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 March 31, 1997
|_| 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 |X| No |_|
The registrant is a limited partnership and issues Units (representing ownership
of limited partner interests).
Number of Units outstanding as of May 13, 1997
Class A 9,977,254
Class B 143,773
Class C 664,063
Page 1 of 24 (Exhibit begins on Page 18)
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HALLWOOD ENERGY PARTNERS, L. P.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
March 31, December 31,
1997 1996
CURRENT ASSETS
Cash and cash equivalents $ 13,373 $ 5,540
Accounts receivable:
Oil and gas revenues 7,190 9,405
Trade 3,496 4,507
Prepaid expenses and other current assets 961 928
---------- ----------
Total 25,020 20,380
-------- --------
PROPERTY, PLANT AND EQUIPMENT, at cost Oil and gas properties (full cost
method):
Proved mineral interests 609,989 607,875
Unproved mineral interests - domestic 1,547 1,244
Furniture, fixtures and other 3,394 3,366
--------- ---------
Total 614,930 612,485
Less accumulated depreciation, depletion,
amortization and property impairment (526,943) (523,936)
------- -------
Total 87,987 88,549
-------- --------
OTHER ASSETS
Investment in common stock of HCRC 14,680 13,700
Deferred expenses and other assets 143 163
---------- ----------
Total 14,823 13,863
-------- --------
TOTAL ASSETS $127,830 $122,792
======= =======
<FN>
(Continued on the following page)
</FN>
-2-
HALLWOOD ENERGY PARTNERS, L. P.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
March 31, December 31,
1997 1996
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 16,312 $ 15,185
Net working capital deficit of affiliate 288 159
Due to affiliates 858 581
Current portion of contract settlement 2,569
Current portion of long-term debt 10,961 5,810
-------- ---------
Total 30,988 21,735
-------- --------
NONCURRENT LIABILITIES
Long-term debt 24,310 29,461
Contract settlement 2,512
Deferred liability 1,488 1,533
--------- ---------
Total 25,798 33,506
--------- --------
Total Liabilities 56,786 55,241
-------- --------
MINORITY INTEREST IN AFFILIATES 3,451 3,336
--------- ---------
PARTNERS' CAPITAL
Class A Units - 9,977,254 Units issued, 9,077,949
outstanding in 1997 and 1996 64,619 61,487
Class B Subordinated Units - 143,773 Units
outstanding in 1997 and 1996 1,324 1,254
Class C Units - 664,063 Units outstanding in 1997 and 1996 5,146 5,146
General Partner 3,483 3,307
Treasury Units - 899,305 Units in 1997 and 1996 (6,979) (6,979)
--------- ---------
Partners' Capital - Net 67,593 64,215
-------- --------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $127,830 $122,792
======= =======
<FN>
The accompanying notes are an integral part of the financial statements.
</FN>
-3-
HALLWOOD ENERGY PARTNERS, L. P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands except per Unit data)
For the Three Months Ended
March 31,
1997 1996
REVENUES:
Oil revenue $ 4,511 $ 5,085
Gas revenue 7,473 7,808
Pipeline, facilities and other 763 735
Interest 123 73
---------- -----------
12,870 13,701
-------- --------
EXPENSES:
Production operating 2,789 3,030
Facilities operating 178 275
General and administrative 1,224 1,168
Depreciation, depletion and amortization 2,952 3,862
Interest 851 1,122
---------- ---------
7,994 9,457
--------- ---------
OTHER INCOME (EXPENSES):
Equity in earnings of HCRC 980 376
Minority interest in net income of affiliates (560) (867)
---------- ----------
420 (491)
---------- ----------
NET INCOME 5,296 3,753
CLASS C UNIT DISTRIBUTIONS ($.25 PER UNIT) 166 166
---------- ----------
NET INCOME ATTRIBUTABLE TO GENERAL PARTNER,
CLASS A AND CLASS B LIMITED PARTNERS $ 5,130 $ 3,587
========= =========
ALLOCATION OF NET INCOME:
General partner $ 627 $ 687
========== ==========
Class A and Class B Limited partners $ 4,503 $ 2,900
========= =========
Per Class A Unit and Class B Unit $ .48 $ .31
=========== ===========
Weighted average Class A Units and Class B Units
and equivalent Units outstanding 9,366 9,271
========= =========
<FN>
The accompanying notes are an integral part of the financial statements.
