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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 1995 COMMISSION FILE NO. 1-9042
KELLEY OIL & GAS PARTNERS, LTD.
(Exact name of registrant as specified in its charter)
TEXAS 76-0135263
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
601 JEFFERSON ST.
SUITE 1100
HOUSTON, TEXAS 77002
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 652-5200
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
--- ---
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KELLEY OIL & GAS PARTNERS, LTD.
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
----
<S> <C>
Consolidated Balance Sheets -- June 30, 1995 (unaudited) and December 31, 1994 ................ 2
Consolidated Statements of Loss -- Three Months ended June 30, 1995 and 1994 (unaudited) ...... 3
Consolidated Statements of Loss -- Six Months ended June 30, 1995 and 1994 (unaudited) ........ 4
Consolidated Statements of Cash Flows -- Six Months ended June 30, 1995 and 1994 (unaudited) .. 5
Notes to Consolidated Financial Statements (unaudited) ........................................ 6
Management s Discussion and Analysis of Financial Condition and Results of Operations ......... 7
PART II. OTHER INFORMATION .................................................................... 13
</TABLE>
1
<PAGE>
PART I. FINANCIAL INFORMATION
KELLEY OIL & GAS PARTNERS, LTD.
CONSOLIDATED BALANCE SHEETS
($ in thousands)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1995 1994
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS:
Cash and cash equivalents.......................................... $ 281 $ 897
Accounts receivable - trade........................................ 1,181 1,612
Accounts receivable - affiliates .................................. 4,642 4,745
Other current assets............................................... 326 287
-------- --------
Total current assets ............................................ 6,430 7,541
-------- --------
Oil and gas properties, successful efforts method:
Unevaluated, net ................................................... 8,176 7,199
Unproved properties................................................. 83,695 --
Properties subject to amortization.................................. 196,097 375,058
Pipelines and other transportation assets............................ 3,637 7,910
-------- --------
291,605 390,167
-------- --------
Less: Accumulated depreciation, depletion and amortization......... (49,458) (192,378)
-------- --------
Total oil and gas properties and pipeline assets, net............. 242,147 197,789
-------- --------
Other assets ........................................................ 978 184
-------- --------
TOTAL ASSETS...................................................... $249,555 $205,514
======== ========
LIABILITIES:
Accounts payable and accrued expenses - trade....................... $ 8,499 $ 10,257
Accounts payable - affiliates ...................................... 15,082 12,423
Notes payable - current ............................................ -- 4,430
-------- --------
Total current liabilities ........................................ 23,581 27,110
-------- --------
Notes payable - long term .......................................... -- 65,470
Advances from parent ............................................... -- 79,613
Convertible subordinated debentures................................. 21,087 25,664
Convertible subordinated notes...................................... 24,331 28,520
-------- --------
TOTAL LIABILITIES................................................. 148,612 146,764
-------- --------
PARTNERS' EQUITY:
Limited Partners' equity, 23,351,645 Units outstanding at
June 30, 1995 and December 31, 1994................................ 110,522 67,589
General Partners' equity (deficit).................................. (9,579) (8,839)
-------- --------
TOTAL PARTNERS' EQUITY ........................................... 100,943 58,750
-------- --------
TOTAL LIABILITIES AND PARTNERS' EQUITY.............................. $249,555 $205,514
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
2
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KELLEY OIL & GAS PARTNERS, LTD.
CONSOLIDATED STATEMENTS OF LOSS
($ IN THOUSANDS EXCEPT PER UNIT DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
----------------------
1995 1994
-------- ---------
(RESTATED)
<S> <C> <C>
REVENUES:
Oil and gas sales........................ $ 6,708 $ 6,721
Pipeline revenues........................ 379 1,171
Other income............................. 24 8
-------- --------
Total revenues......................... 7,111 7,900
-------- --------
COSTS AND EXPENSES:
Cost of gas sold......................... 376 1,162
Lease operating expenses................. 1,867 1,640
Severance taxes.......................... 424 332
Exploration and dry hole costs........... 3,067 4,290
General and administrative expenses...... 591 676
Interest expense......................... 4,088 2,012
Accretion of note discount............... 183 161
Accretion of debt valuation discount..... 509 --
Depreciation, depletion and amortization. 6,540 7,683
-------- --------
Total costs and expenses............... 17,645 17,956
-------- --------
NET LOSS................................... $(10,534) $(10,056)
======== ========
NET LOSS PER UNIT.......................... $(.43) $(.46)
======== ========
Average units outstanding.................. 23,351,645 20,864,890
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE>
KELLEY OIL & GAS PARTNERS, LTD.
CONSOLIDATED STATEMENTS OF LOSS
($ IN THOUSANDS EXCEPT PER UNIT DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------
1995 1994
------ ------
(RESTATED)
<S> <C> <C>
REVENUES:
Oil and gas sales............................... $ 14,909 $ 15,301
Pipeline revenues............................... 722 2,574
Other income.................................... 52 31
-------- --------
Total revenues................................. 15,683 17,906
-------- --------
COSTS AND EXPENSES:
Cost of gas sold................................ 717 2,558
Lease operating expenses........................ 3,578 3,721
Severance taxes................................. 908 659
Exploration and dry hole costs.................. 5,182 6,862
General and administrative expenses............. 1,510 1,359
Interest expense................................ 7,295 3,787
Accretion of note discount...................... 361 320
Accretion of debt valuation discount............ 848 --
Depreciation, depletion and amortization........ 13,472 15,499
-------- --------
Total costs and expenses....................... 33,871 34,765
-------- --------
NET LOSS.......................................... $(18,188) $(16,859)
======== ========
NET LOSS PER UNIT................................. $ (.75) $ (.78)
======== ========
Average units outstanding........................ 23,351,645 20,864,890
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE>
KELLEY OIL & GAS PARTNERS, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------
1995 1994
-------- --------
(RESTATED)
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss ........................................................ $(18,188) $(16,859)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation, depletion and amortization ...................... 13,472 15,499
Dry hole and impairment costs ................................. 2,030 1,861
Amortization of debenture and note offering costs ............. 272 239
Accretion of debt valuation discount .......................... 848 --
Accretion of note discount .................................... 361 320
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable .................... 534 1,470
Increase in prepaid and other current assets .................. (39) (135)
Decrease (increase) in other non-current assets ............... (794) 35
Increase (decrease) in accounts payable and accrued expenses .. 901 (2,729)
-------- --------
Net cash used in operating activities ........................... (603) (299)
-------- --------
INVESTING ACTIVITIES:
Purchases of property and equipment ............................. (9,393) (12,138)
Sale (purchase) of pipeline and other transportation assets ..... (1) 53
Sale of other non-current assets ................................ 202 162
-------- --------
Net cash used in investing activities ........................... (9,192) (11,923)
-------- --------
FINANCING ACTIVITIES:
Proceeds from long term borrowings .............................. 13,100 23,000
Advances from parent, net ....................................... 79,579 --
Principal payments on long term borrowings ...................... (83,000) --
Distributions to partners ....................................... (486) (10,863)
Syndication costs charged to equity ............................. (14) (2)
Note offering costs ............................................. -- (8)
-------- --------
Net cash provided by financing activities ....................... 9,179 12,127
-------- --------
Decrease in cash and cash equivalents ............................. (616) (95)
Cash and cash equivalents, beginning of period .................... 897 1,011
-------- --------
Cash and cash equivalents, end of period .......................... $ 281 $ 916
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
5
<PAGE>
KELLEY OIL & GAS PARTNERS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
GENERAL. The accompanying consolidated financial statements of
Kelley Oil & Gas Partners, Ltd. ("Kelley Partners" or the
"Partnership") have been prepared in accordance with generally
accepted accounting principles and, in the opinion of management,
reflect all adjustments (consisting of normal recurring
adjustments) necessary for a fair statement of the results for the
interim periods presented. The accounting policies followed by the
Partnership are set forth in Note 1 to Kelley Partners' financial
statements in its Annual Report on Form 10-K for the year ended
December 31, 1994. The Financial Accounting Standards Board has
issued Statement No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of,
effective for companies with years beginning after December 31,
1995. Management has not evaluated the potential effects of this
Statement, if any, on the consolidated financial statements of the
Company.
