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 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 (Zip Code)
offices)
Registrant's telephone number, including area code: (303) 850-7373
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No
Shares of Common Stock outstanding at August 9, 1996 992,014
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
HALLWOOD CONSOLIDATED RESOURCES CORPORATION
BALANCE SHEETS
(Unaudited)
(In thousands except Shares)
June 30, December 31,
1996 1995
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 535 $ 1,139
Accrued oil and gas sales 3,498 2,674
Due from affiliates 1,686 381
Prepaid and other assets 248 111
Current assets of affiliates 4,582 4,007
------- -------
Total current assets 10,549 8,312
------- -------
PROPERTY, PLANT AND EQUIPMENT, at cost
Oil and gas properties (full cost method)
Proved oil and gas properties 270,292 268,152
Unproved mineral interests - domestic 966 571
------- -------
Total 271,258 268,723
Less - accumulated depreciation, depletion,
amortization and property impairment (208,197) (203,290)
------- -------
Net property, plant and equipment 63,061 65,433
------- -------
OTHER ASSETS
Noncurrent assets of affiliates 62 194
------- -------
TOTAL ASSETS $ 73,672 $ 73,939
======= =======
</TABLE>
<TABLE>
<CAPTION>
HALLWOOD CONSOLIDATED RESOURCES CORPORATION
BALANCE SHEETS
(Unaudited)
(In thousands except Shares)
June 30, December 31,
1996 1995
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 1,885 $ 3,675
Current portion of contract settlement
obligation 143
Current portion of long-term debt 1,250
Current liabilities of affiliates 3,532 11,696
------- -------
Total current liabilities 6,667 15,514
------- -------
NONCURRENT LIABILITIES
Contract settlement obligation 906 904
Long-term debt 18,750 12,000
Long-term liabilities of affiliates 8,669 8,740
Deferred liability 128 146
------- -------
Total noncurrent liabilities 28,453 21,790
------- -------
Total liabilities 35,120 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 79,978 81,730
Accumulated deficit (37,663) (41,376)
Treasury stock - 86,426 and 83,980 shares
at 1996 and 1995, respectively (3,874) (3,830)
------- -------
Stockholders' equity - Net 38,552 36,635
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 73,672 $ 73,939
======= =======
</TABLE>
<TABLE>
<CAPTION>
HALLWOOD CONSOLIDATED RESOURCES CORPORATION
STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands except per Share)
For the Three Months
Ended June 30,
1996 1995
<S> <C> <C>
REVENUES:
Oil revenue $ 4,380 $ 2,797
Gas revenue 3,643 2,569
Pipeline and other 362 210
Contract settlement 11 12
Interest income 26 34
------- -------
8,422 5,622
------- -------
EXPENSES:
Production operating expense 2,556 2,020
General and administrative 797 935
Interest expense 604 364
Depreciation, depletion and amortization 2,350 1,973
Impairment of oil and gas properties 5,000
Other 116 35
------- -------
6,423 10,327
------- -------
INCOME (LOSS) BEFORE INCOME TAXES 1,999 (4,705)
------- -------
PROVISION (BENEFIT) FOR INCOME TAXES:
Current 36 44
Deferred (1,017)
------- -------
36 (973)
------- -------
NET INCOME (LOSS) $ 1,963 $ (3,732)
======= =======
NET INCOME (LOSS) PER SHARE $ 2.17 $ (3 .49)
======= =======
WEIGHTED AVERAGE SHARES OUTSTANDING 904 1,068
======= =======
</TABLE>
<TABLE>
<CAPTION>
HALLWOOD CONSOLIDATED RESOURCES CORPORATION
STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands except per Share)
For the Six Months
Ended June 30,
1996 1995
<S> <C> <C>
REVENUES:
Oil revenue $ 8,453 $ 5,165
Gas revenue 7,774 5,011
Pipeline and other 708 884
Contract settlement 21 21
Interest income 43 77
------- -------
16,999 11,158
------- -------
EXPENSES:
Production operating expense 5,230 3,882
General and administrative 1,621 1,857
Interest expense 1,344 670
Depreciation, depletion and amortization 4,907 3,778
Impairment of oil and gas properties 9,423
Other 116 72
------- -------
13,218 19,682
------- -------
INCOME (LOSS) BEFORE INCOME TAXES 3,781 (8,524)
