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, 1995
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 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 No
The registrant is a limited partnership and issues Units (representing ownership
of limited partner interests).
Number of Units outstanding as of August 11, 1995 8,818,558
Number of Class B Subordinated Units outstanding as of August 11, 1995 143,773
CONSOLIDATED BALANCE SHEETS
(In thousands except Units)
June 30, December 31,
1995 1994
------------ -------------
(Unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 4,175 $ 2,409
Accounts receivable:
Oil and gas sales 5,929 6,220
Trade 3,164 3,042
Due from affiliates 669 1,647
Prepaid expenses and other
current assets 1,559 1,352
------- -------
Total 15,496 14,670
------- -------
PROPERTY, PLANT AND EQUIPMENT,
at cost
Oil and gas properties (full
cost method):
Proved mineral interests 596,297 588,758
Unproved mineral interests -
domestic 211 380
Unproved mineral interests -
foreign 2,399
Furniture, fixtures and other 3,008 2,980
------- -------
Total 599,516 594,517
Less accumulated depreciation,
depletion, amortization and
property impairment (502,238) (487,103)
--------- -------
Net Property, Plant and
Equipment 97,278 107,414
------- -------
OTHER ASSETS
Investment in common stock of
HCRC 11,411 13,764
Deferred expenses and other
assets 332 433
------- --------
Total 11,743 14,197
------- -------
TOTAL ASSETS $124,517 $136,281
======= =======
CONSOLIDATED BALANCE SHEETS
(In thousands except Units)
(Continued)
June 30, December 31,
1995 1994
----------- -------------
(Unaudited)
CURRENT LIABILITIES
Accounts payable and accrued
liabilities $ 16,824 $ 18,407
Net working capital deficit of
affiliate 1,087 103
Current portion of contract
settlement 1,475 1,425
Current portion of long-term
debt 96 4,125
------- -------
Total 19,482 24,060
------- -------
NONCURRENT LIABILITIES
Long-term debt 34,596 25,898
Contract settlement 2,120 2,666
Deferred liability 1,822 1,931
Long-term debt of affiliate 1,514
------- -------
Total 40,052 30,495
------- -------
Total Liabilities 59,534 54,555
------- -------
MINORITY INTEREST IN SUBSIDIARIES 2,855 2,923
------- -------
PARTNERS' CAPITAL
Units - 8,818,558 Units issued,
8,500,808 outstanding 61,731 77,342
Class B Subordinated Units -
143,773 Units outstanding 1,088 1,350
General Partner 3,249 4,051
Treasury Units - 317,750 Units (3,940) (3,940)
------- -------
Total Partners' Capital 62,128 78,803
------- -------
TOTAL LIABILITIES AND PARTNERS'
CAPITAL $124,517 $136,281
======= =======
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands except Units)
For the Three
Months
Ended June 30,
-----------------
1995 1994
------ ------
REVENUES:
Oil revenue $ 4,246 $ 3,924
Gas revenue 5,151 6,382
Pipeline, facilities and other 978 751
Interest 90 265
------ ------
10,465 11,322
------ ------
EXPENSES:
Production operating 2,402 3,392
Facilities operating 155 229
General and administrative 1,156 1,275
Depreciation, depletion and
amortization 4,052 4,569
Impairment of oil and gas properties 7,000
Interest 1,054 995
------ ------
15,819 10,460
------ ------
OTHER EXPENSES:
Equity in loss of HCRC 1,506 111
Minority interest in net income of
subsidiaries 351 379
------ ------
1,857 490
------ ------
NET INCOME (LOSS) $(7,211) $ 372
====== ======
ALLOCATION OF NET INCOME (LOSS):
General partner $ 188 $ 407
====== ======
Limited partners $(7,399) $ (35)
====== ======
Per Unit and Class B Unit $ (.86) $ (.01)
====== =======
Weighted average Units and Class B
Units outstanding 8,644 8,649
====== ======
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands except Units)
For the Six Months
Ended June 30,
-----------------
1995 1994
------ ------
REVENUES:
Oil revenue $ 8,189 $ 7,367
Gas revenue 10,711 14,061
Pipeline, facilities and other 1,418 1,236
Interest 176 371
------ -------
20,494 23,035
------ ------
EXPENSES:
Production operating 5,089 6,145
Facilities operating 378 413
General and administrative 2,647 2,539
Depreciation, depletion and
amortization 8,024 9,282
Impairment of oil and gas properties 11,051
Interest 2,047 2,029
------ ------
29,236 20,408
------- ------
OTHER EXPENSES:
Equity in loss of HCRC 2,353 260
Minority interest in net income of
subsidiaries 638 1,079
Litigation settlement 30
------ ------
3,021 1,339
NET INCOME (LOSS) $(11,763) $ 1,288
====== ======
