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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to _______________
Commission file number 0-15408
Southwest Royalties, Inc. Income Fund V
(Exact name of registrant as specified
in its limited partnership agreement)
Tennessee 75-2104619
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
407 N. Big Spring, Suite 300
_________Midland, Texas 79701_________
(Address of principal executive offices)
________(915) 686-9927________
(Registrant's telephone number,
including area code)
Indicate by check mark whether registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days:
Yes __X__ No _____
The total number of pages contained in this report is 16.
PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements
The unaudited condensed financial statements included herein have been
prepared by the Registrant (herein also referred to as the "Partnership")
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01
of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all
adjustments necessary for a fair presentation have been included and are of
a normal recurring nature. The financial statements should be read in
conjunction with the audited financial statements and the note thereto for
the year ended December 31, 1999 which are found in the Registrant's Form
10-K Report for 1999 filed with the Securities and Exchange Commission.
The December 31, 1999 balance sheet included herein has been taken from the
Registrant's 1999 Form 10-K Report. Operating results for the three and
nine month periods ended September 30, 2000 are not necessarily indicative
of the results that may be expected for the full year.
Southwest Royalties, Inc. Income Fund V
Balance Sheets
September 30, December 31,
2000 1999
------------- ------------
(unaudited)
Assets
- ------
Current assets
Cash and cash equivalents $ 44,824 44,339
Receivable from Managing General Partner 149,775 87,770
--------- ---------
Total current assets 194,599 132,109
--------- ---------
Oil and gas properties - using the
full cost method of accounting 6,159,438 6,159,438
Less accumulated depreciation,
depletion and amortization 5,774,800 5,750,800
--------- ---------
Net oil and gas properties 384,638 408,638
--------- ---------
$ 579,237 540,747
========= =========
Liabilities and Partners' Equity
- --------------------------------
Current liability - Distribution payable $ 175 71
--------- ---------
Partners' equity
General partners (618,286) (622,125)
Limited partners 1,197,348 1,162,801
--------- ---------
Total partners' equity 579,062 540,676
--------- ---------
$ 579,237 540,747
========= =========
Southwest Royalties, Inc. Income Fund V
Statements of Operations
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
---- ---- ---- ----
Revenues
- --------
Income from net profits
interests $ 92,641 103,281 315,325 176,768
Interest 665 - 2,106 70
------- ------- ------- -------
93,306 103,281 317,431 176,838
------- ------- ------- -------
Expenses
- --------
General and administrative 28,298 28,099 90,045 87,470
Depreciation, depletion and
amortization 9,000 8,000 24,000 34,000
------- ------- ------- -------
37,298 36,099 114,045 121,470
------- ------- ------- -------
Net income $ 56,008 67,182 203,386 55,368
======= ======= ======= =======
Net income allocated to:
Managing General Partner $ 5,042 6,047 18,305 4,983
======= ======= ======= =======
General Partner $ 559 671 2,034 554
======= ======= ======= =======
Limited Partners $ 50,407 60,464 183,047 49,831
======= ======= ======= =======
Per limited partner unit $ 6.72 8.06 24.41 6.65
======= ======= ======= =======
Southwest Royalties, Inc. Income Fund V
Statements of Cash Flows
(unaudited)
Nine Months Ended
September 30,
2000 1999
---- ----
Cash flows from operating activities
Cash received from income from net
profits interests $ 236,460 102,195
Cash paid to suppliers (73,185) (108,020)
Interest received 2,106 70
------- -------
Net cash provided (used in) by operating
activities 165,381 (5,755)
------- -------
Cash flows from financing activities
Distributions to partners (164,896) 1,907
------- -------
Net increase (decrease) in cash and cash
equivalents 485 (3,848)
Beginning of period 44,339 12,785
------- -------
End of period $ 44,824 8,937
======= =======
(continued)
Southwest Royalties, Inc. Income Fund V
Statements of Cash Flows, continued
(unaudited)
Nine Months Ended
September 30,
2000 1999
---- ----
Reconciliation of net income to net
cash provided by (used in) operating activities
Net income $ 203,386 55,368
Adjustments to reconcile net income to
net cash provided by (used in) operating activities
Depreciation, depletion and amortization 24,000 34,000
Increase in receivables (78,865) (74,573)
(Increase) decrease in payable 16,860 (20,550)
------- -------
Net cash provided by (used in) operating activities $ 165,381