CONSOLIDATION. On February 7, 1995, ownership of the equity
interests in Kelley Partners and Kelley Oil Corporation, its
managing general partner ("Kelley Oil"), was consolidated (the
"Consolidation") into Kelley Oil & Gas Corporation ("KOGC"). In the
Consolidation, Units in Kelley Partners held by investors other
than Kelley Oil and its subsidiaries (the "Public Unitholders")
were converted into common and preferred stock of KOGC, and both
Kelley Partners and Kelley Operating Company, Ltd., its operating
partnership ("Kelley Operating"), became 99.98% owned subsidiary
partnerships of KOGC. Following the Consolidation, the historical
carrying values of Kelley Partners' oil and gas properties and
publicly held subordinated debt were adjusted to conform with KOGC's
cost basis for those assets and liabilities in the Consolidation,
reflecting their estimated fair market values at February 7, 1995
based on the market value of the common and preferred stock issued
to the Public Unitholders and the market prices of the Partnership's
subordinated debt.
As a result of this accounting approach, commonly referred to as
"pushdown accounting," the following adjustments were made to
reflect Kelley Partners' assets and liabilities at fair market value
and the net effect on limited partners' equity at February 7, 1995:
<TABLE>
<CAPTION>
$ IN THOUSANDS
<S> <C>
INCREASE (DECREASE) IN:
Purchased unproved properties............................ $ 85,182
Properties subject to amortization....................... (186,887)
Pipelines and other transportation assets................ (4,274)
Accumulated depreciation, depletion and amortization..... (156,594)
Convertible subordinated debentures...................... (5,103)
Convertible subordinated notes........................... (5,110)
Limited partners' equity................................. 60,828
</TABLE>
In the second quarter, certain reclassifications were made to
reflect the Consolidation at February 7, 1995. If the Consolidation
had not taken place, Kelley Partners' depletion, depreciation and
amortization for the quarter and six months ended June 30, 1995
would have increased by approximately $1.3 million and $3.2
million, respectively, with corresponding increases in its net
losses for the interim periods.
GUARANTY OF KOGC SENIOR NOTES. In June 1995, KOGC completed a
public offering of $100 million principal amount of its 13 1/2% Senior
Notes due 1999 (the "Senior Notes"). The Senior Notes are senior
unsecured obligations of KOGC, guaranteed by the Partnership,
Kelley Operating and Kelley Oil. Proceeds from the Senior Note
offering were used primarily to repay outstanding bank debt of
Kelley Operating and Kelley Oil, which was guaranteed by the
Partnership, KOGC and its other subsidiary partnerships.
CHANGE TO SUCCESSFUL EFFORTS ACCOUNTING METHOD. During the third
quarter of 1994, Kelley Partners changed from the full cost method
to the successful efforts method of accounting for its oil and gas
operations. As a result of the change in accounting method, Kelley
Partners' previously reported net losses of $37,293,000 and
$38,204,000 for the quarter and six months ended June 30, 1994
have been restated to net losses of $10,056,000 and $16,859,000,
respectively.
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
INTRODUCTION. Kelley Oil & Gas Partners, Ltd. ("Kelley Partners"
or the "Partnership") is a Texas limited partnership engaged in the
development of oil and natural gas properties located onshore
primarily in Louisiana. Its strategy is focused on development
drilling, with a secondary emphasis on exploration activities in or
near established production areas. The Partnership also owns
natural gas gathering and transportation systems in Louisiana. In
February 1995, ownership of the equity interests in Kelley Partners
and Kelley Oil Corporation, its managing general partner ("Kelley
Oil"), were consolidated (the "Consolidation") into Kelley Oil &
Gas Corporation ("KOGC"). As a subsidiary partnership of KOGC,
Kelley Partners is focused on continuing to replace and expand its
reserve base without the constraints of a cash distribution policy
that constituted its primary financial objective prior to the
Consolidation.
PARTNERSHIP STRUCTURE. The operations of Kelley Partners are
conducted through Kelley Operating Company, Ltd., a Texas limited
partnership of which Kelley Partners is the sole limited partner
and Kelley Oil is the managing general partner ("Kelley Operating").
Unless otherwise indicated, all references to Kelley Partners or
the Partnership in this Report in connection with the ownership and
management of the Partnership's properties also refer to Kelley
Operating, and all financial information reflects the combined
financial position and results of operations of Kelley Partners and
Kelley Operating.
Kelley Partners undertakes development activities consisting
primarily of lease acquisition activities for its own account and
drilling operations, which have historically been conducted in
conjunction with separate development drilling programs ("DDPs")
formed for that purpose. Kelley Partners has participated in
drilling activities on a pro rata basis with the DDPs, retaining
one-third of its working interest in each prospect for which
drilling rights are assigned to a DDP and sharing proportionately
in exploration and development expenses and production revenues. As
a result, the DDPs have financed two-thirds of the total drilling
expenses on Kelley Partners' properties since formation of the
first DDP in 1987.
COMPLETION OF CONSOLIDATION. The Consolidation was completed on
February 7, 1995 upon approval of the transaction by the
Unitholders and the holders of Kelley Oil's voting stock. In the
Consolidation, each Unit held by investors other than Kelley Oil
and its subsidiaries ("Public Unitholders") was converted into the
right to receive 1.2188 shares of KOGC's common stock ("KOGC Common
Stock"), or at the election of each Public Unitholder (the
"Preferred Election"), a combination of .609 of a share of KOGC
Common Stock and .127 of a share of its $2.625 convertible
exchangeable preferred stock ("KOGC Preferred Stock"). Based on
results of the Preferred Election, the Public Unitholders received
a total of 20,622,626 shares of KOGC Common Stock and 649,807
shares of KOGC Preferred Stock. Following the Consolidation, the
Partnership Agreement of Kelley Partners was amended to eliminate
the Partnership's obligation to distribute at least 75% of its net
available cash to the Unitholders, now comprised of KOGC and its
subsidiaries.
PUSHDOWN ACCOUNTING. For financial accounting purposes, the
Consolidation was treated as a purchase by KOGC of the Public
Unitholders' interests in the net assets of Kelley Partners at a
fair value of $109.8 million, representing the estimated market
value of the consideration received by the Public Unitholders in
the Consolidation. Following the Consolidation, the historical
carrying values of Kelley Partners' oil and gas properties and
publicly held subordinated debt were adjusted to conform with KOGC's
cost basis for those assets and liabilities in the Consolidation,
reflecting their estimated fair market values at February 7, 1995
based on the market value of the KOGC Common and Preferred Stock
issued to the Public Unitholders and the market prices of the
Partnership's subordinated debt.
CHANGE TO SUCCESSFUL EFFORTS ACCOUNTING METHOD. During the third
quarter of 1994, the Partnership changed from the full cost method
to the successful efforts method of accounting for its oil and gas
operations. The
7
<PAGE>
Partnership's financial statements for the first two quarters of
1994 have been restated to reflect the new method. As a result of
the change in accounting method, Kelley Partners' previously
reported net losses of $37.3 million and $38.2 million for the
quarter and six months ended June 30, 1994 have been restated to
net losses of $10.1 million and $16.9 million, respectively.
RECENT DEVELOPMENTS
GUARANTY OF KOGC SENIOR NOTES. In June 1995, KOGC completed a
public offering of $100 million principal amount of its 13 1/2% Senior
Notes due 1999 (the "Senior Notes"). The Senior Notes are senior
unsecured obligations of KOGC, guaranteed by the Partnership,
Kelley Operating and Kelley Oil. Proceeds from the Senior Note
offering were used primarily to repay outstanding bank debt of
Kelley Operating and Kelley Oil, which was guaranteed by the
Partnership, KOGC and its other subsidiary partnerships.
DRILLING OPERATIONS. In the first half of 1995, the Partnership
participated in drilling 8 gross (1.18 net) wells, all of which
were found productive, with one additional well drilling as of June
30, 1995. These results continued an effective turnaround in field
operations during 1994, when Kelley Partners completed 31 gross
(5.65 net) wells as producers in 35 attempts. The improvements in
drilling performance after disappointing results in 1993 have been
achieved from lower risk operations in north Louisiana and
increased reliance in south Louisiana on 3-D seismic analysis,
primarily from a 125 square mile 3-D seismic survey covering Kelley
Partners' significant properties in Terrebonne Parish. Although the
Partnership's first exploratory well based on the 3-D seismic
survey was logged in August 1995 and found unproductive,
improvements in south Louisiana drilling operations are anticipated
during the balance of 1995 from use of the survey for lower risk
development wells. The Partnership also plans to increase its
emphasis on lower risk operations in north Louisiana. Drilling on
the next higher potential exploratory prospect developed from the
3-D seismic survey is expected to be postponed until the middle of
1996.
