UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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 June 30, 2015
☐ 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) | |
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):
Large accelerated filer | ☐ | Accelerated filer | ☐ | Non-accelerated filer | ☐ | Smaller reporting company | ☑ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
As of August 7, 2015, 158,521 shares of the Registrant’s $.50 par value common stock were outstanding.
PARTI– FINANCIALINFORMATION
ITEM 1. | FINANCIAL STATEMENTS |
THE RESERVE PETROLEUM COMPANY
BALANCE SHEETS
June 30, | December 31, | |||||||
2015 | 2014 | |||||||
(Unaudited) | (Derived from | |||||||
audited financial | ||||||||
statements) | ||||||||
ASSETS | ||||||||
Current Assets: | ||||||||
Cash and Cash Equivalents | $ | 15,829,688 | $ | 15,203,558 | ||||
Available-for-Sale Securities | 6,653,794 | 6,654,303 | ||||||
Trading Securities | 459,460 | 445,476 | ||||||
Refundable Income Taxes | 462,277 | 154,393 | ||||||
Receivables | 1,017,795 | 2,142,356 | ||||||
Prepaid Seismic | --- | 86,856 | ||||||
| Total Current Assets | 24,423,014 | 24,686,942 | ||||||
Investments: | ||||||||
Equity Investment | 388,135 | 352,995 | ||||||
Other | 676,856 | 672,416 | ||||||
| Total Investments | 1,064,991 | 1,025,411 | ||||||
Property, Plant and Equipment: | ||||||||
Oil and Gas Properties, at Cost,Based on the Successful Efforts Method of Accounting – | ||||||||
Unproved Properties | 2,070,331 | 1,728,944 | ||||||
Proved Properties | 53,307,676 | 53,110,630 | ||||||
| Oil and Gas Properties, Gross | 55,378,007 | 54,839,574 | ||||||
Less – Accumulated Depreciation, Depletion, Amortization andValuation Allowance | 39,422,261 | 36,883,078 | ||||||
| Oil and Gas Properties, Net | 15,955,746 | 17,956,496 | ||||||
Other Property and Equipment, at Cost | 392,918 | 440,284 | ||||||
Less – Accumulated Depreciation | 232,090 | 329,429 | ||||||
| Other Property and Equipment, Net | 160,828 | 110,855 | ||||||
Total Property, Plant and Equipment | 16,116,574 | 18,067,351 | ||||||
Other Assets | --- | 391,290 | ||||||
Total Assets | $ | 41,604,579 | $ | 44,170,994 | ||||
See Accompanying Notes
THE RESERVE PETROLEUM COMPANY
BALANCE SHEETS
June 30, | December 31, | |||||||
2015 | 2014 | |||||||
(Unaudited) | (Derived from | |||||||
audited financial | ||||||||
statements) | ||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current Liabilities: | ||||||||
Accounts Payable | $ | 413,461 | $ | 819,010 | ||||
Other Current Liabilities – Deferred Income Taxes and Other | 186,344 | 263,234 | ||||||
| Total Current Liabilities | 599,805 | 1,082,244 | ||||||
Long-Term Liabilities: | ||||||||
Asset Retirement Obligation | 1,688,672 | 1,645,597 | ||||||
Dividends Payable | 1,470,726 | 1,451,635 | ||||||
Deferred Tax Liability, Net | 2,672,484 | 3,249,291 | ||||||
| Total Long-Term Liabilities | 5,831,882 | 6,346,523 | ||||||
Total Liabilities | 6,431,687 | 7,428,767 | ||||||
Stockholders’ Equity: | ||||||||
Common Stock | 92,368 | 92,368 | ||||||
Additional Paid-in Capital | 65,000 | 65,000 | ||||||
Retained Earnings | 36,409,492 | 37,946,212 | ||||||
| Stockholders’ Equity Before Treasury Stock | 36,566,860 | 38,103,580 | ||||||
Less – Treasury Stock, at Cost | 1,393,968 | 1,361,353 | ||||||
Total Stockholders’ Equity | 35,172,892 | 36,742,227 | ||||||
Total Liabilities and Stockholders’ Equity | $ | 41,604,579 | $ | 44,170,994 | ||||
See Accompanying Notes
THE RESERVE PETROLEUM COMPANY
STATEMENTS OF INCOME
(Unaudited)
