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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 SEPTEMBER 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
PART I. FINANCIAL INFORMATION PAGE
----
Consolidated Balance Sheets -- September 30, 1995 (unaudited) and
December 31, 1994 2
Consolidated Statements of Loss -- Three Months ended September 30,
1995 and 1994 (unaudited) 3
Consolidated Statements of Loss -- Nine Months ended September 30,
1995 and 1994 (unaudited) 4
Consolidated Statements of Cash Flows -- Nine Months ended
September 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
1
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PART I. FINANCIAL INFORMATION
KELLEY OIL & GAS PARTNERS, LTD.
CONSOLIDATED BALANCE SHEETS
($ IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1995 1994
-------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS:
Cash and cash equivalents . . . . . . . . . . $ 1,619 $ 897
Accounts receivable - trade . . . . . . . . . 938 1,612
Accounts receivable - affiliates. . . . . . . 2,473 4,745
Other current assets. . . . . . . . . . . . . 269 287
--------- ---------
Total current assets . . . . . . . . . . 5,299 7,541
--------- ---------
Oil and gas properties, successful efforts
method:
Unevaluated, net . . . . . . . . . . . . 8,977 7,199
Unproved properties. . . . . . . . . . . 81,786 ---
Properties subject to amortization . . . 195,543 375,058
Pipelines and other transportation assets . . 3,637 7,910
--------- ---------
289,943 390,167
--------- ---------
Less: Accumulated depreciation, depletion
and amortization . . . . . . . . . . . (54,775) (192,378)
--------- ---------
Total oil and gas properties and pipeline
assets, net . . . . . . . . . . . . . . 235,168 197,789
--------- ---------
Other assets. . . . . . . . . . . . . . . . . 825 184
--------- ---------
TOTAL ASSETS . . . . . . . . . . . . . . $ 241,292 $ 205,514
--------- ---------
--------- ---------
LIABILITIES:
Accounts payable and accrued expenses -
trade. . . . . . . . . . . . . . . . . . . . $ 12,832 $ 10,257
Accounts payable - affiliates . . . . . . . . 14,022 12,423
Notes payable - current . . . . . . . . . . . --- 4,430
--------- ---------
Total current liabilities. . . . . . . . 26,854 27,110
--------- ---------
Notes payable - long term . . . . . . . . . . --- 65,470
Advances from parent. . . . . . . . . . . . . 77,245 ---
Convertible subordinated debentures . . . . . 21,390 25,664
Convertible subordinated notes. . . . . . . . 24,845 28,520
--------- ---------
TOTAL LIABILITIES. . . . . . . . . . . . 150,334 146,764
--------- ---------
PARTNERS' EQUITY:
Limited Partners' equity, 23,351,645 Units
outstanding at September 30, 1995
and December 31, 1994. . . . . . . . . . . . 100,934 67,589
General Partners' equity (deficit). . . . . . (9,976) (8,839)
--------- ---------
TOTAL PARTNERS' EQUITY . . . . . . . . . 90,958 58,750
--------- ---------
TOTAL LIABILITIES AND PARTNERS' EQUITY. . . . $ 241,292 $ 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
SEPTEMBER 30,
----------------------
1995 1994
--------- ----------
<S> <C> <C>
REVENUES:
Oil and gas sales . . . . . . . . . . . . . . . . $ 4,982 $ 7,850
Pipeline revenues . . . . . . . . . . . . . . . . 346 811
Other income. . . . . . . . . . . . . . . . . . . 28 161
--------- ---------
Total revenues . . . . . . . . . . . . . . . 5,356 8,822
--------- ---------
COSTS AND EXPENSES:
Cost of gas sold. . . . . . . . . . . . . . . . . 345 821
Lease operating expenses. . . . . . . . . . . . . 2,113 2,396
Severance taxes . . . . . . . . . . . . . . . . . 281 477
Exploration and dry hole costs. . . . . . . . . . 1,950 1,830
General and administrative expenses . . . . . . . 541 752
Interest expense. . . . . . . . . . . . . . . . . 4,184 2,294
Accretion of note discount. . . . . . . . . . . . 207 169
Accretion of debt valuation discount. . . . . . . 509 ---
Depreciation, depletion and amortization. . . . . 5,245 12,437
--------- ---------
Total costs and expenses . . . . . . . . . . 15,375 21,176
--------- ---------
NET LOSS . . . . . . . . . . . . . . . . . . . . . . $ (10,019) $ (12,354)
--------- ----------
--------- ----------
NET LOSS PER UNIT. . . . . . . . . . . . . . . . . . . $ (.41) $ (.51)
--------- ----------
--------- ----------
Average units outstanding. . . . . . . . . . . . . . . 23,351,645 23,348,051
---------- ----------
---------- ----------
</TABLE>
See Notes to Consolidated Financial Statements.
