| FINANCIAL STATEMENT PRESENTATION | 1. FINANCIAL STATEMENT PRESENTATION Basis of Presentation and Principles of Consolidation Battalion is 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. The consolidated financial statements include the accounts of all 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 Companyās 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 Companyās 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, as filed with the United States Securities and Exchange Commission (SEC) on March 8, 2021. Please refer to the notes in the Annual Report on Form 10-K for the year ended December 31, 2020 when reviewing interim financial results. Risk and Uncertainties The Company is 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 implementing various measures to ensure the continued operation of its business in a safe and secure manner. In 2020, COVID-19 and governmental actions to contain the pandemic contributed to an economic downturn, reduced demand for oil and natural gas and, together with a price war involving the Organization of Petroleum Exporting Countries (OPEC)/Saudi Arabia and Russia, depressed oil and natural gas prices to historically low levels. Although OPEC and Russia subsequently agreed to reduce production, downward pressure on prices continued for several months, particularly given concerns over the impacts of the economic downturn on demand. As a consequence, beginning in March 2020, the Company realized lower revenue as a result of commodity price declines, resulting in the Company temporarily shutting in producing wells in May and June 2020, which further contributed to lower revenues that year. Additionally, the Company incurred ceiling test impairments, which were primarily driven by a decline in the average pricing used in the valuation of the Companyās reserves. ā During 2021, widespread availability of COVID-19 vaccines in the United States and elsewhere combined with accommodative governmental monetary and fiscal policies and other factors, led to a rebound in demand for oil and natural gas and increases in oil and natural gas prices to pre-pandemic levels. Further, at present, OPEC and Russia have been coordinating production increases to maintain supply and demand balance, stabilize prices and avoid market disruptions. However, there remains the potential for such cooperation to fail and for demand for oil and natural gas to be adversely impacted by the economic effects of the ongoing COVID-19 pandemic, including as a consequence of the circulation of more infectious āvariantsā of the disease, vaccine hesitancy, waning vaccine effectiveness or other factors. As a consequence, the Company is unable to predict whether oil and natural gas prices will remain at current levels or will be adversely impacted by the same sorts of factors that negatively impacted prices during 2020. Furthermore, the health of the Companyās employees, contractors and vendors, and its ability to meet staffing needs in its operations and critical functions remain concerns and cannot be predicted, nor can the impact on the Companyās customers, vendors and contractors. Any material effect on these parties could adversely impact the Company. These and other factors could affect the Companyās operations, earnings and cash flows and could cause its results to not be comparable to those of the same period in previous years. 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 āRisk Factorsā ā Use of Estimates The preparation of the Companyās unaudited condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States requires the Companyās 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. The Company bases its estimates and judgments on historical experience and on various other 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 Companyās operating environment changes. Actual results may differ from the estimates and assumptions used in the preparation of the Companyās unaudited condensed consolidated financial statements. Cash and Cash Equivalents Accounts Receivable and Allowance for Doubtful Accounts The Companyās 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 June 30, 2021 and December 31, 2020, allowances for doubtful accounts were less than $0.1 million and approximately $0.2 million, respectively. Other Operating Property and Equipment Other operating property and equipment 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 fixtures, furniture and equipment eight Property, Plant, and Equipment Concentrations of Credit Risk The Companyās primary concentrations of credit risk are the risks of uncollectible accounts receivable and of nonperformance by counterparties under the Companyās 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. The Companyās accounts receivable are primarily receivables from joint interest owners and oil and natural gas purchasers. The purchasers of the Companyās 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 Companyās 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 Companyās joint interest partners to reimburse the Company could be adversely affected. The Companyās 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 June 30, 2021, the Companyās derivative counterparties include two major financial institutions, both of which are secured lenders under the Senior Credit Agreement. Restructuring During the three and six months ended June 30, 2020, the Company incurred approximately $2.2 million and $2.6 million in restructuring charges, respectively, 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 exercised a one-time early termination option under the lease agreement for the Companyās office space in Denver, Colorado. These costs were recorded in āRestructuringā Leases 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 āGeneral and administrativeā Recently Issued Accounting Pronouncements In March 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2020-04, Reference Rate Reform (Topic 848) ā In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740) ā Simplifying the Accounting for Income Taxes |
