UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DCD.C. 20549
FORM 10-Q
(Mark One)
☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2019
2020
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-8157
THE RESERVE PETROLEUM COMPANY
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE | 73-0237060 |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) |
6801 Broadway ext., Suite 300 Oklahoma City, Oklahoma 73116-9037 (405) 848-7551 | |
(Address and telephone number, including area code, of registrant’s principal executive offices) | |
Securities registered pursuant to Section 12(b) of the Act:
Title ofeachclass | Trading Symbol(s) | Name of each exchange on which registered |
None | None | None |
Indicate by check mark whether the 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 ☐No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☑Yes ☐No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer ☐ | Non-accelerated filer | Accelerated filer ☐ | ||
Smaller reporting company ☑ | Emerging growth company ☐ | |||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐Yes ☑No
Securities registered pursuant to Section 12(b) of the Act:
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As of May 3, 2019, 156,6891, 2020, 156,615 shares of the registrant’s $.50$0.50 par value common stock were outstanding.
TABLE OF CONTENTS
PART I – FINANCIAL INFORMATION
| PART I – FINANCIAL INFORMATION | ||
| Page | ||
Item 1. | Financial Statements | 2 |
Index to Financial Statements | ||
Balance Sheets – March 31, | 2 | |
Statements of | 4 | |
Statements of Stockholders’ Equity – Three Months Ended March 31, | 5 | |
Condensed Statements of Cash Flows – Three Months Ended March 31, | 6 | |
Notes to Financial Statements | 7 | |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 10 |
Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 13 |
Item 4. | Controls and Procedures | 13 |
PART II – OTHER INFORMATION | ||
Item 1. | Legal Proceedings | 14 |
Item 1A. | Risk Factors | 14 |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 14 |
Item 3. | Defaults Upon Senior Securities | 14 |
Item 4. | Mine Safety Disclosures | 14 |
Item 5. | Other Information | 14 |
Item 6. | Exhibits |
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PART I – FINANCIAL INFORMATION
ITEM 1. | FINANCIAL STATEMENTS |
THE RESERVE PETROLEUM COMPANY | |||
BALANCE SHEETS | |||
ASSETS |
March 31, | December 31, | March 31, | December 31, | |||||||||||||
2019 | 2018 | 2020 | 2019 | |||||||||||||
(Unaudited) | (Derived from | (Unaudited) | (Derived from | |||||||||||||
audited financial | audited financial | |||||||||||||||
statements) | statements) | |||||||||||||||
Current Assets: | ||||||||||||||||
Cash and Cash Equivalents | $ | 3,025,623 | $ | 6,428,499 | $ | 3,244,503 | $ | 2,738,338 | ||||||||
Available-for-Sale Debt Securities | 19,702,622 | 16,249,414 | 18,582,693 | 18,517,910 | ||||||||||||
Equity Securities | 543,102 | 454,058 | 475,244 | 545,075 | ||||||||||||
Refundable Income Taxes | --- | 16,387 | --- | 109,999 | ||||||||||||
Accounts Receivable | 904,696 | 846,419 | 639,377 | 968,382 | ||||||||||||
Notes Receivable | 218,158 | 218,158 | 58,853 | --- | ||||||||||||
Total Current Assets | 24,394,201 | 24,212,935 | 23,000,670 | 22,879,704 | ||||||||||||
Investments: | ||||||||||||||||
Equity Method Investments | 811,384 | 881,860 | 720,146 | 744,798 | ||||||||||||
Other Investments | 1,691,116 | 1,689,249 | 1,900,214 | 1,898,347 | ||||||||||||
Total Investments | 2,502,500 | 2,571,109 | 2,620,360 | 2,643,145 | ||||||||||||
Property, Plant and Equipment: | ||||||||||||||||
Oil and Gas Properties, at Cost, Based on the Successful Efforts Method of Accounting – | ||||||||||||||||
Oil and Gas Properties, at Cost, | ||||||||||||||||
Based on the Successful Efforts Method of Accounting – | ||||||||||||||||
Unproved Properties | 2,415,455 | 2,249,113 | 2,749,480 | 2,727,857 | ||||||||||||
Proved Properties | 55,045,718 | 54,789,836 | 54,297,368 | 54,451,862 | ||||||||||||
Oil and Gas Properties, Gross | 57,461,173 | 57,038,949 | 57,046,848 | 57,179,719 | ||||||||||||
Less – Accumulated Depreciation, Depletion, Amortization and Valuation Allowance | 46,235,754 | 46,008,467 | 49,199,232 | 47,852,157 | ||||||||||||
Oil and Gas Properties, Net | 11,225,419 | 11,030,482 | 7,847,616 | 9,327,562 | ||||||||||||
Other Property and Equipment, at Cost | 403,718 | 403,718 | 466,728 | 466,728 | ||||||||||||
Less – Accumulated Depreciation | 256,887 | 249,333 | 292,024 | 279,892 | ||||||||||||
Other Property and Equipment, Net | 146,831 | 154,385 | 174,704 | 186,836 | ||||||||||||
Total Property, Plant and Equipment | 11,372,250 | 11,184,867 | 8,022,320 | 9,514,398 | ||||||||||||
Other Assets | 666,461 | 687,048 | ||||||||||||||
Total Assets | $ | 38,268,951 | $ | 37,968,911 | $ | 34,309,811 | $ | 35,724,295 | ||||||||
See Accompanying Notes |
THE RESERVE PETROLEUM COMPANY | |||
BALANCE SHEETS | |||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
March 31, | December 31, | March 31, | December 31, | |||||||||||||
2019 | 2018 | 2020 | 2019 | |||||||||||||
(Unaudited) | (Derived from | (Unaudited) | (Derived from | |||||||||||||
audited financial | audited financial | |||||||||||||||
statements) | statements) | |||||||||||||||
Current Liabilities: | ||||||||||||||||
Accounts Payable | $ | 168,032 | $ | 318,387 | $ | 152,377 | $ | 156,768 | ||||||||
Income Taxes Payable | 27,718 | --- | 70,309 | --- | ||||||||||||
Other Current Liabilities | 42,743 | 25,243 | 41,243 | 25,243 | ||||||||||||
Total Current Liabilities | 238,493 | 343,630 | 263,929 | 182,011 | ||||||||||||
Long-Term Liabilities: | ||||||||||||||||
Asset Retirement Obligation | 1,793,393 | 1,774,114 | 1,834,089 | 1,821,527 | ||||||||||||
Dividends Payable | 1,034,183 | 1,057,483 | 655,561 | 676,148 | ||||||||||||
Deferred Tax Liability, Net | 1,332,725 | 1,210,271 | 570,944 | 917,365 | ||||||||||||
Total Long-Term Liabilities | 4,160,301 | 4,041,868 | 3,060,594 | 3,415,040 | ||||||||||||
Total Liabilities | 4,398,794 | 4,385,498 | 3,324,523 | 3,597,051 | ||||||||||||
Stockholders’ Equity: | ||||||||||||||||
Common Stock | 92,368 | 92,368 | 92,368 | 92,368 | ||||||||||||
Additional Paid-in Capital | 65,000 | 65,000 | 65,000 | 65,000 | ||||||||||||
Retained Earnings | 35,355,997 | 35,023,662 | 32,518,213 | 33,660,169 | ||||||||||||
