UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31,
20102011or
[ ] TRANSITION REPORT PURSUANT OT SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File No. 000-18774
SPINDLETOP OIL & GAS CO.
(Exact(Exact name of registrant as specified in its charter)
Texas75-2063001
(State(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
12850 Spurling Rd., Suite 200, Dallas, TX 75230
(Address(Address of principal executive offices) (Zip Code)
(972) 644-2581
(Registrant's(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of each exchange on which registered
None N/A
Securities registered pursuant to Section 12(g) of the Act:Common Stock, $0.01 par value
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [ X ]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [ X ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding twelve months (or for such shorter period that the registrant was required to submit and post such files). Yes [ X ] No [ ]
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Company was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
(Sec293.405(§293.405 of this chapter) is not contained herein, and will not be contained, to the best ofregistrant 'sregistrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form 10-K. [ X ]Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer or a smaller reporting company. See definitions of
"large“large acceleratedfiler"filer”,"accelerated filer"“accelerated filer”, and"smaller“smaller reportingcompany"company” in Rule 12b-2 of the Exchange Act (Check one):Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [ X ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act. Yes [ ] No [ X ]
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the
registrant'sregistrant’s most recently completed second fiscal quarter.$3,547,033 based$2,958,442based upon a total of
1,730,2601,740,260 shares held as of June 30,20102011 by persons believed to be non-affiliates of the Registrant; the basis of the calculation does not constitute a determination by the Registrant as defined in Rule 405 of the Securities Act of 1933, as amended, that such calculation, if made as of a date within 60 days of this filing, would yield a different value.APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes [ ] No [ ]
(APPLICABLE(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
Indicate the number of shares outstanding of each of the issuer's classes of common, as of the latest practicable date.
Common Stock, $0.01 par value
7,640,8037,660,803(Class) (Outstanding at
March 31, 2011)April 5, 2012)DOCUMENTS INCORPORATED BY REFERENCE
None
2
PART I
Item 1. Description of Business
GENERAL
Spindletop Oil & Gas Co. is an independent oil and gas company engaged in the exploration, development, production and
acquisitionsacquisition of oil and natural gas; the rental of oilfield equipment; and through one of its subsidiaries, the gathering and marketing of natural gas. The terms the "Company", "We", "Us" orSpindletop“Spindletop” are used interchangeably herein to refer to Spindletop Oil & Gas Co.("SOG"(“SOG”) and its wholly owned subsidiaries,Prairie Pipeline Co. ("PPC") andSpindletop Drilling Company ("SDC"), and Prairie Pipeline Co. (“PPC”).The Company has focused its oil and gas operations principally in Texas, although we operate properties in six states including: Texas, Oklahoma, New Mexico, Louisiana, Alabama and Arkansas. We operate a majority of our projects through the drilling and production phases. Our staff has a great deal of experience in the operations arena. We have traditionally leveraged the risks associated with drilling by obtaining industry partners to share in the
costs of drilling. However, we typically retain a controlling interest in the prospects we drill.costs.In addition, the Company, through PPC, owns approximately 26.1 miles of pipelines located in Texas, which are used for the gathering of natural gas. These gathering lines are located in the Fort Worth Basin and are being utilized to transport the Company's natural gas as well as natural gas produced by third parties.
Website Access to Our Reports
-----------------------------We make available free of charge through our website,www.spindletopoil.com, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on form 8-K, and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with the Securities and Exchange Commission. Information on our website is not a part of this
reportreport.Operating Approach
------------------We believe that a major attribute of the Company is its long history with, and extensive knowledge of, the Fort Worth Basin of Texas. Our technical staff has an average of over
2220 years oil and gas experience, most of it in the Fort Worth Basin.One of our strengths has been the ability of the Company to look at cost effective ways to grow our production. We have traditionally increased our reserve base in one of two ways. Initially, in the
1970's1970s and1980's,1980s, the Company obtained its production through an exploration and development drilling- 3 -program focused principally in the Fort Worth Basin of North Texas. Today, the Company has retained many of these wells as producing properties and holds a large amount of acreage by production in that Basin.From the
1990's1990s through 2003, the Company took advantage of the lower product prices by cost effectively adding to its reserve base through value-priced acquisitions. We found that through selective purchases we could make producing property acquisitions that were more cost effective than drilling.During this time period, the Company acquired a large number of operated and non-operated oil and gas properties in various states.
From 2003 through the fourth quarter of 2008, we returned our focus to a strategy of development drilling with a focus on our Barnett Shale acreage.
FromSince 2009, we split our focus by looking for value-priced acquisitions combined with developmentdrilling.drilling prospects. In the current economic climate, we are continuing our efforts to acquire producing properties and taking a more conservative approach to development of our leasehold acreage. We are looking at growth through acquisitions and limited drilling. With current lower natural gas prices and high costs to produce, we believe that it makes sense to carefully evaluate all our options and make sure that each transaction can be supported intoday'stoday’s lower price environment.Strategic Business Plans
------------------------One of our key strategies is to enhance shareholder value through implementation of plans for controlled growth and development. The Company's long-term focus is to grow its oil and gas production through a strategic combination of selected property acquisitions, to the extent feasible, and an exploration and development program primarily based on developing its leasehold acreage. Additionally, the Company will continue to rework existing wells to increase production and reserves.
The Company's primary area of operation has been and will continue to be in the state of Texas with an emphasis in the geological province known as the Fort Worth Basin. We want to capitalize on our strengths which include an extensive knowledge of the Fort Worth Basin, experience in operations in this geographic area, development of lease holdings, and utilization of existing infrastructure to minimize costs.
The Company will continue to generate and evaluate prospects using its own technical staff. The Company intends to fund operations primarily from cash flow generated by operations.
- 4 -Project Significant Areas
The Company owns various interests in wells located in 15 states and the
Company'sCompany’s operations are currently located in 6 of those states which include Alabama, Arkansas, Louisiana, Oklahoma, New Mexico and Texas.The Company holds approximately
92,293 gross94,989gross acres under lease in 15 states. The majority of the leases are held by production. A breakout of theCompany'sCompany’s leasehold acreage by geographic area is as follows:Operated Non-Operated Percent Properties Properties Total of Total Gross Net Gross Net Gross Net Gross Net Geographic Area Acres Acres Acres Acres Acres Acres Acres Acres ------ ------ ------ ----- ------ ------ ----- ---- North Texas Including the Fort Worth Basin & Bend Arch 7,282 6,750 2,070 221 9,352 6,971 10.1 33.0 East Texas 2,613 2,245 7,629 543 10,242 2,788 11.1 13.2 Gulf Coast Texas 3,903 2,307 2,930 223 6,833 2,530 7.4 12.0 West Texas 788 618 2,664 109 3,452 727 3.7 3.4 Texas Panhandle 640 640 1,280 75 1,920 715 2.1 3.4 Alabama 1,160 634 1,469 135 2,629 769 2.8 3.6 Arkansas 2,936 2,587 4,329 116 7,265 2,703 7.9 12.8 Louisiana 723 506 2,938 138 3,661 644 4.0 3.0 New Mexico 1,524 980 360 4 1,884 985 2.0 4.7 Oklahoma 237 166 33,405 1,020 33,642 1,186 36.3 5.6 Utah - - 2,729 487 2,729 487 3.0 2.3 Wyoming - - 1,800 134 1,800 134 2.0 0.6 Kansas - - 640 184 640 184 0.7 0.9 North Dakota - - 1,262 138 1,262 138 1.4 0.7 Montana - - 2,570 113 2,570 113 2.8 0.5 Colorado - - 1,200 64 1,200 64 1.3 0.3 Mississippi - - 80 - 80 - 0.1 0.0 California - - 892 6 892 6 1.0 0.0 Michigan - - 240 6 240 6 0.3 0.0 Total 21,806 17,433 70,487 3,716 92,293 21,150 100.0 100.0
Operated Non-Operated Percent Properties Properties Total of Total Gross Net Gross Net Gross Net Gross Net Geographic Area Acres Acres Acres Acres Acres Acres Acres Acres North Texas including the Fort Worth Basin & Bend Arch 7,493 6,969 2,223 231 9,716 7,200 10.23% 32.55% East Texas 2,802 2,342 8,570 591 11,372 2,934 11.97% 13.27% Gulf Coast Texas 3,943 2,345 2,930 223 6,873 2,568 7.24% 11.61% West Texas 949 779 2,664 109 3,613 887 3.80% 4.01% Texas Panhandle 680 680 1,360 80 2,040 760 2.15% 3.44% Alabama 1,160 634 1,469 135 2,629 769 2.77% 3.48% Arkansas 2,936 2,587 4,329 116 7,265 2,703 7.65% 12.22% Louisiana 838 551 2,938 138 3,776 689 3.98% 3.12% New Mexico 2,150 1,256 360 4 2,510 1,260 2.64% 5.70% Oklahoma 317 184 33,405 1,020 33,722 1,204 35.50% 5.45% Utah - 2,729 487 2,729 487 2.87% 2.20% Wyoming - 1,800 134 1,800 134 1.89% 0.61% Kansas - 640 184 640 184 0.67% 0.83% North Dakota - 1,262 138 1,262 138 1.33% 0.62% Montana - 2,570 113 2,570 113 2.71% 0.51% Colorado - 1,200 64 1,200 64 1.26% 0.29% Mississippi - 140 6 140 6 0.15% 0.03% California - 892 6 892 6 0.94% 0.03% Michigan - 240 6 240 6 0.25% 0.03% Total 23,268 18,327 71,721 3,785 94,989 22,112 100.00% 100.00% The majority of the
Company'sCompany’s net acres(63.4%(64.89%) are located in Texas.- 5 -A breakout of the Company's most significant oil and gas reserves by geographic area is as follows:
North Texas Including the Fort Worth Basin & Bend Arch 1,413,993 BOE 66.31 % East Texas 231,895 BOE 10.87 % Gulf Coast Texas 106,265 BOE 4.98 % West Texas 55,550 BOE 2.60 % Panhandle Texas 51,768 BOE 2.43 % Total Texas 1,859,471 BOE 87.19 % Oklahoma 97,747 BOE 4.59 % New Mexico 91,187 BOE 4.28 % Alabama 40,760 BOE 1.91 % Arkansas 17,030 BOE 0.80 % Louisiana 15,948 BOE 0.75 % North Dakota 5,213 BOE 0.24 % Wyoming 2,833 BOE 0.13 % California 1,162 BOE 0.05 % Montana 1,062 BOE 0.05 % Kansas 272 BOE 0.01 % Michigan 70 BOE 0.00 % Total 2,132,755 BOE 100.00 %
North Texas including the Fort Worth Basin & Bend Arch 1,108,305.00 BOE 61.90% East Texas 186,825.00 BOE 10.43% Gulf Coast Texas 60,955.00 BOE 3.40% Panhandle Texas 51,177.00 BOE 2.86% West Texas 42,908.00 BOE 2.40% Total Texas 1,450,170.00 BOE 80.99% Oklahoma 107,252.00 BOE 5.98% New Mexico 103,063.00 BOE 5.76% Alabama 75,780.00 BOE 4.23% Louisiana 28,423.00 BOE 1.59% Arkansas 8,530.00 BOE 0.48% North Dakota 6,053.00 BOE 0.34% Kansas 4,182.00 BOE 0.23% Montana 3,252.00 BOE 0.18% Utah 1,960.00 BOE 0.11% Wyoming 915.00 BOE 0.05% California 632.00 BOE 0.04% Michigan 312.00 BOE 0.02% Total Other States 340,354.00 BOE 19.01% Total 1,790,524.00 BOE 100.00% North Texas - Fort Worth Basin & Bend Arch
The Fort Worth Basin-Bend Arch Province has been the focal point of the Company since its inception. Our technical personnel have an average of
2220 years of exploration, drilling, completing, and production experience extracting natural gas and oil from both conventional and unconventional hydrocarbon deposits found across the basin. Furthermore, the Company maintains comprehensive and extensive dossiers of geologic and engineering data gathered from the province. Exploration and development drilling for hydrocarbons across the Fort Worth Basin-Bend Arch Province continue to remain strong.The Fort Worth Basin-Bend Arch Province is a major United States onshore natural gas-prone expanse containing multiple pay zones that range in depth from one thousand to nine thousand (1,000-9,000) feet. Improved technical advances in fracturing and stimulation technologies,
whichhaveunlockedhelped unlock natural gas and oil reserves from the hydrocarbon bearing Barnett Shale Formation; and thus, continue to bolster vigorous exploration and development activities that target these conventional and unconventional reservoir reserves throughout the province.The Barnett Shale is a thick blanket type natural gas bearing stratigraphic zone found throughout the Fort Worth Basin-Bend Arch Province. The natural gas reserves in place are significant; however, as a consequence of the extreme low permeability character of the shales, it has been technically challenging to produce these reserves. According to the United States Geological Survey assessment, an estimated 26.7 trillion cubic feet (TCF) of undiscovered natural gas, 98.5 MMBO of undiscovered oil, as well as a mean of 1.1 BBNGL of
- 6 -undiscovered natural gas liquids reserves remain within the 54,000 square mile Fort Worth Basin-Bend Arch Province. More than 98 percent or approximately 26.2 TCF of the undiscovered natural gas is contained in the organic-rich Mississippian Barnett Shale. Combined, recent advances in hydraulic fracturing, completion procedures, as well as refined horizontal well drilling technologies continue to enable economic recovery of natural gas reserves from tight-gas reservoirs throughout the Fort Worth Basin-Bend Arch Province. Undiscovered conventional reservoir natural gas reserves are estimated to be 467 billion cubic feet of gas (BCFG) the majority of which is dissolved in conventional oil accumulations (source: United States Geological Survey Energy Resource Program).The Company has
9,352 gross9,716gross acres under lease across the prolific Fort Worth Basin-Bend Arch Province the majority of which, is held by production from the more shallow producing zones. The Company uses recent and emerging technologies, as well as provenextantindustry practices to develop and produce oil and natural gas fromthe portfolio.its properties. Additionally, the Company has a dedicated and well-trained team of employees and professional staff that continuallyseeking low- riskseek out low-risk profitable drilling and acquisition opportunities throughout the Fort Worth Basin-Bend Arch Province..
Newark, E. Barnett Shale Field
During the
fourthsecond quarter of2008,2011, thePoston #1Company agreed to participate for a 16.25% working interest and 12.5125% net revenue interest in the drilling of the Pyramid Acres Unit 6-Bryant SA#1H well,located on our Godley North Block, in Johnson County, Texas was drilled to the Barnett Shale Formation atadepth of 6,754 ft. and cased. Thedevelopment wellwas completed, placed on-line and went into sales with an initial rate of 400 mcfgpd on August 2, 2010. The well islocated in the NewarkE. (Barnett Shale) field.East Barnett Shale Field in Tarrant County, Texas. This well was drilled to a total vertical depth of 6,625 ft. and has a measured depth of 10,750 ft. This well was cased and completed in the Barnett shale. The well went into production on September 7, 2011 with an initial gas rate of 1,607 mcfgpd.East Texas
During the first quarter of 2011, the Company
ownscompleted the acquisition of a91.0%25% working interestin this well. The well is currently producing atand arate of 40 mcfgpd and 2 bswpd. Additional Company activities25% net revenue interest in theNorth Texas area includeDavis Heirs #1 well in thefollowing: North Texas During the third quarterHalliday (Woodbine) field of2010,Leon County, Texas. By virtue of this acquisition, the Companyacquired non-operating working interestsobtained 25% of the revenues from this interest net of drilling costs, completion costs, and operating expenses from the date of first production in29 natural gas wells in Jack, Palo Pinto, Parker,December, 2002. As a result, the Company booked a one time payment of $462,111 as gross oil revenue from the production andWise Counties, Texas. Atsale of oil for thetimeyears 2002 to 2011 at an average price ofacquisition, gross production$52.13 per barrel (8,865 bbls). In addition, the Company recorded $185,308 as drilling and development costs, $28,453 as lease and well equipment, $21,331 as severance taxes, and $80,246 as lease operating expenses. The Davis Heirs #1 well was producing approximately 6 bopd fromthese wells was approximately 416 mcfgpd and 3.4 bopd. Net production attributable to the Company's acquired interest was approximately 87 mcfgpd and 0.8 bopd. Working interests acquired range from 21.25% to 40.00%. Net revenue interests acquired range from 16.42% to 30.00%. East TexasWoodbine perforations at 7,233 - 7,248 ft.The Company participated for a
45.00%45% non-operated working interest in the drilling of two wells operated by Giant Energy Co., LP, a related entity. The two wells are located in Nacogdoches County, Texas. The Giant Gas Unit #1 well wasspud on November 11, 2009drilled and reached a total depth of 9,700 ft.on December 6,in late 2009. Production casing was set to a depth of 9,616 ft. through the Travis Peak Formation. The Giant Gas Unit #2 well wasspud on June 1, 2010drilled and reached a total depth of 9,608 ft.onin July7,2010. Production casing was- 7 -set to a depth of 9,605 ft. through the Travis Peak Formation. Thewells areGiant Gas Unit #1 was completed in May, 2011 and began producing approximately 15 mcfgpd. The Giant Gas Unit #2 is currentlybeing worked on. West Texasshut-in.During the
first halffourth quarter of2010,2011, the Companyparticipatedacquired operations and a 51.6359% net working and a 41.68468% net revenue interest in the Watts Gas Unit #1, located in Pine Lake Field, Marion County, Texas. The well is producing from a perforated interval from 10,536 ft. to 10,624 ft. in the Cotton Valley Sands. As of the effective date of December 1, 2011, the well was producing approximately 30 mcfgpd, 0.5 bopd, and 10 bswpd.During the fourth quarter of 2011, the Company elected to participate for a 3.2425% working interest with a 2.431875% net revenue interest in the Patrick #1H well in Leon County, Texas. This well was drilled and cased to a measured depth of 14,872 ft. The well was completed in the Woodbine Sand in the first quarter of 2012 and flow tested 425 bopd, 194 mcfgpd, and 419 bswpd on February 23, 2012.
Also, during the fourth quarter of 2011, the Company elected to participate for a 5.0% working interest with a 3.75% net revenue interest in the Easterling #1H well in Leon County, Texas. The well was drilled during the first quarter of 2012 and was cased and is currently awaiting completion.
West Texas
During the second quarter of 2011, the Company acquired a 100% working interest and 75% net revenue interest in the University #21-34 well in Winkler, County, Texas. The well was producing approximately 8 mcfgpd from the Morrow Formation at a perforated interval of 15,511 ft. to 15,531 ft as of the effective date of April 1, 2011.
During the second quarter of 2011, the Company agreed to participate for 4.68750% non-operated working interest with a 3.28125% net revenue interest in the drilling of
four non-operatedthe Miles #21 and Miles #22 wellslocatedin the Fuhrman-MaschofieldField in Andrews County, Texas.ThreeDuring the third quarter of 2011, the Company participated for the same interests in the drilling of the Miles #24, #25, #26 and #27 wells, also in the Fuhrman-Mascho Field. The wells were drilled and casedcompletedto an approximate depth of 4,900 ft. to test the San Andres andplaced in production during the second quarter of 2010.Grayburg Formations. Thefourth well was cased and completed on July 2, 2010 and placed in production on July 11, 2010. The Miles #13, #14, #15, and #16wells had initialproduction rate of 148potential tests as follows:Miles #21 74 bopd, 29 mcfgpd, 88 bswpd
Miles #22 60 bopd, 8 mcfgpd, 114 bswpd
Miles #24 69 bopd,
9921 mcfgpd, 115 bswpdMiles #25 91 bopd, 36 mcfgpd, 82 bswpd
Miles #26 90 bopd, 33 mcfgpd, 94 bswpd
Miles #27 69 bopd, 21 mcfgpd, 124 bswpd
In December 2011, the Company also agreed to participate for a 4.68750% non-operated working interest with a 3.28125% net revenue interest in the drilling of the Miles #23 well in the Fuhrman-Mascho Field in Andrews County, Texas. This well was drilled and
76 bopd respectively, and 30 mcfgpd, 30 mcfgpd, 28 mcfgpd, and 16 mcfgpd respectively fromcased to a depth of 4,818 ft. The well was perforated in the San AndresformationFormation between 4,464 ft. - 4,699 ft. The initial production was 75 bopd, 14 mcfgpd, and 80 bswpd.South Texas
During the third quarter of 2011, the Company drilled two wells (100% working interest and 60.83984% net revenue interest) on its Hynes Lease in Bee County, Texas. The Hynes #29R and #30R were drilled and cased to test the Catahoula sands at an approximate depth of
4,7503,450 ft.AllBoth wells are expected to be completed within the first half of 2012.Texas Panhandle
During the
wells on this lease are currently producing atsecond quarter of 2011, the Company acquired acombined rate of 203 bopd and 95 mcfgpd. The Company owns a 4.69%100% working interest anda 3.28%78.0% net revenue interest inthese wells.the O. C. Rogers Estate #1 well in Ochiltree, County. The well produces gas from the Farnsworth-Conner (Des Moines) Field but is currently shut in. The effective date of the transaction is June 1, 2011.Additional Company activities in other states outside of Texas
Panhandleinclude the following:Alabama
During the first quarter of 2011, the Company agreed to participate in the Thomasson #1 well in Conecuh County, Alabama for a working interest of 3.70897% and a net revenue interest of 2.78172%. The well was drilled to a total depth of 11,760 ft. and cased. The well was perforated in the Smackover Formation between 11,475 ft. and 11,488 ft. The well was placed into production on June 14, 2011 with an initial potential rate of 456 bopd, 525 mcfgpd, and 0 bswpd.
During the third quarter of
2010,2011, the Companyacquired operations of two wells in its Spearman SE block in Ochiltree County, Texas; the Pope #140-3 and Pope #140-4. The Company hasparticipated for a100.00%0.315657% non-operated working interest andan 81.25% net revenue interest in both of these wells. At the time of acquisition, the Pope #140-3 well was producing atarate of 4 mcfgpd from the Horizon (Oswego) field from a perforated interval at 6,920 ft. - 6,930 ft. in the Oswego Formation. The Pope #140-4 well was producing at a rate of 24 mcfgpd from the Lips (Mississippian) field from a perforated interval at 8,294 ft. - 8,396 ft. in the Mississippian Formation. The Pope #3 well is currently producing at a rate of 3 mcfgpd and the Pope #4 well is currently producing at a rate of 23 mcfgpd. South Texas During the second quarter of 2010, the Company acquired working interests in five natural gas wells in Victoria County, Texas. The Company assumed operatorship of three of these wells effective April 1, 2010. The Vaquero #1 well produces gas from the Rob Welder (Wilcox 9100) field in the Wilcox Group from a perforated interval of 9,314-9,346 ft. Current production from the Vaquero #1 is approximately 6 mcfgpd. The Vaquero "A" #2 well produces gas from the Welder Ranch field from a perforated interval of 12,026 - 12,090 ft. in the Wilcox Group. Current production from this well is approximately 4 mcfgpd. The Rob Welder #1 well produces gas from the McFaddin (5700) field from a perforated interval at 5,660 - 5,658 ft. in the Yegua Formation. Current production from this well is approximately 109 mcfgpd and 4 bswpd. The working interests in these three wells are 94.63%, 85.00%, and 100.00% with net revenue interests of 64.69%, 58.13%, and 68.00% respectively. The interests acquired in the two remaining wells were non-operated working interests. The Company acquired a 25.00% non-operating working interest and 17.00%0.236742% net revenue interest in theWelder Ranchdrilling of the Boothe & Casey 29-8 #1 wellwhich produces gas from the Rob Welder (Wilcox 10,400) field from the perforated interval of 10,480 ft.- 10,520 ft.located in theWilcox Group. Current gross production from this - 8 - well is approximately 11 mcfgpd. The Company acquired a 24.17% non-operating working interest and 16.44% net revenue interestLittle Cedar Creek Field inthe Welder Ranch A #2 well which produces gas from the Marshall (Middle Wilcox) field from a perforated interval of 10,306 - 10,312 ft. in the Middle Wilcox Group. Current gross production from this well is approximately 99 mcfgpd and 0.4 bopd. The Company acquired a 33.06% operated working interest and a 22.5% net revenue interest in the State Tract 39A-#1 gas well in ChambersConecuh County,Texas effective July 1, 2010. The State Tract 39A-#1 well produces gas from the Turtle Beach (Vicksburg) field from a perforated interval at 11,111 ft. - 11,148 ft. in the Vicksburg Formation. Gross gas production from this well at the time of acquisition was approximately 1,294 mcfgpd and 3 bopd. Production attributable to the Company's acquired interest was approximately 292 mcfgpd and 0.5 bopd. Currently, this well is shut-in. On July 29, 2010 the Company spud its Hynes #28 well in Bee County, Texas.Alabama. The well was drilled to a depth of3,50011,175 ft. to test theCatahoula Sands.Smackover Formation. The well wascasedcompleted in the Smackover Formation from perforations between 11,380 ft. andcompleted11,396 ft. The well was placed in production on November 23, 2011 with an initial potential rate of 390 bopd, 345 mcfgpd, andplaced0 bswpd.Also, during the third quarter of 2011, the Company participated for a 10.2% non-operated working interest in the drilling of the Cedar Creek Land and Timber 28-13 #1 well in the Little Cedar Creek Field in Conecuh County, Alabama. This well was drilled to a total depth of 11,775 ft. and cased. It was perforated in the Smackover Formation from 11,415 ft. to 11,428 ft. The well went into production on
August 14, 2010.November 23, 2011 at an initial rate of 362 bopd, 344 mcfgpd, and 52 bswpd.During the fourth quarter of 2011, the Company elected to participate in the drilling of the Jones #28-6 well for a 10.2% non-operated working interest, also in the Little Cedar Creek Field of Conecuh County, Alabama. The
well's IPP (initial potential pumping)well was17drilled to a total depth of 11,750 ft. and cased. The well was perforated from 11,385 ft. to 11,389 ft. in the Smackover Formation. The well went into production on January 26, 2012 with an initial rate of 98 bopd, 122 mcfgpd, and no water.Louisiana
During the second quarter of 2011, the Company acquired a 39.0016667% operated working interest and 29.144608% net revenue interest in the E.S. Mayers #1 well and the Savoy #2 SWD well located in Gray’s Creek Field in Livingston Parish, Louisiana. The E.S. Mayers #1 well was producing from the Evans Formation at an approximate rate of 21 bopd and
20850 bswpd from perforations between 9,646 ft. and 9,713 ft. as of the effective date of June 1, 2011.Mississippi
During the second quarter of 2011, the Company acquired a non-operated 9.56% working interest and 8.34409% net revenue interest in the Mary Hall #7-10 well in Jefferson Davis County, Mississippi. The well has a total depth of 16,726 ft. and is producing from the Hosston Formation between 15,095 ft. and 15,115 ft. The well was producing approximately 125 mcfgpd and 2 bswpd as of the effective date of April 1, 2011.
New Mexico
During the second quarter of 2011, the Company acquired a 10.5% working interest and 8.1375% net revenue interest in the Foster #1 well, in Lea County, New Mexico. The well was producing at an approximate rate of 50 mcfgpd, 0.5 bopd, and 8 bswpd from the
Papalote, E. (3250-B) field atSan Andres Formation from a perforated interval of3,2444,510 ft.- 3,346to 4,522 ft.from the Catahoula Formation. The company owns a 100.00% working interest and a 60.84% net revenue interest in this well. The well is currently producing at a rate of approximately 10.5 bopd and 12 bswpd. Additional Company activities outside of Texas include the following: Oklahoma Effective August 1, 2010, the Company acquired operations and working interests in four wells located in Major County and Canadian County, Oklahoma as follows: The Irvan #1-22 well, located in Major County, produces natural gas from the N. Homestead field from a perforation interval ranging from 7,158 ft. - 7,306 ft. from the Inola and Chester formations. At the time of acquisition, the Irvan #1-22 well was producing natural gas at a rate of 6 mcfgpd and is currently producing at the same rate. The Company acquired a 100.00% working interest and a 75.00% net revenue interest in this well. The Tobe #1-21 well, located in Major County, produces natural gas from the N. Homestead field from a perforation interval ranging from 7,158 ft. - 7,232 ft. from the Red Fork and Inola Formations. At the time of acquisition, the Tobe #1-21 well was shut-in and not producing. The Company acquired a 92.31% working interest and a 73.29% net revenue interest in this well. The Faith #1-21 well, located in Canadian County, produces natural gas from the Watonga-Chickasha field from a perforation interval ranging from 10,882 ft. - 0,952 ft. from the Morrow Formation. At the time of acquisition, the Faith #1-21 well was shut-in and not producing. The Company acquired an 83.33% working interest and a 66.67% net revenue interest in this well. - 9 - The Lottie Jones #33-4 well, located in Canadian County, produces natural gas from the El Reno field from a perforation interval ranging from 8,750 ft. - 10,366 ft. from the Viola, Hunton, Mississippian and Red Fork formations. At the time of acquisition, the Lottie Jones #4 well was shut-in and not producing. The Company acquired a 97.43% working interest and a 74.64% net revenue interest in this well. These wells were acquired for their behind the pipe potential. The Company plans to rework them at a future date and place them back into production, if successful. New Mexico Effective December 1, 2010, the Company acquired operations and working interests in four oil wells located in the Fowler East Field, one oil well located in the Teague Field, and one well located in the Dollarhide Field, Lea County, New Mexico as follows: The Greenback State #1 well produces approximately 2 bopd, 1 mcfgpd, and 3 bswpd, from a perforation interval of 11,685 ft. - 11,839 ft. in the Ellenberger Formation. The Company acquired a 100.00% working interest and 80.25% net revenue interest in this oil well. The Greenback State #2 well produces 4.2 bopd, 4 mcfgpd, and 30 bswpd from an open hole interval of 11,581 ft. - 11,641 ft. from the Ellenberger Formation. The Company acquired a 100.00% working interest and 77.75% net revenue interest. The Greenback State #3 well produces 9.6 bopd, 8 mcfgpd, and 113 bswpd from an open hole interval between 11,630 ft. - 11,756 ft. in the Ellenberger Formation. The Company acquired a 100.00% working interest and 77.75% net revenue interest. The Greenback State #7-1 well is producing from an open hole interval between 11,462 ft. - 11,568 ft. in the Ellenberger Formation. The well produces 16.3 bopd, 10 mcfgpd, and 96 bswpd. The Company acquired an 80.0% working interest and 70.0% net revenue interest. The Greenback Federal #1 well produces from a perforation interval of 7,103 ft. 7,311 ft. from the Abo Formation. The well is currently producing Approximately 0.2 bopd. The Company acquired a 100.00% working interest and 82.50% net revenue interest. The Hunt #23-1 well is producing approximately 3.1 bopd and 52 bswpd from an open hole interval between 10,928 ft.-11,017 ft. in the Ellenberger Formation. The Company acquired a 97.10% working interest and a net revenue interest of 77.05%. Effective December 1, 2010, the Company acquired non-operating working interests in four oil wells in the Monument Abo Field, Lea County New Mexico as follows: -10 - The Foster #3 well produces approximately 20.8 bopd and 25 mcfgpd from a perforation interval of 7,323 ft. -7,428 ft. from the Abo Zone. The Company acquired a working interest of 40.37% and a net revenue interest of 29.27%. The Royal Wulff #1 well produces from an interval of 7,258 ft. - 7,360 ft. from the Abo Formation. The well is currently shut in. The Company acquired a working interest of 40.25% and a Net Revenue interest of 30.19%. The Royal Coachman #1 well produces approximately .033 mcfgpd from a perforation interval of 7,330 ft. - 7,444 ft. in the Abo Formation. The Company purchased a working interest of 38.61% and a net revenue interest of 28.96%. The Royal Trude #1 well produces approximately .09 bopd and 0.19 mcfgpd from a perforation interval of 7,298 ft. - 7,315 ft. in the Abo Formation. The Company purchased a working interest of 12.00% and a net revenue interest of 9.00%. The production rates referenced above for these New Mexico properties areas of the effectivedate.date of April 1, 2011.For all of the
aforementionedabove wells, the Company cautions that the initial production rates ofnew wellsa newly completed well or newly recompleted well or the production rates of a well at the effective date of acquisition may not be an indicator of stabilized production rates or an indicator of the ultimate recoveries obtained.Oil and Natural Gas Reserves
----------------------------The net proved crude oil and gas reserves of the Company as of December 31,
20102011were362,350431,970 barrels of oil and condensate and10.6228.151 BCFG of natural gas. Based on SEC guidelines, the reserves were classified as follows:Proved Developed Producing 327,750 BO and 8.106 BCFG Proved Developed Non-Producing 34,120 BO and 0.648 BCFG Proved Undeveloped 480 BO and 1.868 BCFG Total Proved Reserves 362,350 BO and 10.622 BCFG
Proved Developed Producing 401,240 BO and 8.124 BCFG Proved Developed Non-Producing 30,740 BO and 0.027 BCFG Proved Undeveloped - BO and - BCFG Total Proved Reserves 431,980 BO and 8.151 BCFG Only reserves that fell within the Proved classification were considered. Other categories such as Probable or Possible Reserves were not considered. No value was given to the potential future development of behind pipe reserves, untested fault blocks, or the potential for deeper reservoirs (other than Barnett Shale proved undeveloped reserves directly offset by producing wells which are slated for drilling in the next five years) underlying the Company's properties. Shut-in uneconomic wells and insignificant non-operated interests were excluded.
- 11 -On a BOE (barrel of oil equivalent) basis (6 MCF/BOE), the net reserves are:
Natural Gas Reserves 1,770,405 BOE 83% Oil Reserves 362,350 BOE 17% Total Reserves 2,132,755 BOE 100% Proved Developed Producing 1,678,946 BOE 79% Proved Developed Non-Producing 142,077 BOE 7% Proved Undeveloped 311,732 BOE 14% Total Proved Reserves 2,132,755 BOE 100%
Natural Gas Reserves 1,358,547 BOE 76% Oil Reserves 431,980 BOE 24% Total Reserves 1,790,527 BOE 100% Proved Developed Producing 1,755,097 BOE 98% Proved Developed Non-Producing 35,230 BOE 2% Proved Undeveloped - BOE 0% Total Proved Reserves 1,790,327 BOE 100%
The Company has operational control over the majority of these reserves and can therefore to a large extent control the timing of development and production.
