This discussion and analysis should be read with reference to a similar
discussion in the 2020 Form 10-K, as well as the consolidated 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 natural gas wells, the production that may be obtained from
oil and natural 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 3 of the 2020 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.
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Financial Conditions and Results of Operations
COVID-19
In March 2020, the World Health Organization declared the COVID-19 outbreak a
pandemic. Governments have tried to slow the spread of the virus by imposing
social distancing guidelines, travel restrictions and stay-at-home orders, which
caused a significant decrease in activity in the global economy and the demand
for oil and to a lesser extent natural gas. As a result, the price for oil
decreased significantly. While oil prices have recovered, there is still ongoing
volatility in world demand in the market.
Our profitability was significantly affected by this volatility. A decline in
commodity prices and our future estimated production levels could lead to
additional material impairments of our long-lived assets and equity method
investments. Additional impairments could be triggered if the COVID-19 pandemic
leads to a reduction in global economic activity and demand for energy. We
continue to evaluate all cash management strategies and maintain conservative
choices in short-term investments to protect cash reserves and liquidity.
Liquidity and Capital Resources
Please refer to the Consolidated Balance Sheets and the Condensed Consolidated
Statements of Cash Flows in this Form 10-Q to supplement the following
discussion. In the first nine months of 2021, the Company continued to fund its
business activity using internal sources of cash. The Company had net cash
provided by operations of $2,443,204, and cash provided by the maturities of
available-for-sale debt securities of $1,515,234, sales of securities and
investments of $1,799,967, and cash provided by property dispositions of $18,490
for total cash provided of $5,776,895. The Company utilized cash for property
additions of $2,281,064, the purchase of equity securities and investments of
$15,805,713, and financing activities of $787,337 for total cash applied of
$18,874,114. Cash and cash equivalents decreased $13,097,219 to $3,089,866.
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, 2020. A discussion of these items
follows.
Equity securities increased $12,782,256 (504%) to $15,318,738 as of
September 30, 2021 from $2,536,482 at December 31, 2020. The increase was the
result of $12,433,754 in net purchases and a $348,502 net increase in the equity
securities' market value. The changes were the result of a shift in cash and
investment strategy and funds from available-for-sale debt securities were used
to provide access to capital for other projects and investments.
Refundable income taxes decreased $100,689 (46%) to $117,515 as of September 30,
2021 from $218,204 at December 31, 2020. The change was the result of net income
from increased oil and natural gas prices reducing federal income tax
receivables as of September 30, 2021.
Accounts receivable increased $575,158 (72%) to $1,369,320 as of September 30,
2021 from $794,162 at December 31, 2020. The increase was the result of an
increase in oil and gas receivables of $776,793, primarily resulting from
increased oil and natural gas prices. These were offset by a net decrease in
trade and other accounts receivable of $201,635, primarily resulting from a sale
of an investment at the end of December 2020.
Notes receivable increased $65,757 (24%) to $344,326 as of September 30, 2021
from $278,569 at December 31, 2020. The increase was the result of added notes
receivable from Grand Woods, LLC ("Grand Woods"), an equity method investee. See
Note 4 to the accompanying consolidated financial statements for additional
information about Grand Woods.
Accounts payable and other current liabilities increased $57,099 (22%) to
$320,596 as of September 30, 2021 from $263,497 at December 31, 2020, due to
increases of $128,775 in deferred revenues related to unearned drilling revenue
in the joint venture with TWS South, LLC, and $38,259 in accrued property taxes,
offset by net decreases of $109,935 resulting from timing differences in the
processing of accounts payable and other current liabilities.
Discussion of Significant Changes in the Condensed Consolidated Statements of
Cash Flows. As noted in the first paragraph above, net cash provided by
operating activities was $2,443,204 in the nine months ended September 30, 2021,
an increase of $1,533,426 (169%) from cash provided in the comparable period in
2020 of $909,778. For more information see "Operating Revenues" and "Operating
Costs and Expenses" below.
Cash applied to the purchase of property, plant and equipment in the nine months
ended September 30, 2021 was $2,281,064, an increase of $839,321 (58%) from cash
applied in the comparable period in 2020 of $1,441,743. In both 2021 and 2020,
cash applied to property, plant and equipment additions was mostly related to
oil and gas exploration and development activity. See the subheading
"Exploration Costs" in the "Results of Operations" section below for additional
information.
