COVID-19
The global spread of COVID-19 created significant volatility, uncertainty, and
economic disruption during 2020 and 2021, and threatens to do the same in 2022.
Oil and natural gas prices are expected to continue to be volatile because of
the ongoing COVID-19 pandemic and its effect on oil and natural gas demand, the
availability of personnel and equipment, and national and world economic
performance. While we cannot predict the full impact that COVID-19 or the
related significant disruption and volatility in the oil and natural gas markets
will have on our business, cash flows, liquidity, financial condition and
results of operations, we believe demand has recovered and prices will continue
to be positively impacted in the near term.
Please refer to the consolidated financial statements and related notes in Item
8 of this Form 10-K to supplement this discussion and analysis.
Critical Accounting Estimates
? Estimates of future revenues from oil and gas sales are derived from a
combination of factors which are subject to significant fluctuation over any
given period. Reserve estimates, by their nature, are subject to revision in
the short-term. The evaluating engineer considers production performance data,
reservoir data and geological data available to the Company, as well as makes
estimates of production costs, sale prices and the time period the property
can be produced at a profit. A change in any of the above factors can
significantly change the timing and amount of net revenues from a property.
The Company's producing properties are composed of many small working interest
and royalty interest properties. As a non-operating owner, we have limited
access to the underlying data from which working interest reserve estimates
are calculated. Estimates of royalty interest reserves are not made because
the information required for the estimation is not available to the Company.
While reserve estimates are not accounting estimates, they are the basis for
impairment, depreciation, depletion and amortization described below.
Additionally, the estimated economic life for each producing property from the
reserve estimates is used in the calculation of asset retirement obligations.
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? Reserves relating to the Company's proved properties may become uneconomic to
produce resulting in impairment of proved properties.
? The provisions for depreciation, depletion and amortization of oil and gas
properties all constitute critical accounting estimates. Non-producing
leaseholds are amortized over the life of the leases using a straight-line
method; however, when leases are impaired or condemned, an appropriate
adjustment to the provision is made at that time.
? The provision for impairment of long-lived assets is determined by review of
the estimated future cash flows from the individual properties. A significant,
unforeseen downward adjustment in future prices and/or potential reserves
could result in a material change in estimated long-lived assets impairment.
? Depletion and depreciation of oil and gas properties are computed using the
units-of-production method. A significant, unanticipated change in volume of
production or estimated reserves would result in a material, unexpected change
in the estimated depletion and depreciation provisions.
? The Company has significant obligations to remove tangible equipment and
facilities associated with oil and gas wells and to restore land at the end of
oil and gas production operations. Removal and restoration obligations are
most often associated with plugging and abandoning wells. Estimating the
future restoration and removal costs is difficult and requires estimates and
judgments because most of the removal obligations will take effect in the
future. Additionally, these operations are subject to private contracts and
government regulations that often have vague descriptions of what is required.
Asset removal technologies and costs are constantly changing as are
regulatory, political, environmental and safety considerations. Inherent in
the present value calculations are numerous assumptions and judgments,
including the ultimate removal cost amounts, inflation factors and discount
rate.
? The estimation of the amounts of income tax to be recorded by the Company
involves interpretation of complex tax laws and regulations as well as the
completion of complex calculations, including the determination of the
Company's percentage depletion deduction, if any. To calculate the exact
excess percentage depletion allowance, a well-by-well calculation is and can
only be performed at the end of each year. During interim periods, a
high-level estimate is made considering historical data and current pricing.
Although our management believes its income tax accruals are adequate,
differences may occur in the future depending on the resolution of pending and
new tax matters.
LIQUIDITY AND CAPITAL RESOURCES
To supplement the following discussion, please refer to the consolidated balance
sheets and the consolidated statements of cash flows included in this Form 10-K.
In 2021, as in prior years, the Company funded its business activity using
internal sources of capital. For the most part, these internal sources are cash
flows from operations, cash, cash equivalents and available-for-sale debt
securities. When cash flows from operating activities exceed those needed for
other business activities, the remaining balance is used to increase cash, cash
equivalents, equity securities, and/or available-for-sale debt securities. When
cash flows from operating activities are not adequate to fund other business
activities, withdrawals are made from cash, cash equivalents, equity securities,
and/or available-for-sale debt securities. Cash equivalents are highly liquid
debt instruments purchased with a maturity of three months or less. All the
available-for-sale debt securities were U.S. Treasury Bills.
