Form 10-Q - Quarterly report [Sections 13 or 15(d)]

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Table of Contents

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 June 30, 2023
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 August 17, 2023, 16,456,563 shares of the Registrant’s Common Stock were outstanding.

Table of Contents

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 Six Months Ended June 30, 2023 and 2022	5
	Condensed Consolidated Balance Sheets (Unaudited) as of June 30, 2023 and December 31, 2022	6
	Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) for the Three and Six Months Ended June 30, 2023 and the Year Ended December 31, 2022	7
	Condensed Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, 2023 and 2022	9
	Notes to Unaudited Condensed Consolidated Financial Statements	10
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk	35
ITEM 4.	Controls and Procedures	35

PART II	OTHER INFORMATION
ITEM 1.	Legal Proceedings	36
ITEM 1A.	Risk Factors	36
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	37
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 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, 2022, 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 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 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, including the acid gas treatment facility for our Monument Draw area to handle production volumes and achieve anticipated reductions in the future costs of treating sour gas;

●

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;

●

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;

●

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

●

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				Six Months Ended
	June 30,				June 30,
	2023		2022		2023		2022
Operating revenues:
Oil, natural gas and natural gas liquids sales:
Oil	$	46,168	$	73,944	$	100,383	$	136,468
Natural gas		2,060		14,759		4,960		23,640
Natural gas liquids		5,657		12,587		12,815		22,590
Total oil, natural gas and natural gas liquids sales		53,885		101,290		118,158		182,698
Other		387		221		1,256		415
Total operating revenues		54,272		101,511		119,414		183,113

Operating expenses:
Production:
Lease operating		11,365		11,909		23,056		23,433
Workover and other		2,634		1,383		3,969		2,248
Taxes other than income		3,180		5,372		6,370		10,323
Gathering and other		16,828		15,869		33,345		31,124
General and administrative		5,243		4,588		10,380		9,573
Depletion, depreciation and accretion		14,713		12,601		30,861		22,821
Total operating expenses		53,963		51,722		107,981		99,522
Income (loss) from operations		309		49,789		11,433		83,591

Other income (expenses):
Net gain (loss) on derivative contracts		4,473		(31,910)		23,946		(155,768)
Interest expense and other		(9,530)		(4,832)		(17,316)		(7,520)
Total other income (expenses)		(5,057)		(36,742)		6,630		(163,288)
Income (loss) before income taxes		(4,748)		13,047		18,063		(79,697)
Income tax benefit (provision)		—		—		—		—
Net income (loss)	$	(4,748)	$	13,047	$	18,063	$	(79,697)

Net income (loss) per share of common stock:
Basic	$	(0.35)	$	0.80	$	0.87	$	(4.88)
Diluted	$	(0.35)	$	0.79	$	0.86	$	(4.88)
Weighted average common shares outstanding:
Basic		16,457		16,338		16,425		16,320
Diluted		16,457		16,510		16,520		16,320

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)


	June 30, 2023		December 31, 2022
Current assets:
Cash and cash equivalents	$	18,514	$	32,726
Accounts receivable, net		23,518		37,974
Assets from derivative contracts		9,611		16,244
Restricted cash		90		90
Prepaids and other		1,049		1,131
Total current assets		52,782		88,165
Oil and natural gas properties (full cost method):
Evaluated		727,347		713,585
Unevaluated		62,649		62,621
Gross oil and natural gas properties		789,996		776,206
Less - accumulated depletion		(420,964)		(390,796)
Net oil and natural gas properties		369,032		385,410
Other operating property and equipment:
Other operating property and equipment		4,674		4,434
Less - accumulated depreciation		(1,486)		(1,209)
Net other operating property and equipment		3,188		3,225
Other noncurrent assets:
Assets from derivative contracts		5,299		5,379
Operating lease right of use assets		162		352
Other assets		2,778		2,827
Total assets	$	433,241	$	485,358

Current liabilities:
Accounts payable and accrued liabilities	$	48,897	$	100,095
Liabilities from derivative contracts		15,480		29,286
Current portion of long-term debt		42,606		35,067
Operating lease liabilities		162		352
Asset retirement obligations		111		225
Total current liabilities		107,256		165,025
Long-term debt, net		164,055		182,676
Other noncurrent liabilities:
Liabilities from derivative contracts		17,406		33,649
Asset retirement obligations		15,741		15,244
Other		3,432		4,136
Commitments and contingencies (Note 9)
Temporary equity:
Series A redeemable convertible preferred stock: 25,000 shares of $.0001		26,030		—
par value authorized, issued and outstanding as of June 30, 2023
Stockholders' equity:
Common stock: 100,000,000 shares of $0.0001 par value authorized;
16,456,563 and 16,344,815 shares issued and outstanding as of
June 30, 2023 and December 31, 2022, respectively		2		2
Additional paid-in capital		331,201		334,571
Retained earnings (accumulated deficit)		(231,882)		(249,945)
Total stockholders' equity		99,321		84,628
Total liabilities, temporary equity and stockholders' equity	$	433,241	$	485,358

