December 31, 2005 Form 10-KSB for Hallador Petroleum Company
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D. C. 20549
FORM
10-KSB
[
x
]
|
ANNUAL
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
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|
For
the fiscal year ended: December
31, 2005
|
[
]
|
TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF
1934
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|
|
|
Commission
file number: 0-14731
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|
|
|
HALLADOR
PETROLEUM COMPANY
|
COLORADO
(State
of incorporation)
|
|
84-1014610
(IRS
Employer Identification No.)
|
|
|
|
1660
Lincoln Street, Suite 2700, Denver, Colorado
(Address
of principal executive offices)
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|
80264-2701
(Zip
Code)
|
|
|
|
Issuer's
telephone number: 303.839.5504
|
|
Fax:
303.832.3013
|
Securities
registered under Section 12(b) of the Exchange Act:
NONE
Securities registered under Section 12(g)
of
the Exchange Act: Common Stock, $.01 par value
Check
whether the issuer is not required to file reports pursuant to Section 13
or
15(d) of the Exchange Act. [ ]
Check
whether the issuer (1) filed all reports required to be filed by Section
13 or
15(d) of the Exchange Act during the past 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 [
]
Check
if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained,
to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes [ ] No [x]
Our
revenue from continuing operations for the year ended December 31, 2005 was
about $1.1 million.
At
April 4, 2006, we had 12,168,135 shares outstanding and the aggregate market
value of such shares held by non-affiliates was about $4 million based on
a
closing price of $4.10.
DOCUMENTS
INCORPORATED BY REFERENCE: NONE
ITEM
1. DESCRIPTION OF BUSINESS
General
Development of Business
Hallador
Petroleum Company (Hallador), a Colorado corporation, was organized by our
predecessor in 1949.
About
nine years ago, Yorktown Energy Partners II and affiliates (Yorktown) invested
$5,025,000 in Hallador Petroleum, LLP, a newly formed limited liability limited
partnership, (the "Partnership"). We are the general partner and received
a 70% interest in the partnership in return for contributing our net assets
and
Yorktown representing the limited partners, received a 30% interest for its
$5,025,000 cash contribution. During the third quarter of 2005, we
purchased the limited partners interest in the Partnership, and for accounting
purposes the Partnership no longer exists and, as a result, there is no longer
a
minority interest caption on our balance sheet. Prior to this transaction
we, as general partner, consolidated the activity of the Partnership and
presented the 30% limited partners’ interest as a minority interest.
On August 10, 2004, we entered into an
agreement with E&B Natural Resources Management Corporation (a private
company) to sell all of our interest in the South Cuyama field and adjacent
exploration areas, all located in Santa Barbara County, California, for $23
million; consisting of $19.5 million in cash and an interest bearing (3.5%)
note
of $3.5 million due on September 30, 2005, which was paid. Closing
occurred on September 30, 2004 and we recorded a pre-tax gain of about $14
million. Results from the South Cuyama field have been presented as
discontinued operations in the accompanying Consolidated Statement of
Operations.
Due to the sale, our board of directors and
the
Executive Committee of the Partnership, voted to discontinue new partnership
operations effective October 1, 2004. At that time, the
Partnership's assets consisted of cash, the $3.5 million note receivable, oil
and gas properties in New Mexico and Texas, and other miscellaneous
assets. On October 1, 2004, our board of directors and the Executive
Committee of the Partnership, valued the oil and gas properties in New Mexico
and Texas and the other miscellaneous assets at $4 million. On May 6, 2005
we
made a cash distribution of about $5.2 million to the limited partners.
During the third quarter 2005, we purchased the limited partners' interest
in
the Partnership for about $1.2 million and made a final cash distribution to
the
limited partners of $1.6 million. After these transactions, about $1.7
million remained in the minority interest account and was recorded as a
reduction in our accumulated deficit account.
In late March 2005, we invested $325,000 for
a
29% interest in a newly formed entity called COALition Energy, LLC (CELLC)
to
pursue coal opportunities in the United States. Some of our officers and
directors also invested in CELLC.
We have concluded to deemphasize our oil and
gas operations and concentrate our future efforts in the coal business.
With that in mind, the following events have occurred:
1. In early January 2006, we
signed a Letter of Intent with Sunrise Coal, LLC (Sunrise) in order to effect
a
reorganization/merger between Hallador and Sunrise, a private company not
affiliated with the Yorktown group of companies. We are working on a
formal agreement which we hope to execute sometime in the second quarter 2006.
Upon closing, it is expected that our existing shareholders will own about
52%
and the Sunrise shareholders will own about 48% of the new company.
CELLC brought us the Sunrise deal and, upon
closing, they will receive a finders
fee, stock and warrants in the new company.
During the first quarter of 2006, we loaned
Sunrise $7 million in order for
Sunrise to begin development of their second coal mine (the "Carlisle mine").
Their Howesville mine began producing coal in November 2005.
Both mines are located in Indiana. During the second quarter of
2006, Sunrise expects to enter into a $30 million line-of- credit with two
Indiana banks, at which time our $7 million will be repaid. We have agreed
to guarantee this $30 million line-of-credit.
2. In late February 2006, we
sold 3,181,816 shares for $2.20 per share (about $7 million) to our existing
shareholders. The proceeds will provide working capital for the Sunrise
transaction.
With regards to our oil and gas business, the
following events have occurred:
1. In August 2005, we began
negotiations to purchase from Yorktown Energy Partners II, LP its 32% interest
in Savoy Energy LLP, a private company engaged in the oil and gas business
primarily in the State of Michigan. A purchase price of $4.1 million was
agreed upon and closing occurred on December 31, 2005. On December 20,
2005 we sold about 1,893,000 shares of our common stock to Yorktown Energy
Partners VI LP at $2.20 per share (about $4.1 million). We will account
for our interest in Savoy using the equity method of accounting.
2. In December 2005, we sold
substantially all of our interest in our North Dakota properties for about
$1.6
million, which was our original investment; accordingly, no gain or loss was
recognized.
3. In late March 2006, we signed
a letter-of-intent with Approach Resources Inc., to sell them all our interests
in our Albany Shale prospect located in Kentucky. If we close this
transaction, we expect to recognize a gain of about $600,000 and our cash
proceeds will be about $3.3 million. Approach Resources Inc., based in Fort
Worth, Texas, has an affiliation with the Yorktown group of companies.
Our
office is located at 1660 Lincoln Street, Suite 2700, Denver, Colorado 80264,
phone 303.839.5504, fax 303.832.3013. We have no website.
Until
we close the Sunrise deal, there is no need to discuss the coal business and
the
rest of this discussion will be about our oil and gas operations.
We
operate oil and natural gas properties for our own account and for the account
of others. We also review and evaluate producing oil and natural gas
properties, companies, or other entities, which meet certain guidelines for
acquisition purposes. Occasionally, we engage in the trading and
acquisition of non-producing oil and gas mineral leases and fee-simple
minerals.
Markets
Our
products are sold to various purchasers in the geographic area of the
properties. Natural gas, after processing, is distributed through
pipelines. Oil and natural gas liquids (NGLs) are distributed through
pipelines or hauled by trucks. The principal uses for oil and natural gas
are heating, manufacturing, power, and transportation.
Competition
The
oil and gas industry is highly competitive. We encounter competition from
major and independent oil companies in acquiring economically desirable
producing properties, drilling prospects, and even the equipment and labor
needed to drill, operate and maintain our properties. Competition is
intense with respect to the acquisition of producing and partially developed
properties. We compete with companies having financial resources and
technical staffs significantly larger than our own. We do not own any refining
or retail outlets and have minimal control over the prices of our
products. Generally, higher costs, fees and taxes assessed at the producer
level cannot be passed on to our customers.
We
also face competition from imported products as well as alternative sources
of
energy such as coal, nuclear, hydro-electric power, and a growing trend toward
solar. We could incur delays or curtailments of the purchase of our available
production. We may also encounter increasing costs of production and
transportation while sale prices remain stable or decline. Any of these
competitive factors could have an adverse effect on our operating results.
Environmental
and Other Regulations
Our
operations are affected in varying degrees by federal, state, regional and
local
laws and regulations, including, but not limited to, laws governing allowable
rates of production, well spacing, air emissions, water discharges, endangered
species, marketing, prices and taxes. We are further affected by changes
in such laws and by constantly changing administrative regulations.
Most
natural gas pricing is presently deregulated and the remaining regulation has
no
material impact on our prices. We cannot predict the long-term impact of
future natural gas price regulation or deregulation.
