BATTALION OIL CORP [BATL] Filings

10-Q 1 batl-20220930x10q.htm 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2022
OR
☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

Commission File Number: 001-35467

Battalion Oil Corporation

(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of
incorporation or organization)

1311
(Primary Standard Industrial
Classification Code Number)

20-0700684
(I.R.S. Employer
Identification Number)

3505 West Sam Houston Parkway North, Suite 300, Houston, TX 77043

(Address of principal executive offices)

(832) 538-0300

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ⌧ No ◻

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ⌧ No ◻

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ◻

Accelerated filer ◻

Non-accelerated filer ⌧

Smaller reporting company ☒

Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ⌧

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock, par value $0.0001	BATL	NYSE American

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities made under a plan confirmed by a court. Yes ⌧ No ◻

At November 9, 2022, 16,344,815 shares of the Registrant’s Common Stock were outstanding.

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TABLE OF CONTENTS

		PAGE
PART I	FINANCIAL INFORMATION
ITEM 1.	Condensed Consolidated Financial Statements (Unaudited)	5
	Condensed Consolidated Statements of Operations (Unaudited) for the Three and Nine Months Ended September 30, 2022 and 2021	5
	Condensed Consolidated Balance Sheets (Unaudited) as of September 30, 2022 and December 31, 2021	6
	Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) for the Nine Months Ended September 30, 2022 and the Year Ended December 31, 2021	7
	Condensed Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2022 and 2021	9
	Notes to Unaudited Condensed Consolidated Financial Statements	10
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	34
ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk	34
ITEM 4.	Controls and Procedures	34

PART II	OTHER INFORMATION
ITEM 1.	Legal Proceedings	35
ITEM 1A.	Risk Factors	35
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	36
ITEM 3.	Defaults Upon Senior Securities	36
ITEM 4.	Mine Safety Disclosures	36
ITEM 5.	Other Information	36
ITEM 6.	Exhibits	36
Signatures		38

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Special note regarding forward-looking statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws. All statements, other than statements of historical facts, are forward looking statements and may concern, among other things, planned capital expenditures, potential increases in oil and natural gas production, potential costs to be incurred, future cash flows and borrowings, our financial position, business strategy and other plans and objectives for future operations. These forward-looking statements may be identified by their use of terms and phrases such as “may,” “expect,” “estimate,” “project,” “plan,” “objective,” “believe,” “predict,” “intend,” “achievable,” “anticipate,” “will,” “continue,” “potential,” “should,” “could” and similar terms and phrases. Although we believe that the expectations reflected in forward-looking statements are reasonable, they do involve certain assumptions, risks and uncertainties. Actual results could differ materially from those anticipated in these forward-looking statements. Readers should consider carefully the risks described under the “Risk Factors” section of our previously filed Annual Report on Form 10-K for the fiscal year ended December 31, 2021, as well as the other disclosures contained herein and therein, which describe factors that could cause our actual results to differ from those anticipated in forward-looking statements, which include, but are not limited to, the following factors:

●

volatility in commodity prices for oil, natural gas and natural gas liquids;

●

our ability to generate sufficient cash flow from operations, borrowings or other sources to enable us to fund our operations, satisfy our obligations and develop our undeveloped acreage positions;

●

contractual limitations that affect our management’s discretion in managing our business, including covenants that, among other things, limit our ability to incur debt, make investments and pay cash dividends;

●

our indebtedness, which may increase in the future, and higher levels of indebtedness can make us more vulnerable to economic downturns and adverse developments in our business;

●

our ability to replace our oil and natural gas reserves and production;

●

the presence or recoverability of estimated oil and natural gas reserves attributable to our properties and the actual future production rates and associated costs of producing those oil and natural gas reserves;

●

our ability to successfully develop our large inventory of undeveloped acreage;

●

the cost and availability of goods and services, such as drilling rigs, fracture stimulation services and tubulars, which may be subject to inflation caused by labor shortages, supply shortages and increased demand, and other inflationary pressures

●

our ability to secure adequate sour gas treating and/or sour gas take-away capacity and/or our ability to place our planned acid gas treatment facility in service in our Monument Draw area on-time sufficient to handle production volumes and achieve anticipated levels of sour gas treating cost reductions in the future

