Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended June 30, 2020

OR

For the transition period from                     to                     .

Commission File Number 0-19279

EVERFLOW EASTERN PARTNERS, L.P.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (330) 533-2692

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    X     ☒   No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes    X     ☒    No _____☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ______☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No X ☒

Securities registered pursuant to Section 12(b) of the Act:

None     

There were 5,492,9675,441,928 Units of limited partnership interest of the registrant as of NovemberAugust 10, 2019.2020. The Units generally do not have any voting rights, but, in certain circumstances, the Units are entitled to one vote per Unit.

Except as otherwise indicated, the information contained in this report is as of SeptemberJune 30, 2019.2020.

EVERFLOW EASTERN PARTNERS, L.P.

INDEX

See notes to unaudited consolidated financial statements.

See notes to unaudited consolidated financial statements.

See notes to unaudited consolidated financial statements.

EVERFLOW EASTERN PARTNERS, L.P.

See notes to unaudited consolidated financial statements.

EVERFLOW EASTERN PARTNERS, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

In March 2020, the Coronavirus Aid, Relief and Economic Security Act was enacted into law. The Paycheck Protection Program Flexibility Act (the “Flexibility Act”) was enacted into law in June 2020. Among several other economic stimulus benefits, these laws established the United States Small Business Administration’s

EVERFLOW EASTERN PARTNERS, L.P.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Units represent limited partnership interests in Everflow. The Units are transferable subject to the approval of EML and to the laws governing the transfer of securities. The Units are not listed for trading on any securities exchange nor are they quoted in the automated quotation system of a registered securities association. However, Unitholders may have an opportunity to require Everflow to repurchase their Units pursuant to the Repurchase Right.

The partnership agreement provides that Everflow will repurchase for cash up to 10% of the then outstanding Units, to the extent Unitholders offer Units to Everflow for repurchase pursuant to the Repurchase Right. The Repurchase Right entitles any Unitholder, between May 1 and June 30 of each year, to notify Everflow that the Unitholder elects to exercise the Repurchase Right and have Everflow acquire certain or all Units. The price to be paid for any such Units is calculated based upon the audited financial statements of the Company as of December 31 of the year prior to the year in which the Repurchase Right is to be effective and independently prepared reserve reports. The price per Unit equals 66% of the adjusted book value of the Company allocable to the Units, divided by the number of Units outstanding at the beginning of the year in which the applicable Repurchase Right is to be effective less interim cash distributions received by a Unitholder. The adjusted book value is calculated by adding partners’ equity, the Standardized Measure of Discounted Future Net Cash Flows and the tax effect included in the Standardized Measure and subtracting from that sum the carrying value of oil and gas properties (net of undeveloped lease costs). If more than 10% of the then outstanding Units are tendered during any period during which the Repurchase Right is to be effective, the Investors’ Units tendered shall be prorated for purposes of calculating the actual number of Units to be acquired during any such period. The price associated with the 2019 Repurchase Right, based upon the December 31, 2018 calculation, was $1.50 per Unit, net of a $0.30 per Unit distribution made in April 2019.

In June 2019, the Company repurchased 86,388 Units pursuant to the Repurchase Right at a price of $1.50 per Unit. In June 2018, the Company repurchased 68,261 Units pursuant to the Repurchase Right at a price of $0.11 per Unit. The Company did not offer to repurchase any Units pursuant to the Repurchase Right during 2017 because the price associated with the Repurchase Right was negative.

The Company has an Option Repurchase Plan (the “Option Plan”) which permits the grant of options to select officers and employees to purchase certain Units acquired by the Company pursuant to the Repurchase Right. The purpose of the Option Plan is to assist the Company to attract and retain officers and other key employees and to enable those individuals to acquire or increase their ownership interest in the Company in order to encourage them to promote the growth and profitability of the Company. The Option Plan is designed to align directly the financial interests of the participants with the financial interests of the Unitholders. The Company granted 30,000 options to officers and key employees in June 2019 and 2018, respectively. All options granted were exercised on the same date. The Company did not grant any options in 2017.

