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 September 30, 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 of (I.R.S. Employer
incorporation or organization) Identification Number)
4582 South Ulster Street Parkway
Suite 1700
Denver, Colorado 80237
(Address of principal executive offices) (Zip Code)
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 12, 1996 777,126 shares
Page 1 of 16
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HALLWOOD ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands except Shares)
September 30, December 31,
1996 1995
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $ 879 $ 10
Accounts receivable:
Affiliates 598 372
Trade 77 26
Current assets of affiliate 2,388 2,236
-------- ---------
Total 3,942 2,644
--------- ---------
PROPERTY, PLANT AND EQUIPMENT, at cost Oil and gas properties (full cost
method):
Proved mineral interests 113,319 113,159
Unproved mineral interests 154 82
Other property and equipment 3,780 3,758
--------- ---------
Total 117,253 116,999
Less accumulated depreciation, depletion,
amortization and property impairment (108,312) (107,160)
------- -------
Net Property, Plant and Equipment 8,941 9,839
--------- ---------
OTHER ASSETS
Investment in common stock of parent
(carried at market) 3,781 2,075
Deferred tax asset 311 500
Noncurrent assets of affiliate 1,604 1,407
--------- ---------
Total 5,696 3,982
--------- ---------
TOTAL ASSETS $ 18,579 $ 16,465
======= ========
<FN>
(Continued on the following page)
</FN>
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<CAPTION>
HALLWOOD ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands except Shares)
September 30, December 31,
1996 1995
CURRENT LIABILITIES
<S> <C> <C>
Accounts payable and accrued liabilities $ 189 $ 106
Current portion of long-term debt 300 300
Current liabilities of affiliate 2,394 2,857
-------- --------
Total 2,883 3,263
-------- --------
NONCURRENT LIABILITIES
Long-term debt 600 825
Long-term liabilities of affiliate 4,649 5,366
-------- --------
Total 5,249 6,191
-------- --------
Total Liabilities 8,132 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 (canceled 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 (39,696) (41,584)
Unrealized gain (loss) on investment in common stock
of parent 704 (1,002)
Less cost of treasury stock of 420,995 and 405,995 common
shares at 1996 and 1995, respectively (4,949) (4,791)
-------- --------
Stockholders' Equity - net 10,447 7,011
------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 18,579 $ 16,465
======= =======
<FN>
The accompanying notes are an integral
part of the financial statements.
</FN>
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<CAPTION>
HALLWOOD ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands except per Share data)
For the Three Months Ended
September 30,
1996 1995
REVENUES:
<S> <C> <C>
Oil revenue $ 637 $ 623
Gas revenue 1,021 842
Acquisition fee 287 2
-------- ----------
1,945 1,467
------- -------
EXPENSES:
Production operating expense 356 417
General and administrative 456 384
Depreciation, depletion and amortization 336 456
Interest 104 140
-------- --------
1,252 1,397
------- -------
OTHER INCOME: 54 131
--------- --------
INCOME BEFORE INCOME TAXES 747 201
PROVISION FOR INCOME TAXES:
Current 28
Deferred 31
59
NET INCOME 688 201
PREFERRED STOCK DIVIDENDS 534
NET INCOME (LOSS) FOR COMMON STOCKHOLDERS 688 (333)
======= ========
NET INCOME (LOSS) PER COMMON SHARE $ .89 $ (.74)
========= ========
WEIGHTED AVERAGE COMMON SHARES 777 447
======== ========
<FN>
The accompanying notes are an integral
part of the financial statements.
