Step One in Floyd Wilson’s [former Petrohawk CEO] new oil and gas business venture was the $500 million recapitalization of RAM Energy Resources, Inc. (formerly ticker: RAM) late in 2011 to form Halcón Resources (ticker: HK). Step Two for the company (after cleaning up the RAM assets) was to accelerate Halcón’s growth by adding a strategic acquisition.
HK and GeoResources, Inc. (ticker: GEOI) announced on April 25, 2012, the companies reached an agreement in which GeoResources will merge with Halcón Resources in a cash and stock transaction for approximately $985 million. GeoResources shareholders will receive a total consideration of $39.97 per share based on the closing price of HK on April 24, 2012. The companies anticipate completing the transaction in the third quarter of 2012.
GeoResources’ operational portfolio consists of three key plays in the lower 48 states: Bakken (55,000 net acres), Eagle Ford (24,000 net acres) and the Austin Chalk (200,000 net acres). As of January 1, 2012, GEOI had proved reserves of 31.7 MMBOE, 64% of which is oil and reported Q4’11 production of 6,982 BOEPD (62% oil).
Terms of the Merger Agreement
Halcón Resources will acquire more than 279,000 net acres from GEOI for all outstanding shares of GeoResources common stock (GEOI shareholders will receive $20.00 in cash and 1.932 shares of HK common stock for each share of GEOI common stock). This represents a total consideration to GEOI shareholders of $37.97 per share. GEOI shareholders are expected to own approximately 18% of the combined company’s outstanding shares on a fully diluted basis.
Valuation
Based on the purchase price of approximately $985 million ($520 million cash and 50 million shares at $9.30 per share), the transaction is valued at approximately $141,077 per flowing barrel and $31.07 per proved BOE.
According to EnerCom’s U.S. E&P database of 90 public companies, as of April 20, 2012, HK was trading at an enterprise value to trailing twelve months production and enterprise value to 2011 proved reserves of $35.67 per proved BOE and $364,458 per flowing BOE, respectively.
As of April 20, 2012, HK was trading at 22.0x P/CFPS. It could be ventured to expect the current valuation of HK is driven by Floyd’s previous operational success more than the company’s current assets. We believe this week’s announcement, as well as other expected acquisitions/divestitures in 2012, will test HK’s forward valuation. OAG360 notes that a stock transaction such as this can be thought of as Halcón’s way to tap the capital markets without having to issue “new shares.”
GEOI Assets a Nice Add for Newly Formed Halcón
Halcón Resources, led by former Petrohawk Energy CEO Floyd Wilson, is targeting oil and liquids projects in the Utica Shale (Ohio), Wilcox (Louisiana), Woodbine (Texas) and the Mississippi Lime (Kansas/Oklahoma). In addition to adding valuable oil-weighted assets in some of North America’s most prolific oil and liquids plays, the transaction increases HK’s estimated proved reserves by approximately 150% to nearly 52.8 million barrels of oil equivalent (69% liquids), and increases HK’s average net daily production by over 170% to approximately 11,070 BOEPD.
Source: HK Merger Presentation, April 2012
Keep in mind, HK was formed on December 21, 2011 through Wilson’s takeover purchase of RAM Energy. The investment by Wilson included $275 million in new common stock, a $275 million five-year convertible note and warrants for the purchase of an additional 110 million shares. On December 21, 2011, RAM had a market capitalization of $86.9 million; on April 20, 2012, Halcón was valued at $1.3 billion. During the time subsequent to the takeover, HK grew its production and proved reserves to 52.8 MMBOE and 11,070 BOEPD, respectively. When Mr. Wilson made the initial $500 million recapitalization of RAM, the company had production and proved reserves of 24.4 MMBOE and 4,132 BOEPD, respectively.
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The public markets are aware of Wilson’s previous successes – Hugoton Energy [merged for an enterprise value of $380 million into Chesapeake Energy (ticker: CHK)], 3TEC Energy (merged for $432 million into Plains Exploration and Production), and Petrohawk Energy [merged for total enterprise value of $15.1 billion with BHP Billiton (ticker: BHP)].
Merger Improves Future Liquidity Needs; Eagle Ford Non-Compete with BHP Billiton
The enhanced production provides increased cash flow for reinvestment into expansion projects, and the ability to access the debt markets for additional capital to put to work in developing its oil and liquids plays.
Source: HK Merger Presentation, April 2012
In addition to its current pro forma liquidity position, HK has non-core divestiture plans for its assets in the Permian, South Texas and Louisiana with a total PV-10 value of $367.9 million.
Upon selling Petrohawk to BHP Billiton for $15.1 billion in July 2011, Mr. Wilson signed a non-compete agreement in the Eagle Ford Shale play in South Texas. On the merger conference call held April 25, 2012, Floyd was quoted saying: “So I suspect that we’ll end up divesting the property (Eagle Ford) as per our agreement with BHP. They did a great job of dealing with us in a very businesslike way and we intend to respond in the same way.” Recent analyst estimates believe GEOI’s (now HK’s) 24,000 net acres in Fayette County of the Eagle Ford could bring in as much as $180 million.
