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 strategic focus on the Delaware Basin in West Texas has positioned it as a key player in the region’s dynamic energy landscape.
Established Roots and Operational Expertise
Battalion Oil Corporation, founded in 2019, has quickly established itself as a significant player in the energy sector, particularly in the Delaware Basin. Despite its relatively short history, the company has faced and overcome numerous challenges, demonstrating remarkable resilience and adaptability in a volatile industry. In its inaugural year, Battalion Oil encountered significant obstacles, including a substantial $985 million impairment charge due to a steep decline in oil and gas prices. This setback necessitated the implementation of extensive restructuring and cost-cutting measures to ensure the company’s survival and future viability.
The following year, 2020, brought even greater challenges as the COVID-19 pandemic caused unprecedented disruption in energy markets. Battalion Oil recorded a net loss of $229.7 million during this period, forcing the company to intensify its efforts to reduce debt and streamline operations. Despite these setbacks, Battalion remained committed to its long-term strategy and continued to invest in its core assets.
A turning point came in 2021 when the energy market began to recover. Battalion Oil capitalized on this upturn, generating $103.4 million in operating income. Although the company still recorded a net loss of $28.3 million, this marked a significant improvement from previous years. During this period, Battalion focused on strengthening its balance sheet through strategic debt and equity transactions, laying the groundwork for future growth.
The company’s perseverance paid off in 2022, with Battalion Oil reporting $152.1 million in operating income and achieving profitability with $18.5 million in net income. This success allowed the company to reinvest in its Delaware Basin assets, drilling and completing new wells to expand its production capacity. However, Battalion continued to face challenges in the form of inflationary pressures and supply chain disruptions, which impacted its operations and profitability.
Weathering Market Volatility
The company’s financial performance has been shaped by the inherent volatility of the energy market. In 2023, Battalion reported a net loss of $3.05 million, a significant decline from the previous year’s net income of $18.54 million. This downturn was largely attributable to a drop in oil and natural gas prices, as well as the impact of the COVID-19 pandemic on global energy demand. However, the company’s resilience has been demonstrated by its ability to navigate these challenges and implement cost-cutting measures to maintain operational efficiency.
Diversifying Revenue Streams and Improving Liquidity
To bolster its financial position, Battalion has taken proactive steps to diversify its revenue streams and improve liquidity. In 2022, the company 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. This initiative, known as the AGI Facility, has provided Battalion with an additional revenue source and enhanced its ability to manage its sour gas production.
Furthermore, Battalion has sought to strengthen its liquidity through the issuance of preferred equity securities. In 2023 and 2024, the company raised a total of $95.6 million and an additional $19.5 million, respectively, from its three largest existing shareholders. These capital infusions have helped the company address its near-term debt obligations and fund its ongoing operations.
Adapting to Industry Challenges
The oil and gas industry is known for its inherent volatility, and Battalion has not been immune to the various challenges that have arisen. In 2022, the company was required to seek an amendment to its Term Loan Agreement to alleviate its Current Ratio covenant compliance requirements due to factors such as reduced commodity prices, higher interest rates, and elevated capital costs.
More recently, in the first quarter of 2023, Battalion faced further liquidity constraints as commodity prices, cost conditions, and interest rates continued to deteriorate. This prompted the company to obtain additional preferred equity funding from its major shareholders to shore up its financial position and meet its upcoming obligations.
Merger Agreement with Fury Resources, Inc.
In December 2023, Battalion announced that it had entered into an agreement to be acquired by Fury Resources, Inc. The merger agreement, which has been subsequently amended, provides for the acquisition of Battalion by Fury in an all-cash transaction valued at approximately $450 million. This transaction, if completed, would result in Battalion becoming a wholly-owned subsidiary of Fury and the delisting of Battalion’s common stock from the NYSE American exchange.
Operational Highlights and Financial Performance
Financials
Despite the challenges faced, Battalion has continued to deliver operational results. In 2023, the company reported sales volumes of 14,380 Boe/d, a testament to its ability to maintain production levels. The company’s revenue for the year stood at $220.76 million, with a gross profit of $100.18 million. Net income for 2023 was -$3.05 million, operating cash flow (OCF) was $17.59 million, and free cash flow (FCF) was -$28.85 million.
In the first nine months of 2024, Battalion generated revenue of $144.24 million and a gross profit of $44.21 million. However, the company’s net income for the period was a loss of $33.20 million, primarily due to the impact of derivative contracts and interest expense.
The most recent quarter (Q3 2024) showed some improvement, with revenue of $45.27 million and net income of $21.63 million. OCF for the quarter was -$5.07 million, while FCF was $39.97 million. Year-over-year, revenue decreased by 16.3% due to lower realized commodity prices, while net income increased significantly due to a $26.90 million net gain on derivative contracts. The decrease in OCF was primarily attributable to changes in working capital, while the increase in FCF was due to lower capital expenditures.
