ITEM 1 - BUSINESS
May Drilling Partnership 1983-1 (the "Drilling or General Partnership") and May Limited Partnership 1983-1 (the "Limited Partnership") were organized by May Petroleum Inc. ("May") to explore for and develop oil and gas reserves primarily in Texas, Oklahoma and Louisiana. Funds received from the sale and production of oil and gas reserves are used to pay the obligations of the Limited Partnership. Funds not required by the Limited Partnership as working capital are distributed to the participants in the Drilling Partnership and the general partner.
The general partner of the Limited Partnership is EDP Operating, Ltd., which is one of the operating partnerships for Hallwood Energy Partners, L. P. ("HEP"). The Drilling Partnership is the sole limited partner of the Limited Partnership. The Limited Partnership does not have any subsidiaries, nor does it engage in any other kind of business. The Limited Partnership has no employees and is operated by Hallwood Petroleum, Inc. ("HPI"), a subsidiary of HEP. In February 1998, HPI employed 123 full-time employees.
Pursuant to the terms of the general partnership agreement and the limited partnership agreement, HEP is obligated, from time to time, to contribute certain amounts, in property, cash or unreimbursed services, to the Limited Partnership. As of December 31, 1997, all such required contributions had been made.
Participation in Expenses and Revenues
The principal expenses and revenues of the Limited Partnership are shared by the general partner and the Drilling Partnership as set forth in the following table. The charges and credits to participants in the Drilling Partnership are shared among the participants in proportion to their ownership of units of participation.
1997 1996 1995 ---- ---- ----
Limited Partner 57.6% 57.7% 57.9%
General Partner 42.4% 42.3% 42.1%
In 1998, the sharing ratio will be 57.5% to the limited partner and 42.5% to the general partner.
To the extent that the characterization of any expense of the Limited Partnership depends on its deductibility for federal income tax purposes, the proper characterization is determined by the general partner (according to its intended characterization on the Limited Partnership's federal income tax return) in good faith at the time the expense is to be charged or credited. Such characterization will control related charges and credits to the partners regardless of any subsequent determination by the Internal Revenue Service or a court of law that the reported expenses should be otherwise characterized for tax purposes.
Competition
Oil and gas must compete with coal, atomic energy, hydro-electric power and other forms of energy. See also "Marketing" for a discussion of the market structure for oil and gas sales.
Regulation
Production and sale of oil and gas is subject to federal and state governmental regulations in a variety of ways including environmental regulations, labor law, interstate sales, excise taxes and federal, state and Indian lands royalty payments. Failure to comply with these regulations may result in fines, cancellation of licenses to do business and cancellation of federal, state or Indian leases.
The production of oil and gas is subject to regulation by the state regulatory agencies in the states in which the Limited Partnership does business. These agencies make and enforce regulations to prevent waste of oil and gas and to protect the rights of owners to produce oil and gas from a common reservoir. The regulatory agencies regulate the amount of oil and gas produced by assigning allowable production rates to wells capable of producing oil and gas.
Federal Income Tax Considerations
The Limited Partnership and the General Partnership are partnerships for federal income tax purposes. Consequently, they are not taxable entities; rather, all income, gains, losses, deductions and credits are passed through and taken into account by the partners on their individual federal income tax returns. In general, distributions are not subject to tax so long as such distributions do not exceed the partner's adjusted tax basis. Any distributions in excess of the partner's adjusted tax basis are taxed generally as capital gains.
Marketing
The oil and gas produced from the properties owned by the Limited Partnership has typically been marketed through normal channels for such products. Oil has generally been sold to purchasers at field prices posted by the principal purchasers of crude oil in the areas where the producing properties are located. The majority of the Limited Partnership's gas production is sold on the spot market and is transported in intrastate and interstate pipelines. Both oil and natural gas are purchased by refineries, major oil companies, public utilities and other users and processors of petroleum products.
Factors which, if they were to occur, might adversely affect the Limited Partnership include decreases in oil and gas prices, the availability of a market for production, rising operational costs of producing oil and gas, compliance with and changes in environmental control statutes and increasing costs and difficulties of transportation.
Significant Customer
For the years ended December 31, 1997, 1996 and 1995, purchases by the following company exceeded 10% of the total oil and gas revenues of the Limited Partnership:
1997 1996 1995 - ----- - ----- - ----
Conoco Inc. 79% 89% 91%
Although the Limited Partnership sells the majority of its production to one purchaser, there are numerous other purchasers in the area, so the loss of its significant customer would not adversely affect the Limited Partnership's operations.
Environmental Considerations
The exploration for, and development of, oil and gas involve the extraction, production and transportation of materials which, under certain conditions, can be hazardous or can cause environmental pollution problems. In light of the present general interest in environmental problems, the general partner cannot predict what effect possible future public or private action may have on the business of the Limited Partnership. The Limited Partnership's historical environmental expenditures have not been material and are not expected to be material in the future. The general partner is continually taking all actions it believes necessary in its operations to ensure conformity with applicable federal, state and local environmental regulations and does not presently anticipate that the compliance with federal, state and local environmental regulations will have a material adverse effect upon capital expenditures, earnings or the competitive position of the Limited Partnership in the oil and gas industry.
