What changed in this filing

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

2023-03-30 compared with 2022-03-07 · 339 added, 540 removed, 695 unchanged (56% of the section changed)

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The types of derivative instruments that we typically utilize include fixed-price swaps, costless collars, basis swaps and WTI NYMEX rolls.

The total volumes that we hedge through the use of our derivative instruments varies from period to period, however, our requirement under our Term Loan Agreement, is to hedge approximately 50% to 85% of our anticipated oil and natural gas production, in varying percentages by year, on a rolling basis for the next four years, when derivative contracts are available at terms and prices acceptable to us.

Our hedge policies and objectives may change significantly as our operational profile and contractual obligations change but remain consistent with the requirements in effect under our Term Loan Agreement.

The total volumes that we hedge through the use of our derivative instruments varies from period to period, however, our requirement under our Amended Term Loan Agreement, is to hedge approximately 50% to 85% of our anticipated oil and natural gas production, in varying percentages by year, on a rolling basis for the next four years, when derivative contracts are available at terms and prices acceptable to us.

We do not enter into derivative contracts for speculative trading purposes.

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It is our policy to enter into derivative contracts only with counterparties that are creditworthy institutions deemed by management as competitive market makers.

As of December 31, 2021, we did not post collateral under any of our derivative contracts as they are secured under our Term Loan Agreement.

As of December 31, 2022, we did not post collateral under any of our derivative contracts as they are secured under our Amended Term Loan Agreement.

We account for our derivative activities under the provisions of ASC 815, Derivatives and Hedging , (ASC 815).

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We are also exposed to market risk related to adverse changes in interest rates.

Our interest rate risk exposure results primarily from fluctuations in short-term rates, which are LIBOR based and may result in reductions of earnings or cash flows due to increases in the interest rates we pay on these obligations.

At December 31, 2021, the principal amount of our debt was $200.1 million, of which less than 0.1% bears interest at a weighted average fixed interest rate of 1.0% per year.

The remaining 99.9% of our total debt at December 31, 2021 bears interest at floating and variable interest rates that are tied to LIBOR.

Our interest rate risk exposure results primarily from fluctuations in short-term rates, which are SOFR (and previously, LIBOR) based and may result in reductions of earnings or cash flows due to increases in the interest rates we pay on these obligations.

At December 31, 2022, the principal amount of our debt was $235.0 million, of which substantially all bears interest at floating and variable interest rates that are tied to SOFR.

Fluctuations in market interest rates will cause our annual interest costs to fluctuate.

At December 31, 2022, the weighted average interest rate on our variable rate debt was 12.23% per year.

If the balance of our variable interest rate at December 31, 2021 were to remain constant, a 10% change in market interest rates would impact our cash flows by approximately $1.4 million per year.

If the balance of our variable interest rate debt at December 31, 2022 were to remain constant, a 10% change in market interest rates would impact our cash flows by approximately $2.9 million per year.

CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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/s/ RICHARD H.

KEVIN ANDREWS

Kevin Andrews

/s/ KRISTEN MCWATTERS

Kristen McWatters

Chief Executive Officer

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Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Battalion Oil Corporation and subsidiaries (the "Company") as of December 31, 2021 and 2020, the related consolidated statements of operations, stockholders’ equity, and cash flows, for the years ended December 31, 2021 and 2020, and the related notes (collectively referred to as the “financial statements”).

We have audited the accompanying consolidated balance sheets of Battalion Oil Corporation and subsidiaries (the "Company") as of December 31, 2022 and 2021, the related consolidated statements of operations, stockholders’ equity, and cash flows, for each of the years ended December 31, 2022 and 2021, and the related notes (collectively referred to as the “financial statements”).

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for the years ended December 31, 2022 and 2021, in conformity with accounting principles generally accepted in the United States of America.

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Our responsibility is to express an opinion on the Company's financial statements based on our audits.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

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Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved especially challenging, subjective, or complex judgements.

The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which they relate.

The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

Proved Oil and Natural Gas Property and Depletion — Oil and Natural Gas Reserve Quantities — Refer to Note 1 and 4 to the financial statements

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The development of the Company’s oil and natural gas reserve quantities and the related net present value of future cash flows from the related proved reserves requires management to make significant estimates and assumptions related to the intent and ability to complete undeveloped proved reserves within a five-year development period, as prescribed by SEC guidelines, and the future development costs associated with these reserves.

The Company engages an independent reservoir engineering firm, management’s specialist, to estimate oil and natural gas quantities using these estimates and assumptions and engineering data.

The Company engages an independent reservoir engineering firm, management’s specialist, to estimate oil and natural gas quantities using these assumptions and engineering data.

Changes in these assumptions or engineering data could have a significant impact on the amount of depletion and impairment recorded for the Company’s proved oil and natural gas properties.

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- Internal communications to management and the Board of Directors.

- Approval for expenditures.

- Forecasted information included in Company press releases as well as in analyst and industry reports for the Company and certain of its peer companies.

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- Historical development of similar wells, including location of the well.

- Future development costs to internal data.

- Internal communications to management and the Board of Directors.

- Internal data and internal communications to management and the Board of Directors.

- Approval for expenditures.

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Gathering and other

Restructuring

General and administrative

Depletion, depreciation and accretion

Full cost ceiling impairment

Total operating expenses

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Operating lease right of use assets

Funds in escrow and other

Current liabilities:

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Operating lease liabilities

Asset retirement obligations

Total current liabilities

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Net income (loss)

Equity issuance costs and other

Long-term incentive plan vestings

Tax withholding on vesting of restricted stock units

Stock-based compensation

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Long-term incentive plan vestings

Reduction in shares to cover

individuals' tax withholding

Stock-based compensation

Tax withholding on vesting of restricted stock units

Stock-based compensation and other

Balances at December 31, 2022

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Depletion, depreciation and accretion

Full cost ceiling impairment

Stock-based compensation, net

Unrealized loss (gain) on derivative contracts

Amortization of debt issuance costs

Amortization/accretion of financing related costs

Reorganization items, net

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Accrued settlements on derivative contracts

Change in fair value of embedded derivative liability

Other expense (income)

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Proceeds received from sales of oil and natural gas assets

Acquisition of oil and natural gas properties

Other operating property and equipment capital expenditures

Funds held in escrow and other

Net cash provided by (used in) investing activities

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Repayments of borrowings

Debt issuance costs

Equity issuance costs and other

Payment of deferred financing costs

Net cash provided by (used in) financing activities

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Asset retirement obligations

Accrued equity issuance costs

Accrued debt issuance costs

Accrued capital expenditures

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

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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.

The Company operates in one reportable 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.

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The Company has evaluated events and transactions through the date of issuance of this report in conjunction with the preparation of these consolidated financial statements.

Risk and Uncertainties

The Company is continuously monitoring the current and potential impacts of the novel coronavirus (COVID-19) pandemic on its business, including how it has and may continue to impact its operations, financial results, liquidity, contractors, customers, employees and vendors, and taking appropriate actions in response, including implementing various measures to ensure the continued operation of its business in a safe and secure manner.

In 2020, COVID-19 and governmental actions to contain the pandemic contributed to an economic downturn, reduced demand for oil and natural gas and, together with a price war involving the Organization of Petroleum Exporting Countries (OPEC)/Saudi Arabia and Russia, depressed oil and natural gas prices to historically low levels.

Although OPEC and Russia subsequently agreed to reduce production, downward pressure on prices continued for several months, particularly given concerns over the impacts of the economic downturn on demand.

As a consequence, beginning in March 2020, the Company realized lower revenue as a result of commodity price declines, resulting in the Company temporarily shutting in producing wells in May and June 2020, which further contributed to lower revenues that year.

Additionally in 2020, as discussed further in Note 5, “Oil and Natural Gas Properties,” the Company incurred ceiling test impairments, which were primarily driven by a decline in the average pricing required to be used in the valuation of the Company’s reserves for ceiling test purposes.

During 2021, widespread availability of COVID-19 vaccines in the United States and elsewhere combined with accommodative governmental monetary and fiscal policies and other factors, led to a rebound in demand for oil and natural gas and increases in oil and natural gas prices.

Further, at present, OPEC and Russia have been coordinating production increases to maintain supply and demand balance, stabilize prices and avoid market disruptions.

However, there remains the potential for such cooperation to fail and for demand for oil and natural gas to be adversely impacted by the economic effects of the ongoing COVID-19 pandemic, including as a consequence of the circulation of more infectious “variants” of the disease, vaccine hesitancy, waning vaccine effectiveness or 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 the same sorts of factors that negatively impacted prices during 2020.

Furthermore, the health of the Company’s employees, contractors and vendors, and its ability to meet staffing needs in its operations and critical functions remain concerns and cannot be predicted, nor can the impact on the Company’s customers, vendors and contractors.

Any material effect on these parties could adversely impact the Company.

These and other factors could affect the Company’s operations, earnings and cash flows and could cause its results to not be comparable to those of the same period in previous years.

The results presented in this Form 10-K are not necessarily indicative of future operating results.

For further information regarding the actual and potential impacts of COVID-19 on the Company, see “Risk Factors” in Item 1A of this Annual Report on Form 10-K.

BATTALION OIL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Use of Estimates

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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 consolidated financial statements.

Actual results may differ from the estimates and assumptions used in the preparation of the Company’s consolidated financial statement and the results presented in this Form 10-K are not necessarily indicative of future operating results.

Risk and Uncertainties

Supply chain issues.

In periods of increasing commodity prices, we continue to be at risk to 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.

Commodity Prices .

Despite lower commodity prices in 2020, widespread availability of COVID-19 vaccines during 2021 combined with accommodative governmental monetary and fiscal policies and other factors, led to a rebound in demand for oil and natural gas and increases in oil and natural gas prices.

Further in 2022, the effects of Russian sanctions amidst the conflict with Ukraine have pushed oil and gas prices higher.

However, there remains the potential for demand for oil and natural gas to be adversely impacted by the economic effects of rising interest rates, tightening monetary policies, or 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.

BATTALION OIL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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 Item 1A of this Annual Report on Form 10-K.

Cash, Cash Equivalents and Restricted Cash

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Accounts receivable are recorded at the amount due, less an allowance for doubtful accounts, when applicable.

The Company establishes provisions for losses on accounts receivable if it determines that collection of all or part of the outstanding balance is doubtful.

The Company regularly reviews collectability and establishes or adjusts the allowance for doubtful accounts as necessary using the specific identification method.

As of December 31, 2021 and 2020 allowances for doubtful accounts were approximately $ 0.2 million for both periods.

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.

Oil and Natural Gas Properties

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Depletion of evaluated oil and natural gas properties is computed on the units of production method based on estimated proved reserves.

The net capitalized costs of evaluated oil and natural gas properties are subject to a full cost ceiling

BATTALION OIL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

limitation in which the costs are not allowed to exceed their related estimated future net revenues discounted at 10%, net of tax considerations.

The net capitalized costs of evaluated oil and natural gas properties are subject to a full cost ceiling limitation in which the costs are not allowed to exceed their related estimated future net revenues discounted at 10%, net of tax considerations.

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.

Costs associated with unevaluated properties are excluded from the full cost pool until the Company has made a determination as to the existence of proved reserves.

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Investments in unevaluated oil and natural gas properties and exploration and development projects for which depletion expense is not currently recognized, and for which exploration or development activities are in progress, qualify for interest capitalization.

The Company determines capitalized interest, when applicable, by multiplying the Company’s weighted-average borrowing cost on debt by the average amount of qualifying costs incurred that were excluded from the full cost pool;

The Company determines capitalized interest, when applicable, by multiplying the Company’s weighted-average borrowing cost on debt by the average amount of qualifying costs incurred that were

BATTALION OIL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

excluded from the full cost pool;

however, the amount of capitalized interest cannot exceed the amount of gross interest expense incurred in any given period.

