Sometimes, Wall Street ignores the greatest investment opportunities.
Look at Halcon Resources Corporation (HK).
In June 2017, the stock had just plummeted from a high of $7.46 to a low of $3.69 a share, as oil prices sank from $51.88 to $42.00 a barrel on supply-demand fears.
We believed that HK was a buying opportunity. For one, we knew oil would eventually bottom out and rebound.
Two, one of the best times to buy is when everyone else is fearful. When Wall Street is selling, that’s when we get interested.
As many of us have learned from Warren Buffett, “Be fearful when others are greedy; and greedy when others are fearful.”
Three, as of our July 2017 recommendation of HK at $3.79, we believed the stock had become extremely undervalued, selling at historic lows. Sure, the company just weathered a couple of tough years, even filing for Chapter 11 bankruptcy in July 2016. When it exited bankruptcy, on September 12, 2016, it started trading on the NYSE after a 1:34 reverse stock split.
However, as of July 2017, it had $62 million ($0.68 per share) in cash, and a book value of $7.66 a share. It also had greatly increased its revenues and earnings. In fact, in the first quarter of 2017, HK posted total operating revenues of $135.59 million, compared to $81.34 million year over year. Even its net income improved significantly from a 2016 first quarter loss of $566.86 million to a gain of $188.55 million. Net income rocketed from a loss of $4.72 to a gain of $1.69 a share.
We couldn’t ignore those clear signs of a successful turnaround.
Nowadays, the company just sold most of its North Dakota operations for $1 billion in cash, and it plans to focus on its Permian Basin operation.
According to Reuters:
“The deal with privately held Bruin E&P Partners LLC focuses Halcón on the most-active area in the U.S. oil industry and marks a stunning turnaround for Chief Executive Floyd Wilson, who formed the company in 2011 before having to usher it through bankruptcy in 2016 after oil prices plunged.”
By moving to the Permian, CEO Wilson may be able to sell the company, according to reports.
Reuters also noted that investors are waiting to see if he can “replicate the feat he pulled off in 2011 when he sold Petrohawk Energy to BHP Billiton Plc for $12.1 billion, a 65% premium over the share price before the sale was announced.”
In case you’re new to the Permian Basin, here’s some quick information from Halcon.
The Permian Basin alone is offering us substantial opportunity, as oil companies have reportedly shifted their attention on drilling in the Permian given a higher rate of return. In fact, Exxon Mobil just announced it would triple production in the Permian Basin by 2025, and has plans to increase total daily production in the region by 600,000 barrels of oil equivalent.
Plus, Exxon expects for oil production to increase five-fold in the region, too. Even analysts at RBC Capital Markets believe that exploration and production money flow will continue to push into North America, especially into the Permian Basin.
That’s part of the reason why HK’s stock just soared from our buy at $3.79 in July to a recent high of $9.07 – a win of 139% in just six months.
It goes to prove that buying a low-priced stock with strong fundamentals, as others flee, can pay off quite well. The Cheap Investor has proven that time and again for 36+ years.