Stockholders’ Equity Before Treasury Stock | 35,513,365 | 35,181,030 | 32,675,581 | 33,817,537 | ||||||||||||
Less – Treasury Stock, at Cost | 1,643,208 | 1,597,617 | 1,690,293 | 1,690,293 | ||||||||||||
Total Stockholders’ Equity | 33,870,157 | 33,583,413 | 30,985,288 | 32,127,244 | ||||||||||||
Total Liabilities and Stockholders’ Equity | $ | 38,268,951 | $ | 37,968,911 | $ | 34,309,811 | $ | 35,724,295 | ||||||||
See Accompanying Notes |
THE RESERVE PETROLEUM COMPANY | |||
STATEMENTS OF | |||
(Unaudited) |
Three Months Ended | ||||||||
March 31, | ||||||||
2019 | 2018 | |||||||
Operating Revenues: | ||||||||
Oil and Gas Sales | $ | 1,592,711 | $ | 1,579,281 | ||||
Lease Bonuses and Other | 7,528 | 145,862 | ||||||
Total Operating Revenues | 1,600,239 | 1,725,143 | ||||||
Operating Costs and Expenses: | ||||||||
Production | 558,707 | 606,767 | ||||||
Exploration | 3,219 | 77,645 | ||||||
Depreciation, Depletion, Amortization and Valuation Provisions | 234,841 | 326,332 | ||||||
General, Administrative and Other | 452,860 | 450,534 | ||||||
Total Operating Costs and Expenses | 1,249,627 | 1,461,278 | ||||||
Income from Operations | 350,612 | 263,865 | ||||||
Other Income, Net | 140,558 | 90,399 | ||||||
Income Before Income Tax Provision | 491,170 | 354,264 | ||||||
Income Tax Provision/(Benefit): | ||||||||
Current | 36,381 | (65,904 | ) | |||||
Deferred | 122,454 | 149,574 | ||||||
Total Income Tax Provision | 158,835 | 83,670 | ||||||
Net Income | $ | 332,335 | $ | 270,594 | ||||
Per Share Data: | ||||||||
Net Income, Basic and Diluted | $ | 2.12 | $ | 1.72 | ||||
Weighted Average Shares Outstanding, Basic and Diluted | 157,114 | 157,623 | ||||||
See Accompanying Notes
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Additional | ||||||||||||||||||||
Common | Paid-in | Retained | Treasury | |||||||||||||||||
Stock | Capital | Earnings | Stock | Total | ||||||||||||||||
Three Months Ended March 31, 2019 | ||||||||||||||||||||
Balance as of December 31, 2018 | $ | 92,368 | $ | 65,000 | $ | 35,023,662 | $ | (1,597,617 | ) | $ | 33,583,413 | |||||||||
Net Income | --- | --- | 332,335 | --- | 332,335 | |||||||||||||||
Dividends Declared | --- | --- | --- | --- | --- | |||||||||||||||
Purchase of Treasury Stock | --- | --- | --- | (45,591 | ) | (45,591 | ) | |||||||||||||
Balance as of March 31, 2019 | $ | 92,368 | $ | 65,000 | $ | 35,355,997 | $ | (1,643,208 | ) | $ | 33,870,157 | |||||||||
Three Months Ended March 31, 2018 | ||||||||||||||||||||
Balance as of December 31, 2017 | $ | 92,368 | $ | 65,000 | $ | 33,497,463 | $ | (1,532,813 | ) | $ | 32,122,018 | |||||||||
Net Income | --- | --- | 270,594 | --- | 270,594 | |||||||||||||||
Dividends Declared | --- | --- | --- | --- | --- | |||||||||||||||
Purchase of Treasury Stock | --- | --- | --- | (12,954 | ) | (12,954 | ) | |||||||||||||
Balance as of March 31, 2018 | $ | 92,368 | $ | 65,000 | $ | 33,768,057 | $ | (1,545,767 | ) | $ | 32,379,658 | |||||||||
Three Months Ended | ||||||||
March 31, | ||||||||
2020 | 2019 | |||||||
Operating Revenues: | ||||||||
Oil and Gas Sales | $ | 1,196,262 | $ | 1,592,711 | ||||
Lease Bonuses and Other | 82,221 | 7,528 | ||||||
Total Operating Revenues | 1,278,483 | 1,600,239 | ||||||
Operating Costs and Expenses: | ||||||||
Production | 550,567 | 558,707 | ||||||
Exploration | 43,465 | 3,219 | ||||||
Depreciation, Depletion, Amortization and Valuation Provisions | 1,526,004 | 234,841 | ||||||
General, Administrative and Other | 452,125 | 452,860 | ||||||
Total Operating Costs and Expenses | 2,572,161 | 1,249,627 | ||||||
Income/(Loss) from Operations | (1,293,678 | ) | 350,612 | |||||
Other Income/(Loss), Net | (14,389 | ) | 140,558 | |||||
Income/(Loss) Before Income Taxes | (1,308,067 | ) | 491,170 | |||||
Income Tax Provision/(Benefit): | ||||||||
Current | 180,310 | 36,381 | ||||||
Deferred | (346,421 | ) | 122,454 | |||||
Total Income Tax Provision/(Benefit) | (166,111 | ) | 158,835 | |||||
Net Income/(Loss) | $ | (1,141,956 | ) | $ | 332,335 | |||
Per Share Data: | ||||||||
Net Income/(Loss), Basic and Diluted | $ | (7.29 | ) | $ | 2.12 | |||
Weighted Average Shares Outstanding, Basic and Diluted | 156,615 | 157,114 | ||||||
See Accompanying Notes |
THE RESERVE PETROLEUM COMPANY STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited) |
Common Stock | Additional Paid-in Capital |
Retained Earnings |
Treasury Stock |
Total | ||||||||||||||||
Three Months Ended March 31, 2020 | ||||||||||||||||||||
Balance as of December 31, 201 | $ | 92,368 | $ | 65,000 | $ | 33,660,169 | $ | (1,690,293 | ) | $ | 32,127,244 | |||||||||
Net Income/(Loss) | --- | --- | (1,141,956 | ) | --- | (1,141,956 | ) | |||||||||||||
Dividends Declared | --- | --- | --- | --- | --- | |||||||||||||||
Purchase of Treasury Stock | --- | --- | --- | --- | --- | |||||||||||||||
Balance as of March 31, 2020 | $ | 92,368 | $ | 65,000 | $ | 32,518,213 | $ | (1,690,293 | ) | $ | 30,985,288 | |||||||||
Three Months Ended March 31, 2019 | ||||||||||||||||||||
Balance as of December 31, 2018 | $ | 92,368 | $ | 65,000 | $ | 35,023,662 | $ | (1,597,617 | ) | $ | 33,583,413 | |||||||||
Net Income | --- | --- | 332,335 | --- | 332,335 | |||||||||||||||
Dividends Declared | --- | --- | --- | --- | --- | |||||||||||||||
Purchase of Treasury Stock | --- | --- | --- | (45,591 | ) | (45,591 | ) | |||||||||||||
Balance as of March 31, 2019 | $ | 92,368 | $ | 65,000 | $ | 35,355,997 | $ | (1,643,208 | ) | $ | 33,870,157 | |||||||||
See Accompanying Notes |
THE RESERVE PETROLEUM COMPANY |
CONDENSED STATEMENTS OF CASH FLOWS |
(Unaudited) |
Three Months Ended | Three Months Ended | |||||||||||||||
March 31, | March 31, | |||||||||||||||
2019 | 2018 | 2020 | 2019 | |||||||||||||
Net Cash Provided by Operating Activities | $ | 692,487 | $ | 845,649 | $ | 626,703 | $ | 692,487 | ||||||||
Cash Provided by/(Applied to) Investing Activities: | ||||||||||||||||
Maturity of Available-for-Sale Debt Securities | 2,473,604 | --- | 6,499,519 | 2,473,604 | ||||||||||||
Purchase of Available-for-Sale Debt Securities | (5,926,812 | ) | --- | (6,564,302 | ) | (5,926,812 | ) | |||||||||
Proceeds from Disposal of Property, Plant and Equipment | 10,898 | --- | ||||||||||||||
Purchase of Property, Plant and Equipment | (570,260 | ) | (818,594 | ) | (54,238 | ) | (570,260 | ) | ||||||||
