Battalion Oil Corp (BATL) 2020 Q3 法說會逐字稿

Welcome to the Battalion Oil Q3 2020 Earnings Call. As a reminder, today's conference is being recorded. This conference call contains forward-looking statements. For a detailed description of Battalion's earnings announcement released yesterday and posted to its website. This conference call also includes references to certain non-GAAP financial measures. Reconciliations of these non-GAAP financial measures to the most directly comparable measure under GAAP are also contained in the earnings release.

Now I'll turn it over to Battalion's Chief Executive Officer, Richard Little. Mr. Little, you may begin.

Thank you, and thanks for joining Battalion's Third Quarter 2020 Earnings Call. Before I kick it off, I'd like to take a minute to acknowledge the leadership change we previously disclosed. On August 17, Battalion announced the appointment of Kevin Andrews to replace its CFO, Ragan Altizer, who decided to retire from the oil and gas industry. Again, I want to thank Ragan for his hard work in helping our team navigate financial restructuring and the transformation change that Battalion has come to represent.

I'm excited to welcome the skills and insights Kevin has to offer and look forward to our future together.

It's hard to imagine that what we experienced in the third quarter as much as a recovery, but as prices improved modestly from the lows in Q2, I'm pleased that we've returned to a typical operation in Q3. As a result, we saw the production increase quarter-over-quarter, almost 20%, just over 17,000 Boe per day, of which oil represented 56% of that. Total revenue for the third quarter was $39.8 million, of which 84% related to crude oil. And realized gains on derivative settlements totaled $5.3 million for the third quarter.

We've remained laser-focused on cost reductions. And this quarter, we've demonstrated like previous quarters that we aim to do what we say. We said we'd lower total cost to operate this business, and we've done it again. Adjusted G&A was $2.09 per Boe in the third quarter of 2020 compared to $4.92 per Boe in the third quarter of 2019. Our lease operating workover expense was $7 per Boe in the third quarter of 2020 versus an $8.91 per Boe in the third quarter of 2019. The only after of lower prices is even lower OpEx, and our team is a depth of finding ways to keep saving money. I want to thank them for all their hard work.

The company reported a net loss to common shareholders from the third quarter of $153 million, which includes a full cost ceiling test impairment of $128 million, which was associated almost entirely with a significant drop in the SEC trailing 12-month oil price deck. Battalion also reported a net loss per basic and diluted share of $9.45 and adjusted trailing 12-month EBITDA of $93.9 million as compared to $61.6 million in the third quarter of 2019 or 50% growth over the prior period. This quarter, we continue to keep leverage below 2x, affording us a flexible position to evaluate the optimum path forward.

Our PDP remains well hedged through the first half of 2022 between $45 and $50 per barrel and the September 30 mark-to-market value of $16 million. We recently completed our fall redetermination process, and I'm encouraged by the results. While other companies have seen their facilities substantially cut, we work with BMO to achieve a borrowing base of $190 million, which is slightly higher than the $185 million that we had previously announced in connection with our spring redetermination back in May.

I want to thank BMO for their continued support and confidence in our program during such a challenging time. We continue to improve our infrastructure to create better takeaway optionality, resulting in better netbacks and less flaring across the field. I look forward to better times in our industry, but, in the meantime, we continue to improve our operations and look for opportunities for responsible, strategic M&A to create scope and scale. I'm pleased with the hard work this team has done to continue to create value in this environment.

Again, I want to thank you for your interest in Battalion, and I'll turn it over to the operator now for questions.

(Operator Instructions) And we'll take a question from Noel Parks with Coker & Palmer.

I just wanted to check. I know you did talk about some of the hedge monetizations. And we've had so much longer variability volatility in oil prices just in the last couple of weeks again. In fourth quarter, so far, have you monetized any of the hedge book since the end of third quarter?

No, no. As a matter of fact, we're seeing the opportunity as the ability to layer on more hedges. We do plan on putting more and more activity toward the end of this year. We're going to take advantage of the market where it is right now. And because of that, we want to protect those volumes as well as new hedges.

Great. And I think I might have missed that you're saying about the borrowing base. Could you just go over that again? What happened with the extermination?

Sure. Happy to. So we were originally, back in May, at a $200 million with a plan to step down to $185 by November. And we looked through our redetermination -- our fall redetermination and felt that -- and the banks agreed that the value was there, and we had to step down to $185 million and hold it at $190 million. So we'll do that a lot through the next redetermination. So that's the $5 million improvement from where we were. Does that make sense?

