UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☒⌧	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, ~~2020~~2021
OR
☐◻	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

Commission File Number: ~~001‑35467~~001-35467

Battalion Oil Corporation

(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of
incorporation or organization)

1311
(Primary Standard Industrial
Classification Code Number)

~~20‑0700684~~20-0700684
(I.R.S. Employer
Identification Number)

1000 Louisiana Street, Suite 6600, Houston, TX 77002

(Address of principal executive offices)

(832) ~~538‑0300~~538-0300

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities made under a plan confirmed by a court. Yes ☒ No ☐

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☒⌧ No ☐◻

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation ~~S‑T~~S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒⌧ No ☐◻

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐◻

Accelerated filer ☐◻

~~Non‑accelerated~~Non-accelerated filer ☐⌧

Smaller reporting company ☒⌧

Emerging growth company ☐◻

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐◻

Indicate by check mark whether the registrant is a shell company (as defined in Rule ~~12b‑2~~12b-2 of the Act). Yes ☐◻ No ☒⌧

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock, par value $0.0001	BATL	NYSE American

At May ~~8, 2020, 16,203,967~~11, 2021, 16,267,597 shares of the Registrant’s Common Stock were outstanding.

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TABLE OF CONTENTS

		PAGE
PART I	FINANCIAL INFORMATION
ITEM 1.	Condensed Consolidated Financial Statements (Unaudited)	5
	Condensed Consolidated Statements of Operations (Unaudited) for the Three Months Ended March 31, ~~2020~~2021 and ~~2019~~2020	5
	Condensed Consolidated Balance Sheets (Unaudited) as of March 31, ~~2020~~2021 and ~~the Year Ended~~ December 31, ~~2019~~2020	6
	Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) for the Three Months Ended March 31, ~~2020~~2021 and the Year Ended December 31, ~~2019~~2020	7
	Condensed Consolidated ~~Statement~~Statements of Cash Flows (Unaudited) for the Three Months Ended March 31, ~~2020~~2021 and ~~2019~~2020	9
	Notes to Unaudited Condensed Consolidated Financial Statements	10
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3927
ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk	4936
ITEM 4.	Controls and Procedures	5037

PART II	OTHER INFORMATION
ITEM 1.	Legal Proceedings	5037
ITEM 1A.	Risk Factors	5038
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	5138
ITEM 3.	Defaults Upon Senior Securities	5138
ITEM 4.	Mine Safety Disclosures	5138
ITEM 5.	Other Information	5138
ITEM 6.	Exhibits	5139
Signatures		5240

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Special note regarding ~~forward‑looking~~forward-looking statements

This Quarterly Report on Form ~~10‑Q~~10-Q contains ~~forward‑looking~~forward-looking statements within the meaning of the federal securities laws. All statements, other than statements of historical facts, ~~concerning,~~are forward looking statements and may concern, among other things, planned capital expenditures, potential increases in oil and natural gas production, potential costs to be incurred, future cash flows and borrowings, our financial position, business strategy and other plans and objectives for future ~~operations, are forward‑looking statements.~~operations. These ~~forward‑looking~~forward-looking statements ~~are~~may be identified by their use of terms and phrases such as “may,” “expect,” “estimate,” “project,” “plan,” “objective,” “believe,” “predict,” “intend,” “achievable,” “anticipate,” “will,” “continue,” “potential,” “should,” “could” and similar terms and phrases. Although we believe that the expectations reflected in ~~these forward‑looking~~forward-looking statements are reasonable, they do involve certain assumptions, risks and uncertainties. Actual results could differ materially from those anticipated in ~~these forward‑looking~~forward-looking statements. Readers should consider carefully the risks described under the “Risk Factors” section of our previously filed Annual Report on Form 10-K for the fiscal year ended December 31, ~~2019,~~2020, as well as the other disclosures contained herein and therein, which describe factors that could cause our actual results to differ from those anticipated in ~~forward‑looking~~forward-looking statements, ~~including,~~which include, but are not limited to, the following factors:

●

volatility in commodity prices for oil, natural gas and natural gas liquids;

●

impacts and potential risks related to actual or anticipated pandemics, such as the novel coronavirus (COVID-19) pandemic;

●

impacts of the ongoing COVID-19 pandemic on the health and safety of our employees;

●

our ability to generate sufficient cash flow from operations, borrowings or other sources to enable us to fund our operations, satisfy our obligations and develop our undeveloped acreage positions;

●

~~we have historically had substantial~~our indebtedness, ~~and we~~which may ~~incur more debt~~increase in the future;

●

higher levels of indebtedness make us more vulnerable to economic downturns and adverse developments in our business;

●

our ability to replace our oil and natural gas reserves and production;

●

the presence or recoverability of estimated oil and natural gas reserves attributable to our properties and the actual future production rates and associated costs of producing those oil and natural gas reserves;

●

our ability to successfully develop our large inventory of undeveloped acreage;

●

drilling and operating risks, including accidents, equipment failures, fires, and leaks of toxic or hazardous materials which can result in injury, loss of life, pollution, property damage and suspension of operations;

●

our ability to retain key members of senior management, the board of directors and key technical employees;

●

senior management’s ability to execute our plans to meet our goals;

●

access to and availability of water, sand and other treatment materials to carry out fracture stimulations in our completion operations;

●

our ability to secure adequate sour gas treating and/or sour gas take-away capacity in our Monument Draw area sufficient to handle production volumes;

●

access to adequate gathering systems, processing and treating facilities and transportation ~~take‑away~~take-away capacity to move our production to marketing outlets to sell our production at market prices;

●

the cost and availability of goods and services, such as drilling rigs, fracture stimulation services and tubulars;

●

contractual limitations that affect our management’s discretion in managing our business, including covenants that, among other things, limit our ability to incur debt, make investments and pay cash dividends;

~~Table of Contents~~

●

the potential for production decline rates for our wells to be greater than we expect;

●

competition, including competition for acreage in our resource play;

●

environmental risks;

●

exploration and development risks;

●

the possibility that ~~the~~our industry may be subject to future regulatory or legislative actions (including additional taxes and changes in environmental regulations);

●

general economic conditions, whether internationally, nationally or in the regional and local market areas in which we do business, may be less favorable than expected, including the possibility that economic conditions in the United States will worsen and that capital markets are disrupted, which could adversely affect demand for oil and natural gas and make it difficult to access capital;

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●

social unrest, political instability or armed conflict in major oil and natural gas producing regions outside the United States, such as the Middle East, and armed conflict or acts of terrorism or sabotage;

●

other economic, competitive, governmental, regulatory, legislative, including federal and state regulations and laws, geopolitical and technological factors that may negatively impact our business, operations or oil and natural gas prices;

●

our insurance coverage may not adequately cover all losses that we may sustain; and

●

title to the properties in which we have an interest may be impaired by title defects.

All ~~forward‑looking~~forward-looking statements are expressly qualified in their entirety by the cautionary statements in this paragraph and elsewhere in this document. Other than as required under the securities laws, we do not assume a duty to update these ~~forward‑looking~~forward-looking statements, whether as a result of new information, subsequent events or circumstances, changes in expectations or otherwise.

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PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements (Unaudited)

BATTALION OIL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

(In thousands, except per share amounts)


	Successor		Predecessor
	Three Months		Three Months
	Ended		Ended
	March 31, 2020		March 31, 2019

					Three Months Ended
					March 31,
					2021		2020
Operating revenues:
Oil, natural gas and natural gas liquids sales:
Oil	$	41,917	$	45,517	$	41,270	$	41,917
Natural gas		354		1,461		9,087		354
Natural gas liquids		4,753		4,945		4,909		4,753
Total oil, natural gas and natural gas liquids sales		47,024		51,923		55,266		47,024
Other		375		(7)		252		375
Total operating revenues		47,399		51,916		55,518		47,399


Operating expenses:
Production:
Lease operating		12,489		14,186		9,467		12,489
Workover and other		1,323		2,646		560		1,323
Taxes other than income		2,915		2,893		3,192		2,915
Gathering and other		10,547		14,869		13,171		10,547
Restructuring		418		11,271		—		418
General and administrative		3,856		4,608		4,827		3,856
Depletion, depreciation and accretion		18,030		29,975		10,595		18,030
Full cost ceiling impairment		—		275,239
(Gain) loss on sale of Water Assets		—		885
Total operating expenses		49,578		356,572		41,812		49,578
Income (loss) from operations		(2,179)		(304,656)		13,706		(2,179)


Other income (expenses):
Net gain (loss) on derivative contracts		118,299		(64,799)		(45,711)		118,299
Interest expense and other		(1,629)		(12,589)		(1,370)		(1,629)
Total other income (expenses)		116,670		(77,388)		(47,081)		116,670
Income (loss) before income taxes		114,491		(382,044)		(33,375)		114,491
Income tax benefit (provision)		—		45,485		—		—
Net income (loss)	$	114,491	$	(336,559)	$	(33,375)	$	114,491


Net income (loss) per share of common stock:
Basic	$	7.07	$	(2.12)	$	(2.06)	$	7.07
Diluted	$	7.07	$	(2.12)	$	(2.06)	$	7.07
Weighted average common shares outstanding:
Basic		16,204		158,549		16,232		16,204
Diluted		16,204		158,549		16,232		16,204

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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BATTALION OIL CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

(In thousands, except share and per share amounts)


	Successor
	March 31, 2020		December 31, 2019

					March 31, 2021		December 31, 2020
Current assets:
Cash and cash equivalents	$	938	$	5,701	$	1,671	$	4,295
Accounts receivable, net		30,260		48,504		39,534		32,242
Assets from derivative contracts		71,353		4,995		672		8,559
Restricted cash		—		4,574
Prepaids and other		6,341		7,379		2,591		2,740
Total current assets		108,892		71,153		44,468		47,836
Oil and natural gas properties (full cost method):
Evaluated		485,813		420,609		530,499		509,274
Unevaluated		104,923		105,009		75,880		75,494
Gross oil and natural gas properties		590,736		525,618		606,379		584,768
Less - accumulated depletion		(37,075)		(19,474)		(305,505)		(295,163)
Net oil and natural gas properties		553,661		506,144		300,874		289,605
Other operating property and equipment:
Other operating property and equipment		3,655		3,655		3,524		3,535
Less - accumulated depreciation		(659)		(378)		(1,257)		(1,149)
Net other operating property and equipment		2,996		3,277		2,267		2,386
Other noncurrent assets:						��
Assets from derivative contracts		37,766		224		828		4,009
Operating lease right of use assets		2,932		3,165		195		310
Other assets		6,148		703		1,967		2,351
Total assets	$	712,395	$	584,666	$	350,599	$	346,497


Current liabilities:
Accounts payable and accrued liabilities	$	92,585	$	97,333	$	74,073	$	58,928
Liabilities from derivative contracts		3,972		8,069		42,371		22,125
Current portion of long-term debt						2,123		1,720
Operating lease liabilities		935		923		195		403
Asset retirement obligations		225		109
Total current liabilities		97,717		106,434		118,762		83,176
Long-term debt, net		170,000		144,000
Long-term debt						155,086		158,489
Other noncurrent liabilities:
Liabilities from derivative contracts		473		4,854		9,029		4,291
Asset retirement obligations		10,619		10,481		10,711		10,583
Operating lease liabilities		2,009		2,247
Commitments and contingencies (Note 12)

Commitments and contingencies (Note 10)

Stockholders' equity:
Common stock: 100,000,000 shares of $0.0001 par value authorized;
16,203,967 and 16,203,940 shares issued and outstanding as of
March 31, 2020 and December 31, 2019, respectively		2		2
16,267,157 and 16,203,979 shares issued and outstanding as of
March 31, 2021 and December 31, 2020, respectively						2		2
Additional paid-in capital		327,544		327,108		330,551		330,123
Retained earnings (accumulated deficit)		104,031		(10,460)		(273,542)		(240,167)
Total stockholders' equity		431,577		316,650		57,011		89,958
Total liabilities and stockholders' equity	$	712,395	$	584,666	$	350,599	$	346,497

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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BATTALION OIL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited)

(In thousands)

Retained

Additional

Earnings

Common Stock

Paid-In

(Accumulated

Stockholders'


Shares

Amount

Capital

Deficit)

Equity
Balances at December 31, 2019 (Successor)

16,204

$
2

$
327,108

$
(10,460)

$
316,650
Net income (loss)

—

—

—

114,491

114,491
Equity issuance costs and other

—

—

(13)

—

(13)
Stock-based compensation

—

—

449

—

449
Balances at March 31, 2020 (Successor)

16,204

$
2

$
327,544

$
104,031

$
431,577


						Retained
				Additional		Earnings
	Common Stock			Paid-In		(Accumulated		Stockholders'
	Shares	Amount		Capital		Deficit)		Equity
Balances at December 31, 2020	16,204	$	2	$	330,123	$	(240,167)	$	89,958
Net income (loss)	—		—		—		(33,375)		(33,375)
Long-term incentive plan vestings	87		—		—		—		—
Reduction in shares to cover		��
individuals' tax withholding	(24)		—		(264)		—		(264)
Stock-based compensation	—		—		692		—		692
Balances at March 31, 2021	16,267	$	2	$	330,551	$	(273,542)	$	57,011

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

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BATTALION OIL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited)

(In thousands)

Retained

Additional

Earnings

Common Stock

Paid-In

(Accumulated

Stockholders'


Shares

Amount

Capital

Deficit)

Equity
Balances at December 31, 2018 (Predecessor)

160,613

$
16

$
1,095,367

$
101,661

$
1,197,044
Net income (loss)

—

—

—

(336,559)

(336,559)
Long-term incentive plan grants

4,153

—

—

—

—
Long-term incentive plan forfeitures

(193)

—

—

—

—
Reduction in shares to cover individuals' tax withholding

(253)

—

(406)

—

(406)
Stock-based compensation

—

—

(6,416)

—

(6,416)
Balances at March 31, 2019 (Predecessor)

164,320

16

1,088,545

(234,898)

853,663

Net income (loss)

—

—

—

(640,844)

(640,844)
Long-term incentive plan grants

11

—

—

—

—
Long-term incentive plan forfeitures

(166)

—

—

—

—
Reduction in shares to cover individuals' tax withholding

(42)

—

(20)

—

(20)
Stock-based compensation

—

—

1,358

—

1,358
Balances at June 30, 2019 (Predecessor)

164,123

16

1,089,883

(875,742)

214,157

Net income (loss)

—

—

—

(63,284)

(63,284)
Long-term incentive plan forfeitures

(1,742)

—

—

—

—
Reduction in shares to cover individuals' tax withholding

(164)

—

(14)

—

(14)
Stock-based compensation

—

—

(2,428)

—

(2,428)
Balances at September 30, 2019 (Predecessor)

162,217

16

1,087,441

(939,026)

148,431

Net income (loss)

—

—

—

(115,366)

(115,366)
Reduction in shares to cover individuals' tax withholding

(715)

—

(54)

—

(54)
Stock-based compensation

—

—

(2,534)

—

(2,534)
Balances at October 1, 2019 (Predecessor)

161,502

16

1,084,853

(1,054,392)

30,477
Cancellation of Predecessor equity

(161,502)

(16)

(1,084,853)

1,054,392

(30,477)
Balances at October 1, 2019 (Predecessor)

—

$
—

$
—

$
—

$
—

Issuance of Successor common stock

16,204

$
2

$
322,294

$
—

$
322,296
Issuance of Successor warrants

—

—

7,336

—

7,336
Equity issuance costs

—

—

(2,503)

—

(2,503)
Balances at October 1, 2019 (Successor)

16,204

2

327,127

—

327,129
Net income (loss)

—

—

—

(10,460)

(10,460)
Equity issuance costs

—

—

(19)

—

(19)
Balances at December 31, 2019 (Successor)

16,204

$
2

$
327,108

$
(10,460)

$
316,650


						Retained
				Additional		Earnings
	Common Stock			Paid-In		(Accumulated		Stockholders'
	Shares	Amount		Capital		Deficit)		Equity
Balances at December 31, 2019	16,204	$	2	$	327,108	$	(10,460)	$	316,650
Net income (loss)	—		—		—		114,491		114,491
Equity issuance costs and other	—		—		(13)		—		(13)
Stock-based compensation	—		—		449		—		449
Balances at March 31, 2020	16,204		2		327,544		104,031		431,577
Net income (loss)	—		—		—		(127,316)		(127,316)
Stock-based compensation	—		—		910		—		910
Balances at June 30, 2020	16,204		2		328,454		(23,285)		305,171
Net income (loss)	—		—		—		(153,125)		(153,125)
Stock-based compensation	—		—		744		—		744
Balances at September 30, 2020	16,204		2		329,198		(176,410)		152,790
Net income (loss)	—		—		—		(63,757)		(63,757)
Stock-based compensation	—		—		925		—		925
Balances at December 31, 2020	16,204	$	2	$	330,123	$	(240,167)	$	89,958

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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BATTALION OIL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(In thousands)


	Successor		Predecessor
	Three Months		Three Months
	Ended		Ended
	March 31, 2020		March 31, 2019

					Three Months Ended
					March 31,
					2021		2020
Cash flows from operating activities:
Net income (loss)	$	114,491	$	(336,559)	$	(33,375)	$	114,491
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depletion, depreciation and accretion		18,030		29,975		10,595		18,030
Full cost ceiling impairment		—		275,239
(Gain) loss on sale of Water Assets		—		885
Deferred income tax provision (benefit)		—		(45,485)
Stock-based compensation, net		387		(6,782)		594		387
Unrealized loss (gain) on derivative contracts		(112,378)		68,169		36,052		(112,378)
Amortization and write-off of deferred loan costs		—		404
Amortization of discount and premium		—		55
Reorganization items, net		(4,984)		—		—		(4,984)
Accrued settlements on derivative contracts		(4,923)		1,020		4,568		(4,923)
Other income (expense)		7		388		(117)		7
Change in assets and liabilities:
Accounts receivable		18,919		(3,414)		(7,613)		18,919
Prepaids and other		1,038		(2,876)		149		1,038
Accounts payable and accrued liabilities		(18,244)		(17,853)		2,505		(18,244)
Net cash provided by (used in) operating activities		12,343		(36,834)		13,358		12,343


Cash flows from investing activities:
Oil and natural gas capital expenditures		(48,157)		(81,068)		(13,792)		(48,157)
Acquisition of oil and natural gas properties		—		(2,809)
Other operating property and equipment capital expenditures		—		(30,553)
Proceeds received from sale of oil and natural gas properties						1,076		—
Funds held in escrow and other		509		(1)		(3)		509
Net cash provided by (used in) investing activities		(47,648)		(114,431)		(12,719)		(47,648)


Cash flows from financing activities:
Proceeds from borrowings		51,000		124,000		16,000		51,000
Repayments of borrowings		(25,000)		(19,000)		(19,000)		(25,000)
Equity issuance costs and other		(32)		(406)		(263)		(32)
Net cash provided by (used in) financing activities		25,968		104,594		(3,263)		25,968

Net increase (decrease) in cash, cash equivalents and restricted cash		(9,337)		(46,671)

Cash, cash equivalents and restricted cash at beginning of period		10,275		46,866
Cash, cash equivalents and restricted cash at end of period	$	938	$	195



Net increase (decrease) in cash and cash equivalents						(2,624)		(9,337)

Cash and cash equivalents at beginning of period						4,295		10,275
Cash and cash equivalents at end of period					$	1,671	$	938


Supplemental cash flow information:
Cash paid for reorganization items	$	4,984	$	—	$	—	$	4,984

								��
Disclosure of non-cash investing and financing activities:
Asset retirement obligations	$	105	$	(43)	$	—	$	105

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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BATTALION OIL CORPORATION

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. FINANCIAL STATEMENT PRESENTATION

Basis of Presentation and Principles of Consolidation

Battalion Oil Corporation (Battalion or the Company) is the successor reporting company to Halcón Resources Corporation (Halcón). On January 21, 2020, Battalion filed a Certificate of Amendment to the Company’s Amended and Restated Certificate of Incorporation with the Delaware Secretary of State to effect a change of the Company’s corporate name from Halcón Resources Corporation to Battalion Oil Corporation.

Battalion is an independent energy company focused on the acquisition, production, exploration and development of onshore ~~liquids‑rich~~liquids-rich oil and natural gas assets in the United States. The consolidated financial statements include the accounts of all ~~majority‑owned,~~majority-owned, controlled subsidiaries. The Company operates in one segment which focuses on oil and natural gas acquisition, production, exploration and development. Allocation of capital is made across the Company’s entire portfolio without regard to operating area. All intercompany accounts and transactions have been eliminated. These unaudited condensed consolidated financial statements reflect, in the opinion of the Company’s management, all adjustments, consisting of normal and recurring adjustments, necessary to present fairly the financial position as of, and the results of operations for, the periods presented. During interim periods, Battalion follows the accounting policies disclosed in its Annual Report on Form ~~10‑K,~~10-K, as filed with the United States Securities and Exchange Commission (SEC) on March ~~25, 2020.~~8, 2021. Please refer to the notes in the ~~2019~~2020 Annual Report on Form ~~10‑K~~10-K when reviewing interim financial results.

Risk and Uncertainties

The Company is ~~closely~~continuously monitoring the current and potential impacts of the novel coronavirus (COVID-19) pandemic on its business, including how it has and may continue to impact its operations, financial results, liquidity, contractors, customers, employees and vendors, and taking appropriate actions in response, including ~~reducing capital expenditures, temporarily shutting-in producing wells, and~~ implementing various measures to ensure the continued operation of its business in a safe and secure manner. ~~Governmental~~In 2020, COVID-19 and governmental actions to contain the ~~COVID-19~~ pandemic ~~have~~ contributed to an economic downturn, reduced demand for oil and natural gas and, together with a price war ~~between~~involving the Organization of Petroleum Exporting Countries (OPEC)/Saudi Arabia and Russia, ~~have~~ depressed oil and natural gas prices to historically low levels. Although OPEC and Russia subsequently agreed ~~in April~~ to reduce production, downward pressure on prices ~~has~~ continued ~~and could continue~~ for ~~the foreseeable future,~~several months, particularly given concerns over ~~available storage capacity and~~ the impacts of the ~~current~~ economic downturn on demand. The Company is unable to predict the ~~impact~~future affects that these events will have on itits business and financial condition due to numerous uncertainties, including the continuing severity and duration of the COVID-19 outbreak and the ~~effects~~impacts that governmental or other actions taken to limit the extent and duration of the outbreak, in conjunction with ~~worsening~~ economic conditions, will have on its business, demand for oil and natural gas, and oil and natural gas prices. The health of the Company’s employees, contractors and vendors, and its ability to meet staffing needs in its operations and critical functions cannot be predicted, nor can the impact on the Company’s customers, vendors and contractors. Any material effect on these parties could adversely impact the Company. These and other factors could affect the Company’s operations, earnings and cash flows and could cause its results to not be comparable to those of the same period in previous years. For example, in 2020, the Company realized lower revenue as a result of commodity price declines, which began in March 2020. In response to low commodity prices, the Company ~~realized~~temporarily shut-in producing wells in May and June 2020, which further contributed to lower ~~revenue~~revenues that year. Additionally, the Company incurred ceiling test impairments in ~~March~~ 2020, ~~(Successor).~~which were primarily driven by a decline in the average pricing used in the valuation of the Company’s reserves. The results presented in this Form 10-Q are not necessarily indicative of future operating results. For further information regarding the actual and potential impacts of COVID-19 on the Company, see “Risk Factors” in Item 1A of ~~this Quarterly~~the Company’s 2020 Annual Report on Form ~~10-Q.~~ 10-K.

~~Emergence From Voluntary Reorganization Under Chapter 11~~

On August 7, 2019 (the Petition Date), the Company and its subsidiaries filed voluntary petitions for relief under chapter 11 of the United States Bankruptcy Code in the U.S. Bankruptcy Court for the Southern District of Texas (the Bankruptcy Court) to pursue a prepackaged plan of reorganization (the Plan). ~~The Company’s chapter 11 proceedings were administered under the caption~~ ~~In re Halcón Resources Corporation, et al.~~ ~~(Case No. 19-34446).~~ ~~On September 24,~~

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~~BATTALION OIL CORPORATION~~

~~NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)~~

2019, the Bankruptcy Court entered an order confirming the Plan and on October 8, 2019, the Plan became effective (the Effective Date) and the Company emerged from chapter 11 bankruptcy. See Note 2, “~~Reorganization,” for further details on the Company’s chapter 11 bankruptcy and the Plan.~~

Upon emergence from chapter 11 bankruptcy, the Company adopted fresh-start accounting in accordance with provisions of the Financial Accounting Standards Board’s (FASB) Accounting Standards Codification (ASC) 852, ~~Reorganizations~~ (ASC 852) which resulted in the Company becoming a new entity for financial reporting purposes on the Effective Date. The Company elected to apply fresh-start accounting effective October 1, 2019, to coincide with the timing of its normal fourth quarter reporting period, which resulted in the Company becoming a new entity for financial reporting purposes. The Company evaluated and concluded that events between October 1, 2019 and October 8, 2019 were immaterial and use of an accounting convenience date of October 1, 2019 was appropriate.

