UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
Amended February 27, 1996
MARK ONE
X QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1995
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 of (I.R.S. Employer
incorporation or organization) Identification Number)
4582 SOUTH ULSTER STREET PARKWAY
SUITE 1700
DENVER, COLORADO 80237
(Address of principal executive (Zip Code)
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 November 10, 1995 436,126
<TABLE>
<CAPTION>
HALLWOOD ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands except Shares)
September 30, December 31,
1995 1994
(Unaudited)<PAGE>
<S> <C> <C>
CURRENT ASSETS $ 119 $ 668
Cash and cash equivalents
Accounts receivable: 684 526
Affiliates 16 7
Trade 1,996 1,760
Current assets of affiliate ------ -------
Total 2,815 2,961
------ -------
PROPERTY, PLANT AND EQUIPMENT, at cost
Oil and gas properties (full
cost method):
Proved mineral interests 112,835 111,951
Unproved mineral interests -
domestic 27 46
Unproved mineral interests -
foreign 288
Other property and equipment 3,759 3,745
------- -------
Total 116,621 116,030
Less accumulated depreciation,
depletion, amortization and
property impairment (106,758) (105,461)
------- -------
Net Property, Plant and
Equipment 9,863 10,569
------- -------
OTHER ASSETS
Investment in common stock of
parent (at fair value) 2,713 1,680
Investment in bonds of parent
(at cost adjusted for
amortization of discount) 1,352
Noncurrent assets of affiliate 1,559 1,704
------- -------
Total 4,272 4,736
------- -------
TOTAL ASSETS $ 16,950 $ 18,266
======= =======
</TABLE>
<TABLE>
<CAPTION>
HALLWOOD ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands except Shares)
(Continued)
September 30, December 31,
1995 1994
(Unaudited)<PAGE>
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable and accrued
liabilities $ 149 $ 154
Current portion of long-term
debt 300
Current liabilities of
affiliate 2,636 2,879
------ --------
3,085 3,033
------ -------
NONCURRENT LIABILITIES
Long-term debt 900
Long-term obligations of affiliate 5,350 3,917
------ ------
6,250 3,917
------ ------
Total Liabilities 9,335 6,950
------ ------
STOCKHOLDERS' EQUITY
Series D convertible,
cumulative, redeemable preferred
stock, $.01
par value; 65,000 shares
authorized; 18,864 shares issued
as of 1994 with a liquidation
preference of $1,154 1
Series E convertible preferred
stock; $.01 stated value; 450,000
shares authorized; 356,000 shares
issued with a liquidation
preference of $.01 per share 4 4
Common stock, $.50 par value,
80,000,000 shares authorized;
842,121 shares issued 421 421
Capital in excess of par value 54,598 58,248
Accumulated deficit (42,295) (42,290)
Unrealized loss on investment
in common stock of parent (321) (896)
Less cost of treasury stock of
405,995 and 347,995 common shares
in 1995 and 1994, respectively and
7,500 Series D preferred
shares in 1994 (4,792) (4,172)
------- -------
Total Stockholders' Equity 7,615 11,316
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 16,950 $ 18,266
======= =======
</TABLE>
<TABLE>
<CAPTION>
HALLWOOD ENERGY CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(In thousands except per Share data)
For the Three Months
Ended September 30, <PAGE>
1995 1994
<S>
REVENUES: <C> <C>
Oil revenue $ 623 $ 587
Gas revenue 842 876
------ ------
1,465 1,463
------ ------
EXPENSES:
Production operating 417 383
General and administrative 384 186
Depreciation, depletion and
amortization 456 481