</FN>
-4-
HALLWOOD ENERGY PARTNERS, L. P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
For the Three Months Ended
March 31,
1997 1996
OPERATING ACTIVITIES:
Net income $ 5,296 $ 3,753
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization 2,952 3,862
Depreciation charged to affiliates 55 56
Amortization of deferred loan costs and other assets 20 33
Noncash interest expense 57 54
Equity in earnings of HCRC (980) (376)
Minority interest in net income 560 867
Undistributed earnings of affiliates (123) (456)
Recoupment of take-or-pay liability (45) (176)
----------- --------
Cash from operations before working capital changes 7,792 7,617
Changes in operating assets and liabilities provided (used) cash net of
noncash activity:
Oil and gas revenues receivable 2,215 (790)
Trade receivables 1,011 (280)
Due from affiliates (527)
Prepaid expenses and other current assets (33) 167
Accounts payable and accrued liabilities 1,127 730
Due to affiliates 331
----------
Net cash provided by operating activities 12,443 6,917
-------- -------
INVESTING ACTIVITIES:
Additions to property, plant and equipment (469) (313)
Exploration and development costs incurred (1,708) (1,785)
Proceeds from sales of property, plant and equipment 1,293
Other investing activities (70) (67)
----------- ---------
Net cash used in investing activities (2,247) (872)
--------- --------
FINANCING ACTIVITIES:
Payments of long-term debt (87)
Distributions paid (1,914) (2,216)
Distributions paid by consolidated affiliates to minority interest (445) (332)
Payment of contract settlement (305)
Syndication costs and capital contributions (4) (12)
Other financing activities (9)
------------- ----------
Net cash used in financing activities (2,363) (2,961)
--------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS 7,833 3,084
CASH AND CASH EQUIVALENTS:
BEGINNING OF PERIOD 5,540 4,977
--------- -------
END OF PERIOD $ 13,373 $ 8,061
======== =======
<FN>
The accompanying notes are an integral part of the financial statements.
</FN>
-5-
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. HEP's objective is to provide its partners with a
balanced return through a combination of cash distributions and capital
appreciation. To achieve its objective, HEP utilizes operating cash flow, first,
to reinvest in operations to replace production; second, to maintain stable cash
distributions to Unitholders; and third, to increase HEP's reserve base over
time. HEP seeks to expand its reserve base by continually evaluating,
prioritizing and developing its existing inventory of development, exploitation
and exploration projects. In addition, HEP seeks to expand its inventory of
projects through internal project development and select acquisitions. The
general partner of HEP is HEPGP Ltd.
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
HEPGP Ltd. is the sole general partner of HEPO and 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 notes included in HEP's December 31,
1996 Annual Report on Form 10-K.
Accounting Policies
Consolidation
HEP fully consolidates majority owned entities and reflects a minority interest
in the consolidated financial statements. HEP accounts for its interest in 50%
or less owned affiliated oil and gas partnerships and limited liability
companies using the proportionate consolidation method of accounting. HEP's
investment in the common stock of its affiliate, Hallwood Consolidated Resources
Corporation ("HCRC"), is accounted for under the equity method.
The accompanying financial statements include the activities of HEP, its
subsidiaries Hallwood Petroleum, Inc. ("HPI") and Hallwood Oil and Gas, Inc.
("Hallwood Oil"), and majority owned affiliates, the May Limited Partnerships
1983-1, 1983-2, 1983-3, 1984-1, 1984-2, 1984-3 ("Mays").
Computation of Net Income Per Unit
Net income per Class A and Class B Unit is computed by dividing net income
attributable to the Class A and Class B limited partners' interest (net income
excluding income attributable to the general partner and Class C Units) by the
weighted average number of Class A Units, Class B Units and equivalent Class A
and Class B Units outstanding. The options to acquire Class A Units, which were
issued during 1995, are considered to be Unit equivalents since January 1, 1997
because the market price of the Class A Units has exceeded the exercise price of
the options since that date. The number of equivalent Units was computed using
the treasury stock method which assumes that the increase in the number of Units
is reduced by the number of Units which could have been repurchased by the
Partnership with the proceeds from the exercise of the options (which were
assumed to have been made at the average market price of the Class A Units
during the reporting period).