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Operating Revenues: | ||||||||||||||||
Oil and Gas Sales | $ | 2,081,048 | $ | 5,103,967 | $ | 4,233,996 | $ | 10,379,177 | ||||||||
Lease Bonuses and Other | 112,933 | 414,592 | 648,147 | 615,534 | ||||||||||||
| Total Operating Revenues | 2,193,981 | 5,518,559 | 4,882,143 | 10,994,711 | ||||||||||||
Operating Costs and Expenses: | ||||||||||||||||
Production | 663,560 | 817,889 | 1,354,416 | 1,662,489 | ||||||||||||
Exploration | 203,600 | 559,906 | 353,750 | 1,217,377 | ||||||||||||
Depreciation, Depletion, Amortizationand Valuation Provisions | 1,091,139 | 1,102,494 | 2,661,489 | 1,970,126 | ||||||||||||
General, Administrative and Other | 404,636 | 433,423 | 847,009 | 871,664 | ||||||||||||
| Operating Costs and Expenses | 2,362,935 | 2,913,712 | 5,216,664 | 5,721,656 | ||||||||||||
Income/(Loss) from Operations | (168,954 | ) | 2,604,847 | (334,521 | ) | 5,273,055 | ||||||||||
Other Income, Net | 89,534 | 211,357 | 92,267 | 195,799 | ||||||||||||
Income/(Loss) Before Provision for Income Taxes | (79,420 | ) | 2,816,204 | (242,254 | ) | 5,468,854 | ||||||||||
Income Tax Provision/(Benefit): | ||||||||||||||||
Current | 68,228 | 720,433 | 412,651 | 1,623,195 | ||||||||||||
Deferred | (178,964 | ) | 24,262 | (703,697 | ) | (200,553 | ) | |||||||||
Total Income Tax Provision/(Benefit) | (110,736 | ) | 744,695 | (291,046 | ) | 1,422,642 | ||||||||||
Net Income | $ | 31,316 | $ | 2,071,509 | $ | 48,792 | $ | 4,046,212 | ||||||||
Per Share Data | ||||||||||||||||
Net Income, Basic and Diluted | $ | 0.20 | $ | 13.03 | $ | 0.31 | $ | 25.43 | ||||||||
Cash Dividends Declared and/or Paid | $ | 10.00 | $ | 20.00 | $ | 10.00 | $ | 20.00 | ||||||||
Weighted Average Shares Outstanding,Basic and Diluted | 158,560 | 159,006 | 158,609 | 159,116 | ||||||||||||
See Accompanying Notes
THE RESERVE PETROLEUM COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended | ||||||||
June 30, | ||||||||
2015 | 2014 | |||||||
Net Cash Provided by Operating Activities | $ | 2,996,667 | $ | 7,216,668 | ||||
Cash Applied to Investing Activities: | ||||||||
Purchases of Available-for-Sale Securities | (6,653,795 | ) | (6,654,786 | ) | ||||
Maturity of Available-for-Sale Securities | 6,654,303 | 6,653,823 | ||||||
Proceeds from Disposal of Property, Plant and Equipment | 6,192 | 21,188 | ||||||
Purchase of Property, Plant and Equipment | (1,214,015 | ) | (2,528,483 | ) | ||||
Cash Paid for Investment | (4,440 | ) | --- | |||||
Cash Distribution from Equity Investee | --- | 287,595 | ||||||
Cash Distribution from Other Investments | 50,000 | --- | ||||||
Cash Received from Life Insurance Policies | 390,253 | --- | ||||||
Net Cash Applied to Investing Activities | (771,502 | ) | (2,220,663 | ) | ||||
Cash Applied to Financing Activities: | ||||||||
Dividends Paid to Stockholders | (1,566,420 | ) | (3,021,888 | ) | ||||
Purchase of Treasury Stock | (32,615 | ) | (98,141 | ) | ||||
Total Cash Applied to Financing Activities | (1,599,035 | ) | (3,120,029 | ) | ||||
Net Change in Cash and Cash Equivalents | 626,130 | 1,875,976 | ||||||
Cash and Cash Equivalents, Beginning of Period | 15,203,558 | 10,764,506 | ||||||
Cash and Cash Equivalents, End of Period | $ | 15,829,688 | $ | 12,640,482 | ||||
See Accompanying Notes
THE RESERVE PETROLEUM COMPANY
NOTES TO FINANCIAL STATEMENTS
June 30, 2015
(Unaudited)
Note 1 – BASIS OF PRESENTATION
The accompanying balance sheet as of December 31, 2014, 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 fiscal year ended December 31, 2014.