The Company’s accounting policy on the capitalization of interest establishes thresholds for the determination of a development project for the purpose of interest capitalization.

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.

Other Operating Property and Equipment

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Historically, the Company has not experienced any significant losses from uncollectible accounts from its oil and natural gas purchasers.

In 2021, three individual purchasers of the Company’s production, Western Refining, Inc., Sunoco Inc.

In 2022, three individual purchasers of the Company’s production, Western Refining Company L.P., Sunoco Inc.

and Targa Resources Inc., each accounted for more than 10 % of total sales, collectively representing 82 % of its total sales for the year.

In 2021, three individual purchasers of the Company’s production, Western Refining Company L.P., Sunoco Inc.

and Salt Creek Midstream LLC, each accounted for more than 10 % of total sales, collectively representing 73 % of its total sales for the year.

In 2020, two individual purchasers of the Company’s production, Western Refining Inc.

and Sunoco Inc., each accounted for more than 10 % of total sales, collectively representing 57 % of its total sales for the year.

BATTALION OIL CORPORATION

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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 December 31, 2021, the Company’s derivative counterparties include two major financial institutions, both of which are secured lenders under the Term Loan Agreement.

Employee Retention Credit

The Coronavirus Aid, Relief and Economic Security Act (the CARES Act) was enacted on March 27, 2020 and included, among other things, provisions relating to refundable payroll tax credits (the Employee Retention Credit or ERC).

As provided for in the CARES Act and subsequent legislation which modified and extended the provisions included therein, the ERC allows for a refundable tax credit against certain employment taxes equal to 50% of the first $10,000 in qualified wages paid to each employee after March 12, 2020 and through December 31, 2020 and 70% of the first $10,000 in qualified wages paid to each employee, per calendar quarter, after December 31, 2020 through September 30, 2021.

During the year ended December 31, 2021, the Company determined that the qualifications for the Employee Retention Credit were met and filed the corresponding applications for the applicable 2020 and 2021 periods.

The Company recognized an approximate $ 0.7 million Employee Retention Credit during the year ended December 31, 2021, with approximately $ 0.5 million recorded to “General and administrative” and approximately $ 0.2 million recorded to “Lease operating” in the consolidated statements of operations.

At December 31, 2022, the Company’s derivative counterparties include two major financial institutions, both of which are secured lenders under the Amended Term Loan Agreement.

Risk Management Activities

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The Company classifies all deferred tax assets and liabilities, along with any related valuation allowance, as noncurrent on the consolidated balance sheets.

BATTALION OIL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

The Company follows ASC 740, Income Taxes (ASC 740).

ASC 740 creates a single model to address accounting for the uncertainty in income tax positions and prescribes a minimum recognition threshold a tax position must meet before recognition in the consolidated financial statements.

The evaluation of a tax position in accordance with ASC 740 is a two-step process.

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The tax position is measured at the largest amount of benefit/expense that is more likely than not of being realized upon ultimate settlement.

The Company has no liability for unrecognized tax benefits as of December 31, 2021 and 2020.

Accordingly, there is no amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate and there is no amount of interest or penalties currently recognized in the consolidated statements of operations or consolidated balance sheets as of December 31, 2021 and 2020.

In addition, the Company does not believe that there are any positions for which it is reasonably possible that the total amount of unrecognized tax benefits will significantly increase or decrease within the next twelve months.

The Company includes interest and penalties relating to uncertain tax positions within “Interest expense and other” on the Company’s consolidated statements of operations.

Refer to Note 12, “Income Taxes,” for more details.

Generally, the Company’s income tax years 2018 through 2021 remain open for federal purposes and are subject to examination by federal tax authorities.

The Company’s income tax returns are also subject to audit by the tax authorities in Louisiana, Mississippi, North Dakota, Oklahoma, Texas, Pennsylvania, Ohio and certain other state taxing jurisdictions where the Company has, or previously had, operations.

In certain jurisdictions the Company operates through more than one legal entity, each of which may have different open years subject to examination.

The open years for state purposes can vary from the normal three year statue expiration period for federal purposes.

Tax audits may be ongoing at any point in time.

Tax liabilities are recorded based on estimates of additional taxes which may be due upon the conclusion of these audits.

Estimates of these tax liabilities are made based upon prior experience and are updated for changes in facts and circumstances.

However, due to the uncertain and complex application of tax regulations, it is possible that the ultimate resolution of audits may result in liabilities which could be materially different from these estimates.

Asset Retirement Obligations

ASC 410, Asset Retirement and Environmental Obligations (ASC 410) requires that the fair value of an asset retirement cost, and corresponding liability, should be recorded as part of the cost of the related long-lived asset and subsequently allocated to expense using a systematic and rational method.

The Company records asset retirement obligations to reflect the Company’s legal obligations related to future plugging and abandonment of its oil and natural gas wells, treating equipment and gathering support facilities.

The Company estimates the expected cash flows associated with the obligation and discounts the amounts using a credit-adjusted, risk-free interest rate.

At least annually, the Company reassesses the obligation to determine whether a change in the estimated obligation is necessary.

At least annually, the Company reassesses the obligation to determine whether a change

BATTALION OIL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

in the estimated obligation is necessary.

The Company evaluates whether there are indicators that suggest the estimated cash flows underlying the obligation have materially changed.

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Additional retirement obligations increase the liability associated with new oil and natural gas wells, treating equipment and gathering support facilities as these obligations are incurred.

BATTALION OIL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

The Company sponsors a 401(k) tax deferred savings plan, whereby the Company matches a portion of employees’ contributions in cash.

Participation in the plan is voluntary and all employees of the Company who are 18 years of age are eligible to participate.

The Company provided matching contributions of $ 0.8 million for each of the years ended December 31, 2021 and 2020.

The Company matches employee contributions dollar-for-dollar on the first 10 % of an employee’s pre-tax earnings, subject to individual IRS limitations.

Restructuring

During 2020, the Company incurred approximately $ 2.6 million in restructuring charges related to the consolidation into one corporate office and reductions in its workforce due to efforts to improve efficiencies and reduce future costs.

In May 2020, in furtherance of the consolidation into one corporate office, the Company exercised a one-time early termination option under the lease agreement for the Company’s office space in Denver, Colorado.

These costs were recorded in “Restructuring” on the consolidated statements of operations.

Refer to Note 2, “Leases , ” for further details.

Change in Estimate

In late March 2020, due to changes in market conditions and decreased commodity prices, the Company determined that previously accrued discretionary cash incentives related to 2019 would not be paid, causing a $ 1.6 million reduction to “General and administrative” on the condensed consolidated statement of operations for the year ended December 31, 2020.

The Company records the asset retirement obligation (ARO) liability on the consolidated balance sheets and capitalizes the cost in “Oil and natural gas properties” during the period in which the obligation is incurred.

The Company records the accretion of its ARO liabilities in “Depletion, depreciation and accretion” expense in the consolidated statements of operations.

The additional capitalized costs are depreciated on a unit-of-production basis.

Recently Issued Accounting Pronouncements

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This amendment provides optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging arrangements, and other transactions that reference LIBOR.

ASU 2020-04 will be in effect through December 31, 2022.

The Company is currently evaluating ASU 2020-04 and the impact it may have on its operating results, financial position and disclosures.

In December 2019, the FASB issued ASU No.

2019-12, Income Taxes (Topic 740) – Simplifying the Accounting for Income Taxes (ASU 2019-12) as part of their simplification initiative.

ASU 2019-12 simplifies the accounting for income taxes by removing certain exceptions and by clarifying and amending existing guidance.

ASU 2019-12 is effective for interim and annual periods beginning after December 15, 2020 with early adoption permitted.

The Company adopted ASU 2019-12 effective January 1, 2021.

The adoption of ASU 2019-12 did not have a material impact on the Company’s operating results, financial position or disclosures .

The Company determines if an arrangement is a lease at contract inception.

A lease exists when a contract conveys to the customer the right to control the use of an identified asset for a period of time in exchange for consideration.

The definition of a lease embodies two conditions:

(1) there is an identified asset in the contract that is land or a depreciable asset, and (2) the customer has the right to control the use of the identified asset.

The Company leases equipment and office space pursuant to net operating leases.

Operating leases where the Company is the lessee are included in “Operating lease right of use assets” and “Operating lease liabilities” on the consolidated balance sheets.

The lease liabilities are initially and subsequently measured at the present value of the

BATTALION OIL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

unpaid lease payments at the lease commencement date.

The Company has no leases that meet the criteria for classification as a finance lease.

Key estimates and judgments include how the Company determined (1) the discount rate used to discount the unpaid lease payments to present value, (2) lease term and (3) lease payments.

ASC 842, Leases (ASC 842) requires a lessee to discount its unpaid lease payments using the interest rate implicit in the lease or, if that rate cannot be readily determined, its incremental borrowing rate.

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 incremental borrowing rate for a lease is the rate of interest the Company would have to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms.

Additionally, the Company applies a portfolio approach to determine the discount rate (the incremental borrowing rate for leases with similar characteristics).

The Company uses the implicit rate when readily determinable.

The lease term includes the noncancellable period of the lease plus any additional periods covered by either a lessee option to extend (or not to terminate) the lease that the lessee is reasonably certain to exercise, or an option to extend (or not to terminate) the lease controlled by the lessor.

Lease payments included in the measurement of the lease asset or liability comprise the following, when applicable:

fixed payments (including in-substance fixed payments), variable payments that depend on an index or rate, and the exercise price of a lessee option to purchase the underlying asset if the lessee is reasonably certain to exercise.

The right of use asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for lease payments made at or before the lease commencement date, plus any initial direct costs incurred less any lease incentives received.

For the Company’s operating leases, the right of use asset is subsequently measured throughout the lease term at the carrying amount of the lease liability, plus initial direct costs, plus (minus) any prepaid (accrued) lease payments, less the unamortized balance of lease incentives received.

Lease expense for lease payments is recognized on a straight-line basis over the lease term.

Variable lease payments 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,” “Restructuring” 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 Company has lease agreements which include lease and nonlease components and the Company has elected to combine lease and nonlease components, when fixed, for all lease contracts.

On December 21, 2022, the FASB issued ASU No.

2022-06, “ Reference Rate Reform (Topic 848):

Deferral of the Sunset Date of Topic 848.

” This ASU defers the sunset date from December 31, 2022, to December 31, 2024.

As of the date of this filing, neither ASU 2020-04 nor ASU No.

2022-06 had a material impact on the Company’s operating results, financial position or disclosures.

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.

The Company determines whether the lease or nonlease component is the predominant component on a case-by-case basis.

The Company reviews its right of use assets for impairment in accordance with ASC 360.

ASC 360 requires the Company to evaluate right of use assets for impairment as events occur or circumstances change that would more likely than not reduce the fair value below the carrying amount.

If the carrying amount is not recoverable from its undiscounted cash flows, then the Company would recognize an impairment loss for the difference between the carrying amount and the current fair value.

The Company monitors for events or changes in circumstances that would require a reassessment of a lease.

When a reassessment results in the remeasurement of a lease liability, an adjustment is made to the carrying amount of the corresponding right of use asset unless doing so would reduce the carrying amount of the right of use asset to an amount less than zero.

In that case, the amount of the adjustment that would result in a negative right of use asset balance is recorded in the consolidated statements of operations.

The Company elected not to recognize right of use assets and lease liabilities for all short-term leases that have a lease term of 12 months or less.

The Company recognizes the lease payments associated with its short-term leases when

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.

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

BATTALION OIL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Variable lease payments associated with these leases are recognized and presented in the same manner as for all other leases.

The “Operating lease right of use assets” outstanding on the consolidated balance sheets as of December 31, 2021 and 2020 have initial lease terms of 2.3 and 5.0 years, respectively.

