UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended September 30, 2013
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 0-8157
THE RESERVE PETROLEUM COMPANY
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE | 73-0237060 |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) |
6801 Broadway ext., Suite 300
Oklahoma City, Oklahoma 73116-9037
(405) 848-7551
(Address and telephone number, including area code, of registrant’s principal executive offices)
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 registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ ☒No o☐
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 (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ ☒No o☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):
Large accelerated filer | ☐ | Accelerated filer | ☐ | Non-accelerated filer | ☐ | Smaller reporting company |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o☐ No þ☒
As of November 8, 2013, 159,441May 9, 2014, 159,015 shares of the Registrant’sregistrant’s $.50 par value common stock were outstanding.
PART I – FINANCIAL INFORMATION
ITEM 1. | FINANCIAL STATEMENTS |
THE RESERVE PETROLEUM COMPANY |
BALANCE SHEETS |
ASSETS |
September 30, | December 31, | |||||||
2013 | 2012 | |||||||
(Unaudited) | (Derived from | |||||||
audited financial | ||||||||
statements) | ||||||||
Current Assets: | ||||||||
Cash and Cash Equivalents | $ | 13,172,411 | $ | 10,842,311 | ||||
Available-for-Sale Securities | 6,653,721 | 6,652,590 | ||||||
Trading Securities | 570,388 | 389,335 | ||||||
Refundable Income Taxes | — | 518,077 | ||||||
Receivables | 2,443,874 | 1,736,169 | ||||||
Prepaid Expenses | 8,287 | — | ||||||
22,848,681 | 20,138,482 | |||||||
Investments: | ||||||||
Equity Investment | 610,853 | 594,855 | ||||||
Other | 151,839 | 151,839 | ||||||
762,692 | 746,694 | |||||||
Property, Plant and Equipment: | ||||||||
Oil and Gas Properties, at Cost, Based on the Successful Efforts Method of Accounting – | ||||||||
Unproved Properties | 1,111,132 | 874,367 | ||||||
Proved Properties | 43,545,985 | 39,329,747 | ||||||
44,657,117 | 40,204,114 | |||||||
Less – Accumulated Depreciation, Depletion, Amortization and Valuation Allowance | 28,637,061 | 25,726,672 | ||||||
16,020,056 | 14,477,442 | |||||||
Other Property and Equipment, at Cost | 426,712 | 425,024 | ||||||
Less – Accumulated Depreciation | 295,173 | 268,095 | ||||||
131,539 | 156,929 | |||||||
Total Property, Plant and Equipment | 16,151,595 | 14,634,371 | ||||||
Other Assets | 365,904 | 363,722 | ||||||
Total Assets | $ | 40,128,872 | $ | 35,883,269 | ||||
See Accompanying Notes |
March 31, | December 31, | |||||||
2014 | 2013 | |||||||
(Unaudited) | (Derived from | |||||||
audited financial | ||||||||
statements) | ||||||||
Current Assets: | ||||||||
Cash and Cash Equivalents | $ | 12,678,182 | $ | 10,764,506 | ||||
Available-for-Sale Securities | 6,653,823 | 6,653,823 | ||||||
Trading Securities | 541,197 | 586,708 | ||||||
Refundable Income Taxes | — | 336,620 | ||||||
Receivables | 2,885,515 | 2,449,048 | ||||||
Prepaid Seismic | 1,494 | 6,232 | ||||||
22,760,211 | 20,796,937 | |||||||
Investments: | ||||||||
Equity Investment | 600,708 | 613,558 | ||||||
Other | 151,839 | 151,839 | ||||||
752,547 | 765,397 | |||||||
Property, Plant and Equipment: | ||||||||
Oil and Gas Properties, at Cost, Based on the Successful Efforts Method of Accounting – | ||||||||
Unproved Properties | 1,655,135 | 1,601,180 | ||||||
Proved Properties | 48,521,388 | 47,968,895 | ||||||
50,176,523 | 49,570,075 | |||||||
Less – Accumulated Depreciation, Depletion, Amortization and Valuation Allowance | 32,027,696 | 31,170,203 | ||||||
18,148,827 | 18,399,872 | |||||||
Other Property and Equipment, at Cost | 427,056 | 427,056 | ||||||
Less – Accumulated Depreciation | 314,519 | 305,302 | ||||||
112,537 | 121,754 | |||||||
Total Property, Plant and Equipment | 18,261,364 | 18,521,626 | ||||||
Other Assets | 378,293 | 376,982 | ||||||
Total Assets | $ | 42,152,415 | $ | 40,460,942 |
See Accompanying Notes
THE RESERVE PETROLEUM COMPANY |
BALANCE SHEETS |
LIABILITIES AND STOCKHOLDERS’ EQUITY |
