UNITED STATES
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, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-89194
MAY DRILLING PARTNERSHIP 1984-2
MAY LIMITED PARTNERSHIP 1984-2
(Exact name of registrant as specified in its charter)
75-1985009
Texas 75-1985008
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
4582 South Ulster Street Parkway
Suite 1700
Denver, Colorado 80237
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 850-7373
Securities Registered Pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
None None
Securities Registered Pursuant to Section 12(g) of the Act:
Units of Participation, $1,000 Per Unit
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [x] No [ ]
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. [x]
Page 1 of 23
<PAGE>
- 7 -
DOCUMENTS INCORPORATED BY REFERENCE:
Part of Form 10-K into
Document which it is incorporated
The General Partnership Agreement and the Limited Partnership Agreement
filed as an Exhibit to Registration Statement No. 0-89194 Part IV
<PAGE>
PART I
ITEM 1 - BUSINESS
May Drilling Partnership 1984-2 (the "Drilling or General Partnership") and May
Limited Partnership 1984-2 (the "Limited Partnership") were organized by May
Petroleum Inc. ("May") to explore for and develop oil and gas reserves primarily
in Texas, Oklahoma and Louisiana. Funds received from the sale and production of
oil and gas reserves are used to pay the obligations of the Limited Partnership.
Funds not required by the Limited Partnership as working capital are distributed
to the participants in the Drilling Partnership and the general partner.
The general partner of the Limited Partnership is EDP Operating, Ltd., which is
one of the operating partnerships for Hallwood Energy Partners, L. P. ("HEP").
The Drilling Partnership is the sole limited partner of the Limited Partnership.
The Limited Partnership does not have any subsidiaries, nor does it engage in
any other kind of business. The Limited Partnership has no employees and is
operated by Hallwood Petroleum, Inc. ("HPI"), a subsidiary of HEP. In February
1998, HPI employed 123 full-time employees.
Pursuant to the terms of the general partnership agreement and the limited
partnership agreement, HEP is obligated, from time to time, to contribute
certain amounts, in property, cash or unreimbursed services, to the Limited
Partnership. As of December 31, 1997, all such required contributions had been
accrued.
Participation in Expenses and Revenues
The principal expenses and revenues of the Limited Partnership are shared by the
general partner and the Drilling Partnership as set forth in the following
table. The charges and credits to participants in the Drilling Partnership are
shared among the participants in proportion to their ownership of units of
participation.
<TABLE>
<CAPTION>
Drilling General
Partnership Partner
<S> <C> <C>
Abandonment expenses (1) 99% 1%
Noncapital expenses 99% 1%
Direct expenses 99% 1%
Lease acquisition expenses 100%
Capital expenses 100%
Oil and gas revenues (2) (2)
Operating expenses (2) (2)
Special projects (2) (2)
General and administrative overhead (2) (2)
<FN>
(1) Includes expenses that would otherwise be allocated as lease
acquisition expenses and/or capital expenses but that relate to
abandoned properties.
</FN>
<FN>
(2) Such items were shared 70% by the Drilling Partnership and 30% by the
general partner until December 31, 1984. As of December 31, 1984, and
as of December 31 of each year thereafter, the sharing of such items is
adjusted so the general partner's allocation equals the percentage that
the amount of Limited Partnership expenses allocated to the general
partner bears to the aggregate amount of Limited Partnership expenses
allocated to the general partner and the Drilling Partnership, plus 15
percentage points, but in no event will the general partner's
allocation exceed 50%. The sharing ratio for each of the last three
years was:
</FN>
</TABLE>
<PAGE>
1997 1996 1995
- ----- - ----- - ----
Limited Partner 68.2% 68.4% 68.6%
General Partner 31.8% 31.6% 31.4%
In 1998 the sharing ratio will be 68.1% to the limited partner and 31.9% to the
general partner.
To the extent that the characterization of any expense of the Limited
Partnership depends on its deductibility for federal income tax purposes, the
proper characterization is determined by the general partner (according to its
intended characterization on the Limited Partnership's federal income tax
return) in good faith at the time the expense is to be charged or credited. Such
characterization will control related charges and credits to the partners
regardless of any subsequent determination by the Internal Revenue Service or a
court of law that the reported expenses should be otherwise characterized for
tax purposes.
