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. 0-23784
KELLEY PARTNERS 1994 DEVELOPMENT
DRILLING PROGRAM
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TEXAS 76-0419001
(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
<PAGE>
KELLEY PARTNERS 1994 DEVELOPMENT DRILLING PROGRAM
INDEX
<TABLE>
<CAPTION>
<S> <C>
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 ................................................................... 9
</TABLE>
1
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
KELLEY PARTNERS 1994 DEVELOPMENT DRILLING PROGRAM
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS:
Cash and cash equivalents ................................ $ -- $ 25
Accounts receivable - trade .............................. 75 217
Accounts receivable - affiliates ......................... 5,710 6,202
-------- --------
Total current assets ..................................... 5,785 6,444
-------- --------
Oil and gas properties, successful efforts method:
Properties subject to amortization ...................... 44,830 43,870
Less: Accumulated depreciation, depletion & amortization (28,237) (24,835)
-------- --------
Total oil and gas properties ............................. 16,593 19,035
-------- --------
Total assets ............................................ $ 22,378 $ 25,479
======== ========
LIABILITIES:
Accounts payable and accrued expenses .................... $ 564 $ 2,797
-------- --------
Total current liabilities ................................ 564 2,797
-------- --------
Total liabilities ....................................... 564 2,797
-------- --------
PARTNERS' EQUITY:
LP Unitholders' equity ................................... 1,200 1,527
GP Unitholders' equity ................................... 19,751 20,025
Managing and special general partners' equity ............ 863 1,130
-------- --------
Total partners' equity ................................... 21,814 22,682
-------- --------
Total liabilities and partners' equity .................. $ 22,378 $ 25,479
======== ========
</TABLE>
See Notes to Financial Statements.
2
<PAGE>
KELLEY PARTNERS 1994 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.......................$3,340 $4,963 $12,268 $13,262
Interest income......................... -- 227 135 1,008
------ ------ ------ ------
Total revenues.......................... 3,340 5,190 12,403 14,270
------ ------ ------ ------
COSTS AND EXPENSES:
Lease operating expenses................ (138) 277 1,104 981
Severance taxes......................... 149 195 478 495
Exploration expenses.................... 123 152 369 474
General and administrative expenses..... 234 210 702 649
Depreciation, depletion and amortization 949 1,168 3,402 4,900
------ ------ ------ ------
Total expenses.......................... 1,317 2,002 6,055 7,499
------ ------ ------ ------
Net income................................$2,023 $3,188 $6,348 $6,771
====== ====== ====== ======
Net income allocable to LP unitholders
and GP unitholders......................$1,943 $3,062 $6,097 $6,503
====== ====== ====== ======
Net income allocable to managing and
special general partners................$ 80 $ 126 $ 251 $ 268
====== ====== ====== ======
Net income per LP and GP unit.............$ .09 $ .15 $ .29 $ .31
====== ====== ====== ======
Average LP and GP units outstanding.......20,864 20,864 20,864 20,864
====== ====== ====== ======
See Notes to Financial Statements.
3
<PAGE>
KELLEY PARTNERS 1994 DEVELOPMENT DRILLING PROGRAM
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------
1997 1996
OPERATING ACTIVITIES: ------ ------
Net income.............................................. $6,348 $6,771
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization............... 3,402 4,900
Exploration expenses................................... 369 474
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable............. 634 (3,800)
Decrease in other assets............................... -- 7
Decrease in accounts payable and accrued expenses...... (2,233) (1,135)
------ ------
Net cash provided by operating activities............... 8,520 7,217
------ ------
INVESTING ACTIVITIES:
Capital expenditures.................................... ( 1,329) (11,259)
Sale of other non-current assets........................ -- 82
------ ------
Net cash used in investing activities................... (1,329) (11,177)
------ -------
FINANCING ACTIVITIES:
Capital contributed by partners......................... 5,819 18,716
Distribution of uncommitted capital..................... (1,086) (4,345)
Distributions........................................... (11,949) (10,427)
------- -------
Net cash provided by (used in) financing activities..... (7,216) 3,944
------ ------
Decrease in cash and cash equivalents..................... (25) (16)
Cash and cash equivalents, beginning of period............ 25 57
------ ------
Cash and cash equivalents, end of period.................. $ -- $ 41
====== ======
See Notes to Financial Statements.
4
<PAGE>
KELLEY PARTNERS 1994 DEVELOPMENT DRILLING PROGRAM
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
GENERAL. The accompanying unaudited interim financial statements of Kelley
Partners 1994 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.
NOTE 2 - CAPITAL CONTRIBUTIONS
As of December 31, 1996, there was $5,819,000 of unpaid subscriptions for
the Partnership units that were sold during 1994 to Kelley Oil Corporation
("Kelley Oil"), the managing general partner of the partnership. During the
first six months of 1997, Kelley Oil contributed to the Partnership $5,819,000.
These contributions represent the final balance due to the Partnership from
Kelley Oil for the subscriptions sold.
