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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 MARCH 31, 1998 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
--- ---
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KELLEY PARTNERS 1994 DEVELOPMENT DRILLING PROGRAM
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
<S> <C>
Balance Sheets as of December 31, 1997 and March 31, 1998 (unaudited).............................. 2
Statements of Income for the three months ended March 31, 1997 and 1998 (unaudited)................ 3
Statements of Cash Flows for the three months ended March 31, 1997 and 1998 (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
</TABLE>
1
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
KELLEY PARTNERS 1994 DEVELOPMENT DRILLING PROGRAM
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
------------ ---------
(UNAUDITED)
<S> <C> <C>
ASSETS:
Cash and cash equivalents............................................................. $ -- $ --
Accounts receivable - trade .......................................................... 59 27
Accounts receivable - affiliates ..................................................... 5,979 5,187
-------- --------
Total current assets ................................................................. 6,038 5,214
-------- --------
Oil and gas properties, successful efforts method:
Properties subject to amortization ................................................. 45,209 45,437
Less: Accumulated depreciation, depletion & amortization .......................... (29,466) (30,327)
-------- --------
Total oil and gas properties ......................................................... 15,743 15,110
-------- --------
Total assets........................................................................ $ 21,781 $ 20,324
======== ========
LIABILITIES:
Accounts payable and accrued expenses................................................. $ 487 $ 235
-------- --------
Total current liabilities ............................................................ 487 235
-------- --------
Total liabilities .................................................................. 487 235
-------- --------
PARTNERS' EQUITY:
LP Unitholders' equity ............................................................... 1,172 1,106
GP Unitholders' equity ............................................................... 19,280 18,189
Managing and Special General Partners' equity ........................................ 842 794
-------- --------
Total partners' equity ............................................................... 21,294 20,089
-------- --------
Total liabilities and partners' equity.............................................. $ 21,781 $ 20,324
======== ========
</TABLE>
See Notes to Financial Statements.
2
<PAGE> 4
KELLEY PARTNERS 1994 DEVELOPMENT DRILLING PROGRAM
STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER UNIT DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1997 1998
------- -------
<S> <C> <C>
OPERATING REVENUES:
Oil and gas sales..................................................................... $ 5,107 $ 2,650
Interest income ...................................................................... 115 --
------- -------
Total revenues ....................................................................... 5,222 2,650
------- -------
COSTS AND EXPENSES:
Lease operating expenses ............................................................. 582 228
Severance taxes ...................................................................... 158 138
Exploration expenses ................................................................. 123 --
General and administrative expenses .................................................. 234 238
Depreciation, depletion and amortization ............................................. 1,145 861
------- -------
Total expenses ....................................................................... 2,242 1,465
------- -------
Net income............................................................................... $ 2,980 $ 1,185
======= =======
Net income allocable to LP and GP Unitholders............................................ $ 2,862 $ 1,138
======= =======
Net income allocable to Managing and
Special General Partners.............................................................. $ 118 $ 47
======= =======
Net income per LP and GP unit............................................................ $ .14 $ .05
======= =======
Average LP and GP units outstanding ..................................................... 20,864 20,864
======= =======
</TABLE>
See Notes to Financial Statements.
3
<PAGE> 5
KELLEY PARTNERS 1994 DEVELOPMENT DRILLING PROGRAM
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1997 1998
------- -------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income............................................................................ $ 2,980 $ 1,185
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization ........................................... 1,145 861
Exploration expenses ............................................................... 123 --
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable ......................................... (1,336) 824
Decrease in accounts payable and accrued expenses .................................. (1,609) (252)
------- -------
Net cash provided by operating activities ............................................ 1,303 2,618
------- -------
INVESTING ACTIVITIES:
Capital expenditures ................................................................. (948) (228)
------- -------
Net cash used in investing activities ................................................ (948) (228)
------- -------
FINANCING ACTIVITIES:
Capital contributed by partners ...................................................... 4,404 --
Distributions to partners ............................................................ (4,779) (2,390)
------- -------
Net cash used in financing activities ................................................ (375) (2,390)
------- -------
Decrease in cash and cash equivalents ................................................... (20) --
Cash and cash equivalents, beginning of period .......................................... 25 --
------- -------
Cash and cash equivalents, end of period................................................. $ 5 $ --
======= =======
</TABLE>
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 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 period ended March 31, 1998 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, 1997. These