Interest 140 86
------ ------
1,397 1,136
------ ------
OTHER INCOME 133 78
------ ------
NET INCOME 201 405
PREFERRED STOCK DIVIDENDS 534 18
------ ------
NET INCOME (LOSS) FOR COMMON STOCKHOLDERS $ (333) $ 387
====== ======
NET INCOME (LOSS) PER COMMON SHARE $ (.74) $ .46
====== ======
WEIGHTED AVERAGE COMMON SHARES 447 850
====== ======
</TABLE>
<TABLE>
<CAPTION>
HALLWOOD ENERGY CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(In thousands except per Share data)
For the Nine Months
Ended September 30,
1995 1994
<S>
REVENUES: <C> <C>
Oil revenue $ 1,660 $ 1,548
Gas revenue 2,332 2,977
------ ------
3,992 4,525
------ ------
EXPENSES:
Production operating 1,059 1,244
General and administrative 884 567
Depreciation, depletion and
amortization 1,297 1,421
Impairment of oil and gas
properties 464
Interest 344 278
------ ------<PAGE>
4,048 3,510
------ ------
OTHER INCOME (EXPENSE):
Impairment of investment in
parent (3,249)
Miscellaneous income 51 256
------ ------
51 (2,993)
------ ------
NET LOSS (5) (1,978)
PREFERRED STOCK DIVIDENDS 890 54
------ ------
NET LOSS FOR COMMON STOCKHOLDERS $ (895) $(2,032)
====== ======
NET LOSS PER COMMON SHARE $ (2.04) $ (2.39)
====== ======
WEIGHTED AVERAGE COMMON SHARES 440 850
====== ======
</TABLE>
<TABLE>
<CAPTION>
HALLWOOD ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
For the Nine Months
Ended September 30,
1995 1994
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (5) $(1,978)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation, depletion,
amortization and property
impairment 1,761 1,421
Impairment of investment in
parent 3,249
Undistributed earnings of
affiliate (2,208) (2,848)
Amortization of bond discount (24) (73)
------ ------
Cash used in operations
before working capital
changes (476) (229)
Changes in operating assets and
liabilities provided (used) cash
net of noncash activity:
Receivables from affiliates (158) 56
Receivables - trade (9) (1)
Accounts payable and accrued
liabilities (5) (167)
------ ------<PAGE>
Net cash used in
operating activities (648) (341)
------ ------
INVESTING ACTIVITIES:
Additions to property (51) (117)
Proceeds from property sales 4
Distributions received from
affiliate 2,301 2,201
Proceeds from sale of investment in
bonds of parent 1,376
Purchase of common stock of
parent (458)
Other investing activities 8
------ -------
Net cash provided by 3,168 2,096
investing activities ------ ------
FINANCING ACTIVITIES:
Dividends paid (2,038) (2,774)
Repurchase of Common Stock (1,189)
Repurchase of Series D preferred
shares (1,042)
Proceeds from long-term debt 1,200
------ ------
Net cash used in
financing activities (3,069) (2,774)
------ ------
DECREASE IN CASH AND CASH EQUIVALENTS (549) (1,019)
CASH AND CASH EQUIVALENTS:
BEGINNING OF PERIOD 668 1,128
------ ------
END OF PERIOD $ 119 $ 109
======= ======
</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. The activities of HEP are conducted by HEP
Operating Partners, L. P. ("HEPO") and EDP Operating, Ltd. ("EDPO").
HEC's wholly-owned subsidiaries include Hallwood Operating Company ("HOC"),
former operator for HEC's properties, and Hallwood G. P., Inc., 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
September 30, 1995, HEC's parent company, The Hallwood Group Incorporated
("Hallwood Group"), owns 75.3% of the outstanding shares of HEC assuming
conversion of the Series E Preferred Stock into common stock. 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 interimperiods.
