SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities and Exchange Act of 1934
For the fiscal year ended December 31, 1998
Commission file number 2-70390
SANCHEZ-O'BRIEN 1981-A DRILLING COMPANY
(Exact name of registrant as specified in its charter)
Texas 74-2216121
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5847 San Felipe Suite 1900 Houston, Texas 77057
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 783-8000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Limited Partnership Interest
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
Aggregate market value of the shares held by non affiliates of the
registrant: Non-Applicable
Documents incorporated by reference: None
<PAGE>
SANCHEZ-O'BRIEN 1981-A DRILLING COMPANY
ANNUAL REPORT ON FORM 10-K DECEMBER 31, 1998
INDEX
PART I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 8. Financial Statements and Supplementary Data
Item 9. Disagreements on Accounting and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners
and Management
Item 13. Certain Relationships and Related Transactions
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K
SIGNATURES
<PAGE>
P A R T I
Item 1. Business
Purposes
The registrant, Sanchez-O'Brien 1981-A Drilling Company (the "Drilling
Company"), is a limited partnership formed on December 18, 1980, pursuant to
the provisions of the Texas Uniform Limited Partnership Act. On April 21,
1981, the effective date of the Securities Act of 1933 Registration covering
the offer and sale of the units (No. 2-70390), members of the National
Association of Securities Dealers, Inc. began the sale of limited partnership
interests. The sales period was closed June 23, 1981 with the sale of 5,304
units for a sum of $26,520,000. Sanchez Drilling Corporation (the
"General Partner"), the General Partner of the Drilling Company, contributed
$246,438 to the Drilling Company's capital. Operations commenced on June 23,
1981.
Effective January 1, 1998, Sanchez-O'Brien Drilling Corporation's name was
changed to Sanchez Drilling Corporation. Also, Sanchez-O'Brien Oil & Gas
Corporation's name was changed to Sanchez Oil & Gas Corporation.
Description of Business
The Drilling Company was formed to become a general partner in
Sanchez-O'Brien 1981-A Drilling Partnership (the "Drilling Partnership") to
participate in oil and natural gas exploration, drilling, development,
production and marketing in the United States with Sanchez Oil & Gas
Corporation (the "Managing General Partner") as Managing General Partner.
All of these activities were conducted in the states of Texas, Louisiana,
Oklahoma, New Mexico, Colorado and Wyoming. Substantially all of the
operations and activities of the Drilling Company relate to its interest in
the Drilling Partnership.
As of December 31, 1998, forty-three wells have been drilled. Of this
number, ten wells are commercially productive, twenty-four were dry holes
or have been depleted and abandoned, seven have been sold, and two are
shut-in.
Competitive Conditions
The petroleum industry is comprised of a large number of entities, many
with greater financial resources than the Drilling Company, competing in the
exploration, development, production and marketing of oil and natural gas.
Employees
The Drilling Company has no employees; however, the Managing General
Partner has a staff of geologists, petroleum engineers, landmen and
accounting personnel who administer all of the Drilling Company's operations.
The direct administrative and overhead expenses which are attributable to the
Drilling Company's operations are a cost of the Drilling Company.
<PAGE>
Major Purchasers
Tejas Gas Marketing, LLc purchased over 77% of the Drilling Company's
total oil and natural gas sales during the year ended December 31, 1998
(See Note 3 to the Financial Statements).
Long-term Debt
At December 31, 1998, The Drilling Company does not have any long term
debt.
Marketing Conditions
For 1998, the average price of oil decreased to $11.08/BBL from $15.27/BBL
for 1997, while the average price for natural gas decreased to $2.07/MCF for
1998 from $2.19/MCF in 1997. Several factors contributed to the decrease of
natural gas and oil prices in 1998 compared to 1997. 1) The past two winters
have been milder than usual. 2) There was an oversupply of oil, due in part to;
the Asian financial crisis caused economies in the region to lower their demand;
the aforementioned mild winters caused demand to lower; the allowance of Iraq
to sell its oil for food flooded the market with more production. 3) A mini-
boom in drilling for natural gas during 1995-1997 increased the production
available for sale.
Wellhead prices per MCF during March 1999 were in the $1.65 to $1.75 range,
and we are optimistic that prices will average $2.00 per MCF in 1999.
During January and February 1999 gas was sold for an estimated $1.73.
Despite natural gas storage being high in the first quarter, 1999 prices
should average approximately $2.00/MCF during 1999.
Regulation
Various aspects of the Drilling Partnership's oil and natural gas
operations are regulated by administrative agencies under statutory
provisions of the states where such operations are conducted and by certain
agencies of the Federal government for operations on Federal leases.
