Business context and reporting period
Unaudited Form 10-Q for the quarter ended September 30, 2020. Battalion Oil is an independent oil and gas producer focused on the Delaware Basin in Texas. Results are presented in thousands of dollars unless stated otherwise.
Comparisons with 2019 require caution: Battalion emerged from Chapter 11 in October 2019 and adopted fresh-start accounting, creating a new reporting entity. The 2020 Successor and 2019 Predecessor periods are therefore not directly comparable.
Key financial and operating metrics
| Metric | Q3 2020 | Nine months 2020 | Comparable 2019 period |
|---|---|---|---|
| Operating revenue | $39.8 million | $105.7 million | $50.8 million Q3; $159.1 million nine months |
| Net loss | $153.1 million | $166.0 million | $63.3 million Q3; $1,040.7 million nine months |
| Operating loss | $135.6 million | $228.8 million | $64.4 million Q3; $1,062.8 million nine months |
| Average production | 17,076 Boe/d | 16,712 Boe/d | 16,489 Boe/d Q3; 17,209 Boe/d nine months |
| Average realized price, excluding hedges | $25.11/Boe | $22.82/Boe | $33.33/Boe Q3; $33.71/Boe nine months |
| Net cash from operating activities | Not separately stated | $47.9 million | $(33.2) million nine months |
Q3 2020 included a $128.3 million non-cash full-cost ceiling impairment; nine-month impairment was $188.4 million. The company recorded a $15.8 million net derivative loss in Q3, but a $67.7 million net derivative gain for the first nine months. Nine-month oil and gas capital expenditures were $96.5 million. Cash and cash equivalents were $1.8 million at September 30, versus $5.7 million at year-end 2019.
Total debt was $180.2 million, including $178.0 million outstanding on the revolving facility and a $2.2 million PPP loan. At September 30, the borrowing base was $195.0 million, with $4.7 million of letters of credit and $12.3 million of borrowing capacity. The borrowing base was subsequently set at $190.0 million under an October 29 amendment.
Material changes versus prior periods
- Nine-month revenue fell to $105.7 million from $159.1 million, mainly reflecting lower realized commodity prices and reduced production. Average production declined 3% year over year; Q3 production was higher than the prior-year quarter.
- Management attributed lower nine-month production partly to wells temporarily shut in during May and June in response to low oil prices; estimated downtime averaged about 1,800 Boe/d for the nine-month period.
- Lower lease operating, workover, and general and administrative costs reflected cost controls and operational efficiencies. Gathering and other costs increased to $39.3 million for the nine months, including higher treating-facility costs and rig-stacking charges.
- Cash from operations improved, while investing outflows declined from 2019. The company spent $96.5 million on oil and gas capital and funded operations partly through $34.0 million of net revolving-credit borrowings.
Outlook, commentary, risks and unusual items
- Management reduced its expected full-year 2020 capital spending to approximately $80–84 million from an original budget of $123–138 million. It cited commodity-market conditions and the need to preserve financial flexibility.
- Management said revolving-credit availability could remain limited through at least Q2 2021; the next borrowing-base redetermination was expected in spring 2021. A lower borrowing base could require repayment of excess borrowings. The company was exploring refinancing, asset sales, and other ways to maintain liquidity, but gave no assurance these options would be available.
- Lenders waived the current-ratio covenant for Q3 2020 and suspended its testing through Q4 2021. The amendment also requires hedging at least 65% of anticipated production from proved developed producing reserves through at least December 2022, and imposes limits on overdue uncontested payables. The company reported covenant compliance at September 30 after giving effect to the amendment.
- Management estimated that, if the October 2020 oil price of $42.37 per barrel were held constant for two months in its ceiling-test calculation, the ceiling amount would decline and could produce an additional $77.5 million impairment, all else equal.
- COVID-19, reduced energy demand, commodity-price volatility, midstream access and sour-gas treatment constraints, borrowing-base reductions, covenant compliance, and access to financing were identified as significant risks. The company was evaluating development of an acid-gas injection facility after receiving permits.
- The company received $22.9 million from early termination of certain derivatives during the first nine months; derivative gains and losses include mark-to-market effects and are volatile. The company was pursuing forgiveness of its $2.2 million PPP loan, but forgiveness was not assured.
- The company reported no material expected effect from pending legal proceedings and stated its disclosure controls were effective.
Important facts for investors to verify
- Current borrowing-base availability, liquidity needs, and outcome of the next lender redetermination.
- Compliance with amended credit-facility covenants, required hedge levels, and the impact of any further waivers or amendments.
- Actual capital spending and production relative to management’s revised 2020 plan, including the effects of shut-ins and sour-gas handling.
- Commodity prices and reserve assumptions used in future ceiling tests, including whether additional impairments occur.
- Realized cash flow from hedges versus reported derivative gains and losses, and the status of PPP loan forgiveness.