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Morningstar | Leadership Uncertainty and Slower Growth Outlook Hurt Halcon Fair Value

We are reducing our fair value estimate to $3 for Halcon after incorporating a slower cadence of activity for the firm in 2019 and beyond. The recent decline in crude prices resulted in most upstream firms making steep capital cuts, and Halcon, with very high financial leverage and limited liquidity on hand, is likely to feel the pinch more than most. Our prior valuation was based on a flat three-rig program, though we now expect the firm to limit itself to only one or two rigs for the next few years.

There is a path to competitive margins and sustainable free cash flows, but it could take several years to get there. In the meantime, the firm must be careful to limit its outspending, as it has only around $400 million in cash and available bank debt. At current prices, its cash flows will probably fall short of its spending needs by about $100 million annually. Therefore, there is very little breathing room and Halcon could face a liquidity crunch if commodity prices deteriorate for any length of time.

Instead, it is likely that the company will capitulate to activist demands by attempting to sell itself. Consolidation in the upstream sector was on the rise during 2018, with several notable transactions. Due to economies of scale and by blocking up leasehold to facilitate longer laterals, consolidation can generate value beyond the sum of the parts. And Halcon has high-quality Delaware Basin assets that would be worth much more in the hands of a lower-cost operator. The recent exodus of key executives, including CEO Floyd Wilson, makes this even more likely in our view.