Insurance Coverage
The Limited Partnership is subject to all the risks inherent in the exploration for, and development of, oil and gas, including blowouts, fires and other casualties. The Limited Partnership maintains insurance coverage as is customary for entities of a similar size engaged in operations similar to the Limited Partnership's, but losses can occur from uninsurable risks or in amounts in excess of existing insurance coverage. The occurrence of an event which is not insured or not fully insured could have an adverse impact upon the Limited Partnership's earnings and financial position.
Issues Related to the Year 2000
As the year 2000 approaches, there are uncertainties concerning whether computer systems will properly recognize date-sensitive information when the year changes to 2000. Systems that do not properly recognize such information could generate erroneous data or fail.
Because of the nature of the oil and gas industry and the necessity for the Limited Partnership to make reserve estimates and other plans well beyond the year 2000, the Limited Partnership's computer systems and software were already configured to accommodate dates beyond the year 2000. The Limited Partnership believes that the year 2000 will not pose significant operational problems for the Limited Partnership's computer systems. The Limited Partnership has not yet completed its assessment of all of its systems, or the computer systems of third parties with which it deals, and it is not possible at this time to assess the effect of a third party's inability to adequately address year 2000 issues on the operations of the Limited Partnership.
ITEM 2
ITEM 2 - PROPERTIES
The Limited Partnership's oil and gas reserves are located on properties in south Louisiana. The Limited Partnership's reserves are predominantly natural gas, which accounts for 89% of estimated future gross revenues in the Limited Partnership's reserve report as of December 31, 1997.
Significant Properties
At December 31, 1997, the following properties accounted for approximately 92% of the Limited Partnership's proved oil and gas reserves. Reserve quantities were obtained from the December 31, 1997 reserve report prepared by HPI's petroleum engineers.
Boudreaux Prospect. The Boudreaux prospect is located in Lafayette Parish, Louisiana. The Limited Partnership's interest in the prospect has remaining net proved reserves of 8,800 bbls of oil and 421,900 mcf of gas as of December 31, 1997, all of which are developed and producing at December 31, 1997. The Limited Partnership's working interest in this prospect ranges up to 1.1%.
Meaux Prospect. The Meaux prospect is located in Lafayette Parish, Louisiana. The Limited Partnership's interest in the prospect has remaining net proved reserves of 100 bbls of oil and 22,800 mcf of gas as of December 31, 1997, all of which are developed and producing at December 31, 1997. The Limited Partnership's working interest is 8.5%.
ITEM 3
ITEM 3 - LEGAL PROCEEDINGS
For a description of legal proceedings affecting the Limited Partnership, please refer to Item 8 - Note 4.
ITEM 4
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS
No matter was submitted to a vote of participants during the fourth quarter of 1997.
PART II
ITEM 5
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
a) The registrant's securities consist of partnership interests which are not traded on any exchange and for which no established public trading market exists.
b) As of December 31, 1997, there were approximately 364 holders of record of partnership interests in the Drilling Partnership.
c) Distributions paid by the Limited Partnership were as follows (in thousands):
General Limited Partner Partner
1997 $ 42 $ 58 1996 88 120 1995 18
ITEM 6
ITEM 6 - SELECTED FINANCIAL DATA
ITEM 7
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
Material changes in the Limited Partnership's cash position for the years ended December 31, 1997 and 1996 are summarized as follows:
1997 1996 ----- ----
(In thousands)
Cash provided by operating activities $ 161 $ 223 Distributions to partners (100) (208) Additions to oil and gas properties (13) (15) ------ ---- Increase in cash $ 48 $ ======= ===== Cash provided by operating activities in 1997 was used for distributions to the partners and additions to oil and gas properties. The Limited Partnership has net working capital of $214,000 as of December 31, 1997. This working capital, together with future net cash flows generated from operations, may be used to fund future distributions. Future distributions depend on, among other things, continuation of current or higher oil and gas prices, markets for production and future development costs.
The Limited Partnership's ability to generate funds adequate to meet its future needs will be largely dependent upon its ability to continue to further develop its existing reserves. Proved reserves and discounted future net revenues valued at year-end prices (discounted at 10% and before general and administrative expenses) from proved reserves were estimated at 9,000 bbls and 487,000 mcf valued at $1,062,000 in 1997 and 11,000 bbls and 575,000 mcf valued at $1,875,000 in 1996. The decrease in discounted future net revenues and the fluctuation in the quantities resulted from a decrease in year end oil and gas prices, as well as current year production and changes in the estimated rates of future production on certain wells.
Results of Operations
1997 Compared to 1996
Oil Revenue
Oil revenue decreased $5,000 during 1997 as compared with 1996 primarily due to a decrease in the average oil price from $21.67 per barrel in 1996 to $20.15 per barrel in 1997, combined with an 8% decrease in production as shown in the table below. The decrease in production is due to normal production declines.
