This discussion and analysis should be read with reference to "Management's
Discussion and Analysis of Financial Condition and Results of Operations" 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 military conflict between Russia and Ukraine and related economic sanctions
imposed on Russia has created supply shortages, causing oil and natural gas
prices to increase throughout 2022. We cannot predict how the conflict will
affect oil and natural gas prices in the future.
Grand Woods Development, LLC ("Grand Woods") is an Oklahoma limited liability
company holding approximately 26.56 acres of undeveloped real estate in
northeast Oklahoma City. On September 15, 2022, Grand Woods converted existing
investor loans and credit enhancement fees to member units. Following this
conversion, the Company became the majority owner of the Grand Woods voting
units, which results in the requirement to consolidate Grand Woods' financials
with the Company financials effective for the period ending September 30, 2022.
The consolidation of Grand Woods resulted in the assets, liabilities, and
expenses of Grand Woods, along with the non-controlling interests relating to
Grand Woods being reflected in the Company's consolidated financial statements.
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 2022, the Company continued to fund its
business activity using internal sources of cash. The Company had net cash
provided by operations of $6,850,467, cash provided by distributions from other
investments of $109,450, sales of securities of $3,383,880, cash acquired in
consolidation of Grand Woods of $88,670 and cash provided by property
dispositions of $510,377 for total cash provided of $10,942,844. The Company
utilized cash for the purchase of available-for-sale debt securities of
$885,986, property additions of $9,394,596, the purchase of equity securities
and investments of $4,182,582 and financing activities of $1,563,653 for total
cash applied of $16,026,817. Cash and cash equivalents decreased $5,083,973 to
$5,045,184 as of September 30, 2022 from $10,129,157 at December 31, 2021.
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 decreased $2,390,520 (35%) to $6,751,837 as of September 30,
2022 from $9,142,357 at December 31, 2021. The decrease was the result of
$683,453 in net sales and a $1,707,067 net decrease in the equity securities'
market value.
Refundable income taxes decreased $295,118 (84%) to $55,819 as of September 30,
2022 from $350,927 at December 31, 2021, primarily resulting from tax refunds
paid on prior year carryovers.
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Accounts receivable increased $573,228 (42%) to $1,936,191 as of September 30,
2022 from $1,362,963 at December 31, 2021. This was the result of an increase in
oil and gas receivables of $531,522, primarily resulting from higher oil and
natural gas prices, and an increase in trade and other accounts receivable of
$41,706.
Accounts payable and other current liabilities decreased $133,679 (26%) to
$389,989 as of September 30, 2022 from $523,668 at December 31, 2021, due to
increases of $127,595 in trade accounts payable and accrued property taxes,
offset by a decrease of $261,274 in deferred revenues.
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 $6,850,467 in the nine months ended September 30, 2022,
an increase of $4,407,263 (180%) from cash provided in the comparable period in
2021 of $2,443,204. 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, 2022 was $9,394,596, an increase of $7,113,532 (312%) from
cash applied in the comparable period in 2021 of $2,281,064. In both 2022 and
2021, cash applied to property, plant and equipment additions was mostly related
to acquisitions of working interests and 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 purchase of available-for-sale debt securities in the nine
months ended September 30, 2022 was $885,986, 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 with none in 2022. Cash applied to equity
method and other investments in the nine months ended September 30, 2022 was
$1,220,342, a decrease of $376,400 (24%) from cash applied in the comparable
period of 2021 of $1,596,742.
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
Results of Operations - Nine Months Ended September 30, 2022
Net income increased $1,997,285 (129%) to $3,542,641 in the nine months ended
September 30, 2022 from $1,545,356 in the comparable period in 2021. Net income
per share, basic and diluted, increased $12.82 to $22.69 in the nine months
ended September 30, 2022 from $9.87 in the comparable period in 2021.
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 $4,471,125 (71%)
to $10,795,151 in the nine months ended September 30, 2022 from $6,324,026 in
the comparable period in 2021. The increase is due to an increase in crude oil
sales of $2,547,731, natural gas sales of $1,838,285, and miscellaneous oil and
natural gas product sales of $85,109.
The $2,547,731 (59%) increase in oil sales to $6,872,518 in the nine months
ended September 30, 2022 from $4,324,787 in the comparable period in 2021 was
the net result of a decrease in the volume sold and an increase in the average
price per barrel (Bbl). The volume of oil sold decreased 477 Bbls to 69,084 Bbls
in the nine months ended September 30, 2021, resulting in a negative volume
variance of $29,678. The average price per Bbl increased $37.31 to $99.48 per
Bbl in the nine months ended September 30, 2022 from $62.17 per Bbl in the
comparable period in 2021, resulting in a positive price variance of $2,577,409.
