ITEM 1. BUSINESS
General
The Dyco Oil and Gas Program 1981-1 Limited Partnership (the "Program") is a Minnesota limited partnership engaged in the production of oil and gas. The Program commenced operations on February 7, 1981 with the primary financial objective of investing its limited partners' subscriptions in the drilling of oil and gas prospects and then distributing to its limited partners all available cash flow from the Program's on-going production operations. Dyco Petroleum Corporation ("Dyco") serves as the General Partner of the Program. See "Item 2.
ITEM 2. PROPERTIES
Well Statistics
The following table sets forth the numbers of gross and net productive wells of the Program as of December 31, 1999.
Well Statistics(1) As of December 31, 1999
Gross productive wells(2): Oil - Gas 11 -- Total 11
Net productive wells(3): Oil - Gas .64 --- Total .64
- ---------- (1) The designation of a well as an oil well or gas well is made by Dyco based on the relative amount of oil and gas reserves for the well. Regardless of a well's oil or gas designation, it may produce oil, gas, or both oil and gas. (2) As used throughout this Annual Report on Form 10-K405 ("Annual Report"), "Gross Well" refers to a well in which a working interest is owned. The number of gross wells is the total number of wells in which a working interest is owned. (3) As used throughout this Annual Report, "Net Well" refers to the sum of the fractional working interests owned in gross wells. For example, a 15% working interest in a well represents one Gross Well, but 0.15 Net Well.
Drilling Activities
The Program did not participate in any drilling activities during 1999.
Oil and Gas Production, Revenue, and Price History
The following table sets forth certain historical information concerning the oil (including condensates) and gas production, net of all royalties, overriding royalties, and other third party interests, of the Program, revenues attributable to such production, and certain price and cost information.
Net Production Data
Year Ended December 31, ---------------------------- 1999 1998 1997 -------- -------- --------
Production: Oil (Bbls)(1) 88 180 169 Gas (Mcf)(2) 70,822 94,361 64,261
Oil and gas sales: Oil $ 1,421 $ 2,469 $ 3,367 Gas 157,275 190,556 163,297 ------- ------- ------- Total $158,696 $193,025 $166,664 ======= ======= ======= Total direct operating expenses(3) $ 35,823 $ 35,473 $ 86,425 ======= ======= ======= Direct operating expenses as a percentage of oil and gas sales 22.6% 18.4% 51.9%
Average sales price: Per barrel of oil $16.15 $13.72 $19.92 Per Mcf of gas 2.22 2.02 2.54
Direct operating expenses per equivalent Mcf of gas(4) $ .50 $ .37 $ 1.32
- ----------
(1) As used throughout this Annual Report, "Bbls" refers to barrels of 42 U.S. gallons and represents the basic unit for measuring the production of crude oil and condensate oil. (2) As used throughout this Annual Report, "Mcf" refers to volume of 1,000 cubic feet under prescribed conditions of pressure and temperature and represents the basic unit for measuring the production of gas. (3) Includes lease operating expenses and production taxes. (4) Oil production is converted to gas equivalents at the rate of six Mcf per barrel, representing the estimated relative energy content of gas and oil, which rate is not necessarily indicative of the relationship of oil and gas prices. The respective prices of oil and gas are affected by market and other factors in addition to relative energy content.
Proved Reserves and Net Present Value
The following table sets forth the Program's estimated proved oil and gas reserves and net present value therefrom as of December 31, 1999. The schedule of quantities of proved oil and gas reserves was prepared by Dyco in accordance with the rules
prescribed by the Securities and Exchange Commission (the "SEC"). Certain reserve information was reviewed by Ryder Scott Company, L.P. ("Ryder Scott"), an independent petroleum engineering firm. As used throughout this Annual Report, "proved reserves" refers to those estimated quantities of crude oil, gas, and gas liquids which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known oil and gas reservoirs under existing economic and operating conditions.
Net present value represents estimated future gross cash flow from the production and sale of proved reserves, net of estimated oil and gas production costs (including production taxes, ad valorem taxes, and operating expenses), and estimated future development costs, discounted at 10% per annum. Net present value attributable to the Program's proved reserves was calculated on the basis of current costs and prices at December 31, 1999. Such prices were not escalated except in certain circumstances where escalations were fixed and readily determinable in accordance with applicable contract provisions. The prices used by Dyco in calculating the net present value attributable to the Program's proved reserves do not necessarily reflect market prices for oil and gas production subsequent to December 31, 1999. There can be no assurance that the prices used in calculating the net present value of the Program's proved reserves at December 31, 1999 will actually be realized for such production.
The process of estimating oil and gas reserves is complex, requiring significant subjective decisions in the evaluation of available geological, engineering, and economic data for each reservoir. The data for a given reservoir may change substantially over time as a result of, among other things, additional development activity, production history, and viability of production under varying economic conditions; consequently, it is reasonably possible that material revisions to existing reserve estimates may occur in the near future. Although every reasonable effort has been made to ensure that these reserve estimates represent the most accurate assessment possible, the significance of the subjective decisions required and variances in available data for various reservoirs make these estimates generally less precise than other estimates presented in connection with financial statement disclosures.
Proved Reserves and Net Present Value From Proved Reserves
As of December 31, 1999(1)
Estimated proved reserves: Gas (Mcf) 389,889 Oil and liquids (Bbls) 2,894
Net present value (discounted at 10% per annum) $364,577
- --------------
(1) Includes certain gas balancing adjustments which cause the gas volumes and net present value to differ from the reserve reports prepared by Dyco and reviewed by Ryder Scott.
