A Perfectly Positioned E+P Company

Slowly, we’ve seen a price rise in West Texas Intermediate crude, now approaching $100 a barrel. This rally has come while the global benchmark for crude prices, Brent crude, hasn’t really moved much at all, remaining fairly firm at around $109.  A flat price for global crude with a rising price for US crude has been just the opposite of what the fundamentals seem to say, with a dropping supply profile for Brent crudes and a continuing surplus of domestic crude in Cushing, Oklahoma. 

But there are reasons why what we think we see isn’t what’s actually happening.  On the European side, Cyprus bank issues have shown just how problematic Europe remains, sitting almost always on the edge of a new recessionary event (or worse).  And here in the US, there are new options for relieving the surplus of crude flooding the Gulf Coast from tight oil plays and Canadian sands, both in increasing transport of crude by rail and by the now better logistical activity of the Seaway pipeline. 

All of this to say that I think the conversion, or ‘catching up’ of West Texas Intermediate prices to the rest of global crude pricing is going to continue, even if they’re not about to hit parity anytime soon. 

For stocks, that means that some E+P companies that concentrate on domestic crude production are about to get delivered a premium as compared to those that have producing assets all around the globe.  There are a lot of companies I could suggest that fit this profile but one in particular is perfectly positioned to take advantage of this changing crude price, one that I’ve waited for more than a year to buy: Halcon Resources (HK).

There are a number of reasons -- besides the rising WTI crude price – that explain why I've waited so long to buy Halcon and why I've decided now is the time to get on board.

First, Halcon is run by one of the smartest oilmen I've ever seen, Floyd Wilson. He's had an amazing knack, first for building companies designed to be easily bought out by other, larger E+P companies -- he showed that talent by building Petrohawk Energy and selling it at a big premium to BHP Billiton (BHP) in the summer of 2011.

But he also has an amazing knack for finding the right play with the right mix of assets -- a real "green thumb" for hitting big pays in big plays. With Petrohawk, Wilson was right on target to sell mostly natural gas assets to BHP when the frenzy for shale gas was close to its peak.

But Halcon is built upon liquids -- crude oil and NGLs -- which are the hottest play right now and likely to remain the place to be for the next few years.

The share price for Halcon got way ahead of itself in 2012. Most of the investors in the shares were price-insensitive, simply trying to get in on the back of Floyd Wilson's latest endeavor, to participate in some of his magic and hoping for a quick sale of Halcon in the mold of Petrohawk. But Wilson doesn't work that way. He slowly builds real assets and real value before shopping his company around, and that process takes years.

I still think that a sale of Halcon is far on the horizon, but Wilson has now positioned himself just right in the Bakken, Utica and Eaglebine plays, while the shares have been sloughed off by the impatient investors who were hoping for another Floyd Wilson "overnight sensation." At $7.50 a share, I'm ready to dive in. 

With the increasing price for domestic crude, Halcon is a buy with an easy target I see of $12 a share.