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, 2022	16,345	$	2	$	334,571	$	(249,945)	$	84,628
Net income (loss)	—		—		—		22,811		22,811
Deemed dividends for Series A preferred stock	—		—		(1,492)		—		(1,492)
Long-term incentive plan vestings	159		—		—		—		—
Tax withholding on vesting of restricted stock units	(47)		—		(454)		—		(454)
Stock-based compensation	—		—		327		—		327
Balances at March 31, 2023	16,457		2		332,952		(227,134)		105,820
Net income (loss)	—		—		—		(4,748)		(4,748)
Deemed dividends for Series A preferred stock	—		—		(997)		—		(997)
Stock-based compensation	—		—		(754)		—		(754)
Balances at June 30, 2023	16,457		2		331,201		(231,882)		99,321

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		—		—		—		—
Tax withholding on vesting of restricted stock units	(26)		—		(461)		—		(461)
Stock-based compensation and other	—		—		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		—		—		—		—
Tax withholding on vesting of restricted stock units	—		—		(6)		—		(6)
Stock-based compensation and other	—		—		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		—		—		—		—
Tax withholding on vesting of restricted stock units	(2)		—		(25)		—		(25)
Stock-based compensation and other	—		—		893		—		893
Balances at September 30, 2022	16,344		2		333,634		(242,293)		91,343
Net income (loss)	—		—		—		(7,652)		(7,652)
Stock-based compensation and other	1		—		937		—		937
Balances at December 31, 2022	16,345	$	2	$	334,571	$	(249,945)	$	84,628

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)


	Six Months Ended
	June 30,
	2023		2022
Cash flows from operating activities:
Net income (loss)	$	18,063	$	(79,697)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depletion, depreciation and accretion		30,861		22,821
Stock-based compensation, net		(545)		857
Unrealized loss (gain) on derivative contracts		(23,336)		78,201
Amortization/accretion of financing related costs		3,843		1,807
Reorganization items		—		(744)
Accrued settlements on derivative contracts		(929)		14,652
Change in fair value of embedded derivative liability		(704)		(2,595)
Other income (expense)		53		(96)
Change in assets and liabilities:
Accounts receivable		15,965		(12,596)
Prepaids and other		81		438
Accounts payable and accrued liabilities		(34,703)		5,285
Net cash provided by (used in) operating activities		8,649		28,333

Cash flows from investing activities:
Oil and natural gas capital expenditures		(32,633)		(51,377)
Proceeds received from sale of oil and natural gas assets		1,189		—
Other operating property and equipment capital expenditures		(284)		(705)
Proceeds received from sale of other operating property and equipment		—		96
Other		(11)		—
Net cash provided by (used in) investing activities		(31,739)		(51,986)

Cash flows from financing activities:
Proceeds from borrowings		—		20,000
Repayments of borrowings		(15,043)		(85)
Payment of deferred debt financing costs		—		(379)
Proceeds from issuance of preferred stock		24,375		—
Other		(454)		(467)
Net cash provided by (used in) financing activities		8,878		19,069

Net increase (decrease) in cash, cash equivalents and restricted cash		(14,212)		(4,584)

Cash, cash equivalents and restricted cash at beginning of period		32,816		48,359
Cash, cash equivalents and restricted cash at end of period	$	18,604	$	43,775

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 30, 2023. Please refer to the notes in the Annual Report on Form 10-K for the year ended December 31, 2022 when reviewing interim financial results. The Company has evaluated events or transactions through the date of issuance of these unaudited condensed consolidated financial statements.

Liquidity and Cash Requirements

The accompanying unaudited Condensed Consolidated Financial Statements are prepared in accordance with GAAP applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.

