Battalion Oil Corporation (BATL) is an independent energy company focused on the acquisition, production, exploration, and development of onshore liquids-rich oil and natural gas assets in the United States. The company's financial results are largely driven by the volume of its oil and natural gas production and the prices it receives for that production.
Financials
In the fiscal year ended December 31, 2023, Battalion Oil reported annual revenue of $218.5 million, a net loss of $30.5 million, annual operating cash flow of $17.6 million, and annual free cash flow of -$28.9 million. For the three months ended March 31, 2024, the company generated revenue of $49.9 million, a net loss of $31.2 million, operating cash flow of $3.9 million, and free cash flow of -$31.8 million.
Business Overview
Battalion Oil's operations are currently focused in the Delaware Basin, where it has an extensive drilling inventory that the company believes offers attractive long-term economics. The company's financial results are largely driven by the volume of its oil and natural gas production and the prices it receives for that production. Production volumes will decline as reserves are depleted unless the company expends capital on successful development and exploration activities or acquires properties with existing production.
The amount Battalion Oil realizes for its production depends predominantly upon commodity prices, which are affected by changes in market demand and supply, as impacted by overall economic activity, weather, transportation take-away capacity constraints, inventory storage levels, basis differentials, and other factors. Accordingly, finding, developing, and producing oil and natural gas reserves at economical costs are critical to the company's long-term success.
Operational Highlights
During the first quarter of 2024, Battalion Oil put online 2 gross (2 net) operated wells in the Delaware Basin. This compares to 10 gross (9.5 net) operated wells that were brought online in the twelve months preceding March 31, 2023. The company's production averaged 12,989 Boe/d in the first quarter of 2024, down from 16,200 Boe/d in the same period of 2023, due largely to the timing of capital expenditures spent to bring new wells online and natural production declines on existing producing wells. Additionally, production in the first quarter of 2024 was impacted by curtailment in the Monument Draw area due to downstream throughput limitations.
Hedging and Risk Management
When commodity prices decline, Battalion Oil's ability to finance its capital budget and operations may be adversely impacted. The company uses derivative instruments to provide partial protection against declines in oil and natural gas prices, but the total volumes hedged are less than its expected production and vary from period to period based on the company's view of current and future market conditions. These limitations result in the company's liquidity being susceptible to commodity price declines.
Liquidity
As of March 31, 2024, Battalion Oil had $49.0 million of cash and cash equivalents and $190.0 million of debt outstanding under its Amended Term Loan Agreement. The company is required to make scheduled debt repayments totaling $75.0 million from the fiscal quarter ending June 30, 2024 through the fiscal quarter ending September 30, 2025, with a final payment of $115.0 million due at maturity on November 24, 2025.
The Amended Term Loan Agreement contains certain financial covenants, including the maintenance of an Asset Coverage Ratio, Total Net Leverage Ratio, and Current Ratio. As of March 31, 2024, the company was not in compliance with the Total Net Leverage Ratio covenant but was in compliance with the other financial covenants. On May 14, 2024, Battalion Oil made a $17.3 million prepayment of outstanding borrowings under the Amended Term Loan Agreement, which cured the noncompliance with the Total Net Leverage Ratio as of March 31, 2024.
Preferred Stock Issuances
To bolster its liquidity, Battalion Oil has issued several tranches of redeemable convertible preferred stock over the past year. In March 2024, the company sold 20,000 shares of Series A-3 Preferred Stock for net proceeds of $19.5 million. Subsequently, in May 2024, the company sold an additional 20,000 shares of Series A-4 Preferred Stock for net proceeds of $19.5 million. The preferred stock carries a 14.5% annual cash dividend or 16.0% annual PIK (paid-in-kind) dividend at the company's option.
Recent Developments
H2S Treating Joint Venture
In May 2022, Battalion Oil entered into a joint venture agreement with Caracara Services, LLC to develop a strategic acid gas treatment and carbon sequestration facility in Winkler County, Texas. The joint venture, operating as Wink Amine Treater, LLC (WAT), has also entered into a Gas Treating Agreement with Battalion Oil for natural gas production from the company's Monument Draw area.
The AGI Facility, which is expected to have an initial capacity of approximately 30 MMcf per day and a design capacity to treat up to 10% combined concentrations for H2S and CO2, experienced some operational challenges during the commissioning and initial operations phases. This resulted in higher than expected costs and delays in the facility becoming fully operational. As of March 2024, the AGI Facility has begun treating sour gas, and Battalion Oil's current forecast assumes it will continue processing 20,000 Mcf of natural gas per day in the second quarter of 2024.
Merger Agreement
On December 14, 2023, Battalion Oil entered into an Agreement and Plan of Merger with Fury Resources, Inc. and San Jacinto Merger Sub, Inc. Under the terms of the agreement, Merger Sub will merge with and into Battalion Oil, with Battalion Oil surviving as a wholly owned subsidiary of Fury Resources. The transaction is subject to customary closing conditions, including approval by Battalion Oil's shareholders.
Risks and Challenges
Battalion Oil faces several risks and challenges that could impact its financial performance and liquidity, including:
- Volatility in oil and natural gas prices, which can significantly affect the company's revenues and cash flows - Ability to replace oil and natural gas reserves and production as existing reserves are depleted - Cost and availability of goods and services, such as drilling rigs, fracture stimulation services, and tubulars, which may be subject to inflation - Ability to secure adequate sour gas treating and/or sour gas take-away capacity - Drilling and operating risks, including accidents, equipment failures, and releases of toxic or hazardous materials - Access to adequate gathering systems, processing and treating facilities, and transportation take-away capacity - Competition for acreage in the company's resource play - Environmental risks, such as accidental spills of toxic or hazardous materials - General economic conditions and the potential impact of actual or anticipated pandemics
Outlook
Despite the challenges faced, Battalion Oil remains focused on executing its operational strategy and improving its financial position. The company's recent preferred stock issuances and the potential merger with Fury Resources provide additional liquidity and financial flexibility. However, the company's ability to maintain compliance with its debt covenants and fund its capital expenditures will continue to be closely monitored.
Conclusion
Investors should closely follow Battalion Oil's progress in navigating the current industry environment and managing its operational and financial risks.