-6-
HEP owns approximately 46% of the outstanding common stock of HCRC, while HCRC
owns approximately 19% of HEP's Units. Consequently, HEP has an interest in
899,305 of its own Units at March 31, 1997 and December 31, 1996. These Units
are treated as treasury units in the accompanying financial statements.
During February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings per Share ("SFAS 128"). SFAS
128 establishes standards for computing and presenting earnings per share (EPS),
and supersedes APB Opinion No. 15 and its related interpretations. It replaces
the presentation of primary EPS with a presentation of basic EPS, which excludes
dilution, and requires dual presentation of basic and diluted EPS for all
entities with complex capital structures. Diluted EPS is computed similarly to
fully diluted EPS pursuant to Opinion No. 15. SFAS 128 is effective for periods
ending after December 15, 1997, including interim periods, and will require
restatement of all prior period EPS data presented; earlier application is not
permitted.
A comparison of EPS shown in the accompany financial statements with the pro
forma amounts that would have been determined in accordance with SFAS 128 is as
follows:
For the Quarter Ending March 31,
1997 1996
Primary (Basic):
As reported $ .48 $ .31
Pro forma .49 .31
Fully Diluted (Diluted):
As reported .48 .31
Pro forma .48 .31
Reclassifications
Certain reclassifications have been made to the prior period amounts to conform
to the classifications used in the current period.
NOTE 2 - DEBT
During the first quarter of 1995, HEP and its lenders amended and restated HEP's
Amended and Restated Credit Agreement ("Credit Agreement") to extend the term
date of its line of credit to May 31, 1997. Under the Credit Agreement and an
Amended and Restated Note Purchase Agreement ("Note Purchase Agreement")
(collectively referred to as the "Credit Facilities") HEP has a borrowing base
of $48,000,000. HEP has amounts outstanding at March 31, 1997 of $26,700,000
under the Credit Agreement and $8,571,000 under the Note Purchase Agreement.
HEP's borrowing base is further reduced by an outstanding contract settlement
obligation of $2,569,000; therefore, its unused borrowing base totaled
$10,160,000 at May 13, 1997.
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.
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% (7.4% at March 31, 1997). Interest is payable monthly, and quarterly
principal payments of $1,669,000 commence May 31, 1997. HEP intends to extend
the maturity date of its Credit Agreement prior to the commencement of the
amortization period.
-7-
The borrowing base for the Credit Facilities is redetermined semiannually. 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 $15,000,000 of
its debt for each of 1997 and 1998 and $10,000,000 for each of 1999 and 2000.
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 the next two
years and 25% for each year of the remaining term of the debt. HEP has entered
into four 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 others are
interest rate swaps with fixed rates ranging from 5.75% to 6.57%. 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 - STATEMENTS OF CASH FLOWS
Cash paid for interest during the three months ended March 31, 1997 and 1996 was
$774,000 and $842,000, respectively.
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 $12,443,000 of cash flow from operating activities during the
first three months of 1997.
Cash was used primarily for:
o Additions to property and development costs incurred of $2,177,000 and
o Distributions to Unitholders of $1,914,000
When combined with miscellaneous other cash activity during the period, the
result was an increase of $7,833,000 in HEP's cash from $5,540,000 at December
31, 1996 to $13,373,000 at March 31, 1997.
Development Projects and Acquisitions
Through March 31, 1997, HEP incurred approximately $2,177,000 for exploration,
development and acquisition costs toward the 1997 capital budget of $12,500,000.
The expenditures were comprised of approximately $1,708,000 for exploration and
development expenditures and approximately $469,000 for property acquisitions.
HEP intends to be very active in capital projects during the second and third
quarters of 1997 with projects in more than 25 areas, including drilling 11
wells in the existing Spraberry Texas area, drilling/recompleting 15 wells in
the existing West Texas Kermit area, and participating in or operating ten
seismic prospects. HEP is reviewing possibilities in new locations in Louisiana,
Montana, North Dakota, Oklahoma, Wyoming and Texas. HEP is currently bidding
with a major oil company on an offshore exploration block in Peru.
