UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
MARK ONE
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 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 November 14, 1997
9,977,254
Class A
143,773
Class B
664,063
Class C
Page 1 of 22
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HALLWOOD ENERGY PARTNERS, L. P.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
September 30, December 31,
1997 1996
CURRENT ASSETS
Cash and cash equivalents $ 1,769 $ 5,540
Accounts receivable:
Oil and gas revenues 7,429 9,405
Trade 4,812 4,507
Due from affiliates 996
Prepaid expenses and other current assets 1,959 928
-------- ------
Total 16,965 20,380
-------- ------
PROPERTY, PLANT AND EQUIPMENT, at cost
Oil and gas properties (full cost method):
Proved mineral interests 620,049 607,875
Unproved mineral interests 1,710 1,244
Furniture, fixtures and other 3,498 3,366
------ -----
Total 625,257 612,485
Less accumulated depreciation, depletion,
amortization and property impairment (532,758) (523,936)
--------- --------
Total 92,499 88,549
OTHER ASSETS
Investment in common stock of HCRC 15,084 13,700
Deferred expenses and other assets 102 163
------- ------
Total 15,186 13,863
------- -------
TOTAL ASSETS $124,650 $122,792
======== ========
<FN>
(Continued on the following page)
</FN>
HALLWOOD ENERGY PARTNERS, L. P.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands except Units)
September 30, December 31,
1997 1996
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 16,767 $ 15,185
Net working capital deficit of affiliate 383 581
Due to affiliates 159
Current portion of contract settlement 2,690
Current portion of long-term debt 5,810
------- -------
Total 19,840 21,735
------- -------
NONCURRENT LIABILITIES
Long-term debt 31,986 29,461
Contract settlement 2,512
Deferred liability 1,209 1,533
------ ------
Total 33,195 33,506
------ ------
Total liabilities 53,035 55,241
------ ------
MINORITY INTEREST IN AFFILIATES 3,174 3,336
------ ------
PARTNERS' CAPITAL
Class A Units - 9,977,254 Units issued, 9,077,949
outstanding in 1997 and 1996 65,374 61,487
Class B Subordinated Units - 143,773 Units issued
and outstanding in 1997 and 1996 1,379 1,254
Class C Units - 664,063 Units issued and outstanding
in 1997 and 1996 5,146 5,146
General Partner 3,521 3,307
Treasury Units - 899,305 Units in 1997 and 1996 (6,979) (6,979)
-------- ------
Partners' capital - net 68,441 64,215
-------- ------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $124,650 $122,792
======== ========
<FN>
The accompanying notes are an integral
part of the financial statements.
</FN>
HALLWOOD ENERGY PARTNERS, L. P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands except per Unit data)
For the Three Months Ended
September 30,
1997 1996
----- ----
REVENUES:
Oil revenue $ 3,564 $ 4,478
Gas revenue 6,639 6,593
Pipeline, facilities and other 523 607
Interest 69 125
------ -------
10,795 11,803
------ --------
EXPENSES:
Production operating 2,882 2,687
Facilities operating 190 119
General and administrative 996 1,215
Depreciation, depletion and amortization 3,165 3,226
Interest 716 928
----- -----
7,949 8,175
----- -----
OTHER INCOME (EXPENSES):
Equity in earnings of HCRC 138 500
Minority interest in net income of affiliates (449) (621)
Litigation settlement (33) (2)
------ ----
(344) (123)
----- ----
NET INCOME 2,502 3,505
CLASS C UNIT DISTRIBUTIONS ($.25 PER UNIT) 166 166
------ ---
NET INCOME ATTRIBUTABLE TO GENERAL
PARTNER, CLASS A AND CLASS B LIMITED PARTNERS $ 2,336 $ 3,339
======= =======
ALLOCATION OF NET INCOME:
General partner $ 532 $ 590
========= ========
Class A and Class B limited partners $ 1,804 $ 2,749
========= =======
Per Class A Unit and Class B Unit $ .19 $ .30
========= ========
Weighted average Class A Units and Class B Units
and equivalent Units outstanding 9,335 9,221
======== ======
<FN>
The accompanying notes are an integral
part of the financial statements.
