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Summary

  • Stalled production growth at Halcon Resources is a major concern.
  • Data suggests investors still follow the company based on CEO hype.
  • High debt levels continue to restrict Halcon.

Not many stocks in the energy exploration and production sector see the interests of Halcon Resources (NYSE:HK), especially one that ironically guided towards limited sequential growth for the rest of the year. As an example of the interest level, Halcon has over 8,500 Seeking Alpha readers that get email alerts while an equally sized Sanchez Energy (NYSE:SN) only has 2,100 followers. Halcon has long been a lightning rod in the investor community due to the well known CEO and high debt position.

No doubt the energy sector is a hot area and it isn't surprising to see Halcon Resources trade up a couple of months back, but lots of questions should surround a stock hitting those 52-week highs yet forecasting limited growth. The suddenly hot Tuscaloosa Marine Shale, or TMS, sent Goodrich Petroleum Corp (NYSE:GDP) to highs along with Halcon, but the recent financing deal with Apollo Global Management LLC (NYSE:APO) might limit the upside from this surging area for Halcon.

Now with the recent sell-off from the froth in the stock back in early July is Halcon a buy?

Bakken Shale Growth About To Stall?

The major difference between Halcon Resources and Goodrich Petroleum or Sanchez Energy is that the former has a substantial drilling program in the Bakken Shale. During Q214, Halcon had total production of 42,055 boe/d led by the 28,259 boe/d produced in the Williston Basin. After powering through weather issues, the company increased production approximately 5,000 boe/d from the weak Q1 numbers.

Halcon has working interests in approximately 131,000 acres in the play, but its continuing too see substantial growth with a recent well reaching a record initial production rate of 4,225 boe/d. The company though reduced rig counts by one to only three operated rigs in the basin. The oil producer spudded 14 wells and put 19 wells online during period, but it only expects to average spudding 11.5 wells per quarter during 2H. Sure efficiency gains are allowing for greater production from each rig, but the totals are impacted by the 25% reduction in rigs utilized.

The El Halcon position in the Eagle Ford was seeing incredible growth with a quick ramp to 10,400 boe/d during Q114, up from an average of only 7,018 boe/d in the same period last year. Production faltered to only 9,111 boe/d during Q214. Halcon has 101,000 acres leased in this region.

Halcon continues to ramp up production in the TMS where the company holds a substantial position of over 300,000 acres. In order to finance the growth in this area, it made the financing deal with Apollo Global.

Weak Guidance

Based on the above results, the guidance from the company is rather intriguing. Halcon produced over 36,000 boe/d in Q1 and reached 38,000 boe/d by the time of the Q1 earnings announcement in early May. The confounding part was the guidance for full year production of an average of 40,000 boe/d with the low-end target of only 38,000 boe/d, or virtually flat production from May thru December.

At the time of the Q2 report recently, the company raised full year guidance to a low of 40,000 boe/d to a high of 42,000 boe/d. The production for Q3 is expected to be flat with Q2 numbers suggesting limited to no growth during the 2H14. Remember, Halcon produced 42,055 boe/d during Q2.

The scaled back drilling programs in the Bakken and El Halcon from four rigs to only three in each area for the rest of the year is the primary factor in the stalled growth. This factor leads analysts to only forecast 18% revenue growth for next year, not near what anybody would expect with the stock surging to recent highs and the popularity of the security.

The weak guidance is in contrast to the large ramp up expected by Goodrich Petroleum with analysts expecting revenue to surge in 2015. The current forecast is for revenue to jump by 51%. Analysts forecast a 56% jump in 2015 revenue for Sanchez Energy, but the company is partially benefiting from a merger. Regardless, the sector expects more rigs drilling more wells for the stocks to move higher.

One major concern with Halcon Resources is the substantial debt load of $3.5 billion. The above mentioned companies of Sanchez Energy that has larger production forecast of nearly 50,000 boe/d for this year and Goodrich Petroleum at 11,500 boe/d, those two companies only have debt loads of around $1.4 billion and $500 million, respectively. The smaller debt loads allow the less followed stocks more freedom to advance drilling programs unlike Halcon.

Bottom Line

Though Halcon Resources claimed that it had all the liquidity and funding it needed during the first quarter earnings call, the company is pulling back drilling in high growth areas and using some high-cost funding from Apollo Group to expand in another area. The bottom line is that growth over the rest of 2014 and into 2015 is less than it would appear on the surface.

The recent decline in Halcon isn't a buying opportunity.

Source: Halcon Resources: Where Did The Growth Go?