------- -------
PROVISION (BENEFIT) FOR INCOME TAXES:
Current 68 88
Deferred (2,588)
------- -------
68 (2,500)
------- -------
NET INCOME (LOSS) $ 3,713 $ (6,024)
======= =======
NET INCOME (LOSS) PER SHARE $ 4.05 $ (5.64)
======= =======
WEIGHTED AVERAGE SHARES OUTSTANDING 916 1,068
======= =======
</TABLE>
<TABLE>
<CAPTION>
HALLWOOD CONSOLIDATED RESOURCES CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
For the Six Months
Ended June 30,
1996 1995 <PAGE>
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 3,713 $ (6,024)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation, depletion, amortization and
impairment 4,907 13,201
Deferred income tax benefit (2,588)
Noncash interest expense 21 60
Equity in earnings of affiliates (3,123) (1,123)
Recoupment of take-or-pay liability (62) (21)
------- -------
Cash provided by operations before
working capital changes 5,456 3,505
Changes in assets and liabilities provided
(used) cash net of noncash activity:
Accrued oil and gas sales (824) 381
Due from affiliates (1,305) (1,366)
Prepaid and other assets (137) 17
Accounts payable and accrued liabilities (1,790) (105)
Payable to affiliate (247)
------- -------
Net cash provided by operating activities 1,400 2,185
------- -------
INVESTING ACTIVITIES:
Additions to oil and gas properties (393) (914)
Exploration and development costs incurred (3,270) (3,978)
Proceeds from oil and gas property sales 1,296 508
Refinance of Spraberry investment (6,338)
Distributions received from affiliates 572 316
Other 15
------- -------
Net cash used in investing activities (8,133) (4,053)
------- -------
FINANCING ACTIVITIES:
Repurchase and retirement of common stock (1,752)
Proceeds from long-term debt 8,000
Payments on contract settlement obligation (119) (247)
------- -------
Net cash provided by (used in) financing 6,129 (247)
activities ------- -------
NET DECREASE IN CASH AND CASH EQUIVALENTS (604) (2,115)
CASH AND CASH EQUIVALENTS:
Balance, beginning of period 1,139 2,779
------- -------
Balance, end of period $ 535 $ 664
======= =======
<F1>
The accompanying notes are an integral part
of the financial statements.
</TABLE>
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, Mid-Continent, 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 owned approximately 19% of the outstanding units of HEP which
owns approximately 46% and 40% of the Company's common stock, the Company had an
interest in 86,426 and 83,980 of its own shares at June 30, 1996 and December
31, 1995, respectively. These shares are treated as treasury stock 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. 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.
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. As of June 30, 1996, the Company has borrowed $20,000,000 against
the credit line under which the borrowing base is currently $22,000,000. HCRC's
borrowing base is further reduced by an outstanding contract settlement
obligation of $906,000; therefore, unused borrowing base totaled $1,094,000 at
August 9, 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 June 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 60% 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 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 shareholders 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 shareholders 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 six months ended June 30, 1996 and 1995 was
$604,000 and $277,000, respectively.
NOTE 6 - 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.
NOTE 7 - SUBSEQUENT EVENT
On July 1, 1996, HCRC and HEP 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 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, L.L.C. ( 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 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 100% of
its estimated 1996 production.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW
The Company generated $1,400,000 of cash flow from operating activities during
the first six months of 1996.