We
are subject to various federal, state, regional and local laws and regulations
relating to discharge of materials into, and protection of, the
environment. These laws and regulations may, among other things, impose
liability on the owner or the lessee for the cost of pollution clean-up
resulting from operations, subject the owner or lessee to liability for
pollution damages, require suspension or cessation of operations in affected
areas or impose restrictions on injection into subsurface aquifers that may
contaminate groundwater. Such regulation has increased the resources
required in, and costs associated with, planning, designing, drilling,
installing, operating and abandoning our oil and natural gas wells and other
facilities.
We
have and will continue to make expenditures to comply with these requirements,
which we believe are necessary business costs. Although environmental
requirements do have a substantial impact upon the energy industry, generally
these requirements do not appear to affect us any differently or to any greater
or lesser extent than other companies.
Although
we are not fully insured against all environmental and other risks, we maintain
insurance coverage, which we believe, is customary in the industry.
During
2005, the cost to comply with these recurring environmental regulations were
not
significant to our continuing operations and are not expected to be in the
foreseeable future.
To
the extent these environmental expenditures reduce funds available for
increasing our reserves of oil and natural gas, future operations could be
adversely impacted. Despite the fact that all of our competitors have to
comply with similar regulations, many are much larger and have greater resources
with which to deal with these regulations.
Other
We
have
no significant patents, trademarks, licenses, franchises or
concessions.
The
oil business is not generally seasonal in nature; although unusual weather
extremes for extended periods may increase or decrease demand. Natural gas
prices tend to increase in the fall and winter months and to decrease in the
spring and summer.
We
have four full-time employees and two part-time employees. When needed we
also engage consulting petroleum engineers, environmental professionals,
geologists, geophysicists, landmen, accountants and attorneys on a fee
basis.
ITEM
2. DESCRIPTION OF PROPERTY
Location
and General Character
Our
primary operating property is in the San Juan Basin, located in the northwest
corner of New Mexico.
We
hold
our working interests in oil and natural gas properties either through
recordable assignments, leases, or contractual arrangements such as operating
agreements. Consistent with industry practices, we do not make a detailed
examination of title when we acquire undeveloped acreage. Title to such
properties is examined by legal counsel prior to commencement of drilling
operations. This method of title examination is consistent with industry
practices.
In
the acquisition and operation of oil and natural gas properties, burdens such
as
royalty, overriding royalty, liens incident to operating agreements, liens
by
taxing authorities, as well as other burdens and minor encumbrances are
customarily created. We believe that no such burdens materially affect the
value
or use of our properties.
Savoy's
oil and gas properties are located primarily in the State of Michigan.
Savoy's condensed financial statements are presented in Note 5 to our financial
statements and Savoy's condensed oil and gas reserve information is presented
in
Note 6 to our financial statements.
Proved
Oil and Gas Reserves
Information
concerning our reserve estimates is set forth in Note 6 to the consolidated
financial statements. Our reserve estimates were prepared by a
sole-proprietor consulting petroleum engineer and Savoy's reserve estimates
were
prepared by Netherland, Sewell & Associates. All of our and Savoy's
reserves are located onshore.
Sales
and Price Data
See
Item 6 – MD&A
Producing
Wells
As
of
April 4, 2006, we had a working interest in 32 gross (3 net) gas
wells.
Leasehold
Interests
The
following table sets forth our gross and net acres of undeveloped oil and
gas
leases as of April 4, 2006:
|
|
Gross
|
|
Net
|
|
|
|
|
|
|
|
|
Kentucky
|
66,279
|
|
65,903
|
|
|
Montana
|
34,474
|
|
28,854
|
|
|
North
Dakota
|
812
|
|
121
|
|
|
Wyoming
|
44,324
|
|
36,784
|
|
|
Other
|
238
|
|
25
|
|
|
Total
|
146,127
|
|
131,687
|
|
Drilling
Activity - Continuing Operations
During
2005, we drilled two development gas wells, the Horton 1C and the Horton 1D,
located in the San Juan Basin. We have about a 6% WI in each well.
Nothing
has been drilled so far in 2006.
During
2004, there was no drilling activity.
ITEM
3. LEGAL PROCEEDINGS: None
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
None
PART
II
ITEM
5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES
Our
common stock is traded on the OTC Bulletin Board under the symbol “HPCO”.
The following table sets forth the high and low sales price for the periods
indicated:
|
|
High
|
|
Low
|
|
2006
|
|
|
|
|
|
(January
1 through April 4, 2006)
|
$
|
4.10
|
$
|
3.10
|
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
First
quarter
|
|
2.15
|
|
2.10
|
|
Second
quarter
|
|
3.40
|
|
1.75
|
|
Third
quarter
|
|
8.00
|
|
2.06
|
|
Fourth
quarter
|
|
3.99
|
|
2.00
|
|
|
|
|
|
|
|
2004
|
|
|
|
|
|
First
quarter
|
|
1.55
|
|
1.15
|
|
Second
quarter
|
|
5.15
|
|
1.35
|
|
Third
quarter
|
|
3.00
|
|
2.10
|
|
Fourth
quarter
|
|
3.05
|
|
2.10
|
|
|
|
|
|
|
|
During
the last two years no dividends were paid. We have no present intention to
pay any dividends in the foreseeable future.
At
April 4, 2006 there were 393 holders of record of our common stock and the
last
recorded sales price was $4.10.
ITEM
6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION
Overview
Our
consolidated financial statements should be read in conjunction with this
discussion. Our primary operating property is in the San Juan Basin,
located in the northwest corner of New Mexico. Due to the sale of the
South Cuyama field in 2004, as discussed below, we are engaged in the
exploration, development and production of oil and natural gas in the Rocky
Mountain region. We also have a 32% equity interest in an oil and gas
company which has operations in Michigan. We have concluded to deemphasize
our oil and gas operations and concentrate our future efforts in the coal
business.
What
follows is a timeline that tells where we have been and where we plan to
go.
About
nine years ago, Yorktown Energy Partners II and affiliates (Yorktown) invested
$5,025,000 in Hallador Petroleum, LLP, a newly formed limited liability limited
partnership, (the "Partnership"). We are the general partner and received
a 70% interest in the partnership in return for contributing our net assets
and
Yorktown representing the limited partners, received a 30% interest for its
$5,025,000 cash contribution. During the third quarter of 2005, we
purchased the limited partners interest in the Partnership, and for accounting
purposes the Partnership no longer exists and, as a result, there is no longer
a
minority interest caption on our balance sheet. Prior to this transaction
we, as general partner, consolidated the activity of the Partnership and
presented the 30% limited partners’ interest as a minority interest.
On August 10, 2004, we entered into an
agreement with E&B Natural Resources Management Corporation (a private
company) to sell all of our interest in the South Cuyama field and adjacent
exploration areas, all located in Santa Barbara County, California, for $23
million; consisting of $19.5 million in cash and an interest bearing (3.5%)
note
of $3.5 million due on September 30, 2005, which was paid. Closing
occurred on September 30, 2004 and we recorded a pre-tax gain of about $14
million. Results from the South Cuyama field have been presented as
discontinued operations in the accompanying Consolidated Statement of
Operations; revenue and expenses before the minority interest were about $7
million and $5 million, respectively for 2004.
Due to the sale, our board of directors and
the
Executive Committee of the Partnership, voted to discontinue new partnership
operations effective October 1, 2004. At that time, the
Partnership's assets consisted of cash, the $3.5 million note receivable, oil
and gas properties in New Mexico and Texas, and other miscellaneous
assets. On October 1, 2004, our board of directors and the Executive
Committee of the Partnership, valued the oil and gas properties in New Mexico
and Texas and the other miscellaneous assets at $4 million. On May 6, 2005
we
made a cash distribution of about $5.2 million to the limited partners.
During the third quarter 2005, we purchased the limited partners' interest
in
the Partnership for about $1.2 million and made a final cash distribution to
the
limited partners of $1.6 million. After these transactions, about $1.7
million remained in the minority interest account and was recorded as a
reduction in our accumulated deficit account.
In late March 2005, we invested $325,000 for
a
29% interest in a newly formed entity called COALition Energy, LLC (CELLC)
to
pursue coal opportunities in the United States. Some of our officers and
directors also invested in CELLC.
