UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Amended March 19, 1997
MARK ONE
X QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission File Number 1-8921
HALLWOOD ENERGY PARTNERS, L. P.
(Exact name of registrant as specified in its charter)
DELAWARE 84-0987088
(State or other jurisdiction of (I.R.S. Employer
incorporation ofr organization) Identification Number)
4582 SOUTH ULSTER STREET
PARKWAY, SUITE 1700
DENVER, COLORADO 80237
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code:
(303) 850-7373
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
The registrant is a limited partnership and issues Units (representing ownership
of limited partner interests).
Number of Units outstanding as of May 10, 1996
Class A 9,977,254
Class B 143,773
Class C 664,063
HALLWOOD ENERGY PARTNERS, L. P.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands except Units)
March 31, December 31,
1996 1995
CURRENT ASSETS
Cash and cash equivalents $ 8,061 $ 4,977
Accounts receivable:
Oil and gas sales 7,557 6,767
Trade 3,140 2,860
Due from affiliates 1,552 2,808
Prepaid expenses and other
current assets 924 1,091
------- -------
Total 21,234 18,503
------- -------
PROPERTY, PLANT AND EQUIPMENT, at
cost
Oil and gas properties (full cost
method):
Proved mineral interests 601,623 601,323
Unproved mineral interests -
domestic 792 684
Furniture, fixtures and other 3,126 3,090
------- -------
Total 605,541 605,097
Less accumulated depreciation,
depletion, amortization and
property impairment (514,089) (510,171)
--------- ---------
Total 91,452 94,926
------- -------
OTHER ASSETS
Investment in common stock of
HCRC 11,867 11,491
Deferred expenses and other
assets 265 232
------- -------
Total 12,132 11,723
------- -------
TOTAL ASSETS $124,818 $125,152
========= ========
HALLWOOD ENERGY PARTNERS, L. P.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands except Units)
(Continued)
March 31, December 31,
1996 1995
CURRENT LIABILITIES
Accounts payable and accrued
liabilities $ 16,286 $ 17,344
Net working capital deficit of
affiliates 140 5,061
Current portion of contract
settlement 374
Current portion of long-term debt 87
------- -------
Total 16,426 22,866
------- -------
NONCURRENT LIABILITIES
Long-term debt 37,557 37,557
Contract settlement 2,389 2,397
Long-term liabilities of
affiliate 4,655
Deferred liability 1,730 1,718
------- -------
Total 46,331 41,672
------- -------
Total Liabilities 62,757 64,538
------- -------
MINORITY INTEREST IN SUBSIDIARIES 3,577 3,042
------- -------
PARTNERS' CAPITAL Class A Units - 9,977,254 Units issued, 9,114,123 outstanding
in 1996 and 9,193,159 outstanding
in 1995 55,930 59,614
Class B Subordinated Units -
143,773 Units outstanding 1,090 1,062
Class C Units - 664,063
outstanding in 1996 and
-0- outstanding in 1995 5,146
General Partner 3,016 2,981
Treasury Units - 863,131 Units in
1996 and 784,095 Units in 1995 (6,698) (6,085)
------- -------
Partners' Capital - Net 58,484 57,572
------- -------
TOTAL LIABILITIES AND PARTNERS'
CAPITAL $124,818 $125,152
======= =======
HALLWOOD ENERGY PARTNERS, L. P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands except Units)
For the Three Months
Ended March 31,
1996 1995
REVENUES:
Oil revenue $ 5,085 $ 3,943
Gas revenue 7,808 5,560
Pipeline, facilities and other 735 520
Interest 73 86
------- -------
13,701 10,109
------- -------
EXPENSES:
Production operating 3,030 2,687
Facilities operating 275 223
General and administrative 1,168 1,491
Depreciation, depletion and
amortization 3,862 3,972
Impairment of oil and gas
properties 4,051
Interest 1,122 993
------- -------
9,457 13,417
------- -------
OTHER INCOME (EXPENSES):
Equity in income (loss) of HCRC 376 (847)
Minority interest in net income
of subsidiaries (867) (287)
Litigation settlement (110)
------- -------
(491) (1,244)
------- -------
NET INCOME (LOSS) 3,753 (4,552)
CLASS C UNIT DISTRIBUTIONS
($.25 PER UNIT) 166
------- -------
NET INCOME (LOSS) FOR GENERAL
PARTNER, CLASS A AND CLASS B
LIMITED PARTNERS $ 3,587 $ (4,552)
