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MarketScreener Homepage  >  Equities  >  OTC Bulletin Board - Other OTC  >  Spindletop Oil & Gas Co    SPND

SPINDLETOP OIL & GAS CO

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SPINDLETOP OIL & GAS : Management's Discussion And Analysis Of Financial Condition And (form 10-K)

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04/01/2019 | 03:18pm EDT
Results Of Operations




The following discussion should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this report.

This Report on Form 10-K may contain forward-looking statements within the meaning of the federal securities laws, principally, but not only, under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations." We caution investors that any forward-looking statements in this report, or which management may make orally or in writing from time to time, are based on management's beliefs and on assumptions made by, and information currently available to, management. When used, the words "anticipate," "believe," "expect," "intend," "may," "might," "plan," "estimate," "project," "should," "will," "result" and similar expressions which do not relate solely to historical matters are intended to identify forward-looking statements. These statements are subject to risks, uncertainties, and assumptions and are not guarantees of future performance, which may be affected by known and unknown risks, trends, uncertainties, and factors, that are beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, or projected. We caution you that while forward-looking statements reflect our good faith beliefs when we make them, they are not guarantees of future performance and are impacted by actual events when they occur after we make such statements. We expressly disclaim any responsibility to update our forward-looking statements, whether as a result of new information, future events or otherwise. Accordingly, investors should use caution in relying on past forward-looking statements, which are based on results and trends at the time they are made, to anticipate future results or trends.

Some of the risks and uncertainties that may cause our actual results, performance or achievements to differ materially from those expressed or implied by forward-looking statements include, among others, the factors listed and described at Item 1A "Risk Factors" in the Company's Annual Report on Form 10-K discussed above, which investors should review.

Other sections of this report may also include suggested factors that could adversely affect our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risks may emerge from time to time and it is not possible for management to predict all such matters; nor can we assess the impact of all such matters on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. Investors should also refer to our quarterly reports on Form 10-Q for future periods and current reports on Form 8-K as we file them with the SEC, and to other materials we may furnish to the public from time to time through Forms 8-K or otherwise.




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Oil and Gas Properties

The Company follows the full cost method of accounting for its oil and gas properties. Accordingly, all costs associated with acquisition, exploration and development of oil and natural gas reserves are capitalized in cost centers on a country-by-country basis. For each cost center, capitalized costs, less accumulated amortization and related deferred income taxes, shall not exceed an amount (the cost center ceiling) equal to the sum of:

a) The present value of estimated future net revenues computed by applying

    current prices of oil and natural gas reserves (with consideration of price
    changes only to the extent provided by contractual arrangements) to estimated
    future production of proved oil and gas reserves as of the date of the latest
    balance sheet presented, less estimated future expenditures (based on current
    costs) to be incurred in developing and producing the proved reserves computed
    using a discount factor of ten percent and assuming continuation of existing
    economic conditions; plus

b) The cost of properties not being amortized; plus

c) The lower of cost or estimated fair market value of unproven properties

included in the costs being amortized; less

d) Income tax effects related to differences between the book and tax basis of

    the properties.



If unamortized costs capitalized within a cost center, less related deferred income taxes, exceed the cost center ceiling (as defined), the excess is charged to expense and separately disclosed during the period in which the excess occurs. Amounts required to be written off will not be reinstated for any subsequent increase in the cost center ceiling. All of the Company's oil and gas properties are located within the United States and are accounted for in one cost center.

In order to test the cost center ceiling, the Company prepares a "Standardized Measure of Discounted Future Net Cash Flows and Changes Therein Relating to Proved Oil and Natural Gas Reserves (Unaudited)" as of the end of each calendar year ("the Reserve Report"). The Company prepared its annual Reserve Report as of December 31, 2018.

Reserve estimates are prepared in accordance with standard Security and Exchange Commission guidelines. The estimated net future net cash flows for 2018, 2017, and 2016, were computed using a 12-month average price, calculated as the un-weighted arithmetic average of the first-day-of-the month price for each month of the year. Lease operating costs, compression, dehydration, transportation, ad valorem taxes, severance taxes, and federal income taxes were deducted. Costs and prices were held constant and were not escalated over the life of the properties. No deductions were made for interest. The annual discount of estimated future cash flows is defined, for use herein, as future cash flows discounted at 10% per year, over the expected period of realization. For the year ended December 31, 2016, the Company recorded an impairment expense in the carrying value of its proved oil and gas properties of $695,000. This impairment was due primarily to declines in the average realized prices for sales of its crude oil and natural gas.