EVERFLOW EASTERN PARTNERS, L.P.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

All Units repurchased pursuant to the Repurchase Right are retired except for those Units issued through the exercise of options pursuant to the Option Plan. There were 5,492,967 and 5,549,355

In June 2020, the Company repurchased 81,039 Units pursuant to the Repurchase Right at a price of $0.86 per Unit. In June 2019, the Company repurchased 86,388 Units pursuant to the Repurchase Right at a price of $1.50 per Unit. In June 2018, the Company repurchased 68,261 Units pursuant to the Repurchase Right at a price of $0.11 per Unit.

The Company has an Option Repurchase Plan (the “Option Plan”) which permits the grant of options to select officers and employees to purchase certain Units acquired by the Company pursuant to the Repurchase Right. The purpose of the Option Plan is to assist the Company to attract and retain officers and other key employees and to enable those individuals to acquire or increase their ownership interest in the Company in order to encourage them to promote the growth and profitability of the Company. The Option Plan is designed to align directly the financial interests of the participants with the financial interests of the Unitholders. The Company granted 30,000 options to officers and key employees in June 2020, 2019 and 2018, respectively. All options granted were exercised on the same date.

All Units repurchased pursuant to the Repurchase Right are retired except for those Units issued through the exercise of options pursuant to the Option Plan. There were 5,441,928 outstanding Units following the Company’s repurchase of Units and issuance of options in June 2020. There were no instruments outstanding at June 30, 2020 or 2019 and 2018, respectively. There were no instruments outstanding at September 30, 2019 or 2018 that would potentially dilute net income per Unit.

The Company operates exclusively in Ohio and Pennsylvania of the United States in the business of oil and gas acquisition, exploration, development and production. The Company operates in an environment with many financial risks, including, but not limited to, the ability to acquire additional economically recoverable oil and gas reserves, the inherent risks of the search for, development of and production of oil and gas, the ability to sell oil and gas at prices which will provide attractive rates of return, the volatility and seasonality of oil and gas production and prices, and the highly competitive and, at times, seasonal nature of the industry and worldwide economic conditions. The Company’s ability to expand its reserve base and diversify its operations is also dependent upon the Company’s ability to obtain the necessary capital through operating cash flow, borrowings or equity offerings. Various federal, state and governmental agencies are considering, and some have adopted, laws and regulations regarding environmental protection which could adversely affect the proposed business activities of the Company. The Company cannot predict what effect, if any, current and future regulations may have on the operations of the Company.

The Company has multiple contracts with Dominion Field Services (“Dominion”) which obligate Dominion to purchase, and the Company to sell and deliver, certain quantities of natural gas production from the Company’s oil and gas properties throughout the contract periods. Management believes the Company can meet its delivery commitments based on estimated production.

The Company is party to various legal proceedings and claims in the ordinary course of its business. The Company believes that the outcome of these matters will not have a material adverse effect on its consolidated financial position, results of operations, or liquidity.

The following discussion is intended to assist in the understanding of the Company’s liquidity, capital resources and results of operations. It is suggested that this information be read in conjunction with the Company’s interim consolidated financial statements, the related notes to consolidated financial statements and the Company’s 20182019 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 27, 2019.26, 2020.

On March 11, 2020, the World Health Organization declared the outbreak of the novel strain of the coronavirus (“COVID-19”) a global pandemic. COVID-19 has led to global shutdowns as governments imposed regulations in efforts to control the spread of COVID-19. As a result, physical and economic uncertainties have arisen which have negatively impacted the Company’s operations, cash flows and financial condition.

Liquidity and Capital Resources

The following table summarizes the Company's financial position at SeptemberJune 30, 20192020 and December 31, 2018:2019:

