Battalion Oil(BATL) - 2023 Q4 - Annual Report

Part I Business Battalion Oil, an independent energy company, focuses on Delaware Basin assets, with 68.1 MMBoe proved reserves and a pending $450.0 million merger - The company is an independent energy company focused on the acquisition, production, exploration, and development of onshore liquids-rich oil and natural gas assets, with current activities concentrated in the Delaware Basin[22][23] Proved Reserves and Production (as of December 31, 2023) | Metric | Value | | :--- | :--- | | Total Proved Reserves | 68.1 MMBoe | | - Oil | 34.6 MMBbls | | - NGLs | 14.9 MMBbls | | - Natural Gas | 111.7 Bcf | | Proved Developed | 59% | | Average Daily Production (FY 2023) | 13,784 Boe/d | | Acreage (Net) | 39,867 acres | - On December 14, 2023, Battalion entered into a merger agreement with Fury Resources, Inc., to be acquired for $9.80 per share in cash, representing a total transaction value of approximately $450.0 million[30] - To support liquidity, the company obtained a support letter from its largest shareholders for up to $55.0 million in preferred equity, selling 35,000 shares for net proceeds of $34.1 million in December 2023[30] - The company's H2S treating joint venture facility experienced operational complications and cost overruns, requiring Battalion to advance approximately $15.1 million in capital contributions, with the facility now expected to process 20,000 Mcf of natural gas per day by Q2 2024[34][35][36] Production Volumes, Prices, and Costs (2023 vs. 2022) | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Average Daily Production (Boe/d) | 13,784 | 15,438 | | Average Realized Price (per Boe) | $43.43 | $63.43 | | - Crude Oil ($/Bbl) | $76.04 | $94.36 | | - Natural Gas ($/Mcf) | $1.27 | $4.95 | | Total Average Cost (per Boe) | $25.35 | $24.39 | Risk Factors The company faces significant risks from its pending merger, volatile commodity prices, substantial debt, uncertain reserve estimates, and concentrated Delaware Basin operations - Failure to complete the merger with Fury Resources could materially and adversely affect the company's results of operations and stock price, incurring substantial transaction-related costs regardless of completion[114][115][117] - The company's business is highly sensitive to volatile oil and natural gas prices, which impact revenues, cash flow, and the ability to fund capital expenditures[129] - As of December 31, 2023, the company had approximately $200.0 million of debt outstanding with no additional borrowing capacity under its Amended Term Loan Agreement, where failure to comply with financial covenants, such as the Current Ratio, could result in default[136][138][139] - Reserve estimates are inherently uncertain, with approximately 41% of the company's estimated proved reserves classified as proved undeveloped as of December 31, 2023, requiring significant future capital expenditures to recover[146][151] - The business is geographically concentrated in the Delaware Basin, exposing it to regional supply/demand factors, transportation constraints, and other localized risks[166] - If the merger does not close, the company may be unable to pay cash dividends on its Redeemable Preferred Stock, leading to an increase in the liquidation preference and potential dilution for common stockholders upon conversion[122][123] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None[224] Cybersecurity The company manages cybersecurity risk via internal processes and third-party experts, with Board oversight, and has identified no material incidents - The company employs a risk management strategy using internal processes and third-party experts to identify and mitigate cybersecurity threats[224] - The Board of Directors has ultimate oversight responsibility for cybersecurity, with the Audit Committee handling specific risk management functions and receiving quarterly updates from management[225][227] - The company has not identified any substantive cybersecurity incident that would have a material impact on its business, operations, or financial statements[229] Properties The company believes it holds satisfactory title to its properties, which are deemed adequate and suitable for future business operations - The company believes it holds satisfactory title to its properties, which are deemed adequate and suitable for future business operations[230] Legal Proceedings The company is not a party to any governmental environmental proceedings involving potential monetary sanctions of $300,000 or more - The company is not a party to any governmental environmental proceedings involving potential monetary sanctions of $300,000 or more[231] Mine Safety Disclosures This item is not applicable to the company - Not applicable[232] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on NYSE American under "BATL"; no common stock dividends are anticipated, while $95.6 million in preferred stock was sold in 2023 - The company's common stock is traded on the NYSE American exchange under the ticker symbol "BATL"[232] - The company does not anticipate declaring cash dividends on its common stock in the foreseeable future, as it intends to retain earnings for business operations and is restricted by its Amended Term Loan Agreement[233] - In 2023, the company sold an aggregate of 98,000 shares of redeemable convertible preferred stock in private placements for total net proceeds of $95.6 million[233] Reserved This item is reserved Management's Discussion and Analysis of Financial Condition and Results of Operations Operating revenue decreased to $220.8 million in 2023, resulting in a $3.0 million net loss, with liquidity supported by $95.6 million preferred stock sales and $50.0 million debt due in 2024 Selected Financial Results (in thousands) | Metric | 2023 (in thousands) | 2022 (in