UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
MARK ONE
X QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-9579
HALLWOOD ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
TEXAS 75-1319083
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification Number)
organization)
4582 SOUTH ULSTER STREET
PARKWAY, SUITE 1700
DENVER, COLORADO 80237
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code:
(303) 850-7373
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 x No
Shares of Common Stock outstanding at May 10, 1996 792,126 shares
<TABLE>
<CAPTION>
HALLWOOD ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands except Shares)
March 31, December 31,
1996 1995
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 276 $ 10
Accounts receivable:
Affiliates 654 372
Trade 34 26
Current assets of affiliate 2,560 2,236
------- -------
Total 3,524 2,644
------- -------
PROPERTY, PLANT AND EQUIPMENT, at
cost
Oil and gas properties (full cost
method):
Proved mineral interests 113,096 113,159
Unproved mineral interests -
domestic 95 82
Other property and equipment 3,762 3,758
------- -------
Total 116,953 116,999
Less accumulated depreciation,
depletion, amortization and
property impairment (107,609) (107,160)
------- -------
Net Property, Plant and Equipment 9,344 9,839
------- -------
OTHER ASSETS
Investment in common stock of
parent (carried at market) 3,648 2,075
Deferred tax asset 437 500
Noncurrent assets of affiliate 1,455 1,407
------- -------
Total 5,540 3,982
------- -------
TOTAL ASSETS $ 18,408 $ 16,465
======= =======
</TABLE>
<TABLE>
<CAPTION>
HALLWOOD ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands except Shares)
March 31, December 31,
1996 1995
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable and accrued
liabilities $ 161 $ 106
Current portion of long-term debt 300 300
Current liabilities of affiliate 1,883 2,857
------- -------
Total 2,344 3,263
------- -------
NONCURRENT LIABILITIES
Long-term debt 750 825
Long-term obligations of
affiliate 6,156 5,366
------- -------
Total 6,906 6,191
------- -------
Total Liabilities 9,250 9,454
------- -------
STOCKHOLDERS' EQUITY
Series D convertible cumulative,
redeemable preferred stock, $.01
par value; 65,000 shares
authorized; 18,864 shares issued
with a liquidation preference of
$1,154 (cancelled during 1995)
Series E convertible preferred
stock; $.01 par value; 450,000
shares authorized; 356,000 shares
issued with a liquidation
preference of $.01 per share
(converted to common stock during
1995)
Common stock, $.50 par value;
80,000,000 shares authorized;
1,198,121 shares issued 599 599
Capital in excess of par value 53,789 53,789
Accumulated deficit (41,010) (41,584)
Unrealized gain (loss) on
investment in common stock of
parent 571 (1,002)
Less cost of treasury stock of
405,995 common shares (4,791) (4,791)
------- -------
Stockholders' Equity - net 9,158 7,011
------- -------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 18,408 $ 16,465
======= =======
</TABLE>
<TABLE>
<CAPTION>
HALLWOOD ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands except per Share data)
For the Three Months
Ended March 31,
1996 1995
<S> <C> <C>
REVENUES:
Oil revenue $ 672 $ 518
Gas revenue 1,182 780
------ ------
1,854 1,298
------ ------
EXPENSES:
Production operating expense 382 339
General and administrative 247 252
Depreciation, depletion and
amortization 449 398
Impairment of oil and gas
properties 464
Interest 141 71
------ ------
1,219 1,524
------ ------
OTHER INCOME 28 66
------ ------
INCOME (LOSS) BEFORE INCOME TAXES 663 (160)
PROVISION FOR INCOME TAXES:
Current 26
Deferred 63
------ -------
89
------ -------
NET INCOME (LOSS) 574 (160)
PREFERRED STOCK DIVIDENDS 372
------ ------
NET INCOME (LOSS) FOR COMMON
STOCKHOLDERS $ 574 $ (532)
====== ======
NET INCOME (LOSS) PER COMMON
SHARE $ .72 $ (1.08)
====== ======
WEIGHTED AVERAGE COMMON SHARES 792 494
====== ======
</TABLE>
<TABLE>
<CAPTION>
HALLWOOD ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
For the Three Months
Ended March 31,
1996 1995
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 574 $ (160)
Adjustments to reconcile net
income (loss) to net cash used in
operating activities:<PAGE>
Depreciation, depletion,
amortization and property