Other Investments | (1,867 | ) | (48,731 | ) | (12,415 | ) | (1,867 | ) | ||||||||
Net Cash Applied to Investing Activities | (4,025,335 | ) | (867,325 | ) | (120,538 | ) | (4,025,335 | ) | ||||||||
Cash Applied to Financing Activities: | ||||||||||||||||
Dividends Paid to Stockholders | (24,437 | ) | (50,222 | ) | --- | (24,437 | ) | |||||||||
Purchase of Treasury Stock | (45,591 | ) | (12,954 | ) | --- | (45,591 | ) | |||||||||
Total Cash Applied to Financing Activities | (70,028 | ) | (63,176 | ) | --- | (70,028 | ) | |||||||||
Net Change in Cash and Cash Equivalents | (3,402,876 | ) | (84,852 | ) | 506,165 | (3,402,876 | ) | |||||||||
Cash and Cash Equivalents, Beginning of Period | 6,428,499 | 4,767,810 | 2,738,338 | 6,428,499 | ||||||||||||
Cash and Cash Equivalents, End of Period | $ | 3,025,623 | $ | 4,682,958 | $ | 3,244,503 | $ | 3,025,623 | ||||||||
See Accompanying Notes |
THE RESERVE PETROLEUM COMPANY
NOTES TO FINANCIAL STATEMENTS
March 31, 20192020
(Unaudited)
Note 1 – BASIS OF PRESENTATION
The accompanying balance sheet as of December 31, 2018,2019, which has been derived from audited financial statements, the unaudited interim financial statements and these notes have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, certain disclosures normally included in financial statements prepared in accordance with the accounting principles generally accepted in the United States of America (“GAAP”) have been omitted. The accompanying financial statements and notes thereto should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 20182019 as filed with the Securities and Exchange Commission (hereinafter, the “2018“2019 Form 10-K”).
In the opinion of management, the accompanying financial statements reflect all adjustments (consisting only of normal recurring accruals), which are necessary for a fair statement of the results of the interim periods presented. The results of operations for the current interim periods are not necessarily indicative of the operating results for the full year.
Note 2 – REVENUE RECOGNITION
A portion of oil and gas sales recorded in the statements of operations are the result of estimated volumes and pricing for oil and gas product not yet received for the period. For the three months ended March 31, 2020 and 2019, that estimate represented approximately $177,935 and $293,653, respectively, of oil and gas sales included in the statements of operations.
The Company’s disaggregated revenue has two primary revenue sources which are oil sales and natural gas sales. The following is an analysis of the components of oil and gas sales:
Three Months Ended | ||||||||
March 31, | ||||||||
2020 | 2019 | |||||||
Oil Sales | $ | 834,593 | $ | 981,931 | ||||
Natural Gas Sales | 320,854 | 565,112 | ||||||
Miscellaneous Oil and Gas Product Sales | 40,815 | 45,668 | ||||||
| $ | 1,196,262 | $ | 1,592,711 | |||||
Note 3 – OTHER INCOME,INCOME/(LOSS), NET
The following is an analysis of the components of Other Income,Income/(Loss), Net:
Three Months Ended | Three Months Ended | |||||||||||||||
March 31, | March 31, | |||||||||||||||
2019 | 2018 | 2020 | 2019 | |||||||||||||
Net Realized and Unrealized Gain on Equity Securities | $ | 88,738 | $ | 28,724 | ||||||||||||
Net Realized and Unrealized Gain/(Loss) on Equity Securities | $ | (69,968 | ) | $ | 88,738 | |||||||||||
Gain on Asset Sales | --- | 1,215 | 6,685 | --- | ||||||||||||
Interest Income | 132,527 | 53,617 | 80,116 | 132,527 | ||||||||||||
Equity Earnings/(Losses) in Investees | (70,476 | ) | 1,485 | |||||||||||||
Equity Losses in Investees | (35,200 | ) | (70,476 | ) | ||||||||||||
Other Income | 1,309 | 17,284 | 15,532 | 1,309 | ||||||||||||
Interest and Other Expenses | (11,540 | ) | (11,926 | ) | (11,554 | ) | (11,540 | ) | ||||||||
Other Income, Net | $ | 140,558 | $ | 90,399 | ||||||||||||
Other Income/(Loss), Net | $ | (14,389 | ) | $ | 140,558 | |||||||||||
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The Company’s Equity Method Investments include:
Broadway Sixty-Eight, LLC (“Broadway”), an Oklahoma limited liability company, with a 33% ownership. Broadway owns and operates an office building in Oklahoma City, Oklahoma. The Company leases its corporate office from Broadway on a month-to-month basis under the terms of the modified lease agreement. Rent expense for lease of the corporate office from Broadway was approximately $7,800 and $7,500 during the three months ended March 31, 2019 and 2018, respectively. The Company’s investment in Broadway totaled $182,687 and $172,722 at March 31, 2019 and December 31, 2018, respectively.
Grand Woods Development, LLC (the “LLC”), an Oklahoma limited liability company, with a 47% ownership, was acquired in 2015. The LLC owns approximately 26.56 acres of undeveloped real estate in northeast Oklahoma City. The Company has guaranteed $1,000,000 of a $1,595,750 loan for which the proceeds were used to purchase a portion of the undeveloped real estate acreage. The loan matures October 31, 2020. The Company’s investment in the LLC totaled $360,408 and $438,303 at March 31, 2019 and December 31, 2018, respectively. The Company also holds a note receivable of $43,158 from the LLC.
QSN Office Park (“QSN”), an Oklahoma limited liability company, with a 20% ownership, was acquired in 2016. QSN is constructing and selling office buildings in a new office park. The Company has guaranteed a $1,300,000 loan for which a portion of the proceeds were used to build a speculative office building. The loan matures March 26, 2021. The Company’s investment in QSN totaled $268,289 and $270,835 at March 31, 2019 and December 31, 2018, respectively.
The Company’s Other Investments primarily include:
OKC Industrial Properties (“OKC”), with a 10% ownership, was acquired in 1992. OKC originally owned approximately 260 acres of undeveloped land in north Oklahoma City and over time has sold all but approximately 46 acres. The Company’s investment in OKC totaled $56,164 at March 31, 2019 and December 31, 2018.
Bailey Hilltop Pipeline (“Bailey”), with a 10% ownership, was acquired in 2008. Bailey is a gas gathering system pipeline for the Bailey Hilltop Prospect oil and gas properties in Grady County, Oklahoma. The Company’s investment in Bailey totaled $80,377 at March 31, 2019 and December 31, 2018.
