Battalion Oil Corp. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; unaudited. Battalion is an independent oil and gas company operating primarily in the Delaware Basin, Texas. Financial amounts below are in millions of dollars unless noted.
Financial performance
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Operating revenue | $81.6 | $55.5 |
| Operating income | $33.8 | $13.7 |
| Net loss | $(92.7) | $(33.4) |
| Operating cash flow | $12.0 | $13.4 |
| Oil and gas capital expenditures | $15.7 | $13.8 |
| Cash, cash equivalents and restricted cash, period end | $43.6 | $1.7 |
- Oil, natural gas and NGL sales totaled $81.4 million. Oil revenue was $62.5 million, natural gas $8.9 million and NGLs $10.0 million.
- Average production was 14,767 Boe/d, up from 14,333 Boe/d. Average realized price excluding hedge effects increased $18.42 to $61.26 per Boe.
- Operating margin was approximately 41% of revenue, compared with 25% in Q1 2021. Operating expenses were $47.8 million versus $41.8 million; income tax was zero.
- Net derivative loss was $123.9 million, versus $45.7 million a year earlier. The 2022 loss included $91.0 million unrealized and $32.8 million realized losses; this was the principal driver of the larger net loss despite higher operating income.
- Operating cash flow was below capital expenditures; cash, cash equivalents and restricted cash declined $4.7 million during the quarter. Cash and cash equivalents alone were $43.5 million at quarter-end.
Balance sheet, debt and liquidity
- At March 31, total assets were $410.8 million and total stockholders’ equity was negative $29.0 million, down from positive $63.7 million at December 31, 2021, principally reflecting the quarterly net loss.
- Current assets were $91.9 million and current liabilities $190.0 million. Current liabilities included $103.2 million of derivative liabilities; working capital was negative approximately $98.1 million.
- Term-loan principal outstanding was $200.0 million; reported debt net of unamortized issuance costs was $182.5 million. The facility bears interest at LIBOR or an applicable replacement rate plus 7.00% and matures November 24, 2025. Weighted-average interest rate was 8.01%.
- The agreement provides $35.0 million of conditional delayed-draw capacity; the company drew $20.0 million on April 29, 2022. Scheduled amortization totals $120.0 million from Q1 2023 through Q3 2025. The company reported compliance with financial covenants at March 31, 2022.
Changes, outlook and risks
- Revenue rose approximately 47% year over year, mainly due to higher commodity prices; production was modestly higher, partly reflecting weather-related shut-ins in Q1 2021. Current production faced natural declines, and no new wells had been brought online since June 2021.
- During Q1 2022, Battalion drilled and cased 3 gross operated wells, completed none and placed none online. Management expects 2022 capital expenditures of approximately $130 million to $150 million.
- Management cited higher maintenance, power and chemical costs, higher workover activity, and increased gathering and marketing fees. It noted that rising prices in 2022 were associated in part with sanctions on Russia amid the conflict with Ukraine, but said future prices remain uncertain.
- Commodity hedges reduce some downside exposure but can limit gains when prices rise. The company reported $161.4 million of gross derivative liabilities at quarter-end and hedges covering a substantial portion of anticipated production; its loan agreement generally requires hedging approximately 50%–85% of anticipated production, varying by year.
- Key risks include commodity-price volatility, production declines, capital needs and debt covenant compliance, sour-gas treating and takeaway capacity, costs and availability of services, and economic or pandemic-related disruption. The filing reports approximately $4.9 million of remaining 2022 chemical minimum-volume commitments and a $2.6 million drilling-rig commitment through Q3 2022.
- Louisiana surface owners have asserted environmental-damage claims relating to former operations. The company says exposure in pending matters is not currently determinable and intends to oppose the claims. It reported no changes to the risk factors in its 2021 Form 10-K.
Important facts for investors to verify
- How the substantial derivative liability, future hedge settlements and hedge volumes may affect cash flow as commodity prices change.
- Available liquidity after the April 29 delayed draw, conditions on remaining borrowing capacity, and compliance with tightening financial covenants and scheduled amortization.
- Whether the $130 million–$150 million capital program can offset natural production declines, given no wells were completed or brought online in Q1.
- Progress on sour-gas treating and takeaway capacity, and the cost and timing of committed infrastructure and operating obligations.
- Developments in Louisiana environmental claims and any change in the currently undetermined potential exposure.