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Rectangular joints in siltstone and black shale within the Utica Shale (Ordovician) near Fort Plain, New York. (Photo credit: Wikipedia)
HK : NYSE : US$5.34
BUY
Target: US$8.50
COMPANY DESCRIPTION:
Halcon Resources is an independent energy company engaged in the acquisition, production, exploration and development of onshore oil and natural gas properties in the United States. The company has oil and natural gas reserves located in several key areas including the Bakken, Woodbine/Eagle Ford, Utica, Midway/Navarro, Wilcox, Mississippi Lime and Tuscaloosa Marine.
PREFERRED OFFERING REMOVES FUNDING OVERHANG
Investment recommendation
HK has built positions in some of the most exciting liquids-rich resource plays in the US, including the Utica Shale and Williston Basin (WB). A new Eagle Ford (EF) play called El Halcon was also recently unveiled, and the Wilcox has been moved to the forefront. We believe HK is well positioned to rapidly grow production and cash flow, which we believe in turn should be a catalyst for a higher stock price.
Investment highlights
HK announced Thursday it priced a $300M public offering of 5.75% Series A Cumulative Perpetual Convertible Preferred Stock. The conversion price is ~$6.16, resulting in an additional ~48.7M diluted shares. The underwriters have an over-allotment option for an additional $45M. The company expects to use the estimated net proceeds of $291M to pay down a portion of its revolver, which had $591M drawn on its $850M borrowing base as of June 7.
We are lowering our 2013 and 2014 EPS/CFPS estimates due to an increased share count and the addition of preferred dividends. Our 2013E numbers to go $0.31/$1.39 from $0.35/$1.47 and 2014E goes to $0.63/$2.30 from $0.72/$2.52.
Valuation
Our new $8.50 price target represents a ~20% discount to a $10.55 NAV (down from a $9 price target and $11.25 NAV with the same discount
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