RECENT PRODUCTION PERFORMANCE. From the middle of 1994 through
the first quarter of 1995, the Partnership's operating results
reflected sustained production growth, partially offset by weak
natural gas prices, which averaged $1.73 per Mcf for the first half
of 1995. Kelley Partners' production growth resulted primarily from
improved completion rates and increased interests in various wells
from an exchange offer for the 1991 DDP (the "1991 DDP Exchange")
and acquisitions of north Louisiana properties in which the
Partnership already held working interests (the "1994 Properties").
In addition, the KOGC and its subsidiaries (the "Kelley Group")
have achieved higher flow rates in new north Louisiana wells from
commingled completions in multiple formations and the use of
revised fracture stimulation techniques. Although Kelley Partners
recorded a second quarter 1995 increase in gas equivalent
production of 9.0% from year-earlier levels, those results were off
15.2% compared to the first quarter of 1995. Production performance
in the second quarter of 1995 was affected by the timing of new
well completions, four of which were late in the quarter or in
early July, and by production declines in several significant
wells, some of which are expected to be restored to prior levels
through remedial work. As a result of the remedial operations plus
recent well completions and ongoing drilling activities, the
Partnership anticipates a return to quarterly production growth for
the balance of the year.
HEDGING ACTIVITIES. KOGC periodically uses forward sales
contracts and derivative financial instruments covering natural gas
to reduce exposure to downward price fluctuations on the Kelley
Group's natural gas production. The natural gas swap agreements
generally provide for the Kelley Group to receive or make
counterparty payments on the differential between a fixed price and
a variable indexed price for natural gas. Gains realized by the
Partnership under the swap arrangements and proceeds from forward
sales contracts are included in oil and gas revenues. Through a
combination of natural gas swap agreements and forward sales
contracts, approximately 63% of the Kelley Group's natural gas
production for the first half of 1995 was affected by hedging
transactions at an average Nymex quoted price of $1.80 per MMBtu,
before transaction costs and transportation costs on gas delivered
under forward sales contracts. For the third and fourth quarters of
1995, approximately 68% and 23%, respectively, of the Kelley
Group's anticipated natural gas production has been hedged at
average Nymex quoted prices of $1.65 per MMBtu for the third
quarter and $1.75 per MMBtu for the fourth quarter, before
transaction and transportation costs.
8
<PAGE>
RESULTS OF OPERATIONS
QUARTER ENDED JUNE 30, 1995 COMPARED TO QUARTER ENDED JUNE 30,
1994. Oil and gas revenues of $6,708,000 in the second quarter of
1995 decreased .2% compared to $6,721,000 in the same quarter last
year. During the second quarter of 1995, production of natural gas,
the dominant component of Kelley Partners' revenues, increased
11.4% from 2,925,000 Mcf in the second quarter of 1994 to 3,259,000
Mcf, while the average price of natural gas declined 15.9% from
$1.95 per Mcf to $1.64 per Mcf in the current quarter. Production
of crude oil and natural gas liquids in the current quarter totaled
68,013 barrels, with an average sales price of $19.15 per barrel
compared to 73,474 barrels at $16.01 per barrel in the same quarter
last year, reflecting a volume decline of 7.4% and a price increase
of 19.6%.
The decrease in the Partnership's oil and gas revenues for the
second quarter of 1995 was attributable to production declines in
several significant wells and the decrease in natural gas prices,
partially offset by added production from new wells. See "Recent
Developments." The Partnership anticipates improvement in its
production performance for the balance of the year as new wells are
brought on line and production is restored from remedial work on
various existing wells. In addition, although natural gas prices
have remained depressed, hedging activities added $175,000 to oil
and gas revenues in the current quarter. Hedging arrangements
covering a portion of anticipated natural gas production are in
effect for the remainder of the year. See "Recent
Developments--Hedging Arrangements."
Total revenues of $7,111,000 in the second quarter of 1995
decreased 10.0% from results in the corresponding period last year,
due primarily to a 67.6% decline in pipeline revenues to $379,000
from $1,171,000 during the second quarter of 1994. The decrease in
pipeline revenues resulted from lower volumes and prices of
transported natural gas and was accompanied by a corresponding
decrease in related expenses reflected as cost of gas sold in
pipeline operations.
Lease operating expenses and severance taxes (collectively,
"production expenses") aggregated $2,291,000 in the current quarter
versus $1,972,000 in the second quarter of 1994, an increase of
16.2%, due primarily to higher current severance taxes. On a unit
of production basis, production expenses increased to $.62 per Mcfe
in the second quarter of 1995 from $.59 per Mcfe in the
corresponding quarter last year.
Kelley Partners expensed exploration and dry hole costs of
$3,067,000 in the second quarter of 1995 and $4,290,000 in the same
quarter last year, a decrease of 28.5%, primarily reflecting the
Partnership's focus on lower risk prospects during the current
quarter. The decrease in these expenses resulted from lower delay
rental and geological and geophysical costs, partially offset by
higher unproved leasehold impairment provisions.
General and administrative expenses of $591,000 in the current
quarter decreased 12.6% from $676,000 in the second quarter of
1994, reflecting the Partnership's share of administrative costs
associated with development operations of the Kelley Group. On a
unit of production basis, these expenses decreased from $.20 per
Mcfe in the second quarter of 1994 to $.16 per Mcfe in the current
quarter. A restructuring by Kelley Oil focused on significant staff
reductions at the end of 1994 has generated savings in overhead for
the Kelley Group beginning in the first quarter of 1995.
Interest expense increased 103.2% to $4,088,000 in the current
quarter compared to $2,012,000 in the second quarter of 1994. The
increase in interest expense resulted from both higher interest
rates and borrowing levels in the current quarter.
Kelley Partners recognized $509,000 for accretion of debt
valuation discount in the second quarter of 1995. This noncash
charge represents amortization of the difference between the market
value of the Partnership's publicly held subordinated notes and
debentures at the time of the Consolidation and their historical
carrying value. See "Recent Developments--Pushdown Accounting."
9
<PAGE>
DD&A decreased 14.9% from $7,683,000 in the second quarter of
1994 to $6,540,000 in the current quarter, primarily from a
reduction in the carrying value of properties subject to
amortization under the "pushdown" accounting adjustment in the
Consolidation. See "Recent Developments--Pushdown Accounting." On a
unit of production basis, DD&A decreased from $2.28 per Mcfe in the
second quarter of 1994 to $1.78 per Mcfe in the current quarter. If
the Consolidation had not taken place, DD&A on a standalone basis
would have increased 19.1% to $7,790,000.
The Partnership recognized a net loss of $10,534,000 in the
second quarter of 1995 compared to a net loss of $10,056,000 in the
same quarter last year. The net losses in both periods were due
primarily to noncash charges for DD&A plus exploration and dry hole
costs. If the Consolidation had not taken place, the net loss for
the second quarter of 1995 would have increased to $11,153,000 as a
result of higher DD&A offset by lower unproved leasehold
impairments.
Net available cash from operations, considered by Kelley
Partners as its primary operating benchmark, decreased from
$2,078,000 in the second quarter of 1994 to a deficit of $235,000
in the second quarter this year, reflecting the foregoing
developments.
SIX MONTHS ENDED JUNE 30, 1995 COMPARED TO SIX MONTHS ENDED JUNE
30, 1994. Oil and gas revenues of $14,909,000 in the first half of
1995 decreased 2.6% compared to $15,301,000 in the corresponding
period last year. During the first half of 1995, production of
natural gas increased 15.2% from 6,116,000 Mcf in the first half of
1994 to 7,043,000 Mcf, while the average price of natural gas
declined 18.8% from $2.13 per Mcf to $1.73 per Mcf in the current
period. Production of crude oil and natural gas liquids in the
current period totaled 157,850 barrels, with an average sales price
of $17.56 per barrel compared to 150,526 barrels at $15.31 per
barrel in the same period last year, reflecting volume and price
increases of 4.9% and 14.7% respectively.
The decrease in the Partnership's oil and gas revenues for the
first half of 1995 was primarily attributable to lower natural gas
prices. Prices received for Kelley Partners' natural gas production
reflect the benefits of hedging activities, which added $692,000 to
oil and gas revenues in the current period. See "Recent
Developments."
