ITEM 1. BUSINESS
General
The Dyco Oil and Gas Program 1981-2 Limited Partnership (the "Program") is a Minnesota limited partnership engaged in the production of oil and gas. The Program commenced operations on June 1, 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. Samson Resources Company, an affiliate of Dyco, currently owns more than one-half of the Program's Units of limited partnership interest, making the Program a 50% subsidiary of Samson Resources Company. 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, 2000.
Well Statistics(1) As of December 31, 2000
Gross productive wells(2): Oil - Gas 15 -- Total 15
Net productive wells(3): Oil - Gas 1.82 ---- Total 1.82
- ---------- (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-K ("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 the year ended December 31, 2000.
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, ----------------------------------- 2000 1999 1998 -------- -------- -------- Production: Oil (Bbls)(1) 3,136 781 814 Gas (Mcf)(2) 213,939 159,015 147,505
Oil and gas sales: Oil $ 89,313 $ 11,156 $ 8,525 Gas 855,493 332,512 277,276 ------- ------- ------- Total $944,806 $343,668 $285,801 ======= ======= ======= Total direct operating expenses (3) $170,688 $123,529 $167,970 ======= ======= =======
Direct operating expenses as a percentage of oil and gas sales 18.1% 35.9% 58.8%
Average sales price: Per barrel of oil $28.48 $14.28 $10.47 Per Mcf of gas 4.00 2.09 1.88
Direct operating expenses per equivalent Mcf of gas(4) $ .73 $ .75 $ 1.10
- ---------- (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, 2000. 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, 2000. Such prices were not escalated except in certain circumstances where escalations were fixed and readily determinable in accordance with applicable contract provisions. The high oil and gas prices at December 31, 2000 have caused the estimates of remaining economically recoverable reserves, as well as the value placed on said reserves, to be substantially higher than in the past several years, particularly considering the impact of depletion from production over the years. Any decrease in these prices would result in a corresponding reduction in the estimate of remaining reserves. 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, 2000. There can be no assurance that the prices used in calculating the net present value of the Program's proved reserves at December 31, 2000 will actually be realized for such production. Dyco believes that it is unlikely that prices will remain at their current high levels.
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 Values From Proved Reserves
As of December 31, 2000 (1)
Estimated proved reserves: Gas (Mcf) 1,326,160 Oil and liquids (Bbls) 8,215
Net present value (discounted at 10% per annum) $5,899,407 - -------------------
(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, 2000, the Program's properties consist of 15 gross (1.82 net) productive wells. The Program also owns a non-working interest in an additional 6 wells. Affiliates of the Program operate 8 (38%) of its total wells. All of the Program's properties 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 2000.
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 ---------- -------------
1999: First Quarter $101 $ - Second Quarter 101 - Third Quarter 124 20 Fourth Quarter 104 -
2000: First Quarter $104 $ - Second Quarter 104 - Third Quarter 134 - Fourth Quarter 134 35
2001: First Quarter $ 99 $45
As of March 1, 2001, the Program has 6,000 Units outstanding and approximately 1,600 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 Program's revenues, net income or loss, cash flows, carrying value of oil and gas properties, and amount of oil and gas which can be economically produced depend substantially upon the prevailing prices for oil and gas. Oil and gas prices (and consequently the Program's profitability) depend on a number of factors that are beyond the control of the Program. These factors include worldwide political instability (especially in oil-producing regions), United Nations export embargoes, the supply and price of foreign imports of oil and gas, the level of consumer product demand (which can be heavily influenced by weather patterns), the level of domestic oil and gas production, government regulations and taxes, the price and availability of alternative fuels, the overall economic environment, and the availability and capacity of transportation and processing facilities. The effect of these factors on future oil and gas
industry trends cannot be accurately predicted or anticipated. In addition, the domestic oil and gas industry is highly competitive, with a large number of companies and individuals engaged in the exploration and development of oil and gas properties. Predicting future prices is not possible. Concerning past trends, oil and gas prices in the United States have been highly volatile for many years.
Over the past ten years average yearly wellhead gas prices have generally been in the $1.40 to $2.40 per Mcf range. However, due to unusual supply and demand circumstances gas prices are currently substantially higher than 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 obtaining transportation services provided by pipelines. Spot prices for gas increased from approximately $2.34 per Mcf at December 31, 1999 to approximately $9.23 per Mcf at December 31, 2000. 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 three 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 $9.25 per barrel. However, production curtailment agreements among major oil producing nations and other supply and demand factors 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 oil increased from approximately $22.75 per barrel at December 31, 1999 to approximately $23.75 per barrel at December 31, 2000.
