THE RESERVE PETROLEUM COMPANY Please refer to the financial statements and related notes in Item 8 of this Form 10-K to supplement this discussion and analysis.
Forward-Looking Statements
In addition to historical information, from time to time the Company may publish 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 provide the reader with management's current expectations of future events. They include statements relating to such matters as anticipated financial performance, business prospects such as drilling of oil and gas wells, technological development, and similar matters.
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Although management believes that the expectations reflected in forward-looking statements are based on reasonable assumptions, a variety of factors could cause the Company's actual results and experience to differ materially from the anticipated results or other expectations expressed in the Company's forward-looking statements. The risks and uncertainties that may affect the operations, performance, development, and results of our business include, but are not limited to, the following:
? The Company's future operating results will depend upon management's ability
to employ and retain quality employees, generate revenues, and control
expenses. Any decline in operating revenues, without corresponding reduction
in operating expenses, could have a material adverse effect on our business,
results of operations, and financial condition.
? The Company has no significant long-term sales contracts for either oil or
gas. For the most part, the price we receive for our product is based upon the
spot market price, which in the past has experienced significant fluctuations.
Management anticipates price fluctuations will continue in the future, making
any attempt at estimating future prices subject to significant uncertainty. In
March 2020 , oil prices dropped significantly, to their lowest levels in 18
years. These depressed oil prices will result in a significant reduction of
our revenues. To the extent oil and gas prices remain depressed or decline
further, the Company's results of operation and financial condition will
continue to be adversely impacted.
? Exploration costs have been a significant component of the Company's capital
expenditures in the past and are expected to remain so in the near term. Under
the successful efforts method of accounting for oil and gas properties which
the Company uses, these costs are capitalized if drilling is successful or
charged to operating costs and expenses if unsuccessful. Estimating the amount
of future costs which may relate to successful or unsuccessful drilling is
extremely imprecise at best.
The Company does not undertake any obligation to publicly revise forward-looking
statements to reflect events or circumstances that arise after the filing date
of this Form 10-K. Readers should carefully review the information described in
other documents the Company files from time to time with the
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 of time. 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, and 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.
? 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.
We may be required to recognize significant impairment of our long-lived
assets as a result of the significant decrease in oil and gas prices in March
2020 .
? 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.
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? 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 taking into account 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.© Edgar Online, source