3
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KELLEY OIL & GAS PARTNERS, LTD.
CONSOLIDATED STATEMENTS OF LOSS
($ IN THOUSANDS EXCEPT PER UNIT DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
1995 1994
---------- ----------
<S> <C> <C>
REVENUES:
Oil and gas sales . . . . . . . . . . . . . . . . $ 19,891 $ 23,151
Pipeline revenues . . . . . . . . . . . . . . . . 1,068 3,385
Other income. . . . . . . . . . . . . . . . . . . 80 192
---------- ----------
Total revenues . . . . . . . . . . . . . . . 21,039 26,728
---------- ----------
COSTS AND EXPENSES:
Cost of gas sold. . . . . . . . . . . . . . . . . 1,062 3,379
Lease operating expenses. . . . . . . . . . . . . 5,691 6,117
Severance taxes . . . . . . . . . . . . . . . . . 1,189 1,136
Exploration and dry hole costs. . . . . . . . . . 7,132 8,692
General and administrative expenses . . . . . . . 2,051 2,111
Interest expense. . . . . . . . . . . . . . . . . 11,479 6,081
Accretion of note discount. . . . . . . . . . . . 568 489
Accretion of debt valuation discount. . . . . . . 1,357 ---
Depreciation, depletion and amortization. . . . . 18,717 27,936
---------- ----------
Total costs and expenses . . . . . . . . . . 49,246 55,941
---------- ----------
NET LOSS . . . . . . . . . . . . . . . . . . . . . . $ (28,207) $ (29,213)
---------- ----------
---------- ----------
NET LOSS PER UNIT. . . . . . . . . . . . . . . . . . . $ (1.16) $ (1.29)
---------- ----------
---------- ----------
Average units outstanding. . . . . . . . . . . . . . . 23,351,645 21,692,610
---------- ----------
---------- ----------
</TABLE>
See Notes to Consolidated Financial Statements.
4
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KELLEY OIL & GAS PARTNERS, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
1995 1994
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss. . . . . . . . . . . . . . . . . . . . . $ (28,207) $ (29,213)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation, depletion and amortization . . 18,717 27,936
Dry hole and impairment costs. . . . . . . . 2,632 2,647
Amortization of debenture and note offering
costs . . . . . . . . . . . . . . . . . . . 586 360
Accretion of debt valuation discount . . . . 1,357 ---
Accretion of note discount . . . . . . . . . 568 489
Changes in operating assets and liabilities:
Decrease in accounts receivable. . . . . . . 2,946 2,202
Decrease (increase) in prepaid and other
current assets. . . . . . . . . . . . . . . 18 (140)
Decrease (increase) in other non-current
assets. . . . . . . . . . . . . . . . . . . (641) 51
Increase in accounts payable and accrued
expenses. . . . . . . . . . . . . . . . . . 3,699 6,500
---------- ----------
Net cash provided by operating activities . . . . 1,675 10,832
---------- ----------
INVESTING ACTIVITIES:
Purchases of property and equipment . . . . . . . (14,632) (34,124)
Sale of pipeline and other transportation
assets . . . . . . . . . . . . . . . . . . . . . --- 51
Cash received in exchange offers. . . . . . . . . --- 1,310
Sale of oil and gas properties. . . . . . . . . . 6,807 ---
Sale of other non-current assets. . . . . . . . . 274 355
---------- ----------
Net cash used in investing activities . . . . . . (7,551) (32,408)
---------- ----------
FINANCING ACTIVITIES:
Proceeds from long term borrowings. . . . . . . . 13,100 43,900
Advances from parent, net . . . . . . . . . . . . 76,998 ---
Principal payments on long term borrowings. . . . (83,000) ---
Distributions to partners . . . . . . . . . . . . (486) (15,208)
Syndication costs charged to equity . . . . . . . (14) (1,107)
Note offering costs . . . . . . . . . . . . . . . --- (9)
---------- ----------
Net cash provided by financing activities . . . . 6,598 27,576
---------- ----------
Increase in cash and cash equivalents. . . . . . . . . 722 6,000
Cash and cash equivalents, beginning of period . . . . 897 1,011
---------- ----------
Cash and cash equivalents, end of period . . . . . . . $ 1,619 $ 7,011
---------- ----------
---------- ----------
</TABLE>
See Notes to Consolidated Financial Statements.