Competition
Oil and gas must compete with coal, atomic energy, hydro-electric power and
other forms of energy. See also "Marketing" for a discussion of the market
structure for oil and gas sales.
Regulation
Production and sale of oil and gas is subject to federal and state governmental
regulations in a variety of ways including environmental regulations, labor law,
interstate sales, excise taxes and federal and Indian lands royalty payments.
Failure to comply with these regulations may result in fines, cancellation of
licenses to do business and cancellation of federal, state or Indian leases.
The production of oil and gas is subject to regulation by the state regulatory
agencies in the states in which the Limited Partnership does business. These
agencies make and enforce regulations to prevent waste of oil and gas and to
protect the rights of owners to produce oil and gas from a common reservoir. The
regulatory agencies regulate the amount of oil and gas produced by assigning
allowable production rates to wells capable of producing oil and gas.
Federal Income Tax Considerations
The Limited Partnership and the General Partnership are partnerships for federal
income tax purposes. Consequently, they are not taxable entities; rather, all
income, gains, losses, deductions and credits are passed through and taken into
account by the partners on their individual federal income tax returns. In
general, distributions are not subject to tax so long as such distributions do
not exceed the partner's adjusted tax basis. Any distributions in excess of the
partner's adjusted tax basis are taxed generally as capital gains.
Marketing
The oil and gas produced from the properties owned by the Limited Partnership
has typically been marketed through normal channels for such products. Oil has
generally been sold to purchasers at field prices posted by the principal
purchasers of crude oil in the areas where the producing properties are located.
The majority of the Limited Partnership's gas production is sold on the spot
market and is transported in intrastate and interstate pipelines. Both oil and
natural gas are purchased by refineries, major oil companies, public utilities
and other users and processors of petroleum products.
Factors which, if they were to occur, might adversely affect the Limited
Partnership include decreases in oil and gas prices, the availability of a
market for production, rising operational costs of producing oil and gas,
compliance with and changes in environmental control statutes, and increasing
costs and difficulties of transportation.
Significant Customers
For the years ended December 31, 1997, 1996 and 1995 purchases by each of the
following companies exceeded 10% of the total oil and gas revenues of the
Limited Partnership.
<TABLE>
<CAPTION>
1997 1996 1995
- ----- - ----- - ----
<S> <C> <C> <C>
Conoco Inc. 41% 56% 72%
Marathon Petroleum Company 39%
TXG Gas Marketing 19% 30%
</TABLE>
Although the Limited Partnership sells the majority of its production to a small
number of purchasers, there are numerous other purchasers in the area, so the
loss of any significant customer would not adversely affect the Limited
Partnership's operations.
Environmental Considerations
The exploration for, and development of, oil and gas involve the extraction,
production and transportation of materials which, under certain conditions, can
be hazardous or can cause environmental pollution problems. In light of the
present general interest in environmental problems, the general partner cannot
predict what effect possible future public or private action may have on the
business of the Limited Partnership. The Limited Partnership's historical
environmental expenditures have not been material and are not expected to be
material in the future. The general partner is continually taking actions it
believes necessary in its operations to ensure conformity with applicable
federal, state and local environmental regulations and does not presently
anticipate that the compliance with federal, state and local environmental
regulations will have a material adverse effect upon capital expenditures,
earnings or the competitive position of the Limited Partnership in the oil and
gas industry.
Insurance Coverage
The Limited Partnership is subject to all the risks inherent in the exploration
for, and development of, oil and gas, including blowouts, fires and other
casualties. The Limited Partnership maintains insurance coverage as is customary
for entities of a similar size engaged in operations similar to the Limited
Partnership's, but losses can occur from uninsurable risks or in amounts in
excess of existing insurance coverage. The occurrence of an event which is not
insured or not fully insured could have an adverse impact upon the Limited
Partnership's earnings and financial position.
Issues Related to the Year 2000
As the year 2000 approaches, there are uncertainties concerning whether computer
systems will properly recognize date-sensitive information when the year changes
to 2000. Systems that do not properly recognize such information could generate
erroneous data or fail.
