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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 - 08/14 11:01:49 am
200 USD   -2.44%
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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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08/14/2019 | 10:46am EDT

This discussion and analysis should be read with reference to a similar discussion in the 2018 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 2018 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 half 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 $1,494,017 and cash provided by the maturities of available-for-sale debt securities of $16,249,414 for total cash provided of $17,743,431. The Company utilized cash for the purchase of available-for-sale debt securities of $19,178,476, property additions of $1,258,854, other investment activity of $23,351 and financing activities of $1,174,673 for total cash applied of $21,635,354. Cash and cash equivalents decreased $3,891,923 (73%) to $2,536,576.

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. A discussion of these items follows.

Accounts receivable increased $279,916 (33%) to $1,126,335 as of June 30, 2019 from $846,419 at December 31, 2018 due to increased oil prices and volumes and interest receivable.

Other current assets were $428,410 as of June 30, 2019 from costs incurred for mineral acquisitions in West Virginia.

Income taxes increased $34,416 to a payable of $18,029 as of June 30, 2019 from refundable income taxes of $16,387 at December 31, 2018.

Accounts payable decreased $143,648 (45%) to $174,739 as of June 30, 2019 from $318,387 at December 31, 2018 due to a decrease in the drilling and exploration activity in the quarter ended June 30, 2019 compared to the year ended December 31, 2018.

Other current liabilities increased $35,000 as of June 30, 2019 due to ad valorem tax accruals. 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 $1,494,017 in the six months ended June 30, 2019, a decrease of $245,220 (14%) from the comparable period in 2018 of $1,739,237. The decrease was primarily due to a gain on disposal of property, plant and equipment in 2018, with none in 2019. For more information see "Operating Revenues" and "Other Income" below.




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Cash applied to the purchase of property additions in 2019 was $1,258,854 in the six months ended June 30, 2019, an increase of $420,750 (50%) from cash applied in the comparable period in 2018 of $838,104. In both 2019 and 2018, cash applied to property additions was mostly related to a mineral acquisition project. 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 2018 Form 10-K would not be representative of the Company's current position.

Material Changes in Results of Operations Six Months Ended June 30, 2019, Compared with Six Months Ended June 30, 2018

Net income decreased $598,324 (36%) to $1,054,957 in the six months ended June 30, 2019 from $1,653,281 in the comparable period in 2018. Net income per share, basic and diluted, decreased $3.77 to $6.72 per share in the six months ended June 30, 2019 from $10.49 per share in the comparable period in 2018.

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 $698,262 (17%) to $3,438,209 in 2019 from $4,136,471 in 2018. The $698,262 decrease is due to a decreases in crude oil sales of $552,838, natural gas sales of $112,743 and sales of miscellaneous products of $32,681.

The $552,838 (19%) decrease in oil sales to $2,317,551 in the six months ended June 30, 2019 from $2,870,389 in the comparable period in 2018 was the net result of a decrease in the volume sold and a decrease in the average price per barrel (Bbl). The volume of oil sold decreased 3,820 Bbls to 43,029 Bbls in the six months ended June 30, 2019, resulting in a negative volume variance of $234,049. This volume decrease was the net result of an increase of 4,300 Bbls for production that began after June 30, 2018, offset by a decline of 8,120 Bbls from older properties. The average price per Bbl decreased $7.41 to $53.86 per Bbl in the six months ended June 30, 2019 from $61.27 per Bbl in the comparable period in 2018, resulting in a negative price variance of $318,789.

The $112,743 (10%) decrease in gas sales to $1,018,031 in the six months ended June 30, 2019 from $1,130,774 in the comparable period in 2018 was the result of a decrease in the volume sold and a decrease in the average price per thousand cubic feet (MCF). The volume of gas sold decreased 35,002 MCF to 389,577 MCF in the six months ended June 30, 2019 from 424,579 MCF in the comparable period in 2018, for a negative volume variance of $93,220. The decrease in gas volumes sold was the net result of approximately 94,000 MCF of production declines from older wells, partially offset by production of approximately 59,000 MCF from wells that first produced after June 30, 2018. The average price per MCF decreased $0.05 to $2.61 per MCF in the six months ended June 30, 2019 from $2.66 per MCF in the comparable period in 2018, resulting in a negative price variance of $19,523.

