Q2 2022 Battalion Oil Corp Earnings Call

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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, Director Finance and Investor Relations, Chris lung to open the call.

July .

You may begin.

Good morning, I'm joined by a few of my colleagues today that I'd like to introduce Italians, Chief Executive Officer, Richard Little our Chief Financial Officer, Kevin Andrews, and our Chief operating Officer, Daniel Rohling. 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.

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 has taken the time to join US today, we really appreciate your interest in battalion, and the story, we had the tail.

The second quarter was an exciting one for us and we welcome to return to growth.

Over the course of the entire quarter, we put online five 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.

So on adjusted EBITDA increase of over 50%.

With a full quarter of production from these new wells ahead of us and our next three 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 house supply chain disruptions in inflation that hit the industry hard this year.

Unlike others, we felt these pressures to that's why it's important to remind you that we did factor some of this uncertainty into our original budgeting capital planning process.

While these market dynamics have received a significant amount of our attention this year and we'll 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 operating 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 backed that up with our performance. So I'm proud to say over the last 12 months, we've had zero recordable incidents and we've methodically reduce 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 asset 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 one environmentally we meaningfully reduce our environmental impact with the ability to fully sequester virtue.

We all Sidoti and <unk> from a 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.

Thank you rich I want to start with a few additional comments on EHS and I'll open by congratulating the team on a phenomenal safety achievement.

Portable incident rate of zero point zero is extremely rare in our industry, particularly for companies that are in active development mode.

That type of performance doesn't just happen and are leaders in the field and here in Houston have worked tirelessly to establish or hazard recognition program and to put together a culture of safety one.

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 Battalion, 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 continue to improve and expand on our leak detection program or Eldar. We kicked this program off four 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 of the fields.

Now to touch on a few of our operational results, we had a busy quarter as we look to build on the progress we made in Q1 on a capital program during.

During the quarter, we put online five total wells.

Continued with our one rig program by kicking off and spreading our next three well pad, which we expect to have online by the end of the third quarter.

Overall, we continue to see improved efficiency in drilling and completion operations on the drilling side, we've increased our drilling footage per day by nearly 10% over 2021 averages on the completion side, we're averaging more than 18 and half 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.

Excited to say that those five 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 drove it starts to turn.

We're pre purchasing materials and equipment to stay ahead of supply chain shortages such as casing.

We're utilizing preexisting paths 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 one and is designed to treat natural gas for C. O. Two NH <unk> with a combined concentration of up to 10%.

What that means is that initial capacity this facility will be able to fully capture and sequester more than 50000 tons per year of <unk>.

After treating the facility will deliver sweet gas back to battalion for delivery to its dedicated third party midstream providers.

Construction is well underway and we're planning to have this facility up and running in early 2023.

Beyond phase one 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.

You 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.

Thanks, Danny and good morning, everyone.

Total production in the second quarter increased to 15044 barrels of oil equivalent per day or Boe per day compared to 14767 Boe per day during the first quarter of 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, we're bringing online.

We're encouraged by the impact of 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 our 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 at.

At 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 in our 2022 capital program continued to ramp up we expect to drive significant increases in cash flow through the second half of the year as volumes come online our realized prices continue to improve.

As we turn an eye to 2023, our assignment only builds as our weighted average strike price on crude oil swaps in 2023 improved 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 <unk> 79 per diluted share.

After adjusting for $13 3 million of certain items, including the effect of net unrealized derivative gains the company reflected in the adjusted net loss of <unk> <unk> 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 cost 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 continued to drive scarcity and 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 32022, the company had liquidity of $58 6 million, consisting of $43 6 million of cash and $15 million in delayed draw 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 battalions leverage profile by the end of the year.

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

Thanks, Kevin.

With new wells online, our cash flow building and a game changing asset gas treatment facility breaking ground. There is 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.

Thank you.

I would like to ask a question. Please signal by pressing star one on your telephone keypad.

Using a speaker phone please make sure your mute button.

To allow your signal.

To reach our equipment.

Again press Star one to ask a question.

Pause for just a moment to allow everyone an opportunity.

To signal for questions.

We will take our first question from Edward Stanley. Please go ahead.

Yes, I would like to know.

As you all are planning on drilling.

Rest of the year.

Yeah, Hi, thanks, Thanks for being on the call and listening to our story, we've guided beginning of the year between eight to 12 wells and that's still probably going to be a pretty fair estimate right now so we brought on.

We talked about in the second quarter on track to bring on three in the third so we will continue to grow that but I would estimate anywhere from.

I'll call it eight to 12 still within the guidance.

Okay. Thank you.

As a reminder to ask a question at this time, Please press star one.

Please ensure that the mute function on your telephone is switched off to allow your signal to reach our equipment.

Yes.

Ken.

To ask a question.

Please press star one.

It appears there are no further questions at this time.

I'd like to turn the call back over to Richard lithium for any additional or closing remarks.

Yeah.

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, we're excited about the future returning back to growth, but again I just want to thank you for your interest in Battalion Goodbye.

Yeah.

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

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