PARKER & PARSLEY 86-B LTD
10-Q, 1997-08-11
CRUDE PETROLEUM & NATURAL GAS
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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D. C. 20549


                                    FORM 10-Q


    / x /        Quarterly Report Pursuant to Section 13 or 15(d)
                     of the Securities Exchange Act of 1934

                  For the quarterly period ended June 30, 1997

                                       or

    /   /       Transition Report Pursuant to Section 13 or 15(d)
                     of the Securities Exchange Act of 1934
                For the transition period from _______ to _______


                          Commission File No. 33-3353B


                           PARKER & PARSLEY 86-B, LTD.
             (Exact name of Registrant as specified in its charter)


               Texas                                        75-2140235
    (State or other jurisdiction of                      (I.R.S. Employer
    incorporation or organization)                    Identification Number)


303 West Wall, Suite 101, Midland, Texas                       79701
(Address of principal executive offices)                     (Zip code)


       Registrant's Telephone Number, including area code : (915) 683-4768

                                 Not applicable
              (Former name, former address and former fiscal year,
                          if changed since last report)

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 / /

                               Page 1 of 12 pages.
                            Exhibit index on page 11.



<PAGE>



                           PARKER & PARSLEY 86-B, LTD.

                                TABLE OF CONTENTS


                                                                         Page
                                                                         ----
                          Part I. Financial Information

Item 1.    Financial Statements

           Balance Sheets as of June 30, 1997 and
              December 31, 1996   ......................................    3

           Statements of Operations for the three and six
             months ended June 30, 1997 and 1996........................    4

           Statement of Partners' Capital for the six months
             ended June 30, 1997........................................    5

           Statements of Cash Flows for the six months
             ended June 30, 1997 and 1996...............................    6

           Notes to Financial Statements................................    7

Item 2.    Management's Discussion and Analysis of Financial
             Condition and Results of Operations........................    7


                           Part II. Other Information

Item 6.    Exhibits and Reports on Form 8-K.............................   11

           27.   Financial Data Schedule

           Signatures...................................................   12




                                        2

<PAGE>



                           PARKER & PARSLEY 86-B, LTD.
                          (A Texas Limited Partnership)

                          Part I. Financial Information

Item 1.    Financial Statements
                                 BALANCE SHEETS
                                                     June 30,      December 31,
                                                       1997            1996
                                                   -----------     ------------
                                                   (Unaudited)
                      ASSETS

Current assets:
  Cash and cash equivalents, including interest
     bearing deposits of $254,292 at June 30
     and $271,474 at December 31                   $    254,669    $    294,971
  Accounts receivable - oil and gas sales               189,132         269,921
                                                    -----------     -----------
         Total current assets                           443,801         564,892
                                                    -----------     -----------
Oil and gas properties - at cost, based on the
  successful efforts accounting method               12,261,948      12,282,023
Accumulated depletion                                (8,460,308)     (8,298,577)
                                                    -----------     -----------
         Net oil and gas properties                   3,801,640       3,983,446
                                                    -----------     -----------
                                                   $  4,245,441    $  4,548,338
                                                    ===========     ===========
LIABILITIES AND PARTNERS' CAPITAL

Current liabilities:
  Accounts payable - affiliate                     $     41,990    $     91,772

Partners' capital:
  Managing general partner                               40,758          43,289
  Limited partners (17,208 interests)                 4,162,693       4,413,277
                                                    -----------     -----------
                                                      4,203,451       4,456,566
                                                    -----------     -----------
                                                   $  4,245,441    $  4,548,338
                                                    ===========     ===========


   The financial information included as of June 30, 1997 has been prepared by
           management without audit by independent public accountants.

              The accompanying notes are an integral part of these
                             financial statements.

                                        3

<PAGE>



                           PARKER & PARSLEY 86-B, LTD.
                          (A Texas Limited Partnership)

                            STATEMENTS OF OPERATIONS
                                   (Unaudited)



