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, 2003
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 14, 2003: 7,093,150
PART I - FINANCIAL INFORMATION
Consolidated Balance Sheet
(in thousands)
June 30, December 31,
2003 2002*
--------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 2,943 $ 1,647
Accounts receivable-
Oil and gas sales 783 680
Well operations 262 146
------ ------
Total current assets 3,988 2,473
------ ------
Oil and gas properties, at cost (successful efforts):
Unproved properties 249 247
Proved properties 25,321 25,058
Less - accumulated depreciation,
Depletion, amortization and impairment (19,270) (18,836)
------ ------
6,300 6,469
------ ------
Oil and gas operator bonds 507 417
Investment in Catalytic Solutions 164 164
Other assets 35 38
------ ------
$10,994 $ 9,561
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 1,086 $ 527
Oil and gas sales payable 414 185
------ ------
Total current liabilities 1,500 712
------ ------
Bank debt 251
------ ------
Key employee bonus plan 236 209
------ ------
Future site restoration-South Cuyama Field 954 653
------ ------
Minority interest 4,933 4,763
------ ------
Commitments and contingencies
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 (14,761) (15,159)
------ ------
3,371 2,973
------ ------
$10,994 $ 9,561
====== ======
*Derived from the Form 10-KSB.
See accompanying notes.
Consolidated Statement of Operations
(in thousands)
Six months ended Three months ended
June 30, June 30,
2003 2002 2003 2002
------ ------ ------ ------
Revenue:
Oil $3,828 $2,881 $1,725 $1,559
Gas 835 559 487 302
Realized gain (loss) on crude oil puts 39 (18)
Interest and other 70 25 15 17
----- ----- ----- -----
4,772 3,465 2,209 1,878
----- ----- ----- -----
Costs and expenses:
Lease operating 2,731 2,266 1,494 1,191
Exploration costs 145 47 125 28
Impairment-Fulton Fuller gas well 79 79
Impairment-S.E. Bonus Field 840 840
Depreciation, depletion and
amortization 562 1,346 277 654
General and administrative 585 450 243 217
----- ----- ----- -----
4,023 5,028 2,139 3,009
----- ----- ----- -----
Income (loss) before cumulative effect of
change in accounting principle 749 (1,563) 70 (1,131)
Cumulative effect of change in
accounting principle (181)
----- ----- ----- -----
Income (loss) before minority interest 568 (1,563) 70 (1,131)
Minority interest (170) 469 (21) 339
----- ----- ----- -----
Net income (loss) $ 398 $(1,094) $ 49 $ (792)
===== ===== ===== =====
Income (loss) per share-
basic and diluted:
Before cumulative effect of change in
accounting principle $ .07 $ (.15) $ .01 $ (.11)
Cumulative effect of change in
accounting principle (.02)
----- ----- ----- -----
Net income (loss) $ .05 $ (.15) $ .01 $ (.11)
===== ===== ===== =====
Weighted average shares outstanding-
basic 7,093 7,093 7,093 7,093
===== ===== ===== =====
See accompanying notes.
Consolidated Statement of Cash Flows
(in thousands)
Six months ended June 30,
2003 2002
------ ------
Net cash provided by operating activities $1,548 $1,029
------ -----
Cash flows from investing activities:
Properties (262) (966)
Operator bonds (90) (52)
------ -----
Net cash used in investing activities (352) (1,018)
------ -----
Cash flows from financing activites:
Debt retirement (251)
Cash calls from joint interest owners 351
------
Net cash from financing activities 100
------
Net increase in cash and cash equivalents 1,296 11
Cash and cash equivalents, beginning of period 1,647 2,078
------ -----
Cash and cash equivalents, end of period $ 2,943 $2,089
====== =====
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 2002 Form 10-KSB. This quarterly report should be read in
conjunction with that annual report.
