Executive Summary / Key Takeaways

• Strategic Rebirth and Operational Focus: Battalion Oil Corporation ($BATL) has undergone a significant transformation since 2019, pivoting from a period of scaling back to an aggressive development strategy focused on its liquids-rich Delaware Basin assets, underpinned by enhanced operational efficiencies and a commitment to H2S management.
• Technological Edge in Sour Gas: A key differentiator is BATL's specialized expertise in handling high concentrations of hydrogen sulfide (H2S) in its Monument Draw field, exemplified by its joint venture in an Acid Gas Injection (AGI) facility, which aims to reduce costs and environmental impact, though its recent cessation of operations presents an immediate challenge.
• Financial Performance and Liquidity Headwinds: While BATL achieved net income in Q2 2025 and demonstrated historical EBITDA growth driven by new production, it currently faces negative working capital and a need for additional liquidity to meet debt covenants, despite securing investor support for preferred equity.
• Competitive Niche vs. Scale Giants: Operating in a basin dominated by larger players like Devon Energy and EOG Resources , BATL leverages its focused asset base and operational agility, but its smaller scale and financial metrics lag behind its more diversified and capital-rich competitors.
• Outlook Hinges on Execution and Capital: The company's future hinges on its ability to secure alternative gas processing solutions, execute its cost-reduction plan, and successfully raise additional capital, all while navigating commodity price volatility and addressing its NYSE American listing compliance.

The Resurgence of a Delaware Basin Player

Battalion Oil Corporation, trading as $BATL, is an independent energy company with a singular focus: the acquisition, production, exploration, and development of liquids-rich oil and natural gas assets in the United States. Its operations are concentrated exclusively in the prolific Delaware Basin, spanning Pecos, Reeves, Ward, and Winkler Counties in Texas. This region, known for its stacked pay zones and significant resource potential, forms the bedrock of Battalion's strategy.

The company's journey has been one of strategic evolution. Founded in 1987 as Halcón Resources, a new management team in 2019 initiated a profound transformation, laying the groundwork for a growth narrative. This involved extensive geological study, optimizing frac designs, and a methodical approach to cost reduction and environmental impact mitigation. Despite scaling back operations in early 2020 due to market headwinds, 2021 marked a critical pivot. A new $200 million term loan facility from Macquarie Bank in November 2021 provided the necessary capital to embark on a long-term drilling program, signaling a decisive return to development mode.

Battalion's overarching strategy is built on four core tenets: efficiently developing its liquid-rich acreage to grow production and reserves, enhancing returns through continuous operational and cost efficiencies, maintaining financial flexibility, and pursuing growth via strategic business combinations. This focused approach allows for agility in a basin often dominated by larger, more diversified players.

Operational Excellence and Technological Edge

Central to Battalion's operational strategy is its commitment to efficiency and its specialized expertise in the unique challenges of the Delaware Basin. The company has consistently demonstrated improved drilling and completion performance. In 2021, Battalion achieved a record low total well cost per foot of $875, a significant reduction from $1,306 in 2019. This was a direct result of systematically addressing 16 areas of opportunity, from topside equipment to down-hole design and fluids. Drilling footage per day increased by nearly 10% over 2021 averages in Q2 2022, with pump efficiencies averaging over 18.5 hours per day during completions—both exceptionally high marks for the region.

A critical technological differentiator for Battalion lies in its advanced approach to handling hydrogen sulfide (H2S) in its Monument Draw field. This area, while highly productive, historically presented challenges due to 3% to 4% H2S concentrations, which had previously slowed development. Battalion's team has overhauled its H2S handling capabilities, doubling capacity and achieving zero incidents since 2019. This expertise allows for the safe and economic development of sour gas resources, a competitive advantage in areas where other operators might face greater technical or environmental hurdles.

Further enhancing this capability, Battalion entered a joint venture in May 2022 to develop an Acid Gas Injection (AGI) facility in Winkler County. This facility, designed with an initial capacity of at least 30 million cubic feet per day, was engineered to treat natural gas with combined CO2 and H2S concentrations of up to 10%. At this capacity, it was projected to fully capture and sequester over 50,000 tons per year of H2S and CO2, significantly reducing environmental impact while lowering operating costs. The AGI facility began processing gas in March 2024, representing a "game-changer" for the company's processing needs and environmental footprint.

Battalion also engages in continuous improvement through R&D initiatives. It has tested upgraded surfactants to enhance fluid recovery and increase Estimated Ultimate Recoveries (EURs) and utilized tracer studies to better understand well interaction, fine-tuning forecasting for parent-child wells and optimizing completion design and well spacing for multi-bench and multi-rig scenarios. The ongoing third Bone Spring test, with promising early results, could further derisk this zone, enabling multi-zone development and potentially expanding the company's drilling inventory. These efforts collectively contribute to a more efficient and productive asset base.

Financial Performance and Liquidity Challenges

Battalion's financial performance in recent periods reflects both the benefits of its operational improvements and the pressures of a dynamic market. For the six months ended June 30, 2025, total operating revenues were $90.29 million, a decrease of 8.80% from $98.97 million in the same period of 2024. This decline was primarily driven by a decrease in average realized prices, with lower production volumes also contributing. Oil sales, the largest component, fell from $88.13 million to $75.99 million year-over-year for the six-month period.

