Business context and reporting period
Halcón Resources Corporation’s unaudited Form 10-Q covers the quarter and nine months ended September 30, 2013. Halcón describes itself as a U.S. onshore oil and gas company focused on acquiring, developing and producing liquids-rich assets. Entity discrepancy: the request identifies Battalion Oil Corp., but the supplied filing is for Halcón Resources Corporation; confirm the intended issuer before relying on this summary.
Financial performance and position
Amounts below are in millions of dollars unless stated otherwise.
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Operating revenue | $305.0 | $73.3 | $710.2 | $123.6 |
| Net loss | $(854.8) | $(20.2) | $(812.3) | $(45.8) |
| Net loss per common share | $(2.19) | $(0.11) | $(2.22) | $(1.01) |
| Cash from operations | Not presented for quarter | Not presented for quarter | $391.6 | $1.9 |
- Q3 sales of oil, natural gas and NGLs were $304.2 million. Average daily production was 37,707 Boe, versus 11,185 Boe in Q3 2012; realized revenue per Boe was $87.69, versus $70.77.
- Nine-month average daily production increased 384% to 31,007 Boe from 6,401 Boe. The filing attributes most of the volume and revenue increase to acquisitions and subsequent development.
- Q3 loss included non-cash charges of $909.1 million for the full-cost ceiling impairment, $228.9 million for goodwill impairment and $67.3 million for gathering and other operating assets. The ceiling charge was $574.8 million after tax. Goodwill was reduced to zero.
- At September 30, cash was $0.5 million; current assets were $329.5 million and current liabilities $727.5 million. Long-term debt was $3.004 billion, plus $0.7 million current debt. Stockholders’ equity was $1.850 billion.
- At September 30, the revolving facility had $232.0 million drawn, $1.2 million of letters of credit and $476.8 million available under the then-effective $710 million borrowing base. The borrowing base was subsequently affirmed at $850 million on October 31, subject to reduction to $800 million after all three announced divestitures close. The company reported compliance with debt covenants at September 30.
- Nine-month investing cash outflow was $1.827 billion, including $1.829 billion of oil and gas capital expenditures and $120.1 million of other operating property and equipment spending. Financing cash inflow was $1.433 billion. Ending cash was $0.5 million.
- Operating margin and EBITDA are not stated as clear headline measures in the supplied filing text; reported operating results were significantly affected by the impairments.
Material changes versus prior comparable periods
- Revenue and production rose sharply year over year, principally following the GeoResources, East Texas and Williston Basin acquisitions and drilling activity. These acquisitions contributed approximately 24,600 Boe/day to the nine-month production increase, according to management.
- Despite the revenue growth, reported losses widened substantially, driven chiefly by the Q3 impairments. Depletion also increased: $139.9 million in Q3 versus $21.6 million, and $312.7 million for nine months versus $32.1 million.
- For nine months, operating cash flow improved to $391.6 million from $1.9 million, while investing outflow increased to $1.827 billion from $1.612 billion. Cash remained minimal as spending was funded substantially through financing.
- Debt increased from $2.034 billion at year-end 2012 to approximately $3.005 billion at September 30, 2013. The company issued $600 million of additional 8.875% notes, $400 million of 9.25% notes, $215.2 million net from common stock and $335.5 million net from Series A preferred stock; proceeds primarily repaid revolver borrowings or funded capital needs.
- The company shifted capital and development focus from Woodbine toward El Halcón. It transferred $655.7 million of unevaluated costs into the full-cost pool, including Woodbine and Utica/Point Pleasant properties; management cited non-economic Utica drilling results.
Outlook, commentary, risks and unusual items
- Management increased its 2013 drilling and completion budget from approximately $1.2 billion to $1.4 billion. It expected near-term capital spending to be funded through operating cash flow, asset-sale proceeds, capital markets and revolver borrowings. The filing does not provide a clear numerical production forecast.
- Three agreements to sell non-core conventional assets contemplated approximately $302 million of total consideration; two had closed by the report date and the third was expected to close before year-end 2013. Proceeds were to reduce the full-cost pool without a gain or loss. The Eagle Ford asset sale completed in July generated approximately $147.9 million before adjustments.
- Commodity price exposure remains material. The company targets hedging approximately 70%–80% of current and anticipated production over the next 18–24 months, but derivatives are not designated for hedge accounting. Q3 derivative loss was $54.4 million; nine-month loss was $38.7 million.
- Debt and capital intensity, commodity-price volatility, borrowing-base redeterminations, covenant restrictions, reserve and production uncertainty, and access to capital are highlighted risks. Management warned that sustained lower prices could impair funding capacity and force reduced drilling or asset sales. About 92% of debt bore fixed interest at a weighted average 9.1%; variable-rate debt averaged 2.3%.
- Rig and other office/equipment lease commitments totaled approximately $67.6 million; early termination of drilling-rig commitments would cost about $35.5 million in lieu of $57.4 million of remaining rig commitments.
- Management and legal counsel stated pending ordinary-course litigation was not expected to have a material effect, though outcomes could not be determined. The filing reports effective disclosure controls and no material change in internal control over financial reporting during the quarter.
- The company corrected an immaterial prior-period cash-flow classification error: 2012 operating and investing cash flows were each overstated by $11.7 million, with no effect on net cash flow.
Important facts for investors to verify
- Confirm issuer identity: the submitted company name is Battalion Oil Corp., while the filing identifies Halcón Resources Corporation.
- Review the assumptions and sensitivity behind the $909.1 million ceiling impairment and the additional goodwill and infrastructure impairments.
- Check subsequent completion, net proceeds and borrowing-base impact of all three non-core asset sales, and the resulting available revolver capacity.
- Assess liquidity and funding needs against the $1.4 billion drilling and completion budget, near-zero cash balance, debt maturities, interest costs and covenant terms.
- Review hedge volumes, settlement exposure and the effect of commodity prices and differentials on realized sales and reserve values.