Is Halcón Resources Set for Meaningful Growth?

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While Halcón Resources’ latest operational update looks good, it may be prudent to step back and view the larger picture.

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  • http://investors.halconresources.com/releasedetail.cfm?ReleaseID=853041
  • http://investors.halconresources.com/releasedetail.cfm?ReleaseID=853041
  • http://investors.halconresources.com/releasedetail.cfm?ReleaseID=853041
  • From Investor Presentation:
    http://files.shareholder.com/downloads/ABEA-5X1N65/2897626498x0x760795/817de36d-cf15-421e-8216-e915d44f1f7c/Halcon_IR%20Presentation_June_FINAL2.pdf
  • From Investor Presentation
    http://files.shareholder.com/downloads/ABEA-5X1N65/2897626498x0x760795/817de36d-cf15-421e-8216-e915d44f1f7c/Halcon_IR%20Presentation_June_FINAL2.pdf
  • From Investor Presentation
    http://files.shareholder.com/downloads/ABEA-5X1N65/2897626498x0x760795/817de36d-cf15-421e-8216-e915d44f1f7c/Halcon_IR%20Presentation_June_FINAL2.pdf
  • From 1Q 2014 earnings release, Page 5: http://www.sec.gov/Archives/edgar/data/1282648/000110465914035901/a14-11959_1ex99d1.htm
    From 1Q 2014 earnings call: http://seekingalpha.com/article/2203713-halcon-resources-hk-ceo-floyd-wilson-on-q1-2014-results-earnings-call-transcript
  • From Yahoo! Finance: http://finance.yahoo.com/q/ks?s=HK+Key+Statistics
    From 10K and other company filings: http://www.sec.gov/Archives/edgar/data/1282648/000104746914004710/a2219964z10-q.htm; http://www.sec.gov/Archives/edgar/data/1282648/000104746914001420/a2218408z10-k.htm#h7
  • From company filings.
  • Is Halcón Resources Set for Meaningful Growth?

    1. 1. Is Halcón Resources Set for Meaningful Growth?
    2. 2. Is Halcón's growth for real? • Halcón's latest Tuscaloosa Marine Shale update a major boost. • However, it’s too early to predict a stable production pattern from this emerging shale play. • Halcón's existing production from its Bakken and El Halcón properties not enough to fuel meaningful growth.
    3. 3. Latest TMS update a shot in the arm… • Halcón's first operated well in the TMS achieves average 24-hour IP rate of 1,508 Boe/d. • Superior well design credited for impressive IP rate. • Effective lateral length of 7,060 feet with 24 frac stages. Halcón's 6-month price chart HK data by YCharts
    4. 4. Latest TMS update a shot in the arm… • Currently drilling three more wells. • Expects to drill 10- 12 wells in 2014, plus participation in 15-20 non-operated wells. • Signed financing agreement worth $400 million to develop TMS acreage. Photo credit: Flickr/Paul Lowry
    5. 5. …but still early to predict a pattern. • The Tuscaloosa Marine Shale play is still relatively new. • Encana (NYSE: ECA) and Goodrich Petroleum (NYSE: GDP) have reported 24-hour IP rates between 546 Boe/d and 1,087 Boe/d with a median rate of 895 Boe/d. • Decline rates and EUR yet to be ascertained. • Steep learning curve ahead with management allocating only 10% of D&C capex to the TMS.
    6. 6. What to expect now from the TMS • Well costs are on the expensive side (see chart). • Bakken well cost range: $10-$11 million. • Average El Halcón well cost: $9 million. • Gradual transition to multi-well pad drilling (see chart). Photo credit: Halcón Resources /Investor Presentation
    7. 7. Why the success of TMS is critical • Favorable pricing environment at TMS due to proximity to Light Louisiana Sweet (LLS) market. • Existing production form Bakken and El Halcón not sufficient to fuel meaningful growth. Photo credit: Flickr/Martin Lopatka
    8. 8. Existing production not enough… • 2014 production guidance range: 38,000 Boe/d to 42,000 Boe/d. • Expected growth: 14% to 26% from 2013. • Guidance is essentially devoid of TMS production which will be a bonus. Photo credit: Flickr/Department of Energy and Climate Change
    9. 9. …due to high debt & low returns. • Current debt-to- equity at 256%. • Impairments worth $1.4 billion in 2013 ate into net profits. • Return on equity has been negative for the past three quarters. • Free cash flow deficit a concern. HK data by YCharts
    10. 10. FCF deficit a matter of concern Cash flow from operations not enough to support capital expenditures in the past eight quarters. - 100.0 200.0 300.0 400.0 500.0 600.0 700.0 800.0 900.0 in$millions CFO CapEx Source: Company filings
    11. 11. Investor takeaway: Watch next 2 quarters • The Tuscaloosa Marine Shale remains critical to adding meaningful growth to Halcón's existing production portfolio. • Investors must watch Halcón's operational cash flow very closely. Photo credit: Flickr/Nicholas A. Tonelli
    12. 12. OPEC’s Worst Nightmare

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