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
an extremely 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.
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 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, 2022.
Reserve estimates are prepared in accordance with standard Security and Exchange
Commission guidelines. The estimated net future net cash flows for 2022, 2021,
and 2020, 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.
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, 2022, average quarterly crude oil prices per
bbl for the Company were $71.34, $83.94, $94.15, and $80.80. During the year
ended December 31, 2021, average quarterly crude oil prices per bbl for the
Company were $49.34, $59.53, $53.55, and $56.87. During the year ended December
31, 2020, average quarterly crude oil prices per bbl for the Company were
$45.26, $23.46, $36.48, and $44.94. respectively.
During the year ended December 31, 2022, average quarterly natural gas prices
per bbl for the Company were $5.67, $6.25, $7.81, and $5.92. During the year
ended December 31, 2021, average quarterly natural gas prices per mcf for the
Company were $3.07, $2.93, $4.15, and $4.23. During the year ended December 31,
2020, average quarterly natural gas prices per mcf for the Company were $1.26,
$1.06, $1.88, and $2.20 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 impairments to our crude oil and natural gas properties in future
years. 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 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. 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 to effect
any acquisition.
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Results of Operations
2022 Compared to 2021
Oil and natural gas revenues for the year ended December 31, 2022, were
$7,775,000 compared to $5,466,000 for the year ended December 31, 2021, an
increase of $2,309,000 or 42.2%.
Oil revenue for 2022 was approximately $3,583,000 compared to $2,177,000 for
2021, an increase of approximately $1,406,000 or 64.58%. Oil prices increased to
an average of $92.49 per barrel in 2022 from an average of $56.87 per barrel in
2021, an increase of $35.62 per barrel or 62.6%. Oil sales increased to
approximately 35,700 barrels from approximately 33,600 barrels in 2021, an
increase of 2,100 barrels or 6.3%.
Natural gas revenue for 2022 was approximately $4,192,000 compared to $3,289,000
for 2021, an increase of approximately $903,000 or 27.49%. Natural gas sales
were approximately 653,000 mcf in 2022 from approximately 778,500 mcf in 2021, a
decrease of approximately 125,500 mcf or 16.1%. Natural gas prices increased to
an average of $6.42 per mcf in 2022 an increase of $2.19 or 51.8% from an
average of $4.23 per mcf in 2021.
In general, revenues from oil and natural gas producing operations experienced a
significant increase for the year ended December 31, 2022, as compared to the
same period in 2021. These increases resulted in part from increased oil and
natural gas prices, as well as oil production increases.
Revenue from lease operations was approximately $183,000 for 2022, compared to
approximately $219,000 in 2021, a decrease of approximately $36,000 or 16.4%.
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 2022 were
approximately $89,000, a decrease of approximately $10,000 or 10.1% from
approximately $99,000 in 2021.
Real estate rental revenue for 2022 was approximately $245,000, an increase of
approximately $5,000 or 2.1% from approximately $240,000 in 2021.
Interest income for 2022 was approximately $142,000, a decrease of approximately
$7,000 from approximately $149,000 in 2021 or 4.7%. Interest income is derived
from investments in both short-term and long-term certificates of deposit as
well as money market accounts at banks.
Debt forgiveness income. On March 18, 2021, the Company received funding of a
loan pursuant to the Paycheck Protection Program ("PPP") under the Coronavirus
Aid, Relief and Economic Security Act, enacted March 27, 2020, in the amount of
$403,572. In December 2021, the Company received notification that the Small
Business Administration authorized full forgiveness of the PPP loan. The amount
of the loan which was fully forgiven is recorded as debt forgiveness income.
Other revenue for 2022 was $62,000, as compared to $44,000 in 2021, an increase
of $18,000 or 40.9%.
Lease operating expenses 2022 were $2,120,000 as compared to $1,207,000 in 2021,
a net increase of approximately $913,000, or 75.6%. 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 represented approximately 25% of the total 2022 amount with the
remaining representing net increases and decreases on various operated
properties due to general service cost fluctuations and levels of operational
activity.
Production taxes, gathering, and marketing expenses for 2022 were approximately
$867,000 compared to $896,000 in 2021, a decrease of approximately $29,000, or
3.2%.
Pipeline and rental expenses for 2022 were approximately $21,000 compared to
approximately $17,000 for 2021, an increase of approximately $4,000, or 23.5%.
Real estate expenses in 2022 were approximately $174,000 compared to $167,000
during the same period in 2021, an increase of approximately $7,000 or 4.2%.
Depreciation and amortization expense for 2022 was $74,000 compared to $121,000
for 2021, a decrease of approximately $74,000 or 34.8%. There was no
amortization of the full cost pool of oil and natural gas assets for 2022 as
compared to $63,000 for the year ended 2021, a decrease of approximately $63,000
or 84.0%. The Company re-evaluated its proved oil and gas reserves as of
December 31, 2022, and decreased its estimated total proved reserves by
approximately 205,000 BOE to 846,000 BOE at the end of 2022 compared to
1,051,000 BOE at the end of 2021, a decrease of approximately 19.6%. The net
decrease in the unamortized full cost pool base, is due primarily to credits to
the full cost pool from the sale properties during 2022 in accordance with full
cost accounting procedures and the related reduction of liabilities in the
recalculation of the Asset Retirement Obligation. (See Footnote 17 to the
Financial Statements).
Asset Retirement Obligation ("ARO") accretion expense for 2022 was $2,014,000 up
from $572,000 in 2021, an increase of $1,442,000. 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 interests in
existing wells. This estimated future plugging 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. In view of increasing
plugging costs and regulatory agencies putting pressure on operators to plug and
abandon wells faster than in prior years, management evaluated this year's
provision and estimated that the liability to plug and abandon its wells in the
future, should be increased.