</FN>
HALLWOOD ENERGY PARTNERS, L. P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands except per Unit data)
For the Nine Months Ended
September 30,
1997 1996
----- ----
REVENUES:
Oil revenue $11,157 $14,600
Gas revenue 19,073 21,322
Pipeline, facilities and other 2,072 2,039
Interest 328 331
------ -------
32,630 38,292
------ --------
EXPENSES:
Production operating 8,207 8,379
Facilities operating 560 551
General and administrative 3,250 3,133
Depreciation, depletion and amortization 8,657 10,554
Interest 2,315 3,047
------ ------
22,989 25,664
------ ------
OTHER INCOME (EXPENSES):
Equity in earnings of HCRC 1,384 1,227
Minority interest in net income of affiliates (1,341) (2,092)
Litigation settlement 240 (230)
------ -------
283 (1,095)
------ -------
NET INCOME 9,924 11,533
CLASS C UNIT DISTRIBUTIONS ($.75 PER UNIT) 498 498
---- ---
NET INCOME ATTRIBUTABLE TO GENERAL
PARTNER, CLASS A AND CLASS B LIMITED PARTNERS $ 9,426 $11,035
======= ======
ALLOCATION OF NET INCOME:
General partner $ 1,408 $ 1,923
======== =======
Class A and Class B limited partners $ 8,018 $ 9,112
========= =======
Per Class A Unit and Class B Unit $ .86 $ .99
========== =========
Weighted average Class A Units and Class B Units
and equivalent Units outstanding 9,348 9,246
====== ======
<FN>
The accompanying notes are an integral
part of the financial statements.
</FN>
HALLWOOD ENERGY PARTNERS, L. P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
For the Nine Months Ended
September 30,
1997 1996
----- ----
OPERATING ACTIVITIES:
Net income $ 9,924 $ 11,533
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation, depletion and amortization 8,657 10,554
Depreciation charged to affiliates 165 195
Amortization of deferred loan costs and other assets 61 122
Noncash interest expense 178 163
Equity in earnings of HCRC (1,384) (1,227)
Minority interest in net income of affiliates 1,341 2,092
Undistributed earnings of affiliates 73 (553)
Recoupment of take-or-pay liability (97) (331)
------ -----
Cash from operations before working capital changes 18,918 22,548
Changes in operating assets and liabilities provided (used) cash net of noncash
activity:
Oil and gas revenues receivable 1,976 (146)
Trade receivables (305) (1,243)
Due from affiliates (996) 2,287
Prepaid expenses and other current assets (1,031) (339)
Accounts payable and accrued liabilities 1,488 (1,220)
Due to affiliates (1,772) 861
------- -------
Net cash provided by operating activities 18,278 22,748
------- ------
INVESTING ACTIVITIES:
Additions to property, plant and equipment (2,499) (2,667)
Exploration and development costs incurred (9,073) (6,838)
Proceeds from sales of property, plant and equipment 85 5,287
Refinance of Spraberry investment (4,715)
Investment in affiliates (76) (517)
------- -------
Net cash used in investing activities (11,563) (9,450)
--------- ------
FINANCING ACTIVITIES:
Payments of long-term debt (5,288) (8,373)
Proceeds from long-term debt 2,000 6,000
Distributions paid (5,583) (6,180)
Distributions paid by consolidated affiliates to minority interest (1,503) (1,778)
Payment of contract settlement (305)
Syndication costs and capital contributions (12)
Other financing activities (115) (128)
-------- ---------
Net cash used in financing activities (10,486) (10,776)
--------- --------
(3,771)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,522
CASH AND CASH EQUIVALENTS:
BEGINNING OF PERIOD 5,540 4,977
END OF PERIOD $ 1,769 $ 7,499
========= ========
<FN>
The accompanying notes are an
integral part of the financial
statements.
</FN>
HALLWOOD ENERGY PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - GENERAL
Hallwood Energy Partners, L. P. ("HEP" or the "Partnership") is a publicly
traded Delaware limited partnership engaged in the development, acquisition and
production of oil and gas properties in the continental United States. HEP=s
objective is to provide its partners with an attractive 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
maintain its reserve base and production; second, to make stable cash
distributions to Unitholders; and third, to grow HEP=s reserve base over time.
HEP's future growth will be driven by a combination of development of existing
projects, exploration for new reserves 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).
