Battalion Oil Corp. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; unaudited. Battalion is an independent oil and gas company focused on liquids-rich assets in the Delaware Basin, Texas.
Financial performance
| Metric | Q1 2024 | Q1 2023 |
|---|---|---|
| Total operating revenue | $49.9 million | $65.1 million |
| Operating income | $0.02 million | $11.1 million |
| Net income (loss) | $(31.2) million | $22.8 million |
| Net income (loss) available to common stockholders | $(36.8) million; $(2.24) per share | $21.3 million; $1.29 per share |
| Operating cash flow | $3.9 million | $(0.7) million |
| Oil and gas capital expenditures | $24.6 million | $28.6 million |
| Cash, cash equivalents and restricted cash | $49.0 million | $57.6 million at Dec. 31, 2023 |
| Term loan borrowings | $190.0 million at quarter-end | $200.0 million at Dec. 31, 2023 |
- Revenue and production: Oil, gas and NGL sales fell 23% year over year. Average production declined to 12,989 Boe/d from 16,200 Boe/d; total quarterly volume was 1.182 million Boe versus 1.458 million. Management cited fewer wells brought online, natural declines and Monument Draw throughput curtailments. Average realized price excluding hedges declined about $2.17 per Boe.
- Profitability and margins: Operating income was nearly breakeven, versus $11.1 million a year earlier. Operating margin was approximately 0.05% of revenue, compared with 17.1%. The net loss included a $24.2 million derivative loss, including $19.8 million unrealized; Q1 2023 had a $19.5 million derivative gain. Interest expense and other was $7.0 million. No income tax benefit or provision was recorded.
- Costs: Gathering and other expense rose to $17.3 million from $16.5 million, and increased to $14.62 per Boe from $11.33, reflecting midstream disruptions, sour-gas treatment mix and inflation. Lease operating costs were $9.80 per Boe versus $8.02, largely due to lower production and higher maintenance, power and chemical costs. G&A declined to $4.0 million from $4.9 million.
- Cash flow and liquidity: Operating cash flow less oil and gas capital expenditures was approximately negative $20.7 million. Investing cash outflow was $31.8 million; financing provided $19.3 million, including $19.5 million net proceeds from preferred stock and the $10.0 million merger escrow release, partly offset by $10.0 million of debt repayments. Cash declined $8.6 million during the quarter.
- Debt and obligations: The secured term loan carried a 12.99% weighted-average quarterly rate and matures November 24, 2025. Scheduled principal payments total $75.0 million from Q2 2024 through Q3 2025, followed by a $115.0 million maturity payment. No additional borrowing capacity was available under the loan, apart from $4.7 million for letters of credit.
Material changes and developments
- Compared with Q1 2023, sales revenue decreased by $15.3 million and production fell about 20%. Lower depletion expense and G&A partly offset weaker operating results; a swing in derivative results drove the move from net income to a substantial net loss.
- At March 31, 2024, Battalion was not in compliance with its total net leverage covenant, although it was in compliance with its other financial covenants. On May 14, it used proceeds from a subsequent preferred-stock issuance to prepay $17.3 million of borrowings, reporting that this cured the quarter-end covenant noncompliance. Borrowings after the prepayment were $172.7 million.
- Preferred stock carrying value reached $131.6 million at quarter-end. It accrues cumulative dividends at 14.5% in cash or, at the company’s option, 16.0% as compounded PIK dividends; the loan agreement currently prohibits cash dividends. Q1 included $5.1 million of PIK dividends and $5.6 million of preferred dividends/deemed dividends deducted in calculating income available to common stockholders.
Outlook, risks and unusual items
- Merger: The pending agreement with Fury Resources provides for $9.80 cash per common share, a stated transaction value of approximately $450 million, subject to conditions including approval by a majority of outstanding common shares and required financing. Preferred shares are to be exchanged for Parent preferred shares or purchased for cash based on their conversion or redemption value. The filing describes $160 million of Parent equity commitments, with conditions on the remaining $150 million, including aggregate equity commitments of $200 million and related funding. Completion is not assured. Battalion reported approximately $3.5 million of merger costs incurred through May 9.
- Liquidity outlook: Management said it believes available cash, the merger escrow release and cost reductions make it probable the company can fund operations, debt requirements and covenant compliance for the next 12 months. This depends on forecasts and assumptions; management also said it would continue pursuing financing, asset sales, strategic transactions and further cost reductions. Lower-than-expected cash flow or higher costs could require reduced drilling and development, potentially affecting future production and cash flows.
- Facility and operating outlook: The sour-gas treatment facility began processing on March 9, 2024. The company forecast 20 MMcf/day of processing in Q2 and expects the facility’s tiered rate structure to reduce treating fees by more than 50% when operational. Further remedial work or shutdowns could delay savings and increase fees. The company has advanced $18.5 million for a joint-venture partner’s workover, recorded as a contract asset, and described contractual recovery remedies.
- Key risks: Commodity-price volatility, declining production, high gathering/treating costs, floating-rate debt, substantial scheduled repayments, future covenant compliance, hedging outcomes, and access to capital. Louisiana environmental claims remain pending with overall exposure not currently determinable; management intends to oppose them. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Merger status, shareholder approval, satisfaction of closing conditions and funding of the required equity commitments.
- Post-May 14 debt balance, covenant calculations and ability to meet scheduled repayments and the November 2025 maturity.
- Cash use, operating cash generation and the availability or cost of additional liquidity.
- Production recovery, Monument Draw takeaway constraints, and actual sour-gas facility volumes, reliability and fee savings.
- Preferred-stock liquidation preference, PIK accruals, conversion or redemption terms, and resulting impact on common shareholders.
- Derivative liabilities and realized hedge effects, plus developments in the Louisiana environmental claims.