UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended June 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-14731
HALLADOR PETROLEUM COMPANY
(Exact name of registrant as specified in its charter)
Colorado 84-1014610
(State of incorporation) (I.R.S. Employer Identification No.)
1660 Lincoln Street, Suite 2700, Denver, Colorado 80264-2701
(Address of principal executive offices)
303-839-5504 FAX: 303-832-3013
(Issuer's telephone numbers)
Check whether the issuer (1) filed all reports required by Section 13 or 15(d)
of the Securities Exchange Act during the past 12 months, and (2) has been
subject to such filing requirements for the past 90 days: Yes [x] No [ ]
Shares outstanding as of August 19, 2002: 7,093,150
PART I - FINANCIAL INFORMATION
Consolidated Balance Sheet
(in thousands)
June 30, December 31,
2002 2001*
--------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 2,089 $ 2,078
Accounts receivable-
Oil and gas sales 619 706
Well operations 135 174
------ ------
Total current assets 2,843 2,958
------ ------
Oil and gas properties, at cost (successful efforts):
Unproved properties 260 204
Proved properties 25,395 24,687
Less - accumulated depreciation,
depletion and amortization (18,602) (16,497)
------ ------
7,053 8,394
------ ------
Oil and gas operator bonds 417 366
Investment in Catalytic Solutions 175 175
Other assets 37 44
------ ------
$10,525 $11,937
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 631 $ 833
Oil and gas sales payable 371 180
------ ------
Total current liabilities 1,002 1,013
------ ------
Key employee bonus plan 345 335
------ ------
Future site restoration-South Cuyama field 496 344
------ ------
Minority interest 5,047 5,516
------ ------
Stockholders' equity:
Preferred stock, $.10 par value; 10,000,000
shares authorized; none issued
Common stock, $.01 par value; 100,000,000
shares authorized; 7,093,150 shares issued 71 71
Additional paid-in capital 18,061 18,061
Accumulated deficit (14,497) (13,403)
------ ------
3,635 4,729
------ ------
$10,525 $11,937
====== ======
- ------------------------------
*Derived from the Form 10-KSB.
See accompanying notes.
Consolidated Statement of Operations
(in thousands, except per share amounts)
Six months ended Three months ended
June 30, June 30,
2002 2001 2002 2001
------ ------ ------ ------
Revenue:
Oil $ 2,780 $2,685 $1,505 $1,398
Gas 559 1,761 302 1,276
NGLs 101 204 54 76
Interest and other 25 78 17 35
Gain on prospect sale 67 67
------ ----- ----- -----
3,465 4,795 1,878 2,852
------ ----- ----- -----
Costs and expenses:
Lease operating 2,266 2,091 1,191 971
Exploration costs
Dry hole expense 32 32
Delay rentals 47 32 28 14
Contract termination fee 30 30
Impairment-Fulton Fuller gas well 79 79
Impairment-S.E. Bonus Field 840 840
Depreciation, depletion and
amortization 1,346 452 654 238
General and administrative 437 462 210 215
Purchase of employee stock options 300
Interest 13 26 7 12
------ ----- ----- -----
5,028 3,425 3,009 1,512
------ ----- ----- -----
Income(loss)before minority interest (1,563) 1,370 (1,131) 1,340
Minority interest 469 (411) 339 (402)
------ ----- ----- -----
Net income (loss) $(1,094) $ 959 $ (792) $ 938
====== ===== ===== =====
Basic net income(loss) per share $ (.15) $ .14 $ (.11) $ .13
====== ===== ===== =====
Diluted net income(loss)per share $ (.15) $ .13 $ (.11) $ .12
====== ===== ===== =====
Basic weighted average shares
outstanding 7,093 7,093 7,093 7,093
====== ===== ===== =====
Diluted weighted average shares
outstanding 7,093 7,492 7,093 7,545
====== ===== ===== =====
See accompanying notes.
Consolidated Statement of Cash Flows
(in thousands)
Six months ended June 30,
2002 2001
------ ------
Net cash provided by operating activities $ 1,029 $1,696
------ -----
Cash flows from investing activities:
Properties (966) (1,126)
Other assets (52) (91)
Prospect sale 67
------ -----
Net cash used in investing activities (1,018) (1,150)
------ -----
Net increase in cash and cash equivalents 11 546
Cash and cash equivalents, beginning of period 2,078 2,489
------ -----
Cash and cash equivalents, end of period $ 2,089 $3,035
====== =====
</Table>
See accompanying notes.
Notes to Financial Statements
1. The interim financial data is unaudited; however, in our opinion, it
includes all adjustments, consisting only of normal recurring
adjustments necessary for a fair statement of the results for the
interim periods. The financial statements included herein have been
prepared pursuant to the SEC's rules and regulations; accordingly,
certain information and footnote disclosures normally included in GAAP
financial statements have been condensed or omitted.