No estimates of the proved reserves of the Program comparable to those included herein have been included in reports to any federal agency other than the SEC. Additional information relating to the Program's proved reserves is contained in Note 4 to the Program's financial statements, included in Item 8 of this Annual Report.
Significant Properties
As of December 31, 1999 the Program's properties consisted of 11 gross (.64 net) productive wells. The Program also owned a non-working interest in an additional 17 wells. Affiliates of the Program operate 9 (32%) of its total wells. All of the Program's reserves are located in the Anadarko Basin of western Oklahoma and the Texas panhandle, which is an established oil and gas producing basin.
Title to Oil and Gas Properties
Management believes that the Program has satisfactory title to its oil and gas properties. Record title to substantially all of the Program's properties is held by Dyco as nominee.
Title to the Program's properties is subject to customary royalty, overriding royalty, carried, working, and other similar interests and contractual arrangements customary in the oil and gas industry, to liens for current taxes not yet due, and to other encumbrances. Management believes that such burdens do not materially detract from the value of such properties or from the Program's interest therein or materially interfere with their use in the operation of the Program's business.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
To the knowledge of the management of Dyco and the Program, neither Dyco, the Program, nor the Program's properties are subject to any litigation, the results of which would have a material effect on the Program's or Dyco's financial condition or operations.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF LIMITED PARTNERS
There were no matters submitted to a vote of the limited partners during 1999.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S LIMITED PARTNERSHIP UNITS AND RELATED LIMITED PARTNER MATTERS
The Program does not have an established trading market for its units of limited partnership interest ("Units"). Pursuant to the terms of the Program Agreement, Dyco, as general partner, is obligated to annually issue a repurchase offer which is based on the estimated future net revenues from the Program's reserves and is calculated pursuant to the terms of the Program Agreement. Such repurchase offer is recalculated monthly in order to reflect cash distributions made to the limited partners and extraordinary events. The following table sets forth, for the periods indicated, Dyco's repurchase offer per Unit and the amount of the Program's cash distributions per Unit for the same period. For purposes of this Annual Report, a Unit represents an initial subscription of $5,000 to the Program.
Repurchase Cash Price Distributions ---------- -------------
1998: First Quarter $50 $ - Second Quarter 50 - Third Quarter 43 20 Fourth Quarter 23 -
1999: First Quarter $23 $ - Second Quarter 23 - Third Quarter 51 - Fourth Quarter 51 -
2000: First Quarter $51 $ - - ---------------- As of March 1, 2000, the Program had 7,000 Units outstanding and approximately 2,050 Limited Partners of record.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected financial data for the Program. This data should be read in conjunction with the financial statements of the Program, and the respective notes thereto, included elsewhere in this Annual Report. See "Item 8. Financial Statements and Supplementary Data."
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Use of Forward-Looking Statements and Estimates
This Annual Report contains certain forward-looking statements. The words "anticipate," "believe," "expect," "plan," "intend," "estimate," "project," "could," "may," and similar expressions are intended to identify forward-looking statements. Such statements reflect management's current views with respect to future events and financial performance. This Annual Report also includes certain information which is, or is based upon, estimates and assumptions. Such estimates and assumptions are management's efforts to accurately reflect the condition and operation of the Program.
Use of forward-looking statements and estimates and assumptions involve risks and uncertainties which include, but are not limited to, the volatility of oil and gas prices, the uncertainty of reserve information, the operating risk associated with oil and gas properties (including the risk of personal injury, death, property damage, damage to the well or producing reservoir, environmental contamination, and other operating risks), the prospect of changing tax and regulatory laws, the availability and capacity of processing and transportation facilities, the general economic climate, the supply and price of foreign imports of oil and gas, the level of consumer product demand, and the price and availability of alternative fuels. Should one or more of these risks or uncertainties occur or should estimates or underlying assumptions prove incorrect, actual conditions or results may vary materially and adversely from those stated, anticipated, believed, estimated, or otherwise indicated.
General Discussion
The following general discussion should be read in conjunction with the analysis of results of operations provided below. The most important variable affecting the Program's revenues is the prices received for the sale of oil and gas. Predicting future prices is not possible. Concerning past trends, average yearly wellhead gas prices in the United States have been volatile for many years. Over the past ten years such average prices have generally been in the $1.40 to $2.40 per Mcf range. Gas prices are currently in the upper end of this range.
Substantially all of the Program's gas reserves are being sold on the "spot market." Prices on the spot market are subject to wide seasonal and regional pricing fluctuations due to the highly competitive nature of the spot market. In addition, such spot market sales are generally short-term in nature and are dependent upon the obtaining of transportation services provided by pipelines. Spot prices for the Program's gas increased from
approximately $1.93 per Mcf at December 31, 1998 to approximately $2.24 per Mcf at December 31, 1999. Such prices were on an MMBTU basis and differ from the prices actually received by the Program due to transportation and marketing costs, BTU adjustments, and regional price and quality differences.
For the past ten years, average oil prices have generally been in the $16.00 to $24.00 per barrel range, but have been extremely volatile over the past two years. Due to global consumption and supply trends as well as a slowdown in Asian energy demand, oil prices in late 1997 and early 1998 reached historically low levels, dropping to as low as approximately $9.00 per barrel. However, production curtailment agreements among major oil producing nations have caused recent oil prices to climb to over $30.00 per barrel in some markets. It is not known whether this trend will continue. Prices for the Program's oil increased from approximately $9.50 per barrel at December 31, 1998 to approximately $22.75 per barrel at December 31, 1999.
Future prices for both oil and gas will likely be different from the prices in effect on December 31, 1999. Management is unable to predict whether future oil and gas prices will (i) stabilize, (ii) increase, or (iii) decrease.