In the opinion of management, the accompanying financial statements reflect all adjustments (consisting 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 – OTHER INCOME, NET
The following is an analysis of the components of Other Income/(Loss), Net:
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Net Realized and Unrealized Gain/(Loss)on Trading Securities | $ | 19,565 | $ | 39,942 | $ | 13,570 | $ | (5,983 | ) | |||||||
Gain on Asset Sales | 6,136 | 14,745 | 6,136 | 15,868 | ||||||||||||
Interest Income | 2,560 | 4,477 | 6,311 | 9,809 | ||||||||||||
Equity Earnings in Investee | 23,057 | 29,865 | 35,140 | 57,110 | ||||||||||||
Other Income | 50,225 | 133,586 | 55,123 | 141,516 | ||||||||||||
Interest and Other Expenses | (12,009 | ) | (11,258 | ) | (24,013 | ) | (22,521 | ) | ||||||||
Other Income, Net | $ | 89,534 | $ | 211,357 | $ | 92,267 | $ | 195,799 | ||||||||
Note 3 – INVESTMENTS AND RELATED COMMITMENTS AND CONTINGENT LIABILITIES, INCLUDING GUARANTEES
Equity Investment consists of a 33% ownership interest in Broadway Sixty-Eight, Ltd. (the “Partnership”), an Oklahoma limited partnership, which owns and operates an office building in Oklahoma City, Oklahoma. Although the Company invested as a limited partner, it agreed, jointly and severally, with all other limited partners to reimburse the general partner for any losses suffered from operating the Partnership. The indemnity agreement provides no limitation to the maximum potential future payments. To date, no monies have been paid with respect to this agreement.
Note 4 – PROVISION FOR INCOME TAXES
In 2015 and 2014, the effective tax rate was different than the statutory rate, primarily as a result of allowable depletion for tax purposes in excess of the cost basis in oil and gas properties and the corporate graduated tax rate structure.
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 are 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. 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, 2014 | $ | 1,645,597 | ||
Liabilities incurred for new wells (net of revisions) | 22,184 | |||
Liabilities settled (wells sold or plugged) | (2,875 | ) | ||
Accretion expense | 23,766 | |||
Balance at June 30, 2015 | $ | 1,688,672 |
Note 6 – 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 securities using quoted market prices for securities with similar maturity dates and interest rates. At June 30, 2015 and December 31, 2014, the Company’s assets reported at fair value on a recurring basis are summarized as follows:
June 30, 2015 | ||||||||||||
Level 1 Inputs | Level 2 Inputs | Level 3 Inputs | ||||||||||
Financial Assets: | ||||||||||||
Available-for Sale Securities –U.S. Treasury Bills Maturing in 2015 | $ | --- | $ | 6,653,794 | $ | --- | ||||||
Trading Securities: | ||||||||||||
Domestic Equities | 317,211 | --- | --- | |||||||||
International Equities | 126,749 | --- | --- | |||||||||
Others | 15,500 | --- | --- | |||||||||
December 31, 2014 | ||||||||||||
Level 1 Inputs | Level 2 Inputs | Level 3 Inputs | ||||||||||
Financial Assets: | ||||||||||||
Available-for Sale Securities –U.S. Treasury Bills Maturing in 2015 | $ | --- | $ | 6,654,303 | $ | --- | ||||||
Trading Securities: | ||||||||||||
Domestic Equities | 183,168 | --- | --- | |||||||||
International Equities | 124,998 | --- | --- | |||||||||
Others | 137,310 | --- | --- | |||||||||
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 six months ended June 30, was $22,184 in 2015 and $32,272 in 2014 and was calculated using Level 3 inputs. See Note 5 above for more information about this liability and the inputs used for calculating fair value.