Despite the revenue headwinds, Battalion demonstrated some cost control. Lease operating expenses per Boe decreased due to favorable contract negotiations and preventative maintenance. Gathering and other expenses per Boe also saw a reduction, attributed to progress at central production facilities and increased throughput at the AGI facility. However, workover and other expenses increased due to a non-recurring well cleanout program. The company reported net income of $10.82 million for the six months ended June 30, 2025, a notable improvement from a net loss of $31.31 million in the prior year period. This was significantly aided by a net gain on derivative contracts of $20.85 million in 2025, compared to a $22.96 million loss in 2024.

Liquidity remains a critical focus for Battalion. As of June 30, 2025, the company held $44.62 million in cash and cash equivalents but reported negative working capital of $6.60 million. It had no additional borrowing capacity under its 2024 Amended Term Loan Agreement, with $22.50 million in debt repayments due through June 30, 2026. Management's current forecasts indicate a need for additional liquidity to meet debt covenant requirements over the next 12 months. To address this, Battalion has secured a support letter from its three largest related-party investors to purchase up to $30 million in additional preferred equity securities by August 31, 2026. This, combined with ongoing cost reduction measures, is expected to provide sufficient liquidity for covenant compliance.

Historically, Battalion has shown its ability to grow EBITDA through increased production. In Q3 2022, adjusted EBITDA surged 34% over Q2 2022 to $24.3 million, its highest since 2019, driven by an almost 8% increase in average daily production and an 11% increase in realized crude oil prices (net of hedges), despite a 15% decline in benchmark prices. This highlights the impact of new, unhedged volumes in a favorable price environment.

Competitive Landscape and Strategic Positioning

Battalion operates in a highly competitive U.S. onshore E&P market, particularly within the Delaware Basin. Its direct competitors include industry giants like Devon Energy , EOG Resources , ConocoPhillips , and Occidental Petroleum . These larger players benefit from immense scale, diversified asset portfolios, and robust financial resources.

Comparing financial metrics, Battalion's TTM Gross Profit Margin of 38.09% and EBITDA Margin of 42.51% are significantly lower than its larger peers. For instance, Devon Energy (DVN) boasts a TTM Gross Profit Margin of 60% and EOG Resources (EOG) 43%, while ConocoPhillips (COP) and Occidental Petroleum (OXY) report 29% and 36% respectively. Similarly, BATL's TTM Net Profit Margin of 5.53% lags behind DVN (18%), EOG (27%), COP (17%), and OXY (11%). This disparity underscores the challenges of competing on profitability and cash flow against companies with greater operational leverage and broader market reach.

Battalion's competitive advantage lies in its focused asset base and specialized operational expertise in the Delaware Basin, particularly its H2S management capabilities. This allows for greater operational agility and potentially more efficient resource allocation in its core areas, enabling it to exploit niche opportunities that larger, more bureaucratic organizations might overlook. However, its smaller scale makes it more vulnerable to commodity price fluctuations and supply chain disruptions, as evidenced by the recent AGI facility shutdown.

The company's strategic responses to these competitive forces include its continuous pursuit of operational efficiencies, such as reducing well costs and optimizing frac designs, and its commitment to responsible operating practices, including reducing flare intensity. These efforts aim to enhance returns and differentiate Battalion in a crowded market.

Outlook and Risks

Battalion's outlook is characterized by both significant opportunities and pressing challenges. The company's development program, with new wells brought online and promising tests like the Bone Spring underway, positions it for continued production growth. Management anticipates improved realized pricing in 2023 as lower-priced hedges roll off, with weighted average crude oil swap prices expected to be nearly $15 per barrel higher than Q4 2022 averages. This, coupled with the AGI facility (once operational again), could drive significant increases in cash flow.

However, the recent cessation of operations at the Wink Amine Treater (WAT) AGI facility on August 11, 2025, presents an immediate and material risk. This event has forced Battalion to temporarily shut in a portion of its Monument Draw field production and is expected to materially increase processing costs and decrease production and revenue projections in the near-term. Management is actively working to identify and execute a plan for alternative gas processing, a critical factor for the company's near-term operational and financial stability.

Furthermore, Battalion received notice on May 30, 2025, of non-compliance with NYSE American's continued listing standards due to its stockholders' equity and recent losses. While a compliance plan has been accepted, granting until November 30, 2026, to regain compliance, this situation adds another layer of uncertainty. The company is also evaluating whether to delist from the NYSE American to reduce ongoing costs, a decision that could impact its access to capital markets.

Other risks include the inherent volatility of oil and natural gas prices, the ability to generate sufficient cash flows to fund operations and satisfy obligations, and the cost and availability of goods and services amidst inflationary pressures and supply chain issues. The company's high debt-to-equity ratio (TTM 1.16) and negative free cash flow (TTM -$29.34 million) underscore its reliance on external capital and operational execution.

Conclusion

Battalion Oil Corporation stands at a pivotal juncture, embodying a compelling narrative of strategic transformation and operational resilience within the competitive Delaware Basin. Its focused approach, coupled with a demonstrated ability to enhance operational efficiencies and manage complex sour gas production, forms the core of its investment thesis. The company's historical ability to translate new production into EBITDA growth, even amidst volatile commodity prices, highlights the potential embedded in its asset base.

However, the path forward is not without significant hurdles. The unexpected shutdown of the AGI facility demands immediate and effective alternative solutions to mitigate increased costs and production curtailments. Concurrently, addressing liquidity needs and regaining full compliance with NYSE listing standards are paramount. While Battalion's niche expertise and disciplined operations offer a distinct advantage against larger, more diversified competitors, its smaller scale necessitates flawless execution and strategic capital management to unlock its full potential. Investors will closely monitor the company's ability to overcome these immediate challenges, secure its processing infrastructure, and leverage its technological strengths to deliver sustained value in a dynamic energy landscape.