Battalion Oil Corporation (NYSE:BATL) Q1 2020 Results Conference Call May 12, 2020 11:00 AM ET Company Participants John-Davis Rutkauskas - Director, Corporate Finance & IR Richard Little - Chief Executive Officer Daniel Rohling - Chief Operating Officer Ragan Altizer - Chief Financial Officer Conference Call Participants Noel Parks - Coker & Palmer Emily Holden - The Guardian Operator Good day and welcome to the Battalion Oil Q1 2020 Earnings Call. Today’s conference is being recorded. At this time, I ...

[FORM 10-Q Filing Information](index=1&type=section&id=FORM%2010-Q) [Registrant Information](index=1&type=section&id=Registrant%20Information) This section provides basic information about Battalion Oil Corporation as the registrant, including its company name, jurisdiction of incorporation, primary SIC code, principal executive offices, and SEC filing status - Company name: **Battalion Oil Corporation** (formerly Halcón Resources Corporation)[1](index=1&type=chunk) - Jurisdiction of incorporation: **Delaware**[1](index=1&type=chunk) - Primary Standard Industrial Classification (SIC) code: **1311**[1](index=1&type=chunk) - SEC filing status: All required reports have been filed, and the company has been subject to filing requirements for the past 90 days[1](index=1&type=chunk) - Company type: **Smaller reporting company**[1](index=1&type=chunk) [Securities Registered](index=1&type=section&id=Securities%20Registered) This section lists the company's registered securities and trading information, including common stock trading symbol and exchange, and the number of common shares outstanding as of May 8, 2020 Securities Registered | Title of each class | Trading Symbol | Name of each exchange on which registered | |:--------------------|:---------------|:------------------------------------------| | Common Stock, par value $0.0001 | BATL | NYSE American | - As of May 8, 2020, the company had **16,203,967** shares of common stock outstanding[2](index=2&type=chunk) [Table of Contents](index=2&type=section&id=Table%20of%20Contents) [PART I FINANCIAL INFORMATION](index=2&type=section&id=PART%20I%20FINANCIAL%20INFORMATION) Part I outlines the company's financial information, including unaudited condensed consolidated financial statements, management's discussion and analysis of financial condition and results of operations, quantitative and qualitative disclosures about market risk, and controls and procedures [PART II OTHER INFORMATION](index=2&type=section&id=PART%20II%20OTHER%20INFORMATION) Part II covers other important information, including legal proceedings, risk factors, unregistered sales of equity securities and use of proceeds, defaults upon senior securities, mine safety disclosures, and exhibits [Special note regarding forward‑looking statements](index=2&type=section&id=Special%20note%20regarding%20forward%E2%80%91looking%20statements) [Forward-Looking Statements Disclosure](index=2&type=section&id=Forward-Looking%20Statements%20Disclosure) This section highlights forward-looking statements in the report, cautioning investors that actual results may differ materially from expectations, and the company disclaims any obligation to update these statements unless required by securities laws - Forward-looking statements cover planned capital expenditures, oil and gas production growth, future cash flows, financial condition, business strategies, and future operational objectives[4](index=4&type=chunk) - Actual results may differ materially due to various risks and uncertainties, including commodity price fluctuations, cash flow generation, debt levels, reserve replacement, drilling and operating risks, environmental risks, regulatory changes, and macroeconomic conditions[4](index=4&type=chunk)[5](index=5&type=chunk) - The company disclaims any obligation to update forward-looking statements, unless required by securities laws[6](index=6&type=chunk) [PART I. FINANCIAL INFORMATION](index=5&type=section&id=PART%20I.%20FINANCIAL%20INFORMATION) [Item 1. Condensed Consolidated Financial Statements (Unaudited)](index=5&type=section&id=Item%201.%20Condensed%20Consolidated%20Financial%20Statements%20(Unaudited)) This section presents Battalion Oil Corporation's unaudited condensed consolidated financial statements as of March 31, 2020, and December 31, 2019, including statements of operations, balance sheets, statements of stockholders' equity, and statements of cash flows, with detailed notes [Condensed Consolidated Statements of Operations (Unaudited)](index=5&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations%20(Unaudited)) For the three months ended March 31, 2020, the company reported net income of **$114,491 thousand**, compared to a net loss of **$336,559 thousand** in the prior-year period, primarily driven by net gains on derivative contracts and significantly reduced operating expenses Condensed Consolidated Statements of Operations (Unaudited) | Metric (Thousands of Dollars) | Three Months Ended March 31, 2020 (Successor) | Three Months Ended March 31, 2019 (Predecessor) | |:---|:---|:---| | **Total Operating Revenues** | 47,399 | 51,916 | | **Total Operating Expenses** | 49,578 | 356,572 | | **Operating (Loss) Income** | (2,179) | (304,656) | | **Other Income (Expense), Net** | 116,670 | (77,388) | | **(Loss) Income Before Income Taxes** | 114,491 | (382,044) | | **Income Tax (Expense) Benefit** | — | 45,485 | | **Net (Loss) Income** | 114,491 | (336,559) | | **Basic (Loss) Earnings Per Share** | 7.07 | (2.12) | | **Diluted (Loss) Earnings Per Share** | 7.07 | (2.12) | | **Weighted Average Common Shares Outstanding (Basic)** | 16,204 | 158,549 | | **Weighted Average Common Shares Outstanding (Diluted)** | 16,204 | 158,549 | - Total oil, natural gas, and natural gas liquids sales for the three months ended March 31, 2020, were **$47,024 thousand**, a decrease from **$51,923 thousand** in the prior-year period[7](index=7&type=chunk) - Net gains on derivative contracts were **$118,299 thousand** in the 2020 period, compared to a net loss of **$64,799 thousand** in 2019, a key factor in the turnaround[7](index=7&type=chunk) - Depletion, depreciation, and amortization expense was **$18,030 thousand** in the 2020 period, significantly lower than **$29,975 thousand** in 2019, which also included a **$275,239 thousand** full cost ceiling impairment[7](index=7&type=chunk) [Condensed Consolidated Balance Sheets (Unaudited)](index=6&type=section&id=Condensed%20Consolidated%20Balance%20Sheets%20(Unaudited)) As of March 31, 2020, the company's total assets were **$712,395 thousand**, an increase from December 31, 2019, primarily due to a significant rise in derivative contract assets and an increase in net oil and gas properties, alongside a substantial increase in stockholders' equity Condensed Consolidated Balance Sheets (Unaudited) | Metric (Thousands of Dollars) | March 31, 2020 (Successor) | December 31, 2019 (Successor) | |:---|:---|:---| | **Total Assets** | 712,395 | 584,666 | | Cash and Cash Equivalents | 938 | 5,701 | | Accounts Receivable, Net | 30,260 | 48,504 | | Derivative Contract Assets | 71,353 | 4,995 | | Oil and Natural Gas Properties, Net | 553,661 | 506,144 | | **Total Liabilities** | 281,814 | 164,625 | | Accounts Payable and Accrued Liabilities | 92,585 | 97,333 | | Derivative Contract Liabilities | 3,972 | 8,069 | | Long-Term Debt, Net | 170,000 | 144,000 | | **Total Stockholders' Equity** | 431,577 | 316,650 | | Retained Earnings (Accumulated Deficit) | 104,031 | (10,460) | - As of March 31, 2020, derivative contract assets significantly increased to **$71,353 thousand** from **$4,995 thousand** as of December 31, 2019, reflecting favorable market value changes[9](index=9&type=chunk) - As of March 31, 2020, long-term debt, net, increased to **$170,000 thousand** from **$144,000 thousand** as of December 31, 2019[9](index=9&type=chunk) - As of March 31, 2020, retained earnings shifted to a surplus of **$104,031 thousand** from an accumulated deficit of **$10,460 thousand** as of December 31, 2019[9](index=9&type=chunk) [Condensed Consolidated Statements of Stockholders' Equity (Unaudited)](index=7&type=section&id=Condensed%20Consolidated%20Statements%20of%20Stockholders'%20Equity%20(Unaudited)) As of March 31, 2020, the company's total stockholders' equity significantly increased to **$431,577 thousand** from **$316,650 thousand** as of December 31, 2019, primarily due to the net income contribution for the period Condensed Consolidated Statements of Stockholders' Equity (Unaudited) | Metric (Thousands of Dollars) | Balance December 31, 2019 (Successor) | Net Income (Loss) | Equity Issuance Costs and Other | Stock-Based Compensation | Balance March 31, 2020 (Successor) | |:---|:---|:---|:---|:---|:---|\ | Common Stock Shares | 16,204 | — | — | — | 16,204 | | Common Stock Amount | 2 | — | — | — | 2 | | Additional Paid-in Capital | 327,108 | — | (13) | 449 | 327,544 | | Retained Earnings (Accumulated Deficit) | (10,460) | 114,491 | — | — | 104,031 | | Total Stockholders' Equity | 316,650 | 114,491 | (13) | 449 | 431,577 | - In the first quarter of 2020, the company achieved **net income of $114,491 thousand**, significantly improving its retained earnings position[11](index=11&type=chunk) - Stock-based compensation increased additional paid-in capital by **$449 thousand**[11](index=11&type=chunk) [Condensed Consolidated Statement of Cash Flows (Unaudited)](index=9&type=section&id=Condensed%20Consolidated%20Statement%20of%20Cash%20Flows%20(Unaudited)) For the three months ended March 31, 2020, the company generated **$12,343 thousand** from operating activities, used **$47,648 thousand** in investing activities, and generated **$25,968 thousand** from financing activities, resulting in a net decrease of **$9,337 thousand** in cash, cash equivalents, and restricted cash Condensed Consolidated Statement of Cash Flows (Unaudited) | Metric (Thousands of Dollars) | Three Months Ended March 31, 2020 (Successor) | Three Months Ended March 31, 2019 (Predecessor) | |:---|:---|:---|\ | **Net Cash Provided by (Used in) Operating Activities** | 12,343 | (36,834) | | **Net Cash Used in Investing Activities** | (47,648) | (114,431) | | **Net Cash Provided by Financing Activities** | 25,968 | 104,594 | | **Net Increase (Decrease) in Cash, Cash Equivalents and Restricted Cash** | (9,337) | (46,671) | | **Cash, Cash Equivalents and Restricted Cash at Beginning of Period** | 10,275 | 46,866 | | **Cash, Cash Equivalents and Restricted Cash at End of Period** | 938 | 195 | - Operating cash flow shifted from a net outflow of **$36,834 thousand** in the 2019 period to a net inflow of **$12,343 thousand** in the 2020 period, primarily due to improved net income and reduced operating expenses[16](index=16&type=chunk) - Oil and gas capital expenditures in the first quarter of 2020 were **$48,157 thousand**, lower than **$81,068 thousand** in the prior-year period[16](index=16&type=chunk) - Financing activities primarily included **$51,000 thousand** in proceeds from borrowings and **$25,000 thousand** in repayments of borrowings[16](index=16&type=chunk) [1. FINANCIAL STATEMENT PRESENTATION](index=12&type=section&id=1.%20FINANCIAL%20STATEMENT%20PRESENTATION) This section outlines Battalion Oil Corporation's financial statement preparation basis and consolidation principles, emphasizing its focus as an independent energy company on acquiring, producing, exploring, and developing onshore oil and gas assets in the U.S., while also detailing risks, uncertainties, and the impact of fresh-start accounting post-bankruptcy reorganization - Battalion Oil Corporation is the successor reporting company to Halcón Resources Corporation, with a name change effective January 21, 2020[18](index=18&type=chunk) - The company operates as an independent energy company, focused on the acquisition, production, exploration, and development of onshore liquids-rich oil and natural gas properties in the United States[19](index=19&type=chunk) - The COVID-19 pandemic has led to reduced oil and gas demand and price declines, prompting the company to cut capital expenditures and temporarily shut in production wells in response[20](index=20&type=chunk) - The company completed its bankruptcy reorganization on October 8, 2019, and adopted fresh-start accounting, rendering financial statements before and after the reorganization non-comparable[22](index=22&type=chunk)[23](index=23&type=chunk)[24](index=24&type=chunk) [Basis of Presentation and Principles of Consolidation](index=12&type=section&id=Basis%20of%20Presentation%20and%20Principles%20of%20Consolidation) - Battalion Oil Corporation is the successor reporting company to Halcón Resources Corporation, with a name change effective January 21, 2020[18](index=18&type=chunk) - The company is an independent energy company focused on the acquisition, production, exploration, and development of onshore liquids-rich oil and natural gas properties in the United States[19](index=19&type=chunk) - Consolidated financial statements include all majority-owned and controlled subsidiaries, with all intercompany accounts and transactions eliminated[19](index=19&type=chunk) [Risk and Uncertainties](index=12&type=section&id=Risk%20and%20Uncertainties) - The company is closely monitoring the current and potential impacts of the COVID-19 pandemic on its business, financial performance, liquidity, contractors, customers, employees, and suppliers[20](index=20&type=chunk) - Government actions to contain COVID-19 have led to an economic downturn, reduced oil and gas demand, and, combined with the OPEC/Saudi-Russia price war, caused oil and gas prices to fall to historic lows[20](index=20&type=chunk) - The company has taken measures including reducing capital expenditures, temporarily shutting in production wells, and implementing various steps to ensure safe business operations[20](index=20&type=chunk) [Emergence From Voluntary Reorganization Under Chapter 11](index=12&type=section&id=Emergence%20From%20Voluntary%20Reorganization%20Under%20Chapter%2011) - The company and its subsidiaries filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code on August 7, 2019, to implement a prepackaged plan of reorganization[21](index=21&type=chunk) - The Bankruptcy Court confirmed the reorganization plan on September 24, 2019, and the company emerged from bankruptcy on the effective date of October 8, 2019[22](index=22&type=chunk) - Upon emergence, the company adopted fresh-start accounting, becoming a new financial reporting entity as of October 1, 2019, which renders financial statements before and after the reorganization non-comparable[23](index=23&type=chunk)[24](index=24&type=chunk) [Use of Estimates](index=14&type=section&id=Use%20of%20Estimates) - Financial statement preparation requires management to make estimates and assumptions, including oil and gas revenue accruals, capital and operating expense accruals, oil and gas reserves, depletion, asset retirement obligations, and fair value estimates (including reorganization value and enterprise value)[26](index=26&type=chunk) - These estimates and assumptions are based on historical experience, current conditions, and reasonable