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 September 30, 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 (ASFAS 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 accompanying financial statements with the pro
forma amounts that would have been determined in accordance with SFAS 128 is as
follows:
For the Quarter Ended September 30, For the Nine Months Ended September 30,
1997 1996 1997 1996
Primary (Basic):
As reported $.19 $.30 $.86 $.99
Pro forma $.20 $.30 $.87 $.99
Fully Diluted (Diluted):
As reported $.19 $.30 $.86 $.99
Pro forma $.19 $.30 $.86 $.99
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 second quarter of 1997, HEP and its lenders amended and restated
HEP's Second Amended and Restated Credit Agreement (as amended, the "Credit
Agreement") to extend the term date of its line of credit to May 31, 1999. Under
the Credit Agreement and an Amended and Restated Note Purchase Agreement ("Note
Purchase Agreement") (collectively referred to as the "Credit Facilities") HEP=s
borrowing base is $46,000,000 at October 31, 1997. HEP had amounts outstanding
at September 30, 1997 of $27,700,000 under the Credit Agreement and $4,286,000
under the Note Purchase Agreement. HEP's borrowing base is further reduced by an
outstanding contract settlement obligation of $2,690,000 and borrowings of
$2,000,000 made subsequent to September 30, 1997; therefore, its unused
borrowing base totaled $11,324,000 at October 31, 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. HEP intends to fund the payment due in April 1998 through additional
borrowings under the Credit Agreement; thus, no portion of HEP=s Note Purchase
Agreement is classified as current as of September 30, 1997.
Borrowings against the Credit Agreement bear interest at the lower of the
Certificate of Deposit rate plus from 1.375% to 1.875%, prime plus 1/2% or the
Euro-Dollar rate plus from 1.25% to 1.75%. The applicable interest rate was 7.2%
at September 30, 1997. Interest is payable monthly, and quarterly principal
payments of $2,124,000, as adjusted for the $2,000,000 of borrowings made
subsequent to September 30, 1997 as well as the anticipated borrowings to fund
the Note Purchase Agreement payment due in April 1998, commence May 31, 1999.
-16-
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 50% of distributions received from affiliates, if
the principal amount of debt of HEP is 50% or more of the borrowing base.
Aggregate distributions paid by HEP are limited to 65% of cash flow from
operations before working capital changes and 65% of distributions received from
affiliates, if the principal amount of debt is less than 50% of the borrowing
base.
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 nine months ended September 30, 1997 and 1996
was $2,077,000 and $2,761,000, respectively.
NOTE 4 - SUBSEQUENT EVENT
In October 1997 the Partnership filed with the Securities and Exchange
Commission a registration statement covering the sale by the Partnership of
1,500,000 newly issued Class C Units. The Partnership intends to use the net
proceeds from the offering to accelerate the drilling of its project inventory
and, in the interim, to repay a portion of its outstanding indebtedness under
its Credit Agreement. A registration statement relating to the Class C Units has
been filed with the Securities and Exchange Commission but has not yet become
effective. The Class C Units may not be sold nor may offers to buy be accepted
prior to the time the registration statement becomes effective. This information
shall not constitute an offer to sell or the solicitation of an offer to buy nor
shall there be any sale of the Class C Units in any State in which such offer,
solicitation or sale would be unlawful prior to registration or qualification
under the securities laws of any such State.
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 $18,278,000 of cash flow from operating activities during the
first nine months of 1997.
Cash was used primarily for:
! Additions to property and development costs incurred of $11,572,000
! Payments of long-term debt of $5,285,000, and
! Distributions to Unitholders of $5,583,000.
When combined with long-term borrowings of $2,000,000 and miscellaneous other
cash activity during the period, the result was a decrease of $3,771,000 in
HEP's cash from $5,540,000 at December 31, 1996 to $1,769,000 at September 30,
1997.
Development Projects and Acquisitions
Through September 30, 1997, HEP incurred approximately $11,572,000 for
exploration, development and acquisition costs toward the 1997 capital budget of
$15,500,000. The expenditures were comprised of approximately $9,073,000 for
exploration and development and approximately $2,499,000 for property
acquisitions. As of September 30, 1997, HEP's reserve replacement from
extensions, purchases and revisions totals 75% of its estimated 1997 production.
HEP's 1997 capital budget is allocated to the following: Permian/Delaware
Basins, Gulf Coast Region, Rocky Mountain Region, and other areas. A description
of HEP's significant exploration and development projects through the third
quarter of 1997 follows.