September 30, | December 31, | |||||||
2013 | 2012 | |||||||
(Unaudited) | (Derived from | |||||||
audited financial | ||||||||
statements) | ||||||||
Current Liabilities: | ||||||||
Accounts Payable | $ | 366,547 | $ | 519,654 | ||||
Income Taxes Payable | 453,132 | — | ||||||
Other Current Liabilities – Deferred Income Taxes and Other | 450,945 | 207,430 | ||||||
1,270,624 | 727,084 | |||||||
Long-Term Liabilities: | ||||||||
Asset Retirement Obligation | 1,268,454 | 1,162,078 | ||||||
Dividends Payable | 1,490,912 | 1,535,568 | ||||||
Deferred Tax Liability, Net | 3,679,849 | 3,274,807 | ||||||
6,439,215 | 5,972,453 | |||||||
Total Liabilities | 7,709,839 | 6,699,537 | ||||||
Stockholders’ Equity: | ||||||||
Common Stock | 92,368 | 92,368 | ||||||
Additional Paid-in Capital | 65,000 | 65,000 | ||||||
Retained Earnings | 33,437,319 | 29,898,866 | ||||||
33,594,687 | 30,056,234 | |||||||
Less – Treasury Stock, at Cost | 1,175,654 | 872,502 | ||||||
Total Stockholders’ Equity | 32,419,033 | 29,183,732 | ||||||
Total Liabilities and Stockholders’ Equity | $ | 40,128,872 | $ | 35,883,269 | ||||
See Accompanying Notes |
March 31, | December 31, | |||||||
2014 | 2013 | |||||||
(Unaudited) | (Derived from | |||||||
audited financial | ||||||||
statements) | ||||||||
Current Liabilities: | ||||||||
Accounts Payable | $ | 247,756 | $ | 367,622 | ||||
Current Income Taxes Payable | 66,136 | — | ||||||
Other Current Liabilities – Deferred Income Taxes and Other | 326,885 | 337,624 | ||||||
640,777 | 705,246 | |||||||
Long-Term Liabilities: | ||||||||
Asset Retirement Obligation | 1,548,504 | 1,510,864 | ||||||
Dividends Payable | 1,357,226 | 1,369,966 | ||||||
Deferred Tax Liability, Net | 3,363,959 | 3,548,035 | ||||||
6,269,689 | 6,428,865 | |||||||
Total Liabilities | 6,910,466 | 7,134,111 | ||||||
Stockholders’ Equity: | ||||||||
Common Stock | 92,368 | 92,368 | ||||||
Additional Paid-in Capital | 65,000 | 65,000 | ||||||
Retained Earnings | 36,337,995 | 34,363,292 | ||||||
36,495,363 | 34,520,660 | |||||||
Less – Treasury Stock, at Cost | 1,253,414 | 1,193,829 | ||||||
Total Stockholders’ Equity | 35,241,949 | 33,326,831 | ||||||
Total Liabilities and Stockholders’ Equity | $ | 42,152,415 | $ | 40,460,942 |
See Accompanying Notes
THE RESERVE PETROLEUM COMPANY |
STATEMENTS OF INCOME |
(Unaudited) |
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Operating Revenues: | ||||||||||||||||
Oil and Gas Sales | $ | 4,679,450 | $ | 3,061,322 | $ | 13,460,165 | $ | 9,407,923 | ||||||||
Lease Bonuses and Other | 16,016 | 167,063 | 173,689 | 399,375 | ||||||||||||
4,695,466 | 3,228,385 | 13,633,854 | 9,807,298 | |||||||||||||
Operating Costs and Expenses: | ||||||||||||||||
Production | 725,910 | 595,196 | 2,135,349 | 1,736,733 | ||||||||||||
Exploration | 52,864 | 86,141 | 348,344 | 185,095 | ||||||||||||
Depreciation, Depletion, Amortization and Valuation Provisions | 1,547,272 | 717,724 | 3,343,565 | 2,330,648 | ||||||||||||
General, Administrative and Other | 351,456 | 366,790 | 1,192,367 | 1,197,722 | ||||||||||||
2,677,502 | 1,765,851 | 7,019,625 | 5,450,198 | |||||||||||||
Income from Operations | 2,017,964 | 1,462,534 | 6,614,229 | 4,357,100 | ||||||||||||
Other Income, Net | 116,256 | 19,933 | 278,625 | 514,128 | ||||||||||||
Income Before Provision for Income Taxes | 2,134,220 | 1,482,467 | 6,892,854 | 4,871,228 | ||||||||||||
Income Tax Provision / (Benefit): | ||||||||||||||||
Current | 650,894 | 14,009 | 1,207,228 | 627,604 | ||||||||||||
Deferred | (162,085 | ) | 316,727 | 543,557 | 634,907 | |||||||||||
Total Provision for Income Taxes | 488,809 | 330,736 | 1,750,785 | 1,262,511 | ||||||||||||
Net Income | $ | 1,645,411 | $ | 1,151,731 | $ | 5,142,069 | $ | 3,608,717 | ||||||||
Per Share Data | ||||||||||||||||
Net Income, Basic and Diluted | $ | 10.30 | $ | 7.16 | $ | 32.07 | $ | 22.42 | ||||||||
Cash Dividends Declared and/or Paid | $ | — | $ | — | $ | 10.00 | $ | 10.00 | ||||||||
Weighted Average Shares Outstanding, | ||||||||||||||||
Basic and Diluted | 159,695 | 160,920 | 160,321 | 160,946 | ||||||||||||
See Accompanying Notes |
Three Months Ended | ||||||||
