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, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-19931
HALLWOOD CONSOLIDATED RESOURCES CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 84-1176750
(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 [ ]
Shares of Common Stock outstanding at May 12, 1998 3,007,852
Page 1 of 17
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HALLWOOD CONSOLIDATED RESOURCES CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
March 31, December 31,
1998 1997
CURRENT ASSETS
Cash and cash equivalents $ 1,978 $ 4,492
Accrued oil and gas revenue 3,313 4,266
Due from affiliates 3,797 2,418
Prepaid and other assets 1,309 844
Current assets of affiliates 3,132 3,854
--------- ---------
Total current assets 13,529 15,874
-------- --------
PROPERTY, PLANT AND EQUIPMENT, at cost
Oil and gas properties (full cost method)
Proved oil and gas properties 294,224 294,922
Unproved mineral interests - domestic 2,426 2,250
--------- ---------
Total 296,650 297,172
Less - accumulated depreciation,
depletion, amortization and impairment (223,672) (221,141)
------- -------
Net property, plant and equipment 72,978 76,031
-------- --------
OTHER ASSETS
Deferred tax asset 450 450
Noncurrent assets of affiliate 10 16
---------- ----------
Total other assets 460 466
--------- ---------
TOTAL ASSETS $ 86,967 $ 92,371
======== ========
<FN>
(Continued on the following page)
</FN>
HALLWOOD CONSOLIDATED RESOURCES CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands except Shares)
March 31, December 31,
1998 1997
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 1,956 $ 3,087
Current portion of contract settlement obligation 1,039
Current liabilities of affiliates 5,932 6,881
-------- --------
Total current liabilities 7,888 11,007
-------- -------
NONCURRENT LIABILITIES
Long-term debt 23,989 25,000
Long-term obligations of affiliates 4,852 7,589
Deferred liability 82 89
---------- ----------
Total noncurrent liabilities 28,923 32,678
------- -------
Total liabilities 36,811 43,685
------- -------
COMMITMENTS AND CONTINGENCIES (NOTE 6)
STOCKHOLDERS' EQUITY
Common stock par value $.01; 10,000,000 shares
authorized; 3,007,852 shares issued in 1998 and
2,986,812 shares issued in 1997 30 30
Additional paid-in-capital 81,256 80,111
Accumulated deficit (27,266) (27,581)
Treasury stock - 258,395 shares in 1998 and 259,278 shares in 1997 (3,864) (3,874)
-------- --------
Stockholders' equity - Net 50,156 48,686
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 86,967 $ 92,371
======= =======
<FN>
The accompanying notes are an integral part of the
financial statements.
</FN>
HALLWOOD CONSOLIDATED RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands except per Share data)
For the Three Months Ended
March 31,
1998 1997
REVENUES:
Gas revenue $ 4,312 $ 4,774
Oil revenue 2,745 3,914
Pipeline and other 320 407
Interest income 85 40
--------- ---------
7,462 9,135
------- -------
EXPENSES:
Production operating 2,763 2,515
General and administrative 909 901
Interest 821 596
Depreciation, depletion and amortization 2,531 2,067
------- -------
7,024 6,079
------- -------
INCOME BEFORE INCOME TAXES 438 3,056
------- -------
PROVISION FOR INCOME TAXES:
Current 123 91
------- ---------
NET INCOME $ 315 $ 2,965
======= =======
NET INCOME PER SHARE - BASIC $ .11 $ 1.09
========= ========
NET INCOME PER SHARE - DILUTED $ .11 $ 1.05
========= ========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
2,740 2,718
======= =======
<FN>
The accompanying notes are an integral part of the
financial statements.