Our ability to execute our operating strategy is dependent on our ability to maintain adequate liquidity and continue to access capital, as needed. Our current business estimates and forecasts indicate that we will require additional liquidity to continue our operations and meet our debt covenant requirements for the next 12 months from the issuance of these condensed consolidated financial statements. In response to these events and conditions, we have continued to execute on a plan to reduce operating and capital costs to improve cash flow, including recent reductions in headcount to align with planned drilling activity. The Company also has obtained a support letter from its three largest current related party investors to purchase additional preferred equity securities in an amount up to $38 million. The Company has provided notice to the investors of its intent to draw the $38 million in the third quarter of 2023 to enable the Company to meet its obligations as they become due through at least one year beyond the issuance of these financial statements. Management believes that based upon its operational forecasts, cash and cash equivalents on hand, cost reduction measures, and the additional $38 million in additional preferred equity expected to close in the third quarter of 2023, it is probable the Company will have sufficient liquidity to fund its operations, meet its continuous drilling obligations and debt payment requirements and maintain compliance with our future debt covenants, as described in Note 5, “Debt,” for the next 12 months from the issuance of these condensed consolidated financial statements.

Risk and Uncertainties

Supply chain issues. In periods of increasing commodity prices, the Company is at risk for 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.

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BATTALION OIL CORPORATION

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Commodity Prices. Our financial results depend upon many factors, but are largely driven by the volume of our oil and natural gas production and the price that we receive for that production. Demand for oil and natural gas may be adversely impacted by macro-economic events, such as economic effects of rising interest rates, tightening monetary policies, as well as the price and availability of alternatives or other factors, while supply fluctuates based on controls imposed by oil exporting countries, social, labor and political unrest, armed conflict, terrorist attacks, weather conditions and 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. When commodity prices decline significantly, our ability to finance our capital budget and operations may be adversely impacted to the extent we have not hedged our production, and we may also be required to record non-cash impairment charges as further described in Note 4, “Oil and Natural Gas Properties”.

For further information regarding the actual and potential impacts of the supply chain issues and the potential impact of declines in commodity prices on the Company, see “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022.

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:


	June 30, 2023		December 31, 2022

Cash and cash equivalents	$	18,514	$	32,726
Restricted cash		90		90
Total cash, cash equivalents and restricted cash	$	18,604	$	32,816

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BATTALION OIL CORPORATION

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

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. Payment of our accounts receivable is typically received within 30-60 days. The Company’s historical credit losses have been de minimis and are expected to remain so in the future assuming no substantial changes to the business or creditworthiness of the Company’s counterparties.

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 derivative contracts, the Company selects and monitors counterparties based on an assessment of their financial strength and/or credit ratings. At June 30, 2023, the Company’s derivative counterparties include two major financial institutions, both of which are secured lenders under the Amended Term Loan Agreement.

Recently Issued Accounting Pronouncements

In the first quarter of 2023, the Company early adopted Accounting Standards Update (“ASU”) ASU 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40) (“ASU 2020-06)”. The update simplifies the accounting for convertible debt instruments and convertible preferred stock by reducing the number of accounting models and limiting the number of embedded conversion features separately recognized from the primary contract. The guidance also includes targeted improvements to the disclosures for convertible instruments and earnings per share. The adoption of ASU 2020-06 did not have an impact on the Company’s financial statements.

2. LEASES

The Company leases equipment and office space pursuant to operating leases. We determine if an arrangement is or contains a lease at inception and combine lease and nonlease components, when fixed, for all lease contracts. Nonlease components include common area maintenance charges on office leases and, when applicable, services associated with equipment leases. Operating leases with a lease term greater than 12 months where the Company is the lessee are included in “Operating lease right of use assets” and “Operating lease liabilities” on the consolidated balance sheets and recorded based on the present value of the future minimum lease payments over the lease term. As most of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the commencement date to determine the present value of lease payments. The Company does not recognize right of use assets and lease liabilities for short-term leases that have a lease term of 12 months or less, but rather recognizes the lease payments associated with its short-term leases when incurred.

Payments due under the lease contracts include fixed payments plus, in some instances, variable payments. Variable lease payments, if applicable, associated with the Company’s leases are recognized when the event, activity, or

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BATTALION OIL CORPORATION

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

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 consolidated statements of operations in the same line item as the expense arising from the fixed lease payments on the operating leases.

The “Operating lease right of use assets” outstanding on the unaudited condensed consolidated balance sheets as of June 30, 2023 and December 31, 2022 have an initial lease term 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 six months ended June 30, 2023 and 2022 (in thousands, except term and discount rate):


	Six Months Ended
	June 30,
	2023			2022
Lease cost
Operating lease costs	$	196		$	196
Short-term lease costs		375			4,003
Variable lease costs		—			—
Total lease costs	$	571		$	4,199

Other information
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	196		$	196
Right-of-use assets obtained in exchange for new operating lease liabilities		—			—
Weighted-average remaining lease term - operating leases		0.4	years		1.4	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 June 30, 2023 are presented in the table below (in thousands):


	June 30, 2023
Remaining period in 2023	$	163
Thereafter		—
Total operating lease payments		163
Less: discount to present value		1
Total operating lease liabilities		162
Less: current operating lease liabilities		162
Noncurrent operating lease liabilities	$	—

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 each unit (e.g.