</FN>
</TABLE>
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<CAPTION>
HALLWOOD ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands except per Share data)
For the Nine Months Ended
September 30,
1996 1995
REVENUES:
<S> <C> <C>
Oil revenue $ 1,982 $ 1,660
Gas revenue 3,260 2,332
Acquisition fee 296 7
------- ---------
5,538 3,999
------ ------
EXPENSES:
Production operating expense 1,088 1,059
General and administrative 890 884
Depreciation, depletion and amortization 1,152 1,297
Impairment of oil and gas properties 464
Interest 358 344
------- -------
3,488 4,048
------ ------
OTHER INCOME 109 136
------- -------
INCOME BEFORE INCOME TAXES 2,159 87
PROVISION FOR INCOME TAXES:
Current 82 92
Deferred 189
-------
271 92
------- --------
NET INCOME (LOSS) 1,888 (5)
PREFERRED STOCK DIVIDENDS 890
NET INCOME (LOSS) FOR COMMON STOCKHOLDERS $ 1,888 $ (895)
====== ======
NET INCOME (LOSS) PER COMMON SHARE $ 2.40 $ (2.04)
======= ======
WEIGHTED AVERAGE COMMON SHARES 785 440
======= =======
<FN>
The accompanying notes are an integral
part of the financial statements.
</FN>
</TABLE>
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<CAPTION>
HALLWOOD ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
For the Nine Months Ended
September 30,
1996 1995
OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss) $ 1,888 $ (5)
Adjustments to reconcile net income (loss) to net cash used in operating
activities:
Depreciation, depletion, amortization and
property impairment 1,152 1,761
Equity in earnings of affiliate (3,438) (2,208)
Amortization of bond discount (24)
Deferred income tax expense 189
-------
Cash used in operations before working
capital changes (209) (476)
Changes in operating assets and liabilities provided (used) cash net of
noncash activity:
Receivables from affiliates (226) (158)
Receivables - trade (51) (9)
Accounts payable and accrued liabilities 83 (5)
-------- ---------
Net cash used in operating activities (403) (648)
------- -------
INVESTING ACTIVITIES:
Additions to property (21) (51)
Property development costs (112)
Distributions received from affiliate 1,943 2,301
Refinance of Spraberry investment (155)
Sale of bonds 1,376
Purchase of common stock of parent (458)
---------- -------
Net cash provided by investing activities 1,655 3,168
------ -------
FINANCING ACTIVITIES:
Payments on long-term debt (225)
Proceeds from long-term debt 1,200
Dividends paid (2,038)
Repurchase of common stock (158) (1,189)
Repurchase of Series D preferred shares (1,042)
--------- -------
Net cash used in financing activities (383) (3,069)
------ -------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 869 (549)
CASH AND CASH EQUIVALENTS:
BEGINNING OF PERIOD 10 668
------- -------
END OF PERIOD $ 879 $ 119
====== =======
<FN>
The accompanying notes are an integral
part of the financial statements.
</FN>
</TABLE>
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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. 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 September 30, 1996,
HEC's parent company, The Hallwood Group Incorporated ("Hallwood Group"), owns
approximately 82% 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 46% 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
approximately 82% 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.
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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
September 30, 1996, the Company has $900,000 outstanding against the credit
line. Borrowings against the credit line bear interest at the bank's prime rate
plus 2% (10.25% at September 30, 1996). Interest is payable monthly, and
principal payments of $75,000 are due quarterly. The credit line is secured by
the Class A 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 3 - REPURCHASE OF COMMON STOCK
In May 1996, HEC purchased 15,000 shares of its common stock from an individual
in a privately negotiated transaction for $10.50 per share.
NOTE 4 - STATEMENT OF CASH FLOWS
Cash paid for interest during the nine months ended September 30, 1996 and 1995
was $73,000 and $34,000, respectively. Cash paid for income taxes during the
nine months ended September 30, 1996 and 1995 was $54,000 and $49,000,
respectively.
