Halcón Resources Corporation — Q1 2016 Form 10-Q
Entity note: The request identifies Battalion Oil Corp, but the supplied filing is for Halcón Resources Corporation. This summary reflects the supplied Halcón filing, for the three months ended March 31, 2016, compared with Q1 2015 unless noted.
Business context and reporting period
Halcón is an independent U.S. onshore oil and natural gas company. It curtailed drilling in response to sharply lower commodity prices, concentrating activity on its most economic areas. Average production was 39,527 Boe/d; the company participated in drilling 23 gross (6.9 net) wells, all completed and capable of production.
Key financial metrics
| Metric | Q1 2016 | Q1 2015 / prior balance date |
|---|---|---|
| Operating revenue | $81.3 million | $136.2 million |
| Operating loss | $592.4 million | $626.2 million |
| Net loss | $540.0 million | $587.6 million |
| Net loss available to common stockholders; loss per share | $566.9 million; $4.72 | $601.2 million; $7.16 |
| Operating cash flow | $34.4 million | $93.9 million |
| Oil and gas capital expenditures | $116.8 million | $264.6 million |
| Cash at period end | $8.6 million | $8.0 million at Dec. 31, 2015 |
| Total assets | $2.85 billion | $3.46 billion at Dec. 31, 2015 |
| Long-term debt, net | $2.88 billion | $2.87 billion at Dec. 31, 2015 |
| Stockholders’ equity (deficit) | $(507.8) million | $52.4 million at Dec. 31, 2015 |
Revenue fell about 40%. Production declined 8% to 39,527 Boe/d, and average realized sales price excluding hedge settlements decreased 36%, to $22.42/Boe from $34.93/Boe. Reported operating results included a $496.9 million full-cost ceiling impairment and a $28.1 million impairment of gathering and other operating assets. The operating loss therefore does not represent cash operating performance alone.
Operating cash flow decreased by $59.6 million year over year. Investing cash outflow was $117.8 million and financing cash inflow was $84.0 million, resulting in a $0.6 million increase in cash. Current assets were $440.0 million and current liabilities $213.8 million; the company also reported $538.3 million of available revolving-credit capacity, subject to facility terms and borrowing-base changes.
Material changes versus the prior comparable period
- Oil, gas and NGL sales declined $54.8 million, reflecting lower prices and production. Oil averaged $27.01/Bbl versus $40.19/Bbl.
- Lease operating expense decreased $13.2 million; on a per-Boe basis it declined to $5.72 from $8.71. Workover expense rose $4.7 million, principally due to installation of electric submersible pumps in the Bakken.
- General and administrative expense increased to $39.5 million from $19.6 million. The filing attributes the increase to retention agreements, settlements of disputes with lease brokers and warrant holders, and higher professional fees, partly offset by lower payroll costs.
- Cash capital spending was substantially lower than in Q1 2015. The 2016 quarter included $65.1 million of drilling and completion costs.
- Interest expense and other, net, declined to $47.8 million from $61.3 million. A $81.4 million gain on extinguishment of debt helped offset operating losses.
Outlook, management commentary, risks and unusual items
- Management said it believed liquidity would be adequate for the next 12 months, but stated that reducing long-term debt and cash interest obligations was needed to improve financial flexibility. It was evaluating strategic alternatives and discussing potential debt-reduction terms with stakeholders; timing and outcome were described as highly uncertain. Potential transactions could dilute equity holders or adversely affect debt and equity values.
- The 2016 plan called for an average of 1.3 rigs. No full-year capital expenditure amount is stated in the supplied text.
- At March 31, approximately 82% of anticipated remaining 2016 oil production was hedged at a weighted-average price of $80.50/Bbl. Hedging beyond 2016 was limited, leaving greater exposure to commodity prices after existing hedges expire. Derivative results included $107.7 million of realized gains and $89.0 million of unrealized losses in Q1 2016.
- The company recorded a $496.9 million ceiling-test impairment after transferring remaining Utica and Tuscaloosa Marine Shale properties into the full-cost pool, alongside lower benchmark oil prices. Management said it was no longer probable that capital would be available or approved for continued exploratory drilling in those areas before lease expirations. A further $286 million impairment was estimated under a specified lower-price sensitivity scenario; the filing cautions that this is not a forecast.
- In March, the revolving-credit borrowing base was set at $700 million, with the next redetermination scheduled for September 1, 2016. The company reported compliance with facility financial covenants at quarter-end. Lower prices could reduce borrowing capacity and covenant headroom; failure to comply or obtain needed flexibility could force refinancing, asset sales or further spending cuts.
- Debt was about $2.8 billion, with approximately 95% at fixed rates and a weighted-average fixed rate of 10.5%. The filing reports a $3.2 million quarterly cumulative dividend on redeemable noncontrolling interests and $20.4 million of accretion. Series A preferred dividends were suspended in January; cumulative undeclared dividends were $4.3 million at quarter-end.
- Other notable items include $4.9 million of restructuring expense, the $28.1 million noncash gathering-asset impairment, and a $1.2 million rig termination fee incurred after quarter-end under an April 5 contract termination. Remaining rig commitments were $23.4 million, with estimated termination penalties of $16.7 million if other commitments were terminated.
- Management and legal counsel said pending ordinary-course legal proceedings were not expected to have a material effect. The filing reported no changes to the risk factors in the 2015 Form 10-K. Disclosure controls were considered effective. Halcón reported regaining NYSE minimum-share-price compliance on May 2, 2016.
Important facts for investors to verify
- Confirm the intended company: the supplied 10-Q is Halcón Resources Corporation, not Battalion Oil Corp.
- Review the September 2016 borrowing-base redetermination, covenant headroom, and whether any debt-reduction discussions produced a transaction.
- Assess the sustainability of operating cash flow and liquidity, including the limited cash balance, available revolver capacity, and reliance on hedges.
- Check hedge coverage and realized prices after 2016, and the sensitivity of cash flows and reserve values to commodity prices.
- Monitor additional ceiling-test impairments, reserve changes, and the economics or lease status of Utica and TMS acreage.
- Evaluate debt maturity, interest burden, security ranking, potential dilution, and obligations associated with Apollo’s redeemable TMS preferred interest.