</FN>
HALLWOOD CONSOLIDATED RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
For the Three Months Ended
March 31,
1998 1997
OPERATING ACTIVITIES:
Net income $ 315 $ 2,965
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation, depletion and amortization 2,531 2,067
Amortization of deferred loan costs and warrants 50
Noncash interest expense 6 21
Undistributed earnings of affiliates (698) (1,407)
Recoupment of take-or-pay liability (7) (7)
Changes in assets and liabilities provided (used) cash net of noncash
activity:
Accrued oil and gas sales 953 1,147
Due from affiliates (1,057) (409)
Prepaid and other assets (494) (139)
Accounts payable and accrued liabilities (1,131) (772)
------- --------
Net cash provided by operating activities 468 3,466
------- -------
INVESTING ACTIVITIES:
Additions to oil and gas properties (115) (162)
Exploration and development costs incurred (2,221) (1,197)
Distributions received from affiliates 286 286
Other (4)
----------- ----------
Net cash used in investing activities (2,050) (1,077)
------- -------
FINANCING ACTIVITIES:
Exercise of stock options 113
Payments on contract settlement obligation (1,045)
Net cash used in financing activities (932)
--------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (2,514) 2,389
CASH AND CASH EQUIVALENTS:
BEGINNING OF PERIOD 4,492 628
------- -------
END OF PERIOD $ 1,978 $ 3,017
======= =======
<FN>
The accompanying notes are an integral part of the
financial statements.
</FN>
HALLWOOD CONSOLIDATED RESOURCES CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
Hallwood Consolidated Resources Corporation ("HCRC" or the "Company") is a
Delaware corporation engaged in the development, production, sale and
transportation of oil and gas, and in the acquisition, exploration, development
and operation of oil and gas properties. The Company's properties are primarily
located in the Rocky Mountain, Mid-Continent, Greater Permian and Gulf Coast
regions of the United States. The principal objective of the Company is to
maximize shareholder value by increasing its reserves, production and cash flow
through a balanced program of development and high potential exploration
drilling, as well as selective acquisitions.
The interim financial data in the accompanying financial statements are
unaudited; however, in the opinion of management, 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 the Company's December 31, 1997 Annual Report on
Form 10-K.
NOTE 2 - ACCOUNTING POLICIES
Consolidation
The Company accounts for its interest in affiliated oil and gas partnerships and
limited liability companies using the proportionate consolidation method of
accounting. The accompanying financial statements include the activities of the
Company and its pro rata share of the activities of Hallwood Energy Partners,
L.P. ("HEP").
Treasury Stock
At March 31, 1998 and December 31, 1997, the Company owned approximately 19% of
the outstanding units of HEP which owns approximately 46% of the Company's
common stock; consequently, the Company had an interest in 258,395 and 259,278
of its own shares at March 31, 1998 and December 31, 1997, respectively. These
shares are treated as treasury stock in the accompanying financial statements.
Computation of Net Income Per Share
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 requires
restatement of all prior period EPS data presented. HCRC adopted SFAS 128
effective December 31, 1997, and has restated all prior period EPS data
presented to give retroactive effect to the new accounting standard.
Basic income per share is computed by dividing net income by the weighted
average number of common shares outstanding during the periods. Diluted income
per share includes the potential dilution that could occur upon exercise of
outstanding options to acquire common stock, and the effects of the warrants
described in Note 3, computed using the treasury stock method which assumes that
the increase in the number of shares is reduced by the number of shares which
could have been repurchased by the Company with the proceeds from the exercise
of the options (which were assumed to have been made at the average market price
of the common shares during the reporting period). All share and per share
information has been restated to reflect the three-for-one stock split described
in Note 5.
The following table reconciles the number of shares outstanding used in the
calculation of basic and diluted income per share. The warrants, described in
Note 3, have been ignored in the computation of diluted net income because their
inclusion would be anti-dilutive.
Income Shares Per Share
(In thousands except per Share)
For the Quarter Ended March 31, 1998
Net income per share - basic $ 315 2,740 $ .11
====
Effect of Options 81
-------------- ------
Net Income per share - diluted $ 315 2,821 $ .11
======= ===== ====
For the Quarter Ended March 31, 1997
Net income per share - basic $ 2,965 2,718 $1.09
====
Effect of Options 116
------------- ------
Net Income per share - diluted $ 2,965 2,834 $1.05
======= ===== ====
Recently Issued Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income" ("SAFS
130"). SAFS 130 established standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains, and losses) in a full set
of general-purpose financial statements. SFAS 130 requires that all items that
are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. Reclassification of financial
statements for earlier periods provided for comparative purposes is required.
The Company adopted SFAS 130 on January 1, 1998. The Company does not have any
items of other comprehensive income for the three month periods ended March 31,
1998 and 1997. Therefore, total comprehensive income was the same as net income
for those periods.
Reclassifications
Certain reclassifications have been made to the prior amounts to conform to the
classifications used in the current period.
