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MarketScreener Homepage  >  Equities  >  OTC Bulletin Board - Other OTC  >  Reserve Petroleum Co    RSRV

RESERVE PETROLEUM CO

(RSRV)
Delayed Quote. Delayed OTC Bulletin Board - Other OTC - 09/16 03:10:22 pm
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RESERVE PETROLEUM : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

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11/14/2018 | 02:46pm EDT

This discussion and analysis should be read with reference to a similar discussion in the 2017 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 2017 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


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 nine months of 2018, 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 $3,461,875 and cash provided by the maturities of available-for-sale debt securities of $16,371,544. Additional cash of $593,423 was provided by property dispositions and tax refunds for total cash provided of $20,426,842. The Company utilized cash for the purchase of available-for-sale debt securities of $18,888,614; property additions of $1,744,338; other investments activity of $53,086; and financing activities of $869,453 for total cash applied of $21,555,491. Cash and cash equivalents decreased $1,128,649 (24%) to $3,639,161.

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, 2017. A discussion of these items follows.

Available-for-sale debt securities increased $2,517,070 (15%) to $18,888,614 from $16,371,544. The increase was due to purchasing additional available-for-sale debt securities because of rising short-term interest rates.

Refundable income taxes decreased $178,101 (54%) to $148,729 from $326,830. This decrease was due to higher revenues and lease bonuses for the nine months ended September 30, 2018.

Receivables increased $220,145 (22%) to $1,224,969 from $1,004,824. This increase was due to higher oil and gas sales receivables and an additional note receivable from an equity method investment. See Note 3 to the accompanying financial statements for more information about the note receivable.

Accounts payable decreased $72,071 (31%) to $162,936 from $235,007. This decrease was primarily due to a decrease in intangible drilling costs at September 30, 2018 versus December 31, 2017.

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 $3,461,875 in 2018, an increase of $808,568 (30%) from the comparable period in 2017. The increase was primarily due to increased operating revenues and other income for 2018 compared to 2017. For more information see "Operating Revenues" and "Operating Costs and Expenses" below.

Cash applied to the purchase of property, plant and equipment in 2018 was $1,744,338, a decrease of $98,436 (5%) from cash applied in 2017 of $1,842,774. In both 2018 and 2017, cash applied to property, plant and equipment 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 paid for investments in 2018 was $53,086, an increase of $49,753 from cash paid in 2017 of $3,333. In 2018, the Company increased its investment in QSN Office Park by $8,711 and increased its investment in Cloudburst Solutions by an additional $44,375. The $3,333 for 2017 was an additional investment in Ocean's NG.




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Conclusion. The volatile oil and natural gas commodity prices continue to present many problems and hardships in the oil and gas exploration and production industry. However, during the first nine months of 2018, the Company has continued to generate positive operating cash flows at levels adequate to cover our operating and financing cash needs. Current cash reserves were used for some investment opportunities during this same period. Management is unable to quantify the effect that a continuation of the current volatile commodity prices will have on the Company. Operating results could be negatively impacted by the non-cash long-lived asset impairment write-downs required by the changes in commodity prices. However, management believes that with our current cash reserves the Company will not suffer any material adverse effects to its financial condition for the foreseeable future. Management is unaware of any additional material trends, demands, commitments, events or uncertainties that would impact liquidity and capital resources to the extent that the discussion presented in the 2017 Form 10-K would not be representative of the Company's current position.

Material Changes in Results of Operations Nine Months Ended September 30, 2018, Compared with Nine Months Ended September 30, 2017

Net income increased $1,788,942 (234%) to $2,554,533 in 2018 from $765,591 in 2017. Net income per share, basic and diluted, increased $11.37 to $16.22 in 2018 from $4.85 in 2017.

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 increased $1,388,564 (30%) to $6,005,277 in 2018 from $4,616,713 in 2017. The $1,388,564 increase is due to an increase in crude oil sales of $1,445,794 and an increase in miscellaneous oil and gas product sales of $48,000, offset by a decrease in natural gas sales of $105,230.

The $1,445,794 (55%) increase in oil sales to $4,096,310 in 2018 from $2,650,516 in 2017 was the net result of an increase in the average price per barrel (Bbl) and an increase in the volume sold. The average price per Bbl increased $17.72 to $62.73 per Bbl in 2018, resulting in a positive price variance of $1,157,145. The volume of oil sold increased 6,413 Bbls to 65,299 Bbls in 2018, resulting in a positive volume variance of $288,649. The net increase in oil volumes sold was mostly due to production of 15,500 Bbls from new wells in Oklahoma and Texas, partially offset by production declines from older wells.

