Item 2. Management’s Discussion and Analysis
ITEM 2. MANAGEMENT’S DISCUSSION A ND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is intended to assist in understanding our results of operations for the nine months ended September 30, 2024 and 2023 and should be read in conjunction with our unaudited condensed consolidated financial statements and the notes thereto included in this Quarterly Report on Form 10-Q and with the consolidated financial statements, notes and management’s discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023. The results presented in this Form 10-Q are not necessarily indicative of future operating results.
Statements in this discussion may be forward-looking. These forward-looking statements involve risks and uncertainties, including those discussed below, which could cause actual results to differ from those expressed. For more information, see “ Special note regarding forward-looking statements .”
Overview
We are an independent energy company focused on the acquisition, production, exploration and development of onshore liquids-rich oil and natural gas assets in the United States. Our properties and drilling activities are currently focused in the Delaware Basin, where we have an extensive drilling inventory that we believe offers attractive long-term economics.
Our financial results depend upon many factors, but are largely driven by the volume of our oil and natural gas production and the price that we receive for that production. Our production volumes will decline as reserves are depleted unless we expend capital in successful development and exploration activities or acquire properties with existing production. The amount we realize for our production depends predominantly upon commodity prices, which are affected by changes in market demand and supply, as impacted by overall economic activity, attempts by foreign oil and natural gas producers to control the global supply, weather, transportation take-away capacity constraints, inventory storage levels, basis differentials and other factors. Accordingly, finding, developing and producing oil and natural gas reserves at economical costs are critical to our long-term success.
When commodity prices decline significantly our ability to finance our capital budget and operations may be adversely impacted. While we use derivative instruments to provide partial protection against declines in oil and natural gas prices, the total volumes we hedge are less than our expected production, vary from period to period based on our view of current and future market conditions, remain consistent with the requirements in effect under our Amended Term Loan Agreement and extend, on a rolling basis, for a limited period of time (generally, four years). These limitations result in our liquidity being susceptible to commodity price declines. Additionally, while intended to reduce the effects of volatile commodity prices, derivative transactions may limit our potential gains and increase our potential losses if commodity prices were to rise substantially over the price established by the hedge. Our hedge policies and objectives may change significantly as our operational profile changes and/or commodities prices change. We do not enter into derivative contracts for speculative trading purposes.
Recent Developments
Merger with Fury Resources. On December 14, 2023, we entered into an Agreement and Plan of Merger, as amended (the “Merger Agreement”) with Fury Resources, Inc., a Delaware corporation (“Parent”) and San Jacinto Merger Sub, Inc. (“Merger Sub”), a Delaware corporation and a direct, wholly owned subsidiary of Parent.
The Merger Agreement provides, that upon the terms and subject to the conditions set forth in the Merger Agreement, Merger Sub will merge with and into us (the “Merger”), with us surviving as a wholly owned subsidiary of Parent. Subject to the terms and conditions set forth in the Merger Agreement, at the effective time of the Merger, each of our issued and outstanding shares of Common Stock, par value $0.0001 per share (“Common Stock”) shall be converted into the right to receive $9.80 in cash, without interest, which represents a total transaction value of approximately $450.0 million (the “Merger Consideration”), and such shares shall otherwise cease to be outstanding, shall automatically be canceled and retired and cease to exist; and each outstanding share of redeemable convertible
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preferred stock will be contributed to Parent in exchange for new preferred shares of Parent, or sold to Parent for cash, in each case at valuation based on the conversion or redemption value of such preferred stock.
If the Merger is consummated, our shares of Common Stock will no longer trade on the NYSE American and will be deregistered under the Securities Exchange Act of 1934, as amended. As a result, we will become a private company.
On January 24, 2024, Parent and we agreed to cause an amount equal to $10.0 million to be distributed from the escrow account to the Company.
On April 24, 2024, pursuant to an amendment to the Merger Agreement dated April 16, 2024, Parent paid to us $0.1 million to be used by us to pay our costs and expenses associated with printing and mailing the definitive Proxy Statement for the Merger to our stockholders.
On May 3, 2024, Parent provided Equity Financing Subscription Agreements evidencing agreements by the financing sources party thereto to provide an aggregate amount of equity financing to Parent equal to $160.0 million. Of such $160.0 million equity financing commitments, $10.0 million has been drawn by Parent and was used to fund the initial $10.0 million deposit into escrow at the time the Merger Agreement was signed, and such deposit was released to the Company on January 24, 2024. With respect to the remaining $150.0 million of equity financing commitments, under the terms of the applicable Equity Financing Subscription Agreements, the obligation of the relevant financing sources to fund their portion of the equity financing is conditioned upon the satisfaction of certain conditions, including Parent entering into Equity Financing Subscription Agreements evidencing an aggregate amount of equity financing equal to $200.0 million and the other parties to such Equity Financing Subscription Agreements providing the related equity funding in escrow concurrently with or prior to the closing of the transactions contemplated by the Merger Agreement.