Permian/Delaware Basins
HEP has allocated 37% (approximately $5,750,000) of its 1997 capital budget to
the Permian/Delaware Basins located in Texas and Southeast New Mexico. Through
the end of the third quarter, HEP spent approximately $3,800,000 drilling 19
development wells and 16 exploration wells, and on the acquisition of
undeveloped acreage and geological and geophysical data. Of the wells that were
drilled, 25 (71%) are a success. During the last quarter of 1997, HEP plans to
drill 18 additional development wells and 14 exploration wells. A discussion of
several of the larger projects within the Basins follows.
HEP spent approximately $815,000 successfully recompleting two wells and
drilling two unsuccessful exploration wells in the Catclaw Draw area in Eddy
County, New Mexico. HEP has a 70% working interest in the wells and plans to
workover one well in the fourth quarter of 1997.
The Partnership's nonoperated interest in the Merkel Project includes 10 square
miles of proprietary 3-D seismic data in Jones, Taylor and Nolan Counties,
Texas. HEP began its involvement in this area in 1995 with the successful
completion of one well. In 1996, HEP participated in the drilling of eight
additional wells, seven of which were successful. In 1997, HEP continued its
participation with the drilling of three development and two exploration wells.
Four of the wells are a success. HEP plans to participate in the drilling of
three more exploration wells during the fourth quarter of 1997 and has seven
potential locations. HEP's 1997 costs for the area total approximately $135,000.
HEP owns an average 10% working interest in this area.
Based on the success in the nonoperated Merkel area, HEP acquired 74 additional
square miles of proprietary 3-D seismic data adjacent to the nonoperated area.
HEP owns an average 25% working interest in the area, and HPI is the operator.
HEP has drilled four successful and three unsuccessful exploration wells in the
area. Four exploration wells are scheduled to be drilled during the fourth
quarter of 1997, and 22 potential locations exist for drilling in 1998. HEP's
1997 costs for drilling and acreage in the area are approximately $450,000.
HEP purchased an interest in proprietary 3-D seismic data and selected acreage
within an 85 square mile area, referred to as the Griffin Project, for
approximately $460,000. HEP has developed a number of prospects in the Griffin
Project which it plans to pursue in the fourth quarter of 1997 and future years.
Through the third quarter, HEP has drilled two exploratory wells, for
approximately $390,000, one of which is successful. HEP plans to drill two
exploration wells during the remainder of 1997 and future plans will be
developed based on the results of the exploration wells. HEP owns an approximate
25% working interest in the area.
HEP spent approximately $260,000 in 1997 to drill four successful development
wells in the Spraberry area of West Texas. In July, HEP acquired additional
interests in 34 of its existing wells at a cost of approximately $510,000. HEP
plans to drill eight additional development wells in the fourth quarter of 1997.
HEP owns an approximate 55% working interest in these wells. During the first
nine months of 1997, HEP successfully drilled two and recompleted eight
development wells, all of which were successful, in the East Keystone project in
Winkler County, Texas, at a cost of approximately $245,000. HEP plans to drill
two and recomplete three development wells and to initiate pilot secondary
recovery operations during the fourth quarter of 1997. HEP has a 35% working
interest in the wells.
In 1996, HEP acquired 106 square miles of 3-D seismic data on the Cowden Ranch
in Crane County, Texas. In early 1997, an exploratory well was drilled at a
total cost of approximately $230,000. This well was dry, and HEP does not plan
to continue exploration in this area.
In 1996, HEP became active in the Garden City/Mills project in Glasscock County,
Texas. This project included the interpretation of 66 square miles of
nonproprietary 3-D seismic data and the drilling of one successful exploratory
well prior to the end of 1996. In the first nine months of 1997, HEP drilled a
second successful delineation well. HEP's costs incurred to drill one successful
exploration well, through September 30, 1997 are approximately $225,000. HEP
will attempt to drill one additional exploration well during the remainder of
1997 and future plans will be developed based on the results of the exploration
wells. HEP's working interest in the well is 25%.
Also in the fourth quarter of 1997, HEP plans to drill one and recomplete three
development wells in the Carlsbad area in Lea County, New Mexico. HEP has a 35%
working interest.
Rocky Mountain Region
HEP has allocated approximately 11% (approximately $1,700,000) of its 1997
capital budget to the Rocky Mountain Region located in Colorado, Montana, North
Dakota, Northwest New Mexico and Wyoming. Through the third quarter 1997, HEP
spent approximately $1,120,000 drilling seven development wells, drilling four
exploration wells, and acquiring geological and geophysical data and land. Three
of the wells are a success, and HEP plans to drill an additional three
development wells and two exploration wells in this region in the last quarter
of 1997. A discussion of major projects within the region follows.
