BATTALION OIL CORP annual report, FY2016

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Battalion Oil Corp. — filing identity note

Entity mismatch: The request identifies Battalion Oil Corp., but the supplied 10-K is for Halcón Resources Corporation (ticker HK), for the fiscal year ended December 31, 2016, filed February 28, 2017. This summary reflects the supplied filing, not a Battalion Oil filing.

Business context and reporting period

Halcón was an independent U.S. oil and gas producer focused on liquids-rich assets, principally in the Bakken/Three Forks and East Texas Eagle Ford at year-end. It filed Chapter 11 in July 2016 and emerged on September 9, 2016. Fresh-start accounting created a new reporting entity, so the 2016 Successor period (September 10–December 31) is not directly comparable with the Predecessor period (January 1–September 9) or prior years.

Financial and operating metrics

  • Revenue: $153.4 million in the Successor period and $266.8 million in the Predecessor period, or $420.2 million combined, versus $550.3 million in 2015. The decline reflected lower commodity prices and production.
  • Profit and impairments: Successor net loss was $479.2 million; Predecessor net income was $12.0 million. The periods’ simple combined net loss was $467.2 million, but is not a comparable GAAP annual measure because of fresh-start accounting. Combined full-cost ceiling impairments were approximately $1.176 billion in 2016 ($420.9 million Successor; $754.8 million Predecessor). 2015 impairment was $2.626 billion.
  • Production and pricing: Average production was 37,637 Boe/d in the Successor period and 36,787 Boe/d in the Predecessor period, approximately 37,049 Boe/d combined, versus 41,542 Boe/d in 2015. Reported average realized price excluding settled hedges was $35.87/Boe and $28.53/Boe, respectively.
  • Costs: Lease operating costs were $5.26/Boe in the Successor period and $5.38/Boe in the Predecessor period. Workover and other costs were $2.47/Boe and $2.42/Boe; gathering and other costs were $3.45/Boe and $3.15/Boe.
  • Cash flow: Operating cash flow was $103.1 million (Successor) and $175.3 million (Predecessor); investing cash outflow was $63.0 million and $227.8 million; financing cash flow was negative $54.0 million and positive $58.3 million, respectively. These periods are not directly comparable.
  • Liquidity: Year-end cash was $24,000; current assets were $160.6 million and current liabilities $207.6 million, a $46.9 million working-capital deficit. The company reported $407.3 million of available borrowing capacity under its revolving facility and compliance with its financial covenants at year-end.
  • Debt: Year-end long-term debt, net, was $964.7 million; principal debt was approximately $998.8 million. The $600 million borrowing base supported a $1.5 billion reserve-based facility, with $186 million drawn at year-end. The filing reports fixed-rate debt at a weighted average 9.09% and variable-rate debt at 3.74%.
  • Margins: The filing does not provide a clear consolidated operating-margin measure that is comparable across the two 2016 reporting entities.
  • Reserves: Proved reserves were 148.6 MMBoe at year-end, approximately 58% developed and 42% undeveloped. The standardized measure of discounted future net cash flows was $803.5 million, down from $1.111 billion in 2015.

Material changes and unusual items

  • The reorganization cancelled approximately $2.0 billion of debt obligations and eliminated roughly $200 million of annual interest obligations, while existing second-lien notes were reinstated. Legacy common shares were cancelled and new equity issued to creditors and former shareholders under the plan.
  • Fresh-start accounting revalued assets and liabilities and materially limits year-over-year comparability. The reported 2016 results also include substantial non-cash impairment charges and reorganization accounting effects.
  • In September 2016, Apollo acquired Halcón’s Tuscaloosa Marine Shale subsidiary; the company transferred the subsidiary and its obligations.
  • After year-end, Halcón issued $850 million of 6.75% senior unsecured notes due 2025. It used part of the proceeds to repurchase $289.2 million principal amount of 2020 second-lien notes and planned to redeem the remaining $410.8 million.
  • After year-end, the company closed a $705 million acquisition of 20,901 net acres in the Southern Delaware Basin on February 28, 2017, funded with preferred-stock proceeds and revolver borrowings. It also agreed to acquire additional interests for about $22.3 million.
  • A proposed $500 million sale of the El Halcón assets—about 24% of year-end proved reserves and 7,600 Boe/d of 2016 production—was pending at filing date. Proceeds were intended for revolver repayment and general corporate purposes; closing and final proceeds remained subject to conditions and adjustments.
  • The $400.1 million preferred-stock placement used to help fund the Delaware acquisition was to convert into approximately 55.2 million common shares, about 37% of the December 2016 common shares outstanding, creating substantial dilution potential.

Outlook, management commentary, and key risks

  • Management budgeted approximately $300 million for 2017 drilling and completions plus $15 million for infrastructure, seismic and other items. The budget allocated about 65% to the Bakken/Three Forks and 35% to the Southern Delaware Basin; it was subject to change and expected to be funded mainly by operating cash flow and, to a lesser extent, revolver borrowings.
  • The filing gives differing descriptions of planned 2017 rig activity: one section anticipates two to three operated rigs, while another says the program contemplates reaching an average of four rigs during the second quarter. Verify the operative plan.
  • Management said that using a February 2017 oil price held constant for a trailing 12-month period would have avoided a year-end ceiling impairment, all other assumptions unchanged. This is a sensitivity illustration, not guidance; sustained lower prices or reserve revisions could trigger further impairments.
  • Key risks include volatile oil and gas prices, reserve-based borrowing-base reductions, debt covenant compliance, capital access, reserve replacement and development of undeveloped acreage, transport and gathering constraints, lease expirations, and environmental, water-use, hydraulic-fracturing and regulatory requirements.
  • The company stated that it was in compliance with credit-facility covenants at year-end. It also disclosed NYSE market-capitalization listing concerns and the possibility of delisting. Management and Deloitte reported effective internal control over financial reporting; the financial-statement audit opinion was unqualified. Management reported no pending legal matter expected to have a material adverse effect.

Important facts for investors to verify

  1. Confirm the filing belongs to the intended issuer: the supplied 10-K is Halcón Resources, not Battalion Oil Corp.
  2. Review post-year-end debt refinancing, including completion and cost of redeeming the remaining 2020 second-lien notes and resulting debt service.
  3. Verify closing, final sale proceeds and use of proceeds for the El Halcón divestiture, and the effects on production and reserves.
  4. Assess funding and returns for the $705 million Delaware acquisition, related borrowing, and any exercise of the Ward/Winkler acreage options.
  5. Quantify dilution from the convertible preferred stock, warrants, options and incentive-plan awards.
  6. Monitor the borrowing-base redetermination, covenant headroom, liquidity and the stated NYSE listing risk.
  7. Reconcile the 2017 rig-count statements and test reserve and impairment assumptions against commodity prices, costs and development plans.