Morningstar | Halcon On Track to Hit Guidance But Liquidity Cushion Evaporates
Halcon delivered production of 17.1 mboe/d in the first quarter, which was 1% lower sequentially. The decrease was attributed to third-party sour gas takeaway constraints, which also marred the previous quarter’s operations. However, Halcon’s own sour gas treatment plant entered service during the period as expected, reducing its dependence on third party outlets. The firm is currently producing 20.4 mboe/d (57% oil), and we believe the firm’s annual target of 19-22 mboe/d is still within reach.The firm’s financial results were below Street estimates, with adjusted EBITDA and adjusted EPS coming in at $21.9 million and negative $0.01, respectively (consensus estimates were $22.9 million and negative $0.09). Realized crude prices improved during the period, as the Permian basin pipeline logjam that drove out basis differentials last year is clearing. But unit costs were much higher than guidance, primarily due to sour gas treating fees and rig stacking charges. These items shouldn’t impact future periods.
The firm has engaged advisory firms to evaluate “strategic and financial alternatives,†which boils down to: 1) financial initiatives to bolster the firm’s (precarious) liquidity while it attains sufficient scale to become self-funding; or 2) the potential sale of the company. After redetermination Halcon’s revolver limit was lowered by $50 million, leaving it with $118 million available. At strip prices, we estimate that the company will need all of this liquidity to fund its operations at the current rate, before achieving cash flow neutrality in 2022. Therefore, it has absolutely no breathing room in the event of a slide in commodity prices. On the other hand, in the hands of a larger and more established operator its assets would be worth much more than the market is currently giving credit for as we have previously discussed (justifying our fair value of $3 per share). Our extreme uncertainty rating captures the divergence of these scenarios.
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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