Future Operations
As of December 31, 1998, each Limited Partner has received $435 per each
$5,000 unit. Future distributions will be made after litigation on the
S.W. Escobas (Trevino leases) prospect is settled.
Subsequent to year-end, the Company began considering selling all of its
producing properties. As of March 30, 1999, no firm offer had been accepted.
<PAGE>
Item 2. Properties
The following table summarizes the Drilling Company's well count (#
wells) and average net working interest (ANWI) in oil and natural gas wells
by state that are commercially productive as of December 31, 1998:
Oil Natural Gas Total
# Wells ANWI # Wells ANWI # Wells ANWI
Texas............ - - 7 .11 7 .11
Louisiana........ - - 1 .35 1 .35
Oklahoma......... - - - - - -
New Mexico....... - - - - - -
Colorado......... - - - - - -
Wyoming.......... 2 .12 - - 2 .12
2 .12 8 .14 10 .14
See Note 8 to the Financial Statements for reserve information.
No events during the first quarter of 1999 have substantially changed
these numbers.
Item 3. Legal Proceedings
The litigation against Pennzoil Exploration and Production Company
(Pennzoil) and Sanchez Oil and Gas Corporation (Sanchez) on the Trevino leases
in the S.W. Escobas Prospect is ongoing. The interests in the Trevino leases,
which comprise part of the S.W. Escobas Prospect, were acquired from
Pennzoil. There are currently four producing wells on the Trevino Leases,
in which the Drilling Partnership holds between 22.53%-23.177% gross working
interest. The interest in dispute in this lawsuit is 7/96 or 7.29% of
Sanchez-O'Brien's and Pennzoil's interest. The trial judge, on November 9,
1992, ruled in favor of the defendants, Pennzoil and Sanchez.
The plaintiffs appealed the trial court ruling to the Court of Appeals for
the Fourth District of Texas at San Antonio. In May 1994, the San Antonio
Court of Appeals affirmed the trial court's judgement.The appellants
(plaintiffs) filed an application for writ of error to the Texas Supreme
Court after the Fourth Court Appeals rejected a motion for a rehearing.
On November 6, 1994, the Texas Supreme Court denied the writ of error.
On December 8, 1994, plaintiffs filed a motion for a rehearing with
Texas Supreme Court. The Texas Supreme Court granted a rehearing and heard
oral arguments during September 1995. On October 18, 1996, the Texas Supreme
Court reversed the judgements of both lower courts.On November 20, 1996, a
motion for rehearing was filed. The Texas Supreme Court granted the motion
for a rehearing, but on February 26, 1998, The Texas Supreme Court rendered
an opinion reversing the San Antonio Court of Appeals and the trial court
and rendering judgement for plaintiff. A motion for a rehearing was
filed during March 1998. The motion for a rehearing was denied and all appeals
exhausted.
As a result of the unfavorable ruling, the Drilling Company will have to
forfeit the funds being held in escrow. In addition, the Drilling Company
would lose approximately 7.29% of its' interest in the Trevino properties.
The Company should have enough funds in escrow to pay the plantiff.
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to the Security Holders during the fourth
quarter of 1998.
P A R T II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
The Drilling Company has no outstanding common stock at December 31,
1998. There is no market for the limited partnership units of the
Drilling Company and transferability is subject to certain conditions,
including the consent of the Managing General Partner. The Drilling Company
has 1,480 limited partners as of December 31, 1998.
<PAGE>
As of December 31, 1998, each Limited Partner has received $435 per each
$5,000 unit. Future cash distributions will be made after litigation on
the S.W. Escobas (Trevino leases) has been settled.
According to the terms of the Drilling Company's Partnership Agreement,
the General Partner is obligated to repurchase, if requested, the interests
of limited partners in the Drilling Company. The maximum repurchase
obligation is 10% of the Aggregate Limited Partners Contributions. The
repurchase price will be based primarily on the discounted value of the
Drilling Company's share of the oil and natural gas properties. The
Managing General Partner repurchased 9 units during 1998. As of December
31, 1998, the Managing General Partner has repurchased 2,822 units, or
53.20%, of the total 5,304 units. At January 1, 1998, the managing general
parnter assigned 941 units to Mr. O'Brien as part of a settlement. A
repurchase offer for each outstanding $5,000 unit at December 31, 1998 has
not been made.