On September 19, 2024, pursuant to an amendment to the Merger Agreement, the amount of merger consideration payable to the holders of the Company’s Common Stock in connection with the transactions contemplated by the Merger Agreement would be reduced from $9.80 per share of Common Stock to $7.00 per share of Common Stock. This amendment further amended the Merger Agreement such that the existing holders of the Company’s Series A through Series A-4 preferred stock, par value $0.0001 per share (collectively, the “Preferred Stock”), who are the holders of all of the issued and outstanding Preferred Stock of the Company, will roll over 100% of the Preferred Stock held by them into new preferred equity of Parent following the Merger (such proposed rollover, the “Rollover Transaction”). In addition, this amendment further amended the Merger Agreement to (a) delete the Company’s right to terminate the Merger Agreement at any time prior to delivering the Evidence of Funding by Parent (as defined in the Merger Agreement), (b) add a right for the Company to terminate the Merger Agreement by written notice to Parent if the Closing (as defined in the Merger Agreement) has not occurred on or before 11:59 p.m. Central Time on November 29, 2024 so long as the Company’s breach of the Merger Agreement is not the primary cause of the Closing not to have occurred, (c) add a customary non-solicitation covenant, in substantially the same form as was present in the Merger Agreement before such covenant was amended, prohibiting us from soliciting, providing non-public information in response to, or engaging in discussions or negotiations with respect to, proposals relating to alternative business combination transactions, except as permitted under the Merger Agreement, and (d) consistent with the changes to the amount of the Amended Merger Consideration (as defined in the Merger Agreement) and the structure of the Rollover Transaction contemplated, reduce the amount of aggregate equity financing sufficient to consummate the transactions contemplated by the Merger Agreement (as amended) reflected in the definition of “Evidence of Funding” in the Merger Agreement from $200,000,000 to $160,000,000 (“Sufficient Equity Financing”).
Furthermore, as of September 19, 2024, Parent had delivered to us sufficient binding equity financing commitments that, in the aggregate, reflect the Sufficient Equity Financing and constitute Qualifying Additional Financing Documents (as defined in the Merger Agreement) for purposes of the Merger Agreement, and the amendment reflected an acknowledgement by Parent and the Company that such delivery had taken place.
We will hold a special meeting of the Company stockholders on November 19, 2024 (the “special meeting”) in connection with the Merger. Company stockholders will be asked to vote to adopt the Merger Agreement and approve related matters, as described in the notice of special meeting of stockholders and proxy statement. Adoption of the
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Merger Agreement requires the affirmative vote at the special meeting or by proxy of holders of a majority of the outstanding shares of the Company common stock as of the record date.
The obligations of us, Parent and Merger Sub to consummate the Merger are subject to the satisfaction or waiver of certain customary closing conditions, including, among other things: (a) the absence of any law or order of any Governmental Authority having jurisdiction over a party to the Merger Agreement prohibiting or making illegal the consummation of the Merger, and (b) the adoption of the Merger Agreement by a majority vote of the issued and outstanding shares of Company Common Stock.
We have incurred approximately $4.6 million as of November 8, 2024, and will continue to incur significant costs and expenses, including fees for professional services and other transaction costs, in connection with the Merger.
Preferred Stock Equity Issuance. On March 27, 2024, we sold, in a private placement, the remaining 20,000 shares of Series A-3 Convertible Preferred Stock (the “Series A-3 Preferred Stock”) under a commitment letter received during the third quarter of 2023 to certain funds managed by Luminus Management, LLC, Oaktree Capital Management, LP, and LSP Investment Advisors, LLC, who represent our largest three existing stockholders (the “Investors”). We received $19.5 million in proceeds, net of $0.5 million in original issue discount.
On May 13, 2024, we sold, in a private placement, an aggregate of 20,000 shares of Series A-4 Redeemable Convertible Preferred Stock (the “Series A-4 Preferred Stock”) (together with the Series A-3 Preferred Stock, the “preferred stock”) to the Investors. We received $19.5 million in proceeds, net of $0.5 million in original issue discount.
The issuances of preferred stock were 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.
On May 14, 2024, proceeds from the sale of the Series A-4 Preferred Stock were used to make a $17.3 million prepayment of outstanding borrowings under the Amended Term Loan Agreement to cure noncompliance of the Total Net Leverage Ratio as of March 31, 2024.
Holders of the preferred stock have no voting rights with respect to the shares of preferred stock. The preferred stock is entitled to annual dividends, paid either in cash at a fixed rate of 14.5% annually or accrued at a fixed rate of 16.0% annually (“PIK accrual”) at our option. Currently, our Amended Term Loan Agreement prohibits the payment of cash dividends. Paid-in-kind (“PIK”) dividends are cumulative, compound and accrue quarterly in arrears and are added to the Liquidation Preference (defined below) of the preferred stock.
Shares of preferred stock are convertible, subject to conversion ratios and prices stipulated in the certificate of designation of the preferred stock, at any time by the holders of the preferred stock and by Battalion after meeting certain other agreement requirements. Battalion also has 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 $138.0 million, increased for any PIK accruals) determined according to the redemption date. Additionally, in the event of a change of control, holders of the preferred stock 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. For additional information, see Note 9, “ Redeemable Convertible Preferred Stock” to the unaudited condensed consolidated financial statements.
