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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 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 NO. 2-84452
STERLING DRILLING FUND 1983-1, L.P.
(Exact name of registrant as specified in its charter)
NEW YORK 13-3167549
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE LANDMARK SQUARE
STAMFORD, CONNECTICUT 06901
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (203) 358-5700
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
UNITS OF LIMITED PARTNERSHIP
(Title of Class)
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K 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. o
The Registrant has no voting stock. There is no market for the Units
and therefore no market value of the Units is reported.
The number of Units of the Registrant outstanding as of March 16, 1999,
was: 11,077.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
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STERLING DRILLING FUND 1983-1, L.P.
FORM 10-K ANNUAL REPORT
FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1998
PART I
ITEM 1. BUSINESS
Sterling Drilling Fund 1983-1, L.P., formerly Sterling-Fuel Resources
Drilling Fund 1983-1 (the "Registrant" or the "Partnership") is a limited
partnership formed under the laws of the State of New York on March 18, 1983.
The sole business of the Partnership was the drilling of formation extension
wells principally for natural gas in various locations in the State of West
Virginia. No exploratory drilling was undertaken.
The principal place of business of the Partnership is at One Landmark
Square, Stamford, Connecticut 06901, telephone (203) 358-5700. The Managing
General Partner of the Partnership is PrimeEnergy Management Corporation, a New
York corporation which is a wholly-owned subsidiary of PrimeEnergy Corporation,
a publicly held Delaware corporation. Messrs. Charles E. Drimal, Jr., Oliver J.
Sterling and Samuel R. Campbell also are General Partners. Mr. Drimal is a
Director, President and Chief Executive Officer of PrimeEnergy Management
Corporation and PrimeEnergy Corporation, and Mr. Campbell is a Director of
PrimeEnergy Corporation.
The aggregate contributions to the Partnership were $11,077,000, all of
which, net of the organization expenses of the Partnership, was expended in the
drilling of such formation extension wells. Such properties are located in Clay,
Roane, Calhoun, Gilmer, Wirt, Kanawha, Lincoln and Putnam Counties, West
Virginia. The Partnership does not operate any of the properties in which it has
an interest, but generally such properties are operated and serviced by Prime
Operating Company, a Texas corporation, and Eastern Oil Well Service Company, a
West Virginia corporation, both wholly-owned subsidiaries of PrimeEnergy
Corporation.
During 1998, the Partnership did not engage in any development drilling
activities or the acquisition of any significant additional properties, but
engaged in the production of oil and gas from its producing properties in the
usual and customary course. Since January 1, 1999, and to the date of this
Report, the Partnership has not engaged in any drilling activities nor
participated in the acquisition of any material producing oil and gas
properties.
COMPETITION AND MARKETS
Competitors of the Partnership in the marketing of its oil and gas
production include oil and gas companies, independent concerns, and individual
producers and operators, many of which have financial resources, staffs and
facilities substantially greater than those available to the Partnership.
Furthermore, domestic producers of oil and gas must not only compete with each
other in marketing their output, but must also compete with producers of
imported oil and gas and alternative energy sources such as coal, nuclear power
and hydroelectric power.
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The availability of a ready market for any oil and gas produced by the
Partnership at acceptable prices per unit of production will depend upon
numerous factors beyond the control of the Partnership, including the extent of
domestic production and importation of oil and gas, the proximity of the
Partnership's producing properties to gas pipelines and the availability and
capacity of such pipelines, the marketing of other competitive fuels,
fluctuation in demand, governmental regulation of production, refining,
transportation and sales, general national and worldwide economic conditions,
and pricing, use and allocation of oil and gas and their substitute fuels.
The Partnership does not currently own or lease any bulk storage
facilities or pipelines, other than adjacent to and used in connection with
producing wells. The Partnership deals with a number of major and independent
companies for the purchase of its oil and gas production, in the areas of
production. In 1998, approximately $314,253, or 94.86%, of the Partnership's gas
production was sold to one unaffiliated purchaser, Phoenix Diversified and about
$12,820, or 100%, of oil production was purchased by the American Refining
Group. Neither purchaser has any relationship or is otherwise affiliated with
the Partnership. Sales are made under short-term contractual arrangements. The
Partnership believes that its current purchasers will continue to purchase oil
and gas products and, if not, could be replaced by other purchasers.
ENVIRONMENTAL MATTERS
The petroleum industry is subject to numerous federal and state
environmental statutes, regulations and other pollution controls. In general,
the Partnership is, and will be subject to, present and future environmental
statutes and regulations, and in the future the cost of its activities may
materially increase as a result thereof. The Partnership's expenses relating to
preserving the environment during 1998 as they relate to its oil and gas
operations were not significant in relation to operating costs and the
Partnership expects no material change in the near future. The Partnership
believes that environmental regulations should not, in the future, result in a
curtailment of production or otherwise have a materially adverse effect on the
Partnership's operations or financial condition.
REGULATION
The Partnership's oil and gas operations are subject to a wide variety
of federal, state and local regulations. Administrative agencies in such
jurisdictions may promulgate and enforce rules and regulations relating to,
among other things, drilling and spacing of oil and gas wells, production rates,
prevention of waste, conservation of natural gas and oil, pollution control, and
various other matters, all of which may affect the Partnership's future
operations and production of oil and gas. The Partnership's natural gas
production and prices received for natural gas are regulated by the Federal
Energy Regulatory Commission ("FERC") and the Natural Gas Policy Act of 1978 and
various state regulations. The Partnership was subject to the Crude Oil Windfall
Profit Tax Act of 1980, which imposed an excise tax on producers of crude oil at
various rates for prices received in excess of certain historical base prices.
That Act was repealed in August, 1988. The Partnership is also subject to state
drilling and proration regulations affecting its drilling operations and
production rates.
The FERC continues to regulate interstate natural gas pipeline
transportation rates and service conditions pursuant to the NGA and NGPA.
Federal regulation of interstate transporters affects the marketing of natural
gas produced by the Partnership as well as the revenues received by the
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Partnership for sales of such natural gas. Since the latter part of 1985,
through its Order Nos. 436, 500 and 636 rulemakings, the FERC has endeavored to
make natural gas transportation accessible to gas buyers and sellers on an open
and non-discriminatory basis. The FERC's efforts have significantly altered the
marketing and pricing of natural gas. No prediction can be made as to what
additional legislation may be proposed, if any, affecting the competitive status
of a gas producer, restricting the prices at which a producer may sell its gas,
or the market demand for gas, nor can it be predicted which proposals, including
those presently under consideration, if enacted, might be effective.
