Goodrich Petroleum: 70% Upside As Production Soars Due To Outstanding Haynesville Shale Wells

Summary

• Goodrich is primarily focused on the Haynesville Shale, which has become a hot natural gas play again in recent years.
• It has consistently delivered above type curve, which has allowed it to reduce its 2019 capital expenditure budget by 30% (compared to its March 2018 outlook) while maintaining production targets.
• Cash burn is expected to be modest in 2019, while production increases by 40% compared to Q4 2018 and around 100% compared to 2018's average production.
• Goodrich's leverage is modest (expected to be under 1.0x by the end of 2019).  Goodrich's EV is only 2.6x projected 2019 EBITDA.
• I estimate that Goodrich can be worth $23 in one year as it starts to deliver significantly improved EBITDA (with high capital efficiency) as its production soars.
• This idea was discussed in more depth with members of my private investing community, Distressed Value Investing. Start your free trial today »

Goodrich Petroleum (GDP) has focused on developing its natural gas assets in the Haynesville Shale since emerging from bankruptcy in 2016. It has been able to achieve excellent well-level results that have consistently been above its type curve. This has allowed Goodrich to reduce its 2019 capital expenditure budget by around 30% and still expect to deliver average 2019 production that is around 40% above Q4 2018 levels. With that reduced capital expenditure budget, Goodrich is expected to only have modest cash burn in 2019, with its leverage at around 0.8x by the end of 2019.

It is trading (at $13.68 per share) at a very low multiple to its projected 2019 EBITDA (EV to 2019 EBITDA multiple of 2.6x) as it seems to have been largely ignored post-bankruptcy. As it continues its explosive and cost-efficient production growth, its value should become more apparent.

The Haynesville Heats Up

Chesapeake Energy mentioned in 2018 that the Haynesville Shale "is hot once again", while BP called the Haynesville Shale "the most revenue generative gas play in the U.S."

The rig count for the Haynesville Shale is at 54 rigs now, substantially more than the 19 rigs currently operating in the Utica Shale and not that far behind the 63 rigs in the Marcellus Shale. This is a massive increase from the 13 rigs in the Haynesville Shale in September 2016, when it was behind both the Marcellus Shale and the Utica Shale in rig count.

Source: Chesapeake Energy

Chesapeake mentioned that longer laterals and bigger completions have substantially improved its returns in the Haynesville Shale. This has kept the estimated IRRs at around 40% at $2.75 natural gas for Chesapeake's Haynesville Shale wells despite service cost inflation. These improvements have helped the Haynesville make a massive comeback to become one of the top natural

Analyst’s Disclosure:I am/we are long GDP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.