Why Halcon Resources (HK) Was Downgraded

Story updated at 10:05 a.m. to reflect market activity.

NEW YORK (TheStreet) -- RBC Capital downgraded Halcon Resources (HK) to "sector perform" from "outperform" Wednesday.

Halcon Resources fell 5.8% to $3.87 in morning trading.

The analyst firm lowered its price target for the oil and gas company to $4 from $6. Analysts said the company's leverage profile is concerning, resulting in the downgrade.

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Separately, TheStreet Ratings team rates HALCON RESOURCES CORP as a Sell with a ratings score of D. TheStreet Ratings Team has this to say about their recommendation:

"We rate HALCON RESOURCES CORP (HK) a SELL. This is driven by several weaknesses, which we believe should have a greater impact than any strengths, and could make it more difficult for investors to achieve positive results compared to most of the stocks we cover. The company's weaknesses can be seen in multiple areas, such as its deteriorating net income, generally high debt management risk, disappointing return on equity, generally disappointing historical performance in the stock itself and feeble growth in its earnings per share."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The company, on the basis of change in net income from the same quarter one year ago, has significantly underperformed when compared to that of the S&P 500 and the Oil, Gas & Consumable Fuels industry. The net income has significantly decreased by 4135.8% when compared to the same quarter one year ago, falling from -$20.18 million to -$854.83 million.
  • Currently the debt-to-equity ratio of 1.62 is quite high overall and when compared to the industry average, suggesting that the current management of debt levels should be re-evaluated. Along with this, the company manages to maintain a quick ratio of 0.42, which clearly demonstrates the inability to cover short-term cash needs.
  • Return on equity has greatly decreased when compared to its ROE from the same quarter one year prior. This is a signal of major weakness within the corporation. Compared to other companies in the Oil, Gas & Consumable Fuels industry and the overall market, HALCON RESOURCES CORP's return on equity significantly trails that of both the industry average and the S&P 500.
  • Despite any intermediate fluctuations, we have only bad news to report on this stock's performance over the last year: it has tumbled by 48.42%, worse than the S&P 500's performance. Consistent with the plunge in the stock price, the company's earnings per share are down 1890.90% compared to the year-earlier quarter. Naturally, the overall market trend is bound to be a significant factor. However, in one sense, the stock's sharp decline last year is a positive for future investors, making it cheaper (in proportion to its earnings over the past year) than most other stocks in its industry. But due to other concerns, we feel the stock is still not a good buy right now.
  • HALCON RESOURCES CORP has experienced a steep decline in earnings per share in the most recent quarter in comparison to its performance from the same quarter a year ago. The company has reported a trend of declining earnings per share over the past two years. However, the consensus estimate suggests that this trend should reverse in the coming year. During the past fiscal year, HALCON RESOURCES CORP reported poor results of -$1.24 versus -$0.06 in the prior year. This year, the market expects an improvement in earnings ($0.17 versus -$1.24).
  • You can view the full analysis from the report here: HK Ratings Report

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