In the San Juan Basin in LaPlata County, Colorado and Rio Arriba County, New
Mexico, HEP has an interest in a special purpose entity owned by a large east
cost financial institution that has an interest in 34 wells. Through September
30, 1997, four successful recompletions were performed on these wells and two
additional development wells are planned to be recompleted in the fourth quarter
of 1997. This work and other activity in the San Juan region is expected to
yield significant upward reserve revisions.
In the Lone Tree area of Montana, HEP drilled two development and two
exploration wells during the first nine months of 1997. One development and one
exploration well are successful. Total 1997 costs for the Montana project were
approximately $360,000. HEP plans to drill one exploration well in the fourth
quarter 1997.
HEP also purchased a 12.5% interest in the Hudson Ranch project, a
multi-objective exploration project generated from 120 square miles of 2-D
proprietary seismic data. HEP's 1997 costs for the project are approximately
$325,000. A 3-D seismic data acquisition program is underway and exploratory
drilling is anticipated to begin in 1998.
Gulf Coast Region
HEP's 1997 capital budget allocation for the Gulf Coast Region in Louisiana and
South and East Texas is approximately 18% (approximately $2,800,000). In 1997,
HEP spent approximately $2,250,000 drilling one development well, drilling four
exploration wells and acquiring acreage. Two of the wells are successful. HEP
plans to directionally drill one 10,000 foot exploration well in the Bigeneria
Humblei formation from the shore to a bottom hole location under the waters of
the Gulf of Mexico. The well is planned to be spud in the fourth quarter of
1997. HEP owns a 12.5% working interest.
In 1997, HEP spent approximately $771,000 for tubing repairs, additional
perforations, workovers, and miscellaneous maintenance costs. HEP also spent
approximately $630,000 in the first nine months of 1997 for two exploration
wells in Louisiana which were unsuccessful.
HEP participated in the developing of two Jeffress Field wells in Hidalgo
County, Texas. Both wells are successful and have cost HEP approximately
$685,000. The wells are nonoperated, and HEP owns a 10% interest.
HEP has been active in the Mercy Field in San Jacinto County, Texas where it
drilled an 11,000 foot development well and deepened an existing well to a
different formation during the first nine months of 1997. Both wells are
successful, and the estimated total costs to HEP were approximately $430,000.
Other
HEP's 1997 capital budget allocation for all other areas is approximately 34%
(approximately $5,250,000). Through September 30, 1997, HEP has incurred
approximately $520,000 on nine successful development projects and three
unsuccessful exploration wells. HEP plans to drill four additional development
wells and six exploration wells during the fourth quarter of 1997.
At September 30, 1997, HEP is participating in an exploration prospect in Carter
County, Oklahoma. The project is a 19,000 feet deep multi-formation structural
test. For the first nine months of 1997, HEP's cost is approximately $245,000
for its 5% interest in the well.
In September 1997, HEP and an unaffiliated partner were awarded a deep-water
exploration block offshore of northern Peru. HEP has a 7.5% working interest.
Its partner is proceeding with a 1,200 mile seismic program to further evaluate
the project. HEP's partner, a major oil company, is the operator, and HEP has a
carried interest until drilling begins.
Projects begun in the fourth quarter of 1996 have cost HEP approximately
$800,000 through the third quarter of 1997. The additional costs are comprised
primarily of approximately $200,000 for two unsuccessful exploratory wells in
the Gulf Coast Region and in the Permian/Delaware Basins.
As a result of environmental and title problems, HEP has terminated its
previously disclosed agreement to acquire for $9.8 million properties located
principally in Texas. The seller of the properties is disputing HEP's right to
terminate the agreement and has demanded that the parties proceed to
arbitration.
