Filing Summary: Halcón Resources Corporation, Q1 2018
Registrant identity: The supplied filing is Halcón Resources Corporation’s Form 10-Q, not a filing under the name Battalion Oil Corp. Verify that this is the intended company before relying on the summary.
Business context and reporting period
The unaudited report covers the three months ended March 31, 2018, with comparisons to Q1 2017. Halcón describes itself as a U.S. onshore oil and gas company focused on liquids-rich assets. Following 2017 divestitures, its operations and drilling plans were concentrated in the Delaware Basin of West Texas.
Financial and operating performance
- Revenue: Operating revenue was $49.3 million, down from $135.6 million. Oil, gas and NGL sales were $49.1 million versus $134.8 million.
- Production and pricing: Average production fell to 10,967 Boe/d from 38,478 Boe/d, primarily due to 2017 asset sales. Realized prices excluding settled hedges rose to $49.75/Boe from $38.92/Boe; oil averaged $62.15/Bbl versus $46.57/Bbl.
- Profit and margins: Halcón reported a $2.6 million net loss, or $0.02 per share, compared with $189.4 million net income, or $2.07 basic EPS. Q1 2017 results included a $231.2 million gain on the El Halcón divestiture; Q1 2018 included a $3.7 million reduction to the previously recorded Williston sale gain. Operating loss was $1.5 million in Q1 2018, versus operating income of $256.7 million in Q1 2017, substantially affected by those divestiture gains.
- Costs: Lease operating expense was $4.9 million ($4.98/Boe), down from $20.6 million ($5.96/Boe). Gathering and other expense was $6.4 million ($6.51/Boe), compared with $11.9 million ($3.45/Boe); infrastructure operating costs increased as a component. G&A was $15.2 million including stock compensation, versus $20.8 million; G&A per Boe increased to $11.78 from $6.02, reflecting lower production.
- Cash flow: Operating cash flow was negative $12.6 million, compared with positive $45.6 million. Investing cash outflow was $293.0 million, including $132.5 million of acquisitions and $127.9 million of oil and gas capital spending. Financing provided $263.6 million. Cash declined by $42.0 million to $382.1 million.
- Liquidity: Current assets were $447.7 million and current liabilities $140.1 million. The balance-sheet figures imply a current ratio of about 3.2x. Cash was $382.1 million.
- Debt: Long-term debt, net, was $612.1 million, up from $409.2 million; principal outstanding on the 6.75% senior notes due 2025 was approximately $625.0 million. No revolving-credit borrowings were outstanding at quarter-end. The company issued $200 million principal of additional notes in February.
- Hedges: Derivatives generated a $5.9 million net gain, including $11.1 million unrealized gain and $5.2 million realized loss. At quarter-end, derivative assets were $18.1 million and liabilities were $33.5 million.
Material changes and transactions
- Halcón raised approximately $202.5 million net from additional 6.75% notes and approximately $60.4 million net from a February common-stock offering of 9.2 million shares.
- It acquired the Northern Tract of the Monument Draw assets for approximately $108.2 million in January. The $199.1 million West Quito Draw acquisition closed April 4, after quarter-end, and was funded with the note and equity proceeds.
- The February amendment to the revolving credit agreement waived the March-quarter leverage covenant, provided temporary EBITDA calculation flexibility and set a 4.50:1.00 debt-to-EBITDA limit for Q2 2018, returning to 4.00:1.00 thereafter. Halcón said it was compliant at March 31 after the amendment. A May amendment left the $1.0 billion facility and $200 million borrowing base unchanged.
- ASC 606 adoption reduced both reported natural gas revenue and gathering expense by $0.2 million, with no opening retained-earnings effect.
Outlook, risks and contingencies
- For 2018, management expected $425–475 million of drilling and completion spending and $70–90 million for infrastructure, seismic and other items. It planned to add a fourth operated rig in May. These are forward-looking estimates, not guarantees.
- Management attributed the steep year-over-year production and cash-flow declines primarily to divestitures, while describing Delaware Basin development as its growth strategy. It warned that drilling takes time to replace sold production and that covenant compliance may remain sensitive to production, costs, transportation and commodity prices.
- The borrowing base was $100 million at March 31, with $98.4 million available after letters of credit; it was subsequently redetermined to $200 million. The next redetermination was expected in fall 2018.
- Commodity-price volatility, reserve and production uncertainty, access to capital, infrastructure and takeaway capacity, and the full-cost ceiling test are material risks. No impairment was recorded at March 31, but sustained lower prices could affect future impairment calculations.
- Substantial Delaware Basin production was committed under long-term gathering, transportation and sales contracts for periods of one to 15 years. Active rig commitments totaled $13.8 million; early termination penalties would be approximately $11.7 million. Lease, rig-stacking and other contractual obligations are also disclosed.
- Two purchasers accounted collectively for 89% of Q1 sales, creating customer concentration exposure. Halcón also reported a related-party aircraft payment of approximately $0.5 million to its CEO during the quarter.
- Management and counsel said pending ordinary-course legal matters were not expected to have a material effect. The filing reported no changes to the 2017 Form 10-K risk factors and no material change in internal controls.
Important facts for investors to verify
- Confirm the issuer: the filing identifies Halcón Resources Corporation, whereas the request identifies Battalion Oil Corp.
- Review the post-quarter West Quito Draw closing, purchase-price adjustments and expected production contribution.
- Assess the ability to replace divested production, deliver the 2018 capital program and generate positive operating cash flow.
- Monitor debt, covenant headroom, borrowing-base redeterminations and access to financing.
- Evaluate hedge coverage and terms, purchaser concentration, long-term midstream commitments and commodity-price sensitivity.