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Cash applied to purchase of available-for-sale debt securities in the nine
months ended September 30, 2020 was $8,079,535, with none in 2021. Cash provided
by the maturity of available-for-sale debt securities in the nine months ended
September 30, 2021 was $1,515,234, a decrease of $23,566,977 (94%) from cash
provided in the comparable period in 2020 of $25,082,211. Cash applied to equity
method and other investments in the nine months ended September 30, 2021 was
$1,596,742, an increase of $1,084,327 (212%) from cash applied in the comparable
period of 2020 of $512,415. These changes were the result of a shift in cash and
investment strategy and funds from available-for-sale debt securities were used
to provide access to capital for other projects and investments. For details on
equity method and other investments, see Note 4 - EQUITY METHOD AND OTHER
INVESTMENTS AND RELATED COMMITMENTS AND CONTINGENT LIABILITIES, INCLUDING
GUARANTEES.
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 2020 Form 10-K
would not be representative of the Company's current position.
Results of Operations - Nine Months Ended September 30, 2021
Net income/(loss) increased $3,352,492 to income of $1,545,356 in the nine
months ended September 30, 2021 from a loss of $1,807,136 in the comparable
period in 2020. Net income/(loss) per share, basic and diluted, increased $21.41
to income of $9.87 in the nine months ended September 30, 2021 from a loss of
$11.54 in the comparable period in 2020.
A discussion of revenue from oil and natural gas sales and other significant
line items in the consolidated statements of operations follows.
Operating Revenues. Revenues from oil and gas sales increased $3,330,999 (111%)
to $6,324,026 in the nine months ended September 30, 2021 from $2,993,027 in the
comparable period in 2020. The $3,330,999 increase is due to an increase in
crude oil sales of $2,371,928, natural gas sales of $742,309, and miscellaneous
oil and natural gas product sales of $216,762.
The $2,371,928 (121%) increase in oil sales to $4,324,787 in the nine months
ended September 30, 2021 from $1,952,859 in the comparable period in 2020 was
the net result of an increase in the volume sold and an increase in the average
price per barrel (Bbl). The volume of oil sold increased 15,005 Bbls to 69,561
Bbls in the nine months ended September 30, 2021, resulting in a positive volume
variance of $537,166. The average price per Bbl increased $26.37 to $62.17 per
Bbl in the nine months ended September 30, 2021 from $35.80 per Bbl in the
comparable period in 2020, resulting in a positive price variance of $1,834,762.
The $742,309 (78%) increase in gas sales to $1,689,962 in the nine months ended
September 30, 2021 from $947,653 in the comparable period in 2020 was the result
of a decrease in the volume sold and an increase in the average price per
thousand cubic feet (MCF). The volume of natural gas sold decreased 58,710 MCF
to 505,218 MCF in the nine months ended September 30, 2021 from 563,928 MCF in
the comparable period in 2020, for a negative volume variance of $98,633. The
average price per MCF increased $1.67 to $3.35 per MCF in the nine months ended
September 30, 2021 from $1.68 per MCF in the comparable period in 2020,
resulting in a positive price variance of $840,942.
Sales from the Robertson County, Texas royalty interest properties provided
approximately 28% of the Company's gas sales volumes for both the nine months
ended September 30, 2021 and for the comparable period in 2020. See discussion
on page 10 of the 2020 Form 10-K, under the subheading "Operating Revenues," for
more information about these properties. Sales from Arkansas working interest
properties provided approximately 10% of the Company's gas sales volumes for the
nine months ended September 30, 2021 and 11% of the gas sales volumes for the
comparable period in 2020.
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 due to the impact of COVID-19 on
demand for oil and gas products.
Sales of miscellaneous oil and gas products were $309,277 in the nine months
ended September 30, 2021 as compared to $92,515 in the comparable period in
2020, primarily related to increased oil prices and increased drilling that
resulted in more gas liquids.
The Company received lease bonuses of $9,000 in the nine months ended
September 30, 2021 for leases on its owned minerals compared to $82,221 in the
comparable period in 2020.