A description of significant exploration and development projects to date in
1997 follows.
-8-
HEP has been active in 1997 in the Mercy Field within San Jacinto County, Texas
with the drilling of an 11,000 foot development well and the deepening of an
existing well to a different formation, both of which were successful. Both
projects are currently in the completion phase with total costs estimated to HEP
of approximately $400,000.
In 1996, HEP acquired 106 square miles of three dimensional (3-D) seismic data
on the Cowden Ranch in Crane County, Texas. Two exploratory wells were drilled
in 1996, both of which were dry. In early 1997, a third exploratory well was
drilled at a total cost to HEP of $175,000. This well was dry in its target
location and considered noncommercial in an identified shallow formation.
HEP also became active in Glasscock County, Texas in 1996 with the acquisition
and processing of 66 square miles of 3-D seismic data and the drilling of one
successful exploratory well prior to the end of the year. In 1997, HEP has
incurred approximately $190,000 for the drilling of a second successful 10,000
foot delineation well. This well is currently producing at a rate of 230
equivalent barrels of oil per day, and HEP's working interest in this well is
30%. HEP currently plans to drill at least one development well in this area in
1997 and has identified additional exploration locations.
In the San Juan Basin of New Mexico, HEP is currently recompleting two wells at
an estimated cost of $85,000. HEP plans to recomplete at least one more New
Mexico well and up to seven of their San Juan Basin, Colorado wells in 1997.
The completion of projects begun in the fourth quarter of 1996 has cost HEP
approximately $700,000 in the first quarter of 1997. These additional costs are
comprised primarily of $230,000 for two exploratory wells in Louisiana and
miscellaneous costs in the West Texas Kermit, Merkel and Cowden Ranch areas.
The Merkel Project area initially comprised 10 square miles of 3-D seismic data
in Jones, Taylor and Nolan Counties, Texas. In 1996 HEP participated in the
drilling of eight wells, seven of which were successful. These wells are all
outside operated and HEP owns an average 12.5% working interest in this area.
HEP plans to drill three additional wells in 1997. Based on the success of this
area in 1996, HEP acquired 74 additional miles of 3-D seismic data adjacent to
the nonoperated area and plans to drill a minimum of five wells in 1997, the
first of which was dry. HEP will own a 30% working interest and will be the
operator in the new area.
Distributions
HEP declared distributions of $.13 per Class A Unit and $.25 per Class C Unit,
payable on May 15, 1997 to Unitholders of record on March 31, 1997.
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 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 $48,000,000. HEP has amounts outstanding at March 31, 1997 of $26,700,000
under the Credit Agreement and $8,571,000 under the Note Purchase Agreement.
HEP's borrowing base is further reduced by an outstanding contract settlement
obligation of $2,569,000; therefore, its unused borrowing base totaled
$10,160,000 at May 13, 1997.
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.
-9-
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% (7.4% at March 31, 1997). Interest is payable monthly, and quarterly
principal payments of $1,669,000 commence May 31, 1997. HEP intends to extend
the maturity date of its Credit Agreement prior to the commencement of the
amortization period.
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 $15,000,000 of
its debt for each of 1997 and 1998 and $10,000,000 for each of 1999 and 2000.
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 the next two
years and 25% for each year of the remaining term of the debt. HEP has entered
into four 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 others are
interest rate swaps with fixed rates ranging from 5.75% to 6.57%. The amounts
received or paid upon settlement of these transactions are recognized as
interest expense at the time the interest payments are due.
Cautionary Statement Regarding Forward-Looking Statements
In the interest of providing the Partnership's Unitholders and potential
investors with certain information regarding the Partnership's future plans and
operations, certain statements set forth in this Form 10-Q relate to
management's future plans and objectives. Such statements are "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange act of 1934, as amended.
