Halcon Resources (HK, Financial) has got off to an impressive start to fiscal 2015, delivering strong results in the first quarter. The company delivered an improvement in its revenue and a robust well performance, which boosted its production by 18%. Halcon Resources is set for another solid performance as it is reducing costs in its core areas. Besides these, Halcon will continue to undertake various initiatives to improve production. It will be exciting to see how Halcon performs in a soft commodity price environment.
Reducing costs to strengthen the balance sheet
One of the top priorities of Halcon is to maintain an attractive balance sheet. It has started executing its strategies aiming at this priority and in addition, Halcon also has sufficient liquidity to fund operations and service its debts for the next several years even after the low commodity pricing environment. The company is, however, pleased with the declining well costs and is expecting further decline in the well costs which will help Halcon to improve its margins. Based on the lower completed well costs expectations the company has also reduced its drilling completion budget by another $25 million.
Moving on to its offerings, Halcon is pleased with the performance of the wells that the company brought online in the Williston Basin. Further down spacing will add wings not only to Williston but also to Forth Berthold and Williams County. In addition, its cost saving initiatives will play an important role in its growth story in the coming quarters. This looks promising as the completed well costs in the Fort Berthold area have already come down over 30% since last year’s fourth quarter. This a great sign, and the company expects that ramped-up cost savings and initiative will an important in the short term.
Positioning itself well for the long run
Not only in the oil production but Halcon also continues to increase its gas capture in Williston Basin. The company is having great expectation from Williston and is laser focused on adding value to it. Moving on to East Texas at El Halcon, the positive results have given Halcon confidence and the consistent performance of all the four wells there will give much support to Halcon’s growth in future. But to control costs at El Halcon is also a challenge for the company right now. This can further drive the performance at El Halcon. Halcon is laser focusing on finding ways to improve efficiency and reduce costs at El Halcon in future.
The company is moving with a positive attitude and it is confident to see improvements in 2015 not only due to the market conditions but because of the cost-cutting efforts it is putting in. This is why the main focus of Halcon Resources will lie on the capital discipline as the company has also its capital budget for 2015.
Lastly, Halcon is moving positively on the back of hedging initiatives it is having. The company has already hedged 31,410 barrels per day of oil for the remainder of 2015 at an average price of $90.28. And for 2016, it has hedged at 25,000 barrels per day of oil hedged at an average price of just over $81 per barrel. Having completed this, the company has recently started layering in some hedges for 2017 which indicates strong long term prospects of the company.
Conclusion
Now moving on to the fundamentals, the company is making losses so we cannot see trailing and forward P/E there. But looking at other valuation metrics the prospects of the company doesn’t look strong. Though the company is seeing improvement due to its cost cutting efforts but the future of commodity market is upsetting and the decline in the commodity prices in the future is expected to be more than the growth Halcon Resources is seeing. The company’s financials may grow but the disappointing growth in the market might scare investors away from the stock. So in my opinion, the investors should see investment in Halcon Resources from sidelines as of now.
