The downturn in the oil market has hit debt laden shale drillers particularly hard, with Halcon Resources Corp (HK +0.00%) being among the hardest hit. That said, the company is doing what it can to muddle through the downturn in hopes that it can make it to the other side alive. It's making some progress in its efforts to survive, which was evident in its recently reported second-quarter results. Here are three key takeaways from that report.
1. Results were better than expected
While Halcon Resources reported a net loss of $1.1 billion, or $2.03 billion for the quarter, that number is a bit deceiving as it was the result of a non-cash pre-tax impairment charge due to the drop in oil and gas prices and the impact that has on its reserves. If we adjust for this charge the company actually earned $8.9 million, or $0.02 per share. That was actually much better than analysts were expecting as the consensus was that the company would report a $0.02 per share loss for the quarter. Further, the company's oil and gas operations actually generated $123.6 million in operational cash flow, which was sufficient to fund the Halcon's $75 million in drilling and completion spending in the quarter.
Fueling this better than expected result was the company's strong production, which averaged 41,297 barrels of oil equivalent per day, or BOE/d, during the quarter. That was at the high end of the company's guidance range of 39,500 BOE/d-41,500 BOE/d despite the fact that 700 BOE/d of non-operated production is shut-in while another 1,100 BOE/d of non-operated production is being deferred, both due to weak oil prices.
2. Costs are really coming down
Another big driver of Halcon Resources' better than expected quarter was its rapidly falling operating costs. Those costs are down 28% year over year to $17.51 per BOE and is helping the company offset some of the weakness in the oil price.
Another area where the company is seeing solid cost reduction is on drilling and completing new wells. The company noted in its earnings release that it had "made significant progress negotiating lower costs with service providers" while also modifying its drilling and completion technique in an effort to boost oil and gas recovery and lower its costs. As a result of these efforts the company is reducing its drilling and completion budget by $25 million to $325 million for the full-year. It's keeping its production guidance the same, which shows that it's now able to extract the same amount of oil out of the ground for less money.
3. They have a lot of liquidity, but debt is still an issue
The company's ability to produce the same amount of oil for less capital will really help it to preserve precious liquidity as it waits for oil prices to rebound. Currently, the company has total liquidity of $902 million, which is made up of a combination of cash on hand and available borrowing capacity on its credit facility. When combined with its expected cash flow from oil and gas hedges, this is expected to provide the company with enough liquidity "to execute our business plan and service our debt for the next several years," according to comments made by CEO Floyd Wilson in the earnings press release.
That being said, the company is still looking for long-term solutions to reduce its overall debt. It's this debt, currently totaling just under $3.7 billion, that continues to weigh on the stock price. Halcon Resources' debt could still be the company's undoing if the price of oil doesn't meaningfully improve before the company's liquidity runs dry.
Investor takeaway
Operationally, Halcon Resources actually delivered a pretty solid quarter as it beat estimates on strong production and cost reductions. That said, the company still has way too much debt for the current oil price and has yet to address the situation in a meaningful way. Suffice it to say, if the price of oil doesn't improve that debt will be the company's undoing.
