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 MARCH 31, 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 [_]
1
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KELLEY PARTNERS 1994 DEVELOPMENT DRILLING PROGRAM
INDEX
PART I. FINANCIAL INFORMATION PAGE
Balance Sheets as of December 31, 1996 and
March 31, 1997 (unaudited) ..................................... 2
Statements of Income for the three months
ended March 31, 1996 and 1997 (unaudited) ...................... 3
Statements of Cash Flows for the three months
ended March 31, 1996 and 1997 (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
1
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
KELLEY PARTNERS 1994 DEVELOPMENT DRILLING PROGRAM
BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31, MARCH 31,
1996 1997
-------- --------
(UNAUDITED)
ASSETS:
Cash and cash equivalents ............................ $ 25 $ 5
Accounts receivable - trade .......................... 217 93
Accounts receivable - affiliates ..................... 6,202 7,662
-------- --------
Total current assets ............................... 6,444 7,760
-------- --------
Oil and gas properties, successful efforts method:
Properties subject to amortization ................. 43,870 44,695
Less: Accumulated depreciation, depletion
& amortization ................................... (24,835) (25,980)
-------- --------
Total oil and gas properties ....................... 19,035 18,715
-------- --------
TOTAL ASSETS ......................................... $ 25,479 $ 26,475
======== ========
LIABILITIES:
Accounts payable and accrued expenses ................ $ 2,797 $ 1,188
-------- --------
Total current liabilities .......................... 2,797 1,188
-------- --------
TOTAL LIABILITIES .................................... 2,797 1,188
-------- --------
PARTNERS' EQUITY:
LP Unitholders' equity ............................... 1,527 1,430
GP Unitholders' equity ............................... 20,025 22,610
Managing and special general partners' equity ........ 1,130 1,247
-------- --------
TOTAL PARTNERS' EQUITY ............................... 22,682 25,287
-------- --------
TOTAL LIABILITIES AND PARTNERS' EQUITY ................. $ 25,479 $ 26,475
======== ========
See Notes to Financial Statements.
2
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KELLEY PARTNERS 1994 DEVELOPMENT DRILLING PROGRAM
STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER UNIT DATA)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
--------------------
1996 1997
-------- --------
REVENUES:
Oil and gas sales .................................... $ 4,038 $ 5,107
Interest income ...................................... 481 115
-------- --------
Total revenues ..................................... 4,519 5,222
-------- --------
COSTS AND EXPENSES:
Lease operating expenses ............................. 348 582
Severance taxes ...................................... 135 158
Exploration costs .................................... 155 123
General and administrative expenses .................. 226 234
Depreciation, depletion and amortization ............. 1,402 1,145
-------- --------
Total expenses ......................................... 2,266 2,242
-------- --------
NET INCOME ............................................. $ 2,253 $ 2,980
======== ========
NET INCOME ALLOCABLE TO LP UNITHOLDERS
AND GP UNITHOLDERS ................................... $ 2,164 $ 2,862
======== ========
NET INCOME ALLOCABLE TO MANAGING AND
INDIVIDUAL GENERAL PARTNERS .......................... $ 89 $ 118
======== ========
NET INCOME PER LP AND GP UNIT .......................... $ .11 $ .14
======== ========
Average LP and GP units outstanding .................... 20,864 20,864
======== ========
See Notes to Financial Statements.
3
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KELLEY PARTNERS 1994 DEVELOPMENT DRILLING PROGRAM
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
--------------------
1996 1997
-------- --------
OPERATING ACTIVITIES:
Net income ........................................... $ 2,253 $ 2,980
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation, depletion and amortization ........... 1,402 1,145
Dry hole costs ..................................... (30) --
Changes in operating assets and liabilities:
Increase in accounts receivable .................... (1,317) (1,336)
Decrease in other assets ........................... 12 --
Decrease in accounts payable and accrued expenses .. (4,430) (1,609)
-------- --------
Net cash provided by (used in) operating activities .. (2,110) 1,180
-------- --------
INVESTING ACTIVITIES:
Capital expenditures ................................. (2,554) (825)
Sale of other non-current assets ..................... 58 --
-------- --------
Net cash used in investing activities ................ (2,496) (825)
-------- --------
FINANCING ACTIVITIES:
Capital contributed by partners ...................... 7,505 4,404
Distribution of uncommitted capital .................. (340) --
Distributions ........................................ (2,607) (4,779)
-------- --------
Net cash provided by (used in) financing activities .. 4,558 (375)
-------- --------
Decrease in cash and cash equivalents .................. (48) (20)
Cash and cash equivalents, beginning of period ......... 57 25
-------- --------
Cash and cash equivalents, end of period ............... $ 9 $ 5
======== ========
See Notes to Financial Statements.
