Halcon Resources is focusing on its core producing assets to achieve higher production with low capital spending. Recently, the company reduced this year’s total capital expenditure for its drilling and completion cost by 14% to approximately $950 million for all drilling areas. Despite this cost reduction, the company is still optimistic about its production guidance of 38,000 to 42,000 barrels of oil equivalent per day (boepd), which is higher than the 2013 production guidance of 30,000 to 34,000 boepd. The company’s application of advanced drilling techniques, like pad drilling and long lateral length, will make its production guidance achievable even with reduced capital spending.
One of the company’s core oil producing assets is El Halcon, its Eagle Ford shale play in Texas. Halcon has 90,000 net acres in El Halcon and has a total proven reserve of 2.5 million barrels of oil equivalent (Mmboe). The total reserves of this play are 94% oil and 3% each of natural gas liquid and natural gas. With the amount of oil in this play, the company has experienced massive growth of roughly 800% in production to 6,500 boepd from the initial production rate of 734 boepd.
This growth in production is made possible because of Halcon’s drilling and completion techniques. To continue the increasing production, Halcon integrated the pad drilling technique in its Eagle Ford play. Pad drilling is a technique where the operator can drill multiple wells per site with high mobility rigs that can move quickly to the next pad, which in turn saves drilling time. As a result, during the third quarter, Halcon successfully reduced its average drilling days (starting to reaching total depth) of an oil well to 14.4 days, a decrease of around 37% quarter-over-quarter, and the decrease is expected to continue in 2014.
By reducing the number of drilling days, Halcon will enhance the well completion efficiency while continuing to reduce its operating costs. The savings from operating costs will then enable the company to reduce the capital expenditure, which in turn helps Halcon to meet its capital guidance without hampering the total well production rate.
Apart from the pad drilling technique, Halcon also drilled wells with a longer lateral length, which can increase the total recovery of oil and gas, considering proper optimization. If the lateral length is extended from 800 meters to 1800 meters, it could add 600,000 m3 of oil to the total oil recovery. Currently, Halcon’s oil producing wells are located at depth around 7500 to 8000 feet in the Eagle Ford formation, and it reported continuous increasing production. Although it is very costly to extend the laterals, the company has managed to reduce the average cost per foot by 19% during its third quarter compared to the previous quarter. This decreased cost clearly indicates the company’s efficient operating rigs, and it will help the company maintain lower capital expenditure in drilling and completion.
Halcon continued its average three rig program in El Halcon last year and projected to operate an average of three to four rigs in 2014. Despite fewer rigs, Halcon has already completed drilling of 13 wells and brought 19 wells to sales during the third quarter, and currently the company’s total 31 wells are in production in the Eagle Ford play. Additionally, another eight wells are in the completion stage, and it drilled three more wells in the third quarter, which were expected to come in production by 2014. With these additional producing wells, which are in the completion stages, Halcon will be able to increase its total oil production to meet its production guidance for this year.
More opportunities with step-out wells
Halcon is also using step out wells to increase its footprint in its Eagle Ford formation. Step-out wells are drilled to an unknown reservoir to extend the company’s productive zone. Although it is very risky to drill step out wells since the reservoirs are unknown, Halcon has witnessed better initial production results. One of the company’s initial step out wells in Brazos County, Stasny-Honza 1H, reported a record initial production (IP) rate of 1262 boepd during the third quarter.
Apart from Halcon’s Stasny-Honza 1H, Bumble Bee and 1H Hedge Hog topped the charts with more than 1000 boepd. With these promising step out wells, Halcon has become a primary player in the Aguila Vado field and accounted for more than 50% of the drilling to date. Halcon extended its Aguila Vado field into Brazos County, and it is expanding its reserves capacity with the above producing wells. With the present lateral length and impressive results from the step-out wells, Halcon will witness increasing production from this shale in the coming quarters.
Asset Divestiture will improve cash flow
Halcon decided to pursue its asset divestiture program to increase its funding for its core assets this year. Halcon’s core assets include the Bakken/Three forks formation, Eagle Ford shale, and its Utica shale. Halcon will divest its additional non-core assets like Woodbine, Wilcox, and Tuscaloosa Marine shale (TMS) etc. in 2014, and the total proceeds are expected to be between $300 and $400 million.
The company has already announced a cut in its 2014 capital expenditure by 14% to around $950 million and expects to add the asset sale proceedings to its total projected capital expenditure for drilling and completion activity in 2014.
Since the beginning of last year, Halcon has witnessed higher capital expenditure, which in turn affected the company’s free cash flow throughout the period. Since the company is focusing on production efficiencies to achieve higher production while spending less capital, the projected asset sale will improve the free cash flow structure of the company going forward. This will enable the company to witness improved operating cash flow this year, which in turn will strengthen its free cash flow in the coming quarters and lower capital expenditure.
Conclusion
With its efficient drilling and completion technique in Eagle Ford, Halcon is optimistic about meeting its production guidance. Moreover, less drilling days and reduced cost per foot will improve the company’s long-term financial performance. Despite its reduced capital expenditure, Halcon is optimistic about its total production output in the coming quarters, which will help it strengthen its free cash flow structure.
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