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Introduction

I have been preparing an analysis for the oilfield companies of North America since last week. However, I decided to take a break from the oilfield sector to dig deeper into the latest fundamental news from Halcon Resources (NYSE:HK).

Halcon's valuation has been a very interesting case for me since early 2013. I was wondering why it had such a staggering valuation at $8 in early February 2013. I could not find any fundamental reason to support that valuation, and I made a bearish call back then. I also shorted it as disclosed. The stock dropped down to ~$6 few weeks later, confirming my bearish call. My article is here.

The stock rose again to $8 in early April 2013. However, there was not any publicly available fundamental improvement to justify this move from ~$6. Moreover, I warned all about the company's debt overhang, which was much higher than the peers' average. After all, I shorted it again, and the stock dropped down again to ~6$, confirming my second bearish call. My articles and my analysis are here and here.

In my recent article about Halcon, I pointed out how grossly overvalued it was even at ~$6.30. However, I did not short it, as disclosed. I wanted to read some more news about its highly touted Utica acreage first. My article is here.

In the meantime, I keep being long Surge Energy (ZPTAF.PK) which closed at its 2013 highs at ~$5.30. Actually, I sold three-fourths of my initial position last week to switch to another energy stock, but I still hold a few shares. I have been long Surge Energy since early 2013, and I have an average at ~$3 as disclosed.

Results From Point Pleasant Are Not Pleasant

Halcon holds 125,000 net acres in Ohio and Pennsylvania. Drilling has commenced in this play with first production was expected in Q2 2013. Halcon released the first production numbers yesterday, supporting my assessment that the company's wells in Utica must be natural gas weighted.

These production figures also prove that Halcon's wells are not superior to the wells of the other operators in the area. I was not caught by surprise because the majority of the company's acreage is located in the wet gas and dry gas window.

The first drilling results are below:

1) The Phillips 1H (90% WI), located in Mercer County, Pennsylvania, had a peak 24 hour IP at 490 boepd that could rise to 730 boepd (~60% natural gas), assuming full ethane recovery.

2) The Allam 1H (100% WI), located in Venango County, Pennsylvania, had a peak 24 hour IP at 924 boepd that could rise to 1,652 boepd (~70% natural gas), assuming full ethane recovery.

It does not also bode well for me that Halcon did not provide production details on the other three wells, the Brugler 1H (90% WI), the Yoder 2H (90% WI), and the Kibler 1H (100% WI).

Halcon will continue to delineate its Utica/Point Pleasant acreage position and expects the process to be substantially complete by Q4 2013. The company plans to adhere to a 60 day resting period on all wells throughout the delineation phase. The focus remains on building an inventory of approved/permitted multi-well pads in preparation for a full scale development program.

The Neighbors In Utica

I never held my breath with Halcon's Utica acreage. I still remain very hesitant on that acreage and whether it is oil-weighted. The underlying reason for this is that four of the biggest stakeholders in the Utica Shale have put up all or part of their acreage for sale. In addition, the prices fall by a third in some cases. Here are some examples:

1) According to Jerry James, president of Artex Oil: "Early drilling results showed the oil portion of the Utica isn't as porous as some other shale formations and is shallower than its gas-filled areas, meaning it's harder to get oil to flow through the rock, and there's less natural pressure to help force it out."

In Ohio's Utica formation, drillers frequently found the rock too dense and underground pressures insufficient to produce oil. As such, the rush to buy acreage has reversed.

2) Chesapeake Energy (NYSE:CHK) has decided to leave it to other companies to crack "the code" of the Utica's oil prospects after the company found it wasn't worth trying any longer, Senior Vice President Jeff Mobley said in December 2012 at an industry financial conference. In Q1 2013, Chesapeake confirmed it once again.

Since September 2012, Chesapeake has been seeking a partner to share ownership and costs in the Utica, although Chesapeake had initially boasted Utica would outperform the Eagle Ford. It is worth noting that the three notable wells completed by Chesapeake in the Utica in Q1 2013 had a very poor oil percentage in the total production mix. Their results (24 hour IP) are below:

A) The Coe 34-12-4 1H in Carroll County, OH achieved a peak rate of approximately 1,980 boepd, which included 235 bbls of oil, 470 bbls of NGL and 7.6 mmcf of natural gas per day.

B) The Henderson South 10-12-6 5H in Harrison County, OH achieved a peak rate of approximately 1,625 boepd, which included 755 bbls of oil, 240 bbls of NGL and 3.8 mmcf of natural gas per day.

C) The Scott 24-12-5 6H in Carroll County, OH achieved a peak rate of approximately 1,530 boepd, which included 285 bbls of oil, 350 bbls of NGL and 5.4 mmcf of natural gas per day.

