Results of Operations
WARNING CONCERNING FORWARD LOOKING STATEMENTS
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-Q 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,
which investors should review. There have been changes to the risk factors
previously described in the Company's Form 10-K. for the fiscal year ended
December 31, 2019 (the "Form 10-K"), including significant global economic and
pandemic factors occurring during the first quarter of 2020 and continuing into
the third quarter of 2020 which are described in the following two paragraphs.
At the end of 2019, a novel strain of coronavirus ("COVID-19") was reported in
China. In the first quarter of 2020 and continuing currently, COVID-19 has
spread to other countries including the U.S. This pandemic has drastically
weakened the global demand for oil, putting unprecedented pressure on the price
of oil. In addition, the delay through the end of the first quarter of 2020 of
the Organization of Petroleum Exporting Countries and Russia to agree on
production cuts, caused oil prices to drop dramatically in the first quarter of
2020 to as low as $6.00 per barrel which is approximately one-tenth of the oil
price at the beginning of 2020. Additionally, during the second quarter of 2020,
for the first time ever, the price of a barrel of oil plunged below zero dollars
on the West Texas Intermediate Crude Index going as low as negative $37.63 due
to concerns about dwindling capacity to store all the crude oil produced in
excess of demand. During the third quarter of 2020, the price of a barrel of oil
has somewhat stabilized with an average price per barrel of $36.48.
During the first nine months of 2020 and continuing subsequent to the end of the
quarter, attempts at containment of COVID-19 have resulted in decreased economic
activity which has adversely affected the broader global economy. As the economy
dramatically stalled, the demand for oil and natural gas substantially weakened.
Many countries around the world, as well as the majority of the states in the
United States, ordered their citizens to stay home in order to contain the
spread of the virus. As part of the "shelter in place" and "stay at home" orders
in effect during the nine months of the year, fewer businesses than normal are
open, less people are traveling to work, and more people are working from home
which has reduced the demand for oil and natural gas. Airlines have dramatically
cut back on flights as the number of passengers has fallen off. Fewer cars on
the road and planes in the sky mean far less demand for oil. At this time, the
full extent to which COVID-19 will negatively impact the global economy and our
business is uncertain, but pandemics or other significant public health events
will most likely have a material adverse effect on our business and results of
operations.
10
--------------------------------------------------------------------------------
The Company has felt the negative effects of these plummeting product prices and
implemented cost cutting measures including temporary company-wide reductions in
compensation for Company employees, including key and technical employees and
officers, effective April 1, 2020. To further reduce expenses, the Company
temporarily shut in wells that were not profitable when commodity prices
plummeted. The Company is forecasting that oil and natural gas prices will
remain lower than 2019 prices through the end of 2020, which the Company
believes may cause an operating loss for all of 2020 in spite of the Company's
cost cutting measures. Operating losses are very likely to continue until oil
and natural gas prices return to substantially higher levels on a continued
basis.
Other uncertainties regarding the global economic and financial environment
could lead to an extended national or global economic recession. A slowdown in
economic activity caused by a recession would likely reduce national and
worldwide demand for oil and natural gas and result in lower commodity prices
for long periods of time. Costs of exploration, development and production have
not yet adjusted to current economic conditions, or in proportion to the
significant reduction in product prices. 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.
In the past several years, capital and credit markets have experienced
volatility and disruption. Given the levels of market volatility and disruption,
the availability of funds from those markets may diminish substantially.
Further, arising from concerns about the stability of financial markets
generally and the solvency of borrowers specifically, the cost of accessing the
credit markets has increased as many lenders have raised interest rates, enacted
tighter lending standards, or altogether ceased to provide funding to borrowers.
Due to these potential capital and credit market conditions, the Company cannot
be certain that funding will be available in amounts or on terms acceptable to
the Company. The Company is evaluating whether current cash balances and cash
flow from operations alone would be sufficient to provide working capital to
fully fund the Company's operations. Accordingly, the Company is evaluating
alternatives, such as joint ventures with third parties, or sales of interest in
one or more of its properties. Such transactions, if undertaken, could result in
a reduction in the Company's operating interests or require the Company to
relinquish the right to operate the property. There can be no assurance that any
such transactions can be completed or that such transactions will satisfy the
Company's operating capital requirements. If the Company is not successful in
obtaining sufficient funding or completing an alternative transaction on a
timely basis on terms acceptable to the Company, the Company would be required
to curtail its expenditures or restructure its operations, and the Company would
be unable to continue its exploration, drilling, and recompletion program, any
of which would have a material adverse effect on its business, financial
condition, and results of operations.