2. Our organization and business, the accounting policies we follow and
other information are contained in the notes to our financial statements
filed as part of our 2001 Form 10-KSB. This quarterly report should be
read in conjunction with that annual report.
3. The Fulton Fuller exploratory gas well was placed on production in June
2001. Our cost was about $560,000. The well was a disappointment so we
took a $436,000 impairment charge, based on estimated fair value, during
the third quarter of 2001. We received an offer to purchase our
interest in this property for $25,000 in July 2002 and intend to accept
the offer. Based on a future net cash flow analysis we determined the
well to be impaired. As such, we took an additional impairment charge
of $79,000 during the quarter ended June 30, 2002, to reduce the net book
value to the estimated realizable value of $25,000.
Notes to Financial Statements
(continued)
During the third and fourth quarter of 2001, we participated in a four-
well developmental gas prospect in Wharton County, Texas. These wells
are deep (about 14,000 feet) and expensive; the costs to drill and
complete each well was about $5 million. We have a 5.5% WI (4.3% NRI).
Our net book value in the prospect is about $1.1 million. During the
second quarter of 2002, production from the prospect began to drop
unexpectedly. As a result we reduced the proved reserves for these
wells and based on a future net cash flow analysis determined that the
property had been impaired. As such, we recorded an impairment of
$840,000 to reduce the net book value of these wells to estimated fair
market value.
4. We use Southern California Gas Company (SOCAL) pipeline for transportation
in the marketing of the South Cuyama field's gas production. SOCAL is
imposing new quality standards that could result in our gas being shut-in
until an AMINE unit is installed to remove carbon dioxide. We are
negotiating with SOCAL to allow us to continue to transport our gas until
March 1, 2003. We believe that in the meantime we can install the AMINE
unit. The cost for the AMINE unit would be about $120,000. However, we
are unsure how long it will take to obtain a permit from Santa Barbara
County to install the unit. If our gas is shut-in, the lost revenue
would be about $24,000 per month.
As discussed in our 2001 Form 10-KSB, the SC Field was purchased from
ARCO (Atlantic Richfield which is now part of BP p.l.c.) in May 1990.
ARCO assumed certain environmental liabilities connected with their
40-year ownership of the field and gas plant. Part of the gas plant
has not been operational during the past twenty-five years. Hereafter,
we refer to ARCO's obligation as the "ARCO Indemnity." There is evidence
of asbestos in the non-operational part of the gas plant. It is our
position, and the opinion of our legal counsel, that the ARCO Indemnity
covers future abandonment and clean-up costs associated with this
gas plant. We have had several discussions with BP regarding this matter
and it is possible that we may have to assert our rights under the ARCO
Indemnity through litigation.
The costs to abandon and clean up the old gas plant area and other oil
and gas areas at the field will be significant. There is a chance,
depending on the negotiations with BP, that some or all of the costs
would be borne by us. At this time we have not attempted to estimate
what these costs could ultimately be but we expect that such costs could
have a material adverse effect on our financial condition, results of
operations and cash flows if ultimately we do bear the costs.
HALLADOR PETROLEUM COMPANY
Management's Discussion and Analysis or Plan of Operation
RESULTS OF OPERATIONS
YEAR-TO-DATE COMPARISON
- -----------------------
The table below (in thousands) provides sales data and average prices for the
period.
2002 2001
Sales Average Sales Average
Volume Price Revenue Volume Price Revenue
------- ------- ------ ------ ----- -------
Oil - barrels
South Cuyama field 105 $21.32 $2,239 108 $24.43 $2,638
Cox #41-5 (1) 23 20.96 482 1 25.00 25
South Texas-Bonus 2.2 20.91 46
Other * * 13 * * 22
Gas - mcf
South Cuyama field 14 3.28 46 26 11.19 291
Cox #41-5 (1) 36 2.75 99 65 12.88 837
South Texas - Bonus 96 2.95 283
San Juan - New Mexico 26 1.92 50 27 5.78 156
Merlin Prospect(2) 9 2.22 20 33 11.12 367
Other 23 2.65 61 18 6.11 110
NGLs - barrels
South Cuyama field 7 10.71 75 6.6 23.41 155
San Juan - New Mexico 2.3 10.87 25 2.5 19.20 48
Other * * 1 * * 1
- ------------------------
* Not meaningful
(1) This well is part of the South Cuyama field, due to its significance
we present it separately.
(2) This field located in northern California is near the end of its
economic life.
Current prices for (i) the South Cuyama field are about $26 for oil and
$2.90 for gas (ii) South Texas-Bonus are about $25 for oil and $2.94 for
gas and (iii) San Juan gas is about $2.25.
Current production to the 100% for the South Cuyama field, including the
two Cox wells, is about 1,200 barrels per day (830 net to us.)
