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November 2014

What We Learned From 3rd Quarter Reports of TMS Operators

Posted by bernell on November 12, 2014

The State of the TMS…

We’ve heard from all of the operating companies over the past week and a half and at least have an idea of what they were thinking as of the date of their presentation. 

So, what can we conclude from what we’ve heard.

Some folks have taken an “Oh, woe is me!” attitude about the TMS. 

If I listened to these folks I might contemplate jumping off of a curb and spraining an ankle. 

(Honestly, I think these naysayers simply need to get out more.  The time change and shortening days have thrown their Vitamin D levels too low.  Vitamin D supplements may be helpful.)

Seriously, with the price of oil having dropped into the high $70’s, things are not great in the TMS. 

But, at the same time the drilling/completion success is progressing nicely. 

Let’s look at the attitudes of the operators here on a company by company basis.

Comstock Resources – Both management words and actions speak very loud with Comstock. 

First, Comstock is continuing to increase its leaseholdings. Why would you continue to lease acreage in a play you plan to leave?

Second, Comstock entered the play in July based upon success by Goodrich and Encana and those successes have only gotten better.  Comstock management is sold on the prolific quality of the shale and seems confident the challenges of the play will be worked out.  Specifically, Comstock management said the TMS is a “good bet” going forward.

Plans for 2015 won’t be announced until later in the year, but I’m guessing Comstock continues drilling with one rig in 2015.

Sanchez Energy – Management plans to fulfill drilling commitments in the TMS by the end of the first quarter of 2015.  Once these drilling commitments are completed, Sanchez management will assess things.  This assessment will include the price of oil, Sanchez’ drilling/completion success in the TMS and the drilling/completion success of other companies in the TMS.

Tony Sanchez said with regards to the TMS,…”it’s certainly very encouraging for that play.”

I interpret the Sanchez comments to be mean that if the price of oil rises above $80, especially significantly above $80, and if Sanchez and others in the TMS are having continuing success, then they will likely stay.  If the price of oil is below $80, especially significantly so, and drilling times, drilling/completion issues, costs, etcs…are not continuing to improve, then they plan to pull out for at least a while.

Halcon – Halcon has spud 10 wells, completed 5 and is in the process of drilling/completing 4. Halcon has had a painful learning curve in the TMS and is crying “uncle” for now. 

That said, I heard some positive things from the report. The last completed well will have an acceptable IP.  IF these last two wells are drilled without issue (and both are in what should be good areas) AND oil prices rebound a little, it would not surprise me to see Halcon return to the TMS sooner, rather than later.

(Allow me to add one observation relative to Halcon.  This company has agreements in place that basically give away a portion of the revenue from the oil produced.  Thus, Halcon is impacted even more by lower prices than other companies are in the play.)

Encana- Encana has, frankly, had the most consistent success in the TMS while experimenting as much, or more, than anyone else. Further, Encana is moving into the development phase with 4 well pads over the next few months. Despite indecision on the part of management during the 3rd quarter report, I can’t see Encana leaving the play in 2015. 

By the way, the indecision is not really a knock on the TMS, but rather a pat on the back to the other more proven plays that EnCana is involved.  EnCana is trying to decide whether to go with the flow with the other more proven plays or make the leap of faith necessary and go all in with the TMS.

Again, they seem to be leaning toward the painfully frustrating decision of just limping along in the play for the near term.  When they call and ask, I'll tell them to dive on in...the water is fine!

Goodrich – I have described Goodrich as an ant carrying a loaf of bread. 

IF the TMS is successful, Goodrich will become a very valuable company.  Specifically, assuming Goodrich is able to stick with its guns and drill and hold another 20,000 acres or so on its own in 2015, to go along with its roughly 30,000 acres already held by production, AND the price of oil rebounds, this company’s stock will see an historic rise in value.

With 50,000 proven acres in the heart of the TMS held by production, Goodrich will have as many as 350 wells it can drill when the price of oil goes back up without having to maintain leases.  Just these acres coupled with the companies knowledge and experience will make the company a winner. 

Just imagine what would happen with a JV partner to allow for a tripling or quadrupling effect?

Goodrich attempted to explain things in detail to us in its 3rd quarter report and I was reminded of my efforts to group tutor some struggling math students on the unit measure termed a “yard” some years ago.

Try as I might, I simply couldn’t get the students to retain the fact that 1 yard equaled 3 feet in length.  So, I finally asked them if they had ever heard of a “yard dog.”  When they said they said they had heard the term, I explained to them the origin of the word.  I told them that a “yard dog” was a dog that only had three feet and, therefore, was unable to jump the fence.  Thus, the 3 footed dog had to remain in the yard.

Sadly, some still didn’t get it…but, I digress…

Robert Turnham offered simple and detailed explanations as to why Goodrich and the TMS would be a success going forward. 

No one seemed to understand it. 

Eyes seemed to glaze over.

Here’s my “yard dog” take on the Goodrich presentation. 

  1. Goodrich has figured out how to successfully drill and complete wells in the TMS as evidenced by its last dozen wells or so and is continuing to see improvements in the process.

  2. The production curve has improved with the last few wells.  That is, the production levels of each well is dropping more slowly from the initial peak level.  Bottom line is pay back will be sooner, rather than later, with new wells.

  3. Goodrich management has plans to bring down costs.  (multi-well pads, common sense cost reductions, etc…).

  4. With its hedging program, Goodrich will net around $90 a barrel in 2015 even if the price of oil remains at its current low price level.

  5. If no JV partner shows up, they are capable of doing it all on their own...although more slowly.

I don’t know how you feel about ants, but I’m cheering for this one.


In summary, the price of oil has dampened the progress of the TMS. 

Despite this, Goodrich and Encana in 2014 have proven the TMS can be successfully drilled and completed.  Halcon, Sanchez and Comstock may add further evidence with their next few wells.

The TMS has been here for 93 million years.

When the price of oil goes back up, and it will, the TMS will still be here waiting for someone to tap into its oil saturated rock. 

Whether the current companies are involved or not is up to them.

What do you think about it?