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Halcón Resources Corporation (NYSE:HK)

Q2 2012 Earnings Call

August 2, 2012, 10:00 am ET

Executives

Floyd Wilson - Chairman & CEO

Mark Mize - EVP, CFO & Treasurer

Steve Herod - President

Analysts

Leo Mariani - RBC Capital Markets

Ron Mills - Johnson Rice

Operator

Good day ladies and gentlemen and welcome to the Halcón Resources second quarter earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this call maybe recorded.

I would now like to introduce your host for today's conference, Floyd Wilson, Chairman and Chief Executive Officer. Sir you may begin.

Floyd Wilson

Good morning and thanks all for joining. This conference may certain forward-looking statements intended to be covered by the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. For a detailed description of our disclaimer see our earnings release issued this morning and posted to our website.

With me on the call today is our CFO Mark Mize and our President Steve Herod. This quarter represents the final RAM Energy only report and marks the beginning of our aggressive growth in value reporting. Welcome to Halcón Resources.

Since February 8th we have made significant progress towards our goal of building an oil weighted energy company with a substantial drilling inventory. The heavylifting with respect to acquiring the acreage necessary to achieve our goals is complete. We are now transitioning from lease acquisition to drilling and development. In fact, we have nearly 10 rigs running today.

We have accumulated nearly 1 million acres of highly perspective land, all identified through our research and experience. And this platform is a great one; by the way on a proforma basis, average daily net production for the second quarter was nearly 15,000 barrel of oil equivalent per day. We have eight operated drilling rigs running in our oily resource plays and we will add several more rigs throughout the year approaching 15 rigs by the end of the year. We expect to drill over 60 wells during the second half of 2012.

All-in-all, a great start maybe even better and that today we are announcing two Wildcat discoveries. In East Texas our Woodbine and our Woodbine Eagle Ford area are exploratory well, the Covington 1H in Grimes County found productive intervals in both the Woodbine and Eagle Ford formations. We are currently drilling a horizontal lateral in this one in the Woodbine and intend to produce that zone first in this well bore. We plan to drill in Eagle Ford only producer as soon as possible on the same location.

Our area of interest here includes Leon, Madison, Grimes, Brazos, Walker and Polk counties. We will be running five rigs here by the fourth quarter of this year. We currently hold over 170,000 acres in this exciting area and plan to drill at least 20 more wells during the second half of the year.

Our second Wildcat discovery that we’ll mention today is one of our previously undisclosed Wildcat plays and is also a multi-zone discovery. In Austin, Colorado Counties, Texas where we accumulated over 10,000 acres, on our way to our goal of 50,000 acres or so, targeting the Midway and Navarro formations. Our Kollatschny 1 (inaudible) in both of these areas. This well was drilled to a total vertical depth of just over 17,000 feet and completion operations are underway in the Navarro section between 15,000 and just under 17,000 feet. This is a vertical well utilizing stage hydraulic pressure and we will co-mingle midway within Navarro after the Navarro production settles in or we’ll drill a separate midway well on this pad site.

We have already spud our second well on this project, the Hillboldt 1, approximately six miles north east of the initial well and we have 60 square mile 3D shoot underway. In both of the discoveries, we expect oil gas and natural gas liquids production and I am expecting big numbers. In the Williston Basin we are running three operating rigs today and plan to keep this rig counts through the end of the year.

Recent wells continue to perform in line with our expectations and our type curve and drilling and completion cost remain below $8 million per well. We are currently evaluating modifications and completion design up here which we hope may increase recoveries. And here the prospects of the spread narrowing as compared to NYMEX or WTI looks favorable overtime. We may look to add to our position in the Bakken overtime and we plan to begin testing the Three Forks on our acreage very soon.

Our Mississippi Lime project in Osage County is well underway. We have drilled five horizontal wells and four disposal wells so far. One well recently went on production, another is being fracked today and three more waiting on frac jobs. It’s too early to say much here, but we are encouraged by what we have seen so far.

In the recent call, in the recent press release we unveiled our entry into the Tuscaloosa Marine Shale play and disclosed our intent to acquire up to 200,000 acres. We have well over 50,000 acres in this play so far and we will spud our first well there this quarter. Also in Louisiana, in the Wilcox play we now hold over 80,000 net acres of leasehold in seismic options. We will complete our first well in this area later this month and we will run at least for the balance 2012.