The Company's Operated Wells 1,864,327 BOE 87%
Non Operated Wells 268,428 BOE 13%
Total 2,132,755 BOE 100%
| The Company's Operated Wells | 1,499,367 | BOE | 84% |
| Non-Operate Wells | 291,160 | BOE | 16% |
| Total | 1,790,527 | BOE | 100% |
Financial Information Relating to Industry Segments
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The Company has three identifiable business segments: exploration, development and production of oil and natural gas, gas gathering, and commercial real estate investment. Footnote 15 to the Consolidated Financial Statements filed herein sets forth the relevant information regarding revenues, income from operations and identifiable assets for these segments.
Narrative Description of Business
---------------------------------
The Company is engaged in the exploration, development and production of oil and natural gas, and the gathering and marketing of natural gas. The Company is also engaged in commercial real estate leasing through the acquisition and partial occupancy of its corporate headquarters office building.
Principal Products, Distribution and Availability
The principal products marketed by the Company are crude oil and natural gas which are sold to major oil and gas companies, brokers, pipelines and distributors, and oil and gas properties which are acquired and sold to oil and gas development entities. Reserves of oil and gas are depleted upon extraction, and the Company is in competition with other entities for the discovery of new prospects.
The Company is also engaged in the gathering and marketing of natural gas through its subsidiary PPC, which owns 26.1 miles of pipelines and currently gathers approximately 1,7931,604 mcfgpd. Natural gas is gathered for a fee. Substantially all of the gas gathered by the Company is gas produced from wells that the Company operates and in which it owns a working interest.
- 12 -
The Company owns land and a two story commercial office building in Dallas, Texas, which it uses as its principal headquarters office. The Company leases the remainder of the building to non-related third party commercial tenants at prevailing market rates.
Patents, Licenses and Franchises
Oil and gas leases of the Company are obtained from the owner of the mineral estate. The leases are generally for a primary term of one to fivethree or more years, and in some instancesoften have extension options for an equivalent period as long as ten years, with the provision that suchoriginal primary term for payment of additional bonus consideration. The leases shall be extended into a secondarycustomarily provide for extension beyond their primary term and will continue during such secondary
termfor as long as oil and gas are produced in commercial quantities or other operations are conducted on such leases as provided by the terms of the leases.
It is generally required that a delay rental be paid on an annual basis during
the primary term of the lease unless the lease is producing. Delay rentals are
normally $1.00 to $25.00 per net mineral acre but can exceed this range.
The Company currently holds interests in producing and non-producing oil and gas leases. The existence of the oil and gas leases and the terms of the oil and gas leases are important to the business of the Company because future additions to reserves will come from oil and gas leases currently owned by the Company, and others that may be acquired, when they are proven to be productive. The Company is continuing to purchase oil and gas leases in areas where it currently has production, and also in other areas.
Dependence on Customers
The following is a summary of significant purchasers from oil and natural gas produced by the Company for the three-year period ended December 31, 2010:
Year Ended December 31, (1)
--------------------------------
Purchaser 2010 2009 2008
----------------------------------------- -------- -------- --------
Enbridge Energy Partners
(formerly Enbridge North Texas) 26% 36% 26%
Crosstex Gulf Coast Mktg 16% 23% 42%
Eastex Crude Company 7% 7% 3%
Shell Trading (US) Company 7% 6% 5%
Kinder Morgan 5% -% -%
Enterprise Crude Oil LLC(Teppco Crude Oil, LP) 5% 4% 2%
Conoco Phillips Company 4% 1% -%
Targa Midstream Service, LIM 3% 3% 6%
Navajo Refining Co. 3% 3% 1%
Genesis 2% 2% 1%
DCP Midstream, LP 2% -% -%
ETC Texas Pipeline 2% 1% 1%
Sunoco Partners Marketing 2% -% -%
Devon Gas Services, LP -% 1% 2%
Gateway Gathering & Marketing -% -% 1%
2011:
| Year Ended December 31, (1) | |||
| Purchaser | 2011 | 2010 | 2009 |
| Enbridge Energy Partners | 22% | 26% | 63% |
| Shell trading (US) Company | 20% | 7% | 6% |
| Crosstex Gulf Coast Mktg | 11% | 16% | 23% |
| Eastex Crude Company | 7% | 7% | 7% |
| Enterprise Crude Oil LLC | 5% | 5% | 4% |
| Targa Midstream Service, LIM | 4% | 3% | 3% |
| Gulfmark Energy Inc. | 3% | 0% | 0% |
| Conoco Phillips Company | 2% | 4% | 1% |
| Holly Corp (formerly Navajo Refining Co.) | 2% | 3% | 3% |
| DCP Midstream, LP | 2% | 2% | 0% |
| ETC Texas Pipeline | 2% | 2% | 1% |
| Sunoco Partners Marketing | 1% | 1% | 0% |
| Empire Pipeline Corp | 1% | 1% | 2% |
| XTO Energy, Inc. | 1% | 0% | 0% |
| Devon Gas Services, LP | 1% | 0% | 1% |
| Kinder Morgan | 0% | 5% | 0% |
| Genesis | 0% | 2% | 2% |
(1) Percent of Total Oil & Gas Sales
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Oil and gas is sold toapproximately 102100 different purchasersunder market sensitive, short-term contracts computed on a month to month basis.
Except as set forth above, there are no other customers of the Company that individually accounted for more than two percent of the Company's oil and gas revenues during the three years ended
December 31, 2010.
2011.
The Company currently has no hedged contracts.
Prospective Drilling Activities
The Company's primary oil and gas prospect generation and acquisition efforts have been in known producing areas in the United States with emphasis devoted to Texas.
The Company intends to use a portion of its available funds to participate in drilling activities. The Company does not own any drilling rigs and all drilling activity is performed by independent drilling contractors. The Company does not refine or otherwise process its oil and gas production.
Exploration for oil and gas is normally conducted with the Company acquiring undeveloped oil and gas leases under prospects, and carrying out exploratory drilling on the prospective leasehold with the Company retaining a majority interest in the prospect. Interests in the property are sometimes sold to key employees and associated companies at cost. Also, interests may be sold to third parties with the Company retaining an overriding royalty interest, carried working interest, or a reversionary interest.
A prospect is a geographical area designated by the Company for the purpose of searching for oil and gas reserves and reasonably expected by it to contain at least one oil or gas reservoir. The Company utilizes its own funds along with the issuance of common stock and options to purchase common stock in some limited cases, to acquire oil and gas leases covering the lands comprising the prospects. These leases are selected by the Company and are obtained directly from the landowners, as well as from land men,landmen, geologists, other oil companies, some of whom may be affiliated with the Company, and by direct purchase, farm-in, or option agreements. After an initial test well is drilled on a property, any subsequent development drilling of such prospect will normally require the Company to fund the development activities.
Special Tax Provisions
See Footnote 8 to Consolidated Financial Statements regarding the accounting for income taxes.
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Employees
The Company employs or contracts for the services of a total ofapproximately sixty-two people. Twenty-sevenTwenty-eight are full-time employees. The remainder, are part-time employees or independent contractors. We believe that our relationships with our employees are good.
In order to effectively utilize our resources, we employ the services of independent consultants and contractors to perform a variety of professional and technical services, including in the areas of lease acquisition, land related documentation and contracts, drilling and completion work, pumping, inspection, testing, maintenance and specialized services. We believe that it can be more cost effective to utilize the services of consultants and independent contractors for some of these services.
We depend to a large extent on the services of certain key management personnel and officers, and the loss of any these individuals could have a material adverse effect on our operations. The Company does not maintain key-man life insurance policies on its employees.
Financial information about foreign and domestic operations and export sales
All of the Company's business is conducted domestically, with no export sales.
Compliance with Environmental Regulations
Our oil and natural gas operations are subject to numerous United States federal, state and local laws and regulations relating to the protection of the environment, including those governing the discharge of materials into the water and air, the generation, management and disposal of hazardous substances and wastes and clean-up of contaminated science. We could incur material costs, including clean-up costs, fines and civil and criminal sanctions and third party claims for property damage and personal injury as a result of violations of, or liabilities under, environmental laws and regulations. Such laws and regulations not only expose us to liability for our own activities, but may also expose us to liability for the conduct of others or for actions by us that were in compliance with all applicable laws at the time those actions were taken. In addition, we could incur substantial expenditures complying with environmental laws and regulations, including future environmental laws and regulations which may be more stringent.
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Glossary of Oil and Gas Terms
The following are abbreviations and definitions of terms commonly used in the oil and gas industry that are used in this Report. The terms defined herein may be found in this report in both upper and lower case or a combination of both.
"BBL"
"BBL" means a barrel of 42 U.S. gallons.
"BBNGL"
“BBNGL” means billion barrels of natural gas liquids.
"BCF"
“BCF” or "BCFG"“BCFG” means billion cubic feet.
"BOE"
"BOE" means barrels of oil equivalent; converting volumes of natural gas to oil equivalent volumes using a ratio of six Mcf of natural gas to one Bbl of oil.
"BOPD"
“BOPD” means barrels of oil per day.
"BTU"
"BTU" means British Thermal Units. British Thermal Unit means the quantity of heat required to raise the temperature of one pound of water by one degree Fahrenheit.
"BSWPD"
“BSWPD” means barrels of salt water per day.
"Completion"
"Completion" means the installation of permanent equipment for the production of oil or gas.
"Development
"Development Well" means a well drilled within the proved area of an oil or gas reservoir to the depth of a strata graphic horizon known to be productive.
"Dry
"Dry Hole" or "Dry Well" means a well found to be incapable of producing hydrocarbons in sufficient quantities such that proceeds from the sale of such production exceed production expenses and taxes.
"Exploratory
"Exploratory Well" means a well drilled to find and produce oil or gas reserves not classified as proved, to find a new production reservoir in a field previously found to be productive of oil or gas in another reservoir or to extend a known reservoir.
"Farm-Out"
"Farm-Out" means an agreement pursuant to which the owner of a working interest in an oil and gas lease assigns the working interest or a portion thereof to another party who desires to drill on the leased acreage. Generally, the assignee is required to drill one or more wells in order to earn its interest in the acreage. The assignor usually retains a royalty or reversionary interest in the lease. The interest received by an assignee is a "farm-in" and the assignor issues a "farm-out."
"Farm-In"
"Farm-In" see "Farm-Out" above.
"Gas"
"Gas" means natural gas.
- 16 -
"Gross"
"Gross" when used with respect to acres or wells, refers to the total acres or wells in which we have a working interest.
"Infill
"Infill Drilling" means drilling of an additional well or wells provided for by an existing spacing order to more adequately drain a reservoir.
"MCF"
"MCF" or "MCFG"“MCFG” means thousand cubic feet.
"MCFE"
"MCFE" means MCF of natural gas equivalent; converting volumes of oil to natural gas equivalent volumes using a ratio of one BBL of oil to six MCF of natural gas.
"MCFGPD"
“MCFGPD” means thousand cubic feet of gas per day.
"MMBO"
“MMBO” means million barrels of oil.
"MMBTU"
"MMBTU" means ones million BTUs.
"Net"
"Net" when used with respect to acres or wells, refers to gross acres or wells multiplied, in each case, by the percentage working interest owned by the Company.
"Net
"Net Production" means production that is owned by the Company less royalties and production due others.
"Non-Operated"
"Non-Operated" or "Outside Operated" means wells that are operated by a third party.
"Operator"
"Operator" means the individual or company responsible for the exploration, development, production and management of an oil or gas well or lease.
"Overriding Royalty"
“Overriding Royalty” means a royalty interest which is usually reserved by an owner of the leasehold in connection with a transfer to a subsequent owner.
"Present
"Present Value" ("PV") when used with respect to oil and gas reserves, means the estimated future gross revenues to be generated from the production of proved reserves calculated in accordance with the guidelines of the SEC, net of estimated production and future development costs, using prices and costs as of the date of estimation without future escalation (except to the extent a contract specifically provides otherwise), without giving effect to non-property related expenses such as general and administrative expenses, debt service, future income tax expense and depreciation, depletion and amortization, and discounted using an annual discount rate of 10%.
"Productive
"Productive Wells" or "Producing Wells" consist of producing wells and wells capable of production, including wells waiting on pipeline connections.
"Proved
"Proved Developed Reserves" means reserves that can be expected to be recovered through existing wells with existing equipment and operating methods. Additional oil and gas expected to be obtained through the application of fluid injection or other improved recovery techniques for supplementing the natural forces and mechanisms of primary recovery will be included as "proved developed reserves" only after testing by a pilot project or after the operation of an - 17 -
installed program has confirmed through production response that increased recovery will be achieved.
"Proved
"Proved Reserves" means the estimated quantities of crude oil and natural gas which upon analysis of geological and engineering data appear with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions, i.e., prices and costs as of the date the estimate is made. Prices include consideration of changes in existing prices provided only by contractual arrangements, but not on escalations based upon future conditions.
(i) Reservoirs are considered proved if either actual production or
onclusive
conclusive formation tests support economic producibility. The area of
a reservoir considered proved includes (A) that portion delineated by
drilling and defined by gas-oil and/or oil-water contacts, if any; and
(B) the immediately adjoining portions not yet drilled, but which can
be reasonably judged as economically productive on the basis of
available geological and engineering data. In the absence of
information on fluid contacts, the lowest known structural occurrence
of hydrocarbons controls the lower proved limit of the reservoir.
(ii) Reserves which can be produced economically through application
of improved recovery techniques (such as fluid injection) are included
in the "proved" classification when successful testing by a pilot
project, or the operation of an installed program in the reservoir,
provides support for the engineering analysis on which the project or
program was based.
(iii) Estimates of proved reserves do not include the following: (A)
oil that may become available from known reservoirs but is classified
separately as "indicated additional reserves"; (B) crude oil and
natural gas, the recovery of which is subject to reasonable doubt
because of uncertainty as to geology, reservoir characteristics or
economic factors; (C) crude oil and natural gas that may occur in
undrilled prospects; and (D) crude oil and natural gas that may be
recovered from oil shales, coal, gilsonite and other such resources.
"Proved
"Proved Undeveloped Reserves" means reserves that are recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required for completion. Reserves on undrilled acreage shall be limited to those drilling units offsetting productive units that are reasonably certain of production when drilled. Proved reserves for other undrilled units can be claimed only where it can be demonstrated with certainty that there is continuity of production from the existing productive formation. Under no circumstances should estimates for proved undeveloped reserves be attributable to any acreage for which an application of fluid injection or other improved recovery technique is contemplated, unless such techniques have been proved effective by actual tests in the area and in the same reservoir.
- 18 -
"Recompletion"
"Recompletion" means the completion for production of an existing well bore in another formation from that in which the well has been previously completed.
"Reserves"
"Reserves" means proved reserves.
"Reservoir"
"Reservoir" means a porous and permeable underground formation containing a natural accumulation of producible oil and/or gas that is confined by impermeable rock or water barriers and is individual and separate from other reservoirs.
"Royalty"
"Royalty" means an interest in an oil and gas lease that gives the owner of the interest the right to receive a portion of the production from the leased acreage (or of the proceeds of the sale thereof), but generally does not require the owner to pay any portion of the costs of drilling or operating the wells on the leased acreage. Royalties may be either landowner's royalties, which are reserved by the owner of the leased acreage at the time the lease is granted, or overriding royalties, which are usually reserved by an owner of the leasehold in connection with a transfer to a subsequent owner.
"TCF"
“TCF” means trillion cubic feet.
"2-D
"2-D Seismic" means an advanced technology method by which a cross-section of the earth's subsurface is created through the interpretation of reflecting seismic data collected along a single source profile.
"3-D
"3-D Seismic" means an advanced technology method by which a three dimensional image of the earth's subsurface is created through the interpretation of reflection seismic data collected over a surface grid. 3-D seismic surveys allow for a more detailed understanding of the subsurface than do conventional surveys and contribute significantly to field appraisal, development and production.
"Working
"Working Interest" means an interest in an oil and gas lease that gives the owner of the interest the right to drill for and produce oil and gas on the leased acreage and requires the owner to pay a share of the costs of drilling and production operations. The share of production to which a working interest owner is entitled will always be smaller than the share of costs that the working interest owner is required to bear, with the balance of the production accruing to the owners of royalties.
"Workover"
"Workover" means operations on a producing well to restore or increase production.
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Item 1A.Risk Factors
Risks related directly to our Company
One should carefully consider the following risk factors, in addition to the other information set forth in this Report, before investing in shares of our common stock. Each of these risk factors could adversely affect our business, operating results and financial condition, as well as adversely affect the value of an investment in our common stock. Some information in this Report may contain "forward-looking" statements that discuss future expectations of our financial condition and results of operation. The risk factors noted in this section and other factors could cause our actual results to differ materially from those contained in any forward-looking statements.
The current global economic and financial crisis could lead to an extended national or global economic recession. A slowdown in economic activity caused by a recession would likely reduce national and worldwide demand for oil and natural gas and result in lower commodity prices for longforlong periods of time. Costs of exploration, development and production have not yet adjusted to current economic conditions. or in proportion to the significant reduction in product prices. Prolonged,substantial decreases in oil and natural gas prices would likely havelikelyhave a material adverse effect on Spindletop'sSpindletop’s business, financial condition and results of operations, could further limit the Company's access to liquidity and credit and could hinder its ability to satisfy its capital requirements.
Capital and credit markets have experienced unprecedented volatility and disruption during recent years. Given the current levels of market volatility and disruption, the availability of funds from those markets has diminished substantially. Further, arising from concerns about the stability of financial markets generally and the solvency of borrowers specifically, the cost of accessing the credit markets has increased as many lenders have raised interest rates, enacted tighter lending standards or altogether ceased to provide funding to borrowers.
Due to these capital and credit market conditions, Spindletop cannot be certain that funding will be available to the Company in amounts or on terms acceptable to the Company. The Company is evaluating whether current cash balances and cash flow from operations alone would be sufficient to provide working capital to fully fund the Company's operations. Accordingly, the Company is evaluating alternatives, such as joint ventures with third parties,or sales of interest in one or more of its properties. Such transactions if undertaken, could result in a reduction in the Company's operating interests or require the Company to relinquish the right to operate the property. There can be no assurance that any such transactions can be completed or that such transactions will satisfy the Company's operating capital requirements. If the Company is not successful in obtaining sufficient funding or completing an alternative transaction on a timely basis on terms acceptable to the Company, Spindletop would be required to curtail its expenditures or restructure its operations, and the Company would be unable to continue its exploration, drilling, and recompletion program, any of which would have a material adverse effect on Spindletop's business, financial condition and results of operations.
- 20 -
| 15 |
We face significant competition, and many of our competitors have resources in excess of our available resources.
resources.
The oil and gas industry is highly competitive. We encounter competition from other oil and gas companies in all areas of our operations, including the acquisition of producing properties and sale of crude oil and natural gas. Our competitors include major integrated oil and gas companies and numerous independent oil and gas companies, individuals and drilling and income programs. Many of our competitors are large, well established companies with substantially larger operating staffs and greater capital resources than us. Such companies may be able to pay more for productive oil and gas properties and exploratory prospects and to define, evaluate, bid for and purchase a greater number of properties and prospects than our financial or human resources permit. Our ability to acquire additional properties and to discover reserves in the future will depend upon our ability to evaluate and select suitable properties and to consummate transactions in this highly competitive environment.
Exploratory drilling is a speculative activity that may not result in commercially productive reserves and may require expenditures in excess of budgeted amounts.
amounts.
Drilling activities are subject to many risks, including the risk that no commercially productive oil or gas reservoirs will be encountered. There can be no assurance that new wells drilled by us will be productive or that we will recover all or any portion of our investment. Drilling for oil and gas may involve unprofitable efforts, not only from dry wells, but also from wells that are productive but do not produce sufficient net revenues to return a profit after drilling, operating and other costs. The cost of drilling, completing and operating wells is often uncertain. Our drilling operations may be curtailed, delayed or canceled as a result of a variety of factors, many of which are beyond our control, including economic conditions, mechanical problems, pressure or irregularities in formations, title problems, weather conditions, compliance with governmental requirements and shortages in or delays in the delivery of equipment and services. In today's environment, shortages make drilling rigs, labor and services difficult to obtain and could cause delays or inability to proceed with our drilling and development plans. Such equipment shortages and delays sometimes involve drilling rigs where inclement weather prohibits the movement of land rigs causing a high demand for rigs by a large number of companies during a relatively short period of time. Our future drilling activities may not be successful. Lack of drilling success could have a material adverse effect on our financial condition and results of operations.
Our operations are also subject to all the hazards and risks normally incident to the development, exploitation, production and transportation of, and the exploration for, oil and gas, including unusual or unexpected geologic formations, pressures, down hole fires, mechanical failures, blowouts, explosions, uncontrollable flows of oil, gas or well fluids and pollution and other environmental risks. These hazards could result in substantial losses to us due to injury and loss of life, severe damage to and destruction of property and equipment, pollution and other environmental damage and suspension of operations. We participate in insurance coverage maintained by the operator of - 21 -
its wells, although there can be no assurances that such coverage will be sufficient to prevent a material adverse effect to us in such events.
The vast majority of our oil and gas reserves are classified as proved reserves. Recovery of the Company's future proved undeveloped reserves will require significant capital expenditures. Our management estimates that aggregate capital expenditures of approximately $2,187,000$ 108,000 will be required to fully develop some of these reserves in the next twelve month period. No assurance can be given that our estimates of capital expenditures will prove accurate, that our financing sources will be sufficient to fully fund our planned development activities or that development activities will be either successful or in accordance with our schedule. Additionally, any significant decrease in oil and gas prices or any significant increase in the cost of development could result in a significant reduction in the number of wells drilled and/or reworked. No assurance can be given that any wells will produce oil or gas in commercially profitable quantities.
We are subject to uncertainties in reserve estimates and future net cash flows.
This annual report contains estimates of our oil and gas reserves and the future net cash flows from those reserves. These estimates have been prepared by Company personnel for 2011, 2010 and 2009 and by Netherland, Sewell & Associates,
Inc., independent petroleum engineers for 2008.2009. There are numerous uncertainties inherent in estimating quantities of reserves of oil and gas and in projecting future rates of production and the timing of development expenditures, including many factors beyond our control. The reserve estimates in this annual report are based on various assumptions, including, for example, constant oil and gas prices, operating expenses, capital expenditures and the availability of funds, and therefore, are inherently imprecise indications of future net cash flows. Actual future production, cash flows, taxes, operating expenses, development expenditures and quantities of recoverable oil and gas reserves may vary substantially from those assumed in the estimates. Any significant variance in these assumptions could materially affect the estimated quantity and value of reserves set forth in this prospectus. Additionally, our reserves may be subject to downward or upward revision based upon actual production performance, results of future development and exploration, prevailing oil and gas prices and other factors, many of which are beyond our control.
The present value of future net reserves discounted at 10% (the "PV-10") of proved reserves referred to in this annual report should not be construed as the current market value of the estimated proved reserves of oil and gas attributable to our properties. In accordance with applicable requirements of the SEC, the estimated discounted future net cash flows from proved reserves are generally based on prices and costs as of the date of the estimate, whereas actual future prices and costs may be materially higher or lower. Actual future net cash flows also will be affected by: (i) the timing of both production and related expenses; (ii) changes in consumption levels; and (iii) governmental regulations or taxation. In addition, the calculation of the present value of the future net cash flows using a 10% discount as required by the SEC is not necessarily the most appropriate discount factor based on interest rates in effect from time to time and risks associated with our - 22 -
reserves or the oil and gas industry in general. Furthermore, our reserves may be subject to downward or upward revision based upon actual production, results of future development, supply and demand for oil and gas, prevailing oil and gas prices and other factors. See "Properties - Oil and Gas Reserves."
Unless we replace our oil and natural gas reserves, our reserves and production will decline, which would adversely affect our cash flows and income.
Unless we conduct successful development, exploitation and exploration activities or acquire properties containing proved reserves, our proved reserves will decline as those reserves are produced. Producing oil and natural gas reservoirs generally are characterized by declining production rates that vary depending upon reservoir characteristics and other factors. Our future oil and natural gas reserves and production, and, therefore our cash flow and income, are highly dependent on our success in efficiently developing and exploiting our current reserves and economically finding or acquiring additional recoverable reserves. We may be unable to make such acquisitions because we are:
- unable to identify attractive acquisition candidates or negotiate
acceptable purchase contracts with them;
- unable to obtain financing for these acquisitions on economically
acceptable terms; or
- outbid by competitors.
| · | unable to identify attractive acquisition candidates or negotiate acceptable purchase contracts with them; |
| · | unable to obtain financing for these acquisitions on economically acceptable terms; or |
| · | outbid by competitors. |
If we are unable to develop, exploit, find or acquire additional reserves to replace our current and future production, our cash flow and income will decline as production declines, until our existing properties would be incapable of sustaining commercial production.
There are risks in acquiring producing oil and gas properties, including difficulties in integrating acquired properties into our business, additional liabilities and expenses associated with acquired properties, diversion of management attention, increasing the scope, geographic diversity and complexity of our operations.
One of our business strategies includes growing our reserve base through acquisitions. Our failure to integrate acquired properties successfully into our existing business, or the expense incurred in consummating future acquisitions, could result in unanticipated expenses and losses. In addition, we may assume cleanup or reclamation obligations or other unanticipated liabilities in connection with these acquisitions. The scope and cost of these obligations may ultimately be materially greater than estimated at the time of the acquisition.
We are continually investigating opportunities for acquisitions. In connection with future acquisitions, the process of integrating acquired operations into our existing operations may result in unforeseen operating difficulties and may require significant management attention and financial resources that would otherwise be available for the ongoing development or expansion of existing operations. Our ability to make future acquisitions may be constrained by our ability to obtain additional financing.
- 23 -
Possible future acquisitions could result in our incurring debt, contingent liabilities and expense, all of which could have a material effect on our financial condition and operating results.
Acquisitions may prove to be worth less than we paid because of uncertainties in evaluating recoverable reserves and potential liabilities.
Successful acquisitions require an assessment of a number of factors, including estimates of recoverable reserves, exploration potential, recovery applicability from waterflood and Enhanced Oil Recovery techniques ("EOR"(“EOR”), future oil and natural gas prices, operating costs and potential environmental and other liabilities. Such assessments are inexact and their accuracy is inherently uncertain. In connection with our assessments, we perform a review of the acquired properties which we believe is generally consistent with industry practices. However, such a review will not reveal all existing or potential problems. In addition, our review may not permit us to become sufficiently familiar with the properties to fully assess their deficiencies and capabilities. We do not inspect every well or property. Even when we inspect a well or property, we do not always discover structural, subsurface and environmental problems that may exist or arise. We are generally not entitled to contractual indemnification for pre-closing liabilities, including environmental liabilities. Normally, we acquire interests in properties on an "as is"“as is” basis with limited remedies for breaches of representations and warranties. As a result of these factors, we may not be able to acquire oil and natural gas properties that contain economically recoverable reserves or be able to complete such acquisitions on acceptable terms.
Additionally, significant acquisitions can change the nature of our operations and business depending upon the character of the acquired properties, which may have substantially different operating and geological characteristics or be in different geographic locations than our existing properties. It is our current intention to continue focusing on acquiring properties with development and exploration potential located in onshore United States. To the extent that we acquire properties substantially different from the properties in our primary operating regions or acquire properties that require different technical expertise, we may not be able to realize the economic benefits of these acquisitions as efficiently as in our prior acquisitions.
We cannot control activities on properties we do not operate. Failure to fund capital expenditure requirements may result in reduction or forfeiture of our interests in some of our non-operated projects.
We do not operate some of the properties in which we have an interest and we have limited ability to exercise influence over operations for these properties or their associated costs. As of December 31, 2010,2011, approximately 13%16% of our crude oil and natural gas proved reserves were operated by other companies. Our dependence on other
| 18 |
operators and other working interest owners for these projects and our limited ability to influence operations and associated costs could materially adversely affect the realization of our targeted return on capital in drilling or acquisition activities and our targeted production - 24 -
growth rate. The success and timing of drilling, development and exploitation activities on properties operated by others depend on a number of factors that are beyond our control, including the operator'soperator’s expertise and financial resources, approval of other participants for drilling wells and utilization of technology.
When we are not the majority owner or operator of a particular crude oil or natural gas project, we may have no control over the timing or amount of capital expenditures associated with such project. If we are not willing or able to fund our capital expenditures relating to such projects when required by the majority owner or operator, our interests in these projects may be reduced or forfeited.
We are subject to risks associated with the current United States Government Administration'sAdministration’s proposed budget features.
The Obama administration has set forth budget proposals which if passed, would significantly curtail our ability to attract investors and raise capital. Proposed changes in the Federal income tax laws which would eliminate or reduce the percentage depletion deduction and the deduction for intangible drilling and development costs for small independent producers, will significantly reduce the investment capital available to those in the industry as well as our Company. Lengthening the time to expense seismic costs will also have an adverse effect on our ability to explore and find new reserves.
We are subject to various operating and other casualty risks that could result in liability exposure or the loss of production and revenues.
revenues.
Our oil and gas business involves a variety of operating risks, including, but not limited to, unexpected formations or pressures, uncontrollable flows of oil, gas, brine or well fluids into the environment (including groundwater contamination), blowouts, fires, explosions, pollution and other risks, any of which could result in personal injuries, loss of life, damage to properties and substantial losses. Although we carry insurance at levels that we believe are reasonable, we are not fully insured against all risks. We do not carry business interruption insurance. Losses and liabilities arising from uninsured or under-insured events could have a material adverse effect on our financial condition and operations.
From time to time, due primarily to contract terms, pipeline interruptions or weather conditions, the producing wells in which we own an interest have been subject to production curtailments. The curtailments range from production being partially restricted to wells being completely shut-in. The duration of curtailments varies from a few days to several months. In most cases, we are provided only limited notice as to when production will be curtailed and the duration of such curtailments. We are not currently experiencing any material curtailment of our production.
We intend to increase to some extent ourextentour development and, to a lesser extent, exploration activities. Exploration drilling and, to a lesser extent,
- 25 - development drilling of oil and gas reserves involve a high degree of risk that no commercial production will be obtained and/or that production will be insufficient to recover drilling and completion costs. The cost of drilling, completing and operating wells is often uncertain. Our drilling operations may be curtailed, delayed or canceled as a result of numerous factors, including title problems, weather conditions, compliance with governmental requirements and shortages or delays in the delivery of equipment. Furthermore, completion of a well does not assure a profit on the investment or a recovery of drilling, completion and operating costs.
We depend on our key management personnel and technical experts and the loss of any of these individuals could adversely affect our business.
If we lose the services of our key management personnel, technical experts or are unable to attract additional qualified personnel, our business, financial condition, results of operations, development efforts and ability to grow could suffer. We have assembled a team of engineers and geologists who have considerable experience in applying
| 19 |
advanced drilling and completion techniques to explore for and to develop crude oil and natural gas. We depend upon the knowledge, skill and experience of these experts to assist us in improving the performance and reducing the risks associated with our participation in crude oil and natural gas exploration and development projects. In addition, the success of our business depends, to a significant extent, upon the abilities and continued efforts of our management, particularly Chris Mazzini, our Chief Executive Officer, President and Chairman of the Board. We do not have an employment agreement with or key mankey-man life insurance on Mr. Mazzini or any of our other employees.
Certain of our affiliates control a majority of our outstanding common stock, which may affect your vote as a shareholder.
shareholder.
Our executive officers, directors and their affiliates hold approximately 77% of our outstanding shares of common stock. As a result, officers, directors and their affiliates and such shareholders have the ability to exert significant influence over our business affairs, including the ability to control the election of directors and results of voting on all matters requiring shareholder approval. This concentration of voting power may delay or prevent a potential change in control.
Certain of our affiliates have engaged in business transactions with the Company, which may result in conflicts of interest.
Certain officers, directors and related parties, including entities controlled by Mr. Mazzini, the President and Chief Executive Officer, have engaged in business transactions with the Company which were not the result of arm's length negotiations between independent parties. Our management believes that the terms of these transactions were as favorable to us as those that could have been obtained from unaffiliated parties under similar circumstances. All future transactions between us and our affiliates will be on terms no less - 26 -
favorable than could be obtained from unaffiliated third parties and will be approved by a majority of the disinterested members of our Board of Directors.
Our common stock is traded on the Over-the-Counter market and is currently quoted on the OTC Bulletin Board ("OTCBB"(“OTCQB”), symbol "SPND".
The liquidity of our common stock may be adversely affected, and purchasers of our common stock may have difficulty selling our common stock, if our common stock does not continue to trade in that or another suitable trading market.
There is presently only a limited public market for our common stock, and there is no assurance that a ready public market for our securities will develop. It is likely that any market that develops for our common stock will be highly volatile and that the trading volume in such market will be limited. The trading price of our common stock could be subject to wide fluctuations in response to quarter-to-quarter variations in our operating results, announcements of our drilling results and other events or factors. In addition, the United States stock market has from time to time experienced extreme price and volume fluctuations that have affected the market price for many companies and which often have been unrelated to the operating performance of these companies. These broad market fluctuations may adversely affect the market price of our securities.
We do not intend to declare dividends in the foreseeable future.
future.
Our Board of Directors presently intends to retain all of our earnings for the expansion of our business. We therefore do not anticipate the distribution of cash dividends in the foreseeable future. Any future decision of our Board of Directors to pay cash dividends will depend, among other factors, upon our earnings, financial position and cash requirements.
We are subject to certain title risks.
