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EXHIBIT C
Supplement to
Kelley Oil Corporation
Offer to Purchase
Units of
Kelley Partners 1992 Development Drilling Program
for
$0.123 per Unit in Cash
THIS DOCUMENT SUPPLEMENTS THE OFFER TO PURCHASE DATED NOVEMBER 28, 2000
PREVIOUSLY SENT TO YOU (THE "ORIGINAL OFFER"). THE TERMS OF THE OFFER HAVE NOT
CHANGED, BUT THIS SUPPLEMENT PROVIDES ADDITIONAL DISCLOSURE REGARDING THE OFFER
AND THE PARTNERSHIP. YOU SHOULD READ THIS DOCUMENT IN CONJUNCTION WITH THE
ORIGINAL OFFER.
This offer will expire at noon, Houston, Texas time on December 28, 2000
(the "expiration date"). You must validly tender your units on or before the
expiration date to receive the purchase price. You may withdraw any tendered
units before the expiration date.
Kelley Oil Corporation invites you to tender all of the units you hold in
Kelley Partners 1992 Development Drilling Program (the "partnership") for a cash
purchase price of $0.123 per unit (the "purchase price") on the terms and
subject to the conditions set forth herein and in the enclosed letter of
transmittal. The Original Offer, as supplemented by this document, and the
letter of transmittal together constitute our offer.
This offer is being made to all unitholders. We will pay the purchase price
for all units validly tendered and not withdrawn on the terms and subject to the
conditions of this offer.
We are the managing general partner of the partnership. Our board of
directors has approved this offer and believes it is fair, from a financial
point of view, to holders of units not affiliated with us. The partnership,
acting through us as its general partner, also believes this offer is fair, from
a financial point of view, to holders of units not affiliated with it. However,
we may have a conflict of interest in this matter, and this is not a
recommendation regarding the offer. You must make the decision as to whether or
not you will tender your units.
THE PURCHASE PRICE IS BASED ON A FAIR MARKET APPRAISAL OF THE PARTNERSHIP'S
OIL AND GAS RESERVES CONDUCTED BY INDEPENDENT PETROLEUM ENGINEERS. THAT
APPRAISED FAIR MARKET VALUE IS $2,050,000. A COMPONENT OF THE FAIR MARKET VALUE
DETERMINATION IS THE "PV-10", OR ESTIMATED PRESENT VALUE OF FUTURE NET CASH
FLOWS USING THE PRICING ASSUMPTIONS MORE FULLY DESCRIBED IN THE ENGINEERS'
REPORT. THE PV-10 OF THE PARTNERSHIP'S OIL AND GAS RESERVES IS $2,949,000. THE
PURCHASE PRICE THEREFORE DOES NOT FULLY REFLECT THE PV-10 OF THE PARTNERSHIP'S
OIL AND GAS RESERVES.
This transaction has not been approved or disapproved by the Securities and
Exchange Commission nor has the SEC passed upon the fairness or merits of this
offer or the adequacy or accuracy of the information in this document. Any
representation to the contrary is a criminal offense.
Subject to applicable securities laws, we reserve the right to waive any
conditions of this offer, to extend or terminate the offer or to amend the
offer.
You should read "Risk Factors" beginning on page 6 of the Original Offer
and beginning on page 3 of this supplement for discussions of certain factors
you should consider in evaluating this offer.
We have not engaged any dealer-manager, depositary, or information or
solicitation agent in connection with this offer. If you have questions or need
additional copies of this document or the letter of transmittal, please contact
us at 601 Jefferson, Suite 1100, Houston, Texas 77002 or by telephone at (713)
652-5200. This supplement is first being sent or given to unitholders on or
about December 12, 2000.
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SUMMARY TERMS OF THE OFFER
In this document, the terms "we", "us" and "our" refer to Kelley Oil
Corporation and not to the partnership.
