ITEM 1 - BUSINESS
May Drilling Partnership 1984-2 (the "Drilling or General Partnership") and May Limited Partnership 1984-2 (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 Hallwood Energy Partners, L.P., which is a subsidiary of Hallwood Energy Corporation ("HEC"). 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 HEC. In February 2000, HPI employed 100 full-time employees.
Pursuant to the terms of the general partnership agreement and the limited partnership agreement, HEC is obligated, from time to time, to contribute certain amounts, in property, cash or unreimbursed services, to the Limited Partnership. As of December 31, 1999, all such required contributions had been accrued.
The partnership agreements governing the Drilling Partnership and the Limited Partnership provide for a fifteen-year term of existence. As a result, the term of the Drilling Partnership and the Limited Partnership ended on September 18, 1999.
Over the first four months of 2000, the general partner will proceed to wind-up the Drilling Partnership and the Limited Partnership. This process includes preparing a final accounting, paying the liabilities of the Drilling Partnership and the Limited Partnership, and making a liquidating distribution in accordance with the capital accounts of the partners. The general partner believes that it would be in the best interest of the limited partners to sell the assets of the Limited Partnership and distribute any cash remaining after payment of liabilities. The distribution of a pro rata direct working interest in the Freddie Aker #1 well to each of the partners would not be practicable because of the large number of partners involved (over 700), the small size of the resulting interests and, in general, the risks and inconvenience that can be associated with being a small working interest owner. The general partner intends to sell the investors' interest in the Freddie Aker #1 well at a public auction in the first quarter of 2000.
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.
Drilling General Partnership Partner
Abandonment expenses (1) 99% 1% Noncapital expenses 99% 1% Direct expenses 99% 1% Lease acquisition expenses 100% Capital expenses 100% Oil and gas revenues (2) (2) Operating expenses (2) (2) Special projects (2) (2) General and administrative overhead (2) (2)
(1) Includes expenses that would otherwise be allocated as lease acquisition expenses and/or capital expenses but that relate to abandoned properties.
(2) Such items were shared 70% by the Drilling Partnership and 30% by the general partner until December 31, 1984. As of December 31, 1984, and as of December 31 of each year thereafter, the sharing of such items is adjusted so the general partner's allocation equals the percentage that the amount of Limited Partnership expenses allocated to the general partner bears to the aggregate amount of Limited Partnership expenses allocated to the general partner and the Drilling Partnership, plus 15 percentage points, but in no event will the general partner's allocation exceed 50%. The sharing ratio for each of the last three years was:
1999 1998 1997 ---- ---- ----
Limited Partner 68.0% 68.1% 68.2% General Partner 32.0% 31.9% 31.8%
In 2000, the sharing ratio will be 68.0% to the limited partner and 32.0% to the general partner.
To the extent that the characterization of any expense to 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 Customers
For the years ended December 31, 1999, 1998 and 1997, purchases by the following companies exceeded 10% of the total oil and gas revenues of the Limited Partnership:
1999 1998 1997 ---- ---- ----
Conoco Inc. 68% 48% 41% Plains All American Inc. 31% Marathon Petroleum Company 16% 39% TXG Gas Marketing 17% 19% Scurlock Permian LLC 17%
Although the Limited Partnership sells the majority of its production to a small number of purchasers, there are numerous other purchasers in the area, so the loss of any 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 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.
Cautionary Statement Regarding Forward-Looking Statements
In the interest of providing the partners with certain information regarding the Limited Partnership's future plans and operations, certain statements set forth in this Form 10-K relate to management's future plans and objectives. Such statements are forward-looking statements. Although any forward-looking statements contained in this Form 10-K or otherwise expressed by or on behalf of the Limited Partnership are, to the knowledge and in the judgment of the officers and directors of the general partner, expected to prove true and come to pass, management is not able to predict the future with absolute certainty. Forward-looking statements involve known and unknown risks and uncertainties which may cause the Limited Partnership's actual performance and financial results in future periods to differ materially from any projection, estimate or forecasted result. These risks and uncertainties include, among other things, volatility of oil and gas prices, competition, risks inherent in the Limited Partnership's oil and gas operations, the inexact nature of interpretation of seismic and other geological and geophysical data, imprecision of reserve estimates, the Limited Partnership's ability to replace and expand oil and gas reserves, and such other risks and uncertainties described from time to time in the Limited Partnership's periodic reports and filings with the Securities and Exchange Commission. Accordingly, partners are cautioned that certain events or circumstances could cause actual results to differ materially from those projected, estimated or predicted.