Our company employees and contract land professionals have reviewed title records or other title review materials relating to substantially all of our producing properties. The title investigation performed by us prior to acquiring undeveloped properties is thorough, but less rigorous than that conducted prior to drilling, consistent with industry standards. We believe we have satisfactory title to all our producing properties in accordance with standards generally accepted in the oil and gas industry. Our properties are subject to customary royalty interests, liens incident to operating agreements, liens for current taxes and other burdens, which we believe do not materially interfere with the use of or affect the value of such properties. At December 31, 2010,2011, our leaseholds for some of our net acreage were being kept in force by virtue of production on that acreage in paying quantities. The remaining net acreage was held by lease rentals and similar provisions and requires production in paying quantities prior to expiration of various time periods to avoid lease termination.
- 27 -
We expect to make acquisitions of oil and gas properties from time to time subject to available resources. In making an acquisition, we generally focus most of our title and valuation efforts on the more significant properties. It is generally not feasible for us to review in-depth every property we purchase and all records with respect to such properties. However, even an in-depth review of properties and records may not necessarily reveal existing or potential problems, nor will it permit us to become familiar enough with the properties to assess fully their deficiencies and capabilities. Evaluation of future recoverable reserves of oil and gas, which is an integral part of the property selection process, is a process that depends upon evaluation of existing geological, engineering and production data, some or all of which may prove to be unreliable or not indicative of future performance. To the extent the seller does not operate the properties, obtaining access to properties and records may be more difficult. Even when problems are identified, the seller may not be willing or financially able to give contractual protection against such problems, and we may decide to assume environmental and other liabilities in connection with acquired properties.
Our business is highly capital-intensive requiring continuous development and acquisition of oil and gas reserves. In addition, capital is required to operate and expand our oil and gas field operations and purchase equipment. At December 31, 2010,2011, we had working capital of $5,685,000.$5,670,000. We anticipate that we will be able to meet our cash requirements for the next 12 months. However, if such plans or assumptions change or prove to be inaccurate, we could be required to seek additional financing sooner than currently anticipated.
We have funded our operations, acquisitions and expansion costs primarily through our internally generated cash flow. Our success in obtaining the necessary capital resources to fund future costs associated with our operations and expansion plans is dependent upon our ability to: (i) increase revenues through acquisitions and recovery of our proved producing and proved developed non-producing oil and gas reserves; and (ii) maintain effective cost controls at the corporate administrative office and in field operations. However, even if we achieve some success with our plans, there can be no assurance that we will be able to generate sufficient revenues to achieve significant profitable operations or fund our expansion plans.
We have substantial capital requirements necessary for undeveloped properties for which we may not be able to obtain adequate financing.
Development of our properties will require additional capital resources. We have no commitments to obtain any additional debt or equity financing and there can be no assurance that additional financing will be available, when required, on favorable terms to us. The inability to obtain additional financing could have a material adverse effect on us, including requiring us to curtail significantly our oil and gas acquisition and development plans or farm-out development of our properties. Any additional financing may involve substantial dilution to the interests of our shareholders at that time.
- 28 -
| 21 |
Oil and natural gas prices fluctuate widely and low prices could have a material adverse impact on our business and financial results.
results.
Our revenues, profitability and the carrying value of our oil and gas properties are substantially dependent upon prevailing prices of, and demand for, oil and gas and the costs of acquiring, finding, developing and producing reserves. Our ability to obtain borrowing capacity, to repay future indebtedness, and to obtain additional capital on favorable terms is also substantially dependent upon oil and gas prices. Historically, the markets for oil and gas have been volatile and are likely to continue to be volatile in the future. Prices for oil and gas are subject to wide fluctuations in response to: (i) relatively minor changes in the supply of, and demand for, oil and gas; (ii) market uncertainty; and (iii) a variety of additional factors, all of which are beyond our control. These factors include domestic and foreign political conditions, the price and availability of domestic and imported oil and gas, the level of consumer and industrial demand, weather, domestic and foreign government relations, the price and availability of alternative fuels and overall economic conditions. Furthermore, the marketability of our production depends in part upon the availability, proximity and capacity of gathering systems, pipelines and processing facilities. Volatility in oil and gas prices could affect our ability to market our production through such systems, pipelines or facilities. As of December 31, 2010,2011, approximately 76%80% of our oil and gas production is currently sold to nine gaseleven purchasing firms on a month-to-month basis at prevailing spot market prices. Oil prices remained subject to unpredictable political and economic forces during 2011, 2010, 2009, and 2008,2009, and experienced fluctuations similar to those seen in natural gas prices for the year. We believe that oil prices will continue to fluctuate in response to changes in the policies of the Organization of Petroleum Exporting Countries ("OPEC"), changes in demand from many Asian countries, current events in the Middle East, security threats to the United States, and other factors associated with the world political and economic environment. As a result of the many uncertainties associated with levels of production maintained by OPEC and other oil producing countries, the availabilities of worldwide energy supplies and competitive relationships and consumer perceptions of various energy sources, we are unable to predict what changes will occur in crude oil and natural gas prices.
We may be responsible for additional costs in connection with abandonment of properties.
properties.
We are responsible for payment of plugging and abandonment costs on its oil and gas properties pro rata to our working interest. Based on our experience, we anticipate that in most cases, the ultimate aggregate salvage value of lease and well equipment located on our properties should equal to the costs of abandoning such properties. There can be no assurance, however, that we will be successful in avoiding additional expenses in connection with the abandonment of any of our properties. In addition, abandonment costs and their timing may change due to many factors, including actual production results, inflation rates and changes in environmental laws and regulations.
- 29 -
Risks that Involve the Oil & Gas Industry in General
----------------------------------------------------
General.
We are subject to various governmental regulations which may cause us to incur substantial costs.
costs.
Our operations are affected from time to time in varying degrees by political developments and federal, state and local laws and regulations. In particular, oil and gas production related operations are or have been subject to price controls, taxes and other laws and regulations relating to the oil and gas industry. Failure to comply with such laws and regulations can result in substantial penalties. The regulatory burden on the oil and gas industry increases our cost of doing business and affects our profitability. Although we believe we are in substantial compliance with all applicable laws and regulations, because such laws and regulations are frequently amended or reinterpreted, we are unable to predict the future cost or impact of complying with such laws and regulations.
Sales of natural gas by us are not regulated and are generally made at market prices. However, the Federal Energy Regulatory Commission ("FERC") regulates interstate natural gas transportation rates and service conditions, which affect the marketing of natural gas produced by us, as well as the revenues received by us for sales of such
| 22 |
production. Sales of our natural gas currently are made at uncontrolled market prices, subject to applicable contract provisions and price fluctuations that normally attend sales of commodity products.
Since the mid-1980's,mid-1980s, the FERC has issued a series of orders, culminating in Order Nos. 636, 636-A and 636-B ("Order 636"), that have significantly altered the marketing and transportation of natural gas. Order 636 mandated a fundamental restructuring of interstate pipeline sales and transportation service, including the unbundling by interstate pipelines of the sale, transportation, storage and other components of the city-gate sales services such pipelines previously performed. One of the FERC's purposes in issuing the orders was to increase competition within all phases of the natural gas industry. Order 636 and subsequent FERC orders issued in individual pipeline restructuring proceedings have been the subject of appeals, and the courts have largely upheld Order 636. Because further review of certain of these orders is still possible, and other appeals may be pending, it is difficult to exactly predict the ultimate impact of the orders on us and our natural gas marketing efforts. Generally, Order 636 has eliminated or substantially reduced the interstate pipelines' traditional role as wholesalers of natural gas, and has substantially increased competition and volatility in natural gas markets.
While significant regulatory uncertainty remains, Order 636 may ultimately enhance our ability to market and transport our natural gas, although it may also subject us to greater competition, more restrictive pipeline imbalance tolerances and greater associated penalties for violation of such tolerances.
The FERC has announced several important transportation-related policy statements and proposed rule changes, including the appropriate manner in which interstate pipelines release capacity under Order 636 and, more recently, the
- 30 - price which shippers can charge for their released capacity. In addition, in 1995, the FERC issued a policy statement on how interstate natural gas pipelines can recover the costs of new pipeline facilities. In January 1997, the FERC issued a policy statement and a request for comments concerning alternatives to its traditional cost-of-service rate making methodology. A number of pipelines have obtained FERC authorization to charge negotiated rates as one such alternative. While any additional FERC action on these matters would affect us only indirectly, these policy statements and proposed rule changes are intended to further enhance competition in natural gas markets. We cannot predict what the FERC will take on these matters, nor can we predict whether the FERC's actions will achieve its stated goal of increasing competition in natural gas markets. However, we do not believe that we will be treated materially differently than other natural gas producers and marketers with which we compete.
The price we receive from the sale of oil is affected by the cost of transporting such products to market. Effective January 1, 1995, the FERC implemented regulations establishing an indexing system for transportation rates for oil pipelines, which, generally, would index such rates to inflation, subject to certain conditions and limitations. These regulations could increase the cost of transporting oil by interstate pipelines, although the most recent adjustment generally decreased rates. These regulations have generally been approved on judicial review. We are not able to predict with certainty the effect, if any, of these regulations on its operations. However, the regulations may increase transportation costs or reduce wellhead prices for oil.
The State of Texas and many other states require permits for drilling operations, drilling bonds and reports concerning operations and impose other requirements relating to the exploration for and production of oil and gas. Such states also have statutes or regulations addressing conservation matters, including provisions for the unitization or pooling of oil and gas properties, the establishment of maximum rates of production from wells and the regulation of spacing, plugging and abandonment of such wells. The statutes and regulations of certain states limit the rate at which oil and gas can be produced from our properties. However, we do not believe we will be affected materially differently by these statutes and regulations than any other similarly situated oil and gas company.
We may not have enough insurance to cover all of the risks we face, which could result in significant financial exposure.
We maintain insurance coverage against some, but not all, potential losses in order to protect against the risks we face. We may elect not to carry insurance if our management believes that the cost of insurance is excessive
| 23 |
relative to the risks presented. If an event occurs that is not covered, or not fully covered, by insurance, it could harm our financial condition, results of operations and cash flows. In addition, we cannot fully insure against pollution and environmental risks.
- 31 -
We are subject to various environmental risks which may cause us to incur substantial costs.
costs.
Our operations and properties are subject to extensive and changing federal, state and local laws and regulations relating to environmental protection, including the generation, storage, handling and transportation of oil and gas and the discharge of materials into the environment, and relating to safety and health. The recent trend in environmental legislation and regulation generally is toward stricter standards, and this trend will likely continue. These laws and regulations may require the acquisition of a permit or other authorization before construction or drilling commences and for certain other activities; limit or prohibit construction, drilling and other activities on certain lands lying within wilderness and other protected areas; and impose substantial liabilities for pollution resulting from our operations. The permits required for our various operations are subject to revocation, modification and renewal by issuing authorities. Governmental authorities have the power to enforce compliance with their regulations, and violations are subject to fines, penalties or injunctions. In the opinion of management, we are in substantial compliance with current applicable environmental laws and regulations, and we have no material commitments for capital expenditures to comply with existing environmental requirements. Nevertheless, changes in existing environmental laws and regulations or in interpretations thereof could have a significant impact on us. The impact of such changes, however, would not likely be any more burdensome to us than to any other similarly situated oil and gas company.
The Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA"), also known as the "Superfund" law, and similar state laws impose liability, without regard to fault or the legality of the original conduct, on certain classes of persons that are considered to have contributed to the release of a "hazardous substance" into the environment. These persons include the owner or operator of the disposal site or sites where the release occurred and companies that disposed or arranged for the disposal of the hazardous substances found at the site. Persons who are or were responsible for releases of hazardous substances under CERCLA may be subject to joint and several liability for the costs of cleaning up the hazardous substances that have been released into the environment and for damages to natural resources. Furthermore, neighboring landowners and other third parties may file claims for personal injury and property damage allegedly caused by the hazardous substances released into the environment.
We generate typical oil and gas field wastes, including hazardous wastes that are subject to the Federal Resources Conservation and Recovery Act and comparable state statutes. The United States Environmental Protection Agency and various state agencies have limited the approved methods of disposal for certain hazardous and non-hazardous wastes. Furthermore, certain wastes generated by our oil and gas operations that are currently exempt from regulation as "hazardous wastes" may in the future be designated as "hazardous wastes", and therefore be subject to more rigorous and costly operating and disposal requirements.
The Oil Pollution Act ("OPA") imposes a variety of requirements on responsible parties for onshore and offshore oil and gas facilities and vessels related to
- 32 - the prevention of oil spills and liability for damages resulting from such spills in waters of the United States. The "responsible party" includes the owner or operator of an onshore facility or vessel or the lessee or permittee of, or the holder of a right of use and easement for, the area where an onshore facility is located. OPA assigns liability to each responsible party for oil spill removal costs and a variety of public and private damages from oil spills. Few defenses exist to the liability for oil spills imposed by OPA. OPA also imposes financial responsibility requirements. Failure to comply with ongoing requirements or inadequate cooperation in a spill event may subject a responsible party to civil or criminal enforcement actions.
We own or lease properties that for many years have produced oil and gas. We also own natural gas gathering systems. It is not uncommon for such properties to be contaminated with hydrocarbons. Although we or previous owners of these interests may have used operating and disposal practices that were standard in the industry at the
| 24 |
time, hydrocarbons or other wastes may have been disposed of or released on or under the properties or on or under other locations where such wastes have been taken for disposal. These properties may be subject to federal or state requirements that could require us to remove any such wastes or to remediate the resulting contamination. In addition to properties that we operate, we have interests in many properties which are operated by third parties over whom we have limited control. Notwithstanding our lack of control over properties operated by others, the failure of the previous owners or operators to comply with applicable environmental regulations may, in certain circumstances, adversely impact us.
Item 1B. Unresolved Staff Comments
None
Item 2. Properties
OIL AND GAS PROPERTIES
The following table sets forth pertinent data with respect to the Company-owned oil and gas properties, all located within the continental United States, as estimated by the Company:
Year Ended December 31,
-----------------------------------
2010 2009 2008
----------- ----------- -----------
Gas and Oil Properties, net (1):
Proved developed gas reserves-Mcf (2)
Proved developed producing 8,106,000 8,166,000 8,280,000
Proved developed non-producing 648,000 2,507,000 2,603,000
Proved undeveloped gas reserves-Mcf (3) 1,868,000 1,848,000 2,877,000
----------- ----------- -----------
Total proved gas reserves-Mcf 10,622,000 12,521,000 13,760,000
=========== =========== ===========
- 33 -
Proved Developed Crude Oil and
Condensate reserves-Bbls (2)
Proved developed producing 328,000 284,000 225,000
Proved developed non-producing 34,000 13,000 28,000
Proved Undeveloped crude oil and
Condensate reserves-Bbls (3) -0- 26,000 9,000
----------- ----------- -----------
Total proved crude oil and condensate
Reserves-Bbls 362,000 323,000 262,000
=========== =========== ===========
| Year Ended December 31, | |||
| 2011 | 2010 | 2009 | |
| Gas and Oil Properties, net (1) | |||
| Proved developed gas reserves - Mcf (2) | |||
| Proved developed producing | 8,124,000 | 8,106,000 | 8,166,000 |
| Proved developed non-producing | 27,000 | 648,000 | 2,507,000 |
| Proved undeveloped gas reserves - Mcf (3) | - | 1,868,000 | 1,848,000 |
| Total proved gas reserves - Mcf | 8,151,000 | 10,622,000 | 12,521,000 |
| Proved Developed Crude Oil and | |||
| Condensate reserves - Bbls (2) | |||
| Proved developed producing | 401,000 | 328,000 | 284,000 |
| Proved developed non-producing | 31,000 | 34,000 | 13,000 |
| Proved Undeveloped crude oil and | |||
| Condensate reserves - Bbls (3) | - | - | 26,000 |
| 432,000 | 362,000 | 323,000 | |
(1) The estimate of the net proved oil and gas reserves, future net revenues, and the present value of future net revenues.
(2) "Proved Developed Oil and Gas Reserves" are reserves that can be expected to be recovered through existing wells with existing equipment and operating methods.
(3) "Proved Undeveloped Reserves" are reserves that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required for recompletion. See Footnote 18 to the Financial Statements, Supplemental Reserve Information (Unaudited), for further explanation of the changes for 20082009 through 2010.
2011.
(4) Reserve amounts are rounded to the nearest thousand.
Productive Wells
----------------
The following table sets forth our domestic productive wells and includes both operated wells and wells operated by third parties at December 31, 2010.
Gas Wells Oil Wells Total Wells
---------------------- --------------------- ---------------------
Gross Net Gross Net Gross Net
---------- ---------- ---------- ---------- ---------- ----------
374 97.24 153 63.06 527 160.30
2011.
| Gas Wells | Oil Wells | Total Wells | |||
| Gross | Net | Gross | Net | Gross | Net |
| 381 | 102.81 | 162 | 64.38 | 543 | 167.19 |
Acreage
The following table sets forth our undeveloped and developed gross and net leasehold acreage for our operated and non-operated wells at December 31, 2010.2011. Undeveloped acreage includes leased acres on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of oil and gas, regardless of whether or not such acreage contains proved reserves. Undeveloped acreage should not be confused with undrilled acreage held by Production under the terms of a lease. Undrilled acreage held by production under the terms of a lease is included in the Developed AcreAcreage category total shown below.
- 34 -
Undeveloped Acreage Developed Acreage Total Acreage
---------------------- --------------------- ---------------------
Gross Net Gross Net Gross Net
---------- ---------- ---------- ---------- ---------- ----------
7,215 3,398 92,294 21,152 99,509 25,550
| Undeveloped Acreage | Developed Acreage | Total Acreage | |||
| Gross | Net | Gross | Net | Gross | Net |
| 5,537 | 1,585 | 94,989 | 22,112 | 100,526 | 23,697 |
All the leases for the undeveloped acreage summarized in the preceding table will expire at the end of their respective primary terms unless prior to that date, the existing leases are renewed or production has been obtained from the acreage subject to the lease, in which event the lease will remain in effect until the cessation of production. As is customary in the industry, we generally acquire oil and gas acreage without any warranty of title except as to claims made by, through or under the transferor. Although we have title to developed acreage examined prior to acquisition in those cases in which the economic significance of the acreage justifies the cost, there can be no assurance that losses will not result from title defect or from defects in the assignment of leasehold rights.
Wells Drilled and Completed
---------------------------
The Company's working interests in both operated and outside operated exploration and development wells completed during the years indicated were as follows:
Year Ended December 31,
-----------------------------------------
2010 2009 2008
------------- ------------- -------------
Gross Net Gross Net Gross Net
------ ------ ------ ------ ------ ------
Exploratory Wells (1):
Productive - - - - - -
Non-Productive - - - - - -
------ ------ ------ ------ ------ ------
Total - - - - - -
------ ------ ------ ------ ------ ------
Development Wells (2):
Productive 10.000 1.391 9.000 1.261 11.000 1.962
Non-Productive - - - - - -
------ ------ ------ ------ ------ ------
Total 10.000 1.391 9.000 1.261 11.000 1.962
------ ------ ------ ------ ------ ------
Total Exploration & Development
Wells:
Productive 10.000 1.391 9.000 1.261 11.000 1.962
Non-Productive - - - - - -
------ ------ ------ ------ ------ ------
Total 10.000 1.391 9.000 1.261 11.000 1.962
------ ------ ------ ------ ------ ------
- 35 -
| 2011 | 2010 | 2009 | ||||
| Gross | Net | Gross | Net | Gross | Net | |
| Exploratory Wells (1): | ||||||
| Productive | - | - | - | - | - | - |
| Non-Productive | - | - | - | - | - | - |
| Total | - | - | - | - | - | - |
| 26 |
| Developed Wells (2): | ||||||
| Productive | 11.000 | 1.036 | 10.000 | 1.391 | 9.000 | 1.261 |
| Non-Productive | - | - | - | - | - | - |
| Total | 11.000 | 1.036 | 10.000 | 1.391 | 9.000 | 1.261 |
| Total Exploration & Development Wells: | ||||||
| Productive | 11.000 | 1.036 | 10.000 | 1.391 | 9.000 | 1.261 |
| Non-Productive | - | - | - | - | - | - |
| Total | 11.000 | 1.036 | 10.000 | 1.391 | 9.000 | 1.261 |
(1) An exploratory well is a well drilled to find and produce oil or gas in an unproved area, to find a new reservoir in a field previously found to be productive of oil or gas in another reservoir, or to extend a known reservoir
reservoir.
(2) A development well is a well drilled within the proved area of an oil or gas reservoir to the depth of a stratigraphic horizon known to be productive.
The following tables set forth additional data with respect to production from Company-owned oil and gas operated and non-operated properties, all located within the continental United States:
For the years ended December 31
2010 2009 2008 2007 2006
-------- -------- -------- -------- --------
Oil and Gas Production, net:
Natural Gas (Mcf) 823,957 866,416 1,231,835 880,662 671,527
Crude Oil & Condensate (Bbl) 31,526 25,875 32,663 24,472 25,443
Average Sales Price per Unit
Produced:
Natural Gas ($/Mcf) $ 4.89 $ 4.13 $ 8.41 $ 6.63 $ 5.55
Crude Oil & Condensate($/Bbl)$ 74.35 $ 56.55 $ 71.21 $ 65.17 $ 53.14
Average Production Cost per
Equivalent Barrel (1) (2) $ 15.48 $ 14.37 $ 14.98 $ 14.36 $ 15.14
| For the years ended December 31, | |||||
| 2011 | 2010 | 2009 | 2008 | 2007 | |
| Oil and Gas Production, net: | |||||
| Natural Gas (Mcf) | 733,816 | 823,957 | 866,416 | 1,231,835 | 880,662 |
| Crude Oil & Condensate (Bbl) | 48,708 | 31,526 | 25,875 | 32,663 | 24,472 |
| Average Sales Price per Unit Produced | |||||
| Natural Gas (Mcf) | $ 5.34 | $ 4.89 | $ 4.13 | $ 8.41 | $ 6.63 |
| Crude Oil & Condensate (Bbl) | $ 83.85 | $ 74.35 | $ 56.55 | $ 71.21 | $ 65.18 |
| Average Production Cost per Equivalent Barrel (1) (2) | $ 19.02 | $ 15.48 | $ 14.37 | $ 14.98 | $ 14.36 |
(1) Includes severance taxes and ad valorem taxes.
(2) Gas production is converted to equivalent barrels at the rate of six MCFG per barrel, representing relative energy content of natural gas to oil.
The Company owns producing royalties and overriding royalties under properties located in Texas. The revenue from these properties is not significant.
The Company is not aware of any major discovery or other favorable or adverse event that is believed to have caused a significant change in the estimated proved reserves since December 31, 2010.
2011.
OFFICE SPACE
The Company owns a commercial office building. The property is a two story multi-tenant, garden office building with a sub-grade parking garage. The 2829 year old building contains approximately 46,286 rentable square feet and sits on a 1.4919 acre block of land situated in north Dallas, Texas in close proximity to hotels, restaurants and shopping areas (the Galleria/Valley ViewGalleria Mall) with easy access to Interstate Highway 635 (LBJ Freeway) and Dallas Parkway (North Dallas Toll Road). The Company occupies approximately 10,317 rentable square feet of the building as its primary office headquarters, and leases the remaining space in the building to non-related third party commercial tenants at prevailing market rates.
- 36 -
The address of the Company's principal executive offices is One Spindletop Centre, 12850 Spurling Road, Suite 200, Dallas, Texas 75230. The telephone number is (972) 644-2581.
PIPELINES
The Company owns, through its subsidiary, PPC, 26.1 miles of natural gas pipelines in Parker, Palo Pinto and Eastland Counties, Texas. These pipelines are steel and polyethylene and range in size from two inches to four inches. These pipelines primarily gather natural gas from wells operated by the Company and in which the Company owns a working interest, but also for other parties.
The Company normally does not purchase and resell natural gas, but gathers gas for a fee. The fees charged in some cases are subject to regulations by the State of Texas and the Federal Energy Regulatory Commission. Average daily volumes of gas gathered by the pipelines owned by the Company were 1,604, 1,793, 1,659, and 1,520,1,659 MCF per day for 2011, 2010, and 2009, and 2008 respectively.
Oilfield Production Equipment
-----------------------------
The Company owns various natural gas compressors, pumping units, dehydrators and various other pieces of oil field production equipment.
Substantially all of the equipment is located on oil and gas properties operated by the Company and in which it owns a working interest. The rental fees are charged as lease operating fees to each property and each owner.
M-R Oilfield Services, LP, is an oilfield service company which provides to the
Company, roustabout, swabbing and completion services to the Company at rates which are at or below market. This limited partnership has Chris G. Mazzini and Michelle H. Mazzini as its limited partners. This oil fieldoilfield services company currently does work exclusively for the Company and its related company, Giant Energy, although it has contemplated doing work for unrelated third parties as well. The Company benefits by having immediate access to services.
Item 3. Legal Proceedings
Neither the Registrant nor its subsidiaries nor any officers or directors is a party to any material pending legal proceedings for or against the Company or its subsidiary nor are any of their properties subject to any proceedings.
During the fourth quarter of the fiscal year covered by this report, no proceeding previously reported was terminated.
Item 4. Submission Of Matters Of Security Holders To A Vote
During the fourth quarter of the registrant's fiscal year covered by this
report, no matter was submitted to a vote of security holders of the registrant.
- 37 -
Mine Safety Disclosures
Not Applicable
PART II
Item 5. Market For The Company's Common Stock, Related Stockholder Matters And Issuer Purchases Of Equity Securities.
Securities.
The Company's common stock trades over-the-counter under the symbol "SPND".
Prior to 2004, no significant public trading market had been established for the Company's common stock. The Company does not believe that listings of bid and asking prices for its stock are indicative of the actual trades of its stock, since trades are made infrequently. However during 2004, there was a material increase in the number of shares traded and a material increase in the stock price. The following table shows high and low trading prices for each quarter in 2008, 2009,2011, 2010, and 2010.
Price Per Share
High Low
2008
First Quarter $ 6.50 $ 5.00
Second Quarter 10.95 5.23
Third Quarter 8.80 4.25
Fourth Quarter 4.00 1.75
2009
First Quarter 3.19 1.75
Second Quarter 2.50 1.70
Third Quarter 2.45 1.50
Fourth Quarter 2.95 1.65
2010
First Quarter 1.99 1.65
Second Quarter 5.50 1.60
Third Quarter 2.25 1.39
Fourth Quarter 2.25 1.45
2009.
| Price Per Share | ||
| High | Low | |
| 2011 | ||
| First Quarter | $ 2.79 | $ 2.79 |
| Second Quarter | 2.52 | 1.52 |
| Thirs Quarter | 2.00 | 1.70 |
| Fourth Quarter | 2.10 | 1.70 |
| 2010 | ||
| First Quarter | 1.99 | 1.65 |
| Second Quarter | 5.50 | 1.60 |
| Thirs Quarter | 2.25 | 1.39 |
| Fourth Quarter | 2.25 | 1.45 |
| 2009 | ||
| First Quarter | 3.19 | 1.75 |
| Second Quarter | 2.50 | 1.70 |
| Thirs Quarter | 2.45 | 1.50 |
| Fourth Quarter | 2.95 | 1.65 |
During the First Quarter of 2011,2012, subsequent to year end, the following high and low prices were recorded for the Company's common stock.
Price Per Share
High Low
2011
First Quarter $ 2.79 $ 2.10
| Price Per Share | ||
| High | Low | |
| 2011 | ||
| First Quarter | $ 1.90 | $ 1.50 |
There is no amount of common stock that is subject to outstanding warrants to purchase, or securities convertible into, common stock of the Company.
According to the transfer records of the Company at March 31, 2011,April 5, 2012, common stock of the Company was held by approximately 547548 holders of record.
- 38 -
The following chart compares the yearly percentage change in the cumulative total stockholder return on the Company's Common Stock during the five years ended December 31, 20102011 with the cumulative total return of the Standard and Poor's 500 Stock Index and of the Dow Jones U.S. Exploration and Production Index (formerly Dow Jones Secondary Oil Stock Index). The comparison assumes $100 was invested on December 31, 20052006 in the Company's Common Stock and in each of the foregoing indices and assumes reinvestment of dividends. The Company paid no dividends on its Common Stock during the five-year period.
Stock Performance Chart
(See Chart in PDF Format filed separately)
| Comparison of Five-Year Cumulative Total Return Among |
| Spindletop Oil & Gas Co., S&P 500 Index and |
| the Dow Jones U.S. Exploration and Production Index |
The Company has not paid any dividends since its reorganization and it is not contemplated that it will pay any dividends on its Common Stock in the foreseeable future. The Business Loan Agreement entered into between the Company and JPMorgan Chase Bank for the purpose of acquiring its commercial office building contains restrictions on the payment of dividends in the event a default under terms of the Business Loan Agreement has occurred and is continuing or would result from the payment of such dividends or distributions.
The Registrant currently serves as its own stock transfer agent and registrar
registrar.
During the fourth quarter of the fiscal year ended December 31, 2010,2011, the Company did not repurchase any of its equity securities. The Board of Directors has not approved nor authorized any standing repurchase program.
- 39 -
Item 6. Selected Financial Data
The selected financial information presented should be read in conjunction with the consolidated financial statements and the related notes thereto.
For the years ended December 31
2010 2009 2008 2007 2006
----------- ----------- ----------- ----------- -----------
Total Revenue $ 7,656,000 6,913,000 $14,064,000 $ 8,707,000 $ 6,174,000
Net Income 447,000 39,000 3,521,000 1,808,000 920,000
Earnings per Share $ 0.06 $ 0.01 $ 0.46 $ 0.24 $ 0.12
As of December 31,
2010 2009 2008 2007 2006
----------- ----------- ----------- ----------- -----------
Total Assets $20,777,000 $20,386,000 $21,289,000 $15,631,000 $13,024,000
Long-Term Debt 840,000 960,000 1,080,000 1,200,000 1,320,000
| For the years ended December 31, | |||||
| 2011 | 2010 | 2009 | 2008 | 2007 | |
| Total Revenue | $ 9,340,000 | $ 7,656,000 | $ 6,913,000 | $ 14,064,000 | $ 8,707,000 |
| Net Income | 1,753,000 | 447,000 | 39,000 | 3,521,000 | 1,808,000 |
| Earnings per Share | $ 0.23 | $ 0.06 | $ 0.01 | $ 0.46 | $ 0.24 |
| For the years ended December 31, | |||||
| 2011 | 2010 | 2009 | 2008 | 2007 | |
| Total Assets | $ 23,279,000 | $ 20,777,000 | $ 20,386,000 | $ 21,289,000 | $ 15,631,000 |
| Long-Term Debt | 720,000 | 840,000 | 960,000 | 1,080,000 | 12,000 |
Item 7. Management's Discussion And Analysis Of Financial Condition And
Results Of Operations
Liquidity and Capital Resources
-------------------------------
The Company's operating capital needs, as well as its capital spending program are generally funded from cash flow generated by operations. Because future cash flow is subject to a number of variables, such as the level of production and the sales price of oil and natural gas, the Company can provide no assurance that its operations will provide cash sufficient to maintain current levels of capital spending. Accordingly, the Company may be required to seek additional financing from third parties in order to fund its exploration and development programs.
Results of Operations
---------------------
2011 Compared to 2010
Oil revenue for 2011 was approximately $4,084,000 compared to $2,368,000 for 2010, an increase of approximately $1,716,000 or 72%. Oil prices increased to an average of $83.85 per barrel in 2011 from an average of $74.35 per bbl in 2010, an increase of $9.50 per bbl or 13%. In addition to the increase in prices, oil sales increased to 48,708 bbls from approximately 31,526 bbls in 2010, an increase of 17,182 bbls or55%. The increase in oil revenue and sales is predominantly due to properties acquired or drilled in 2011.
Gas revenue for 2011 was approximately $3,916,000 compared to $3,934,000 for 2010, a decrease of approximately $18,000 or 0.5%. Gas sales decreased to approximately 734,000 mcf in 2011 from approximately 824,000 mcf in 2010, a reduction of 90,000 mcf or 11%. Gas prices, however, increased to an average of $5.34 per mcf in 2011, an increase of $0.45 or 9% from an average of $4.89 per mcf in 2010.
Revenue from lease operations was $289,000 for 2011, a decrease of $30,000 or 9% from $319,000 in 2010. This decrease was a result of lower pumper fees and field supervision costs charged to operated properties between the two years.
Revenue from gas gathering for 2011 was $172,000, a decrease of $7,000 or 4% from $179,000 in 2010. This was due primarily to the decrease in gas volume sold.
Real estate income for 2011 was $436,000, down 3% or $12,000 from $448,000 in 2010. This was due primarily to the expiration of a rental contract in late 2011 which was not renewed and some lease renewal incentives.
Interest income for 2011 was $83,000, a decrease of $75,000 from $158,000 in 2010 or 47%. Overall interest rates on deposit accounts at most of the banks in which the Company is a depositor, has decreased significantly over prior years.
Other income for 2011 was $360,000, as compared to $250,000 in 2010; an increase of $110,000 or 44%. The increase is due primarily to increases in farmouts and assignment of certain leases between years. In addition, amounts were brought into income from reconciliation efforts on accounts payable for non-operated properties. Amounts carried as payables were determined not to be liabilities and were taken to income.
Lease operating expenses increased to $2,444,000 in 2011 from $1,901,000 in 2010 an increase of $543,000 or 29%. Approximately $525,000 of this net increase comes from operated wells drilled or acquired in 2011 or late 2010. Another $185,000 comes from an increase in non-operated wells, the majority of which is due to the acquisition of a non-operated working interest in the Davis Heirs #1 which included expenses from a time period of 2002 to 2011. Expenses to plug non-economical wells decreased by $157,000 from 2010 and the remaining difference was the result of a net difference in workover costs between the two years.