Because of the nature of the oil and gas industry and the necessity for the
Limited Partnership to make reserve estimates and other plans well beyond the
year 2000, the Limited Partnership's computer systems and software were already
configured to accommodate dates beyond the year 2000. The Limited Partnership
believes that the year 2000 will not pose significant operational problems for
the Limited Partnership's computer systems. The Limited Partnership has not yet
completed its assessment of all of its systems, or the computer systems of third
parties with which it deals, and it is not possible at this time to assess the
effect of a third party's inability to adequately address year 2000 issues on
the operations of the Limited Partnership.
<PAGE>
ITEM 2 - PROPERTIES
The Limited Partnership's oil and gas reserves are concentrated in one prospect
in south Louisiana. Natural gas accounts for 65% of estimated future gross
revenues in the Limited Partnership's reserve report as of December 31, 1997.
Significant Property
At December 31, 1997, the following property accounted for all of the Limited
Partnership's proved oil and gas reserves. Reserve quantities were obtained from
the December 31, 1997 reserve report prepared by HPI's petroleum engineers.
Montet Prospect. The Montet prospect is located in Lafayette Parish, Louisiana.
The Limited Partnership's interest in the prospect contains one productive well
(the Freddie Aker) and has estimated remaining net proved reserves of 27,000
bbls of oil and 290,000 mcf of gas as of December 31, 1997. The Limited
Partnership's working interest in this well is 13.1%. The prospect produces from
one zone, the Bol Mex 3 formation at 15,275 feet.
ITEM 3 - LEGAL PROCEEDINGS
For a description of legal proceedings affecting The Limited Partnership, please
refer to Item 8 Note 4.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS
No matter was submitted to a vote of participants during the fourth quarter of
1997.
PART II
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
a) The registrant's securities consist of partnership interests
which are not traded on any exchange and for which no established
public trading market exists.
b) As of December 31, 1997, there were approximately 732 holders of
record of partnership interests in the Drilling Partnership.
c) Distributions paid by the Limited Partnership were as follows (in
thousands):
General Limited
Partner Partner
1997 $ 436 $ 865
1996 524 1,078
1995 336 676
<PAGE>
ITEM 6 - SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
For the Limited Partnership
As of or for the Year Ended December 31,
1997 1996 1995 1994 1993
- ----- - ----- - ----- - ----- - ----
(In thousands)
<S> <C> <C> <C> <C> <C>
Total revenues $1,311 $2,010 $1,170 $1,446 $1,110
Oil and gas revenues 1,287 1,996 1,156 1,437 1,101
Net income 1,098 1,796 988 1,270 921
Working capital 605 806 580 577 603
Total assets 652 818 597 591 618
Partners' capital 638 806 580 577 603
</TABLE>
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Liquidity and Capital Resources
Material changes in the Limited Partnership's cash position for the years ended
December 31, 1997 and 1996 are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
- ----- - ----
(In thousands)
<S> <C> <C>
Cash provided by operating activities $ 1,276 $ 1,687
Distributions to partners (1,301) (1,602)
Contributions from partners 32 27
Additions to oil and gas properties (73) (10)
----- ------
Increase (decrease) in cash $ (66) $ 102
========= =======
</TABLE>
Cash provided by operating activities in 1997 was used primarily for
distributions to the partners. Future distributions depend on, among other
things, continuation of current or higher oil and gas prices and markets for
production.
The Limited Partnership has net working capital of $605,000 at December 31,
1997. This working capital, together with cash flows generated from operations,
may be used to fund future distributions.
Proved reserves and discounted future net revenues valued at year-end prices
(discounted at 10% and before general and administrative expenses) attributable
to proved reserves were estimated at 27,000 bbls and 290,000 mcf valued at
$1,127,000 in 1997 and 33,000 bbls and 345,000 mcf valued at $2,146,000 in 1996.
The decrease in discounted future net revenues and the fluctuation in the
quantities resulted from a decrease in year end oil and gas prices, as well as
current year production and changes in the estimated rates of future production
on the Freddie Aker well.
<PAGE>
Results of Operations
1997 Compared to 1996
Oil Revenue
Oil revenue decreased $260,000 during 1997 as compared with 1996. The decrease
is comprised of a 31% decrease in production, combined with a decrease in the
average price from $21.40 per barrel in 1996 to $20.28 per barrel in 1997. The
decrease in production from 35,244 barrels in 1996 to 24,353 barrels in 1997 is
due to normal production declines.
