Battalion Oil Corp. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Unaudited results. Battalion is an independent oil and gas company focused on liquids-rich assets in the Delaware Basin, Texas.
Financial and operating performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Operating revenue | $64.4 million | $18.5 million | $119.9 million | $65.9 million |
| Operating income (loss) | $20.9 million | $(91.0) million | $34.6 million | $(93.2) million |
| Net income (loss) | $(33.9) million | $(127.3) million | $(67.3) million | $(12.8) million |
| Operating cash flow | Not presented separately | Not presented separately | $29.1 million | $43.1 million |
| Capital expenditures | Not presented separately | Not presented separately | $37.6 million | $91.2 million |
| Average production | 15,571 Boe/d | 14,264 Boe/d | 14,956 Boe/d | 16,527 Boe/d |
- Q2 operating margin was approximately 32.5%; six-month operating margin was approximately 28.9%. Net losses persisted, with derivative losses weighing heavily on reported results.
- For the first six months, average realized price excluding hedging effects rose $22.47 per Boe to $44.10. Revenue increased despite average production falling about 9.5% year over year. Q2 production was higher year over year, supported by new wells and wells returned to production.
- Six-month operating cash flow declined by $14.0 million year over year, partly reflecting derivative settlement results and the prior-year receipt of proceeds from early hedge terminations. Cash used in investing was $36.7 million; net financing cash flow was $4.7 million. Cash declined $2.8 million to $1.5 million.
Balance sheet, debt and liquidity
- At June 30, 2021, total debt was $165.2 million, including $163.0 million under the senior revolving facility and a $2.2 million PPP loan. Debt was up $5.0 million from year-end 2020.
- The senior facility’s borrowing base was $185 million, with $163 million drawn and approximately $1.9 million of letters of credit; reported borrowing capacity was $20.1 million. The base was scheduled to fall to $175 million on September 1, 2021, before a further fall redetermination in autumn.
- Current assets were $42.3 million and current liabilities $139.0 million, implying negative working capital of approximately $96.7 million. Current liabilities include $71.4 million of current derivative liabilities. Stockholders’ equity was $23.6 million.
- The company reported compliance with financial covenants at June 30 after amendments. Testing of the minimum current-ratio covenant was suspended through the quarter ending December 31, 2021.
Material changes, outlook and risks
- Six-month net loss worsened from the prior year despite higher revenue and operating income. The main driver was a $98.8 million net derivative loss in 2021, compared with an $83.5 million derivative gain in 2020. Q2 derivative loss was $53.1 million. At June 30, derivative liabilities totaled $86.6 million, versus $26.4 million at December 31, 2020.
- The 2020 comparison included a $60.1 million full-cost ceiling impairment and $2.6 million of restructuring charges; neither recurred in the first half of 2021. The 2020 six-month derivative result also included gains, including proceeds from early contract terminations.
- Management expected 2021 drilling, completion, infrastructure and other capital spending of $40–$50 million; $37.6 million had been spent in the first half. Management expected to fund spending with cash, operating cash flow and, if needed, revolver borrowings.
- Management described commodity prices as volatile and flagged pandemic effects, production interruptions, third-party processing curtailments, facility downtime, sour-gas handling and transport capacity, and potential lender borrowing-base reductions as risks to cash flow and liquidity. The company said the fall borrowing-base review could reduce liquidity or require repayment if borrowings exceed the revised base.
- The company hedges production but does not apply hedge accounting, so mark-to-market movements affect reported earnings. Its stated hedge objective is generally 65%–85% of anticipated production for up to about 30 months; credit terms require at least 65% of anticipated proved-developed-producing production to be hedged through December 31, 2022.
- A minimum sour-gas treating commitment requires payments of approximately $4.9 million for the remainder of 2021 and $4.8 million in 2022. Management was pursuing forgiveness of the PPP loan but gave no assurance that forgiveness would be granted. Management said pending legal matters were not expected to have a material effect.
Key facts for investors to verify
- Outcome of the scheduled borrowing-base reduction and fall 2021 redetermination, including available borrowing capacity and covenant headroom.
- Operating cash generation and capital spending relative to the $40–$50 million 2021 plan, especially given low cash and negative working capital.
- Derivative contract exposure, settlement cash requirements, and sensitivity of reported earnings and liquidity to commodity-price changes.
- Production recovery and constraints from weather, processing curtailments, facility work and sour-gas treatment or takeaway capacity.
- Status of PPP loan forgiveness and the company’s ability to meet sour-gas minimum-volume commitments.