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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 JUNE 30, 2000 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
<TABLE>
<CAPTION>
PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Balance Sheets as of December 31, 1999 and June 30, 2000 (unaudited)............................... 2
Statements of Income for the three months and six months ended
June 30, 1999 and 2000 (unaudited).............................................................. 3
Statements of Cash Flows for the six months ended June 30, 1999 and 2000 (unaudited)............... 4
Notes to Financial Statements (unaudited).......................................................... 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...... 6
Item 3. Quantitative and Qualitative Disclosure About Market Risk.................................. 8
PART II. OTHER INFORMATION.............................................................................. 9
Item 6. Exhibits and Reports on Form 8-K........................................................... 9
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
KELLEY PARTNERS 1992 DEVELOPMENT DRILLING PROGRAM
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 2000
-------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS:
Cash and cash equivalents........................................................... $ -- $ --
Accounts receivable - trade......................................................... 28 49
Accounts receivable - affiliates.................................................... 17 156
--------- ---------
Total current assets................................................................ 45 205
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Oil and gas properties, successful efforts method:
Properties subject to amortization................................................ 41,466 41,409
Less: Accumulated depreciation, depletion and amortization....................... (40,396) (40,462)
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Total oil and gas properties........................................................ 1,070 947
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Total assets........................................................................... $ 1,115 $ 1,152
========= =========
LIABILITIES:
Accounts payable and accrued expenses............................................... $ 62 $ 69
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Total current liabilities........................................................... 62 69
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Long term note payable - affiliate.................................................. 166 62
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Total liabilities...................................................................... 228 131
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PARTNERS' EQUITY:
LP Unitholders' equity ............................................................. 62 76
GP Unitholders' equity.............................................................. 789 903
Managing and special general partners' equity....................................... 36 42
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Total partners' equity................................................................. 887 1,021
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Total liabilities and partners' equity................................................. $ 1,115 $ 1,152
========= =========
</TABLE>
See Notes to Financial Statements.
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KELLEY PARTNERS 1992 DEVELOPMENT DRILLING PROGRAM
STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER UNIT DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1999 2000 1999 2000
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<S> <C> <C> <C> <C>
REVENUES:
Oil and gas sales..........................................$ 208 $ 198 $ 542 $ 369
Gain on sale of properties................................. 855 -- 855 --
--------- --------- -------- ---------
Total revenues............................................. 1,063 198 1,397 369
--------- --------- -------- ---------
EXPENSES:
Lease operating expenses................................... 79 67 195 121
Severance taxes............................................ 12 5 29 9
General and administrative expenses........................ 22 15 54 33
Interest expenses.......................................... 62 1 126 6
Depreciation, depletion and amortization................... 58 33 159 66
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Total expenses............................................. 233 121 563 235
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Net income....................................................$ 830 $ 77 $ 834 $ 134
========= ========= ======== =========
Net income allocable to LP and GP unitholders.................$ 797 $ 73 $ 801 $ 129
========= ========= ======== =========
Net income allocable to managing and
special general partners...................................$ 33 $ 4 $ 33 $ 5
========= ========= ======== =========
Net income per LP and GP unit.................................$ .05 $ .00 $ .05 $ .01
========= ========= ======== =========
Average LP and GP units outstanding........................... 16,033 16,033 16,033 16,033
========= ========= ======== =========
</TABLE>
See Notes to Financial Statements.
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KELLEY PARTNERS 1992 DEVELOPMENT DRILLING PROGRAM
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
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1999 2000
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<S> <C> <C>
OPERATING ACTIVITIES:
Net income...........................................................................$ 834 $ 134
Adjustments to reconcile net income to net cash
provided by operating activities:
Gain on sale of properties......................................................... (855) --
Depreciation, depletion and amortization........................................... 159 66
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable......................................... 101 (160)
(Decrease) increase in accounts payable and accrued expenses....................... (14) 7
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Net cash provided by operating activities............................................ 225 47
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INVESTING ACTIVITIES:
Capital expenditures ................................................................ (23) 57
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Net cash (used in) provided by investing activities.................................. (23) 57
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FINANCING ACTIVITIES:
Principal payments on long-term borrowings........................................... (202) (104)
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Net cash used in financing activities................................................ (202) (104)
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Decrease in cash and cash equivalents................................................... -- --
Cash and cash equivalents, beginning of period.......................................... -- --
--------- ---------
Cash and cash equivalents, end of period................................................$ -- $ --
========= =========
</TABLE>
See Notes to Financial Statements.