3. In July 2001, the Financial Accounting Standards Board issued SFAS No. 143,
"Accounting for Asset Retirement Obligations." SFAS No. 143 requires
entities to record the fair value of a liability for an asset retirement
obligation in the period in which it is incurred and a corresponding
increase in the carrying amount of the related long-lived asset and is
effective for fiscal years beginning after June 15, 2002. We adopted
SFAS No. 143 on January 1, 2003 and increased our liability for asset
retirement obligations by $264,000 (using an 8% discount rate) and
recorded a cumulative effect of change in accounting principle of $181,000.
For the six months ended June 30, 2003, we recognized $37,000 of accretion
on the liability as a component of depletion expense.
Had SFAS No. 143 been adopted on January 1, 2002, the pro forma net loss
would have been $1,147,000 and the pro forma net loss per share would have
been $(.16) for the six months ended June 30, 2002 and the pro forma asset
retirement obligation at January 1, 2002 would have been $850,000.
4. As allowed in SFAS No. 123, "Accounting for Stock-Based Compensation,"
we continue to apply Accounting Principles Board Opinion (APB) No. 25,
"Accounting for Stock Issued to Employees," and related interpretations
in recording compensation related to our plan. The supplemental
disclosures required by SFAS No. 123, as amended in SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure,"
related to our stock option plan are presented below.
Under SFAS No. 123, compensation cost would be recognized for the fair
value of the employee's option rights. The fair value of each option was
estimated on the date of grant using the Black-Scholes option-pricing model
with the following assumptions for option grants made in 2002 (there were
no grants issued in the first six months of 2003):
2002
-----
Expected option life 10 years
Volatility 120%
Risk-free interest rate 4.14%
Had compensation cost for our stock based compensation plan been based upon
the fair value at the grant dates for awards under the plan consistent with
the method of SFAS No. 123 using the Black-Scholes model, our net income
and earnings per share would have been recorded as the pro forma amounts
indicated below for the six months ended June 30, 2003 and 2002 (in
thousands, except per share data):
2003 2002
----- -----
Net income (loss):
As reported $ 398 $(1,094)
Pro forma 373 (1,127)
Basic and diluted net income (loss) per share:
As reported .05 (.15)
Pro forma .05 (.16)
5. Through mid February 2003, we had never entered into any commodity
derivative agreements since acquiring the SC Field. During mid February
2003 oil prices in the field reached a level of about $36 per barrel.
For the first time we purchased puts on 23,000 barrels of oil for the
month of June 2003 (strike price of $29.00 per barrel) and 16,500 barrels
of oil for the month of July 2003 (average strike price of $30.48 per
barrel). Our total investment was $83,000. At March 31, 2003 the fair
value of these puts was $140,000. During the second quarter we sold the
puts for $122,000. Our net gain from this transaction was $39,000. For
accounting purposes we realized a gain of $57,000 in the first quarter and
in the second quarter we recognized a loss of $18,000.
6. As discussed in previous filings, the SC Field was purchased from ARCO
(Atlantic Richfield which is now part of BP p.l.c.) in May 1990. As part
of the Purchase and Sale Agreement, ARCO agreed to indemnify us for
certain environmental liabilities connected with their 40-year ownership of
the field and gas plant ("ARCO Indemnity"). Part of the gas plant has not
been operational during the past twenty-five years. 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. BP
continues to deny any responsibility.
The costs to abandon and clean up the gas plant area and other oil and gas
areas at the field will be significant. There is a chance, depending on
the negotiations and legal proceedings with BP, that some or all of the
costs could be borne by us. At this time we are unable 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.
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.
2003 2002
Sales Average Sales Average
Volume Price Revenue Volume Price Revenue
------- ------- ------ ------ ----- -------
Oil - barrels
South Cuyama field 130 $28.82 $3,746 135 $20.70 $2,795
Other 5 16.40 82 6 14.33 86
Gas - mcf
South Cuyama field 79 5.56 439 49 2.96 145
San Juan-New Mexico 26 4.57 119 26 1.92 50
Other 45 6.15 277 128 2.84 364
Oil and gas revenue increased due to higher prices as set forth in the
Table above. Decrease in other gas production was due to the significant
Production decline in our South Texas - Bonus field. As previously
disclosed, we took an impairment charge of $840,000 in the second quarter
of 2002 for this field.