Gas Revenue
Gas revenue decreased $449,000 during 1997 as compared with 1996. The decrease
is due to a decrease in the average gas price from $3.15 per mcf during 1996 to
$3.07 per mcf during 1997 combined with a 34% decrease in production. The
decrease in production from 394,446 mcf in 1996 to 258,483 mcf in 1997 is due to
normal production declines.
Other
Other income is comprised of insurance proceeds which reimbursed a portion of
expense incurred in a prior period to settle certain litigation.
Lease Operating
Lease operating expense increased $12,000 during 1997 as compared with 1996
primarily due to increased maintenance activity during 1997.
Production Taxes
Production taxes decreased $39,000 during 1997 as compared with 1996 as a result
of decreased oil and gas production during 1997.
General and Administrative
General and administrative expenses decreased $4,000 during 1997 as compared
with 1996 primarily due to a decrease in the allocation of overhead from the
general partner.
Depletion
Depletion expense increased $30,000 during 1997 as compared with 1996 due to an
increase in capitalized costs during 1997.
1996 Compared to 1995
Oil Revenue
Oil revenue increased $211,000 during 1996 as compared with 1995. The increase
is comprised of a 15% increase in production, combined with an increase in the
average price from $17.67 per barrel in 1995 to $21.40 per barrel in 1996. The
increase in production from 30,712 barrels in 1995 to 35,244 barrels in 1996 is
primarily due to increased state allowable production limits partially offset by
normal production declines.
<PAGE>
Gas Revenue
Gas revenue increased $629,000 during 1996 as compared with 1995. The increase
is due to an increase in the average gas price from $1.98 per mcf during 1995 to
$3.15 per mcf during 1996 combined with a 28% increase in production. The
increase in production from 309,054 mcf in 1995 to 394,446 mcf in 1996 is due to
increased state allowable production limits partially offset by normal
production declines.
Lease Operating
Lease operating expense increased $8,000 during 1996 as compared with 1995
primarily due to increased maintenance activity during 1996.
Production Taxes
Production taxes increased $33,000 during 1996 as compared with 1995 as a result
of increased oil and gas revenue during 1996.
General and Administrative
General and administrative expenses decreased $10,000 during 1996 as compared
with 1995 primarily due to a decrease in the allocation of overhead from the
general partner.
Depletion
Depletion expense increased $8,000 during 1996 as compared with 1995 due to an
increase in capitalized costs during 1996.
<PAGE>
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS
Page
FINANCIAL STATEMENTS:
<S> <C>
Independent Auditors' Report 11
Balance Sheets at December 31, 1997 and 1996 -
May Drilling Partnership 1984-2 12
Balance Sheets at December 31, 1997 and 1996 -
May Limited Partnership 1984-2 13
Statements of Operations for the Years Ended
December 31, 1997, 1996 and 1995 -
May Limited Partnership 1984-2 14
Statements of Changes in Partners' Capital for the Years Ended December 31,
1997, 1996 and 1995 -
May Limited Partnership 1984-2 15
Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995 -
May Limited Partnership 1984-2 16
Notes to Financial Statements - May Drilling Partnership 1984-2
and May Limited Partnership 1984-2 17-20
SUPPLEMENTAL OIL AND GAS RESERVE INFORMATION (UNAUDITED) 21
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Partners of May Drilling Partnership 1984-2 and
May Limited Partnership 1984-2:
We have audited the financial statements of May Drilling Partnership 1984-2
("General Partnership") and May Limited Partnership 1984-2 ("Limited
Partnership") as of December 31, 1997 and 1996 and for each of the three years
in the period ended December 31, 1997, listed in the accompanying index at Item
8. These financial statements are the responsibility of the Partnerships'
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, such financial statements present fairly, in all material
respects, the financial position of the General Partnership and the Limited
Partnership at December 31, 1997 and 1996, and the results of operations and
cash flows of the Limited Partnership for each of the three years in the period
ended December 31, 1997 in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Denver, Colorado
February 27, 1998
<PAGE>
<TABLE>
<CAPTION>
MAY DRILLING PARTNERSHIP 1984-2
BALANCE SHEETS
(In thousands)
December 31, December 31,
1997 1996
ASSETS
<S> <C> <C>
Investment in May Limited Partnership 1984-2 $320 $445
=== ===
PARTNERS' CAPITAL
Partners' Capital $320 $445
=== ===
<FN>
Note: The statements of operations, changes in partners capital and cash
flows for May Drilling Partnership 1984-2 are not presented because
such information is equal to the Limited Partners' share of such
activity as presented in the May Limited Partnership 1984-2 financial
statements. The May Drilling Partnership carries its investment in May
Limited Partnership 1984-2 on the equity method. The May Limited
Partnership 1984-2 financial statements should be read in conjunction
with this balance sheet.