Distributions
HEP declared distributions of $.13 per Class A Unit and $.25 per Class C Unit,
payable on November 14, 1997 to Unitholders of record on September 30, 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 second quarter of 1997, HEP and its lenders amended and restated
HEP's Second Amended and Restated Credit Agreement (as amended, the "Credit
Agreement") to extend the term date of its line of credit to May 31, 1999. Under
the Credit Agreement and an Amended and Restated Note Purchase Agreement ("Note
Purchase Agreement") (collectively referred to as the "Credit Facilities") HEP=s
borrowing base is $46,000,000 as of October 31, 1997. HEP has amounts
outstanding at September 30, 1997 of $27,700,000 under the Credit Agreement and
$4,286,000 under the Note Purchase Agreement. HEP's borrowing base is further
reduced by an outstanding contract settlement obligation of $2,690,000 and
borrowings of $2,000,000 made subsequent to September 30, 1997; therefore, its
unused borrowing base totaled $11,324,000 at October 31, 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. HEP intends to fund the payment due in April 1998 through additional
borrowings under the Credit Agreement; thus, no portion of HEP=s Note Purchase
Agreement is classified as current as of September 30, 1997.
Borrowings against the Credit Agreement bear interest at the lower of the
Certificate of Deposit rate plus from 1.375% to 1.875%, prime plus 1/2% or the
Euro-Dollar rate plus from 1.25% to 1.75%. The applicable interest rate was 7.2%
at September 30, 1997. Interest is payable monthly, and quarterly principal
payments of $2,124,000, as adjusted for the $2,000,000 of borrowings made
subsequent to September 30, 1997 as well as the anticipated borrowings to fund
the Note Purchase Agreement payment due in April 1998, commence May 31, 1999.
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 50% of distributions received from affiliates, if
the principal amount of debt of HEP is 50% or more of the borrowing base.
Aggregate distributions paid by HEP are limited to 65% of cash flow from
operations before working capital changes and 65% of distributions received from
affiliates, if the principal amount of debt is less than 50% of the borrowing
base.
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.
In October 1997 the Partnership filed with the Securities and Exchange
Commission a registration statement covering the sale by the Partnership of
1,500,000 newly issued Class C Units. The Partnership intends to use the net
proceeds from the offering to accelerate the drilling of its project inventory
and, in the interim, to repay a portion of its outstanding indebtedness under
its Credit Agreement. A registration statement relating to the Class C Units has
been filed with the Securities and Exchange Commission but has not yet become
effective. The Class C Units may not be sold nor may offers to buy be accepted
prior to the time the registration statement becomes effective. This information
shall not constitute an offer to sell or the solicitation of an offer to buy nor
shall there be any sale of the Class C Units in any State in which such offer,
solicitation or sale would be unlawful prior to registration or qualification
under the securities laws of any such State.
Inflation and Changing Prices
Prices
Prices received 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 through
the third quarter of 1997. The following table presents the weighted average
prices received each quarter by HEP and the effects of the hedging transactions
discussed below.
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
Second quarter - 1997 17.71 17.71 2.02 1.98
Third quarter - 1997 18.40 18.47 2.25 2.13
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 tables provide a summary of HEP's outstanding financial contracts:
Oil
Percent of Production Contract
Period Hedged Floor Price
(per bbl)
Last three months of 1997 48% $17.78
1998 26% $17.12
1999 3% $15.88
Certain of HEP's financial contracts for oil are participating hedges 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. Certain other of HEP's
financial contracts for oil are collar agreements 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 three months of 1997 46% $1.97
1998 46% $2.04
1999 27% $1.87
2000 16% $2.01
Certain of HEP's financial contracts for natural gas are collar agreements
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. During the fourth quarter
through October 31, 1997 the weighted average oil price (for barrels not hedged)
was approximately $20.20 per barrel. The weighted average price of natural gas
(for mcf not hedged) during that period was approximately $3.15 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%.