NOTE 3 - DEBT
On December 23, 1997, HCRC sold $25,000,000 of 10.32% Senior Subordinated Notes
("Subordinated Notes") due December 23, 2007 to a financial institution. HCRC
also sold Warrants to the lender to purchase 98,599 shares of Common Stock at an
exercise price of $28.99 per share. The Subordinated Notes bear interest at the
rate of 10.32% per annum on the unpaid balance, payable quarterly. Annual
principal payments of $5,000,000 are due on each of December 23, 2003 through
December 23, 2007.
The proceeds from the Subordinated Notes were allocated to the Subordinated
Notes and to the Warrants based upon the relative fair values of the
Subordinated Notes without the Warrants and of the Warrants themselves at the
time of issuance. The allocated value of the Warrants of $1,032,000 was recorded
as paid-in-capital. The discount on the Subordinated Notes will be amortized
over the term of the Subordinated Notes using the interest method of
amortization.
During 1997, the Company and its banks amended the Company's Credit Agreement to
extend the maturity date to May 31, 1999 and to reduce its borrowing base to
$10,000,000. As of March 31, 1998, the Company had no borrowings against the
credit line. HCRC's unused borrowing base totaled $10,000,000 at May 12, 1998.
When the acquisition of the volumetric production payment described in Note 7 is
consummated, HCRC's borrowing base will increase to $22,000,000.
Borrowings against the credit line bear interest, at the option of the Company,
at either (i) the banks' Certificate of Deposit rate plus from 1.375% to1.875%,
(ii) the Euro-Dollar rate plus from 1.25% to 1.75% or (iii) the higher of the
prime rate of Morgan Guaranty Trust or the sum of one-half of 1% plus the
Federal funds rate, plus .75%. Interest is payable at least quarterly. The
credit facility is secured by a first lien on approximately 80% in value of the
Company's oil and gas properties.
NOTE 4 - STATEMENTS OF CASH FLOWS
Cash paid for interest during the three months ended March 31, 1998 and 1997 was
$645,000 and $402,000, respectively.
NOTE 5 - STOCK SPLIT
During July 1997, the stockholders of HCRC approved an increase in the number of
authorized shares of its Common Stock from 2,000,000 shares to 10,000,000
shares. HCRC also declared a three-for-one split of its outstanding Common
Stock. The stock split was effected by issuing, as a stock dividend, two
additional shares of Common Stock for each share outstanding. The stock dividend
was paid on August 11 to shareholders of record on August 4. All share and per
share information has been restated to reflect the three-for-one stock split.
NOTE 6 - LEGAL PROCEEDINGS
On December 3, 1997, Arcadia Exploration and Production Company ("Arcadia")
filed a Demand for Arbitration with the American Arbitration Association against
Hallwood Consolidated Resources Corporation, Hallwood Energy Partners, L.P.,
E.M. Nominee Partnership Company and Hallwood Consolidated Partners, L.P.
(collectively referred to herein as "Hallwood"), claiming that Hallwood breached
a Purchase and Sale Agreement dated August 25, 1997, between Arcadia and HCRC
and HEP. Arcadia's Demand for Arbitration seeks specific performance of the
agreement which Arcadia claims requires Hallwood to purchase oil and gas
properties from Arcadia for approximately $27 million. HCRC and HEP terminated
the agreement because of environmental and title problems with the properties.
Additionally, Arcadia seeks incidental and special damages, prejudgment interest
and attorneys' fees and costs. Hallwood filed its Answering Statement and
Counterclaim asserting that it properly terminated and/or rescinded the
Agreement and seeking refund of Hallwood's earnest money deposit, prejudgment
interest, attorneys' fees and costs. HCRC's management intends to vigorously
defend the claims asserted by Arcadia and intends to vigorously pursue the
counterclaim against Arcadia. This matter is currently set for hearing before
the arbitrators in May 1998.
On April 23, 1992, a lawsuit was filed in the Chancery Court for New Castle
County, Delaware, styled Tappe v. Hallwood Consolidated Resources Corporation,
Hallwood Consolidated Partners, L. P., Hallwood Oil and Gas, Inc., Hallwood
Energy Partners, L. P., and Hallwood Petroleum, Inc. (C. A. No 12536). The
lawsuit seeks to rescind the conversion of Hallwood Consolidated Partners, L.P.