Upon the adoption of fresh-start accounting, the Company’s assets and liabilities were recorded at their fair values as of the fresh-start reporting date. As a result of the adoption of fresh-start accounting, the Company’s unaudited condensed consolidated financial statements subsequent to October 1, 2019 are not comparable to its consolidated financial statements prior to, and including, October 1, 2019. See Note 3, ~~“Fresh-start Accounting,”~~ ~~for further details on the impact of fresh-start accounting on the Company’s unaudited condensed consolidated financial statements.~~

References to “Successor” or “Successor Company” relate to the financial position and results of operations of the reorganized Company subsequent to October 1, 2019. References to “Predecessor” or “Predecessor Company” relate to the financial position and results of operations of the Company prior to, and including, October 1, 2019.

Use of Estimates

The preparation of the Company’s unaudited condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities, if any, at the date of the unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during the respective reporting periods. Estimates and assumptions that, in the opinion of management of the Company, are significant include oil and natural gas revenue accruals, capital and operating expense accruals, oil and natural gas reserves, depletion relating to oil and natural gas properties, asset retirement obligations, and fair value ~~estimates, including estimates of Reorganization Value, Enterprise Value and the fair value of assets and liabilities recorded as a result of the adoption of fresh-start accounting.~~estimates. The Company bases its estimates and judgments on historical experience and on various other

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BATTALION OIL CORPORATION

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

assumptions and information believed to be reasonable under the circumstances. Estimates and assumptions about future events and their effects cannot be predicted with certainty and, accordingly, these estimates may change as new events occur, as more experience is acquired, as additional information is obtained and as the Company’s operating environment changes. Actual results may differ from the estimates and assumptions used in the preparation of the Company’s unaudited condensed consolidated financial statements.

Interim period results are not necessarily indicative of results of operations or cash flows for the full year and accordingly, certain information normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States, has been condensed or omitted. The Company has evaluated events or transactions through the date of issuance of these unaudited condensed consolidated financial statements.

Cash and Cash Equivalents ~~and Restricted Cash~~

The Company considers all highly liquid short-term investments with a maturity of three months or less at the time of purchase to be cash equivalents. These investments are carried at cost, which approximates fair value. ~~Amounts in the unaudited condensed consolidated balance sheets included in “Cash, cash equivalents” and “Restricted cash” reconcile to the Company’s unaudited condensed consolidated statement of cash flows as follows:~~

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~~BATTALION OIL CORPORATION~~

~~NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)~~

Successor

March 31, 2020

December 31, 2019

Cash and cash equivalents

$
938

$
5,701
Restricted cash

—

4,574
Total cash, cash equivalents and restricted cash

$
938

$
10,275

~~Restricted Cash consisted of funds related to payments prescribed under the Plan that were held in an interest-bearing escrow account.~~

Accounts Receivable and Allowance for Doubtful Accounts

The Company’s accounts receivable are primarily receivables from joint interest owners and oil and natural gas purchasers. Accounts receivable are recorded at the amount due, less an allowance for doubtful accounts, when applicable. The Company establishes provisions for losses on accounts receivable if it determines that collection of all or part of the outstanding balance is doubtful. The Company regularly reviews collectability and establishes or adjusts the allowance for doubtful accounts as necessary using the specific identification method. As of March 31, ~~2020 (Successor)~~2021 and December 31, ~~2019 (Successor),~~2020, allowances for doubtful accounts were approximately ~~$0.1~~$0.2 million for both periods.

Other Operating Property and Equipment

Other operating property and equipment ~~was recorded at fair value as a result of fresh-start accounting on October 1, 2019 and~~ additions are recorded at cost. Depreciation is calculated using the straight-line method over the following estimated useful lives: buildings, twenty years; automobiles and computers, three years; computer software, fixtures, furniture and equipment, ~~the lesser of lease term or~~ five years; trailers, seven years; heavy equipment, eight to ten years and leasehold improvements, lease term. Land and artwork are not depreciated. Upon disposition, the cost and accumulated depreciation are removed and any gains or losses are reflected in current operations. Maintenance and repair costs are charged to operating expense as incurred. Material expenditures which increase the life or productive capacity of an asset are capitalized and depreciated over the estimated remaining useful life of the asset.

~~Refer to Note 6,~~ ~~“Divestitures,”~~ ~~for a discussion of other operating property and equipment divested.~~

The Company reviews its other operating property and equipment for impairment in accordance with ~~ASC~~Accounting Standards Codification (ASC) 360, Property, Plant, and Equipment (ASC 360). ASC 360 requires the Company to evaluate other operating property and equipment for impairment as events occur or circumstances change that would more likely than not reduce the fair value below the carrying amount. If the carrying amount is not recoverable from its undiscounted cash flows, then the Company would recognize an impairment loss for the difference between the carrying amount and the current fair value. Further, the Company evaluates the remaining useful lives of its other operating property and equipment at each reporting period to determine whether events and circumstances warrant a revision to the remaining depreciation periods.

~~Restructuring~~

During the three months ended March 31, 2020 (Successor), the Company incurred approximately $0.4 million in restructuring charges related to the consolidation into one corporate office and reductions in its workforce due to efforts to improve efficiencies and go forward costs.

In May 2020, in furtherance of the consolidation into one corporate office, the Company terminated its office lease in Denver, Colorado and paid a $1.3 million termination fee. Pursuant to the agreement provision under the lease

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~~BATTALION OIL CORPORATION~~

~~NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)~~

~~agreement, the Company will incur monthly rent payments from June 2020 through March 2021 totaling approximately $0.8 million.~~

During the three months ended March 31, 2019 (Predecessor), senior executives of the Company resigned from their positions. These were considered terminations without cause under their respective employment agreements, which entitled them to certain benefits. Additionally during the three months ended March 31, 2019 (Predecessor), the Company had reductions in its workforce due to a decrease in drilling and developmental activities planned for 2019. Consequently, for the three months ended March 31, 2019 (Predecessor), the Company incurred approximately $11.3 million in restructuring charges.

~~These costs were recorded in~~ ~~“Restructuring”~~ ~~on the unaudited condensed consolidated statements of operations.~~

Concentrations of Credit Risk

~~As of March 31, 2020, the~~The Company’s primary concentrations of credit risk are the risks of uncollectible accounts receivable and of nonperformance by counterparties under the Company’s derivative contracts. Each reporting period, the Company assesses the recoverability of material receivables using historical data, current market conditions and reasonable and supportable forecasts of future economic conditions to determine expected collectability of its material receivables.

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BATTALION OIL CORPORATION

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

The Company’s accounts receivable are primarily receivables from joint interest owners and oil and natural gas purchasers. The purchasers of the Company’s oil and natural gas production consist primarily of independent marketers, major oil and natural gas companies and gas pipeline companies. Historically, the Company has not experienced any significant losses from uncollectible accounts from its oil and natural gas purchasers. The Company operates a substantial portion of its oil and natural gas properties. As the operator of a property, the Company makes full payments for costs associated with the property and seeks reimbursement from the other working interest owners in the property for their share of those costs. Joint operating agreements govern the operations of an oil or natural gas well and, in most instances, provide for offsetting of amounts payable or receivable between the Company and its joint interest owners. The Company’s joint interest partners consist primarily of independent oil and natural gas producers. If the oil and natural gas exploration and production industry in general was adversely affected, the ability of the Company’s joint interest partners to reimburse the Company could be adversely affected.

The Company’s exposure to credit risk under its derivative contracts is diversified among major financial institutions with investment grade credit ratings, where it has master netting agreements which provide for offsetting of amounts payable or receivable between the Company and the counterparty. To manage counterparty risk associated with derivative contracts, the Company selects and monitors counterparties based on an assessment of their financial strength and/or credit ratings. At March 31, ~~2020,~~2021, the Company’s derivative counterparties include two major financial institutions, both of which are secured lenders under the Senior Credit Agreement.

Change in Estimate

In late March 2020, due to changes in market conditions and decreased commodity prices, the Company determined that previously accrued discretionary cash incentives related to 2019 would not be paid, causing a $1.6 million reduction to “General and administrative” on the unaudited condensed consolidated statement of operations for the three months ended March 31, 2020.

Recently Issued Accounting Pronouncements

In ~~April~~March 2020, the ~~FASB~~Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2020-04, Reference Rate Reform (Topic 848) (ASU 2020-04), in response to the risk of cessation of the London Interbank Offered Rate (LIBOR). This

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~~BATTALION OIL CORPORATION~~

~~NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)~~

amendment provides optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging arrangements, and other transactions that reference LIBOR. ASU 2020-04 ~~is effective as of March 12, 2020~~will be in effect through December 31, 2022. The Company is currently evaluating ASU 2020-04 and the impact it ~~will~~may have on its operating results, financial position and disclosures.

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740) – Simplifying the Accounting for Income Taxes (ASU 2019-12) as part of their simplification initiative. ASU 2019-12 simplifies the accounting for income taxes by removing certain exceptions and by clarifying and amending existing guidance. ASU 2019-12 is effective for interim and annual periods beginning after December 15, 2020 with early adoption permitted. The Company ~~is currently evaluating the effects~~adopted ASU 2019-12 effective January 1, 2021. The adoption of ASU 2019-12 ~~but does not believe that it will have a material impact on its operating results, financial position or disclosures.~~

~~In June 2016, the FASB issued ASU No. 2016-13,~~ ~~Financial Instruments – Credit Losses (Topic 326)~~ ~~(ASU 2016-13), which changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income.~~ ~~ASU 2016-13 will replace the currently required incurred loss approach with an expected loss model for instruments measured at amortized cost.~~ ~~The Company adopted ASU 2016-13 effective January 1, 2020 using the modified retrospective approach as of the adoption date. Based~~ ~~the Company’s assessment of its applicable financial assets, which are primarily receivables from joint interest owners and oil and natural gas purchasers,~~ ~~and various potential remedies ensuring collection from those parties, the adoption of ASU 2016-13~~ did not have a material impact on the Company’s operating results, financial position or ~~financial position.~~disclosures.

2. ~~REORGANIZATION~~LEASES

On August 2, 2019, the Company entered into a Restructuring Support Agreement (the Restructuring Support Agreement) with certain holders of the Company’s 6.75% senior unsecured notes due 2025 (the Unsecured Senior Noteholders). On August 7, 2019, the Company filed voluntary petitions for relief under chapter 11 of the Bankruptcy Court to effect an accelerated prepackaged bankruptcy restructuring as contemplated in the Restructuring Support Agreement. The Company continued to operate its businesses as debtors-in-possession under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the United States Bankruptcy Code and orders of the Bankruptcy Court. On September 24, 2019, the Bankruptcy Court entered an order confirming the Plan and on October 8, 2019 (the Effective Date), the Company emerged from chapter 11 bankruptcy.

Pursuant to the terms of the Plan contemplated by the Restructuring Support Agreement, the Unsecured Senior Noteholders and other claim and interest holders received the following treatment in full and final satisfaction of their claims and interests:

~~borrowings outstanding under the Predecessor Credit Agreement, plus unpaid interest and fees, were repaid in full, in cash, including by a refinancing (refer to Note 8, “Long-Term Debt” for further details regarding the credit agreement);~~

the Unsecured Senior Noteholders received their pro rata share of 91% of the common stock of reorganized Battalion (New Common Shares), subject to dilution, issued pursuant to the Plan and participated in the Senior Noteholder Rights Offering (defined below);

~~the Company’s general unsecured claims were unimpaired and paid in full in the ordinary course; and~~

all of the Predecessor Company’s outstanding shares of common stock were cancelled and the existing common stockholders received their pro rata share of 9% of the New Common Shares issued pursuant to the Plan, subject to dilution, together with Warrants (defined below) to purchase common stock of reorganized Battalion

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~~BATTALION OIL CORPORATION~~

~~NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)~~

and participated in the Existing Equity Interests Rights Offering (defined below and, collectively, the Existing Equity Total Consideration); provided, however, that registered holders of existing common stock with 2,000 shares or fewer of common stock received cash in an amount equal to the inherent value of such holder’s pro rata share of the Existing Equity Total Consideration (the Existing Equity Cash Out).

Each of the foregoing percentages of equity in the reorganized Company were as of October 8, 2019 and are subject to dilution by New Common Shares issued in connection with (i) a management incentive plan, (ii) the Warrants (defined below), (iii) the Equity Rights Offerings (defined below), and (iv) the Backstop Commitment Premium (defined below).

As a component of the Restructuring Support Agreement (i) certain Unsecured Senior Noteholders purchased their pro rata share of New Common Shares for an aggregate purchase price of $150.2 million (the Senior Noteholder Rights Offering) and (ii) certain existing common stockholders purchased their pro rata share of New Common Shares for an aggregate purchase price of $5.8 million (the Existing Equity Interests Rights Offering, and together with the Senior Noteholder Rights Offering, the Equity Rights Offerings), in each case, at a price per share equal to a 26% discount to the value of the New Common Shares based on an assumed total enterprise value of $425.0 million. Certain of the Unsecured Senior Noteholders backstopped the Senior Noteholder Rights Offering and received as consideration (the Backstop Commitment Premium) New Common Shares equal to 6% of the aggregate amount of the Senior Noteholder Rights Offering, subject to dilution by New Common Shares issued in connection with a management incentive plan and the Warrants. If the backstop agreement had been terminated, the Company would have been obligated to make a cash payment equal to 6% of the aggregate amount of the Senior Noteholder Rights Offering. The proceeds of the Equity Rights Offerings were used by the Company to (i) provide additional liquidity for working capital and general corporate purposes, (ii) pay reasonable and documented restructuring expenses, and (iii) fund Plan distributions.

Under the Restructuring Support Agreement, the existing common stockholders (subject to the Existing Equity Cash Out) were issued a series of warrants exercisable for cash for a three year period subsequent to the effective date of the Plan (Warrants). The Warrants were issued with strike prices based upon stipulated rate-of-return levels achieved by the Unsecured Senior Noteholders. The Warrants cumulatively represent 30% of the New Common Shares issued pursuant to the Plan.

~~Registration Rights Agreement~~

On the Effective Date, the Company and the other signatories thereto (the Demand Stockholders), entered into a registration rights agreement (the Registration Rights Agreement), pursuant to which, subject to certain conditions and limitations, the Company agreed to file with the SEC a registration statement concerning the resale of the registrable shares of New Common Shares of the Company held by Demand Stockholders (the Registrable Securities), as soon as reasonably practicable but in no event later than the later to occur of (i) ninety (90) days after the Effective Date and (ii) a date specified by a written notice to the Company by Demand Stockholders holding at least a majority of the Registerable Securities, and thereafter to use its commercially reasonable best efforts to cause the registration statement to be declared effective by the SEC as soon as reasonably practicable. In addition, from time to time, the Demand Stockholders may request that additional Registrable Securities be registered for resale by the Company. Subject to certain limitations, the Demand Stockholders also have the right to request that the Company facilitate the resale of Registrable Securities pursuant to firm commitment underwritten public offerings.

The Registration Rights Agreement contains other customary terms and conditions, including, without limitation, provisions with respect to suspensions of our registration obligations and indemnification.

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~~BATTALION OIL CORPORATION~~

~~NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)~~

~~3. FRESH-START ACCOUNTING~~

Upon the Company’s emergence from chapter 11 bankruptcy, the Company qualified for and adopted fresh-start accounting in accordance with the provisions set forth in ASC 852 as (i) the Reorganization Value of the Company’s assets immediately prior to the date of confirmation was less than the total of the post-petition liabilities and allowed claims, and (ii) the holders of the existing voting shares of the Predecessor entity received less than 50% of the voting shares of the emerging entity. Refer to Note 2~~, “Reorganization,”~~ for the terms of the Plan. Fresh-start accounting requires the Company to present its assets, liabilities, and equity as if it were a new entity upon emergence from bankruptcy. The new entity is referred to as “Successor” or “Successor Company.” However, the Company will continue to present financial information for any periods before adoption of fresh-start accounting for the Predecessor Company. The Predecessor and Successor Companies lack comparability, as required in ASC Topic 205, ~~Presentation of Financial Statements~~ (ASC 205). ASC 205 states financial statements are required to be presented comparably from year to year, with any exceptions to comparability clearly disclosed. Therefore, “black-line” financial statements are presented to distinguish between the Predecessor and Successor Companies.

Adopting fresh-start accounting results in a new financial reporting entity with no beginning retained earnings or deficit as of the fresh-start reporting date. Upon the adoption of fresh-start accounting, the Company allocated the Reorganization Value (the fair value of the Successor Company’s total assets) to its individual assets based on their estimated fair values. The Reorganization Value is intended to represent the approximate amount a willing buyer would pay for the Company’s assets immediately after the reorganization.

Reorganization Value is derived from an estimate of Enterprise Value, or the fair value of the Company’s long-term debt, stockholders’ equity and working capital. The estimated Enterprise Value of $441.6 million at the Effective Date was in the Bankruptcy Court approved range of $425.0 million and $475.0 million. The Enterprise Value was derived from an independent valuation using an asset based methodology of estimated proved reserves, undeveloped acreage, and other financial information, considerations and projections, applying a combination of the income, cost and market approaches as of the fresh-start reporting date of October 1, 2019.

The Company elected to adopt fresh-start accounting effective October 1, 2019, to coincide with the timing of its normal fourth quarter reporting period, which resulted in the Company becoming a new entity for financial reporting purposes. The Company evaluated and concluded that events between October 1, 2019 and October 8, 2019 were immaterial and use of an accounting convenience date of October 1, 2019 was appropriate.

The Company’s principal assets are its oil and natural gas properties. For purposes of estimating the fair value of the Company’s proved reserves, an income approach was used which estimated fair value based on the anticipated cash flows associated with the Company’s reserves, risked by reserve category and discounted using a weighted average cost of capital rate of 10.0%. The proved reserve locations were limited to wells expected to be drilled in the Company’s five year development plan. Weighted average commodity prices utilized in the determination of the fair value of oil and natural gas properties were $71.51 per barrel of oil, $3.37 per million British thermal units (MMBtu) of natural gas and $29.50 per barrel of oil equivalent of natural gas liquids. Base pricing was derived from an average of forward strip prices and analysts’ estimated prices. In estimating the fair value of the Company’s unproved acreage, a market approach was used in which a review of recent transactions involving properties in the same geographical location indicated the fair value of the Company’s unproved acreage from a market participant perspective. See further discussion below in the ~~“Fresh-start accounting adjustments”~~ ~~for the specific assumptions used in the valuation of the Company’s various other assets.~~

Although the Company believes the assumptions and estimates used to develop Enterprise Value and Reorganization Value are reasonable and appropriate, different assumptions and estimates could materially impact the analysis and resulting conclusions. The assumptions used in estimating these values are inherently uncertain and require

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~~BATTALION OIL CORPORATION~~

~~NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)~~

~~judgment. The following table reconciles the Company’s Enterprise Value to the estimated fair value of the Successor’s common stock as of October 1, 2019 (in thousands):~~

October 1, 2019

Enterprise Value

$
441,583
Plus: Cash

15,546
Less: Fair value of debt

(130,000)
Less: Fair value of warrants

(7,336)
Fair value of Successor common stock

$
319,793

~~The following table reconciles the Company’s Enterprise Value to its Reorganization Value as of October 1, 2019 (in thousands):~~

October 1, 2019

Enterprise Value

$
441,583
Plus: Cash

15,546
Plus: Current liabilities

122,134
Plus: Lease liabilities

3,395
Plus: Noncurrent asset retirement obligation

10,153
Plus: Other noncurrent liabilities

1,625
Reorganization Value of Successor assets

$
594,436

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~~BATTALION OIL CORPORATION~~

~~NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)~~

~~Condensed Consolidated Balance Sheet~~

The following illustrates the effects on the Company’s unaudited condensed consolidated balance sheet due to the reorganization and fresh-start accounting adjustments. The explanatory notes following the table below provide further details on the adjustments, including the Company’s assumptions and methods used to determine fair value for its assets, liabilities, and warrants. Amounts included in the table below are rounded to thousands.

As of October 1, 2019


Predecessor
Company

Reorganization
Adjustments

Fresh-Start
Adjustments

Successor
Company
Current assets:

Cash and cash equivalents

$
17,009

$
(1,463)
(1)
$
—

$
15,546
Accounts receivable, net

37,826

—

—

37,826
Assets from derivative contracts

15,310

—

—

15,310
Restricted cash

—

13,839
(2)

—

13,839
Prepaids and other

14,642

7,110
(3)

(11,462)
(11)

10,290
Total current assets

84,787

19,486

(11,462)

92,811
Oil and natural gas properties (full cost method):

Evaluated

2,155,288

—

(1,774,924)
(12)(13)

380,364
Unevaluated

438,365

—

(329,411)
(13)

108,954
Gross oil and natural gas properties

2,593,653

—

(2,104,335)

489,318
Less - accumulated depletion

(1,709,719)

—

1,709,719
(13)

—
Net oil and natural gas properties

883,934

—

(394,616)

489,318
Other operating property and equipment:

Other operating property and equipment

203,373

—

(199,718)
(12)(14)

3,655
Less - accumulated depreciation

(14,416)

—

14,416
(14)

—
Net other operating property and equipment

188,957

—

(185,302)

3,655
Other noncurrent assets:

Assets from derivative contracts

4,120

—

—

4,120
Operating lease right of use assets

3,694

—

(300)
(15)

3,394
Funds in escrow and other

1,138

—

—

1,138
Total assets

$
1,166,630

$
19,486

$
(591,680)

$
594,436

Current liabilities:

Accounts payable and accrued liabilities

$
112,578

$
2,727
(4)
$
—

$
115,305
Liabilities from derivative contracts

6,829

—

—

6,829
Current portion of long-term debt, net

258,234

(258,234)
(5)

—

—
Operating lease liabilities

1,337

—

(424)
(15)

913
Total current liabilities

378,978

(255,507)

(424)

123,047
Long-term debt, net

—

130,000
(6)

—

130,000
Liabilities subject to compromise

625,005

(625,005)
(7)

—

—
Other noncurrent liabilities:

Liabilities from derivative contracts

1,625

—

—

1,625
Asset retirement obligations

10,153

—

—

10,153
Operating lease liabilities

2,438

—

44
(15)

2,482
Commitments and contingencies

Stockholders' equity:

Common Stock (Predecessor)

16

(16)
(8)

—

—
Common Stock (Successor)

—

2
(9)

—

2
Additional paid-in capital (Predecessor)

1,087,441

(1,087,441)
(8)

—

—
Additional paid-in capital (Successor)

—

327,127
(9)

—

327,127
Retained earnings (accumulated deficit)

(939,026)

1,530,326
(10)

(591,300)
(16)

—
Total stockholders' equity

148,431

769,998

(591,300)

327,129
Total liabilities and stockholders' equity

$
1,166,630

$
19,486

$
(591,680)

$
594,436

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~~BATTALION OIL CORPORATION~~

~~NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)~~

~~Reorganization adjustments~~

~~The table below details cash payments as of October 1, 2019, pursuant to the terms of the Plan described in Note 2, “Reorganization,” (in thousands):~~

Sources:

Proceeds from Senior Noteholder Rights Offering

$
150,150
Proceeds from Senior Credit Agreement

130,000
Proceeds from Existing Equity Interests Rights Offering

5,779
Total Sources

$
285,929

Uses:

Payment of Predecessor Credit Agreement principal, accrued interest, and fees

$
(226,580)
Payment of debtor-in-possession junior secured term credit facility principal and accrued interest

(35,174)
Funding of professional fee escrow and cash collateral account

(13,839)
Payment of debt issuance costs on Senior Credit Agreement

(8,764)
Payment of professional fees and other

(3,035)
Total Uses

$
(287,392)

Total Sources and Uses

$
(1,463)

Reflects the funding of an escrow account for professional fees associated with the chapter 11 bankruptcy and an account to cash collateralize the Predecessor Company’s outstanding letters of credit.

Represents $10.2 million in debt issuance costs related to the Senior Credit Agreement, partially offset by the release of $3.1 million in fees paid to the Company’s restructuring advisors prior to the emergence from chapter 11 bankruptcy.