The $105,230 (6%) decrease in gas sales to $1,711,191 in 2018 from $1,816,421 in 2017 was the net result of an increase in the average price per thousand cubic feet (MCF) and a decrease in the volume sold. The average price per MCF increased $0.05 to $2.72 per MCF in 2018, resulting in a positive price variance of $27,060. The volume of gas sold decreased 49,546 MCF to 629,782 MCF in 2018, resulting in a negative volume variance of $132,290. The net decrease in gas volumes sold was mostly due to production declines from older wells, partially offset by production of 10,900 MCF from several new working and royalty interest wells.

Sales from the Robertson County, Texas royalty interest properties provided approximately 33% of the Company's first nine months gas sales volumes for 2018 and 22% of the first nine months gas sales volumes for 2017. See discussion on page 11 of the 2017 Form 10-K, under the subheading "Operating Revenues," for more information about these properties. Sales from Arkansas working interest properties provided approximately 12% of the Company's first nine months of 2018 gas sales volumes and about 14% of the first nine months of 2017 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 $197,775 in 2018 as compared to $149,776 in 2017.

The Company received lease bonuses of $523,445 in the first nine months of 2018 for leases on its owned minerals compared to $171,229 in the first nine months of 2017. In 2018, 91% of lease bonuses were for leases on owned minerals in Texas compared to 100% in 2017.

Operating Costs and Expenses. Operating costs and expenses decreased $156,555 (3%) to $4,438,570 in 2018 from $4,595,125 in 2017. Material line item changes are discussed and analyzed in the following paragraphs.

Production costs increased $178,517 (11%) in 2018 to $1,783,107 from $1,604,590 in 2017. This increase was primarily the result of an increase of $114,276 in lease operating expenses and an increase in production taxes of $87,900, partially offset by a decrease of $24,398 in handling expenses.

Exploration costs decreased $356,728 (66%) to $180,388 in 2018 from $537,116 in 2017. The decrease is due to a decrease in dry hole costs and a decrease in delay rental expense, offset by an increase in geological and geophysical expenses. Geological and geophysical expenses totaled $162,514 in 2018 as compared to $25,817 in 2017. Dry hole costs decreased $452,973 to $48,203 in 2018 from $501,176 in 2017. Delay rental expenses were $1,094 in 2018 compared to $10,123 for 2017.




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The following is a summary as of November 1, 2018, updating both exploration and development activity from December 31, 2017, for the period ended September 30, 2018.



  The Company participated with 12% and 8% working interests in the drilling of
  two development wells on a Woods County, Oklahoma prospect. Completions are in
  progress on both wells. Capitalized costs for the period were $134,000.




  The Company participated with a 12.1% working interest in the drilling of a
  development well on a Woods County, Oklahoma prospect. A completion is in
  progress. Capitalized costs for the period were $34,139.




  The Company participated with its 18% working interest in the drilling of a
  development well on a Barber County, Kansas prospect. A completion is in
  progress. Capitalized costs for the period were $36,777.




  The Company participated with its 8.4% working interest in the drilling of an
  exploratory well on a Thomas County, Kansas prospect. The well was completed as
  a dry hole. No additional drilling is planned on the prospect. Dry hole costs
  for the period were $15,107 and an impairment expense of $19,258 was taken
  against the leasehold.




  The Company participated with its 10.5% working interest in the drilling of an
  exploratory well on a Thomas County, Kansas prospect. The well was completed as
  a dry hole. No additional drilling is planned on the prospect. Dry hole costs
  for the period were $19,949 and an impairment expense of $684 was taken against
  the leasehold.




  The Company participated with its 18% working interest in the drilling of two
  step-out wells (one a re-entry) on a Kiowa County, Kansas prospect. Both wells
  were completed as commercial oil and gas producers. Actual costs of $121,835
  for the period were offset by prepaid costs from 2017 for a net capitalized
  amount of $0.




  The Company participated with its 14% working interest in the drilling of two
  injection wells on a Hansford County, Texas waterflood unit. One well has been
  completed and is injecting water and the other missed the reservoir and was
  plugged. There are three other injection wells and two producing wells in the
  unit. Actual costs of $214,638 for the period were offset by $103,936 of
  prepaid costs from 2017 for a net capitalized amount of $110,702.




