<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NO. 0-10501
STERLING GAS DRILLING FUND 1981
(Exact name of Registrant as specified in its charter)
NEW YORK 13-3098770
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE LANDMARK SQUARE
STAMFORD, CONNECTICUT 06901
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (203) 358-5700
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
UNITS OF LIMITED PARTNERSHIP
(Title of Class)
Indicate by check mark whether 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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not 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-K or any
amendment to this Form 10-K. [ ]
The Registrant has no voting stock. There is no market for the Units
and therefore no market value of the Units is reported.
The number of Units of the Registrant outstanding as of March 16,
1999, was: 8,790.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
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<PAGE> 2
STERLING GAS DRILLING FUND 1981
FORM 10-K ANNUAL REPORT
FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1998
PART I
ITEM 1. BUSINESS
Sterling Gas Drilling Fund 1981 (the "Registrant" or the
"Partnership") is a limited partnership formed under the laws of the State of
New York on September 28, 1981. The sole business of the Partnership was the
drilling of formation extension wells principally for natural gas in various
locations in the State of West Virginia. No exploratory drilling was
undertaken.
The principal place of business of the Partnership is at One Landmark
Square, Stamford, Connecticut 06901, telephone (203) 358-5700. The Managing
General Partner of the Partnership is PrimeEnergy Management Corporation, a New
York corporation, which is a wholly-owned subsidiary of PrimeEnergy
Corporation, a publicly held Delaware corporation. Messrs. Charles E. Drimal,
Jr., Oliver J. Sterling and Samuel R. Campbell also are General Partners. Mr.
Drimal is a Director, President and Chief Executive Officer of PrimeEnergy
Management Corporation and PrimeEnergy Corporation, and Mr. Campbell is a
Director of PrimeEnergy Corporation.
The aggregate contributions to the Partnership were $8,790,000, all of
which, net of the organization expenses of the Partnership, was expended in the
drilling of such formation extension wells. Such properties are located in
Clay, Roane, Calhoun, and Wirt Counties, West Virginia. The Partnership does
not operate any of the properties in which it has an interest, but generally
such properties are operated and serviced by Prime Operating Company, a Texas
corporation, and Eastern Oil Well Service Company, a West Virginia corporation,
both wholly-owned subsidiaries of PrimeEnergy Corporation.
During 1998, the Partnership did not engage in any development
drilling activities or the acquisition of any significant additional
properties, but engaged in the production of oil and gas from its producing
properties in the usual and customary course. Since January 1, 1999, and to the
date of this Report, the Partnership has not engaged in any drilling activities
nor participated in the acquisition of any material producing oil and gas
properties.
COMPETITION AND MARKETS
Competitors of the Partnership in the marketing of its oil and gas
production include oil and gas companies, independent concerns, and individual
producers and operators, many of which have financial resources, staffs and
facilities substantially greater than those available to the Partnership.
Furthermore, domestic producers of oil and gas must not only compete with each
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<PAGE> 3
other in marketing their output, but must also compete with producers of
imported oil and gas and alternative energy sources such as coal, nuclear power
and hydro-electric power.
The availability of a ready market for any oil and gas produced by the
Partnership at acceptable prices per unit of production will depend upon
numerous factors beyond the control of the Partnership, including the extent of
domestic production and importation of oil and gas, the proximity of the
Partnership's producing properties to gas pipelines and the availability and
capacity of such pipelines, the marketing of other competitive fuels,
fluctuation in demand, governmental regulation of production, refining,
transportation and sales, general national and worldwide economic conditions,
and pricing, use and allocation of oil and gas and their substitute fuels.
The Partnership does not currently own or lease any bulk storage
facilities or pipelines, other than adjacent to and used in connection with
producing wells. The Partnership deals with a number of major and independent
companies for the purchase of its oil and gas production, in the areas of
production. Sales are made under short-term contractual arrangements or monthly
spot prices. In 1998, approximately $184,191, or 61.87%, and $100,237, or
33.67%, of the Partnership's gas production was purchased by the Brooklyn Union
Gas Company and Phoenix Diversified, respectively; approximately $5,095, or
90.15% of oil production was purchased by the American Refining Group. None of
these purchasers has any relationship or is otherwise affiliated with the
Partnership. The Partnership believes that its current purchasers will continue
to purchase its oil and gas products and, if not, could be replaced by other
purchasers.
ENVIRONMENTAL MATTERS
The petroleum industry is subject to numerous federal and state
environmental statutes, regulations and other pollution controls. In general,
the Partnership is, and will be subject to, present and future environmental
statutes and regulations, and in the future the cost of its activities may
materially increase as a result thereof. The Partnership's expenses relating to
preserving the environment during 1998 as they relate to its oil and gas
operations were not significant in relation to operating costs and the
Partnership expects no material change in the near future. The Partnership
believes that environmental regulations should not, in the future, result in a
curtailment of production or otherwise have a materially adverse effect on the
Partnership's operations or financial condition.
REGULATION
The Partnership's oil and gas operations are subject to a wide variety
of federal, state and local regulations. Administrative agencies in such
jurisdictions may promulgate and enforce rules and regulations relating to,
among other things, drilling and spacing of oil and gas wells, production
rates, prevention of waste, conservation of natural gas and oil, pollution
control, and various other matters, all of which may affect the Partnership's
future operations and production of oil and gas. The Partnership's natural gas
production and prices received for natural gas are regulated by the Federal
Energy Regulatory Commission ("FERC") and the Natural Gas Policy Act of 1978
and various state regulations. The Partnership was subject to the Crude Oil
Windfall
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Profit Tax Act of 1980, which imposed an excise tax on producers of crude oil
at various rates for prices received in excess of certain historical base
prices. That Act was repealed in August, 1988. The Partnership is also subject
to state drilling and proration regulations affecting its drilling operations
and production rates.
The FERC continues to regulate interstate natural gas pipeline
transportation rates and service conditions pursuant to the NGA and NGPA.
Federal regulation of interstate transporters affects the marketing of natural
gas produced by the Partnership as well as the revenues received by the
Partnership for sales of such natural gas. Since the latter part of 1985,
through its Order Nos. 436, 500 and 636 rulemakings, the FERC has endeavored to
make natural gas transportation accessible to gas buyers and sellers on an open
and non-discriminatory basis. The FERC's efforts have significantly altered the
marketing and pricing of natural gas. No prediction can be made as to what
additional legislation may be proposed, if any, affecting the competitive
status of a gas producer, restricting the prices at which a producer may sell
its gas, or the market demand for gas, nor can it be predicted which proposals,
including those presently under consideration, if enacted, might be effective.