Item 6. Selected Financial Data
The financial results of operations of the Drilling Company as of and for
the years ended December 31, 1998, 1997 and 1996 are as follows:
[CAPTION]
1998 1997 1996
[S] [C] [C] [C]
Revenues. . . . . . . . . .$ 462,242 763,517 462,242
Expenses. . . . . . . . . . 267,426 373,281 267,426
Net income. . . . . . . . . 194,816 390,236 194,816
LP's net income (99%) . . . 192,868 386,334 192,868
LP's net income per unit. . 36 73 36
Total assets. . . . . . . . 1,582,964 1,380,407 1,582,964
Working capital increase ..$ 308,641 34,688 308,641
Partners' equity (deficit)
Limited partners . . . .$ 1,324,307 1,131,434 1,324,307
General partner. . . . .$ 13,372 11,429 13,372
See Notes 1, 2 and 3 to the Financial Statements for a discussion of the
Drilling Company's significant accounting policies, allocations of revenues,
costs and expenses and oil and gas producing activities.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
The Drilling Company commenced operations on June 23, 1981. Substantially
all of the Drilling Company's revenues are comprised of its proportionate
share of the oil and natural gas sales of the Drilling Partnership.
<PAGE>
Liquidity and Capital Resources
The principal sources of the Drilling Company's working capital have been
the capital contributions of the limited partners, bank borrowings (see Note
4 to the Financial Statements), advances from the Managing General Partner
and working capital provided from operations.
During 1998, the price of natural gas and oil decreased from 1997. The
Drilling Company repaid the full amount of the note payable to the Managing
General Partner on July 1, 1993.
Results of Operations
The Drilling Company had net income of $194,816 in 1998, $390,236 in 1997,
and $378,346 in 1996.
Oil and natural gas sales totaled $438,068 in 1998, $742,030 in 1997, and
$716,938 in 1996.
Operating expenses as a percentage of oil and natural gas sales were
30.68% in 1998, 22.73% in 1997, and 25.49% in 1996.
Interest income was $24,174 in 1998, $21,487 in 1997, and $12,331 in 1996.
General and administrative expenses consist primarily of the Drilling
Company's proportionate share of such expenses allocated to the Drilling
Partnership from Sanchez Oil & Gas Corporation.
The current year depletion amounted to $93,000. Depletion per net
equivalent barrel of production was $2.40 in 1998, $2.73 in 1997, $2.48 in
1996.
<PAGE>
Item 8. Financial Statements and Supplementary Data
Sanchez-O'Brien 1981-A Drilling Company
(a limited partnership)
Index to Financial Statements
Balance Sheets - December 31, 1998 and 1997
Statements of Operations - Years ended December 31, 1998, 1997
and 1996
Statements of Partners' Equity (Deficit) - Years ended December
31, 1998, 1997 and 1996
Cash Flows Statement of - Years ended December 31, 1998, 1997
and 1996.
Notes to Financial Statements
Schedule V - Property and Equipment - Years ended December 31, 1998,
1997 and 1996
Schedule VI - Accumulated Depreciation, Depletion and Amortization of
Property and Equipment - Years ended December 31, 1998, 1997 and 1996
All other schedules are omitted as the required information is
unapplicable or the information is included in the financial statements
or related notes.
<PAGE>
<TABLE>
SANCHEZ-O'BRIEN 1981-A DRILLING COMPANY
(a limited partnership)
Balance Sheets
December 31, 1998 and 1997
(Unaudited)
<CAPTION>
ASSETS 1998 1997
<S> <C> <C>
Current assets:
Cash $ 1,011,552 665,680
Accounts receivable 18,843 48,333
Total current assets 1,030,395 714,013
Oil and natural gas properties (full
cost method), at cost, pledged
(notes 3 and 4) 31,022,493 31,043,318
Less accumulated depreciation,
depletion and amortization (note 3) 30,469,924 30,376,924
Net oil and natural gas
properties 552,569 666,394
Organization costs, less applicable
amortization - -
TOTAL ASSETS 1,582,964 1,380,407
<CAPTION>
LIABILITIES AND PARTNERS' EQUITY
<S> <C> <C>
Current liabilities:
Accounts payable 64,730 53,074
Suspense payable-investors 180,555 184,470
Total current liabilities 245,285 237,544
Partners' equity:
Limited partners 1,324,307 1,131,439
General partner 13,372 11,424
Total partners' equity 1,337,679 1,142,863
TOTAL LIABILITES AND
PARTNERS' EQUITY $ 1,582,964 1,380,407
See accompanying notes to financial statements.
<PAGE>
</TABLE>
<TABLE>
SANCHEZ-O'BRIEN 1981-A DRILLING COMPANY
(a limited partnership)
Statements of Operations
Years Ended December 31, 1998, 1997 and 1996
(Unaudited)
<CAPTION>
1998 1997 1996
<S>
Revenues: <C> <C> <C>
Oil and natural gas sales $ 438,068 742,030 716,938
Interest income 24,174 21,487 12,331
Other income - - -
462,242 763,517 729,269
Expenses:
Operating expenses 134,437 168,710 182,750
General and administrative
expenses (note 7) 39,989 50,571 30,173
Depreciation, depletion and
amortization (note 3) 93,000 154,000 138,000
Interest expense - - -
267,426 373,281 350,923
Net income $ 194,816 390,236 378,346
Net income applicable
to limited partners $ 192,868 386,334 374,563
Net income of limited
partners per unit
of limited partnership
interest $ 36 73 71
Number of units of limited
partnership interests
outstanding 5,304 5,304 5,304
See accompanying notes to financial statements.