There could be adverse legislation which if passed, would significantly curtail
our ability to attract investors and raise capital. Proposed changes in the
Federal income tax laws which would eliminate or reduce the percentage depletion
deduction and the deduction for intangible drilling and development costs for
small independent producers, will significantly reduce the investment capital
available to those in the industry as well as our Company. Lengthening the time
to expense seismic costs will also have an adverse effect on our ability to
explore and find new reserves.
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.
11
--------------------------------------------------------------------------------
Results of Operations
Nine months ended September 30, 2020 compared to nine months ended September 30,
2019
Oil and gas revenues for the first nine months of 2020 were $2,025,000, as
compared to $3,501,000 for the same period in 2019, a decrease of approximately
$1,476,000 or 42.16%, due to low oil and natural gas prices and the shutting in
of wells during 2020.
Oil sales for the first nine months of 2020 were approximately $1,178,000
compared to approximately $2,099,000 for the first nine months of 2019, a
decrease of approximately $921,000 or 43.9%. Oil sales volumes for the first
nine months of 2020 were approximately 21,987 bbls, compared to approximately
31,700 bbls during the same period in 2019, a decrease of approximately 9,713
bbls, or 30.6%.
Average oil prices received were $40.77 per bbl in the first nine months of 2020
compared to $56.80 per bbl in the first nine months of 2019, a decrease of
approximately $13.09 per bbl or 23.1%.
Natural gas revenue for the first nine months of 2020 was $847,000 compared to
$1,402,000 for the same period in 2019, a decrease of approximately $555,000 or
39.59%. Natural gas sales volumes for the first nine months of 2020 were
approximately 524,000 mcf compared to approximately 692,000 mcf during the first
nine months of 2019, a decrease of approximately 168,000 mcf or 24.3%.
Average gross natural gas prices received were $1.72 per mcf in the first nine
months of 2020 as compared to $2.03 per mcf in the same time period in 2019, a
decrease of approximately $0.41 per mcf or 20.2%.
Revenues from oil and gas producing operations experienced a significant
decrease for the nine months ended 2020 compared to the same period in 2019. In
addition, the third quarter results from operations also experienced a
significant decline over the same period in 2019 as well as a decline from
operations during the first nine months of 2020. The declines result in part
from decreased oil and gas prices, as well as production declines. A number of
both operated wells and non-operated wells were shut-in during the first nine
months of 2020 due to the low oil and gas prices. Operators shut in wells, where
practicable, waiting for the low oil prices to rebound.
Revenues from lease operations were $168,000 in the first nine months of 2020
compared to $249,000 in the first nine months of 2019, a decrease of
approximately $81,000 or 32.5%. This decrease is due to a reduction in field
supervision charges. Revenues from lease operations are derived from field
supervision charged to operated leases along with operator overhead charged to
operated leases.
Revenues from gas gathering, compression and equipment rental for the first nine
months of 2020 were $57,000 compared to $94,000 for the same period in 2019, a
decrease of approximately $37,000 or 39.4%. These revenues are derived from gas
volumes produced and transported through the Company owned gas gathering
systems.
Real estate revenue was approximately $204,000 during the first nine months of
2020 compared to $179,000 for the first nine months of 2019, an increase of
approximately $25,000, or 13.9%. The increase is due to new office leases signed
during the period.
Interest income was $164,000 during the first nine months of 2020 as compared to
$150,000 during the same period in 2019, an increase of approximately $14,000 or
9.3%. Interest income is due to the Company investing its funds in both
long-term and short-term certificates of depository accounts paying higher rates
of interest than those received in money market accounts.
Other revenues for the first nine months of 2020 were $29,000 as compared to
$49,000 for the same time period in 2019, a decrease of approximately $20,000 or
40.8%.