TABLE OF HEP EARNINGS FOR MANAGEMENT DISCUSSION
(In thousands except price)
For the Quarter Ended September 30, 1997 For the Quarter Ended September 30,1996
---------------------------------------- ---------------------------------------
Direct Direct
Owned Mays Total Owned Mays Total
Oil production (bbl) 171 22 193 188 28 216
Gas production (mcf) 2,734 380 3,114 2,692 435 3,127
Average oil price (per bbl) $ 18.42 $ 18.86 $ 18.47 $ 20.54 $ 22.03 $ 20.73
Average gas price (per mcf) $ 2.08 $ 2.54 $ 2.13 $ 2.02 $ 2.66 $ 2.11
Oil revenue $ 3,149 $ 415 $ 3,564 $ 3,861 $ 617 $ 4,478
Gas revenue 5,675 964 6,639 5,434 1,159 6,593
Pipeline, facilities and other revenue 523 523 607 607
Interest income 53 16 69 110 15 125
----- ---- ----- ----- ----- -----
Total revenue 9,400 1,395 10,795 10,012 1,791 11,803
----- ----- ------ ------ ----- ------
Production operating 2,743 139 2,882 2,511 176 2,687
Facilities operating 190 190 119 119
General and administrative 902 94 996 1,140 75 1,215
Depreciation, depletion, and amortization 2,876 289 3,166 2,787 439 3,226
Interest 716 716 928 928
Litigation settlement expense 9 24 33 1 1 2
Equity in earnings of HCRC (138) (138) (500) (500)
Minority interest in net income of affiliates 449 449 621 621
------ ----- ----- ----- --- ---
Total expense 7,298 995 8,293 6,986 1,312 8,298
----- ----- ------ ----- ----- ------
Net income $ 2,102 $ 400 $ 2,502 $ 3,026 $ 479 $ 3,505
======== ===== ======== ======= ======== =======
TABLE OF HEP EARNINGS FOR MANAGEMENT DISCUSSION
(In thousands except price)
For the Nine Months Ended September 30, 1997 For the Nine Months Ended September 30,1996
Direct Direct
Owned Mays Total Owned Mays Total
Oil production (bbl) 521 60 581 663 86 749
Gas production (mcf) 7,563 1,025 8,588 8,386 1,404 9,790
Average oil price (per bbl) $ 19.06 $ 20.47 $ 19.20 $ 19.34 $ 20.64 $ 19.49
Average gas price (per mcf) $ 2.15 $ 2.75 $ 2.22 $ 2.04 $ 2.99 $ 2.18
Oil revenue $ 9,929 $ 1,228 $11,157 $12,825 $ 1,775 $14,600
Gas revenue 16,255 2,818 19,073 17,123 4,199 21,322
Pipeline, facilities and other 2,072 2,072 2,039 2,039
Interest 272 56 328 284 47 331
------ ----- ----- ------ ---- -----
Total revenue 28,528 4,102 32,630 32,271 6,021 38,292
------ ------ ------- ------ ------- ------
Production operating 7,785 422 8,207 7,855 524 8,379
Facilities operating 560 560 551 551
General and administrative 2,958 292 3,250 2,826 307 3,133
Depreciation, depletion, and amortization 7,754 903 8,657 9,136 1,418 10,554
Interest 2,315 2,315 3,047 3,047
Litigation settlement (income) expense (234) (6) (240) 223 7 230
Equity in earnings of HCRC (1,384) (1,384) (1,227) (1,227)
Minority interest in net income of affiliates 1,341 1,341 2,092 2,092
------ ----- ------- ---- ----- -----
Total expense 19,754 2,952 22,706 22,411 4,348 26,759
------ ------ ------- ------ ----- ------
Net income $ 8,774 $ 1,150 $ 9,924 $ 9,860 $ 1,673 $11,533
======== ======= ========= ======= ======= ======
Third Quarter of 1997 Compared to Third Quarter of 1996
Oil Revenue
Oil revenue decreased $914,000 during the third quarter of 1997 as compared with
the third quarter of 1996. The decrease is the result of a decrease in
production from 216,000 barrels in 1996 to 193,000 barrels in 1997 and a
decrease in the average oil price from $20.73 per barrel in 1996 to $18.47 per
barrel in 1997. The decrease in oil production is primarily due to normal
production declines.
The effect of HEP's hedging transactions, as described under "Inflation and
Changing Prices," during the third quarter of 1997, was to increase HEP's
average oil price from $18.40 per barrel to $18.47 per barrel, resulting in a
$14,000 increase in revenue from hedging transactions.
Gas Revenue
Gas revenue increased $46,000 during the third quarter of 1997 as compared with
the third quarter of 1996. The increase is the result of an increase in the
average gas price from $2.11 per mcf in 1996 to $2.13 per mcf in 1997 partially
offset by a decrease in production from 3,127,000 mcf in 1996 to 3,114,000 mcf
in 1997. The decrease in production is due to normal production declines.
The effect of HEP's hedging transactions during the third quarter of 1997, was
to decrease HEP's average gas price from $2.25 per mcf to $2.13 per mcf,
representing a $374,000 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, New Mexico. Pipeline, facilities and other revenue decreased $84,000
during the third quarter of 1997 as compared with the third quarter of 1996 due
to fluctuations in numerous miscellaneous items, none of which are individually
significant.