Significant
Transactions
1. In early January 2006, we
signed a Letter of Intent with Sunrise Coal, LLC (Sunrise) with the intent
to
effect a reorganization/merger between Hallador and Sunrise a private company
not affiliated with the Yorktown group of companies. We are working on a
formal agreement which we hope to execute sometime in the second quarter 2006.
Upon closing, it is expected that our existing shareholders will own about
52%
and the Sunrise shareholders will own about 48% of the new company.
CELLC brought us the Sunrise deal and, upon
closing, they will receive a finders
fee, stock and warrants in the new company.
During the first quarter of 2006, we loaned
Sunrise $7 million in order for
Sunrise to begin development of their second coal mine (the "Carlisle
mine"). Their Howesville mine began producing coal in November 2005.
Both mines are located in Indiana. During the second quarter of 2006,
Sunrise expects to enter into a $30 million line-of- credit with two Indiana
banks, at which time our $7 million will be repaid. We have agreed to
guarantee this $30 million line-of-credit.
2. In late February 2006, we
sold 3,181,816 shares for $2.20 per share (about $7 million) to our
existing shareholders. The proceeds were used to make the bridge loan
discussed above.
With regards to our oil and gas business, the
following events have occurred:
1. In August 2005, we began
negotiations to purchase from Yorktown Energy Partners II, LP its 32% interest
in Savoy Energy LLP, a private company engaged in the oil and gas business
primarily in the State of Michigan. A purchase price of $4.1 million was
agreed upon and closing occurred on December 31, 2005. On December 20,
2005 we sold about 1,893,000 shares of our common stock to Yorktown Energy
Partners VI, L.P. at $2.20 per share (about $4.1 million). We will
account for our interest in Savoy using the equity method of accounting.
2. In December 2005, we sold
substantially all of our interest in our North Dakota properties for about
$1.6
million, which was our original investment; accordingly, no gain or loss was
recognized.
3. In late March 2006, we signed
a letter-of-intent with Approach Resources Inc., to sell them all our
interests in our Albany Shale prospect located in Kentucky. If we close
this transaction, we expect to recognize a gain of about $600,000 and our cash
proceeds will be about $3.3 million. Approach Resources Inc., based in
Fort Worth, Texas, has an affiliation with the Yorktown group of
companies.
Our
profitability in any particular accounting period will be directly related
to: (i) prices, (ii) production, (iii) lifting costs, and (iv) exploration
activities. Accordingly, operating results will fluctuate from period to
period based on these factors, among others.
What follows is a discussion of our primary operating
area.
San
Juan Basin
This
gas
field is located in the northwest corner of New Mexico in San Juan County.
We have an interest in 28 wells and are the operator. These wells have
long-lived reserves. Our WI in this field ranges from 5%-15% with NRIs between
5%-13%. At December 31, 2005, our net book value in this prospect was
about $600,000. We assigned proved developed gas reserves to this field of
about 1.3 BCF to our interest.
Investments
Made In 2005
In
December 2005, we sold substantially all of our interest in North Dakota for
$1.6 million which was our original cost, and accordingly, no gain or loss
was
recognized.
Coal
In
late
March 2005, we invested $325,000 for a 29% interest in a newly formed entity
called COALition Energy, LLC (CELLC). CELLC was formed to pursue coal
investments. Mr. Stabio, Mr. Dietler, Mr. David Hardie and Mr. Steven
Hardie, of our board of directors, also invested in CELLC on the same terms
as
we did, and collectively they own about 14%. Kestrel Energy
Partners, which Yorktown Energy Partners, LLC, has invested in, has a 20%
interest in CELLC. We provide offices and administrative services for
CELLC. Gerald Schissler, CEO, age 61 and Jerry Vaninetti, COO, age 56,
both of which have extensive experience in the coal industry are contract
employees of CELLC. At payout, these two individuals, will each earn a 10%
interest in CELLC.
As
discussed above, CELLC will receive a finders fee upon the closing of the
Sunrise deal.
Albany Shale Gas Lease Play
During
2005, we have invested about $2.8 million in this wildcat gas lease play located
in Western Kentucky. To date we have leased about 65,000 acres. Over
80% of the acreage is held under five-year leases with the right to extend
for
another five years by paying $2 per acre per year. As discussed above, we
hope to sell this prospect to Approach Resources, Inc. sometime in April
2006. Under the letter of intent, Approach is to drill and complete three
exploratory gas wells at no cost to us, other than minimal acreage
costs. Upon completion we will have a one third (1/3) interest in
each well and have the right to repurchase a one third (1/3) interest in future
drilling prospects at the ground floor cost.
Liquidity
and Capital Resources
To
date, we have incurred significant accounting and legal fees ($150,000) in
connection with the Sunrise deal and such fees will continue until closing
occurs. At December 31, 2005, we capitalized $21,000 in such costs, and if
closing does not occur, such costs will be expensed.
Cash
and cash to be provided from operations are expected to enable us to meet our
obligations as they become due during the next several years.
We have no bank debt, no special purpose
entities and no off-balance sheet arrangements.
As discussed above, we have entered into
significant related party transactions with the Yorktown group of
companies. Yorktown and its affiliates currently own about 54% of our
common stock and represents one of the five seats on our board.
Results
Of Continuing Operations
The table below provides sales data and average
prices for the period.
|
2005
|
|
2004
|
|
Sales
Volume
|
|
Average
Price
|
|
Revenue
|
|
Sales
Volume
|
|
Average
Price
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas-mcf
|
|
|
|
|
|
|
|
|
|
|
|
San
Juan
|
62,515
|
$
|
10.81
|
$
|
675,800
|
|
68,500
|
$
|
7.66
|
$
|
524,700
|
Other
|
41,000
|
|
8.20
|
|
336,200
|
|
48,480
|
|
6.13
|
|
297,200
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil-barrels
|
|
|
|
|
|
|
|
|
|
|
|
San
Juan
|
110
|
|
49.09
|
|
5,400
|
|
105
|
|
28.58
|
|
3,000
|
Other
|
1,565
|
|
54.31
|
|
85,000
|
|
2,030
|
|
39.41
|
|
80,000
|
Revenue increased due to higher prices.
The higher prices more than offset the decline
in production as indicated
above. San Juan natural gas is sold at an index price that is set at the
first of every month and remains in effect for the entire month. Our San
Juan March 2006 price is about $7.26 per MCF.
Interest
income increased due to investing the proceeds from the sale that occurred
in
September 2004.
General
and administrative expenses declined due to the termination of two employees
after the California property sale, and salary reductions in the Denver
office. Our CEO's salary was reduced 26% and certain other employees'
salaries were reduced 10%.
Critical
Accounting Policies and Estimates
We
believe the following critical accounting policies affect our more significant
judgments and estimates used in the preparation of our financial
statements.
Successful Efforts Method of
Accounting
We account for our exploration and development
activities utilizing the successful efforts method of accounting. Under this
method, costs of productive exploratory wells, development dry holes and
productive wells and undeveloped leases are capitalized. Oil and gas lease
acquisition costs are also capitalized. Exploration costs, including personnel
costs, certain geological and geophysical expenses and delay rentals for oil
and
gas leases, are charged to expense as incurred. Exploratory drilling costs
are
initially capitalized, but charged to expense if and when the well is determined
not to have found reserves in commercial quantities. The sale of a partial
interest in a proved property is accounted for as a cost recovery and no gain
or
loss is recognized as long as this treatment does not significantly affect
the
unit-of-production amortization rate. A gain or loss is recognized for all
other
sales of producing properties.
The application of the successful efforts
method of accounting requires managerial judgment to determine the proper
classification of wells designated as developmental or exploratory which will
ultimately determine the proper accounting treatment of the costs incurred.
The
results from a drilling operation can take considerable time to analyze and
the
determination that commercial reserves have been discovered requires both
judgment and industry experience. Wells may be completed that are assumed to
be
productive and actually deliver oil and gas in quantities insufficient to be
economic, which may result in the abandonment of the wells at a later date.
Wells are drilled that have targeted geologic structures that are both
developmental and exploratory in nature and an allocation of costs is required
to properly account for the results. The evaluation of oil and gas
leasehold acquisition costs requires managerial judgment to estimate the fair
value of these costs with reference to drilling activity in a given area.
Drilling activities in an area by other companies may also effectively condemn
leasehold positions.
The
successful efforts method of accounting can have a significant impact on the
operational results reported when we enter a new exploratory area in hopes
of
finding an oil and gas field that will be the focus of future development
drilling activity. The initial exploratory wells may be unsuccessful and will
be
expensed. Seismic costs can be substantial which will result in additional
exploration expenses when incurred.