unaudited interim financial statements should be read in conjunction with the
audited financial statements and notes thereto included in the Partnership's
1997 Annual Report on Form 10-K.
Changes in Presentation. Certain 1997 financial statement items have
been reclassified to conform to the 1998 presentation.
Comprehensive Income. In June 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS 130"). SFAS 130 is effective for periods beginning
after December 15, 1997. SFAS 130 establishes standards for reporting and
displaying comprehensive income and its components. The purpose of reporting
comprehensive income is to report a measure of all changes in equity of an
enterprise that results from recognized transactions and other economic events
of the period other than transactions with owners in their capacity as owners.
As of March 31, 1998, there are no adjustments ("Other comprehensive income") to
net income in deriving comprehensive income.
5
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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 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 Kelley Oil & Gas Corporation ("KOGC"), owns 91.85% of
the Units, together with its 3.94% managing general partnership interest.
RECENT DEVELOPMENTS
Drilling Operations. Since inception, the Partnership participated in
drilling 92 gross (29.31 net) wells, of which 88 gross (26.64 net) wells were
found productive and 4 gross (2.67 net) wells were dry. See "Liquidity and
Capital Resources" below.
Hedging Activities. KOGC has periodically used forward sales contracts,
natural gas swap agreements, natural gas basis swap agreements and options to
reduce exposure to downward price fluctuations on its natural gas production.
KOGC's hedging activities also cover the gas production attributable to the
interest in such production of the public unitholders in its subsidiary
partnerships. The credit risk exposure from counterparty nonperformance on
natural gas forward sales contracts and derivative financial instruments is
generally the amount of unrealized gains under the contracts. KOGC has not
experienced counterparty nonperformance on these agreements and does not
anticipate any in future periods.
Through natural gas price swap agreements, approximately 29% of the
Partnership's natural gas production for the first quarter of 1998 was affected
by hedging transactions at an average NYMEX quoted price of $2.38 per Mmbtu
before transaction and transportation costs. Hedging activities increased
Partnership revenues by approximately $77,000 in the first quarter of 1998 as
compared to estimated revenues had no hedging activities been conducted. As of
March 31, 1998, approximately 31% of the Partnership's anticipated natural gas
production for the remainder of 1998 had been hedged by natural gas price swap
agreements at an average NYMEX quoted price of $2.27 per Mmbtu before
transaction and transportation costs. Certain natural gas price swap agreements
outstanding at March 31, 1998 grant the counterparty the option to double the
contract volume at a specified price. If this option is exercised on all
contracts outstanding at March 31, 1998, approximately 47% of the Partnership's
anticipated natural gas production for April 1998 through December 1998 has been
hedged by natural gas price swap agreements at an average NYMEX quoted price of
$2.29 per Mmbtu before transaction and transportation costs. In addition, as of
March 31, 1998, outstanding natural gas basis swap agreements hedged
approximately 51% of the Partnership's anticipated natural gas production for
April 1998 through September 1998.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1998 and 1997. Oil and gas revenues of
$2,650,000 for the first quarter of 1998 decreased 48% compared to $5,107,000 in
the corresponding quarter of 1997 primarily as a result of lower gas production
volume and prices. Production of natural gas decreased 38% from 2,034,000 Mcf in
the first quarter of 1997 to 1,251,000 Mcf in the same period of 1998. Natural
gas prices of $2.43 per Mcf in the first quarter of 1997, decreased 16% to $2.05
in the corresponding quarter of 1998. Gas production decreased due to natural
depletion.