Although any forward-looking statements contained in this Form 10-Q or otherwise
expressed by or on behalf of the Partnership are, to the knowledge and in the
judgment of the officers and directors of the General Partner, expected to prove
true and to come to pass, management is not able to predict the future with
absolute certainty. Forward-looking statements involve known and unknown risks
and uncertainties which may cause the Partnership's actual performance and
financial results in future periods to differ materially from any projection,
estimate or forecasted result. These risks and uncertainties include, among
other things, volatility of oil and gas prices, competition, risks inherent in
the Partnership's oil and gas operations, the inexact nature of interpretation
of seismic and other geological and geophysical data, imprecision of reserve
estimates, the Partnership's ability to replace and expand oil and gas reserves,
and such other risks and uncertainties described from time to time in the
Partnership's periodic reports and filings with the Securities and Exchange
Commission. Accordingly, Unitholders and potential investors are cautioned that
certain events or circumstances could cause actual results to differ materially
from those projected.
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 1996 and 1997.
The following table presents the weighted average prices received each quarter
by HEP and the effects of the hedging transactions discussed below.
-10-
Oil Oil Gas Gas
(excluding the (including the (excluding the (including the
effects of effects of effects of effects of
hedging hedging hedging hedging
transactions) transactions) transactions) transactions)
(per bbl) (per bbl) (per mcf) (per mcf)
First quarter - 1996 $18.05 $17.97 $2.41 $2.30
Second quarter - 1996 20.56 20.15 2.15 2.12
Third quarter - 1996 21.66 20.73 2.17 2.11
Fourth quarter - 1996 24.04 22.23 2.81 2.43
First quarter - 1997 22.10 21.08 2.89 2.52
HEP has entered into numerous financial contracts to hedge the price of its oil
and natural gas. The purpose of the hedges is to provide protection against
price decreases and to provide a measure of stability in the volatile
environment of oil and natural gas spot pricing. The revenue associated with
these contracts is recognized as oil or gas revenue at the time the hedged
volumes are sold.
The following table provides a summary of HEP's outstanding financial contracts:
Oil
Percent of Production Contract
Period Hedged Floor Price
(per bbl)
Last nine months of 1997 46% $17.78
1998 21% $16.41
1999 3% $15.88
Between 12% 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 32% and 100% of the volumes hedged in each year are
subject to a collar agreement whereby HEP will receive the contract price if the
spot price is lower than the contract price, the cap price if the spot price is
higher than the cap price, and the spot price if that price is between the
contract price and the cap price. The cap prices range from $17.50 to $19.35.
Gas
Percent of Production Contract
Period Hedged Floor Price
(per mcf)
Last nine months of 1997 54% $1.97
1998 48% $2.02
1999 24% $1.86
2000 18% $2.01
Between 0% and 43% 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 $2.78 to $2.93.
-11-
During the second quarter through April 23, 1997 the weighted average oil price
(for barrels not hedged) was approximately $18.75 per barrel. The weighted
average price of natural gas (for mcf not hedged) during that period was
approximately $1.80 per mcf.
Inflation
Inflation did not have a material impact on HEP in 1996 and is not anticipated
to have a material impact in 1997.
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 1997, HEP owned interests which ranged from 57.5% to
68.2% of the Mays, and in 1996, HEP's ownership in the Mays ranged from 54.5% to
68.3%.
-12-
TABLE OF HEP EARNINGS FOR MANAGEMENT DISCUSSION
(In thousands except price)
For the Quarter Ended March 31, 1997 For the Quarter Ended March 31, 1996
------------------------------------ ------------------------------------
Direct Direct
Owned Mays Total Owned Mays Total
Oil production (bbl) 192 22 214 251 32 283
Gas production (mcf) 2,609 359 2,968 2,884 510 3,394
Average oil price (per bbl) $20.90 $22.68 $21.08 $17.82 $19.16 $17.97
Average gas price (per mcf) $ 2.41 $ 3.28 $ 2.52 $ 2.08 $ 3.54 $ 2.30
Oil revenue $ 4,012 $ 499 $ 4,511 $ 4,472 $ 613 $ 5,085
Gas revenue 6,295 1,178 7,473 6,002 1,806 7,808
Pipeline, facilities and other revenue 763 763 735 735
Interest income 106 17 123 59 14 73
-------- --------- -------- --------- --------- ---------
Total revenue 11,176 1,694 12,870 11,268 2,433 13,701
------ ------- ------ ------ ------- ------
Production operating expense 2,633 156 2,789 2,848 182 3,030
Facilities operating expense 178 178 275 275
General and administrative expense 1,115 109 1,224 1,055 113 1,168
Depreciation, depletion, and amortization 2,611 341 2,952 3,330 532 3,862
Interest expense 851 851 1,122 1,122
Equity in income of HCRC (980) (980) (376) (376)
Minority interest 560 560 867 867
----------- -------- -------- ----------- -------- --------
Total expense 6,408 1,166 7,574 8,254 1,694 9,948
------- ------- ------- ------- ------- -------
Net income $ 4,768 $ 528 $ 5,296 $ 3,014 $ 739 $ 3,753
======= ======== ====== ======= ======== =======
-13-
First Quarter of 1997 Compared to First Quarter of 1996
Oil Revenue
Oil revenue decreased $574,000 during the first quarter of 1997 as compared with
the first quarter of 1996. The decrease is the result of a decrease in
production from 283,000 barrels in 1996 to 214,000 barrels in 1997, partially
offset by an increase in the average oil price from $17.97 per barrel in 1996 to
$21.08 per barrel in 1997. The decrease in oil production is due to a temporary
production decline on the A.L. Boudreaux well in the Louisiana area as well as
steep production declines on wells located in the West Texas area.