(5,755)
======= =======
Southwest Royalties, Inc. Income Fund V
(a Tennessee limited partnership)
Notes to Financial Statements
1. Organization
Southwest Royalties, Inc. Income Fund V was organized under the laws
of the state of Tennessee on May 1, 1986, for the purpose of acquiring
producing oil and gas properties and to produce and market crude oil
and natural gas produced from such properties for a term of 50 years,
unless terminated at an earlier date as provided for in the
Partnership Agreement. The Partnership sells its oil and gas
production to a variety of purchasers with the prices it receives
being dependent upon the oil and gas economy. Southwest Royalties,
Inc. serves as the Managing General Partner and H. H. Wommack, III, as
the individual general partner. Revenues, costs and expenses are
allocated as follows:
Limited General
Partners Partners
-------- --------
Interest income on capital contributions 100% -
Oil and gas sales 90% 10%
All other revenues 90% 10%
Organization and offering costs (1) 100% -
Amortization of organization costs 100% -
Property acquisition costs 100% -
Gain/loss on property disposition 90% 10%
Operating and administrative costs (2) 90% 10%
Depreciation, depletion and amortization
of oil and gas properties 90% 10%
All other costs 90% 10%
(1) All organization costs in excess of 3% of initial capital
contributions will be paid by the Managing General Partner and
will be treated as a capital contribution. The Partnership paid
the Managing General Partner an amount equal to 3% of initial
capital contributions for such organization costs.
(2) Administrative costs in any year which exceed 2% of capital
contributions shall be paid by the Managing General Partner and
will be treated as a capital contribution.
2. Summary of Significant Accounting Policies
The interim financial information as of September 30, 2000, and for
the three and nine months ended September 30, 2000, is unaudited.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted in this Form 10-Q
pursuant to the rules and regulations of the Securities and Exchange
Commission. However, in the opinion of management, these interim
financial statements include all the necessary adjustments to fairly
present the results of the interim periods and all such adjustments
are of a normal recurring nature. The interim consolidated financial
statements should be read in conjunction with the audited financial
statements for the year ended December 31, 1999.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
Southwest Royalties, Inc. Income Fund V was organized as a Tennessee
limited partnership on May 1, 1986, after receipt from investors of
$1,000,000 in limited partner capital contributions. The offering of
limited partnership interests began on January 22, 1986 and concluded on
July 22, 1986, with total limited partner contributions of $7,500,000.
The Partnership was formed to acquire royalty and net profits interests in
producing oil and gas properties, to produce and market crude oil and
natural gas produced from such properties, and to distribute the net
proceeds from operations to the limited and general partners. Net revenues
from producing oil and gas properties are not reinvested in other revenue
producing assets except to the extent that production facilities and wells
are improved or reworked or where methods are employed to improve or enable
more efficient recovery of oil and gas reserves.
Increases or decreases in Partnership revenues and, therefore,
distributions to partners will depend primarily on changes in the prices
received for production, changes in volumes of production sold, increases
and decreases in lease operating expenses, enhanced recovery projects,
offset drilling activities pursuant to farm-out arrangements, sales of
properties, and the depletion of wells. Since wells deplete over time,
production can generally be expected to decline from year to year.
Well operating costs and general and administrative costs usually decrease
with production declines; however, these costs may not decrease
proportionately. Net income available for distribution to the partners is
therefore expected to fluctuate in later years based on these factors.
Based on current conditions, management anticipates the possibility of
performing some workovers during the next twelve months. The Partnership
could possibly experience a normal decline of 8% to 10% a year.
Oil and Gas Properties
Oil and gas properties are accounted for at cost under the full-cost
method. Under this method, all productive and nonproductive costs incurred
in connection with the acquisition, exploration and development of oil and
gas reserves are capitalized. Gain or loss on the sale of oil and gas
properties is not recognized unless significant oil and gas reserves are
involved.