●

drilling and operating risks, including accidents, equipment failures, fires, and leaks of toxic or hazardous materials, such as hydrogen sulfide (H₂S), which can result in injury, loss of life, pollution, property damage and suspension of operations;

●

our ability to retain key members of senior management, the board of directors and key technical employees;

●

senior management’s ability to execute our plans to meet our goals;

●

access to and availability of water, sand and other treatment materials to carry out fracture stimulations in our completion operations;

●

the possibility that our industry may be subject to future regulatory or legislative actions (including additional taxes and changes in environmental regulations);

●

access to adequate gathering systems, processing and treating facilities and transportation take-away capacity to move our production to marketing outlets to sell our production at market prices;

●

the potential for production decline rates for our wells to be greater than we expect;

●

competition, including competition for acreage in our resource play;

●

environmental risks, such as accidental spills of toxic or hazardous materials, and the potential for environmental liabilities;

●

exploration and development risks;

●

social unrest, political instability or armed conflict in major oil and natural gas producing regions outside the United States, such as the conflict between Ukraine and Russia, and acts of terrorism or sabotage;

●

general economic conditions, whether internationally, nationally or in the regional and local market areas in which we do business, may be less favorable than expected, including the possibility that economic conditions

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in the United States will worsen and that capital markets are disrupted, which could adversely affect demand for oil and natural gas and make it difficult to access capital;

●

impacts and potential risks related to actual or anticipated pandemics, such as the novel coronavirus (COVID-19) pandemic, including how it has and may continue to impact our operations, financial results, liquidity, contractors, customers, employees and vendors;

●

other economic, competitive, governmental, regulatory, legislative, including federal and state regulations and laws, geopolitical and technological factors that may negatively impact our business, operations or oil and natural gas prices;

●

our insurance coverage may not adequately cover all losses that we may sustain; and

●

title to the properties in which we have an interest may be impaired by title defects.

All forward-looking statements are expressly qualified in their entirety by the cautionary statements in this paragraph and elsewhere in this document. Other than as required under the securities laws, we do not assume a duty to update these forward-looking statements, whether as a result of new information, subsequent events or circumstances, changes in expectations or otherwise.

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PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements (Unaudited)

BATTALION OIL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

(In thousands, except per share amounts)


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2022		2021		2022		2021
Operating revenues:
Oil, natural gas and natural gas liquids sales:
Oil	$	70,406	$	60,023	$	206,874	$	153,228
Natural gas		15,656		9,435		39,296		23,839
Natural gas liquids		12,644		11,046		35,234		22,806
Total oil, natural gas and natural gas liquids sales		98,706		80,504		281,404		199,873
Other		443		312		858		827
Total operating revenues		99,149		80,816		282,262		200,700

Operating expenses:
Production:
Lease operating		12,265		11,979		35,698		31,615
Workover and other		2,559		990		4,807		2,317
Taxes other than income		5,613		3,082		15,936		9,186
Gathering and other		16,663		15,934		47,787		43,436
General and administrative		4,498		4,491		14,071		13,349
Depletion, depreciation and accretion		13,615		10,885		36,436		32,729
Total operating expenses		55,213		47,361		154,735		132,632
Income (loss) from operations		43,936		33,455		127,527		68,068

Other income (expenses):
Net gain (loss) on derivative contracts		67,634		(20,571)		(88,134)		(119,371)
Interest expense and other		(5,682)		(1,900)		(13,202)		(5,017)
Gain (loss) on extinguishment of debt		-		2,068		—		2,068
Total other income (expenses)		61,952		(20,403)		(101,336)		(122,320)
Income (loss) before income taxes		105,888		13,052		26,191		(54,252)
Income tax benefit (provision)		—		—		—		—
Net income (loss)	$	105,888	$	13,052	$	26,191	$	(54,252)

Net income (loss) per share of common stock:
Basic	$	6.48	$	0.80	$	1.60	$	(3.34)
Diluted	$	6.42	$	0.79	$	1.59	$	(3.34)
Weighted average common shares outstanding:
Basic		16,340		16,270		16,327		16,257
Diluted		16,483		16,428		16,496		16,257

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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BATTALION OIL CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

(In thousands, except share and per share amounts)