Payments due under the lease contracts include fixed payments plus, in some instances, variable payments.

The “Operating lease right of use assets” outstanding on the consolidated balance sheets as of December 31, 2022 and 2021 both have initial lease terms of 2.3 years.

The table below summarizes the Company’s leases for the periods indicated (in thousands, except years and discount rate):

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Weighted-average discount rate - operating leases

As described in Note 1, “Summary of Significant Events and Accounting Policies , ” the Company exercised a one-time early termination option under the lease agreement for the Company’s office space in Denver, Colorado in May 2020 and paid a $ 1.3 million termination fee.

The early termination option was deemed probable in May 2020 and was recognized in the Company’s operating lease right of use asset and operating lease liability during the three months ended June 30, 2020.

This reduced the Company’s operating lease liability to $ 0.5 million, representing the remaining lease cost to be incurred from June 2020 through March 2021.

The Company’s abandonment of its office lease in Denver resulted in a $ 0.5 million impairment to its operating lease right of use asset presented as “Restructuring” in the consolidated statement of operations for the year ended December 31, 2020.

Future minimum lease payments associated with the Company’s non-cancellable operating leases for office space and equipment as of December 31, 2022, are presented in the table below (in thousands):

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Noncurrent operating lease liabilities

BATTALION OIL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Practical Expedients

The Company elected the following practical expedients for transition to, and ongoing accounting under, ASC 842:

(i) the Company does not separate lease and non-lease components of a contract, (ii) the Company does not reassess whether expired or existing contracts contain leases, nor does it reassess the lease classification for expired or existing leases and does not reassess whether previously capitalized initial direct costs would qualify for capitalization under ASC 842, (iii) the Company applies a single discount rate to a portfolio of leases with reasonably similar characteristics and (iv) the Company does not assess whether existing or expired land easements that were previously accounted for as leases are or contain a lease under ASC 842.

OPERATING REVENUES

Revenue Recognition

Revenue is measured based on consideration specified in a contract with a customer and excludes amounts collected on behalf of third parties.

Substantially all of the Company’s oil, natural gas, and NGL revenues are derived from 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.

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.

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 the commodity to the customer.

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 $ 35.1 million and $ 24.5 million as of December 31, 2021 and 2020, respectively, as “Accounts receivable” and “Other assets” on the consolidated balance sheets.

Substantially all of the Company’s revenues are derived from single basin operations, the Delaware Basin in Pecos, Reeves, Ward and Winkler Counties, Texas.

The following table disaggregates the Company’s revenues by major product, in order to depict how the nature, timing, and uncertainty of revenue and cash flows are affected by economic factors in the Company’s single basin operations, for the periods indicated (in thousands):

Years Ended December 31,

Operating revenues:

Oil, natural gas and natural gas liquids sales:

Natural gas liquids

Total oil, natural gas and natural gas liquids sales

Total operating revenues

The Company generally markets its crude oil production directly to the customer using two methods.

Under the first method, crude oil is sold at the wellhead at an index price, averaged over the daily settlement prices for a production month, and adjusted for pricing differentials and other deductions.

Revenue is recognized at the wellhead, where control of the crude oil transfers to the customer, at the net price received.

Under the second method, crude oil is delivered to the customer at a contractual delivery point at which the customer takes custody, title and risk of loss of the product.

The Company receives a specified index price from the customer, averaged over the daily settlement prices for a production month, and net of applicable market-related adjustments.

Revenue is recognized when control of the crude oil transfers at the delivery point at the net price received.

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 $ 34.0 million and $ 35.1 million as of December 31, 2022 and 2021, respectively, as “Accounts receivable, net” on the consolidated balance sheets.

The Company utilizes the practical expedient exempting the disclosure of the transaction price of

BATTALION OIL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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).

We record revenue in the month our production is delivered to the purchaser.

However, to the extent settlement statements and/or payments are not available, we are required to estimate the amount of production delivered to the purchaser and the price that will be received for the sale of the product.

We record any differences, which historically have not been significant, between the actual amounts ultimately received and the original estimates in the period they become finalized.

The Company recognizes revenue when control of the crude oil transfers at the delivery point at the net price received.

Generally, this occurs when the Company (i) sells its crude oil production at the wellhead where control of the crude oil transfers to the customer at an index price, averaged over the daily settlement prices for a production month, and adjusted for pricing differentials and other deduction or (ii) when delivered to the customer at a contractual delivery point at which the customer takes custody, title and risk of loss of the product.

The Company receives a specified index price from the customer, averaged over the daily settlement prices for a production month, and net of applicable market-related adjustments.

Settlement statements for the Company’s crude oil production are typically received within the month following the date of production and therefore the amount of production delivered to the customer and the price that will be received for that production are known at the time the revenue is recorded.

Payment under the Company’s crude oil contracts is typically due on or before the 20 th day of the month following the delivery month.

Natural Gas and Natural Gas Liquids Sales

Natural Gas and NGL Sales

The Company evaluates its natural gas gathering and processing arrangements in place with midstream companies to determine when control of the natural gas is transferred.

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In these instances, revenues are presented on a gross basis and any fees incurred to gather, process or transport the commodities are presented separately as “Gathering and other” on the consolidated statements of operations.

Settlement statements for the Company’s natural gas and natural gas liquids production are typically received 30 days after the date of production and therefore the Company estimates the amount of production delivered to the customer and the price that will be received for that production.

The majority of the Company’s natural gas and natural gas liquids prices are based on daily average pricing for the month.

Historically, differences between the Company’s estimates and the actual revenue received have not been material.

Payment under the Company’s natural gas gathering and processing contracts is typically due on or before the fifth day of the second month following the delivery month.

Practical Expedients

The Company does not disclose 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).

Northern West Quito Assets

On December 18, 2020, the Company sold certain oil and gas properties and related assets located in Ward County, Texas (the North West Quito Assets) to Point Energy Partners Operating, LLC for a total adjusted sales price of $ 25.9 million in cash.

The effective date of the transaction was October 1, 2020.

Proceeds from the sale were recorded as a reduction to the carrying value of the Company’s full cost pool with no gain or loss recorded.

The Company used the net proceeds from the sale to repay amounts then outstanding under the Company’s Senior Credit Agreement and for general corporate purposes.

BATTALION OIL CORPORATION

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Not subject to depletion:

Exploration and extension wells in progress

Other capital costs:

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Incurred in 2020

Incurred in 2018 and prior

Incurred in 2019 (1)

Total not subject to depletion

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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.

Depletion for oil and natural gas properties is calculated using the unit of production method, which depletes the capitalized costs of evaluated properties plus future development costs based on the ratio of production for the current period to total reserve volumes of evaluated properties as of the beginning of the period.

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Depletion expense is recorded in “Depletion, depreciation and accretion” in the Company’s consolidated statements of operations.

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.

For the three months ended September 30, 2020, the Company transferred approximately $ 23.6 million of unevaluated property costs to the full cost pool.

These transfers of unevaluated property to the full cost pool in 2020 were the result of the Company’s intent to focus available capital on Monument Draw.

BATTALION OIL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

The ceiling test value of the Company’s reserves was calculated based on the following prices:

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(1) Unweighted average of the first day of the 12-months ended spot price, adjusted by lease or field for quality, transportation fees, and regional price differentials.

The Company's net book value of oil and natural gas properties in 2021 did not exceed the ceiling amount.

The Company’s net book value of oil and natural gas properties at June 30, September 30, and December 31, 2020 exceeded the ceiling amount and the Company recorded full cost ceiling test impairments before income taxes of $ 60.1 million, $ 128.3 million, and $ 26.7 million, respectively, for those periods, or $ 215.1 million for the year ended December 31, 2020.

The ceiling test impairments during 2020 were primarily driven by decreases in the first-day-of-the-month 12-month average prices for crude oil used in the ceiling test calculation.

Additionally, during the three months ended September 30, 2020, the transfer of unevaluated property costs to the full cost pool, as discussed above, also contributed to the impairment recorded for the period.

During the three months ended December 31, 2020, proved undeveloped reserves additions as a result of changes to the Company’s five year development plan partially offset the impact on the impairment of the average price decline for the period.

Full cost ceiling test impairments are recorded in “Full cost ceiling impairment” in the Company’s consolidated statements of operations and in “Accumulated depletion” in the Company’s consolidated balance sheets.

BATTALION OIL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

The Company's net book value of oil and natural gas properties for both 2022 and 2021 did not exceed the ceiling amount.

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.

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Term loan credit facility

Senior revolving credit facility

Paycheck Protection Program loan

Total debt, net

Current portion of Paycheck Protection Program loan

Total long-term debt, net

(1) Amount is net of $ 14.2 million unamortized debt issuance costs at December 31, 2021.

Amount also excludes $ 4.2 million allocated to the change of control call option embedded derivative.

Refer to “Term Loan Credit Facility” below for further details .

Total debt (Face Value)

Current Portion of Long-Term Debt (1)

Long-Term Debt, net

(1) As of December 31, 2022, amount primarily reflects amortization payments of $ 35.0 million under the Amended Term Loan Agreement due within one year.

As of December 31, 2021, amount represents the balance owed under the Paycheck Protection Program Loan.

(2) Amounts primarily reflect unamortized debt issuance costs of approximately $ 13.0 million and $ 14.2 million at December 31, 2022 and December 31, 2021, respectively, but also include amounts associated with an embedded derivative separately presented and further described in Note 6.

Fair Value Measurements.

For the years ended December 31, 2022 and 2021, we recorded approximately $ 5.4 million and $ 0.4 million, respectively, in interest expense reflecting the amortization/accretion of these amounts.

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.

The Term Loan Agreement amended and restated in its entirety the senior secured revolving credit agreement, as amended, (the Senior Credit Agreement) entered into in 2019.

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, the following:

● Current Ratio .

Our Current Ratio financial covenant decreased to 0.90 to 1.00 as of September 30, 2022, to 0.70 to 1.00 for the quarter ended December 31, 2022, and to 0.75 to 1.00 for the quarter ended March 31, 2023, returning to 1.00 to 1.00 for the quarter ended June 30, 2023 and for each fiscal quarter thereafter as further described below.

● Interest Rate.

We converted our benchmark interest rate from LIBOR to a Secured Overnight Financing Rate (SOFR) plus 0.15 % and increased the applicable margin on borrowings by 0.50 % , such that borrowings under

BATTALION OIL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Limited, as administrative agent, and certain other financial institutions party thereto, as lenders.

The Term Loan Agreement amends and restates in its entirety the Senior Credit Agreement as discussed below.

Pursuant to the Term Loan Agreement, the lenders have agreed to loan the Company (i) $ 200.0 million, which was funded on November 24, 2021 and was partially used to refinance all amounts owed under the Senior Credit Agreement;

(ii) up to $ 20.0 million, available to be drawn up to 18 months from November 24, 2021, subject to the satisfaction of certain conditions;

and (iii) up to $ 15.0 million, which amount will be available to be drawn from the date certain wells included in the approved plan of development (APOD) are deemed producing APOD wells until up to 18 months after November 24, 2021, subject to the satisfaction of certain conditions.

An additional $ 5.0 million is available for the issuance of letters of credit.

The maturity date of the Term Loan Agreement is November 24, 2025.

Until such maturity date, borrowings under the Term Loan Agreement shall bear interest at a rate per annum equal to LIBOR (or another applicable reference rate, as determined pursuant to the provisions of the Term Loan Agreement) plus an applicable margin of 7.00 %.

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

the Amended Term Loan Agreement will now bear interest at a rate per annum equal to the SOFR benchmark rate plus 7.65 % .

● Prepayment Premium.