Sales from the Robertson County, Texas royalty interest properties provided approximately 35% of the Company's gas sales volumes for the six months ended June 30, 2019 and 34% of the gas sales volumes for the comparable period in 2018. See discussion on page 11 of the 2018 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 gas sales volumes for the six months ended June 30, 2019 and about 10% of the gas sales volumes for the comparable period in 2018.

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 products were $102,627 in the six months ended June 30, 2019 compared to $135,308 in the comparable period in 2018.

The Company received lease bonuses of $89,097 in the six months ended June 30, 2019 for leases on its owned minerals with $225,795 in the comparable period in 2018. In 2019, most of the bonuses were for leases on owned minerals in Oklahoma.

Operating Costs and Expenses. Operating costs and expenses decreased $545,030 (17%) to $2,636,242 in the six months ended June 30, 2019 from $3,181,272 in the comparable period in 2018. Material line item changes are discussed and analyzed in the following paragraphs.




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Production costs decreased $35,412 (3%) in the six months ended June 30, 2019 to $1,183,847 from $1,219,259 in the comparable period in 2018. This decrease was primarily the result of a decrease of $38,000 in production taxes.

Exploration costs decreased $90,320 (67%) to $44,865 in the six months ended June 30, 2019 from $135,185 in the comparable period in 2018. This is primarily due to a decrease in geological and geophysical expense of $91,971 to $40,549 in the six months ended June 30, 2019 from $132,520 in the comparable period in 2018.

The following is a summary as of July 31, 2019, updating both exploration and development activity from December 31, 2018, for the period ended June 30, 2019.

The Company participated with a 9.5% working interest in the completion of a development well that was drilled in 2018 on a Woods County, Oklahoma prospect. The well is a commercial oil and gas producer. Capitalized costs for the period were $37,762.

The Company is participating with its 14% interest in the acquisition of additional leasehold on a Creek County, Oklahoma 3-D seismic prospect. At least one exploratory well will be drilled on the prospect in 2019. Leasehold costs for the period were $5,598.

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 and its partners have entered into an agreement whereby a third party would drill two strat tests on the prospect, earning the option to drill three additional wells, purchase a 50% interest in the acreage and conduct a thermal recovery pilot test. The strat tests have been drilled and the third party has decided to proceed with the drilling of the additional wells.

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 fourteen prospects have been identified. Two exploratory wells have been drilled on two of the prospects. One well was completed as a commercial oil and gas producer and the other is awaiting completion. An exploratory well will be drilled on a third prospect starting in September 2019. Lease acquisition is in progress on seven additional prospects. Leasehold costs for the period were $50,962. Additional capitalized costs were $193,170.

The Company has been participating with a 50% interest in an attempt to develop oil prospects in the Permian Basin. Lease acquisition is in progress on two prospects, one in Crane County, Texas and the other in Crockett County, Texas. The Company will sell a portion of its interest prior to any drilling. Geological costs for the period were $34,270 and leasehold costs were $9,993.

The Company participated with its 16% working interest in the drilling of an exploratory well on a Barber County, Kansas prospect. The well has been completed as a commercial oil producer. 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 are then sold to a third party for a profit, with the Company retaining an interest in the minerals. Several small tracts have been acquired and sold, and two significant tracts are under contract. Costs for the period, net of sales proceeds, were $230,728.

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 $154,226, including $13,125 of additional leasehold costs.

The Company participated with 17.1% and 17.5% working interests in successful recompletions of two wells on a McClain County, Oklahoma prospect. Capital costs for the period were $15,596.

In June 2019, the Company purchased a 10.5% interest in 100 net acres of leasehold, five producing wells and two salt water disposal wells on a Murray County, Oklahoma prospect for $231,000. A development well has been drilled on the prospect and a completion is in progress. Additional capitalized costs for the period were $53,449.

Other Income, Net. This line item decreased $444,376 (63%) to $263,067 in the six months ended June 30, 2019 from $707,443 in the comparable period in 2018. 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.