The Partnership's policy for depreciation, depletion and amortization of
oil and gas properties is computed under the units of revenue method.
Under the units of revenue method, depreciation, depletion and amortization
is computed on the basis of current gross revenues from production in
relation to future gross revenues, based on current prices, from estimated
production of proved oil and gas reserves.
Should the net capitalized costs exceed the estimated present value of oil
and gas reserves, discounted at 10%, such excess costs would be charged to
current expense. As of September 30, 2000, the net capitalized costs did
not exceed the estimated present value of oil and gas reserves.
Results of Operations
A. General Comparison of the Quarters Ended September 30, 2000 and 1999
The following table provides certain information regarding performance
factors for the quarters ended September 30, 2000 and 1999:
Three Months
Ended Percentage
September 30, Increase
2000 1999 (Decrease)
---- ---- ----------
Average price per barrel of oil $ 29.95 21.18 41%
Average price per mcf of gas $ 5.40 2.84 90%
Oil production in barrels 5,000 5,840 (14%)
Gas production in mcf 26,800 35,380 (24%)
Income from net profits interests $ 92,641 103,281 (10%)
Partnership distributions $ 65,000 - 100%
Limited partner distributions $ 58,500 - 100%
Per unit distribution to limited partners $ 7.80 - 100%
Number of limited partner units 7,499 7,499
Revenues
The Partnership's income from net profits interests decreased to $92,641
from $103,281 for the quarters ended September 30, 2000 and 1999,
respectively, a decrease of 10%. The principal factors affecting the
comparison of the quarters ended September 30, 2000 and 1999 are as
follows:
1. The average price for a barrel of oil received by the Partnership
increased during the quarter ended September 30, 2000 as compared to
the quarter ended September 30, 1999 by 41%, or $8.77 per barrel,
resulting in an increase of approximately $51,200 in income from net
profits interests. Oil sales represented 51% of total oil and gas
sales during the quarter ended September 30, 2000 as compared to 55%
during the quarter ended September 30, 1999.
The average price for an mcf of gas received by the Partnership
increased during the same period by 90%, or $2.56 per mcf, resulting in
an increase of approximately $90,600 in income from net profits
interests.
The total increase in income from net profits interests due to the
change in prices received from oil and gas production is approximately
$141,800. The market price for oil and gas has been extremely volatile
over the past decade, and management expects a certain amount of
volatility to continue in the foreseeable future.
2. Oil production decreased approximately 840 barrels or 14% during the
quarter ended September 30, 2000 as compared to the quarter ended
September 30, 1999, resulting in a decrease of approximately $25,200 in
income from net profits interests.
Gas production decreased approximately 8,600 mcf or 24% during the same
period, resulting in a decrease of approximately $46,400 in income from
net profits interests.
The total decrease in income from net profits interests due to the
change in production is approximately $71,600. The decrease in gas
production is due primarily to one well, which a workover was performed
on during the first quarter of 1999, dramatically increasing production
during the second quarter of 1999. This same well by year end 1999 had
shut down and was no longer a producing well, thus the decrease for the
quarter ended September 30, 2000.
3. Lease operating costs and production taxes was 38% higher, or
approximately $45,900 more during the quarter ended September 30, 2000
as compared to the quarter ended September 30, 1999. The increase in
lease operating costs and production taxes is primarily a result of the
higher oil and gas prices received by the Partnership. Higher prices
have made it possible for the Partnership to perform needed major
repairs and maintenance. Since production taxes are based on gross
revenues, the increase in oil and gas prices have directly increased
production taxes.
Costs and Expenses
Total costs and expenses increased to $37,298 from $36,099 for the quarters
ended September 30, 2000 and 1999, respectively, an increase of 3%. The
increase is the result of higher depletion expense and general and
administrative expense.
1. General and administrative costs consists of independent accounting and
engineering fees, computer services, postage, and Managing General
Partner personnel costs. General and administrative costs increased 1%
or approximately $200 during the quarter ended September 30, 2000 as
compared to the quarter ended September 30, 1999.
