Battalion Oil Corp. — Q3 2022 Form 10-Q
Business context and reporting period. Battalion is an independent oil and gas company focused on liquids-rich assets in the Delaware Basin of Texas. This unaudited report covers the three and nine months ended September 30, 2022; comparisons are with the same 2021 periods. The company reported average production of 16,228 Boe/d in Q3 and 15,352 Boe/d for the first nine months.
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Operating revenue | $99.1 million | $80.8 million | $282.3 million | $200.7 million |
| Operating income | $43.9 million | $33.5 million | $127.5 million | $68.1 million |
| Net income (loss) | $105.9 million | $13.1 million | $26.2 million | $(54.3) million |
| Operating cash flow | Not separately provided | Not separately provided | $53.8 million | $47.1 million |
- Q3 operating margin was approximately 44% of revenue, versus approximately 41% in Q3 2021. These figures are calculated from reported operating income and revenue.
- Q3 diluted earnings per share were $6.42, versus $0.79; nine-month diluted EPS was $1.59, versus a loss of $3.34.
- Q3 net income included a $67.6 million derivative gain, principally a $102.1 million unrealized gain offset by $34.5 million of realized losses. Nine-month results included an $88.1 million net derivative loss, including $112.0 million of realized losses. Derivative marks therefore materially affected reported earnings.
- Average realized price, excluding hedging effects, increased about $16.75/Boe in Q3 and $21.07/Boe for the nine-month period. Production volumes declined year over year in both periods.
- For the nine months, capital spending was $87.0 million, largely for drilling and completion. Cash and restricted cash decreased by $14.8 million to $33.6 million; investing cash outflow was $87.8 million and financing inflow was $19.2 million.
- At September 30, cash and cash equivalents were $33.5 million. Debt principal was $220.0 million; reported debt, net of issuance costs and other adjustments, was $204.4 million, including $25.0 million current. Current assets were $92.6 million and current liabilities $166.9 million. The company reported a 0.96 covenant current ratio under the credit agreement’s definitions.
Changes, outlook and risks
- Revenue rose year over year, principally from higher realized commodity prices, partly offset by lower production. Q3 average daily production was 16,228 Boe/d versus 17,728; nine-month production was 15,352 Boe/d versus 15,890. Management attributed lower output in part to capital-spending timing and natural declines.
- Operating costs increased: nine-month lease operating expense was $8.52/Boe versus $7.29; taxes other than income were $3.80/Boe versus $2.12; and gathering and other costs were $11.40/Boe versus $10.01. Management cited higher maintenance, power, chemical, service and materials costs, and increased sour-gas marketing fees.
- For 2022, management expected capital expenditures of approximately $130 million to $150 million. The company reported drilling and casing eight gross (7.5 net) operated wells and bringing five gross (4.5 net) wells online during the first nine months.
- In May 2022, Battalion formed a joint venture for an acid-gas treatment facility, retaining a 5% interest while its partner funds construction. Management expected service in Q1 2023 and estimated treating fees could decline by more than 50% once operational; timing and savings are subject to execution and other risks. The gas-treating agreement includes a 20 MMcf/day minimum-volume commitment for an initial five years.
- Subsequent debt amendment: On November 14, 2022, the company paid approximately $2.4 million and amended its term loan. The amendment converted the benchmark to SOFR and raised the margin to 7.50%; reset prepayment premiums; and temporarily reduced the minimum current-ratio covenant to 0.90 for Q3 2022, 0.70 for Q4 2022 and 0.75 for Q1 2023, returning to 1.00 thereafter. It also requires $120 million of scheduled amortization from Q1 2023 through Q3 2025 and may require excess-cash prepayments beginning in 2023. The amendment brought the reported Q3 covenant ratio into compliance; the company had previously been below the original covenant.
- Key risks include commodity-price volatility and hedge exposure, debt service and covenant compliance, supply-chain and inflation pressures, production declines, sour-gas treatment and takeaway capacity, and possible delays or cost increases. The company also disclosed Louisiana environmental-damage claims for which total exposure was not determinable; it intends to contest them. It reported no material changes to the risk factors in its 2021 Form 10-K.
Important facts for investors to verify
- How much of Q3’s unusually high net income reflects noncash derivative revaluation rather than recurring operating performance, and how hedges affect future realized prices.
- Whether production growth and the 2022 capital program are achieved, and whether higher operating and service costs persist.
- Liquidity, covenant headroom and ability to meet the amended loan’s amortization and potential excess-cash repayment requirements; verify the amendment’s full terms and any future financing or covenant changes.
- Whether the acid-gas facility reaches service as expected and delivers the projected treating-cost reduction, while meeting its minimum-volume commitment.
- The eventual outcome and potential financial exposure from Louisiana environmental claims and other disclosed commitments.