BATTALION OIL CORP quarterly report, Q2 FY2022

Battalion Oil Corp. — Q2 2022 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2022. Unaudited results. Battalion is an independent oil and gas company focused on liquids-rich assets in the Delaware Basin, Texas.

Key financial metrics

Metric	Q2 2022	Q2 2021	Six months 2022	Six months 2021
Operating revenue	$101.5 million	$64.4 million	$183.1 million	$119.9 million
Operating income	$49.8 million	$20.9 million	$83.6 million	$34.6 million
Net income (loss)	$13.0 million	$(33.9) million	$(79.7) million	$(67.3) million
Operating cash flow	Not stated separately	Not stated separately	$28.3 million	$29.1 million
Capital expenditures	Not stated separately	Not stated separately	$51.4 million for oil and gas properties	$37.6 million for oil and gas properties

Q2 operating margin was approximately 49%; the six-month operating margin was approximately 46%. These measures precede derivative results, interest and tax.
Average production was 15,044 Boe/d in Q2, down from 15,571 Boe/d; six-month production averaged 14,906 Boe/d, nearly flat with 14,956 Boe/d.
Six-month average realized price, excluding hedging, rose to $67.72/Boe from $44.10/Boe. Oil, natural gas and NGL sales increased 53% year over year to $182.7 million.
Six-month net derivative loss was $155.8 million, including $78.2 million unrealized and $77.6 million realized losses. This substantially contributed to the reported net loss; Q2 derivative loss was $31.9 million.
At June 30, cash and cash equivalents were $43.6 million; total cash including restricted cash was $43.8 million. Current assets were $103.9 million versus current liabilities of $204.9 million.
Debt principal outstanding was $220.0 million under the term loan; the balance-sheet carrying amount, net of issuance costs and other adjustments, was $203.4 million. Long-term debt maturity is November 2025. The loan bears floating-rate interest at LIBOR or an applicable alternative reference rate plus 7%; the reported weighted-average rate was 9.25%.
Stockholders’ equity was negative $15.4 million, compared with positive $63.7 million at year-end 2021.

Material changes and drivers

Higher commodity prices drove revenue growth despite slightly lower production. Q2 operating revenue rose 58% year over year; six-month revenue rose 53%.
Higher costs partially offset revenue gains: six-month lease operating expense rose to $8.69/Boe from $7.25/Boe, and gathering and other expense to $11.54/Boe from $10.16/Boe. Management cited increased maintenance, power and chemical costs, workovers, and sour-gas marketing fees.
Six-month operating cash flow was slightly lower year over year, while capital spending increased. Operating, investing and financing cash flows were $28.3 million, $(52.0) million and $19.1 million, respectively; cash and restricted cash declined $4.6 million.
Interest expense and other increased to $7.5 million for the first half from $3.1 million, reflecting higher debt, interest rates and loan-cost amortization.
As of June 30, derivative liabilities were $149.9 million gross, compared with $10.1 million of derivative assets. These contracts are not designated for hedge accounting, so fair-value changes flow through earnings.

Outlook, financing, risks and unusual items

Management expected 2022 capital expenditures of approximately $130–$150 million, funded by cash on hand, term-loan funding and operating cash flow. Through June, the company had drilled and cased five gross operated wells and completed and brought online five gross operated wells.
The term loan had $15 million of additional delayed-draw availability, subject to conditions. Scheduled amortization totals $120 million from Q1 2023 through Q3 2025; mandatory prepayments may also apply under specified conditions. The company reported covenant compliance at June 30, 2022, but covenant thresholds become more restrictive over time.
In May 2022, Battalion entered a joint venture with Caracara to develop a sour-gas treatment and carbon-sequestration facility. Battalion retained a 5% equity interest; Caracara is to fund construction. The planned facility has initial capacity of about 30 MMcf/d and was expected to enter service within 12 months of the gas treating agreement. The agreement includes a 20-MMcf/d minimum volume commitment for an initial five-year term and a 20-year treating term.
Other commitments included approximately $3.3 million of chemical purchases through year-end and a drilling-rig commitment extended through Q4 2022. Long-term gathering, transportation and sales contracts cover a substantial portion of production for terms of one to 20 years from first production.
Management highlighted commodity-price volatility, production declines, supply-chain and service-cost pressures, take-away and sour-gas treatment capacity, and the ability to fund operations and meet debt covenants. Higher prices also increase the risk of realized hedge losses and limit upside on hedged volumes. The filing states there was no ceiling-test impairment at June 30, 2022.
Louisiana surface-owner environmental claims remain pending; overall exposure was not determinable. Management stated it intends to oppose the claims and believes resolution of ordinary-course proceedings will not materially affect results, financial position or cash flows.
Management reported disclosure controls and procedures were effective and no material change in internal control over financial reporting occurred during the quarter.

Important facts for investors to verify

How production, realized prices and operating costs evolve, and whether the 2022 capital-spending plan translates into production and cash generation.
Hedge volumes, prices, settlements and future derivative liabilities; distinguish noncash mark-to-market losses from realized cash settlements.
Liquidity and covenant headroom under the term loan, including upcoming amortization, floating-rate interest exposure and access to delayed-draw funds.
Construction, timing, economics and minimum-volume obligations of the BAT treating facility and related sour-gas commitments.
Progress and potential financial exposure of the Louisiana environmental claims, along with any changes in other commitments or contingencies.