<PAGE>
</TABLE>
<TABLE>
SANCHEZ-O'BRIEN 1981-A DRILLING COMPANY
(a limited partnership)
Statements of Partners' Equity (Deficit)
Years Ended December 31, 1998, 1997, and 1996
(Unaudited)
Limited Partners
Partners'
General Equity
Units Amount Partner (Deficit)
<CAPTION>
<S> <C> <C> <C> <C>
Balances at December 31, 1995 5,304 $1,184,440 11,961 1,196,401
Cash distribution (393,822) (3,978) (397,800)
Net income 374,563 3,783 378,346
Balances at December 31, 1996 5,304 1,165,181 11,766 1,176,947
Cash distribution - (420,076) (4,244) (424,320)
Net income 386,334 3,902 390,236
Balnaces at December 31, 1997 5,304 1,131,439 11,424 1,142,863
Cash distribution - - - -
Net income - 192,868 1,948 194,816
Balances at December 31, 1998 5,304 $1,324,307 13,372 1,337,679
See accompanying notes to financial statements.
<PAGE>
</TABLE>
<TABLE>
SANCHEZ-O'BRIEN 1981-A DRILLING COMPANY
(a limited partnership)
Statements of Cash Flows
December 31, 1998, 1997 and 1996
(Unaudited)
1998 1997 1996
<CAPTION>
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 194,816 390,236 378,346
Adjustments to reconcile net earnings
to net cash provided by operating
activities: Depreciation, depletion
and amortization 93,000 154,000 138,000
Change in assets and liabilities:
Accounts receivable 29,490 54,884 (33,760)
Accounts payable 11,656 45,240 (111,622)
Suspense payable (3,915) 29,845 33,265
Total adjustments 130,231 283,969 25,883
Net cash provided by operating
activities 325,047 674,205 404,229
Cash flows from investing activities:
Cash distributions - (424,320) (397,800)
Additions to property and equipment 20,825 (85,503) (26,465)
Net cash used in investing activities 20,825 (509,823) (424,265)
Cash flows from financing activities:
Payments of long-term debt - - -
Proceeds fom long-term debt - - -
Net cash provided by financing
activities - - -
Net increase (decrease) in cash and cash
equivalents 345,872 164,382 (20,036)
Cash and cash equivalents at beginning of year 665,680 501,298 521,334
Cash and cash equivalents at end of year $ 1,011,552 665,680 501,298
</TABLE>
<PAGE>
SANCHEZ-O'BRIEN 1981-A DRILLING COMPANY
(a limited partnership)
Notes to Financial Statements
December 31, 1998 and 1997
(1) Organization and Summary of Significant Accounting Policies
Organization - Sanchez-O'Brien 1981-A Drilling Company
Sanchez-O'Brien 1981-A Drilling Company (the Drilling
Company), a Texas limited partnership, was formed on December
18, 1980 with Sanchez Drilling Corporation (a
wholly-owned subsidiary of Sanchez Oil & Gas
Corporation) as general partner and an organizational limited
partner. On June 23, 1981, Sanchez Drilling Corporation,
as general partner, and investors, representing
5,304 units of limited partnership interests ($5,000 per
unit), entered into an Agreement of Limited Partnership for
the Sanchez-O'Brien 1981-A Drilling Company. The Drilling
Company was to remain in existence until December 31, 2011,
unless dissolved prior to that date according to provisions of
the Drilling Company Partnership Agreement. Sanchez Drilling
Corporation and the individual limited partners are
not required to make additional capital contributions to the
Drilling Company.
The Drilling Company Partnership Agreement provides for
quarterly distributions from available cash.
Organization - Sanchez-O'Brien 1981-A Drilling Partnership
Sanchez-O'Brien 1981-A Drilling Partnership (the Drilling
Partnership), a Texas general partnership, was organized on
June 23, 1981 with Sanchez Oil & Gas Corporation as managing
general partner and Sanchez-O'Brien 1981-A Drilling
Company as general partner. The Drilling Partnership was
formed to engage in oil and natural gas exploration, drilling,
development, production and marketing in the United States.
The Drilling Partnership was to remain in existence until
December 31, 2011, unless dissolved prior to that date
according to provisions of the Drilling Partnership Agreement.