In 2021, net cash provided by operating activities was $3,777,163, net cash
applied to investing activities was $8,997,314 and net cash applied to financing
activities was $837,777.
Other than cash and cash equivalents, other significant changes in working
capital include the following:
Available-for-sale debt securities decreased $1,515,234 (100%) to zero in 2021
from $1,515,234 in 2020. This decrease was the result of the Company's shift in
cash management and investment strategy from available-for-sale debt securities
to a more diversified portfolio of investments.
Equity securities increased $6,605,875 (260%) to $9,142,357 in 2021 from
$2,536,482 in 2020. The net increase is due to a net increase in purchases and
reinvestments of $6,019,753, net realized and unrealized gains of $573,631 and
$12,491 in revisions in basis of select securities.
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Refundable income taxes increased $132,723 (61%) to $350,927 from $218,204 in
2020, primarily resulting from increased allowable depletion that offset current
tax liabilities, and from 2021 federal income tax loss carrybacks that resulted
in substantial refundable income taxes.
Accounts receivable increased $568,801 (72%) to $1,362,963 in 2021 from $794,162
in 2020, primarily due to changes in oil and gas sales receivables in an
increased pricing environment.
Notes receivable increased $193,876 (70%) to $472,445 in 2021 from $278,569 in
2020. See "Investing Activities" in the "Discussion of Selected Material Line
Items in Cash Flows" below for a discussion of notes receivable.
Accounts payable increased $13,060 (5%) to $261,114 in 2021 from $248,054 in
2020, primarily due to the timing of payable processing.
Other current liabilities increased $247,111 to $262,554 in 2021 from $15,443 in
2020, primarily due to an increase in deferred revenues of $261,274, offset by a
net decrease of $14,163 in gas balancing payables and other liabilities.
Discussion of Selected Material Line Items in Cash Flows.
The following is a discussion of material changes in cash flow by activity
between the years ended December 31, 2021 and 2020. Also, see the discussion of
changes in operating results under "Results of Operations" below in this Item 7.
Operating Activities
Net cash flows provided by operating activities in 2021 were $3,777,163, which,
when compared to the $1,086,237 provided in 2020, represents a net increase of
$2,690,926. Significant items effecting the change are discussed below.
Cash provided by oil and gas sales increased $3,732,306 (86%) to $8,055,832 in
2021 from $4,323,526 in 2020, primarily the result of an increase in oil and gas
sales prices and sales volumes. See "Results of Operations" below for a
price/volume analysis and the related discussion of oil and gas sales.
Cash provided by service revenue was $303,356 in 2021, with none in 2020. Of the
$303,356 cash received for service revenue, $42,082 was recognized in service
revenue and $261,274 is recorded as deferred revenue in other current
liabilities. Service revenue consists of $333,356, primarily from water well
drilling and related activities, of which, $72,082 was recognized and $261,274
was deferred.
Cash provided by interest decreased $210,882 (98%) to $3,274 in 2021 from
$214,156 in 2020. This decrease was the result of the Company's shift in cash
management and investment strategy from available-for-sale debt securities to a
more diversified portfolio of investments, which include increased growth and
income securities that resulted in an increase of $351,920 in cash received from
dividends on equity securities to $360,407 in 2021 from $8,487 in 2020.
Cash applied to production costs increased $657,958 (35%) to $2,557,012 in 2021
from $1,899,054 in 2020 and cash applied to general suppliers, employees and
taxes, other than income taxes increased $581,555 (33%) to $2,333,939 in 2021
from $1,752,384 in 2020. See "Results of Operations" below for discussion of
these items.
Investing Activities
Net cash applied to investing activities was $8,997,314 in 2021, from a net cash
provided by investing activities of $13,148,188 in 2020. The 2021 amount was due
to a net decrease in available-for-sale debt securities activity of $15,487,443
and a decrease in notes receivable of $109,858, offset by an increase in net
equity securities purchases of $4,461,821, an increase in net property purchases
of $1,393,664, a net increase of cash applied to equity method and other
investments of $912,432.
The notes receivable discussed above are all receivable from Grand Woods
Development, LLC, an equity investment ("Grand Woods"). During 2021, the Company
provided $168,711 in additional cash to Grand Woods. Interest receivable of
$25,165 earned from existing notes was consolidated into a new note for a total
of $472,445 at December 31, 2021. The Company expects the note to be paid within
the next year upon the sale of a portion of the property held by the investment.
See Item 8, Note 7 to the accompanying consolidated financial statements for
related disclosures and additional information regarding equity investments.