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Gains on equity securities in the six months ended June 30, 2019 were $87,902 compared to gains of $14,945 in the comparable period in 2018, an increase of $72,957. In the six months ended June 30, 2019, the Company had realized losses of $(40,924) and unrealized gains of $128,826 from adjusting the securities to estimated fair market value. In the comparable period in 2018, the Company had realized gains of $59,657 and unrealized losses of $(44,712).

Gain on asset sales decreased $598,767 to $2,464 in the six months ended June 30, 2019 compared to $601,231 in the comparable period in 2018. The 2018 amount was mostly from the sale of leasehold rights along with associated wells and gathering system in Major County, Oklahoma.

Other Income decreased $22,058 (90%) to $2,390 in the six months ended June 30, 2019 from $24,448 in the comparable period in 2018 due to the decrease in agricultural and other investment income.

Equity losses increased $65,665 (218%) to a loss of $95,724 from a loss of $30,059 in the comparable period in 2018. The loss was almost entirely due to Grand Woods (see Note 3).

Income Tax Provision/(Benefit). Income tax provision decreased $135,732 to $99,424 in the six months ended June 30, 2019 from $235,156 in the comparable period in 2018. Of the 2019 income tax provision, the estimated current tax expense was $78,694 and the estimated deferred tax expense was $20,730. Of the 2018 income tax provision, the estimated current tax expense was $92,438 and the estimated deferred tax expense was $142,718. 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, 2019, Compared with Three Months Ended June 30, 2018

Net income decreased $660,066 to $722,622 in the three months ended June 30, 2019 from $1,382,688 in the comparable period in 2018. 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 $711,693 (28%) to $1,845,498 in the three months ended June 30, 2019 from $2,557,191 in the comparable period in 2018. This was due to decreases in crude oil sales of $553,983, natural gas sales of $136,582 and sales of miscellaneous products of $21,128.

The $553,983 decrease in crude oil sales was the net result of a decrease in the volume of oil sold of 5,897 Bbls to 24,285 Bbls, for a negative volume variance of $369,193, and a decrease in the average price received of $7.61 per Bbl to $55.00, for a negative price variance of $184,790.

The $136,582 decrease in natural gas sales was the net result of a decrease in the volume of gas sold of 28,456 MCF to 197,445 MCF, for a negative volume variance of $74,258, and a decrease in the average price of $0.32 per MCF to $2.29, for a negative price variance of $62,324.

Other operating revenues were $81,820 in the three months ended June 30, 2019 from lease bonuses with $79,932 in the comparable period in 2018.

Operating Costs and Expenses. Operating costs and expenses decreased $333,379 (19%) to $1,386,615 in the three months ended June 30, 2019 from $1,719,994 in the comparable period in 2018. The decline was mostly due to the Depreciation, Depletion, Amortization and Valuation Provision, which decreased $317,002 (50%) to $316,160 in the three months ended June 30, 2019 from $633,162 in the comparable period in 2018. The decrease was due primarily to a long lived asset impairment of $66,791 in the three months ended June 30, 2019 versus $321,376 in the comparable period in 2018, and decreases in provisions for depletion, depreciation and amortization. See Note 10 - LONG-LIVED ASSETS IMPAIRMENT LOSS on page 31 of the 2018 Form 10-K for a description of the impairment loss calculation.

Other Income, Net. This line item decreased $494,537 (80%) to $122,508 in the three months ended June 30, 2019 from $617,045 in the comparable period in 2018. 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.

Gain on Asset Sales decreased $597,552 to $2,464 in the three months ended June 30, 2019 from the $600,016 in the comparable period in 2018. The 2018 amount was mostly from the sale of leasehold rights along with associated wells and gathering system in Major County, Oklahoma.

Income Tax Provision/(Benefit). Income taxes decreased $210,897 to a tax benefit of $(59,411) in the three months ended June 30, 2019 from a tax provision of $151,486 in the comparable period in 2018. 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, 2019.




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Off-Balance Sheet Arrangements

The Company's off-balance sheet arrangements relate to Broadway Sixty-Eight, LLC, an Oklahoma limited liability company, Grand Woods Development, LLC, an Oklahoma limited liability company, and QSN Office Park, 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 3 to the accompanying financial statements.

© Edgar Online, source Glimpses

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