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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[x] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 [Fee Required]
For the fiscal year ended December 31, 1996
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required]
For the transition period from to
Commission File Number 33-47668-02
Southwest Royalties Institutional Income Fund XI-B, L.P.
(Exact name of registrant as specified in
its limited partnership agreement)
Delaware 75-2427289
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
407 N. Big Spring, Suite 300, Midland, Texas 79701
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (915) 686-9927
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
limited partnership interests
Indicate by check mark whether registrant (1) has filed 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
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [x]
The registrant's outstanding securities consist of Units of limited
partnership interests for which there exists no established public market
from which to base a calculation of aggregate market value.
The total number of pages contained in this report is 42. There is no
exhibit index.
PAGE
Table of Contents
Item Page
Part I
1. Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2. Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . 9
4. Submission of Matters to a Vote of Security Holders . . . . . . . . 9
Part II
5. Market for Registrant's Common Equity and Related
Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . .10
6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . .11
7. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . . . . .12
8. Financial Statements and Supplementary Data . . . . . . . . . . . .20
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure. . . . . . . . . . . . . . .35
Part III
10. Directors and Executive Officers of the Registrant. . . . . . . . .36
11. Executive Compensation. . . . . . . . . . . . . . . . . . . . . . .39
12. Security Ownership of Certain Beneficial Owners and
Management. . . . . . . . . . . . . . . . . . . . . . . . . . . . .39
13. Certain Relationships and Related Transactions. . . . . . . . . . .40
Part IV
14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . .41
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . .42
Part I
Item 1. Business
General
Southwest Royalties Institutional Income Fund XI-B, L.P. (the "Partnership"
or "Registrant") was organized as a Delaware limited partnership on August
31, 1993. The offering of limited partnership interests began October 25,
1993, as part of a shelf offering registered under the name Southwest
Royalties Institutional 1992-93 Income Program. Minimum capital requirements
for the Partnership were met on December 8, 1993 and concluded August 20,
1994. The Partnership has no subsidiaries.
As of December 31, 1996, the Partnership had utilized approximately
$2,008,600 of limited partner capital contributions to acquire interests in
oil and gas properties. All excess capital, $89,489, and the associated
organization costs of $3,132, has been distributed to the limited partners in
proportion to their capital contributions as a return of capital.
The principal executive offices of the Partnership are located at 407 N. Big
Spring, Suite 300, Midland, Texas, 79701. The Managing General Partner of
the Partnership, Southwest Royalties, Inc. (the "Managing General Partner")
and its staff of 245 individuals, together with certain independent
consultants used on an "as needed" basis, perform various services on behalf
of the Partnership, including the selection of oil and gas properties and the
marketing of production from such properties. H. H. Wommack, III, a
stockholder, director, President and Treasurer of the Managing General
Partner, is also a general partner. The Partnership has no employees.
Principal Products, Marketing and Distribution
The Partnership has acquired and holds royalty interest and net profit
interests in oil and gas properties located in New Mexico and Texas. All
activities of the Partnership are confined to the continental United States.
All oil and gas produced from these properties is sold to unrelated third
parties in the oil and gas business.
The revenues generated from the Partnership's oil and gas activities are
dependent upon the current market for oil and gas. With some periodic
exceptions, since the early 1980's, there has been a worldwide oversupply of
oil; therefore, market prices have declined significantly. The prices
received by the Partnership for its oil and gas production depend upon
numerous factors beyond the Partnership's control, including competition,
economic, political and regulatory developments and competitive energy
sources, and make it particularly difficult to estimate future prices for oil
and natural gas.
The recent strength in the price of crude oil reflects a continued growth in
demand for energy. The worldwide demand for oil continues to grow. The
United States dependence on foreign oil reached a record 51% in 1996. The
supply of oil is not keeping up with the demand on either a domestic or
worldwide economic basis. Oil production in the United States fell for the
fifth straight year, dropping 1.8% to 6.45 million barrels per day in 1996.
At the same time, economic recovery in the world economy continues to apply
upward pressure on demand. Current oil consumption of over 70 million
barrels per day is growing on an annual basis. This is especially acute in
the lesser developed countries as they move toward industrialization. Supply
and demand for oil has moved very close to being in balance. The lack of
excess capacity in the oil markets has helped push oil prices into the mid-
20's during 1996.
For the last several years, the natural gas industry in the United States has
been affected generally by a surplus in available natural gas and enhanced
delivery capability causing a general deterioration in natural gas prices.
In 1996, natural gas prices recovered significantly after having been
adversely affected for many years by the chronic oversupply. A colder than
normal 1995 and 1996 winter for most of the nation and a cold start for the
1996 and 1997 heating season has increased demand, while supplies have
declined creating a guarded optimism within the industry in regards to the
1997 gas price. January 1997's gas price is the highest the industry has
seen since deregulation in 1985.
Following is a table of the ratios of revenues received from oil and gas
production for the last three years:
Oil Gas
1996 53% 47%
1995 54% 46%
1994 59% 41%
As the table indicates, the Partnership's revenue is almost evenly divided
between its oil and gas production, the Partnership revenues will be highly
dependent upon the future prices and demands for oil and gas.
Seasonality of Business
Although the demand for natural gas is highly seasonal, with higher demand in
the colder winter months and in very hot summer months, the Partnership has
been able to sell all of its natural gas, either through contracts in place
or on the spot market at the then prevailing spot market price. As a result,
the volume sold by the Partnership are not expected to fluctuate materially
with the change of season.
Customer Dependence
No material portion of the Partnership's business is dependent on a single
purchaser, or a very few purchasers, where the loss of one would have a
material adverse impact on the Partnership. Two purchasers accounted for 69%
of the Partnership's total oil and gas production during 1996: Navajo
Refining Company, Inc. 41%, and American Processing 28%.
Two purchasers accounted for 69% of the Partnership's total oil and gas
production during 1995: Navajo Refining Company, Inc. and American Processing
purchased 40% and 29%, respectively. Two purchasers accounted for 68% of the
Partnership's total oil and gas production during 1994: Navajo Refining
Company, Inc. and Nustar Joint Venture purchased 56% and 12%, respectively.
All purchasers of the Partnership's oil and gas production are unrelated
third parties. In the event any of these purchasers were to discontinue
purchasing the Partnership's production, the Managing General Partner
believes that a substitute purchaser or purchasers could be located without
undue delay. No other purchaser accounted for an amount equal to or greater
than 10% of the Partnership's sales of oil and gas production.
Competition
Because the Partnership has utilized all of its funds available for the
acquisition of interests in producing oil and gas properties, it is not
subject to competition from other oil and gas property purchasers. See Item
2, Properties.
Factors that may adversely affect the Partnership include delays in
completing arrangements for the sale of production, availability of a market
for production, rising operating costs of producing oil and gas and complying
with applicable water and air pollution control statutes, increasing costs
and difficulties of transportation, and marketing of competitive fuels.
Moreover, domestic oil and gas must compete with imported oil and gas and
with coal, atomic energy, hydroelectric power and other forms of energy.
Regulation
Oil and Gas Production - The production and sale of oil and gas is subject to
federal and state governmental regulation in several respects, such as
existing price controls on natural gas and possible price controls on crude
oil, regulation of oil and gas production by state and local governmental
agencies, pollution and environmental controls and various other direct and
indirect regulation. Many jurisdictions have periodically imposed
limitations on oil and gas production by restricting the rate of flow for oil
and gas wells below their actual capacity to produce and by imposing acreage
limitations for the drilling of wells. The federal government has the power
to permit increases in the amount of oil imported from other countries and to
impose pollution control measures. Various aspects of the Partnership's oil
and gas activities will be regulated by administrative agencies under
statutory provisions of the states where such activities are conducted and by
certain agencies of the federal government for operations on Federal leases.