Cloudburst Solutions (“Solutions”), with a 10.625% ownership, was acquired with an initial investment of $500,000 in 2014, and additional investments of $750,000 and $44,375 in 2016 and 2018, respectively. Solutions owns exclusive rights to a water purification process technology that is being developed and currently tested. The Company’s investment in Solutions totaled $1,294,375 at March 31, 2019 and December 31, 2018. The Company also holds a note receivable of $175,000 from Solutions.
Ocean’s NG (“Ocean”), with a 12.44% ownership, was acquired in 2015. Ocean is developing an underground Compressed Natural Gas (“CNG”) storage and delivery system for retail sales of CNG. The Company’s investment in Ocean totaled $219,885 and $218,018 at March 31, 2019 and December 31, 2018, respectively.
Note 4 – | EQUITY METHOD AND OTHER INVESTMENTS AND RELATED COMMITMENTS AND CONTINGENT LIABILITIES, INCLUDING GUARANTEES |
The Company’s Equity Method Investments include:
Broadway Sixty-Eight, LLC (“Broadway”), an Oklahoma limited liability company, with a 33% ownership. Broadway owns and operates an office building in Oklahoma City, Oklahoma. The Company leases its corporate office from Broadway on a month-to-month basis under the terms of the modified lease agreement. Rent expense for lease of the corporate office from Broadway was approximately $8,700 and $7,800 during the three months ended March 31, 2020 and 2019, respectively. The Company’s investment in Broadway totaled $173,164 and $157,911 at March 31, 2020 and December 31, 2019, respectively.
Grand Woods Development, LLC (the “LLC”), an Oklahoma limited liability company, with a 47% ownership, was acquired in 2015. The LLC owns approximately 26.56 acres of undeveloped real estate in northeast Oklahoma City. The Company has guaranteed $1,200,000 of a $1,755,000 loan for which the proceeds were used to purchase a portion of the undeveloped real estate acreage. The loan matures October 31, 2020. The Company also holds a note receivable of $58,853 from the LLC. The Company’s investment in the LLC totaled $270,120 and $316,384 at March 31, 2020 and December 31, 2019, respectively.
QSN Office Park (“QSN”), an Oklahoma limited liability company, with a 20% ownership, was acquired in 2016. QSN is constructing and selling office buildings in a new office park. The Company has guaranteed a $1,300,000 loan for which a portion of the proceeds were used to build a speculative office building. The loan matures March 26, 2021. The Company’s investment in QSN totaled $276,862 and $270,503 at March 31, 2020 and December 31, 2019, respectively.
The Company’s Other Investments primarily include:
OKC Industrial Properties (“OKC”), with a 10% ownership, was acquired in 1992. OKC originally owned approximately 260 acres of undeveloped land in north Oklahoma City and over time has sold all but approximately 46 acres. The Company’s investment in OKC totaled $56,164 at March 31, 2020 and December 31, 2019.
Bailey Hilltop Pipeline (“Bailey”), with a 10% ownership, was acquired in 2008. Bailey is a gas gathering system pipeline for the Bailey Hilltop Prospect oil and gas properties in Grady County, Oklahoma. The Company’s investment in Bailey totaled $80,377 at March 31, 2020 and December 31, 2019.
Cloudburst International, Inc. (“Cloudburst”), with an 11.9375% ownership, was acquired with an initial investment of $1,294,375 in 2019 through the conversion of Cloudburst Solutions (“Solutions”) equity. See Note 7 on page 28 of the Company’s 2019 10-K for details of the conversion. Cloudburst owns exclusive rights to a water purification process technology that is being developed and currently tested. The Company’s investment in Cloudburst totaled $1,496,007 at March 31, 2020 and December 31, 2019.
Ocean’s NG (“Ocean”), with a 12.44% ownership, was acquired in 2015. Ocean is developing an underground Compressed Natural Gas (“CNG”) storage and delivery system for retail sales of CNG. The Company’s investment in Ocean totaled $227,351 and $225,485 at March 31, 2020 and December 31, 2019, respectively.
Note 5 – PROVISION FOR INCOME TAXES
On December 22, 2017, the President of the United States signed into law the Tax CutsIn 2020 and Jobs Act (“Tax Act”), which substantially revised numerous areas of U.S. federal income tax law, including reducing the tax rate for corporations from a maximum rate of 35% to a flat rate of 21% and eliminating the corporate alternative minimum tax (AMT). The various estimates included in determining our tax provision as of December 31, 2018 remain provisional through the three months ended March 31, 2019, and may be adjusted through subsequent events such as the filing of our 2018 federal income tax return and the issuance of additional guidance such as new Treasury Regulations.
In 2019 and 2018, the effective tax rate differed from the statutory rate, primarily as a result of allowable depletion for tax purposes in excess of the cost basis in oil and gas properties.
Excess federal percentage depletion, which is limited to certain production volumes and by certain income levels, reduces estimated taxable income projected for any year. The federal excess percentage depletion estimates will be updated throughout the year until finalized with the detail well-by-well calculations at year-end. When a provision for income taxes is recorded, federal excess percentage depletion benefits decrease the effective tax rate. When a benefit for income taxes is recorded, federal excess percentage depletion benefits increase the effective tax rate. The benefit of federal excess percentage depletion is not directly related to the amount of pre-tax income recorded in a period. Accordingly, in periods where a recorded pre-tax income is relatively small, the proportional effect of these items on the effective tax rate may be significant.
Note 5 – ASSET RETIREMENT OBLIGATION
The Company records the fair value of its estimated liability to retire its oil and natural gas producing properties in the period in which it is incurred (typically the date of first sale). The estimated liability is calculated by obtaining current estimated plugging costs from the well operators and inflating it over the life of the property. Current year inflation rate used is 4.08%. When the liability is first recorded, a corresponding increase in the carrying amount of the related long-lived asset is also recorded. Subsequently, the asset is amortized to expense over the life of the property and the liability is increased annually for the change in its present value which is currently 3.25%.
A reconciliation of the Company’s asset retirement obligation liability is as follows:
Balance at December 31, 2018 | $ | 1,774,114 | ||
Liabilities incurred for new wells (net of revisions) | 8,352 | |||
Liabilities settled (wells sold or plugged) | --- | |||
Accretion expense | 11,398 | |||
Revision to estimate | (471 | ) | ||
Balance at March 31, 2019 | $ | 1,793,393 |
Note 6 – ASSET RETIREMENT OBLIGATION
The Company records the fair value of its estimated liability to retire its oil and natural gas producing properties in the period in which it is incurred (typically the date of first sale). The estimated liability is calculated by obtaining current estimated plugging costs from the well operators and inflating it over the life of the property. Current year inflation rate used is 4.08%. When the liability is first recorded, a corresponding increase in the carrying amount of the related long-lived asset is also recorded. Subsequently, the asset is amortized to expense over the life of the property and the liability is increased annually for the change in its present value which is currently 3.25%.
A reconciliation of the Company’s asset retirement obligation liability is as follows:
Balance at December 31, 2019 | $ | 1,821,527 | ||
Liabilities incurred for new wells (net of revisions) | 4,206 | |||
Liabilities settled (wells sold or plugged) | (3,056 | ) | ||
Accretion expense | 11,412 | |||
Balance at March 31, 2020 | $ | 1,834,089 |
Note 7 – FAIR VALUE MEASUREMENTS
Inputs used to measure fair value are organized into a fair value hierarchy based on the observability of the inputs. Level 1 inputs consist of quoted prices in active markets for identical assets. Level 2 inputs are inputs, other than quoted prices, for similar assets that are observable. Level 3 inputs are unobservable inputs.
