Is Halcon Resources Corp Destined for Greatness?

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Halcon Resources (HK) fit the bill? Let's take a look at what its recent results tell us about its potential for future gains.

What we're looking for
The graphs you're about to see tell Halcon Resources' story, and we'll be grading the quality of that story in several ways:

• Growth: are profits, margins, and free cash flow all increasing?
• Valuation: is share price growing in line with earnings per share?
• Opportunities: is return on equity increasing while debt to equity declines?
• Dividends: are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let's take a look at Halcon Resources' key statistics:

HK Total Return Price data by YCharts

Source: YCharts. * Period begins at end of Q1 2011.

HK Return on Equity (TTM) data by YCharts

Source: YCharts. * Period begins at end of Q1 2011.

How we got here and where we're going
It's not easy being an up-and-coming oil producer in America's red-hot oil-shale regions. Sure, there's tons of oil, but getting it out of tight rock formations requires incredible capital deployment, and as you can see by Halcon's results, building a network of productive wells may require years of spending far more on expenses than a small producer might recoup on the top line, let alone in profit. As a result of its buildout, Halcon's fundamentals have largely been in freefall, earning it a disappointing two out of seven possible passing grades today. Halcon is hardly alone in the struggle toward oil-patch profitability, but will it get there any time soon, and improve its low score in the process? Let's dig deeper to find out.

Halcon has clearly been spending tons of money on building out its production infrastructure -- to be accurate, a ton  of $100 bills would weigh about $91 million, so Halcon's trailing 12-month capital expenditures  of $2.6 billion would be more than 28 tons of $100 bills. However, the market has been expecting huge returns on all those tons of money, and it has rewarded Halcon investors by pushing shares 65% higher so far this year.

No one event was primarily responsible for the rise, but there has been a string of good news over the past few months, from a doubling of production in the fourth quarter of 2013 to another 41% year-over-year production surge in the first quarter of 2014. This comes in spite of operating through a wretched winter that hurt shale-oil peers like Kodiak Oil & Gas (NYSE: KOG), which actually reported a sequential decline in quarterly production at the same time as Halcon blew past expectations with its 41% uptick. While Halcon's shares are up big this year, its superb performance has only had a net effect of bringing share prices back to even on a 52-week basis -- Halcon lost nearly half its value in 2013. Key to Halcon's turnaround has been belt-tightening efforts and a laser-sharp focus on the most productive assets in its portfolio, as management's get-big-and-sell-out-fast strategy hinges on both trimming capex by 35% and boosting production 65% higher than levels reached last year.

The linchpin of Halcon's production push lies in the Tuscaloosa Marine shale region, which stretches across Louisiana and Mississippi and which has been relatively undeveloped so far. Halcon CEO Floyd Wilson has staked his company's future on the Tuscaloosa Marine shale, claiming publicly that the region will be the last major shale-oil play in America. It is one of three drillers, along with Encana (OVV 0.45%) and Goodrich Petroleum (NYSE: GDP), to make a major push into this oil-rich area, and its commitment may dwarf that of its peers over the long run.

Encana plans to drill up to 12 wells  in the Tuscaloosa Marine shale this year, and Goodrich has committed roughly $240 million this year to developing its Tuscaloosa assets, but Halcon recently closed a deal to add $400 million in cash to its war chest for the express purpose of developing its 314,000 net acres in the region. Only two of Halcon's nine operational rigs  are currently working the Tuscaloosa shale, but the company believes that it could easily double its rig count there by next year. Only one of these three companies (Encana) is currently profitable, but investors are clearly willing to overlook that in light of the early promise of the wells Halcon and Goodrich have dug.

It's also worth noting that the Tuscaloosa Marine shales are among the most difficult in the world to drill, with far deeper and far thicker deposits than the more famous Bakken and Eagle Ford shale plays. Devon Energy (DVN 0.98%), which is more than ten times Halcon's size, already tried its hand at the Tuscaloosa only to conclude that it wasn't worth the expense. Halcon might do much better, but the region could easily prove more trouble than it's worth -- and that would tank Halcon's hopes for sustained high production growth.

Putting the pieces together
Today, Halcon Resources has few of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.