This discussion and analysis should be read with reference to a similar
discussion in the 2020 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 2020 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
COVID-19
In March 2020, the World Health Organization declared the COVID-19 outbreak a
pandemic. Governments have tried to slow the spread of the virus by imposing
social distancing guidelines, travel restrictions and stay-at-home orders, which
caused a significant decrease in activity in the global economy and the demand
for oil and to a lesser extent natural gas. As a result, the price for oil
decreased significantly. While oil prices have recovered to pre-pandemic levels,
world demand has not and there is still ongoing volatility in the market.
Our profitability has been and will likely continue to be significantly affected
by this volatility. A 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.
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 2021, the Company continued to fund its
business activity using internal sources of cash. The Company had net cash
provided by operations of $408,694. The Company had maturities of
available-for-sale debt securities of $1,515,234 and sales of equity securities
of $700,602 for total cash provided by investing activities of $2,215,836. The
Company utilized cash for the purchase of property of $637,236, purchase of
equity method investments of $10,000 and purchase of equity securities of
$1,036,150 for total cash applied of $1,683,386. Cash and cash equivalents
increased $939,559 (6%) to $17,126,644.
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, 2020. A discussion of these items
follows.
Equity securities increased $394,857 (16%) to $2,931,339 as of March 31, 2021
from $2,536,482 at December 31, 2020. The increase was the result of $335,548 in
net purchases, a $4,008 decrease in the equity securities' market value and a
$63,317 net gain from these securities.
Refundable income taxes increased $96,671 (44%) to $314,875 as of March 31, 2021
from $218,204 at December 31, 2020.
Accounts payable decreased $60,969 (25%) to $187,085 as of March 31, 2021 from
$248,054 at December 31, 2020 due to timing differences in the processing of
accounts payable.
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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 $408,694 in the three months ended March 31, 2021, a decrease of $281,213
(41%) from the comparable period in 2020 of $689,907. 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, 2021 was $637,236, an increase of $582,998 from cash applied in the
comparable period in 2020 of $54,238. For 2021, cash applied to property
additions related to oil and gas exploration and development activity was
$307,236 and $330,000 was related to equipment purchases. 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, 2021 was $1,036,150, compared to $355,881 in the comparable period in
2020. Cash provided by the sale of equity securities in the three months ended
March 31, 2021 was $700,602, compared to $292,677 in the comparable period in
2020. The Company is increasing equity securities as part of a strategy to
offset the loss of interest income in the depressed available-for-sale debt
securities environment.
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 2020 Form 10-K
would not be representative of the Company's current position.
Results of Operations
Net income increased $1,401,422 to a net income of $259,466 in the three months
ended March 31, 2021 from a net loss of $(1,141,956) in the comparable period in
2020. Net income/(loss) per share, basic and diluted, increased $8.95 to a net
income per share of $1.66 in the three months ended March 31, 2021 from a net
loss per share of $(7.29) in the comparable period in 2020.
A discussion of revenue from oil and gas sales and other significant line items
in the consolidated statements of operations follows.
Operating Revenues. Revenues from oil and gas sales increased $404,192 (34%) to
$1,600,454 in the three months ended March 31, 2021 from $1,196,262 in 2020. Of
the $404,192 increase, crude oil sales increased $154,365; natural gas sales
increased $229,982; and miscellaneous oil and gas product sales increased
$19,575.
The $154,635 (19%) increase in oil sales to $989,228 in the three months ended
March 31, 2021 from $834,593 in the comparable period in 2020 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 1,460 Bbls to 18,841 Bbls in the three
months ended March 31, 2021, resulting in a positive volume variance of $70,109
compared to the comparable period in 2020. The average price per Bbl increased
$4.48 to $52.50 per Bbl in the three months ended March 31, 2021, resulting in a
positive price variance of $84,526 compared to the comparable period in 2020.
The $229,982 (72%) increase in gas sales to $550,836 in the three months ended
March 31, 2021 from $320,854 in the comparable period in 2020 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 7,877 MCF to 181,820 MCF in
the three months ended March 31, 2021 from 189,687 MCF in the comparable period
in 2020, for a negative volume variance of $(13,312). The average price per MCF
increased $1.34 to $3.03 per MCF in the three months ended March 31, 2021 from
$1.69 per MCF in the comparable period in 2020, resulting in a positive price
variance of $243,294.