("HCP") into the Company ("Conversion") and to recover damages in unspecified
amounts. The plaintiff also seeks class certification to represent similarly
situated HCP unitholders. In general, the suit alleges that the defendants
breached fiduciary duties to HCP unitholders by, among other things, proposing
allocation of common stock in the Conversion on a basis that the plaintiff
alleges is unfair, failing to require that the allocation be approved by an
independent third party, causing the costs of proposing the Conversion to be
borne indirectly by the partners of HCP whether or not the Conversion was
completed, and failing to disclose certain matters in the Consent
Statement/Prospectus soliciting consents to the Conversion. The defendants
believe that they fully considered and disclosed all material information in
connection with the Conversion, and they believe that the suit is without merit.
HCRC plans to vigorously defend this case, but because of its early stages,
cannot predict the outcome of this matter or any possible effect an adverse
outcome might have.
The Company is involved in other legal proceedings and claims which have arisen
in the ordinary course of its business and have not been finally adjudicated.
The Company believes that its liability, if any, as a result of such proceedings
and claims will not materially affect its financial condition or operations.
NOTE - 7 SUBSEQUENT EVENT
On May 8, 1998, HCRC signed an agreement to purchase a volumetric production
payment in 34 coal bed methane wells located in La Plata County, Colorado. HCRC
plans to fund its $17,257,000 share of the acquisition price from operating cash
flow and borrowings under its Credit Agreement. The production payment will be
owned by a limited liability company owned equally by HCRC and its affiliate
HEP. The acquisition is scheduled to close at the end of May. HCRC's lenders
have agreed to increase HCRC's borrowing base under its Credit Agreement to
$22,000,000 when the acquisition is consummated.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Liquidity and Capital Resources
Cash Flow
The Company generated $468,000 of cash flow from operating activities during the
first three months of 1998. The other primary cash inflow was $286,000 in
distributions received from affiliates. Cash was primarily used for additions to
property and exploration and development costs of $2,336,000 and for payments on
contract settlement obligation of $1,045,000 for the three months ended March
31, 1998, resulting in a $2,514,000 decrease in cash from $4,492,000 at December
31, 1997 to $1,978,000 at March 31, 1998.
Exploration and Development Projects
Through March 31, 1998, HCRC incurred $2,336,000 in direct property additions
and exploration and development costs. The costs were comprised of approximately
$2,221,000 for domestic exploration and development expenditures and
approximately $115,000 for property acquisitions. HCRC anticipates an active
capital expenditure program during the remainder of 1998. HCRC's 1998 capital
budget has been set at $21,426,000 and will include projects in more than 35
areas, including 164 potential development, exploration and seismic projects. A
description of significant exploration and development projects to date in 1998
follows.
Greater Permian Region
During the first quarter of 1998, HCRC expended approximately $1,385,000 of its
capital budget in the Greater Permian Region located in Texas and Southeast New
Mexico. HCRC spent approximately $220,000 drilling nine development wells and
four exploration wells, and acquiring undeveloped acreage and geological and
geophysical data. Seven (54%) of the wells drilled were successful. A discussion
of several of the larger projects within the Region follows.
HCRC spent approximately $50,000 successfully recompleting four wells in the
Carlsbad/Catclaw Draw areas in Lea, Eddy and Chaves Counties, New Mexico.
In 1997, HCRC acquired 74 square miles of proprietary 3-D seismic data in Jones,
Taylor and Nolan Counties, Texas, in a project area which originated in 1995. In
1997, HCRC drilled 10 exploration wells, seven of which were successful. During
the first quarter of 1998, HCRC continued work in the area by drilling two
exploration wells, one of which is successful. Seven additional exploration
projects are in progress. HCRC incurred costs in this area of approximately
$595,000 in 1998.
In 1997, HCRC purchased an interest in proprietary 3-D seismic data and selected
acreage within an 85 square mile area. During first quarter of 1998, HCRC
attempted completion on one exploration well began in 1997 and drilled one
additional development well. Both wells were unsuccessful. HCRC is currently
participating in the drilling of one exploration well and has incurred
approximately $285,000 in this area in 1998.
HCRC has delayed drilling 16 West Texas Spraberry and Clearfork formation
development wells to permit HCRC to further evaluate the effects of both lower
oil prices and declining drilling costs.
Other projects begun in 1997 in the Greater Permian Region have cost HCRC
approximately $380,000 during 1998.
