Filing identity and reporting period
The supplied filing is Halcón Resources Corporation’s unaudited Form 10-Q for the quarter ended June 30, 2017, not a filing identified as Battalion Oil Corp. The summary below reflects the filing text provided. Halcón is an independent U.S. oil and natural gas company. Its financial statements distinguish “Successor” results after emergence from Chapter 11 on September 9, 2016 from “Predecessor” results before then; the company cautions that the periods are not directly comparable because of fresh-start accounting.
Unless noted otherwise, financial amounts below are in millions of dollars. Production volumes and prices are stated as reported.
Key financial results and position
| Metric | Three months ended June 30, 2017 | Six months ended June 30, 2017 |
|---|---|---|
| Operating revenue | $120.1 | $255.7 |
| Net income | $20.2 | $209.5 |
| Net income (loss) available to common shareholders | $(27.0) | $161.5 |
| Operating cash flow | Not provided separately for the quarter | $122.6 |
| Investing cash flow | Not provided separately for the quarter | $(580.0) |
| Financing cash flow | Not provided separately for the quarter | $457.4 |
- Revenue and production: Q2 oil, gas and NGL sales were $119.9 million. Average daily production was 36,308 Boe/d, versus 35,879 Boe/d in Q2 2016; realized price excluding hedge settlements was $36.30/Boe versus $32.39/Boe. For the first half, sales were $254.7 million, average production was 37,387 Boe/d versus 37,703 Boe/d, and realized price was $37.64/Boe versus $27.16/Boe.
- Profit and unusual items: First-half net income included a $235.7 million gain on the East Texas asset sale and a $50.6 million derivative gain, offset in part by a $56.9 million debt-extinguishment loss and $12.0 million income-tax provision. Q2 net income included a $4.5 million sale-gain adjustment and a $24.2 million derivative gain. A $47.2 million non-cash preferred dividend contributed to the Q2 loss available to common shareholders.
- Margins and costs: The filing does not provide a single operating-margin or EBITDA measure. Q2 lease operating expense was $6.17/Boe, gathering and other expense $3.58/Boe, and depletion $9.20/Boe. First-half figures were $6.06, $3.51 and $9.13 per Boe, respectively. Management attributed higher lease operating and workover costs in part to Bakken activity and, in Q1, weather-related workovers.
- Cash generation and spending: First-half operating cash flow declined from $142.7 million in the comparable 2016 period. Investing outflow principally reflected acquisitions, including $705.3 million in cash expenditures for the Pecos County assets, and $121.2 million of oil and gas capital expenditures; $487.5 million of proceeds from the East Texas divestiture partly offset spending. Cash was $21,000 at June 30.
- Debt and liquidity: Balance-sheet long-term debt, net, was $1,093.5 million; reported debt principal was approximately $1.116 billion. The company had $153.0 million drawn on its revolving facility, $6.4 million of letters of credit, and about $490.6 million of borrowing capacity under a $650 million borrowing base. Current assets of $157.5 million compared with current liabilities of $228.3 million. Halcón reported compliance with its credit-facility financial covenants at quarter-end.
Material changes versus comparable periods
- Q2 revenue increased to $120.1 million from $106.1 million, while the reported net result shifted from a $374.3 million loss to $20.2 million income. The comparison is affected by the prior-year $257.9 million ceiling-test impairment and a large prior-year derivative loss.
- First-half revenue increased to $255.7 million from $187.5 million, while net income moved from a $914.3 million loss to $209.5 million income. The 2016 period included $754.8 million of ceiling-test impairment and $28.1 million of other operating-asset impairment; 2017 included the $235.7 million divestiture gain and a $56.9 million debt-extinguishment loss.
- Average first-half production was slightly lower year over year, reflecting the East Texas divestiture, partly offset by Pecos County acquisition production and increased Bakken/Three Forks production. Higher realized prices contributed to higher sales.
- Debt refinancing replaced $700 million principal amount of 8.625% second-lien notes due 2020 with $850 million of 6.75% senior unsecured notes due 2025. The company also raised approximately $400.1 million in preferred-stock proceeds; the preferred shares converted into 55.2 million common shares in April, increasing dilution.
Outlook, risks and contingencies
- Planned Williston sale: After quarter-end, Halcón agreed to sell its operated Williston Basin assets for $1.4 billion, subject to adjustments and closing conditions, with closing expected in September 2017. The buyer placed a $140 million deposit in escrow. The sale was not complete as of the filing, and the company cautioned it might not close on the expected terms or timing, or at all.
- The Williston assets represented approximately 71% of year-end 2016 proved reserves and 79% of Q2 2017 average daily production. Following a sale, Halcón expected to concentrate on the Southern Delaware Basin, where it said it had less operating experience and substantial undeveloped acreage. Management said sale proceeds were intended for repayment of the 12% second-lien notes, a required offer to repurchase some 2025 notes, repayment of revolving borrowings, and general corporate purposes. The borrowing base was expected to decline after the sale.
- Holders of approximately 99% of the 2025 notes consented to indenture amendments. If the Williston sale closes, Halcón must offer to repurchase up to 50% of outstanding 2025-note principal at 103% of principal, plus accrued interest; consenting holders received a 2% consent fee, approximately $16.9 million.
- Management cited volatile commodity prices, access to capital, reserve replacement and development, production declines, costs, transportation and gathering capacity, and the ability to execute planned drilling as key risks. Lower prices could pressure cash flow, capital spending and full-cost ceiling calculations. The June 2017 ceiling test did not require impairment, but future results could change with prices, reserves, production and development costs.
- Commitments included $34.6 million of remaining drilling and hydraulic-fracturing obligations, with $9.7 million of estimated early-termination penalties, plus $13.6 million of operating-lease obligations and $6.5 million of rig-stacking commitments. The company also had acreage options and drilling commitments in Ward and Winkler Counties. Management said pending legal matters were not expected to have a material effect; no material legal contingency value was specified.
- No formal earnings, production or capital-spending guidance is provided in the supplied filing text. Management described planned Delaware Basin development and potential acquisitions, subject to financing, commodity prices and transaction completion.
Important facts for investors to verify
- Confirm the filing entity: the supplied 10-Q is for Halcón Resources Corporation, not Battalion Oil Corp.
- Check whether the $1.4 billion Williston divestiture closed, its final adjusted proceeds, and the effect on production, reserves and the revolving-credit borrowing base.
- Verify how sale proceeds were applied, including debt repayments and the 2025-note repurchase offer, and review debt balances and covenant headroom after the transaction.
- Assess the company’s very low reported cash balance, current-liability position, cash generation, and funding needs for planned drilling and acquisitions.
- Separate recurring operating performance from the East Texas sale gain, derivative mark-to-market effects, preferred-stock accounting charge and debt-extinguishment loss; also account for fresh-start non-comparability and share dilution.
- Review Delaware Basin drilling results and the economic viability of the undeveloped acreage, as well as exposure to commodity prices, transport constraints and required delivery commitments.