March 31, | ||||||||
2014 | 2013 | |||||||
Operating Revenues: | ||||||||
Oil and Gas Sales | $ | 5,275,210 | $ | 3,824,316 | ||||
Lease Bonuses and Other | 200,942 | 22,068 | ||||||
5,476,152 | 3,846,384 | |||||||
Operating Costs and Expenses: | ||||||||
Production | 844,600 | 727,505 | ||||||
Exploration | 657,471 | 241,803 | ||||||
Depreciation, Depletion, Amortization and Valuation Provisions | 867,632 | 872,955 | ||||||
General, Administrative and Other | 438,241 | 431,970 | ||||||
2,807,944 | 2,274,233 | |||||||
Income from Operations | 2,668,208 | 1,572,151 | ||||||
Other Income/(Loss), Net | (15,558 | ) | 54,364 | |||||
Income Before Provision for Income Taxes | 2,652,650 | 1,626,515 | ||||||
Income Tax Provision/(Benefit): | ||||||||
Current | 902,762 | 227,710 | ||||||
Deferred | (224,815 | ) | 155,795 | |||||
Total Provision for Income Taxes | 677,947 | 383,505 | ||||||
Net Income | $ | 1,974,703 | $ | 1,243,010 | ||||
Per Share Data: | ||||||||
Net Income, Basic and Diluted | $ | 12.40 | $ | 7.73 | ||||
Weighted Average Shares Outstanding, Basic and Diluted | 159,228 | 160,747 |
See Accompanying Notes
THE RESERVE PETROLEUM COMPANY |
CONDENSED STATEMENTS OF CASH FLOWS |
(Unaudited) |
Nine Months Ended | ||||||||
September 30, | ||||||||
2013 | 2012 | |||||||
Net Cash Provided by Operating Activities | $ | 9,173,877 | $ | 6,698,435 | ||||
Cash Flows Applied to Investing Activities: | ||||||||
Purchases of Available-for-Sale Securities | (6,653,721 | ) | (6,652,196 | ) | ||||
Maturity of Available-for-Sale Securities | 6,652,590 | 6,654,838 | ||||||
Proceeds from Disposal of Property, Plant and Equipment | 42,640 | 493,763 | ||||||
Purchase of Property, Plant and Equipment | (4,950,362 | ) | (5,504,763 | ) | ||||
Cash Distribution from Equity Investee | 16,500 | — | ||||||
Net Cash Applied to Investing Activities | (4,892,353 | ) | (5,008,358 | ) | ||||
Cash Flows Applied to Financing Activities: | ||||||||
Dividends Paid to Stockholders | (1,648,272 | ) | (1,602,073 | ) | ||||
Purchase of Treasury Stock | (303,152 | ) | (17,080 | ) | ||||
Total Cash Applied to Financing Activities | (1,951,424 | ) | (1,619,153 | ) | ||||
Net Change in Cash and Cash Equivalents | 2,330,100 | 70,924 | ||||||
Cash and Cash Equivalents, Beginning of Period | 10,842,311 | 10,150,742 | ||||||
Cash and Cash Equivalents, End of Period | $ | 13,172,411 | $ | 10,221,666 | ||||
See Accompanying Notes |
Three Months Ended | ||||||||
March 31, | ||||||||
2014 | 2013 | |||||||
Net Cash Provided by Operating Activities | $ | 3,264,333 | $ | 2,229,181 | ||||
Cash Flows Applied to Investing Activities: | ||||||||
Proceeds from Disposal of Property, Plant and Equipment | 200 | — | ||||||
Purchase of Property, Plant and Equipment | (1,318,627 | ) | (2,175,804 | ) | ||||
Cash Distribution from Equity Investee | 40,095 | 16,500 | ||||||
Net Cash Applied to Investing Activities | (1,278,332 | ) | (2,159,304 | ) | ||||
Cash Flows Applied to Financing Activities: | ||||||||
Dividends Paid to Stockholders | (12,740 | ) | (18,662 | ) | ||||
Purchase of Treasury Stock | (59,585 | ) | (13,320 | ) | ||||
Total Cash Applied to Financing Activities | (72,325 | ) | (31,982 | ) | ||||
Net Change in Cash and Cash Equivalents | 1,913,676 | 37,895 | ||||||
Cash and Cash Equivalents, Beginning of Period | 10,764,506 | 10,842,311 | ||||||
Cash and Cash Equivalents, End of Period | $ | 12,678,182 | $ | 10,880,206 |
See Accompanying Notes
THE RESERVE PETROLEUM COMPANY
NOTES TO FINANCIAL STATEMENTS
March 31, 2014
(Unaudited)
Note 1 – BASIS OF PRESENTATION
The accompanying balance sheet as of December 31, 2012,2013, which has been derived from audited financial statements, the unaudited interim financial statements and these notes have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, certain disclosures normally included in financial statements prepared in accordance with the accounting principles generally accepted in the United States of America (“GAAP”) have been omitted. The accompanying financial statements and notes thereto should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012.
