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RSRV Reserve Petroleum

Filed: 15 Apr 21, 6:06am
 

 

THE RESERVE PETROLEUM COMPANY

6801 Broadway Ext. Suite 300

Oklahoma City, Oklahoma 73116-9092

 

 

 

SECURTIES AND EXCHANGE COMMISSION

Washington DC

 

 

 

 

 

Dear Sir:

 

Forwarded herewith is the Annual Report to security holders for the year ended December 31, 2020, to be mailed to the security holders along with proxy material on or about April 15, 2021. No changes were made from 2019 in accounting principles or practices, or in the methods of application of those principles or practices.

 

 

Date: April 15, 2020

Very truly yours,

 

THE RESERVE PETROLEUM COMPANY

 

/s/ Lawrence R. Francis

  
 

Lawrence R. Francis

1st Vice President

 

 

 

 

         

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(Mark One)

☑         ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2020

☐         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 000-08157

 

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)

 

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

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

None

None

None

 

Securities registered under Section 12(g) of the Exchange Act:

 

COMMON STOCK ($0.50 PAR VALUE)

(Title of Class)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☐Yes ☑No

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. ☐Yes ☑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 registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. ☑Yes ☐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 ☐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:

 

Large accelerated filer ☐Accelerated filer ☐Non-accelerated filer ☐
Smaller reporting company ☑Emerging growth company ☐

 

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 accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐

 

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

 

As of June 30, 2020 (the last business day of the registrant’s most recently completed second fiscal quarter), the aggregate market value of the voting and non-voting common stock of the registrant held by non-affiliates of the registrant was $15,875,499, as computed by reference to the last reported sale which was on June 22, 2020.

 

As of March 18, 2021, there were 156,595 shares of the registrant’s common stock outstanding.

 

 

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the definitive proxy statement (the “Proxy Statement”) relating to the registrant’s Annual Meeting of Shareholders to be held on May 25, 2021, which will be filed within 120 days of the end of the registrant’s year ended December 31, 2020, are incorporated by reference into Part III of this Form 10-K to the extent described therein.

 

 

 

TABLE OF CONTENTS

 

 

  Page
Forward-Looking Statements3
   
PART I
   
Item 1.Business3
Item 1A. Risk Factors5
Item 1B.Unresolved Staff Comments5
Item 2.Properties5
Item 3.Legal Proceedings7
Item 4.Mine Safety Disclosures7
   
PART II
   
Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities7
Item 6.Selected Financial Data7
Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations 7
Item 7A.Quantitative and Qualitative Disclosures about Market Risk 13
Item 8.Financial Statements and Supplementary Data13
Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 36
Item 9A.Controls and Procedures36
Item 9B.Other Information37
   
PART III
   
Item 10.Directors, Executive Officers and Corporate Governance37
Item 11.Executive Compensation37
Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters37
Item 13.Certain Relationships and Related Transactions and Director Independence37
Item 14.Principal Accountant Fees and Services37
   
PART IV
   
Item 15.Exhibits and Financial Statement Schedules38
Item 16.Form 10-K Summary38

 

2

 

 

Forward-Looking Statements

 

In addition to historical information, from time to time the Company may publish 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 provide the reader with management’s current expectations of future events. They include statements relating to such matters as anticipated financial performance, business prospects such as drilling of oil and gas wells, technological development and similar matters.

 

Although management believes that the expectations reflected in forward-looking statements are based on reasonable assumptions, a variety of factors could cause the Company’s actual results and experience to differ materially from the anticipated results or other expectations expressed in the Company’s forward-looking statements. The risks and uncertainties that may affect the operations, performance, development and results of our business include, but are not limited to, the following:

 

 

The Company’s future operating results will depend upon management’s ability to employ and retain quality employees, generate revenues and control expenses. Any decline in operating revenues, without a corresponding reduction in operating expenses, could have a material adverse effect on our business, results of operations and financial condition.

 

 

The Company has no significant long-term sales contracts for either oil or gas. For the most part, the price we receive for our product is based upon the spot market price, which in the past has experienced significant fluctuations. Management anticipates price fluctuations will continue in the future, making any attempt at estimating future prices subject to significant uncertainty. In March and April 2020, oil prices dropped significantly, to their lowest levels in 21 years. These depressed oil prices resulted in a significant reduction of our revenues. To the extent oil and gas prices remain depressed or decline further, the Company’s results of operations and financial condition will continue to be adversely impacted.

��

 

Exploration costs have been a significant component of the Company’s capital expenditures in the past and are expected to remain so in the near term. Under the successful efforts method of accounting for oil and gas properties which the Company uses, these costs are capitalized if drilling is successful or charged to operating costs and expenses if unsuccessful. Estimating the amount of future costs which may relate to successful or unsuccessful drilling is extremely imprecise.

 

The Company does not undertake any obligation to publicly revise forward-looking statements to reflect events or circumstances that arise after the filing date of this Form 10-K. Readers should carefully review the information described in other documents the Company files from time to time with the Securities and Exchange Commission, including the Quarterly Reports on Form 10-Q to be filed by the Company in 2021 and any Current Reports on Form 8-K filed by the Company.

 

 

PART I

 

ITEM 1.

BUSINESS

 

Overview

 

The Reserve Petroleum Company (the “Company,” “we,” “our” or “us”) is engaged principally in managing its owned mineral properties and the exploration for and the development of oil and natural gas properties. Other business segments are not significant factors in our operations. The Company is a corporation organized under the laws of the State of Delaware in 1931.

 

Oil and Natural Gas Properties

 

For a summary of certain data relating to the Company’s oil and gas properties, including production, undeveloped acreage, producing and dry wells drilled and recent activity, see Item 2, “Properties.” For a discussion and analysis of current and prior years’ revenue and related costs of oil and gas operations and a discussion of liquidity and capital resource requirements, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

Owned Mineral Property Management

 

The Company owns non-producing mineral interests in 256,684 gross acres equivalent to 88,282 net acres. These mineral interests are in ten different states in the north and south-central United States. A total of 81,148 (92%) net acres are in the states of Arkansas, Kansas, Oklahoma, South Dakota and Texas, the areas of concentration for the Company in our exploration and development programs.

 

3

 

The Company has several options relating to the exploration and/or development of our owned mineral interests. Management continually reviews various industry reports and other sources for activity (leasing, drilling, significant discoveries, etc.) in areas where the Company has mineral ownership. Based on our analysis of any activity and assessment of the potential risk relative to the particular area, management may negotiate a lease or farmout agreement and accept a royalty interest, or we may choose to participate as a working interest owner and pay our proportionate share of any exploration or development drilling costs.

 

A substantial amount of the Company’s oil and gas revenue has resulted from our owned mineral property management. In 2020, $1,797,344 (45%) of oil and gas sales was from royalty interests versus $2,541,341 (39%) in 2019. As a result of our mineral ownership, the Company had royalty interests in 7 gross (0.10 net) wells, which were drilled and completed as producing wells in 2020. This resulted in an average royalty interest of 1.4% for these 7 new wells. The Company has very little control over the timing or extent of the operations conducted on our royalty interest properties. See the following paragraphs for a discussion of mineral interests in which the Company chooses to participate as a working interest owner.

 

Development Program

 

Development drilling by the Company is usually initiated in one of three ways. The Company may participate as a working interest owner with a third party operator in the development of non-producing mineral interests, which it owns; with a joint interest operator, we may participate in drilling additional wells on our producing leaseholds; or if our exploration program, discussed below, results in a successful exploratory well, we may participate in the drilling of additional wells on the exploratory prospect. In 2020, the Company participated in the drilling of 7 development wells with 3 (0.42 net) completed as producers and 4 (0.13 net) in progress at the end of 2020.

 

Exploration Program

 

The Company’s exploration program is normally conducted by purchasing interests in prospects developed by independent third parties; participating in third party exploration of Company-owned non-producing minerals; developing our own exploratory prospects; or a combination of the above.

 

The Company normally acquires interests in exploratory prospects from someone in the industry with whom management has conducted business in the past and/or if management has confidence in the quality of the geological and geophysical information presented for evaluation to Company personnel. If evaluation indicates the prospect is within our risk limits, we may negotiate to acquire an interest in the prospect and participate in a non-operating capacity.

 

The Company develops exploratory drilling prospects by identification of an area of interest, development of geological and geophysical information and purchase of leaseholds in the area. The Company may then attempt to sell an interest in the prospect to one or more companies in the petroleum industry with one of the purchasing companies functioning as operator. In 2020, we participated in the drilling of 6 exploratory wells with 3 wells (0.42 net) completed as producers, 1 well (0.13 net) in progress at the end of 2020 and 2 wells (0.25 net) completed as dry holes.

 

For a summation of exploratory and development wells drilled in 2020 or planned for in 2021, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” subheading “Update of Oil and Gas Exploration and Development Activity.”

 

Customers

 

In 2020, the Company had one customer whose total purchases were greater than 10% of revenues from oil and gas sales. Redland Resources, LLC’s purchases were $717,866 or 17% of total oil and gas sales. The Company sells most of its oil and gas under short-term sales contracts that are based on the spot market price.

 

Competition

 

The oil and gas industry is highly competitive in all of its phases. There are numerous circumstances within the industry and related market place that are out of the Company’s control such as cost and availability of alternative fuels, the level of consumer demand, the extent of other domestic production of oil and gas, the price and extent of importation of foreign oil and gas, the cost of and proximity of pipelines and other transportation facilities, the cost and availability of drilling rigs, regulation by state and federal authorities and the cost of complying with applicable environmental regulations.

 

4

 

The Company does not operate any of the wells in which we have an interest; rather, we partner with companies that have the resources, staff and experience to operate wells both in the drilling and production phases. The Company uses its strong financial base and its mineral and leasehold acreage ownership, along with its own geologic and economic evaluations, to participate in drilling operations with these companies. This methodology allows us to participate in exploration and development activities we could not undertake on our own due to financial and personnel limits and allows us to maintain low overhead costs.