General and administrative expenses for 2022 were approximately $3,126,000 as
compared to approximately $2,685,000 for 2021, an increase of approximately
$441,000 or 16.4%. Approximately $218,000 is attributed to increases in
personnel salaries and benefits. In addition, $170,000 of bad debt expense
relating to a third party working interest owner was written off.
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2021 Compared to 2020
Oil and natural gas revenues for the year ended December 31, 2021, were
$5,466,000 compared to $2,924,000 for the year ended December 31, 2020, an
increase of $2,542,000 or 86.9%.
Oil revenue for 2021 was approximately $2,177,000 compared to $1,552,000 for
2020, an increase of approximately $625,000 or 40.3%. Oil prices increased to an
average of $56.87 per barrel in 2021 from an average of $41.71 per barrel in
2020, an increase of $15.16 per barrel or 36.5%. Oil sales increased to 33,600
barrels from approximately 30,900 barrels in 2020, an increase of 2,700 barrels
or 8.7%.
Natural gas revenue for 2021 was approximately $3,289,000 compared to $1,372,000
for 2020, an increase of approximately $1,917,000 or 139.7%. Natural gas sales
increased to approximately 778,500 mcf in 2021 from approximately 743,000 mcf in
2020, an increase of approximately 35,500 mcf or 4.8%. Natural gas prices
increased to an average of $4.23 per mcf in 2021 an increase of $2.39 or 129.9%
from an average of $1.84 per mcf in 2020.
In general, revenues from oil and natural gas producing operations experienced a
significant increase for the year ended December 31, 2021, as compared to the
same period in 2020. These increases resulted in part from increased oil and
natural gas prices, as well as production increases. A significant number of
both operated and non-operated wells were shut-in during 2020 due to historic
low oil and natural gas prices and most of these wells were returned to
production in 2021 and were producing at December 31, 2021.
Revenue from lease operations was approximately $219,000 for 2021, compared to
approximately $233,000 in 2020, a decrease of approximately $14,000 or 6.0%.
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 2021 were
approximately $99,000, an increase of approximately $10,000 or 11.2% from
approximately $89,000 in 2020. The increase was due primarily to an increase in
natural gas volume sold through PPC.
Real estate rental revenue for 2021 was approximately $240,000, a decrease of
approximately 32,000 or 11.7% from approximately $272,000 in 2020. The decrease
was due to lease re-negotiations and the loss of tenants.
Interest income for 2021 was approximately $149,000, a decrease of approximately
$67,000 from approximately $216,000 in 2020 or 31.0%. Interest income is derived
from investments in both short-term and long-term certificates of deposit as
well as money market accounts at banks.
Debt forgiveness income. On March 18, 2021, the Company received funding of a
loan pursuant to the Paycheck Protection Program ("PPP") under the Coronavirus
Aid, Relief and Economic Security Act, enacted March 27, 2020, in the amount of
$403,572. In December 2021, the Company received notification that the Small
Business Administration authorized full forgiveness of the PPP loan. The amount
of the loan which was fully forgiven is recorded as debt forgiveness income.
Other revenue for 2021 was $44,000, as compared to $42,000 in 2020, an increase
of $2,000 or 4.8%.
Lease operating expenses 2021 were $1,207,000 as compared to $1,324,000 in 2020,
a net decrease of approximately $117,000, or 8.8%. 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 $95,000. The remaining decrease of
approximately $22,000 represents net increases and decreases on various operated
properties due to general price fluctuations and levels of operation activity.
Production taxes, gathering, and marketing expenses for 2021 were approximately
$896,000 compared to $675,000 in 2020, an increase of approximately $221,000, or
32.7%. This increase was directly related to the increase in oil and natural gas
production and revenues.
Pipeline and rental expenses for 2021 were approximately $17,000 compared to
approximately $9,000 for 2020, an increase of approximately $8,000, or 88.9%.
The increase is primarily due to repair and maintenance expenses in 2021 as
compared to 2020.
Real estate expenses in 2021 were approximately $167,000 compared to $174,000
during the same period in 2020, a decrease of approximately $7,000 or 4.0%.
Depreciation and amortization expense for 2021 was $121,000 compared to $452,000
for 2020, a decrease of approximately $331,000 or 73.2%. Amortization of the
full cost pool of oil and natural gas assets for 2021 was approximately $63,000
compared to $393,000 for the year ended 2020, a decrease of approximately
$330,000 or 84.0%. The Company re-evaluated its proved oil and gas reserves as
of December 31, 2021, and increased its estimated total proved reserves by
approximately 421,000 BOE to 1,051,000 BOE at the end of 2021 compared to
630,000 BOE at the end of 2020, an increase of approximately 66.8%. Sales of oil
and natural gas products during 2021 increased by approximately 8,000 BOE from
approximately 155,000 BOE in 2020 to approximately 163,000 BOE in 2021, an
increase of 5.1%. (See Footnote 17 to the Financial Statements). This resulted
in a decrease in the depletion rate factor from 19.722% in 2020 on an
unamortized full cost pool base of $1,994,000 to a depletion rate factor of
13.107% on an unamortized full cost pool base of $477,000 in 2021. The net
decrease in the unamortized full cost pool base of $1,517,000 is due primarily
to a credit to the full cost pool of approximately $1,511,000 from the sale
properties during 2021 in accordance with full cost accounting procedures.
Asset Retirement Obligation ("ARO") accretion expense for 2021 was $572,000 up
from $139,000 in 2020, an increase of $433,000 or 311.5%. 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
interests in existing wells. This estimated future plugging 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 2021 were approximately $2,685,000 as
compared to approximately $2,640,000 for 2020, an increase of approximately
$45,000 or 1.7%.
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