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BATTALION OIL CORPORATION

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

barrel of oil, Mcf of gas) of commodity to the customer. Revenue is measured based on contract consideration allocated to each unit of commodity 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.

Since 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 of $19.9 million and $34.0 million as of June 30, 2023 and December 31, 2022, respectively, as “Accounts receivable, net” on the unaudited condensed consolidated balance sheets. The Company utilizes the practical expedient exempting the disclosure of the transaction price of unsatisfied performance obligations for (i) contracts with an original expected duration of one year or less and (ii) contracts where variable consideration is allocated entirely to a wholly unsatisfied performance obligation (each unit of product typically represents a separate performance obligation, and therefore, future volumes under the Company’s long-term contracts are wholly unsatisfied).

For additional information regarding our operating revenues, refer to our Annual Report on Form 10-K for the year ended December 31, 2022.

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 June 30, 2023, and June 30, 2022, using first-day-of-the-month average West Texas Intermediate (WTI) crude oil spot prices and Henry Hub natural gas prices for the respective prior 12-month periods, the Company’s net book value of oil and natural gas properties at June 30, 2023 and June 30, 2022, did not exceed the ceiling test value of the Company’s reserves. Oil and natural gas prices utilized for the ceiling test calculations as of June 30, 2023 and June 30, 2022 were $83.23/bbl and $85.82/bbl of oil, respectively and $4.76/MMBtu and $5.13/MMBtu per MMBtu for natural gas, respectively.

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. Additionally, since oil and natural gas prices are inherently volatile, sustained lower commodity prices over a period of time could result in non-cash impairment charges of our oil and natural gas properties under our full cost ceiling test calculation which would result in a negative impact to our earnings and financial position.

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BATTALION OIL CORPORATION

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

5. DEBT

As of June 30, 2023 and December 31, 2022, the Company’s debt consisted of the following (in thousands):


	June 30, 2023		December 31, 2022
Term loan credit facility	$	220,000	$	235,000
Other		265		190
Total debt (Face Value)		220,265		235,190
Less:
Current portion of long-term debt⁽¹⁾		(42,606)		(35,067)
Other⁽²⁾		(13,604)		(17,447)
Long-Term Debt, net	$	164,055	$	182,676

(1)	Amounts primarily reflect amortization payments under the Amended Term Loan Agreement due within one year.

(2)

Amounts primarily reflect unamortized debt issuance costs of approximately $9.9 million and $13.0 million at June 30, 2023 and December 31, 2022, respectively, but also includes remaining amounts to be accreted associated with the embedded derivative separately presented and further described in Note 6, “Fair Value Measurements”.

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. 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, its Current Ratio financial covenant, interest rate benchmark, and prepayment premiums, all as further described below.

As of June 30, 2023, we had $220.3 million of indebtedness outstanding and approximately $1.4 million of letters of credit outstanding under the Amended Term Loan Agreement. Subsequent to June 30, 2023, the letters of credit were cancelled. We currently have $5.0 million available for the issuance of letters of credit. The maturity date of the Amended Term Loan Agreement is November 24, 2025. We have a variable interest rate on our borrowings based on the Secured Overnight Financing Rate (SOFR) plus 0.15% and increased the applicable margin on borrowings by 0.50%, such that borrowings under the Amended Term Loan Agreement bear interest at a rate per annum equal to the SOFR benchmark rate plus 7.65%. The weighted average interest rate on our borrowings for the quarter ended June 30, 2023 was approximately 12.6%.

The Company may elect, at its option, to prepay any borrowing outstanding under the Amended Term Loan Agreement subject to the following prepayment premiums:


Period (after applicable borrowing date⁽¹⁾)			Premium
Months 0-12			Make-whole amount equal to 12 months of interest plus 2.00%
Months 13-24			2.00%
Months 25-36			1.00%
Months 37-48			0.00%

(1)

Applicable borrowing dates are November 2021 for the original $200 million borrowed and April and November 2022 for the $20 million and $15 million in delayed draw borrowings, respectively.

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BATTALION OIL CORPORATION

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

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 capital expenditures for the succeeding fiscal quarter on the approved plan of development (“APOD”) wells (i.e. oil and gas wells located within a specified boundary as set by our Amended Term Loan Agreement) are excluded for purposes of determining the Consolidated Cash Balance.

