Tuscaloosa Marine Shale concerns may increase for Halcon

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Tuscaloosa Marine Shale

We talked about Halcon Resources’ (HK) operations in the El Halcon area in the previous section of this series. In this article, we’ll discuss HK’s operations in the Tuscaloosa Marine Shale.

Halcon Field Services (or HFS), a subsidiary of Halcon Resources, has undertaken three major projects in the Tuscaloosa Marine Shale (or TMS) in Mississippi and Louisiana. HK has a total of ~ 305,000 net acres in the TMS.

TMS acreage

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Halcon Resources’ 3Q14 activity in the TMS

Halcon operated an average of two rigs in the TMS and participated in six wells. The wells had 895 barrels of oil equivalent per day production rate on average. 92% of HK’s production in TMS was oil.

Halcon’s plans for 4Q14 in the TMS

During 4Q14, HK expects to spud two gross operated wells with two rigs. A large portion of HK’s acreage in TMS has not yet started producing. Unless production starts, or production in paying quantities is established there, its lease will expire under leasing terms.

Lower benefits from WTI-LLS spread fall

Halcon’s TMS asset base is strategically positioned near the Louisiana oil hub. Oil priced in Louisiana is generally priced higher than WTI. WTI prices have generally represented the Mid-Continent crude oil market, or more commonly, the producers’ market. However, US Gulf Coast refineries usually purchase crude oil based on Light Louisiana Sweet (or LLS) prices.

In 2013, LLS traded at ~$9.37 per barrel premium to WTI, lower than the ~$17.52 per barrel level in 2012. Year-to-date, the spread has continued to slide, and is now near ~$2.50 per barrel.

HK will lose if the spread narrows. Other energy upstream companies that will be negatively affected by the falling spread include Cheasapeake Energy (CHK), Anadarko Petroleum (APC), and EOG Resources, Inc. (EOG). Some of these companies are components of the Energy Select Sector SPDR ETF (XLE).

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