Reserve Estimates
Our estimates of oil and gas reserves, by
necessity, are projections based on geologic and engineering data, and there
are
uncertainties inherent in the interpretation of such data as well as the
projection of future rates of production and the timing of development
expenditures. Reserve engineering is a subjective process of estimating
underground accumulations of oil and gas that are difficult to measure. The
accuracy of any reserve estimate is a function of the quality of available
data,
engineering and geological interpretation and judgment. Estimates of
economically recoverable oil and gas reserves and future net cash flows
necessarily depend upon a number of variable factors and assumptions, such
as
historical production from the area compared with production from other
producing areas, the assumed effects of regulations by governmental agencies
and
assumptions governing future oil and gas prices, future operating costs,
severance taxes, development costs and workover costs, all of which may in
fact
vary considerably from actual results. The future drilling costs associated
with
reserves assigned to proved undeveloped locations may ultimately increase to
an
extent that these reserves may be later determined to be uneconomic. For these
reasons, estimates
of the economically recoverable quantities
of
oil and gas attributable to any particular group of properties, classifications
of such reserves based on risk of recovery, and estimates of the future net
cash
flows expected therefrom may vary substantially. Any significant variance in
the
assumptions could materially affect the estimated quantity and value of the
reserves, which could affect the carrying value of our oil and gas properties
and/or the rate of depletion of the oil and gas properties. Actual production,
revenues and expenditures with respect to our reserves will likely vary from
estimates, and such variances may be material.
Impairment of Developed Oil and
Gas
Properties
We review our oil and gas properties for
impairment whenever events and circumstances indicate a decline in the
recoverability of their carrying value. We estimate the expected future cash
flows of our oil and gas properties and compare such future cash flows to the
carrying amount of our oil and gas properties to determine if the carrying
amount is recoverable. If the carrying amount exceeds the estimated
undiscounted future cash flows, we will adjust the carrying amount of the oil
and gas properties to their fair value. The factors used to determine fair
value
include, but are not limited to, estimates of proved reserves, future commodity
pricing, future production estimates, anticipated capital expenditures, and
a
discount rate commensurate with the risk associated with realizing the expected
cash flows projected.
Impairment of Unproved Oil and
Gas
Properties
We periodically assess individually significant
unproved oil and gas properties for impairment, on a project-by-project
basis. Our assessment of the results of exploration activities, commodity
price outlooks, planned future sales or expiration of all or a portion of such
projects impact the amount and timing of impairment provisions.
New Accounting
Pronouncements
In
December 2004, the FASB issued SFAS 123(R) that requires that the compensation
cost relating to share-based payment transactions be recognized in the financial
statements. That cost will be measured based on the fair value of the
equity or liability instrument issued. SFAS 123(R) covers a wide range of
share-based awards, stock appreciation rights, and employee stock purchase
plans. SFAS 123(R) replaces SFAS 123, "Accounting for Stock-Based Compensation,"
and supersedes APB Opinion 25, "Accounting for Stock Issued to Employees."
We will be required to apply SFAS 123(R) in the first quarter 2006, and will
use
the modified prospective method of adoption. We had $1,035,000 of unvested
compensation related to outstanding stock options and estimate having to expense
$115,000 during the first quarter of 2006.
None of the other FASB pronouncements issued
during the last two years had, or will have, any effect on us.
ITEM
7. FINANCIAL STATEMENTS
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
Report
of Independent Registered Public Accounting Firm
|
15
|
|
|
|
|
Consolidated
Balance Sheet, December 31, 2005
|
16
|
|
|
|
|
Consolidated
Statement of Operations, Years ended December 31, 2005 and
2004
|
17
|
|
|
|
|
Consolidated
Statement of Cash Flows, Years ended December 31, 2005 and
2004
|
18
|
|
|
|
|
Notes
to Consolidated Financial Statements
|
19
|
|
REPORT
OF INDEPENDENT REGISTERED
PUBLIC
ACCOUNTING FIRM
To
the Board of Directors and Stockholders
Hallador
Petroleum Company
Denver,
Colorado
We
have audited the consolidated balance sheet of Hallador Petroleum Company and
Subsidiaries as of December 31, 2005 and the consolidated statements of
operations and cash flows for the years ended December 31, 2005 and 2004. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We
conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration
of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose
of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In
our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial condition of Hallador Petroleum
Company and Subsidiaries, as of December 31, 2005 and the results of their
operations and their cash flows for the years ended December 31, 2005 and 2004,
in conformity with accounting principles generally accepted in the United States
of America.
/s/
Ehrhardt Keefe Steiner & Hottman PC
March
31, 2006
Denver,
Colorado
Consolidated
Balance Sheet
December
31, 2005
(in
thousands)
ASSETS
|
|
|
|
Current
assets:
|
|
|
|
Cash
and cash equivalents
|
$
|
12,261
|
|
Accounts
receivable-
|
|
|
|
Oil
and gas sales
|
|
950
|
|
Well
operations
|
|
1,198
|
|
Total
current assets
|
|
14,409
|
|
|
|
|
|
Oil
and gas properties, at cost (successful efforts):
|
|
|
|
Unproved
properties
|
|
2,909
|
|
Proved
properties
|
|
2,388
|
|
Less
– accumulated depreciation, depletion, amortization and
impairment
|
|
(1,776)
|
|
|
|
3,521
|
|
Investment
in CELLC
|
|
223
|
|
Investment
in Savoy
|
|
4,205
|
|
Other
assets
|
|
246
|
|
|
$
|
22,604
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
Current
liabilities:
|
|
|
|
Accounts
payable and accrued liabilities
|
$
|
1,346
|
|
Oil
and gas sales payable
|
|
1,494
|
|
Income
tax payable
|
|
208
|
|
Total
current liabilities
|
|
3,048
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
Preferred stock, $.10 par
value;
|
|
|
|
10,000,000 shares authorized;
none
issued
|
|
|
|
Common stock, $ .01 par value;
100,000,000
|
|
|
|
shares authorized, 8,986,319
shares issued
|
|
90
|
|
Additional paid-in
capital
|
|
22,207
|
|
Accumulated deficit
|
|
(2,741)
|
|
|
|
19,556
|
|
|
$
|
22,604
|
|
See
accompanying notes.
Consolidated
Statement of Operations
(in
thousands)
|
|
Years
ended December 31,
|
|
|
2005
|
|
2004
|
Revenue:
|
|
|
Gas
|
$
|
1,012
|
$
|
822
|
Oil
|
|
90
|
|
83
|
Interest
|
|
544
|
|
167
|
|
|
1,646
|
|
1,072
|
Costs and expenses:
|
|
|
|
|
Lease operating
|
|
227
|
|
149
|
Delay rentals
|
|
57
|
|
102
|
Impairment – unproved
properties
|
|
183
|
|
144
|
Equity loss in CELLC
|
|
103
|
|
|
Depreciation, depletion and
amortization
|
|
43
|
|
42
|
General and
administrative
|
|
612
|
|
852
|
|
|
1,225
|
|
1,289
|
|
|
|
|
|
Income (loss) from continuing
operations before minority interest
|
|
421
|
|
(217)
|
Minority interest
|
|
(84)
|
|
65
|
Income (loss) from continuing operations
before taxes
|
|
337
|
|
(152)
|
Income tax-current
|
|
(145)
|
|
|
Income (loss) from continuing
operations
|
|
192
|
|
(152)
|
|
|
|
|
|
Income
(loss) from discontinued operations net of minority interest of
$(18) and $592
|
|
(30)
|
|
1,380
|
|
|
|
|
|
Gain on sale of discontinued operations,
net of taxes of $1,085 and minority interest of $4,168
|
|
|
|
8,642
|
|
|
|
|
|
Net income
|
$
|
162
|
$
|
9,870
|
Net Income (loss) per share –
basic
|
|
|
|
|
Continuing operations
|
$
|
.027
|
$
|
(.02)
|
Discontinued operations
|
|
(.004)
|
|
.19
|
Gain on sale of discontinued
operations
|
|
|
|
1.22
|
Net earnings per share
|
$
|
.023
|
$
|
1.39
|
|
|
|
|
|
Weighted average shares
outstanding-basic
|
|
7,155
|
|
7,093
|
|
|
|
|
|
|
See
accompanying notes.