Recurring Fair Value Measurements
Certain of the Company’s assets are reported at fair value in the accompanying balance sheets on a recurring basis. The Company determined the fair value of the available-for-sale debt securities using quoted market prices for securities with similar maturity dates and interest rates. At March 31, 20192020 and December 31, 2018,2019, the Company’s assets reported at fair value on a recurring basis are summarized as follows:
March 31, 2019 | March 31, 2020 | |||||||||||||||||||||||
Level 1 Inputs | Level 2 Inputs | Level 3 Inputs | Level 1 Inputs | Level 2 Inputs | Level 3 Inputs | |||||||||||||||||||
Financial Assets: | ||||||||||||||||||||||||
Available-for-Sale Debt Securities – | ||||||||||||||||||||||||
U.S. Treasury Bills Maturing in 2019 | $ | --- | $ | 19,702,622 | $ | --- | ||||||||||||||||||
U.S. Treasury Bills Maturing in 2020 | $ | --- | $ | 18,582,693 | $ | --- | ||||||||||||||||||
Equity Securities: | ||||||||||||||||||||||||
Domestic Equities | 337,010 | --- | --- | 380,764 | --- | --- | ||||||||||||||||||
International Equities | 193,672 | --- | --- | 88,673 | --- | --- | ||||||||||||||||||
Others | 12,420 | --- | --- | 5,807 | --- | --- | ||||||||||||||||||
| $ | 475,244 | $ | 18,582,693 | $ | --- | |||||||||||||||||||
December 31, 2018 | December 31, 2019 | |||||||||||||||||||||||
Level 1 Inputs | Level 2 Inputs | Level 3 Inputs | Level 1 Inputs | Level 2 Inputs | Level 3 Inputs | |||||||||||||||||||
Financial Assets: | ||||||||||||||||||||||||
Available-for-Sale Debt Securities – | ||||||||||||||||||||||||
U.S. Treasury Bills Maturing in 2019 | $ | --- | $ | 16,249,414 | $ | --- | ||||||||||||||||||
U.S. Treasury Bills Maturing in 2020 | $ | --- | $ | 18,517,910 | $ | --- | ||||||||||||||||||
Equity Securities: | ||||||||||||||||||||||||
Domestic Equities | 259,843 | --- | --- | 364,171 | --- | --- | ||||||||||||||||||
International Equities | 179,083 | --- | --- | 110,629 | --- | --- | ||||||||||||||||||
Others | 15,132 | --- | --- | 70,275 | --- | --- | ||||||||||||||||||
| $ | 545,075 | $ | 18,517,910 | $ | --- | |||||||||||||||||||
Non-Recurring Fair Value Measurements
The Company’s asset retirement obligation annually represents a non-recurring fair value liability. The fair value of the non-financial liability incurred in the quarterthree months ended March 31, 2020 and 2019 was $4,206 and $8,352, with $5,408 in 2018,respectively, and was calculated using Level 3 inputs. See Note 56 above for more information about this liability and the inputs used for calculating fair value.
There was no long-lived assetThe impairment loss forin the first quarter for either 2019 or 2018.ended March 31, 2020 was $1,312,328 with none in 2019. This also represents non-recurring fair value expense calculated using Level 3 inputs. See Note 10 – LONG-LIVED ASSETS IMPAIRMENT LOSS on page 31 of the 2018 Form 10-K8 below for a description of the impairment loss calculation.
Fair Value of Financial Instruments
The Company’s financial instruments consist primarily of cash and cash equivalents, trade receivables, marketable securities, trade payables and dividends payable. At March 31, 20192020 and December 31, 2018,2019, the historical cost of cash and cash equivalents, trade receivables, trade payables and dividends payable are considered to be representative of their respective fair values due to the short-term maturities of these items.
Note 78 – NEW ACCOUNTING PRONOUNCEMENTSLONG-LIVED ASSETS IMPAIRMENT LOSS
On January 1, 2019, the Company adopted ASU No. 2016-02, Leases. The Company currently has no significant capital or operating leases. The new guidance is not applicable for leases with a term of 12 months or less, nor is it applicable forCertain oil and gas leases.producing properties have been deemed to be impaired because the assets, evaluated on a property-by-property basis, are not expected to recover their entire carrying value through future cash flows. Impairment losses totaling $1,312,328 for the quarter ended March 31, 2020 are included in the statements of operation in the line item Depreciation, Depletion, Amortization and Valuation Provisions. The Company’s building lease is a month to month contract. The new guidance does not have any impact onimpairments were calculated by reducing the Company’s financial position, results of operations or cash flows.
See the “New Accounting Pronouncements” disclosures on page 26carrying value of the 2018 Form 10-K. There were no other accounting pronouncements issued or that have become effective since December 31, 2018.individual properties to an estimated fair value equal to the discounted present value of the future cash flow from these properties. Forward pricing was used for calculating future revenue and cash flow.
Note 89 – REVENUE RECOGNITIONNEW ACCOUNTING PRONOUNCEMENTS
The FinancialSee the “New Accounting Standards Board (FASB) issued Revenue from Contracts with Customers(Topic 606) superseding virtually all existing revenue recognition guidance. We adopted this new standard in the first quarter of 2018 using the modified retrospective approach. AdoptionPronouncements” disclosures on page 25 of the new standard did not require an adjustment to the opening balance of equity and did not2019 Form 10-K. There were no other accounting pronouncements issued or that have an impact on income from operations, earnings per share or cash flows.
The Company’s revenues are primarily derived from its interests in the sale of oil and natural gas production. Each barrel of oil or thousand cubic feet of natural gas delivered is considered a separate performance obligation. The Company recognizes revenue from its interests in the sales of oil and natural gas in the period that its performance obligations to provide oil and natural gas to customers are satisfied. Performance obligations are satisfied when the Company has no further obligations to perform related to the sale and the customer obtains control of product. The sales of oil and natural gas are made under contracts which the third-party operators of the wells have negotiated with customers, which typically include variable consideration that is based on pricing tied to local indices and volumes delivered in the current month. The Company receives payment from the sale of oil and natural gas production from one to three months after delivery. At the end of each month as performance obligations are satisfied, the variable consideration can be reasonably estimated and amounts due from customers are accrued in accounts receivable in the balance sheets. Variances between the Company’s estimated revenue and actual payments are recorded in the month the payment is received, however, differences have been and are insignificant. Accordingly, the variable consideration is not constrained. A portion of oil and gas sales recorded in the statements of income are the result of estimated volumes and pricing for oil and gas product not yet received for the period. For the periods ending Marchbecome effective since December 31, 2019 and 2018, that estimate represented approximately $293,653 and $264,543, respectively, of oil and gas sales included in the statements of income.
The Company’s contracts with customers originate at or near the time of delivery and transfer of control of oil and natural gas to the purchasers. As such, the Company does not have significant unsatisfied performance obligations.