A number of legislative proposals have been introduced in Congress and
the state legislatures of various states, that, if enacted, would significantly
affect the petroleum industry. Such proposals involve, among other things, the
imposition of land and use controls and certain measures designed to prevent
petroleum companies from acquiring assets in other energy areas. In addition,
there is always the possibility that if market conditions change dramatically
in favor of oil and gas producers that some new form of "windfall profit" or
severance tax may be proposed for and imposed upon either oil or gas. At the
present time it is impossible to predict which proposals, if any, will actually
be enacted by Congress or the various state legislatures. The Partnership
believes that it will comply with all orders and regulations applicable to its
operations. However, in view of the many uncertainties with respect to the
current controls, including their duration and possible modification together
with any new proposals that may be enacted, the Partnership cannot predict the
overall effect, if any, of such controls on its operations.
TAXATION
The Partnership received an opinion of its counsel that the
Partnership would be classified as a partnership and the holders of Partnership
Units would be treated as limited partners for federal income tax purposes. The
Partnership itself, to the extent that it is treated for federal income tax
purposes as a partnership, is not subject to any federal income taxation, but
it is required to file annual partnership returns. Each holder of Partnership
Units will be allocated his distributive shares of the Partnership's income,
gain, profit, loss, deductions, credits, tax preference items and distributions
for any taxable year of the Partnership ending within or with his taxable year
without regard as to whether such holder has received or will receive any cash
distributions from the Partnership.
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<PAGE> 5
ITEM 2. PROPERTIES
The Partnership has no interest in any properties other than its oil
and gas properties. The information set forth below summarizes the
Partnership's oil and gas wells, production and reserves, for the periods
indicated.
PRODUCING WELLS AND OPERATING INFORMATION
The Partnership, following its formation, and in December, 1981,
contracted for the drilling of 41 development wells, which resulted in 37
producing wells, three non-commercial wells and one dry hole.
As of December 31, 1998, the Partnership had ownership interests in
the following gross and net producing oil and gas wells and gross and net
producing acres.(1) The Partnership has no material undeveloped leasehold,
mineral or royalty acreage.
Producing wells:
<TABLE>
<CAPTION>
Gross Net
----- ---
<S> <C> <C>
Oil Wells................... 0 0.0
Gas Wells................... 42 32.6
Producing acres............. 2,798.75 2,172.39
</TABLE>
- ------------------
(1) A gross well is a well in which an interest is owned; a net
well is the sum of the interests owned in gross wells. Wells
are classified by their primary product. Some wells produce
both oil and gas.
The following table sets forth the Partnership's oil and gas
production, average sales prices and average production costs as of and for the
periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1998 1997 1996 1995 1994
------------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Production:
Oil and Condensate (bbl)............. 709 515 541 416 387
Gas (Mcf)............................ 102,850 85,541 88,693 93,101 84,266
Average Price of Sales:
Oil and Condensate ($ per bbl). . ... $ 12.14 18.34 19.50 16.72 13.96
Gas ($ per Mcf)...................... $ 2.92 2.93 2.63 2.66 2.89
Production Expense per Dollar
of Operating Revenue................. $ 0.39 0.40 0.38 0.36 0.45
</TABLE>
OIL AND GAS RESERVES
The Partnership's interests in proved developed oil and gas properties
have been evaluated by Ryder Scott Company for the periods indicated below. All
of the Partnership's reserves are
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<PAGE> 6
located in the continental United States. The following table summarizes the
Partnership's oil and gas reserves at the dates shown (figures rounded):
<TABLE>
<CAPTION>
Proved Developed
As of ---------------------------------------------------
12-31 Oil (bbls) Gas (Mcf)
----- ---------- ---------
<S> <C> <C>
1994 1,000 1,209,000
1995 3,500 1,453,500
1996 3,600 1,435,000
1997 4,690 1,273,000
1998 4,620 1,472,000
</TABLE>
The estimated future net revenue (using current prices and costs as of
the dates indicated, exclusive of income taxes (at a 10% discount for estimated
timing of cash flow) for the Partnership's proved developed oil and gas
reserves for the periods indicated are summarized as follows (figures rounded):
<TABLE>
<CAPTION>
Proved Developed
--------------------------------------------
As of Future Net Present Value of
12-31 Revenue Future Net Revenue
----- ----------- ------------------
<S> <C> <C>
1994 $1,423,000 $703,000
1995 1,745,700 765,500
1996 1,893,800 817,000
1997 1,558,300 687,900
1998 1,820,700 807,750
</TABLE>
Since January 1, 1998, the Partnership has not filed any estimates of
its oil and gas reserves with, nor were any such estimates included in any
reports, to any federal authority or agency, other than the Securities and
Exchange Commission.
ITEM 3. LEGAL PROCEEDINGS
The Partnership is not a party to, nor is any of its property the
subject of, any legal proceedings actual or threatened, which would have a
material adverse effect on the business and affairs of the Partnership.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted during 1998 for vote by the holders of
Partnership Units.
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<PAGE> 7
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
There is no market for the Limited Partnership Units (the "Units") of
the Partnership. As of March 16, 1999, there were 629 holders of record of the
Units.
The Units are not regarded as stock and payments or distributions to
holders of Units are not made in the form of dividends. There were no
distributions to the holders of Units in 1998 or 1997. Aggregate cash
distributions to the holders of the Units as of December 31, 1998, was
$3,955,500.
The Managing General Partner may purchase Units directly from the unit
holders if presented to the Managing General Partner, subject to conditions,
including limitations on numbers of Units, and at a price to be fixed by the
Managing General Partner in accordance with certain procedures, all as provided
for in the Limited Partnership Agreement of the Partnership.
ITEM 6. SELECTED FINANCIAL DATA
The information required hereunder is set forth under "Selected
Financial Data" in the Financial Information section included in this Report.
The index to the Financial Information section is at page F-1.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The information required hereunder is set forth under "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
the Financial Information section included in this Report. The index to the
Financial Information section is at page F-1.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required hereunder is set forth under "Report of
Independent Public Accountants," "Balance Sheets," "Statements of Operations,"
"Statements of Changes in Partners' Equity," "Statements of Cash Flows" and
"Notes to Financial Statements" in the Financial Information section included
in this Report. The index to the Financial Information section is at page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
There was no disagreement between the Partnership and its certified
public accountants on any matter of accounting principles or practices or
financial statement disclosure.
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<PAGE> 8
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Managing General Partner of the Partnership is PrimeEnergy
Management Corporation, a New York corporation ("Management"). The principal
business of Management is the management of the Partnership and other publicly
and privately held exploration and development limited partnerships and joint
ventures and publicly held asset and income fund limited partnerships. As of
March 16, 1999, Management acts as the Managing General Partner in a total of
51 limited partnerships and joint ventures, of which 5 are publicly held, and
is the Managing Trustee of 2 Delaware Business Trusts. The primary activity of
such Partnerships, joint ventures and trusts is the production of oil and gas
and Management, as the Managing General Partner of the Partnership, will devote
such of its time as it believes necessary in the conduct and management of the
business and affairs of the Partnership. Management, and other of the General
Partners of the Partnership, are engaged in and intend to continue to engage in
the oil and gas business for their own accounts and for the accounts of others.
