Battalion Oil(BATL) - 2020 Q1 - Quarterly Report

FORM 10-Q Filing Information Registrant Information 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] - Jurisdiction of incorporation: Delaware[1] - Primary Standard Industrial Classification (SIC) code: 1311[1] - SEC filing status: All required reports have been filed, and the company has been subject to filing requirements for the past 90 days[1] - Company type: Smaller reporting company[1] Securities Registered 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] Table of Contents PART I FINANCIAL INFORMATION 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 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 Forward-Looking Statements Disclosure 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] - 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][5] - The company disclaims any obligation to update forward-looking statements, unless required by securities laws[6] PART I. FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements (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) 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] - 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] - 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] Condensed Consolidated Balance Sheets (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] - As of March 31, 2020, long-term debt, net, increased to $170,000 thousand from $144,000 thousand as of December 31, 2019[9] - 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] Condensed Consolidated Statements of Stockholders' Equity (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] - Stock-based compensation increased additional paid-in capital by $449 thousand[11] Condensed Consolidated Statement of Cash Flows (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] - 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] - Financing activities primarily included $51,000 thousand in proceeds from borrowings and $25,000 thousand in repayments of borrowings[16] 1. FINANCIAL STATEMENT PRESENTATION 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] - 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] - 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] - 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][23][24] Basis of Presentation and Principles of Consolidation - Battalion Oil Corporation is the successor reporting company to Halcón Resources Corporation, with a name change effective January 21, 2020[18] - 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] - Consolidated financial statements include all majority-owned and controlled subsidiaries, with all intercompany accounts and transactions eliminated[19] Risk and Uncertainties - 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] - 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] - The company has taken measures including reducing capital expenditures, temporarily shutting in production wells, and implementing various steps to ensure safe business operations[20] Emergence From Voluntary Reorganization Under Chapter 11 - 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] - 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] - 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][24] Use of Estimates - 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] - 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] Cash, Cash Equivalents and Restricted Cash - 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] 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] Accounts Receivable and Allowance for Doubtful Accounts - The company's accounts receivable primarily arise from joint interest owners and purchasers of oil and natural gas[30] - The company periodically reviews the collectability of accounts receivable using a specific identification method and establishes or adjusts an allowance for doubtful accounts[30] - As of March 31, 2020, and December 31, 2019, the allowance for doubtful accounts was approximately $0.1 million[30] Other Operating Property and Equipment - 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] - Depreciation is calculated using the straight-line method over the estimated useful lives[31] - The company assesses other operating property and equipment for impairment under ASC 360 and recognizes impairment losses when indicators of impairment are present[33] 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] - 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][36] - 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] Concentrations of Credit Risk - 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] - 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] - Credit risk for derivative contracts is diversified among major financial institutions with investment-grade credit ratings, and master netting agreements are in place[41] Change in Estimate - 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] Recently Issued Accounting Pronouncements - 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][44] - 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] - 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] 2. REORGANIZATION 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] - 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] - Existing common stockholders received 9% of the reorganized Battalion's common stock and warrants, and participated in an existing equity interest rights offering[48][49] - The equity rights offerings raised a total of $156.0 million to provide liquidity, pay reorganization expenses, and fund plan distributions[51] - 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] Registration Rights Agreement - 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] - Demand holders have the right to require the company to assist in reselling registrable securities through an underwritten public offering[53] 3. FRESH-START ACCOUNTING 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] - 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] - 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][57] - 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] 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 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] - 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] - 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] 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 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] - Revenue from oil, natural gas, and natural gas liquids sales is recognized when control of the commodity transfers to the customer[96] - Nearly all of the company's revenue is derived from its single basin operations in the Delaware Basin[97] 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 - 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] - 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] Natural Gas and Natural Gas Liquids Sales - The company assesses natural gas gathering and processing arrangements with midstream companies to determine when control of natural gas transfers[101] - 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] - 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] 6. DIVESTITURES 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] - 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] - For the three months ended March 31, 2019 (Predecessor), the company recognized a $0.9 million gain from the water asset sale[107] 7. OIL AND NATURAL GAS PROPERTIES 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] - 