What happened
Halcon Resources' (HK) stock was scorching hot in July, jumping 34.4% by the end of the month.
So what
One of the drivers of Halcon's huge gain last month was oil, which rebounded more than 9%. It was also crude's biggest gain in more than a year. Several catalysts fueled the surge, including reports that the U.S. was planning to impose sanctions on Venezuela, which could result in supply shortages.
Image source: Getty Images.
That said, while the rally in the oil market helped fuel oil stocks last month, Halcon got an even bigger boost when it announced the sale of its operated assets in the Bakken shale for $1.4 billion in cash. That transaction does two things for the company. First, it transforms it into a pure play on the Permian Basin, where companies can earn higher drilling returns at current oil prices than most other shale plays. While that deal will shrink Halcon significantly since its Bakken assets currently produce 29,000 barrels of oil equivalent per day (BOE/d) versus just 7,500 BOE/d from its retained assets, it's on pace to increase output from the Permian to more than 13,000 BOE/d by year-end.
Aside from shrinking the company down to a fast-growing core, the other benefit of this transaction is that it will significantly improve Halcon's balance sheet. The company has already called for the redemption of half its 6.75% notes due in 2025 while also planning to retire all the outstanding second lien notes due in 2022 and pay off its credit facility. As a result, the company will cut its debt from $1.16 billion to $425 billion while improving its liquidity from $447 million to $730 million. That gives it a much stronger balance sheet and completes its remarkable transformation from a company that sank into bankruptcy during the early stages of the oil market downturn to one that will soon have more cash than debt.
Now what
The Bakken sale is a game changer for Halcon Resources because it significantly improves its financial situation. Furthermore, the deal will enable the company to completely focus its attention on its rapidly growing Permian position, which has the potential to fuel high-return growth for the next several years if oil prices cooperate. That growth could fuel even more gains for investors in the coming years.