The terms of the offer have not changed from those set forth in the
Original Offer. The following are the material terms of the offer.
o The offer is made by Kelley Oil Corporation, the managing general partner
of the partnership and holder of 84% of the outstanding units, to all
unitholders of the partnership.
o We have set no minimum tender. We will pay the purchase price for all units
validly tendered and not withdrawn on the terms and subject to the
conditions of this offer.
o If you tender any of your units, you must tender all of your units. The
partnership agreement does not permit a transfer of units in part.
o To accept the offer, you must return a properly completed and signed letter
of transmittal in the form enclosed on or before the expiration date. You
may withdraw any tender before the expiration date.
o The purchase price of $0.123 per unit represents the distribution that
would be made if the partnership sold all of its oil and gas reserves at
their fair market value as recently appraised by independent petroleum
engineers, and liquidated.
o You are not required to accept the offer. Our board of directors believes
the offer is fair, from a financial point of view, to holders of units.
However, this is not a recommendation regarding the offer. You must
evaluate the offer and make your own decision.
THIS OFFER IS MADE BY THE MANAGING GENERAL PARTNER OF THE PARTNERSHIP, WHO
OWNS A MAJORITY OF THE OUTSTANDING UNITS. WE MAY THEREFORE HAVE A CONFLICT OF
INTEREST IN MAKING THIS OFFER. IT IS IN OUR INTEREST TO PURCHASE YOUR UNITS AT
THE LOWEST POSSIBLE PRICE. THIS IS IN CONTRAST TO YOUR BEST INTEREST TO PROFIT
BY SELLING AT THE HIGHEST POSSIBLE PRICE. YOU SHOULD CONSIDER THAT FACT IN
DETERMINING WHETHER OR NOT TO ACCEPT THIS OFFER.
BECAUSE OF THIS CONFLICT OF INTEREST, WE HAVE BASED THE PURCHASE PRICE ON A
FAIR MARKET APPRAISAL OF THE PARTNERSHIP'S OIL AND GAS RESERVES CONDUCTED BY
INDEPENDENT PETROLEUM ENGINEERS.
We have not engaged any person to solicit tenders. We have not, and the
partnership has not, authorized any person to make a recommendation on our or
its behalf as to whether you should accept the offer or to give you any
additional information regarding the offer of the partnership. Do not rely on
any such recommendation or on any information not contained or expressly
incorporated into this document.
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ANSWERS TO YOUR QUESTIONS REGARDING THE OFFER
The following question and answer supplements those in the Original Offer.
WHY IS THE APPRAISED FAIR MARKET VALUE LOWER THAN THE PV-10 OF THE PARTNERSHIP'S
RESERVES?
We asked Gruy to evaluate the fair market value of the partnership's oil
and gas reserves. As described in Gruy's report, Gruy's valuation methodology
began using the income forecast method, which is based on the present value of
estimated future net cash flows of partnership's oil and gas reserves. This
method results in a figure commonly referred to as "PV-10". The PV-10 of the
partnership's oil and gas reserves is approximately $2.9 million. This figure
includes, among other things, assumptions about the amount of recoverable
reserves, the timing of recovery of those reserves and the prevailing prices for
oil and natural gas at the time those reserves are recovered. Standing alone,
this figure may or may not represent the fair market value, or the amount that a
willing seller would pay and a willing buyer would accept.
As stated in Gruy's report, "To subsequently arrive at the estimated fair
market value, consideration has been given to current and expected future oil
and natural gas product sales prices, and significant attention has been given
to those financial indices common to recent transactions involving oil and
natural gas properties similar to [the partnership's]."
There are several reasons the PV-10 might not reflect the fair market
value. One is that some costs are not included in a PV-10. As stated in the Gruy
report, "Future cash inflow and future net cash flow as stated in this report
exclude consideration of state or federal income tax. Future costs of abandoning
the facilities and wells, and the future costs of restoration of producing
properties to satisfy environmental standards are not deducted from cash flow.