Moreover, certain prices at which the Partnership may sell its natural gas
production are controlled by the Natural Gas Policy Act of 1978, the Natural
Gas Wellhead Decontrol Act of 1989 and the regulations promulgated by the
Federal Energy Regulatory Commission.
Environmental - The Partnership's oil and gas activities will be subject to
extensive federal, state and local laws and regulations governing the
generation, storage, handling, emission, transportation and discharge of
materials into the environment. Governmental authorities have the power to
enforce compliance with their regulations, and violations carry substantial
penalties. This regulatory burden on the oil and gas industry increases its
cost of doing business and consequently affects its profitability. The
Managing General Partner is unable to predict what, if any, effect compliance
will have on the Partnership.
Industry Regulations and Guidelines - Certain industry regulations and
guidelines apply to the registration, qualification and operation of oil and
gas programs in the form of limited partnerships. The Partnership is subject
to these guidelines which regulate and restrict transactions between the
Managing General Partner and the Partnership. The Partnership complies with
these guidelines and the Managing General Partner does not anticipate that
continued compliance will have a material adverse effect on Partnership
operations.
Partnership Employees
The Partnership has no employees; however the Managing General Partner has a
staff of geologists, engineers, accountants, landmen and clerical staff who
engage in Partnership activities and operations and perform additional
services for the Partnership as needed. In addition to the Managing General
Partner's staff, the Partnership engages independent consultants such as
petroleum engineers and geologists as needed. As of December 31, 1996 there
were 245 individuals directly employed by the Managing General Partner in
various capacities.
Item 2. Properties
In determining whether an interest in a particular producing property was to
be acquired, the Managing General Partner considered such criteria as
estimated oil and gas reserves, estimated cash flow from the sale of
production, present and future prices of oil and gas, the extent of
undeveloped and unproved reserves, the potential for secondary, tertiary and
other enhanced recovery projects and the availability of markets.
As of December 31, 1996, the Partnership possessed an interest in oil and gas
properties located in Eddy and Lea Counties of New Mexico; Andrews, Cochran,
Dawson, Howard, Midland, Reagan, Reeves, Schleicher, Stonewall, Upton, Ward
and Winkler Counties of Texas. These properties consist of various interests
in 88 wells and units.
Due to the Partnership's objective of maintaining current operations without
engaging in the drilling of any developmental or exploratory wells, or
additional acquisitions of producing properties, there has not been any
significant changes in properties during 1996.
During 1995, the Partnership acquired the Kaiser State 44 acquisition,
located in Lea County, New Mexico, for approximately $90,000. The
acquisition was effective as of June 1, 1995 and was purchased from an
unrelated third party, Elkhorn Oil and Gas, LLC.
The Elizabeth Windham #2 was acquired effective October 1, 1994. The
acquisition was purchased from the Partnership's Managing General Partner,
Southwest Royalties, Inc., for $200,000. The Custer and Wright acquisition
was purchased, effective November 1, 1994, for approximately $870,000. The
acquisition was acquired from several different individuals and is located in
Winkler County of Texas. The Tar Baby Lease was acquired, effective October
1, 1994, for approximately $131,000 from a third party. The lease is in
Howard County of Texas. The Michael Dingman acquisition, located in various
counties in Texas and New Mexico, was acquired for approximately $700,000.
The acquisition was effective September 1, 1994 and was purchased from
Michael Dingman, an unrelated third party.
In compliance with the Partnership Agreement, if the Partnership should
purchase a producing property from the Managing General Partner, such
purchase price would be prior cost, adjusted for any intervening operation.
If such adjusted cost was greater than fair market value, of if specific cost
was unable to be determined, such purchase price would be fair market value
as determined by an independent reservoir engineer.
Significant Properties
The following table reflects the significant properties in which the
Partnership has an interest:
Date
Purchased No. of Proved Reserves*
Name and Location and Interest Wells Oil (bbls) Gas (mcf)
Custer & Wright 11/94 at 32 51,824 1,121,720
Winkler County, 1% to 40%
Texas net profits
interests
Michael Dingman 9/94 at 53 64,128 172,739
Midland, Stonewall, .5% to 50%
Reeves, Reagan, net profits
Dawson, Schleicher, interests
Winkler, Ward,
Andrews, Cochran
Counties, Texas:
Eddy County,
New Mexico
Elizabeth Windham 10/94 at 1 488 136,054
Upton County, 11.6% net
Texas profits
interests
*The reserve estimates were prepared as of January 1, 1997, by Donald R.
Creamer, P.E., an independent registered petroleum engineer. The reserve
estimates were made in accordance with guidelines established by the
Securities and Exchange Commission pursuant to Rule 4-10(a) of Regulation S-
X. Such guidelines require oil and gas reserve reports be prepared under
existing economic and operation conditions, price and costs, as of the date
the estimation is made. Prices may include consideration of changes in
existing price provided only by contractual arrangements, but not on
escalations based upon future conditions.
An oil price of $23.93 per barrel was used in the preparation of the reserve
report as of January 1, 1997. The West Texas Intermediate posted price at
December 31, 1996 of $24.25 was used as the beginning basis for the oil
price. Oil price adjustments from $24.25 per barrel were made in the
individual evaluations to allow for the average difference between recent
prices actually received (current prices) and the West Texas Intermediate
posted price on the sales date. This effectively adjusts for temperature,
gravity, transportation and impurities on an individual property basis to
arrive at a fair value for the selling price.
A gas price of $3.60 per mcf was used in the preparation of the reserve
report as of January 1, 1997. The El Paso Permian Basin Index posted price
at December 31, 1996 of $3.59 was used as the beginning basis for the gas
price. Gas price adjustments from $3.59 per mcf were made in the individual
evaluations to allow for the average difference between recent prices
actually received (current prices) and the El Paso Permian Basin Index posted
price on the sales date. This effectively adjusts for temperature, gravity,
transportation and impurities on an individual property basis to arrive at a
fair value for the selling price.
As also discussed in Part II, Item 7, Management's Discussion and Analysis of
Financial Condition and Results of Operations, oil and gas prices were
subject to frequent changes in 1996.
The evaluation of oil and gas properties is not an exact science and
inevitably involves a significant degree of uncertainty, particularly with
respect to the quantity of oil or gas that any given property is capable of
producing. Estimates of oil and gas reserves are based on available
geological and engineering data, the extent and quality of which may vary in
each case and, in certain instances, may prove to be inaccurate.
Consequently, properties may be depleted more rapidly than the geological and
engineering data have indicated. Unanticipated depletion, if it occurs, will
result in lower reserves than previously estimated; thus an ultimately lower
return for the Partnership. Basic changes in past reserve estimates occur
annually. As new data is gathered during the subsequent year, the engineer
must revise his earlier estimates. A year of new information, which is
pertinent to the estimation of future recoverable volumes, is available
during the subsequent year evaluation.
In applying industry standards and procedures, the new data may cause the
previous estimates to be revised. This revision may increase or decrease the
earlier estimated volumes. Pertinent information gathered during the year
may include actual production and decline rates, production from offset wells
drilled to the same geologic formation, increased or decreased water
production, workovers, and changes in lifting costs among others.
Accordingly, reserve estimates are often different from the quantities of oil
and gas that are ultimately recovered.
The Partnership has reserves which are classified a proved developed
producing, proved developed non-producing and proved undeveloped. All of the
proved reserves are included in the engineering reports which evaluate the
Partnership's present reserves.
Because the Partnership does not engage in drilling activities, the
development of proved undeveloped reserves is conducted pursuant to farmout
arrangements with the Managing General Partner or unrelated third parties.
Generally, the Partnership retains a carried interest such as an overriding
royalty interest under the terms of a farmout, or receives cash.
The Partnership or the owners of properties in which the Partnership owns an
interest can engage in workover projects or supplementary recovery projects,
for example, to extract behind the pipe reserves which qualify as proved
developed non-producing reserves. See Part II, Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operation.