Operating Costs and Expenses. Operating costs and expenses decreased $733,193
(13%) to $4,926,305 in the nine months ended September 30, 2021 from $5,659,498
in the comparable period of 2020. Material line-item changes are discussed and
analyzed in the following paragraphs.
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Production costs increased $444,162 (32%) to $1,814,861 in the nine months ended
September 30, 2021 from $1,370,699 in the comparable period in 2020. Lease
operating expenses increased $223,954, primarily due to increased drilling and
workovers resulting from oil and gas price increases. Hauling, compression, and
other costs increased by $97,277 due to higher production and increased
postproduction costs on select wells. Gross production taxes increased $122,931,
due to increased production of oil and natural gas.
Exploration costs increased $307,029 (201%) to $460,002 in the nine months ended
September 30, 2021 from $152,973 in the comparable period in 2020, due to
increases of $400,787 in geological and geophysical and other expenses, offset
by decreases in $73,953 in dry hole and plugging costs, and a $19,805 decrease
in land costs associated with mineral acquisitions in the prior year.
The following is a summary as of November 8, 2021, updating both exploration and
development activity from December 31, 2020, for the period ended September 30,
2021.
The Company is participating with its 16% interest in drilling on a Creek
County, Oklahoma 3-D seismic project. At the start of 2021 there were six active
prospects within the project. Exploratory wells were drilled on two of the
prospects and both were completed as dry holes. A total of five development
wells were drilled on two other prospects. All five wells have been completed
and appear to be commercial oil producers. Capitalized costs for the period were
$198,056. Dry hole costs of $35,514 have been or will be written off to expense.
The Company owns a 40% interest in 16,472.55 net acres of leasehold on a
Crockett and Val Verde Counties, Texas prospect. Most of the acreage is
underlain by a shallow heavy oil zone. The Company participated with a 17.5%
interest in the re-entry, completion and testing of a previously drilled test
well on the prospect with the intention of conducting a thermal recovery pilot
test. The results of the re-entry were inconclusive, and further work on the
thermal recovery project has been postponed. The Company is participating with a
20% interest in the purchase and re-processing of two seismic lines on the
acreage in an attempt to develop gas prospects. Capitalized costs for the period
were $25,096.
The Company is participating with a 14.85% interest in a 3-D seismic project
covering approximately 35,000 acres in San Patricio County, Texas. At the start
of 2021 there were six active prospects within the project. An exploratory well
was drilled and completed on one of these in 2020, testing gas at a commercial
rate. It has been shut in awaiting pipeline construction, which is now complete.
The Company participated in the re-completion of another well and in the
conversion of an abandoned producer to a saltwater disposal well. It also
participated in the construction of a water system connecting all three existing
project wells, which have been shut in, to the disposal facility. All three
wells will be put back on production shortly. An additional exploratory well
will be drilled starting in November or December 2021. Capitalized costs for the
period were $117,752.
The Company has been participating with a 50% interest in the development of a
Nolan County, Texas prospect. The Company and its partner have acquired 3,200
net acres of leasehold and three producing wells on the prospect and have
negotiated a sale of a portion of their interest. The Company will participate
with a 20.4% working interest in the drilling of an exploratory horizontal well
on the prospect in the first quarter of 2022. Geological costs for the period
were $33,750 and capitalized costs were $222,448.
The Company participated in the completion of four horizontal development wells
that were drilled in 2020 on fee minerals located in Kingfisher County,
Oklahoma. The Company has a 3.2% working interest in three of the wells and a
3.5% working interest in the fourth. All four wells were completed as commercial
oil and gas producers. Actual costs of $354,278 for the period were offset by
prepaid costs from 2020 for a net capitalized amount of $0.
The Company participated with its 3% working interest in the drilling of a
development well on a Hitchcock County, Nebraska prospect. The well has been
completed and appears to be a commercial oil producer. Capitalized costs for the
period were $6,178.
The Company participated with its 22% working interest in the drilling of a
development well on a Barber County, Kansas prospect. The well has been
completed, testing gas at a commercial rate. It is shut in awaiting pipeline
construction. Capitalized costs for the period were $103,820.