 

Regulation

 

The Company’s operations are affected in varying degrees by political developments and federal and state laws and regulations. Although released from federal price controls, interstate sales of natural gas are subject to regulation by the Federal Energy Regulatory Commission (FERC). Oil and gas operations are affected by environmental laws and other laws relating to the petroleum industry, and both are affected by constantly changing administrative regulations. Rates of production of oil and gas have, for many years, been subject to a variety of conservation laws and regulations, and the petroleum industry is frequently affected by changes in the federal tax laws.

 

Generally, the respective state regulatory agencies supervise various aspects of oil and gas operations within their states and the transportation of oil and gas sold intrastate.

 

Environmental Protection and Climate Change

 

The Company may be, directly and indirectly, subject to the effects of climate change and may, directly or indirectly, be affected by government laws and regulations related to climate change. We cannot predict with any degree of certainty what effect, if any, climate change and government laws and regulations related to climate change will have on the Company and our business, whether directly or indirectly. While we believe that it is difficult to assess the timing and effect of climate change and pending legislation and regulation related to climate change on our business, we believe that those laws and regulations may affect, directly or indirectly, (i) the costs associated with drilling and production operations in which we participate, (ii) the demand for oil and natural gas, (iii) insurance premiums, deductibles and the availability of coverage and (iv) the cost of utilities paid by the Company. In addition, climate change may increase the likelihood of property damage and the disruption of operation of wells in which we participate. As a result, our financial condition could be negatively impacted, but we are unable to determine at this time whether that impact would be material.

 

Other Business

 

See Item 8, Notes 2 and 7 to the accompanying financial statements for a discussion of other business including guarantees.

 

Employees

 

At December 31, 2020, the Company had seven employees including officers. See the Proxy Statement for additional information. During 2020, all our employees devoted a portion of their time to duties with affiliated companies, and we were reimbursed for the affiliates’ share of compensation directly from those companies. See Item 8, Note 12 to the accompanying financial statements for additional information.

 

ITEM 1A.

RISK FACTORS

 

Not applicable.

 

ITEM 1B.

UNRESOLVED STAFF COMMENTS

 

Not applicable.

 

ITEM 2.

PROPERTIES

 

The Company’s principal properties are oil and natural gas properties. We have interests in approximately 821 producing properties with 43% of them being working interest properties and the remaining 57% being royalty interest properties. About 80% of all properties are in Oklahoma and Texas and account for approximately 77% of our annual oil and gas sales. About 14% of the properties are in Arkansas, Kansas and South Dakota and account for approximately 21% of our annual oil and gas sales. The remaining 6% of these properties are in Colorado, Montana, Nebraska, New Mexico and West Virginia and account for about 2% of our annual oil and gas sales. No individual property provides more than 10% of our annual oil and gas sales. See discussion of revenues from Robertson County, Texas, royalty interest properties in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” subheading “Operating Revenues” for additional information about significant properties.

 

5

 

OIL AND NATURAL GAS OPERATIONS

 

Oil and Gas Reserves

 

Reference is made to the Unaudited Supplemental Financial Information beginning on Page 31 for working interest reserve quantity information.

 

Since January 1, 2020, the Company has not filed any reports with any federal authority or agency, which included estimates of total proved net oil or gas reserves, except for its 2019 Annual Report on Form 10-K and federal income tax return for the year ended December 31, 2019. Those reserve estimates were identical.

 

Production

 

The average sales price of oil and gas production for the Company’s royalty and working interests as well as the average working interest production cost (lifting cost) per equivalent thousand cubic feet (MCF) of gas are presented in the table below for the years ended December 31, 2020, 2019 and 2018. Equivalent MCF was calculated using approximate relative energy content.

 

  

Royalties

  

Working Interests

 
  

Sales Price

  

Sales Price

  

Average Production

 
  

Oil

  

Gas

  

Oil

  

Gas

  

Cost per

 
  

Per Bbl

  

Per MCF

  

Per Bbl

  

Per MCF

  

Equivalent MCF

 

2020

 $38.48  $1.95  $34.88  $1.69  $2.46 

2019

 $56.00  $2.53  $52.39  $1.99  $2.56 

2018

 $62.48  $2.93  $60.87  $2.79  $2.72 

 

At December 31, 2020, the Company had working interests in 165 gross (21.00 net) wells producing primarily gas and 247 gross (26.29 net) wells producing primarily oil. These interests were in 63,433 gross (7,624 net) producing acres. These wells include 47 gross (1.61 net) wells associated with secondary recovery projects.

 

Undeveloped Acreage

 

The Company’s undeveloped acreage consists of non-producing mineral interests and undeveloped leaseholds. The following table summarizes the Company’s gross and net acres in each at December 31, 2020.

 

  

Acreage

 
  

Gross

  

Net

 

Non-producing Mineral Interests

  256,684   88,282 

Undeveloped Leaseholds

  38,048   9,130 

 

Net Productive and Dry Wells Drilled

 

The following table summarizes the net wells drilled, in which the Company had a working interest for the years ended December 31, 2018 and thereafter, as to net productive and dry exploratory wells drilled and net productive and dry development wells drilled. Net exploratory and development totals for 2020 include the 2 exploratory wells still drilling at the end of 2019. As indicated in the “Development Program” and “Exploration Program” on Page 4, 4 development wells and 1 exploratory well were still in progress at the time of this Form 10-K.

 

  

Number of Net Working Interest Wells Drilled

 
  

Exploratory

  

Development

 
  

Productive

  

Dry

  

Productive

  

Dry

 

2020

  0.42   0.25   0.42   --- 

2019

  0.63   0.08   0.28   --- 

2018

  0.18   0.24   0.68   --- 

 

6

 

Recent Activities

 

See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” subheading “Update of Oil and Gas Exploration and Development Activity” for a summary of recent activities related to oil and natural gas operations.

 

ITEM 3.

LEGAL PROCEEDINGS

 

There are no material legal proceedings pending affecting the Company or any of its properties.

 

ITEM 4.

MINE SAFETY DISCLOSURES

 

Not applicable.

 

 

PART II

 

ITEM 5.

MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

The Company’s stock is dually traded in the Pink Sheet Electronic Quotation Service and the OTC Bulletin Board under the symbol “RSRV.” The following high and low bid information was quoted on the Pink Sheets OTC Market Report. Prices reflect inter-dealer prices without retail markup, markdown, or commission and may not reflect actual transactions.

 

  

Quarterly Ranges

 

Quarter Ending

 

High Bid

  

Low Bid

 

03/31/19

 $200  $187 

06/30/19

 $206  $193 

09/30/19

 $210  $194 

12/31/19

 $210  $190 

03/31/20

 $210  $110 

06/30/20

 $137  $111 

09/30/20

 $140  $122 

12/31/20

 $140  $126 

 

There was limited public trading in the Company’s common stock in 2020 and 2019.

 

At March 18, 2021, the Company had 1,628 holders of record of its common stock. The Company paid dividends on its common stock in the amount of $5.00 per share in the second quarter of 2020 and $7.00 per share in the second quarter of 2019. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” subheading “Financing Activities” section for more information about dividends paid. Management will review the amount of the annual dividend to be paid in 2021, if any, with the Board of Directors for its approval.

 

ITEM 6.

SELECTED FINANCIAL DATA

 

Not applicable.

 

ITEM 7.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

COVID-19

 

In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. Governments have tried to slow the spread of the virus by imposing social distancing guidelines, travel restrictions and stay-at-home orders, which have caused a significant decrease in activity in the global economy and the demand for oil and to a lesser extent natural gas. As a result, the price for oil decreased significantly. While oil prices have recovered significantly, there is still ongoing volatility in the market.

 

7

 

Our profitability has been and will likely continue to be significantly affected by this decreased demand and lower commodity price environment. The decline in commodity prices and our future estimated production levels could lead to additional material impairments of our long-lived assets, equity method investments and right-of-use assets. It is likely that additional impairments could be triggered if the COVID-19 pandemic leads to a continued and sustained reduction in global economic activity and demand for energy. We continue to evaluate all cash management strategies, maintaining conservative choices in short-term investments to protect cash reserves and liquidity.

 

Please refer to the financial statements and related notes in Item 8 of this Form 10-K to supplement this discussion and analysis.

 

Critical Accounting Estimates

 

 

Estimates of future revenues from oil and gas sales are derived from a combination of factors which are subject to significant fluctuation over any given period. Reserve estimates, by their nature, are subject to revision in the short-term. The evaluating engineer considers production performance data, reservoir data and geological data available to the Company, as well as makes estimates of production costs, sale prices and the time period the property can be produced at a profit. A change in any of the above factors can significantly change the timing and amount of net revenues from a property. The Company’s producing properties are composed of many small working interest and royalty interest properties. As a non-operating owner, we have limited access to the underlying data from which working interest reserve estimates are calculated. Estimates of royalty interest reserves are not made because the information required for the estimation is not available to the Company. While reserve estimates are not accounting estimates, they are the basis for impairment, depreciation, depletion and amortization described below. Additionally, the estimated economic life for each producing property from the reserve estimates is used in the calculation of asset retirement obligations.

 

 

Reserves relating to the Company’s proved properties may become uneconomic to produce resulting in impairment of proved properties.

 

 

The provisions for depreciation, depletion and amortization of oil and gas properties all constitute critical accounting estimates. Non-producing leaseholds are amortized over the life of the leases using a straight-line method; however, when leases are impaired or condemned, an appropriate adjustment to the provision is made at that time.

 

 

The provision for impairment of long-lived assets is determined by review of the estimated future cash flows from the individual properties. A significant, unforeseen downward adjustment in future prices and/or potential reserves could result in a material change in estimated long-lived assets impairment.

 

 

Depletion and depreciation of oil and gas properties are computed using the units-of-production method. A significant, unanticipated change in volume of production or estimated reserves would result in a material, unexpected change in the estimated depletion and depreciation provisions.