Results of Operations
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998 ----------------------------------------
Total oil and gas sales decreased $34,329 (17.8%) in 1999 as compared to 1998. Of this decrease, approximately $48,000 was related to a decrease in volumes of gas sold. This decrease was partially offset by an increase of approximately $14,000 related to an increase in the average price of gas sold. Volumes of oil and gas sold decreased 92 barrels and 23,539 Mcf, respectively, in 1999 as compared to 1998. The decrease in volumes of gas sold was primarily due to (i) positive prior period volume adjustments made by the purchasers on two wells during 1998, (ii) a negative gas balancing adjustment made by the operator on one well during 1999, and (iii) normal declines in production. Average oil and gas prices increased to $16.15 per barrel and $2.22 per Mcf, respectively, in 1999 from $13.72 per barrel and $2.02 per Mcf, respectively, in 1998.
Oil and gas production expenses (including lease operating expenses and production taxes) increased $350 (1.0%) in 1999 as compared to 1998. This increase was primarily due to (i) workover expenses incurred on one well during 1999 in order to improve the recovery of reserves and (ii) credits received from the operator on two wells during 1998 for prior period lease operating expenses. These increases were substantially offset by (i) a decrease in lease operating expenses associated with the
decrease in volumes of oil and gas sold and (ii) a decrease in production taxes as a result of a refund received during 1999. As a percentage of oil and gas sales, these expenses increased to 22.6% in 1999 from 18.4% in 1998. This percentage increase was primarily due to the dollar increase in oil and gas production expenses.
Depreciation, depletion, and amortization of oil and gas properties decreased $6,002 (42.8%) in 1999 as compared to 1998. This decrease was primarily due to (i) the decreases in volumes of oil and gas sold and (ii) the increase in the gas price used in the valuation of reserves at December 31, 1999. As a percentage of oil and gas sales, this expense decreased to 5.1% in 1999 from 7.3% in 1998. This percentage decrease was primarily due to the dollar decrease in depreciation, depletion, and amortization.
General and administrative expenses remained relatively constant in 1999 as compared to 1998. As a percentage of oil and gas sales, these expenses increased to 42.5% in 1999 from 35.2% in 1998. This percentage increase was primarily due to the decrease in oil and gas sales.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997 ----------------------------------------
Total oil and gas sales increased $26,361 (15.8%) in 1998 as compared to 1997. Of this increase, approximately $76,000 was related to an increase in volumes of gas sold, which increase was partially offset by a decrease of approximately $49,000 related to a decrease in the average price of gas sold. Volumes of oil and gas sold increased by 11 barrels and 30,100 Mcf, respectively, in 1998 as compared to 1997. The increase in volumes of gas sold was primarily due to a negative gas balancing adjustment on one well in 1997. Average oil and gas prices decreased to $13.72 per barrel and $2.02 per Mcf, respectively, in 1998 from $19.92 per barrel and $2.54 per Mcf, respectively, in 1997.
Oil and gas production expenses (including lease operating expenses and production taxes) decreased $50,952 (59.0%) in 1998 as compared to 1997. This decrease resulted primarily from (i) workover expenses incurred in 1997 on one well in order to improve the recovery of reserves and (ii) negative prior period lease operating expense adjustments made by the operator during 1998 on two wells. As a percentage of oil and gas sales, these expenses decreased to 18.4% in 1998 from 51.9% in 1997. This percentage decrease was primarily due to the dollar decrease in lease operating expenses.
Depreciation, depletion, and amortization of oil and gas properties decreased $6,379 (31.3%) in 1998 as compared to 1997. This decrease resulted primarily from an upward revision in the estimate of remaining gas reserves at December 31, 1998, which decrease was partially offset by the increase in volumes of oil and gas sold. As a percentage of oil and gas sales, this expense decreased to 7.3% in 1998 from 12.2% in 1997. This percentage decrease was primarily due to the upward reserve revision.
General and administrative expenses decreased $6,598 (8.9%) in 1998 as compared to 1997. As a percentage of oil and gas sales, these expenses decreased to 35.2% in 1998 from 44.7% in 1997. This percentage decrease was primarily due to the increase in oil and gas sales.
Liquidity and Capital Resources
Net proceeds from operations less necessary operating capital are distributed to the limited partners on a quarterly basis. See "Item 5. Market for the Registrant's Limited Partnership Units and Related Limited Partner Matters." The net proceeds from production are not reinvested in productive assets, except to the extent that producing wells are improved, or where methods are employed to permit more efficient recovery of reserves, thereby resulting in a positive economic impact. Assuming 1999 production levels for future years, the Program's proved reserve quantities at December 31, 1999 would have a remaining life of approximately 5.5 years for gas reserves. Assuming average production levels for the three years ended December 31, 1999, the Program's proved oil reserve quantities at December 31, 1999 would have a remaining life of approximately 19.9 years. However, since the Program's reserve estimates are based on oil and gas prices at December 31, 1999, it is possible that a significant decrease in oil and gas prices from December 31, 1999 levels will reduce such reserves and their corresponding life-span.
The Program's available capital from the limited partners' subscriptions has been spent on oil and gas drilling activities and there should be no further material capital resource commitments in the future. Occasional expenditures by the Program for well completions or workovers, however, may reduce or eliminate cash available for a particular quarterly cash distribution. The Program has no debt commitments. Cash for operational purposes has generally been provided by current oil and gas production. Management believes that cash for ordinary operational purposes in the future will be provided by current oil and gas production.