Salvage values are not included in net cash flow." Another reason PV-10 may not
reflect fair market value is that a willing seller or willing buyer may not
agree with the pricing assumptions included in the PV-10. The pricing
assumptions Gruy used are reflected in their report. A willing buyer must
accept the risk that future oil and gas prices may be less than those
reflected in the PV-10.
The following answer supersedes the answer to the question of the same
title set forth in the Original Offer.
AS MANAGING GENERAL PARTNER, DON'T YOU HAVE A CONFLICT OF INTEREST? HOW DOES
THIS OFFER BENEFIT YOU?
As managing general partner of the partnership, we may have a conflict of
interest in making this offer. That is why we engaged a third party to appraise
the value of the partnership's oil and gas reserves. Nonetheless, you should
consider that this offer is beneficial to us. First, as majority unitholder, we
indirectly bear the majority of the administrative costs of the partnership that
we seek to mitigate by conducting this offer. Secondly, some of these
administrative burdens are less tangible, such as the time and effort expended
by our staff on partnership administration. Although we are reimbursed by the
partnership for an allocated portion of these tasks, we believe that economic
reimbursement does not fully compensate us for the distraction of our management
from its primary task of operating Kelley Oil Corporation. Thirdly, to the
extent we purchase units, our interest in the net book value and net earnings of
the partnership will increase. The net book value per unit of the partnership is
$.07. The net income per unit for the three months ended September 30, 2000 was
$.01. The amount our interest in the net book value and net earnings of the
partnership will increase depends on how many units are validly tendered.
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RISK FACTORS
You should consider the following factors, in addition to the risk factors
included in the Original Offer and the partnership's SEC filings incorporated
herein by reference, in evaluating the offer.
The following risk factor supplements those in the Original Offer.
YOU WILL NOT PARTICIPATE IN FUTURE PROFITS OF THE PARTNERSHIP IF YOU TENDER YOUR
UNITS.
If you validly tender your units and we accept and pay for them, you will
not participate in future profits of the partnership.
All unitholders will receive a distribution of profits for the third and
fourth quarters of 2000 if the partnership generates a profit for those periods,
which has not yet been determined. If these distributions are made, you will
receive them whether or not you tender your units.
The following risk factors supersede the risk factors of the same title set
forth in the Original Offer
WE MAY HAVE A CONFLICT OF INTEREST IN MAKING THIS OFFER.
As managing general partner of the partnership, we may have a conflict of
interest in making this offer. You should consider that this offer is beneficial
to us. First, as majority unitholder, we indirectly bear the majority of the
administrative costs of the partnership that we seek to mitigate by conducting
this offer. Secondly, some of these administrative burdens are less tangible,
such as the time and effort expended by our staff on partnership administration.
Although we are reimbursed by the partnership for an allocated portion of these
tasks, we believe that economic reimbursement does not fully compensate us for
the distraction of our management from its primary task of operating Kelley Oil
Corporation. Thirdly, to the extent we purchase units, our interest in the net
book value and net earnings of the partnership will increase. The net book value
per unit of the partnership is $.07. The net income per unit for the three
months ended September 30, 2000 was $.01. The amount our interest in the net
book value and net earnings of the partnership will increase depends on how many
units are validly tendered.
It is in our interest to purchase your units at the lowest possible price.
This is in contrast to your best interest to profit by selling at the highest
possible price. You should consider that fact in determining whether or not to
accept this offer.
THE PURCHASE PRICE MIGHT NOT ACCURATELY REFLECT THE VALUE OF YOUR UNITS.
Gruy's appraisal of the fair market value of the partnership's oil and gas
reserves is a subjective process and may prove to be inaccurate. Any valuation
of oil and gas reserves is inherently uncertain. It is possible that more oil
and gas could be recovered than is reflected in Gruy's report or that the oil
and gas produced could be sold at higher prices than those assumed in that
report. In that case, by retaining your units you may receive more value over
time through partnership distributions than you will receive by tendering your
units.