We reset the prepayment periods (for outstanding borrowings) beginning on the amendment date with the following prepayment premiums, subject to the conditions described in the table and further discussion below:

Period (after amendment date)

Months 0 - 12

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Months 13 - 24

Months 25 - 36

Months 37 - 48

The Company may be required to make mandatory prepayments of the loans under the Term Loan Agreement in connection with the incurrence of non-permitted debt, certain asset sales, and with excess cash on hand in excess of certain maximum levels.

For each fiscal quarter after January 1, 2023, the Company shall make mandatory prepayments when the Consolidated Cash Balance, as defined in the Term Loan Agreement, exceeds $ 20.0 million.

Until December 31, 2024, the forecasted APOD capital expenditures for the succeeding fiscal quarter are excluded for purposes of determining the Consolidated Cash Balance.

In the following scenarios, our prepayment premiums would differ from those noted in the table above:

(i) if within 6 months after the November 14, 2022 amendment date the Company raises a minimum of $ 20 million of new capital in the form of equity, equity-linked, preferred equity, or unsecured debt, in all cases bearing no cash dividend or cash interest, to bolster liquidity or repay debt, our prepayment premiums will reset to those in the original Term Loan Agreement, or (ii) if a change of control results in prepayment within the second anniversary of the amendment date, a 2 % payment premium will apply.

As of December 31, 2022, we had $ 235.0 million of indebtedness outstanding and approximately $ 1.4 million of letters of credit outstanding under the Amended Term Loan Agreement.

An additional $ 3.6 million is available for the issuance of letters of credit.

We have a variable interest rate on our borrowings based on SOFR subsequent to the November 2022 amendment (LIBOR prior to the amendment) plus an applicable margin of 7.5 % .

The weighted average interest rate on our borrowings for the year ended December 31, 2022 was approximately 9.1 %.

The maturity date of the Amended Term Loan Agreement is November 24, 2025 .

The Company may be required to make mandatory prepayments of the loans under the Amended Term Loan Agreement in connection with the incurrence of non-permitted debt, certain asset sales, or with excess cash on hand in excess of certain maximum levels beginning in 2023.

For each fiscal quarter after January 1, 2023, the Company shall 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 approved plan of development (APOD) capital expenditures for the succeeding fiscal quarter are excluded for purposes of determining the Consolidated Cash Balance.

The Company is required to make scheduled amortization payments in the aggregate amount of $ 120.0 million from the fiscal quarter ending March 31, 2023 through the fiscal quarter ending September 30, 2025.

Amounts outstanding under the Term Loan Agreement are guaranteed by certain of the Borrower’s direct and indirect subsidiaries and secured by a security interest in substantially all of the assets of the Borrower and such direct and indirect subsidiaries, and of the equity interests of the Borrower held by the Company.

As part of the Term Loan Agreement there are certain restrictions on the transfer of assets, including cash, to Battalion from the guarantor subsidiaries.

The Term Loan Agreement also contains certain financial covenants, including the maintenance of (i) an Asset Coverage Ratio (as defined in the Term Loan Agreement) of not less than (A) 1.50 to 1.00 as of December 31, 2021 and March 31, 2022, (B) 1.60 to 1.00 as of June 30, 2022, (C) 1.70 to 1.00 as of September 30, 2022, and (D) 1.80 to 1.00 as of December 31, 2022 and each fiscal quarter thereafter, (ii) a Total Net Leverage Ratio (as defined in the Term Loan Agreement) of not greater than (A) 3.25 to 1.00 as of December 31, 2021 through and including June 30, 2022, (B) 3.00 to 1.00 as of September 30, 2022 and December 31, 2022, (C) 2.75 to 1.00 as of March 31, 2023, and (D) 2.50 to 1.00 as of each fiscal quarter thereafter, and (iii) a Current Ratio (as defined in the Term Loan Agreement) of not less than 1.00 to 1.00 , each determined as of the last day of any fiscal quarter period.

As of December 31, 2021, the Company was in compliance with the financial covenants under the Term Loan Agreement.

The Term Loan Agreement also contains an APOD for the Company’s Monument Draw acreage through the drilling and completion of certain wells.

The 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.

Amounts outstanding under the Amended Term Loan Agreement are guaranteed by certain of the Borrower’s direct and indirect subsidiaries and secured by a security interest in substantially all of the assets of the Borrower and such direct and indirect subsidiaries, and of 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;

● an Asset Coverage Ratio of not less than 1.80 to 1.00 as of December 31, 2022 and each fiscal quarter thereafter;

● Total Net Leverage Ratio of not greater than 3.00 to 1.00 as of December 31, 2022, 2.75 to 1.00 as of March 31, 2023 and 2.50 to 1.00 as of each fiscal quarter thereafter;

● a Current Ratio of not less than 1.00 to 1.00, each determined as of the last day of any fiscal quarter period, other than as amended in November 2022 to 0.70 to 1.00 as of December 31, 2022, and to 0.75 to 1.00 as of March 31, 2023.

BATTALION OIL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

The Term Loan Agreement also contains certain events of default, including non-payment;

As of December 31, 2022, 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;

3 unchanged sentences

and voluntary and involuntary bankruptcy.

At December 31, 2021, the Company had $ 200.0 million indebtedness outstanding, approximately $ 0.3 million letters of credit outstanding and $ 35.0 million in delayed draw term loans available to be drawn under the Term Loan Agreement, subject to the satisfaction of certain conditions defined in the agreement.

In conjunction with the Term Loan Agreement, 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 Chief 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 Company determined that the Change of Control Call Option was an embedded derivative in accordance with FASB ASC 815, Derivatives and Hedging , concluded the embedded derivative was not clearly and closely related to the host debt instrument, and recorded the initial $ 4.2 million fair value separately on the consolidated balance sheet within “Other noncurrent liabilities.” The Change of Control Call Option will be subsequently remeasured at fair value each reporting period with fair value changes recorded in “Interest expense and other” on the consolidated statements of operations.

The Company determined that the Change of Control Call Option was an embedded derivative, concluded the embedded derivative was not clearly and closely related to the host debt instrument, and recorded the fair value separately on the consolidated balance sheet within “Other noncurrent liabilities.” The Change of Control Call Option will be subsequently remeasured at fair value each reporting period with fair value changes recorded in “Interest expense and other” on the 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.

Senior Revolving Credit Facility

On October 8, 2019, the Company entered into a senior secured revolving credit agreement, as amended, (the Senior Credit Agreement) with Bank of Montreal, as administrative agent, and certain other financial institutions party thereto, as lenders, which refinanced the Company’s debtor-in-possession junior secured term credit facility and its Predecessor senior secured revolving credit facility.

The Senior Credit Agreement provided for a $ 750.0 million senior secured reserve-based revolving credit facility.

A portion of the Senior Credit Agreement, in the amount of $ 25.0 million, was available for the issuance of letters of credit.

The maturity date of the Senior Credit Agreement was October 8, 2024.

The borrowing base was redetermined semi-annually, with the lenders and the Company each having the right to one interim unscheduled redetermination between any two consecutive semi-annual redeterminations.

The borrowing base took into account the estimated value of the Company’s oil and natural gas properties, proved reserves, total indebtedness, and other relevant factors consistent with customary oil and natural gas lending criteria.

Amounts outstanding under the Senior Credit Agreement bore interest at specified margins over the base rate of 1.50 % to 2.50 % for ABR-based loans or at specified margins over LIBOR of 2.50 % to 3.50 % for Eurodollar-based loans.

These margins fluctuated based on the Company’s utilization of the facility.

The Senior Credit Agreement was amended and restated by the Term Loan Agreement.

Borrowings outstanding under the Senior Credit Agreement were repaid with proceeds from the Term Loan Agreement and the resulting charge of $ 0.1 million was recorded in “Gain (loss) on extinguishment of debt” in the consolidated statement of operations for the year ended December 31, 2021.

On May 10, 2021, the Company entered into the Fourth Amendment to Senior Secured Revolving Credit Agreement (the Fourth Amendment) which reduced the borrowing base to $ 185.0 million effective June 1, 2021 and further reduced the borrowing base to $ 175.0 million effective September 1, 2021.

The Fourth Amendment also, among other things, (i) increased interest margins to 2.00 % to 3.00 % for ABR-based loans and 3.00 % to 4.00 % for Eurodollar-based loans, (ii) amended the covenant relating to the minimum mortgaged total value of proved borrowing base properties to increase the value from 90 % to 95 %, (iii) provided for direct reductions in the borrowing base in the event of asset dispositions in excess of $ 1.0 million per fiscal year or swap terminations and (iv) revised certain covenants and covenant-related baskets including, but not limited to, adding covenants prohibiting the designation of unrestricted subsidiaries and requiring prior consent from the lenders regarding asset dispositions or swap terminations in excess of the greater of $ 7.5 million or 3.5 % of the then effective borrowing base.

BATTALION OIL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

On September 24, 2021, the Company entered into the Fifth Amendment to Senior Secured Revolving Credit Agreement (the Fifth Amendment) which, among other things, modified the limits on swap agreements so as not to exceed, (i) from the period of the Fifth Amendment effective date through December 31, 2021, the percentage of the reasonably anticipated hydrocarbon production from proved developed producing reserves during such period hedged pursuant to secured swap agreements in place as of the Fifth Amendment effective date;

(ii) for the fiscal year ending December 31, 2022, the greater of (a) the proved developed producing reserves during such fiscal year hedged pursuant to secured swap agreements in place as of the Fifth Amendment effective date and (b) 85 % of the proved developed producing reserves during such fiscal year;

and (iii) for the fiscal years ending December 31, 2023, December 31, 2024 and December 31, 2025, swap agreements not to exceed 85 %, 70 % and 60 % of the proved developed producing reserves, respectively, during each fiscal year.

Paycheck Protection Program Loan

On April 16, 2020, the Company entered into a promissory note (the PPP Loan) for a principal amount of approximately $ 2.2 million from Bank of Montreal under the Paycheck Protection Program of the CARES Act, which is administered by the U.S.

Small Business Administration (SBA).

Pursuant to the terms of the CARES Act, the proceeds of the PPP Loan may be used for payroll costs, mortgage interest, rent or utility costs.

The PPP Loan bears interest at a rate of 1.0 % per annum and has a maturity date of April 16, 2022 .

As long as the Company made a timely application of forgiveness to the SBA, the Company was not required to make any payments under the PPP Loan until the forgiveness amount was communicated to the Company by the SBA.

The Company applied for forgiveness of the amount due on the PPP Loan based on the use of the loan proceeds on eligible expenses in accordance with the terms of the CARES Act.

Effective August 13, 2021, the principal amount of the Company’s PPP Loan was reduced to approximately $ 0.2 million by the SBA and the Company recorded a gain on the extinguishment of the forgiven portion of the PPP Loan and related accrued interest of $ 2.1 million.

The gain is presented in “Gain (loss) on extinguishment of debt” in the consolidated statements of operations for the year ended December 31, 2021.

The PPP Loan contains certain events of default including non-payment, breach of representations and warranties, cross-defaults to other loans with the lender or to material indebtedness, voluntary or involuntary bankruptcy, judgments and change in control.

Debt Maturities

Aggregate maturities required on debt at December 31, 2022 due in future years are as follows (in thousands):

Debt Issuance Costs

The Company capitalizes certain direct costs associated with the issuance of debt and amortizes such costs over the lives of the respective debt.

During the year ended December 31, 2021, the Company capitalized approximately $ 14.6 million of debt issuance costs related to the Term Loan Agreement.

At December 31, 2021, the Company had $ 14.2 million of unamortized debt issuance costs.

BATTALION OIL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FAIR VALUE MEASUREMENTS

Pursuant to ASC 820, Fair Value Measurement (ASC 820), 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 consolidated balance sheets, but also the impact of the Company’s nonperformance risk on its own liabilities.