The impairment losses in the six months ended June 30 of$556,734 in 2015, with none for 2014, also represents non-recurring fair value expenses calculated using Level 3 inputs. See Note 7 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 June 30, 2015 and December 31, 2014, 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 7 -LONG-LIVED ASSETS IMPAIRMENT LOSS
Oil and gas producing properties, are monitored for potential impairment when circumstances indicate that theyare not expected to recover their entire carrying value through future cash flows. The evaluations involve significant judgment since the results are based on estimated future events, such as inflation rates, future sales prices for oil and gas, future production costs, estimates of future oil and gas reserves to be recovered and the timing thereof, the economic and regulatory climates and other factors. The need to test a property for impairment may result from significant declines in sales prices or unfavorable adjustments to oil and gas reserves. Between periods in which reserves would normally be calculated, the Company updates the reserve calculations utilizing updated projected future price decks current with the period. The assessment determined no impairment provisions were needed for the three months ended June 30, 2015 and 2014. For the six months ended June 30, 2015, the assessment resulted in an impairment provision of $556,374. No impairment was needed for the same period in 2014. The impairment provision for the six months ended June 30, 2015, is principally the result of lower projected future prices for oil and gas. A reduction in oil or gas prices, or a decline in reserve volumes, could lead to additional impairment that may be material to the Company.
Note 8 – NEW ACCOUNTING PRONOUNCEMENTS
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”). ASU 2014-09 clarifies the principles for recognizing revenue and develops a common revenue standard under U.S. GAAP under which an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 is effective for the Company beginning January 1, 2018. The new standard allows application either retrospectively to each prior reporting period presented or as a cumulative-effect adjustment as of the date of adoption. Management is currently assessing the adoption method and the impact ASU 2014-09 will have on the Company, but it is not expected to have a material effect on the Company’s financial position, results of operations or cash flows.
On April 7, 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2015-03,Interest - Imputation of Interest(“ASU 2015-03”). The standard requires that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of the debt liability, consistent with debt discounts or premiums. ASU 2015-03 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015. The Company currently has no debt nor any plans to issue any debt. Accordingly, adoption of ASU 2015-03 will have no effect on the Company’s financial position, results of operations or cash flows.
There were no other accounting pronouncements issued and none that became effective since December 31, 2014 that were directly applicable to the Company.
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 Company’s Annual Report on Form 10-K for the year ended December 31, 2014 as filed with the Securities and Exchange Commission (hereinafter, the “2014 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 8 of the 2014 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. 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
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 half of 2015, the Company continued to fund its business activity through the use of internal sources of cash. The Company had cash provided by operations of $2,996,667 and cash provided by the maturities of available-for-sale securities of $6,654,303. Additional cash of $56,192 was provided by property dispositions and investment distributions and $390,253 from two life insurance policies for total cash provided of $10,097,415. The Company utilized cash for the purchase of available-for-sale securities of $6,653,795, property additions of $1,214,015, investment activity of $4,440 and financing activities of $1,599,035 for total cash applied of $9,471,285. Cash and cash equivalents increased $626,130 (4%) to $15,829,688.
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, 2014. A discussion of these items follows.
Refundable income taxes increased $307,884 (199%) to $462,277 from $154,393 due to the first half 2015 current income tax provision of $412,651, offset by estimated tax payments of $720,535 for the same period.
Receivables declined $1,124,561 (52%) to $1,017,795 from $2,142,356. This decrease was due entirely to lower oil and gas sales receivables. Sales variances are discussed in the “Results of Operations” section below.
Accounts payable decreased $405,549 (50%) to $413,461 from $819,010. The decrease was due to a decline in the drilling activity in the quarter ended June 30, 2015 compared to the quarter ended December 31, 2014.
Deferred income taxes and other liabilities decreased $76,890 (29%) to $186,344 from $263,234 due to an increase of $50,000 in ad valorem tax accruals and a decrease of $126,890 in current deferred income taxes. Ad valorem (property) taxes are primarily for Texas properties and are accrued for the first three quarters each year to be paid in the fourth quarter.
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 $2,996,667 in 2015, a decrease of $4,220,001 (58%) from the comparable period in 2014. The decrease was primarily due to decreased operating revenue, partially offset by decreased production and exploration costs. For more information see “Operating Revenues” and “Exploration Costs” below.
Cash applied to the purchase of property additions in 2015 was $1,214,015, a decrease of $1,314,468 (52%) from cash applied in 2014 of $2,528,483. In both 2015 and 2014, 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.
