Battalion Oil Corp. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Unaudited results. Battalion is an independent oil and gas company focused on liquids-rich assets in the Delaware Basin of West Texas.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $80.8 million | $39.8 million | $200.7 million | $105.7 million |
| Operating income (loss) | $33.5 million | ($135.6 million) | $68.1 million | ($228.8 million) |
| Net income (loss) | $13.1 million | ($153.1 million) | ($54.3 million) | ($166.0 million) |
| Net income (loss) per share | $0.80 basic | ($9.45) basic | ($3.34) basic | ($10.24) basic |
| Operating cash flow | Not separately provided | Not separately provided | $47.1 million | $47.9 million |
- Q3 oil, gas and NGL sales rose to $80.5 million from $39.4 million. Average production was 17,728 Boe/d, up from 17,076; realized prices excluding hedges increased $24.25/Boe.
- For the first nine months, average production fell to 15,890 Boe/d from 16,712, while realized prices excluding hedges rose $23.25/Boe. The higher prices drove revenue growth despite lower production.
- Reported operating income margins were approximately 41% for Q3 and 34% for the first nine months of 2021; comparisons with 2020 are heavily affected by 2020 ceiling-test impairment charges.
- Nine-month capital expenditures were $47.2 million. Operating cash flow approximately covered this spending; investing cash flow was negative $46.2 million, and cash declined $2.4 million to $1.9 million.
- At September 30, cash was $1.9 million, current assets $44.0 million, current liabilities $135.2 million, and stockholders’ equity $37.2 million.
Debt, liquidity and hedging
- Total debt was $155.1 million, primarily $155.0 million under the senior revolving credit facility. Against a $175.0 million borrowing base, approximately $2.0 million of letters of credit left $18.0 million of borrowing capacity.
- The facility matures October 8, 2024. Lenders postponed the fall 2021 borrowing-base redetermination until December. The company reported covenant compliance at September 30; current-ratio testing had been suspended through the quarter ending December 31, 2021.
- Derivative liabilities totaled $83.8 million, including $74.3 million current, compared with total derivative liabilities of $26.4 million at year-end 2020. Nine-month derivative results were a $119.4 million loss, versus a $67.7 million gain in 2020, including unrealized mark-to-market changes.
- Debt amendments reduced the borrowing base, increased interest margins and tightened certain collateral and transaction covenants. The company said it was exploring financing options but gave no assurance that additional financing would be available on acceptable terms.
Changes, outlook and notable items
- The 2021 nine-month net loss improved from 2020, principally because 2020 included $188.4 million of full-cost ceiling impairments. Q3 2020 alone included a $128.3 million impairment. No ceiling impairment was recorded in 2021 through September.
- Management expected 2021 capital spending of approximately $45 million to $55 million, funded with cash, operating cash flow and, if needed, revolver borrowings. The filing does not provide a specific production or earnings forecast.
- Management cited stronger commodity prices and recovering demand in 2021, while warning that prices may weaken with renewed pandemic effects, supply changes or other market conditions. A lower borrowing-base redetermination could constrain liquidity and require repayment.
- Operating costs increased in several areas: Q3 lease operating expense was $7.34/Boe versus $6.42, and gathering and other expense was $9.77/Boe versus $8.59. Management attributed cost pressure to maintenance, power, chemicals and sour-gas marketing and processing.
- Production was affected by February weather, third-party processing curtailments, and facility upgrades and repairs. Sour-gas treating and transportation capacity, commodity-price volatility, lender access and covenant compliance remain risks.
- The SBA reduced the PPP loan by approximately $2.0 million; the company recorded a $2.1 million debt-extinguishment gain. It also recognized approximately $0.7 million of Employee Retention Credits.
- Commitments included sour-gas treating minimum-volume payments of approximately $2.4 million for the remainder of 2021 and $4.8 million for 2022, plus long-term gathering, transportation and sales contracts covering a substantial portion of production. Management said pending legal matters were not expected to have a material effect.
Important facts for investors to verify
- Outcome of the postponed December borrowing-base redetermination and resulting borrowing availability.
- Liquidity and covenant position after current-ratio testing resumed for the quarter ending December 31, 2021.
- Production, realized prices and operating costs, especially sour-gas handling and third-party processing constraints.
- Derivative settlements, remaining hedge coverage and the potential cash-flow effects of the large derivative liability.
- Funding for capital spending and debt service, given low cash on hand and limited revolver capacity.
- Potential future ceiling-test impairment if commodity prices or reserve and cost assumptions deteriorate.