Interest Income
Interest income decreased $56,000 during the third quarter of 1997 as compared
with the third quarter of 1996 due to a lower average cash balance during 1997.
Production Operating Expense
Production operating expense increased $195,000 during the third quarter of 1997
as compared with the third quarter of 1996 primarily due to increased
maintenance activity.
Facilities Operating Expense
Facilities operating expense represents the costs of operating and maintaining
two gathering systems located in New Mexico. Costs increased $71,000 during the
third quarter of 1997 as compared with the third quarter of 1996 primarily due
to increased maintenance activity during 1997.
General and Administrative
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 $219,000 during the third quarter of 1997 as compared
with the third quarter of 1996 primarily due to the timing of the payment of
consulting fees.
Depreciation, Depletion and Amortization Expense
Depreciation, depletion and amortization expense decreased $61,000 during the
third quarter of 1997 as compared with the third quarter of 1996. The decrease
is primarily the result of a lower depletion rate in 1997 due to the decline in
production previously discussed.
Interest Expense
Interest expense decreased $212,000 during the third quarter of 1997 as compared
with the third quarter of 1996, primarily as a result of lower outstanding debt
during 1997.
Equity in Earnings of HCRC
Equity in earnings of HCRC decreased $362,000 during the third quarter of 1997
as compared with the third quarter of 1996. The decrease is primarily due to
HCRC's increased income tax expense during 1997.
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 $172,000 is
due to a decrease in the net income of the May Partnerships resulting primarily
from decreased production on their properties.
Litigation Settlement Expense
Litigation settlement expense during the third quarters of 1997 and 1996 is
comprised of the expense incurred to settle several property related claims,
none of which are individually significant.
First Nine Months of 1997 Compared to First Nine Months of 1996
The comparisons for the first nine months of 1997 and the first nine months of
1996 are consistent with those discussed in the third quarter of 1997 compared
to the third quarter 1996 except for the following:
Oil Revenue
Oil revenue decreased $3,443,000 during the first nine months of 1997 as
compared with the first nine months of 1996. The decrease is the result of a
decrease in production from 749,000 barrels in 1996 to 581,000 barrels in 1997
and a decrease in the average oil price from $19.49 per barrel in 1996 to $19.20
per barrel in 1997. The decrease in oil production is due to the temporary
shut-in of two wells in the Louisiana area during the second quarter of 1997
while workover procedures were performed and production declines on wells
located in the West Texas area.
The effect of HEP=s hedging transactions during the first nine months of 1997
was to decrease HEP=s average oil price from $19.56 per barrel to $19.20 per
barrel, representing a reduction in revenue from hedging transactions of
$209,000.
Gas Revenue
Gas revenue decreased $2,249,000 during the first nine months of 1997 as
compared with the first nine months of 1996. The decrease is the result of a
decrease in production from 9,790,000 mcf in 1996 to 8,588,000 mcf in 1997
partially offset by an increase in price from $2.18 per mcf in 1996 to $2.22 per
mcf in 1997. The decrease in production is due to the temporary shut-in of two
wells in the Louisiana area during the second quarter of 1997 while workover
procedures were performed and production declines on wells located in the West
Texas area.
The effect of HEP's hedging transactions during the first nine months of 1997
was to decrease HEP's average gas price from $2.40 per mcf to $2.22 per mcf,
representing a $1,546,000 reduction in revenue from hedging transactions.
Production Operating Expense
Production operating expense decreased $172,000 during the first nine months of
1997 as compared with the first nine months of 1996. The decrease is primarily
due to lower production taxes and operating expenses due to the decrease in
production previously discussed.
Equity in Earnings of HCRC
Equity in earnings of HCRC increased $157,000 during the first nine months of
1997 as compared with the first nine months of 1996. The increase is primarily
due to lower operating expenses combined with lower depletion expense during
1997.
Litigation Settlement
Litigation settlement income during the first nine months of 1997 is comprised
of insurance proceeds which reimbursed a portion of expense incurred in a prior
period to settle certain litigation. Litigation settlement expense during the
first nine months of 1996 consists primarily of expenses incurred to settle a
property related lawsuit.
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
Exhibit
10.16 Amendment No. 1 to Third Amended and Restated Credit
Agreement dated as of October 31, 1997.
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: November 14, 1977 By: Robert S.Pfeiffer
Robert S. Pfeiffer,
Vice President
(Chief Financial Officer)