An Opportunistic Play with Large Insiders Buys

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

What is better than a company’s insiders, including the CEO, accumulate a big chunk of stocks for their personal portfolio? This happened recently with Halcon Resources (NYSE: HK). It just reported its third quarter earnings results and provided a decent outlook for 2013. After that, eight insiders bought more than 354,000 shares for more than $2 million. Out of that, Floyd Wilson, its chairman and CEO, bought 175,000 shares at the average price of $5.71 per share, for the total value of nearly $1 million. It seems that insiders are bullish. Should we share the same attitude to buy shares of Halcon along with the insiders? Let’s find out.

Halcon is in the business of exploring and producing onshore oil and natural gas properties in the US. Since its establishment in 1987, the company has been quite active in three states, including Louisiana, Texas, and Oklahoma. As of December 2011, the company’s estimated proved reserves were 21.1 MMBOE, with 59% were crude oil, 32% were natural gas, and 9% were NGLs. In fiscal 2011, Halcon produced more than 1,500 MBOE, with an average rate of 4,100 BOE per day.

In the third quarter 2012, Halcon had operating revenue of $73.1 million, nearly three times higher than the same quarter last year. It was due to the significant increase in sales of oil, from $18.96 million to nearly $65.7 million this quarter. The increase in oil revenue was mainly due to the rise in production volumes in GeoResources and East Texas Assets acquisitions.

However, it produced $20 million in losses in net income for the third quarter, or a loss per share of $0.11. The loss was due to significant increases in the general and administrative costs and the cost of depletion, depreciation, and accretion. Its chairman and CEO has commented that the company was switching to the exploitation phase after a multi-year drilling:

“We have achieved our goal of building an oil company with a multi-year drilling inventory in several liquids-rich basins. Now we turn to exploitation. The drill bit is spinning to the right in all three of our core plays, plus a few others. We have the knowledge, people and capital necessary to execute on our growth initiatives.”

Halcon has a decent balance sheet, with no long-term debt and $1.11 billion in stockholders’ equity. The biggest item in its balance sheet is the oil and natural gas properties with the net value of $2.37 billion. Currently, it is trading at $5.70 per share; the total market capitalization is $1.23 billion. With the proved reserves of 21.1 MMBOE, the market is currently valuing Halcon at $53.22 BOE, with the P/B of 1.1x. 

As mentioned above, it is worth noting that since Nov. 9, eight insiders have accumulated shares of Halcon in the price range of $5.35 - $5.74. The two most aggressive insiders are the chairman and CEO Floyd Wilson, with 175,000 shares for the total value of nearly $1 million, and James Christmas, a director with 100,000 shares for the total value of more than $570,000.

Wilson has an admirable record in the oil / gas industry. He founded Petrohawk Energy, a shale development company, which was bought out by BHP Billiton (NYSE: BHP) in 2011 for total consideration of $15 billion. The transaction provided BHP Billiton with Petrohawk assets of around 1 million acres in Texas and Louisiana with the proved reserves of 3.4 Tcfe. With the acquisition, BHP Billion recognized the goodwill of more than $3.5 billion. Thanks to the rising US gas prices, otherwise BHP Billion would have to write PetroHawk’s acquisition down. In addition, the shale addition to BHP’s assets might have a higher value than the purchase price.

Before that, Wilson founded Hugoton Energy, which was acquired by Chesapeake Energy (NYSE: CHK) in 1998. With that acquisition, Chesapeake owned 300 Bcfe of proved serves, more than 50% of total Chesapeake’s proved reserves of 580 Bcfe at that time. In 2011, the total proved reserves were nearly 18.9 trillion cubic feet of natural gas equivalent onshore in the US. Chesapeake is trading at $16.39 per share, with the total market capitalization of $10.9 billion.

My Foolish Take

With the successful record of its Chairman and CEO Floyd Wilson, I think the probability of Halcon Resources success would be very high. The confidence comes stronger with his $1 million insider purchase in the company. Like Hugoton and Petrohawnk, Halcon Resources might be up for sale to bigger energy corporation in the near future.

hoangquocanh has no positions in the stocks mentioned above. The Motley Fool has the following options: long JAN 2013 $16.00 calls on Chesapeake Energy, long JAN 2013 $16.00 calls on Chesapeake Energy, long JAN 2013 $25.00 calls on Chesapeake Energy, long JAN 2014 $20.00 calls on Chesapeake Energy, long JAN 2014 $20.00 calls on Chesapeake Energy, long JAN 2014 $30.00 calls on Chesapeake Energy, long JAN 2014 $30.00 calls on Chesapeake Energy, and short JAN 2014 $15.00 puts on Chesapeake Energy. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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