13 January 2015 HY Corporate Credit Energy Halcon Resources Relative value In the face of the dramatic downward shift in commodity prices over the last few months, the question hanging over the lower-rated credits is the sustainability of the business model itself. For HaIcon (H K). given its high leverage levels, this issue is even more relevant. In this context, the revised outlook provided by the management earlier this week is a major positive. The company said it would contain drilling & completion capex to $375-$425 million, sharply below the $1,100 million in FY 14E while keeping total production relatively flat. To place the new plan in perspective, it is just half of the previous capex budget provided in November of $775 million while production target has been taken down by just 18%. The management is achieving this by halving its rig program from 6 to 3 - two of the rigs will now be focused on its best asset, the Fort Berthold acreage of its Bakken play. The East Texas Eagle Ford play, where the company had previously planned a ramp-up, will now be allocated a solitary rig. The revised production target also means its oil production for FY 15 is now largely hedged (88% @ $87.29/bbl). We therefore see EBITDA of $655 million (only 15% below FY 14E levels) with a modest cash burn of -$75 before asset sales despite a heavy interest burden of $185 million (about a quarter of EBITDA). We see a largely similar financial performance in FY 16 as well - flat production levels on a -$500 million capex program though driving slightly higher FCF burn due to lower realization levels (negative $85 million). Liquidity, while modest at $797 million including $95 million of cash, will be more than sufficient to manage the revised drilling program. Overall, while leverage levels will stay elevated (5.8x by FY 16E), the company looks reasonably well placed to service its debt through FY 16. The longer term outlook is more challenging however. Th