Battalion Oil Corporation — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. Amounts are in U.S. dollars; financial statement amounts below are in millions unless otherwise noted. Battalion is an independent oil and gas company focused on the Delaware Basin in West Texas.
Financial results and key metrics
| Metric | Q1 2021 | Q1 2020 | Change / context |
|---|---|---|---|
| Operating revenue | $55.5 | $47.4 | Up $8.1, or about 17%; higher realized prices more than offset lower production. |
| Operating income (loss) | $13.7 | ($2.2) | Operating margin was about 24.7%, versus about negative 4.6%. |
| Net income (loss) | ($33.4) | $114.5 | Includes a $45.7 derivative loss in 2021 versus a $118.3 derivative gain in 2020. |
| Basic and diluted EPS | ($2.06) | $7.07 | Weighted-average shares were 16.2 million in both periods. |
| Operating cash flow | $13.4 | $12.3 | Capital expenditures were $13.8 in 2021. |
| Cash and cash equivalents | $1.7 | $4.3 at Dec. 31, 2020 | Cash declined $2.6 during the quarter. |
| Total debt | $157.2 | $160.2 at Dec. 31, 2020 | Includes $155.0 under the revolving facility and a $2.2 PPP loan. |
Current assets were $44.5 million and current liabilities were $118.8 million at quarter-end. The resulting current ratio based on reported balance-sheet totals was about 0.37; the credit agreement’s current-ratio test was suspended until the quarter ending December 31, 2021. Long-term debt was $155.1 million. The company reported $32.5 million of availability under the $190 million borrowing base at March 31, after $155 million drawn and approximately $2.5 million in letters of credit.
Material changes versus the prior period
- Average realized price, excluding the effects of settled hedges, rose to $42.84 per Boe from $27.50; average daily production fell to 14,333 Boe/d from 18,791 Boe/d.
- Production fell mainly due to declines in non-core areas, the December 2020 asset divestiture, and February 2021 weather-related shut-ins. The company estimated the weather-related impact at approximately 1,300 Boe/d. Monument Draw production increased with new wells.
- Oil and gas sales rose to $55.3 million from $47.0 million. Natural gas revenue increased to $9.1 million from $0.4 million, while oil revenue declined slightly to $41.3 million from $41.9 million.
- Operating expenses totaled $41.8 million versus $49.6 million. Lower lease operating costs and depletion helped; gathering and other expense increased to $13.2 million from $10.5 million, including higher third-party sour-gas marketing fees and weather-related electricity and fuel costs.
- Depletion, depreciation and accretion declined to $10.6 million from $18.0 million, partly because 2020 full-cost ceiling-test impairments reduced the depletable base.
- Derivative fair value shifted materially: the company recorded a $36.1 million unrealized loss and $9.7 million realized loss in Q1 2021, compared with a $112.4 million unrealized gain and $5.9 million realized gain in Q1 2020. At March 31, derivative assets were $1.5 million and liabilities were $51.4 million, shown gross on the balance sheet.
Outlook, financing, risks and unusual items
- Management expected to spend approximately $40–$50 million on drilling, completion, support infrastructure and other capital costs during 2021, funded with cash, operating cash flow and, if needed, credit-facility borrowings. No production or earnings guidance was provided in the filing text.
- A May 10, 2021 credit amendment, after quarter-end, reduces the borrowing base from $190 million to $185 million effective June 1 and to $175 million effective September 1. It also increases certain collateral requirements, revises covenants and restricts certain asset dispositions and swap terminations. A further borrowing-base reduction could constrain liquidity or require repayment if borrowings exceed the base.
- The company reported compliance with its financial covenants at March 31, 2021, following prior amendments and waivers. Management cautioned that future relief is not assured and that alternative financing, if available, could be more costly or restrictive.
- The revolving facility requires hedging at least 65% of anticipated production from proved developed producing reserves through December 31, 2022. Management’s stated general objective was to hedge approximately 65%–85% of anticipated production for up to 30 months. Hedging reduces exposure to price declines but may limit gains if prices rise.
- The company had a minimum sour-gas treating volume commitment through June 30, 2022, with expected payments of approximately $7.3 million for the rest of 2021 and $4.8 million in 2022. It also has long-term gathering, transportation and sales contracts covering a substantial portion of Delaware Basin production.
- The company intends to seek forgiveness of its approximately $2.2 million PPP loan but stated that forgiveness is not assured. Management believed pending legal proceedings would not have a material effect.
- Key risks cited include oil and gas price volatility, COVID-19 and economic conditions, ability to generate cash and maintain liquidity, borrowing-base and covenant risk, production declines, weather and operating disruptions, and availability of sour-gas treatment and takeaway capacity.
Important facts for investors to verify
- Whether operating cash flow and the planned capital program can be sustained as cash was only $1.7 million at quarter-end.
- The effect of the scheduled borrowing-base reductions and fall 2021 redetermination on available liquidity, covenant compliance and required repayments.
- Realized commodity prices, production trends and weather-related or divestiture-related volume impacts.
- The cash and earnings effects of derivative settlements and changes in mark-to-market values, including hedge volumes and pricing terms.
- Progress on PPP loan forgiveness and the company’s ability to meet sour-gas treating commitments and production transportation needs.