Rocky Mountain Region
HCRC expended approximately $495,000 of its capital budget in the Rocky Mountain
Region located in Colorado, Montana, North Dakota, Northwest New Mexico and
Wyoming. During first quarter of 1998, HCRC spent approximately $315,000
recompleting two development wells and one exploration well. One well was
successful. A discussion of the larger projects within the Region follows.
HCRC incurred approximately $100,000 on one unsuccessful recompletion attempt in
San Juan County, New Mexico.
In the Lone Tree area of Montana, HCRC drilled one unsuccessful exploration well
for a cost of approximately $205,000.
Development drilling is anticipated to begin on HCRC's Piceance Basin Douglas
Arch properties in the second quarter of 1998. Three of the 16 identified
locations will be drilled in the first segment of this project.
HCRC plans to drill three development wells in Toole County, Montana in the
third quarter. HCRC has a 50% working interest in this project.
Other projects begun in 1997 in the Rocky Mountain Region have cost HCRC
approximately $120,000 during 1998.
On May 8, 1998, HCRC signed an agreement to purchase a volumetric production
payment in 34 coal bed methane wells located in La Plata County, Colorado. HCRC
plans to fund its $17,257,000 share of the acquisition price from operating cash
flow and borrowings under its Credit Agreement. The production payment will be
owned by a limited liability company owned equally by HCRC and its affiliate
HEP. The acquisition is scheduled to close at the end of May. HCRC's lenders
have agreed to increase HCRC's borrowing base under its Credit Agreement to
$22,000,000 when the acquisition is consummated.
Mid-Continent Region
HCRC expended approximately $285,000 of its capital budget in the Mid-Continent
Region located in Oklahoma and Kansas.
HCRC is participating in an exploration prospect in Carter County, Oklahoma.
This project is a 19,000 feet deep multi-formation structural test and is
currently in the completion phase. The drilling costs during first quarter of
1998 were approximately $125,000.
Approximately $35,000 was incurred in 1998 by HCRC for the completion of one
successful exploration well in the Andarko Basin area.
Other
The remaining $171,000 of HCRC's 1998 capital expenditures were devoted
principally to drilling one unsuccessful exploration well in Yolo County,
California and to other miscellaneous projects. HCRC is also participating in
two nonoperated 3-D projects underway in nearby Solano and Colusa Counties.
Drilling is expected to begin in the third quarter on two recently defined
operated exploration projects. HCRC has a 32.5% working interest in a project to
evaluate the Buda, Woodbine and Dexter formations, and a 17.5% working interest
in a project to test the Frio formation.
Financing
On December 23, 1997, HCRC sold $25,000,000 of 10.32% Senior Subordinated Notes
("Subordinated Notes") due December 23, 2007 to a financial institution. HCRC
also sold Warrants to the lender to purchase 98,599 shares of Common Stock at an
exercise price of $28.99 per share. The Subordinated Notes bear interest at the
rate of 10.32% per annum on the unpaid balance, payable quarterly. Annual
principal payments of $5,000,000 are due on each of December 23, 2003 through
December 23, 2007.
The proceeds from the Subordinated Notes were allocated to the Subordinated
Notes and to the Warrants based upon the relative fair values of the
Subordinated Notes without the Warrants and of the Warrants themselves at the
time of issuance. The allocated value of the Warrants of $1,032,000 was recorded
as paid-in-capital. The discount on the Subordinated Notes will be amortized
over the term of the Subordinated Notes using the interest method of
amortization.
During 1997, the Company and its banks amended the Company's Credit Agreement to
extend the maturity date to May 31, 1999 and to reduce its borrowing base to
$10,000,000. As of March 31, 1998, the Company has no borrowings against the
credit line. HCRC's unused borrowing base totaled $10,000,000 at May 12, 1998.
When the acquisition of the volumetric production payment described above is
consummated, HCRC's borrowing base will increase to $22,000,000.
Borrowings against the credit line bear interest, at the option of the Company,
at either (i) the banks' Certificate of Deposit rate plus from 1.375% to1.875%,
(ii) the Euro-Dollar rate plus from 1.25% to 1.75% or (iii) the higher of the
prime rate of Morgan Guaranty Trust or the sum of one-half of 1% plus the
Federal funds rate, plus .75%. Interest is payable at least quarterly. The
credit facility is secured by a first lien on approximately 80% in value of the
Company's oil and gas properties.