Working capital of $29.8$27.1 million as of SeptemberJune 30, 20192020 represented an increasea decrease of $1.4$2.4 million from December 31, 2018,2019, due primarily to an increase in investments and a decrease in accrued expenses; offset somewhat by decreases in cash and equivalents and production accounts receivable, andas well as an increase in accounts payable.payable; offset somewhat by an increase in investments. The decrease in cash and equivalents is primarily the result of cash provided by operating activities and existing cash and equivalents being used in investing and financing activities. The decrease in production accounts receivable is the combined result of decreases in natural gas volumes produced, crude oil volumes sold and lower natural gas and crude oil prices received during the current receivable production period as compared to the prior comparable period, offset somewhat by decreases in production costs incurred during the current receivable period as compared to the prior comparable receivable period. The decreases in natural gas volumes produced and production costs are primarily the result of additional Company operated properties being shut-in during the current receivable period that were otherwise producing during the prior comparable receivable period. The decrease in crude oil volumes sold during the current receivable period as compared to the prior comparable receivable period is primarily the result of the Company strategically holding much of its crude oil production in field tanks and delaying shipment during the COVID-19 pandemic while extreme market price volatility was prevalent. The increase in accounts payable is primarily the result of additional production and related other payables outstanding at June 30, 2020 as compared to the prior comparable reporting date, as well as additional other payables recognized at June 30, 2020 in association with the disposal of various oil and gas properties made during the six month period ending June 30, 2020. The increase in investments was primarily the result of additional purchases of shares in a mutual fund during the nine months ended September 30, 2019 that invests primarily in investment grade, short-term fixed and floating rate debt securities. The decrease in accrued expenses was primarily the result of all payroll and retirement contributions accrued at December 31, 2018 being paid during the nine months ended September 30, 2019. The decrease in production accounts receivable was primarily the result of lower average natural gas and crude oil prices received on production, as well as less natural gas volumes produced, during the current receivable period as compared to the prior comparable receivable period. The effect of lower average natural gas and crude oil prices received and less natural gas volumes produced was offset somewhat by additional natural gas and crude oil volumes recognized from third party operators during the current receivable period as compared to the prior comparable receivable period. The decrease in natural gas volumes produced was primarily the result of more Company operated properties being voluntarily shut-in during the current receivable period as compared to the prior comparable receivable period. The increase in accounts payable was primarily the result of additional production and related other payables outstanding at September 30, 2019 as compared to the prior comparable reporting date.

The Company generally funds its operations with cash generated by operations and/or existing cash and equivalent balances. In April 2020, the Company obtained a $327,000 loan through the United States Small Business Administration’s Paycheck Protection Program. The Company has had no other borrowings since 2003 and no other principal indebtedness was outstanding as of NovemberAugust 10, 2019. The Company used cash provided by operating activities and existing cash and equivalents to fund the purchase of $2.9 million of investments during the nine month period ending September 30, 2019, the payment of a distribution amounting to approximately $1.7 million in April 2019, and $130,000 in payments in July 2019 associated with the repurchase of Units tendered in conjunction with the Company’s 2019 Repurchase Right.2020.

The Company’s cash flow provided by operations before the change in working capital was $3.3 million$19,000 during the ninesix months ended SeptemberJune 30, 2019,2020, a decrease of $748,000$2.8 million as compared to $4.0$2.8 million of cash flow provided by operations before the change in working capital during the prior comparable period. Changes in working capital from operations other than cash and equivalents increased cash by $604,000$214,000 during the ninesix months ended SeptemberJune 30, 2019.2020. Cash flows provided by operating activities was $3.9 million$233,000 for the ninesix months ended SeptemberJune 30, 2019.2020. The Company used cash provided by operating activities as well as existing cash and equivalents to fund the payment of a distribution amounting to approximately $1.4 million in April 2020.

Management of the Company believes cash flows and existing cash and equivalents should be sufficient to meet the current funding requirements of ongoing operations, capital investments to develop and/or purchase oil and gas properties and the repurchase of Units pursuant to the 20202021 Repurchase Right.Right, if necessary.

The Company has multiple contracts with Dominion Field Services (“Dominion”) which obligate Dominion to purchase, and the Company to sell and deliver, certain quantities of natural gas production from the Company’s oil and gas properties throughout the contract periods. Management believes the Company can meet its delivery commitments based on estimated production.

Results of Operations

The following table and discussion is a review of the results of operations of the Company for the three and ninesix month periods ended SeptemberJune 30, 20192020 and 2018.2019. All items in the table are calculated as a percentage of total revenues. This table should be read in conjunction with the discussions of select items below:

Revenues for the three month period ended SeptemberJune 30, 20192020 decreased $1.3$1.4 million, or 48%71%, as compared to the prior comparable period. Revenues for the ninesix month period ended SeptemberJune 30, 20192020 decreased $1.2$2.9 million, or 16%60%, as compared to the prior comparable period. Both revenue variances were primarily the result of variancesdecreases in crude oil and natural gas sales from the current period in comparison to the prior comparable periods.sales.