In the opinion of Management, the accompanying financial statements reflect all adjustments (consisting only of normal recurring accruals), which are necessary for a fair statement of the results of the interim periods presented. The results of operations for the current interim periods are not necessarily indicative of the operating results for the full year.
Note 2 – OTHER INCOME,INCOME/(LOSS), NET
The following is an analysis of the components of Other Income, Net for the three months and nine months ended September 30, 2013 and 2012:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Net Realized and Unrealized Gain (Loss) on Trading Securities | $ | 100,173 | $ | (12,102 | ) | $ | 179,967 | $ | (3,278 | ) | ||||||
Gain on Asset Sales | 766 | 12,682 | 33,238 | 447,255 | ||||||||||||
Interest Income | 4,171 | 8,479 | 17,255 | 24,595 | ||||||||||||
Equity Earnings in Investee | 11,739 | 11,799 | 32,498 | 49,959 | ||||||||||||
Other Income | 8,142 | 6,604 | 41,780 | 22,477 | ||||||||||||
Interest and Other Expenses | (8,735 | ) | (7,529 | ) | (26,113 | ) | (26,880 | ) | ||||||||
Other Income, Net | $ | 116,256 | $ | 19,933 | $ | 278,625 | $ | 514,128 |
Three Months Ended | ||||||||
March 31, | ||||||||
2014 | 2013 | |||||||
Net Realized and Unrealized Gain/(Loss) on Trading Securities | $ | (45,925 | ) | $ | 35,074 | |||
Gain on Asset Sales | 1,123 | 3,683 | ||||||
Interest Income | 5,332 | 5,844 | ||||||
Equity Earnings in Investee | 27,245 | 15,267 | ||||||
Other Income | 7,930 | 3,219 | ||||||
Interest and Other Expenses | (11,263 | ) | (8,723 | ) | ||||
Other Income, Net | $ | (15,558 | ) | $ | 54,364 |
Note 3 – INVESTMENTS AND RELATED COMMITMENTS AND CONTINGENT LIABILITIES, INCLUDING GUARANTEES
Equity Investment consists of a 33% ownership interest in Broadway Sixty-Eight, Ltd. (the “Partnership”), an Oklahoma limited partnership, which owns and operates an office building in Oklahoma City, Oklahoma. Although the Company invested as a limited partner, it agreed, jointly and severally, with all other limited partners to reimburse the general partner for any losses suffered from operating the Partnership. The indemnity agreement provides no limitation to the maximum potential future payments. To date, no monies have been paid with respect to this agreement.
Note 4 – PROVISION FOR INCOME TAXES
In 20132014 and 2012,2013, the effective tax rate was less than the statutory rate, primarily as a result of allowable depletion for tax purposes in excess of the cost basis in oil and gas properties and the corporate graduated tax rate structure.
Excess federal percentage depletion, which is limited to certain production volumes and by certain income levels, reduces estimated taxable income projected for any year. The federal excess percentage depletion estimates will be updated throughout the year until finalized with the detail well-by-well calculations at year-end. When a provision for income taxes is recorded, federal excess percentage depletion benefits decrease the effective tax rate. The benefit of federal excess percentage depletion is not directly related to the amount of pre-tax income recorded in a period. Accordingly, in periods where a recorded pre-tax income is relatively small, the proportional effect of these items on the effective tax rate may be significant.
Note 5 – ASSET RETIREMENT OBLIGATION
The Company records the fair value of its estimated liability to retire its oil and natural gas producing properties in the period in which it is incurred (typically the date of first sale). The estimated liability is calculated by obtaining current estimated plugging costs from the well operators and inflating it over the life of the property. Current year inflation rate used is 4.08%. When the liability is first recorded, a corresponding increase in the carrying amount of the related long-lived asset is also recorded. Subsequently, the asset is amortized to expense over the life of the property and the liability is increased annually for the change in its present value which is currently 3.25%.