	September 30, 2022		December 31, 2021
Current assets:
Cash and cash equivalents	$	33,499	$	46,864
Accounts receivable, net		39,867		36,806
Assets from derivative contracts		18,225		1,383
Restricted cash		60		1,495
Prepaids and other		958		1,366
Total current assets		92,609		87,914
Oil and natural gas properties (full cost method):
Evaluated		680,202		569,886
Unevaluated		65,021		64,305
Gross oil and natural gas properties		745,223		634,191
Less - accumulated depletion		(375,648)		(339,776)
Net oil and natural gas properties		369,575		294,415
Other operating property and equipment:
Other operating property and equipment		4,223		3,467
Less - accumulated depreciation		(1,072)		(1,035)
Net other operating property and equipment		3,151		2,432
Other noncurrent assets:
Assets from derivative contracts		8,789		2,515
Operating lease right of use assets		446		721
Other assets		2,933		2,270
Total assets	$	477,503	$	390,267

Current liabilities:
Accounts payable and accrued liabilities	$	100,198	$	62,826
Liabilities from derivative contracts		41,088		58,322
Current portion of long-term debt		25,041		85
Operating lease liabilities		381		369
Asset retirement obligations		222		—
Total current liabilities		166,930		121,602
Long-term debt, net		179,372		181,565
Other noncurrent liabilities:
Liabilities from derivative contracts		23,583		7,144
Asset retirement obligations		15,250		11,896
Operating lease liabilities		65		352
Other		960		4,003
Commitments and contingencies (Note 9)

Stockholders' equity:
Common stock: 100,000,000 shares of $0.0001 par value authorized;
16,343,814 and 16,273,913 shares issued and outstanding as of
September 30, 2022 and December 31, 2021, respectively		2		2
Additional paid-in capital		333,634		332,187
Retained earnings (accumulated deficit)		(242,293)		(268,484)
Total stockholders' equity		91,343		63,705
Total liabilities and stockholders' equity	$	477,503	$	390,267

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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BATTALION OIL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited)

(In thousands)


						Retained
				Additional		Earnings
	Common Stock			Paid-In		(Accumulated		Stockholders'
	Shares	Amount		Capital		Deficit)		Equity
Balances at December 31, 2021	16,274	$	2	$	332,187	$	(268,484)	$	63,705
Net income (loss)	—		—		—		(92,744)		(92,744)
Long-term incentive plan vestings	89		—		—		—		—
Reduction in shares to cover
individuals' tax withholding	(26)		—		(461)		—		(461)
Stock-based compensation	—		—		452		—		452
Balances at March 31, 2022	16,337		2		332,178		(361,228)		(29,048)
Net income (loss)	—		—		—		13,047		13,047
Long-term incentive plan vestings	1		—		—		—		—
Reduction in shares to cover
individuals' tax withholding	—		—		(6)		—		(6)
Stock-based compensation	—		—		594		—		594
Balances at June 30, 2022	16,338		2		332,766		(348,181)		(15,413)
Net income (loss)	—		—		—		105,888		105,888
Long-term incentive plan vestings	8		—		—		—		—
Reduction in shares to cover
individuals' tax withholding	(2)		—		(25)		—		(25)
Stock-based compensation	—		—		893		—		893
Balances at September 30, 2022	16,344	$	2	$	333,634	$	(242,293)	$	91,343

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

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BATTALION OIL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited)

(In thousands)


						Retained
				Additional		Earnings
	Common Stock			Paid-In		(Accumulated		Stockholders'
	Shares	Amount		Capital		Deficit)		Equity
Balances at December 31, 2020	16,204	$	2	$	330,123	$	(240,167)	$	89,958
Net income (loss)	—		—		—		(33,375)		(33,375)
Long-term incentive plan vestings	87		—		—		—		—
Reduction in shares to cover
individuals' tax withholding	(24)		—		(264)		—		(264)
Stock-based compensation	—		—		692		—		692
Balances at March 31, 2021	16,267		2		330,551		(273,542)		57,011
Net income (loss)	—		—		—		(33,929)		(33,929)
Long-term incentive plan vestings	1		—		—		—		—
Reduction in shares to cover
individuals' tax withholding	—		—		(5)		—		(5)
Stock-based compensation	—		—		571		—		571
Balances at June 30, 2021	16,268		2		331,117		(307,471)		23,648
Net income (loss)	—		—		—		13,052		13,052
Long-term incentive plan vestings	8		—		—		—		—
Reduction in shares to cover
individuals' tax withholding	(2)		—		(22)		—		(22)
Stock-based compensation	—		—		565		—		565
Balances at September 30, 2021	16,274		2		331,660		(294,419)		37,243
Net income (loss)	—		—		—		25,935		25,935
Stock-based compensation	—		—		527		—		527
Balances at December 31, 2021	16,274	$	2	$	332,187	$	(268,484)	$	63,705

