Citadel Investment Group, a large hedge fund managed by billionaire Ken Griffin, now owns over 18 million shares of Halcon Resources Corp (NYSE:HK) according to a filing with the SEC. Halcon is an oil and gas exploration and production company with a focus on U.S. shale plays including the Bakken, Eagle Ford, and Utica. We track 13F filings from Citadel and other hedge funds as part of our work developing investment strategies (for example, we have found that the most popular small cap stocks among hedge funds earn an average excess return of 18 percentage points per year) and our database shows that the fund owned a little over 12 million shares of Halcon as of the beginning of this year (see more of Griffin’s stock picks).
Halcon Resources Corp (NYSE:HK)’s operating revenues more than doubled last year compared to 2011, but production costs were up as well and SGA expenses grew at a very fast rate. As a result, the company actually reported an operating loss for 2012 compared to operating profits of $20 million the year before. Interest expenses were higher as well. Halcon’s troubles occurred despite the fact that 70% of the company’s production by boe was crude oil, which has seen a more favorable market recently than natural gas, and that that commodity supplied about 90% of revenues. In terms of cash flow, however, the story was better: depreciation accounts for all of Halcon Resources Corp (NYSE:HK)’s net losses, and cash flow from operations soared to almost $120 million in 2012. This was well short of the $1.2 billion in capital expenditures, and even more than that figure in acquisition, that Halcon made during the year.
The stock is down 40% in the last year as the market has reacted to these developments, and the most recent data shows that 14% of the float is held short. In addition, hedge funds other than Citadel have showed little interest in Halcon: at the end of December, the only other funds we track which had more than $10 million invested in the company were Farallon Capital (find Farallon’s favorite stocks) and billionaire Israel Englander’s Millennium Management (check out more stocks Millennium owned). Wall Street analysts are more optimistic about Halcon’s prospects, however. At a market cap of $2.5 billion, Halcon trades at 9 times forward earnings estimates with analyst expectations over the following years implying a five-year PEG ratio of only 0.5.
Peers for Halcon Resources Corp (NYSE:HK) include Anadarko Petroleum Corporation (NYSE:APC), Continental Resources, Inc. (NYSE:CLR), Magnum Hunter Resources Corp (NYSE:MHR) and Bakken-focused Kodiak Oil & Gas Corp (USA) (NYSE:KOG). Kodiak is the only one of these which is as cheap on a forward basis- it is valued at 8 times consensus earnings for 2014- although that company is characterized not only by high expectations but also by decent historical results which place its trailing P/E multiple in the teens. Anadarko and Continental carry trailing earnings multiples in the 18-20 range, reflecting that the market expects those companies to grow their bottom lines through higher production. The “best case scenario” appears to be weaker there, though these companies are significantly larger than Kodiak or Halcon Resources Corp (NYSE:HK) by market cap and the sell-side is actually quite optimistic about Continental’s next several years. Magnum Hunter is generally expected to lose money in the current fiscal year, and given these other options we would avoid the stock; we’d note that that company is a very popular short, with short sellers accounting for over 30% of the float.
Analyst expectations suggest that Halcon has some promise, but we think we’d rather stick to companies which are currently profitable yet which carry forward earnings estimates that put them somewhat close to Halcon Resources Corp (NYSE:HK)’s pricing on that basis. As such Continental and certainly Kodiak appear more worthy of further research from a value perspective.
Disclosure: I own no shares of any stocks mentioned in this article.