This discussion and analysis should be read with reference to a similar
discussion in the 2021 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 gas wells, the production that may be obtained from oil and
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 2021 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.
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
Executive Overview
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, equipment and materials, and national and world
economic performance. 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.
The military conflict between Russia and Ukraine and related economic sanctions
imposed on Russia has impacted existing supply shortages, causing oil and
natural gas prices to increase even more during the first quarter of 2022.
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 quarter of 2022, the Company continued to fund its
business activity using internal sources of cash. The Company had net cash
provided by operations of $1,441,668 in the three months ending March 31, 2022.
The Company had sales of equity securities of $628,126, proceeds from disposal
of property, plant and equipment of $457,898, and cash distributions from other
investments of $8,318, for total cash provided by investing activities of
$1,094,342 in the three months ending March 31, 2022. The Company utilized cash
for the purchase of property of $1,069,680, purchase of equity method
investments of $174,006 and purchase of equity securities of $1,520,591 for
total cash applied of $2,764,277 in the three months ending March 31, 2022. Cash
and cash equivalents decreased $228,267 (<3%) to $9,900,890 at March 31, 2022
from $10,129,157 at December 31, 2021.
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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, 2021. A discussion of these items
follows.
Equity securities increased $735,651 (8%) to $9,878,008 as of March 31, 2022
from $9,142,357 at December 31, 2021. The increase was the result of $751,915 in
net purchases and a $16,264 decrease in market value.
Refundable income taxes decreased $49,326 (14%) to $301,601 as of March 31, 2022
from $350,927 at December 31, 2021.
Accounts receivable increased $752,293 (55%) to $2,115,256 as of March 31, 2022
from $1,362,963 at December 31, 2021. The increase was primarily related to
increased production and increased oil and gas prices during the period ending
March 31, 2022.
Discussion of Significant Changes in the Condensed Statements of Cash Flows. As
noted in the first paragraph above, net cash provided by operating activities
was $1,441,668 in the three months ended March 31, 2022, an increase of
$1,032,974 (253%) from the comparable period in 2021 of $408,694. For more
information see "Operating Revenues" and "Other Income, Net" below.
Cash applied to the purchase of property additions in the three months ended
March 31, 2022 was $1,069,680, an increase of $432,444 (68%) from cash applied
in the comparable period in 2021 of $637,236. For 2022, cash applied to property
additions was all related to oil and gas exploration and development activity.
See the subheading "Exploration Costs" in the "Results of Operations" section
below for additional information.
Cash applied to the purchase of equity securities in the three months ended
March 31, 2022 was $1,520,591, compared to $1,036,150 in the comparable period
in 2021. Cash provided by the sale of equity securities in the three months
ended March 31, 2022 was $628,126, compared to $700,602 in the comparable period
in 2021.
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 2021 Form 10-K
would not be representative of the Company's current position.
RESULTS OF OPERATIONS
Net income increased $1,426,013 (550%) to $1,685,479 in the three months ended
March 31, 2022 from $259,466 in the comparable period in 2021. Net income per
share, basic, increased $9.13 to a net income per share of $10.79 in the three
months ended March 31, 2022 from a net income per share of $1.66 in the
comparable period in 2021.
A discussion of revenue from oil and gas sales and other significant line items
in the consolidated statements of income follows.
Operating Revenues. Revenues from oil and gas sales increased $1,833,370 (115%)
to $3,433,824 in the three months ended March 31, 2022 from $1,600,454 in 2021.
Of the $1,833,370 increase, crude oil sales increased $1,362,905; natural gas
sales increased $385,972; and miscellaneous oil and gas product sales increased
$84,493.
The $1,362,905 (138%) increase in oil sales to $2,352,133 in the three months
ended March 31, 2022 from $989,228 in the comparable period in 2021 was the
result of an increase in the volume sold and an increase in the average price
per barrel (Bbl). The volume of oil sold increased 6,198 Bbls to 25,039 Bbls in
the three months ended March 31, 2022, resulting in a positive volume variance
of $325,415 compared to the comparable period in 2021. The average price per Bbl
increased $41.43 to $93.94 per Bbl in the three months ended March 31, 2022,
resulting in a positive price variance of $1,037,490 compared to the comparable
period in 2021.
The $385,972 (71%) increase in gas sales to $936,808 in the three months ended
March 31, 2022 from $550,836 in the comparable period in 2021 was the result of
an increase in the average price per thousand cubic feet (MCF), partially offset
by a decrease in the volume sold. The volume of gas sold decreased 11,662 MCF to
170,158 MCF in the three months ended March 31, 2022 from 181,820 MCF in the
comparable period in 2021, for a negative volume variance of $(35,332). The
average price per MCF increased $2.48 to $5.51 per MCF in the three months ended
March 31, 2022 from $3.03 per MCF in the comparable period in 2021, resulting in
a positive price variance of $421,303.
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.