A number of legislative proposals have been introduced in Congress and
the state legislatures of various states, that, if enacted, would significantly
affect the petroleum industry. Such proposals involve, among other things, the
imposition of land and use controls and certain measures designed to prevent
petroleum companies from acquiring assets in other energy areas. In addition,
there is always the possibility that if market conditions change dramatically in
favor of oil and gas producers that some new form of "windfall profit" or
severance tax may be proposed for and imposed upon either oil or gas. At the
present time it is impossible to predict which proposals, if any, will actually
be enacted by Congress or the various state legislatures. The Partnership
believes that it will comply with all orders and regulations applicable to its
operations. However, in view of the many uncertainties with respect to the
current controls, including their duration and possible modification together
with any new proposals that may be enacted, the Partnership cannot predict the
overall effect, if any, of such controls on its operations.
TAXATION
The Partnership received an opinion of its counsel that the Partnership
would be classified as a partnership and the holders of Partnership Units would
be treated as limited partners for federal income tax purposes. The Partnership
itself, to the extent that it is treated for federal income tax purposes as a
partnership, is not subject to any federal income taxation, but it is required
to file annual partnership returns. Each holder of Partnership Units will be
allocated his distributive shares of the Partnership's income, gain, profit,
loss, deductions, credits, tax preference items and distributions for any
taxable year of the Partnership ending within or with his taxable year without
regard as to whether such holder has received or will receive any cash
distributions from the Partnership.
ITEM 2. PROPERTIES
The Partnership has no interest in any properties other than its oil
and gas properties. The information set forth below summarizes the Partnership's
oil and gas wells, production and reserves, for the periods indicated.
PRODUCING WELLS AND OPERATING INFORMATION
The Partnership, following its formation, and in November, 1983,
contracted for the drilling of 38 development wells, which resulted in 37
producing wells and one dry hole.
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As of December 31, 1998, the Partnership had ownership interests in the
following gross and net producing oil and gas wells and gross and net producing
acres(1). The Partnership has no material undeveloped leasehold, mineral or
royalty acreage.
Producing wells:
Gross Net
----- ---
Oil Wells......................... 0 0
Gas Wells......................... 39 31.3
Producing acres............................. 1,833 1,771
- --------------
(1) A gross well is a well in which an interest is owned; a net
well is the sum of the interests owned in gross wells. Wells
are classified by their primary product. Some wells produce
both oil and gas.
The following table sets forth the Partnership's oil and gas
production, average sales prices and average production costs as of and for the
periods indicated:
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
Production:
Oil and Condensate (bbl) ................... 1,232 1,302 1,524 1,508 1,521
Gas (Mcf) .................................. 100,993 111,382 113,227 116,201 104,386
Average Price of Sales:
Oil and Condensate ($ per bbl) ............. $ 12.05 19.64 16.37 17.82 12.89
Gas ($ per Mcf) ............................ $ 3.17 3.15 2.31 2.17 3.12
Production Expense per Dollar
of Operating Revenue ....................... $ 0.45 0.44 0.47 0.46 0.53
OIL AND GAS RESERVES
The Partnership's interests in proved developed oil and gas properties
have been evaluated by Ryder Scott Company for the periods indicated below. All
of the Partnership's reserves are located in the continental United States. The
following table summarizes the Partnership's oil and gas reserves at the dates
shown (figures rounded):
Proved Developed
As of ----------------------------------------------
12-31 Oil (bbls) Gas (Mcf)
- ----- ---------- ---------
1994 11,000 1,837,000
1995 15,500 2,210,000
1996 13,850 2,233,000
1997 14,000 2,034,300
1998 13,000 1,808,900
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The estimated future net revenue (using current prices and costs as of
the dates indicated, exclusive of income taxes (at a 10% discount for estimated
timing of cash flow) for the Partnership's proved developed oil and gas reserves
for the periods indicated are summarized as follows (figures rounded):
Proved Developed
--------------------------------------------
As of Future Net Present Value of
12-31 Revenue Future Net Revenue
----- ---------- ------------------
1994 $1,735,000 $ 782,000
1995 2,272,900 893,700
1996 3,414,800 1,313,750
1997 2,940,800 1,200,900
1998 2,293,000 915,800
Since January 1, 1998, the Partnership has not filed any estimates of
its oil and gas reserves with, nor were any such estimates included in any
reports, to any federal authority or agency, other than the Securities and
Exchange Commission.
ITEM 3. LEGAL PROCEEDINGS
The Partnership is not a party to, nor is any of its property the
subject of, any legal proceedings actual or threatened, which would have a
material adverse effect on the business and affairs of the Partnership.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted during 1998 for vote by the holders of
Partnership Units.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
There is no market for the Limited Partnership Units (the "Units") of
the Partnership. As of March 16, 1999, there were 694 holders of record of the
Units.
The Units are not regarded as stock and payments or distributions to
holders of Units are not made in the form of dividends. Cash distributions to
the holders of Units for 1998 aggregated $41,539. Aggregate cash distributions
to the holders of the Units as of December 31, 1998, is $2,340,016.
The Managing General Partner may purchase Units directly from the unit
holders if presented to the Managing General Partner, subject to conditions,
including limitations on numbers of Units, and at a price to be fixed by the
Managing General Partner in accordance with certain procedures, all as provided
for in the Limited Partnership Agreement of the Partnership.
ITEM 6. SELECTED FINANCIAL DATA
The information required hereunder is set forth under "Selected
Financial Data" in the Financial Information section included in this Report.
The index to the Financial Information section is at page F-1.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information required hereunder is set forth under "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Financial Information section included in this Report. The index to the
Financial Information section is at page F-1.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required hereunder is set forth under "Report of
Independent Public Accountants," "Balance Sheets," "Statements of Operations"
"Statements of Changes in Partners' Equity," "Statements of Cash Flows" and
"Notes to Financial Statements" in the Financial Information section included in
this Report. The index to the Financial Information section is at page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There was no disagreement between the Partnership and its certified
public accountants on any matter of accounting principles or practices or
financial statement disclosure.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Managing General Partner of the Partnership is PrimeEnergy
Management Corporation, a New York corporation ("Management"). The principal
business of Management is the management of the Partnership and other publicly
and privately held exploration and development limited partnerships and joint
ventures and publicly held asset and income fund limited partnerships. As of
March 16, 1999, Management acts as the Managing General Partner in a total of 51
limited partnerships and joint ventures, of which 5 are publicly held, and is
the Managing Trustee of 2 Delaware Business Trusts. The primary activity of such
Partnerships, joint ventures and trusts is the production of oil and gas and
Management, as the Managing General Partner of the Partnership, will devote such
of its time as it believes necessary in the conduct and management of the
business and affairs of the Partnership. Management, and other of the General
Partners of the Partnership, are engaged in and intend to continue to engage in
the oil and gas business for their own accounts and for the accounts of others.
