A Great Time to Buy This Oil & Gas Company

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Last week, Halcon Resources (NASDAQ: RAM) announced a secondary offering of up to 43.7 million shares that caused the stock to crash. The stock traded at $6 for a few days prior to offering announcement, though typical of any “surprise” secondary, the plunge provides an opportunity to scoop up shares of a good company.

The company is a growing oil exploration and production firm heavily indebted from an asset acquisition spree to purchase leases in the Bakken, El Hacon, and Utica shale regions. 

After all, one of the best ways for investors to make great returns is to identify the good stocks to buy on weakness. If an investor has done the research prior to a major event or catalyst, they can better react to the movement in the stock.

Secondary details
Halcon sold 38 million shares at $5.10 per share, with the underwriters accepting the grant to purchase an additional 5.7 million shares. The deal was priced 13% below the stock’s closing price on the day prior to the announcement. The proceeds will be used to pay down debt and fund the massive expansion plans.

No surprise that the underwriters snapped up the additional shares, considering the stock ended last week at $5.40 compared to the $5.10 offering price. The company will gross $222 million in the offering prior to the fees paid to the underwriters for executing the offering.

Even more interesting is that insiders used the offering to load up on shares with the CEO purchasing 100,000 shares and other insiders buying around 500,000 shares. The total is not a large percentage of the offering, but it does amount to a significant amount spent by insiders at around $3 million.

Debt offering as well
Along with the stock offering, the company raised $400 million from an offering of senior unsecured notes due in 2022. The notes were increased from $300 million and bear interest at a rate of 9.25%.

The proceeds from the notes will be combined with the stock offering to repay a portion of the outstanding borrowings under its senior secured revolving credit facility. Previously, the company had roughly $2.7 billion in total borrowings, so only a portion will be repaid.

Other equity offerings
Typically secondary offerings can be bullish for investors that get in around the offering as the cash is used to reduce debt or fund growth operations. The experience in the small-cap oil exploration sector is mixed. Kodiak Oil & Gas (NYSE: KOG) completed a secondary offering back in November 2011 that also included a $550 million debt offering. The company priced a similar 42 million shares at $7.75 each. In this case, the funds were being used for an acquisition of leases in the Williston Basin. The stock not sits around $10, providing investors a 25% gain in the two years after the offering.

A high profile example of a successful secondary equity offering was the recent deal done by Tesla Motors (NASDAQ: TSLA). Back in May, the company sold 3.4 million shares at a price of $92.24. The company also issued $600 million of senior convertible notes to raise a total of $968 million in gross proceeds. The cash was used to repay a U.S. Department of Energy loan that brought some positive karma to the company. The stock now trades above $150, providing a roughly 65% gain in a few months to the secondary buyers.

Funding huge growth
A primary need for the large debt levels, and hence, these offerings are to fund the huge production growth. For Q2 2013, Halcon reported that revenue surged to $214.3 million, compared to $23.3 million on net production growth of 646% year-over-year. More importantly, the company achieved this growth by focusing on production that includes 83% oil. This focus on oil growth has already allowed it to produce positive earnings.

Management forecasts a further increase in production during Q3 to roughly 35,000 barrels of oil equivalent per day (Boe/d), up from only 29,165 Boe/d during Q2. Likewise, analysts are forecasting revenue to surge further to $257 million in Q3 and even more to $299 million during Q4. This growth comes at a cost with capital spending on drilling and completions alone at $468 million.

Great long-term entry
The key to stock offerings based on funding growth is that it creates an artificial sell-off that provides long-term investors with a great price to purchase the stock.

The below chart highlights the five-year returns of these stocks to where both Kodiak and Tesla have performed well after the secondary offerings, though to greatly different levels of success:

<img alt="" src="http://media.ycharts.com/charts/72fb413828d27157de16d7916e4ffca0.png" />

HK data by YCharts

Bottom line
While the above secondary offerings are just a few examples, the results can be mixed depending on the use of the proceeds from the offerings and the prospects of the company and sector. One key to a secondary offering is that it typically creates a bottom in the stock and improves the balance sheet. Where the company goes from that point will ultimately decide whether investors make profits.

Considering those facts, Halcon offers a better situation than most stocks based on an experienced management team. In addition, any investors watching on the sidelines now have the ideal entry point for a long-term investment. As far as the two other stocks, Kodiak provides a better investment option at this point considering Tesla has already made a huge run following the offering.

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Mark Holder and Stone Fox Capital Advisors, LLC have no positions in any stocks mentioned. The Motley Fool recommends Tesla Motors . The Motley Fool owns shares of Tesla Motors . 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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