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.
? Reserves relating to the Company's proved properties may become uneconomic to
produce resulting in impairment of proved properties.
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? 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 2022, 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 and equity
securities. Cash equivalents are highly liquid debt instruments purchased with a
maturity of three months or less.
In 2022, net cash provided by operating activities was $8,850,077, net cash
applied to investing activities was $10,102,441 and net cash applied to
financing activities was $1,577,569.
Other than cash and cash equivalents, other significant changes in working
capital include the following:
Available-for-sale debt securities increased to $4,208,648 in 2022 from zero in
2021. This was the result of the Company's shift in cash management and
investment strategy to available-for-sale debt securities from equity
securities.
Equity securities decreased $6,839,398 (75%) to $2,302,959 in 2022 from
$9,142,357 in 2021. The net decrease is due to sales in excess of purchases of
$5,204,158 and net realized and unrealized losses of $1,635,240.
Refundable income taxes decreased $230,697 (66%) to $120,230 in 2022 from
$350,927 in 2021, primarily resulting from increased taxable income that
resulted in increases in the current tax provision.
Accounts receivable increased $955,220 (70%) to $2,318,183 in 2022 from
$1,362,963 in 2021, primarily due to changes in oil and gas sales receivables in
an increased pricing environment.
Accounts payable increased $138,621 (53%) to $399,735 in 2022 from $261,114 in
2021, primarily due to the timing of payable processing.
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Other current liabilities decreased $186,879 (71%) to $75,675 in 2022 from
$262,554 in 2021, due to a decrease in deferred revenues of $186,274 and a net
decrease of $605 in gas balancing payables and other liabilities.
The note payable was recorded as a result of consolidation of Grand Woods. See
Note 8 - NOTE PAYABLE for details of note payable.
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, 2022 and 2021. 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 2022 were $8,850,077, which,
when compared to the $3,777,163 provided in 2021, represents a net increase of
$5,072,914 (134%). Significant items effecting the change are discussed below.
Cash provided by oil and gas sales increased $5,872,374 (73%) to $13,928,206 in
2022 from $8,055,832 in 2021, 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 lease bonuses increased $279,510 to $289,314 in 2022 from
$9,804 in 2021.
Cash provided by service revenue was $788,941 in 2022, with $713,941 provided by
water well drilling services. Cash provided in connection with a management
services agreement with Mesquite Minerals, Inc. was $75,000, all of which was
recorded as deferred revenue in other current liabilities. In 2021, of the
$303,356 received for services, $42,082 was recognized in service revenue and
$261,274 was recorded as deferred revenue in other current liabilities, all of
which was recognized in service revenue in 2022.
Cash provided by interest increased $58,949 to $62,223 in 2022 from $3,274 in
2021. This increase was the result of the Company's shift in cash management and
investment strategy to available-for-sale debt securities from equity
securities.
Cash applied to production and exploration costs increased $1,247,063 (49%) to
$3,804,075 in 2022 from $2,557,012 in 2021 and cash applied to general
suppliers, employees and taxes, other than income taxes increased $627,914 (27%)
to $2,961,853 in 2022 from $2,333,939 in 2021. See "Results of Operations" below
for discussion of these items.
Investing Activities
Net cash applied to investing activities was $10,102,441 in 2022, an increase of
$1,105,127 (12%) compared to net cash applied to investing activities of
$8,997,314 in 2021. The 2022 amount was the result of purchases of
available-for-sale debt securities of $4,208,648, net property purchases of
$9,732,874, a net increase of cash applied to equity method and other
investments of $1,365,078 and net equity securities sales of $5,204,159.
Financing Activities
Cash applied to financing activities increased $739,792 (88%) to $1,577,569 in
2022 from $837,777 in 2021. Cash applied to financing activities consist of cash
dividends on common stock, cash used for the purchase of treasury stock, and
payments of notes payable. In 2022, cash dividends paid on common stock amounted
to $1,561,573 compared to $782,892 in 2021. Dividends of $10.00 per share were
paid in 2022 and $5.00 per share were paid in 2021. Cash applied to purchase
treasury stock decreased $52,805 to $2,080 in 2022 from $54,885 in 2021.