Current prices for the South Cuyama field are about $29.42 for oil and
$5.00 for gas and San Juan gas is about $4.40.
The table below (in thousands) shows lease operating expenses (LOE) for
our two primary fields.
2003 2002
---- ----
South Cuyama field:
LOE excluding electricity $1,900 $1,439
Electricity 694 696
----- -----
2,594 2,135
San Juan-New Mexico 78 30
Other 59 101
----- -----
Total $2,731 $2,266
===== =====
LOE in the field increased due to higher operating expenses relating to
the new equipment we had to install in the first quarter of 2003 in order
to remove CO2 from our gas stream. Furthermore, when oil prices are high,
we perform more repair and maintenance in the field compared to when
prices are low (see the table above for 2003 and 2002 average oil prices.)
The increase in exploration costs was due primarily to a late billing for
$64,000 relating to 3-D work performed in the fourth quarter 2002.
The increase in G&A was due to higher 2002 audit and tax fees - $35,000,
accruals for 2003 audit and tax fees - $25,000, higher employee costs -
$32,000, higher legal fees associated with the ARCO Indemnity and SOCAL
negotiations - $24,000, and other minor increases of $19,000.
DD&A decreased due to higher reserve estimates at June 30, 2003 compared
to June 30, 2002. The increase in reserves was due to higher oil prices.
QUARTER-TO-DATE COMPARISON
--------------------------
The table below (in thousands) provides sales data and average prices for
the period.
2003 2002
Sales Average Sales Average
Volume Price Revenue Volume Price Revenue
------- ------- ------ ------ ----- -------
Oil - barrels
South Cuyama field 64 $26.33 $1,685 65 $23.32 $1,516
Other 4 10.00 40 3 14.33 43
Gas - mcf
South Cuyama field 58 5.47 317 23 3.48 80
San Juan-New Mexico 13 4.38 57 13 2.38 31
Other 19 5.95 113 55 3.47 191
The table below (in thousands) shows lease operating expenses (LOE) for
our primary fields.
2003 2002
---- ----
South Cuyama field:
LOE excluding electricity $1,042 $ 752
Electricity 374 377
----- -----
1,416 1,129
San Juan-New Mexico 52 13
Other 26 49
----- -----
Total $1,494 $1,191
===== =====
The explanations above for the year-to-date comparisons also apply to the
quarter-to-date comparisons, other than for G&A.
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 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. At March 31, 2003 we owed $244,000 under this line.
On April 28, 2003 the loan was paid off.
THE FOLLOWING DISCUSSION UPDATES THE MD&A CONTAINED IN ITEM 6 OF THE 2002
FORM 10-KSB AND THE TWO DISCUSSIONS SHOULD BE READ TOGETHER.
PROSPECT DEVELOPMENT AND EXPLORATION ACTIVITY
---------------------------------------------
South Cuyama Field
-------------------
Based on the results of our 3-D project we have identified four
wildcat sites located outside the field boundaries. Also, we have
identified six developmental drilling opportunities within the boundaries
of the field. During July 2003 we drilled three development wells. We
are still in the process of perforating and production testing. It is too
early to assign reserves to these wells, but the results are encouraging.
The wildcat wells outside the field will not be drilled until sometime next
year and no further development drilling is planned for this year.
SOCAL
-----
Currently gas sales in the SC Field are 1,000 MCF per day. Southern
California Gas Company (SOCAL), the pipeline company and our only outlet to
sell gas has imposed a 1,000 MCF per day maximum limit. If it weren't for
this limit, we believe we could sell 1,800 MCF per day. If we are unable to
sell more gas, we will have to curtail our exploration and development plans.
We have been negotiating with SOCAL to increase the capacity from 1,000 MCF
per day to 3,000 MCF per day. We should know in the next 30 days the results
of these negotiations.