Total revenues of $15,683,000 in the first half of 1995
decreased 12.4% from results in the corresponding period last year,
due primarily to a 72.0% decline in pipeline revenues to $722,000
from $2,574,000 during the first half of 1994. The decrease in
pipeline revenues resulted from lower volumes and prices of
transported natural gas and was accompanied by a corresponding
decrease in related expenses reflected as cost of gas sold in
pipeline operations.
Production expenses aggregated $4,486,000 in the current period
versus $4,380,000 in the first half of 1994, an increase of 2.4%,
reflecting higher severance taxes partially offset by lower
workover costs. On a unit of production basis, production expenses
decreased to $.56 per Mcfe in the first half of 1995 from $.62 per
Mcfe in the corresponding period last year.
Kelley Partners expensed exploration and dry hole costs of
$5,182,000 in the first half of 1995 and $6,862,000 in the same
period last year, a decrease of 24.5%, primarily reflecting the
Partnership's focus on lower risk prospects during the current
period. The decrease in these expenses resulted from lower delay
rental, geological and geophysical and dry hole costs, partially
offset by higher unproved leasehold impairment provisions.
General and administrative expenses of $1,510,000 in the current
period increased 11.1% from $1,359,000 in the first half of 1994,
reflecting the Partnership's share of administrative costs
associated with development operations of the Kelley Group and a
portion of the Consolidation expenses. On a unit of production
basis, these expenses stayed the same at $.19 per Mcfe in the first
half of 1995 and 1994.
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<PAGE>
Interest expense increased 92.6% to $7,295,000 in the current period
compared to $3,787,000 in the first half of 1994. The increase in interest
expense resulted from both higher interest rates and borrowing levels in the
current period.
Kelley Partners recognized $848,000 for accretion of debt valuation
discount in the first half of 1995. This noncash charge represents
amortization of the difference between the market value of the Partnership's
publicly held subordinated notes and debentures at the time of the
Consolidation and their historical carrying value. See "Recent
Developments--Pushdown Accounting."
DD&A decreased 13.1% from $15,499,000 in the first half of 1994 to
$13,472,000 in the current period, primarily from a reduction in the carrying
value of properties subject to amortization under the pushdown accounting
adjustment in the Consolidation. See "Recent Developments--Pushdown
Accounting." On a unit of production basis, DD&A decreased from $2.21 per Mcfe
in the first half of 1994 to $1.69 per Mcfe in the current period. If the
Consolidation had not taken place, DD&A on a standalone basis would have
increased 23.8% to $16,682,000.
The Partnership recognized a net loss of $18,188,000 in the first half
of 1995 compared to a net loss of $16,859,000 in the same period last year.
The net losses in both periods were due primarily to noncash charges for DD&A
plus exploration and dry hole costs. If the Consolidation had not taken
place, the net loss for the first half of 1995 would have increased to
$20,767,000 as a result of higher DD&A offset by lower unproved leasehold
impairments.
Net available cash from operations decreased 71.2% from $5,822,000 in
the first half of 1994 to $1,675,000 in the same period this year, reflecting
the foregoing developments.
The results of operations for the quarter and six months ended June 30,
1995 are not necessarily indicative of the Partnership's operating results to
be expected for the full year.
LIQUIDITY AND CAPITAL RESOURCES
NET AVAILABLE CASH. Prior to the Consolidation, the Partnership
Agreement of Kelley Partners provided for distributions to Unitholders of at
least 75% of net available cash from operations each quarter. Net available
cash is effectively defined as the net operating revenues of the Partnership
after payment of certain expenses, including interest expense, and after
giving effect to any appropriate reserves, but before repayment of principal
or development, acquisition and exploration costs. Net available cash
generally corresponds to the sum of Kelley Partners' net income (loss) and
exploration and dry hole costs plus depreciation, depletion and amortization
and other noncash charges and is not intended to represent net cash provided
by operating activities computed under generally accepted accounting
principles.
In February 1995, the Partnership paid a cash distribution of $.02 per
Unit, representing approximately 75% of net available cash from operations in
the prior quarter. Following the Consolidation, the Partnership Agreement of
Kelley Partners was amended to eliminate its cash distribution requirements.
LIQUIDITY. Net cash used in operating activities of Kelley Partners
during the first half of 1995 aggregated $603,000. The Partnership's cash
position was increased during the period by advances of $13.1 million under
its credit facility and advances of $79.6 million by KOGC. During the period,
$83 million was repaid by Kelley Partners under its credit facilities, $9.4
million was invested in the acquisition and development of oil and gas
properties and $486,000 was distributed to the partners. As a result of these
activities, the Partnership's cash and cash equivalents decreased from
$897,000 at December 31, 1994 to $281,000 at June 30, 1995.
Kelley Partners had a working capital deficit of approximately $17.2
million at June 30, 1995, compared to a deficit of $19.6 million at December
31, 1994. The current deficit primarily reflects accounts payable to
11
<PAGE>
affiliates following advances from proceeds of KOGC's Senior Note offering.
See "Recent Developments--Guaranty of KOGC Senior Notes."
In July 1995, the Kelley Group completed sales of several nonstrategic
oil and gas properties primarily in north Louisiana. The properties were
offered for sale based on their high operating costs and low priority within
the Kelley Group's development strategy. The Partnership received net
proceeds of $7.1 million for its interests in the properties, which accounted
for approximately 6% of Kelley Partners' estimated proved reserved as of
January 1, 1995. In addition to improving the Partnership's working capital
position, the property sales are expected to reduce production expenses in
subsequent periods.
CAPITAL RESOURCES. As of December 31, 1994, Kelley Partners had borrowed
$69.9 million under its credit facility with Bank of Montreal, as agent for
participating banks, primarily to fund ongoing development activities as well
as the purchase of the 1994 Properties. On February 7, 1995, in connection
with the Consolidation, KOGC completed a refinancing for the outstanding bank
debt of the Kelley Group. The refinancing was provided by Kelley Partners'
prior lending banks under a $70 million revolving credit facility (the
"Credit Facility") and a $20 million term loan facility (the "Term Facility").
The borrowers under the facilities are Kelley Operating and Kelley Oil.
Kelley Partners, KOGC and its other subsidiary partnerships are guarantors.
The facilities are secured by all the oil and gas properties and other assets
of Kelley Partners, KOGC and its other subsidiaries.
Borrowings of $90 million under the two facilities were used to
refinance Kelley Partners' bank debt of $69.9 million, Kelley Oil's bank debt
of $9 million and borrowings of $6 million by the 1992 DDP, with the balance
of $5.1 million used to fund payables of Kelley Partners and KOGC, including
part of the expenses for the Consolidation. On February 9, 1995, borrowings
of $10 million under the Credit Facility were repaid with a portion of
proceeds of a $16 million equity private placement by KOGC. Advances of $10
million were made under the Credit Facility through May 1995 primarily to
fund drilling activities.
In June 1995, the Kelley Group's outstanding bank debt of $90 million
was repaid with proceeds from KOGC's Senior Note offering. See "Recent
Developments--Guaranty of KOGC Senior Notes." In connection with the offering,
the Term Facility was terminated following repayment, and the agreement
covering the Credit Facility was amended to reduce the interest rate and
eliminate all financial covenants other than a working capital maintenance
requirement and a limitation on accounts payable above a specified level. The
borrowing base limitations for the Credit Facility were also amended to
conform with debt restrictions under the indenture for the Senior Notes,
which generally limits additional borrowings by the Kelley Group to $30
million for working capital purposes plus $5 million per year for capital
expenditures. The Senior Note indenture contains a number of other covenants
that include limitations on mergers and asset transfers, dividend and other
payments and use of proceeds from asset sales.
Under the terms of the Consolidation, Kelley Partners' 8-1/2% Convertible
Subordinated Debentures due 2000 ("8-1/2% Debentures") and 7-7/8% Convertible
Subordinated Notes due 1999 ("7-7/8% Notes") in the aggregate principal amounts
of $26,856,000 and $34,390,000, respectively, remain outstanding but became
convertible into KOGC Common Stock or a combination of KOGC Common and
Preferred Stock instead of Units based on the exchange ratios for the Units
in the Consolidation. The conversion rates for the Partnership's subordinated
debt were adjusted proportionately to 51.864 shares of KOGC Common Stock per
$1,000 principal amount of the 8-1/2% Debentures and 71.263 shares of KOGC
Common Stock per $1,000 face amount of the 7-7/8% Notes, with corresponding
adjustments for the Preferred Election.