Management, which provides all of the executive, management and
administrative functions of the Partnership, is a wholly-owned subsidiary of
PrimeEnergy Corporation ("PrimeEnergy"), a publicly held Delaware corporation.
The principal offices of PrimeEnergy and Management are in Stamford,
Connecticut. The operating subsidiaries of PrimeEnergy, Prime Operating Company
and Eastern Oil Well Service Company, maintain their principal offices in
Houston, Texas, with district offices in Midland, Texas, Oklahoma City,
Oklahoma, and Charleston, West Virginia. PrimeEnergy and its subsidiaries have
about 176 employees, including their principal officers, providing management
and administrative services, accounting, engineers, geologists, production
engineers, land department personnel and field employees.
Set forth below is information concerning the directors and executive
officers of Management and PrimeEnergy who are involved with the conduct of the
business and operations of the Partnership.
Charles E. Drimal, Jr., age 51, is a Director and President of
Management and has held those positions since May, 1983. He is also a Director
and President of PrimeEnergy and the operating subsidiaries. He graduated from
the University of Maryland in 1970 and from Samford University School of Law in
1973 and is a member of the New York State Bar.
Beverly A. Cummings, age 46, has been a Director and Vice President,
Finance, of Management since August, 1985. She is also a Director and Vice
President, Finance, and Treasurer of PrimeEnergy and the operating
subsidiaries. Ms. Cummings is a Certified Public Accountant and holds a
Bachelor of Science degree from the State University of New York and a Master
in Business Administration from Rutgers University.
Bennie H. Wallace, Jr., age 47, is a Director and Vice President of
Management and has held such positions since May, 1989. He is also Acquisitions
Manager for Management, a Vice President of PrimeEnergy, a Director of
PrimeEnergy since June, 1993, and is a Vice President and Director of the
operating subsidiaries. He graduated from Louisiana State University in 1975
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<PAGE> 9
with a Bachelor of Science degree in petroleum engineering and is a registered
professional engineer in the States of Texas and Louisiana and was an
independent petroleum engineer engaged in the evaluation and operation of oil
and gas properties from 1983 to 1987.
Lynne G. Pizor, age 39, has been Controller of Prime Operating Company
since January, 1992, and Eastern Oil Well Service Company since September,
1990. She also held that position with Management from January 1986 through
August, 1994, and PrimeEnergy from May, 1990, through August, 1994. She joined
Management in October, 1984, as Manager of Partnership Accounting. She is a
graduate of Wagner College with a Bachelor of Science degree in Economics and
Business Administration and is a Certified Public Accountant.
James F. Gilbert, age 66, has been Secretary of Management since June,
1990, Secretary of PrimeEnergy since March, 1973, and was a Director of
PrimeEnergy from that date to October, 1987. He also serves as Secretary of the
operating subsidiaries. He is an attorney in Dallas, Texas.
ITEM 11. EXECUTIVE COMPENSATION
The Partnership has no officers, directors or employees. The officers
and employees of the Managing General Partner and PrimeEnergy perform all
management and operational functions of the Partnership. The Partnership does
not pay any direct salaries or other remuneration to the officers, directors or
employees of the Managing General Partner or PrimeEnergy. The Managing General
Partner is reimbursed for the general and administrative expenses of the
Partnership reasonably allocated to the Partnership for in-house expenses
incurred on behalf of the Partnership limited annually to an amount equal to 7%
of the first $7,000,000 and 6% thereafter, of capital contributions, or in the
case of third-party expenses, 3.5% of such contributions. During 1998 and 1997,
the allocation of general and administrative expenses to the Partnership was
$100,000 for each year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The Partnership does not know of any person, entity or group, other
than the Managing General Partner and PrimeEnergy Corporation that beneficially
owns more than five percent of the Units. The following table shows as of March
16, 1999, the name and address of such beneficial owners, and the number and
percent of Units beneficially owned by them, all of which are directly owned.
-8-
<PAGE> 10
<TABLE>
<CAPTION>
Number
Name and Address of Beneficial Owner of Units Percent
- ------------------------------------ -------- -------
<S> <C> <C>
PrimeEnergy Management Corporation
One Landmark Square
Stamford, CT 06901...................................... 756 8.60%
PrimeEnergy Corporation
One Landmark Square
Stamford, CT 06901 ..................................... 1,479 16.82%
</TABLE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Prime Operating Company acts as the operator for most of the producing
oil and gas wells of the Partnership pursuant to operating agreements with the
Partnership and other working interest owners, including other partnerships
managed by the Managing General Partner, and in 1998 was paid well operating
fees ranging from about $307 to $555 per month per well. Together with well
operating supplies and equipment and related servicing operations are generally
provided by Eastern Oil Well Service Company. The Partnership pays its
proportionate part of such operating fees and expenses. Such fees and expenses
vary depending on such matters as the location of the well, the complexity of
the producing equipment, whether wells produce oil or gas or both and similar
factors. The Partnership believes that such services are as favorable to the
Partnership as they would be if the Partnership entered into such transactions
with unaffiliated third parties. In 1998 and 1997, the Partnership paid an
aggregate of $78,979 and $71,090, respectively, in such fees and expenses.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) The following documents are filed as a part of this Report:
1. Financial Statements (Index to the Financial
Information at page F-1)
2. Exhibits:
(3) Form of Agreement of Limited Partnership of
Sterling Gas Drilling Fund 1981 (Incorporated
by reference to Exhibit (3) of Sterling Gas
Drilling Fund 1981 Form 10-K for the year
ended December 31, 1994.)
(24) Consent of Ryder Scott Company (filed herewith)
(27) Financial Data Schedule. (filed herewith)
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<PAGE> 11
(b) Reports on Form 8-K:
No reports on Form 8-K have been filed during the last quarter of
the year covered by this Report.
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<PAGE> 12
SIGNATURES
Pursuant to the requirements of Section 13 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 authorized, on the 30th day of
March, 1999.
Sterling Gas Drilling Fund 1981
By: PrimeEnergy Management Corporation
Managing General Partner
By: /s/ CHARLES E. DRIMAL, JR.
-------------------------------------
Charles E. Drimal, Jr.
President
Pursuant to the requirements of 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 and on the 23rd day of March, 1999.
<TABLE>
<S> <C>
/s/ CHARLES E. DRIMAL, JR. Director and President,
- ----------------------------------- PrimeEnergy Management Corporation;
Charles E. Drimal, Jr.
