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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, 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)

(832538-0300

(Registrant’s telephone number, including area code)

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

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 (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 

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 14, 2023, 16,456,563 shares of the Registrant’s Common Stock were outstanding.

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, 2023 and 2022

5

Condensed Consolidated Balance Sheets (Unaudited) as of September 30, 2023 and December 31, 2022

6

Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) for the Nine Months Ended September 30, 2023 and the Year Ended December 31, 2022

7

Condensed Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 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

28

ITEM 3.

Quantitative and Qualitative Disclosures about Market Risk

38

ITEM 4.

Controls and Procedures

38

PART II

OTHER INFORMATION

ITEM 1.

Legal Proceedings

39

ITEM 1A.

Risk Factors

39

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

39

ITEM 3.

Defaults Upon Senior Securities

39

ITEM 4.

Mine Safety Disclosures

39

ITEM 5.

Other Information

39

ITEM 6.

Exhibits

40

Signatures

41

2

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, the potential availability and capacity of acid gas treatment facilities being brought online, potential costs to be incurred, future cash flows, borrowings and equity raises, 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, but not limited to, 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;
our ability to pursue and integrate strategic mergers and acquisitions;
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;

3

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 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.

4

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,

2023

2022

2023

2022

Operating revenues:

Oil, natural gas and natural gas liquids sales:

Oil

$

43,689

$

70,406

$

144,072

$

206,874

Natural gas

3,668

15,656

8,628

39,296

Natural gas liquids

6,078

12,644

18,893

35,234

Total oil, natural gas and natural gas liquids sales

53,435

98,706

171,593

281,404

Other

671

443

1,927

858

Total operating revenues

54,106

99,149

173,520

282,262

Operating expenses:

Production:

Lease operating

11,152

12,265

34,208

35,698

Workover and other

700

2,559

4,669

4,807

Taxes other than income

3,307

5,613

9,677

15,936

Gathering and other

15,512

16,663

48,857

47,787

General and administrative

3,192

4,498

13,572

14,071

Depletion, depreciation and accretion

13,426

13,615

44,287

36,436

Total operating expenses

47,289

55,213

155,270

154,735

Income from operations

6,817

43,936

18,250

127,527

Other income (expenses):

Net (loss) gain on derivative contracts

(53,687)

67,634

(29,741)

(88,134)

Interest expense and other

(6,929)

(5,682)

(24,245)

(13,202)

Total other (expenses) income

(60,616)

61,952

(53,986)

(101,336)

(Loss) income before income taxes

(53,799)

105,888

(35,736)

26,191

Income tax benefit (provision)

Net (loss) income

$

(53,799)

$

105,888

$

(35,736)

$

26,191

Series A preferred dividends

(3,863)

(6,352)

Net (loss) income available to common stockholders

$

(57,662)

$

105,888

$

(42,088)

$

26,191

Net (loss) income per share of common stock available to common stockholders:

Basic

$

(3.50)

$

6.48

$

(2.56)

$

1.60

Diluted

$

(3.50)

$

6.42

$

(2.56)

$

1.59

Weighted average common shares outstanding:

Basic

16,457

16,340

16,436

16,327

Diluted

16,457

16,483

16,436

16,496

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

5

BATTALION OIL CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

(In thousands, except share and per share amounts)

September 30, 2023

December 31, 2022

Current assets:

Cash and cash equivalents

$

42,590

$

32,726

Accounts receivable, net

27,177

37,974

Assets from derivative contracts

4,649

16,244

Restricted cash

90

90

Prepaids and other

786

1,131

Total current assets

75,292

88,165

Oil and natural gas properties (full cost method):

Evaluated

736,205

713,585

Unevaluated

62,649

62,621

Gross oil and natural gas properties

798,854

776,206

Less: accumulated depletion

(434,034)

(390,796)

Net oil and natural gas properties

364,820

385,410

Other operating property and equipment:

Other operating property and equipment

4,623

4,434

Less: accumulated depreciation

(1,653)

(1,209)

Net other operating property and equipment

2,970

3,225

Other noncurrent assets:

Assets from derivative contracts

2,022

5,379

Operating lease right of use assets

889

352

Other assets

10,768

2,827

Total assets

$

456,761

$

485,358

Current liabilities:

Accounts payable and accrued liabilities

$

59,417

$

100,095

Liabilities from derivative contracts

36,363

29,286

Current portion of long-term debt

45,106

35,067

Operating lease liabilities

513

352

Asset retirement obligations

225

Total current liabilities

141,399

165,025

Long-term debt, net

153,476

182,676

Other noncurrent liabilities:

Liabilities from derivative contracts

35,089

33,649

Asset retirement obligations

17,202

15,244

Operating lease liabilities

375

Other

1,554

4,136

Commitments and contingencies (Note 9)

Temporary equity:

Series A redeemable convertible preferred stock: 63,000 shares of $0.0001

66,834

par value authorized, issued and outstanding as of September 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

September 30, 2023 and December 31, 2022, respectively

2

2

Additional paid-in capital

326,511

334,571

Retained earnings (accumulated deficit)

(285,681)

(249,945)

Total stockholders' equity

40,832

84,628

Total liabilities, temporary equity and stockholders' equity

$

456,761

$

485,358

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

6

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

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 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

Net loss

(53,799)

(53,799)

Deemed dividends for Series A preferred stock

(3,863)

(3,863)

Stock-based compensation

(827)

(827)

Balances at September 30, 2023

16,457

$

2

$

326,511

$

(285,681)

$

40,832

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

7

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 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

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

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 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.

8

BATTALION OIL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(In thousands)

Nine Months Ended

September 30,

2023

2022

Cash flows from operating activities:

Net (loss) income

$

(35,736)

$

26,191

Adjustments to reconcile net (loss) income to net cash

provided by operating activities:

Depletion, depreciation and accretion

44,287

36,436

Stock-based compensation, net

(1,231)

1,540

Unrealized loss (gain) on derivative contracts

23,469

(23,911)

Amortization/accretion of financing related costs

5,789

2,726

Reorganization items

(744)

Accrued settlements on derivative contracts

2,846

7,493

Change in fair value of embedded derivative liability

(2,582)

(3,043)

Other

144

(128)

Change in assets and liabilities:

Accounts receivable

11,410

(1,605)

Prepaids and other

344

407

Accounts payable and accrued liabilities

(37,675)

8,452

Net cash provided by operating activities

11,065

53,814

Cash flows from investing activities:

Oil and natural gas capital expenditures

(36,695)

(86,998)

Proceeds received from sale of oil and natural gas assets

1,189

1

Other operating property and equipment capital expenditures

(136)

(949)

Other

(1,464)

166

Net cash used in investing activities

(37,106)

(87,780)

Cash flows from financing activities:

Proceeds from borrowings

20,122

Repayments of borrowings

(25,066)

(85)

Payment of deferred debt financing costs

(379)

Proceeds from issuance of preferred stock

61,425

Other

(454)

(492)

Net cash provided by financing activities

35,905

19,166

Net increase (decrease) in cash, cash equivalents and restricted cash

9,864

(14,800)

Cash, cash equivalents and restricted cash at beginning of period

32,816

48,359

Cash, cash equivalents and restricted cash at end of period

$

42,680

$

33,559

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

9

Table of Contents

BATTALION OIL CORPORATION

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. FINANCIAL STATEMENT PRESENTATION

Basis of Presentation and Principles of Consolidation

Battalion Oil Corporation (“Battalion” or the “Company”) 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 (“GAAP”), 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 (the “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.

The Company’s ability to execute its operating strategy is dependent on its ability to maintain adequate liquidity and continue to access capital, as needed. The Company’s current business estimates and forecasts indicate that it will require additional liquidity to continue its operations and meet its debt covenant requirements for the next 12 months from the issuance of these unaudited condensed consolidated financial statements. In response to these events and conditions, the Company has 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. During the third quarter of 2023, the Company obtained an additional support letter from the three largest existing stockholders to purchase additional preferred equity securities in an amount up to $55.0 million over the next 12 months to enable the Company to meet its obligations as they become due through at least one year beyond the issuance of these unaudited condensed consolidated financial statements. The Company’s management believes that based upon its operational forecasts, cash and cash equivalents on hand, cost reduction measures, and the additional $55.0 million of preferred equity commitments available, 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 its future debt covenants, as described in Note 5, “Debt,” for the next 12 months from the issuance of these unaudited condensed consolidated financial statements.

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Table of Contents

BATTALION OIL CORPORATION

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

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 its 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 the Company’s operations and profitability.

Commodity Prices. The Company’s financial results depend upon many factors, but are largely driven by the volume of its oil and natural gas production and the price that it receives 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 future oil and natural gas prices. When commodity prices decline, the Company’s ability to finance its capital budget and operations may be adversely impacted to the extent the Company has not or is unable to hedge the prices it receives for its production sufficiently to offset such declines, and it 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 the Company’s 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 GAAP 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 (“AROs”), 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.

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Table of Contents

BATTALION OIL CORPORATION

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

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 (in thousands):

    

September 30, 2023

December 31, 2022

Cash and cash equivalents

$

42,590

$

32,726

Restricted cash

90

90

Total cash, cash equivalents and restricted cash

$

42,680

$

32,816

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 the Company’s 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 September 30, 2023, the Company’s derivative counterparties include two major financial institutions, both of which are secured lenders under the Amended Term Loan Agreement (as defined in Note 5, “Debt”).