The Gruy appraisal is not based on an actual third-party offer to purchase
the partnership's oil and gas reserves. We have neither sought nor received, and
we are not seeking and do not expect to receive, an offer from a third party to
purchase the partnership's oil and gas reserves. Nonetheless, it is possible
that a third party would be willing to pay a higher price for the reserves than
the price reflected in that report. Therefore, the purchase price may be lower
than the market value of the partnership units. We have no current intention to
sell the partnership's oil and gas reserves. However, if the partnership were to
sell its oil and gas reserves in the future at a higher price than that
reflected in the Gruy report and liquidate, holders of units who do not tender
their units in this offer may receive more for their units following such a
sale. Therefore, the purchase price may be lower than the liquidation value of
the partnership units.
Further, the purchase price is lower than the PV-10 of the partnership's
oil and gas reserves and, if current oil and gas prices hold through the end of
the year, likely will be substantially lower than the partnership's PV-10 as we
will calculate it at that time.
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THE PARTNERSHIP
The following sections supplement the Original Offer.
SELECTED FINANCIAL DATA
The following table presents selected financial data for the
partnership. The financial information presented below is derived from the
partnership's audited financial statements incorporated by reference into this
document and should be read in conjunction with those financial statements and
the related Notes thereto.
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------- -------------
SUMMARY OF OPERATIONS: 1995 1996 1997 1998 1999 2000
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Total revenues $ 5,713 $ 4,991 $ 2,322 $ 1,398 $ 1,645 $ 569
Production expenses 1,223 816 576 497 330 190
Exploration expenses 148 (3) -- -- -- --
General and administrative expenses 474 325 476 134 92 54
Interest expense 672 810 376 287 174 6
Depreciation, depletion and 4,945 1,280 587 427 225 93
amortization
Impairment of oil and gas properties 11,082 -- -- 466 -- --
Net income (loss) (12,831) 1,763 307 (413) 824 226
Net income (loss) per Unit(1) $ (.77) $ .11 $ .02 $ (.02) $ .05 $ .01
Distributions paid per Unit(1) .02 -- -- -- -- --
Units outstanding 16,033 16,033 16,033 16,033 16,033 16,033
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------- -------------
1995 1996 1997 1998 1999 2000
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
SUMMARY BALANCE SHEET DATA:
Working capital (deficit) $(1,857) $ 1,582 $ 288 $ 23 $ (17) $ 198
Oil and gas properties, net 6,263 3,987 3,369 2,528 1,070 915
Long term debt 6,000 5,400 3,181 2,488 166 --
Total partners' equity (deficit) (1,594) 169 476 63 887 1,113
Total assets 6,469 5,712 3,741 2,649 1,115 1,192
</TABLE>
(1) Per unit amounts are based on the Unitholders' 96.04% share of net
income and loss.
PARTNERSHIP PROPERTIES
The partnership's assets consist primarily of working interests in oil and
gas properties in Texas and Louisiana. The partnership has interests in 9 gross
(1.35 net) producing oil and gas wells. The estimated total net proved reserves
attributable on January 1, 2001 to the partnership's interests are 63,600
barrels of oil and 1,113 million standard cubic feet of natural gas. The
partnership has no intention of acquiring additional property. The partnership's
interests in these wells is not mortgaged. The partnership has no intention to
incur material capital expenditures with respect to these properties other than
maintenance expenditure, re-completions and the like in the ordinary course of
business. For further discussion of the partnership's properties, see the
partnership's Annual Report on Form 10-K for the year ended December 31, 1999,
which is incorporated herein by reference.