In the Northeast, up in Pennsylvania and Ohio, we hold over 160,000 acres targeting the oil and condensate rich areas of the Utica and Point Pleasant shales. We will spud our first two wells there in September and we'll quickly build a three rig program. Industry results continue to be highly attractive and successful in this play. We are planning some 3D seismic and with likely start in the fourth quarter. So more to come on that. And in all of these areas, Halcón field services is on the job and staying ahead of the rigs.

The last drilling area to talk about today is our Eagle Ford drilling project in Fayette and Gonzales Counties, Texas. This excellent 24,000 net acre property will be divested this year due to a non-compete agreement. We have hired a banker to work with us on this process. We will open a data room in the next couple weeks.

It is important to note that the newer wells continue to outperform the 325,000 barrel oil equivalent type curve. This is due to changes in the completion design. This is a great project. We won’t be happy to sell it, but it will be worth a lot of money. This area is currently producing 2,700 net barrel of oil equivalent per day and we have two rigs running around the clock.

Additionally, we’ve made substantial progress in deciding which of our other assets to target for early divestiture and which should target for improvements. More news on that in the next few weeks.

Mark Mize will now discuss second quarter financial results and provide some additional information on liquidity and capitalization.

Mark Mize

Thanks Floyd (inaudible) completed a private offering of senior secured bonds in the amount of $750 million with a coupon of 9.75 quarters. There was strong demand for the pay in the deal up size from the original offering of $500 million. Proceeds from the bond initially close in the (inaudible) yesterday and use of the fund the cash portion of the GeoResources acquisition as well as a portion of the East Texas Woodbine deal.

In addition to the bond financing, we amended our senior secured line of credit concurrent with closing of the GeoResources acquisition. The borrowing base was increased from $225 million to $525 million and we can now hedge up to 85% of projected production from total [crude] reserves. As a result of these financing activities in considering the fuel resources and Woodbine acquisitions, we ended the quarter with pro forma liquidity of just over $600 million.

Moving on to the financial results, as Floyd has already pointed out, this the last quarter that will be largely driven by standalone legacy RAM operations beginning in Q3. Our production of financial results will include contributions from Geo and the East Texas acquisitions in addition to drilling activities in our new place. Production for the quarter came in at just over 3,900 barrel equivalent a day for a total of 356,000 barrels but more importantly as Floyd touched on, if you take a pro forma look at the company, it was 15,000 barrels equivalent a day.

As mentioned in the first quarter earnings call, [LOE] and normalize G&A continue to run above previously published annual guidance that we expect this metrics to be within our guidance range for the full-year ended 2012. This (inaudible) improvement in LOE and G&A over the remainder of the year will be driven by increased production levels as well as continued operational efficiencies.

(Inaudible) G&A this quarter was $13.1 million which includes a significant amount of acquisition and merger related cost. In total, there is $3.6 million of selected items reflect in G&A. Generally speaking, these were non-recurring in nature so they will not be reflected in future periods and we have removed them from EPS in the selected items table.

Turning to the selected item table, we have disclosed several items in this table which you can find on the last page of the press release. Some of these items require no explanation. The two that I will touch on are the recapitalization restructuring charges and the non -cash preferred dividend, there is a total of $5.1 million of charges reflected in the table that relate to the recapitalization and the acquisition of RAM and GeoResources.

These represent charges such as professional fees, financing costs and then another transitional employee related expenses. The second item is the preferred dividend, the nature of this item was addressed on the first quarter earnings call and as you may recall it's related to the issuance of the privately placed stock offering earlier this year.

This is the last quarter will be reflected in quarterly earnings and this is a non-cash item and really has no economic impact on the company. If you eliminate the impact of the selected items we reported net income per share of $0.02 versus the free consensus loss of [attending].

From a capital point of view, we spent $444 million this quarter on oil & gas capital expenditures, $425 million of which was related to lease hold acquisitions, a $164 million of that related to the previously announced 27,000 net acre acquisition in the Utica and Point Pleasant play. And then most of the remaining $260 million was spent in the Utica and Woodbine plays.

We ended the quarter with share count of about 144 million shares outstanding. However, after this week’s acquisitions Geo and the other Woodbine we have approximately 260 million shares outstanding. The final area to touch on is our hedging program, our strategy is just with what we had previously announced rental off the hedge 80% of our invested production over the next 18 to 24 months. Accordingly, we have been actively adding all hedges to our portfolio over the last call it 30 to 45 days as opportunities have arose and while we've not been active with gas or NGL hedging given the continued depressed price environment, we are going to continue to monitor market conditions.

With regards to the current hedge portfolio and by the way my comments on hedge levels are pro forma for the positions that were [no bated] over to HK from Geo but we now have approximately 4,800 barrels a day of oil hedge for the remainder of 2012, what the floor right at $93 a barrel and 2013 we have just over 5,600 barrels a day hedge at $89 a barrel. That represents about 25% of our published production guidance.

On the gas side, we have about 7.2 million cubic feet a day of hedges in place for the second half of ’12 at $4.74 and 1.3 million cubic feet a day in ’13 at $4.18. So clearly we strive always to go achieve our overall hedge targets as (inaudible) continue to monitor the market layer and position thus deem it appropriate.

Now I will turn the call back over to Floyd.

Floyd Wilson

Thanks Mark. I guess I am so excited thinking about the growth we've had down the Eagle Ford play, a minute ago I reported 2,700 barrels a day, that number is correct, that's gross production. The net production from that property to us is 1,100 barrels of oil equivalent per day, reminds you that property was producing less than 200 barrels a day in the fourth quarter of 2011.

So it's really going great down there. As we look forward the next several quarters let me remind you that we have guided for strong production increases and the dramatically improving cost structure. We see no reason to change those aggressive projections at this time and feel quite comfortable within. We've built a formidable land position in just a few months and we now have begun to develop these holdings.

Our balance sheet is in great shape and we have no current need or plan to raise any additional equity. We are doing extremely well operationally and position for significant growth. We have built and sold companies before and intend to have proved on those past successes. Operator we are ready for questions now if there are any?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from Leo Mariani of RBC Capital Markets. Your line is now open.

Leo Mariani - RBC Capital Markets

Hey guys just looking for a little bit more color on the Navarro/Midway formations that you guys are targeting in Austin and in Colorado Counties just anymore kind of detail on the geologic concept there and any detail on potentially historical production in that area as well will be great?

Floyd Wilson

Leo, this is one of the first projects that we started working on when we began Halcón there is no Navarro production nearby there is some quite a bit in East Texas that is very similar to what you saw in the (inaudible) in areas but this is a pure Wildcat discovery, there is Midway production in the area, a few miles away but nothing near where we are.

So our expectations are quite high here, this is a deep over pressured very rich pay zone in both of these sections and we expect big rates out of this. We are just now completing a five stage frac in the Navarro section and we will test that and I am basically assuming that it will be too strong to go the Midway at this time and we will have some additional news on the actual production rate within the next few days.

Leo Mariani - RBC Capital Markets

Is that something you guys would announce with another update prior to the next quarter's earnings; I know you said there was bunch of potential well resolved to an update on some of the A&D activity coming that something we should look forward in the near future?

Floyd Wilson

I don’t think I said anything about the A&D activity, but on this drilling I think we will be in a position to announce prior to the next quarter release some of these results just because we are getting first, a lot of calls about it and second we have a lot of people out watching these well sites and trying to figure out what we are getting. So we'll just make those announcements ourselves than have others do it.

Leo Mariani - RBC Capital Markets

Obviously, you guys are involved in a ton of different plays at this point. If you guys had to think about sort of a top three, will that be something you guys could enlighten us with?

Floyd Wilson

Well we certainly have high regard for everything that we are doing. At this time, you know the data points that are strongest involve the Woodbine and Eagle Ford Play in East Texas. This what we call our catch springs project which is this Navarro Midway is of course high on the list right now and the Utica and Point Pleasant, every single data point that the industry has been coming out with over the last several months has done nothing but anchor our own analysis and provide us with a high level of confidence.

So while all of our other projects are extremely interesting to us, including a couple of undisclosed (inaudible) at this time, of course those three would be top of the list. The Mississippi Lime is just a little too early, but we've seen some great beginning there, indicative of other operator results in the area. So we’re not unhappy with anything that we're doing.

Leo Mariani - RBC Capital Markets

That’s great. And obviously you guys talked about no changes to your robust production outlook, the rest of this year. I assume that’s also the same for 2013 as well?

