Battalion Oil(BATL) - 2019 Q1 - Quarterly Report

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) 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) 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] Condensed Consolidated Balance Sheets (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] Condensed Consolidated Statements of Stockholders' Equity (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] Condensed Consolidated Statements of Cash Flows (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] Notes to Unaudited Condensed Consolidated Financial Statements This section provides detailed explanations of accounting policies, significant transactions, and financial position for the unaudited statements Note 1. Financial Statement Presentation 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][165] - 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][185][234] - 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][95][106] - 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][186][236] - 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][212] Note 2. Leases 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] 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] Note 3. Operating Revenues 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] 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] Note 4. Acquisitions and Divestitures 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] - On January 9, 2018, the Company purchased acreage in the Monument Draw area of the Delaware Basin for $108.2 million in cash[82] - 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] - 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][220] Note 5. Oil and Natural Gas Properties 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] - 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][218] - 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][218] - 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] Note 6. Debt 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][106] - 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][177] - 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][102][103][104][170][171][172][173] - 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][106][183] Note 7. Fair Value Measurements 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] 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] Note 8. Derivative and Hedging Activities 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][128][224] - 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][221][226] 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] Note 9. Asset Retirement Obligations 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] 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 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] 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] - 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][233] Note 11. Stockholders' Equity 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] - 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][216] - 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][216] - As of March 31, 2019, 1.1 million shares of common stock remained reserved for issuance under the 2016 Long-Term Incentive Plan[149] Note 12. Earnings Per Common Share 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][160] Note 13. Additional Financial Statement Information 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 This section provides management's analysis of Halcón's Q1 2019 financial condition and operations, highlighting net losses, impairment, and going concern challenges 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] 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][208] - Financial results are largely driven by oil and natural gas production volume and commodity prices, which are inherently volatile[167][168] - 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] Recent Developments 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] - 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] - 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] - 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][173] - 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] Capital Resources and Liquidity 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] - 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] - 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][185] - 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][235] - 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][236] Cash Flow 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] - 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][198] - 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][201] Contractual Obligations 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] Critical Accounting Policies and Estimates 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] Results of Operations 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][206][218][221] - 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][208] - 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] - 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] Recently Issued Accounting Pronouncements 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] ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 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 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] - 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] - The Company does not designate any derivative contracts for hedge accounting and does not enter into them for speculative trading purposes[224] - 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] Fair Market Value of Financial Instruments 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] - 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] - 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] Interest Rate Sensitivity 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] - 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] - 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] ITEM 4. Controls and Procedures 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] - There were no material changes in internal controls over financial reporting during the three months ended March 31, 2019[231] PART II—OTHER INFORMATION This section covers legal proceedings, critical risk factors, and other required disclosures for Halcón Resources Corporation ITEM 1. Legal Proceedings 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] - 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] ITEM 1A. Risk Factors 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] - 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] - A default could permit lenders to accelerate approximately $730.0 million in outstanding indebtedness, which the company currently lacks sufficient liquidity to repay[235] - 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][238] - 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] ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 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] ITEM 3. Defaults Upon Senior Securities This section indicates that there were no defaults upon senior securities during the reporting period - No defaults upon senior securities[243] ITEM 4. Mine Safety Disclosures This section states that mine safety disclosures are not applicable to the company - Mine Safety Disclosures are not applicable[243] ITEM 5. Other Information 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] ITEM 6. Exhibits 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] - Sarbanes-Oxley Section 302 certifications of the Principal Executive Officer and Principal Financial Officer, and Section 906 certification, are included as exhibits[252]