A Closer Look at Halcon Resources' Balance Sheet

If growth in oil production is what you're looking for, Halcon Resources (NYSE: HK  ) is certainly a respectable choice. The company is led by legendary CEO Floyd Wilson, otherwise known as the person who "discovered" the Eagle Ford Shale when he was the CEO of Petrohawk Resources. Halcon has more than just good bloodlines, however: In its most recent quarter, the company grew revenue by 44% year on year and grew total production by 41%. 

Halcon currently operates in three major areas, all of which are premier shale oil plays: The Bakken, the El Halcón play (which is just north and east of the Eagle Ford), and the Tuscaloosa Marine Shale. The company owns 142,000 net acres and 90 million barrels equivalent in the Bakken, 100,000 net acres and 27 million barrels equivalent in the El Halcón, and finally a huge 307,000 net acres in the newer Tuscaloosa Marine Shale. 

Of course, assessing an oil and gas producer is not just about growth and acreage. We must also look also at a company's finances to see what possible risks lie beneath. The company's best peers would be other mid-cap, upstream names in multiple shale plays: Think Carrizo Oil and Gas (NASDAQ: CRZO  ) , Rosetta Resources (NASDAQ: ROSE  ) , or QEP Resources (NYSE: QEP  ) . This article will compare the finances of Halcon to companies like those above.

A rig in the Williston Basin, an key operating area for Halcon. This illustration is from the 1930s. Source: Boston Public Library


Funding gap ahead

Data by Morningstar

Like most smaller shale operators, Halcon has a rather large funding gap right now. This is not because the company is unprofitable; it is just spending large amounts of capital on drilling and land acquisition. Halcon's $2.5 billion capital budget and $500 million operational cash flow are somewhat similar to Sanchez's $1.1 billion capital budget and $200 million operational cash flow. They are also somewhat similar to QEP's $2.5 billion capital budget and $1.3 billion operational cash flow.

The majority of Halcon's capital budget this year will be allocated to the Bakken and the El Halcón play. Such large capital expenditure should keep growth momentum going, or possibly accelerate it. Guidance for 2014 is an amazing 61% of production growth. Expect this growth to continue for multiple years because the company's 300,000 acre position in the Tuscaloosa Marine Shale is largely untouched. 

Source: Investor Relations

Debt management
Halcon is growing production at an impressive clip, but can the company manage? The company's debt, which is 4.4 times EBITDA, is all in the form of senior notes or bonds. All rates are fixed, so interest rate fluctuations will not effect them. Furthermore, few bond obligations are due until 2020 and 2021. This means that Halcon has about six years to turn itself significantly cash-positive and either pay off that debt or roll the debt over in a refinance according to whatever rates may be in 2020. While predicting conditions six years from now is difficult, Halcon is successfully developing its Eagle Ford and Bakken acreage and is positioning itself so that this debt will not be a problem down the line. One other thing worth noting is that Halcon does have a revolving credit facility of $800 million, and it is entirely untapped. 

Bottom line
Halcon is a lot like its mid-cap, shale-drilling peers in that it is currently spending far more than it is taking in. However, that spending is going into intense drilling activity in high-margin, high-growth shale assets. The company's Bakken and El Halcón Eagle Ford assets deliver growth today, but it's the company's gigantic Tuscaloosa acreage position that carries the most potential. From what we can see today, we have every reason to be confident that Halcon will successfully manage its debt and in a few years will become a very profitable company.

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  • Report this Comment On May 19, 2014, at 2:32 PM, OILSTKS wrote:

    Good analysis of this dynamic E&P.

    I would suggest that anyone who is not willing to ride the coattails of the " legendary CEO Floyd Wilson ",

    find something else to invest in .

    He is battle tested ,and driven to make the current " Hawk " a success.

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