Lease operating expenses in the first nine months of 2020 were $727,000 as
compared to $1,239,000 in the first nine months of 2019, a net decrease of
$512,000, or 41.3%. Of this net decrease, approximately $97,000 is due in part
to net decreases in operating expenses billed by third-party operators on
non-operated properties that were shut in during the first nine months of 2020.
The remaining net decrease of approximately $415,000 represents overall
increases and decreases in well expenditures on various operated properties. A
number of both operated wells and non-operated wells were shut-in during the
first nine months of 2020 due to low oil and gas prices.
12
--------------------------------------------------------------------------------
Production taxes, gathering and marketing expenses in the first nine months of
2020 were approximately $468,000 as compared to $592,000 for the first nine
months of 2019, a decrease of approximately $124,000, or 21.0%. This decrease
relates directly to the decrease in oil and gas revenues as described in the
above paragraphs.
Pipeline and rental expenses for the first nine months of 2020 were $6,000
compared to $25,000 for the same time period in 2019, a decrease of
approximately $19,000. The decrease in 2020 is due to non-recurring repair and
maintenance expenses in the first nine months of 2019.
Real estate expenses in the first nine months of 2020 were approximately
$106,000 compared to $104,000 during the same period in 2019, an increase of
approximately $2,000 or 1.9%.
Depreciation, depletion, and amortization expenses for first nine months of 2020
were $261,000 as compared to $407,000 for the same period in 2019, a decrease of
$146,000, or 35.9%. $216,000 of the amount for the first nine months of 2020 was
for amortization of the full cost pool of capitalized costs compared to $362,000
for the same period of 2019, a decrease of $146,000 or 40.3%. The Company
re-evaluated its proved oil and natural gas reserve quantities as of December
31, 2019. This re-evaluated reserve base was reduced for oil and gas reserves
that were produced or sold during the first nine months of 2020 and adjusted for
newly acquired reserves or for changes in estimated production curves and future
price assumptions. A depletion rate of 4.184% for the first quarter of 2020, a
depletion rate of 0.813% for the second quarter of 2020, and a depletion rate of
5.269% for the third quarter of 2020 was calculated and applied to the Company's
full cost pool of capitalized oil and natural gas properties compared to rates
of 3.191%, 3.554% and 3.727% for the third quarter of 2019. respectively.
Asset Retirement Obligation ("ARO") expense for the first nine months of 2020
was approximately $90,000 as compared to approximately $142,000 for the same
time period in 2019, a decrease of approximately $52,000 or 36.6%. The ARO
expense is calculated to be the discounted present value of the estimated future
cost to plug and abandon the Company's producing wells.
General and administrative expenses for the first nine months of 2020 were
approximately $1,723,000 as compared to approximately $2,212,000 for the same
time period of 2019, a decrease of approximately $489,000 or 22.1%. The decrease
is from reduced salary, wages, other personnel costs, and reduced office,
computer, and other expenses.
Three months ended September 30, 2020 compared to three months ended September
30, 2019
Oil and natural gas revenues for the three months ended September 30, 2020 were
$933,000, compared to $1,126,000 for the same period in 2019, a decrease of
$193,000, or 17.1%, due to low oil prices and the shutting in of wells during
the third quarter of 2020.
Oil sales for the third quarter of 2020 were approximately $570,000 compared to
approximately $749,000 for the same period of 2019, a decrease of approximately
$179,000 or 23.9%. Oil volumes sold for the third quarter of 2020 were
approximately 9,687 bbls compared to approximately 11,300 bbls during the same
period of 2019, a decrease of approximately 7,000 bbl or 68.6%.
Average oil prices received were approximately $36.48 per bbl in the third
quarter of 2020 compared to $54.84 per bbl during the same period of 2019, a
decrease of approximately $9.54 per bbl, or 17.4%.
Natural gas revenues for the third quarter of 2020 were $363,000 compared to
$377,000 for the same period in 201 9, a decrease of approximately $14,000 or
3.7%.
Average gross natural gas prices received were approximately $1.88 per mcf in
the third quarter of 2020 as compared to approximately $1.62 per mcf during the
same period in 2019.
Revenues from lease operations for the third quarter of 2020 were approximately
$49,000 compared to approximately $62,000 for the same period in 2019, a
decrease of approximately $13,000 or 21.0%. This decrease is due to a reduction
in field supervision charges. Revenues from lease operations are derived from
field supervision charged to operated leases along with operator overhead
charged to operated leases.
