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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 MARCH 31, 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 -- March 31, 1995 (unaudited) and December 31, 1994 . . . . . . . . . 2
Consolidated Statements of Loss -- Three Months ended March 31, 1995 and 1994 (unaudited) . . . . 3
Consolidated Statements of Cash Flows -- Three Months ended March 31, 1995 and 1994 (unaudited) . 4
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . 6
PART II. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
</TABLE>
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PART I. FINANCIAL INFORMATION
KELLEY OIL & GAS PARTNERS, LTD.
CONSOLIDATED BALANCE SHEETS
($ IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1995 1994
---------- ----------
(UNAUDITED)
<S> <C> <C>
ASSETS:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,520 $ 897
Accounts receivable - trade . . . . . . . . . . . . . . . . . . . . . . . . . 1,941 1,612
Accounts receivable - affiliates . . . . . . . . . . . . . . . . . . . . . . . 4,621 4,745
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 174 287
--------- ---------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,256 7,541
--------- ---------
Oil and gas properties, successful efforts method:
Unevaluated, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,552 7,199
Unproved properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85,182 ---
Properties subject to amortization . . . . . . . . . . . . . . . . . . . . . 152,811 375,058
Pipelines and other transportation assets . . . . . . . . . . . . . . . . . . 3,636 7,910
--------- ---------
249,181 390,167
--------- ---------
Less: Accumulated depreciation, depletion and amortization . . . . . . . . . (4,187) (192,378)
--------- ---------
Total oil and gas properties and pipeline assets, net . . . . . . . . . . . 244,994 197,789
--------- ---------
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,473 184
--------- ---------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 254,723 $ 205,514
========= =========
LIABILITIES:
Accounts payable and accrued expenses - trade . . . . . . . . . . . . . . . . $ 9,085 $ 10,257
Accounts payable - affiliates . . . . . . . . . . . . . . . . . . . . . . . . 11,749 12,423
Notes payable - current . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,088 4,430
--------- ---------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . 27,922 27,110
--------- ---------
Notes payable - long term . . . . . . . . . . . . . . . . . . . . . . . . . . 60,912 65,470
Advance from parent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000 ---
Convertible subordinated debentures . . . . . . . . . . . . . . . . . . . . . 20,783 25,664
Convertible subordinated notes . . . . . . . . . . . . . . . . . . . . . . . . 23,826 28,520
--------- ---------
TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143,443 146,764
--------- ---------
PARTNERS' EQUITY:
Limited Partners' equity, 23,351,645 Units outstanding at
March 31, 1995 and December 31, 1994 . . . . . . . . . . . . . . . . . . . . 120,447 67,589
General Partners' equity (deficit) . . . . . . . . . . . . . . . . . . . . . . (9,167) (8,839)
--------- ---------
TOTAL PARTNERS' EQUITY . . . . . . . . . . . . . . . . . . . . . . . . . . . 111,280 58,750
--------- ---------
TOTAL LIABILITIES AND PARTNERS' EQUITY . . . . . . . . . . . . . . . . . . . . $ 254,723 $ 205,514
========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
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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
MARCH 31,
------------------------
1995 1994
--------- ---------
(RESTATED)
<S> <C> <C>
REVENUES:
Oil and gas sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,201 $ 8,580
Pipeline revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 343 1,403
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 23
--------- --------
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,572 10,006
--------- --------
COSTS AND EXPENSES:
Cost of gas sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 341 1,396
Lease operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,711 2,081
Severance taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 484 327
Exploration and dry hole costs . . . . . . . . . . . . . . . . . . . . . . . . . 2,115 2,572
General and administrative expenses . . . . . . . . . . . . . . . . . . . . . . 919 683
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,207 1,775
Accretion of note discount . . . . . . . . . . . . . . . . . . . . . . . . . . . 178 159
Accretion of debt valuation discount . . . . . . . . . . . . . . . . . . . . . . 339 ---
Depreciation, depletion and amortization . . . . . . . . . . . . . . . . . . . . 6,932 7,816
--------- --------
