10QSB 1 ssept2001q.txt 9/30/2001 10-QSB 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, 2001 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 Section13 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, 2001: 7,093,150 PART I. FINANCIAL INFORMATION HALLADOR PETROLEUM COMPANY Consolidated Balance Sheet (in thousands)
September 30, December 31, 2001 2000* --------- ----------- ASSETS Current assets: Cash and cash equivalents $ 2,751 $ 2,489 Accounts receivable- Oil and gas sales 624 716 Well operations 277 583 ------ ------ Total current assets 3,652 3,788 ------ ------ Oil and gas properties at cost (successful efforts): Unproved properties 317 313 Prepaid drilling cost 477 Proved properties 24,008 21,597 Less - accumulated depreciation, depletion, amortization and impairment (16,064) (14,934) ------ ------ 8,261 7,453 ------ ------ Oil and gas operator bonds 364 312 Investment in Catalytic Solutions 175 175 Other assets 49 51 ------ ------ $12,501 $11,779 ====== ====== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities $ 525 $ 626 Oil and gas sales payable 286 440 Bank debt 31 ------ ------ Total current liabilities 842 1,066 ------ ------ Bank debt 231 ------ Key employee bonus plan 333 295 ------ ------ Future site restoration-South Cuyama field 283 189 ------ ------ Minority interest 5,755 5,441 ------ ------ Stockholders' equity: Preferred stock, $.10 par value; 10,000,000 shares authorized; no shares 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 (12,844) (13,575) ------ ------ 5,288 4,557 ------ ------ $12,501 $11,779 ====== ====== ------------------------------ *Derived from the Form 10-KSB.
See accompanying notes. HALLADOR PETROLEUM COMPANY Consolidated Statement of Operations (in thousands, except per share amounts)
Nine months ended Three months ended September 30, September 30, 2001 2000 2001 2000 ------ ------ ------ ------ Revenue: Oil $4,025 $4,818 $1,340 $1,660 Gas 2,085 669 324 230 NGLs 266 301 62 113 Interest and other 112 120 34 49 Gain on prospect sale 67 120 ----- ----- ----- ----- 6,555 6,028 1,760 2,052 ----- ----- ----- ----- Costs and expenses: Lease operating 3,024 2,613 933 920 Exploration costs Geological and geophysical 276 256 Dry hole expense 103 283 71 44 Delay rentals 58 51 26 4 Contract termination fee 30 Impairment-Fulton Fuller gas well 436 436 Impairment-Paradox Basin Prospect 99 99 Depreciation, depletion and amortization 702 735 250 216 General and administrative 660 581 205 168 California income taxes 63 56 Purchase of employee stock options 300 Interest 35 80 9 18 ----- ----- ----- ----- 5,510 4,619 2,085 1,626 ----- ----- ----- ----- Income(loss)before minority interest 1,045 1,409 (325) 426 Minority interest (314) (423) 98 (128) ----- ----- ----- ----- Net income (loss) $ 731 $ 986 $ (227) $ 298 ===== ===== ===== ===== Basic net income(loss) per share $ .10 $ .14 $ (.03) $ .04 ===== ===== ===== ===== Diluted net income(loss)per share $ .10 $ .13 $ (.03) $ .04 ===== ===== ===== ===== Basic weighted average shares outstanding 7,093 7,093 7,093 7,093 ===== ===== ===== ===== Diluted weighted average shares outstanding 7,507 7,393 7,093 7,571 ===== ===== ===== =====
See accompanying notes. HALLADOR PETROLEUM COMPANY Consolidated Statement of Cash Flows (in thousands)
Nine months ended September 30, 2001 2000 --------- -------- Net cash provided by operating activities $2,026 $2,051 ----- ----- Cash flows from investing activities: Properties (1,568) (1,085) Other assets (63) (199) Prospect sale 67 120 ----- ----- Net cash used in investing activities (1,564) (1,164) ----- ----- Cash flows from financing activities: Repayment of bank debt (200) (1,000) ----- ----- Net increase (decrease) in cash and cash equivalents 262 (113) Cash and cash equivalents, beginning of period 2,489 1,957 ----- ----- Cash and cash equivalents, end of period $2,751 $1,844 ===== =====
See accompanying notes. HALLADOR PETROLEUM COMPANY 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. Certain amounts have been reclassified to the 2001 presentation. 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 2000 Form 10-KSB. This quarterly report should be read in conjunction with that annual report. HALLADOR PETROLEUM COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION RESULTS OF OPERATIONS YEAR-TO-DATE COMPARISON ----------------------- The table below provides sales data and average prices for the periods.
