Filing summary
Filing identity: The request identifies Battalion Oil Corp., but the supplied 10-Q is for Halcón Resources Corporation. It covers the quarter ended June 30, 2013 and was signed August 1, 2013. Confirm the intended company before relying on this summary.
Business context and reporting period
Halcón is an independent U.S. onshore oil and natural gas company focused on liquids-rich assets. Its 2013 results reflect a much larger business following the GeoResources, East Texas and Williston Basin acquisitions completed in 2012. The financial statements are unaudited.
Key financial metrics
| Metric | Three months ended June 30, 2013 | Six months ended June 30, 2013 |
|---|---|---|
| Operating revenue | $214.3 million | $405.2 million |
| Income from operations | $31.8 million | $63.9 million |
| Net income | $37.1 million | $42.6 million |
| Net income available to common stockholders | $36.4 million; $0.10 basic EPS and $0.08 diluted EPS | $41.8 million; $0.12 basic EPS and $0.11 diluted EPS |
| Operating cash flow | Not provided separately for the quarter in the supplied text | $229.9 million |
| Capital expenditures and other investing cash flows | Not provided separately for the quarter in the supplied text | $1.17 billion net cash used in investing; $1.02 billion of oil and gas capital expenditures |
Second-quarter operating and net margins were approximately 14.9% and 17.3%, respectively; the net result included a $34.1 million derivative gain. For the first half, operating and net margins were approximately 15.8% and 10.5%. These calculated margins should be read in light of acquisition-related changes and noncash items.
- Average daily production was 29,165 Boe in Q2 and 27,602 Boe for the first half. First-half production increased 593% from 3,984 Boe per day in 2012.
- First-half realized revenue per Boe was $80.85, versus $69.22 in 2012. Oil averaged $92.52 per barrel; natural gas averaged $3.39 per Mcf.
- At June 30, cash was $3.1 million; current assets were $296.2 million and current liabilities $714.7 million. The resulting current-asset shortfall was partly offset for covenant purposes by unused revolver availability.
- Total long-term debt was $2.714 billion, including $343 million drawn on the revolver. The company reported $505.8 million of revolver availability and compliance with its financial covenants at June 30. Cash and cash equivalents ended the half at $3.1 million.
Material changes versus the prior comparable period
- Q2 revenue rose to $214.3 million from $23.3 million, and net income was $37.1 million versus $7.7 million. First-half revenue was $405.2 million versus $50.3 million, and net income was $42.6 million versus a $25.7 million loss.
- Management attributed the increase primarily to acquisitions and development: first-half daily production increased by 23,618 Boe, and acquired assets accounted for most of the production and revenue growth. Accordingly, prior-year comparisons are not on a like-for-like asset base.
- First-half operating cash flow improved from a $2.7 million use to $229.9 million provided. Investment spending rose sharply, with net investing cash outflow of $1.17 billion versus $500.8 million in the prior-year period.
- Debt increased from $2.03 billion at December 31, 2012 to $2.71 billion at June 30, 2013. The company issued an additional $600 million of 8.875% notes in January and raised $345 million gross through Series A preferred stock in June; net preferred proceeds of $335.5 million were used to repay revolver borrowings.
- First-half depletion, depreciation and accretion increased to $177.2 million from $11.9 million, largely reflecting acquired properties, higher production and a higher depletion rate per Boe.
Outlook, risks, contingencies and unusual items
- Management increased its 2013 drilling and completion budget from approximately $1.2 billion to $1.4 billion. It expected to fund capital needs through operating cash flow, potential asset sales and capital-market transactions, and revolver borrowings; the budget remains subject to change.
- On July 19, 2013, after quarter-end, Halcón sold its Eagle Ford interests in Fayette and Gonzales Counties for estimated proceeds of approximately $144 million before adjustments. Proceeds were to reduce the full-cost pool without a reported gain or loss; the revolver borrowing base was reduced from $850 million to $810 million.
- Commodity price exposure is partly managed with derivatives. The company generally targeted hedging approximately 70%–80% of current and anticipated production over the next 18–24 months, but derivative fair-value changes flow through earnings because the contracts were not designated for hedge accounting. No open interest-rate swaps were in place at June 30.
- Management identified substantial capital requirements, possible borrowing-base reductions, debt covenants, volatile commodity prices, production and reserve uncertainty, operating and environmental risks, and access to infrastructure and services as material risks. It specifically warned that inadequate access to debt or equity funding could force reduced drilling or asset sales.
- Operating lease commitments totaled approximately $66.7 million; early termination of drilling-rig commitments could incur penalties of approximately $42.6 million. Management said pending legal matters were not expected to have a material effect. No change in risk factors was reported apart from newly described financing, contractual-limitation and cybersecurity risks.
- Other notable items include a $0.7 million preferred dividend for Series A preferred stock and a 38.3% estimated annual effective tax rate. The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm whether the intended filing is Halcón Resources Corporation’s 2013 Q2 10-Q or a Battalion Oil Corp. filing.
- Review the sustainability and comparability of production growth given its dependence on major acquisitions and ongoing drilling investment.
- Assess liquidity and refinancing risk: cash was low, current liabilities exceeded current assets, and the company depended on operating cash flow, financing markets and revolver capacity.
- Separate recurring operating performance from derivative gains, noncash depletion and capitalized interest; Q2 earnings included a material unrealized derivative gain.
- Check execution of the $1.4 billion drilling budget, results of the Eagle Ford sale, and the effects of borrowing-base redeterminations and debt covenants.