ASC 820 defines fair value 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).

ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value.

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 consolidated balance sheets, but also the impact of the Company’s nonperformance risk on its own liabilities.

Fair value 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).

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The Company classifies fair value balances based on the observability of those inputs.

As required by ASC 820, 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.

BATTALION OIL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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 that were accounted for at fair value as of December 31, 2021 and 2020 (in thousands):

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 December 31, 2022 and 2021 (in thousands):

December 31, 2022

Assets from derivative contracts

Liabilities from derivative contracts

Assets from commodity-based derivative contracts

Liabilities from commodity-based derivative contracts

December 31, 2021

Assets from derivative contracts

Liabilities from derivative contracts

Assets from commodity-based derivative contracts

Liabilities from commodity-based derivative contracts

Derivative contracts listed above as Level 2 include fixed-price swaps, collars, puts, calls, 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 consolidated statements of operations.

The Company is able to value the assets and liabilities based on observable market data for similar instruments, which resulted in the Company reporting its derivatives as Level 2.

This 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.

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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however, the Company does not anticipate such nonperformance.

BATTALION OIL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

As discussed in Note 6, “Debt,” the Company recorded the Change of Control Call Option separately at fair value on the consolidated balance sheets in “Other noncurrent liabilities.” The valuation of the Change of Control Call Option includes significant inputs such as the timing and probability of discrete potential exit scenarios, forward LIBOR curves, and discount rates based on implied and market yields.

As discussed in Note 5, “Debt,” the Company recorded the fair value of the Change of Control Call Option separately on the consolidated balance sheets in “Other noncurrent liabilities.” The fair value of the Change of Control Call Option is subsequently remeasured each reporting period with fair values changes recorded in “ Interest expense and other ’ on the consolidated statement 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

Balance at November 24, 2021

Balance at December 31, 2021

Change in fair value

Balance at December 31, 2022

BATTALION OIL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Estimated fair value amounts have been determined at discrete points in time based on relevant market information.

The estimated fair value of cash and cash equivalents, restricted cash, accounts receivable and accounts payable approximates their carrying value due to their short- term nature.

The estimated fair value of the Company’s Term Loan Agreement and Senior Credit Agreement approximates carrying value because the interest rates approximate current market rates.

The Company follows the provisions of ASC 820, for nonfinancial assets and liabilities measured at fair value on a non-recurring basis.

The estimated fair value of borrowings under the Company’s Amended Term Loan Agreement approximate carrying value because the interest rates approximate current market rates.

The Company follows the provisions of ASC 820, Fair Value Measurement for nonfinancial assets and liabilities measured at fair value on a non-recurring basis.

These provisions apply to the Company’s initial recognition of asset retirement obligations for which fair value is used.

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Derivatives are carried at fair value on the consolidated balance sheets as assets or liabilities, with the changes in the fair value included in the consolidated statements of operations for the period in which the change occurs.

The Company has elected not to designate any of its derivative contracts for hedge accounting.

Accordingly, the Company records the net change in the mark-to-market valuation of these derivative contracts, as well as all payments and receipts on settled derivative contracts, in “Net gain (loss) on derivative contracts” on the consolidated statements of operations.

The Company’s hedge policies and objectives may change significantly as its operational profile changes.

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It is the Company’s policy to enter into derivative contracts only with counterparties that are creditworthy financial or commodity hedging institutions deemed by management as competent and competitive market makers.

As of December 31, 2021, the Company did not post collateral under any of its derivative contracts as they are secured under the Company’s Term Loan Agreement.

The Company’s crude oil and natural gas derivative positions at any point in time may consist of fixed-price swaps, costless put/call collars, basis swaps and WTI NYMEX rolls.

As of December 31, 2022, the Company did not post collateral under any of its derivative contracts as they are secured under the Company’s Amended Term Loan Agreement.

The Company’s crude oil and natural gas derivative positions at any point in time may consist of fixed-price swaps, costless put/call collars, basis swaps and WTI NYMEX rolls further described as follows:

● Fixed-price swaps are designed so that the Company receives or makes payments based on a differential between fixed and variable prices for crude oil and natural gas.

A costless collar consists of a sold call, which establishes a maximum price the Company will receive for the volumes under contract and a purchased put that establishes a minimum price and are generally utilized less frequently by the Company than fixed-price swaps.

● Costless collars consist of a sold call, which establishes a maximum price the Company will receive for the volumes under contract and a purchased put that establishes a minimum price and are generally utilized less frequently by the Company than fixed-price swaps.

● Basis swaps effectively lock in a price differential between regional prices (i.e.

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● WTI NYMEX roll agreements account for pricing adjustments to the trade month versus the delivery month for contract pricing.

The Company has elected not to designate any of its derivative contracts for hedge accounting.

Accordingly, the Company records the net change in the mark-to-market valuation of these derivative contracts, as well

BATTALION OIL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

as all payments and receipts on settled derivative contracts, in “Net gain (loss) on derivative contracts” on the consolidated statements of operations.

All derivative contracts are recorded at fair market value in accordance with ASC 815 and ASC 820 and included in the consolidated balance sheets as assets or liabilities.

The following table summarizes the location and fair value amounts of all derivative contracts in the consolidated balance sheets as of December 31, 2022 and 2021 (in thousands):

Derivatives not designated

as hedging contracts under

Asset derivative contracts

Liability derivative contracts

Years Ended December 31,

Balance sheet location

December 31, 2021

December 31, 2020

Balance sheet location

December 31, 2021

December 31, 2020

Commodity contracts

Current assets - assets from derivative contracts

Current liabilities - liabilities from derivative contracts

Commodity contracts

Other noncurrent assets - assets from derivative contracts

Other noncurrent liabilities - liabilities from derivative contracts

Total derivatives not designated as hedging contracts under ASC 815

Current assets

Current liabilities

Other noncurrent assets

Other noncurrent liabilities

The following table summarizes the location and amounts of the Company’s realized and unrealized gains and losses on derivative contracts in the Company’s consolidated statements of operations (in thousands):

Amount of gain or (loss) recognized in

income on derivative contracts for the

Derivatives not designated

Location of gain or (loss)

as hedging contracts

recognized in income

on derivative contracts on

Years Ended December 31,

under ASC 815

on derivative contracts

Statement of Operations

Commodity contracts:

Unrealized gain (loss) on commodity contracts

Other income (expenses) - net gain (loss) on derivative contracts

Realized gain (loss) on commodity contracts

Other income (expenses) - net gain (loss) on derivative contracts

Total net gain (loss) on derivative contracts

During the year ended December 31, 2020, the Company terminated certain derivative contracts in advance of their natural expiration dates and received net proceeds of approximately $ 22.9 million, which were recorded in “Net gain (loss) on derivative contracts” on the consolidated statements of operations.

BATTALION OIL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Unrealized gain (loss)

Other income (expenses)

Realized gain (loss)

Other income (expenses)

Total net gain (loss)

At December 31, 2022, the Company had the following open crude oil and natural gas derivative contracts:

Crude oil fixed-price swap:

Fixed-price swap:

Total volumes (Bbls)

Weighted average price

Crude oil basis swap:

Total volumes (Bbls)

Weighted average price

Crude oil WTI NYMEX roll:

WTI NYMEX roll:

Total volumes (Bbls)

Weighted average price

Natural gas fixed-price swap:

Fixed-price swap:

Total volumes (MMBtu)

Weighted average price

Natural gas producer two-way collar:

Two-way collar:

Total volumes (MMBtu)

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Weighted average price (put)

Natural gas basis swap:

Total volumes (MMBtu)

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Derivative Liabilities

Years Ended December 31,

Offsetting of Derivative Assets and Liabilities

December 31, 2021

December 31, 2020

December 31, 2021

December 31, 2020

Gross amounts presented in the consolidated balance sheet

Amounts not offset in the consolidated balance sheet

Gross Amounts - Consolidated Balance Sheet

Amounts Not Offset - Consolidated Balance Sheet

BATTALION OIL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

The Company enters into an International Swap Dealers Association Master Agreement (ISDA) with each counterparty prior to a derivative contract with such counterparty.

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The Company records an asset retirement obligation (ARO) on oil and natural gas properties when it can reasonably estimate the fair value of an obligation to perform site reclamation, dismantle facilities or plug and abandon costs.

The Company records the ARO liability on the consolidated balance sheets and capitalizes the cost in “Oil and natural gas properties” during the period in which the obligation is incurred.

The Company records the accretion of its ARO liabilities in “Depletion, depreciation and accretion” expense in the consolidated statements of operations.

The additional capitalized costs are depreciated on a unit-of-production basis.

BATTALION OIL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

The Company recorded the following activity related to its ARO liability (inclusive of the current portion) (in thousands):

Liability for asset retirement obligations as of December 31, 2019

Liabilities settled and divested (1)

Accretion expense

Revisions in estimated cash flows

Liability for asset retirement obligations as of December 31, 2020

For the Year Ended December 31,

Asset retirement obligations at beginning of the period

Accretion expense

Revisions in estimated cash flows

Liability for asset retirement obligations as of December 31, 2021

(1) See Note 4, “Divestitures,” for additional information on the Company’s divestiture activities.

Liabilities incurred

Liabilities settled/divested

Revisions to estimate

Asset retirement obligations at end of period

current asset retirement obligations

Long-term asset retirement obligations at the end of the period

COMMITMENTS AND CONTINGENCIES

As of December 31, 2021, the Company has a minimum volume commitment with a third party for the treating of sour gas production through June 30, 2022.

The future payments associated with the minimum volume commitment are approximately $ 4.8 million.

As of December 31, 2022, the Company has an active drilling rig commitment of approximately $ 2.7 million that will be incurred in 2023.

Termination of the active drilling rig commitment would require an early termination penalty of $ 1.1 million, which would be in lieu of paying the active drilling rig commitment of $ 2.7 million.

In May 2022, we also entered into a joint venture agreement to develop a strategic acid gas treatment and carbon sequestration facility and entered into a gas treating agreement.

Once the facility is in service, we have a minimum volume commitment of 20,000 Mcf per day under the gas treating agreement, with certain rollover rights and start-up flexibility, for an initial term of five years from the in-service date of the facility.

Under the gas treating agreement, we will pay a treating rate that begins at $ 1.65 /Mcf and varies based on volumes delivered to the facility.

At an initial treated volume of 12,000 Mcf/d, our commitment would be approximately $ 7.3 million for the first 12 months of the agreement.

For additional information on this joint venture, see Note 13, Additional Financial Information .

The Company has entered into various long-term gathering, transportation and sales contracts with respect to its oil and natural gas production from the Delaware Basin in West Texas.

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Under the terms of these contracts, the Company has committed a substantial portion of its production from this area for periods ranging from one to twenty years from the date of first production.

BATTALION OIL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Contingencies

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The Company intends to vigorously oppose these claims.

BATTALION OIL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

On February 26, 2019, a subsidiary of the Company was ordered to pay $ 9.1 million in a judgment entered by The Court of Common Pleas of Mercer County, Pennsylvania in a litigation matter captioned Vodenichar, et al., v.

Halcón Energy Properties, Inc.

2013-0512, arising from a dispute over whether the subsidiary complied with the terms of a letter of intent related to the leasing of acreage.

The Court of Common Pleas of Mercer County, Pennsylvania marked the judgment as satisfied on February 3, 2020 and the Company considers this contingency resolved.

STOCKHOLDERS’ EQUITY

On October 8, 2019, upon emergence from chapter 11 bankruptcy, the Successor Company filed an amended and restated certificate of incorporation with the Delaware Secretary of State to provide for, among other things, (i) the total number of shares of all classes of capital stock that the Successor Company has the authority to issue is 101,000,000 of which 100,000,000 shares are common stock, par value $ 0.0001 per share and 1,000,000 shares are preferred stock, par value $ 0.0001 per share and (ii) a restriction on the Successor Company from issuing any non-voting equity securities in violation of Section 1123(a)(6) of chapter 11 of title 11 of the United States Code.