======= =======
ALLOCATION OF NET INCOME (LOSS):
General partner $ 687 $ 201
======= =======
Class A and Class B Limited
partners $ 2,900 $ (4,753)
======= =======
Per Class A Unit and Class B Unit $ .31 $ (.55)
======= =======
Weighted average Class A Units
and Class B Units outstanding 9,271 8,644
======= =======
HALLWOOD ENERGY PARTNERS, L. P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
For the Three Months
Ended March 31,
1996 1995
OPERATING ACTIVITIES:
Net income (loss) $ 3,753 $ (4,552)
Adjustments to reconcile net income
(loss) to net cash flow provided by
operating activities:
Depreciation, depletion, amortization
and impairment 3,862 8,023
Depreciation charged to affiliates 56 51
Amortization of deferred loan costs
and other assets 33 50
Noncash interest expense 54 82
Equity in (earnings) loss of HCRC (376) 847
Minority interest in net income of
subsidiaries 867 287
Undistributed earnings of affiliates (456) (66)
Recoupment of take-or-pay liability (176) (40)
------- -------
Cash provided by operations before
working capital changes 7,617 4,682
Changes in operating assets and
liabilities provided (used) cash net
of noncash activity:
Oil and gas sales receivable (790) 1,149
Trade receivable (280) (738)
Due from affiliates (527) 1,647
Prepaid expenses and other current
assets 167 (3)
Accounts payable and accrued
liabilities 730 (767)
Due to affiliates 1,003
------- -------
Net cash provided by operating 6,917 6,973
activities ------- -------
INVESTING ACTIVITIES:
Additions to property, plant and
equipment (313) (573)
Exploration and development costs
incurred (1,785) (3,460)
Proceeds from sales of property, plant
and equipment 1,293 181
Other investing activities (67)
------- -------
Net cash used in investing activities (872) (3,852)
------- -------
FINANCING ACTIVITIES:
Payments of long-term debt (87) (3,022)
Proceeds from long-term debt 10,000
Distributions paid (2,216) (2,448)
Distributions paid by consolidated
subsidiaries to minority shareholders (332) (315)
Payments of contract settlement (305) (333)
Syndication costs and capital
contributions (12) (23)
Other financing activities (9) (59)
------- -------
Net cash provided by (used in)
financing activities (2,961) 3,800
------- -------
NET INCREASE IN CASH AND CASH
EQUIVALENTS 3,084 6,921
CASH AND CASH EQUIVALENTS:
BEGINNING OF PERIOD 4,977 2,409
------- -------
END OF PERIOD $ 8,061 $ 9,330
======= =======
HALLWOOD ENERGY PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - GENERAL
Hallwood Energy Partners, L. P. ("HEP") is a publicly traded Delaware limited
partnership engaged in the development, production, sale and transportation of
oil and gas and in the acquisition, exploration, development and operation of
oil and gas properties. The principal objectives of HEP are to maintain and to
expand its reserve base and to provide cash distributions to holders of its
units representing limited partner interests ("Units"). The general partner of
HEP is Hallwood Energy Corporation ("HEC") which has been engaged in oil and gas
exploration and development since its incorporation in 1968.
The activities of HEP are conducted through HEP Operating Partners, L. P.
("HEPO") and EDP Operating, Ltd. ("EDPO"). HEP is the sole limited partner and
HEC is the sole general partner of HEPO. Hallwood G. P., Inc. ("HGPI"), a
wholly-owned subsidiary of HEC, is the sole general partner, and HEP is the sole
limited partner of EDPO. Solely for purposes of simplicity herein, unless
otherwise indicated, all references to HEP in connection with the ownership,
exploration, development or production of oil and gas properties include HEPO
and EDPO.
The interim financial data are unaudited; however, in the opinion of the general
partner, the interim data include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the results for the
interim periods. These financial statements should be read in conjunction with
the financial statements and accompanying footnotes included in HEP's December
31, 1995 Annual Report on Form 10-K.