These financial statements should be read in conjunction with the financial
statements and accompanying footnotes included in HEC's December 31,1994 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% and 7.3% of HEP's limited partner units as of September 30,
1995 and December 31, 1994, respectively. 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 40% 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, is a
diversified holding company with interests in oil and gas, specialty
restaurants, real estate, textile products and hotels. During 1991, HEC
purchased $2,149,000 aggregate principal amount of Hallwood Group's 13.5%
Subordinated Debentures due July 31, 2009 ("Subordinated Debentures"). The
purchase price was $1,429,000 including $99,000 of accrued interest. During
1992, HEC received an additional $290,000 face value of bonds as payment in lieu
of interest. HEC exchanged the original issue Subordinated Debentures for 7%
Collateralized Subordinated Debentures (the "New Collateralized Debentures") on
March 2, 1993. Interest on the New Collateralized Debentures accrued from the
date of the exchange at the rate of 7% per annum, payable quarterly in cash.
Additionally, during the first
quarter of 1993, Hallwood Group purchased for $380,000 the Subordinated
Debentures that had been issued to HEC in 1991 and 1992 as payment in lieu of
interest. On March 29, 1995, Hallwood Group repurchased the New Collateralized
Debentures for $1,376,000 plus accrued interest through the purchase date.
On October 23, 1995, the board of directors of Hallwood Group authorized it to
purchase up to an additional 40,000 shares of the common stock of HEC. The
purchases may be made on the open market or in private transactions from time to
time. The board has authorized the purchases to enable HEC to be consolidated
with Hallwood Group for federal income tax purposes. Subsequent to September
30, through November 7, 1995, Hallwood Group has purchased an additional 25,186
common shares of HEC.
From 1990 through the third quarter of 1995, HEC acquired 264,709 shares of
Hallwood Group's Common Stock (adjusted for the one-for-four reverse stock
split), or approximately 17% of the outstanding shares of Hallwood Group, on the
open market at an average cost of $11.64 per share. HEC is holding the stock of
Hallwood Group as a long-term investment and has classified it as an available-
for-sale security.
NOTE 2 - DIVIDENDS
HEC paid a dividend of $1.00 per share of common stock and Series E Preferred
Stock on March 3, 1995. On August 15, 1995, HEC paid a dividend of $1.50 per
share of common stock and Series E Preferred Stock. On October 31, 1995, HEC
declared a dividend of $.80 per share of common stock and Series E Preferred
Stock to all shareholders of record on November 11, 1995, payable on or about
November 15, 1995. The Board of Directors will determine future dividends, if
any, after consideration of the cash flow and working capital needs of HEC.
NOTE 3 - REPURCHASES OF SERIES D PREFERRED STOCK AND COMMON STOCK
During the first quarter of 1995, HEC repurchased 1,500 shares of its Series D
Preferred Stock for $90.88 per share. During April 1995, in two separate
transactions, HEC repurchased the remaining 9,864 shares of its Series D
Preferred Stock at $91.80 per share.
In July 1995, HEC purchased 58,000 shares of its common stock from an individual
in a privately negotiated transaction for a total cost of $1,189,000.
NOTE 4 - 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
September 30, 1995, the Company has borrowed $1,200,000 against the credit line.
Borrowings against the credit line bear interest at the bank's prime rate plus
2% (10.75% at September 30, 1995). Interest is payable monthly, and quarterly
principal payments of $75,000 commence December 1, 1995. 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.
NOTE 5 - LITIGATION SETTLEMENT OF AFFILIATE
In September 1995, the court order approving the settlement in the class action
lawsuit styled In re Hallwood Energy Partners, L.P. Securities Litigation became
final. As part of the settlement on September 28, 1995, HEP paid $2,870,000 in
cash (which was recorded as expense in the December 31, 1994 financial
statements) and issued 1,158,696 HEP Units with a market value of $5,330,000 to
a nominee of the class. These Units were subsequently purchased from the
nominee by HCRC for $5,330,000 in cash. Other defendants contributed an
additional $900,000 in cash to the settlement. The net proceeds of the
settlement will be distributed to a class consisting of former owners of limited
partner interests in Energy Development Partners, Ltd. who exchanged their Units
in that entity for units of HEP pursuant to the merger of EDP and HEP on May 9,
1990.