The other primary cash inflows were:
. $8,000,000 in proceeds from long-term borrowings
. $572,000 from distributions received from affiliates
. $1,296,000 from oil and gas property sales
Cash was used for:
. $3,663,000 for additions to property and exploration and development costs
. $6,338,000 for the refinance of Spraberry investment
. $1,752,000 for the repurchase and retirement of common stock
. $119,000 for payments of contract settlement obligation
This resulted in a decrease in the Company's cash of $604,000 for the six months
ended June 30, 1996 from $1,139,000 at December 31, 1995 to $535,000 at June 30,
1996.
DEVELOPMENT PROJECTS AND ACQUISITIONS
Through June 30, 1996, HCRC incurred approximately $1,752,000 for an odd lot
share repurchase discussed below, and $3,663,000 for exploration, development
and acquisition costs, toward the 1996 capital budget of $12,500,000. The
expenditures were comprised of approximately $3,270,000 for domestic exploration
and development expenditures and approximately $393,000 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 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 $400,000. 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. HCRC's interest in these wells averages 11%. HCRC
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.
HCRC 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 HCRC has a 12.5% working interest. Costs to date are
$425,000. Seismic interpretation is in process, and two exploratory wells are
expected to be drilled in 1996.
HCRC 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, HCRC
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 producing with average initial rates of 60 barrels
of oil per day and one well was unsuccessful. HCRC s interest in the wells is
10%. Fourteen more prospects have been identified on thirteen square miles of
data, and seismic interpretation has just begun on the remaining 75 square miles
of data.
HCRC incurred approximately $249,000 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 115
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 quarter of 1996, HCRC recompleted
three wells, two of which were successful, and began drilling another well in
July. HCRC has plans to recomplete at least five more wells before year end and
will consider other work, if the capital is available.
HCRC 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. HCRC also drilled an exploratory dry hole in
Richland County, Montana, at a cost of $120,000. HCRC is currently completing
an Interlake Formation development well, drilled in the second quarter at a net
cost of approximately $425,000.
In the San Juan Basin area HCRC, through an affiliate, acquired interests in 34
coal bed methane wells located in La Plata County, Colorado for $1,300,000.
HCRC s interest in the wells is expected to add 10 BCF of gas to its reserve
base, which represents approximately 96% of its estimated 1996 production. The
acquisition was completed on July 1, 1996. In the same transaction, HCRC also
directly acquired interests in four non-producing wells in Rio Arriba County,
New Mexico.
In the first quarter of 1996, HCRC successfully recompleted a well in New Mexico
for approximately $75,000. 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. HCRC owns approximately 45% of this well. HCRC began drilling another
Fruitland Coal development well in late July and anticipates completion of the
well in August.
Under a farmout agreement completed in 1995, HCRC 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. HCRC's interests in the area range from 7% to 10%. Gross
average initial production rates were 750 barrels of oil per day on the first
two wells. HCRC's cost for all three wells was approximately $60,000.
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 second 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 shareholders 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 shareholders 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 of the line of credit 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. As of June 30, 1996, the Company has borrowed
$20,000,000 against the credit line under which the borrowing base is currently
$22,000,000. HCRC's borrowing base is further reduced by an outstanding
contract settlement obligation of $906,000; therefore, unused borrowing base
totaled $1,094,000 at August 9, 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 June 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 60% 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 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.
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 second 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
(excluding the (including the
effects of effects of
hedging hedging
transactions) transactions)
(bbl) (bbl)
<S> <C> <C>
First quarter 1995 $17.08 $17.54
Second quarter 1995 17.01 17.15
Third quarter 1995 16.17 16.60
Fourth quarter 1995 16.93 17.29
First quarter 1996 17.92 17.86
Second quarter 1996 21.00 20.56
</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 $1.43 $1.63
Second quarter 1995 1.37 1.53
Third quarter 1995 1.26 1.45
Fourth quarter 1995 1.76 1.86
First quarter 1996 2.00 1.94
Second quarter 1996 1.80 1.80
</TABLE>
The 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 six months of 1996 34% $16.98
1997 15% 15.13
1998 15% 15.07
1999 5% 15.88
</TABLE>
Between 24% 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 54% 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
Production Contract
Period Hedged Floor Price
(per mcf)
<S> <C> <C>
Last six months of 1996 50% $1.88
1997 49% 1.89
1998 32% 2.07
1999 12% 1.85
2000 14% 1.86
</TABLE>
Between 0% and 53% 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 third quarter through July 26, 1996, the oil price (for barrels not
hedged) is averaging between $20.00 and $22.00 per barrel and the weighted
average price of natural gas (for mcf not hedged) is averaging between $1.40 and
$2.80 per mcf.