H 2 S Treating Joint Venture. In May 2022, we entered into a joint venture agreement with Caracara Services, LLC (“Caracara”) to develop a strategic acid gas treatment and carbon sequestration facility (the “AGI Facility”) in Winkler County, Texas. The joint venture, operating as Wink Amine Treater, LLC (“WAT”) (previously Brazos Amine Treater, LLC (“BAT”)), has also entered into a Gas Treating Agreement (“GTA”) with us for natural gas production from our Monument Draw area. In exchange for contributing to the joint venture a wellbore with an approved permit for the
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injection of acid gas and surface land, we retained a 5% equity interest in WAT, an unconsolidated subsidiary. Caracara provided the initial capital for the construction of the AGI Facility, which is expected to have an initial capacity of approximately 30 MMcf per day, and a design capacity to treat up to 10% combined concentrations for H 2 S and CO2. We initially expected the AGI Facility to be mechanically complete in early April 2023 and to be in service in the second quarter of 2023. However, during commissioning and initial operations, it was determined that additional pressure was required to initiate gas injection. To correct this issue, a positive displacement pump was ordered and installed. The AGI Facility’s injection well also experienced pressure communication between the tubing and annular space after an injection procedure. We commenced workover operations to remediate this issue.
During the third quarter of 2023, additional complications were encountered with the workover operation at the AGI Facility causing higher than expected costs. To fund this workover operation, we advanced capital contributions totaling approximately $18.5 million to date as of September 30, 2024 on behalf of our joint venture partner in WAT. Pursuant to the terms of the agreement governing the joint venture, we believe that we have multiple remedies to recover such advance, including (1) declaring such payment a loan, which pursuant to the agreement would have an interest rate of the lesser of 15% or the maximum rate permitted by law, (2) recoupment from distributions from the joint venture and (3) reallocation of equity of the joint venture based on the relative level of total capital contributions by the parties after taking into account the advance, none of which would occur until the expiration of the current tolling agreement between the parties.
The AGI Facility has been processing gas since March 9, 2024 and continued to process gas in the third quarter of 2024. Additional projects have been completed causing interruption in the daily rates; however, the facility has processed over 3.7 Bcf through the third quarter of 2024. The delays during the second and third quarters of 2024 have resulted in higher than expected gathering and treating costs. It is possible that the existing remedial facility work by WAT could extend past the third quarter of 2024, and any delays in fully commissioning the facility or shut downs of the plant past the third quarter of 2024 will result in higher processing fees than currently forecast until such time the facility becomes fully operational.
Under the GTA, we will pay a treating rate that varies based on volumes delivered to the Facility for a term that will last 20 years from the in-service date of the Facility and have a minimum volume commitment of 20 MMcf per day, with certain rollover rights and start-up flexibility, for an initial term of five years from the in service date of the Facility, which can be extended up to seven years under certain conditions. Once in service, the GTA has a tiered-rate structure which is expected to drive a greater than 50 percent reduction in treating fees. Our current estimates of facility in-service dates and future treating fee reductions are subject to various operational and other risk factors, some of which are beyond our control, which could impact the timing and extent of these estimates.
Capital Resources and Liquidity
Overview. Our ability to execute our operating strategy is dependent on our ability to maintain adequate liquidity and access additional capital, as needed. Our future capital resources and liquidity depend, in part, on our success in developing our leasehold interests, growing our reserves and production and finding additional reserves. Sufficient levels of available cash are required to fund capital expenditures necessary to offset inherent declines in our production and proven reserves. We generated a net loss of $33.2 million for the nine months ended September 30, 2024 and had negative working capital of $64.5 million as of September 30, 2024. As of September 30, 2024, we had $29.8 million of cash and cash equivalents, no additional borrowing capacity under the Amended Term Loan Agreement (as defined in Note 4, “ Debt ” to the unaudited condensed consolidated financial statements) and a total of $50.0 million in debt repayments due through September 2025, including $15.0 million due at the end of each of the fourth quarter of 2024 and the first quarter of 2025 and $10.0 million due at the end of each of the second and third quarters of 2025. We will be required to make a final payment of $97.7 million at maturity on November 24, 2025.
In November 2022, we were required to seek an amendment to our Term Loan Agreement (as defined in Note 4, “Debt” to the unaudited condensed consolidated financial statements) to alleviate Current Ratio covenant compliance requirements through the first quarter of 2023 as a result of reduced commodity prices, higher interest rates, and the high capital costs experienced in our 2022 drilling program, which are by nature difficult to predict and subject to factors outside our control. In the first quarter of 2023, commodity prices, cost conditions and interest rates continued to
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deteriorate, which further constrained our liquidity. As a result, we projected near-term future covenant breaches (specifically the Current Ratio) beginning with the first quarter of 2023, coupled with inadequate liquidity resources available to fully fund all of our upcoming obligations, including debt repayments and interest, capital expenditures and operating costs. In the absence of additional liquidity from other sources with agreeable economic terms, we obtained $95.6 million of preferred equity funding during 2023 and an additional $19.5 million during the quarter ended March 31, 2024 from our three largest existing stockholders.
