Battalion Oil Corp. — Q1 2023 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 31, 2023, compared with Q1 2022. Battalion is an independent oil and gas company focused on liquids-rich assets in the Delaware Basin of Texas.
Financial and operating metrics
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Total revenue | $65.1 million | $81.6 million |
| Operating income | $11.1 million | $33.8 million |
| Net income (loss) | $22.8 million | $(92.7) million |
| Operating margin | 17.1% | 41.4% |
| Net cash from operations | $(0.7) million | $12.0 million |
| Oil and gas capital expenditures | $28.6 million | $15.7 million |
| Cash and cash equivalents at quarter-end | $23.2 million | $32.7 million at year-end 2022 |
| Term loan principal at quarter-end | $230.0 million | $235.0 million at year-end 2022 |
Production averaged 16,200 Boe/d, up from 14,767 Boe/d (about 10%). Unhedged realized prices averaged $44.08/Boe versus $61.26/Boe. The company reported a $19.5 million derivative gain in Q1 2023, compared with a $123.9 million derivative loss in Q1 2022; Q1 2023 net income therefore includes a material, volatile derivative effect. Interest expense and other rose to $7.8 million from $2.7 million.
Current assets were $71.9 million and current liabilities $117.2 million, a working-capital deficit of about $45.3 million. Operating and investing cash outflows, partly offset by preferred-stock proceeds, reduced cash and restricted cash by $9.5 million during the quarter. Gross debt was $230.3 million, including other debt; the company reported no additional borrowing capacity under its term loan.
Material changes versus the prior comparable period
- Revenue declined about 20%, primarily due to lower commodity prices, partly offset by higher production.
- Operating income fell to $11.1 million from $33.8 million. Gathering expense, workover costs, and depletion increased; lower production taxes partly offset these pressures.
- Operating cash flow turned negative, while capital spending increased to $28.6 million.
- Net results swung from a large loss to a profit, chiefly reflecting the change in mark-to-market derivative results rather than a comparable change in underlying operations.
Outlook, liquidity, risks and unusual items
- Liquidity: Management said forecasts indicate additional liquidity is needed over the next 12 months to fund operations and debt requirements. It cited cost reductions, including an April headcount reduction, and a support letter from its three largest investors for up to $20 million of additional preferred equity as needed. Management stated it believes these resources make adequate liquidity and covenant compliance probable for the next 12 months; this depends on forecasts and investor support. The company is also pursuing other financing and strategic alternatives.
- Preferred financing: On March 28, the company received $24.4 million net proceeds from issuing $25 million of Series A redeemable convertible preferred stock to its three largest existing investors. The preferred stock carries a 14.5% annual cash dividend or a 16% PIK rate; the credit agreement currently prohibits cash dividends. The shares have conversion and redemption features and are recorded as temporary equity.
- Debt and covenants: The $230 million secured term loan matures November 24, 2025, bears SOFR plus 7.65%, and had a Q1 weighted-average rate of about 12.2% (approximately 12.5% cited at March 31 for market-risk disclosure). Scheduled amortization totals $115 million from Q2 2023 through Q3 2025. Battalion was in compliance with covenants at March 31; the current-ratio minimum was temporarily reduced to 0.75 for that date and returns to 1.00 from Q2 2023. Future compliance and liquidity remain sensitive to commodity prices, costs, production, and financing availability.
- Operations and hedging: Battalion ran one operated rig and put one operated well online in Q1. Hedges reduce some price exposure but cover less than expected production and can limit gains when prices rise. The loan requires hedging roughly 50%–85% of anticipated production on a rolling basis.
- Gas treating facility: The company reported testing and initial processing at its acid-gas treatment project. It expects the facility to reduce treating fees by more than 50% when operational, but timing and savings are uncertain. The related agreement includes a 20 MMcf/day minimum-volume commitment for an initial five-year term once in service.
- Other risks and contingencies: Risks include volatile commodity prices, floating-rate debt, supply and service costs, covenant requirements, and sour-gas treatment and takeaway capacity. Louisiana surface-owner environmental claims remain pending; the company says overall exposure is not currently determinable and intends to contest them.
Important facts for investors to verify
- Whether the investors provide the additional preferred financing contemplated by the support letter, and whether liquidity forecasts remain achievable.
- Upcoming term-loan amortization, covenant headroom after the temporary Q1 current-ratio relief, and any amendments or waivers.
- Actual production, realized prices, capital spending, and cash generation relative to management’s plans; the filing gives no specific production or capital-spending guidance.
- Progress, start-up timing, costs, and realized savings from the acid-gas facility, including compliance with its volume commitments.
- The evolving status and potential financial exposure of Louisiana environmental claims, and the effect of derivative positions on future realized prices and earnings.