Source: Flickr user Lindsey G.
Shares of Halcon Resources (HK) have been pummeled over the past year. While weak commodity prices are the main culprit, it certainly didn't help matters that it was pretty much leveraged to the hilt before commodity prices turned south. That overextended leverage picture was a major point of the discussion on the company's third-quarter conference call with five key areas addressed by management on the call.
1. We have fairly good liquidity at the moment
CFO Mark Mize updated investors on Halcon's liquidity situation by saying:
We ended the quarter with $827 million of liquidity. It consisted of cash on hand plus our undrawn capacity on our revolver ... our bank group did recently reaffirm our $850 million borrowing base and our next redetermination will be the regularly scheduled redetermination in the spring of 2016.
It's critical to note that all of Halcon's liquidity at the moment consists of the available borrowing capacity on its credit facility. Its borrowing base was just reaffirmed, which means the company can bank on it until next spring. Further, CEO Floyd Wilson noted later on during the call that "we're not expecting any kind of giant, sort of, draconian situation in terms of [a reduction] as it relates to Halcon's" borrowing base in the future, suggesting that its liquidity could remain intact provided Halcon doesn't start burning through it.
Surprisingly, Halcon was one of several indebted oil company that had its borrowing base reaffirmed this fall. It joined Bakken peer Whiting Petroleum (WLL), which, for example, saw its banks leave its $4 billion borrowing base untouched. That outcome probably surprised Whiting's CEO James Volker after he commented earlier in the fall that he thought the company's maximum commitment level would be reduced by $750 million. Overall, banks have been very supportive of shale producers during the downturn, though there's still no guarantee this support will last.
2. We're working to improve our balance sheet
Having its banks guarantee its liquidity for another six months buys the company more time to address its balance sheet, which Mize noted is already improving. He pointed out:
Since the beginning of the year, we've executed on several initiatives to strengthen our balance sheet and improve our leverage profile. ... When you combine this with the exchanges that we did earlier this year, we've reduced our overall debt by more than $800 million. This is a strong step in the right direction, but we're going to remain focused on further improvement to our leverage profile as we move forward.
The company's debt is visibly heading lower after rocketing higher in recent years.
HK Net Financial Debt (Quarterly) data by YCharts.
While the company hasn't yet put a target on total debt reduction, it likely will still need to remove several hundred million dollars in additional debt from its balance sheet before its finances are on solid ground.
3. We're OK ... for now
Wilson addressed its options for future debt reduction by noting:
We have several levers we can pull. We're evaluating all of them constantly. We're in good shape at this moment. We're not in good shape forever, but we're in good shape at this moment. So we understand what's going on in the market, and we're evaluating lots of different ideas and when one comes to the forefront, you'll hear about it after we did it.
Halcon clearly does need to make additional moves. That said, it is worth noting that while it has several options, one thing Mize did point out on the call is the fact that it does not have any additional capacity to take on more third-lien debt for the purpose of another debt swap.
4. We're making permanent cost reductions
While balance sheet improvements are a big focus for Halcon right now, another major focus of the company has been to push its costs down. Wilson noted:
Lease operating costs are also down about a third since this time last year. Completed well costs on our property in the Williston Basin have been running at about $7.2 million this quarter, while new [wells are] projecting [at] $6.8 million. ... About a third of the reduction -- this is kind of a good point -- in total completed well costs since last year for us is related to design modifications. These efficiencies will stick even in a higher commodity price environment.
Two of the company's biggest costs -- lease operating expenses and completed well costs -- have experienced meaningful reductions over the past year. Even better, about a third of the well cost reductions are going to be permanent due to design modifications. This will enable Halcon to enjoy even better drilling returns when oil prices and, therefore, service costs, eventually begin to rebound.
5. Here are our initial thoughts on 2016
While Halcon Resources isn't yet ready to put out official guidance for 2015, here are Wilson's current thoughts:
We're operating three rigs today. We will likely keep three rigs running next year as well. Our three-rig program in 2016 should run about 25% less in CapEx than this year and allow us to keep production relatively flat. Those are comments -- not perfect guidance at this time.
He estimates that Halcon will need to spend just three quarters of the $325 million it spent this year, or roughly $250 million, on capex to keep its production flat. While that's a steep reduction, it's not as steep as what Whiting Petroleum expects to see next year, with the company estimating that it can cut its capex budget in half to roughly $1 billion and still keep its production flat.
Investor takeaway
There were two major themes running through management's comments. First, it's making tremendous progress to improve its costs and its balance sheet, which is buying valuable time for the company to seek out additional improvements. So, while it's clearly not out of the woods, it isn't in the dire straits either.
