Floyd Wilson aims to turn Halcón into a new Petrohawk – minus the gas

June 1, 2012


Don Stowers, Editor – OGFJ

EDITOR'S NOTE: Floyd Wilson has not been idle. Last year he oversaw the sale of the tremendously successful Petrohawk Energy, a company he founded, to BHP Billiton for $15.1 billion. He has since recapitalized another company (RAM Energy), changed the name to Halcón Resources, and in April acquired still another company (GeoResources) for over $1 billion in cash and stock. OGFJ Editor Don Stowers recently caught up with Wilson for a short Q&A session.

OIL & GAS FINANCIAL JOURNAL: Why did you decide to go back into business right on the heels of the sale of Petrohawk? Didn't you need a little time for R&R?

FLOYD WILSON: The unconventional business here in the US is growing by leaps and bounds, so I felt there was a good opportunity to build a company similar to Petrohawk but start from scratch basically and build an oil company rather than a largely natural gas company [like Petrohawk]. Having been reasonably successful with this, I thought it would be a good idea to jump right back in and follow up on some ideas I had.

OGFJ: So why did you choose RAM Energy to recapitalize?

WILSON: Well, both RAM and GeoResources came to me, so it was a little different than me going out and looking. In the case of RAM, they had a mature production base, largely oil, low decline, good EBIDA production, non-risky, and access to one of the emerging oil plays in the US – not a shale, but the Mississippi Lime, which is a conventional reservoir being completed in unconventional ways, horizontal drilling, multi-stage fracing, and so on.

And with RAM, you had a company in which a majority of the shareholders were willing to look into the future and allow themselves to be recapitalized and, basically, taken over. So there were a number of attractive elements there – oil, a new play, and speed. With my experience and background, you might notice that speed seems to be important to me and my colleagues, and it is.

OGFJ: What do you see as the upside to the GeoResources acquisition? How is this a good fit for Halcón?

WILSON: On the surface, there were a number of similarities to RAM. There was a mature, solid, largely oil production base. This was a company that was in very good shape financially – very little debt – so this played a part in the decision process as well. GeoResources had taken a look at some of the things that had gone on with Petrohawk with respect to companies that we acquired and what had happened to their shareholders. They saw that the shareholders had been treated very well financially in those transactions, so they decided to talk to us about the possibility of a buyout. The company was attractive to us because it provided access to three really interesting plays: the Eagle Ford, down in Fayette County; the Bakken, which I had been looking at for years but never gotten into; and a large acreage position in the Austin Chalk. All these things combined made the company very interesting to me, and the fact that they were interested in a significant component of stock in the transaction was a major consideration.

OGFJ: If I heard correctly, pursuant to the sale of Petrohawk to BHP, you are prohibited from operating in the Eagle Ford until November of this year. Since the acquisition of GeoResources puts Halcón squarely in that play, what is the status of those assets and must they be divested?

WILSON: I'm not actually constrained from operating in the Eagle Ford, but under the non-compete agreement that we constructed, I'm not supposed to operate within 50 miles of a current BHP Billiton operation in existence at the time of the transaction. Since the GeoResources Eagle Ford assets are within that halo, I contacted BHP. They said to go ahead with the transaction but that we would have to divest the Eagle Ford assets, which I've agreed to do. Having said that, it's a great piece of property and a great location. It's oil. And whether it's a development project in-house or a divestiture project, it's worth a lot of money, and it's in the early stages. So by the time we get the deal closed, we'll have a few more wells drilled by ourselves and by a competitor. It'll bring top dollar, so I wasn't at all dismayed by the fact that BHP preferred that we stick strictly to our agreement. They paid a very fair price for Petrohawk, and they deserve to have us live up to our end of the bargain. We'll divest those properties shortly after closing the deal with GeoResources.

OGFJ: What is the origin of the company's name – Halcón Resources?

WILSON: Halcón is a Spanish word that means hawk or falcon. Most people say HAL-con, but with the accent mark over the "o" it's hal-CONE.

OGFJ: Rumor has it that Halcón has been acquiring a leasehold position in the emerging Tuscaloosa Marine Shale in Louisiana. Would you care to comment on this?

WILSON: There was a blog out there that mentioned that. We've been acquiring land in four announced areas. We added these areas with the GeoResources acquisition, and then we announced that we had been acquiring land in three undisclosed plays. And then we added a fourth on our recent [analyst] conference call. We've been leasing underneath the radar screen, so to speak, because that is very effective in keeping the costs down. We're leasing purely oil-biased reservoirs, and those are very attractive to nearly everyone these days. So we're just keeping quiet about those where we're building our position. Other than that, I'm not really in a position where I can discuss those plays. However, we will be talking about them later this year. We're well on the road toward our acreage target, and we are moving rigs in as we speak, so we'll have a lot to talk about in a couple of months.

OGFJ: Rice University recently released a report about projected oil production in the US and its impact on oil imports. It stated that currently only about 15% of our offshore areas are open to drilling and that the other 85% could add significantly to our reserves. Combine this with our unconventional reserves, and that's a lot of oil. Are you optimistic that the US is headed toward greater self-sufficiency in energy and that we'll be less reliant on oil imports from nations in politically unstable areas?