The Company’s oil is typically sold at delivery points under contract terms that are common in our industry. The Company's natural gas produced is delivered by the well operators to various purchasers at agreed upon delivery points under a limited number of contract types that are also common in our industry. However, under these contracts, the natural gas may be sold to a single purchaser or may be sold to separate purchasers. Regardless of the contract type, the terms of these contracts compensate the well operators for the value of the oil and natural gas at specified prices, and then the well operators will remit payment to the Company for its share in the value of the oil and natural gas sold.
The Company’s disaggregated revenue has two primary revenue sources which are oil sales and natural gas sales. Oil sales for the three months ended March 31, 2019 and 2018 were $981,931 and $980,786, respectively. Natural gas sales for the three months ended March 31, 2019 and 2018 were $565,112 and $541,273, respectively. Miscellaneous oil and gas product sales for the three months ended March 31, 2019 and 2018 were $45,668 and $57,222, respectively.2019.
Note 10 – SUBSEQUENT EVENTS
On March 27, 2020, Congress passed the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act. Included in the act was the Paycheck Protection Program (“PPP”) implemented by the Small Business Administration (“SBA”) to provide small businesses with funds to pay up to eight weeks of payroll costs. Based on the understanding of the guidelines and information provided at the time, the Company applied for and received a PPP loan in the amount of $174,600 from the SBA to cover payroll costs. Subsequent to receiving the funds, the Company evaluated additional new guidance issued by the SBA, and on May 1, 2020, the Company determined to repay the loan in full together with accrued interest.
ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
This discussion and analysis should be read with reference to a similar discussion in the 20182019 Form 10-K, as well as the financial statements included in this Form 10-Q.
Forward-Looking Statements
This discussion and analysis includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements give the Company’s current expectations of future events. They include statements regarding the drilling of oil and gas wells, the production that may be obtained from oil and gas wells, cash flow and anticipated liquidity and expected future expenses.
Although management believes the expectations in these and other forward-looking statements are reasonable, we can give no assurance they will prove to have been correct. They can be affected by inaccurate assumptions or by known or unknown risks and uncertainties. Factors that would cause actual results to differ materially from expected results are described under “Forward-Looking Statements” on page 87 of the 20182019 Form 10-K.
We caution you not to place undue reliance on these forward-looking statements, which speak only as of the date of this Form 10-Q, and we undertake no obligation to update this information because of new information, future developments, or otherwise. You are urged to carefully review and consider the disclosures made in this and our other reports filed with the Securities and Exchange Commission that attempt to advise interested parties of the risks and factors that may affect our business.
Financial Conditions and Results of Operations
COVID-19
In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. Governments have tried to slow the spread of the virus by imposing social distancing guidelines, travel restrictions and stay-at-home orders, which have caused a significant decrease in activity in the global economy and the demand for oil and to a lesser extent natural gas and NGLs. As a result, the price for oil has decreased significantly.
We are unable to predict the impact that the COVID-19 pandemic will have on us, including on our financial position, operating results, liquidity and ability to obtain financing, in future reporting periods, due to numerous uncertainties. These uncertainties include the severity of the virus, the duration of the outbreak, governmental or other actions taken to combat the virus (which could include limitations on our operations or the operations of our customers and vendors and other business partners), the possibility of operators deciding to slow down, shut in or defer maintenance on producing wells, and the effect that the COVID-19 pandemic will have on the demand for natural gas, NGLs and oil.
The health of our employees, customers, contractors and vendors, and our ability to meet staffing needs in our operations and certain critical functions, are vital to our operations, and the effect of the pandemic on these persons and our staffing needs cannot be predicted. Further, the impacts of a potential worsening of global economic conditions and the continued disruptions to, and volatility in, the credit and financial markets as well as other unanticipated consequences remain unknown. In addition, we cannot predict the impact that COVID-19 will have on our customers, vendors and contractors; however, any material effect on these parties could adversely impact us.
Collectively, these factors have contributed to significant negative global economic impacts, including a significant drop in demand for hydrocarbon products, potentially causing the US and other global economies to fall into a recession that could extend throughout 2020 and beyond. A recession could likely extend the time for the current crude oil markets to absorb excess supplies, resulting in suppressed crude oil prices for a number of future quarters.
Our profitability has been and will likely continue to be significantly affected by this decreased demand and lower commodity price environment. The decline in commodity prices and our future estimated production levels could lead to additional material impairments of our long-lived assets, intangible assets, equity method investments and right-of-use assets. It is likely additional impairments could be triggered if the COVID-19 pandemic leads to a continued and sustained reduction in global economic activity and demand for energy.
Liquidity and Capital Resources
Please refer to the Balance Sheets and the Condensed Statements of Cash Flows in this Form 10-Q to supplement the following discussion. In the first quarter of 2019,2020, the Company continued to fund its business activity through the use of internal sources of cash. The Company had net cash provided by operations of $692,487 and cash provided by the$626,703, maturities of available-for-sale debt securities of $2,473,604$6,499,519 and property dispositions of $10,898 for total cash provided of $3,166,091.$7,137,120. The Company utilized cash for the purchase of available-for-sale debt securities of $5,926,812,$6,564,302, property additions of $570,260,$54,238 and other investment activity of $1,867 and financing activities of $70,028$12,415 for total cash applied of $6,568,967.$6,630,955. Cash and cash equivalents decreased $3,402,876 (53%increased $506,165 (18%) to $3,025,623.$3,244,503.
Discussion of Significant Changes in Working Capital. In addition to the changes in cash and cash equivalents discussed above, there were other changes in working capital line items from December 31, 2018.2019. A discussion of these items follows.
Equity securities increased $89,044 (20%decreased $69,831 (13%) to $543,102$475,244 as of March 31, 20192020 from $454,058$545,075 at December 31, 2018.2019. The increasedecrease was the result of a $150,324 increase$51,853 decrease in the equity securities’ market value offset by $61,280 ofand a $17,978 net loss from these securities.
Refundable income taxes decreased $16,387.$180,307 to a tax payable of $70,309. This decrease was due to the $16,387 tax benefiteffect of the long-lived asset impairment on deferred taxes.
Accounts receivable decreased $329,005 (34%) to $639,377 as of March 31, 2020 from $968,382 at December 31, 2018 with none at March 31, 2019. The decrease was due to decreased oil and gas prices and volumes.
During the period, the Company added a $58,853 note receivable from Grand Woods, LLC, (the LLC), an equity method investee. See Note 4 to the accompanying financial statements for additional information about the investment.
Accounts payable decreased $150,355 (47%$4,391 (3%) to $168,032$152,377 as of March 31, 20192020 from $318,387$156,768 at December 31, 20182019 due to a decrease in thelower drilling and exploration activity at March 31, 20192020 versus December 31, 2018.2019.
Discussion of Significant Changes in the Condensed Statements of Cash Flows. As noted in the first paragraph above, net cash provided by operating activities was $692,487$626,703 in the three months ended March 31, 2019,2020, a decrease of $153,162 (18%$65,784 (9%) from the comparable period in 20182019 of $845,649.$692,487. The decrease was primarily due to a decrease in lease bonus income.oil and gas prices. For more information see “Operating Revenues” and “Other Income,Income/(Loss), Net” below.
Cash applied to the purchase of property additions in the three months ended March 31, 20192020 was $570,260,$54,238, a decrease of $248,334 (30%$516,022 (90%) from cash applied in the comparable period in 20182019 of $818,594.$570,260. For both 20192020 and 2018,2019, cash applied to property additions was mostly related to oil and gas exploration and development activity. See the subheading “Exploration Costs” in the “Results of Operations” section below for additional information.
