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, 1997 COMMISSION FILE NO. 0-20998
KELLEY PARTNERS 1992 DEVELOPMENT
DRILLING PROGRAM
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TEXAS 76-0373428
(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 PARTNERS 1992 DEVELOPMENT DRILLING PROGRAM
INDEX
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<CAPTION>
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PART I. FINANCIAL INFORMATION ................................................................ PAGE
----
Balance Sheets as of September 30, 1997 (unaudited) and December 31, 1996.................. 2
Statements of Income for the three months and nine months ended
September 30, 1997 and 1996 (unaudited) ................................................. 3
Statements of Cash Flows for the nine months ended September 30, 1997 and 1996 (unaudited). 4
Notes to Financial Statements (unaudited) ................................................. 5
Management's Discussion and Analysis of Financial Condition and Results of Operations...... 6
PART II. OTHER INFORMATION ................................................................... 8
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1
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
KELLEY PARTNERS 1992 DEVELOPMENT DRILLING PROGRAM
BALANCE SHEETS
(IN THOUSANDS)
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<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS:
Cash and cash equivalents ................................ $ -- $ 22
Accounts receivable - trade .............................. 35 126
Accounts receivable - affiliates ......................... 535 1,577
-------- --------
Total current assets ..................................... 570 1,725
-------- --------
Oil and gas properties, successful efforts method:
Properties subject to amortization ...................... 44,302 44,333
Less: Accumulated depreciation, depletion & amortization (40,786) (40,346)
-------- --------
Total oil and gas properties ............................. 3,516 3,987
-------- --------
Total assets ............................................ $ 4,086 $ 5,712
======== ========
LIABILITIES:
Accounts payable and accrued expenses .................... $ 122 $ 143
Long term note payable - affiliate ....................... 3,293 5,400
-------- --------
Total liabilities ........................................ 3,415 5,543
-------- --------
PARTNERS' EQUITY:
LP Unitholders' equity (deficit) ......................... 40 (9)
GP Unitholders' equity ................................... 604 171
Managing and special general partners' equity ............ 27 7
-------- --------
Total partners' equity ................................... 671 169
-------- --------
Total liabilities and partners' equity .................. $ 4,086 $ 5,712
======== ========
</TABLE>
See Notes to Financial Statements.
2
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KELLEY PARTNERS 1992 DEVELOPMENT DRILLING PROGRAM
STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER UNIT DATA)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
1997 1996 1997 1996
--------- ------- -------- -------
REVENUES:
Oil and gas sales.......................$ 540 $1,199 $2,045 $3,721
Interest income......................... -- -- -- 3
------ ------ ------ ------
Total revenues.......................... 540 1,199 2,045 3,724
------ ------ ------ ------
COSTS AND EXPENSES:
Lease operating expenses................ 48 129 365 465
Severance taxes......................... 25 52 88 142
Exploration expenses.................... -- (2) -- (4)
General and administrative expenses..... 119 64 357 259
Interest expense........................ 83 203 293 608
Depreciation, depletion and amortization 111 345 440 1,084
------ ------ ------ ------
Total expenses.......................... 386 791 1,543 2,554
------ ------ ------ ------
Net income................................$ 154 $ 408 $ 502 $1,170
====== ====== ====== ======
Net income allocable to LP Unitholders
and GP Unitholders......................$ 148 $ 392 $ 482 $1,124
====== ====== ====== ======
Net income allocable to managing and
special general partners................$ 6 $ 16 $ 20 $ 46
====== ====== ====== ======
Net income per LP and GP Unit.............$ .01 $ .02 $ .03 $ .07
====== ====== ====== ======
Average LP and GP Units outstanding.......16,033 16,033 16,033 16,033
====== ====== ====== ======
See Notes to Financial Statements.
3
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KELLEY PARTNERS 1992 DEVELOPMENT DRILLING PROGRAM
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
1997 1996
------- -----
OPERATING ACTIVITIES:
Net income................................................$ 502 $1,170
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization................ 440 1,084
Exploration expenses.................................... -- (4)
Changes in operating assets and liabilities:
Decrease in accounts receivable......................... 1,133 707
Decrease in prepaid and other current assets............ -- 7
Decrease in accounts payable and accrued expenses....... (21) (2,808)
------ ------
Net cash provided by operating activities................. 2,054 156
------ ------
INVESTING ACTIVITIES:
Capital expenditures...................................... (40) (226)
Proceeds from sale of assets.............................. 71 99
------ ------
Net cash provided by (used in) investing activities....... 31 (127)
------ ------
FINANCING ACTIVITIES:
Principal payments on long-term borrowings................(2,107) --
------ ------
Net cash used in financing activities.....................(2,107) --
------ ------
Increase (decrease) in cash and cash equivalents............ (22) 29
Cash and cash equivalents, beginning of period.............. 22 14
------ ------
Cash and cash equivalents, end of period....................$ -- $ 43
====== ======
See Notes to Financial Statements.