INFLATION
Inflation is not anticipated to have a material impact on the Company in 1996.
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.
<TABLE>
<CAPTION>
TABLE OF HCRC 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 HEP Total
<S> <C> <C> <C>
Oil production (bbl) 169 44 213
Gas production (mcf) 1,477 546 2,023
Average oil price $20.73 $19.91 $20.56
Average gas price $ 1.76 $ 1.92 $ 1.80
Oil revenue $ 3,504 $ 876 $ 4,380
Gas revenue 2,597 1,046 3,643
Pipeline and other 235 127 362
Contract settlement 11 11
Interest income 2 24 26
------- ------- -------
Total revenue 6,349 2,073 8,422
------- ------- -------
Production operating expense 2,055 501 2,556
General and administrative expense 674 123 797
Interest expense 418 186 604
Depreciation, depletion, and
amortization 1,772 578 2,350
Other 70 46 116
------- ------- -------
Total expense 4,989 1,434 6,423
------- ------- -------
Income (Loss) before Income Taxes 1,360 639 1,999
------- ------- -------
Provision (Benefit) for Income
Taxes:
Current 36 36
Deferred ------- ------- -------
36 36
------- ------- -------
Net income (loss) $ 1,324 $ 639 $ 1,963
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
For the Quarter Ended June 30, 1995
Direct
Owned HEP Total
<S> <C> <C> <C>
Oil production (bbl) 144 19 163
Gas production (mcf) 1,436 245 1,681
Average oil price $17.01 $18.31 $17.15
Average gas price $ 1.50 $ 1.67 $ 1.53
Oil revenue $ 2,449 $ 348 $ 2,797
Gas revenue 2,159 410 2,569
Pipeline and other 140 70 210
Contract settlement 12 12
Interest income 27 7 34
------- ------- -------
Total revenue 4,787 835 5,622
------- ------- -------
Production operating expense 1,816 204 2,020
General and administrative expense 839 96 935
Interest expense 275 89 364
Depreciation, depletion, and
amortization 1,706 267 1,973
Impairment of oil and gas
properties 5,000 5,000
Other 35 35
------- ------- -------
Total expense 9,636 691 10,327
------- ------- -------
Income (Loss) before Income Taxes (4,849) 144 (4,705)
------- ------- -------
Provision (Benefit) for Income
Taxes:
Current 44 44
Deferred (1,017) (1,017)
------- ------- -------
(973) (973)
------- ------- -------
Net income (loss) $ (3,876) $ 144 $ (3,732)
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
TABLE OF HCRC 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 HEP Total
<S> <C> <C> <C>
Oil production (bbl) 348 93 441
Gas production (mcf) 3,037 1,114 4,151
Average oil price $19.24 $18.88 $19.17
Average gas price $ 1.81 $ 2.05 $ 1.87
Oil revenue $ 6,697 $ 1,756 $ 8,453
Gas revenue 5,491 2,283 7,774
Pipeline and other 446 262 708
Contract settlement 21 21
Interest income 6 37 43
------- ------- -------
Total revenue 12,661 4,338 16,999
------- ------- -------
Production operating expense 4,135 1,095 5,230
General and administrative expense 1,287 334 1,621
Interest expense 947 397 1,344
Depreciation, depletion, and
amortization 3,700 1,207 4,907
Other 70 46 116
------- ------- -------
Total expense 10,139 3,079 13,218
------- ------- -------
Income (Loss) before Income Taxes 2,522 1,259 3,781
------- ------- -------
Provision (Benefit) for Income
Taxes:
Current 68 68
Deferred
------- ------- -------
68 68
------- ------- -------
Net income (loss) $ 2,454 $ 1,259 $ 3,713
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
For the Six Months Ended June 30, 1995
Direct
Owned HEP Total
<S> <C> <C> <C>
Oil production (bbl) 261 37 298
Gas production (mcf) 2,692 483 3,175
Average oil price $17.18 $18.40 $17.33
Average gas price $1.54 $ 1.80 $ 1.58
