Halcón cutting number of drilling rigs due to slide in oil prices

Halcón Resources Corp. (NYSE: HK) is cutting nearly half the rigs it originally planned to operate next year due to the more than 25% slide in crude oil prices.

Shares of Halcón, which operates in the Bakken shale play in North Dakota and the Eagle Ford shale play in Texas, fell nearly 10% to $2.94 after the close of regular trading.

"In response to lower oil prices, the company expects to operate six rigs in 2015, five rigs less than originally planned," Halcón said in its third-quarter earnings release.

Responding to this news, Wunderlich Securities commented, “Pointing to the high end of 2014 guidance driven by strong Williston and El Halcón growth. The company is indicating production should be at the high end of its 40-42 mboe/day 2014 average, a nice move that indicates solid growth again in 4Q14. Pulling back spending in 2015 but not production growth. The company announced early 2015 guidance of $750–$800 million in CAPEX (down from $1.1 billion as previously indicated) and yet still announced growth of 15–20% sequentially, which is in line with our estimates. These reduced costs are a big deal given HK's debt load and shows the quality of its assets.

“Good strong wells in the Williston continue to show Halcón's move toward full optimization. The company had 17 wells put online in 3Q14 with an average IP of 2,935 boe/day. This included one that had a huge 4,381 boe/day rate and the progress here continues to impress. El Halcón is one of the better plays nobody is taking about. The company's El Halcón play has been showing strong results and with 25 industry rigs now in the play, HK believes its 101,000 net acres are de-risked. Look for HK to continue developing this acreage given lucrative returns.

“Ample liquidity and a strong hedge book. The company has $800 million in liquidity and with the pull back of activity should be able to fund 2015 growth nearly within cash flow. Further, with about 80% of production hedged at favorable prices, HK should see a nice return on that investment.”

Stifel analysts also added the following commentary: “HK expects to run an average of six rigs during 2015, down significantly from the previously planned 11 rigs. Management released a preliminary 2015 budget of $750–$800 million, down 30% from its 2014 D&C budget. During 3Q, the company ran an average of eight rigs: three in Williston, three in El Halcón, and two in the TMS. We expect the company to maintain its three-rig pace in the Williston, where we estimate the company is generating its highest returns, and pull back in El Halcón and the TMS, where returns are not as robust.

“HK is among the most heavily hedged in the industry with 75% and 78% of 4Q14 and FY15 oil production hedged at floors of approximately $88/bl. On Sept. 30, 2014, HK's credit facility was increased 50% to $1.05 billion. As of 3Q, the company had approximately $345 million outstanding and $705 million of borrowings available, which, combined with cash, puts HK's total liquidity at approximately $800 million. We project the company's 3Q14 Net Debt/TTM EBITDA of 4.3x will be relatively unchanged throughout 2015.

“HK continues to see initial production rate improvements from its East Texas Eagle Ford assets, located in Brazos and Burleson counties, where the company now has 78 operated wells producing. During the quarter, the company's 12 wells placed online produced an average 30-day rate of 726 Boe/d, up 17% from 2Q. In the Williston, HK brought online 17 FBIR wells with an average IP rate of 2,935 Boe/d (up 15% Q/Q) and an average 30-day rate of 1,288 Boe/d (up 1% Q/Q).
 
“HK reported 3Q14 EPS/CFPS of $0.02/$0.31, below our estimates of $0.07/$0.35 and consensus of $0.06/$0.36. The slight miss was due to lower than forecasted composite realized price (-6% versus our estimates, -9% versus consensus) and higher share count (11%) which was partially offset by higher production (4%) and lower per unit operating costs (-8%). Management now expects to be toward the high end of its previously issued 2014 production guidance range of 40-42 MBoe/d. HK shares are currently trading at 6.2x 2015 EBITDA and 108% of our total NAV estimate, a 17% average premium to our peer group. We believe the stock is currently fully valued in the current oil price environment and are therefore maintaining our Hold rating on the shares.”

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