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 September 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 November 14, 2002: 7,093,150
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Consolidated Balance Sheet
(in thousands)
September 30, December 31,
2002 2001*
--------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 2,238 $ 2,078
Accounts receivable-
Oil and gas sales 789 706
Well operations 364 174
------ ------
Total current assets 3,391 2,958
------ ------
Oil and gas properties, at cost (successful efforts):
Unproved properties 243 204
Proved properties 25,390 24,687
Less - accumulated depreciation,
depletion and amortization (19,087) (16,497)
------ ------
6,546 8,394
------ ------
Oil and gas operator bonds 417 366
Investment in Catalytic Solutions 175 175
Other assets 33 44
------ ------
$10,562 $11,937
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 1,317 $ 833
Oil and gas sales payable 416 180
------ ------
Total current liabilities 1,733 1,013
------ ------
Key employee bonus plan 354 335
------ ------
Future site restoration-South Cuyama field 579 344
------ ------
Minority interest 4,811 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 (15,047) (13,403)
------ ------
3,085 4,729
------ ------
$10,562 $11,937
====== ======
- ------------------------------
*Derived from the Form 10-KSB.
See accompanying notes.
Consolidated Statement of Operations
(in thousands, except per share amounts)
Nine months ended Three months ended
September 30, September 30,
2002 2001 2002 2001
------ ------ ------ ------
Revenue:
Oil $ 4,656 $4,025 $1,877 $1,340
Gas 858 2,085 298 324
NGLs 157 266 56 62
Interest and other 35 112 10 34
Gain on prospect sale 67
------ ----- ----- -----
5,706 6,555 2,241 1,760
------ ----- ----- -----
Costs and expenses:
Lease operating 3,474 3,024 1,208 933
Exploration costs
Geological and geophysical 1,031 1,031
Dry hole expense 103 71
Delay rentals 55 58 9 26
Contract termination fee 30
Impairment-Fulton Fuller gas well 79 436 436
Impairment-S.E. Bonus Field 840
Impairment-Unproved properties 18 99 18 99 Depreciation, depletion and
amortization 1,918 702 572 250
General and administrative 656 660 219 205
California income taxes (refund) (34) 63 (34) 56
Purchase of employee stock options 300
Interest 18 35 5 9
------ ----- ----- -----
8,055 5,510 3,028 2,085
------ ----- ----- -----
Income(loss)before minority interest (2,349) 1,045 (787) (325)
Minority interest 705 (314) 236 98
------ ----- ----- -----
Net income (loss) $(1,644) $ 731 $ (551) $ (227)
====== ===== ===== =====
Basic net income (loss) per share $ (.23) $ .10 $ (.08) $ (.03)
====== ===== ===== =====
Diluted net income (loss) per share $ (.23) $ .10 $ (.08) $ (.03)
====== ===== ===== =====
Basic weighted average shares
outstanding 7,093 7,093 7,093 7,093
====== ===== ===== =====
Diluted weighted average shares
outstanding 7,093 7,507 7,093 7,093
====== ===== ===== =====
See accompanying notes.
Consolidated Statement of Cash Flows
(in thousands)
Nine months ended
September 30,
2002 2001
------ ------
Net cash provided by operating activities $ 1,206 $2,026
------ -----
Cash flows from investing activities:
Properties (993) (1,568)
Other assets (53) (63)
Prospect sale 67
------ -----
Net cash used in investing activities (1,046) (1,564)
------ -----
Cash flows from financing activities:
Repayment of bank debt (200)
-----
Net increase in cash and cash equivalents 160 262
Cash and cash equivalents, beginning of period 2,078 2,489
------ -----
Cash and cash equivalents, end of period $ 2,238 $2,751
====== =====
</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. In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This statement deals with the costs of closing
facilities and removing assets. SFAS No. 143 requires entities to record
the fair value of a legal liability for an asset retirement obligation in
the period it is incurred. This cost is initially capitalized and
amortized over the remaining life of the underlying asset. Once the
obligation is ultimately settled, any difference between the final cost
and the recorded liability is recognized as a gain or loss on disposition.
SFAS No. 143 is effective for years
Notes to Financial Statements
(continued)
beginning after June 15, 2002. Hallador is currently evaluating the
impact this pronouncement will have on its future financial results.
4. 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 recently accepted
it. 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.
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 was 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.
5. 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 have retained a San Francisco law firm to assert our rights under the
ARCO Indemnity.
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.