Production taxes, gathering, transportation and marketing expenses for 2011 were approximately $809,000 compared to $712,000 in 2010, a net increase of $97,000. This 14% net increase is due an increase of approximately $116,000 in Severance Taxes paid on properties acquired in 2011 or late 2010. This amount is offset by a reduction in other revenue deductions of approximately $20,000.
Pipeline and rental operation expenses were $25,000 in 2011 from $33,000 in 2010 a decrease of $8,000 or 24%. This was due mainly to a decrease in the costs associated with compressor and pipeline repairs.
Real estate operations expenses for 2011 were $225,000, down from $246,000 in 2010. This 9% decrease of $21,000 was mainly due to the reduction of electricity costs after the Company changed electric carriers.
Depreciation and amortization expense for 2011 was $1,152,000 compared to $1,042,000 for 2010, an increase of $110,000, or 11%. The Company re-evaluated its proved oil and gas reserves as of December 31, 2011, and decreased its estimated total proved reserves by approximately 342,000 BOE to 1,791,000 BOE at the end of 2011 compared to 2,133,000 BOE at the end of 2010, a decrease of approximately 16.0%. Sales of oil and gas products during 2011 increased by approximately 2,000 BOE from approximately 169,000 BOE in 2010 to approximately 171,000 BOE in 2011, an increase of approximately 1.2%. (See Footnote 18 to the Financial Statements). This resulted in an increase in the depletion rate factor from 7.336% in 2010 on an unamortized full cost pot base of $12,496,000 to a depletion rate factor of 8.718% on an unamortized full cost pot base of $11,843,000 in 2011. The decrease in the unamortized full cost pot base of $653,000 was due primarily to a reduction of future development costs as calculated in the Company’s reserve report between 2010 and 2011 of approximately $2,079,000.
Asset Retirement Obligation (“ARO”) accretion expense for 2011 was $34,000 down from $48,000 in 2010; a decrease of $14,000 or 29%. The ARO calculation is based on the Company’s annual reserve report and takes into consideration the changes between years of the Company’s estimated obligation to plug its interest in existing wells. This estimated future cost is discounted using a 10% discount factor based on the estimated life of each property. Changes are incorporated as applicable into the full cost pot and the carrying value of the liability. Accretion expense measures and incorporates changes due to the passage of time into the carrying amount of the liability.
General and administrative expenses for 2011 were $3,275,000 compared to $3,467,000 for 2010, a decrease of approximately $192,000 between years or 6%. This decrease is due mainly to the reduction in payroll and associated employee benefit costs during 2011.
Interest expense for 2011 was $55,000, down from $84,000 in 2010; a decrease of $29,000 or 35%. The majority of this change is due to a Revenue Agent’s Report assessed in late 2010 that was not incurred in 2011.
2010 Compared to 2009
Oil revenue for 2010 was approximately $ 2,368,000 compared to $1,485,000 for 2009, an increase of approximately $883,000 or 59%. This was due in large part to an increase in oil prices from an average of $56.55 per bbl in 2009 to an average of $74.35 per bbl in 2010; an increase of $17.80 per bbl or 31%. In addition to the increase in prices, oil sales increased from approximately 25,875 bbls in 2009 to approximately 31,526 bbls in 2010, an increase of 5,651 bbls or 22%.
- 40 -
Gas revenue for 2010 was approximately $3,934,000 compared to $3,582,000 for 2009, an increase of approximately $352,000 or 10%. Gas sales decreased from approximately 866,000 mcf in 2009 to approximately 824,000 mcf in 2010, a decrease of 42,000 mcf or 5%. Gas prices increased an average of $0.76 per mcf or 18% from an average of $4.13 per mcf in 2009, to an average of $4.89 per mcf in 2010.
Revenue from gas gathering for 2010 was $179,000, a decrease of $13,000 or 7% from $192,000 in 2009. This was due primarily to the decrease in gas volume sold.
Real estate income was down 11% or $55,000 from $503,000 in 2009 to $448,000 in 2010. This was due to the expiration of three rental contracts in 2010 which were not renewed.
Interest income for 2010 was $158,000, a decrease of $50,000 from $208,000 in 2009 or 24%.
The interest rate on certain deposit accounts at one of the banks in which the Company is a depositor was decreased significantly toward the end of the year resulting in an approximate $18,000 reduction in interest income received. In addition, certificate of deposit rates decreased from an average of 3.3% in 2009 to an average of 1.8% in 2010 resulting in a decrease of approximately $14,000. Also, in 2009, an interest payment of approximately $18,000 was received from the Texas State Comptroller that was not received in 2010.
Other income for 2010 was $250,000, a decrease of $376,000 or over 60% from $626,000 in 2009. Approximately $100,000 of this decrease is due to ad valorem service fees charged by the Company in 2009 over those charged in 2010. An additional $20,000 was due to gain on divestitures in 2009 that did not exist in 2010. The majority of the remaining amount is due to recognition of turnkey income in 2009 that did not occur in 2010.
Lease operating expenses increased to $1,901,000 in 2010 from $1,640,000 in 2009, an increase of $261,000 or 16%. Approximately $120,000 of this increase comes from new wells in 2010 and another $52,000 comes from increased work over costs. Expenses to plug non-economical wells increased by $37,000 and finally, there was an increase in expenses from non-operated wells of approximately $29,000.
Production taxes, gathering, transportation and marketing expenses for 2010 were approximately $712,000 compared to $807,000 in 2009, a net decrease of $95,000. This 12% decrease is due in part to the decrease in volume sold. Additionally, there have beenwere reductions in severance taxes paid due to the low-volume tax exemptions.
Depreciation and amortization expense for 2010 was $1,042,000 compared to $997,000 for 2009, an increase of $45,000, or 4.5%. The Company re-evaluated its proved oil and gas reserves as of December 31, 2010, and decreased its estimated total proved reserves by approximately 277,000 BOE to 2,133,000 BOE at the end of 2010 compared to 2,410,000 BOE at the end of 2009, a decrease of approximately 11.5%. Sales of oil and gas products during 2010 decreased by approximately - 41 -
31,000 BOE from approximately 200,000 BOE in 2009 to approximately 169,000 BOE in 2010, a decrease of 15.5%. (See Footnote 18 to the Financial Statements). This resulted in a decrease in the depletion rate factor from 7.662% in 2009 on an unamortized full cost pot base of $11,368,000 to a depletion rate factor of 7.336% on an unamortized full cost pot base of $12,496,000 in 2010.
ARO expense for 2010 was $48,000 down from $86,000 in 2009; a decrease of $38,000 or 44%. The ARO calculation is based on the Company’s annual reserve report and takes into consideration the changes between years of the Company’s estimated obligation to plug its interest in existing wells. This estimated future cost is discounted using a 10% discount factor based on the estimated life of each property. Changes are incorporated as applicable into the full cost pot and the carrying value of the liability.. Accretion expense measures and incorporates changes due to the passage of time into the carrying amount of the liability.
General and administrative expenses for 2010 were $3,467,000 compared to $3,332,000 for 2009, an increase of approximately $135,000 between years or 4%. This increase is due mainly to payroll and associated employee benefit costs of approximately $175,000. This was offset by a decrease in SEC related costs of approximately $40,000 as the Company brought the preparation of its annual reserve report in house as opposed to having it prepared by an outside third party.
2009 Compared to 2008
Oil revenue for 2009 was approximately $1,485,000 compared to $2,326,000 for
2008, a decrease of approximately $841,000 or 36.16%. This was due to a
decrease in average oil prices from $71.21 per bbl in 2008 to $56.55 per bbl in
2009, a decrease of $14.66 per bbl or 20.59%. In addition to the decrease in
oil prices, oil sales decreased from approximately 32,650 bbls in 2008 to
approximately 25,875 bbls in 2009, a decrease of 6,775 bbls or 20.75%.
Gas revenue for 2009 was approximately $3,582,000 compared to $10,364,000 for
2008, a decrease of approximately $6,782,000 or 65.44%. This was due primarily
to a drop in average gas prices from $8.41 per Mcf in 2008 to $4.13 per Mcf in
2009, a decrease of $4.28 per MCF or 50.89%. In addition to the decrease in
gas prices, gas sales decreased from approximately 1,232,000 Mcf in 2008 to
approximately 866,000 Mcf in 2009, a decrease of 366,000 Mcf or 29.71%.
Lease operating expenses for 2009 were $1,640,000 compared to $2,552,000 in
2008, a net decrease of $912,000 or 35.74%. Production taxes, gathering,
transportation and marketing expenses for 2009 were approximately $807,000
compared to $969,000 in 2008, a net decrease of $162,000 or 16.75%. For
presentation purposes the Company split out amounts for production taxes,
gathering, transportation and marketing expenses separately from lease
operating expenses. In prior years, these amounts were presented together
under the line item description of lease operating expenses. There have been
no changes to total expenses for the each of the periods shown, and the
presentation for 2008 has been restated to conform to the new presentation.
The Company believes the separate reporting of the amounts gives a better look
at the results of the Company's expenses to operate its leases. Approximately
$413,000 of the decrease in lease operating expenses is due to reduced workover
costs. Another $250,000 of the drop is due to high cost wells being shut in
during 2009. Nearly $100,000 is due to reduced water production on wells which
in 2008 had significant water hauling expenses. The remaining decrease in lease
operating expenses is due to cost containment. The decrease in production
taxes, gathering, transportation and marketing expenses is due to overall
production being down from 2008 to 2009.
- 42 -
Depreciation and amortization for 2009 was $997,000 compared to $1,215,000 for
2008, a decrease of $218,000, or 17.94%. The Company re-evaluated its proved
oil and gas reserves as of December 31, 2009, and decreased its estimated total
proved reserves by approximately 145,000 BOE to 2,410,000 BOE at the end of
2009 compared to 2,555,000 BOE at the end of 2008, a decrease of approximately
5.68%. Sale of oil and gas products during 2009 decreased by approximately
38,000 BOE from approximately 238,000 BOE in 2008 to approximately 200,000 BOE
in 2009, a decrease of 15.97%. (See Footnote 18 to the Financial Statements).
This resulted in a decrease in the depletion rate factor from 8.520% in 2008 to
7.662% in 2009. In addition to the lower depletion rate, the overall decrease
in the amount of amortization was caused by a reduction between years in the
estimated cost basis on which the depletion rate factor was applied. This
decrease was primarily due to a reduction in the estimated future cost of
developing proved undeveloped properties by approximately $1,794,000 in the
2009 reserve report.
General and administrative expenses for 2009 were $3,332,000 compared to
$3,198,000 for 2008, an increase of approximately $134,000 between years or
4.19%. This increase is due mainly to payroll costs and associated employee
benefit costs. Personnel costs and benefits accounted for approximately
$2,970,000 of the total general and administrative costs in 2009 as compared to
$2,649,000 in 2008. A portion of the increase in salary and benefits was due
to personnel added to the Company's payroll as the result of the termination of
the Management Services Contract between the Company and Giant Energy on
September 30, 2008. Effective October 1, 2008, Chris Mazzini, Michelle
Mazzini, President and Vice President of the Company respectively, became
employees of Spindletop Oil & Gas Co. which eliminated the monthly management
fee.
Certain Factors That Could Affect Future Operations
---------------------------------------------------
Certain information contained in this report, as well as written and oral statements made or incorporated by reference from time to time by the Company and its representatives in other reports, filings with the Securities and Exchange Commission, press releases, conferences, teleconferences or otherwise, may be deemed to be 'forward-looking statements' within the meaning of Section 21E of the Securities Exchange Act of 1934 and are subject to the 'Safe Harbor' provisions of that section.
Forward-looking statements include statements concerning the Company's and management's plans, objectives, goals, strategies and future operations and performance and the assumptions underlying such forward-looking statements. When used in this document, the words "anticipates", "estimates", "expects", "believes", "intends", "plans", and similar expressions are intended to identify such forward-looking statements. Actual results and developments could differ materially from those expressed in or implied by such statements due to these and other factors.
- 43 -
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Commodity Price Risk
We are subject to price fluctuations for natural gas, natural gas liquids and crude oil. Prices received for natural gas sold on the spot market are volatile due primarily to seasonality of demand and other factors beyond our control. Reductions in crude oil, natural gas and natural gas liquids prices could have a material adverse effect on our financial position, results of operations and quantities of reserves recoverable on an economic basis. Any reduction in reserves, including reductions due to price fluctuations, can adversely affect our liquidity and our ability to obtain capital for our acquisition and development activities. To date, we have not entered into futures contracts or other hedging agreements to manage the commodity price risk for a portion of our production.
Interest Rate Risk
As of December 31, 2011, we had $840,000 of long-term debt outstanding under our Note payable to a bank, which matures in November 2018. This debt bears interest at a variable annual interest rate based upon an index which is the Treasury securities rate for a term of seven years, plus 2.2%. The interest rate is subject to change on the first day of each seven year anniversary after the date of the note based on the Index then in effect. Effective December 27, 2011, the annual interest rate was adjusted to 3.61% which is fixed through the maturity date of the note. As such our interest rate risk is not material.
Item 8. Consolidated Financial Statements And
Schedules Index AtPage 54
44
Item 9. Changes In And Disagreements With Accountants On Accounting And Financial Disclosure
None
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Principal Executive Officer and Principal Financial and Accounting Officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e)) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"“Exchange Act”), which are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC'sSEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Principal Executive Officer and Principal Financial and Accounting Officer, as appropriate to allow timely decisions regarding required disclosure. Based on this evaluation, our Principal Executive Officer and Principal Financial and Accounting Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.
Management's
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles. There are inherent limitations to the effectiveness of any system of internal control over financial reporting. These limitations include the possibility of human error, the circumvention of overriding of the system and reasonable resource constraints. Because of its inherent limitations, our internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with policies or procedures may deteriorate.
Management assessed the effectiveness of the Company'sCompany’s internal controls over financial reporting as of December 31, 2010.2011. In making this assessment, management used the criteria set forth inInternal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on management'smanagement’s assessments and those criteria, - 44 -
management has concluded that Company'sCompany’s internal control over financial reporting was effective as of December 31, 2010.
2011.
This annual report does not include an attestation report of the Company'sCompany’s registered public accounting firm regarding internal control over financial report. Management'sManagement’s report was not subject to attestation by the Company'sCompany’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management'smanagement’s report in this annual report.
Changes in Internal Control over Financial Reporting
In preparation for management'smanagement’s report on internal control over financial reporting, we documented and tested the design and operating effectiveness of our internal control over financial reporting. There were no changes in our internal controls over financial reporting (as such term is defined in Exchange Act Rule 13a-15(f)) that occurred during the quarter ended December 31, 20102011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
Not Applicable
PART III
Item 10. Directors And Executive Officers Of The Registrant
The Directors and Executive Officers of the Company and certain information concerning them is set forth below:
Name Age Position
Chris G. Mazzini 53
| Name | Age | Position |
| Chris G. Mazzini | 54 | Chairman of the Board, |
| Michelle H. Mazzini | 50 | Director, Vice President, Secretary, Treasurer |
| Ted R. Munselle | 56 | Director |
On AprilJanuary 2, 2008,2012, Mr. David E. Allard, was appointedresigned as a member of the Board of Directors of Spindletop Oil & Gas Co.
All
On February 17, 2012, Mr. Ted R. Munselle, age 56, was appointed as a member of the Board of Directors ofSpindletop Oil & Gas Co. Mr. Munselle is determined to have all the credentials and qualifications to be an Independent Financial Expert and has been appointed as an Independent Financial Expert for the Audit Committee of the Board of Directors and has been appointed as Chairman of the Audit Committee.
Except as set forth above, all directors hold offices until the next annual meeting of the shareholders or until their successors are duly elected and qualified. Officers of the Company serve at the discretion of the Board of directors.
- 45 -
Directors.
Business Experience
Chris Mazzini, Chairman of the Board of Directors and President, graduated from the University of Texas at Arlington in 1979 with a Bachelor of Science degree in Geology. He started his career in the oil and gas industry in 1978, and began as a Petroleum Geologist with Spindletop in 1979, working the Fort Worth Basin of North Texas. He became Vice President of Geology at Spindletop in 1982, and served in that capacity until he left the Company in 1985 when he founded Giant Energy Corp. ("Giant"). Mr. Mazzini has served as President of Giant since then. He rejoined the Company in December 1999 when he, through Giant, purchased controlling interest. Mr. Mazzini has been Chairman of the Board of Directors and President of the Company since 1999 and is a Certified and Licensed Petroleum Geologist. Mr. Mazzini has worked numerous geological basins throughout the United States with an emphasis on the Fort Worth Basin. He is responsible for several new field discoveries in the Fort Worth Basin.
Michelle Mazzini, Vice President and General Counsel, received her Bachelor of Science Degree in Business Administration (Major: Accounting) from the University of Southwestern Louisiana (now named University of Louisiana at Lafayette) where she graduated magna cum laude in 1985. She earned her law degree from Louisiana State University where she graduated Order of the Coif in 1988. Ms. Mazzini began her career with Thompson & Knight, a large law firm in Dallas, where she focused her practice on general corporate and finance transactions. She also worked as Corporate Counsel for Alcatel USA, a global telecommunications manufacturing corporation where her practice was broad-
ased.broad-based. Ms. Mazzini serves as Vice President and General Counsel of the Company.
On February 17, 2012, Mr. Allard has been employed (since May 2008) by Wescott, LLC,Ted R. Munselle, age 56, was appointed as a Dallas, Texas
based investment holding company. He was Chief Financial Officer (February
2005 to May 2008)member of Digital Witness Surveillance, a Dallas, Texas based
development stage software provider; Executive Vice President and Secretary
(April 2003 to February 2, 2005)the Board of Internet America, Inc.Directors ofSpindletop Oil & Gas Co. Mr. Allard was
Chief Operating Officer (2000-2002) of Primedia Workplace Learning, a workplace
training business; ExecutiveMunselle is Vice President and Chief Financial Officer (1999-
2000) of E-Train, Inc., a provider of online job training and seminars; Special
Advisor (1998-1999) of Thayer Capital Partners; Chief Operating Officer (1997-(since October 1998) of Career Track,Landmark Nurseries, Inc. (a subsidiaryHe is a Certified Public Accountant (since 1980) who was employed as an Audit Partner in two Dallas, Texas based CPA firms (1986 to 1998), as an Audit Manager at Grant Thornton, LLP (1983 to 1986) and as Audit Staff to Audit Supervisor at Laventhol & Horwath (1977 to 1983). Mr. Munselle is also a director (since February 2004) of American Realty Investors, Inc. and Transcontinental Realty Investors, Inc.); Senior Vice President, both of which are Nevada corporations which have their common stock listed and Vice President - Business Development (1992-
996)traded on the New York Stock Exchange (“NYSE”), as well as a director (since May 2009) of Wescott Communications,Income Opportunity Realty Investors, Inc.; Partner (1985-1992) of Farmer, a Nevada corporation which has its common stock listed and Allard,
P.C. (a CPA firm); Audit Manager/CPA (1983-1985) of Grant Thornton LLP (a CPA
Firm)traded on the American Stock Exchange (the “AMEX”). Mr. Allard has been a Certified Public Accountant since 1983.
- 46 -
Key and Technical Employees
In addition to the services provided by Mr. Mazzini and Ms. Mazzini (both of whom have biographies listed above), the Company also relies extensively on the key and the technical employees identified below.
Michael G. Boos, Geologist, earned a Bachelor of Science degree in Geology from the University of Delaware in 1979. After performing geophysical research for the State of Delaware seeking hydrothermal energy sources, Mr. Boos worked independently for many years as a Petroleum Exploration Consultant and as a Staff Explorationist for a local oil company. He has numerous field discoveries in the Mid-Continent to his credit. In 1993 Mr. Boos joined Spindletop'sSpindletop’s Geological Department. He pursued a Masters degree through the University of Texas system, and later worked as a Geologist and Senior Project Manager for several national environmental consulting firms until rejoining Spindletop in October, 2008. His petroleum exploration experience includes Alaska'sAlaska’s North Slope (Prudhoe Bay), many of the continental U.S. producing basins, as well as Central and South America. He has testified as an expert witness before the Texas Railroad Commission (TRRC) on several occasions. He is a founding member of both the Geological Information Library of Dallas (GILD, now Geomap) and the American Association of Petroleum Geologists (AAPG) Environmental Division, and is a licensed Professional Geologist (P.G.) in the states of Texas and Tennessee.
Dave Chivvis, Petroleum Engineer, joined the Company at the end ofin May, 2008. Mr. Chivvis earned his Bachelor of Science degree in Petroleum Engineering from Texas A&M University in 1993. After graduation, he worked for Cox Resources Corporation, an independent oil and gas company located in Dallas, Texas. Mr. Chivvis worked in various engineering areas from operations to acquisitions of oil and gas properties in Texas, Oklahoma, Louisiana, and Arkansas. He then moved to Los Angeles in 2001 to pursue other opportunities before moving back to Texas to join the Company.
Robert E. Corbin, Controller, has been a full-time employee of Spindletop since April 2002. From May 2001 until April 2002, Mr. Corbin was an Independent Accounting Consultant and devoted substantially all of his time to Spindletop. He has been active in the oil and gas industry for over 3536 years, during which time he has served as financial officer of a publicly-held company as well as several private oil and gas companies and partnerships. Mr. Corbin graduated from Texas Tech University in 1969 with a BBA degree in Accounting and began his accounting career as an auditor with Arthur Andersen & Co. in 1970. Mr. Corbin is a Certified Public Accountant.
Charles (Chuck) D. Howell, Jr., Geologist, joined the Company in April, 2008. Mr. Howell earned a Bachelor of Science in Geology from Southern Methodist University in 1999. Currently, he is finishing his Ph.D. in Geology at the University of Texas at Dallas. Mr. Howell has been in the energy industry since 2003. He began his career at Pioneer Natural Resources working in the Gulf of Mexico. During 2005, Mr. Howell was an Independent Consulting Geologist for Anadarko Petroleum Corporation and worked on development of the historic Salt Creek Oil Field. In 2007, immediately before joining Spindletop Oil and Gas Company, he was a Geologist for Chevron Energy Technology Company - 47 -
in Houston, Texas and was part of a team of stratigraphic specialists for the West Coast of Africa. Mr. Howell is a long-standing and active member of the American Association of Petroleum Geologists, the Society for Sedimentary Geology, the Geological Society of America, the International Association of Sedimentologists, and remains associated with the Ichnology Research Group.
Dick A. Mastin, Petroleum Landman, has been a full-time employee of the Company since February, 2006. Mr. Mastin graduated cum laude from Stephen F. Austin State University in 1980 with a Bachelor of Science in Forestry and a minor in General Business. From September of 1980 until December of 1985, Mr. Mastin worked for Spindletop Oil & Gas Co. as a Petroleum Landman. He received his Masters of Science in Management and Administrative Sciences from the University of Texas at Dallas in 1990. In January of 1987, he took a position with the Dallas office of the Federal Bureau of Investigation. After a year with the Bureau, he accepted a position with the Internal Revenue Service as a Revenue Agent. Fifteen of his eighteen years with the Service were spent in the Large and Mid-Sized Business unit auditing tax returns of the largest business entities.
Glenn E. Sparks is the Land Director and also acts as Associate General Counsel to the Company. Mr. Sparks was previously employed as a Landman by the Company from 1982 through 1986, prior to attending law school. Mr. Sparks holds a B.B.A. with a concentration in Finance from the University of Texas at Arlington, and a J.D. from Texas Tech University School of Law. From 1990 to 2005, Mr. Sparks practiced law in a private practice focusing primarily on oil and gas law and real estate, as a partner in the law firm of Logan & Sparks, PLLC, and has acted as outside legal counsel for the Company in numerous oil and gas transactions during his years in private practice. Mr. Sparks left his private law practice and joined the Company again as an employee in his current position in 2005. Mr. Sparks is Board Certified in Oil & Gas Mineral Law by the Texas Board of Legal Specialization.
Family Relationships
Michelle Mazzini, Vice President, Secretary and General Counsel is the wife of Chris Mazzini, Chairman of the Board and President.
Involvement in Certain Legal Proceedings
None of the directors or executive officers of the Registrant, during the past five years, has been involved in any civil or criminal legal proceedings, bankruptcy filings or has been the subject of an order, judgment or decree of any Federal or State authority involving Federal or State securities laws.
- 48 -
Board Meetings and Committees
The Board of Directors met two timesone time in 2010.2011. The Board has established an audit committee. The Board is small and all members of the Board serve on the audit committee. The function of the audit committee is to assist the Board in fulfilling its oversight responsibilities by reviewing the financial information that will be provided to the shareholders and others, the systems of internal controls that management and the Board of Directors have established, and the audit process. TheDuring 2011, the audit committee iswas comprised of Mr. David Allard (Chairman), Mr. Chris Mazzini, and Ms. Michelle Mazzini. The committee
met two times in 2010.
Mazzini and subsequent to December 31, 2011, Mr. Allard resigned as a member of the Board of Directors and as Chairman of the Audit Committee. Effective with his appointment as a member of the Board of Directors of the Company on February 17, 2012, Mr. Munselle assumed the position of Chairman of the Audit Committee.
With respect to nominations to the Board, compensation, financial planning, strategies, and business alternatives, the Company does not have separate committees as the Board is small and all members of the Board participate in making recommendations and decisions on these matters.
Item 11. Executive Compensation
Cash Compensation
-----------------
On October 1, 2008, Mr. Mazzini and Ms. Mazzini became employees of the
Company. From October 1, 2008 to December 31, 2008 neither Mr. Mazzini nor
Ms. Mazzini were paid cash compensation in excess of $100,000.00 each as they
were employed by Giant from January 1, 2008 through October 31, 2008. In 2008,
management fees the Company paid to Giant were used to reimburse a portion of
Mr. Mazzini's, Ms. Mazzini's and other Giant employees' salaries for time spent
working on matters for the Company.
Cash compensation including salaries and bonuses, of $295,686, $297,038, and $195,400$195,038 was paid to Mr. Mazzini in 2011, 2010, and 2009 respectively. Cash compensation including salaries and bonuses of $168,694, $170,180, and $143,700 was paid to Ms. Mazzini in 2011, 2010, and 2009 respectively.
The Company has no stock option or incentive plan, does not grant any plan-
basedplan-based awards or awards of equity securities. The Company has no pension plan for its employees.
Compensation Pursuant to Plan
None
Other Compensation
Key employees and officers of the Company may sometimes be assigned overriding royalty interests and/or carried working interests in prospects acquired by or generated by the Company. These interests normally vary from less than one percent to three percent for each employee or officer. There is no set formula or policy for such program, and the frequency and amounts are largely controlled by the economics of each particular prospect. We believe that these types of compensation arrangements enable us to attract, retain and provide additional incentives to qualified and experienced personnel
- personnel.
Effective August 1, 2011, the Company issued 10,000 shares of restricted common stock (5,000 shares to each of two individuals) pursuant to an employment package. The shares were valued at $1.70 per share, the believed market value for free trading shares at the time of issue. The amount was expensed as general and administrative expense. The shares of common stock were issued out of Treasury Stock and reduced the amount of the Company's common stock held in Treasury from 36,668 to 26,668 shares.
Effective December 30, 2011, the Company issued 10,000 shares of restricted common stock to a key employee pursuant to an employment package. The shares were valued at $1.70 per share, the believed market value for free trading shares at the time of issue. The amount was expensed as general and administrative expense. The shares of common stock were issued out of Treasury Stock and reduced the amount of the Company's common stock held in Treasury from 26,668 to 16,668 shares.
Compensation of Directors
Directors who are employees of the Company are not currently compensated for their services on the Board. Mr. Allard was paid a director’s fee of $10,000 in 2011, $12,500 in 2010, and $15,000 in 2009 to compensate him for his position as the Board of Directors' Financial Expert. Mr. Allard received $2,500 for each Board of directors meeting during the year other than the annual meeting. Mr. Munselle will have similar compensation package for 2012 for his service on the Board.
Termination of Employment and Change of Control Arrangement
There are no plans or arrangements for payment to officers or directors upon resignation or a change in control of the Registrant.
| 39 |
Item 12. Security Ownership Of Certain Beneficial Owners And Management
Security Ownership of Certain Beneficial Owners and Managers
The table below sets forth the information indicated regarding ownership of the Registrant's common stock, $.01 par value, the only outstanding voting securities, as of April 5, 2012 with respect to: (i) any person who is known to the Registrant to be the owner of more than five percent of the Registrant's common stock; (ii) the common stock of the Registrant beneficially owned by each of the directors of the Registrant, and (iii) by all officers and directors as a group. Each person has sole investment and voting power with respect to the shares indicated, except as otherwise set forth in the footnotes to the table.
| Name and Address of Beneficial Owner | Number of Shares | Nature of Beneficial Ownership * | Pct Based on Outstanding Percent of Class ** |
| Chris Mazzini and Michelle Mazzini | 5,900,543 | (1) | 77.0% |
| 12850 Spurling Rd., Suite 200 | |||
| Dallas, Texas 75230 | |||
| All officers and directors as a group | 5,900,543 | 77.0% | |
| West Coast Asset Management, Inc. | 3,000 | (2) | < 1% |
| Paul J. Orfalea | |||
| Lance W. Helfert | |||
| R. Atticus Lowe | |||
| 1205 Coast Village Road | |||
| Montecito, California 93108 | |||
| Enerjex Resources, Inc. | - | (3) | 0% |
| 1600 NE Loop 410, Suite 104 | |||
| San Antonio, Texas 78209 | |||
| Nadel and Gussman Energy, LLC | 700,000 | (3) (4) | 9.2% |
| Stephen J. Heyman | |||
| James F. Adelson | |||
| 15 East 5th Street, Suite 3200 | |||
| Tulsa, Oklahoma 74103 |
* “Beneficial Ownership” means the sole or shared power to vote, or direct the voting of, a security or investment power with respect to a security, or any combination thereof.
** Percentages are base upon 7,660,803 shares of Common Stock outstanding at April 5, 2012
(1) Chris Mazzini directly owns 39,654 shares (0.51761%). Giant Energy Corp. directly owns 5,860,889 shares (76.5049%). Chris Mazzini owns 100% of the common stock of Giant Energy Corp.
(2) According to a Schedule 13D/A filed with the Commission by these persons for an event occurring December 31, 2010, each of the individually named persons have shared power to vote or direct a vote as well as shared power to dispose of or direct the disposition of the aggregate amount of stock owned. Each person is listed as the beneficial owner of the aggregate amount of these shares.
(3) According to a Schedule 13G filed with the Commission by Enerjex Resources, Inc. for an event occurring December 31, 2010, Enerjex Resources, Inc. owns beneficially 700,000 shares of the Company’s Common Stock. According to a Schedule 13D/A filed by West Coast Opportunity Fund, LLC, West Coast Asset Management, Inc., R. Atticus Lowe, Lance W. Helfert and Paul J. Orfalea for event occurring December 31, 2010, such group of “Reporting Persons” for which West Coast Opportunity Fund, LLC is described as the “Fund” contributed its interest in 700,000 shares to Enerjex Resources, Inc. in exchange for all Enerjex Resources, Inc. Common Stock.
(4) According to Schedule 13G filed with the Commission with respect to an event occurring January 19, 2011, these persons own the number of shares reported. Such Schedule 13G does not identify any transaction involving the acquisition of such shares. It is believed the 700,000 shares of the Company’s Common Stock reported as owned by Nadel and Gussman Energy, LLC were acquired from Enerjex Resources, Inc.
Changes in control
The Company is not aware of any arrangements or pledges with respect to its securities that may result in a change in control of the Company.
Item 13. Certain Relationships And Related Transactions
Transactions with management and others
Certain officers, directors and related parties, including entities controlled by Mr. Mazzini, the President and Chief Executive Officer, have engaged in business transactions with the Company which were not the result of arm's length negotiations between independent parties. Our management believes that the terms of these transactions were as favorable to us as those that could have been obtained from unaffiliated parties under similar circumstances. All future transactions between us and our affiliates will be on terms no less favorable than could be obtained from unaffiliated third parties and will be approved by a majority of the disinterested members of our Board of Directors.
Chris G. Mazzini and Michelle H. Mazzini, through a limited partnership in which they are limited partners, own M-R Oilfield Services, LP ("MRO"), an oilfield service company which provides roustabout, swabbing and completion services at rates which are at or below market to the Company. This oilfield services company currently does work exclusively for the Company, its parent company, Giant Energy Corp. and Giant NRG, LP, although MRO is contemplating offering its services to unrelated third-parties. The Company benefits by having immediate access to services.
Certain Business Relationships
The long-term debt, which is secured by the commercial office building, is also guaranteed individually by Chris G. Mazzini and Michelle H. Mazzini, related parties.
On October 1, 2008, Giant entered into an Administrative Services Agreement with the Company whereby Giant pays the Company $250 per month for the Company providing administrative services to Giant.
The Company has entered into a management services agreement with MRO whereby MRO makes monthly payments in the amount of $1,000 per month to the Company in exchange for the Company providing administrative services to MRO. On October 1, 2008, the Company entered into a similar agreement with Giant NRG, LP (“NRG”) a limited partnership with Chris Mazzini and Michelle Mazzini as limited partners. Under this agreement NRG pays a monthly fee of $2,500 to the Company in exchange for the Company providing certain administrative services to NRG. The Company has entered into a similar arrangement with Peveler Pipeline, LP ("Peveler"), whereby Peveler pays the Company a monthly charge of $250 in exchange for the Company providing administrative services to Peveler. Chris and Michelle Mazzini are the owners of Peveler Pipeline, LP, a limited partnership which owns a pipeline gathering system servicing wells owned by Giant, another related entity, described elsewhere in this report. The Company entered into a similar agreement with M-R Ventures, LLC (“MRV”) a limited liability company that operates some wells in Michigan, and that is owned by Chris and Michelle Mazzini. Pursuant to this agreement, MRV pays the Company a monthly fee in the amount of $500 for certain administrative services that the Company provides to MRV. See also note 6 to the Financial Statements.
