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Morningstar | Halcon Battling Liquidity Crisis Despite Solid Permian Asset Base

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. Therefore its fixed costs are not spread thinly enough and its unit expenses are much higher than what peers are reporting. As a result, Halcon is unable to live within cash flows over the next few years. To make matters worse, the recent decline in commodity prices could limit the firm's ability to quickly scale its operations. Halcon plans to run only two rigs in 2019, down from three in the prior year.There is a clear 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 $100 million in cash and available bank debt. 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 has been on the rise, with several notable transactions in the last year or so. 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 former CEO Floyd Wilson, makes this scenario even more likely, in our view.