Sanchez Oil & Gas Corporation, as managing general
partner, is required to make capital contributions to the
Drilling Partnership on a current basis sufficient to pay the
costs allocated to the managing general partner under the
terms of the Drilling Partnership Agreement. The managing
general partner was required to make capital contributions in
an amount equal to 20 percent of the capital contributions of
the limited partners to the Drilling Company, reduced by any
organization or other costs incurred by the managing general
partner which were reimbursed by the Drilling Company or the
Drilling Partnership, by June 23, 1983. This capital
contribution requirement was met, and cumulative capital
contributions by the managing general partner total $5,331,953
as of December 31, 1998.
<PAGE>
The Drilling Partnership Agreement provides that funds in
excess of amounts necessary to pay the partners' share of
existing and anticipated expenditures, including the repayment
of borrowings, shall be distributed quarterly to the partners
of the Drilling Partnership.
Basis of Financial Statement Presentation
The financial statements of the Drilling Company include its
proportionate share in specific assets, liabilities, revenues
and expenses of the Drilling Partnership. All significant
intercompany balances and transactions have been eliminated.
Oil and Gas Properties
The Drilling Company follows the full cost method of
accounting for its proportionate interest in the oil and
natural gas operations of the Drilling Partnership. Under
this method, all costs incurred in the acquisition,
exploration and development of properties, including costs of
surrendered and abandoned leaseholds, delay lease rentals and
dry holes, are capitalized. Dispositions of oil and natural
gas properties are accounted for as adjustments to capitalized
costs, with no gain or loss recognized. Depreciation,
depletion and amortization of oil and natural gas properties
is provided by the units-of-production method based on proved
oil and natural gas reserves.
Under the full cost method of accounting for oil and natural
gas operations, capitalized costs of oil and natural gas
properties are not to exceed the present value of future net
revenues from estimated production of proved oil and natural
gas properties plus the lower of cost or estimated fair market
value of unproved properties. If capitalized costs exceed
this limitation, an additional provision is to be made to
depreciation, depletion and amortization.
Federal Income Taxes
For Federal income tax purposes, the partners' respective
interests in the revenues, expenses and other deductions and
credits of the Drilling Company are reportable in their
individual tax returns. Accordingly, no provision or liability
for Federal income taxes has been shown on the accompanying
financial statements.
Organization Costs
Organization costs were capitalized and amortized over five
years using the straight-line method.
<PAGE>
Syndication Costs
Syndication costs (sales commissions to brokers for their
sales of limited partnership interests) have been deducted
directly from the capital accounts in the Drilling Company.
(2) Allocations of Revenues, Costs and Expenses
Drilling Company
All revenues, costs and expenses of the Drilling Company are
allocated 1 percent to the general partner, Sanchez-O'Brien
Drilling Corporation, and 99 percent to the limited partners.
All revenues, costs and expenses are allocated to the
individual limited partners in proportion to their capital
accounts.
Drilling Partnership
Revenues and expenses of the Drilling Partnership which relate
to capital wells (wells which are funded principally by
capital contributions of the Drilling Company) are allocated
30 percent to the managing general partner, Sanchez Oil & Gas
Corporation, and 70 percent to the general partner, the Drilling
Company, until partnership payout is reached, and
50 percent to each partner thereafter. All costs of capital
wells which are non-capitalized costs for Federal income tax
purposes are charged to the Drilling Company. All capitalized
costs of capital wells and leasehold costs relating to
producing capital wells are charged to Sanchez Oil & Gas Corporation.
All revenues, expenses, well costs and leasehold costs
relating to subsequent wells (all wells other than the capital
wells) are allocated 50 percent to Sanchez Oil & Gas
Corporation and 50 percent to the Drilling Company.
All interest earned as a result of the temporary investment of
the Drilling Company's capital contribution to the Drilling
Partnership are allocated 100 percent to the Drilling Company.
(3) Oil and Natural Gas Producing Activities
The aggregate amount of capitalized costs of the Drilling
Company's proportionate share of the oil and natural gas
properties of the Drilling Partnership for the years ended
December 31, 1998 and 1997 were as follows:
<PAGE>
[CAPTION]
1998 1997
[S] [C] [C]
Costs related to proved
properties $31,022,493 31,043,318
Costs related to unproved
properties - -
31,022,493 31,043,318
Less accumulated depletion 30,469,924 30,376,924
$ 552,569 666,394
The following schedule presents the results of operations of
the Drilling Company's proportionate share of the oil and
natural gas producing activities of the Drilling Partnership
for the years ended December 31, 1997, 1996 and 1995:
[CAPTION]
1998 1997 1996
[S] [C] [C] [C]
Oil and natural gas revenues $ 438,068 742,030 716,938
Operating expenses 134,437 166,191 182,750
Depreciation, depletion and
amortization 93,000 154,000 138,000
Results of operations from
producing activities
(excluding overhead and
interest costs)
Net income $ 210,631 421,839 396,188
Operating expenses include production taxes of $2,456, $ 2,520,
and $3,119 in 1998, 1997 and 1996, respectively.