CAPITAL COMMITMENTS. The Kelley Group's business plan contemplates a
total commitment of up to $40 million for exploration and development
activities in 1995, including approximately $10 million for seismic,
leasehold and recompletion expenses. Drilling expenditures for the balance of
the year are targeted for a mix of moderate and lower risk south Louisiana
drilling prospects and low risk north Louisiana prospects. Consistent with
the Kelley Group's historical arrangements, drilling activities are being
financed one-third by Kelley Partners and two-thirds by the 1994 DDP.
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The Kelley Group's balanced capital expenditure program is intended to
generate reserve additions and performance gains that will enhance financing
opportunities over the next four years. KOGC issued its Senior Notes to
replace outstanding debt under the Credit Facility and Term Facility with
intermediate term capital needed to realize the Kelley Group's operational
objectives during that period. The Senior Notes are senior unsecured
obligations of KOGC. As a result of holding company considerations from the
Kelley Group's organizational structure following the Consolidation, the
Partnership, Kelley Operating and Kelley Oil have guaranteed the indebtedness
under the Senior Notes. Kelley Partners' obligations under its guaranty of
the Senior Notes ranks senior in right of payment to the 8-1/2% Debentures
and 7-7/8% Notes.
Upon completion of the Senior Note offering, KOGC retained $40 million
of the Kelley Group's borrowing capacity under the Credit Facility, with a
current borrowing base of $35 million, subject to restrictions on incurrance
of additional indebtedness under the indenture for the Senior Notes. See
"Capital Resources" above. These arrangements are expected to provide adequate
financial flexibility to satisfy the Kelley Group's capital expenditure
requirements through 1996, while also eliminating exposure under the Credit
Facility to borrowing base reductions from declines in natural gas prices.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<S> <C>
4.1 Indenture dated as of June 15, 1995 among Kelley Oil & Gas
Corporation, as issuer ("KOGC"), the Registrant, Kelley Operating
Company, Ltd. and Kelley Oil Corporation, as guarantors, and Chemical
Bank, as trustee, relating to KOGC's 13-1/2% Senior Notes Due 1999
(incorporated by reference to the Registration Statement on Form S-3
(Reg. No. 33-92214) of KOGC, Registrant, Kelley Operating Company,
Ltd. and Kelley Oil Corporation filed May 12, 1995, as amended).
10.1 First Amendment and Supplement to Credit Agreement dated as of
June 19, 1995 to Credit Agreement dated February 7, 1995 among Kelley
Operating Company, Ltd. and Kelley Oil Corporation, as borrowers, the
Registrant, Kelley Oil & Gas Corporation and its subsidiary
partnerships, as guarantors, and Bank of Montreal and Union Bank, as
agents for the lenders signatory thereto.
</TABLE>
(b) REPORTS ON FORM 8-K. None.
13
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
KELLEY OIL & GAS PARTNERS, LTD.
By: Kelley Oil Corporation,
Managing General Partner
Date: August 11, 1995 By: /s/ AMELIA L. JOHNSON
------------------------------
Amelia L. Johnson,
Controller
(Duly Authorized Officer)
(Principal Accounting Officer)
14
<PAGE>
FIRST AMENDMENT AND SUPPLEMENT TO
CREDIT AGREEMENT
BY AND AMONG
KELLEY OPERATING COMPANY, LTD.
AND
KELLEY OIL CORPORATION,
AS BORROWERS,
KELLEY OIL & GAS CORPORATION,
KELLEY OIL & GAS PARTNERS, LTD.,
KELLEY PARTNERS 1992 DEVELOPMENT DRILLING JOINT VENTURE,
KELLEY PARTNERS 1994 DEVELOPMENT DRILLING JOINT VENTURE,
KELLEY PARTNERS 1992 DEVELOPMENT DRILLING PROGRAM,
AND
KELLEY PARTNERS 1994 DEVELOPMENT DRILLING PROGRAM,
AS GUARANTORS,
BANK OF MONTREAL,
AS AGENT,
UNION BANK,
AS CO-AGENT
AND
THE LENDERS SIGNATORY HERETO
DATED AS OF JUNE 19, 1995
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I. DEFINITIONS
Section 1.01 TERMS DEFINED ABOVE........................................ 1
Section 1.02 TERMS DEFINED IN CREDIT AGREEMENT.......................... 2
Section 1.03 OTHER DEFINITIONAL PROVISIONS.............................. 2
ARTICLE II. AMENDMENTS TO CREDIT AGREEMENT
Section 2.01 AMENDMENTS AND SUPPLEMENTS TO DEFINITIONS.................. 2
Section 2.02 AMENDMENTS AND SUPPLEMENTS TO ARTICLE II................... 3
Section 2.03 AMENDMENTS AND SUPPLEMENTS TO ARTICLE VII.................. 5
Section 2.04 AMENDMENTS AND SUPPLEMENTS TO ARTICLE VIII................. 6
Section 2.05 AMENDMENTS AND SUPPLEMENTS TO ARTICLE IX................... 6
Section 2.06 AMENDMENTS AND SUPPLEMENTS TO ARTICLE X.................... 7
ARTICLE III. CONDITIONS
Section 3.01 LOAN DOCUMENTS............................................. 7
Section 3.02 CORPORATE PROCEEDINGS OF LOAN PARTIES...................... 7
Section 3.03 REPRESENTATIONS AND WARRANTIES............................. 8
Section 3.04 NO DEFAULT................................................. 8
Section 3.05 NO CHANGE................................................... 8
Section 3.06 SECURITY INSTRUMENTS........................................ 8
Section 3.07 SENIOR NOTES AND BANK FACILITIES EVENTS..................... 8
Section 3.08 OTHER INSTRUMENTS OR DOCUMENTS AND PAYMENT OF LEGAL FEES.... 8
ARTICLE IV. MISCELLANEOUS
Section 4.01 ADOPTION, RATIFICATION AND CONFIRMATION OF CREDIT
AGREEMENT.................................................. 9
Section 4.02 RATIFICATION AND AFFIRMATION OF GUARANTY................... 9
Section 4.03 SUCCESSORS AND ASSIGNS..................................... 9
Section 4.04 COUNTERPARTS............................................... 9
Section 4.05 NUMBER AND GENDER.......................................... 9
Section 4.06 ENTIRE AGREEMENT........................................... 9
Section 4.07 INVALIDITY................................................. 10
Section 4.08 TITLES OF ARTICLES, SECTIONS AND SUBSECTIONS............... 10
Section 4.09 GOVERNING LAW.............................................. 10
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FIRST AMENDMENT AND SUPPLEMENT TO
CREDIT AGREEMENT
This FIRST AMENDMENT AND SUPPLEMENT TO CREDIT AGREEMENT (this "FIRST
AMENDMENT") executed effective as of the 19th day of June, 1995 (the
"EFFECTIVE DATE"), is by and among KELLEY OIL CORPORATION, a Delaware
corporation ("KOC"), KELLEY OPERATING COMPANY, LTD., a limited partnership
formed under the laws of the State of Texas ("KELLEY OPERATING"; KOC and
Kelley Operating, collectively, the "BORROWERS"); KELLEY OIL & GAS
CORPORATION, a Delaware corporation, (the "PARENT"), KELLEY OIL & GAS
PARTNERS, LTD., a limited partnership formed under the laws of the State of
Texas ("KELLEY PARTNERS"), KELLEY PARTNERS 1992 DEVELOPMENT DRILLING JOINT
VENTURE, a general partnership formed under the laws of the State of Texas
("92 JV"), KELLEY PARTNERS 1994 DEVELOPMENT DRILLING JOINT VENTURE, a general
partnership formed under the laws of the State of Texas ("94 JV"), KELLEY
PARTNERS 1992 DEVELOPMENT DRILLING PROGRAM, a Texas limited partnership ("92
DDP") and KELLEY PARTNERS 1994 DEVELOPMENT DRILLING PROGRAM, a Texas limited
partnership ("94 DDP"; the Parent, Kelley Partners, 92 JV, 94 JV, 92 DDP and
94 DDP, collectively, the "GUARANTORS"); each of the lenders that is a
signatory hereto or which becomes a signatory hereto as provided in Section
12.06 (individually, together with its successors and assigns, a "LENDER"
and, collectively, the "LENDERS"); BANK OF MONTREAL, as agent for the Lenders
(in such capacity, together with its successors in such capacity, the
"AGENT"); and UNION BANK, as co-agent for the Lenders (in such capacity,
together with its successors in such capacity, the "CO-AGENT").
