James Christmas, who joined the Board of Directors at Halcon Resources Corp (NYSE:HK) earlier this year, probably needed to buy some shares of the company (in addition to a recent stock grant) to signal his confidence in the company. However, the size of Christmas’s recent purchase suggests that it is much more than a token move: he bought 100,000 shares at an average price of $7.24. Halcon Resources Corp is an exploration and production company which operates in the onshore U.S.; most of its proved reserves are in Texas with other positions in Oklahoma and Louisiana, and a recent acquisition of acreage in the Utica Shale this year. Insider trading is generally a bullish sign (see our discussion of insider trading). However, we’re a bit worried in this particular case as a major shareholder (EnCap Energy Capital Fund VIII L.P.) is seeking to sell 35 million shares of the company. This may be an attempt to cash out rather than a particularly bearish sign, but the size of the sale is large enough to be concerning. Christmas also served on the Board of Directors at Petrohawk Corporation until its acquisition last year by BHP Billiton Limited (NYSE:BHP) to strengthen that company’s position in U.S. shale (see more insider purchases at Halcon). Billionaire Ken Griffin’s hedge fund upped its stake in Halcon Resources significantly over the second quarter to $28 million (check out Ken Griffin’s top picks).
The company’s most recent 10-Q reported considerably worse performance than a year ago. Halcon’s second quarter revenue was 17% lower than the same period in 2011, and because of a rise in expenses (including seeing general and administrative expenses nearly triple) the company reported an operating loss of $7 million. The second quarter of 2011 had shown $8 million in operating income. Because of a large preferred dividend, common shareholders saw a loss of 59 cents per share. For the year net losses per share have come in at $1.11, again due to down revenue and rising operating costs. Cash flow from operations have also tilted negative so far in 2012. The overwhelming majority of Halcon’s revenue comes from oil, particularly with natural gas revenues falling by over half in the second quarter compared to a year earlier due to lower prices.
Halcon Resources Corp is expected to have a small net loss per share this year, and produce 43 cents per share of earnings in 2013. At the stock’s current $1.6 billion market capitalization, this represents a forward earnings multiple of 17. With the company’s business struggling, we don’t particularly like the prospects of achieving a turnaround of the magnitude the Street expects. Even if it does get there, we have a forward multiple that is not particularly attractive.
Kodiak Oil & Gas Corp (NYSE:KOG) and SandRidge Energy Inc. (NYSE:SD) are similar companies with somewhat higher market caps than Halcon ($2.6 billion and $3.5 billion, respectively). Kodiak operates in the Western U.S. with positions in North Dakota’s Bakken shale and the Green River play in Colorado and Wyoming; SandRidge primarily operates in Texas. Both of these companies, in contrast to Halcon, are benefitting strongly from the growth in U.S. shale and more than tripled their earnings in their most recent quarter compared to the previous year. Kodiak trades at 26 times trailing earnings but analysts expect continued growth and therefore its forward P/E is 12 and its five-year PEG ratio is 0.4. Continental Resources, Inc. (NYSE:CLR) is significantly larger at a $15 billion market cap, and trades at 19 times trailing earnings and a forward earnings multiple of 20. However, it too is solidly profitable and despite its larger size grew its revenue by 34% and its earnings by 70% last quarter versus the second quarter of 2011. We think that it and Kodiak are better buys. We like to see insider buys but the large shareholder’s sale worries us and these stocks appear to have better growth prospects.