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] - The company quarterly assesses unproved properties for impairment and performs a full cost ceiling test[110] - 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] 8. LONG‑TERM DEBT 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] - 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] - 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] - 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] - 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][122] 9. FAIR VALUE MEASUREMENTS 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] - 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][129] 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] 10. DERIVATIVE AND HEDGING ACTIVITIES 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][135] - Derivative contracts primarily include fixed-price swaps, costless collar options, basis swaps, and WTI NYMEX roll[137] - 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] 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] 11. ASSET RETIREMENT OBLIGATIONS 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] - Accretion expense on ARO liabilities is recognized in "Depletion, depreciation and amortization" on the statements of operations[147] 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 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][151] - 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] - 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] 13. STOCKHOLDERS' EQUITY 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] - 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] - 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][158] - 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] - 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] Common Stock - 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] - 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] 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] - 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] - 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] Incentive Plans - 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] - 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] - As of March 31, 2020, 0.2 million shares of common stock remained available for issuance[162] - 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] Stock Options - 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] - 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] - 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] Restricted Stock - 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] - Of these, 0.4 million RSUs vest in equal quarterly installments over four years, with a fair value of $11.89 per share[170] - 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] - 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] - 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] 14. EARNINGS PER SHARE 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] - 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] 15. ADDITIONAL FINANCIAL STATEMENT INFORMATION 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] - 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] ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 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][181] - 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] - The company's 2020 capital expenditure budget was significantly reduced from $123-138 million to approximately $76 million[191] - 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][194] - 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][205][209] 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] - 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] - 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][183] Recent Developments 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] - The company obtained an acid gas injection well permit, which is expected to reduce future operating costs[185] - 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] - The company's common stock began trading on the NYSE American exchange under the symbol "BATL" on February 20, 2020[189] Capital Resources and Liquidity 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] - The company's 2020 capital expenditure budget has been reduced from $123-138 million to approximately $76 million[191] - 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] - 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][194] - 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] Cash Flow 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][203] - Investing cash outflow in Q1 2020 decreased to $47.6 million, primarily for oil and gas capital expenditures of $48.2 million[205][207] - 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] Critical Accounting Policies and Estimates 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] - Financial statement preparation requires management to make estimates and judgments regarding assets, liabilities, revenues, and expenses[219] Results of Operations 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] - 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][224][226][227][228] - 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] - 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] ITEM 3. Quantitative and Qualitative Disclosures about Market Risk 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][240] - 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] - The company only transacts derivative contracts with highly-rated financial institutions to manage counterparty risk[238] - 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] - 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] ITEM 4. Controls and Procedures 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] - There were no material changes in the company's internal control over financial reporting during the three months ended March 31, 2020[243] PART II. OTHER INFORMATION ITEM 1. Legal Proceedings 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] ITEM 1A. Risk Factors 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] - The COVID-19 pandemic may lead to a significant or prolonged decrease in oil and gas demand, impacting the company's revenue[246] - The pandemic could disrupt company operations, affect employee and contractor performance, or cause disruptions for midstream service providers[247] - The pandemic may impact the company's ability to access capital, monetize assets, and successfully execute its plans[247] - 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] ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 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] ITEM 3. Defaults Upon Senior Securities This section states that the company had no defaults upon senior securities - No defaults upon senior securities[249] ITEM 4. Mine Safety Disclosures This section states that mine safety disclosures are not applicable - Mine safety disclosures are not applicable[249] ITEM 5. Other Information This section states that there is no other information - No other information[249] ITEM 6. Exhibits 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] - Also included are Sarbanes-Oxley Act Sections 302 and 906 certifications from the Chief Executive Officer and Chief Financial Officer[252] - 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] SIGNATURES 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