The Principal Executive Officer
/s/ BEVERLY A. CUMMINGS Director and Vice President and Treasurer,
- ----------------------------------- PrimeEnergy Management Corporation;
Beverly A. Cummings
The Principal Financial and Accounting Officer
/s/ BENNIE H. WALLACE, JR. Director, PrimeEnergy Management
- ----------------------------------- Corporation
Bennie H. Wallace, Jr.
</TABLE>
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<PAGE> 13
STERLING GAS DRILLING FUND 1981
(a New York limited partnership)
Index to Financial Information and Schedules
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
Selected Financial Data F-2
Management's Discussion and Analysis of Financial Condition
and Results of Operations F-2
Report of Independent Public Accountants F-6
Financial Statements:
Balance Sheets, December 31, 1998 and 1997 F-7
Statements of Operations for the Years Ended December 31,
1998, 1997 and 1996 F-8
Statements of Changes in Partners' Equity for the Years
Ended December 31, 1998, 1997 and 1996 F-9
Statements of Cash Flows for the Years Ended December 31,
1998, 1997 and 1996 F-10
Notes to Financial Statements F-11
Schedules:
V - Property and Equipment - Oil and Gas Properties for
the Years Ended December 31, 1998, 1997 and 1996 F-19
VI - Accumulated Depreciation, Depletion, and Amortization -
Oil and Gas Properties for the Years Ended December 31,
1998, 1997 and 1996 F-20
</TABLE>
All other schedules have been omitted as the information required is either
included in the financial statements, related notes, or is not applicable.
F-1
<PAGE> 14
ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes certain selected financial data to
highlight significant trends in the Registrant's financial condition and
results of operations for the periods indicated. The selected financial data
should be read in conjunction with the financial statements and related notes
included elsewhere in this report.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, (000'S OMITTED)
-----------------------------------------------------------------
1998 1997 1996 1995 1994
------- ------ ------ ------ -------
<S> <C> <C> <C> <C> <C>
Revenues............................. $ 309 $ 264 $ 244 $ 291 $ 248
Net income (loss):
Limited Partners.................. (35) (34) (48) (31) (380)
General Partners.................. 8 6 4 9 (5)
Per equity unit................... (3.99) (4.63) (5.46) (3.47) (43.23)
Total assets......................... 1,162 1,161 1,239 1,305 1,389
Cash distributions:
Limited Partners.................. -- -- -- -- --
General Partners.................. -- -- -- -- --
Limited partners as
a % of original
contribution..................... -- -- -- -- --
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL
CONDITION & RESULTS OF OPERATIONS
1. Liquidity: The oil and gas industry is intensely competitive in all
its phases. There is also competition between this industry and other
industries in supplying energy and fuel requirements of industrial and
residential consumers. It is not possible for the Partnership to calculate its
position in the industry as the Partnership competes with many other companies
having substantially greater financial and other resources. In accordance with
the terms of the Agreement of Limited Partnership of the Partnership, the
General Partners of the Partnership will make cash distributions of as much of
the Partnership cash credited to the capital accounts of the partners as the
General Partners have determined is not necessary or desirable for the payment
of any contingent debts, liabilities or expenses for the conduct of the
Partnership business. As of December 31, 1998, the General Partners have
distributed to the Limited partners $3,955,500. Such cash distributions are
equivalent to 45% of original total Limited Partner capital contributions.
The Year 2000 (Y2K) issue is the definition and resolution of
potential problems resulting from computer application programs or imbedded
chip instruction sets utilizing two-digits, as opposed to four digits, to
define a specific year. Such date sensitive systems may be unable to properly
interpret dates, which could cause a system failure or other computer errors,
leading to disruptions in operations. The Partnership relies on the Managing
General Partner for all management and administrative functions. Consequently,
the Partnership's exposure to the Y2K problems is determined by what Year 2000
efforts have been undertaken by the Managing General Partner.
F-2
<PAGE> 15
In 1997, the Managing General Partner developed a three-phase program
for the Y2K information systems compliance. Phase I is to identify those
systems with which the Partnership has exposure to Y2K issues. Phase II is to
remediate systems and replace equipment where required. Phase III, to be
completed by mid-1999, is the final testing of each major area of exposure to
ensure compliance. The Managing General Partner has identified four major areas
determined to be critical for successful Y2K compliance: (1) financial and
informational system applications, (2) communications applications, (3) oil and
gas producing operations, and (4) third-party relationships.
The Managing General Partner, in accordance with Phase I of the
program, is in the process of conducting an internal review of all systems and
contacting all software suppliers to determine major areas of exposure to Y2K
issues. The Managing General Partner has completed the modifications to its
core financial and reporting systems and is continuing to test compliance in
this area. These modifications were made in conjunction with an upgrade of the
financial reporting applications provided by the Managing General Partner's
software vendor. Conversion to the new system was completed during 1998. Due to
the technology advances in the communications area the Managing General Partner
has upgraded such equipment regularly over the past three years. Y2K compliance
was a specification requirement of each installation. Consequently, the
Managing General Partner expects exposure in this area to be limited to third
party readiness. The Managing General Partner is in the process of identifying
areas of exposure resulting from equipment used in its oil and gas producing
operations. The Managing General Partner expects to complete identification of
critical systems by June 1999 and to continue remediation and testing
throughout 1999. In the third-party area, the Managing General Partner has
received assurance from its significant service suppliers that they intend to
be Y2K compliant by 2000. The Managing General Partner has implemented a
program to request Year 2000 certification or other assurance from other third
parties during 1999.
The Partnership recognizes that, notwithstanding the efforts described
above, the Partnership could experience disruptions to its operations or
administrative functions, including those resulting from non-compliant systems
utilized by unrelated third party governmental and business entities. The
Managing General Partner is in the process of developing a contingency plan in
order to mitigate potential disruption to business operations. The Managing
General Partner expects to complete this contingency plan by the second quarter
of 1999 but also expects to refine this plan throughout 1999.
Through 1998, the Managing General Partner has handled identifying,
remediating and testing systems for Year 2000 compliance within the scope of
routine upgrades and systems evaluations. The Managing General Partner expects
to complete the review of oil and gas operations exposure in the same manner,
without incurring substantial additional costs. However, information resulting
from the oil and gas operations review may indicate required expenditures not
currently contemplated by the Partnership.
The net proved oil and gas reserves of the Partnership are considered
to be a primary indicator of financial strength and future liquidity. The
present value of unescalated future net revenue (S.E.C. case) associated with
such reserves, discounted at 10% as of December 31, 1998 was approximately
$807,750 as compared to December 31, 1997, of about $687,900. Overall reservoir
engineering is a subjective process of estimating underground accumulations of
gas and
F-3
<PAGE> 16
oil that can not be measured in an exact manner. The accuracy of any reserve
estimate is a function of the quality of available data and of the engineering
and geological interpretation and judgment. Accordingly, reserve estimates are
generally different from the quantities of gas and oil that are ultimately
recovered and such differences may have a material impact on the Partnership's
financial results and future liquidity.