Item 3. Legal Proceedings
There are no material pending legal proceedings to which the Partnership is
a party.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders during the fourth
quarter of 1996 through the solicitation of proxies or otherwise.
Part II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
Market Information
Limited partnership interests, or units, in the Partnership are currently
being offered and sold for a price of $500. Limited partner units are not
traded on any exchange and there is no public or organized trading market for
them. Further, a transferee may not become a substitute limited partner
without the consent of the Managing General Partner.
The Managing General Partner has the right, but not the obligation, to
purchase limited partnership units should an investor desire to sell. The
value of the unit is determined by adding the sum of (1) current assets less
liabilities and (2) the present value of the future net revenues attributable
to proved reserves and by discounting the future net revenues at a rate not
in excess of the prime rate charged by NationsBank, N.A. of Midland, Texas
plus one percent (1%), which value shall be further reduced by a risk factor
discount of no more than one-third (1/3) to be determined by the Managing
General Partner in its sole and absolute discretion. As of December 31,
1996, 1995 and 1994, no limited partner units were purchased by the Managing
General Partner.
Number of Limited Partner Interest Holders
As of December 31, 1996, there were 174 holders of limited partner units in
the Partnership.
Distributions
Pursuant to Article III, Section 3.05 of the Partnership's Certificate and
Agreement of Limited Partnership, "Net Cash Flow" shall be distributed to the
partners on a monthly basis. "Net Cash Flow" is defined as "the cash
generated by the Partnership's investments in producing oil and gas
properties, less (i) General and Administrative Costs, (ii) Direct Costs,
(iii) Operating Costs, and (iv) any reserves necessary to meet current and
anticipated needs of the Partnership, as determined in the sole discretion of
the Managing General Partner."
During 1996, twelve monthly distributions were made totaling $338,739, with
$314,239 distributed to the limited partners and $24,500 to the general
partners. For the year ended December 31, 1996, distributions of $64.78 per
limited partner unit were made, based upon 4,851 limited partner units
outstanding. During 1995, twelve monthly distributions were made totaling
$242,797, with $218,971 distributed to the limited partners and $23,826 to
the general partners. For the year ended December 31, 1995, distributions of
$45.14 per limited partner unit were made, based on 4,851 limited partner
units outstanding. During 1994, eleven monthly distributions were made
totaling $48,803, with $47,953 distributed to the limited partners and $850
to the general partners. For the year ended December 31, 1994, distributions
of $9.89 per limited partner unit were made, based on 4,851 limited partner
units outstanding.
Item 6. Selected Financial Data
The following selected financial data for the years ended December 31, 1996,
1995, 1994 and the period from December 8, 1993, date of inception, through
December 31, 1993, should be read in conjunction with the financial
statements included in Item 8:
Period from
inception
Years ended through
December 31, December 31,
---------------------------------- -------------
1996 1995 1994 1993
---- ---- ---- ----
Revenues $ 395,095 251,501 150,925 1,287
Net income (loss) 180,841 (99,700) 87,328 1,287
Partners' share of
net income (loss):
General partners 34,555 19,946 10,522 -
Limited partners 146,286 (119,646) 76,806 1,287
Limited partners' net
income (loss) per unit 30.16 (24.66) 15.83 .50
Limited partner's cash
distribution per unit 64.78 45.14 9.89 -
Total assets $ 1,677,907 1,835,834 2,184,955 1,132,972
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
Southwest Royalties Institutional Income Fund XI-B, L.P. was organized as a
Delaware limited partnership on August 31, 1993. The offering of limited
partnership interests began October 25, 1993, as part of a shelf offering
registered under the name Southwest Royalties Institutional 1992-93 Income
Program. Minimum capital requirements for the Partnership were met on
December 8, 1993, and the Offering Period terminated August 20, 1994 with 174
limited partners purchasing 4,851 units for $2,425,500.
The Partnership was formed to acquire non-operating interests in producing
oil and gas properties, to produce and market crude oil and natural gas
produced from such properties and to distribute any net proceeds from
operations to the general and limited partners. Net revenues from producing
oil and gas properties will not be reinvested in other revenue producing
assets except to the extent that producing facilities and wells are reworked
or where methods are employed to improve or enable more efficient recovery of
oil and gas reserves. The economic life of the Partnership will thus depend
on the period over which the Partnership's oil and gas reserves are
economically recoverable.
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, lease operating expenses,
enhanced recovery projects, offset drilling activities pursuant to farmout
arrangements and on the depletion 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 limited
partners has fluctuated over the past few years and is expected to fluctuate
in later years based on these factors.
Based on current conditions, management anticipates performing workovers
during the next four years to enhance production. The Partnership could
possibly experience a slight increase during that time and thereafter, could
possibly experience a normal decline.
Results of Operations
A. General Review of the Years Ended December 31, 1996 and 1995
The following table provides certain information regarding performance
factors for the years ended December 31, 1996 and 1995.
Year Ended Percentage
December 31, Increase
1996 1995 (Decrease)
---- ---- ----------
Average price per barrel of oil $ 20.65 17.10 21%
Average price per mcf of gas $ 2.15 1.56 38%
Oil production in barrels 15,400 17,500 (12%)
Gas production in mcf 133,300 160,000 (17%)
Income from net profits interests $ 315,055 246,752 28%
Partnership distributions $ 338,739 242,797 40%
Limited partner distributions $ 314,239 218,971 44%
Per unit distribution to limited
partners $ 64.78 45.14 44%
Number of limited partner units 4,851 4,851
Revenues
The Partnership's income from net profits interests increased to $315,055
from $246,752 for the years ended December 31, 1996 and 1995, respectively,
an increase of 28%. The principal factors affecting the comparison of the
years ended December 31, 1996 and 1995 are as follows:
1. The average price for a barrel of oil received by the Partnership
increased during the year ended December 31, 1996 as compared to the year
ended December 31, 1995 by 21%, or $3.55 per barrel, resulting in an
increase of approximately $62,100 in income from net profits interests.
Oil sales represented 53% of total oil and gas sales during the year
ended December 31, 1996 as compared to 54% during the year ended December
31, 1995.
The average price for an mcf of gas received by the Partnership increased
during the same period by 38%, or $.59 per mcf, resulting in an increase
of approximately $94,400 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 $156,500.
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 2,100 barrels or 12% during the
year ended December 31, 1996 as compared to the year ended December 31,
1995, resulting in a decrease of approximately $43,400 in income from net
profits interests.
Gas production decreased approximately 26,700 mcf or 17% during the same
period, resulting in a decrease of approximately $57,400 in income from
net profits interests.
The total decrease in income from net profits interests due to the change
in production is approximately $100,800. The decrease is primarily a
result of surface problems.
3. As of December 31, 1996, miscellaneous income was approximately $77,700.
The income is a result of a purchase agreement, on the Tar Baby lease,
that guarantees the Partnership a net income of approximately $3,400 each
month from October 1994 to January 1998.
4. Lease operating costs and production taxes were 3% lower, or
approximately $9,700 less during the year ended December 31, 1996 as
compared to the year ended December 31, 1995.
Costs and Expenses
Total costs and expenses decreased to $214,254 from $351,201 for the years
ended December 31, 1996 and 1995, respectively, a decrease of 39%. The
decrease is the result of lower depletion expense, 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 2%
or approximately $800 during the year ended December 31, 1996 as compared
to the year ended December 31, 1995.
2. Depletion expense decreased to $158,000 for the year ended December 31,
1996 from $211,000 for the same period in 1995. This represents a
decrease of 25%. 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.
A contributing factor to the decline in depletion expense between the
comparative periods was the increase in the price of oil and gas used to
determine the Partnership's reserves for January 1, 1997 as compared to
1996. Another contributing factor was due to the impact of revisions of
previous estimates on reserves. Revisions of previous estimates can be
attributed to the changes in production performance, oil and gas price
and production costs. The impact of the revision would have decreased
depletion expense approximately $15,000 as of December 31, 1995.