Cautionary Statement Regarding Forward Looking Statements
In the interest of providing the Company's stockholders and potential investors
with certain information regarding the Company'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 Company are, to the knowledge and in the judgment of the
officers and directors of the Company, 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 Company'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 Company's oil and gas operations,
the inexact nature of interpretation of seismic and other geological and
geophysical data, imprecision of reserve estimates, the Company's ability to
replace and expand oil and gas reserves, and such other risks and uncertainties
described from time to time in the Company's periodic reports and filings with
the Securities and Exchange Commission. Accordingly, stockholders and potential
investors are cautioned that certain events or circumstances could cause actual
results to differ materially from those projected, estimated or predicted.
Inflation and Changing Prices
Prices
Prices obtained for oil and gas production depend upon numerous factors that are
beyond the control of the Company, 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 1997 and through
the first quarter of 1998. The following table sets forth the weighted average
price received each quarter by the Company and the effects of the hedging
transactions described 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 1997 $23.56 $20.49 $2.64 $2.41
Second quarter 1997 17.85 17.88 1.91 1.87
Third quarter 1997 18.20 18.31 2.09 1.96
Fourth quarter 1997 18.60 18.60 2.72 2.38
First quarter 1998 14.92 15.08 1.98 1.93
The Company 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 amounts paid or received
upon settlement of these contracts are recognized as oil or gas revenue at the
time the hedged volumes are sold.
The following table provides a summary of the Company's outstanding financial
contracts:
Oil
Percent of Direct Contract
Period Production Hedged Floor Price
(per bbl)
Last nine months of 1998 14% $14.57
1999 5% 15.38
Between 30% and 100% of the oil volumes hedged in each year are subject to a
participating hedge whereby HCRC will receive the contract price if the posted
futures price is lower than the contract price, and will receive the contract
price plus 25% of the difference between the contract price and the posted
futures price if the posted futures price is greater than the contract price.
All of the volumes hedged in each year are subject to a collar agreement whereby
HCRC 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 $17.00 to $18.85 per barrel.
Gas
Percent of Direct Contract
Period Production Hedged Floor Price
(per mcf)
Last nine months of 1998 31% $1.91
1999 18% 1.67
2000 9% 1.86
2001 5% 1.53
Between 0% and 37% of the gas volumes hedged in each year are subject to a
collar agreement whereby HCRC 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 price is $2.93 per mcf.
During the second quarter through April 25, 1998, the weighted average oil price
(for barrels not hedged) was approximately $14.25 per barrel and the weighted
average price of natural gas (for mcf not hedged) was approximately $2.05 per
mcf.
Inflation
Inflation is not anticipated to have a material impact on the Company in 1998.
Results of Operations
The following tables are presented to contrast HCRC's revenue, expense and
earnings for discussion purposes. Significant fluctuations are discussed in the
accompanying narrative.
The "direct owned" column represents HCRC's direct royalty and working interests
in oil and gas properties. The "HEP" column represents HCRC's share of the
results of operations of HEP; HCRC owned approximately 19% of the outstanding
limited partner units of HEP during 1997 and 1998.
TABLE OF HCRC EARNINGS FOR MANAGEMENT DISCUSSION
(In thousands except price)
For the Quarter Ended March 31, 1998 For the Quarter Ended March 31, 1997
------------------------------------ ------------------------------------
Direct Direct
Owned HEP Total Owned HEP Total
Gas production (mcf) 1,673 567 2,240 1,470 509 1,979
Oil production (bbl) 146 36 182 153 38 191
Average gas price (per mcf) $ 1.88 $ 2.05 $ 1.93 $ 2.40 $ 2.44 $ 2.41
Average oil price (per bbl) $15.03 $15.30 $15.08 $20.46 $20.63 $20.49
Gas revenue $ 3,151 $ 1,161 $ 4,312 $ 3,531 $ 1,243 $ 4,774
Oil revenue 2,194 551 2,745 3,130 784 3,914
Pipeline and other 183 137 320 267 140 407
Interest income 60 25 85 18 22 40
------ ------ ------- ------- ------- -------
Total revenue 5,588 1,874 7,462 6,946 2,189 9,135
------ ------ ------ ------ ------ ------
Production operating expense 2,182 581 2,763 1,977 538 2,515
General and administrative expense 699 210 909 679 222 901
Interest expense 699 122 821 446 150 596
Depreciation, depletion and amortization 1,939 592 2,531 1,579 488 2,067
------ ------ ------ ------ ------- ------
Total expense 5,519 1,505 7,024 4,681 1,398 6,079
------ ------ ------ ------ ------ ------
Income before Income Taxes 69 369 438 2,265 791 3,056
------- ------ ------ ------ ------- ------
Provision for Income Taxes:
Current 123 123 91 91
------ ------ ------- -------
Net income (loss) $ (54) $ 369 $ 315 $ 2,174 $ 791 $ 2,965
====== ====== ====== ====== ======= ======
First Quarter of 1998 Compared to first Quarter of 1997
Gas Revenue
Gas revenue decreased $462,000 during the first quarter of 1998 as compared with
the first quarter of 1997. The decrease is comprised of a decrease in price from
$2.41 per mcf in 1997 to $1.93 per mcf in 1998 partially offset by an increase
in gas production from 1,979,000 mcf in 1997 to 2,240,000 mcf in 1998. The
increase in production is primarily due to workover procedures performed during
the second quarter of 1997. The effect of the Company's hedging transactions
during the first quarter of 1998 was to decrease the Company's average gas price
from $1.98 to $1.93 per mcf, resulting in a $112,000 decrease in revenue.