At March 31, 2024, we were not in compliance with the Total Net Leverage Ratio covenant under our Amended Term Loan Agreement. On May 13, 2024, we issued 20,000 additional shares of preferred equity and received net proceeds of $19.5 million, net of original issue discount and issuance costs. On May 14, 2024, the proceeds were used to make an optional prepayment of outstanding borrowings in the amount of $17.3 million under the Amended Term Loan Agreement. Such prepayment cured the noncompliance of the Total Net Leverage Ratio as of March 31, 2024.
We continue to execute on a plan to reduce operating and capital costs to improve cash flow, including the issuance of preferred stock totaling $134.6 million as of September 30, 2024 . Changes to our current business estimates and forecasts, based primarily on recent commodity prices and modifications to our planned drilling schedule to achieve better overall well economics, indicate that we will require additional liquidity to continue our operations, satisfy our debt payment requirements and meet our debt covenant requirements for the next 12 months from the issuance of these condensed consolidated financial statements. In response to these events and conditions, we have continued to execute on a plan to reduce operating and capital costs to improve cash flow. We also obtained support letters from our three largest current investors to purchase up to $30.0 million of additional preferred equity securities. We believe that, based upon our operational forecasts, cash and cash equivalents on hand, cost reduction measures, and the commitment of the investors to purchase up to $30.0 million in additional preferred equity if needed, it is probable that we will have sufficient liquidity to fund our operations, meet our debt requirements and maintain compliance with our future debt covenants as described in Note 4, “ Debt, ” for the next 12 months from the issuance of these condensed consolidated financial statements. We will, however, continue to consider alternative liquidity sources which could include entering into other financing arrangements (e.g. the refinancing of our Amended Term Loan), a sale of a portion of our non-core assets, seeking capital partners for our drilling program, pursuing strategic merger opportunities or joint ventures, the sale of the Company, or pursuing additional general and administrative or other cost reduction opportunities. Our estimates and forecasts are based upon assumptions that may prove to be incorrect due to many factors that are currently unknown, such as prevailing economic conditions, many of which are beyond our control.
In the event the assumptions underlying our estimates and forecasts prove to be incorrect, our operating plans, capital requirements, and covenant compliance may be adversely impacted. In the event our cash flows are materially less than anticipated or our costs are materially greater than anticipated and other sources of capital we historically have utilized are not available on acceptable terms, we may be required to curtail drilling, development, land acquisitions and other activities to reduce our capital spending. However, significant or prolonged reductions in capital spending will adversely impact our production and may negatively affect our future cash flows.
We continuously monitor changes in market conditions and will continue to adapt our operational plans as necessary to strive to maintain sufficient liquidity, facilitate drilling on our undeveloped acreage position and permit us to selectively expand our acreage, as well as meet our debt obligations and restrictive covenants. We continue to explore strategic transactions to address these concerns, while also looking at opportunities to significantly reduce expenses in the near term. In this regard, we have considered whether it is advisable to continue to bear the ongoing costs of the listing of our common stock on the NYSE American and of being a reporting company under the Securities Exchange Act of 1934. We believe that we currently qualify to suspend these obligations should we elect to do so. While such a determination has not yet been made, we expect that the cost savings, particularly over the longer term, would be significant. Accordingly, we will continue to consider the matter while we simultaneously pursue strategic and financial alternatives that may render it unnecessary.
Other Risks and Uncertainties. Our ability to complete transactions and maintain or increase our liquidity is subject to a number of variables, including our level of oil and natural gas production, proved reserves and commodity prices, the amount and cost of our indebtedness, as well as various economic and market conditions that have historically affected the oil and natural gas industry. Even if we are otherwise successful in growing our proved reserves and
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production, if oil and natural gas prices decline for a sustained period of time, our ability to fund our capital expenditures, complete acquisitions, reduce debt, meet our financial obligations and become profitable may be materially impacted.
Additionally, 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.
Lastly, actual or anticipated declines in domestic or foreign economic activity or growth rates, regional or worldwide increases in tariffs or other trade restrictions, turmoil affecting the United States or global financial system and markets and a severe economic contraction either regionally or worldwide, resulting from international conflicts, efforts to contain pandemics or other factors, could materially affect our business and financial condition and impact our ability to finance operations by worsening the actual or anticipated future drop in worldwide oil demand, negatively impacting the price received for oil and natural gas production or adversely impacting our ability to comply with covenants in our Amended Term Loan Agreement. Negative economic conditions could also adversely affect the collectability of our trade receivables or performance by our vendors and suppliers or cause our commodity hedging arrangements to be ineffective if our counterparties are unable to perform their obligations. All of the foregoing may adversely affect our business, financial condition, results of operations, cash flows and, potentially, compliance with the covenants contained in our Amended Term Loan Agreement.
Debt Obligations. On November 24, 2021, we and our wholly owned subsidiary, Halcón Holdings, LLC (Borrower) entered into the Term Loan Agreement with Macquarie Bank Limited, as administrative agent, and certain other financial institutions party thereto, as lenders.