impairment 449 862
Equity in earnings of affiliate (1,222) (706)
Amortization of bond discount (24)
Deferred income tax expense 63
------ --------
Cash used in operations before
working capital changes (136) (28)
Changes in operating assets and
liabilities provided (used) cash
net of noncash activity:
Receivables from affiliates (301) (1,553)
Receivables - trade (8)
Accounts payable and accrued
liabilities 55 (12)
------- -------
Net cash used in operating
activities (390) (1,593)
------ ------
INVESTING ACTIVITIES:
Additions to property (17) (17)
Distributions received from
affiliate 748 788
Sale of bonds 1,385
Other investing activities (2)
------- -------
Net cash provided by investing
activities 731 2,154
------ ------
FINANCING ACTIVITIES:
Payments on long-term debt (75)
Dividends paid (865)
Repurchase of preferred shares (136)
-------- ------
Net cash used in financing
activities (75) (1,001)
------ ------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 266 (440)
CASH AND CASH EQUIVALENTS:
BEGINNING OF PERIOD 10 668
------ ------
END OF PERIOD $ 276 $ 228
====== ======
<F1>
The accompanying notes are an integral part
of the financial statements.
</TABLE>
HALLWOOD ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - GENERAL
Hallwood Energy Corporation ("HEC" or the "Company") is a Texas corporation
engaged in the development, production and sale of oil and gas. HEC is the
general partner of Hallwood Energy Partners, L. P. ("HEP"), a publicly traded
Delaware limited partnership. HEP commenced operations in August 1985 after
completing an exchange offer in which HEP acquired oil and gas properties and
operations from HEC, 24 oil and gas limited partnerships of which HEC was the
general partner and certain working interest owners that had participated in
wells with HEC and the limited partnerships. HEC now conducts substantially all
of its operations through HEP. HEP's properties are primarily located in the
Rocky Mountain, Mid-Continent, Texas and Gulf Coast regions of the United
States. The activities of HEP are conducted by HEP Operating Partners, L. P.
("HEPO") and EDP Operating, Ltd. ("EDPO").
HEC's wholly-owned subsidiary, Hallwood G. P., Inc., is the general partner of
EDPO. Unless otherwise indicated, all references to HEC in connection with the
ownership, exploration, development or production of oil and gas properties
refer to HEC and its proportionate ownership of HEP. As of March 31, 1996,
HEC's parent company, The Hallwood Group Incorporated ("Hallwood Group"), owns
80% of the outstanding common shares of HEC.
The interim financial data are unaudited; however, in the opinion of management,
the interim data include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the results for the interim
periods. These financial statements should be read in conjunction with the
financial statements and accompanying footnotes included in HEC's December 31,
1995 Annual Report on Form 10-K.
ACCOUNTING POLICIES
INVESTMENT IN HEP
HEC's general partner interest in HEP entitles it to a share of net revenues
derived from HEP's properties ranging from 2% to 25%, and HEC holds
approximately 6.5% of HEP's limited partner Units. HEC accounts for its
ownership of HEP using the proportionate consolidation method of accounting
whereby HEC records its proportionate share of each of HEP's revenues and
expenses, current assets, current liabilities, noncurrent assets, long-term
obligations and fixed assets. HEP owns approximately 44% of its affiliate,
Hallwood Consolidated Resources Corporation ("HCRC"), which HEP accounts for
under the equity method.
INVESTMENT IN PARENT
Hallwood Group, a public company traded on the New York Stock Exchange, owns 80%
of the outstanding common shares of HEC. Hallwood Group is a diversified
holding company with interests in oil and gas, specialty restaurants, real
estate, textile products and hotels.
From 1990 through 1995, HEC acquired 267,709 shares (adjusted for Hallwood
Group's 1-for-4 reverse split) or approximately 17% of the outstanding shares of
Hallwood Group, on the open market. Because HEC has the ability and the intent
to hold the stock of Hallwood Group indefinitely, HEC has recorded it as a long-
term investment and has classified it as an available-for-sale security.