The Program's Statements of Cash Flows for the years ended December 31, 1999, 1998, and 1997 include proceeds from the sale of oil and gas properties during 1999, 1998, and 1997. It is possible that the Program's repurchase values and the amount or
likelihood of future cash distributions could decline as a result of the disposition of these properties. On the other hand, the General Partner believes there will be beneficial operating efficiencies related to the Program's remaining properties. This is primarily due to the fact that the properties sold generally bore a higher ratio of operating expenses as compared to reserves than the Program's remaining properties.
There can be no assurance as to the amount of the Program's future cash distributions. The Program's ability to make cash distributions depends primarily upon the level of available cash flow generated by the Program's operating activities, which will be affected (either positively or negatively) by many factors beyond the control of the Program, including the price of and demand for oil and gas and other market and economic conditions. Even if prices and costs remain stable, the amount of cash available for distributions will decline over time (as the volume of production from producing properties declines) since the Program is not replacing production through acquisitions of producing properties and drilling.
Inflation and Changing Prices
Prices obtained for oil and gas production depend upon numerous factors, including the extent of domestic and foreign production, foreign imports of oil, market demand, domestic and foreign economic conditions in general, and governmental regulations and tax laws. The general level of inflation in the economy did not have a material effect on the operations of the Program in 1999. Oil and gas prices have fluctuated during recent years and generally have not followed the same pattern as inflation. See "Item 2. Properties - Oil and Gas Production, Revenue, and Price History."
Year 2000 Computer Issues
The year 2000 issue refers to the inability of computer and other information technology systems to properly process date and time information, stemming from the earlier programming practice of using two digits rather than four to represent the year in a date. To the knowledge of the General Partner, the Program has not experienced any material effects from the year 2000 issue. Costs incurred by the Program in order to ensure year 2000 compatibility were not material to the Program.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Program does not hold any market risk sensitive instruments.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE PARTNERS
DYCO OIL AND GAS PROGRAM 1981-1 LIMITED PARTNERSHIP
In our opinion, the accompanying balance sheets and the related statements of operations, changes in partners' capital and cash flows present fairly, in all material respects, the financial position of the Dyco Oil and Gas Program 1981-1 Limited Partnership, a Minnesota limited partnership, at December 31, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Program's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Tulsa, Oklahoma March 11, 2000
DYCO OIL AND GAS PROGRAM 1981-1 LIMITED PARTNERSHIP Balance Sheets December 31, 1999 and 1998
ASSETS ------ 1999 1998 -------- -------- CURRENT ASSETS: Cash and cash equivalents $ 88,532 $ 31,207 Accrued oil and gas sales 27,008 30,083 ------- ------- Total current assets $115,540 $ 61,290
NET OIL AND GAS PROPERTIES, utilizing the full cost method 35,194 53,958
DEFERRED CHARGE - 1,927 ------- -------
$150,734 $117,175 ======= =======
LIABILITIES AND PARTNERS' CAPITAL ---------------------------------- CURRENT LIABILITIES: Accounts payable $ 2,535 $ 2,847 Gas imbalance payable 17,787 10,976 ------- ------- Total current liabilities $ 20,322 $ 13,823
ACCRUED LIABILITY $ 56,362 $ 78,950
PARTNERS' CAPITAL: General Partner, 70 general partner units $ 739 $ 243 Limited Partners, issued and outstanding, 7,000 Units 73,311 24,159 ------- ------- Total Partners' capital $ 74,050 $ 24,402 ------- -------
$150,734 $117,175 ======= =======
The accompanying notes are an integral part of these financial statements
DYCO OIL AND GAS PROGRAM 1981-1 LIMITED PARTNERSHIP Statements of Operations For the Years Ended December 31, 1999, 1998, and 1997
1999 1998 1997 -------- -------- -------- REVENUES: Oil and gas sales $158,696 $193,025 $166,664 Interest 2,202 4,368 4,812 ------- ------- ------- $160,898 $197,393 $171,476
COSTS AND EXPENSES: Lease operating $ 29,641 $ 20,807 $ 75,972 Production taxes 6,182 14,666 10,453 Depreciation, depletion, and amortization of oil and gas properties 8,030 14,032 20,411 General and administrative 67,397 67,858 74,456 ------- ------- ------- $111,250 $117,363 $181,292 ------- ------- ------- NET INCOME (LOSS) $ 49,648 $ 80,030 ($ 9,816) ======= ======= ======= GENERAL PARTNER (1%) - NET INCOME (LOSS) $ 496 $ 800 ($ 98) ======= ======= ======= LIMITED PARTNERS (99%) - NET INCOME (LOSS) $ 49,152 $ 79,230 ($ 9,718) ======= ======= ======= NET INCOME (LOSS) per Unit $ 7.02 $ 11.32 ($ 1.39) ======= ======= ======= UNITS OUTSTANDING 7,070 7,070 7,070 ======= ======= =======
The accompanying notes are an integral part of these financial statements
DYCO OIL AND GAS PROGRAM 1981-1 LIMITED PARTNERSHIP Statements of Changes in Partners' Capital For the Years Ended December 31, 1999, 1998, and 1997
General Limited Partner Partners Total -------- ---------- ----------
Balances at December 31, 1996 $2,722 $269,616 $272,338 Cash distributions ( 1,767) ( 174,983) ( 176,750) Net loss ( 98) ( 9,718) ( 9,816) ----- ------- -------
Balances at December 31, 1997 $ 857 $ 84,915 $ 85,772 Cash distributions ( 1,414) ( 139,986) ( 141,400) Net income 800 79,230 80,030 ----- ------- -------
Balances at December 31, 1998 $ 243 $ 24,159 $ 24,402 Net income 496 49,152 49,648 ----- ------- -------
Balances at December 31, 1999 $ 739 $ 73,311 $ 74,050 ===== ======= =======
The accompanying notes are an integral part of these financial statements.