ACCOUNTING POLICIES
CONSOLIDATION
HEP fully consolidates majority owned entities and reflects a minority interest
in the consolidated financial statements. HEP accounts for its interest in 50%
or less owned affiliated oil and gas partnerships and limited liability
companies using the proportionate consolidation method of accounting. HEP's
investment in approximately 44% 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 44% and 40% of the outstanding common stock of HCRC, at
March 31, 1996 and December 31, 1995, respectively; while HCRC owned
approximately 19% and 9% of HEP's Units at March 31, 1996 and December 31, 1995,
respectively; consequently, HEP had an interest in 863,131 and 784,095 of its
own Units at March 31, 1996 and December 31, 1995, respectively. These Units are
treated as treasury units in the accompanying financial statements.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior period's amounts to
conform to the classifications used in the current period.
NOTE 2 - DEBT
During the first quarter of 1995, HEP and its lenders amended and restated HEP's
Amended and Restated Credit Agreement ("Credit Agreement") to extend the term
date of its line of credit to May 31, 1997. Under the Credit Agreement and an
Amended and Restated Note Purchase Agreement ("Note Purchase Agreement")
(collectively referred to as the "Credit Facilities") HEP has a borrowing base
of $45,000,000. HEP has amounts outstanding at March 31, 1996 of $24,700,000
under the Credit Agreement and $12,857,000 under the Note Purchase Agreement.
Effective April 1, 1996, HEP paid off its proportionate share of the bank debt
of Hallwood Spraberry Drilling Company, L.L.C. ("HSD"). The ownership of HSD's
properties was transferred directly to HEP, HCRC and HEC. HEP mortgaged its
share of the HSD properties to its lenders and borrowed an additional $5,000,000
under its Credit Agreement to fund the repayment of the debt. HEP's borrowing
base is further reduced by an outstanding contract settlement obligation of
$2,389,000; therefore, its unused borrowing base totaled $54,000 at May 10,
1996.
Borrowings under the Note Purchase Agreement bear interest at an annual rate of
11.85%, which is payable quarterly. Annual principal payments of $4,286,000
began April 30, 1992, and the debt is required to be paid in full on April 30,
1998. HEP funded 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 March 31, 1996.
Borrowings against the Credit Agreement bear interest at the lower of the
Certificate of Deposit rate plus 1.875%, prime plus 1/2% or the Euro-Dollar rate
plus 1.75% (7.06% at March 31, 1996). Interest is payable monthly, and quarterly
principal payments of $2,124,000, as adjusted for the additional 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.
HEP entered into contracts to hedge its interest rate payments on $10,000,000 of
its debt for 1996 and 1997 and $5,000,000 for 1998. HEP does not use the hedges
for trading purposes, but rather for the purpose of providing a measure of
predictability for a portion of HEP's interest payments under its debt agreement
which has a floating interest rate. In general, it is HEP's goal to hedge 50% of
the principal amount of its debt for each year of the remaining term of the
debt. HEP has entered into two hedges, one of which is an interest rate collar
pursuant to which it pays a floor rate of 7.55% and a ceiling rate of 9.85%, and
the other is an interest rate swap with a fixed rate of 7.49%. The amounts
received or paid upon settlement of these transactions are recognized as
interest expense at the time the interest payments are due.
NOTE 3 - STATEMENT OF CASH FLOWS
Cash paid for interest during the three months ended March 31, 1996 and 1995 was
$842,000 and $825,000, respectively.
NOTE 4 - SUBSEQUENT EVENT
Effective April 1, 1996, HEP paid off its proportionate share of the bank debt
of HSD. The ownership of HSD's properties was transferred directly to HEP, HCRC
and HEC. HEP mortgaged its share of the HSD properties to its lenders and
borrowed an additional $5,000,000 under its Credit Agreement to fund the
repayment of the debt.
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 $6,917,000 of cash flow from operating activities during the first
three months of 1996.
The other primary cash inflow was:
. $1,293,000 in proceeds from the sale of property
Cash was used primarily for:
. Additions to property and development costs incurred of $2,098,000
. Distributions to Unitholders of $2,216,000
. Payments of contract settlement of $305,000
When combined with miscellaneous other cash activity during the period, the
result was an increase of $3,084,000 in HEP's cash from $4,977,000 at December
31, 1995 to $8,061,000 at March 31, 1996.