ALLOCATION OF NET INCOME (LOSS):
General partner $ 389 $ 995
======= =======
Limited partners $(12,152) $ 293
====== ======
Per Unit and Class B Unit $ (1.41) $ .03
====== ======
Weighted average Units and Class B
Units outstanding 8,644 8,649
====== ======
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
For the Six
Months
Ended June 30,
----------------
1995 1994
------- ------
OPERATING ACTIVITIES:
Net income (loss) $(11,763) $ 1,288
Adjustments to reconcile net income
(loss) to net cash flow
provided by operating activities:
Depreciation, depletion, amortization
and impairment 19,075 9,282
Depreciation charged to affiliates 111 174
Amortization of deferred loan costs
and other assets 101 130
Noncash interest expense 158 209
Equity in loss of HCRC 2,353 260
Minority interest in net income 638 1,079
Undistributed (earnings) loss of
affiliates (244) 86
Recoupment of take-or-pay liability (96) (192)
------ ------
Cash provided by operations before
working capital changes 10,333 12,316
Changes in operating assets and
liabilities provided (used) cash net of
noncash activity:
Oil and gas sales receivable 291 3,256
Trade receivable (122) 2,148
Due from affiliates 453 (877)
Prepaid expenses and other current
assets 207 3,440
Accounts payable and accrued
liabilities (1,533) (8,073)
------ ------
Net cash provided by operating
activities 9,629 2,210
INVESTING ACTIVITIES:
Additions to property, plant and
equipment (1,392) (1,666)
Exploration and development costs
incurred (5,064) (4,313)
Proceeds from sales of property, plant
and equipment 258 112
Other investing activities (146)
------ ------
Net cash used in investing activities (6,198) (6,013)
FINANCING ACTIVITIES:
Payments of long-term debt (7,331) (7,329)
Proceeds from long-term debt 12,000 4,300
Distributions paid (4,876) (4,889)
Distributions paid by consolidated
subsidiaries to minority shareholders (706) (1,242)
Payments of contract settlement (704) (597)
Syndication costs and capital
contributions (36) (22)
Other financing activities (12)
------ ------
Net cash used in financing activities (1,665) (9,779)
------ ------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 1,766 (3,582)
CASH AND CASH EQUIVALENTS:
BEGINNING OF PERIOD 2,409 13,139
------ ------
END OF PERIOD $ 4,175 $ 9,557
====== ======
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, 1994 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 approximately 40% of 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 40% of the outstanding common stock of HCRC, which owns
approximately 9% of HEP's Units; consequently, HEP has an interest in 317,750 of
its own Units. These Units are treated as treasury units in the accompanying
financial statements.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior period's amounts to
conform to the classifications used in the current period.
NOTE 2 - DEBT
During the first quarter, 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 $42,000,000.
HEP has amounts outstanding at June 30, 1995 of $21,700,000 under the Credit
Agreement and $12,857,000 under the Note Purchase Agreement. HEP's borrowing
base is further reduced by the outstanding contract settlement debt of
$3,595,000 and capital lease obligations of $135,000; therefore, its unused
borrowing base totaled $3,713,000 at June 30, 1995.
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 1996 through additional
borrowings under the Credit Agreement; thus, no portion of HEP's Note Purchase
Agreement is classified as current as of June 30, 1995.
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% (7.87% at June 30, 1995). Interest is payable monthly, and quarterly
principal payments of $1,624,000, as adjusted for the anticipated borrowings
during April 1996, 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
lien 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.
The current portion of long-term debt represents a current capital lease
obligation of $96,000.
HEP has entered into contracts to hedge its interest rate payments on $5,000,000
of its debt through the end of 1995, $10,000,000 for 1996 and 1997 and
$5,000,000 for the first three quarters of 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 5.8% and a ceiling rate of 8.1%, and
the other is an interest rate swap with a fixed rate of 5.75%. 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, 1995 and 1994 was
$1,684,000 and $1,691,000, respectively.