NOTE 6 - LEGAL PROCEEDINGS
In October 1995, the parties agreed in principle to settle the lawsuit styled
Stutes v. Hallwood Petroleum, Inc. et al. The plaintiff in the lawsuit alleged
that as a result of exposure to benzene in the petroleum he was hauling from
various wells owned and operated by HEP and approximately 80 other named
defendants, he contracted myelogenous leukemia. The majority of HEP's share of
the settlement liability is covered by HEP's liability insurance carriers.
HEP's share of the amounts not covered by insurance is not material.
In June 1995, an additional lawsuit was filed against HEP in the 15th Judicial
District Court, Lafayette Parish, Louisiana, Docket No. 952601-3B, styled Lamson
Petroleum Corporation v. Hallwood Petroleum, Inc. et al. The plaintiffs in the
lawsuit claim that they have an additional valid lease covering streets and
roads in the units of the A. L. Boudreaux #1 well, G. S. Boudreaux #1 well, Mary
Guilbeau #1 well and Duhon #1 well and are entitled to a portion of the
production from the wells. HEP has not yet determined the amount of its
interest in the properties which is at issue. At this time, HEP believes that
the difference between the amount already in escrow as a result of the
litigation and the amount of any liability that may result upon resolution of
this matter will not be material.
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
September 30, 1995, the Company has borrowed $1,200,000 against the credit line.
Borrowings against the credit line bear interest at the bank's prime rate plus
2% (10.75% at September 30, 1995). Interest is payable monthly, and quarterly
principal payments of $75,000 commence December 1, 1995. 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 September 30, 1995 are long-term
obligations of affiliate of $5,350,000. This amount represents HEC's share of
HEP's outstanding long-term obligations which 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.
PROPERTY SALES AND CAPITAL BUDGET
During the third quarter of 1995, HEC purchased 15,275 shares of Hallwood Group
at an average cost of $10.49 per share.
During the first quarter of 1995, HEC repurchased 1,500 shares of its Series D
Preferred Stock for $90.88 per share. During the second quarter of 1995, in two
separate transactions, HEC repurchased the remaining 9,864 shares of its Series
D Preferred Stock at $91.80 per share.
On July 17, 1995, HEC purchased 58,000 shares of its common stock from an
individual in a privately negotiated transaction for a total price of
$1,189,000.
CAPITAL PROJECTS
During 1995, the Company participated in drilling five wells in Winkler County
and five wells in Reagan and Irion Counties, Texas, through its interest in the
Saxon Drilling Venture (the "Drilling Venture"). The Company's share of capital
costs on these wells was $225,000 though September 30, 1995. The Drilling
Venture is a joint venture between the Company and HEP which was originally
established in 1985. Under the terms of the Drilling Venture, the Company
receives an 18.75% interest in revenues and costs relating to production from
certain wells drilled in West Texas, in return for payment of 7.5% of the
drilling costs. The Reagan County wells were drilled utilizing the third party
financing described below. Therefore, HEC has recorded its share of debt on
these wells ($134,000 at September 30, 1995), under the caption "Current
Liabilities of Affiliate," in the accompanying balance sheet as the debt matures
in August 1996.
HEC had no other material property acquisitions, sales, exploration or
development activity during the third quarter of 1995. A summary of HEP's
significant property transactions follows.
For 1995, HEP has a capital budget of $15,800,000 which includes $11,600,000 for
direct expenditures and $4,200,000 for indirect expenditures through its
investment in Hallwood Spraberry Drilling Company, L.L.C. ("HSD"). Through
September 30, 1995, HEP incurred approximately $13,602,000 in capital
expenditures which includes $8,557,000 directly and $5,045,000 indirectly
through HSD. A description of significant exploration and development projects
to date in 1995 follows.