DEVELOPMENT PROJECTS AND ACQUISITIONS
Through March 31, 1996, HEP has incurred approximately $2,098,000 directly and
$189,000 indirectly through its investment in Hallwood Spraberry Drilling
Company, L.L.C. ("HSD") for exploration, development and acquisition costs
toward the 1996 capital budget of $11,500,000. The direct expenditures were
comprised of approximately $1,785,000 for domestic exploration and development
expenditures and approximately $313,000 for property acquisitions and land. The
indirect expenditures were comprised of drilling costs. A description of
significant exploration and development projects to date in 1996 follows.
HEP has incurred approximately $189,000 in the first quarter, net to HEP's
interest, for four recompletions and one drilled well in the Rocker "b" Ranch in
Reagan County, Texas. This activity has increased HEP's share of production by
90 equivalent barrels of oil per day. Effective April 1, 1996, HEP repaid its
share of HSD's third party loan through additional borrowings on its bank credit
agreement and assumed direct ownership of its share of HSD's properties. There
are still 10 undrilled locations which were recorded as proved reserves at
December 31, 1995 which HEP plans to drill at some date in the future. During
the first quarter, HEP also acquired interests in five additional producing
leases on the Rocker "b" Ranch for a total of $93,000. HEP plans to recomplete
at least seven wells from this acquisition by year end. The results of the first
two recompletions, which are in progress, appear favorable.
HEP has had continued success in the West Texas Kermit area in 1996, drilling or
participating in the drilling of six successful wells in the first quarter for
approximately $400,000. These new wells are capable of producing approximately
800 gross equivalent barrels of oil per day but are currently limited to
approximately 350 gross equivalent barrels of oil per day due to limitations on
production imposed by state laws and regulations. HEP's interest in these wells
averages 35%. HEP is committed to drilling at least seven more wells in the
second quarter and has plans for several more recompletions in the second half
of 1996.
HEP also continues to participate in a nonoperated development program in the
Southeastern New Mexico area which began in late 1994, with two more successful
wells being drilled for a net cost of approximately $69,000. HEP has a 5%
interest in these wells which are currently producing at a gross rate of 750
equivalent barrels of oil per day. HEP is committed to further participation in
this program and currently plans to drill at least one well in the second
quarter. HEP has also performed three successful recompletions on wells it
operates in the Catclaw Draw area for a cost of approximately $90,000.
Under a farmout agreement completed in 1995, HEP is participating in several
multiple lateral, horizontal wells in the Giddings Austin Chalk play in Lee
County, Texas. Two successful wells have been drilled thus far, and a third well
is currently being drilled. HEP's interests in the area range from 3% to 4%,
with gross average initial production rates of 750 barrels of oil per day on the
first two wells. HEP's cost for both wells was approximately $20,000.
HEP has also participated in the drilling of two nonoperated wells in Williams
County, North Dakota in the latter part of 1995 and the first quarter of 1996,
one of which was dry and the other only marginally successful, for a total cost
of approximately $200,000. HEP also drilled an exploratory dry hole in Richland
County, Montana at a cost of $120,000. HEP is evaluating an Interlake Formation
development well drilled in April.
In the San Juan Basin of New Mexico, HEP successfully recompleted a well in the
first quarter of 1996 for approximately $90,000. Current production on this well
is approximately 1,200 mcf of gas per day which equals the initial production
rates experienced when the well was drilled in 1990. Rates prior to this
workover were approximately 400 mcf of gas per day. HEP owns approximately 55%
of this well.
HEP acquired three dimensional (3-D) seismic data in several different areas in
the latter part of 1995 and early 1996. Expenditures thus far in 1996 total
approximately $300,000 and HEP plans to expend at least another $200,000 in the
second quarter of 1996. Drilling of resulting prospects will commence in the
second quarter of 1996.
HEP is also actively evaluating acquisitions in strategic areas. Such
acquisitions would be financed using the capital budget, supplemented by
external financing when appropriate.
PROPERTY SALES
During the first quarter of 1996, HEP received approximately $1,300,000 for the
sale of its interests in the Hoople Field in Crosby County, Texas. HEP also
received another $88,000 in early April for the sale of various nonstrategic
properties at auction. HEP continues to evaluate unsolicited offers on various
properties it owns.