NOTE 4 - LEGAL PROCEEDINGS
On August 15, 1995, the United States District Court for the Southern District
of New York issued a Final Order approving the settlement of In Re: Hallwood
Energy Partners, L. P. Securities Litigation, 90 Civ. 1555. The settlement
class is composed of all persons and entities who beneficially owned or held
units of Energy Development Partners, Ltd. ("EDP") on May 9, 1990 and who
exchanged, or were eligible to exchange, their EDP units for HEP Units pursuant
to the merger of EDP into HEP (the "Transaction").
As part of the settlement, HEP will make a cash payment of approximately
$2,870,000, which was recorded as an expense in HEP's 1994 financial statements
as the estimated cost associated with the litigation. In addition, in
connection with plaintiffs' allegation that they did not receive adequate
compensation for their EDP Units at the time of the Transaction, HEP will issue
Units having a market value of $5,330,000. When issued, these Units, which are
presently estimated to total approximately 1,185,000, will be treated, for
financial statement purposes only, as additional Units issued in connection with
the Transaction, which was accounted for as a reorganization of entities under
common control, in a manner similar to a pooling of interests, and will be
reflected as outstanding Units since May 9, 1990, the date of the Transaction.
As a result, after the Units are issued, the number of Units outstanding and the
net income (loss) per Unit will be retroactively restated for all periods
subsequent to the Transaction. The Board of Directors of HCRC has approved the
exercise by HCRC of an option to purchase all of the Units for $5,330,000,
provided that the effective price paid by HCRC for the Units is no more than
$6.00 and no less than $3.875. If the completion of the settlement is
substantially delayed, or if there is a material change in circumstances, HCRC
will reassess its current intention to purchase the settlement Units. HEP Units
will be issued and the settlement proceeds will be distributed to the class
after all time periods for an appeal of the final settlement order have expired.
Unless there is an appeal of the court's order, HEP expects to issue the Units
and pay the cash portion to the class nominee in late September or October 1995.
Trial in the lawsuit styled Stutes v. Hallwood Petroleum, Inc. et al. has been
set for February 1996. The plaintiff in the lawsuit, a driver for Koch
Services, alleges that as a result of exposure to benzene in the petroleum he
was hauling from various wells owned and operated by HPI and the approximately
80 other named defendants, he contracted myelogenous leukemia. Discovery is
ongoing. HPI plans to vigorously defend this case, but cannot predict the
outcome of this matter or any possible effect an uninsured or unindemnified
adverse outcome might have.
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 $9,613,000 of cash flow from operating activities during the first
six months of 1995.
The other primary cash inflows were:
o $12,000,000 in proceeds from long-term debt
o $258,000 in proceeds from the sale of property
Cash was used primarily for:
o Payments of long-term debt of $7,331,000
o Additions to property and development costs incurred of $6,456,000
o Distributions to Unitholders of $4,571,000
o Payments of contract settlement of $704,000
When combined with miscellaneous other cash activity during the period, the
result was an increase of $1,766,000 in HEP's cash from $2,409,000 at December
31, 1994 to $4,175,000 at June 30, 1995.
CAPITAL PROJECTS
For 1995, HEP has a capital budget of $15,800,000 which includes $11,600,000 for
direct expenditures and $4,200,000 for indirect expenditures through its
investment in Hallwood Spraberry Drilling Company, L.L.C. ("HSD"). Through June
30, 1995, HEP incurred approximately $9,299,000 in capital expenditures which
includes $6,456,000 directly and $2,843,000 indirectly through HSD. A
description of significant exploration and development projects to date in 1995
follows.
HSD has incurred approximately $2,843,000, net to HEP's interest, through June
30, 1995 for 20 drilled wells, 12 recompletions and acquisition of drilling
leases on the Rocker "b" Ranch in Reagan County, Texas. HSD has its own line of
credit of $4,000,000, net to HEP's interest, provided by a third party lender.
The line of credit is secured only by certain leases on the Rocker "b" Ranch and
is otherwise nonrecourse to HEP. Based on the initial success of the drilling
and recompletions, HEP spent approximately $780,000 on additional acreage in the
Rocker "b" Ranch during the second quarter, and HSD plans to expand its project
area to include this acreage. HSD has three drilling rigs under contract in the
area currently, and now plans to drill 54 wells by the end of 1995. It is HEP's
intention to arrange third party financing for the drilling. The wells drilled
and recompleted through June 30, 1995 added a total of 1 million equivalent
barrels of proven developed and undeveloped reserves, including 640,000
equivalent barrels which were booked as proven undeveloped reserves at December
31, 1994. From June 30 to August 11, 1995, HSD drilled an additional seven
wells. The 39 wells drilled or recompleted since January 1, 1995, have
increased HEP's share of production on the Rocker "b" properties by 590 barrels
of oil equivalent per day.
