Shares of Halcon Resources (HK) were up 12% this morning and have settled to 6.6% as of this writing at noon EST today. While there was no distinct news from the company, the move is largely predicated on the recent OPEC meeting announcement.
In the oil and gas industry, when OPEC talks, stocks listen. Earlier today at an OPEC meeting, the organization announced a tentative agreement to keep its current production levels through the rest of 2018 in order to maintain oil prices. As it stands, a barrel of Brent crude -- the international benchmark price for crude -- was $63.50 a barrel.
For any pure-play oil and gas producer like Halcon, this is good news because it helps to support its production growth plans that, according to management, will result in burning through cash until the fourth quarter of 2019. On the company's current investor presentation, it will be able to achieve this if the average price of U.S. crude remains above $55 per barrel.
Here's the crux with Halcon. It touts having a strong balance sheet and this amazing acreage in the Permian Basin that is cheap to develop. However, this is a company that has been a serial buyer and seller of drilling acreage throughout the continental U.S., and somehow each of those positions had superior rates of return. Also, Halcon's balance sheet strength comes as a result of a recent asset sale and emerging from chapter 11 bankruptcy less than a year ago.
It's also a little discouraging that the company won't be cash flow neutral until the end of 2019. If we were to assume that oil remains above that $55-a-barrel threshold Halcon requires -- a reasonable assumption based on today's market -- then it could get there. At the same time, though, that puts a lot of faith in nothing happening for two years that could roil the oil market.
With so many other investments in the oil and gas industry today that are already producing positive cash flow results and have breakeven prices at lower than $55 a barrel, it's hard to get excited about Halcon's stock.