</FN>
<FN>
The accompanying notes are an integral part
of the financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MAY LIMITED PARTNERSHIP 1984-2
BALANCE SHEETS
(In thousands)
December 31, December 31,
1997 1996
ASSETS
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $ 286 $ 352
Accrued oil and gas revenues 192 320
Due from affiliate 106 114
Contributions receivable from general partner 35 32
----- ----
Total 619 818
OIL AND GAS PROPERTIES, using the
full cost method of accounting 10,442 10,369
Less accumulated depletion (10,409) (10,369)
------- -------
Net oil and gas properties 33
TOTAL ASSETS $ 652 $ 818
======== =======
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 14 $ 12
-------- --------
PARTNERS' CAPITAL
General Partner 318 361
Limited Partner 320 445
------ ------
Total 638 806
------ -----
TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 652 $ 818
====== =======
<FN>
The accompanying notes are an integral part
of the financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MAY LIMITED PARTNERSHIP 1984-2
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(In thousands, except for Unit and per Unit Information)
1997 1996 1995
-- ----- -- ----- -- ----
REVENUES
<S> <C> <C> <C>
Oil revenue $ 494 $ 754 $ 543
Gas revenue 793 1,242 613
Interest income 15 14 14
Other 9
-------- ------
Total 1,311 2,010 1,170
-------- ----- - -----
COSTS AND EXPENSES
Lease operating 45 33 25
Production taxes 86 125 92
General and administrative 32 36 46
Depletion 40 10 2
Litigation settlement 7
Professional services and other 10 10 10
------ ------ ----
Total 213 214 182
---- ---- ----
NET INCOME $ 1,098 $ 1,796 $ 988
======= ====== =======
ALLOCATION OF NET INCOME:
General Partner $ 358 $ 569 $ 313
======= ======= ======
Limited Partner $ 740 $ 1,227 $ 675
======= ====== ======
Per initial $1,000 Limited Partner
investment $ 85.71 $142.13 $ 78.19
====== ====== ======
Weighted average initial $1,000 Limited
Partner investment units outstanding 8,633 8,633 8,633
===== ===== =====
<FN>
The accompanying notes are an integral part
of the financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MAY LIMITED PARTNERSHIP 1984-2
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(In thousands)
General Limited
Partner Partner Total
<S> <C> <C> <C>
BALANCE, December 31, 1994 $ 280 $ 297 $ 577
Capital contributions 27 27
Net income 313 675 988
Distributions (336) (676) (1,012)
-- ---- -- ---- ------
BALANCE, December 31, 1995 284 296 580
Capital contributions 32 32
Net income 569 1,227 1,796
Distributions (524) (1,078) (1,602)
-- ---- ------ ------
BALANCE, December 31, 1996 361 445 806
Capital contributions 35 35
Net income 358 740 1,098
Distributions (436) (865) (1,301)
------ ------ -----
BALANCE, December 31, 1997 $ 318 $ 320 $ 638
====== ====== ======
<FN>
The accompanying notes are an integral part
of the financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MAY LIMITED PARTNERSHIP 1984-2
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(In thousands)
1997 1996 1995
------ -- ----- -- ----
OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income $ 1,098 $ 1,796 $ 988
Adjustment to reconcile net income
to net cash provided by operating activities:
Depletion 40 10 2
Changes in assets and liabilities provided (used) cash:
Accrued oil and gas revenues 128 (75) (42)
Due from affiliate 8 (39) 11
Accounts payable and accrued
liabilities 2 (5) 3
---- ------ ----
Net cash provided by
operating activities 1,276 1,687 962
-------- ----- ---
INVESTING ACTIVITIES -
Additions to oil and gas properties (73) (10) (2)
------ --- --
FINANCING ACTIVITIES -
Distributions to partners (1,301) (1,602) (1,012)
Contributions from partners 32 27 26
------- ---- -----
Net cash used in financing
activities (1,269) (1,575) (986)
------- ------ ----
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (66) 102 (26)
CASH AND CASH EQUIVALENTS:
BEGINNING OF YEAR 352 250 276
----- --- ---
END OF YEAR $ 286 $ 352 $ 250
======= ======= =======
<FN>
The accompanying notes are an integral part
of the financial statements.