DYCO OIL AND GAS PROGRAM 1981-1 LIMITED PARTNERSHIP Statements of Cash Flows For the Years Ended December 31, 1999, 1998, and 1997
1999 1998 1997 ---------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 40,648 $ 80,030 ($ 9,816) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation, depletion, and amortization of oil and gas properties 8,030 14,032 20,411 (Increase) decrease in accrued oil and gas sales 3,075 ( 2,246) 27,927 Decrease in deferred charge 1,927 1,407 64,690 Decrease in accounts payable ( 312) ( 378) ( 8,736) Increase (decrease) in gas imbalance payable 6,811 ( 36,212) 20,276 Decrease in accrued liability ( 22,588) ( 6,455) ( 41,946) ------- ------- ------- Net cash provided by operating activities $ 46,591 $ 50,178 $ 72,806 ------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from the sale of oil and gas properties $ 10,734 $ 3,839 $ 26,596 Additions to oil and gas properties - ( 385) ( 1,519) ------- ------- ------- Net cash provided by investing activities $ 10,734 $ 3,454 $ 25,077 ------- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Cash distributions $ - ($141,400) ($176,750) ------- ------- ------- Net cash used by financing activities $ - ($141,400) ($176,750) ------- ------- ------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ 57,325 ($ 87,768) ($ 78,867)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 31,207 118,975 197,842 ------- ------- ------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 88,532 $ 31,207 $118,975 ======= ======= =======
The accompanying notes are an integral part of these financial statements.
DYCO OIL AND GAS PROGRAM 1981-1 LIMITED PARTNERSHIP Notes to Financial Statements For the Years Ended December 31, 1999, 1998, and 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Operations
The Dyco Oil and Gas Program 1981-1 Limited Partnership (the "Program"), a Minnesota limited partnership, commenced operations on February 7, 1981. Dyco Petroleum Corporation ("Dyco") is the General Partner of the Program. Affiliates of Dyco owned 3,318 (47.4%) of the Program's Units at December 31, 1999.
The Program's sole business is the development and production of oil and gas with a concentration on gas. Substantially all of the Program's gas reserves are being sold regionally in the "spot market." Due to the highly competitive nature of the spot market, prices on the spot market are subject to wide seasonal and regional pricing fluctuations. In addition, such spot market sales are generally short-term in nature and are dependent upon the obtaining of transportation services provided by pipelines. The prices received for the Program's oil and gas are subject to influences such as global consumption and supply trends.
Cash and Cash Equivalents
The Program considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Cash equivalents are not insured, which cause the Program to be subject to risk.
Credit Risk
Accrued oil and gas sales which are due from a variety of oil and gas purchasers subject the Program to a concentration of credit risk. Some of these purchasers are discussed in Note 3 - Major Customers.
Oil and Gas Properties
Oil and gas operations are accounted for using the full cost method of accounting. All productive and non-productive costs associated with the acquisition, exploration, and development of oil and gas reserves are capitalized. Capitalized costs are depleted on the gross revenue method using estimates of proved reserves. The full cost
amortization rates per equivalent Mcf of gas produced during the years ended December 31, 1999, 1998, and 1997 were $0.11, $0.15, and $0.31, respectively. The Program's calculation of depreciation, depletion, and amortization includes estimated future expenditures to be incurred in developing proved reserves and estimated dismantlement and abandonment costs, net of estimated salvage values. In the event the unamortized cost of oil and gas properties being amortized exceeds the full cost ceiling (as defined by the Securities and Exchange Commission ("SEC")) the excess is charged to expense in the year during which such excess occurs. Sales and abandonments of properties are accounted for as adjustments of capitalized costs with no gain or loss recognized, unless such adjustments would significantly alter the relationship between capitalized costs and proved oil and gas reserves.
Deferred Charge
The Deferred Charge at December 31, 1998 represents costs deferred for lease operating expenses incurred in connection with the Program's underproduced gas imbalance positions. The rate used in calculating the deferred charge is the average of the annual production costs per Mcf. At December 31, 1998, cumulative total gas sales volumes for underproduced wells were less than the Program's pro-rata share of total gas production from these wells by 2,371 Mcf, resulting in prepaid lease operating expenses of $1,927. At December 31, 1999, none of the Program's wells were underproduced.
Accrued Liability
The Accrued Liability at December 31, 1999 and 1998 represents charges accrued for lease operating expenses incurred in connection with the Program's overproduced gas imbalance positions. The rate used in calculating the accrued liability is the average of the annual production costs per Mcf. At December 31, 1999, cumulative total gas sales volumes for overproduced wells exceeded the Program's pro-rata share of total gas production from these wells by 96,485 Mcf, resulting in accrued lease operating expenses of $56,362. At December 31, 1998, cumulative total gas sales volumes for overproduced wells exceeded the Program's pro-rata share of total gas production from these wells by 97,134 Mcf, resulting in accrued lease operating expenses of $78,950.
Oil and Gas Sales and Gas Imbalance Payable
The Program's oil and condensate production is sold, title passed, and revenue recognized at or near the Program's wells under short-term purchase contracts at prevailing prices in accordance with arrangements which are customary in the oil industry. Sales of gas applicable to the Program's interest in producing oil and gas leases are recorded as revenue when the gas is metered and title transferred pursuant to the gas sales contracts covering the Program's interest in gas reserves. During such times as the Program's sales of gas exceed its pro rata ownership in a well, such sales are recorded as revenue unless total sales from the well have exceeded the Program's share of estimated total gas reserves underlying the property at which time such excess is recorded as a liability. The rates per Mcf used to calculate this liability are based on the average gas prices received for the volumes at the time the overproduction occurred. At December 31, 1999, total sales exceeded the Program's share of estimated total gas reserves on three wells by $17,787 (11,858 Mcf). At December 31, 1998, total sales exceeded the Program's share of estimated total gas reserves on five wells by $10,976 (7,317 Mcf). These amounts were recorded as gas imbalance payables at December 31, 1999 and 1998 in accordance with the sales method.
