AFTER SELLING A COMPANY for $12.1 billion, most of us would focus on leisurely matters, like deciding how many pina colada machines to install in our new Malibu home. Not Floyd Wilson. Immediately after selling natural-gas explorer Petrohawk to BHP Billiton (BHP) in 2011, the oilman was already looking for new properties to buy. Fresh off the sale, he founded a company called Halcón Resources (HK), and grabbed Petrohawk's old HK stock ticker. At Halcón, he plans to repeat his strategy from Petrohawk and his other successful energy ventures: raise money in a hurry and drill baby drill. As Wilson put it to the Wall Street Journal last year, "We rush down the stairs and we just hope we don't fall."
Unfortunately for investors, the stock has been falling. It's off 47% in the past year, dropping to $5.53 from over $10. Some of the company's riskier plays have been slow to develop, which has contributed to the slide.
One previous problem with Halcón stock was that investors had to pay a premium based on Wilson's history. A company with the same assets but without Wilson's imprimatur would likely trade for a lesser multiple. But that "Wilson premium" has narrowed, if not disappeared entirely.
"At these levels, you don't have that premium anymore," said Alan Lancz, president of Alan B. Lancz & Associates, which has been accumulating Halcón stock in the past few weeks. "That's what we like: buying the quality management when the expectations aren't as high."
Halcón lost money in 2011 and 2012, but began turning a profit in the first quarter of this year. Analysts see Halcón earning 31 cents per share this year and 67 cents next year. It trades at 11.3 times forward earnings, a discount to several more established oil explorers.
Based on its net asset value, Halcón would be worth about $8.25 in a sale, estimates Wunderlich analyst Jason Wangler. Valuing the stock based on cash-flow expectations, Wangler thinks it's worth $10, about a 20% premium to its peers.
Unlike Petrohawk, Halcón's assets are mostly in oil, with about 95% of its $190 million in revenue coming from oil sales in the first quarter. The company, now operating 17 rigs, is producing about 30,000 barrels of oil equivalent per day, six times as much as a year ago. Halcón, based in Houston, is drilling in proven areas like the Bakken shale in North Dakota, but also has more speculative operations, including the Utica play in Ohio and Pennsylvania. Those assets have not yet paid off as handsomely as bullish investors had hoped.
Investors who expect an easy road to a monster buyout price are probably mistaken. Even Petrohawk, which leased land at much cheaper prices than are available now, went through significant ups and downs, Wangler notes. The company raises capital at a fast clip to fund its operations, and had $2.5 billion in debt after the first quarter. Its long-term debt makes up 54% of its capitalization, more than most large U.S. explorers, which average around 36%, according to Thomson Reuters. Halcón just announced last week that it will issue 300,000 preferred shares. But Wangler thinks that the company's success in the Bakken and other established plays means it's unlikely to fall much further: "It's going to be pretty hard for that to breach $5 for an extended period of time, barring a commodity collapse. At that level, there is a lot of value in those assets that we do know about."