HSD has incurred approximately $5,045,000, net to HEP's interest, through
September 30, 1995 for 31 drilled wells, 12 recompletions and acquisition of
drilling leases on the Rocker "b" Ranch in Reagan County, Texas. HSD has its
own line of credit of $4,000,000, net to HEP's interest, provided by a third
party lender. Based on the initial results of the drilling and recompletions,
HEP spent approximately $815,000 on additional acreage in the Rocker "b" Ranch
during the second and third quarters, HSD has expanded its project area to
include certain sections of this acreage. The line of credit is secured only by
certain leases held by HSD on the Rocker "b" Ranch and is otherwise nonrecourse
to HEP. HSD has made a request to increase the size of the facility to
$6,400,000, net to HEP's interest. HSD has funded the drilling to date from the
line of credit as well as from cash flow generated from drilling activities.
HSD has had up to three drilling rigs under contract in this area in 1995, but
plans to scale back to one rig by the end of the year, in order to allow time to
evaluate the results of the drilling to date before moving forward. The 43
wells drilled or recompleted since January 1, 1995, have increased HEP's share
of production on the Rocker "b" properties by 522 barrels of oil equivalent per
day. HSD has drilled five locations and recompleted three wells subsequent to
September 30. These wells, together with the 43 wells drilled through September
30, have added a total of 1.1 million equivalent barrels of reserves net to
HEP's interest, of which 640,000 were booked as proved undeveloped reserves at
December 31, 1994. HSD has plans to drill two additional locations and
recomplete twelve wells prior to year end.
HEP expended approximately $520,000 in late August and September for the
drilling of five exploratory wells in Reagan County, Texas. Two of the five
wells are currently producing at an average rate of 46 barrels of oil per day,
one well was unsuccessful and is scheduled for recompletion and the remaining
two are presently being evaluated. Two additional wells are being drilled on
this acreage at the present time. The performance of these initial seven wells
will determine future development plans in this area.
HEP spent approximately $790,000 on six successful drilling wells and seven
successful recompletions in the West Texas Kermit area where HEP has working
interests ranging from 25% to 80%. Gross production on these properties is
currently averaging 596 barrels of oil per day and 870 mcf per day. Future
projects in the area include secondary recovery in the San Andres and Holt
Formations. It is anticipated that four more wells will be recompleted and
eight more wells will be drilled in the fourth quarter of 1995 and the first
quarter of 1996. Waterflood potential for this area is being considered for
1996.
A workover in the second quarter of 1995 on the G.S. Boudreaux in Lafayette
Parish, Louisiana, increased gross production rates from 17,500 mcf per day and
370 barrels of condensate per day to current rates of 22,000 mcf per day and 450
barrels of condensate per day. HEP has a 24% working interest in the well. The
A.L. Boudreaux in the same area has increased from 20,000 mcf per day to 26,000
mcf per day. HEP has a 26% interest in the A.L. Boudreaux. HEP purchased an
additional interest in the G. S. Boudreaux for $225,000 in the third quarter of
1995.
In Richland County, Montana, the Lewis #1 was recompleted uphole to the
Interlake Formation in the first quarter of 1995, and the well continues to flow
240 barrels of oil per day and 135 mcf per day. HEP has incurred approximately
$100,000 for the drilling of a Red River/Interlake development well which was
spud in early September and is presently being completed. HEP also has plans to
reenter a temporarily abandoned wellbore in this area in the fourth quarter of
1995 and recomplete it to the Interlake formation. HEP has a 22% working
interest in the area.
In the first nine months of 1995, HEP spent approximately $335,000 on a program
started in late 1994 in New Mexico. This amount includes nine successful and
one unsuccessful non-operated development wells in Lea County, New Mexico, and
four successful operated recompletions in Eddy County, New Mexico, having gross
combined initial flowing potentials of 3,350 barrels of oil per day and 4,200
mcf per day. HEP has a 5% working interest in the Lea County field and 25% to
50% interests in the Eddy County wells.