Production a year ago was about 830 barrels per day (588 net to us.)
There is no guarantee that the current production will be sustainable
in the near future.
The table below (in thousands) shows lease operating expenses (LOE) for our
primary fields.
2002 2001
---- ----
South Cuyama field:
LOE excluding electricity $1,439 $1,341
Electricity 696 659
----- -----
2,135 2,000
South Texas - Bonus 30
San Juan - New Mexico 30 51
Other 71 40
----- -----
Total $2,266 $2,091
===== =====
Although oil prices declined our oil revenue increased slightly due to
the higher production from the Cox #41-5 as set forth in the table above.
Although our gas and NGL production increased compared to last year, the
prices dropped significantly as set forth in the table above. Last summer
we received abnormally high gas prices due to the California energy crisis.
DD&A increased because of lower reserve estimates. The impairment charges
are discussed below. The $300,000 for employee stock options was a one time
event.
QUARTER-TO-DATE COMPARISON
- ---------------------------
The table below (in thousands) provides sales data and average prices for the
period.
2002 2001
Sales Average Sales Average
Volume Price Revenue Volume Price Revenue
------- ------- ------ ------ ----- -------
Oil - barrels
South Cuyama field 52 $24.08 $1,252 55 $24.71 $1,359
Cox #41-5 (1) 9.4 23.89 225 1 25.00 25
South Texas - Bonus * 22.58 20
Other * 10.86 8 * 26.35 14
Gas - mcf
South Cuyama field 10 3.60 36 14 14.71 206
Cox #41-5 (1) 13 3.38 44 62 13.27 823
South Texas - Bonus 40 3.63 145
San Juan - New Mexico 13 2.38 31 11 3.54 39
Merlin Prospect(2) 3 2.67 8 15 10.47 157
Other 11 3.45 38 10 5.10 51
NGLs - barrels
South Cuyama field 4 9.50 38 3 18.00 54
San Juan - New Mexico 1.3 11.54 15 1.3 16.15 21
Other * * 1 * * 1
- ------------------------
* Not meaningful
(1) This well is part of the South Cuyama field, due to its significance
we present it separately.
(2) This field located in northern California is near the end of its
economic life.
The table below (in thousands) shows lease operating expenses (LOE) for our
primary fields.
2002 2001
---- ----
South Cuyama field:
LOE excluding electricity $ 752 $ 505
Electricity 377 430
----- -----
1,129 935
South Texas - Bonus 16
San Juan - New Mexico 13 22
Other 33 14
----- -----
Total $1,191 $ 971
===== =====
The explanations above for the year-to-date comparisons also apply to
the quarter-to-date comparisons.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Cash and cash flow from operations are expected to enable us to meet our
obligations as they become due during the next several years. Our
operating cash flow decreased due to reduced prices as discussed above.
Bank Debt
---------
The South Cuyama field (SC Field), our principal asset, is pledged to
U. S. Bank National Association under a $2,200,000 revolving line of credit,
which was renewed on March 31,2002. Presently, we owe $31,000 under this
Line, which is included in accrued liabilities.
THE FOLLOWING DISCUSSION UPDATES THE MD&A CONTAINED IN ITEM 6 OF THE
2001 FORM 10-KSB AND THE TWO DISCUSSIONS SHOULD BE READ TOGETHER.
PROSPECT DEVELOPMENT AND EXPLORATION ACTIVITY
- ---------------------------------------------
South Cuyama Field
- ------------------
The production from the Cox #41-5 well is declining. During March 2002 the well
was producing 500 mcf/day and 275 barrels/day; during August the gas production
declined to 250 mcf/day and the oil production declined to 100 barrels/day.
This well has performed as expected.
In June/July we drilled and completed the Cox #42-5, an offset to the Cox #41-5,
at a cost of about $375,000 to the 100%. This well is producing 185 barrels/day
and 200 mcf/day. When the current producing zones deplete, we plan to move up
the hole and begin producing from the Buckhorn sand. The gas reserves assigned
to the Buckhorn are 1.5 BCF. There is another zone above the Buckhorn with
estimated proved reserves of 250 MMCF. This zone will be completed in the
future from either the #41-5 or #42-5.
We have a 70% WI (60% NRI) in each of the two Cox wells.
We plan to drill an exploratory oil/gas well sometime next year in the same
3-D area, two miles away from the #41-5 and #42-5 wells. The estimated costs to
the 100% are $700,000; our share would be about $500,000. The exact date is
uncertain due to the difficulty in obtaining drilling permits from Santa
Barbara County. The permitting process to drill a well outside the confines of
our existing oil field can take up to one year.
Recompletion of an existing shut-in oil well
--------------------------------------------
In July we perforated a sand at 3,000 feet in an existing shut-in oil well.
