This discussion and analysis should be read with reference to Management's
Discussion and Analysis of Financial Condition and Results of Operations 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, there is still ongoing
volatility in world demand 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 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 half of 2021, the Company continued to fund its
business activity using internal sources of cash. The Company had net cash
provided by operations of $874,504, cash provided by the maturities of
available-for-sale debt securities of $1,515,234, sales of equity securities and
investments of $1,063,813 and cash provided by property dispositions of $22,000
for total cash provided of $3,475,551. The Company utilized cash for property
additions of $903,903, the purchase of equity securities and investments of
$14,590,884 and financing activities of $787,337 for cash applied of
$16,282,124. Cash and cash equivalents decreased $12,806,573 (79%) to $3,380,512
due to a shift in the Company cash management and investment strategy.
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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 $12,920,057 (509%) to $15,456,539 as of June 30,
2021 from $2,536,482 at December 31, 2020. The increase was the result of
$12,326,734 in net purchases and a $593,323 net increase in the equity
securities' market value.
Refundable income taxes decreased $130,800 (60%) to $87,404 as of June 30, 2021
from $218,204 at December 31, 2020.
Notes receivable increased $65,757 (24%) to $344,326 as of June 30, 2021 from
$278,569 at December 31, 2020. The increase was the result of added notes
receivable to Grand Woods, LLC ("Grand Woods"), an equity method investee. See
Note 4 to the accompanying financial statements for additional information about
Grand Woods.
Accounts payable and other current liabilities decreased $88,585 (34%) to
$174,912 as of June 30, 2021 from $263,497 at December 31, 2020, primarily due
to timing differences in the processing of accounts payable and other current
liabilities.
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 $874,504 in the six months ended June 30, 2021, an
increase of $81,481 (10%) from the comparable period in 2020 of $793,023. For
more information see "Operating Revenues" and "Other Income" below.
Cash applied to the purchase of property additions in 2021 was $903,903 in the
six months ended June 30, 2021, an increase of$739,262 from cash applied in the
comparable period in 2020 of $164,641. See the subheading "Exploration Costs" in
the "Results of Operations" section below for additional information.
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 - Six Months Ended June 30, 2021
Net income/(loss) increased $1,972,725 to a net income of $902,637 in the six
months ended June 30, 2021 from net loss of $(1,070,088) in the comparable
period in 2020. Net income/(loss) per share, basic and diluted, increased $12.60
to net income per share of $5.77 in the six months ended June 30, 2021 from net
loss of $(6.83) per share 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 $1,290,405 (72%)
to $3,087,298 in 2021 from $1,796,893 in 2020. This was due to increases in
crude oil sales of $830,619, natural gas sales of $406,615 and sales of
miscellaneous products of $53,171.
The $830,619 (70%) increase in oil sales to $2,017,443 in the six months ended
June 30, 2021 from $1,186,824 in the comparable period in 2020 was the net
result of an increase in the volume sold and an increase in the average price
per barrel (Bbl). The volume of oil sold increased 2,881 Bbls to 36,041 Bbls in
the six months ended June 30, 2021, resulting in a positive volume variance of
$103,094. The average price per Bbl increased $20.19 to $55.98 per Bbl in the
six months ended June 30, 2021 from $35.79 per Bbl in the comparable period in
2020, resulting in a positive price variance of $727,525.
The $406,615 (74%) increase in gas sales to $956,645 in the six months ended
June 30, 2021 from $550,030 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 22,229 MCF to 323,101 MCF in
the six months ended June 30, 2021 from 345,330 MCF in the comparable period in
2020, for a negative volume variance of $35,343. The average price per MCF
increased $1.37 to $2.96 per MCF in the six months ended June 30, 2021 from
$1.59 per MCF in the comparable period in 2020, resulting in a positive price
variance of $441,958.
Sales from the Robertson County, Texas royalty interest properties provided
approximately 28% of the Company's gas sales volumes for the six months ended
June 30, 2021 and 26% of the gas sales volumes for the comparable period in
2020. See discussion on page 10 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 13% of the Company's
gas sales volumes for the six months ended June 30, 2021 and approximately 11%
of the gas sales volumes for the comparable period in 2020.
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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 products were $113,210 in the six months ended June 30,
2021 compared to $60,039 in the comparable period in 2020.
The Company received lease bonuses of $9,000 in the six months ended June 30,
2021 for leases on its owned minerals with $82,221 in the comparable period in
2020.
Operating Costs and Expenses. Operating costs and expenses decreased $891,833
(25%) to $2,627,560 in the six months ended June 30, 2021 from $3,519,393 in the
comparable period in 2020. Material line item changes are discussed and analyzed
in the following paragraphs.
Production Costs increased $75,677 (8%) in the six months ended June 30, 2021 to
$1,013,973 from $938,296 in the comparable period in 2020. The increase was the
result of an increase in gross production taxes and transportation costs of
$78,784, offset by decreases in lease operating expense and other costs of
$3,107.
Exploration Costs decreased $46,023 (61%) to $29,147 in the six months ended
June 30, 2021 from $75,170 in the comparable period in 2020. The decrease was
the result of a $26,135 decrease in dry hole, plugging and abandonment costs, as
well as a decrease of $19,888 in geological, geophysical and other costs.
The following is a summary as of August 6, 2021, updating both exploration and
development activity from December 31, 2020, for the period ended June 30, 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 total of five development wells were
drilled on two other prospects. One well was completed as a commercial oil
producer, two have completions in progress and two are awaiting completion. An
additional exploratory well is expected to be drilled in the third quarter.