 

 

The Company has significant obligations to remove tangible equipment and facilities associated with oil and gas wells and to restore land at the end of oil and gas production operations. Removal and restoration obligations are most often associated with plugging and abandoning wells. Estimating the future restoration and removal costs is difficult and requires estimates and judgments because most of the removal obligations will take effect in the future. Additionally, these operations are subject to private contracts and government regulations that often have vague descriptions of what is required. Asset removal technologies and costs are constantly changing as are regulatory, political, environmental and safety considerations. Inherent in the present value calculations are numerous assumptions and judgments, including the ultimate removal cost amounts, inflation factors and discount rate.

 

 

The estimation of the amounts of income tax to be recorded by the Company involves interpretation of complex tax laws and regulations as well as the completion of complex calculations, including the determination of the Company’s percentage depletion deduction, if any. To calculate the exact excess percentage depletion allowance, a well-by-well calculation is and can only be performed at the end of each year. During interim periods, a high-level estimate is made considering historical data and current pricing. Although our management believes its income tax accruals are adequate, differences may occur in the future depending on the resolution of pending and new tax matters.

 

 

LIQUIDITY AND CAPITAL RESOURCES

 

To supplement the following discussion, please refer to the balance sheets and the statements of cash flows included in this Form 10-K.

 

8

 

In 2020, as in prior years, the Company funded its business activity using internal sources of capital. For the most part, these internal sources are cash flows from operations, cash, cash equivalents and available-for-sale debt securities. When cash flows from operating activities are in excess of those needed for other business activities, the remaining balance is used to increase cash, cash equivalents and/or available-for-sale debt securities. When cash flows from operating activities are not adequate to fund other business activities, withdrawals are made from cash, cash equivalents and/or available-for-sale debt securities. Cash equivalents are highly liquid debt instruments purchased with a maturity of three months or less. All the available-for-sale debt securities are U.S. Treasury Bills.

 

In 2020, net cash provided by operating activities was $1,105,337, net cash provided by investing activities was $13,129,088 and net cash applied to financing activities was $785,678.

 

Other than cash and cash equivalents, other significant changes in working capital include the following:

 

Equity securities increased $1,991,407 (365%) to $2,536,482 in 2020 from $545,075 in 2019. The net increase is primarily due to a net increase in purchases of $1,577,032, unrealized gains of $296,920, which represent the change in the fair value of the securities from their original cost and $117,455 of 2020 realized gain on sales.

 

Refundable income taxes increased $108,205 (50%) to $218,204 from $109,999 in 2019, due primarily to a current tax benefit in 2020.

 

Accounts receivable decreased $174,220 (18%) to $794,162 in 2020 from $968,382 in 2019. The change was primarily due to changes in oil and gas sales receivables due to the current decreased pricing environment.

 

Notes receivable of $278,569 were issued in 2020, with none in 2019. See “Investing Activities” below for detail on notes receivable.

 

Accounts payable increased $91,286 (58%) to $248,054 in 2020 from $156,768 in 2019, due to timing of payables processing.

 

Discussion of Selected Material Line Items in Cash Flows.

 

The following is a discussion of material changes in cash flow by activity between the years ended December 31, 2020 and 2019. Also, see the discussion of changes in operating results under “Results of Operations” below in this Item 7.

 

Operating Activities

 

As noted above, net cash flows provided by operating activities in 2020 were $1,105,337, which, when compared to the $2,855,972 provided in 2019, represents a net decrease of $1,750,635. The decrease was mostly due to a decrease in oil and gas sales of $2,069,316 and a decrease of interest received of $259,679, offset by a decrease in production costs of $424,142 and income tax refunds net of taxes paid of $77,550 in 2020, compared to income taxes paid net of refunds of $163,443 in 2019. Additional discussion of the significant items follows.

 

The $2,069,316 (32%) decrease in cash received from oil and gas sales to $4,323,526 in 2020 from $6,392,842 in 2019 was the result of a decrease in oil and gas sales prices and a decrease in oil and gas sales volumes. See “Results of Operations” below for a price/volume analysis and the related discussion of oil and gas sales.

 

Interest received decreased $259,679 (55%) to $214,156 in 2020 from $473,835 in 2019. This decrease was the result of decreased interest rates on available-for-sale debt securities.

 

Investing Activities

 

Net cash provided by investing activities was $13,129,088 in 2020, from a net cash applied to investing activities of $4,287,328 in 2019. The 2020 amount was due to a net increase in the maturity of available-for-sale debt securities of $17,002,677 available-for-sale debt securities, offset by net equity securities purchases of $1,577,032, net property purchases of $1,517,255, notes receivable issued for $278,569 and a $500,733 increase in purchases of other investments.

 

The $278,569 in notes receivable discussed above are all receivable from Grand Woods, an equity investment. The notes are expected to be paid within the next year, either upon restructuring of financing agreements within the investment or upon the sale of property held by the investment. See Item 8, Note 7 to the accompanying financial statements for related disclosures and additional information regarding equity investments.

 

9

 

Financing Activities

 

Cash applied to financing activities decreased $1,473,127 (65%) to $785,678 in 2020 from $2,258,805 in 2019. Cash applied to financing activities consist of cash dividends on common stock and cash used for the purchase of treasury stock. In 2020, cash dividends paid on common stock amounted to $783,078 as compared to $1,479,081 in 2019. Dividends of $5.00 per share were paid in 2020 compared to $7.00 per share paid in 2019. Dividends payable of $687,048 in 2019 represented net cash transferred to the Company’s transfer agent for payment and escheatment of past dividends. Cash applied to purchase treasury stock decreased $90,076 to $2,600 in 2020 from $92,676 in 2019.

 

Forward-Looking Summary

 

The Company’s latest estimate of business to be done beyond 2020 indicates the projected activity can be funded from cash flows from operations and other internal sources, including net working capital. The Company is engaged in exploratory drilling. If this drilling is successful, substantial development drilling may result. Also, should other exploration projects which fit the Company’s risk parameters become available or other investment opportunities become known, capital requirements may be more than the Company has available. If so, the Company could require external sources of financing.

 

RESULTS OF OPERATIONS

 

As disclosed in the statements of operations in Item 8 of this Form 10-K, in 2020 the Company had a net loss of $(1,956,255) as compared to net loss of $(266,763) in 2019. Net loss per share, basic and diluted, was $(12.49) in 2020, an increase of $10.79 per share from $(1.70) in 2019. Material line item changes in the statements of operations will be discussed in the following paragraphs.

 

Operating Revenues

 

Operating revenues decreased $2,546,191 (38%) to $4,082,098 in 2020 from $6,628,289 in 2019. Oil and gas sales decreased $2,495,988 (38%) to $3,995,074 in 2020 from $6,491,062 in 2019. Lease bonuses and other revenues decreased $50,203 (37%) to $87,024 in 2020 from $137,227 in 2019. The decrease in oil and gas sales is discussed in the following paragraphs.

 

The $2,495,988 decrease in oil and gas sales was the result of a $523,261 decrease in gas sales, a $1,918,842 decrease in oil sales and an $53,885 decrease in miscellaneous oil and gas product sales. The following price and volume analysis is presented to explain the changes in oil and gas sales from 2019 to 2020. Miscellaneous oil and gas product sales of $126,167 in 2020 and $180,052 in 2019 are not included in the analysis.

 

(in thousands, except      

Variance

     
per Unit prices)                 
Production  

2020

  

Price

  

Volume

  

2019

 
Gas –                 
MCF   712       (103)  815 
$  $1,283  $(294) $(229) $1,806 
Unit Price  $1.80  $(0.42)     $2.22 
Oil –                 
Bbls   71       (13)  84 
$  $2,586  $(1,234) $(685) $4,505 
Unit Price  $36.28  $(17.31)     $53.59 

 

The $523,261 (29%) decrease in natural gas sales to $1,283,011 in 2020 from $1,806,272 in 2019 was the result of a decrease in gas sales volumes and a decrease in the average price received per thousand cubic feet (MCF). The average price per MCF of natural gas sales decreased $0.42 per MCF to $1.80 per MCF in 2020 from $2.22 per MCF in 2019, resulting in a negative gas price variance of $294,001. A negative volume variance of $229,259 was the result of a decrease in natural gas volumes sold of 103,270 MCF to 711,981 MCF in 2020 from 815,251 MCF in 2019.

 

The decrease in the volume of gas production was the net result of new 2020 production of about 3,800 MCF, offset by a decline of about 107,000 MCF in production from previous wells. As disclosed in Supplemental Schedule 1 of the Unaudited Supplemental Financial Information included in Item 8 below, working interests in natural gas extensions and discoveries were not adequate to replace working interest reserves produced in 2020 or 2019.

 

10

 

The gas production for 2020 and 2019 includes production from about 100 royalty interest properties drilled by various operators in Robertson County, Texas. These properties accounted for approximately 196,000 MCF and $386,000 of the 2020 gas sales and approximately 233,000 MCF and $653,000 of the 2019 gas sales. These properties accounted for about 31% of the Company’s gas revenues in 2020 versus 34% in 2019. The Company has no control over the timing of future drilling on the acreage in which we hold mineral interests.

 

The $1,918,842 (43%) decrease in crude oil sales to $2,585,896 in 2020 from $4,504,738 in 2019 was the result of a decrease in the average price per barrel (Bbl) and a decrease in oil sales volumes. The average price received per Bbl of oil decreased $17.31 to $36.28 in 2020 from $53.59 in 2019, resulting in a negative oil price variance of $1,233,610. A decrease in oil sales volumes of 12,786 Bbls to 71,271 Bbls in 2020 from 84,057 Bbls in 2019 resulted in a negative volume variance of $685,232.