B. General Review of the Years Ended December 31, 1995 and 1994
The following table provides certain information regarding performance
factors for the years ended December 31, 1995 and 1994.
Year Ended
December 31,
1995 1994
---- ----
Average price per barrel of oil $ 17.10 16.06
Average price per mcf of gas $ 1.56 1.77
Oil production in barrels 17,500 6,200
Gas production in mcf 160,000 38,200
Income from net profits interests $ 246,752 110,673
Partnership distributions $ 242,797 48,803
Limited partner distributions $ 218,971 47,953
Per unit distribution to limited
partners $ 45.14 9.89
Number of limited partner units 4,851 4,851
Per the Partnership agreement, the acquisition period in which the
Partnership will make property acquisitions commences on the termination of
the Offering Period, August 20, 1994, and ends on the date on which the
Partnership's property acquisitions are completed, but in no event, shall
this period continue longer than two (2) years from the termination of the
Offering Period. Since August 20, 1994, the termination of the Offering
Period, the Partnership has been in the Acquisition Period seeking to acquire
producing oil and gas properties.
During 1995, the Partnership acquired the Kaiser State 44 acquisition,
located in Lea County, New Mexico, for approximately $90,000. The
acquisition was effective as of June 1, 1995 and was purchased from an
unrelated third party, Elkhorn Oil and Gas, LLC.
The Elizabeth Windham #2 was acquired effective October 1, 1994. The
acquisition was purchased from the Partnership's Managing General Partner,
Southwest Royalties, Inc., for $200,000. The Custer and Wright acquisition
was purchased, effective November 1, 1994, for approximately $870,000. The
acquisition was acquired from several different individuals and is located in
Winkler County of Texas. The Tar Baby Lease was acquired, effective October
1, 1994, for approximately $131,000 from a third party. The lease is in
Howard County of Texas. The Michael Dingman acquisition, located in various
counties in Texas and New Mexico, was acquired for approximately $700,000.
The acquisition was effective September 1, 1994 and was purchased from
Michael Dingman, an unrelated third party.
Pending use for the acquisition of oil and gas properties, Partnership funds
were being held in an interest bearing account. During the year ended
December 31, 1995 and 1994, the Partnership earned $4,201 and $38,093,
respectively, on funds held in such interest bearing account.
Revenues
The Partnership's income from net profits interests increased to $246,752
from $110,673 for the years ended December 31, 1995 and 1994, respectively.
The Partnership did not begin purchasing interests in oil and gas properties
until October 1994, therefore the transactions will be substantially lower in
1994 as compared to 1995. The principal factors affecting the comparison of
the years ended December 31, 1995 and 1994 are as follows:
1. The average price for a barrel of oil received by the Partnership
increased during the year ended December 31, 1995 as compared to the
year ended December 31, 1994 by 6%, or $1.04 per barrel, resulting in an
increase of approximately $6,500 in income from net profits interests.
Oil sales represented 54% of total oil and gas sales during the year
ended December 31, 1995 as compared to 59% during the year ended
December 31, 1994.
The average price for an mcf of gas received by the Partnership
decreased during the same period by 12%, or $.21 per mcf, resulting in
a decrease of approximately $8,000 in income from net profits interests.
The net decrease in income from net profits interests due to the change
in prices received from oil and gas production is approximately $1,500.
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 increased approximately 11,300 barrels or 182% during the
year ended December 31, 1995 as compared to the year ended December 31,
1994, resulting in an increase of approximately $193,000 in income from
net profits interests.
Gas production increased approximately 121,800 mcf or 319% during the
same period, resulting in an increase of approximately $190,000 in
income from net profits interests.
The total increase in income from net profits interests due to the
change in production is approximately $383,000. The increase is
reflective of the increased investments and months of operations during
1995 as compared to 1994.
3. Lease operating costs and production taxes increased by approximately
$243,000 during the year ended December 31, 1995 as compared to the year
ended December 31, 1994. This increase is due to a full year of
production activity in 1995 as compared to a partial year in 1994.
Costs and Expenses
Total costs and expenses increased to $351,201 from $63,597 for the year
ended December 31, 1995 and 1994, respectively. The increase is the result
of a full year of general and administrative costs, depletion and a write-
down in 1995.
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
$40,000 during the year ended December 31, 1995 as compared to the year
ended December 31, 1994.
2. Depletion expense increased to $211,000 for the year ended December 31,
1995 from $49,000 for the same period in 1994. Depletion is calculated
using the units of revenue method of amortization based on a percentage
of current gross revenues to future gross revenues. Consequently,
depletion will fluctuate in direct relation to oil and gas revenues. As
noted above, oil and gas revenues increased due to the purchase of
properties during 1994 and 1995, with 1995 reflecting a full year of
production.
3. The Partnership incurred a write-down of approximately $84,000 on oil
and gas properties for the year ended December 31, 1995, as the net
capitalized costs of the Partnership's oil and gas properties exceeded
the present value of oil and gas reserves. This write-down has the
effect of reducing net income, but did not affect cash flow or
partnership distributions.
4. The main contributing factor was an unexpected decline in the production
of certain leases, as well as an increase in lease operating costs.
C. Revenue and Distribution Comparison
Partnership income or (loss) for the years ended December 31, 1996, 1995 and
1994 was $180,841, $(99,700) and $87,328, respectively. Excluding the
effects of depreciation, depletion, amortization and provision for
impairment, net income would have been $346,439 in 1996, $203,652 in 1995 and
$143,318 in 1994. Correspondingly, Partnership distributions for the years
ended December 31, 1996, 1995 and 1994 were $338,739, $242,797 and $48,803,
respectively. These differences are indicative of the changes in oil and gas
prices, production and property.
The sources for the 1996 distributions of $338,739 were oil and gas
operations of approximately $259,900, the refund of organization cost of
approximately $3,100 and excess capital of approximately $89,500, resulting
in excess cash for contingencies or subsequent distributions. The sources
for the 1995 distributions of $242,797, were oil and gas operations of
$231,073, interest received from capital contributions of approximately
$4,000, reduced by additions to oil and gas properties of $17,063, with the
balance from available cash on hand at beginning of period. The sources for
the 1994 distributions of $48,803 were oil and gas operations of
approximately $21,500 and interest received from capital contributions of
approximately $40,700, resulting in excess cash for contingencies or
subsequent distributions.
Total distributions during the year ended December 31, 1996 were $338,739 of
which $314,239 was distributed to the limited partners and $24,500 to the
general partners. The per unit distribution to limited partners during the
same period was $64.78. Total distributions during the year ended December
31, 1995 were $242,797 of which $218,971 was distributed to the limited
partners and $23,826 to the general partners. The per unit distribution to
limited partners during the same period was $45.14. Total distributions
during the year ended December 31, 1994 were $48,803 of which $47,953 was
distributed to the limited partners and $850 to the general partners. The
per unit distribution to limited partners during the same period was $9.89.
Since inception of the Partnership, cumulative monthly cash contributions of
$630,339 have been made to the partners. As of December 31,1996 $581,163 or
$119.80 per limited partner unit, has been distributed to the limited
partners, representing a 24% return of the capital contributed.
Liquidity and Capital Resources
The primary source of cash is from operations, the receipt of income from net
profits 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 $259,900 in
1996 compared to approximately $235,000 in 1995 and approximately $62,100 in
1994. The primary source of the 1996 cash flow from operating activities was
profitable operations.
Cash flows provided by or (used in) investing activities were approximately
$3,100 in 1996 compared to approximately $(113,500) in 1995 and approximately
$(1,909,200) in 1994. The principal source of the 1996 cash flow from
investing activities was the refund of organization costs.
