Battalion Oil Corp. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023; comparative periods ended September 30, 2022. Unaudited. Battalion is an independent oil and gas company focused on liquids-rich assets in the Delaware Basin, Texas.
Financial and operating performance
Dollar amounts below are in millions unless stated otherwise.
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total operating revenue | $54.1 | $99.1 | $173.5 | $282.3 |
| Income from operations | $6.8 | $43.9 | $18.3 | $127.5 |
| Net income (loss) | $(53.8) | $105.9 | $(35.7) | $26.2 |
| Net income (loss) available to common | $(57.7) | $105.9 | $(42.1) | $26.2 |
| Basic loss/income per share | $(3.50) | $6.48 | $(2.56) | $1.60 |
- Operating margin, calculated as operating income divided by revenue, was approximately 12.6% in Q3 2023 versus 44.3% in Q3 2022; for the nine-month periods it was approximately 10.5% versus 45.2%.
- Q3 oil, gas and NGL sales were $53.4 million, down from $98.7 million. Nine-month sales were $171.6 million versus $281.4 million. Management attributed the decline to lower realized prices and production.
- Average production was 12,717 Boe/day in Q3 and 14,377 Boe/day for the nine months, down from 16,228 and 15,352 Boe/day, respectively. Midstream disruptions, plant curtailments and natural declines contributed; one operated well was completed and brought online in the first nine months.
- Average realized price excluding hedges fell $20.44/Boe year over year in Q3 and $23.42/Boe for the nine months. Nine-month operating costs included higher per-Boe lease operating, gathering and G&A costs; depletion was $11.02/Boe versus $8.56/Boe.
- Derivative results were a $53.7 million loss in Q3 2023 (including a $46.8 million unrealized loss) versus a $67.6 million gain in Q3 2022. Nine-month derivative losses were $29.7 million versus $88.1 million. These mark-to-market and settlement effects materially affected reported earnings.
- Interest expense and other was $6.9 million in Q3 and $24.2 million for the nine months, up from $5.7 million and $13.2 million. The Q3 weighted-average borrowing rate was 12.89%; management estimated approximately 13.04% for Q4.
Cash, debt and liquidity
- At September 30, 2023, cash and cash equivalents were $42.6 million (plus $0.1 million restricted cash); current assets were $75.3 million and current liabilities $141.4 million. Total assets were $456.8 million.
- Gross debt was $210.2 million, down from $235.2 million at December 31, 2022. The secured term loan matures November 24, 2025, bears SOFR plus 0.15% and a 7.5% margin, and is secured by substantially all borrower and guarantor assets. No additional borrowing capacity was available; $4.7 million of letter-of-credit capacity remained as of the filing date.
- Scheduled principal payments include $10 million due in Q4 2023 and Q1 2024, further quarterly installments, and a $115 million final payment at maturity. The filing describes $95 million of scheduled amortization through Q3 2025.
- Nine-month operating cash flow was $11.1 million versus $53.8 million. Investing cash outflow was $37.1 million, including $36.7 million of oil and gas capital expenditures; financing provided $35.9 million, including $61.4 million from preferred stock issuance and $25.1 million of debt repayments.
- Management states additional liquidity is required to support operations and covenant compliance over the next 12 months. It believes available cash, cost reductions, forecasts and a stockholder support commitment to purchase up to $55 million of additional preferred securities make sufficient liquidity probable for that period. This assessment depends on assumptions and the commitment being available when needed.
- The company was in compliance with its debt financial covenants at September 30, 2023. Required thresholds include a minimum 1.80x asset coverage ratio, maximum 2.50x total net leverage ratio and minimum 1.00x current ratio.
Material changes, outlook and risks
- Existing major stockholders purchased $63 million of Series A redeemable convertible preferred stock in 2023, generating $61.4 million net cash proceeds. The shares carry cumulative dividends of 14.5% in cash or 16.0% if paid in kind; the term loan currently prohibits cash dividends. Preferred stock carrying value was $66.8 million at quarter-end, including PIK dividends, and reduces value attributable to common shareholders.
- Management reported cost-reduction measures, including an April headcount reduction, and said it is pursuing other financing, asset sales, capital partners, strategic transactions and further expense reductions. No formal earnings or production guidance is provided.
- The acid-gas treatment facility joint venture has faced commissioning and injection-well problems. Battalion advanced $8.05 million on behalf of its partner for workover costs and estimated another $5.5 million advance in Q4. Management’s forecast assumes processing of 20,000 Mcf/day in Q1 2024; delays could increase treating costs. Once operating, the facility is expected to reduce treating fees by more than 50%, subject to execution and timing risks.
- Hedges cover a substantial but varying portion of anticipated production; loan requirements call for hedging approximately 50%–85% by year over a rolling four-year period. Hedges can limit gains when prices rise and do not eliminate exposure to price declines. At quarter-end, derivative assets were $6.7 million and liabilities $71.5 million (gross balance-sheet amounts).
- Other significant risks include volatile commodity prices, production declines, midstream and sour-gas treating capacity, supply-chain costs, interest rates, liquidity and covenant compliance. Louisiana surface-owner environmental claims remain pending; total exposure is not currently determinable. Management says other pending legal matters are not expected to have a material effect.
- The filing reports effective disclosure controls and no material change in internal control over financial reporting during the period.
Important facts for investors to verify
- Availability and timing of the up-to-$55 million preferred-equity support commitment, and whether liquidity and covenant compliance remain adequate.
- Debt amortization and the $115 million maturity payment, including the company’s plans for refinancing or repayment.
- Progress, cost recovery and commissioning timing for the acid-gas facility and injection well; verify the expected Q1 2024 start and projected treating-fee savings.
- Production recovery from midstream disruptions and curtailments, realized prices, per-unit costs and the financial impact of the hedge portfolio.
- Preferred-stock PIK accruals, redemption and conversion terms, and their effect on common-stockholder value; also monitor the uncertain exposure from Louisiana claims.