The $1,838,285 (109%) increase in gas sales to $3,528,247 in the nine months
ended September 30, 2022 from $1,689,962 in the comparable period in 2021 was
the result of an increase in the volume sold and an increase in the average
price per thousand cubic feet (MCF). The volume of natural gas sold increased
19,382 MCF to 524,600 MCF in the nine months ended September 30, 2022 from
505,218 MCF in the comparable period in 2021, for a positive volume variance of
$64,832. The average price per MCF increased $3.38 to $6.73 per MCF in the nine
months ended September 30, 2022 from $3.35 per MCF in the comparable period in
2021, resulting in a positive price variance of $1,773,452.
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.
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Sales of miscellaneous oil and gas products were $394,386 in the nine months
ended September 30, 2022 as compared to $309,277 in the comparable period in
2021, primarily related to increased oil prices.
The Company had water well drilling revenues of $826,662 in the nine months
ended September 30, 2022 related to water well drilling through TWSTX, with
$36,907 in the comparable period in 2021.
The Company received lease bonuses of $154,469 in the nine months ended
September 30, 2022 for leases on its owned minerals compared to $9,000 in the
comparable period in 2021.
Operating Costs and Expenses. Operating costs and expenses increased $580,835
(12%) to $5,490,827 in the nine months ended September 30, 2022 from $4,909,992
in the comparable period of 2021. Material line-item changes are discussed and
analyzed in the following paragraphs.
Production Costs. Production costs increased $663,032 (37%) to $2,477,893 in the
nine months ended September 30, 2022 from $1,814,861 in the comparable period in
2021. Lease operating expenses increased $343,366, primarily due to increased
drilling and workovers to increase production. Hauling, compression, and other
costs increased by $30,483 due to higher production and increased post
production costs on select wells. Gross production taxes increased $289,183, due
to increased production of oil and natural gas.
Exploration Costs. Exploration costs decreased $181,390 (65%) to $278,612 in the
nine months ended September 30, 2022 from $460,002 in the comparable period in
2021, due to decreases of $151,707 in geological and geophysical and other
expenses, an adjustment to leaseholds of $(158,793), offset by increases of
$129,110 in dry hole and plugging costs.
The following is a summary as of November 7, 2022, updating both exploration and
development activity from December 31, 2021, for the period ended September 30,
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 $557,359.
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
$30,375. 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 $1,448,928.
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 $20,579.
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 has been
completed and appears to be a commercial gas producer. Capitalized costs for the
period were $111,352.
The Company participated with 20% and 22.5% working interests in the drilling of
two 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. Capitalized costs for the period were $340,607.
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 participated with a 9% working interest in the drilling of an
exploratory well on a third Finney County, Kansas prospect. The well was
completed as a dry hole. Dry hole costs for the period were $45,450.
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 $1,828,954, including $6,346 of prospect leasehold costs.
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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 $68,326.
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 $34,971.
The Company participated with a 4.6% working interest in the drilling of an
exploratory horizontal well on leasehold in Dewey County, Oklahoma. A completion
is in progress. Capitalized costs for the period were $248,977.
In April 2022 and subsequent months, the Company purchased a 6% interest in
leasehold, minerals and seismic on a Grayson County, Texas prospect for
$433,927. The Company is participating in an exploratory well on the prospect
that is currently drilling.
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 Roger Mills County, Oklahoma prospect for $63,920. An exploratory
horizontal well will be drilled on the prospect starting in November 2022.
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. Three development wells have been drilled on one of the
prospects. Completions are in progress on two of these and the third is awaiting
completion. An exploratory well will be drilled on each of the other four
prospects starting in November 2022. Leasehold costs for the period were $1,457
and additional capitalized costs were $91,219.
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 $225,650.
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 at net book value totaling $289,739.
Management believes the amounts paid are reasonable estimates of fair values of
the assets acquired.
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.
Water Well Drilling Costs. Water well drilling costs increased $397,298 (184%)
to $613,711 in the nine months ended September 30, 2022 from $216,413 in the
comparable period in 2021. These costs consist of contract labor, equipment
rental and maintenance, fuel costs, and other operating supplies related to the
drilling of water wells through TWSTX.
Depreciation, Depletion, Amortization and Valuation Provision (DD&A). DD&A
decreased $31,859 (3%) to $918,648 in the nine months ended September 30, 2022
from $950,507 in the comparable period in 2021, primarily due to a decrease in
long-lived assets impairments of $176,578 resulting from increased oil and
natural gas prices, offset by a $144,719 net increase in depletion,
depreciation, and amortization due to increased production.
