May 04, 2015 - 10:05pm EST by
2015 2016
Price: 1.40 EPS 0 0
Shares Out. (in M): 500 P/E 0 0
Market Cap (in $M): 700 P/FCF 0 0
Net Debt (in $M): 3,750 EBIT 0 0
TEV (in $M): 4,450 TEV/EBIT 0 0
Borrow Cost: Tight 15-50% cost

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  • Oil and Gas
  • Energy


David Einhorn today laid out an investment thesis suggesting shorting oil frackers, focusing on the "mother fracker" Pioneer (PXD). However, there are companies that are more egrigiously overvalued, and have multiple catalysts actively driving down their shares in real time. And some of these overvalued companies have far worse recent capital allocation track records than Pioneer. One such company is Halcon Resources (HK). Short Halcon because:

1) it is extremely overvalued, trading at more than 2.5x likely proved reserve value and more than 10x EV/EBITDA (excluding hedges)

2) it is extremely overlevered, with unhedged debt to ebitda of more than 8x

3) debt to equity swaps are diluting shareholders and knocking down the stock price in real time

4) Halcon has deployed and destroyed capital across multiple failed resource plays, with only 1 and a half areas that aren't near zeros


EV/EBITDA and Debt to EBITDA: Halcon's EBITDA is overstated in analyst estimates by its hedge book. A more accurate assessment of the business involves counting the mark to market value of the hedges as a "cash like instrument" and then evaluating the business on an unhedged basis. At $60 oil, Halcon shows that it will generate $300 million of EBITDA from hedges in 2015 and $174 million in 2016. This is approximately the interest that Halcon will have to pay on its debt over the next two years.

Unhedged, with 43,000 boepd of production (Halcon's forecast 2015 production level), Halcon will generate under $400 million in EBITDA, assuming a $25 net back (revenue net of G&A, LOE, taxes, royalties, etc) per barrel. This number is consistent with analyst estimates, after netting out the ~$300 million of hedge impact. With an almost $4.5 billion enterprise value and with $3.75 billion in debt, it is obvious that the company is overlevered and likely overvalued, considering most peers, levered and unlevered, trade at considerably lower multiples. 

Reserves: Halcon shows proved reserves of $3.4 billion, based on SEC guidelines, as seen in its most recent presentation on slide 4 (http://bit.ly/1JmyC4j). However, this was based on $95 oil. At a more reasonable current $60 per barrel, conservatively that value should at most be 50% of the value at $95. (remember margins are only $25 per barrel at $60 oil, so the extra $35 likely goes a long way in the reserve value). But it gets worse for Halcon: 59% of those reserves are "proved undeveloped", meaning that the oil is likely there, but the capital still needs to be spent to access them and get them out of the ground. It is likely proved undeveloped reserve values have fallen by closer to 75%. On a blended basis, Halcon's reserve value may have declined by 65%, to $1.2 billion. This compares very unfavorably to the current enterprise value of $4.5 billion, and even when added to the $475 million of hedge value and whatever additional reserves might have been added in the 4 months since the end of the year, offers less than 50% coverage to the existing debt in place.

Debt to Equity Swaps: No wonder then that Halcon is swapping out debt with equity, on extremely favorable terms to bondholders (and unfavorable to Halcon). Halcon recently swapped $116.5 million of its bonds into equity. The bonds had traded down to the mid 60's cents on the dollar, but Halcon traded them for equity at par, even allowing a slight discount to the then equity price. This introduced more than 60 million additional shares into the share count, increasing the float by 15% and putting weeks worth of trading volume of stock into the hands of bondholders likely to dump the stock in the market.

There is no indication that this will be the last debt to equity swap, and likely the shares that were swapped are still being sold by the bondholder, further pressuring the stock. Halcon is also in the midst of a $150 million at the money equity offering (http://www.mlvco.com/transaction/halcon-resources-031915/), which is likely also pressuring the stock. While the highly favorable terms to bond holders and the at the market offering may be frustrating to existing shareholders, they are likely accretive considering the current proved reserve value and high multiple the stock is trading at versus its peers. Further deals are likely and will further pressure the stock.

Poor Capital Allocation:

Halcon has spent billions of dollars acquiring leases and drilling wells. Going through years of Halcon presentations highlights repeated capital destruction. Plays such as the Mississippi Lime, the TMS, the Utica (in NE PA), and 3 other "stealth plays" were failures, leading to write downs of some or all of the capital deployed, and likely substantial future write downs. See slide 9 of this presentation http://bit.ly/1ETa0R4 from 2012, slide 5 of this presentation http://bit.ly/1zuLhlC from  2013, and slide 4 of this presentation http://bit.ly/1R88Rdm from 2014 and compare them to the most recent company presentation (http://bit.ly/1JmyC4j) to see the various plays that were "core" to Halcon and have subsequently fallen by the wayside.

Even in the Bakken, one of the two remaining plays that Halcon highlights as core, much of the land is in North West Williams County, an area which was marginally economic at $100 oil and is likely another near zero at current prices. Halcon broadcasts the 127,000 acres it owns in the Bakken, but does not break out how much is in the economic area (Fort Berthold) versus the uneconomic area in Williams.


In short, Halcon is a compelling short at the current $1.40 per share. It has substantial remaining market cap despite being a zombie equity, displays the characteristics David Einhorn highlighted as negative about Pioneer except even more extreme and with more financial leverage and more historic operating mess ups, is overvalued, and has substantial technical pressure on the shares as tens of millions of shares are dumped by bond holders and by the company in an at the market offering.


Disclaimer: Opinions expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment adviser capacity. This is not an investment research report. The author's opinions expressed herein address only select aspects of potential investment in securities of the companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies' SEC filings, and consult a qualified investment adviser. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of the date of publication, and are subject to change without notice.

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.


More debt to equity swaps, more at the money offerings, market digesting existing offerings

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