Floyd Wilson

Yeah, we see no change at this time. I will say that we'll update to you as soon as we feel the need to, but right now we view those as conservative while they are strong – we view those as conservative achievable targets.

Operator

Thank you. Our next question comes from (inaudible) of KRL Group. Your line is now open.

Unidentified Analyst

I appreciate the update on your leasehold acquisition. You know, kind of looking out to the Utica and Point Pleasant. Can you comment on whether your leasing all rights there, been hearing of some other operators chasing steps of the play. Just curious what you are thinking there?

Floyd Wilson

In a general sense, across our entire acreage block, we hold all rights of the needs of (inaudible) which is a shallow productive zone that’s historically been drilled for almost a 100 years up there. Hopefully that would answer your question.

Unidentified Analyst

Sure, that helps. And then as far as kind of the drilling plan for this year, you are going to be targeting the Utica, the Point Pleasant up there?

Floyd Wilson

We are targeting the Utica, the Point Pleasant we will be looking at the [Rhine] Street of course and certain areas and anything else that would come up, but the area that we are leasing in is most highly perspective for the Utica Point Pleasant.

Operator

Our next question comes from Rhys Williams of Johnson Rice.

Ron Mills - Johnson Rice

Hey guys it is Ron Mills. A question for you on Midway Navarro, is this a more conventional play, is that why you are shooting 3-D seismic or do you think this is a play that exhibits more resource play characteristics just trying to think about how you think about the geologic study here?

Floyd Wilson

Well, Rhys, it's conventional and definitely in the Midway and the midway these are sands. The Navarro is conventional at this time, but you might remember that some of the most heady successes in South Texas in the (inaudible) have been in these areas where they had drilled vertically and are now drilling horizontally.

So the Navarro is a more evenly distributed section in this area, so it's certainly will be something we will be looking at. At this time, the section has thickened up. As I said we have a five stage frac just finishing up in the Navarro over about, well somewhat less than 2000 feet. So it's quite thick enough to do a really interesting vertical multi-stage hydraulically fracked completion.

The Midway has a similar number of sections in it and so this first group of activities will be vertical, but we are certainly going to be looking at the ability to access these zones horizontally.

We think that the -- we are shooting the 3-D seismic to delineate how much of leasing we really intend to do and it’s certainly not a structural play, but we can certainly track the sand in the Navarro section with 3-D seismic better than we can with 2D.

Ron Mills - Johnson Rice

Is the Navarro thick enough, it sounds today more like a Wolfberry type play in the Permian although the Wolfcamp people are starting to talk about multiple benches and going horizontally. Is the Navarro, it sounds thick enough, does it have similar of the characteristics where you may have separate benches that you would have target in individual horizontals if it became a horizontal play?

Steve Herod

That's certainly a possibility. I just have to point out the tremendous difference between where we are and at these depths relative to the Permian, this is an over pressured reservoir. We have done some coring and it has great porosity and high TOCs and all of this. So it’s an unknown about drilling a horizontal well at this depth for us and at these pressures.

We are stepping our way into a wildcat discovery like this fairly conservatively because as I said it’s an over pressured reservoir that has got some strong promise. I don’t think I would liken it to the Wolfcamp out in the Permian just yet.

Ron Mills - Johnson Rice

Okay. And can you just -- I think I got all these. You were talking about I think the Woodbine going to 5 rigs by year end. The Williston at three rigs, Mississippi and I assume you are going to complete the wells before you determine what you are doing there. I know you are going to have one rig in the TMS and one rig in the (inaudible) and I guess one rig in the Midway Navarro, is that kind of the rig count as you see it today to allow yourself to drill those 60 wells in the second half?

Floyd Wilson

We would probably have an additional rig in the Tuscaloosa Marine Shale before year end. I don’t know that we will have an additional rig in this Midway Navarro just because we have done that seismic work. We would have a couple of rigs may be built into as many as three and the Utica Point Pleasant area. So I think our current and then of course if you add the rigs that we are running in the Eagle Ford and the Bakken area are 8 rig count would grow to 13, 14 or thereabouts pretty soon here.

Operator

(Operator Instructions)

Floyd Wilson

Operator I think we have taken the questions and we appreciate everybody's interest this morning. We will end the call now and feel free to give us a call if you think of something that wasn't covered on the call. Thank you.

Operator

Ladies and gentlemen thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone have a great day.

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