Halcón Resources Corporation — Q3 2012 Form 10-Q
Entity note: The supplied filing is for Halcón Resources Corporation, formerly RAM Energy Resources—not Battalion Oil Corp. It covers the quarter and nine months ended September 30, 2012; the financial statements are unaudited. Dollar amounts below are in millions unless noted.
Business context and reporting period
Halcón is a U.S. oil and natural gas exploration and production company. The period was marked by a February recapitalization and major acquisitions: GeoResources and East Texas assets closed in August, while the company also expanded undeveloped acreage in Ohio and other areas. The acquisitions materially changed the company’s scale and operating footprint; acquired-company results are included from the relevant acquisition dates.
Financial and operating performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $73.1 | $24.2 | $123.3 | $78.1 |
| Operating income (loss) | $(4.6) | $5.7 | $(21.6) | $19.8 |
| Net income (loss) | $(20.2) | $11.8 | $(45.8) | $10.8 |
| Net income (loss) available to common stockholders | $(20.2) | $11.8 | $(134.3) | $10.8 |
| Basic and diluted loss per share | $(0.11) | $0.45 | $(1.01) | $0.41 |
| Operating cash flow | Not separately provided for quarter | Not separately provided for quarter | $13.6 | $23.8 |
Q3 revenue rose sharply, primarily because of the acquisitions and higher production. Average daily production was 11,185 Boe in Q3 versus 3,924 Boe a year earlier; for the nine-month period it averaged 6,401 Boe, up 55% from 4,132. Q3 realized revenue was $70.60 per Boe; nine-month realized revenue was $69.97 per Boe. Lease operating expense per Boe improved, but depletion per Boe increased. The company attributed the swing to losses in part to higher general and administrative expense, acquisition and recapitalization costs, higher depletion and interest expense, and Q3 derivative losses. In Q3 2012, derivatives produced a $9.6 million loss versus a $22.6 million gain in Q3 2011.
For the nine months, a $88.4 million non-cash preferred dividend reduced income available to common stockholders; the preferred shares had converted to common stock in April. Q3 included $17.6 million of acquisition and merger transaction costs in general and administrative expense. Nine-month G&A also included change-in-control, employee, transaction, and other corporate costs.
Cash, debt and liquidity
- At September 30, cash was $18.1 million; current assets were $150.8 million and current liabilities were $206.0 million.
- Reported debt carrying value was $1.175 billion: the 8% convertible note, 9.75% senior notes, and revolving credit borrowings. The note balances are net of unamortized discounts. The revolving facility had $185.0 million drawn, $1.3 million of letters of credit, and $338.7 million of available borrowing capacity at September 30. The company reported covenant compliance.
- Nine-month operating cash flow of $13.6 million compared with $1.624 billion used in investing, largely for acquisitions and leasehold spending. Financing provided $1.629 billion. Cash ended the period $18.1 million, up from $0.05 million at year-end 2011.
- Capitalized interest was $22.8 million for the first nine months, primarily related to unevaluated properties.
Material changes, outlook and risks
- Acquisitions and financing: GeoResources was acquired for approximately $854 million of purchase consideration, and East Texas assets for approximately $432 million before post-closing adjustments. The acquisitions were partly financed with $750 million of 9.75% notes. Purchase accounting for both transactions was preliminary; GeoResources generated $160.9 million of goodwill.
- Pending Williston transaction: After quarter-end, Halcón agreed to acquire approximately 81,000 net acres for $1.45 billion—$700 million cash and $750 million of preferred stock expected to convert into about 100.7 million common shares. Closing was expected in mid-December 2012, subject to conditions and price adjustments; the agreement could be terminated if it did not close by December 20 or adjustments exceeded $217.5 million.
- Related funding: CPPIB agreed to buy approximately $300 million of common stock, subject to closing conditions. On November 6, Halcón sold $750 million of 8.875% notes due 2021; net proceeds of $725.6 million were escrowed pending the Williston acquisition. Lenders also committed, subject to conditions, to a borrowing-base increase to $850 million and up to $500 million of bridge financing.
- Management outlook: The company emphasized continued leasing, development and acquisition activity, funded through operating cash flow, available credit, capital markets and potentially asset sales. It provided no specific production, earnings or capital-spending guidance in the supplied text. Management cautioned that lower commodity prices or limited access to capital could impair planned spending, acquisitions, debt reduction and profitability.
- Key risks and unusual items: Commodity-price volatility and derivative mark-to-market swings; significant leverage, interest burden and restrictive debt covenants; acquisition integration and execution; uncertain results from emerging plays and undeveloped acreage; drilling, service availability, takeaway-capacity and weather risks; and environmental, hydraulic-fracturing and regulatory exposure. Hurricane Isaac temporarily shut in Louisiana production. Drilling commitments were $57.9 million, with $38.5 million of termination penalties; operating leases totaled $41.5 million. Management said pending legal matters were not expected to have a material effect. Disclosure controls were reported effective.
Important facts for investors to verify
- Confirm the filing issuer and its relationship, if any, to Battalion Oil Corp.; this filing names Halcón Resources Corporation.
- Track completion and final purchase-price adjustments for the Williston acquisition, related equity issuance, and use of the escrowed note proceeds.
- Review post-transaction debt, borrowing-base availability, interest costs, covenant headroom and any dilution from preferred-stock conversions or equity issuance.
- Assess whether acquired production, reserves and integration progress support the company’s spending plans and whether undeveloped acreage is economic.
- Reconcile reported losses with acquisition costs, non-cash preferred dividends, capitalized interest and derivative gains or losses; evaluate exposure to commodity prices and hedge terms.