4
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KELLEY PARTNERS 1992 DEVELOPMENT DRILLING PROGRAM
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
GENERAL. The accompanying unaudited interim financial statements of Kelley
Partners 1992 Development Drilling Program (the "Partnership") have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission in accordance with generally accepted accounting principles for
interim financial information. These financial statements reflect all
adjustments (consisting of normal recurring adjustments) necessary for a fair
statement of the results for the interim periods presented. The results of
operations for the periods ended September 30, 1997 are not necessarily
indicative of results to be expected for the full year. The accounting policies
followed by the Partnership are set forth in Note 1 to the financial statements
included in its Annual Report on Form 10-K for the year ended December 31, 1996.
These unaudited interim financial statements should be read in conjunction with
the audited financial statements and notes thereto included in the Partnership's
1996 Annual Report on Form 10-K.
Certain 1996 financial statement items have been reclassified to conform
to the 1997 presentation.
5
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
In 1992, the Partnership issued a total of 16,033,009 units of limited and
general partner interests ("Units") at $3 per Unit for a total of $48,099,027.
The Units represent 96.04% of the total interests in the Partnership and consist
of 1,647,500 Units of limited partner interests ("LP Units") and 14,385,509
Units of general partner interests ("GP Units") at September 30, 1997. In
addition, the Partnership issued managing and special general partner interests
on a pro rata basis for $1,983,258, representing 3.96% of the total interests in
the Partnership. Kelley Oil Corporation, managing general partner of the
Partnership ("Kelley Oil") and a wholly owned subsidiary of Kelly Oil & Gas
Corporation ("KOGC"), owns 83.72% of the Units, together with its 3.94% managing
general partnership interest.
RECENT DEVELOPMENTS
DRILLING OPERATIONS. Since inception, the Partnership participated in
drilling 39 gross (15.23 net) wells, of which 30 gross (11.07 net) wells were
found productive and 9 gross (4.16 net) wells were dry.
HEDGING ACTIVITIES. KOGC has periodically used forward sales contracts,
natural gas swap agreements and options to reduce exposure to downward price
fluctuations on its natural gas production. The swap agreements generally
provide for KOGC to receive or make counterparty payments on the differential
between a fixed price and a variable indexed price for natural gas. KOGC's
hedging activities also cover the oil and gas production attributable to the
interest in such production of the public unitholders in its subsidiary
partnerships. Through natural gas swap agreements, approximately 81% and 71% of
the Partnership's natural gas production for the third quarter of 1997 and the
first nine months of 1997, respectively, were affected by hedging transactions
at an average NYMEX quoted price of $2.18 per MMBtu and $2.34 per MMBtu,
respectively, before transaction and transportation costs. As of September 30,
1997, approximately 47% of the Partnership's anticipated natural gas production
for the remainder of 1997 had been hedged by natural gas swap agreements at an
average NYMEX quoted price of $2.42 per MMBtu before transaction and
transportation costs. Gains and losses realized from hedging activities are
included in oil and gas revenues and average sales prices. Hedging activities
reduced Partnership revenues by $18,000 in the third quarter of 1997 and by
$87,000 in the first nine months of 1997, as compared to estimated revenues had
no hedging activities been conducted.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996. Oil and gas revenues of
$540,000 for the third quarter of 1997 decreased 55% compared to $1,199,000 in
the corresponding quarter of 1996 as a result of lower production and prices.
Production of natural gas decreased 50% from 443,000 Mcf in the third quarter of
1996 to 221,000 Mcf in the current quarter, while the average price of natural
gas decreased 5% from $2.39 per Mcf in the third quarter of 1996 to $2.27 per
Mcf in the current quarter. Production of crude oil in the current quarter
totaled 2,110 barrels, with an average sales price of $18.34 per barrel compared
to 6,886 barrels at $20.37 per barrel in the same quarter last year,
representing a volume decrease of 69% and a price decrease of 10%. Oil and gas
production decreased due to natural depletion and a reduction in the drilling of
new wells to offset that decline.