Sales from the Robertson County, Texas royalty interest properties provided
approximately 24% of the Company's gas sales volumes for the three months ended
March 31, 2021 and 28% of the gas sales volumes for the comparable period in
2020. See discussion on page 11 of the 2020 Form 10-K under the subheading
"Operating Revenues" for more information about these properties. Sales from
Arkansas working interest properties provided approximately 12% of the Company's
gas sales volumes for the three months ended March 31, 2021 and about 11% of the
gas sales volumes for the comparable period in 2020.
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 $19,575 (48%) to $60,390
in the three months ended March 31, 2021 from $40,815 in the comparable period
in 2020.
The Company received no lease bonuses in the three months ended March 31, 2021
for leases on its owned minerals compared to $82,221 in the comparable period in
2020.
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Operating Costs and Expenses. Operating costs and expenses decreased $1,210,616
(47%) to $1,361,545 in the three months ended March 31, 2021 from $2,572,161 in
the comparable period in 2020. The decrease was primarily due to the significant
impairments in the 2020 period.
Production Costs. Production costs decreased $24,008 (4%) to $526,559 in the
three months ended March 31, 2021 from $550,567 in the comparable period in
2020. This decrease was primarily the result of a decrease of $67,171 in lease
operating expense, offset by an increase of $32,093 in production tax and an
increase of $10,952 in hauling and compression expenses.
Exploration Costs. Total exploration expense decreased $27,275 (63%) to $16,190
in the three months ended March 31, 2021 from $43,465 in the comparable period
in 2020.
The following is a summary as of May 7, 2021, updating both exploration and
development activity from December 31, 2020, for the period ended March 31,
2021.
The Company is participating with its 14% interest in drilling on a Creek
County, Oklahoma 3-D seismic project. At the start of 2021 there were six active
prospects within the project. An exploratory well was drilled on one of the
prospects and completed as a dry hole. A development well was drilled on another
prospect and a completion is in progress. An additional exploratory well and
four additional development wells are expected to be drilled starting in May
2021. Prepaid costs for the period were $35,978.
The Company owns a 35% interest in 16,472.55 net acres of leasehold on a
Crockett and Val Verde Counties, Texas prospect. Most of the acreage is
underlain by a shallow heavy oil zone. The Company is participating with a 17.5%
interest in the re-entry, completion and testing of a previously drilled test
well on the prospect with the intention of conducting a thermal recovery pilot
test. Prepaid costs for the period were $26,722.
The Company has been participating with a 13% interest in a 3-D seismic project
covering approximately 35,000 acres in San Patricio County, Texas. At the start
of 2021 there were six active prospects within the project. An exploratory well
was drilled and completed on one of these in 2020, testing gas at a commercial
rate. It is shut in awaiting pipeline construction. The Company is participating
in the conversion of an abandoned producer to a saltwater disposal well that
will handle water from this well and two other previously drilled producers on
the project, and any future wells drilled in the area. Additional exploratory
well proposals are anticipated in 2021. Prepaid costs for the period were
$28,578.
The Company has been participating with a 50% interest in the development of a
Nolan County, Texas prospect. The Company and its partner have acquired 3,182
net acres of leasehold and three producing wells on the prospect and are
currently involved in efforts to sell a portion of their interest. Once
sufficient interest has been placed, an exploratory horizontal well will be
drilled on the prospect. Geological costs for the period were $11,250 and
capitalized costs were $222,714.
The Company is participating in the completion of four horizontal development
wells that were drilled in 2020 on fee minerals located in Kingfisher County,
Oklahoma. The Company has a 3.2% working interest in three of the wells and a
3.5% working interest in the fourth. Actual costs of $2,543 for the period were
offset by prepaid costs from 2020 for a net capitalized amount of $0.
Depreciation, Depletion, Amortization and Valuation Provision (DD&A). DD&A
decreased $1,280,879 (84%) to $245,125 in the three months ended March 31, 2021
from $1,526,004 in the comparable period in 2020. The decrease was from
long-lived asset impairments in the 2020 period of $1,312,328 due to
historically low oil futures prices at March 31, 2020.
General, Administrative and Other (G&A). G&A increased $121,546 (27%) to
$573,671 in the three months ended March 31, 2021from $452,125 in the comparable
period in 2020. The increase was primarily due to accounting services and
consulting costs related to implementation of new accounting software.
Other Income, Net. Other Income, Net increased $66,133 to $86,944 in the three
months ended March 31, 2021 from $20,811 in the comparable period in 2020. 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, 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. In the comparable
period in 2020, the Company had an estimated income tax benefit of $166,111 as
the result of a deferred tax benefit of $346,421 and a current tax provision of
$180,310. See Note 5 to the accompanying consolidated financial statements for
additional information on income taxes.
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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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