On October 8, 2019, upon emergence from chapter 11 bankruptcy, Battalion Oil Corporation filed an amended and restated certificate of incorporation with the Delaware Secretary of State to provide for, among other things, (i) the total number of shares of all classes of capital stock that Battalion Oil Corporation has the authority to issue is 101,000,000 of which 100,000,000 shares are common stock, par value $ 0.0001 per share and 1,000,000 shares are preferred stock, par value $ 0.0001 per share and (ii) a restriction on Battalion Oil Corporation from issuing any non-voting equity securities in violation of Section 1123(a)(6) of chapter 11 of title 11 of the United States Code.

In addition, pursuant to the Company’s certificate of incorporation, effective at the 2021 annual meeting of stockholders, the board ceased to be divided into two classes, and the provision for the right of removal of any directors designated as a Group II director by an increased voting threshold from a majority to 85 % of the shares then entitled to vote at an election of directors shares expired.

On October 8, 2019, the Company entered into a warrant agreement (the Warrant Agreement) with Broadridge Corporate Issuer Solutions, Inc.

as the warrant agent, pursuant to which the Company issued three series of warrants (the Series A Warrants, the Series B Warrants and the Series C Warrants and together, the Warrants, and the holders thereof, the Warrant Holders), on a pro rata basis to pre-emergence holders of the predecessor Company’s common stock pursuant to the Company’s plan of reorganization.

Each Warrant represents the right to purchase one share of common stock at the applicable exercise price, subject to adjustment as provided in the Warrant Agreement and as summarized below.

On October 8, 2019, the Company issued (i) Series A Warrants to purchase an aggregate of 1,798,322 shares of common stock, with an initial exercise price of $ 40.17 per share, (ii) Series B Warrants to purchase an aggregate of 2,247,985 shares of common stock, with an initial exercise price of $ 48.28 per share and (iii) Series C Warrants to purchase an aggregate of 2,890,271 shares of common stock, with an initial exercise price of $ 60.45 per share.

Each series of Warrants issued under the Warrant Agreement has a three-year term, expiring on October 8, 2022.

The strike price of each series of Warrants issued under the Warrant Agreement increases monthly at an annualized rate of 6.75 %, compounding monthly, as provided in the Warrant Agreement.

As of December 31, 2021, the Company had 1.8 million Series A, 2.2 million Series B and 2.9 million Series C warrants outstanding with corresponding exercise prices of $ 44.95 , $ 54.34 and $ 68.42 , respectively.

The Warrants do not grant the Warrant Holder any voting or control rights or dividend rights, or contain any negative covenants restricting the operation of the Company’s business.

Incentive Plans

On January 29, 2020, the Company’s board of directors adopted the 2020 Long-Term Incentive Plan (the Plan) with an effective date of January 1, 2020 in which an aggregate of approximately 1.5 million shares of the Company’s common stock were available for grant pursuant to awards under the Plan.

On June 8, 2021, Amendment No.

1 to the Plan to increase, by 0.3 million shares, the maximum number of shares of common stock that may be issued thereunder, i.e., a maximum of approximately 1.8 million shares, became effective.

As of December 31, 2021 and 2020, a maximum of 0.5 million and 0.2 million shares, respectively, of the Company’s common stock remained reserved for issuance under the Plan.

BATTALION OIL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

The Company accounts for stock-based payment accruals under authoritative guidance on stock compensation.

The guidance requires all stock-based payments to employees and directors, including grants of stock options and restricted stock, to be recognized in the financial statements based on their fair values.

The Company has elected not to apply a forfeiture estimate and will recognize a credit in compensation expense to the extent awards are forfeited.

For the years ended December 31, 2021 and 2020, the Company recognized $ 2.0 million and $ 2.6 million, respectively, related to stock-based compensation recorded as a component of “General and administrative” on the consolidated statements of operations.

Stock Options

From time to time, the Company grants stock options under the Plan covering shares of common stock to employees of the Company.

Stock options, when exercised, are settled through the payment of the exercise price in exchange for new shares of stock underlying the option.

Awards granted under the Plan typically vest over a four year period at a rate of one -fourth on the annual anniversary date of the grant and expire seven years from the date of grant.

No stock options were granted during the year ended December 31, 2021.

At December 31, 2021, the Company had $ 0.4 million of unrecognized compensation expense related to non-vested stock-options to be recognized over a weighted-average period of 1.2 years.

The aggregate grant date fair value of options granted during the year ended December 31, 2020 was $ 1.9 million.

At December 31, 2020, the Company had $ 0.9 million of unrecognized compensation expense related to non-vested stock-options to be recognized over a weighted-average period of 1.7 years.

The following table sets forth the stock option transactions for the periods indicated:

Exercise Price

(In thousands)

Weighted Average

Contractual Life

Outstanding at December 31, 2019

Outstanding at December 31, 2020

Outstanding at December 31, 2021

(1) The period end intrinsic value of stock options was calculated as the amount by which the closing market price on December 31, 2021 and 2020 of the underlying stock exceeded the exercise price of the option.

BATTALION OIL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Options outstanding at December 31, 2021 consisted of the following:

Exercisable (1)

Weighted Average

Range of Grant

Exercise Price

Contractual Life

Exercise Price

Contractual Life

Prices Per Share

(1) At December 31, 2021, none of the Company’s stock options were exercisable due to service performance conditions or options exercise prices above current market value of the underlying stock.

The assumptions used in calculating the Black-Scholes-Merton valuation model fair value of the Company’s stock options for year ended December 31, 2020 are set forth in the following table:

December 31, 2020

Weighted average value per option granted during the period

Stock price volatility (1)

Risk free rate of return

Expected term

(1) Due to the Company’s limited historical data, expected volatility was estimated using volatilities of similar entities whose share or option prices and assumptions were publicly available.

Restricted Stock

The Company’s board of directors adopted the 2020 Long-Term Incentive Plan (the Plan), as amended in 2021, in which an aggregate of approximately 1.8 million shares of the Company’s common stock were available for grant pursuant to awards under the Plan.

As of December 31, 2022, a maximum of 0.2 million shares of the Company’s common stock remained reserved for issuance under the Plan.

For the years ended December 31, 2022 and 2021, the Company recognized $ 2.2 million and $ 2.0 million, respectively, related to stock-based compensation awards granted to employees and directors, primarily related to restricted stock unit grants.

Stock-based compensation is recorded as a component of “General and administrative” on the consolidated statements of operations.

Restricted Stock Units

From time to time, the Company grants shares of restricted stock units (RSUs) under the Plan to employees of the Company.

Under the Plan, employee RSUs will vest and convert to shares typically over a four year period at a rate of one -fourth on the annual anniversary date of the grant or when the performance or market conditions described below occur.

During the year ended December 31, 2021, the Company granted less than 0.1 million shares of RSUs which will vest over four years at a rate of one -fourth on the annual anniversary date of the grant.

The aggregate grant date fair value of these RSUs was $ 0.1 million.

At December 31, 2021, the Company had $ 2.2 million of unrecognized compensation expense related to non-vested RSU awards to be recognized over a weighted average period of 1.8 years.

During the year ended December 31, 2020, the Company granted 1.0 million shares of RSUs with the vesting conditions and fair values described below under the Plan to employees of the Company.

At December 31, 2020, the Company had $ 4.1 million of unrecognized compensation expense related to non-vested RSU awards to be recognized over a weighted-average period of 2.5 years.

● 0.4 million RSUs granted will vest over four years at a rate one -fourth on the annual anniversary of date of the grant.

The aggregate grant date fair value of these RSUs was $ 5.0 million.

● 0.2 million RSUs granted will vest in full only upon achievement of certain business combination goals, as defined in the awards agreements.

The aggregate grant date fair value of these RSUs was $ 2.1 million.

As of December 31, 2021, a business combination, as defined in the awards agreements, had not been

Under the Plan, employee RSUs will vest and convert to shares typically in equal amounts over a three or four year vesting period from the date of the grant, depending on award, or when the performance or market conditions described below occur.

At December 31, 2022 and 2021, the Company had $ 2.6 million and $ 2.2 million, respectively of unrecognized compensation expense related to non-vested RSU awards to be recognized over a weighted average period of 1 year and 1.8 years, respectively.

BATTALION OIL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

consummated and was not considered probable.

As such, no expense has been recognized for the RSUs with business combination vesting conditions.

● 0.4 million RSUs granted will vest in full or in part or may terminate based on the Company’s total shareholder return relative to the total shareholder return of certain of its peer companies as defined in the awards agreements over the performance period ending on February 20, 2024.

The aggregate grant date fair value of these RSUs was $ 2.3 million.

The following table sets forth the restricted stock transactions for the periods indicated:

The following table sets forth the restricted stock unit transactions for the periods indicated:

Average Grant

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The total fair value of shares vested was $ 1.7 million for the year ended December 31, 2022.

The assumptions used in calculating the Monte Carlo valuation model fair value of the Company’s RSUs with performance based vesting conditions for the year ended December 31, 2020 are set forth in the following table:

The discussion below outlines the vesting conditions and fair values for each type of the Company’s approximately 0.9 million unvested outstanding RSU under the Plan issued to employees of the Company as of December 31, 2022.

● Time-Based RSU .

0.4 million RSUs will vest over a three or four year vesting period from the date of the grant, depending on award .

The aggregate grant date fair value of these RSUs was $ 5.2 million.

● Performance-Based RSU .

0.2 million RSUs will vest in full only upon achievement of certain business combination goals, as defined in the awards agreements.

The aggregate grant date fair value of these RSUs was $ 1.8 million.

As of December 31, 2022, no expense had been recognized for these awards as a business combination, as defined in the award agreements, had neither been consummated nor was considered probable.

● Market-Based (e.g.

0.3 million RSUs will vest in full or in part or may terminate based on the Company’s total shareholder return (TSR) relative to the total shareholder return of certain of its peer companies as defined in the awards agreements over the performance period ending on February 20, 2024.

The aggregate grant date fair value of these RSUs was $ 1.9 million.

The assumptions used in calculating the Monte Carlo valuation model fair value of the Company’s RSUs with market based (e.g.

TSR) vesting conditions granted in 2020 are set forth in the following table:

December 31, 2020

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Stock Options

From time to time, the Company has granted stock options under the Plan covering shares of common stock to employees of the Company.

The Company has not granted stock options since 2020.

Stock options, if exercised, are settled through the payment of the exercise price in exchange for new shares of stock underlying the option.

Awards granted under the Plan typically vest over a four-year period at a rate of one -fourth on the annual anniversary date of the grant and expire seven years from the date of grant.

At December 31, 2022, the Company had 478,152 options outstanding ( 3 equal tranches of 159,384 options at exercise prices of $ 18.91 , $ 28.23 , and $ 37.83 per share) with a weighted average exercise price of $ 28.32 /share.

As of December 31, 2022 and 2021 no options were either exercisable nor had intrinsic value due to service performance conditions and/or based on the exercise price of the option exceeding the closing market price.

The weighted average remaining contractual life at December 31, 2022 was approximately 4.2 years.

Approximately $ 0.2 million of unrecognized compensation expense remains related to non-vested stock-options to be recognized over a weighted-average period of 0.7 years.

The assumptions used in calculating the Black-Scholes-Merton valuation model fair value of the Company’s stock options granted in 2020 are set forth in the following table:

December 31, 2020

Weighted average value per option granted during the period

Stock price volatility (1)

Risk free rate of return

Expected term

(1) Due to the Company’s limited historical data, expected volatility was estimated using volatilities of similar entities whose share or option prices and assumptions were publicly available.