Production and Pricing
Battalion’s total production for the nine months ended September 30, 2024 was 3.46 million barrels of oil equivalent (Boe), or an average of 12.64 thousand Boe per day (Boed). This compares to 3.92 million Boe, or 14.38 thousand Boed, in the same period of 2023. The decrease in production was largely due to the timing of bringing new wells online and natural production declines on existing wells.
The average realized price for Battalion’s oil production was $75.97 per barrel for the nine-month period in 2024, compared to $75.63 per barrel in the prior year period. Natural gas prices averaged $0.45 per Mcf, down from $1.30 per Mcf in the first nine months of 2023, while NGL prices averaged $20.91 per barrel, up slightly from $20.60 per barrel in the prior year period.
Operational Expenses
Battalion’s lease operating expenses were $34.19 million for the nine months ended September 30, 2024, compared to $34.21 million in the same period of 2023. On a per-unit basis, lease operating expenses were $9.87 per Boe in 2024, up from $8.72 per Boe in the prior year period, primarily due to inflationary cost pressures and lower production volumes.
Workover and other expenses totaled $3.09 million in the first nine months of 2024, down from $4.67 million in the prior year period. Taxes other than income were $8.87 million, or $2.56 per Boe, compared to $9.68 million, or $2.47 per Boe, in the same period of 2023.
Gathering and other expenses, which include costs associated with the gathering and processing of Battalion’s production, were $41.85 million, or $12.09 per Boe, in the first nine months of 2024, compared to $48.86 million, or $12.45 per Boe, in the prior year period. The decrease was primarily related to the commencement of volumes being treated by Battalion’s acid gas treatment facility in its Monument Draw area.
General and administrative expenses, excluding stock-based compensation, were $11.12 million, or $3.21 per Boe, for the nine months ended September 30, 2024, down from $14.80 million, or $3.77 per Boe, in the same period of 2023. This decrease was primarily due to a reduction in payroll and benefits related to a headcount reduction in 2023, partially offset by an increase in legal fees associated with the pending merger.
Liquidity
As Battalion navigates the complexities of the energy industry, the company remains focused on optimizing its operations, managing costs, and strengthening its financial position. The successful commissioning of the AGI Facility and the ongoing preferred equity issuances have been instrumental in enhancing Battalion’s liquidity and providing a path forward.
As of September 30, 2024, Battalion Oil had a total debt of $147.83 million and total equity of $174.56 million, resulting in a Debt/Equity ratio of 0.85. The company had $29.83 million in cash and cash equivalents, with $0.30 million in letters of credit outstanding under its $147.70 million Amended Term Loan Agreement, and an additional $4.70 million available for the issuance of letters of credit.
Battalion’s current ratio and quick ratio both stood at 0.47 as of September 30, 2024, indicating potential short-term liquidity challenges. The company’s Amended Term Loan Agreement matures on November 24, 2025 and contains certain financial covenants, including requirements to maintain minimum asset coverage, total net leverage, and current ratios. As of September 30, 2024, the company was in compliance with these covenants.
Derivative Instruments and Hedging Activity
Battalion uses derivative instruments, such as fixed-price swaps, collars, basis swaps, and WTI NYMEX rolls, to manage its exposure to commodity price fluctuations. For the nine months ended September 30, 2024, Battalion recorded a net gain on derivative contracts of $3.93 million, which included a $12.76 million unrealized gain on the mark-to-market valuation of its open derivative positions and an $8.83 million realized loss on settled contracts.
Outlook and Future Prospects
Looking ahead, the proposed merger with Fury Resources, if completed, would offer Battalion’s shareholders an opportunity to realize value for their investment. The transaction, which is subject to customary closing conditions, including shareholder approval, is expected to provide Battalion with the resources and support necessary to continue its growth and development in the Delaware Basin.
Battalion’s operations remain focused on its core assets in the Delaware Basin, where it continues to optimize its development and production activities. While the company has faced headwinds from lower commodity prices and inflationary cost pressures, it has taken steps to improve its liquidity and financial position, including through the issuance of preferred equity and amendments to its credit facility.
Conclusion
Battalion Oil Corporation has demonstrated its resilience in the face of market volatility and industry challenges. Through strategic initiatives, cost-cutting measures, and financial restructuring, the company has positioned itself to navigate the complexities of the energy sector. As it continues to explore new opportunities and adapt to evolving market conditions, Battalion remains committed to delivering long-term value for its shareholders. The pending merger with Fury Resources, if completed, could provide a significant cash infusion and strategic opportunity for the company, potentially marking a new chapter in Battalion’s corporate history.
Disclaimer: This article is for informational purposes only. It does not constitute financial, legal, or other types of advice. While every effort has been made to ensure the accuracy of the information presented here, the author and the publisher do not make any guarantees about the completeness, reliability, and accuracy of this information.