Halcon Resources: Post-Bankruptcy Value Estimated At $8.25 To $11.00 Per Share

Summary

• Halcon Resources has emerged from bankruptcy and conducted a 34 to 1 reverse split for its old common shares, while issuing new shares and warrants to past noteholders.
• Halcon's unsecured debt has performed significantly better than its common shares since the restructuring plan was announced.
• The company's unhedged breakeven is estimated at $55 to $56 oil, while its credit facility covenants appear to require an average of above $45 oil in 2017 and $50+ in 2019.
• Halcon appears to be competitive in the new oil price environment, although its net debt is still around 4x unhedged EBITDA at $50 oil.
• Estimated valuation range for Halcon is $8.25 to $11.00 per share.

Halcon Resources (HK) emerged quickly from bankruptcy after its restructuring plan was confirmed by the Bankruptcy Court. It did a 34 to 1 reverse split with its existing common shares and then issued new shares and warrants in exchange to certain debtholders. The result is that Halcon now has 90 million shares outstanding, and another 10 million shares reserved for its management incentive plan (although only part of that 10 million is currently vested or issued).

Pre- And Post- Split Prices

At an $8.56 per share price now, that translates into a $0.252 per share pre-split price. The recovery for the unsecured noteholders is approximately 24.2 cents on the dollar excluding the value of the warrants. The warrants should add an extra one to two cents on the dollar for noteholders.

As is often the case with distressed companies, purchasing the unsecured debt offered better results than the common shares. I previously noted that Halcon's common shares potentially could be worth up to 50% less based on the restructuring plan, and its common shares have fallen 50% since that article. Halcon's unsecured notes appeared slightly undervalued at the time and the return on the unsecured notes appears to be around positive 7% since that article, including the estimated value of the warrants.

Halcon's share price has been affected by the recent decline in oil prices combined with the possible selling of some shares owned by former debtholders. Trading volume has been very heavy post-bankruptcy emergence. The four trading days since emergence have all ranked in Halcon's top 10 heaviest volume days in the past three years based on percentage of outstanding shares traded.

Debt And Liquidity

Halcon's net debt is now approximately $1.09 billion (pro-forma Q2 2016), with its debt consisting of $304 million in credit facility borrowings, $700 million in 8.625% second-lien notes due 2020 and $113 million in 12% second-lien notes due 2022. It has $315 million in liquidity, including $291 million in availability under its credit facility and $24 million in cash on hand.

Source: Halcon Resources

Halcon does have substantial remaining hedges though (primarily for 2016), which should allow it to have significant positive cash flow through the rest of the year. I estimate that Halcon will end up with around $150 million to $200 million in credit facility borrowings at the end of 2016, assuming its cash balance stays near current levels.

Halcon appears to need above $45 NYMEX oil to remain in compliance with its credit facility covenants in 2017, rising to above $50 NYMEX oil in 2019.

Unhedged Breakeven Scenario

Halcon's projected unhedged breakeven point is $55 to $56 NYMEX oil and $3 NYMEX gas. This incorporates the differentials mentioned in Halcon's presentation and assumes 36,500 BOEPD in production.

Source: Halcon Resources

While this is higher than Q2 2016's production level, 36,500 BOEPD during the second half of 2016 would put Halcon's total 2016 production at the lower end of its guidance range of 37,000 to 39,000 BOEPD for 2016. Halcon did have a significant amount of production shut-in during Q2 2016, so bringing some of that production back online would allow the company to reach its guidance while spending below maintenance capital expenditure levels.

Type	Barrels/Mcf	$ Per Barrel/Mcf	$ Million
Oil	10,191,713	$48.29	$492
NGLs	1,532,088	$11.10	$17
Gas	9,592,200	$2.10	$20
Total			$529

Click to enlarge

Halcon's cash interest costs have been reduced substantially as a result of the restructuring, falling from around $300 million per year at the beginning of 2016 to around $80 million per year now. This assumes that its credit facility is partially paid down as a result of Halcon's positive cash flow during the remainder of 2016.

	$ Million
Lease Operating & Workover	$107
Production Taxes	$48
Cash G&A	$55
Gathering, Transportation and Other	$27
Cash Interest	$80
Maintenance Capex	$210
Total	$527

Click to enlarge

Below is a look at Halcon's current 2016 guidance. Capital expenditures are below estimated maintenance levels, resulting in the production declines during 2016.

Source: Halcon Resources

Valuation

My new valuation estimate for Halcon is a range of approximately $8.25 to $11.00 per share. This is based on Halcon's projected net debt of approximately $0.96 billion at the end of 2016, along with production being maintained at approximately 36,500 BOEPD. Long-term oil prices are assumed to range between $55 and $60, similar to the price range for long-term oil futures during the last four months.

The share count used in this calculation is 92.5 million shares, which incorporates the restricted shares that are already vested and are due to vest in one year. However, the 5 million in options are not included in the calculations since it is assumed that the options will have an exercise price near current levels. Dilution from the options would, therefore, have little effect at current prices, although it would act as a drag on valuation should Halcon's share price start to increase.

Conclusion

Halcon's debt fared much better than its equity even after its reorganization plan was known. Halcon's common shares were overvalued based on the percentage of the new equity that it would be converted into, although that valuation gap narrowed as time went on.

The new Halcon looks relatively fairly priced right now, with its current price within its estimated valuation range. Halcon's breakeven point is roughly $55 to $56 oil, so it does need oil prices to increase in 2017 to avoid burning cash or deal with declining production. Halcon's share price will be largely tied to the price of oil, although it may potentially be able to move its range through acquisitions. Further cost reductions could help Halcon increase production at lower oil prices as well, which would help drive its value up.

Halcon does retain a fair amount of debt post-restructuring, which is something to keep an eye on. Projected year-end net debt is around 4x unhedged EBITDA with $50 NYMEX oil and 36,500 BOEPD in production.

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Disclosure: I am/we are 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.