BATTALION OIL CORP annual report, FY2018

Business context and reporting period

The supplied filing is Halcón Resources Corporation’s Form 10-K for the fiscal year ended December 31, 2018, filed March 12, 2019—not a Battalion Oil Corp. filing. It reports full-year results; the filing separately provides unaudited fourth-quarter data. Halcón was an independent U.S. oil and gas producer focused on the Delaware Basin, with approximately 56,900 net acres in West Texas.

Comparisons with earlier periods are affected by 2017 divestitures of the Williston Basin and East Texas assets and by the resulting shift to a Delaware Basin-focused business. Financial statements before and after Halcón’s 2016 emergence from Chapter 11 use fresh-start accounting and are not fully comparable.

Key financial and operating metrics

At December 31, 2018, principal debt was approximately $625.0 million, consisting of 6.75% senior notes due 2025; the company had no revolver borrowings, $1.0 million of letters of credit and approximately $274.0 million of available borrowing capacity under a $275.0 million effective facility limit. The notes’ reported net carrying value was $613.1 million. Current assets were $144.7 million versus current liabilities of $161.7 million.

Oil and gas capital expenditures were $475.7 million, including $444.4 million for drilling and completions. Investing cash outflow was $706.5 million, while financing cash inflow was $262.1 million. Year-end proved reserves were 85.2 MMBoe, up from 51.1 MMBoe, with 47% proved developed and 53% proved undeveloped.

Material changes versus the prior period

• Revenue fell about 40% and average production fell about 49%, primarily reflecting the 2017 asset sales; higher realized prices partially offset lower volumes.
• Net income declined sharply from 2017, which included a $721.6 million gain on oil and gas property sales. In 2018, results included a $119.0 million gain on the water infrastructure sale, a $92.6 million derivative gain and a $95.8 million income tax provision.
• Cash from operations fell by $47.4 million. Cash declined by $377.2 million during 2018, largely as acquisition and capital spending exceeded operating and financing inflows.
• Debt increased following issuance of an additional $200 million of 6.75% notes in February 2018. Halcón also raised approximately $60.4 million net from a common-stock offering and acquired West Quito Draw properties for approximately $198.5 million.
• Proved reserves increased 34.1 MMBoe: 53.2 MMBoe of additions and extensions and 3.7 MMBoe of acquisitions were partly offset by 17.6 MMBoe of negative revisions and 5.1 MMBoe of production.

Outlook, commentary, risks and unusual items

• 2019 plan: Budgeted drilling and completion spending of $190–$210 million, plus $60–$80 million for infrastructure, seismic and other activities. The plan called for an average of two operated rigs, 17 gross wells drilled, 18 completed and 23 brought online. Funding was expected from cash, operating cash flow and revolver borrowings; management said spending could be curtailed if cash flows or financing were inadequate.
• Covenants and financing: Halcón periodically amended or obtained consents under its revolving-credit covenants when it anticipated difficulty maintaining compliance. Amendments and consents after year-end revised leverage tests and EBITDA calculations for 2019 into 2020. Management cautioned that even modest operating or spending variances could affect covenant compliance, and future lender relief was not assured.
• Operating disruption: A third-party pipeline outage led to approximately $32.5 million of 2018 costs to remove hydrogen sulfide from Monument Draw gas. The company expected treating costs to decline substantially in early 2019 after securing alternative capacity and progressing its own treating solution.
• Water asset sale: Halcón sold its Delaware Basin water infrastructure for $214.1 million cash and recognized a $119.0 million gain. Potential incentive payments of up to $25 million annually for five years depend on annual well-connection thresholds; the company dedicated produced water in specified operating areas to the buyer.
• Reserve and impairment sensitivity: Approximately $413 million of future development spending was assumed to develop proved reserves, mainly during 2019–2023. Management estimated that using a lower, more recent oil-price assumption would have implied a $15.5 million ceiling-test impairment, all else equal; a 10% decrease in the SEC 12-month average prices would have reduced the ceiling by about $193.9 million and generated an impairment.
• Other risks: Commodity-price volatility, a concentrated and largely undeveloped single-basin portfolio, transportation and water access, environmental and regulatory requirements, reserve-estimate uncertainty, debt and covenant restrictions, and access to capital. Two buyers together accounted for 77% of 2018 sales. The filing also disclosed a former CEO’s departure and a search for a replacement, activist shareholder activity, and credit ratings of CCC+ and B3, both with negative outlooks.
• Quarterly context: Fourth-quarter 2018 revenue was $60.3 million and net income was $146.7 million; the quarter included the $119.0 million water-asset sale gain. Full-year earnings therefore should not be viewed as a clear measure of recurring profitability.
• Controls and audit: Management and Deloitte reported effective internal control over financial reporting as of year-end; the financial-statement audit opinion was unqualified.

Most important facts for investors to verify

• Confirm the issuer identity: the supplied 10-K is for Halcón Resources Corporation, not Battalion Oil Corp., and covers fiscal 2018 rather than only Q4.
• Reconcile recurring operating performance with reported earnings, including the water-sale gain, derivative marks and tax provision.
• Check liquidity and covenant headroom after the subsequent credit-agreement amendments, and assess the $625 million notes and $274 million revolver availability against the capital plan.
• Track production, realized pricing, H2S treatment costs and gathering expenses, including whether the expected 2019 cost reduction occurred.
• Evaluate reserve additions and negative revisions, the development schedule and funding required for the 45.3 MMBoe of proved undeveloped reserves.
• Assess buyer concentration, long-term gathering and transportation commitments, and the conditions attached to potential water-sale incentive payments.