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The following section supersedes the section of the same title set forth in
the Original Offer
DETERMINATION OF FAIRNESS
Financial Fairness
Our board of directors has approved this offer and believes it is fair,
from a financial point of view, to holders of units not affiliated with us. The
partnership, acting through us as its general partner, also believes this offer
is fair, from a financial point of view, to holders of units not affiliated with
it. In formulating this belief, we considered, among other things,
o the appraised value of the partnership's oil and gas reserves as reflected
in the Gruy report,
o the restrictions on transfer of units,
o the desire expressed to us by several unitholders to liquidate their
investment in the partnership,
o the diminishing nature of the partnership's oil and gas reserves and the
current and future expected income from those oil and gas reserves to
unitholders,
o the current high level of both natural gas and crude oil prices compared to
historical averages and the effect of those prices on the PV-10 of the
partnership's assets,
o the administrative burden on unitholders of receiving an annual K-1 income
statement and including that income in their federal tax returns, and
o the administrative costs of the partnership to prepare tax forms and SEC
filings in relation to the revenue of the partnership and the effects of
these costs on income and distributions.
The most significant factor in this determination was the Gruy report. We
believe that report most accurately reflects the fair market value of the
partnership's oil and gas reserves based primarily on the present value of
future net cash flows and financial multiples reflected in the sale of
comparable oil and gas reserves. We neither sought nor received an offer from a
third party to purchase the partnership's oil and gas reserves, and no such
offer is reflected in this determination.
We did not consider current or historical market prices for the units, as
there is no market for the units. We did not place much significance on the net
book value of the partnership, as we believe the book value of oil and gas
reserves, which constitute the majority of the partnership's assets, does not
reflect market value, and in fact undervalues such assets. We believe the Gruy
valuation of the partnership's oil and gas reserves adequately considers the
going concern value and liquidation value of the partnership.
Procedural Fairness
We and the partnership also believe that this transaction is procedurally
fair to unaffiliated unitholders. In formulating this belief, we considered,
among other things, the following: (i) the purchase price is based on an
appraisal by an independent, third-party professional, (ii) no unitholder will
be forced to sell his or her units, regardless of the number of units tendered,
and (iii) by amending the partnership agreement to permit transfers among
existing unitholders, we may have created an alternative exit strategy to the
extent any existing unitholder wishes to acquire additional units.
This transaction is not structured so that approval of a majority of
unaffiliated unitholders is required. Each unitholder may make his or her own
decision as to whether or not to tender, and we will accept all validly tendered
units. We did not hire an unaffiliated representative to act solely on behalf of
unaffiliated unitholders for purposes of negotiating this transaction and/or
preparing a report concerning the fairness of the transaction. Instead, we
engaged Gruy, which is not affiliated with us or the partnership, to determine
an unbiased, fair market value of the partnership's oil and gas reserves using
their best professional judgment. This transaction was not approved by a
majority of our directors who are not our employees, because all of our
directors are also our employees.
We may have a conflict of interest in this matter, and these determinations
of fairness are not a recommendation that you accept the offer.
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THE OFFER
The following sections supersede the sections of the same title set forth
in the Original Offer
SOURCE OF FUNDS
If all outstanding units are tendered, the aggregate purchase price will be
approximately $321,000. We have sufficient cash on hand to pay the full purchase
price of any units tendered. We have not established an alternative financing
plan, as we do not believe such a plan is necessary.
PURPOSES AND EFFECTS OF THE OFFER
Purposes of the Offer
The purpose of the offering is two-fold: First, to provide a convenient
means for those unitholders no longer interested in maintaining an investment in
the partnership to liquidate their units at what we believe is a fair and
reasonable price. Second, to reduce the administrative costs of maintaining the
partnership by reducing the number of unitholders.
If a sufficient number of unitholders accept the offer and validly tender
their units so that 300 or less unitholders remain, we intend to seek
deregistration of the units under the Securities Exchange Act. In that case, the
partnership would no longer be obligated to file annual, quarterly or other
reports with the SEC. However, if more than 300 unitholders remain following the
offer, the partnership will continue to file the appropriate SEC reports as
required and the administrative costs of maintaining the partnership and the
costs to unitholders may not be reduced.