2. Capital resources: The Partnership was formed for the sole
intention of drilling oil and gas wells. The Partnership entered into a
drilling contract with an independent drilling contractor in December, 1981,
for $6,900,000. Pursuant to the terms of this contract, thirty-seven producing
wells, three non-commercial wells and one plugged well were drilled. The
Partnership has had a reserve report prepared which details reserve value
information, and such information is available to the Limited Partners pursuant
to the buy-out provision of the Agreement of Limited Partnership of the
Partnership.
3. Results of operations:
1998 compared to 1997
Operating revenue increased from $264,531 in 1997 to $309,715 in 1998.
The Partnership did experience a significant increase in gas production, from
85,541 mcf in 1997 to 102,850 mcf in 1998. The difference in the average price
per mcf received in 1998 and 1997 was a slight decrease of one cent per mcf. The
stable price for gas combined with the increased mcf production were the main
factors in increased revenue received from gas production. The Partnership
receives very little income from the production of oil but during 1998 oil
production was slightly higher, 709 barrels as compared to 515 barrels in 1997.
The total benefit to revenue from oil production was offset due to significantly
lower average prices per barrel received from the purchasers throughout 1998,
$18.54 per average barrel in 1997 to $12.14 per average barrel in 1998. The
operator of the wells may determine that additional equipment or replacement
equipment may assist in maintaining current production levels or reduce declines
in production. The additional equipment expenditures helped the Partnership's
production throughout 1998.
Overall production expenses increased from $103,551 in 1997 to $137,561
in 1998. Occasionally the Partnership will expend additional funds on light
repairs, which the operator has deemed necessary. These repairs are considered
an appropriate means to increase, sustain or halt changes in production. These
repairs as well as the additional or replacement equipment contributed to
additional cost incurred, which may include supplemental maintenance, labor,
location, access road work and other needed repairs. The majority of the
production expenditures for 1997 were for the general upkeep and routine
maintenance at the well and well sites. General and administrative costs showed
a small increase from $117,548 a in 1997 to $118,363 in 1998. Amounts in both
years are substantially less than the $439,500 which may be allocable to the
Partnership under the Partnership Agreement. Management continues to use
in-house resources if it will provide efficient and timely services to the
Partnership. Slight changes to these type costs are in keeping with management's
overall goal to limit costs, both incurred and allocated to the Partnership.
F-4
<PAGE> 17
The Partnership records additional depreciation, depletion and
amortization to the extent that the net capitalized costs exceed the
undiscounted future net cash flows attributable to the Partnership. No
additional depletion was needed in 1998 or 1997. Normal depletion for both 1998
and 1997 was consistent with the Partnership's remaining property basis and the
appropriate rates applied.
1997 compared to 1996
Operating revenue increased from $244,020 in 1996 to $264,531 in 1997.
The main variable to effect the overall revenue was the favorable gas pricing
contracts the Partnership participated in for the full twelve months of 1997.
The average price per mcf in 1997 was $2.93 in 1997 as compared to $2.63 in
1996. The Partnership did experience a decline in gas production, from 88,693
mcf in 1996 to 85,541 mcf in 1997. The Partnership receives very little income
from the production of oil and in 1997 both oil production and price were down,
541 barrels and a $19.50 average price in 1996 compared to 515 barrels and an
average price of $18.54 in 1997.
Overall production expenses increased from $92,332 in 1996 to $103,551
in 1997. Occasionally the Partnership will expend additional funds on light
repairs which the operator has deemed necessary. These repairs are considered
an appropriate means to increase, sustain or halt changes in production. These
contributed to additional cost incurred, which may include additional
maintenance, labor, location, access road work and other needed repairs. The
majority of the rest of the costs expended for 1997 and for the previous year
were for the general upkeep and maintenance at the well and well sites. General
and administrative costs remained relatively unchanged from $118,658 in 1996 to
$117,548 in 1997. Amounts in both years are substantially less than the
$439,500 allocable to the Partnership under the Partnership Agreement. Any
declines in these costs reflect management's efforts to limit costs, both
incurred and allocated to the Partnership. Management continues to monitor any
third party costs and use in-house resources if it will provide efficient and
timely services to the Partnership.
The Partnership records additional depreciation, depletion and
amortization to the extent that the net capitalized costs exceeds the
undiscounted future net cash flows attributable to the Partnership. No
additional depletion was needed in 1997 or 1996. Normal depletion for both 1997
and 1996 was consistent with the Partnership's remaining property basis and the
appropriate rates applied.
F-5
<PAGE> 18
STERLING GAS DRILLING FUND 1981
(a New York limited partnership)
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of
Sterling Gas Drilling Fund 1981:
We have audited the accompanying balance sheets of Sterling Gas Drilling Fund
1981 (a New York limited partnership) as of December 31, 1998 and 1997, and the
related statements of operations, changes in partners' equity, and cash flows
for the years ended December 31 1998, 1997 and 1996. These financial statements
are the responsibility of the Partnership's management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Sterling Gas Drilling Fund
1981 as of December 31, 1998 and 1997, and the results of its operations and
cash flows for the years ended December 31, 1998, 1997 and 1996 in conformity
with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedules listed in the index to
financial statements and schedules are presented for purposes of complying with
the Securities and Exchange Commission's rules and are not part of the basic
financial statements. These schedules have been subjected to the auditing
procedures applied in the examination of the basic financial statements and, in
our opinion, fairly state in all material respects the financial data required
to be set forth therein in relation to the basic financial statements taken as
a whole.
PUSTORINO, PUGLISI & CO., LLP
New York, New York
February 9, 1999
F-6
<PAGE> 19
STERLING GAS DRILLING FUND 1981
(a New York limited partnership)
BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
Assets
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Current Assets:
Cash and cash equivalents (Note 2) $ 19 $ 16
----------- -----------
Total Current Assets 19 16
----------- -----------
Oil and Gas Properties - successful efforts
method (Note 3) - (Schedules V and VI):
Leasehold costs 236,502 236,502
Wells and related facilities 7,026,724 6,944,355
----------- -----------
Total 7,263,226 7,180,857
Less - Accumulated depreciation, depletion (6,101,369) (6,020,197)
and amortization ----------- -----------
1,161,857 1,160,660
----------- -----------
Total Assets $ 1,161,876 $ 1,160,676
=========== ===========
Liabilities and Partners' Equity
Current Liabilities:
Due to affiliates (Note 6) 152,677 124,096
----------- -----------
Total Current Liabilities 152,677 124,096
----------- -----------
Partners' Equity:
Limited partners 1,107,736 1,142,831
General partners (98,537) (106,251)
----------- -----------
Total Partners' Equity 1,009,199 1,036,580
----------- -----------
Total Liabilities and Partners' Equity $ 1,161,876 $ 1,160,676
=========== ===========
</TABLE>
The Notes to Financial Statements are an integral part of these statements.