Consolidated
Statement of Cash Flows
(in
thousands)
|
Years
ended December 31,
|
|
2005
|
|
2004
|
Cash flows from operating
activities:
|
|
|
|
|
|
Net income
|
$
|
162
|
|
$
|
9,870
|
Equity loss in CELLC
|
|
103
|
|
|
|
Depreciation, depletion, and
amortization
|
|
43
|
|
|
721
|
Minority interest
|
|
66
|
|
|
4,695
|
Impairment of undeveloped
properties
|
|
183
|
|
|
144
|
Change in accounts
receivable
|
|
(1,197)
|
|
|
812
|
Gain on
sale
of discontinued operations exclusive of $1,705 of bonuses paid in
connection with sale
|
|
|
|
|
(15,600)
|
Change in payables and accrued
liabilities
|
|
1,235
|
|
|
(623)
|
Income taxes payable
|
|
(92)
|
|
|
300
|
Key employee bonus plan
|
|
|
|
|
(253)
|
Other
|
|
10
|
|
|
90
|
Net cash provided by operating
activities
|
|
513
|
|
|
156
|
|
|
|
|
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
Proceeds from property sale
(Cuyama)*
|
|
3,538
|
|
|
18,110
|
Investment in COALition
|
|
(326)
|
|
|
|
Investment in Savoy
|
|
(4,205)
|
|
|
|
Decrease in bonds
|
|
252
|
|
|
|
Properties
|
|
(4,696)
|
|
|
(253)
|
Prospect sale
|
|
1,616
|
|
|
|
Other assets
|
|
(35)
|
|
|
(100)
|
Net cash (used in) provided
by investing activities
|
|
(3,856)
|
|
|
17,757
|
|
|
|
|
|
|
Cash flows from financing
activities:
|
|
|
|
|
|
Repurchase of employee stock
options
|
|
(407)
|
|
|
(1,305)
|
Distributions to limited
partners
|
|
(8,081)
|
|
|
|
Stock sale to Yorktown Energy
VI,
L.P.
|
|
4,165
|
|
|
|
Net cash used in financing
activities
|
|
(4,323)
|
|
|
(1,305)
|
|
|
|
|
|
|
Net (decrease) increase in cash and
cash
equivalents
|
|
(7,666)
|
|
|
16,608
|
Cash and cash equivalents, beginning
of
year
|
|
19,927
|
|
|
3,319
|
Cash and cash equivalents, end of
year
|
$
|
12,261
|
|
$
|
19,927
|
|
|
|
|
|
|
Taxes paid
|
$
|
225
|
|
$
|
785
|
------------------------
*
In
2004 we received a $3,500,000 note receivable in connection with the sale of
Cuyama, which was a non-cash investing activity.
See
accompanying notes.
Notes
to Consolidated Financial Statements
(1)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation and Consolidation
The
accompanying consolidated financial statements include the accounts of Hallador
Petroleum Company and its subsidiaries. All significant intercompany
accounts and transactions have been eliminated. We are engaged in the
exploration, development, and production of oil and natural gas in the Rocky
Mountain region. We also have a 32% equity interest in an oil and gas
company which has operations in Michigan.
As discussed in Item 6. (MD&A), we have
entered into significant related party transactions with the Yorktown group
of
companies. Yorktown and its affiliates currently own about 54% of our
common stock and represents one of the five seats on our board.
In early January 2006, we signed a Letter of
Intent with Sunrise Coal, LLC (Sunrise) in order to effect a
reorganization/merger between Hallador and Sunrise, a private company not
affiliated with the Yorktown group of companies. We are working on a
formal agreement which we hope to execute sometime in the second quarter
2006. In late February 2006, we sold 3,181,816 shares for $2.20 per
share (about $7 million) to our existing shareholders. The proceeds will
provide working capital for the Sunrise transaction.
During the first quarter of 2006, we loaned
Sunrise $7 million in order for Sunrise to begin development of their second
coal mine (the "Carlisle mine"). Their Howesville mine began
producing coal in November 2005. Both mines are located in
Indiana. During the second quarter of 2006, Sunrise expects to enter
into a $30 million line-of- credit with two Indiana banks, at which time our
$7
million will be repaid. We have agreed to guarantee this $30 million
line-of-credit.
We
have concluded to deemphasize our oil and gas operations and concentrate our
future efforts in the coal business.
About
nine years ago, Yorktown Energy Partners II and affiliates (Yorktown) invested
$5,025,000 in Hallador Petroleum, LLP, a newly formed limited liability limited
partnership, (the "Partnership"). We are the general partner and received
a 70% interest in the partnership in return for contributing our net assets
and
Yorktown representing the limited partners, received a 30% interest for its
$5,025,000 cash contribution. During the third quarter of 2005, we
purchased the limited partners interest in the Partnership, and for accounting
purposes the Partnership no longer exists and, as a result, there is no longer
a
minority interest caption on our balance sheet. Prior to this transaction
we, as general partner, consolidated the activity of the Partnership and
presented the 30% limited partners’ interest as a minority interest.
On August 10, 2004, we entered into an
agreement with E&B Natural Resources Management Corporation (a private
company) to sell all of our interest in the South Cuyama field and adjacent
exploration areas, all located in Santa Barbara County, California, for $23
million; consisting of $19.5 million in cash and an interest bearing (3.5%)
note
of $3.5 million due on September 30, 2005, which was paid. Closing
occurred on September 30, 2004 and we recorded a pre-tax gain of about $14
million. Results from the South Cuyama field have been presented as
discontinued operations in the accompanying Consolidated Statement of
Operations; revenue and expenses before the minority interest were about $7
million and $5 million, respectively for 2004.
Due to the sale, our board of directors and
the
Executive Committee of the Partnership, voted to discontinue new partnership
operations effective October 1, 2004. At that time, the
Partnership's assets consisted of cash, the $3.5 million note receivable, oil
and gas properties in New Mexico and Texas, and other miscellaneous
assets. On October 1, 2004, our board of directors and the Executive
Committee of the Partnership, valued the oil and gas properties in New Mexico
and Texas and the other miscellaneous assets at $4 million. On May 6, 2005
we
made a cash distribution of about $5.2 million to the limited partners.
During the third quarter 2005, we purchased the limited partners' interest
in
the Partnership for about $1.2 million and made a final cash distribution to
the
limited partners of $1.6 million. After these transactions, about $1.7
million remained in the minority interest account and was recorded as a
reduction in our accumulated deficit account.
In late March 2005, we invested $325,000 for
a
29% interest in a newly formed entity called COALition Energy, LLC (CELLC)
to
pursue coal opportunities in the United States. Some of our officers and
directors also invested in CELLC.
Oil
and Gas Properties
We
account for our oil and gas activities using the successful efforts method
of
accounting. Under the successful efforts method, the costs of successful
wells, development dry holes and productive leases are capitalized and amortized
on a units-of-production basis over the remaining life of the related
reserves. Exploratory dry hole costs and other exploratory costs,
including geological and geophysical costs, and delay rentals are expensed
as
incurred. Cost centers for amortization purposes are determined on a
field-by-field basis. Unproved properties with significant acquisition
costs are periodically assessed for impairment in value, with any impairment
charged to expense.
Prior
to 2003, the estimated costs of plugging and abandoning wells were accrued
using
the units-of-production method and were considered in determining DD&A
expense. However, in 2003 we adopted SFAS 143, Accounting for Asset
Retirement Obligations. Under this standard, we record the fair value of
the future abandonment as capitalized abandonment costs in Oil and Gas
properties with an offsetting abandonment liability. The adoption of this
method was not significant to our continuing operations. The capitalized
abandonment costs are amortized with other property costs using the
units-of-production method.
The
carrying value of each field is assessed for impairment on a quarterly
basis. If estimated future undiscounted net revenues are less than the
recorded amounts, an impairment charge is recorded based on the estimated fair
value of the field.
Statement
of Cash Flows
Cash
equivalents include investments, which includes mutual funds, with maturities
when purchased of three months or less.
Income
Taxes
Income
taxes are provided based on the liability method of accounting pursuant to
SFAS
109, Accounting for Income Taxes. The provision for income taxes is based
on pretax financial taxable income. Deferred tax assets and liabilities
are recognized for the future expected tax consequences of temporary differences
between income tax and financial reporting and principally relate to differences
in the tax basis of assets and liabilities and their reported amounts, using
enacted tax rates in effect for the year in which differences are expected
to
reverse. If it is more likely than not that some portion or all of a
deferred tax asset will not be realized, a valuation allowance is
recognized.