Management, which provides all of the executive, management and
administrative functions of the Partnership, is a wholly-owned subsidiary of
PrimeEnergy Corporation ("PrimeEnergy"), a publicly held Delaware corporation.
The principal offices of PrimeEnergy and Management are in Stamford,
Connecticut. The operating subsidiaries of PrimeEnergy, Prime Operating Company
and Eastern Oil Well Service Company, maintain their principal offices in
Houston, Texas, with district offices in Midland, Texas, Oklahoma City,
Oklahoma, and Charleston, West Virginia. PrimeEnergy and its subsidiaries have
about 176 employees, including their principal officers providing management and
administrative services, accounting, geologists, production engineers, land
department personnel and field employees.
Set forth below is information concerning the directors and executive
officers of Management and PrimeEnergy who are involved with the conduct of the
business and operations of the Partnership.
Charles E. Drimal, Jr., age 51, is a Director and President of
Management and has held those positions since May, 1983. He is also a Director
and President of Prime Energy and the operating subsidiaries. He graduated from
the University of Maryland in 1970 and from Stamford University School of Law in
1973 and is a member of the New York State Bar.
Beverly A. Cummings, age 46, has been a Director and Vice President,
Finance, of Management since August, 1985. She is also a Director and Vice
President, Finance, and Treasurer of PrimeEnergy and the operating subsidiaries.
Ms. Cummings is a Certified Public Accountant and holds a Bachelor of Science
degree from the State University of New York and a Master in Business
Administration from Rutgers University.
Bennie H. Wallace, Jr., age 47, is a Director and Vice President of
Management and has held such positions since May, 1989. He is also Acquisitions
Manager for Management, a Vice President of PrimeEnergy, a Director of
PrimeEnergy since June, 1993, and is a Vice President and Director
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of the operating subsidiaries. He graduated from Louisiana State University in
1975 with a Bachelor of Science degree in petroleum engineering and is a
registered professional engineer in the States of Texas and Louisiana and was an
independent petroleum engineer engaged in the evaluation and operation of oil
and gas properties from 1983 to 1987.
Lynne G. Pizor, age 39, has been Controller of Prime Operating Company
since January 1992 and Eastern Oil Well Service Company since September, 1990.
She also held that position with Management from January, 1986, through August,
1994, and PrimeEnergy from May, 1990, through August, 1994. She joined
Management in October, 1984, as Manager of Partnership Accounting. She is a
graduate of Wagner College with a Bachelor of Science degree in Economics and
Business Administration and is a Certified Public Accountant.
James F. Gilbert, age 66, has been Secretary of Management since June,
1990, and has been Secretary of PrimeEnergy since March, 1973, and was a
Director of PrimeEnergy from that date to October, 1987. He also serves as
Secretary of the operating subsidiaries. He is an attorney in Dallas, Texas.
ITEM 11. EXECUTIVE COMPENSATION
The Partnership has no officers, directors or employees. The officers
and employees of the Managing General Partner and PrimeEnergy perform all
management and operational functions of the Partnership. The Partnership does
not pay any direct salaries or other remuneration to the officers, directors or
employees of the Managing General Partner or PrimeEnergy. The Managing General
Partner is reimbursed for the general and administrative expenses of the
Partnership which are allocated to the Partnership for expenses incurred on
behalf of the Partnership, together with administrative work by third parties,
limited annually to 5% of the aggregate capital contribution of the holders of
the Partnership Units. During 1998 and 1997, the allocation of general and
administrative expenses to the Partnership was $100,000 for each year.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
PRIMEENERGY CORPORATION
The Partnership does not know of any person, entity or group, other
than the Managing General Partner that beneficially owns more than five percent
of the Partnership Units. The following table shows as of March 16, 1999, the
name and address of such beneficial owners, and the number and percent of
partnership units beneficially owned by them, all of which are directly owned.
Number
Name and Address of Beneficial Owner of Units Percent
------------------------------------ -------- -------
PrimeEnergy Management Corporation
One Landmark Square
Stamford, CT 06901...................... 1,152 10.40%
PrimeEnergy Corporation
One Landmark Square
Stamford, Connecticut 06901............. 1,617 14.60%
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Prime Operating Company acts as the operator for most of the producing
oil and gas wells of the Partnership pursuant to operating agreements with the
Partnership and other working interest owners, including other partnerships
managed by the Managing General Partner, and in 1998, was paid well operating
fees ranging from about $444 to $615 per month per well. Well operating supplies
and equipment and related servicing operations are generally provided by Eastern
Oil Well Service Company. The Partnership pays its proportionate part of such
operating fees and expenses. Such fees and expenses vary depending on such
matters as the location of the well, the complexity of the producing equipment,
whether wells produce oil or gas or both and similar factors. The Partnership
believes that such services are as favorable to the Partnership as they would be
if the Partnership entered into such transactions with unaffiliated third
parties. In 1998 and 1997, the Partnership paid an aggregate of $106,181 and
$116,779, respectively, in such fees and expenses.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) The following documents are filed as a part of this Report:
1. Financial Statements (Index to the Financial Information
at page F-1)
2. Exhibits:
(3) Form of Agreement of Limited Partnership of
Sterling-Fuel Resources Drilling Fund 1983-1, now
Sterling Drilling Fund 1983-1, L.P. (Incorporated by
reference to Exhibit (3) of Sterling Drilling Fund
1983-1, L.P. Form 10-K for the year ended December
31, 1994.)
(24) Consent of Ryder Scott Company (filed herewith)
(27) Financial Data Schedule. (filed herewith)
(b) Reports on Form 8-K:
No reports on Form 8-K have been filed during the last quarter
of the year covered by this Report.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 30th day of
March, 1999.
Sterling Drilling Fund 1983-1, L.P.
By: PrimeEnergy Management Corporation
Managing General Partner
By: /s/ CHARLES E. DRIMAL, JR.
-----------------------------------------
Charles E. Drimal, Jr.
President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated and on the 30th day of March, 1999.