Use of Estimates in Financial Statements
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Further, the deferred charge, the gas imbalance payable, and the accrued liability all involve estimates which could materially differ from the actual amounts ultimately realized or incurred in the near term. Oil and gas reserves (see Note 4) also involve significant estimates which could materially differ from the actual amounts ultimately realized.
Income Taxes
Income or loss for income tax purposes is includable in the income tax returns of the partners. Accordingly, no recognition has been given to income taxes in the accompanying financial statements.
2. TRANSACTIONS WITH RELATED PARTIES
Under the terms of the Program Agreement, Dyco is entitled to receive a reimbursement for all direct expenses and general and administrative, geological, and engineering expenses it incurs on behalf of the Program. During the years ended December 31, 1999, 1998, and 1997, such expenses totaled $67,397, $67,858, and $74,456, respectively, of which $50,052 was paid each year to Dyco and its affiliates.
Affiliates of the Program operate certain of the Program's properties. Their policy is to bill the Program for all customary charges and cost reimbursements associated with these activities, together with any compressor rentals, consulting, or other services provided. Such charges are comparable to third party charges in the area where the wells are located and are the same as charged to other working interest owners in the wells.
3. MAJOR CUSTOMERS
The following purchaser individually accounted for 10% or more of the combined oil and gas sales of the Program for the years ended December 31, 1999, 1998, and 1997:
Purchaser 1999 1998 1997 --------- ----- ----- -----
El Paso Energy Marketing Company 92.5% 95.8% 91.3%
In the event of interruption of purchases by this significant customer or the cessation or material change in availability of open-access transportation by the Program's pipeline transporters, the Program may encounter difficulty in marketing its gas and in maintaining historic sales levels. Alternative purchasers or transporters may not be readily available.
4. SUPPLEMENTAL OIL AND GAS INFORMATION
The following supplemental information regarding the oil and gas activities of the Program is presented pursuant to the disclosure requirements promulgated by the SEC.
Capitalized Costs
The Program's capitalized costs and accumulated depreciation, depletion, amortization, and valuation allowance at December 31, 1999 and 1998 were as follows:
December 31, ---------------------------- 1999 1998 ------------- -------------
Proved properties $41,106,260 $41,116,994
Less accumulated depreciation, depletion, amortization, and valuation allowance ( 41,071,066) ( 41,063,036) ---------- ----------
Net oil and gas properties $ 35,194 $ 53,958 ========== ==========
Cost Incurred
The Program incurred no oil and gas property acquisition or exploration costs during 1999, 1998, and 1997. Costs incurred by the Program in connection with its oil and gas property development activities during 1999, 1998, and 1997 were as follows:
December 31,
------------------------ 1999 1998 1997 ------ ------ ------
Development costs $ - $ 385 $1,519 ===== ===== =====
Quantities of Proved Oil and Gas Reserves - Unaudited
Set forth below is a summary of the changes in the net quantities of the Program's proved oil and gas reserves for the years ended December 31, 1999, 1998, and 1997. Proved reserves were estimated by petroleum engineers employed by affiliates of Dyco. Certain reserve information was reviewed by Ryder Scott Company, L.P., an independent petroleum engineering firm. All of the Program's reserves are located in the United States. The following information includes certain gas balancing adjustments which cause the gas volumes to differ from the reserve information prepared by Dyco and reviewed by Ryder Scott.
The process of estimating oil and gas reserves is complex, requiring significant subjective decisions in the evaluation of available geological, engineering, and economic data for each reservoir. The data for a given reservoir may change substantially over time as a result of, among other things, additional development activity, production history, and viability of production under varying economic conditions; consequently, it is reasonably possible that material revisions to existing reserve estimates may occur in the near future. Although every reasonable effort has been made to ensure that the reserve estimates reported herein represent the most accurate assessment possible, the significance of the subjective decisions required and variances in available data for various reservoirs make these estimates generally less precise than other estimates presented in connection with financial statement disclosures. The Program's reserves were determined at December 31, 1999 using oil and gas prices of $22.75 per barrel and $2.24 per Mcf, respectively.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Program is a limited partnership and has no directors or executive officers. The following individuals are directors and executive officers of Dyco, the General Partner. The business address of such directors and executive officers is Two West Second Street, Tulsa, Oklahoma 74103.
NAME AGE POSITION WITH DYCO ---------------- --- -------------------------------- Dennis R. Neill 47 President and Director
Patrick M. Hall 41 Chief Financial Officer
Judy K. Fox 48 Secretary
The director will hold office until the next annual meeting of shareholders of Dyco or until his successor has been duly elected and qualified. All executive officers serve at the discretion of the Board of Directors.
Dennis R. Neill joined Samson in 1981, was named Senior Vice President and Director of Dyco on June 18, 1991, and was named
President of Dyco on June 30, 1996. Prior to joining Samson, he was associated with a Tulsa law firm, Conner and Winters, where his principal practice was in the securities area. He received a Bachelor of Arts degree in political science from Oklahoma State University and a Juris Doctorate degree from the University of Texas. Mr. Neill also serves as Senior Vice President of Samson Investment Company and as President and Director of Samson Properties Incorporated, Samson Hydrocarbons Company, Berry Gas Company, Circle L Drilling Company, Compression, Inc., and Geodyne Resources, Inc. and its subsidiaries.
