Battalion Oil: Too Debt-Heavy (NYSE:BATL)

Battalion Oil Corporation (NYSE:BATL) is a small oil producing firm that emerged from chapter (it had been Halcón Resources) in early 2020.

Higher-valued oil manufacturing is about half of complete manufacturing.

Thinly traded and with a liability-to-asset ratio of 81%, the corporate’s first precedence is paying off high-cost debt. On September 30, 2022, Battalion had a time period mortgage credit score facility of $204 million. In November 2022, it amended the credit score settlement and is at the moment paying curiosity on the secured in a single day financing fee (SOFR) PLUS 7.5%. At current the SOFR is 4.55%, which suggests the corporate’s curiosity prices on its credit score facility are a excessive 12.05%.

Although Battalion is making attention-grabbing drilling and manufacturing progress, its straitened circumstances and first-priority high-cost debt make it unappealing to fairness traders. And–obviously-it doesn’t provide a dividend.

Results for 4Q22 and full 12 months 2022 are anticipated the week of March 6-10.

Third Quarter 2022 Results and Guidance

In the third quarter of 2022, Battalion’s working income was $99 million, 70% from crude oil. Operating bills had been $55 million to offer earnings from operations of $44 million.

However, quarterly internet earnings was an outsized $106 million, or $6.42/diluted share. This was attributable to a $67 million achieve on spinoff contracts, a achieve unlikely to be repeated in future quarters.

Cash supplied from operations was $25.5 million for 3Q22 and $53.8 million for the primary 9 months of 2022.

During the quarter, Battalion produced a median each day internet of 16,200 barrels of oil equal/day (BOE/day), 50% oil.

The common worth obtained earlier than derivatives in 3Q22 was $66.11/BOE, in comparison with $49.36/BOE in 3Q21. However, with spinoff settlements included, the realizations had been nearer: $43.02/BOE in 3Q22 in comparison with $35.63/BOE in 3Q21.

For full-year 2022, the corporate projected manufacturing to common between 14,000 and 17,000 BOE/D, about half oil. Capital expenditures for the 12 months had been projected at $130-$150 million.

Operations

Battalion has pursuits in 40,400 internet acres within the Delaware sub-basin within the west Texas counties of Pecos, Ward, Winkler, and Reeves (proven above).

The firm’s major belongings are within the Monument Draw, West Quito, and Hackberry areas of west Texas.

Because a few of its pure gasoline manufacturing has excessive ranges of hydrogen sulfide, Battalion and Caracara Services joint ventured (5% Battalion-95% Caracara) to construct an amine treating facility. This is because of come on-line in 1Q23. Initial capability will permit the seize and sequestration of over 50,000 tons per 12 months of hydrogen sulfide and carbon dioxide, enhancing reserve entry for Battalion.

US Oil and Gas Prices

The February 17, 2023, oil futures worth for March 2023 supply was $76.34/barrel for West Texas Intermediate (WTI) crude oil. The pure gasoline futures worth that day, additionally for March 2023 supply, was $2.275/MMBTU.

While oil provide is on the tight aspect, a lot will depend on China’s restoration and demand. Natural gasoline pricing is predicted to be looser till new (not simply the Freeport restart) US LNG crops come on-line in 2024.

Ironically, or perhaps not, the Biden administration’s across-the-board warfare on hydrocarbons leads to greater oil costs since firms are returning capital to shareholders moderately than amping up spending on home manufacturing.

The Energy Information Administration’s (EIA’s) Short Term Energy Outlook (STEO) initiatives 5-95 confidence intervals for oil and gasoline costs by means of the top of 2024 as proven beneath.

Hedges

In its November 2022 investor presentation, Battalion famous an aggressive hedging technique for base manufacturing. For 2023, amongst its positions are 6900 BPD of WTI oil swaps at $69.62/bbl and 13,760 MMBTU of Henry Hub gasoline swaps at $3.70/MMBTU.

Reserves

At December 31, 2021, Battalion’s complete estimated proved reserves had been 95.8 million BOEs. This might enhance on the year-end 2022 evaluation attributable to greater hydrocarbon costs. Of the overall, oil was 58.2 million barrels (61%), pure gasoline liquids had been 16.3 million barrels (17%), and pure gasoline was 125.0 billion cubic toes (22%).

The SEC PV-10 worth of reserves on December 31, 2021, was $1.08 billion, 5x the worth of year-end 2020.