Represents $7.7 million in fees to be paid to the Company’s restructuring advisors subsequent to the Company’s emergence from chapter 11 bankruptcy, partially offset by payments of i) payments of accrued interest and fees on the Predecessor Credit Agreement and the debtor-in-possession junior secured term credit facility of $3.5 million and ii) professional fees associated with the chapter 11 bankruptcy of $1.5 million.

On the Emergence Date, in accordance with the Plan, the Company repaid the principal outstanding on the Predecessor Credit Agreement of $223.2 million and the debtor-in-possession junior secured term credit facility of $35.0 million using proceeds from the Equity Rights Offerings and borrowings under the Senior Credit Agreement.

~~Reflects the initial borrowing on the Senior Credit Agreement.~~

~~Liabilities subject to compromise were as follows (in thousands):~~

6.75% senior notes due 2025

$
625,005
Liabilities subject to compromise

625,005
Discount on shares issued per the Senior Noteholder Subscription Rights Offering

(67,840)
Issuance of common stock to Class 4 claimholders

(75,388)
Gain on settlement of liabilities subject to compromise

$
481,777

~~Reflects the cancellation of Predecessor common stock and additional paid-in capital.~~

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~~BATTALION OIL CORPORATION~~

~~NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)~~

~~The following table reconciles reorganization adjustments made to Successor common stock and additional paid-in capital (in thousands):~~

Par value of 16,203,940 shares of new common stock issued to holders of senior note claims and existing equity interest claims (valued at $19.74 per share)

$
2
Fair value of warrants issued to holder of the Existing Equity Interests (1)

7,336
Additional paid-in-capital (Successor)

322,294
Equity issuance costs associated with Equity Rights Offering

(2,503)
Total change in Successor common stock and additional paid-in capital

$
327,129

~~(1)~~

The fair value of the warrants was estimated using a Binomial Lattice model with the following assumptions: implied stock price of the Successor Company of $19.74; initial strike price per share of $40.17, $48.28, and $60.45, for Series A, B, and C warrants, respectively, increased each month at an annualized rate of 6.75%; expected volatility of 45%; and risk free interest rate using the USD Yield Curve at each time-step in the lattice.

~~10)~~

~~The table below reflects the cumulative effect of the adjustments discussed above (in thousands):~~

Gain on settlement of liabilities subject to compromise

$
481,777
Success fees incurred upon emergence

(8,376)
Fair value of equity issued to Predecessor common stockholders

(7,449)
Fair value of warrants issued to Predecessor common stockholders

(7,336)
Issuance of common stock to backstop commitment parties

(13,079)
Other

(2,668)
Cancellation of Predecessor equity

1,087,457
Net impact to retained earnings (accumulated deficit)

$
1,530,326

~~Fresh-start accounting adjustments~~

~~11)~~

Adjustment reflects the write-off of debt issuance costs associated with the Senior Credit Agreement of $10.2 million and the write-off of prepaid expenses related to $1.2 million of premiums for the Predecessor Company’s directors and officers’ insurance policy.

~~12)~~

~~Includes the reclassification of treating equipment and gathering support facilities from~~ ~~“Other operating property and equipment”~~ to ~~“Oil and natural gas properties, evaluated.”~~ The Successor Company’s policy of accounting for its treating equipment and gathering support facilities identifies these assets as part of the Company’s full cost pool due to their supporting nature to the Company’s oil and natural gas operations.

~~13)~~

~~Reflects the adjustment to fair value of the Company’s oil and natural gas properties and unproved acreage, as well as the elimination of accumulated depletion.~~

In estimating the fair value of its oil and natural gas properties, the Company used a combination of the income and market approaches. For purposes of estimating the fair value of the Company’s proved reserves, an income approach was used which estimated fair value based on the anticipated cash flows associated with the Company’s reserves, risked by reserve category and discounted using a weighted average cost of capital rate of 10.0%. The proved reserve locations were limited to wells expected to be drilled in the Company’s five year development plan. Weighted average commodity prices utilized in the determination of the fair value of oil and natural gas properties were $71.51 per barrel of oil, $3.37 per MMBtu of natural gas and $29.50 per barrel of natural gas liquids. Base pricing was derived from an average of forward strip prices and analysts’ estimated prices.

~~Table of Contents~~

~~BATTALION OIL CORPORATION~~

~~NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)~~

In estimating the fair value of the Company’s unproved acreage, a market approach was used in which a review of recent transactions involving properties in the same geographical location indicated the fair value of the Company’s unproved acreage from a market participant perspective.

~~14)~~

~~Reflects the adjustment to fair value of the Company’s other operating property and equipment, as well as the elimination of accumulated depreciation.~~

For purposes of estimating the fair value of its other operating property and equipment, the Company used a combination of the market and cost approaches. A market approach was relied upon to value land and vehicles, and in this valuation approach, recent transactions of similar assets were utilized to determine the value from a market participant perspective. For the remaining other operating assets, a cost approach was used. The estimation of fair value under the cost approach was based on current replacement costs of the assets, less depreciation based on the estimated economic useful lives of the assets and age of the assets.

~~15)~~

Upon adoption of fresh start accounting, the Company’s lease obligations were recalculated using the incremental borrowing rate applicable to the Company upon emergence from chapter 11 bankruptcy and commensurate with its new capital structure. The incremental borrowing rate used decreased from 4.83% in the Predecessor period to 3.70% in the Successor period. Additionally represents the removal of right-of-use assets and lease liabilities associated with the Company’s compressors, as the remaining contract term of the compressor leases were less than one year as of the Effective Date. See Note 4, ~~“Leases,”~~ ~~for details associated with the Company’s short-term lease costs.~~

~~16)~~

~~Reflects the cumulative effect of the fresh-start accounting adjustments discussed above.~~

~~4. LEASES~~

The Company determines if an arrangement is a lease at contract inception. A lease exists when a contract conveys to the customer the right to control the use of an identified asset for a period of time in exchange for consideration. The definition of a lease embodies two conditions: (1) there is an identified asset in the contract that is land or a depreciable asset, and (2) the customer has the right to control the use of the identified asset.

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BATTALION OIL CORPORATION

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

The Company leases equipment and office space pursuant to net operating leases. Operating leases where the Company is the lessee are included in “Operating lease right of use assets” and “Operating lease liabilities” on the unaudited condensed consolidated balance sheets. The lease liabilities are initially and subsequently measured at the present value of the unpaid lease payments at the lease commencement date.

Key estimates and judgments include how the Company determined (1) the discount rate used to discount the unpaid lease payments to present value, (2) lease term and (3) lease payments. ASC 842, Leases (ASC 842) requires a lessee to discount its unpaid lease payments using the interest rate implicit in the lease or, if that rate cannot be readily determined, its incremental borrowing rate. As most of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the commencement date to determine the present value of lease payments. The incremental borrowing rate for a lease is the rate of interest the Company would have to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms. Additionally, the Company applies a portfolio approach to determine the discount rate (the incremental borrowing rate for leases with similar characteristics). The Company uses the implicit rate when readily determinable. The lease term includes the noncancellable period of the lease plus any additional periods covered by either a lessee option to extend (or not to terminate) the lease that the lessee is reasonably certain to exercise, or an option to extend (or not to terminate) the lease controlled by the lessor. Lease payments included in the measurement of the lease asset or liability comprise the following, when applicable: fixed payments (including ~~in‑substance~~in-substance fixed payments), variable payments that depend on

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~~BATTALION OIL CORPORATION~~

~~NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)~~

an index or rate, and the exercise price of a lessee option to purchase the underlying asset if the lessee is reasonably certain to exercise.

The right of use asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for lease payments made at or before the lease commencement date, plus any initial direct costs incurred less any lease incentives received. For the Company’s operating leases, the right of use asset is subsequently measured throughout the lease term at the carrying amount of the lease liability, plus initial direct costs, plus (minus) any prepaid (accrued) lease payments, less the unamortized balance of lease incentives received. Lease expense for lease payments is recognized on a ~~straight‑line~~straight-line basis over the lease term.

Variable lease payments associated with the Company’s leases are recognized when the event, activity, or circumstance in the lease agreement on which those payments are assessed occurs. Variable lease payments, when applicable, are presented as “Gathering and ~~other”~~other,” “Restructuring” or “General and administrative” in the unaudited condensed consolidated statements of operations in the same line item as the expense arising from the fixed lease payments on the operating leases.

The Company has lease agreements which include lease and nonlease components and the Company has elected to combine lease and nonlease components, when fixed, for all lease contracts. Nonlease components include common area maintenance charges on office leases and, when applicable, services associated with equipment leases. The Company determines whether the lease or nonlease component is the predominant component on a ~~case‑by‑case~~case-by-case basis.

The Company reviews its right of use assets for impairment in accordance with ASC 360. ASC 360 requires the Company to evaluate right of use assets for impairment as events occur or circumstances change that would more likely than not reduce the fair value below the carrying amount. If the carrying amount is not recoverable from its undiscounted cash flows, then the Company would recognize an impairment loss for the difference between the carrying amount and the current fair value.

The Company monitors for events or changes in circumstances that would require a reassessment of a lease. When a reassessment results in the remeasurement of a lease liability, an adjustment is made to the carrying amount of the corresponding right of use asset unless doing so would reduce the carrying amount of the right of use asset to an amount less than zero. In that case, the amount of the adjustment that would result in a negative right of use asset balance is recorded in the unaudited condensed consolidated statements of operations.

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BATTALION OIL CORPORATION

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

The Company elected not to recognize right of use assets and lease liabilities for all ~~short‑term~~short-term leases that have a lease term of 12 months or less. The Company recognizes the lease payments associated with its ~~short‑term~~short-term leases ~~as an expense on a straight‑line basis over the lease term.~~when incurred. Variable lease payments associated with these leases are recognized and presented in the same manner as for all other leases.

The Company leases equipment and office space under operating leases. The Company has no leases that meet the criteria for classification as a finance lease. The ~~operating leases~~“Operating lease right of use assets” outstanding on the unaudited condensed consolidated balance sheets as of March 31, ~~2020~~2021 and December 31, ~~2019 (Successor)~~2020 have an initial lease ~~terms ranging from 2 to~~term of 5 years. Payments due under the lease contracts include fixed payments plus, in some instances, variable payments. The table below summarizes the Company’s leases for the three months ended March 31, ~~2020 (Successor)~~2021 and ~~2019 (Predecessor)~~2020 (in thousands, except years and discount rate):


	Three Months Ended
	March 31,
	2021			2020
Lease cost
Operating lease costs	$	118		$	260
Short-term lease costs		1,171			12,258
Variable lease costs		113			210
Total lease costs	$	1,402		$	12,728

Other information
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	211		$	254
Weighted-average remaining lease term - operating leases		0.4	years		3.3	years
Weighted-average discount rate - operating leases		3.70	%		3.70	%

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~~BATTALION OIL CORPORATION~~

~~NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)~~

Successor

Predecessor

Three Months

Three Months

Ended

Ended


March 31, 2020



March 31, 2019

Lease cost

Operating lease costs

$
260

$
644

Short-term lease costs

12,258

5,718

Variable lease costs

210

425

Total lease costs

$
12,728

$
6,787

Other information

Cash paid for amounts included in the measurement of lease liabilities

Operating cash flows from operating leases

$
254

$
1,229

Right-of-use assets obtained in exchange for new operating lease liabilities

—

5,462

Weighted-average remaining lease term - operating leases

3.3
years



3.6
years
Weighted-average discount  rate - operating leases

3.70
%

4.83
%

~~Refer to Note 3, “Fresh-start Accounting,”~~ ~~for a discussion of the valuation approach used to record the right of use asset at fair value as of October 1, 2019.~~

Future minimum lease payments associated with the Company’s non-cancellable operating leases for office space and equipment as of March 31, ~~2020 and December 31, 2019 (Successor),~~2021, are presented in the table below (in thousands):


Operating Leases	Successor
	March 31, 2020		December 31, 2019
Remaining period in 2020	$	768	$	1,022
2021		876		876

					March 31, 2021
Remaining period in 2021					$	196
2022		574		574		—
2023		585		585		—
2024		345		345		—
2025						—
Thereafter		—		—		—
Total operating lease payments		3,148		3,402		196
Less: discount to present value		204		232		1
Total operating lease liabilities		2,944		3,170		195
Less: current operating lease liabilities		935		923		195
Noncurrent operating lease liabilities	$	2,009	$	2,247	$	—

5.3. OPERATING REVENUES

Revenue is measured based on consideration specified in a contract with a customer and excludes amounts collected on behalf of third parties. Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction that are collected by the Company from a customer are excluded from revenue. Revenues from the sale of crude oil, natural gas and natural gas liquids are recognized, at a point in time, when a performance obligation is satisfied by the transfer of control of the commodity to the customer. Because the Company’s

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BATTALION OIL CORPORATION

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

performance obligations have been satisfied and an unconditional right to consideration exists as of the balance sheet date, the Company recognized amounts due from contracts with customers of ~~$19.3~~$34.1 million and ~~$36.4~~$24.5 million as of March 31, ~~2020~~2021 and December 31, ~~2019 (Successor),~~2020, respectively, as “Accounts receivable” and “Other assets” on the unaudited condensed consolidated balance sheets.

~~Table of Contents~~

~~BATTALION OIL CORPORATION~~

~~NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)~~

Substantially all of the Company’s revenues are derived from ~~its~~ single basin operations, the Delaware Basin in Pecos, Reeves, Ward and Winkler Counties, Texas. The following table disaggregates the Company’s revenues by major product, in order to depict how the nature, timing, and uncertainty of revenue and cash flows are affected by economic factors in the Company’s single basin operations, for the periods indicated (in thousands):


	Successor		Predecessor
	Three Months		Three Months
	Ended		Ended
	March 31, 2020		March 31, 2019

					Three Months Ended
					March 31,
					2021		2020
Operating revenues:
Oil, natural gas and natural gas liquids sales:
Oil	$	41,917	$	45,517	$	41,270	$	41,917
Natural gas		354		1,461		9,087		354
Natural gas liquids		4,753		4,945		4,909		4,753
Total oil, natural gas and natural gas liquids sales		47,024		51,923		55,266		47,024
Other		375		(7)		252		375
Total operating revenues	$	47,399	$	51,916	$	55,518	$	47,399

Oil Sales

The Company generally markets its crude oil production directly to the customer using two methods. Under the first method, crude oil is sold at the wellhead at an index price, averaged over the daily settlement prices for a production month, and adjusted for pricing differentials and other deductions. Revenue is recognized at the wellhead, where control of the crude oil transfers to the customer, at the net price received. Under the second method, crude oil is delivered to the customer at a contractual delivery point at which the customer takes custody, title and risk of loss of the product. The Company receives a specified index price from the customer, averaged over the daily settlement prices for a production month, and net of applicable market-related adjustments. Revenue is recognized when control of the crude oil transfers at the delivery point at the net price received.

Settlement statements for the Company’s crude oil production are typically received within the month following the date of production and therefore the amount of production delivered to the customer and the price that will be received for that production are known at the time the revenue is recorded. Payment under the Company’s crude oil contracts is typically due on or before the 20^th day of the month following the delivery month.

Natural Gas and Natural Gas Liquids Sales

The Company evaluates its natural gas gathering and processing arrangements in place with midstream companies to determine when control of the natural gas is transferred. Under contracts where it is determined that control of the natural gas transfers at the wellhead, any fees incurred to gather or process the unprocessed natural gas are treated as a reduction of the sales price of unprocessed natural gas, and therefore revenues from such transactions are presented on a net basis. Under contracts where it is determined that control of the natural gas transfers at the tailgate of the midstream entity’s processing plant, revenues are presented on a gross basis for amounts expected to be received from the midstream company or third party purchasers through the gathering and treating process and presented as "Natural gas"

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BATTALION OIL CORPORATION

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

or "Natural gas liquids" and any fees incurred to gather or process the natural gas are presented separately as “Gathering and other " on the unaudited condensed consolidated statements of operations.

Under certain contracts, the Company may elect to take its residue gas and/or natural gas liquids in-kind at the tailgate of the midstream entity’s processing plant. The Company then sells the products to a customer at contractual delivery points at prices based on an index. In these instances, revenues are presented on a gross basis and any fees

~~Table of Contents~~

~~BATTALION OIL CORPORATION~~

~~NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)~~

incurred to gather, process or transport the commodities are presented separately as “Gathering and other" on the unaudited condensed consolidated statements of operations.

Settlement statements for the Company’s natural gas and natural gas liquids production are typically received 30 days after the date of production and therefore the Company estimates the amount of production delivered to the customer and the price that will be received for that production. The majority of the Company’s natural gas and natural gas liquids prices are based on daily average pricing for the month. Historically, differences between the Company’s estimates and the actual revenue received have not been material. Payment under the Company’s natural gas gathering and processing contracts is typically due on or before the fifth day of the second month following the delivery month.

6.4. DIVESTITURES

~~Water Infrastructure~~

Northern West Quito Assets

On December ~~20, 2018 (Predecessor),~~18, 2020, the Company sold ~~its water infrastructure~~certain oil and gas properties and related assets located in ~~the Delaware Basin~~Ward County, Texas (the ~~Water~~North West Quito Assets) to ~~WaterBridge Resources~~Point Energy Partners Operating, LLC ~~(the Purchaser)~~ for a total ~~adjusted purchase~~sales price of ~~$210.9~~$26.3 million in cash, ~~(the Water Infrastructure Divestiture).~~subject to customary post-closing adjustments as provided in the Purchase and Sale Agreement. The effective date of the transaction was October 1, ~~2018 (Predecessor).~~

~~Upon closing,~~2020. Proceeds from the ~~Company dedicated all~~sale were recorded as a reduction to the carrying value of the ~~produced water~~Company’s full cost pool with no gain or loss recorded. The Company used the net proceeds from its oil and natural gas wells within its Monument Draw, Hackberry Draw and West Quito Draw operating areas to the Purchaser. There were no drilling or throughput commitments associated with the Water Infrastructure Divestiture. The Purchaser will receive a market price, subject to annual adjustments for inflation, in exchange for the transportation, disposal and treatment of such produced water, and the Purchaser will receive a market price for the supply of freshwater and recycled produced water to the Company.

~~During the three months ended March 31, 2019 (Predecessor), the Company recorded a gain of $0.9 million on~~ the sale ofto repay amounts outstanding under the ~~Water Assets on the unaudited condensed consolidated statements of operations in~~ ~~“(Gain) loss on sale of Water Assets.”~~Company’s Senior Credit Agreement and for general corporate purposes.

7.5. OIL AND NATURAL GAS PROPERTIES

The Company uses the full cost method of accounting for its investment in oil and natural gas properties. Under this method of accounting, all costs of acquisition, exploration and development of oil and natural gas reserves (including such costs as leasehold acquisition costs, geological expenditures, treating equipment and gathering support facilities costs, dry hole costs, tangible and intangible development costs and direct internal costs) are capitalized as the cost of oil and natural gas properties when incurred. To the extent capitalized costs of evaluated oil and natural gas properties, net of accumulated depletion, exceed the discounted future net revenues of proved oil and natural gas reserves, net of deferred taxes, such excess capitalized costs are charged to expense.

With the adoption of fresh-start accounting, the Company recorded its oil and natural gas properties at fair value as of the Emergence Date. The Company’s evaluated and unevaluated properties were assigned fair values of $380.4 million and $109.0 million, respectively.

The Successor Company’s policy of accounting for its treating equipment and gathering support facilities identifies these assets as part of the Company’s full cost pool due to their supporting nature to the Company’s oil and natural gas operations. The Company’s treating equipment and gathering support facilities were included in “~~Oil and natural gas properties, evaluated” on the unaudited condensed consolidated balance sheet as of the Emergence Date. Refer to Note 3, “Fresh-start Accounting,” for a discussion of the valuation approaches used.~~

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~~BATTALION OIL CORPORATION~~

~~NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)~~

Additionally, the Company assesses all properties classified as unevaluated property on a quarterly basis for possible impairment or reduction in value. The Company assesses properties on an individual basis or as a group, if properties are individually insignificant. The assessment includes consideration of the following factors, among others: intent to drill; remaining lease term; geological and geophysical evaluations; drilling results and activity; the assignment of proved reserves; and the economic viability of development if proved reserves are assigned. During any period in which these factors indicate impairment, the cumulative drilling costs incurred to date for such property and all or a portion of the associated leasehold costs are transferred to the full cost pool and are then subject to depletion and the full cost ceiling test limitation.

At March 31, ~~2020 (Successor),~~2021, the ceiling test value of the Company’s reserves was calculated based on the ~~first‑day‑of‑the‑month~~first-day-of-the-month average for the ~~12‑months~~12-months ended March 31, ~~2020~~2021 of the West Texas Intermediate (WTI) crude oil spot price of ~~$55.96~~$39.95 per barrel, adjusted by lease or field for quality, transportation fees, and regional price differentials, and the ~~first‑day‑of‑the‑month~~first-day-of-the-month average for the ~~12‑months~~12-months ended March 31, ~~2020~~2021 of the Henry Hub natural gas price of ~~$2.30~~ $2.16 per

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BATTALION OIL CORPORATION

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

MMBtu, adjusted by lease or field for energy content, transportation fees, and regional price differentials. Using these prices, the Company’s net book value of oil and natural gas properties at March 31, ~~2020~~2021 did not exceed the ceiling amount.

At March 31, ~~2019 (Predecessor),~~2020, the ceiling test value of the Company’s reserves was calculated based on the ~~first‑day‑of‑the‑month~~first-day-of-the-month average for the ~~12‑months~~12-months ended March 31, ~~2019~~2020 of the WTI crude oil spot price of ~~$63.06~~$55.96 per barrel, adjusted by lease or field for quality, transportation fees, and regional price differentials, and the ~~first‑day‑of‑the‑month~~first-day-of-the-month average for the ~~12‑months~~12-months ended March 31, ~~2019~~2020 of the Henry Hub natural gas price of ~~$3.07~~$2.30 per MMBtu, adjusted by lease or field for energy content, transportation fees, and regional price differentials. Using these prices, the Company’s net book value of oil and natural gas properties at March 31, ~~2019 exceeded~~2020 did not exceed the ceiling ~~amount by $275.2 million ($217.4 million after taxes) which resulted in a ceiling test impairment charge of that amount for the quarter. The impairment was recorded in~~ ~~“Full cost ceiling test impairment”~~ on the unaudited condensed consolidated statements of operations. The ceiling test impairment was driven by a decrease in the first‑day‑of‑the‑month average price for crude oil used in the ceiling test calculation and the Company’s intent to expend capital only on its most economic areas. As such, the Company identified certain leases in the Hackberry Draw area with near‑term expirations and transferred approximately $51.0 million of associated unevaluated property costs to the full cost pool during the three months ended March 31, 2019 (Predecessor). amount.

Changes in commodity prices, production rates, levels of reserves, future development costs, transfers of unevaluated properties to the full cost pool, capital spending, and other factors will determine the Company’s ceiling test calculation and impairment analyses in future periods.

~~8. LONG‑TERM~~6. DEBT

~~Long‑term debt as~~As of March 31, ~~2020~~2021 and December 31, ~~2019 (Successor)~~2020, the Company’s debt consisted of the following (in thousands):

Successor

March 31, 2020

December 31, 2019
Senior revolving credit facility

$ 170,000

$ 144,000


	March 31, 2021		December 31, 2020
Senior revolving credit facility	$	155,000	$	158,000
Paycheck Protection Program loan		2,209		2,209
Total debt		157,209		160,209
Current portion of Paycheck Protection Program loan		2,123		1,720
Total long-term debt	$	155,086	$	158,489

Senior Revolving Credit Facility

On ~~the Effective Date,~~October 8, 2019, the Company entered into a senior secured revolving credit agreement, as amended, (the Senior Credit Agreement) with Bank of Montreal, as administrative agent, and certain other financial institutions party thereto, as ~~lenders, which refinanced the Predecessor Company’s Amended and Restated Senior Secured Revolving Credit Agreement (the Predecessor Credit Agreement).~~lenders. The Senior Credit Agreement provides for a $750.0 million senior secured ~~reserve‑based~~reserve-based revolving credit facility with a current borrowing base of ~~$200.0~~$190.0 million. At March 31,

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~~BATTALION OIL CORPORATION~~

~~NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)~~

~~2020 (Successor),~~ 2021, the Company had ~~$170.0~~$155.0 million indebtedness outstanding and approximately ~~$4.4~~$2.5 million letters of credit ~~outstanding. Under~~outstanding under the Senior Credit Agreement, resulting in $32.5 million of borrowing capacity under the current borrowing base of ~~$200.0 million,~~$190.0 million. Pursuant to the ~~Company would have approximately $25.6 million of borrowing capacity available under~~Fourth Amendment to the Senior Credit Agreement, ~~as of March 31, 2020 (Successor).~~the borrowing base is subject to certain reductions beginning June 1, 2021, which are discussed further below.