The 1998 full cost ceiling test did not warrant an additional
charge to depreciation, depletion and amortization. The
calculation of the limitation on capitalized costs as of
December 31, 1998 was based on $2.00 per MCF.
The regular provision for depreciation, depletion and
amortization per unit of production (net equivalent barrel)
for the years ended December 31, 1998, 1997 and 1996 was
$2.40, $2.73 and $2.48 respectively. These rates are
exclusive of the amounts attributable to the limitation on
capitalized costs.
Over seventy seven percent of the natural gas sales from seven S. W.
Escobas producing wells were sold to Tejas Gas Marketing, LLC during 1998.
<PAGE>
(4) Notes Payable
As of December 31, 1998, the Drilling Company does not have
any debt.
(5) Federal Income Taxes
Under the method of accounting followed by the Drilling
Company for Federal income tax reporting purposes: (a)
expenditures incurred in acquiring undeveloped properties and
equipping productive oil and natural gas properties are
capitalized, whereas such expenditures relating to dry holes
are charged against earnings; (b) both productive and
nonproductive intangible drilling and development costs are
expensed currently; (c) revenues, expenses, capital
contributions and distributions are generally recognized as
cash received or paid; (d) tentative depletion expense is
computed using the greater of cost or percentage depletion for
each property; and (e) depreciation of lease and well
equipment is computed using the accelerated cost recovery
system over a five year period.
The following is a reconciliation of the net income of the
Drilling Company as reported herein, to its earnings reported
for Federal income tax purposes for the years ended December 31,
1998, 1997 and 1996.
[CAPTION]
1998 1997 1996
[S] [C] [C] [C]
Net income as reported
herein $ 194,816 390,236 378,346
Less costs capitalized for
financial reporting purposes
which are expenses for tax
purposes (primarily intangible
drilling and dry hole costs) (20,825) 83,524 13,475
Add depreciation, depletion and
amortization for financial
reporting purposes 93,000 154,000 138,000
Less depreciation and cost
depletion for tax purposes 68,732 53,755 63,476
Differences in accrual method
of accounting for financial
reporting purposes and cash
basis for tax purposes (40,156) 31,397 18,063
Income for Federal income tax
purposes $ 199,753 438,354 457,458
<PAGE>
(6) Repurchase Obligations
In accordance with the terms of the Drilling Company's
Partnership Agreement, Sanchez Drilling Corporation is
obligated to purchase, if requested, the interests of limited
partners in the Drilling Company. The purchase price is to be
based primarily on annual determinations of the discounted
value of the Drilling Company's share of the oil and natural
gas properties of the Drilling Partnership. The maximum
repurchase obligation is 10% of the Aggregate Limited
Partners' Capital Contributions. Sanchez Oil & Gas
Corporation purchased 9 units during 1998.
(7) Related Party Transactions
Sanchez Oil & Gas Corporation functions as operator
for the Drilling Partnership's wells. In this capacity,
Sanchez Oil & Gas Corporation receives monthly fees as
operator on drilling and producing wells, and under the terms
of the Drilling Company and Drilling Partnership Agreements,
Sanchez Oil & Gas Corporation is reimbursed for direct
costs of performing services for the Drilling Company and the
Drilling Partnership and for that part of its administrative
overhead that reasonably pertains to the Drilling Company and
the Drilling Partnership. These reimbursements amounted to
$57,152 in 1998 for both the Drilling Partnership and Drilling
Company. Of these amounts, $30,000 was paid for overhead
reimbursements and $27,152 for direct administrative charges.
The Drilling Company's share of the above reimbursements
included $20,377 of administrative charges, both overhead and
direct charges, for the year 1998.
Accounts payable on the accompanying balance sheets are due
the Managing General Partner.
Substantially all of the Drilling Partnership's oil and
natural gas leases were acquired from the Managing General
Partner at cost, plus carrying and administrative charges.
A staff overriding royalty pool, consisting of a maximum of 7%
of the Drilling Partnership's net revenue interest in all oil
and natural gas leases, is shared by certain geological,
engineering and other key employees of Sanchez Oil &
Gas Corporation.
<PAGE>
(8) Oil and Natural Gas Reserves (Unaudited)
The following is a summary of the Drilling Company's
proportionate share of the proved oil and natural gas reserve
quantities of the Drilling Partnership as estimated by Lone
Cypress Engineering, Inc. of Houston, Texas.
