Higher Capital Efficiency
Halcón is cutting its 2014 drilling and completions capex guidance by approximately $150 million to $950 million. The budget will also include $100-$125 million for land, infrastructure, seismic and other spending, bringing the total to $1,050-$1,075 million (before including capitalized interest and G&A).
Halcón also specified that it expects proceeds from additional non-core asset divestitures in 2014 to be approximately $300 to $400 million (the company stated previously that it planned to pursue material sales of non-core assets in 2014).
The announcement is positive news for the stock: in spite of reduced drilling capex, Halcón reaffirmed its previously issued 2014 production guidance of 38,000 to 42,000 Boe/d.
The reduction in spending is likely achieved in part by eliminating exploration dollars and greater focus on the most productive drilling inventory and in part reflects management's confidence in improving well performance in the Bakken and El Halcón. The impact of the anticipated divestiture program was, most likely, already factored in to the previous production guidance and does not represent real news.
The combination of the spending cut and divestitures should help close the gap in the company's funding for the next year. A more balanced rate of spending is a positive change from the break-neck pace seen earlier this year. In the third quarter alone, Halcón spent $671 million ($390 million on drilling and completions; $125 million on land, infrastructure, seismic and other; and $156 million on acquisitions and new acreage). The spending compared to $179 million of discretionary cash flow reported during the quarter.
Assuming Halcon generates $700-$800 million in discretionary cash flow during 2014 and adding estimated $300-$400 million of divestiture proceeds, the company may now be able to avoid draw-downs on its revolver and should see its credit metrics incrementally improve as a result of stronger cash flow. Still, Halcón's leverage and coverage ratios will remain uncomfortably high even at the end of 2014.
Cost Of Borrowing Remains High
In a separate press release, Halcón announced issuance of $400 million of 9.75% senior unsecured notes due 2020 (in the form of an add-on offering to existing notes). The notes priced at a yield to worst of ~9.0%. Halcón intends to use the proceeds to repay a portion of its revolver balance.
The offering reflects the high cost of borrowing that Halcón incurs as a result of its over-levered balance sheet.
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