Halcón Resources Corporation (formerly RAM Energy Resources, Inc.) — Q1 2012 Form 10-Q
Entity note: The supplied filing is for Halcón Resources Corporation, not Battalion Oil Corp. It covers the three months ended March 31, 2012; the unaudited financial statements compare with Q1 2011. Halcón was an independent U.S. oil and gas exploration and production company.
Financial performance
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Operating revenue | $26.9 million | $25.8 million |
| Operating loss | $9.8 million | Operating income $5.8 million |
| Net loss | $33.3 million | $9.9 million |
| Net loss per common share | $0.50 | $0.38 |
| Cash from operations | $(9.2) million | $4.2 million |
| Capital expenditures for oil and gas properties | $24.0 million | $5.6 million |
Oil and gas sales rose 4.3% to $26.8 million. Higher realized prices—especially oil—more than offset lower production. Average daily output fell 6% to 4,055 Boe; oil production increased modestly, while natural gas and NGL volumes declined. Average realized price was $74.28 per Boe after cash derivative settlements, versus $68.62.
Operating expenses increased to $36.7 million, driven principally by general and administrative expense of $20.3 million versus $4.5 million. This included change-in-control costs, severance-related and professional fees, and accelerated share-based compensation. Interest expense rose to $13.0 million, including costs of terminating old credit facilities. Derivative contracts produced a $4.9 million net loss, substantially lower than the $14.3 million loss in Q1 2011. The company recorded a $5.6 million income tax provision despite a pretax loss, partly reflecting limits on interest deductibility and tax attributes.
Balance sheet, liquidity and financing
- At March 31, cash was $685.8 million, total current assets $704.9 million and current liabilities $23.9 million. Total assets were $969.4 million and stockholders’ equity $672.9 million.
- Long-term debt carrying value was $235.5 million, including an unamortized discount on the $275 million, 8% senior convertible note. The note matures in February 2017 and may be converted after February 2014. The company elected to add $3.2 million of Q1 interest to principal.
- A new $500 million secured revolving credit facility had a $225 million borrowing base; no amount was drawn at quarter-end, and the company reported compliance with its covenants. The former revolving and term facilities were repaid and terminated.
- Financing activities provided $723.3 million in cash, principally from the February recapitalization and a $400 million gross preferred-stock placement in March. Cash increased by $685.7 million during the quarter. The preferred stock converted into 44.4 million common shares on April 17, 2012.
- Net derivative liabilities were $5.7 million at quarter-end. The company’s disclosed estimated fair value of the note, $783.9 million, substantially exceeded its $235.5 million carrying value.
Material changes, outlook and risks
- The February recapitalization brought a change in control, new leadership and the company’s name change to Halcón Resources. Related charges included management change-in-control payments, accelerated equity compensation, prior-debt repayment costs and transaction fees.
- Management said near-term spending would be funded by financing proceeds, operating cash flow, potential asset sales and revolver capacity. It planned continued drilling and acreage acquisition in targeted resource plays; the filing gives no specific production, earnings or capital-spending guidance.
- In March, Halcón announced plans to close its Plano office and move key administrative functions to Houston. Estimated severance and retention expense was approximately $3.4 million, recognized through May 2013 as applicable.
- On April 24, Halcón agreed to acquire GeoResources for $20 cash and 1.932 Halcón shares per GeoResources share, a transaction valued at approximately $1.0 billion based on the cited market price. Closing was expected in Q3 2012, subject to shareholder, regulatory and other conditions. Four putative class actions challenged the merger consideration and process; Halcón said it considered them without merit and intended to defend them.
- Key risks include volatile oil and gas prices, production declines, drilling and reserve uncertainty, access to capital and infrastructure, and the ability to complete and integrate the GeoResources transaction. The recapitalization also imposed Section 382 limitations on pre-change net operating losses. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the issuer identity: this filing is Halcón Resources, not Battalion Oil Corp.
- Review the recapitalization securities’ terms, dilution, the note’s discount and conversion provisions, and the preferred stock’s subsequent conversion.
- Assess the sustainability of cash balances and planned spending against negative operating cash flow, debt service and the borrowing-base redetermination terms.
- Check the merger’s closing status, consideration, financing needs, litigation developments and potential dilution; the transaction was pending at the filing date.
- Evaluate production trends, hedge volumes and payoff exposure, commodity-price sensitivity, and the tax effects of the ownership change and interest-deduction limits.