Patrick M. Hall joined Samson in 1983, was named a Vice President of Dyco on June 18, 1991, and was named Chief Financial Officer of Dyco on June 30, 1996. Prior to joining Samson he was a senior accountant with Peat Marwick Main & Co. in Tulsa. He holds a Bachelor of Science degree in accounting from Oklahoma State University and is a Certified Public Accountant. Mr. Hall also serves as Senior Vice President - Controller of Samson Investment Company.
Judy K. Fox joined Samson in 1990 and was named Secretary of Dyco on June 30, 1996. Prior to joining Samson, she served as Gas Contract Manager for Ely Energy Company. Ms. Fox is also Secretary of Berry Gas Company, Circle L Drilling Company, Compression, Inc., Samson Hydrocarbons Company, Samson Properties Incorporated, and Geodyne Resources, Inc. and its subsidiaries.
Section 16(a) Beneficial Ownership Reporting Compliance
To the best knowledge of the Program and Dyco, there were no officers, directors, or ten percent owners who were delinquent filers during 1999 of reports required under Section 16(a) of the Securities and Exchange Act of 1934.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The Program is a limited partnership and, therefore, has no officers or directors. The following table summarizes the amounts paid by the Program as compensation and reimbursements to Dyco and its affiliates for the three years ended December 31, 1999:
Compensation/Reimbursement to Dyco and its affiliates Three Years Ended December 31, 1999
Type of Compensation/Reimbursement(1) Expense - ------------------------------------- ------------------------- 1999 1998 1997 ------- ------- ------- Compensation: Operations (2) (2) (2)
Reimbursements: General and Administrative, Geological, and Engineering Expenses and Direct Expenses(3) $50,052 $50,052 $50,052 - ----------
(1) The authority for all of such compensation and reimbursement is the Program Agreement. With respect to the Operations activities noted in the table, management believes that such compensation is equal to or less than that charged by unaffiliated persons in the same geographic areas and under the same conditions. (2) Affiliates of the Program serve as operator of a significant portion of the Program's wells. Dyco, as general partner, contracts with such affiliates for services as operator of the wells. As operator, such affiliates are compensated at rates provided in the operating agreements in effect and charged to all parties to such agreement. The dollar amount of such compensation paid by the Program to such affiliates is impossible to quantify as of the date of this Annual Report. (3) The Program reimburses Dyco and its affiliates for reasonable and necessary general and administrative, geological, and engineering expenses and direct expenses incurred in connection with their management and operation of the Program. The directors, officers, and employees of Dyco and its affiliates receive no direct remuneration from the Program for their services to the Program. See "Salary Reimbursement Table" below. The allocable general and administrative, geological, and engineering expenses are apportioned on a reasonable basis between the Program's business and all other oil and gas activities of Dyco and its affiliates, including Dyco's management and operation of affiliated oil and gas limited partnerships. The allocation to the Program of these costs is made by Dyco as General Partner.
As noted in the Compensation/Reimbursement Table above, the directors, officers, and employees of Dyco and their affiliates receive no direct remuneration from the Program for their services. However, to the extent such services represent direct involvement with the Program, as opposed to general corporate functions, such persons' salaries are allocated to and reimbursed
by the Program. Such allocation to the Program's general and administrative, geological, and engineering expenses of the salaries of directors, officers, and employees of Dyco and its affiliates is based on internal records maintained by Dyco and its affiliates, and represents investor relations, legal, accounting, data processing, management, gas marketing, and other functions directly attributable to the Program's operations. When actual costs incurred benefit other partnerships and affiliates, the allocation of costs is based on the relationship of the Program's reserves to the total reserves owned by all partnerships and affiliates. The following table indicates the approximate amount of general and administrative expense reimbursement attributable to the salaries of the directors, officers, and employees of Dyco and its affiliates for the three years ended December 31, 1999:
Samson maintains necessary inventories of new and used field equipment. Samson may have provided some of this equipment for wells in which the Program has an interest. This equipment was provided at prices or rates equal to or less than those normally charged in the same or comparable geographic area by unaffiliated persons or companies dealing at arm's length. The operators of these wells bill the Program for a portion of such costs based upon the Program's interest in the well.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table provides information as to the beneficial ownership of the Program's Units as of March 1, 2000 by each beneficial owner of more than 5% of the issued and outstanding Units and by the directors, officers, and affiliates of Dyco. The address of each of such persons is Samson Plaza, Two West Second Street, Tulsa, Oklahoma 74103.
Number of Units Beneficially Owned (Percent Beneficial Owner of Outstanding) - ----------------------------------------- -----------------
Samson Resources Company 3,324 (47.5%)
All directors, officers, and affiliates of Dyco as a group and Dyco (5 persons) 3,324 (47.5%)
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain affiliates of Dyco engage in oil and gas activities independently of the Program which result in conflicts of interest that cannot be totally eliminated. The allocation of acquisition and drilling opportunities and the nature of the compensation arrangements between the Program and such affiliates also create potential conflicts of interest. An affiliate of the Program owns a significant amount of the Program's Units and therefore has an identity of interest with other limited partners with respect to the operations of the Program.
In order to attempt to assure limited liability for limited partners as well as an orderly conduct of business, management of the Program is exercised solely by Dyco. The Program Agreement grants Dyco broad discretionary authority with respect to the Program's participation in drilling prospects and expenditure and control of funds, including borrowings. These provisions are
similar to those contained in prospectuses and partnership agreements for other public oil and gas partnerships. Broad discretion as to general management of the Program involves circumstances where Dyco has conflicts of interest and where it must allocate costs and expenses, or opportunities, among the Program and other competing interests.