/s/ CHARLES E. DRIMAL, JR. Director and President,
- ----------------------------- PrimeEnergy Management Corporation;
Charles E. Drimal, Jr.
The Principal Executive Officer
/s/ BEVERLY A. CUMMINGS Director and Vice President and Treasurer,
- ----------------------------- PrimeEnergy Management Corporation;
Beverly A. Cummings
The Principal Financial and Accounting Officer
/s/ BENNIE H. WALLACE, JR. Director, PrimeEnergy Management
- ----------------------------- Corporation
Bennie H. Wallace, Jr.
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STERLING DRILLING FUND 1983-1, L.P.
(a New York limited partnership)
Index to Financial Information and Schedules
PAGE NO.
--------
Selected Financial Data F-2
Management's Discussion and Analysis of Financial Condition
and Results of Operations F-2
Report of Independent Public Accountants F-6
Financial Statements:
Balance Sheets, December 31, 1998 and 1997 F-7
Statements of Operations for the Years Ended December 31,
1998, 1997 and 1996 F-8
Statements of Changes in Partners' Equity for the Years
Ended December 31, 1998, 1997 and 1996 F-9
Statements of Cash Flows for the Years
Ended December 31, 1998, 1997 and 1996 F-10
Notes to Financial Statements F-11
Schedules:
V - Property and Equipment - Oil and Gas Properties for
the Years Ended December 31, 1998, 1997, and 1996 F-19
VI - Accumulated Depreciation, Depletion and Amortization -
Oil and Gas Properties for the Years Ended December 31,
1998, 1997 and 1996 F-20
All other schedules have been omitted as the information required is either
included in the financial statements, related notes, or is not applicable.
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ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes certain selected financial data to
highlight significant trends in the Registrant's financial condition and results
of operations for the periods indicated. The selected financial data should be
read in conjunction with the financial statements and related notes included
elsewhere in this report.
YEAR ENDED DECEMBER 31, (000's omitted)
-----------------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
Revenues .......................... $ 346 386 297 361 350
Net income (loss):
Limited Partners ................ $ (15) 1 (42) (3) (557)
General Partners ................ $ 9 15 2 23 (54)
Per equity unit ................. $ (1.35) 0.11 (3.79) (0.26) (50.25)
Total assets ...................... $ 1,635 1,693 1,729 1,823 1,878
Cash distributions:
Limited Partners ................ $ 42 42 42 28 28
General Partners ................ $ 11 11 12 7 7
Limited partners as
a % of original
contribution .................... 0.375% 0.375% 0.375% 0.25% 0.25%
ITEM 7. MANAGEMENTS DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF
OPERATIONS
1. Liquidity: The oil and gas industry is intensely competitive in all
its phases. There is also competition between this industry and other industries
in supplying energy and fuel requirements of industrial and residential
consumers. It is not possible for the Partnership to calculate its position in
the industry as the Partnership competes with many other companies having
substantially greater financial and other resources. In accordance with the
terms of the Agreement of Limited Partnership of the Partnership, the General
Partners of the Partnership will make cash distributions of as much of the
Partnership cash credited to the capital accounts of the partners as the General
Partners have determined is not necessary or desirable for the payment of any
contingent debts, liabilities or expenses for the conduct of the Partnership
business. As of December 31, 1998, the General Partners have distributed to the
Limited Partners $2,340,016 or 21.125% of the total Limited Partner capital
contributions to the Limited Partnership.
The Year 2000 (Y2K) issue is the definition and resolution of potential
problems resulting from computer application programs or imbedded chip
instruction sets utilizing two-digits, as opposed to four digits, to define a
specific the year. Such date sensitive systems may be unable to properly
interpret dates, which could cause a system failure or other computer errors,
leading to disruptions in operations. The Partnership relies on the Managing
General Partner for all
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management and administrative functions. Consequently, the Partnership's
exposure to the Y2K problems is determined by what Year 2000 efforts have been
undertaken by the Managing General Partner.
In 1997, the Managing General Partner developed a three-phase program
for the Y2K information systems compliance. Phase I is to identify those systems
with which the Partnership has exposure to Y2K issues. Phase II is to remediate
systems and replace equipment where required. Phase III, to be completed by
mid-1999, is the final testing of each major area of exposure to ensure
compliance. The Managing General Partner has identified four major areas
determined to be critical for successful Y2K compliance: (1) financial and
informational system applications, (2) communications applications, (3) oil and
gas producing operations, and (4) third-party relationships.
The Managing General Partner, in accordance with Phase I of the
program, is in the process of conducting an internal review of all systems and
contacting all software suppliers to determine major areas of exposure to Y2K
issues. The Managing General Partner has completed the modifications to its core
financial and reporting systems and is continuing to test compliance in this
area. These modifications were made in conjunction with an upgrade of the
financial reporting applications provided by the Managing General Partner's
software vendor. Conversion to the new system was completed during 1998. Due to
the technology advances in the communications area the Managing General Partner
has upgraded such equipment regularly over the past three years. Y2K compliance
was a specification requirement of each installation. Consequently, the Managing
General Partner expects exposure in this area to be limited to third party
readiness. The Managing General Partner is in the process of identifying areas
of exposure resulting from equipment used in its oil and gas producing
operations. The Managing General Partner expects to complete identification of
critical systems by June 1999 and to continue remediation and testing throughout
1999. In the third-party area, the Managing General Partner has received
assurance from its significant service suppliers that they intend to be Y2K
compliant by 2000. The Managing General Partner has implemented a program to
request Year 2000 certification or other assurance from other third parties
during 1999.
The Partnership recognizes that, notwithstanding the efforts described
above, the Partnership could experience disruptions to its operations or
administrative functions, including those resulting from non-compliant systems
utilized by unrelated third party governmental and business entities. The
Managing General Partner is in the process of developing a contingency plan in
order to mitigate potential disruption to business operations. The Managing
General Partner expects to complete this contingency plan by the second quarter
of 1999 but also expects to refine this plan throughout 1999.
Through 1998, the Managing General Partner has handled identifying,
remediating and testing systems for Year 2000 compliance within the scope of
routine upgrades and systems evaluations. The Managing General Partner expects
to complete the review of oil and gas operations exposure in the same manner,
without incurring substantial additional costs. However, information resulting
from the oil and gas operations review may indicate required expenditures not
currently contemplated by the Partnership.
The net proved oil and gas reserves of the Partnership are considered
to be a primary indicator of financial strength and future liquidity. The
present value of unescalated future net revenue (S.E.C.
