Goodrich Petroleum Corporation: Oil Production Ramp In Progress

Oct.14.11 | About: Goodrich Petroleum (GDPM)

3Q Catalysts Just Around The Corner

Goodrich Petroleum Corporation (GDP) reports 3Q11 results on November 3, along with data on eight new wells (six Eagle Ford Shale wells and two Buda Lime) completed on their EFS position in La Salle and Frio counties, TX. They will have other news as well but I want to focus on these wells and their growing oil production wedge.

First, the very basic nutshell. GDP’s Eagle Ford acreage is in the oil window and the initial production (IP) rates have been marching higher with increased lateral length and frac stage count and with experience in the play. The first 11 EFS wells averaged 800 BOEpd and the more recent IPs have been trending north of 1,000 BOEpd. There are graphs below. The point is it is announcing six more wells in the southern portion of the position near prior successes of its own and offset operators [Chesapeake Energy Corporation (CHK), El Passo (EP), Chesapeake Energy Corporation (COG), EOG Resources (NYSE:EOG)] and these are fairly high working interest wells. If the wells average 1,000 BOEpd at roughly a 50% NRI (that may be a bit low) that comes to flush production of 6 x 1,000 BOEpd X 0.50% NRI = 3,000 BOEpd, about 75% of that being oil, with the balance a mix of condensate, NGLs , and natural gas. Obviously those rates are just IP and the wells will likely decline as much as 80% in the first year but the redeployment of capital to this highly economic play, now that the East Texas and Northwest Louisiana leasehold is almost entirely held is welcome relief.

As to the Buda, it’s less of a resource play but highly economic when you land a lateral in a naturally vertically fractured zone. While production falls off a little more rapidly than an EFS well they are cheap to drill and complet (no frac needed) and they seem to work well wherever the Austin Chalk did historically. It’s early here but the first three wells IP’d at an average of roughly 900 BOEpd with the last one really dragging that average up (see table below).

OK, so why does that matter? I’ve followed GDP for over a decade through thick and thin and have only recently reopened a position. Gil is a smart guy but he’s got a lot of debt and his company is very gassy. Or at least it was. Last quarter it produced liquids 1,473 bopd, or 8% of total production. Add up my numbers above and then look at 3Q company guidance of 2,500 to 2,800 BOEpd and you see a picture of yet another gassy name going after liquids by transferring the horizontal drilling and completion skill set honed in places like the Haynesville, to an oil play and getting it right. Lastly, 2Q11 quarter liquids may have been 8% of total production but they were 25% of oil and gas revenue. This quarter liquids should be about 12 to 15% with the year-end exit rate higher, so while oil still seems like a sliver of production it is growing even more rapidly in financial significance.

This is not a full company piece and I only have a starter position in the name for now but if it continues to show the kind of linear improvement in results, not necessarily flashy IPs, but what amount to highly economic wells that result in strong reserve growth and increased liquidity, I think the stock gets a leg up. Recall that it had a strong 2Q report and a positive reaction by the sellside and in the marketplace but within days, Greece upset Europe again, the dollar rallied, oil stalled and almost all of the E&P group, gassy or oily, large or small, tumbled. Goodrich tumbled with them. I think that’s overdone and that the coming quarter offers a chance at reinvigorating the story especially given that it is trading at an ultra low 3.8x this year’s CFPS and 2.5x 2012′s estimate. Enough verbiage, how about some graphs?

(Click charts to expand)

Total Production Is Slowly Slipping Higher, But Oil Production Is Really Ramping

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GDP’s Eagle Ford and Buda Lime Wells So Far … Nice Progression

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Disclosure: I am long GDP, CHK, EOG.