NOTE 5 - PROPERTY INTEREST ACQUISITION
On July 1, 1996, HEP and HCRC completed a transaction involving the acquisition
from Fuel Resources Development Co., a wholly owned subsidiary of Public Service
Company of Colorado, and other interest owners of their interests in 38 coal bed
methane wells located in La Plata County, Colorado and Rio Arriba County, New
Mexico. Thirty-four of the wells, estimated to have reserves of 53 BCF, were
assigned to 44 Canyon LLC ("44 Canyon"), a special purpose entity owned by a
large east coast financial institution. The wells qualify for tax credits under
Section 29 of the Internal Revenue Code. Hallwood Petroleum, Inc. ("HPI") will
manage and operate the properties on behalf of 44 Canyon. The $27.8 million
purchase price was funded by 44 Canyon through the sale of a volumetric
production payment to an affiliate of Enron Capital & Trade Resources Corp., a
subsidiary of Enron Corp., the sale of a subordinated production payment and
certain other property interests for $3.45 million to an affiliate of HEP and
HCRC, La Plata Associates, LLC ("LPA") and additional cash contributed by the
owners of 44 Canyon. LPA is owned equally by HEP and HCRC. As a result of the
transaction, HEP expects to add 9.8 BCF of gas to its reserve base, which
represents approximately 52% of its estimated 1996 production.
HEC will receive a 4% economic interest in HEP's interest in LPA in satisfaction
of the acquisition fee payable to HEC. The assignment of this interest will
result in the addition of approximately 400,000 mcf of gas to HEC's direct
reserve base. HEC also received a cash acquisition fee of $284,000 for this
acquisition.
NOTE 6 - LEGAL PROCEEDINGS
In June 1996, HEP and the other parties to the lawsuits styled Lamson
Petroleum Corporation v. Hallwood Petroleum, Inc. et al. settled the lawsuits.
The plaintiffs in the lawsuits claimed they had valid leases covering streets
and roads in the units of the A. L. Boudreaux #1 well, G. S. Boudreaux #1 well,
Paul Castille #1 well, Evangeline Shrine Club #1 well and Duhon #1 well, which
represented approximately .4% to 2.3% of HEP's interest in these properties, and
they were entitled to a portion of the production from the wells dating from
February 1990. In the settlement, HEP and the plaintiffs agreed to cross-convey
interests in certain leases to one another, and HEP agreed to pay the plaintiffs
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$728,000. HEP has not recognized revenue attributable to the contested leases
since January 1993. These revenues plus accrued interest, totaling $506,000, had
been placed in escrow pending the resolution of the lawsuits. HEC's pro rata
share of the excess of the cash paid over the escrowed amounts, is included in
other income (expense) in the accompanying financial statements. The
cross-conveyance of the interests in the leases will result in a decrease in
HEP's reserves of $374,000 in future net revenues, discounted at 10%.
NOTE 7 - SUBSEQUENT EVENT
During October 1996, HEC entered into a Merger Agreement providing for the
merger of HEC into Hallwood Group. On October 15, 1996, Hallwood Group commenced
a tender offer for all the outstanding shares of common stock of HEC at a price
of $19.50 per share. Hallwood Group currently owns approximately 82% of the
outstanding common shares of HEC. The completion of the merger will be
conditioned on the valid tender of a majority of the shares of HEC not currently
held by Hallwood Group.
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, 1996, the Company has $900,000 outstanding against the credit
line. Borrowings against the credit line bear interest at the bank's prime rate
plus 2% (10.25% at September 30, 1996). Interest is payable monthly, and
principal payments of $75,000 are due quarterly. The credit line is secured by
the HEP Class A 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, 1996 are long-term
obligations of affiliate of $4,649,000 which represents HEC's pro rata share of
the long-term obligations of HEP. The long-term obligations of HEP consist
primarily of $26,700,000 borrowed under a line of credit and $8,571,000 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.
Development Projects and Acquisitions
In the first nine months of 1996, HEC through its interest in the Saxon Drilling
Venture, participated in drilling or recompleting fourteen wells in Winkler
County, Texas. Total net cost to HEC is approximately $100,000. Effective April
1, 1996, HEC repaid its share of the loan provided to Hallwood Spraberry
Drilling Company, L.L.C. ("HSD") by an outside third party. The net cost to HEC
was approximately $176,000, and HEC now has direct ownership of an interest of
approximately 2% in the Rocker "b" Ranch properties.