forecasts of future events, but actual results may differ from these estimates[26](index=26&type=chunk) [Cash, Cash Equivalents and Restricted Cash](index=14&type=section&id=Cash,%20Cash%20Equivalents%20and%20Restricted%20Cash) - The company considers all highly liquid short-term investments with original maturities of three months or less at the time of purchase to be cash equivalents[28](index=28&type=chunk) Cash, Cash Equivalents and Restricted Cash | Metric (Thousands of Dollars) | March 31, 2020 (Successor) | December 31, 2019 (Successor) | |:---|:---|:---|\ | Cash and Cash Equivalents | 938 | 5,701 | | Restricted Cash | — | 4,574 | | **Total Cash, Cash Equivalents and Restricted Cash** | 938 | 10,275 | - Restricted cash includes funds held in interest-bearing escrow accounts as required by the reorganization plan[29](index=29&type=chunk) [Accounts Receivable and Allowance for Doubtful Accounts](index=16&type=section&id=Accounts%20Receivable%20and%20Allowance%20for%20Doubtful%20Accounts) - The company's accounts receivable primarily arise from joint interest owners and purchasers of oil and natural gas[30](index=30&type=chunk) - The company periodically reviews the collectability of accounts receivable using a specific identification method and establishes or adjusts an allowance for doubtful accounts[30](index=30&type=chunk) - As of March 31, 2020, and December 31, 2019, the allowance for doubtful accounts was approximately **$0.1 million**[30](index=30&type=chunk) [Other Operating Property and Equipment](index=16&type=section&id=Other%20Operating%20Property%20and%20Equipment) - Other operating property and equipment are recorded at fair value upon fresh-start accounting on October 1, 2019, with subsequent additions recorded at cost[31](index=31&type=chunk) - Depreciation is calculated using the straight-line method over the estimated useful lives[31](index=31&type=chunk) - The company assesses other operating property and equipment for impairment under ASC 360 and recognizes impairment losses when indicators of impairment are present[33](index=33&type=chunk) [Restructuring](index=16&type=section&id=Restructuring) - For the three months ended March 31, 2020, the company incurred approximately **$0.4 million** in restructuring charges due to consolidating corporate offices and reducing headcount for efficiency[34](index=34&type=chunk) - In May 2020, the company terminated its Denver office lease, incurring a **$1.3 million** termination fee and approximately **$0.8 million** in monthly rent from June 2020 through March 2021[35](index=35&type=chunk)[36](index=36&type=chunk) - For the three months ended March 31, 2019, the company incurred approximately **$11.3 million** in restructuring charges due to senior management resignations and headcount reductions from decreased drilling and development activity[37](index=37&type=chunk) [Concentrations of Credit Risk](index=18&type=section&id=Concentrations%20of%20Credit%20Risk) - As of March 31, 2020, the company's primary credit risks are concentrated in the collectability of accounts receivable and the performance of derivative contract counterparties[39](index=39&type=chunk) - Purchasers of oil and gas production are primarily independent marketers, major oil and gas companies, and natural gas pipeline companies, with no significant bad debt losses historically[40](index=40&type=chunk) - Credit risk for derivative contracts is diversified among major financial institutions with investment-grade credit ratings, and master netting agreements are in place[41](index=41&type=chunk) [Change in Estimate](index=18&type=section&id=Change%20in%20Estimate) - In late March 2020, due to changing market conditions and declining commodity prices, the company decided not to pay discretionary cash incentives related to 2019, resulting in a **$1.6 million** reduction in "General and administrative expenses" for the three months ended March 31, 2020[42](index=42&type=chunk) [Recently Issued Accounting Pronouncements](index=18&type=section&id=Recently%20Issued%20Accounting%20Pronouncements) - FASB issued ASU No. 2020-04 (Reference Rate Reform), providing optional expedients for LIBOR-related contracts and hedging arrangements, which the company is currently evaluating for impact[43](index=43&type=chunk)[44](index=44&type=chunk) - FASB issued ASU No. 2019-12 (Income Taxes), simplifying income tax accounting, which the company believes will not have a material impact on its financial performance, position, or disclosures[45](index=45&type=chunk) - The company adopted ASU No. 2016-13 (Financial Instruments—Credit Losses) on January 1, 2020, which did not have a material impact on its operating results or financial position[46](index=46&type=chunk) [2. REORGANIZATION](index=20&type=section&id=2.%20REORGANIZATION) This section details the company's Chapter 11 reorganization process, including the restructuring support agreement with senior unsecured noteholders, bankruptcy filing, plan confirmation, and effective date of emergence, along with the treatment of various creditors and equity holders, and equity issuance and subscription rights arrangements - The company filed for bankruptcy on August 7, 2019, and emerged on October 8, 2019, implementing a prepackaged reorganization plan[47](index=47&type=chunk) - Under the reorganization plan, senior unsecured noteholders received **91%** of the reorganized Battalion's common stock and participated in a senior noteholder rights offering[48](index=48&type=chunk) - Existing common stockholders received **9%** of the reorganized Battalion's common stock and warrants, and participated in an existing equity interest rights offering[48](index=48&type=chunk)[49](index=49&type=chunk) - The equity rights offerings raised a total of **$156.0 million** to provide liquidity, pay reorganization expenses, and fund plan distributions[51](index=51&type=chunk) - The company issued warrants to existing common stockholders, exercisable for cash over three years, representing **30%** of the newly issued common stock post-reorganization[52](index=52&type=chunk) [Registration Rights Agreement](index=22&type=section&id=Registration%20Rights%20Agreement) - The company entered into a registration rights agreement with demand holders, committing to file a registration statement with the SEC for the resale of new common stock held by demand holders[53](index=53&type=chunk) - Demand holders have the right to require the company to assist in reselling registrable securities through an underwritten public offering[53](index=53&type=chunk) [3. FRESH-START ACCOUNTING](index=23&type=section&id=3.%20FRESH-START%20ACCOUNTING) This section explains the basis and impact of the company's adoption of fresh-start accounting post-bankruptcy, where assets and liabilities were remeasured at fair value, and reorganization and enterprise values were determined, resulting in non-comparable financial statements and balance sheet adjustments, particularly for oil and gas asset valuation - The company met the conditions of ASC 852 and adopted fresh-start accounting, presenting assets, liabilities, and equity as a new entity[55](index=55&type=chunk) - Fresh-start accounting renders financial statements before and after the reorganization non-comparable, necessitating "black line" financial statements to distinguish the predecessor and successor entities[55](index=55&type=chunk) - The company allocated the reorganization value (fair value of the successor's total assets) to individual assets, with the enterprise value estimated at **$441.6 million**[56](index=56&type=chunk)[57](index=57&type=chunk) - Fair value estimates for oil and gas properties used income and market approaches, with proved reserves discounted at a **10.0%** weighted average cost of capital[59](index=59&type=chunk) Enterprise Value Reconciliation | Metric (Thousands of Dollars) | October 1, 2019 | |:---|:---|\ | Enterprise Value | 441,583 | | Add: Cash | 15,546 | | Less: Fair Value of Debt | (130,000) | | Less: Fair Value of Warrants | (7,336) | | **Fair Value of Successor Common Stock** | 319,793 | Reorganization Value of Successor Assets | Metric (Thousands of Dollars) | October 1, 2019 | |:---|:---|\ | Enterprise Value | 441,583 | | Add: Cash | 15,546 | | Add: Current Liabilities | 122,134 | | Add: Lease Liabilities | 3,395 | | Add: Noncurrent Asset Retirement Obligations | 10,153 | | Add: Other Noncurrent Liabilities | 1,625 | | **Reorganization Value of Successor Assets** | 594,436 | [4. LEASES](index=31&type=section&id=4.%20LEASES) This section describes the company's lease accounting policies, including lease identification, measurement of lease liabilities and right-of-use assets, and lease expense recognition, primarily for equipment and office space, using a portfolio approach for discount rates, and discloses lease costs and future minimum lease payments as of March 31, 2020, and December 31, 2019 - The company leases equipment and office space, recognized as operating leases on the balance sheet as "Right-of-use assets" and "Lease liabilities"[84](index=84&type=chunk) - Lease liabilities are measured at the present value of unpaid lease payments, with the discount rate typically being the company's incremental borrowing rate[85](index=85&type=chunk) - The company elects not to recognize right-of-use assets and lease liabilities for short-term leases with a term of 12 months or less[92](index=92&type=chunk) Lease Costs and Other Information | Metric (Thousands of Dollars) | Three Months Ended March 31, 2020 (Successor) | Three Months Ended March 31, 2019 (Predecessor) | |:---|:---|:---|\ | Operating Lease Cost | 260 | 644 | | Short-Term Lease Cost | 12,258 | 5,718 | | Variable Lease Cost | 210 | 425 | | **Total Lease Cost** | 12,728 | 6,787 | | Cash Flow from Operating Leases | 254 | 1,229 | | Weighted-Average Remaining Lease Term | 3.3 years | 3.6 years | | Weighted-Average Discount Rate | 3.70% | 4.83% | Future Minimum Lease Payments | Future Minimum Lease Payments (Thousands of Dollars) | March 31, 2020 (Successor) | December 31, 2019 (Successor) | |:---|:---|:---|\ | Remaining 2020 | 768 | 1,022 | | 2021 | 876 | 876 | | 2022 | 574 | 574 | | 2023 | 585 | 585 | | 2024 | 345 | 345 | | Thereafter | — | — | | **Total Operating Lease Payments** | 3,148 | 3,402 | | Less: Discount to Present Value | 204 | 232 | | **Total Operating Lease Liabilities** | 2,944 | 3,170 | | Less: Current Operating Lease Liabilities | 935 | 923 | | **Noncurrent Operating Lease Liabilities** | 2,009 | 2,247 | [5. OPERATING REVENUES](index=34&type=section&id=5.%20OPERATING%20REVENUES) This section details the company's revenue recognition principles and composition, primarily from oil, natural gas, and natural gas liquids sales in the Delaware Basin, with revenue recognized when control of the commodity transfers to the customer, accounted for based on different sales methods (wellhead or delivery point sales), and provides a breakdown of revenue by product - Revenue is measured based on the consideration specified in contracts with customers, excluding amounts collected on behalf of third parties[96](index=96&type=chunk) - Revenue from oil, natural gas, and natural gas liquids sales is recognized when control of the commodity transfers to the customer[96](index=96&type=chunk) - Nearly all of the company's revenue is derived from its single basin operations in the Delaware Basin[97](index=97&type=chunk) Operating Revenues | Operating Revenues (Thousands of Dollars) | Three Months Ended March 31, 2020 (Successor) | Three Months Ended March 31, 2019 (Predecessor) | |:---|:---|:---|\ | Oil | 41,917 | 45,517 | | Natural Gas | 354 | 1,461 | | Natural Gas Liquids | 4,753 | 4,945 | | **Total Oil, Natural Gas and NGL Sales** | 47,024 | 51,923 | | Other | 375 | (7) | | **Total Operating Revenues** | 47,399 | 51,916 | [Oil Sales](index=36&type=section&id=Oil%20Sales) - The company typically sells crude oil directly to customers through two methods: wellhead sales (adjusted by index prices) and delivery point sales (at contract delivery point prices)[99](index=99&type=chunk) - Settlement statements for crude oil production are usually received within one month following the production month, with payments typically due on or before the 20th day of the month following delivery[100](index=100&type=chunk) [Natural Gas and Natural Gas Liquids Sales](index=36&type=section&id=Natural%20Gas%20and%20Natural%20Gas%20Liquids%20Sales) - The company assesses natural gas gathering and processing arrangements with midstream companies to determine when control of natural gas transfers[101](index=101&type=chunk) - Under certain contracts, the company may elect to take physical delivery of residue gas and/or natural gas liquids at the tailgate of the midstream entity's processing plant, then sell to customers at index prices[102](index=102&type=chunk) - Settlement statements for natural gas and natural gas liquids production are typically received within 30 days after the production date, with payments usually due on or before the fifth day of the second month following delivery[104](index=104&type=chunk) [6. DIVESTITURES](index=38&type=section&id=6.%20DIVESTITURES) This section discloses the company's 2018 divestiture of water infrastructure assets in the Delaware Basin, recognizing related gains, where the company dedicated all produced water to the buyer and pays market rates for transportation, disposal, and treatment - On December 20, 2018 (Predecessor), the company sold its water infrastructure assets in the Delaware Basin for **$210.9 million** in cash[105](index=105&type=chunk) - The transaction's effective date was October 1, 2018, with the company dedicating all produced water from its Monument Draw, Hackberry Draw, and West Quito Draw operating areas to the buyer[106](index=106&type=chunk) - For the three months ended March 31, 2019 (Predecessor), the company recognized a **$0.9 million** gain from the water asset sale[107](index=107&type=chunk) [7. OIL AND NATURAL GAS PROPERTIES](index=38&type=section&id=7.%20OIL%20AND%20NATURAL%20GAS%20PROPERTIES) This section outlines the company's full cost method of accounting for oil and gas properties, which were remeasured at fair value under fresh-start accounting post-bankruptcy, and details the "full cost ceiling test" for impairment assessment, disclosing a **$275.2 million** impairment loss in Q1 2019 due to declining commodity prices - The company uses the full cost method of accounting for oil and gas properties, capitalizing all acquisition, exploration, and development costs[107](index=107&type=chunk) - Following the adoption of fresh-start accounting, the company's oil and gas properties were recorded at fair value, with proved and unproved properties valued at **$380.4 million** and **$109.0 million**, respectively[108](index=108&type=chunk) - The company quarterly assesses unproved properties for impairment and performs a full cost ceiling test[110](index=110&type=chunk) - As of March 31, 2019 (Predecessor), the company recognized a **$275.2 million** full cost ceiling impairment loss due to declining average crude oil prices and changes in capital expenditure strategy[112](index=112&type=chunk) [8. LONG‑TERM DEBT](index=39&type=section&id=8.