On October 8, 2019, pursuant to the Company’s plan of reorganization, approximately 6.9 million Series A, Series B and Series C warrants were issued to pre-emergence holders of the predecessor Company’s common stock with corresponding initial exercise prices ranging from $ 40.17 to $ 60.45 per share, on a pro rata basis.

Each series of Warrants issued under the Warrant Agreement had a three-year term, which expired on October 8, 2022 .

BATTALION OIL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Income tax benefit (provision) for the indicated periods is comprised of the following (in thousands):

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Employee retention credit

Non-deductible compensation

Total income tax benefit (provision)

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Disallowed interest Section 163(j)

Basis difference in debt

Change of Control Call Option Embedded Derivative

Embedded derivative liability

Operating lease liability

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Basis difference in debt

Investment in unconsolidated subsidiary

Amortization of debt issuance costs

Lease right of use

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The Company will continue to monitor facts and circumstances in the reassessment of the likelihood that operating loss carryforwards, credits and other deferred tax assets will be utilized.

The Company emerged from Chapter 11 Bankruptcy on October 8, 2019.

Under the plan of reorganization, a substantial portion of the Company’s pre-petition debt securities were extinguished.

Absent an exception, a debtor recognizes cancellation of indebtedness income (CODI) upon discharge of its outstanding indebtedness for an amount of consideration that is less than its adjusted issue price.

The IRC provides that a debtor in bankruptcy may exclude CODI from taxable income but must first reduce its tax attributes by the amount any CODI realized as a result of the consummation of a plan of reorganization.

The amount of CODI realized by a taxpayer is the adjusted issue price of any indebtedness discharged less the sum of (i) the amount of cash paid, (ii) the issue price of any new indebtedness issued

BATTALION OIL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

and (iii) the fair market value of any other consideration, including equity, issued.

As a result of the market value of equity upon emergence from chapter 11 bankruptcy proceedings, U.S.

CODI was approximately $ 524.8 million, which reduced the value of the Company’s net operating losses and capital losses on January 1, 2020.

The deferred tax balances disclosed above reflect the estimated impact of the attribute reduction on January 1, 2020.

IRC Section 382 provides an annual limitation with respect to the ability of a corporation to utilize its tax attributes, as well as certain built-in-losses, against future U.S.

taxable income in the event of a change in ownership.

The Company's emergence from chapter 11 bankruptcy proceedings is considered a change in ownership for purposes of IRC Section 382.

The limitation under the IRC is based on the value of the corporation as of the emergence date.

The ownership changes and resulting annual limitation resulted in the expiration of approximately $ 454.2 million of net operating losses generated prior to the emergence date.

The expiration of these tax attributes was fully offset by a corresponding decrease in the Company's U.S.

valuation allowance, which results in no net tax provision.

ASC 740, Income Taxes (ASC 740) prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of income tax positions taken or expected to be taken in an income tax return.

ASC 740 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of income tax positions taken or expected to be taken in an income tax return.

For those benefits to be recognized, an income tax position must be more-likely-than-not to be sustained upon examination by taxing authorities.

The Company has no unrecognized tax benefits for the year ended December 31, 2022 and 2021.

BATTALION OIL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

consolidated balance sheets as of December 31, 2022 and 2021.

Tax audits may be ongoing at any point in time.

Tax liabilities are recorded based on estimates of additional taxes which may be due upon the conclusion of these audits.

Estimates of these tax liabilities are made based upon prior experience and are updated for changes in facts and circumstances.

Generally, the Company’s income tax years 2019 through 2022 remain open for federal purposes and are subject to examination by Federal tax authorities.

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The open years for state purposes can vary from the normal three year statue expiration period for federal purposes.

The Company recognizes interest and penalties accrued to unrecognized benefits in “Interest expense and other” in its consolidated statements of operations.

For the year ended December 31, 2021 and 2020, the Company recognized no interest and penalties.

On August 16, 2022, the Inflation Reduction Act of 2022 (IRA) was enacted into law.

The IRA contains significant U.S.

federal income tax law changes, including the addition of a corporate alternative minimum tax imposed at a rate of fifteen percent (15%) on our global adjusted financial statement income effective as of January 1, 2023.

Based on current guidance, we do not expect the IRA to have a material adverse impact on our business, results of operations or financial position.

During 2020, the CARES Act and the Consolidated Appropriations Act of 2021 (the CAA) were signed into law.

The CARES Act provides relief to corporate taxpayers by permitting a five-year carryback of 2018 to 2020 NOLs, removing the 80% limitation on the utilization of those NOLs, increasing the Section 163(j) 30% limitation on interest expense deductibility to 50% of adjusted taxable income for 2019 and 2020, and accelerates refunds for minimum tax credit carryforwards, as well as other provisions.

The CAA extends various expiring tax provisions, clarifies that debt forgiven under the Paycheck Protection Program (PPP) is not included in gross income, clarifies that certain business expenses paid with forgiven PPP funds are tax deductible, as well as other tax provisions.

Both the CARES Act and CAA did not have a material impact to the Company’s consolidated financial statements and related disclosures .

BATTALION OIL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

EARNINGS PER SHARE

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Years Ended December 31,

Net income (loss) available to common stockholders

Net income (loss)

Weighted average basic number of common shares outstanding

Basic net income (loss) per common share

Net income (loss) available to common stockholders

Basic net income (loss) per share of common share

Net income (loss)

Weighted average basic number of common shares outstanding

Common stock equivalent shares representing shares issuable upon:

Exercise of Series A Warrants

Anti-dilutive

Exercise of Series B Warrants

Anti-dilutive

Exercise of Series C Warrants

Anti-dilutive

Exercise of stock options

Exercise of Warrants & Stock Options

Anti-dilutive

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Anti-dilutive

Weighted average diluted number of common shares outstanding

Diluted net income (loss) per common share

Common stock equivalents, including warrants, stock options and restricted stock units, if considered issuable, totaling 7.7 million for the year ended December 31, 2021 were not included in the computation of diluted earnings per share of common stock because the effect would have been anti-dilutive due to the net loss.

Common stock equivalents, including warrants, stock options and restricted stock units, if considered issuable, totaling 7.7 million shares for the year ended December 31, 2020 were not included in the computation of diluted earnings per share of common stock because the effect would have been anti-dilutive due to the net loss.

Diluted net income (loss) per share of common stock

For the year ended December 31, 2022, common stock equivalents, including warrants, stock options and certain restricted stock units, totaling 5.8 million weighted-average shares were anti-dilutive and not included in the computation of diluted earnings per share of common stock.

For the year ended December 31, 2021, common stock equivalents, including warrants, stock options and restricted stock units, totaling 7.7 million shares were not included in the computation of diluted earnings per share of common stock because the effect would have been anti-dilutive due to

BATTALION OIL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

the Company’s net loss in the period.

Additionally, we also have approximately 0.5 million restricted stock units that vest only upon achievement of certain business combination goals or based on the Company’s total shareholder return (TSR) as further described in Note 10, Stockholder’s Equity .

On October 8, 2022 approximately 6.9 million warrants expired which previously gave the holder the right to purchase one share of common stock for each warrant.

ADDITIONAL FINANCIAL STATEMENT INFORMATION

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Funds in escrow

Funds in escrow and other:

Other assets (Non-current):

Investment in unconsolidated affiliate (1)

Oil, natural gas and natural gas liquids revenues

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Accrued lease operating expenses

(1) In May 2022, we entered into a joint venture with Caracara Services, LLC (“Caracara”) to develop an acid gas treatment facility to remove hydrogen sulfide and carbon dioxide from our produced natural gas.

Caracara will provide all necessary capital for the construction of the treatment facility.

We contributed certain full cost pool assets to this related party joint venture in a non-cash exchange for a retained 5 % equity interest in BAT, an unconsolidated subsidiary.

For accounting purposes, since we do not control the key activities (e.g.

operating and maintaining the facility) which most significantly impact economic performance nor do we have the obligation to absorb losses or the right to receive benefits that could potentially be significant, we are not the primary beneficiary of BAT.

Accordingly, we account for our investment in BAT (a related party) using the equity method of accounting based on our ability to exercise significant influence , but not control, over the key activities of the joint venture.

For more information related to this joint venture, see Note 9, Commitments and Contingencies .

BATTALION OIL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

SUBSEQUENT EVENTS

Preferred Stock Equity Issuance.

On March 28, 2023, we sold, in a private placement, an aggregate of 25,000 shares of Series A Convertible Preferred Stock (the “preferred stock”) to certain funds managed by Luminus Management, LLC, Oaktree Capital Management, LP, and LSP Investment Advisors, LLC, our largest three existing shareholders that represent 50 percent of our board of directors.

We received $ 24,375,000 in proceeds, net of $ 625,000 in original issue discount.

The issuance of preferred stock was approved by our board of directors upon recommendation by a special committee of disinterested directors that was established to evaluate the proposed terms of the preferred stock.

Holders will have no voting rights with respect to the shares of preferred stock.

The preferred stock will receive annual dividends, paid either in cash at a fixed rate of 14.5 % annually or accrued (“PIK accrual”) at a fixed rate of 16.0 % annually at the option of the Company.

Currently, the Company’s Amended Term Loan Agreement prohibits the payment of cash dividends.

PIK dividends will be cumulative, compound and accrue quarterly in arrears and will be added to the Liquidation Preference.

Shares of preferred stock will be convertible, subject to conversion ratios and prices stipulated in the agreement, at any time by the holders and by Battalion after meeting certain other agreement requirements.

Battalion will also have the right to redeem the preferred stock in cash at an amount equal to between 100 - 120 % of the Liquidation Preference ($ 1,000 per share, or $ 25.0 million, increased for any PIK accruals) determined according to the redemption date.

Additionally, in the event of a change of control, holders have the right to receive, (i) at any time on or prior to 150 days following the closing date, and at the election of the Company, a cash payment equal to the Liquidation Preference or equity consideration equal to the 107.5 % of the Liquidation Preference, or (ii) at any time after 150 days following the closing date, a cash payment equal to between 100 - 120 % of the Liquidation Preference determined by the redemption date or conversion into common stock.

Until (i) a termination of or certain amendments to the Amended Term Loan Agreement or (ii) one year past the maturity date of the Amended Term Loan Agreement, an election of the cash payment option by holders in a change of control scenario is not permitted.

SUPPLEMENTAL OIL AND GAS INFORMATION (UNAUDITED)

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Although every reasonable effort is made to ensure reserve estimates reported represent the most accurate assessments possible, the subjective decisions and variances in available data for various reservoirs make these estimates generally less precise than other estimates included in the financial statement disclosures.

Proved reserves represent estimated quantities of natural gas, crude oil and condensate and natural gas liquids that geological and engineering data demonstrate, with reasonable certainty, to be recoverable in future years from known reservoirs under economic and operating conditions in effect when the estimates were made.

Proved developed reserves are proved reserves expected to be recovered through wells and equipment in place and under operating methods used when the estimates were made.

The proved reserves estimates reported herein for the years ended December 31, 2021, 2020 and 2019 have been independently evaluated by Netherland, Sewell, a worldwide leader of petroleum property analysis for industry and financial organizations and government agencies.

Netherland, Sewell was founded in 1961 and performs consulting petroleum engineering services under Texas Board of Professional Engineers Registration No.

Within Netherland, Sewell, the technical persons primarily responsible for preparing the estimates set forth in the Netherland, Sewell reserves reports incorporated herein are Mr.

Little and Mr.

Edward Roy III.

Little, a Licensed Professional Engineer in the State of Texas (No.

117966), has been practicing consulting petroleum engineering at Netherland, Sewell since 2011 and has over nine years of prior industry experience.

He graduated from Rice University in 2002 with a Bachelor of Science Degree in Chemical Engineering and from University of Houston in 2007 with a Master of Business Administration Degree.

