Halcón Resources Corporation — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. The filing identifies the registrant as Halcón Resources Corporation; this differs from the supplied company metadata, “Battalion Oil Corp.” The financial statements are unaudited and amounts below are in millions of dollars unless noted.
Business context and reporting period
Halcón was an independent U.S. oil and natural gas exploration and production company. Its 2012 strategy emphasized acquiring undeveloped acreage in emerging resource plays, including the Utica/Point Pleasant and Woodbine/Eagle Ford. Results for the periods ended June 30 exclude the GeoResources merger and East Texas acquisition, both of which closed in August 2012.
Key financial metrics
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Operating revenue | $23.3 | $28.2 | $50.2 | $53.9 |
| Operating income (loss) | $(7.2) | $8.3 | $(17.0) | $14.0 |
| Net income (loss) | $7.7 | $8.9 | $(25.7) | $(1.0) |
| Net income (loss) available to common shareholders | $(79.7) | $8.9 | $(114.1) | $(1.0) |
| Basic and diluted EPS | $(0.59) | $0.34 | $(1.11) | $(0.04) |
| Average daily production | 3,912 Boe | 4,176 Boe | 3,984 Boe | 4,238 Boe |
| Operating cash flow | Not provided quarterly | Not provided quarterly | $(2.7) | $13.0 |
- Revenue declined 17% in Q2 and 7% for the six-month period. Six-month oil and gas sales fell by $3.8 million, primarily from lower production volumes; quarterly sales were also affected by lower realized prices.
- Six-month realized price averaged $69.08/Boe, versus $70.19/Boe. Q2 average was $65.30/Boe, versus $73.99/Boe. Six-month production fell 6% to 3,984 Boe/day, attributed mainly to natural declines and South Texas pipeline issues.
- Operating expenses were $30.5 million in Q2 and $67.2 million for the first half. G&A was $13.1 million in Q2 and $33.4 million for the first half, including change-in-control, transaction, personnel and professional costs. No consolidated gross or operating margin percentage is reported.
- Derivative gains were $13.7 million in Q2 and $8.7 million for the first half, substantially reflecting unrealized fair-value changes. Six-month interest expense and other, net, was $17.2 million, including debt payoff-related costs; $3.4 million of interest was capitalized.
- At June 30, cash was $219.2 million and current assets were $242.2 million versus current liabilities of $38.2 million. Working capital was approximately $204.0 million (calculated from reported balances). Total assets were $994.8 million and stockholders’ equity was $680.9 million.
- Long-term debt carrying value was $242.6 million, comprising the 8% senior convertible note, net of a $41.3 million unamortized discount. The note’s principal was $275 million. The company had no revolver borrowings, $1.3 million of letters of credit and $223.7 million of available borrowing capacity under the then-current facility; it reported covenant compliance.
- Investing cash outflow was $500.8 million and financing cash inflow was $722.7 million in the first half. Capital spending included $453.2 million on unevaluated oil and gas properties. Financing included recapitalization and preferred-stock offering proceeds.
Material changes and unusual items
- The February recapitalization brought $275 million from common stock issuance, a $275 million 8% convertible note and warrants. It resulted in a change of control, executive departures and related costs, repayment of prior credit facilities, and a one-for-three reverse stock split.
- The March preferred-stock offering generated approximately $400 million gross and converted into 44.4 million common shares in April. A $88.4 million beneficial conversion feature was recognized as a non-cash preferred dividend; $87.3 million was accelerated into Q2 upon conversion. This explains why Q2 GAAP net income of $7.7 million became a $79.7 million loss available to common shareholders.
- G&A rose sharply: first-half G&A increased $21.0 million year over year. The filing attributes approximately $5.4 million to change-in-control payments, $3.6 million to acquisition/merger costs, and additional amounts to employee costs, professional fees and termination fees. First-half restructuring expense was $1.0 million for the Plano office closure and relocation of functions to Houston.
- On June 28, Halcón acquired approximately 27,000 net acres in Eastern Ohio for about $164 million cash. No production or proved reserves were attributed to this acreage at acquisition. It also spent approximately $274.5 million on other unevaluated leasehold acquisitions during the first half.
- After quarter-end, Halcón issued $750 million of 9.75% senior unsecured notes due 2020, receiving approximately $724.8 million net. It used the proceeds toward the GeoResources merger and East Texas acquisition. The August 1 transactions included approximately $525 million cash and 51 million shares for GeoResources, and approximately $300 million cash plus 20.7 million shares for East Texas Assets.
- In connection with those acquisitions, the revolving facility was amended to commitments of up to $1.5 billion and a $525 million borrowing base. Management stated that approximately $220 million was drawn against the borrowing base as of August 1. Management expected combined production to increase from approximately 4,000 to 14,000 Boe/day; this is an expectation, not reported post-close performance.
Outlook, risks and contingencies
- No formal earnings or production guidance for the remainder of 2012 is provided. Management said near-term capital needs were expected to be funded by operating cash flow, potential asset sales and revolver borrowings, and anticipated continued access to capital markets if terms were acceptable.
- Key risks include volatile oil, gas and NGL prices; production declines and reserve uncertainty; ability to economically develop substantial undeveloped acreage; drilling and service availability; pipeline and gathering capacity; integration of GeoResources and East Texas; and access to financing. Management cautioned that sustained price declines could impair funding, covenant compliance, profitability and acquisition or development plans.
- Debt agreements restrict dividends, additional debt, liens, asset sales and other activities; covenant breaches could trigger acceleration. The 9.75% notes and amended revolver increase leverage and financing constraints.
- Two purchasers represented approximately 74% of Q2 and first-half oil, gas and NGL revenue. Commodity derivatives were not designated as accounting hedges, so fair-value changes flow through earnings. At June 30, the net derivative asset was $7.2 million; a 10% commodity-price decline was estimated to increase future derivative receipts to $20.5 million, while a 10% increase was estimated to result in $6.5 million of payments.
- The company reported $40.7 million of future minimum operating lease payments. Management and counsel did not expect pending ordinary-course litigation to materially affect results, financial position or cash flows. A GeoResources shareholder lawsuit settlement remained subject to court approval after quarter-end.
Important facts for investors to verify
- Confirm the entity identity: this filing is for Halcón Resources Corporation, not the company named in the request metadata.
- Review acquisition accounting, purchase-price allocations, assumed liabilities and actual post-close production for GeoResources and the East Texas Assets; these were not finalized or included in the June-quarter results.
- Track the 9.75% notes, revolver borrowings, borrowing-base redeterminations, interest burden and compliance with debt covenants.
- Separate recurring operating performance from derivative mark-to-market gains, recapitalization costs, restructuring charges and the non-cash preferred dividend.
- Assess production trends, realized prices, reserve revisions, development economics and the commercial progress of acreage with no proved reserves or production at acquisition.