%20LONG%E2%80%91TERM%20DEBT) This section details the company's long-term debt, primarily a senior revolving credit facility, with **$170.0 million** outstanding as of March 31, 2020, and compliance with all financial covenants, also describing credit agreement amendments including borrowing base adjustments, increased interest rates, and PPP loan-related terms Long-Term Debt | Long-Term Debt (Thousands of Dollars) | March 31, 2020 (Successor) | December 31, 2019 (Successor) | |:---|:---|:---|\ | Senior Revolving Credit Facility | 170,000 | 144,000 | - On October 8, 2019, the company entered into a senior secured revolving credit facility, replacing the predecessor's credit agreement, providing a **$750.0 million** credit facility with a current borrowing base of **$200.0 million**[115](index=115&type=chunk) - As of March 31, 2020, the company had **$170.0 million** outstanding under the credit facility, with **$25.6 million** in available borrowing capacity[116](index=116&type=chunk) - The credit agreement includes financial covenants requiring a total net leverage ratio not exceeding **3.50:1.00** and a current ratio not less than **1.00:1.00**, both of which the company met as of March 31, 2020[119](index=119&type=chunk) - On April 30, 2020, the credit agreement was amended a second time, reducing the borrowing base to **$200.0 million** with planned further reductions to **$185.0 million**, increasing the interest rate spread, and adding a mandatory prepayment clause if cash balances exceed **$10.0 million**[120](index=120&type=chunk) - The second amendment also included terms related to the Paycheck Protection Program (PPP) loan, which the company plans to use for forgivable purposes under the CARES Act[121](index=121&type=chunk)[122](index=122&type=chunk) [9. FAIR VALUE MEASUREMENTS](index=43&type=section&id=9.%20FAIR%20VALUE%20MEASUREMENTS) This section outlines the company's fair value measurement methods and hierarchy for financial instruments under ASC 820, primarily classifying derivative contracts as Level 2 due to their valuation based on observable market data, and discloses derivative contract fair values as of March 31, 2020, and December 31, 2019 - The company defines fair value under ASC 820 as the price received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date[125](index=125&type=chunk) - Fair value hierarchy is categorized into three levels, with the company primarily classifying derivative contracts as **Level 2** because their value is based on observable market data[125](index=125&type=chunk)[129](index=129&type=chunk) Fair Value Measurements | Asset/Liability (Thousands of Dollars) | Level 1 | Level 2 | Level 3 | Total | |:---|:---|:---|:---|:---|\ | **March 31, 2020 (Successor)** | | | | | | Derivative Contract Assets | — | 109,119 | — | 109,119 | | Derivative Contract Liabilities | — | 4,445 | — | 4,445 | | **December 31, 2019 (Successor)** | | | | | | Derivative Contract Assets | — | 5,219 | — | 5,219 | | Derivative Contract Liabilities | — | 12,923 | — | 12,923 | - The fair values of cash, cash equivalents, restricted cash, accounts receivable, and accounts payable approximate their carrying values due to their short-term nature[131](index=131&type=chunk) [10. DERIVATIVE AND HEDGING ACTIVITIES](index=44&type=section&id=10.%20DERIVATIVE%20AND%20HEDGING%20ACTIVITIES) This section details the company's derivative and hedging activities to manage commodity price and interest rate risks, primarily using fixed-price swaps, costless collar options, basis swaps, and WTI NYMEX roll, without engaging in speculative trading, with all derivative contracts measured at fair value, and discloses derivative assets, liabilities, and realized and unrealized gains/losses as of March 31, 2020, and December 31, 2019 - The company hedges future oil and gas production through derivative contracts to mitigate commodity price volatility risk, not engaging in speculative trading[134](index=134&type=chunk)[135](index=135&type=chunk) - Derivative contracts primarily include fixed-price swaps, costless collar options, basis swaps, and WTI NYMEX roll[137](index=137&type=chunk) - The company has not designated any derivative contracts for hedge accounting, so fair value changes are recognized in "Net gain (loss) on derivative contracts" in the statements of operations[137](index=137&type=chunk) Derivative Assets and Liabilities | Derivative Type | Balance Sheet Location | March 31, 2020 (Successor) Assets (Thousands of Dollars) | December 31, 2019 (Successor) Assets (Thousands of Dollars) | March 31, 2020 (Successor) Liabilities (Thousands of Dollars) | December 31, 2019 (Successor) Liabilities (Thousands of Dollars) | |:---|:---|:---|:---|:---|:---|\ | Commodity Contracts (Current) | Current Assets - Derivative Contract Assets | 71,353 | 4,995 | (3,972) | (8,069) | | Commodity Contracts (Noncurrent) | Other Noncurrent Assets - Derivative Contract Assets | 37,766 | 224 | (473) | (4,854) | | **Total** | | 109,119 | 5,219 | (4,445) | (12,923) | Derivative Gains (Losses) | Derivative Gains (Losses) (Thousands of Dollars) | Three Months Ended March 31, 2020 (Successor) | Three Months Ended March 31, 2019 (Predecessor) | |:---|:---|:---|\ | Unrealized Gains (Losses) | 112,378 | (68,169) | | Realized Gains (Losses) | 5,921 | 3,370 | | **Total Net Gain (Loss) on Derivative Contracts** | 118,299 | (64,799) | - In April 2020, the company terminated certain derivative contracts, realizing approximately **$4.8 million** in termination gains, in response to market changes and temporary production shut-ins[146](index=146&type=chunk) [11. ASSET RETIREMENT OBLIGATIONS](index=49&type=section&id=11.%20ASSET%20RETIREMENT%20OBLIGATIONS) This section describes the recognition and measurement of the company's Asset Retirement Obligations (ARO), which are recorded when the fair value of site reclamation, facility removal, or plugging and abandonment costs can be reasonably estimated, with accretion expense recognized in "Depletion, depreciation and amortization" on the statements of operations - The company records Asset Retirement Obligations (ARO) when the fair value of site reclamation, facility removal, or plugging and abandonment costs can be reasonably estimated[147](index=147&type=chunk) - Accretion expense on ARO liabilities is recognized in "Depletion, depreciation and amortization" on the statements of operations[147](index=147&type=chunk) Asset Retirement Obligations | Metric (Thousands of Dollars) | March 31, 2020 (Successor) | |:---|:---|\ | Asset Retirement Obligation Liability, December 31, 2019 | 10,590 | | Additions | 105 | | Accretion Expense | 149 | | **Asset Retirement Obligation Liability, March 31, 2020** | 10,844 | [12. COMMITMENTS AND CONTINGENCIES](index=51&type=section&id=12.%20COMMITMENTS%20AND%20CONTINGENCIES) This section discloses the company's commitments and contingencies as of March 31, 2020, primarily including drilling rig and equipment purchase commitments, and long-term gathering, transportation, and sales contracts related to oil and gas production, with management believing that the resolution of existing legal proceedings will not materially impact the company's operating results, financial condition, or cash flows - As of March 31, 2020, the company had approximately **$1.2 million** in active drilling rig commitments and approximately **$1.6 million** in equipment purchase commitments[150](index=150&type=chunk)[151](index=151&type=chunk) - The company has entered into several long-term crude oil and natural gas gathering, transportation, and sales contracts, committing most of its Delaware Basin production for terms ranging from 1 to 20 years[152](index=152&type=chunk) - Management and legal counsel believe that the resolution of existing legal proceedings will not have a material adverse effect on the company's operating results, financial condition, or cash flows[153](index=153&type=chunk) [13. STOCKHOLDERS' EQUITY](index=51&type=section&id=13.%20STOCKHOLDERS'%20EQUITY) This section details the composition and changes in the company's stockholders' equity, including common stock, warrants, and equity incentive plans, noting that all predecessor common stock was canceled and approximately **16.2 million** new common shares were issued post-bankruptcy, along with the issuance of three series of warrants and the adoption of the 2020 Long-Term Incentive Plan for stock options and restricted stock units - On October 8, 2019, upon the company's emergence from bankruptcy, all common stock of the predecessor company was canceled, and approximately **16.2 million** new shares of common stock were issued[154](index=154&type=chunk) - The company amended its certificate of incorporation to set the total authorized capital stock at **101,000,000** shares, comprising **100,000,000** shares of common stock and **1,000,000** shares of preferred stock[155](index=155&type=chunk) - The company issued three series of warrants (Series A, B, and C), exercisable over three years, with exercise prices increasing monthly at an annualized rate of **6.75%**[157](index=157&type=chunk)[158](index=158&type=chunk) - The company adopted the 2020 Long-Term Incentive Plan, authorizing the grant of approximately **1.5 million** shares of common stock, with **0.2 million** shares remaining available for issuance as of March 31, 2020[162](index=162&type=chunk) - For the three months ended March 31, 2020, the company recognized **$0.4 million** in stock-based compensation expense, compared to a **$6.8 million** credit in the prior-year period[164](index=164&type=chunk) [Common Stock](index=51&type=section&id=Common%20Stock) - On October 8, 2019, upon the company's emergence from bankruptcy, all common stock of the predecessor company was canceled, and approximately **16.2 million** new shares of common stock were issued[154](index=154&type=chunk) - The company amended its certificate of incorporation to set the total authorized capital stock at **101,000,000** shares, comprising **100,000,000** shares of common stock and **1,000,000** shares of preferred stock[155](index=155&type=chunk) [Warrants](index=53&type=section&id=Warrants) - On October 8, 2019, upon the company's emergence from bankruptcy, all warrants of the predecessor company were canceled, and three series of warrants (Series A, B, and C) were issued to existing equity interest holders[157](index=157&type=chunk) - As of March 31, 2020, the company had **1.8 million** Series A, **2.2 million** Series B, and **2.9 million** Series C warrants outstanding, with exercise prices of **$41.03**, **$49.37**, and **$61.89** per share, respectively[158](index=158&type=chunk) - Each series of warrants has a three-year term, expiring on October 8, 2022, with exercise prices increasing monthly at an annualized rate of **6.75%**[158](index=158&type=chunk) [Incentive Plans](index=53&type=section&id=Incentive%20Plans) - The 2016 Long-Term Incentive Plan was terminated prior to the company's emergence from bankruptcy, and all unexercised equity incentive awards were either vested or canceled[161](index=161&type=chunk) - On January 29, 2020, the company's Board of Directors adopted the 2020 Long-Term Incentive Plan, authorizing the grant of approximately **1.5 million** shares of common stock[162](index=162&type=chunk) - As of March 31, 2020, **0.2 million** shares of common stock remained available for issuance[162](index=162&type=chunk) - For the three months ended March 31, 2020, the company recognized **$0.4 million** in stock-based compensation expense, compared to a **$6.8 million** credit in the prior-year period[164](index=164&type=chunk) [Stock Options](index=55&type=section&id=Stock%20Options) - In the first quarter of 2020, the company granted **0.5 million** stock options to employees under the 2020 Plan, with exercise prices ranging from **$18.91** to **$37.83** and a weighted-average exercise price of **$28.32**[166](index=166&type=chunk) - As of March 31, 2020, the company had **$1.5 million** in unrecognized compensation expense, to be recognized over a weighted-average period of **2.4 years**[166](index=166&type=chunk) - No stock options were granted in the first quarter of 2019, and all unexercised stock options under the 2016 Plan were canceled prior to emergence from bankruptcy[167](index=167&type=chunk) [Restricted Stock](index=55&type=section&id=Restricted%20Stock) - In the first quarter of 2020, the company granted **0.9 million** restricted stock units (RSUs) to employees under the 2020 Plan, with varying vesting conditions and fair values[169](index=169&type=chunk) - Of these, **0.4 million** RSUs vest in equal quarterly installments over four years, with a fair value of **$11.89** per share[170](index=170&type=chunk) - **0.2 million** RSUs vest fully only upon achieving specific business combination targets, with a fair value of **$11.89** per share, and no expense was recognized as of March 31, 2020[171](index=171&type=chunk) - **0.3 million** RSUs vest based on the company's total shareholder return relative to peer companies, with a fair value of **$6.48** per share[172](index=172&type=chunk) - As of March 31, 2020, the company had **$6.4 million** in unrecognized compensation expense, to be recognized over a weighted-average period of **3.2 years**[169](index=169&type=chunk) [14. EARNINGS PER SHARE](index=58&type=section&id=14.%20EARNINGS%20PER%20SHARE) This section provides the company's earnings per share calculations for the three months ended March 31, 2020, and March 31, 2019, noting a significant change in the basis of EPS calculation due to the issuance of new shares and cancellation of predecessor equity following the company's emergence from bankruptcy on October 8, 2019 Earnings Per Share | Metric (Thousands of Dollars, except per share amounts) | Three Months Ended March 31, 2020 (Successor) | Three Months Ended March 31, 2019 (Predecessor) | |:---|:---|:---|\ | **Basic Earnings Per Share** | | | | Net Income (Loss) | 114,491 | (336,559) | | Weighted Average Basic Common Shares Outstanding | 16,204 | 158,549 | | Basic Net Income (Loss) Per Share | 7.07 | (2.12) | | **Diluted Earnings Per Share** | | | | Net Income (Loss) | 114,491 | (336,559) | | Weighted Average Basic Common Shares Outstanding | 16,204 | 158,549 | | Weighted Average Diluted Common Shares Outstanding | 16,204 | 158,549 | | Diluted Net Income (Loss) Per Share | 7.07 | (2.12) | - As of March 31, 2020, common stock equivalents (including warrants, options, and restricted stock units) totaling **7.3 million** shares were excluded from diluted EPS calculation because their effect was anti-dilutive[175](index=175&type=chunk) - As of March 31, 2019, common stock equivalents totaling **14.9 million** shares were excluded from diluted EPS calculation because the net loss made their effect anti-dilutive[176](index=176&type=chunk) [15. ADDITIONAL FINANCIAL STATEMENT INFORMATION](index=59&type=section&id=15.