ITEM 2
ITEM 2 - PROPERTIES
The Limited Partnership's oil and gas reserves are located on properties in south Louisiana. Natural gas accounts for 55% of estimated future gross revenues in the Limited Partnership's reserve report as of December 31, 1999.
Significant Properties
At December 31, 1999, the following prospect accounted for all of the Limited Partnership's proved oil and gas reserves. Reserve quantities were obtained from the December 31, 1999 reserve report prepared by HPI's petroleum engineers.
Meaux Prospect. The Meaux prospect is located in Lafayette Parish, Louisiana. The Limited Partnership's interest in the prospect contains one productive well (the Freddie Aker) and has estimated remaining net proved reserves of 7,000 bbls of oil and 79,000 mcf of gas as of December 31, 1999. The Limited Partnership's working interest in this well is 13.1%. The prospect produces from one zone, the Bol Mex.3 formation, at 15,275 feet.
As part of the liquidation process, the general partner intends to sell the investors' interest in the Freddie Aker #1 well at public auction during the first quarter of 2000.
ITEM 3
ITEM 3 - LEGAL PROCEEDINGS
None.
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 1999.
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, 1999, there were approximately 746 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
1999 $107 $191 1998 289 546 1997 436 865
ITEM 6
ITEM 6 - SELECTED FINANCIAL DATA
ITEM 7
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The terms of the partnership agreements governing the General Partnership and the Limited Partnership provide for a fifteen year term of existence which extended through September 18, 1999. The partnerships are expected to be liquidated prior to the end of the second quarter of 2000. As a result, the General Partnership and the Limited Partnership changed their basis of accounting from the going concern basis to the liquidation basis effective December 31, 1998. Accordingly, assets have been valued at estimated realizable value, net of estimated disposition costs, and liabilities have been adjusted to estimated settlement amounts, as follows (in thousands):
December 31, 1999 1998 ---- ----
Appreciation of oil and gas properties $ 76 $ 77 Deferral of appreciated gain on oil and gas properties (76) (77)
Liquidity and Capital Resources
Material changes in the Limited Partnership's cash position for the years ended December 31, 1999 and 1998 are summarized as follows:
1999 1998 ---- ---- (In thousands)
Cash provided by operating activities $ 305 $ 676 Distributions to partners (298) (835) Contributions from partners 17 35 Additions to oil and gas properties (94) ---- ----- Decrease in cash $ (70) $(124) ==== ====
Cash provided by operating activities in 1999 was used primarily for distributions to the partners and for capital expenditures.
The reserves of the Limited Partnership have been estimated by HPI's in-house engineers and have been reviewed by independent petroleum engineers. 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 7,000 bbls and 79,000 mcf valued at $299,000 in 1999 and 10,000 bbls and 105,000 mcf valued at $293,000 in 1998. The increase in discounted future net revenues and in the quantities resulted from an increase in year-end oil and gas prices, partially offset by current year production and decreases in the estimated rates of future production on the Freddie Aker well as it is nearing the end of its productive life. Estimates of discounted future net revenues should not be construed as the current market value of the estimated oil and gas reserves. In accordance with requirements of the Securities and Exchange Commission, the estimated discounted future net revenues from proved reserves are generally based on prices and costs as of the date of the estimate, whereas actual future prices and costs may be materially higher or lower. In addition, the 10% discount factor, which is required by the SEC for reporting purposes, is not necessarily the most appropriate discount factor based on risks associated with the production of the reserves or the oil and gas industry in general. Accordingly, the price received from the sale of oil and gas reserves is not generally the same as the estimated future net revenues for those reserves and the amount received in liquidation of the assets.
Results of Operations
1999 Compared to 1998
Gas Revenue
Gas revenue decreased $195,000 during 1999 compared with 1998. The decrease is due to a 53% decrease in production partially offset by an increase in the average gas price from $2.50 per mcf during 1998 to $2.64 per mcf during 1999. The decrease in production from 154,502 mcf in 1998 to 72,618 mcf in 1999 is due to the shut-in of the Freddie Aker #1 well during October 1999 while workover procedures were performed and increased rates of water production on the well.