These Reserve Reports do not purport to present the fair market value of a company's oil and gas properties. An estimate of such value should consider, among other factors, anticipated future prices of oil and natural gas, the probability of recoveries in excess of existing proved reserves, the value of probable reserves and acreage prospects, and perhaps different discount rates.

It should be noted that estimates of reserve quantities, especially from new discoveries, are inherently imprecise and subject to substantial revision. Accordingly, the estimates are expected to change as more current information becomes available. It is reasonably possible that, because of changes in market conditions or the inherent imprecision of these reserve estimates, that the estimates of future cash inflows, future gross revenues, the amount of oil and natural gas reserves, the remaining estimated lives of the oil and natural gas properties, or any combination of the above may be increased or reduced in the near term. If reduced, the carrying amount of capitalized oil and gas properties may be reduced materially in the near term.

During the year ended December 31, 2018, average quarterly natural gas prices per mcf for the Company were $3.03, $2.55, $2.74, and $2.93 respectively. During the year ended December 31, 2017, average quarterly natural gas prices per mcf for the Company were $2.25, $2.79, $2.83, and $2.82 respectively. Average quarterly natural gas prices per mcf for the Company for the year ended December 31, 2016 were $1.34, $1.77, $2.25, and $2.62 respectively.




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During the year ended December 31, 2018, average quarterly crude oil prices per bbl for the Company were $51.95, $65.00, $57.61, and $52.48 respectively. During the year ended December 31, 2017, average quarterly crude oil prices per bbl for the Company were $46.24, $44.42, $44.06, and $49.72 respectively. Average quarterly crude oil prices per bbl for the Company for the year ended December 31, 2016 were $30.62, $38.02, $39.80, and $41.95 respectively.

The increases or decreases in the Company's product prices have a direct effect on its cash flow, profits, projected development and drilling schedules, and the estimated net present value of its proved reserves. Prolonged, substantial decreases in oil and natural gas prices would likely have a material adverse effect on the Company's business, financial condition, and results of operations, and could further limit the Company's access to liquidity and credit, and could hinder its ability to satisfy its capital requirements.

We may incur further impairments to our crude oil and natural gas properties in 2019 if prices do not increase. The possibility and amount of any future impairment is difficult to predict, and will depend, in part, upon future crude oil and natural gas prices to be utilized in the ceiling test, estimates of proved reserves and future capital expenditures and operating costs. We cannot assure you that we will not experience write-downs in the future. If commodity prices decline or if any of our proved reserves are revised downward, a write-down of the carrying value of our oil and gas properties may be required.

Liquidity and Capital Resources

The Company's operating capital needs, as well as its capital spending program, are generally funded from cash flow generated by operations. Because future cash flow is subject to a number of variables, such as the level of production and the sales price of oil and natural gas, the Company can provide no assurance that its operations will provide cash sufficient to maintain current levels of capital spending. Substantial decreases in crude oil and natural gas prices would likely have a material adverse effect on the Company's business, financial condition, and results of operations, and could further limit the Company's access to liquidity and credit, and could hinder its ability to satisfy its capital requirements. Accordingly, the Company may be required to seek additional financing from third parties in order to fund its exploration and development programs.

As noted in our Results of Operations discussion below, the Company has focused on lowering costs through headcount reduction by attrition and spending only on essential general and administrative expenditures. In order to raise additional revenue, the Company is pursuing the acquisition of new operated and non-operated reserves through acquisitions of producing properties and drilling ventures. The Company believes that it is well positioned to take advantage of the declining prices for existing wells with its cash reserves and ability to borrow in order to effect any acquisition.







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Results of Operations



                             2018 Compared to 2017


Oil and natural gas revenues for the year ended December 31, 2018 were $5,848,000 compared to $4,495,000 for the year ended December 31, 2017, an increase of $1,353,000 or 30.1%.

Oil revenue for 2018 was approximately $3,350,000 compared to $2,717,000 for 2017, an increase of approximately $633,000 or 23.3%. Average oil prices increased to an average of $62.09 per barrel in 2018 from an average of $47.70 per barrel in 2017, an increase of $14.39 per barrel or 30.2%. Oil sales decreased to 43,136 barrels from approximately 51,082 barrels in 2017, a decrease of 7,946 barrels or 15.6%.