 

The decrease in the oil volume production was the net result of new 2020 production of about 8,000 Bbls, offset by a 21,000 Bbl decline in production from previous wells. As disclosed in Supplemental Schedule 1 of the Unaudited Supplemental Financial Information included below in Item 8, working interests in oil extensions and discoveries were not adequate to replace working interest reserves produced in 2020 or 2019.

 

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.

 

Operating Costs and Expenses

 

Operating costs and expenses decreased $395,872 (5%) to $7,237,873 in 2020 from $7,633,745 in 2019, primarily due to decreases in production and exploration expenses, offset by an increase in long-lived assets impairment. The material components of operating costs and expenses are discussed below.

 

Production Costs. Production costs decreased $455,934 (20%) to $1,878,319 in 2020 from $2,334,253 in 2019. The decrease was the result of a $325,915 (20%) decrease in lease operating expense to $1,319,563 in 2020 from $1,645,478 in 2019 and a $124,136 (38%) decrease in gross production taxes to $206,671 in 2020 from $330,807 in 2019. Gross production taxes are state taxes, which are calculated as a percentage of gross proceeds from the sale of products from each producing oil and gas property, therefore, they fluctuate with the change in the dollar amount of revenues from oil and gas sales.

 

Exploration and Development Costs. Under the successful efforts method of accounting used by the Company, geological and geophysical costs are expensed as incurred, as are the costs of unsuccessful exploratory drilling. The costs of successful exploratory drilling and all development costs are capitalized. Total costs of exploration and development, excluding asset retirement obligations but inclusive of geological and geophysical costs, were $1,268,387 in 2020 and $1,082,804 in 2019. See Item 8, Note 8 to the accompanying financial statements for a breakdown of these costs. Exploration and acquisition costs charged to operations were $161,288 in 2020 and $709,753 in 2019, inclusive of geological and geophysical costs of $64,898 in 2020 and $54,317 in 2019. Mineral acquisition costs were $19,805 in 2020 and $471,251 in 2019.

 

Update of Oil and Gas Exploration and Development Activity. For the year ended December 31, 2020, the Company participated in the drilling of 6 gross exploratory working interest wells (including 2 in progress at the end of 2019) and 7 gross development working interest wells, with working interests ranging from a high of 14% to a low of 3.2%. Of the 6 exploratory wells, 3 were completed as producing wells, 2 as dry holes and 1 was in progress. Of the 7 development wells, 3 were completed as producing wells and 4 were in progress.

 

The following is a summary as of March 18, 2021, updating both exploration and development activity from December 31, 2019, for the period ended December 31, 2020.

 

The Company is participating with its 14% interest in the acquisition of additional leasehold and exploratory drilling on a Creek County, Oklahoma 3-D seismic project. There are currently seven active prospects within the project. Exploratory wells were drilled on two of the prospects in 2019. The two wells were completed in 2020, one as a commercial oil producer and the other as a dry hole. Three development wells were drilled on the first prospect and all three were completed as commercial oil producers. Exploratory wells were drilled on two additional prospects with one completed as a commercial oil producer and the other as a marginal oil producer. Another development well and two more exploratory wells will be drilled starting in March 2021, with additional development drilling to follow. Leasehold costs for the period were $9,872 and additional capitalized costs were $162,654. Dry hole costs of $31,390 were written off to expense.

 

11

 

The Company owns a 35% interest in 16,472.55 net acres of leasehold on a Crockett and Val Verde Counties, Texas prospect. Most of the acreage is underlain by a shallow heavy oil zone. The Company will participate with a 17.5% interest in the re-entry, completion and testing of a previously drilled test well on the prospect with the intention of conducting a thermal recovery pilot test.

 

The Company has been participating with a 13% interest in a 3-D seismic project covering approximately 35,000 acres in San Patricio County, Texas. Fourteen prospects have been identified and exploratory wells were successfully completed on two of these in 2019. Leasing is complete on six additional prospects. An exploratory well was drilled and completed on one of these, testing gas at a commercial rate. It is shut in awaiting pipeline construction. The Company is participating in the conversion of an abandoned producer to a saltwater disposal well that will handle water from all three existing wells and any future wells drilled in the area. Also, additional processing of the 3-D seismic data has been completed and additional well proposals are anticipated. Leasehold costs for the period were $40,175, additional capitalized costs were $223,428 and geophysical costs were $13,485.

 

The Company has been participating with a 50% interest in an attempt to develop oil prospects in the Permian Basin. The Company has acquired a 50% interest in 3,182 net acres of leasehold and three producing wells on a Nolan County, Texas prospect and is currently involved in efforts to sell a portion of its interest. Once sufficient interest has been placed, an exploratory horizontal well will be drilled on the prospect. Geological costs for the period were $51,413 and leasehold costs were $175,514.

 

The Company participated in an attempt to restore commercial production from a well that was drilled and completed in 2019 on a Murray County, Oklahoma prospect. The effort was unsuccessful, as was an attempt to re-complete in another zone. The well is under evaluation.

 

In August 2020, the Company purchased a 10.5% interest in 637.58 net acres of leasehold on a Lincoln County, Oklahoma prospect for $30,126. An exploratory well was drilled on the prospect and completed as a dry hole. Dry hole costs for the period were $21,378.

 

The Company is participating in the drilling of four horizontal development wells on fee minerals located in Kingfisher County, Oklahoma. The Company has a 3.2% working interest in three of the wells and a 3.5% working interest in the fourth. All four wells have been drilled with casing set and are scheduled for completion in April 2021. Prepaid costs for the period were $709,845, covering actual costs of $209,113.

 

The Company largely curtailed its exploration and development activity due to the historic collapse of oil prices in March and April 2020. It resumed drilling activity in the second half of the year with the improvement in the outlook for both oil and gas prices.

 

Depreciation, Depletion, Amortization and Valuation Provisions (DD&A). Major DD&A components are the provision for impairment of undeveloped leaseholds, provision for impairment of long-lived assets, depletion of producing leaseholds and depreciation of tangible and intangible lease and well costs. Undeveloped leaseholds are amortized over the life of the leasehold (most are 3 years) using a straight line method, except when the leasehold is impaired or condemned by drilling and/or geological interpretation of seismic data; if so, an adjustment to the provision is made at the time of impairment. The provision for impairment of undeveloped leaseholds was $36,872 in 2020 versus $928,524 in 2019.

 

As discussed in Item 8, Note 10 to the accompanying financial statements, accounting principles require the recognition of an impairment loss on long-lived assets used in operations when indicators of impairment are present. Impairment evaluation is a two-step process. The first step is to measure when the undiscounted cash flows estimated to be generated by those assets, determined on a well basis, is less than the assets’ carrying amounts. Those assets meeting the first criterion are adjusted to estimated fair value. Evaluation for impairment was performed in both 2020 and 2019. The 2020 impairment loss was $2,517,873 and the 2019 impairment loss was $912,045.

 

The depletion and depreciation of oil and gas properties are computed by the units-of-production method. The amount expensed in any year will fluctuate with the change in estimated reserves of oil and gas, a change in the rate of production or a change in the basis of the assets. The provision for depletion and depreciation was $798,805 in 2020 and $997,043 in 2019. The provision includes $83,453 for 2020 and $88,816 for 2019 for the amortization of the asset retirement costs. See Item 8, Note 2 to the accompanying financial statements for additional information regarding the asset retirement obligation.

 

The provision for depreciation for other assets was $45,725 in 2020 and $30,559 in 2019.

 

12

 

Other Income, Net. See Item 8, Note 11 to the accompanying financial statements for an analysis of the components of this line item for 2020 and 2019. Other income, net increased $171,902 (28%) to $775,082 in 2020 from $603,180 in 2019. The line items responsible for this net increase are described below.

 

Net realized and unrealized gain on equity securities increased $323,906 (358%) to a net gain of $414,375 in 2020 from a net gain of $90,469 in 2019. Realized gains or losses result when an equity security is sold. Unrealized gains or losses result from adjusting the Company’s carrying amount in equity securities owned at the reporting date to estimated fair value. In 2020, the Company had realized gains of $117,455 and unrealized gains of $296,920. In 2019, the Company had realized losses of $(10,778) and unrealized gains of $101,247.

 

Income from other investments increased $233,366 to $241,866 in 2020 from $8,500 in 2019, primarily resulting from a sale of property in OKC Industrial, LC.

 

Gains on asset sales increased $5,480 to $23,590 in 2020 from $18,110 in 2019.

 

Interest income decreased $372,452 (72%) to $147,867 in 2020 from $520,319 in 2019. This decrease was the result of a decrease in the average interest rate, an increase in the average balance of cash equivalents and a decrease in the average balance of available-for-sale debt securities from which most of the interest income is derived. The average interest rate decreased from 1.96% in 2019 to 0.72% in 2020. The average balance outstanding decreased $1,541,720 to $19,805,548 in 2020 from $21,347,268 in 2019.

 

Provision/(Benefit) for Income Taxes. In 2020, the Company had an estimated income tax benefit of $534,293 as the result of a deferred tax benefit of $348,738 and a current tax benefit of $185,555. In 2019, the Company had an estimated income tax benefit of $223,075 as the result of a deferred tax benefit of $292,906 and a current tax provision of $69,831. See Item 8, Note 6 to the accompanying financial statements for an analysis of the various components of income taxes and a discussion of the federal tax rate change.

 

ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

 

Not applicable.