Dyco does not devote all of its time, efforts, and personnel exclusively to the Program. Furthermore, the Program does not have any employees, but instead relies on the personnel of Samson. The Program thus competes with Samson (including other oil and gas programs) for the time and resources of such personnel. Samson devotes such time and personnel to the management of the Program as are indicated by the circumstances and as are consistent with Dyco's fiduciary duties.
Affiliates of the Program are solely responsible for the negotiation, administration, and enforcement of oil and gas sales agreements covering the Program's leasehold interests. Because affiliates of the Program who provide services to the Program have fiduciary or other duties to other members of Samson, contract amendments and negotiating positions taken by them in their effort to enforce contracts with purchasers may not necessarily represent the positions that a Program would take if it were to administer its own contracts without involvement with other members of Samson. On the other hand, management believes that the Program's negotiating strength and contractual positions have been enhanced by virtue of its affiliation with Samson.
Samson Resources Company, an affiliate of Dyco, ("Resources") owns approximately 47.5% of the Program's outstanding Units as of March 1, 2000. The Program Agreement permits Resources to independently vote its Units. Resources' significant Unit ownership will therefore likely determine the outcome of any matter submitted for a vote of the Limited Partners.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements, Financial Statement Schedules, and Exhibits.
(1) Financial Statements: The following financial statements for the Program as of December 31, 1999 and 1998 and for the years ended December 31, 1999, 1998, and 1997 are filed as part of this report:
Report of Independent Accountants Balance Sheets Statements of Operations Statements of Changes in Partners' Capital Statements of Cash Flows Notes to Financial Statements
(2) Financial Statement Schedules:
None.
(3) Exhibits:
4.1 Drilling Agreement dated February 11, 1981 for Dyco Oil and Gas Program 1981-1 by and between Dyco Oil and Gas Program 1981-1, Dyco Petroleum Corporation, and Jaye F. Dyer filed as Exhibit 4.1 to Annual Report on Form 10-K for the year ended December 31, 1991 on April 13, 1992 and is hereby incorporated herein.
4.2 Form of Program Agreement for Dyco Oil and Gas Program 1981-1 by and between Dyco Petroleum Corporation and the Participants filed as Exhibit 4.2 to Annual Report on Form 10-K for the year ended December 31, 1991 on April 13, 1992 and is hereby incorporated herein.
4.3 Amendment to Program Agreement for Dyco Oil and Gas Program 1981-1 dated February 9, 1989 filed as Exhibit 4.3 to Annual Report on Form 10-K for the year ended December 31, 1991 on April 13, 1992 and is hereby incorporated herein.
4.4 Certificate of Limited Partnership, as amended for Dyco Oil and Gas Program 1981-1 Limited Partnership filed as Exhibit 4.4 to Annual Report on Form 10-K for the year ended December 31, 1991 on April 13, 1992 and is hereby incorporated herein.
*23.1 Consent of Ryder Scott Company, L.P. for Dyco Oil and Gas Program 1981-1 Limited Partnership.
*27.1 Financial Data Schedule containing summary financial information extracted from the Dyco Oil and Gas Program 1981-1 Limited Partnership's financial statements as of December 31, 1999 and for the year ended December 31, 1999.
All other Exhibits are omitted as inapplicable.
------------------- * Filed herewith.
(b) Reports on Form 8-K filed during the fourth quarter of 1999:
None.
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) 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 organized.
DYCO OIL AND GAS PROGRAM 1981-1 LIMITED PARTNERSHIP
By: DYCO PETROLEUM CORPORATION General Partner
March 16, 2000
By: //s// Dennis R. Neill ------------------------------ Dennis R. Neill President
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 on the dates indicated.
By: //s// Dennis R. Neill President and March 16, 2000 ------------------- Director (Principal Dennis R. Neill Executive Officer)
//s// Patrick M. Hall Chief Financial March 16, 2000 ------------------- Officer (Principal Patrick M. Hall Financial and Accounting Officer)
//s// Judy K. Fox Secretary March 16, 2000 ------------------- Judy K. Fox
INDEX TO EXHIBITS
Exhibit Number Description - ------- -----------
4.1 Drilling Agreement dated February 11, 1981 for Dyco Oil and Gas Program 1981-1 by and between Dyco Oil and Gas Program 1981-1, Dyco Petroleum Corporation, and Jaye F. Dyer filed as Exhibit 4.1 to Annual Report on Form 10-K for the year ended December 31, 1991 on April 13, 1992 and is hereby incorporated herein.
4.2 Form of Program Agreement for Dyco Oil and Gas Program 1981-1 by and between Dyco Petroleum Corporation and the Participants filed as Exhibit 4.2 to Annual Report on Form 10-K for the year ended December 31, 1991 on April 13, 1992 and is hereby incorporated herein.
4.3 Amendment to Program Agreement for Dyco Oil and Gas Program 1981-1 dated February 9, 1989 filed as Exhibit 4.3 to Annual Report on Form 10-K for the year ended December 31, 1991 on April 13, 1992 and is hereby incorporated herein.
4.4 Certificate of Limited Partnership, as amended for Dyco Oil and Gas Program 1981-1 Limited Partnership filed as Exhibit 4.4 to Annual Report on Form 10-K for the year ended December 31, 1991 on April 13, 1992 and is hereby incorporated herein.
*23.1 Consent of Ryder Scott Company, L.P. for Dyco Oil and Gas Program 1978-1 Limited Partnership.
*27.1 Financial Data Schedule containing summary financial information extracted from the Dyco Oil and Gas Program 1981-1 Limited Partnership's financial statements as of December 31, 1999 and for the year ended December 31, 1999.
- ------------------- * Filed herewith.