Roy, a Licensed Professional Geoscientist in the State of Texas, Geology (No.

2364), has been practicing consulting petroleum geoscience at Netherland, Sewell since 2008 and has over 11 years of prior industry experience.

He graduated from Texas Christian University in 1992 with a Bachelor of Science Degree in Geology and from Texas A&M University in 1998 with a Master of Science Degree in Geology.

Netherland, Sewell has reported to the Company that both technical principals meet or exceed the education, training, and experience requirements set forth in the Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserves Information promulgated by the Society of Petroleum Engineers;

they are both proficient in judiciously applying industry standard practices to engineering and geoscience evaluations as well as applying SEC and other industry reserves definitions and guidelines.

The Company’s board of directors has established an independent reserves committee composed of independent directors with experience in energy company reserve evaluations.

The Company’s independent engineering firm reports jointly to the reserves committee and to the Executive Vice President and Chief Operating Officer.

The reserves committee is charged with ensuring the integrity of the process of selection and engagement of the independent engineering firm and in making a recommendation to the board of directors as to whether to approve the report prepared by the independent engineering firm.

Rohling, the Company’s Executive Vice President and Chief Operating Officer is primarily responsible for overseeing the preparation of the annual reserve report by Netherland, Sewell.

He has approximately 15 years of oil and gas operations experience and earned a Bachelor of Science degree in Petroleum Engineering from Texas A&M University and is an active member of the Society of Petroleum Engineers.

The reserves information in this Annual Report on Form 10-K represents only estimates.

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Accordingly, initial reserve estimates are often different from the quantities of oil and natural gas that are ultimately recovered.

The meaningfulness of such estimates depends primarily on the accuracy of the assumptions upon which they

The meaningfulness of such estimates depends primarily on the accuracy of the assumptions upon which they were based.

Except to the extent the Company acquires additional properties containing proved reserves or conducts successful exploration and development activities or both, the Company’s proved reserves will decline as reserves are produced.

Proved developed reserves are proved reserves expected to be recovered through wells and equipment in place and under operating methods used when the estimates were made.

The proved reserves estimates reported herein for the years ended December 31, 2022, 2021 and 2020 have been independently evaluated by Netherland, Sewell, our independent reserve engineering firm.

For additional information regarding estimates of proved reserves and other information about our oil and gas reserves, see Item 1.

Business and the report of Netherland, Sewell which is included as an Exhibit to this Annual Report on Form 10-K.

The following tables illustrate changes in the Company’s estimated net proved developed and proved undeveloped reserves for the periods indicated.

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The natural gas prices as of December 31, 2022, 2021 and 2020 are based on the respective 12-month unweighted average of the first of the month prices of the Henry Hub spot price which equates to $6.36 per MMBtu, $3.60 per MMBtu and $1.99 per MMBtu, respectively.

All prices are adjusted by lease or field for energy content, transportation fees, and market differentials.

All prices are adjusted by lease or field for energy content, transportation fees, and market

differentials.

All prices are held constant in accordance with SEC guidelines.

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Total Proved Reserves

Proved reserves, December 31, 2018 (Predecessor)

Proved reserves, December 31, 2019

Extensions and discoveries

Sale of minerals in place

Revision of previous estimates

Proved reserves, December 31, 2019 (Successor)

Proved reserves, December 31, 2020

Extensions and discoveries

Sale of minerals in place

Revision of previous estimates

Proved reserves, December 31, 2020 (Successor)

Proved reserves, December 31, 2021

Extensions and discoveries

Sale of minerals in place

Revision of previous estimates

Proved reserves, December 31, 2021 (Successor)

Proved reserves, December 31, 2022

Equivalent (Mboe)

Proved reserves, December 31, 2018 (Predecessor)

Proved reserves, December 31, 2019

Extensions and discoveries

Sale of minerals in place

Revision of previous estimates

Proved reserves, December 31, 2019 (Successor)

Proved reserves, December 31, 2020

Extensions and discoveries

Sale of minerals in place

Revision of previous estimates

Proved reserves, December 31, 2020 (Successor)

Proved reserves, December 31, 2021

Extensions and discoveries

Sale of minerals in place

Revision of previous estimates

Proved reserves, December 31, 2021 (Successor)

Proved reserves, December 31, 2022

Proved Developed Reserves

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December 31, 2020

The Company’s proved reserves have been estimated using deterministic methods.

At December 31, 2021, total proved reserves were approximately 95.9 MMBoe, a 32.5 MMBoe net increase over the previous year’s estimate of 63.4 MMBoe.

The net increase in total proved reserves was the result of additions and extensions of 26.5 MMBoe and positive revisions of 11.9 MMBoe due primarily to increases in SEC pricing, partially offset by production of 5.9 MMBoe.

At December 31, 2021, the Company’s proved developed reserves were approximately 42.4 MMBoe, a 6.2 MMBoe net increase from the previous year’s estimate of 36.2 MMBoe.

The net increase in total proved reserves was the result of positive revisions of 10.0 MMBoe due to increases in SEC pricing and the development of 2.1 MMBoe (transferred from proved undeveloped), partially offset by production of 5.9 MMBoe.

At December 31, 2021, the Company’s estimated proved undeveloped (PUD) reserves were approximately 53.5 MMBoe, a 26.4 MMBoe net increase from the previous year’s estimate of 27.1 MMBoe.

The net increase in total PUD reserves was the result of additions and extensions of 26.5 MMBoe and positive revisions of 1.9 MMBoe due to increases in SEC pricing, partially offset by development of 2.1 MMBoe.

Of the 26.5 MMBoe of extensions and discoveries in PUD reserves, all are associated with drilling extensions in the Delaware Basin.

Year Ended December 31, 2022

At December 31, 2022, the Company’s proved developed reserves of 46.3 MMBoe increased approximately 3.9 MMBoe from December 31, 2021 as a result of PUD reserve development of 8.3 MMBoe and positive revisions of 1.2 MMBoe, offset by production of 5.6 MMBoe.

At December 31, 2022, the Company’s estimated proved undeveloped (PUD) reserves of 45.7 MMBoe decreased approximately 7.8 MMBoe from December 31, 2021.

The transfer of 8.3 MMBoe to proved developed producing reserves and downward revisions of 6.4 MMBoe due primarily to increased capital and operating costs were offset by additions and extensions of 7.0 MMBoe in the Delaware Basin primarily associated with infill drilling activity.

All of the Company’s PUD reserves are planned to be developed within five years from the date they were initially recorded.

During 2022, approximately $119.8 million in capital expenditures went toward the development of proved undeveloped reserves, which includes drilling, completion and other facility costs.

Year Ended December 31, 2021

At December 31, 2021, the Company’s proved developed reserves of approximately 42.4 MMBoe increased approximately 6.2 MMBoe from 2021 as a result of positive revisions of 10.0 MMBoe due to increases in SEC pricing and the development of 2.1 MMBoe of PUD reserves, partially offset by production of 5.9 MMBoe.

At December 31, 2021, the Company’s estimated PUD reserves were approximately 53.5 MMBoe, a 26.4 MMBoe net increase from December 31, 2020 as a result of drilling extensions in the Delaware Basin of 26.5 MMBoe and positive revisions of 1.9 MMBoe due to increases in SEC pricing, partially offset by development of 2.1 MMBoe.

None of the extensions and discoveries in PUD reserves in 2021 were associated with infill drilling activity.

At December 31, 2020, the Company’s proved developed reserves were approximately 36.2 MMBoe, a 1.7 MMBoe net decrease from the previous year’s estimate of 37.9 MMBoe.

The net decrease in total proved reserves was the result of production of 6.2 MMBoe and sales of 2.0 MMBoe, partially offset by development of 6.5 MMBoe (transferred from proved undeveloped).

At December 31, 2020, the Company’s estimated PUD reserves were approximately 27.1 MMBoe, a 3.0 MMBoe net increase from the previous year’s estimate of 24.1 MMBoe.

The net increase in total PUD reserves was the result of additions and extensions of 12.4 MMBoe, partially offset by development of 6.5 MMBoe and negative revisions of 2.8 MMBoe due primarily to decreases in SEC pricing.

Of the 12.4 MMBoe of extensions and discoveries in PUD reserves, all are associated with drilling extensions in the Delaware Basin.

Year Ended December 31, 2020

At December 31, 2020, the Company’s proved developed reserves of approximately 36.2 MMBoe decreased approximately 1.7 MMBoe from December 31, 2019 as a result of production of 6.2 MMBoe and sales of 2.0 MMBoe, partially offset by PUD reserve development of 6.5 MMBoe.

At December 31, 2020, the Company’s estimated PUD reserves of approximately 27.1 MMBoe, increased by approximately 3.0 MMBoe from December 31, 2021 as a result of result of drilling extensions in the Delaware Basin of 12.4 MMBoe, partially offset by PUD reserve development of 6.5 MMBoe and negative revisions of 2.8 MMBoe due primarily to decreases in SEC pricing.

None of the extensions and discoveries in PUD reserves in 2020 were associated with infill drilling activity.

At December 31, 2019, the Company’s proved developed reserves were approximately 37.9 MMBoe, a 2.0 MMBoe net decrease from the previous year’s estimate of 39.9 MMBoe.

The net decrease in total proved reserves was the result of negative revisions of 8.4 MMBoe and production of 6.5 MMBoe, partially offset by additions and extensions of 2.8 MMBoe and development of 10.1 MMBoe (transferred from proved undeveloped).

Negative revisions of 8.4 MMBoe primarily relate to changes in the Company’s development plans to focus on Monument Draw and due to the effect of lower prices.

Of the 2.8 MMBoe of extensions and discoveries in proved developed reserves, approximately 1.2 MMBoe are associated with infill drilling activity and 1.6 MMBoe are associated with drilling extensions in the Delaware Basin.

At December 31, 2019, the Company’s estimated PUD reserves were approximately 24.1 MMBoe, a 21.2 MMBoe net decrease from the previous year’s estimate of 45.3 MMBoe.

The net decrease in total PUD reserves was the result of negative revisions of 21.4 MMBoe and development of 10.2 MMBoe, partially offset by additions and extensions of 10.4 MMBoe.

The negative revisions to PUD reserves in 2019 were primarily attributable to the changes in the Company’s development plans to focus on Monument Draw and due to the effect of lower prices.

Of the 10.4 MMBoe of extensions and discoveries in PUD reserves, approximately 6.6 MMBoe are associated with infill drilling activity and 3.8 MMBoe are associated with drilling extensions in the Delaware Basin.

As of December 31, 2021 all of the Company’s PUD reserves are planned to be developed within five years from the date they were initially recorded.

During 2021, approximately $37.6 million in capital expenditures went toward the development of proved undeveloped reserves, which includes drilling, completion and other facility costs associated with developing proved undeveloped wells.

For wells classified as proved developed producing where sufficient production history existed, reserves were based on individual well performance evaluation and production decline curve extrapolation techniques.

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Costs incurred in property acquisition, exploration and development activities were as follows:

October 2, 2019

January 1, 2019

Years Ended December 31,

December 31, 2019

October 1, 2019

Property acquisition costs, proved

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Development costs (1)

(1) Excludes $5.7 million, $31.5 million, $11.3 million and $72.9 million for the years ended December 31, 2021 and 2020, the period from October 2, 2019 to December 31, 2019 and the period from January 1, 2019 to October 1, 2019, respectively, of development costs related to the Company’s treating equipment and gathering support facilities.

(1) Excludes $15.0 million, $5.7 million and $31.5 million for the years ended December 31, 2022, 2021 and 2020, respectively, of development costs related to the Company’s treating equipment and gathering support facilities.

Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Natural Gas Reserves

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7A. Quantitative and Qualitative Disclosures About Market Risk