DISTRIBUTIONS
HEP declared a $.13 per Class A Unit and a $.25 per Class C Unit distribution
payable on May 15, 1996 to Unitholders of record on March 31, 1996.
Distributions on the Class B Units are suspended if the Class A Units receive a
distribution of less than $.20 per Class A Unit per calendar quarter. In any
quarter for which distributions of $.20 or more per unit are made on the Class A
Units, the Class B Units are entitled to be paid, in whole or in part, suspended
distributions.
FINANCING
During the first quarter of 1995, HEP and its lenders amended and restated HEP's
Amended and Restated Credit Agreement ("Credit Agreement") to extend the
maturity date of its line of credit to May 31, 1997. Under the Credit Agreement
and an Amended and Restated Note Purchase Agreement ("Note Purchase Agreement")
(collectively referred to as the "Credit Facilities") HEP has a borrowing base
of $45,000,000. HEP has amounts outstanding at March 31, 1996 of $24,700,000
under the Credit Agreement and $12,857,000 under the Note Purchase Agreement.
Effective April 1, 1996, HEP paid off its proportional share of the bank debt of
Hallwood Spraberry Drilling Company, L.L.C. ("HSD"). The ownership of HSD's
properties was transferred directly to HEP, HCRC and HEC. HEP mortgaged its
share of the HSD properties to its lenders and borrowed an additional $5,000,000
under its Credit Agreement to fund the repayment of the debt. HEP's borrowing
base is further reduced by an outstanding contract settlement obligation of
$2,389,000; therefore, its unused borrowing base totaled $54,000 at May 10,
1996.
Borrowings under the Note Purchase Agreement bear interest at an annual rate of
11.85%, which is payable quarterly. Annual principal payments of $4,286,000
began April 30, 1992, and the debt is required to be paid in full on April 30,
1998. HEP funded 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 March 31, 1996.
Borrowings against the Credit Agreement bear interest at the lower of the
Certificate of Deposit rate plus 1.875%, prime plus 1/2% or the Euro-Dollar rate
plus 1.75% (7.06% at March 31, 1996). Interest is payable monthly, and quarterly
principal payments of $2,124,000, as adjusted for the additional 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.
HEP entered into contracts to hedge its interest rate payments on $10,000,000 of
its debt for 1996 and 1997 and $5,000,000 for 1998. HEP does not use the hedges
for trading purposes, but rather for the purpose of providing a measure of
predictability for a portion of HEP's interest payments under its debt agreement
which has a floating interest rate. In general, it is HEP's goal to hedge 50% of
the principal amount of its debt for each year of the remaining term of the
debt. HEP has entered into two hedges, one of which is an interest rate collar
pursuant to which it pays a floor rate of 7.55% and a ceiling rate of 9.85%, and
the other is an interest rate swap with a fixed rate of 7.49%. The amounts
received or paid upon settlement of these transactions are recognized as
interest expense at the time the interest payments are due.
INFLATION AND CHANGING PRICES
PRICES
Prices obtained for oil and gas production depend upon numerous factors that are
beyond the control of HEP, including the extent of domestic and foreign
production, imports of foreign oil, market demand, domestic and worldwide
economic and political conditions, and government regulations and tax laws.
Prices for both oil and gas fluctuated significantly throughout 1995 and 1996.
The following table presents the average prices received each quarter by HEP and
the effects of the hedging transactions discussed below.
Oil Oil
(excluding the (including the
effects of effects of
hedging hedging
transactions) transactions)
(bbl) (bbl)
First quarter - 1995 $16.79 $17.22
Second quarter - 1995 18.00 18.14
Third quarter - 1995 16.15 16.63
Fourth quarter - 1995 17.13 17.57
First quarter - 1996 18.05 17.97
Gas Gas
(excluding the (including the
effects of effects of
hedging hedging
transactions) transactions)
(mcf) (mcf)
First quarter - 1995 $1.51 $1.81
Second quarter - 1995 1.39 1.64
Third quarter - 1995 1.54 1.84
Fourth quarter - 1995 1.87 1.99
First quarter - 1996 2.41 2.30
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 Contract
Period Production Floor Price
Hedged (per bbl)
Last nine months of 1996 21% $15.08
1997 18% $14.87
1998 15% $14.83
1999 3% $15.38
Between 16% and 100% of the oil volumes hedged in each year are subject to a
participating hedge whereby HEP will receive the contract price if the posted
futures price is lower than the contract price, and will receive the contract
price plus between 25% and 75% of the difference between the contract price and
the posted futures price if the posted futures price is greater than the
contract price. Between 75% 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.
