Morningstar | Halcon Liquidity Crunch More Severe Than We Imagined
After our first take on Halcon's first-quarter results we noted than the firm is on track to hit its production guidance, with just enough liquidity to keep drilling until achieving sustainable free cash flows around 2021 (assuming strip prices for oil and natural gas). That has not changed. However, management commentary on the May 10 conference call indicates that the liquidity situation is tighter than we thought. Specifically, the $50 million reduction in revolver availability was based on banks' concern over Halcon's balance sheet rather than limited proved reserves.Management now claims to have enough liquidity to get through the ongoing strategic evaluation, during which the firm will attempt to sell itself, sell assets, or secure financing to fund its future growth. The failure to do any of these things will probably result in the firm's second bankruptcy, and a hefty (or total) haircut for shareholders. Our prior view was that the firm's current revolver would enable it to scrape through the next couple of years without further funding, before generating free cash flows around 2021. This does not now appear to be correct--management is no longer contracting its two rigs and is contemplating dropping one, without penalty, to maximize near-term liquidity.
That leaves us with two diverging scenarios - either the firm can cobble together enough financial firepower to keep drilling and growing, in which case its equity is worth at least $3 per share, or it can't, in which case the probability of bankruptcy is no longer remote. Our updated fair value, which still reflects a steep premium to the current price after taking the stock's latest slide into account, is $1.50 (an equal-weighted average of these two scenarios). We remind investors that Halcon's acreage is theoretically worth even more than $3 in the hands of a top-tier Permian operator, due to economies of scale, learning curve effects, and a lower cost of capital.
Halcon Resources is an independent energy company focused on the acquisition, production, exploration and development of onshore liquids-rich oil and natural gas assets in the U.S. The company focuses on oil and natural gas acquisition, production, exploration and development in the Delaware Basin. The company's properties and drilling activities are focused in the Delaware Basin in Pecos, Reeves, Ward and Winkler Counties, TX.
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