Page 11 of 15
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, 1998
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 15.
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, 1997 which are found in the Registrant's Form
10-K Report for 1997 filed with the Securities and Exchange Commission.
The December 31, 1997 balance sheet included herein has been taken from the
Registrant's 1997 Form 10-K Report. Operating results for the three and
nine month periods ended September 30, 1998 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,
1998 1997
------------- ------------
(unaudited)
Assets
- ------
Current assets
Cash and cash equivalents $ 12,724 4,418
Receivable from Managing General Partner 47,425 123,280
Distribution receivable - 114
--------- ---------
Total current assets 60,149 127,812
--------- ---------
Oil and gas properties - using the
full cost method of accounting 6,159,438 6,159,438
Less accumulated depreciation,
depletion and amortization 5,073,520 4,985,520
--------- ---------
Net oil and gas properties 1,085,918 1,173,918
--------- ---------
$1,146,067 1,301,730
========= =========
Liabilities and Partners' Equity
- --------------------------------
Current liability - Distribution payable $ 180 -
--------- ---------
Partners' equity
General partners (561,605) (546,020)
Limited partners 1,707,492 1,847,750
--------- ---------
Total partners' equity 1,145,887 1,301,730
--------- ---------
$1,146,067 1,301,730
========= =========
Southwest Royalties, Inc. Income Fund V
Statements of Operations
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
Revenues
- --------
Income from net profits
interests $ 23,853 50,064 133,593 265,428
Interest 87 72 879 788
------ ------ ------- -------
23,941 50,136 134,472 266,216
------ ------ ------- -------
Expenses
- --------
General and administrative 31,287 27,637 97,814 90,473
Depreciation, depletion and
amortization 16,000 32,000 88,000 100,000
------ ------ ------- -------
47,287 59,637 185,814 190,473
------ ------ ------- -------
Net income (loss) $ (23,346) (9,501) (51,342) 75,743
====== ====== ======= =======
Net income (loss) allocated to:
Managing General Partner $ (2,100) (854) (4,621) 6,817
====== ====== ======= =======
General Partner $ (234) (96) (513) 757
====== ====== ======= =======
Limited Partners $ (21,012) (8,551) (46,208) 68,169
====== ====== ======= =======
Per limited partner unit $ (2.80) (1.14) (6.16) 9.09
====== ====== ======= =======
Southwest Royalties, Inc. Income Fund V
Statements of Cash Flows
(unaudited)
Nine Months Ended
September 30,
1998 1997
---- ----
Cash flows from operating activities
Cash received from income from net
profits interests $ 214,662 340,948
Cash paid to suppliers (103,029) (90,473)
Interest received 879 788
------- -------
Net cash provided by operating activities 112,512 251,263
------- -------
Cash flows from financing activities
Distributions to partners (104,206) (269,372)
Bank overdraft - 1,729
------- -------
Net cash used in financing activities (104,206) (267,643)
------- -------
Net increase (decrease) in cash and cash
equivalents 8,306 (16,380)
Beginning of period 4,418 16,380
------- -------
End of period $ 12,724 -
======= =======
(continued)
Southwest Royalties, Inc. Income Fund V
Statements of Cash Flows, continued
(unaudited)
Nine Months Ended
September 30,
1998 1997
---- ----
Reconciliation of net income (loss) to net
cash provided by operating activities
Net income (loss) $ (51,342) 75,743
Adjustments to reconcile net income (loss) to
net cash provided by operating activities
Depreciation, depletion and amortization 88,000 100,000
Decrease in receivables 81,069 75,520
Decrease in payable (5,215) -
------- -------
Net cash provided by operating activities $ 112,512 251,263
======= =======
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 does not anticipate performing
workovers during 1998. 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, 1998, the net capitalized costs did
not exceed the estimated present value of oil and gas reserves. A
continuation of the oil price environment experienced during the first
three quarters of 1998 will have an adverse affect on the Company's
revenues and operating cash flow. Also, further declines in oil prices
could result in additional decreases in the carrying value of the Company's
oil and gas properties.