Total costs and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,226 16,809
--------- --------
NET LOSS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (7,654) $ (6,803)
========= ========
NET LOSS PER UNIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (.31) $ (.31)
========= ========
Average units outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,351,645 20,864,890
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
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KELLEY OIL & GAS PARTNERS, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------
1995 1994
--------- ---------
(RESTATED)
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (7,654) $ (6,803)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation, depletion and amortization . . . . . . . . . . . . . . . . . . . . 6,932 7,816
Dry hole and impairment costs . . . . . . . . . . . . . . . . . . . . . . . . . 597 646
Amortization of debenture and note offering costs . . . . . . . . . . . . . . . 120 121
Accretion of debt valuation discount . . . . . . . . . . . . . . . . . . . . . . 339 ---
Accretion of note discount . . . . . . . . . . . . . . . . . . . . . . . . . . . 178 159
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable . . . . . . . . . . . . . . . . . . (205) 380
Decrease (increase) in prepaid and other current assets . . . . . . . . . . . 113 (43)
Decrease (increase) in other non-current assets . . . . . . . . . . . . . . . (1,289) 18
Increase (decrease) in accounts payable and accrued expenses . . . . . . . . . (1,846) (3,025)
--------- --------
Net cash used in operating activities . . . . . . . . . . . . . . . . . . . . . . (2,715) (731)
--------- --------
INVESTING ACTIVITIES:
Purchases of property and equipment . . . . . . . . . . . . . . . . . . . . . . . (4,401) (4,641)
Sale of pipeline and other transportation assets . . . . . . . . . . . . . . . . . --- 58
Sale of other non-current assets . . . . . . . . . . . . . . . . . . . . . . . . . 134 38
--------- --------
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . (4,267) (4,545)
--------- --------
FINANCING ACTIVITIES:
Proceeds from long term borrowings . . . . . . . . . . . . . . . . . . . . . . . . 8,100 13,000
Advance from parent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000 ---
Principal payments on long term borrowings . . . . . . . . . . . . . . . . . . . . (10,000) ---
Distributions to partners . . . . . . . . . . . . . . . . . . . . . . . . . . . . (486) (6,518)
Syndication costs charged to equity . . . . . . . . . . . . . . . . . . . . . . . (9) (1)
Note offering costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . --- (9)
--------- --------
Net cash provided by financing activities . . . . . . . . . . . . . . . . . . . . 7,605 6,472
--------- --------
Increase in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . 623 1,196
Cash and cash equivalents, beginning of period . . . . . . . . . . . . . . . . . . . 897 1,011
--------- --------
Cash and cash equivalents, end of period . . . . . . . . . . . . . . . . . . . . . . $ 1,520 $ 2,207
========= ========
</TABLE>
See Notes to Consolidated Financial Statements.
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KELLEY OIL & GAS PARTNERS, LTD.
NOTES TO RESTATED 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.
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 Kelley Partners
became a 99.98% owned subsidiary partnership 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.
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:
$ IN THOUSANDS
<TABLE>
<S> <C>
INCREASE (DECREASE) IN:
Purchased unproved properties . . . . . . . . . . . . . . . . . . . . . . . . $ 85,182
Properties subject to amortization . . . . . . . . . . . . . . . . . . . . . . (225,698)
Pipelines and other transportation assets . . . . . . . . . . . . . . . . . . (4,274)
Accumulated depreciation, depletion and amortization . . . . . . . . . . . . . (195,405)
Convertible subordinated debentures . . . . . . . . . . . . . . . . . . . . . (5,103)
Convertible subordinated notes . . . . . . . . . . . . . . . . . . . . . . . . (5,110)
Limited partners' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,828
</TABLE>
If the Consolidation had not taken place, Kelley Partners' depletion,
depreciation and amortization for the quarter ended March 31, 1995 would have
increased by approximately $1.9 million, with a corresponding increase in its
net loss for the quarter.
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 loss of $911,000 for the quarter ended March 31, 1994 has been restated to
a net loss of $6,803,000.
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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.
RECENT DEVELOPMENTS
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.
