BATL - AMEX

Welcome to the Battalion Oil Third Quarter 2021 Earnings Call. As a reminder, today's conference is being recorded. Now, I'll turn it over to Manager of Finance, Chris Lang. You may begin.

Good morning. I'm joined by a few of my colleagues today that I'd like to introduce Battalion's 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?

Good morning and thank you for joining us this morning. We are excited to share with you the results from our third quarter, which has been our best quarter this year. During the first half of 2021, we put significant effort into high grading our central processing facility at Monument Draw. That was to allow for improved flow assurance and reduced downtime across the field. Our results this quarter put that on display. Despite completing our capital program in the second quarter, our total daily production increased 14% quarter-over-quarter, due in large part to our facility upgrades at Monument Draw and reduced well downtime. Our operations team has been relentlessly focused on efficiently and cost-effectively repairing, maintaining and working over our field and facilities this year and we're hopeful this success serves as a springboard for us, as we move through the fourth quarter and into 2022. The robust production was well timed, as it allowed us to really take advantage of an improving commodity price environment. The increased production, together with an increased gas and NGL price in the second half of this year, provided a boost to our bottom line, as we recorded adjusted EBITDA of approximately $23 million in the third quarter. That's a 63% increase over the second quarter. This increase in cash flow allowed us to accelerate our deleveraging, pulling our net leverage ratio down to 2.5 times at quarter end. With a strong third quarter behind us, we pivot to the fourth quarter with a clear focus, continue optimizing our operations, as we prepare to return to development on our Monument Draw asset. On the production front, we remain diligent in our efforts to improve flow assurance and manage operating expenses, despite a rising service cost environment. On the development side, as we work to finalize our 2022 capital program, we're taking important steps to mitigate cost increases by advanced purchasing materials and protecting our cash flows through increased hedging activity. One final note, as we touch on 2022. We recently entered into a rig contract and expect to spud our next well in December of this year, as we aim to get a jump on our 2022 program. As such, we are increasing our 2021 CapEx guidance range to $45 million to $55 million. Now, I'll pass it off to Kevin to walk through our financial results.

Thank you, Rich, and good morning, everyone. Let me walk you through a few financial highlights from the third quarter. Total production in the third quarter averaged 17,728 barrels of oil equivalent per day, compared to 15,571 barrels of oil equivalent per day during the second quarter this year, a 14% increase quarter-over-quarter, which can primarily be attributed to facility upgrades at Monument Draw and reduced well downtime. Total revenue was $80.8 million for the third quarter of 2021, which all represented 74%. We realized 98% of the average NYMEX oil price during the quarter and realized a $22.4 million loss from our hedge program. We reported GAAP net income to common shareholders for the third quarter of 2021 of $13.1 million, or $0.80 per basic share and $0.79 per diluted share. After adjusting for certain items, including the effect of net unrealized derivative losses and gain on extinguishment of debt, and I refer you to the press release for details of those adjustments, the company reflected net income of $9.7 million, or $0.60 per basic share and $0.59 per diluted share. Adjusted EBITDA totaled $23.0 million for the third quarter of 2021. During the nine months ended September 30, 2021, we incurred $41.9 million in the oil and natural gas capital expenditures, of which $34.2 million related to drilling and completion costs and $5 million related to the development of our treating equipment and gathering support infrastructure. These amounts represent the majority of our previously announced 2021 capital budget. As Rich mentioned, we have since increased guidance of our 2021 capital budget by $5 million to reflect our decision to accelerate development of our 2022 capital program by spudding a well in December. A few comments on liquidity and capitalization. At September 30, 2021, the company had liquidity of $19.9 million consisting of $1.9 million of cash on hand and $18 million of availability under our revolving credit facility. Something we're particularly proud to report this quarter is that as a result of the robust cash flow we generated this quarter, the company was able to reduce its net indebtedness by $10.4 million between June 30 and September 30, 2021. A portion of the debt reduction in the quarter relates to our PPP loan. This quarter, we reported that effective August 13, 2021, the principal amount of the company's PPP loan was reduced to approximately $200,000 by the SBA and the company recorded a gain on the extinguishment of the forgiven portion of the PPP loan and related accrued interest of $2.1 million. Regarding our credit facility, in September the company entered into its 5th amendment to its senior secured revolving credit agreement, which among other things modifies the limits on swap agreements. Additionally, while redeterminations of the borrowing base occur semiannually on May 1 and November 1, the lenders agreed to postpone the fall determination until December 2021. One final comment on the company's hedge position. While we did not enter into any new derivative contracts in the third quarter 2021, subsequent to the quarter end, we have increased our hedging activity and have added on a substantial amount of crude oil and natural gas hedges at attractive prices, details of which can be found in our quarterly report on Form 10-Q. As we return to development, we expect to continue opportunistically layering in hedges to protect our future cash flows. Now let me turn it back to Rich to offer some concluding remarks.

Thanks, Kevin. We're very proud of the results we put up this quarter and we're excited about how that sets us up for the future. We believe we operate one of the premier assets in the Southern Delaware and we're eager to get back to work developing it. Once again, thank you for your interest in Battalion. That concludes our scripted remarks. I'll turn it back to the operator to facilitate Q&A.