BATTALION OIL CORP quarterly report, Q2 FY2015

SEC Filing Summary

Entity discrepancy: The request identifies Battalion Oil Corp, but the supplied Form 10-Q is for Halcón Resources Corporation. This summary covers Halcón’s filing for the quarter ended June 30, 2015, filed July 31, 2015. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions unless stated otherwise.

Business context and reporting period

Halcón is an independent U.S. oil and gas company focused on acquiring, producing, exploring and developing liquids-rich assets. Its main operating areas discussed are the Bakken/Three Forks in North Dakota and El Halcón in East Texas. The filing compares the three and six months ended June 30, 2015 with the corresponding 2014 periods.

Key financial metrics

Metric	Q2 2015	Six months 2015	Comparable 2014
Operating revenue	$168.0 million	$304.2 million	$327.1 million Q2; $602.3 million six months
Net loss	$1,088.6 million	$1,676.3 million	$67.5 million Q2; $140.4 million six months
Operating cash flow	Not separately stated	$217.5 million	$410.9 million six months
Investing cash flow	Not separately stated	$(412.2) million	$(607.6) million six months
Financing cash flow	Not separately stated	$160.9 million	$355.1 million six months
Cash at period end	—	$10.0 million	$43.7 million at Dec. 31, 2014
Long-term debt	—	$3,650.6 million at June 30	$3,746.7 million at Dec. 31, 2014

Q2 oil, gas and NGL sales were $167.6 million; total operating expenses were $1,122.4 million, including a $948.6 million full-cost ceiling impairment. The resulting operating loss was $954.4 million.
For the first half, the full-cost ceiling impairment was $1,502.6 million, versus $61.2 million in the first half of 2014. The impairment is non-cash and reflected lower commodity prices in the ceiling-test calculation.
Q2 loss available to common stockholders was $1,104.6 million, or $(2.03) per share; first-half loss available was $1,705.8 million, or $(3.53) per share.
At June 30, current assets were $488.7 million and current liabilities were $458.6 million. Current assets included $235.9 million of current derivative receivables. Cash was $10.0 million.
The revolving credit borrowing base was $900 million; $24 million was drawn and $1 million of letters of credit was outstanding, leaving approximately $875 million of stated borrowing capacity. The company reported compliance with its credit agreement covenants at June 30.
Average production was 41,297 Boe/day in Q2, down from 42,055 a year earlier; first-half production averaged 42,182 Boe/day, up from 39,354. Average realized prices excluding settled hedges were $44.59/Boe in Q2 and $39.69/Boe for the first half, down 47% and 53%, respectively, year over year.

Material changes versus prior comparable periods

Revenue fell approximately 49% year over year in Q2 and 50% for the first half, principally due to sharply lower realized commodity prices. First-half production growth partly offset the price decline.
The first-half net loss widened substantially, mainly because of the $1.5 billion ceiling-test impairment. Q2’s impairment alone was $948.6 million; the 2014 Q2 period had no ceiling-test impairment.
First-half operating cash flow decreased to $217.5 million from $410.9 million. Oil and gas capital expenditures fell to $407.8 million from $853.7 million; the company said it had significantly reduced planned 2015 capital spending.
Debt declined by about $96.1 million from year-end, while cash fell by $33.7 million. Halcón issued $700 million of 8.625% secured notes and used net proceeds primarily to repay revolving-credit borrowings.
In Q2, Halcón exchanged $258 million principal amount of senior unsecured notes for approximately 144.8 million common shares, recording a $22.8 million gain on debt extinguishment. Common shares outstanding increased from 427.8 million at year-end to 590.3 million at June 30.

Outlook, commentary, risks and unusual items

Management said near-term capital spending was expected to be funded by operating cash flow, with the credit facility also available. It had curtailed spending, focused drilling on higher-return projects, reduced costs and continued exploring divestitures. No specific full-year production or capital-spending guidance is provided in the supplied filing text.
Management warned that sustained low oil and gas prices could reduce revenue, borrowing-base value and covenant capacity, and could cause further ceiling-test write-downs. The next borrowing-base redetermination was expected around October 2015.
The credit agreement amendment reduced the borrowing base to $900 million and replaced the interest-coverage covenant with a maximum secured-debt-to-EBITDA ratio of 2.75 to 1.0. Management noted that failure to obtain needed covenant flexibility or comply could require repayment/refinancing, constrain operations or lead to default and acceleration.
Halcón reported $3.65 billion of long-term debt, most of it fixed-rate; it stated that approximately 99% bore a weighted-average fixed rate of 9.0%. The company also cited substantial indebtedness and dependence on capital access as risks.
Hedging provided partial protection, but derivatives were not designated for hedge accounting, so fair-value changes affected reported earnings. First-half derivative results were a $12.2 million net gain, comprising $195.9 million of realized gains and $183.7 million of unrealized losses. Derivative assets totaled $313.5 million at June 30.
Halcón’s TMS subsidiary, HK TMS, amended its Apollo agreement: it must drill at least 6.5 net wells in each of five consecutive twelve-month periods beginning December 31, 2015. Apollo received an option to seek redemption of preferred shares in a specified 2016 window, subject to available cash; missed drilling commitments can require redemption from cash above a minimum balance. The preferred investment carries an 8% cumulative dividend and a redemption formula tied to a 12% annual return or 1.25 times invested capital, plus applicable fees.
Drilling commitments included a $6 million early-termination fee already paid, a $17,000-per-day stacking fee for a rig through the second quarter of 2018, and potential termination penalties of approximately $39.1 million for other rig commitments. Office and equipment lease commitments were approximately $55.4 million.
Halcón disclosed a NYSE minimum-price risk: its common stock closed at $0.87 on July 27, 2015, below the $1.00 continued-listing threshold described in the filing. Shareholders had approved a potential one-for-five reverse split, but the board had not committed to implement it.
Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It said pending ordinary-course legal matters were not expected to have a material effect.

Important facts for investors to verify

Confirm the intended issuer: the supplied filing is Halcón Resources Corporation’s 10-Q, not a Battalion Oil Corp filing.
Review the full-cost ceiling test assumptions, subsequent commodity prices and potential for additional impairments.
Assess liquidity beyond reported borrowing availability, including the October 2015 borrowing-base redetermination, covenant calculations and the limited cash balance.
Review total debt terms, interest costs, lien priority, maturities and any restrictions on borrowing or transfers from HK TMS.
Evaluate dilution and potential additional share issuance following the debt-for-equity exchanges, equity distribution program, convertible note and warrants.
Examine hedge volumes, settlement exposure and the distinction between realized cash proceeds and non-cash mark-to-market losses.
Track NYSE listing compliance and the status of any reverse-split action.