Halcon Resources (NYSE:HK) recently reported better-than-expected second-quarter results as the company actually made money when analysts expected it would report a loss. That upside surprise aside, the company has a real tough road ahead of it as its debt is too high and the oil price is too low. Here are five things its management team said on its second-quarter conference call about its ability to weather that storm.
1. We've taken steps to improve our financial footing
First and foremost on investors' minds is the company's finances, which are currently weighed down by a lot of debt. CFO Mark Mize addressed these concerns by detailing four specific initiatives the company has undertaken so far this year:
- Extended the maturity of its 8% senior convertible notes to 2020 from 2017.
- Raised $15 million in equity via its at-the-market program at $1.63 per share.
- Negotiated with bondholders to exchange $250 million in face value of its senior unsecured notes for common equity at around $1.80 a share.
- Issued about $700 million in senior secured second lien notes due in 2020 and used the proceeds to repay outstanding borrowings under its revolver.
Overall, these initiatives pushed out its maturity levels and bolstered its near-term liquidity. While it hasn't exactly addressed its overall debt situation, as actual outstanding borrowings have increased, it has reduced some of its balance-sheet risk by paying down its revolver.
2. We have enough money to last us a few years
In a sense, the company's balance-sheet initiatives bought Halcon Resources some time. Mize said:
The end result of these efforts is that we have no near-term maturities and we have sufficient liquidity to fund our operations and service our debt for years to come. We continue to look for ways to further strengthen our balance sheet as it relates to leverage and liquidity. We ended the second quarter with just over $900 million of liquidity and we can comfortably operate the company through 2018 at the current drilling pace with the current financial resources available to Halcon Resources.
The good news is that at the moment the company has enough cash and liquidity to survive at the current oil price through 2018. Ideally, oil will be much higher by that point, enabling it to run its business with cash flow. However, if oil isn't meaningfully higher by that time, there's still a real risk that Halcon Resources could end up going bankrupt.
3. We're comfortable with our current production guidance
On a more pleasant note, the company's operations are really strong as production during the quarter hit the upper end of its guidance range. Looking ahead, Mize noted that despite 1,800 BOE a day of nonoperated production in the Williston Basin that's currently shut in or deferred, the company is "still comfortable with our full-year production guidance of 40,000 BOE a day or 45,000 BOE a day." In other words, despite the fact that nearly 5% of its production is currently shut-in due to lower oil prices, the rest of the company's wells are performing strong enough that it still expects to hit its full-year targets.
4. We've made solid progress on our costs
The other really pleasant surprise during the second quarter was the progress Halcon Resources made on reducing its costs. Mize noted:
Overall, total operating cost per BOE improved 11% compared to the first quarter of this year and 28% compared to the second quarter of 2014. This cost improvements are the result of continued efforts to drive efficiencies in all aspects of the business or continuing to seek out additional ways to get costs down further.
As he points out, the company has seen a significant improvement in costs over the past year. However, it's not done pushing costs out of its operations as it's continuing to seek ways to reduce its costs even further so that it can better manage the current low-oil-price environment. Further improvements will go a long way toward enabling the company to survive the downturn should it persist for a few more years.
5. We're doing just fine
CEO Floyd Wilson summarized the company's progress and its current predicament in closing his prepared remarks on the call. He said:
So operations are going great, cost are downs, spending is down, and production is holding up nicely. Our liquidity is strong and we are very well-hedged through the end of next year. Current economics to drilling complete wells are attractive. Our inventory is deep and we are looking at opportunities to add to our high quality future drill sites. Make no mistake. Our business is in stormy seas at this time, and while we expect and hope for improvement, we are planning for current conditions to persist.
In a sense, what he is saying is that Halcon Resources is making the best of the current environment, which it's expecting to be the new normal for at least the next few years. That being said, it's hoping for some improvement in the oil price as that's what is really needed to give the company the cash flow not just to grow production but to better support its balance sheet. Only time will tell if that improvement will come in time to keep the company from sinking under the weight of its debt.
Matt DiLallo has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.