RESULTS OF OPERATIONS
As disclosed in the consolidated statements of income in Item 8 of this Form
10-K, in 2022 the Company had net income attributable to common stockholders of
$4,000,751 compared to net income of $1,251,295 in 2021. Net income per share
attributable to common stockholders, basic and diluted, was $25.62 in 2022, an
increase of $17.62 per share (220%) from net income of $8.00 in 2021. Material
line-item changes in the consolidated statements of income will be discussed in
the following paragraphs.
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Operating Revenues
Operating revenues increased $7,054,458 (77%) to $16,170,884 in 2022 from
$9,116,426 in 2021. Oil and gas sales increased $5,834,679 (65%) to $14,869,219
in 2022 from $9,034,540 in 2021. Lease bonuses and other revenues increased
$285,740 to $295,544 in 2022 from $9,804 in 2021. Water well drilling services
increased $934,039 to $1,006,121 in 2022 from $72,082 in 2021. The increase in
oil and gas sales is discussed in the following paragraphs.
The $5,834,677 increase in oil and gas sales was the result of a $1,714,253
increase in gas sales, a $4,070,217 increase in oil sales and a $50,207 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 2021 to
2022. Miscellaneous oil and gas product sales of $550,341 in 2022 and $500,132
in 2021 are not included in the analysis.
(in thousands, except Variance
per Unit prices)
Production 2022 Price Volume 2021
Gas -
MCF 711 27 684
$ $ 4,342 $ 1,611 $ 103 $ 2,628
Unit Price $ 6.11 $ 2.27 $ 3.84
Oil -
Bbls 107 17 90
$ $ 9,976 $ 2,941 $ 1,129 $ 5,906
Unit Price $ 92.88 $ 27.38 $ 65.50The $1,714,253 (65%) increase in natural gas sales to $4,342,725 in 2022 from
$2,628,472 in 2021 was the result of an increase 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 $2.27 per MCF to $6.11 per
MCF in 2022 from $3.84 per MCF in 2021, resulting in a positive gas price
variance of $1,611,126. A positive volume variance of $103,127 was the result of
an increase in natural gas volumes sold of 26,848 MCF to 711,172 MCF in 2022
from 684,324 MCF in 2021.
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 2022.
The $4,070,217 (69%) increase in crude oil sales to $9,976,153 in 2022 from
$5,905,936 in 2021 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 $27.38 to $92.88 in 2022 from $65.50 in 2021, resulting in a
positive oil price variance of $2,940,884. An increase in oil sales volumes of
17,241 Bbls to 107,406 Bbls in 2022 from 90,165 Bbls in 2021 resulted in a
positive volume variance of $1,129,333.
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 2022.
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 $1,281,830 (15%) to $9,741,059 in 2022
from $8,459,229 in 2021. The material components of operating costs and expenses
are discussed below.
Production Costs. Production costs increased $918,097 (34%) to $3,639,924 in
2022 from $2,721,827 in 2021. The increase was the result of a $589,095 (34%)
increase in lease operating expense to $2,320,736 in 2022 from $1,731,641 in
2021, a $336,395 (69%) increase in gross production taxes to $825,205 in 2022
from $488,810 in 2021, and a $7,393 decrease in hauling and compression costs to
$493,983 in 2022 from $501,376 in 2021. The increase in lease operating expense
was primarily due to the addition of new wells in 2022, a significant portion of
which were horizontal. 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.
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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 $5,377,898 in 2022 and $1,209,748 in
2021. See Item 8, Note 9 to the accompanying consolidated financial statements
for a breakdown of these costs. Exploration and acquisition costs charged to
operations were $474,773 in 2022 and $687,648 in 2021, inclusive of geological
and geophysical costs of $300,993 in 2022 and $468,199 in 2021.
For the year ended December 31, 2022, the Company participated in the drilling
of 11 gross exploratory working interest wells and 15 gross development working
interest wells, with working interests ranging from a high of 26% to a low of
0.4%. Of the 11 exploratory wells, 3 were completed as producing wells, 3 as dry
holes and 5 wells were in progress at the end of 2022. Of the 15 development
wells, 14 were completed as producing wells and 1 well was in progress at the
end of 2022.
The following is a summary as of March 3, 2023, updating both exploration and
development activity from December 31, 2021, for the period ended December 31,
2022.