5
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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 ("FAS 121"), effective for companies with years beginning after
December 31, 1995. While management has not evaluated the potential effect of
FAS 121 on the consolidated financial statements of the Partnership, the impact
could be material.
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:
$ IN THOUSANDS
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
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
nine months ended September 30, 1995 would have increased by approximately $1
million and $4.2 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.
SALE OF NONSTRATEGIC PROPERTIES. In July 1995, Kelley Partners 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 Partnership's development strategy. The
Kelley Group received net proceeds of $6.8 million for the properties, which
accounted for approximately 6% of Kelley Partners' proved reserves as of
January 1, 1995.
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. The Partnership 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 in Kelley Partners
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.
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
7
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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.
POTENTIAL PROPERTY IMPAIRMENT. 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 ("FAS 121"), effective for companies
with years beginning after December 31, 1995. While management has not
evaluated the potential effect of FAS 121 on the consolidated financial
statements of the Partnership, the impact could be material.
RECENT DEVELOPMENTS
DRILLING OPERATIONS. In the first nine months of 1995, the Partnership
participated in drilling 16 wells, of which 15 gross (2.53 net) wells were found
productive and one gross (.33 net) well was dry. 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 have been achieved since
that time from use of the survey for lower risk wells. The Partnership has also
increased its emphasis on north Louisiana operations, nearly doubling its first
half drilling rate during the third quarter of 1995. As of the end of the
quarter, Kelley Partners was in the process of drilling 5 wells, 4 of which were
completed as producers through November 8, 1995.
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 declining natural gas prices, which
averaged $1.70 per Mcf for the first nine months 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 and
acquisitions of north Louisiana properties in which the Partnership already held
working interests (the "1994 Properties"). In addition, 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 on a pro forma basis,
those results were off 15.2% compared to the first quarter of 1995, and third
quarter 1995 production was off 22.6% from second quarter levels. Production
performance in the second and third quarters of 1995 was affected by the timing
of new well completions, remedial requirements and production declines in core
properties. Third quarter production was further reduced by the sale of
nonstrategic properties in July 1995. See "Liquidity and Capital Resources--
Liquidity" below. As a result of recent well completions and ongoing drilling
activities, the Partnership anticipates increased quarterly production
commencing in the fourth 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 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 and losses 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 80% of
the Kelley Group's natural gas production for the first nine months of 1995 was
affected by hedging transactions at an average Nymex quoted price of $1.76 per
MMBtu, before transaction costs and transportation costs on gas delivered under
forward sales contracts. For the fourth quarter of 1995, approximately 56% of
the Kelley Group's anticipated natural gas production has been hedged at an
average Nymex quoted price of $1.77 per MMBtu, before transaction and
transportation costs.
8
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MANAGEMENT CHANGES. In October 1995, David L. Kelley was replaced as
Chairman, Chief Executive Officer and President of Kelley Oil. He subsequently
resigned as a director of Kelley Oil and KOGC. As part of several related
management changes, Ralph P. Davidson, a director of Kelley Oil since 1993, was
appointed to serve as its Chairman of the Board, and Fair Colvin, Jr., a
director since 1990 and President of its gas marketing subsidiary since 1987,
was appointed Chief Executive Officer and President of Kelley Oil. The
Partnership has retained access to Mr. Kelley's expertise in evaluating drilling
prospects through consulting arrangements with Kelley Oil.
RESULTS OF OPERATIONS
QUARTERS ENDED SEPTEMBER 30, 1995 AND 1994. Oil and gas revenues of
$4,982,000 in the third quarter of 1995 decreased 36.5% compared to $7,850,000
in the same quarter last year. During the third quarter of 1995, production of
natural gas, the dominant component of Kelley Partners' revenues, decreased
33.6% from 3,781,000 Mcf in the third quarter of 1994 to 2,511,000 Mcf, while
the average price of natural gas declined 4.7% from $1.72 per Mcf to $1.64 per
Mcf in the current quarter. Production of crude oil and natural gas liquids in
the current quarter totaled 54,296 barrels, with an average sales price of
$17.32 per barrel compared to 89,803 barrels at $17.45 per barrel in the same
quarter last year, reflecting volume and price declines of 39.5% and .7%,
respectively.