Future prices for both oil and gas will likely be different from the prices in effect on December 31, 2000. While it is impossible to predict whether future oil and gas prices will (i) stabilize, (ii) increase, or (iii) decrease, management believes it is unlikely that future oil and gas prices will remain as high as those experienced at December 31, 2000.
Results of Operations
Year Ended December 31, 2000 Compared to Year Ended December, 1999 -------------------------------------
Total oil and gas sales increased $601,138 (174.9%) in 2000 as compared to 1999. Of this increase, approximately $408,000 was related to an increase in the average price of gas sold and approximately $115,000 was related to an increase in volumes of gas sold. Volumes of oil and gas sold increased 2,355 barrels and 54,924 Mcf, respectively, in 2000 as compared to 1999. The increases in volumes of oil and gas sold were primarily due to the successful recompletion of one well during the first quarter of 2000. Average oil and gas prices increased to $28.48 per barrel and $4.00 per Mcf, respectively, in 2000 from $14.28 per barrel and $2.09 per Mcf, respectively, in 1999.
Oil and gas production expenses (including lease operating expenses and production taxes) increased $47,159 (38.2%) in 2000 as compared to 1999. This increase was primarily due to (i) an increase in production taxes associated with the increase in oil and gas sales, (ii) workover expenses incurred on one well during 2000 in order to improve the recovery of reserves, and (iii) an increase in pipeline compression charges on the well successfully recompleted during the first quarter of 2000. These increases were partially offset by (i) legal fees incurred on one well during 1999 related to a gas balancing and collections matter initiated by the operator of that well and (ii) the sale of one well during 2000. As a percentage of oil and gas sales, these expenses decreased to 18.1% in 2000 from 35.9% in 1999. This percentage decrease was primarily due to the increases in the average prices of oil and gas sold.
Depreciation, depletion, and amortization of oil and gas properties decreased $15,603 (38.3%) in 2000 as compared to 1999. This decrease was primarily due to (i) increases in the oil and gas prices used in the valuation of reserves at December 31, 2000 as compared to December 31, 1999 and (ii) upward revisions in the estimates of remaining oil and gas reserves at December 31, 2000. The decrease caused by these factors was partially offset by the increases in volumes of oil and gas sold. As a percentage of oil and gas sales, this expense decreased to 2.7% in 2000 from 11.8% in 1999. This percentage decrease was primarily due to the increases in the average prices of oil and gas sold and the dollar decrease in depreciation, depletion and amortization.
General and administrative expenses decreased $3,932 (6.2%) in 2000 as compared to 1999. As a percentage of oil and gas sales, these expenses decreased to 6.3% in 2000 from 18.4% in 1999. This percentage decrease was primarily due to the increase in oil and gas sales.
Year Ended December 31, 1999 Compared to Year Ended December, 1998 -------------------------------------
Total oil and gas sales increased $57,867 (20.2%) in 1999 as compared to 1998. Of this increase, approximately $22,000 was related to an increase in volumes of gas sold and approximately $34,000 was related to an increase in the average price of gas sold. Volumes of oil sold decreased 33 barrels, while volumes of gas sold increased 11,510 Mcf in 1999 as compared to 1998. The increase in volumes of gas sold was primarily due to the successful completion of a new well in late 1998 and the Program receiving a reduced percentage of sales on one well during 1998 due to the Program's overproduced gas balancing position in that well. These increases were partially offset by normal declines in production. Average oil and gas prices increased to $14.28 per barrel and $2.09 per Mcf, respectively, in 1999 from $10.47 per barrel and $1.88 per Mcf, respectively, in 1998.
Oil and gas production expenses (including lease operating expenses and production taxes) decreased $44,441 (26.5%) in 1999 as compared to 1998. This decrease was primarily due to workover expenses incurred in 1998 on one well in order to improve the recovery of reserves and subsurface repair and maintenance expenses incurred in 1998 on another well. As a percentage of oil and gas sales, these expenses decreased to 35.9% in 1999 from 58.8% in 1998. This percentage decrease was primarily due to the increases in the average prices of oil and gas sold and the dollar decrease in oil and gas production expenses.