Crude oil and natural gas sales decreased $1.3 million, or 50%73%, during the three months ended SeptemberJune 30, 2019 as compared to the prior comparable period. The decrease was primarily the result of less natural gas and crude oil volumes produced and lower average crude oil and natural gas prices received during the three month period ended September 30, 20192020 as compared to the prior comparable period. Crude oil and natural gas sales decreased $1.2$2.8 million, or 16%62%, during the ninesix months ended SeptemberJune 30, 2019 as compared to the prior comparable period. The decrease was primarily the result of less natural gas and crude oil volumes produced and lower average crude oil prices received, offset somewhat by the effect of higher average natural gas prices received, during the nine month period ended September 30, 2019 as compared to the prior comparable period. The decreases in natural gas and crude oil volumes produced during the three and nine month periods ended September 30, 2019 as compared to the prior comparable periods were primarily the result of more Company operated properties being voluntarily shut-in. Another contributing factor to the decreases in crude oil and natural gas sales for the three and nine month periods ended September 30, 2019 as compared to the prior comparable periods was the recognition of $956,000 of crude oil and natural gas sales reported by a third party operator significantly in arrears during the three and nine month periods ended September 30, 2018.

Production costs decreased $581,000, or 51%, during the three months ended September 30, 2019 as compared to the prior comparable period. Production costs decreased $435,000, or 18%, during the nine months ended September 30, 20192020 as compared to the prior comparable period. The decreases were primarily the result of one-time recognition of $637,000 of production costs reported by a third party operator significantly in arrearsless natural gas volumes produced and less crude oil volumes sold, as well as lower average natural gas and crude oil prices received, during the three and ninesix month periods ended June 30, 2020 as compared to the prior comparable periods. The decrease in natural gas volumes produced during the three and six month periods ended June 30, 2020 as compared to the prior comparable periods was primarily the result of Company operated properties being voluntarily shut-in during the three and six month periods ended June 30, 2020 that were not shut-in during the prior comparable periods, as well as less reported volumes recognized from third party operated properties. The decrease in crude oil volumes sold during the three and six month periods ended June 30, 2020 as compared to the prior comparable periods was primarily the result of the Company strategically holding much of its crude oil production in field tanks and delaying shipment during the COVID-19 pandemic while extreme market price volatility was prevalent.

Production costs decreased $192,000, or 36%, during the three months ended SeptemberJune 30, 2018, respectively, offset somewhat by additional2020 as compared to the prior comparable period. Production costs associateddecreased $369,000, or 27% during the six months ended June 30, 2020 as compared to the prior comparable period. The primary reasons for both of the decreases are the result of less costs recognized in association with third party operated wellsproperties and decreased costs associated with Company operated properties as more Company operated properties were voluntarily shut-in during the three and ninesix month periods ended SeptemberJune 30, 2020 as compared to the prior comparable periods.

Depreciation, depletion and amortization (“DD&A”) increased $37,000, or 33% during the three months ended June 30, 2020 as compared to the prior comparable period. DD&A increased $107,000, or 47% during the six months ended June 30, 2020 as compared to the prior comparable period. The primary reasons for both of the increases are lower projected crude oil and natural gas reserves during the three and six month periods ended June 30, 2020 as compared to the prior comparable periods. The decrease in projected crude oil and natural gas reserves is primarily the result of lower benchmark crude oil and natural gas prices indexed throughout the first three and six months of 2020 as compared to the benchmark prices indexed throughout the prior comparable periods. The lower 2020 benchmark prices project to decrease reserves at December 31, 2020, the next scheduled valuation date, which will decrease the average economic life of the Company’s oil and gas properties as compared to December 31, 2019, the prior valuation date. The effect that lower projected crude oil and natural gas reserves had on DD&A was offset somewhat by less crude oil and natural gas volumes produced during the three and six month periods ended June 30, 2020 as compared to the prior comparable periods.