Oil Revenue
Oil revenue decreased $1,169,000 during the first quarter of 1998 as compared
with the first quarter of 1997. The decrease in revenue is comprised of a
decrease in oil production from 191,000 barrels in 1997 to 182,000 barrels in
1998 and a decrease in the average oil price from $20.49 per barrel in 1997 to
$15.08 per barrel in 1998. The decrease in production is primarily due to normal
production declines. The effect of HCRC's hedging transactions, as described
under "Inflation and Changing Prices," during the first quarter of 1998, was to
increase the Company's average oil price from $14.92 per barrel to $15.08 per
barrel, resulting in a $29,000 increase in revenue.
Pipeline and Other
Pipeline and other revenue consists of revenue derived from salt water disposal,
incentive and tax credit payments from certain coal bed methane wells and other
miscellaneous items. Pipeline and other revenue decreased $87,000 during the
first quarter of 1998 as compared with the first quarter of 1997 due to
fluctuations in numerous miscellaneous items, none of which are individually
significant.
Interest Income
Interest income increased $45,000 during the first quarter of 1998 as compared
with the first quarter of 1997 due to a higher average cash balance during 1998.
Production Operating Expense
Production operating expense increased $248,000 during the first quarter of 1998
as compared with the first quarter of 1997, primarily as a result of increased
maintenance activity and increased production taxes due to the increase in gas
production as discussed above.
Interest Expense
Interest expense increased $225,000 during the first quarter of 1998 as compared
with the first quarter of 1997 due to a higher outstanding debt during 1998.
Depreciation, Depletion and Amortization Expense
Depreciation, depletion and amortization expense increased $464,000 primarily
due to a higher depletion rate in 1998 resulting from the increase in gas
production previously discussed.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
Reference is made to Item 8 - Note 14 of Form 10-K for the year
ended December 31, 1997 and Note 6 of this Form 10-Q.
ITEM 2 - CHANGES IN SECURITIES
None.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 - SUBMISSION OF MATERS TO A VOTE OF SECURITY HOLDERS
On May 5, 1998, HCRC held its Annual Meeting of Shareholders
at which Anthony J. Gumbiner, William L. Guzzetti, Brian M. Troup,
John R. Isaac, Jr., Jerry A. Lubliner, Bill M. Van Meter and
Hamilton P. Schrauff were elected directors. Following is the
number of votes cast for and votes withheld for each of the
directors:
Name Votes For Votes Withheld
Anthony J. Gumbiner 2,888,498 27,628
William L. Guzzetti 2,887,926 28,200
Brian M. Troup 2,888,516 27,610
John R. Isaac, Jr. 2,887,841 28,285
Jerry A. Lubliner 2,888,134 27,992
Bill M. Van Meter 2,888,134 27,992
Hamilton P. Schrauff 2,888,205 27,921
There were no abstentions or broker non-votes.
ITEM 5 - OTHER INFORMATION
None.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
None.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
HALLWOOD CONSOLIDATED RESOURCES CORPORATION
Date: May 12, 1998 By: /s/Thomas J. Jung
----------------- -----------------------------------
Thomas J. Jung, Vice President
(Chief Financial Officer)