Is Halcon Resources a Buy?

Shares of Halcon Resources (HK) have dropped nearly 76% year-to-date despite a strapping earnings performance in the first-quarter of 2016. This decline in its earnings can be attributed to its move of filing Chapter 11 that protects against bankruptcy. Halcon, as part of its restructuring agreement with the creditors, remains high on eliminating approximately $1.8 billion of debt and around $222 million of preferred equity this year.

Moreover, Halcon with this move plans to wipe out more than $200 million of annual interest burden this year.

While this strategic move can help the company surviving the downturn, the company is confronted with the delisting issues. On June 02, 2016 Halcon received a notice from the New York Stock Exchange that the price of its common stocks has dropped to below the NYSE’s continued listing standard. As per NYSE, the average closing price of the stock should not be less than $1.00 per share for 30 uninterrupted trading days.

Now, it has been more than 15 days since the price of stock fell below $1.00 per share, but in my opinion, the stock will quickly go past $1.00 per share as the restructuring initiatives have started bearing fruits. In fact, the stock has picked up nearly 36% since touching its lowest level of $0.22 per share on May 2016. Let us have a look at its restructuring initiatives that helped the company to improve its bottom line performance despite a significant drop in the revenue in the last reported quarter.

Costs reductions are improving its earnings

Halcon Resources continues to get better on the costs structure during this challenging oil and natural gas environment. For instance, its lease operating and workover costs fell by 6% to $7.89 per Boe for the first quarter as compared to $8.36 per Boe in the fourth quarter of 2015. In fact, these expenses fell by 17% on a year-over-year basis. Meanwhile, its G&A expenses for the quarter dropped 8% to $4.52 per Boe as against the G&A costs of $4.93 per Boe in the fourth quarter of 2015. As a result of these reductions in the expenses, its total operating costs for the quarter came in at $16.50 per Boe, down 3% as compared to $17.08 per Boe in the previous quarter.

As observed in the chart above, these cost reductions efforts enabled the company to improve its bottom line performance. For instance, its earnings for the quarter came in at $0.21 per share from a loss of $1.43 per share in the first quarter of 2015. Moreover, this improvement in the earnings was despite its revenue getting declined by over 61% on a year-over-year basis.

Looking ahead, Halcon sees significant cost reduction opportunities at Eagle Ford and Bakken Three Forks. For instance, the company at the Bakken/Three Forks is making completions modifications for its wells through proppant type, fluid type & pumping services, electrification of fields, produced water offloading solutions and optimization of the chemical program. As a result of the completion modifications at Bakken/Three Forks the company expects well costs at Fort Berthold to drop approximately 44% in 2016 from 2015 levels.

Apart from the reduction in costs, the company has lowered its capital expenditure by 53% to $150 million this year from $322 million in 2015. Thus, these cost reduction efforts should improve its earnings performance this year. The most important thing is that Halcon is not only reducing costs at its core assets but increasing productivity for its assets that should all together bring better returns from its assets going forward.

For instance, Halcon, despite this massive drop in the capital expenditure expects a modest reduction in the production for 2016. Its production is expected to drop only by 8% as against a 53% drop in the capital spending.

Strong hedging position to protect its cash flows

Halcon should benefit from its strong hedging position. For instance, the company has hedged about 84% of its oil production at a weighted average oil price of $81 per barrel for the remainder of the year. In fact, the company has hedged approximately 3,750 barrels of oil equivalents per day at average oil price of $65 per barrel in 2017. Halcon expects the pre-tax mark-to-market value of this hedging portfolio to be at $220 million as of May 5, 2016.  Thus, this strong hedging program should protect its cash flows going forward.


Although Halcon is facing delisting issues, its restructuring initiatives are worth observing and could result in significant value creation in the future. At the same time, the company is lowering its operating costs by a significant manner as stated above. So, all-in-all the stock remains a safe investment in the long-run.

Published on Jul 18, 2016
By Vinay Singh

Copyrighted 2020. Content published with author's permission.

Posted in ...