 

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

 Index to Financial Statements  
  Page 
 Report of Independent Registered Public Accounting Firm, HoganTaylor LLP14 
 Balance Sheets – December 31, 2020 and 201916 
 Statements of Operations – Years Ended December 31, 2020 and 201918 
 Statements of Stockholders’ Equity – Years Ended December 31, 2020 and 201919 
 Statements of Cash Flows – Years Ended December 31, 2020 and 201920 
 Notes to Financial Statements22 
 Unaudited Supplemental Financial Information31 

 

13

 

b01.jpg

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

 

To the Stockholders and the Board of Directors

of The Reserve Petroleum Company

 

Opinion on the Financial Statements

 

We have audited the accompanying balance sheets of The Reserve Petroleum Company (the Company) as of December 31, 2020 and 2019, the related statements of operation, stockholders' equity and cash flows for the years then ended, and the related notes to the financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting 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.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

Critical Audit Matter

 

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the board of directors and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

 

Proved Oil and Natural Gas Properties Oil and Natural Gas Reserve Quantities and Future Cash Flows Used to Determine Depletion and to Assess Impairment

 

Critical Audit Matter Description

 

14

 

To the Stockholders and the Board of Directors

of The Reserve Petroleum Company

Page 2

 

 

As discussed in Notes 2, 9, and 10 to the financial statements, the Company's proved oil and natural gas properties are depleted using the units-of-production method on a property-by-property basis and is based primarily on estimates of proved reserve quantities. Additionally, the Company recognizes impairment of proved oil and natural gas properties on a property-by-property basis when indicators of impairment are present and the undiscounted cash flows are not sufficient to recover the property's carrying amount. The impairment loss is measured by comparing the fair value of the property to its carrying amount. The Company's oil and natural gas reserve quantities and the related future net cash flows required management to make significant estimates and assumptions. As a result of changing market conditions and commodity prices, assumptions can change from period to period, causing the estimates of proved reserves to change. The Company employs a petroleum engineer to estimate oil and natural gas reserves using generally accepted methods, calculation procedures and engineering data, and also engages an independent engineering firm to review the reasonableness of the Company's estimated reserves. Changes in these assumptions or engineering data could have a significant impact on reserve quantities and the amount of depletion and impairment recorded during a period. The proved oil and natural gas properties balance was $5,513,593 as of December 31, 2020, net of accumulated depreciation, depletion, amortization and valuation allowance. Related depreciation, depletion and amortization expense was $798,805 and impairment expense was $2,517,873 for the year ended December 31, 2020.

 

Given the significant judgments made by management, performing audit procedures to evaluate the Company's oil and natural gas reserve quantities and the related cash flows including management's estimates and assumptions required a high degree of auditor judgment and an increased extent of effort.

 

How the Critical Audit Matter Was Addressed in the Audit

 

Our audit procedures to address management's significant judgments and assumptions related to oil and natural gas reserve quantities and estimates of the future cash flows included the following, among others:

 

 

a.

Evaluated the experience, qualifications and objectivity of the Company's internal and external reservoir engineers, including the methodologies and calculation procedures used to estimate oil and natural gas reserves.

 

b.

Evaluated forecasted production by comparing to historical production and decline rates.

 

c.

Evaluated the future operating and capital cost assumptions used by the internal reservoir engineer to estimate future cash flows by comparing them to historical costs.

 

d.

Assessed management's estimated oil and natural gas prices by:

 

i.

Understanding the methodology used by management for development of the oil and natural gas prices used for assessing impairment and comparing the estimated prices to an independently determined range of prices, including published forward pricing indices and third-party industry sources.

 

ii.

Understanding the methodology used by management for development of the oil and natural gas prices used for calculating depletion and comparing the prices to average historical prices.

 

iii.

Evaluating the historical realized price differentials incorporated in the oil and natural gas prices.

 

 

 

b02.jpg

 

We have served as the Company's auditor since 2009.

 

Oklahoma City, Oklahoma

March 31, 2021

 

15

 

THE RESERVE PETROLEUM COMPANY

BALANCE SHEETS

 

 
  

December 31,

 
  

2020

  

2019

 
ASSETS        

Current Assets:

        

Cash and Cash Equivalents (Note 2)

 $16,187,085  $2,738,338 

Available-for-Sale Debt Securities (Notes 2, 5 & 9)

  1,515,234   18,517,910 

Equity Securities (Notes 2, 5 & 9)

  2,536,482   545,075 

Refundable Income Taxes

  218,204   109,999 

Accounts Receivable (Note 2)

  794,162   968,382 

Notes Receivable (Note 7)

  278,569   --- 

Total Current Assets

  21,529,736   22,879,704 
         

Investments:

        

Equity Method Investments (Notes 2 & 7)

  604,991   744,798 

Other Investments (Notes 2 & 7)

  2,415,399   1,898,347 

Total Investments

  3,020,390   2,643,145 
         

Property, Plant and Equipment (Notes 2, 8, 9 & 10):

        

Oil and Gas Properties, at Cost,

        

Based on the Successful Efforts Method of Accounting –

        

Unproved Properties

  1,883,055   2,727,857 

Proved Properties

  55,095,961   54,451,862 

Oil and Gas Properties, Gross

  56,979,016   57,179,719 
         

Less – Accumulated Depreciation, Depletion, Amortization and Valuation Allowance

  (49,684,584)  (47,852,157)
         

Oil and Gas Properties, Net

  7,294,432   9,327,562 
         

Other Property and Equipment, at Cost

  279,240   466,728 
         

Less – Accumulated Depreciation

  (96,532)  (279,892)
         

Other Property and Equipment, Net

  182,708   186,836 
         

Total Property, Plant and Equipment

  7,477,140   9,514,398 
         

Other Assets

  120,445   687,048 
         

Total Assets

 $32,147,711  $35,724,295 

 

See Accompanying Notes 

 

16

 

 

THE RESERVE PETROLEUM COMPANY

BALANCE SHEETS

LIABILITIES AND STOCKHOLDERS EQUITY

 

  

December 31,

 
  

2020

  

2019

 

Current Liabilities:

        

Accounts Payable

 $248,054  $156,768 

Other Current Liabilities

  15,443   25,243 

Total Current Liabilities

  263,497   182,011 
         

Long-Term Liabilities:

        

Asset Retirement Obligation (Note 2)

  1,810,729   1,821,527 

Dividends Payable (Note 3)

  119,546   676,148 

Deferred Tax Liability, Net (Note 6)

  568,627   917,365 

Total Long-Term Liabilities

  2,498,902   3,415,040 

Total Liabilities

  2,762,399   3,597,051 
         
         

Commitments and Contingencies (Notes 2 & 7)

        
         

Stockholders’ Equity (Notes 3 & 4):

        

Common Stock

  92,368   92,368 

Additional Paid-in Capital

  65,000   65,000 

Retained Earnings

  30,920,837   33,660,169 

Stockholders’ Equity Before Treasury Stock

  31,078,205   33,817,537 
         

Less – Treasury Stock, at Cost

  (1,692,893)  (1,690,293)
         

Total Stockholders’ Equity

  29,385,312   32,127,244 
         

Total Liabilities and Stockholders’ Equity

 $32,147,711  $35,724,295 

 

See Accompanying Notes

 

17

 

 

THE RESERVE PETROLEUM COMPANY

STATEMENTS OF OPERATIONS

 

  

Year Ended December 31,

 
  

2020

  

2019

 

Operating Revenues:

        

Oil and Gas Sales (Note 2)

 $3,995,074  $6,491,062 

Lease Bonuses and Other

  87,024   137,227 

Total Operating Revenues

  4,082,098   6,628,289 
         

Operating Costs and Expenses:

        

Production

  1,878,319   2,334,253 

Exploration

  161,288   709,753 

Depreciation, Depletion, Amortization and Valuation Provisions (Note 10)

  3,399,275   2,868,171 

General, Administrative and Other

  1,798,991   1,721,568 

Total Operating Costs and Expenses

  7,237,873   7,633,745 

Loss from Operations

  (3,155,775)  (1,005,456)

Equity Loss in Investees (Note 7)

  (109,855)  (87,562)

Other Income, Net (Note 11)

  775,082   603,180 

Loss Before Income Taxes

  (2,490,548)  (489,838)

Income Tax Benefit (Notes 2 & 6)

  534,293   223,075 

Net Loss

 $(1,956,255) $(266,763)
         
         

Per Share Data (Note 2):

        

Net Loss, Basic and Diluted

 $(12.49) $(1.70)
         

Cash Dividends

 $5.00  $7.00 
         

Weighted Average Shares Outstanding, Basic and Diluted

  156,595   156,769 

 

See Accompanying Notes

 

18

 

 

THE RESERVE PETROLEUM COMPANY

STATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2020 AND 2019

 

  

Common

Stock

  

Additional

Paid-in

Capital

  

Retained

Earnings

  

Treasury

Stock

  

Total

 
                     

Year Ended December 31, 2020

                    

Balance as of December 31, 2019

 $92,368  $65,000  $33,660,169  $(1,690,293) $32,127,244 

Net Loss

  ---   ---   (1,956,255)  ---   (1,956,255)

Dividends Declared

  ---   ---   (783,077)  ---   (783,077)

Purchase of Treasury Stock

  ---   ---   ---   (2,600)  (2,600)

Balance as of December 31, 2020

 $92,368  $65,000  $30,920,837  $(1,692,893) $29,385,312 
                     

Year Ended December 31, 2019

                    

Balance as of December 31, 2018

 $92,368  $65,000  $35,023,662  $(1,597,617) $33,583,413 

Net Loss

  ---   ---   (266,763)  ---   (266,763)

Dividends Declared

  ---   ---   (1,096,730)  ---   (1,096,730)

Purchase of Treasury Stock

  ---   ---   ---   (92,676)  (92,676)

Balance as of December 31, 2019

 $92,368  $65,000  $33,660,169  $(1,690,293) $32,127,244 

 

See Accompanying Notes

 

19

 

 

THE RESERVE PETROLEUM COMPANY

STATEMENTS OF CASH FLOWS

 

  

Year Ended December 31,

 
  

2020

  

2019

 

Cash Provided by/(Applied to) Operating Activities:

        

Cash Received –

        

Oil and Gas Sales

 $4,323,526  $6,392,842 

Lease Bonuses and Other

  87,024   137,227 

Interest Received

  214,156   473,835 

Agricultural Rentals and Other

  5,600   11,476 

Dividends Received on Equity Securities

  8,487   463 

Cash Distributions from Equity Method Investments

  49,500   49,500 

Income Tax Refunds, Net of Income Taxes Paid

  77,550   --- 

Cash Received from Class Action Lawsuits

  4,699   --- 

Cash Paid –

        

