Battalion Oil Corporation — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Battalion is a Delaware Basin-focused oil and gas producer, formerly Halcón Resources. The company emerged from Chapter 11 in October 2019 and adopted fresh-start accounting; accordingly, Q1 2020 “Successor” results are not directly comparable with Q1 2019 “Predecessor” results.
Key financial results
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Operating revenue | $47.4 million | $51.9 million |
| Operating income (loss) | $(2.2) million | $(304.7) million |
| Net income (loss) | $114.5 million | $(336.6) million |
| Operating cash flow | $12.3 million | $(36.8) million |
| Capital expenditures | $48.2 million | $111.6 million |
| Cash and restricted cash at period-end | $0.9 million | $0.2 million |
- Revenue fell about 9% year over year, while average production rose to 18,791 Boe/d from 17,089 Boe/d. Lower realized prices more than offset higher volumes: realized revenue price was $27.50/Boe versus $33.76/Boe, excluding hedge settlements.
- Q1 net income included a $118.3 million derivative gain, principally a $112.4 million unrealized mark-to-market gain. Thus, reported earnings substantially reflect noncash valuation changes, not operating profitability. The company recorded a $2.2 million operating loss.
- Operating costs improved in several categories: lease operating expense was $7.30/Boe versus $9.22/Boe; gathering and other was $6.17/Boe versus $9.67/Boe. Depletion was $10.29/Boe versus $18.41/Boe, partly reflecting fresh-start accounting.
- Operating cash flow improved to $12.3 million, but investing outflows of $47.6 million and net financing inflows of $26.0 million resulted in a $9.3 million decrease in cash, cash equivalents and restricted cash.
- At March 31, debt was $170.0 million, up from $144.0 million at year-end. Against a $200.0 million borrowing base and $4.4 million of letters of credit, disclosed available borrowing capacity was $25.6 million. Current assets of $108.9 million compared with current liabilities of $97.7 million. The company reported compliance with credit-facility financial covenants at quarter-end.
Changes, outlook and risks
- The much larger Q1 2019 loss included a $275.2 million ceiling-test impairment; Q1 2020 recorded no such impairment. The company estimated that, using an April 2020 oil price of $20.31/Bbl held constant for two months and all other inputs unchanged, the ceiling amount would imply a $205.5 million impairment. This was a sensitivity estimate, not a recorded Q1 charge.
- COVID-19, the demand shock and the oil-price decline prompted capital reductions and temporary shut-ins of some producing wells. The original 2020 capital budget was $123–$138 million; the company subsequently expected full-year spending to be approximately $76 million at the upper end, with further evaluation based on market conditions.
- On April 30, 2020, the company amended its credit agreement. The $200 million borrowing base was scheduled to decline by $5 million monthly beginning September 1, to $185 million on November 1, subject to redetermination. The amendment also increased interest margins, requires cash above $10 million to be applied to debt under specified terms, and waived a swap-related requirement for Q2 2020. The filing does not state the amount of the separate PPP loan.
- Management disclosed hedges on approximately 90%, 100% and 75% of remaining anticipated 2020, 2021 and 2022 production, respectively, at weighted average prices of $52.21, $45.51 and $52.38/Bbl. These hedges may cushion price declines, but volumes, basis exposure and settlement terms remain relevant. Certain May 2020 oil positions were terminated in April for approximately $4.8 million.
- Other notable items: Q1 restructuring charges were $0.4 million. In May, the company terminated its Denver office lease, paying a $1.3 million fee, and expected about $0.8 million of rent through March 2021. The company received permits for an acid-gas injection well, which management said could provide a lower-cost alternative for sour-gas treatment.
- Key risks include volatile commodity prices, borrowing-base reductions and limited liquidity, covenant and refinancing exposure, operational and midstream constraints (including sour-gas handling), and the uncertain effects of COVID-19. The filing reported no legal proceedings expected to have a material effect.
Important facts for investors to verify
- How subsequent oil prices, production shut-ins and hedge settlements affected realized cash flow and the value of the derivative position.
- Whether the November borrowing-base redetermination, scheduled step-downs and cash-sweep terms constrain liquidity or capital spending.
- Whether the reduced 2020 capital plan is sufficient to sustain production and meet contractual, operating and development needs.
- Whether low commodity prices trigger a ceiling-test impairment; the disclosed $205.5 million sensitivity is assumption-dependent.
- The PPP loan amount, eligibility and forgiveness outcome, which are not clearly quantified in the provided filing text.
- How fresh-start accounting limits period-to-period comparisons, particularly for earnings, depletion and per-share results.