4
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KELLEY PARTNERS 1994 DEVELOPMENT DRILLING PROGRAM
NOTES TO FINANCIAL STATEMENTS(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
GENERAL. The accompanying financial statements of Kelley Partners 1994
Development Drilling Program (the "Partnership") have been prepared in
accordance with generally accepted accounting principles and, in the opinion of
management, 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 three months ended March 31, 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.
Certain financial statement items in the interim 1996 period have been
reclassified to conform to the interim 1997 presentation.
5
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
In 1994, 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 1,178,796 Units of limited partner interests ("LP
Units") and 19,685,618 Units of general partner interests ("GP Units"). 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. After giving effect to a required reduction of Partnership
capital to reflect a distribution of uncommitted funds to Unitholders other than
Kelley Oil, its outstanding subscription commitment was $1.4 million as of March
31, 1997. See "Liquidity and Capital Resources" below.
RECENT DEVELOPMENTS
DRILLING OPERATIONS. Since inception, the Partnership participated in
drilling 87 gross (26.88 net) wells, of which 83 gross (24.21 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 Kelley's subsidiary
partnerships. Through natural gas swap agreements, approximately 64% of the
Partnership's natural gas production for the first quarter of 1997 was affected
by hedging transactions at an average NYMEX quoted price of $2.56 per MMBtu
before transaction and transportation costs. As of March 31, 1997, approximately
38% 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 $2.29 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
approximately $0.7 million in the first quarter of 1997 as compared to estimated
revenues had no hedging activities been conducted.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996. Oil and gas revenues of
$5,107,000 for the first quarter of 1997 increased 26.5% compared to $4,038,000
in the corresponding quarter of 1996 as a result of higher prices and gas
production volumes, partially offset by lower oil production volumes. During the
current quarter, production of natural gas increased 26.0% from 1,614,000 Mcf in
the first quarter of 1996 to 2,034,000 Mcf, while the average price of natural
gas increased 2.5% from $2.37 per Mcf in the first quarter of 1996 to $2.43 per
Mcf in the current quarter. Production of crude oil in the current quarter
totaled 7,694 barrels, with an average sales price of $20.88 per barrel compared
to 12,510 barrels at $20.20 per barrel in the same quarter last year,
representing a volume decrease of 38.5% and a price increase of 3.4%.
Lease operating expenses and severance taxes were $740,000 in the
current quarter versus $483,000 in the first quarter of 1996, an increase of
53.2%, reflecting higher production levels. On a unit of production basis, these
expenses increased to $0.36 per Mcfe in the first quarter of 1997 from $0.29 per
Mcfe in the same quarter of 1996.
6
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The Partnership expensed exploration costs in the first quarter of 1997
of $123,000, a 20.6% decrease from the 1996 level of $155,000, primarily
reflecting the decrease in exploratory activities during the current period.
General and administrative expenses of $234,000 in the current quarter
increased 3.5% from $226,000 in the first quarter of 1996, reflecting the
Partnership's share of administration costs associated with development
operations of the Kelley Group. On a unit of production basis, these expenses
decreased from $0.13 per Mcfe in the first quarter of 1996 to $0.11 per Mcfe in
the current quarter.
Depreciation, depletion and amortization ("DD&A") decreased 18.3% from
$1,402,000 in the first quarter of 1996 to $1,145,000 in the current quarter,
primarily as a result of lower depletion rates partially offset by increased
production. On a unit of production basis, DD&A decreased to $0.55 per Mcfe in
the first quarter of 1997 from $0.83 per Mcfe in the same quarter last year.
The Partnership recognized net income of $2,980,000 or $0.14 per Unit
for the first quarter of 1997. For the first quarter of 1996, the Partnership
recognized net income of $2,253,000 or $0.11 per Unit. The variance between
first quarter 1997 and first quarter 1996 is reflected in the foregoing
discussion.