A portion of the Senior Credit Agreement, in the amount of ~~$50.0~~$25.0 million, is available for the issuance of letters of credit. The maturity date of the Senior Credit Agreement is October 8, 2024. Redeterminations ~~will~~of the borrowing base occur semi-annually on May 1 and November 1, with the lenders and the Company each having the right to one interim unscheduled redetermination between any two consecutive semi-annual redeterminations. The borrowing base takes into account the estimated value of the Company’s oil and natural gas properties, proved reserves, total indebtedness, and other relevant factors consistent with customary oil and natural gas lending criteria. Amounts outstanding under the Senior Credit Agreement bear interest at specified margins over the base rate of ~~1.50%~~2.00% to ~~2.50%~~3.00% for ABR-based loans or at specified margins over LIBOR of ~~2.50%~~3.00% to ~~3.50%~~4.00% for Eurodollar-based loans, which margins may be increased one-time by not more than 50 basis points per annum if necessary in order to successfully syndicate the Senior Credit Agreement. These margins fluctuate based on the Company’s utilization of the facility.

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BATTALION OIL CORPORATION

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

The Company may elect, at its option, to prepay any borrowings outstanding under the Senior Credit Agreement without premium or penalty, except with respect to any break funding payments which may be payable pursuant to the terms of the Senior Credit Agreement. The Company may be required to make mandatory prepayments of the outstanding borrowings under the Senior Credit Agreement in connection with certain borrowing base deficiencies, including deficiencies which may arise in connection with a borrowing base redetermination, an asset disposition or swap ~~terminations attributable in the aggregate to more than ten percent (10%) of the then-effective borrowing base.~~terminations. Amounts outstanding under the Senior Credit Agreement are guaranteed by the Company’s direct and indirect subsidiaries and secured by a security interest in substantially all of the assets of the Company and its subsidiaries.

The Senior Credit Agreement contains certain events of default, including non-payment; breaches of representation and warranties; non-compliance with covenants; cross-defaults to material indebtedness; voluntary or involuntary bankruptcy; judgments and change in control. The Senior Credit Agreement also contains certain financial covenants, including maintenance of (i) a Total Net Indebtedness Leverage Ratio (as defined in the Senior Credit Agreement) of not greater than 3.50 to 1.00 and (ii) a Current Ratio (as defined in the Senior Credit Agreement) of not less than 1.00 to ~~1.00, both commencing with the fiscal quarter ending March 31, 2020.~~1.00. As of March 31, ~~2020 (Successor),~~2021, after giving effect to the Third Amendment, discussed below, the Company was in compliance with the financial covenants under the Senior Credit Agreement.

On ~~April 30,~~October 29, 2020, ~~(Successor),~~ the Company entered into the ~~Second~~Third Amendment to Senior Secured Revolving Credit Agreement and Limited Waiver (the Third Amendment). The Third Amendment, among other things, set the borrowing base to $190.0 million as of November 1, 2020. The Third Amendment also reduced the amount available for issuance of letters of credit to $25.0 million and amended certain covenants including, but not limited to, covenants relating to increasing the minimum mortgaged total value of proved borrowing base properties from 85% to 90%. Additionally, the Third Amendment provided for new covenants that, among other things, require the Company to enter into swap agreements representing not less than 65% of the Company’s reasonably anticipated projected production from proved reserves classified as developed producing reserves for a period from the Third Amendment effective date through at least December 31, 2022 and prohibit no more than $3.0 million of the Company’s uncontested accounts payable or accrued expenses, liabilities or other obligations from remaining outstanding for longer than 90 days. Pursuant to the Third Amendment, the administrative agent and the lenders consented to a waiver of the Current Ratio (as defined in the Senior Credit Agreement) for the fiscal quarter ended September 30, 2020 and suspended testing of the Current Ratio until the fiscal quarter ending December 31, 2021.

On May 10, 2021, the Company entered into the Fourth Amendment to Senior Secured Revolving Credit Agreement ~~(Second~~(the Fourth Amendment) which reduces the borrowing base to $185.0 million effective June 1, 2021 and further reduces the borrowing base to $175.0 million effective September 1, 2021. The Fourth Amendment also, among other things, (i) ~~reduced~~increased interest margins to 2.00% to 3.00% for ABR-based loans and 3.00% to 4.00% for Eurodollar-based loans, (ii) amended the covenant relating to the minimum mortgaged total value of proved borrowing base properties to increase the value from 90% to 95%, (iii) provides for direct reductions in the borrowing base in the event of asset dispositions in excess of $1.0 million per fiscal year or swap terminations and (iv) revised certain covenants and covenant-related baskets including, but not limited to, ~~$200.0~~adding covenants prohibiting the designation of unrestricted subsidiaries and requiring prior consent from the lenders regarding asset dispositions or swap terminations in excess of the greater of $7.5 million or 3.5% of the then effective borrowing base.

Paycheck Protection Program Loan

On April 16, 2020, the Company entered into a promissory note (the PPP Loan) for a principal amount of approximately $2.2 million from ~~April 30, 2020,~~Bank of Montreal under the Paycheck Protection Program of the CARES Act, which ~~shall then be reduced~~is administered by ~~$5.0 million monthly starting September 1, 2020 until November 1, 2020, so that~~ the ~~borrowing base is scheduled to be $185.0 million on November 1, 2020, provided the borrowing base redetermination scheduled for November 1, 2020 shall occur pursuant~~U.S. Small Business Administration (SBA). Pursuant to the terms of the ~~Senior Credit Agreement, (ii) increased~~CARES Act, the proceeds of the PPP Loan may be used for payroll costs, mortgage interest, ~~margins to 1.50% to 2.50% for ABR-based loans~~rent or utility costs. The PPP Loan bears interest at a rate of 1.0% per annum and, ~~2.50% to 3.50% for Eurodollar-based loans, (iii) provided that should~~if not forgiven, has a maturity date of April 16, 2022. As long as the ~~Company’s Consolidated Cash Balance (as defined pursuant~~Company makes a

Table of Contents

BATTALION OIL CORPORATION

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

timely application of forgiveness to the ~~Second Amendment) exceed $10.0 million, such amounts shall be used~~SBA, the Company is not required to make any payments under the PPP Loan until the forgiveness amount is communicated to the Company by the SBA.

The Company may elect, at its option, to prepay ~~any~~20% or less of the borrowings outstanding under the ~~Senior Credit Agreement~~PPP Loan without premium or penalty, and ~~thereafter,~~without notice. Prepayments of more than 20% of the outstanding borrowings require written advanced notice and payment of accrued interest. The PPP Loan contains certain events of default including non-payment, breach of representations and warranties, cross-defaults to ~~the extent of any uncollateralized letters of credit exposure, shall be cash collateralized in accordance~~other loans with the ~~Senior Credit Agreement~~lender or to material indebtedness, voluntary or involuntary bankruptcy, judgments and ~~(iv) allowed for a replacement benchmark rate to the London Interbank Offered Rate (which may include SOFR, Compounded SOFR or Term SOFR).~~change in control.

The Second Amendment also added provisions related a loan (PPP Loan) incurred by the Company from the U.S. Small Business Administration, under the Paycheck Protection Program (PPP) of the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act). Under the terms of the CARES Act, ~~PPP Loan recipients~~the Company can apply for and be granted forgiveness for all or a portion of ~~loans granted under~~ the ~~PPP.~~PPP Loan. Such forgiveness will be determined, subject to limitations, based on the use of loan proceeds ~~for payment~~in accordance with the terms of ~~payroll costs~~the CARES Act during the covered period after loan origination and ~~any payments~~the maintenance or achievement of ~~mortgage interest, rent,~~

~~Table of Contents~~

~~BATTALION OIL CORPORATION~~

~~NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)~~

~~and utilities.~~certain employee levels. The Company believes it is eligible for, and intends to ~~use, and the Second Amendment requires the Company to use,~~pursue, forgiveness of the PPP Loan ~~proceeds for CARES Forgivable Uses~~in accordance with the requirements and limitations under the CARES ~~Act.~~

~~Additionally, the Second Amendment waived, for the fiscal quarter ended June 30, 2020,~~Act; however, no assurance can be provided that the Company comply with the requirement under the Senior Credit Agreement that the Company unwind certain swap agreements for which settlement payments are calculated in such fiscal quarter to exceed 100%forgiveness of ~~actual production.~~

On November 21, 2019 (Successor), the Company entered into the First Amendment to the Senior Credit Agreement which, among other things, (i) reduced the borrowing base to $240.0 million and (ii) limited the Total Net Indebtedness Leverage Ratio (as defined in the Senior Credit Agreement) asany portion of the ~~last day of each fiscal quarter, commencing with the fiscal quarter ending March 31, 2020, of not greater than 3.50 to 1.00.~~PPP Loan will be obtained.

9.7. FAIR VALUE MEASUREMENTS

Pursuant to ASC 820, Fair Value Measurement (ASC 820), the Company’s determination of fair value incorporates not only the credit standing of the counterparties involved in transactions with the Company resulting in receivables on the Company’s unaudited condensed consolidated balance sheets, but also the impact of the Company’s nonperformance risk on its own liabilities. ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy assigns the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). Level 2 measurements are inputs that are observable for assets or liabilities, either directly or indirectly, other than quoted prices included within Level 1. The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. The Company classifies fair value balances based on the observability of those inputs.

As required by ASC 820, a financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels. There were no transfers between fair value hierarchy levels for any period presented. The following tables set forth by level within the fair value hierarchy the Company’s financial assets and liabilities that were accounted for at fair value as of March 31, ~~2020~~2021 and December 31, ~~2019 (Successor)~~2020 (in thousands):


	Successor
	March 31, 2020
	Level 1		Level 2		Level 3		Total

									March 31, 2021
									Level 1		Level 2		Level 3		Total
Assets
Assets from derivative contracts	$	—		109,119	$	—		109,119	$	—		1,500	$	—		1,500


Liabilities
Liabilities from derivative contracts	$	—		4,445	$	—		4,445	$	—		51,400	$	—		51,400

2819

Table of Contents

BATTALION OIL CORPORATION

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)


	Successor
	December 31, 2019
	Level 1		Level 2		Level 3		Total

									December 31, 2020
									Level 1		Level 2		Level 3		Total
Assets
Assets from derivative contracts	$	—	$	5,219	$	—	$	5,219	$	—	$	12,568	$	—	$	12,568


Liabilities
Liabilities from derivative contracts	$	—	$	12,923	$	—	$	12,923	$	—	$	26,416	$	—	$	26,416

Derivative contracts listed above as Level 2 include fixed-price swaps, collars, ~~puts, calls,~~ basis swaps and WTI NYMEX rolls that are carried at fair value. The Company records the net change in the fair value of these positions in “Net gain (loss) on derivative contracts” in the Company’s unaudited condensed consolidated statements of operations. The Company is able to value the assets and liabilities based on observable market data for similar instruments, which resulted in the Company reporting its derivatives as Level 2. This observable data includes the forward curves for commodity prices based on quoted market prices and implied volatility factors related to changes in the forward curves. See Note ~~10,~~ 8, “Derivative and Hedging Activities,” for additional discussion of derivatives.

The Company’s derivative contracts are with major financial institutions with investment grade credit ratings which are believed to have minimal credit risk. As such, the Company is exposed to credit risk to the extent of nonperformance by the counterparties in the derivative contracts; however, the Company does not anticipate such nonperformance.

The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of ASC 825, Financial Instruments. The estimated fair value amounts have been determined at discrete points in time based on relevant market information. These estimates involve uncertainties and cannot be determined with precision. The estimated fair value of cash and cash equivalents, ~~restricted cash, accounts receivable, noncurrent~~ accounts receivable, and accounts payable approximates their carrying value due to their ~~short‑~~short-term nature. The estimated fair value of the Company’s Senior Credit Agreement approximates carrying value because the interest rates approximate current market rates.

On the Effective Date, the Company emerged from chapter 11 bankruptcy and adopted fresh-start accounting, which resulted in the Company becoming a new entity for financial reporting purposes. Upon the adoption of fresh-start accounting, the Company’s assets, liabilities and warrants were recorded at their fair values as of the fresh-start reporting date, October 1, 2019. See Note 3, ~~“Fresh-start Accounting,”~~ ~~for a detailed discussion of the fair value approaches used by the Company.~~

The Company follows the provisions of ASC 820, for nonfinancial assets and liabilities measured at fair value on a ~~non‑recurring~~non-recurring basis. These provisions apply to the Company’s initial recognition of asset retirement obligations for which fair value is used. The asset retirement obligation estimates are derived from historical costs and management’s expectation of future cost environments; and therefore, the Company has designated these liabilities as Level 3. See Note ~~11,~~ 9, “Asset Retirement Obligations,” for a reconciliation of the beginning and ending balances of the liability for the Company’s asset retirement obligations.

~~10.~~8. DERIVATIVE AND HEDGING ACTIVITIES

The Company is exposed to certain risks relating to its ongoing business operations, such as commodity price risk and interest rate risk. In accordance with the Company’s policy, it generally hedges a substantial, but varying, portion of anticipated oil, natural gas and natural gas liquids production for future periods. Derivatives are carried at fair value on the unaudited condensed consolidated balance sheets as assets or liabilities, with the changes in the fair value included in the unaudited condensed consolidated statements of operations for the period in which the change occurs. The

~~Table of Contents~~

~~BATTALION OIL CORPORATION~~

~~NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)~~

Company’s hedge policies and objectives may change significantly as its operational profile changes. The Company does not enter into derivative contracts for speculative trading purposes.

It is the Company’s policy to enter into derivative contracts only with counterparties that are creditworthy financial or commodity hedging institutions deemed by management as competent and competitive market makers. As of March 31, ~~2020 (Successor),~~2021, the Company did not post collateral under any of its derivative contracts as they are secured under the Company’s Senior Credit ~~Agreement or are uncollateralized trades.~~Agreement.

Table of Contents

BATTALION OIL CORPORATION

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

The Company’s crude oil, natural gas and natural gas liquids derivative positions at any point in time may consist of fixed-price swaps, costless put/call collars, basis swaps and WTI NYMEX rolls. Fixed-price swaps are designed so that the Company receives or makes payments based on a differential between fixed and variable prices for crude oil and natural gas. A costless collar consists of a sold call, which establishes a maximum price the Company will receive for the volumes under contract and a purchased put that establishes a minimum price. Basis swaps effectively lock in a price differential between regional prices (i.e. Midland) where the product is sold and the relevant pricing index under which the oil production is hedged (i.e. Cushing). WTI NYMEX roll agreements account for pricing adjustments to the trade month versus the delivery month for contract pricing. The Company has elected not to designate any of its derivative contracts for hedge accounting. Accordingly, the Company records the net change in the mark-to-market valuation of these derivative contracts, as well as all payments and receipts on settled derivative contracts, in “Net gain (loss) on derivative contracts” on the unaudited condensed consolidated statements of operations.

All derivative contracts are recorded at fair market value in accordance with ASC 815 and ASC 820 and included in the unaudited condensed consolidated balance sheets as assets or liabilities. The following table summarizes the location and fair value amounts of all derivative contracts in the unaudited condensed consolidated balance sheets as of March 31, ~~2020~~2021 and December 31, ~~2019 (Successor)~~2020 (in thousands):


		Successor					Successor

Derivatives not designated as		Asset derivative contracts					Liability derivative contracts					Asset derivative contracts					Liability derivative contracts
hedging contracts under ASC 815	Balance sheet location	March 31, 2020		December 31, 2019		Balance sheet location	March 31, 2020		December 31, 2019		Balance sheet location	March 31, 2021		December 31, 2020		Balance sheet location	March 31, 2021		December 31, 2020
Commodity contracts	Current assets - assets from derivative contracts	$	71,353	$	4,995	Current liabilities - liabilities from derivative contracts	$	(3,972)	$	(8,069)	Current assets - assets from derivative contracts	$	672	$	8,559	Current liabilities - liabilities from derivative contracts	$	(42,371)	$	(22,125)
Commodity contracts	Other noncurrent assets - assets from derivative contracts		37,766		224	Other noncurrent liabilities - liabilities from derivative contracts		(473)		(4,854)	Other noncurrent assets - assets from derivative contracts		828		4,009	Other noncurrent liabilities - liabilities from derivative contracts		(9,029)		(4,291)
Total derivatives not designated as hedging contracts under ASC 815		$	109,119	$	5,219		$	(4,445)	$	(12,923)		$	1,500	$	12,568		$	(51,400)	$	(26,416)

~~Table of Contents~~

~~BATTALION OIL CORPORATION~~

~~NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)~~

The following table summarizes the location and amounts of the Company’s realized and unrealized gains and losses on derivative contracts in the Company’s unaudited condensed consolidated statements of operations (in thousands):

Amount of gain or (loss) recognized in income on
derivative contracts for the

Successor

Predecessor

Three Months

Derivatives not designated as

Location of gain or (loss) recognized in

Ended

hedging contracts under ASC 815

income on derivative contracts

March 31, 2020

March 31, 2019

Amount of gain or (loss)

recognized in income on

derivative contracts for the

Derivatives not designated

Location of gain or

Three Months Ended

as hedging contracts

(loss) recognized in income

March 31,

under ASC 815

on derivative contracts

2021

2020

Commodity contracts:

Unrealized gain (loss) on commodity contracts

Other income (expenses) - net gain (loss) on derivative contracts

112,378

(68,169)

Other income (expenses) - net gain (loss) on derivative contracts

(36,052)

112,378

Realized gain (loss) on commodity contracts

Other income (expenses) - net gain (loss) on derivative contracts

5,921

3,370

Other income (expenses) - net gain (loss) on derivative contracts

(9,659)

5,921

Total net gain (loss) on derivative contracts

118,299

(64,799)

(45,711)

118,299

Table of Contents

BATTALION OIL CORPORATION

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

At March 31, ~~2020 and December 31, 2019 (Successor),~~2021, the Company had the following open crude oil and natural gas derivative contracts:

Successor

March 31, 2020

Floors

Ceilings

Basis Differential

Volume in

Weighted

Weighted

Weighted

Mmbtu's/

Price /

Average

Price /

Average

Price /

Average
Period

Instrument

Commodity

Bbl's

Price Range

Price

Price Range

Price

Price Range

Price
April 2020 - June 2020

Fixed-Price Swap

Crude Oil

91,000

$
55.74

$
55.74

$
—

$
—

$
-

$
-
April 2020 - June 2020

Basis Swap

Crude Oil

182,000

0.75

0.75
April 2020 - June 2020

WTI NYMEX Roll

Crude Oil

182,000

0.61

0.61

April 2020 - September 2020

Fixed-Price Swap

Natural Gas

640,000

2.61

2.61

April 2020 - December 2020

Fixed-Price Swap

Crude Oil

550,000

55.68 - 60.00

57.84

April 2020 - December 2020

Collar

Crude Oil

412,500

50.00

50.00

70.00

70.00

April 2020 - December 2020

Call

Crude Oil

1,760,000

70.00

70.00

April 2020 - December 2020

Put

Crude Oil

687,500

55.00

55.00

April 2020 - December 2020

Basis Swap

Crude Oil

1,375,000

0.67 - 0.85

0.72
April 2020 - December 2020

WTI NYMEX Roll

Crude Oil

1,375,000

0.37 - 0.54

0.43

April 2020 - December 2020

Fixed-Price Swap

Natural Gas

2,200,000

2.55 - 2.57

2.56

July 2020 - September 2020

Fixed-Price Swap

Crude Oil

92,000

58.20

58.20

July 2020 - September 2020

Basis Swap

Crude Oil

92,000

0.90

0.90
July 2020 - September 2020

WTI NYMEX Roll

Crude Oil

92,000

0.63

0.63

July 2020 - December 2020

Fixed-Price Swap

Crude Oil

184,000

32.60

32.60

July 2020 - December 2020

Basis Swap

Crude Oil

368,000

(2.20) - 0.95

(0.63)
July 2020 - December 2020

WTI NYMEX Roll

Crude Oil

368,000

(1.10) - 0.64

(0.23)

October 2020 - December 2020

Fixed-Price Swap

Crude Oil

92,000

56.80

56.80

October 2020 - December 2020

Basis Swap

Crude Oil

92,000

0.95

0.95
October 2020 - December 2020

WTI NYMEX Roll

Crude Oil

92,000

0.51

0.51

January 2021 - March 2021

Fixed-Price Swap

Crude Oil

180,000

55.55 - 56.08

55.82

January 2021 - March 2021

Basis Swap

Crude Oil

180,000

1.00 - 1.05

1.03
January 2021 - March 2021

WTI NYMEX Roll

Crude Oil

180,000

0.42 - 0.48

0.45

January 2021 - June 2021

Fixed-Price Swap

Crude Oil

181,000

32.60

32.60

January 2021 - June 2021

Basis Swap

Crude Oil

181,000

(2.20)

(2.20)
January 2021 - June 2021

WTI NYMEX Roll

Crude Oil

181,000

(1.10)

(1.10)

April 2021 - June 2021

Fixed-Price Swap

Crude Oil

91,000

54.60

54.60

April 2021 - June 2021

Basis Swap

Crude Oil

91,000

1.05

1.05
April 2021 - June 2021

WTI NYMEX Roll

Crude Oil

91,000

0.32

0.32

January 2021 - December 2021

Fixed-Price Swap

Crude Oil

1,460,000

50.70 - 52.80

51.91

January  2021  -  December  2021

Basis Swap

Crude Oil

1,460,000

0.82 - 0.95

0.85
January  2021  -  December  2021

WTI NYMEX Roll

Crude Oil

1,460,000

0.13 - 0.14

0.14

January 2021 - December 2021

Fixed-Price Swap

Natural Gas

2,190,000

2.47 - 2.48

2.47

January 2022 - December 2022

Fixed-Price Swap

Crude Oil

1,460,000

51.50

51.50

January  2022  -  December  2022

Basis Swap

Crude Oil

1,460,000

0.85 - 0.95

0.88
January  2022  -  December  2022

WTI NYMEX Roll

Crude Oil

1,460,000

-

-


			Volume in	Weighted
			Mmbtu's/	Average
Period	Instrument	Commodity	Bbl's	Price
2021	Fixed-Price Swap	Crude Oil	2,306,000	$	44.29
2021	Fixed-Price Swap	Natural Gas	3,363,030		2.73
2021	Basis Swap	Crude Oil	2,306,000		(0.19)
2021	Basis Swap	Natural Gas	3,363,030		(0.24)
2021	WTI NYMEX Roll	Crude Oil	2,006,000		(0.37)
2022	Fixed-Price Swap	Crude Oil	2,296,800		48.48
2022	Fixed-Price Swap	Natural Gas	1,297,420		3.01
2022	Producer Collar (Ceiling)	Natural Gas	2,388,624		2.65
2022	Producer Collar (Floor)	Natural Gas	2,388,624		2.50
2022	Basis Swap	Crude Oil	2,296,800		0.48
2022	Basis Swap	Natural Gas	3,686,044		(0.30)
2022	WTI NYMEX Roll	Crude Oil	2,327,800		(0.04)

~~Table of Contents~~

~~BATTALION OIL CORPORATION~~

~~NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)~~

Successor

December 31, 2019

Floors

Ceilings

Basis Differential

Volume in

Weighted

Weighted

Weighted

Mmbtu's/

Price /

Average

Price /

Average

Price /

Average
Period

Instrument

Commodity

Bbl's

Price Range

Price

Price Range

Price

Price Range

Price
January 2020 - June 2020

Fixed-Price Swap

Crude Oil

182,000

$
55.74

$
55.74

$
—

$
—

$
—

$
—
January 2020 - September 2020

Fixed-Price Swap

Natural Gas

1,186,000

2.61

2.61

January 2020 - December 2020

Fixed-Price Swap

Crude Oil

732,000

55.68 - 60.00

57.84

January 2020 - December 2020

Fixed-Price Swap

Natural Gas

2,928,000

2.55 - 2.57

2.56

January 2020 - December 2020

Collar

Crude Oil

549,000

50.00

50.00

70.00

70.00

January 2020  - December  2020

Call

Crude Oil

2,342,400

70.00

70.00

January 2020  - December  2020

Put

Crude Oil

915,000

55.00

55.00

January 2020 - December 2020

Basis Swap

Crude Oil

1,464,000

0.67 - 0.85

0.72
January 2020 - December 2020

WTI NYMEX Roll

Crude Oil

366,000

0.37

0.37

February 2020 - December 2020

WTI NYMEX Roll

Crude Oil

1,340,000

0.41 - 0.54

0.44

April 2020 - December 2020

Basis Swap

Crude Oil

275,000

0.75

0.75
January 2021 - December 2021

Fixed-Price Swap

Crude Oil

1,460,000

50.70 - 52.80

51.91

January 2021 - December 2021

Fixed-Price Swap

Natural Gas

2,190,000

2.47 - 2.48

2.47

January 2021 - December 2021

Basis Swap

Crude Oil

1,460,000

0.82 - 0.95

0.85
January 2021 - December 2021

WTI NYMEX Roll

Crude Oil

1,460,000

0.13 - 0.14

0.14

January 2022 - December 2022

Fixed-Price Swap

Crude Oil

1,460,000

51.50

51.50

January 2022 - December 2022

Basis Swap

Crude Oil

1,460,000

0.85 - 0.95

0.88
January 2022 - December 2022

WTI NYMEX Roll

Crude Oil

2,555,000

(0.02) - 0.00

(0.01)

The Company presents the fair value of its derivative contracts at the gross amounts in the unaudited condensed consolidated balance sheets. The following table shows the potential effects of master netting arrangements on the fair value of the Company’s derivative contracts at March 31, ~~2020~~2021 and December 31, ~~2019 (Successor)~~2020 (in thousands):


	Successor				Successor
	Derivative Assets				Derivative Liabilities

									Derivative Assets				Derivative Liabilities
Offsetting of Derivative Assets and Liabilities	March 31, 2020		December 31, 2019		March 31, 2020		December 31, 2019		March 31, 2021		December 31, 2020		March 31, 2021		December 31, 2020


Gross Amounts Presented in the Consolidated Balance Sheet	$	109,119	$	5,219	$	(4,445)	$	(12,923)	$	1,500	$	12,568	$	(51,400)	$	(26,416)
Amounts Not Offset in the Consolidated Balance Sheet		(4,445)		(4,557)		4,445		4,557		(1,500)		(8,968)		1,500		8,968
Net Amount	$	104,674	$	662	$	—	$	(8,366)	$	—	$	3,600	$	(49,900)	$	(17,448)

The Company enters into an International Swap Dealers Association Master Agreement (ISDA) with each counterparty prior to a derivative contract with such counterparty. The ISDA is a standard contract that governs all derivative contracts entered into between the Company and the respective counterparty. The ISDA allows for offsetting of amounts payable or receivable between the Company and the counterparty, at the election of both parties, for transactions that occur on the same date and in the same currency.