During 1991 and 1992 HEC acquired $2,439,000 principal amount of Hallwood
Group's 13.5% Subordinated Debentures due July 31, 2009, which it subsequently
exchanged for 7% Collateralized Subordinated Debentures due July 31, 2000. On
March 29, 1995, Hallwood Group repurchased the 7% Collateralized Subordinated
Debentures for $1,376,000 plus accrued interest through the purchase date. The
debentures were repurchased for an amount approximately equal to their carrying
value.
NOTE 2 - DEBT
During the second quarter of 1995, the Company entered into a credit agreement
with a bank that has committed to loan the Company up to $1,500,000. As of
March 31, 1996, the Company has $1,050,000 outstanding against the credit line.
Borrowings against the credit line bear interest at the bank's prime rate plus
2% (10.25% at March 31, 1996). Interest is payable monthly, and principal
payments of $75,000 are due quarterly. The credit line is secured by the HEP
Units owned by the Company. The credit agreement limits aggregate dividends
paid by the Company to $3.50 per share each fiscal year.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
FINANCING
During the second quarter of 1995, the Company entered into a credit agreement
with a bank that has committed to loan the Company up to $1,500,000. As of
March 31, 1996, the Company has $1,050,000 outstanding against the credit line.
Borrowings against the credit line bear interest at the bank's prime rate plus
2% (10.25% at March 31, 1996). Interest is payable monthly, and principal
payments of $75,000 are due quarterly. The credit line is secured by the HEP
Units owned by the Company. The credit agreement limits aggregate dividends
paid by the Company to $3.50 per share each fiscal year.
Included in the accompanying balance sheet at March 31, 1996 are long-term
obligations of affiliate of $6,156,000 which represents HEC's pro rata share of
the long-term obligations of HEP and Hallwood Spraberry Drilling Company, L.L.C.
("HSD"). The long-term obligations of HEP consist primarily of $24,700,000
borrowed under a line of credit and $12,857,000 borrowed under a note purchase
agreement. HEP's borrowings are secured by a first lien on approximately 80% in
value of HEP's oil and gas properties. Effective April 1, 1996, HEC paid off
its proportional share of the bank debt of HSD of $176,000, and the ownership of
HSD's properties was transferred directly to HEC, HEP and HCRC.
DEVELOPMENT PROJECTS AND ACQUISITIONS
In the first quarter of 1996, HEC has participated in drilling five wells in
Winkler County, Texas through its interest in the Saxon Drilling Venture. Total
net cost to HEC is approximately $18,000. Effective April 1, 1996, HEC repaid
its share of the loan provided to HSD by an outside third party for costs
incurred to acquire and drill leases on the Rocker "b" Ranch in 1995. The net
cost to HEC was approximately $176,000, and HEC now has a direct ownership in
the Rocker "b" Ranch properties of approximately 2%.
HEC had no other material property acquisitions, sales, exploration or
development activity during the first quarter of 1996. A summary of HEP's
significant property transactions follows.
Through March 31, 1996, HEP has incurred approximately $2,098,000 directly and
$189,000 indirectly through its investment in HSD for exploration, development
and acquisition costs toward the 1996 capital budget of $11,500,000. The direct
expenditures were comprised of approximately $1,785,000 for domestic exploration
and development expenditures and approximately $313,000 for property
acquisitions and land. The indirect expenditures were comprised of drilling
costs. A description of significant exploration and development projects to
date in 1996 follows.
HEP has incurred approximately $189,000 in the first quarter, net to HEP's
interest, for four recompletions and one drilled well in the Rocker "b" Ranch in
Reagan County, Texas. This activity has increased HEP's share of production by
90 equivalent barrels of oil per day. Effective April 1, 1996, HEP paid off its
share of HSD's third party loan through additional borrowings on its bank credit
agreement and assumed direct ownership of its share of HSD's properties. There
are still 10 undrilled locations which were recorded as proved reserves at
December 31, 1995 which HEP plans to drill at some date in the future. During
the first quarter, HEP also acquired interests in five additional producing
leases on the Rocker "b" Ranch for a total of $93,000. HEP plans to recomplete
at least seven wells from this acquisition by year end. The results of the
first two recompletions, which are in progress, appear favorable.