2001 2000 ------------------------ ---------------------- Sales Average Sales Average Volume Price Revenue Volume Price Revenue ------- ------- ------ ------ ----- ------- Oil - barrels South Cuyama field 161,820 $23.89 $3,866 175,806 $27.29 $4,798 Cox 41-5 5,337 23.46 125 Other 1,272 26.50 34 703 28.11 20 Gas - mcf South Cuyama field 40,592 9.30 377 31,449 3.43 108 Cox 41-5 109,494 8.83 967 Northern California 46,567 8.73 407 90,660 3.07 278 South Texas 22,218 5.25 117 53,186 2.99 159 New Mexico 37,677 4.71 177 39,932 3.03 121 Other 12,836 3.15 40 1,289 2.77 3 NGLs - barrels South Cuyama field 10,037 20.17 202 12,366 18.92 234 New Mexico 3,734 16.77 63 3,724 17.32 65 Other * * 1 * * 2 ---------------- * Not meaningful
Current oil and gas prices for the South Cuyama field are about $17.00 per barrel for oil and $2.87 per MCF for gas. Current gas prices in Northern California are $3.00, South Texas prices are $3.00 and New Mexico prices are $2.50. The table below (in thousands) shows lease operating expenses (LOE) by field.
2001 2000 ---- ---- South Cuyama field: LOE excluding electricity $1,919 $1,859 Electricity 972 624 ----- ----- 2,891 2,483 Northern California 13 26 South Texas 19 23 New Mexico 75 60 Other 26 21 ----- ----- Total $3,024 $2,613 ===== =====
Oil and NGL revenue is down compared to last year due to lower prices and volumes. The increase in gas revenue is due primarily to the Cox 41-5 and to the abnormally high gas prices. LOE increased primarily due to higher electricity costs as set forth in the table above. In January 2001, we purchased from certain employees 177,777 options at a cost of $1.6875 per option (about $300,000), which was recorded as compensation expense. QUARTER-TO-DATE COMPARISON ----------------------- The table below provides sales data and average prices for the periods.
2001 2000 ------------------------ ---------------------- Sales Average Sales Average Volume Price Revenue Volume Price Revenue ------- ------- ------ ------ ----- ------- Oil - barrels South Cuyama field 53,870 $22.79 $1,228 55,664 $29.66 $1,651 Cox 41-5 4,582 23.14 106 Other 233 25.24 6 309 29.39 9 Gas - mcf South Cuyama field 14,336 3.84 55 10,429 4.13 43 Cox 41-5 45,045 3.58 161 Northern California 13,232 2.99 40 19,949 4.44 89 South Texas 5,600 3.33 19 10,178 4.07 41 New Mexico 10,128 2.13 21 14,677 3.76 55 Other 10,999 2.55 28 535 3.36 2 NGLs - barrels South Cuyama field 3,405 13.88 47 4,272 19.86 85 New Mexico 1,192 12.33 15 1,470 18.18 27 Other * * 1 ---------------- * Not meaningful
The table below (in thousands) shows lease operating expenses (LOE) by field.
2001 2000 ---- ---- South Cuyama field: LOE excluding electricity $ 578 $ 658 Electricity 313 224 ---- ---- 891 882 Northern California 5 5 South Texas 5 3 New Mexico 24 28 Other 8 2 ---- ---- Total $ 933 $ 920 ===== =====
The explanations above for the year-to-date comparisons also apply to the quarter-to-date comparisons, except that oil revenue declined due to lower prices. LIQUIDITY AND CAPITAL RESOURCES ------------------------------- Cash on hand, cash flow from operations and bank borrowings are expected to enable us to meet our obligations as they become due during the next several years. THE FOLLOWING DISCUSSION UPDATES THE MD&A CONTAINED IN ITEM 6 OF THE 2000 FORM 10-KSB AND THE TWO DISCUSSIONS SHOULD BE READ TOGETHER. PROSPECT DEVELOPMENT AND EXPLORATION ACTIVITY --------------------------------------------- South Cuyama Field ------------------ During October 2000, we completed a 3-D project on adjoining acreage east of the South Cuyama field (SC Field). The cost of this project was $350,000 to the 100%. We have a 70% WI in this project. The data was evaluated in January 2001 and several drillable prospects were identified. The first exploratory gas well (the Cox 41-5) was drilled in March 2001. Currently, the well is producing 300 MCF per day from a depth of about 3,400 feet. In May 2001, the well began producing oil and is currently producing about 140 barrels per day. We are the operator and own a 70% WI (60% NRI). The cost to drill and complete this well was about $300,000 to the 100%. This well is an important step in validating our 3-D seismic project. We are reviewing our 3-D seismic data to identify other locations to drill. With the high gas prices we received during the second quarter, the revenue from the Cox 41-5 recovered our drilling and seismic costs ($650,000) in less than two months. Because of the California electricity crisis natural gas prices were abnormally high during the first six months of the year. Due to the success of the Cox 41- 5, in April, we sent our gas purchaser a contract termination notice. We were able to cancel the contract prematurely effective April 1, 2001 by paying the purchaser $50,000 ($30,000 net to us). Our new gas contract pays market prices, is month to month, and can be cancelled by either party with 30 days notice. During the second quarter we were selling the gas for as high as $16 per MCF. Currently, the prices are around $3. We estimate the gas reserves for this well to the 100% to be about 1,800,000 