A reconciliation of the Company’s asset retirement obligation liability is as follows:
Balance at December 31, 2012 | $ | 1,162,078 | ||
Liabilities incurred for new wells | 80,588 | |||
Accretion expense | 25,788 | |||
Balance at September 30, 2013 | $ | 1,268,454 |
Balance at December 31, 2013 | $ | 1,510,864 | ||
Liabilities incurred for new wells | 26,651 | |||
Liabilities settled (wells sold or plugged) | (162 | ) | ||
Accretion expense | 11,151 | |||
Balance at March 31, 2014 | $ | 1,548,504 |
Note 6 – FAIR VALUE MEASUREMENTS
Inputs used to measure fair value are organized into a fair value hierarchy based on the observability of the inputs. Level 1 inputs consist of quoted prices in active markets for identical assets. Level 2 inputs are inputs, other than quoted prices, for similar assets that are observable. Level 3 inputs are unobservable inputs.
Recurring Fair Value Measurements
Certain of the Company’s assets are reported at fair value in the accompanying balance sheets on a recurring basis. The Company determined the fair value of the available-for-sale securities using quoted market prices for securities with similar maturity dates and interest rates. At September 30, 2013March 31, 2014 and December 31, 2012,2013, the Company’s assets reported at fair value on a recurring basis are summarized as follows:
September 30, 2013 | ||||||||||||
Level 1 Inputs | Level 2 Inputs | Level 3 Inputs | ||||||||||
Financial Assets: | ||||||||||||
Available-for Sale Securities – | ||||||||||||
U.S. Treasury Bills Maturing in 2013 | $ | — | $ | 6,653,721 | $ | — | ||||||
Trading Securities: | ||||||||||||
Domestic Equities | 418,613 | — | — | |||||||||
International Equities | 128,830 | — | — | |||||||||
Others | 22,945 | — | — |
December 31, 2012 | ||||||||||||
Level 1 Inputs | Level 2 Inputs | Level 3 Inputs | ||||||||||
Financial Assets: | ||||||||||||
Available-for Sale Securities – | ||||||||||||
U.S. Treasury Bills Maturing in 2013 | $ | — | $ | 6,652,590 | $ | — | ||||||
Trading Securities: | ||||||||||||
Domestic Equities | 211,103 | — | — | |||||||||
International Equities | 115,106 | — | — | |||||||||
Others | 63,126 | — | — |
March 31, 2014 | ||||||||||||
Level 1 Inputs | Level 2 Inputs | Level 3 Inputs | ||||||||||
Financial Assets: | ||||||||||||
Available-for Sale Securities – | ||||||||||||
U.S. Treasury Bills Maturing in 2014 | $ | — | $ | 6,653,823 | $ | — | ||||||
Trading Securities: | ||||||||||||
Domestic Equities | 372,832 | — | — | |||||||||
International Equities | 95,937 | — | — | |||||||||
Others | 72,428 | — | — |
December 31, 2013 | ||||||||||||
Level 1 Inputs | Level 2 Inputs | Level 3 Inputs | ||||||||||
Financial Assets: | ||||||||||||
Available-for Sale Securities – | ||||||||||||
U.S. Treasury Bills Maturing in 2014 | $ | — | $ | 6,653,823 | $ | — | ||||||
Trading Securities: | ||||||||||||
Domestic Equities | 389,766 | — | — | |||||||||
International Equities | 179,509 | — | — | |||||||||
Others | 17,433 | — | — |
Non-Recurring Fair Value Measurements
The Company’s asset retirement obligation annually represents a non-recurring fair value liability. The fair value of the non-financial liability incurred in the nine monthsquarter ended September 30,March 31, was $80,588$26,651 in 20132014 and $113,204$47,090 in 20122013 and was calculated using Level 3 inputs. See Note 5 above for more information about this liability and the inputs used for calculating fair value.
Fair Value of Financial Instruments
The Company’s financial instruments consist primarily of cash and cash equivalents, trade receivables, marketable securities, trade payables and dividends payable. At September 30, 2013March 31, 2014 and December 31, 2012,2013, the historical cost of cash and cash equivalents, trade receivables, trade payables and dividends payable are considered to be representative of their respective fair values due to the short-term maturities of these items.
Note 7 – NEW ACCOUNTING PRONOUNCEMENTS
There were no accounting pronouncements issued and none that became effective since December 31, 20122013 that were directly applicable to the Company.
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
This discussion and analysis should be read with reference to a similar discussion in the Company’s Annual Report on Form 10-K for the year ended December 31, 20122013 as filed with the Securities and Exchange Commission (hereinafter, the “2012“2013 Form 10-K”), as well as the financial statements included in this Form 10-Q.
Forward Looking Statements
This discussion and analysis includes forward looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward looking statements give the Company’s current expectations of future events. They include statements regarding the drilling of oil and gas wells, the production that may be obtained from oil and gas wells, cash flow and anticipated liquidity and expected future expenses.
