Form 4: Brookfield and Oaktree Entities Acquire $6.2 Million in Battalion Oil Corp Series A-3 Convertible Preferred Stock

Brookfield and Oaktree-affiliated entities have jointly filed a Form 4 disclosing the acquisition of 6,376 shares of Series A-3 Redeemable Convertible Preferred Stock in Battalion Oil Corp for approximately $6.2 million on March 27, 2024.

Summary

• Brookfield and Oaktree-affiliated entities, including OCM HLCN Holdings, L.P., Oaktree Fund GP, LLC, and Brookfield Corporation, jointly filed a Form 4 with the SEC.
• The filing reports the acquisition of 6,376 shares of Series A-3 Redeemable Convertible Preferred Stock of Battalion Oil Corp on March 27, 2024.
• The aggregate purchase price for the preferred stock was approximately $6.2 million.
• The Series A-3 Preferred Shares are convertible into common stock at a conversion price of $6.83 per share, subject to adjustments.
• OCM HLCN has the option to convert the preferred shares into common stock starting July 25, 2024.
• Battalion Oil Corp has the right to force conversion if certain conditions related to the PDP PV-20 value and common stock price are met.
• The Series A-3 Preferred Shares are also subject to redemption by the Issuer at any time following the Issuance Date in accordance with the terms of the Series A-3 Certificate of Designations.
• In the event of a change of control transaction, the Series A-3 Preferred Shares are subject to redemption or conversion in accordance with the terms of the Series A-3 Certificate of Designations.

Sentiment

Score: 7

Explanation: The sentiment is neutral to positive. The investment by Brookfield and Oaktree provides Battalion Oil Corp with capital, but the terms of the preferred stock could create future obligations and potential dilution.

Positives

• Battalion Oil Corp secures $6.2 million in funding through the issuance of Series A-3 Preferred Stock.
• The conversion feature provides potential upside for OCM HLCN if Battalion Oil Corp's stock price increases.
• The structure allows Battalion Oil Corp to potentially force conversion if certain performance metrics are met, reducing the preferred equity on its balance sheet.
• The Series A-3 Preferred Shares are also subject to redemption by the Issuer at any time following the Issuance Date in accordance with the terms of the Series A-3 Certificate of Designations.
• In the event of a change of control transaction, the Series A-3 Preferred Shares are subject to redemption or conversion in accordance with the terms of the Series A-3 Certificate of Designations.

Negatives

• The conversion of preferred stock could dilute existing common shareholders.
• The terms of the Series A-3 Preferred Stock, including the conversion price and redemption provisions, could potentially limit Battalion Oil Corp's financial flexibility.
• The Issuer may, from time to time until such time that the foregoing conditions are no longer satisfied or a Material Adverse Effect (as defined in the Series A-3 Purchase Agreement) has occurred since the date of the most financial statements that met the foregoing conditions, cause the conversion of all or any portion of the Series A-3 Preferred Shares into Common Stock using the then-applicable Conversion Ratio.

Risks

• The value of the investment is subject to the performance of Battalion Oil Corp and fluctuations in the oil and gas market.
• The conversion price is subject to adjustment, which could impact the number of shares OCM HLCN receives upon conversion.
• A 'Material Adverse Effect' could prevent Battalion Oil Corp from forcing conversion of the preferred stock.
• The Series A-3 Preferred Shares are also subject to redemption by the Issuer at any time following the Issuance Date in accordance with the terms of the Series A-3 Certificate of Designations.
• In the event of a change of control transaction, the Series A-3 Preferred Shares are subject to redemption or conversion in accordance with the terms of the Series A-3 Certificate of Designations.

Future Outlook

The document outlines the terms and conditions for the conversion and redemption of the Series A-3 Preferred Stock, providing a framework for future actions based on Battalion Oil Corp's performance and market conditions.

Industry Context

This investment reflects continued interest in the oil and gas sector, with private equity firms like Oaktree and Brookfield making strategic investments in companies like Battalion Oil Corp. The convertible preferred stock structure allows investors to participate in potential upside while providing downside protection.

Comparison to Industry Standards

• Convertible preferred stock is a common financing tool in the oil and gas industry, particularly for companies seeking growth capital.
• The conversion price of $6.83 will be compared to the market price of Battalion Oil Corp's common stock to determine the value of the conversion option.
• The PDP PV-20 metric is a standard measure used in the oil and gas industry to assess the value of proved developed producing reserves, and its use in the forced conversion clause aligns with industry practices.

Stakeholder Impact

• Shareholders may experience dilution if the preferred stock is converted into common stock.
• The investment provides Battalion Oil Corp with capital to potentially grow its business, which could benefit employees and other stakeholders.
• The Series A-3 Preferred Shares are also subject to redemption by the Issuer at any time following the Issuance Date in accordance with the terms of the Series A-3 Certificate of Designations.
• In the event of a change of control transaction, the Series A-3 Preferred Shares are subject to redemption or conversion in accordance with the terms of the Series A-3 Certificate of Designations.

Next Steps

• OCM HLCN will monitor Battalion Oil Corp's performance and may choose to convert the preferred stock into common stock starting July 25, 2024.
• Battalion Oil Corp will manage its operations to potentially meet the conditions for forcing conversion of the preferred stock.
• The Series A-3 Preferred Shares are also subject to redemption by the Issuer at any time following the Issuance Date in accordance with the terms of the Series A-3 Certificate of Designations.
• In the event of a change of control transaction, the Series A-3 Preferred Shares are subject to redemption or conversion in accordance with the terms of the Series A-3 Certificate of Designations.

Key Dates