The results of operations for the quarter ended March 31, 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 three months of 1997, as reflected on its statement of cash
flows, totaled $1,180,000. During the period, funds used in investing and
financing activities were comprised primarily of property and equipment
expenditures of $825,000 for development of the Partnership's oil and gas
properties. For the first three months of 1997, capital contributions totaled
$4,404,000 while distributions totaled $4,779,000. As a result of these
activities, the Partnership's cash and cash equivalents decreased to $5,000 at
March 31, 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, 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 $60.7 million for Committed Expenditures. From inception
through December 31, 1996, a total of $55.3 million was expended on Partnership
activities, including syndication costs. For the balance of the Partnership's
drilling program from January 1, 1997, a total of $2.4 million has been
contracted or allocated for drilling an additional seven wells during 1997 and
two proved undeveloped locations thereafter, plus $0.3 million for drilling
overruns, contingencies and necessary operating capital. The expenditures
through 1996 plus these budgeted expenditures for 1997 aggregate $58.0 million,
representing a total reduction of $2.7 million or $0.12 per Unit in Committed
Expenditures (the "Commitment Reduction"). As a result of the Commitment
Reduction, a distribution of the excess Contemplated Capital is expected to be
made in 1997.
As of March 31, 1997, Kelley Oil had contributed $54.6 million to the
Partnership, together with interest at a market rate on the portion of its
commitment that remained outstanding after November 1994. After giving effect to
the February 1996 reduction in Contemplated Capital under the Partnership
Agreement and the additional Commitment Reduction in 1997, the Kelly Oil share
of Committed Expenditures will be reduced to $53.4 million. 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
the maximum amount of its net available cash to Unitholders on a quarterly
basis. For these purposes, net available cash is generally defined as the net
operating cash flow of the Partnership after deducting working capital
requirements. The Partnership made four quarterly distributions in 1996
aggregating $0.69 per Unit or a total of $14,396,000, together with $594,000 to
the General Partners for their general partner interests. In March 1997, the
Partnership made a quarterly distribution of $0.22 per Unit
7
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(aggregating $4,590,000), together with $189,000 to the General Partners for
their general partner interests. The distributions in each quarter generally
represented substantially all of the Partnership's net available cash from prior
quarter operations. The Partnership intends to continue making quarterly
distributions consistent with its cash distribution policy.
Net available cash per Unit from operations for the three months ended
March 31, 1996 and 1997 was determined as follows:
THREE MONTHS ENDED
MARCH 31,
--------------------
1996 1997
-------- --------
Net income per Unit .................................... $ .11 $ .14
Depreciation, depletion and amortization
charges per Unit .................................. .06 .05
Exploration and dry hole costs per Unit ................ .01 .01
-------- --------
Net available cash per Unit .......................... $ .18 $ .20
======== ========
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
FROM TIME TO TIME, THE COMPANY MAY PUBLISH 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 COMPANY. 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 COMPANY,
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," "EXPERT," "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.
8
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PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
Initial test results for wells completed in the first quarter of 1997
are summarized in the following table.
INITIAL TEST RESULTS(1) FROM
FIRST 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>
Sutton A #4-Alt .... 1/16/97 Hosston 7349 - 10140' 16 2,250 3,086 18 .2234158
West Bryceland ... A & B
Bienville, LA
Baker Land Co. #1-AH 2/18/97 Hosston 7954 - 9809' 15 2,300 3,114 13 .2361488
Sailes ........... A & B
Bienville, LA
</TABLE>
(1) Reflects initial test results reported under state reporting
requirements and may not be indicative of actual producing rates to sales.
9
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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 1994
DEVELOPMENT DRILLING PROGRAM
By: KELLEY OIL CORPORATION
Managing General Partner
Date: May 15, 1997 By: /s/ DAVID C. BAGGETT
David C. Baggett
Senior Vice President and
Chief Financial Officer
(Duly Authorized Officer)
(Principal Accounting Officer)
10
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 5
<SECURITIES> 0
<RECEIVABLES> 7,755
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 7,760
<PP&E> 44,695
<DEPRECIATION> 25,980
<TOTAL-ASSETS> 26,475
<CURRENT-LIABILITIES> 1,188
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 25,287
<TOTAL-LIABILITY-AND-EQUITY> 26,475
<SALES> 5,107
<TOTAL-REVENUES> 5,222
<CGS> 0
<TOTAL-COSTS> 863
<OTHER-EXPENSES> 1,379
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,980
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,980
<EPS-PRIMARY> .14
<EPS-DILUTED> 0
</TABLE>