Cash flows provided by or (used in) financing activities were approximately
$(338,800) in 1996 compared to approximately $(243,000) in 1995 and
approximately $958,000 in 1994. The only 1996 use in financing activities
was the distribution to partners.
As of December 31, 1996, the Partnership had approximately $157,000 in
working capital. The Managing General Partner knows of no other commitments
and believes the revenues generated from operations will be adequate to meet
the operating needs of the Partnership.
Item 8. Financial Statements and Supplementary Data
Index to Financial Statements
Page
Report of Independent Accountants. . . . . . . . . . . . . . . . . . . .21
Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22
Statements of Operations . . . . . . . . . . . . . . . . . . . . . . . .23
Statements of Changes in Partners' Equity. . . . . . . . . . . . . . . .24
Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . .25
Notes to Financial Statements. . . . . . . . . . . . . . . . . . . . . .27
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners
Southwest Royalties Institutional
Income Fund XI-B, L.P.
Midland, Texas
We have audited the accompanying balance sheets of Southwest Royalties
Institutional Income Fund XI-B, L.P. as of December 31, 1996 and 1995, and
the related statements of operations, changes in partners' equity and cash
flows for each of the three years in the period ended December 31, 1996.
These financial statements are the responsibility of the partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Southwest Royalties
Institutional Income Fund XI-B, L.P. as of December 31, 1996 and 1995, and
the results of its operations and its cash flows for each of the three years
in the period ended December 31, 1996, in conformity with generally accepted
accounting principles.
JOSEPH DECOSIMO AND COMPANY
A Tennessee Registered Limited Liability Partnership
Chattanooga, Tennessee
March 14, 1997
Southwest Royalties Institutional Income Fund XI-B, L.P.
(a Delaware limited partnership)
Balance Sheets
December 31, 1996 and 1995
1996 1995
---- ----
Assets
Current assets:
Cash and cash equivalents $ 20,225 96,063
Receivable from Managing General
Partner 79,012 50,110
Other receivable 57,669 -
Distribution receivable 70 -
--------- ---------
Total current assets 156,976 146,173
--------- ---------
Oil and gas properties - using the
full-cost method of accounting 2,008,569 2,008,569
Less accumulated depreciation,
depletion and amortization 502,000 344,000
--------- ---------
Net oil and gas properties 1,506,569 1,664,569
--------- ---------
Organization costs, net of amortization
of $22,940 in 1996 and $15,342 in 1995 14,362 25,092
--------- ---------
$ 1,677,907 1,835,834
========= =========
Liabilities and Partners' Equity
Current liability - Distribution payable $ - 29
--------- ---------
Partners' equity:
General partners 15,847 5,792
Limited partners 1,662,060 1,830,013
--------- ---------
Total partners' equity 1,677,907 1,835,805
--------- ---------
$ 1,677,907 1,835,834
========= =========
The accompanying notes are an integral
part of these financial statements.
Southwest Royalties Institutional Income Fund XI-B, L.P.
(a Delaware limited partnership)
Statements of Operations
Years ended December 31, 1996, 1995 and 1994
1996 1995 1994
---- ---- ----
Revenues
Income from net profits interests $ 315,055 246,752 110,673
Interest income from capital
contributions 895 4,201 38,093
Interest from operations 1,476 548 2,159
Miscellaneous income 77,669 - -
------- ------- -------
395,095 251,501 150,925
------- ------- -------
Expenses
General and administrative 48,656 47,849 7,607
Depreciation, depletion and
amortization 165,598 219,352 55,990
Provision for impairment of
oil and gas properties - 84,000 -
------- ------- -------
214,254 351,201 63,597
------- ------- -------
Net income (loss) $ 180,841 (99,700) 87,328
======= ======= =======
Net income (loss)allocated to:
Managing General Partner $ 31,099 17,951 9,470
======= ======= =======
General Partner $ 3,456 1,995 1,052
======= ======= =======
Limited partners $ 146,286 (119,646) 76,806
======= ======= =======
Per limited partner unit $ 30.16 (24.66) 15.83
======= ======= =======
The accompanying notes are an integral
part of these financial statements.
Southwest Royalties Institutional Income Fund XI-B, L.P.
(a Delaware limited partnership)
Statements of Changes in Partners' Equity
Years ended December 31, 1996, 1995 and 1994
General Limited
Partners Partners Total
-------- -------- -----
Balance at December 31, 1993 $ - 1,131,652 1,131,652
Capital contributions - 1,149,000 1,149,000
Syndication costs - (140,875) (140,875)
Net income 10,522 76,806 87,328
Distributions (850) (47,953) (48,803)
------- --------- ---------
Balance at December 31, 1994 9,672 2,168,630 2,178,302
Net income (loss) 19,946 (119,646) (99,700)
Distributions (23,826) (218,971) (242,797)
------- --------- ---------
Balance at December 31, 1995 5,792 1,830,013 1,835,805
Net income 34,555 146,286 180,841
Distributions (24,500) (314,239) (338,739)
------- --------- ---------
Balance at December 31, 1996 $ 15,847 1,662,060 1,677,907
======= ========= =========
The accompanying notes are an integral
part of these financial statements.
Southwest Royalties Institutional Income Fund XI-B, L.P.
(a Delaware limited partnership)
Statements of Cash Flows
Years ended December 31, 1996, 1995 and 1994
1996 1995 1994
---- ---- ----
Cash flows from operating activities:
Cash received from net profits
interests $ 306,153 278,371 28,944
Cash paid to suppliers (48,656) (47,982) (7,474)
Interest received 2,371 4,886 40,666
-------- -------- ----------
Net cash provided by operating
activities 259,868 235,275 62,136
-------- -------- ----------
Cash flows from investing activities:
Organization costs 3,132 - (14,241)
Additions to oil and gas
properties - (113,583) (1,894,986)
-------- -------- ----------
Net cash provided by (used in)
investing activities 3,132 (113,583) (1,909,227)
-------- -------- ----------
Cash flows from financing activities:
Capital contributed by
limited partners - - 1,149,000
Distributions to partners (338,838) (242,740) (48,831)
Syndication costs - - (142,195)
-------- -------- ----------
Net cash provided by (used in)
financing activities (338,838) (242,740) 957,974
-------- -------- ----------
Net decrease in cash and cash
equivalents (75,838) (121,048) (889,117)
Beginning of period 96,063 217,111 1,106,228
-------- -------- ----------
End of period $ 20,225 96,063 217,111
======== ======== ==========
(continued)
The accompanying notes are an integral
part of these financial statements.
Southwest Royalties Institutional Income Fund XI-B, L.P.
(a Delaware limited partnership)
Statements of Cash Flows, continued
Years ended December 31, 1996, 1995 and 1994
1996 1995 1994
---- ---- ----
Reconciliation of net income (loss) to
net cash provided by operating activities:
Net income (loss) $ 180,841 (99,700) 87,328
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation, depletion and amortization 165,598 219,352 55,990
(Increase) decrease in receivables (86,571) 31,756 (81,315)
Increase (decrease) in payables - (133) 133
Provision for impairment of oil
and gas properties - 84,000 -
------- ------- -------
Net cash provided by operating
activities $ 259,868 235,275 62,136
======= ======= =======
Supplemental schedule of noncash
financing activities:
Oil and gas properties included in
accounts payable to Managing General
Partner and subsidiary $ - - 6,520
The accompanying notes are an integral
part of these financial statements.
Southwest Royalties Institutional Income Fund XI-B, L.P.
(a Delaware limited partnership)
Notes to Financial Statements
1. Summary of Significant Accounting Policies
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.
Under the units of revenue method, the Partnership computes the
provision by multiplying the total unamortized cost of oil and gas
properties by an overall rate determined by dividing (a) oil and gas
revenues during the period by (b) the total future gross oil and gas
revenues as estimated by the Partnership's independent petroleum
consultants. It is reasonably possible that those estimates of
anticipated future gross revenues, the remaining estimated economic life
of the product, or both could be changed significantly in the near term
due to the potential fluctuation of oil and gas prices or production.
