Halcon Resources (HK) Reports Strong Q413 Volumes; Beats on Cash Flow; Reiterates 2014 Guidance; Announces Renewed Focus in TMS and Bigger EURs in the Williston and East Texas Eagle Ford
The Q413 Numbers: Volumes were nicely ahead of expectations despite 1,220 BOEpd weather downtime impact, mostly from the Bakken. Production mix was as expected.
- 1Q14 volumes guided to 34 to 36 MBOEpd. This is down 15% sequentially (on mid) due asset sales that closed in December and due to lingering weather impacts in the Bakken. Taking a pro forma view of Q413 yields sequential growth into the mid of 1Q14 guidance of 4%.
- 2014 reiterated at 38 to 42 MBOEpd, up 20% on the mid. On a pro forma basis that comes to > 60% growth. Note that the 2014 guidance is maintained despite the divestiture of 3,800 BOEpd of non core asset sales (this should be the Woodbine assets) announced today (see below) that closes in 2Q14.
- They are calling for 21% drop in unit LOE and a 11% drop in unit cash G&A
Williston Basin (Bakken / Three Forks)
- 49% of 2014 budget with 4 rig program ( in the recent past they had told us 3 to 4 rigs)
- They are taking type curves higher by 39% in the FBIR (to 801 MBOE) for a long lateral well (this is still below your average KOG well in the area, potentially suggesting room for future upside)
- And by 43% in Williams County (to 477 MBOE)
- They said all the slickwater wells completed in the FBIR are outperforming the newly raised 801 MBOE type curve (again, suggesting future upside to EURs) … they put the slickwater frac FBIR wells at 970 MBOE.
- Going forward, they are doing all slickwater jobs in the FBIR and most of this year's Williston drilling with target those bigger Fort Berthold area wells,
- All activity in the Basin will be on pads this year with half of their drilling going to 6 well pads. Notably, they drilled an industry best 10,000' lateral in the FIBR in 4.15 days.
Eagle Ford Share:
- 40% of the drilling budget with a 3 rig program for 2014
- Increased EURs by 22% on improving well results to 452 MBOE (7500' lateral length)
- They continue to hone completion method and are testing much tighter spacing.
- They noted that recent drilling in the southern portion of El Halcon is showing early encouraging results. This is Burleson County, deeper and almost all oil.
Tuscaloosa Marine Shale
- As expected, they stepped up the prominence of the play calling it a new core area. They are easing in to the TMS though, not going full tilt as some would fear.
- They now have 307,000 net acres, with 77% in the "eastern TMS". Goodrich (GDP) was talking about a good operator entering the play and this was the worst kept secret of the quarter. They have data sharing agreements in place with Goodrich and Encana (ECA).
- No change to the overall budget for incremental TMS drilling. Halcon plans to keep 2 rigs running to drill 10 -12 gross operated wells as well as participating as a minority interest holder in another operator's well (Goodrich was alluding to this the other day on their call). First operated well to spud in March in Wilkinson County, MS followed by the second well, same county, in April. Same county but to the west of Goodrich's strong Crosby well. They plan to go with longer laterals (7,200') than what has mostly been done so far with about 15% more proppant per foot and tighter cluster spacing (will do 50' vs. current industry at 66' or less).
- Spud to production is expected to be 90 days. So maybe we have news on the 2Q call but may be a bit longer for early ones. Planned IRRs of 50 to 90% at $100 oil on a future $12 mm completed well cost.
- Good comparison vs. the EFS (stratigraphic equivalent but a little less porosity but a good deal more pressure) in their new presentation. They are commenting that were they are at the clay content is high but the percentage of swelling clays (bad clays) is low and they note total clay and swelling clay (smectite) is very similar to East EFS. Good thickness and TOC.
- They are bringing in an experienced crew and rig from El Halcon
- They mentioned exploring JVs on this acreage to reduce risk and cost as they look to delineate. Expect something definitive in 1H14 and it does look like something will happen, structured as a straight carry.
- We'd like to know how much of the $113 mm leasing budget for 2014 went to adding acreage there. No cost per acre was given so the recent accumulation was likely much of the 2014 lease budget.
- They announced the sale of Leon, Grimes, and Madison County, TX acreage and associated production of 3,800 BOEpd for $450 mm. They didn't refer to this as their Woodbine asset they shot 3D over to further evaluate but this just about has to be it. Look for commentary on the call.
- They didn't mention the Utica. But we noted they did say the asset sale above completes their planned sales for this year. Our sense is that they are back burnering it for this year and watching the play develop around them. Maybe we see one more well completed in the Trumbull area.
- Reserves grew at an pro forma for asset sales organic growth rate of 61% … expect the 2014 report to be closer to the production growth rate plus a little extra for enhancements.
Nutshell: Strong quarter. Guidance for the year unaffected by the planned asset sale which is nice for modeling purposes. Knocks on the quarter will likely come in the form of EPS (we don't care, they beat on cash flow), higher operating costs in the quarter (guessing they will say winter), the lack of the mention of Utica, the sale of the Woodbine without saying "we sold the Woodbine", and expansion of their TMS focus (although it's a small piece of the budget). That last one is the only one that sort of bugs us but as you know, we're patient and willing to watch, listen and learn and not willing to judge the move based on the western drilling difficulties nor on the drilling difficulties by others in the eastern core of the play who may be considered less technically adept operators (not a slam on the other guys but HK has historically been very good at unlocking plays and then honing results). We don't care for the fact that the TMS play has put Goodrich into the well watcher category of stocks and that will happen to Halcon as well now to some extent (despite TMS only being 10% of the HK budget this year vs. 75% of the 2014 budget over at Goodrich). We're glad the budget is highly focused. We continue to own HK in the ZLT as about a 3.3% position which puts it roughly in 12th place and less than half the size of the big names in the portfolio. They remain leveraged (overly so but not critically so) and are not exactly "easy to own" unless you are patient but we also see this as the early innings here. We think both items start to change over the next 12 to 24 months. They'll still outspend cash flow this year but the asset sale takes care of the overage and more. Discipline on the lease expenditures side of capex and consistency in the top 2 plays will be watched for this year. The TMS is a project and it will swing the stock about from time to time. On a pro forma basis they are looking at 60%-ish growth this year and are trading at a 2014 multiple of EBITDA of 6.7x. We don't see anything about the quarter that would call for lower estimates for cash flow this year and the higher EURs auger for increased NAV price targets by that segment of the Street that is inclined to use them. We may add another trading position on any extreme weakness today as we see the current plan as less risky in terms of making production targets than it was prior to the improved well news in the two core plays that are getting 90% of their budget.