Filing summary
Entity-name discrepancy: The request identifies Battalion Oil Corp, but the supplied Form 10-Q is for Halcón Resources Corporation (ticker HK). This summary covers the filing provided, for the quarter ended March 31, 2019.
Business context and reporting period
Halcón was an independent oil and gas company focused on liquids-rich assets in the Delaware Basin of West Texas. Results are unaudited and compare the three months ended March 31, 2019 with the same 2018 period. Average production rose to 17,089 Boe/d from 10,967 Boe/d, attributed to West Quito Draw properties and drilling in Monument Draw and West Quito Draw. The company participated in drilling nine gross (8.6 net) wells, with no dry holes.
Financial performance and position
| Metric | Q1 2019 | Q1 2018 / prior date |
|---|---|---|
| Oil, gas and NGL sales | $51.9 million | $49.1 million |
| Net loss | $336.6 million | $2.6 million |
| Net loss per share | $2.12 | $0.02 |
| Net cash used in operating activities | $36.8 million | $12.6 million |
| Net cash used in investing activities | $114.4 million | $293.0 million |
| Net cash from financing activities | $104.6 million | $263.6 million |
| Cash and cash equivalents at period end | $0.2 million | $46.9 million at Dec. 31, 2018 |
| Total debt carrying amount | $718.5 million | $613.1 million at Dec. 31, 2018 |
| Stockholders’ equity | $853.7 million | $1,197.0 million at Dec. 31, 2018 |
Revenue increased about 5.4%, while production volume rose about 55.8%. Average realized prices before hedging fell to $33.76/Boe from $49.75/Boe; oil averaged $49.42/Bbl versus $62.15, gas $0.75/Mcf versus $2.62, and NGLs $16.88/Bbl versus $25.42. The filing does not report a consolidated gross margin.
Major expenses included a $275.2 million non-cash full-cost ceiling impairment ($217.4 million after tax), a $64.8 million net derivative loss, and $11.3 million of restructuring costs. Interest expense and other rose to $12.6 million from $7.0 million. An income-tax benefit of $45.5 million partly offset the loss. Oil and gas capital expenditures were $81.1 million; other property and equipment spending was $30.6 million.
At March 31, total current assets were $61.5 million and current liabilities were $264.0 million, including $105.0 million of revolving-credit borrowings classified as current. The company had $105.0 million drawn under its credit facility and approximately $118.2 million of stated borrowing capacity after $1.8 million of letters of credit, based on a $225 million borrowing base. Senior notes had $625.0 million principal outstanding; total debt principal was approximately $730 million.
Material changes and unusual items
- The ceiling-test impairment reduced net oil and gas properties to $1.58 billion from $1.80 billion at year-end. The filing attributes the impairment to lower ceiling-test oil prices and a decision to focus capital on the most economic areas. It estimates that using a more recent illustrative oil-price assumption would have produced a further $19.6 million impairment before tax, holding other inputs constant.
- Derivative results swung from a $5.9 million gain in Q1 2018 to a $64.8 million loss in Q1 2019, primarily due to a $68.2 million unrealized loss; realized settlements produced a $3.4 million gain.
- Operating costs increased, including lease operating expense of $14.2 million versus $4.9 million and gathering and other expense of $14.9 million versus $6.4 million. Gathering costs included about $8.2 million to remove hydrogen sulfide after a third-party pipeline outage; management expected treating costs to decline substantially after Q1.
- Four senior executives departed and the company reduced staff as planned 2019 drilling and development activity declined. Restructuring charges were $11.3 million; stock-based compensation was a $6.8 million credit, including an $8.4 million incremental reduction related to executive departures and award modifications.
- Cash fell sharply as operating and investing outflows were partly funded with net revolving-credit borrowings of $105 million. Q1 2019 investing outflows were lower than the prior year, which included substantial acreage acquisitions.
- The December 2018 sale of water infrastructure assets generated $211.9 million cash proceeds and a $118.1 million gain in 2018; Q1 2019 included a $0.9 million post-closing adjustment. Additional incentive payments of up to $25 million annually for five years depend on well-connection thresholds.
Outlook, liquidity, risks and contingencies
Going concern: Management concluded that conditions raise substantial doubt about the company’s ability to continue as a going concern. Internal projections indicated potential noncompliance with the debt agreement’s leverage and current-ratio covenants beginning in Q2 2019. Lenders did not approve the requested covenant amendment for the following twelve months. A default could allow acceleration of approximately $730 million of debt; the company stated it lacked sufficient liquidity to repay accelerated amounts. Derivatives in a net liability position could also become payable. The statements nevertheless use the going-concern basis and include no adjustments for this uncertainty.
On May 8, 2019, after quarter-end, lenders waived the potential Q1 leverage-ratio default, raised borrowing margins, capped the defined consolidated cash balance at $5 million, and required periodic cash-flow and accounts-payable reporting. The waiver could be terminated earlier on July 1, 2019 and otherwise was scheduled to end August 1, 2019 unless specified requirements were met. The borrowing base was reduced from $275 million to $225 million. Management was pursuing covenant relief, alternative capital, asset sales, strategic transactions and cost reductions; there was no assurance these efforts would succeed. Management warned that insufficient capital could force cuts to drilling and development, asset sales, or other actions that could harm production and financial results.
Other risks include volatile commodity prices, reserve and production uncertainty, access to financing, operational and environmental risks, pipeline and processing capacity, and debt restrictions. The company hedges a varying share of expected production; its general objective was to hedge approximately 70%–80% of anticipated production for the next 18–24 months when acceptable contracts were available. Management said Q1 H2S treating costs should fall substantially after the quarter, but provided no broader production, earnings or capital-spending guidance. Routine legal proceedings were not expected by management to have a material effect.
Investor verification priorities
- Confirm that the intended issuer is Halcón Resources Corporation, not Battalion Oil Corp, before relying on this filing summary.
- Track covenant compliance, waiver conditions and lender termination rights, especially the July 1 and August 1, 2019 dates, and any subsequent amendments or defaults.
- Verify liquidity, cash restrictions, borrowing-base capacity and the company’s ability to fund operations and debt service.
- Review subsequent financing, asset-sale, merger or restructuring developments and whether going-concern uncertainty was resolved.
- Monitor commodity prices, hedge settlements and derivative liabilities, as well as production, realized prices and H2S-related operating costs.
- Assess the assumptions behind the ceiling-test impairment and the risk of further impairment if prices, reserves or development plans change.