On November 14, 2022, we paid approximately $2.4 million and entered into a further Amended Credit Agreement (the “Amended Term Loan Agreement”) with our lenders which modified certain provisions of its original Term Loan Agreement including, but not limited to, our Current Ratio financial covenant, interest rate benchmark, and prepayment premiums, all as further described below.
On March 28, 2024, we entered into the Third Amendment to the Amended Term Loan Agreement (the “Third Amendment”) with our lenders. The Third Amendment, amended the Amended Term Loan Agreement to, among other things, (a) amend the approved plan of development (“APOD”) for certain properties, (b) remove the Proved Developed Producing (“PDP”) Production Test and APOD Economic Test (each defined in the Term Loan Agreement), (c) require the Borrower to receive cash proceeds from equity issuances and/or cash contributions in an aggregate amount of not less than $38.0 million during the period from Amendment Effective Date through March 31, 2024 (the “Specified Additional Equity Capital”), which such Specified Additional Equity Capital shall be excluded from the calculation of Consolidated Cash Balance (as defined in the Term Loan Agreement) through December 31, 2024, and (d) make amendments to certain other affirmative covenants in connection with the foregoing.
On August 23, 2024, we entered into the Fourth Amendment to the Amended Term Loan Agreement (the “Fourth Amendment”) with our lenders. The Fourth Amendment amended the Amended Term Loan Agreement to allow for a Current Ratio (as defined in the Amended Term Loan Agreement) of not less than 0.90 to 1.00 for the fiscal quarter ending September 30, 2024.
As of September 30, 2024, we had $147.7 million of indebtedness outstanding and $0.3 million of letters of credit outstanding under the Amended Term Loan Agreement. We currently, as of November 8, 2024, have $147.7 million in borrowings outstanding and $5.0 million available for the issuance of letters of credit. The maturity date of the Amended Term Loan Agreement is November 24, 2025. Borrowings under the Amended Term Loan Agreement bear a variable interest rate based on the Secured Overnight Financing Rate (“SOFR”) plus 0.15% plus a fixed applicable margin of 7.5%. The weighted average interest rate on our borrowings for the quarter ended September 30, 2024 was approximately 12.98%.
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Our Amended Term Loan Agreement contains a mandatory repayment schedule with $15.0 million due at the end of the fourth quarter in 2024 and in the aggregate, $35.0 million due from the first quarter ending March 31, 2025 through the fiscal quarter ending September 30, 2025 as well as a $97.7 million payment due upon maturity on November 24, 2025. Amounts outstanding under the Amended Term Loan Agreement are guaranteed by certain of the Borrower’s direct and indirect subsidiaries and secured by a security interest in substantially all of the assets of the Borrower and such direct and indirect subsidiaries, and all of the equity interests of the Borrower held by us. 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.
We may elect, at our option, to prepay any borrowing outstanding under the Amended Term Loan Agreement subject to the following prepayment premiums:
Period (after applicable borrowing date (1) )
Premium
Months 0-12
Make-whole amount equal to 12 months of interest plus 2.00%
Months 13-24
2.00%
Months 25-36
1.00%
Months 37-48
0.00%
(1) Applicable borrowing dates are November 2021 for the original $200.0 million borrowed and April and November 2022 for the $20.0 million and $15.0 million in delayed draw borrowings, respectively.
We 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 cash on hand in excess of certain maximum levels beginning in 2023. For each fiscal quarter after January 1, 2023, we are required to make mandatory prepayments when our Consolidated Cash Balance, as defined in the Amended 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. As of September 30, 2024, the Consolidated Cash Balance, as defined in the Amended Term Loan Agreement and excluding the Specified Additional Equity Capital, did not exceed $20.0 million; therefore, no mandatory prepayment was necessary.
The Amended Term Loan Agreement also contains certain financial covenants (as defined), including the maintenance of the following ratios:
● Asset Coverage Ratio of not less than 1.80 to 1.00 as of September 30, 2024 and each fiscal quarter thereafter
● Total Net Leverage Ratio of not greater than 2.50 to 1.00 as of September 30, 2024, and each fiscal quarter thereafter, and
● Current Ratio of not less than 0.90 to 1.00 for the fiscal quarter ending September 30, 2024 and not less than 1.00 to 1.00, determined as of the last day of any fiscal quarter period, as of December 31, 2024 and for each fiscal quarter thereafter.
At March 31, 2024, subject to the cure provision discussed below, we were not in compliance with the Total Net Leverage Ratio covenant but were in compliance with the remaining financial covenants under the Amended Term Loan Agreement. Under the Amended Term Loan Agreement, we have a right to cure noncompliance with the Total Net Leverage Ratio covenant within 15 days of delivery of financial statements by making an optional prepayment in an amount not greater than the amount required for purposes of complying with the Total Net Leverage Ratio and such prepayment shall not be subject to the applicable prepayment premium. Once such prepayment is made, the Total Net Leverage Ratio shall be recalculated giving effect to the reduction in the outstanding amount of borrowings as if such prepayment had occurred on the last day of the quarter. Accordingly, on May 14, 2024, we made a prepayment of outstanding borrowings under the Amended Term Loan Agreement in the amount of $17.3 million resulting in total borrowings outstanding of $172.7 million. Upon giving effect to such prepayment for the calculation of the Total Net Leverage Ratio at March 31, 2024, we were in compliance with such financial covenant.