Cash applied to other investments in the three months ended March 31, 2019 was $1,867, a decrease of $46,864 (96%) from cash applied in the comparable period in 2018 of $48,731.
Cash applied to financing activities in the three months ended March 31, 2019 was $70,028, an increase of $6,852 (11%) from cash appliedwith none in the comparable period in 2018 of $63,176.2020.
Conclusion. Management is unaware of any additional material trends, demands, commitments, events or uncertainties, which would impact liquidity and capital resources to the extent that the discussion presented in the 20182019 Form 10-K would not be representative of the Company’s current position.
Material Changes in Results of Operations Three Months Ended March 31, 2019,31, 2020, Compared with Three Months Ended March 31, 20182019
Net income increased $61,741 (23%)decreased $1,474,291 to $332,335a net loss of $(1,141,956) in the three months ended March 31, 20192020 from $270,594net income of $332,335 in the comparable period in 2018.2019. Net incomeincome/(loss) per share, basic and diluted, increased $0.40decreased $9.41 to $2.12a net loss of $(7.29) in the three months ended March 31, 20192020 from $1.72net income of $2.12 in the comparable period in 2018.2019.
A discussion of revenue from oil and gas sales and other significant line items in the statements of incomeoperations follows.
Operating Revenues. Revenues from oil and gas sales increased $13,430 (1%decreased $396,449 (25%) to $1,592,711$1,196,262 in the three months ended March 31, 20192020 from $1,579,281$1,592,711 in 2018.2019. Of the $13,430 increase,$396,449 decrease, crude oil sales increased $1,145;decreased $147,338; natural gas sales increased $23,839;decreased $244,258; and miscellaneous oil and gas product sales decreased $11,554.$4,853.
The $1,145 increase$147,338 (15%) decrease in oil sales to $981,931$834,593 in the three months ended March 31, 20192020 from $980,786$981,931 in the comparable period in 20182019 was the net result of a decrease in the average price per barrel (Bbl) offset by an increaseand a decrease in the volume sold. The volume of oil sold increased 2,077decreased 1,363 Bbls to 18,74417,381 Bbls in the three months ended March 31, 2019,2020, resulting in a positivenegative volume variance of $122,231$71,408 compared to the comparable period in 2018.2019. The average price per Bbl decreased $6.46$4.37 to $52.39$48.02 per Bbl in the three months ended March 31, 2019,2020, resulting in a negative price variance of $121,086$75,930 compared to the comparable period in 2018.2019. The increasedecrease in oil volumes sold was due to a decline in production of 3,6002,300 Bbls from newolder wells, partially offset by production declines from oldernew wells.
The $23,839 (4%$244,258 (43%) increasedecrease in gas sales to $565,112$320,854 in the three months ended March 31, 20192020 from $541,273$565,112 in the comparable period in 20182019 was the net result of an increasea decrease in the average price per thousand cubic feet (MCF) offset byand a decrease in the volume sold. The volume of gas sold decreased 6,5452,436 MCF to 192,133189,687 MCF in the three months ended March 31, 20192020 from 198,678192,133 MCF in the comparable period in 2018,2019, for a negative volume variance of $17,802$7,162 compared to the comparable period in 2018.2019. The average price per MCF increased $0.22decreased $1.25 to $2.94$1.69 per MCF in the three months ended March 31, 20192020 from $2.72$2.94 per MCF in the comparable period in 2018,2019, resulting in a positivenegative price variance of $41,641$237,096 compared to the comparable period in 2018.2019. The decrease in gas volumes sold was due to a decline in production of 9,70010,673 MCF from older wells, partially offset by production of 8,237 MCF from new wells offset by production declines from older wells.
Sales from the Robertson County, Texas royalty interest properties provided approximately 32%28% of the Company’s gas sales volumes for the three months ended March 31, 20192020 and 29%32% of the gas sales volumes for the comparable period in 2018.2019. See discussion on page 11 of the 20182019 Form 10-K under the subheading “Operating Revenues” for more information about these properties. Sales from Arkansas working interest properties provided approximately 12%11% of the Company’s gas sales volumes for the three months ended March 31, 20192020 and about 11%12% of the gas sales volumes for the comparable period in 2018.2019.
For both oil and gas sales, the price change was mostly the result of a change in the spot market prices upon which most of the Company’s oil and gas sales are based. These spot market prices have had significant fluctuations in the past and these fluctuations are expected to continue. Spot market prices dropped significantly in the first quarter for a variety of reasons, including but not limited to the impact of COVID-19 on demand for oil and gas products. Following the first quarter, oil prices decreased even further. Such lower prices will negatively affect our results of operation and financial condition and will continue to do so as long as prices remain at depressed levels.
Sales of miscellaneous oil and gas products were $45,668$40,815 in the three months ended March 31, 20192020 compared to $57,222$45,668 in the comparable period in 2018.2019.
The Company received lease bonuses of $7,528$82,221 in the three months ended March 31, 20192020 for leases on its owned minerals compared to $145,862$7,528 in the comparable period in 2018.2019.
Operating Costs and Expenses. Operating costs and expenses decreased $211,651 (14%increased $1,322,534 (106%) to $1,249,627$2,572,161 in the three months ended March 31, 20192020 from $1,461,278$1,249,627 in the comparable period in 2018.2019. The increase was primarily due to the significant impairments described below.
Production Costs. Production costs decreased $48,060 (8%$8,140 (1%) to $558,707$550,567 in the three months ended March 31, 20192020 from $606,767$558,707 in the comparable period in 2018.2019. This decrease was primarily the result of a decrease of $53,000$13,000 in production taxes, offset by lease operating expenses.and gathering charges.
Exploration Costs. Total exploration expense decreased $74,426 (96%)increased $40,246 to $3,219$43,465 in the three months ended March 31, 20192020 from $77,645$3,219 in the comparable period in 2018. The decrease was due to a decrease of $109,484 in geological and geophysical expenses, offset by an increase in other expenses of $35,058.2019.
The following is a summary as of May 3, 2019,6, 2020, updating both exploration and development activity from December 31, 2018,2019, for the period ended March 31, 2019.
The Company is participating with a 9.5% working interest in the completion of a development well on a Woods County, Oklahoma prospect. The well was drilled in 2018. Capitalized costs for the period were $37,762.2020.
The Company is participating with its 14% interest in the acquisition of additional leasehold and exploratory drilling on a Creek County, Oklahoma 3-D seismic prospect. It is likely thatproject. There are currently seven active prospects within the project. Exploratory wells were drilled on two of the prospects in 2019, resulting in one or moresuccessful completion and another completion suspended pending an improvement in oil prices. Five additional exploratory wells will be drilled on the prospect in 2019.are planned, and possibly two development wells. Leasehold costs for the period were $1,458.$5,000. Additional capitalized costs were $1,466.
The Company owns a 35% interest in 16,472.55 net acres of leasehold on a Crockett and Val Verde Counties, Texas prospect. Most of the acreage is underlain by a shallow heavy oil zone. The Company and its partners have entered into an agreement wherebyplans to participate with a third party would drill10.5% interest in the drilling of two strat teststest wells on the prospect earningwith the option to drill three additional wells, purchase a 50% interest in the acreage and conductintention of conducting a thermal recovery pilot test. The strat tests have been drilled and the third party has decided to proceed with the drillingtest at one of the additional wells.locations.