NOTE 3 - DISTRIBUTION OF UNCOMMITTED CAPITAL
The Partnership Agreement provides for pro rata contributions from the
Unitholders and general partners of $62,593,242 (96.04%) and $2,580,897 (3.96%),
respectively, for a total of $65,174,139 ("Contemplated Capital"), subject to
the return of Contemplated Capital remaining uncommitted after two years. During
1996, Kelley initiated a program for streamlining operations, improving drilling
efficiency and reducing lease operating costs. These efforts generated cost
savings that have effectively reduced the February 1996 estimate of Committed
Expenditures. As a result, on July 3, 1997, the Partnership distributed
uncommitted funds of $1,086,000 or $0.05 per Unit to the partners as a return of
Contemplated Capital.
5
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
In 1994, Kelley Partners 1994 Development Drilling Program (the
"Partnership") issued a total of 20,864,414 units of limited and general partner
interests ("Units") at $3 per Unit for total subscription commitments of
$62,593,242. The Units represent 96.04% of the total interests in the
Partnership and consist of 1,194,782 Units of limited partner interests ("LP
Units") and 19,669,632 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 subscription commitments of
$2,580,897, 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 Kelley Oil & Gas Corporation ("KOGC"), owns 91.85%
of the Units, together with its 3.94% managing general partnership interest.
Kelley Oil did not have adequate current liquidity or capital resources to
fund its entire subscription commitment by the end of the deferred payment
period in November 1994. Kelley Oil has made subsequent contributions, together
with interest at a market rate, as funds were needed for the Partnership's
drilling activities. As of September 30, 1997, Kelley Oil has fully funded its
subscription commitment. See "Liquidity and Capital Resources" below.
RECENT DEVELOPMENTS
DRILLING OPERATIONS. Since inception, the Partnership participated in
drilling 90 gross (27.53 net) wells, of which 86 gross (24.86 net) wells were
found productive and 4 gross (2.67 net) wells were dry. Recompletion and
workover operations have been conducted on several of the wells. See "Liquidity
and Capital Resources" below.
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 $133,000 in the third quarter of 1997 and
$620,000 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
$3,340,000 for the third quarter of 1997 decreased 33% compared to $4,963,000 in
the corresponding quarter of 1996 as a result of lower production volumes.
Production of natural gas decreased 30% from 2,110,000 Mcf in the third quarter
of 1996 to 1,467,000 Mcf in the same period of 1997. Production of crude oil
decreased 48% from 13,285 barrels in the third quarter of 1996 to 6,886 barrels
in the current quarter. Oil and gas production decreased due to natural
depletion and a reduction in the drilling of new wells to offset that decline.
Interest income decreased 100% from $227,000 in the third quarter of 1996
to $0 in the current quarter. This was due to Kelley Oil funding its
subscription commitment in its entirety during the second quarter of 1997.
6
<PAGE>
Lease operating expenses and severance taxes were $11,000 in the current
quarter versus $472,000 in the third quarter of 1996. This decrease was due to
an adjustment of the accrual for lease operating expenses of $347,000 that
reduced third quarter 1997 expense. On a unit of production basis (excluding the
accrual adjustment), these expenses increased to $0.24 per Mcfe in the third
quarter of 1997 from $0.22 per Mcfe in the same quarter of 1996.
The Partnership expensed exploration costs in the third quarter of 1997 of
$123,000, a 19% decrease from the 1996 level of $152,000, primarily reflecting
the decrease in exploratory activities during the current period.
General and administrative expenses of $234,000 in the current quarter
increased 11% from $210,000 in the third quarter of 1996, reflecting the
Partnership's share of administration costs associated with development
operations of KOGC. On a unit of production basis, these expenses increased from
$0.10 per Mcfe in the third quarter of 1996 to $0.16 per Mcfe in the current
quarter.
Depreciation, depletion and amortization ("DD&A") expense decreased 19%
from $1,168,000 in the third quarter of 1996 to $949,000 in the current quarter,
primarily as a result of lower depletion rates and decreased production,
partially offset by an adjustment of year-to-date DD&A expense recorded in the
third quarter of 1996 that lowered that period's expense.
The Partnership recognized net income of $2,023,000 or $0.09 per Unit for
the third quarter of 1997. For the third quarter of 1996, the Partnership
recognized net income of $3,188,000 or $0.15 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
$12,268,000 for the first nine months of 1997 decreased 7% compared to
$13,262,000 in the corresponding period of 1996 as a result of lower gas and oil
production volumes. Production of natural gas decreased 5% from 5,552,000 Mcf in
the first nine months of 1996 to 5,297,000 Mcf in the current period. Production
of crude oil in the current period totaled 22,844 barrels compared to 38,199
barrels in the same period last year, representing a volume decrease of 40%. Oil
and gas production decreased due to natural depletion and a reduction in the
drilling of new wells to offset that decline.
