On May 2nd, Halcon Resources (NYSE:HK) put out its operations and financial update before the market open, and Gastar Exploration (NYSEMKT:GST) put out its operations and financial update after the close. Halcon was down significantly after the announcement, at one point down more than 10%. Gastar has not traded yet after its announcement, but may be up significantly tomorrow.
Halcon reported significantly higher capex than expected, and did not report results for Utica wells. Investors were likely negatively surprised by the higher than expected capex, and were also hoping for Utica results.
Halcon trades at over 10x EV/EBITDA, and has substantial debt on its balance sheet. The stock has been essentially a bet on CEO Floyd Wilson's ability to replicate his success at Petro-Hawk. His ability to do so will depend on the success of the resource plays that his new company, Halcon, has entered.
So far, the results have been mixed -- Eagle Bine results have been lower than expected, the Tuscaloosa Marine Shale has been mostly disappointing with higher than expected costs and lower than expected production results, Bakken production has been lower and costs have been higher, etc. The one play that does seem to be working very well for Halcon is its new Eagle Ford play in East Texas, where it announced two wells with 30 day IP rates of almost 1,000 barrels of oil per day.
It may be tough sledding for investors in Halcon until additional resource plays are proved-out, and even then, it may be difficult for Halcon to justify its high valuation and high debt to cash flow levels.
Gastar's report was very different -- Gastar grew substantially, met cash flow and capex expectations, and guided production for Q2 way higher than analyst estimates (52 mmcfe/d vs 45 mmcfe/d consensus estimates). Gastar announced in-line results in its Marcellus play, which is meeting expectations with high rate of return wells and substantial production increases.
And almost as importantly, it announced sustained high levels of production for its second well in the Sooner trend, which produced 1,169 boepd on average for the past 30 days ending April 30th. This sustained high production rate is impressive, as the well's production seems to not be falling off like a typical resource-play well, implying exceptionally high economics.
Gastar's third well in the play is in the process of "cleaning up," producing 50-80 barrels per day and continuing to incline production. The second well started at around that rate and inclined to over 1,000 boepd, and Gastar's management had previously stated that this third well is a "type curve" well, implying an expectation of a maximum production rate of ~400 barrels per day.
In the same way that lower guidance for Halcon negatively impacted its stock, higher than expected guidance for Gastar may positively impact its stock. Additionally, Gastar is pricing in lower expectations, at ~6.6x EV/EBITDA, vs. Halcon trading at over 10x EV/EBITDA. With the increased production guidance, Gastar's 2013 EBITDA could potentially increase, implying an even lower multiple (and it will further benefit from the recent increase in higher natural gas prices).
Until its recently announced sale, Gastar was neighbors with Halcon in East Texas, with land next to Halcon's Woodbine/Eagle Bine play. When the divestiture takes affect (a substantially accretive deal for Gastar, selling at an estimated 10x cash flow vs. Gastar's current 6.6x multiple), Gastar will no longer have adjacent properties to Halcon. However, considering the contrast in valuation multiples, Gastar's lower debt level, and its recent large scale resource play discovery, Gastar could be an accretive acquisition candidate for Halcon. At an accretive 9x multiple, Gastar stock would be at ~$6.33 per share, and would offer Halcon substantial valuation and development upside. There have been no indications that a deal is in the works, but given Halcon's acquisition of Georesources, an acquisition is certainly not out of the realm of possibility, and this valuation differential highlight's Gastar's attractive valuation at its current $2.73 share price.
Additional disclosure: I am long GST and may buy or sell it at any time without further disclosure