Lease operating expenses and severance taxes were $73,000 in the current
quarter versus $181,000 in the third quarter of 1996, a decrease of 60%. The
decrease was due primarily to an adjustment of the accrual for lease operating
expenses of $57,000 which reduced third quarter 1997 expense, while lower
production reduced severance tax expense. On a unit of production basis, these
expenses decreased to $0.32 per Mcfe in the third quarter of 1997 from $0.37 per
Mcfe in the same quarter of 1996.
General and administrative expenses of $119,000 in the current quarter
increased 86% from $64,000 in the third quarter of 1996. On a unit of production
basis, these expenses increased from $0.13 per Mcfe in the third quarter of 1996
to $0.51 per Mcfe in the current quarter.
6
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In the third quarters of 1997 and 1996, the Partnership incurred interest
expense of $83,000 and $203,000, respectively, on a loan advanced to it by
Kelley Oil in August 1994 ("Initial Loan") to fund part of its drilling expenses
in excess of contributed capital. The reduction reflects the lower average note
payable balance outstanding in the third quarter of 1997 as compared to the same
period in 1996. See "Liquidity and Capital Resources" below.
Depreciation, depletion and amortization ("DD&A") expense decreased 68%
from $345,000 in the third quarter of 1996 to $111,000 in the current quarter
due to lower production levels and depletion rates. On a unit of production
basis, DD&A expense decreased to $0.47 per Mcfe in the third quarter of 1997
from $0.71 per Mcfe in the same quarter last year.
The Partnership recognized net income of $154,000 or $0.01 per Unit for
the third quarter of 1997. For the third quarter of 1996, the Partnership
recognized net income of $408,000 or $0.02 per Unit. The reasons for the
variance between the third quarter of 1997 and the third quarter of 1996 are
described in the foregoing discussion.
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996. Oil and gas revenues of
$2,045,000 for the first nine months of 1997 decreased 45% compared to
$3,721,000 in the corresponding period of 1996 as a result of lower oil and gas
production. Production of natural gas decreased 40% from 1,422,000 Mcf in the
first nine months of 1996 to 848,000 Mcf in the current period. Production of
crude oil in the current period totaled 9,353 barrels compared to 21,435 barrels
in the same period last year, representing a decrease of 56%. Oil and gas
production decreased due to natural depletion and a reduction in the drilling of
new wells to offset that decline.
Lease operating expenses and severance taxes were $453,000 in the current
period versus $607,000 in the first nine months of 1996, a decrease of 25%,
reflecting lower production levels. On a unit of production basis, these
expenses increased to $0.50 per Mcfe in the first nine months of 1997 from $0.39
per Mcfe in the year-earlier period.
General and administrative expenses of $357,000 in the current period
increased 38% from $259,000 in the first nine months of 1996. On a unit of
production basis, these expenses increased from $0.17 per Mcfe in the first nine
months of 1996 to $0.39 per Mcfe in the current period.
In the first nine months of 1997 and 1996, the Partnership incurred
interest expense of $293,000 and $608,000, respectively, on a loan advanced to
it by Kelley Oil in August 1994 to fund part of its drilling expenses in excess
of contributed capital. The reduction reflects the lower average note payable
balance outstanding in the first nine months of 1997 as compared to the same
period in 1996. See "Liquidity and Capital Resources" below.
DD&A expense decreased 59% from $1,084,000 in the first nine months of
1996 to $440,000 in the current period due to lower production levels and lower
depletion rates. On a unit of production basis, DD&A expense decreased to $0.49
per Mcfe in the first nine months of 1997 from $0.70 per Mcfe in the same period
last year.
The Partnership recognized net income of $502,000 or $0.03 per Unit for
the first nine months of 1997. For the first nine months of 1996, the
Partnership recognized net income of $1,170,000 or $0.07 per Unit. The reasons
for the variance between the first nine months of 1997 and the first nine months
of 1996 are described in the foregoing discussion.
The results of operations for the quarter and nine months ended September
30, 1997 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 the Partnership's operating activities
during the first nine months of 1997, as reflected on its statement of cash
flows, totaled $2,054,000. During the period, funds used in financing activities
included a reduction in the loan principal of approximately $2,107,000. As a
result of these activities, the Partnership's cash and cash equivalents were
reduced to zero at September 30, 1997 from $22,000 at December 31, 1996.
