One for the Speculators Amongst You
By Dan Dicker - Feb 24, 2014, 9:12 AM CST
The last several weeks have seen some very strong US crude oil prices, adding strength to my prediction that we'll likely see average prices of well over $100 a barrel for crude oil for the remainder of 2014. Along with this prediction should come some actionable US exploration and production companies that are being undervalued based upon continuing high and sticky crude prices. I've highlighted a few of these recently, including Noble Energy (NBL), EOG Resources (EOG), Continental (CLR) and Cimarex (XEC). But most of my readers want even more risk for part of their energy portfolio and the chance to make 40-50% or even more on their investments, a difficult target for any mid- or large cap E+P I'd likely recommend.
But for those that cannot resist, I have an idea -- let's have another look, a rather speculative one, at Halcon Resources (HK), now trading just north of $3.70.
The story of Halcon is pretty well known: Floyd Wilson, the CEO of Halcon has become an oil legend, most due to his great success with previous oil start-up Petrohawk Energy, bought out by BHP Billiton for a 60% premium. Not satisfied with the one-time score, Wilson went almost immediately "back to the well" again, starting Halcon Resources with some of the profits from Petrohawk but using the same stock symbol. Halcon and Floyd did not go back to the Haynesville shale to attempt a repeat of their success but began in the…
The last several weeks have seen some very strong US crude oil prices, adding strength to my prediction that we'll likely see average prices of well over $100 a barrel for crude oil for the remainder of 2014. Along with this prediction should come some actionable US exploration and production companies that are being undervalued based upon continuing high and sticky crude prices. I've highlighted a few of these recently, including Noble Energy (NBL), EOG Resources (EOG), Continental (CLR) and Cimarex (XEC). But most of my readers want even more risk for part of their energy portfolio and the chance to make 40-50% or even more on their investments, a difficult target for any mid- or large cap E+P I'd likely recommend.
But for those that cannot resist, I have an idea -- let's have another look, a rather speculative one, at Halcon Resources (HK), now trading just north of $3.70.
The story of Halcon is pretty well known: Floyd Wilson, the CEO of Halcon has become an oil legend, most due to his great success with previous oil start-up Petrohawk Energy, bought out by BHP Billiton for a 60% premium. Not satisfied with the one-time score, Wilson went almost immediately "back to the well" again, starting Halcon Resources with some of the profits from Petrohawk but using the same stock symbol. Halcon and Floyd did not go back to the Haynesville shale to attempt a repeat of their success but began in the newly ramping Three Forks area of the Bakken. Since 2010, Halcon has increased their exposure into other hot shale plays including the Utica and Eagle Ford -- but also greatly increasing their debt load in the process.
My history with Halcon as an investor is important to this recommendation too - I refrained from backing Wilson immediately upon his return to E+P, believing his reputation entirely overhyped in valuation on shares and I watched confidently as shares traded in the high teens throughout 2011 before dropping under $10. But with Floyd's move into the Utica, I felt that he was finally working the type of acreage that had made him so successful with Petrohawk and recommended shares as a speculative play at $7.
Sadly, all that Halcon and Floyd Wilson have hit so far in the Utica with their major test wells has been water, and water is not pricing anywhere near $100 a barrel. I suffered some sharp losses on that play in 2012 as I watched shares sink with the bad news, but promised to keep an eye on Halcon and try and find another opportunity to take a chance on the 'oil genius' Floyd Wilson. I believe that time has come.
Halcon's latest acreage play in the Eagle Ford is starting to show the kind of life that was expected both in the Bakken and the Utica but hasn't panned out. Results from the 42 operating wells show gross oil production increases between 40-50% and new drilling show impressive success (no water!) and quality production rates. This is more like it. One great tell of the success of HK in the Eagle Ford is in the drilling pattern of competitor Apache (APA), which with tons of options in the Eagle Ford is literally following the drilling pattern of Halcon with their own drilling in Brazos county. Somebody else thinks Floyd Wilson is finally on the right track.
Halcon is burdened with plenty of debt - $3B worth in fact. That's a heavy anchor which will require a lot of future success in the Eagle Ford to overcome. Can Floyd Wilson deliver again? That's obviously the very speculative question, but at $3.70 a share, I think the risk/reward is worth a small bet. If Floyd can catch lightning in a bottle a second time, the prospects for the shares is no mere 6-10% upside. HK could easily double in the next two years, particularly if oil remains above $100 a barrel.
This is a speculative call, but recommended (again) - HK at $3.70.