Sales of miscellaneous oil and gas products increased $84,493 (140%) to $144,883
in the three months ended March 31, 2022 from $60,390 in the comparable period
in 2021.
Lease bonuses and other increased $236,400 to $236,400 in the three months ended
March 31, 2022 from none in the comparable period in 2021. The Company had
$37,654 in lease bonuses and $198,746 in gain on the sale of unproved
properties.
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The Company had water well drilling revenues of $275,534 in the three months
ended March 31, 2022 related to water well drilling through TWSTX, with none in
the comparable period in 2021.
Operating Costs and Expenses. Operating costs and expenses increased $381,583
(28%) to $1,743,128 in the three months ended March 31, 2022 from $1,361,545 in
the comparable period in 2021. The increase was primarily due to increased
production, revenue, and drilling activity in the 2022 period.
Production Costs. Production costs increased $251,616 (48%) to $778,175 in the
three months ended March 31, 2022 from $526,559 in the comparable period in
2021. This increase was primarily the result of an increase of $136,720 in lease
operating expense and an increase of $60,500 in production tax and an increase
of $54,396 in hauling, compression and other expenses.
Exploration Costs. Total exploration expense decreased $69,971 to $(53,781) in
the three months ended March 31, 2022 from $16,190 in the comparable period in
2021. This change was the result of an increase in geological and geophysical
costs of $13,210, an increase in dry hole costs, P&A and other costs of $75,612,
offset by an adjustment to leaseholds of $158,793.
The following is a summary as of May 6, 2022, updating both exploration and
development activity from December 31, 2021, for the period ended March 31,
2022.
The Company participated with its 14.85% working interest in the drilling of an
exploratory well on a San Patricio County, Texas prospect. It is currently
awaiting completion. An exploratory well will be drilled on another nearby
prospect starting in July 2022. Leasehold costs for the period were $2,325.
Additional capitalized costs were $205,673.
The Company participated with its 18% working interest in the drilling of an
exploratory horizontal well on a Nolan County, Texas prospect. The well was
successfully drilled with casing set, and it is currently awaiting completion.
An old well has been re-entered and converted to a saltwater disposal well.
Geological costs for the period were $11,250. Leasehold costs were $12,903 and
additional capitalized costs were $238,105.
The Company participated with its 3% working interest in the drilling of a
development well on a Hitchcock County, Nebraska prospect. It is currently
awaiting completion. Capitalized costs for the period were $4,259.
The Company participated with its 20% working interest in the drilling of a
step-out well on a Finney County, Kansas prospect. The well was completed as a
commercial oil producer. Capitalized costs for the period were $125,000.
In January 2022, the Company purchased a 20% interest in 1,536 net acres of
leasehold on another Finney County, Kansas prospect for $41,150. An exploratory
well was drilled on the prospect and completed as a dry hole. Dry hole costs for
the period were $78,294.
The Company participated with its 10% working interest in the drilling of a
development horizontal well on a Logan County, Oklahoma prospect. The well was
completed as a commercial oil and gas producer. The Company will participate in
the drilling of three additional development horizontal wells on the prospect
starting in May 2022. Capitalized costs for the period were $329,793, including
$5,855 of prospect leasehold costs.
The Company participated with a 1% working interest in the drilling of a
development horizontal well on fee minerals located in Ellis County, Oklahoma. A
completion is in progress. Capitalized costs for the period were $67,953.
The Company participated with its 19% working interest in the drilling of a
development well on a Woods County, Oklahoma prospect. It is currently awaiting
completion.
At this time, the oil and gas industry is experiencing severe shortages of
personnel, equipment and materials. The pending activity discussed above may or
may not proceed as scheduled or in a timely manner, depending on the ability of
our operators to secure the needed services and materials.
Depreciation, Depletion, Amortization and Valuation Provision (DD&A). DD&A
increased $89,921 (37%) to $335,046 in the three months ended March 31, 2022
from $245,125 in the comparable period in 2021, primarily due to an increase in
drilling costs in the current period.
General, Administrative and Other (G&A). G&A decreased $39,504 (7%) to $534,167
in the three months ended March 31, 2022 from $573,671 in the comparable period
in 2021. The decrease was primarily due to a decrease in accounting services and
consulting costs related to implementation of new accounting software.
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Other Income/(Loss), Net. Other Income/(Loss), Net decreased $152,050 to loss of
$(65,106) in the three months ended March 31, 2022 from income of $86,944 in the
comparable period in 2021. See Note 3 to the accompanying consolidated financial
statements for the various components of Other Income, Net.
Income Tax Provision. In the three months ended March 31, 2022, the Company had
an estimated income tax provision of $368,588 as the result of a deferred tax
provision of $317,418 and a current tax provision of $51,170. In the comparable
period in 2021, the Company had an estimated income tax provision of $67,472 as
the result of a deferred tax provision of $163,675 and a current tax benefit of
$96,203. See Note 5 to the accompanying consolidated financial statements for
additional information on income taxes.
Off-Balance Sheet Arrangement
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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