The Company participated with its 16.71% working interest in the drilling of
exploratory wells on two San Patricio County, Texas prospects. Completion
attempts of both wells are in progress. Leasehold costs for the period were
$2,439. Additional capitalized costs were $629,797.
The Company participated with its 20.25% working interest in the drilling of an
exploratory horizontal well on a Nolan County, Texas prospect. The well was
completed as a commercial oil and gas producer. An old well was re-entered and
converted to a saltwater disposal well. Geological costs for the period were
$40,500. Actual leasehold costs of $152,944 for the period were offset by
$457,898 of proceeds from the sell down of the Company's interest. Additional
capitalized costs were $1,612,035.
The Company participated with a 3% working interest in the drilling of a
step-out well and with a 4.5% working interest in a development well on a
Hitchcock County, Nebraska prospect. A completion attempt of the first well was
unsuccessful, and it is under evaluation for use as an injection or disposal
well. The second well was completed as a commercial oil producer. Capitalized
costs for the period were $40,544.
The Company participated with its 26% working interest in the re-entry and wash
down of an old dry hole on a Barber County, Kansas prospect. The well was
completed as a commercial gas producer. Capitalized costs for the period were
$93,341.
The Company participated with 20%, 22.5% and 22.5% working interests in the
drilling of three step-out wells on a Finney County, Kansas prospect. The first
well was completed as a commercial oil producer and a completion attempt is in
progress on the second. The third well was completed as a dry hole. Capitalized
costs for the period were $354,077.
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 $89,318.
The Company purchased 9%, 18% and 9% interests in three additional Finney
County, Kansas prospects. Exploratory wells drilled on the first two prospects
resulted in dry holes and an exploratory well is in progress on the third.
Leasehold costs for the period were $40,500, geological costs were $4,050 and
dry hole costs were $60,352.
The Company participated with its 10% working interest in the drilling of five
development horizontal wells on a Logan County, Oklahoma prospect. The wells
have all been completed as commercial oil and gas producers. Capitalized costs
for the period were $1,690,194, including $9,733 of prospect leasehold costs.
The Company participated with a 1% interest in the drilling of a development
horizontal well on fee minerals located in Ellis County, Oklahoma. The well was
completed as a commercial oil and gas producer. Capitalized costs for the period
were $70,089.
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The Company participated with its 22% working interest in the drilling of a
development well on a Woods County, Oklahoma prospect. The well was completed as
a commercial oil and gas producer. Capitalized costs for the period were
$190,258.
The Company participated with a 0.4% working interest in the drilling of an
exploratory horizontal well on leasehold in Stephens County, Oklahoma. The well
was completed as a commercial oil and gas producer. Capitalized costs for the
period were $37,612.
The Company participated with a 4.6% working interest in the drilling of an
exploratory horizontal well on leasehold in Dewey County, Oklahoma. The well was
completed as a commercial oil and gas producer. Capitalized costs for the period
were $368,010.
In April 2022 and subsequent months, the Company purchased a 6% interest in
leasehold, minerals and seismic on a Grayson County, Texas prospect for
$434,481. The Company participated in the drilling of an exploratory well on the
prospect that was completed as a dry hole. Dry hole costs for the period were
$266,717.
In August 2022, the Company purchased a 10% interest in 8,831 net acres of
leasehold and working interests ranging from 3.33% to 10% in 34 producing oil
wells in Campbell County, Wyoming for $2,700,000.
In August 2022, the Company purchased a 10% interest in 639.2 net acres of
leasehold on a Dewey County, Oklahoma prospect for $63,920. An exploratory
horizontal well has been drilled on the prospect and is awaiting completion.
Additional capitalized costs for the period were $429,670.
The Company has been participating with its 18% interest in drilling on a Creek
County, Oklahoma 3-D seismic project. There are currently five active prospects
within the project. Four development wells have been drilled on one of the
prospects. All four have been completed as commercial oil producers. Exploratory
wells are planned for each of the other four prospects in 2023. Leasehold costs
for the period were $2,780 and additional capitalized costs were $184,593.
The Company participated with its 22% working interest in the drilling of a
step-out well on a Chase County, Nebraska prospect. A completion is in progress.
