Overview
— Independent U.S. oil and gas exploration and production (E&P;) company
Halcon Resources Corp. (Halcon) plans to issue $500 million of senior
unsecured notes.
— We are assigning our ‘B-‘ corporate credit rating to the company.
— We are assigning a ‘CCC+’ issue rating and ‘5’ recovery rating to
Halcon’s proposed $500 million senior unsecured notes due 2020.
— The outlook is positive because we could raise the ratings if the
company achieves its production and reserve growth goals as well as its
operating expense reduction targets.
Rating Action
On June 25, 2012, Standard & Poor’s Ratings Services assigned its ‘B-‘
corporate credit rating to Houston, Texas-based Halcon Resources Corp. The
outlook is positive.
At the same time, we assigned a ‘CCC+’ issue rating to Halcon’s proposed $500
million senior unsecured notes due 2020. We assigned a ‘5’ recovery rating to
the notes, indicating our expectation of modest (10% to 30%) recovery in the
event of a payment default.
Rationale
The ratings on Halcon reflect its small reserve and production base, very
aggressive capital spending plans that will require significant external
sources to fund, high current cost structure and limited reserve replacement
history. The ratings also reflect the volatility and capital intensive nature
of the oil and gas industry. These weaknesses are adequately offset at the
rating level by an oil-weighted reserve profile, a well-regarded management
team, and extensive acreage holdings in multiple onshore liquids-rich U.S.
basins. Standard & Poor’s characterizes Halcon’s business risk as
“vulnerable”, its financial risk as “highly-leveraged” and its liquidity as
“less than adequate”.
Halcon plans to buy GeoResources Inc. for approximately $1 billion and East
Texas properties for approximately $500 million. The company intends to use
the proceeds from the note issuance to fund a portion of the GeoResources
purchase price. If the acquisition does not close by Dec. 31, 2012, the notes
will be repaid.
Pro forma for the acquisitions, Halcon will have approximately 73 million
barrels of oil equivalent (MBoe) of proved reserves and daily production of
approximately 14,550 barrels of oil equivalent (Boe), which is comparable with
similarly rated peers. Oil and natural gas liquids account for 74% of reserves
and 55% are categorized as proved-developed, which we view as relatively
favorable characteristics. Halcon and GeoResources’ combined historical
operating costs are high at $21 per boe (lease operating expense and
production tax) in the first quarter of 2012, reflecting the mature nature of
a substantial portion of their producing assets, which require artificial lift
to produce. We expect costs to improve as Halcon adds new production and that
its historically poor reserve replacement record will improve as the company
develops its extensive acreage holdings.
Halcon will derive about half of its pro forma production from major
liquids-rich resource plays that offer attractive growth prospects: Bakken
Shale in Montana and North Dakota, Austin Chalk and Woodbine formation in
Texas. Properties in the Eagle Ford Shale will be divested following the
GeoResources acquisition to comply with management’s non-competition
agreement. The remaining half of Halcon’s pro forma production comes from
conventional assets located mainly in Texas, Louisiana and Oklahoma. We expect
the company to focus on optimizing production and reducing costs at these
relatively mature properties. Halcon also holds leases for more than 700,000
net acres in more prospective areas including the Wilcox, Mississippi Lime and
Utica Shale formations as well as areas where it has existing proved reserves
and production. Concerns about the level and source of capital required to
develop this enviable collection of properties are reflected in the ratings on
Halcon. The company’s management, including CEO Floyd C. Wilson, has an
impressive record of building E&P; companies, which we regard as a positive for
attracting capital and talented personnel.
The financial risk profile is viewed as highly leveraged, driven primarily by
Halcon’s ambitious capital spending plans relative to its projected liquidity.
We estimate that the company will need $700 million of external funding
(inclusive of borrowings under its credit facility) in 2012 in order to fund
its $1.1 billion investment budget. At our price deck, (which for West Texas
Intermediate (WTI) oil is $85 in 2012, $80 in 2013, and $70 in 2014 and
thereafter and for natural gas is $2.00 in 2012, $2.75 in 2013, and $3.50 in
2014 and thereafter), we think Halcon will generate modest funds from
operations (FFO) in 2012. Cash flow will likely benefit from increased
production and cost reduction in 2013, but we expect capital spending to
exceed internally generated cash flow again by a wide margin. Halcon currently
has no borrowings under its $500 million credit facility with a $225 million
borrowing base. Standard & Poor’s expects that the borrowing base will be
raised significantly to reflect the higher reserve value following the close
of the GeoResources and East Texas acquisitions. However, we expect planned
2012 funding needs to exceed the revised borrowing base.
Halcon’s pro forma debt leverage following the GeoResources and East Texas
acquisition will be approximately 4.4x debt to EBITDA, which we view as
moderate for the rating. We annualize expected pro forma EBITDA of
approximately $54 million for the third quarter of 2012 for this calculation,
and make the standard adjustments to debt. Halcon plans to hedge a significant
portion of its expected production, providing a measure of cash flow
protection.
Liquidity
We characterize Halcon’s liquidity as less than adequate. Our assessment
incorporates the following expectations and assumptions:
— We project that 2012 FFO will approximate $100 million;
— We expect the company’s current $225 million borrowing base to
increase significantly following the acquisition of GeoResources and East
Texas assets, and that the credit facility will be undrawn at the close of the
acquisitions.
— The company’s pro forma capital budget for the year is $1.1 billion;
— We project that Halcon will need approximately $700 million of
external capital to fund its 2012 spending plans, which will likely exceed the
borrowing base. We also expect 2013 capital spending to exceed internally
generated cash flow by a wide margin.
— We expect the company to use asset sales, debt or equity issuance or
some combination to fund its capital needs while maintaining liquidity.
However, the execution risk associated with this assumption is a significant
factor in the rating.
— We view management’s strong track record of building E&P; companies as
favorable for Halcon’s ability to attract funding.
Recovery analysis
For the full recovery analysis, please see the recovery report on Halcon to be
published on RatingsDirect following the release of this report.
Outlook
The positive outlook reflects the potential that we could raise ratings if
Halcon achieves ambitious cost reduction and production growth targets while
maintaining projected leverage under 5x debt to EBITDA and improving
liquidity. Meeting financial goals while funding an aggressive capital
spending program require that Halcon obtain significant external funding. We
could change the outlook to stable if these sources do not materialize or if
the company cost reduction and production growth progress fall short of
expectations.
Related Criteria And Research
— Standard & Poor’s Lowers Its U.S. Natural Gas Price Assumptions; Oil
Price Assumptions Are Unchanged, April 18, 2012
— Standard & Poor’s Raises Its Oil Price Assumptions; Natural Gas Price
Assumptions Unchanged, March 22, 2012
— Key Credit Factors: Global Criteria For Rating The Oil And Gas
Exploration And Production Industry, Jan. 20, 2012
— Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
— Criteria Guidelines For Recovery Ratings, Aug. 10, 2009.
— 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
Ratings List
New Ratings; Outlook Positive
Halcon Resources Corp.
Corporate Credit Rating B-/Positive/–
Senior Unsecured
US$500 mil sr unsecd nts due 2020 CCC+
Recovery Rating 5