HEP has had continued success in the West Texas Kermit area in 1996, drilling or
participating in the drilling of six successful wells in the first quarter for
approximately $400,000. These new wells are capable of producing approximately
800 gross equivalent barrels of oil per day but are currently limited to
approximately 350 gross equivalent barrels of oil per day due to limitations on
production imposed by state laws and regulations. HEP's interest in these
wells averages 35%. HEP is committed to drilling at least seven more wells in
the second quarter and has plans for several more recompletions in the second
half of 1996.
HEP also continues to participate in a nonoperated development program in the
Southeastern New Mexico area which began in late 1994, with two more successful
wells being drilled for a net cost of approximately $69,000. HEP has a 5%
interest in these wells which are currently producing at a gross rate of 750
equivalent barrels of oil per day. HEP is committed to further participation in
this program and currently plans to drill at least one well in the second
quarter. HEP has also performed three successful recompletions on wells it
operates in the Catclaw Draw area for a cost of approximately $90,000.
Under a farmout agreement completed in 1995, HEP is participating in several
multiple lateral, horizontal wells in the Giddings Austin Chalk play in Lee
County, Texas. Two successful wells have been drilled thus far, and a third
well is currently being drilled. HEP's interests in the area range from 3% to
4%, with gross average initial production rates of 750 barrels of oil per day on
the first two wells. HEP's cost for both wells was approximately $20,000.
HEP has also participated in the drilling of two nonoperated wells in Williams
County, North Dakota in the latter part of 1995 and the first quarter of 1996,
one of which was dry and the other only marginally successful, for a total cost
of approximately $200,000. HEP also drilled an exploratory dry hole in Richland
County, Montana at a cost of $120,000. HEP in evaluating an Interlake Formation
development well drilled in April.
In the San Juan Basin of New Mexico, HEP successfully recompleted a well in the
first quarter of 1996 for approximately $90,000. Current production on this
well is approximately 1,200 mcf of gas per day which equals the initial
production rates experienced when the well was drilled in 1990. Rates prior to
this workover were approximately 400 mcf of gas per day. HEP owns approximately
55% of this well.
HEP acquired three dimensional (3-D) seismic data in several different areas in
the latter part of 1995 and early 1996. Expenditures thus far in 1996 total
approximately $300,000, and HEP plans to purchase an additional $200,000 of
seismic data in the second quarter of 1996. Drilling of resulting prospects
will commence in the second quarter of 1996.
HEP is also actively evaluating acquisitions in strategic areas. Such
acquisitions would be financed using the capital budget, supplemented by
external financing when appropriate.
PROPERTY SALES
During the first quarter of 1996, HEP received approximately $1,300,000 for the
sale of its interests in the Hoople Field in Crosby County, Texas. HEP also
received another $88,000 in early April for the sale of various nonstrategic
properties at auction. HEP continues to evaluate unsolicited offers on various
properties it owns.
HEP DISTRIBUTIONS
HEP declared a limited partner distribution of $.13 per Class A Unit and $.25
per Class C Unit and a general partner distribution of $652,000 for the first
quarter of 1996, payable on May 15, 1996. The total of the distributions
receivable by HEC is $748,000, which has been accrued in receivables from
affiliates at March 31, 1996.
RESULTS OF OPERATIONS
The following table is presented to contrast HEC's average oil and gas prices
and production. Significant fluctuations are discussed in the accompanying
narrative.
<TABLE>
<CAPTION>
OIL AND GAS PRICES AND PRODUCTION
(In thousands except for price)
For the Three Months Ended March 31,
1996 1995
Oil Gas Oil Gas
(bbl) (mcf) (bbl) (mcf)
<S> <C> <C> <C> <C>
Average price $17.68 $2.54 $17.27 $1.76
Production 38 465 30 443
</TABLE>
QUARTER ENDED MARCH 31, 1996 COMPARED TO QUARTER ENDED MARCH 31, 1995
OIL REVENUE
Oil revenue increased $154,000 during the first quarter of 1996 as compared with
the first quarter of 1995. This increase is comprised of an increase in oil
production from 30,000 barrels in 1995 to 38,000 barrels in 1996 combined with
an increase in oil prices from $17.27 per barrel in 1995 to $17.68 per barrel in
1996. The increase in oil production is due to increased production from
developmental and exploratory drilling projects in Montana, Wyoming and West
Texas partially offset by normal production declines.