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Financing Activities
Cash applied to financing activities increased $52,099 (7%) to $837,777 in 2021
from $785,678 in 2020. Cash applied to financing activities consist of cash
dividends on common stock and cash used for the purchase of treasury stock. In
2021, cash dividends paid on common stock amounted to $782,892 as compared to
$783,078 in 2020. Dividends of $5.00 per share were paid in 2021 and 2020. Cash
applied to purchase treasury stock increased $52,285 to $54,885 in 2021 from
$2,600 in 2020.
RESULTS OF OPERATIONS
As disclosed in the consolidated statements of operations in Item 8 of this Form
10-K, in 2021 the Company had net income of $1,251,295 as compared to net loss
of $(1,956,255) in 2020. Net income per share, basic and diluted, was $8.00 in
2021, an increase of $20.49 per share from net loss of $(12.49) in 2020.
Material line-item changes in the consolidated statements of operations will be
discussed in the following paragraphs.
Operating Revenues
Operating revenues increased $5,034,328 (123%) to $9,116,426 in 2021 from
$4,082,098 in 2020. Oil and gas sales increased $5,039,466 (126%) to $9,034,540
in 2021 from $3,995,074 in 2020. Lease bonuses and other revenues decreased
$77,220 (89%) to $9,804 in 2021 from $87,024 in 2020. Service revenues increased
$72,082 (100%) in 2021 from none in 2020. Recognized service revenues consisted
of water well drilling and related revenue in TWSTX. The increase in oil and gas
sales is discussed in the following paragraphs.
The $5,039,466 increase in oil and gas sales was the result of a $1,345,461
increase in gas sales, a $3,320,040 increase in oil sales and a $373,965
increase in miscellaneous oil and gas product sales. The following price and
volume analysis is presented to explain the changes in oil and gas sales from
2020 to 2021. Miscellaneous oil and gas product sales of $500,132 in 2021 and
$126,167 in 2020 are not included in the analysis.
(in thousands, except Variance
per Unit prices)
Production 2021 Price Volume 2020
Gas -
MCF 684 (28 ) 712
$ $ 2,628 $ 1,395 (50 ) $ 1,283
Unit Price $ 3.84 $ 2.04 $ 1.80
Oil -
Bbls 90 19 71
$ $ 5,906 $ 2,634 $ 686 $ 2,586
Unit Price $ 65.50 $ 29.22 $ 36.28The $1,345,461 (105%) increase in natural gas sales to $2,628,472 in 2021 from
$1,283,011 in 2020 was the result of a decrease in gas sales volumes and an
increase in the average price received per thousand cubic feet (MCF). The
average price per MCF of natural gas sales increased $2.04 per MCF to $3.84 per
MCF in 2021 from $1.80 per MCF in 2020, resulting in a positive gas price
variance of $1,395,299. A negative volume variance of $49,839 was the result of
a decrease in natural gas volumes sold of 27,657 MCF to 684,324 MCF in 2021 from
711,981 MCF in 2020.
As disclosed in Supplemental Schedule 1 of the Unaudited Supplemental Financial
Information included in Item 8 below, working interests in natural gas
extensions and discoveries were adequate to replace working interest reserves
produced in 2021, but not in 2020.
The gas production for 2021 and 2020 includes production from about 100 royalty
interest properties drilled by various operators in Robertson County, Texas.
These properties accounted for 164,538 MCF and $667,470 of the 2021 gas sales
and 195,633 MCF and $385,872 of the 2020 gas sales. These properties accounted
for 25% of the Company's gas revenues in 2021 versus 31% in 2020. The Company
has no control over the timing of future drilling on the acreage in which we
hold mineral interests.
The $3,320,040 (128%) increase in crude oil sales to $5,905,936 in 2021 from
$2,585,896 in 2020 was the result of an increase in the average price per barrel
(Bbl) and an increase in oil sales volumes. The average price received per Bbl
of oil increased $29.22 to $65.50 in 2021 from $36.28 in 2020, resulting in a
positive oil price variance of $2,634,500. An increase in oil sales volumes of
18,894 Bbls to 90,165 Bbls in 2021 from 71,271 Bbls in 2020 resulted in a
positive volume variance of $685,540.
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As disclosed in Supplemental Schedule 1 of the Unaudited Supplemental Financial
Information included below in Item 8, working interests in oil extensions and
discoveries were not adequate to replace working interest reserves produced in
2021 or 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.
