Battalion Oil(BATL) - 2019 Q2 - Quarterly Report

PART I—FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements (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 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 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 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] Condensed Consolidated Statements of Cash Flows 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 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][23] - 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] - 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] - 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][168][177] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 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 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] - On August 7, 2019, the company filed for Chapter 11 bankruptcy to implement a pre-packaged plan of reorganization[192] - 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] - 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][214] Capital Resources and Liquidity 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] - 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] 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 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][270] - 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] Item 3. Quantitative and Qualitative Disclosures About Market Risk 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] - 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] Item 4. Controls and Procedures 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] - No material changes were made to internal controls over financial reporting during the three months ended June 30, 2019[294] PART II—OTHER INFORMATION Item 1. Legal Proceedings 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] - The company filed for Chapter 11 bankruptcy on August 7, 2019, which is the most significant legal proceeding[140] Item 1A. Risk Factors 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] - 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][318] - 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][325] - 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][329][331] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 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][333] Item 3. Defaults Upon Senior Securities 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][335] Item 5. Other Information No other information is reported for this item Item 6. Exhibits 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]