Production Costs

  (1,899,054)  (2,323,196)

General Suppliers, Employees and Taxes, Other than Income Taxes

  (1,733,284)  (1,722,165)

Income Taxes Paid, Net of Income Tax Refunds

  ---   (163,443)

Interest Paid

  (23,252)  --- 

Cash Paid to Equity Method Investments

  (9,000)  --- 

Farm Expense and Other

  (615)  (567)
         

Net Cash Provided by Operating Activities

  1,105,337   2,855,972 
         
         
         

Cash Provided by/(Applied to) Investing Activities:

        

Sale of Equity Securities

  5,927,534   1,120,176 

Purchase of Equity Securities

  (7,504,566)  (1,120,724)

Maturity of Available-for-Sale Debt Securities

  25,082,212   35,427,891 

Purchase of Available-for-Sale Debt Securities

  (8,079,535)  (37,696,386)

Proceeds from Disposal of Property, Plant and Equipment

  16,418   21,515 

Purchase of Property, Plant and Equipment

  (1,533,673)  (2,083,991)

Cash Distributions from Other Investments

  3,000   8,500 

Purchase of Other Investments

  (503,733)  (7,467)

Notes Receivable

  (278,569)  43,158 
         

Net Cash Provided by/(Applied to) Investing Activities

  13,129,088   (4,287,328)

 

See Accompanying Notes

 

20

 

 

THE RESERVE PETROLEUM COMPANY

STATEMENTS OF CASH FLOWS

 

  

Year Ended December 31,

 
  

2020

  

2019

 

Cash Applied to Financing Activities:

        

Dividends Paid

 $(783,078) $(1,479,081)

Dividends Payable to Stockholders

  ---   (687,048)

Purchase of Treasury Stock

  (2,600)  (92,676)
         

Total Cash Applied to Financing Activities

  (785,678)  (2,258,805)
         
         

Net Change in Cash and Cash Equivalents

  13,448,747   (3,690,161)
         

Cash and Cash Equivalents at Beginning of Year

  2,738,338   6,428,499 
         

Cash and Cash Equivalents at End of Year

 $16,187,085  $2,738,338 
         
         
         

Reconciliation of Net Loss to Net Cash Provided by/(Applied to) Operating Activities:

        

Net Loss

 $(1,956,255) $(266,763)

Net Loss Increased (Decreased) by Net Change in –

        

Net Unrealized Holding Gains on Equity Securities

  (296,920)  (101,247)

Realized (Gains)/Losses on Equity Securities

  (117,455)  10,778 

Accounts Receivable

  107,932   (98,220)

Interest and Dividends Receivable

  66,289   (19,854)

Refundable Income Taxes

  (108,205)  (93,612)

Accounts Payable

  50,692   10,460 

Deferred Taxes

  (348,738)  (292,906)

Other Liabilities

  104,887   111,123 

Changes in Equity Method and Other Investments

  73,988   52,432 

Cash Distribution from Equity Method Investments

  49,500   49,500 

Exploration Costs

  109,749   744,446 

Disposition of Property, Plant and Equipment

  54,051   (29,520)

Depreciation, Depletion, Amortization and Valuation Provisions

  3,315,822   2,779,355 
         

Net Cash Provided by Operating Activities

 $1,105,337  $2,855,972 

 

See Accompanying Notes

 

21

 

THE RESERVE PETROLEUM COMPANY

NOTES TO FINANCIAL STATEMENTS

 

 

 

 

Note 1 – NATURE OF OPERATIONS

 

The Company is engaged in oil and natural gas exploration and development and minerals management with areas of concentration in Texas, Oklahoma, Kansas, Arkansas and South Dakota, a single business segment.

 

 

Note 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Cash and Cash Equivalents

 

The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents.

 

Investments

 

Marketable Securities:

The Company classifies its debt and marketable equity securities in one of two categories: equity or available-for-sale. Equity securities are bought and held principally for the purposes of selling them in the near term. All other securities are classified as available-for-sale debt securities. Equity securities and available-for-sale debt securities are recorded at fair value. Unrealized gains and losses on equity securities are reported in current earnings. Unrealized gains and losses on available-for-sale debt securities, which consist entirely of U.S. Government securities, are reported as a component of other comprehensive income when significant to the financial statements. There are no significant cumulative unrealized gains or losses on available-for-sale debt securities as of December 31, 2020 or 2019.

 

Equity Method and Other Investments:

The Company accounts for its non-marketable investment in partnerships on the equity method if ownership allows the Company to exercise significant influence.

 

Other investments, without readily determinable fair values, that are not accounted for under the equity method are measured at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. Management reviews our other investments and the underlying projects and activity periodically and assesses the need for any impairment. Management does not believe any investments need to be impaired at the present time.

 

See Note 7 for additional information on investments.

 

Receivables and Revenue Recognition

 

Oil and gas sales and resulting receivables are recognized when the product is delivered to the purchaser and title has transferred. Sales are to credit-worthy major energy purchasers with payments generally received within 60 days of transportation from the well site. Historically, the Company has had little, if any, uncollectible receivables; therefore, an allowance for uncollectible accounts has not been provided.

 

The Company’s revenues are primarily derived from its interests in the sale of oil and natural gas production. Each barrel of oil or thousand cubic feet of natural gas delivered is considered a separate performance obligation. The Company recognizes revenue from its interests in the sales of oil and natural gas in the period that its performance obligations to provide oil and natural gas to customers are satisfied. Performance obligations are satisfied when the Company has no further obligations to perform related to the sale and the customer obtains control of product. The sales of oil and natural gas are made under contracts which the third-party operators of the wells have negotiated with customers, which typically include variable consideration that is based on pricing tied to local indices and volumes delivered in the current month. The Company receives payment from the sale of oil and natural gas production from one to three months after delivery. At the end of each month, as performance obligations are satisfied, the variable consideration can be reasonably estimated and amounts due from customers are accrued in accounts receivable in the balance sheet. Variances between the Company’s estimated revenue and actual payments are recorded in the month the payment is received; however, differences have been and are insignificant. Accordingly, the variable consideration is not constrained. A portion of oil and gas sales recorded in the statements of operations are the result of estimated volumes and pricing for oil and gas products not yet received for the period. For the periods ending December 31, 2020 and 2019, that estimate represented approximately $232,860 and $366,148, respectively, of accrued oil and gas sales included in the statements of operations.

 

22

 

The Company’s contracts with customers originate at or near the time of delivery and transfer of control of oil and natural gas to the purchasers. As such, the Company does not have significant unsatisfied performance obligations.

 

The Company’s oil is typically sold at delivery points under contract terms that are common in our industry. The Company's natural gas produced is delivered by the well operators to various purchasers at agreed upon delivery points under a limited number of contract types that are also common in our industry. However, under these contracts, the natural gas may be sold to a single purchaser or may be sold to separate purchasers. Regardless of the contract type, the terms of these contracts compensate the well operators for the value of the oil and natural gas at specified prices, and then the well operators will remit payment to the Company for its share in the value of the oil and natural gas sold.

 

The Company’s disaggregated revenue has two primary revenue sources which are oil sales and natural gas sales. The following is an analysis of the components of oil and gas sales:

 

  

Year Ended December 30,

 
  

2020

  

2019

 

Oil Sales

 $2,585,896  $4,504,738 

Natural Gas Sales

  1,283,011   1,806,272 

Miscellaneous Oil and Gas Product Sales

  126,167   180,052 
  $3,995,074  $6,491,062 

 

The Company recognizes revenue from lease bonuses when it has received an executed lease agreement with a third party transferring the rights to explore for and produce any oil or gas they may find within the terms of the lease, the payment has been collected and the Company has no obligation to refund the payment. The Company recognizes the lease bonus as a cost recovery with any excess above its cost basis in the mineral properties being treated as income.

 

Property, Plant and Equipment

 

Oil and gas properties are accounted for on the successful efforts method. The acquisition, exploration and development costs of producing properties are capitalized. The Company has not historically had any capitalized exploratory drilling costs that are pending determination of reserves for more than one year. All costs relating to unsuccessful exploratory wells, geological and geophysical costs, delay rentals and abandoned properties are expensed. Lease costs related to unproved properties are amortized over the life of the lease and are assessed for impairment when indicators of impairment are present. Any impairment of value is charged to expense.

 

The Company assesses its proved oil and gas properties for impairment whenever events or circumstances indicate that the carrying value of the assets may not be recoverable. Such events include, but are not limited to, declines in commodity prices, increases in operating costs, unfavorable reserve revisions, poor well performance, changes in development plans and potential property divestitures. The impairment test compares undiscounted future net cash flows to the assets’ net book value. These undiscounted cash flows are driven by significant assumptions, including the Company’s expected future development activity, reserve estimates, forecasted pricing, future operating costs, capital expenditures and severance taxes. If the net capitalized costs exceed undiscounted future net cash flows, then the cost of the property is written down to fair value utilizing a discounted future net cash flow analysis.

 

Depreciation, depletion and amortization of producing properties is computed on the units-of-production method on a property-by-property basis. The units-of-production method is based primarily on estimates of proved reserve quantities. Due to uncertainties inherent in this estimation process, it is at least reasonably possible that reserve quantities will be revised in the near term. Changes in estimated reserve quantities are applied to depreciation, depletion and amortization computations prospectively.

 

Other property and equipment are depreciated on the straight line, declining balance, or other accelerated method as appropriate.

 

The following estimated useful lives are used for property and equipment:

 

Office furniture and fixtures (in years)

 5to10

Automotive equipment (in years)

 5to8

 

23

 

Income Taxes

 

The Company utilizes an asset/liability approach to calculating deferred income taxes. Deferred income taxes are provided to reflect temporary differences in the basis of net assets and liabilities for income tax and financial reporting purposes. Deferred tax assets are reduced by a valuation allowance if a determination is made that it is more likely than not that some or all the deferred assets will not be realized based on the weight of all available evidence.