In the second quarter of 1996, HEC repurchased 15,000 shares of its common stock
from an individual in a privately negotiated transaction for $10.50 per share.
HEC had no other material property acquisitions, sales, exploration or
development activity during the first nine months of 1996. A summary of HEP's
significant property transactions follows.
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<PAGE>
Through September 30, 1996, HEP incurred approximately $441,000 for the purchase
of shares of Hallwood Consolidated Resources Corporation ("HCRC") and $9,505,000
for exploration, development and acquisition costs toward the revised 1996
capital budget of $12,700,000. The expenditures were comprised of approximately
$6,838,000 for exploration and development expenditures and approximately
$2,667,000 for property acquisitions. A description of significant exploration
and development projects to date in 1996 follows.
During the second quarter of 1996, HEP purchased 12,965 shares of HCRC for $34
per share. The shares were originally purchased by HCRC in connection with an
odd lot repurchase offer and then were resold to HEP at the price paid by HCRC
for such shares.
HEP continues to devote capital resources to the West Texas Kermit area in 1996.
HEP drilled or participated in the drilling of fourteen wells, thirteen of which
were successful, and participated in four recompletions, three of which were
successful, in the first nine months of 1996, for a total cost of approximately
$1,100,000. The wells in this area are currently producing approximately 700
gross equivalent barrels of oil per day. HEP's interest in these wells averages
27%. HEP plans to drill or recomplete up to nine additional wells by year end.
HEP acquired 106 square miles of three dimensional (3-D) seismic data on the
Cowden Ranch in Crane County, Texas. The prospect will be operated by a major
oil company, and HEP has a 12.5% working interest. HEP's share of costs to date
is $455,000. Seismic interpretation was recently completed, and two exploratory
wells are planned for the fourth quarter of 1996, with additional exploratory
activity to follow in 1997.
HEP acquired 3-D seismic data and related acreage in the Merkel Project Area
which covers 18 square miles in Jones, Taylor and Nolan Counties, Texas.
Expenditures in the first nine months of 1996 totaled $567,000. Thus far, HEP
has participated in drilling five wells on four exploration prospects for a
total cost of $135,000, including one well drilled in late 1995. Four of the
wells are each producing at average rates of 70 gross barrels of oil per day,
two of the wells encountered multiple pay zones but only one zone is currently
producing and one well was unsuccessful. HEP's interest in the wells is 12.5%.
Two wells are planned for the fourth quarter of 1996, and an additional 10
prospects will be tested in 1997 and beyond. An additional 74 square miles of
3-D seismic data, which is presently being interpreted, was acquired in the same
area. HEP's working interest in this area averages 27.5%, and prospect
exploratory drilling will begin in the first quarter of 1997. Preliminary work
indicates as many as 25 wells may be drilled.
HEP 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 $300,000. HEP also drilled an exploratory dry hole in Richland
County, Montana, at a cost of $150,000. HEP completed an Interlake Formation
development well, drilled in the second quarter, at a cost of approximately
$535,000. This well is currently producing at a rate of 130 gross barrels of oil
per day, and HEP's interest is 45%.
HEP incurred approximately $230,000 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 44
equivalent barrels of oil per day. During the first quarter, HEP also acquired
interests in five additional producing leases on the Rocker "b" Ranch for a
total of $93,000. In the second and third quarters of 1996, HEP recompleted five
wells, four of which were successful, and drilled one additional well for a
total cost of $230,000. This activity increased HEP's share of production by 57
equivalent barrels of oil per day. HEP has plans to recomplete at least five
more wells before year end and will consider other work, if the capital is
available. Exploitation in this area is expected to slow toward the end of 1997
as HEP's undeveloped acreage position declines.