Depreciation, depletion, and amortization of oil and gas properties increased $13,192 (47.9%) in 1999 as compared to 1998. This increase was primarily due to an increase in depletable oil and gas properties due to the purchase of gas reserves on one significant well in 1999 in order to help reduce a gas imbalance on the well. As a percentage of oil and gas sales, this expense increased to 11.8% in 1999 from 9.6% in 1998. This percentage increase was primarily due to the dollar increase 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 decreased to 18.4% in 1999 from 22.2% in 1998. 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 2000 production levels for future years, the Program's proved reserve quantities at December 31, 2000 would have remaining lives of approximately 6.2 years for gas reserves and 2.6 years for oil reserves. These life of reserves estimates are based on the current estimates of remaining oil and gas reserves. See "Item 2. Properties" for a discussion of these reserve estimates. Any decrease from the high oil and gas prices at December 31, 2000 may cause a decrease in the estimated life of said reserves.
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. However, during 2000 the Program incurred capital costs of $60,225 primarly related to the successful recompletion of the Brown No. 1-14 well. During 1999 the Program paid $289,553, net of taxes, for the purchase of gas reserves from Burlington Resources (of which $158,361 was recorded to oil and gas properties and $131,192 was used to reduce the accrued liability for lease operating expenses) which was related to the Yowell No. 1-26 well in which the Program had produced significantly more than its share of gas. These reserves were purchased in order to assist the Program in reducing its gas imbalance liability on this well. In addition, during 1998 the Program participated in successfully drilling the Lemasters No. 1-19 well and incurred capital costs of $26,182 relating to this drilling activity. These expenditures by the Program may reduce or eliminate cash available for a particular quarterly cash distribution. In connection with the 1999 expenditure, the Program received a temporary advance from the General Partner. This advance was fully repaid during 2000. The Program has no other debt commitments. Management believes that cash for ordinary operational purposes will be provided by current oil and gas production.
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 2000. 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."
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 1981-2 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 1981-2 Limited Partnership, a Minnesota limited partnership, at December 31, 2000 and 1999, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. 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 of America, 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 our opinion.
PricewaterhouseCoopers LLP
Tulsa, Oklahoma March 21, 2001
DYCO OIL AND GAS PROGRAM 1981-2 LIMITED PARTNERSHIP Balance Sheets December 31, 2000 and 1999
ASSETS ------ 2000 1999 -------- -------- CURRENT ASSETS: Cash and cash equivalents $128,567 $ 4,991 Accrued oil and gas sales 184,787 61,205 ------- ------- Total current assets $313,354 $ 66,196
NET OIL AND GAS PROPERTIES, utilizing the full cost method 256,599 229,994
DEFERRED CHARGE 31,375 41,174 ------- ------- $601,328 $337,364 ======= =======
LIABILITIES AND PARTNERS' CAPITAL ---------------------------------
CURRENT LIABILITIES: Accounts payable $ 5,428 $ 4,795 Payable to General Partner (Note 2) - 207,000 Gas imbalance payable - 825 ------- ------- Total current liabilities $ 5,428 $212,620
ACCRUED LIABILITY $ 31,597 $ 40,141
PARTNERS' CAPITAL: General Partner, 74 general partner units $ 5,644 $ 847 Limited Partners, issued and outstanding, 6,000 Units 558,659 83,756 ------- ------- Total Partners' Capital $564,303 $ 84,603 ------- ------- $601,328 $337,364 ======= =======
The accompanying notes are an integral part of these financial statements.