The decrease in the Partnership's oil and gas production and revenues for
the third quarter of 1995 was attributable to production declines in its core
properties, the sale of various wells included in a divestiture of nonstrategic
properties and the decrease in natural gas prices, partially offset by added
production from new wells. See "Recent Developments--Recent Production
Performance." 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 $245,000 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 $5,356,000 in the third quarter of 1995 decreased 39.3%
from results in the corresponding period last year, reflecting the decrease in
oil and gas revenues and a 57.3% decline in pipeline revenues to $346,000 from
$811,000 during the third 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 $2,394,000 in the current quarter versus $2,873,000 in the
third quarter of 1994, a decrease of 16.7%, due primarily to lower current
severance taxes and workover costs. On a unit of production basis, production
expenses increased to $.84 per Mcfe in the third quarter of 1995 from $.67 per
Mcfe in the corresponding quarter last year.
Kelley Partners expensed exploration and dry hole costs of $1,950,000 in
the third quarter of 1995 and $1,830,000 in the same quarter last year, an
increase of 6.6%. The increase in these expenses resulted from higher delay
rental costs, partially offset by lower geological and geophysical and dry hole
costs. Dry hole costs in the current quarter represent the remaining expenses
for an unsuccessful well commenced during the second quarter of 1995.
General and administrative expenses of $541,000 in the third quarter of
1995 decreased 28.1% from $752,000 in the same quarter last year, reflecting the
Partnership's share of administrative costs associated with development
operations of the Kelley Group. The decrease in these expenses reflects the
benefits of a restructuring by Kelley Oil focused on staff reductions of
approximately 25% implemented at the end of 1994 plus ongoing cost containment
measures. On a unit of production basis, these expenses increased from $.17 per
Mcfe in the third quarter of 1994 to $.19 per Mcfe in the current quarter.
9
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Interest expense increased 82.4% to $4,184,000 in the current quarter
compared to $2,294,000 in the third quarter of 1994. The increase in interest
expense resulted from higher debt levels in the current quarter.
Kelley Partners recognized $509,000 for accretion of debt valuation
discount in the third 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."
Depreciation, depletion and amortization ("DD&A") decreased 57.8% from
$12,437,000 in the third quarter of 1994 to $5,245,000 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 $2.88 per Mcfe in the third quarter of 1994 to $1.85 per
Mcfe in the current quarter. If the Consolidation had not taken place, DD&A on
a standalone basis would have increased 18.6% to $6,219,000.
The Partnership recognized a net loss of $10,019,000 in the third quarter
of 1995 compared to a net loss of $12,354,000 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 third quarter of 1995 would have increased to $10,993,000
as a result of higher DD&A.
NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994. Oil and gas revenues of
$19,891,000 in the first nine months of 1995 decreased 14.1% compared to
$23,151,000 in the corresponding period last year. During the current period,
production of natural gas decreased 3.5% from 9,897,000 Mcf in the first nine
months of 1994 to 9,554,000 Mcf, while the average price of natural gas declined
13.7% from $1.97 per Mcf to $1.70 per Mcf in the current period. Production of
crude oil and natural gas liquids in the first nine months of 1995 totaled
212,146 barrels, with an average sales price of $17.50 per barrel compared to
240,329 barrels at $16.11 per barrel in the same period last year, reflecting a
price increase of 8.6% and a volume decrease of 11.7%.
The decrease in the Partnership's oil and gas revenues for the first nine
months of 1995 was primarily attributable to production declines in the third
quarter and lower natural gas prices throughout the period. See "General--
Recent Production Performance." Prices received for Kelley Partners' natural
gas production reflect the benefits of hedging activities, which added $917,000
to oil and gas revenues in the current period. See "Recent Developments."
Total revenues of $21,039,000 in the first nine months of 1995 decreased
21.3% from results in the corresponding period last year, reflecting the
decrease in oil and gas revenues and a 68.4% decline in pipeline revenues to
$1,068,000 from $3,385,000 during the first nine months 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 $6,880,000 in the current period versus
$7,253,000 in the first nine months of 1994, a decrease of 5.1%, reflecting
lower severance taxes and workover costs. On a unit of production basis,
production expenses remained constant at $.64 per Mcfe in the first nine months
of 1995 and in the corresponding period last year.
