BATTALION OIL CORP annual report, FY2022

Battalion Oil Corp. — FY 2022 Form 10-K

Reporting period: Year ended December 31, 2022; comparisons are with FY 2021 unless noted. Battalion is an independent oil and gas producer focused on the Delaware Basin in West Texas. It reported 40,375 net acres and average net production of 15,438 Boe/d.

Financial and operating performance

Metric	FY 2022	FY 2021
Operating revenue	$359.1 million	$285.2 million
Operating income	$152.1 million	$103.4 million
Net income (loss), audited statements	$18.5 million	($28.3) million
Operating cash flow	$78.8 million	$68.6 million
Capital expenditures	$125.5 million	$52.6 million
Cash and cash equivalents at year-end	$32.7 million	$46.9 million
Debt principal at year-end	$235.0 million	$200.0 million

Revenue grew about 26%, mainly from higher commodity prices; oil, gas and NGL production revenue rose to $357.4 million. Average unhedged realized price increased to $63.43/Boe from $47.93/Boe.
Production declined about 5% to 5.64 million Boe (15,438 Boe/d), from 5.93 million Boe (16,241 Boe/d). Nine gross (8.5 net) operated wells were brought online.
Operating margin was approximately 42% of revenue; net margin was approximately 5%. Production costs rose: total average production cost increased to $24.39/Boe from $20.23/Boe, reflecting inflation and higher sour-gas treatment costs.
Derivative contracts produced a $110.0 million net loss, including $130.3 million of realized losses partly offset by a $20.3 million unrealized gain. These losses materially reduced the benefit of higher unhedged commodity prices.
Investing cash use rose to $126.1 million, mainly for oil and gas capital spending. Cash, cash equivalents and restricted cash decreased by $15.5 million during 2022.
Year-end current assets were $88.2 million versus current liabilities of $165.0 million, implying negative working capital of about $76.9 million. Debt was floating-rate; year-end weighted-average rate was 12.23%. Debt maturity was November 2025.

Material changes and financing

Revenue and operating income increased substantially, but production volumes declined and per-unit operating costs, depletion and interest expense increased. Interest expense rose to $23.6 million from $8.0 million.
Proved reserves decreased 3.9 MMBoe to 92.0 MMBoe. Proved developed reserves increased to 46.3 MMBoe; proved undeveloped reserves fell to 45.7 MMBoe, including downward revisions largely attributed to higher capital and operating costs. About half of proved reserves remained undeveloped.
The November 2022 loan amendment raised the borrowing margin and reset the rate to SOFR plus 7.65%, eased near-term current-ratio covenants, and required scheduled principal payments. The company had no additional borrowing capacity under the term loan at year-end.
On March 28, 2023, the company raised $24.4 million net through 25,000 shares of Series A convertible preferred stock sold to its three largest existing shareholders. Dividends are 14.5% annually in cash or 16% if accrued as additional liquidation preference; cash dividends were then prohibited by the loan agreement. The preferred stock is convertible at an initial $9.03 conversion price, subject to adjustments, and creates potential dilution.

Outlook, risks and unusual items

Management said operating cash flow, cash on hand and the March 2023 preferred issuance were expected to provide liquidity for near-term maturities, covenant compliance and lease-related drilling requirements. It also warned liquidity would remain constrained without additional funding and might not support production growth. Management cited approximately $45 million of debt maturities through the first quarter of 2024; the loan schedule lists $35.1 million due in 2023 and $50.1 million in 2024.
The company is exploring strategic transactions and cost reductions, including potential asset sales, financing, joint ventures or mergers. It also stated it was considering delisting and suspending SEC reporting obligations; no decision had been made.
A joint venture acid-gas treatment facility was expected to enter service in Q2 2023. The company retained a 5% interest and has a 20-year treating agreement with a minimum volume commitment of 20 MMcf/d for an initial five years. Management expected treating-fee reductions, but timing and savings were uncertain.
Key risks include commodity-price volatility, high leverage and required amortization, covenant compliance, access to capital, cost inflation and supply constraints, production declines, sour-gas handling and takeaway capacity, and environmental and regulatory requirements. Three purchasers represented 82% of 2022 sales. The company also disclosed Louisiana environmental claims with exposure not currently determinable; management intended to oppose them.
The filing reports no impairment of oil and gas properties at year-end. Reserve values depend on SEC price assumptions and estimates; the standardized measure was $1.46 billion and PV-10 was $1.57 billion, both estimates rather than market value. The auditor issued an unqualified opinion and identified reserve quantities and related depletion/impairment estimates as a critical audit matter.

Important facts for investors to verify

Near-term liquidity against scheduled debt payments, covenant thresholds and the availability and terms of any additional financing.
Preferred-stock dividend accruals, conversion and redemption terms, and resulting potential dilution.
Actual production, capital spending and reserve development compared with the company’s plans, including the ability to convert PUD reserves within five years.
Whether the acid-gas facility entered service as planned and whether it delivered the expected treatment-cost savings.
Commodity hedge volumes, realized settlements and counterparty exposure, alongside the company’s sensitivity to floating interest rates.
The MD&A states net income of $17.7 million in one passage, while the audited statements report $18.539 million; investors should confirm this textual inconsistency against the filed financial statements.