The Company ishas been participating with a 13% interest in a 3-D seismic prospectproject covering approximately 35,000 acres in San Patricio County, Texas. A 3-D seismic survey of the prospect area has been completed and thirteenFourteen prospects have been identified. Anidentified, and exploratory well was drilledwells were successfully completed on one prospect, resultingtwo of these in a commercial oil2019. Leasing is complete on six additional prospects and gas producer that is awaiting pipeline connection.exploratory wells have been proposed on two. Lease acquisition is in progress on seven prospects, and additional exploratory drilling is planned this year.another prospect. Leasehold costs for the period were $4,138. Actual drilling costs of $140,384 for the period were offset by prepaid costs from 2018 for a net capitalized amount of $0.$16,569.
The Company has been participating with a 50% interest in an attempt to develop shallow oil prospects in the Permian Basin. Lease acquisition is in progress on one prospect in Cranea Nolan County, Texas.Texas prospect. The Company willis currently involved in negotiations to sell a portion of its interest prior to any drilling. Leaseholdin the prospect. Geological costs for the period were $13,913 and leasehold costs were $2,019 for the period.$7,075.
The Company participated with its 16% working interest in the drilling of an exploratoryattempt to restore commercial production from a well that was drilled and completed in 2019 on a BarberMurray County, KansasOklahoma prospect. The welleffort has been completedunsuccessful and the well is being tested. Capitalized costs for the period were $57,133.
In October 2018, the Company entered into an agreement to acquire mineral rights in Tyler, Doddridge and Ritchie Counties, West Virginia. The Company is funding the acquisition of the mineral rights which will then be sold to a third party for a profit, with the Company retaining an interest in the minerals. Costs for the period were $198,186.
The Company is participating with its 10.5% working interest in the completion of an exploratory well on an Oldham County, Texas prospect. The well was drilled in 2018. Capitalized costs for the period were $144,160, including $13,125 of additional leasehold costs.under evaluation.
The Company participated with 17.1%has largely curtailed its exploration and 17.5% working interestsdevelopment activity due to the historic collapse of oil prices in successful recompletionsMarch and April, 2020, and does not plan to resume it until the price situation improves. The planned activity discussed above will likely be postponed at least until the fourth quarter of two wells on a McClain County, Oklahoma prospect. Capital costs for the period were $15,596.2020 and possibly until 2021.
Depreciation, Depletion, Amortization and Valuation Provision (DD&A). DD&A decreased $91,491 (28%increased $1,291,163 (550%) to $234,841$1,526,004 in the three months ended March 31, 20192020 from $326,332$234,841 in the comparable period in 2018.2019. The decreaseincrease was from long-lived asset impairments of $1,312,328 due primarily to revisions in reserve estimates and $44,700 less impairment of non-producing leaseholds for 2019 versus 2018.historically low oil futures prices.
Other Income,Income/(Loss), Net. This line item increased $50,159 (55%)decreased $154,947 to $140,558$(14,389) in the three months ended March 31, 20192020 from $90,399$140,558 in the comparable period in 2018.2019. See Note 23 to the accompanying financial statements for the various components of this line item.
Income Tax Provision. Income tax provision increased $75,165 (90%) to $158,835 inIn the three months ended March 31, 2019 from $83,670 in2020, the Company had an estimated income tax benefit of $166,111 as the result of a deferred tax benefit of $346,421 and a current tax provision of $180,310. In the comparable period in 2018. The increase was due to2019, the Company had an increase in Income Before Income Tax Provisionestimated income tax provision of $136,906 (39%) to $491,170$158,835 as compared to $354,264 in the comparable period in 2018.result of a deferred tax provision of $122,454 and a current tax provision of $36,381. See Note 45 to the accompanying financial statements for additional information on income taxes.
Off-Balance Sheet Arrangement
The Company’s off-balance sheet arrangements relate to Broadway Sixty-Eight, LLC, an Oklahoma limited liability company, and Grand Woods Development, LLC, an Oklahoma limited liability company, and QSN Office Park, LLC, an Oklahoma limited liability company. The Company does not have actual or effective control of these entities. Management of these entities could at any time make decisions in their own best interest, which could materially affect the Company’s net income or the value of the Company’s investment. For more information about these entities and the related off-balance sheet arrangements, see Note 34 to the accompanying financial statements.
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Not applicable.
ITEM 4. | CONTROLS AND PROCEDURES |
As defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the "Exchange Act"), the term “disclosure controls and procedures” means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.
The Company’s Principal Executive Officer and Principal Financial Officer evaluated the effectiveness of the Company’s disclosure controls and procedures. Based on this evaluation, they concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2019.
2020.
Internal Control over Financial Reporting
As defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act, the term "internal control over financial reporting" means a process designed by, or under the supervision of, the issuer's principal executive and principal financial officers, or persons performing similar functions, and effected by the issuer's board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes, in accordance with generally accepted accounting principles and includes those policies and procedures that:
(1) | Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer; |
(2) | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the issuer are being made only in accordance with authorizations of management and directors of the issuer; and |
(3) | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the issuer's assets that could have a material effect on the financial statements. |
The Company's management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. There were no changes in the Company’s internal control over financial reporting during the quarter ended March 31, 20192020 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
PART II – OTHER INFORMATION
ITEM 1. | LEGAL PROCEEDINGS |
During the quarter ended March 31, 2019,2020, the Company did not have any material legal proceedings brought against it or its properties.
ITEM 1A. | RISK FACTORS |
Not applicable.
ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
ISSUER PURCHASES OF EQUITY SECURITIES
| ||||||||||||||||
Period | Total Number of Shares Purchased | Average Price Paid Per Share |
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs1 |
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs1 | ||||||||||||
January 1 to January 31, 2019 | 47 | $ | 150 | --- | --- | |||||||||||
February 1 to February 28, 2019 | 164 | $ | 150 | --- | --- | |||||||||||
March 1 to March 31, 2019 | 93 | $ | 150 | --- | --- | |||||||||||
Total | 304 | $ | 150 | --- | --- | |||||||||||
1The Company has no formal equity security purchase program or plan. The Company acts as its own transfer agent, and most purchases result from requests made by shareholders receiving small odd lot share quantities as the result of probate transfers.None.
ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
None.
ITEM 4. | MINE SAFETY DISCLOSURES |
Not applicable.
ITEM 5. | OTHER INFORMATION |
None.
| ITEM 6. EXHIBITS |
The following documents are exhibits to this Form 10-Q. Each document marked by an asterisk is filed electronically herewith.
Exhibit Number |
Description | ||
31.1* | |||
31.2* | |||
32* | |||
101.INS* | XBRL Instance Document | ||
101.SCH* | XBRL Taxonomy Extension Schema Document | ||
101.CAL* | XBRL Taxonomy Calculation Linkbase Document | ||
101.DEF* | XBRL Taxonomy Definition Linkbase Document | ||
101.LAB* | XBRL Taxonomy Label Linkbase Document | ||
101.PRE* | XBRL Taxonomy Presentation Linkbase Document | ||
| * Filed electronically herewith. | |||
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized.
THE RESERVE PETROLEUM COMPANY | ||
| (Registrant) | ||
Date: May 15, |
| |
Cameron R. McLain, | ||
Principal Executive Officer | ||
Date: May 15, |
| |
Lawrence R. Francis | ||
Principal Financial Officer |