UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
MARK ONE
X QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 1-8921
HALLWOOD ENERGY PARTNERS, L. P.
(Exact name of registrant as specified in its charter)
DELAWARE 84-0987088
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
4582 SOUTH ULSTER STREET PARKWAY
SUITE 1700
DENVER, COLORADO 80237
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code: (303) 850-7373
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No
The registrant is a limited partnership and issues Units (representing ownership
of limited partner interests).
<TABLE>
<CAPTION>
Number of Units outstanding as of August 9, 1996
<S> <C>
Class A 9,977,254
Class B 143,773
Class C 664,063
</TABLE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
HALLWOOD ENERGY PARTNERS, L. P.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands except Units)
June 30, December 31,
1996 1995
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 12,497 $ 4,977
Accounts receivable:
Oil and gas sales 7,533 6,767
Trade 2,330 2,860
Due from affiliates 1,833
Prepaid expenses and other current assets 1,062 1,091
Net working capital of affiliates 47
------- -------
Total 23,469 17,528
------- -------
PROPERTY, PLANT AND EQUIPMENT, at cost
Oil and gas properties (full cost method):
Proved mineral interests 599,536 601,323
Unproved mineral interests - domestic 1,061 684
Furniture, fixtures and other 3,223 3,090
------- -------
Total 603,820 605,097
Less accumulated depreciation, depletion,
amortization and property impairment (517,624) (510,171)
------- -------
Total 86,196 94,926
------- -------
OTHER ASSETS
Investment in common stock of HCRC 12,659 11,491
Deferred expenses and other assets 329 232
------- -------
Total 12,988 11,723
------- -------
TOTAL ASSETS $122,653 $124,177
======= =======
</TABLE>
<TABLE>
<CAPTION>
HALLWOOD ENERGY PARTNERS, L. P.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands except Units)
June 30, December 31,
1996 1995
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 14,219 $ 16,369
Net working capital deficit of affiliates 5,061
Due to affiliates 1,421
Current portion of contract settlement 374
Current portion of long-term debt 2,187 87
------- -------
Total 17,827 21,891
------- -------
NONCURRENT LIABILITIES
Long-term debt 37,084 37,557
Contract settlement 2,401 2,397
Deferred liability 1,679 1,718
------- -------
Total 41,164 41,672
------- -------
Total Liabilities 58,991 63,563
------- -------
MINORITY INTEREST IN SUBSIDIARIES 3,178 3,042
------- -------
PARTNERS' CAPITAL
Class A Units - 9,977,254 Units issued,
9,077,496 outstanding in 1996 and 9,193,159
outstanding in 1995 63,205 59,614
Class B Subordinated Units - 143,773 Units
outstanding in 1996 and 1995 1,147 1,062
Class C Units - 664,063 outstanding in 1996
and -0- outstanding in 1995
General Partner 3,114 2,981
Treasury Units - 899,758 Units in 1996 and
784,095 Units in 1995 (6,982) (6,085)
------- -------
Partners' Capital - Net 60,484 57,572
------- -------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $122,653 $124,177
======= =======
</TABLE>
<TABLE>
<CAPTION>
HALLWOOD ENERGY PARTNERS, L. P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands except Units)
For the Three Months
Ended June 30,
1996 1995
<S> <C> <C>
REVENUES:
Oil revenue $ 5,037 $ 4,246
Gas revenue 6,921 5,151
Pipeline, facilities and other 697 978
Interest 133 90
------- -------
12,788 10,465
------- -------
EXPENSES:
Production operating 2,662 2,402
Facilities operating 157 155
General and administrative 750 1,156
Depreciation, depletion and amortization 3,466 4,052
Impairment of oil and gas properties 7,000
Interest 997 1,054
------- -------
8,032 15,819
------- -------
OTHER INCOME (EXPENSES):
Equity in income (loss) of HCRC 351 (1,506)
Minority interest in net income of
subsidiaries (604) (351)
Litigation settlement (228)
------- -------
(481) (1,857)
------- -------
NET INCOME (LOSS) 4,275 (7,211)
------- -------
CLASS C UNIT DISTRIBUTIONS ($.25 PER UNIT) 166
------- -------
NET INCOME (LOSS) FOR GENERAL PARTNER,
CLASS A AND CLASS B LIMITED PARTNERS $ 4,109 $ (7,211)
======= =======
ALLOCATION OF NET INCOME (LOSS):
General partner $ 646 $ 188
======= =======
Class A and Class B Limited partners $ 3,463 $ (7,399)
======= =======
Per Class A Unit and Class B Unit $ .37 $ (.86)
======= =======
Weighted average Class A Units and
Class B Units outstanding 9,246 8,644
======= =======
</TABLE>
<TABLE>
<CAPTION>
HALLWOOD ENERGY PARTNERS, L. P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands except Units)
For the Six Months
Ended June 30,
1996 1995
<S> <C> <C>
REVENUES:
Oil revenue $ 10,122 $ 8,189
Gas revenue 14,729 10,711
Pipeline, facilities and other 1,432 1,418
Interest 206 176
------- -------
26,489 20,494
------- -------
EXPENSES:
Production operating 5,692 5,089
Facilities operating 432 378
General and administrative 1,918 2,647
Depreciation, depletion and amortization 7,328 8,024
Impairment of oil and gas properties 11,051
Interest 2,119 2,047
------- -------
17,489 29,236
------- -------
OTHER INCOME (EXPENSES):
Equity in income (loss) of HCRC 727 (2,353)
Minority interest in net income of
subsidiaries (1,471) (638)
Litigation settlement (228) (30)
------- -------
(972) (3,021)
------- -------
NET INCOME (LOSS) 8,028 (11,763)
CLASS C UNIT DISTRIBUTIONS ($.50 PER UNIT) 332
------- -------
NET INCOME (LOSS) FOR GENERAL PARTNER,
CLASS A AND CLASS B LIMITED PARTNERS $ 7,696 $(11,763)
======= =======
ALLOCATION OF NET INCOME (LOSS):
General partner $ 1,333 $ 389
======= =======
Class A and Class B Limited partners $ 6,363 $(12,152)
======= =======
Per Class A Unit and Class B Unit $ .69 $ (1.41)
======= =======
Weighted average Class A Units and
Class B Units outstanding 9,258 8,644
======= =======
</TABLE>
<TABLE>
<CAPTION>
HALLWOOD ENERGY PARTNERS, L. P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
For the Six Months
Ended June 30,
1996 1995
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 8,028 $(11,763)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation, depletion, amortization and
impairment 7,328 19,075
Depreciation charged to affiliates 125 111
Amortization of deferred loan costs and other
assets 78 101
Noncash interest expense 55 158
Equity in (earnings) loss of HCRC (727) 2,353
Minority interest in net income of
subsidiaries 1,471 638
Undistributed earnings of affiliates (451) (244)
Recoupment of take-or-pay liability (216) (96)
------- -------
Cash provided by operations before
working capital changes 15,691 10,333
Changes in operating assets and liabilities
provided (used) cash net of noncash activity:
Oil and gas sales receivable (766) 291
Trade receivables 530 (122)
Due from affiliates 1,405 453
Prepaid expenses and other current assets 29 207
Accounts payable and accrued liabilities (2,150) (1,533)
Due to affiliates 1,849
------- -------
Net cash provided by operating activities 16,588 9,629
------- -------
INVESTING ACTIVITIES:
Additions to property, plant and equipment (616) (1,392)
Exploration and development costs incurred (4,142) (5,064)
Proceeds from sales of property, plant and
equipment 5,263 258
Refinance of Spraberry investment (4,715)
Investment in affiliates (508)
------- -------
Net cash used in investing activities (4,718) (6,198)
------- -------
FINANCING ACTIVITIES:
Payments of long-term debt (4,373) (7,331)
Proceeds from long-term debt 6,000 12,000
Distributions paid (4,207) (4,876)
Distributions paid by consolidated
subsidiaries to minority shareholders (1,335) (706)
Payments of contract settlement (305) (704)
Syndication costs and capital contributions (12) (36)
Other financing activities (118) (12)
------- -------
Net cash used in financing activities (4,350) (1,665)
------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS 7,520 1,766
CASH AND CASH EQUIVALENTS:
BEGINNING OF PERIOD 4,977 2,409
------- -------
END OF PERIOD $ 12,497 $ 4,175
======= =======
<F1>
The accompanying notes are an integral part
of the financial statements.
</TABLE>
HALLWOOD ENERGY PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - GENERAL
Hallwood Energy Partners, L. P. ("HEP") is a publicly traded Delaware limited
partnership engaged in the development, production, sale and transportation of
oil and gas and in the acquisition, exploration, development and operation of
oil and gas properties. The principal objectives of HEP are to maintain and to
expand its reserve base and to provide cash distributions to holders of its
units representing limited partner interests ("Units"). The general partner of
HEP is Hallwood Energy Corporation ("HEC") which has been engaged in oil and gas
exploration and development since its incorporation in 1968.
The activities of HEP are conducted through HEP Operating Partners, L. P.
("HEPO") and EDP Operating, Ltd. ("EDPO"). HEP is the sole limited partner and
HEC is the sole general partner of HEPO. Hallwood G. P., Inc. ("HGPI"), a
wholly-owned subsidiary of HEC, is the sole general partner, and HEP is the sole
limited partner of EDPO. Solely for purposes of simplicity herein, unless
otherwise indicated, all references to HEP in connection with the ownership,
exploration, development or production of oil and gas properties include HEPO
and EDPO.
The interim financial data are unaudited; however, in the opinion of the general
partner, the interim data include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the results for the
interim periods. These financial statements should be read in conjunction with
the financial statements and accompanying footnotes included in HEP's December
31, 1995 Annual Report on Form 10-K.
ACCOUNTING POLICIES
CONSOLIDATION
HEP fully consolidates majority owned entities and reflects a minority interest
in the consolidated financial statements. HEP accounts for its interest in 50%
or less owned affiliated oil and gas partnerships and limited liability
companies using the proportionate consolidation method of accounting. HEP's
investment in the common stock of its affiliate, Hallwood Consolidated
Resources Corporation ("HCRC"), is accounted for under the equity method.
The accompanying financial statements include the activities of HEP, its
subsidiaries Hallwood Petroleum, Inc. ("HPI") and Hallwood Oil and Gas, Inc.
("Hallwood Oil"), and majority owned affiliates, the May Limited Partnerships
1983-1, 1983-2, 1983-3, 1984-1, 1984-2, 1984-3 ("Mays").
TREASURY STOCK
HEP owns approximately 46% and 40% of the outstanding common stock of HCRC, at
June 30, 1996 and December 31, 1995, respectively; while HCRC owned
approximately 19% and 9% of HEP's Units at June 30, 1996 and December 31, 1995,
respectively; consequently, HEP had an interest in 899,758 and 784,095 of its
own Units at June 30, 1996 and December 31, 1995, respectively. These Units are
treated as treasury units in the accompanying financial statements.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior period amounts to conform
to the classifications used in the current period.
NOTE 2 - DEBT
During the first quarter of 1995, HEP and its lenders amended and restated HEP's
Amended and Restated Credit Agreement ("Credit Agreement") to extend the term
date of its line of credit to May 31, 1997. Under the Credit Agreement and an
Amended and Restated Note Purchase Agreement ("Note Purchase Agreement")
(collectively referred to as the "Credit Facilities") HEP has a borrowing base
of $45,000,000. HEP has amounts outstanding at June 30, 1996 of $30,700,000
under the Credit Agreement and $8,571,000 under the Note Purchase Agreement.
HEP's borrowing base is further reduced by an outstanding contract settlement
o b ligation of $2,401,000; therefore, its unused borrowing base totaled
$3,328,000 at August 9, 1996.
Borrowings under the Note Purchase Agreement bear interest at an annual rate of
11.85%, which is payable quarterly. Annual principal payments of $4,286,000
began April 30, 1992, and the debt is required to be paid in full on April 30,
1998. HEP intends to fund the payment due in April 1997 through additional
borrowings under the Credit Agreement; thus, no portion of HEP's Note Purchase
Agreement is classified as current as of June 30, 1996.
Borrowings against the Credit Agreement bear interest at the lower of the
Certificate of Deposit rate plus 1.875%, prime plus 1/2% or the Euro-Dollar rate
plus 1.75% (7.2% at June 30, 1996). Interest is payable monthly, and quarterly
principal payments of $2,187,000, as adjusted for the anticipated borrowings to
fund the Note Purchase Agreement payment due in April 1997, commence May 31,
1997.
The borrowing base for the Credit Facilities is redetermined semiannually in
March and September of each year. The Credit Facilities are secured by a first
l i en on approximately 80% in value of HEP's oil and gas properties.
Additionally, aggregate distributions paid by HEP in any 12 month period are
limited to 50% of cash flow from operations before working capital changes and
distributions received from affiliates.
HEP entered into contracts to hedge its interest rate payments on $10,000,000 of
its debt for 1996 and 1997 and $5,000,000 for 1998. HEP does not use the hedges
for trading purposes, but rather for the purpose of providing a measure of
predictability for a portion of HEP's interest payments under its debt agreement
which has a floating interest rate. In general, it is HEP's goal to hedge 50%
of the principal amount of its debt for each year of the remaining term of the
debt. HEP has entered into two hedges, one of which is an interest rate collar
pursuant to which it pays a floor rate of 7.55% and a ceiling rate of 9.85%, and
the other is an interest rate swap with a fixed rate of 7.49%. The amounts
received or paid upon settlement of these transactions are recognized as
interest expense at the time the interest payments are due.
NOTE 3 - STATEMENT OF CASH FLOWS
Cash paid for interest during the six months ended June 30, 1996 and 1995 was
$1,913,000 and $1,684,000, respectively.
NOTE 4 - LEGAL PROCEEDINGS
In June 1996, HEP and the other parties to the lawsuits styled Lamson Petroleum
Corporation v. Hallwood Petroleum, Inc. et al. settled the lawsuits. The
plaintiffs in the lawsuits claimed they had valid leases covering streets and
roads in the units of the A. L. Boudreaux #1 well, G. S. Boudreaux #1 well, Paul
Castille #1 well, Evangeline Shrine Club #1 well and Duhon #1 well, which
represented approximately .4% to 2.3% of HEP s interest in these properties, and
they were entitled to a portion of the production from the wells dating from
February 1990. In the settlement, HEP and the plaintiffs agreed to cross-convey
interests in certain leases to one another, and HEP agreed to pay the plaintiffs
$728,000. HEP has not recognized revenue attributable to the contested leases
since January 1993. These revenues plus accrued interest, totaling $506,000,
had been placed in escrow pending the resolution of the lawsuits. The excess of
the cash paid over the escrowed amounts, is reflected as litigation settlement
expense in the accompanying financial statements. The cross-conveyance of the
interests in the leases will result in a decrease in HEP s reserves of $374,000
in future net revenues, discounted at 10%.
NOTE 5 - SUBSEQUENT EVENT
On July 1, 1996, HEP and HCRC completed a transaction involving the sale by Fuel
Resources Development Co., a wholly owned subsidiary of Public Service Company
of Colorado, and other interest owners of their interests in 38 coal bed methane
wells located in La Plata County, Colorado and Rio Arriba County, New Mexico.
Thirty-four of the wells, estimated to have reserves of 53 BCF, were assigned to
44 Canyon LLC ( 44 Canyon ), a special purpose entity owned by a large east
coast financial institution. The wells qualify for tax credits under Section 29
of the Internal Revenue Code. HPI will manage and operate the properties on
behalf of 44 Canyon. The $27.8 million purchase price was funded by 44 Canyon
through the sale of a volumetric production payment to an affiliate of Enron
Capital & Trade Resources Corp., a subsidiary of Enron Corp., the sale of a
subordinated production payment and certain other property interests for $3.45
million to an affiliate of HEP and HCRC, and additional cash contributed by the
owners of 44 Canyon. The affiliate of HEP and HCRC which purchased the
subordinated production payment and other property interests is owned equally by
HEP and HCRC. The interests in the four wells in Rio Arriba County were
acquired directly by HEP and HCRC. As a result of the transaction, HEP expects
to add 9.8 BCF of gas to its reserve base, which represents approximately 52% of
its estimated 1996 production.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW
HEP generated $16,588,000 of cash flow from operating activities during the
first six months of 1996.
The other primary cash inflow was:
. $5,263,000 in proceeds from the sale of property
. $6,000,000 in proceeds from long-term debt
Cash was used primarily for:
. Additions to property and development costs incurred of $4,758,000
. Refinance of Spraberry investment of $4,715,000
. Distributions to Unitholders of $4,207,000
. Payments of contract settlement of $305,000
When combined with miscellaneous other cash activity during the period, the
result was an increase of $7,520,000 in HEP's cash from $4,977,000 at December
31, 1995 to $12,497,000 at June 30, 1996.
DEVELOPMENT PROJECTS AND ACQUISITIONS
Through June 30, 1996, HEP incurred approximately $4,758,000 for exploration,
development and acquisition costs and approximately $441,000 for the purchase of
shares of Hallwood Consolidated Resources Corporation ( HCRC ) toward the 1996
capital budget of $11,500,000. The expenditures were comprised of approximately
$ 4 , 1 4 2,000 for domestic exploration and development expenditures and
approximately $616,000 for property acquisitions. A description of significant
exploration and development projects to date in 1996 follows.
HEP continues to devote capital resources to the West Texas Kermit area in 1996.
HEP drilled or participated in the drilling of nine wells, eight of which were
successful, and participated in one unsuccessful recompletion in the first six
months of 1996, for a total cost of approximately $760,000. The new wells in
this area are capable of producing approximately 750 gross equivalent barrels of
oil per day but are currently limited to approximately 500 gross equivalent
barrels of oil per day due to limitations on production imposed by state laws
and regulations. HEP's interest in these wells averages 23%. HEP is committed
to drilling at least three more wells in this area in the third quarter and has
plans to drill or recomplete up to ten additional wells by year end.
During the second quarter of 1996, HEP purchased 12,965 shares of HCRC for $34
per share. The shares were originally purchased by HCRC in connection with an
odd lot repurchase offer and then were resold to HEP at the price paid by HCRC
for such shares.
HEP acquired three dimensional (3-D) seismic data covering 106 square miles on
the Cowden Ranch in Crane County, Texas. The prospect will be operated by a
major oil company, and HEP has a 12.5% working interest. HEP s share of costs
to date is $425,000. Seismic interpretation is in process, and two exploratory
wells are expected to be drilled in 1996.
HEP acquired 3-D seismic data and related acreage in the Merkel prospect area
which covers 87 square miles in Jones, Taylor and Nolan Counties, Texas.
Expenditures in the first six months of 1996 totaled $200,000. Thus far, HEP
has participated in drilling five wells on developed prospects for a total cost
of $135,000, including one well drilled in late 1995. Two of the wells are
awaiting completion, two are on production with average initial rates of 60
barrels of oil per day, and one well was unsuccessful. HEP s interest in the
wells is 10%. Fourteen more prospects have been identified on 13 square miles
of data, and seismic interpretation has begun on the remaining 74 square miles
of data.
HEP also participated in the drilling of two nonoperated wells in Williams
County, North Dakota in the latter part of 1995 and the first quarter of 1996,
one of which was dry and the other only marginally successful, for a total cost
of approximately $200,000. HEP also drilled an exploratory dry hole in Richland
County, Montana, at a cost of $120,000. HEP is currently completing an
Interlake Formation development well, drilled in the second quarter at a cost of
approximately $425,000
HEP incurred approximately $189,000 in the first quarter, net to HEP's interest,
for four recompletions and one drilled well in the Rocker "b" Ranch in Reagan
County, Texas. This activity has increased HEP's share of production by 90
equivalent barrels of oil per day. During the first quarter, HEP also acquired
interests in five additional producing leases on the Rocker "b" Ranch for a
total of $93,000. Effective April 1, 1996, HEP repaid its share of the debt of
Hallwood Spraberry Drilling Company, L.L.C. ( HSD ) through additional
borrowings under its bank credit agreement and assumed direct ownership of its
share of HSD s properties. In the second quarter of 1996, HEP recompleted
three wells, two of which were successful, and began drilling another well in
July. HEP has plans to recomplete at least five more wells before year end and
will consider other work, if the capital is available.
Under a farmout agreement completed in 1995, HEP participates in several
multiple lateral, horizontal wells in the Giddings Austin Chalk play in Lee
County, Texas. Two successful wells and one unsuccessful well have been drilled
thus far. HEP's interests in the area range from 3% to 4%. Gross average
initial production rates were 750 barrels of oil per day on the first two wells.
HEP's cost for all three wells was approximately $25,000.
In the San Juan Basin area, HEP, through an affiliate, acquired interests in 34
coal bed methane wells located in La Plata County, Colorado for $1,300,000.
HEP s interest in the wells is expected to add 9.8 BCF of gas to its reserve
base, which represents approximately 52% of its estimated 1996 production. The
acquisition was completed on July 1, 1996. In the same transaction, HEP also
directly acquired interests in four non-producing wells in Rio Arriba County,
New Mexico.
In the first quarter of 1996, HEP successfully recompleted a well in New Mexico
for approximately $90,000. Production on this well averaged 1,600 mcf of gas
per day which exceeds the initial production rates experienced when the well was
drilled in 1990. Rates prior to this workover were approximately 400 mcf of gas
per day. HEP owns approximately 55% of this well. HEP began drilling another
Fruitland Coal development well in late July and anticipates completion of the
well in August.
HEP is also actively evaluating acquisitions in strategic areas. Such
acquisitions would be financed using the capital budget, supplemented by
external financing when appropriate.
PROPERTY SALES
During the first quarter of 1996, HEP received approximately $1,300,000 for the
sale of its interests in the Hoople Field in Crosby County, Texas. HEP also
received another $88,000 in early April for the sale of various nonstrategic
properties at auction. In June 1996, HEP completed the sale of its interests in
the Bethany Longstreet area of Louisiana (approximately 575,000 equivalent
barrels of oil, measured using December 31, 1995 pricing) for approximately
$3,800,000.
DISTRIBUTIONS
HEP declared distributions of $.13 per Class A Unit and $.25 per Class C Unit,
payable on August 15, 1996 to Unitholders of record on June 30, 1996.
Distributions on the Class B Units are suspended if the Class A Units receive a
distribution of less than $.20 per Class A Unit per calendar quarter. In any
quarter for which distributions of $.20 or more per unit are made on the Class A
Units, the Class B Units are entitled to be paid, in whole or in part, suspended
distributions.
FINANCING
During the first quarter of 1995, HEP and its lenders amended and restated HEP's
Amended and Restated Credit Agreement ("Credit Agreement") to extend the
maturity date of its line of credit to May 31, 1997. Under the Credit agreement
and an Amended and Restated Note Purchase Agreement ("Note Purchase Agreement")
(collectively referred to as the "Credit Facilities") HEP has a borrowing base
of $45,000,000. HEP has amounts outstanding at June 30, 1996 of $30,700,000
under the Credit Agreement and $8,571,000 under the Note Purchase Agreement.
HEP's borrowing base is further reduced by an outstanding contract settlement
o b ligation of $2,401,000; therefore, its unused borrowing base totaled
$3,328,000 at August 9, 1996.
Borrowings under the Note Purchase Agreement bear interest at an annual rate of
11.85%, which is payable quarterly. Annual principal payments of $4,286,000
began April 30, 1992, and the debt is required to be paid in full on April 30,
1998. HEP intends to fund the payment due in April 1997 through additional
borrowings under the Credit Agreement; thus, no portion of HEP's Note Purchase
Agreement is classified as current as of June 30, 1996.
Borrowings against the Credit Agreement bear interest at the lower of the
Certificate of Deposit rate plus 1.875%, prime plus 1/2% or the Euro-Dollar rate
plus 1.75% (7.2% at June 30, 1996). Interest is payable monthly, and quarterly
principal payments of $2,187,000, as adjusted for the anticipated borrowings to
fund the Note Purchase Agreement payment due in April 1997, commence May 31,
1997.
The borrowing base for the Credit Facilities is redetermined semiannually in
March and September of each year. The Credit Facilities are secured by a first
l i en on approximately 80% in value of HEP's oil and gas properties.
Additionally, aggregate distributions paid by HEP in any 12 month period are
limited to 50% of cash flow from operations before working capital changes and
distributions received from affiliates.
HEP entered into contracts to hedge its interest rate payments on $10,000,000 of
its debt for 1996 and 1997 and $5,000,000 for 1998. HEP does not use the hedges
for trading purposes, but rather for the purpose of providing a measure of
predictability for a portion of HEP's interest payments under its debt agreement
which has a floating interest rate. In general, it is HEP's goal to hedge 50%
of the principal amount of its debt for each year of the remaining term of the
debt. HEP has entered into two hedges, one of which is an interest rate collar
pursuant to which it pays a floor rate of 7.55% and a ceiling rate of 9.85%, and
the other is an interest rate swap with a fixed rate of 7.49%. The amounts
received or paid upon settlement of these transactions are recognized as
interest expense at the time the interest payments are due.
INFLATION AND CHANGING PRICES
PRICES
Prices obtained for oil and gas production depend upon numerous factors that are
beyond the control of HEP, including the extent of domestic and foreign
production, imports of foreign oil, market demand, domestic and worldwide
economic and political conditions, and government regulations and tax laws.
Prices for both oil and gas fluctuated significantly throughout 1995 and 1996.
The following table presents the average prices received each quarter by HEP and
the effects of the hedging transactions discussed below.
<TABLE>
<CAPTION>
Oil Oil
(excluding the (including the
effects of effects of
hedging hedging
transactions) transactions)
(bbl) (bbl)
<S> <C> <C>
First quarter - 1995 $16.79 $17.22
Second quarter - 1995 18.00 18.14
Third quarter - 1995 16.15 16.63
Fourth quarter - 1995 17.13 17.57
First quarter - 1996 18.05 17.97
Second quarter - 1996 20.56 20.15
</TABLE>
<TABLE>
<CAPTION>
Gas Gas
(excluding the (including the
effects of effects of
hedging hedging
transactions) transactions)
(mcf) (mcf)
<S> <C> <C>
First quarter - 1995 $1.51 $1.81
Second quarter - 1995 1.39 1.64
Third quarter - 1995 1.54 1.84
Fourth quarter - 1995 1.87 1.99
First quarter - 1996 2.41 2.30
Second quarter - 1996 2.15 2.12
</TABLE>
HEP has entered into numerous financial contracts to hedge the price of its oil
and natural gas. The purpose of the hedges is to provide protection against
price decreases and to provide a measure of stability in the volatile
environment of oil and natural gas spot pricing. The revenue associated with
these contracts is recognized as oil or gas revenue at the time the hedged
volumes are sold.
The following table provides a summary of HEP's outstanding financial contracts:
<TABLE>
<CAPTION>
Oil
Percent of
Production Contract
Period Hedged Floor Price
(per bbl)
<S> <C> <C>
Last six months of 1996 36% $16.90
1997 18% $15.37
1998 15% $15.33
1999 3% $15.88
</TABLE>
Between 16% and 100% of the oil volumes hedged in each year are subject to a
participating hedge whereby HEP will receive the contract price if the posted
futures price is lower than the contract price, and will receive the contract
price plus between 25% and 75% of the difference between the contract price and
the posted futures price if the posted futures price is greater than the
contract price. Between 48% and 100% of the volumes hedged in each year are
subject to a collar agreement whereby HEP will receive the contract price if the
spot price is lower than the contract price, the cap price if the spot price is
higher than the cap price, and the spot price if that price is between the
contract price and the cap price. The cap prices range from $17.00 to $19.35.
<TABLE>
<CAPTION>
Gas
Percent of
Production Contract
Period Hedged Floor Price
(per mcf)
<S> <C> <C>
Last six months of 1996 54% $1.96
1997 54% $1.97
1998 41% $2.10
1999 17% $2.01
2000 20% $2.01
</TABLE>
Between 0% and 50% of the gas volumes hedged in each year are subject to a
collar agreement whereby HEP will receive the contract price if the spot price
is lower than the contract price, the cap price if the spot price is higher than
the cap price, and the spot price if that price is between the contract price
and the cap price. The cap prices range from $2.65 to $2.93.
During the third quarter through July 26, 1996, the oil price (for barrels not
hedged) averaged between $20.00 and $22.00 per barrel. The weighted average
price of natural gas (for mcf not hedged) during that period was between $1.40
and $2.80 per mcf.
INFLATION
Inflation did not have a material impact on HEP in 1995 and is not anticipated
to have a material impact in 1996.
RESULTS OF OPERATIONS
The following tables are presented to contrast HEP's revenue, expense and
earnings for discussion purposes. Significant fluctuations are discussed in the
accompanying narrative. The "direct owned" column represents HEP's direct
royalty and working interests in oil and gas properties. The "Mays" column
represents the results of operations of six May Limited Partnerships which are
consolidated with HEP. In 1996, HEP owned interests which ranged from 54.5% to
68.3% of the Mays, and in 1995, HEP's ownership in the Mays ranged from 54.1% to
67.8%.
<TABLE>
<CAPTION>
TABLE OF HEP EARNINGS FOR MANAGEMENT DISCUSSION
(In thousands except price)
FOR THE QUARTERS ENDED JUNE 30, 1996 AND 1995
For the Quarter Ended June 30, 1996
Direct
Owned Mays Total
<S> <C> <C> <C>
Oil production (bbl) 224 26 250
Gas production (mcf) 2,810 459 3,269
Average oil price $20.05 $20.96 $20.15
Average gas price $ 2.02 $ 2.69 $ 2.12
Oil revenue $ 4,492 $ 545 $5,037
Gas revenue 5,687 1,234 6,921
Pipeline, facilities and other 697 697
revenue
Interest income 115 18 133
------- ------- -------
Total revenue 10,991 1,797 12,788
------- ------- -------
Production operating expense 2,496 166 2,662
Facilities operating expense 157 157
General and administrative expense 631 119 750
Depreciation, depletion, and
amortization 3,019 447 3,466
Interest expense 997 997
Litigation settlement expense 222 6 228
Equity in (income) loss of HCRC (351) (351)
Minority interest 604 604
------- ------- -------
Total expense 7,171 1,342 8,513
------- ------- -------
Net income (loss) $ 3,820 $ 455 $ 4,275
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
For the Quarter Ended June 30, 1995
Direct
Owned Mays Total
<S> <C> <C> <C>
Oil production (bbl) 210 24 234
Gas production (mcf) 2,793 354 3,147
Average oil price $18.15 $18.13 $18.14
Average gas price $ 1.60 $ 1.93 $ 1.64
Oil revenue $ 3,811 $ 435 $ 4,246
Gas revenue 4,469 682 5,151
Pipeline, facilities and other
revenue 978 978
Interest income 73 17 90
------- ------- -------
Total revenue 9,331 1,134 10,465
------- ------- -------
Production operating expense 2,231 171 2,402
Facilities operating expense 155 155
General and administrative expense 1,040 116 1,156
Depreciation, depletion, and
amortization 3,611 441 4,052
Impairment of oil and gas
properties 7,000 7,000
Interest expense 1,054 1,054
Equity in (income) loss of HCRC 1,506 1,506
Minority interest 351 351
------- ------- -------
Total expense 16,597 1,079 17,676
------- ------- -------
Net income (loss) $ (7,266) $ 55 $ (7,211)
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
TABLE OF HEP EARNINGS FOR MANAGEMENT DISCUSSION
(In thousands except price)
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995
For the Six Months Ended June 30, 1996
Direct
Owned Mays Total
<S> <C> <C> <C>
Oil production (bbl) 475 58 533
Gas production (mcf) 5,694 969 6,663
Average oil price $18.87 $19.97 $18.99
Average gas price $ 2.05 $ 3.14 $ 2.21
Oil revenue $ 8,964 $ 1,158 $ 10,122
Gas revenue 11,689 3,040 14,729
Pipeline, facilities and other
revenue 1,432 1,432
Interest income 174 32 206
------- ------- -------
Total revenue 22,259 4,230 26,489
------- ------- -------
Production operating expense 5,344 348 5,692
Facilities operating expense 432 432
General and administrative expense 1,686 232 1,918
Depreciation, depletion, and
amortization 6,349 979 7,328
Interest expense 2,119 2,119
Litigation settlement expense 222 6 228
Equity in (income) loss of HCRC (727) (727)
Minority interest 1,471 1,471
------- ------- -------
Total expense 15,425 3,036 18,461
------- ------- -------
Net income (loss) $ 6,834 $ 1,194 $ 8,028
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
For the Six Months Ended June 30, 1995
Direct
Owned Mays Total
<S> <C> <C> <C>
Oil production (bbl) 419 44 463
Gas production (mcf) 5,519 700 6,219
Average oil price $17.64 $18.09 $17.68
Average gas price $ 1.71 $ 1.83 $ 1.72
Oil revenue $ 7,393 $ 796 $ 8,189
Gas revenue 9,427 1,284 10,711
Pipeline, facilities and other
revenue 1,418 1,418
Interest income 143 33 176
------- ------- -------
Total revenue 18,381 2,113 20,494
------- ------- -------
Production operating expense 4,783 306 5,089
Facilities operating expense 378 378
General and administrative expense 2,420 227 2,647
Depreciation, depletion, and
amortization 7,163 861 8,024
Impairment of oil and gas
properties 11,051 11,051
Interest expense 2,047 2,047
Litigation settlement expense 30 30
Equity in (income) loss of HCRC 2,353 2,353
Minority interest 638 638
------- ------- -------
Total expense 30,225 2,032 32,257
------- ------- -------
Net income (loss) $(11,844) $ 81 $(11,763)
======= ======= =======
</TABLE>
SECOND QUARTER 1996 COMPARED TO SECOND QUARTER 1995
OIL REVENUE
Oil revenue increased by $791,000 during the second quarter of 1996 as compared
with the second quarter of 1995. The increase is the result of an increase in
the average oil price from $18.14 per barrel in 1995 to $20.15 per barrel in
1996 combined with an increase in oil production from 234,000 barrels in 1995 to
250,000 barrels in 1996. The increase in oil production is due to increased
production from exploratory and developmental drilling projects in Montana,
Wyoming and West Texas partially offset by normal production declines.
The effect of HEP's hedging transactions, as described under "Inflation and
Changing Prices," was to decrease HEP's average oil price from $20.56 per
barrel to $20.15 per barrel, representing a reduction in revenue from hedging
transactions of $103,000.
GAS REVENUE
Gas revenue increased by $1,770,000 during the second quarter of 1996 as
compared with the second quarter of 1995. The increase is the result of an
increase in production from 3,147,000 mcf in 1995 to 3,269,000 mcf in 1996,
combined with a 29% increase in price from $1.64 per mcf in 1995 to $2.12 per
mcf in 1996. The increase in production is due to increased production from
exploratory and developmental drilling projects in Montana,Wyoming and West
Texas and increased state allowable production limits in Louisiana which
is partially offset by normal production declines.
The effect of HEP's hedging transactions was to decrease HEP's average gas
price from $2.15 per mcf to $2.12 per mcf, representing a $98,000 reduction
in revenue from hedging transactions.
PIPELINE, FACILITIES AND OTHER
Pipeline, facilities and other revenue consists primarily of facilities income
from two gathering systems located in New Mexico, revenues derived from salt
water disposal, and incentive payments related to certain wells in San Juan
County. Pipeline, facilities and other income decreased by $281,000 during
the second quarter of 1996 as compared with the second quarter of 1995,
primarily as a result of the receipt of disputed revenues related to prior
periods during the second quarter of 1995.
INTEREST INCOME
The increase in interest income of $43,000 during the second quarter of 1996 as
compared with the second quarter of 1995 resulted from a higher average cash
balance during the second quarter of 1996 as compared with the same period
during 1995.
PRODUCTION OPERATING EXPENSE
Production operating expense increased $260,000 during the second quarter of
1996 as compared with the second quarter of 1995, primarily as a result of
an increase in production taxes and operating costs associated with the increase
in production as described above.
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expense includes costs incurred for direct
administrative services such as legal, audit and reserve reports, as well as
allocated internal overhead incurred by the operating company on behalf of
HEP. These expenses decreased $406,000 during the second quarter of 1996 as
compared with the second quarter of 1995 primarily due to bank fees associated
with the extension of HEP s line of credit during 1995.
DEPRECIATION, DEPLETION AND AMORTIZATION EXPENSE
Depreciation, depletion and amortization expense decreased $586,000 during the
second quarter of 1996 as compared with the second quarter of 1995. The decrease
is primarily the result of lower capitalized costs in 1996 as compared with
1995, due to the property impairments recorded during 1995.
IMPAIRMENT OF OIL AND GAS PROPERTIES
HEP recorded a property impairment at June 30, 1995 of $7,000,000 because
capitalized costs on that date exceeded the present value (discounted at 10%)
of estimated future net revenues from proved oil and gas reserves based upon
prices received at June 30, 1995 of $16.50 per barrel of oil and $1.50 per mcf
of gas.
INTEREST EXPENSE
Interest expense decreased $57,000 during the second quarter of 1996 as compared
with the second quarter of 1995, primarily as the result of lower interest rates
during 1996.
EQUITY IN INCOME (LOSS) OF HCRC
Equity in income (loss) of HCRC increased $1,857,000 during the second quarter
of 1996 as compared with the second quarter of 1995. The increase is primarily
due to HCRC's property impairment recorded during the second quarter of 1995.
MINORITY INTEREST IN NET INCOME OF SUBSIDIARIES
Minority interest in net income of subsidiaries represents unaffiliated
partners' interest in the net income of the May Partnerships. The increase of
$253,000 is due to an increase in the net income of the May Partnerships
resulting from increased production on their properties, as well as higher oil
and gas prices during 1996.
LITIGATION SETTLEMENT EXPENSE
Litigation settlement expense during 1996 consists primarily of expenses
incurred to settle the Lamson lawsuit described in Item 1. Note 4 of this Form
10-Q.
FIRST SIX MONTHS 1996 COMPARED TO THE FIRST SIX MONTHS 1995.
The comparisons for the first six months of 1996 and the first six months of
1995 are consistent with those discussed in the second quarter 1996 compared
to the second quarter 1995 except for the following.
OIL REVENUE
Oil revenue increased $1,933,000 or 24%. The increase is comprised of an
increase in average oil prices from $17.68 per barrel in 1995 to $18.99 per
barrel in 1996 combined with an increase in production from 463,000 barrels
in 1995 to 533,000 barrels in 1996. The production increase is due to
increased production from developmental and exploratory drilling projects in
Montana, Wyoming and West Texas partially offset by normal production
declines.
The effect of HEP s hedging transactions was to decrease HEP s average oil price
from $19.22 per barrel to $18.99 per barrel, representing a $123,000 decrease in
revenues.
GAS REVENUE
Gas revenue increased $4,018,000 during the first six months of 1996 as compared
with the first six months of 1995. The increase is comprised of an increase in
price from $1.72 per mcf in 1995 to $2.21 per mcf in 1996 combined with an
increase in production from 6,219,000 mcf in 1995 to 6,663,000 mcf in 1996.
The production increase is due to higher state allowable production limits in
Louisiana as well as increased production from exploratory and developmental
drilling projects in Montana, Wyoming and West Texas which is partially offset
by normal production declines.
The effect of HEP s hedging transactions was to decrease HEP s average gas price
from $2.28 per mcf to $2.21 per mcf, representing a $466,000 reduction in
revenue from hedging transactions.
FACILITIES OPERATING EXPENSE
Facilities operating expense represents the costs of operating and maintaining
two gathering systems located in New Mexico. Costs increased by $54,000 during
1996 as compared with 1995 due to the connection of additional wells to the
gathering systems.
IMPAIRMENT OF OIL AND GAS PROPERTIES
Impairment of oil and gas properties during the first six months of 1995
includes the write-off of HEP s Indonesian operations as well as the previously
discussed property impairment.
EQUITY IN INCOME (LOSS) OF HCRC
Equity in income (loss) of HCRC increased $3,080,000 during the first six months
of 1996 as compared with the first six months of 1995. The increase is
primarily due to HCRC's impairment expense resulting from the write-off of its
Indonesian operations during the first quarter of 1995 and a property
impairment recorded by HCRC during the second quarter of 1995.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
Reference is made to Item 8 - Notes 13 and 14 of Form 10-K for the
year ended December 31, 1995, and Item 1 - Note 4 of this Form 10-Q.
ITEM 2 - CHANGES IN SECURITIES
None.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5 - OTHER INFORMATION
None.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
None.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Partnership has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HALLWOOD ENERGY PARTNERS, L. P.
BY: HALLWOOD ENERGY CORPORATION
GENERAL PARTNER
Date: August 9, 1996 By: /s/Robert S. Pfeiffer
Robert S. Pfeiffer, Vice President
(Chief Financial Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Form 10-Q
for the quarter ended June 30, 1996 for Hallwood Energy Partners, L.P. and is
qualified in its entirety by reference to such Form 10-Q.
</LEGEND>
<CIK> 0000768172
<NAME> HALLWOOD ENERGY PARTNERS, L.P.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 12,497
<SECURITIES> 0
<RECEIVABLES> 9,863
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 23,469
<PP&E> 603,820
<DEPRECIATION> 517,624
<TOTAL-ASSETS> 122,653
<CURRENT-LIABILITIES> 17,827
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 60,484
<TOTAL-LIABILITY-AND-EQUITY> 122,653
<SALES> 24,851
<TOTAL-REVENUES> 26,489
<CGS> 0
<TOTAL-COSTS> 15,370
<OTHER-EXPENSES> 972
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,119
<INCOME-PRETAX> 8,028
<INCOME-TAX> 0
<INCOME-CONTINUING> 8,028
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,028
<EPS-PRIMARY> .69
<EPS-DILUTED> .69
</TABLE>
