is halcón resources set for meaningful growth?
TRANSCRIPT
Is Halcón Resources Set
for Meaningful Growth?
Is Halcón's growth for real?
• Halcón's latest Tuscaloosa Marine Shale update a major boost.
• However, it’s too early to predict a stable production pattern from this emerging shale play.
• Halcón's existing production from its Bakken and El Halcón properties not enough to fuel meaningful growth.
Latest TMS update a shot in the arm…
• Halcón's first operated well in the TMS achieves average 24-hour IP rate of 1,508 Boe/d.
• Superior well design credited for impressive IP rate.
• Effective lateral length of 7,060 feet with 24 frac stages. Halcón's 6-month price chart HK data by YCharts
Latest TMS update a shot in the arm…
• Currently drilling three more wells.
• Expects to drill 10-12 wells in 2014, plus participation in 15-20 non-operated wells.
• Signed financing agreement worth $400 million to develop TMS acreage.
Photo credit: Flickr/Paul Lowry
…but still early to predict a pattern.
• The Tuscaloosa Marine Shale play is still relatively new.
• Encana (NYSE: ECA) and Goodrich Petroleum (NYSE: GDP) have reported 24-hour IP rates between 546 Boe/d and 1,087 Boe/d with a median rate of 895 Boe/d.
• Decline rates and EUR yet to be ascertained.
• Steep learning curve ahead with management allocating only 10% of D&C capex to the TMS.
What to expect now from the TMS
• Well costs are on the expensive side (see chart).
• Bakken well cost range: $10-$11 million.
• Average El Halcón well cost: $9 million.
• Gradual transition to multi-well pad drilling (see chart).
Photo credit: Halcón Resources /Investor Presentation
Why the success of TMS is critical
• Favorable pricing environment at TMS due to proximity to Light Louisiana Sweet (LLS) market.
• Existing production form Bakken and El Halcón not sufficient to fuel meaningful growth.
Photo credit: Flickr/Martin Lopatka
Existing production not enough…
• 2014 production guidance range: 38,000 Boe/d to 42,000 Boe/d.
• Expected growth: 14% to 26% from 2013.
• Guidance is essentially devoid of TMS production which will be a bonus.
Photo credit: Flickr/Department of Energy and Climate Change
…due to high debt & low returns.
• Current debt-to-equity at 256%.
• Impairments worth $1.4 billion in 2013 ate into net profits.
• Return on equity has been negative for the past three quarters.
• Free cash flow deficit a concern.
HK data by YCharts
FCF deficit a matter of concern
Cash flow from operations not enough to support capital expenditures in the past eight quarters.
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Source: Company filings
Investor takeaway: Watch next 2 quarters
• The Tuscaloosa Marine Shale remains critical to adding meaningful growth to Halcón's existing production portfolio.
• Investors must watch Halcón's operational cash flow very closely.
Photo credit: Flickr/Nicholas A. Tonelli
