BATTALION OIL CORP quarterly report, Q2 FY2014

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Filing summary

Entity discrepancy: The request identifies Battalion Oil Corp., but the supplied Form 10-Q is for Halcón Resources Corporation. Confirm the filing and issuer before relying on this summary.

Business context and reporting period

Unaudited quarterly report for the three and six months ended June 30, 2014. Halcón describes itself as an independent U.S. onshore oil and gas company, focused on liquids-rich assets, including the Bakken/Three Forks, East Texas and Tuscaloosa Marine Shale (TMS). Results reflect substantial development activity and non-core asset sales.

Financial performance and liquidity

Unless noted otherwise, figures below are in millions of dollars. Q2 2014 revenue was $327.1, up 53% from $214.3 in Q2 2013; six-month revenue was $602.3, up 49% from $405.2. Oil, natural gas and NGL sales drove the increase. Average daily production rose 44% in Q2 to 42,055 Boe/d and 43% for the six-month period to 39,354 Boe/d.

  • Profitability: Q2 operating income was $91.3 versus $31.8 a year earlier; operating margin was approximately 27.9% versus 14.9%. Yet Q2 net loss was $67.5, compared with net income of $37.1, principally reflecting a $121.0 derivative loss and higher interest expense. Six-month net loss was $140.4 versus net income of $42.6; loss available to common shareholders was $151.3, or $0.37 per diluted share.
  • Costs: Q2 depletion, depreciation and accretion was $133.5, up from $95.3. Lease operating cost per Boe declined to $8.09 from $11.99 in Q2; production taxes and gathering costs increased with production and Bakken activity.
  • Cash flow: Six-month operating cash flow was $410.9, versus $231.4 in 2013. Investing cash outflow was $607.6, including $853.7 of oil and gas capital expenditures and $189.4 advanced under a TMS carry arrangement, partly offset by $465.5 in asset-sale proceeds. Financing cash inflow was $355.1; cash ended at $161.3. Operating cash flow less oil and gas and other property capital expenditures was approximately negative $472.3.
  • Liquidity and debt: At June 30, cash was $161.3 and restricted cash $16.0; current assets were $514.6 and current liabilities $739.9. Long-term debt, including current maturities, totaled approximately $3.447 billion. The $700 million revolving-credit borrowing base had $259 million drawn; the filing also reports approximately $266 million of additional borrowing capacity under indenture limitations. Halcón said it was in compliance with credit-agreement covenants.
  • Margins and tax: Six-month operating margin was approximately 13.8%, versus 15.8% in 2013. No income tax expense or benefit was recorded in 2014 because of a valuation allowance against deferred tax assets.

Material changes versus prior comparable periods

  • Production growth and higher realized prices raised Q2 oil, gas and NGL sales to $323.9 from $213.6; six-month sales reached $598.1 from $403.9.
  • Hedge marks swung sharply: Q2 derivative results were a $121.0 loss versus a $34.1 gain; six-month results were a $154.7 loss versus a $15.7 gain. These included substantial unrealized losses and do not alone represent the period’s cash operating performance.
  • Interest expense and other, net, increased to $37.7 in Q2 from $5.7 and to $68.7 for six months from $10.6. The company attributed the increase in part to additional debt issued after the prior-year period.
  • Six-month 2014 expenses included a $61.2 full-cost ceiling impairment recorded in Q1 and $3.8 impairment related to midstream assets. No ceiling impairment was recorded in Q2.
  • Halcón sold certain East Texas non-core assets in May for $425.3 after adjustments; proceeds reduced the full-cost pool, with no gain or loss recorded. The sale reduced the revolving-credit borrowing base by $100 million to $700 million.

Outlook, commentary, risks and unusual items

  • Management said near-term spending would be funded by operating cash flow, potential non-core divestitures and capital-market transactions, and revolver borrowings. It had scaled back capital spending, prioritized higher-return drilling, and continued to explore asset sales. No specific production or earnings guidance is provided in the supplied filing text.
  • For the TMS, Apollo affiliates invested $150 million in HK TMS preferred interests; Halcón also contributed $50 million cash and TMS acreage. The preferred interests carry an 8% cumulative return and defined redemption provisions. Halcón committed to drill at least 6.5 net wells in each of six consecutive 12-month periods starting June 16, 2014. Apollo also has rights to invest up to an additional $250 million on specified terms.
  • Halcón reported a $189.4 million TMS carry arrangement, paid during the first half; unspent funds are returnable if not used by August 31, 2017. Drilling-rig commitments were $73.1 million, with estimated early-termination penalties of $39.2 million; other office and equipment lease commitments totaled approximately $66.1 million.
  • Management highlighted substantial indebtedness and the importance of covenant compliance. The credit agreement required a minimum 2.0:1 interest coverage ratio through year-end 2014, then 2.5:1, and a minimum working-capital covenant. Lower commodity prices, reserve or borrowing-base reductions, production declines, or unavailable covenant relief could constrain funding and force spending cuts, refinancing or asset sales.
  • Commodity derivatives reduce some price exposure, but fair-value changes run through earnings because hedge accounting was not elected. At quarter-end, derivative liabilities were $145.2 million, against derivative assets of $0.7 million. The company generally targeted hedging 70%–80% of current and anticipated production for the next 18–24 months.
  • Newly emphasized risks included North Dakota gas-flaring capture rules and possible production restrictions or penalties, potential rail-shipping regulation for Bakken crude, and hydraulic-fracturing and climate-related regulation. The filing says management considered pending legal proceedings not expected to have a material effect; an IRS audit of GeoResources tax returns was ongoing.

Important facts for investors to verify

  • Confirm that this Halcón Resources filing—not a Battalion Oil filing—is the intended document.
  • Review debt maturities, borrowing-base redeterminations, covenant calculations and actual availability under both the credit agreement and indentures.
  • Assess derivative contract volumes, settlement cash flows, mark-to-market sensitivity and the effect of hedges on realized prices.
  • Check the TMS preferred-interest redemption economics, Apollo tranche rights, drilling obligations and use of carry funds.
  • Evaluate whether production growth and asset-sale proceeds can support capital needs, interest costs and liquidity without further financing or divestitures.
  • Monitor Bakken gas-capture infrastructure and regulatory deadlines, and the potential operational and cost effects of flaring, transport and fracturing rules.