DYCO OIL AND GAS PROGRAM 1981-2 LIMITED PARTNERSHIP Statements of Operations For the Years Ended December 31, 2000, 1999, and 1998
2000 1999 1998 -------- -------- -------- REVENUES: Oil and gas sales $944,806 $343,668 $285,801 Interest 2,520 3,101 4,955 ------- ------- ------- $947,326 $346,769 $290,756
COSTS AND EXPENSES: Lease operating $104,089 $ 99,393 $148,997 Production taxes 66,599 24,136 18,973 Depreciation, depletion, and amortization of oil and gas properties 25,112 40,715 27,523 General and administrative 59,236 63,168 63,410 ------- ------- ------- $255,036 $227,412 $258,903 ------- ------- ------- NET INCOME $692,290 $119,357 $ 31,853 ======= ======= =======
GENERAL PARTNER (1%) - NET INCOME $ 6,923 $ 1,194 $ 319 ======= ======= =======
LIMITED PARTNERS (99%) - NET INCOME $685,367 $118,163 $ 31,534 ======= ======= =======
NET INCOME per Unit $ 113.98 $ 19.65 $ 5.24 ======= ======= =======
UNITS OUTSTANDING 6,074 6,074 6,074 ======= ======= =======
The accompanying notes are an integral part of these financial statements
DYCO OIL AND GAS PROGRAM 1981-2 LIMITED PARTNERSHIP Statements of Changes in Partners' Capital For the Years Ended December 31, 2000, 1999, and 1998
General Limited Partner Partners Total -------- ---------- ----------
Balances at Dec. 31, 1997 $1,764 $174,589 $176,353 Cash distributions ( 1,215) ( 120,265) ( 121,480) Net income 319 31,534 31,853 ----- ------- -------
Balances at Dec. 31, 1998 $ 868 $ 85,858 $ 86,726 Cash distributions ( 1,215) ( 120,265) ( 121,480) Net income 1,194 118,163 119,357 ----- ------- -------
Balances at Dec. 31, 1999 $ 847 $ 83,756 $ 84,603 Cash distributions ( 2,126) ( 210,464) ( 212,590) Net income 6,923 685,367 692,290 ----- ------- -------
Balances at Dec. 31, 2000 $5,644 $558,659 $564,303 ===== ======= =======
The accompanying notes are an integral part of these financial statements
The accompanying notes are an integral part of these financial statements
DYCO OIL AND GAS PROGRAM 1981-2 LIMITED PARTNERSHIP Notes to Financial Statements For the Years Ended December 31, 2000, 1999, and 1998
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Operations
The Dyco Oil and Gas Program 1981-2 Limited Partnership (the "Program"), a Minnesota limited partnership, commenced operations on June 1, 1981. Dyco Petroleum Corporation ("Dyco") is the General Partner of the Program. Affiliates of Dyco owned 3,064 (51.1%) of the Program's Units at December 31, 2000.
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 obtaining 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. During 2000 the Program incurred capital costs of $60,225 primarily related to the recompletion of the Brown No. 1-14 well. During 1999 the Program purchased
reserves in the amount of $158,361 (207,777 Mcf), net of accrued liability, on the Yowell No. 1-26 well in which the Program had produced significantly more than its share of gas. 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, 2000, 1999, and 1998, were $0.11, $0.25, and $0.18, 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, 2000 and 1999 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, 2000, 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 71,306 Mcf, resulting in prepaid lease operating expenses of $31,375. At December 31, 1999, 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 72,965 Mcf, resulting in prepaid lease operating expenses of $41,174.
Payable to General Partner
The Payable to General Partner at December 31, 1999 represents a cash advance from Dyco, which was repaid during 2000. This advance was necessary to pay for the purchase of reserves at $1.50 per Mcf on the Yowell No. 1-26 well in which the Program had produced significantly more than its share of gas.
Accrued Liability
The Accrued Liability at December 31, 2000 and 1999 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, 2000, cumulative total gas sales volumes for overproduced wells exceeded the Program's pro-rata share of total gas production from these wells by 71,812 Mcf, resulting in accrued lease operating expenses of $31,597. 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 71,134 Mcf, resulting in accrued lease operating expenses of $40,141.
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 one well by $825 (550 Mcf). No such liability was recorded at December 31, 2000.
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. During 2000, upon Samson Resources Company's ownership of Units first exceeding 50% and as required by IRS Regulations, the Program's tax year was changed from January 1/December 31 in order to coincide with Samson's tax year of July 1/June 30.
2. TRANSACTIONS WITH RELATED PARTIES
The Program obtained an operating advance from the General Partner during the fourth quarter of 1999 due to the purchase of reserves on one well, which was repaid during 2000.
