Page 15 of 14
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
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 number 0-15411
Southwest Royalties, Inc. Income Fund VI
(Exact name of registrant as specified
in its limited partnership agreement)
Tennessee 75-2127812
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
407 N. Big Spring, Suite 300
_________Midland, Texas 79701_________
(Address of principal executive offices)
________(915) 686-9927________
(Registrant's telephone number,
including area code)
Indicate by check mark whether 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 _____
The total number of pages contained in this report is 15.
<PAGE>
PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements
The unaudited condensed financial statements included herein have been
prepared by the Registrant (herein also referred to as the "Partnership")
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01
of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all
adjustments necessary for a fair presentation have been included and are of
a normal recurring nature. The financial statements should be read in
conjunction with the audited financial statements and the note thereto for
the year ended December 31, 1997 which are found in the Registrant's Form
10-K Report for 1997 filed with the Securities and Exchange Commission.
The December 31, 1997 balance sheet included herein has been taken from the
Registrant's 1997 Form 10-K Report. Operating results for the three and
nine month periods ended September 30, 1998 are not necessarily indicative
of the results that may be expected for the full year.
<PAGE>
Southwest Royalties, Inc. Income Fund VI
Balance Sheets
September 30, December 31,
1998 1997
------------- ------------
(unaudited)
Assets
Current assets
Cash and cash equivalents $ 67,438 40,719
Receivable from Managing General Partner 90,645 251,738
Other receivable - 20,000
--------- ---------
Total current assets 158,083 312,457
--------- ---------
Oil and gas properties - using the
full cost method of accounting 8,482,231 8,505,071
Less accumulated depreciation,
depletion and amortization 6,321,000 6,176,000
--------- ---------
Net oil and gas properties 2,161,231 2,329,071
--------- ---------
$2,319,314 2,641,528
========= =========
Liabilities and Partners' Equity
Current liability - Distribution payable $ 416 203
--------- ---------
Partners' equity
General partners (622,961) (592,733)
Limited partners 2,941,859 3,234,058
--------- ---------
Total partners' equity 2,318,898 2,641,325
--------- ---------
$2,319,314 2,641,528
========= =========
<PAGE>
Southwest Royalties, Inc. Income Fund VI
Statements of Operations
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
Revenues
Income from net profits
interests $ 82,981 221,161 311,647 659,703
Interest 1,099 757 3,807 2,717
------- ------- ------- -------
84,080 221,918 315,454 662,420
------- ------- ------- -------
Expenses
General and administrative 42,225 36,657 130,729 121,734
Depreciation, depletion and
amortization 40,000 45,000 145,000 144,000
------- ------- ------- -------
82,225 81,657 275,729 265,734
------- ------- ------- -------
Net income $ 1,855 140,261 39,725 396,686
======= ======= ======= =======
Net income allocated to:
Managing General Partner $ 167 12,623 3,575 35,702
======= ======= ========= =======
General Partner $ 19 1,404 397 3,967
======= ======= ========= =======
Limited Partners $ 1,669 126,234 35,753 357,017
======= ======= ========= =======
Per limited partner unit $ .08 6.31 1.79 17.85
======= ======= ========= =======
<PAGE>
Southwest Royalties, Inc. Income Fund VI
Statements of Cash Flows
(unaudited)
Nine Months Ended
September 30,
1998 1997
---- ----
Cash flows from operating activities
Cash received from income from net
profits interests $ 419,597 812,611
Cash paid to suppliers (77,586) (121,734)
Interest received 3,807 2,717
------- -------
Net cash provided by operating activities 345,818 693,594
------- -------
Cash flows provided by investing activities
Cash received from sale of oil and gas
property interest 42,840 75
------- -------
Cash flows used in financing activities
Distributions to partners (361,939) (699,766)
------- -------
Net increase (decrease) in cash and cash
equivalents 26,719 (6,097)
Beginning of period 40,719 65,438
------- -------
End of period $ 67,438 59,341
======= =======
(continued)
<PAGE>
Southwest Royalties, Inc. Income Fund VI
Statements of Cash Flows, continued
(unaudited)
Nine Months Ended
September 30,
1998 1997
---- ----
Reconciliation of net income to net cash
provided by operating activities
Net income $ 39,725 396,686
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation, depletion and amortization 145,000 144,000
Decrease in receivables 107,950 152,908
Increase in payables 53,143 -
------- -------
Net cash provided by operating activities $ 345,818 693,594
======= =======
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
Southwest Royalties, Inc. Income Fund VI was organized as a Tennessee
limited partnership on December 4, 1986. The offering of such limited
partnership interests began August 25, 1986, minimum capital requirements
were met October 3, 1986 and concluded January 29, 1987, with total limited
partner contributions of $10,000,000.