Item 14. Principal Accounting Fees and Services
The following table sets forth the aggregate fees for professional services rendered to Spindletop Oil & Gas Co. and Subsidiaries for the years 2011 and 2010 by accounting firm, Farmer, Fuqua, & Huff, P.C.
| Type of Fees | 2011 | 2010 |
| Audit Fees | $ 43,000 | $ 41,000 |
| Audit Related Fees | - | - |
| Tax Fees | - | 4,000 |
| All other fees | - | - |
Members of the Board of Directors (the "Board") fulfill the responsibilities of an audit committee and have established policies and Procedures for the approval and pre-approval of audit services and permitted non-audit services. The Board has the responsibility to engage and terminate Farmer, Fuqua, & Huff, P.C. independent auditors, to pre-approve their performance of audit services and permitted non-audit services, to approve all audit and non-audit fees, and to set guidelines for permitted non-audit services and fees. All the fees for 2011, 2010 and 2009 were pre-approved by the Board or were within the pre-approved guidelines for permitted non-audit services and fees established by the Board, and there were no instances of waiver of approved requirements or guidelines during the same periods.
PART IV
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as a part of this report:
(1) FINANCIAL STATEMENTS: The following financial statements of the Registrant and Report of Independent Registered Public Accounting Firm therein are filed as part of this Report on Form 10-K:
| Page | |
| Report of Farmer, Fuqua & Huff, P.C | |
| Independent Registered Public Accounting Firm | 46 |
| Consolidated Balance Sheets | 47-48 |
| Consolidated Statements of Operations | 49 |
| Consolidated Statements of Changes in | |
| Stockholders' Equity | 50 |
| Consolidated Statements of Cash Flows | 51 |
| Notes to Consolidated Financial Statements | 52 |
(2) FINANCIAL STATEMENT SCHEDULES:
| Schedule II - Valuation and Qualifying Accounts | 71 |
| Schedule III - Real Estate and Accumulated Depreciation | 72 |
Other financial statement schedules have been omitted because the information required to be set forth therein is not applicable, is immaterial or is shown in the consolidated financial statements or notes thereto.
(3) EXHIBITS
The following documents are filed as exhibits (or are incorporated by reference as indicated) into this Report:
| Exhibit Designation | Exhibit Description | |
| 3.1 | Articles of Incorporation of Spindletop Oil & Gas Co. (previously filed with our General Form for Registration of Securities on Form 10, filed with the Commission on August 14, 1990) | |
| 3.2 | Bylaws of Spindletop Oil & Gas Co. (previously filed with our General Form for Registration of Securities on Form 10, filed with the Commission on August 14, 1990) | |
| 14 | Code of Ethics for Senior Financial Officers (Incorporated by reference to Exhibit 14 to the registrant's annual report Form 10-K for the fiscal year ended December 31, 2005) | |
| 21 | Subsidiaries of the Registrant | |
| 31.1 * | Rule 13a-14(a) Certification of Chief Executive Officer | |
| 31.2 * | Rule 13a-14(a) Certification of Chief Financial Officer | |
| 32. * | Officers' Section 1350 Certifications | |
| * Filed herewith |
(b) The Index of Exhibits is included following the Financial Statement Schedules beginning at page 72 of this Report.
(c) The Index to Consolidated Financial Statements and Supplemental Schedules is included following the signatures, beginning at page 44of this Report
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
SPINDLETOP OIL & GAS CO.
| Date: April 5, 2012 | |
| By:/s/ Chris G. Mazzini | |
| Chris G. Mazzini | |
| President, Principal Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following on behalf of the Registrant and in the capacities and on the dates indicated.
| Signatures | |||
| Principal Executive Officers | Capacity | Date | |
| /s/ Chris Mazzini | |||
| President, Director | April 5, 2012 | ||
| Chris Mazzini | (Chief Executive Officer | ||
| /s/ Michelle Mazzini | |||
| Vice President, Secretary, | April 5, 2012 | ||
| Michelle Mazzini | Treasurer, Director | ||
| /s/ Ted R. Munselle | |||
| Director | April 5, 2012 | ||
| Ted R. Munselle | |||
| /s/ Robert E. Corbin | |||
| Controller (Principal Financial | April 5, 2012 | ||
| Robert E. Corbin | and Accounting Officer) |
SPINDLETOP OIL & GAS CO. AND SUBSIDIARIES
Index to Consolidated Financial Statements and Schedules
| Page | |
| Report of Independent Registered Public Accounting Firm | 46 |
| Consolidated Balance Sheets - December 31, 2011 and 2010 | 47-48 |
| Consolidated Statements of Operations for the years ended | |
| December 31, 2011, 2010 and 2009 | 49 |
| Consolidated Statements of Changes in Shareholders' | |
| Equity for the years ended December 31, 2011, 2010, and 2009 | 50 |
| Consolidated Statements of Cash Flows for the years ended | |
| December 31, 2011, 2010 and 2009 | 51 |
| Notes to Consolidated Financial Statements | 52 |
| Schedules for the years ended December 31,2011, 2010 and 2009 | |
| II - Valuation and Qualifying Accounts | 71 |
| III - Real Estate and Accumulated Depreciation | 72 |
All other schedules have been omitted because they are not applicable, not required, or the information has been supplied in the consolidated financial statements or notes thereto.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Shareholders of Spindletop Oil & Gas Co.
We have audited the accompanying consolidated balance sheets of Spindletop Oil & Gas Co. (A Texas Corporation) and subsidiaries as of December 31, 2011 and 2010, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 2011. Spindletop Oil & Gas Co.’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Spindletop Oil & Gas Co. and subsidiaries as of December 31, 2011 and 2010, and the consolidated results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2011 in conformity with accounting principles generally accepted in the United States of America.
We were not engaged to examine management’s assertion about the effectiveness of Spindletop Oil & Gas Co.’s internal control over financial reporting as of December 31, 2011 included in the accompanying management report on internal control over financial reporting and, accordingly, we do not express an opinion thereon.
Our audits were made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The schedules listed in the index of the consolidated financial statements are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic consolidated financial statements. These schedules have been subjected to the auditing procedures applied in the audits of the basic consolidated financial statements and, in our opinion, fairly state, in all material respects, the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole.
/s/ Farmer, Fuqua and Huff, P.C.
Plano, Texas
April 5, 2012
| SPINDLETOP OIL & GAS CO. AND SUBSIDIARIES | ||
| CONSOLIDATED BALANCE SHEETS | ||
| As of December 31, | ||
| 2011 | 2010 | |
| ASSETS | ||
| Current Assets | ||
| Cash and cash equivalents | $ 6,695,000 | $ 6,244,000 |
| Accounts receivable, Trade | 1,609,000 | 1,088,000 |
| Prepaid income tax | 405,000 | 446,000 |
| Other short-term investments | 400,000 | 400,000 |
| Total Current Assets | 9,109,000 | 8,178,000 |
| Property and Equipment - at cost | ||
| Oil and gas properties (full cost method) | 20,395,000 | 17,884,000 |
| Rental equipment | 399,000 | 399,000 |
| Gas gathering system | 145,000 | 145,000 |
| Other property and equipment | 245,000 | 245,000 |
| 21,184,000 | 18,673,000 | |
| Accumulated depreciation and amortization | (9,896,000) | (8,844,000) |
| Total Property and Equipment | 11,288,000 | 9,829,000 |
| Real Estate Property - at cost | ||
| Land | 688,000 | 688,000 |
| Commercial office building | 1,580,000 | 1,580,000 |
| Accumulated depreciation | (601,000) | (501,000) |
| Total Real Estate Property | 1,667,000 | 1,767,000 |
| Other Assets | ||
| Other long-term investments | 1,200,000 | 1,000,000 |
| Other | 15,000 | 3,000 |
| Total Other Assets | 1,215,000 | 1,003,000 |
| Total Assets | $ 23,279,000 | $ 20,777,000 |
| - | - | |
| The accompanying notes are an integral part of these statements | ||
| SPINDLETOP OIL & GAS CO. AND SUBSIDIARIES | ||
| CONSOLIDATED BALANCE SHEETS | ||
| As of December 31, | ||
| 2011 | 2010 | |
| LIABILITIES AND SHAREHOLDERS' EQUITY | ||
| Current Liabilities | ||
| Notes payable, current portion | $ 120,000 | $ 120,000 |
| Accounts payable and accrued liabilities | 3,222,000 | 2,276,000 |
| Tax savings benefit | 97,000 | 97,000 |
| Total Current Liabilities | 3,439,000 | 2,493,000 |
| Noncurrent Liabilities | ||
| Notes payable, long-term portion | 720,000 | 840,000 |
| Asset Retirement obligation | 946,000 | 854,000 |
| Total Noncurrent Liabilities | 1,666,000 | 1,694,000 |
| Deferred Income Tax Payable | 2,806,000 | 3,009,000 |
| Total Liabilities | 7,911,000 | 7,196,000 |
| Shareholders' Equity | ||
| Common Stock, $.01 par value, 100,000,000 shares authorized; 7,677,471 shares issued and 7,660,803 shares outstanding at December 31, 2011; 7,677,471 shares issued and 7,640,803 shares outstanding at December 31, 2010. | 77,000 | 77,000 |
| Additional paid-in capital | 943,000 | 919,000 |
| Treasury Stock, at cost | (8,000) | (18,000) |
| Retained earnings | 14,356,000 | 12,603,000 |
| Total Shareholder's Equity | 15,368,000 | 13,581,000 |
| Total Liabilities and Shareholders' Equity | $ 23,279,000 | $ 20,777,000 |
| - | - | |
| The accompanying notes are an integral part of these statements | ||
| SPINDLETOP OIL & GAS CO. AND SUBSIDIARIES | |||
| CONSOLIDATED STATEMENTS OF OPERATIONS | |||
| (Unaudited) | |||
| Years Ended December 31, | |||
| 2011 | 2010 | 2009 | |
| Revenues | |||
| Oil and gas revenues | $ 8,000,000 | $ 6,302,000 | 5,067,000 |
| Revenue from lease operations | 289,000 | 319,000 | 317,000 |
| Gas gathering, compression, equip rental | 172,000 | 179,000 | 192,000 |
| Real estate rental income | 436,000 | 448,000 | 503,000 |
| Interest Income | 83,000 | 158,000 | 208,000 |
| Other | 360,000 | 250,000 | 626,000 |
| Total Revenues | 9,340,000 | 7,656,000 | 6,913,000 |
| Expenses | |||
| Lease operations | 2,444,000 | 1,901,000 | 1,640,000 |
| Production taxes, gathering and marketing | 809,000 | 712,000 | 807,000 |
| Pipeline and rental operations | 25,000 | 33,000 | 34,000 |
| Real estate operations | 225,000 | 246,000 | 249,000 |
| Depreciation and amortization | 1,152,000 | 1,042,000 | 997,000 |
| ARO accretion expense | 34,000 | 48,000 | 86,000 |
| General and administrative | 3,275,000 | 3,467,000 | 3,332,000 |
| Interest expense | 55,000 | 84,000 | 71,000 |
| Total Expenses | 8,019,000 | 7,533,000 | 7,216,000 |
| Income Before Income Tax | 1,321,000 | 123,000 | (303,000) |
| Current income tax provision (benefit) | (229,000) | (97,000) | (226,000) |
| Deferred income tax provision (benefit) | (203,000) | (227,000) | (116,000) |
| Total income tax provision (benefit) | (432,000) | (324,000) | (342,000) |
| Net Income | $ 1,753,000 | $ 447,000 | 39,000 |
| Earnings per Share of Common Stock | |||
| Basic and Diluted | $ 0.23 | $ 0.06 | $ 0.01 |
| Weighted Average Shares Outstanding | |||
| Basic and Diluted | 7,645,858 | 7,631,652 | 7,618,940 |
| The accompanying notes are an integral part of these statements | |||
| SPINDLETOP OIL & GAS CO. & SUBSIDIARIES | ||||||
| CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY | ||||||
| For the Years Ended December 31, 2010, 2009, 2008 and the | ||||||
| Twelve Months Ended December 31, 2011, | ||||||
| Additional | ||||||
| Common Stock | Paid-In | Treasury Stock | Retained | |||
| Shares | Amount | Capital | Shares | Amount | Earnings | |
| Balance December 31, 2008 | 7,677,471 | $ 77,000 | $ 874,000 | 66,668 | $ (32,000) | $ 12,117,000 |
| Issuance of 10,000 shares of Common Stock out of Treasury Stock as part of an employee compensation package | 15,000 | (10,000) | 5,000 | |||
| Issuance of 10,000 shares of Common Stock out of Treasury Stock as part of an employee compensation package | 12,000 | (10,000) | 4,000 | |||
| Net Income (Loss) | $ 39,000 | |||||
| Balance December 31, 2009 | 7,677,471 | $ 77,000 | $ 901,000 | 46,668 | $ (23,000) | $ 12,156,000 |
| Issuance of 10,000 shares of Common Stock out of Treasury Stock as part of an employee compensation package | 18,000 | (10,000) | 5,000 | |||
| Net Income (Loss) | $ 447,000 | |||||
| Balance December 31, 2010 | 7,677,471 | $ 77,000 | $ 919,000 | 36,668 | $ (18,000) | $ 12,603,000 |
| Issuance of 10,000 shares of Common Stock out of Treasury Stock as part of an employee compensation package | 12,000 | (10,000) | 5,000 | |||
| Issuance of 10,000 shares of Common Stock out of Treasury Stock as part of an employee compensation package | 12,000 | (10,000) | 5,000 | |||
| Net Income (Loss) | $ 1,753,000 | |||||
| Balance December 31, 2011 | 7,677,471 | $ 77,000 | $ 943,000 | 16,668 | $ (8,000) | $ 14,356,000 |
| The accompanying notes are an integral part of these statements | ||||||
| SPINDLETOP OIL & GAS CO. AND SUBSIDIARIES | |||
| CONSOLIDATED STATEMENTS OF CASH FLOWS | |||
| Twelve Months Ended December 31, | |||
| 2011 | 2010 | 2009 | |
| Cash Flows from Operating Activities | |||
| Net Income | $ 1,753,000 | $ 447,000 | $ 39,000 |
| Reconciliation of net income to net cash | |||
| provided by operating activities | |||
| Depreciation and amortization | 1,152,000 | 1,042,000 | 997,000 |
| Accretion of asset retirement obligation | 34,000 | 48,000 | 86,000 |
| Non-cash employee compensation paid with treasury stock | 34,000 | 23,000 | 36,000 |
| Changes in accounts receivable | (521,000) | (215,000) | 637,000 |
| Changes in prepaid income tax | 41,000 | - | (582,000) |
| Changes in accounts payable | 946,000 | (719,000) | (794,000) |
| Changes in current tax payable | - | 136,000 | (44,000) |
| Changes in deferred tax payable | (203,000) | 668,000 | (116,000) |
| Changes in other assets | (12,000) | - | - |
| Net cash provided by operating activities | 3,224,000 | 1,430,000 | 259,000 |
| Cash Flows from Investing Activities | |||
| Capitalized acquisition, exploration and development costs | (2,453,000) | (2,760,000) | (1,437,000) |
| Purchase of other property and equipment | - | (59,000) | (17,000) |
| Purchase of other short-term invesments | - | (400,000) | - |
| Purchase of other long-term invesments | (200,000) | (1,000,000) | - |
| Net cash used by investing activities | (2,653,000) | (4,219,000) | (1,454,000) |
| Cash Flows from Financing Activities | |||
| Repayment of note payable to bank | (120,000) | (120,000) | (120,000) |
| Net cash used by financing activities | (120,000) | (120,000) | (120,000) |
| Increase (decrease) in cash | 451,000 | (2,909,000) | (1,315,000) |
| Cash at beginning of period | 6,244,000 | 9,153,000 | 10,468,000 |
| Cash at end of period | $ 6,695,000 | $ 6,244,000 | $ 9,153,000 |
| The accompanying notes are an integral part of these statements | |||
SPINDLETOP OIL & GAS CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND ORGANIZATION
Merger and Basis of Presentation
On July 13, 1990, Prairie States Energy Co., a Texas corporation, (the Company) merged with Spindletop Oil & Gas Co., a Utah corporation (the Acquired Company). The name of Prairie States Energy Co. was changed to Spindletop Oil & Gas Co., a Texas corporation at the time of the merger.
Organization and Nature of Operations
The Company was organized as a Texas corporation in September 1985, in connection with the Plan of Reorganization ("the Plan"), effective September 9, 1985, of Prairie States Exploration, Inc., ("Exploration"), a Colorado corporation, which had previously filed for Chapter 11 bankruptcy. In connection with the Plan, Exploration was merged into the Company, with the Company being the surviving corporation. After giving effect to a stock split, up to a total of 166,667 of the Company's common shares may be issued to Exploration's former shareholders. As of December 31, 2011, 122,436 shares have been issued to former shareholders in connection with the Plan.
Spindletop Oil & Gas Co. is engaged in the exploration, development and production of oil and natural gas; and through one of its subsidiaries, the gathering and marketing of natural gas.
The Company owns land along with a commercial office building which contains approximately 46,286 of rentable square feet, of which the Company occupies approximately 10,317 rentable square feet as its corporate office headquarters. The Company leases the remaining space in the building to non-related third party commercial tenants at prevailing market rates.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in the preparation of the accompanying financial statements follows:
FASB Accounting Standards Codification
The Company presents its financial statements in accordance with generally accepted accounting principles in the United States ("GAAP"). In June, 2009, the Financial Accounting Standards Board ("FASB") completed its accounting guidance codification project. The FASB Accounting Standards Codification ("ASC") became effective for the Company's financial statements issued subsequent to June 30, 2009 and is the single source of authoritative accounting principles recognized by the FASB to be applied to nongovernmental entities in the preparation of financial statements in conformity with GAAP. As of the effective date, the Company will no longer refer to the authoritative guidance dictating its accounting methodologies under the previous accounting standards hierarchy. Instead, the Company will refer to the ASC as the sole source of authoritative literature.
Consolidation
The consolidated financial statements include the accounts of Spindletop Oil & Gas Co. and its wholly owned subsidiaries, Prairie Pipeline Co. and Spindletop Drilling Company. All significant inter-company transactions and accounts have been eliminated.
Cash and Cash Equivalents
The Company considers all highly liquid instruments with a maturity of three months or less to be cash equivalents.
Other Investments
Other short-term and long-term investments consist of certificates of deposit with maturities of more than three months. Carrying amounts approximate fair value. Amounts for Changes in other short-term investments and Changes in other long-term investments in the Consolidated Statements of Cash Flows for 2010 have been reclassified to conform with the classifications shown in the 2011 Consolidated Statements of Cash Flows.
Allowance for Doubtful Accounts
The Company provides an allowance for doubtful accounts equal to the estimated uncollectible portion of accounts receivable. This estimate is based on historical collection experience and a review of the current status of accounts receivable.
Oil and Gas Properties
The Company follows the full cost method of accounting for its oil and gas properties. Accordingly, all costs associated with acquisition, exploration and development of oil and gas reserves are capitalized and accounted for in cost centers, on a country-by-country basis. For each cost center, capitalized costs, less accumulated amortization and related deferred income taxes, shall not exceed an amount (the cost center ceiling) equal to the sum of:
a)The present value of estimated future net revenues computed by applying current prices of oil and gas reserves (with consideration of price changes only to the extent provided by contractual arrangements) to estimated future production of proved oil and gas reserves as of the date of the latest balance sheet presented, less estimated future expenditures (based on current costs) to be incurred in developing and producing the proved reserves computed using a discount factor of ten percent and assuming continuation of existing economic conditions; plus
b)The cost of properties not being amortized; plus
c)The lower of cost or estimated fair market value of unproven properties included in the costs being amortized; less
d)Income tax effects related to differences between the book and tax basis of the properties.
If unamortized costs capitalized within a cost center, less related deferred income taxes, exceed the cost center ceiling (as defined), the excess is charged to expense and separately disclosed during the period in which the excess occurs. Amounts required to be written off will not be reinstated for any subsequent increase in the cost center ceiling. No impairment of oil and gas properties charge was recorded for 2011, 2010 or 2009.
Depreciation and amortization for each cost center are computed on a composite unit-of-production method, based on estimated proven reserves attributable to the respective cost center. All costs associated with oil and gas properties are currently included in the base for computation and amortization. Such costs include all acquisition, exploration, development costs and estimated future expenditures for proved undeveloped properties as well as estimated dismantlement and abandonment costs as calculated under the asset retirement obligation category, net of salvage value. All of the Company's oil and gas properties are located within the continental United States.
Gains and losses on sales of oil and gas properties are treated as adjustments of capitalized costs. Gains or losses on sales of property and equipment, other than oil and gas properties, are recognized as part of operations. Expenditures for renewals and improvements are capitalized, while expenditures for maintenance and repairs are charged to operations as incurred.
Property and Equipment
The Company, as operator, leases equipment to owners of oil and gas wells, on a month-to-month basis.
The Company, as operator, transports gas through its gas gathering systems, in exchange for a fee.
Depreciation is provided in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives (5 to 10 years for rental equipment and gas gathering systems, 4 to 5 years for other property and equipment). The straight-line method of depreciation is used for financial reporting purposes, while accelerated methods are used for tax purposes.
Real Estate Property
The Company owns land along with a two-story commercial office building which is situated thereon. The Company occupies a portion of the building as its primary corporate headquarters, and leases the remaining space in the building to non-related third party commercial tenants at prevailing market rates. The Company depreciates the commercial office using the straight-line method of depreciation for financial statement and income tax purposes.
Investments in Real Estate
All investments in real estate holdings are stated at cost or adjusted carrying value. ASC Topic 360, “Accounting for the Impairment or Disposal of Long-Lived Assets”, requires that a property be considered impaired if the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the property. If impairment exists, an impairment loss is recognized by a charge against earnings equal to the amount by which the carrying amount of the property exceeds fair market value less cost to sell the property. If impairment of a property is recognized, the carrying amount of the property is reduced by the amount of the impairment, and a new cost for the property is established. Depreciation is provided over the properties estimated remaining useful life. There was no charge to earnings during 2011 due to impairment of real estate holdings.
Accounting for Asset Retirement Obligations
The Company adopted ASC Topic 410-20, "Accounting for Asset Retirement Obligations" on December 31, 2005. The adoption of ASC Topic 410-20 resulted in a cumulative effect adjustment to record a $239,000 increase in the carrying value of oil and gas properties, and an asset retirement obligation liability of the same amount. This statement requires the recording of a liability in the period in which an asset retirement obligation ("ARO") is incurred, in an amount equal to the discounted estimated fair value of the obligation that is capitalized. Thereafter, each quarter, this liability is accreted up to the final retirement cost. The determination of the ARO is based on an estimate of the future cost to plug and abandon our oil and gas wells. The actual costs could be higher or lower than current estimates.
The following table reflects the changes of the asset retirement obligations during the period ending December 31;
| 2011 | 2010 | |
| Carrying amount of asset retirement obligation | $ 854,000 | $ 762,000 |
| Liabilities added | 42,000 | 131,000 |
| Liabilities divested or settled | 16,000 | (87,000) |
| Current period accretion expenses | 34,000 | 48,000 |
| Carrying amount as of December 31, | $ 946,000 | $ 854,000 |
Revenue Recognition
The Company follows the “sales” (takes or cash) method of accounting for oil and gas revenues. Under this method, the Company recognizes revenues on oil and gas production as it is taken and delivered to the purchasers. The volumes sold may be more or less than the volumes the Company is entitled to take based on our ownership in the property. These differences result in a condition known as a production imbalance. Our crude oil and natural gas imbalances are insignificant.
Income Taxes
In June, 2006, an interpretation of ASC Topic 740-10, “Accounting for Uncertainty in Income Taxes” was issued. The interpretation creates a single model to address accounting for uncertainty in tax positions. Specifically, the pronouncement prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The interpretation also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition of certain tax positions.
The Company adopted the provisions of the interpretation of ASC Topic 740-10 effective January 1, 2007. The adoption of this accounting principle did not have an effect on the Company’s consolidated financial statements at, and for the three years ended December 31, 2011.
The Company accounts for income taxes pursuant to ASC Topic 740-10 "Accounting for Income Taxes" , which requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement carrying amounts and tax bases of assets and liabilities, using enacted tax rates in effect in the years in which the differences are expected to reverse. The temporary differences primarily relate to depreciation, depletion and intangible drilling costs.
Use of Estimates
The preparation of financial statements in conformity with U. S. Generally Accepted Accounting Principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Share-Based Payments
Effective January 1, 2006, the Company adopted ASC Topic 718-10, “Share-Based Payment". ASC Topic 718-10 requires compensation costs related to share-based payments to be recognized in the income statement over the requisite service period. The amount of the compensation cost is to be measured based on the grant-date fair value of the instrument issued. ASC Topic 718-10 is effective for awards granted or modified after the date of adoption and for awards granted prior to that date that have not vested. ASC Topic 718-10 does not materially change the Company's existing accounting practices or the amount of share-based compensation recognized in earnings.
Recently Issued Accounting Pronouncements
FASB Accounting Standards Update (“ASU”) 2010-03 was issued in January 2010, and aligns the current oil and natural gas reserve estimation and disclosure requirements of ASC Topic 932 with those in theSEC Final Rule Modernization of Oil and Gas Reporting issued December 31, 2008. Specifically, ASU No. 2010-03 (1) introduces additional terms and re-defines others, (2) expands the definition of the term oil and gas producing activities, (3) requires a reporting entity to take into account its equity method investments in determining whether it engages in significant oil and gas producing activities, (4) requires that an un-weighted average of prices for the previous 12 months be used to determine whether proved reserves are economically producible, and (5) requires separate
| 55 |
disclosure of information about reserve quantities and financial statement amounts for geographic areas representing 15% or more of proved reserves. ASU 2010-03 is effective for entities with annual reporting periods ending on or after December 31, 2009. The Company adopted both the FASB and SEC rules as of December 31, 2009. The adoption did not have a material impact on the consolidated financial statements.
The FASB issued Accounting Standards Update No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in the U.S. GAAP and IFRS” (Topic 820), in May, 2011. This ASC Topic changes the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. The Company plans to adopt this statement in early 2012. The adoption of this statement will not have a material impact on the consolidated financial statements of the Company
The FASB issued Accounting Standards Update No. 2011-05, “Comprehensive Income” (Topic 220) in June, 2011. This ASC Topic gives an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. For public entities, the amendments are effective for fiscal years and interim periods within those years, beginning after December 15, 2011. In December, 2011, the FASB issued Accounting Standards Update No. 2011-12, “Comprehensive Income” (Topic 220), “Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05”. The Company plans to adopt this statement in early 2012. The adoption of these statements will not have a material impact on the consolidated financial statements of the Company.
The FASB issued Accounting Standards Update No. 2011-08, “Intangibles – Goodwill and Other (Topic 350); Testing Goodwill for Impairment” in September, 2011. The objective of this Update is to simplify how entities, both public and non public, test goodwill for impairment. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Company plans to adopt this amendment effective with its consolidated financial statements dated December 31, 2012; however the adoption of this statement will not have a material impact on the consolidated financial statements of the Company.
The FASB issued Accounting Standards Update No. 2011-09, “Compensation-Retirement Benefits-Multiemployer Plans (Subtopic 715-80); Disclosures about an Employer’s Participation in a Multiemployer Plan” in September, 2011. The objective of this Update is to address concerns from various users of financial statements on the lack of transparency about an employer’s participation in a multiemployer pension plan. The amendments are effective for annual periods for fiscal years beginning after December 15, 2011. The Company plans to adopt this amendment effective with its consolidated financial statements dated December 31, 2012; however the adoption of this statement will not have a material impact on the consolidated financial statements of the Company.
The FASB issued Accounting Standards Update No. 2011-10, “Property, Plant and Equipment (Topic 360); Derecognition of in Substance Real Estate-A Scope Clarification” in December, 2011. The amendments in this Update affect entities that cease to have a controlling financial interest in a subsidiary that is in substance real estate as a result of default on the subsidiary’s nonrecourse debt. The adoption of this statement will not have a material impact on the consolidated financial statements of the Company.
The FASB issued Accounting Standards Update No. 2011-11, “Balance Sheet (Topic 210); Disclosures about Offsetting Assets and Liabilities” in December, 2011. The amendments in this Update require an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. The Company has no such assets and liabilities and this statement will not have a material impact on the consolidated financial statements of the Company.
Subsequent Events
The Company has evaluated subsequent events through the issuance date of April 5, 2012.
3. ACCOUNTS RECEIVABLE
| December 31, | ||
| 2011 | 2010 | |
| Trade | $ 101,000 | $ 127,000 |
| Accrued receivable | 1,523,000 | 976,000 |
| 1,624,000 | 1,103,000 | |
| Less: Allowance for losses | (15,000) | (15,000) |
| $ 1,609,000 | $ 1,088,000 | |
Accrued receivables are receivables from purchasers of oil and gas. These revenues are booked from check stub detail after receipt of the check for sales of oil and gas products. These payments are for sales of oil and gas produced in the reporting period, but for which payment has not yet been received until after the closing date of the reporting period. Therefore these sales are accrued as receivables as of the balance sheet date. Revenues for oil and gas production that has been sold but for which payment has not yet been received is accrued in the period sold.
4. ACCOUNTS PAYABLE
| December 31, | ||
| 2011 | 2010 | |
| Trade payables | $ 1,170,000 | $ 505,000 |
| Production proceeds payable | 1,865,000 | 1,535,000 |
| Prepaid drilling costs | 187,000 | 236,000 |
| $ 3,222,000 | $ 2,276,000 | |
5. NOTES PAYABLE
| December 31, | ||
| 2011 | 2010 | |
Note payable to a bank with monthly principal
payments of $10,000 plus accrued interest
at a variable annual interest rate based upon
an index which is the Treasury securities rate
for a term of seven years, plus 2.2%. The
interest rate is subject to change on the first
day of each seven year anniversary after the
date of the note based on the Index then in
effect. As of the date of the Loan, the annual
interest rate was 6.11%. Effective December 27,
2011, the Annual interest rate was adjusted
to 3.61%. The note is collateralized by land
and a commercial office building, plus a
guarantee by certain related parties.
The note matures in November, 2018.
| 840,000 | 960,000 | |
| Less current maturities | (120,000) | (120,000) |
| Total notes payable, long-term portion | 720,000 | 840,000 |
Estimated annual maturities for long-term debt are as follows:
| 2012 | 120,000 |
| 2013 | 120,000 |
| 2014 | 120,000 |
| 2015 | 120,000 |
| 2016 | 120,000 |
| thereafter | 240,000 |
| 840,000 |
6. RELATED PARTY TRANSACTIONS
On October 1, 2008, Giant entered into an Administrative Services Agreement with the Company whereby Giant agreed to pay the Company $250 per month for the Company providing administrative services to Giant. The Company also entered into a management services agreement with M-R Oilfield Services, LP (“MRO”), whereby MRO makes monthly payments in the amount of $1,000 to the Company in exchange for the Company providing administrative services to MRO. On October 1, 2008, the Company entered into a similar agreement with Giant NRG, LP (“NRG”), a limited partnership with Chris Mazzini and Michelle Mazzini as limited partners. Under this agreement NRG pays a monthly fee of $2,500 to the Company in exchange for the Company providing certain administrative services to NRG. The Company has entered into a similar arrangement with Peveler Pipeline, LP ("Peveler"), whereby Peveler pays the Company a monthly charge of $250 in exchange for the Company providing administrative services to Peveler. Chris and Michelle Mazzini are the owners of Peveler Pipeline, LP, a limited partnership which owns a pipeline gathering system servicing wells owned by Giant, another related entity, described elsewhere in this report. The Company entered into a similar agreement with M-R Ventures, LLC (“MRV”), a limited liability company that operates some wells in Michigan, and that is owned by Chris and Michelle Mazzini. Pursuant to this agreement, MRV pays the Company a monthly fee in the amount of $500 for certain administrative services that the Company provides to MRV.
The long-term debt, which is secured by the commercial office building, is also guaranteed individually by Chris G. Mazzini and Michelle H. Mazzini, related parties.
7. COMMON STOCK
Effective January 1, 2006, the Company adopted ASC Topic 718-10, "Share-Based Payment". ASC Topic 718-10 requires compensation costs related to share-based payments to be recognized in the income statement over the requisite service period. The amount of the compensation cost is to be measured based on the grant date fair value of the instrument issued. ASC Topic 718-10 is effective for awards granted or modified after the date of adoption and for awards granted prior to that date that have not vested. ASC Topic 718-10 does not materially change the Company's existing accounting practices or the amount of share-based compensation recognized in earnings.
Effective April 9, 2009, the Company issued 10,000 shares of restricted common stock to a key employee pursuant to an employment package. The shares were valued at $2.00 per share, the believed market value for free trading shares at the time of issue. The amount was expensed as general and administrative expense. The shares of common stock were issued out of Treasury Stock and reduced the amount of the Company's common stock held in Treasury from 66,668 to 56,668 shares.
Effective December 16, 2009, the Company issued 10,000 shares of restricted common stock to a key employee pursuant to an employment package. The shares were valued at $1.65 per share, the believed market value for free trading shares at the time of issue. The amount was expensed as general and administrative expense. The shares of common stock were issued out of Treasury Stock and reduced the amount of the Company's common stock held in Treasury from 56,668 to 46,668 shares.
Effective December 1, 2010, the Company issued 10,000 shares of restricted common stock to a key employee pursuant to an employment package. The shares were valued at $2.25 per share, the believed market value for free trading shares at the time of issue. The amount was expensed as general and administrative expense. The shares of common stock were issued out of Treasury Stock and reduced the amount of the Company's common stock held in Treasury from 46,668 to 36,668 shares.
