Earnings Transcript for BATL - Q2 Fiscal Year 2022

Operator: Welcome to the Battalion Oil Q2 2022 Earnings Call. As a reminder, today's conference is being recorded. Now I'll turn it over to Battalion Oil Corporation's Director, Finance and Investor Relations, Chris Lang, to open the call. Mr. Lang, you may begin.

Chris Lang;Director, Finance and Investor Relations: Good morning. I'm joined by a few of my colleagues today that I'd like to introduce

This conference call contains forward-looking statements. For a detailed description of our disclaimer, see our earnings release issued yesterday and posted on our website. This conference call also includes references to certain non-GAAP financial measures. Reconciliations of these non-GAAP financial measures to the most directly comparable measure under GAAP are contained in our earnings release announcement released yesterday. :

We have also published an investor presentation, which may be found on our website and will be referenced during this webcast. Now our team will present a few scripted remarks followed by Q&A. And with that, I'd like to turn it over to Rich to start things off. Rich? :

Richard Little: Thanks, Chris. It's great to be here this morning. Welcome, everyone, to our second quarter 2022 earnings call. I'd like to thank everyone who's taken the time to join us today. We really appreciate your interest in Battalion and the story we have to tell.

The second quarter was an exciting one for us as we welcomed the return to growth. Over the course of the entire quarter, we put online 5 new wells, the first from our 2022 capital program and saw our daily production begin to trend up as we exited the quarter. These new volumes are critical for us as we look to drive an increase in cash flow in the second half of the year. With much of our base production hedged coming into the year, our ability to participate in this higher pricing environment relied on our ability to bring on new volumes. :

Our results this quarter do a great job illustrating what happens when we execute. So despite volumes remaining roughly flat quarter-over-quarter, we saw an adjusted EBITDA increase of over 50%. With a full quarter of production from these new wells ahead of us and our next 3-well pad on track to come online late in the third quarter, we're building solid momentum as we accelerate into the second half of the year. :

Getting to this point hasn't come without its challenges, though. You've no doubt heard from operators and service providers across the energy sector on how supply chain disruptions and inflation have hit the industry hard this year. And like others, we felt these pressures, too. That's why it's important to remind you that we did factor some of this uncertainty into our original budgeting and capital planning process. While these market dynamics have received a significant amount of our attention this year and will continue to do so, we believe the steps we've taken in our planning process and our ability to capture capital and operational efficiencies leave us well-equipped to continue executing on our plan without disruption while offsetting some of the inflationary pricing pressures that we've been seeing. :

As our activity levels continue to increase and our business continues to build momentum, it's important that we also emphasize our commitment to operate in the right way. We believe we have a responsibility to our team, our industry and the communities around us to operate in a safe and environmentally friendly way, and we back that up with our performance. So I'm proud to say, over the last 12 months, we've had 0 recordable incidents and we've methodically reduced our flare intensity to below industry standards. We want to win but we also want to do it the right way. :

Before I pass it off to Danny, I would also like to take this chance to highlight the joint venture we announced in May to develop a strategic acid gas treatment facility in Winkler County. This is a significant development for Battalion and one that checks every box. Operationally, the facility provides a comprehensive solution for our current and future processing needs with multiple expansion opportunities beyond Phase 1. :

Environmentally, we meaningfully reduce our environmental impact with the ability to fully sequester virtually all CO2 and H2S from our Monument Draw production. And then financially, we meaningfully reduce our operating costs while minimizing the incremental capital requirements of the company by utilizing an existing wellbore. This is a milestone agreement for us as we transition to a profitable growth and accelerate balance sheet improvements and one that I believe sets us apart from our peers in the basin. :

Now I'd like to pass it over to Danny to continue providing some detail on the project and our operational results. Danny? :

Daniel Rohling: Thank you, Rich. I want to start with a few additional comments on EHS, and I'll open by congratulating the team on the phenomenal safety achievement. Our recordable incident rate of 0.0 is extremely rare in our industry, particularly for companies that are in active development mode. That type of performance doesn't just happen, and our leaders in the field and here in Houston have worked tirelessly to establish our hazard recognition program and to put together a culture of safety first.

We're also delivering on the environmental front, where we continued our trend of reducing flare volumes in Q2. This has been a major focus for us at the time this year, and we're proud of where we sit today with our trailing 12-month average well below the industry standard and continuing to drop. In addition to our reduced flare volumes, we also continued to improve and expand on our leak detection program or LDAR. We kicked this program off 4 years ago with the goal of being proactive instead of reactive in addressing emissions issues, and we're encouraged by the improvements we've made across all the fields. :

Now to touch on a few of our operational results. We had a busy quarter as we looked to build on the progress we made in Q1 on our capital program. During the quarter, we put online 5 total wells and continued with our 1-rig program by kicking off and spudding our next 3-well pad, which we expect to have online by the end of the third quarter. Overall, we continue to see improved efficiency in drilling completion operations. :

On the drilling side, we've increased our drilling footage per day by nearly 10% over 2021 averages. And on the completion side, we're averaging more than 18.5 pumping hours per day, both exceptionally high marks for operators in our area. What adds to our optimism is the fact that these operational efficiencies are coupled with high productivity. We're excited to say that those 5 wells came online with higher average initial production rates than we planned. :

