Halcon Will Reward Patient Investors

Feb.20.14 | About: Halcon Resources (HK)

Halcon Resources (NYSE:HK) is a mid-cap independent oil exploration, development and production company headquartered in Houston, TX. The company fell upon hard times; however, three years ago, a veteran of the oil industry, CEO Floyd Wilson and his seasoned management team came to Halcon on a turnaround mission.

Since first recommending HK here last May, I have lost a boatload of money waiting, wishing, and hoping that the "master of turnarounds", Floyd Wilson would perform his magic on HK, and that the company would be sold to a larger suitor for a tidy profit as many analysts have predicted. HK currently trades at $3.75, and that's on a good day. In Wall Street parlance, I wasn't wrong, I was just early. It may take Mr. Wilson and his team another two years to rehabilitate HK, and it probably will not be worth $10-$12 a share but the turnaround will happen. I believe HK will be sold for substantially more than its current share price and here is why.

Economic and Oil & Gas Production Growth

Predictions are that the domestic economy will grow at about 2.5% for the foreseeable future. This should keep WTI crude in the $90 to $100 a barrel range which seems to be the sweet spot that enables drillers to profit nicely. The O&G drilling boom is in high gear and expected to last throughout the decade with horizontal drilling and fracking being the accelerators. At last glance, 2014 looks to be another very good year for O&G production. Rather than rehash HK's drilling activity in this article, Richard Zeitz wrote a comprehensive and eloquent SA article in January fully explaining HK's drilling and production activity here. I can't do better and that is not the real purpose of this article.

Company Valuation

According to Thomson Reuters February 14, 2014 HK stock report provided by my Fidelity brokerage service, of the 21 non-independent analysts currently following HK, two have strong buy ratings, 10 have buy ratings and only one has a sell rating. Without going through spreadsheet gymnastics here, if HK can reduce its debt by 40% and produce at projected rates for two years, it will become a $9 per share company. HK's financial metrics have improved since my initial article last May, but still have a ways to go for the company to be considered financially healthy. HK was recently trading at 19 times 2014 estimated earnings which is a 20% discount to the industry average, and cash flow is steadily improving. Management sold some low performing assets late last year and the proceeds are being used to strengthen the balance sheet and acquire more lucrative drilling plays. A representative from the HK Investor Relations Office told me that HK is focused on improving capital efficiency and maintaining capital discipline this year and that the plan is to spend nearly 90% of the D&C budget on the highest return assets in the Williston Basin and El Halcon.


Sometimes alpha comes with patience and discipline in the face of circumstances that scream for one to sell or don't buy and I believe this is one of those times. SEC filings show that HK insiders, including CEO, Floyd Wilson and institutional investors such as the Canadian Public Pension Board have made substantial purchases around $4.25 a share and I'm sure their intent is not to lose money. Now is the time to buy this stock 40% below where I initially recommended it, and where I am trying to recover to.

Bottom line, HK is under proven leadership and now operating like a real O&G exploration and production company, strategically acquiring proven reserves, and perfecting production efficiencies along the way. HK's continued price decline over the last 9 months provides an entry-point where most of the downside risk has been wrung out of the stock, and unless Floyd Wilson and his team just gives up or HK files for bankruptcy, both of which are unlikely, HK's value will increase. I believe patient investors will profit handsomely as it seems the turnaround is gaining real traction

On another note, there is an oil field services company, ENSV that has Halcon as one of its major clients. As Halcon increases its productivity, ENSV will benefit as well. I introduced ENSV to SA readers last September here when it was trading at $1.46, and followed-up on in December here when it was trading at $1.80. Last month, ENSV reported a "blow out" Q4-13 and the stock traded as high as $2.40 before settling down in the $2.30 range. Based on the continuing oil drilling and production boom, management's aggressive organic growth strategy, a 30% to 40% annual growth rate that repeatedly exceeds analyst estimates, and the eventual up-listing of the stock to a more notable exchange from the OTC "pink sheets", I now believe ENSV will trade at $3.50 by year end.

There is the risk of capital loss, with both of these situations, so conduct your own research and speak with your investment advisor.

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.