Filing summary
Entity and period: The supplied filing is Halcón Resources Corporation’s unaudited Form 10-Q for the quarter ended June 30, 2018—not a filing identified as Battalion Oil Corp. Verify the issuer before relying on this summary.
Business context and reporting period
Halcón describes itself as an independent oil and gas company focused on liquids-rich assets in the Delaware Basin of West Texas. After divesting assets in the Williston Basin and East Texas in 2017, it concentrated operations and investment in the Delaware Basin. The filing compares the three and six months ended June 30, 2018 with the corresponding 2017 periods.
Financial and operating performance
- Revenue: Second-quarter total operating revenue was $55.4 million, down from $120.1 million; first-half revenue was $104.7 million, down from $255.7 million. Oil, gas and NGL sales were $55.3 million and $104.4 million, respectively, in 2018.
- Profit: Halcón reported a second-quarter net loss of $16.3 million, versus net income of $20.2 million in 2017. The first-half net loss was $18.9 million, versus net income of $209.5 million. The prior-year first-half comparison included large divestiture gains; the 2018 period included a $5.9 million reduction to the prior Williston sale gain.
- Margins and unit economics: Operating income was $6.4 million in Q2 and $4.9 million in H1, approximately 11.5% and 4.7% of revenue, respectively. Average realized price excluding hedge settlements rose to $47.60/Boe in Q2 from $36.30, and to $48.58/Boe in H1 from $37.64. Production fell to 12,769 Boe/d in Q2 from 36,308, and to 11,873 Boe/d in H1 from 37,387, primarily reflecting 2017 asset sales.
- Cash flow and investment: First-half operating cash flow was $43.6 million, down from $122.6 million. Investing cash outflow was $634.3 million, including $332.9 million for acquisitions, $252.0 million in oil and gas capital spending, and $53.2 million for other property and equipment. Financing provided $262.5 million. Cash declined from $424.1 million at year-end to $95.9 million at June 30.
- Debt and liquidity: Long-term debt, net, was $612.4 million; the stated principal amount of 6.75% notes due 2025 was approximately $625.0 million. No revolver borrowings were outstanding; $198.4 million of capacity was available under the $200 million borrowing base, after letters of credit. Current assets were $164.4 million versus current liabilities of $189.1 million.
- Other: Derivative contracts were a $20.8 million asset and a $74.5 million liability at quarter-end. H1 net derivative results were a $6.2 million loss, versus a $50.6 million gain in 2017. Two purchasers accounted collectively for 86% of first-half sales.
Material changes versus the prior period
- The sharp decline in production and revenue primarily reflects the 2017 divestitures; higher realized commodity prices partly offset the volume decline.
- Per-Boe lease operating and workover costs improved, while gathering and other costs rose to $5.76/Boe from $3.51 and G&A rose to $10.07/Boe from $3.91. Lower production contributed to higher per-unit costs.
- Halcón acquired the West Quito Draw properties for an adjusted purchase price of $199.1 million and purchased the Northern Tract of its Monument Draw acreage for approximately $108.2 million.
- To fund the acquisition and business needs, the company issued $200 million of additional 6.75% notes and sold 9.2 million common shares, raising net proceeds of approximately $202.4 million and $60.4 million, respectively.
Outlook, risks and notable items
- Management projected 2018 drilling and completion spending of $390–$440 million and infrastructure, seismic and other spending of $90–$110 million. It reduced operated rigs from four to three. These estimates were subject to change.
- Halcón was in compliance with credit-facility financial covenants at June 30 after amendments and a waiver. A July 12, 2018 amendment subsequently raised leverage limits for specified quarters through 2019. Management cautioned that modest changes to production, costs or debt could still create covenant-compliance difficulties; the next borrowing-base redetermination was expected in fall 2018.
- Management expected less than $4 million of third-quarter costs to treat gas after a third-party pipeline outage, with costs expected to decline significantly thereafter.
- Commodity-price volatility, access to capital, production and reserve replacement, pipeline capacity, service-cost inflation and steel and aluminum tariffs are identified risks. The company hedges production but does not apply hedge accounting, so derivative fair-value movements affect reported earnings.
- Long-term gathering and sales contracts commit a substantial portion of Delaware Basin production for periods of one to 20 years. A July 2018 crude-oil gathering agreement with an Ares-controlled affiliate was approved through the company’s related-party review process. The filing also reports related-party gas processing arrangements and aircraft charter payments to the CEO.
- Management said pending legal proceedings were not expected to have a material effect. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported for the quarter.
Important facts for investors to verify
- Confirm the filing’s issuer: the document names Halcón Resources Corporation, whereas the request names Battalion Oil Corp.
- Review the leverage-covenant definitions, amended limits, and headroom against actual and forecast results, including the fall 2018 borrowing-base redetermination.
- Assess whether operating cash flow and available liquidity can support the capital program, acquisitions and debt obligations as cash has fallen substantially.
- Verify production growth and per-unit cost trends in the Delaware Basin, and the sensitivity of the business to commodity prices, basis differentials and hedging.
- Examine purchaser concentration, long-term midstream commitments, pipeline-outage exposure and the terms and oversight of related-party agreements.