When considering any stock for your portfolio, don't be swayed by just the positives. Examine its pros and cons, and decide whether its possible upside outweighs its risks. Let's take a look at Halcon Resources (NYSE:HK) today, and see why you might want to buy, sell, or hold it.
Founded in 1987, based in Houston, and with a market capitalization of about $1.7 billion, Halcon is an explorer and developer of oil and gas, focused mainly on properties in Texas, Oklahoma, and Louisiana. Before last year, it was known as RAM Energy Resources. Its stock is down about 30% over the past year, and has averaged annual losses of 11% over the past five. That makes some want to steer clear, while others wonder if it's now a bargain. After all, sometimes fallen stocks can represent great buying opportunities.
One big plus for the company is its industry: energy. Our planet isn't likely to stop demanding it anytime soon.
Another plus, in the eyes of many, is management. CEO Floyd Wilson was behind the success of natural gas company Petrohawk Energy, which he sold to BHP Billiton (NYSE:BHP) for $15.1 billion. He grabbed the reins of RAM Energy Resources, now Halcon (which means hawk), and is aiming to turn it into a new Petrohawk, focusing on oil and natural gas liquids. With the price of natural gas (not the liquids) so low in recent years, many energy companies, such as SandRidge Energy and even BHP Billiton have been shifting their focus away from it.
Management seems to be making smart moves, too, such as expanding into the oil-laden Williston Basin, which offers significant cost savings as it's close to other Halcon operations.
Analysts are expecting strong growth from the company, in part due to its acquisition last year of GeoResources, which boosted Halcon's presence in the desirable Bakken shale fields. Over the coming five years, annual growth of more than 30% is expected, more than double that for the industry. Also promising is a recently unveiled gas operation in Texas.
At a recent energy conference, management cited many reasons to be bullish on Halcon, such as:
- It's entering a high-growth phase
- It has a long-term focus
- It has sufficient liquidity with which to execute its plans
Halcon's past growth rates are not the most impressive (though the future matters much more than the past). Its revenue growth in recent years has been lumpy, and its bottom line has been in the red more than the black. Its share count has recently surged, too, reflecting the threat of dilution.
The company's long-term debt, near $200 million, has been shrinking in recent years, which is good, but it's still worrisome, given low cash levels and free cash flow that has been meager in recent years and dove into the red. Bulls are less bothered by the debt, as it was used to acquire other companies and position Halcon for likely near-term growth.
Another reason to steer clear might be the company's valuation. Its price-to-earnings (P/E) ratio has been negative, due to net losses instead of net income. Its price-to-sales ratio was recently 5.4, nearly twice the industry average and price-to-cash-flow a hefty 42. Given its expected growth rate, though, its forward P/E of about 14 is actually appealing.
Given the reasons to buy or sell Halcon Resources, it's not unreasonable to decide to just hold off on it. You might want to wait for its debt levels to shrink more or cash levels to rise. You might demand significant free cash flow, or more robust growth over at least several quarters.
You might also check out some other interesting energy companies, to see if they seem like better bargains than Halcon Resources. Perhaps take a look at FuelCell Energy (NASDAQ:FCEL), which operates fuel-cell power plants. It has some promising orders, but it's also facing powerful competition and operating in the red. Relatively newly public oil refiner Northern Tier Energy L.P. (NYSE:NTI) sports profits and positive free cash flow, and a new dividend that looks to be yielding around 24%. (Such high yields are often unsustainable, but even a 75% haircut from that level would be attractive.) Northern Tier isn't a huge refiner, but it also operates more than 160 convenience stores.
I'm holding off on Halcon Resources for now, but I'm intrigued. Everyone's investment calculations are different, though. Do your own digging and see what you think. The company may perform spectacularly in the coming years, but remember that there are plenty of compelling stocks out there.
Longtime Fool contributor Selena Maranjian, whom you can follow on Twitter, has no position in any stocks mentioned, and neither does The Motley Fool. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.