Halcon Resources: A Review Of Its 2019 And 2020 Outlook

Apr. 19, 2019 2:54 AM ETBattalion Oil Corporation (BATL)18 Comments2 Likes

Summary

  • Halcon is projected to burn $172 million in 2019 at current strip prices.
  • Infrastructure and gas treatment costs, as well as low Permian natural gas prices are contributing to that cash burn.
  • The outlook for 2020 looks much better with stronger Permian gas prices expected, along with less need for infrastructure and gas treatment spending.
  • Halcon's liquidity looks okay, although it may utilise half of its current $275 million credit facility borrowing base by the end of 2019.
  • Halcon's debt level will be fairly elevated, but it doesn't have note maturities until 2025.
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Halcon Resources (HK) is expected to have a significant amount of cash burn in 2019 due to a combination of production growth, infrastructure build-out, low Permian natural gas prices and elevated gas treatment costs. By 2020, Halcon's infrastructure and gas treatment costs should be quite reduced, while Permian natural gas prices should recover somewhat. Thus, Halcon may be able to deliver positive cash flow in 2020 at current strip prices, albeit without much production growth.

2019 Outlook

Halcon expects an average of 20,500 BOEPD (57.5% oil) in production during 2019. This is a 19% increase in total production from its Q4 2018 average. 2019 oil production is expected to be roughly flat compared to Q4 2018 though, since Halcon has started to develop its Southern West Quito Draw position, which provides high total production, but is only around 40% to 50% oil.

At current strip prices (of around $61 WTI oil) for 2019, Halcon is projected to generate around $291 million in oil and gas revenue. Its hedges have around negative $10 million in value, largely due to oil collars that have a ceiling of around $60 (compared to oil futures average around $63 to $64 for the last three quarters of 2019). Halcon does have positive value WAHA basis hedges, having essentially hedged all its 2019 natural gas production at negative $1.18.

Type

Barrels/Mcf

$ Per Barrel/Mcf

$ Million

Oil

4,302,438

$58.00

$250

NGLs

1,646,150

$20.00

$33

Gas

9,203,475

$0.85

$8

Hedge Value

-$10

Total

$281

Halcon's cash expenditures are estimated at $453 million during 2019, so it is projected to burn around $172 million during 2019.

$ Million

Lease Operating and Workover

$52

Production Taxes

$17

G&A

$32

Q1 H2S Treatment Costs

$11

Recurring Gathering, Transportation and Other

$26

Cash Interest

$45

Capex

$270

Total

$453

Halcon had $47 million in cash on hand at the end of 2018, along with an undrawn $275 million credit facility, so its liquidity situation looks okay at the moment.

2020 Outlook

Halcon's outlook for 2020 looks considerably better though. It grew production substantially during 2018 (with Q4 production 57% higher than Q1), so its base decline rate is fairly high at the moment. With the slower production growth in 2019, Halcon's base decline rate should decrease.

If Halcon exits 2019 with around 24,000 BOEPD (55% oil) in production, it would generate around $352 million in oil and gas revenue at strip prices. The realised price for its gas should increase compared to 2019 due to the narrowing WAHA basis (currently at negative $0.87 for 2020), while it could receive close to the $61 WTI 2020 strip price for its oil due to the full year of takeaway to the Gulf Coast.

Type

Barrels/Mcf

$ Per Barrel/Mcf

$ Million

Oil

4,818,000

$60.50

$291

NGLs

2,058,600

$20.00

$41

Gas

11,563,200

$1.75

$20

Hedge Value

-$3

Total

$349

In this scenario, Halcon's D&C capital expenditures may be around $137 million to maintain production at 24,000 BOEPD, with another $13 million for infrastructure.

Halcon's expenditures are expected to come down considerably due to the completion of its larger infrastructure projects as well as the decrease in Monument Draw H2S treatment costs.

Source: Halcon Resources

$ Million

Lease Operating and Workover

$61

Production Taxes

$21

G&A

$32

Recurring Gathering, Transportation and Other

$22

Cash Interest

$46

Capex

$150

Total

$332

Thus, at current 2020 strip prices, Halcon would be able to generate around $17 million in positive cash flow while maintaining production at around 24,000 BOEPD.

Conclusion

Halcon's outlook for 2020 should be significantly improved from 2019 as it should have reduced costs as well as improved Permian gas prices. Thus, it may be able to deliver positive cash flow in 2020, depending on how much it plans on growing production. Halcon will need to manage its liquidity due to its 2019 cash burn, but may only use up half of its credit facility borrowing capacity (based on its current $275 million borrowing base) by the end of 2019.

Halcon's level of debt is an issue, but it appears to have a viable path to stopping its cash burn and doesn't have note maturities until 2025 (with its credit facility currently maturing in 2022).

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