Drilling Operations. During 1994, Kelley Partners participated in
drilling 35 wells, of which 31 gross (5.65 net) wells were found productive and
4 gross (1.33 net) wells were dry. The Partnership participated in drilling an
additional 5 gross (.71 net) wells in the first quarter of 1995, all of which
were found productive. These results reflect an effective turnaround in field
operations from the disappointments of 1993, when a number of higher risk wells
were largely unsuccessful despite promising initial results. The improvement
in drilling performance was achieved during 1994 and the first quarter of 1995
from lower risk operations aided by revised completion techniques in north
Louisiana and increased reliance on 3-D seismic analysis in south Louisiana.
Additional improvements in south Louisiana drilling operations are anticipated
for the balance of 1995 from use of
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a recently completed 3-D seismic survey covering several of the Partnership's
significant properties in Terrebonne Parish.
Recent Production Performance. Kelley Partners' operating results
reflect sustained production growth since the middle of 1994, accompanied by
continuing weakness in natural gas prices. For the first quarter of 1995 and
the second half of 1994, the Partnership recorded gains in gas equivalent
production of 18.3% and 12.9%, respectively, over year-earlier levels. 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 northern Louisiana properties
in which the Partnership already held working interests (the "1994
Properties"). The benefits of higher production volumes were partially offset
by declining natural gas prices, which averaged $1.80 per Mcf for the first
quarter of 1995.
Hedging Activities. KOGC periodically uses forward sales contracts
and derivative financial instruments covering natural gas to reduce exposure to
downward price fluctuations on natural gas production of its subsidiaries and
subsidiary partnerships (collectively, the "Kelley Group"). Through a
combination of natural gas swap agreements and forward sales contracts,
approximately 50% of the Kelley Group's anticipated natural gas production for
1995 has been hedged at $2.00 per Mcf in the first quarter of 1995 and an
average of $1.72 per Mcf for the balance of the year. 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.
Pushdown Accounting. For financial accounting purposes, the
Consolidation is 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. As a
result of this accounting approach, accumulated depreciation, depletion and
amortization ("DD&A") of $195,405,000 was eliminated.
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.
Although the full cost method continues to be generally accepted, the Financial
Accounting Standards Board has expressed a preference for the successful
efforts method. Under current conditions, Kelley Partners believes the
successful efforts method provides a more appropriate basis for measuring the
results of its oil and gas operations and comparing these results with similar
companies that use the successful efforts method. The Partnership's financial
statements for the first quarter of 1994 was restated to reflect the new
method. As a result of the change in accounting method, Kelley Partners'
previously reported net loss of $911,000 for the quarter ended March 31, 1994
has been restated to a net loss of $6,803,000.
RESULTS OF OPERATIONS
Quarter Ended March 31, 1995 Compared to Quarter Ended March 31, 1994.
Oil and gas revenues of $8,201,000 in the first quarter of 1995 decreased 4.4%
compared to $8,580,000 in the same quarter last year. During the first quarter
of 1995, production of natural gas, the dominant component of Kelley Partners'
revenues, increased 18.5% from 3,192,000 Mcf in the first quarter of 1994 to
3,784,000 Mcf, while the average price of natural gas decreased 21.4% from
$2.29 per Mcf to $1.80 per Mcf in the current quarter. Production of crude oil
and natural gas liquids in the current quarter totaled 89,837 barrels, with an
average sales price of $16.36 per barrel, compared to 77,052 barrels at $14.65
per barrel in the same quarter last year, reflecting volume and price increases
of 16.6% and 11.7%, respectively.
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The decrease in the Partnership's oil and gas revenues for the first
quarter of 1995 was due to the decline in natural gas prices, partially offset
by added production from wells recently drilled by Kelley Partners and acquired
in the 1991 DDP Exchange and the purchase of the 1994 Properties. See "Recent
Developments." The Partnership anticipates continued improvement in its
production performance for the balance of the year from new wells being drilled
by the Kelley Group. In addition, although natural gas prices were depressed
in the first quarter of 1995, hedging activities added $498,000 to oil and gas
revenues in the quarter. See "Recent Developments--Hedging Arrangements."
