Filing identity and reporting period
Important: The supplied filing is Halcón Resources Corporation’s unaudited Form 10-Q for the quarter ended September 30, 2018—not a filing for Battalion Oil Corp. The summary below reflects Halcón’s filing. Halcón describes itself as an independent U.S. oil and gas company focused on the Delaware Basin.
Financial performance and liquidity
Amounts below are in millions of dollars unless otherwise noted.
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Operating revenue | $61.6 | $97.0 | $166.3 | $352.7 |
| Net income (loss) | $(81.8) | $419.3 | $(100.7) | $628.8 |
| Operating cash flow | Not provided separately | Not provided separately | $36.7 | $102.2 |
| Capital spending on oil and gas properties | Not provided separately | Not provided separately | $369.3 | $218.9 |
- Oil and gas sales were $61.2 million in Q3 and $165.7 million for the first nine months. Average daily production fell to 14,609 Boe/d in Q3 and 12,795 Boe/d year to date, from 28,859 and 34,513 Boe/d, respectively, mainly due to 2017 divestitures. Average realized prices, excluding hedge effects, rose to $45.57/Boe in Q3 and $47.42/Boe year to date.
- Q3 operating loss was $8.5 million; nine-month operating loss was $3.6 million. The 2017 comparison includes large divestiture gains: $491.8 million in Q3 and $727.5 million for nine months. The 2018 nine-month result also includes a $7.2 million reduction to the prior Williston sale gain from closing adjustments.
- Derivative contracts produced a $60.4 million net loss in Q3 and a $66.6 million net loss for nine months, including substantial unrealized losses. Interest expense and other was $12.9 million in Q3 and $30.5 million for nine months. No income tax benefit was recorded in 2018.
- At September 30, cash was only $0.137 million; current assets were $74.4 million and current liabilities $227.7 million. Stockholders’ equity was $1,046.5 million. The filing does not present a conventional current ratio calculation in the supplied text.
- Long-term debt, net, was $667.7 million, versus $409.2 million at year-end 2017. Debt principal was approximately $680 million: $625 million of 6.75% notes due 2025 and $55 million drawn on the revolving facility. The revolver had $143.4 million of available capacity at quarter-end, after $1.6 million of letters of credit.
Material changes versus the prior comparable period
- Revenue declined as production volumes contracted following the Williston and El Halcón divestitures, despite higher average realized prices per Boe.
- Net results swung from substantial 2017 profits to losses, principally because 2017 included major asset-sale gains; 2018 also had derivative losses and no comparable divestiture gain.
- Lease operating cost improved to $3.92/Boe in Q3 and $4.44/Boe year to date, while gathering and other costs rose to $13.69/Boe in Q3 and $8.81/Boe year to date. G&A increased per Boe year to date to $10.58, reflecting lower production.
- Cash used in investing was $778.1 million for nine months, reflecting acquisitions, drilling and infrastructure investment. Financing provided $317.5 million, including proceeds from additional notes and a common-stock offering. Cash declined by $423.9 million from year-end.
- Halcón issued $200 million of additional 6.75% notes and sold 9.2 million common shares in February 2018. It acquired the West Quito Draw properties for an adjusted $198.5 million and purchased the Northern Tract Monument Draw acreage for approximately $108.2 million.
Outlook, risks and unusual items
- Management expected Q4 2018 drilling and completion spending of $75–$95 million and infrastructure, seismic and other spending of $20–$30 million. It reduced operated rigs in the Delaware Basin from four to three. These estimates were subject to change.
- About $13.7 million of Q3 gathering and other expense related to hydrogen-sulfide treatment after a third-party pipeline went out of service. Management expected elevated treating costs to continue in Q4, ease somewhat, and decrease substantially in early 2019 as alternative capacity and purchased treatment equipment came online.
- After quarter-end, Halcón agreed to sell Delaware Basin water infrastructure for up to $325 million: $200 million cash at closing and potential incentive payments of up to $25 million annually for five years. Closing was expected in late December 2018, subject to conditions. If a separate water-supply agreement were not finalized before closing, $30 million of cash consideration could be deferred. The sale was not completed as of the filing.
- Lenders committed to increase the borrowing base from $200 million to $275 million upon closing of the water-asset sale. Subsequent November amendments adjusted leverage-covenant calculations and limits; after giving effect to the consent and Fifth Amendment, the company reported compliance at September 30. Management cautioned that modest operating or cost deviations could still affect covenant compliance and that future lender relief was not assured.
- The company’s long-term strategy was to grow Delaware Basin production and reserves, but management acknowledged that the transition and lower production made near-term covenant compliance more challenging. Key risks include commodity-price volatility, access to capital, production and reserve replacement, takeaway capacity, operating costs, and potential shortages or higher prices for rigs, materials and services. Steel and aluminum tariffs were specifically cited as a cost risk.
- Halcón reported $123.6 million of derivative liabilities and $19.3 million of derivative assets at quarter-end. Its hedges reduce some commodity-price exposure but can also create significant mark-to-market earnings volatility. It said its general objective was to hedge approximately 70%–80% of anticipated production over the next 18–24 months when acceptable terms were available.
- Other commitments included $9.8 million remaining for gas-treating equipment, $9.1 million of active drilling-rig commitments, and $9.3 million of operating lease obligations. Management said ordinary-course legal proceedings were not expected to have a material effect; it paid an EPA civil penalty of $110,000 in September 2018. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Confirm the intended issuer: this source is Halcón Resources, not Battalion Oil Corp.
- Review the actual and expected timing, net proceeds and conditions of the water-infrastructure sale, including the contingent payments and potential $30 million deferral.
- Assess liquidity given minimal quarter-end cash, operating cash flow below investment needs, debt levels and reliance on the asset sale and borrowing capacity.
- Check the latest covenant calculations, lender amendments, borrowing-base availability and compliance headroom.
- Track production recovery, the impact of three operated rigs, realized pricing, H2S treatment costs and the company’s hedge positions and settlements.