Gain on Disposition of Oil and Gas Properties. The Company had an increase in
gains on oil and gas property sales of $199,025 in the nine months ended
September 30, 2022 compared to $16,313 gain in the comparable period 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 decreased $83,534 (6%) to
$1,400,988 in the nine months ended September 30, 2022 from $1,484,522 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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Equity Losses in Investees. Equity losses in investees increased $46,127 (71%)
to $(111,105) in the nine months ended September 30, 2022 from $(64,978) in the
comparable period in 2021. Losses were made up of losses of $119,392 in Broadway
Seventy-Two, LLC ("Broadway 72"), losses of $12,788 in QSN Office Park, LLC
("QSN"), and income of $21,075 in Broadway Sixty-Eight, LLC ("Broadway 68"). See
Note 4 to the accompanying financial statements for additional information on
equity method investments.
Other Income/(Loss), Net. Other income/(loss), net was $(1,617,765) in the nine
months ended September 30, 2022 as compared to $360,468 in the comparable period
in 2021. See Note 3 to the accompanying consolidated financial statements for an
analysis of the components of this line item.
Income Tax Provision. Income tax provision increased $803,869 (381%) to
$1,014,747 in the nine months ended September 30, 2022 from $210,878 in the
comparable period in 2021. Of the 2022 tax provision, estimated current tax
provision was $68,723 and estimated deferred tax provision was $946,024. Of the
2021 income tax provision, the estimated current tax provision was $117,983 and
the estimated deferred tax provision was $92,895. See Note 5 to the accompanying
consolidated financial statements for additional information on income taxes.
Results of Operations - Three Months Ended September 30, 2022
Net income increased $388,533 to $1,031,252 in the three months ended
September 30, 2022 from $642,719 in the comparable period in 2021. The
significant changes in the consolidated statements of income are discussed
below. Net income per share, basic and diluted, increased $2.49 to $6.60 in the
three months ended September 30, 2022 from $4.11 in the comparable period in
2021.
Operating Revenues. Revenues from oil and gas sales increased $86,246 (3%) to
$3,322,974 in the three months ended September 30, 2022 from $3,236,728 in the
comparable period in 2021. The increase is due to an increase in natural gas
sales of $569,434, offset by decreases in oil sales of $416,032 and
miscellaneous oil and gas product sales of $67,156.
The $416,032 (18%) decrease in oil sales to $1,891,312 in the three months ended
September 30, 2022 from $2,307,344 in the comparable period in 2021 was the net
result of a decrease in the volume sold and an increase in the average price per
barrel (Bbl). The volume of oil sold decreased 12,921 Bbls to 20,600 Bbls in the
three months ended September 30, 2022, resulting in a negative volume variance
of $889,366. The average price per Bbl increased $22.98 to $91.81 per Bbl in the
three months ended September 30, 2022 from $68.83 per Bbl in the comparable
period in 2021, resulting in a positive price variance of $473,334.
The $569,434 (78%) increase in gas sales to $1,302,751 in the three months ended
September 30, 2022 from $733,317 in the comparable period in 2021 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 8,570 MCF to 173,546
MCF in the three months ended September 30, 2022 from 182,116 MCF in the
comparable period in 2021, for a negative volume variance of $34,512. The
average price per MCF increased $3.48 to $7.51 per MCF in the three months ended
September 30, 2022 from $4.03 per MCF in the comparable period in 2021,
resulting in a positive price variance of $603,945.
Operating Costs and Expenses. Operating costs and expenses decreased $140,985
(6%) to $2,156,690 in the three months ended September 30, 2022 from $2,297,675
in the comparable period in 2021. The decrease was primarily the net result of
an increase in production costs of $72,960; a decrease in exploration costs
charged to expense of $146,220; an increase in water well drilling costs of
$143,805; a decrease in DD&A of $268,791; and an increase in G&A of $56,191.
Equity Losses in Investees. Equity losses in investees decreased $56,736 (87%)
to $(8,227) in the three months ended September 30, 2022 from $(64,963) in the
comparable period in 2021. See Note 4 to the accompanying financial statements
for additional information on equity method investments.
Other Income/(Loss), Net. Other income/(loss), net decreased $45,515 (45%) in
the three months ended September 30, 2022 to $(55,009) from $(100,524) in the
comparable period in 2021. See Note 3 to the accompanying consolidated financial
statements for an analysis of the components of this item.
Income Tax Provision/(Benefit). Income tax provision increased $274,161 to
$367,241 in the three months ended September 30, 2022 from $93,080 in the
comparable period in 2021. Of the 2022 tax provision, estimated current tax
provision was $655,691 and estimated deferred tax benefit was $(288,450). Of the
2021 income tax provision, the estimated current tax benefit was $(5,125) and
the estimated deferred tax provision was $98,205. 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.
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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, 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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