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 2014 Form 10-K would not be representative of the Company’s current position.
Material Changes in Results of Operations Six Months Ended June 30, 2015, Compared with Six Months Ended June 30, 2014
Net income decreased $3,997,420 (99%) to $48,792 in 2015 from $4,046,212 in 2014. Net income per share, basic and diluted, decreased $25.12 (99%) to $0.31 in 2015 from $25.43 in 2014.
A discussion of revenue from oil and gas sales and other significant line items in the statements of income follows.
Operating Revenues. Revenues from oil and gas sales decreased $6,145,181 (59%) to $4,233,996 in 2015 from $10,379,177 in 2014. The $6,145,181 decrease is due to lower crude oil sales of $4,052,174; lower natural gas sales of $1,805,317; and a decrease in miscellaneous oil and gas product sales of $287,690.
The $4,052,174 (61%) decrease in oil sales to $2,556,592 in 2015 from $6,608,766 in 2014 was the result of a decrease in both the volume sold and the average price per barrel (Bbl). The volume of oil sold decreased 16,440 Bbls to 54,114 Bbls in 2015, resulting in a negative volume variance of $1,539,935. This volume decrease was the net result of an increase of 11,098 Bbls for production that began after June 30, 2014, offset by a decline of 27,538 Bbls from older properties. The average price per Bbl decreased $46.43 to $47.24 per Bbl in 2015, resulting in a negative price variance of $2,512,239.
The $1,805,317 (53%) decrease in gas sales to $1,573,681 in 2015 from $3,378,998 in 2014 was the result of a decrease in both the volume sold and the average price per thousand cubic feet (MCF). The volume of gas sold decreased 123,751 MCF to 596,081 MCF from 719,832 MCF in 2014, for a negative volume variance of $580,392. The decrease in gas volumes sold was the net result of approximately 236,000 MCF of production declines from older wells, partially offset by production of approximately 113,000 MCF from wells that first produced after June 30, 2014. The average price per MCF decreased $2.05 to $2.64 per MCF from $4.69 per MCF in 2014, resulting in a negative price variance of $1,224,925.
Sales from the Robertson County, Texas royalty interest properties provided approximately 22% of the Company’s first half 2014 and 2015 gas sales volumes. See discussion on page 11 of the 2014 Form 10-K under the subheading “Operating Revenues” for more information about these properties. Sales from Arkansas working interest properties provided approximately 15% of the Company’s first half 2015 gas sales volumes and about 19% of the first half 2014 gas sales volumes.
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.
Sales of miscellaneous oil and gas products were $103,723 in 2015 as compared to $391,413 in 2014.
The Company received lease bonuses of $647,442 in the first half of 2015 for leases on its owned minerals. Lease bonuses for the first half of 2014 were $614,894. In 2015, 98% of the bonuses were for leases on owned minerals in Oklahoma and the remainder were for owned minerals in Texas. In 2014, 11% of the bonuses were for Oklahoma leases and 89% were for Texas leases.
Operating Costs and Expenses. Operating costs and expenses decreased $504,992 (9%) to $5,216,664 in 2015 from $5,721,656 in 2014. Material line item changes are discussed and analyzed in the following paragraphs.
Production Costs. Production costs decreased $308,073 (19%) to $1,354,416 in 2015 from $1,662,489 in 2014. Lease operating expense and transportation and compression expense decreased $49,130 (4%) to $1,193,214 in 2015 from $1,242,344 in 2014. Production taxes decreased $258,943 (62%) to $161,202 in 2015 from $420,145 in 2014 due primarily to the decline in oil and gas sales revenues described above in the “Operating Revenues” section.
Exploration Costs. Total exploration expense decreased $863,627 (71%) to $353,750 in 2015 from $1,217,377 in 2014. Dry hole costs decreased $279,479 to $277,081 in 2015 from $556,560 in 2014. Geological and geophysical expense decreased $584,148 to $76,668 in 2015 from $660,816 in 2014.
The following is a summary as of July 29, 2015, updating both exploration and development activity from December 31, 2014, for the period ended June 30, 2015.
The Company will participate with its 18% working interest in the drilling of three development wells on a Barber County, Kansas prospect in the second half of 2015.