W I T N E S S E T H:
WHEREAS, Borrowers, Guarantors, Agent and Lenders are parties to that
certain Credit Agreement dated as of February 7, 1995 (the "CREDIT
AGREEMENT"), pursuant to which the Lenders agreed to make loans to Borrowers;
and
WHEREAS, the Borrowers, Guarantors and Lenders desire to amend the
Credit Agreement in the particulars hereinafter provided:
NOW, THEREFORE, in consideration of the premises and the mutual
covenants herein contained, the parties hereto agree as follows:
ARTICLES I. DEFINITIONS
Section 1.01 TERMS DEFINED ABOVE. As used in this First Amendment,
each of the terms "92 DDP", "94 DDP", "92 JV", "94 JV", "AGENT", "BORROWERS",
"CO-AGENT", "CREDIT AGREEMENT", "EFFECTIVE DATE", "FIRST AMENDMENT",
"GUARANTORS", "KELLEY OPERATING", "KELLEY PARTNERS", "KOC", "LENDER" AND
"PARENT", shall have the meaning assigned to such term hereinabove.
<PAGE>
Section 1.02 TERMS DEFINED IN CREDIT AGREEMENT. Each term defined in
the Credit Agreement and used herein without definition shall have the
meaning assigned to such term in the Credit Agreement, unless expressly
provided to the contrary.
Section 1.03 OTHER DEFINITIONAL PROVISIONS.
(a) The words "hereby", "herein", "hereinafter", "hereof",
"hereto", and "hereunder" when used in this First Amendment shall refer
to this First Amendment as a whole and not to any particular Article,
Section, subsection or provision of this First Amendment.
(b) Section, subsection and Exhibit references herein are to
such Sections, subsections and Exhibits to this First Amendment unless
otherwise specified.
ARTICLE II. AMENDMENTS TO CREDIT AGREEMENT
Borrowers, Guarantors, Agent and Lenders agree that the Credit Agreement
is hereby amended, effective as of the Effective Date, in the following
particulars.
Section 2.01 AMENDMENTS AND SUPPLEMENTS TO DEFINITIONS.
(a) The following terms, which are defined in Section 1.02 of
the Credit Agreement, are hereby amended in their entirety to read as
follows:
"AGREEMENT" shall mean this Credit Agreement, as amended
and supplemented by this First Amendment and as the same may from
time to time be further amended or supplemented.
"AGGREGATE MAXIMUM CREDIT AMOUNTS" at any time shall equal
the sum of the Maximum Credit Amounts of the Lenders
($40,000,000) as the same may be reduced pursuant to Section
2.03(b)
"MAJORITY LENDERS" shall mean, at any time while no Loans
are outstanding, Lenders (including the Agent) having at least
sixty-six and two-thirds percent (66-2/3%) of the Aggregate
Commitments and, at any time while Loans are outstanding,
Lenders (including the Agent) holding at least sixty-six and
two-thirds percent (66-2/3%) of the outstanding aggregate
principal amount of the Loans (without regard to any sale by a
Lender of a participation in any Loan under Section 12.06(c)).
"MAXIMUM CREDIT AMOUNT" shall mean, as to each Lender, the
amount set forth opposite such Lender's name on Exhibit G-1
attached to the First Amendment under the caption "Maximum Credit
Amounts" (as the same may be reduced pursuant to Section 2.03(b)
hereof pro rata to each Lender based
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<PAGE>
on its Percentage Share), as modified from time to time to
reflect any assignments permitted by Section 12.06(b).
"PERCENTAGE SHARE" shall mean the percentage of the
Aggregate Commitments to be provided by a Lender under this
Agreement as indicated on Exhibit G-1 attached to the First
Amendment, hereto, as modified from time to time to reflect any
assignments permitted by Section 12.06(b).
"TRANSFER" shall have the meaning assigned to such term in
Section 2.07(d).
(b) Section 1.02 of the Credit Agreement is hereby further
amended and supplemented by adding the following new definitions where
alphabetically appropriate, which read in their entirety as follows:
"FIRST AMENDMENT" shall mean that certain First Amendment
and Supplement to Credit Agreement dated as of June 19, 1995, by
and among the Borrowers, Guarantors, Agent and Lenders.
"FIRST AMENDMENT EFFECTIVE DATE" means June 19, 1995.
"INDENTURE" means the indenture dated as of June 15, 1995,
between the Parent and Chemical Bank, as Trustee, under which
the Senior Notes have been issued, as amended, supplemented or
otherwise modified.
"SENIOR NOTES" means the unsecured 13-1/2% Senior Notes
Due 1999 issued by the Parent under the terms and provisions of
the Indenture, in the aggregate principal amount of $100,000,000,
and maturing June 15, 1999.
Section 2.02 AMENDMENTS AND SUPPLEMENTS TO ARTICLE II.
(a) Section 2.04(a) of the Credit Agreement is hereby amended
in its entirety to read as follows:
"(a) COMMITMENT FEE. The Borrowers shall pay to the Agent
for the account of each Lender a commitment fee on the daily
average unused amount of the Aggregate Commitments for the period
from and including the First Amendment Effective Date up to, but
excluding, the earlier of the date the Aggregate Commitments are
terminated or the Revolving Credit Termination Date at a rate per
annum equal to 3/8 of 1%. Accrued commitment fees shall be
payable quarterly in arrears on each Quarterly Date and on the
earlier of the date the Aggregate Commitments are terminated or
the Revolving Credit Termination Date."
(b) Sections 2.07(c) and (d) of the Credit Agreement are
hereby amended in their entirety to read as follows:
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<PAGE>
"(c) Subject to Section 2.07(d), upon redetermination of the
amount of the Borrowing Base in accordance with Section 2.08, if
the aggregate outstanding principal amount of the Loans exceeds
the redetermined Borrowing Base, then the Borrowers shall prepay
the Loans in an aggregate principal amount equal to such excess
in six equal monthly installments, together with interest on the
principal amount paid accrued to the date of each such
prepayment, with the first installment commencing no later than
fifteen (15) Business Days after receipt of the Agent's notice of
the new Borrowing Base and the next five installments on the
same day of each successive month thereafter.
(d) If, after a sale, assignment, farmout, conveyance or
other transfer ("TRANSFER") of any Oil and Gas Properties (or
any interest therein) and any redetermination of the Borrowing
Base pursuant to Section 2.08(d), the aggregate outstanding
principal amount of the Loans exceeds the redetermined Borrowing
Base, then the Borrowers shall promptly prepay the Loans in an
aggregate principal amount equal to such excess, together with
interest on the principal amount paid accrued to the date of
such prepayment."
(c) Section 2.08(a), (b) and (d) of the Credit Agreement are
hereby amended in their entirety to read as follows:
"(a) The Borrowing Base shall be determined in accordance
with Section 2.08(b) by the Agent with the concurrence of the
Lenders and is subject to redetermination in accordance with
Section 2.08(d). Upon any redetermination of the Borrowing Base,
such redetermination shall remain in effect until the next
successive Redetermination Date. "REDETERMINATION DATE" shall
mean the date that the redetermination Borrowing Base becomes
effective subject to the notice requirements specified in
Section 2.08(e) both for scheduled redeterminations and
unscheduled redeterminations. So long as any of the Commitments
are in effect and Loans are outstanding hereunder, this facility
shall be governed by the then effective Borrowing Base. During
the period from and after the First Amendment Effective Date
until the Borrowing Base is redetermined pursuant to Section
2.08(d) or adjusted pursuant to Section 8.08(c), the amount of
the Borrowing Base shall be $35,000,000.