Competitors

Battalion competes with nearly all of US private and non-private oil and gasoline firms since most have Permian operations. Also, like most, it’s headquartered in Houston, Texas.

Governance

At February 1, 2023, Institutional Shareholder Services ranked Battalion Oil’s general governance as a 5, with sub-scores of audit (8), board (5), shareholder rights (1), and compensation (8). In this rating a 1 signifies decrease governance threat and a ten signifies greater governance threat, so Battalion’s general governance rating is neither weak nor robust.

On January 31, 2023, brief shares had been 8.95% of float and insiders held 1.51%.

Battalion’s beta is 1.18, shocking tame given its small measurement and oil’s worth volatility.

At December 30, 2022, the highest 4 holders of Battalion’s inventory had been Luminus Management, a hedge fund (38.0%), Oaktree Capital-alternative investments (18.6%), LSP Investment Advisors (fund holding primarily vitality and utility shares), (14.6%), and Goldman Sachs (5.7%).

In late January 2023 the corporate introduced the appointment of Kristen McWatters to be government vice chairman, chief monetary officer, and treasurer, changing Kevin Andrews.

Financial and Stock Highlights

A February 17, 2023, closing worth of $9.77/share offers a market capitalization of $160 million. The 52-week vary is $7.42-$21.85, so the closing worth is just 45% of the 52-week excessive.

Trailing twelve months’ (TTM) internet earnings (by means of September 30, 2022) was $52.1 million, for an earnings per share of $3.11. Operating money circulation was $75.2 million and levered money circulation was -$16.9 million.

The TTM worth/earnings ratio suggests appreciable worth at simply 3.1.

Also on September 30, 2022, liabilities had been $386 million, of which internet long-term debt was $179 million and complete (present and noncurrent) liabilities from spinoff contracts had been $64.7 million. The excessive curiosity value of 12.05% is described above. Assets had been $477.5 million. Most of the belongings, $369.6 million, had been the NET worth (gross much less depletion) of oil and gasoline properties, appraised utilizing full value technique.

Overall, this provides a steep liability-to-asset ratio of 81%.

Total (present and noncurrent) debt of $204 million at September 30, 2022, in comparison with market capitalization of $160 million now offers a debt/market cap ratio of 1.28, that’s, debt considerably outweighs the market capitalization. Net long-term debt of $179 million nonetheless exceeds market capitalization.

Battalion Oil doesn’t pay a dividend.

Only one analyst follows the corporate: that analyst charges BATL a “buy.”

In addition to its small market cap, one other issue is skinny buying and selling. For instance, out of 6.11 million shares floated (16.34 million excellent), on February 17, 2023, the inventory traded a small 4,900 shares. Average buying and selling quantity is just 10,600 shares. Thin quantity leads to high-friction sudden inventory worth strikes.

Notes on Valuation

The firm’s enterprise worth (EV) is $338 million. With trailing twelve months’ EBITDA of $118 million, the enterprise worth/EBITDA is a really cut price stage of two.9.

Battalion’s market capitalization per flowing BOE is low at $9900 whereas its market cap per flowing barrel of oil can also be low at $19,700.

Summarizing, the corporate has an enterprise worth on February 17, 2023, of $338 million and market capitalization of $160 million. On September 30, 2022, complete belongings had been $478 million, and liabilities had been $386 million. For year-end 2021, the SEC PV-10 worth of reserves was $1.1 billion.

Positive and Negative Risks

Potential traders ought to take into account their inflation expectations as these will have an effect on Battalion’s working and curiosity prices. Investors also needs to weigh their oil and pure gasoline worth expectations as key elements in Battalion Oil’s future outcomes.

The elevated seismicity of the Permian can also be a threat for all firms there.

Recommendations for Battalion Oil Corporation

Battalion Oil is more likely to report greater reserve values for year-end 2022. Its EV/EBITDA ratio and trailing price-earnings ratios each point out bargains at very low ranges of two.9 and three.1, respectively.

However, high-cost (at the moment 12.05%) debt that now outweighs market capitalization means debt holders name the pictures.

Among fairness holders, the three largest traders personal 70% of fairness. This means they, too, may have appreciable say-especially Luminus Management-in Battalion’s operations.

Battalion’s inventory is thinly traded, doesn’t pay a dividend, and its upside is proscribed attributable to hedges and heavy leverage.

I like to recommend in opposition to investing in Battalion Oil inventory.