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Battalion Oil’s (NYSE:BATL) Q3 2022 report was on the disappointing side due to its downward revision in 2022 oil production guidance. While Battalion is maintaining its total production guidance, it reduced its oil production guidance by approximately 750 barrels per day.
Battalion appears to have over 70% of its oil production hedged for Q4 2022 and 2023 and it would likely benefit from having more unhedged barrels to provide potential upside. As it stands, Battalion should be able to reduce its leverage to around 1.0x EBITDAX by the end of 2023, but it will have to carefully manage its finances as it is also required to make quarterly payments on its term loan borrowings.
Battalion’s reduction in oil production guidance reduces its projected cash flow by approximately $15 million. I have trimmed my estimates of Battalion’s value to reflect the lower oil production growth in 2022 and potential for a lower oil production peak in future years. Battalion’s ability to further grow production is currently constrained by its need to manage its term loan repayments.
Reduction In Oil Guidance
Battalion maintained its total production guidance for 2022, but lowered its oil production guidance to a range of 7,500 to 8,500 barrels per day. This was reduced from its previous guidance for 8,000 to 9,500 barrels per day for 2022 oil production.
Battalion mentioned that oil cuts were slightly lower than planned, but didn’t provide more details about what caused that. It does appear that the oil cuts for Battalion’s PDP wells may be declining faster than it expected though.
At the end of 2021, Battalion’s PDP reserves were reported at 51% oil. However, in Q2 2022, Battalion’s production was only 49% oil, despite a modest amount of production from Battalion’s new wells (which would have had a higher oil cut). Battalion’s production in Q3 2022 edged up to 50% oil with a full quarter’s worth of production from five wells that came online in Q2 2022.
At guidance midpoint, the 750 barrel per day reduction in Battalion’s expected oil production hits its projected 2022 cash flow by close to $15 million. Battalion’s total production outlook is unchanged, but replacing oil with NGLs or natural gas reduces its 2022 realized price by close to $60 per BOE for those 750 BOEPD.
2023 Outlook
It appears that Battalion Oil will end 2022 with approximately $200 million in net debt. It wasn’t expected to make progress in reducing its debt in 2022 due to its hedges, but its hedging situation is improved for 2023.
Battalion hasn’t finalized its 2023 plans yet, but I am currently modeling a scenario where it spends $130 million on capex in 2023 to average 9,500 barrels per day of oil production along with 18,500 BOEPD in total production. Battalion has done pretty well so far to mitigate inflationary pressure with its development activities.
This would be mid-single digits oil production growth from expected Q4 2022 levels. Battalion’s last two wells from its 2022 development program are expected to come online in December, so those wells would mainly have an impact on 2023 production.
At the current high-$70s WTI strip, Battalion is projected to generate $328 million in revenues after hedges in 2023.
|
Type |
Barrels/Mcf |
$ Per Barrel/Mcf |
$ Million |
|
Oil |
3,467,500 |
$77.00 |
$267 |
|
NGLs |
1,543,950 |
$30.00 |
$46 |
|
Gas |
10,446,300 |
$4.25 |
$44 |
|
Hedge Value |
$-29 |
||
|
Total |
$328 |
This would result in Battalion generating around $25 million in positive cash flow in 2023, reducing its net debt to approximately $175 million by the end of 2023. This would put its leverage at 1.0x by the end of 2023, in line with Battalion’s stated target.
This assumes that Battalion’s gathering and other costs are reduced by over $3 per BOE due to the acid gas treating facility entering service in Q1 2023. Battalion’s term loan now has an interest rate of SOFR + 7.5%, which results in an interest rate of 11.3% at the moment.
|
$ Million |
|
|
Lease Operating and Workover |
$62 |
|
Production Taxes |
$20 |
|
Cash G&A |
$17 |
|
Gathering and Other |
$52 |
|
Cash Interest |
$22 |
|
Capital Expenditures |
$130 |
|
Total |
$303 |
Battalion is required to make $35 million in payments on its term loan in 2023, which it should be able to achieve through cash on hand plus its projected 2023 cash flow. It will then need to make $50 million in payments on its term loan in 2024, which may result in it reducing its capex budget to deliver more free cash flow.
Conclusion
Due to Battalion’s reduced expectations for oil production, I now estimate its value in the mid-teens per share (as a target price for the end of 2023) in a long-term (after 2023) $70 WTI oil scenario. Battalion should be able to reduce its leverage to around 1.0x by the end of 2023, and the reduced treatment costs (due to the new acid gas treating facility) should help it.
Battalion remains fairly risky due to its need to manage the repayment of its term loan debt. There does appear to be a reasonable path for it to deal with its term loan debt with $70s oil though.
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