As Oil Slumps, Wildcatter Struggles With Shale Debt; Energy Drillers Find Pursuing Big Drilling Plans Tougher Amid Investor Skepticism

As Oil Slumps, Wildcatter Struggles With Shale Debt

Energy Drillers Find Pursuing Big Drilling Plans Tougher Amid Investor Skepticism

A shift on Wall Street to more defensive energy stocks is making it harder for oil-and-gas drillers to pursue expansions without the cash flow from production to finance the work.

By Russell Gold

One of the early stars of the U.S. energy boom is having a tough time in an increasingly skeptical energy investment environment. Floyd C. Wilson, chairman and chief executive of Halcón Resources Corp., was a pioneer in finding oil and gas in shale formations. His previous company, Petrohawk Energy Corp., discovered the prolific Eagle Ford Shale in South Texas and became a Wall Street darling before being acquired by BHP Billiton Ltd. in 2011.But analysts and investors have become concerned about Halcón’s ability to find enough oil and gas to pay for aggressive drilling and production plans. Mr. Wilson and others now must struggle to convince investors they can find finance their expansion from revenues.

Mr. Wilson’s troubles underscore a shift among investors and Wall Street analysts. Until recently, Wall Street was willing to back energy companies that promised rapid growth and planned to assemble oil and gas fields to sell, at a premium, to larger companies, which has been Mr. Wilson’s forte.

Big companies’ appetite for this kind of deal has dwindled, especially in the wake of Royal Dutch Shell’s decision earlier this year to write down the value of its U.S. shale stakes by $2 billion and sell South Texas assets.

On Monday, Goldman Sachs became the latest to warn about Halcón’s outlook, advising investors sell the company’s shares. Goldman analysts argued that mediocre drilling results in two areas will force Halcón to either to sell assets or more shares to cover drilling costs.

Halcón’s shares, which are off 36% this year, fell 6.5% on Monday, to $4.43. In September, Halcón sold $303 million of its properties in North Texas, and earlier this month took a $1.2 billion noncash impairment charge related to disappointing results in Ohio and Texas.

Mr. Wilson said he understands the concerns but thinks they are off target. “Our job is to build a large inventory of good oil wells and that’s what we’re doing,” he said in an interview.

Halcón may be out of favor among investors, but had good long-term prospects, he said, adding, “We’re not the flavor of the day right now.”

Investors have pushed energy companies to increase their revenues to cover the drilling costs, or rein in their spending. Those that have complied, such as Cabot Oil & Gas Corp. and EOG Resources Inc., have had strong stock-market performance. Those that resisted, like Chesapeake Energy Corp. under founder Aubrey McClendon, have come under the kind of pressure that helped force Mr. McClendon out as CEO in April.

Another factor hurting Halcón: some forecasters say crude oil prices, which have dropped recently, have further to fall. Stephen Davis, chief executive of Signal Investment Research, believes crude is entering a weak period, driven by worries about China’s economy and rising crude inventory levels. Crude oil futures fell 81 cents on Monday to $93.03 a barrel, the lowest level since May.

Halcón “may not be the stock you want to own in the environment we’re heading into,” says Mr. Davis. Investors are selling off stocks of higher-risk companies with large debt loads, such as Halcón, he said, and buying defensive energy stocks, such as Exxon Mobil Corp.

Mr. Wilson has a reputation as an energy executive with a deft touch for creating shareholder value and skillfully negotiating the rapid growth in oil and gas production from shale rocks. When he took over Petrohawk Energy in 2004, the company had a market capitalization of $54 million; he sold it to BHP for $12.1 billion in cash and the assumption of $3 billion in debt. He had previously built up two other companies, both of which were sold for big gains.

He created Halcón in late 2011, acquiring control of a small listed company and renaming it. Many on Wall Street expected his golden touch to continue. Its stock jumped to $8.46 a share from $3.30 in a week. Two months later, in February 2012, it hit $12.76.

Mr. Wilson said the company’s operations in the Bakken Shale in North Dakota and the El Halcón in central Texas are going well. It reported record production in the third quarter and promised further growth next year.

“We have more debt than some people are comfortable with but it is long-term debt and we will grow into it,” he said. Halcón had $3 billion in long term at the end of September.

A sale of Halcón is possible once energy deals pick up. “Not in a couple of years,” he said, “but at some time in the future.”