The Partnership was formed to acquire royalty and net profits interests in
producing oil and gas properties, to produce and market crude oil and
natural gas produced from such properties, and to distribute the net
proceeds from operations to the limited and general partners. Net revenues
from producing oil and gas properties will not be reinvested in other
revenue producing assets except to the extent that production facilities
and wells are improved or reworked or where methods are employed to improve
or enable more efficient recovery of oil and gas reserves.
Increases or decreases in Partnership revenues and, therefore,
distributions to partners will depend primarily on changes in the prices
received for production, changes in volumes of production sold, lease
operating expenses, enhanced recovery projects, offset drilling activities
pursuant to farm-out arrangements, sales of properties, and the depletion
of wells. Since wells deplete over time, production can generally be
expected to decline from year to year.
Well operating costs and general and administrative costs usually decrease
with production declines; however, these costs may not decrease
proportionately. Net income available for distribution to the partners is
therefore expected to fluctuate in later years based on these factors.
Based on current conditions, management does not anticipate performing
workovers during the next year. The Partnership could possibly experience
a normal decline.
Oil and Gas Properties
Oil and gas properties are accounted for at cost under the full-cost
method. Under this method, all productive and nonproductive costs incurred
in connection with the acquisition, exploration and development of oil and
gas reserves are capitalized. Gain or loss on the sale of oil and gas
properties is not recognized unless significant oil and gas reserves are
involved.
The Partnership's policy for depreciation, depletion and amortization of
oil and gas properties is computed under the units of revenue method.
Under the units of revenue method, depreciation, depletion and amortization
is computed on the basis of current gross revenues from production in
relation to future gross revenues, based on current prices, from estimated
production of proved oil and gas reserves.
Should the net capitalized costs exceed the estimated present value of oil
and gas reserves, discounted at 10%, such excess costs would be charged to
current expense. As of September 30, 1998, the net capitalized costs did
not exceed the estimated present value of oil and gas reserves. A
continuation of the oil price environment experienced during the first
three quarters of 1998 will have an adverse affect on the Company's
revenues and operating cash flow. Also, further declines in oil prices
could result in additional decreases in the carrying value of the Company's
oil and gas properties.
<PAGE>
Results of Operations
A. General Comparison of the Quarters Ended September 30, 1998 and 1997
The following table provides certain information regarding performance
factors for the quarters ended September 30, 1998 and 1997:
Three Months
Ended Percentage
September 30, Increase
1998 1997 (Decrease)
---- ---- ---------
Average price per barrel of oil $ 12.10 17.46 (31%)
Average price per mcf of gas $ 1.80 2.27 (21%)
Oil production in barrels 10,950 12,200 (10%)
Gas production in mcf 120,700 118,600 2%
Income from net profits interests $ 82,981 221,161 (62%)
Partnership distributions $ 65,000 195,000 (67%)
Limited partner distributions $ 58,500 175,500 (67%)
Per unit distribution to limited partners $ 2.93 8.78 (67%)
Number of limited partner units 20,000 20,000
Revenues
The Partnership's income from net profits interests decreased to $82,981
from $221,161 for the quarters ended September 30, 1998 and 1997,
respectively, a decrease of 62%. The principal factors affecting the
comparison of the quarters ended September 30, 1998 and 1997 are as
follows:
1. The average price for a barrel of oil received by the Partnership
decreased during the quarter ended September 30, 1998 as compared to
the quarter ended September 30, 1997 by 31%, or $5.36 per barrel,
resulting in a decrease of approximately $65,400 in income from net
profits interests. Oil sales represented 38% of total oil and gas
sales during the quarter ended September 30, 1998 as compared to 44%
during the quarter ended September 30, 1997.
The average price for an mcf of gas received by the Partnership
decreased during the same period by 21%, or $.47 per mcf, resulting in
a decrease of approximately $55,700 in income from net profits
interests.
The total decrease in income from net profits interests due to the
change in prices received from oil and gas production is approximately
$121,100. The market price for oil and gas has been extremely volatile
over the past decade, and management expects a certain amount of
volatility to continue in the foreseeable future.
<PAGE>
2. Oil production decreased approximately 1,250 barrels or 10% during the
quarter ended September 30, 1998 as compared to the quarter ended
September 30, 1997, resulting in a decrease of approximately $15,100 in
income from net profits interests.
Gas production increased approximately 2,100 mcf or 2% during the same
period, resulting in an increase of approximately $3,780 in income from
net profits interests.
The net total decrease in income from net profits interests due to the
change in production is approximately $11,320.