%20ADDITIONAL%20FINANCIAL%20STATEMENT%20INFORMATION) This section provides a detailed breakdown of selected balance sheet accounts as of March 31, 2020, and December 31, 2019, including accounts receivable, prepaid expenses and other, other assets, and accounts payable and accrued liabilities Additional Financial Statement Information | Account (Thousands of Dollars) | March 31, 2020 (Successor) | December 31, 2019 (Successor) | |:---|:---|:---|\ | **Accounts Receivable, Net:** | | | | Oil, Natural Gas and NGL Revenue | 19,321 | 36,367 | | Joint Interest Accounts | 6,042 | 10,145 | | Other | 4,897 | 1,992 | | **Total** | 30,260 | 48,504 | | **Prepaid Expenses and Other:** | | | | Prepaid Expenses | 1,057 | 2,093 | | Income Tax Receivable | 1,250 | 1,250 | | Escrow Funds | 4,000 | 4,000 | | Other | 34 | 36 | | **Total** | 6,341 | 7,379 | | **Other Assets:** | | | | Joint Interest Accounts | 5,442 | — | | Escrow Funds | 581 | 580 | | Other | 125 | 123 | | **Total** | 6,148 | 703 | | **Accounts Payable and Accrued Liabilities:** | | | | Trade Accounts Payable | 23,501 | 36,038 | | Accrued Oil and Natural Gas Capital Costs | 41,202 | 22,781 | | Revenue and Royalty Payables | 16,606 | 25,457 | | Accrued Interest Expense | 335 | 604 | | Accrued Employee Compensation | 141 | 2,947 | | Accrued Lease Operating Expenses | 10,563 | 9,230 | | Other | 237 | 276 | | **Total** | 92,585 | 97,333 | - As of March 31, 2020, oil, natural gas, and NGL revenue accounts receivable decreased to **$19,321 thousand** from **$36,367 thousand** as of December 31, 2019[177](index=177&type=chunk) - Accrued oil and natural gas capital costs increased to **$41,202 thousand** as of March 31, 2020, from **$22,781 thousand** as of December 31, 2019[177](index=177&type=chunk) [ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=60&type=section&id=ITEM%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's detailed discussion and analysis of the company's financial condition and results of operations for the three months ended March 31, 2020, and March 31, 2019, covering an overview, recent developments, capital resources and liquidity, cash flows, and specific operating performance metrics, emphasizing the significant impact of the COVID-19 pandemic and commodity price volatility on the company's business - The company is an independent energy company focused on oil and gas assets in the Delaware Basin, with an average daily production of **18,791 BOE/d** in Q1 2020, up from **17,089 BOE/d** in Q1 2019[180](index=180&type=chunk)[181](index=181&type=chunk) - The COVID-19 pandemic and oil price war led to significant declines in oil and gas demand and prices, prompting the company to cut capital expenditures and temporarily shut in production wells in response[184](index=184&type=chunk) - The company's 2020 capital expenditure budget was significantly reduced from **$123-138 million** to approximately **$76 million**[191](index=191&type=chunk) - As of March 31, 2020, the company had **$170.0 million** in outstanding debt under its senior revolving credit facility, with **$25.6 million** in available borrowing capacity, and was in compliance with all financial covenants[192](index=192&type=chunk)[194](index=194&type=chunk) - In Q1 2020, the company's operating cash flow was **$12.3 million**, investing cash outflow was **$47.6 million**, and financing cash flow was **$26.0 million**[202](index=202&type=chunk)[205](index=205&type=chunk)[209](index=209&type=chunk) [Overview](index=60&type=section&id=Overview) - The company is an independent energy company focused on the acquisition, production, exploration, and development of onshore liquids-rich oil and natural gas properties in the United States, currently concentrated in the Delaware Basin[180](index=180&type=chunk) - Average daily production in the first quarter of 2020 was **18,791 barrels of oil equivalent per day (BOE/d)**, higher than **17,089 BOE/d** in the prior-year period, primarily due to drilling activities in Monument Draw and West Quito Draw[181](index=181&type=chunk) - Oil and gas price fluctuations significantly impact the company's financial performance, and sustained low prices could lead to full cost ceiling test impairments[182](index=182&type=chunk)[183](index=183&type=chunk) [Recent Developments](index=61&type=section&id=Recent%20Developments) This section outlines the company's recent challenges and responses, including the impact of the COVID-19 pandemic on markets and operations, the acquisition of an acid gas injection well permit, amendments to the senior revolving credit facility, and the listing of common stock on NYSE American - The COVID-19 pandemic has led to significant declines in oil and gas demand and prices, prompting the company to cut capital expenditures and temporarily shut in production wells in response[184](index=184&type=chunk) - The company obtained an acid gas injection well permit, which is expected to reduce future operating costs[185](index=185&type=chunk) - The senior revolving credit facility was amended on April 30, 2020, reducing the borrowing base to **$200.0 million** with planned further reductions, increasing the interest rate spread, and adding a mandatory prepayment clause if cash balances exceed **$10.0 million**[186](index=186&type=chunk) - The company's common stock began trading on the NYSE American exchange under the symbol "BATL" on February 20, 2020[189](index=189&type=chunk) [Capital Resources and Liquidity](index=63&type=section&id=Capital%20Resources%20and%20Liquidity) This section discusses the company's capital resources and liquidity in the current market environment, particularly amid the COVID-19 pandemic and declining commodity prices, noting significant reductions in the 2020 capital expenditure budget and plans to meet near-term capital needs through cash on hand, operating cash flow, and borrowings under the senior revolving credit facility, while emphasizing hedging strategies and debt covenant compliance - The COVID-19 pandemic has led to significant declines in oil and gas demand and prices, prompting the company to reduce its operating scale, including temporarily shutting in some production[189](index=189&type=chunk) - The company's 2020 capital expenditure budget has been reduced from **$123-138 million** to approximately **$76 million**[191](index=191&type=chunk) - Near-term capital expenditure requirements are expected to be met through cash on hand, cash flow from operations, and borrowings under the senior revolving credit facility[192](index=192&type=chunk) - As of March 31, 2020, the company had **$170.0 million** in outstanding debt under its senior revolving credit facility, with **$25.6 million** in available borrowing capacity, and was in compliance with all financial covenants[192](index=192&type=chunk)[194](index=194&type=chunk) - The company has hedged approximately **90%**, **100%**, and **75%** of its expected production from proved developed producing reserves for 2020, 2021, and 2022, respectively[195](index=195&type=chunk) [Cash Flow](index=67&type=section&id=Cash%20Flow) This section analyzes the company's cash flows from operating, investing, and financing activities for the three months ended March 31, 2020, and March 31, 2019, noting a shift to positive operating cash flow in Q1 2020, reduced investing cash outflows, and financing cash flows primarily supporting drilling and development projects Cash Flow Activities | Cash Flow Activities (Thousands of Dollars) | Three Months Ended March 31, 2020 (Successor) | Three Months Ended March 31, 2019 (Predecessor) | |:---|:---|:---|\ | Net Cash Provided by (Used in) Operating Activities | 12,343 | (36,834) | | Net Cash Used in Investing Activities | (47,648) | (114,431) | | Net Cash Provided by Financing Activities | 25,968 | 104,594 | | Net Increase (Decrease) in Cash, Cash Equivalents and Restricted Cash | (9,337) | (46,671) | - Operating cash flow in Q1 2020 shifted to a net inflow of **$12.3 million**, primarily due to reduced operating expenses and lower interest expense[202](index=202&type=chunk)[203](index=203&type=chunk) - Investing cash outflow in Q1 2020 decreased to **$47.6 million**, primarily for oil and gas capital expenditures of **$48.2 million**[205](index=205&type=chunk)[207](index=207&type=chunk) - Financing cash flow in Q1 2020 was **$26.0 million**, mainly from net borrowings under the senior revolving credit facility, used to fund drilling and development projects[209](index=209&type=chunk) [Critical Accounting Policies and Estimates](index=70&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) This section states that the company's critical accounting policies and estimates remain materially unchanged from those described in the 2019 annual report on Form 10-K, with financial statement preparation relying on management's estimates and judgments regarding assets, liabilities, revenues, and expenses - The company's critical accounting policies and estimates are materially unchanged from those described in the 2019 annual report on Form 10-K[219](index=219&type=chunk) - Financial statement preparation requires management to make estimates and judgments regarding assets, liabilities, revenues, and expenses[219](index=219&type=chunk) [Results of Operations](index=71&type=section&id=Results%20of%20Operations) This section provides a detailed analysis of the company's operating results for the three months ended March 31, 2020, and March 31, 2019, covering operating revenues, various operating expenses, depletion, impairment, derivative gains/losses, and interest expense, noting net income in Q1 2020 primarily from significant derivative contract gains and reduced operating costs, despite lower oil and gas sales revenue Results of Operations | Metric (Thousands of Dollars, except per unit and per BOE amounts) | Three Months Ended March 31, 2020 (Successor) | Three Months Ended March 31, 2019 (Predecessor) | |:---|:---|:---|\ | **Net Income (Loss)** | 114,491 | (336,559) | | **Operating Revenues:** | | | | Oil | 41,917 | 45,517 | | Natural Gas | 354 | 1,461 | | Natural Gas Liquids | 4,753 | 4,945 | | Other | 375 | (7) | | **Operating Expenses:** | | | | Lease Operating | 12,489 | 14,186 | | Workover and Other | 1,323 | 2,646 | | Taxes Other Than Income | 2,915 | 2,893 | | Gathering and Other | 10,547 | 14,869 | | Restructuring | 418 | 11,271 | | General and Administrative | 3,469 | 11,390 | | Stock-Based Compensation | 387 | (6,782) | | Depletion – Full Cost | 17,600 | 28,322 | | Depreciation – Other | 281 | 1,553 | | Accretion Expense | 149 | 100 | | Full Cost Ceiling Impairment | — | 275,239 | | Water Asset Sale (Gain) Loss | — | 885 | | **Other Income (Expense):** | | | | Net Gain (Loss) on Derivative Contracts | 118,299 | (64,799) | | Interest Expense and Other | (1,629) | (12,589) | | Income Tax Benefit (Expense) | — | 45,485 | | **Production:** | | | | Oil – MBbls | 937 | 921 | | Natural Gas – MMcf | 2,539 | 1,941 | | NGLs – MBbls | 350 | 293 | | Total BOE (1) | 1,710 | 1,538 | | Average Daily Production – BOE/d | 18,791 | 17,089 | | **Average Unit Prices: (2)** | | | | Oil Price - $/Bbl | 44.74 | 49.42 | | Natural Gas Price - $/Mcf | 0.14 | 0.75 | | NGL Price - $/Bbl | 13.58 | 16.88 | | Total $/BOE | 27.50 | 33.76 | | **Average Costs Per BOE:** | | | | Lease Operating | 7.30 | 9.22 | | Workover and Other | 0.77 | 1.72 | | Taxes Other Than Income | 1.70 | 1.88 | | Gathering and Other | 6.17 | 9.67 | | Restructuring | 0.24 | 7.33 | | General and Administrative | 2.03 | 7.41 | | Stock-Based Compensation | 0.23 | (4.41) | | Depletion | 10.29 | 18.41 | - Oil and gas sales revenue in Q1 2020 was **$47.0 million**, lower than **$51.9 million** in the prior-year period, primarily due to declining commodity prices[222](index=222&type=chunk) - In Q1 2020, lease operating expenses, workover and other expenses, gathering and other expenses, restructuring expenses, and general and administrative expenses all significantly decreased, reflecting the company's efforts in efficiency and cost savings[223](index=223&type=chunk)[224](index=224&type=chunk)[226](index=226&type=chunk)[227](index=227&type=chunk)[228](index=228&type=chunk) - Net gains on derivative contracts in Q1 2020 were **$118.3 million**, compared to a net loss of **$64.8 million** in the prior-year period, representing the primary driver for the company's return to profitability[234](index=234&type=chunk) - Interest expense and other in Q1 2020 was **$1.6 million**, significantly lower than **$12.6 million** in the prior-year period, primarily due to reduced debt post-bankruptcy reorganization[235](index=235&type=chunk) [ITEM 3. Quantitative and Qualitative Disclosures about Market Risk](index=76&type=section&id=ITEM%203.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) This section discloses the company's market risks, primarily energy commodity price risk and interest rate risk, detailing its use of derivative instruments to manage commodity price volatility and regular fair value assessments of financial instruments, along with a quantitative analysis of interest rate fluctuations' potential impact on cash flow - The company faces energy commodity price risk (such as basis differentials between NYMEX commodity prices and local sales index prices) and interest rate risk[237](index=237&type=chunk)[240](index=240&type=chunk) - The company hedges commodity price risk using derivative instruments like fixed-price swaps, costless collar options, basis swaps, and WTI NYMEX roll, targeting **75% to 85%** of expected production for the next 24 to 36 months[237](index=237&type=chunk) - The company only transacts derivative contracts with highly-rated financial institutions to manage counterparty risk[238](index=238&type=chunk) - As of March 31, 2020, the company's debt principal was **$170.0 million**, all bearing floating interest rates, with a weighted-average interest rate of **3.43%**[241](index=241&type=chunk) - A **10%** change in market interest rates would have an approximate annual impact of **$0.6 million** on the company's cash flow, assuming floating-rate debt balances remain constant[241](index=241&type=chunk) [ITEM 4. Controls and Procedures](index=77&type=section&id=ITEM%204.%20Controls%20and%20Procedures) This section states that, under the supervision and participation of management (including the Chief Executive Officer and Chief Financial Officer), the company evaluated the effectiveness of its disclosure controls and procedures as of March 31, 2020, concluding they are effectively designed to provide reasonable assurance that required information is timely recorded, processed, summarized, and reported - As of March 31, 2020, the company's management assessed and concluded that disclosure controls and procedures are effectively designed to provide reasonable assurance that required information is timely recorded, processed, summarized, and reported[242](index=242&type=chunk) - There were no material changes in the company's internal control over financial reporting during the three months ended March 31, 2020[243](index=243&type=chunk) [PART II. OTHER INFORMATION](index=77&type=section&id=PART%20II.%20OTHER%20INFORMATION) [ITEM 1. Legal Proceedings](index=77&type=section&id=ITEM%201.