In May 1995, HEP completed an exploratory well in Hot Springs County, Wyoming
for approximately $120,000. The well is flowing 620 barrels of oil per day. A
delineation well was drilled in August and completed in September at a cost of
$70,000 and is currently flowing 650 barrels of oil per day. A third well on a
separate but nearby structure was spud October 10th and is presently being
completed. It is anticipated that up to nine additional locations may be
available. HEP has a 15% working interest in this field.
In the first nine months of 1995, HEP completed two additional coal bed methane
development wells and acquired working interests in the San Juan Basin of New
Mexico, for a total of approximately $215,000. The two new wells have increased
gross production in this area by 700 mcf per day. HEP has working interests in
these new wells of 18% and 25%.
During the first nine months of 1995, HEP also acquired additional acreage in
Martin County, Texas for approximately $90,000 and has acquired interest in two
three-D seismic prospects in Taylor and Jones Counties, Texas and is pursuing
two other three-D projects in this area. HEP participated in the drilling of a
nonoperated exploratory well in one of the three-D prospects in this area in the
third quarter. This well is flowing 90 barrels of oil per day and additional
behind pipe reserves were recorded. Additional development drilling on this
discovery is anticipated in 1996. HEP has a 12% interest in this area. HEP has
also spent approximately $530,000 on two successful development wells in Reagan
County, Texas in which it has a 90% working interest. Numerous other projects,
which are individually less significant, are also underway in Montana, Colorado,
North Dakota, Texas and Utah.
DIVIDENDS
HEC paid a dividend of $1.00 per share of common stock and Series E Preferred
Stock on March 3, 1995. On August 15, 1995, HEC paid a dividend of $1.50 per
share of common stock and Series E Preferred Stock. On October 31, 1995, HEC
declared a dividend of $.80 per share of common stock and Series E Preferred
Stock to all shareholders of record on November 11, 1995, payable on or about
November 15, 1995.
The Board of Directors will determine future dividends, if any, after
consideration of the cash flow and the working capital needs of HEC.
HEP DISTRIBUTIONS
HEP declared a limited partner distribution of $.20 per Unit and a general
partner distribution of $615,000 for the third quarter of 1995, payable on
November 15, 1995. The total of the distributions receivable by HEC is
$746,000, which has been accrued in receivables from affiliates at September 30,
1995.
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>
OIL AND GAS PRICES AND PRODUCTION
(In thousands except for price)
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
1995 1994 1995 1994 <PAGE>
<CAPTION> Oil Gas Oil Gas Oil Gas Oil Gas
(bbl) (mcf) (bbl) (mcf) (bbl) (mcf) (bbl) (mcf)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Average
price $17.80 $1.88 $17.26 $2.00 $17.11 $1.75 $16.29 $2.19
Production 35 449 34 438 97 1,329 95 1,360
</TABLE>
QUARTER ENDED SEPTEMBER 30, 1995 COMPARED TO QUARTER ENDED SEPTEMBER 30, 1994
OIL REVENUE
Oil revenue increased $36,000 during the third quarter of 1995 as compared with
the third quarter of 1994. This increase is comprised of an increase in oil
production from 34,000 barrels in 1994 to 35,000 barrels in 1995 combined with
an increase in oil prices from $17.26 per barrel in 1994 to $17.80 per barrel in
1995. The increase in oil production is due to increased production from
developmental drilling projects in West Texas partially offset by normal
production declines.
GAS REVENUE
Gas revenue decreased $34,000 during the third quarter of 1995 as compared with
the third quarter of 1994 primarily as a result of a decrease in average gas
prices from $2.00 per mcf in 1994 to $1.88 in 1995. The price decrease was
partially offset by an increase in production from 438,000 mcf in 1994 to
449,000 mcf in 1995. The increase in gas production is primarily due to
increased production from developmental drilling projects in West Texas
partially offset by normal production declines and allowable production limits.
PRODUCTION OPERATING EXPENSE
Production operating expense increased $34,000 during the third quarter of 1995
as compared with the third quarter of 1994. The increase is primarily due to
increased maintenance activity during the third quarter of 1995.