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As of September 30, 2024, we were in compliance with the financial covenants under the Amended Term Loan Agreement.
The Amended Term Loan Agreement contains an APOD for our Monument Draw acreage through the drilling and completion of certain wells.
The Amended Term Loan Agreement also contains certain events of default, including non-payment; breaches of representations and warranties; non-compliance with covenants or other agreements; cross-default to material indebtedness; judgments; change of control; and voluntary and involuntary bankruptcy.
Changes in the level and timing of our production, drilling and completion costs, the cost and availability of transportation for our production and other factors varying from our expectations can affect our ability to comply with the covenants under our Amended Term Loan Agreement. As a consequence, we endeavor to anticipate potential covenant compliance issues and work with our lenders to address any such issues ahead of time.
While we have largely been successful in obtaining modifications of our covenants as needed, as evidenced most recently by the Fourth Amendment in August 2024 and the Third Amendment in March 2024, there can be no assurance that we will be successful in the future. In the event we are not successful in obtaining covenant modifications, if needed, there is no assurance that we will be successful in implementing alternatives that allow us to maintain compliance with our covenants or that we will be successful in obtaining alternative financing that provides us with the liquidity that we need to operate our business. Even if successful, alternative sources of financing could prove more expensive than borrowings under our Amended Term Loan Agreement.
Cash Flow
Net decrease in cash and cash equivalents is summarized as follows (in thousands):
Nine Months Ended
September 30,
2024
2023
Cash flows provided by (used in) operating activities
$
28,669
$
11,065
Cash flows used in investing activities
(52,586)
(37,106)
Cash flows (used in) provided by financing activities
(3,777)
35,905
Net decrease in cash, cash equivalents and restricted cash
$
(27,694)
$
9,864
Operating Activities . Net cash flows provided by operating activities for the nine months ended September 30, 2024 were $28.7 million compared to net cash flows provided by operating activities of $11.1 million for the nine months ended September 30, 2023. Items impacting the increase in operating cash flows were primarily driven by changes in working capital offset by lower total operating revenues resulting from an approximate $2.22 per Boe decrease in average realized prices (excluding the impact of hedging arrangements), lower production volumes for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023, and the impact of settled derivative contracts period over period .
Investing Activities. Net cash flows used in investing activities for the nine months ended September 30, 2024 and 2023 were approximately $52.6 million and $37.1 million, respectively, primarily for drilling and completion activities.
During the nine months ended September 30, 2024, we spent $51.8 million on oil and natural gas capital expenditures, of which $46.8 million related to drilling and completion costs and $4.1 million related to the development of our treating equipment and gathering support infrastructure. During the first half of 2024, our cash capital expenditures included amounts related to the drilling and completion activities that occurred in the fourth quarter of 2023. In the first nine months of 2024, we ran one 1 operated rig in the Delaware Basin, drilled and cased four 4 gross
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(3.73 net), and completed and put online two 2 gross (1.925 net) operated wells. We also received $7.0 million in proceeds from the sale of oil and natural gas assets that were deemed to be unnecessary for future operations.
During the nine months ended September 30, 2023, we spent $36.7 million on oil and natural gas capital expenditures, of which $31.6 million related to drilling and completion costs and $4.1 million related to the development of our treating equipment and gathering support infrastructure. In the first nine months of 2023, we ran one operated rig in the Delaware Basin and completed and put online one operated well.
Financing Activities. Net cash flows used in financing activities for the nine months ended September 30, 2024 were $3.8 million and net cash flows provided by financing activities for the nine months ended September 30, 2023 were $35.9 million. During the nine months ended September 30, 2024, we repaid $52.3 million under our Amended Term Loan Agreement and received $38.8 million from our preferred stock equity issuances. Our net cash flows provided by financing activities during the nine months ended September 30, 2024 also reflect the receipt of the $10.0 million distributed from the Merger escrow account to the Company. During the nine months ended September 30, 2023, we received $61.4 million from our preferred stock equity issuance and repaid $25.1 million under our Amended Term Loan Agreement.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon the unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. Preparation of these unaudited condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. There have been no material changes to our critical accounting policies from those described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023.
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Results of Operations
The table below sets forth financial information for the periods presented.