Other income decreased $67,000,increased $196,000, or 33%121%, during the three month period ended SeptemberJune 30, 2019 as compared to the prior comparable period. Other income decreased $414,000, or 45%, during the nine month period ended September 30, 20192020 as compared to the prior comparable period. The primary reason for the decreasesincrease was the result of less gaindue to an increase in investment income recognized on the disposal of property and equipment. The Company had a substantial decrease in the number of properties disposed during the three and nine month periodsmonths ended SeptemberJune 30, 20192020 as compared to the prior comparable periods. The majority of the gains on disposal of property and equipment during the three and nine month periods ended September 2018 were associated with settlements of the properties’ related asset retirement obligations. The effect of less gain recognized on the disposal of property and equipment was offset somewhat by additional interest and dividend income recognized during the three and nine month periods ended September 30, 2019 as compared to the prior comparable periods.period. The increase in interest and dividendinvestment income was primarily the result of additional unrealized gains on investments held andrecognized during the relatedthree month period ended June 30, 2020 as compared to the prior comparable period, the effect of which was offset somewhat by less dividends yielded on investments during the three and nine month periodsperiod ended SeptemberJune 30, 20192020 as compared to the prior comparable periods.period. Other income increased $324,000, or 85%, during the six month period ended June 30, 2020 as compared to the prior comparable period. The primary reason for the increase was the result of an increase in gain on disposal of property and equipment, offset somewhat by a decrease in investment income recognized, during the six month period ended June 30, 2020 as compared to the prior comparable period. The increase in gain on disposal of property and equipment was primarily the result of the Company selling substantially all of its interests in 190 oil and gas properties during the six months ended June 30, 2020, as compared to the sale of 1 oil and gas property during the prior comparable period. The decrease in investment income is primarily due to the Company having received less dividends from its investments during the six month period ended June 30, 2020 as compared to the prior comparable period. Additionally, the Company recognized less unrealized gains on investments during the six month period ended June 30, 2020 as compared to the prior comparable period.

The Company reported net incomelosses of $178,000$168,000 and $1.0 million$23,000 during the three and six months ended SeptemberJune 30, 2019 and 2018,2020 , respectively, representing 12% and 38% of total revenues duringwhereas the three month periods ended September 30, 2019 and 2018, respectively. The Company reported net income of $2.4 million$806,000 and $3.4$2.2 million during the ninethree and six months ended SeptemberJune 30, 2019, and 2018, respectively, representing 38% and 47% of total revenues during the nine month periods ended September 30, 2019 and 2018, respectively. The decreases in net income werein both periods was primarily the result of decreases in crude oil and natural gas sales and other income,increases in DD&A, offset somewhat by a decreases in production costs.costs and increases in other income. The Company’s net loss represented 30% and 1% of total revenues during the three and six month periods ended June 30, 2020, respectively. The Company’s net income represented 42% and 45% of total revenues during the three and six month periods ending June 30, 2019, respectively.

Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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. The critical accounting policies that affect the Company’s more complex judgments and estimates are described in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018.2019.

Forward-Looking Statements

Except for historical financial information contained in this Form 10-Q, the statements made in this report are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”). In addition, words such as “expects,” “anticipate,” “intends,” “plans,” “believes,” “estimates,” variations of such words and similar expressions are intended to identify forward-looking statements. Factors that may cause actual results to differ materially from those in the forward-looking statements include price fluctuations in the gas market in the Appalachian Basin, actual oil and gas production and the ability to locate economically productive oil and gas prospects for development by the Company.Company and the impact of COVID-19 on the Company’s business and global economy generally. In addition, any forward-looking statements speak only as of the date on which such statement is made and the Company does not undertake any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

This information has been omitted, as the Company qualifies as a smaller reporting company.

(a)       Disclosure Controls and Procedures. As of the end of the period covered by this report, management performed, with the participation of our Principal Executive Officer (the “CEO”) and Principal Financial and Accounting Officer (the “CFO”), an evaluation of the effectiveness of our disclosure controls and procedures as defined in Exchange Act Rules 13a-15 (the “evaluation”). Our disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our CEO and CFO, to allow timely decisions regarding required disclosures. Based on the evaluation, management, including our CEO and CFO, concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

The certifications of the Company’s CEO and CFO are attached as Exhibits 31.1 and 31.2 to this Quarterly Report on Form 10-Q and include, in paragraph 4 of such certifications, information concerning the Company’s disclosure controls and procedures and internal control over financial reporting. Such certifications should be read in conjunction with the information contained in this Item 4., including the information incorporated by reference to our filing on Form 10-K for the year ended December 31, 2018,2019, for a more complete understanding of the matters covered by such certifications.

(b)       Changes in internal control over financial reporting. No change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

SIGNATURE

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 thereunto duly authorized.

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