%20Legal%20Proceedings) This section refers to the company's legal proceedings information disclosed in Note 12, "Commitments and Contingencies," to the financial statements, with management and legal counsel believing that the resolution of existing legal proceedings will not materially impact the company's operating results, financial condition, or cash flows - Legal proceedings information is disclosed in Note 12, "Commitments and Contingencies," to the financial statements[244](index=244&type=chunk) [ITEM 1A. Risk Factors](index=77&type=section&id=ITEM%201A.%20Risk%20Factors) This section updates the company's risk factors, specifically highlighting the potential adverse impacts of the COVID-19 pandemic on its operations and financial results, which may include decreased oil and gas demand and prices, operational disruptions, supply chain issues, and limited access to capital - This report primarily updates risks related to the COVID-19 pandemic, in addition to those described in the 2019 annual report on Form 10-K[245](index=245&type=chunk) - The COVID-19 pandemic may lead to a significant or prolonged decrease in oil and gas demand, impacting the company's revenue[246](index=246&type=chunk) - The pandemic could disrupt company operations, affect employee and contractor performance, or cause disruptions for midstream service providers[247](index=247&type=chunk) - The pandemic may impact the company's ability to access capital, monetize assets, and successfully execute its plans[247](index=247&type=chunk) - The company has reduced capital expenditures, deferred drilling and completion plans, and begun shutting in some production wells in response to current low oil and gas prices[248](index=248&type=chunk) [ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=78&type=section&id=ITEM%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) This section states that the company had no unregistered sales of equity securities or use of proceeds - No unregistered sales of equity securities or use of proceeds[249](index=249&type=chunk) [ITEM 3. Defaults Upon Senior Securities](index=78&type=section&id=ITEM%203.%20Defaults%20Upon%20Senior%20Securities) This section states that the company had no defaults upon senior securities - No defaults upon senior securities[249](index=249&type=chunk) [ITEM 4. Mine Safety Disclosures](index=78&type=section&id=ITEM%204.%20Mine%20Safety%20Disclosures) This section states that mine safety disclosures are not applicable - Mine safety disclosures are not applicable[249](index=249&type=chunk) [ITEM 5. Other Information](index=78&type=section&id=ITEM%205.%20Other%20Information) This section states that there is no other information - No other information[249](index=249&type=chunk) [ITEM 6. Exhibits](index=79&type=section&id=ITEM%206.%20Exhibits) This section lists all exhibits filed with this Quarterly Report on Form 10-Q, including the company's certificate of incorporation, credit agreement, warrant agreements, registration rights agreement, and various certifications and XBRL files required by the Sarbanes-Oxley Act - Exhibits include the company's certificate of incorporation, credit agreement and its amendments, warrant agreements, and registration rights agreement[252](index=252&type=chunk) - Also included are Sarbanes-Oxley Act Sections 302 and 906 certifications from the Chief Executive Officer and Chief Financial Officer[252](index=252&type=chunk) - XBRL files (instance document, taxonomy extension schema document, calculation linkbase document, definition linkbase document, label linkbase document, and presentation linkbase document) are also filed as exhibits[252](index=252&type=chunk) [SIGNATURES](index=80&type=section&id=SIGNATURES) [Signatures](index=80&type=section&id=Signatures) This section contains the report signed by authorized representatives of Battalion Oil Corporation as required by the Securities Exchange Act of 1934 - The r

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Use these links to rapidly review the document TABLE OF CONTENTS 1311 (Primary Standard Industrial Classification Code Number) Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2019 OR o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File N ...

PART I—FINANCIAL INFORMATION [Item 1. Condensed Consolidated Financial Statements (Unaudited)](index=6&type=section&id=Item%201.%20Condensed%20Consolidated%20Financial%20Statements%20(Unaudited)) The unaudited condensed consolidated financial statements for the period ended June 30, 2019, reflect significant financial distress, including a **$939.6 million** impairment, a **$977.4 million** net loss, and debt reclassification to current liabilities due to the August 2019 Chapter 11 bankruptcy filing [Condensed Consolidated Statements of Operations](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) For the six months ended June 30, 2019, the company reported a **$977.4 million** net loss, primarily due to a **$939.6 million** impairment, with operating expenses surging to **$1.11 billion** Condensed Consolidated Statements of Operations (Six Months Ended June 30, in thousands) | Metric | 2019 | 2018 | | :--- | :--- | :--- | | **Total operating revenues** | $108,294 | $104,670 | | **Total operating expenses** | $1,106,640 | $99,763 | | *Full cost ceiling impairment* | *$939,622* | *$0* | | **Loss from operations** | ($998,346) | $4,907 | | **Net loss** | ($977,403) | ($18,872) | | **Net loss per share (Basic & Diluted)** | ($6.15) | ($0.12) | [Condensed Consolidated Balance Sheets](index=7&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) As of June 30, 2019, total assets decreased to **$1.16 billion**, liabilities increased to **$941.3 million** with **$801.9 million** debt reclassified as current, and equity plummeted to **$214.2 million** Condensed Consolidated Balance Sheets (as of, in thousands) | Metric | June 30, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | **Total Current Assets** | $59,212 | $144,652 | | **Net Oil and Natural Gas Properties** | $906,784 | $1,802,476 | | **Total Assets** | $1,155,473 | $2,083,609 | | **Total Current Liabilities** | $927,235 | $161,742 | | *Current portion of long-term debt, net* | *$801,887* | *$0* | | **Total Liabilities** | $941,316 | $886,565 | | **Total Stockholders' Equity** | $214,157 | $1,197,044 | [Condensed Consolidated Statements of Stockholders' Equity](index=8&type=section&id=Condensed%20Consolidated%20Statements%20of%20Stockholders'%20Equity) Stockholders' equity dramatically declined from **$1.20 billion** to **$214.2 million** by June 30, 2019, primarily due to the **$977.4 million** net loss - The retained earnings (accumulated deficit) shifted from a positive **$101.7 million** at the end of 2018 to a deficit of **$875.7 million** by June 30, 2019, reflecting the substantial net losses during the period[15](index=15&type=chunk) [Condensed Consolidated Statements of Cash Flows](index=10&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) For the six months ended June 30, 2019, operating activities resulted in a **$26.9 million** cash outflow, investing activities used **$205.3 million**, and cash and equivalents decreased by **$44.6 million** Cash Flow Summary (Six Months Ended June 30, in thousands) | Cash Flow Activity | 2019 | 2018 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | ($26,898) | $43,578 | | Net cash used in investing activities | ($205,303) | ($634,271) | | Net cash provided by financing activities | $187,573 | $262,492 | | **Net decrease in cash and cash equivalents** | **($44,628)** | **($328,201)** | [Notes to Unaudited Condensed Consolidated Financial Statements](index=11&type=section&id=Notes%20to%20Unaudited%20Condensed%20Consolidated%20Financial%20Statements) The notes detail the August 2019 Chapter 11 bankruptcy filing, a **$939.6 million** impairment, debt reclassification, and the arrangement of DIP and exit financing - On August 7, 2019, the company filed for Chapter 11 bankruptcy to pursue a pre-packaged plan of reorganization, triggering defaults on all debt agreements and leading to the reclassification of all debt as a current liability[22](index=22&type=chunk)[23](index=23&type=chunk) - The Chapter 11 proceedings raise substantial doubt about the company's ability to continue as a going concern, though the financial statements were prepared on that basis without adjustments for potential outcomes of the bankruptcy[24](index=24&type=chunk) - The company recorded a full cost ceiling impairment of **$939.6 million** in the first six months of 2019, primarily due to focusing on its most economic area (Monument Draw) and transferring **$481.7 million** of unevaluated property costs from the Hackberry Draw area to the full cost pool[80](index=80&type=chunk) - Subsequent to the quarter-end, the company entered into a Restructuring Support Agreement, arranged a **$35.0 million** Debtor-in-Possession (DIP) credit facility, and received a commitment for a **$750 million** exit financing facility[161](index=161&type=chunk)[168](index=168&type=chunk)[177](index=177&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=43&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses the company's transformation into a Delaware Basin operator, detailing the Chapter 11 filing, restructuring agreements, and the significant net loss driven by impairment and increased operating costs [Overview and Recent Developments](index=43&type=section&id=Overview%20and%20Recent%20Developments) The company transitioned to a pure-play Delaware Basin operator, increasing production, but financial distress led to an August 2019 Chapter 11 filing, with a plan for senior noteholders to receive **91%** of new equity - Production averaged **17,575 Boe/d** for the first six months of 2019, up from **11,873 Boe/d** in the same period of 2018, due to acquisitions and drilling in the Delaware Basin[188](index=188&type=chunk) - On August 7, 2019, the company filed for Chapter 11 bankruptcy to implement a pre-packaged plan of reorganization[192](index=192&type=chunk) - The reorganization plan proposes that Unsecured Senior Noteholders will receive **91%** of the new common stock, while existing common stockholders will receive **9%**, subject to dilution[193](index=193&type=chunk) - The company has arranged a **$35.0 million** debtor-in-possession (DIP) facility and has a commitment for a **$750 million** exit facility to fund operations during and after bankruptcy[206](index=206&type=chunk)[214](index=214&type=chunk) [Capital Resources and Liquidity](index=48&type=section&id=Capital%20Resources%20and%20Liquidity) Liquidity is severely strained due to capital expenditures and covenant issues, leading to the Chapter 11 filing, with near-term funding reliant on DIP and Exit Facilities - The company's strategic shift to the Delaware Basin required significant capital, which adversely impacted its ability to comply with debt covenants, contributing to the bankruptcy filing[225](index=225&type=chunk) - Near-term capital will be funded by cash on hand, operations, and the DIP and Exit Facilities, as the existing Senior Credit Agreement is in default[224](index=224&type=chunk) Cash Flow Summary (Six Months Ended June 30, in thousands) | Cash Flow Activity | 2019 | 2018 | | :--- | :--- | :--- | | Cash flows (used in) provided by operating activities | ($26,898) | $43,578 | | Cash flows used in investing activities | ($205,303) | ($634,271) | | Cash flows provided by financing activities | $187,573 | $262,492 | [Results of Operations](index=52&type=section&id=Results%20of%20Operations) Results worsened significantly in 2019, with a **$977.4 million** net loss primarily due to a **$939.6 million** impairment, and increased operating costs despite higher production Results of Operations Comparison (Three Months Ended June 30, in thousands, except per Boe) | Metric | 2019 | 2018 | | :--- | :--- | :--- | | **Net loss** | ($640,844) | ($16,274) | | **Full cost ceiling impairment** | $664,383 | $0 | | **Total Production (MBoe)** | 1,643 | 1,162 | | **Average Price per Boe** | $34.01 | $47.60 | | **Lease Operating Expense per Boe** | $8.20 | $4.57 | | **Gathering and other per Boe** | $6.72 | $5.13 | Results of Operations Comparison (Six Months Ended June 30, in thousands, except per Boe) | Metric | 2019 | 2018 | | :--- | :--- | :--- | | **Net loss** | ($977,403) | ($18,872) | | **Full cost ceiling impairment** | $939,622 | $0 | | **Total Production (MBoe)** | 3,181 | 2,149 | | **Average Price per Boe** | $33.89 | $48.58 | | **Lease Operating Expense per Boe** | $8.70 | $4.76 | | **Gathering and other per Boe** | $8.15 | $5.76 | - The increase in lease operating expenses was driven by higher third-party water hauling and disposal costs following the 2018 sale of water infrastructure assets[249](index=249&type=chunk)[270](index=270&type=chunk) - Restructuring expenses surged to **$11.9 million** for the six months ended June 30, 2019, from **$0.1 million** in the prior year, due to executive departures and workforce reductions[274](index=274&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=60&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company is exposed to commodity price and interest rate risks, hedging **70-80%** of production and noting a **$1.5 million** annual cash flow impact from a **10%** interest rate change - The company's policy is to hedge approximately **70%** to **80%** of its anticipated production for the next 18 to 24 months using derivative instruments to mitigate commodity price volatility[286](index=286&type=chunk) - As of June 30, 2019, **23%** of the company's total debt bears variable interest rates, where a **10%** change in market interest rates would impact cash flows by approximately **$1.5 million** per year[292](index=292&type=chunk) [Item 4. Controls and Procedures](index=61&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that disclosure controls and procedures were effective as of June 30, 2019, with no material changes to internal controls over financial reporting - Management concluded that as of June 30, 2019, the company's disclosure controls and procedures were effective[293](index=293&type=chunk) - No material changes were made to internal controls over financial reporting during the three months ended June 30, 2019[294](index=294&type=chunk) PART II—OTHER INFORMATION [Item 1. Legal Proceedings](index=62&type=section&id=Item%201.%20Legal%20Proceedings) The company is involved in legal proceedings, including an appeal of a **$9.1 million** judgment and the significant Chapter 11 bankruptcy proceedings filed on August 7, 2019 - The company is appealing a judgment of approximately **$9.1 million** in a litigation matter in Pennsylvania[139](index=139&type=chunk) - The company filed for Chapter 11 bankruptcy on August 7, 2019, which is the most significant legal proceeding[140](index=140&type=chunk) [Item 1A. Risk Factors](index=62&type=section&id=Item%201A.