In July 2021, the Company acquired a 20% interest in 960 net acres of leasehold
on a Finney County, Kansas prospect. An exploratory well has been drilled on the
prospect and a completion is in progress. Geological costs for the period were
$25,000 and capitalized costs were $75,000.
In August 2021, the Company purchased a 10% interest in 4,250.3 net acres of
leasehold, five active producing wells, one active injection well and thirteen
inactive wells on a Logan County, Oklahoma prospect for $305,644. An exploratory
horizontal well has been drilled on the prospect and a completion is in
progress. The Company also participated with its prospect interest in the
purchase of an approximately 75% interest in eight horizontal producing wells
and a saltwater disposal well for $303,000 in October 2021, primarily to acquire
the disposal well. Additional capitalized costs for the period were $275,000.
The Company purchased the working interest properties of Mid-American Oil
Company, an affiliated company, for $500,469 effective July 1, 2021. The Company
already owns working interests in most of these properties. For more information
regarding this transaction, see Note 10 - RELATED PARTY TRANSACTIONS.
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Depreciation, depletion, amortization and valuation provision (DD&A) decreased
$1,919,461 (67%) to $950,507 in the nine months ended September 30, 2021 from
$2,869,968 in the comparable period in 2020, primarily due to a decrease in
long-lived assets impairments of $2,242,320 resulting from increased oil and
natural gas prices. There was a $146,281 net increase in depletion,
depreciation, and amortization due to increased production, and we had
non-producing leasehold impairments totaling $176,578. See Note 10 - LONG-LIVED
ASSETS IMPAIRMENT LOSS on page 29 of the 2020 Form 10-K for a description of the
impairment loss calculation.
General, administrative and other (G&A) increased $435,077 (34%) to $1,700,935
in the nine months ended September 30, 2021 from $1,265,858 in the comparable
period in 2020. The increase was primarily due to expenses of $216,413 related
to new costs in the joint venture with TWS South, LLC and $134,487 in
consulting, SOX compliance and audit costs related to the implementation of new
accounting software. The Company experienced human resource turnover with
multiple retirements of long-term employees resulting in a net increase of
approximately $23,000 in human resource costs and accounting service fees. The
remainder of the increase was a net increase of approximately $61,177 in all
other G&A account activity.
Other Income/(Loss), Net. Other income decreased $10,183 (3%) to $376,781 in the
nine months ended September 30, 2021 from $386,964 in the comparable period in
2020. See Note 3 to the accompanying consolidated financial statements for an
analysis of the components of this item.
Income Tax Provision/(Benefit). Income taxes increased $658,064 to a provision
of $210,878 in the nine months ended September 30, 2021 from a benefit of
$447,186 in the comparable period in 2020. Of the 2021 tax provision, estimated
current tax provision was $117,983 and estimated deferred tax provision was
$92,895. Of the 2020 income tax benefit, the estimated current tax benefit was
$188,592 and the estimated deferred tax benefit was $258,594. See Note 5 to the
accompanying consolidated financial statements for additional information on
income taxes.
Results of Operations - Three Months Ended September 30, 2021
Net income/(loss) increased $1,379,767 to income of $642,719 in the three months
ended September 30, 2021 from loss of $737,048 in the comparable period in 2020.
The significant changes in the consolidated statements of operations are
discussed below. Net income/(loss) per share, basic and diluted, increased $8.81
to income of $4.10 in the three months ended September 30, 2021 from a loss of
$4.71 in the comparable period in 2020.
Operating Revenues. Revenues from oil and gas sales increased $2,040,594 (171%)
to $3,236,728 in the three months ended September 30, 2021 from $1,196,134 in
the comparable period in 2020. The $2,040,594 increase is due to an increase in
crude oil sales of $1,541,309, natural gas sales of $335,694 and miscellaneous
oil and gas product sales of $163,591.
The $1,541,309 (201%) increase in oil sales to $2,307,344 in the three months
ended September 30, 2021 from $766,035 in the comparable period in 2020 was the
net result of an increase in the volume sold and an increase in the average
price per barrel (Bbl). The volume of oil sold increased 12,124 Bbls to 33,521
Bbls in the three months ended September 30, 2021, resulting in a positive
volume variance of $434,064. The average price per Bbl increased $33.03 to
$68.83 per Bbl in the three months ended September 30, 2021 from $35.80 per Bbl
in the comparable period in 2020, resulting in a positive price variance of
$1,107,245.
