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Halcon (HK) to Vend Williston Assets, Eyes Delaware Basin

Zacks Equity Research

Shares of US-based upstream company Halcón Resources Corporation HK moved up 51.35% to eventually close at $6.75 on Jul 12. The upside was driven by the company’s announcement of the divesture of Williston Basin assets to increase its focus on the Delaware Basin.  

Deal Highlights

Per the deal, Halcón will offload the Williston Basin assets in North Dakota to a private energy firm unit Bruin E&P Partners, LLC. Halcón will offload around 104,000 net acres of oil and gas properties in McKenzie, Williams, Mountrail and Dunn counties in North Dakota. The assets have a production capacity of around 29,000 barrels of oil equivalent per day (boe/d).

The company will however retain interests in its non-operated Williston Basin assets and hopes to vend it in future at an attractive price. The non-operated assets of the company in the basin include 15,600 net acres and around 1,000 undeveloped locations. These assets have a production capacity of 2,350 boe/d.

The transaction is valued at $1.4 billion, all in cash. Halcón plans to use the proceeds from the sale for debt reduction. The company intends to purchase up to half of its 6.75% unsecured notes due 2025 and redeem all outstanding 12.0% second lien notes due 2022, including related prepayment premiums.

Subject to regulatory approvals and satisfactory closing conditions, the deal is scheduled to close in August. If the deal fails, Halcón will pay Bruin E&P $42 million as compensation.

Halcón Strengthens Foothold in the Delaware Basin

Halcón has acquired several acreages in Eagle Ford, Tuscaloosa Marine, Utica, and Bakken plays. The CEO Floyd Wilson was of the opinion that these buyouts would be profitable for the company. However, with the industry’s downturn all his hopes were crushed. The company, being one of the big sufferers from the weak crude environment, filed for bankruptcy in Jul 2016. In September, it completed financial restructuring and emerged from bankruptcy. Since then, the company has been divesting assets in most of its basins in order to concentrate on the prolific Delaware play.

Since the beginning of 2017, the company has been strengthening its foothold in the Delaware Basin through acquisitions. This has enabled Halcón to increase its acreage in the region at a reasonable price. In the Delaware Basin, the company currently owns over 41,000 net acres in Ward and Pecos counties. In January, Halcón acquired over 21,000 acres in Pecos for $705 million, while divesting the El Halcón assets in the East Texas Eagle Ford for $500 million. Halcón also aimed to purchase an additional 15,040 net acres in Ward. The company bought around 594 acres in Pecos in March with a production capacity of 160 Boe/d. In June, the company further increased its acreage by over 3,600 acres in Pecos.

The current deal has revamped Halcón’s existing asset base and modified its prior production outlook. The company had expected to produce around 39,000–41,000 Boe/d in 2017 prior to the asset sale agreement. However, after the deal the current production guidance of the company has gone down to 7,500 boe/d. Nevertheless, the company plans to operate two rigs in the Delaware Basin for the rest of the year, increasing its estimated production capacity to 13,000 boe/d by the end of 2017.

The company also expects to acquire an additional 8,320 net acres in the northern part of Ward, by Dec 31.

Deal Benefits

The deal marks Halcón’s transformation into a single-basin company, focused on the Delaware Basin portion of the Permian Basin – one of the most active and economic plays in North America. The proceeds from the asset sale will be utilized in paying off $735 million of debt. This will strengthen the company’s balance sheet and provide it with increased liquidity to execute its drilling growth projects.

Wilson believes that concentrating on the Permian Basin will enable the sale of Halcón at a lucrative price to the highest bidder. In a similar fashion he had sold another company Petrohawk Energy to BHP Billiton Limited BHP for 12.1 billion, reflecting a 65% premium over the share price.

The deal is also expected to create significant value addition for Bruin E&P as Williston assets are complementary to the company’s existing portfolio. The deal will enhance the acreage, inventory and production of the company and boost earnings.

Zacks Rank & Key Picks

Headquartered in Louisiana, Halcón is an energy company engaged in the acquisition, exploration and development of onshore oil and natural gas properties in the United States. The company, under Zacks categorized U.S. Oil & Gas Exploration and Production industry, currently carries a Zacks Rank #3 (Hold).

Halcon Resources Corporation Price

Halcon Resources Corporation Price | Halcon Resources Corporation Quote

Some better-ranked players in the same industry are Cheniere Energy, Inc. LNG and Antero Resources Corporation AR. While Cheniere Energy sports a Zacks Rank #1 (Strong Buy), Antero Resources carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Cheniere Energy delivered an average positive earnings surprise of 14% in the trailing four quarters.

Antero Resources delivered a positive earnings surprise in each of the last four quarters, the average being 665.77%.

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