Operating Costs and Expenses
Operating costs and expenses increased $1,237,669 (17%) to $8,475,542 in 2021
from $7,237,873 in 2020. The material components of operating costs and expenses
are discussed below.
Production Costs. Production costs increased $843,508 (45%) to $2,721,827 in
2021 from $1,878,319 in 2020. The increase was the result of a $412,078 (31%)
increase in lease operating expense to $1,731,641 in 2021 from $1,319,563 in
2020, a $282,139 (137%) increase in gross production taxes to $488,810 in 2021
from $206,671 in 2020, and a $149,291 increase in hauling and compression costs
to $501,376 in 2021 from $352,085 in 2020. Gross production taxes are state
taxes, which are calculated as a percentage of gross proceeds from the sale of
products from each producing oil and gas property, therefore, they fluctuate
with the change in the dollar amount of revenues from oil and gas sales.
Exploration Costs. Under the successful efforts method of accounting used by the
Company, geological and geophysical costs are expensed as incurred, as are the
costs of unsuccessful exploratory drilling. The costs of successful exploratory
drilling and all development costs are capitalized. Total costs of exploration
and development, excluding asset retirement obligations but inclusive of
geological and geophysical costs, were $1,209,748 in 2021 and $1,268,387 in
2020. See Item 8, Note 8 to the accompanying consolidated financial statements
for a breakdown of these costs. Exploration and acquisition costs charged to
operations were $687,648 in 2021 and $161,288 in 2020, inclusive of geological
and geophysical costs of $468,199 in 2021 and $64,898 in 2020.
For the year ended December 31, 2021, the Company participated in the drilling
of 5 gross exploratory working interest wells, including 1 in progress at the
end of 2020, and 10 gross development working interest wells, including 4 in
progress at the end of 2021, with working interests ranging from a high of 22%
to a low of 3.2%. Of the 5 exploratory wells, 3 were completed as producing
wells, and 2 as dry holes. Of the 10 development wells, all were completed as
producing wells.
The following is a summary as of March 4, 2022, updating both exploration and
development activity from December 31, 2020, for the period ended December 31,
2021.
The Company has been 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,
two as commercial oil producers and three as marginal oil producers. Capitalized
costs for the period were $207,234. Dry hole costs of $36,686 were 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 participated with a 20%
interest in the purchase and re-processing of two seismic lines in an effort to
develop gas prospects on the acreage. That effort is ongoing. Capitalized costs
for the period were $21,513 and geophysical costs were $6,274.
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 have been placed back on production. An additional exploratory well is
currently in progress. Capitalized costs for the period were $176,562.
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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 now
sold of a portion of their interest. The Company participated with an 18%
working interest in the drilling of an exploratory horizontal well on the
prospect. The well was successfully drilled with casing set, and it is currently
awaiting completion. Geological costs for the period were $45,000 and
capitalized costs were $228,283.
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 $358,426 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 was
completed as a commercial oil producer. Capitalized costs for the period were
$7,346.
The Company participated with its 22% working interest in the drilling of a
development well on a Barber County, Kansas prospect. The well was completed as
a marginal gas producer. Capitalized costs for the period were $103,542.
In July 2021, the Company acquired a 20% interest in 960 net acres of leasehold
on a Finney County, Kansas prospect. The Company participated in the drilling of
an exploratory well and a step-out well on the prospect. The exploratory well
was completed as a commercial oil producer and a completion is in progress on
the step-out well. Geological costs for the period were $25,000 and capitalized
costs were $157,307.
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. The Company
participated in the drilling of an exploratory horizontal well and a development
horizontal well on the prospect and both have been completed as commercial oil
and gas producers. The Company also participated with its prospect interest in
the purchase of an approximately 94% interest in eight horizontal producing
wells and a saltwater disposal well for $403,550 in October and November 2021,
primarily to acquire the disposal well. Additional capitalized costs for the
period were $337,289.
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 owned working interests in almost all of these properties.
Depreciation, Depletion, Amortization and Valuation Provisions (DD&A). Major
components of DD&A are the provision for impairment of undeveloped leaseholds,
provision for impairment of long-lived assets, depletion of producing leaseholds
and depreciation of tangible and intangible lease and well costs. Undeveloped
leaseholds are amortized over the life of the leasehold (most are 3 years) using
a straight-line method, except when the leasehold is impaired or condemned by
drilling and/or geological interpretation of seismic data; if so, an adjustment
to the provision is made at the time of impairment. The provision for impairment
of undeveloped leaseholds was $64,835 in 2021 versus $36,872 in 2020.