Recently Issued Accounting Pronouncements

In the first quarter of 2023, the Company early adopted the Financial Accounting Standards Board’s (the “FASB”) 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.

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BATTALION OIL CORPORATION

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

2. LEASES

The Company leases equipment and office space pursuant to operating leases. The Company determines if an arrangement is or contains a lease at inception and combines lease and non-lease components, when fixed, for all lease contracts. Non-lease 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 unaudited condensed consolidated balance sheets and are 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 of the lease 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 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 “Operating lease right of use assets” outstanding on the unaudited condensed consolidated balance sheets as of September 30, 2023 and December 31, 2022 have initial lease terms ranging from 1.9 to 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 periods presented (in thousands, except term and discount rate):

Nine Months Ended

September 30,

    

2023

  

2022

 

Lease cost

Operating lease costs

$

381

$

294

Short-term lease costs

1,022

6,112

Total lease costs

$

1,403

$

6,406

Other information

Cash paid for amounts included in the measurement of lease liabilities

Operating cash flows from operating leases

$

381

$

294

Weighted-average remaining lease term - operating leases

1.6

years

1.2

years

Weighted-average discount rate - operating leases

12.13

%  

4.29

%

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BATTALION OIL CORPORATION

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Future minimum lease payments associated with the Company’s non-cancellable operating leases as of September 30, 2023 are presented in the table below (in thousands):

    

September 30, 2023

Remaining period in 2023

$

196

2024

522

2025

261

Thereafter

Total operating lease payments

979

Less: discount to present value

91

Total operating lease liabilities

888

Less: current operating lease liabilities

513

Noncurrent operating lease liabilities

$

375

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 unaudited condensed consolidated 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 and (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. 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.

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 of $24.6 million and $34.0 million as of September 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 the Company’s operating revenues, refer to its 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

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BATTALION OIL CORPORATION

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

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, 2023 and September 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 September 30, 2023 and September 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 September 30, 2023 and September 30, 2022 were $78.53/bbl and $92.16/bbl of oil, respectively and $3.42/MMBtu and $6.13/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, because oil and natural gas prices are inherently volatile, sustained lower commodity prices would reduce the calculated first-day-of-the-month average prices which could result in non-cash impairment charges of the Company’s oil and natural gas properties under its full cost ceiling test calculation, negatively impacting earnings and financial position.

5. DEBT

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

September 30, 2023

December 31, 2022

Term loan credit facility

$

210,001

$

235,000

Other

241

190

Total debt (Face Value)

210,242

235,190

Less:

Current portion of long-term debt(1)

(45,106)

(35,067)

Other(2)

(11,660)

(17,447)

Long-Term Debt, net

$

153,476

$

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 $8.3 million and $13.0 million at September 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”.

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BATTALION OIL CORPORATION

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Term Loan Credit Facility

On November 24, 2021, the Company and its wholly owned subsidiary, Halcón Holdings, LLC (the “Borrower”) entered into an Amended and Restated Senior Secured Credit Agreement (the “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 September 30, 2023, the Company had $210.2 million of indebtedness outstanding and no letters of credit outstanding under the Amended Term Loan Agreement. The Company had $5.0 million available for the issuance of letters of credit as of September 30, 2023 and $4.7 million available as of the date of this filing. The maturity date of the Amended Term Loan Agreement is November 24, 2025. Borrowings under the Amended Term Loan Agreement bear a variable interest rate based on the Secured Overnight Financing Rate (“SOFR”) plus 0.15% plus a fixed applicable margin of 7.5%. The weighted average interest rate on the Company’s borrowings for the quarter ended September 30, 2023 was approximately 12.89%.

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 $200.0 million borrowed and April and November 2022 for the $20.0 million and $15.0 million in delayed draw borrowings, respectively.

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 natural gas wells located within a specified boundary as set by the 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 $95.0 million from the fiscal quarter ending December 31, 2023 through the fiscal quarter ending September 30, 2025 with $10.0 million due at the end of the fourth quarter of 2023 and the first quarter of 2024, $12.5 million due at the end of each of the second and third quarters of 2024, $15.0 million due at the end of the fourth quarter of 2024 and the first quarter of 2025 and $10.0 million due at the end of each of the second and third quarters of 2025. The Company will be required to make a final payment of $115.0 million at maturity on November 24, 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.

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BATTALION OIL CORPORATION

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

Asset Coverage Ratio of not less than 1.80 to 1.00 as of September 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 September 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 September 30, 2023 and for each fiscal quarter thereafter.

As of September 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 (the “CEO”) 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 condensed consolidated statements of operations. Refer to Note 6, “Fair Value Measurements,” for a discussion of the valuation approach used, 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.

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BATTALION OIL CORPORATION

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

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 September 30, 2023 and December 31, 2022 (in thousands):

September 30, 2023

    

Level 1

    

Level 2

    

Level 3

    

Total

Assets