thousands) | | :--- | :--- | :--- | | Total Operating Revenues | $220,762 | $359,064 | | Net (Loss) Income | ($3,048) | $18,539 | | Net Cash from Operations | $17,589 | $78,801 | | Net Cash used in Investing | ($51,845) | ($126,130) | | Net Cash from Financing | $59,059 | $31,786 | - The decrease in revenue was primarily due to a ~$20.00 per Boe decrease in average realized prices and lower production volumes in 2023 compared to 2022[278][302] - As of December 31, 2023, the company had $57.5 million in cash and cash equivalents, no additional borrowing capacity under its Amended Term Loan Agreement, and $50.0 million in debt repayments due in 2024[254] - Management believes that cash on hand, proceeds from a March 2024 preferred equity sale, and cost reduction measures provide sufficient liquidity to fund operations and meet debt requirements for the next 12 months[259] - General and administrative expenses increased to $20.1 million in 2023 from $15.4 million in 2022, primarily due to professional fees and non-recurring costs related to the pending merger[308] - Interest expense increased to $33.3 million in 2023 from $23.6 million in 2022, mainly due to higher interest rates and amortization of financing costs[313] Quantitative and Qualitative Disclosures About Market Risk The company manages commodity price and interest rate risks through hedging programs, with $200.0 million in variable-rate debt and a 10% rate change impacting cash flow by $2.6 million - The company uses derivative instruments to hedge against commodity price volatility, with a requirement under its Amended Term Loan Agreement to hedge approximately 50% to 85% of anticipated production on a rolling four-year basis[315] - The company is exposed to interest rate risk on its $200.0 million of variable-rate debt, where a 10% change in market interest rates would impact annual cash flows by approximately $2.6 million as of December 31, 2023[319] Consolidated Financial Statements and Supplementary Data The audited financial statements include an unqualified auditor's report, highlighting reserve estimation as a critical matter, with proved reserves declining from 92.0 MMBoe to 68.1 MMBoe due to negative revisions - The report from Deloitte & Touche LLP expresses an unqualified opinion on the financial statements and highlights the estimation of proved oil and natural gas reserve quantities as a critical audit matter due to significant judgments involved[327][332] Change in Total Proved Reserves (MBoe) | Description | 2022 (MBoe) | 2023 (MBoe) | | :--- | :--- | :--- | | Beginning Balance | 95,880 | 92,020 | | Extensions and discoveries | 7,018 | 5 | | Production | (5,635) | (5,031) | | Revision of previous estimates | (5,204) | (18,887) | | Ending Balance | 92,020 | 68,107 | - The 18.9 MMBoe negative revision in 2023 includes a 13.0 MMBoe downward revision from the removal of Proved Undeveloped (PUD) reserves due to decreased activity associated with managing cash flow, servicing debt, and recapitalizing the business[498][500] Standardized Measure of Discounted Future Net Cash Flows (in thousands) | Metric | Dec 31, 2023 (in thousands) | Dec 31, 2022 (in thousands) | | :--- | :--- | :--- | | Future cash inflows | $3,126,801 | $6,095,180 | | Future production & development costs | ($1,903,883) | ($2,937,500) | | Future income tax expense | ($28,551) | ($306,160) | | 10% Discounted Future Net Cash Flows | $598,481 | $1,461,676 | - The company issued three series of Redeemable Convertible Preferred Stock in 2023 (Series A, A-1, and A-2), raising total net proceeds of approximately $95.6 million[442][443][444] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[515] Controls and Procedures Management concluded the company's disclosure controls and procedures were effective as of December 31, 2023, with no material changes in internal control - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2023[516] - No changes in internal control over financial reporting occurred during the fourth quarter of 2023 that materially affected, or are reasonably likely to materially affect, internal controls[517] Other Information The company reports no other information under this item - None[517] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - Not applicable[517] Part III Directors, Executive Officers and Corporate Governance Information required for this item is incorporated by reference from the company's definitive proxy statement for its 2023 Annual Meeting of Stockholders Executive Compensation Information required for this item is incorporated by reference from the company's definitive proxy statement for its 2023 Annual Meeting of Stockholders Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section details equity compensation plans, with 384,358 securities outstanding and 1.1 million available for future issuance as of December 31, 2023 Equity Compensation Plan Information (as of Dec 31, 2023) | Plan Category | Securities to be Issued Upon Exercise (A) | Weighted-Average Exercise Price | Securities Remaining for Future Issuance (Excluding A) | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 384,358 | $28.32 | 1,067,966 | Certain Relationships and Related Transactions, and Director Independence Information required for this item is incorporated by reference from the company's definitive proxy statement for its 2023 Annual Meeting of Stockholders Principal Accountant Fees and Services Information required for this item is incorporated by reference from the company's definitive proxy statement for its 2024 Annual Meeting of Stockholders Part IV Exhibits and Financial Statement Schedules This section lists consolidated financial statements and exhibits, including the merger agreement and debt documents, with financial statement schedules omitted Form 10-K Summary The company provides no summary under this item - None[532]