                                 Three months ended          Six months ended
                                       June 30,                  June 30,
                                ----------------------    ----------------------
                                   1997        1996          1997        1996
                                ---------   ----------    ---------   ----------
Revenues:
  Oil and gas                   $ 329,527   $  407,378    $ 726,372   $  803,178
  Interest                          4,381        2,975        8,251        5,385
  Salvage income from equipment
    disposals                         -          5,972          -         12,859
  Gain on sale of assets              -         62,724          -         67,056
  Litigation proceeds                 -        565,756          -        565,756
                                 --------    ---------     --------    ---------
                                  333,908    1,044,805      734,623    1,454,234
                                 --------    ---------     --------    ---------
Costs and expenses:
  Oil and gas production          151,422      194,705      311,885      394,964
  General and administrative        9,886       12,221       21,791       24,095
  Depletion                        81,613       79,117      161,731      171,169
  Abandoned property                  -          6,854          -          8,340
                                 --------    ---------     --------    ---------
                                  242,921      292,897      495,407      598,568
                                 --------    ---------     --------    ---------
Net income                      $  90,987   $  751,908    $ 239,216   $  855,666
                                 ========    =========     ========    =========
Allocation of net income:
  Managing general partner      $     910   $    7,519    $   2,392   $    8,557
                                 ========    =========     ========    =========
  Limited partners              $  90,077   $  744,389    $ 236,824   $  847,109
                                 ========    =========     ========    =========
Net income per limited
  partnership interest          $    5.23   $    43.26    $   13.76   $    49.23
                                 ========    =========     ========    =========
Distributions per limited
  partnership interest          $   11.50   $    43.80    $   28.32   $    53.84
                                 ========    =========     ========    =========

         The financial information included herein has been prepared by
           management without audit by independent public accountants.

              The accompanying notes are an integral part of these
                             financial statements.

                                        4

<PAGE>



                           PARKER & PARSLEY 86-B, LTD.
                          (A Texas Limited Partnership)

                         STATEMENT OF PARTNERS' CAPITAL
                                   (Unaudited)




                                     Managing
                                     general       Limited
                                     partner       partners        Total
                                    ---------     ----------     ----------

Balance at January 1, 1997          $  43,289     $4,413,277     $4,456,566

    Distributions                      (4,923)      (487,408)      (492,331)

    Net income                          2,392        236,824        239,216
                                     --------      ---------      ---------

Balance at June 30, 1997            $  40,758     $4,162,693     $4,203,451
                                     ========      =========      =========






         The financial information included herein has been prepared by
           management without audit by independent public accountants.

              The accompanying notes are an integral part of these
                             financial statements.

                                        5

<PAGE>



                           PARKER & PARSLEY 86-B, LTD.
                          (A Texas Limited Partnership)

                            STATEMENTS OF CASH FLOWS
                                   (Unaudited)

                                                           Six months ended
                                                               June 30,
                                                        -----------------------
                                                           1997         1996
                                                        ----------   ----------
Cash flows from operating activities:
   Net income                                           $  239,216   $  855,666
   Adjustments to reconcile net income to net
     cash provided by operating activities:
        Depletion                                          161,731      171,169
        Salvage income from equipment disposals                -        (12,859)
        Gain on sale of assets                                 -        (67,056)
   Changes in assets and liabilities:
     (Increase) decrease in accounts receivable             80,789      (26,038)
     Increase (decrease) in accounts payable               (49,782)      52,487
                                                         ---------    ---------
           Net cash provided by operating activities       431,954      973,369
                                                         ---------    ---------
Cash flows from investing activities:
   Disposals of oil and gas properties                      20,075       12,078
   Proceeds from salvage income on equipment disposals         -         12,859
   Proceeds from sale of assets                                -        217,857
                                                         ---------    ---------
           Net cash provided by investing activities        20,075      242,794
                                                         ---------    ---------
Cash flows from financing activities:
   Cash distributions to partners                         (492,331)    (935,897)
                                                         ---------    ---------
Net increase (decrease) in cash and cash equivalents       (40,302)     280,266
Cash and cash equivalents at beginning of period           294,971      151,763
                                                         ---------    ---------
Cash and cash equivalents at end of period              $  254,669   $  432,029
                                                         =========    =========


         The financial information included herein has been prepared by
           management without audit by independent public accountants.

              The accompanying notes are an integral part of these
                             financial statements.

                                        6

<PAGE>



                           PARKER & PARSLEY 86-B, LTD.
                          (A Texas Limited Partnership)

                          NOTES TO FINANCIAL STATEMENTS
                                  June 30, 1997
                                   (Unaudited)


Note 1.     Basis of presentation

In the opinion of  management,  the unaudited  financial  statements of Parker &
Parsley 86-B, Ltd. (the "Partnership") as of June 30, 1997 and for the three and
six months  ended June 30, 1997 and 1996  include all  adjustments  and accruals
consisting only of normal recurring accrual  adjustments which are necessary for
a fair presentation of the results for the interim period. These interim results
are not necessarily indicative of results for a full year.