Although management believes the expectations in these and other forward looking statements are reasonable, we can give no assurance they will prove to have been correct. They can be affected by inaccurate assumptions or by known or unknown risks and uncertainties. Factors that would cause actual results to differ materially from expected results are described under “Forward Looking Statements” on page 8 of the 20122013 Form 10-K.
We caution you not to place undue reliance on these forward looking statements, which speak only as of the date of this Form 10-Q, and we undertake no obligation to update this information. You are urged to carefully review and consider the disclosures made in this and our other reports filed with the Securities and Exchange Commission that attempt to advise interested parties of the risks and factors that may affect our business.
Financial Conditions and Results of Operations
Liquidity and Capital Resources
Please refer to the Balance Sheets and the Condensed Statements of Cash Flows in this Form 10-Q to supplement the following discussion. In the first nine monthsquarter of 2013,2014, the Company continued to fund its business activity through the use of internal sources of cash. The Company had cash provided by operations of $9,173,877$3,264,333 and a cash provided by the maturitiesdistribution of available-for-sale securities of $6,652,590. Additional cash of $59,140 was provided by property dispositions and$40,095 from an equity investment distribution for total cash provided of $15,885,607.$3,304,428. The Company utilized cash for the purchase of available-for-sale securities of $6,653,721; property additions of $4,950,362$1,318,627 and financing activities of $1,951,424$72,325 for total cash applied of $13,555,507.$1,390,952. Cash and cash equivalents increased $2,330,100$1,913,676 to $13,172,411.
Discussion of Significant Changes in Working Capital.
In addition to the changes in cash and cash equivalents discussed above, there were other changes in working capital line items from December 31,Trading securities increased $181,053 (47%decreased $45,511 (8%) from $389,335$586,708 to $570,388.$541,197. The increasedecrease was the net result of a $140,089 increase$62,657 decrease in the trading securities’securities market value plus $40,964offset by $17,146 of net income from these securities.
Refundable income taxes declined $971,209decreased $402,756 (120%) from $518,077a receivable of $336,620 to a $453,132 payable. This decrease waspayable of $66,136 due primarily to the first quarter 2014 current income tax provision for the nine months ended September 30, 2013 of $1,207,228,$902,762 offset by estimated tax payments of $250,000$500,006 for the same period.
Receivables increased $707,705 (41%$436,467 (18%) to $2,443,874$2,885,515 from $1,736,169.$2,449,048. This increase was due almost entirelymostly to an increase inhigher oil and gas sales receivable.receivables. Sales variances are discussed in the “Results of Operations” section below.
Accounts payable decreased $153,107 (29%$119,866 (33%) to $366,547$247,756 from $519,654. This decrease was$367,622 due primarily to a decline in the drilling activity at September 30, 2013 versusin the quarter ended March 31, 2014 compared to the quarter ended December 31, 2012.
Discussion of Significant Changes in the Condensed Statements of Cash Flows.
As noted in the first paragraph above, net cash provided by operating activities wasCash applied to the purchase of property plant and equipmentadditions in 20132014 was $4,950,362,$1,318,627, a decrease of $554,401 (10%$857,177 (39%) from cash applied in 20122013 of $5,504,763. In$2,175,804. For both 20132014 and 2012,2013, cash applied to property plant and equipment additions was mostly related to oil and gas exploration and development activity. The changedecrease in property additions for 2014 is mostly due to decreaseda decline in the exploration and development drilling activity in 2013 compared to 2012.the first quarter of 2014 versus 2013. See the subheading “Exploration Costs” in the “Results of Operations” section below for additional information.
Conclusion.
Management is unaware of any additional material trends, demands, commitments, events or uncertainties, which would impact liquidity and capital resources to the extent that the discussion presented in theMaterial Changes in Results of Operations NineThree Months Ended September 30, 2013,March 31, 2014, Compared with NineThree Months Ended September 30, 2012
Net income increased $1,533,352 (42%$731,693 (59%) to $5,142,069$1,974,703 in 20132014 from $3,608,717$1,243,010 in 2012.2013. Net income per share, basic and diluted, increased $9.65$4.67 (60%) to $32.07$12.40 in 20132014 from $22.42$7.73 in 2012.
A discussion of revenue from oil and gas sales and other significant line items in the statements of income follows.
Operating Revenues.
The $2,432,978 (35%$751,525 (30%) increase in oil sales to $9,465,205$3,256,819 in 20132014 from $7,032,227$2,505,294 in 20122013 was the result of increasesan increase in the volume sold and the average price per barrel (Bbl). and the volume sold. The volume of oil sold increased 25,4155,813 Bbls to 104,80335,533 Bbls in 2013,2014, resulting in a positive volume variance of $2,251,261.$490,012. The average price per Bbl increased $1.73$7.36 to $90.31$91.65 per Bbl in 2013,2014, resulting in a positive price variance of $181,717.$261,513. The increase in oil volumes sold was mostly due to production of 36,32416,094 Bbls from new wells in Oklahoma, Texas and Kansas,partially offset partially by 10,281 Bbls of production declines from older wells.
