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Morningstar | Halcon Produces Oil and Natural Gas in the Delaware Basin

Halcon Resources completed a thorough portfolio overhaul in 2017, exiting the Bakken and El Halcon shale plays and pivoting to the southern Delaware Basin (Permian). Due to these transactions, the firm no longer bears much resemblance to its predecessor, which went bankrupt during the 2015-16 downturn in global crude prices (common shareholders were severely burned during the restructuring that followed, with 96% of the firm's equity being redistributed to creditors).The Delaware Basin acquisition replaced less than 10% of what was sold, leaving the company with a very small production base from which it plans to grow extremely rapidly. We expect Halcon's production to reach 24 thousand barrels of oil equivalent per day by the first quarter of 2019, which is more than double what it was at the beginning of this year. That puts the firm on track to surpass the previous peak of approximately 35 mboe/d during 2019. However, pipeline congestion in the Permian Basin is putting pressure on the company's netbacks, and until regional takeaway capacity catches up with production in the second half of 2019, Halcon must contend with challenging conditions.In the long run, we view the company as a potential takeover target. The Delaware Basin is the cheapest source of unconventional oil in the United States, and Halcon's assets, in Ward and Pecos counties, are located in areas with high levels of industry activity. Consolidation in the area has already begun, with several notable M&A transactions having already taken place. With more than 2,000 potential drilling locations on its acreage, Halcon has about 40 years of inventory to work through. But several larger peers have shorter runways and would benefit from additional acreage. Further, due to economies of scale and by blocking up leasehold to facilitate longer laterals, consolidation in this segment can generate value beyond the sum of the parts.