Battalion Oil Corp. — FY2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021; comparison is primarily with FY2020. Battalion is an independent oil and gas producer focused on liquids-rich assets in the Delaware Basin of West Texas. Its financial statements reflect the successor company following its 2019 Chapter 11 emergence and fresh-start accounting.
Financial and operating performance
| Metric | FY2021 | FY2020 |
|---|---|---|
| Total operating revenue | $285.2 million | $148.3 million |
| Net loss | $28.3 million | $229.7 million |
| Operating cash flow | $68.6 million | $50.2 million |
| Capital expenditures for oil and gas | $52.6 million | $101.8 million |
| Average production | 16,241 Boe/d | 16,858 Boe/d |
- Revenue rose about 92%, primarily as the average realized price excluding hedges increased $24.14 per Boe, to $47.93 per Boe. Production declined about 4%.
- Operating income was $103.4 million, about 36% of revenue. The net loss reflected a $125.6 million net derivative loss, including $77.9 million realized and $47.7 million unrealized losses. FY2020 included a $215.1 million noncash ceiling-test impairment; FY2021 had none.
- FY2021 oil, natural gas and NGL sales were $284.2 million. Operating costs per Boe were $20.23, up from $18.13; lease operating, gathering and production taxes per Boe increased, while depletion declined to $7.53 from $9.81.
- Cash from operations was $68.6 million; investing cash outflow was $51.9 million and financing cash inflow was $27.4 million. Cash and restricted cash totaled $48.4 million at year-end, including $46.9 million of cash and cash equivalents.
- At December 31, 2021, total assets were $390.3 million and stockholders’ equity was $63.7 million. Current assets of $87.9 million were below current liabilities of $121.6 million; the resulting reported working-capital deficit was approximately $33.7 million.
- Year-end debt principal was $200.1 million, including $200.0 million under the new term loan and $0.1 million remaining PPP debt. Debt was variable-rate, with a reported weighted-average rate of 7.22%. Term-loan carrying value was $181.6 million, net of issuance costs and excluding the embedded call-option liability.
Material changes and financing
- In November 2021, Battalion replaced its revolving credit agreement with a senior secured term loan. The $200 million initial funding refinanced the prior facility; up to an additional $35 million may be drawn subject to conditions. The loan matures November 24, 2025, bears interest at LIBOR or a replacement reference rate plus 7%, and is secured by substantially all assets of the borrower and guarantors.
- The agreement requires $120 million of scheduled amortization from Q1 2023 through Q3 2025, as well as financial covenant compliance and certain mandatory prepayments. Battalion reported compliance with its defined covenants at year-end. It also reported $0.3 million of letters of credit outstanding.
- The SBA reduced the PPP loan balance from $2.2 million to $0.2 million in August 2021; Battalion recognized a $2.1 million debt-extinguishment gain. It also recognized about $0.7 million of Employee Retention Credits.
- Proved reserves increased 32.5 MMBoe to 95.9 MMBoe: 42.4 MMBoe developed and 53.5 MMBoe undeveloped. Additions/extensions and positive revisions drove the increase, partly offset by 5.9 MMBoe of production. Approximately 56% of reserves were proved undeveloped; all were scheduled for development within five years of initial booking.
Outlook, risks and unusual items
- For 2022, management expected capital expenditures of $130–$150 million, one operated rig, 12 gross wells drilled, 9–13 completed and 8–12 brought online. Planned funding sources were cash, term-loan funding and operating cash flow; management said plans could change with market conditions or funding shortfalls.
- Commodity prices and hedging materially affect results. Term-loan terms require hedging a substantial share of anticipated production; hedges can limit gains in rising markets. Derivative fair-value liabilities were $65.5 million at year-end, against $3.9 million of derivative assets.
- Key exposures include dependence on one basin, sour-gas treating and takeaway capacity, third-party processing and transportation, production declines, drilling and cost inflation, weather, regulatory and environmental obligations, and COVID-19 or other demand disruptions. Three purchasers represented 73% of FY2021 sales.
- Liquidity and covenant compliance warrant attention: the company has scheduled debt amortization beginning in 2023, restrictive covenants, and a history of obtaining covenant waivers under prior credit agreements. Nearly all term-loan debt bears floating interest; management estimated that a 10% rate change would affect annual cash flows by about $1.4 million at the year-end balance.
- Commitments included approximately $4.8 million for a sour-gas treating minimum-volume agreement through June 30, 2022 and a $2.6 million drilling-rig commitment for 2022. Louisiana environmental-damage claims remained pending with exposure not currently determinable; management said it intended to oppose them. No material environmental proceedings involving the specified SEC disclosure threshold were reported.
- Management’s internal-control assessment was effective as of year-end; the auditor did not provide an internal-control attestation. Deloitte issued an unqualified opinion on the financial statements and identified proved reserves and depletion as a critical audit matter. The filing notes that FY2020’s $215.1 million impairment and FY2021’s commodity-price recovery affect comparability.
Investor verification priorities
- Review the term-loan agreement, covenant definitions and headroom, conditional delayed-draw availability, amortization schedule, prepayment terms and LIBOR replacement provisions.
- Assess whether the 2022 capital program can be funded while meeting debt service, maintaining liquidity and converting the large PUD inventory into production.
- Examine hedge volumes, pricing, settlement exposure and sensitivity to commodity prices, basis differentials and counterparty performance.
- Validate reserve assumptions, SEC pricing, PUD development timing and costs, particularly given the reserve increase and reliance on undeveloped reserves.
- Evaluate sour-gas processing capacity, transportation access, purchaser concentration and the status and potential cost of Louisiana claims.