Normally I write about companies that are financially sound with promising growth rates, and stock prices that do not yet reflect the company's full-value. This is not one of those stories, but rather a speculative turnaround story of a financially shaky oil company whose new CEO is on a well drilling mission from Hades!
Halcon Resources Corporation (HK) formerly known as Ram Energy Resources, is a mid-cap independent oil exploration, development and production company headquartered in Houston, TX. On Thursday, May 2nd, at one point, HK was trading at $5.34, down 14%; and that was following the release of a solid 1st quarter operations report and during an upbeat conference call. HK's 52 week high was $11.10, and low $5.26. From current trading levels, I believe HK will provide substantial investor returns within 12 months and here is why.
Oil & Gas Production Growth
The nation is in the midst of an oil & natural gas drilling boom that is expected to last for years and advanced recovery methods (fracking) are helping production soar. HK has highly-quality, high-growth assets in the Bakken, Eagle Ford and Utica shales.
HK's Q1, 2013 report shows company-wide average daily production increased 542% year-over-year. Its Bakken production alone was up 40% from last year. HK has successfully completed dozens of new wells in the last 12 months and is in the process of drilling dozens more. The new wells have more oil than gas and CEO, Floyd Wilson says the "flowback" data from the wells is encouraging and he is committed to building infrastructure that brings HK's oil to the most profitable markets.
HK's EPS are estimated to increase 129% over the next 36 months. At the writing of this article, HK was trading at 12.8x forecasted 2013 earnings and 7.5x 2014 estimates. Any mention of other traditional measures of value such as PEG or P/CF ratios would scare the life out of you and are not really pertinent to this argument as HK is not an undervalued company as it currently sits. It was nice to see that reported cash flow per share increased 211% year-over-year and revenues for Q1, 2013 increased to $190.7 million, compared to $26.9 million for Q1, 2012. Both are good signs that HK is moving in the right direction.
Other Factors & Conclusion
There is concern about HK's debt level and it is massive. However, the company is in the midst of an asset divestiture plan for everything not considered essential to its strategy of building an oil company focused on 3-5 core resource plays. Divestiture proceeds will likely be directed to debt reduction that should strengthen the balance sheet.
Analyst sentiment for HK is bearish, with only Raymond James and Wunderlich venturing "Buy" signals. James has a target price of $10.
Sometimes alpha comes when one acts contrary to what most research analysts are espousing, and I believe this is one of those times. HK just reported mostly positive data and its conference call was upbeat with company representatives proclaiming "we will have no problems meeting our numbers."
Bottom line, HK under its new leadership is finally beginning to act like a real oil exploration and production company! As SA Editor Miriam Metzinger pointed out here on April 16th, Current CEO, Floyd Wilson, is a master at turning around oil companies and selling them at a substantial profit. He was Petrohawk's CEO when it was taken over by BHP for a 69% premium in 2011. This is a pure turnaround play grounded in the argument that Mr. Wilson and his team pumped life into four other troubled oil companies, producing handsome profits for stockholders; and will do it again with HK. The recent price decline offers an attractive entry point that looked long gone just a month ago. That being said, as with any stock, there is the risk of capital loss, so conduct your own research and speak with your investment advisor about HK.
On another alpha note, I recently wrote about Homeowners Choice Inc. here, arguing that the stock's true value was $35 when it was trading around $25. Last Thursday, (HCI) reported a "blow out" Q1 exceeding First Call Earnings estimate by 60% and the stock that closed at $26.70 on Thursday spiked as high as $32.42 on Friday. Based on its history of consistently exceeding earnings estimates, I believe HCI will soon be a $40-$42 stock.
Disclosure: I am long HK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.