F-7
<PAGE> 20
STERLING GAS DRILLING FUND 1981
(A New York limited partnership)
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1998 1997
------------------------------------- ------------------------------------
Limited General Limited General
Partners Partners Total Partners Partners Total
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Operating revenues $ 260,625 $ 49,090 $ 309,715 $ 222,603 $ 41,928 $ 264,531
--------- --------- --------- --------- --------- ---------
Costs and Expenses:
Production expenses 115,758 21,803 137,561 87,138 16,413 103,551
Depreciation,
depletion and
amortization 80,360 812 81,172 77,211 780 77,991
General and
administrative
expenses (Note 7) 99,602 18,761 118,363 98,917 18,631 117,548
--------- --------- --------- --------- --------- ---------
Total Expenses 295,720 41,376 337,096 263,266 35,824 299,090
--------- --------- --------- --------- --------- ---------
Net Income (Loss) $ (35,095) $ 7,714 $ (27,381) $ (40,663) $ 6,104 $ (34,559
========= ========= ========= ========= ========= =========
Net (Loss) Per
Equity Unit (Note 2) $ (3.99) $ (4.63)
========= =========
<CAPTION>
1996
------------------------------------
Limited General
Partners Partners Total
--------- --------- ---------
<S> <C> <C> <C>
Revenues:
Operating revenues $ 205,353 $ 38,667 $ 244,020
--------- --------- ---------
Costs and Expenses:
Production expenses 77,697 14,635 92,332
Depreciation,
depletion and
amortization 75,779 765 76,544
General and
administrative
expenses (Note 7) 99,851 18,807 118,658
--------- --------- ---------
Total Expenses 253,327 34,207 287,534
--------- --------- ---------
Net Income (Loss) $ (47,974) $ 4,460 $ (43,514)
========= ========= =========
Net (Loss) Per
Equity Unit (Note 2) $ (5.46)
=========
</TABLE>
The Notes to Financial Statements are an integral part of these statements.
F-8
<PAGE> 21
STERLING GAS DRILLING FUND 1981
(a New York limited partnership)
STATEMENTS OF CHANGES IN PARTNERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1996 AND 1995
<TABLE>
<CAPTION>
Limited General
Partners Partners Total
----------- ----------- -----------
<S> <C> <C> <C>
Balance at December 31, 1995 $ 1,231,468 $ (116,815) $ 1,114,653
Net (Loss) (47,974) 4,460 (43,514)
----------- ----------- -----------
Balance at December 31, 1996 1,183,494 (112,355) 1,071,139
Net Income (Loss) (40,663) 6,104 (34,559)
----------- ----------- -----------
Balance at December 31, 1997 1,142,831 (106,251) 1,036,580
----------- ----------- -----------
Net Income (Loss) (35,095) 7,714 (27,381)
----------- ----------- -----------
Balance at December 31,1998 $ 1,107,736 $ (98,537) $ 1,009,199
=========== =========== ===========
</TABLE>
The Notes to Financial Statements are an integral part of these statements.
F-9
<PAGE> 22
STERLING GAS DRILLING FUND 1981
(a New York limited partnership)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net (loss) $ (27,381) $ (34,559) $ (43,514)
--------- --------- ---------
Adjustments to reconcile net (loss) to
net cash provided by operating activities:
Depreciation, depletion and amortization 81,172 77,991 76,544
Changes in Assets and Liabilities:
Due to affiliates 28,581 (43,442) (23,055)
--------- --------- ---------
Total Adjustments 109,753 34,549 53,489
--------- --------- ---------
Net Cash Provided (Used) by
Operating Activities 82,372 10 9,975
--------- --------- ---------
Cash Flows From Investing Activities:
Equipment purchases (82,369) -- (9,978)
--------- --------- ---------
Net Cash Provided by Investing Activities (82,369) -- (9,978)
--------- --------- ---------
Net increase (decrease) in cash and cash
equivalents 3 (10) (3)
Cash and cash equivalents, beginning of year 16 26 29
--------- --------- ---------
Cash and cash equivalents, end of year $ 19 $ 16 $ 26
========= ========= =========
</TABLE>
The Notes to Financial Statements are an integral part of these statements.
F-10
<PAGE> 23
STERLING GAS DRILLING FUND 1981
(a New York limited partnership)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(1) Organization and Capital Contributions:
Sterling Gas Drilling Fund 1981, a New York limited partnership (the
"Partnership"), was formed on September 28, 1981, for the primary
purpose of acquiring, drilling, developing and producing oil and gas
in the state of West Virginia. The general partners are: PrimeEnergy
Management Corporation (PEMC), a wholly owned subsidiary of
PrimeEnergy Corporation (PEC), Charles E. Drimal, Jr., Oliver J.
Sterling and Samuel R. Campbell. The subscription period began on
October 9, 1981 and terminated December 15, 1981. Eight thousand seven
hundred ninety limited partnership units, (8,790), were sold at $1,000
per unit aggregating total limited partner capital contributions of
$8,790,000. The general partners' made no capital contributions.
Partnership operations commenced on December 23, 1981.
(2) Summary of Significant Accounting Policies:
Revenue Recognition:
The Partnership recognizes operating revenues, consisting of sales of
oil and gas production, in the month of sale. Uncollected revenue is
accrued based on known facts and trends of the relevant oil and gas
properties on a monthly basis.
Basis of Accounting:
The accounts of the Partnership are maintained in accordance with
accounting practices permitted for federal income tax reporting
purposes. Under this method of accounting, (a) substantially all
exploration and development costs except leasehold and equipment costs
are expensed as paid, (b) costs of abandoned leases and equipment are
expensed when abandoned, and (c) depreciation (for equipment placed in
service) is provided on an accelerated basis. In order to present the
accompanying financial statements in accordance with generally
accepted accounting principles, memorandum adjustments have been made
to account for oil and gas properties, as discussed below.
Oil and Gas Producing Activities:
The Partnership accounts for its oil and gas operations using the
successful efforts method of accounting on a property by property
basis. The Partnership only participates in developmental drilling.
Accordingly, all costs of drilling and equipping these wells, together
with leasehold acquisition costs, are capitalized. These
F-11
<PAGE> 24
STERLING GAS DRILLING FUND 1981
(a New York limited partnership)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(2) Summary of Significant Accounting Policies - (Cont'd):
capitalized costs are amortized on a property by property basis
(utilizing aggregations of common geological structures) by the
unit-of-production method based upon the ratio of production to proved
developed oil and gas reserves. Additional depreciation, depletion and
amortization may be recorded if net capitalized costs exceed the
undiscounted future net cash flows attributable to Partnership
properties. (See Note 4)
Federal Income Taxes:
As federal income taxes are the liability of the individual partners,
the accompanying financial statements do not include any provision for
federal income taxes. (See Note 8)
Limited Partners' (Loss) Per Equity Unit:
The limited partners' (loss) per equity unit is computed on the 8,790
limited partner equity units.