The $1,643,652 (77%$508,743 (41%) increase in gas sales to $3,772,088$1,753,948 in 2014 from $1,245,205 in 2013 from $2,128,436 in 2012 was the net result of increasesan increase in the volume sold and the average price per thousand cubic feet (MCF). and a decrease in the volume sold. The volume of gas sold increased 295,633decreased 37,249 MCF to 1,079,197 MCF from 783,564367,705 MCF in 2012,2014 from 404,954 MCF in 2013, for a positivenegative volume variance of $804,122.$114,354. The decrease in gas volumes sold was mostly due to production declines from older wells, especially in Arkansas, partially offset by production of 128,054 MCF from new wells. The average price per MCF increased $0.78$1.70 to $3.50 per MCF from $2.72$4.77 per MCF in 2012,2014 from $3.07 per MCF in 2013, resulting in a positive price variance of $839,531. The net increase in gas volumes sold was due to 385,000 MCF of production from several new working and royalty interest wells, offset by a decline in sales from older properties. Robertson County, Texas royalty interest properties and Arkansas working interest wells accounted for 281,000 MCF (73%) of the increase in sales volumes for the new wells.
Sales from the Robertson County, Texas royalty interest properties provided approximately 23%21% of the Company’s first nine monthsquarter 2014 gas sales volumes and about 27% of the first quarter 2013 and 2012 gas sales volumes. See discussion on page 1211 of the 20122013 Form 10-K under the subheading “Operating Revenues,”Revenues” for more information about these properties.
For both oil and gas sales, the price change was mostly the result of a change in the spot market prices upon which most of the Company’s oil and gas sales are based. These spot market prices have had significant fluctuations in the past and these fluctuations are expected to continue.
Sales of miscellaneous oil and gas products were $222,872$264,443 in 20132014 compared to $247,260$73,817 in 2012.
The Company received lease bonuses of $172,246$200,942 in 2013the first quarter of 2014 for leases on its owned minerals compared to $179,245 in 2012.
There were no coal royalties for 2012the first quarter of 2014 or 2013 for coal mined during these periods on North Dakota leases. See subheading “Operating Revenues” on page 12 of the 2012 Form 10-K for more information about this property.
Operating Costs and Expenses.
Production Costs.
Production costs increasedExploration Costs.
Total exploration expense increasedThe following is a summary as of November 1, 2013,April 30, 2014, updating both exploration and development activity from December 31, 2012,2013, for the period ended September 30, 2013.
The Company participatedis participating with its 18% working interest in the drilling of seventhree development wells on a Barber County, Kansas prospect. Two of theseThe wells were completed as commercial gas producers, one as a commercial oilhave been drilled and gas producer and one as a marginal oil producer. Completions are in progressawaiting completion. Three additional development wells will be drilled on the other three wells.prospect in 2014. Capitalized costs for the period were $521,079,$84,856, including $184,250$79,257 in prepaid drilling costs.
The Company participated with 14%, 14%16% and 8% working interests in the drilling of three step-outtwo development wells on a Woods County, Oklahoma prospect. The first two wells were completed as commercial oil and gas producers and the third is awaiting completion. The Company will participate with 8%, 15% and 15% working interestsCompletions are in the drilling of three additional step-out wells starting in January 2014.progress on both wells. Capitalized costs for the period were $240,843,$140,800, including $39,049$64,500 in prepaid drilling costs.
The Company participated with 13.7% working interests in the drilling of three development wells and with a 17.9% interest in the drilling of a fourth on a Woods County, Oklahoma prospect. Two of these wells were completed as commercial oil and gas producers and completions are in progress on the other two. Capitalized costs for the period were $349,689, including $152,120 in prepaid drilling costs.
The Company participated in the drilling of an exploratory well that was completed as a dry hole. A second exploratory well will be drilled in November 2013. Dry hole costs for the period were $36,691. Seismic costs of $185,187 were expensed.
The Company participatedis participating with a 9% working interest in the drilling of a step-out horizontal development well on a Roger Mills County, Oklahoma prospect. A completionThe well is in progress.
The Company participatedwill participate with its 10.5% working interest in the drilling of an exploratory well that is awaiting completion. Aon a Logan County, Oklahoma prospect starting in the second quarter of 2014.
The Company participated with a 6.6% working interest in the drilling of an exploratory well on a Garvin County, Oklahoma prospect. The deep objectives were non-productive and the lower portion of the hole was plugged. The Company will be drilledparticipate with a 12.8% working interest in November 2013.a completion attempt of a shallow zone.
