Battalion Oil Q2 Earnings: Facing Substantial Debt Challenges (NYSE:BATL)

Battalion Oil (NYSE:BATL) not too long ago reported its Q2 2023 earnings after a delay attributed to its former CFO out of the blue leaving the corporate in early August. Battalion’s current wells have carried out solidly and it ought to see substantial price financial savings as soon as its acid gasoline injection mission is totally ramped up. Nonetheless, the acid gasoline injection facility is now anticipated to be on-line by the top of 2023, when it had previously been expected to have a big impact on 2023 prices.

Battalion is hampered by excessive curiosity and most popular dividend prices together with hedges which are beneath strip costs. It additionally has restricted liquidity and is required to make common funds to pay down its time period mortgage. This has resulted in plans to lift as much as one other $38 million from issuing most popular fairness.

Battalion’s restricted liquidity is prone to stop it from investing a lot in new growth, leading to manufacturing ranges which will decline sooner than Battalion can scale back the mixed quantity of its internet debt and most popular shares.

Consequently, the worth of Battalion’s frequent shares is prone to be eroded by curiosity prices and the growing liquidation choice on its most popular shares.

Administration Turnover

Kristen McWatters was appointed as Battalion’s CFO in January 2023 after Kevin Andrews determined to depart to pursue different alternatives. After simply over six months, McWatters notified Battalion (apparently with restricted discover) that she would resign to pursue different alternatives.

CEO Matthew Steele has taken over McWatters’s monetary supervisory duties for now, however the sudden change led to Battalion’s Q2 2023 report being delayed.

Steele solely turned CEO of Battalion in April 2023 after Richard Little resigned. This excessive stage of administration turnover is indicative of an organization that’s in fairly a difficult place.

Manufacturing Declines

Battalion’s Q2 2023 manufacturing ended up averaging 14,253 BOEPD (49% oil). This was down considerably from its common manufacturing of 16,200 BOEPD (50% oil) in Q1 2023. Battalion’s complete day by day manufacturing declined by 12% quarter-over-quarter, whereas its day by day oil manufacturing declined by 14% quarter-over-quarter.

This important decline was attributed to pure nicely declines as Battalion introduced on-line 4 internet wells in This fall 2022 (making Q1 2023 the primary full quarter of manufacturing from these wells) and one internet nicely in Q1 2023, however no new wells in Q2 2023.

Potential 2H 2023 Outlook

As a result of liquidity constraints, Battalion doesn’t seem able to drilling extra wells within the near-term. I’ve thus modeled its 2H 2023 manufacturing at roughly 13,050 BOEPD (48% to 49% oil), assuming that its manufacturing continues to say no, albeit at a slower fee of decline than from Q1 2023 to Q2 2023.

At present high-$70s WTI strip, Battalion is projected to generate $111 million in oil and gasoline revenues earlier than hedges, whereas its hedges have damaging $10 million in estimated worth.

If Battalion’s manufacturing declines as modeled right here, it can have round 96% of its 2H 2023 oil manufacturing hedged at $67.36 per barrel, contributing to these hedging losses.

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Battalion is thus projected to generate $14 million in free money stream over the second half of 2023. This assumes minimal capex and that its money G&A prices are diminished to $5 million within the second half of the 12 months because of its April workforce reductions.

I’ve additionally assumed that the acid gasoline injection facility would not meaningfully scale back gathering and different prices throughout 2023. That facility was beforehand anticipated to be “mechanically full in early April”, lowering gasoline treating prices considerably throughout 2023. Nonetheless, Battalion’s Q2 2023 report now signifies that the ability can be on-line by the top of 2023.

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Battalion had $19 million in money readily available on the finish of Q2 2023. Battalion’s projected free money stream in 2H 2023 provides $14 million, however Battalion additionally has $20 million in time period mortgage funds due in 2H 2023. With the web proceeds from its most popular fairness providing, it could finish 2023 with roughly $50 million in money readily available, assuming there aren’t any working capital modifications.

Battalion’s accounts payable and accrued liabilities exceed its internet accounts receivable by $25 million, so there’s a respectable probability that working capital modifications scale back its money readily available.

Potential 2024 Outlook

Assuming that growth capex continues to be minimal, I’ve modeled Battalion’s 2024 manufacturing at roughly 11,400 BOEPD (48% oil).

On the present strip for 2024, Battalion would generate $191 million in oil and gasoline revenues, whereas its hedges have damaging $22 million in estimated worth. On this state of affairs, Battalion would have 90% of its 2024 oil manufacturing hedged at a WTI value of $63.69 per barrel.

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I’ve assumed that Battalion’s acid gasoline injection facility is totally operational throughout 2024, resulting in important financial savings for its gathering and different expense class.

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Battalion may thus generate $32 million in free money stream throughout 2024. As famous earlier than, it was projected to finish 2023 with $50 million in money readily available earlier than working capital modifications.

Nonetheless, Battalion can be required to make $50 million in time period mortgage funds in 2024, so it could then finish 2024 with $32 million in money readily available earlier than any working capital modifications.

Debt State of affairs

On the finish of 2024, Battalion is projected to have $32 million in money readily available (earlier than working capital modifications) together with $150 million in remaining time period mortgage debt.

With the 16% PIK rate of interest on its most popular shares, the liquidation choice on these share will improve comparatively rapidly. The liquidation choice on the popular shares was $26 million on the finish of Q2 2023. That is anticipated to finish up at $65 million on the finish of Q3 2023 if the settlement for an extra $38 million in most popular shares closes by the top of the quarter.

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The PIK curiosity would then improve the liquidation choice for its most popular shares to $79.1 million by the top of 2024.

On the finish of 2024, there would thus be $143 million in internet debt (together with the working capital deficit) and $79 million in most popular shares rating forward of the frequent shares.

This mixed $222 million complete could also be round 3.2x Battalion’s EBITDAX at $75 WTI oil and Battalion’s 2024 exit fee manufacturing. With out additional growth, Battalion’s 2024 exit fee manufacturing could also be round 10,500 BOEPD.

Conclusion

Battalion seems to be largely caught in a troublesome place proper now. It’s required to make common funds on its time period mortgage (together with $20 million in 2H 2023 and $50 million in 2024). This has resulted in it needing to problem extra most popular shares to take care of some liquidity.

These most popular shares have a excessive PIK rate of interest of 16%, which begins consuming into the worth that’s left for the frequent fairness. The acid gasoline injection facility ought to assist scale back Battalion’s prices as soon as it’s totally operational, however it would not seem that Battalion has the monetary capability to do further growth.

Battalion is projected to have $222 million in internet debt and most popular shares rating forward of the frequent shares on the finish of 2024. This compares to $252 million in internet debt and most popular shares on the finish of Q2 2023.

This can be a 12% discount in internet debt and most popular shares, however Battalion’s manufacturing is projected to say no by round 24% over the identical interval. Thus there could also be fairly restricted worth left for Battalion’s frequent shares ultimately, whereas its hedges stop it from benefiting a lot (with out further growth) from any main rise in commodity costs.