Q. How would you describe the strategy that drives your company and how will you implement it this year?
A. Our strategy is to build a significant position in a few scalable liquids-rich plays, prove that position through the drillbit and build a large inventory of de-risked, but un-booked locations. Part of the strategy also includes divesting of all assets that do not compete for capital and/or are considered non-core. As we execute our plan over time, we expect to grow production, reserves and cash flow.
Q. How have high oil prices and low gas prices affected your business?
A. When we started Halcón we made a conscious decision to focus on oil instead of gas. By the time we sold Petrohawk, it was apparent that due to the large, new supplies from shale gas fields, gas prices were going to be under pressure for quite some time. We felt like the economics on oil plays were strong and likely to stay that way for the foreseeable future. Since we don’t know what commodity prices will do in the future, we hedge approximately 80 percent of what we expect to produce in order to protect cash flow.
Q. What results are you seeing from the modifications made to drilling and completions in the Williston Basin?
A. The Company continues to modify its drilling completions techniques in an effort to improve recoveries and reduce costs. Based on improved results to date, Halcón has revised the EUR estimates higher for its type curves. The Company is now using one average type curve for all Bakken and Three Forks wells drilled in the Fort Berthold area, and one average type curve for all Bakken wells drilled in Williams County. In the Fort Berthold area, the average Bakken/Three Forks type curve increased by 39% to 801 thousand barrels of oil equivalent (Mboe), while the average Bakken type curve EUR in Williams County was revised higher by 43% to 477 Mboe.
Data suggests that wells completed with slickwater fracs in the Williston Basin are outperforming wells completed with cross-linked gel, all else being equal. As a result, Halcón plans to complete the majority of its future operated wells in the Williston Basin using the slickwater frac technique. All Company-operated wells online in the Fort Berthold area that were completed via a slickwater frac are outperforming the new 801 Mboe type curve.
Additionally, early stage downspacing tests continue to yield positive results, and indicate the potential for up to 16 locations per drilling spacing unit (DSU) in the Fort Berthold area, which would more than triple the Company’s drilling inventory in this area alone compared to the previous development plan.
Q. You recently announced the TMS as one of your core plays. What are your plans for this region?
A. We currently have approximately 307,000 net acres leased or under contract in what we think is the geologic core of this play. Approximately 77 percent of the acreage is located in Southwest Mississippi and Louisiana Florida Parishes, also known as the “Eastern TMS”. We plan to operate an average of 2 rigs for the remainder of 2014 and spud 10-12 gross operated wells in this play. We also expect to participate in several non-operated wells. We have been working the Tuscaloosa Marine Shale from a geologic standpoint and monitoring industry activity in the play for quite some time. Our strategy is to identify scalable and repeatable resources plays where we feel we can meaningfully improve the economics by applying our extensive technical experience. We believe the TMS fits that strategy, and we’re excited about our position in the play.
Q. Last year you announced a new play, El Halcón. What are your plans for development?
A. We currently have approximately 100,000 net acres in El Halcón, which is located in East Texas in and around Brazos and Burleson Counties. El Halcón is an extension of the South Texas Eagle Ford shale play in which our management team here at Halcón drilled the discovery well in 2008 while at Petrohawk. We’ve identified +/- 1,000 drilling locations. The reservoir is 200’ thick with high oil saturation and good porosity. It lies between the Buda and Austin Chalk formations. We have experienced significant production growth here; going from almost no production to over 7,000 net barrels of oil equivalent per day in 12 months. El Halcón is definitely an area of focus for us. It represents approximately 40 percent of our total drilling and completions budget for 2014. We recently drilled the record well in the play and hope to translate improvements in well costs and efficiencies across all areas of the company.
Q. You have divested or are planning to divest multiple properties this year. How does that fit within your strategy and impact your plan going forward?
A. Last year we divested properties that had an impact of approximately 9,000 barrels of oil equivalent per day from non-core conventional assets located throughout the U.S. for $450 million. Estimated proved reserves associated with these divested properties was approximately 23 million barrels of oil equivalent. These were all non-core properties with high LOE and limited upside.
In addition, we expect to close on another divestiture for approximately $450 million related to some producing and undeveloped assets in East Texas in the second quarter of this year.
It has always been our strategy to sell properties that do not fit our model and reinvest the proceeds into our core areas. We are always working towards having a tightly focused, quality property set. With these divestments we have become a more concentrated oil producer and expect to realize lower operating costs from a more concentrated portfolio.
Q. What is the greatest challenge you face this year?
A. Execution is always a risk inherent to the oil and gas business, but we think this risk is minimized by our team’s successful track record and strong history of solid execution. We also believe that technology will ultimately drive recoveries and economics, which is why we invest heavily in our technical team. Halcón is at the forefront of adoption and application of cutting-edge unconventional drilling and completion technology to drive well performance.
Q. What is the one thing you want investors to know?
A. How far we have come in such a short period of time. Halcón has only been around for two years, and in that time, we’ve grown a $550 million start-up into a multi-billion dollar company that has hundreds of thousands of quality acres in some of the most prolific plays in the U.S. We have a management team that is experienced, has realized great success for shareholders in past ventures and is working hard to do so again. We are on track to deliver on our strategy. There’s still work to do- delineating our acreage, continuing to search for other resource play opportunities and realizing operational improvements- but we are well on our way.