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KELLEY PARTNERS 1992 DEVELOPMENT DRILLING PROGRAM
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - GENERAL, INDUSTRY CONDITIONS AND LIQUIDITY
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 solely of normal recurring adjustments) necessary for a
fair statement of the results for the interim periods presented. The results of
operations for the period ended June 30, 2000 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 2 to the financial statements included in
its Annual Report on Form 10-K for the year ended December 31, 1999. These
unaudited interim financial statements should be read in conjunction with the
audited financial statements and notes thereto included in the Partnership's
1999 Annual Report on Form 10-K.
Derivative and Hedge Accounting. In June 1998, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133")
which was amended in June 1999 by SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133 - an amendment of FASB Statement No. 133." SFAS No. 133, as
amended, is effective for fiscal years beginning after June 15, 2000, and
establishes accounting and reporting standards for derivative instruments and
hedging activities that require an entity to recognize all derivatives as an
asset or liability measured at its fair value. Depending on the intended use of
the derivative, changes in its fair value will be reported in the period of
change as either a component of earnings or a component of other comprehensive
income. Retroactive application to periods prior to adoption is not allowed. The
Partnership has not quantified the impact of adoption on its financial
statements.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
In 1992, Kelley Partners 1992 Development Drilling Program (the
"Partnership") issued units of limited and general partner interests ("Units").
The Units represent 96.04% of the total interests in the Partnership. In
addition, the Partnership issued managing and special general partner interests
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 Contour Energy Co. (formerly Kelley Oil & Gas
Corporation) ("Contour "), 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. Contour periodically uses forward sales contracts,
swap agreements, natural gas basis swap agreements, collars and options to
reduce exposure to downward price fluctuations on its natural gas and crude oil
production. Contour's hedging activities also cover the production attributable
to the interest of the public unitholders in its subsidiary partnerships. The
credit risk exposure from counterparty nonperformance on forward sales contracts
and derivative financial instruments is generally the amount of unrealized gains
under the contracts. Contour has not experienced counterparty nonperformance on
these agreements and does not anticipate any in future periods.
Through natural gas price swap agreements, approximately 52%, 56%, 60%
and 52% of the Partnership's natural gas production for the second quarter of
1999, the second quarter of 2000, the first half of 1999 and the first half of
2000, respectively, was affected by hedging transactions at average NYMEX quoted
prices of $2.11 per Mmbtu, $2.60 per Mmbtu, $2.21 per Mmbtu and $2.54 per Mmbtu,
respectively, before transaction and transportation costs. Through crude oil
price swap agreements, the Partnership hedged approximately 73% and 70% of its
crude oil production for the three and six months ended June 30, 2000,
respectively, at average NYMEX quoted prices of $27.65 per bbl and $26.38 per
bbl, respectively, before transaction and transportation costs. No crude oil was
hedged in the three and six month period ended June 30, 1999. Hedging activities
increased Partnership revenues by approximately $10,000 and $64,000 in the
second quarter of 1999 and first half of 1999, respectively, as compared to
estimated revenues had no hedging activities been conducted. Hedging activities
decreased Partnership revenues by approximately $16,000 and $14,000 in the
second quarter of 2000 and first half of 2000, respectively, as compared to
estimated revenues had no hedging activities been conducted. As of June 30,
2000, approximately 39% of the Partnership's anticipated natural gas production
for the remainder of 2000 had been hedged by natural gas price swap agreements
at an average NYMEX quoted price of $2.60 per Mmbtu before transaction and
transportation costs. As of June 30, 2000, approximately 15% of the
Partnership's anticipated crude oil production for the remainder of 2000 has
been hedged by crude oil price swap agreements at an average NYMEX quoted price
of $25.40 per bbl before transaction and transportation costs. As of June 30,
2000, approximately 50% of the Partnership's natural gas production for the July
- December 2000 period had been hedged in the form of collars at a floor of
$4.00/Mmbtu and a ceiling of $4.98/Mmbtu. Since June 30, 2000, the Partnership
has executed two collars on approximately 50% of its expected natural gas
production for the calendar year 2001. The terms of the first collar include a
ceiling of $5.00/Mmbtu and a floor of $3.55/Mmbtu at closing NYMEX prices above
$3.00/Mmbtu. However, at prices below $3.00/Mmbtu, the floor moves to NYMEX
price plus $0.55 /Mmbtu. The terms of the second collar include a ceiling of
$5.00/Mmbtu and a floor of $3.75/Mmbtu at closing NYMEX prices above
$3.09/Mmbtu. However, at prices below $3.09/Mmbtu, the floor moves to NYMEX
price plus $0.66 /Mmbtu.
