Halcon Resources Is Betting on the Last American Shale Oil Play

NEW YORK (TheStreet) -- Halcon Resources (HK) has been getting most of its output from Bakken formation, but this could start changing from next year when the company will begin pumping oil from Tuscaloosa Marine Shale, or TMS, the last remaining major American unconventional oil play.

Halcon Resources is a small, independent energy company valued at $2.3 billion with significant operations at two shale formations: Bakken - Three Forks in North Dakota and El Halcon in Eagle Ford East Texas. Furthermore, Halcon Resources is one of the few oil producers that are betting big on the rise of TMS as a major shale oil play which stretches from South Louisiana to Southwest Mississippi.

Halcon Resources' shares ar up 38.2% this year, currently hovering around $5.50.

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Halcon Resources has nearly 120 million barrels of oil-weighted proved reserves, of which more than 75% are located at Bakken while most of the remaining are at El Halcon. In an email to TheStreet, the company's Vice President for investor relations Scott Zuehlke said that Halcon Resources' growth has been driven by its assets at the Bakken and Eagle Ford formations and this trend will likely continue in the coming years.

In its previous quarterly results which came out last week, the company's production, which consist of mainly oil and natural gas liquids, increased by 44.2% from last year to more than 42,000 barrels of oil equivalents per day. This growth was driven by 87% and 453% increases in production from Williston Basin at the Bakken formation and El Halcon respectively. Around 67% of the company's output came from the former and 22% from the latter.

The company swung to a loss of $73.3 million from a profit of $36.3 million a year earlier but this was on the back of $106 million non-cash loss on oil derivatives. Excluding the impact of one-off items, the company reported net income of 7 cents a share, up from 4 cents a share a year earlier.

Halcon Resources is currently evaluating its acreage at TMS. This asset has not made any notable contribution to the company's daily production or total reserve base. This, however, might change in the near future. Earlier in June, Halcon Resources signed a $400 million agreement with Apollo Global Management (APO) to fund its growth in TMS.

So far, the results from the initial TMS test wells have been encouraging. Further positive results can give a significant boost to the company's proven reserves base, considering the size and quality of its acreage.

Halcon Resources has leased around 315,000 net acres at TMS, which is bigger than its combined acreage at Bakken and El Halcon, making it one of the biggest players in this shale play. Furthermore, Zuehlke has said that most of its acreage at TMS lies in the "sweet spot", or the most promising area, of the shale oil play.

Although TMS is as old as Eagle Ford in terms of geological age, it is a tougher place to drill for oil and gas. Several operators, such as Devon Energy (DVN), have been unsuccessful at exploiting this area which could be home to 7 billion barrels of oil. However, Zuehlke has said that drilling and completion challenges are expected in any early stage play. With improvements in understanding about the region, the industry as a whole "has a much better handle on where to land the laterals and how to effectively complete these TMS wells compared to a year or two ago when other operators were trying less effective methods."

This is one of the reasons why other companies, such as Encana (ECA) and Goodrich Petroleum (GDP), are also positive about the future of TMS. Encana and Goodrich Petroleum own about 200,000 and 300,000 net acres at TMS respectively. Like Halcon Resources, Encana and Goodrich Petroleum are currently evaluating their TMS assets.

Halcon Resources plans to drill more than a dozen operated and non-operated wells at TMS in the second half of this year. With ongoing development, Scott has predicted that TMS will start making a "meaningful contribution" to the company's production "towards the second half of 2015."

At the time of publication, the author held no positions in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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TheStreet Ratings team rates HALCON RESOURCES CORP as a Hold with a ratings score of C-. TheStreet Ratings Team has this to say about their recommendation:

"We rate HALCON RESOURCES CORP (HK) a HOLD. The primary factors that have impacted our rating are mixed ? some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its robust revenue growth, good cash flow from operations and expanding profit margins. However, as a counter to these strengths, we also find weaknesses including deteriorating net income, generally higher debt management risk and disappointing return on equity."

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

  • HK's very impressive revenue growth greatly exceeded the industry average of 1.5%. Since the same quarter one year prior, revenues leaped by 51.6%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
  • Net operating cash flow has increased to $251.44 million or 44.00% when compared to the same quarter last year. The firm also exceeded the industry average cash flow growth rate of 18.80%.
  • Compared to where it was 12 months ago, the stock is up, but it has so far lagged the appreciation in the S&P 500. Despite the fact that it has already risen in the past year, there is currently no conclusive evidence that warrants the purchase or sale of this stock.
  • The debt-to-equity ratio is very high at 2.61 and currently higher than the industry average, implying increased risk associated with the management of debt levels within the company. To add to this, HK has a quick ratio of 0.66, this demonstrates the lack of ability of the company to cover short-term liquidity 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.

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