In my article here back in early February 2013, I analyzed Halcon Resources (NYSE:HK), explaining why the market boosted Halcon's valuation and why it was a great short candidate at $8. Among others, I noted that the traders and the speculators pushed Halcon to an outrageous overvaluation at $8. This is why I decided to short the stock at $8. Since then, the stock has dropped down to almost $6 in early March, confirming my bearish call. I closed my short position at $6.5, because I felt that the momentum traders and speculators were about to jump on board for the new ride after the severe correction of 22%. The momentum traders and speculators truly arrived at ~$6.5, and made the stock a roller coaster pushing it back again to ~$8 in early April. This rise was short-lived though, and the stock landed at ~$6.6 again around the second half of April.
The stock was hovering at ~$6.6 when I decided to short it again as disclosed. In my articles, I also explained why the company's fundamentals do not justify its current valuation in my opinion, and why its drilling results have been below average thus far. As expected, the bulls had a different opinion and the comments' section at the bottom of those articles are really very interesting.
Halcon released its Q1 2013 results few days later. The results were bad and the stock dropped down to almost $5.3. Apparently, these results did not surprise me. I closed my short position at $5.57 to lock a ~16% profit in just few days. After the latest correction of ~20%, the short covering along with the arrival of the new wave of momentum traders and speculators pushed the stock higher than $6.
That was not the first time my fundamentally-driven bearish call about Halcon was confirmed in a record time. In fact, that was the second time in the last three months. I received a lot of messages in my personal account from readers who thanked me after following my bearish calls twice in three months. That was a huge gift for me. It showed to me that fortunately there are still investors who buy the fundamentals and dump the speculation. I believe, this is a very encouraging sign for the markets as a whole. The markets need Warren Buffetts, in my opinion. The markets do not need gamblers.
Last Friday, the analysts at Global Hunter Securities agreed with my bearish call, cutting their price target on shares of Halcon Resources from $8.00 to $6.50.
As I have also discussed, the fundamentally-driven investors have to check out Surge Energy (ZPTAF.PK). Surge Energy is one of my recent bullish bets from the energy sector. I bought it below $4 and added more when it dropped below $3. To me, Surge Energy is the most undervalued oil-weighted producer of North America, as I have explained in my articles here and here.
Let's return back to Halcon and its Q1 2013 results. Some contributors of another online publication said that the stock tumbled and the markets punished Halcon for the earnings miss, which seemed worse when looked at percentage-wise, as net income was about 20% below expectations. They also said that the market was perhaps expecting an earnings beat.
I disagree with them. I believe that more and more investors understand that Halcon carries an unjustifiable premium on key metrics other than the earnings, in comparison to its peers.
The question now is: Is Halcon fundamentally cheap in comparison to its peers after the recent drop from $6.6? Do the Q1 2013 results make Halcon a good value at the current levels?
Furthermore, the company has long term debt of $2.5 billion and Enterprise Value of $4.8 billion currently. After all, Halcon trades at $184,500/boepd and $44.12/boe of proved reserves.
The company also remains highly leveraged, having a meaty D/CF (annualized) ratio at 6x. Additionally:
1) Utica: The quarterly report notes that: "The Phillips 1H commenced flow back on April 8, 2013 and measured first hydrocarbons on April 14, 2013. Halcón has maintained a continuous flowback on the well and rates continue to increase. While still recovering frac load, early stage flow rate data is encouraging".
This is the only well currently producing there, but the company does not mention the 24-hour IP. To me, this is not a good sign. Numerous energy companies tout a high 24-hour IP shortly after they hit it, despite the fact that the decline curve may be steep. However, Halcon does not say anything about the 24-hour IP of its first Utica well. In my opinion, this most likely means that the 24-hour IP is well below average. To say it differently, this well does not seem to be a game changer to make Halcon deserve a premium valuation.
2) Woodbine: The quarterly report notes that: "Halcón brought ten Woodbine wells online during the period (eight in Leon County and two in Madison County), five of which have been online long enough to report flow rates using the new standardized measure".
As I pointed out in my last article, Halcon's average IP-30 results in that formation have been poor so far. Even Halcon accepts it this time by saying: "Based on extensive technical work and recent well data, Halcón expects Woodbine results to improve and plans to focus on drilling in the core of the Halliday Field".
For instance, Crimson Exploration (NASDAQ:CXPO) is a primary player of this play. According to Crimson's presentation, the average IP-30 for its Woodbine (Eaglebine) wells is 748 boepd, which is almost double the average IP-30 of Halcon's wells.
3) El Halcon: There is nothing new on that front. The company has already informed us that there are currently seven wells producing in the Eagle Ford shale. The average IP-30 day rate for the seven producing Eagle Ford wells is 694 boepd (94% oil), which is good but it is not exceptional. In fact, this is the average IP-30 for Penn Virginia's (NYSE:PVA) wells in Gonzales and Lavaca Counties of Texas. Why should an investor pay the premium valuation for Halcon?