</FN>
</TABLE>
<PAGE>
MAY DRILLING PARTNERSHIP 1984-2
AND
MAY LIMITED PARTNERSHIP 1984-2
NOTES TO FINANCIAL STATEMENTS
(1) ACCOUNTING POLICIES AND OTHER MATTERS
General Partnership
May Drilling Partnership 1984-2, a Texas general partnership (the
"General Partnership"), was organized by May Petroleum Inc. ("May") for
the purpose of oil and gas exploration through May Limited Partnership
1984-2 (the "Limited Partnership"). The General Partnership was formed
on September 18, 1984, with investors ("Participants") subscribing an
aggregate of $8,633,000 in assessable $1,000 units. After the
expenditure of the initial contributions of the Participants,
additional mandatory assessments from each Participant are provided for
under the terms of the general partnership agreement in an amount up to
25% of the initial contribution of the Participant. During 1985, May
assessed the Participants 5% of initial contributions. No additional
assessments have been made since 1985.
The general partnership agreement requires that the manager, Hallwood
Energy Partners, L. P. ("HEP"), offer to repurchase partnership
interests from Participants for cash at amounts to be determined by
appraisal (as set forth in the partnership agreement) of the Limited
Partnership's net assets no later than December 31, 1988, and during
each succeeding year, if such net assets are positive. The manager has
made repurchase offers in each year since 1989 and intends to make a
repurchase offer in 1998.
As the General Partnership is the sole limited partner of the Limited
Partnership, and there are no other revenues or expenses of the General
Partnership, its results of operations, changes in partners capital and
cash flows are equal to the limited partner's share of the Limited
Partnership's results of operations, changes in partners capital and
cash flows as set forth herein. Therefore, separate statements of
operations, changes in partners capital and cash flows are not
presented for the General Partnership.
Limited Partnership
The Limited Partnership, a Texas limited partnership, was organized by
May and the General Partnership, for the purpose of oil and gas
exploration and the production of crude oil, natural gas and petroleum
products. The Limited Partnership's oil and gas reserves are
concentrated in one prospect in south Louisiana. Among other things,
the terms of the Limited Partnership agreement (the "Agreement") give
the general partner the authority to borrow funds. The Agreement also
requires that the general partner's total capital contributions to the
Limited Partnership as of each year end, including unrecovered general
partner acreage and equipment advances, must be compared to total
Limited Partnership expenditures from inception to date, and if such
contributions are less than 15% of such expenditures, an additional
contribution in the amount of the deficiency is required. As of
December 31, 1997, all such contributions had been accrued.
On June 30, 1987, May sold to HEP all of its economic interest in the
Limited Partnership and account receivable balances due from the
Limited Partnership. HEP became the general partner of the Limited
Partnership in 1988.
<PAGE>
Sharing of Costs and Revenues
Capital costs, as defined by the Agreement, for commercially productive
wells and the costs related to the organization of the Limited
Partnership are borne by the general partner. Noncapital costs and
direct expenses, as defined by the Agreement, are charged 1% to the
general partner and 99% to the limited partner. Oil and gas sales,
operating expenses and general and administrative overhead are shared
so that the general partner's allocation will equal the percentage that
the amount of Limited Partnership expenses, as defined, allocated to
the general partner bears to the aggregate amount of Limited
Partnership expenses allocated to the general partner and the limited
partner, plus 15 percentage points, but in no event will the general
partner's allocation exceed 50%. The sharing ratio for each of the last
three years was as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- ----- - ----- - ----
<S> <C> <C> <C>
Limited Partner $ 68.2 68.4% 68.6%
General Partner $ 31.8 31.6% 31.4%
</TABLE>
Significant Customers
For the years ended December 31, 1997, 1996 and 1995, purchases by each
of the following companies exceeded 10% of the total oil and gas
revenues of the Limited Partnership:
<TABLE>
<CAPTION>
1997 1996 1995
- ----- - ----- - ----
<S> <C> <C> <C>
Conoco Inc. 41% 56% 72%
Marathon Petroleum Company 39%
TXG Gas Marketing 19% 30%
</TABLE>
Although the Limited Partnership sells the majority of its production
to a small number of purchasers, there are numerous other purchasers in
the area, so the loss of any significant customer would not adversely
affect the Limited Partnership's operations.