RESULTS OF OPERATIONS
Three Months Ended June 30, 2000 and 1999. Oil and gas revenues of
$198,000 for the second quarter of 2000 decreased 5% compared to $208,000 in the
corresponding quarter of 1999 primarily as a result of lower gas production.
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Production of natural gas decreased 52% from 84,000 Mcf in the second quarter of
1999 to 40,000 Mcf in the current quarter primarily due to the sale of
properties in the second quarter of 1999 to Phillips Petroleum Company, see
below. The average price of natural gas increased 54% from $2.13 per Mcf in the
second quarter of 1999 to $3.27 per Mcf in the current quarter. Production of
crude oil in the current quarter totaled 2,360 barrels, with an average sales
price of $29.53 per barrel compared to 2,578 barrels at $15.83 per barrel in the
same quarter last year, representing a volume decrease of 8% and a price
increase of 87%. In the second quarter of 1999, the Partnership conveyed its
interests in the West Bryceland and Sailes fields to Phillips Petroleum Company.
This transaction resulted in a second quarter 1999 gain on sale of properties of
$855,000; see Liquidity and Capital Resources for further discussion.
Lease operating expenses and severance taxes were $72,000 in the
current quarter versus $91,000 in the second quarter of 1999, a decrease of 21%.
The decrease was due primarily to lower second quarter 1998 lifting costs
resulting from lower gas production due to the sale of properties in the second
quarter of 1999. On a unit of production basis, these expenses increased to
$1.34 per Mcfe in the second quarter of 2000 from $0.92 per Mcfe in the same
quarter of 1999.
General and administrative ("G&A") expenses of $15,000 in the current
quarter decreased 32% from $22,000 in the second quarter of 1999. Lower second
quarter 2000 Partnership production activity caused the decline in G&A expenses
charged by Kelley Oil to the Partnership. On a unit of production basis, these
expenses increased from $0.22 per Mcfe in the second quarter of 1999 to $0.28
per Mcfe in the current quarter.
Depreciation, depletion and amortization ("DD&A") expenses decreased
43% from $58,000 in the second quarter of 1999 to $33,000 in the current quarter
due to lower current quarter production levels related to the sale of properties
in the second quarter of 1999. On a unit of production basis, DD&A expenses
increased to $0.61 per Mcfe in the second quarter of 2000 from $0.59 per Mcfe in
the same quarter last year.
The Partnership recognized net income of $77,000 or $0.00 per Unit for
the second quarter of 2000. For the second quarter of 1999, the Partnership
recognized net income of $830,000 or $0.05 per Unit. The reasons for the
variance between the second quarter of 2000 and the second quarter of 1999 are
described in the foregoing discussion.
Six Months Ended June 30, 2000 and 1999. Oil and gas revenues of
$369,000 for the first six months of 2000 decreased 32% compared to $542,000 in
the corresponding period of 1999 as a result of lower gas production partially
offset by higher gas and oil prices. Production of natural gas decreased 69%
from 237,000 Mcf in the first six months of 1999 to 74,000 Mcf in the current
period primarily due to the sale of properties in the first half of 1999 to
Phillips Petroleum Company. The average price of natural gas was $3.04 per Mmcf
in the first half of 2000 compared to $2.05 per Mmcf in the prior year.
Production of crude oil in the current period totaled 5,264 barrels, with an
average sales price of $27.89 per barrel compared to 4,952 barrels at $13.70 per
barrel in the same period last year, representing a volume increase of 6% and a
price increase of 104%. In the first half of 1999, the Partnership conveyed its
interests in the West Bryceland and Sailes fields to Phillips Petroleum Company.