Kelley Partners expensed exploration and dry hole costs of $7,132,000 in
the first nine months of 1995 and $8,692,000 in the same period last year, a
decrease of 17.9%, 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 $2,051,000 in the current period
decreased 2.8% from $2,111,000 in the first nine months of 1994, reflecting the
Partnership's share of administrative costs associated with development
10
<PAGE>
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 nine months of 1995 and 1994.
Interest expense increased 88.8% to $11,479,000 in the current period
compared to $6,081,000 in the first nine months of 1994. The increase in
interest expense resulted from both higher interest rates and borrowing levels
in the current period.
Kelley Partners recognized $1,357,000 for accretion of debt valuation
discount in the first nine months 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 33.0% from $27,936,000 in the first nine months of 1994 to
$18,717,000 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 $2.46 per Mcfe
in the first nine months of 1994 to $1.73 per Mcfe in the current period. If
the Consolidation had not taken place, DD&A on a stand alone basis would have
increased 22.4% to $22,901,000.
The Partnership recognized a net loss of $28,207,000 in the first nine
months of 1995 compared to a net loss of $29,213,000 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 nine months of 1995 would have increased to
$31,760,000 as a result of higher DD&A offset by lower unproved property
impairments.
The results of operations for the quarter and nine months ended September
30, 1995 are not necessarily indicative of the Partnership's operating results
to be expected for the full year.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY. Net cash provided by operating activities of Kelley Partners
during the first nine months of 1995 aggregated $2,150,000. The Partnership's
cash position was increased during the period by advances of $13.1 million under
its credit facility and net advances of $77.0 million by KOGC. During the
period, $83 million was repaid by Kelley Partners under its credit facilities,
$14.6 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 increased from $897,000
at December 31, 1994 to $1,619,000 at September 30, 1995.
Kelley Partners had a working capital deficit of approximately
$21.6 million at September 30, 1995, compared to a deficit of $15.1 million at
December 31, 1994. The current deficit primarily reflects accounts payable to
affiliates following advances from proceeds of KOGC's Senior Note offering. See
"General--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 Kelley Group received net proceeds of $6.8
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 have reduced the Kelley Group's ongoing production expenses.
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
11
<PAGE>
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 "General--Senior
Note Offering." 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
to the greater of 12 1/2% of adjusted consolidated net tangible assets or
$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.
During October 1995, the Partnership borrowed $10 million under the Credit
Facility primarily to fund its participation in the Kelley Group's drilling
activities. As of October 31, 1995, total borrowings of $10 million were
outstanding under the Credit Facility, and $25 million was available for
additional borrowings before giving effect to an anticipated $5 million increase
in credit availability for capital expenditures during 1996.
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 an
ongoing commitment to exploration and development activities. During 1996, the
Partnership's capital expenditures will continue to be focused on low risk
drilling in north Louisiana, where the Kelley Group expects to drill between 20
and 25 wells. In addition, KOGC plans to aggressively pursue an industry
partnership to conserve capital and diversify the risks associated with
developing its higher potential prospects in south Louisiana. Consistent with
the Kelley Group's historical arrangements, drilling activities will continue to
be financed one-third by Kelley Partners and two-thirds by the 1994 DDP. The
allocation will not affect the Kelley Group's drilling strategy or capital
expenditure budget.
Although KOGC anticipates an increase in the borrowing base under its
Credit Facility from $35 million to $40 million by year end, available
borrowings are expected to fund the Kelley Group's capital expenditure
requirements only through the first half of 1996. KOGC believes its revised
drilling strategy will generate reserve additions and performance gains
enhancing its financing opportunities by that time. Those opportunities will be
limited, however, by restrictions on additional indebtedness under the indenture
for the Senior Notes. Accordingly, KOGC will be required to consider other
alternatives at that time, which could include an equity financing, property
divestiture or, if its revised drilling strategy fails to meet expectations, a
sale of the Kelley Group.
12
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS. None.
(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: November 13, 1995 By: /S/ AMELIA L. JOHNSON
-------------------------
Amelia L. Johnson,
Controller
(Duly Authorized Officer)
(Principal Accounting Officer)
14
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<PERIOD-END> SEP-30-1995
<CASH> 1,619
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