As discussed in Item 8, Note 10 to the accompanying consolidated financial
statements, accounting principles require the recognition of an impairment loss
on long-lived assets used in operations when indicators of impairment are
present. Impairment evaluation is a two-step process. The first step is to
measure when the undiscounted cash flows estimated to be generated by those
assets, determined on a well basis, is less than the assets' carrying amounts.
The second step is to adjust those assets meeting the first criterion to
estimated fair value. Evaluation for impairment was performed in both 2021 and
2020. The 2021 impairment loss was $1,673,929 and the 2020 impairment loss was
$2,517,873.
The depletion and depreciation of oil and gas properties are computed by the
units-of-production method. The amount expensed in any year will fluctuate with
the change in estimated reserves of oil and gas, a change in the rate of
production or a change in the basis of the assets. The provision for depletion
and depreciation was $937,206 in 2021 and $798,805 in 2020. The provision
includes $137,732 for 2021 and $83,453 for 2020 for the amortization of the
asset retirement costs. See Item 8, Note 2 to the accompanying consolidated
financial statements for additional information regarding the asset retirement
obligation. The provision for depreciation for other assets was $78,953 in 2021
and $45,725 in 2020.
General, Administrative and Other (G&A). G&A increased $512,153 (28%) to
$2,311,144 in 2021 from $1,798,991 in 2020. The increase was primarily due to
expenses of $319,574 related to water well drilling costs, $134,487 in
consulting and compliance costs related to the implementation of new accounting
software, and $76,813 in software and consulting costs related to the
implementation of new mineral management software. The Company also experienced
human resource turnover with multiple retirements of long-term employees that
resulted in a net increase of approximately $36,000 in human resource costs and
accounting service fees to transition into new processes. The increases were
offset by a net decrease of $54,721 in all other G&A account activity.
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Equity Loss in Investees
Equity loss in investees increased $44,186 (40%) to $154,041 in 2021 from
$109,855 in 2020. The 2021 net loss consisted of Broadway Sixty-Eight, LLC
("Broadway 68") income of $23,290, Broadway Seventy-Two, LLC ("Broadway 72")
losses of $51,307, Grand Woods Development, LLC ("Grand Woods") losses of
$123,327 and QSN Office Park, LLC ("QSN") losses of $2,697. Broadway 72 is the
Company's investment in a commercial building. Capital improvements in the
building resulted in securing a long-term lease in early 2022. Grand Woods has
entered an agreement to sell a portion of the real estate offering in the
investment. Proceeds from the sale will reduce or eliminate the senior note on
the property, with the potential of reducing or eliminating the Company's note
receivable from Grand Woods.
Other Income, Net
Other income, net decreased $65,519 (8%) to $709,563 in 2021 from $775,082 in
2020. See Item 8, Note 11 to the accompanying consolidated financial statements
for a breakdown of other income. The material components of other income are
discussed below.
Net realized and unrealized gain on equity securities increased $140,156 (32%)
to $573,631 in 2021 from $433,475 in 2020. Realized gains or losses result when
an equity security is sold. Unrealized gains or losses result from adjusting the
Company's carrying amount in equity securities owned at the reporting date to
estimated fair value. In 2021, the Company had realized gains of $176,858 and
unrealized gains of $396,773. In 2020, the Company had realized gains of
$136,555 and unrealized gains of $296,920.
Income from other investments decreased $238,611 to $3,255 in 2021 from $241,866
in 2020, primarily resulting from a sale of property in OKC Industrial
Properties, LC in 2020, with none in 2021.
The Company had a loss on asset sales of $184,806 in 2021 as compared to a gain
on asset sales of $23,590 in 2020. The loss in 2021 was primarily related to the
loss of $223,698 on Ocean's NG, one of the Company's other investments, offset
by other net gains of $38,892.
Interest income decreased $123,868 (84%) to $23,999 in 2021 from $147,867 in
2020 and dividend income increased $355,982 to $364,469 in 2021 from $8,487 in
2020, primarily due to the Company's shift in investment strategy.
Income Tax Benefit
In 2021, the Company had an estimated income tax benefit of $54,889 as the
result of a deferred tax benefit of $17,307 and a current tax benefit of
$37,582. In 2020, the Company had an estimated income tax benefit of $534,293 as
the result of a deferred tax benefit of $348,738 and a current tax benefit of
$185,555. See Item 8, Note 6 to the accompanying consolidated financial
statements for an analysis of the various components of income taxes and a
discussion of the federal tax rate change.
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