Crude oil prices in downtrend
The “lower for longer” trend in crude oil prices in the past two years has not only seen the value of crude oil decline by ~53% but also taken its toll on crude oil producers. When crude oil prices are in decline, profit margins for crude oil producers gets affected adversely, bringing down stock prices.
Halcón’s weakened balance sheet
Even the best hedgers in the oil and gas industry have felt the impact. Halcón Resources (HK) saw its revenues decline by ~75%, from ~$323 million in 2Q14 to just above $80 million in 1Q16. But Halcón Resources’ production fell by just ~7% from 42.1 Mboe (thousand barrels of oil equivalent) per day in 2Q14 to 39.5 Mboe per day in 1Q16.
Lower revenues in recent quarters have yielded negative operating margins for Halcón. In 2014, the company generated operating profits of ~$373 million, whereas in last twelve months it generated ~-$17 million in operating profits. Add into this the unavoidable cash outgoes—such as interest payments on existing debt (~$200 million per year), dividends on preferred equity (~$17 million per year), and capital expenditure (~$500 million in the past twelve months)—and the outcome is major strain on Halcón’s balance sheet.
Notably, the company’s debt-to-equity ratio shot up to ~1,215% in 4Q15. In 1Q16, its stockholders’ equity turned into a deficit.
Halcón announces restructuring
On May 18, 2016, Halcón announced the restructuring of its balance sheet through an accelerated pre-packaged Chapter 11 bankruptcy filing. Halcón Resources plans to remain in operation during the restructuring process.
But so far, more than 60 oil and gas producers have filed for bankruptcies. This includes upstream companies like Ultra Petroleum (UPL), Linn Energy (LINE), Penn Virginia (PVA), Breitburn Energy (BBEP), SandRidge Energy (SDOCQ), and Goodrich Petroleum (GDPMQ). The volatility in oil prices also impacts ETFs and ETNs like the ProShares UltraShort Bloomberg Crude Oil ETF (SCO), the Vanguard Energy ETF (VDE), and the VelocityShares 3x Long Crude Oil ETN (UWTI).
In this series, we’ll analyze Halcón Resources’ existing debt, its various stakeholders, its debt restructuring benefits, and the details of the treatment various stakeholders will get under the restructuring plan.