Interest income decreased 100% from $115,000 in the first quarter of
1997 to zero dollars in the current quarter. This was due to Kelley Oil funding
its subscription commitment in its entirety during the second quarter of 1997.
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Lease operating expenses and severance taxes were $366,000 in the
current quarter versus $740,000 in the first quarter of 1997. This 51% decrease
was due in part to lower workover expenses incurred in the first quarter of
1998. On a unit of production basis, these expenses decreased from $0.36 per
Mcfe in the first quarter of 1997 to $0.29 per Mcfe in the same quarter of 1998.
The Partnership incurred exploration expenses in the first quarter of
1997 of $123,000 but did not incur any exploration expenses in the first quarter
of 1998 reflecting the cessation of exploratory activities.
General and administrative expenses of $238,000 in the current quarter
increased 2% from $234,000 in the first quarter of 1997, reflecting the
Partnership's share of administration costs associated with development
operations of KOGC. On a unit of production basis, these expenses increased from
$0.11 per Mcfe in the first quarter of 1997 to $0.19 per Mcfe in the current
quarter.
Depreciation, depletion and amortization ("DD&A") expense decreased 25%
from $1,145,000 in the first quarter of 1997 to $861,000 in the current quarter,
primarily as a result of decreased production partially offset by higher
depletion rates.
The Partnership recognized net income of $1,185,000 or $0.05 per Unit
for the first quarter of 1998 compared to first quarter 1997 net income of
$2,980,000 or $0.14 per Unit. The reasons for the variance between the first
quarter of 1998 and the first quarter of 1997 are described in the foregoing
discussion.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity. Net cash provided by the Partnership's operating activities
during the first three months of 1998, as reflected on its statement of cash
flows, totaled $2,618,000. During the period, funds used in investing activities
were comprised of capital expenditures of $228,000 for development of the
Partnership's oil and gas properties. For the first three months of 1998, cash
distributions to partners totaled $2,390,000. As a result of these activities,
the Partnership's cash and cash equivalents remained unchanged from December 31,
1997.
Capital Resources. The capitalization of the partnership was completed
in 1997. 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 February 1998, the
Partnership made a quarterly distribution of $0.11 per Unit (aggregating
$2,390,000) as compared to a distribution of $0.22 per Unit (aggregating
$4,779,000) in the first quarter of 1997. 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 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,
7
<PAGE> 9
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, 1997.
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 5. OTHER INFORMATION
Initial test results for wells completed in the first quarter of 1998
are summarized in the following Table.
INITIAL TEST RESULTS(1) FROM
FIRST QUARTER 1998 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>
Woodard Walker "G" 2-Alt 2/12/98 Hosston A&B 6922-8820' 12 2,080 1,494 12 .3100849
Ada
Bienville, 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:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER: EXHIBIT
------- -------
<S> <C>
27 Financial Data Schedule (included only in the
electronic filing of this document).
</TABLE>
(b) Reports on Form 8-K:
No reports on Form 8-K were filed by the Registrant during the
first quarter of 1998.
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 1994
DEVELOPMENT DRILLING PROGRAM
By: KELLEY OIL CORPORATION
Managing General Partner
Date: May 13, 1998 By: /s/ David C. Baggett
-----------------------------------
David C. Baggett
Senior Vice President and
Chief Financial Officer
(Duly Authorized Officer)
(Principal Financial Officer)
9
<PAGE> 11
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER: EXHIBIT
------- -------
<S> <C>
27 Financial Data Schedule (included only in the
electronic filing of this document).
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 5,214
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,214
<PP&E> 45,437
<DEPRECIATION> 30,327
<TOTAL-ASSETS> 20,324
<CURRENT-LIABILITIES> 235
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 20,089
<TOTAL-LIABILITY-AND-EQUITY> 20,324
<SALES> 2,650
<TOTAL-REVENUES> 2,650
<CGS> 0
<TOTAL-COSTS> 366
<OTHER-EXPENSES> 1,099
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,185
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,185
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,185
<EPS-PRIMARY> .05
<EPS-DILUTED> .05
</TABLE>