Effective December 16, 2009,August 1, 2011, the Company issued 10,000 shares of restricted common stock (5,000 shares to a key employeeeach of two individuals) pursuant to an employment package. The shares were valued at $1.65$1.70 per share, the believed market value for free trading shares at the time of issue. The amount was expensed as general and administrative expense. The shares of common stock were issued out of Treasury Stock and reduced the amount of the Company's common stock held in Treasury from 56,66836,668 to 46,66826,668 shares.
Effective April 9, 2009,December 30, 2011, the Company issued 10,000 shares of restricted common stock to a key employee pursuant to an employment package. The shares were valued at $2.00$1.70 per share, the believed market value for free trading shares at the time of issue. The amount was expensed as general and administrative expense. The shares of common stock were issued out of Treasury Stock and reduced the amount of the Company's common stock held in Treasury from 66,66826,668 to 56,66816,668 shares.
Compensation
8. INCOME TAXES
The Company accounts for income taxes pursuant to ASC Topic 740-10, "Accounting for Income Taxes". ASC Topic 740-10 utilizes the liability method of Directors
Directors whocomputing deferred income taxes.
In connection with the Plan discussed in Note 1, the Company agreed to pay, in cash, to Exploration's unsecured creditors, as defined, one-half of the future reductions of Federal income taxes which were directly related to any allowed carryovers of Exploration's net operating losses and investment tax credits. Such payments are employeesto be made on a pro-rata basis. Amounts incurred under this agreement, which are considered contingent consideration, totaled $ -0-, $ -0-, and $ -0- in 2011, 2010 and 2009, respectively. As of December 31, 2011 the Company has not received a ruling from the Internal Revenue Service concerning the net operating loss and investment credit carryovers. Until the tax savings which result from the utilization of these carry-forwards is assured, the Company will not pay to Exploration's unsecured creditors any of the tax savings benefit. As of December 31, 2011, the Company owes $97,000 to Exploration's unsecured creditors.
In calculating tax savings benefits described above, consideration was given to the alternative minimum tax, where applicable, and the tax effects of temporary differences, as shown below:
Income tax differed from the amounts computed by applying an effective United States federal income tax rate of 34% to pretax income in 2011, 2010 and 2009 as a result of the following:
| 2011 | 2010 | 2009 | |
| Computed expected tax expense (benefit) | $ 449,000 | $ 42,000 | $ (104,000) |
| Miscellaneous timing differences | |||
| related to book and tax depletion | |||
| differences and the expensing of | |||
| intangible drilling costs | (678,000) | (139,000) | (122,000) |
| Expected Federal income tax expense (benefit) | $ (229,000) | $ (97,000) | $ (226,000) |
Income tax expense (benefit) for the years ended December 31, 2011, 2010 and 2009 consisted of the following:
| 2011 | 2010 | 2009 | |
| Federal income taxes (benefit) | $ (229,000) | $ (97,000) | $ (226,000) |
| State income taxes | - | - | - |
| Current income tax provision (benefit) | $ (229,000) | $ (97,000) | $ (226,000) |
Deferred income taxes reflect the effects of temporary differences between the tax bases of assets and liabilities and the reported amounts of those assets and liabilities for financial reporting purposes. Deferred income taxes also reflect the value of net operating losses, investment tax credits and an offsetting valuation allowance. The Company's total deferred tax assets and corresponding valuation allowance at December 31, 2011 and 2010 consisted of the following:
| December 31, | ||
| 2011 | 2010 | |
| Deferred tax assets | ||
| Depreciation, depletion and amortization | 238,000 | 320,000 |
| Other, net | 7,000 | 16,000 |
| Total | 245,000 | 336,000 |
| Deferred tax liabilities | ||
| Expired leashold | (335,000) | (231,000) |
| Intangible drilling costs | (2,716,000) | (3,114,000) |
| Net deferred tax liability | $ (2,806,000) | $ (3,009,000) |
9. CASH FLOW INFORMATION
The Company does not consider any of its assets, other than cash and certificates of deposit shown as cash on the balance sheet, to meet the definition of a cash equivalent.
Net cash provided by operating activities includes cash payments for interest of $55,000, $84,000, and $71,000 for the years 2011, 2010 and 2009, respectively. Also included are cash payments for taxesof $170,000, $-0-, and $400,000,in 2011, 2010 and 2009, respectively.
Excluded from the Consolidated Statements of Cash Flows were the effects of certain non-cash investing and financing activities, as follows:
| 2011 | 2010 | 2009 | |
| Addition of Oil & Gas | |||
| properties by recognitions of | |||
| asset retirement oblibation | $ 57,000 | $ 45,000 | $ 8,000 |
| $ 57,000 | $ 45,000 | $ 8,000 |
10. EARNINGS PER SHARE
Earnings per share ("EPS") are calculated in accordance with ASC Topic 260-10, "Earnings per Share", which was adopted in 1997 for all years presented. Basic EPS is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding during the period. The adoption of ASC Topic 260-10 had no effect on previously reported EPS. Diluted EPS is computed based on the weighted number of shares outstanding, plus the additional common shares that would have been issued had the options outstanding been exercised.
11. CONCENTRATIONS OF CREDIT RISK
As of December 31, 2011 the Company had approximately $3,172,000 in checking and money market accounts at one bank, and approximately $2,550,000 in a second bank. The Company also had approximately $3,542,000, including $400,000 of short-term certificates of deposit and $1,200,000 of long-term certificates of deposit invested at seven other banking institutions. Cash amounts on deposit at these institutions exceed current per account FDIC protection limits by approximately $2,862,000.
Most of the Company's business activity is located in Texas. Accounts receivable as of December 31, 2011 and 2010 are due from both individual and institutional owners of joint interests in oil and gas wells as well as purchasers of oil and gas. A portion of the Company's ability to collect these receivables is dependent upon revenues generated from sales of oil and gas produced by the related wells.
12. FINANCIAL INSTRUMENTS
The estimated fair value of the Company's financial instruments at December 31, 2011 and 2010 follows:
| 2011 | 2010 | |||
| Carrying Amount | Fair Value | Carrying Amount | Fair Value | |
| Cash | $ 6,695,000 | $ 6,695,000 | $ 6,244,000 | $ 6,244,000 |
| Short-term certificates | 400,000 | 400,000 | 400,000 | 400,000 |
| Long-term certificates | 1,200,000 | 1,200,000 | 1,000,000 | 1,000,000 |
| Accounts receivable | 1,609,000 | 1,609,000 | 1,088,000 | 1,088,000 |
The fair value amounts for each of the financial instruments listed above approximate carrying amounts due to the short maturities of these instruments.
13. COMMITMENTS AND CONTINGENCIES
In connection with the Plan of Reorganization discussed in Note 1, the Company agreed to pay, in cash, to Exploration's unsecured creditors, as defined, one-half of the future reduction of Federal income taxes which were directly related to any allowed carryovers of Exploration's net operating losses and investment tax credits existing at the time of the reorganization.
The Company's oil and gas exploration and production activities are subject to Federal, State and environmental quality and pollution control laws and regulations. Such regulations restrict emission and discharge of wastes from wells, may require permits for the drilling of wells, prescribe the spacing of wells and rate of production, and require prevention and clean-up of pollution.
Although the Company has not in the past incurred substantial costs in complying with such laws and regulations, future environmental restrictions or requirements may materially increase the Company's capital expenditures, reduce earnings, and delay or prohibit certain activities.
At December 31, 2011 the Company has acquired bonds and letters of credit issued in favor of various state regulatory agencies as mandated by state law in order to comply with financial assurance regulations required to perform oil and gas operations within the various state jurisdictions.
The Company has seven, $5,000 single-well bonds totaling $35,000 and one $10,000 single well bond with an insurance company, for wells the Company operates in Alabama. The $5,000 bonds are written for a three year period and the $10,000 bond is written for a one year period.
The Company has 10 letters of credit from a bank issued for the benefit of various state regulatory agencies in Texas, New Mexico, Oklahoma, and Louisiana, ranging in amounts from $10,000 to $50,000 and totaling $298,000. These letters of credit have expiration dates that range from January 1, 2012 through January 16, 2015 and are fully secured by funds on deposit with the bank in business money market accounts.
14. ADDITIONAL OPERATIONS AND BALANCE SHEET INFORMATION
Certain information about the Company's operations for the years ended December 31, 2011, 2010 and 2009 follows.
Sale of Oil & Gas Properties
In March, 2010, the Company sold its working interest and operations in the Robertson 20-12 well located in Lamar County, Alabama to an unrelated party for $5,000 in cash.
Dependence on Customers
The following is a summary of significant purchasers from oil and natural gas produced by the Company for the three-year period ended December 31, 2011:
| Year Ended December 31, (1) | |||
| Purchaser | 2011 | 2010 | 2009 |
| Enbridge Energy Partners | 22% | 26% | 63% |
| Shell trading (US) Company | 20% | 7% | 6% |
| Crosstex Gulf Coast Mktg | 11% | 16% | 23% |
| Eastex Crude Company | 7% | 7% | 7% |
| Enterprise Crude Oil LLC | 5% | 5% | 4% |
| Targa Midstream Service, LIM | 4% | 3% | 3% |
| Gulfmark Energy Inc. | 3% | 0% | 0% |
| Conoco Phillips Company | 2% | 4% | 1% |
| Holly Corp (formerly Navajo Refining Co.) | 2% | 3% | 3% |
| DCP Midstream, LP | 2% | 2% | 0% |
| ETC Texas Pipeline | 2% | 2% | 1% |
| Sunoco Partners Marketing | 1% | 1% | 0% |
| Empire Pipeline Corp | 1% | 1% | 2% |
| XTO Energy, Inc. | 1% | 0% | 0% |
| Devon Gas Services, LP | 1% | 0% | 1% |
| Kinder Morgan | 0% | 5% | 0% |
| Genesis | 0% | 2% | 2% |
(1) Percent of Total Oil & Gas Sales
Oil and gas is sold toapproximately 100 different purchasersunder market sensitive, short-term contracts computed on a month to month basis.
Except as set forth above, there are no other customers of the Company that individually accounted for more than two percent of the Company's oil and gas revenues during the three years ended December 31, 2011.
The Company currently has no hedged contracts.
Certain revenues, costs and expenses related to the Company's oil and gas operations are not currently compensated for
their servicesas follows:
| Year Ended December 31, | |||
| 2011 | 2010 | 2009 | |
| Capitalized costs relating to oil and gas | |||
| producing activities: | |||
| Unproved properties | $ 2,242,000 | $ 2,064,000 | $ 1,874,000 |
| Proved properties | 18,153,000 | 15,820,000 | 13,206,000 |
| Total capitalized costs | 20,395,000 | 17,884,000 | 15,080,000 |
| Accumulated amortization | (9,161,000) | (8,129,000) | (7,212,000) |
| Total capitalized costs, net | $ 11,234,000 | $ 9,755,000 | $ 7,868,000 |
| Year Ended December 31, | |||
| 2011 | 2010 | 2009 | |
| Costs incurred in oil and gas property | |||
| acquistions, exploration and development: | |||
| Acquistion of properties | $ 303,000 | $ 458,000 | $ 121,000 |
| Development costs | 2,208,000 | 2,346,000 | 1,327,000 |
| Total costs incurred | $ 2,511,000 | $ 2,804,000 | $ 1,448,000 |
| Year Ended December 31, | |||
| 2011 | 2010 | 2009 | |
| Results of operations from producing activities: | |||
| Sales of oil and gas | $ 8,000,000 | $ 6,302,000 | $ 5,067,000 |
| Production costs | 3,253,000 | 2,613,000 | 2,447,000 |
| Amortization of oil and gas properties | 1,032,000 | 916,000 | 871,000 |
| Total production costs | 4,285,000 | 3,529,000 | 3,318,000 |
| Total net revenue | $ 3,715,000 | $ 2,773,000 | $ 1,749,000 |
| Year Ended December 31, | |||
| 2011 | 2010 | 2009 | |
| Sales price per equivalent Mcf | $ 7.80 | $ 6.22 | $ 4.96 |
| Production costs per equivalent Mcf | $ 3.17 | $ 2.58 | $ 2.40 |
| Amortization per equivalent Mcf | $ 1.01 | $ 0.90 | $ 0.85 |
| Year Ended December 31, | |||
| 2011 | 2010 | 2009 | |
| Results of operations from gas gathering | |||
| and equipment rental activities: | |||
| Revenue | $ 172,000 | $ 179,000 | $ 192,000 |
| Operating expenses | 25,000 | 33,000 | 34,000 |
| Depreciation | 1,000 | 1,000 | 7,000 |
| Total costs | 26,000 | 34,000 | 41,000 |
| Total net revenue | $ 146,000 | $ 145,000 | $ 151,000 |
15. BUSINESS SEGMENTS
The Company's three business segments are (1) oil and gas exploration, production and operations, (2) transportation and compression of natural gas, and (3) commercial real estate investment. Management has chosen to organize the Company into the three segments based on the Board. Mr. Allard was paidproducts or services provided. The following is a director's feesummary of $12,500
in 2010, $15,000 in 2009selected information for these segments for the
three-year period ended December 31, 2011:
| Year Ended December 31, | |||
| 2011 | 2010 | 2009 | |
| Revenues: (1) | |||
| Oil and gas exploration, production | $ 8,289,000 | $ 6,621,000 | $ 5,384,000 |
| and operations | |||
| Gas gathering, compression and | 172,000 | 179,000 | 192,000 |
| equipment rental | |||
| Real estate rental | 436,000 | 448,000 | 503,000 |
| $ 8,897,000 | $ 7,248,000 | $ 6,079,000 | |
| Year Ended December 31, | |||
| 2011 | 2010 | 2009 | |
| Depreciation, depletion, and | |||
| amortization expense: | |||
| Oil and gas exploration, production | $ 1,050,000 | $ 940,000 | $ 890,000 |
| and operations | |||
| Gas gathering, compression and | 1,000 | 1,000 | 7,000 |
| equipment rental | |||
| Real estate rental | 101,000 | 101,000 | 100,000 |
| $ 1,152,000 | $ 1,042,000 | $ 997,000 | |
| Year Ended December 31, | |||
| 2011 | 2010 | 2009 | |
| Income from operations: | |||
| Oil and gas exploration, production | $ 3,952,000 | $ 3,020,000 | $ 1,961,000 |
| and operations | |||
| Gas gathering, compression and | 146,000 | 145,000 | 151,000 |
| equipment rental | |||
| Real estate rental | 110,000 | 101,000 | 154,000 |
| 4,208,000 | 3,266,000 | 2,266,000 | |
| Corporate and other (2) | (2,455,000) | (2,819,000) | (2,227,000) |
| Consolidated net income | $ 1,753,000 | $ 447,000 | $ 39,000 |
| Year Ended December 31, | |||
| 2011 | 2010 | 2009 | |
| Identifiable assets net of DDA: | |||
| Oil and gas exploration, production | |||
| and operations | $ 11,289,000 | $ 9,829,000 | $ 7,906,000 |
| Gas gathering, compression and | |||
| equipment rental | (1,000) | - | 1,000 |
| Real estate rental | 1,667,000 | 1,767,000 | 1,868,000 |
| 12,955,000 | 11,596,000 | 9,775,000 | |
| Corporate and other (3) | 10,324,000 | 9,181,000 | 10,611,000 |
| Consolidated total assets | $ 23,279,000 | $ 20,777,000 | $ 20,386,000 |
Note (1): All reported revenues are from external customers.
Note (2): Corporate and $17,500 in 2008other includes general and administrative expenses,
other non-operating income and expense and income taxes.
Note (3): Corporate and other includes cash, accounts and notes receivable,
inventory, other property and equipment and intangible assets.
16. SUPPLEMENTARY INCOME STATEMENT INFORMATION
The following items were charged directly to compensate him for his position
as the Board of Directors' Financial Expert. Mr. Allard receives $2,500 for
each Board of directors meeting during the year.
Termination of Employment and Change of Control Arrangement
There are no plans or arrangements for payment to officers or directors upon
resignation or a change in control of the Registrant.
Item 12. Security Ownership Of Certain Beneficial Owners And Management
Security Ownership of Certain Beneficial Owners and Managers
------------------------------------------------------------
expense:
| Year Ended December 31, | |||
| 2011 | 2010 | 2009 | |
| Maintenance and repairs | $ 15,000 | $ 15,000 | $ 15,000 |
| Production taxes | 371,000 | 256,000 | 233,000 |
| Taxes, other than payroll and income taxes | 11,000 | 4,000 | 77,000 |
17. QUARTERLY DATA (UNAUDITED)
The table below sets forthreflects selected quarterly information for the information indicated regarding ownershipyears ended December 31, 2011, 2010 and 2009.
| Year Ended December 31, 2011 | ||||
| First Quarter | Second Quarter | Third Quarter | Fourth Quarter | |
| Revenue | $ 2,620,000 | $ 2,077,000 | $ 2,040,000 | $ 2,603,000 |
| Expense | (1,770,000) | (1,805,000) | (1,774,000) | (2,670,000) |
| Operating income (loss_ | 850,000 | 272,000 | 266,000 | (67,000) |
| Current tax (provision) benefit | (79,000) | 113,000 | (12,000) | 207,000 |
| Deferred tax (provision) benefit | 37,000 | (104,000) | 10,000 | 260,000 |
| Net income (loss) | $ 808,000 | $ 281,000 | $ 264,000 | $ 400,000 |
| Earnings (loss) per share of | ||||
| common stock | ||||
| Basic and diluted | $ 0.10 | $ 0.04 | $ 0.03 | $ 0.06 |
| Year Ended December 31, 2010 | ||||
| First Quarter | Second Quarter | Third Quarter | Fourth Quarter | |
| Revenue | $ 1,968,000 | $ 1,765,000 | $ 1,831,000 | $ 2,092,000 |
| Expense | (1,523,000) | (1,631,000) | (1,810,000) | (2,569,000) |
| Operating income (loss_ | 445,000 | 134,000 | 21,000 | (477,000) |
| Current tax (provision) benefit | (31,000) | (63,000) | 244,000 | (53,000) |
| Deferred tax (provision) benefit | (59,000) | 76,000 | (39,000) | 249,000 |
| Net income (loss) | $ 355,000 | $ 147,000 | $ 226,000 | $ (281,000) |
| Earnings (loss) per share of | ||||
| common stock | ||||
| Basic and diluted | $ 0.05 | $ 0.02 | $ 0.03 | $ (0.04) |
| Year Ended December 31, 2009 | ||||
| First Quarter | Second Quarter | Third Quarter | Fourth Quarter | |
| Revenue | $ 1,479,000 | $ 1,749,000 | $ 1,390,000 | $ 2,295,000 |
| Expense | (1,660,000) | (1,750,000) | (1,813,000) | (1,993,000) |
| Operating income (loss_ | (181,000) | (1,000) | (423,000) | 302,000 |
| Current tax (provision) benefit | - | - | 14,000 | 212,000 |
| Deferred tax (provision) benefit | 59,000 | 1,000 | 139,000 | (83,000) |
| Net income (loss) | $ (122,000) | $ - | $ (270,000) | $ 431,000 |
| Earnings (loss) per share of | ||||
| common stock | ||||
| Basic and diluted | $ (0.02) | $ - | $ (0.04) | $ (0.07) |
18. SUPPLEMENTAL RESERVE INFORMATION (UNAUDITED)
The Company’s net proved oil and natural gas reserves as of December 31, 2011, 2010, and 2009 have been estimated by Company personnel.
All estimates are in accordance generally accepted petroleum engineering and evaluation principles and definitions and with guidelines established by the Securities and Exchange Commission. All of the Registrant's common stock, $.01 par value,Company’s reserves are located in the only outstanding voting
securities, asUnited States of March 31, 2011America and accounted for under one cost center.
Our policies and practices regarding internal control over the estimating of reserves are structured to objectively and accurately estimate our oil and natural gas reserve quantities and present values in compliance with respect to: (i) any personthe U.S. Securities and Exchange Commission (“SEC”) regulations and accounting principles generally accepted in the United States of America. We maintain an internal staff of petroleum engineers and geosciences professionals who work closely with the accounting and financial departments to insure the integrity, accuracy and timeliness of data used in the estimation process. The data used in our reserve estimation process is known
tobased on historical results for production, oil and natural gas prices received, lease operating expenses and development costs incurred, ownership interest and other required data. Historical oil and gas prices, lease operating expenses, and ownership interests are provided by and verified by the Registrant to beCompany’s accounting department.
The Petroleum Engineer responsible for the owner of more than five percentsupervision and preparation of the Registrant's
common stock; (ii)Company’s internally generated reserve report has a Bachelor of Science degree in Petroleum Engineering from a major university and has experience in preparing economic evaluations and reserve estimates. He meets the common stock of the Registrant beneficially owned by
each of the directors of the Registrantrequirements regarding qualifications, objectivity and (iii) by all officers and
directors as a group. Each person has sole investment and voting power with
- 50 -
respect to the shares indicated, except as otherwiseconfidentiality set forth in the footnotesStandards Pertaining to the table.
PctEngineering and Auditing of Oil and Gas Reserves Information promulgated by the Society of Petroleum Engineers.
The Company has established a written internal control procedure to verify that the data entered into our engineering evaluation software is complete and correct. These internal control procedures establish the source of the data both internally and externally, the personnel that will collect the data and testing of the data collected to ensure its accuracy.
The following reserve estimates were based on existing economic and operating conditions. Oil and gas prices for 2011, 2010, and 2009 were calculated using a 12-month average price, calculated as the un-weighted arithmetic average of the first-day-of-the month price for each month of each year. Operating costs, production and ad valorem taxes and future development costs were based on current costs with no escalation.
There are numerous uncertainties inherent in estimating quantities of proved reserves and in projecting the future rates of production and timing of development expenditures. The following reserve data represents estimates only and should not be construed as being exact. Moreover, the present values should not be construed as the current market value of the Company's oil and gas reserves or the costs that would be incurred to obtain equivalent reserves.
Changes in Estimated Quantities of Proved Oil and Gas Reserves (Unaudited):
| Quantities of Proved Reserves: | Crude Oil Bbls | Natural Gas Mcf | |
| Balance December 31, 2008 | 261,712 | 13,759,948 | |
| Sales of reserves in place | - | - | |
| Acquired properties | 16,300 | 1,810 | |
| Extensions and discoveries | 25,630 | - | |
| Revisions of previous estimates * | 45,113 | (374,211) | |
| Production | (25,875) | (866,417) | |
| Balance December 31, 2009 | 322,880 | 12,521,130 | |
| Sales of reserves in place | - | (62,930) | |
| Acquired properties | 59,580 | 290,940 | |
| Extensions and discoveries | 1,570 | 172,880 | |
| Revisions of previous estimates * | 9,846 | (1,475,633) | |
| Production | (31,526) | (823,957) | |
| Balance December 31, 2010 | 362,350 | 10,622,430 | |
| Sales of reserves in place | - | - | |
| Acquired properties | 11,390 | 122,310 | |
| Extensions and discoveries | 36,610 | 226,300 | |
| Revisions of previous estimates * | 70,338 | (2,085,974) | |
| Production | (48,708) | (733,816) | |
| Balance December 31, 2011 | 431,980 | 8,151,250 | |
| * May also include divestitures, not only changes in engineering | |||
| Proved Developed Reserves: | |||
| Balance December 31, 2009 | 296,770 | 10,672,610 | |
| Balance December 31, 2010 | 361,870 | 8,754,920 | |
| Balance December 31, 2011 | 401,240 | 8,124,340 | |
Standardized Measure of Discounted Future Net Cash Flows and Changes Therein Relating to Proved Oil and Gas Reserves (Unaudited)
The Standardized Measure of Discounted Future Net Cash Flows and Changes Therein Relating to Proved Oil and Gas Reserves ("Standardized Measures") does not purport to present the fair market value of a company's oil and gas properties. An estimate of such value should consider, among other factors, anticipated future prices of oil and gas, the probability of recoveries in excess of existing proved reserves, the value of probable reserves and acreage prospects, and perhaps different discount rates. It should be noted that estimates of reserve quantities, especially from new discoveries, are inherently imprecise and subject to substantial revision.
Reserve estimates were prepared in accordance with standard Security and Exchange Commission guidelines. The future net cash flow for 2011, 2010, and 2009 was computed using a 12-month average price, calculated as the un-weighted arithmetic average of the first-day-of-the month price for each month of the year. Lease operating costs, compression, dehydration, transportation, ad valorem taxes, severance taxes, and federal income taxes were deducted. Costs and prices were held constant and were not escalated over the life of the properties. No deduction has been made for interest, or general corporate overhead. The annual discount of estimated future cash flows is defined, for use herein, as future cash flows discounted at 10% per year, over the expected period of realization.
Proved Developed Reserves were calculated based on Decline Curve Analysis on 92 operated wells and 130 non-operated wells. Materially insignificant operated and non-operated wells were excluded from the reserve estimate.
The Company emphasizes that reserve estimates are inherently imprecise. Accordingly, the estimates are expected to change as more current information becomes available. It is reasonably possible that, because of changes in market conditions or the inherent imprecision of these reserve estimates, thatthe estimates of future cash inflows, future gross revenues, the amount of oil and gas reserves, the remaining estimated lives of the oil and gas properties, or any combination of the above may be increased or reduced in the near term. If reduced, the carrying amount of capitalized oil and gas properties may be reduced materially in the near term.
Standardized measure of discounted future net cash flows related to proved reserves:
| Year Ended December 31, | |||
| 2011 | 2010 | 2009 | |
| Future production revenue | $ 78,938,000 | $ 72,465,000 | $ 61,140,000 |
| Future development costs | (108,000) | (2,187,000) | (2,807,000) |
| Future production costs | (32,843,000) | (32,386,000) | (23,501,000) |
| Future net cash flow before Federal income taxes | 45,987,000 | 37,892,000 | 34,832,000 |
| Future income taxes | (12,876,000) | (10,610,000) | (9,753,000) |
| Future net cash flows | 33,111,000 | 27,282,000 | 25,079,000 |
| Effect of 10% annual discounting | (9,649,000) | (8,577,000) | (8,969,000) |
| Standardized measure of discounted cash flows | $ 23,462,000 | $ 18,705,000 | $ 16,110,000 |
Changes in the standardized measure of discounted future net cash flows:
Amounts for 2009 are restated from previously issued report to more closely align with SEC reporting rules.
| Year Ended December 31, | |||
| 2011 | 2010 | 2009 | |
| Beginning of the year | $ 18,705,000 | $ 16,110,000 | $ 22,261,000 |
| Sales of oil and gas, net of production costs | (4,516,000) | (3,510,000) | (2,493,000) |
| Net changes in prices and production costs | 5,970,000 | 3,713,000 | (7,333,000) |
| Extensions, discoveries, additions | |||
| less related costs | 2,179,000 | 377,000 | 256,000 |
| Development costs incurred | 2,101,000 | 1,936,000 | 1,263,000 |
| Net changes in future development cost | (1,492,000) | (581,000) | (1,494,000) |
| Revisions of previous quantity estimates | (1,243,000) | (2,131,000) | (172,000) |
| Net change in purchase and sales of | |||
| minerals in place | 581,000 | 1,318,000 | 168,000 |
| Accretion of discount | 1,871,000 | 1,611,000 | 2,226,000 |
| Net change in income taxes | (417,000) | 152,000 | 1,596,000 |
| Other | (277,000) | (290,000) | (168,000) |
| End of year | $ 23,462,000 | $ 18,705,000 | $ 16,110,000 |
SPINDLETOP OIL & GAS CO. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2011, 2010, AND 2009
| SCHEDULE I I | ||||
| Balance | Costs & Expenses | Deductions | Ending Balance | |
| Allowance for doubtful accounts | ||||
| December 31, 2009 | $ 14,000 | $ - | $ - | $ 14,000 |
| December 31, 2010 | $ 14,000 | $ 24,000 | $ 23,000 | $ 15,000 |
| December 31, 2011 | $ 15,000 | $ - | $ - | $ 15,000 |
| SCHEDULE III | |||||
| SPINDLETOP OIL & GAS CO. AND SUBSIDIARIES | |||||
| REAL ESTATE AND ACCUMULATED DEPRECIATION | |||||
| Initial Cost to Corporation | Total Cost | ||||
| Description | Encumbrances | Land | Buildings | Subsequent to Acquist'n | |
| Two story multi-tenant garden office building with sub-grade parking garage located in Dallas, Texas | (b) | $ 688,000 | $ 1,298,000 | $ 282,000 | |
| Gross amounts at which carried at close of year | |||||
| Land | Buildings | Total | Accumulated Depreciation | Life on which Depreciation Calculated | Date Acquired |
| $ 688,000 | $ 1,580,000 | $ 2,268,000 | $ 601,000 | (a) | 12/27/2004 |
Notes to Schedule III
(a) See Footnote 2 to the Financial Statements outlining depreciation methods and lives.
(b) See description of notes payable in Footnote 5 to the Financial Statements outlining the terms and provisions of the acquisition loan for the building.
(c) The reconciliation for investments in real estate and accumulated depreciation for the years ended December 31, 2011 are as follows:
| Investments in Real Estate | Accumulated Depreciation | |
| Balance, December 31, 2005 | $ 1,986,000 | $ 49,000 |
| Acquisitions | 210,000 | |
| Depreciation expense | 71,000 | |
| Balance, December 31, 2006 | 2,196,000 | 120,000 |
| Acquisitions | 34,000 | |
| Depreciation expense | 84,000 | |
| Balance, December 31, 2007 | 2,230,000 | 204,000 |
| Acquisitions | 38,000 | |
| Depreciation expense | 96,000 | |
| Balance, December 31, 2008 | 2,268,000 | 300,000 |
| Acquisitions | ||
| Depreciation expense | 100,000 | |
| Balance, December 31, 2009 | 2,268,000 | 400,000 |
| Acquisitions | ||
| Depreciation expense | 101,000 | |
| Balance, December 31, 2010 | 2,268,000 | 501,000 |
| Acquisitions | ||
| Depreciation expense | 100,000 | |
| Balance, December 31, 2011 | $ 2,268,000 | $ 601,000 |
Exhibit 21
SPINDLETOP OIL & GAS CO. AND SUBSIDIARIES
Subsidiaries of the Registrant
Spindletop Drilling Company, incorporated September 5, 1975, under the laws of the State of Texas, is a wholly owned subsidiary of the Registrant.
Prairie Pipeline Co. incorporated June 22, 1983, under the laws of the State of Texas, is a wholly owned subsidiary of Registrant.
Exhibit 31.1
CERTIFICATIONS
I, Chris G. Mazzini, certify that:
1. I have reviewed this report on Form 10-K of Spindletop Oil & Gas Co.;
2. Based On
Natureon my knowledge, this report does not contain any untrue statement of Outstanding
Namea material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and Address Number Beneficial Percentother financial information included in this report, fairly present in all material respects the financial condition, results of Of Beneficial Owneroperations and cash flows of Shares Ownership* Class**
----------------------------------- -------------- ----------- ---------------
Chris Mazzinithe registrant as of, and Michelle Mazzini 5,900,543 (1) 77%
12850 Spurling Rd., Suite 200
Dallas, Texas 75230
Allfor, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13-15(e) and 15d-15e) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:
| (a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the controls and procedures as of the end of the period covered by this report based on such evaluation; and |
| (d) | disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and |
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's Board of directors (or persons performing the equivalent functions):
| (a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |
| (b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls. |
Dated: April 5, 2012
/s/ Chris G. Mazzini
CHRIS G. MAZZINI
Principal Executive Officer
Exhibit 31.2
CERTIFICATIONS
I, Robert E. Corbin, certify that:
1. I have reviewed this report on Form 10-K of Spindletop Oil & Gas Co.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as a group 5,900,543 77%
West Coast Asset Management, Inc. 3,000 (2) < 1%
Paul J. Orfalea
Lance W. Helfert
R. Atticus Lowe
1205 Coast Village Road
Montecito, California 93108
Enerjex Resources, Inc.
1600 NE Loop 410, Suite 104
San Antonio, Texas 78209 0 (3) 0%
Nadel and Gussman Energy, LLC 700,000 (3)(4) 9%
Stephen J. Heyman
James F. Adelson
15 East 5th Street, Suite 3200
Tulsa, Oklahoma 74103
-------------------------------
* "Beneficial Ownership" means the sole or shared power to vote, or direct the
voting of, a security or investment power with respect to a security, or any
combination thereof.
** Percentages are base upon 7,640,803 shares of Common Stock outstanding at
March 31, 2011
(1) Chris Mazzini directly owns 39,654 shares (1%). Giant Energy Corp.
directly owns 5,860,889 shares (76%). Chris Mazzini owns 100% of the common
stock of Giant Energy Corp.
(2) According to a Schedule 13D/A filed with the Commission by these persons
for an event occurring December 31, 2010, each of the individually named
persons have shared power to vote or direct a vote as well as shared power to
dispose of or direct the disposition of the aggregate amount of stock owned.
Each person is listed as the beneficial owner of the aggregate amount of these
shares.
- 51 -
(3) According to a Schedule 13G filed with the Commission by Enerjex
Resources, Inc. for an event occurring December 31, 2010, Enerjex Resources,
Inc. owns beneficially 700,000 shares of the Company's Common Stock. According
to a Schedule 13D/A filed by West Coast Opportunity Fund, LLC, West Coast Asset
Management, Inc., R. Atticus Lowe, Lance W. Helfert and Paul J. Orfalea for
event occurring December 31, 2010, such group of "Reporting Persons" for which
West Coast Opportunity Fund, LLC is described as the "Fund" contributed its
interest in 700,000 shares to Enerjex Resources, Inc. in exchange for all
Enerjex Resources, Inc. Common Stock.
(4) According to Schedule 13G filed with the Commission with respect to an
event occurring January 19, 2011, these persons own the number of shares
reported. Such Schedule 13G does not identify any transaction involving the
acquisition of such shares. It is believed the 700,000 shares of the Company's
Common Stock reported as owned by Nadel and Gussman Energy, LLC were acquired
from Enerjex Resources, Inc.