In response to changing market conditions, the Company plans to temporarily shut-in a portion of its production, which resulted in the Company terminating certain derivative contracts in April 2020 (Successor). The Company terminated 217,000 Bbls of its crude oil fixed-price swaps, collars and put positions for the month of May 2020 (Successor). A portion of the positions were entered into after March 31, 2020 (Successor). The Company received approximately $4.8 million for these terminations.

~~11.~~9. ASSET RETIREMENT OBLIGATIONS

The Company records an asset retirement obligation (ARO) on oil and natural gas properties when it can reasonably estimate the fair value of an obligation to perform site reclamation, dismantle facilities or plug and abandon costs. The Company records the ARO liability on the unaudited condensed consolidated balance sheets and capitalizes the cost in “Oil and natural gas properties” during the period in which the obligation is incurred. The Company records the accretion of its ARO liabilities in “Depletion, depreciation and accretion” expense in the unaudited condensed consolidated statements of operations. The additional capitalized costs are depreciated on a unit-of-production basis.

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BATTALION OIL CORPORATION

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

The Company recorded the following activity related to its ARO liability ~~(inclusive of the current portion)~~ (in thousands):

Liability for asset retirement obligations as of December 31, 2019 (Successor)

$
10,590
Additions

105
Accretion expense

149
Liability for asset retirement obligations as of March 31, 2020 (Successor)

$
10,844


Liability for asset retirement obligations as of December 31, 2020	$	10,583
Accretion expense		128
Liability for asset retirement obligations as of March 31, 2021	$	10,711

~~12.~~10. COMMITMENTS AND CONTINGENCIES

Commitments

As of March 31, ~~2020 (Successor),~~2021, the Company has ~~an active drilling rig~~a minimum volume commitment with a third party for the treating of sour gas production through June 30, 2022. The future payments associated with the minimum volume commitment are approximately ~~$1.2~~$7.3 million ~~that will be incurred during 2020. Termination~~and $4.8 million for the remainder of ~~the active drilling rig commitment would require an early termination penalty of $1.0 million, which would be in lieu of paying the active drilling rig commitment of $1.2 million.~~

~~As of March 31, 2020 (Successor), the Company has purchase commitments related to equipment of approximately $1.6 million that will be incurred during 2020.~~

2021 and for 2022, respectively.

The Company has entered into various long-term gathering, transportation and sales contracts with respect to its oil and natural gas production from the Delaware Basin in West Texas. As of March 31, ~~2020 (Successor),~~2021, the Company had in place ~~three~~two long-term crude oil contracts and 1412 long-term natural gas contracts in this area and the sales prices under these contracts are based on posted market rates. Under the terms of these contracts, the Company has committed a substantial portion of its production from this area for periods ranging from one to twenty years from the date of first production.

Contingencies

From time to time, the Company may be a plaintiff or defendant in a pending or threatened legal proceeding arising in the normal course of our business. While the outcome and impact of currently pending legal proceedings cannot be determined, the Company’s management and legal counsel believe that the resolution of these proceedings through settlement or adverse judgment will not have a material effect on the Company’s unaudited condensed consolidated operating results, financial position or cash flows.

~~13.~~11. STOCKHOLDERS’ EQUITY

~~Common Stock~~

On October 8, 2019, upon emergence from chapter 11 bankruptcy, all existing shares of Predecessor common stock were cancelled and the Successor Company issued approximately 16.2 million shares of new common stock. Refer to Note 2, “~~Reorganization,” for further details.~~Warrants

On October 8, 2019, ~~upon emergence from chapter 11 bankruptcy,~~ the Successor Company filed an amended and restated certificate of incorporation with the Delaware Secretary of State to provide for, among other things, (i) the total number of shares of all classes of capital stock that the Successor Company has the authority to issue is 101,000,000 of which 100,000,000 shares are common stock, par value $0.0001 per share and 1,000,000 shares are preferred stock, par value $0.0001 per share, (ii) a classified board structure until the 2021 Annual Meeting of Stockholders, and (iii) a restriction on the Successor Company from issuing any non‑voting equity securities in violation of Section 1123(a)(6) of chapter 11 of title 11 of the United States Code. In addition, the amended and restated certificate of incorporation

~~Table of Contents~~

~~BATTALION OIL CORPORATION~~

~~NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)~~

stipulates provisions for the right of removal of directors, specifically that prior to the 2021 Annual Meeting, any Group II Director (as defined in the certificate of incorporation) may be removed with or without cause by 85% of the shares then entitled to vote at an election of directors (which voting threshold has been increased solely with respect to such class of directors from a majority of shares then entitled to vote at an election of directors). Beginning at the 2021 Annual Meeting, any director of either class may be removed with or without cause by a majority of shares entitled to vote.

~~Warrants~~

~~On October 8, 2019, upon emergence from chapter 11 bankruptcy, by operation of the Plan and the confirmation order, all existing warrants of the Predecessor Company were cancelled and the Successor~~ Company entered into a warrant agreement (the Warrant Agreement) with Broadridge Corporate Issuer Solutions, Inc. as the warrant agent, pursuant to which the ~~Successor~~ Company issued three series of warrants (the Series A Warrants, the Series B Warrants and the Series C Warrants and together, the Warrants, ~~and the holders thereof, the Warrant Holders),~~ on a pro rata basis to pre-emergence holders of the predecessor Company’s ~~Existing Equity Interests~~common stock pursuant to the ~~Plan.~~Company’s plan of reorganization.

Each Warrant represents the right to purchase one share of common stock at the applicable exercise price, subject to adjustment as provided in the Warrant Agreement and as summarized below. On ~~the Effective Date,~~October 8, 2019, the Company issued (i) Series A Warrants to purchase an aggregate of 1,798,322 shares of common stock, with an initial exercise price of $40.17 per share, (ii) Series B Warrants to purchase an aggregate of 2,247,985 shares of common stock, with an initial exercise price of $48.28 per share and (iii) Series C Warrants to purchase an aggregate of 2,890,271 shares of common stock, with an initial exercise price of $60.45 per share. Each series of Warrants issued under the Warrant Agreement has a three-year term, expiring on October 8, 2022. The strike price of each series of Warrants issued under the Warrant Agreement increases monthly at an annualized rate of 6.75%, compounding monthly, as provided in the Warrant Agreement. As of March 31, ~~2020 (Successor),~~2021, the Company had 1.8 million Series A, 2.2 million Series B and 2.9 million Series C warrants outstanding with corresponding exercise prices of ~~$41.03, $49.37~~$43.21, $52.13 and ~~$61.89,~~$65.52 per share, respectively.

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BATTALION OIL CORPORATION

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

The Warrants do not grant ~~the Warrant Holder~~ any voting or control rights or dividend rights, or contain any negative covenants restricting the operation of ~~our~~the Company’s business. ~~Refer to Note 2 “Reorganization”~~ ~~for further details.~~

On September 9, 2016, the Predecessor Company issued 4.7 million warrants. The warrants could be exercised to purchase 4.7 million shares of the Predecessor Company's common stock at an exercise price of $14.04 per share. The holders were entitled to exercise the warrants in whole or in part at any time prior to expiration on September 9, 2020. Upon emergence from chapter 11 bankruptcy, all outstanding warrants were cancelled. Refer to Note 2, ~~“Reorganization,”~~ ~~for further details.~~

Incentive Plans

On ~~September 9, 2016,~~January 29, 2020, the ~~Predecessor~~ Company’s board of directors adopted the ~~2016 Long‑Term~~2020 Long-Term Incentive Plan (the ~~2016~~ Plan)~~. As~~ with an effective date of ~~April 6, 2017 (Predecessor), an~~January 1, 2020. An aggregate of ~~19.0~~approximately 1.5 million shares of the ~~Predecessor~~ Company’s common stock were available for grant pursuant to awards under the 2016 Plan. Immediately prior to emergence from chapter 11 bankruptcy, the 2016 Plan was cancelled and all outstanding stock-based compensation awards granted thereunder were either vested or cancelled.

On January 29, 2020, the Successor Company’s board of directors adopted the 2020 Long-Term Incentive Plan (the 2020 Plan). An aggregate of approximately 1.5 million shares of the Successor Company’s common stock were available for grant pursuant to awards under the 2020 Plan. As of March 31, 2021 and December 31, 2020, ~~(Successor),~~ a maximum of 0.2 million ~~shares~~for both periods, of the ~~Successor~~ Company’s common stock remained reserved for issuance under the ~~2020~~ Plan.

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~~BATTALION OIL CORPORATION~~

~~NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)~~

The Company accounts for stock-based payment accruals under authoritative guidance on stock compensation. The guidance requires all stock-based payments to employees and directors, including grants of stock options and restricted stock, to be recognized in the financial statements based on their fair values. The Company has elected not to apply a forfeiture estimate and will recognize a credit in compensation expense to the extent awards are forfeited.

For the three months ended March 31, ~~2020 (Successor)~~2021 and ~~2019 (Predecessor),~~2020, the Company recognized expense of ~~$0.4~~$0.6 million and ~~a credit of $6.8~~$0.4 million, respectively, related to ~~stock-based-compensation~~stock-based compensation. Stock-based compensation expense is recorded as a component of "General and administrative" on the unaudited condensed consolidated statements of operations. During the three months ended March 31, 2019 (Predecessor), senior executives departed the Company. In accordance with the terms of these senior executives' employment agreements, unvested stock options and unvested shares of restricted stock were modified to vest immediately upon termination. For the three months ended March 31, 2019 (Predecessor), the Company recognized an incremental reduction to stock-based compensation expense of $8.4 million, respectively, associated with these modifications.

Stock Options

From time to time, the Company grants stock options under the ~~2020~~ Plan covering shares of common stock to employees of the ~~Successor Company and granted stock options under the 2016 Plan covering shares of common stock to employees of the Predecessor~~ Company. Stock options, when exercised, are settled through the payment of the exercise price in exchange for new shares of stock underlying the option. Awards granted under the ~~2020~~ Plan typically vest over a four year period at a rate of one-fourth on the annual anniversary date of the grant and expire seven years from the date of grant. ~~Awards~~

No stock options were granted ~~under~~during the ~~2016 Plan typically vested~~three months ended March 31, 2021. At March 31, 2021, the Company had $0.8 million of unrecognized compensation expense related to non-vested stock options to be recognized over a ~~three year~~weighted-average period ~~at a rate~~ of ~~one-third on the annual anniversary date of the grant and expired ten years from the grant date.~~1.9 years.

During the three months ended March 31, 2020, ~~(Successor),~~ the Company granted stock options under the ~~2020~~ Plan covering 0.5 million shares of common stock to employees of the Company. These stock options have exercise prices ranging from $18.91 to $37.83 with a weighted average exercise price of $28.32 per share. At March 31, 2020, ~~(Successor),~~ the Company had $1.5 million of unrecognized compensation expense related to non-vested stock options to be recognized over a weighted-average period of 2.4 years.

No stock options were granted during the three months ended March 31, 2019 (Predecessor). At March 31, 2019 (Predecessor), the Company had $1.5 million of unrecognized compensation expense related to non‑vested stock options to be recognized over a weighted‑average period of 0.8 years. Immediately prior to emergence from chapter 11 bankruptcy, all outstanding stock options under the 2016 Plan were cancelled. Refer to Note 2, ~~“Reorganization,”~~ ~~for further details.~~

Restricted Stock

From time to time, the Company grants shares of restricted stock units (RSUs) under the ~~2020~~ Plan to employees of the ~~Successor Company and granted shares of restricted stock under the 2016 Plan to employees and non-employee directors of the Predecessor~~ Company. Under the ~~2020~~ Plan, employee RSUs will vest and convert to shares typically over a four year period at a rate of one-fourth on the annual anniversary date of the grant or when the performance or market conditions described below occur. ~~Under~~

During the ~~2016 Plan, employee~~three months ended March 31, 2021, the Company granted less than 0.1 million shares ~~typically vested~~of RSUs which will vest over ~~a three year period~~four years at a rate of ~~one-third~~one-fourth on the annual anniversary date of the ~~grant, and~~grant. These RSUs were granted at a fair value price of $8.00 per share. At March 31, 2021, the ~~non-employee directors' shares vested six months from the date~~Company had $3.6 million of ~~grant.~~unrecognized compensation expense related to non-vested RSU awards to be recognized over a weighted average period of 2.5 years.

During the three months ended March 31, 2020, ~~(Successor),~~ the Company granted 0.9 million shares of RSUs with the vesting conditions and fair values described below under the ~~2020~~ Plan to employees of the Company. At March 31, 2020, ~~(Successor),~~ the

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BATTALION OIL CORPORATION

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Company had $6.4 million of unrecognized compensation expense related to non-vested RSU awards to be recognized over a ~~weighted-average~~weighted average period of 3.2 years.

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~~BATTALION OIL CORPORATION~~

~~NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)~~

●

0.4 million RSUs granted will vest over four years at a rate one-fourth on the annual anniversary of date of the grant. These RSUs were granted at a fair value of $11.89 per share.

●

0.2 million RSUs granted will vest in full only upon achievement of certain business combination goals, as defined in the award agreements. These RSUs were granted at a fair value of $11.89 per share. As of March 31, ~~2020,~~2021, a business combination, as defined in the awards ~~agreement,~~agreements, had not been consummated and was not considered probable. As such, no expense has been recognized for the RSUs with business combination vesting conditions.

●

0.3 million RSUs granted will vest in full or in part or may terminate based on the Company’s total shareholder return relative to the total shareholder return of certain of its peer companies as defined in the award agreements over the ~~four year~~performance period ending on February 20, ~~2024 as defined in the award agreements.~~2024. These RSUs were granted at a fair value of $6.48 per share.

During the three months ended March 31, 2019 (Predecessor), the Company granted 4.2 million shares of restricted stock under the 2016 Plan to employees of the Company. These restricted shares were granted at $1.29 per share. At March 31, 2019 (Predecessor), the Company had $8.2 million of unrecognized compensation expense related to non‑vested restricted stock awards to be recognized over a weighted‑average period of 1.8 years. Immediately prior to emergence from chapter 11 bankruptcy, all outstanding unvested restricted stock granted under the 2016 Plan was vested. Refer to Note 2, ~~"Reorganization,"~~ ~~for further details.~~

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~~BATTALION OIL CORPORATION~~

~~NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)~~

~~14.~~12. EARNINGS PER SHARE

~~On October 8, 2019, upon emergence from chapter 11 bankruptcy, the Predecessor Company’s equity was cancelled and new equity was issued. Refer to Note 2,~~ ~~“Reorganization,”~~ ~~for further details.~~

The following represents the calculation of earnings (loss) per share (in thousands, except per share amounts):


	Successor		Predecessor
	Three Months		Three Months
	Ended		Ended
	March 31, 2020		March 31, 2019

					Three Months Ended
					March 31,
					2021		2020
Basic:
Net income (loss)	$	114,491	$	(336,559)	$	(33,375)	$	114,491
Weighted average basic number of common shares outstanding		16,204		158,549		16,232		16,204
Basic net income (loss) per share of common stock	$	7.07	$	(2.12)	$	(2.06)	$	7.07
Diluted:
Net income (loss)		114,491		(336,559)		(33,375)		114,491


Weighted average basic number of common shares outstanding		16,204		158,549		16,232		16,204
Common stock equivalent shares representing shares issuable upon:
Exercise of Predecessor stock options		—		Anti-dilutive
Exercise of Predecessor warrants		—		Anti-dilutive
Vesting of Predecessor restricted shares		—		Anti-dilutive
Exercise of Successor Series A Warrants		Anti-dilutive		—
Exercise of Successor Series B Warrants		Anti-dilutive		—
Exercise of Successor Series C Warrants		Anti-dilutive		—
Exercise of Successor stock options		Anti-dilutive		—
Vesting of Successor restricted share units		Anti-dilutive		—
Exercise of Series A Warrants						Anti-dilutive		Anti-dilutive
Exercise of Series B Warrants						Anti-dilutive		Anti-dilutive
Exercise of Series C Warrants						Anti-dilutive		Anti-dilutive
Exercise of stock options						Anti-dilutive		Anti-dilutive
Vesting of restricted stock units						Anti-dilutive		Anti-dilutive
Weighted average diluted number of common shares outstanding		16,204		158,549		16,232		16,204
Diluted net income (loss) per share of common stock	$	7.07	$	(2.12)	$	(2.06)	$	7.07

Common stock equivalents, including warrants, options and restricted stock units, totaling ~~7.3~~7.8 million ~~shares~~ for the three months ended March 31, ~~2020 (Successor) were not included in the computation of diluted earnings per share of common stock because the effect would have been anti-dilutive.~~

~~Common stock equivalents, including stock options, restricted shares and warrants, totaling 14.9 million shares for the three months ended March 31, 2019 (Predecessor)~~2021 were not included in the computation of diluted earnings per share of common stock because the effect would have been anti-dilutive due to the net loss.

Common stock equivalents, including warrants, options and restricted stock units, totaling 7.3 million for the three months ended March 31, 2020 were not included in the computation of diluted earnings per share of common stock because the effect would have been anti-dilutive.

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BATTALION OIL CORPORATION

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

~~15.~~13. ADDITIONAL FINANCIAL STATEMENT INFORMATION

Certain balance sheet amounts are comprised of the following (in thousands):


	Successor
	March 31, 2020		December 31, 2019

					March 31, 2021		December 31, 2020
Accounts receivable, net:
Oil, natural gas and natural gas liquids revenues	$	19,321	$	36,367	$	32,787	$	22,781
Joint interest accounts		6,042		10,145		6,508		8,543
Other		4,897		1,992		239		918
	$	30,260	$	48,504
					$	39,534	$	32,242
Prepaids and other:
Prepaids	$	1,057	$	2,093	$	743	$	892
Income tax receivable		1,250		1,250
Funds in escrow		4,000		4,000		1,740		1,740
Other		34		36		108		108
	$	6,341	$	7,379
					$	2,591	$	2,740
Other assets:
Joint interest accounts	$	5,442	$	—
Oil, natural gas and natural gas liquids revenues					$	1,335	$	1,720
Funds in escrow		581		580		581		581
Other		125		123		51		50
	$	6,148	$	703
					$	1,967	$	2,351
Accounts payable and accrued liabilities:
Trade payables	$	23,501	$	36,038	$	27,922	$	22,740
Accrued oil and natural gas capital costs		41,202		22,781		16,810		8,344
Revenues and royalties payable		16,606		25,457		21,049		16,412
Accrued interest expense		335		604		1,219		482
Accrued employee compensation		141		2,947		967		3,223
Accrued lease operating expenses		10,563		9,230		6,002		7,622
Other		237		276		104		105
	$	92,585	$	97,333
					$	74,073	$	58,928

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion is intended to assist in understanding our results of operations for the three months ended March 31, ~~2020 (Successor)~~2021 and ~~2019 (Predecessor)~~2020 and should be read in conjunction with our unaudited condensed consolidated financial statements and the notes thereto included in this Quarterly Report on Form 10-Q and with the consolidated financial statements, notes and management’s discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2019 (Successor).~~2020.

Certain prior year financial statements are not comparable to our current year financial statements due to the adoption of fresh‑start accounting. References to “Successor” or “Successor Company” relate to the financial position and results of operations of the reorganized Company subsequent to October 1, 2019. References to “Predecessor” or “Predecessor Company” relate to the financial position and results of operations of the Company prior to, and including, October 1, 2019.

Statements in this discussion may be ~~forward‑looking.~~forward-looking. These ~~forward‑looking~~forward-looking statements involve risks and uncertainties, including those discussed below, which could cause actual results to differ from those expressed. For more information, see “Special note regarding ~~forward‑looking~~forward-looking statements.”

Overview

We are an independent energy company focused on the acquisition, production, exploration and development of onshore liquids-rich oil and natural gas assets in the United States. During 2017, ~~(Predecessor),~~ we acquired certain properties in the Delaware Basin and divested our assets located in the Williston Basin in North Dakota and in the El Halcón area of East Texas. As a result, our properties and drilling activities are currently focused in the Delaware Basin, where we have an extensive drilling inventory that we believe offers attractive long-term economics.

Our total operating revenues for the first three months of 2021 and 2020 were $55.5 million and $47.4 million, respectively. The increase in revenues in the most recent period is primarily attributable to an approximate $15.34 per Boe increase in average realized prices in the most recent period. During the first three months of ~~2020 (Successor),~~2021, production averaged ~~18,791~~14,333 Boe/d compared to ~~our~~ average production of ~~17,089~~18,791 Boe/d during the first three months of ~~2019 (Predecessor).~~2020. Our average daily oil and natural gas production ~~increased~~decreased in the first three months of ~~2020 (Successor)~~2021 when compared to the same period in the prior year primarily due to production declines in our ~~drilling activities in~~non-core areas, which were partially offset by increased production from our Monument Draw ~~and West Quito Draw.~~area, where new production came online as a result of our capital spending program. Also contributing to decreased total production in the current year period is a temporary shut-in of production in February 2021 as a result of inclement weather. The estimated production decrease associated with this temporary shut-in was approximately 1,300 Boe/d for the first three months of 2021. In addition, in December 2020, we divested properties that produced approximately 800 Boe/d during the three months ended March 31, 2020. For the three months ended March 31, ~~2020 (Successor),~~2021, we drilled and cased ~~3.0~~2.0 gross ~~(3.0~~(2.0 net) operated wells, completed ~~5.0~~4.0 gross ~~(4.3~~(4.0 net) operated wells, and put online ~~6.0~~4.0 gross ~~(5.3~~(4.0 net) operated wells.

Our financial results depend upon many factors, but are largely driven by the volume of our oil and natural gas production and the price that we receive for that production. Our production volumes will decline as reserves are depleted unless we expend capital in successful development and exploration activities or acquire properties with existing production. The amount we realize for our production depends predominantly upon commodity prices, which are affected by changes in market demand and supply, as impacted by overall economic activity, weather, transportation take-away capacity constraints, inventory storage levels, basis differentials and other factors. Accordingly, finding, developing and ~~developing~~producing oil and natural gas reserves at economical costs isare critical to our long-term success.

