BATTALION OIL CORP annual report, FY2017

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Filing and reporting period

Issuer identification mismatch: The request identifies Battalion Oil Corp., but the supplied filing is Halcón Resources Corporation’s Form 10-K for the fiscal year ended December 31, 2017, filed February 28, 2018. The summary below reflects Halcón’s filing, not Battalion’s. The filing reports full-year results and selected fourth-quarter data; it is not a standalone quarterly filing.

Halcón shifted to a Delaware Basin-focused oil and gas business after selling its Williston Basin and East Texas assets and acquiring Delaware Basin acreage. Comparisons with 2016 require caution: the company adopted fresh-start accounting upon emergence from bankruptcy on September 9, 2016, creating separate Predecessor and Successor reporting periods.

Financial performance and position

  • Revenue and production: 2017 operating revenue was $378.0 million, versus $420.2 million across the two 2016 reporting periods combined. Average production was 27,397 Boe/d, versus 37,049 Boe/d combined in 2016. Management attributed the declines primarily to divestitures. Full-year realized price, excluding derivative settlements, was $37.58/Boe.
  • Fourth quarter: Revenue was $25.3 million; operating loss was $30.1 million; net loss was $93.1 million. Quarterly results were highly variable, including a $419.3 million net income in Q3 and a loss in Q4.
  • Profit: Full-year net income was $535.7 million, or $3.67 per basic share. This was not representative of recurring operating performance: results included $721.6 million of divestiture gains and $114.9 million of debt-extinguishment losses. Operating income was $715.4 million, also substantially affected by the divestiture gains. The filing does not provide a clear consolidated operating-margin measure that isolates recurring performance.
  • Cash flow: Operating cash flow was $114.6 million; investing cash flow was positive $598.6 million, primarily reflecting asset-sale proceeds; financing cash flow was negative $289.1 million. Cash increased by $424.0 million to $424.1 million at year-end. Capital expenditures for oil and gas properties were $331.3 million, including $309.6 million for drilling and completions.
  • Liquidity: Year-end working capital was $321.5 million, with current assets of $471.8 million and current liabilities of $150.3 million. The $1.0 billion revolving facility had a $100 million borrowing base; no borrowings were outstanding, $1.6 million of letters of credit were outstanding, and reported availability was $98.4 million.
  • Debt: Year-end long-term debt was $409.2 million net of discount and issuance costs, representing $425.0 million principal of 6.75% notes due 2025. The company had repaid its 2020 second-lien notes and redeemed its 12% second-lien notes during 2017. After year-end, it issued $200 million additional 6.75% 2025 notes; the February 2018 stock offering raised $60.8 million net.
  • Reserves: Year-end proved reserves were 51.1 MMBoe, down from 148.6 MMBoe in 2016, principally due to 160.3 MMBoe of divestitures. Acquisitions, extensions and revisions partly offset the decrease. About 69% of year-end proved reserves were undeveloped.

Material changes, outlook, and risks

  • The company sold operated Williston assets for approximately $1.4 billion, East Texas Eagle Ford assets for approximately $491.1 million, and non-operated Williston assets for approximately $105.2 million. It acquired Delaware Basin assets, including the $699.2 million Hackberry Draw acquisition and additional Monument Draw acreage. The resulting company was substantially concentrated in the Delaware Basin.
  • Management’s 2018 budget called for $280–$320 million in drilling and completion spending and $30–$40 million for infrastructure, seismic and other items, with an average of three operated rigs. The budget was subject to revision following the proposed acquisition of 10,524 net acres in West Quito Draw for $200 million. Closing was expected in early April 2018 and remained subject to conditions; the filing gives no assurance the deal would close or deliver expected benefits.
  • Management expected to fund spending with cash, operating cash flow, debt and equity proceeds, and revolver borrowings; it said spending could be reduced if cash flows or financing were inadequate. The February 2018 credit amendment waived the leverage covenant for Q1 2018 and relaxed covenant calculations and thresholds for specified 2018 quarters. The next scheduled borrowing-base redetermination was May 2018. These amendments underscore covenant and funding sensitivity.
  • Key risks include volatile commodity prices; dependence on drilling success in a concentrated, largely undeveloped basin where the company has limited recent operating history; reserve estimation and development risk; transportation, water and service availability; lease expirations; environmental and hydraulic-fracturing regulation; and possible asset impairments. A 10% decrease in the specified 12-month average oil and gas prices, with other assumptions held constant, would have reduced the year-end ceiling amount by about $91.8 million and triggered an impairment.
  • Halcón generally targeted hedging 70%–80% of anticipated production for 18–24 months, subject to market availability and management discretion. It reported $27.0 million of derivative liabilities at year-end and does not apply hedge accounting, so fair-value changes affect reported earnings.
  • Two purchasers accounted collectively for 58% of sales in both 2017 and 2016. A 15-year gas gathering and processing agreement with Salt Creek Midstream covers specified acreage; Salt Creek was controlled by Ares, which also controlled funds holding more than 10% of Halcón’s stock. The filing says the agreement was reviewed and approved by the audit committee and disinterested directors.
  • Management and Deloitte reported effective internal control over financial reporting; Deloitte issued an unqualified opinion on the financial statements. The filing says ordinary-course legal proceedings were not expected to have a material effect.

Investor verification priorities

  1. Confirm the intended issuer: this is Halcón Resources’ filing, not a Battalion Oil filing.
  2. Separate recurring operating results from the $721.6 million divestiture gain, debt-retirement charges, derivative effects and other nonrecurring items; review Q4’s operating performance independently.
  3. Verify post-year-end debt and equity proceeds, total debt after the additional notes, use of proceeds, and the effect of dilution from the 9.2 million-share offering.
  4. Check the status, final purchase-price adjustments and funding of the West Quito Draw acquisition, and any revised 2018 capital budget.
  5. Monitor the May 2018 borrowing-base redetermination, covenant compliance and the impact of the credit-agreement amendments.
  6. Assess whether drilling converts the large undeveloped reserve base into production and cash flow, while addressing lease expirations and the company’s basin concentration.