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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BATTALION OIL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(In thousands)


	Nine Months Ended
	September 30,
	2022		2021
Cash flows from operating activities:
Net income (loss)	$	26,191	$	(54,252)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depletion, depreciation and accretion		36,436		32,729
Stock-based compensation, net		1,540		1,560
Unrealized loss (gain) on derivative contracts		(23,911)		69,053
Amortization of deferred loan costs		2,726		—
Reorganization items		(744)		—
Loss (gain) on extinguishment of debt		—		(2,068)
Accrued settlements on derivative contracts		7,493		6,769
Change in fair value of Change of Control Call Option		(3,043)		—
Other income (expense)		(128)		(229)
Change in assets and liabilities:
Accounts receivable		(1,605)		(8,432)
Prepaids and other		407		806
Accounts payable and accrued liabilities		8,452		1,196
Net cash provided by (used in) operating activities		53,814		47,132

Cash flows from investing activities:
Oil and natural gas capital expenditures		(86,998)		(47,204)
Proceeds received from sale of oil and natural gas properties		1		947
Other operating property and equipment capital expenditures		(949)		(7)
Other		166		16
Net cash provided by (used in) investing activities		(87,780)		(46,248)

Cash flows from financing activities:
Proceeds from borrowings		20,122		145,000
Repayments of borrowings		(85)		(148,021)
Debt issuance costs		(379)		—
Other		(492)		(290)
Net cash provided by (used in) financing activities		19,166		(3,311)

Net increase (decrease) in cash, cash equivalents and restricted cash		(14,800)		(2,427)

Cash, cash equivalents and restricted cash at beginning of period		48,359		4,295
Cash, cash equivalents and restricted cash at end of period	$	33,559	$	1,868


Supplemental cash flow information:
Cash paid for reorganization items	$	744	$	—

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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BATTALION OIL CORPORATION

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. FINANCIAL STATEMENT PRESENTATION

Basis of Presentation and Principles of Consolidation

Battalion 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 consolidated financial statements include the accounts of all majority-owned, controlled subsidiaries. The Company operates in one segment which focuses on oil and natural gas acquisition, production, exploration and development. Allocation of capital is made across the Company’s entire portfolio without regard to operating area. All intercompany accounts and transactions have been eliminated.

These unaudited condensed consolidated financial statements reflect, in the opinion of the Company’s management, all adjustments, consisting of normal and recurring adjustments, necessary to present fairly the financial position as of, and the results of operations for, the periods presented. Interim period results are not necessarily indicative of results of operations or cash flows for the full year and accordingly, certain information normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States, has been condensed or omitted. During interim periods, Battalion follows the accounting policies disclosed in its Annual Report on Form 10-K, as filed with the United States Securities and Exchange Commission (SEC) on March 7, 2022. Please refer to the notes in the Annual Report on Form 10-K for the year ended December 31, 2021 when reviewing interim financial results. The Company has evaluated events or transactions through the date of issuance of these unaudited condensed consolidated financial statements.

Risk and Uncertainties

Supply chain issues. In periods of increasing commodity prices, the Company continues to be at risk to supply chain issues, including, but not limited to, labor shortages, pipe restrictions and potential delays in obtaining frac and/or drilling related equipment that could impact our business. During these periods, the costs and delivery times of rigs, equipment and supplies may also be substantially greater. The unavailability or high cost of drilling rigs and/or frac crews, pressure pumping equipment, tubulars and other supplies, and of qualified personnel can materially and adversely affect our operations and profitability.

COVID-19. The Company is continuously monitoring the current and potential impacts of the novel coronavirus (COVID-19) pandemic on its business, including how it has and may continue to impact its operations, financial results, liquidity, contractors, customers, employees and vendors, and taking appropriate actions in response, including implementing various measures to ensure the continued operation of its business in a safe and secure manner.