The depletion estimate would also be affected by this change.
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 December 31, 1996, the net
capitalized costs did not exceed the estimated value of oil and gas
reserves. The Partnership reduced the net capitalized costs of oil and
gas properties in 1995 by approximately $84,000. This write-down has
the effect of reducing net income, but did not affect cash flow or
partner distributions. As of December 31, 1994, the net capitalized
costs did not exceed the estimated present values of oil and gas
reserves.
The Partnership's interest in oil and gas properties consists of net
profits interests in proved properties located within the continental
United States. A net profits interest is created when the owner of a
working interest in a property enters into an arrangement providing that
the net profits interest owner will receive a stated percentage of the
net profit from the property. The net profits interest owner will not
otherwise participate in additional costs and expenses of the property.
Southwest Royalties Institutional Income Fund XI-B, L.P.
(a Delaware limited partnership)
Notes to Financial Statements
Estimates and Uncertainties
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.
Organization Costs
Organization costs are stated at cost and are amortized over sixty
months using the straight-line method.
Syndication Costs
Syndication costs are accounted for as a reduction of partnership
equity.
Environmental Costs
The Partnership is subject to extensive federal, state and local
environmental laws and regulations. These laws, which are constantly
changing, regulate the discharge of materials into the environment and
may require the Partnership to remove or mitigate the environmental
effects of the disposal or release of petroleum or chemical substances
at various sites. Environmental expenditures are expensed or
capitalized depending on their future economic benefit. Costs which
improve a property as compared with the condition of the property when
originally constructed or acquired and costs which prevent future
environmental contamination are capitalized. Expenditures that relate
to an existing condition caused by past operations and that have no
future economic benefits are expensed. Liabilities for expenditures of
a non-capital nature are recorded when environmental assessment and/or
remediation is probable, and the costs can be reasonably estimated.
Gas Balancing
The Partnership utilizes the sales method of accounting for gas-
balancing arrangements. Under this method the Partnership recognizes
sales revenue on all gas sold. As of December 31, 1996, 1995 and 1994,
there were no significant amounts of imbalance in terms of units and
value.
Southwest Royalties Institutional Income Fund XI-B, L.P.
(a Delaware limited partnership)
Notes to Financial Statements
Income Taxes
No provision for income taxes is reflected in these financial
statements, since the tax effects of the Partnership's income or loss
are passed through to the individual partners.
In accordance with the requirements of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," the Partnership's tax
basis in its oil and gas properties at December 31, 1996 and 1995 is
$100,499 and $3,651, respectively, less than that shown on the
accompanying Balance Sheet in accordance with generally accepted
accounting principles.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Partnership considers
all highly liquid debt instruments purchased with a maturity of three
months or less to be cash equivalents. The Partnership maintains its
cash at one financial institution.
Number of Limited Partner Units
As of December 31, 1996, 1995 and 1994 there were 4,851 limited partner
units outstanding.
2. Organization
Southwest Royalties Institutional Income Fund XI-B, L.P. was organized
under the laws of the state of Delaware on August 31, 1993, 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 will sell 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. Partnership profits and losses, as well as
all items of income, gain, loss, deduction, or credit, will be credited
or charged as follows:
Southwest Royalties Institutional Income Fund XI-B, L.P.
(a Delaware limited partnership)
Notes to Financial Statements
2. Organization - continued
Limited General
Partner Partners (1)
------- --------
Organization and offering expenses (2) 100% -
Acquisition costs 100% -
Operating costs 90% 10%
Administrative costs (3) 90% 10%
Direct costs 90% 10%
All other costs 90% 10%
Interest income earned on capital
contributions 100% -
Oil and gas revenues 90% 10%
All other revenues 90% 10%
Amortization 100% -
Depletion allowances 100% -
(1) H.H. Wommack, III, President of the Managing General Partner, is an
additional general partner in the Partnership and has a one percent
interest in the Partnership. Mr. Wommack is the majority
stockholder of the Managing General Partner whose continued
involvement in Partnership management is important to its
operations. Mr. Wommack, as a general partner, shares also in
Partnership liabilities.
(2) Organization and Offering Expenses (including all cost of selling
and organizing the offering) include a payment by the Partnership
of an amount equal to three percent (3%) of Capital Contributions
for reimbursement of such expenses. All Organization Costs (which
excludes sales commissions and fees) in excess of three percent
(3%) of Capital Contributions with respect to the Partnership will
be allocated to and paid by the Managing General Partner.
(3) Administrative Costs will be paid from the Partnership's revenues;
however; Administrative Costs in the Partnership year in excess of
two percent (2%) of Capital Contributions shall be allocated to and
paid by the Managing General Partner.
Southwest Royalties Institutional Income Fund XI-B, L.P.
(a Delaware limited partnership)
Notes to Financial Statements
3. Oil and Gas Properties
Costs incurred in connection with the Partnership's oil and gas
producing activities for the year ended December 31, 1996, 1995 and 1994
are as follows:
1996 1995 1994
Acquisition costs $ - 90,000 1,901,506
======= ======= =========
Developmental costs $ - 17,063 -
======= ======= =========
Depreciation, depletion and
amortization $ 158,000 211,000 49,000
======= ======= =========
Impairment of oil and gas
properties $ - 84,000 -
======= ======= =========
All of the Partnership's properties were proved when acquired.
4. Commitments and Contingent Liabilities
The Partnership is subject to various federal, state and local
environmental laws and regulations which establish standards and
requirements for protection of the environment. The Partnership cannot
predict the future impact of such standards and requirements, which are
subject to change and can have retroactive effectiveness. The
Partnership continues to monitor the status of these laws and
regulations.
As of December 31, 1996, the Partnership has not been fined, cited or
notified of any environmental violations and management is not aware of
any unasserted violations which would have a material adverse effect
upon capital expenditures, earnings or the competitive position in the
oil and gas industry. However, the Managing General Partner does
recognize by the very nature of its business, material costs could be
incurred in the near term to bring the Partnership into total
compliance. The amount of such future expenditures is not reliably
determinable due to several factors, including the unknown magnitude of
possible contaminations, the unknown timing and extent of the corrective
actions which may be required, the determination of the Partnership's
liability in proportion to other responsible parties and the extent to
which such expenditures are recoverable from insurance or
indemnifications from prior owners of Partnership's properties.
Southwest Royalties Institutional Income Fund XI-B, L.P.
(a Delaware limited partnership)
Notes to Financial Statements
5. Related Party Transactions
A significant portion of the oil and gas properties in which the
Partnership has an interest are operated by and purchased from the
Managing General Partner. As is usual in the industry and as provided
for in the operating agreement for each respective oil and gas property
in which the Partnership has an interest, the operator is paid an amount
for administrative overhead attributable to operating such properties,
with such amounts to Southwest Royalties, Inc. as operator approximating
$57,200, $55,000 and $8,900 for the years ended December 31, 1996, 1995
and 1994, respectively. In addition, the Managing General Partner and
certain officers and employees may have an interest in some of the
properties that the Partnership also participates.
Certain subsidiaries of the Managing General Partner perform various
oilfield services for properties in which the Partnership owns an
interest. Such services aggregated approximately $3,000, $3,500 and
$400 for the years ended December 31, 1996, 1995 and 1994, respectively,
and the Managing General Partner believes that these costs are
comparable to similar charges paid by the Partnership to unrelated third
parties.
Southwest Royalties, Inc., the Managing General Partner, was paid
$40,896 during 1996 and 40,000 during 1995, as an administrative fee for
indirect general and administrative overhead expenses.
Receivables from Southwest Royalties, Inc., the Managing General
Partner, of approximately $79,012 and $50,110 are from oil and gas
production, net of lease operating costs and production taxes, as of
December 31, 1996 and 1995, respectively.