Oil and natural gas prices are inherently volatile and sustained lower commodity prices could ~~have a material impact upon~~result in impairment charges under our full cost ceiling test calculation. The ceiling test calculation dictates that we use the unweighted arithmetic average price of crude oil and natural gas as of the first day of each month for the 12-month period ending at the balance sheet date. Using the crude oil price for April ~~2020~~2021 of ~~$20.31~~$61.35 per barrel, and holding it constant for two months to create a trailing 12-month period of average prices that is more reflective of recent price trends, our ceiling ~~amount related to the net book value of our oil and natural gas properties~~test calculation would ~~have been reduced and would~~not have generated an impairment, ~~of $205.5 million,~~ holding all other inputs and factors constant. In addition to commodity prices, our production rates, levels of proved reserves, future development costs, transfers of unevaluated properties to our full cost pool, capital spending and other factors will determine our actual ceiling test calculation and impairment analyses in future periods.

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Recent Developments

Risk and Uncertainties

We are ~~closely~~continuously monitoring the current and potential impacts of the novel coronavirus (COVID-19) pandemic on our business, including how it has and may continue to impact our operations, financial results, liquidity, contractors, customers, employees and vendors, and taking appropriate actions in response, including ~~reducing capital expenditures, temporarily shutting-in producing wells, and~~ implementing various measures to ensure the continued operation of our business in a safe and secure manner. ~~Governmental~~In 2020, COVID-19 and governmental actions to contain the ~~COVID-19~~ pandemic ~~have~~ contributed to an economic downturn, reduced demand for oil and natural gas and, together with a price war ~~between~~involving the Organization of Petroleum Exporting Countries (OPEC)/Saudi Arabia and Russia, ~~have~~ depressed oil and natural gas prices to historically low levels. Although OPEC and Russia subsequently agreed ~~in April~~ to reduce production, downward pressure on prices ~~has~~ continued ~~and could continue~~ for ~~the foreseeable future,~~several months, particularly given concerns over ~~available storage capacity and~~ the impacts of the ~~current~~ economic downturn on demand. We are unable to predict the ~~impact~~future affects that these events will have on usour business and financial condition due to numerous uncertainties, including the continuing severity and duration of the COVID-19 outbreak and the ~~effects~~impacts that governmental or other actions taken to limit the extent and duration of the outbreak, in conjunction with ~~worsening~~ economic conditions, will have on our business, demand for oil and natural gas, and oil and natural gas prices. The health of our employees, contractors and vendors, and our ability to meet staffing needs in our operations and critical functions cannot be predicted, nor can the impact on our customers, vendors and contractors. Any material effect on these parties could adversely impact us. These and other factors could affect ~~the Company’s~~our operations, earnings and cash flows and could cause our results to not be comparable to those of the same period in previous years. For example, in 2020, we realized lower revenue as a result of commodity price declines, which began in March 2020. In response to low commodity prices, we temporarily shut-in producing wells in May and June 2020, which further contributed to lower revenues that year. Additionally, we incurred ceiling test impairments in 2020, which were primarily driven by a decline in the average pricing required to be used in the valuation of our reserves for ceiling test purposes. The results presented in this Form 10-Q are not necessarily indicative of future operating results. For further information regarding the actual and potential impacts of COVID-19 on us, see “Risk Factors” in Item 1A of ~~this Quarterly~~our 2020 Annual Report on Form ~~10-Q.~~10-K.

~~Acid Gas Injection Well Permit~~

During the three months ended March 31, 2020 (Successor), we received permits from the Texas Railroad Commission and the Texas Commission on Environmental Quality to construct and operate an acid gas injection well by converting an existing producing gas well. Acid gas injection provides a more cost effective alternative to sour gas treating, and offers the opportunity for lower operating costs in the future.

~~Successor~~ Senior Revolving Credit Facility

On ~~April 30, 2020 (Successor),~~May 10, 2021, we entered into the ~~Second~~Fourth Amendment to ~~the~~ Senior Secured Revolving Credit Agreement ~~(Second~~(the Fourth Amendment) which reduces the borrowing base to $185.0 million effective June 1, 2021 and further reduces the borrowing base to $175.0 million effective September 1, 2021. The Fourth Amendment also, among other things, (i) reduced the borrowing base to $200.0 million effective from April 30, 2020, which shall then be reduced by $5.0 million monthly starting September 1, 2020 until November 1, 2020, so that the borrowing base is scheduled to be $185.0 million on November 1, 2020, provided the borrowing base redetermination scheduled for November 1, 2020 shall occur pursuant to the terms of the Senior Credit Agreement, (ii) increased interest margins to ~~1.50%~~2.00% to ~~2.50%~~3.00% for ABR-based loans and ~~2.50%~~3.00% to ~~3.50%~~4.00% for Eurodollar-based loans, ~~(iii) provided that should our Consolidated Cash Balance (as defined pursuant~~(ii) amended the covenant relating to the ~~Second Amendment) exceed $10.0 million, such amounts shall be used~~minimum mortgaged total value of proved borrowing base properties to ~~prepay any borrowings under~~increase the ~~Senior Credit Agreement and thereafter,~~value from 90% to ~~the extent of any uncollateralized letters of credit exposure, shall be cash collateralized~~95%, (iii) provides for direct reductions in ~~accordance with the Senior Credit Agreement and (iv) allowed for a replacement benchmark rate to the London Interbank Offered Rate (which may include SOFR, Compounded SOFR or Term SOFR).~~

The Second Amendment also added provisions related a loan (PPP Loan) incurred by us from the U.S. Small Business Administration, under the Paycheck Protection Program (PPP) of the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act). Under the terms of the CARES Act, PPP Loan recipients can apply for and be granted forgiveness for all or a portion of loans granted under the PPP. Such forgiveness will be determined, subject to limitations, based on the use of loan proceeds for payment of payroll costs and any payments of mortgage interest, rent, and utilities. We intend to use, and the Second Amendment requires us to use, the PPP Loan proceeds for CARES Forgivable Uses under the CARES Act.

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Additionally, the Second Amendment waived, for the fiscal quarter ended June 30, 2020, that we comply with the requirement under the Senior Credit Agreement that we unwind certain swap agreements for which settlement payments are calculated in such fiscal quarter to exceed 100% of actual production.

~~On November 21, 2019 (Successor), we entered into the First Amendment to the Senior Credit Agreement which, among other things, (i) reduced~~ the borrowing base ~~to $240.0 million and (ii) limited the Total Net Indebtedness Leverage Ratio (as defined~~ in the ~~Senior Credit Agreement) as~~event of asset dispositions in excess of $1.0 million per fiscal year or swap terminations and (iv) revised certain covenants and covenant-related baskets including, but not limited to, adding covenants prohibiting the designation of unrestricted subsidiaries and requiring prior consent from the lenders regarding asset dispositions or swap terminations in excess of the ~~last day~~greater of ~~each fiscal quarter, commencing with the fiscal quarter ending March 31, 2020, of not greater than 3.50 to 1.00.~~

~~Listing of our Common Stock on NYSE American~~

~~Our Predecessor common stock was previously listed on the New York Stock Exchange (NYSE) under the symbol “HK.” As a result of our failure to satisfy the continued listing requirements~~$7.5 million or 3.5% of the ~~NYSE, on July 22, 2019, our Predecessor common stock was delisted from the NYSE. Effective February 20, 2020, we commenced trading on the NYSE American exchange under the symbol “BATL.”~~then effective borrowing base.

Capital Resources and Liquidity

In March 2020, ~~(Successor),~~ the World Health Organization declared the outbreak of COVID-19 a pandemic. TIn 2020, thehe COVID-19 outbreak and associated government restrictions ~~have~~ significantly impacted economic activity and markets and ~~have~~ dramatically reduced ~~current and anticipated~~ demand for oil and natural gas at the same time that supply was maintained at high levels due to a price and market share war involving the OPEC/Saudi Arabia and Russia, all of which adversely ~~impacting~~impacted the prices we ~~receive~~received for our production. ~~As a result of commodity price declines,~~Thus, in 2020, we realized lower revenue as a result of these commodity price declines, which began in March ~~2020 (Successor). Also in~~2020. In response to ~~current market conditions,~~low commodity prices, we ~~have scaled back our operations, including temporary shut-ins of~~temporarily shut-in producing wells in May and June 2020, which further contributed to lower revenues that year. Additionally, we incurred ceiling test impairments during 2020, which were primarily driven by a ~~portion~~decline in the average pricing required to be used in the valuation of our ~~production.~~reserves for ceiling test purposes.

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Continued actual or anticipated declines in domestic or foreign economic activity or growth rates, regional or worldwide increases in tariffs or other trade restrictions, turmoil affecting the U.S. or global financial system and markets and ~~a severe~~an economic contraction either regionally or worldwide, resulting from current efforts to contain the COVID-19 coronavirus or other factors, could materially affect our business and financial condition and impact our ability to finance operations by worsening the actual or anticipated future drop in worldwide oil demand, negatively impacting the price received for oil and natural gas production, ~~inhibiting~~adversely impacting our ~~lenders from funding borrowings under~~ability to comply with covenants in our Senior Credit Agreement or ~~resulting in~~causing our lenders ~~reducing~~to further reduce the borrowing base under our Senior Credit Agreement. Negative economic conditions could also adversely affect the collectability of our trade receivables or performance by our vendors and suppliers or cause our commodity hedging arrangements to be ineffective if our counterparties are unable to perform their obligations. All of the foregoing may adversely affect our business, financial condition, results of operations, cash flows and, potentially, compliance with the covenants contained in, and borrowing capacity under, our Senior Credit Agreement.

~~Our 2020 drilling and completion budget, approved by our board in December 2019, contemplated running one operated rig in the Delaware Basin during the year. That budget contemplated spending~~We expect to spend approximately ~~$123~~$40.0 million to ~~$138~~$50.0 million ~~in capital expenditures, including~~on drilling, ~~completions,~~completion, support infrastructure and other capital costs ~~to drill seven to ten gross operated wells and to put online 12 to 14 gross operated wells~~ during the year. We continuously monitor changes in market conditions and adapt our operational plans as necessary in order to maintain financial flexibility, preserve acreage, and meet our contractual obligations. As a result of changes in market conditions and commodity prices in March 2020, we have scaled back our capital operations and currently expect that our expenditures for the remainder of 2020 will decline significantly from the levels incurred during the three months ended March 31, 2020 and that we maintain the upper end of our anticipated full year 2020 capital expenditures to be approximately $76 million, subject to our continuing evaluation in light of market conditions and the risks and uncertainties detailed elsewhere in this report.

~~Our near‑term~~2021. These near-term capital spending requirements are expected to be funded with cash and cash equivalents on hand, cash flows from operations and, if needed, borrowings under our Senior Credit Agreement, which has a current borrowing base of ~~$200.0 million. At March 31, 2020 (Successor), we had $170.0~~$190.0 million, ~~of indebtedness outstanding~~which is scheduled to be reduced to $185.0 million on June 1, 2021 and ~~approximately $4.4~~to $175.0 million ~~letters of credit outstanding. Under~~on September 1, 2021 pursuant to the ~~current borrowing base of $200.0 million, we would have $25.6 million of borrowing capacity available under the~~Fourth Amendment to our Senior Credit Agreement, as ~~of March 31, 2020 (Successor).~~discussed in greater detail above. Amounts

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borrowed under ~~the~~our Senior Credit Agreement will mature on October 8, 2024. ~~Our~~At March 31, 2021, we had $155.0 million of indebtedness outstanding and approximately $2.5 million letters of credit outstanding under our Senior Credit Agreement, resulting in $32.5 million of borrowing capacity under the current $190.0 million borrowing base. The next redetermination is scheduled for the fall of 2021. If our borrowing base is ~~redetermined on~~further reduced upon a ~~semi-annual basis (with us~~redetermination, our resulting liquidity could be insufficient to fund our business, operations and planned capital expenditures and the ~~lenders each having~~reduction could result in a borrowing base deficiency, which would require us to repay any amount outstanding in excess of the ~~right to one interim unscheduled redetermination between any two consecutive semi-annual redeterminations) and adjusted based on the estimated value~~borrowing base.

As part of our ~~oil~~ongoing efforts to manage our business and ~~natural gas reserves and other relevant factors.~~

~~The~~liquidity, we are in regular contact with our lenders regarding matters relating to the Senior Credit Agreement, ~~contains~~and we closely monitor our compliance with the various covenants under our Senior Credit Agreement, which include certain financial covenants, ~~including~~such as maintenance of (i) a Total Net Indebtedness Leverage Ratio (as defined in the Senior Credit Agreement) of not greater than 3.50 to 1.00 and (ii) a Current Ratio (as defined in the Senior Credit Agreement) of not less than 1.00:~~1.00, both commencing with the fiscal quarter ending March 31, 2020.~~1.00. As of March 31, ~~2020 (Successor)~~2021, after giving effect to the Third Amendment to Senior Secured Revolving Credit Agreement and Limited Waiver (the Third Amendment), we were in compliance with the financial covenants under the Senior Credit Agreement.

When commodity prices decline significantly, as they have recently, our ability to finance our capital budget and operations may be adversely impacted. While we use derivative instruments to provide partial protection against declines in oil, natural gas and natural gas liquids prices, the total volumes we hedge are less than our expected production, varies from period to period based on our view of current and future market conditions and generally extends up to approximately 36 months. This variation in hedged volumes may result in our liquidity being susceptible to commodity price declines. As of October 8, 2019, the Senior Credit Agreement contained minimum hedging requirements. Specifically, for the first twelve months and for months 13 to 24 following October 8, 2019, that 75% and 50%, respectively, of anticipated production from proved developed producing reserves be covered by hedges. While production volumes naturally decrease over time, we currently have approximately 90%, 100%, and 75% of remaining 2020, 2021, and 2022 anticipated production from proved developed producing reserves hedged at weighted average prices of $52.21, $45.51 and $52.38 per barrel, respectively. Our hedge policies and objectives may change significantly as our operational profile changes and/or commodities prices change. We do not enter into derivative contracts for speculative trading purposes.

We have ~~in the past~~periodically, including as recently as October 2020, obtained waivers or amendments to the financial covenants under our ~~Predecessor Credit Agreements under~~revolving credit agreements in circumstances where we anticipated that it might be challenging for us to comply with ~~our financial covenants~~them for a particular period of time. As part of our plan to manage liquidity risks, we scaled back our capital expenditures budget, focused our drilling program on our highest return projects, continued to explore opportunities to divest non-core properties, entered into a Restructuring Support Agreement to restructure our indebtedness and, on August 7, 2019, filed a voluntary petition for relief under chapter 11 of the United States Bankruptcy Code in the U.S. Bankruptcy Court for the Southern District of Texas to pursue a prepackaged plan of reorganization. On September 24, 2019, the Bankruptcy Court entered an order confirming our plan of reorganization and on October 8, 2019, we emerged from chapter 11 bankruptcy. Our strategic decision to transform into a pure-play, single basin company focused on the Delaware Basin in West Texas resulted in us divesting our producing properties located in other areas and acquiring primarily undeveloped acreage in the Delaware Basin. Our drilling activities since acquiring the assets required significant capital expenditure outlays to replenish production and related EBITDA. These and other factors adversely impacted our ability to comply with our debt covenants under the Predecessor Credit Agreement by reducing our production, reserves and EBITDA on a current and a pro forma historical basis, while making us more susceptible to fluctuations in performance and compliance more challenging. In addition, we encountered certain operational challenges that impacted our ability to comply, including, elevated levels of hydrogen sulfide in the natural gas produced from our Monument Draw wells, and limited and expensive treatment and transportation options. Severance payments to executives in 2019 also impacted our ability to comply with our financial covenants.

Changes in the level and timing of our production, drilling and completion costs, the cost and availability of transportation for our production and other factors varying from our expectations can ~~cause our EBITDA to change significantly and~~ affect our ability to comply with the covenants under our Senior Credit Agreement. As a consequence, we endeavor to anticipate potential covenant compliance issues and work with the lenders under our Senior Credit Agreement to address any such issues ahead of time. For instance, depressed oil and natural gas prices during 2020 and our decision to temporarily shut-in a portion of our production in response to market conditions adversely impacted our cash flows, which, combined with cash requirements associated with capital-intensive oil and gas development projects undertaken in late 2019 and early 2020, led to challenges in our compliance with the Current Ratio under the Senior Credit Agreement for the fiscal quarter ended June 30, 2020. Thus, on July 31, 2020, we secured a waiver in which the lenders consented to waive maintenance of the Current Ratio (as defined in the Senior Credit Agreement) of not less than 1.00 to 1.00 for the fiscal quarter ended June 30, 2020. In conjunction with the fall 2020 borrowing base redetermination process, and due to a decline in the value associated with our derivative contracts, we pursued additional relief from our lenders in regards to the Current Ratio. On October 29, 2020, in the Third Amendment, the lenders waived maintenance with the Current Ratio for the fiscal quarter ending September 30, 2020 and suspended testing of the Current Ratio until the fiscal quarter ending December 31, 2021.

Similarly, in prior years, we have also obtained waivers and amendments for other financial covenant violations. For instance, our strategic decision to transform into a pure-play, single basin company focused on the Delaware Basin in

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West Texas resulted in us divesting our producing properties located in other areas and acquiring primarily undeveloped acreage in the Delaware Basin. Our drilling activities once we acquired these assets required significant capital expenditure outlays to replenish production and related EBITDA from the divested producing properties. These and other factors adversely impacted our ability to comply with our debt covenants under the predecessor credit agreement by reducing our production, reserves and EBITDA on a current and a pro forma historical basis, while making us more susceptible to fluctuations in performance and compliance more challenging. In addition, we encountered certain operational difficulties that impacted our ability to comply at the time, including elevated levels of hydrogen sulfide in the natural gas produced from our Monument Draw wells and limited and expensive treatment and transportation options. Severance payments to executives in 2019 also impacted our ability to comply with our financial covenants.

In short, historically, our lenders have provided us with the covenant relief we have sought to the extent it was necessary to manage through near-term business and operational challenges as we pursued our longer-term business objectives; however, there is no assurance that they will be amenable to providing any such relief in the future, should it become necessary. Further, there is some evidence that credit is becoming more challenging for oil and gas companies generally, and for us in particular, to secure. As noted previously, late last year, Bank of Montreal, the primary lender under our Senior Credit Agreement, announced that it was exiting its U.S. energy investment banking business, a service line that is generally complementary to commercial banking service offerings. Bank of Montreal’s election to exit that line of business may be an indication of sentiment overall with regards to the business and investment banking environment affecting the U.S. oil and gas industry in the near term.

More specifically as it regards us, in our recent redetermination, the lenders under our Senior Credit Agreement have reduced our borrowing base to $185.0 million effective on June 1, 2021 and $175.0 million effective on September 1, 2021, and we agreed to some other modifications of the terms and covenants contained in our Senior Credit Agreement at the request of our lenders in the Fourth Amendment, as discussed in greater detail above. While we ~~have largely been~~anticipate that we will be able to operate our business and maintain adequate liquidity within the limitations imposed by our Senior Credit Agreement, as amended, the loss of additional liquidity may prevent us from accelerating our drilling plans in an effort to manage our liquidity more closely. Additionally, reduced access to bank borrowings limits our flexibility in responding to unforeseen adverse events as well as our ability to pursue opportunities that might prove beneficial in the future. As noted elsewhere herein and our other filings with the Securities and Exchange Commission, many factors, including many that are beyond our control, affect our business and operations and may adversely impact our cash flows, liquidity and our ability to comply with the covenants under our Senior Credit Agreement. Consequently, there is no assurance that our expectations with regard to our capital needs or compliance with the covenants in the Senior Credit Agreement will prove accurate. In the event we are unable to maintain compliance, the lenders under our Senior Credit Agreement may be unwilling to provide us with the covenant relief we need. In the event we are not successful in obtaining covenant modifications, ~~of our covenants as~~if needed, there ~~can be~~is no assurance that we will be successful in securing alternative means of financing our business upon favorable terms or at all. If we are able to secure alternative financing, it may be more costly, provide less liquidity, or impose more restrictive covenants than our Senior Credit Agreement.

When commodity prices decline significantly, as they did in 2020, our ability to finance our capital budget and operations may be adversely impacted. We employ derivative instruments to provide partial protection against declines in oil, natural gas and natural gas liquids prices, however, the ~~future.~~total volumes we typically hedge are less than our expected production, vary from period to period based on our view of current and future market conditions and generally extend up to only approximately 30 months. These limitations result in our liquidity being susceptible to commodity price declines in the near term and, in particular, if such prices decline for a sustained period of time. Additionally, while intended to reduce the effects of volatile commodity prices, derivative transactions may limit our potential gains and increase our potential losses if commodity prices were to rise substantially over the price established under our hedges. Our Senior Credit Agreement contains minimum hedging requirements. Pursuant to the Third Amendment, we are required to hedge at least 65% of anticipated production from proved developed producing reserves through December 31, 2022. Our hedge policies and objectives may change significantly as our operational profile changes and/or commodities prices change. We do not enter into derivative contracts for speculative trading purposes.

Our future capital resources and liquidity depend ~~in part,~~ on our success in developing our leasehold interests, growing our reserves and production and finding additional reserves. Cash is required to fund capital expenditures necessary to offset inherent declines in our production and proven reserves, which is typical in the capital-intensive oil and natural gas

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~~and natural gas~~ industry. We therefore continuously monitor our liquidity and evaluate our development plans in light of a variety of factors, including, but not limited to, our cash flows, capital resources, acquisition opportunities and drilling successes.

We strive to maintain financial flexibility while pursuing our drilling plans and may access capital markets, pursue joint ventures, sell assets and engage in other transactions as necessary to, among other things, maintain borrowing capacity, facilitate drilling on our undeveloped acreage position and permit us to selectively expand our acreage. Our ability to complete such transactions and maintain or increase our borrowing base is subject to a number of variables, including our level of oil and natural gas production, proved reserves and commodity prices, the amount and cost of our indebtedness, as well as various economic and market conditions that have historically affected the oil and natural gas industry. Even if we are otherwise successful in growing our proved reserves and production, if oil and natural gas prices decline for a sustained period of time, our ability to fund our capital expenditures, complete acquisitions, reduce debt, meet our financial obligations and become profitable may be materially impacted.

Cash Flow

During the three months ended March 31, ~~2020 (Successor),~~2021, operating cash ~~on hand supplemented with~~flows and proceeds from divested properties funded our capital expenditures program and net repayments of borrowings under our Senior Credit Agreement were used to fund our drilling and completion program. During the three months ended March 31, 2019 (Predecessor), cash on hand supplemented with borrowings under our Predecessor Credit Agreement were used to fund our drilling and completion program.Agreement. See “Results of Operations” for a review of the impact of prices and volumes on operating revenues.

Net increase (decrease) in cash and cash equivalents ~~and restricted cash~~ is summarized as follows (in thousands):


	Successor		Predecessor
	Three Months		Three Months
	Ended		Ended
	March 31, 2020		March 31, 2019


					Three Months Ended
					March 31,
					2021		2020

Cash flows provided by (used in) operating activities	$	12,343	$	(36,834)	$	13,358	$	12,343
Cash flows provided by (used in) investing activities		(47,648)		(114,431)		(12,719)		(47,648)
Cash flows provided by (used in) financing activities		25,968		104,594		(3,263)		25,968
Net increase (decrease) in cash, cash equivalents and restricted cash	$	(9,337)	$	(46,671)
Net increase (decrease) in cash and cash equivalents					$	(2,624)	$	(9,337)

Operating Activities. Net cash flows provided by operating activities for the three months ended March 31, 2021 and 2020 ~~(Successor)~~were $13.4 million and ~~net~~$12.3 million, respectively.

Operating cash flows ~~used in operating activities~~ for the three months ended March 31, ~~2019 (Predecessor)~~2021 increased slightly between the first three months of 2021 and 2020. Our average realized price increase of approximately $15.34 per Boe contributed to higher total operating revenues in 2021 which were ~~$12.3 million and $36.8 million, respectively.~~partially offset by payments on derivative settlements in 2021.

Operating cash flows for the three months ended March 31, 2020 ~~(Successor)~~ increased from the comparable prior year ~~period~~ due to decreases in our operating expenses associated with our focus on efficiencies and cost savings and a decrease in interest expense associated with lower outstanding debt due to our chapter 11 bankruptcy. These decreases in expenditures were partially offset by decreased oil and natural gas revenues as a result of lower realized commodity prices.

Operating cash flows for the three months ended March 31, 2019 (Predecessor) decreased from the comparable prior year period due to increases in our operating expenses, primarily severances paid to executives, natural gas treating costs, and third party water hauling and disposal costs, which were partially offset by increased oil and natural gas revenues and realized settlements on our derivative contracts.

