Vadzim Kushniarou/iStock via Getty Images Battalion Oil ( BATL ) has strategically refinanced its debt to give it more liquidity to invest in Monument Draw production growth and take advantage of currently strong oil prices.
This strategy has risks in that if its wells do not perform as well as expected or if commodity prices decrease significantly, Battalion will be entirely focused on attempting to pay back its term loan. This would likely result in significant production declines as its term loan maturity approaches.
However, if oil prices remain in the $70s or better over the next couple years (and its wells meet or exceed expectations), it could be worth in the $20s in a couple years.
I liked Battalion as an interesting high-risk option when it was trading in the low-double digits. When it hit $20+, the risk/reward equation wasn’t that favorable anymore. At $15 per share, Battalion does have some upside potential, with the caveat that it is relatively risky due to its debt. Term Loan Facility
Battalion entered into a new first-lien delayed draw term loan facility maturing in November 2025. This gives it additional liquidity to grow its production through Monument Draw development. The downside for Battalion is that is paying a higher interest rate on its new borrowings, while also giving its lenders significant control over its development plans.
The new term loan facility may allow Battalion to borrow up to $235 million, and has $200 million in initial borrowings. I projected Battalion Oil to end 2021 with around $140 million in net debt, so these borrowings allow it to pay off its previous credit facility borrowings and fund Monument Draw development.
The interest rate on Battalion’s previous credit facility was approximately 4%, while its new term loan facility has an interest rate of LIBOR + 7%, increasing its effective interest rate by over 3%.
The new term loan facility also calls for Battalion’s capital expenditures to be primarily limited to an approved plan of development (APOD), which consists of five initial Monument Draw wells, followed by tranches of six Monument Draw wells after that. The APOD wells are also subject to an economic test calling for minimum IRRs. Hedging Situation
Battalion’s hedges are likely to result in a significant negative value in 2022, although this should ease in 2023. It has around 62% of its oil production hedged for 2022 at $48.81 per barrel, assuming that it completes 11-12 net wells during the year. In 2023 it has around 35% of its oil production hedged at $66.55 per barrel. Battalion’s Hedges (battalionoil.com) Notes On Well-Level Results
Battalion’s Monument Draw wells have produced well, with first-year oil production around 8% higher than the Delaware Basin average (both per well and per lateral foot). However, Battalion’s very high gathering and other costs (to deal with sour gas treatment costs) make its production less valuable. At $55 WTI oil, Battalion’s Monument Draw production margins per BOE may be around 29% than its Delaware Basin peers, resulting in total production margins (in dollars) being around 23% less than its Delaware Basin peers after factoring in the higher production productivity. Monument Draw Well Productivity (battalionoil.com) The percentage gap narrows with higher oil prices. At $85 WTI oil, Battalion’s Monument Draw production margins per BOE are estimated at 16% lower than its Delaware Basin peers, resulting in total production margins (in dollars) estimated at around 10% less than its Delaware Basin peers. Potential 2022 Outlook
Strip prices for 2022 have improved to approximately $85 WTI oil. This is a scenario where Battalion could generate $396 million in oil and gas revenues before hedges, while its 2022 hedges would have negative $90 million in value.
This assumes that Battalion can average 19,000 BOEPD (55% oil) in production in 2022 while spending $120 million on capital expenditures. Type Barrels/Mcf $ Per Barrel/Mcf $ Million Oil 3,814,250 $83.00 $317 NGLs 1,341,923 $31.00 $42 Gas 10,672,965 $3.50 $37 Hedge Value $-90 Total $306 Source: Author’s Work
Battalion is now projected to generate $20 million in positive cash flow in 2022 at current strip while investing in that production growth. $ Million Lease Operating and Workover $52 Production Taxes $20 Cash G&A $16 Gathering and Other $64 Cash Interest $14 Capital Expenditures $120 Total $286 Source: Author’s Work Debt Situation
Battalion is required to pay down its term loan by $35 million in 2023 and $50 million in 2024 and $40 million in 2025 (prior to the term loan maturing in November 2025. It should be able to achieve this at […]
source Battalion Oil: Aiming For Quick Well Paybacks In Monument Draw
Protected by Patchstack