Oil Revenue
Oil revenue decreased $75,000 during 1999 compared with 1998. The decrease is comprised of a 52% decrease in production, partially offset by an increase in the average price from $12.99 per barrel in 1998 to $16.34 per barrel in 1999. The decrease in production from 14,367 barrels in 1998 to 6,833 barrels in 1999 is due to the shut-in of the Freddie Aker #1 well during October 1999 while workover procedures were performed and increased rates of water production on the well.
Interest Income
Interest income decreased $7,000 during 1999 compared with 1998 due to a lower average cash balance during 1999.
Lease Operating
Lease operating expense decreased $6,000 during 1999 compared with 1998 primarily due to decreased maintenance activity during 1999.
Production Taxes
Production taxes decreased $18,000 during 1999 compared with 1998 as a result of a decreased oil and gas production during 1999.
General and Administrative
General and administrative expenses decreased $4,000 during 1999 compared with 1998 primarily due to a decrease in performance based compensation expense.
Depletion
Depletion expense increased $21,000 during 1999 compared with 1998 primarily due to an increase in capitalized costs during 1999 resulting from workover procedures performed on the Freddie Aker #1 well.
Professional Services and Other
Professional services and other expense increased $2,000 during 1999 compared to 1998 due to an increase in numerous miscellaneous items, none of which is individually significant.
1998 Compared to 1997
Gas Revenue
Gas revenue decreased $406,000 during 1998 compared with 1997. The decrease is due to a decrease in the average gas price from $3.07 per mcf during 1997 to $2.50 per mcf during 1998, combined with a 40% decrease in production. The decrease in production from 258,483 mcf in 1997 to 154,502 mcf in 1998 is due to increased rates of water production on the Freddie Aker #1 well in Louisiana.
Oil Revenue
Oil revenue decreased $307,000 during 1998 compared with 1997. The decrease is comprised of a 41% decrease in production, combined with a decrease in the average price from $20.28 per barrel in 1997 to $12.99 per barrel in 1998. The decrease in production from 24,353 barrels in 1997 to 14,367 barrels in 1998 is due to due to increased rates of water production on the Freddie Aker #1 well in Louisiana.
Interest Income
Interest income decreased $3,000 during 1998 compared with 1997 due to a lower average cash balance during 1998.
Other
Other income during 1997 is comprised of insurance proceeds which reimbursed a portion of expense incurred in a prior period to settle certain litigation.
Lease Operating
Lease operating expense decreased $12,000 during 1998 compared with 1997 primarily due to decreased maintenance activity during 1998.
Production Taxes
Production taxes decreased $46,000 during 1998 compared with 1997 as a result of a decreased oil and gas production during 1998.
General and Administrative
General and administrative expenses increased $1,000 during 1998 compared with 1997 primarily due to an increase in performance based compensation expense.
Depletion
Depletion expense decreased $22,000 during 1998 compared with 1997 due to a lower depletion rate caused by a decrease in production and a decrease in capitalized costs during 1998.
ITEM 7A
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Limited Partnership's primary market risk relates to changes in the prices received from sales of oil and natural gas production. The Limited Partnership manages its commodity price risks by using well-trained and experienced marketing personnel to sell its production. The Limited Partnership does not use any financial instruments or derivative commodity instruments that are subject to price or interest rate risk.
INDEPENDENT AUDITORS' REPORT
To the Partners of May Drilling Partnership 1984-2 and May Limited Partnership 1984-2:
We have audited the accompanying financial statements of May Drilling Partnership 1984-2 ("General Partnership") and May Limited Partnership 1984-2 ("Limited Partnership") 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 HEC 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 4610 S. Ulster Street Parkway, Denver, Colorado 80237, and which beneficially owns approximately 34% of the outstanding units.
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. 0-89194, are incorporated herein by reference.
27 Financial Data Schedule
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 1984-2 MAY LIMITED PARTNERSHIP 1984-2
By: HALLWOOD ENERGY PARTNERS, L.P. General Partner
By: HEC ACQUISITION CORP. General Partner
Date: March 6, 2000 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/William J. Baumgartner Vice President March 6, 2000 - --------------------------- William J. Baumgartner Chief Financial Officer (Principal Financial and Accounting Officer)