Realistic 50% Upside, Goodrich Petroleum Proves The Tuscaloosa Marine Isn't Dead

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 |  About: Goodrich Petroleum Corporation (GDP)
by: Callum Turcan

Summary

The Tuscaloosa Marine Shale isn't dead, just look at Goodrich Petroleum's latest well results.

Goodrich fell hard after the results of Beech Grove 94H-1 was released, but several new wells point towards the very oily promise of this play.

Production mixes are made up of over 90% crude in the Tuscaloosa Marine, yet this is held back by high well completion costs.

The TMS could yield almost a billion barrels of BOE on Goodrich's acreage.

Investors could make a realistic 50% return if Goodrich returns to its previous levels.

It turns out the Tuscaloosa Marine Shale isn't dead, not even close. When Goodrich Petroleum Corporation (NYSE:GDP) updated investors in its second quarter results, an enormous relief washed over Wall Street after reading the new well results out of the Tuscaloosa Marine.

One Bad Sheep Doesn't Ruin The Flock

Goodrich reported that its Beech Grove 94H-1 well had an 24-hour IP rate of 740 BOE/d (91% oil) back in early July, investors panicked. Wells before then had seen 24-hour IP rates exceed 1,000 BOE/d, and investors were worried that previous expectations were too high. Well completion costs in the Tuscaloosa Marine are much higher than in other shale plays, with a single well costing $13 million, versus $7 million - $10 million in the Eagle Ford.

To compensate for the higher costs, Goodrich had to be able to prove that it could bring strong wells online with a high crude content. This quarter, it did just that. The 81H-1 well had an 24-hour IP rate of 900 BOE/d (96% crude), the non-operated Lewis 7-18H-1 had an 24-hour IP rate of 1,500 BOE/d (93% oil), and the non-operated Mathis 29-32H-1 had an 24-hour IP rate of 1,300 BOE/d (92% crude).

Other promising wells that Goodrich was able to bring online in the Tuscaloosa Marine include the Crosby 12 H1 with an 24-hour IP of 1,300 BOE/d and the Lewis 30-19 H1 with an 24-hour IP of 1,450 BOE/d.

Why the Tuscaloosa Marine is important

Goodrich Petroleum has over 300,000 net acres in the Tuscaloosa Marine Shale, and sees 736 million BOE of reserve potential in the play, just under its market capitalization. That dwarfs its small 4 million BOE of proved reserves in the TMS as of the end of 2013, and is almost 10 times the size of its proven reserve base. Before factoring in Goodrich's Eagle Ford or Haynesville assets, investors could effectively purchase one BOE that is heavily weighted towards crude for just $1 (potential reserves divided by market cap). If Goodrich is able to prove that it can effectively develop this acreage, then its shares should be trading much higher than they are today.

Back when the Beech Groves well came online, Goodrich's shares plummeted from the high $20's to $17 a share as Wall Street fretted over whether or not the TMS could live up to Goodrich's claims. After this quarter, at least some of those fears should be alleviated. Strong TMS well results sent Goodrich's stock up 12% in early trading, but don't let that put you off from considering this stock.

If Goodrich was to reclaim its share price before Beech Groves, investors could net a realistic 50% return. WTI prices have pulled back since then, but due to the TMS' proximity to the Gulf of Mexico Goodrich can realize LLS pricing. By realizing LLS pricing, Goodrich is able to sell its TMS crude for $94.55 per barrel versus $93.18 per barrel for WTI. In 2015 it only gets better, as Goodrich will receive ~$96.11 a barrel for LLS.

Final thoughts

This is a company with a market cap of under $1 billion, yet it could have almost 1 billion barrels of recoverable, oil heavy hydrocarbons on its acreage. Most of Goodrich Petroleum's capex is directed towards the Tuscaloosa Marine Shale, making it one of the best pure plays around. As Goodrich gets a better feel for the play, it will be able to lower well costs while realizing LLS pricing, pointing towards plenty of potential profitability waiting to be tapped into.

Some soured on the TMS after Beech Groves, but after this quarter it seems that some of the fears over one "bad" well were well overblown. For any investor looking to bet on one of America's best emerging oil fields, a take a look at Goodrich Petroleum. While Goodrich is rallying, these results could carry it all the way up to $30 a share and beyond.

Disclosure: The author is long GDP. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article. Callum Turcan owns December 20 $25 call options for Goodrich Petroleum Corporation.