2. Depletion expense increased to $9,000 for the quarter ended September
30, 2000 from $8,000 for the same period in 1999. This represents an
increase of 13%. Depletion is calculated using the units of revenue
method of amortization based on a percentage of current period gross
revenues to total future gross oil and gas revenues, as estimated by
the Partnership's independent petroleum consultants. The increase in
depletion expense is due to an accrual adjustment, which was made
during the quarter ended September 30, 1999 to adjust for the over
accrual of depletion in the first two quarters of 1999. The rapid rise
in prices during the first three quarters of 1999 from $14/bbl to
$23/bbl and from $1.71/mcf to $2.38/mcf caused an adjustment to be
necessary during the third quarter of 1999.
B. General Comparison of the Nine Month Periods Ended September 30, 2000
and 1999
The following table provides certain information regarding performance
factors for the nine month periods ended September 30, 2000 and 1999:
Nine Months
Ended Percentage
September 30, Increase
2000 1999 (Decrease)
---- ---- ---------
Average price per barrel of oil $ 28.54 15.99 78%
Average price per mcf of gas $ 4.28 2.16 98%
Oil production in barrels 14,200 17,400 (18%)
Gas production in mcf 77,200 94,600 (18%)
Income from net profits interests $ 315,325 176,768 78%
Partnership distributions $ 165,000 - 100%
Limited partner distributions $ 148,500 - 100%
Per unit distribution to limited partners $ 19.80 - 100%
Number of limited partner units 7,499 7,499
Revenues
The Partnership's income from net profits interests increased to $315,325
from $176,768 for the nine months ended September 30, 2000 and 1999,
respectively, an increase of 78%. The principal factors affecting the
comparison of the nine months ended September 30, 2000 and 1999 are as
follows:
1. The average price for a barrel of oil received by the Partnership
increased during the nine months ended September 30, 2000 as compared
to the nine months ended September 30, 1999 by 78%, or $12.55 per
barrel, resulting in an increase of approximately $218,400 in income
from net profits interests. Oil sales represented 55% of total oil and
gas sales during the nine months ended September 30, 2000 as compared
to 58% during the nine months ended September 30, 1999.
The average price for an mcf of gas received by the Partnership
increased during the same period by 98%, or $2.12 per mcf, resulting in
an increase of approximately $200,600 in income from net profits
interests.
The total increase in income from net profits interests due to the
change in prices received from oil and gas production is approximately
$419,000. The market price for oil and gas has been extremely volatile
over the past decade, and management expects a certain amount of
volatility to continue in the foreseeable future.
2. Oil production decreased approximately 3,200 barrels or 18% during the
nine months ended September 30, 2000 as compared to the nine months
ended September 30, 1999, resulting in a decrease of approximately
$91,300 in income from net profits interests.
Gas production decreased approximately 17,400 mcf or 18% during the
same period, resulting in a decrease of approximately $74,500 in income
from net profits interests.
The total decrease in income from net profits interests due to the
change in production is approximately $165,800. The decrease in
production is due primarily to one well, which a workover was performed
on during the first quarter of 1999, dramatically increasing production
during the second quarter of 1999. This same well by year end 1999 had
shut down and was no longer a producing well, thus the decrease for the
nine months ended September 30, 2000. The decrease in production for
the nine months that is due to the above well was partially offset by
increased production from wells previously shut-in due to low oil and
gas prices and in turn the inability to perform repairs and
maintenance.
3. Lease operating costs and production taxes were 38% higher, or
approximately $114,900 more during the nine months ended September 30,
2000 as compared to the nine months ended September 30, 1999. The
increase in lease operating costs and production taxes is primarily a
result of the higher oil and gas prices received by the Partnership.
Higher prices have made it possible for the Partnership to perform
needed major repairs and maintenance. Since production taxes are based
on gross revenues, the increase in oil and gas prices have directly
increased production taxes.
Costs and Expenses
Total costs and expenses decreased to $114,045 from $121,470 for the nine
months ended September 30, 2000 and 1999, respectively, a decrease of 6%.
The decrease is the result of lower depletion expense, partially offset by
an increase in general and administrative expense.