3. Lease operating costs and production taxes were 2% higher, or
approximately $6,400 more during the quarter ended September 30, 1998
as compared to the quarter ended September 30, 1997.
Costs and Expenses
Total costs and expenses increased to $82,225 from $81,657 for the quarters
ended September 30, 1998 and 1997, respectively, an increase of 1%. The
increase is the result of higher general and administrative expense,
partially offset by a decrease in depletion expense.
1. General and administrative costs consists of independent accounting and
engineering fees, computer services, postage, and Managing General
Partner personnel costs. General and administrative costs increased
15% or approximately $5,600 during the quarter ended September 30, 1998
as compared to the quarter ended September 30, 1997. The increase in
general and administrative costs are due largely to higher accounting
fees. The 10-Q's are now required to be reviewed based on new
accounting pronouncements.
2. Depletion expense decreased to $40,000 for the quarter ended September
30, 1998 from $45,000 for the same period in 1997. This represents a
decrease of 11%. Depletion is calculated using the units of revenue
method of amortization based on a percentage of current period gross
revenues to total future gross oil and gas revenues, as estimated by
the Partnership's independent petroleum consultants.
<PAGE>
B. General Comparison of the Nine Month Periods Ended September 30, 1998
and 1997
The following table provides certain information regarding performance
factors for the nine month periods ended September 30, 1998 and 1997:
Nine Months
Ended Percentage
September 30, Increase
1998 1997 (Decrease)
---- ---- ---------
Average price per barrel of oil $ 12.77 18.99 (33%)
Average price per mcf of gas $ 1.93 2.34 (18%)
Oil production in barrels 32,250 37,300 (14%)
Gas production in mcf 350,900 355,900 (1%)
Income from net profits interests $ 311,647 659,703 (53%)
Partnership distributions $ 362,153 700,000 (48%)
Limited partner distributions $ 327,953 630,000 (48%)
Per unit distribution to limited partners $ 16.40 31.50 (48%)
Number of limited partner units $ 20,000 20,000
Revenues
The Partnership's income from net profits interests decreased to $311,647
from $659,703 for the nine months ended September 30, 1998 and 1997,
respectively, a decrease of 53%. The principal factors affecting the
comparison of the nine months ended September 30, 1998 and 1997 are as
follows:
1. The average price for a barrel of oil received by the Partnership
decreased during the nine months ended September 30, 1998 as compared
to the nine months ended September 30, 1997 by 33%, or $6.22 per
barrel, resulting in a decrease of approximately $232,000 in income
from net profits interests. Oil sales represented 38% of total oil and
gas sales during the nine months ended September 30, 1998 as compared
to 46% during the nine months ended September 30, 1997.
The average price for an mcf of gas received by the Partnership
decreased during the same period by 18%, or $.41 per mcf, resulting in
a decrease of approximately $145,900 in income from net profits
interests.
The total decrease in income from net profits interests due to the
change in prices received from oil and gas production is approximately
$377,900. The market price for oil and gas has been extremely volatile
over the past decade, and management expects a certain amount of
volatility to continue in the foreseeable future.
<PAGE>
2. Oil production decreased approximately 5,050 barrels or 14% during the
nine months ended September 30, 1998 as compared to the nine months
ended September 30, 1997, resulting in a decrease of approximately
$64,500 in income from net profits interests.
Gas production decreased approximately 5,000 mcf or 1% during the same
period, resulting in a decrease of approximately $9,600 in income from
net profits interests.
The total decrease in income from net profits interests due to the
change in production is approximately $74,100.
3. Lease operating costs and production taxes were 12% lower, or
approximately $105,100 less during the nine months ended September 30,
1998 as compared to the nine months ended September 30, 1997.
Costs and Expenses
Total costs and expenses increased to $275,729 from $265,734 for the nine
months ended September 30, 1998 and 1997, respectively, an increase of 4%.
The increase is the result of higher depletion expense and general and
administrative costs.
1. General and administrative costs consists of independent accounting and
engineering fees, computer services, postage, and Managing General
Partner personnel costs. General and administrative costs increased 7%
or approximately $9,000 during the nine months ended September 30, 1998
as compared to the nine months ended September 30, 1997.
2. Depletion expense increased to $145,000 for the nine months ended
September 30, 1998 from $144,000 for the same period in 1997. This
represents an increase of 1%. Depletion is calculated using the units
of revenue method of amortization based on a percentage of current
period gross revenues to total future gross oil and gas revenues, as
estimated by the Partnership's independent petroleum consultants.
<PAGE>
Liquidity and Capital Resources
The primary source of cash is from operations, the receipt of income from
interests in oil and gas properties. The Partnership knows of no material
change, nor does it anticipate any such change.