[CAPTION]
Oil and Natural
Condensate Gas
(Barrels) (MCF)
Proved developed and
undeveloped reserves:
[S] [C] [C]
Balance at December 31, 1997 41,421 1,210,495
1998 adjustments (15,977) (401,389)
Production (2,974) (214,507)
Balance at December 31, 1998 22,470 594,599
Proved developed and
undeveloped reserves:
December 31, 1996 43,481 1,511,612
December 31, 1997 41,421 1,210,495
December 31, 1998 22,470 594,599
All the reserves of the Drilling Company are attributable to
its interest in the Drilling Partnership, and are located within
the United States.
<PAGE>
Schedule V
SANCHEZ-O'BRIEN 1981-A DRILLING COMPANY
(a limited partnership)
Property and Equipment
Years Ended December 31, 1998, 1997 and 1996
[CAPTION]
Balance at Balance at
Beginning of End of
Classification Period Additions Retirements Period
1996
[S] [C] [C] [C] [C]
Oil and natural gas properties $30,931,350 26,465 0 30,957,815
1997
Oil and natural gas properties $30,957,815 85,503 0 31,043,318
1998
Oil and natural gas properties $31,043,318 0 20,825 31,022,493
<PAGE>
Schedule VI
SANCHEZ-O'BRIEN 1981-A DRILLING COMPANY
(a limited partnership)
Accumulated Depreciation, Depletion
and Amortization
Years Ended December 31, 1998, 1997 and 1996
[CAPTION]
Balance at Balance at
Beginning of End of
Classification Period Additions Retirements Period
1996
[S] [C] [C] [C] [C]
Oil and natural gas properties $30,084,924 138,000 0 30,222,924
1997
Oil and natural gas properties $30,222,924 154,000 0 30,376,924
1998
Oil and natural gas properties $30,376,924 93,000 0 30,469,924
<PAGE>
Item 9. Disagreements on Accounting and Financial Disclosure
There have been no disagreements by the Drilling Company with
its accountants on accounting or financial disclosures which would
warrant disclosure pursuant to this item.
PART III
Item 10. Directors and Executive Officers of the Registrant
The Drilling Company has no directors or executive officers.
The General Partner, Sanchez Drilling Corporation, is a wholly
owned subsidiary of Sanchez Oil & Gas Corporation. The names,
ages (as of March 1, 1999) and positions of the directors and
executive officers of Sanchez Drilling Corporation are as
follows:
NAME AGE POSITION
Antonio R. Sanchez, Jr. 56 Chairman of the Board and
Chief Executive Officer
Frank A. Guerra 50 President, COO and CFO
Minita M. Freeman 78 Senior Vice President,
Secretary, Treasurer and
Director
Olivero F. Garza, III 52 Assistant Secretary
Antonio R. Sanchez, Jr., age 56, is Chairman of the Board and
Chief Executive Officer. He holds a Bachelor of Business
Administration degree and a Doctor of Jurisprudence degree from St.
Mary's University of San Antonio, Texas. Prior to 1973, Mr.
Sanchez, Jr., practiced law in both San Antonio and Laredo, Texas,
and served as an administrative assistant to the Lieutenant
Governor of Texas. In addition to his oil and natural gas
investments, Mr. Sanchez, Jr. has other substantial investments.
<PAGE>
Minita M. Freeman, age 78, is Senior Vice President, Secretary, Treasurer
and a Director. Mrs. Freeman holds a Bachelor of Business Administration
degree from the University of Texas at Austin with a major in accounting.
Prior to joining affiliates of the Managing General Partner in 1975,
Mrs. Freeman practiced accounting primarily in Laredo, Texas.
Frank A. Guerra, age 50, President, COO and CFO, was employed by the
Managing General Partner in early 1979. He is in charge of accounting for the
Managing General Partner and all affiliates. Mr. Guerra was previously
employed by Exxon Corporation as an accounting supervisor in the Exploration
and Production Department from 1977 to 1979 and as a senior auditor on various
staffs from 1972 to 1977. Mr. Guerra received a Bachelor of Business
Administration degree in accounting from Texas A & M Universiry in 1971 and
is a Certified Public Accountant.
Olivero F. Garza, III, age 52, is Vice President-Accounting/Administration
for the Managing General Partner. He was employed in March 1980 as Manager of
Corporate Accounting. Mr. Garza has been employed in the oil and natural gas
industry since 1968 with companies such as Exxon Corporation, Coastal
Corporation and TransOcean Oil Company. Mr. Garza received a Bachelor of
Business Administration degree in accounting from Pan American College in
Edinburg, Texas in 1968.
The terms of each officer and director named above expire at the Company's
annual meeting of directors or such other time as his successor is duly elected
and qualified.
