Big investment in Halcón drilling reflects confidence in a lucrative TMS
A private equity firm’s pledge to invest up to $400 million in Halcón Resources’ deep drilling in Mississippi and Louisiana could lead to a doubling of Halcón’s 2015 operations in the region.
The investment from Apollo Globe Management allows Halcón to accelerate its drilling for oil and gas on the 314,000 acres the Houston-based company has leased within the Tuscaloosa Marine Shale formation a several-hundred square mile reserve spanning Southwest Mississippi and Southeast Louisiana.
The Louisiana Department of Natural Resources estimates the formation holds seven billion barrels of light, sweet crude oil. Further estimates are that the premium crude makes up 94 percent of extractable deposits within the TMS, with natural gas accounting for an additional 4 percent and water for the remainder.
Getting to the sweet crude, however, requires drilling from 10,000 to 125,000 feet and extending horizontal bores that extract oil and gas through s shale rock fracturing process that requires millions of gallons of water. With the hydraulic pressure of water, sand and chemicals exerted through a horizontal bore hole, drillers try to fracture the rock to free trapped oil and liquefied natural gas. Operators prefer to drill in areas where the shale is brittle and has fewer clay deposits.
Halcón plans to spend $950 million this year in its U.S. drilling operations, nearly half of which will go into the Bakkan/Three Forks formation in North Dakota and 40 percent into rigs operating within the Southeast Texas Eagle Ford formation.
The remaining portion of the $950 million, according to the company’s 2013 10K filing with the SEC, is earmarked for the Tuscaloosa Marine Shale, or TMS, formation and the Utica/Point Pleasant trend in Ohio.
The Ohio fracturing operations are in pursuit of natural gas a little more than 1,200 feet below ground. Low market prices for natural gas have stalled momentum there, industry experts say.
With the Apollo Global investment, Halcón says it can increase its TMS drilling by $100 million this year and hike that amount by two to three times next year. Apollo’ initial investment in the TMS is for $150 million, Halcón says.
“This year we expect to spud (start) 10 to 12 gross wells in TMS and participate in 15 to 20 non-op wells,” spokeswoman Kelly Weber said in an email.
So far this year, Halcón has drilled one well in Wilkinson County with a 38-day period from start to reaching of its total depth. The well is producing 1,548 barrels a day, the company says. The company drilled a second Wilkinson County well that took 28 days to reach total depth. It has since started a third well in Wilkinson County.
Halcón and other drillers, including Encana Corp., Devon Energy and Goodrich Petroleum, want to get their per-well drilling costs to below $12 million. Halcón is getting close, Weber said.
“We’re tracking between $13 million and $13.5 million currently but expect to decrease costs by $1 million a year over the next two years,” she added.
Meanwhile, Halcón plans a $6 oil handling terminal at the Port of Natchez on 50 acres it plans to buy from Adams County. The terminal will give the company direct access to refineries on the Lower Mississippi River.
“This is a proactive move to position us for the future,” Weber said. “We think as the play develops, it will require additional infrastructure.”
Weber noted the terminal project is still in its very early stages.
Floyd C. Wilson, Halcón chairman and CEO, said his company is off to a solid start in the TMS. “The capital from our partnership with Apollo will help to accelerate activity,” Wilson said in a company press statement.
“The TMS is quickly evolving into a world-class oil play.”
Halcón is not alone in accelerating its work in the TMS, according to oil and gas consultant Charlotte Batson, principal of South Mississippi-based Batson Co.
All of the companies but Encana, which has shifted more of its interest to plays in Canada and elsewhere, have increased their drilling, Batson said in a recent interview.
“All of the operators have moved new rigs into the area. They have plans laid out for 2014 that are bigger than in any previous year.”
While well-drilling costs are important, Halcón and the others are more interested in gaining “repeatability” of the production, she noted, and explained repeatability will provide confidence in the cost and yields of the wells they plan.
You want a high degree of confidence and a low-level of risk, she said.
To achieve repeatability, the companies will focus on concentrated geographic areas in Wilkinson and Amite counties, according to Batson.
“It makes operations more efficient when you have these” centrally located pockets and you don’t have to move equipment, she said.
At the same time, they want production test results from a variety of locations within the TMS, Baton said.
Thus, areas selected for the clustered operations are spread apart.
“They are spreading out this testing and seeing what kind of production rates they can get in areas farther and farther apart. At the same time, they are starting to be more efficient in their operations with these clusters they have.”
Batson said projections are that drillers will spend about $600 million this year in the TMS – the most ever.
Apollo Global’s investment of $150,000 now with up to $250 million to follow is one of the largest single outside equity investments yet in the TMS, according to Batson.
“It shows a very high degree of confidence,” she said.
Batson attributed a good degree of the investment momentum to Mississippi’s July 2013 lowering of its severance tax.
As of July 1 of last year, Mississippi severance tax on hydraulically fractured oil wells dropped from 6 percent to 1.25 percent for first 30 months of well production.
Under the law, a county in which a horizontal oil well is located would get all the tax proceeds rather than sharing them with the state.
The law gives the tax break on a specific well for up to 30 months or until the well’s costs have been recovered, whichever comes first. The law also gives a five-year tax break for oil exploration efforts.
Halcón’s Weber said the cut in taxes levied on oil and gas extractions “has definitely had an effect on the willingness to invest for our company and others like us.”
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