F-3
16
case) associated with such reserves, discounted at 10% as of December 31, 1998,
was approximately $915,800 as compared to the discounted reserves as of December
31, 1997, which were approximately $1,200,900.
Reservoir engineering is a subjective process of estimating underground
accumulations of gas and oil that can not be measured in an exact manner. The
accuracy of any reserve estimate is a function of the quality of available data
and of the engineering and geological interpretation and judgment. Accordingly,
reserve estimates are generally different from the quantities of gas and oil
that are ultimately recovered and such differences may have a material impact on
the Partnership's financial results and future liquidity.
2. Capital resources: The Partnership was formed for the sole intention
of drilling oil and gas wells. The Partnership entered into a drilling contract
with an independent drilling contractor in November, 1983, for $9,400,000.
Pursuant to the terms of this contract, thirty-eight wells were drilled
resulting in thirty-seven producing wells and one dry-hole.
3. Results of Operations:
1998 compared to 1997
Overall operating revenues declined from $379,079 in 1997 to $337,678
in 1998. The Partnership receives some of its revenue from oil production as
well as gas production. The Partnership's oil production did not change
significantly from 1997 to 1998, 1302 bbls to 1232 bbls respectively. The stable
production was offset by significantly lower average price per barrel, from
$19.64 in 1997 to $12.05 in 1998. The Partnership main source of revenue is from
its gas produced and sold. A decline in its gas production from 111,382 mcf in
1997 to 100,983 mcf in 1998 was only slightly offset by a very small increase in
average price per mcf from $3.15 in 1997 to $3.17 in 1998. Normal production
decline can sometimes be attributed to shut-ins and higher main transport line
pressures. The higher main line pressure can inhibit or restrict the free
movement of the Partnership's gas from the wells to the purchaser's transport
line.
Interest income fluctuates with changes in the interest rates received
as well as the amount of cash in the bank at any given time.
Production expenses decreased from $165,863 in 1997 to $152,083 in
1998. Some production expenses can be variable based upon to the volumes of gas
and oil produced. The operator also expends funds or repairs, labors,
maintenance and location costs based upon the needs at a particular well or well
site. During 1998, the majority of production expenses were associated with
routine maintenance at the wells or well sites. Any variable costs incurred were
reasonable based upon the current production volumes. During 1997, the operator
performed supplemental repairs which included location work, road repairs,
pipeline repairs and additional labor expenditures. In most cases large repairs
are made to help maintain overall production or to minimize current declines.
General and administrative costs remained relatively unchanged between 1997 and
1998, from $121,632 to $120,356, respectively. Management will use in-house
resources if it will provide efficient and timely services to the partnership.
Amounts in both years are substantially less than the $553,850 allocable to the
Partnership under the Partnership Agreement.
F-4
17
The Partnership records additional depreciation, depletion and
amortization to the extent that the net capitalized costs exceed the
undiscounted future net cash flows attributable to the Partnership. No revisions
to the basis of the Partnership properties were needed in 1998 or 1997. The
overall depreciation for both years was consistent with the rates used and the
remaining property basis.
1997 compared to 1996
Operating revenue increased from $290,733 in 1996 to $379,079 in 1997.
This increase can be attributed to a variety of factors, including only minor
fluctuations in gas and oil production, from 113,227 mcf and 1,524 barrels in
1996 to 111,382 mcf and 1,302 barrels in 1997. Both gas and oil revenues were
helped substantially by the increased average price per mcf and barrel in 1997
when compared to 1996. On average, the Partnership was paid $2.31 per mcf and
$16.37 per barrel in 1996 and $3.15 per mcf and $19.64 per barrel in 1997. The
Partnership has locked into a favorable gas contract price that will be in place
until November of 1998.
Production expenses increased from $135,780 in 1996 to $165,863 in
1997. The Partnership did expend funds on additional capitalized well equipment
and other repairs performed on a few wells. The operator will determine if
additional equipment, for example lift equipment, will have a beneficial effect
on production. The operator will also perform various repairs including but not
limited to location work, road repairs, pipeline repairs and additional labor
cost as deemed appropriate. In most cases large repairs are made to help
maintain overall production. Also the Partnership in both years expended the
necessary funds on the routine, general upkeep and maintenance of the well and
well site. General and administrative costs remained relatively unchanged
between 1996 and 1997, from $121,632 to $121,848, respectively. Management
continues to monitor any third party costs and use in-house resources if it will
provide efficient and timely services to the Partnership. Amounts in both years
are substantially less than the $553,850 allocable to the Partnership under the
Partnership Agreement.
The Partnership records additional depreciation, depletion and
amortization to the extent that the net capitalized costs exceeds the
undiscounted future net cash flows attributable to the Partnership. No revisions
to the basis of the Partnership properties was needed in 1997 or 1996. The
overall depreciation for both years was consistent with the rates used and the
remaining property basis.
F-5
18
STERLING DRILLING FUND 1983-1, L.P.
(a New York limited partnership)
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of
Sterling Drilling Fund 1983-1, L.P.:
We have audited the accompanying balance sheets of Sterling Drilling Fund
1983-1, L.P. (a New York limited partnership) as of December 31, 1998 and 1997,
and the related statements of operations, changes in partners' equity, and cash
flows for the years ended December 31, 1998, 1997 and 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 Sterling Drilling Fund 1983-1,
L.P. as of December 31, 1998 and 1997, and the results of its operations and
cash flows for the years ended December 31, 1998, 1997 and 1996 in conformity
with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedules listed in the index to
financial statements and schedules are presented for purposes of complying with
the Securities and Exchange Commission's rules and are not part of the basic
financial statements. These schedules have been subjected to the auditing
procedures applied in the examination of the basic financial statements and, in
our opinion, fairly state in all material respects the financial data required
to be set forth therein in relation to the basic financial statements taken as a
whole.
PUSTORINO, PUGLISI & CO., LLP
New York, New York
February 9, 1999
F-6
19
STERLING DRILLING FUND 1983-1, L.P.