Total revenues of $8,572,000 in the first quarter of 1995 decreased
14.3% from results in the corresponding period last year, due primarily to a
75.6% decline in pipeline revenues to $343,000 from $1,403,000 during the first
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 $2,195,000 in the current quarter versus
$2,408,000 in the first quarter of 1994, a decrease of 8.8%, reflecting lower
workover costs. On a unit of production basis, production expenses decreased
to $.51 per Mcfe in the first quarter of 1995 from $.66 per Mcfe in the
corresponding quarter last year.
Kelley Partners expensed exploration and dry hole costs of $2,115,000
in the first quarter of 1995 and $2,572,000 in the same quarter last year, a
decrease of 17.8% primarily reflecting the Partnership's focus on lower risk
prospects during the current quarter. The decrease in these expenses also
reflects lower delay rental costs and geological and geophysical expenses,
paritally offset by higher unproved leasehold impairment provisions.
General and administrative expenses of $919,000 in the current quarter
increased 34.6% from $683,000 in the first quarter of 1994, reflecting the
Partnership's share of administrative costs associated with development
operations of the Kelly Group and a portion of the Consolidation expenses. On
a unit of production basis, these expenses increased from $.19 per Mcfe in the
first quarter of 1994 to $.21 per Mcfe in the current quarter.
Interest expense increased to $3,207,000 in the current quarter
compared to $1,775,000 in the first quarter of 1994. The increase in interest
expense resulted from both higher interest rates and borrowing levels in the
current quarter.
Kelley Partners recognized $339,000 for accretion of debt valuation
discount in the first 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."
DD&A decreased 11.3% from $7,816,000 in the first quarter of 1994 to
$6,932,000 in the current quarter, primarily as a result of a reduction in the
carrying value of properties subject to amortization as a result of the
"pushdown" accounting adjustment in the Consolidation. See "Recent
Developments--Pushdown Accounting." On a unit of production basis, DD&A
decreased from $2.14 per Mcfe in the first quarter of 1994 to $1.60 per Mcfe in
the current quarter. If the Consolidation had not taken place, DD&A on a
standalone basis would have increased 22% to $8,892,000.
The Partnership recognized a net loss of $7,654,000 in the first
quarter of 1995 compared to a net loss of $6,803,000 in the same quarter last
year. The net losses in both periods were due primarily to noncash charges for
DD&A. If the Consolidation had not taken place, the net loss for the first
quarter of 1995 would have increased to $9,614,000 as a result of higher DD&A.
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<PAGE> 10
Net available cash from operations, considered by Kelley Partners as
its primary operating benchmark, decreased 58.0% from $3,744,000 in the first
quarter of 1994 to $1,571,000 in the first quarter this year, reflecting the
foregoing developments.
The results of operations for the quarter ended March 31, 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 quarter of 1995 aggregated $2,715,000. The Partnership's cash
position was further increased during the quarter by advances of $8.1 million
under its credit facility. During the quarter, $486,000 was distributed to the
partners and $4,401,000 was invested in the acquisition and development of oil
and gas properties. As a result of these activities, the Partnership's cash
and cash equivalents increased from $897,000 at December 31, 1994 to $1,520,000
at March 31, 1995.
Kelley Partners had a working capital deficit of approximately $19.7
million at March 31, 1995, compared to a deficit of $19.6 million at December
31, 1994. The deficit at March 31, 1995 includes intercompany payables of
$11.7 million and debt amortization requirements of $7.1 million during the
next twelve months. See "Capital Resources" below. To improve liquidity for
the Kelley Group, KOGC has commenced registration procedures with the
Securities and Exchange Commission for a proposed public offering of
$100,000,000 in Senior Notes due 1999 (the "KOGC Notes"). KOGC has also
offered several nonstrategic oil and gas properties for sale based on their
high operating costs and low priorities within the Kelley Group's development
strategy. As of the date of this Report, bids have been received on three of
property packages. While these bids are subject to various conditions, the
Partnership expects to receive up to $12 million from the sales. Any proceeds
received prior to the completion of the KOGC Note offering to be used for
reducing bank debt, with any subsequent proceeds added to the Partnership's
working capital. See"Capital Commitments" below. If completed, the sales
could be expected to impact production levels in the second quarter of 1995.