To expand on Rich's earlier comments around market uncertainty, our efforts to curb inflation and limit logistical hiccups began well before the drill bit starts to turn. We're prepurchasing materials and equipment to stay ahead of supply chain shortages such as casing. We're utilizing preexisting pads and site work, where available, to lower costs, and we're modifying frac designs to optimize production. All of this hard work has helped us efficiently move through our development plan without interruption, all while dampening the full impact of inflation. :

Finally, I'd like to provide a little more color on the joint venture we announced in May to develop a strategic acid gas treatment facility. This facility, which is supported by an AGI well, represents a tremendous step forward for us as we develop our assets in a cost-effective and environmentally friendly way. The facility will have an initial capacity of at least 30 million cubic feet a day as part of Phase 1 and is designed to treat natural gas for CO2 and H2S with a combined concentration of up to 10%. :

What that means is at initial capacity, this facility will be able to fully capture and sequester more than 50,000 tons per year of H2S and CO2. After treating, the facility will deliver sweet gas back to Battalion for delivery to its dedicated third-party midstream providers. Construction is well under way, and we are planning to have this facility up and running in early 2023. :

Beyond Phase 1, there are multiple expansion opportunities, providing flexibility and optionality to further accelerate development. To have a project that solves for our treating and processing needs at Monument Draw is a big win. To have one that also provides improved offtake optionality, significantly reduces cost and meaningfully enhances our environmental footprint and culture of safety is a game-changer. :

Now Kevin is going to walk you through our financial results. :

R. Kevin Andrews: Thanks, Danny, and good morning, everyone. Total production in the second quarter increased to 15,044 barrels of oil equivalent per day, or BOE per day, compared to 14,767 BOE per day during the first quarter this year. We entered the quarter anticipating volumes to be roughly flat with first quarter results. The fact that we were able to increase total volumes despite downtime in June related to weather and third-party curtailments is a real testament to the strength of the wells being online. And we're encouraged by the impact those volumes are having on our financial results.

Total revenue in the second quarter was $101.5 million, of which oil represented 73%. We continue to receive strong pricing, realizing 101% of the average NYMEX oil price during the quarter before realizing a $44.7 million loss from our hedge program. We came into 2022 heavily hedged on our base production, with many of those hedges below current market prices. One of the primary benefits of this new production from a 2022 capital program is that we're able to more fully participate in an improved commodity price environment, evidenced by an increase in adjusted EBITDA. :

During the second quarter, adjusted EBITDA totaled $18.2 million, a 54% increase over the first quarter of this year, and that was on relatively flat production volumes. With our third quarter being the first to fully benefit from production from these new wells and our 2022 capital program continuing to ramp up, we expect to drive significant increases in cash flow through the second half of the year as volumes come online and realized prices continue to improve. :

As we turn an eye to 2023, our excitement only builds as our weighted average strike price on crude oil swaps in 2023 improves by over $15 per barrel as compared to the second half of 2022. :

Continuing with our financial results. We reported GAAP net income to common shareholders for the second quarter of 2022 of $13.1 million or $0.79 per diluted share. After adjusting for $13.3 million of certain items, including the effect of net unrealized derivative gains, the company reflected an adjusted net loss of $0.01 per diluted share. For details of these adjustments, please refer to our earnings announcement released yesterday. :

With the increase in activity, we incurred $39.9 million of capital expenditures on an accrual basis, of which $35.6 million related to drilling and completion costs and $3.5 million related to the development of our treating equipment and gathering support infrastructure. Our team continues to do a great job delivering volumes while mitigating the impact of inflation. Those supply chain issues continue to drive scarcity in equipment and materials. We will continue to monitor the market and do our best to mitigate any price increases through increased efficiencies and thoughtful planning. :

Finally, a few comments on liquidity and capitalization. At June 30, 2022, the company had liquidity of $58.6 million, consisting of $43.6 million of cash and $15 million in delayed draw of term loans available to be drawn under our term loan agreement. With strong liquidity and strong cash flow generating capability in the back half of the year, we expect a meaningful improvement in Battalion's leverage profile by the end of the year. :

Now I will turn it back over to Rich to offer some concluding remarks. :

Richard Little: Thanks, Kevin. With new wells online, our cash flow building and a game-changing asset gas treatment facility breaking ground, there's a lot to be optimistic about. We are at our turning point and we're excited about the second half of the year. With our capital program ramping up, we expect to methodically grow production and drive cash flow growth as we move forward. Once again, thank you for your interest in Battalion, and that concludes our scripted remarks. I'll now turn it over to the operator to facilitate Q&A.

Operator: [Operator Instructions] We will take our first question from [ Edward Steely ].

Unknown Analyst: Yes, I would like to know on wells you're planning on drilling for the rest of the year.

Richard Little: Yes. Thanks for being on the call and listening to our story. We've guided beginning of the year between 8, 12 wells, and that's still probably going to be a pretty fair estimate right now. So we brought on the 5 that we talked about in the second quarter. We're on track to bring on 3 in the third, and so we'll continue to grow that. But I would estimate anywhere from, call it, 8 to 12 still within the guidance.

Operator: [Operator Instructions] It appears there are no further questions at this time. I would like to turn the call back over to Richard Little for any additional or closing remarks.

Richard Little: Okay, great. Thanks. And I do appreciate everybody's time today. This is an exciting time for us. It's taken a lot of hard work and dedication by our team to get to this point, and we're excited about the future, returning back to growth. But again, I just want to thank you for your interest in Battalion. Goodbye.

Operator: That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.