(a New York limited partnership)
BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
Assets
1998 1997
----------- -----------
Current Assets:
Cash and cash equivalents (Note 2) $ 174,678 $ 145,635
Due from affiliates (Note 6) 36,882 45,126
----------- -----------
Total Current Assets 211,560 190,761
----------- -----------
Oil and Gas Properties - successful efforts
methods (Note 3) - (Schedules V and VI):
Leasehold costs 321,314 321,314
Wells and related facilities 8,919,173 8,918,786
----------- -----------
Total 9,240,487 9,240,100
Less - Accumulated depreciation, depletion (7,817,328) (7,737,872)
----------- -----------
and amortization
1,423,159 1,502,228
----------- -----------
Total Assets $ 1,634,719 $ 1,692,989
=========== ===========
Liabilities and Partners' Equity
Total Liabilities $ -- $ --
----------- -----------
Partners' Equity:
Limited partners 1,579,044 1,635,538
General partners 55,675 57,451
----------- -----------
Total Partners' Equity 1,634,719 1,692,989
----------- -----------
Total Liabilities and Partners' Equity $ 1,634,719 $ 1,692,989
=========== ===========
The Notes to Financial Statements are an integral part of these statements.
F-7
20
STERLING DRILLING FUND 1983-1, L.P.
(a New York limited partnership)
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996
--------------------------------- -------------------------------- ---------------------------------
Limited General Limited General Limited General
Partners Partners Total Partners Partners Total Partners Partners Total
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Revenues:
Operating revenues $ 258,324 $ 79,354 $ 337,678 $ 289,995 $ 89,084 $ 379,079 $ 222,411 $ 68,322 $ 290,733
Interest 7,840 728 8,568 6,565 610 7,175 5,856 544 6,400
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Total Revenues 266,164 80,082 346,246 296,560 89,694 386,254 228,267 68,866 297,133
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Costs and Expenses:
Production expenses 116,344 35,739 152,083 126,885 38,978 165,863 103,872 31,908 135,780
Depreciation, 72,703 6,754 79,457 75,263 6,992 82,255 73,291 6,809 80,100
depletion and
amortization
General and 92,072 28,284 120,356 93,214 28,634 121,848 93,048 28,584 121,632
--------- --------- --------- --------- --------- --------- --------- --------- ---------
administrative
expenses (Note 7)
Total Expenses 281,119 70,777 351,896 295,362 74,604 369,966 270,211 67,301 337,512
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Net Income (Loss) $ (14,955) $ 9,305 $ (5,650) $ 1,198 $ 15,090 $ 16,288 $ (41,944) $ 1,565 $ (40,379)
========= ========= ========= ========= ========= ========= ========= ========= =========
Net income (Loss) Per $ (1.35) $ 0.11 $ (3.79)
========= ========= =========
Equity Unit (Note 2)
The Notes to Financial Statements are an integral part of these statements.
F-8
21
STERLING DRILLING FUND 1983-1, L.P.
(a New York limited partnership)
STATEMENTS OF CHANGES IN PARTNERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
Limited General
Partners Partners Total
----------- ----------- -----------
Balance at December 31, 1995 $ 1,759,361 $ 63,506 $ 1,822,867
Partners' contributions -- 177 177
Distributions to partners (41,538) (11,621) (53,159)
Net Income (Loss) (41,944) 1,565 (40,379)
----------- ----------- -----------
Balance at December 31, 1996 1,675,879 53,627 1,729,506
Partners' contributions -- 177 177
Distributions to partners (41,539) (11,443) (52,982)
Net Income (Loss) 1,198 15,090 16,288
----------- ----------- -----------
Balance at December 31, 1997 1,635,538 57,451 1,692,989
Partners' contributions -- 176 176
Distributions to partners (41,539) (11,257) (52,796)
Net Income (Loss) (14,955) 9,305 (5,650)
----------- ----------- -----------
Balance at December 31, 1998 $ 1,579,044 $ 55,675 $ 1,634,719
=========== =========== ===========
The Notes to Financial Statements are an integral part of these statements.
F-9
22
STERLING DRILLING FUND 1983-1, L.P.
(a New York limited partnership)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996
--------- --------- ---------
Net (loss) income $ (5,650) $ 16,288 $ (40,379)
Adjustments to reconcile net income (loss)
to net cash provided (used) by operating
activities:
Depreciation, depletion and amortization 79,457 82,255 80,100
Changes in Assets and Liabilities -
Decrease (increase) in due from
affiliates (36,882) (45,127) (9,595)
Increase (decrease) in due to affiliates 45,125 9,595 94,873
--------- --------- ---------
Net Cash Provided (Used) by 82,050 63,011 124,999
--------- --------- ---------
Operating Activities
Cash Flows From Investing Activities:
Equipment purchases (387) (6,188) (17,601)
--------- --------- ---------
Net Cash Provided by Investing
Activities (387) (6,188) (17,601)
--------- --------- ---------
Cash Flows From Financing Activities:
Partners' contributions 176 177 177
Distributions to partners (52,796) (52,982) (53,159)
--------- --------- ---------
Net Cash Used in Financing activities (52,620) (52,805) (52,982)
--------- --------- ---------
Net increase in cash and cash equivalents 29,043 4,018 54,416
Cash and cash equivalents, beginning of year 145,635 141,617 87,201
--------- --------- ---------
Cash and cash equivalents, end of year $ 174,678 $ 145,635 $ 141,617
========= ========= =========
The Notes to Financial Statements are an integral part of these statements.
F-10
23
STERLING DRILLING FUND 1983-1, L.P.
(a New York limited partnership)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(1) Organization and Capital Contributions:
Sterling Drilling Fund 1983-1, L.P., formerly Sterling-Fuel Resources
Drilling Fund 1983-1, a New York limited partnership (the
"Partnership"), was formed on March 18, 1983 for the primary purpose of
acquiring, developing and producing oil and gas in the state of West
Virginia. The general partners are: PrimeEnergy Management Corporation
(PEMC), a wholly owned subsidiary of PrimeEnergy Corporation (PEC),
Charles E. Drimal, Jr., Oliver J. Sterling and Samuel R. Campbell.
Eleven thousand seventy-seven limited partnership units, (11,077), were
sold at $1,000 per unit aggregating total limited partner contributions
of $11,077,000. The general partners' contributions amounted to
$902,847. Partnership operations commenced on November 10, 1983.
(2) Summary of Significant Accounting Policies:
Revenue Recognition:
The Partnership recognizes operating revenues, consisting of sales of
oil and gas production, in the month of sale. Uncollected revenue is
accrued based on known facts and trends of the relevant oil and gas
properties on a monthly basis.