HEP's $11,600,000 direct capital budget is being expended on a variety of
projects described below. The reserve additions generated by the following
expenditures resulted in replacement of 72% of production during the first half
of 1995 net of downward revisions caused primarily by price declines.
HEP spent approximately $825,000 on six successful drilling wells and eight
successful recompletions in the West Texas Kermit area where HEP has working
interests ranging from 25% to 80%. Gross production on these properties has
increased by 690 barrels of oil per day and 1,275 mcf per day. Future projects
in the area include secondary recovery in the San Andres and Holt Formations.
It is anticipated that six more wells will be recompleted and seven more wells
will be drilled by year end.
A workover on the G.S. Boudreaux in Lafayette Parish increased gross production
rates from 17,500 mcf per day and 370 barrels of condensate per day to 22,000
mcf per day and 450 barrels of condensate per day during the second quarter of
1995. The increased production rate on the G.S. Boudreaux is anticipated to
increase the state administered production allowable for the A.L. Boudreaux in
the same area from its current 20,000 mcf per day to 28,000 mcf per day. HEP
has a 26% interest in the A.L. Boudreaux.
In Richland County, Montana, the Lewis #1 was recompleted to the Interlake
Formation in the first quarter of 1995, and the well is currently flowing 325
barrels of oil per day and 165 mcf per day. Two development wells to further
exploit this field's reserves are planned for 1995. HEP has a 22% working
interest in the area.
In the first six months of 1995, HEP spent approximately $290,000 on a program
started in late 1994 in New Mexico. This amount includes eight successful non-
operated development wells in Lea County, New Mexico, and two successful
operated recompletions in Eddy County, New Mexico, having gross combined initial
flowing potentials of 2,750 barrels of oil per day and 3,525 mcf per day. HEP
has a 5% working interest in the Lea County field and 25% to 50% interests in
the Eddy County wells. An additional five nonoperated wells are expected to be
drilled by the end of 1996.
In May 1995, HEP completed an exploratory well in Hot Springs County, Wyoming.
The well is flowing 550 barrels of oil per day, and a delineation well is
presently being drilled. HEP has a 17% working interest in this field.
Depending upon the results of the delineation well, additional field development
is possible.
In the first six months of 1995, HEP drilled two additional coal bed methane
development wells and acquired working interests in the San Juan Basin of New
Mexico, for a total of approximately $194,000. The two new wells have increased
gross production in this area by 325 mcf per day, and gross production is
expected to increase further as the Fruitland Coal dewaters. HEP has working
interests in these new wells of 18% and 25%.
During the first six months of 1995, HEP also acquired additional acreage in
Martin County, Reagan County and Irion County, Texas for approximately $497,000.
Nine wells are planned to be drilled on the Irion County acreage in 1995. HEP
has also spent approximately $555,000 on two development wells in Reagan County,
Texas in which it has a 90% working interest. Significant additional acreage
acquisition in 1995 is anticipated to support 1996 drilling plans in Reagan
County. Numerous other projects, which are individually less significant, are
also underway in Montana, Colorado, North Dakota, Texas and Utah. Additionally,
six wildcat exploration wells are planned for the second half of 1995.
During the first quarter of 1995, Hallwood Petroleum Indonesia, Inc. ("Hallwood
Indonesia") completed and evaluated its first well, PTH-01, in the Telaga Said
Field in North Sumatra, Indonesia. A 39 barrel per day oil test was obtained,
but insufficient reserves were indicated to justify field development costs.
Consequently, Hallwood Indonesia has decided to relinquish its interest in the
contract area and is in the process of closing down its operations there. HEP
recorded $4,051,000 of impairment expense in the first quarter of 1995, which
represents the write-off of its entire investment in Hallwood Indonesia.
DISTRIBUTIONS
HEP paid a $.20 per Unit distribution on May 15, 1995 and a $.20 per Unit
distribution on August 15, 1995. HEP will continue to evaluate its cash flow
from operations on a quarterly basis and will determine each quarter's
distribution accordingly. HEP expects to continue distributions at the current
level through 1995, absent adverse developments in price, production or costs.
FINANCING
During the first quarter, 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 $42,000,000.
HEP has amounts outstanding at June 30, 1995 of $21,700,000 under the Credit
Agreement and $12,857,000 under the Note Purchase Agreement. HEP's borrowing
base is further reduced by the outstanding contract settlement debt of
$3,595,000 and capital lease obligations of $135,000; therefore, its unused
borrowing base totaled $3,713,000 at June 30, 1995.
