Goodrich Petroleum's New Well No Match for Massive Short Float

Michael Teague |

Shares of Houston, Texas-based Goodrich Petroleum (GDP) were trading 36 percent higher by midday on Monday after the independent oil and gas producer announced the completion of and production results from its Blades 33H-1 well in Louisiana.

The Tangipahoa, LA well has so far proven capable of peak average 24-hour production rate of 1,270 barrels of oil equivalent, the vast majority of which is comprised of crude oil (1,250 barrels). The fact that the company’s new well is producing mostly crude can be cited as one of the main factors that sent investors rushing in to the stock, with shares opening the day on a gap-up of $2 before embarking on a relentless climb that showed no signs of abating.

As a result of the “shale boom,” the US is now producing some 8 million barrels of oil on a daily basis, with about one third of that amount coming from the nation’s many unconventional plays. In terms of the $814 million market-cap Goodrich, however, who has seen shares lose more than half their selling price between a November 2013 52-week high of $28.55 and the $12 price from mid-February, it is not clear how sustainable Monday’s rally will be.

For all the hype surrounding hydraulic fracturing, and horizontal drilling, the market seems to be reasonably skeptical of shale plays, even those producing valuable crude oil, given the much greater rates of decline at these wells that can reach as high as 70 percent during the course of just one year, compared to the old-fashioned vertical wells that usually decline by around 50 percent over a two-year period.

For independent producers like Goodrich, the revenue from one new and successful well often ends up being cancelled out by existing debts and continued operating costs, which can be seen in the company’s Return-on-Equity rate, currently 63 percent in the negative.

Furthermore, while the company has managed to slightly outperform other independents so far in 2014, it is hard to overlook the enormous 45 percent short float, which is all the more staggering considering that Monday’s session saw the stock trading on some 8 times average volume of 2.13 million shares per day.

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