Battalion Oil Corp. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Battalion is an independent oil and gas company focused on liquids-rich assets in the Delaware Basin, Texas. Financial statements are unaudited.
Financial performance and liquidity
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $54.3 million | $101.5 million | $119.4 million | $183.1 million |
| Operating income | $0.3 million | $49.8 million | $11.4 million | $83.6 million |
| Net income (loss) | $(4.7) million | $13.0 million | $18.1 million | $(79.7) million |
| Operating cash flow | Not separately presented | Not separately presented | $8.6 million | $28.3 million |
Q2 operating margin was approximately 0.6%, versus 49.0% a year earlier; six-month margin was approximately 9.6%, versus 45.7%. Revenue fell about 47% in Q2 and 35% for the first half, primarily because realized commodity prices declined. Average production was 14,253 Boe/d in Q2, down from 15,044; first-half production averaged 15,221 Boe/d, up from 14,906.
Six-month investing cash outflow was $31.7 million, including $32.6 million of oil and gas capital expenditures. Financing provided $8.9 million, including $24.4 million from preferred stock issuance and $15.0 million of debt repayments. Cash, cash equivalents and restricted cash declined $14.2 million to $18.6 million; unrestricted cash was $18.5 million at June 30.
At June 30, gross debt was approximately $220.3 million, with no additional term-loan borrowing capacity. The balance sheet showed $42.6 million of current debt and $164.1 million of long-term debt, net. The secured term loan matures November 24, 2025, bears a floating rate of SOFR plus 7.65%, and had a 12.6% weighted-average rate in Q2. The company reported covenant compliance at quarter-end; scheduled repayments total $105 million through September 2025, including $20 million due in the remainder of 2023.
Material changes and notable items
- Commodity sales were $53.9 million in Q2, versus $101.3 million a year earlier. Average realized prices excluding hedging fell about $32.44 per Boe for Q2 and $24.83 per Boe for the first half.
- Derivative contracts produced gains of $4.5 million in Q2 and $23.9 million in the first half, versus losses of $31.9 million and $155.8 million in the comparable 2022 periods. These mark-to-market and settlement effects materially affected reported earnings; Q2 still recorded a net loss.
- Interest expense and other increased to $9.5 million in Q2 from $4.8 million, reflecting higher rates, debt and financing-cost amortization. Gathering, workover and G&A costs also rose; lower commodity prices reduced production taxes.
- In March, the company issued $25 million of Series A redeemable convertible preferred stock to existing major investors, receiving $24.4 million net. The preferred stock carries cumulative dividends of 14.5% if paid in cash or 16.0% if paid in kind; cash dividends are currently prohibited by the loan agreement. Its June 30 carrying value was $26.0 million, including accrued PIK dividends.
Liquidity, outlook and risks
Management said forecasts indicated additional liquidity would be required to fund operations and meet debt-covenant requirements over the next 12 months. The three largest investors provided a support letter for up to $38 million of additional preferred equity; Battalion gave notice of its intent to draw that amount in Q3 2023. Management considered the funding, cost reductions and operating forecasts sufficient to make liquidity adequate for the next 12 months, but the expected investment was not reported as completed in this filing. The company also described potential alternatives including asset sales, financing, capital partners, strategic transactions and further cost reductions. No formal production or earnings guidance was provided.
The acid-gas treatment and carbon-sequestration facility serving Monument Draw had commissioning issues: additional injection pressure was needed and pressure communication at the injection well required remediation. The forecast assumed processing would begin at 20,000 Mcf/d in October 2023; delays could extend higher treating costs. The related agreement includes a 20,000 Mcf/d minimum-volume commitment for an initial five-year term.
Key risks include commodity-price volatility, liquidity and covenant compliance, high floating-rate debt, production declines, supply and service costs, and access to gas treating and takeaway capacity. Louisiana environmental-damage claims remain pending and the company said total exposure is not currently determinable. Management reported disclosure controls were effective and no material change in internal control over financial reporting.
Investor verification priorities
- Confirm whether the planned $38 million preferred-equity funding closed, on what terms, and whether it supports liquidity and covenant compliance.
- Review cash availability, covenant headroom and the timing and sources of the $20 million remaining-2023 debt payments and subsequent amortization.
- Track facility remediation, commissioning and actual treating costs against the October 2023 forecast and minimum-volume commitment.
- Assess realized commodity prices, production trends and hedge coverage, including the potential effect of hedges on upside and cash flows.
- Monitor the preferred stock’s cumulative dividend accruals, redemption/conversion provisions and the outcome or exposure of Louisiana claims.