This transaction resulted in a second quarter 1999 gain on sale of properties of
$855,000; see Liquidity and Capital Resources for further discussion.
Lease operating expenses and severance taxes were $130,000 in the
current period versus $224,000 in the first half of 1999, a decrease of 42%. The
decrease was due primarily to lower lifting costs in the first half of 2000
resulting from lower gas production related to the sale of properties in the
first half of 1999. On a unit of production basis, these expenses increased to
$1.24 per Mcfe in the first six months of 2000 from $0.84 per Mcfe in the
year-earlier period.
G&A expenses of $33,000 in the current period decreased 39% from
$54,000 in the first half of 1999. Lower current period Partnership production
activity caused the decline in G&A expenses charged by Kelley Oil to the
Partnership. On a unit of production basis, these expenses increased from $0.20
per Mcfe in the first six months of 1999 to $0.31 per Mcfe in the current
period.
In the first six months of 2000 and 1999, the Partnership incurred
interest expenses of $6,000 and $126,000, respectively, on a loan advanced to it
by Kelley Oil in August 1994 ("Initial Loan") to fund part of its drilling
expenditures
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in excess of contributed capital. The reduction reflects the lower average note
payable balance outstanding in the first half of 2000. See "Liquidity and
Capital Resources" below.
DD&A expenses decreased 58% from $159,000 in the first six months of
1999 to $66,000 in the current period due to lower current period production
levels partially offset by higher current period depletion rates. On a unit of
production basis, DD&A expenses increased to $0.63 per Mcfe in the first half of
2000 from $0.60 per Mcfe in the same period last year.
The Partnership recognized net income of $134,000 or $0.01 per Unit for
the first half of 1999. For the first half of 1999, the Partnership recognized
net income of $834,000 or $0.05 per Unit. The reasons for the variance between
the first six months of 2000 and the first six months of 1999 are described in
the foregoing discussion.
The results of operations for the quarter and six months ended June 30,
2000 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 six months of 2000, as reflected on its statement of cash
flows, totaled $47,000. During the period, funds provided by investing
activities were comprised of net reductions to capital expenditures of $57,000,
and funds used in financing activities included a reduction in the Initial Loan
principal of $104,000. As a result of these activities, the Partnership's cash
and cash equivalents remained unchanged from December 31, 1999.
Capital Resources. 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.
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 are currently being applied to pay interest
and principal on the Initial Loan. At June 30, 2000, $62,000 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 remaining
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.
Accounting Pronouncements. In June 1998, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133")
which was amended in June 1999 by SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133 - an amendment of FASB Statement No. 133." SFAS No. 133, as
amended, is effective for fiscal years beginning after June 15, 2000, and
establishes accounting and reporting standards for derivative instruments and
hedging activities that require an entity to recognize all derivatives as an
asset or liability measured at its fair value. Depending on the intended use of
the derivative, changes in its fair value will be reported in the period of
change as either a component of earnings or a component of other comprehensive
income. Retroactive application to periods prior to adoption is not allowed. The
Partnership has not quantified the impact of adoption on its financial
statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
See discussion in Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Hedging Activities.
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FORWARD-LOOKING STATEMENTS
Statements contained in this Report and other materials filed or to be
filed by the Partnership with the Securities and Exchange Commission (as well as
information included in oral or other written statements made or to be made by
the Partnership or its representatives) 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, uncertainty of reserve estimates, rates and timing of future
production of oil and gas, exploratory and development activities, acquisition
risks, changes in the level and timing of future costs and expenses related to
drilling and operating activities and those risk factors described on pages 9
and 10 of the Partnership's Annual Report on Form 10-K for the fiscal year ended
December 31, 1999.
Words such as "anticipated," "expect," "estimate," "project" and
similar expressions are intended to identify forward-looking statements.
Forward-looking statements include the risk factors described in the
Partnership's Form 10-K mentioned above.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
EXHIBIT
NUMBER: EXHIBIT
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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
second quarter of 2000.
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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: August 11, 2000 By: /s/ Rick G. Lester
-------------------------------------
Rick G. Lester
Chief Financial Officer
(Duly Authorized Officer)
(Principal Accounting Officer)
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
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27 Financial Data Schedule
