<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-8979
HONDO OIL & GAS COMPANY
(Exact name of registrant as specified in its charter)
Delaware 95-1998768
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
410 East College Blvd, Roswell, New Mexico 88201
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (505) 625-8700
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 [ ]
The registrant has one class of common stock outstanding. As of July 26,
1995, 13,309,456 shares of registrant's $1 par value common stock were
outstanding.
1
HONDO OIL & GAS COMPANY
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE NINE MONTHS ENDED JUNE 30, 1995
PAGE
----
PART I - FINANCIAL INFORMATION
ITEM 1 Financial Statements
Consolidated Balance Sheets as of
June 30, 1995 and September 30, 1994 3
Consolidated Statements of Operations for the
three months ended June 30, 1995 and 1994 4
Consolidated Statements of Operations for the
nine months ended June 30, 1995 and 1994 5
Consolidated Statements of Cash Flows for the
nine months ended June 30, 1995 and 1994 6
Notes to Consolidated Financial Statements 7
ITEM 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
PART II - OTHER INFORMATION
ITEM 6 Exhibits and Reports on Form 8-K 20
SIGNATURES 20
2
PART I
Item 1 FINANCIAL STATEMENTS
HONDO OIL & GAS COMPANY
CONSOLIDATED BALANCE SHEETS
(In Thousands Except Share Information)
June 30, September 30,
1995 1994
------------- -------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $155 $1,141
Accounts receivable (Note 2) 439 5,477
Prepaid expenses and other 72 33
------------- -------------
Total current assets 666 6,651
Properties, net 11,385 10,855
Net assets of discontinued
operations (Note 3) 6,869 6,851
Other assets 668 551
------------- -------------
$19,588 $24,908
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $315 $196
Current portion of long-term debt 235 220
Accrued expenses and other (Note 4) 2,349 3,822
------------- -------------
Total current liabilities 2,899 4,238
Long-term debt, including $78,284 and
$77,755, respectively, payable to a
related party (Note 2) 82,205 81,888
Other liabilities, including $1,179 and
$2,354, respectively, payable to a related
party (Note 5) 3,873 5,463
------------- -------------
88,977 91,589
Shareholders' equity (deficit):
Common stock, $1 par value, 30,000,000
shares authorized; shares issued and
outstanding: 13,229,256 and 13,032,276,
respectively 13,229 13,032
Additional paid-in capital 46,127 43,972
Accumulated deficit (128,745) (123,685)
------------- -------------
(69,389) (66,681)
------------- -------------
$19,588 $24,908
============= =============
The accompanying notes are an integral part of these financial statements.
3
HONDO OIL & GAS COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In Thousands Except Share and Per Share Data)
For the three months ended
June 30,
-----------------------------
1995 1994
------------- -------------
REVENUES
Sales and operating revenue $2 $12
Overhead reimbursement and other income 2 16
------------- -------------
4 28
------------- -------------
COSTS AND EXPENSES
Operating costs (recoveries) (4) 77
Depreciation and amortization 42 38
General and administrative 375 545
Interest expense, all to a related party 1,179 1,174
Loss on sale of assets -- 5
------------- -------------
1,592 1,839
------------- -------------
Loss from continuing operations
before income taxes (1,588) (1,811)
Income tax expense -- --
------------- -------------
Loss from continuing operations (1,588) (1,811)
Loss from discontinued operations (Note 3) -- (1,400)
------------- -------------
Net Loss ($1,588) ($3,211)
============= =============
Loss per share:
Continuing operations ($0.12) ($0.14)
Discontinued operations -- (0.11)
------------- -------------
Loss per share ($0.12) ($0.25)
============= =============
Weighted average common shares outstanding 13,229,256 13,006,892
The accompanying notes are an integral part of these financial statements.
4
HONDO OIL & GAS COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In Thousands Except Share and Per Share Data)
For the nine months ended
June 30,
-----------------------------
1995 1994
------------- -------------
REVENUES
Sales and operating revenue $6 $367
Overhead reimbursement and other income 8 343
------------- -------------
14 710
------------- -------------
COSTS AND EXPENSES
Operating costs 2 518
Depreciation and amortization 125 182
General and administrative 1,176 1,725
Interest expense, all to a related party 3,471 3,424
Loss on sale of assets -- 1,240
------------- -------------
4,774 7,089
------------- -------------
Loss from continuing operations
before income taxes (4,760) (6,379)
Income tax expense -- --
------------- -------------
Loss from continuing operations (4,760) (6,379)
Loss from discontinued operations (Note 3) (300) (1,400)
------------- -------------
Net Loss ($5,060) ($7,779)
============= =============
Loss per share:
Continuing operations ($0.37) ($0.49)
Discontinued operations (0.02) (0.11)
------------- -------------
Loss per share ($0.39) ($0.60)
============= =============
Weighted average common shares outstanding 13,102,936 13,006,892
The accompanying notes are an integral part of these financial statements.
5
<TABLE>
<CAPTION>
HONDO OIL & GAS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In Thousands)
For the nine months ended
June 30,
-----------------------------
1995 1994
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Loss from continuing operations ($4,760) ($6,379)
Adjustments to reconcile loss from continuing operations
to net cash used by continuing operations:
Depreciation and amortization 125 182
Loss on sale of assets -- 1,240
Accrued interest added to long-term debt 2,377 2,272
Changes in operating assets and liabilities:
Decrease (increase) in:
Accounts receivable 200 1,731
Inventory -- 633
Prepaid expenses and other (39) 19
Other assets (209) 72
Increase (decrease) in:
Accounts payable 119 (1,465)
Accrued expenses and other 45 (755)
Other liabilities 702 1,691
------------- -------------
Net cash used by continuing operations (1,440) (759)
Net cash used by discontinued operations (343) (404)
------------- -------------
Net cash used by operating activities (1,783) (1,163)
------------- -------------
Cash flows from investing activities:
Proceeds from sale of assets 4,804 1,467
Capital expenditures (2,021) (857)
------------- -------------
Net cash provided by investing activities 2,783 610
------------- -------------
Cash flows from financing activities:
Proceeds from long-term borrowings 3,175 1,000
Principal payments on long-term debt (5,220) (210)
Issuance of common stock 59 --
------------- -------------
Net cash provided (used) by financing activities (1,986) 790
------------- -------------
Net increase (decrease) in cash and cash equivalents (986) 237
Cash and cash equivalents at the beginning of the period 1,141 601
------------- -------------
Cash and cash equivalents at the end of the period $155 $838
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995
(All Dollar Amounts in Thousands)
1) Summary of Significant Accounting Policies
------------------------------------------
(a) Basis of Consolidation and Presentation
---------------------------------------
The consolidated financial statements of Hondo Oil & Gas Company
(hereinafter referred to as "Hondo Oil" or "the Company") include the
accounts of all subsidiaries, all of which are wholly-owned. All
significant intercompany transactions have been eliminated. The
Hondo Company owns 77% of Hondo Oil's common stock. Lonrho Plc, an
English company, owns 50% of The Hondo Company.
The accompanying consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q
and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. There has
not been any change in the Company's significant accounting policies
for the periods presented. There has not been any significant devel-
opments or changes in contingent liabilities and commitments since
September 30, 1994, including the contingency described in Note 7.
In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have
been included. The results for these interim periods are not
necessarily indicative of results for the entire year. These
statements should be read in conjunction with the financial
statements and notes thereto included in the Company's Form 10-K for
the fiscal year ended September 30, 1994.
(b) Earnings Per Share
------------------
Net income (loss) per share amounts are computed using the weighted
average number of common shares and dilutive common equivalent shares
outstanding. The effect of common stock equivalents is not included
for periods with losses. Fully diluted per share amounts are the
same as primary per share amounts and, accordingly, are not presented.
(c) Income Taxes
------------
As required by the provisions of SFAS No. 109, the Company changed
its method of accounting for income taxes from the provisions of SFAS
No. 96, "Accounting For Income Taxes", to the provisions of SFAS No.
109, "Accounting For Income Taxes", effective October 1, 1993. The
change in accounting method has had no material effect on the
Company's financial position, results of operations, or components of
income tax expense for the current or previous periods. Accordingly,
no cumulative effect of a change in accounting principle has been
recognized and the footnote disclosures required by SFAS No. 109 have
been omitted.
7
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995
(All Dollar Amounts in Thousands)
1) Summary of Significant Accounting Policies (continued)
------------------------------------------------------
(c) Income Taxes (continued)
------------------------
Under Statement 109, the liability method is used in accounting for
income taxes. Under this method, deferred tax assets and liabilities
are determined based on reversals of differences between financial
reporting and tax bases of assets and liabilities and are measured
using the enacted effective tax rates and laws that will be in effect
when the differences are expected to reverse.
The Company provides for income taxes in interim periods based on
estimated annual effective rates. The Company records current income
tax expense to the extent that federal, state or alternative minimum
tax is projected to be owed. The Company has investment tax credit
carryforwards of $3,665 which are accounted for by the flow-through
method.
2) Accounts Receivable and Long-Term Debt
--------------------------------------
Under the terms of a Farmout Agreement with Amoco Colombia, Amoco
Colombia paid the Company $5,000 (less withholding taxes of $200) in
October 1994. This amount was included in accounts receivable by the
Company at September 30, 1994. Also in October 1994, the Company
paid $5,000 to Lonrho Plc to reduce the balance of a loan from Lonrho
Plc. At the same time, Lonrho Plc made available $5,000 in the form
of a facility loan that may be drawn as needed by the Company. The
Company has drawn $3,175 as of June 30, 1995.
The balances of the Company's long-term debts to Lonrho Plc were also
increased by the addition of accrued interest of $2,354 on October 1,
1994. See Note 5.
3) Discontinued Operations
-----------------------
Effective March 31 and September 4, 1991, respectively, the Company
adopted plans of disposal for its refining and marketing and real
estate segments. On October 1, 1993, the Company completed a sale of
substantially all of its refining and marketing segment. Further
proceeds are to be received when certain components of the refinery
equipment are sold by the buyer. See Note 7.
8
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995
(All Dollar Amounts in Thousands)
3) Discontinued Operations (continued)
-----------------------------------
Operating losses of discontinued operations for the quarters ended
June 30, 1995 and 1994 were $110 and $155, respectively.
Corresponding amounts for the nine-month periods were $318 and $401,
respectively, and were charged against loss provisions established in
earlier periods. The Company recorded discontinued loss provisions
of $300 for the quarter ended March 31, 1995 and $1,400 for the
quarter ended June 30, 1994. No other loss provisions have been
recorded in the subject periods.
Interest expense included in the losses from discontinued operations
pertains only to debt directly attributable to the discontinued
operations and is charged against loss provisions established in
earlier periods. The operating losses from discontinued operations
for the quarters ended June 30, 1995 and 1994 include interest
expense of $68 and $71, respectively. Corresponding amounts for the
nine-month periods ended June 30, 1995 and 1994 were $205 and $213,
respectively.
The balance of net assets of discontinued operations is comprised
solely of two parcels of land in the real estate segment. Changes in
this balance for the nine months ended June 30, 1995 are as follows:
Balance as of September 30, 1994 $6,851
Valuation provisions recorded (300)
Valuation provisions used 318
-------------
Balance at June 30, 1995 (unaudited) $6,869
=============
4) Accrued Expenses
----------------
Accrued expenses consist of the following:
June 30, September 30,
1995 1994
------------- -------------
(Unaudited)
Drilling costs (a) -- $2,000
Tier I Development costs (Note 8c) $541 --
Refining and marketing costs (Note 7) 1,486 1,544
Other 322 278
------------- -------------
$2,349 $3,822
============= =============
(a) Under the terms of a Farmout Agreement with Amoco Colombia,
the Company was obligated to pay $2,000 (approximately 10%) of
the costs to drill the Opon No. 4 well in Colombia. Drilling
commenced in February 1995 and the Company paid its $2,000
obligation in April 1995.
9
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995
(All Dollar Amounts in Thousands)
5) Other Liabilities
-----------------
In accordance with the terms of the Company's debts to Lonrho Plc, if
the Company does not have cash to pay interest, accrued interest is
either added to the outstanding principal or paid by issuance of the
Company's common stock on the interest due date, at the option of
Lonrho Plc. Accrued interest of $2,354 for the six-month period
ended September 30, 1994 was added to the outstanding principal
balances on October 1, 1994. Accrued interest of $2,292 for the
six-month period ended March 31, 1995 was paid by the issuance of
189,080 shares of common stock in April 1995.
Other liabilities consist of the following:
June 30, September 30,
1995 1994
------------- -------------
(Unaudited)
Interest payable to Lonrho Plc $1,179 $2,354
City of Long Beach 1,534 1,534
Other 1,160 1,575
------------- -------------
$3,873 $5,463
============= =============
6) Cash Flow Information
---------------------
Cash interest expense paid, all of which arises from discontinued
operations, was $210 and $224 for the nine months ended June 30, 1995
and 1994, respectively.
7) Contingencies
-------------
In the agreement for the sale of the Fletcher refinery, the Company
indemnified the buyer as to liabilities in excess of $300 for certain
federal and state excise taxes arising from periods prior to the
sale. Fletcher notified the Company in July 1994 that an audit for
California Motor Vehicle Fuels Tax was underway and a preliminary
review by present Fletcher employees indicated that a significant
liability might exist. The Company retained a consultant to evaluate
the contingent liability. In September 1994, the Company accrued
$1,400 as a result of the consultant's evaluation. The State of
California's audit is still in process and, when concluded, could
result in a liability different from the amount accrued.
10
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995
(All Dollar Amounts in Thousands)
8) Subsequent Events
-----------------
(a) Purchase of an Additional Interest in the Opon Contract
-------------------------------------------------------
As more fully described in the Company's 1994 Annual Report on Form
10-K, the Company owns a 30% interest in the Opon Association
Contract, an exploration and exploitation contract covering lands in
the Middle Magdalena Valley of Colombia. Currently, the parties to
the Opon Contract include Hondo Magdalena Oil & Gas Limited ("Hondo
Magdalena")(a wholly-owned subsidiary of Hondo Oil & Gas Company),
Amoco Colombia Petroleum Company ("Amoco Colombia"), and Opon
Development Company ("ODC"). The Colombian national oil company,
Ecopetrol, has the right to acquire a 50% interest when commerciality
is declared and will reimburse the associate parties for 50% of the
direct exploration costs.
In July 1995, the Company executed an agreement for the purchase of
an additional 0.88875% interest in the Opon Association Contract from
a party for whom ODC holds record title for a price of $888,750,
payable with not greater than 65,000 shares of the Company's common
stock. The number of shares to be issued to the beneficial owner is
dependent on the market price of the common stock at closing. The
transaction is contingent upon registration and listing of the common
shares to be issued. If the contingency has not been satisfied by
October 4, 1995, the agreement will terminate. The transaction is
also contingent upon obtaining a waiver from Amoco Colombia of any
preferential rights it holds under the Farmout Agreement.
(b) Memorandum of Understanding
---------------------------
In July 1995, Hondo Magdalena, Amoco Colombia, ODC, and Ecopetrol
executed a Memorandum of Understanding ("MOU") for the construction
of a pipeline and the sale of natural gas from the Opon Contract
area. See "General Discussion, Opon Exploration" in Management's
Discussion and Analysis of Financial Condition and Results of
Operations in Item 2.
(c) Interim Funding Agreement
-------------------------
As a result of execution of the MOU described above, another
agreement among Amoco Colombia, Hondo Magdalena, and ODC became
effective in July 1995. The Funding Agreement for Tier I Development
Project (the "Funding Agreement") provides for interim financing of
costs associated with the construction of a pipeline from the Opon
Contract area and certain other costs related to the Opon Contract.
See "Liquidity and Capital Resources" in Management's Discussion and
Analysis of Financial Condition and Results of Operations in Item 2.
When the Funding Agreement became effective, Hondo Magdalena became
obligated for its share of subject costs since October 1, 1994.
Through June 30, 1995, the Company has accrued $541 for Tier I
Development costs.
11
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995
(All Dollar Amounts in Thousands)
8) Subsequent Events (continued)
-----------------------------
(d) Exercise of Stock Options
-------------------------
Stock options for 80,200 shares of the Company's common stock held
by former officers and employees of the Company have been exercised
subsequent to June 30, 1995. These exercises have resulted in
proceeds to the Company of $1,461 through July 26, 1995.
12
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL DISCUSSION
The Company's principal asset is its interest in the Opon Association
Contract (the "Opon Contract"), an exploration concession for an area in
the Middle Magdalena Valley in Colombia, South America. No revenues are
currently being generated and none are expected until the spring of 1996
at the earliest.
Opon Exploration
----------------
Hondo Magdalena Oil & Gas Limited ("Hondo Magdalena"), a wholly-owned
subsidiary, became involved in the Opon Contract through a farmout
agreement with Opon Development Company ("ODC") in 1991. In August
1993, Hondo Magdalena and ODC entered into a Farmout Agreement under
which Amoco Colombia Petroleum Company ("Amoco Colombia") has earned a
participating interest in the Opon Contract. Amoco Colombia, Hondo
Magdalena and ODC presently have interests of 60%, 30% and 10%,
respectively. Empresa Colombiana de Petroleos ("Ecopetrol"), the
Colombian national oil company, has the right to acquire a 50% interest
when commerciality is declared and will reimburse the associate parties
for 50% of the direct exploration costs. As of June 30, 1995, Hondo
Magdalena has accumulated approximately $18.0 million in connection with
exploration of the Opon Contract area. Of this amount management
estimates that from $1.0 million to $7.2 million would be recoverable as
direct exploration costs after a declaration of commerciality. These
amounts would be recovered out of Ecopetrol's share of production.
Amoco Colombia assumed the role of operator from Hondo Magdalena on
March 1, 1994.
On July 21, 1995, Hondo Magdalena, ODC and Alliance Petroleum
International Co. ("Alliance") entered into a Purchase and Sale
Agreement under which Hondo Magdalena will acquire an additional
0.88875% interest in the Opon Contract. The interest is held by ODC as
nominee for Alliance. The sales price is $888,750 payable to Alliance
in shares of newly issued common stock of the Company. The number of
shares will be determined by the market price of the shares on the
American Stock Exchange at closing. However, no more than 65,000 shares
of common stock will be issued as consideration in the transaction.
Closing of the transaction is contingent upon effectiveness of a
registration statement for the shares and approval by the American Stock
Exchange of an Additional Listing Application. If this contingency has
not been satisfied by October 4, 1995, the agreement will terminate.
The closing is also contingent upon obtaining a waiver from Amoco
Colombia of any preferential rights under the Farmout Agreement.
In September 1994, Amoco Colombia and Hondo Magdalena announced the test
results of the Opon No. 3 well. The well tested at a rate of 45 million
cubic feet of natural gas and 2,000 barrels of condensate daily through
a 42/64-inch opening at the surface with 6,000 pounds-per-square-inch
flowing tubing pressure. The well was drilled to a depth of 12,710 feet
13
and produced from 1,118 feet of perforations over the interval from
10,018 feet to 12,348 feet within the La Paz formation. Downhole
restrictions prevented the well from testing at higher rates. Although
a significant amount of geologic information was obtained from the
drilling of the Opon No. 3 well, no core samples were taken and it is
not yet possible to accurately determine the porosities of the
productive intervals in the La Paz formation. Also, there is not yet
enough information to assess the quantity of reserves related to the La
Paz formation, including any hydrocarbons that may be present outside of
the area of current drilling. Additional seismic work is planned to
assess potential prospects in other portions of the Opon Contract area,
including areas where past theoretical interpretations have suggested
the possibility of the presence of a "hanging wall" section of the La
Paz formation. Additional drilling would be required to confirm if
hydrocarbons are present in these areas.
Amoco Colombia will pay all but $2.0 million of Hondo Magdalena's costs
related to the sixth-year obligations under the Opon Contract, a La Paz
formation well that commenced drilling on February 21, 1995. The well
has been drilled to its total depth of 12,800 feet. Completion and
testing of the Opon No. 4 well are expected to occur in August 1995.
As more fully described in the Company's 1994 Annual Report on Form
10-K, the Opon Contract provides that the Contract area will be reduced
by 50% at the end of the exploration period, July 13, 1995. Two more
acreage relinquishments are scheduled in the future at the end of two
successive two-year periods. Ecopetrol has verbally informed Amoco
Colombia that it will defer the 50% acreage relinquishment in July 1995.
Instead, the Contract area will be reduced by 75% (as opposed to 25%) in
July 1997.
On July 26, 1995, Hondo Magdalena, ODC, Amoco Colombia and Ecopetrol
executed a Memorandum of Understanding ("MOU") for the construction of a
pipeline and the sale of natural gas from the Opon Contract area. The
MOU provides that the parties will construct a 16 inch pipeline
approximately 88 kilometers in length from the Opon Contract area to
Ecopetrol's gas processing plant at El Centro, and from there to
Ecopetrol's refinery at Barrancabermeja. The pipeline is estimated to
cost $56.5 million. Preliminary work for the pipeline began in late
1994, and an order for pipe has been placed. Hondo Magdalena, ODC and
Amoco Colombia will each pay their respective share of the costs
incurred prior to July 1, 1995, up to a maximum of 10% of the total
pipeline costs. Ecopetrol will pay in cash its share of costs for the
pipeline incurred after July 1, 1995, if and when the field is declared
commercial (anticipated at the completion of the Opon Well No. 4,
assuming that the results are successful). After commerciality, the
remainder of Ecopetrol's share of costs will be recovered out of
production. Hondo Magdalena, ODC and Amoco Colombia have entered into
an agreement that provides for an interim financing arrangement for
Hondo Magdalena's share of the pipeline costs. See Note 8 to the
Consolidated Financial Statements in Item 1 and Liquidity and Capital
Resources, below. The investment in pipeline costs will be recovered
through a pipeline tariff that will include a 13.2% rate of return
(after Colombian taxes) on the investment. In the MOU, Ecopetrol agreed
to construct improvements at its El Centro gas processing plant to
14
handle incremental production from the Opon Contract area. Ecopetrol
will recover its investment through a gas processing fee that will
include a 13.2% rate of return (after Colombian taxes). The parties
agreed in the MOU to negotiate a contract for gas processing.
The MOU also provides that the parties will negotiate a gas sales
contract under which Ecopetrol will purchase from the Opon Contract
parties, on a take-or-pay basis, 80 million cubic feet of natural gas
per day for the first three years after production begins, and 40
million cubic feet per day for the subsequent twelve years. The price
for the natural gas will be determined semi-annually by a formula based
upon the average price received by Ecopetrol for exported fuel oil
during the prior two six-month periods. The formula, as of July 1,
1995, yields a price of US$1.17 per million British Thermal Units. If
the Opon No. 4 well is not successful, the parties have certain options
with regard to the construction of the pipeline.
With completion of the Opon No. 3 well, which discovered potentially
significant reserves of natural gas and condensate, the first obstacle
in securing the Company's future was overcome. Execution of the MOU and
the interim Funding Agreement described in Liquidity and Capital
Resources below are additional milestones in the Company's return to
financial health. However, a number of activities remain to be
successfully completed, including: timely and successful results of the
Opon No. 4 well; assessing the size of the hydrocarbon resources
discovered; and carrying out further exploration and development
activities. Most of these activities will require additional capital
which the Company does not have at present. See Liquidity and Capital
Resources, below.
Domestic Activities
-------------------
The Company sold substantially all of its U.S. oil and gas assets in
June 1992. During the subsequent three years, the Company has
continually reduced the scope of its domestic operations. The Company
now has three professional and two support employees and has no
significant domestic oil and gas properties or owned office facilities.
Management believes the Company's overhead costs have been reduced to
the minimum level that will allow the efficient administration of its
continuing business.
See Liquidity and Capital Resources for a description of changes in the
terms and amounts of the Company's long-term debt occurring in fiscal
1995.
Discontinued Operations
-----------------------
The Company has completed the disposal of its discontinued refining and
marketing assets. Further proceeds, currently estimated at $0.4
million, are to be received when certain components of the refinery
equipment are sold by the buyer. In the agreement for the sale of the
15
Fletcher refinery, the Company indemnified the buyer as to liabilities
in excess of $0.3 million for certain federal and state excise taxes
arising from periods prior to the sale. In September 1994, the Company
accrued a contingent liability of $1.4 million for the indemnification
because of the preliminary results of an audit for California Motor
Vehicle Fuels Tax. The audit, when concluded could result in a
liability different from the amount accrued. See Liquidity and Capital
Resources, below.
Included in the Company's discontinued real estate operations are two
parcels of real estate in California: the 11 acre Via Verde Bluffs
property in the City of San Dimas and the 105 acre Valley Gateway
property in the City of Santa Clarita. Management began an effort to
sell these properties in 1991. In 1993, the Company suspended a
development plan for the Valley Gateway property, a former refinery
site, due to the Company's limited cash resources and poor market
conditions in California. As described in Item 1 of the Company's 1994
Annual Report on Form 10-K, the Company estimates that $2.0 million
would be incurred in completing existing environmental remediation plans
for the Valley Gateway property. Management intends to sell the
property without incurring these costs by reducing the purchase price.
The Company listed the Valley Gateway property with a broker during
1994. The Company has had several inquiries, but no offers have been
received.
Other
-----
As more fully described in Item 5 of the Company's 1994 Annual Report on
Form 10-K, the Company does not fully meet all of the guidelines of the
American Stock Exchange for continued listing of its shares because of
continuing losses and decreases in shareholders' equity. Management has
kept the American Stock Exchange fully informed regarding the Company's
present status and future plans. Although the Company does not or may
not meet all of the guidelines, to date, the American Stock Exchange has
chosen to allow the Company's shares to remain listed. However, no
assurances can be given that the Company's shares will remain listed on
the Exchange in the future.
RESULTS OF OPERATIONS
The Company sold substantially all of its domestic oil and gas
operations in June 1992 and has continued to reduce the scope of its
domestic operations since that time. As a result, historical results of
continuing operations (primarily domestic in nature) are not indicative
of the Company's expected future operating results (primarily foreign in
nature).
Quarters ended June 30, 1995 and 1994
--------------------------------------
Results of continuing operations for the quarter ended June 30, 1995
amounted to a net loss of $1.6 million, or 12 cents per share. The
16
Company reported a net loss from continuing operations of $1.8 million,
or 14 cents per share, for the quarter ended June 30, 1994. Results for
the quarter ended June 30, 1994 also included a discontinued loss
provision of $1.4 million, or 11 cents per share.
The decrease in general and administrative expense of $0.2 million
between the quarters arises primarily from reductions in the number of
employees and insurance costs.
Operating losses of discontinued operations, which are charged against
loss provisions established in earlier periods, amounted to $0.1 million
and $0.2 million for the quarters ended June 30, 1995 and 1994,
respectively.
Nine months ended June 30, 1995 and 1994
----------------------------------------
Results of continuing operations for the nine months ended June 30, 1995
amounted to a net loss of $4.8 million, or 37 cents per share. The
Company reported a net loss from continuing operations of $6.4 million,
or 49 cents per share, for the nine months ended June 30, 1994. Results
for the nine month periods ended June 30, 1995 and 1994 also included
discontinued loss provisions of $0.3 million, or 2 cents per share, and
$1.4 million, or 11 cents per share, respectively.
Significant variances in the components of results of operations between
the nine-month periods ended June 30, 1995 and 1994 result primarily
from non-recurring transactions occurring in the nine months ended June
30, 1994, including the following:
- Sales and operating revenue includes recoupment of $0.3 million
in oil and gas revenues from a single payor arising from periods
prior to the asset sale in June 1992.
- Loss on sale of assets includes $0.2 million from the sale of the
last significant oil and gas asset not included in the June 1992
asset sale and $0.9 million from the sale of the Company's office
building and certain furniture and equipment in Roswell, New
Mexico.
- Overhead reimbursement and other income includes $0.3 million for
services as operator of the Opon Association Contract.
- Operating costs include $0.4 million arising from a pipe
inventory obsolescence charge.
The decrease in general and administrative expense of $0.5 million
between the periods arises primarily from reductions in the number of
employees and insurance costs. General and administrative expense for
the nine months ended June 30, 1995 also includes a one time charge of
$0.1 million for compensation expense arising from stock options granted
to a former officer.
Operating losses of discontinued operations, which are charged against
loss provisions established in earlier periods, amounted to $0.3 million
17
and $0.4 million for the nine month periods ended June 30, 1995 and
1994, respectively. An additional loss provision of $0.3 million was
recorded in March 1995 due to the extended holding periods of the
subject properties. An additional loss provision of $1.4 million was
recorded in June 1994 due to local market conditions and sales
negotiations in process at that time.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended June 30, 1995, cash inflows of $4.8
million, $3.2 million, and $0.1 million arose from the sale of assets,
borrowings from Lonrho Plc under existing loan agreements, and issuance
of common stock as a result of the exercise of stock options,
respectively. The Company utilized cash of $1.4 million and $0.3
million to finance continuing and discontinued operations, respectively,
$2.0 million for capital expenditures, $5.0 million to reduce the
balance of loans from Lonrho Plc (see below), and made scheduled debt
repayments of $0.2 million. At June 30, 1995, the Company had cash
balances of $0.2 million. The Company has received $1.5 million
subsequent to June 30, 1995 from the exercise of stock options held by
former officers and employees of the Company.
In October 1994, the Company received $4.8 million, net of withholding
taxes, from Amoco Colombia in accordance with the Farmout Agreement.
Also in October 1994, the Company paid $5.0 million to Lonrho Plc to
reduce the balance of outstanding loans from Lonrho Plc, and future
interest expense. At the same time, Lonrho Plc made available $5.0
million in the form of a facility loan that may be drawn as needed by
the Company. This facility loan was used in April 1995 to fund Hondo
Magdalena's $2.0 million contribution to the costs of drilling the Opon
No. 4 well, and will be used to satisfy any liability which may
ultimately arise from the state excise tax audit described above, and to
finance other business activities. As of June 30, 1995, the Company had
drawn $3.2 million of the facility loan.
In November 1994, the Company obtained extensions of the maturity of its
debts to Lonrho Plc. The maturity of all loans from Lonrho Plc has been
extended from 1995 to not earlier than October 1, 1996. Approximately
$49 million of the Company's long-term debt becomes due in fiscal year
1997 under the revised terms. At present, the Company does not have
funds to meet these obligations, or subsequent long-term debt
obligations. Management believes that the Company will be able to
repay, refinance, or restructure these amounts if and when it
establishes sufficient proven reserves and production at the Opon
project.
On May 5, 1995, Hondo Magdalena, ODC and Amoco Colombia entered into a
Funding Agreement for Tier I Development Project costs (the "Funding
Agreement") for the interim financing of costs associated with the
construction of a pipeline from the Opon Contract area (see Note 8 to
the Consolidated Financial Statements in Item 1 and General Discussion,
Opon Exploration, above) and certain other costs related to the Opon
Contract. The Funding Agreement became effective on July 26, 1995 with
the execution of the MOU. Hondo Magdalena may finance its share of the
costs (including overhead) for the pipeline and an approved geological
18
and geophysical work program for up to 365 days after the date that
production from the Opon Contract area begins. The Funding Agreement
provides that Hondo Magdalena may repay the amounts financed from prior
to the date of first production until 365 days thereafter, along with an
equity premium computed on a 22% annualized interest rate. The equity
premium will be computed monthly on Hondo Magdalena's share of
expenditures (including any amounts to be later recouped from Ecopetrol
after commerciality). Alternatively, from the date of first production
until 90 days thereafter, Hondo Magdalena may elect to repay 125% of its
share (excluding any amounts to be later recouped from Ecopetrol after
commerciality) of the total costs accumulated up to the date of
repayment. If the financed amounts are not repaid within 365 days after
the date of first production, an additional penalty of 100% of the
amount then due would be recovered out of Hondo Magdalena's revenues.
Hondo Magdalena's revenues from production of the first 80 million cubic
feet of natural gas and corresponding condensate and natural gas liquids
are pledged to secure its obligations under the Funding Agreement.
Based upon the Company's budget and current projections, existing cash,
available facilities and the newly completed interim Funding Agreement
are expected to be sufficient to finance the Company's capital
expenditure obligations for the Opon Contract, and other business
activities, during fiscal 1995. However, subsequent to the completion
and testing of the Opon No. 4 well (estimated to occur in August 1995),
significant additional permanent financing will be required for capital
expenditures for facilities for processing and transporting the
production, operator's overhead costs, further exploration and
development activities, and other business activities. Cash from
operations is not expected to be a source of funds until the Opon
Project begins commercial production.
Management has held preliminary discussions with a number of lenders
regarding financing of the Company's future obligations for the Opon
project. The Company's management believes that, subject to successful
completion of the Opon No. 4 well, the elements to support permanent
long-term debt or equity funds should be in place.
The Company believes that the Opon Project has significant potential to
be developed in conjunction with Colombia's planned natural gas
transmission network and that the Company's future revenues will be
derived from this source. A number of challenges remain, the most
important of which is obtaining permanent financing, before the
Company's long-term future can be secure. There can be no assurance
that the Opon Project will be successfully developed or that additional
debt or equity funds will become available in the future.
19
PART II
Item 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulations S-K are set forth in
the Exhibit Index below.
(b) No reports on Form 8-K were filed during the quarter ended June
30, 1995.
SIGNATURES
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.
HONDO OIL & GAS COMPANY
(Registrant)
Date: July 28, 1995 /s/ Stanton J. Urquhart
______________ _______________________
Stanton J. Urquhart
Vice President and
Controller
The above officer of the registrant has signed this report as its duly
authorized representative and as its chief accounting officer.
EXHIBIT INDEX
Exhibit
Number Subject
_______ __________________________________
10.1 Funding Agreement for Tier I Development Project among
Hondo Magdalena Oil & Gas Limited, Amoco Colombia
Petroleum Company and Opon Development Company dated
May 5, 1995, excluding exhibits (except Exhibit A).
10.2 Purchase and Sale Agreement among Hondo Magdalena Oil
& Gas Limited, Opon Development Company and Alliance
Petroleum International Co. dated July 21, 1995,
excluding exhibits.
10.3 Memorandum of Understanding (translation) among Hondo
Magdalena Oil & Gas Limited, Amoco Colombia Petroleum
Company, Opon Development Company, and Empresa
Colombiana de Petroleos dated July 26, 1995, excluding
exhibits (except Exhibit A).
27 Financial Data Schedule
20
FUNDING AGREEMENT FOR TIER I DEVELOPMENT PROJECT
AMONG
HONDO MAGDALENA OIL & GAS LIMITED
OPON DEVELOPMENT COMPANY
AND
AMOCO COLOMBIA PETROLEUM COMPANY
May 5, 1995
1
FUNDING AGREEMENT FOR TIER I DEVELOPMENT PROJECT
This Agreement made as of the 5th day of May, 1995 among Amoco Colombia
Petroleum Company (hereinafter referred to as "AMOCO"), a company
incorporated in Delaware, U.S.A., having offices at 200 Randolph Drive,
Chicago, Illinois 60601; Hondo Magdalena Oil & Gas Limited, (hereinafter
called "HONDO"), a company duly organized and existing under the laws of
the Island of Jersey, Channel Islands, having its principal office at
410 East College Boulevard, Roswell, New Mexico 88201, U.S.A.; and Opon
Development Company, (hereinafter called "ODC"), a partnership duly
formed and existing under the laws of the State of Colorado, U.S.A.,
having its principal offices at 1675 Broadway, Suite 1050, Denver,
Colorado 80202, hereinafter called a Party or the Parties.
WITNESSETH
A. WHEREAS, as of this date, AMOCO holds a sixty percent (60%)
undivided participating interest, ODC holds a ten percent (10%)
undivided participating interest, and HONDO holds a thirty percent
(30%) undivided participating interest in the Opon Association
Contract with Empresa Colombiana de Petroleos ("Ecopetrol"), in the
Republic of Colombia ("the Opon Association Contract").
B. WHEREAS, AMOCO, HONDO and ODC have entered into appropriate Farmout
and Operating Agreements dated August 9, 1993 providing for their
respective right and obligations to conduct operations under the
Opon Association Contract.
C. WHEREAS, HONDO, ODC and AMOCO have discussed the possibility of
Amoco providing assistance with funding HONDO's and ODC's
proportionate share of the proposed Budget for the expenditures
necessary to complete the Tier I Development Project as defined
herein and AMOCO is prepared to extend financing to ODC and HONDO
subject to the terms and conditions established in this Agreement.
NOW THEREFORE, in consideration of the mutual promises contained herein
the Parties agree as follows:
1. AMOCO will pay HONDO's and ODC's proportionate share of
expenditures incurred for the proposed seismic programs, pipeline,
treating facilities, buildings and other construction expenditures
associated with the Tier I Development Project and operating
expenses including overhead, during the period of October 1, 1994
to the date one year after the date of first production and sales
through the pipeline ("First Production") from the Opon Field as
provided herein. The Tier I Development Project are those works and
related expenditures defined in Exhibit A attached hereto.
2. During the period up to the date of First Production, HONDO and ODC
will have the option to reimburse AMOCO for all spending described
in Paragraph 1 above, made on their behalf for the Tier I
Development Project (including their share of any expenditures made
by AMOCO on behalf of Ecopetrol's interest in the Tier I
Development Project) plus an equity premium equivalent to one and
2
sixty-seven one-hundredths percent (1.67%) interest compounded
monthly (twenty-two percent (22%) annualized interest) before tax
on all such expenditures incurred through the date of reimbursement
to AMOCO from the time funds are disbursed on HONDO and ODC's
behalf. If HONDO and ODC reimburse AMOCO during the period up to
the date of First Production, HONDO and ODC shall pay AMOCO any
equity premiums to which AMOCO is entitled and any sums advanced by
AMOCO pursuant to this Agreement in cash. After Amoco has been
reimbursed according to the terms of this paragraph, Hondo and ODC
will assume full responsibility for funding their shares of all
future Tier I Development Project expenses under the terms of the
Joint Operating Agreement among AMOCO, HONDO and ODC dated August
9, 1993.
3. During the period from the date of First Production through the
365th day after the date of First Production, HONDO and ODC will
have the option to reimburse AMOCO for all spending, described in
Paragraph 1 above, made on their behalf for the Tier I Development
Project (including their share of any expenditures made by AMOCO on
behalf of Ecopetrol's interest in the Tier I Development Project)
plus an equity premium equivalent to one and sixty-seven
one-hundredths percent (1.67%) interest compounded monthly
(twenty-two percent (22%) annualized interest) before tax on all
such expenditures incurred through the date of reimbursement to
AMOCO from the time funds are disbursed on HONDO's and ODC's
behalf. If HONDO and ODC reimburse AMOCO during the period after
the date of First Production through the 365th day after the date
of First Production, HONDO and ODC shall pay AMOCO any equity
premiums to which AMOCO is entitled and/or any sums advanced by
AMOCO pursuant to this Agreement in cash. Any outstanding balance
of sums advanced by AMOCO and premium due to AMOCO shall be reduced
by, and until any outstanding balance has been reimbursed AMOCO
shall be entitled to, (i) HONDO's and ODC's share of production
revenues from sales of the first 80 mmcfd natural gas and
corresponding condensate and natural gas liquids from the Opon
Structure as defined in Exhibit D, (ii) HONDO's and ODC's share of
all tariff revenues pertaining to that first 80 mmcfgd received by
AMOCO as Operator of the Opon Association Contract Area from
transporters of gas through the Tier I Development Project
pipeline, and (iii) HONDO's and ODC's share of Ecopetrol's
reimbursement pertaining to the Tier I Development Project, as
revenues are received. After Amoco has been reimbursed according to
the terms of this paragraph, Hondo and ODC will assume full
responsibility for funding their shares of all future Tier I
Development Project expenses under the terms of the Joint Operating
Agreement among AMOCO, HONDO and ODC dated August 9, 1993 and
revisions to that Operating Agreement.
4. From the date of First Production through the 90th day of
production, HONDO and ODC will have the option to reimburse AMOCO
for all spending, described in Paragraph 1 above, made on their
behalf for the Tier I Development Project (excluding their share of
any expenditures made by AMOCO on behalf of Ecopetrol's interest in
the Tier I Development Project) plus an equity premium equivalent
to twenty-five percent (25%) of all such expenditures incurred
3
through the date of reimbursement to AMOCO. If HONDO and ODC
reimburse AMOCO during the period from the date of First Production
through the 90th day of production, HONDO and ODC shall pay AMOCO
any equity premiums to which AMOCO is entitled and any sums
advanced by AMOCO pursuant to this Agreement in cash. The sum of
all expenditures made by AMOCO on behalf of HONDO and ODC and
premium due to AMOCO shall be reduced by, and until any outstanding
balance has been reimbursed AMOCO shall be entitled to, (i) HONDO's
and ODC's share of production revenues from sales of the first 80
mmcfd natural gas and corresponding condensate and natural gas
liquids from the Opon Structure as defined in Exhibit D, (ii)
HONDO's and ODC's share of all tariff revenues pertaining to the
first 80 mmcfgd received by AMOCO as Operator of the Opon
Association Contract Area from transporters of gas through the Tier
I Development Project pipeline as of the date of reimbursement, and
(iii) HONDO's and ODC's share of Ecopetrol's reimbursement
pertaining to the Tier I Development Project. After Amoco has been
reimbursed according to the terms of this paragraph, Hondo and ODC
will assume full responsibility for funding their shares of all
future Tier I Development Project expenses under the terms of the
Joint Operating Agreement among AMOCO, HONDO and ODC dated August
9, 1993.
5. If after 365 days past the date of First Production HONDO and ODC
have not reimbursed AMOCO for all Tier I Development Project
expenditures plus any equity premium as stated above, HONDO and ODC
will reimburse AMOCO as follows. The total expenditures made on
behalf of HONDO and ODC (including their share of any expenditures
made by AMOCO on behalf of Ecopetrol's interest in the Tier I
Development Project) shall be computed on the date of First
Production. The balance referred to in this paragraph shall be
increased after the date of First Production by (a) any additional
expenditures on behalf of HONDO and ODC to the extent such
expenditures exceed revenues during the month of expenditure, and
(b) an equity premium equivalent to one and sixty-seven
one-hundredths percent (1.67%) interest compounded monthly
(twenty-two percent (22%) annualized interest) before tax from the
time funds are disbursed. Such balance shall be similarly decreased
by (a) any revenues (including any tariffs or reimbursements from
Ecopetrol) before tax net of royalties and expenditures
attributable to HONDO's and ODC's interest, in the first 80 mmcfd
natural gas and corresponding condensate and natural gas liquids
produced from the Opon Structure defined in Exhibit D, and (b) any
partial payments made by HONDO and ODC. Such increases and
decreases shall be applied to such balance as they occur. On the
366th day after the date of First Production such balance shall
then be subject to a 100% equity premium. Until such balance plus a
100% equity premium has been reimbursed to AMOCO on an after-tax
basis as defined in Paragraph 6, AMOCO shall be entitled to HONDO's
and ODC's share of production revenues from sales of the first 80
mmcfd natural gas and corresponding condensate and natural gas
liquids from the Opon Structure defined on Exhibit D, HONDO's and
ODC's share of all tariff revenues received by Amoco as operator of
the Opon Association Contract Area from transporters of gas through
the Tier I Development Project pipeline attributable to the above
4
mentioned first 80 mmcfgd, and HONDO's and ODC's share of Ecopetrol
reimbursements to the Association.
6. The after-tax payback of expenditures and premium described in the
above Paragraph 5 will be calculated using only production revenue,
transportation tariffs, and expenditures associated with the first
tranche of 80 mmcfd gross gas sales from the Opon Structure as
defined in Exhibit D. Such after-tax payback shall be calculated by
applying Colombian taxes to AMOCO's Colombian taxable income under
Colombian law that would result from a calculation using only
HONDO's and ODC's proportionate share of the revenue from
production and transportation tariffs associated with the first
tranche of 80 mmcfd gross gas sales from the Opon Structure as
defined in Exhibit D and the expenditures made on the behalf of
HONDO and ODC. In the event such revenues are available, HONDO and
ODC have the option to apply revenues associated with production in
excess of the first tranche of 80 mmcfd gross gas sales to the
payback of the Tier I Development Project in the same manner as
above.
7. AMOCO's funding of ODC's and HONDO's proportionate share of
expenditures as provided herein, shall be secured by HONDO's and
ODC's respective share of the first 80 mmcfd natural gas and
corresponding condensate and natural gas liquids production from
the Opon Structure as defined in Exhibit D.
8. HONDO and ODC hereby cast their affirmative vote under the Opon
Association Contract and that certain Operating Agreement among
AMOCO, HONDO and ODC dated August 9, 1993, to declare commerciality
of the field once the Opon #4 Well has been drilled and tested. The
Parties shall meet to mutually agree on an acceptable development
program to be presented to Ecopetrol.
9. The Parties agree and hereby incorporate the following change to
the Joint Operating Agreement among HONDO, ODC and AMOCO:
(a) The provisions contained in Article 14.2 of the Joint
Operating Agreement and Clause 14(m) of the Farmout Agreement
among the Parties are deleted hereby. For United States
Federal Income Tax purposes, this Agreement and the operations
under this Agreement, the Farmout and Joint Operating
Agreements are regarded as a partnership, the parties hereby
elect to be included in the application of all of the
provisions of Sub-Chapter K, Chapter 1, Sub-Title A of the
United States Internal Revenue Code of 1986, as amended.
AMOCO as Operator is authorized and directed to execute for
each Party such evidence of this election as may be required
by the Internal Revenue Service. No party shall give any
notice or take any other action inconsistent with the election
made hereby. The tax partnership created pursuant to this
Agreement shall be regulated pursuant to terms and conditions
established by a Tax Partnership Agreement that the Parties
shall promptly negotiate in good faith, and attach to this
Agreement as Exhibit C.
5
(b) Except for the foregoing modification contained herein, the
remaining provision of the Farmout and Joint Operating
Agreements among AMOCO, HONDO and ODC shall remain in full
force and effect.
(c) Also, since the Parties desire to introduce some additional
changes to the Joint Operating Agreement among AMOCO, HONDO
and ODC, the parties shall meet as soon as possible to
negotiate in good faith such changes.
10. The Parties shall immediately negotiate and enter into a mutually
acceptable Lifting Agreement to produce and sell the hydrocarbons
(including natural gas liquids and condensate) produced from the
field under the Opon Association Contract. However, until the time
when the Parties execute such Lifting Agreement, AMOCO shall have
the right to lift and sell, domestically or internationally,
HONDO's and ODC's share of hydrocarbons including natural gas
liquids and condensate produced from the Opon Field, at El Centro
Gas Processing Plant and/or other facilities and account therefor.
Thereafter, the Parties shall comply with the provisions of such
Lifting Agreement.
11. The Parties shall be reimbursed by Ecopetrol pursuant to the terms
of the Association Contract, first for the Parties' costs,
expenditures and overhead for the Tier I Development Project as
established in this Agreement.
12. HONDO and ODC hereby cast their affirmative vote to AMOCO's
proposed Budget for the expenditures necessary to complete the Tier
I Development Project which is attached herein as Exhibit B to this
Agreement.
13. Each of the Parties may separately exercise the alternative options
described in Paragraphs 2, 3 and 4, without reference to the
actions taken by the other Parties. The obligations of the Parties
are several and not joint.
14. The choice of law and dispute resolution provisions of the Farmout
and Joint Operating Agreement among HONDO, ODC and AMOCO shall
apply to this Agreement and as applicable the remaining provisions
of such Agreements.
15. This Agreement is contingent upon the Parties executing a
Memorandum of Understanding with Ecopetrol to proceed with the
construction of the pipeline from the Opon Field to Ecopetrol's
refinery in Barrancabermeja, Colombia and the corresponding gas
processing facilities which are part of the Tier I Development
Project as described herein. Therefore, this Agreement shall
become effective on the date the Parties execute such Memorandum of
Understanding with Ecopetrol.
16. AMOCO, HONDO and ODC each, respectively, as to its own interests
represent and warrant to the others that they have the power and
authority to enter into and perform the obligations undertaken by
them under this Agreement and their doing so will not violate, nor
6
constitute a default or breach under, any law, contract, loan
arrangement, corporate authority or restriction applicable to each
of them or to which each of them is a party and the persons
executing this Agreement on their behalf are legally authorized to
do so.
17. Payments in kind and production revenue reimbursements as
contemplated herein shall follow the principals of the Joint
Operating Agreement. Any reimbursement in currency under this
Agreement shall be made in U.S. Dollars.
18. AMOCO will provide to HONDO and ODC monthly statements showing
disbursements made and equity premium accrued for the Tier I
Development Program.
19. Where revenues are used to reduce any outstanding balance pursuant
to this Agreement, it is the intent of the Parties to deduct excise
taxes actually paid before reducing such outstanding balance.
7
THIS AGREEMENT may be executed in counterparts each of which when
executed and delivered shall be an original but all of which together
shall constitute one and the same instrument.
IN WITNESS WHEREOF, this Agreement has been executed by the duly
authorized representatives of the Parties as of the day of and year
first above written.
HONDO MAGDALENA OIL & GAS LIMITED
By: /s/ C.B. McDaniel
---------------------------------
C. B. McDanlel
Title: General Counsel and Assistant Secretary
Date: May 5, 1995
---------------------------------
AMOCO COLOMBIA PETROLEUM COMPANY
By: /s/ T.W. Melson
---------------------------------
Title: Attorney In Fact
---------------------------------
Date: May 5, 1995
---------------------------------
OPON DEVELOPMENT COMPANY
BY: /s/ Douglas K. Childs
---------------------------------
Title: President of Childs Petroleum Corporation,
General Partner Chase Petroleum Ltd., General
Partner of Chase Opon Ltd., Managing General
Partner of Opon Development Company.
Date: May 5, 1995
---------------------------------
8
EXHIBIT A
TIER I DEVELOPMENT PROJECT
The Tier I Development comprises all expenditures related to the
construction and operation of facilities required to make gas sales into
the local Colombian gas market. These facilities include field flowlines
and production treating facilities, a pipeline to Barrancabermeja,
upgrade of gas processing facilities at Ecopetrol's El Centro plant, and
construction of a permanent warehouse and personnel housing at the field
location. All expenditures for geological and geophysical work,
including 2D and 3D seismic surveys, are also included in the Tier I
Development Project. The Tier I Development Project includes:
Flowlines and pipeline to Barrancabermeja (16" pipeline via El Centro)
El Centro processing equipment and storage upgrades
Opon Field treating facilities
Geological and geophysical work programs
Other construction, including field warehouse and housing
Operating expenses, including overhead
9
PURCHASE AND SALE AGREEMENT
----------------------------
This PURCHASE AND SALE AGREEMENT (the "Agreement") is entered into
as of the 21st day of July, 1995, by and among OPON DEVELOPMENT COMPANY,
a Colorado partnership ("ODC"), ALLIANCE PETROLEUM INTERNATIONAL CO., a
Texas corporation ("Alliance"), and HONDO MAGDALENA OIL & GAS LIMITED, a
Jersey, Channel Islands corporation ("Purchaser").
W I T N E S S E T H:
--------------------
WHEREAS, ODC is the record owner of a zero point eight eight eight
seven five percent (0.88875%) interest (the "Interest") in the OPON
Association Contract (the "OPON Contract") dated July 15, 1987 by and
between ODC and Empresa Colombiana de Petroleos ("ECOPETROL") (the
present calculation of the amount of the Interest being subject to the
right of ECOPETROL to reacquire a fifty percent (50%) interest in the
OPON Contract); and
WHEREAS, Alliance is the sole beneficial owner of the Interest
being held by ODC, under that certain Compensation/Settlement Agreement
dated October 17, 1990, by and among Purchaser, Hondo Oil & Gas Company,
a Delaware corporation ("Hondo"), Jim C. Roth ("Roth"), International
Exploration Advisors ("International"), Gary D. Bell ("Bell"), Alliance
and ODC and certain oral agreements between ODC and Alliance
(collectively, the "Compensation/Settlement Agreement"); and
WHEREAS, at the time of execution of the Compensation/Settlement
Agreement certain parties were listed collectively, without further
allocation among them, as co-recipients of the interests conveyed
pursuant to that agreement, including Roth, individually and as managing
partner of International, an entity described in the
Compensation/Settlement Agreement as a partnership, Bell, individually,
and Alliance Petroleum International, an entity described in the
Compensation/Settlement Agreement as a partnership and, subsequent to
the execution of that Compensation/Settlement Agreement, it was
clarified that International was never formally established and that
Alliance Petroleum International was actually formed as a Texas
corporation; and
WHEREAS, Roth and Bell acknowledge and represent that no portion of
the Interest was accepted or held by International at any time and that
any portions of the Interest to which Roth and Bell may have
individually been entitled to take ownership were transferred to and
held as assets of Alliance of which they were and are the sole
shareholders; and
WHEREAS, Purchaser separately owns an interest in the OPON Contract
and desires to increase its interest therein by acquiring the Interest
from ODC and Alliance; and
WHEREAS, Alliance desires to sell and assign its beneficial
interest to Purchaser and in connection therewith ODC desires to assign
the Interest to Purchaser, and Alliance desires to receive as
consideration therefore, freely trading common stock of Hondo; and
WHEREAS, Hondo is agreeable to the issuance of its common stock in
accordance with the terms and conditions hereof in order to facilitate
the acquisition of the Interest by Purchaser, which Hondo deems to be in
the best interests of Hondo.
NOW, THEREFORE, for Ten and No/100 Dollars (U.S. $10.00) and other
good and valuable consideration to be received by the parties hereunder,
the receipt and sufficiency of which are hereby acknowledged, and in
consideration of the mutual promises, covenants, representations, and
warranties herein contained, the parties hereto agree as follows:
ARTICLE I
THE INTEREST
--------------
1.1 Purchase and Delivery of the Interest. Upon the basis of the
representations and warranties and on the terms and subject to the
conditions set forth in this Agreement, Alliance hereby agrees to sell
to Purchaser, ODC hereby agrees to assign to Purchaser and Purchaser
hereby agrees to purchase from Alliance and receive from ODC, the
Interest at the Closing (as hereinafter defined).
1.2 Calculation of Interest. Each of the parties acknowledges and
agrees that the Interest is correctly calculated as of the date of this
Agreement as a zero point eight eight eight seven five percent
(0.88875%) interest in the OPON Contract.
ARTICLE II
CONSIDERATION
--------------
As consideration of the sale by Alliance and the delivery of the
Interest to Purchaser by ODC as provided in Article I hereof, Purchaser
shall cause Hondo to issue to Alliance at the Closing, such number of
shares (the "Shares") of Common Stock, $1.00 par value in Hondo (the
"Hondo Stock") as shall be equivalent to EIGHT HUNDRED EIGHTY EIGHT
THOUSAND SEVEN HUNDRED FIFTY DOLLARS (U.S. $888,750) (the "Sales Price")
based upon the closing price on the American Stock Exchange ("AMEX") of
such Hondo Stock on the business day immediately prior to the later of
(i) the effective date (the "Effective Date") of the Registration
Statement (as hereinafter defined) as declared by The United States
Securities and Exchange Commission (the "Commission") or (ii) the date
(the "AMEX Approval Date") AMEX approves the listing of the Shares on
its exchange pursuant to an Additional Listing Application (the
"Additional Listing Application") to be filed by Hondo. Provided,
however, in no event shall the number of the Shares exceed (and in no
event shall Hondo be required to issue to Alliance more than) sixty-five
thousand (65,000) shares of Hondo Stock. In the event that upon the
later of the Effective Date of such Registration Statement or the AMEX
Approval Date, Hondo would otherwise be required to issue more than
sixty-five thousand (65,000) shares of Hondo Stock as the Shares in
order to satisfy the Sales Price, Alliance shall have the right, solely
and without the joinder of ODC, to (i) terminate this Agreement upon
written notice to Purchaser and ODC, whereupon the transactions
contemplated hereunder shall be void and of no further force and effect,
-2-
or (ii) accept such sixty-five thousand (65,000) shares of Hondo Stock
as the Shares in full satisfaction of the Sales Price hereunder.
Provided, however, in the event that at any time after the date of this
Agreement and prior to the Closing, the closing price of the Hondo Stock
on AMEX is Thirteen and 625/1000 Dollars (U.S.$13.625) or less for five
(5) consecutive business days, then Alliance shall have the right to
terminate this Agreement upon written notice to Purchaser and the
transactions contemplated hereunder shall be void and of no further
force and effect. The Sales Price shall be paid in shares of Hondo
Stock only, in no event shall the Purchaser be obligated to pay the
Sales Price in cash or any other funds whatsoever. The parties
acknowledge and agree that no portion of the Sales Price shall be
payable to ODC.
ARTICLE III
REGISTRATION OF THE HONDO STOCK
-------------------------------
Upon execution of this Agreement, Purchaser shall be obligated to
cause Hondo to (i) prepare and file with the Commission a registration
statement on an appropriate form, together with all necessary amendments
thereto, with respect to the Shares (the "Registration Statement") as
soon as is reasonably possible; (ii) use its best efforts to cause such
Registration Statement to become effective as soon as is reasonably
possible and to remain effective; and (iii) perform such other actions
as shall be necessary to issue and deliver such Shares to Alliance,
including, but not limited to, preparing and delivering as soon as is
reasonably possible the Additional Listing Application to AMEX.
Purchaser shall provide Alliance courtesy copies of all materials that
are otherwise publicly available which relate to the Registration
Statement or the Additional Listing Application and which are filed with
the Commission and/or AMEX.
ARTICLE IV
CLOSING
-------
4.1 Closing. Subject to the terms and conditions of this
Agreement, the closing of the transactions contemplated hereby (the
"Closing") shall take place at the offices of WINSTEAD SECHREST & MINICK
P.C. in Houston, Texas, or such other mutually acceptable location in
Houston, Texas as shall be selected by the parties, within two (2) days
from the later of (i) the Effective Date of the Registration Statement
or (ii) the AMEX Approval Date. In the event that the Closing has not
occurred prior to seventy-five (75) days from the date of this
Agreement, then this Agreement shall be deemed terminated and the
transactions contemplated hereunder shall be void and of no further
force and effect without any further action on the part of the parties
whatsoever. The parties acknowledge and agree that the approval of
ECOPETROL to the transactions contemplated by this Agreement shall be
obtained by Purchaser and ODC following the Closing.
4.2 Purchaser's Obligations at Closing. At Closing, Purchaser
shall deliver to Alliance the Shares in payment of the Sales Price. The
Shares will be registered under the Securities Act of 1933, as amended,
-3-
will bear no restrictive legends and will be freely transferable by
Alliance. At Closing, Purchaser shall reimburse Alliance for the amount
of any cash calls actually paid by Alliance that are made after the date
of this Agreement and prior to Closing by the operator, Amoco Colombia
Petroleum Company ("Amoco"), under that certain New Operating Agreement
dated as of August 9, 1993 by and among Amoco, Purchaser and ODC (the
"New Operating Agreement"). Such reimbursement shall be made by
Purchaser in cash or, if applicable, in the same form of payment made by
Alliance to Amoco. At Closing, Purchaser shall assume any debts, liens
or other obligations that burden the Interest and are created under that
certain Funding Agreement for Tier I Development Project dated as of May
5, 1995 by and among Amoco, Purchaser and ODC, if, as and when such
agreement becomes effective.
4.3 Alliance's Obligations at Closing. At Closing, Alliance shall
execute and deliver or cause to be executed and delivered such
additional mutually acceptable documentation as shall be necessary to
effect the assignment of the beneficial interest in the Interest to
Purchaser.
4.4 ODC's Obligations at Closing. At Closing, ODC shall execute
and deliver an assignment in recordable form (in Colombia) or other
suitable documentation in the form substantially similar to that
attached to this Agreement as Exhibit "A", reflecting the assignment of
the Interest to Purchaser. In addition, ODC shall certify to Purchaser,
through such reasonably acceptable documentation as Purchaser shall
request, that all joint account or other equivalent billings for the
Interest are or shall be current as of the date of the Closing.
4.5 Mutual Release and Termination Agreement. In addition, at the
Closing, as additional consideration for the obligations of the parties
hereunder, each of the parties shall execute and deliver a mutual
release and termination agreement in the form attached to this Agreement
as Exhibit "B."
4.6 Taxes. Alliance and Purchaser shall be responsible for their
respective income or other taxes due in any taxing jurisdiction (foreign
or domestic) on account of the transactions contemplated by this
Agreement. In no event shall ODC bear any responsibility for any taxes
imposed as a result of the transactions contemplated by this Agreement.
Alliance or Purchaser, as applicable, shall be entitled to any benefits
or credits resulting from the payment of any such taxes by Alliance or
Purchaser, respectively.
4.7 Condition to Closing. Notwithstanding anything to the
contrary set forth herein, to the extent deemed necessary by Purchaser,
the Closing shall be expressly subject to and contingent upon Purchaser
obtaining a written waiver acceptable to Purchaser by Amoco of certain
preferential purchase rights which Amoco may have pursuant to that
certain Farmout Agreement dated as of August 9, 1993 by and between
Amoco, ODC and Purchaser (the "Farmout Agreement"). Purchaser shall
notify Amoco of the transaction contemplated by this Agreement and
request Amoco to provide a waiver of such preferential purchase rights
within fourteen (14) days from the date of this Agreement or the
-4-
contingency in this Paragraph 4.7 to Closing shall be deemed waived by
Purchaser.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF ALLIANCE
-------------------------------------------
Alliance and its individual shareholders, Roth and Bell, hereby
represent and warrant to Purchaser and ODC, each of which
representations and warranties is hereby deemed material, as follows:
5.1 Title to Interest. Alliance owns one hundred percent (100%)
of the beneficial interest in the Interest. Alliance has not created,
and will not prior to Closing create any restrictions or conditions to
transfer or assignment, rights of first refusal, preferential purchase
rights, pending litigation, mortgages, liens, pledges, charges,
encumbrances, equities, claims, covenants, conditions, restrictions or
other limitations upon title of any nature whatsoever affecting the
Interest.
5.2 Consents and Approvals. Except with respect to the
Registration Statement, the Additional Listing Application and the
waiver of Amoco referenced in Section 4.7, no consent, approval or
authorization of, or filing or registration with any national or foreign
governmental authority or any other party whatsoever is required to be
made or obtained by Alliance in connection with the execution, delivery
or performance of this Agreement by Alliance or the consummation by
Alliance of the transactions contemplated hereby.
5.3 Validity of Representations. No representation by Alliance,
nor any agreement or other document furnished or to be furnished by
Alliance to Purchaser pursuant to this Agreement, or in connection with
the transactions contemplated herein, contains or will contain any
untrue statement of a material fact, or omits or will omit to state a
material fact necessary to make the statements contained therein not
misleading.
5.4 Broker's or Finder's Fees. Alliance has not incurred any
obligation or liability, contingent or otherwise, for any broker's or
finder's fees in connection with the transactions contemplated by this
Agreement.
5.5 Capacity; Validity of Agreement. Alliance has the capacity,
authority and legal right to execute, deliver and perform its
obligations under this Agreement. This Agreement, upon due execution by
the parties hereto, will constitute a legal, valid and binding
obligation of Alliance, enforceable in accordance with its terms, except
as such enforceability may be limited by bankruptcy, insolvency or other
laws relating to or affecting the enforcement of creditors rights
generally and general principles of equity (regardless of whether such
enforceability is considered in a proceeding in equity or at law).
5.6 Disclosure. Alliance has provided to Purchaser any and all
material documentation related to the Interest and the ownership thereof
and disposition hereunder by Alliance. Alliance is experienced and
-5-
knowledgeable in business and financial matters in general and in the
industry in which the parties are involved in particular, and is capable
of evaluating the transactions provided for herein. Furthermore,
Alliance has sought and obtained such independent advice and counsel as
it deems appropriate with respect to the transactions contemplated
hereby. Alliance acknowledges and agrees that Purchaser and ODC have
provided Alliance with any and all information deemed to be material by
Alliance with respect to the Hondo Stock, the Interest, and the
acquisition of the Interest hereunder by Purchaser. Alliance
acknowledges and agrees that it has been given an opportunity to make
inquiries and receive answers of Purchaser and ODC with regard to the
Hondo Stock, the Interest and the acquisition of the Interest hereunder
by Purchaser and to obtain any such information from Purchaser and ODC
that is necessary to clarify the accuracy of the information provided by
Purchaser or ODC.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF ODC
-------------------------------------
ODC hereby represents and warrants to Purchaser and Alliance, each
of which representations and warranties is hereby deemed material, as
follows:
6.1 Title to Interest. ODC holds one hundred percent (100%) of
the Interest as nominee for purposes of holding record title for
Alliance. ODC has not created, and will not prior to Closing create,
any restrictions or conditions to transfer or assignment, mortgages,
liens, pledges, charges, encumbrances or other limitations upon title of
any nature whatsoever affecting the Interest, except any such matters
created in agreements among ODC, Purchaser and Amoco, or any two (2) of
them.
6.2 Broker's or Finder's Fees. ODC has not incurred any
obligation or liability, contingent or otherwise, for any broker's or
finder's fees in connection with the transactions contemplated by this
Agreement.
6.3 Capacity; Validity of Agreement. ODC has the capacity,
authority and legal right to execute, deliver and perform its
obligations under this Agreement. This Agreement, upon due execution by
the parties hereto, will constitute a legal, valid and binding
obligation of ODC, enforceable in accordance with its terms, except as
such enforceability may be limited by bankruptcy, insolvency or other
laws relating to or affecting the enforcement of creditors rights
generally and general principles of equity (regardless of whether such
enforceability is considered in a proceeding in equity or at law).
-6-
ARTICLE VII
REPRESENTATIONS AND WARRANTIES OF PURCHASER
-------------------------------------------
Purchaser hereby represents and warrants to Alliance and ODC, each
of which representations and warranties is hereby deemed material, as
follows:
7.1 Consents and Approvals. Except with respect to the
Registration Statement, the Additional Listing Application and the
waiver of Amoco referenced in Section 4.7, no consent, approval or
authorization of, or filing or registration with any national or foreign
governmental authority or any other party whatsoever is required to be
made or obtained by Purchaser in connection with the execution, delivery
or performance of this Agreement by Purchaser or the consummation by
Purchaser of the transactions contemplated hereby.
7.2 Broker's or Finder's Fees. Purchaser has not incurred any
obligation or liability, contingent or otherwise, for any broker's or
finder's fees in connection with the transactions contemplated by this
Agreement.
7.3 Validity of Representations. No representation or warranty of
Purchaser contained herein, nor any agreement or other document
furnished or to be furnished to Alliance pursuant hereto or in
connection with the transactions contemplated hereby, contains or will
contain any untrue statement of a material fact, or omits or will omit
to state a material fact necessary to make the statements contained
therein not misleading.
7.4 Capacity; Validity of Agreement. Purchaser has the
capacity, authority and legal right to execute, deliver and perform its
obligations under this Agreement. This Agreement, upon due execution by
the parties hereto, will constitute a legal, valid and binding
obligation of Purchaser, enforceable in accordance with its terms,
except as such enforceability may be limited by bankruptcy, insolvency
or other laws relating to or affecting the enforcement of creditors
rights generally and general principles of equity (regardless of whether
such enforceability is considered in a proceeding in equity or at law).
7.5 Disclosure. Purchaser has delivered to Alliance the following
documents filed by Hondo pursuant to the Securities Exchange Act of
1934, as amended; Annual Report on Form 10-K for the fiscal year ended
September 30, 1994; Proxy Statement dated January 30, 1995; Quarterly
Reports on Form 10-Q for the quarters ended December 31, 1994 and
March 31, 1995; and Current Reports on Form 8-K dated November 29, 1994
and March 3, 1995.
-7-
ARTICLE VIII
INDEMNIFICATION
---------------
8.1 Indemnification by Alliance. Alliance hereby agrees to
indemnify, reimburse and hold Purchaser (and with respect to
Subsection A, Purchaser and ODC) harmless from and against:
A. All losses, expenses, damages and liabilities suffered or
incurred by such indemnified party as a result of the
untruth or breach of any representation or warranty by
Alliance, or the failure of Alliance to perform any
agreement or obligation of Alliance, contained in this
Agreement or in any agreement or other document furnished
or to be furnished by Alliance pursuant to this Agreement
or in connection with the transactions contemplated by
this Agreement;
B. Any and all losses, expenses, damages, liabilities,
claims, demands and judgments arising from the ownership
of the Interest prior to the Closing, but only to the
extent that they arise out of or result from any
transaction not otherwise giving rise to a right of
indemnification of Alliance hereunder; and
C. Any and all losses, expenses, damages, liabilities,
suits, demands, exceptions, judgments, costs and expenses
incident to any of the foregoing matters described in
this Section.
8.2 Indemnification by Purchaser. Purchaser hereby agrees to
indemnify, reimburse and hold harmless Alliance from and against:
A. All losses, expenses, damages and liabilities suffered or
incurred by Alliance as a result of the untruth or breach
of any representation or warranty by Purchaser, or the
failure of Purchaser to perform any agreement or
obligation of Purchaser, contained in this Agreement or
in any agreement or other document furnished or to be
furnished by such Purchaser pursuant to this Agreement or
in connection with the transactions contemplated by this
Agreement;
B. Any and all losses, expenses, damages, liabilities,
claims, demands and judgments arising from the ownership
of the Interest following the Closing, but only to the
extent that they arise out of or result from any
transaction not otherwise giving rise to a right of
indemnification of Purchaser hereunder; and
C. Any and all losses, expenses, damages, liabilities,
suits, demands, exceptions, judgments, costs and expenses
incident to any of the foregoing matters described in
this Section.
-8-
8.3 Cooperation of Parties. The parties hereto shall
reasonably, diligently, and in good faith, cooperate with each other in
connection with the investigation, accounting, disposition, or payment
of any matter reasonably believed to give rise to a right of
indemnification under Section 8.1 or 8.2 of this Agreement.
ARTICLE IX
MISCELLANEOUS
-------------
9.1 Expenses. Each of the parties shall pay its own costs and
expenses, including attorney's and accounting fees, incurred by such
party or for such party s benefit in connection with the negotiation,
preparation, consummation and performance of this Agreement and the
transactions provided for herein. Alliance shall continue to be
responsible for all billings and administrative expenses related to the
Interest due to ODC with respect to periods or actions prior to the
Closing. Alliance shall pay at or prior to the Closing, any and all
outstanding administrative expenses or other obligations related to the
Interest which are otherwise due to ODC in connection with the ownership
of the Interest prior to the Closing subject to normal industry auditing
procedures.
9.2 Survival of Representations. Notwithstanding any
investigation made by or on behalf of a party or parties, all
representations, warranties, and covenants made by the parties each to
the other in this Agreement or pursuant hereto shall survive the Closing
and the consummation of the transactions contemplated by this Agreement.
9.3 No Assignment. This Agreement shall not be assigned by any
party hereunder, the parties' intention hereunder being to reflect that
the Purchaser's obligation to cause the Hondo Stock to be delivered to
Alliance shall be personal to Alliance only and that Alliance's and
ODC's obligation to assign and deliver the Interest hereunder shall be
personal to the Purchaser only. Accordingly, neither ODC nor Alliance
shall assign or deliver the Interest (or any portion thereof) to any
party other than Purchaser prior to the Closing or earlier termination
of this Agreement.
9.4 Entire Agreement. This Agreement and any documents executed
or delivered by the parties pursuant to this Agreement, constitute the
entire understanding and agreement of the parties hereto and supersede
all other prior agreements and understandings, written or oral, between
the parties.
9.5 Further Instruments. The parties hereto will, upon execution
of the Agreement or any time thereafter, deliver and/or execute such
further instruments as may reasonably be requested by the other party
which are necessary or appropriate with respect to the consummation of
the transactions contemplated by this Agreement. None of the documents
or instruments requested hereunder shall contain an undertaking or
representation inconsistent with the undertakings and representations
contained in this Agreement.
-9-
9.6 Notices. All notices, requests, demands, and other
communications hereunder shall be in writing and shall be deemed to have
been duly given if delivered by hand or mailed certified or registered
mail, return receipt requested, with first class postage prepaid or by
facsimile:
(a) If to Alliance:Alliance Petroleum International Co.
11711 Memorial Drive, Suite 260
Houston, Texas 77024
Facsimile: (713) 975-6088
Attn: Jim C. Roth
(b) If to Purchaser:Hondo Magdalena Oil & Gas Limited
410 East College Boulevard
Roswell, New Mexico 88201
Facsimile: (505) 625-6829
Attn: C. B. McDaniel,
Assistant Secretary
with a copy to: Douglas S. Craig, Jr., Esquire
Winstead Sechrest & Minick P.C.
910 Travis Building, Suite 1700
Houston, Texas 77002-5895
Facsimile: (713) 951-3800
(c) If to ODC: OPON Development Company
1675 Broadway Suite 1050
Denver, Colorado 80202
Facsimile: (303) 629-6233
Attn:Douglas L. Childs
or such other persons or addresses of which the parties shall give
notice in accordance with this Section.
9.7 Headings. The headings of the sections of this Agreement are
inserted for convenience only and shall not constitute a part hereof.
9.8 Governing Law. This Agreement shall be governed by, construed
and interpreted according to, the laws of the state of Texas, U.S.A.
without regard to the conflicts of laws principles thereof and venue for
any matter shall lie exclusively in the courts of Harris County, Texas,
U.S.A. This Agreement calls for performance and shall be performable in
Harris County, Texas, U.S.A.
9.9 Waiver. No term, provision, or condition of this Agreement
shall be waived except in a writing signed by the party waiving
compliance and any such written waiver in any one or more instances
shall not be deemed to be a further continuing waiver of any such term,
provision, or condition of this Agreement.
9.10 Counterparts. This Agreement may be executed simultaneously
in counterparts, each of which shall be deemed an original, but all of
which together constitute one and the same instrument.
-10-
9.11 Amendments and Modifications. Any and all amendments and
modifications of this Agreement must be in writing signed by each of the
parties hereto.
9.12 Arbitration. Any dispute or controversy arising hereunder or
in connection with this Agreement (other than disputes or controversies
involving injunctive relief) shall be settled exclusively by
arbitration, conducted before a panel of three (3) arbitrators in
Houston, Texas, U.S.A. in accordance with the rules of the American
Arbitration Association then in effect.
9.13 Non-Disclosure. From the date of this Agreement through such
date as is thirty (30) days from the date of the Closing, no disclosure
of the terms of this Agreement, the subject matter hereof, nor any
confirmation or other information regarding this Agreement shall be made
by any party hereto to any party whatsoever (excluding any disclosure
required by any governmental authorities, disclosure to such parties'
legal and financial advisors or lenders any disclosure to Amoco and,
with respect to Purchaser or Hondo on Purchaser's behalf, any public
announcement in connection with the Registration Statement or the
Additional Listing Application or to comply with the disclosure
requirements of U.S. securities laws and AMEX's listing requirements)
without the express prior written consent of the other parties hereto,
which consent shall not be unreasonably withheld or delayed.
-11-
IN WITNESS WHEREOF, the parties hereto hereby execute this
Agreement as of the day and year first written above.
NOTICE OF INDEMNIFICATION: THE PARTIES TO THIS AGREEMENT HEREBY
ACKNOWLEDGE AND AGREE THAT THIS AGREEMENT CONTAINS INDEMNIFICATION
PROVISIONS IN ARTICLE VIII.
ALLIANCE:
ALLIANCE PETROLEUM INTERNATIONAL CO.,
a Texas corporation
By: /s/ Gary D. Bell
---------------------------
Name: Gary D. Bell
---------------------------
Title: President
---------------------------
Roth and Bell hereby execute this Agreement in their individual
capacities for the limited purpose of evidencing their acknowledgment
and agreement to the terms of the second, third and fourth recitals on
the first page, Section 4.5 and Article V hereof.
ROTH: /s/ Jim C. Roth
---------------------------
JIM C. ROTH
BELL: /s/ Gary D. Bell
---------------------------
GARY D. BELL
PURCHASER:
HONDO MAGDALENA OIL & GAS LIMITED,
a Jersey, Channel Islands corporation
By: /s/ C. B. McDaniel
---------------------------
Name: C.B. McDaniel
---------------------------
Title: Assistant Secretary
---------------------------
-12-
ODC:
OPON DEVELOPMENT COMPANY,
a Colorado partnership
By: CHASE OPON, LTD.,
a Colorado limited part-
nership, its managing
general partner
By: CHASE PETROLEUM, LTD.,
a Colorado limited part-
nership, its sole general
partner
By: CHILDS PETROLEUM
CORPORATION,
a Colorado corporation,
its sole general partner
By: /s/ Douglas K. Childs
---------------------
Douglas K. Childs,
President
-13-
MEMORANDUM OF UNDERSTANDING BETWEEN ECOPETROL AND
THE ASSOCIATED PARTY (AMOCO, HONDO AND OPON)
IN THE "OPON" CONTRACT ASSOCIATION.
This Memorandum of Understanding is made between: For one party,
EMPRESA COLOMBIANA DE PETROLEOS - ECOPETROL (hereafter ECOPETROL)
an industrial and commercial enterprise of the State created by
law 165 in 1948 and presently controlled by statutes approved by
means of Decree 1209 of June 15, 1994 with principal office in
Santafe de Bogota, represented by JUAN MARIA RENDON GUTIERREZ,
adult, identified by citizenship card number 17,125,100 issued in
Santafe de Bogota, residing in said city, who in his position as
President acts in name and representation of said Enterprise,
duly authorized by the Board of Directors of the same, as stated
in Act number 2107 of July 11, 1995. For the other party
(hereafter "THE ASSOCIATES") AMOCO COLOMBIA PETROLEUM COMPANY
(hereafter AMOCO) a corporation established in accordance with
the laws of Delaware, with a branch office established in
Colombia, as set forth in public deed number 1,953 of March 19,
1991, executed before Notary No. 5 of Santafe de Bogota D.C.,
represented by GREGORY P. WILLIAMS, adult, identified by tourist
card No. 260,005 issued in Santafe de Bogota, residing in said
city; HONDO MAGDALENA OIL & GAS LIMITED (hereafter HONDO) an
association established in accordance with the laws of Jersey -
Channel Islands, with a branch office established in Colombia as
set forth in public deed number 944 of December 3, 1990 before
Notary No. 45 of Santafe de Bogota, D.C., represented by JOHN
JOSEPH HOEY, adult, identified by United States passport No.
150151531, residing in Santafe de Bogota and OPON DEVELOPMENT
COMPANY (hereafter OPON DEVELOPMENT), a company established in
conformity with the laws of Colorado, United States of America,
with a branch office established in the Republic of Colombia, as
set forth in public deed number 3,022 of August 21, 1987 before
Notary No. 11 of Santafe de Bogota, represented by Sergio Rueda
Ferreira, adult, identified by citizenship card number 2,031,832
issued in Santafe de Bogota, residing in the same city.
The Associates form a party of the OPON Association Contract
("the Association Contract"), dated the 15th of July, 1987, with
the modifications agreed upon in relation to the area of the
contract known as OPON, with the discovery of natural gas known
as the OPON Field.
In conformance with the Association Contract, ECOPETROL and the
Associates have the right to take and separately dispose of their
proportionate shares of the total volume of hydrocarbons that may
be produced in the OPON field.
In accordance with the Association Contract, Ecopetrol has the
right to participate in the production of the OPON Association,
pursuant to Clause 9 of the Association Contract, once the
commerciality of the OPON Field is declared.
This Memorandum of Understanding contains the basic principles
for the utilization of the OPON gas arising from the project of
early production in this field, which will be the subject of a
detailed agreement between the parties.
Now, by virtue of the previous considerations, it is agreed:
A. The Associates assume the following obligations:
1. Complete engineering and design work on pipeline,
processing facilities at El Centro and well site
facilities.
2. Complete environment assessment on pipeline corridor
and wellsite facilities and secure environmental
permits.
3. Complete right of way acquisition.
4. Prepare and receive quotes for all construction work.
5. Order miscellaneous material required to produce and
deliver gas to Barrancabermeja.
B. Ecopetrol is obligated to:
1. Purchase 40 MMcfd of natural gas from the Opon
Association on a take-or-pay basis for a term of 15
years to the extent that gas is available. In
addition, Ecopetrol will purchase an additional 40
MMcfd of natural gas from the Opon Association on a
take-or-pay basis for a term of 3 years to the extent
that gas is available. Ecopetrol shall have the right
to make up volumes of gas paid for but not taken from
any gas volumes in excess of the contracted volumes
that may be transported from the Opon field to
Barrancabermeja.
Ecopetrol may at its option jointly market with
Associates up to 40 MMcfd to mutually acceptable third
party end-users subject to being acceptable in
accordance with the CREG Regulations. Ecopetrol's
obligation to purchase 80 MMcfd during the first 3
years may be reduced by an amount equal to the take-or-
pay volumes delivered to such third party end-users.
Ecopetrol's take-or-pay obligation to the Opon
Association shall in no event be less than 40 MMcfd for
15 years.
2
2. Ecopetrol and the Associates will jointly market to
third parties all natural gas from the Opon Association
Contract Area in excess of the volumes mentioned in
Paragraph 1 subject to being acceptable in accordance
with the CREG Regulations.
3. Ecopetrol will guarantee gas volumes up to a maximum of
40 MMcfd jointly marketed by Ecopetrol and the
Associates to third party end-users to the extent that
the Associates cannot deliver such volumes and
Ecopetrol has the volumes available during the first 3
years. Sales made by Ecopetrol and Associates to third
party end-users shall take priority over sales to
Ecopetrol's refinery at Barrancabermeja.
4. The price to be paid for natural gas pursuant to the
volumes mentioned in Paragraph 1 shall be as follows:
(i) in accordance to the formula in Exhibit A, plus
the tariffs in number 5, part B, of this
memorandum;
(ii) for the volume of gas paid for but not taken by
Ecopetrol, the formula outlined in Exhibit A, plus
the tariffs pursuant to number 5, part B, of this
memorandum, that would have been received by the
Associates.
However, all parties agree that the pricing will be
subject to the maximum gas price permitted under the
CREG Regulations.
5. The tariffs to be charged to Ecopetrol and/or third
parties for natural gas and hydrocarbon liquid
transportation from the Opon Field to the refinery at
Barrancabermeja will be calculated to be sufficient for
the Associates to cover funding cost and provide a
thirteen and two tenths percent (13.2%) rate of return
after Colombian taxes on pipeline investments
(currently estimated to be $56.5 million US) pursuant
to Exhibit B. The tariffs pursuant to this Paragraph
will be adjusted based on actual pipeline investments,
actual operating costs, and actual throughput.
6. The tariff to be paid to Ecopetrol by the Associates
will for gas processing be sufficient for Ecopetrol to
cover funding costs and provide a thirteen and two
tenths percent (13.2%) rate of return after Colombian
taxes on the El Centro gas processing plant investments
required to handle incremental production from the Opon
Field (currently estimated to be $18.2 million US)
pursuant to Exhibit C.
3
7. Ecopetrol and Associates will negotiate in good faith
and if mutually acceptable terms are reached execute a
gas sales contract as soon possible.
8. Associates and Ecopetrol shall have the right to lift
and sell domestically or internationally their
respective shares of natural gas liquids and condensate
produced from the wells and/or processed at El Centro
and/or other facilities. However, it is the intention
of the Parties to sell from the Opon Field the
condensate and natural gas liquids produced at the gas
processing facility at El Centro to Ecopetrol. The
Parties agree to negotiate a mutually acceptable sales
contract for the condensate and natural gas liquids as
soon as possible.
9. Associates agree to pay all costs incurred prior to
July 1, 1995, up to a maximum of 10% of the pipeline
costs (currently estimated to be $56.5 million US).
Ecopetrol's share of these costs will be reimbursed
from the production from the wells pursuant to the
Association Contract. Once the field is declared
commercial, all costs incurred after July 1, 1995 for
the pipeline costs will be paid in cash by Ecopetrol
and Associates in the proportions contemplated pursuant
to the Association Contract.
Wellhead and facilities costs for the Opon #3 and #4
wells will be reimbursed twenty percent (20%) in kind
and eighty percent (80%) in cash once such costs are
incurred and commerciality is declared.
10. In the event Opon #4 results are not geologically
satisfactory to the Associates and as a result
Ecopetrol and the Associates decide not to proceed with
the pipeline, then Ecopetrol shall reimburse Associates
100% of the pipe costs and 50% of associated expenses
which estimate of costs and associated expenses is
attached as Exhibit D. In that event, Ecopetrol shall
have ownership of the pipe.
In the event Opon #4 results are not geologically
satisfactory to the Associates, and Ecopetrol
constructs the pipeline and one or more of the
Associates do not participate, the Associates that do
not participate agree to negotiate in good faith a
tariff arrangement for the transportation and
processing of natural gas and the transportation of
hydrocarbon liquids. Such tariff shall be sufficient
for Ecopetrol to cover its investment on behalf of the
non-participating Associates and provide a thirteen and
two tenths percent (13.2%) rate of return after
4
Colombian taxes on such investment. In the event Amoco
does not participate, then Ecopetrol shall reimburse
Amoco 100% of the pipe cost and 100% of associated
expenses which estimate of costs and associated
expenses is attached as Exhibit D. In that event,
Ecopetrol shall have ownership of the pipe.
In the event the Opon #4 is not successful for
mechanical reasons and the La Paz formation is not
reached, the Associates agree to drill a replacement
well for Opon #4 pursuant to the Association Contract
and in that event, the Associates and Ecopetrol agree
to proceed with the installation of a pipeline as
defined herein.
11. If Associates are required to pay any new or increased
taxes, duties, fees, or other charges related to
natural gas sales and/or transportation to any entity
of Colombia that adversely effect Associates after the
effective date of the Gas Sales Contract, then
Ecopetrol shall reimburse associates for any such
payments made by Associates.
12. Ecopetrol shall be bound by the terms of this
Memorandum of Understanding whether or not Ecopetrol
agrees the OPON Field is commercial pursuant to Clause
9.1 of the Association Contract.
13. The terms agreed upon in numbers 1, 2, 3, 4, 7, 8, 10
(second paragraph) and 11 of part B are totally
independent of the obligations originally assumed in
the OPON Association Contract.
The parties agree to cooperate and use due diligence in
completing the project so that gas can be delivered to
Barrancabermeja as early as possible in 1996.
This Memorandum of Understanding has been executed in Santafe de
Bogota, on the 26th day of July, 1995.
/s/ Gregory P. Williams
AMOCO COLOMBIA PETROLEUM COMPANY
/s/ John J. Hoey
HONDO MAGDALENA OIL & GAS LIMITED
/s/ Sergio Rueda F.
OPON DEVELOPMENT COMPANY
/s/ Juan Maria Rendon
EMPRESA COLOMBIANA DE PETROLEOS
ECOPETROL
5
EXHIBIT A
FORMULA FOR FIXING THE PRICE OF GAS ON A MMBTU EQUIVALENT BASIS
The liquidation of the price of natural gas will be made in
accordance with the following formula:
P1 = Po x (FO1/FOo), where P1 is the price in dollars per
million BTU (US$/MBTU) to be fixed for the semester; Po is the
price (US$/MBTU) in effect during the previous semester; FO1 is
the average computed of the export price of fuel oil of ECOPETROL
(FOB Cartagena) during the semester immediately previous to the
one for which the price will be established; FOo is the average
computed of the price of fuel oil (FOB Cartagena) during the same
semester of the year previous to the one for which the price will
be established. The value of Po, for the first semester of 1995,
was US$1.03/MBTU. The value of FO1, for the first semester of
1995, was US$14.68/barrel. The value of FOo for the second
semester of 1994, was $12.87/barrel. The price will be
readjusted each semester on the first day of the months of
January and July of each year. After the lst of July, 1995, the
calculation will be made using two decimal numbers and the result
will be rounded off in such a way that the cents of a dollar will
be rounded to the nearest when the thousandths are equal to or
more than 5 and will be left same (equal) when the thousandths
are less than 5.
The payment will be made in United States of America dollars up
to a maximum of seventy-five (75%) percent of the price of
unassociated natural gas that is processed and produced in
Colombia.
6
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial
information extracted from Hondo Oil & Gas
Company's Form 10-Q for the period identified
below. This information is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-END> JUN-30-1995
<CASH> 155
<SECURITIES> 0
<RECEIVABLES> 439
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 666
<PP&E> 11,385
<DEPRECIATION> 0
<TOTAL-ASSETS> 19,588
<CURRENT-LIABILITIES> 2,899
<BONDS> 82,205
<COMMON> 13,229
0
0
<OTHER-SE> (82,618)
<TOTAL-LIABILITY-AND-EQUITY> 19,588
<SALES> 6
<TOTAL-REVENUES> 14
<CGS> 0
<TOTAL-COSTS> 2
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,471
<INCOME-PRETAX> (4,760)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,760)
<DISCONTINUED> (300)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,060)
<EPS-PRIMARY> (0.39)
<EPS-DILUTED> (0.39)
</TABLE>
