Battalion Oil Corporation — 2020 Form 10-K
Business context and reporting period. This filing covers the fiscal year ended December 31, 2020. Battalion is an independent oil and gas producer focused primarily on liquids-rich properties in the Delaware Basin of West Texas. The company emerged from Chapter 11 in October 2019 and adopted fresh-start accounting; accordingly, 2020 results are not directly comparable with predecessor periods, and 2019 includes distinct successor and predecessor periods.
Key financial and operating metrics
| Metric | 2020 |
|---|---|
| Total operating revenue | $148.3 million |
| Net loss | $229.7 million; loss per share was $14.18 |
| Operating loss | $261.8 million |
| Operating cash flow | $50.2 million |
| Oil and gas capital expenditures | $101.8 million |
| Cash and cash equivalents at year-end | $4.3 million |
| Total debt at year-end | $160.2 million, including $158.0 million under the revolving facility and a $2.2 million PPP loan |
| Proved reserves at year-end | 63.4 MMBoe; 57% classified as proved developed |
The $229.7 million net loss included a $215.1 million non-cash full-cost ceiling impairment, recorded in three quarterly charges and primarily driven by lower oil prices used in reserve valuation. The filing reports no income tax benefit for 2020; deferred tax assets were substantially offset by a $489.5 million valuation allowance.
Average production was 16,858 Boe/d, versus 17,986 Boe/d across the two separate 2019 reporting periods combined. Realized prices excluding settled derivatives averaged $23.79/Boe, compared with $34.88/Boe for the October–December 2019 successor period and $33.71/Boe for the January–October 2019 predecessor period. Including settled derivatives, the 2020 realized price was $31.07/Boe. Production costs included lease operating expense of $6.82/Boe and gathering and other expense of $9.08/Boe.
Year-end current assets were $47.8 million and current liabilities were $83.2 million. The $190.0 million revolving-credit borrowing base had $158.0 million drawn, approximately $4.7 million of letters of credit outstanding, and about $27.3 million of remaining borrowing capacity. The facility matures October 8, 2024; the next borrowing-base redetermination was scheduled for spring 2021. Net cash decreased $6.0 million during 2020.
Material changes versus prior periods
- Revenue and production were pressured by lower commodity prices and temporary shut-ins in May and June 2020. Management estimated the shut-ins reduced full-year production by about 1,300 Boe/d.
- In December 2020, Battalion sold the North West Quito assets for $26.3 million cash, subject to customary adjustments. The assets represented about 2 MMBoe of proved reserves and had produced approximately 600 Boe/d during the first nine months of 2020. Proceeds were used to repay revolving debt and for general corporate purposes; no gain or loss was recorded.
- Reserves increased by 1.3 MMBoe to 63.4 MMBoe. Additions and extensions of 12.4 MMBoe were partly offset by production of 6.2 MMBoe, asset sales of 2.0 MMBoe, and negative revisions of 2.9 MMBoe, primarily reflecting lower SEC pricing. The standardized measure of discounted future net cash flows fell to $209.4 million from $408.9 million in 2019, with price and cost changes the largest negative factor.
- Operating cash flow was $50.2 million. It benefited from cost reductions and derivative settlements, including $22.9 million received from early termination of contracts, but was partly offset by lower prices and production. Investing cash use was $72.4 million, and financing provided $16.2 million.
Outlook, risks, and unusual items
- 2021 plan: Management expected capital expenditures of $40–$50 million, with plans to drill two gross operated wells, complete six, and bring six online. It expected to fund spending from cash on hand, operating cash flow, and, if needed, revolving borrowings; the budget could change with market conditions.
- Credit and liquidity: The company obtained waivers of its minimum current-ratio covenant for the second and third quarters of 2020 and suspended current-ratio testing until the quarter ending December 31, 2021. Battalion reported compliance with financial covenants at year-end after the amendments. Bank of Montreal held substantially all facility commitments and had announced plans to exit U.S. oil and gas investment banking, creating refinancing and borrowing-base uncertainty.
- Hedging: The amended facility requires swaps covering at least 65% of anticipated production from proved developed producing reserves through at least December 31, 2022. Battalion also generally targets hedging 65%–85% of anticipated production for up to 30 months. Derivatives can limit gains and expose the company to counterparty, volume, and basis risks.
- PPP loan: Battalion borrowed approximately $2.2 million at 1% interest, due April 2022 if not forgiven. Management intended to seek forgiveness, but no assurance was given that any amount would be forgiven.
- Operating and market risks: Key exposures include oil and gas price volatility, COVID-19 and demand uncertainty, reliance on a single basin, sour-gas treatment and takeaway capacity, transportation constraints, water access, drilling and reserve-estimation uncertainty, and environmental and regulatory requirements. Two purchasers accounted for 57% of 2020 sales.
- Other developments: Battalion received permits for an acid-gas injection well and was evaluating facility development and other options. Management reported effective disclosure controls and internal control over financial reporting; the auditor did not provide an internal-control attestation because the company qualified as a smaller reporting company.
Important facts for investors to verify
- Review the spring 2021 borrowing-base redetermination, covenant status, lender concentration, and available liquidity against the 2021 spending plan.
- Assess the drivers and sensitivity of the $215.1 million impairment, reserve revisions, and $209.4 million standardized measure; these are estimates, not market value.
- Confirm actual production, realized prices, hedge settlements and coverage, and the extent to which hedging supports cash flow.
- Track development and funding of proved undeveloped reserves, lease expirations, and the company’s ability to execute its five-year development plan.
- Verify the status of PPP forgiveness, sour-gas handling and takeaway arrangements, and the concentration of sales among major purchasers.
- Use caution when comparing periods: fresh-start accounting and the separate 2019 successor and predecessor periods limit comparability.