Oil revenue $ 4,484 $ 681 $ 5,165
Gas revenue 4,137 874 5,011
Pipeline and other 767 117 884
Contract settlement 21 21
Interest income 62 15 77
------- ------- -------
Total revenue 9,471 1,687 11,158
------- ------- -------
Production operating expense 3,424 458 3,882
General and administrative expense 1,630 227 1,857
Interest expense 494 176 670
Depreciation, depletion, and
amortization 3,239 539 3,778
Impairment of oil and gas
properties 9,066 357 9,423
Other 72 72
------- ------- -------
Total expense 17,853 1,829 19,682
------- ------- -------
Income (Loss) before Income Taxes (8,382) (142) (8,524)
------- ------- -------
Provision (Benefit) for Income
Taxes:
Current 88 88
Deferred (2,588) (2,588)
------- ------- -------
(2,500) (2,500)
------- ------- -------
Net income (loss) $ (5,882) $ (142) $ (6,024)
======= ======= =======
</TABLE>
SECOND QUARTER 1996 COMPARED TO SECOND QUARTER 1995
OIL REVENUE
Oil revenue increased $1,583,000, during the second quarter of 1996 as compared
with the second quarter of 1995. The increase in revenue is comprised of an
increase in oil production from 163,000 barrels in 1995 to 213,000 barrels in
1996 combined with an increase in the average oil price from $17.15 per barrel
in 1995 to $20.56 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 $21.00 per barrel to $20.56 per barrel,
resulting in a $94,000 decrease in revenue.
GAS REVENUE
Gas revenue increased $1,074,000 during the second quarter of 1996 as compared
with the second quarter of 1995. The increase is comprised of an increase in
gas production from 1,681,000 mcf in 1995 to 2,023,000 mcf in 1996, combined
with an increase in price from $1.53 per mcf in 1995 to $1.80 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 maintain the Company's average gas price at $1.80 per mcf,
resulting in an immaterial impact on revenue.
PIPELINE AND OTHER
Pipeline and other revenue consists of revenue derived from salt water disposal,
incentive payments from certain wells in San Juan County and other miscellaneous
items. Pipeline and other revenue increased $152,000 during the second quarter
of 1996 as compared with the second quarter of 1995. The increase is primarily
due to an increase in HCRC's pro rata share of HEP's pipeline and other income
as well as an increase in numerous miscellaneous items, none of which are
individually significant.
INTEREST INCOME
Interest income decreased $8,000 during the second quarter of 1996 as compared
with the second quarter of 1995 primarily due to a lower average cash balance
during 1996.
PRODUCTION OPERATING EXPENSE
Production operating expense increased $536,000 during the second quarter of
1996 as compared with the second quarter of 1995, primarily as a result of
increased production taxes and operating expenses due to the increased oil and
gas revenue 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 decreased $138,000 during the second quarter
of 1996 as compared with the second quarter of 1995, because of a decrease in
allocated internal overhead expenses.
INTEREST EXPENSE
Interest expense increased $240,000 during the second quarter of 1996 as
compared with the second quarter of 1995. The increase is primarily the result
of a higher outstanding debt balance during 1996.
DEPRECIATION, DEPLETION AND AMORTIZATION
Depreciation, depletion and amortization expense increased $377,000 during the
second quarter of 1996 as compared with the second quarter of 1995. The
increase is due to a higher depletion rate caused by the increase in production
as previously discussed.