Great. And as far as the pricing, was there any changes when the prices went full round for the LNG?

No, not at all.

Okay, great. Let me see. Yes. I guess, just in general, we've seen a popular question these days of -- as you can imagine, we've seen a good bit more kind of activity going on of seeing some bolt-on activity as well. So any thoughts you have about that either as far as some of the valuations we've been seeing? Or also, any thoughts about what you see going on inside your basin?

Yes. No, good question. I still think, as I think others do as well, that it makes a lot of sense for the micro caps to consolidate. So we continue to stay active in that space, and we'll try to be involved in whatever happens in that space. Obviously, we are always going to try to do responsible M&A. We're not willing to overpay for anything, but we do think that there's a lot of synergies in just putting a lot of these companies together. We still stay focused on that in our playground.

I have been surprised with some of the larger independents on their margins. Glad to see it. It still makes sense in a lot of different levels to create those synergies. So no, I think what's happening in our space should be expected and should be expected to continue.

Right. And generally, whenever we hear about deals and just what people are thinking on from a valuation standpoint, a lot of times, it's pretty clear that people are only willing to pay for PDP at most. And so I was wondering about sort of your talk about that considering over the gas was more drilling, there is some variation as far as how well-developed various areas of the Delaware are. So I guess, I want your thoughts on a more PDP heavy acquisition as opposed maybe one that had one running room. And also, if anything, that could entice you over in the Midland side of the basin that you could envision.

No. Say that question again about the Midland Basin. You cut out.

Oh, sorry. I was wondering if there was anything you could envision enticing you to look in the Midland Basin as well.

Okay. Yes, thank you. So right now, I don't think you can expect to get a lot of value other than just PDP, but what you're starting to see is that people recognizing those that have the running room. We've got a lot of undeveloped acreage. We're excited about what our inventory looks like. But I think what that does is it makes us a more attractive merger partner because people can see the growth in that.

When we think about Delaware versus Midland, we're really thinking about just the Permian Basin. You know this team has extensive experience. We've talked about it on previous calls with experience in the Midland Basin as well. So we don't shy away from that either. So we do see opportunities and synergies that can be created in the Permian Basin, including Delaware and Midland.

Great. And just the last one for me, regards to the service cost environment. I had heard earlier in the year from many operators of a lot of confidence that you're going to see service cost is low for the foreseeable future. But I have heard a couple of operators, as they look to a 2021 plan, starting to take out a little bit of inflation. I just wondered when you came down on that question.

Yes. So no, I don't disagree with that. I think what we're going to see is operators trying to be as efficient with their capital at any one given calendar year. So you're going to see a lot of activity in the first part of the year that quickly dies off, which is also why we're looking at increasing our speeding up our activity before the first of the year. We -- if you noticed in our 10-Q, we guided to a slightly higher capital than what we've guided to for the last 3 quarters. And the reason for that is that we want to take advantage of the pricing at the end of the year before we get -- before the full service get busy in 2021. Does that make sense?

We had a question come in -- hang on. Noel, are you still there? Okay. Okay.

Noel is back on the line.

My questions are all -- have all been answered.

No, you asked the question, but I want to make sure we're answering it accurate. So I have Daniel, my Finance Director, wants to clear up all the answers. So go ahead, Daniel.

You were asking about hedging, and it sounded like you were asking about opportunities in the market that we're seeing right now in Q4, and that's how Rich answered, just mentioned that we do see opportunities, and there is room to add on more hedge volume. Were you asking about Q4 kind of current operations, current activity? Or were you talking about hedges we unwound or monetized in Q3.

No, I was wondering, during Q4, you had looked at the hedge book. And since we saw on -- a bit more and devolved. So I just wondered maybe you had hedged very low basically during the month of October or November so far -- I'm sorry, if you have monetized any of your hedges during October, November.

Got you. Okay. Understood. Yes, I just want to make sure we were answering your question correctly, and it sounds like we did. Sorry for bringing you back on, but just want to make sure we have that right.

Yes. Thanks, Noel. But before you; go, I just want to thank you also for your write-up and continuing to follow us. So thanks a lot.

And I'll now turn the call back over to Richard Little for any additional or closing remarks.

Okay. Thank you. And again, I want to thank the people listening for their interest in Battalion Oil. These, no doubt, continue to be very challenging in uncertain times. But we remain laser-focused on reducing costs and finding strategic ways to increase scope and scale while returning value to our shareholders. So we look forward to speaking again. Thank you.

And this does conclude today's call. We thank you for your participation. You may now disconnect.