Battalion Oil Corp. — 2023 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2023. Filed March 29, 2024. Battalion is an independent oil and gas producer focused on the Delaware Basin in Texas.
Business context and operations
- Held approximately 39,867 net acres in the Delaware Basin and averaged 13,784 Boe/d, down from 15,438 Boe/d in 2022. The company operated 90 producing wells at year-end.
- Year-end proved reserves were 68.1 MMBoe: 34.6 MMBbls of oil, 14.9 MMBbls of NGLs and 111.7 Bcf of natural gas. About 59% were proved developed.
Financial and operating performance
| Metric | 2023 | 2022 |
|---|---|---|
| Operating revenue | $220.8 million | $359.1 million |
| Operating income | $17.6 million | $152.1 million |
| Net income (loss) | $(3.0) million | $18.5 million |
| Net income (loss) available to common shareholders | $(15.1) million | $18.5 million |
| Operating cash flow | $17.6 million | $78.8 million |
| Capital expenditures | $46.3 million | $125.5 million |
| Cash and cash equivalents at year-end | $57.5 million | $32.7 million |
| Long-term debt, face value | $200.0 million | $235.0 million |
- Oil, gas and NGL sales fell to $218.5 million from $357.4 million. Management attributed the decline mainly to lower realized prices ($100.6 million impact) and lower production volumes ($38.3 million impact).
- Average realized price excluding settled derivatives declined to $43.43/Boe from $63.43/Boe. Production fell about 11%, reflecting natural declines, fewer wells brought online and second-half Monument Draw curtailments related to downstream throughput limits.
- Operating margin was approximately 8% of revenue, compared with approximately 42% in 2022. Operating expenses were $203.2 million; gathering and other costs were $63.6 million, or $12.64/Boe.
- Derivative contracts produced a $12.7 million net gain in 2023, versus a $110.0 million loss in 2022. The 2023 result included a $21.9 million unrealized gain and a $9.2 million realized loss. The company does not apply hedge accounting.
- Interest expense and other rose to $33.3 million from $23.6 million. Average borrowing interest rate was approximately 12.68% for 2023; the year-end rate was 12.99%. Debt is substantially floating-rate.
- Cash used in investing was $51.8 million; cash provided by financing was $59.1 million, including $94.6 million of preferred-stock proceeds and $35.1 million of debt repayments. Year-end current liabilities of $134.4 million exceeded current assets of $90.5 million.
- PV-10 of proved reserves was $613.2 million; the standardized measure of discounted future net cash flows was $598.5 million, down from $1.46 billion in 2022. These reserve-value measures depend on SEC pricing assumptions and are not estimates of market value.
Material changes versus 2022
- Proved reserves declined 23.9 MMBoe, from 92.0 to 68.1 MMBoe. The company cited production, negative revisions and a 15.3 MMBoe reduction in proved undeveloped reserves, including removal of 13.0 MMBoe associated with reduced activity amid cash-flow, debt and covenant constraints.
- Capital spending decreased to $46.3 million from $125.5 million; three gross operated wells were put online versus nine in 2022.
- Operating cash flow fell by $61.2 million. The filing cites lower realized prices, higher operating and interest costs, and working-capital changes.
- Debt declined by $35.0 million, while cash increased. The company raised $95.6 million of preferred equity during 2023; the preferred stock carries a 14.5% cash dividend rate or 16.0% compounding PIK rate. Cash dividends were prohibited under the loan agreement, and $12.0 million of preferred dividends were reflected as a deduction in earnings available to common shareholders.
Liquidity, outlook, risks and unusual items
- Debt and liquidity: No additional borrowing capacity was available under the term loan at year-end. Scheduled repayments totaled $50.0 million through December 2024, followed by $35.0 million through September 2025 and a $115.0 million final payment at maturity on November 24, 2025. The company was in covenant compliance at December 31, 2023, but has previously amended its loan terms to address anticipated covenant issues.
- Management outlook: Management said available cash, the $10.0 million merger escrow distribution, the March 2024 preferred issuance and cost reductions were expected to support operations, debt obligations and covenant compliance for the next 12 months. This outlook depends on forecasts and other assumptions; the company said it would continue seeking liquidity and cost-saving options.
- Proposed merger: Under the agreement with Fury Resources, common shareholders would receive $9.80 per share in cash, for an indicated transaction value of approximately $450 million. The merger remained subject to customary conditions, including shareholder approval, and was expected to close in the second quarter of 2024. Completion was not assured. The filing also warns of transaction costs, potential litigation, termination risk and possible adverse effects if the deal fails.
- Subsequent financing: On March 27, 2024, Battalion issued an additional $19.5 million of preferred equity, net of discount. On March 28, it amended the term loan, including changes to development and financial-test requirements. These events occurred after year-end.
- Gas-treatment joint venture: Battalion advanced approximately $15.1 million in 2023 on behalf of its joint venture partner for work on the acid-gas injection facility and advanced a further approximately $3.0 million in the first quarter of 2024. The company described contractual remedies to recover the advances. Work was completed, with processing of 20,000 Mcf/d forecast for the second quarter of 2024; timing and fee reductions remained subject to operational risk.
- Other risks: Exposure includes oil and gas price volatility, high leverage and interest rates, reserve replacement and development risk, sour-gas treatment and takeaway capacity, customer concentration (two buyers represented 79% of 2023 sales), and environmental, regulatory and climate-related requirements. The company reported no material cybersecurity incident and management assessed internal control over financial reporting as effective; the auditor did not provide an internal-control attestation.
Important facts for investors to verify
- Whether the Fury Resources merger closed, its final terms and consideration, and any required shareholder or regulatory approvals.
- Current liquidity, covenant compliance and ability to meet scheduled loan payments, particularly the $50.0 million due in 2024 and the $115.0 million maturity payment in November 2025.
- How preferred-stock dividends, redemption or conversion provisions affect the common shareholders’ economic and voting interests if the merger does not close.
- Actual production, realized prices, hedging settlements and throughput constraints compared with management’s expectations.
- Progress and economics of the acid-gas facility, and recovery or treatment of the amounts advanced to the joint venture partner.
- Reserve revisions, development spending and the company’s capacity to develop proved undeveloped reserves; the filing’s reserve estimates assume specified prices and future investment.