In the San Juan Basin area of Colorado, HEP, through an affiliate La Plata
Associates L L C ("LPA"), acquired interests in 34 coal bed methane wells
located in La Plata County, Colorado for $1,734,000. HEP's interest in the wells
is expected to add 9.8 bcf of gas to its reserve base, which represents
approximately 52% of its estimated 1996 production. The acquisition was
completed on July 1, 1996. Seven refracs/recompletions have been completed since
July 1 at a net cost to HEP of approximately $300,000. Numerous other
recompletions and facility projects are planned for the
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remainder of 1996 at an estimated net cost to HEP of $490,000. Gross production
has increased by 2,500 mcf of gas per day as a result of the work done thus far.
Similar activity levels in 1997 are anticipated on these newly acquired
properties. In other parts of the New Mexico portion of the San Juan Basin, HEP
has recompleted three wells, two of which were successful, drilled two wells and
is converting another well to be a disposal well. The total cost for this work
was $497,000, and production has increased by 2,000 mcf of gas per day. HEP's
share of this production is approximately 50%.
HEP participated in a 13 square mile 3-D seismic shoot at the Packsaddle Project
in the Big Horn Basin of Wyoming. The data is now being processed and additional
development and exploration is expected in the area following HEP's previous
discovery. HEP's ownership in the Big Horn Basin continues to increase through a
joint venture created to evaluate a 4,000 mile 2-D Seismic Data Base from which
HEP hopes to create additional drillable prospects.
In September, HEP spent $225,000 for a recompletion of the A. L. Boudreaux well
into a shallower interval of the Bol Mex 3 Formation after the previous
completion in the Bol Mex 3 Formation began to produce water and sand.
Production after the recompletion is currently 22 mmcf per day and 450 barrels
of condensate per day.
Numerous other projects, which are individually less significant have been
completed or are underway in Kansas, Louisiana, Texas and New Mexico, including
participation in five other 3-D seismic data acquisition programs not included
in the above activity.
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. In June 1996, HEP completed the sale of its interests in
the Bethany Longstreet area of Louisiana (approximately 575,000 equivalent
barrels of oil, measured using December 31, 1995 pricing) for approximately
$3,800,000.
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 $510,000 for the third
quarter of 1996, payable on November 15, 1996. The total of the distributions
receivable by HEC is $588,000, which has been accrued in receivables from
affiliates at September 30, 1996.
Cautionary Statement Regarding Forward-Looking Statements
In the interest of providing the Company's stockholders and potential investors
with certain information regarding the Company's future plans and operations,
certain statements set forth in this Form 10-Q relate to management's future
plans and objectives. Such statements are "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended, and in
Section 21E of the Securities Exchange Act of 1934, as amended. Although any
forward-looking statements contained in this Form 10-Q or otherwise expressed by
or on behalf of the Company are, to the knowledge and in the judgment of the
officers and directors of the Company, expected to prove true and to come to
pass, management is not able to predict the future with absolute certainty.
Forward-looking statements involve known and unknown risks and uncertainties
which may cause the Company's actual performance and financial results in future
periods to differ materially from any projection, estimate or forecasted result.
These risks and uncertainties include, among other things, volatility of oil and
gas prices, competition, risks inherent in the Company's oil and gas operations,
the inexact nature of interpretation of seismic and other geological and
geophysical data, imprecision of reserve estimates, the Company's ability to
replace and expand oil and gas reserves, and such other risks and uncertainties
described from time to time in the Company's periodic reports and filings with
the Securities and Exchange Commission. Accordingly, stockholders and potential
investors are cautioned that certain events or circumstances could cause actual
results to differ materially from those projected, estimated or predicted.
