Halcon Resources Is a Risky Investment Due to a High DebtHK) is a stock that investors should not fall for. The company has suffered as a result of the weakness in the energy markets, but the fact that it is heavily laden with debt is another reason why investors have been negative about Halcon. In fact, when the company had released its second-quarter results, its operating revenue was down 49% from last year.
In addition, Halcon had reported a second-quarter net loss of $1.1 billion, or $2.03 per share, as compared to a net loss of $67.5 million, or $0.18 per share, during the same period last year.
Halcon has seen a significant contraction in both its top line and bottom lines primarily driven by the ongoing weaker global commodity environment and forcing the company to reduce non-core expenditures to sustain daily operations.
But, despite the end market weakness, Halcon grew its second quarter oil, natural gas, and oil equivalents production significantly and hedged pricing by executing a major strategic hedging program to counter the continued decline in global crude prices. In addition, the company announced a 28% decline in its net operating costs per unit on a year-over-year basis.
At present, Halcón is operating three rigs throughout its holdings and has nearly 14 wells already completed or in progress towards completion. Importantly, year-till-date, completed well costs have declined substantially in the core plays of the company and it estimates this trend of cost-minimization to continue.
Moreover, Halcon is continuously focused on optimizing the operations at each of the three rigs across its holdings to minimize costs, enhance production, and deliver profitability.
The strategic price hedging program of Halcón should allow it to strengthen its balance sheet and recover safely from the ongoing weaker global commodity pricing environment. These efforts are further supported by the company’s expanding year-over-year production levels and are in line with its expectations for the quarter.
Going forward, Halcon estimates to produce in the range of 39.5 and 41.5 Mboe/day in the third quarter of 2015, accounting for nearly 700 Boe/day of non-operated production in the Williston Basin that should continue to be closed and nearly 1,100 Boe/d of non-operated production in the Williston Basin that is expected to get deferred.
But, in my opinion, investors should not miss that Halcon is laden with a lot of debt. Global Hunter Securities has reiterated its “Sell” rating on Halcon Resources primarily due to weaker net asset value and growing overall debt levels, although Halcon has successfully executed its share hedging program for the quarter.
In addition, TheStreet Ratings team rates Halcon Resources as a “Sell” with a ratings score of D+. This is also due to the company’s elevated debt management risk and weaker historical performance of the stock.
As such, most of the analysts are negative about the growth outlook of Halcon Resources. As a result, most of them have provided either a “Hold” or a “Sell” rating to the stock considering its weaker growth prospects amid a tough operating environment. In addition, Halcon’s debt is another sticking point.
I think that investors should avoid an investment in Halcon Resources looking at the company’s weak valuations and disappointing growth prospects. The negative profit margin of 143.48% indicates that its margins are under heavy pressure. Moreover, despite a strategic price hedging program being executed by Halcon, it is debt-burdened with a significant total debt of $3.65 billion as against weaker total cash position of $9.97 million only. Hence, despite certain positives, it will be ideal for investors to avoid an investment in Halcon Resources.
Published on Sep 21, 2015By Ayush Singh