  The Company is participating with its 14% interest in the reworking of
  previously acquired 3-D seismic and in the acquisition of additional leasehold
  on a Creek County, Oklahoma prospect. Capitalized costs for the period were
  $17,124 and seismic costs were $3,357.




  The Company owns a 35% interest in 16,472.55 net acres of leasehold on a
  Crockett and Val Verde Counties, Texas prospect. The Company is participating
  in the development of the prospect and is currently engaged in efforts to
  acquire an additional 480 net acres of leasehold and to sell a portion of its
  interest. Leasehold costs for the period were $7,902 and geological costs were
  $1,916.




  The Company owns a 12.25% interest in 4,882.5 net acres of leasehold on a
  Crockett County, Texas prospect. An exploratory well was drilled on the
  prospect in 2017. A completion attempt of the well was unsuccessful and it will
  be plugged. A dry hole expense of $31,788 was taken against the well.




  The Company is participating with a 13% interest in a 3-D seismic prospect
  covering approximately 35,000 acres in San Patricio County, Texas. A 3-D
  seismic survey of the prospect area has been completed and analysis of the data
  is ongoing. Nine prospects have already been identified and lease acquisition
  is in progress on five. An exploratory well will be drilled starting in
  November 2018. Capitalized costs for the period were $23,382 and seismic costs
  were $107,752.




  The Company participated with its 10.5% working interest in the completion of
  an exploratory well that was drilled in 2017 on a Lea County, New Mexico
  prospect. The well is a marginal oil producer. Capitalized costs for the period
  were $65,421 and an impairment expense of $265,818 was taken against the well.




  The Company participated with its 7% working interest in the drilling of an
  exploratory well on a Summit County, Utah prospect. The well has been completed
  as a commercial gas and gas condensate producer and is awaiting pipeline
  connection. Capitalized costs for the period were $974,258.




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  The Company is participating with its 11.2% working interest in workovers on a
  group of wells that were purchased in 2017 on a Tyler County, Texas prospect.
  The workovers performed so far have been successful in significantly increasing
  production. Capitalized costs for the period were negligible as most of the
  work was charged to expense.




  The Company participated with its 8.33% working interest in the drilling of a
  horizontal well in a Harding County, South Dakota producing unit. The well has
  been completed and is being tested. The unit is being developed for
  waterflooding. Capitalized costs for the period were $152,878.




  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 Crane County, Texas. The Company will sell a portion of its
  interest prior to any drilling. Geological costs were $48,961 for the period
  and leasehold costs were $10,953.




  In October 2018, the Company purchased a 16% interest in 784.12 net acres of
  leasehold on a Barber County, Kansas prospect for $12,546. An exploratory well
  will be drilled on the prospect starting in January 2019.



Depreciation, Depletion, Amortization and Valuation Provision (DD&A). DD&A decreased $18,305 (1%) to $1,276,288 in 2018 from $1,294,593 in 2017. Depreciation, Depletion and Amortization amounts decreased $250,000, offset by an increase in impairment loss of approximately $232,000. See Note 10 - LONG-LIVED ASSETS IMPAIRMENT LOSS on page 30 of the 2017 Form 10-K for a description of the impairment loss calculation.

Other Income, Net. This line item increased $126,372 (19%) to $777,235 in 2018 from $650,863 in 2017. See Note 2 to the accompanying financial statements for an analysis of the components of this item.

Equity securities losses were $(4,598) in 2018 compared to gains of $90,860 in 2017. In 2018, the Company had unrealized losses of $80,001 from adjusting securities, held at September 30, to estimated fair market value and net realized trading gains of $75,403. In 2017, the Company had unrealized gains of $76,703 and net realized trading gains of $14,157.

Gain on the sale of assets increased $543,054 (933%) to $601,231 in 2018 from $58,177 in 2017. This was mostly due to the sale of leasehold rights in Major County, Oklahoma.

Interest income increased $144,983 (172%) to $229,441 in 2018 from $84,458 in 2017. The increase was due to increased interest rates on available-for-sale debt securities and other interest-bearing accounts.

Other income decreased $430,472 (95%) to $24,882 in 2018 from $455,354 in 2017 mostly due to a decrease in other investment income to $16,500 in 2018 from $445,000 in 2017.