Earnings
per Share
We
follow the provisions of SFAS 128, Earnings Per Share. Basic earnings per
share are computed based on the weighted average number of common shares
outstanding. Diluted earnings per share are computed based on the weighted
average number of common shares outstanding adjusted for the incremental shares
attributed to outstanding stock options.
Use
of Estimates in the Preparation of Financial Statements
The
preparation of financial statements in conformity with generally accepted
accounting principles requires us to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements, and the reported
amounts of revenue and expenses during the reporting period. Actual
amounts could differ from those estimates.
Revenue
Recognition
We
recognize oil and natural gas revenue from our interest in producing wells
as
natural gas and oil is produced and sold from those wells using the entitlement
method.
Concentration
of Credit Risk
Our
revenues are derived principally from uncollateralized sales to two customers
in
the oil and gas industry. The concentration of credit risk in a single
industry affects our overall exposure to credit risk because customers may
be
similarly affected by changes in economic and other conditions.
Stock
Based Compensation
On
April 15, 2005, we issued 750,000 ten-year options to employees at an exercise
price of $2.25. The exercise price was based on the sales price of a March
2005 private stock transaction between one of our shareholders and a third
party. These options vest at 1/3 per year over the next three years.
There are no more options available for issuance.
As
allowed in SFAS 123, Accounting for Stock-Based Compensation, we continue to
apply APB 25, Accounting for Stock Issued to Employees, and related
interpretations in recording compensation related to our plan. Had
compensation costs for the plan been determined consistent with SFAS 123, we
would have estimated the fair value of the option grant using the Black-Scholes
option-pricing model, using the following assumptions for the 2005 grants:
(i)
risk free interest rate of 4.24%; (ii) expected life of 10 years; (iii) expected
volatility of 120%; (iv) expected default rate of 5%, and (v) no dividend
yield. The average fair value of options granted during 2005 was
$2.15. Pro forma loss for the year ended December 31, 2005 would have been
$183,000 or $(0.03) per share. Pro forma results for 2004 were
immaterial.
No
grants
were issued during 2004.
On October 8, 2004 we
purchased back 749,723 outstanding employee stock options at a price equal
to
$2.80 per share minus the exercise price of each option for a total amount
of
$1,305,000.
Changes
in Stockholders' Equity
|
|
000's
|
|
|
|
|
|
Stockholders'
Equity December 31, 2004
|
$
|
13,507
|
|
Proceeds
from stock sale (1,893,169 shares)
|
|
4,165
|
|
Minority
interest balance
|
|
1,722
|
|
Net
income
|
|
162
|
|
Stockholders'
Equity December 31, 2005
|
$
|
19,556
|
|
Net
income was the only change in stockholders' equity during
2004.
New Accounting
Pronouncements
In
December 2004, the FASB issued SFAS 123(R) that requires that the compensation
cost relating to share-based payment transactions be recognized in the financial
statements. That cost will be measured based on the fair value of the
equity or liability instrument issued. SFAS 123(R) covers a wide range of
share-based awards, stock appreciation rights, and employee stock purchase
plans. SFAS 123(R) replaces SFAS 123, "Accounting for Stock-Based Compensation,"
and supersedes APB Opinion 25, "Accounting for Stock Issued to Employees."
We will be required to apply SFAS 123(R) in the first quarter 2006, and will
use
the modified prospective method of adoption. We had $1,035,000 of unvested
compensation related to outstanding stock options and estimate having to expense
$115,000 during the first quarter of 2006.
None
of
the other FASB pronouncements issued during the last two years had, or will
have, any effect on us.
(2)
INCOME TAXES (in thousands)
The
provision for income taxes is comprised of the following:
|
|
|
2005
|
|
2004
|
|
|
Current
:
|
|
|
|
|
|
|
Federal
|
$
|
415
|
$
|
265
|
|
|
State
|
|
189
|
|
361
|
|
|
|
|
604
|
|
626
|
|
|
Deferred:
|
|
|
|
|
|
|
Federal
|
|
(297)
|
|
297
|
|
|
State
|
|
(162)
|
|
162
|
|
|
|
|
(459)
|
|
459
|
|
|
|
$
|
145
|
$
|
1,085
|
|
The
net
deferred tax asset at December 31, 2005 was not material.
Our
income tax is different than the expected amount computed using the applicable
federal statutory income tax rate of 35% and a California state tax rate
of
8.84%. The reasons for and effects of such differences are as
follows:
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
Expected
amount
|
$
|
115
|
$
|
4,864
|
|
Utilization
of tax net operating losses
|
|
--
|
|
(2,174)
|
|
Utilization
of statutory depletion carry forwards
|
|
--
|
|
(974)
|
|
State
income taxes, net of federal benefit
|
|
16
|
|
(340)
|
|
Change
in valuation allowance and other
|
|
14
|
|
(291)
|
|
|
$
|
145
|
$
|
1,085
|
|
At
December 31, 2005, we had no federal or state net operating
loss, alternative minimum tax or statutory depletion carry forwards as
all
amounts were utilized during the current fiscal year.
(3)
STOCK OPTIONS AND BONUS PLANS
Stock
Option Plan
On October 8, 2004, we purchased back 749,723
outstanding employee stock options at a price equal to $2.80 per share minus
the
exercise price of each option for a total amount of $1,305,000. The
options were cancelled and available for reissuance. The $1,305,000 was
expensed during 2004. At December 31, 2004 there were no options
outstanding. All options were granted at fair value.
In
April 2005, we issued 750,000 options at an exercise price of $2.25 based on
a
March 2005 private transaction between one of our shareholders and a third
party. These options vest at 1/3 per year for the next three years and
expire in April 2015. There are no more options available for
issuance.
Options
to purchase up to 3% of the partnership interest in Hallador Petroleum, LLP
were
issued in 1997 and 1998. As of December 31, 2004, 2.692% were outstanding
and exercisable. The exercise price for these options was based on the
fair market value on the date of grant. On January 8, 2005 we purchased
back all of these outstanding options for a total of $407,000, which was accrued
for as of December 31, 2004.
(4)
MAJOR CUSTOMERS
During
2005 and 2004, the San Juan Basin’s gas and NGL production was purchased by
Coral Energy Resources, LP and Williams Energy Services.
(5)
EQUITY INVESTMENT IN SAVOY
In August 2005, we began negotiations to
purchase from Yorktown Energy Partners II, LP its 32% interest in Savoy Energy
LLP, a private company engaged in the oil and gas business primarily in the
State of Michigan. A purchase price of $4.1 million was agreed upon and
closing occurred on December 31, 2005. On December 20, 2005 we sold about
1,893,000 shares of our common stock to Yorktown Energy Partners VI, L.P.
at $2.20 per share (about $4.1 million). We will account for our interest
in Savoy using the equity method of accounting.
Below (in thousands)
are: (i) a condensed balance sheet at December 31, 2005, and (ii) a
condensed statement of operations for the year ended December 31, 2005.
Condensed Balance Sheet
|
|
|
|
|
|
Current
assets
|
$
|
12,393
|
|
|
PP&E,
net
|
|
8,306
|
|
|
|
$
|
20,699
|
|
|
|
|
|
|
|
Total liabilities
|
$
|
5,450
|
|
|
Partners
capital
|
|
15,249
|
|
|
|
$
|
20,699
|
|
Condensed Statement Of Operations
|
Revenue
|
$
|
6,038
|
|
|
Gain
on sale
|
|
3,133
|
|
|
|
|
9,171
|
|
|
|
|
|
|
|
Expenses
|
|
(4,364)
|
|
|
Net
income
|
$
|
4,807
|
|
No
equity
income was recorded as closing on occurred on December 31, 2005.
Any difference between the purchase price and
our pro rata share of the equity of Savoy will be amortized based on Savoy's
units of production rate.
(6)
RESERVE DATA (UNAUDITED)
Our
reserve estimates for the years ended December 31, 2005 and 2004 were prepared
by a sole-proprietor consulting petroleum engineer based on data we
supplied. Savoy's reserve estimates were prepared by Netherland, Sewell
& Associates. Be cautious that there are many uncertainties inherent
in estimating proved reserve quantities and in projecting future production
rates.
Proved
reserves are the estimated quantities of oil and natural gas which geological
and engineering data demonstrate with reasonable certainty to be recoverable
in
future years from known reservoirs under existing economic and operating
conditions. Proved developed reserves are those reserves expected to be
recovered through existing wells with existing equipment and operating
methods.