The well was placed on production in early August and is currently producing
225 barrels/day. The costs to complete this zone were $15,000 ($12,500 net
to us.) After the well has produced for a few months we expect to assign
proved reserves.
We hope to identify more of these type projects from the results of the second
3-D project discussed below.
Second 3-D Seismic Project
--------------------------
We are on track to commence the second 3-D project we discussed in our 10-KSB.
The shooting will begin in a few weeks and the results should be known by March
2003. The cost to the 100% is estimated to be $1.3 million and our share would
be about $1 million, which will be expensed as incurred.
WesternGeco, a division of Schlumberger, will be the contractor for the project.
This project will cover about 35 square miles. The October 2000 3-D project
covered 10 square miles. When we purchased this field from ARCO twelve years
ago, 3-D seismic was in its infancy and very expensive. We are very excited
about the possibilities this second 3-D project can bring to us.
SOCAL
-----
We use Southern California Gas Company (SOCAL) pipeline for transportation
in the marketing of the South Cuyama field's gas production. SOCAL is
imposing new quality standards that could result in our gas being shut-in
until an AMINE unit is installed to remove carbon dioxide. We are negotiating
with SOCAL to allow us to continue to transport our gas until March 1, 2003.
We believe that in the meantime we can install the AMINE unit. The cost for
the AMINE unit would be about $120,000. However, we are unsure how long it
will take to obtain a permit from Santa Barbara County to install the unit.
If our gas is shut-in, the lost revenue would be about $24,000 per month.
ARCO Indemnity
--------------
As discussed in our 2001 Form 10-KSB, the SC Field was purchased from ARCO
(Atlantic Richfield which is now part of BP p.l.c.) in May 1990. ARCO
assumed certain environmental liabilities connected with their 40-year
ownership of the field and gas plant. Part of the gas plant has not been
operational during the past twenty-five years. Hereafter, we refer to
ARCO's obligation as the "ARCO Indemnity." There is evidence of asbestos in
the non-operational part of the gas plant. It is our position, and the
opinion of our legal counsel, that the ARCO Indemnity covers future
abandonment and clean-up costs associated with this gas plant. We have had
several discussions with BP regarding this matter and it is possible that
we may have to assert our rights under the ARCO Indemnity through litigation.
The costs to abandon and clean up the old gas plant area and other oil and
gas areas at the field will be significant. There is a chance, depending on
the negotiations with BP, that some or all of the costs would be borne by us.
At this time we have not attempted to estimate what these costs could
ultimately be but we expect that such costs could have a material adverse
effect on our financial condition, results of operations and cash flows if
ultimately we do bear the costs.
Fulton Fuller
- -------------
The Fulton Fuller exploratory gas well was placed on production in June
2001. Our cost was about $560,000. The well was a disappointment so we took
a $436,000 impairment charge, based on estimated fair value, during the third
quarter of 2001. We received an offer to purchase our interest in this
property for $25,000 in July 2002 and intend to accept the offer. Based on
a future net cash flow analysis we determined the well to be impaired. As
such, we took an additional impairment charge of $79,000 during the quarter
ended June 30, 2002, to reduce the net book value to the estimated realizable
value of $25,000.
South Texas -Bonus
- ------------------
During the third and fourth quarter of 2001, we participated in a four-well
developmental gas prospect in Wharton County, Texas. These wells are deep
(about 14,000 feet) and expensive; the costs to drill and complete each well
was about $5 million. We have a 5.5% WI (4.3% NRI). Our net book value in
the prospect is about $1.1 million. During the second quarter of 2002,
production from the prospect began to drop unexpectedly. As a result we
reduced the proved reserves for these wells and based on a future net cash
flow analysis determined that the property had been impaired. As such, we
recorded an impairment of $840,000 to reduce the net book value of these
wells to estimated fair market value.
There are no other significant changes or developments to report from what we
disclosed in the 2001 Form 10-KSB.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - none
(b) Form 8-K filed on July 31, 2002 reporting change of auditors on July 24,
2002.
SIGNATURE
In accordance with the requirements of the Exchange Act, the Registrant has
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
HALLADOR PETROLEUM COMPANY
Dated: August 19, 2002 By: /S/VICTOR P. STABIO
Chief Executive Officer and
Chief Financial Officer
Signing on behalf of registrant
and as principal financial officer.
CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Hallador Petroleum Company (the
"Company"), on Form 10-QSB for the quarterly period ended June 30, 2002, as
filed with the Securities and Exchange Commission on the date hereof (the
"Report"), the undersigned, in the capacities and dates indicated below,
hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully
complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934; and (2) The information contained in the Report fairly
presents, in all material respects, the financial condition and results of
operations of the Company.
Dated: August 19, 2002 By: /S/VICTOR P. STABIO
Chief Executive Officer and
Chief Financial Officer