GAS REVENUE
Gas revenue increased $402,000 during the first quarter of 1996 as compared with
the first quarter of 1995 primarily as a result of an increase in average gas
prices from $1.76 per mcf in 1995 to $2.54 in 1996 combined with an increase in
production from 443,000 mcf in 1995 to 465,000 mcf in 1996. The increase in gas
production is primarily due to increased production from developmental and
exploratory drilling projects in Montana, Wyoming and West Texas partially
offset by normal production declines.
PRODUCTION OPERATING EXPENSE
Production operating expense increased $43,000 during the first quarter of 1996
as compared with the first quarter of 1995. The increase is primarily due to
increased production taxes during the first quarter of 1996 due to a 43%
increase in oil and gas revenue.
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expense includes costs incurred for direct
administrative services such as legal and audit fees, as well as allocated
internal overhead incurred by Hallwood Petroleum, Inc. ("HPI"), an affiliate of
HEC, which manages and operates certain oil and gas properties on behalf of HEC,
HEP and their affiliates. These costs decreased $5,000 during the first quarter
of 1996 as compared to the first quarter of 1995, primarily due to a decrease in
allocated internal overhead.
DEPRECIATION, DEPLETION AND AMORTIZATION
Depreciation, depletion and amortization expense increased $51,000 during the
first quarter of 1996 as compared with the first quarter of 1995. The increase
is primarily due to a higher depletion rate in 1996 as a result of a 12%
increase in production.
IMPAIRMENT OF OIL AND GAS PROPERTIES
Impairment of oil and gas properties represents HEC's pro rata share of the
write-off of HEP's Indonesian operations.
INTEREST EXPENSE
Interest expense increased $70,000 during the first quarter of 1996 as compared
with the first quarter of 1995 as a result of HEC's borrowings under its line of
credit during the first quarter of 1996.
OTHER INCOME
Other income consists primarily of HEC's direct interest income, as well as
HEC's share of HEP's interest income, facilities income from two gathering
systems in New Mexico, pipeline revenue, equity in income/(loss) of affiliate
and miscellaneous income or expense. The decrease of $38,000 during the first
quarter of 1996 as compared with the first quarter of 1995 is primarily due to a
decrease in HEC's direct interest income due to a lower average cash balance
during 1996. The remaining increase is comprised of numerous other items, none
of which are individually significant.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
Reference is made to Item 8 - Note 12 of Form 10-K for the year
ended December 31, 1995.
ITEM 2 - CHANGES IN SECURITIES
None.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5 - OTHER INFORMATION
None.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
None.
SIGNATURE
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.
HALLWOOD ENERGY CORPORATION
Date: May 10, 1996 By: /s/Robert S. Pfeiffer
Robert S. Pfeiffer,
Vice President
(Chief Financial Officer)<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Form 10-Q
for the quarter ended March 31, 1996 for Hallwood Energy Corporation and is
qualified in its entirety by reference to such Form 10-Q.
</LEGEND>
<CIK> 0000319019
<NAME> HALLWOOD ENERGY CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 276
<SECURITIES> 0
<RECEIVABLES> 688
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,524
<PP&E> 116,953
<DEPRECIATION> 107,609
<TOTAL-ASSETS> 18,408
<CURRENT-LIABILITIES> 2,344
<BONDS> 0
0
0
<COMMON> 599
<OTHER-SE> 8,559
<TOTAL-LIABILITY-AND-EQUITY> 18,408
<SALES> 1,854
<TOTAL-REVENUES> 1,854
<CGS> 0
<TOTAL-COSTS> 1,078
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 141
<INCOME-PRETAX> 663
<INCOME-TAX> 89
<INCOME-CONTINUING> 574
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 574
<EPS-PRIMARY> .72
<EPS-DILUTED> .72
</TABLE>