Results of Operations
A. General Comparison of the Quarters Ended September 30, 1998 and 1997
The following table provides certain information regarding performance
factors for the quarters ended September 30, 1998 and 1997:
Three Months
Ended Percentage
September 30, Increase
1998 1997 (Decrease)
---- ---- ----------
Average price per barrel of oil $ 12.23 18.42 (34%)
Average price per mcf of gas $ 1.87 2.33 (20%)
Oil production in barrels 4,500 8,300 (46%)
Gas production in mcf 34,900 41,700 (16%)
Income from net profits interests $ 23,853 50,064 (52%)
Partnership distributions $ - 30,000 (100%)
Limited partner distributions $ - 27,000 (100%)
Per unit distribution to limited partners $ - 3.60 (100%)
Number of limited partner units 7,499 7,499
Revenues
The Partnership's income from net profits interests decreased to $23,853
from $50,064 for the quarters ended September 30, 1998 and 1997,
respectively, a decrease of 52%. The principal factors affecting the
comparison of the quarters ended September 30, 1998 and 1997 are as
follows:
1. The average price for a barrel of oil received by the Partnership
decreased during the quarter ended September 30, 1998 as compared to
the quarter ended September 30, 1997 by 34%, or $6.19 per barrel,
resulting in a decrease of approximately $51,400 in income from net
profits interests. Oil sales represented 46% of total oil and gas
sales during the quarter ended September 30, 1998 as compared to 61%
during the quarter ended September 30, 1997.
The average price for an mcf of gas received by the Partnership
decreased during the same period by 20%, or $.46 per mcf, resulting in
a decrease of approximately $19,200 in income from net profits
interests.
The total decrease in income from net profits interests due to the
change in prices received from oil and gas production is approximately
$70,600. 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 3,800 barrels or 46% during the
quarter ended September 30, 1998 as compared to the quarter ended
September 30, 1997, resulting in a decrease of approximately $46,500 in
income from net profits interests.
Gas production decreased approximately 6,800 mcf or 16% during the same
period, resulting in a decrease of approximately $12,700 in income from
net profits interests.
The total decrease in income from net profits interests due to the
change in production is approximately $59,200. The decrease in
production is primarily attributable to sharp natural decline of oil
wells and one well being shut-in due to mechanical failures that were
uneconomical to repair because of the decrease in oil price.
3. Lease operating costs and production taxes was 52% lower, or
approximately $103,400 less during the quarter ended September 30, 1998
as compared to the quarter ended September 30, 1997. The decrease in
lease operating costs are primarily attributable to costs incurred in
1997 due to the failure of the Managing General Partner to bill the
Partnership on one lease for a three year period and pulling expenses
in 1997.
Costs and Expenses
Total costs and expenses decreased to $47,287 from $59,637 for the quarters
ended September 30, 1998 and 1997, respectively, a decrease of 21%. 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
13% or approximately $3,700 during the quarter ended September 30, 1998
as compared to the quarter ended September 30, 1997.
2. Depletion expense decreased to $16,000 for the quarter ended September
30, 1998 from $32,000 for the same period in 1997. This represents a
decrease of 50%. 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 contributing
factor to the decline was the decrease in gross oil and gas revenue,
due largely to the sharp decline in oil prices.
B. General Comparison of the Nine Month Periods Ended September 30, 1998
and 1997
The following table provides certain information regarding performance
factors for the nine month periods ended September 30, 1998 and 1997:
Nine Months
Ended Percentage
September 30, Increase
1998 1997 (Decrease)
---- ---- ---------
Average price per barrel of oil $ 13.46 19.55 (31%)
Average price per mcf of gas $ 2.03 2.34 (13%)
Oil production in barrels 19,500 25,900 (25%)
Gas production in mcf 107,000 122,600 (13%)
Income from net profits interests $ 133,593 265,428 (50%)
Partnership distributions $ 104,500 269,000 (61%)
Limited partner distributions $ 94,050 242,100 (61%)
Per unit distribution to limited partners $ 12.54 32.28 (61%)
Number of limited partner units 7,499 7,499
Revenues
The Partnership's income from net profits interests decreased to $133,593
from $265,428 for the nine months ended September 30, 1998 and 1997,
respectively, a decrease of 50%. The principal factors affecting the
comparison of the nine months ended September 30, 1998 and 1997 are as
follows:
1. The average price for a barrel of oil received by the Partnership
decreased during the nine months ended September 30, 1998 as compared
to the nine months ended September 30, 1997 by 31%, or $6.09 per
barrel, resulting in a decrease of approximately $157,700 in income
from net profits interests. Oil sales represented 55% of total oil and
gas sales during the nine months ended September 30, 1998 as compared
to 64% during the nine months ended September 30, 1997.
The average price for an mcf of gas received by the Partnership
decreased during the same period by 13%, or $.31 per mcf, resulting in
a decrease of approximately $38,000 in income from net profits
interests.
