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It Just Might Be Time to Worry About Halcon Resources in 2014

Last month, Halcon Resources Corp (NYSE: HK  ) announced a 14% cut in its planned 2014 capital expenditure spending plan. On the one hand, there was some very good news as the company reiterated its production guidance, meaning the spending cut wouldn't lead to lower production. That said, there still are reasons to worry about Halcon Resources in 2014, and here's why.

Flat production
Halcon Resources now plans to spend $950 million in 2014 on drilling and completing new wells. Those funds should enable the company to produce an average of 38,000 to 42,000 barrels of oil equivalent per day, or Boe/d, in 2014. What's a bit concerning about those numbers is that Halcon Resources produced 37,707 Boe/d in the third quarter of 2013. Essentially, that near billion dollars in capital isn't leading to a whole lot of production growth in 2014.

One reason Halcon Resources doesn't see much growth is due to the fact that it's selling assets to pay for its 2014 plan. While that could pay dividends down the road, there are plenty of other energy companies actually growing production in 2014. For example, Concho Resources (NYSE: CXO  ) recently accelerated its drilling program in the Permian Basin. Concho Resources now sees its production growth averaging 25% over the next three years, which has it on pace to double its production by 2016.

Funding gap
The other issue facing investors is the fact that Halcon Resources is still aggressively spending, but not aggressively growing. For example, the company is funding its 2014 capital plan with a combination of internally generated cash flow, borrowing under its credit facility and additional non-core asset sales.

Lately, we've been witnessing more and more energy companies shy away from aggressive, underfunded capital plans. One of the leaders of that strategy, Chesapeake Energy Corporation (NYSE: CHK  ) is backing away from it in 2014. Under the leadership of new CEO Doug Lawler, Chesapeake Energy is lowering its capital spending to the point where its growth is funded within its cash flow.

Similarly, other aggressive growers like Kodiak Oil & Gas Corp (NYSE: KOG  ) are shifting gears to reduce capital spending to match cash flow. In 2014 Kodiak Oil & Gas is reducing its planned capital spend by about $60 million to match its expected cash flow for the year. However, the company also expects to grow its production by 45% for the year.

Investor takeaway
The fact that Halcon Resources is reducing its planned capital spending isn't a bad thing. However, it's not reducing it enough to match its planned cash flow. Further, the money it is spending isn't producing the growth that some of its peers will enjoy in 2014. That's a worrisome combination for me and why I plan on steering clear of the stock in 2014. I simply see much better opportunities elsewhere.

One great oil stock to buy in 2014

Halcon Resources can still thrive in 2014, but it has an uphill road to climb as it isn't as well positioned as some of its peers. In fact, there are three energy companies that are so well positioned to profit from the boom that they offer investors like you a better opportunity. That's why you need to check our special free report, "3 Stocks for the American Energy Bonanza." Don't miss out on this timely opportunity; click here to access your report -- it's absolutely free. 

Read/Post Comments (3) | Recommend This Article (9)

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  • Report this Comment On January 03, 2014, at 12:20 PM, adecinvestor wrote:

    It might be time to worry about your or your buddies' short position

  • Report this Comment On January 03, 2014, at 7:25 PM, mickeyp123 wrote:

    Was it time to worry when stock was 9, 8, 7, 6, 5, 4, ... but now at $3.70 its time to worry. Little late to the party.

  • Report this Comment On January 08, 2014, at 3:00 PM, brooks1988 wrote:

    Another big factor you forgot to mention is the $300 million or so it costs to simply pay interest on HK's massive debt. HK overpaid for assets it acquired and now it is overpaying to maintain them. Absent perfect execution of its business plan, coupled with rising oil prices that may not happen, HK is in a death spiral much like ATPG a few years ago. Too much debt and no way to fund it.

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Matt DiLallo

Matthew is a Senior Energy and Materials Specialist with The Motley Fool. He graduated from the Liberty University with a degree in Biblical Studies and a Masters of Business Administration. You can follow him on Twitter for the latest news and analysis of the energy and materials industries:

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