Three Months Ended
Nine Months Ended
September 30,
September 30,
In thousands (except per unit and per Boe amounts)
2024
2023
2024
2023
Operating revenues:
Oil
42,545
43,689
$
130,673
$
144,072
Natural gas
(2,588)
3,668
(2,660)
8,628
Natural gas liquids
5,145
6,078
15,704
18,893
Other
164
671
523
1,927
Operating expenses:
Production:
Lease operating
11,602
11,152
34,193
34,208
Workover and other
1,249
700
3,088
4,669
Taxes other than income
2,532
3,307
8,872
9,677
Gathering and other
12,442
15,512
41,854
48,857
General and administrative:
General and administrative
3,849
3,878
11,125
14,803
Stock-based compensation
5
(686)
140
(1,231)
Depletion, depreciation and accretion:
Depletion – Full cost
12,121
13,070
37,559
43,238
Depreciation – Other
163
167
486
488
Accretion expense
249
189
726
561
Other income (expenses):
Net gain (loss) on derivative contracts
26,896
(53,687)
3,932
(29,741)
Interest expense and other
(6,322)
(6,929)
(19,809)
(24,245)
Net income (loss)
$
21,628
$
(53,799)
$
(9,680)
$
(35,736)
Production:
Oil – MBbls
577
539
1,720
1,905
Natural Gas - MMcf
1,844
2,054
5,953
6,616
Natural gas liquids – MBbls
227
288
751
917
Total MBoe (1)
1,111
1,170
3,463
3,925
Average daily production – Boe (1)
12,076
12,717
12,639
14,377
Average price per unit (2) :
Oil price - Bbl
$
73.73
$
81.06
$
75.97
$
75.63
Natural gas price - Mcf
(1.40)
1.79
(0.45)
1.30
Natural gas liquids price - Bbl
22.67
21.10
20.91
20.60
Total per Boe (1)
40.60
45.67
41.50
43.72
Average cost per Boe:
Production:
Lease operating
$
10.44
$
9.53
$
9.87
$
8.72
Workover and other
1.12
0.60
0.89
1.19
Taxes other than income
2.28
2.83
2.56
2.47
Gathering and other
11.20
13.26
12.09
12.45
General and administrative:
General and administrative
3.46
3.31
3.21
3.77
Stock-based compensation
—
(0.59)
0.04
(0.31)
Depletion
10.91
11.17
10.85
11.02
(1) Determined using a ratio of six Mcf of natural gas to one barrel of oil, condensate, or natural gas liquids (“NGLs”) based on approximate energy equivalency. This is an energy content correlation and does not reflect the value or price relationship between the commodities.
(2) Amounts exclude the impact of cash paid/received on settled contracts as we did not elect to apply hedge accounting.
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Operating Revenues. Oil, natural gas and NGLs revenues were $45.1 million and $53.4 million for the three months ended September 30, 2024 and 2023. The decrease in revenues is primarily attributable a decrease in average realized prices combined with our lower production volumes in 2024 compared to 2023. Average realized prices (excluding the effects of hedging arrangements) decreased approximately $5.07 per Boe for three months ended September 30, 2024 when compared with the same period in 2023.
Oil, natural gas and NGLs revenues were $143.7 million and $171.6 million for the nine months ended September 30, 2024 and 2023, respectively. The decrease in revenues is primarily attributable to a decrease in our average realized prices and lower production volumes in 2024 compared to 2023. Average realized prices (excluding the effects of hedging arrangements) decreased approximately $2.22 per Boe for the nine months ended September 30, 2024 when compared with the same period in 2023. The amount we realize for our production depends predominantly upon commodity prices, which are affected by changes in market demand and supply, as impacted by overall economic activity, weather, transportation take-away capacity constraints, inventory storage levels, quality of production, basis differentials and other factors.
Production averaged 12,076 Boe/d and 12,717 Boe/d for the three months ended September 30, 2024 and 2023, respectively, and 12,639 Boe/d and 14,377 Boe/d for the nine months ended September 30, 2024 and 2023, respectively. Production was lower in the third quarter and year to date period 2024 compared with the same period in 2023 due largely to the timing of capital expenditures spent to bring new wells online and natural production declines on our existing producing wells. Also impacting 2024 production volumes was curtailment in Monument Draw due to downstream throughput limitations causing increased downtime and shut-in production.
Lease Operating Expenses. Lease operating expenses were $11.6 million and $11.2 million for the three months ended September 30, 2024 and 2023, respectively, and $34.2 million for each of the nine months ended September 30, 2024 and 2023. On a per unit basis, lease operating expenses were $10.44 per Boe and $9.53 per Boe for the three months ended September 30, 2024 and 2023, respectively, and $9.87 per Boe and $8.72 per Boe for the nine months ended September 30, 2024 and 2023, respectively. The increase in lease operating expenses on a per unit basis in the third quarter and first nine months of 2024 is primarily a result of an inflationary market increase in maintenance, power, and chemical costs combined with lower production .
Workover and Other Expenses. Workover and other expenses were $1.2 million and $0.7 million for the three months ended September 30, 2024 and 2023, respectively and $3.1 million and $4.7 million for the nine months ended September 30, 2024 and 2023, respectively. On a per unit basis, workover and other expenses were $1.12 per Boe and $0.60 per Boe for the three months ended September 30, 2024 and 2023, respectively, and $0.89 per Boe and $1.19 per Boe for the nine months ended September 30, 2024 and 2023, respectively. The year to date September 30, 2024 decrease in workover and other expenses compared to the same period in 2023 relate to more significant workover projects undertaken in the prior year.
