Q1 Results Fail to Bring Halcon Resources Corp (NYSE:HK) Back on Track

Halcon Resources Corp (NYSE:HK) revealed its Q1 2015 results last week to no significant investor response. Being a price taker just like any other E&P out there, Halcon recorded yet another negative quarter heavily influenced by the recent price slump in the whole oil and gas industry.

While the market value of HK remained unchanged at $1.39 on earnings day, i.e May 5, it has since dwindled to $1.22 per share, a 10% depreciation in less than two weeks. Even though HK is still one of the top trading oil stocks under $3.00, investors appear to be losing interest with daily volumes fluctuating between 2 and 4 million this week as opposed to 4-9 million last month. Yet, is the situation really that bad for the independent producer of oil and natural gas?

Indeed, Halcon reported a net loss attributable to common stockholders in excess of $600 million vs a modest 78 million a year earlier. The total ceiling impairment charge was, however, increased by a factor of nine over the same period, well exceeding $0.5 billion this time. While this charge is not sucking any hard cash out of the company, it is indicative of dwindling profitability of the company’s proved reserves as a result of the heavily declining price of the underlying commodities, i.e oil and gas. In this respect, HK’s 18% increase in production does little to offset the huge write-down.

In the light of the developments mentioned above, it is no wonder why management has resorted to converting a portion of its debt ($252 million) into 140+ million shares of common stock. It also explains why an additional $700 million have recently been raised thru a private placement to both ensure adequate cash reserves and repay remaining debt. According to management, the fresh capital injection will guarantee Halcon’s stability regardless of where oil and gas prices will go. Yet, this is still debt financing which will have to be paid off in the future either by sale of additional stock, or by deploying what’s left from future cash flows. At this stage, the latter scenario could only become a reality in the event of favourable market prices.

In the short-term, investors could expect a rebound as HK shares are now at a stone’s throw from entering RSI’s oversold zone. The last two times HK got there, the company’s shares got a boost. How much the stock will go up will pretty much depend on investors’ confidence in the company and its ability to perform better in the current quarter.