The Company will participate in the drilling of an exploratory well and a salt water disposal well on a Seminole County, Oklahoma prospect starting in the second quarter of 2014. Prepaid drilling costs for the period were $51,750.
The Company participated with a 10.7% working interest in the drilling of a development well and Valuation Provision (DD&A).
In February 2014, the Company purchased a 10% interest in 250 net acres of leasehold on a McClain County, Oklahoma prospect for $11,875. The Company is participating in an increaseexploratory well that has been drilled and is awaiting completion.
In March 2014, the Company purchased a 14% interest in 1,705 net acres of $694,702leasehold and 70 square miles of 3-D seismic data on a Creek County, Oklahoma prospect for $684,376. Seismic interpretation and additional leasehold acquisition are in depreciation expense on oilprogress. Eight potential structures have been identified and gas properties due to increased production volumes and well investment costs. In addition, impairment losses on long-lived assets increased $300,000 for some marginal horizontal wells completedexploratory drilling will start in 2013.
Other Income, Net.
Trading securities losses in 2014 were $(45,925) compared to gains of $35,074 in 2013, were $179,967 as compared toa decrease of $80,999. In 2014, the Company had realized gains of $16,732 and unrealized losses of $3,278 in 2012, an increase of $183,245.$(62,657) from adjusting the securities to estimated fair market value. In 2013, the Company had realized losses of $(11,155) and unrealized gains of $140,089 from adjusting securities, held at September 30, to estimated fair market value and net realized trading gains of $39,878. In 2012, the Company had unrealized losses of $8,681 and net realized trading gains of $5,404.
Provision for Income Taxes.
Off-Balance Sheet Arrangements
The Company’s off-balance sheet arrangement relates to Broadway Sixty-Eight, Ltd., an Oklahoma limited partnership. The Company does not have actual or effective control of this entity. Management of this entity could at any time make decisions in its own best interest, which could materially affect the Company’s net income or the value of the Company’s investment. For more information about this entity, see Note 3 to the accompanying financial statements.
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Not applicable.
ITEM 4. | CONTROLS AND PROCEDURES |
As defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”), the term “disclosure controls and procedures” means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.
The Company’s Principal Executive Officer and Principal Financial Officer evaluated the effectiveness of the Company’s disclosure controls and procedures. Based on this evaluation, they concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2013.
Internal Control over Financial Reporting
As defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act, the term “internal control over financial reporting” means a process designed by, or under the supervision of, the issuer’s principal executive and principal financial officers, or persons performing similar functions, and effected by the issuer’s board of directors, management and other personnel, 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 and includes those policies and procedures that:
(1) | Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer; | ||
(2) | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the issuer are being made only in accordance with authorizations of management and directors of the issuer; and | ||
(3) | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the issuer’s assets that could have a material |
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. There were no changes in the Company’s internal control over financial reporting during the quarter ended September 30, 2013March 31, 2014 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II – OTHER INFORMATION
During the quarter ended September 30, 2013,March 31, 2014, the Company did not have any material legal proceedings brought against it or its properties.
Not applicable.
ISSUER PURCHASES OF EQUITY SECURITIES
Period | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs1 | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs1 | |||||||||||
January 1 to January 31, 2014 | 6 | $ | 230 | — | — | ||||||||||
February 1 to February 28, 2014 | 304 | $ | 180 | — | — | ||||||||||
March 1 to March 31, 2014 | 20 | $ | 180 | — | — | ||||||||||
Total | 330 | $ | 181 | — | — | ||||||||||
1 The Company has no formal equity security purchase program or plan. The Company acts as its own transfer agent, and most purchases result from requests made by shareholders receiving small odd lot share quantities as the result of probate transfers. |
Period | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs1 | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs1 | |
July 1 to July 31, 2013 | 188 | $ 230.00 | — | — | |
August 1 to August 31, 2013 | 323 | $ 230.00 | — | — | |
September 1 to September 30, 2013 | 81 | $ 230.00 | — | — | |
Total | 592 | $ 230.00 | — | — |
None.
Not applicable.
None.
The following documents are exhibits to this Form 10-Q. Each document marked by an asterisk is filed electronically herewith.
Exhibit Number | Description | |
31.1* | ||
31.2* | ||
32* | ||
XBRL Instance Document | ||
XBRL Taxonomy Extension Schema Document | ||
XBRL Taxonomy Calculation Linkbase Document | ||
XBRL Taxonomy Label Linkbase Document | ||
XBRL Taxonomy Presentation Linkbase Document | ||
______________________ | ||
* Filed electronically herewith. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized.
THE RESERVE PETROLEUM COMPANY | |||||
(Registrant) | |||||
Date: May 15, 2014 | |||||
Cameron R. McLain, | |||||
Principal Executive Officer | |||||
Date: May 15, 2014 | |||||
James L. Tyler | |||||
Principal Financial Officer |
12