ARCO Indemnity
--------------
As discussed in previous filings, the SC Field was purchased from ARCO
(Atlantic Richfield which is now part of BP p.l.c.) in May 1990. As part of
the Purchase and Sale Agreement, ARCO agreed to indemnify us for certain
environmental liabilities connected with their 40-year ownership of the field
and gas plant ("ARCO Indemnity"). Part of the gas plant has not been
operational during the past twenty-five years. 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. BP continues
to deny any responsibility.
The costs to abandon and clean up the gas plant area and other oil and gas areas
at the field will be significant. There is a chance, depending on the
negotiations and legal proceedings with BP, that some or all of the costs could
be borne by us. At this time we are unable 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.
San Juan Basin - New Mexico
---------------------------
Two successful development gas wells were drilled during April. In July and
August, we drilled three more successful development gas wells. These five
wells cost about $3 million to the 100%. We have an approximate 10% WI in
these five wells. We expect to assign proved developed gas reserves to the
100% of between 1 BCF and 1.5 BCF per well. Our net revenue interest in these
wells is about 6%. One more development gas well is planned before the end of
the year and that will conclude our development activity in this area.
Crude Oil Put Options
---------------------
Through mid February 2003, we had never entered into any commodity derivative
agreements since acquiring the SC Field. During mid February 2003 oil prices
in the field reached a level of about $36 per barrel. For the first time we
purchased puts on 23,000 barrels of oil for the month of June 2003 (strike
price of $29.00 per barrel) and 16,500 barrels of oil for the month of July
2003 (average strike price of $30.48 per barrel). Our total investment was
$83,000. At March 31, 2003 the fair value of these puts was $140,000.
During the second quarter we sold the puts for $122,000. Our net gain from
this transaction was $39,000. For accounting purposes we realized a gain of
$57,000 in the first quarter and in the second quarter we recognized a loss
of $18,000.
Predecessor Entity
------------------
Over the past 12 years we have paid about $200,000 to properly plug and abandon
12 or so sites which were previously plugged and abandoned by Kimbark Oil & Gas
Company, our predecessor entity. For the six months ended June 30, 2003 and
2002, we have spent less than $2,000 for these type of costs. We do not expect
any more notices from state regulatory jurisdictions regarding improperly P&A
wells, but it is possible that there could be more.
SFAS No. 143 - "Accounting for Asset Retirement Obligations"
------------------------------------------------------------
In July 2001, the Financial Accounting Standards Board issued SFAS No. 143,
"Accounting for Asset Retirement Obligations." SFAS No. 143 requires entities
to record the fair value of a liability for an asset retirement obligation in
the period in which it is incurred and a corresponding increase in the carrying
amount of the related long-lived asset and is effective for fiscal years
beginning after June 15, 2002. We adopted SFAS No. 143 on January 1, 2003 and
increased our liability for asset retirement obligations by $264,000 (using an
8% discount rate) and recorded a cumulative effect of change in accounting
principle of $181,000. For the six months ended June 30, 2003, we
recognized $37,000 of accretion on the liability as a component of depletion
expense.
There are no other significant changes or developments to report from what we
disclosed in the 2002 Form 10-KSB.
ITEM 3. CONTROLS AND PROCEDURES
We maintain a system of disclosure controls and procedures that are designed
for the purposes of ensuring that information required to be disclosed in our
SEC reports is recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms, and that such information is
accumulated and communicated to our CEO as appropriate to allow timely
decisions regarding required disclosure.
As of the end of the period covered by this report, we have carried out an
evaluation, under the supervision and with the participation of our CEO of the
effectiveness of the design and operation of our disclosure controls and
procedures. Based upon that evaluation, our CEO, who is also our CFO, concluded
that our disclosure controls and procedures are effective for the purposes
discussed above. There have been no significant changes in our internal
controls or in other factors that could significantly affect these controls
subsequent to the date of the evaluation.
PART II-OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
31 - SOX 302 Certification
32 - SOX 906 Certification
(b) Form 8-K dated June 27, 2003 - Item 4. Change in Registrant's Certifying
Accountant.
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 14, 2003 By: /S/VICTOR P. STABIO
Chief Executive Officer and
Chief Financial Officer
Signing on behalf of registrant
and as principal financial officer.