Natural gas revenue for 2018 was approximately $2,498,000 compared to $1,778,000 for 2017, an increase of approximately $720,000 or 40.5%. Natural gas sales increased to approximately 875,000 mcf in 2018 from approximately 620,000 mcf in 2017, an increase of approximately 255,000 mcf or 41.1%. Natural gas prices decreased to an average of $2.86 per mcf in 2018, a decrease of $0.01 or 0.3% from an average of $2.87 per mcf in 2017.

The increase in oil revenue is predominantly due to an increase in crude oil prices during 2018 compared to 2017. In addition, the increase in natural gas revenue is primarily due to natural gas production increases related to producing wells acquired during the fourth quarter of 2017.

Revenue from lease operations was approximately $258,000 for 2018, compared to approximately $394,000 in 2017, a decrease of approximately $136,000 or 34.5%. Revenue from lease operations results from field supervision charges on operated wells as well as administrative overhead billed to working interest owners.

Revenues from gas gathering, compression, and equipment rental for 2018 were approximately $136,000, an increase of $10,000 or 7.9% from approximately $126,000 in 2017. The increase was due primarily to an increase in natural gas volume sold through PPC.

Real estate rental revenue for 2018 was approximately $232,000, a decrease of $42,000 or 15.3% from approximately $274,000 in 2017. The decrease was due to an increase in vacancies at the Company's corporate office building.

Interest income for 2018 was approximately $181,000, an increase of $14,000 from approximately $167,000 in 2017 or 8.4%. The increase in interest income was due to the Company investing its funds in both long-term and short-term certificates of deposit and depository accounts paying higher rates of interest than those received in prior years.

Other revenue for 2018 was $79,000, as compared to $148,000 in 2017, a decrease of $69,000 or 46.6%. The reduction in 2018 is due in part to the recognition of fees earned under a marketing agreement during 2017.

Lease operating expenses 2018 were $1,656,000 as compared to $1,542,000 in 2017, a net increase of approximately $114,000, or 7.4%. There were both increases and decreases within different segment categories of lease operating expenses. Amounts billed by third-party operators as operating expenses on non-operated properties decreased by approximately $50,000. There was an approximate $114,000 increase in expenses due to several wells that were acquired during late 2017. Workover expenses decreased approximately $73,000 between years. There was an increase of approximately $151,000 in 2018 over the prior year which included recovery through insurance proceeds. The remaining $28,000 represents net increases and decreases on various properties due to general price fluctuations and levels of operation activity.









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Production taxes, gathering, and marketing expenses for 2018 were approximately $835,000 compared to $515,000 in 2017, an increase of approximately $320,000, or 62.1%. This increase was directly related to the increase in oil and natural gas production and revenues, which have been partially offset by a decrease in overall gathering and marketing expenses for non-operated leases.

Pipeline and rental expenses for 2018 were $49,000 compared to $40,000 for 2017, an increase of $9,000, or 22.5%.

Real estate expenses in 2018 were approximately $196,000 compared to $183,000 during the same period in 2017, an increase of approximately $13,000 or 7.1%.

Depreciation and amortization expense for 2018 was $499,000 compared to $522,000 for 2017, a decrease of $23,000 or 4.4%. Amortization of the full cost pool of oil and natural gas assets for 2018 was $439,000 compared to $457,000 for the year ended 2017, a decrease of $18,000 or 3.9%. The Company re-evaluated its proved oil and gas reserves as of December 31, 2018, and decreased its estimated total proved reserves by approximately 102,000 BOE to 1,403,000 BOE at the end of 2018 compared to 1,505,000 BOE at the end of 2017, a decrease of approximately 6.8%. Sales of oil and natural gas products during 2018 increased by 35,000 BOE from approximately 154,000 BOE in 2017 to approximately 189,000 BOE in 2018, an increase of approximately 22.7 %. (See Footnote 17 to the Financial Statements). This resulted in an increase in the depletion rate factor from 9.305% in 2017 on an unamortized full cost pool base of $4,922,000 to a depletion rate factor of 11.868% on an unamortized full cost pool base of $3,700,000 in 2018. The net decrease in the unamortized full cost pool base of $1,222,000 was due to accumulated depletion of $457,000 from 2017. In addition, $965,000 of proceed from sales of properties was credited to the full cost pool in accordance with GAAP. Proceeds from the sales of properties were used to acquire new properties whose purchase prices totaling $21,000 was added to the full cost pool. Other capitalized additions during 2018 of $179,000 were also added.