Gas
Percent of Contract
Period Production Floor Price
Hedged (per bbl)
Last nine months of 1996 47% $2.01
1997 39% $2.06
1998 41% $2.10
1999 17% $2.01
2000 20% $2.01
Between 0% and 50% of the gas volumes hedged in each year are subject to a
collar agreement whereby HEP will receive the contract price if the spot price
is lower than the contract price, the cap price if the spot price is higher than
the cap price, and the spot price if that price is between the contract price
and the cap price. The cap prices range from $2.65 to $2.93.
During the second quarter through April 20, 1996, the oil price (for barrels not
hedged) averaged between $20.00 and $23.00 per barrel. The weighted average
price of natural gas (for mcf not hedged) was between $1.15 and $3.00 per mcf.
INFLATION
Inflation did not have a material impact on HEP in 1995 and is not anticipated
to have a material impact in 1996.
RESULTS OF OPERATIONS
The following tables are presented to contrast HEP's revenue, expense and
earnings for discussion purposes. Significant fluctuations are discussed in the
accompanying narrative. The "direct owned" column represents HEP's direct
royalty and working interests in oil and gas properties. The "Mays" column
represents the results of operations of six May Limited Partnerships which are
consolidated with HEP. In 1996, HEP owned interests which ranged from 54.5% to
68.3% of the Mays, and in 1995, HEP's ownership in the Mays ranged from 54.1% to
TABLE OF HEP EARNINGS FOR MANAGEMENT DISCUSSION
(In thousands except price)
FOR THE QUARTERS ENDED MARCH 31, 1996 AND 1995
For the Quarter Ended March 31, 1996
Direct
Owned Mays Total
Oil production (bbl) 251 32 283
Gas production (mcf) 2,884 510 3,394
Average oil price $17.82 $19.16 $17.97
Average gas price $ 2.08 $ 3.54 $ 2.30
Oil revenue $ 4,472 $ 613 $ 5,085
Gas revenue 6,002 1,806 7,808
Pipeline, facilities and other
revenue 735 735
Interest income 59 14 73
------ ------ ------
Total revenue 11,268 2,433 13,701
------ ------ ------
Production operating expense 2,848 182 3,030
Facilities operating expense 275 275
General and administrative
expense 1,055 113 1,168
Depreciation, depletion, and
amortization 3,330 532 3,862
Impairment of oil and gas
properties
Interest expense 1,122 1,122
Litigation settlement expense
Equity in (earnings) loss of HCRC (376) (376)
Minority interest 867 867
------- ------- ------
Total expense 8,254 1,694 9,948
------ ------ ------
Net income (loss) $ 3,014 $ 739 $ 3,753
====== ====== ======
For the Quarter Ended March 31, 1995
Direct
Owned Mays Total
Oil production (bbl) 209 20 229
Gas production (mcf) 2,726 346 3,072
Average oil price $17.14 $18.05 $17.22
Average gas price $ 1.82 $ 1.74 $ 1.81
Oil revenue $ 3,582 $ 361 $ 3,943
Gas revenue 4,958 602 5,560
Pipeline, facilities and
other revenue 520 520
Interest income 70 16 86
------ ------ ------
Total revenue 9,130 979 10,109
------ ------ ------
Production operating expense 2,552 135 2,687
Facilities operating expense 223 223
General and administrative
expense 1,380 111 1,491
Depreciation, depletion, and
amortization 3,862 110 3,972
Impairment of oil and gas
properties 4,051 4,051
Interest expense 993 993
Litigation settlement
expense 110 110
Equity in (earnings) loss of
HCRC 847 847
Minority interest 287 287
------- ------ -------
Total expense 14,018 643 14,661
------ ------ ------
Net income (loss) $(4,888) $ 336 $(4,552)
====== ====== ======
FIRST QUARTER 1996 COMPARED TO FIRST QUARTER 1995
OIL REVENUE
Oil revenue increased by $1,142,000 during the first quarter of 1996 as compared
with the first quarter of 1995. The increase is the result of an increase in the
average oil price from $17.22 per barrel in 1995 to $17.97 per barrel in 1996
combined with an increase in oil production from 229,000 barrels in 1995 to
283,000 barrels in 1996. The increase in oil production is due to increased
production from exploratory and developmental drilling projects in Montana,
Wyoming and West Texas partially offset by normal production declines.