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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 For the Nine Months
Ended September 30, Ended September 30,
-------------------- -------------------
1996 1995 1996 1995
----- ----- ----- ----
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 $21.97 $ 2.34 $17.80 $ 1.88 $19.62 $ 2.39 $17.11 $ 1.75
Production 29 436 35 449 101 1,364 97 1,329
</TABLE>
Quarter Ended September 30, 1996 Compared to Quarter Ended September 30, 1995
Oil Revenue
Oil revenue increased $14,000 during the third quarter of 1996 as compared with
the third quarter of 1995. This increase is comprised of an increase in oil
prices from $17.80 per barrel in 1995 to $21.97 per barrel in 1996 partially
offset by a decrease in production from 35,000 barrels in 1995 to 29,000 barrels
in 1996. The decrease in oil production is primarily due to normal production
declines.
Gas Revenue
Gas revenue increased $179,000 during the third quarter of 1996 as compared with
the third quarter of 1995 primarily as a result of an increase in average gas
prices from $1.88 per mcf in 1995 to $2.34 in 1996 partially offset by a
decrease in production from 449,000 mcf in 1995 to 436,000 mcf in 1996. The
decrease in gas production is primarily due to normal production declines.
Acquisition Fee
The acquisition fee earned in 1996 and 1995 relates to property acquisitions
made by HEP. The fee increased during the third quarter of 1996 as compared to
the third quarter of 1995 due to the property interest acquisition described in
Item 1 - Note 5.
Production Operating Expense
Production operating expense decreased $61,000 during the third quarter of 1996
as compared with the third quarter of 1995. The decrease is primarily the
production decrease described above.
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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 $72,000 during the third quarter
of 1996 as compared to the third quarter of 1995, primarily due to an increase
in Directors' and Officers' insurance costs as well as an increase in allocated
internal overhead.
Depreciation, Depletion and Amortization
Depreciation, depletion and amortization expense decreased $120,000 during the
third quarter of 1996 as compared with the third quarter of 1995. The decrease
is primarily due to lower capitalized costs in 1996.
Interest Expense
Interest expense decreased $36,000 during the third quarter of 1996 as compared
with the third quarter of 1995 as a result of lower outstanding debt during
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 $77,000 during the third
quarter of 1996 as compared with the third quarter of 1995 is primarily due to a
decrease in HEP's equity in earnings of affiliate due to an income tax
adjustment during 1995. The remaining decrease is comprised of numerous other
items, none of which are individually significant.
First Nine Months of 1996 Compared to First Nine Months of 1995
The comparisons for the first nine months of 1996 and the first nine months of
1995 are consistent with those discussed in the third quarter of 1996 compared
to the third quarter of 1995 except for the following:
Oil Revenue
Oil revenue increased $322,000 during the first nine months of 1996 as compared
with the first nine months of 1995 due to an increase in oil prices from $17.11
per barrel in 1995 to $19.62 per barrel in 1996 combined with an increase in oil
production from 97,000 barrels in 1995 to 101,000 barrels in 1996. The
production increase 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 $928,000 during the first nine months of 1996 as compared
with the same period in 1995 due to an increase in gas prices from $1.75 per mcf
in 1995 to $2.39 in 1996 combined with an increase in production from 1,329,000
mcf in 1995 to 1,364,000 mcf in 1996. The increase in production is 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 $29,000 during the first nine months of
1996 as compared with the first nine months of 1995 primarily due to increased
production taxes and operating expenses associated with the increase in
production discussed above.
-13-
<PAGE>
Impairment of Oil and Gas Properties
Impairment of oil and gas properties for the nine months ended September 30,
1995, represents HEC's pro rata share of the write-off of HEP's Indonesian
operations.
Interest Expense
Interest expense increased $14,000 during the first nine months of 1996 as
compared with the first nine months of 1995 as HEC had outstanding borrowings
for nine months in 1996 and for five months in 1995.
-14-
<PAGE>
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, and Item 1 - Note 4 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.
-15-
<PAGE>
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 12 , 1996 By: /s/Robert S. Pfeiffer
------------------------ ----------------------
Robert S. Pfeiffer, Vice President
(Chief Financial Officer)
Document: P:\DOC\HECQ1.DOC
-16-
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Form 10-Q
for the quarter ended September 30, 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
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<S> <C>
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<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-END> Sep-30-1996
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