Basis of Accounting:
The accounts of the Partnership are maintained in accordance with
accounting practices permitted for federal income tax reporting
purposes. Under this method of accounting, (a) substantially all
exploration and development costs except leasehold and equipment costs
are expensed as paid, (b) costs of abandoned leases and equipment are
expensed when abandoned, and (c) depreciation (for equipment placed in
service) is provided on an accelerated basis. In order to present the
accompanying financial statements in accordance with generally accepted
accounting principles, memorandum adjustments have been made to account
for oil and gas properties, as discussed below.
Oil and Gas Producing Activities:
The Partnership accounts for its oil and gas operations using the
successful efforts method of accounting on a property by property
basis. The Partnership only participates in developmental drilling.
Accordingly, all costs of drilling and equipping these wells, together
with leasehold acquisition costs, are capitalized. These capitalized
costs are amortized on a property by property basis by the unit-of-
F-11
24
STERLING DRILLING FUND 1983-1, L.P.
(a New York limited partnership)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(2) Summary of Significant Accounting Policies - (Cont'd):
production method based upon the ratio of production to proved oil and
gas reserves. Additional depreciation, depletion and amortization may
be recorded if net capitalized costs exceed the undiscounted future net
cash flows attributable to Partnership properties. (See Note 4)
Federal Income Taxes:
As federal income taxes are the liability of the individual partners,
the accompanying financial statements do not include any provision for
federal income taxes. (See Note 8)
Limited Partners' Loss Per Equity Unit:
The limited partners' income (loss) per equity unit is computed on the
11,077 limited partner equity units.
Cash and Cash Equivalents:
For purposes of the statements of cash flows the Partnership considers
all highly liquid debt instruments with a maturity of three months or
less to be cash equivalents.
Use of Estimates:
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.
F-12
25
STERLING DRILLING FUND 1983-1, L.P.
(a New York limited partnership)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(3) Oil and Gas Properties:
The Partnership acquired leases or farmouts from PEMC at its cost. Cost
is defined as any amount paid for delay rentals, lease bonuses, if any,
surveys and other expenses including such portion of any of the general
partners', or their affiliates' reasonable, necessary and actual
expenses for geological, geophysical, seismic, land, engineering,
drafting, accounting, legal and other services. The Partnership
currently pays royalties of approximately 12.5% to 17.9% of the selling
price of the oil and gas extracted.
The following table sets forth certain revenue and expense data
concerning the Partnership's oil and gas activities for the years ended
December 31, 1998, 1997 and 1996:
1998 1997 1996
--------- -------- ------
Average sales price per MCF of gas $ 3.17 $ 3.15 $ 2.31
Average sales price per BBL of oil 12.05 19.64 16.37
and other liquids
Production expense per dollar of .45 .44 .47
operating revenue
(4) Quantities of Oil and Gas Reserves:
The amount of proved developed reserves presented below have been
estimated by an independent firm of petroleum engineers as of January
1, 1998. Petroleum engineers on the staff of PEC have reviewed the data
presented below, as of December 31, 1998, for consistency with current
year production and operating history. All of the Partnership's oil and
gas reserves are located within the United States:
(Unaudited)
--------------------------
GAS (MCF) OIL (BBL)
----------- -----------
Reserves as of December 31, 1995 2,208,803 15,545
Revisions of previous estimates 137,611 (172)
Production (113,227) (1,524)
----------- -----------
Reserves as of December 31, 1996 2,233,187 13,849
Revisions of previous estimates (87,617) 1,490
Production (111,382) (1,302)
----------- -----------
Reserves as of December 31, 1997 2,034,188 14,037
Revisions of previous estimates (124,297) 207
Production (100,993) (1,232)
----------- -----------
Reserves as of December 31, 1998 1,808,898 13,012
=========== ===========
F-13
26
STERLING DRILLING FUND 1983-1, L.P.
(a New York limited partnership)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(4) Quantities of Oil and Gas Reserves - (Cont'd):
Should current prices continue into the future, operation of certain
wells would become uneconomic, on a pretax basis, as production levels
decline with age. In accordance with the rules and regulations of the
Securities and Exchange Commission, proved reserves exclude production
which would be uneconomic. The partners are entitled to certain tax
benefits and credits which, if available in the future, may result in
production continuing beyond the level included in the above table.
Revisions arise from changes in current prices, as well as engineering
and geological data which would alter the useful life and therefore the
overall predicted production of each well. Future changes in these
estimates are common and would impact the reserve quantities used to
calculate depreciation, depletion and amortization.
As discussed in Note 2, the Partnership may record additional
depreciation, depletion and amortization if net capitalized costs
exceed the undiscounted future net cash flows attributable to
Partnership properties. Price declines affect estimated future net
revenues both directly and as a consequence of their impact on
estimates of future production. The Partnership has recorded no
additional provision for 1998, 1997 or 1996. If the additional
provision had been computed based on the limited partners' interest in
capitalized costs and estimated future net revenues, rather than on the
basis of total Partnership interests, the limited partners' income
would not have been reduced for 1998, 1997 or 1996.
F-14
27
STERLING DRILLING FUND 1983-1, L.P.
(a New York limited partnership)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(5) Allocation of Partnership Revenues, Costs and Expenses:
Under the terms of the Limited Partnership Agreement, all Partnership
revenues and expenses, including deductions attributable thereto, are
to be allocated as follows:
Limited General
Partners Partners
-------- --------
Participation in Costs:
Sales commissions and dealer manager fees 100.0% -%
in excess of the $50,000 paid by PEMC
Offering costs other than $75,000
paid by the Partnership and the
Sterling Drilling Fund 1983-2, L.P. -% 100.0%
Management fee 100.0% -%
Lease acquisition costs 91.5% 8.5%
Drilling and completion costs 91.5% 8.5%
General and administrative expenses 76.5% 23.5%
Production operator's fee 76.5% 23.5%
Operating expenses 76.5% 23.5%
All other costs 91.5% 8.5%
Participation in Revenues:
Sale of production 76.5% 23.5%
Sale of properties 91.5% 8.5%
Sale of equipment 91.5% 8.5%
All other revenues 91.5% 8.5%
(6) Transactions With Affiliates:
(a) The due from affiliates at December 1998 and 1997 represents
general and administrative and certain other expenses incurred on
behalf of the Partnership by PEC and its subsidiaries, and
amounts due for production operator's fees (Note 6(b)), net of
production revenues collected on behalf of the Partnership.
(b) As operator of the Partnership's properties, Prime Operating
Company (POC), a subsidiary of PEC, receives, as compensation
from the Partnership, a monthly production operator's fee of $444
for each producing gas well and $615 for each producing oil or
combination gas and oil well, based on the Partnership's
F-15
28
STERLING DRILLING FUND 1983-1, L.P.