Cash flows provided by operating activities were approximately $345,800 in
the nine months ended September 30, 1998 as compared to approximately
$693,600 in the nine months ended September 30, 1997. The primary source
of the 1998 cash flow from operating activities was profitable operations.
Cash flows provided by investing activities were approximately $42,800 in
the nine months ended September 30, 1998 as compared to approximately $100
in the nine months ended September 30, 1997. The principle source of the
1998 cash flow from investing activities was the change in oil and gas
properties.
Cash flows used in financing activities were approximately $361,900 in the
nine months ended September 30, 1998 as compared to approximately $699,800
in the nine months ended September 30, 1997. The only use in financing
activities was the distributions to partners.
Total distributions during the nine months ended September 30, 1998 were
$362,153 of which $327,953 was distributed to the limited partners and
$34,200 to the general partners. The per unit distribution to limited
partners during the nine months ended September 30, 1998 was $16.40. Total
distributions during the nine months ended September 30, 1997 were $700,000
of which $630,000 was distributed to the limited partners and $70,000 to
the general partners. The per unit distribution to limited partners during
the nine months ended September 30, 1997 was $31.50.
The sources for the 1998 distributions of $362,153 were oil and gas
operations of approximately $345,800 and the change in oil and gas
properties of approximately $42,800, result in excess cash for
contingencies or subsequent distributions. The sources for the 1997
distributions of $700,000 were oil and gas operations of approximately
$693,600 and the change in oil and gas properties of approximately $100,
with the balance from available cash on hand at the beginning of the
period.
Since inception of the Partnership, cumulative monthly cash distributions
of $14,598,651 have been made to the partners. As of September 30, 1998,
$13,153,974 or $657.70 per limited partner unit has been distributed to the
limited partners, representing a 132% return of the capital contributed.
As of September 30, 1998, the Partnership had approximately $157,667 in
working capital. The Managing General Partner knows of no unusual
contractual commitments and believes the revenues generated from operations
are adequate to meet the needs of the Partnership.
<PAGE>
Information Systems for the Year 2000
The Partnership relies on the Managing General Partner for their data
processing requirements. This includes use of a program designed and
implemented by Midland Southwest Software, the Managing General Partner's
software subsidiary. Midland Southwest Software currently has a year 2000
plan in effect. They have surveyed existing programs and hardware and
estimate a compliance date of early 1999. Determination of the total cost
in connection with the year 2000 compliance issue is difficult to determine
due to the fact that they are in the process of developing their new 1998
version of marketed oil and gas software, which has, from inception,
included year 2000 compliance. Third party software programs utilized by
the Managing General Partner are either in compliance or are not affected
by the year 2000, with the exception of the payroll service, which is
currently modifying its system to accurately handle the Year 2000 issue.
The Managing General Partner has not completed its evaluation of its
vendors or suppliers systems to determine the effect, if any, the non-
compliance of such systems would have on the operations of the Managing
General Partner. Plans are under way to perform an audit in late 1998 or
early 1999 to determine the effect of non-compliance of its vendors and
suppliers on the Managing General Partner and thus formulate a contingency
plan.
A potential source of risk includes, but is not limited to, the inability
of principal purchasers and suppliers to be year 2000 compliant, which
could have a material effect on the Managing General Partner's production,
cash flow and overall financial condition, notwithstanding the Managing
General Partner's actions to prepare its own information systems. The
Managing General Partner currently does not have a contingency plan in
place to cover any unforeseen problems encountered that relate to the year
2000, but intends to produce one before the end of the fiscal year.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matter to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a)Exhibits:
27 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter for
which this report is filed.
<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.
Southwest Royalties, Inc. Income Fund VI
a Tennessee limited partnership
By: Southwest Royalties, Inc.
Managing General Partner
By: /s/ Bill E. Coggin
------------------------------
Bill E. Coggin, Vice President
and Chief Financial Officer
Date: November 15, 1998
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Balance Sheet at September 30, 1998 (Unaudited) and the Statement of
Operations for the Nine Months Ended September 30, 1998 (Unaudited) and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 67,438
<SECURITIES> 0
<RECEIVABLES> 90,645
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 158,083
<PP&E> 8,482,231
<DEPRECIATION> 6,321,000
<TOTAL-ASSETS> 2,319,314
<CURRENT-LIABILITIES> 416
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 2,318,898
<TOTAL-LIABILITY-AND-EQUITY> 2,319,314
<SALES> 311,647
<TOTAL-REVENUES> 315,454
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 275,729
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 39,725
<INCOME-TAX> 0
<INCOME-CONTINUING> 39,725
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 39,725
<EPS-PRIMARY> 1.79
<EPS-DILUTED> 1.79
</TABLE>
