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Halcon Reports Progress in TMS, Improved Drilling in Williston

Halcon Resources Corp. reported forward progress in the Tuscaloosa Marine Shale (TMS) during the first quarter, while making drilling improvements in the Williston Basin and derisking its holdings in a portion of the Eagle Ford Shale in East Texas.

The Houston-based company reported total operating revenues of $275.1 million for 1Q2014, a 43.7% increase over the $190.9 million reported for 1Q2013. Production for the quarter beat guidance and increased to 36,622 boe/d, a 40.7% increase over the preceding first quarter, when it produced 26,022 boe/d.

In the Williston Basin, Halcon said it operated an average of four rigs during the first quarter and planned to keep three to four rigs deployed there for the rest of the year. Production in the basin averaged 23,313 boe/d, a 73% increase compared to 1Q2013. According to Halcon, current production in the basin is about 25,000 boe/d.

Halcon participated in 72 non-operated wells in the Williston during the first quarter, with an average working interest (WI) of 6%. The company said production from non-operated wells averaged about 3,500 boe/d during 1Q2014.

The company reported that it had made progress improving drilling efficiencies during the first quarter, lowering drilling costs by 9% and increasing the number of feet drilled per day by 13%, compared to the 2013 average. Halcon said it believed it was on track to reduce completed well costs by 5-10% by the end of 2014.

Halcon also said it was in various stages of downspacing tests on 16 pads (50 wells) in the Fort Berthold area, which is prospective to the Bakken Shale and Three Forks formation. The company said it was in the process of bringing six wells online from a single pad, with the wells on 660-foot spacing.

Halcon also had an average of four rigs deployed in a portion of the Eagle Ford in East Texas that the company has dubbed the El Halcon. It plans to operate two to three rigs in the play for the remainder of the year. Production in the play averaged 7,018 boe/d, a more than eight-fold increase over the preceding first quarter. Halcon said it was currently producing about 10,400 boe/d in the El Halcon.

"Production growth is almost exponential [in the El Halcon]," CEO Floyd Wilson said during a conference call Thursday to discuss 1Q2014. "Keep in mind we only have on production 50 or 60 wells. [We're at an] early stage in a play of this nature.

"Testing is underway on a number of completion design variations to reduce cost and increase performance...Also, several artificial lift modifications are being evaluated as we continue to work to find the most economic formula overall. We're also working on trying to define that point of diminishing returns in terms of lateral length. [We're] not quite there yet. We continue to feel that the longer lateral lengths are yielding the better results. We expect well costs to decrease as we continue to transition to full-scale pad drilling."

In the TMS, Halcon said it plans to keep an average of two rigs deployed in the play for the full-year 2014, spudding 10 to 12 operated wells and participating in 15 to 20 non-operated wells during the course of the year. The company recently spudded two wells, Horseshoe Hill 11-22H-1 (92% WI) and Black Stone 4H-2 (86% WI), in Wilkinson County, MS. It plans to spud a third well, Fassman 9H-1 (84% WI) in early June.

"I notice that one of our peers in the [TMS] has reported that they expect to drill their wells in less than 40 days, assuming no major trouble," Wilson said. "We are planning on this sort of timing, but we would expect to beat it, of course. On the cost side...our initial feel for the play is that we'll drill the first few wells for about $13 million. We think we can get that down about $1 million a year, each year, for a couple of years."

Wilson later added that Halcon was "looking for big-ass results" in the TMS.

"I don't know what else to say," the CEO said. "We've programmed the drilling and the completion for optimal initial production rates and frac jobs that last, and we've equipped the wells appropriately...To meet the type curves that we've proposed, and to meet the type curves that some of our industry partners are using, you need a fairly stout start to make those work. Others are doing it, and we expect to meet or beat our own expectations."

Halcon said it was evaluating joint venture (JV) options for its entire TMS position, as well as financing options. The company said discussions with several potential partners were ongoing but would conclude during 2Q2014.

"We decided to at least evaluate options at this moment, and it's not a critical item to us," Wilson said of the search for a JV partner. "We would only do a deal that's attractive to us. It's just one of the things that we have determined that would be appropriate for us to review for this play.

"Our plans for 2014 and our current plan for 2015 will be unchanged in the absence of any kind of a new JV or some sort of financing of that type. We might ramp up a bit quicker at the end of the year and into 2015...Results are the first thing. We've got plenty of money right now. Ramping up is an objective, but it's an objective based on results."

Halcon reaffirmed its production guidance for the full-year 2014, ranging from 38,000-42,000 boe/d, with 85% weighted toward oil, 10% natural gas and 5% natural gas liquids (NGL). For the second quarter, the company issued production guidance of 39,000-41,000 boe/d.

In a note Friday, analysts with Canaccord Genuity Inc. issued a hold rating on Halcon, on the belief that the company was under a "somewhat stretched valuation and high financial leverage."

"Halcon will be significantly outspending cash flow for the foreseeable future," Canaccord analysts Stephen Berman, Sam Burwell and Erika Brownson said. "While the borrowing base should grow substantially, the company may need to access capital markets for equity or debt (high yield) financing. This could be dilutive, and market conditions may not be optimal at the time for equity or debt issuance."

The analysts added that "commodity price swings will impact Halcon. If oil prices fall below $70/bbl, the economics for a portion of its projects would be stressed."

The company reported a net loss of $72.3 million for the first quarter of 2014, or a 19-cent loss per share. By comparison, Halcon reported net income of $5.5 million for the first quarter of 2013, or income of one-cent per share.

Halcon said it expects to close this month on an agreement to sell noncore assets in East Texas for $450 million, excluding closing and post-closing adjustments (see Shale DailyFeb. 27). The assets include 83,000 net acres primarily in Grimes, Leon and Madison counties, TX, which produced an average of approximately 3,718 boe/d during 1Q2014. Estimated proved reserves associated with the assets, as of Dec. 31, 2013, were about 16.3 million boe, 39% of which were proved developed.

The company said revenue generated from the sale of its East Texas assets would go toward funding operations in the TMS.

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