(a New York limited partnership)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(6) Transactions With Affiliates - (Cont'd):
percentage of working interest in the well. Such fee is subject
to annual adjustment by the percentage increase in the Cost of
Living Index published by the U.S. Department of Labor over the
year in which production began. During 1998, 1997 and 1996,
$104,801, $110,512, and $87,747 of production operator's fees
were incurred, respectively.
(c) In accordance with the terms of the Partnership Agreement, the
general partners are required to pay 8.5% of drilling and
completion costs, lease acquisition costs and certain other
costs, of which 1% will be paid for by the general partners out
of revenues received by them from the Partnership. At December
31, 1998, $21,720 was due from certain general partners for such
costs.
(d) Eastern Oil Well Services Company (EOWSC), a subsidiary of PEC,
provided field services to the Partnership during the years
ending December 31, 1998 and 1997 for which it was billed $1,380
and $6,267 respectively.
(7) General and Administrative Expenses:
In accordance with the Management Agreement, the general partners are
reimbursed for the portion of their in-house overhead, including
salaries and related benefits, attributable to the affairs and
operations of the Partnership.
This amount, combined with certain direct expenses for geology,
engineering, legal, accounting, auditing, insurance and other items
shall not exceed an annual amount equal to 5% of limited partner
capital contributions. Excess expenses shall be borne by the general
partners.
During 1998, 1997 and 1996, the Partnership recognized general and
administrative expenses incurred on its behalf by a general partner of
$100,000, $100,000, and $100,000 respectively.
F-16
29
STERLING DRILLING FUND 1983-1, L.P.
(a New York limited partnership)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(8) Federal Income Taxes:
The following is a reconciliation between the net income (loss) as
reported on the Partnership's federal income tax return and the net
income (loss) reported in the accompanying financial statements:
Year Ended December 31,
-----------------------------------
1998 1997 1996
-------- -------- --------
Net income (loss) as
reported on the
Partnership's federal
income tax return $ 68,370 $ 91,673 $ 36,200
Depreciation, depletion and
amortization for income
tax purposes in excess
of (less than) financial
reporting amount (74,020) (75,385) (76,579)
-------- -------- --------
Net income (loss) per
accompanying financial
statements $ (5,650) $ 16,288 $(40,379)
======== ======== ========
The tax returns of the Partnership, the qualifications of the
Partnership as such for tax purposes, and the amount of Partnership
income or loss are subject to examination by federal and state taxing
authorities. If such examinations result in changes with respect to
Partnership's qualifications or in changes to its income or loss, the
tax liability of the partners would be changed accordingly.
The Tax Reform Act of 1976 provides that no part of any depletion
deduction with respect to oil and gas wells is to be determined by the
Partnership but must be computed separately by the partners. Thus, cost
or percentage depletion, as applicable, must be computed by each
partner so that a specific depletion computation can be made when each
partner files his U.S. income tax return. Information is furnished to
the partners to compute the depletion deduction.
F-17
30
STERLING DRILLING FUND 1983-1, L.P.
(a New York limited partnership)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(9) Major Customers:
A schedule of the major purchases of the Partnership's production is as
follows:
Purchaser 1998 1997 1996
--------- -------- -------- --------
Phoenix Diversified $314,253 $323,563 $251,463
F-18
31
SCHEDULE V
STERLING DRILLING FUND 1983-1, L.P.
(a New York limited partnership)
PROPERTY AND EQUIPMENT - OIL AND GAS PROPERTIES
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
Balance at Balance
Beginning Additions Other at End
of Year at Cost Retirements Changes of Year
---------- ---------- ----------- ---------- ----------
Year Ended December 31, 1998:
Leasehold costs $ 321,314 $ -- $ -- $ -- $ 321,314
Wells and related facilities 8,918,786 387 -- -- 8,919,173
---------- ---------- ---------- ---------- ----------
$9,240,100 $ 387 $ -- $ -- $9,240,487
========== ========== ========== ========== ==========
Year ended December 31, 1997: $ 321,314 $ -- $ -- $ -- $ 321,314
Leasehold costs 8,912,598 6,188 -- -- 8,918,786
---------- ---------- ---------- ---------- ----------
Wells and related facilities $9,233,912 $ 6,188 $ -- $ -- $9,240,100
========== ========== ========== ========== ==========
Year Ended December 31, 1996:
Leasehold costs $ 321,314 $ -- $ -- $ -- $ 321,314
Wells and related facilities 8,894,997 17,601 -- -- 8,912,598
---------- ---------- ---------- ---------- ----------
$9,216,311 $ 17,601 $ -- $ -- $9,233,912
========== ========== ========== ========== ==========
F-19
32
SCHEDULE VI
STERLING DRILLING FUND 1983-1, L.P.
(a New York limited partnership)
ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION - OIL AND GAS PROPERTIES
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
Balance at Charges to Balance
Beginning Costs and Other at End
of Year Expenses Retirements Changes of Year
---------- ---------- ----------- -------- ----------
Year Ended December 31, 1998:
Wells and related facilities $7,416,558 $79,456 $ - $ - $7,496,014
Leasehold costs 321,314 - - - 321,314
---------- ------- --------- -------- ----------
$7,737,872 $79,456 $ - $ - $7,817,328
========== ======= ========= ======== ==========
Year ended December 31, 1997:
Wells and related facilities 7,334,303 $82,255 $ - $ - $7,416,558
Leasehold costs 321,314 - - - 321,314
---------- ------- --------- -------- ----------
$7,655,617 $82,255 $ - $ - $7,737,872
========== ======= ========= ======== ==========
Year Ended December 31, 1996:
Wells and related facilities $7,254,203 $80,100 $ - $ - $7,334,303
Leasehold costs 321,314 - - - 321,314
---------- ------- --------- -------- ----------
$7,575,517 $80,100 $ - $ - $7,655,617
========== ======= ========= ======== ==========
F-20
33
INDEX TO EXHIBITS
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER EXHIBIT PAGE
- ------- ------- ------------
(3) Form of Agreement of Limited Partnership of Sterling-Fuel Resources
Drilling Fund 1983-1 (now Sterling Drilling Fund 1983-1, L.P.)
(incorporated by reference to Exhibit (3) of Sterling Gas Drilling
Fund 1983-1 Form 10-K for the year ended December 31, 1994)
(24) Consent of Ryder Scott Company (filed herewith)
(27) Financial Data Schedule. (filed herewith)