Certain  information  and  footnote  disclosure  normally  included in financial
statements prepared in accordance with generally accepted accounting  principles
have been  condensed  or  omitted  in this Form 10-Q  pursuant  to the rules and
regulations of the Securities and Exchange Commission.  The financial statements
should  be read in  conjunction  with the  financial  statements  and the  notes
thereto  contained in the  Partnership's  Report on Form 10-K for the year ended
December 31, 1996, as filed with the Securities and Exchange Commission,  a copy
of  which is available upon  request by writing to Rich Dealy,  Controller,  303
West Wall, Suite 101, Midland, Texas 79701.

Item 2.     Management's Discussion and Analysis of Financial Condition
              and Results of Operations (1)

Results of Operations

Six months ended June 30, 1997 compared with six months ended
  June 30, 1996

Revenues:

The Partnership's  oil and gas revenues  decreased 10% to $726,372 from $803,178
for the six months  ended June 30, 1997 as compared to the six months ended June
30, 1996.  The decrease in revenues  resulted  from a 16% decrease in mcf of gas
produced  and sold and an 11%  decrease  in  barrels of oil  produced  and sold,
offset by a 12%  increase in the  average  price  received  per mcf of gas and a
slight  increase in the average  price  received  per barrel of oil. For the six
months ended June 30, 1997,  24,727  barrels of oil were sold compared to 27,909
for the same period in 1996, a decrease of 3,182 barrels. Of the decrease, 1,792
barrels,  or 6%, was  attributable to the sale of eight oil and gas wells during
1996.  The remaining  decrease of 5%, or 1,390  barrels,  was due to the decline
characteristics of the Partnership's oil and gas properties.  For the six months
ended June 30,  1997,  87,446 mcf of gas were sold  compared  to 104,133 for the

                                        7

<PAGE>



same period in 1996,  a decrease of 16,687 mcf. Of the  decrease,  7,168 mcf, or
7%, was  attributable  to the sale of eight oil and gas wells during  1996.  The
remaining  decrease of 9,519 mcf, or 9%, was due to the decline  characteristics
of the Partnership's oil and gas properties.  Because of these  characteristics,
management  expects a certain amount of decline in production to continue in the
future  until the  Partnership's  economically  recoverable  reserves  are fully
depleted.

The average price received per barrel of oil increased  slightly from $20.27 for
the six months ended June 30, 1996 to $20.33 for the same period in 1997,  while
the  average  price  received  per mcf of gas  increased  from $2.28 for the six
months  ended  June 30,  1996 to $2.56 for the same  period in 1997.  The market
price  for oil and gas has  been  extremely  volatile  in the past  decade,  and
management expects a certain amount of volatility to continue in the foreseeable
future.  The Partnership may therefore sell its future oil and gas production at
average  prices lower or higher than that  received  during the six months ended
June 30, 1997.

Salvage income of $12,859 was received during the six months ended June 30, 1996
from the disposal of oil and gas equipment on one fully depleted well.

For the six months ended June 30,  1996,  the  Partnership  recognized a gain on
sale of assets of $67,056. Of this amount,  $62,724 was from the sale of six oil
and gas wells and four saltwater  disposal wells to Costilla  Energy,  L.L.C. An
additional  unrelated  sale of four fully depleted oil and gas wells resulted in
proceeds received of $4,332.

On April 29, 1996, Southmark  Corporation,  the managing general partner and the
Partnership entered into a final $7.4 million settlement  agreement with Jack N.
Price resolving all outstanding litigation between the parties. As a result, all
of the pending lawsuits and judgments have been dismissed,  the supersedeas bond
released,  and the Reserve  released as  collateral.  On June 28,  1996, a final
distribution was made to the working interest owners of $565,756, which included
$547,002, or $31.79 per limited partnership interest, to the Partnership and its
partners.

Costs and Expenses:

Total costs and expenses decreased to $495,407 for the six months ended June 30,
1997 as  compared  to  $598,568  for the same  period  in 1996,  a  decrease  of
$103,161,  or 17%.  This  decrease  was due to  declines  in  production  costs,
depletion,  abandoned  property  costs and general and  administrative  expenses
("G&A").

Production  costs  were  $311,885  for the six months  ended  June 30,  1997 and
$394,964 for the same period in 1996 resulting in a $83,079 decrease, or 21%. Of
the decrease,  $33,834, or 9%, was attributable to the sale of eight oil and gas
wells and four saltwater  disposal wells during 1996. The remaining  decrease of
$49,245, or 12%, was due to a decline in well repair and maintenance costs.