The Company participated with its 16% working interest in the drilling of a development well on a Woods County, Oklahoma prospect. The well was completed as a commercial oil and gas producer. Capitalized costs for the period were $68,800.
The Company participated with an 8% working interest in the completion of a development well that was drilled in 2014 on a Woods County, Oklahoma prospect. The well is a commercial oil and gas producer.
The Company participated with its 10.5% working interest in the drilling of two exploratory wells on a Cimarron County, Oklahoma prospect. Both wells were completed as dry holes. No further drilling is planned on the prospect. Costs expensed to dry hole costs were $128,709. Leasehold impairment expense for the prospect was $120,675.
The Company participated with its 10.5% working interest in the completion of an exploratory well that was drilled in 2014 on a Logan County, Oklahoma prospect. The well is being tested. Capitalized costs for the period were $57,275.
The Company participated with its 10.5% working interest in the drilling of a development well on a Seminole County, Oklahoma prospect. A completion is in progress. The Company also participated in operations to plug back and repair a salt water disposal well that has been returned to service, and in the installation of submersible pumping equipment in another well that is being tested.
The Company is participating with its 10.5% working interest in three development wells on a Seminole County, Oklahoma prospect. Drilling is in progress on the first well. Capitalized costs for the period were $100,580.
The Company participated in the drilling of two exploratory wells on a Creek County, Oklahoma prospect. The first well was completed as a dry hole and a completion is in progress on the second. The Company will participate in the drilling of an additional exploratory well starting in August or September 2015. Dry hole costs for the period were $28,629 and capitalized costs were $57,579.
The Company participated with its 8.4% interest in a 3-D seismic survey on a Thomas County, Kansas prospect. The Company also participated in the drilling of an exploratory well on the prospect that was completed as a dry hole. Costs expensed to dry hole costs were $27,046.
In April 2015, the Company purchased a 16% interest in 1,861 net acres of leasehold on a Chase County, Nebraska prospect for $40,191. The Company participated in the drilling of an exploratory well on the prospect that was completed as a commercial oil producer. Capitalized costs for the period were $99,676.
In July 2015, the Company purchased a 10.5% interest in 18,069.51 net acres of leasehold on a Thomas County, Kansas prospect for $218,189. A 3-D seismic survey of the prospect will be conducted starting in October 2015. After the seismic data has been acquired, processed and analyzed, decisions about exploratory drilling will be made.
Depreciation, Depletion, Amortization and Valuation Provision (DD&A). DD&A increased $691,363 (35%) to $2,661,489 in 2015 from $1,970,126 in 2014. The increase was due primarily to an increase in lease impairments of $128,478 and $556,734 of long-lived asset impairment losses for 2015 with none for 2014. See Note 7 to the accompanying financial statements for a description of the impairment loss calculation.
Other Income, Net. This line item decreased $103,532 (53%) to $92,267 in 2015 from $195,799 in 2014. See Note 2 to the accompanying financial statements for the analysis of the various components of this line item. Components with significant changes are discussed in the following paragraphs.
Gains on trading securities in 2015 were $13,570 as compared to losses of $(5,983) in 2014, an increase of $19,553. In 2015, the Company had realized losses of $(15,650) and unrealized gains of $29,220 from adjusting the securities to estimated fair market value. In 2014, the Company had realized gains of $18,779 and unrealized losses of $(24,762).
Other income decreased $86,393 (61%) to $55,123 in 2015 from $141,516 in 2014. Most of the decrease was due to $130,701 of class action lawsuit settlements in 2014 compared to $4,707 in 2015. This decrease was partially offset by $50,000 of other investment income in 2015 compared to $10,000 in 2014.
Income TaxProvision/(Benefit). Income taxes decreased $1,713,688 to a $(291,046) tax benefit in 2015 from a $1,422,642 tax provision in 2014. The decrease was due to the decrease in income/(loss) before income taxes of $5,711,108 to $(242,254) in 2015 from $5,468,854 in 2014. Of the 2015 income tax benefit, the estimated current tax expense was $412,651 and the estimated deferred tax benefit was $(703,697). Of the 2014 income tax provision, the current tax expense was $1,623,195 and deferred tax benefit was $(200,553). See Note 4 to the accompanying financial statements for additional information on income taxes.