Analysis of Changes in Proved Developed
Reserves *
(in
thousands)
|
|
|
|
|
|
|
|
Oil
|
|
Gas
|
|
|
(BBLs)
|
|
(MCF)
|
|
Balance at December 31, 2003
|
1,557
|
|
2,384
|
|
|
Revisions of previous estimates
|
--
|
|
(266)
|
|
|
Discoveries
|
--
|
|
141
|
|
|
Production
|
(162)
|
|
(280)
|
|
|
Cuyama sale
|
(1,392)
|
|
(546)
|
|
Balance at December 31, 2004
|
3
|
|
1,433
|
|
|
Revisions of previous estimates
|
(1)
|
|
(41)
|
|
|
Discoveries
|
|
|
112
|
|
|
Production
|
(2)
|
|
(104)
|
|
Balance at December 31, 2005
(1)
|
0
|
|
1,400
|
|
|
|
|
|
|
*We have no significant proved
undeveloped reserves.
|
|
|
|
|
|
|
|
|
|
Equity interest (32%) in Savoy's
Reserves:
|
|
|
|
|
|
|
|
|
|
Proved developed
|
22
|
|
634
|
|
|
|
|
|
|
Proved undeveloped
|
43
|
|
712
|
|
|
|
|
|
|
|
---------------------------
(1) Our oil reserves are not
material.
The following table (in
thousands) sets forth a standardized measure of the discounted future net cash
flows attributable to our proved developed reserves (hereinafter referred to
as
"SMOG"). Future cash inflows were computed using December 31, 2005 and 2004
gas
prices of $8.69 and $6.06, respectively. Future production costs represent
the estimated future expenditures to be incurred in producing the reserves,
assuming continuation of economic conditions existing at year-end.
Discounting the annual net cash inflows at 10% illustrates the impact of timing
on these future cash inflows.
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
Future gas revenue
|
$
|
12,350
|
|
$
|
8,200
|
|
Future cash outflows – production
and abandonment costs
|
|
(3,600)
|
|
|
(2,800)
|
|
Future income taxes
|
|
(3,500)
|
|
|
(2,100)
|
|
Future net cash flows
|
|
5,250
|
|
|
3,300
|
|
10% discount factor
|
|
(2,450)
|
|
|
(1,500)
|
SMOG
|
$
|
2,800
|
|
$
|
1,800
|
|
|
|
|
|
|
Equity interest (32%) in Savoy
(About 50% relates to proved undeveloped
reserves)
|
$
|
4,400
|
|
|
|
|
|
|
|
|
|
|
The
following table (in thousands) summarizes the principal factors comprising
the
changes in SMOG:
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
SMOG, beginning of year
|
$
|
1,800
|
|
$
|
11,500
|
|
Sales of oil and gas, net of production
costs
|
|
(875)
|
|
|
(3,600)
|
|
Net changes in prices and production
costs
|
|
2,160
|
|
|
(350)
|
|
Revisions
|
|
(165)
|
|
|
(300)
|
|
Discoveries
|
|
450
|
|
|
100
|
|
Change in income taxes
|
|
(750)
|
|
|
(1,200)
|
|
Accretion of discount
|
|
180
|
|
|
1,150
|
|
Cuyama sale
|
|
--
|
|
|
(5,500)
|
SMOG, end of year
|
$
|
2,800
|
|
$
|
1,800
|
|
|
|
|
|
|
|
|
ITEM
8. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM
8A. 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 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 changes in our
internal controls or in other factors that could significantly affect these
controls subsequent to the date of the evaluation.
ITEM
8B. OTHER INFORMATION
None.
PART
III
ITEM
9. DIRECTORS, EXECUTIVE
OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE
EXCHANGE ACT
CORTLANDT
S. DIETLER, 84, has been one of our directors since November 1995. From
April 1995 to October 1999 he was CEO of TransMontaigne Inc. and is currently
Chairman of the Board. He also serves as a director of Forest Oil
Corporation, Cimarex Energy Company and Nytis Exploration Company.
DAVID
HARDIE, 55 is the Chairman of the Board and has served as a director since
July
1989. He is the President of Hallador Investment Advisors Inc., which
manages Hallador Equity Fund, Hallador Fixed Income Fund, Hallador Alternative
Assets Fund and Hallador Balance Fund; he also is a General Partner of Hallador
Venture Partners LLC, the General Partner of Hallador Venture Fund II &
III. Mr. Hardie is and serves as a director and partner of other private
entities that are owned by members of his family. Mr. Hardie is a graduate
of
California Polytechnic University, San Luis Obispo and Harvard Business School,
OPM.
STEVEN
HARDIE, 52 has been a director since 1994. He and David Hardie are
brothers. For the last 22 years he has been an investor in common stock
and private equity. He is the Vice-President of Hallador Investment
Advisors, which manages Hallador Equity Fund, Hallador Fixed Income Fund,
Hallador Alternative Assets Fund and Hallador Balance Fund. He also serves
as a
director and partner of other private entities that are owned by members of
his
family.
BRYAN
H. LAWRENCE, 62, has been one of our directors since November 1995. He is
a founder and senior manager of Yorktown Partners LLC that manages investment
partnerships formerly affiliated with Dillon, Read & Co. Inc., an
investment-banking firm (Dillon Read). He had been employed with Dillon,
Read since 1966, serving most recently as a Managing Director until the merger
of Dillon Read with SBC Warburg in September 1997. He also serves as a
Director of TransMontaigne, Inc., Crosstex Energy, Inc. and Crosstex Energy,
L.P. (each a United States public company), Winstar Resources Ltd. ( a Canadian
Public Company) and certain non-public companies in the energy industry in
which
Yorktown partnership holds equity interests including, PetroSantander Inc.,
Savoy Energy, L.P., Camden Resources, Inc., ESI Energy Services Inc., Ellora
Energy Inc., Dernick Resources Inc., Cinco Natural Resources Corp., Approach
Resources Inc., Peak Energy Resources Inc., Nytis Exploration Company, Compass
Petroleum, Ltd and Momentum Energy Group. Mr. Lawrence is a graduate of Hamilton
College and has a MBA from Columbia University.
VICTOR
P. STABIO, 58 is our President, CEO, CFO and a director. He joined us in
March 1991 as our President and CEO and has been active in the oil and gas
business for the past 30 years.
We
do not have an audit committee financial expert serving on our audit
committee. We believe that the additional costs to recruit a financial
expert exceed the benefits, if any.
Our
Code of Ethics is filed as Exhibit 14 to this Form 10-KSB.
Section
16(a) Beneficial Ownership Reporting Compliance
Our
CEO, Victor Stabio, was late on filing one of his Form 4s.
ITEM
10. EXECUTIVE
COMPENSATION
SUMMARY
COMPENSATION TABLE
|
|
Annual
Compensation
|
|
Name
and Principal Position
|
Year
|
Salary
|
Bonus
|
|
Other
Annual Compensation
|
|
Stock
Options
|
Victor
P. Stabio, CEO
|
2005
|
$100,000
|
$
3,846
|
|
$
0
|
|
400,000
|
|
2004
|
137,000
|
632,000
|
(1)
|
1,251,900
|
(3)
|
|
|
2003
|
146,000
|
73,500
|
(1)
|
6,000
|
(2)
|
|
--------------------------------
(1)
|
Relates to the
Key
Employee Bonus Plan.
|
|
|
(2)
|
Our contribution
to
the 401(k) Plan.
|
|
|
(3)
|
Includes the
purchase of 545,000 stock options at a cost of $1.80 per option or
$981,000 in October 2004 and $265,000 for the options to purchase
1.75% of
Hallador Petroleum, LLP paid in January
2005.
|
On April 15, 2005, we
granted Mr. Stabio 400,000 ten-year options at an exercise price of $2.25 per
share. Such options represented 53% of all the options granted to
employees that year.
At December 31, 2005,
Mr
Stabio had 400,000 unexercisable options and the in-the-money value was
$400,000. Mr. Stabio did not exercise any options during the
year.
