Halcón Resources Corporation (HK) announced its Q4 and full year 2012 financial results this morning before the market opened. Q4 revenues came in at $124.7 million compared to $25.6 million for the quarter ended December 31, 2011 - up 487%. Revenues for the full year 2012 were $247.9 million, compared to $103.7 million for the full year 2011, up 239%.
Excluding non-recurring items, HK posted Q4 earnings of $0.02/share, which met the Capital IQ Consensus estimate. Revenues were $10 million above estimates.
Production Zooms Higher
Production for the three months and full year ended December 31, 2012 increased by 349% and 128% to 18,348 barrels of oil equivalent per day (Boe/d) and 9,404 Boe/d, respectively, compared to the same periods of 2011. Q4 production was comprised of 75% oil, 6% natural gas liquids (NGLS) and 19% natural gas.
Hedging Strategy Is Working Well
Taking into account the company's active hedging program, Halcón realized 104% of the average NYMEX oil price, 44% of the average NYMEX oil price for NGLs and 102% of the average NYMEX natural gas price during Q4 2012. Similarly, for the full year 2012, the Company realized 99% of the average NYMEX oil price, 44% of the average NYMEX oil price for NGLs and 129% of the average NYMEX natural gas price.
Chairman and CEO Floyd Wilson commented on the results:
Halcón has been public for about a year now and we have built an oil company with core assets in some of the most prolific established and emerging unconventional resource plays in the lower 48. Our balance sheet is healthy and we are well positioned to execute on our business plan. We are in the early innings of implementing efficiencies and performance enhancements in our core areas with a focus on growing production, reserves and cash flow.
Exploitation of HK's asset base will take cash. HK recently closed an additional $600 million in aggregate principal amount of its 8.875% senior unsecured notes due 2021 in a private offering at an issue price of 105% of par, which yielded net proceeds to Halcón of approximately $619.5 million.
As of December 31, 2012, and pro forma for the January 2013 notes offering, Halcón had liquidity of approximately $1.2 billion, which consisted of $324.0 million in cash and $850.0 million of borrowing capacity available on its $1.5 billion senior secured revolving credit facility.
Some investors are concerned about the company's ability to fund its E&P cap-ex program. I believe those concerns are overblown. Financing is in place and HK's hedging strategy will protect income streams as production continues to ramp up.
The following slide from a recent Goldman Sachs presentation summarizes Halcón's production growth expectations in 2013. The Q4 release contained some good updates on how the company is doing and plans to achieve these impressive growth targets.
Halcón currently has 15 operated rigs running and expects to add several operated rigs by year-end 2013.
The Company currently has working interests in approximately 130,000 net acres prospective for the Bakken and Three Forks formations in the Williston Basin. Halcón plans to operate 6 to 8 rigs and spud 65 to 75 gross operated wells with an average working interest of approximately 63% in 2013.
Pro forma, 31 wells have been put online in the play since October 1, 2012 (17 wells in the Fort Berthold area, 2 wells in the Marmon area, 10 wells in the New Home II area and 2 wells in E. Montana). Of the 17 wells put online in the Fort Berthold area, 8 of them were Bakken completions and 9 of them were Three Forks completions. The average initial and 30 day rates for the applicable Bakken wells were 1,544 Boe/d (83% oil) and 780 Boe/d (84% oil), respectively.
Similarly, the average initial and 30 day rates for the applicable Three Forks wells were 1,472 Boe/d (84% oil) and 823 Boe/d (82% oil), respectively.
There are currently 95 Bakken wells producing, 6 Bakken wells being completed or waiting on completion and 5 Bakken wells being drilled on Halcón's operated acreage. Similarly, there are currently 28 Three Forks wells producing, 2 Three Forks wells being completed or waiting on completion and 3 Three Forks wells being drilled on HK's operated acreage.
Drilling Optimization Program
Halcón is in the process of optimizing all of its Williston Basin activities. HK is implementing a number of drilling and completion modifications intended to improve economics. These changes should begin to yield benefits in the second quarter of 2013. HK has begun full scale pad drilling and plans to preset surface casing, implement batch drilling on intermediate and production intervals, modify motor/bit configurations in curves and laterals, utilize a combination of geosteering tools/practices and mudlogging and incorporate new high efficiency skid capable AC rigs.
On the completion side, Halcón expects to utilize core and log analysis in all areas to develop a petrophysical model, geomechanics and integrated reservoir simulation to design and optimize its completion techniques. Increasing proppant per stage to 120,000 pounds from 100,000 pounds, changing the fluid design to 28 pound from 35 pound XL gels, increasing stage density to 30 from 25, eliminating blast joints in favor of swell packers for positive isolation, conducting perf and plug completion projects in the Fort Berthold and Marmon areas and incorporating frac strings for improved safety and flow back operations are examples of other measures being taken to increase recoveries.
The company currently has approximately 235,000 net acres leased or under contract across East Texas that are prospective for the Woodbine, Eagle Ford and other formations. Expectations are to spud 75 to 85 gross operated wells in 2013 with an average working interest of approximately 90%. Halcón plans to operate five to seven rigs in the play throughout the year and anticipates spending approximately $490 million on drilling and completions.
Halcón has put nine wells online in the play since October 1, 2012. The natural gas being produced from all these wells is currently being flared. Based on the amount of natural gas being flared, HK estimates that the oil being produced from each well accounts for more than 90% of the total hydrocarbon volume.
Six of the nine wells are located in Leon and Northern Madison Counties. The average initial and 30 day rates for the applicable wells were 948 Boe/d and 388 Boe/d, respectively. Of these six wells, the Keeling 1H in Leon County is performing the best and had an initial rate of 1,407 Boe/d and a 30 day rate of 749 Boe/d.
Of the three remaining wells, two are located in Brazos County and have an average initial rate of 1,463 Boe/d. The most recent well completed in Brazos County, the Coyote 1H, had an initial rate of 1,230 Boe/d.
There are currently 29 wells producing, 11 wells being completed or waiting on completion and 5 wells being drilled across the Company's operated acreage.
Halcón Field Services (HFS) is in the process of building infrastructure in the play capable of handling gas, NGLs and produced water. More than 50 miles of pipeline are planned and a processing plant with residue gas and liquids takeaway capacity is expected to be in service by the end of the first quarter 2013.
HK currently has approximately 130,000 net acres leased or under contract in the play and expects to spud 20 to 25 gross wells on its operated acreage in 2013 with an average working interest of approximately 91% and a drilling and completions budget of approximately $200 million. The first ten wells will be drilled to delineate acreage, which will allow for a more focused approach to wells drilled in the second half of 2013. Halcón currently operates two rigs in the play and expects to add one to two additional rigs by year end.
Waiting On Results ...
The Allam 1H in Venango County, Pennsylvania and the Phillips 1H in Mercer County, Pennsylvania have each been drilled and completed and are currently resting for 60 days. Production tests are expected to occur on these two wells in the second quarter of 2013.
2013 promises to be an exciting year for Halcón. As the company's exploitation program ramps up, drilling results will be coming in on a regular basis throughout the year. The company's drilling optimization efforts should increase recovery and decrease drilling costs. It will be interesting to see how increased production will translate into increased cash flow and net income.
Since my first article on HK back in December of 2012, when I recommended buying the stock at $6.29, the stock had a nice run up to around $8.25. I took partial profits at $8, and bought some shares back this morning at $7 and change. Halcón is an oil production growth and somewhat speculative investment. HK's drilling and financial results need to be watched carefully going forward. That said, Floyd Wilson has a great track record. If Q4 2012 results are any indication, the company is on track for a great 2013.
The company's conference call was held this morning and can be accessed here.