BATTALION OIL CORP quarterly report, Q3 FY2019

Full document

Filing summary

Issuer identification: The supplied filing is Halcón Resources Corporation’s Form 10-Q for the quarter ended September 30, 2019, not a filing identified as Battalion Oil Corp. Verify the issuer and filing before relying on this summary.

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. The filing reports unaudited results for the three and nine months ended September 30, 2019, against the comparable 2018 periods. Halcón filed for prepackaged Chapter 11 on August 7, 2019; the court confirmed its plan on September 24, and the company emerged on October 8, 2019, after the reporting date. The September financial statements are therefore for the predecessor debtor-in-possession; fresh-start accounting created a successor reporting entity at emergence, limiting comparability with historical results.

Financial performance and position

  • Revenue: Third-quarter operating revenue was $50.8 million, down from $61.6 million in 2018. Nine-month revenue was $159.1 million, down from $166.3 million. Nine-month oil, natural gas and NGL sales were $158.4 million.
  • Production and realized prices: Average production rose to 16,489 Boe/d in Q3 from 14,609 Boe/d, and to 17,209 Boe/d for nine months from 12,795 Boe/d. Average realized price, excluding hedge effects, fell to $33.33/Boe in Q3 from $45.57, and to $33.71/Boe for nine months from $47.42.
  • Profit and impairment: Q3 net loss was $63.3 million versus $81.8 million; nine-month net loss was $1.041 billion versus $100.7 million. The 2019 nine-month loss included a $985.2 million noncash full-cost ceiling impairment, including $664.4 million in Q2 and $275.2 million in Q1; Q3 impairment was $45.6 million. The nine-month results also included a $95.8 million income tax benefit.
  • Costs and margins: Q3 lease operating expense rose to $12.0 million ($7.88/Boe) from $5.3 million ($3.92/Boe), primarily due to water hauling and disposal costs and a larger well inventory. Nine-month lease operating expense was $39.6 million ($8.43/Boe). Nine-month depletion, depreciation and accretion was $90.9 million. The filing does not state a single operating-margin measure; operating loss was $64.4 million for Q3 and $1.063 billion for nine months.
  • Cash flow: Nine-month operating cash flow was negative $33.2 million, compared with positive $36.7 million in 2018; investing cash outflow was $254.4 million and financing inflow was $257.8 million. Cash declined to $17.0 million from $46.9 million at year-end 2018. Oil and gas capital spending was $167.2 million, and other property and equipment spending was $85.6 million.
  • Debt and liquidity: At September 30, $258.2 million was outstanding under the senior revolver and DIP facility; the $625.0 million 6.75% notes were classified as liabilities subject to compromise. Current assets were $84.8 million against current liabilities of $379.0 million. After quarter-end, the company refinanced the facilities and notes through its restructuring and a new $750 million exit revolving facility, with a $275 million initial borrowing base and $130 million initially drawn. The notes were cancelled upon emergence.
  • Hedges: Q3 net derivative gain was $13.5 million, versus a $60.4 million loss in 2018; the nine-month derivative loss was $34.3 million versus $66.6 million. At September 30, derivative assets were $19.4 million and liabilities $8.5 million.

Material changes and unusual items

  • The restructuring exchanged the predecessor’s capital structure: senior noteholders received most of the reorganized equity, while existing holders received a smaller equity allocation and warrants, subject to dilution. Pre-emergence shares were cancelled. Fresh-start valuation was still being finalized; court-approved enterprise value was estimated at $425 million to $475 million.
  • Halcón delisted from the NYSE on July 22, 2019 and said it intended to seek relisting by year-end 2019. The filing does not confirm that relisting occurred.
  • Management cited lower commodity prices and weaker realized prices, despite higher production, as key revenue pressures. A 2019 H2S treating plant reduced reliance on expensive wellhead treating, but the company continued to identify sour-gas handling and takeaway as risks.
  • Nine-month restructuring expense was $15.1 million, mainly associated with executive departures, severance, relocation, office consolidation and hiring. Professional fees related to debt restructuring contributed to higher G&A.
  • Halcón sold its water infrastructure assets for an adjusted $210.9 million in December 2018 and recognized a cumulative $115.4 million gain. In August 2019, it terminated the associated potential incentive payments.

Outlook, risks and contingencies

The filing provides no specific forward production or capital-spending guidance. Management expected near-term capital needs to be funded by cash, operating cash flow and Exit Facility borrowings. It warned that borrowing-base reductions could constrain liquidity and that the bankruptcy projections were prepared for court proceedings, were not being updated, and should not be relied upon as ongoing guidance. Exit Facility covenants include a maximum leverage ratio of 4.00:1.00 and a minimum current ratio of 1.00:1.00, beginning with the quarter ending March 31, 2020.

  • Principal operating and market risks include volatile oil and gas prices, reserve and production declines, capital access, water costs, gathering and transportation capacity, and elevated H2S in some gas production.
  • Fresh-start accounting, a new ownership and governance structure, and the substantial change in capital structure mean future results may not be comparable with predecessor results. Management also warned that restructuring could impair the ability to use tax attributes; it reported approximately $2.6 billion in NOL carryforwards at December 31, 2018, with availability subject to limitations and further review.
  • A subsidiary was appealing a Pennsylvania judgment ordering payment of approximately $9.1 million in a leasing dispute. The outcome was pending.
  • The filing describes a 15-year crude oil gathering agreement and 15-year gas gathering and processing agreement with entities controlled by funds affiliated with Ares; it also discloses a related-party service provider relationship.

Investor verification priorities

  1. Confirm the filing’s issuer: this document names Halcón Resources Corporation, not Battalion Oil Corp.
  2. Review post-emergence filings for finalized fresh-start balances, successor share count, ownership dilution, and whether the stock was relisted.
  3. Verify current Exit Facility borrowings, borrowing base, covenant compliance and liquidity after the spring 2020 redetermination.
  4. Assess the causes and potential recurrence of the $985.2 million impairment, including reserve assumptions and commodity-price sensitivity.
  5. Check updates on the Pennsylvania appeal, H2S capacity and operating costs, and availability of tax attributes following the ownership change.