MCF (1.8 BCF). The zone we are currently producing has produced over 200,000 MCF and the remaining reserves for this zone is 130,000 MCF. The zone above it has estimated reserves of 1,330,000 MCF and the upper most zone has estimated reserves of 165,000 MCF. Oil reserves are estimated to be 50,000 to 75,000 barrels to the 100%. Eventually, we will move up the hole and produce from the upper zones. We would like to drill an offset well to accelerate production from the upper zones, but these plans are on hold due to low gas prices. Our electricity costs have increased significantly. Last year our average monthly electricity cost in the field was $73,000; currently our monthly electricity costs are double that amount. With all of the current uncertainty and turmoil that exists in the California electricity market, we can provide no assurance as to the timing and nature of the resolution of this crisis. If electricity costs continue to increase, we will have to shut in certain oil wells. We are continuing to develop the proper strategy to optimize the cash flow from the SC Field considering these high electricity costs. Potential Impairment Charge for the South Cuyama Field ------------------------------------------------------ Oil prices have declined 25%. If oil prices continue to decline and if we conclude no improvement in the near future, we may take an impairment charge at year end. The net book value of the South Cuyama field at September 30, 2001 was $6.3 million. Oil prices need to be above $17 in order for us to assign proved reserves to the field. Merlin Prospect of the Sac Basin - Northern California ------------------------------------------------------- This field is located about 70 miles north of Sacramento, California. Equity Oil Company of Salt Lake City, Utah is the operator. Presently, we have two producing gas wells. These wells have an estimated remaining life of four years. We participated in an exploratory dry hole gas well during July 2001. Our share of the dry hole cost was $67,000. No more drilling is planned for this prospect. Our net book value in this prospect is less than $16,000. South Texas - Alleyton ---------------------- This gas field is located about 75 miles west of Houston in Colorado County. Marquee Corporation of Corpus Christi, Texas is the operator. We have a 14% WI (11% NRI) in this field. Presently, we have one producing well remaining. Our net book value in this prospect is less than $30,000. We participated in an exploratory dry hole gas well during April 2001. Our share of the dry hole cost was $36,000. We participated in a successful exploratory gas well during late October located near the Alleyton prospect. We have a 24% WI (17% NRI) before pay-out and an 18% WI (12% NRI) after pay-out. Our share of the costs were $57,000. We estimate the reserves to the 100% to be one BCF of gas. No more drilling is planned for these two prospects. South Texas - Bonus ------------------- We are participating with Forest Oil Company of Denver in a four-well develop- mental prospect in Wharton County, Texas located about 70 miles southwest of Houston. Two of the wells reached total depth during the third quarter and are currently producing about 17,000 MCF/day. Two more wells have reached total depth and are ready for fracting. We have a 5% WI (4% NRI). These wells are expensive, deep (about 14,000 feet) and the estimated costs to drill and complete are $5 million per well. Our share of this prospect, will be in the $1.2 million range. Many of the wells in the area are producing 10,000 MCF per day. Currently, there is litigation surrounding proper title. If we lose the lawsuit, we will recover only our investment through net revenue from successful wells. We are at risk for any dry hole costs. Revenue recorded through September 30 was $10,000. East Texas ---------- This is a new prospect located about 150 miles southeast of Dallas in Nacogdoches County. We participated in an exploratory gas well (the Fulton - Fuller 1H), which was completed in April 2001. The well is currently producing about 200 MCF per day at a price of $2.75. The cost to drill and complete this well to the 100% was about $2,000,000. We have a 25% WI (20% NRI) in this well. The well may be fracted or placed on a compressor in order to increase production. Pure Resources of Midland, Texas is the operator. This well has been a major disappointment for us and during the third quarter we recorded a $436,000 impairment charge. A second exploratory gas well was originally planned to be drilled in late August 2001 in Shelby County, Texas, about 20 miles east from the Fulton - Fuller 1H. El Paso Energy, the operator, now plans to drill the well during first quarter 2002. We will have a 7% WI (6% NRI) in this well. The cost to drill and complete this well to the 100% is about $2 million; our share would be about $150,000. We are reconsidering our participation in this well. San Juan Basin -------------- This gas field is located in the northwest corner of New Mexico in San Juan County. Three development wells were drilled in early