In a $1.45 billion deal expected to close in December, Houston-based Halcon Resources is acquiring approximately 81,000 net acres and production of more than 10,500 barrels of oil equivalent per day in northwest North Dakota from Dallas-based independent Petro-Hunt. The deal increases Halcon’s footprint in the Williston Basin to more than 135,000 net acres.
The acquisition consists of more than 38,000 acres in Petro-Hunt’s Marmon area in Williams County where one rig is currently operating. The other acreages in the deal are in the Fort Berthold area of Mountrail, McKenzie and Dunn counties and consist of more than 10,500 acres in Petro-Hunt’s Antelope area and more than 16,500 acres in its McGregory Buttes area. There are currently two rigs operating in each of the two areas. Halcon will have an average working interest of approximately 70 percent across all three areas.
“Petro-Hunt has done a wonderful job of setting these properties up for large-scale future development, which we will begin to undertake now,” Halcon Chairman and Chief Executive Officer Floyd Wilson said in an Oct. 22 conference call. “Our strategy to build an attractive northerly asset base in a few core resource plays and rationalize other assets as production ramps in the key plays is well under way.”
In a press release issued Oct. 22 prior to the conference call, Petro-Hunt President Bruce Hunt said his company is “pleased to become a significant Halcon shareholder through this transaction. The track record of Halcon’s management team speaks for itself, and we are confident they will do a great job of developing these solid assets. Petro-Hunt has a long history of operating oil and gas properties in the Williston Basin.” Petro-Hunt, he said, “will continue to operate production of approximately 24,000 Boe/d and develop our 600,000 plus acres of oil and gas leasehold in the Williston Basin with the full attention of our existing staff.”
What’s in the assets?
In the Oct. 22 conference call, Wilson said that more than 90 percent of the 81,000 net acres Halcon is acquiring from Petro-Hunt is held by production, and the remainder of the prospective acreage should be held by production by early 2013. Wilson said Halcon will have more than a 70 percent average working interest in the operating wells drilled in the acquired acreage, and will be operating 95 percent of the new acreage.
“This premier acreage position is prospective for the Bakken and Three Forks, and much of it is located in the core of the play,” Wilson said. “Current production from these assets is over 10,500 barrels of oil equivalent per day, and total proved reserves are estimated at approximately 42 million barrels of oil equivalent, 88 percent oil, 61 percent undeveloped, with an estimated total resource potential of over 100 million barrels of oil equivalent. Approximately 60 percent of the estimated proved reserves are attributable to the Fort Berthold area in Mountrail, Dunn and McKenzie counties, the core of the entire play.” While the new acreages are prospective in both the Bakken and Three Forks formations, Wilson said Halcon is currently focused on the Bakken.
Wilson went on to say that production results are better in the Fort Berthold area versus the Williams County area where he sees “huge room for improvement.” Of these two areas, Wilson said one is the “absolute heart of the field” and the other is the “next ring out.”
According to Halcon Chief Operating Officer Robert Anderson, there are 17 locations already permitted and ready to drill on the Fort Berthold Indian Reservation and most of that acreage is already held by production. Permitting does take a little longer on the reservation, Anderson said, “but we’ve got a number of locations in the queue.”
Moving forward, Wilson said Halcon will work to reduce drilling days by utilizing pad drilling, and said that Halcon can lower completion costs in several ways, one notable way is by reducing fluid volumes in frack jobs. He said Halcon can also increase recoveries via completion design changes in casing and propant.
Improvements to infrastructure will also be significant, Wilson said. “We can reduce gas flaring and capture revenue by installing gas gatherings. We can reduce weather-related downtime with the installation of oil gathering systems. We can reduce LOE (lease operating expense) through installing salt water disposal systems.”
Financing the deal
Halcon is financing the $1.45 billion acquisition of the Petro-Hunt assets with $750 million in equity notes and $700 in cash. The equity notes are in the form of preferred stock that will convert to just over 100 million shares of Halcon common stock upon Halcon shareholder approval to increase the total number of shares outstanding.
The cash comes from several sources. Halcon recently expanded its borrowing base through financing commitments from J.P. Morgan, Wells Fargo, Barclays and Goldman Sachs and has a $500 million bridge loan commitment.
The other major source of cash for the Petro-Hunt deal comes from the Canadian Pension Plan Investment Board or CPPIB, which recently agreed to purchase $300 million worth of Halcon common stock. Through this agreement, the CPPIB will own an approximately 10 percent interest in Halcon and will be offered one seat on the board of directors. “We welcome CPPIB as a long-term, energy smart partner,” Wilson said in Halcon’s Oct. 22 press release.
Scott Lawrence, CPPIB vice president and head of relationship investments said, “Halcon has accumulated a sizeable portfolio of high quality assets across a significant land base. We believe the acquisition announced will further position Halcon for significant growth and we look forward to working with Mr. Wilson and his experienced management team in continuing to build the company in the years ahead.”
What this does for Halcon
The Petro-Hunt acreage adds to the approximately 28,000 net acres that Halcon already operates in Williams County, where two rigs are currently operating with a 30 to 35 percent Halcon working interest. Halcon also has a 45 percent working interest in another 13,000 operated net acres in eastern Montana where one rig is operating. In addition, Halcon has 15,477 non-operated net acres that are actively being drilled. In total, Halcon has more than 700 gross operated drilling locations.
“This acquisition will increase our reserves dramatically,” Wilson said. “Our strategy to build an attractive northerly asset base in a few core resource plays and rationalize other assets as production ramps in the key plays is well underway.”
On a larger scale, the Petro-Hunt acreage brings to three the number of plays in which Halcon owns over 130,000 net acres, the other two being the Woodbine/Eagle Ford in Texas, and the Utica/Point Pleasant in Ohio and Pennsylvania. “Clearly we’re in a development mode going forward. This was an opportunity to create that third leg of the stool for us or with the Woodbine/Eagle Ford and the Utica/Point Pleasant.” Wilson went on to say that the acreage totals in all three plays have approached 100 percent of Halcon’s target. Going forward, he said, it is more “grassroots,” and “we don’t have our eyes on any significant transaction at this time.”
“We will have grown from an idea to a well staffed oil company producing over 25,000 barrels of oil equivalent per day with the closing of this transaction,” Wilson said. “We are appropriately capitalized and are looking forward to years of significant growth in both production and reserves.”