Income Taxes
No provision for federal income taxes is included in the financial
statements of the Limited Partnership or the General Partnership
because, as partnerships, they are not subject to federal income tax
and the tax effects of their activities accrue to the partners. The
partnerships' tax returns, the qualification of the General and Limited
Partnerships as partnerships for federal income tax purposes, and the
amount of taxable income or loss are subject to examination by federal
and state taxing authorities. If such examinations result in changes to
the partnerships' taxable income or loss, the tax liability of the
partners could change accordingly.
Oil and Gas Properties
The Limited Partnership follows the full cost method of accounting for
oil and gas properties and, accordingly, capitalizes all costs
associated with the exploration and development of oil and gas
reserves.
The capitalized costs of evaluated properties, including the estimated
future costs to develop proved reserves, are amortized on the units of
production basis. Full cost amortization per dollar of gross oil and
gas revenues was $.03 in 1997 and $.01 in both 1996 and 1995.
<PAGE>
Capitalized costs are limited to an amount not to exceed the present
value of estimated future net cash flows. No valuation adjustment was
required in 1997, 1996 or 1995. Significant price declines in the
future could cause the Limited Partnership to recognize valuation
adjustments and could reduce the amount of future cash flow available
for distributions and operations.
Generally no gains or losses are recognized on the sale or disposition
of oil and gas properties. Maintenance and repairs are charged against
income when incurred.
Gas Balancing
The Limited Partnership uses the sales method of accounting for gas
balancing. Under this method, the Limited Partnership recognizes
revenue on all of its sales of production, and any over production or
under production is recovered at a future date.
As of December 31, 1997, the net imbalance to the Limited Partnership's
interest is not considered material. Current imbalances can be made up
with production from the existing well.
Use of Estimates
The preparation of the financial statements for the Limited Partnership
and General Partnership 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 these
estimates.
Related Party Transactions
Hallwood Petroleum, Inc. ("HPI"), a subsidiary of the general partner,
pays all costs and expenses of operations and receives all revenues
associated with the Limited Partnership's properties. At month end, HPI
distributes revenues in excess of costs to the Limited Partnership. The
amounts due from HPI were $106,000 and $114,000 as of December 31, 1997
and 1996, respectively. These balances represent net revenues less
operating costs and expenses.
Cash Flows
All highly liquid investments purchased with an original maturity of
three months or less are considered to be cash equivalents.
(2) GENERAL AND ADMINISTRATIVE OVERHEAD
HPI conducts the day to day operations of the Limited Partnership and
other affiliated partnerships of HEP. The costs of operating the
entities are allocated to each entity based upon the time spent on that
entity. General and administrative overhead allocated by HPI to the
Limited Partnership totaled $32,000 in 1997, $36,000 in 1996 and
$46,000 in 1995.
<PAGE>
(3) INCOME TAXES
As a result of the differences in the accounting treatment of certain
items for income tax purposes as opposed to financial reporting
purposes, primarily depreciation, depletion and amortization of oil and
gas properties and the recognition of intangible drilling costs as an
expense or capital item, the income tax basis of oil and gas properties
differs from the basis used for financial reporting purposes. At
December 31, 1997 and 1996, the income tax bases of the Limited
Partnership's oil and gas properties were approximately $5,600 and
$6,800, respectively.
(4) LITIGATION SETTLEMENT
In the fourth quarter of 1995, the parties settled the lawsuit styled
Stutes v. Hallwood Petroleum, Inc. et al. The plaintiff in the lawsuit
alleged that as a result of exposure to benzene in the petroleum he was
hauling from various wells owned and operated by the Limited
Partnership and the approximately 80 other named defendants, he
contracted myelogenous leukemia. The Limited Partnership's share of the
settlement not covered by insurance was $7,000.