During 2021, widespread availability of COVID-19 vaccines in the United States and elsewhere combined with accommodative governmental monetary and fiscal policies and other factors, led to a rebound in demand for oil and natural gas and increases in oil and natural gas prices. Further, in 2022, the effects of Russian sanctions amidst the conflict with Ukraine have pushed oil and gas prices higher. However, there remains the potential for demand for oil and natural gas to be adversely impacted by the economic effects of rising interest rates and tightening monetary policies, as well as the ongoing COVID-19 pandemic, including as a consequence of the circulation of more infectious “variants” of the disease, vaccine hesitancy, waning vaccine effectiveness or other factors. As a consequence, the Company is unable to predict whether oil and natural gas prices will remain at current levels or will be adversely impacted by these or other factors. The results presented in this Form 10-Q are not necessarily indicative of future operating results.

For further information regarding supply chain issues and the actual and potential impacts of COVID-19 on the Company, see “Risk Factors” in Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

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BATTALION OIL CORPORATION

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Use of Estimates

The preparation of the Company’s unaudited condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities, if any, at the date of the unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during the respective reporting periods. Estimates and assumptions that, in the opinion of management of the Company, are significant include oil and natural gas revenue accruals, capital and operating expense accruals, oil and natural gas reserves, depletion relating to oil and natural gas properties, asset retirement obligations, and fair value estimates. The Company bases its estimates and judgments on historical experience and on various other assumptions and information believed to be reasonable under the circumstances. Estimates and assumptions about future events and their effects cannot be predicted with certainty and, accordingly, these estimates may change as new events occur, as more experience is acquired, as additional information is obtained and as the Company’s operating environment changes. Actual results may differ from the estimates and assumptions used in the preparation of the Company’s unaudited condensed consolidated financial statements.

Cash, Cash Equivalents and Restricted Cash

The Company considers all highly liquid short-term investments with a maturity of three months or less at the time of purchase to be cash equivalents. These investments are carried at cost, which approximates fair value. Amounts in the unaudited condensed consolidated balance sheets included in “Cash and cash equivalents” and “Restricted cash” reconcile to the Company’s unaudited condensed statements of cash flows as follows:


	September 30, 2022		December 31, 2021

Cash and cash equivalents	$	33,499	$	46,864
Restricted cash		60		1,495
Total cash, cash equivalents and restricted cash	$	33,559	$	48,359

Restricted cash consists of funds to collateralize lines of credit.

Accounts Receivable and Allowance for Doubtful Accounts

The Company’s accounts receivable are primarily receivables from joint interest owners and oil and natural gas purchasers. Accounts receivable are recorded at the amount due, less an allowance for doubtful accounts, when applicable. The Company establishes provisions for losses on accounts receivable if it determines that collection of all or part of the outstanding balance is doubtful. The Company regularly reviews collectability and establishes or adjusts the allowance for doubtful accounts as necessary using the specific identification method. As of both September 30, 2022 and December 31, 2021, allowances for doubtful accounts were approximately $0.2 million.

Concentrations of Credit Risk

The Company’s primary concentrations of credit risk are the risks of uncollectible accounts receivable and of nonperformance by counterparties under the Company’s derivative contracts. Each reporting period, the Company assesses the recoverability of material receivables using historical data, current market conditions and reasonable and supportable forecasts of future economic conditions to determine expected collectability of its material receivables.

The Company’s exposure to credit risk under its derivative contracts is varied among major financial institutions with investment grade credit ratings, where it has master netting agreements which provide for offsetting of amounts payable or receivable between the Company and the counterparty. To manage counterparty risk associated with

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BATTALION OIL CORPORATION

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

derivative contracts, the Company selects and monitors counterparties based on an assessment of their financial strength and/or credit ratings. At September 30, 2022, the Company’s derivative counterparties include two major financial institutions, both of which are secured lenders under the Term Loan Agreement.

Recently Issued Accounting Pronouncements

In March 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2020-04, Reference Rate Reform (Topic 848) (ASU 2020-04), in response to the risk of cessation of the London Interbank Offered Rate (LIBOR). This amendment provides optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging arrangements, and other transactions that reference LIBOR. ASU 2020-04 will be in effect through December 31, 2022. As of the date of this filing, ASU 2020-04 has not had a material impact on the Company’s operating results, financial position and disclosures.

