September 14, 2018 - 4:39pm EST by
2018 2019
Price: 4.83 EPS -.06 .25
Shares Out. (in M): 161 P/E N/A 19
Market Cap (in $M): 777 P/FCF N/A N/A
Net Debt (in $M): 517 EBIT 29 96
TEV ($): 1,293 TEV/EBIT 45 14

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  • Energy
  • E&P


This idea is for a pair trade: Long Halcon Resources (HK) and Short Jagged Peak (JAG) which are currently trading at $4.83 and $13.33, respectively. Borrow on JAG is available and the cost to borrow is currently -2%.  While I think HK is an attractive long given that it is trading materially cheaper than its peer group given the quality of its assets, I have some concerns about owning oil-focused E&P companies which will require decades of sustained demand for oil to truly justify their valuations.  As such, I think pairing HK, which trades very cheaply compared to its peer group, with JAG, which has very similar assets and trades, arguably, slightly expensively relative to the same peer group, is an attractive way to take advantage of what appears to be a substantial relative mis-pricing in the market.


Both HK and JAG are Permian oil and gas producers focused on the Western extent of the Delaware Basin.  Their acreage positions, size, and well results are quite similar; however, their valuations are substantially different with the major functional differences between the two being that (i) HK is more leveraged than JAG and (ii) JAG is 12 months ahead of Halcon in developing their assets.


Company Backgrounds:


Halcon was founded by Floyd Wilson in 2012 after he sold Petrohark to BHP for ~$15 billion.  Halcon became a relatively early mover in the Williston basin (Bakken) but was forced to restructure in 2016 after running up a ~$4 billion debt balance (~5-6x EBITDA) just prior to the oil crash.  After the restructuring Halcon began shifting its focus from the Bakken to the Permian and ultimately ended up selling their Bakken assets for $1.4 billion in the summer of 2017. Halcon’s restructuring which essentially wiped out the old equity holders appears to have affected the market’s perception of the company and Floyd Wilson (who had previously been considered amongst the best E&P executives); the market seems to be giving no consideration to the fact that what Floyd and Halcon got wrong was the direction of oil prices (a notoriously difficult market to forecast), not the assets or the operations.


Jagged Peak was formed in 2013 by the Private Equity firm Quantum Energy Partners (for, it appears, their fund V which was closed in 2009).  The company began acquiring acreage in the Permian basin in 2013 and began their drilling program late that year though the program didn’t pick up much steam until after the company went public in early 2017 - between 2013 and Q4 2016, the company only completed 16 wells.


Asset Overview:


Halcon owns ~60,000 net acres almost entirely located in Ward (~33k net acres) and Pecos (~27k net acres) counties of West Texas.  At present, Halcon is producing ~13,750 BoE/d (70% Oil). Halcon’s acreage breaks down into 3 areas: Monument Draw (22k acres), West Quito Draw (11k acres), and Hackberry Draw (27k acres).


Jagged Peak owns ~79,300 net acres similar located almost entirely in Ward (~35-40k acres) and Pecos (40-45k acres).  At present, JAG is producing ~34,500 BoE/d (77% Oil) JAG’s acreage also breaks down into 3 areas: Cochise (~13k acres), Whiskey River (~36k acres), and Big Tex (~30k acres).


The map below depicts the relative acreage positions with HK’s acreage in green and JAG’s in Maroon.


Note: The HK position in Western Ward (West Quito) is an approximation - the acreage map this is taken from is slightly stale.


Some notes on the various acreage positions: Halcon’s Monument Draw and JAG’s Cochise areas are adjacent to each other; JAG’s Big Tex position (~35-40% of total net acreage) is on the fringe of the Delaware basin and results to date as well as estimates of original oil in place indicate this area may be uneconomic.  Similarly, Halcon’s Hackberry Draw area (45% of total net acreage) has seen mixed results and some portions of this position may be uneconomic as well.

Drilling Result Comparison:


As mentioned, both operators have seen similar results as a function of the similarity in their acreage positions - though, if anything, Halcon’s results to date have been superior to those of JAG.  The chart below comes from a JAG presentation released on July 9th and it shows a combined type curve for all of JAG’s wells drilled in the Lower Wolfcamp A - the most economic area they are targeting.  The graphic indicates that, at 200 days, JAG’s wells are producing <700 BoE/d and at ~650 days around 350 BoE/d. JAG uses an internal type-curve (similar to the one their 3rd-party reserve auditors use) which projects ~1.2mm BoE of total production from these wells.


While Halcon’s wells aren’t perfectly comparable (HK’s wells are slightly longer and, according to recent disclosure, slightly cheaper), it is useful to note that Halcon’s Monument Draw wells are producing ~1,000 BoE/d at the 200 day mark having been above 1,000 BoE/d for the first 6 months (substantially better than what JAG has experienced):  In Monument Draw, Halcon’s type-curve calls for 1.9mm BoE of total production and Halcon’s results have outperformed this curve thus far. Oil & gas splits should be comparable for the two operators.


And wells from Halcon’s worst area (Hackberry Draw) drilled by the previous operator are producing in-line with Jagged Peak’s overall average at ~350 BoE/d at the 650 day mark: