UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
MARK ONE
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1996
|_| TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-19931
HALLWOOD CONSOLIDATED RESOURCES CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of 84-1176750
incorporation or organization) (I.R.S. Employer
Identification Number)
4582 South Ulster Street Parkway
Suite 1700
Denver, Colorado 80237
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 850-7373
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Shares of Common Stock outstanding at November 12, 1996 992,014
Page 1 of 21
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<CAPTION>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HALLWOOD CONSOLIDATED RESOURCES CORPORATION
BALANCE SHEETS
(Unaudited)
(In thousands except Shares)
September 30, December 31,
1996 1995
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $ 404 $ 1,139
Accrued oil and gas sales 3,647 2,674
Due from affiliates 1,183 381
Prepaid and other assets 393 111
Current assets of affiliates 4,153 4,007
-------- ---------
Total current assets 9,780 8,312
-------- ---------
PROPERTY, PLANT AND EQUIPMENT, at cost
Oil and gas properties (full cost method)
Proved oil and gas properties 274,895 268,152
Unproved mineral interests 1,554 571
--------- ----------
Total 276,449 268,723
Less - accumulated depreciation, depletion,
amortization and property impairment (210,473) (203,290)
------- -------
Net property, plant and equipment 65,976 65,433
-------- --------
OTHER ASSETS
Noncurrent assets of affiliates 40 194
----------- ----------
TOTAL ASSETS $ 75,796 $ 73,939
======= ========
<FN>
(Continued on the following page)
</FN>
</TABLE>
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<TABLE>
<CAPTION>
HALLWOOD CONSOLIDATED RESOURCES CORPORATION
BALANCE SHEETS
(Unaudited)
(In thousands except Shares)
September 30, December 31,
1996 1995
CURRENT LIABILITIES
<S> <C> <C>
Accounts payable and accrued liabilities $ 2,281 $ 3,675
Current portion of contract settlement obligation 143
Current portion of long-term debt 2,500
Current liabilities of affiliates 4,117 11,696
-------- --------
Total current liabilities 8,898 15,514
-------- --------
NONCURRENT LIABILITIES
Contract settlement obligation 927 904
Long-term debt 17,500 12,000
Long-term liabilities of affiliates 7,590 8,740
Deferred liability 114 146
--------- ----------
Total noncurrent liabilities 26,131 21,790
------- --------
Total liabilities 35,029 37,304
------- --------
STOCKHOLDERS' EQUITY
Common stock par value $.01; 2,000,000 shares authorized; 992,014 and
1,081,763 shares issued at 1996 and
1995, respectively 111 111
Additional paid-in capital 79,980 81,730
Accumulated deficit (35,450) (41,376)
Treasury stock - 86,426 and 83,980 shares
at 1996 and 1995, respectively (3,874) (3,830)
-------- ---------
Stockholders' equity - Net 40,767 36,635
------- --------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 75,796 $ 73,939
======= ========
<FN>
The accompanying notes are an integral
part of the financial statements.
</FN>
</TABLE>
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<TABLE>
<CAPTION>
HALLWOOD CONSOLIDATED RESOURCES CORPORATION
STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands except per Share data)
For the Three Months Ended
September 30,
1996 1995
REVENUES:
<S> <C> <C>
Oil revenue $ 4,107 $ 3,271
Gas revenue 4,163 2,650
Pipeline and other 277 342
Contract settlement 14 11
Interest income 33 35
--------- ---------
8,594 6,309
------- -------
EXPENSES:
Production operating expense 2,471 2,024
General and administrative 993 850
Interest expense 594 444
Depreciation, depletion and amortization 2,276 1,997
Other 45
----------- ---------
6,334 5,360
------- -------
INCOME BEFORE INCOME TAX 2,260 949
------- --------
PROVISION (BENEFIT) FOR INCOME TAX:
Current 47 (58)
--------- ---------
NET INCOME $ 2,213 $ 1,007
======= =======
NET INCOME PER SHARE $ 2.39 $ .94
======== =========
WEIGHTED AVERAGE COMMON SHARES AND
COMMON SHARE EQUIVALENTS OUTSTANDING 927 1,067
======== ========
<FN>
The accompanying notes are an integral
part of the financial statements.
</FN>
</TABLE>
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<TABLE>
<CAPTION>
HALLWOOD CONSOLIDATED RESOURCES CORPORATION
STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands except per Share data)
For the Nine Months Ended
September 30,
1996 1995
REVENUES:
<S> <C> <C>
Oil revenue $ 12,560 $ 8,436
Gas revenue 11,937 7,661
Pipeline and other 983 1,226
Contract settlement 35 32
Interest income 76 112
---------- --------
25,591 17,467
------- ------
EXPENSES:
Production operating expense 7,701 5,906
General and administrative 2,614 2,707
Interest expense 1,938 1,114
Depreciation, depletion and amortization 7,183 5,775
Impairment of oil and gas properties 9,423
Other 114 117
--------- --------
19,550 25,042
------- ------
INCOME (LOSS) BEFORE INCOME TAX 6,041 (7,575)
------- ------
PROVISION (BENEFIT) FOR INCOME TAX:
Current 115 30
Deferred (2,588)
------------ ------
115 (2,558)
--------- ------
NET INCOME (LOSS) $ 5,926 $(5,017)
======== ======
NET INCOME (LOSS) PER SHARE $ 6.41 $ (4.70)
========= =======
WEIGHTED AVERAGE COMMON SHARES AND
COMMON SHARE EQUIVALENTS OUTSTANDING 924 1,067
======== =======
<FN>
The accompanying notes are an integral
part of the financial statements.
</FN>
</TABLE>
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<TABLE>
<CAPTION>
HALLWOOD CONSOLIDATED RESOURCES CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
For the Nine Months Ended
September 30,
1996 1995
OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss) $ 5,926 $ (5,017)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation, depletion, amortization and
impairment 7,183 15,198
Deferred income tax benefit (2,588)
Noncash interest expense 61 86
Undistributed earnings of affiliates (4,374) (1,853)
Recoupment of take-or-pay liability (98) (125)
---------- --------
Cash provided by operations before
working capital changes 8,698 5,701
Changes in assets and liabilities provided (used) cash net of noncash
activity:
Accrued oil and gas sales (973) 469
Due from affiliates (802) (887)
Prepaid and other assets (571) 115
Accounts payable and accrued liabilities (1,394) 302
Payable to affiliate (247)
------------ --------
Net cash provided by operating activities 4,958 5,453
-------- -------
INVESTING ACTIVITIES:
Additions to oil and gas properties (2,101) (6,822)
Exploration and development costs incurred (5,609) (5,626)
Proceeds from oil and gas property sales 1,364 509
Refinance of Spraberry investment (6,338)
Distributions received from affiliates 858 706
Other 3 14
----------- ---------
Net cash used in investing activities (11,823) (11,219)
------- -------
FINANCING ACTIVITIES:
Repurchase and retirement of common stock (1,752)
Proceeds from long-term debt 9,000 4,000
Payments of long-term debt (1,000)
Payments on contract settlement obligation (118) (387)
---------- ---------
Net cash provided by financing activities 6,130 3,613
-------- -------
NET DECREASE IN CASH AND CASH EQUIVALENTS (735) (2,153)
CASH AND CASH EQUIVALENTS:
Balance, beginning of period 1,139 2,779
-------- -------
Balance, end of period $ 404 $ 626
========= ========
<FN>
The accompanying notes are an integral
part of the financial statements.
</FN>
</TABLE>
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HALLWOOD CONSOLIDATED RESOURCES CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
Hallwood Consolidated Resources Corporation ("HCRC" or the "Company") is a
Delaware corporation 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 Company's properties are primarily
located in the Rocky Mountain, MidContinent, Texas and Gulf Coast regions of the
United States.
The interim financial data in the accompanying financial statements are
unaudited; however, in the opinion of management, the interim data include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the results for the interim periods. These financial
statements should be read in conjunction with the financial statements and
accompanying footnotes included in the Company's December 31, 1995 Annual Report
on Form 10-K.
NOTE 2 - ACCOUNTING POLICIES
Consolidation
The Company accounts for its interest in affiliated oil and gas
partnerships and limited liability companies using the proportionate
consolidation method of accounting. The accompanying financial statements
include the activities of the Company and its pro rata share of the activities
of Hallwood Energy Partners, L. P. ("HEP").
Treasury Stock
As the Company owns approximately 19% of the outstanding units of HEP which owns
approximately 46% and 40% of the Company's common stock, at September 30, 1996
and December 31, 1995, respectively. The Company has an interest in 86,426 and
83,980 of its own shares at September 30, 1996 and December 31, 1995,
respectively. These shares are treated as treasury stock in the accompanying
financial statements.
Net Income (Loss) per Share
Net income (loss) per share is computed by dividing net income (loss) by the
weighted average number of common shares and common share equivalents
outstanding during the reporting period. The stock options granted during 1995
are considered to be common share equivalents since January 1, 1996 because the
market price of the common stock has exceeded the exercise price of the options
since that date. The number of common share equivalents was computed using the
treasury stock method which assumes that the increase in the number of common
shares is reduced by the number of common shares which could have been
repurchased by the Company with the proceeds from the exercise of the options
(which were assumed to have been made at the average market price of the common
stock during the reporting period).
Reclassifications
Certain reclassifications have been made to the prior period amounts to conform
to the classifications used in the current period. The share and per share
amounts for all periods presented have been restated to give effect to a one for
ten share reverse split which was effective November 9, 1995.
-7-
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NOTE 3 - DEBT
On March 31, 1995 the Company and its banks amended their credit agreement to
extend the maturity date to May 31, 1997. On April 1, 1996, the banks increased
their loan commitments under the credit agreement from $18,000,000 to
$22,000,000. The borrowing base is currently $23,000,000, however, the Company's
borrowings are presently limited to the bank's commitment level. As of September
30, 1996, the Company has borrowed $20,000,000 against the credit line. HCRC's
borrowing base is further reduced by an outstanding contract settlement
obligation of $927,000; therefore, unused borrowing base totaled $2,073,000 at
November 12, 1996.
Borrowings against the credit line bear interest, at the option of the Company,
at either (i) the banks' Certificate of Deposit rate plus 1.875%, (ii) the
Euro-Dollar rate plus 1.75% or (iii) the higher of the prime rate of Morgan
Guaranty Trust or the sum of one-half of 1% plus the Federal funds rate, plus
.75% (7.2% at September 30, 1996). Interest is payable at least quarterly, and
quarterly principal payments of $1,250,000, commence May 31, 1997. The credit
facility is secured by a first lien on approximately 80% in value of the
Company's oil and gas properties.
HCRC has entered into contracts to hedge its interest rate payments on
$7,000,000 of its debt for 1996 and 1997 and $5,000,000 for 1998. HCRC does not
use the hedges for trading purposes, but rather for the purpose of providing a
measure of predictability for a portion of HCRC's interest payments under its
debt agreement which has a floating interest rate. In general, it is HCRC's goal
to hedge 50% of the principal amount of its debt for the next two years and 25%
for each year of the remaining term of the debt. HCRC 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 of which is an
interest rate swap with a fixed rate of 7.5%. The amounts received or paid upon
settlement of these transactions are recognized as interest expense at the time
the interest payments are due.
NOTE 4 - ODD LOT REPURCHASE
The Company initiated an offer to repurchase odd lot holdings of 99 or fewer
shares from its stockholders of record as of November 30, 1995. The offer was
initially for the period from November 30, 1995 through January 5, 1996 and was
subsequently extended through January 26, 1996. The Company repurchased a total
of 98,869 shares through the January 26, 1996 closing date. The repurchase price
was $24.09 per share.
On April 1, 1996, HCRC initiated another offer to purchase holdings of 99 shares
or fewer from its stockholders of record as of March 25, 1996. The offer was for
the period from April 1, 1996 through May 3, 1996. The Company repurchased a
total of 25,930 shares at a purchase price of $34.00 per share. HCRC resold
12,965 of these shares to HEP at the price paid by HCRC for such shares.
NOTE 5 - STATEMENT OF CASH FLOWS
Cash paid for interest during the nine months ended September 30, 1996 and 1995
was $980,000 and $414,000, respectively. Cash paid for income taxes during the
nine months ended September 30, 1996 and 1995 was $59,000 and $202,000,
respectively.
NOTE 6 - ACQUISITION OF PROPERTY INTERESTS
On July 1, 1996, HCRC and HEP completed a transaction involving the acquisition
from Fuel Resources Development Co., a wholly owned subsidiary of Public Service
Company of Colorado, and other interest owners of their interest in 38 coal bed
methane wells located in La Plata County, Colorado and Rio Arriba, 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
-8-
<PAGE>
Code. Hallwood Petroleum, Inc. ("HPI") will manage and operate the properties on
behalf of 44 Canyon. The $27.8 million purchase price was funded by 44 Canyon
through the sale of a volumetric production payment to an affiliate of Enron
Capital & Trade Resources Corp., a subsidiary of Enron Corp., the sale of a
subordinated production payment and certain other property interests for $3.45
million to an affiliate of HCRC and HEP, and additional cash contributed by the
owners of 44 Canyon. The affiliate of HCRC and HEP which purchased the
subordinated production payment and other property interests is owned equally by
HCRC and HEP. The interests in the four wells in Rio Arriba County were acquired
directly by HEP and HCRC. As a result of the transaction, HCRC expects to add 10
BCF of gas to its reserve base, which represents approximately 95% of its
estimated 1996 production.
NOTE 7 - LEGAL PROCEEDINGS
On April 23, 1992, a lawsuit was filed in the Chancery Court for New Castle
County, Delaware, styled Tappe v. Hallwood Consolidated Resources Corporation,
Hallwood Consolidated Partners, L. P., Hallwood Oil and Gas, Inc., Hallwood
Energy Partners, L.P., and Hallwood Petroleum, Inc. (C.A. No. 12536). The
lawsuit seeks to rescind the conversion of Hallwood Consolidated Partners, L.P.
("HCP") into the Company ("Conversion") and to recover damages in unspecified
amounts. The plaintiff also seeks class certification to represent similarly
situated HCP unitholders. In general, the suit alleges that the defendants
breached fiduciary duties to HCP unitholders by, among other things, proposing
allocation of common stock in the Conversion on a basis that the plaintiff
alleges is unfair, failing to require that the allocation be approved by an
independent third party, causing the costs of proposing the Conversion to be
borne indirectly by the partners of HCP whether or not the Conversion was
completed and failing to disclose certain matters in the Consent
Statement/Prospectus soliciting consents to the Conversion. The defendants
believe that they fully considered and disclosed all material information in
connection with the Conversion, and they believe that the suit is without merit.
HCRC plans to vigorously defend this case, but because of its early stages,
cannot predict the outcome of this matter or any possible effect an adverse
outcome might have.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Liquidity and Capital Resources
Cash Flow
The Company generated $4,958,000 of cash flow from operating activities during
the first nine months of 1996.
The other primary cash inflows were:
o $9,000,000 in proceeds from long-term borrowings
o $858,000 in distributions received from affiliates
o $1,364,000 in proceeds oil and gas property sales
Cash was used for:
o $7,710,000 for additions to property and exploration and development
costs
o $6,338,000 for the refinance of Spraberry investment
o $1,752,000 for the repurchase and retirement of common stock
o $1,000,000 for the repayment of debt
o $118,000 for payments of contract settlement obligation
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This resulted in a decrease in the Company's cash of $735,000 for the nine
months ended September 30, 1996 from $1,139,000 at December 31, 1995 to $404,000
at September 30, 1996.
Development Projects and Acquisitions
Through September 30, 1996, HCRC incurred approximately $1,752,000 for an odd
lot share repurchase discussed below, and $7,710,000 for exploration,
development and acquisition costs, toward the 1996 capital budget of
$13,700,000. The expenditures were comprised of approximately $5,609,000 for
exploration and development expenditures and approximately $2,101,000 for
property acquisitions. A description of significant exploration and development
projects to date in 1996 follows.
HCRC continues to devote capital resources to the West Texas Kermit area in
1996. HCRC has drilled or participated in the drilling of fourteen wells,
thirteen of which were successful, and participated in four recompletions, three
of which were successful, in the first nine months of 1996, for a total cost of
approximately $620,000. The wells in this area are currently producing
approximately 700 gross equivalent barrels of oil per day. HCRC's interest in
these wells averages 14%. HCRC has plans to drill or recomplete up to nine
additional wells by year end.
HCRC acquired 106 square miles of three dimensional (3-D) seismic data on the
Cowden Ranch in Crane County, Texas. The prospect is operated by a major oil
company, and HCRC has a 12.5% working interest. HCRC's share of costs to date is
$455,000. Seismic interpretation was recently completed, and two exploratory
wells are planned for the fourth quarter of 1996, with additional exploratory
activity to follow in 1997.
HCRC acquired 3-D seismic data and related acreage in the Merkel Project Area
which covers 18 square miles in Jones, Taylor and Nolan Counties, Texas.
Expenditures in the first nine months of 1996 totaled $567,000. Thus far, HCRC
has participated in drilling five wells on four exploration prospects for a
total cost of $135,000, including one well drilled in late 1995. Four of the
wells are each producing at average rates of 70 gross barrels of oil per day,
two of the wells encountered multiple pay zones but only one zone is currently
producing, and one well was unsuccessful. HCRC's interest in the wells is 25%.
Two wells are planned for the fourth quarter of 1996, and an additional 10
prospects will be tested in 1997 and beyond. An additional 74 square miles of
3-D seismic data, which is presently being interpreted, was acquired in the same
area. HCRC's working interest in this area averages 55%, and prospect
exploratory drilling will begin in the first quarter of 1997. Preliminary work
indicates as many as 25 wells may be drilled.
HCRC incurred approximately $305,000 in the first quarter, net to HCRC's
interest, for four recompletions and one drilled well in the Rocker "b" Ranch in
Reagan County, Texas. This activity increased HCRC's share of production by 55
equivalent barrels of oil per day. During the first quarter, HCRC also acquired
interests in five additional producing leases on the Rocker "b" Ranch for a
total of $93,000. Effective April 1, 1996, HCRC repaid its share of the bank
debt of Hallwood Spraberry Drilling Company, L.L.C. ("HSD") through additional
borrowings on its bank credit agreement and assumed direct ownership of its
share of HSD's properties. In the second and third quarters of 1996, HCRC
recompleted five wells, four of which were successful, and drilled one
additional well for a total cost of $230,000. This activity resulted in
increasing HCRC's share of production by 57 equivalent barrels of oil per day.
HCRC plans to recomplete at least five more wells before year end and will
consider other work, if the capital is available. Exploration in this area is
expected to slow toward the end of 1997 as HCRC's undeveloped acreage position
declines.
HCRC participated in the drilling of two nonoperated wells in Williams County,
North Dakota in the latter part of 1995 and the first quarter of 1996, one of
which was dry and the other only marginally successful, for a total cost of
approximately $300,000. HCRC also drilled an exploratory dry hole in Richland
County, Montana, at a cost of $150,000. HCRC completed an Interlake Formation
development well, drilled in the third quarter at a net cost of approximately
$535,000. This well is currently producing at a rate of 130 barrels of oil per
day, and HCRC's interest is 45%.
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<PAGE>
In the San Juan Basin area of Colorado, HCRC, through an affiliate La Plata
Associates LLC ("LPA"), acquired interests in 34 coal bed methane wells located
in La Plata County, Colorado for $1,450,000. HCRC's interest in the wells is
expected to add 10 bcf of gas to its reserve base, which represents
approximately 95% of its estimated 1996 production. The acquisition was
completed on July 1, 1996. Seven refracs/recompletions have been completed since
July 1 at a net cost to HCRC of approximately $300,000. Numerous other
recompletions and facility projects are planned for 1996 at an estimated total
net cost to HCRC of $500,000. Gross production has increased by approximately
2,500 mcf of gas per day as a result of the work done to date. Similar activity
levels in 1997 are anticipated on these newly acquired properties. In other
parts of the New Mexico portion of the San Juan Basin area, HCRC has recompleted
three wells, two of which were successful, drilled two wells and is converting
another well to be a disposal well. The total cost for this work was $435,000,
and HCRC's share of this production is approximately 41%.
Numerous other projects, which are individually less significant have been
completed or are underway in Kansas, Louisiana, Texas and New Mexico including
participation in five other 3-D seismic data acquisition programs not included
in the above activity. HCRC 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 third quarter of 1996, HCRC received approximately $175,000 for the
sale of its interests in the Hoople Field in Crosby County, Texas. HCRC also
received another $21,000 in early April for the sale of various nonstrategic
properties at auction. In June 1996, HCRC completed the sale of its interests in
the Bethany Longstreet area of Louisiana (approximately 175,000 equivalent
barrels of oil, measured using December 31, 1995 pricing) for approximately
$1,100,000.
Odd Lot Repurchase
The Company made an offer to repurchase odd lot holdings of 99 or fewer shares
from its stockholders of record as of November 30, 1995. The offer was initially
for the period from November 30, 1995 through January 5, 1996 and was
subsequently extended through January 26, 1996. The Company repurchased a total
of 98,869 shares through the January 26, 1996 closing date for $2,382,000 at a
purchase price of $24.09 per share, of which $1,312,000 was expended during
1996.
On April 1, 1996, HCRC made another offer to purchase holdings of 99 shares or
fewer from its stockholders of record as of March 25, 1996. The offer was for
the period from April 1, 1996 through May 3, 1996. The Company repurchased a
total of 25,930 shares at a purchase price of $34.00 per share. HCRC resold
12,965 of these shares to HEP at the price paid by HCRC for such shares.
Financing
On March 31, 1995 the Company and its banks amended their credit agreement to
extend the maturity date to May 31, 1997. On April 1, 1996, the banks increased
their loan commitments under the credit agreement from $18,000,000 to
$22,000,000. The borrowing base is currently $23,000,000, however, the Company's
borrowings are presently limited to the bank's commitment level. As of September
30, 1996, the Company has borrowed $20,000,000 against the credit line. HCRC's
borrowing base is further reduced by an outstanding contract settlement
obligation of $927,000; therefore, unused borrowing base totaled $2,073,000 at
November __, 1996.
Borrowings against the credit line bear interest, at the option of the Company,
at either (i) the banks' Certificate of Deposit rate plus 1.875%, (ii) the
Euro-Dollar rate plus 1.75% or (iii) the higher of the prime rate of Morgan
Guaranty Trust or the sum of one-half of 1% plus the Federal funds rate, plus
.75% (7.2% at September 30, 1996). Interest is payable at least quarterly, and
quarterly principal payments of $1,250,000, commence May 31, 1997. The credit
facility is secured by a first lien on approximately 80% in value of the
Company's oil and gas properties.
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<PAGE>
HCRC has entered into contracts to hedge its interest rate payments on
$7,000,000 of its debt for 1996 and 1997 and $5,000,000 for 1998. HCRC does not
use the hedges for trading purposes, but rather for the purpose of providing a
measure of predictability for a portion of HCRC's interest payments under its
debt agreement which has a floating interest rate. In general, it is HCRC's goal
to hedge 50% of the principal amount of its debt for the next two years and 25%
for each year of the remaining term of the debt. HCRC 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 7.50%. The amounts received or paid upon
settlement of these transactions are recognized as interest expense at the time
the interest payments are due.
Cautionary Statement Regarding Forward-Looking Statements
In the interest of providing the Company's stockholders and potential investors
with certain information regarding the Company's future plans and operations,
certain statements setforth in this Form 10-Q relate to management's future
plans and objectives. Such statements are "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended, and in
Section 21E of the Securities Exchange Act of 1934, as amended. Although any
forward-looking statements contained in this Form 10-Q or otherwise expressed by
or on behalf of the Company are, to the knowledge and in the judgment of the
officers and directors of the Company, expected to prove true and to come to
pass, management is not able to predict the future with absolute certainty.
Forward-looking statements involve known and unknown risks and uncertainties
which may cause the Company's actual performance and financial results in future
periods to differ materially from any projection, estimate or forecasted result.
These risks and uncertainties include, among other things, volatility of oil and
gas prices, competition, risks inherent in the Company's oil and gas operations,
the inexact nature of interpretation of seismic and other geological and
geophysical data, imprecision of reserve estimates, the Company's ability to
replace and expand oil and gas reserves, and such other risks and uncertainties
described from time to time in the Company's periodic reports and filings with
the Securities and Exchange Commission. Accordingly, stockholders and potential
investors are cautioned that certain events or circumstances could cause actual
results to differ materially from those projected, estimated or predicted.
Inflation and Changing Prices
Prices
Prices obtained for oil and gas production depend upon numerous factors that are
beyond the control of the Company, 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 through
the third quarter of 1996. The following table sets forth the average price
received each quarter by the Company and the effects of the hedging transactions
described below:
<TABLE>
<CAPTION>
Oil Oil Gas Gas
(excluding the (including the (excluding the (including the
effects of effects of effects of effects of
hedging hedging hedging hedging
transactions) transactions) transactions) transactions)
(bbl) (bbl) (mcf) (mcf)
<S> <C> <C> <C> <C>
First quarter 1995 $17.08 $17.54 $1.43 $1.63
Second quarter 1995 17.01 17.15 1.37 1.53
Third quarter 1995 16.17 16.60 1.26 1.45
Fourth quarter 1995 16.93 17.29 1.76 1.86
First quarter 1996 17.92 17.86 2.00 1.94
Second quarter 1996 21.00 20.56 1.80 1.80
Third quarter 1996 21.39 20.43 1.99 1.94
</TABLE>
Company 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 the Company's outstanding financial
contracts:
<TABLE>
<CAPTION>
Oil
Percent of Direct Contract
Period Production Hedged Floor Price
(per bbl)
<S> <C> <C>
Last three months of 1996 63% $18.92
1997 43% 17.88
1998 16% 15.07
1999 5% 15.88
</TABLE>
Between 15% and 100% of the oil volumes hedged in each year are subject to a
participating hedge whereby HCRC 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 28% and 100% of the volumes hedged in each year are
subject to a collar agreement whereby HCRC 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 per
barrel.
<TABLE>
<CAPTION>
Gas
Percent of Direct Contract
Period Production Hedged Floor Price
(per mcf)
<S> <C> <C>
Last three months of 1996 50% $1.87
1997 46% 1.89
1998 40% 1.91
1999 24% 1.68
2000 12% 1.86
</TABLE>
Between 0% and 40% of the gas volumes hedged in each year are subject to a
collar agreement whereby HCRC 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 per mcf.
During the fourth quarter through October 25, 1996, the oil price (for barrels
not hedged) is averaging between $22.00 and $24.00 per barrel and the weighted
average price of natural gas (for mcf not hedged) is averaging between $1.50 and
$2.10 per mcf.
Inflation
Inflation is not anticipated to have a material impact on the Company in 1996.
-12-
<PAGE>
Results of Operations
The following tables are presented to contrast HCRC's revenue, expense and
earnings for discussion purposes. Significant fluctuations are discussed in the
accompanying narrative.
The "direct owned" column represents HCRC's direct royalty and working interest
shares interest in oil and gas properties. The "HEP" column represents HCRC's
share of the results of operations of HEP; HCRC owned approximately 9% of the
outstanding limited partner units of HEP during 1995 and 19% during 1996.
-13-
<PAGE>
<TABLE>
<CAPTION>
TABLE OF HCRC EARNINGS FOR MANAGEMENT DISCUSSION
(In thousands except price)
For the Quarters Ended September 30, 1996 and 1995
For the Quarter Ended September 30, 1996 For the Quarter Ended September 30, 1995
---------------------------------------- ----------------------------------------
Direct Direct
Owned HEP Total Owned HEP Total
<S> <C> <C> <C> <C> <C> <C>
Oil production (bbl) 164 37 201 174 23 197
Gas production (mcf) 1,618 527 2,145 1,551 273 1,824
Average oil price $20.37 $20.70 $20.43 $16.59 $16.65 $16.60
Average gas price $ 1.86 $ 2.18 $ 1.94 $ 1.37 $ 1.87 $ 1.45
Oil revenue $ 3,341 $ 766 $ 4,107 $ 2,888 $ 383 $ 3,271
Gas revenue 3,012 1,151 4,163 2,140 510 2,650
Pipeline and other 166 111 277 308 34 342
Contract settlement 14 14 11 11
Interest income 11 22 33 29 6 35
-------- -------- -------- -------- --------- -------
Total revenue 6,544 2,050 8,594 5,376 933 6,309
------ ------ ------ ------ ------- ------
Production operating expense 1,963 508 2,471 1,746 278 2,024
General and administrative expense 760 233 993 757 93 850
Interest expense 417 177 594 353 91 444
Depreciation, depletion, and amortization 1,767 509 2,276 1,724 273 1,997
Other 45 45
---------- ---------- ---------- ---------- -------- --------
Total expense 4,907 1,427 6,334 4,580 780 5,360
------ ------ ------ ------ ------- ------
Income before Income Tax 1,637 623 2,260 796 153 949
------ ------- ------ ------- ------- -------
Provision (Benefit) for Income Tax:
Current 47 47 (58) (58)
-------- -------- --------- --------
Net income $ 1,590 $ 623 $ 2,213 $ 854 $ 153 $ 1,007
====== ======= ====== ======= ======= ======
</TABLE>
-14-
<PAGE>
<TABLE>
<CAPTION>
TABLE OF HCRC EARNINGS FOR MANAGEMENT DISCUSSION
(In thousands except price)
For the Nine Months Ended September 30, 1996 and 1995
For the Nine Months Ended September 30, 1996 For the Nine Months Ended September 30, 1995
-------------------------------------------- --------------------------------------------
Direct Direct
Owned HEP Total Owned HEP Total
<S> <C> <C> <C> <C> <C> <C>
Oil production (bbl) 512 130 642 435 60 495
Gas production (mcf) 4,655 1,641 6,296 4,243 756 4,999
Average oil price $19.60 $19.40 $19.56 $16.95 $17.73 $17.04
Average gas price $ 1.83 $ 2.09 $ 1.90 $ 1.48 $ 1.83 $ 1.53
Oil revenue $10,038 $ 2,522 $12,560 $ 7,372 $ 1,064 $ 8,436
Gas revenue 8,503 3,434 11,937 6,277 1,384 7,661
Pipeline and other 610 373 983 1,075 151 1,226
Contract settlement 35 35 32 32
Interest income 17 59 76 91 21 112
--------- -------- --------- -------- -------- --------
Total revenue 19,203 6,388 25,591 14,847 2,620 17,467
------ ------ ------ ------ ------ ------
Production operating expense 6,098 1,603 7,701 5,170 736 5,906
General and administrative expense 2,047 567 2,614 2,387 320 2,707
Interest expense 1,364 574 1,938 847 267 1,114
Depreciation, depletion, and amortization 5,467 1,716 7,183 4,963 812 5,775
Impairment of oil and gas properties 9,066 357 9,423
Other 68 46 114 117 117
--------- -------- -------- ----------- ------- --------
Total expense 15,044 4,506 19,550 22,433 2,609 25,042
------ ------ ------ ------ ------ ------
Income (Loss) before Income Tax 4,159 1,882 6,041 (7,586) 11 (7,575)
------- ------ ------ ------- -------- ------
Provision (Benefit) for Income Tax:
Current 115 115 30 30
Deferred (2,588) (2,588)
----------- ---------- ----------- ------- --------- -------
115 115 (2,558) (2,558)
-------- ---------- -------- ------- --------- -------
Net income (loss) $ 4,044 $ 1,882 $ 5,926 $ (5,028) $ 11 $ (5,017)
====== ====== ====== ======= ======== =======
</TABLE>
-15-
<PAGE>
Third Quarter of 1996 Compared to Third Quarter of 1995
Oil Revenue
Oil revenue increased $836,000, during the third quarter of 1996 as compared
with the third quarter of 1995. The increase in revenue is comprised of an
increase in oil production from 197,000 barrels in 1995 to 201,000 barrels in
1996 combined with an increase in the average oil price from $16.60 per barrel
in 1995 to $20.43 per barrel in 1996. The increase in production is due to
increased production from exploratory and developmental drilling projects in,
Montana, Wyoming and West Texas, partially offset by normal production declines.
Because the Company's hedged oil prices were lower than average posted prices in
1996, the effect of hedging transactions, as described above, was to decrease
the Company's average oil price from $21.39 per barrel to $20.43 per barrel,
resulting in a $193,000 decrease in revenue.
Gas Revenue
Gas revenue increased $1,513,000 during the third quarter of 1996 as compared
with the third quarter of 1995. The increase is comprised of an increase in gas
production from 1,824,000 mcf in 1995 to 2,145,000 mcf in 1996, combined with an
increase in price from $1.45 per mcf in 1995 to $1.94 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, partially
offset by normal production declines. The effect of the Company's hedging
activity was to decrease the Company's average gas price from $1.99 per mcf to
$1.94 per mcf, resulting in a $107,000 decrease in revenue.
Pipeline and Other
Pipeline and other revenue consists of revenue derived from salt water disposal,
incentive and tax credit payments from certain coal bed methane wells and other
miscellaneous items. Pipeline and other revenue decreased $65,000 during the
third quarter of 1996 as compared with the third quarter of 1995. The decrease
is due to numerous miscellaneous items, none of which are individually
significant.
Production Operating Expense
Production operating expense increased $447,000 during the third quarter of 1996
as compared with the third quarter of 1995, primarily as a result of increased
production taxes and operating expenses due to the increased oil and gas
production as discussed previously.
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 Hallwood Petroleum, Inc. ("HPI"), an
affiliate of HCRC, which manages and operates certain oil and gas properties on
behalf of the Company. These costs increased $143,000 during the third quarter
of 1996 as compared with the third quarter of 1995, because certain bank fees
were incurred during the third quarter in 1996 and during the first quarter in
1995.
Interest Expense
Interest expense increased $150,000 during the third quarter of 1996 as compared
with the third quarter of 1995. The increase is primarily the result of a higher
outstanding debt balance during 1996.
-16-
<PAGE>
Depreciation, Depletion and Amortization
Depreciation, depletion and amortization expense increased $279,000 during the
third quarter of 1996 as compared with the third quarter of 1995, due to a
higher depletion rate caused by the increase in production as previously
discussed.
Provision (Benefit) for Income Taxes
Income taxes for the third quarter of 1996 are less than would be expected using
the statutory rate due to the change in the valuation allowance due to the
utilization of net operating loss carryforwards.
First Nine Months of 1996 Compared to First Nine Months of 1995
The comparisons for the first nine months of 1996 and the first nine months of
1995 are consistent with those discussed in the third quarter of 1996 compared
to the third quarter of 1995 except for the following:
Oil Revenue
Oil revenue increased $4,124,000 during the first nine months of 1996 as
compared with the first nine months of 1995. The increase is comprised of an
increase in average oil prices from $17.04 per barrel in 1995 to $19.56 per
barrel in 1996 combined with an increase in production from 495,000 barrels in
1995 to 642,000 barrels in 1996. The production increase is due to increased
production from developmental drilling projects in West Texas, Montana and
Wyoming, partially offset by normal production declines.
The effect of HCRC's hedging transactions was to decrease HCRC's average oil
price from $20.03 per barrel to $19.56 per barrel, representing a $302,000
decrease in revenues.
Gas Revenue
Gas revenue increased $4,276,000 during the first nine months of 1996 as
compared with the first nine months of 1995. The increase is comprised of an
increase in price from $1.53 per mcf in 1995 to $1.90 per mcf in 1996 combined
with an increase in production from 4,999,000 mcf in 1995 to 6,296,000 mcf in
1996. The production increase is due to increased production from developmental
drilling projects in West Texas, Montana and Wyoming, partially offset by normal
production declines.
The effect of HCRC's hedging transactions was to decrease HCRC's average gas
price from $1.93 per mcf to $1.90 per mcf, representing a $189,000 reduction in
revenue from hedging transactions.
Pipeline and Other
Pipeline and other revenue decreased by $243,000 during the first nine months of
1996 as compared with the first nine months of 1995, primarily due to a payout
adjustment on one of HCRC's wells which occurred during the first nine months of
1995.
Interest Income
Interest income decreased $36,000 during the first nine months of 1996 as
compared with the same period during 1995 primarily due to a lower average cash
balance during 1996.
-17-
<PAGE>
General and Administrative Expense
General and administrative expense decreased $93,000 during the first nine
months of 1996 as compared with the first nine months of 1995 primarily due to
lower overall administrative costs resulting from personnel reductions during
1995.
Impairment of Oil and Gas Properties
Impairment of oil and gas properties during the first nine months of 1995
includes the write-off of HCRC's Indonesian operations as well as a property
impairment recorded because capitalized costs at June 30, 1995 exceeded the
present value (discounted at 10%) of estimated future net revenues from proved
oil and gas reserves based on prices received at that date.
-18-
<PAGE>
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
Reference is made to Item 8 - Note 16 of Form 10-K for the year
ended December 31, 1995, and Item 1 - Note 7 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.
-19-
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
HALLWOOD CONSOLIDATED RESOURCES CORPORATION
Date: November 12, 1996 By: /s/Robert S. Pfeiffer
------------------------------ ------------------------
Robert S. Pfeiffer, Vice President
(Chief Financial Officer)
-20-
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Form 10-Q
for the quarter ended September 30, 1996 for Hallwood Consolidated Resources
Corporation and is qualified in its entirety by reference to such Form 10-Q.
</LEGEND>
<CIK> 0000883953
<NAME> Hallwood Consolidated Resources Corporation
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-mos
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-END> Sep-30-1996
<CASH> 404
<SECURITIES> 0
<RECEIVABLES> 4,830
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 9,780
<PP&E> 276,449
<DEPRECIATION> 210,473
<TOTAL-ASSETS> 75,796
<CURRENT-LIABILITIES> 2,281
<BONDS> 0
0
0
<COMMON> 111
<OTHER-SE> 40,656
<TOTAL-LIABILITY-AND-EQUITY> 75,796
<SALES> 24,497
<TOTAL-REVENUES> 25,591
<CGS> 0
<TOTAL-COSTS> 17,498
<OTHER-EXPENSES> 114
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,938
<INCOME-PRETAX> 6,041
<INCOME-TAX> 115
<INCOME-CONTINUING> 5,926
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,926
<EPS-PRIMARY> 6.41
<EPS-DILUTED> 6.41
</TABLE>