2. LEASES

The Company leases equipment and office space pursuant to net operating leases. Operating leases where the Company is the lessee are included in “Operating lease right of use assets” and “Operating lease liabilities” on the unaudited condensed consolidated balance sheets. The lease liabilities are initially and subsequently measured at the present value of the unpaid lease payments at the lease commencement date. The Company has no leases that meet the criteria for classification as a finance lease.

Variable lease payments associated with the Company’s leases are recognized when the event, activity, or circumstance in the lease agreement on which those payments are assessed occurs. Variable lease payments, when applicable, are presented as “Gathering and other” or “General and administrative” in the unaudited condensed consolidated statements of operations in the same line item as the expense arising from the fixed lease payments on the operating leases.

The Company elected not to recognize right of use assets and lease liabilities for all short-term leases that have a lease term of 12 months or less. The Company recognizes the lease payments associated with its short-term leases when incurred. Variable lease payments associated with these leases are recognized and presented in the same manner as for all other leases.

The “Operating lease right of use assets” outstanding on the unaudited condensed consolidated balance sheets as of September 30, 2022 and December 31, 2021 both have initial lease terms of 2.3 years. Payments due under the lease contracts include fixed payments plus, in some instances, variable payments. The table below summarizes the Company’s leases for the nine months ended September 30, 2022 and 2021 (in thousands, except term and discount rate):

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	Nine Months Ended
	September 30,
	2022			2021
Lease cost
Operating lease costs	$	294		$	346
Short-term lease costs		6,112			2,231
Variable lease costs		—			307
Total lease costs	$	6,406		$	2,884

Other information
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	294		$	439
Right-of-use assets obtained in exchange for new operating lease liabilities					841
Weighted-average remaining lease term - operating leases		1.2	years		2.2	years
Weighted-average discount rate - operating leases		4.29	%		4.29	%

Future minimum lease payments associated with the Company’s non-cancellable operating leases for office space as of September 30, 2022 are presented in the table below (in thousands):


	September 30, 2022
Remaining period in 2022	$	98
2023		359
2024		—
2025		—
2026		—
Thereafter		—
Total operating lease payments		457
Less: discount to present value		11
Total operating lease liabilities		446
Less: current operating lease liabilities		381
Noncurrent operating lease liabilities	$	65

3. OPERATING REVENUES

Substantially all of the Company’s revenues are derived from single basin operations, the Delaware Basin in Pecos, Reeves, Ward and Winkler Counties, Texas. Revenue is presented disaggregated in the statement of operations by major product, and depicts how the nature, timing, and uncertainty of revenue and cash flows are affected by economic factors in the Company’s single basin operations.

Revenue is recognized when the following five steps are completed: (1) identify the contract with the customer, (2) identify the performance obligation (promise) in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, (5) recognize revenue when the reporting organization satisfies a performance obligation. Revenues from the sale of crude oil, natural gas and natural gas liquids are recognized, at a point in time, when a performance obligation is satisfied by the transfer of control of the commodity to the customer. Revenue is measured based on consideration specified in a contract with a customer and excludes amounts collected on behalf of third parties. Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction that are collected by the Company from a customer are excluded from revenue. Because the Company’s performance obligations have been satisfied and an unconditional right to consideration exists as of the balance sheet date, the Company recognized amounts due from contracts with customers

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NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

of $36.5 million and $35.1 million as of September 30, 2022 and December 31, 2021, respectively, as “Accounts receivable, net” on the unaudited condensed consolidated balance sheets.

4. OIL AND NATURAL GAS PROPERTIES

The Company uses the full cost method of accounting for its investment in oil and natural gas properties. Under this method of accounting, all costs of acquisition, exploration and development of oil and natural gas reserves (including such costs as leasehold acquisition costs, geological expenditures, treating equipment and gathering support facilities costs, dry hole costs, tangible and intangible development costs and direct internal costs) are capitalized as the cost of oil and natural gas properties when incurred. To the extent capitalized costs of evaluated oil and natural gas properties, net of accumulated depletion, exceed the discounted future net revenues of proved oil and natural gas reserves, net of deferred taxes, such excess capitalized costs are charged to expense.