%20Risk%20Factors) Significant new risks stem from Chapter 11 proceedings, including potential failure to confirm the reorganization plan, high costs, stakeholder relationship impacts, stock delisting, and substantial dilution for existing stockholders - The company faces significant risks associated with its Chapter 11 proceedings, including the ability to confirm and consummate the reorganization plan, high costs, and maintaining relationships with suppliers and employees[299](index=299&type=chunk) - Under the proposed reorganization plan, existing common stockholders will receive only **9%** of the new common shares, subject to significant further dilution from warrants, a management incentive plan, and equity offerings[317](index=317&type=chunk)[318](index=318&type=chunk) - The company's common stock was delisted from the NYSE on July 22, 2019, and now trades on the less liquid OTC Pink marketplace, which could depress its value[324](index=324&type=chunk)[325](index=325&type=chunk) - The company's ability to utilize its approximately **$2.6 billion** in net operating loss (NOL) carryforwards may be substantially limited due to an "ownership change" under Section 382 of the Internal Revenue Code, which is believed to have occurred and is expected to occur again upon emergence from bankruptcy[327](index=327&type=chunk)[329](index=329&type=chunk)[331](index=331&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=67&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) During Q2 2019, the company acquired **42,196** common shares from employees to cover tax withholding on vested restricted stock awards - In Q2 2019, a total of **42,196** shares were acquired from employees to cover tax withholding on vested restricted stock awards[332](index=332&type=chunk)[333](index=333&type=chunk) [Item 3. Defaults Upon Senior Securities](index=68&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) The company is in default on its senior securities, as the Chapter 11 bankruptcy filing automatically accelerated obligations under all outstanding debt instruments - The Chapter 11 bankruptcy filing is an event of default that automatically accelerated the company's obligations under its debt instruments[23](index=23&type=chunk)[335](index=335&type=chunk) [Item 5. Other Information](index=68&type=section&id=Item%205.%20Other%20Information) No other information is reported for this item [Item 6. Exhibits](index=68&type=section&id=Item%206.%20Exhibits) This section lists key exhibits filed with the Form 10-Q, including the Chapter 11 Plan, Restructuring Support Agreement, and financing commitment letters, central to the company's restructuring - Key exhibits filed include the Chapter 11 Plan, Disclosure Statement, Restructuring Support Agreement, and financing commitment letters[337](index=337&type=chunk)

Financial Data and Key Metrics Changes - Production for Q1 2019 averaged approximately 17,000 barrels of oil equivalent per day, with about 60% being oil [6] - The realized oil differential improved to 90% of NYMEX from 83% in the previous quarter, while the natural gas differential was 25% of NYMEX due to weak Waha pricing [8] - Adjusted G&A expense totaled $9.2 million in Q1, up from $8 million in Q4, primarily due to a prior quarter legal settlement [9] - D&C CapEx was approximately $72 million in Q1, with an additional $29 million spent on infrastructure [10] Business Line Data and Key Metrics Changes - The new H2S treating plant became operational, allowing for improved production in Monument Draw, with current net production exceeding 20,000 Boe per day [7] - Four new Wolfcamp wells were brought online in Monument Draw, achieving an average 30-day peak IP rate of 1,002 Boe per day at 83% oil [12] - In West Quito Draw, five new 2000-foot lateral Wolfcamp wells were added, but oil cuts averaged around 35%, below expectations [15] Market Data and Key Metrics Changes - The company faced challenges with sour gas handling and takeaway constraints, impacting production during the quarter [6] - The operational issues are expected to decrease now that the H2S treating plant is online, which should enhance production capabilities [6][12] Company Strategy and Development Direction - The company is reviewing strategic and financial alternatives, including M&A, asset sales, and standalone financing [4] - A search for a new CEO is underway as part of the strategic review process [5] - The company plans to continue developing its acreage position in Monument Draw throughout 2019 [5] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about the progress made in the field, particularly with the new H2S treating plant [5] - The company anticipates fewer issues with sour gas outlets going forward, which should improve production [6] - There is a focus on maximizing liquidity and flexibility in financing to support ongoing operations [11] Other Important Information - The borrowing base was reduced to $225 million, which is expected to provide significant liquidity until further strategic decisions are made [10] - The company is considering dropping rig counts to maximize liquidity, but has not yet revised its capital production guidance for the year [11] Q&A Session Summary Question: What is the current status of the strategic review process? - The company is in the middle of the process, exploring various options including M&A and asset sales [4] Question: How is the new H2S treating plant impacting production? - The plant has improved production capabilities, with current net production exceeding 20,000 Boe per day [7] Question: What are the expectations for future drilling in West Quito Draw? - Drilling in the southern area has been paused due to weak gas pricing, with plans to return to the northern area in early 2020 [15]

PART I—FINANCIAL INFORMATION This section presents Halcón Resources Corporation's unaudited condensed consolidated financial statements and management's discussion and analysis for the period [ITEM 1. Condensed Consolidated Financial Statements (Unaudited)](index=5&type=section&id=ITEM%201.%20Condensed%20Consolidated%20Financial%20Statements%20(Unaudited)) This section presents Halcón's unaudited condensed consolidated financial statements, including operations, balance sheets, equity, cash flows, and detailed notes [Condensed Consolidated Statements of Operations (Unaudited)](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations%20(Unaudited)) This statement details Halcón's revenues, expenses, and net income (loss) for the three months ended March 31, 2019 and 2018 Condensed Consolidated Statements of Operations (Unaudited) - Key Figures | Metric | Three Months Ended March 31, 2019 (in thousands) | Three Months Ended March 31, 2018 (in thousands) | | :-------------------------------------- | :----------------------------------------------- | :----------------------------------------------- | | Net income (loss) | $(336,559) | $(2,598) | | Total operating revenues | $51,916 | $49,255 | | Total operating expenses | $356,572 | $50,708 | | Income (loss) from operations | $(304,656) | $(1,453) | | Net gain (loss) on derivative contracts | $(64,799) | $5,903 | | Income tax benefit (provision) | $45,485 | $— | | Basic EPS | $(2.12) | $(0.02) | | Diluted EPS | $(2.12) | $(0.02) | - The company reported a significant increase in net loss from $(2.6) million in Q1 2018 to $(336.6) million in Q1 2019, primarily driven by a full cost ceiling impairment of $275.2 million and a net loss on derivative contracts[12](index=12&type=chunk) [Condensed Consolidated Balance Sheets (Unaudited)](index=7&type=section&id=Condensed%20Consolidated%20Balance%20Sheets%20(Unaudited)) This statement presents Halcón's assets, liabilities, and stockholders' equity as of March 31, 2019, and December 31, 2018 Condensed Consolidated Balance Sheets (Unaudited) - Key Figures | Metric | March 31, 2019 (in thousands) | December 31, 2018 (in thousands) | | :-------------------------------------- | :---------------------------- | :------------------------------- | | Cash and cash equivalents | $195 | $46,866 | | Receivables from derivative contracts | $11,223 | $57,280 | | Total current assets | $61,457 | $144,652 | | Net oil and natural gas properties | $1,578,277 | $1,802,476 | | Total assets | $1,798,838 | $2,083,609 | | Current portion of long-term debt | $105,000 | $— | | Total current liabilities | $263,970 | $161,742 | | Long-term debt, net | $613,493 | $613,105 | | Total liabilities | $931,110 | $886,825 | | Total stockholders' equity | $853,663 | $1,197,044 | - Total assets decreased from $2.08 billion at December 31, 2018, to $1.80 billion at March 31, 2019, primarily due to a significant reduction in cash and cash equivalents and net oil and natural gas properties. Current liabilities increased substantially, mainly due to the reclassification of $105.0 million of long-term debt to current[15](index=15&type=chunk) [Condensed Consolidated Statements of Stockholders' Equity (Unaudited)](index=8&type=section&id=Condensed%20Consolidated%20Statements%20of%20Stockholders'%20Equity%20(Unaudited)) This statement outlines changes in Halcón's stockholders' equity for the three months ended March 31, 2019 and 2018 Condensed Consolidated Statements of Stockholders' Equity (Unaudited) - Key Figures | Metric | December 31, 2018 (in thousands) | March 31, 2019 (in thousands) | | :-------------------------------------- | :------------------------------- | :---------------------------- | | Balances at December 31, 2018 | $1,197,044 | | | Net income (loss) | | $(336,559) | | Stock-based compensation | | $(6,416) | | Balances at March 31, 2019 | | $853,663 | - Total stockholders' equity decreased significantly from $1.20 billion at December 31, 2018, to $853.7 million at March 31, 2019, primarily due to the net loss incurred during the three months ended March 31, 2019[17](index=17&type=chunk) [Condensed Consolidated Statements of Cash Flows (Unaudited)](index=10&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows%20(Unaudited)) This statement summarizes Halcón's cash flows from operating, investing, and financing activities for Q1 2019 and Q1 2018 Condensed Consolidated Statements of Cash Flows (Unaudited) - Key Figures | Metric | Three Months Ended March 31, 2019 (in thousands) | Three Months Ended March 31, 2018 (in thousands) | | :-------------------------------------------- | :----------------------------------------------- | :----------------------------------------------- | | Net cash provided by (used in) operating activities | $(36,834) | $(12,582) | | Net cash provided by (used in) investing activities | $(114,431) | $(293,048) | | Net cash provided by (used in) financing activities | $104,594 | $263,634 | | Net increase (decrease) in cash and cash equivalents | $(46,671) | $(41,996) | | Cash and cash equivalents at end of period | $195 | $382,075 | - Net cash used in operating activities increased from $(12.6) million in Q1 2018 to $(36.8) million in Q1 2019. Net cash used in investing activities decreased significantly from $(293.0) million in Q1 2018 to $(114.4) million in Q1 2019. Net cash provided by financing activities decreased from $263.6 million in Q1 2018 to $104.6 million in Q1 2019[21](index=21&type=chunk) [Notes to Unaudited Condensed Consolidated Financial Statements](index=11&type=section&id=Notes%20to%20Unaudited%20Condensed%20Consolidated%20Financial%20Statements) This section provides detailed explanations of accounting policies, significant transactions, and financial position for the unaudited statements [Note 1. Financial Statement Presentation](index=11&type=section&id=1.%20FINANCIAL%20STATEMENT%20PRESENTATION) Halcón faces substantial doubt about its going concern ability due to projected debt covenant non-compliance, reclassifying debt as current - Halcón Resources Corporation is an independent energy company focused on the acquisition, production, exploration, and development of onshore liquids-rich oil and natural gas assets in the Delaware Basin in West Texas[23](index=23&type=chunk)[165](index=165&type=chunk) - The company has determined that there are conditions and events that raise substantial doubt about its ability to continue as a going concern due to expected inability to comply with Consolidated Total Net Debt to EBITDA Ratio and Current Ratio covenants in its Senior Credit Agreement within one year from the issuance date of the financial statements[28](index=28&type=chunk)[185](index=185&type=chunk)[234](index=234&type=chunk) - As a result of the going concern uncertainty, outstanding borrowings under the Senior Credit Agreement ($105.0 million as of March 31, 2019) have been classified as a current liability on the unaudited condensed consolidated balance sheet[32](index=32&type=chunk)[95](index=95&type=chunk)[106](index=106&type=chunk) - The company has engaged advisors to evaluate strategic and financial alternatives, including amending the Senior Credit Agreement, seeking alternative capital, divesting assets, exploring M&A options, and reducing operating costs[29](index=29&type=chunk)[186](index=186&type=chunk)[236](index=236&type=chunk) - During Q1 2019, four executives resigned, and the company reduced its workforce, incurring approximately $11.3 million in severance costs recorded as 'Restructuring' expenses[50](index=50&type=chunk)[212](index=212&type=chunk) [Note 2. Leases](index=17&type=section&id=2.%20LEASES) Effective January 1, 2019, Halcón adopted ASC 842, Leases, recognizing operating lease right-of-use assets and liabilities on the balance sheet - The Company adopted ASC 842, Leases, effective January 1, 2019, using the modified retrospective approach[62](index=62&type=chunk) Impact of ASC 842 Adoption on Balance Sheet (January 1, 2019) | Balance Sheet Item | Impact of adoption of ASC 842 (in thousands) | | :--------------------------------------- | :------------------------------------------- | | Operating lease right of use assets | $5,462 | | Accounts payable and accrued liabilities | $(85) | | Operating lease liabilities (current) | $2,103 | | Operating lease liabilities (noncurrent) | $3,444 | Total Lease Costs (Three Months Ended March 31, 2019) | Lease Cost Type | Amount (in thousands) | | :------------------ | :-------------------- | | Operating lease costs | $644 | | Short-term lease costs | $5,718 | | Variable lease costs | $425 | | **Total lease costs** | **$6,787** | - The weighted-average remaining lease term for operating leases is 3.6 years, with a weighted-average discount rate of **4.83%**[66](index=66&type=chunk) [Note 3. Operating Revenues](index=19&type=section&id=3.%20OPERATING%20REVENUES) Halcón's revenues, primarily from crude oil, natural gas, and NGL sales in the Delaware Basin, increased slightly in Q1 2019 due to higher oil/NGL sales - Substantially all of the Company's revenues are derived from its single basin operations, the Delaware Basin in Pecos, Reeves, Ward and Winkler Counties, Texas[73](index=73&type=chunk) Operating Revenues by Product (Three Months Ended March 31) | Operating Revenues (in thousands) | 2019 | 2018 | | :------------------------------------- | :------ | :------ | | Oil | $45,517 | $43,069 | | Natural gas | $1,461 | $2,319 | | Natural gas liquids | $4,945 | $3,712 | | Total oil, natural gas and NGL sales | $51,923 | $49,100 | | Other | $(7) | $155 | | **Total operating revenues** | **$51,916** | **$49,255** | - Revenues from the sale of crude oil, natural gas, and natural gas liquids are recognized at the point in time when control of the commodity is transferred to the customer[70](index=70&type=chunk) [Note 4. Acquisitions and Divestitures](index=21&type=section&id=4.