Income Tax Provision. Income taxes increased $222,515 to $313,657 in 2018 from $91,142 in 2017. The income tax increase was the result of a $2,011,457 increase in the pre-tax income to $2,868,190 in 2018 from an $856,733 pre-tax income in 2017. Of the 2018 income tax provision, the estimated current tax provision was $163,107 and the estimated deferred tax provision was $150,550. Of the 2017 income tax provision, the estimated current tax provision was $109,577 and the estimated deferred tax benefit was $(18,435). See Note 4 to the accompanying financial statements for additional information on income taxes.




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Material Changes in Results of Operations Three Months Ended September 30, 2018, Compared with Three Months Ended September 30, 2017

Net income increased $597,775 (197%) to $901,253 in 2018 from $303,478 in 2017. The significant changes in the statements of income are discussed below.

Operating Revenues. Revenues from oil and gas sales increased $464,086 (33%) to $1,868,807 in 2018 from $1,404,721 in 2017 due to increases in gas, oil and other product sales of $26,231, $423,103 and $14,752, respectively.

The increase in gas sales was the result of an increase in the average price of $0.65 per MCF to $2.83, for a positive price variance of $132,475, and a decrease in the volume of gas sold of 48,736 MCF to 205,202 MCF, for a negative volume variance of $106,244. See the "Results of Operations" section above for the nine months ended September 30, 2018 for additional discussion of gas sales variances.

The increase in oil sales was the net result of an increase in the average price received of $22.55 per Bbl to $66.44, for a positive price variance of $416,124, and an increase in the volume of oil sold of 160 Bbls to 18,451 Bbls, for a positive volume variance of $6,979. See the "Results of Operations" section above for the nine months ended September 30, 2018 for additional discussion of the oil sales variances.

Other operating revenues increased $114,171 (62%) to $298,453 for 2018 due to an increase in lease bonuses.

Operating Costs and Expenses. Operating costs and expenses decreased $13,491 (1%) to $1,257,299 in 2018 from $1,270,790 in 2017. The decrease was the net result of an increase in production costs of $20,059; an increase in exploration costs charged to expense of $30,234; a decrease in depreciation, depletion, amortization and valuation provisions (DD&A) of $45,676; and a decrease in general administrative and other expense (G&A) of $18,108. The significant changes in these line items are discussed below.

Exploration costs increased $30,234 (202%) to $45,203 in 2018 from $14,969 in 2017. Most of the increase is due to a $32,224 increase in geological and geophysical costs for 2018 compared to 2017.

Depreciation, Depletion, Amortization and Valuation Provision decreased $45,676 (13%) to $316,795 in 2018 from $362,471 in 2017. The decrease is due to lower gas sales volumes (see "Operating Revenues" above) and a lower depreciable asset base. The lower depreciable asset base is a result of the long-lived asset impairment losses for fiscal 2017 and the six months ended June 30, 2018. There were no impairment losses for the third quarter of 2018 or 2017. See Note 10 - LONG-LIVED ASSETS IMPAIRMENT LOSS on page 30 of the 2017 Form 10-K for a description of the impairment loss calculation.

Other Income, Net. See Note 2 to the accompanying financial statements for an analysis of the components of other income, net. In 2018, this line item increased $16,454 (31%) to $69,793 from $53,339 in 2017.

Equity securities decreased $45,527 in 2018 to losses of $(19,542) compared to gains of $25,985 in 2017. The decrease was due to a decline in realized gains of $33,023 and an increase in unrealized losses of $12,504.

Interest income increased $67,260 (162%) to $108,708 in 2018 from $41,448 in 2017. The increase was due to increased interest rates on available-for-sale debt securities and other interest-bearing accounts.

Income Tax Provision. Income taxes increased $10,427 (15%) to $78,501 in 2018 from $68,074 in 2017. The increase was due to the increase in income before income taxes of $608,202 to $979,754 in 2018 from $371,552 in 2017. Of the 2018 income tax provision, the estimated current tax provision was $70,669 and the estimated deferred tax provision was $7,832. Of the 2017 income tax provision, the estimated current tax provision was $31,308 and the estimated deferred tax provision was $36,766. See discussions above in "Results of Operations" section and Note 4 to the accompanying financial statements for additional explanation of the changes in the provision for income taxes.

Off-Balance Sheet Arrangements

The Company's off-balance sheet arrangements relate to Broadway Sixty-Eight, Ltd., an Oklahoma limited partnership, and Grand Woods Development, 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. See Note 3 to the accompanying financial statements for more information about these entities.




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