Cash and Cash Equivalents:
For purposes of the statements of cash flows the Partnership considers
all highly liquid debt instruments with a maturity of three months or
less to be cash equivalents.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management 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 revenues
and expenses during the reporting period.
Actual results could differ from those estimates.
F-12
<PAGE> 25
STERLING GAS DRILLING FUND 1981
(a New York limited partnership)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(3) Oil and Gas Properties:
The Partnership acquired leases or farmouts from PEMC at its cost.
Cost is defined as any amount paid for delay rentals, lease bonuses,
if any, surveys and other expenses including such portion of any of
the general partners', or their affiliates' reasonable, necessary and
actual expenses for geological, geophysical, seismic, land,
engineering, drafting, accounting, legal and other services. During
1981, the Partnership, as reimbursement of costs for leases it
acquired from PEMC, paid PEMC $236,502. The Partnership currently pays
royalties of approximately 12.5% to 20.8% of the selling price of the
gas and oil extracted.
The following table sets forth certain revenue and expense data
concerning the Partnership's oil and gas activities for the years
ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Average sales price per MCF of gas $ 2.92 $ 2.93 $ 2.63
Average sales price per barrel of
oil and other liquids 12.14 18.54 19.50
Production expense per dollar of .39 .40 0.38
operating revenue
</TABLE>
(4) Quantities of Oil and Gas Reserves:
The amount of proved reserves presented below has been estimated by an
independent firm of petroleum engineers as of January 1, 1998.
Petroleum engineers on the staff of PEC have reviewed the data
presented below, as of December 31, 1998, for consistency with current
year production and operating history. All of the Partnership's gas
and oil reserves are located within the United States:
F-13
<PAGE> 26
STERLING GAS DRILLING FUND 1981
(a New York limited partnership)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(4) Quantities of Oil and Gas Reserves - (Cont'd):
<TABLE>
<CAPTION>
(Unaudited)
-------------------------
GAS (MCF) OIL (BBL)
---------- ----------
<S> <C> <C>
Reserves as of December 31, 1995 1,453,554 3,523
Revisions of previous estimates 70,045 662
Production (88,693) (541)
---------- ----------
Reserves as of December 31, 1996 1,434,906 3,644
Revisions of previous estimates (76,355) 1,564
Production (85,541) (515)
---------- ----------
Reserves as of December 31, 1997 1,273,010 4,693
Revisions of Previous Estimates 302,253 635
Production (102,850) (709)
---------- ----------
Reserves as of December 31, 1998 1,472,413 4,619
========== ==========
</TABLE>
If current prices were to prevail into the future, operation of
certain wells would become uneconomic, on a pretax basis, as
production levels decline with age. In accordance with the rules and
regulations of the Securities and Exchange Commission, proved reserves
exclude production which would be uneconomic. The partners are
entitled to certain tax benefits and credits which, if available in
the future, may result in production continuing beyond that included
above.
Revisions arise from changes in current prices, as well as,
engineering and geological data which would alter the useful life and
therefore the overall predicted production of each well. Future
changes in these estimates are common and would impact the reserve
quantities used to calculate depreciation, depletion, and
amortization.
As discussed in Note 2, the Partnership may record additional
depreciation, depletion and amortization if net capitalized costs
exceed the undiscounted future net cash flows attributable to
Partnership properties. Significant price declines affect estimated
future net revenues both directly and because of they're impact on
estimates of future production. The Partnership has recorded no
additional provision in 1998, 1997 or 1996. If the additional
provision had been computed based on the limited partners' interest in
capitalized costs and estimated future net revenues, rather than on
the basis of total Partnership interests, the limited partners income
equity would not have been reduced in 1998, 1997 or 1996.
F-14
<PAGE> 27
STERLING GAS DRILLING FUND 1981
(a New York limited partnership)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(5) Allocation of Partnership Revenues, Costs and Expenses:
Under the terms of the Limited Partnership Agreement, all Partnership
revenues and expenses, including deductions attributable thereto, are
to be allocated as follows:
Drilling and completion costs (paid out of initial capital
contributions):
Limited partners 99.00%
General partners 1.00%
------
100.00%
======
Expenses of organization, costs of acquiring leases and the
nonrecurring management fee:
Limited partners 100.00%
General partners --%
------
100.00%
======
Net Revenue from oil and gas operations, general and administrative
expenses and production operating fees:
Limited partners 84.15%
General partners 15.85%
------
100.00%
======
All other income, gains, losses, costs, expenses, deductions and
credits:
Limited partners 99.00%
General partners 1.00%
------
100.00%
======
(6) Transactions With Affiliates:
(a) The payable to affiliates at December 31, 1998 and 1997
represents all revenues and expenses collected or incurred on
behalf of the Partnership by PEC and its subsidiaries,
including the production operator's fees (Note 6(b)) and any
advances made to the Partnership. PEMC intends to continue to
make advances to the Partnership to fund any working capital
deficiencies in the future on an interest free basis.
F-15
<PAGE> 28
STERLING GAS DRILLING FUND 1981
(a New York limited partnership)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(6) Transactions With Affiliates - (Cont'd):
(b) As operator of the Partnership's properties, Prime Operating
Company (POC), a subsidiary of PEC, receives, as compensation
from the Partnership, a monthly production operator's fee of
$307 for each producing gas well and $555 for each producing
oil or combination gas and oil well, based on the Partnership's
percentage of working interest in the well. These fees are
subject to annual adjustment by the percentage increase in the
Cost of Living Index published by the U.S. Department of Labor
over the year in which production began. During 1998, 1997 and
1996, $74,107, $68,976 , and $56,420 of production operator's
fees were incurred, respectively.
(c) Eastern Oil Well Services Company (EOWSC), a subsidiary of PEC,
provided field services to the Partnership during the years
ending December 31, 1998 and 1997 for which it was billed $4,872
and $2,114 respectively.
(7) General and Administrative Expenses:
In accordance with the Management Agreement, PEMC will be reimbursed
for the portion of PEMC's in-house overhead, including salaries and
related benefits, attributable to the affairs and operations of the
Partnership not exceeding an annual maximum amount of $440,000.
In addition, the Partnership will pay for third party expenses for
geology, engineering, legal, accounting, auditing, insurance and other
items not exceeding an annual amount equal to 3.5% of limited partner
capital contributions. The excess, if any, shall be borne by the
general partners in their individual capacity.