Material Changes in Results of Operations Three Months Ended June 30, 2015, Compared with Three Months Ended June 30, 2014
Net income decreased $2,040,193 (98%) to $31,316 in 2015 from $2,071,509 in 2014. The material changes in the results of operations, which caused the decrease in net income, are discussed below.
Operating Revenues. Revenues from crude oil and natural gas sales decreased $3,022,919 (59%) to $2,081,048 in 2015 from $5,103,967 in 2014. The $3,022,919 decrease is due to lower crude oil sales of $2,075,241; lower natural gas sales of $871,121; and a decrease in sales of miscellaneous products of $76,557.
The $2,075,241 decrease in crude oil sales was the result of a decrease in the volume of oil sold of 9,213 Bbls to 25,808 Bbls, for a negative volume variance of $881,776, and a decrease in the average price received of $46.24 per Bbl to $49.47, for a negative price variance of $1,193,465.
The $871,121 decrease in natural gas sales was the result of a decrease in the volume of gas sold of 47,421 MCF to 304,707 MCF, for a negative volume variance of $218,611, and a decrease in the average price of $2.14 per MCF to $2.47, for a negative price variance of $652,510.
Other operating revenues decreased $301,659 (73%) to $112,933 in 2015 from $414,592 in 2014. This decrease was due to a decrease in lease bonuses for minerals in various Oklahoma and Texas Counties of $301,659 to $112,293 in 2015 from $413,952 in 2014.
Production Expense. Production expense decreased $154,329 (19%) to $663,560 in 2015 from $817,889 in 2014. Lease operating expense and transportation and compression expense decreased $29,200 to $580,677 in 2015 from $609,877 in 2014. Production taxes decreased $125,129 to $82,883 in 2015 from $208,012 in 2014.
Exploration Costs. Total exploration expense decreased $356,306 (64%) to $203,600 in 2015 from $559,906 in 2014. Dry hole costs decreased $429,048 to $127,987 in 2015 from $557,035 in 2014. Geological and geophysical expense increased $72,742 to $75,613 in 2015 from $2,871 in 2014.
Other Income, Net. This line item decreased $121,823 (58%) to $89,534 in 2015 from $211,357 in 2014. See Note 2 to the accompanying financial statements for an analysis of the components of other income, net. Components with significant changes are discussed in the following paragraphs.
Other income decreased $83,361 (62%) to $50,225 in 2015 from $133,586 in 2014. Most of the decrease was due to $123,186 of class action lawsuit settlements in 2014 with no similar amounts in 2015. This decrease was offset by a $40,000 increase in other investment income to $50,000 in 2015 from $10,000 in 2014.
Income Tax Provision/(Benefit). Income tax provision decreased $855,431 to a tax benefit of $(110,736) in 2015 from a tax provision of $744,695 in 2014. See discussion above in “Item 2.” and Note 4 to the accompanying financial statements for a discussion of the changes in the provision for income taxes.
There were no additional material changes between the quarters, which were not covered in the discussion in “Item 2.” above, for the six months ended June 30, 2015.
Off-Balance Sheet Arrangement
The Company’s off-balance sheet arrangement relates to Broadway Sixty-Eight, Ltd., an Oklahoma limited partnership. The Company does not have actual or effective control of this entity. Management of this entity could at any time make decisions in its own best interest, which could materially affect the Company’s net income or the value of the Company’s investment.
For more information about this entity, see Note 3 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 June 30, 2015.
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 June 30, 2015 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 June 30, 2015, 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 | ||||||||||||
April 1 to April 30, 2015 | 96 | $ | 230 | --- | --- | |||||||||||
May 1 to May 31, 2015 | 3 | $ | 230 | --- | --- | |||||||||||
June 1 to June 30, 2015 | 21 | $ | 230 | --- | --- | |||||||||||
Total | 120 | $ | 230 | --- | --- | |||||||||||
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 stockholders receiving small odd lot share quantities as the result of probate transfers.
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* | Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as amended. | ||
31.2* | Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as amended. | ||
32* | Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350. | ||
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: August 12, 2015 | /s/ Cameron R. McLain | |
Cameron R. McLain, | ||
Principal Executive Officer | ||
Date: August 12, 2015 | /s/ James L. Tyler | |
James L. Tyler | ||
Principal Financial Officer |
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