Additionally, the Company assesses all properties classified as unevaluated property on a quarterly basis for possible impairment. The Company assesses properties on an individual basis or as a group, if properties are individually insignificant. The assessment includes consideration of the following factors, among others: intent to drill; remaining lease term; geological and geophysical evaluations; drilling results and activity; the assignment of proved reserves; and the economic viability of development if proved reserves are assigned. During any period in which these factors indicate impairment, the cumulative drilling costs incurred to date for such property and all or a portion of the associated leasehold costs are transferred to the full cost pool and are then subject to depletion and the full cost ceiling test limitation.

At September 30, 2022, the ceiling test value of the Company’s reserves was calculated based on the first-day-of-the-month average for the 12-months ended September 30, 2022 of the West Texas Intermediate (WTI) crude oil spot price of $92.16 per barrel, adjusted by lease or field for quality, transportation fees, and regional price differentials, and the first-day-of-the-month average for the 12-months ended September 30, 2022 of the Henry Hub natural gas price of $6.13 per MMBtu, adjusted by lease or field for energy content, transportation fees, and regional price differentials. Using these prices, the Company’s net book value of oil and natural gas properties at September 30, 2022 did not exceed the ceiling amount.

At September 30, 2021, the ceiling test value of the Company’s reserves was calculated based on the first-day-of-the-month average for the 12-months ended September 30, 2021 of the WTI crude oil spot price of $57.64 per barrel, adjusted by lease or field for quality, transportation fees, and regional price differentials, and the first-day-of-the-month average for the 12-months ended September 30, 2021 of the Henry Hub natural gas price of $2.94 per MMBtu, adjusted by lease or field for energy content, transportation fees, and regional price differentials. Using these prices, the Company’s net book value of oil and natural gas properties at September 30, 2021 did not exceed the ceiling amount.

Changes in commodity prices, production rates, levels of reserves, future development costs, transfers of unevaluated properties to the full cost pool, capital spending, and other factors will determine the Company’s ceiling test calculation and impairment analyses in future periods.

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5. DEBT

As of September 30, 2022 and December 31, 2021, the Company’s debt consisted of the following (in thousands):


	September 30, 2022		December 31, 2021
Term loan credit facility⁽¹⁾	$	204,291	$	181,565
Other		122		85
Total debt, net		204,413		181,650
Current portion of long-term debt⁽²⁾		25,041		85
Total long-term debt, net	$	179,372	$	181,565

(1)

Amount is net of $11.5 million and $14.2 million in unamortized debt issuance costs at September 30, 2022 and December 31, 2021, respectively. Amount also excludes the initial fair value allocated to the change of control call option embedded derivative of $4.2 million. Refer to “Term Loan Credit Facility” below for further details.

(2)	As of September 30, 2022, amount primarily represents amortization payments of $25.0 million under the Term Loan Agreement due within one year. As of December 31, 2021, amount represents the balance owed under the Company’s Paycheck Protection Program Loan.

Term Loan Credit Facility

On November 24, 2021, the Company and its wholly owned subsidiary, Halcón Holdings, LLC (Borrower) entered into an Amended and Restated Senior Secured Credit Agreement (Term Loan Agreement) with Macquarie Bank Limited, as administrative agent, and certain other financial institutions party thereto, as lenders. The Term Loan Agreement amends and restates in its entirety the senior secured revolving credit agreement, as amended, (the Senior Credit Agreement) entered into in 2019. As of September 30, 2022, the Company had borrowed $220.0 million under the Term Loan Agreement, a portion of which was used to refinance all amounts owed under the Senior Credit Agreement, and had approximately $1.3 million letters of credit outstanding. Under the Term Loan Agreement, the lenders have also agreed to loan the Company up to an additional $15.0 million, which will be available to be drawn from the date certain wells included in the approved plan of development (APOD) are deemed producing APOD wells until up to 18 months after November 24, 2021, subject to the satisfaction of certain conditions. An additional $5.0 million is available for the issuance of letters of credit. The maturity date of the Term Loan Agreement is November 24, 2025. Until such maturity date, borrowings under the Term Loan Agreement bear interest at a rate per annum equal to LIBOR (or another applicable reference rate, as determined pursuant to the provisions of the Term Loan Agreement) plus an applicable margin of 7.00%.