Changes in control
------------------
The Company is not aware of any arrangements or pledges with respect to its
securities that may result in a change in control of the Company.
Item 13. Certain Relationships And Related Transactions
Transactions with management and others
---------------------------------------
Certain officers, directors and related parties, including entities controlled
by Mr. Mazzini, the President and Chief Executive Officer, have engaged in
business transactions with the Company which were not the result of arm's
length negotiations between independent parties. Our management believes that
the terms of these transactions were as favorable to us as those that could
have been obtained from unaffiliated parties under similar circumstances. All
future transactions between us and our affiliates will be on terms no less
favorable than could be obtained from unaffiliated third parties and will be
approved by a majority of the disinterested members of our Board of Directors.
Chris G. Mazzini and Michelle H. Mazzini, through a limited partnership in
which they are limited partners, own M-R Oilfield Services, LP ("MRO"), an
oilfield service company which provides roustabout, swabbing and completion
services at rates which are at or below market to the Company. This oilfield
services company currently does work exclusively for the Company, its parent
company, Giant Energy Corp. and Giant NRG, LP, although MRO is contemplating
offering its services to unrelated third-parties. The Company benefits by
having immediate access to services.
- 52 -
Certain Business Relationships
------------------------------
The long-term debt, which is secured by the commercial office building, is also
guaranteed individually by Chris G. Mazzini and Michelle H. Mazzini, related
parties.
The management services agreement between Giant and the Company was in effect
from 1999 until September 30, 2008 when it terminated. This agreement provided
monthly payments from the Company to Giant in the amount of $20,000 in exchange
for several of Giant's personnel providing management, administrative and other
services to the Company and for the use of certain Giant assets.
On October 1, 2008, Giant entered into an Administrative Services Agreement
with the Company whereby Giant pays the Company $250 per month for the Company
providing administrative services to Giant.
The Company has entered into a management services agreement with MRO whereby
MRO makes monthly payments in the amount of $1,000 per month to the Company in
exchange for the Company providing administrative services to MRO. On October
1, 2008, the Company entered into a similar agreement with Giant NRG, LP
("NRG") a limited partnership with Chris Mazzini and Michelle Mazzini as
limited partners. Under this agreement NRG pays a monthly fee of $2,500 to the
Company in exchange for the Company providing certain administrative services
to NRG. The Company has entered into a similar arrangement with Peveler
Pipeline, LP ("Peveler"), whereby Peveler pays the Company a monthly charge of
$250 in exchange for the Company providing administrative services to Peveler.
Chris and Michelle Mazzini are the owners of Peveler Pipeline, LP, a limited
partnership which owns a pipeline gathering system servicing wells owned by
Giant, another related entity, described elsewhere in this report. The Company
entered into a similar agreement with M-R Ventures, LLC ("MRV") a limited
liability company that operates some wells in Michigan, and that is owned by
Chris and Michelle Mazzini. Pursuant to this agreement, MRV will pay the
Company a monthly fee in the amount of $500 for certain administrative services
that the Company provides to MRV. See also note 6 to the Financial Statements.
Item 14. Principal Accounting Fees and Services
The following table sets forth the aggregate fees for professional services
rendered to Spindletop Oil & Gas Co. and Subsidiaries for the years 2010, 2009
and 2008 by accounting firm, Farmer, Fuqua, & Huff, P.C.
Type of Fees 2010 2009 2008
------------------ ------- ------- -------
Audit Fees $41,000 $40,000 $31,000
Audit related fees - - -
Tax fees 4,000 - -
All other fees - - -
Members of the Board of Directors (the "Board") fulfill the responsibilities of
an audit committee and have established policies and Procedures for the
- 53 -
approval and pre-approval of audit services and permitted non-audit services.
The Board has the responsibility to engage and terminate Farmer, Fuqua, & Huff,
P.C. independent auditors, to pre-approve their performance of audit services
and permitted non-audit services, to approve all audit and non-audit fees, and
to set guidelines for permitted non-audit services and fees. All the fees for
2010, 2009 and 2008 were pre-approved by the Board or were within the pre-
approved guidelines for permitted non-audit services and fees established by
the Board, and there were no instances of waiver of approved requirements or
guidelines during the same periods.
PART IV
(a) The following documents are filed as a part of this report:
(1) FINANCIAL STATEMENTS: The following financial statements of the
Registrant and Report of Independent Registered Public Accounting Firm
therein are filed as part of this Report on Form 10-K:
Page
Report of Farmer, Fuqua & Huff, P.C
Independent Registered Public Accounting Firm 58
Consolidated Balance Sheets 58
Consolidated Statement of Operations 60
Consolidated Statement of Changes in
Stockholders' Equity 61
Consolidated Statements of Cash Flows 62
Notes to Consolidated Financial Statements 64
(2) FINANCIAL STATEMENT SCHEDULES: Other financial statement schedules
have been omitted because the information required to be set forth therein
is not applicable, is immaterial or is shown in the consolidated financial
statements or notes thereto.
(3) EXHIBITS
The following documents are filed as exhibits (or are incorporated by reference
as indicated) into this Report:
Exhibit
Designation Description
3.1 Articles of Incorporation of Spindletop Oil & Gas Co. (previously
filed with our General Form for Registration of Securities on Form
10, filed with the Commission on August 14, 1990)
3.2 Bylaws of Spindletop Oil & Gas Co. (previously filed with our
General Form for Registration of Securities on Form 10, filed with
the Commission on August 14, 1990)
- 54 -
14 Code of Ethics for Senior Financial Officers (Incorporated by
reference to Exhibit 14 to the registrant's annual report
Form 10-K for the fiscal year ended December 31, 2005).
21* Subsidiaries of the Registrant
31.1* Rule 13a-14(a) Certification of Chief Executive Officer
31.2* Rule 13a-14(a) Certification of Chief Financial Officer
32* Officers' Section 1350 Certifications
-----------------------------
* Filed herewith
(b) The Index of Exhibits is included following the Financial Statement
Schedules beginning at page 87 of this Report.
(c) The Index to Consolidated Financial Statements and Supplemental Schedules
is included following the signatures, beginning at page 57 of this Report.
- 55 -
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SPINDLETOP OIL & GAS CO.
Dated: April 15, 2011
By /s/ Chris Mazzini
________________________
Chris Mazzini
President, Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following on behalf of the Registrant and
in the capacities and on the dates indicated.
Signatures Capacity Date
Principal Executive Officers:
/s/ Chris Mazzini
__________________________________ President, Director April 15, 2011
Chris Mazzini (Chief Executive
Officer)
/s/ Michelle Mazzini
__________________________________ Vice President, Secretary, April 15, 2011
Michelle Mazzini Treasurer, Director
/s/ David E. Allard
__________________________________ Director April 15, 2011
David E. Allard
/s/ Robert E. Corbin
__________________________________ Controller (Principal April 15, 2011
Robert E. Corbin Financial and Accounting
Officer)
- 56 -
SPINDLETOP OIL & GAS CO. AND SUBSIDIARIES
Index to Consolidated Financial Statements and Schedules
Page
Report of Independent Registered Public Accounting Firm 58
Consolidated Balance Sheets - December 31, 2010 and 2009 59
Consolidated Statements of perations for the years
Ended December 31, 2010, 2009 and 2008 61
Consolidated Statements of Changes in Shareholders'
Equity for the years ended December 31, 2010, 2009, and 2008. 62
Consolidated Statements of Cash Flows for the years ended
December 31, 2010, 2009 and 2008 63
Notes to Consolidated Financial Statements 64
Schedules for the years ended December 31, 2010, 2009 and 2008
II - Valuation and Qualifying Accounts 86
III - Real Estate and Accumulated Depreciation 87
All other schedules have been omitted because they are not applicable, not
required, or the information has been supplied in the consolidated financial
statements or notes thereto.
- 57 -
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Shareholders of Spindletop Oil & Gas Co.
We have audited the accompanying consolidated balance sheets of Spindletop Oil
& Gas Co. (A Texas Corporation) and subsidiaries as of December 31, 2010 and
2009, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 2010. Spindletop Oil & Gas Co.'s management is responsible for
these consolidated financial statements. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. Our
audits included consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the
company's internal control over financial reporting. Accordingly, we express
no such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial
statements, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Spindletop Oil &
Gas Co. and subsidiaries as of December 31, 2010 and 2009, and the consolidated
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2010 in conformity with accounting
principles generally accepted in the United States of America.
We were not engaged to examine management's assertion about the effectiveness
of Spindletop Oil & Gas Co.'s internal control over financial reporting as of
December 31, 2010 included in the accompanying management report on internal
control over financial reporting and, accordingly, we do not express an opinion
thereon.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedules listed in the
index of the consolidated financial statements are presented for purposes of
complying with the Securities and Exchange Commission's rules and are not part
of the basic consolidated financial statements. These schedules have been
subjected to the auditing procedures applied in the audits of the basic
consolidated financial statements and, in our opinion, fairly state, in all
material respects, the financial data required to be set forth therein in
relation to the basic consolidated financial statements taken as a whole.
/s/ Farmer, Fuqua and Huff, P.C.
Plano, Texas
April 15, 2011
SPINDLETOP OIL & GAS CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 31
--------------------------
2010 2009
----------- -----------
ASSETS
Current Assets
Cash and cash equivalents $ 6,244,000 $ 9,153,000
Accounts receivable, trade 1,088,000 873,000
Income tax receivable 446,000 582,000
Other short-term investments 400,000 -
----------- -----------
Total current assets 8,178,000 10,608,000
----------- -----------
Property and Equipment, at cost
Oil and gas properties (full cost method) 17,884,000 15,080,000
Rental equipment 399,000 399,000
Gas gathering systems 145,000 145,000
Other property and equipment 245,000 187,000
----------- -----------
18,673,000 15,811,000
Accumulated depreciation and amortization (8,844,000) (7,904,000)
----------- -----------
Total property and equipment, net 9,829,000 7,907,000
----------- -----------
Real Estate Property, at cost
Land 688,000 688,000
Commercial office building 1,580,000 1,580,000
Accumulated depreciation (501,000) (400,000)
----------- -----------
Total real estate property, net 1,767,000 1,868,000
----------- -----------
Other assets
Other long-term investments 1,000,000 -
Other Assets 3,000 3,000
----------- -----------
Total other assets 1,003,000 3,000
----------- -----------
Total Assets $20,777,000 $20,386,000
=========== ===========
The accompanying notes are an integral part of these statements.
- 59 -
SPINDLETOP OIL & GAS CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - (Continued)
As of December 31
--------------------------
2010 2009
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Notes payable, current portion $ 120,000 $ 120,000
Accounts payable and accrued liabilities 2,276,000 2,995,000
Tax savings benefit payable 97,000 97,000
----------- -----------
Total current liabilities 2,493,000 3,212,000
----------- -----------
Non-current Liabilities
Notes payable, long-term portion 840,000 960,000
Asset Retirement Obligation 854,000 762,000
----------- -----------
Total non-current liabilities 1,694,000 1,722,000
----------- -----------
Deferred income tax payable 3,009,000 2,341,000
----------- -----------
Total liabilities 7,196,000 7,275,000
----------- -----------
Shareholders' Equity
Common stock, $.01 par value; 100,000,000
Shares authorized; 7,677,471 shares
issued and 7,640,803 shares outstanding
at December 31, 2010; 7,677,471 shares
issued and 7,630,803 shares outstanding at
December 31, 2009. 77,000 77,000
Additional paid-in capital 919,000 901,000
Treasury Stock at cost (18,000) (23,000)
Retained earnings 12,603,000 12,156,000
----------- -----------
Total shareholders' equity 13,581,000 13,111,000
----------- -----------
Total Liabilities and Shareholders' Equity $20,777,000 $20,386,000
=========== ===========
The accompanying notes are an integral part of these statements.
- 60 -
SPINDLETOP OIL & GAS CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31,
-----------------------------------
2010 2009 2008
----------- ----------- -----------
Revenues
Oil and gas revenue $ 6,302,000 $ 5,067,000 $12,690,000
Revenue from lease operations 319,000 317,000 269,000
Gas gathering, compression and
Equipment rental 179,000 192,000 179,000
Real estate rental income 448,000 503,000 509,000
Interest income 158,000 208,000 285,000
Other 250,000 626,000 132,000
----------- ----------- -----------
Total revenue 7,656,000 6,913,000 14,064,000
----------- ----------- -----------
Expenses
Lease operations 1,901,000 1,640,000 2,552,000
Production taxes, gathering & marketing 712,000 807,000 969,000
Pipeline and rental operations 33,000 34,000 40,000
Real estate operations 246,000 249,000 320,000
Depreciation and amortization 1,042,000 997,000 1,215,000
Accretion of asset retirement obligation 48,000 86,000 38,000
General and administrative 3,467,000 3,332,000 3,198,000
Interest expense 84,000 71,000 112,000
----------- ----------- -----------
Total expenses 7,533,000 7,216,000 8,444,000
----------- ----------- -----------
Income (loss) before income tax 123,000 (303,000) 5,620,000
----------- ----------- -----------
Current tax provision (benefit) (97,000) (226,000) 1,497,000
Deferred tax provision (benefit) (227,000) (116,000) 602,000
----------- ----------- -----------
(324,000) (342,000) 2,099,000
----------- ----------- -----------
Net income $ 447,000 $ 39,000 $ 3,521,000
=========== =========== ===========
Earnings per share of common stock
Basic & Diluted $ 0.06 $ 0.01 $ 0.46
=========== =========== ===========
Weighted Average Shares Outstanding
Basic and Diluted 7,631,652 7,618,940 7,610,803
=========== =========== ===========
The accompanying notes are an integral part of these statements.
- 61 -
SPINDLETOP OIL & GAS CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2010, 2009 and 2008
Additional Treasury
Common Stock Paid-In Stock Retained
Shares Amount Capital Shares Amount Earnings
--------- -------- ---------- -------- -------- -----------
Balance at
December 31, 2007 7,677,471 $ 77,000 $ 874,000 66,668 $(32,000)$ 8,596,000
Net Income - - - - - 3,521,000
--------- -------- ---------- -------- -------- -----------
Balance at
December 31, 2008 7,677,471 $ 77,000 $ 874,000 66,668 $(32,000)$12,117,000
Issuance of 10,000
shares of Common Stock
out of Treasury Stock
as part of an employee
compensation package - - 15,000 (10,000) 5,000 -
Issuance of 10,000
shares of Common Stock
out of Treasury Stock
as part of an employee
compensation package - - 12,000 (10,000) 4,000 -
Net income - - - - - 39,000
--------- -------- ---------- -------- -------- -----------
Balance at
December 31, 2009 7,677,471 $ 77,000 $ 901,000 46,668 $(23,000)$12,156,000
Issuance of 10,000
shares of Common Stock
out of Treasury Stock
as part of an employee
compensation package - - 18,000 (10,000) 5,000 -
Net Income - - - - - 447,000
--------- -------- ---------- -------- -------- -----------
Balance at
December 31, 2010 7,677,471 $ 77,000 $ 919,000 36,668 $(18,000)$12,603,000
========= ======== ========== ======== ======== ===========
The accompanying notes are an integral part of these statements.
- 62 -
SPINDLETOP OIL & GAS CO AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
-----------------------------------
2010 2009 2008
----------- ----------- -----------
Cash Flows from Operating Activities
Net income $ 447,000 $ 39,000 $ 3,521,000
Reconciliation of net income
to net cash provided by
Operating Activities
Depreciation and amortization 1,042,000 997,000 1,215,000
Accretion of asset retirement
Obligation 48,000 86,000 38,000
Loss on disposal of assets - - 8,000
Non-cash employee compensation 23,000 36,000 -
Changes in accounts receivable (215,000) 637,000 (97,000)
Changes in income tax receivable - (582,000) -
Changes in accounts payable (719,000) (794,000) 1,517,000
Changes in current taxes payable 136,000 (44,000) 35,000
Changes in deferred taxes payable 668,000 (116,000) 602,000
Changes in other short-term investments (400,000) - -
Changes in other long-term investments (1,000,000) - -
Changes in other assets - - (2,000)
----------- ----------- -----------
Net cash provided by operating
activities 30,000 259,000 6,837,000
----------- ----------- -----------
Cash flows from Investing Activities
Capitalized acquisition, exploration
and development costs (2,760,000) (1,437,000) (2,527,000)
Purchase of property and equipment (59,000) (17,000) (8,000)
Capitalized tenant improvements - - (39,000)
----------- ----------- -----------
Net cash used for investing activities
activities (2,819,000) (1,454,000) (2,574,000)
----------- ----------- -----------
Cash Flows from Financing Activities
Repayment of note payable to a bank (120,000) (120,000) (120,000)
----------- ----------- -----------
Net cash used for financing
activities (120,000) (120,000) (120,000)
----------- ----------- -----------
Increase (decrease)in cash (2,909,000) (1,315,000) 4,143,000
Cash at beginning of period 9,153,000 10,468,000 6,325,000
----------- ----------- -----------
Cash at end of period $ 6,244,000 $ 9,153,000 $10,468,000
=========== =========== ===========
The accompanying notes are an integral part of these statements.
- 63 -
SPINDLETOP OIL & GAS CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND ORGANIZATION
Merger and Basis of Presentation
On July 13, 1990, Prairie States Energy Co., a Texas corporation, (the Company)
merged with Spindletop Oil & Gas Co., a Utah corporation (the Acquired
Company). The name of Prairie States Energy Co. was changed to Spindletop Oil
& Gas Co., a Texas corporation at the time of the merger.
Certain balances for 2008 have been reclassified to conform to the 2010 and
2009 presentations.
Organization and Nature of Operations
The Company was organized as a Texas corporation in September 1985, in
connection with the Plan of Reorganization ("the Plan"), effective September 9,
1985, of Prairie States Exploration, Inc., ("Exploration"), a Colorado
corporation, which had previously filed for Chapter 11 bankruptcy. In
connection with the Plan, Exploration was merged into the Company, with the
Company being the surviving corporation. After giving effect to a stock split,
up to a total of 166,667 of the Company's common shares may be issued to
Exploration's former shareholders. As of December 31, 2010, 122,436 shares
have been issued to former shareholders in connection with the Plan.
Spindletop Oil & Gas Co. is engaged in the exploration, development and
production of oil and natural gas; and through one of its subsidiaries, the
gathering and marketing of natural gas.
The Company owns land along with a commercial office building which contains
approximately 46,286 of rentable square feet, of which the Company occupies
approximately 10,317 rentable square feet as its corporate office headquarters.
The Company leases the remaining space in the building to non-related third
party commercial tenants at prevailing market rates.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in the
preparation of the accompanying financial statements follows:
FASB Accounting Standards Codification
The Company presents its financial statements in accordance with generally
accepted accounting principles in the United States ("GAAP"). In June, 2009,
the Financial Accounting Standards Board ("FASB") completed its accounting
guidance codification project. The FASB Accounting Standards Codification
("ASC") became effective for the Company's financial statements issued
subsequent to June 30, 2009 and is the single source of authoritative
- 64 -
accounting principles recognized by the FASB to be applied to nongovernmental
entities in the preparation of financial statements in conformity with GAAP.
As of the effective date, the Company will no longer refer to the authoritative
guidance dictating its accounting methodologies under the previous accounting
standards hierarchy. Instead, the Company will refer to the ASC as the sole
source of authoritative literature.
Consolidation
-------------
The consolidated financial statements include the accounts of Spindletop Oil &
Gas Co. and its wholly owned subsidiaries, Prairie Pipeline Co. and Spindletop
Drilling Company. All significant inter-company transactions and accounts have
been eliminated.
Cash and Cash Equivalents
-------------------------
The Company considers all highly liquid instruments with a maturity of three
months or less to be cash equivalents.
Other Investments
-----------------
Other short-term and long-term investments consist of certificates of deposit
with maturities of more than three months. Carrying amounts approximate fair
value.
Allowance for Doubtful Accounts
-------------------------------
The Company provides an allowance for doubtful accounts equal to the estimated
uncollectible portion of accounts receivable. This estimate is based on
historical collection experience and a review of the current status of accounts
receivable.
Oil and Gas Properties
----------------------
The Company follows the full cost method of accounting for its oil and gas
properties. Accordingly, all costs associated with acquisition, exploration
and development of oil and gas reserves are capitalized and accounted for in
cost centers, on a country-by-country basis. For each cost center, capitalized
costs, less accumulated amortization and related deferred income taxes, shall
not exceed an amount (the cost center ceiling) equal to the sum of:
a) The present value of estimated future net revenues computed by applying
current prices of oil and gas reserves (with consideration of price
changes only to the extent provided by contractual arrangements) to
estimated future production of proved oil and gas reserves as of the
date of the latest balance sheet presented, less estimated future
expenditures (based on current costs) to be incurred in developing and
- 65 -
producing the proved reserves computed using a discount factor of ten
percent and assuming continuation of existing economic conditions; plus
b) The cost of properties not being amortized; plus
c) The lower of cost or estimated fair market value of unproven properties
included in the costs being amortized; less
d) Income tax effects related to differences between the book and tax basis
of the properties.
If unamortized costs capitalized within a cost center, less related deferred
income taxes, exceed the cost center ceiling (as defined), the excess is
charged to expense and separately disclosed during the period in which the
excess occurs. Amounts required to be written off will not be reinstated for
any subsequent increase in the cost center ceiling. Accordingly, no impairment
of oil and gas properties charge was recorded for 2010 or 2009.
Depreciation and amortization for each cost center are computed on a composite
unit-of-production method, based on estimated proven reserves attributable to
the respective cost center. All costs associated with oil and gas properties
are currently included in the base for computation and amortization. Such
costs include all acquisition, exploration, development costs and estimated
future expenditures for proved undeveloped properties as well as estimated
dismantlement and abandonment costs as calculated under the asset retirement
obligation category, net of salvage value. All of the Company's oil and gas
properties are located within the continental United States.
Gains and losses on sales of oil and gas properties are treated as adjustments
of capitalized costs. Gains or losses on sales of property and equipment, other
than oil and gas properties, are recognized as part of operations.
Expenditures for renewals and improvements are capitalized, while expenditures
for maintenance and repairs are charged to operations as incurred.
Property and Equipment
----------------------
The Company, as operator, leases equipment to owners of oil and gas wells, on a
month-to-month basis.
The Company, as operator, transports gas through its gas gathering systems, in
exchange for a fee.
Depreciation is provided in amounts sufficient to relate the cost of
depreciable assets to operations over their estimated service lives (5 to 10
years for rental equipment and gas gathering systems, 4 to 5 years for other
property and equipment). The straight-line method of depreciation is used for
financial reporting purposes, while accelerated methods are used for tax
purposes.
Real Estate Property
--------------------
The Company owns land along with a two-story commercial office building which
is situated thereon. The Company occupies a portion of the building as its
- 66 -
primary corporate headquarters, and leases the remaining space in the building
to non-related third party commercial tenants at prevailing market rates. The
Company depreciates the commercial office using the straight-line method of
depreciation for financial statement and income tax purposes.
Investments in Real Estate
--------------------------
All investments in real estate holdings are stated at cost or adjusted carrying
value. ASC Topic 360, "Accounting for the Impairment or Disposal of Long-Lived
Assets", requires that a property be considered impaired if the sum of the
expected future cash flows (undiscounted and without interest charges) is less
than the carrying amount of the property. If impairment exists, an impairment
loss is recognized by a charge against earnings equal to the amount by which
the carrying amount of the property exceeds fair market value less cost to sell
the property. If impairment of a property is recognized, the carrying amount
of the property is reduced by the amount of the impairment, and a new cost for
the property is established. Depreciation is provided over the properties
estimated remaining useful life. There was no charge to earnings during 2010
due to impairment of real estate holdings.
Accounting for Asset Retirement Obligations
-------------------------------------------
The Company adopted ASC Topic 410-20, "Accounting for Asset Retirement
Obligations" on December 31, 2005. The adoption of ASC Topic 410-20 resulted
in a cumulative effect adjustment to record a $239,000 increase in the carrying
value of oil and gas properties, and an asset retirement obligation liability
of the same amount. This statement requires the recording of a liability in
the period in which an asset retirement obligation ("ARO") is incurred, in an
amount equal to the discounted estimated fair value of the obligation that is
capitalized. Thereafter, each quarter, this liability is accreted up to the
final retirement cost. The determination of the ARO is based on an estimate of
the future cost to plug and abandon our oil and gas wells. The actual costs
could be higher or lower than current estimates.
The following table reflects the changes of the asset retirement obligations
during the period ending December 31;
2010 2009
------------ ------------
Carrying amount of asset retirement obligation $ 762,000 $ 667,000
Liabilities added 131,000 61,000
Liabilities divested or settled (87,000) (52,000)
Current period accretion expenses 48,000 86,000
------------ ------------
Carrying amount as of December 31, $ 854,000 $ 762,000
============ ============
- 67 -
Revenue Recognition
-------------------
The Company follows the "sales" (takes or cash) method of accounting for oil
and gas revenues. Under this method, the Company recognizes revenues on oil
and gas production as it is taken and delivered to the purchasers. The volumes
sold may be more or less than the volumes the Company is entitled to take based
on our ownership in the property. These differences result in a condition
known as a production imbalance. Our crude oil and natural gas imbalances are
insignificant.
Income Taxes
------------
In June, 2006, an interpretation of ASC Topic 740-10, "Accounting for
Uncertainty in Income Taxes" was issued. The interpretation creates a single
model to address accounting for uncertainty in tax positions. Specifically, the
pronouncement prescribes a recognition threshold and a measurement attribute
for the financial statement recognition and measurement of a tax position taken
or expected to be taken in a tax return. The interpretation also provides
guidance on de-recognition, classification, interest and penalties, accounting
in interim periods, disclosure and transition of certain tax positions.
The Company adopted the provisions of the interpretation of ASC Topic 740-10
effective January 1, 2007. The adoption of this accounting principle did not
have an effect on the Company's consolidated financial statements at, and for
the three years ended December 31, 2010.
The Company accounts for income taxes pursuant to ASC Topic 740-10 "Accounting
for Income Taxes" , which requires the recognition of deferred tax liabilities
and assets for the expected future tax consequences of events that have been
recognized in the Company's financial statements or tax returns. Under this
method, deferred tax liabilities and assets are determined based on the
difference between the financial statement carrying amounts and tax bases of
assets and liabilities, using enacted tax rates in effect in the years in which
the differences are expected to reverse. The temporary differences primarily
relate to depreciation, depletion and intangible drilling costs.
Use of Estimates
----------------
The preparation of financial statements in conformity with U. S. Generally
Accepted Accounting Principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
- 68 -
Share-Based Payments
--------------------
Effective January 1, 2006, the Company adopted ASC Topic 718-10, "Share-Based
Payment". ASC Topic 718-10 requires compensation costs related to share-based
payments to be recognized in the income statement over the requisite service
period. The amount of the compensation cost is to be measured based on the
grant-date fair value of the instrument issued. ASC Topic 718-10 is effective
for awards granted or modified after the date of adoption and for awards
granted prior to that date that have not vested. ASC Topic 718-10 does not
materially change the Company's existing accounting practices or the amount of
share-based compensation recognized in earnings.
Recently issued accounting pronouncements
-------------------------------------------
FASB Accounting Standards Update ("ASU") 2010-03 was issued in January 2010,
and aligns the current oil and natural gas reserve estimation and disclosure
requirements of ASC Topic 932 with those in the SEC Final Rule Modernization of
Oil and Gas Reporting issued December 31, 2008. Specifically, ASU No. 2010-03
introduces additional terms and re-defines others, (2) expands the definition
of the term oil and gas producing activities, (3) requires a reporting entity
to take into account its equity method investments in determining whether it
engages in significant oil and gas producing activities, (4) requires that an
un-weighted average of prices for the previous 12 months to be used to
determine whether proved reserves are economically producible, and (5) requires
separate disclosure of information about reserve quantities and financial
statement amounts for geographic areas representing 15% or more of proved
reserves. ASU 2010-03 is effective for entities with annual reporting periods
ending on or after December 31, 2009. The Company adopted both the FASB and
SEC rules as of December 31, 2009. The adoption did not have a material impact
on the consolidated financial statements.
In August 2009, the Financial Accounting Standards Board ("FASB") issued ASU
No. 2009-05, Fair Value Measurement and Disclosures: Measuring Liabilities at
Fair Value. ASU 2009-05 provides clarification on measuring liabilities at fair
value when a quoted price in an active market available. The Company adopted
ASU No. 2009-05 (ASC Topic 820-10). The adoption of this statement did not have
an impact on the consolidated financial statements.
The Company adopted FSP SFAS 107-1 and APB 28-1 (incorporated in ASC Topic
825), "Interim Disclosures about Fair Value of Financial Instruments". The
statement increases the frequency of fair value disclosures to a quarterly
nstead of annual basis. The guidance relates to fair value disclosures for any
financial instruments that are not currently reflected on the balance sheet at
fair value. The adoption of this statement did not have a material impact on
the consolidated financial statements.
The Company adopted FSP SFAS 157-4 (incorporated in ASC Topic 820),
"Determining Fair Value When the Volume and Level of Activity for the Asset and
Liability Have Significantly Decreased and Identifying Transactions That Are
Not Orderly". ASC 820 provides guidelines for a broad interpretation of when to
- 69 -
apply market-based fair value measures. The statement reaffirms management's
need to use judgment to determine when a market that was once active has become
inactive and in determining fair values in markets that are no longer active.
The Company adopted ASC Topic 815, "Disclosure about Derivative Instruments and
Hedging Activities" on January 1, 2009. ASC Topic 815 amends and expands the
disclosure requirements for derivatives and hedging activities with the intent
to provide users of financial statements with an enhanced understanding. The
adoption of this statement did not have an impact on the consolidated financial
statements.
The Company adopted ASC Topic 805, "Business Combinations" on January 1, 2009.
The revision broadens the definition of a business combination to include
transactions or other events in which control of one or more business is
obtained. Further, this statement establishes principles and requirements for
how an acquirer recognizes assets acquired, liabilities assumed and any non-
ontrolling interests acquired. The adoption of this statement did not have an
impact on the consolidated financial statements.
In January 2010, FASB issued ASU No. 2010-06, Fair Value Measurements and
Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements.
ASU 2010-06 requires reporting entities to provide information about movements
of assets among Levels 1 and 2 of the three-tier fair value hierarchy
established by ASC Topic 820. The guidance is effective for any fiscal year
that begins after December 15, 2010 and should be used for quarterly and annual
filings. The Company adopted the provisions of ASU 2010-06 on January 1, 2010
and this standard did not impact the Company's consolidated financial
statements.
Subsequent Events
-----------------
The Company has evaluated subsequent events through the issuance date of April
15, 2011.
3. ACCOUNTS RECEIVABLE
December 31,
----------------------------
2010 2009
------------ ------------
Trade $ 127,000 $ 95,000
Accrued receivable 976,000 792,000
------------ ------------
1,103,000 887,000
Less: Allowance for losses (15,000) (14,000)
------------ ------------
$ 1,088,000 $ 873,000
============ ============
Accrued receivables are receivables from purchasers of oil and gas. These
revenues are booked from check stub detail after receipt of the check for sales
of oil and gas products. These payments are for sales of oil and gas produced
------------------------------------ 70 -
in the reporting period, but for which payment has not yet been received until
after the closing date of the reporting period. Therefore these sales are
accrued as receivables as of the balance sheet date. Revenues for oil and gas
production that has been sold but for which payment has not yet been received
is accrued in the period sold.
4. ACCOUNTS PAYABLE
December 31,
----------------------------
2010 2009
------------ ------------
Trade payables $ 505,000 $ 1,736,000
Production proceeds payable 1,535,000 976,000
Prepaid drilling costs 236,000 283,000
----------- ------------
$ 2,276,000 $ 2,995,000
=========== ============
5. NOTES PAYABLE
December 31,
----------------------------
2010 2009
------------ ------------
Note payable to a bank with monthly principal
payments of $10,000 plus accrued interest at a
variable annual interest rate based upon an
index which is the Treasury securities rate for
a term of seven years, plus 2.20%. The interest
rate is subject to change on the first day of
each seven year anniversary after the date of
the note based on the Index then in effect.
As of the date of the Loan, the annual interest
rate was 6.11%. The note is collateralized by
land and a commercial office building, plus a
guarantee by certain related parties.
The note matures in November, 2018. $ 960,000 $ 1,080,000
Less current maturities 120,000 120,000
------------ ------------
Total notes payable, long-term portion $ 840,000 $ 960,000
============ ============
Estimated annual maturities for long-term debt are as follows:
2011 120,000
2012 120,000
2013 120,000
2014 120,000
2015 120,000
thereafter 360,000
-----------
$ 960,000
===========
- 71 -
6. RELATED PARTY TRANSACTIONS
From 1999 through September 30, 2008, Giant Energy Corp. ("Giant") charged the
Company a fee pursuant to a management services agreement. Giant is wholly
owned by Chris Mazzini, President of the Company. General and administrative
expense for the year ending December 31, 2008 was $180,000 related to this
agreement. Effective October 1, 2008, this agreement was terminated.
On October 1, 2008, Giant entered into an Administrative Services Agreement
with the Company whereby Giant agreed to pay the Company $250 per month for the
Company providing administrative services to Giant.