IMPAIRMENT OF OIL AND GAS PROPERTIES
Impairment of oil and gas properties during 1995 represents the property
impairment recorded by the Company 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 June 30, 1995 of
$16.50 per barrel of oil and $1.50 per mcf of gas.
OTHER
Other expenses is comprised of numerous miscellaneous items, none of which are
individually significant.
PROVISION (BENEFIT) FOR INCOME TAXES
Income taxes for the second 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 SIX MONTHS 1996 COMPARED TO 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 $3,288,000 or 64%. The increase is comprised of an
increase in average oil prices from $17.33 per barrel in 1995 to $19.17 per
barrel in 1996 combined with an increase in production from 298,000 barrels in
1995 to 441,000 barrels in 1996. The production increase is due to increased
production from developmental drilling projects in West Texas, partially offset
by normal production declines.
The effect of HCRC's hedging transactions was to decrease HCRC's average oil
price from $19.41 per barrel to $19.17 per barrel, representing a $106,000
decrease in revenues.
GAS REVENUE
Gas revenue increased $2,763,000 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 $1.58 per mcf in 1995 to $1.87 per mcf in 1996 combined with an
increase in production from 3,175,000 mcf in 1995 to 4,151,000 mcf in 1996. The
production increase is due to increased production from developmental drilling
projects in West Texas, partially offset by normal production declines.
The effect of HCRC's hedging transactions was to decrease HCRC's average gas
price from $1.90 per mcf to $1.87 per mcf, representing a $125,000 reduction in
revenue from hedging transactions.
PIPELINE AND OTHER
Pipeline and other revenue consists of revenue derived from salt water disposal,
incentive payments from the sale of a term working interest in certain wells in
San Juan County and other miscellaneous items. Pipeline and other revenue
decreased by $176,000 during the first six months of 1996 as compared with the
first six months of 1995, primarily due to a payout adjustment on one of HCRC's
wells which occurred during the first six months of 1995.
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expense decreased $236,000 during the first six
months of 1996 as compared with the first six months of 1995 primarily due to
bank fees associated with the extension of HCRC's line of credit during the
first quarter of 1995.
IMPAIRMENT OF OIL AND GAS PROPERTIES
Impairment of oil and gas properties during the first six months of 1995
includes the write-off of HCRC s Indonesian operations as well as the previously
discussed property impairment.
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 6 of this Form 10-Q.
ITEM 2 - CHANGES IN SECURITIES
None.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 14, 1996, HCRC held its Annual Meeting of Shareholders at
which Anthony J. Gumbiner, William L. Guzzetti, Brian M. Troup, John
R. Isaac, Jr., and Jerry A. Lubliner were elected directors.
Following is the number of votes cast for and withheld for each of
the directors:
<TABLE>
<CAPTION>
Name Votes For Votes Withheld
<S> <C> <C>
Anthony J. Gumbiner 855,744 33,732
William L. Guzzetti 855,767 33,739
Brian M. Troup 855,789 33,717
John R. Isaac, Jr. 848,163 35,343
Jerry A. Lubliner 848,174 35,332
<F1>
There were no abstentions or broker non-votes.
</TABLE>
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 Company
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
HALLWOOD CONSOLIDATED RESOURCES CORPORATION
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 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 535
<SECURITIES> 0
<RECEIVABLES> 5,184
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 10,549
<PP&E> 271,258
<DEPRECIATION> 208,197
<TOTAL-ASSETS> 73,672
<CURRENT-LIABILITIES> 6,667
<BONDS> 0
0
0
<COMMON> 111
<OTHER-SE> 38,441
<TOTAL-LIABILITY-AND-EQUITY> 73,672
<SALES> 16,227
<TOTAL-REVENUES> 16,999
<CGS> 0
<TOTAL-COSTS> 11,758
<OTHER-EXPENSES> 116
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,344
<INCOME-PRETAX> 3,781
<INCOME-TAX> 68
<INCOME-CONTINUING> 3,713
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,713
<EPS-PRIMARY> 4.05
<EPS-DILUTED> 4.05
</TABLE>