7
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CAPITAL RESOURCES. The partners' equity at September 30, 1997 increased to
$671,000 as compared to $169,000 at December 31, 1996. The Partnership has
completed its development stage. Accordingly, cash flow from operations should
be adequate to meet its expected capital and general working capital needs. As
of September 30, 1997, the Partnership was fully capitalized with contributions
aggregating $50,082,285.
DISTRIBUTION POLICY. The Partnership maintains a policy of distributing
cash which is not required for the conduct of Partnership business to
Unitholders on a quarterly basis. To meet its financial obligations for drilling
overexpenditures, the Partnership suspended distributions commencing in October
1994 and reinstated a quarterly distribution for only one quarter in 1995. The
Partnership's operating cash flows in 1996 were applied to pay interest on the
Initial Loan and to reduce unfunded payables for third party drilling
overexpenditures. At September 30, 1997, $3,293,000 of the $6,000,000 Initial
Loan remained outstanding. By continuing to service its debt from operating cash
flow, the Partnership expects to further reduce the outstanding balance of the
Initial Loan.
INFLATION AND CHANGING PRICES. Oil and natural gas prices, as with most
commodities, are highly volatile, have fluctuated during recent years and
generally have not followed the same pattern as inflation.
FORWARD-LOOKING STATEMENTS
STATEMENTS MADE HEREIN THAT ARE FORWARD-LOOKING IN NATURE ARE INTENDED TO
BE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF THE
SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE
ACT OF 1934, AS AMENDED, RELATING TO MATTERS SUCH AS ANTICIPATED OPERATING AND
FINANCIAL PERFORMANCE, BUSINESS PROSPECTS, DEVELOPMENTS AND RESULTS OF THE
PARTNERSHIP. ACTUAL PERFORMANCE, PROSPECTS, DEVELOPMENTS AND RESULTS MAY DIFFER
MATERIALLY FROM ANY OR ALL ANTICIPATED RESULTS DUE TO ECONOMIC CONDITIONS AND
OTHER RISKS, UNCERTAINTIES AND CIRCUMSTANCES PARTLY OR TOTALLY OUTSIDE THE
CONTROL OF THE PARTNERSHIP, INCLUDING RATES OF INFLATION, NATURAL GAS PRICES,
RESERVE ESTIMATES, RATES AND TIMING OF FUTURE PRODUCTION OF OIL AND GAS, AND
CHANGES IN THE LEVEL AND TIMING OF FUTURE COSTS AND EXPENSES RELATED TO DRILLING
AND OPERATING ACTIVITIES.
WORDS SUCH AS "ANTICIPATED," "EXPECT," "ESTIMATE," "PROJECT" AND SIMILAR
EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. FORWARD-LOOKING
STATEMENTS MAY BE MADE IN MANAGEMENT'S STATEMENTS (ORALLY OR IN WRITING)
INCLUDING PRESS RELEASES, AND IN FILINGS OF THE SEC, INCLUDING THIS REPORT.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a)Exhibits:
EXHIBIT
NUMBER: EXHIBIT
------- -------
27 Financial Data Schedule (included only in the electronic
filing of this document).
(b)Reports on Form 8-K:
No reports on Form 8-K were filed by the Registrant during the third
quarter of 1997.
8
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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 PARTNERS 1992
DEVELOPMENT DRILLING PROGRAM
By: KELLEY OIL CORPORATION
Managing General Partner
Date: November 12, 1997 By: /s/ DAVID C. BAGGETT
David C. Baggett
Senior Vice President and
Chief Financial Officer
(Duly Authorized Officer)
(Principal Financial Officer)
9
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<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 570
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 570
<PP&E> 44,302
<DEPRECIATION> 40,786
<TOTAL-ASSETS> 4,086
<CURRENT-LIABILITIES> 122
<BONDS> 3,293
0
0
<COMMON> 0
<OTHER-SE> 671
<TOTAL-LIABILITY-AND-EQUITY> 4,086
<SALES> 2,045
<TOTAL-REVENUES> 2,045
<CGS> 0
<TOTAL-COSTS> 453
<OTHER-EXPENSES> 797
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<INTEREST-EXPENSE> 293
<INCOME-PRETAX> 502
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