HK and MILL

[dan_s]

In the next few days I will publish updated profiles on HK and MILL. They have more risk than the companies in our Small-Cap Growth Portfolio (OEDV is an exception), but I can see a clear path to much higher share prices for both of them. - Dan

http://seekingalpha.com/article/2287573 ... -in-energy

I have been fortunate over the past few years to see several stakes in small exploration and production (E&P) plays double or triple in fairly short order. These included positions in Warren Resources (WRES), Synergy Resources (SYRG), Abraxas Petroleum (AXAS) and Gulfport Energy (GPOR).

As the results of these huge gains, the sector is near and dear to my heart. I am always on the lookout for similarly positioned small and mid-cap E&P plays that could turn out to be my next big winners. Here are a couple of additional opportunities in the space. Neither company has much in the way of profits right now. However, both are seeing very good production gains and are well-positioned for sustained growth over the next few years.

Halcon Resources (HK) is a midcap E&P play (~$6.5B enterprise value) with production acreage in the Bakken, Eagle Ford and most importantly in the Tuscaloosa Marine Shale region where it is starting to see some good results.

The company is starting to get some positive notice from analysts. Yesterday, Miller Tabak slapped a "Buy" rating and a $9 price target on the shares - the stock currently sells for under $7 a share. Miller Tabak's analyst believes "will significantly outperform the E&P sector in 2014 as investors begin to realize the massive upside of the company's divisions." This follows Wunderlich upping its price target to $9 a share as well a couple of weeks ago. Canaccord Genuity also raised its price target on Halcon earlier in the month.

The company got a vote of confidence in June by Apollo Global Management (APO) announcing it will invest up to $400mm in Halcon to help expand production in the Tuscaloosa Marine Shale. The company is already slightly profitable and should experience 15% to 20% production growth in coming years. Given the recent positive analyst coverage, it appears to be a good speculative play here.

Miller Energy Resources (MILL) shows how far the energy revolution has expanded in the United States as it operates acreage far from the main shale regions (Bakken, Eagle Ford, Permian) in the country. The company has oil and gas wells in the Appalachian region of east Tennessee and in south-central Alaska. It is in the process of selling off its minor Tennessee assets to become a pure play Alaskan centric producer which should eliminate some operational costs and produce economies of scale.

This E&P concern is a more speculative bet than Halcon in that it has a much smaller enterprise value (~$300 million) and is not profitable as of yet. Where it is superior to Halcon is production growth. Revenues are on track to more than double in FY2014 and analysts currently believe that growth will accelerate slightly in FY2015.

The stock sells for just less than book value with a current price of just over $5.50 a share. Brean Capital came out in mid-May with a price target of $8 a share on this fast growing speculative stock. It also upgraded its rating on the shares from Hold to Buy. The company should get near breakeven in earnings in FY2015 and then start to be increasingly profitable starting in 2016 according to current projection. This is a speculative buy but one with considerable upside in my opinion.