Not dead yet: Shares in oil driller Halcon surge on debt swap

Shares in Halcon Resources surged this morning, up 20% in heavy volume, before pulling back. Over the past two days they have jumped more than 35%. Could this mean the troubled oil company’s woes are behind it? This morning Halcon (NYSE: HK) announced it had reached a deal with bondholders to exchange $1.57 billion principal amount senior unsecured notes for $1.02 billion new third lien senior secured notes.

The deal reduces Halcon’s long-term debt by $548 million to about $3 billion. And it will reduce Halcon’s annual interest payments by $12 million. The old bonds that Halcon is retiring had original coupons between 8.875% and 9.75%. 

The new bonds, despite being higher up the capital structure, will pay 13%. As Halcon’s financial position has deteriorated in the past year, its senior unsecured bonds have plunged in price from $108 a year ago to $36.8 today, for an implied yield of 40%, according to FINRA data. Those unsecured creditors are usually left hung out to dry in bankruptcy restructuring. Even with a lower yield, third lien is better than no lien.

It make sense that Halcon shares are up today on the news. Less debt means more value for the equity holders. “We remain steadfast in our mission to continue improving our balance sheet and are confident we will emerge from this downturn a much stronger company,” said CEO Floyd Wilson, in a statement.

And yet the deal doesn’t do much to improve Halcon’s near-term prospects. The company is burning cash. In the first half it generated $218 million in cash from operations (down from $411 million the year before). That cash was devoured by capex of $412 million (versus $608 million prior year). For the half interest and preferred dividend payments ate up $130 million.

Even during good times Halcon didn’t live within cashflow — only making ends meet by continually issuing more stock and selling debt. That strategy could continue indefinitely while oil prices were high, but if it stays below $40 a barrel for the next year, companies like Halcon are going to run out of cash and run out of options.

Investors that helped troubled oil companies refinance debt in the past year have already suffered giant paper losses. The distressed debt desk at Jefferies has reportedly lost $100 million so far this year. Goldman Sachs distressed traders have taken a $50 million hit. The Bank of Montreal said this week it is carrying $79 million of impaired loans to oil and gas companies. JP Morgan has set aside $140 million to cover sour oil loans.

Before you think about jumping on the bandwagon and speculating in shares of Halcon or other troubled companies, ask yourself the question: How likely is it that bond investors and other lenders will have the appetite to refinance the $500 billion in outstanding oil and gas debt, much of it coming due within five years?

http://www.forbes.com/sites/christopherhelman/2015/08/28/not-dead-yet-shares-in-oil-driller-halcon-surge-on-debt-swap/2/