Goodrich Petroleum Corp Is Accelerating Development in This Hot Shale Play

You might not have heard about the Tuscaloosa Marine shale, but it is one of the most promising new shale plays in the country. Located in central Louisiana and southern Mississippi, the Tuscaloosa Marine Shale, or TMS, sits on the same rock formation as does the more well-known Eagle Ford Shale in southern Texas.

So far, production in the TMS has been almost entirely oil, and estimated per well ultimate recovery assets rival that of the Bakken, Could the Tuscaloosa be the next Bakken Shale? Maybe. While many producers are, right now, a bit hesitant to add yet more capacity, the TMS still shows a lot of promise.

The largest acreage holder in the TMS is a company you may have never heard of: Goodrich Petroleum (NYSE: GDP). This $1 billion company holds drilling rights to a whopping 400,000+ acres in the Tuscaloosa Marine Shale. If the TMS works out, no one else will benefit more than will Goodrich Petroleum. 

Gas drilling in the Haynesville Shale, Louisiana, one of Goodrich's key operating areas. Source: Wikipedia

Accelerated drilling
Goodrich expects to spend between $325 million and $375 million in drilling, leasehold, and infrastructure this year. At least two thirds of that will go to the TMS. Thanks to faster completion times, management now expects to drill between 10 and 15 wells in just the second half of this year, this will likely be an improvement over the first half of this year. To give an idea of just how far ahead of the pack Goodrich is in the TMS, the next biggest capital spender here, Encana Corporation (NYSE: ECA), will spend only $150 million here in 2014 and will drill between 9 and 12 wells throughout the entire year.

Fantastic economics

Source: Investor relations

The above chart shows how the TMS may ultimately rival the Bakken Shale. Economics of the base wells (the red line) are for wells which will ultimately recover 600,000 barrels of oil equivalent, or boe. The yellow line represents wells which are expected to recover 800,000 boe. The average Bakken well is expected to yield somewhere between 600,000 boe and 700,000 boe. However, Tuscaloosa wells, at this time, cost $13 million to complete on average. Bakken wells can be completed for much less. 

Management expects well costs to drop to $11.5 million by the end of this year, which will further improve well economics. Even at $85 oil, the base case still has a 'reasonable' internal rate of return over 20%. This number will only improve as Goodrich's completion costs come down thanks to refined best practices and increased availability of oil services in the area. In the long run, management believes that it can further reduce well costs to $10 million.

Valuation and final thoughts
Last month Goodrich rocketed higher by about 30% in one day thanks to great initial production rates from its new Blades well. Currently, Goodrich stock trades at 3.27 times per share book value. This is a bit pricey, but the big picture for the Tuscaloosa is bright. Encana, which has acreage in several less-developed shale basins, trades at a similar 3.3 times book value per share. The bottom line is this: If the TMS is commercially successful, which looks increasingly likely, then Goodrich's 400,000+ core acres alone will be worth much more than $1 billion. 

To sum up, Goodrich will benefit immensely from declining costs in this new, oil-rich shale play. The economics of the TMS may one day look similar to that of the Bakken. The Tuscaloosa Marine Shale is a major emerging shale play and Goodrich is the best way to participate in it. 

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