The effect of HEP's hedging transactions, as described under "Inflation and
Changing Prices," was to decrease HEP's average oil price from $18.05 per barrel
to $17.97 per barrel, representing a reduction in revenue from hedging
transactions of $23,000.
GAS REVENUE
Gas revenue increased by $2,248,000 during the first quarter of 1996 as compared
with the first quarter of 1995. The increase is the result of an increase in
production from 3,072,000 mcf in 1995 to 3,394,000 mcf in 1996, combined with a
27% increase in price from $1.81 per mcf in 1995 to $2.30 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 which is
partially offset by normal production declines.
The effect of HEP's hedging transactions was to decrease HEP's average gas price
from $2.41 per mcf to $2.30 per mcf, representing a $373,000 reduction in
revenue from hedging transactions.
PIPELINE, FACILITIES AND OTHER
Pipeline, facilities and other revenue consists primarily of facilities income
from two gathering systems located in New Mexico, revenues derived from salt
water disposal, and incentive payments related to certain wells in San Juan
County. Pipeline, facilities and other income increased by $215,000 during the
first quarter of 1996 as compared with the first quarter of 1995, primarily as a
result of a pay-out adjustment on one of HEP's properties during 1995.
INTEREST INCOME
The decrease in interest income of $13,000 during the first quarter of 1996 as
compared with the first quarter of 1995 resulted from a lower average cash
balance during the first quarter of 1996 as compared with the same period during
1995.
PRODUCTION OPERATING EXPENSE
Production operating expense increased $343,000 during the first quarter of 1996
as compared with the first quarter of 1995, primarily as a result of an increase
in production taxes and operating costs associated with the 15% increase in
production as described above.
FACILITIES OPERATING EXPENSE
Facilities operating expense represents the costs of operating and maintaining
two gathering systems located in New Mexico. Costs increased by $52,000 during
1996 as compared with 1995 due to the connection of additional wells to the
gathering systems.
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 $323,000 during the first quarter of 1996 as compared
with the first quarter of 1995. The decrease is primarily the result of a
reduction in internal allocated overhead.
DEPRECIATION, DEPLETION AND AMORTIZATION EXPENSE
Depreciation, depletion and amortization expense decreased $110,000 during the
first quarter of 1996 as compared with the first quarter of 1995. The decrease
is primarily the result of lower capitalized costs in 1996 as compared with
1995, due to the property impairments recorded during 1995.
IMPAIRMENT OF OIL AND GAS PROPERTIES
Impairment of oil and gas properties represents the write-off of HEP's
Indonesian operations.
INTEREST EXPENSE
Interest expense increased $129,000 during the first quarter of 1996 as compared
with the first quarter of 1995, primarily as the result of a higher outstanding
debt balance during 1996.
EQUITY IN INCOME (LOSS) OF HCRC
Equity in income (loss) of HCRC increased $1,223,000 during the first quarter of
1996 as compared with the first quarter of 1995. The increase is primarily due
to HCRC's impairment expense resulting from the write-off of its Indonesian
operations during 1995.
MINORITY INTEREST IN NET INCOME OF SUBSIDIARIES
Minority interest in net income of subsidiaries represents unaffiliated
partners' interest in the net income of the May Partnerships. The increase of
$580,000 is due to an increase in the net income of the May Partnerships
resulting from increased production on their properties, as well as higher oil
and gas prices during 1996.
LITIGATION SETTLEMENT EXPENSE
Litigation settlement expense during 1995 consists primarily of expenses
incurred to settle various individually immaterial claims against HEP.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
Reference is made to Item 8 - Notes 13 and 14 of Form 10-K for the
year ended December 31, 1995.
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: March 19, 1997 By: /s/Robert S. Pfeiffer
Robert S. Pfeiffer,
Vice President
(Chief Financial Officer)