                                        8

<PAGE>



G&A's  components are independent  accounting and engineering  fees and managing
general  partner  personnel  and  operating  costs.   During  this  period,  G&A
decreased,  in  aggregate,  10%,  from $24,095 for the six months ended June 30,
1996 to $21,791 for the same period in 1997. The  Partnership  agreement  limits
G&A to 3% of gross oil and gas revenues.

Depletion  was  $161,731  for the six months  ended June 30,  1997  compared  to
$171,169 for the same period in 1996.  This  represented a decrease in depletion
of $9,438,  or 6%, primarily  attributable to the sale of properties during 1996
and a  decline  in oil  production  of 1,390  barrels  on the  remaining  active
properties for the six months ended June 30, 1997 from the same period in 1996.

Abandoned  property  costs of $8,340  were  incurred  on one well during the six
months ended June 30, 1996.

Three months ended June 30, 1997 compared with three months ended
   June 30, 1996

Revenues:

The Partnership's  oil and gas revenues  decreased 19% to $329,527 from $407,378
for the three  months  ended June 30, 1997 as compared to the three months ended
June 30,  1996.  The  decrease in revenues  resulted  from a 14% decrease in the
average  price  received per barrel of oil, a 12% decrease in the average  price
received per mcf of gas, a 9% decrease in mcf of gas produced and sold, and a 6%
decrease in barrels of oil  produced  and sold.  For the three months ended June
30, 1997, 12,263 barrels of oil were sold compared to 13,083 for the same period
in 1996, a decrease of 820 barrels.  Of the  decrease,  390 barrels,  or 3%, was
attributable to the sale of eight oil and gas wells. The additional  decrease of
3%, or 430 barrels, was due to the decline  characteristics of the Partnership's
oil and gas properties.  For the three months ended June 30, 1997, 46,843 mcf of
gas were sold  compared  to 51,266 for the same  period in 1996,  a decrease  of
4,423 mcf. Of the decrease,  1,712 mcf, or 4%, was  attributable  to the sale of
eight oil and gas wells. The additional decrease of 2,711 mcf, or 5%, was due to
the decline characteristics of the Partnership's oil and gas properties.

The average price received per barrel of oil decreased $2.96 from $21.71 for the
three  months  ended June 30, 1996 to $18.75 for the same period in 1997,  while
the average price  received per mcf of gas decreased from $2.41 during the three
months ended June 30, 1996 to $2.13 in 1997.

Salvage  income of $5,972 was  received  during the three  months ended June 30,
1996 from the disposal of oil and gas equipment on one fully depleted well.

A gain of  $62,724  from the sale of six oil and gas  wells  and four  saltwater
disposal wells to Costilla Energy, L.L.C. was recognized during the three months
ended June 30, 1996.

On April 29, 1996, Southmark  Corporation,  the managing general partner and the
Partnership entered into a final $7.4 million settlement  agreement with Jack N.
Price resolving all outstanding litigation between the parties. As a result, all

                                        9

<PAGE>



of the pending lawsuits and judgments have been dismissed,  the supersedeas bond
released,  and the Reserve  released as  collateral.  On June 28,  1996, a final
distribution was made to the working interest owners of $565,756, which included
$547,002, or $31.79 per limited partnership interest, to the Partnership and its
partners.

Costs and Expenses:

Total costs and  expenses  decreased to $242,921 for the three months ended June
30,  1997 as compared  to  $292,897  for the same period in 1996,  a decrease of
$49,976,  or  17%.  This  decrease  was due to  declines  in  production  costs,
abandoned property costs and G&A, offset by an increase in depletion.

Production  costs were  $151,422  for the three  months  ended June 30, 1997 and
$194,705 for the same period in 1996 resulting in a $43,283 decrease, or 22%. Of
the decrease,  $14,326, or 7%, was attributable to the sale of eight oil and gas
wells and four saltwater  disposal wells during 1996. The remaining  decrease of
$28,957, or 15%, was due to a decline in well repair and maintenance costs.

G&A's  components are independent  accounting and engineering  fees and managing
general  partner  personnel  and  operating  costs.   During  this  period,  G&A
decreased,  in  aggregate,  19% from $12,221 for the three months ended June 30,
1996 to $9,886 for the same period in 1997.

Depletion  was $81,613  for the three  months  ended June 30,  1997  compared to
$79,117 for the same period in 1996.  This  represented an increase in depletion
of $2,496, or 3%, primarily  attributable to a reduction in oil and gas reserves
as a result of lower commodity prices.

Abandoned  property costs of $6,854 were incurred  during the three months ended
June 30, 1996.