The effect of HEP's hedging transactions, as described under "Inflation and
Changing Prices," during the first quarter of 1997, was to decrease HEP's
average oil price from $22.10 per barrel to $21.08 per barrel, representing a
reduction in revenue from hedging transactions of $218,000.
Gas Revenue
Gas revenue decreased $335,000 during the first quarter of 1997 as compared with
the first quarter of 1996. The decrease is the result of a decrease in
production from 3,394,000 mcf in 1996 to 2,968,000 mcf in 1997 partially offset
by an increase in price from $2.30 per mcf in 1996 to $2.52 per mcf in 1997. The
decrease in production is due to a temporary production decline on the A.L.
Boudreaux well in the Louisiana area as well as steep production declines on
wells located in the West Texas area.
The effect of HEP's hedging transactions during the first quarter of 1997, was
to decrease HEP's average gas price from $2.89 per mcf to $2.52 per mcf,
representing a $1,098,000 reduction in revenue from hedging transactions.
Interest Income
The increase in interest income of $50,000 during the first quarter of 1997 as
compared with the first quarter of 1996 resulted from a higher average cash
balance during the first quarter of 1997 as compared with the same period during
1996.
Production Operating Expense
Production operating expense decreased $241,000 during the first quarter of 1997
as compared with the first quarter of 1996, primarily due to decreased
production taxes resulting from the lower production described above.
Facilities Operating Expense
Facilities operating expense represents the costs of operating and maintaining
two gathering systems located in New Mexico. Costs decreased $97,000 during the
first quarter of 1997 as compared with the first quarter of 1996 primarily due
to the sale of a facility in Louisiana during the second quarter of 1996.
Depreciation, Depletion and Amortization Expense
Depreciation, depletion and amortization expense decreased $910,000 during the
first quarter of 1997 as compared with the first quarter of 1996. The decrease
is primarily the result of lower capitalized costs in 1997 as compared with
1996, as well as a lower depletion rate in 1997 due to the decline in production
previously discussed.
Interest Expense
Interest expense decreased $271,000 during the first quarter of 1997 as compared
with the first quarter of 1996, primarily as a result of lower outstanding debt
during 1997.
-14-
Equity in Income of HCRC
Equity in income of HCRC increased $604,000 during the first quarter of 1997 as
compared with the first quarter of 1996. The increase is primarily due to HCRC's
higher gas revenue and lower depreciation, depletion and amortization expense.
Minority Interest in Net Income of Affiliates
Minority interest in net income of affiliates represents unaffiliated partners'
interest in the net income of the May Partnerships. The decrease of $307,000 is
due to a decrease in the net income of the May Partnerships resulting primarily
from decreased production on their properties.
-15-
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
Reference is made to Item 8 - Notes 12 and 13 of Form 10-K for the
year ended December 31, 1996.
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
10.14 - Financial Consulting Agreement
-16-
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: HEPGP LTD.
General Partner
BY: HALLWOOD G.P., INC.
General Partner
Date: May 13, 1997 By: /s/Robert S. Pfeiffer
---------------------------------- ----------------------
Robert S. Pfeiffer, Vice President
(Chief Financial Officer)