Battalion Oil Corporation — Q2 2020 Form 10-Q
Business context and period. Battalion is an independent oil and gas producer focused on liquids-rich assets in the Delaware Basin of West Texas. This unaudited report covers the quarter and six months ended June 30, 2020. The company emerged from Chapter 11 in October 2019 and adopted fresh-start accounting; accordingly, 2020 Successor and 2019 Predecessor results are not directly comparable.
Financial performance and liquidity
Amounts below are in millions of dollars, except per-share, per-Boe, and production data.
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Operating revenue | $18.5 | $56.4 | $65.9 | $108.3 |
| Net income (loss) | $(127.3) | $(640.8) | $(12.8) | $(977.4) |
| Full-cost ceiling impairment | $60.1 | $664.4 | $60.1 | $939.6 |
| Average production | 14,264 Boe/d | 18,055 Boe/d | 16,527 Boe/d | 17,575 Boe/d |
| Realized price, excluding hedges | $13.89/Boe | $34.01/Boe | $21.63/Boe | $33.89/Boe |
- Q2 oil, natural gas and NGL sales were $18.0 million. The decline from 2019 reflected sharply lower commodity prices and lower volumes; the company temporarily shut in wells in May and June.
- Q2 operating loss was $91.0 million. The $60.1 million impairment was non-cash and reflected lower oil prices used in the ceiling test. Q2 derivative results were a $34.8 million loss, including a $67.2 million unrealized loss partly offset by realized gains.
- For the six months, operating cash flow was $43.1 million, investing cash outflow was $90.2 million, and financing cash inflow was $37.2 million. Cash, cash equivalents and restricted cash declined $9.9 million to $0.4 million.
- At June 30, cash was $0.4 million, current assets were $55.3 million and current liabilities were $76.7 million. Debt totaled $181.2 million, comprising $179.0 million under the revolving facility and a $2.2 million PPP loan. Stockholders’ equity was $305.2 million.
- The revolving facility had a $200 million borrowing base, $179 million drawn and about $5 million of letters of credit, leaving $16 million of stated borrowing capacity. The facility matures October 2024. A $1.0 million PPP loan portion was classified as current.
Material changes and management commentary
- Compared with the prior-year periods, revenue and production fell materially. The company attributed production declines to shut-ins, with estimated downtime of approximately 5,400 Boe/d in Q2 and 2,700 Boe/d for the first half. Lower prices reduced realized revenue; lower lease operating and administrative costs partly offset the impact.
- Gathering and other expense was $15.2 million in Q2, up from $11.0 million, in part because of higher Monument Draw gas-treating operating costs and $3.4 million of rig-stacking charges.
- Management reduced the 2020 capital spending plan: the original budget was $123–$138 million; the upper end of expected full-year spending was revised to approximately $76 million. First-half oil and gas capital expenditures were $91.2 million.
- Management estimated that, holding other inputs constant, using July 2020 WTI of $39.81 per barrel for two months to update the trailing-average ceiling-test price would have produced an additional $148.9 million impairment. This was a sensitivity estimate, not a recorded charge.
- Management said the April credit amendment schedules $5 million monthly borrowing-base reductions beginning September 2020, to $185 million by November, before redetermination. It expected facility availability to be severely limited through at least Q2 2021 and was exploring refinancing, asset sales, derivative monetization and spending reductions.
Guidance, risks and unusual items
- On July 31, 2020, lenders waived the 1.00:1.00 current-ratio covenant for the June quarter after the company failed to meet it; Battalion reported covenant compliance after giving effect to the waiver. Future compliance and further waivers are not assured.
- The filing identifies COVID-19, weak energy demand and prices, commodity volatility, production shut-ins, borrowing-base reductions, covenant compliance and access to capital as material risks. Lower prices could also trigger further ceiling-test impairments.
- The company received a $2.2 million PPP loan at 1% interest and was pursuing forgiveness; it cautioned that forgiveness was not assured. The company also terminated certain hedges early, receiving approximately $16.3 million during the first half and $3.2 million in July for additional terminations.
- Restructuring charges were $2.2 million for Q2 and $2.6 million for the first half, including workforce reductions and office consolidation. Battalion paid a $1.3 million Denver office lease termination fee and recorded a $0.5 million right-of-use asset impairment.
- The company received permits for an acid-gas injection well, which management said could provide a lower-cost alternative to sour-gas treating. It also remains committed to substantial portions of Delaware Basin production under long-term gathering, transportation and sales contracts.
- Management reported effective disclosure controls and procedures. It said pending legal proceedings were not expected to have a material effect; no material change to previously disclosed risk factors was reported other than the added COVID-19 risk discussion.
Most important facts for investors to verify
- Updated borrowing-base determination, actual available liquidity, and any further covenant waivers or amendments.
- Whether reduced capital spending, shut-ins, and lower prices affect production, operating cash flow, and the company’s ability to fund obligations.
- Subsequent ceiling-test calculations and impairment sensitivity to commodity prices and reserve assumptions.
- PPP loan forgiveness outcome and the impact of hedge settlements, open derivative positions, and future hedging requirements.
- Full-year capital expenditures versus the revised approximately $76 million upper-end expectation, and progress on alternative financing or asset monetization.