Gas Revenue
Gas revenue decreased $47,000 during 1997 as compared with 1996. The decrease is due to a decrease in the average gas price from $2.92 per mcf during 1996 to $2.79 per mcf during 1997, combined with a 12% decrease in production as shown below. The decrease in production is primarily due to normal production declines.
The following table summarizes the Limited Partnership's share of production from the Limited Partnership's significant properties for 1997 and 1996.
Lease Operating
Lease operating expense decreased $16,000 during 1997 as compared with 1996 primarily due to lower costs associated with salt water disposal resulting from recompletion work performed during 1997 on the A.L. Boudreaux #1 and the G.S. Boudreaux Estate #1 which lowered the production of saltwater.
General and Administrative
General and administrative expenses increased $5,000 during 1997 as compared with 1996 due to an increase in performance based compensation expense.
Depletion
Depletion expense decreased $4,000 during 1997 as compared with 1996 as a result of decreased production and lower capitalized costs during 1997.
Litigation Settlement
Litigation settlement expense during 1997 and 1996 represents the expense associated with the settlement of property related claims.
Professional Services and Other
Professional services and other expense increased $2,000 during 1997 as compared with 1996. The increase is comprised of an increase in legal fees relating to the settlement of property related claims and an increase in miscellaneous other expenses, none of which are individually significant.
1996 Compared to 1995
Oil Revenue
Oil revenue increased $5,000 during 1996 as compared with 1995. The increase is comprised of an increase in the average oil price from $17.68 per barrel in 1995 to $21.67 per barrel in 1996 partially offset by a 5% decrease in production as shown in the table below. The decrease in production is primarily due to normal production declines.
Gas Revenue
Gas revenue increased $106,000 during 1996 as compared with 1995. The increase is due to an increase in the average gas price from $1.83 per mcf during 1995 to $2.92 per mcf during 1996, partially offset by a 2% decrease in production as shown below. The decrease in production is primarily due to normal production declines.
The following table summarizes the Limited Partnership's share of production from the Limited Partnership's significant properties for 1996 and 1995.
Interest Income
Interest income increased $2,000 during 1996 as compared with 1995 due to a higher average cash balance during 1996.
Lease Operating
Lease operating expense decreased $5,000 during 1996 as compared with 1995 primarily due to decreases in operating expenses resulting from cost saving measures implemented during 1996.
General and Administrative
General and administrative expenses decreased $13,000 during 1996 as compared with 1995 primarily due to a decrease in the allocation of overhead from the general partner.
Depletion
Depletion expense decreased $8,000 during 1996 as compared with 1995 as a result of decreased production and lower capitalized costs during 1996.
Litigation Settlement
Litigation settlement expense during 1996 represents the settlement of a property related lawsuit. The litigation settlement expense during 1995 primarily represents amounts paid in connection with the settlement of a royalty dispute on the Duhon #1 well.
INDEPENDENT AUDITORS' REPORT
To the Partners of May Drilling Partnership 1983-1 and May Limited Partnership 1983-1:
We have audited the financial statements of May Drilling Partnership 1983-1 ("General Partnership") and May Limited Partnership 1983-1 ("Limited Partnership") as of December 31, 1997 and 1996 and for each of the three years in the period ended December 31, 1997, listed in the accompanying index at Item 8.
ITEM 9 - DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Drilling Partnership and Limited Partnership are managed by affiliates of HEP and do not have directors or executive officers.
ITEM 11
ITEM 11 - EXECUTIVE COMPENSATION
The partnerships pay no salaries or other direct remuneration to officers, directors or key employees of the general partner or HPI. The Limited Partnership reimburses the general partner for general and administrative costs incurred on behalf of the partnerships. See Note 2 to the Financial Statements.
ITEM 12
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
To the knowledge of the general partner, no person owns of record or beneficially more than 5% of the Drilling Partnership's outstanding units, other than HEP, the address of which is 4582 S. Ulster Street Parkway, Denver, Colorado 80237, and which beneficially owns approximately 38.8% of the outstanding units. The general partner of HEP is HEPGP Ltd.
ITEM 13
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For information with respect to the Limited Partnership and its relationships and transactions with the general partner, see Part I, Item 1 and Part II, Item 7.
PART IV
ITEM 14
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
a. Financial Statements and Schedules: See Index at Item 8.
b. Reports on Form 8-K - None.
c. Exhibits:
3.1 The General Partnership Agreement and the Limited Partnership Agreement filed as an Exhibit to Registration Statement No. 0-11311, are incorporated herein by reference.
- 24 - SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Partnerships have duly caused this report to be signed on their behalf by the undersigned, thereunto duly authorized.
MAY DRILLING PARTNERSHIP 1983-1 MAY LIMITED PARTNERSHIP 1983-1
By: EDP OPERATING, LTD., General Partner
By: HEPGP LTD., General Partner
By: HALLWOOD G.P., INC., General Partner
By: /s/William L. Guzzetti William L. Guzzetti President, Chief Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/Robert S.Pfeiffer Vice President February 27, 1998 Robert S. Pfeiffer (Principal Accounting Officer)