The Company also entered into a management services agreement with M-R Oilfield
Services, LP ("MRO") whereby MRO makes monthly payments in the amount of $1,000
per month to the Company in exchange for the Company providing administrative
services to MRO. On October 1, 2008, the Company entered into a similar
agreement with Giant NRG, LP ("NRG") a limited partnership with Chris Mazzini
and Michelle Mazzini as limited partners. Under this agreement NRG pays a
monthly fee of $2,500 to the Company in exchange for the Company providing
certain administrative services to NRG. The Company has entered into a similar
arrangement with Peveler Pipeline, LP ("Peveler"), whereby Peveler pays the
Company a monthly charge of $250 in exchange for the Company providing
administrative services to Peveler. Chris and Michelle Mazzini are the owners
of Peveler Pipeline, LP, a limited partnership which owns a pipeline gathering
system servicing wells owned by Giant, another related entity, described
elsewhere in this report. The Company entered into a similar agreement with
M-R Ventures, LLC ("MRV") a limited liability company that operates some wells
in Michigan, and that is owned by Chris and Michelle Mazzini. Pursuant to this
agreement, MRV will pay the Company a monthly fee in the amount of $500 for
certain administrative services that the Company provides to MRV.
The long-term debt, which is secured by the commercial office building, is also
guaranteed individually by Chris G. Mazzini and Michelle H. Mazzini, related
parties.
The Company and Giant entered into a joint Barnett Shale horizontal drilling
and development program dated August 22, 2006, and later amended on October 20,
2006 (the "Agreement") with an unrelated third party company. Effective
September 19, 2008, the unrelated third party terminated the Agreement in
accordance with provisions contained in the Agreement, and subsequent
amendments.
7. COMMON STOCK
Effective January 1, 2006, the Company adopted ASC Topic 718-10, "Share-Based
Payment". ASC Topic 718-10 requires compensation costs related to share-based
payments to be recognized in the income statement over the requisite service
period. The amount of the compensation cost is to be measured based on the
grant-date fair value of the instrument issued. ASC Topic 718-10 is effective
for awards granted or modified after the date of adoption and for awards
granted prior to that date that have not vested. ASC Topic 718-10 does not
- 72 -
materially change the Company's existing accounting practices or the amount of
share-based compensation recognized in earnings.
Effective April 9, 2009, the Company issued 10,000 shares of restricted common
stock to a key employee pursuant to an employment package. The shares were
valued at $2.00 per share, the believed market value for free trading shares at
the time of issue. The amount was expensed as general and administrative
expense. The shares of common stock were issued out of Treasury Stock and
reduced the amount of the Company's common stock held in Treasury from 66,668
to 56,668 shares.
Effective December 16, 2009, the Company issued 10,000 shares of restricted
common stock to a key employee pursuant to an employment package. The shares
were valued at $1.65 per share, the believed market value for free trading
shares at the time of issue. The amount was expensed as general and
administrative expense. The shares of common stock were issued out of Treasury
Stock and reduced the amount of the Company's common stock held in Treasury
from 56,668 to 46,668 shares.
Effective December 1, 2010, the Company issued 10,000 shares of restricted
common stock to a key employee pursuant to an employment package. The shares
were valued at $2.25 per share, the believed market value for free trading
shares at the time of issue. The amount was expensed as general and
administrative expense. The shares of common stock were issued out of Treasury
Stock and reduced the amount of the Company's common stock held in Treasury
from 46,668 to 36,668 shares.
8. INCOME TAXES
The Company accounts for income taxes pursuant to ASC Topic 740-10, "Accounting
for Income Taxes". ASC Topic 740-10 utilizes the liability method of
computing deferred income taxes.
In connection with the Plan discussed in Note 1, the Company agreed to pay, in
cash, to Exploration's unsecured creditors, as defined, one-half of the future
reductions of Federal income taxes which were directly related to any allowed
carryovers of Exploration's net operating losses and investment tax credits.
Such payments are to be made on a pro-rata basis. Amounts incurred under this
agreement, which are considered contingent consideration, totaled $ -0-, $ -0-,
and $ -0- in 2010, 2009 and 2008, respectively. As of December 31, 2010 the
Company has not received a ruling from the Internal Revenue Service concerning
the net operating loss and investment credit carryovers. Until the tax savings
which result from the utilization of these carry-forwards is assured, the
Company will not pay to Exploration's unsecured creditors any of the tax
savings benefit. As of December 31, 2010, the Company owes $97,000 to
Exploration's unsecured creditors.
In calculating tax savings benefits described above, consideration was given to
the alternative minimum tax, where applicable, and the tax effects of temporary
differences, as shown below:
- 73 -
Income tax differed from the amounts computed by applying an effective United
States federal income tax rate of 34% to pretax income in 2010, 2009 and 2008
as a result of the following:
2010 2009 2008
----------- ---------- ----------
Computed expected tax expense (benefit)$ 42,000 $ (104,000) $1,910,000
Miscellaneous timing differences
related to book and tax depletion
differences and the expensing of
intangible drilling costs (139,000) (122,000) (576,000)
----------- ---------- ----------
Expected Federal
income tax expense(benefit) $ (97,000) $ (226,000) $1,334,000
=========== ========== ==========
Income tax expense (benefit) for the years ended December 31, 2010, 2009 and
2008 consisted of the following:
2010 2009 2008
----------- ---------- ----------
Federal income taxes (benefit) $ (97,000) $ (226,000) $1,334,000
State income taxes - - 163,000
----------- ---------- ----------
Current income tax provision (benefit)$ (97,000) $ (226,000 $1,497,000
=========== ========== ==========
Deferred income taxes reflect the effects of temporary differences between the
tax bases of assets and liabilities and the reported amounts of those assets
and liabilities for financial reporting purposes. Deferred income taxes also
reflect the value of net operating losses, investment tax credits and an
offsetting valuation allowance. The Company's total deferred tax assets and
corresponding valuation allowance at December 31, 2010 and 2009 consisted of
the following:
December 31,
----------------------------
2010 2009
------------ ------------
Deferred tax assets
Depreciation, depletion and amortization 320,000 422,000
Other, net 16,000 9,000
------------ ------------
Total 336,000 431,000
Deferred tax liabilities
Expired leasehold (231,000) (54,000)
Intangible drilling costs (3,114,000) (2,718,000)
------------ ------------
Net deferred tax liability (3,009,000) (2,341,000)
============ ============
- 74 -
9. CASH FLOW INFORMATION
The Company does not consider any of its assets, other than cash and
certificates of deposit shown as cash on the balance sheet, to meet the
definition of a cash equivalent.
Net cash provided by operating activities includes cash payments for interest
of $84,000, $71,000, and $79,000 for the years 2010, 2009 and 2008,
respectively. Also included are cash payments for taxes of $-0-, $400,000,
and $1,300,000 in 2010, 2009 and 2008, respectively.
Excluded from the Consolidated Statements of Cash Flows were the effects of
certain non-cash investing and financing activities, as follows:
2010 2009 2008
----------- ----------- -----------
Addition (reduction) of Oil & Gas
Properties by recognition of
Asset Retirement Obligation $ 45,000 8,000 $ 65,000
----------- ----------- -----------
$ 45,000 $ 8,000 $ 65,000
=========== =========== ===========
10. EARNINGS PER SHARE
Earnings per share ("EPS") are calculated in accordance with ASC Topic 260-10,
"Earnings per Share", which was adopted in 1997 for all years presented. Basic
EPS is computed by dividing income available to common shareholders by the
weighted average number of common shares outstanding during the period. The
adoption of ASC Topic 260-10 had no effect on previously reported EPS. Diluted
EPS is computed based on the weighted number of shares outstanding, plus the
additional common shares that would have been issued had the options
outstanding been exercised.
11. CONCENTRATIONS OF CREDIT RISK
As of December 31, 2010 the Company had approximately $2,192,000 in checking
and money market accounts at one bank, and approximately $2,863,000 in a second
bank. The Company also had approximately $2,900,000, including $400,000 of
short-term certificates of deposit and $1,000,000 of long-term certificates of
deposit invested at eight other banking institutions. Cash amounts on deposit
at these institutions exceed current per account FDIC protection limits by
approximately $2,623,000.
Most of the Company's business activity is located in Texas. Accounts
receivable as of December 31, 2010 and 2009 are due from both individual and
institutional owners of joint interests in oil and gas wells as well as
purchasers of oil and gas. A portion of the Company's ability to collect these
receivables is dependent upon revenues generated from sales of oil and gas
produced by the related wells.
- 75 -
12. FINANCIAL INSTRUMENTS
The estimated fair value of the Company's financial instruments at December 31,
2010 and 2009 follows:
-------- 2010 ------ -------- 2009 -------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------- ----------- ----------- -----------
Cash $ 6,244,000 $ 6,244,000 $ 9,153,000 $ 9,153,000
Short-term certificates 400,000 400,000 - -
Accounts receivable 1,088,000 1,088,000 873,000 873,000
The fair value amounts for each of the financial instruments listed above
approximate carrying amounts due to the short maturities of these instruments.
13. COMMITMENTS AND CONTINGENCIES
In connection with the Plan of Reorganization discussed in Note 1, the Company
agreed to pay, in cash, to Exploration's unsecured creditors, as defined, one-
half of the future reduction of Federal income taxes which were directly
related to any allowed carryovers of Exploration's net operating losses and
investment tax credits existing at the time of the reorganization.
The Company's oil and gas exploration and production activities are subject to
Federal, State and environmental quality and pollution control laws and
regulations. Such regulations restrict emission and discharge of wastes from
wells, may require permits for the drilling of wells, prescribe the spacing of
wells and rate of production, and require prevention and clean-up pollution.
Although the Company has not in the past incurred substantial costs in
complying with such laws and regulations, future environmental restrictions or
requirements may materially increase the Company's capital expenditures, reduce
earnings, and delay or prohibit certain activities.
At December 31, 2010 the Company has acquired bonds and letters of credit
issued in favor of various state regulatory agencies as mandated by state law
in order to comply with financial assurance regulations required to perform oil
and gas operations within the various state jurisdictions.
The Company has seven, $5,000 single-well bonds totaling $35,000 and three
$10,000 single well bonds with an insurance company, for wells the Company
operates in Alabama. The $5,000 bonds are written for a three year period and
the $10,000 bonds are written for a one year period.
The Company has 11 letters of credit from a bank issued for the benefit of
various state regulatory agencies in Texas, Oklahoma, and Louisiana, ranging in
amounts from $15,000 to $50,000 and totaling $413,000. These letters of credit
have expiration dates that range from January 1, 2011 through March 31, 2014
and are fully secured by funds on deposit with the bank in business money
market accounts.
- 76 -
14. ADDITIONAL OPERATIONS AND BALANCE SHEET INFORMATION
Certain information about the Company's operations for the years ended
December 31, 2010, 2009 and 2008 follows.
Sale of Oil & Gas Properties
In March, 2010, the Company sold its working interest and operations in the
Robertson 20-12 well located in Lamar County, Alabama to an unrelated party
for $5,000 in cash.
Dependence on Customers
The following is a summary of significant purchasers from oil and natural gas
produced by the Company for the three-year period ended December 31, 2010:
Year Ended December 31, (1)
--------------------------------
Purchaser 2010 2009 2008
----------------------------------------- -------- -------- --------
Enbridge Energy Partners
(formerly Enbridge North Texas) 26% 36% 26%
Crosstex Gulf Coast Mktg 16% 23% 42%
Eastex Crude Company 7% 7% 3%
Shell Trading (US) Company 7% 6% 5%
Kinder Morgan 5% -% -%
Enterprise Crude Oil LLC(Teppco Crude Oil, LP) 5% 4% 2%
Conoco Phillips Company 4% 1% -%
Targa Midstream Service, LIM 3% 3% 6%
Navajo Refining Co. 3% 3% 1%
Genesis 2% 2% 1%
DCP Midstream, LP 2% -% -%
ETC Texas Pipeline 2% 1% 1%
Sunoco Partners Marketing 2% -% -%
Devon Gas Services, LP -% 1% 2%
Gateway Gathering & Marketing -% -% 1%
(1) Percent of Total Oil & Gas Sales
Oil and gas is sold to approximately 102 different purchasers under market
sensitive, short-term contracts computed on a month to month basis.
Except as set forth above, there are no other customers of the Company that
individually accounted for more than two percent of the Company's oil and gas
revenues during the three years ended December 31, 2010.
The Company currently has no hedged contracts.
- 77 -
Certain revenues, costs and expenses related to the Company's oil and gas
operations are as follows:
Year Ended December 31,
-----------------------------------
2010 2009 2008
----------- ----------- -----------
Capitalized costs relating to oil
and gas producing activities:
Unproved properties $ 2,064,000 $ 1,874,000 $ 1,820,000
Proved properties 15,820,000 13,206,000 11,813,000
----------- ----------- -----------
Total capitalized costs 17,884,000 15,080,000 13,633,000
Accumulated amortization (8,129,000) (7,212,000) (6,340,000)
----------- ----------- -----------
Total capitalized costs, net $ 9,755,000 $ 7,868,000 $ 7,293,000
=========== =========== ===========
Year Ended December 31,
-----------------------------------
2010 2009 2008
----------- ----------- -----------
Costs incurred in oil and gas property
acquisition, exploration and
development:
Acquisition of properties $ 458,000 $ 121,000 $ 28,000
Development costs 2,346,000 1,327,000 2,509,000
----------- ----------- -----------
Total costs incurred $ 2,804,000 $ 1,448,000 $ 2,537,000
=========== =========== ===========
Year Ended December 31,
-----------------------------------
2010 2009 2008
----------- ----------- -----------
Results of Operations from producing
activities:
Sales of oil and gas $ 6,302,000 $ 5,067,000 $12,690,000
----------- ----------- -----------
Production costs 2,613,000 2,447,000 3,521,000
Amortization of oil and gas
Properties 916,000 871,000 1,091,000
----------- ----------- -----------
Total production costs 3,529,000 3,318,000 4,612,000
----------- ----------- -----------
Total net revenue $ 2,773,000 $ 1,749,000 $ 8,078,000
=========== =========== ===========
- 78 -
Year Ended December 31,
-----------------------------------
2010 2009 2008
----------- ----------- -----------
Sales price per equivalent Mcf $ 6.22 $ 4.96 $ 8.89
=========== =========== ===========
Production costs per equivalent Mcf $ 2.58 $ 2.40 $ 2.47
=========== =========== ===========
Amortization per equivalent Mcf $ 0.90 $ 0.85 $ .76
=========== =========== ===========
Year Ended December 31,
-----------------------------------
2010 2009 2008
----------- ----------- -----------
Results of Operations from gas
gathering and equipment rental
activities:
Revenue $ 179,000 $ 192,000 $ 179,000
----------- ----------- -----------
Operating expenses 33,000 34,000 40,000
Depreciation 1,000 7,000 8,000
----------- ----------- -----------
Total costs 34,000 41,000 48,000
----------- ----------- -----------
Total net revenue $ 145,000 $ 151,000 $ 131,000
=========== =========== ===========
15. BUSINESS SEGMENTS
The Company's three business segments are (1) oil and gas exploration,
production and operations, (2) transportation and compression of natural gas,
and (3) commercial real estate investment. Management has chosen to organize
the Company into the three segments based on the products or services provided.
The following is a summary of selected information for these segments for the
three-year period ended December 31, 2010:
Year Ended December 31,
-----------------------------------
2010 2009 2008
----------- ----------- -----------
Revenues: (3)
Oil and gas exploration, production
and operations $ 6,621,000 $ 5,384,000 $12,959,000
Gas gathering, compression and
equipment rental 179,000 192,000 179,000
Real estate rental 448,000 503,000 509,000
----------- ----------- -----------
$ 7,248,000 $ 6,079,000 $13,647,000
=========== =========== ===========
- 79 -
Depreciation, depletion and
Amortization expense:
Oil and gas exploration, production
and operations $ 940,000 $ 890,000 $ 1,110,000
Gas gathering, compression and
equipment rental 1,000 7,000 8,000
Real estate rental 101,000 100,000 97,000
----------- ----------- -----------
$ 1,042,000 $ 997,000 $ 1,215,000
=========== =========== ===========
Income from operations:
Oil and gas exploration, production
and operations $ 3,020,000 $ 1,961,000 $ 8,240,000
Gas gathering, compression and
equipment rental 145,000 151,000 131,000
Real estate rental 101,000 154,000 142,000
----------- ----------- -----------
3,266,000 2,266,000 8,513,000
Corporate and other (1) (2,819,000) (2,227,000) (4,992,000)
----------- ----------- -----------
Consolidated net income (loss) $ 447,000 $ 39,000 $ 3,521,000
=========== =========== ===========
Identifiable Assets net of DDA:
Oil and gas exploration, production
and operations $ 9,829,000 $ 7,906,000 $ 7,333,000
Gas gathering, compression and
equipment rental - 1,000 7,000
Real estate rental 1,767,000 1,868,000 1,968,000
----------- ----------- -----------
11,596,000 9,775,000 9,308,000
Corporate and other (2) 9,181,000 10,611,000 11,981,000
----------- ----------- -----------
Consolidated total assets $20,777,000 $20,386,000 $21,289,000
=========== =========== ===========
Note (1): Corporate and other includes general and administrative expenses,
other non-operating income and expense and income taxes.
Note (2): Corporate and other includes cash, accounts and notes receivable,
inventory, other property and equipment and intangible assets.
Note (3): All reported revenues are from external customers.
16. SUPPLEMENTARY INCOME STATEMENT INFORMATION
The following items were charged directly to expense:
Year Ended December 31,
-----------------------------------
2010 2009 2008
----------- ----------- -----------
Maintenance and repairs $ 15,000 $ 15,000 $ 21,000
Production taxes 256,000 233,000 337,000
Taxes, other than payroll and
income taxes 4,000 77,000 (13,000)
- 80 -
17. QUARTERLY DATA (UNAUDITED)
The table below reflects selected quarterly information for the years ended
December 31, 2010, 2009 and 2008.
Year Ended December 31, 2010
----------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
---------- ---------- ---------- ----------
Revenue $1,968,000 $1,765,000 $1,831,000 $2,092,000
Expense (1,523,000) (1,631,000) (1,810,000) (2,569,000)
---------- ---------- ---------- ----------
Operating income (loss) 445,000 134,000 21,000 (477,000)
Current tax (provision) benefit (31,000) (63,000) 244,000 (53,000)
Deferred tax (provision) benefit (59,000) 76,000 (39,000) 249,000
---------- ---------- ---------- ----------
Net income (loss) 355,000 147,000 226,000 (281,000)
========== ========== ========== ==========
Earnings (loss) per share
of common stock
Basic and diluted $0.05 $ 0.02 $0.03 ($0.04)
Year Ended December 31, 2009
----------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
---------- ---------- ---------- ----------
Revenue $1,479,000 $1,749,000 $1,390,000 $2,295,000
Expense (1,660,000) (1,750,000) (1,813,000) (1,993,000)
---------- ---------- ---------- ----------
Operating income (loss) (181,000) (1,000) (423,000) 302,000
Current tax (provision) benefit - - 14,000 212,000
Deferred tax (provision) benefit 59,000 1,000 139,000 (83,000)
---------- ---------- ---------- ----------
Net income (loss) (122,000) - (270,000) 431,000
========== ========== ========== ==========
Earnings (loss) per share
of common stock
Basic and diluted ($0.02) $ - ($0.04) $0.07
Year Ended December 31, 2008
----------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
---------- ---------- ---------- ----------
Revenue $3,410,000 $3,553,000 $4,482,000 $2,619,000
Expense (1,502,000) (2,052,000) (1,975,000) (2,915,000)
---------- ---------- ---------- ----------
Operating income 1,908,000 1,501,000 2,507,000 (296,000)
- 81 -
Current tax provision (321,000) (540,000) (859,000) 223,000
Deferred tax provision (410,000) 56,000 30,000 (278,000)
---------- ---------- ---------- ----------
Net income 1,177,000 1,017,000 1,678,000 (351,000)
========== ========== ========== ==========
Earnings per share
of common stock
Basic and diluted $0.15 $0.13 $0.22 ($0.04)
18. SUPPLEMENTAL RESERVE INFORMATION (UNAUDITED)
The Company's net proved oil and natural gas reserves as of December 31, 2010
and 2009 have been estimated by Company personnel. The Company's net proved
oil and natural gas reserves as of December 31, 2008 were estimated by
Netherland, Sewell & Associates, Inc.
All estimates are in accordance generally accepted petroleum engineering and
evaluation principles and definitions and with guidelines established by the
Securities and Exchange Commission.
Our policies and practices regarding internal control over the estimating of
reserves are structured to objectively and accurately estimate our oil and
natural gas reserve quantities and present values in compliance with the U.S.
Securities and Exchange Commission ("SEC") regulations and accounting
principles generally accepted in the United States of America. We maintain an
internal staff of petroleum engineers and geosciences professionals who work
closely with the accounting and financial departments to insure the integrity,
accuracy and timeliness of data used in the estimation process. The data used
in our reserve estimation process is based on historical results for
production, oil and natural gas prices received, lease operating expenses and
development costs incurred, ownership interest and other required data.
Historical oil and gas prices, lease operating expenses, and ownership
interests are provided by and verified by the Company's accounting department.
The Petroleum Engineer responsible for the supervision and preparation of the
Company's internally generated reserve report has a Bachelor of Science degree
in Petroleum Engineering from a major university and has experience in
preparing economic evaluations and reserve estimates. He meets the
requirements regarding qualifications, objectivity and confidentiality set
forth in the Standards Pertaining to the Engineering and Auditing of Oil and
Gas Reserves Information promulgated by the Society of Petroleum Engineers.
The Company has established a written internal control procedure to verify that
the data entered into our engineering evaluation software is complete and
correct. These internal control procedures establish the source of the data
both internally and externally, the personnel that will collect the data and
testing of the data collected to insure its accuracy. A summary of the
procedures are shown below:
Accordingly, the following reserve estimates were based on existing economic
and operating conditions. Oil and gas prices for 2010 and 2009 were calculated
- 82 -
using a 12-month average price, calculated as the unweighted arithmetic of the
first-day-of-the month price for each month of each year. Oil and gas prices
in effect at December 31, were used for 2008. Operating costs, production and
ad valorem taxes and future development costs were based on current costs with
no escalation.
There are numerous uncertainties inherent in estimating quantities of proved
reserves and in projecting the future rates of production and timing of
development expenditures. The following reserve data represents estimates only
and should not be construed as being exact. Moreover, the present values
should not be construed as the current market value of the Company's oil and
gas reserves or the costs that would be incurred to obtain equivalent reserves.
Changes in Estimated Quantities of Proved Oil and Gas Reserves (Unaudited):
Crude Oil Natural Gas
Bbls Mcf
------------ ------------
Quantities of Proved Reserves:
------------------------------
Balance December 31, 2007 345,154 14,366,765
Sales of reserves in place - -
Acquired properties - -
Extensions and discoveries 1,500 130,600
Revisions of previous estimates (52,279) 494,418
Production (32,663) (1,231,835)
------------ ------------
Balance December 31, 2008 261,712 13,759,948
Sales of reserves in place - -
Acquired properties 16,300 1,810
Extensions and discoveries 25,630 -
Revisions of previous estimates 45,113 (374,211)
Production (25,875) (866,417)
------------ ------------
Balance December 31, 2009 322,880 12,521,130
Sales of reserves in place - (62,930)
Acquired properties 59,580 290,940
Extensions and discoveries 1,570 172,880
Revisions of previous estimates 9,846 (1,475,633)
Production (31,526) (823,957)
------------ ------------
Balance December 31, 2010 362,350 10,622,430
* May be described as a divestiture, not a change in engineering.
Proved Developed Reserves:
--------------------------
Balance December 31, 2008 252,948 10,882,637
Balance December 31, 2009 296,770 10,672,610
Balance December 31, 2010 361,870 8,754,920
- 83 -
Standardized Measure of Discounted Future Net Cash Flows and Changes Therein
Relating to Proved Oil and Gas Reserves (Unaudited)
The Standardized Measure of Discounted Future Net Cash Flows and Changes
Therein Relating to Proved Oil and Gas Reserves ("Standardized Measures") does
not purport to present the fair market value of a company's oil and gas
properties. An estimate of such value should consider, among other factors,
anticipated future prices of oil and gas, the probability of recoveries in
excess of existing proved reserves, the value of probable reserves and acreage
prospects, and perhaps different discount rates. It should be noted that
estimates of reserve quantities, especially from new discoveries, are
inherently imprecise and subject to substantial revision.
Reserve estimates were prepared in accordance with standard Security and
Exchange Commission guidelines. The future net cash flow for 2010 and 2009 was
computed using a 12-month average price, calculated as the un-weighted
arithmetic average of the first-day-of-the month price for each month of the
year. The future net cash flow for 2008 was calculated using year-end prices.
Lease operating costs, compression, dehydration, transportation, ad valorem
taxes, severance taxes, and federal income taxes were deducted. Costs and
prices were held constant and were not escalated over the life of the
properties. No deduction has been made for interest, or general corporate
overhead. The annual discount of estimated future cash flows is defined, for
use herein, as future cash flows discounted at 10% per year, over the expected
period of realization.
Proved Developed Reserves were calculated based on Decline Curve Analysis on
115 operated wells and 113 non-operated wells. Materially insignificant
operated and non-operated wells were excluded from the reserve estimate.
The Company emphasizes that reserve estimates are inherently imprecise.
Accordingly, the estimates are expected to change as more current information
becomes available. It is reasonably possible that, because of changes in
market conditions or the inherent imprecision of these reserve estimates, that
the estimates of future cash inflows, future gross revenues, the amount of oil
and gas reserves, the remaining estimated lives of the oil and gas properties,
or any combination of the above may be increased or reduced in the near term.
If reduced, the carrying amount of capitalized oil and gas properties may be
reduced materially in the near term.
- 84 -
Standardized measure of discounted future net cash flows related to proved
reserves:
Year Ended December 31,
--------------------------------------
2010 2009 2008
------------ ------------ ------------
Future production revenue $ 72,465,000 $ 61,140,000 $ 83,207,000
Future development costs (2,187,000) (2,807,000) (4,476,000)
Future production costs (32,386,000) (23,501,000) (29,657,000)
------------ ------------ ------------
Future net cash flow before
Federal income tax 37,892,000 34,832,000 49,074,000
Future income taxes (10,610,000) (9,753,000) (13,741,000)
------------ ------------ ------------
Future net cash flows 27,282,000 25,079,000 35,333,000
Effect of 10% annual discounting ( 8,577,000) (8,969,000) (13,072,000)
------------ ------------ ------------
Standardized measure of
Discounted net cash flows $ 18,705,000 $ 16,110,000 $ 22,261,000
============ ============ ============
Changes in the standardized measure of discounted future net cash flows:
Amounts for 2009 and 2008 are restated from previously issued report to more
closely align with SEC reporting rules.
Year Ended December 31,
--------------------------------------
2010 2009 2008
------------ ------------ ------------
Beginning of the year $ 16,110,000 $ 22,261,000 $ 42,214,000
Sales of Oil and gas, net of
production costs (3,510,000) (2,493,000) (8,724,000)
Net changes in prices and
Production costs 3,713,000 (7,333,000) (19,493,000)
Extensions, discoveries, additions
Less related costs 377,000 256,000 305,000
Development costs incurred 1,936,000 1,263,000 2,387,000
Net changes in future
development cost (581,000) (1,494,000) (1,173,000)
Revisions of previous
quantity estimates (2,131,000) (172,000) 347,000
Net change in purchase and sales
Of minerals in place 1,318,000 168,000 -
Accretion of discount 1,611,000 2,226,000 4,221,000
Net change in income taxes 152,000 1,596,000 1,971,000
Other (290,000) (168,000) 206,000
------------ ------------ ------------
End of year $ 18,705,000 $ 16,110,000 $ 22,261,000
============ ============ ============
- 85 -
SPINDLETOP OIL & GAS CO. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2010, 2009, AND 2008
SCHEDULE II
Beginning Costs & Ending
Description Balance Expenses Deductions Balance
----------------------------- ----------- ----------- ----------- -----------
Allowance for
doubtful Accounts
December 31, 2008 $ 14,000 $ - $ - $ 14,000
========== ========== ========== ==========
December 31, 2009 $ 14,000 $ - $ - $ 14,000
========== ========== ========== ==========
December 31, 2010 $ 14,000 $ 24,000 $ 23,000 $ 15,000
========== ========== ========== ==========
- 86 -
SCHEDULE III
SPINDLETOP OIL & GAS CO. AND SUBSIDIARIES
REAL ESTATE AND ACCUMULATED DEPRECIATION
Initial Cost to Corporation Total Cost
----------------------------------------------------------------- Subsequent
Description Encumbrances Land Buildings To Acquist'n
------------------------- ------------- ----------- ----------- -----------
Two story multi-tenant
garden office building with
sub-grade parking garage
located in Dallas, Texas (b) $ 688,000 $1,298,000 $282,000
Gross Amounts at Which Carried at Close of Year
Life on which
Accumulated Depreciation Date
Land Buildings Total Depreciation Calculated Acquired
---------- ------------ ----------- ------------- ------------ -----------
$ 688,000 $ 1,580,000 $ 2,268,000 $ 501,000 (a) 12/27/2004
Notes to Schedule III
(a) See Footnote 2 to the Financial Statements outlining depreciation methods
and lives.
(b) See description of notes payable in Footnote 5 to the Financial Statements
outlining the terms and provisions of the acquisition loan for the building.
(c) The reconciliation for investments in real estate and accumulated
depreciation for the years ended December 31, 2010 is as follows:
Investments in Accumulated
Real Estate Depreciation
------------ ------------
Balance, December 31, 2005 $ 1,986,000 $ 49,000
Acquisitions 210,000
Depreciation expense 71,000
------------ ------------
Balance, December 31, 2006 $ 2,196,000 $ 120,000
Acquisitions 34,000
Depreciation expense 84,000
------------ ------------
Balance, December 31, 2007 $ 2,230,000 $ 204,000
Acquisitions 38,000
Depreciation expense 96,000
------------ ------------
Balance, December 31, 2008 $ 2,268,000 $ 300,000
Depreciation expense 100,000
------------ ------------
Balance, December 31, 2009 $ 2,268,000 $ 400,000
- 87 -
Depreciation expense 101,000
------------ ------------
Balance, December 31, 2010 $ 2,268,000 $ 501,000
============ ============
- 88 -
SPINDLETOP OIL & GAS CO. AND SUBSIDIARIES
Index to Exhibits
The following documents are filed as exhibits (or are incorporated by reference
as indicated) into this Report:
Exhibit
Designation Description
3.1 Articles of Incorporation of Spindletop Oil & Gas Co. (previously
filed with our General Form for Registration of Securities on
Form 10, filed with the Commission on August 14, 1990)
3.2 Bylaws of Spindletop Oil & Gas Co. (previously filed with our
General Form for Registration of Securities on Form 10, filed with
the Commission on August 14,1990)
14 Code of Ethics for Senior Financial Officers (previously filed with
our Annual Report Form 10-K for the fiscal year ended
December 31, 2005)
21 Subsidiaries of the Registrant
31.1 Rule 13a-14(a) Certification of Chief Executive Officer
31.2 Rule 13a-14(a) Certification of Chief Executive Officer
32 Officers' Section 1350 Certifications
- 89 -
Exhibit 21
SPINDLETOP OIL & GAS CO. AND SUBSIDIARIES
Subsidiaries of the Registrant
Spindletop Drilling Company, incorporated September 5, 1975, under the laws of
the State of Texas, is a wholly owned subsidiary of the Registrant.
Prairie Pipeline Co. incorporated June 22, 1983, under the laws of the State of
Texas, is a wholly owned subsidiary of Registrant.
- 90 -
Exhibit 31.1
CERTIFICATIONS
I, Chris G. Mazzini, certify that:
1. I have reviewed this report on Form 10-K of Spindletop Oil & Gas Co.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the registrant
as of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13-15(e) and 15d-15e) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the
registrant and have:
(a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
(c) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the controls and procedures as of the end of the
period covered by this report based on such evaluation; and
(d) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
-91-
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls.
Dated: April 15, 2011
/s/ Chris G. Mazzini
CHRIS G. MAZZINI
Principal Executive Officer
-92-
Exhibit 31.2
CERTIFICATIONS
I, Robert E. Corbin, certify that:
1. I have reviewed this report on Form 10-K of Spindletop Oil & Gas Co.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the registrant
as of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13-15(e) and 15d-15e) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the
registrant and have:
(a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
(c) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the controls and procedures as of the end of the
period covered by this report based on such evaluation; and
(d) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
-93-
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls.
Dated: April 15, 2011
/s/ Robert E. Corbin
ROBERT E. CORBIN
Principal Financial and
Accounting Officer
-94-
Exhibit 32
Certification Pursuant to 18 U.S.C. Section 1350
As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Annual Report of Spindletop Oil & Gas Co.
(the "Company"), on Form 10-K for the year ended December 31, 2010 as filed
with the Securities Exchange Commission on the date hereof (the "Report"),
the undersigned Principal Executive Officer and Principal Financial and
Accounting Officer of the Company, do hereby certify, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, that:
The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material
respects, the financial condition and result of operations of the Company.
Dated: April 15, 2011
/s/ Chris G. Mazzini
CHRIS G. MAZZINI
Principal Executive Officer
/s/ Robert E. Corbin
ROBERT E. CORBIN
Principal Financial and
Accounting Officer
- 95 -
of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13-15(e) and 15d-15e) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:
| (a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the controls and procedures as of the end of the period covered by this report based on such evaluation; and |
| (d) | disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and |
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's Board of directors (or persons performing the equivalent functions):
| (a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |
| (b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls. |
Dated: April 5, 2012
/s/ Robert E. Corbin
ROBERT E. CORBIN
Principal Financial and
Accounting Officer
Exhibit 32
Certification Pursuant to 18 U.S.C. Section 1350
As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Annual Report of Spindletop Oil & Gas Co. (the “Company”), on
Form 10-K for the year ended December 31, 2011 as filed with the Securities Exchange Commission on the date hereof (the “Report”), the undersigned Principal Executive Officer and Principal Financial and Accounting Officer of the Company, do hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
Dated: April 5, 2012
/s/ Chris G. Mazzini
CHRIS G. MAZZINI
Principal Executive Officer
/s/ Robert E. Corbin
ROBERT E. CORBIN
Principal Financial and
Accounting Officer