(b) Upon receipt of the reports required by Section 8.07
and such other reports, data and supplemental information as may
from time to time be reasonably requested by the Agent (the
"ENGINEERING REPORTS"), the Agent will redetermine the Borrowing
Base. Such redetermination will be in accordance with its normal
and customary procedures for evaluating oil and gas reserves and
other related assets as such exist at that particular time. Each
Lender, in its sole discretion, may make adjustments to the
rates, volumes and prices and other assumptions set forth therein
in accordance
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<PAGE>
with its normal and customary procedures for evaluating oil and gas
reserves and other related assets as such exist at that particular
time including, without limitation, taking into account the level
of general and administrative expenses, subordinated debt, the
Senior Notes, operating and drilling history, and accessibility to
the public equity markets. The Agent shall propose to the Lenders a
new Borrowing Base within 30 days following receipt by the Agent
and the Lenders of the Engineering Reports in a timely and complete
manner. After having received notice of such proposal by the Agent,
the Lenders shall have 14 days to agree or disagree with such
proposal. If at the end of the 14 days, any Lenders have not
communicated their approval or disapproval, such silence shall be
deemed to be an approval and the Agent's proposal shall be the new
Borrowing Base. If however, the Lenders notify Agent within such 14
days of their disapproval, the Lenders shall, within a reasonable
period of time, agree on a new Borrowing Base. The Agent and all of
the Lenders must approve a new Borrowing Base."
"(d) So long as the Commitments are in effect and until
payment in full of all Loans hereunder, on or before the fifteenth
(15th) day of each May and November, commencing May 15, 1995 (each
being a "SCHEDULED REDETERMINATION DATE"), the Lenders shall
redetermine the amount of the Borrowing Base in accordance with
Section 2.08(b). In addition, the Majority Lenders may initiate a
redetermination of the Borrowing Base (i) if, during any period
beginning on the First Amendment Effective Date or a Scheduled
Redetermination Date, as applicable, and ending on the immediately
succeeding Scheduled Redetermination Date, the Obligors make a
Transfer of any Oil and Gas Properties (or interests therein) which
were given value in the immediately preceding Borrowing Base
redetermination and have a cumulative fair market value exceeding
$3,000,000 and (ii) at any other time as they so elect; provided,
however, that the Majority Lenders may (absent a Transfer of Oil
and Gas Properties as described in clause (i) above) initiate only
one such unscheduled redetermination during any consecutive twelve
(12) month period by specifying in writing to the Borrowers the
date on which the Borrowers are to furnish a Reserve Report in
accordance with Section 8.07(b) and the date on which such
redetermination is to occur."
Section 2.03 AMENDMENTS AND SUPPLEMENTS TO ARTICLE VII. Section 7.07
of the Credit Agreement is hereby amended in it entirety to read as follows:
"Section 7.07 USE OF LOANS. The proceeds of Loans in an aggregate
amount not to exceed $30,000,000 shall be used for current working
capital expenses and other customary general business purposes of the
Borrowers, and any additional Loans available under this Agreement shall
be used for current exploration and development capital expenditures,
including the acquisition of Oil and Gas Properties. None of the
Obligors is engaged principally, or as one of its important activities,
in the business of extending credit for the purpose, whether immediate,
incidental or ultimate, of buying or carrying margin stock (within the
meaning of
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<PAGE>
Regulation G, U or X of the Board of Governors of the Federal Reserve
System) and no part of the proceeds of any Loan hereunder will be used
or carry any margin stock.
Section 2.04. AMENDMENTS AND SUPPLEMENTS TO ARTICLE VIII.
(a) Section 8.01(j) of the Credit Agreement is hereby amended in
its entirety to read as follows:
"(j) Within 45 days after the end of each quarter, a report
satisfactory in form and substance to the Lenders containing, a
summary of production volumes and the actual weighted commodity
price received (expressed both as a gross price and as a price net
of transportation costs)."
(b) Sections 8.01(k) and (l) of the Credit Agreement are hereby
deleted in their entirety."
(c) The last paragraph of Section 8.01 is hereby amended by
deleting therefrom references to Sections 9.13, 9.15, 9.17 and 9.26.
(d) Section 8.09 of the Credit Agreement is hereby deleted in its
entirety."
Section 2.05. AMENDMENTS AND SUPPLEMENTS TO ARTICLE IX.
(a) Section 9.01 of the Credit Agreement is hereby amended and
supplemented by adding thereto a new subsection (h) to read in its
entirety as follows:
"(h) Debt evidenced by the Senior Notes and guarantees of
such Debt by the Obligors."
(b) Section 9.12 of the Credit Agreement is hereby amended in its
entirety to read as follows:
"Section 9.12 CURRENT RATIO. The Parent will not permit its
ratio of (i) consolidated current assets (including, prior to
February 1, 1996, unused availability under the Commitment) to (ii)
consolidated current liabilities to be less than 1.0 to 1.0 at any
time."
(c) Sections 9.13, 9.14, 9.15, 9.16, 9.17 and 9.24 of the Credit
Agreement are hereby deleted in their entirety.
(d) Section 9.26 of the Credit Agreement is hereby deleted in its
entirety and replaced as follows:
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<PAGE>
"Section 9.26 LIMITED ON ACQUISITIONS. From and after the
First Amendment Effective Date and each Scheduled Redetermination
Date until the immediately succeeding Scheduled Redetermination
Date, the Obligors will not acquire any Oil and Gas Properties (or
any interests therein) which during each such period exceed
$5,000,000 in the aggregate, other than with proceeds from
permitted assets sales."
Section 2.06 AMENDMENTS AND SUPPLEMENTS TO ARTICLE X. Section 10.01 of
the Credit Agreement is hereby amended and supplemented by adding thereto new
subsections (l) and (m) to read in their entirety as follows:
"(l) the occurrence of any event which requires mandatory
prepayment, in whole or in part, of the Senior Notes.
(m) a default or event of default shall occur under the Indenture."
Section 2.07 AMENDMENTS AND SUPPLEMENTS TO EXHIBITS. Exhibit G to the
Credit Agreement is hereby replaced with Exhibit G-1 attached hereto.
ARTICLE III. CONDITIONS
The enforceability of this First Amendment against the Agent and the
Lenders is subject to the satisfaction of the following conditions precedent:
Section 3.01 LOAN DOCUMENTS. The Agent shall have received the
following:
(a) multiple original counterparts, as requested by the Agent, of
this First Amendment executed and delivered by a duly authorized officer
of the Borrowers, Guarantors, Agent, and each Lender; and
(b) favorable written opinions of Stahl & Zelmanovitz, counsel to
the Borrowers and Guarantors, and Hargrove, Pesnell & Wyatt, special
Louisiana counsel to the Borrowers and Guarantors, in form and substance
satisfactory to the Agent, as to such matters incident to the transactions
herein contemplated as the Agent may reasonably request.
Section 3.02 CORPORATE PROCEEDINGS OF LOAN PARTIES. The Agent shall
have received multiple copies, as requested by the Agent, of the resolutions,
in form and substance reasonably satisfactory to the Agent, of the Boards of
Directors of the Borrowers and the Guarantors, authorizing the execution,
delivery and performance of this First Amendment, each such copy being
attached to an original certificate of the Secretary or an Assistant
Secretary of the Borrowers or the Guarantors, as applicable, dated as of the
Effective Date, certifying (i) that the resolutions attached thereto are
true, correct and complete copies of resolutions duly adopted by written
consents or at meetings of the Boards of Directors, (ii) that such
resolutions constitute all resolutions adopted with respect to the transactions
-7-
<PAGE>
contemplated hereby, (iii) that such resolutions have not been amended,
modified, revoked or rescinded as of the Effective Date, (iv) that the
respective articles of incorporation and bylaws of the Borrowers and the
Guarantors have not been amended or otherwise modified since the effective
date of the Credit Agreement, except pursuant to any amendments attached
thereto, and (v) as to the incumbency and signature of the officers of the
Borrowers or the Guarantors, as applicable, executing this First Amendment.
Section 3.03 REPRESENTATIONS AND WARRANTIES. Except as affected by the
transactions contemplated in the Credit Agreement and this First Amendment,
each of the representations and warranties made by the Borrowers and the
Guarantors in or pursuant to any of the Loan Documents shall be true and
correct in all material respects as of the Effective Date (rather than the
Closing Date, as defined in the Credit Agreement), as if made on and as of
such date.
Section 3.04 NO DEFAULT. No Default or Event of Default shall have
occurred and be continuing as of the Effective Date.
Section 3.05 NO CHANGE. No event shall have occurred since December 31,
1994, which, in the reasonable opinion of the Lenders, could have a material
adverse effect on the condition (financial or otherwise), business,
operations or prospects of the Borrowers or the Guarantors.
