Halcón Days Are Here

 | Feb 20, 2014 | 3:38 PM EST  | Comments
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Stock quotes in this article:

nbl

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eog

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clr

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xec

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hk

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bhp

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apa

The last several weeks have seen some very strong U.S. 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 U.S. exploration and production companies that are being undervalued based on continuing high and sticky crude prices. I've highlighted a few of these recently, including Noble Energy (NBL), EOG Resources (EOG), Continental Resources (CLR) and Cimarex Energy (XEC). Most of my readers want even more risk for part of their energy portfolio, however, and the chance to make 40%-50% (or even more) on their investments, a difficult target for any mid- or large-cap exploration and production name that I'd likely suggest.

But for those who cannot resist, I have an idea: Let's have another look, a rather speculative one, at Halcón Resources (HK), now trading just north of $3.70.

The story of Halcón is pretty well-known: Floyd Wilson, the CEO of Halcón, has become an oil legend, mostly due to his great success with previous oil start-up Petrohawk Energy, bought out by BHP Billiton (BHP) for a 60% premium. Not satisfied with the one-time score, Wilson went almost immediately back to the well, starting Halcón Resources with some of the profits from Petrohawk but using the same stock symbol. Halcón 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, Halcón has increased its 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 Halcón as an investor is important to this suggestion, too. I refrained from backing Wilson immediately upon his return to exploration and production, believing his reputation to be 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 suggested shares as a speculative play at $7.

Sadly, all that Halcón and Floyd Wilson have hit so far in the Utica with the 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 I promised to keep an eye on Halcón and try to find another opportunity to take a chance on oil genius Floyd Wilson. I believe that time has come.

Halcón'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% and 50%, and new drilling shows impressive success (no water!) and quality production rates. This is more like it. One great tell of the success of Halcón 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 Halcón with its own drilling in Brazos County. Somebody else thinks that Floyd Wilson is finally on the right track.

Halcón is burdened with plenty of debt -- $3 billion worth, in fact. That's a heavy anchor that 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. Halcón could easily double in the next two years, particularly if oil remains above $100 a barrel.

This is a speculative call, but suggested (again) -- Halcón at $3.70.

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