Revenues from gas gathering, compression and equipment rental for the third
quarter of 2020 were approximately $12,000, compared to approximately $28,000
for the same period in 2019, a decrease of approximately $16,000 or 57.1%. These
revenues are derived from gas volumes produced and transported through our gas
gathering systems.
13
--------------------------------------------------------------------------------
Real estate revenue was approximately $70,000 during the third quarter of 2020
compared to $60,000 for the same period in 2019. The increase is due to higher
rental rates and new office leases signed during the period.
Interest income for the third quarter of 2020 was approximately $61,000 as
compared with approximately $37,000 for the same period in 2019, an increase of
approximately $24,000 or 64.9%. Interest income is derived from investments in
both short-term and long-term certificates of deposit as well as money market
accounts at banks.
Other revenues for the third quarter of 2020 were approximately $10,000 as
compared with approximately $27,000 for the same period in 2019, a decrease of
approximately $17,000 or 63.0%.
Lease operating expenses in the third quarter of 2020 were $265,000 as compared
to $418,000 in the third quarter of 2019, a net decrease of approximately
$153,000, or 36.6%. Of this decrease, approximately $41,000 is due in part to
net decreases in operating expenses billed by third-party operators on
non-operated properties. The remaining net decrease of approximately $112,000
represents overall increases and decreases in well expenditures on various
operated properties. A significant number of both operated wells and
non-operated wells were shut-in during the first nine months of 2020 due to low
oil and gas prices. Operators shut in wells, where practicable, waiting for the
low prices to rebound.
Production taxes, gathering, transportation and marketing expenses for the third
quarter of 2020 were approximately $212,000 as compared to $204,000 during the
third quarter of 2019, a net increase of approximately $8,000 or 3.9%.
Pipeline and rental expenses for the third quarter of 2020 were $2,000 compared
to $6,000 for the same period in 2019, a decrease of approximately $4,000, or
66.7%. The decrease in 2020 is due to non-recurring repair and maintenance
expenses incurred in the third quarter of 2019.
Real estate expenses during the third quarter 2020 were approximately $39,000
compared to approximately $32,000 for the same period in 2019, an increase of
approximately $7,000 or 21.9%.
Depreciation, depletion, and amortization expenses for the third quarter of 2020
were $126,000 as compared to $137,000 for the same period in 2019, a decrease of
$11,000, or 8.0%. $111,000 of the amount for the third quarter of 2020 was for
amortization of the full cost pool of capitalized costs compared to $123,000 for
the third quarter of 2019, a decrease of $12,000 or 9.8%. The Company
re-evaluated its proved oil and natural gas reserve quantities as of December
31, 2019. This re-evaluated reserve base was reduced for oil and gas reserves
that were produced or sold during the first nine months of 2020 and adjusted for
newly acquired reserves or for changes in estimated production curves and future
price assumptions. A depletion rate of 5.269% for the third quarter of 2020 was
calculated and applied to the Company's full cost pool of capitalized oil and
natural gas properties compared to rate of 3.727% for the third quarter of 2019,
respectively.
Asset Retirement Obligation ("ARO") expense for the third quarter of 2020 was
approximately $30,000 as compared to approximately $48,000 for the same period
in 2019, a decrease of approximately $18,000 or 37.5%. The ARO expense is
calculated to be the discounted present value of the estimated future cost to
plug and abandon the Company's producing wells.
General and administrative expenses for the third quarter of 2020 were $332,000
compared to $721,000 for the same period in 2019, a decrease of approximately
$389,000 or 54.0%. The decrease comes from decreased salary, wages, and other
personnel costs, as well as decreases in office, computer, and other expenses.
14
--------------------------------------------------------------------------------
Financial Condition and Liquidity
The Company's operating capital needs, as well as its capital spending program
are generally funded from cash flow generated by operations. The Company is
operating at a loss and projects to continue to operate at a deficient through
the end of the year unless oil and natural gas prices rebound substantially.
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. Accordingly, the Company may be
required to seek additional financing from third parties in order to fund its
exploration and development programs.
© Edgar Online, source Glimpses
SPINDLETOP OIL & GAS CO. 