Halcon Resources Refocuses on Finding the Quickest Way to the Exit

Photo credit: Flickr/Paul Lowry 

Halcon Resources (NYSE: HK  ) CEO Floyd Wilson reiterated at a conference last week that his plan for the company has always been to repeat his previous success and sell for a big profit. Most investors remember that he sold his previous company Petrohawk Energy to BHP Billiton (NYSE: BHP  ) for an impressive $12.1 billion. That was a 65% premium over the stock price before the sale was announced. Everyone expected him to quickly do the same with Halcon, which is Spanish for "hawk". Unfortunately, things haven't been as easy the second time around, which is why he's refocusing on what will lead to the quickest exit for the company.

What went wrong?
Wilson has been upfront with investors that the weak results it has experienced in Ohio's Utica shale formation have been a setback. The company had amassed a 142,000 acre position in the play making it one of the top-five drillers most levered to the Utica Shale. The problem is that its spot in the play was much farther to the northwest of the sweet spot that's fueling solid returns for rivals like Gulfport Energy (NASDAQ: GPOR  ) . Wells drilled on Halcon's acreage haven't yielded the top notch results that many expected. Because of that the company is practically abandoning the play.

Gulfport on the other hand, which has 165,000 net acres in the Utica, sees it's position fueling impressive production growth in 2014. Overall, Gulfport Energy sees its production surging to 55,000 barrels of oil equivalent per day from last year's 11,300 barrels of oil per day on the strength of its Utica production alone. The key here is that Gulfport is drilling in a great spot in the play while Halcon's well locations weren't in as good a spot.

What must go right for a repeat?
Giving up on the Utica was really the quickest way for Halcon to exit. It can now focus on succeeding in the two areas what will enable it to attract interest. First, it can focus its attention on manufacturing returns out of its core Bakken and Eagle Ford plays. Second, it prove up is massive position in the Tuscaloosa Marine Shale, or TMS and show that it isn't another Utica.

For 2014 Halcon Resources will spend about 35% less capital than last year. However, by focusing on its most economic areas it expects that spending to fuel a 61% surge in production, which is close to the 65% increase in production Halcon saw last year. Hitting or exceeding these targets will certainly make it easier for Wilson to sell Halcon at a profit in the shortest amount of time.

Photo credit: Copyright © Encana Corporation. All rights reserved.  

In addition to that Halcon can focus some of its capital on finding success in the TMS so that it can become a third core pillar to the company's growth. Wilson has gone on record to say that he thinks this is the last great oil field we'll see discovered by the industry. Peers like Encana  (NYSE: ECA  )  also sees big potential from the play. This is why Encana placed it as one of its top five core plays, which are entrusted with fueling its rebound. 

The big question is if Halcon and peers like Encana will figure out how to economically get the oil out. Halcon thinks that its development plan, which includes longer laterals, increased proppant volume and close cluster spacing is the key to economically developing the play so that it can eventually can be used to manufacture returns. If the TMS delivers for Halcon, its massive 300,000 net acre position will become very desirable to a would-be acquirer.

Investor takeaway
Halcon Resources certainly has the potential to repeat the past success of Petrohawk and net investors a nice premium. By focusing on earning strong returns in the Eagle Ford and Bakken it can show a buyer that its assets can fuel profitable growth. Further, if the TMS is as good as Wilson thinks it will be, that upside could become the base for a nice premium that rewards Wilson and investors for taking the risk. Wilson is hoping that this new focus will allow him to find the quickest way to exit his investment in Halcon at a nice profit. 

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  • Report this Comment On April 09, 2014, at 7:45 AM, Ostrowsr wrote:

    With a PEG (based on accelerated earnings) of 0.5, this stock could easily double just to reach fair value. And growth is projected at 35% after that. And it is a conservative number. At least $10 is fair value this year.

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