Filing identity and reporting period
The supplied filing is Halcón Resources Corporation’s unaudited Form 10-Q for the quarter ended September 30, 2017, filed November 9, 2017. This does not match the requested company name, Battalion Oil Corp.; investors should verify the filing entity before relying on this summary. Halcón was an independent U.S. oil and gas company, with operations shifting toward the Delaware Basin.
Comparisons require caution: Halcón emerged from Chapter 11 and adopted fresh-start accounting on September 9, 2016. The filing labels pre- and post-emergence financial statements “Predecessor” and “Successor” and says they are not comparable. The reported 2016 quarter also consists of separate partial periods.
Financial results and liquidity
Amounts below are in U.S. dollars; financial statements are unaudited.
| Metric | Three months ended September 30, 2017 | Nine months ended September 30, 2017 |
|---|---|---|
| Total operating revenue | $97.0 million | $352.7 million |
| Net income | $419.3 million | $628.8 million |
| Net income available to common stockholders | $419.3 million | $580.8 million |
| Net cash provided by operating activities | Not separately stated | $102.2 million |
| Net cash provided by investing activities | Not separately stated | $737.8 million |
| Net cash provided by financing activities | Not separately stated | $149.3 million |
- Third-quarter operating income was $473.2 million, driven chiefly by a $491.8 million gain on the sale of operated Williston assets. Nine-month operating income was $745.6 million, including $727.5 million of gains from the Williston and El Halcón sales. Reported profit therefore does not represent recurring operating earnings.
- Third-quarter net income included a $22.4 million derivative loss, $19.3 million of interest expense and other, and a $29.2 million debt-extinguishment loss. Nine-month derivative results were a $28.1 million gain; debt-extinguishment losses totaled $86.1 million.
- Average daily production was 28,859 Boe/d in the third quarter and 34,513 Boe/d for the first nine months. Average realized price, excluding settled hedges, was $36.38/Boe for the quarter and $37.29/Boe year to date. Per-Boe production costs for the quarter included lease operating expense of $6.70, workover and other of $1.37, production taxes of $2.58, and gathering and other of $4.10.
- Cash at September 30 was $989.3 million. Current assets were $1,115.4 million and current liabilities $584.2 million. Long-term debt, net, was $817.8 million, split equally between current and noncurrent portions; stated principal on the 6.75% senior notes was $850 million. The current portion reflects a subsequent $425 million note repurchase.
- At September 30, the company had no borrowings under its revolving facility, $6.4 million of letters of credit, and about $133.6 million of available borrowing capacity under the then-effective $140 million borrowing base. It reported compliance with financial covenants. The borrowing base later fell to $100 million following the sale of non-operated Williston assets.
- The filing does not provide a clear recurring operating margin. Reported operating income and net income are materially affected by divestiture gains and other unusual items.
Material changes and capital actions
- Halcón acquired Delaware Basin assets in Pecos and Reeves Counties for approximately $699.2 million, funded through preferred-stock proceeds and revolver borrowings. The assets contributed $28.3 million of revenue and $2.4 million of net field operating income in the first nine months.
- It sold East Texas Eagle Ford assets for approximately $491.1 million, recognizing a $235.7 million gain, and sold operated Williston assets for approximately $1.4 billion, recognizing a $491.8 million gain. The Williston assets represented about 76% of nine-month production and revenue and approximately 71% of year-end 2016 proved reserves.
- In February 2017, Halcón issued $850 million of 6.75% notes due 2025 and used most proceeds to retire approximately $700 million principal amount of 8.625% second-lien notes due 2020. It also raised approximately $400.1 million through automatically convertible preferred stock, which converted into 55.2 million common shares in April.
- Using Williston sale proceeds, the company funded redemption of its $112.8 million principal amount of 12% second-lien notes, including a make-whole premium, and repurchased $425 million principal amount of the 2025 notes at 103% of par on October 10, after quarter-end.
- On November 9, after quarter-end, Halcón completed the sale of non-operated Williston assets for an adjusted purchase price of approximately $105.2 million, subject to closing adjustments.
Outlook, risks and contingencies
- Management said its properties and drilling activity were now focused on the Delaware Basin, which it considered to offer more attractive economics, and described the Williston divestiture as improving liquidity and reducing debt. It reported one rig operating in Hackberry Draw and 75 gross (12.6 net) wells participated in year to date, all completed and capable of production.
- No quantified production, capital-spending, earnings, or cash-flow guidance is provided in the supplied filing text. Management said near-term capital needs were expected to be funded from operating cash flow, cash on hand, and potential revolver borrowings.
- The principal strategic risk is increased concentration in largely undeveloped Delaware Basin acreage, where Halcón acknowledged limited recent operating experience. It is more dependent on drilling success following disposal of assets that supplied most production and reserves.
- Other stated risks include commodity-price volatility, reserve replacement and decline rates, access to capital and sufficient cash flow, borrowing-base changes and debt covenants, development and operating costs, transportation and gathering capacity, water availability, and regulatory and environmental matters. A sustained decline in commodity prices could reduce liquidity and trigger future full-cost ceiling impairments. No impairment was recorded at September 30, 2017.
- Halcón reported $12.6 million of operating-lease obligations, $4.4 million of active drilling-rig commitments, and $5.2 million of expected rig-stacking or termination commitments. Management and counsel said pending ordinary-course legal proceedings were not expected to have a material effect.
Most important facts for investors to verify
- Confirm that this Halcón Resources filing—not a Battalion Oil Corp. filing—is the intended document.
- Separate recurring operating performance and cash generation from the $727.5 million of nine-month divestiture gains and other nonrecurring items.
- Verify post-quarter-end debt balances and cash uses, including the 2025 note repurchase, 12% note redemption, and November Williston asset sale.
- Assess Delaware Basin production, drilling results, development capital needs, and the company’s ability to replace production and reserves after selling its largest producing properties.
- Monitor the reduced $100 million revolver borrowing base, covenant compliance, commodity prices, and the potential for future ceiling-test impairment.