THE RESERVE PETROLEUM COMPANY COVID-19
In
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Our profitability has been and will likely continue to be significantly affected by this decreased demand and lower commodity price environment. The decline in commodity prices and our future estimated production levels could lead to additional material impairments of our long-lived assets, equity method investments and right-of-use assets. It is likely that additional impairments could be triggered if the COVID-19 pandemic leads to a continued and sustained reduction in global economic activity and demand for energy. We continue to evaluate all cash management strategies, maintaining conservative choices in short-term investments to protect cash reserves and liquidity.
Please refer to the 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.
? 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 balance sheets and the statements of cash flows included in this Form 10-K.
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In 2020, 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 are in excess of those
needed for other business activities, the remaining balance is used to increase
cash, cash equivalents 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/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 are
In 2020, net cash provided by operating activities was
Other than cash and cash equivalents, other significant changes in working capital include the following:
Equity securities increased
Refundable income taxes increased
Accounts receivable decreased
Notes receivable of
Accounts payable increased
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
Operating Activities
As noted above, net cash flows provided by operating activities in 2020 were
The
Interest received decreased
Investing Activities
Net cash provided by investing activities was
The
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Financing Activities
Cash applied to financing activities decreased
Forward-Looking Summary
The Company's latest estimate of business to be done beyond 2020 indicates the projected activity can be funded from cash flows from operations and other internal sources, including net working capital. The Company is engaged in exploratory drilling. If this drilling is successful, substantial development drilling may result. Also, should other exploration projects which fit the Company's risk parameters become available or other investment opportunities become known, capital requirements may be more than the Company has available. If so, the Company could require external sources of financing.
RESULTS OF OPERATIONS
As disclosed in the statements of operations in Item 8 of this Form 10-K, in
2020 the Company had a net loss of
Operating Revenues
Operating revenues decreased
The
(in thousands, except Variance
per Unit prices)
Production 2020 Price Volume 2019
Gas -
MCF 712 (103 ) 815
$ $ 1,283 $ (294 ) $ (229 ) $ 1,806
Unit Price $ 1.80 $ (0.42 ) $ 2.22
Oil -
Bbls 71 (13 ) 84
$ $ 2,586 $ (1,234 ) $ (685 ) $ 4,505
Unit Price $ 36.28 $ (17.31 ) $ 53.59 The
The decrease in the volume of gas production was the net result of new 2020 production of about 3,800 MCF, offset by a decline of about 107,000 MCF in production from previous wells. 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 not adequate to replace working interest reserves produced in 2020 or 2019.
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The gas production for 2020 and 2019 includes production from about 100 royalty
interest properties drilled by various operators in
The
The decrease in the oil volume production was the net result of new 2020 production of about 8,000 Bbls, offset by a 21,000 Bbl decline in production from previous wells. 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 2020 or 2019.
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 decreased
Production Costs. Production costs decreased
Exploration and Development 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
Update of Oil and Gas Exploration and Development Activity. For the year ended
The following is a summary as of
The Company is participating with its 14% interest in the acquisition of
additional leasehold and exploratory drilling on a
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The Company owns a 35% interest in 16,472.55 net acres of leasehold on a
The Company has been participating with a 13% interest in a
The Company has been participating with a 50% interest in an attempt to develop
oil prospects in the
The Company participated in an attempt to restore commercial production from a
well that was drilled and completed in 2019 on a
In
The Company is participating in the drilling of four horizontal development
wells on fee minerals located in
The Company largely curtailed its exploration and development activity due to
the historic collapse of oil prices in March and
Depreciation, Depletion, Amortization and Valuation Provisions (DD&A). Major
DD&A components 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
As discussed in Item 8, Note 10 to the accompanying 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. Those
assets meeting the first criterion are adjusted to estimated fair value.
Evaluation for impairment was performed in both 2020 and 2019. The 2020
impairment loss was
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
The provision for depreciation for other assets was
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Other Income, Net. See Item 8, Note 11 to the accompanying financial statements
for an analysis of the components of this line item for 2020 and 2019. Other
income, net increased
Net realized and unrealized gain on equity securities increased
Income from other investments increased
Gains on asset sales increased
Interest income decreased
Provision/(Benefit) for Income Taxes. In 2020, the Company had an estimated
income tax benefit of
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