During 1998, 1997 and 1996, the Partnership recognized general and
administrative expenses incurred on its behalf by a general partner of
$100,000, $100,000, and $100,000 respectively.
F-16
<PAGE> 29
STERLING GAS DRILLING FUND 1981
(a New York limited partnership)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(8) Federal Income Taxes:
The following is a reconciliation between the net income (loss) as
reported on the Partnership's federal income tax return and the net
income (loss) reported in the accompanying financial statements:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Net income (loss) as
reported on the
Partnership's federal
income tax return $(28,344) $ 40,239 $ 31,035
Recompletion costs reported
differently for financial
reporting purposes and for
income tax reporting
purposes 79,623 -- --
Depreciation, depletion and
amortization for financial
reporting purposes
(greater) less than income
tax amount (78,660) (74,798) (74,549)
-------- -------- --------
Net (loss) per accompanying
financial statements $(27,381) $(34,559) $(43,514)
======== ======== ========
</TABLE>
The tax returns of the Partnership, the qualifications of the
Partnership as such for tax purposes, and the amount of Partnership
income or loss are subject to examination by federal and state taxing
authorities. If such examinations result in changes with respect to
Partnership's qualifications or in changes to its income or loss, the
tax liability of the partners would be changed accordingly.
The Tax Reform Act of 1976 provides that no part of any depletion
deduction with respect to oil and gas wells is to be determined by the
Partnership but must be computed separately by the partners. Thus,
cost or percentage depletion, as applicable, must be computed by each
partner so that a specific depletion computation can be made when each
partner files his U.S. income tax return. Information is furnished to
the partners to compute the depletion deduction.
F-17
<PAGE> 30
STERLING GAS DRILLING FUND 1981
(a New York limited partnership)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(9) Major Customers:
A schedule of its major purchases of the Partnership's production is
as follows:
<TABLE>
<CAPTION>
Purchaser 1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Brooklyn Union $ 184,191 $ 140,133 $ 146,923
Phoenix Diversified $ 100,237 $ 97,986 $ 70,723
American Refining Group $ 5,094 -- --
</TABLE>
F-18
<PAGE> 31
SCHEDULE V
STERLING GAS DRILLING FUND 1981
(A New York limited partnership)
PROPERTY AND EQUIPMENT - OIL AND GAS PROPERTIES
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
Balance at Balance
Beginning Additions Other at End
of Year at Cost Retirements Changes of Year
---------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1998:
- ----------------------------
Leasehold costs $ 236,502 $ -- $ -- $ -- $ 236,502
Wells and related facilities 6,944,355 82,369 -- -- 7,026,724
---------- ---------- ---------- ---------- ----------
$7,180,857 $ 82,369 $ -- $ -- $7,263,226
========== ========== ========== ========== ==========
Year Ended December 31, 1997:
- ----------------------------
Leasehold costs $ 236,502 $ -- $ -- $ -- $ 236,502
Wells and related facilities 6,944,355 -- -- -- 6,944,355
---------- ---------- ---------- ---------- ----------
$7,180,857 $ -- $ -- $ -- $7,180,877
========== ========== ========== ========== ==========
Year ended December 31, 1996:
- ----------------------------
Leasehold costs $ 236,502 $ -- $ -- $ -- $ 236,502
Wells and related facilities 6,934,377 9,978 -- -- 6,944,355
---------- ---------- ---------- ---------- ----------
$7,170,879 $ 9,978 $ -- $ -- $7,180,857
========== ========== ========== ========== ==========
</TABLE>
F-19
<PAGE> 32
SCHEDULE VI
STERLING GAS DRILLING FUND 1981
(a New York limited partnership)
ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION - OIL AND GAS PROPERTIES
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
Balance at Charges to Balance
Beginning Costs and Other at End
of Year Expenses Retirements Changes of Year
---------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1998:
Wells and related facilities $5,783,695 $ 81,172 $ -- $ -- $5,864,867
Leasehold costs 236,502 -- -- -- 236,502
---------- ---------- ---------- ---------- ----------
6,020,197 81,172 $ -- $ -- $6,101,369
---------- ---------- ---------- ---------- ----------
Year Ended December 31, 1997:
Wells and related facilities $5,705,704 $ 77,991 $ -- $ -- $5,783,695
Leasehold costs 236,502 -- -- -- 236,502
---------- ---------- ---------- ---------- ----------
$5,942,206 $ 77,991 $ -- $ -- $6,020,197
========== ========== ========== ========== ==========
Year ended December 31, 1996:
Wells and related facilities $5,629,160 $ 76,544 $ -- $ -- $5,705,704
Leasehold costs 236,502 -- -- -- 236,502
---------- ---------- ---------- ---------- ----------
$5,865,662 $ 76,544 $ -- $ -- $5,942,206
========== ========== ========== ========== ==========
</TABLE>
F-20
<PAGE> 33
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER EXHIBIT PAGE
------ ------- ----
<S> <C> <C>
(3) Form of Agreement of Limited Partnership of Sterling Gas Drilling Fund 1981
(incorporated by reference to Exhibit (3) of Sterling Gas Drilling Fund 1981 Form 10-K
for the year ended December 31, 1994)
(24) Consent of Ryder Scott Company (filed herewith)
(27) Financial Data Schedule. (filed herewith)
</TABLE>
<PAGE> 1
EXHIBIT 24
[RYDER SCOTT COMPANY LETTERHEAD]
CONSENT OF RYDER SCOTT COMPANY
We consent to the use on the Form 10-K of Sterling Gas Drilling Fund 1981
of our reserve report and all schedules, exhibits, and attachments thereto
incorporated by reference of Form 10-K and to any reference made to us on Form
10-K as a result of such incorporation.
Very Truly Yours,
/s/ RYDER SCOTT COMPANY
RYDER SCOTT COMPANY
PETROLEUM ENGINEERS
Denver, Colorado
March 17, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM STERLING
DRILLING FUND 1983-2 FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 19
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 19
<PP&E> 7,263,724
<DEPRECIATION> (6,101,369)
<TOTAL-ASSETS> 1,161,876
<CURRENT-LIABILITIES> 152,677
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 1,009,199<F1>
<TOTAL-LIABILITY-AND-EQUITY> 1,161,876
<SALES> 309,715
<TOTAL-REVENUES> 309,715
<CGS> 337,096
<TOTAL-COSTS> 337,096
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 27,381
<EPS-PRIMARY> (3.99)<F2>
<EPS-DILUTED> 0
<FN>
<F1>OTHER - SE IS COMPOSED OF PARTNERSHIP EQUITY.
<F2>EPS - PRIMARY IS BASED UPON LIMITED PARTNERS SHARE OF NET INCOME DIVIDED BY THE
OUTSTANDING PARTNERSHIP UNITS OF 8,790.
</FN>
</TABLE>