On November 14, 2022, the Company paid approximately $2.4 million and entered into a further Amended Credit Agreement (the “Amended Term Loan Agreement”) with its lenders which modified certain provisions of its original Term Loan Agreement including, but not limited to, the following:

●

Current Ratio. Our Current Ratio financial covenant decreased to 0.9 to 1.00 as of September 30, 2022, to 0.70 to 1.00 for the quarter ended December 31, 2022, and to 0.75 to 1.00 for the quarter ended March 31, 2023, returning to 1.00 to 1.00 for the quarter ended June 30, 2023 and for each fiscal quarter thereafter as further described below.

●

Interest Rate. We (i) converted the benchmark interest rate to the Secured Overnight Financing Rate (SOFR) and (ii) increased the applicable margin on borrowings by 0.50%, such that borrowings under the Term Loan Agreement will now bear interest at a rate per annum equal to the SOFR plus an applicable margin of 7.50%.

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●

Prepayment Premium. We reset the prepayment periods (for outstanding borrowings) beginning on the amendment date with the following prepayment premiums, subject to the conditions described in the table below and the discussion that follows:


Period (after amendment date)			Premium
Months 0 - 12			Make-whole amount equal to 12 months of interest plus 2.00%
Months 13 - 24			2.00%
Thereafter			0.00%

If within 6 months after the November 14, 2022 amendment date the Company raises a minimum of $20 million of new capital in the form of equity, equity-linked, preferred equity, or unsecured debt, in call cases bearing no cash dividend or cash interest, to bolster liquidity or repay debt, our prepayment premiums will reset to those in the original credit agreement (as further described in our 2021 Annual Report on Form 10-K). Additionally, if a change of control results in prepayment within the second anniversary of the amendment date, a 2% payment premium will apply.

The Company may be required to make mandatory prepayments under the Amended Term Loan Agreement in connection with the incurrence of non-permitted debt, certain asset sales, or with cash on hand in excess of certain maximum levels beginning in 2023. For each fiscal quarter after January 1, 2023, the Company is required to make mandatory prepayments when the Consolidated Cash Balance, as defined in the Amended Term Loan Agreement, exceeds $20.0 million. Until December 31, 2024, the forecasted APOD capital expenditures for the succeeding fiscal quarter are excluded for purposes of determining the Consolidated Cash Balance.

The Company is required to make scheduled amortization payments in the aggregate amount of $120.0 million from the fiscal quarter ending March 31, 2023 through the fiscal quarter ending September 30, 2025. Amounts outstanding under the Amended Term Loan Agreement are guaranteed by certain of the Borrower’s direct and indirect subsidiaries and secured by substantially all of the assets of the Borrower and such direct and indirect subsidiaries, and by the equity interests of the Borrower held by the Company. As part of the Amended Term Loan Agreement there are certain restrictions on the transfer of assets, including cash, to Battalion from the guarantor subsidiaries.

The Amended Term Loan Agreement also contains certain financial covenants (as defined), including the maintenance of the following ratios:

●

Asset Coverage Ratio of not less than 1.70 to 1.00 as of September 30, 2022, and 1.80 to 1.00 as of December 31, 2022 and each fiscal quarter thereafter

●

Total Net Leverage Ratio of not greater than 3.00 to 1.00 as of September 30, 2022 and December 31, 2022, 2.75 to 1.00 as of March 31, 2023, and 2.50 to 1.00 as of each fiscal quarter thereafter, and

●

Current Ratio of not less than 1.00 to 1.00, each determined as of the last day of any fiscal quarter period, other than as amended in November 2022 to 0.9 to 1.00 as of September 30, 2022, to 0.70 to 1.00 as of December 31, 2022, and to 0.75 to 1.00 as of March 31, 2023

As of September 30, 2022, (i) the Company was in compliance with the Asset Coverage Ratio and Total Net Leverage Ratio covenants under the Term Loan Agreement and (ii) our Current Ratio was 0.96 to 1, which was less than the 1.00 to 1.00 Current Ratio required under the original terms of the Term Loan Agreement. As a result of the amendment to our Term Loan Agreement on November 14, 2022, we were in compliance with the amended Current Ratio covenant of 0.9 to 1.00 for the quarter ended September 30, 2022.

The Amended Term Loan Agreement also contains an APOD for the Company’s Monument Draw acreage through the drilling and completion of certain wells. The Amended Term Loan Agreement contains a proved developed producing production test and an APOD economic test which the Company must maintain compliance with otherwise, subject to any available remedies or waivers, the Company is required to immediately cease making expenditures in

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NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)