1. General and administrative costs consists of independent accounting and
engineering fees, computer services, postage, and Managing General
Partner personnel costs. General and administrative costs increased 3%
or approximately $2,600 during the nine months ended September 30, 2000
as compared to the nine months ended September 30, 1999.
2. Depletion expense decreased to $24,000 for the nine months ended
September 30, 2000 from $34,000 for the same period in 1999. This
represents a decrease of 29%. Depletion is calculated using the units
of revenue method of amortization based on a percentage of current
period gross revenues to total future gross oil and gas revenues, as
estimated by the Partnership's independent petroleum consultants.
Contributing factors to the decline in depletion expense between the
comparative periods were the increase in the price of oil and gas used
to determine the Partnership's reserves and the increase in the
Partnerships revenues.
Liquidity and Capital Resources
The primary source of cash is from operations, the receipt of income from
interests in oil and gas properties. The Partnership knows of no material
change, nor does it anticipate any such change.
Cash flows provided by (used in) operating activities were approximately
$165,400 in the nine months ended September 30, 2000 as compared to
approximately $(5,800) in the nine months ended September 30, 1999. The
primary source of the 2000 cash flow from operating activities was
operations.
There were no cash flows provided by investing activities in the nine
months ended September 30, 2000 and 1999.
Cash flows (used in) provided by financing activities were approximately
$(165,000) in the nine months ended September 30, 2000 as compared to
approximately $1,900 in the nine months ended September 30, 1999. The only
use in financing activities was the distributions to partners.
Total distributions during the nine months ended September 30, 2000 were
$165,000 of which $148,500 was distributed to the limited partners and
$16,500 to the general partners. The per unit distribution to limited
partners during the nine months ended September 30, 2000 was $19.80. There
were no distributions during the nine months ended September 30, 1999.
The sources for the 2000 distributions of $165,000 were oil and gas
operations of approximately $165,400, resulting in excess cash for
contingencies or subsequent distributions.
Since inception of the Partnership, cumulative monthly cash distributions
of $7,553,543 have been made to the partners. As of September 30, 2000,
$6,781,820 or $904.36 per limited partner unit has been distributed to the
limited partners, representing an 90% return of the capital contributed.
As of September 30, 2000, the Partnership had approximately $194,400 in
working capital. The Managing General Partner knows of no unusual
contractual commitments and believes the revenues generated from operations
are adequate to meet the needs of the Partnership.
Liquidity - Managing General Partner
The Managing General Partner has a highly leveraged capital structure with
approximately, $33.8 million of cash interest and $5.9 million of principal
due within the next twelve months. The Managing General Partner is
currently in the process of renegotiating the terms of its various
obligations with its note holders and/or attempting to seek new lenders or
equity investors. Additionally, the Managing General Partner would
consider disposing of certain assets in order to meet its obligations.
There can be no assurance that the Managing General Partner's continuing
debt restructuring efforts will be successful or that the lenders will
agree to a course of action consistent with the Managing General Partners
requirements in restructuring the obligations. Even if such agreement is
reached, it may require approval of additional lenders, which is not
assured. Furthermore, there can be no assurance that the sales of assets
can be successfully accomplished on terms acceptable to the Managing
General Partner. Under current circumstances, the Managing General
Partner's ability to continue as a going concern depends upon its ability
to (1) successfully restructure its obligations or obtain additional
financing as may be required, (2) maintain compliance with all debt
covenants, (3) generate sufficient cash flow to meet its obligations on a
timely basis, and (4) achieve satisfactory levels of future earnings. If
the Managing General Partner is unsuccessful in its efforts, it may be
unable to meet its obligations making it necessary to undertake such other
actions as may be appropriate to preserve asset values.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matter to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a)Exhibits:
27 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter for
which this report is filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Southwest Royalties, Inc. Income Fund V
a Tennessee limited partnership
By: Southwest Royalties, Inc.
Managing General Partner
By: /s/ Bill E. Coggin
------------------------------
Bill E. Coggin, Vice President
and Chief Financial Officer
Date: November 15, 2000