Capitalized costs for the period were $99,434.
The Company has been participating with other industry partners in the
acquisition of leasehold rights in Ellis and Roger Mills Counties, Oklahoma. The
Company already owns fee minerals in the area and plans to participate in
horizontal wells in 2023. Leasehold costs for the period were $203,085.
The Company purchased the working interest properties of Mesquite Minerals,
Inc., an affiliated company, for $699,770 effective July 1, 2022. The Company
already owned working interests in these properties. The Company also purchased
non-producing leaseholds and other assets totaling $289,739. Management believes
the amounts paid are reasonable estimates of fair values of the assets acquired.
Water Well Drilling Services. Water well drilling services increased $531,983
(142%) to $907,447 from $375,554 in 2021. The increase was due to increases of
$126,011 in contract labor, $218,135 in repairs and maintenance, $146,156 in
equipment and auto expense, $36,306 in depreciation, and a net increase of
$5,375 in other operating expenses.
Grand Woods Expenses. Grand Woods expenses were $32,827 in 2022. These costs
consisted of $25,819 in property taxes, $3,400 in repairs and maintenance, and a
net $3,608 in other general and administrative costs. Grand Woods was not a
consolidated entity until the period ending September 30, 2022. As such, all
applicable expenses for 2021 were included in equity method investments.
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 $82,308 in 2022 versus $64,835 in 2021.
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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 2022 and
2021. The 2022 impairment loss was $1,109,455 and the 2021 impairment loss was
$1,673,929.
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 $1,543,184 in 2022 and $937,206 in 2021. The provision
includes $149,402 for 2022 and $137,732 for 2021 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 $67,059 in 2022
and $78,953 in 2021.
Gain on Disposition of Oil and Gas Properties. The Company had gains on oil and
gas property sales of $198,443 compared to a $16,313 gain in 2021. The current
period gain was primarily due to the sale of 29.75% ownership of assets in a
Nolan County, Texas prospect.
General, Administrative and Other (G&A). G&A increased $118,940 (6%) to
$2,082,525 from $1,963,585 in 2021. The increase was primarily due to a net
decrease of $99,473 in costs related to implementation of new accounting and
mineral management software in 2021, offset by increases in salaries and 401K
contributions of $147,682, real estate and franchise taxes of $20,383, and net
increases in all other G&A accounts of $50,348.
Equity Loss in Investees
Equity loss in investees increased $10,456 (7%) to $164,497 in 2022 from
$154,041 in 2021. The 2022 net loss consisted of Broadway Seventy-Two, LLC
("Broadway 72") losses of $168,228, Grand Woods loss of $15,972, Broadway
Sixty-Eight, LLC ("Broadway 68") income of $15,217 and QSN Office Park, LLC
("QSN") income of $4,486.
Other Income/(Loss), Net
Other income/(loss), net in 2022 was a loss of $1,185,161 and income of $693,250
in 2021. See Item 8, Note 12 to the accompanying consolidated financial
statements for a breakdown of other income/(loss), net. The material components
of other income/(loss) are discussed below.
Net realized and unrealized loss on equity securities was $1,635,240 in 2022
with a net realized and unrealized gain of $573,631 in 2021. 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 2022, the Company had realized losses
of $350,469 and unrealized losses of $1,284,771. In 2021, the Company had
realized gains of $176,858 and unrealized gains of $396,773.
Income from other investments increased $104,779 to $108,034 in 2022 from $3,255
in 2021, primarily resulting from distributions of income on newly invested
master limited partnerships.
The Company had a gain on asset sales of $49,823 in 2022 compared to a loss on
asset sales of $201,119 in 2021. The gain in 2022 was the result of a gain of
$26,777 on vehicle sales and other net gains of $23,046.
Interest income increased $74,232 (309%) to $98,231 in 2022 from $23,999 in 2021
and dividend income decreased $100,434 to $264,035 in 2022 from $364,469 in
2021, primarily due to the Company's shift in investment strategy back to
available-for-sale debt securities.
Income Tax Provision/(Benefit)
In 2022, the Company had an estimated income tax provision of $1,072,524 as the
result of a deferred tax provision of $1,068,275 and a current tax provision of
$4,249. 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. See Item 8, Note 5 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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