Asset Retirement Obligation ("ARO") accretion expense for 2018 was $189,000 up from $12,000 in 2017, an increase of $177,000 or 1475.0%. The ARO calculation is based on the Company's annual reserve report and takes into consideration the changes between years of the Company's estimated obligation to plug its interest in existing wells. This estimated future cost is discounted using a 10% discount factor based on the estimated life of each property. Changes are incorporated as applicable into the full cost pool and the carrying value of the liability. Accretion expense measures and incorporates changes due to the passage of time into the carrying amount of the liability.

General and administrative expenses for 2018 were approximately $2,943,000 as compared to approximately $2,560,000 for 2017, an increase of approximately $383,000 or 15.0%. The increase was primarily due to increased salary, wages and employee benefits as new employees were added in late 2017 and during 2018. The Company also saw a significant increase in health insurance costs in 2018.





                             2017 Compared to 2016


Oil and natural gas revenues for the year ended December 31, 2017 were $4,495,000 compared to $3,320,000 for the year ended December 31, 2016, an increase of $1,175,000 or 35.4%.

Oil revenue for 2017 was approximately $2,717,000 compared to $2,106,000 for 2016, an increase of approximately $611,000 or 29.0%. Average oil prices increased to an average of $47.70 per barrel in 2017 from an average of $37.49 per barrel in 2016, an increase of $10.21 per barrel or 27.2%. Oil sales increased to 51,082 barrels from approximately 50,248 barrels in 2016, an increase of 834 barrels or 1.7%.

Natural gas revenue for 2017 was approximately $1,778,000 compared to $1,214,000 for 2016, an increase of approximately $564,000 or 46.5%. Natural gas sales increased to approximately 620,000 mcf in 2017 from approximately 582,000 mcf in 2016, an increase of approximately 38,000 mcf or 6.5%. Natural gas prices increased to an average of $2.87 per mcf in 2017, an increase of $0.79 or 38.0% from an average of $2.08 per mcf in 2016.

The increase in oil and gas revenue is predominantly due to an increase in crude oil and natural gas prices during 2017 compared to 2016. In addition, production increases were aided by production from producing wells acquired during the fourth quarter of 2017.




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Revenue from lease operations was approximately $394,000 for 2017, compared to approximately $415,000 in 2016, a decrease of approximately $21,000 or 5.1%. Revenue from lease operations results from field supervision charges on operated wells as well as administrative overhead billed to working interest owners.

Revenues from gas gathering, compression, and equipment rental for 2017 were approximately $126,000, an increase of $12,000 or 10.5% from approximately $114,000 in 2016. This was due primarily to an increase in natural gas volume sold through PPC.

Real estate rental revenue for 2017 was approximately $274,000, a decrease of $40,000 or 12.7% from approximately $314,000 in 2016. The decrease was due to an increase in vacancies at the Company's corporate office building.

Interest income for 2017 was approximately $167,000, an increase of $84,000 from approximately $83,000 in 2016 or 101.2%. The increase in interest income was due to the Company investing its funds in both long-term and short-term certificates of deposit and depository accounts paying higher rates of interest than those received in prior years.

Other revenue for 2017 was $148,000, as compared to $269,000 in 2016, a decrease of $121,000 or 45.0%. The reduction in 2017 is due in part to the timing of a negotiated settlement in 2016 as well as recognition of fees earned under a drilling venture during 2016.

Lease operating expenses 2017 were $1,542,000 as compared to $1,499,000 in 2016, a net increase of approximately $43,000, or 2.9%. There were both increases and decreases within different segment categories of lease operating expenses. Amounts billed by third-party operators as operating expenses on non-operated properties decreased by approximately $51,000. There was an approximate $25,000 decrease in expenses due to several wells that were either divested or plugged during 2016. Workover expenses increased approximately $124,000 between years. Workover activity in 2016 was reduced due to reduced drilling and workover activity as the result of lower oil and natural gas price economics in 2016. There was a decrease of approximately $26,000 related to an environmental remediation expense associated with a nonrecurring weather event in 2016 of approximately $140,000 for which the expense was offset in 2017 with a $114,000 recovery through insurance proceeds. The remaining $65,000 represents net increases and decreases on various properties due to general price fluctuations and levels of operation activity.