4) Bakken/Three Forks: Nothing has changed on that front either. The company's average IP-30 remains mediocre. In fact, if it was not the small acreage in Fort Berthold, the average IP-30 from Halcon's Bakken acreage would be very poor.
The problem is that most of Halcon's Bakken acreage is located in New Home II and Marmon, where the company's average IP-30 is ~300 boepd and ~500 boepd respectively. According to the corporate presentation, Halcon has a very small acreage in Fort Berthold which gives the good results.
After all, Halcon's average IP-30 from all its Bakken wells is lower than Magnum Hunter's (NYSE:MHR) results from its Bakken acreage in North Dakota. Add on this that Magnum's acreage is not considered top-quality.
Magnum Hunter Resources has an average IP-30 at 552 boepd from its Bakken wells in North Dakota while Kodiak Oil and Gas (NYSE:KOG) has an average IP-30 at 945 boepd from its Bakken wells according to the corporate presentation. I found this by calculating the respective numbers from Kodiak's sixty four Bakken wells drilled and completed in 2012.
Let's check out now the peers. I have not selected these peers accidentally. They all operate where Halcon also operates, and they are all heavily oil-weighted. In fact, some of them are more oil-weighted than Halcon. None of them also pays a dividend.
1) Oasis Petroleum (NYSE:OAS) is an one-Basin play. It owns 335,383 net acres in the Bakken/Three Forks trend of the Williston Basin.
As of Q4 2012, Oasis produces ~28,000 boepd (91% oil and liquids) and has 143.3 MMboe proved reserves (December 2012). This pure Williston Basin play has also a net debt of $1 billion (December 2012).
With Enterprise Value at $4,1 billion, Oasis trades at $146,400/boepd and $28.6/boe of proved reserves.
Furthermore, Oasis trades with a good premium (PBV=3.91) and the D/CF ratio (annualized) is 3.06x.
2) Continental Resources (NYSE:CLR) has its core operations in the Bakken formation of North Dakota and Montana, as well as in the SCOOP and Northwest Cana plays of Oklahoma.
In Q4 2102, it produced ~107,000 boepd (~80% oil and liquids) and holds 785 MMboe proved reserves (December 2012).
With Enterprise Value at ~18 billion, Continental trades at $168,200/boepd and $22.93/boe of proved reserves. Moreover, Continental trades with a significant premium at PBV=4.53 and the D/CF ratio (annualized) is 1.83x.
According to the company, total production in February 2013 was on track to exceed 120,000 boepd.
3) Whiting Petroleum (NYSE:WLL) has producing assets in the Rocky Mountain, Permian Basin, Mid-Continent, Michigan and Gulf Coast regions of the United States. The company's largest projects are in the Bakken and Three Forks plays in North Dakota and its Enhanced Oil Recovery fields in Oklahoma and Texas.
In Q1 2013, Whiting produced 89,135 boepd (87% oil and liquids) and had proved reserves of 378.8 MMboe (90% oil and liquids) as of December 2012. With Enterprise Value at $7 billion, Whiting trades at $78,500/boepd and $18.48/boe of proved reserves.
Whiting also trades with a decent premium (PBV=1.44) and the D/CF ratio (annualized) stands at 1.54x.
4) Northern Oil and Gas (NYSEMKT:NOG) is one of the largest non-operating participants in the core of the Bakken and Three Forks play in western North Dakota and eastern Montana. The company has participated in more than 1,500 Bakken or Three Forks wells since 2007, currently holds interests in 1,355 gross (115.8 net) producing Bakken/Three Forks wells and controls ~180,000 net mineral acres.
It produces 11,100 boepd (~95% oil and liquids) and has proved reserves of 67.6 MMboe (~95% oil and liquids) as of December 2012. With Enterprise Value at $1,2 billion, Northern trades at $108,100/boepd and $17.75/boe of proved reserves.
The profitable Northern trades with a decent premium (PBV=1.34). The D/CF ratio (annualized) is at 2.1x.
Let The Numbers Speak For Themselves
After all, this is what we get:
LT Debt /
LT: Long Term
The numbers speak volumes as always. Do you want me to buy a highly leveraged company with a premium like Halcon, when the market offers at least five peers with much lower debt and much better valuation on key metrics than Halcon?
On top of that, these peers are Halcon's neighbors operating in the same safe jurisdiction where Halcon operates, and some of them are also more oil-weighted than Halcon.
Has something changed in the stock market? Shouldn't an investor buy low to sell high? Has the game reversed? I believe nothing has changed. This is why, if I wanted to buy a heavily oil-weighted stock, that would not be Halcon at the current levels.