Item 11. Executive Compensation
Inasmuch as the Drilling Company has no directors, officers or employees,
it paid no remuneration during 1998. In accordance with the Agreement of
Limited Partnership, the Drilling Company reimbursed the Managing General
Partner for direct expenses and administrative and overhead expenses
attributable to the operations of the Drilling Company (see Note 7 to the
Financial Statements).
All of the oil and natural gas properties of the Drilling Partnership were
acquired at cost (including carrying costs) or were obtained on its behalf by
the Managing General Partner from third parties. The Managing General Partner
acts as operator for certain drilling or producing wells of the Drilling
Partnership.
Item 12. Security Owenership of Certain Benefical Owners and Management
(a) Principal Security Holders
At December 31, 1998, Sanchez Oil & Gas Corporation, owned a 35.63
percent interest (1,890 units) in the Drilling Company. One investor,
Brian E. O'Brien, owned 17.74 percent interest (941 units), but no other
limited partner owned, of record or beneficially, more than one percent
of the Drilling Company (See Note 6 to the Financial Statements).
As provided under the terms of the Agreement of Limited Partnership, the
General Partner has a one percent interest in all of the Drilling Company's
revenues, expenses, profits or losses, and upon liquidation, a one percent
interest in the Drilling Company's properties.
As provided under the terms of the Articles of Partnership of the
Drilling Partnership, Sanchez Oil & Gas Corporation, the Managing
General Partner of the Drilling Partnership, has a revenue interest which
varies from 30 percent to 50 percent in the Drilling Partnership's revenues.
(b) Amount of Sanchez Oil & Gas Corporation Securities Owned by
Officers and Directors of Sanchez Oil & Gas Corporation
At March 1, 1998, the Estate of Antonio R. Sanchez and Antonio R. Sanchez,
Jr. own one hundred percent of the outstanding common stock of Sanchez Oil &
Gas Corporation.
(c) Changes in control
There have been no changes in control of the Drilling Company during the
period ended December 31, 1998.
Item 13. Certain Relationships and Related Transactions
During 1981, the Drilling Company paid Sanchez Drilling Corporation
$300,000 for costs related to organizing the Drilling Company and offering the
limited partnership interests therein. As operator of the Drilling
Partnership's wells, Sanchez Oil & Gas Corporation receives monthly
fees on drilling and producing wells. The Drilling Partnership also paid
Sanchez Oil & Gas Corporation a management fee of $1,193,400 in 1981.
Substantially all of the Drilling Partnership's oil and natural gas leases
were acquired from Sanchez Oil & Gas Corporation at cost plus administrative
and carrying charges. Certain key employees of Sanchez Oil & Gas
Corporation participate in a staff overriding royalty pool consisting of a
maximum of 7% of the Drilling Partnership's net revenue interest in all oil
and natural gas leases. (See Note 7 to the Financial Statements).
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
Financial Statements and Schedules
(a) The following documents are filed as part of this annual report on
Form 10-K:
1. Financial Statements
(See Index to Financial Statements in Item 8)
2. Financial Statement Schedules
The financial statement schedules are filed as part
of this report as listed in the Index to Financial Statements
in Item 8.
3. Exhibits:
*3.1-Articles of Limited Partnership, as amended,
filed as exhibit 4.1 to the Registrant's Registration
Statement on Form S-1 (Reg. No. 2-70390).
*3.2-Articles of Partnership, as amended, filed as exhibit
4.2 to the Registrant's Registration Statement on
Form S-1 (Reg. No. 2-70390).
*Incorporated by reference, as indicated.
(b) Reports on Form 8-K
There were no reports on Form 8-K for the twelve months ended
December 31, 1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly aythorized on March 31, 1999.
SANCHEZ OIL & GAS CORPORATION
By Sanchez Drilling Corporation
By Antonio R. Sanchez, Jr.
Chairman of the Board of Directors
and Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements iof the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 31, 1999.
Frank A. Guerra Minita M. Freeman
President Senior Vice President,
(Principal Operating Officer) Secretary, Treasurer and Director
(Principal Financial Officer and Director)
Olivero F. Garza, III
Assistant Secretary
<PAGE>
Pursuant to the requirements of Section 13 of 15(d) of the Securities
Exchange Act of 1934, the registrant hasduly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized on March 31, 1999.
SANCHEZ OIL & GAS CORPORATION
By Sanchez Drilling Corporation
By s/Antonio R. Sanchez, Jr.
Antonio R. Sanchez, Jr.
Chairman of the Board of Directors
and Chief Executive Officer
(Principal Executive Officer)
s/Frank A. Guerra s/Minita M. Freeman
Frank A. Guerra Minita M. Freeman
President Senior Vice President,
(Principal Operating Officer) Secretary, Treasurer and Director
(Principal Financial Officer and Director
s/Olivero F. Garza, III
Olivero F. Garza, III
Assistant Secretary
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