BATTALION OIL CORP quarterly report, Q3 FY2016

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Filing identity and reporting period

Important identity discrepancy: The supplied filing is Halcón Resources Corporation’s Form 10-Q for the quarter ended September 30, 2016, not a filing identified as Battalion Oil Corp. Verify the issuer before relying on this summary.

Halcón was an independent U.S. oil and gas company focused on liquids-rich assets, including the Bakken/Three Forks and Eagle Ford. It emerged from Chapter 11 on September 9, 2016 and adopted fresh-start accounting. Consequently, results are split between predecessor and successor periods and are not directly comparable; the reported third-quarter predecessor period ends September 9, while the successor period covers September 10–30.

Financial and operating highlights

  • Revenue: Oil, natural gas and NGL sales were $79.1 million for July 1–September 9 (predecessor) and $22.9 million for September 10–30 (successor). Third-quarter 2015 sales were $129.5 million. The separate 2016 periods do not provide a directly comparable reported quarterly total.
  • Profit and impairment: Successor net loss was $450.7 million, including a $420.9 million noncash full-cost ceiling impairment. Predecessor net income was $926.3 million, substantially reflecting a $913.7 million reorganization gain. Third-quarter 2015 net income was $147.1 million and included a $511.9 million ceiling impairment and a $535.1 million debt-extinguishment gain. These unusual items make earnings comparisons especially difficult.
  • Production and realized prices: Average daily production was 33,333 Boe for the successor period and 34,437 Boe for July 1–September 9, versus 40,739 Boe/day in third-quarter 2015. Realized sales price, excluding hedge settlements, was $32.69/Boe and $32.35/Boe, respectively, versus $34.56/Boe in third-quarter 2015.
  • Costs and margins: Lease operating cost was $5.42/Boe in the successor period and $5.10/Boe in the predecessor period; workover cost was $2.24/Boe and $2.78/Boe. Workover costs rose versus 2015 due mainly to Bakken well repairs. The filing does not provide a directly comparable quarterly operating margin; reported operating loss for the successor period was $433.7 million, dominated by impairment.
  • Cash flow: Operating cash flow was $12.3 million for September 10–30 and $175.3 million for January 1–September 9. Investing cash outflows were $12.2 million and $227.8 million, respectively. Successor-period financing cash outflow was $12.0 million. Cash was $2.0 million at September 30, compared with $8.0 million at December 31, 2015; the reporting-entity change affects comparability.
  • Debt and liquidity: September 30 debt carrying value was $1.005 billion. The $600 million senior secured revolver had $228 million outstanding, approximately $367 million of borrowing capacity available and $5 million of letters of credit. Current assets were $206.0 million versus current liabilities of $177.3 million. The company reported covenant compliance at quarter-end.
  • Hedges: Derivative assets totaled $73.7 million and liabilities $2.5 million. Management said approximately 77% of anticipated remaining 2016 oil production was hedged at a weighted-average $76.60/Bbl; only a limited amount of production beyond 2016 was hedged.

Material changes versus prior periods

  • Chapter 11 restructuring cancelled approximately $2.0 billion of debt obligations and, according to management, reduced annual interest obligations by more than $200 million. Third-lien and unsecured debt and the convertible note were cancelled; existing second-lien notes were reinstated.
  • At September 30, total debt was approximately $1.0 billion, versus $2.874 billion carrying value at December 31, 2015. The comparison is affected by debt cancellation and fresh-start fair-value accounting.
  • Fresh-start accounting reset assets and liabilities to fair value and reset accumulated deficit. Oil and gas properties were valued using estimated future commodity prices, including $72.30/Bbl oil in the fresh-start valuation; subsequent ceiling-test accounting used a trailing 12-month WTI average of $41.68/Bbl and produced the $420.9 million successor impairment.
  • On September 30, Halcón transferred its Tuscaloosa Marine Shale subsidiary, HK TMS, to an Apollo affiliate, which assumed related obligations. The filing text does not provide a clear cash sale price.
  • Production and capital spending were reduced in response to weak commodity prices. Combined predecessor-period oil and gas capital expenditures were $226.6 million for January 1–September 9, compared with $531.7 million in the first nine months of 2015.

Outlook, risks and unusual items

  • Management expected near-term capital needs to be funded by operating cash flow and revolver borrowings, while emphasizing ongoing liquidity monitoring and prioritization of higher-return projects. No specific production, revenue, earnings or capital-spending guidance is provided in the supplied filing text.
  • The next borrowing-base redetermination was scheduled for May 2017. The revolver includes leverage and current-ratio covenants, mandatory-prepayment provisions and potential availability changes; the current-ratio covenant begins with the December 2016 quarter.
  • Management warned that prolonged low oil and gas prices could constrain cash flow, investment, debt service and production, and lead to further curtailments or asset sales. Limited hedging beyond 2016 increases exposure to commodity-price volatility.
  • Other disclosed risks include possible NYSE delisting while the company awaited confirmation of regained market-capitalization compliance; concentrated ownership and potential stock dilution; limits on use of approximately $1.5 billion of federal NOL carryforwards following an ownership change; and environmental, flaring, transportation, operational and regulatory risks.
  • Commitments included $18.2 million of drilling-rig obligations and $14.7 million of rig-stacking commitments, in addition to $16.4 million of operating leases. Early termination of certain rig commitments could trigger approximately $13.0 million in penalties.
  • Management stated that pending ordinary-course legal proceedings were not expected to have a material effect. Bankruptcy-court projections were expressly identified as not updated and not suitable for investor reliance.

Investor verification priorities

  1. Confirm whether Halcón Resources Corporation, rather than Battalion Oil Corp, is the intended issuer.
  2. Review the restructuring plan, fresh-start valuation assumptions, debt terms and post-emergence share and warrant dilution.
  3. Check current liquidity, revolver borrowing-base capacity, covenant headroom and the outcome of subsequent borrowing-base redeterminations.
  4. Assess realized prices, production trends, hedge coverage after 2016 and the sensitivity of future ceiling-test impairments to commodity prices.
  5. Verify the economics and transferred obligations of the HK TMS divestiture, as well as rig commitments, NYSE listing status and NOL limitations.