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 increased $198,000 during the third
quarter of 1995 as compared to the third quarter of 1994, primarily due to
increased insurance premiums as well as increased allocated internal overhead.
DEPRECIATION, DEPLETION AND AMORTIZATION
Depreciation, depletion and amortization expense decreased $25,000 during the
third quarter of 1995 as compared with the third quarter of 1994. The decrease
is primarily due to lower capitalized costs in 1995.
INTEREST EXPENSE
Interest expense increased $54,000 during the third quarter of 1995 as compared
with the third quarter of 1994 as a result of HEC's borrowings under its line of
credit during the third quarter of 1995.
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 increase of $55,000 during the third
quarter of 1995 as compared with the third quarter of 1994 is due to an increase
in HEP's equity in income of affiliate due to an increase in the affiliates's
oil and gas revenue. The remaining increase is comprised of numerous other
items, none of which are individually significant.
INCOME TAX PROVISION
There was no income tax provision recorded in either 1995 or 1994 due to the
existence of net operating loss carryforwards.
FIRST NINE MONTHS 1995 COMPARED TO FIRST NINE MONTHS 1994
The comparisons for the first nine months of 1995 and the first nine months of
1994 are consistent with those discussed in the third quarter of 1995 compared
to the third quarter of 1994 except for the following:
OIL REVENUE
Oil revenue increased $112,000 during the first nine months of 1995 as compared
with the first nine months of 1994 due to an increase in oil production from
95,000 barrels in 1994 to 97,000 barrels in 1995 combined with an increase in
oil prices from $16.29 per barrel in 1994 to $17.11 per barrel in 1995. The
production increase is due to increased production from developmental drilling
projects in West Texas partially offset by normal production declines.
GAS REVENUE
Gas revenue decreased $645,000 during the first nine months of 1995 as compared
with the same period in 1994 due to a decrease in gas prices from $2.19 per mcf
in 1994 to $1.75 per mcf in 1995 combined with a decrease in production from
1,360,000 mcf in 1994 to 1,329,000 mcf in 1995. The decrease in production is
due to normal production declines and allowable production limits.
PRODUCTION OPERATING EXPENSE
Production operating expense decreased $185,000 during the first nine months of
1995 as compared to the same period during 1994. The decrease is primarily due
to general operating cost reductions in West Texas.
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.
IMPAIRMENT OF INVESTMENT IN PARENT
Impairment of investment in parent of $3,249,000 during the nine months ended
September 30, 1994 represents an other than temporary decline in the fair value
of the Hallwood Group stock held by HEC. The impairment, which was recorded at
June 30, 1994, reflects the difference between the market value of the stock at
June 30, 1994 and HEC's original cost basis.
MISCELLANEOUS INCOME
Miscellaneous income decreased $205,000 during the first nine months of 1995 as
compared with the same period during 1994. The decrease is primarily due to an
increase in HEP's equity in loss of affiliate due to an impairment of oil and
gas properties recorded by HEP's affiliate.
PART II - OTHER INFORMATION<PAGE>
ITEM 1 - LEGAL PROCEEDINGS
Reference is made to Item 8 - Note 11 of Form 10-K for the year ended
December 31, 1994, Item 1 - Note 4 of Form 10-Q for the quarter ended
March 31, 1995, Item 1 - Note 5 of Form 10-Q for the quarter ended
June 30, 1995 and Item 1 - Notes 5 and 6 of this Form 10-Q.
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: November 13, 1995 By: /s/Robert S. Pfeiffer
Robert S. Pfeiffer,
Vice President
(Chief Financial Officer)<PAGE>
<TABLE> <S> <C>
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<LEGEND>
This schedule contains summary financial information extracted from Form 10-Q
for the quarter ended September 30, 1995 for Hallwood Energy Corporation and is
qualified in its entirety by reference to such Form 10-Q.
</LEGEND>
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<NAME> HALLWOOD ENERGY CORPORATION
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