Section 3.06 SECURITY INSTRUMENTS. All of the Security Instruments
shall be in full force and effect and provide to the Agent the security
intended thereby to secure the Indebtedness, as amended and supplemented
hereby.
Section 3.07 SENIOR NOTES AND BANK FACILITIES EVENTS. The following
events shall have occurred:
(i) the Indenture with terms and provisions satisfactory to the
Lenders shall have been executed;
(ii) all of the Senior Notes shall have been issued;
(iii) all indebtedness under the Bridge Facility shall have been
paid in full and the Bridge Facility terminated;
(iv) the entire balance of Indebtedness outstanding under the
Credit Agreement shall have been repaid; and
(v) payment of engineering fees due pursuant to Section 2.04(c)
of the Credit Agreement.
Section 3.08 OTHER INSTRUMENTS OR DOCUMENTS AND PAYMENT OF LEGAL FEES.
The Agent or any Lender or counsel to the Agent shall receive such other
instruments or
-8-
<PAGE>
documents as they may reasonably request and all invoiced fees and expenses
of the Agent's legal counsel shall have been paid.
ARTICLE IV. MISCELLANEOUS
Section 4.01 ADOPTION, RATIFICATION AND CONFIRMATION OF CREDIT
AGREEMENT. Each of the Borrowers, the Guarantors, the Agent, and the Lenders
does hereby adopt, ratify and confirm the Credit Agreement, as amended
hereby, and acknowledges and agrees that the Credit Agreement, as amended
hereby, is and remains in full force and effect.
Section 4.02 RATIFICATION AND AFFIRMATION OF GUARANTY. Each of the
Guarantors hereby expressly (i) acknowledges the terms of this First
Amendment, (ii) ratifies and affirms its obligation under its Guaranty
Agreement dated as of February 7, 1995, in favor of the Agent and the
Lenders, as amended, supplemented or otherwise modified, (iii) acknowledges,
renews and extends its continued liability under its Guaranty Agreement and
agrees that said Guaranty Agreement remains in full force and effect; and
(iv) guarantees to the Agent and each Lender to promptly pay when due all
amounts owing or to be owing by it under its Guaranty pursuant to the terms
and conditions thereof.
Section 4.03 SUCCESSORS AND ASSIGNS. This First Amendment shall be
binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns permitted pursuant to the Credit Agreement.
Section 4.04 COUNTERPARTS. This First Amendment may be executed by
one or more of the parties hereto in any number of separate counterparts, and
all of such counterparts taken together shall be deemed to constitute one and
the same instrument and shall be enforceable as of the Effective Date upon
the execution of one or more counterparts hereof by the Borrowers, the
Guarantors, the Agent and the Lenders. In this regard, each of the parties
hereto acknowledges that a counterpart of this First Amendment containing a
set of counterpart execution pages reflecting the execution of each party
hereto shall be sufficient to reflect the execution of this First Amendment
by each necessary party hereto and shall constitute one instrument.
Section 4.05 NUMBER AND GENDER. Whenever the context requires,
reference herein made to the single number shall be understood to include the
plural; and likewise, the plural shall be understood to include the singular.
Words denoting sex shall be construed to include the masculine, feminine and
neuter, when such construction is appropriate; and specific enumeration shall
not exclude the general but shall be construed as cumulative. Definitions of
terms defined in the singular or plural shall be equally applicable to the
plural or singular, as the case may be, unless otherwise indicated.
Section 4.06 ENTIRE AGREEMENT. This First Amendment constitutes the
entire agreement among the parties hereto with respect to the subject hereof.
All prior understandings, statements and agreements, whether written or oral,
relating to the subject hereof are superseded by this First Amendment.
-9-
<PAGE>
Section 4.07 INVALIDITY. In the event that any one or more of the
provisions contained in this First Amendment shall for any reason be held
invalid, illegal or unenforceable in any respect, such invalidity, illegality
or unenforceability shall not affect any other provision of this First
Amendment.
Section 4.08 TITLES OF ARTICLES, SECTIONS AND SUBSECTIONS. All titles
or headings to Articles, Sections, subsections or other divisions of this
First Amendment or the exhibits hereto, if any, are only for the convenience
of the parties and shall not be construed to have any effect or meaning with
respect to the other content of such Articles, Sections, subsections, other
divisions or exhibits, such other content being controlling as the agreement
among the parties hereto.
Section 1.09 GOVERNING LAW. This First Amendment shall be deemed to be
a contract made under and shall be governed by and construed in accordance
with the internal laws of the State of Texas.
THIS FIRST AMENDMENT, THE CREDIT AGREEMENT, AS SUPPLEMENTED AND AMENDED
HEREBY, THE NOTES, AND THE OTHER SECURITY INSTRUMENTS REPRESENT THE
FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY
EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF
THE PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
[SIGNATURE PAGES BEGIN ON THE NEXT PAGE]
-10-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this First Amendment
to be duly executed and delivered by their proper and duly authorized
officers as of the Effective Date.
BORROWERS:
KELLEY OPERATING COMPANY, LTD
By: Kelley Oil Corporation,
its Managing General Partner
By: W. MATT RALLS
-----------------------------------
W. Matt Ralls
Senior Vice President
KELLEY OIL CORPORATION
By: W. MATT RALLS
-----------------------------------
W. Matt Ralls
Senior Vice President
GUARANTORS:
KELLEY OIL & GAS PARTNERS, LTD
By: Kelley Oil Corporation,
its Managing General Partner
By: W. MATT RALLS
- -----------------------------------
W. Matt Ralls
Senior Vice President
KELLEY OIL & GAS CORPORATION
By: W. MATT RALLS
-------------------------------------
W. Matt Ralls
Senior Vice President
<PAGE>
KELLEY PARTNERS 1992
DEVELOPMENT DRILLING JOINT
VENTURE
By: Kelley Partners 1992 Development
Drilling Program, the Managing
Joint Venture
By: Kelley Oil Corporation,
its Managing General Partner
By: W. MATT RALLS
------------------------------------
W. Matt Ralls
Senior Vice President
KELLEY PARTNERS 1994
DEVELOPMENT DRILLING JOINT
VENTURE
By: Kelley Partners 1994 Development
Drilling Program, the Managing
Joint Venture
By: Kelley Oil Corporation,
its Managing General Partner
By: W. MATT RALLS
------------------------------------
W. Matt Ralls
Senior Vice President
<PAGE>
KELLEY PARTNERS 1992
DEVELOPMENT DRILLING PROGRAM
By: Kelley Oil Corporation,
its Managing General Partner
By: W. MATT RALLS
-------------------------------
W. Matt Ralls
Senior Vice President
KELLEY PARTNERS 1994
DEVELOPMENT DRILLING PROGRAM
By: Kelley Oil Corporation,
its Managing General Partner
By: W. MATT RALLS
-------------------------------
W. Matt Ralls
Senior Vice President
<PAGE>
LENDER AND AGENT: BANK OF MONTREAL, individually and
as Agent
By:_______________________________
Name: Robert L. Roberts
Title: Director, U.S. Corporate Banking
<PAGE>
LENDER AND CO-AGENT: UNION BANK, individually and as
Co-Agent
By:_______________________________
Name: Carl Stutzman
Title: Vice President
By:_______________________________
Name:
Title:
<PAGE>
LENDERS: NBD BANK
By:_______________________________
Name: George R. Schanz
Title: Vice President
<PAGE>
EXHIBIT G-1
LIST OF MAXIMUM CREDIT AMOUNTS
<TABLE>
<CAPTION>
Maximum
Name of Lender Percentage Share Credit Amount
-------------- ---------------- -------------
<S> <C> <C>
Bank of Montreal 38.75% $15,500,000
Union Bank 33.125% $13,250,000
NBD Bank 28.125% $11,250,000
------ -----------
TOTAL 100% $40,000,000
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1995
<CASH> 281
<SECURITIES> 0
<RECEIVABLES> 5,823
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 6,430
<PP&E> 291,605
<DEPRECIATION> 49,458
<TOTAL-ASSETS> 249,555
<CURRENT-LIABILITIES> 23,581
<BONDS> 125,031
<COMMON> 0
0
0
<OTHER-SE> 100,943
<TOTAL-LIABILITY-AND-EQUITY> 249,555
<SALES> 15,631
<TOTAL-REVENUES> 15,683
<CGS> 717
<TOTAL-COSTS> 24,650
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,504
<INCOME-PRETAX> (18,188)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (18,188)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