The $335,694 (84%) increase in gas sales to $733,317 in the three months ended
September 30, 2021 from $397,623 in the comparable period in 2020 was the result
of a decrease in the volume sold and an increase in the average price per
thousand cubic feet (MCF). The volume of gas sold decreased 36,482 MCF to
182,116 MCF in the three months ended September 30, 2021 from 218,598 MCF in the
comparable period in 2020, for a negative volume variance of $66,360. The
average price per MCF increased $2.21 to $4.03 per MCF in the three months ended
September 30, 2021 from $1.82 per MCF in the comparable period in 2020,
resulting in a positive price variance of $402,054.
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Operating Costs and Expenses. Operating costs and expenses increased $158,640
(7%) to $2,298,745 in the three months ended September 30, 2021 from $2,140,105
in the comparable period in 2020. The increase was the net result of an increase
in production costs of $368,485; an increase in exploration costs charged to
expense of $353,052; a decrease in DD&A of $696,051; and an increase in G&A of
$133,154. The significant changes in these line items are discussed below.
Production costs increased $368,485 (85%) to $800,888 in the three months ended
September 30, 2021 from $432,403 in the comparable period in 2020. Lease
operating expenses increased $227,180, primarily due to increased drilling and
workovers resulting from oil and gas price increases. Hauling, compression, and
other costs increased by $87,742 due to higher production and increased
postproduction costs on select wells. Gross production taxes increased $53,563,
due to increased production of oil and natural gas.
Exploration costs increased $353,052 (454%) to $430,855 in the three months
ended September 30, 2021 from $77,803 in the comparable period in 2020. Most of
the increase is due to a $420,675 increase in geological and geophysical costs,
offset by $47,818 net decreases in dry hole, plug and abandonment costs, and a
$19,805 decrease in land costs associated with mineral acquisitions in the prior
year.
DD&A decreased $696,051 (56%) to $556,993 in the three months ended
September 30, 2021 from $1,253,044 in the comparable period in 2020, primarily
due to a decrease in long-lived assets impairments of $929,992 resulting from
increased oil and natural gas prices. There was a $233,941 net increase in
depletion, depreciation, and amortization due to increased production. See Note
10 - LONG-LIVED ASSETS IMPAIRMENT LOSS on page 29 of the 2020 Form 10-K for a
description of the impairment loss calculation.
G&A increased $133,154 (35%) to $510,009 in the three months ended September 30,
2021 from $376,855 in the comparable period in 2020. The increase was primarily
due to expenses of $99,289 related to new costs in the joint venture with TWS
South, LLC and a $33,865 net increase in all other G&A account activity.
Other Income/(Loss), Net. Other income/(loss) decreased $193,916 (205%) in the
three months ended September 30, 2021 to a loss of $99,454 from income of
$94,462 in the comparable period in 2020. See Note 3 to the accompanying
consolidated financial statements for an analysis of the components of this
item.
Income Tax Provision/(Benefit). Income taxes increased $224,063 to a provision
of $93,080 in the three months ended September 30, 2021 from a benefit of
$130,983 in the comparable period in 2020. Of the 2021 tax provision, estimated
current tax benefit was $5,125 and estimated deferred tax provision was $98,205.
Of the 2020 income tax benefit, the estimated current tax benefit was $202,801
and the estimated deferred tax provision was $71,818. See discussions above in
"Results of Operations" section and Note 5 to the accompanying consolidated
financial statements for additional explanation of the changes in the provision
for income taxes.
Off-Balance Sheet Arrangements
The Company's off-balance sheet arrangements relate to Broadway Sixty-Eight,
LLC, an Oklahoma limited liability company, Broadway Seventy-Two, LLC, an
Oklahoma limited liability company, Grand Woods Development, LLC, an Oklahoma
limited liability company, and QSN Office Park, LLC, an Oklahoma limited
liability company. The Company does not have actual or effective control of
these entities. Management of these entities could at any time make decisions in
their own best interest, which could materially affect the Company's net income
or the value of the Company's investment. For more information about these
entities and the related off-balance sheet arrangements, see Note 4 to the
accompanying consolidated financial statements.
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