The oil portion of these three wells was 12%, 19% and 46% of the total production mix. If these wells are "notable" according to Chesapeake, how about the "non-notable" ones?

3) EnerVest had also said the Utica would bring jobs to Ohio and Pennsylvania. Nevertheless, EnerVest in the past year has also tried to sell acreage there and no buyers have emerged thus far. The company's executives have traveled to China, Japan and Korea to market the properties.

4) Devon (NYSE:DVN) is also packing up and moving on. After putting a portion of its acreage into a joint-venture package with Sinopec (NYSE:SHI) last year, Devon also decided to unload its remaining 157,000 net acres in the Utica so it can concentrate on more profitable plays. Devon said that its first two wells in the northwestern edge of the Utica were disappointing and that it would shift its focus eastward to where most companies are exploring.

The Peers

Halcon hovers at ~$5.5 today. Despite this drop of 15%, Halcon remains one of the most overvalued oil-weighted producers in North America. Actually, Halcon's case reminds me of Pinecrest Energy (OTCPK:PNCGF) when it was hovering at ~$2 in late 2012. Pinecrest Energy is an oil-weighted producer from Canada. My followers know that I was very bearish on Pinecrest's valuation back then. I did not short it, but I wish I had. Pinecrest's stock stands at ~$0.8 today.

After reading all the first quarter reports, I updated the respective valuations shown in the table below:

Company

Production

(boepd)

Proved Reserves

(MMboe)

EV ($ million)

$/boepd

$/boe

LT Debt /

Cash Flow

(annualized)

NOG

11,115

(~95% oil/liquids)

67.6

~1,290

~116,000

~19.08

2

OAS

30,153

(~92% oil/liquids)

143.3

~4,620

~153,200

~29.73

1.76

CLR

121,500

(~80% oil/liquids)

785

~19,450

~160,100

~24.78

2.18

DNR

63,823

(~95% oil/liquids)

409

~10,100

~158,300

~24.69

3.07

HK

26,022

(87% oil/liquids)

108.8

~4,540

~174,500

41.73

6

LT: Long Term

The comparison above is not an "apples and oranges" comparison. All the companies are oil-weighted, operating in North America. They do not operate in risky jurisdictions or politically unstable countries where the nationalization fear lingers. Some of these companies are also Halcon's neighbors.

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.

Oasis Petroleum (NYSE:OAS) is a one-Basin play. It owns 335,383 net acres in the Bakken/Three Forks trend of the Williston Basin.

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.

Denbury Resources (NYSE:DNR) dominates Enhanced Oil Recovery primarily in Mississippi and Louisiana where it takes mature wells and extract more oil and gas from them. The company also holds producing assets in the Rocky Mountain region. From a total production standpoint, Q1 2013 was a transition quarter for Denbury as it sold its Bakken area assets in Q4 2012 and acquired the replacement assets in the Cedar Creek Anticline in Q1 2013. These newly acquired properties are currently producing around 11,000 boepd net to Denbury, and the company expects over 20% of its total daily production to come from the Cedar Creek Anticline for the remainder of 2013.

My Target

As always, many folks who follow my recommendations will email me to ask what my new price target is for Halcon. I will be straight and clear as always. I will put Halcon on my buying radar when it drops below $4. Once this happens, I will analyze the situation both fundamentally and technically to decide accordingly. I will also take into account the performance of the indexes and a few other criteria.

If this move downwards never happens, it does not matter to me. I have many other stocks in my database that I follow on a daily basis. I believe I will find other buying opportunities if Halcon does not drop below $4. I am not stuck on Halcon. I take my publicly available recommendations very seriously, and I do not want my followers to lose money.

Some folks were bullish on Halcon because T. Boone Pickens added on his position in late April-early May 2013, when the stock was at ~$6.80. Pickens and many other famous fund managers (i.e., Paulson) make big bets, but they also make big mistakes. Pickens has lost a lot of money by investing big in the wind and solar sectors. After betting and losing big in renewable energy, he admitted in 2012 that he doesn't think the time to transition to wind and solar is now. I discussed Pickens' case and Paulson's big bets in my article here. In fact, Paulson's big bets have been the ultimate contrarian indicators for two years now.

Conclusion

Warren Buffett has said that the markets have a tendency to overshoot at both ends. I believe this is the case with Halcon, whose valuation has been overshot to the upside. The past drilling results coupled with the recent ones from Utica also prove that the company's acreage is far from ideal. I can afford to not buy Halcon at the current levels, but I'll remain a watcher.

Source: The Utica Shale Does Not Seem To Be The Ace Up This Producer's Sleeve