While Halcon Resources is poised for 15 to 20 percent pro forma growth in 2015 with a capital expenditure budget of approximately $750 million, Chief Executive Officer Floyd Wilson says industry service costs are not in sync with crude oil prices, and consequently Halcon is cutting five rigs from its 2015 plans.
“In response to currently low crude prices and currently high service costs, we’ve decided to not employ five rigs we had prior planned to employ next year,” Wilson said in a Nov. 11 third quarter conference call with industry analysts. “We’ll run six rigs getting started here and see how the year unfolds.”
Although well positioned with hedges, Wilson does not like the position Halcon is in with the disparity between oil prices and service costs. “While we are substantially hedged for next year, we are in that uncomfortable space where crude prices have declined dramatically while service costs have remained at an all-time high,” he said. “Of course the flip side to that is that efficiencies are at an all-time high as well, so it’s not … a black hole by any means, but they are out of sync,” Wilson said.
“As has happened many times in my time in the business, ourselves and our great partners on the service side of the industry will react according to changing conditions and reach a comfortable space,” Wilson continued. “As you all know, we need each other.” Wilson added that Halcon will remain flexible going forward to either increase or decrease capex in 2015 depending on how the conditions in the industry evolve.
Halcon’s strategy is to hedge approximately 80 percent of anticipated production over the coming 18 to 24 months. For the fourth quarter, Halcon has hedged approximately 2.5 million barrels through collars and another 138,000 barrels through swaps for a combined weighted average price of $89.26 per barrel. That combined weighted average increases slightly to $89.33 in 2016.
In the third quarter, Halcon’s crude oil sale price averaged $87.20 per barrel. In the second quarter the company’s price averaged $94.01.
Halcon has two core resource plays on which it is currently focused, the Bakken where the company holds approximately 131,000 acres, and its El Halcon play in East Texas where it holds approximately 101,000 net acres.
Halcon has a third core resource play in the Tuscaloosa Marine Shale, TMS, in Louisiana and Mississippi where it has approximately 315,000 net acres either leased or under contract. However, while Wilson said there “is a lot of oil” in the TMS, he added that the play is in the early stages of development and costs are high. Consequently, Halcon is currently focusing on growth in the Bakken and El Halcon. “Our efforts are focused on our two core plays which provide all of our current production - almost all of our current production and all of our projected production growth in the future.”
But even with stressed crude oil prices, Wilson said the Bakken and El Halcon are making money for the company, and while the company will spend less than initially anticipated in 2015, it still plans to grow production by 15 to 20 percent in the coming year. “But our core plays are profitable at today’s prices or even lower,” he said. “Our expectation is to run six rigs across our portfolio in 2015 and we’ll spend meaningfully less than what we planned to spend next year. We’ll grow production, as I mentioned, 15 to 20 percent, 100 percent driven by our Williston Basin and El Halcon assets.”
Combined, Halcon’s total production averaged 43,554 barrels of oil equivalent per day in the third quarter, above the midpoint of guidance. That is an increase of 4 percent over second quarter production and 16 percent over the third quarter 2013. The third quarter production increase came despite the company selling approximately 3,700 boepd of assets in the second quarter, Wilson said.
In the Bakken, Halcon has two core areas, one on the Fort Berthold Indian Reservation, FBIR, and the other in Williams County. In the third quarter, the company put 17 wells on production on the FBIR and spudded another two. In Williams County, the company put two wells on production while spudding two others. The 24-hour initial production, IP, rates for the FBIR wells averaged 2,935 boepd and 30-day IPs averaged 1,288 boepd. The Williams County wells’ 24-hour and 30-day IPs averaged 923 and 513 boepd.
The average FBIR 24-hour and 30-day IPs stand 15 and 1.4 percent above the company’s average IPs. Wilson said Halcon is in pad drilling with simultaneous operations and ongoing completion modifications. He said the company went to 100 percent sand in completions rather than resin-coated sand and lightweight ceramic, and added that on average, wells completed with the modified completions outperformed the company’s type curves in both of its Bakken core areas.
Halcon is also experimenting with modified or hybrid-slickwater completions in an effort to lower completed well costs, and thus far Wilson said the results are encouraging. “The idea is to pump the hybrid jobs at a similar rate 60, 70 barrels per minute - a similar rate as a regular slickwater completion using the same amount of proppant but to use less water,” he said. “Down in the Fort Berthold area we have to source the water right off the Fort Berthold Indian reservation and it’s quite expensive.” He said the new method has resulted in savings of approximately $300,000 to $400,000 per well.
The company has also been experimenting with downspacing, and Wilson said it is planning on spacings of either 660 or 880 feet under its current development plans.
On gas capture in the basin, Wilson said Halcon continues to make progress to expedite gathering pipeline construction, and as a result the company was able to reduce its flaring by 50 percent in the third quarter reducing the company’s total flaring to 25 percent. “It’s a huge improvement and there is more to come,” he said.
Currently, Halcon has 169 operated Bakken and 51 Three Forks wells on production, with seven Bakken and three Three Forks wells either under or waiting on completion. In the fourth quarter, Halcon plans to run three drill rigs in the basin and expects to spud between eight and 10 gross operated wells. Halcon also plans to participate in 65 to 70 non-operated wells in which it has an average working interest of approximately 5 percent.
In August, the latest month for which production data are available from the Department of Mineral Resources, Halcon ranked as the 11th largest Bakken oil producer in North Dakota averaging 42,259 bpd for operated, non-confidential wells.
