Battalion Oil Corporation (formerly Halcón Resources Corporation) — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. Battalion emerged from Chapter 11 on October 8, 2019 and adopted fresh-start accounting effective October 1, creating separate Predecessor and Successor reporting periods. Accordingly, full-year 2019 amounts combined from those periods are useful context but are not directly comparable to prior-year GAAP results. The company changed its name in January 2020 and began trading on NYSE American as BATL on February 20, 2020.
Business context and key financial metrics
Battalion is an independent oil and gas producer focused primarily on liquids-rich properties in the Delaware Basin of West Texas. At year-end it reported approximately 52,368 net Delaware Basin acres and 62.1 MMBoe of proved reserves; 61% were proved developed. Its production averaged 17,986 Boe/d across the two 2019 reporting periods, compared with 13,904 Boe/d in 2018, reflecting West Quito Draw acquisitions and drilling in Monument Draw and West Quito Draw.
| Metric | 2019 / year-end disclosure | Comparable context |
|---|---|---|
| Operating revenue | $224.7 million combined: $159.1 million Predecessor and $65.6 million Successor | $226.6 million in 2018; combined 2019 revenue was slightly lower, but reporting bases differ |
| Net income (loss) | Predecessor period: $(1,156.1) million; Successor period: $(10.5) million | The Predecessor loss included a $985.2 million full-cost ceiling impairment and $117.1 million of net reorganization items. 2018 net income was $46.0 million, including a $119.0 million gain on water assets |
| Production and realized price | Average daily production: 17,209 Boe/d Predecessor and 20,293 Boe/d Successor. Average realized price excluding settled derivatives: $33.71/Boe and $34.88/Boe, respectively | 2018 average production: 13,904 Boe/d; realized price: $44.44/Boe |
| Cash flow | Operating cash flow: $(39.7) million Predecessor and $13.7 million Successor. Investing cash flow: $(254.4) million and $(42.8) million, respectively | 2018 operating cash flow was $67.2 million. Combined 2019 operating cash flow across the two periods was a use of approximately $26.1 million |
| Cash and liquidity | Year-end cash and equivalents: $5.7 million; restricted cash: $4.6 million. Current assets: $71.2 million; current liabilities: $106.4 million | Approximately $93.7 million of borrowing capacity remained under the credit facility, after $144.0 million of debt and $2.3 million of letters of credit |
| Debt | $144.0 million outstanding, floating-rate and secured; facility maturity October 2024 | Predecessor’s $625.0 million face amount of 6.75% notes due 2025 was cancelled in the reorganization |
| Capital spending | Approximately $187.8 million of 2019 drilling and completion expenditures | Management expected 2020 capital spending of approximately $60–$76 million, versus the December 2019 plan of $123–$138 million |
The filing does not provide a directly comparable full-year 2019 profit or margin because the Predecessor and Successor statements use different accounting bases. On a per-Boe basis, lease operating, workover, production tax, and gathering costs were higher in the first 2019 reporting period than in the Successor period; gathering and treating costs also reflect the company’s infrastructure arrangements and sour-gas treatment needs.
Material changes versus prior periods
- Chapter 11 reorganization extinguished the predecessor common shares and 2025 notes, repaid the predecessor credit and DIP facilities, and issued approximately 16.2 million new shares. Noteholders received the principal equity allocation; existing shareholders received a smaller equity allocation and warrants.
- Fresh-start accounting reset assets and liabilities to fair value and eliminated the predecessor accumulated deficit. Net oil and gas property carrying value was $506.1 million at December 31, 2019, versus $1.802 billion at December 31, 2018; these balances are not comparable.
- Proved reserves declined to 62.1 MMBoe from 85.2 MMBoe. Negative revisions of 29.7 MMBoe and production of 6.6 MMBoe exceeded additions and extensions of 13.2 MMBoe. Management attributed revisions principally to lower prices and a development-plan focus on Monument Draw.
- Production increased year over year while realized prices per Boe declined. The 2019 Predecessor period also included substantial restructuring expense, executive severance, and reorganization costs.
- The company sold its water infrastructure in 2018 and thereafter incurred third-party water hauling and disposal costs. It installed an H2S treating plant in April 2019 to reduce reliance on more expensive wellhead treatment.
Outlook, risks, contingencies, and unusual items
- 2020 plan and market uncertainty: Management described a possible reduction in the 2020 capital program to $60–$76 million, with four to six gross operated wells drilled and six to seven placed online. It expected to fund spending with cash, operating cash flow, and facility borrowings; lower-than-expected cash flow could require further curtailments. The filing identifies COVID-19 and commodity-price volatility as risks to demand, prices, borrowing capacity, and liquidity.
- Borrowing-base and covenant risk: The $240 million borrowing base was subject to a spring 2020 redetermination and semiannual reviews. Financial covenants, including a maximum 3.50:1 leverage ratio and minimum 1.00:1 current ratio, began with the quarter ending March 31, 2020. A borrowing-base reduction could require repayment and constrain operations.
- Hedges: Management reported approximately 90%, 84%, and 88% of expected proved-developed-producing output hedged for 2020, 2021, and 2022, respectively, at weighted average oil prices of $56.11, $53.44, and $52.38 per barrel. Derivatives can limit upside, and counterparty performance and basis differentials remain risks.
- Operational and concentration risks: The company is a single-basin operator, faces water, gathering, transportation and sour-gas treating constraints, and relies on two purchasers for 80% of combined 2019 sales. Drilling success, reserve estimates, lease expirations, environmental regulation, and production decline rates are material uncertainties.
- Unusual and contingent items: A Pennsylvania judgment of approximately $9.1 million was marked satisfied on February 3, 2020, and the company considered the matter resolved. Management stated other ordinary-course proceedings were not expected to materially affect results, financial position, or cash flows. The filing also disclosed approximately $3.2 million of rig commitments and $8.2 million of equipment purchase commitments for 2020.
- Reporting and controls: Deloitte issued unqualified opinions on the financial statements and internal controls; management also concluded internal control over financial reporting was effective at year-end.
Important facts for investors to verify
- Whether the spring 2020 borrowing-base review changed the $240 million base, available liquidity, or facility terms.
- Whether the proposed lower 2020 capital budget was finalized and how it affected drilling, production, lease preservation, and cash needs.
- Subsequent production results, reserve revisions, and the economics underlying the 24.1 MMBoe of proved undeveloped reserves.
- Actual realized prices, hedge settlements, basis differentials, and hedge coverage relative to production after year-end.
- Current working capital, covenant compliance, cash generation, and the ability to fund operations without additional financing or asset sales.
- Exposure to the two major purchasers and the availability and cost of water, sour-gas treatment, gathering, and transportation capacity.