The total decrease in income from net profits interests due to the
change in prices received from oil and gas production is approximately
$195,700. 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 6,400 barrels or 25% during the
nine months ended September 30, 1998 as compared to the nine months
ended September 30, 1997, resulting in a decrease of approximately
$86,100 in income from net profits interests.
Gas production decreased approximately 15,600 mcf or 13% during the
same period, resulting in a decrease of approximately $31,700 in income
from net profits interests.
The total decrease in income from net profits interests due to the
change in production is approximately $117,800. The decrease in
production is primarily attributable to the explosion of a gas plant,
which caused a decline in mcfs for two months of 1998 and two wells
being shut-in after downtime. Repairs were uneconomical to make due to
the decrease in oil price.
3. Lease operating costs and production taxes were 34% lower, or
approximately $181,700 less during the nine months ended September 30,
1998 as compared to the nine months ended September 30, 1997. The
decrease in lease operating costs are primarily attributable to costs
incurred in 1997 due to the failure of the Managing General Partner to
bill the Partnership on one lease for a three year period and pulling
expenses in 1997.
Costs and Expenses
Total costs and expenses decreased to $185,814 from $190,473 for the nine
months ended September 30, 1998 and 1997, respectively, a decrease of 2%.
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 8%
or approximately $7,300 during the nine months ended September 30, 1998
as compared to the nine months ended September 30, 1997.
2. Depletion expense decreased to $88,000 for the nine months ended
September 30, 1998 from $100,000 for the same period in 1997. This
represents a decrease of 12%. 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.
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 operating activities were approximately $112,500 in
the nine months ended September 30, 1998 as compared to approximately
$251,300 in the nine months ended September 30, 1997. The primary source
of the 1998 cash flow from operating activities was profitable operations.
There were no cash flows provided by investing activities in the nine
months ended September 30, 1998 and 1997.
Cash flows used in financing activities were approximately $104,200 in the
nine months ended September 30, 1998 as compared to approximately $267,600
in the nine months ended September 30, 1997. The primary use of financing
activities was the distributions to partners.
Total distributions during the nine months ended September 30, 1998 were
$104,500 of which $94,050 was distributed to the limited partners and
$10,450 to the general partners. The per unit distribution to limited
partners during the nine months ended September 30, 1998 was $12.54. Total
distributions during the nine months ended September 30, 1997 were $269,000
of which $242,100 was distributed to the limited partners and $26,900 to
the general partners. The per unit distribution to limited partners during
the nine months ended September 30, 1997 was $32.28.
The sources for the 1998 distributions of $104,500 were oil and gas
operations of approximately $112,500, resulting in excess cash for
contingencies or subsequent distributions. The source for the 1997
distributions of $269,000 was oil and gas operations of approximately
$251,300, with the balance from available cash on hand at the beginning of
the period.
Since inception of the Partnership, cumulative monthly cash distributions
of $7,338,543 have been made to the partners. As of September 30, 1998,
$6,588,320 or $878.56 per limited partner unit has been distributed to the
limited partners, representing an 88% return of the capital contributed.
As of September 30, 1998, the Partnership had approximately $59,900 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.
Information Systems for the Year 2000
The Partnership relies on the Managing General Partner for their data
processing requirements. This includes use of a program designed and
implemented by Midland Southwest Software, the Managing General Partner's
software subsidiary. Midland Southwest Software currently has a year 2000
plan in effect. They have surveyed existing programs and hardware and
estimate a compliance date of early 1999. Determination of the total cost
in connection with the year 2000 compliance issue is difficult to determine
due to the fact that they are in the process of developing their new 1998
version of marketed oil and gas software, which has, from inception,
included year 2000 compliance. Third party software programs utilized by
the Managing General Partner are either in compliance or are not affected
by the year 2000, with the exception of the payroll service, which is
currently modifying its system to accurately handle the Year 2000 issue.
The Managing General Partner has not completed its evaluation of its
vendors or suppliers systems to determine the effect, if any, the non-
compliance of such systems would have on the operations of the Managing
General Partner. Plans are under way to perform an audit in late 1998 or
early 1999 to determine the effect of non-compliance of its vendors and
suppliers on the Managing General Partner and thus formulate a contingency
plan.
A potential source of risk includes, but is not limited to, the inability
of principal purchasers and suppliers to be year 2000 compliant, which
could have a material effect on the Managing General Partner's production,
cash flow and overall financial condition, notwithstanding the Managing
General Partner's actions to prepare its own information systems. The
Managing General Partner currently does not have a contingency plan in
place to cover any unforeseen problems encountered that relate to the year
2000, but intends to produce one before the end of the fiscal year.
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, 1998