Consideration Given to Alternative for Increasing Unitholder Value--Asset
Sales and Roll-ups
We have neither sought nor received, and we are not seeking and do not
expect to receive, an offer from a third party to purchase the partnership's
assets. Given the size and nature of the partnership's portfolio, we do not
believe that its remaining assets would attract an outside purchaser at an
acceptable price. The partnership's assets are minority interests in numerous
oil and gas properties. Further, the time and costs associated with marketing
the partnership's properties and negotiating a purchase agreement, which would
include legal fees and may include environmental surveys, brokers' fees and
other costs, would delay the partnership's dissolution and decrease the amount
of funds available for unitholders on dissolution.
In addition, we or our affiliates also hold interests directly in many of
the properties in which the partnership holds interests. In those cases, it is
not in our best interest to have an outside party acquire the partnership's
assets and thereby become a partner with us in those properties.
Further, we recognize that not all unitholders wish to liquidate their
investment at this time. A sale of all of the partnership assets and liquidation
would necessitate that all unitholders receive cash for their units. Our
preference is to provide you with the option of selling or retaining your units.
Other partnerships like this have, in the past, been "rolled up" into the
managing general partner or one of its affiliates. In a roll up, you would
receive shares of Kelley Oil Corporation or, more likely, its publicly-traded
parent, Contour Energy Co. Neither we nor Contour is interested in engaging in a
roll-up transaction at this time. Among other things, we believe that the
transaction costs associated with such an arrangement would further diminish the
value that we could offer you.
If a sufficient number of unitholders accept the offer and validly tender
their units, we may in the future consider various reorganization transactions
to dissolve the partnership and further reduce the administrative burdens
associated with maintaining the partnership entity. In such a transaction, we
may endeavor, to the extent practical and permitted under applicable securities
laws, to provide each unitholder with the economic equivalent of his or her
units. For example, one such structure that we have considered is a dissolution
of the partnership and a distribution of net profits interests carved from the
mineral interests the partnership owns. However, we are not undertaking to
accomplish any such transaction, and we cannot assure you that we will effect
such a transaction.
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Reasons for Making the Offer Now.
The partnership, by its nature, has a depleting asset base. When the
partnership was formed in 1992, it acquired interests in certain oil and gas
properties. Over the years, as oil and gas have been produced from those
properties, the partnership's reserve base has been depleted. As the
partnership's reserves are depleted, its revenues and income also decline.
Partnership income for the first nine months of 2000 amounted to $.01 per unit,
and we expect that income to decrease further in future years as the
partnership's reserves are further depleted, depending on prevailing prices for
oil and gas.
Several unitholders have expressed to us that the administrative burdens of
holding units, including the administrative burdens associated with income tax
filings, outweigh the de minimis occasional income provided to unitholders.
Unfortunately, the partnership agreement does not provide for a convenient
method for unitholders to liquidate their investment, and units generally are
not transferable. We are making this offer to provide a convenient means for
those unitholders no longer interested in maintaining an investment in the
partnership to liquidate their units at what we believe is a fair and reasonable
price. We intend to complete the offer before the end of 2000 so that if you
tender your units, 2000 will be the final year you receive a K-1 income report
from the partnership.
We believe that the partnership structure, with its excessive
administrative costs and dwindling revenues and asset base, has reached or is
near reaching the point that it has outlived its usefulness.
FEES AND EXPENSES
We will bear the fees and expenses of the offering. No transfer fees will
be imposed on a tender of your units. Because all unitholders are record
holders, no brokerage fees should be applicable. We estimate the fees and
expenses of the offer as follows:
SEC filing fees: $ 65
Legal fees: 15,000
Accounting fees: 2,500
Appraisal fees: 8,500
Solicitation expense: n/a
Printing and mailing costs: 7,000
Other expenses: 935
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Total $34,000
GRUY REPORT
Gruy has amended the penultimate paragraph of its report to read as
follows:
"If investments or business decisions are to be made in reliance on these
estimates by anyone other than our client, such person, with the approval of our
client, is invited to visit our offices at his expense so that he can evaluate
the assumptions made and the completeness and extent of the data available on
which our estimates are based."
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