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 1996 through additional
borrowings under the Credit Agreement; thus, no portion of HEP's Note Purchase
Agreement is classified as current as of June 30, 1995.
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% (7.87% at June 30, 1995). Interest is payable monthly, and quarterly
principal payments of $1,624,000, as adjusted for the anticipated borrowings
during April 1996, 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
lien 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.
The current portion of long-term debt represents a current capital lease
obligation of $96,000.
HEP has entered into contracts to hedge its interest rate payments on $5,000,000
of its debt through the end of 1995, $10,000,000 for 1996 and 1997 and
$5,000,000 for the first three quarters of 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 5.8% and a ceiling rate of 8.1%, and
the other is an interest rate swap with a fixed rate of 5.75%. 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 1994 and 1995.
The following table presents the average prices received each quarter by HEP and
the effects of the hedging transactions discussed below.
Oil Oil
(excluding the (including the
effects of effects of
hedging hedging
transactions) transactions)
(bbl) (bbl)
Second quarter - 1994 $16.03 $16.84
Third quarter - 1994 17.08 17.58
Fourth quarter - 1994 16.05 16.89
First quarter - 1995 16.79 17.22
Second quarter - 1995 18.00 18.14
Gas Gas
(excluding the (including the
effects of effects of
hedging hedging
transactions) transactions)
(mcf) (mcf)
Second quarter - 1994 $1.90 $1.94
Third quarter - 1994 1.81 1.95
Fourth quarter - 1994 1.65 1.84
First quarter - 1995 1.51 1.81
Second quarter - 1995 1.39 1.64
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 drops 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:
Oil
Percent of
Production Contract
Period Hedged Floor Price
------ -------- --------
(per bbl)
Last six months 45% $17.12
of 1995 22% $15.25
1996 18% $15.08
1997 14% $15.14
1998 3% $15.38
1999
Between 20% 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 25% 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 $16.50 to $18.85.
[CAPTION]
Gas
Percent of Contract
Production Floor Price
Period Hedged (per mcf)
------ -------- --------
[S] [C] [C]
Last six months
of 1995 55% $2.04
1996 28% 2.05
1997 31% 1.95
1998 33% 2.00
1999 4% 1.49
[/TABLE]
Between 28% and 68% 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 $2.50 to $2.81. During the third
quarter through August 3, 1995, the oil price (for barrels not hedged) averaged
between $15.75 and $16.25 per barrel. The weighted average price of natural
gas (for mcf not hedged) was between $1.30 and $1.40 per mcf.
INFLATION
Inflation did not have a material impact on HEP in 1994 and is not anticipated
to have a material impact in 1995.
RESULTS OF OPERATIONS
The following table is presented to contrast HEP's average oil and gas prices
and production. Significant fluctuations are discussed in the accompanying
narrative.
OIL AND GAS PRICES AND PRODUCTION
(In thousands except for price)
For the Three Months Ended For the Six Months Ended
June 30, June 30,
1995 1994 1995 1994
Oil Gas Oil Gas Oil Gas Oil Gas
(bbl) (mcf) (bbl) (mcf) (bbl) (mcf) (bbl) (mcf)
Average
price $18.14 $1.64 $16.84 $1.94 $17.68 $1.72 $15.71 $2.04
Production 234 3,147 233 3,296 463 6,219 469 6,896
SECOND QUARTER 1995 COMPARED TO SECOND QUARTER 1994
OIL REVENUE
Oil revenue increased by $322,000, or 8%, during the second quarter of 1995 as
compared with the second quarter of 1994. The increase is the result of an
increase in the average oil price from $16.84 per barrel in 1994 to $18.14 per
barrel in 1995 combined with a slight increase in oil production from 233,000
barrels in 1994 to 234,000 barrels in 1995. The increase in oil production is
due to increased production from developmental drilling projects in West Texas
which more than offset normal production declines.
The effect of HEP's hedging transactions, as described under "Inflation and
Changing Prices," was to increase HEP's average oil price from $18.00 per barrel
to $18.14 per barrel, representing $33,000 in additional revenue from hedging
transactions.
GAS REVENUE
Gas revenue decreased by $1,231,000 during the second quarter of 1995 as
compared with the second quarter of 1994. The decrease is the result of a
decrease in production from 3,296,000 mcf in 1994 to 3,147,000 mcf in 1995,
combined with a 15% decrease in price from $1.94 per mcf in 1994 to $1.64 per
mcf in 1995. The decrease in production is due to allowable production limits
and normal production declines.