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.
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
9
<PAGE> 11
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. An advance of
$3 million was made under the Credit Facility in March 1995 primarily to fund
drilling activities, leaving $83 million outstanding under the two facilities
at March 31, 1995 and $7 million available for future borrowings, of which $4
million was advanced in April 1995 and the remaining $3 million is expected to
be drawn in May 1995.
The Credit Facility requires the payment of interest only until
January 31, 1997, when all borrowings under the facility will be repayable,
subject to annual extensions at the lenders' discretion if the Term Facility
has been repaid. The Term Facility is amortizable 10% on July 31, 1995 and 15%
every three months thereafter, with a final payment due on January 31, 1997.
Borrowings under the Credit Facility are subject to borrowing base limitations
and adjustments based on semiannual evaluations of KOGC's oil and gas reserves.
Both facilities are secured by all the oil and gas properties and other assets
of Kelley Partners, KOGC and its other subsidiaries. The agreements covering
the facilities provide various financial covenants, including the maintenance
of working capital and net worth at specified levels and limitations on capital
expenditures and accounts payable above specified levels. The agreements also
require prepayments with net proceeds from any property sales and any equity
financing other than the equity private placement completed by KOGC in February
1995.
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. KOGC is currently
considering alternatives to refinance or encourage conversion of Kelley
Partners' subordinated debt.
Capital Commitments. The Kelley Group's business plan contemplates a
total commitment of up to $40 million for exploration and development
activities in 1995. Capital expenditures for the year are targeted at
approximately $20 million for a mix of moderate and higher risk south Louisiana
drilling prospects, $10 million for low risk north Louisiana prospects and the
balance for seismic, leasehold and recompletion expenses. 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.
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 plans to offer the KOGC 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 KOGC Notes will be 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 are expected to guaranty the
indebtedness under the KOGC Notes. Kelley Partners' obligations under its
guaranty of the KOGC Notes is intended to rank senior in right of payment to
the 8 1/2% Debentures and 7 7/8% Notes.
Upon completion of the KOGC Note offering, KOGC intends retain part of
the Kelley Group's borrowing capacity under the Credit Facility, with the
credit limit initially reduced to $40 million, subject to restrictions on
incurrence of additional indebtedness under the proposed indenture for the KOGC
Notes. The indenture will generally permit the Kelley Group to borrow the
greater of 12 1/2% of adjusted consolidated net tangible assets or $30 million,
plus $5 million per year solely for capital expenditures. 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 existing Credit Facility to borrowing base reductions from
any declines in natural gas prices. If the KOGC Note offering is completed,
the agreements covering the Kelley Group's bank debt are
10
<PAGE> 12
expected to be amended to reflect these arrangements, terminate the Term
Facility and eliminate several existing covenants.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. None.
(b) Reports on Form 8-K. The Partnership filed a Current Report on
Form 8-K dated February 10, 1995 relating the Consolidation.
11
<PAGE> 13
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: May 14, 1995 By: /s/ W. Matt Ralls
--------------------------------------
W. Matt Ralls,
Senior Vice President and
Chief Financial Officer
(Duly Authorized Officer)
(Principal Financial Officer)
12
<PAGE> 14
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- - - - ------- ----------- ------------
<S> <C> <C>
27 Financial Data Schedule.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> MAR-31-1995
<CASH> 1,520
<SECURITIES> 0
<RECEIVABLES> 6,562
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 8,256
<PP&E> 249,181
<DEPRECIATION> 4,187
<TOTAL-ASSETS> 254,723
<CURRENT-LIABILITIES> 27,922
<BONDS> 40,609
<COMMON> 0
0
0
<OTHER-SE> 111,280
<TOTAL-LIABILITY-AND-EQUITY> 254,723
<SALES> 8,544
<TOTAL-REVENUES> 8,572
<CGS> 341
<TOTAL-COSTS> 12,161
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,724
<INCOME-PRETAX> (7,654)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,654)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