Interest income decreased 87% from $1,008,000 in the first nine months of
1996 to $135,000 in the same period of 1997. This was due to lower interest
income from Kelley Oil as a result of the repayment of its unfunded subscription
commitment to the Partnership in the first six months of 1997.
Lease operating expenses and severance taxes were $1,582,000 in the first
nine months of 1997 versus $1,476,000 in the first nine months of 1996, an
increase of 7%. The increase was primarily due to workover expenses incurred in
1997 on the Exxon Fee #1 well, offset partially by an adjustment of the accrued
lease operating expense liability that lowered 1997 expense. On a unit of
production basis, these expenses increased to $0.29 per Mcfe in the current
period from $0.26 per Mcfe in the same period of 1996.
The Partnership expensed exploration costs in the first nine months of
1997 of $369,000, a 22% decrease from the 1996 level of $474,000, primarily
reflecting the decrease in exploratory activities during the current period.
General and administrative expenses of $702,000 in the current period
increased 8% from $649,000 in the first nine months of 1996, reflecting the
Partnership's share of administration costs associated with development
operations of KOGC. On a unit of production basis, these expenses were $0.13 per
Mcfe for the first nine months of 1997, compared to $0.11 per Mcfe in the same
period of 1996.
DD&A expense decreased 31% from $4,900,000 in the first nine months of
1996 to $3,402,000 in the current period as a result of lower depletion rates
and production. On a unit of production basis, DD&A expense decreased to $0.63
per Mcfe in the first nine months of 1997 from $0.85 per Mcfe in the same period
last year.
7
<PAGE>
The Partnership recognized net income of $6,348,000 or $0.29 per Unit for
the first nine months of 1997. For the first nine months of 1996, the
Partnership recognized net income of $6,771,000 or $0.31 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 $8,520,000. During the period, funds used in investing and
financing activities were comprised primarily of capital expenditures of
$1,329,000 for development of the Partnership's oil and gas properties. For the
first nine months of 1997, capital contributions totaled $5,819,000 while
distributions totaled $11,949,000. The Partnership also returned to the partners
uncommitted capital of $1,086,000. As a result of these activities, the
Partnership's cash and cash equivalents were reduced to zero at September 30,
1997 from $25,000 at December 31, 1996.
CAPITAL RESOURCES. The Partnership Agreement provides for pro rata
contributions from the Unitholders and general partners of $62,593,242 (96.04%)
and $2,580,897 (3.96%), respectively, for a total of $65,174,139 ("Contemplated
Capital"), subject to the return of Contemplated Capital remaining uncommitted
after two years. During 1996, KOGC initiated a program for streamlining
operations, improving drilling efficiency and reducing lease operating costs.
These efforts generated cost savings that have effectively reduced the February
1996 estimate of Committed Expenditures. As a result, on July 3, 1997, the
Partnership distributed uncommitted funds of $1,086,000 or $0.05 per Unit to the
partners as a return of Contemplated Capital.
During the first six months of 1997, Kelley Oil contributed the final
portion of its commitment to the Partnership with capital contributions of
$5,819,000. Cash flows from operations are expected to be adequate to meet the
Partnership's capital expenditures and 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. In March, June and August 1997, the
Partnership made quarterly distributions of $0.22, $0.20 and $0.13 per Unit,
respectively, (aggregating $11,949,000). The Partnership intends to continue
making quarterly distributions consistent with its cash distribution policy.
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.
8
<PAGE>
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 5. OTHER INFORMATION
Initial test results for wells completed in the third quarter of 1997 are
summarized in the following table.
INITIAL TEST RESULTS(1) FROM
THIRD QUARTER 1997 COMPLETIONS
<TABLE>
<CAPTION>
THOUSAND
WELL NAME /64" FLOWING CUBIC BARRELS
FIELD NAME COMPLETION RESERVOIR CHOKE TUBING FEET OIL WORKING
PARISH, STATE DATE COMPLETED PERFORATIONS SIZE PRESSURE PER DAY PER DAY INTEREST
- ---------------- ---------- --------- ------------ ------ -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Burson-Mears A#1 Alt. 7/18/97 Hosston B 8375-8842' 27 820 2,400 3 .1623724
Sibley
Webster, LA
</TABLE>
(1) Reflects initial test results reported under state reporting requirements
and may not be indicative of actual producing rates to sales.
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.
9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
KELLEY PARTNERS 1994
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)
10
<TABLE> <S> <C>
<ARTICLE> 5
<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> 5,785
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,785
<PP&E> 44,830
<DEPRECIATION> 28,237
<TOTAL-ASSETS> 22,378
<CURRENT-LIABILITIES> 564
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 21,814
<TOTAL-LIABILITY-AND-EQUITY> 22,378
<SALES> 12,268
<TOTAL-REVENUES> 12,403
<CGS> 0
<TOTAL-COSTS> 1,951
<OTHER-EXPENSES> 4,104
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 6,348
<INCOME-TAX> 0
<INCOME-CONTINUING> 6,348
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,348
<EPS-PRIMARY> .29
<EPS-DILUTED> .29
</TABLE>