Production taxes, gathering, and marketing expenses for 2017 were approximately $515,000 compared to $422,000 in 2016, an increase of approximately $93,000, or 22.0%. This increase was directly related to the increase in oil and natural gas production and revenues, which have been partially offset by a decrease in overall gathering and marketing expenses for non-operated leases.

Pipeline and rental expenses for 2017 were $40,000 compared to $46,000 for 2016, a decrease of $6,000, or 13.0%.

Real estate expenses in 2017 were approximately $183,000 compared to $175,000 during the same period in 2016, an increase of approximately $8,000 or 4.6%.

Depreciation and amortization expense for 2017 was $522,000 compared to $1,104,000 for 2016, a decrease of $582,000 or 52.7%. Amortization of the full cost pool of oil and natural gas assets for 2017 was $457,000 compared to $1,038,000 for the year ended 2016, a decrease of $581,000 or 56.0%.

The Company re-evaluated its proved oil and gas reserves as of December 31, 2017, and increased its estimated total proved reserves by approximately 551,000 BOE to 1,505,000 BOE at the end of 2017 compared to 954,000 BOE at the end of 2016, an increase of approximately 57.8%. Sales of oil and natural gas products during 2017 increased by 7,000 BOE from approximately 147,000 BOE in 2016 to approximately 154,000 BOE in 2017, an increase of approximately 4.8 %. (See Footnote 17 to the Financial Statements). This resulted in a decrease in the depletion rate factor from 13.378% in 2016 on an unamortized full cost pool base of $7,756,000 to a depletion rate factor of 9.305% on an unamortized full cost pool base of $4,922,000 in 2017. The net decrease in the unamortized full cost pool base of $2,834,000 was due to accumulated depletion of $1,038,000 from 2016. There was an additional impairment of the full cost pool for 2016 of $695,000 (See paragraph below). In addition, $4,732,000 of proceed from sales of properties was credited to the full cost pool in accordance with GAAP. Proceeds from the sales of properties were used to acquire new properties whose purchase prices totaling $3,228,000 was added to the full cost pool. Other capitalized additions during 2017 of $403,000 were also added.




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The Company recorded an impairment expense in the carrying value of its proved oil and gas properties of $5,116,000 in 2015 and $695,000 in 2016 due primarily to declines in the average realized prices for sales of its crude oil and natural gas on the first calendar day of each month during the trailing 12-month period prior to December 31, 2015 and 2016 respectively. The net present value of the Company's proved oil and natural gas reserves, discounted at 10% at December 31, 2016, was approximately $6,023,000 compared to $7,006,000 at December 31, 2015 and $22,218,000 at December 31, 2014. (See Footnote 17 to the Financial Statements).

A ceiling test at December 31, 2016, determined that the unamortized cost of the full cost pool of $7,756,000 less the current year amortization of $1,038,000 equaled $6,718,000, which is $695,000 above the net present value of the Company's proved oil and gas reserves. The impairment provision was credited to accumulated depreciation and amortization on the balance sheet. No impairment of oil and gas properties charge was recorded for 2017.

Asset Retirement Obligation ("ARO") accretion expense for 2017 was $12,000 down from $36,000 in 2016, a decrease of $24,000 or 66.7%. The ARO calculation is based on the Company's annual reserve report and takes into consideration the changes between years of the Company's estimated obligation to plug its interest in existing wells. This estimated future cost is discounted using a 10% discount factor based on the estimated life of each property. Changes are incorporated as applicable into the full cost pool and the carrying value of the liability. Accretion expense measures and incorporates changes due to the passage of time into the carrying amount of the liability.

General and administrative expenses for 2017 were approximately $2,560,000 as compared to approximately $2,512,000 for 2016, an increase of approximately $48,000 or 1.9%. The decreases for 2017 and 2016 as compared to 2015 were primarily due to decreases in salary, wages and related employee benefits. In view of the large decreases in oil and gas prices and reduction of revenues during 2016, the Company has made a concentrated effort to reduce its general and administrative costs. Personnel costs have been reduced primarily through an approximate 8.0% reduction in headcount through attrition. As employees left the Company, they were not replaced and responsibilities have been spread among the remaining staff. This decrease has been partially offset by cost of living wage adjustments and higher health insurance premiums.

© Edgar Online, source Glimpses

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