In addition, a director and officer of the Managing General Partner is
a partner in a law firm, with such firm providing legal services to the
Partnership approximating $90, $300 and $2,600 for the years ended
December 31, 1996, 1995 and 1994, respectively.
6. Major Customers
During 1996, two customers purchased 41% and 28% of the Partnership's
oil and gas production. During 1995, two customers purchased 40% and
29% of the Partnership's oil and gas production. During 1994, two
customers purchased 56% and 12% of the Partnership's oil and gas
production.
During 1996, one lease accounted for 16% of the Partnership's gross
revenue. During 1995, one lease accounted for 16% of the Partnership's
gross revenues.
Southwest Royalties Institutional Income Fund XI-B, L.P.
(a Delaware limited partnership)
Notes to Financial Statements
7. Estimated Oil and Gas Reserves (unaudited)
The Partnership's interest in proved oil and gas reserves is as follows:
Oil (bbls) Gas (mcf)
---------- ---------
Proved developed and undeveloped
reserves -
January 1, 1994 - -
Purchase of oil and gas properties 170,000 1,715,000
Production (2,000) (8,000)
------- ---------
December 31, 1994 168,000 1,707,000
Revisions of previous estimates (20,000) (80,000)
Production (17,000) (160,000)
------- ---------
December 31, 1995 131,000 1,467,000
Revisions of previous estimates 13,000 113,000
Production (15,000) (133,000)
------- ---------
December 31, 1996 129,000 1,447,000
======= =========
Proved developed reserves -
December 31, 1994 147,000 1,402,000
======= =========
December 31, 1995 125,000 1,451,000
======= =========
December 31, 1996 122,000 1,428,000
======= =========
All of the Partnership's reserves are located within the continental
United States.
Southwest Royalties Institutional Income Fund XI-B, L.P.
(a Delaware limited partnership)
Notes to Financial Statements
7. Estimated Oil & Gas Reserves (unaudited) - continued
The standardized measure of discounted future net cash flows relating to
proved oil and gas reserves at December 31, 1996, 1995 and 1994 is
presented below:
1996 1995 1994
Future cash inflows, net of
production and development
costs $ 4,409,000 2,650,000 3,526,000
10% annual discount for
estimated timing of cash
flows 1,692,000 985,000 1,248,000
--------- --------- ---------
Standardized measure of
discounted future net cash
flows $ 2,717,000 1,665,000 2,278,000
========= ========= =========
The principal sources of change in the standardized measure of
discounted future net cash flows for the years ended December 31, 1996,
1995 and 1994 are as follows:
1996 1995 1994
Sales of oil and gas produced,
net of production costs $ (580,000) (492,000) (33,000)
Changes in price 1,642,000 220,000 -
Revisions to estimated
production costs 78,000 (303,000) -
Purchase of minerals in place - - 2,311,000
Revisions of previous
quantities estimates (357,000) (240,000) -
Accretion of discount 269,000 202,000 -
Discounted future net
cash flows -
Beginning of year 1,665,000 2,278,000 -
--------- --------- ---------
End of year $ 2,717,000 1,665,000 2,278,000
========= ========= =========
Future net cash flows were computed using year-end prices and costs that
related to existing proved oil and gas reserves in which the Partnership
has mineral interests.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
Part III
Item 10. Directors and Executive Officers of the Registrant
Management of the Partnership is provided by Southwest Royalties, Inc., as
Managing General Partner. The names, ages, offices, positions and length of
service of the directors and executive officers of Southwest Royalties, Inc.
are set forth below. Each director and executive officer serves for a term
of one year. The present directors of the Managing General Partner have
served in their capacity since the Company's formation in 1983.
Name Age Position
- -------------------- --- -------------------------------------
H. H. Wommack, III 41 Chairman of the Board, President,
Chief Executive Officer, Treasurer
and Director
H. Allen Corey 41 Secretary and Director
Bill E. Coggin 42 Vice President and Chief Financial
Officer
Richard E. Masterson 43 Vice President, Exploration and
Acquisitions
Jon P. Tate 39 Vice President, Land and Assistant
Secretary
Joel D. Talley 35 Vice President, Acquisitions and
Exploitation Manager
R. Douglas Keathley 41 Vice President, Operations
H. H. Wommack, III, is Chairman of the Board, President, Chief Executive
Officer, Treasurer, principal stockholder and a director of the Managing
General Partner, and has served as its President since the Company's
organization in August, 1983. Prior to the formation of the Company, Mr.
Wommack was a self-employed independent oil producer engaged in the purchase
and sale of royalty and working interests in oil and gas leases, and the
drilling of exploratory and developmental oil and gas wells. Mr. Wommack
holds a J.D. degree from the University of Texas from which he graduated in
1980, and a B.A. from the University of North Carolina in 1977.
H. Allen Corey, a founder of the Managing General Partner, has served as the
Managing General Partner's secretary and a director since its inception. Mr.
Corey is President of Trolley Barn Brewery, Inc., a brew pub restaurant chain
based in the Southeast. Prior to his involvement with Trolley Barn, Mr.
Corey was a partner at the law firm of Miller & Martin in Chattanooga,
Tennessee. He is currently of counsel to the law firm of Baker, Donelson,
Bearman & Caldwell, with the offices in Chattanooga, Tennessee. Mr. Corey
received a J.D. degree from the Vanderbilt University Law School and B.A.
degree from the University of North Carolina at Chapel Hill.
Bill E. Coggin, Vice President and Chief Financial Officer, has been with the
Managing General Partner since 1985. Mr. Coggin was Controller for Rod Ric
Corporation of Midland, Texas, an oil and gas drilling company, during the
latter part of 1984. He was Controller for C.F. Lawrence & Associates, Inc.,
an independent oil and gas operator also of Midland, Texas during the early
part of 1984. Mr. Coggin taught public school for four years prior to his
business experience. Mr. Coggin received a B.S. in Education and a B.B.A.
in Accounting from Angelo State University.
Richard E. Masterson, Vice President, Exploration and Acquisitions, first
became associated with the Managing General Partner as a geological
consultant in 1985. He was employed as a petroleum geologist by Grand Banks
Energy (1980-1985), Monsanto (1977-1980) and Texaco, Inc. (1974-1976) prior
to joining the Managing General Partner. Mr. Masterson is a member of the
Society of Economic Paleontologists and Mineralogists and the West Texas
Geological Society. Mr. Masterson received his B.A. degree in Geology from
Trinity University.
Jon P. Tate, Vice President, Land and Assistant Secretary, assumed his
responsibilities with the Managing General Partner in 1989. Prior to joining
the Managing General Partner, Mr. Tate was employed by C.F. Lawrence &
Associates, Inc., an independent oil and gas company, as Land Manager from
1981 through 1989. Mr. Tate is a member of the Permian Basin Landman's
Association and received his B.B.S. degree from Hardin-Simmons University.
Joel D. Talley, Vice President, Acquisitions and Exploitation Manager,
assumed his responsibilities with the Managing General Partner on July 15,
1996. Prior to joining the Managing General Partner, Mr. Talley was employed
for four (4) years by Merit Energy Company as Acquisitions Manager and then
as Region Manager over West Texas, New Mexico and Wyoming (1992-1996) and
eight (8) years by ARCO Oil & Gas Company in various engineering positions
(1984-1992). Mr. Talley received his B.S. in Mechanical Engineering in 1984
from Texas A&M University.
R. Douglas Keathley, Vice President, Operations, assumed his responsibilities
with the Managing General Partner as a Production Engineer in October, 1992.