Equity
Compensation Plan Information
In April 2005, we granted
750,000 options at an exercise price of $2.25 per share to our employees
of
which 400,000 were issued to Mr. Stabio. As of December 31, 2005, there
were 750,000 options outstanding and there were no options outstanding at
December 31, 2004.
|
|
|
|
|
Plan
Category
|
Number
of Securities to be issued upon exercise of outstanding options,
warrants
and rights
(a)
|
Weighted-average
exercise price of outstanding options, warrants
and rights
(b)
|
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in column
(a))
(c)
|
|
Equity
compensation plans approved by security
holders
|
750,000
|
$2.25
|
0
|
|
Equity
compensation plans not approved by security holders
|
0
|
0
|
0
|
|
|
|
|
|
|
|
|
|
ITEM
11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENTAND RELATED STOCKHOLDER MATTERS
The following table is
as
of April 4, 2006.
|
|
|
|
|
|
David
Hardie and Steven Hardie as Nominee for Hardie Family Members
(2)
|
3,573,341
|
29
|
|
|
|
Victor P.
Stabio(6)
|
208,270
|
2
|
|
|
|
Cortlandt S.
Dietler
(3)
|
100,000
|
1
|
|
|
|
Bryan H.
Lawrence (4)
|
6,607,166
|
54
|
|
|
|
Lubar &
Associates (5)
|
823,276
|
7
|
|
|
|
All directors
and
executive officer as a group
|
10,488,777
|
86
|
|
|
|
(1)
|
Based
on total outstanding shares of 12,168,135. Beneficial
ownership of certain shares has been, or is being, specifically disclaimed
by certain directors in ownership reports filed with the
SEC.
|
|
|
(2)
|
The
Hardie family business address is 3000 S Street, Suite 200,
Sacramento, California, 95816.
|
|
|
(3)
|
Mr.
Dietler’s address is P. O. Box 5660, Denver, Colorado
80217. All shares are held by Pinnacle Engine Company LLC, wholly
owned by Mr. Dietler.
|
|
|
(4)
|
Mr.
Lawrence’s address is 410 Park Avenue, 19th Floor,
New York, NY 10022. Mr. Lawrence owns 50,000 shares directly, and
the remainder is held by Yorktown Energy Partners VI, L.P., an
affiliate.
|
|
|
(5)
|
Lubar
&
Associates address
is 700 North Water Street,
Suite 1200, Milwaukee, WI 53202.
|
|
|
(6)
|
Includes
133,333 options exercisable within sixty days of April 4,
2006.
|
|
|
ITEM
12. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS
As discussed in Item 6. (MD&A), we have
entered into significant related party transactions with the Yorktown group
of
companies. Yorktown and its affiliates currently own about 54% of our
common stock and represents one of the five seats on our board.
(a)
Exhibits
3.1
|
Restated
Articles of Incorporation of Kimbark Oil and Gas Company, effective
September 24, 1987 (1)
|
3.2
|
Articles
of Amendment to Restated Articles of Incorporation of Kimbark Oil
&
Gas Company, effective December 14, 1989, to effect change of name
to
Hallador Petroleum Company and to change the par value and number
of
authorized shares of common stock (1)
|
3.3
|
Amendment
to Articles of Incorporation dated December 31, 1990 to effect the
one-for-ten reverse stock split (2)
|
3.4
|
By-laws
of Hallador Petroleum Company, effective November 9, 1993
(4)
|
10.1
|
Composite
Agreement and Plan of Merger dated as of July 17, 1989, as amended
as
of August 24, 1989, among Kimbark Oil & Gas Company, KOG
Acquisition, Inc., Hallador Exploration Company and Harco Investors,
with
Exhibits A, B, C and D (1)
|
10.2
|
Hallador
Petroleum Company 1993 Stock Option Plan *(3)
|
10.3
|
Hallador
Petroleum Company Key Employee Bonus Compensation Plan
*(3)
|
10.4
|
First
Amendment to the 1993 Stock Option Plan *(6)
|
10.5
|
First
Amendment to Key Employee Bonus Compensation Plan
*(6)
|
10.6
|
Stock
Purchase Agreement with Yorktown dated November 15, 1995
(6)
|
10.7
|
Second
Amendment to Key Employee Bonus Compensation Plan
*(7)
|
10.8
|
Hallador
Petroleum, LLP Agreement (9)
|
10.9
|
Hallador
Petroleum, LLP Stock Option Agreement *(9)
|
10.10
|
Purchase
And Sale Agreement Among Hallador Petroleum Company, Hallador Production
Company, Hallador Petroleum, LLP, Santa Barbara Partners, Trio Petroleum
Inc., Cuyama Drilling and Production Company And South Cuyama Limited
Partnership ("Sellers") And E&B Natural Resources Management
Corporation and WRBD II, LP ("Buyers") (11)
|
10.11
|
Subscription
Agreement - by and between Hallador Petroleum Company and Yorktown
Energy
Partners VI, L.P, dated December 20, 2005.(12)
|
10.12
|
Purchase
and Sale Agreement dated December 31, 2005 between Hallador Petroleum
Company, as Purchase and Yorktown Energy Partners II, L.P., as Seller
relating to the purchase and sale of limited partnership interests
in
Savoy Energy Limited Partnership (13)
|
10.13
|
Letter
of Intent dated January 5, 2006 between Hallador Petroleum Company
and
Sunrise Coal, LLC (14)
|
10.14
|
Subscription
Agreement - by and between Hallador Petroleum Company and Yorktown
Energy
Partners VI, L.P., et al dated February 22, 2006.
(15)
|
10.15
|
Subscription
Agreement - by and between Hallador Petroleum Company and Hallador
Alternative Assets Fund LLC dated February 14, 2006.
(16)
|
10.16
|
Subscription
Agreement - by and between Hallador Petroleum Company and Tecovas
Partners
V LP dated February 14, 2006. (16)
|
10.17
|
Subscription
Agreement - by and between Hallador Petroleum Company and Lubar
Equity Fund LLC dated February 14, 2006. (16)
|
10.18
|
Subscription
Agreement - by and between Hallador Petroleum Company and Murchison
Capital Partners LP dated February 14, 2006. (16)
|
14.
|
Code
Of Ethics For Senior Financial Officers. (16)
|
21.1
|
List
of Subsidiaries (2)
|
31
|
SOX
302 Certification (16)
|
32
|
SOX
906 Certification (16)
|
-----------------------------------------------
(1)
Incorporated
by reference (IBR) to the 1989 Form 10-K.
|
(9)
IBR to the 1997 Form 10-KSB.
|
(2)
IBR to the 1990 Form 10-K.
|
(10)
Not used.
|
(3)
IBR to the 1992 Form 10-KSB.
|
(11)
IBR to June 30, 2004 Form 10-QSB.
|
(4)
IBR to the 1993 Form 10-KSB.
|
(12)
IBR to Form 8-K dated December 31, 2005
|
(5)
Not used.
|
(13)
IBR to Form 8-K dated January 3, 2006
|
(6)
IBR to the 1995 Form 10-KSB.
|
(14)
IBR to Form 8-K dated January 6, 2006
|
(7)
IBR to the September 30, 1996 Form 10-QSB.
|
(15)
IBR to Form 8-K dated February 27, 2006
|
(8)
Not
used.
|
(16)
Filed herewith.
|
*
Management
contracts or compensatory plans.
|
|
ITEM
14. PRINCIPAL ACCOUNTANT FEES AND
SERVICES
The
fees
incurred for 2005 and 2004 were:
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
Audit
Fees
|
$
|
64,500
|
|
$
|
56,000
|
|
Audit-related
fees
|
|
|
|
|
|
|
Tax
fees
|
|
15,000
|
|
|
31,000
|
|
All
other fees
|
|
|
|
|
|
|
Total
fees
|
$
|
79,500
|
|
$
|
87,000
|
|
Pre-approval
Policy
In 2003 the Audit
Committee adopted a formal policy concerning approval of audit and non-audit
services to be provided by Ehrhardt Keefe Steiner & Hottman PC (EKSH).
The policy requires that all services EKSH provides to us be pre-approved by
the
Committee. The Committee approved all services provided by EKSH during
2005 and 2004.
SIGNATURES
In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
this report to be signed on our behalf by the undersigned, thereunto duly
authorized.
|
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HALLADOR
PETROLEUM COMPANY
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Dated:
April 14, 2006
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BY:/S/
VICTOR P. STABIO
VICTOR
P. STABIO, CEO
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In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on
the
dates indicated.
/S/
DAVID HARDIE
DAVID
HARDIE
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Chairman
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April
14, 2006
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/S/
VICTOR P. STABIO
VICTOR
P. STABIO
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CEO,
CFO, CAO and Director
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April
14, 2006
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/S/
BRYAN LAWRENCE
BRYAN
LAWRENCE
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Director
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April
14, 2006
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