Liquidity and Capital Resources

Net Cash Provided by Operating Activities

Net cash  provided by operating  activities  decreased  $541,415  during the six
months  ended  June 30,  1997 from the same  period  ended June 30,  1996.  This
decrease  was  primarily  due to the  receipt of  proceeds  from the  litigation
settlement during 1996 as discussed in Item 2, offset by a decline in production
costs paid and an increase in oil and gas sale receipts.

Net Cash Provided by Investing Activities

The Partnership's investing activities during the six months ended June 30, 1997
and 1996  were  related  to the  disposal  of oil and gas  equipment  on  active
properties.

Proceeds from salvage income of $12,859 was received during the six months ended
June 30, 1996 from the sale of oil and gas equipment on one fully depleted well.

                                       10

<PAGE>



Proceeds of $217,857  were  received  during the six months  ended June 30, 1996
from the sale of ten oil and gas wells.

Net Cash Used in Financing Activities

Cash  was   sufficient  for  the  six  months  ended  June  30,  1997  to  cover
distributions to the partners of $492,331 of which $4,923 was distributed to the
managing  general  partner and  $487,408 to the limited  partners.  For the same
period  ended  June 30,  1996,  cash was  sufficient  for  distributions  to the
partners of $935,897 of which $9,359 was  distributed  to the  managing  general
partner and $926,538 to the limited partners. Cash distributions to the partners
of  $935,897  for the six months  ended  June 30,  1996  included  $5,525 to the
managing  general  partner and $547,002 to the limited  partners  resulting from
proceeds  received in the litigation  settlement as discussed in Item 2. At June
30, 1996, a receivable of $13,229 from the  settlement was  outstanding  pending
revision of division orders after pay-out provisions on one well.

It is expected  that future net cash  provided by operating  activities  will be
sufficient for any capital expenditures and any distributions. As the production
from the properties declines, distributions are also expected to decrease.

- --------------

(1)    "Item 2. Management's  Discussion and Analysis of Financial Condition and
       Results of Operations"  contains forward looking  statements that involve
       risks and uncertainties. Accordingly, no assurances can be given that the
       actual  events and  results  will not be  materially  different  than the
       anticipated results described in the forward looking statements.



                           Part II. Other Information

Item 6.     Exhibits and Reports on Form 8-K

(a)    Exhibits

       27.   Financial Data Schedule

(b)    Reports on Form 8-K - none


                                       11

<PAGE>


                           PARKER & PARSLEY 86-B, LTD.
                          (A Texas Limited Partnership)



                               S I G N A T U R E S



      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.


                                       PARKER & PARSLEY 86-B, LTD.

                                 By:   Parker & Parsley Development L.P.,
                                        Managing General Partner
                                       By:  Parker & Parsley Petroleum USA, Inc.
                                             ("PPUSA"), General Partner




Dated:  August 11, 1997          By:    /s/ Rich Dealy
                                       -------------------------------
                                       Rich Dealy, Controller of PPUSA



                                       12

<PAGE>




<TABLE> <S> <C>

<ARTICLE> 5
<CIK> 0000789790
<NAME> 86B.
<MULTIPLIER> 1
       
<S>                             <C>
<PERIOD-TYPE>                   6-MOS
<FISCAL-YEAR-END>                          DEC-31-1997
<PERIOD-END>                               JUN-30-1997
<CASH>                                         254,669
<SECURITIES>                                         0
<RECEIVABLES>                                  189,132
<ALLOWANCES>                                         0
<INVENTORY>                                          0
<CURRENT-ASSETS>                               443,801
<PP&E>                                      12,261,948
<DEPRECIATION>                               8,460,308
<TOTAL-ASSETS>                               4,245,441
<CURRENT-LIABILITIES>                           41,990
<BONDS>                                              0
                                0
                                          0
<COMMON>                                             0
<OTHER-SE>                                   4,203,451
<TOTAL-LIABILITY-AND-EQUITY>                 4,245,441
<SALES>                                        726,372
<TOTAL-REVENUES>                               734,623
<CGS>                                                0
<TOTAL-COSTS>                                  495,407
<OTHER-EXPENSES>                                     0
<LOSS-PROVISION>                                     0
<INTEREST-EXPENSE>                                   0
<INCOME-PRETAX>                                239,216
<INCOME-TAX>                                         0
<INCOME-CONTINUING>                            239,216
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                                   239,216
<EPS-PRIMARY>                                    13.76
<EPS-DILUTED>                                        0
        

</TABLE>


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