The Company is required to make scheduled remaining amortization payments in the aggregate amount of $105.0 million from the fiscal quarter ending September 30, 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 1.80 to 1.00 as of June 30, 2023 and the last day of each fiscal quarter thereafter

●

Total Net Leverage Ratio of not greater than 2.50 to 1.00 as of June 30, 2023, and each fiscal quarter thereafter, and

●

Current Ratio of not less than 1.00 to 1.00, determined as of the last day of any fiscal quarter period, as of June 30, 2023 and for each fiscal quarter thereafter.

As of June 30, 2023, the Company was in compliance with the financial covenants under the Amended Term Loan Agreement.

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 respect of the APOD other than any expenditures deemed necessary by the Company in respect of no more than six additional APOD wells.

The Amended Term Loan Agreement also contains certain events of default, including non-payment; breaches of representations and warranties; non-compliance with covenants or other agreements; cross-default to material indebtedness; judgments; change of control; and voluntary and involuntary bankruptcy.

In conjunction with entering into the original Term Loan Agreement in November 2021, the Company agreed to pay a premium to the lenders upon a future change of control event in which a majority of the board of directors or the Chief Executive Officer or the Principal Financial Officer positions do not remain held by the same persons as before the change of control event (Change of Control Call Option). The premium is reduced over time through the payment of interest and certain fees. The Change of Control Call Option is accounted for as an embedded derivative not clearly and closely related to the host debt instrument. Accordingly, the Company recorded the initial fair value separately on the unaudited condensed consolidated balance sheet within “Other noncurrent liabilities” and records changes in the fair value of the embedded derivative each reporting period in “Interest expense and other” on the unaudited consolidated statements of operations. Refer to Note 6, “Fair Value Measurements,” for a discussion of the valuation approach used,

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BATTALION OIL CORPORATION

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

the significant inputs to the valuation, and for a reconciliation of the change in fair value of the Change of Control Call Option.

6. FAIR VALUE MEASUREMENTS

The Company’s determination of fair value incorporates not only the credit standing of the counterparties involved in transactions with the Company resulting in receivables on the Company’s unaudited condensed consolidated balance sheets, but also the impact of the Company’s nonperformance risk on its own liabilities. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The Company separates the fair value of its financial instruments using a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy assigns the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). Level 2 measurements are inputs that are observable for assets or liabilities, either directly or indirectly, other than quoted prices included within Level 1. The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. The Company classifies fair value balances based on the observability of those inputs.

A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels. There were no transfers between fair value hierarchy levels for any period presented. The following tables set forth by level within the fair value hierarchy the Company’s financial assets and liabilities associated with commodity-based derivative contracts that were accounted for at fair value as of June 30, 2023 and December 31, 2022 (in thousands):


	June 30, 2023
	Level 1		Level 2		Level 3		Total
Assets
Assets from commodity-based derivative contracts	$	—	$	14,910	$	—	$	14,910

Liabilities
Liabilities from commodity-based derivative contracts	$	—	$	32,886	$	—	$	32,886


	December 31, 2022
	Level 1		Level 2		Level 3		Total
Assets
Assets from commodity-based derivative contracts	$	—	$	21,623	$	—	$	21,623

Liabilities
Liabilities from commodity-based derivative contracts	$	—	$	62,935	$	—	$	62,935

Derivative contracts listed above as Level 2 include fixed-price swaps, collars, basis swaps and WTI NYMEX rolls that are carried at fair value. The Company records the net change in the fair value of these positions in “Net gain (loss) on derivative contracts” in the Company’s unaudited condensed consolidated statements of operations. The Level 2 observable data includes the forward curves for commodity prices based on quoted market prices and implied volatility factors related to changes in the forward curves. See Note 7, “Derivative and Hedging Activities,” for additional discussion of derivatives.

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BATTALION OIL CORPORATION

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

The Company’s derivative contracts are with major financial institutions with investment grade credit ratings which are believed to have minimal credit risk. As such, the Company is exposed to credit risk to the extent of nonperformance by the counterparties in the derivative contracts; however, the Company does not anticipate such nonperformance.

As discussed in Note 5, “Debt,” the Company reflects the fair value of the Change of Control Call Option separately on the unaudited condensed consolidated balance sheets and changes to the fair value of the embedded derivative each reporting period in “Interest expense and other” on the unaudited consolidated statements of operations. The valuation of the Change of Control Call Option includes significant inputs such as the timing and probability of discrete potential exit scenarios, forward interest rate curves, and discount rates based on implied and market yields. The following table sets forth a reconciliation of the changes in fair value of the Change of Control Call Option classified as Level 3 in the fair value hierarchy (in thousands):


		Change of Control
		Call Option
Balance at December 31, 2022		$

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