spring 2000. We have an interest in 22 wells and are the operator. These wells have long-lived reserves. Our WI in this field ranges from 5%-10% with NRIs between 4%-8%. Our net book value in this prospect is about $120,000. Due to regulators requiring an environmental impact statement, the nine additional development wells planned to be drilled later this year and next year will be delayed until 2002 and 2003. The costs to the 100% to drill and complete these wells are about $700,000 each. Questar, a Salt Lake City company, will be the operator of these wells during the drilling phase. Paradox Basin - Utah --------------------- This prospect, which we have a basis of $200,000, was fully impaired in the third quarter. $100,000 was taken during 1998 and the remaining taken this quarter. Environmental and Regulation ---------------------------- We are directly affected by changing environmental rules and regulations. Although we believe our operations and facilities are in compliance with applicable environmental regulations, risk of substantial cost and liabilities resulting from an unintentional breach of environmental regulations are inherent to oil and gas operations. It is possible that other developments, such as increasingly strict environmental laws, regulations, and enforcement policies or claims for damages could result in significant costs and liability in the future. In January 1999, the California legislature passed a bill, which will increase our operator's bond from $100,000 to $250,000 to be phased in over a five-year period. In addition, an idle-well bill was passed to insure that funds would be available to properly plug and abandon (P&A) California wells upon their depletion. Over the next seven years, we are required to place in an interest-bearing escrow account $500 per year for each idle-well in the South Cuyama field (SC Field) until such well is plugged and abandoned or until $5,000 has been deposited. Installments of $60,000, $68,000 and $58,000 were paid in June 1999, 2000 and 2001, respectively. We estimate that after ten annual installments we will have met our current funding obligation of $700,000 considering the interest to be earned. As the SC Field depletes, and more wells move from the producing category to the idle-well category we will have to make additional annual payments. Presently, there are 280 wells in the SC Field, 140 of which are classified as "idle." During 1999, we began amortizing; using the units-of-production method, our share of the estimated future costs ($1,207,000) to P&A the SC Field's 280 wells. Included in the DD&A expense for YTD 2001 and 2000 was $93,000 and $82,000, respectively, and QTD 2001 and 2000 were $32,000 and $26,000, respectively, associated with these estimated future costs. Washington County, Colorado Gas Plant ------------------------------------- In late February 2001, we were notified by the Colorado Oil and Gas Conservation Commission that we must conduct a site investigation of a gas plant that our predecessor operated 40 years ago. The site investigation discovered no impacts to groundwater and the surface restoration costs were completed at a cost of $10,000. New Accounting Pronouncements ----------------------------- In June 2001, the FASB issued SFAS No. 141, "Business Combinations" and SFAS No. 142 "Goodwill and Other Intangible Assets." These statements prohibit pooling-of-interests accounting for transactions initiated after June 30, 2001, require the use of the purchase method of accounting for all combinations after June 30, 2001, and establish new standards for accounting for goodwill and other intangibles acquired in business combinations. Currently, these pronouncements have no affect on us. In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." This standard is effective for fiscal years beginning after June 15, 2002, and provides accounting requirements for asset retirement obligations associated with tangible long-lived assets. We have not yet determined the effects of this standard on our financial statements but expect it to be material. In October 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets", which supersedes SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". Statement No. 144 also supercedes the accounting and reporting provisions of APB Opinion No. 30 "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." Statement No. 144 is intended to establish one accounting model for long-lived assets to be disposed of by sale and to address significant implementation issues. We will adopt Statement No. 144 on January 1, 2002. We do not expect Statement No. 144 to have a material effect on the consolidated financial statements. PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits - None. (b) No reports on Form 8-K were filed during the quarter. SIGNATURE In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. HALLADOR PETROLEUM COMPANY Date: November 14, 2001 By: /s/VICTOR P. STABIO Victor P. Stabio Chief Executive Officer and Chief Financial Officer Signing on behalf of registrant and as principal financial officer.