Taxes Other than Income. Taxes other than income were $2.5 million and $3.3 million for the three months ended September 30, 2024 and 2023, respectively, and $8.9 million and $9.7 million for the nine months ended September 30, 2024 and 2023, respectively. Severance taxes are based on realized prices and volumes at the wellhead, while ad valorem taxes are tied to the annual valuation of our properties. As revenues or volumes from oil and natural gas sales increase or decrease, severance taxes on these sales also increase or decrease. On a per unit basis, taxes other than income were $2.28 per Boe and $2.83 per Boe for the three months ended September 30, 2024 and 2023, respectively, and $2.56 per Boe and $2.47 per Boe for the nine months ended September 30, 2024 and 2023, respectively.
Gathering and Other Expenses. Gathering and other expenses were $12.4 million and $15.5 million for the three months ended September 30, 2024 and 2023, respectively, and $41.9 million and $48.9 million for the nine months ended September 30, 2024 and 2023, respectively. Gathering and other expenses include gathering fees paid to third parties on our oil and natural gas production and operating expenses of our gathering support infrastructure. Our gathering and other expenses are primarily driven by the amount and location of natural gas production, the concentration of H 2 S in our sour gas produced, and the amounts paid to treat our sour gas volumes, either through our own hydrogen sulfide treating plant or through third parties. On a per unit basis, gathering and other expenses were $11.20 per Boe and $13.26 per Boe for the three months ended September 30, 2024 and 2023, respectively, and $12.09 per Boe and $12.45 per Boe for the nine months ended September 30, 2024 and 2023, respectively. The decrease in
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gathering and other expenses per Boe for the three and nine months ended September 30, 2024 is primarily related to the commencement of volumes being treated by the AGI facility during 2024.
General and Administrative Expense. General and administrative expense was $3.8 million and $3.9 million for the three months ended September 30, 2024 and 2023, respectively, and $11.1 million and $14.8 million for the nine months ended September 30, 2024 and 2023, respectively. On a per unit basis, general and administrative expenses were $3.46 per Boe and $3.31 per Boe for the three months ended September 30, 2024 and 2023, respectively, and $3.21 per Boe and $3.77 per Boe for the nine months ended September 30, 2024 and 2023, respectively. The decreases in general and administrative expense for the three and nine months ended September 30, 2024 compared with the prior year periods is primarily associated with a decrease in payroll and benefits in connection with the headcount reduction in 2023 partially offset by an increase in legal fees associated with the merger.
Depletion, Depreciation, and Amortization Expense. 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.
Depletion expense was $12.1 million and $13.1 million for the three months ended September 30, 2024 and 2023, respectively, and $37.6 million and $43.2 million for the nine months ended September 30, 2024 and 2023, respectively. On a per unit basis, depletion expense was $10.91 per Boe and $11.17 per Boe for the three months ended September 30, 2024 and 2023, respectively, and $10.85 per Boe and $11.02 per Boe for the nine months ended September 30, 2024 and 2023, respectively. The decreases in our depletion rates per Boe are primarily due to a period over period decrease in future development costs associated with proved reserves relative to the associated period over period decrease in proved reserves.
Net gain (loss) on derivative contracts. We enter into derivative commodity instruments to hedge our exposure to price fluctuations on our anticipated oil, natural gas and NGLs production. Consistent with prior years, we have elected not to designate any positions as cash flow hedges for accounting purposes, and accordingly, we recorded the net change in the mark-to-market value of these derivative contracts in the unaudited condensed consolidated statements of operations.
For the three months ended September 30, 2024, we recorded a net derivative gain of $26.9 million ($28.1 million net gain on unsettled contracts and $1.2 million net realized loss on settled contracts). For the three months ended September 30, 2023, we recorded a net derivative loss of $53.7 million ( $46.8 million net loss on unsettled contracts and $6.9 million net realized loss on settled contracts ). For the nine months ended September 30, 2024, we recorded a net derivative gain of $3.9 million ($12.7 million net gain on unsettled contracts and $8.8 million net realized loss on settled contracts). For the nine months ended September 30, 2023, we recorded a net derivative loss of $29.7 million ($23.5 million net loss on unsettled contracts and $6.3 million net realized loss on settled contracts). At September 30, 2024, we had a $12.9 million derivative asset ($5.7 million current) and a $19.5 million derivative liability ($9.8 million current).
Interest Expense and Other. Interest expense and other was $6.3 million and $6.9 million for the three months ended September 30, 2024 and 2023, respectively, and $19.8 million and $24.2 million for the nine months ended September 30, 2024 and 2023, respectively. Interest expense and other primarily decreased in the current year periods compared to the same periods in the prior year due to a lower average debt balance resulting from repayment of borrowings associated with our Amended Term Loan Agreement. Our weighted average interest rate was approximately 12.98% for the quarter ended September 30, 2024 and 12.97% for the nine months ended September 30, 2024 . For the fourth quarter of 2024, our interest rate will be approximately 12.25% on outstanding borrowings .
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.