 

The Company recognizes a tax benefit from an uncertain tax position when it is more likely than not that the position will be sustained upon examination, based upon the technical merits of the position. The Company will record the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement with taxing authorities.

 

The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense. There were no uncertain tax positions as of December 31, 2020 and 2019. The federal income tax returns for 2017, 2018 and 2019 are subject to examination. See Note 6 for discussion of income taxes.

 

Earnings Per Share

 

Accounting guidance for Earnings Per Share (EPS) establishes the methodology of calculating basic earnings per share and diluted earnings per share. The calculations of basic earnings per share and diluted earnings per share differ in that instruments convertible to common stock (such as stock options, warrants and convertible preferred stock) are added to weighted average shares outstanding when computing diluted earnings per share. For 2020 and 2019, the Company had no dilutive shares outstanding; therefore, basic and diluted earnings per share are the same.

 

Concentrations of Credit Risk and Major Customers

 

The Company’s receivables relate primarily to sales of oil and natural gas to purchasers with operations in Texas, Oklahoma, Kansas and South Dakota. The Company had one purchaser in 2020 whose total purchases were 17% of total oil and gas sales and two purchasers in 2019 whose purchases were 27% of total oil and gas sales.

 

The Company maintains its cash in bank deposit accounts, which at times may exceed federally insured limits. The Company has not experienced any losses in such accounts and believes that it is not exposed to any significant credit risk with respect to cash and cash equivalents.

 

The Company’s investment in marketable equity securities consists of equity interests in both U.S. and international entities involved in a broad range of industries. These marketable equity securities are subject to overall market risks, which could result in a temporary or permanent decline in the fair value of these securities.

 

Use of Estimates

 

The preparation of the 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 amounts reported in the financial statements and accompanying notes. These estimates include oil and natural gas reserve quantities that form the basis for the calculation of amortization of oil and natural gas properties. Management emphasizes that reserve estimates are inherently imprecise and that estimates of more recent reserve discoveries are more imprecise than those for properties with long production histories. Actual results could differ from the estimates and assumptions used in the preparation of the Company’s financial statements.

 

Gas Balancing

 

Gas imbalances are accounted for under the sales method whereby revenues are recognized based on production sold. A liability is recorded when the Company’s excess takes of natural gas volumes exceed our estimated remaining recoverable reserves (over-produced). No receivables are recorded for those wells where the Company has taken less than our ownership share of gas production (under-produced).

 

Guarantees

 

At the inception of a guarantee or subsequent modification, the Company records a liability for the fair value of the obligation undertaken in issuing the guarantee. The Company records a liability for its obligations when it becomes probable that the Company will have to perform under the guarantee. The Company has issued guarantees associated with the Company’s equity method investments. See Note 7 for discussion of equity investments.

 

24

 

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 sales). The estimated liability is calculated by obtaining current estimated plugging costs from the well operators, inflating it over the life of the property and discounting the estimated obligation to its present value. 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%.

 

The following table summarizes the asset retirement obligation for 2020 and 2019:

 

  

2020

  

2019

 

Beginning balance at January 1

 $1,821,527  $1,774,114 

Liabilities incurred

  ---   44,994 

Liabilities settled (wells sold or plugged)

  (25,205)  (24,148)

Accretion expense

  45,649   45,590 

Revision to estimate

  (31,242)  (19,023)

Ending balance at December 31

 $1,810,729  $1,821,527 

 

New Accounting Pronouncements

 

On January 16, 2020, the FASB issued ASU 2020-01, InvestmentsEquity Securities (Topic 321), InvestmentsEquity Method and Joint Ventures (Topic 323) and Derivatives and Hedging (Topic 815)Clarifying the Interactions between Topic 321, Topic 323 and Topic 815. This ASU among other things clarifies that a company should consider observable transactions that require a company to either apply or discontinue the equity method of accounting under Topic 323, Investments—Equity Method and Joint Ventures, for the purposes of applying the measurement alternative in accordance with Topic 321 immediately before applying or upon discontinuing the equity method. The new ASU clarifies that, when determining the accounting for certain forward contracts and purchased options a company should not consider, whether upon settlement or exercise, if the underlying securities would be accounted for under the equity method or fair value option. The ASU was effective for public business entities for fiscal years and interim periods within those fiscal years, beginning after December 15, 2020. The Company does not anticipate the adoption of this update to have a material impact on the Company’s financial position, results of operations or cash flows.

 

On December 18, 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This ASU removes specific exceptions to the general principles in Topic 740 in Generally Accepted Accounting Principles (GAAP). It eliminates the need for an organization to analyze whether the following apply in a given period: Exception to the incremental approach for intraperiod tax allocation; exceptions to accounting for basis differences when there are ownership changes in foreign investments; and exception in interim period income tax accounting for year-to-date losses that exceed anticipated losses.

 

The ASU also improves financial statement preparers’ application of income tax-related guidance and simplifies GAAP for: Franchise taxes that are partially based on income; transactions with a government that result in a step up in the tax basis of goodwill; separate financial statements of legal entities that are not subject to tax; and enacted changes in tax laws in interim periods.

 

The ASU was effective for public business entities for fiscal years and interim periods within those fiscal years, beginning after December 15, 2020. The Company does not anticipate the adoption of this update to have a material impact on the Company’s financial position, results of operations or cash flows.

 

Reclassifications

 

Certain amounts in the 2019 financial statements have been reclassified to conform to the 2020 presentation. The amounts were not material to the financial statements and had no effect on previously reported net income.

 

25

 

 

 

Note 3 – DIVIDENDS PAYABLE

 

Dividends payable includes amounts that are due to stockholders whom the Company has been unable to locate, stockholders’ heirs pending ownership transfer documents, or uncashed dividend checks of other stockholders. Funds required to satisfy dividends payable are held in custody of the Company’s transfer agent and are included in Other Assets on the Company’s balance sheets.

 

 

Note 4 – COMMON STOCK

 

The following table summarizes the changes in common stock issued and outstanding:

 

      

Shares of

     
  

Shares

  

Treasury

  

Shares

 
  

Issued

  

Stock

  

Outstanding

 

January 1, 2019, $.50 par value stock, 200,000 shares authorized

  184,735   27,502   157,233 

Purchase of stock

  ---   618   (618)
             

December 31, 2019, $.50 par value stock, 200,000 shares authorized

  184,735   28,120   156,615 

Purchase of stock

  ---   20   (20)
             

December 31, 2020, $.50 par value stock, 200,000 shares authorized

  184,735   28,140   156,595 

 

 

Note 5 – MARKETABLE SECURITIES

 

At December 31, 2020, available-for-sale debt securities, consisting entirely of U.S. government securities, are due within one year or less by contractual maturity.

 

For equity securities, in 2020 the Company recorded realized gains of $117,455 and unrealized gains of $296,920. In 2019 the Company recorded realized losses of $(10,778) and unrealized gains of $101,247.

 

 

Note 6 – INCOME TAXES

 

Components of deferred taxes are as follows:

 

  

December 31,

 
  

2020

  

2019

 

Assets:

        

Net Leasehold Impairment Reserves

 $144,013  $257,389 

Gas Balance Receivable

  ---   32,352 

Long-Lived Asset Impairment

  1,059,416   806,364 

Deferred Geological and Geophysical Expense

  13,073   17,087 

Other

  273,211   318,734 

Total Assets

  1,489,713   1,431,926 
         

Liabilities:

        

Receivables

  48,901   76,891 

Intangible Drilling Costs

  1,374,233   1,546,222 

Depletion, Depreciation and Other

  635,206   726,178 

Total Liabilities

  2,058,340   2,349,291 

Net Deferred Tax Liability

 $(568,627) $(917,365)

 

The decrease in the deferred tax liability for 2020 reflected in the above table is primarily the result of the decrease in intangible drilling costs and an increase in long-lived asset impairment.

 

26

 

 

The following table summarizes the current and deferred portions of income tax expense:

 

  

Year Ended December 31,

 
  

2020

  

2019

 

Current Tax Provision/(Benefit):

        

Federal

 $(185,731) $68,198 

State

  176   1,633 

Total Current Provision/(Benefit)

  (185,555)  69,831 

Deferred Tax Benefit

  (348,738)  (292,906)

Total Benefit

 $(534,293) $(223,075)

 

The total income tax provision/(benefit) expressed as a percentage of income before income tax was 21% for 2020 and 46% for 2019. These amounts differ from the amounts computed by applying the statutory U.S. federal enacted income tax rate of 21% for 2020 and 2019 as summarized in the following reconciliation:

 

  

Year Ended December 31,

 
  

2020

  

2019

 

Computed Federal Tax Benefit

 $(523,015) $(102,866)

Increase (Decrease) in Tax from:

        

Allowable Depletion in Excess of Basis

  ---   (60,224)

Dividend Received Deduction

  (891)  (4,443)

State Income Tax Provision/(Benefit)

  176   (1,633)

Other

  (10,563)  (53,909)

Income Tax Benefit

 $(534,293) $(223,075)

Effective Tax Rate

  21%  46%

 

Excess federal percentage depletion, which is limited to certain production volumes and by certain income levels, reduces estimated taxable income projected for any year. When a provision for income taxes is recorded, federal excess percentage depletion benefits decrease the effective tax rate. When a benefit for income taxes is recorded, federal excess percentage depletion benefits increase 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 or a pre-tax loss, the proportional effect of these items on the effective tax rate may be significant.