Investing Activities. Net cash flows used in investing activities for the three months ended March 31, ~~2020 (Successor)~~2021 and ~~2019 (Predecessor)~~2020 were approximately ~~$47.6~~$12.7 million and ~~$114.4~~$47.6 million, respectively.

~~Table~~During the three months ended March 31, 2021, we spent $13.8 million on oil and natural gas capital expenditures, of ~~Contents~~

which $10.8 million related to drilling and completion costs and $2.2 million related to the development of our treating equipment and gathering support infrastructure. We received $1.1 million in proceeds from the sale of oil and natural gas properties.

During the three months ended March 31, 2020, ~~(Successor),~~ we spent $48.2 million on oil and natural gas capital expenditures, of which $26.0 million related to drilling and completion costs and $21.8 million related to the development of our treating equipment and our gathering support infrastructure. In addition, we received $0.5 million in insurance proceeds associated with a casualty loss on our support infrastructure.

~~During~~31

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Financing Activities. Net cash flows used in financing activities for the three months ended March 31, 2019 (Predecessor), we spent $81.1 million on oil and natural gas capital expenditures, of which $76.7 million related to drilling and completion costs. We also spent approximately $30.6 million on capital expenditures related to the development of our natural gas treating equipment and our gathering support infrastructure.

~~Financing Activities.~~2021 was $3.3 million. Net cash ~~flows~~flow provided by financing activities for the three months ended March 31, 2020 ~~(Successor) and 2019 (Predecessor) were~~was $26.0 million.

During the three months ended March 31, 2021, we used cash flows from operations to make net repayments of $3.0 million ~~and $104.6 million, respectively.~~on our Senior Credit Agreement.

During the three months ended March 31, 2020, ~~(Successor),~~ net borrowings of $26.0 million under our Senior Credit Agreement were used to fund our drilling and completions program and the development of our treating equipment and gathering support facilities.

During the three months ended March 31, 2019 (Predecessor), net borrowings of $105.0 million under our Predecessor Credit Agreement were used to fund our drilling and completions program, as well as the development of our treating infrastructure and our gathering support infrastructure.

Senior Revolving Credit Facility

On ~~the Effective Date,~~October 8, 2019, we entered into the Senior Credit Agreement with Bank of Montreal, as administrative agent, and certain other financial institutions party thereto, as lenders. The Senior Credit Agreement, as amended, provides for a $750.0 million senior secured reserve-based revolving credit facility with a current borrowing base of ~~$200.0~~$190.0 million. A portion of the Senior Credit Agreement, in the amount of ~~$50.0~~$25.0 million, is available for the issuance of letters of credit. The maturity date of the Senior Credit Agreement is October 8, 2024. Redeterminations ~~will~~of the borrowing base occur semi-annually on May 1 and November 1, with the lenders and us each having the right to one interim unscheduled redetermination between any two consecutive semi-annual redeterminations. The borrowing base takes into account the estimated value of our oil and natural gas properties, proved reserves, total indebtedness, and other relevant factors consistent with customary oil and natural gas lending criteria. Amounts outstanding under the Senior Credit Agreement bear interest at specified margins over the base rate of ~~1.50%~~2.00% to ~~2.50%~~3.00% for ABR-based loans or at specified margins over LIBOR of ~~2.50%~~3.00% to ~~3.50%~~4.00% for Eurodollar-based loans, which margins may be increased one-time by not more than 50 basis points per annum if necessary in order to successfully syndicate the Senior Credit Agreement. These margins fluctuate based on our utilization of the facility.

We may elect, at our option, to prepay any borrowings outstanding under the Senior Credit Agreement without premium or penalty, except with respect to any break funding payments ~~which~~that may be payable pursuant to the terms of the Senior Credit Agreement. We may be required to make mandatory prepayments of the outstanding borrowings under the Senior Credit Agreement in connection with certain borrowing base deficiencies, including deficiencies which may arise in connection with a borrowing base redetermination, an asset disposition or swap ~~terminations attributable in the aggregate to more than ten percent (10%) of the then-effective borrowing base.~~terminations. Amounts outstanding under the Senior Credit Agreement are guaranteed by our direct and indirect subsidiaries and secured by a security interest in substantially all of the assets of us and our subsidiaries.

On October 29, 2020, we entered into the Third Amendment. The Third Amendment, among other things, set the borrowing base to $190.0 million as of November 1, 2020. The Third Amendment also reduced the amount available for the issuance of letters of credit to $25.0 million and amended certain covenants including, but not limited to, covenants relating to increasing the minimum mortgaged total value of proved borrowing base properties from 85% to 90%. Additionally, the Third Amendment provided for new covenants that, among other things, require us to enter into swap agreements representing not less than 65% of our reasonably anticipated projected production from proved reserves classified as developed producing reserves for a period from the Third Amendment effective date through at least December 31, 2022 and prohibit no more than $3.0 million of our uncontested accounts payable or accrued expenses, liabilities or other obligations from remaining outstanding for longer than 90 days. Pursuant to the Third Amendment, the administrative agent and the lenders consented to a waiver of the Current Ratio (as defined in the Senior Credit Agreement) for the fiscal quarter ended September 30, 2020 and suspended testing of the Current Ratio until the fiscal quarter ending ~~March~~December 31, ~~2020.~~

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On ~~April 30, 2020 (Successor),~~May 10, 2021, we entered into the ~~Second~~Fourth Amendment which reduces the borrowing base to $185.0 million effective June 1, 2021 and further reduces the ~~Senior Credit Agreement (Second Amendment) which~~borrowing base to $175.0 million effective September 1, 2021. The Fourth Amendment also, among other things, (i) ~~reduced~~increased interest margins to 2.00% to 3.00% for ABR-based loans and 3.00% to 4.00% for Eurodollar-based loans, (ii) amended the covenant relating to the minimum mortgaged total value of proved borrowing base properties to increase the value from 90% to 95%, (iii) provides for direct reductions in the borrowing base in the event of asset dispositions in excess of $1.0 million per fiscal year or swap terminations and (iv) revised certain covenants and covenant-related baskets including, but not limited to, ~~$200.0~~adding covenants prohibiting the designation of unrestricted subsidiaries and requiring prior consent from the lenders regarding asset dispositions or swap terminations in excess of the greater of $7.5 million or 3.5% of the then effective borrowing base.

As of March 31, 2021, after giving effect to the Third Amendment, we were in compliance with the financial covenants under the Senior Credit Agreement.

Paycheck Protection Program Loan

On April 16, 2020, we entered into a promissory note (the PPP Loan) for a principal amount of approximately $2.2 million from ~~April 30, 2020,~~Bank of Montreal under the Paycheck Protection Program of the CARES Act, which ~~shall then be reduced~~is administered by ~~$5.0 million monthly starting September 1, 2020 until November 1, 2020, so that~~ the ~~borrowing base is scheduled to be $185.0 million on November 1, 2020, provided the borrowing base redetermination scheduled for November 1, 2020 shall occur pursuant~~U.S. Small Business Administration (SBA). Pursuant to the terms of the ~~Senior Credit Agreement, (ii) increased~~CARES Act, the proceeds of the PPP Loan may be used for payroll costs, mortgage interest, ~~margins to 1.50% to 2.50% for ABR-based loans~~rent or utility costs. The PPP Loan bears interest at a rate of 1.0% per annum and, ~~2.50% to 3.50% for Eurodollar-based loans, (iii) provided that should our Consolidated Cash Balance (as defined pursuant~~if not forgiven, has a maturity date of April 16, 2022. As long as we make a timely application of forgiveness to the ~~Second Amendment) exceed $10.0 million, such amounts shall be used~~SBA, we are not required to make any payments under the PPP Loan until the forgiveness amount is communicated to us by the SBA.

We may elect, at our option, to prepay ~~any~~20% or less of the borrowings outstanding under the ~~Senior Credit Agreement~~PPP Loan without premium or penalty, and ~~thereafter,~~without notice. Prepayments of more than 20% of the outstanding borrowings require written advanced notice and payment of accrued interest. The PPP Loan contains certain events of default including non-payment, breach of representations and warranties, cross-defaults to ~~the extent of any uncollateralized letters of credit exposure, shall be cash collateralized in accordance~~other loans with the ~~Senior Credit Agreement~~lender or to material indebtedness, voluntary or involuntary bankruptcy, judgments and ~~(iv) allowed for a replacement benchmark rate to the London Interbank Offered Rate (which may include SOFR, Compounded SOFR or Term SOFR).~~change in control.

The Second Amendment also added provisions related a loan (PPP Loan) incurred by us from the U.S. Small Business Administration, under the Paycheck Protection Program (PPP) of the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act). Under the terms of the CARES Act, ~~PPP Loan recipients~~we can apply for and be granted forgiveness for all or a portion of ~~loans granted under~~ the ~~PPP.~~PPP Loan. Such forgiveness will be determined, subject to limitations, based on the use of loan proceeds in accordance with the terms of the CARES Act during the covered period after loan origination and the maintenance or achievement of certain employee levels. We believe we are eligible for, ~~payment of payroll costs~~ and ~~any payments of mortgage interest, rent, and utilities. We~~ intend to ~~use, and the Second Amendment requires us to use,~~pursue, forgiveness of the PPP Loan ~~proceeds for CARES Forgivable Uses~~in accordance with the requirements and limitations under the CARES ~~Act.~~

~~Additionally, the Second Amendment waived, for the fiscal quarter ended June 30, 2020,~~Act; however, no assurance can be provided that ~~we comply with the requirement under the Senior Credit Agreement that we unwind certain swap agreements for which settlement payments are calculated in such fiscal quarter to exceed 100%~~forgiveness of ~~actual production.~~

On November 21, 2019 (Successor), we entered into the First Amendment to the Senior Credit Agreement which, among other things, (i) reduced the borrowing base to $240.0 million and (ii) limited the Total Net Indebtedness Leverage Ratio (as defined in the Senior Credit Agreement) asany portion of the ~~last day of each fiscal quarter, commencing with the fiscal quarter ending March 31, 2020, of not greater than 3.50 to 1.00.~~

~~As of March 31, 2020 (Successor), we were in compliance with the financial covenants under the Senior Credit Agreement.~~PPP Loan will be obtained.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon the unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. Preparation of these unaudited condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. There have been no material changes to our critical accounting policies from those described in our Annual Report on Form ~~10‑K~~10-K for the fiscal year ended December 31, ~~2019.~~

2020.

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Results of Operations

Three Months Ended March 31, ~~2020 (Successor)~~2021 and ~~2019 (Predecessor)~~2020

We reported a net loss of $33.4 million and net income of $114.5 ~~million and a net loss $336.6~~ million for the three months ended March 31, ~~2020 (Successor)~~2021 and ~~2019 (Predecessor),~~2020, respectively. The table included below sets forth financial information for the periods presented.


	Successor		Predecessor
	Three Months		Three Months
	Ended		Ended

					Three Months Ended
					March 31,
In thousands (except per unit and per Boe amounts)	March 31, 2020		March 31, 2019		2021		2020		Change
Net income (loss)	$	114,491	$	(336,559)	$	(33,375)	$	114,491	$	(147,866)
Operating revenues:
Oil		41,917		45,517		41,270		41,917		(647)
Natural gas		354		1,461		9,087		354		8,733
Natural gas liquids		4,753		4,945		4,909		4,753		156
Other		375		(7)		252		375		(123)
Operating expenses:
Production:
Lease operating		12,489		14,186		9,467		12,489		(3,022)
Workover and other		1,323		2,646		560		1,323		(763)
Taxes other than income		2,915		2,893		3,192		2,915		277
Gathering and other		10,547		14,869		13,171		10,547		2,624
Restructuring		418		11,271		—		418		(418)
General and administrative:
General and administrative		3,469		11,390		4,233		3,469		764
Stock-based compensation		387		(6,782)		594		387		207
Depletion, depreciation and accretion:
Depletion – Full cost		17,600		28,322		10,341		17,600		(7,259)
Depreciation – Other		281		1,553		126		281		(155)
Accretion expense		149		100		128		149		(21)
Full cost ceiling impairment		—		275,239
(Gain) loss on sale of Water Assets		—		885
Other income (expenses):
Net gain (loss) on derivative contracts		118,299		(64,799)		(45,711)		118,299		(164,010)
Interest expense and other		(1,629)		(12,589)		(1,370)		(1,629)		259
Income tax benefit (provision)		—		45,485


Production:
Oil – MBbls		937		921		719		937		(218)
Natural Gas - MMcf		2,539		1,941		2,133		2,539		(406)
Natural gas liquids – MBbls		350		293		215		350		(135)
Total MBoe(1)		1,710		1,538		1,290		1,710		(420)
Average daily production – Boe/d(1)		18,791		17,089

Average daily production – Boe⁽¹⁾						14,333		18,791		(4,458)

Average price per unit (2):
Oil price - Bbl	$	44.74	$	49.42	$	57.40	$	44.74	$	12.66
Natural gas price - Mcf		0.14		0.75		4.26		0.14		4.12
Natural gas liquids price - Bbl		13.58		16.88		22.83		13.58		9.25
Total per Boe(1)		27.50		33.76		42.84		27.50		15.34


Average cost per Boe:
Production:
Lease operating	$	7.30	$	9.22	$	7.34	$	7.30	$	0.04
Workover and other		0.77		1.72		0.43		0.77		(0.34)
Taxes other than income		1.70		1.88		2.47		1.70		0.77
Gathering and other		6.17		9.67		10.21		6.17		4.04
Restructuring		0.24		7.33		—		0.24		(0.24)
General and administrative:
General and administrative		2.03		7.41		3.28		2.03		1.25
Stock-based compensation		0.23		(4.41)		0.46		0.23		0.23
Depletion		10.29		18.41		8.02		10.29		(2.27)

(1)

⁽¹⁾

Natural gas reserves are converted to oil reserves using a ratio of six Mcf to one Bbl of oil. This ratio is based on energy equivalency, not price equivalency. The price for a barrel of oil equivalent for natural gas is substantially lower than the price for a barrel of oil.

(2)

⁽²⁾

Amounts exclude the impact of cash paid/received on settled contracts as we did not elect to apply hedge accounting.

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Oil, natural gas and natural gas liquids revenues were ~~$47.0~~$55.3 million and ~~$51.9~~$47.0 million for the three months ended March 31, ~~2020 (Successor)~~2021 and ~~2019 (Predecessor),~~2020, respectively. For the three months ended March 31 ~~2020 (Successor)~~2021 and ~~2019 (Predecessor),~~2020, production averaged ~~18,791~~14,333 Boe/d and ~~17,089~~18,791 Boe/d, respectively. Our average daily oil, natural gas and natural gas liquids production ~~increased~~decreased in the first three months ~~of 2020~~ended March 31, 2021 when compared to the same period in the prior year primarily due to production declines in our ~~drilling activities in~~non-core areas, which were partially offset by increased production from our Monument Draw ~~and West Quito Draw.~~area, where new production came online as a result of our capital spending program. Also contributing to decreased total production in the current year period is a temporary shut-in of production in February 2021 as a result of inclement weather. The estimated production decrease associated with this temporary shut-in was approximately 1,300 Boe/d for the first three months of 2021. In addition, in December 2020, we divested properties that produced approximately 800 Boe/d during the three months ended March 31, 2020. Average realized prices (excluding the effects of hedging arrangements) were ~~$27.50~~$42.84 per Boe and ~~$33.76~~$27.50 per Boe for the three months ended March 31, ~~2020 (Successor)~~2021 and ~~2019 (Predecessor),~~2020, respectively. The amount we realize for our production depends predominantly upon commodity prices, which are affected by changes in market demand and supply, as impacted by overall economic activity, weather, transportation take-away capacity constraints, inventory storage levels, quality of production, basis differentials and other factors.

Lease operating expenses were ~~$12.5~~$9.5 million and ~~$14.2~~$12.5 million for the three months ended March 31, 2021 and 2020, ~~(Successor)~~respectively. The decrease in lease operating expenses in 2021 results from decreased salt water disposal costs due to lower production volumes and ~~2019 (Predecessor), respectively.~~less produced water. On a per unit basis, lease operating expenses were ~~$7.30~~$7.34 per Boe and ~~$9.22~~$7.30 per Boe for the three months ended March 31, 2021 and 2020, ~~(Successor) and 2019 (Predecessor),~~ respectively. ~~The decrease in lease operating expenses in 2020 results from our focus on optimization of production operations and decreased salt water disposal costs.~~

Workover and other expenses were ~~$1.3~~$0.6 million and ~~$2.6~~$1.3 million for the three months ended March 31, ~~2020 (Successor)~~2021 and ~~2019 (Predecessor),~~2020, respectively. On a per unit basis, workover and other expenses were ~~$0.77~~$0.43 per Boe and ~~$1.72~~$0.77 per Boe for the three months ended March 31, ~~2020 (Successor)~~2021 and ~~2019 (Predecessor),~~2020, respectively. The decreased ~~costs~~workover and other expenses in ~~2020~~2021 relate to ~~recent strides~~preventive operational measures previously undertaken to mitigate potential future failures in ~~improving~~producing wells, continued improvements in well and completion designs, and ~~fewer workovers performed.~~cost reductions for materials and services.

Taxes other than income were $3.2 million and $2.9 million for ~~both~~ the three months ended March 31, 2021 and 2020, ~~(Successor) and 2019 (Predecessor).~~respectively. Most production taxes are based on realized prices at the wellhead. As revenues or volumes from oil and natural gas sales increase or decrease, production taxes on these sales also increase or decrease. On a per unit basis, taxes other than income were ~~$1.70~~$2.47 per Boe and ~~$1.88~~$1.70 per Boe for the three months ended March 31, 2021 and 2020, ~~(Successor) and 2019 (Predecessor),~~ respectively.

Gathering and other expenses were ~~$10.5~~$13.2 million and ~~$14.9~~$10.5 million for the three months ended March 31, ~~2020 (Successor)~~2021 and ~~2019 (Predecessor),~~2020, respectively. Gathering and other expenses include gathering fees paid to third parties on our oil and natural gas production and operating expenses of our gathering support ~~infrastructure, gas treating fees, rig stacking charges and other.~~infrastructure. Approximately ~~$2.9~~$4.0 million and ~~$3.8~~$2.9 million for the three months ended March 31, ~~2020 (Successor)~~2021 and ~~2019 (Predecessor),~~2020, respectively, relate to gathering and marketing fees paid to third parties on our oil and natural gas production. Gathering and marketing fees increased in 2021 as we marketed higher quantities of sour gas production to third parties in the current year period. Approximately ~~$7.6~~$9.2 million and ~~$9.9~~$7.6 million for the three months ended March 31, ~~2020 (Successor)~~2021 and ~~2019 (Predecessor),~~2020, respectively, relate to operating expenses on our treating equipment and gathering support facilities. ~~Included~~The increase in ~~the three months ended March 31, 2019 (Predecessor) are $8.2 million~~treating equipment and gathering support facilities expenses in 2021 results from higher electricity and buy back fuel costs incurred as a result of ~~wellhead-level~~inclement weather in February 2021 and higher chemical costs to ~~remove hydrogen sulfide from natural~~improve the quality of treated oil, which were partially offset by lower operating expenses associated with our treating equipment, as fewer sour gas ~~produced from~~production volumes were processed through our ~~Monument Draw properties. In April 2019 (Predecessor), we installed a~~ hydrogen sulfide treating plant ~~that more efficiently removes hydrogen sulfide from our produced natural gas and reduces our reliance on expensive wellhead-level treating. Also included are $0.8 million of rig stacking charges for~~in the ~~three months ended March 31, 2019 (Predecessor).~~current year period.

Restructuring expense was approximately $0.4 ~~million and $11.3~~ million for the three months ended March 31, ~~2020 (Successor) and 2019 (Predecessor), respectively.~~2020. During the three months ended March 31, 2020, ~~(Successor),~~ we incurred restructuring charges related to the consolidation into one corporate office and had reductions in our workforce due to efforts to improve efficiencies and go forward costs. During the three months ended March 31, 2019 (Predecessor), senior executives resigned from their positions. These were considered terminations without cause under their respective employment agreements, which entitled them to certain benefits.

General and administrative expense was ~~$3.5~~$4.2 million and ~~$11.4~~$3.5 million for the three months ended March 31, 2021 and 2020, ~~(Successor) and 2019 (Predecessor),~~ respectively. ~~The decrease in general and administrative expense primarily results from a reduction in our payroll and employee-related benefits.~~ In late March 2020, due to changes in market conditions and decreased commodity prices, we determined that previously accrued discretionary cash incentives related to 2019 would not be paid, causing a $1.6 million reduction to general and administrative expense for the period. ~~Payroll and employee-related benefits also decreased due to a reduction in our workforce since the prior year period. The decrease in general and~~

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~~administrative costs also results from other administrative cost reductions as part of our continued focus on efficiencies and cost savings.~~ On a per unit basis, general and administrative expenses were ~~$2.03~~$3.28 per Boe and ~~$7.41~~$2.03 per Boe for the three months ended March 31, 2021 and 2020, ~~(Successor) and 2019 (Predecessor),~~ respectively.

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Stock-based compensation expense was ~~$0.4~~$0.6 million and ~~a credit of $6.8~~$0.4 million for the three months ended March 31, 2021 and 2020, ~~(Successor) and 2019 (Predecessor),~~ respectively. ~~During~~Stock based compensation expense increased in the current period related to awards granted during the first three months ~~ended March 31, 2019 (Predecessors), senior executives resigned from their positions. In accordance with the terms~~ of these senior executives’ employment agreements, unvested stock options and unvested shares of restricted stock were modified to vest immediately upon termination. For the three months ended March 31, 2019 (Predecessor), we recognized an incremental reduction to stock-based compensation expense of $8.4 million associated with these modifications.2020.

Depletion for oil and natural gas properties is calculated using the unit of production method, which depletes the capitalized costs of evaluated properties plus future development costs based on the ratio of production for the current period to total reserve volumes of evaluated properties as of the beginning of the period. Depletion expense was ~~$17.6~~$10.3 million and ~~$28.3~~$17.6 million for the three months ended March 31, ~~2020 (Successor)~~2021 and ~~2019 (Predecessor),~~2020, respectively. On a per unit basis, depletion expense was ~~$10.29~~$8.02 per Boe and ~~$18.41~~$10.29 per Boe for the three months ended March 31, ~~2020 (Successor)~~2021 and ~~2019 (Predecessor),~~2020, respectively. The lower depletion rate in the ~~Successor period~~2021 is attributable to the change in our depletable base as a result of ~~the adoption of fresh-start accounting.~~

Under the full cost method of accounting, we are required on a quarterly basis to determine whether the book value of our oil and natural gas properties (excluding unevaluated properties) is less than or equal to the “ceiling”, based upon the expected after tax present value (discounted at 10%) of the future net cash flows from our proved reserves. Any excess of the net book value of our oil and natural gas properties over the ceiling must be recognized as a non-cash impairment expense. At March 31, 2019 (Predecessor), we recorded a full cost ceiling ~~impairment of $275.2 million. The ceiling~~ test ~~impairment at March 31, 2019 (Predecessor) was driven by a decrease~~impairments incurred in the first-day-of-the-month average price for crude oil used in the ceiling test calculation and our intent to expend capital only on our most economic areas. As such, we identified certain leases in the Hackberry Draw area with near-term expirations and transferred approximately $51.0 million of associated unevaluated property costs to the full cost pool during the three months ended March 31, 2019 (Predecessor). Changes in commodity prices, production rates, levels of reserves, future development costs, transfers of unevaluated properties, and other factors will determine our actual ceiling test calculation and impairment analyses in future periods.

On December 20, 2018 (Predecessor), we sold our water infrastructure assets located in the Delaware Basin for a total adjusted purchase price of $210.9 million. We recognized a cumulative $115.9 million gain on the sale. The gain was reduced during the three months ended March 31, 2019 (Predecessor) by approximately $0.9 million as a result of customary post‑closing adjustments.2020.