Capitalized costs for the period were $180,830. Dry hole costs of $14,650 were
written off to expense.
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. Capitalized costs for the period were $26,798.
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 has been shut in awaiting pipeline construction, which is now in
progress. The Company participated in the re-completion of another well and is
participating in the conversion of an abandoned producer to a saltwater disposal
well. Additional exploratory well proposals are anticipated in 2021. Capitalized
costs for the period were $33,325.
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 is expected
to be drilled on the prospect. Geological costs for the period were $22,500 and
capitalized costs were $222,185.
The Company participated 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. All four wells were completed as commercial
oil and gas producers. Actual costs of $337,687 for the period were offset by
prepaid costs from 2020.
The Company has entered into an agreement to purchase the working interest
properties of Mid-American Oil Company, an affiliated company, for $500,469 plus
adjustments effective July 1, 2021. The Company already owns working interests
in almost all of these properties. The purchase is expected to take place in
August 2021.
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Depreciation, Depletion, Amortization and Valuation Provision (DD&A). DD&A
decreased $1,223,410 (76%) to $393,514 in the six months ended June 30, 2021
from $1,616,924 in the comparable period in 2020. This was primarily due to the
$1,312,328 long-lived assets impairment in the comparable period in 2020.
General, Administrative and Other (G&A). G&A increased $301,923 (34%) to
$1,190,926 in the six months ended June 30, 2021 from $889,003 in the comparable
period in 2020. The increase was primarily due to expenses of approximately
$108,000 related to costs in new consolidated entities and costs related to the
implementation of new accounting software in 2021.
Other Income, Net. This line item increased $183,733 (63%) to $476,235 in the
six months ended June 30, 2021 from $292,502 in the comparable period in 2020.
See Note 3 to the accompanying financial statements for the analysis of the
various components of this line item.
Income Tax Provision/(Benefit). Income tax benefit decreased $434,001 to a tax
provision of $117,798 in the six months ended June 30, 2021 from a tax benefit
of $(316,203) in the comparable period in 2020. Of the 2021 tax provision,
estimated current tax expense was $123,108 and estimated deferred tax credit was
$5,310. Of the 2020 income tax benefit, the estimated current tax expense was
$14,209 and the estimated deferred tax credit was $(330,412). See Note 5 to the
accompanying financial statements for additional information on income taxes.
Results of Operations - Three Months Ended June 30, 2021
Net income increased $571,303 to $643,171 in the three months ended June 30,
2021 from $71,868 in the comparable period in 2020. The material changes in the
results of operations, which caused the increase in net income, are discussed
below.
Operating Revenues. Revenues from crude oil and natural gas sales increased
$886,213 (148%) to $1,486,844 in the three months ended June 30, 2020 from
$600,631 in the comparable period in 2020. This was due to increases in crude
oil sales of $675,985, natural gas sales of $176,633 and sales of miscellaneous
products of $31,595.
The $675,985 (192%) increase in oil sales to $1,028,216 in the three months
ended June 30, 2021 from $352,231 in the comparable period in 2020 was the net
result of an increase in the volume sold and an increase in the average price
per barrel (Bbl). The volume of oil sold increased 1,420 Bbls to 17,199 Bbls in
the three months ended June 30, 2021, resulting in a positive volume variance of
$31,709. The average price per Bbl increased $37.46 to $59.78 per Bbl in the
three months ended June 30, 2021 from $22.32 per Bbl in the comparable period in
2020, resulting in a positive price variance of $644,276.
The $176,633 (77%) increase in gas sales to $405,809 in the three months ended
June 30, 2021 from $229,176 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 14,352 MCF to 141,281 MCF in
the three months ended June 30, 2021 from 155,633 MCF in the comparable period
in 2020, for a negative volume variance of $21,134. The average price per MCF
increased $1.40 to $2.87 per MCF in the three months ended June 30, 2021 from
$1.47 per MCF in the comparable period in 2020, resulting in a positive price
variance of $197,767.
Operating Costs and Expenses. Operating costs and expenses increased $318,783
(34%) to $1,266,015 in the three months ended June 30, 2021 from $947,232 in the
comparable period in 2020. This was mostly due to an increase in production
costs of $99,685 and an increase in G&A expense of $180,377, an increase in the
Depreciation, Depletion, Amortization and Valuation provision of $57,469, and a
decrease in exploration costs of $18,748. There were no long-lived assets
impairments for the three months ended June 30, 2021 or June 30, 2020. See Note
10 - LONG-LIVED ASSETS IMPAIRMENT LOSS on page 29 of the 2020 Form 10-K for a
description of the impairment loss calculation.
Other Income, Net. This line item increased $117,600 (43%) to $389,291 in the
three months ended June 30, 2021 from $271,691 in the comparable period in 2020.
See Note 3 to the accompanying consolidated financial statements for an analysis
of the components of other income, net.
Income Tax Provision/(Benefit). Income tax benefit decreased $200,418 to a tax
provision of $50,326 in the three months ended June 30, 2021 from a tax benefit
of $(150,092) in the comparable period in 2020. See discussion above in "Item
2." and Note 5 to the accompanying consolidated financial statements for a
discussion of the changes in the provision for income taxes.
There were no additional material changes between the quarters, which were not
covered in the discussion in "Item 2." above, for the six months ended June 30,
2021.
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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, 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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