Prior to joining the Managing General Partner, Mr. Keathley was employed for
four (4) years by ARCO Oil & Gas Company as senior drilling engineer working
in all phases of well production (1988-1992), eight (8) years by Reading &
Bates Petroleum Company as senior petroleum engineer responsible for drilling
(1980-1988) and two (2) years by Tenneco Oil Company as drilling engineer
responsible for all phases of drilling (1978-1980). Mr. Keathley received
his B.S. in Petroleum Engineering in 1977 from the University of Oklahoma.
Key Employees
Accounting and Administrative Officer - Debbie A. Brock, age 44, assumed her
position with the Managing General Partner in 1991. Prior to joining the
Managing General Partner, Ms. Brock was employed with Western Container
Corporation as Accounting Manager (1982-1990), Synthetic Industries (Texas),
Inc. as Accounting Manager (1976-1982) and held various accounting positions
in the manufacturing industry (1971-1975). Ms. Brock received a B.B.A. from
the University of Houston.
Controller - Robert A. Langford, age 47, assumed his responsibilities with
the Managing General Partner in 1992. Mr. Langford received his B.B.A.
degree in Accounting in 1975 from the University of Central Arkansas. Prior
to joining the Managing General Partner, Mr. Langford was employed with
Forest Oil Corporation as Corporate Coordinator, Regional Coordinator,
Accounting Manager. He held various other positions from 1982-1992 and 1976-
1980 and was Assistant Controller of National Oil Company from 1980-1982.
Financial Reporting Manager - Bryan Dixon, C.P.A., age 30, assumed his
responsibilities with the Managing General Partner in 1992. Mr. Dixon
received his B.B.A. degree in Accounting in 1988 from Texas Tech University
in Lubbock, Texas. Prior to joining the Managing General Partner, Mr. Dixon
was employed as a Senior Auditor with Johnson, Miller & Company from 1991-
1992 and Audit Supervisor for Texas Tech University and the Texas Tech
University Health Sciences Center from 1988-1991.
Production Superintendent - Steve C. Garner, age 55, assumed his
responsibilities with the Managing General Partner as Production
Superintendent in July, 1989. Prior to joining the Managing General Partner,
Mr. Garner was employed 16 years by Shell Oil Company working in all phases
of oil field production as operations foreman, one and one-half years with
Petroleum Corporation of Delaware as Production Superintendent, six years as
an independent engineering consultant, and one year with Citation Oil & Gas
Corp. as a workover, completion and production foreman. Mr. Garner has
worked extensively in the Permian Basin oil field for the last 25 years.
Tax Manager - Carolyn Cookson, age 40, assumed her position with the Managing
General Partner in April, 1989. Prior to joining the Managing General
Partner, Ms. Cookson was employed as Director of Taxes at C.F. Lawrence &
Associates, Inc. from 1983 to 1989, and worked in public accounting at
McCleskey, Cook & Green, P.C. from 1981 to 1983 and Deanna Brady, C.P.A. from
1980 to 1981. She is a member of the Permian Basin Chapter of the Petroleum
Accountants' Society, and serves on its Board of Directors and is liaison to
the Tax Committee. Ms. Cookson received a B.B.A. in accounting from New
Mexico State University.
Vice President, Marketing - Steve J. Person, age 38, joined the Managing
General Partner in 1989. Prior to joining the Managing General Partner, Mr.
Person served as Vice President of Marketing for CRI, Inc., and was
associated with Capital Financial Group and Dean Witter (1983). He received
a B.B.A. from Baylor University in 1982 and an M.D.A. from Houston Baptist
University in 1987.
Investor Relations Manager - Sandra K. Flournoy, age 50, came to Southwest
Royalties, Inc. in 1988 from Parker & Parsley Petroleum, where she was
Assistant Manager of Investor Services and Broker/Dealer Relations for two
years. Prior to that, Ms. Flournoy was Administrative Assistant to the
Superintendent at Greenwood ISD for four years.
In certain instances, the Managing General Partner will engage professional
petroleum consultants and other independent contractors, including engineers
and geologists in connection with property acquisitions, geological and
geophysical analysis, and reservoir engineering. The Managing General
Partner believes that, in addition to its own "in-house" staff, the
utilization of such consultants and independent contractors in specific
instances and on an "as-needed" basis allows for greater flexibility and
greater opportunity to perform its oil and gas activities more economically
and effectively.
Item 11. Executive Compensation
The Partnership does not have any directors or executive officers. The
executive officers of the Managing General Partner do not receive any cash
compensation, bonuses, deferred compensation or compensation pursuant to any
type of plan, from the Partnership. The Managing General Partner received
$40,896 during 1996 and 40,000 during 1995, as an annual administrative fee.
Item 12. Security Ownership of Certain Beneficial Owners and Management
There are no limited partners who own of record, or are known by the Managing
General Partner to beneficially own, more than five percent of the
Partnership's limited partnership interests.
The Managing General Partner owns a nine percent interest in the Partnership
as a general partner.
No officer or director of the Managing General Partner owns Units in the
Partnership. H. H. Wommack, III, as the individual general partner of the
Partnership, owns a one percent interest as a general partner. There are no
arrangements known to the Managing General Partner which may at a subsequent
date result in a change of control of the Partnership.
Item 13. Certain Relationships and Related Transactions
In 1996, the Managing General Partner received $40,896 as an administrative
fee. This amount is part of the general and administrative expenses incurred
by the Partnership.
In some instances the Managing General Partner and certain officers and
employees may be working interest owners in an oil and gas property in which
the Partnership also has a working interest. Certain properties in which the
Partnership has an interest are operated by the Managing General Partner, who
was paid approximately $57,200 for administrative overhead attributable to
operating such properties during 1996.
Certain subsidiaries of the Managing General Partner perform various oilfield
services for properties in which the Partnership owns an interest. Such
services aggregated approximately $3,000 for the year ended December 31,
1996.
The law firm of Miller & Martin, of which H. Allen Corey, an officer and
director of the Managing General Partner, is a partner, is counsel to the
Partnership. Miller & Martin provided services totaling approximately $90
during the period ended December 31, 1996, which constitutes an immaterial
portion of that firm's business. Subsequent to December 31, 1996, the
counsel to the Partnership, H. Allen Corey, became a partner in the law firm
Baker, Donelson, Bearman & Caldwell.
In the opinion of management, the terms of the above transactions are similar
to ones with unaffiliated third parties.
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) Financial Statements:
Included in Part II of this report --
Report of Independent Accountants
Balance Sheet
Statement of Operations
Statement of Changes in Partners' Equity
Statement of Cash Flows
Notes to Financial Statements
(2) Schedules required by Article 12 of Regulation S-X are
either omitted because they are not applicable or because
the required information is shown in the financial
statements or the notes thereto.
(3) Exhibits:
4 (a) Certificate of Limited Partnership of Southwest
Royalties Institutional Income Fund XI-B, L.P.,
dated August 24, 1993. (Incorporated by reference
from Partnership's Form 10-K for the fiscal year
ended December 31, 1993).
(b) Agreement of Limited Partnership of Southwest
Royalties Institutional Income Fund XI-B, L.P.,
dated August 27, 1993. (Incorporated by reference
from Partnership;s Form 10-K for the fiscal year
ended December 31, 1993).
27 Financial Data Schedule
(b) Reports on Form 8-K
There were no reports filed on Form 8-K during the quarter
ended December 31, 1996.
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Partnership has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Southwest Royalties Institutional Income
Fund XI-B, L.P., a Delaware limited partnership
By: Southwest Royalties, Inc., Managing
General Partner
By: /s/ H. H. Wommack, III
-----------------------------
H. H. Wommack, III, President
Date: March 26, 1997
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
Partnership and in the capacities and on the dates indicated.
By: /s/ H. H. Wommack, III
-----------------------------------
H. H. Wommack, III, Chairman of the
Board, President, Chief Executive
Officer, Treasurer and Director
Date: March 26, 1997
By: /s/ H. Allen Corey
-----------------------------
H. Allen Corey, Secretary and
Director
Date: March 26, 1997