6. In August 2002, the Company issued 177,500 incentive stock options to
certain employees at an exercise price of $1.25 per share, which was fair
market value on grant date. These options vested one-third at date of
grant and the remaining over two years. The options expire August 31,
2012. Total issued and outstanding options are 749,723.
ITEM 2. 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 199 $23.00 $4,577 167 $23.90 $3,991
South Texas-Bonus 2.8 22.14 62
Other * * 17 1.3 26.15 34
Gas - mcf
South Cuyama field 80 3.14 251 150 8.96 1,344
South Texas-Bonus 125 3.11 389 4 2.75 11
San Juan-New Mexico 37 2.05 76 38 4.66 177
Merlin Prospect (1) 12 2.42 29 47 8.66 407
Other 45 2.51 113 31 4.71 146
NGLs - barrels
South Cuyama field 11 10.45 115 10 20.20 202
San Juan-New Mexico 3.6 11.39 41 3.7 17.03 63
Other * * 1 * * 1
- ------------------------
* Not meaningful
(1) This field located in northern California is near the end of its
economic life.
Current prices for (i) the South Cuyama field are about $23.39 for oil and
$3.94 for gas (ii) South Texas-Bonus are about $22.50 for oil and $3.88 for
gas and (iii) San Juan gas is about $3.58.
Current production to the 100% for the South Cuyama field is about 1,035
barrels per day (741 net to us.) Production a year ago was about 930
barrels per day (665 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 $2,054 $1,919
Electricity 1,221 972
----- -----
3,275 2,891
South Texas-Bonus 57 19
San Juan-New Mexico 49 75
Other 93 39
----- -----
Total $3,474 $3,024
===== =====
Our oil revenue increased due to higher production in the South Cuyama field
as set forth in the table above. Prices were about the same.
Although our gas and NGL production increased compared to last year, the
prices dropped significantly as set forth in the table above. During the
summer of 2001 we received abnormally high gas prices due to the California
energy crisis.
As expected our electricity costs have increased due to higher rates and
usage. DD&A increased because of lower reserve estimates. The impairment
charges are discussed below. The $300,000 for employee stock options and
the G&G costs were 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 71 $26.16 $1,857 58 $23.00 $1,334
South Texas-Bonus * * 16
Other * * 4 * * 6
Gas - mcf
South Cuyama field 30 3.53 106 59 3.66 216
South Texas-Bonus 29 3.62 105 4 2.75 11
San Juan-New Mexico 11 2.36 26 10 2.10 21
Merlin Prospect (1) 3 3.33 10 13 3.07 40
Other 22 2.32 51 12 3.00 36
NGLs - barrels
South Cuyama field 3.5 11.43 40 3.4 13.82 47
San Juan-New Mexico 1.2 13.33 16 1.2 12.50 15
Other * * * * * *
- ------------------------
* Not meaningful
(1) 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 $ 637 $ 509
Electricity 504 382
----- -----
1,141 891
South Texas-Bonus 28 5
San Juan-New Mexico 18 24
Other 21 13
----- -----
Total $1,208 $ 933
===== =====
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.
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
- ------------------
Two years ago the field's daily production averaged about 750 bopd. During
the past two years, we have brought on new production through the
recompletion of two wells and the drilling of two wells all of which were
identified in our first 3-D seismic project. These wells raised our
production to a peak of 1,190 bopd during the third quarter of 2002. Current
production is at 1,035 bopd. The drop is due to a fast decline in initial
production and the normal decline rate which we estimate to be about 8% per
year. Currently, the four new wells provide about one-third of the daily
production.
Second 3-D Seismic Project
--------------------------
We completed our second 3-D seismic project and the results should be known
by March 2003. The cost to the 100% was about $1.3 million and our share
was about $1 million, which was expensed during the third quarter.
WesternGeco, a division of Schlumberger, is the contractor for the project.
This project covered about 36 square miles. The October 2000 3-D seismic
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 seismic project can bring
to us.
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 have retained a San Francisco law firm to assert our
rights under the ARCO Indemnity.
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 recently accepted it. 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 was 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.
ITEM 3. CONTROLS AND PROCEDURES
a) Evaluation of Disclosure Controls and Procedures
Our CEO, who is also our CFO, has evaluated the Company's disclosure
controls and procedures as of November 14, 2002, and concluded that
these controls and procedures are effective.
b) Changes in Internal Controls
There are no significant changes in internal controls or in other
factors that could significantly affect these controls subsequent to
November 14, 2002.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K - none.
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: November 14, 2002 By: /S/VICTOR P. STABIO
Chief Executive Officer and
Chief Financial Officer
Signing on behalf of registrant
and as principal financial officer.
CERTIFICATION
I, Victor P. Stabio, certify that:
1. I have reviewed the quarterly report on Form 10-QSB of Hallador
Petroleum Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. I am responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and I have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to me by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report my conclusion about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. I have disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent function) :
a) all significant deficiencies in the design or operation of internal
controls, which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weakness in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. I have indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our most
recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 14, 2002
/S/ VICTOR P. STABIO
Chief Executive Officer and Chief 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 September 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: November 14, 2002 By: /S/VICTOR P. STABIO
Chief Executive Officer and
Chief Financial Officer