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, 2000, 1999, and 1998, such expenses totaled $59,236, $63,168, and $63,410, respectively, of which $44,064, $47,952, and $47,952, respectively, were 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 more than 10% of the combined oil and gas sales of the Program for the years ended December 31, 2000, 1999, and 1998:
Purchaser 2000 1999 1998 --------- ----- ----- -----
El Paso Energy Marketing Company 89.0% 94.0% 93.0%
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, 2000 and 1999 were as follows:
December 31, ------------------------------- 2000 1999 ------------- ------------- Proved properties $39,984,614 $39,932,897
Less accumulated depreciation, depletion, amortization, and valuation allowance ( 39,728,015) ( 39,702,903) ---------- ----------
Net oil and gas properties $ 256,599 $ 229,994 ========== ==========
Costs Incurred
The Program incurred no oil and gas exploration costs during 2000, 1999, and 1998. During 2000, 1999, and 1998 the Program incurred oil and gas property acquisition (purchase of reserves) and development costs as follows:
December 31, ------------------------------- 2000 1999 1998 ------- -------- -------
Acquisition costs, net of accrued liability $ - $158,361 $ - Development costs 60,225 1,133 26,182
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, 2000, 1999, and 1998. 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, 2000 using oil and gas prices of $23.82 per barrel and $8.86 per Mcf, respectively.
5. QUARTERLY FINANCIAL DATA (Unaudited)
Summarized unaudited quarterly financial data for 2000 and 1999 are as follows:
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 49 President and Director
Patrick M. Hall 42 Chief Financial Officer
Judy K. Fox 50 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 2000 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, 2000:
Compensation/Reimbursement to Dyco and its affiliates Three Years Ended December 31, 2000
Type of Compensation/Reimbursement(1) Expense ------------------------------------- ---------------------------- 2000 1999 1998 ------- ------- ------- Compensation: Operations (2) (2) (2)
Reimbursements: General and Administrative, Geological, and Engineering Expenses and Direct Expenses(3) $44,064 $47,952 $47,952
- ----------
(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 majority 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, 2000:
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, 2001 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 3,065 (51.1%)
All directors, officers, and affiliates of Dyco as a group and Dyco (5 persons) 3,065 (51.1%)
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 the 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. These provisions are similar to those contained in prospectuses and partnership agreements for other public oil and gas partnerships.
Samson Resources Company, an affiliate of Dyco, ("Resources") owns approximately 51% of the Program's outstanding Units as of March 1, 2001. The Program Agreement permits Resources to independently vote its Units. Resources' majority Unit ownership will 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, 2000 and 1999 and for the years ended December 31, 2000, 1999, and 1998 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 June 5, 1981 for Dyco Drilling Program 1981-2 by and between Dyco Oil and Gas Program 1981-2, 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 by reference.
4.2 Program Agreement dated June 5, 1981 for Dyco Oil and Gas Program 1981-2 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 by reference.
4.3 Amendment to Program Agreement for Dyco Oil and Gas Program 1981-2 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 by reference.
4.4 Certificate of Limited Partnership, as amended, for Dyco Oil and Gas Program 1981-2 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 by reference.
*23.1 Consent of Ryder Scott Company, L.P. for Dyco Oil and Gas Program 1981-2 Limited Partnership.
All other Exhibits are omitted as inapplicable.
------------------ * Filed herewith.
(b) Reports on Form 8-K filed during the fourth quarter of 2000.
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 1981-2 LIMITED PARTNERSHIP
By: DYCO PETROLEUM CORPORATION General Partner
March 28, 2001
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 28, 2001 ------------------- Director (Principal Dennis R. Neill Executive Officer)
/s/ Patrick M. Hall Chief Financial March 28, 2001 ------------------- Officer (Principal Patrick M. Hall Financial and Accounting Officer)
/s/ Judy K. Fox Secretary March 28, 2001 ------------------- Judy K. Fox
INDEX TO EXHIBITS
Exhibit Number Description - ------- -----------
4.1 Drilling Agreement dated June 5, 1981 for Dyco Drilling Program 1981-2 by and between Dyco Oil and Gas Program 1981-2, 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 by reference.
4.2 Program Agreement dated June 5, 1981 for Dyco Oil and Gas Program 1981-2 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 by reference.
4.3 Amendment to Program Agreement for Dyco Oil and Gas Program 1981-2 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 by reference.
4.4 Certificate of Limited Partnership, as amended, for Dyco Oil and Gas Program 1981-2 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 by reference.
*23.1 Consent of Ryder Scott Company, L.P. for Dyco Oil and Gas 1981-2 Limited Partnership.
- ------------------ * Filed herewith.