WILSON: I'm not a big macro economist or anything, but I'm highly confident that the US is headed toward a much higher degree of energy self-sufficiency. When the explosion of gas production from the shales started to hit the market in 2009 and 2010, our system of supply and demand got really out of whack. Supply outdistanced demand quickly, and gas prices fell dramatically. Oil is a little different. We're a significant user and importer of oil. However, I believe I read that we've recently become the largest producer of oil in the world on a daily basis. That's due largely to the Eagle Ford and Bakken shale plays. Over time, there's a huge opportunity for greater independence. It's hard to say what this will do to prices because oil is a global commodity and globally priced. Other countries will eventually see shale development as well, but right now they're so far behind in terms of infrastructure and technical expertise, it's going to be some time before that occurs. We have plenty of room for US production to increase dramatically over the next five or 10 years, which will be very good for the country. I'm not a politician either, but we seem to be taking very slow steps to take advantage of this explosion of natural gas onshore US. There is a huge opportunity for us to use more of this ample supply of natural gas for power generation, industrial consumption, and transportation.

OGFJ: Is the current low price for natural gas out of whack?

WILSON: It's the supply and demand that is out of whack. The price for natural gas is based on supply and demand, which is a fair enough way to price things. It's a tremendous opportunity for the United States to have all this gas. Also, with the increased production of natural gas liquids and crude from these shales, we're going to see a resurgence of the petrochemical business here in the US due to two things: 1) the feedstock of natural gas is so inexpensive, and 2) all the NGLs being produced also play a part in this. There doesn't seem to be a downside to what is going on.

OGFJ: Unless you're in the coal business.

WILSON: [Laughs] Well, as far as power generation is concerned, natural gas is the only good bridge fuel to other sources of electricity that are not that commercial right now. Low gas prices have put a damper on the outlook for some of these solar and wind projects that require so much development capital and, sometimes, subsidies.

Back to crude though, there is a really solid chance we can achieve or move toward energy independence because of these unconventional reservoirs and conventional reservoirs that are being dealt with in an unconventional manner. That is, through horizontal drilling and hydraulic fracturing. So our target at Halcón is strictly those kinds of formations. In just a few short months, we've acquired hundreds of thousands of acres all geared toward oil and liquids production. It's been not as expensive as you might think even though everyone is interested in those kinds of things. They're still very front-end loaded in terms of technology and geoscience. You have to figure out all these things in advance and then get in there and compete with peers who have the same idea. So it's not an easy business, but we've been able to amass quite a bit of acreage in just a couple of months.

OGFJ: Currently I believe that roughly 65% of your production is in Texas, 25% in Oklahoma, and about 10% in Louisiana. Do you expect these proportions to remain about the same in the next year, and what projects will account for most of your production growth in the next 12 to 24 months?

WILSON: If you'll allow me to think about GeoResources in a pro-forma way, the basic production mix doesn't change that much when you add them to Halcón's current basics except that they've got a couple of thousand barrels per day up in the Rockies. We've recently acquired acreage up in Pennsylvania and Ohio in the Utica-Point Pleasant shale play and are moving a rig in almost as we speak. So this is clearly in a different area for us. We intend to grow the Bakken component that Geo is going to provide us as a starter kit, and that is also in a different area than Texas, Oklahoma, and Louisiana. We'll also see growth in the Mississippi Lime (Oklahoma), the Woodbine (East Texas), and the Wilcox (Central Louisiana), but we're very excited about what's going on in Pennsylvania and Ohio. The Utica is an oily play.

OGFJ: I saw a map somewhere that indicated that the western portion of the Utica in Ohio is the oily area of that play. Is that correct?

WILSON: Well, we've spent a lot of time and money trying to figure that out. I suspect that statement is not quite right. [Laughs] These plays have a tendency to have a dry gas window, a volatile condensate window, then a black oil window, and an area where the oil is immature. The Eagle Ford is that way, and it seems as if the Utica-Point Pleasant is the same way. It's too general to say that the western portion is the oily part. But in any one single area, the western-most part of that specific area is the oilier part, if that makes sense.

OGFJ: Thanks for setting me straight on that. I know you need to go, but I have one final question: Earlier this year, you completed a $400 million equity offering. How will you use the proceeds from that offering and how is the capital being allocated?

WILSON: To keep it in context, we brought $550 million into RAM and then changed the name to Halcón. We added $400 million to that, so in round numbers we have about $1 billion of capital available to us. We paid off a few credit lines, but we established new credit lines, so in terms of liquidity today, we have about $900 million available to us. We will use that money strictly to buy land in the oily shale and conventional plays that we've announced and in ones that we haven't identified yet, and of course some drilling. We have a fairly strong drilling program this year for a company that's only been around a couple of months. I think we're spending well over $300 million this year drilling. So we have quite an appetite for capital.

OGFJ: Would you ever consider forming a joint venture with another company to develop acreage to reduce land and drilling costs?

WILSON: This may be a good strategy for companies that want to pursue that, but we don't. My view is more old school. If someone wants to do a JV with us, they can JV the whole company. We pursue early-stage development projects with decades and decades of drilling ahead of them, and I don't like selling off chunks of that. I'd rather raise money in some other way, and we've always been able to do that. At the end of the day, the value that's created through a transaction such as the one we did at Petrohawk is much more lucrative for the shareholders than the fleeting value created by a JV, which generally is driven by a balance sheet in trouble in terms of liquidity.

OGFJ: Thanks very much for your time.

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