Why Halcon Resources Is On The Verge Of Disaster

|
About: Halcón Resources Corporation (HK)
by: StockBaller
Summary

Halcon Resources is burning cash, has large debt, limited current assets, no CEO, and an immediate need to raise cash.

The company has to resolve at least part of its debt situation by the end of Q2 2019 to avoid violating its Senior Credit Agreement.

It is hard to see any scenario in which the stock turns into an attractive potential investment.

Halcon Resources (HK) is an independent energy company engaged in the acquisition, production, exploration, and development of onshore oil and natural gas assets in the US. While the company has had major difficulties for the past year relating to debt, liquidity, and cash burn issues, it has reached a crisis point in the last week in the wake of the company's Q1 2019 earnings announcement, dropping from well over $1 to around $0.28 at the time of writing. In this article, I'll take a look at HK's earnings as well as evaluate its ability to continue operating.

Latest Earnings

HK's Q1 2019 earnings reports revenue of $51.9 million with a net loss available to common stockholders of $336.6 million, though with an adjusted net loss of only $1.7 million (if excluding selected items including a full cost ceiling impairment of over $275 million). Adjusted EBITDA came in at $21.9 million compared to $18.1 million for Q1 of 2018. HK faced some difficulties in their Monument Draw area relating to unexpected downtime, leading to lower-than-expected sour gas outputs. They also had higher operating costs per barrel of oil equivalent: $21.73 in Q1 2019 compared to $21.14 in Q4 of 2018, driven by an increase in water disposal costs. It was also during this quarter that the CEO of HK left abruptly, and they have yet to find a replacement.

Future Liquidity

While the last quarter earnings may not necessarily be considered a disaster (non-GAAP EPS of -$0.01 beat the estimate by $0.08), a look through HK's latest balance sheet reveals a worrisome state of affairs, not least in that their total current assets has dropped well over 50% since just the start of 2019:

Source: Halcón Resources Announces First Quarter 2019 Results and Provides an Update on Operations and Other Activities

With only $61.5 million in total current assets and a net loss last quarter of $336.6 million, there is no doubt that there is an immediate risk of HK's ability to continue operating. It is also worth noting that in HK's latest Form 10-Q, we can also see that they have around $613.5 million in long-term debt, and on page 11, the following is stated:

The Company's current internal projections show that it will not be in compliance with the Consolidated Total Net Debt to EBITDA Ratio and the Current Ratio covenants in certain future periods, beginning with the three months ended June 30, 2019

And at the end of the same paragraph:

As a result of the Company's expected inability to comply with its Consolidated Total Net Debt to EBITDA Ratio and its Current Ratio covenants contained in its Senior Credit Agreement within one year from the issuance date of the unaudited condensed consolidated financial statements for the three months ended March 31, 2019, the Company has determined that there are conditions and events that raise substantial doubt about the Company's ability to continue as a going concern.

So, HK - currently without a CEO to lead it as mentioned - is burning cash at a rate where it looks like they would be facing Chapter 11 bankruptcy by the end of the year if they continue and has hundreds of millions of dollars in debt that makes it unable to comply with its Senior Credit Agreement. Should HK be unable to at least partly resolve its debt situation to the point where they are in compliance with their Senior Credit Agreement by the middle of the year, I believe a foreclosure could be forced. That leaves just a few weeks left for HK to take drastic action (it's unlikely any major decisions have been made between the end of Q1 2019 and now given the lack of news of the sort).

The Chairman of the HK Board mentions in their latest earnings call transcript that they are considering a range of options to solve their liquidity issues including M&A, asset sales, and standalone financing alternatives. It would appear that the main option to be considered is for HK to sell one of its sites, which would (assuming it can be done very quickly) at least allow it to stay in compliance with its Senior Credit Agreement and continue operating for some time further, though the long-term issues would remain. Otherwise, there is some possibility that an investment bank will be able to sell the entire company, and we'll see within the next few weeks which way the wind blows.

Conclusion

With a huge rate of cash burn, large debt, very limited current assets, no CEO, and an immediate need to raise cash in some way, the future of HK is in extreme doubt. It is hard to see any scenario in which this stock could be considered an attractive investment in the near term.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.