uploads/2014/09/Returns.jpg

Why Halcon Resources’ market outperformance decreased lately

By

Updated

Halcon Resources beats the market in 2014

In 2014, Halcon Resources (HK) outperformed the industry and broader market. HK’s stock has returned ~34% year-to-date (or YTD). On an annualized basis, this means a return of ~50%.

In comparison, the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) has returned ~12% YTD—or ~17% annualized. The SPDR S&P 500 ETF (SPY) in the broader market is up ~10% YTD—or ~15% annualized.

Returns

However, HK’s returns were dramatic until late July. It has come down significantly since then. It was as low as -14% in mid-January. It racked up gains of up to ~84% in late July.

Other upstream operators include Anadarko Petroleum (APC) and Sandridge Energy (SD). APC and SD had YTD annualized returns of 55% and -25%, respectively.

What’s been boosting Halcon?

Article continues below advertisement
  • Dramatic growth in production in the past three years – oil, gas, and natural gas liquid (or NGL) production has increased significantly from 2011 to 2013. It continues to rise in 2014.
  • Focused on acquiring and developing acreage in liquid-rich basins like the Eagle Ford, Bakken, Three Forks, and Tuscaloosa Marine Shale (or TMS).
  • Restructuring its asset portfolio to stay flexible – Halcon has focused on core assets with significant proved reserves and production potential. It has also focused on divestitures of non-core assets to repay debt.
  • Efficiency in production leads to cost minimization – HK’s lease operating and general and administrative costs have decreased remarkably over the past three years. Efficient drilling and technology use led to efficiency gains.
  • Capital expenditure—or capex—has increased tremendously during the past three years. It was ~$25 million in 2011. It spent $1.5 billion in 2013—a staggering increase of ~70 times in two years.

Capex

What reversed the outperformance?

  • Impairment expense related to HK’s oil and natural gas exploration and development activities
  • Loss on derivatives
  • Higher interest expense due to higher debt issuance
  • Capital expenditure is projected to decrease 26% to $1.1 billion in 2014—from $1.5 billion in 2013
  • HK’s well drilling has decreased substantially since 2011. It had 159 gross wells in the first half of 2013. The number decreased to 144 YTD.

Continue reading the next part in this series to learn about concerns regarding HK.

Check out our Energy & Power sector page for more interesting articles on the industry. Learn what’s been happening lately in the sector.

Advertisement

More From Market Realist