<PAGE>
SUPPLEMENTAL OIL AND GAS RESERVE INFORMATION
(Unaudited)
The following tables contain certain costs and reserve information related to
the Limited Partnership's oil and gas activities. The Limited Partnership has no
long-term supply agreements and all reserves are located within the United
States.
Costs Incurred -
<TABLE>
<CAPTION>
For the Years Ended December 31,
1997 1996 1995
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Development costs $73 $10 $ 2
=== == ==
</TABLE>
Oil and Gas Reserves (valued at year-end prices discounted at 10%) -
<TABLE>
<CAPTION>
1997 1995
---- ----
1996
----
Bbls Mcf Bbls Mcf Bbls Mcf
Total Proved Reserves:
<S> <C> <C> <C> <C> <C> <C>
Beginning of period 33 345 34 335 31 280
Revisions to previous estimates 18 203 34 404 34 364
Production (24) (258) (35) (394) (31) (309)
--- --- --- ---- --- ----
End of period 27 290 33 345 34 335
=== === === ==== ===
Proved Developed
Reserves:
Beginning of period 33 345 34 335 31 280
= == === = == = === = == = ===
End of period 27 290 33 345 34 335
= == === = == = === = == = ===
</TABLE>
Certain reserve value information is provided directly to partners pursuant to
the Agreement. Accordingly, such information is not presented herein.
<PAGE>
ITEM 9 - DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Drilling Partnership and Limited Partnership are managed by
affiliates of HEP and do not have directors or executive officers.
ITEM 11 - EXECUTIVE COMPENSATION
The partnerships pay no salaries or other direct remuneration to
officers, directors or key employees of the general partner or HPI.
The Limited Partnership reimburses the general partner for general
and administrative costs incurred on behalf of the partnerships. See
Note 2 to the Financial Statements.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
To the knowledge of the general partner, no person owns of record or
beneficially more than 5% of the Drilling Partnership's outstanding
units, other than HEP, the address of which is 4582 S. Ulster Street
Parkway, Denver, Colorado 80237, and which beneficially owns
approximately 33.3% of the outstanding units. The general partner of
HEP is HEPGP Ltd.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For information with respect to the Limited Partnership and its
relationships and transactions with the general partner, see Part I,
Item 1 and Part II, Item 7.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
a. Financial Statements and Schedules:
See Index at Item 8.
b. Reports on Form 8-K - None.
c. Exhibits:
3.1 The General Partnership Agreement and the Limited
Partnership Agreement filed as an Exhibit to Registration
Statement No. 0-89194, are incorporated herein by reference.
<PAGE>
-23-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the Partnerships have duly caused this report to be
signed on their behalf by the undersigned, thereunto duly authorized.
MAY DRILLING PARTNERSHIP 1984-2
MAY LIMITED PARTNERSHIP 1984-2
By: EDP OPERATING, LTD.,
General Partner
By: HEPGP LTD.,
General Partner
By: HALLWOOD G.P., Inc.
General Partner
By: /s/William L.Guzzetti
William L. Guzzetti
President, Chief Executive
Officer and Director
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 and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/Robert S. Pfeiffer Vice President February 27, 1998
(Principal Accounting Officer)
Robert S. Pfeiffer
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Form 10-K
for the year ended December 31, 1997 for May Limited Partnership 1984-2 and is
qualified in its entirety by reference to such Form 10-K.
</LEGEND>
<CIK> 0000757385
<NAME> May Limited Partnership 1984-2
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-END> Dec-31-1997
<CASH> 286
<SECURITIES> 0
<RECEIVABLES> 333
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 619
<PP&E> 10,442
<DEPRECIATION> 10,409
<TOTAL-ASSETS> 652
<CURRENT-LIABILITIES> 14
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 638
<TOTAL-LIABILITY-AND-EQUITY> 652
<SALES> 1,287
<TOTAL-REVENUES> 1,311
<CGS> 0
<TOTAL-COSTS> 213
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,098
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,098
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,098
<EPS-PRIMARY> 85.71
<EPS-DILUTED> 85.71
</TABLE>