%20ACQUISITIONS%20AND%20DIVESTITURES) Halcón acquired Delaware Basin acreage in 2018 and divested water infrastructure assets for $211.9 million, recognizing a substantial gain - On February 6, 2018, the Company purchased West Quito Draw Properties in Ward County, Texas, for an adjusted purchase price of $198.5 million[81](index=81&type=chunk) - On January 9, 2018, the Company purchased acreage in the Monument Draw area of the Delaware Basin for $108.2 million in cash[82](index=82&type=chunk) - On December 20, 2018, the Company sold its water infrastructure assets in the Delaware Basin for $211.9 million in cash, with potential additional incentive payments of up to $25.0 million per year for five years[84](index=84&type=chunk) - The Company recognized a gain of $118.1 million on the sale of the Water Assets, which was reduced by approximately $0.9 million during the three months ended March 31, 2019, due to post-closing adjustments[86](index=86&type=chunk)[220](index=220&type=chunk) [Note 5. Oil and Natural Gas Properties](index=22&type=section&id=5.%20OIL%20AND%20NATURAL%20GAS%20PROPERTIES) Halcón recorded a $275.2 million full cost ceiling impairment in Q1 2019 due to lower crude oil prices and a strategic focus on economic areas - The Company uses the full cost method of accounting for its investment in oil and natural gas properties, capitalizing all acquisition, exploration, and development costs[87](index=87&type=chunk) - A full cost ceiling test impairment charge of $275.2 million ($217.4 million after taxes) was recorded for the three months ended March 31, 2019[90](index=90&type=chunk)[218](index=218&type=chunk) - The impairment was driven by a decrease in the 12-month average WTI crude oil spot price used in the calculation ($63.06 per barrel at March 31, 2019) and the Company's intent to expend capital only on its most economic areas, resulting in the transfer of $51.0 million of unevaluated property costs to the full cost pool[90](index=90&type=chunk)[218](index=218&type=chunk) - At March 31, 2018, the ceiling test value did not exceed the net book value of oil and natural gas properties, with a WTI crude oil spot price of $53.49 per barrel[91](index=91&type=chunk) [Note 6. Debt](index=24&type=section&id=6.%20DEBT) Halcón's total debt increased to $718.5 million, with $105.0 million reclassified as current due to projected debt covenant non-compliance despite amendments Debt Composition (in thousands) | Debt Type | March 31, 2019 | December 31, 2018 | | :------------------------------- | :------------- | :---------------- | | Senior revolving credit facility | $105,000 | $— | | 6.75% senior notes due 2025 | $613,493 | $613,105 | | **Total Debt** | **$718,493** | **$613,105** | - Outstanding borrowings of $105.0 million under the Senior Credit Agreement were classified as a current liability as of March 31, 2019, due to expected non-compliance with covenants[95](index=95&type=chunk)[106](index=106&type=chunk) - As of March 31, 2019, the company had $118.2 million of borrowing capacity available under its Senior Credit Agreement, which has a current borrowing base of $225.0 million[100](index=100&type=chunk)[177](index=177&type=chunk) - The company entered into the Eighth Amendment (May 8, 2019) to waive Q1 2019 leverage ratio default, increase interest margins, and limit cash balance. It also obtained the Seventh Amendment (Feb 15, 2019) to adjust Consolidated Total Net Debt to EBITDA ratios for future quarters and the H2S Consent (Nov 6, 2018) and Severance and Office Payments Consent (Feb 28, 2019) to allow certain expenses to be added back to EBITDA[101](index=101&type=chunk)[102](index=102&type=chunk)[103](index=103&type=chunk)[104](index=104&type=chunk)[170](index=170&type=chunk)[171](index=171&type=chunk)[172](index=172&type=chunk)[173](index=173&type=chunk) - Despite current compliance after waivers, internal projections indicate non-compliance with Consolidated Total Net Debt to EBITDA Ratio and Current Ratio covenants starting with the three months ended June 30, 2019[105](index=105&type=chunk)[106](index=106&type=chunk)[183](index=183&type=chunk) [Note 7. Fair Value Measurements](index=27&type=section&id=7.%20FAIR%20VALUE%20MEASUREMENTS) Halcón measures financial instruments at fair value, classifying derivative contracts as Level 2, with senior notes' fair value significantly below principal Fair Value of Derivative Contracts (in thousands) | Derivative Type | March 31, 2019 | December 31, 2018 | | :-------------------------------- | :------------- | :---------------- | | Receivables from derivative contracts | $16,067 | $69,717 | | Liabilities from derivative contracts | $27,427 | $12,907 | - All derivative contracts are classified as Level 2 in the fair value hierarchy, based on observable market data for similar instruments[120](index=120&type=chunk) Fair Value of 6.75% Senior Notes (in thousands) | Debt | Principal Amount (Mar 31, 2019) | Estimated Fair Value (Mar 31, 2019) | Principal Amount (Dec 31, 2018) | Estimated Fair Value (Dec 31, 2018) | | :----------------- | :------------------------------ | :---------------------------------- | :------------------------------ | :---------------------------------- | | 6.75% senior notes | $625,005 | $376,566 | $625,005 | $458,210 | - The fair value of the company's fixed interest rate, long-term debt instrument (**6.75%** senior notes) was significantly lower than its principal amount, indicating market discount[124](index=124&type=chunk) [Note 8. Derivative and Hedging Activities](index=29&type=section&id=8.%20DERIVATIVE%20AND%20HEDGING%20ACTIVITIES) Halcón uses derivative contracts to manage commodity price risk without hedge accounting, resulting in a $64.8 million net derivative loss in Q1 2019 - The Company utilizes derivative contracts (fixed-price swaps, basis swaps, and costless put/call 'collars') to hedge exposure to price fluctuations and reduce cash flow variability from anticipated oil, natural gas, and natural gas liquids production[127](index=127&type=chunk)[128](index=128&type=chunk)[224](index=224&type=chunk) - The Company has elected not to designate any of its derivative contracts for hedge accounting, recording net changes in fair value and all payments/receipts on settled contracts in 'Net gain (loss) on derivative contracts' on the statements of operations[128](index=128&type=chunk)[221](index=221&type=chunk)[226](index=226&type=chunk) Net Gain (Loss) on Derivative Contracts (Three Months Ended March 31) | Metric (in thousands) | 2019 | 2018 | | :------------------------------------ | :-------- | :------ | | Unrealized gain (loss) on commodity contracts | $(68,169) | $11,113 | | Realized gain (loss) on commodity contracts | $3,370 | $(5,210) | | **Total net gain (loss) on derivative contracts** | **$(64,799)** | **$5,903** | - As of March 31, 2019, the Company had 56 open commodity derivative contracts, including natural gas collars/basis swaps, natural gas liquids swaps, and various crude oil contracts[128](index=128&type=chunk) [Note 9. Asset Retirement Obligations](index=33&type=section&id=9.%20ASSET%20RETIREMENT%20OBLIGATIONS) Halcón records Asset Retirement Obligations (AROs) for site reclamation and abandonment costs, with the liability increasing slightly in Q1 2019 - The Company records an Asset Retirement Obligation (ARO) on oil and natural gas properties and other operating property and equipment when the fair value of the obligation for site reclamation, dismantling facilities, or plugging and abandonment costs can be reasonably estimated[137](index=137&type=chunk) Asset Retirement Obligations Activity (in thousands) | Metric | Amount (in thousands) | | :-------------------------------------------- | :-------------------- | | Liability for ARO as of December 31, 2018 | $6,914 | | Liabilities settled and divested | $(229) | | Additions | $186 | | Accretion expense | $100 | | **Liability for ARO as of March 31, 2019** | **$6,971** | [Note 10. Commitments and Contingencies](index=35&type=section&id=10.%20COMMITMENTS%20AND%20CONTINGENCIES) Halcón has drilling rig, equipment purchase, and long-term production commitments, with ongoing legal proceedings not expected to have a material financial impact Active Drilling Rig Commitments (Remaining 2019) | Period | Amount (in thousands) | | :----------------------- | :-------------------- | | Remaining period in 2019 | $1,321 | | **Total** | **$1,321** | - Termination of active drilling rig commitments would incur early termination penalties of $1.1 million, in lieu of $1.3 million in remaining commitments[141](index=141&type=chunk) Rig Termination Commitment (2020) | Period | Amount (in thousands) | | :----- | :-------------------- | | 2020 | $3,000 | | **Total** | **$3,000** | Equipment Purchase Commitments (Remaining 2019) | Period | Amount (in thousands) | | :----------------------- | :-------------------- | | Remaining period in 2019 | $7,997 | | **Total** | **$7,997** | - The Company has entered into various long-term gathering, transportation, and sales contracts for a substantial portion of its Delaware Basin production, ranging from one to twenty years[144](index=144&type=chunk) - Management believes that the resolution of currently pending legal proceedings will not have a material effect on the Company's financial position or results[145](index=145&type=chunk)[233](index=233&type=chunk) [Note 11. Stockholders' Equity](index=36&type=section&id=11.%20STOCKHOLDERS'%20EQUITY) Stockholders' equity significantly decreased due to net loss, with stock-based compensation showing an $8.4 million credit from executive departures - Total stockholders' equity decreased from $1.20 billion at December 31, 2018, to $853.7 million at March 31, 2019[17](index=17&type=chunk) - Stock-based compensation was a credit of $6.8 million for the three months ended March 31, 2019, compared to an expense of $3.6 million in the prior year period[151](index=151&type=chunk)[216](index=216&type=chunk) - An incremental reduction of $8.4 million to stock-based compensation expense was recognized in Q1 2019 due to the immediate vesting of unvested stock options and restricted stock for four departing senior executives[152](index=152&type=chunk)[216](index=216&type=chunk) - As of March 31, 2019, 1.1 million shares of common stock remained reserved for issuance under the 2016 Long-Term Incentive Plan[149](index=149&type=chunk) [Note 12. Earnings Per Common Share](index=39&type=section&id=12.%20EARNINGS%20PER%20COMMON%20SHARE) Halcón reported a basic and diluted net loss per share of $(2.12) for Q1 2019, a significant increase from $(0.02) in the prior year Earnings Per Common Share (Three Months Ended March 31) | Metric | 2019 | 2018 | | :---------------------------------------- | :-------- | :------ | | Net income (loss) | $(336,559) | $(2,598) | | Weighted average basic shares outstanding | 158,549 | 153,884 | | Basic net income (loss) per share | $(2.12) | $(0.02) | | Diluted net income (loss) per share | $(2.12) | $(0.02) | - Common stock equivalents totaling 14.9 million shares for Q1 2019 (and 13.2 million for Q1 2018) were not included in the diluted EPS calculation because their effect would have been anti-dilutive due to the net loss[159](index=159&type=chunk)[160](index=160&type=chunk) [Note 13. Additional Financial Statement Information](index=40&type=section&id=13.%20ADDITIONAL%20FINANCIAL%20STATEMENT%20INFORMATION) This note provides detailed breakdowns of selected balance sheet accounts, including accounts receivable and accounts payable/accrued liabilities Accounts Receivable Breakdown (in thousands) | Category | March 31, 2019 | December 31, 2018 | | :-------------------------------------- | :------------- | :---------------- | | Oil, natural gas and natural gas liquids revenues | $30,705 | $26,432 | | Joint interest accounts | $7,470 | $7,369 | | Other | $3,224 | $1,917 | | **Total Accounts Receivable** | **$41,399** | **$35,718** | Accounts Payable and Accrued Liabilities Breakdown (in thousands) | Category | March 31, 2019 | December 31, 2018 | | :-------------------------------------- | :------------- | :---------------- | | Trade payables | $55,668 | $68,959 | | Accrued oil and natural gas capital costs | $40,492 | $41,461 | | Revenues and royalties payable | $20,241 | $20,526 | | Accrued interest expense | $6,343 | $16,971 | | Accrued employee compensation | $2,729 | $3,421 | | Accrued lease operating expenses | $11,152 | $6,292 | | Other | $391 | $218 | | **Total Accounts Payable and Accrued Liabilities** | **$137,016** | **$157,848** | [ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=41&type=section&id=ITEM%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's analysis of Halcón's Q1 2019 financial condition and operations, highlighting net losses, impairment, and going concern challenges [Overview](index=41&type=section&id=Overview) Halcón is an independent energy company focused on the Delaware Basin, with financial results driven by production volume and commodity prices - Halcón is an independent energy company focused on the acquisition, production, exploration, and development of onshore liquids-rich oil and natural gas assets in the Delaware Basin of West Texas[165](index=165&type=chunk) Average Daily Production (Boe/d) | Period | Average Daily Production (Boe/d) | | :----- | :------------------------------- | | Q1 2019 | 17,089 | | Q1 2018 | 10,967 | - The increase in average daily production in Q1 2019 was due to the acquisition of properties in West Quito Draw and drilling activities in Monument Draw and West Quito Draw[166](index=166&type=chunk)[208](index=208&type=chunk) - Financial results are largely driven by oil and natural gas production volume and commodity prices, which are inherently volatile[167](index=167&type=chunk)[168](index=168&type=chunk) - A potential additional full cost ceiling impairment of $19.6 million ($15.5 million after taxes) was noted if the April 2019 crude oil price ($61.59 per Bbl) was used for a trailing 12-month average[168](index=168&type=chunk) [Recent Developments](index=42&type=section&id=Recent%20Developments) This section highlights recent amendments to the Senior Credit Agreement and the sale of water infrastructure assets - On May 8, 2019, the company entered into the Eighth Amendment to its Senior Credit Agreement, waiving the Q1 2019 Leverage Ratio Default, increasing interest margins, limiting the Consolidated Cash Balance to $5.0 million, and requiring periodic reporting[170](index=170&type=chunk) - The waiver under the Eighth Amendment for Q1 2019 compliance extends until August 1, 2019, but may be terminated earlier by lenders on July 1, 2019[170](index=170&type=chunk) - The Seventh Amendment (Feb 15, 2019) provided for annualized financial data in determining EBITDA for Q1-Q3 2019 and amended the Consolidated Total Net Debt to EBITDA ratio, setting it at **5.00:1.0** for Q1 2019 and gradually decreasing to **4.0:1.0** by Q1 2020[172](index=172&type=chunk) - The company also received consents (Severance and Office Payments Consent, H2S Consent) allowing certain non-recurring expenses to exceed EBITDA add-back limits for covenant calculations in recent and upcoming quarters[171](index=171&type=chunk)[173](index=173&type=chunk) - On December 20, 2018, the company sold its water infrastructure assets for $211.9 million cash, with potential for up to $25.0 million per year in incentive payments for five years[174](index=174&type=chunk) [Capital Resources and Liquidity](index=43&type=section&id=Capital%20Resources%20and%20Liquidity) This section discusses funding sources, debt covenant compliance, and the company's ability to continue as a going concern - Near-term capital spending is expected to be funded by cash on hand, cash flows from operations, and borrowings under the Senior Credit Agreement[177](index=177&type=chunk) - As of March 31, 2019, the company had $118.2 million of borrowing capacity available under its $225.0 million Senior Credit Agreement borrowing base[177](index=177&type=chunk) - The company's current internal projections show non-compliance with Consolidated Total Net Debt to EBITDA Ratio and Current Ratio covenants starting with the quarter ended June 30, 2019, raising substantial doubt about its ability to continue as a going concern[183](index=183&type=chunk)[185](index=185&type=chunk) - A default under the Senior Credit Agreement could lead to the acceleration of approximately $730.0 million in outstanding indebtedness, which the company currently lacks sufficient liquidity to repay[185](index=185&type=chunk)[235](index=235&type=chunk) - The company is pursuing strategic and financial alternatives, including covenant amendments, seeking alternative capital, divesting assets, exploring M&A, and reducing operating costs, but there is no assurance of success[186](index=186&type=chunk)[236](index=236&type=chunk) [Cash Flow](index=46&type=section&id=Cash%20Flow) This section analyzes cash flows from operating, investing, and financing activities for the reporting periods Net Cash Flow Summary (in thousands) | Cash Flow Activity | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :------------------------------------ | :-------------------------------- | :-------------------------------- | | Operating activities | $(36,834) | $(12,582) | | Investing activities | $(114,431) | $(293,048) | | Financing activities | $104,594 | $263,634 | | Net increase (decrease) in cash and cash equivalents | $(46,671) | $(41,996) | - Operating cash flows decreased in Q1 2019 due to increased operating expenses (severances, natural gas treating, water hauling/disposal), partially offset by higher oil and natural gas revenues and derivative settlements[194](index=194&type=chunk) - Investing activities used less cash in Q1 2019 ($114.4 million) compared to Q1 2018 ($293.0 million), with Q1 2019 capital expenditures primarily for drilling and completion ($81.1 million) and other operating property and equipment ($30.6 million)[197](index=197&type=chunk)[198](index=198&type=chunk) - Financing activities provided less cash in Q1 2019 ($104.6 million) compared to Q1 2018 ($263.6 million), with Q1 2019 primarily from net borrowings under the Senior Credit Agreement[200](index=200&type=chunk)[201](index=201&type=chunk) [Contractual Obligations](index=47&type=section&id=Contractual%20Obligations) This section confirms no material changes to contractual obligations from the prior annual report - There were no material changes outside the ordinary course of business to contractual obligations from those disclosed in the Annual Report on Form 10-K for the fiscal year ended December 31, 2018[202](index=202&type=chunk) [Critical Accounting Policies and Estimates](index=47&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) This section confirms no material changes to critical accounting policies from the prior annual report - There have been no material changes to the critical accounting policies from those described in the Annual Report on Form 10-K for the fiscal year ended December 31, 2018[203](index=203&type=chunk) [Results of Operations](index=48&type=section&id=Results%20of%20Operations) This section details the company's financial and operational performance, including net loss, revenues, and expenses Key Financial and Operational Results (Three Months Ended March 31) | Metric | 2019 (in thousands, except per unit) | 2018 (in thousands, except per unit) | Change (in thousands) | | :-------------------------------------- | :----------------------------------- | :----------------------------------- | :-------------------- | | Net income (loss) | $(336,559) | $(2,598) | $(333,961) | | Total operating revenues | $51,916 | $49,255 | $2,661 | | Average daily production (Boe/d) | 17,089 | 10,967 | 6,122 | | Average realized price per Boe | $33.76 | $49.75 | $(15.99) | | Full cost ceiling impairment | $275,239 | $— | $275,239 | | Net gain (loss) on derivative contracts | $(64,799) | $5,903 | $(70,702) | | Restructuring expenses | $11,271 | $101 | $11,170 | | Stock-based compensation | $(6,782) | $3,581 | $(10,363) | | Depletion expense | $28,322 | $14,462 | $13,860 | - Net loss significantly increased to $336.6 million in Q1 2019 from $2.6 million in Q1 2018, primarily due to a $275.2 million full cost ceiling impairment and a $64.8 million net derivative loss[205](index=205&type=chunk)[206](index=206&type=chunk)[218](index=218&type=chunk)[221](index=221&type=chunk) - Total operating revenues increased slightly to $51.9 million in Q1 2019, driven by higher production volumes (17,089 Boe/d vs. 10,967 Boe/d), despite a decrease in average realized prices per Boe ($33.76 vs. $49.75)[206](index=206&type=chunk)[208](index=208&type=chunk) - Lease operating expenses increased to $14.2 million ($9.22 per Boe) in Q1 2019 from $4.9 million ($4.98 per Boe) in Q1 2018, mainly due to third-party water hauling/disposal costs and an increased inventory of wells[209](index=209&type=chunk) - Gathering and other expenses increased to $14.9 million in Q1 2019, including $8.2 million for hydrogen sulfide removal from natural gas, expected to decrease after Q1 2019[211](index=211&type=chunk) [Recently Issued Accounting Pronouncements](index=51&type=section&id=Recently%20Issued%20Accounting%20Pronouncements) This section refers to Note 1 for discussion of recently adopted and issued accounting standards - Discussion of recently adopted and issued accounting standards is provided in Note 1, 'Financial Statement Presentation'[224](index=224&type=chunk) [ITEM 3. Quantitative and Qualitative Disclosures About Market Risk](index=51&type=section&id=ITEM%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) This section details Halcón's exposure to market risks, including commodity price and interest rate risks, and its use of derivative instruments without hedge accounting [Derivative Instruments and Hedging Activity](index=51&type=section&id=Derivative%20Instruments%20and%20Hedging%20Activity) This section describes the company's use of derivative instruments to manage commodity price risk without hedge accounting - The Company uses derivative instruments (costless collars, fixed-price swaps, and basis swaps) to provide partial protection against declines in oil and natural gas prices and reduce cash flow variability[224](index=224&type=chunk) - The objective is generally to hedge approximately **70%** to **80%** of anticipated production for the next 18 to 24 months, when acceptable terms are available[224](index=224&type=chunk) - The Company does not designate any derivative contracts for hedge accounting and does not enter into them for speculative trading purposes[224](index=224&type=chunk) - The Company is exposed to market risk from potential non-performance by counterparties but only enters into contracts with creditworthy financial or commodity hedging institutions[225](index=225&type=chunk) [Fair Market Value of Financial Instruments](index=52&type=section&id=Fair%20Market%20Value%20of%20Financial%20Instruments) This section explains the fair value measurement of financial instruments, including derivative contracts and senior notes - The estimated fair value of cash and cash equivalents, accounts receivable, and accounts payable approximates their carrying value due to their short-term nature[227](index=227&type=chunk) - The estimated fair value of the Company's Senior Credit Agreement approximates its carrying value because interest rates are close to current market rates[123](index=123&type=chunk) - The fair value of the Company's senior notes is based on quoted market prices from trades of such debt, classified as Level 2[124](index=124&type=chunk) [Interest Rate Sensitivity](index=52&type=section&id=Interest%20Rate%20Sensitivity) This section details the company's exposure to interest rate risk, primarily from variable-rate debt - The Company's interest rate risk primarily results from fluctuations in short-term rates (LIBOR and ABR-based) on its variable-rate debt[228](index=228&type=chunk) - As of March 31, 2019, approximately **86%** of the Company's $730.0 million total debt bears a fixed interest rate of **6.75%**, while the remaining **14%** bears floating/variable interest rates (weighted average **7.00%**)[229](index=229&type=chunk) - A **10%** change in market interest rates would impact the Company's cash flows by approximately $0.7 million per year, assuming the variable interest rate balance remains constant[229](index=229&type=chunk) [ITEM 4. Controls and Procedures](index=52&type=section&id=ITEM%204.%20Controls%20and%20Procedures) Management concluded disclosure controls and procedures were effective as of March 31, 2019, with no material changes to internal controls over financial reporting - Management concluded that the company's disclosure controls and procedures were designed and effective to provide reasonable assurance that required information is recorded, processed, summarized, and reported timely[230](index=230&type=chunk) - There were no material changes in internal controls over financial reporting during the three months ended March 31, 2019[231](index=231&type=chunk) PART II—OTHER INFORMATION This section covers legal proceedings, critical risk factors, and other required disclosures for Halcón Resources Corporation [ITEM 1. Legal Proceedings](index=53&type=section&id=ITEM%201.%20Legal%20Proceedings) Halcón is involved in various legal proceedings, but management believes their resolution will not materially affect the company's financial position or results - The Company may be a plaintiff or defendant in pending or threatened legal proceedings arising in the normal course of business[233](index=233&type=chunk) - Management and legal counsel believe that the resolution of these proceedings will not have a material effect on the Company's condensed consolidated operating results, financial position, or cash flows[233](index=233&type=chunk) [ITEM 1A. Risk Factors](index=53&type=section&id=ITEM%201A.%20Risk%20Factors) The primary risk is substantial doubt about Halcón's going concern ability due to projected debt covenant non-compliance, potentially leading to debt acceleration or bankruptcy - Uncertainty about the company's ability to remain in compliance with restrictive covenants in its Senior Credit Agreement raises substantial doubt about its ability to continue as a going concern[234](index=234&type=chunk) - Current internal projections show non-compliance with Consolidated Total Net Debt to EBITDA Ratio and Current Ratio covenants starting Q2 2019, despite a waiver for Q1 2019[235](index=235&type=chunk) - A default could permit lenders to accelerate approximately $730.0 million in outstanding indebtedness, which the company currently lacks sufficient liquidity to repay[235](index=235&type=chunk) - The company is pursuing strategic and financial alternatives, but there is no assurance that it will comply with covenants, obtain relief, or secure alternative financing, which could materially negatively impact operations[236](index=236&type=chunk)[238](index=238&type=chunk) - If unable to continue as a going concern, the company may find it necessary to file a petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code[240](index=240&type=chunk) [ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=54&type=section&id=ITEM%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) This section states that there were no unregistered sales of equity securities or use of proceeds to report for the period - No unregistered sales of equity securities or use of proceeds to report[243](index=243&type=chunk) [ITEM 3. Defaults Upon Senior Securities](index=54&type=section&id=ITEM%203.%20Defaults%20Upon%20Senior%20Securities) This section indicates that there were no defaults upon senior securities during the reporting period - No defaults upon senior securities[243](index=243&type=chunk) [ITEM 4. Mine Safety Disclosures](index=54&type=section&id=ITEM%204.%20Mine%20Safety%20Disclosures) This section states that mine safety disclosures are not applicable to the company - Mine Safety Disclosures are not applicable[243](index=243&type=chunk) [ITEM 5. Other Information](index=54&type=section&id=ITEM%205.%20Other%20Information) Halcón acquired common stock shares in Q1 2019, surrendered by employees to cover tax withholding upon restricted stock award vesting Acquisition of Shares of Common Stock | Month | Total Number of Shares Purchased | Average Price Paid Per Share | | :------------ | :------------------------------- | :--------------------------- | | February 2019 | 61,527 | $1.79 | | March 2019 | 191,074 | $1.55 | - All shares were surrendered by employees in exchange for the payment of tax withholding upon the vesting of restricted stock awards[244](index=244&type=chunk) [ITEM 6. Exhibits](index=55&type=section&id=ITEM%206.%20Exhibits) This section lists all documents filed as exhibits to the Form 10-Q, including Senior Credit Agreement amendments and Sarbanes-Oxley certifications - The Eighth Amendment to Amended and Restated Senior Secured Revolving Credit Agreement, dated May 8, 2019, is filed as Exhibit 10.1.7[252](index=252&type=chunk) - Sarbanes-Oxley Section 302 certifications of the Principal Executive Officer and Principal Financial Officer, and Section 906 certification, are included as exhibits[252](index=252&type=chunk)

Halcon Resources Corporation (HK) Q4 2018 Earnings Conference Call March 13, 2019 11:00 AM ET Company Participants James Christmas - Chairman Quentin Hicks - EVP, Finance, Capital Markets and IR Jon Wright - EVP and COO Conference Call Participants Jeffrey Cambell - Tuohy Brothers Jason Wangler - Imperial Capital Tariq Ahmed - JPMorgan Chase Jacob Gomolinski-Ekel - Morgan Stanley Jason Gilbert - Goldman Sachs David Meats - Morningstar Marianna Kushner - Nomura Asset Operator Greetings, welcome to the Halcon ...

Use these links to rapidly review the document TABLE OF CONTENTS ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Delaware (State or other jurisdiction of incorporation or organization) 20-0700684 (I.R.S. Employer Identification Number) Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2018 Commission File Number: 001-35 ...