We enter into derivative commodity instruments to ~~economically~~ hedge our exposure to price fluctuations on our anticipated oil, natural gas and natural gas liquids production. Consistent with prior years, we have elected not to designate any positions as cash flow hedges for accounting purposes, and accordingly, we recorded the net change in the mark-to-market value of these derivative contracts in the unaudited condensed consolidated statements of operations. At March 31, ~~2020 (Successor),~~2021, we had a ~~$109.1~~$1.5 million derivative asset, ~~$71.4~~$0.7 million of which was classified as current, and we had a ~~$4.4~~$51.4 million derivative liability, ~~$4.0~~$42.4 million of which was classified as current. We recorded a net derivative loss of $45.7 million ($36.0 million net unrealized loss and $9.7 million net realized loss on settled and early terminated contracts) for the three months ended March 31, 2021. For the three months ended March 31, 2020, we recorded a net derivative gain of $118.3 million ($112.4 million net unrealized gain and $5.9 million net realized gain on settled and early terminated contracts) for the three months ended March 31, 2020 (Successor) compared to a net derivative loss of $64.8 million ($68.2 million net unrealized loss and $3.4 million net realized gain on settled and early terminated contracts) for the three months ended March 31, 2019 (Predecessor).

Interest expense and other was ~~$1.6~~$1.4 million and ~~$12.6~~$1.6 million for the three months ended March 31, ~~2020 (Successor)~~2021 and ~~2019 (Predecessor),~~2020, respectively. Interest expense for the Successor period represents interest associated with borrowings under the Senior Credit Agreement. Interest expense in the Predecessor period represents interest associated with the Predecessor Credit Agreement and the 6.75% senior notes. In addition to interest expense,decreased during the three months ended March 31, ~~2019 (Predecessor), we paid fees associated with consents and amendments to our Predecessor Credit Agreement.~~

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~~We recorded an income tax benefit of $45.5 million for the three months ended March 31, 2019 (Predecessor), resulting from the reduction~~2021 as compared to the ~~deferred tax liability generated by the impact of the ceiling test impairment~~prior year period due to lower interest rates incurred on oil and gas properties and the deferred tax asset created by the tax loss from operations. The 12% effective tax rate for the three months ended March 31, 2019 (Predecessor) differs from the 21% statutory rate because of non‑deductible executive compensation and non‑deductible realized built in losses.outstanding borrowings under our Senior Credit Agreement.

Recently Issued Accounting Pronouncements

We discuss recently adopted and issued accounting standards in ~~Item1.~~Item 1. Condensed Consolidated Financial Statements (Unaudited)—Note 1, “Financial Statement Presentation.”

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Derivative Instruments and Hedging Activity

We are exposed to various risks, including energy commodity price risk, such as price differentials between the NYMEX commodity price and the index price at the location where our production is sold. When oil, natural gas, and natural gas liquids prices decline significantly, our ability to finance our capital budget and operations may be adversely impacted. We expect energy prices to remain volatile and unpredictable, therefore we have designed a risk management policy which provides for the use of derivative instruments to provide partial protection against declines in oil, natural gas and natural gas liquids prices by reducing the risk of price volatility and the affect it could have on our operations. The types of derivative instruments that we typically utilize include fixed-price swaps, costless collars, basis swaps and WTI NYMEX rolls. The total volumes that we hedge through the use of our derivative instruments varies from period to period, however, generally our objective is to hedge approximately ~~75%~~65% to 85% of our anticipated production for up to the next ~~24 to 36~~30 months, when derivative contracts are available atupon terms ~~(or prices)~~and prices acceptable to ~~us.~~us and in a manner consistent with at least the minimum requirements that may be in effect from time to time under our Senior Credit Agreement. Our hedge policies and objectives may change significantly as our operational profile and contractual obligations changes. We do not enter into derivative contracts for speculative trading purposes.

We are exposed to market risk on our open derivative contracts related to potential non-performance by our counterparties. It is our policy to enter into derivative contracts only with counterparties that are creditworthy institutions deemed by management as competitive market makers. As of March 31, ~~2020 (Successor),~~2021, we did not post collateral under any of our derivative contracts as they are secured under our Senior Credit ~~Agreement or are uncollateralized trades.~~Agreement. We account for our derivative activities under the provisions of ASC 815, Derivatives and Hedging, (ASC 815). ASC 815 establishes accounting and reporting

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that every derivative instrument be recorded on the balance sheet as either an asset or liability measured at fair value. See Item 1. Condensed Consolidated Financial Statements (Unaudited)—Note ~~10,~~ 8, “Derivative and Hedging Activities,” for more details.

Fair Market Value of Financial Instruments

The estimated fair values for financial instruments under ASC 825, Financial Instruments, (ASC 825) are determined at discrete points in time based on relevant market information. These estimates involve uncertainties and cannot be determined with precision. The estimated fair value of cash and cash equivalents, ~~restricted cash,~~ accounts receivable and accounts payable approximates their carrying value due to their ~~short‑term~~short-term nature. See Item 1. Condensed Consolidated Financial Statements (Unaudited)—Note 9,7, “Fair Value Measurements,” for additional information.

Interest Rate Sensitivity

We are also exposed to market risk related to adverse changes in interest rates. Our interest rate risk exposure results primarily from fluctuations in short-term rates, which are LIBOR and ABR based and may result in reductions of earnings or cash flows due to increases in the interest rates we pay on these obligations.

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At March 31, ~~2020 (Successor),~~2021, the principal amount of our debt was ~~$170.0~~$157.2 million, ~~all~~ of which approximately 1.4% bears interest at a weighted average fixed interest rate of 1.0% per year. The remaining 98.6% of our total debt at March 31, 2021 bears interest at floating and variable interest rates that, at our option, are tied to the prime rate or LIBOR. Fluctuations in market interest rates will cause our annual interest costs to fluctuate. At March 31, ~~2020 (Successor),~~2021, the weighted average interest rate on our variable rate debt was ~~3.43%~~3.5% per year. If the balance of our variable interest rate at March 31, ~~2020 (Successor)~~2021 were to remain constant, a 10% change in market interest rates would impact our cash flows by approximately~~$0.6~~ $0.5 million per year.

ITEM 4. CONTROLS AND PROCEDURES

Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we evaluated the design and operation of our disclosure controls and procedures (as defined in rules ~~13a‑15(e)~~13a-15(e) and ~~15d‑15(e)~~15d-15(e) of the Securities Exchange Act of 1934, or the Exchange Act) as of March 31, ~~2020 (Successor).~~2021. On the basis of this review, our management, including our Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures are designed, and are effective, to give reasonable assurance that the information required to be disclosed by us in reports that we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and to ensure that information required to be disclosed in the reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, in a manner that allows timely decisions regarding required disclosure.

We did not have any change in our internal controls over financial reporting during the three months ended March 31, ~~2020 (Successor)~~2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Information regarding legal proceedings to which we are a party is set forth in Item 1. Condensed Consolidated Financial Statements (Unaudited)—Note ~~12,~~10, “Commitments and Contingencies,” which is incorporated herein by reference.

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ITEM 1A. RISK FACTORS

There have been no changes to the risk factors described in our ~~2019~~2020 Annual Report on Form ~~10‑K,~~10-K, for the fiscal year ended December 31, ~~2019, except as described below.~~2020.

~~Events beyond our control, including a global or domestic health crisis, may result in unexpected adverse operating and financial results.~~

~~In response to the novel~~ ~~coronavirus (COVID-19)~~ pandemic governments around the world, including U.S. federal and state governments, have imposed restrictions intended to limit the extent and spread of the virus, including travel restrictions, quarantines and business closures. These and other actions could, among other things, impact the ability of our employees and contractors to perform their duties, cause increased technology and security risk due to extended and company-wide telecommuting and lead to disruptions in our permitting activities and critical business relationships. Additionally, the ~~COVID~~-19 outbreak and governmental restrictions have significantly impacted economic activity and markets and have dramatically reduced current and anticipated demand for oil and natural gas, adversely impacting the prices we receive for our production. The severity and duration of the current ~~COVID-19 outbreak and the potential for future outbreaks are uncertain and difficult to predict.~~ ~~COVID-19 or another similar outbreak may negatively impact our business in numerous ways, including, but not limited to, the following:~~

~~reducing our revenues if the outbreak results in a substantial or prolonged decrease in demand for oil and natural gas due to an economic downturn or recession;~~

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disrupting our operations if our employees or contractors are unable to work due to illness or if our field operations are suspended or temporarily shut-down or restricted due to measures designed to contain the outbreak;

disrupting the operations of our midstream service providers, on whom we rely for the gathering, processing and transportation of our production, due to measures designed to contain the outbreak, and/or the difficult economic environment may lead to capital spending constraints, bankruptcy, the closing of facilities or inability to maintain infrastructure, which may adversely affect our ability to market our production, increase our costs, lower the prices we receive, or result in the shut-in of our producing wells or a delay or discontinuation of our development plans; and

the disruption and instability in the financial markets and the uncertainty in the general business environment may affect our ability to access capital, monetize assets and successfully execute our plans.

~~The~~ ~~COVID-19 pandemic may also have the effect of heightening many of the other risks set forth in Item 1A,~~ ~~“Risk Factors”~~ in our Annual Report on Form 10-K for the year ended December 31, 2019. Any of these factors could have a material adverse effect on our business, operations, financial results and liquidity. Currently, oil and natural gas have declined to historically low levels and we have reduced our planned capital expenditures, delayed our drilling and completion plans and have begun shutting-in some of our producing wells, among other responses. We are unable to predict the ultimate adverse impact of ~~COVID~~-19 on our business, which will depend on numerous evolving factors and future developments, including the length of time that the pandemic continues, its ongoing effect on the demand for oil and natural gas and the response of the overall economy and the financial markets after governmental restrictions are eased.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

~~None.~~The following table sets forth information regarding our acquisition of shares of common stock for the periods presented.


	Total Number of Shares Purchased⁽¹⁾	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs
January 2021	—	$	—	—	—
February 2021	23,680		11.16	—	—
March 2021	—		—	—	—

(1)	All of the shares were surrendered by employees in exchange for the payment of tax withholding upon the vesting of restricted stock units. The acquisition of the surrendered shares was not part of a publicly announced program to repurchase shares of our common stock.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

~~None.~~On May 10, 2021, the Company entered into the Fourth Amendment to Senior Secured Revolving Credit Agreement (the Fourth Amendment) which reduces the borrowing base to $185.0 million effective June 1, 2021 and further reduces the borrowing base to $175.0 million effective September 1, 2021. The Fourth Amendment also, among other things, (i) increased interest margins to 2.00% to 3.00% for ABR-based loans and 3.00% to 4.00% for Eurodollar-based loans, (ii) amended the covenant relating to the minimum mortgaged total value of proved borrowing base properties to increase the value from 90% to 95%, (iii) provides for direct reductions in the borrowing base in the event of asset dispositions in excess of $1.0 million per fiscal year or swap terminations and (iv) revised certain covenants and covenant-related baskets including, but not limited to, adding covenants prohibiting the designation of unrestricted subsidiaries and requiring prior consent from the lenders regarding asset dispositions or swap terminations in excess of the greater of $7.5 million or 3.5% of the then effective borrowing base.

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ITEM 6. EXHIBITS

The following documents are included as exhibits to this Quarterly Report on Form ~~10‑Q.~~10-Q. Those exhibits incorporated by reference are so indicated by the information supplied with respect thereto. Those exhibits which are not incorporated by reference are attached hereto.


3.1		Amended and Restated Certificate of Incorporation of Battalion Oil Corporation (formerly Halcón Resources Corporation) dated October 8, 2019, as amended by the Certificate of Amendment, dated January 21, 2020 (Incorporated by reference to Exhibit 3.1 of our Annual Report on Form 10-K filed March 25, 2020).
3.2		Seventh Amended and Restated Bylaws of Battalion Oil Corporation (Incorporated by reference to Exhibit 3.2 of our Current Report on Form ~~8‑K~~8-K filed January 27, 2020).
10.1		Senior Secured Revolving Credit Agreement, dated as of October 8, 2019, by and among Battalion Oil Corporation (formerly Halcón Resources Corporation), as borrower, Bank of Montreal, as administrative agent, and certain other financial institutions party thereto, as lenders (Incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed October 8, 2019).
10.1.1		First Amendment to the Senior Secured Revolving Credit Agreement, dated as of November 21, 2019, by and among Battalion Oil Corporation (formerly Halcón Resources Corporation), as borrower, Bank of Montreal, as administrative agent, and the lenders party thereto. (Incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed November 27, 2019).
10.1.2		Second Amendment to the Senior Secured Revolving Credit Agreement and Limited Consent, dated as of April 30, 2020, by and among Battalion Oil Corporation, as borrower, Bank of Montreal, as administrative agent, and the lenders party thereto. (Incorporated by reference to Exhibit 10.1 orof our Current Report on Form 8-K filed May 6, 2020).
~~10.2~~ 10.1.3		~~Warrant~~Third Amendment to the Senior Secured Revolving Credit Agreement and Limited Waiver, dated as of October ~~8, 2019,~~29, 2020, by and ~~between~~among Battalion Oil Corporation, (~~formerly~~ ~~Halcón Resources Corporation)~~ as ~~Issuer~~borrower, Bank of Montreal, as administrative agent, and ~~Broadridge Corporate Issuer Solutions, Inc., as warrant agent~~the lenders party thereto. (Incorporated by reference to Exhibit ~~10.2~~10.1 of our Current Report on Form 8-K filed ~~October 8, 2019)~~November 2, 2020).
~~10.3~~ 10.1.4*		~~Registration Rights~~Fourth Amendment to the Senior Secured Revolving Credit Agreement dated as of ~~October 8, 2019,~~May 10, 2021, by and among Battalion Oil Corporation, (~~formerly~~ ~~Halcón Resources Corporation~~as borrower, Bank of Montreal, as administrative agent, and ~~each of~~ the ~~parties thereto, as investors (Incorporated by reference to Exhibit 10.3 of our Current Report on Form 8-K filed October 8, 2019).~~lenders party thereto.
31.1^*		~~Sarbanes‑Oxley~~Sarbanes-Oxley Section 302 certification of Principal Executive Officer
31.2^*		~~Sarbanes‑Oxley~~Sarbanes-Oxley Section 302 certification of Principal Financial Officer
32^*		~~Sarbanes‑Oxley~~Sarbanes-Oxley Section 906 certification of Principal Executive Officer and Principal Financial Officer
101.INS^*		XBRL Instance Document
101.SCH^*		XBRL Taxonomy Extension Schema Document
101.CAL^*		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF^*		XBRL Taxonomy Extension Definition Document
101.LAB^*		XBRL Taxonomy Extension Label Linkbase Document
101.PRE^*		XBRL Taxonomy Extension Presentation Linkbase Document

^*	Attached hereto.

^†	Indicates management contract or compensatory plan or arrangement.

*~~Attached hereto.~~

†~~Indicates management contract or compensatory plan or arrangement.~~

5239

Table of Contents

SIGNATURES

~~SIGNATURES~~

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


				BATTALION OIL CORPORATION
	~~BATTALION OIL CORPORATION~~


May ~~11, 2020~~14, 2021	By:	/s/ RICHARD H. LITTLE
		Name:	Richard H. Little
		Title:	Chief Executive Officer


May ~~11, 2020~~14, 2021	By:	/s/ ~~RAGAN T. ALTIZER~~R. KEVIN ANDREWS
		Name:	~~Ragan T. Altizer~~R. Kevin Andrews
		Title:	Executive Vice President, Chief Financial Officer and Treasurer

5340


						Retained
				Additional		Earnings
	Common Stock			Paid-In		(Accumulated		Stockholders'
	Shares	Amount		Capital		Deficit)		Equity
Balances at December 31, 2019 (Successor)	16,204	$	2	$	327,108	$	(10,460)	$	316,650
Net income (loss)	—		—		—		114,491		114,491
Equity issuance costs and other	—		—		(13)		—		(13)
Stock-based compensation	—		—		449		—		449
Balances at March 31, 2020 (Successor)	16,204	$	2	$	327,544	$	104,031	$	431,577


	October 1, 2019

Enterprise Value	$	441,583
Plus: Cash		15,546
Less: Fair value of debt		(130,000)
Less: Fair value of warrants		(7,336)
Fair value of Successor common stock	$	319,793


	As of October 1, 2019
	Predecessor Company		Reorganization Adjustments			Fresh-Start Adjustments			Successor Company
Current assets:
Cash and cash equivalents	$	17,009	$	(1,463)	(1)	$	—		$	15,546
Accounts receivable, net		37,826		—			—			37,826
Assets from derivative contracts		15,310		—			—			15,310
Restricted cash		—		13,839	(2)		—			13,839
Prepaids and other		14,642		7,110	(3)		(11,462)	(11)		10,290
Total current assets		84,787		19,486			(11,462)			92,811
Oil and natural gas properties (full cost method):
Evaluated		2,155,288		—			(1,774,924)	(12)(13)		380,364
Unevaluated		438,365		—			(329,411)	(13)		108,954
Gross oil and natural gas properties		2,593,653		—			(2,104,335)			489,318
Less - accumulated depletion		(1,709,719)		—			1,709,719	(13)		—
Net oil and natural gas properties		883,934		—			(394,616)			489,318
Other operating property and equipment:
Other operating property and equipment		203,373		—			(199,718)	(12)(14)		3,655
Less - accumulated depreciation		(14,416)		—			14,416	(14)		—
Net other operating property and equipment		188,957		—			(185,302)			3,655
Other noncurrent assets:
Assets from derivative contracts		4,120		—			—			4,120
Operating lease right of use assets		3,694		—			(300)	(15)		3,394
Funds in escrow and other		1,138		—			—			1,138
Total assets	$	1,166,630	$	19,486		$	(591,680)		$	594,436

Current liabilities:
Accounts payable and accrued liabilities	$	112,578	$	2,727	(4)	$	—		$	115,305
Liabilities from derivative contracts		6,829		—			—			6,829
Current portion of long-term debt, net		258,234		(258,234)	(5)		—			—
Operating lease liabilities		1,337		—			(424)	(15)		913
Total current liabilities		378,978		(255,507)			(424)			123,047
Long-term debt, net		—		130,000	(6)		—			130,000
Liabilities subject to compromise		625,005		(625,005)	(7)		—			—
Other noncurrent liabilities:
Liabilities from derivative contracts		1,625		—			—			1,625
Asset retirement obligations		10,153		—			—			10,153
Operating lease liabilities		2,438		—			44	(15)		2,482
Commitments and contingencies
Stockholders' equity:
Common Stock (Predecessor)		16		(16)	(8)		—			—
Common Stock (Successor)		—		2	(9)		—			2
Additional paid-in capital (Predecessor)		1,087,441		(1,087,441)	(8)		—			—
Additional paid-in capital (Successor)		—		327,127	(9)		—			327,127
Retained earnings (accumulated deficit)		(939,026)		1,530,326	(10)		(591,300)	(16)		—
Total stockholders' equity		148,431		769,998			(591,300)			327,129
Total liabilities and stockholders' equity	$	1,166,630	$	19,486		$	(591,680)		$	594,436


Sources:
Proceeds from Senior Noteholder Rights Offering	$	150,150
Proceeds from Senior Credit Agreement		130,000
Proceeds from Existing Equity Interests Rights Offering		5,779
Total Sources	$	285,929

Uses:
Payment of Predecessor Credit Agreement principal, accrued interest, and fees	$	(226,580)
Payment of debtor-in-possession junior secured term credit facility principal and accrued interest		(35,174)
Funding of professional fee escrow and cash collateral account		(13,839)
Payment of debt issuance costs on Senior Credit Agreement		(8,764)
Payment of professional fees and other		(3,035)
Total Uses	$	(287,392)

Total Sources and Uses	$	(1,463)


6.75% senior notes due 2025	$	625,005
Liabilities subject to compromise		625,005
Discount on shares issued per the Senior Noteholder Subscription Rights Offering		(67,840)
Issuance of common stock to Class 4 claimholders		(75,388)
Gain on settlement of liabilities subject to compromise	$	481,777


Par value of 16,203,940 shares of new common stock issued to holders of senior note claims and existing equity interest claims (valued at $19.74 per share)	$	2
Fair value of warrants issued to holder of the Existing Equity Interests (1)		7,336
Additional paid-in-capital (Successor)		322,294
Equity issuance costs associated with Equity Rights Offering		(2,503)
Total change in Successor common stock and additional paid-in capital	$	327,129


Gain on settlement of liabilities subject to compromise	$	481,777
Success fees incurred upon emergence		(8,376)
Fair value of equity issued to Predecessor common stockholders		(7,449)
Fair value of warrants issued to Predecessor common stockholders		(7,336)
Issuance of common stock to backstop commitment parties		(13,079)
Other		(2,668)
Cancellation of Predecessor equity		1,087,457
Net impact to retained earnings (accumulated deficit)	$	1,530,326


			Successor
			March 31, 2020
				Floors				Ceilings				Basis Differential
			Volume in			Weighted				Weighted				Weighted
			Mmbtu's/	Price /		Average		Price /		Average		Price /		Average
Period	Instrument	Commodity	Bbl's	Price Range		Price		Price Range		Price		Price Range		Price
April 2020 - June 2020	Fixed-Price Swap	Crude Oil	91,000	$	55.74	$	55.74	$	—	$	—	$	-	$	-
April 2020 - June 2020	Basis Swap	Crude Oil	182,000										0.75		0.75
April 2020 - June 2020	WTI NYMEX Roll	Crude Oil	182,000		0.61		0.61
April 2020 - September 2020	Fixed-Price Swap	Natural Gas	640,000		2.61		2.61
April 2020 - December 2020	Fixed-Price Swap	Crude Oil	550,000		55.68 - 60.00		57.84
April 2020 - December 2020	Collar	Crude Oil	412,500		50.00		50.00		70.00		70.00
April 2020 - December 2020	Call	Crude Oil	1,760,000						70.00		70.00
April 2020 - December 2020	Put	Crude Oil	687,500		55.00		55.00
April 2020 - December 2020	Basis Swap	Crude Oil	1,375,000										0.67 - 0.85		0.72
April 2020 - December 2020	WTI NYMEX Roll	Crude Oil	1,375,000		0.37 - 0.54		0.43
April 2020 - December 2020	Fixed-Price Swap	Natural Gas	2,200,000		2.55 - 2.57		2.56
July 2020 - September 2020	Fixed-Price Swap	Crude Oil	92,000		58.20		58.20
July 2020 - September 2020	Basis Swap	Crude Oil	92,000										0.90		0.90
July 2020 - September 2020	WTI NYMEX Roll	Crude Oil	92,000		0.63		0.63
July 2020 - December 2020	Fixed-Price Swap	Crude Oil	184,000		32.60		32.60
July 2020 - December 2020	Basis Swap	Crude Oil	368,000										(2.20) - 0.95		(0.63)
July 2020 - December 2020	WTI NYMEX Roll	Crude Oil	368,000		(1.10) - 0.64		(0.23)
October 2020 - December 2020	Fixed-Price Swap	Crude Oil	92,000		56.80		56.80
October 2020 - December 2020	Basis Swap	Crude Oil	92,000										0.95		0.95
October 2020 - December 2020	WTI NYMEX Roll	Crude Oil	92,000		0.51		0.51
January 2021 - March 2021	Fixed-Price Swap	Crude Oil	180,000		55.55 - 56.08		55.82
January 2021 - March 2021	Basis Swap	Crude Oil	180,000										1.00 - 1.05		1.03
January 2021 - March 2021	WTI NYMEX Roll	Crude Oil	180,000		0.42 - 0.48		0.45
January 2021 - June 2021	Fixed-Price Swap	Crude Oil	181,000		32.60		32.60
January 2021 - June 2021	Basis Swap	Crude Oil	181,000										(2.20)		(2.20)
January 2021 - June 2021	WTI NYMEX Roll	Crude Oil	181,000		(1.10)		(1.10)
April 2021 - June 2021	Fixed-Price Swap	Crude Oil	91,000		54.60		54.60
April 2021 - June 2021	Basis Swap	Crude Oil	91,000										1.05		1.05
April 2021 - June 2021	WTI NYMEX Roll	Crude Oil	91,000		0.32		0.32
January 2021 - December 2021	Fixed-Price Swap	Crude Oil	1,460,000		50.70 - 52.80		51.91
January 2021 - December 2021	Basis Swap	Crude Oil	1,460,000										0.82 - 0.95		0.85
January 2021 - December 2021	WTI NYMEX Roll	Crude Oil	1,460,000		0.13 - 0.14		0.14
January 2021 - December 2021	Fixed-Price Swap	Natural Gas	2,190,000		2.47 - 2.48		2.47
January 2022 - December 2022	Fixed-Price Swap	Crude Oil	1,460,000		51.50		51.50
January 2022 - December 2022	Basis Swap	Crude Oil	1,460,000										0.85 - 0.95		0.88
January 2022 - December 2022	WTI NYMEX Roll	Crude Oil	1,460,000		-		-


Liability for asset retirement obligations as of December 31, 2019 (Successor)	$	10,590
Additions		105
Accretion expense		149
Liability for asset retirement obligations as of March 31, 2020 (Successor)	$	10,844