The effect of HEP's hedging transactions was to increase HEP's average gas price
from $1.39 per mcf to $1.64 per mcf, representing $787,000 in additional 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 the sale of a term working
interest in certain wells in San Juan County. Pipeline, facilities and other
income increased by $227,000 during the second quarter of 1995 as compared with
the second quarter of 1994, primarily as a result of incentive payments received
during the second quarter of 1995.
INTEREST INCOME
The decrease in interest income of $175,000 during the second quarter of 1995 as
compared with the second quarter of 1994 resulted from a lower average cash
balance during the second quarter of 1995 as compared with the same period
during 1994.
PRODUCTION OPERATING EXPENSE
Production operating expense decreased $990,000 during the second quarter of
1995 as compared with the second quarter of 1994, primarily as a result of lower
production taxes due to decreased oil and gas revenue and general cost
reductions in West Texas.
FACILITIES OPERATING EXPENSE
Facilities operating expense represents the costs of operating and maintaining
two gathering systems located in New Mexico. Costs decreased by $74,000 during
1995 as compared with 1994 due to decreased maintenance activity.
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 $119,000 during the second quarter of 1995 as compared
with the second quarter of 1994 primarily due to reductions in personnel during
the first quarter of 1995.
DEPRECIATION, DEPLETION AND AMORTIZATION EXPENSE
Depreciation, depletion and amortization expense decreased $517,000 during the
second quarter of 1995 as compared with the second quarter of 1994. The
decrease is primarily the result of lower capitalized costs in 1995 as compared
with 1994 due to the property impairment recorded during the fourth quarter of
1994.
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 increased by $59,000 during the second quarter of 1995 as
compared with the second quarter of 1994, primarily as the result of a higher
interest rates.
EQUITY IN LOSS OF HCRC
Equity in loss of affiliate represents HEP's share of its equity investment in
HCRC. HEP's equity in loss increased $1,395,000 during the second quarter of
1995 as compared with the second quarter of 1994. The increase is the result of
a property impairment recorded by HCRC.
FIRST SIX MONTHS 1995 COMPARED TO THE FIRST SIX MONTHS 1994
The comparisons for the first six months of 1995 and the first six months of
1994 are consistent with those discussed in the second quarter 1995 compared to
the second quarter 1994 except for the following:
OIL REVENUE
Oil revenue increased $822,000 or 11%. The increase is comprised of an increase
in average oil prices from $15.71 per barrel in 1994 to $17.68 per barrel in
1995 slightly offset by a decrease in production from 469,000 barrels in 1994 to
463,000 barrels in 1995. The production decrease is due to normal production
declines partially offset by increased production from developmental drilling
projects in West Texas.
The effect of HEP's hedging transactions was to increase HEP's average oil price
from $17.40 per barrel to $17.68 per barrel, representing a $130,000 increase in
revenues.
GAS REVENUE
Gas revenue decreased $3,350,000 during the first six months of 1995 as compared
with the first six months of 1994. The decrease is comprised of a decrease in
price from $2.04 per mcf in 1994 to $1.72 per mcf in 1995 combined with a
decrease in production from 6,896,000 mcf in 1994 to 6,219,000 mcf in 1995. The
production decrease is due to allowable production limits and normal production
declines.
The effect of HEP's hedging transactions was to increase HEP's average gas price
from $1.45 per mcf to $1.72 per mcf, representing $1,679,000 in additional
revenue from hedging transactions.
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expense increased $108,000 during the first six
months of 1995 as compared with the first six months of 1994 primarily due to
bank fees associated with the extension of HEP'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 HEP's Indonesian operations as well as the previously
discussed property impairment.
EQUITY IN LOSS OF HCRC
Equity in loss of HCRC increased $2,093,000 during the first six months of 1995
as compared with the first six months of 1994. 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 second quarter property
impairment recorded by HCRC.
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 decrease is
due to a decline in the net income of the May Partnerships resulting from
decreased production on their properties.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
Reference is made to Item 8 - Note 14 of
Form 10-K for the year ended December 31, 1994, Item 1 - Note 4 of
Form 10-Q for the quarter ended March 31, 1995 and Item 1 - Note 4 of
Form 10-Q for the quarter ended June 30, 1995.
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 11, 1995 By: Robert S. Pfeiffer
Robert S. Pfeiffer,
Vice President
(Chief Financial Officer)