 

 

Note 7 – EQUITY METHOD AND OTHER INVESTMENTS AND RELATED COMMITMENTS AND CONTINGENT LIABILITIES INCLUDING GUARANTEES

 

The Company’s Equity Method Investments include:

 

Broadway Sixty-Eight, LLC (“Broadway”), an Oklahoma limited liability company, with a 33% ownership. Broadway owns and operates an office building in Oklahoma City, Oklahoma. The Company leases its corporate office from Broadway on a month-to-month basis under the terms of the modified lease agreement. Rent expense for lease of the corporate office from Broadway was approximately $35,000 for 2020 and 2019. The Company’s investment in Broadway totaled $142,917 and $157,911 at December 31, 2020 and 2019, respectively.

 

Grand Woods Development, LLC (“Grand Woods”), an Oklahoma limited liability company, with a 47% ownership, was acquired in 2015. Grand Woods owns approximately 26.56 acres of undeveloped real estate in northeast Oklahoma City. The Company has guaranteed $1,200,000 of a $1,579,500 loan for which the proceeds were used to purchase a portion of the undeveloped real estate acreage. The loan matures May 23, 2021. The Company holds notes receivable of $278,569 from Grand Woods. The Company’s investment in Grand Woods totaled $179,615 and $316,384 at December 31, 2020 and 2019, respectively.

 

QSN Office Park, LLC (“QSN”), an Oklahoma limited liability company, with a 20% ownership, was acquired in 2016. QSN is constructing and selling office buildings in a new office park. The Company has guaranteed 20% of a $550,000 loan for which a portion of the proceeds were used to build a speculative office building. The loan matures March 9, 2027. The Company’s investment in QSN totaled $282,459 and $270,503 at December 31, 2020 and 2019, respectively.

 

27

 

 

The Company’s Other Investments primarily include:

 

Bailey Hilltop Pipeline, LLC (“Bailey”), with a 10% ownership, was acquired in 2008. Bailey is a gas gathering system pipeline for the Bailey Hilltop Prospect oil and gas properties in Grady County, Oklahoma. The Company’s investment in Bailey totaled $80,377 at December 31, 2020 and 2019.

 

Cloudburst International, Inc. (“Cloudburst”), with a 13.39% ownership, was acquired in 2019. Cloudburst owns exclusive rights to a water purification process technology that is being developed and currently tested. The Company’s investment in Cloudburst totaled $1,496,007 at December 31, 2020 and 2019.

 

Genlith, Inc. (“Genlith”), with a 1.8% ownership, was acquired in July 2020. Genlith identifies and structures investments in the new energy economy through corporate ventures, advisory and fund management. The Company’s investment in Genlith totaled $500,000 at December 31, 2020.

 

Ocean’s NG, LLC (“Ocean”), with a 12.44% ownership, was acquired in 2015. Ocean is developing an underground Compressed Natural Gas (“CNG”) storage and delivery system for use of CNG. The Company’s investment in Ocean totaled $229,218 and $225,484 at December 31, 2020 and 2019, respectively.

 

OKC Industrial Properties, LC (“OKC”), with a 10% ownership, was acquired in 1992. OKC originally owned approximately 260 acres of undeveloped land in north Oklahoma City and over time has sold all but approximately 23 acres. The Company’s investment in OKC totaled $69,482 and $56,164 at December 31, 2020 and 2019, respectively.

 

 

Note 8 – COSTS INCURRED IN OIL AND GAS PROPERTY ACQUISITION, EXPLORATION AND DEVELOPMENT ACTIVITIES

 

All the Company’s oil and gas operations are within the continental United States. In connection with its oil and gas operations, the following costs were incurred:

 

  

Year Ended December 31,

 
  

2020

  

2019

 

Acquisition of Properties:

        

Unproved

 $271,001  $513,309 

Proved

  ---   231,000 

Exploration Costs

  413,779   970,994 

Development Costs

  854,608   111,810 

Asset Retirement Obligation

  ---   1,823 

 

 

Note 9 – FAIR VALUE MEASUREMENTS

 

The Company uses a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:

 

Level 1 – Unadjusted quoted prices for identical assets or liabilities in active markets.

 

Level 2 – Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and model-derived valuations whose inputs or significant value drivers are observable.

 

Level 3 – Unobservable inputs that reflect the Company’s own assumptions.

 

During 2020 and 2019, there were no transfers into or out of Level 2 or Level 3.

 

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 equity securities and available-for-sale debt securities using quoted market prices, and where applicable, securities with similar maturity dates and interest rates.

 

28

 

 

At December 31, 2020 and 2019, the Company’s assets reported at fair value on a recurring basis are summarized as follows:

 

  

2020

 
  

Level 1 Inputs

  

Level 2 Inputs

  

Level 3 Inputs

 

Financial Assets:

            

Available-for-Sale Debt Securities –

            

U.S. Treasury Bills Maturing in 2021

 $---  $1,515,234  $--- 

Equity Securities –

            

Domestic Equities

  1,506,514   ---   --- 

International Equities

  630,494   ---   --- 

Others

  399,474   ---   --- 
  $2,536,482  $1,515,234  $--- 

 

 

  

2019

 
  

Level 1 Inputs

  

Level 2 Inputs

  

Level 3 Inputs

 

Financial Assets:

            

Available-for-Sale Debt Securities –

            

U.S. Treasury Bills Maturing in 2020

 $---  $18,517,910  $--- 

Equity Securities –

            

Domestic Equities

  364,171   ---   --- 

International Equities

  110,629   ---   --- 

Others

  70,275   ---   --- 
  $545,075  $18,517,910  $--- 

 

Non-recurring Fair Value Measurements

 

The Company’s asset retirement obligation incurred annually represents non-recurring fair value liabilities. The fair value of the non-financial liabilities incurred was $0 in 2020 and $44,994 in 2019 and was calculated using Level 3 inputs. See Note 2 for more information about this liability and the inputs used for calculating fair value.

 

The fair value of oil and gas properties used in estimating impairment losses of $2,517,873 for 2020 and $912,045 for 2019 were based on Level 3 inputs. See Note 10 for the procedure used for calculating these expenses.

 

Fair Value of Financial Instruments

 

The Company’s financial instruments consist primarily of cash and cash equivalents, trade and notes receivables, trade payables and dividends payable. As of December 31, 2020 and 2019, the historical cost of cash and cash equivalents, trade and notes 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 10 – LONG-LIVED ASSETS IMPAIRMENT LOSS

 

Certain oil and gas producing properties have been deemed to be impaired because the assets, evaluated on a property-by-property basis, are not expected to recover their entire carrying value through future cash flows. Impairment losses totaling $2,517,873 for 2020 and $912,045 for 2019 are included in the statements of operations in the line item Depreciation, Depletion, Amortization and Valuation Provisions. The impairments for 2020 and 2019 were calculated by reducing the carrying value of the individual properties to an estimated fair value equal to the discounted present value of the future cash flows from these properties. Forward pricing was used for calculating future revenue and cash flow.

 

29

 

 

 

Note 11 – OTHER INCOME, NET

 

The following is an analysis of the components of Other Income, Net:

 

  

2020

  

2019

 

Net Realized and Unrealized Gain on Equity Securities

 $414,375  $90,469 

Gains on Asset Sales

  23,590   18,110 

Interest Income

  147,867   520,319 

Agricultural Rental Income

  5,600   11,476 

Dividend Income

  8,487   463 

Income from Other Investments

  241,866   8,500 

Interest and Other Expenses

  (66,703)  (46,157)

Other Income, Net

 $775,082  $603,180 

 

 

Note 12 – CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

 

The Company is affiliated by common management and ownership with Mesquite Minerals, Inc. (“Mesquite”), Mid-American Oil Company (“Mid-American”) and Lochbuie Limited Liability Company (“Lochbuie”). The Company also owns interests in certain producing and non-producing oil and gas properties as tenants in common with Mesquite, Mid-American and Lochbuie.

 

Mesquite, Mid-American and Lochbuie share facilities and employees including executive officers with the Company. The Company has been reimbursed for services, facilities and miscellaneous business expenses incurred in 2020 in the amount of $201,905 each by Mesquite, Mid-American and Lochbuie. Reimbursements in 2019 were $199,116 each by Mesquite, Mid-American and Lochbuie. Included in the 2020 amounts, Mesquite, Mid-American and Lochbuie each paid $126,245 for their share of salaries. In 2019, the share of salaries paid by Mesquite, Mid-American and Lochbuie was $135,778 each.

 

30

 

 

 

 

UNAUDITED SUPPLEMENTAL FINANCIAL INFORMATION

 

 

 

 

31

 

 

SUPPLEMENTAL SCHEDULE 1

 

THE RESERVE PETROLEUM COMPANY

WORKING INTEREST RESERVE QUANTITY INFORMATION

(Unaudited)

 

  

Year Ended December 31,

 
  

2020

  

2019

 

Oil and Condensate (Bbls)

        

Proved Developed and Undeveloped Reserves:

        

Beginning of Year

  331,162   363,198 

Revisions of Previous Estimates

  (65,821)  (4,587)

Extensions and Discoveries

  ---   9,383 

Purchase of Reserves

  ---   19,219 

Production

  (43,546)  (56,051)

End of Year

  221,795   331,162 
         

Proved Developed Reserves:

        

Beginning of Year

  314,932   326,752 

End of Year

  221,795   314,932 
         

Gas (MCF)

        

Proved Developed and Undeveloped Reserves:

        

Beginning of Year

  2,460,433   2,831,861 

Revisions of Previous Estimates

  (524,260)  (281,944)

Extensions and Discoveries

  ---   377,521 

Purchase of Reserves

  ---   7,860 

Production

  (401,862)  (474,865)

End of Year

  1,534,311   2,460,433 
         

Proved Developed Reserves:

        

Beginning of Year

  2,298,135   2,576,738 

End of Year

  1,534,311   2,298,135 

 

See notes on next page.

 

32

 

SUPPLEMENTAL SCHEDULE 1

 

 

 

THE RESERVE PETROLEUM COMPANY

WORKING INTEREST RESERVE QUANTITY INFORMATION

(Unaudited)

 

 

 

Notes:

 

 

1.

Estimates of royalty interests’ reserves, on properties in which the Company does not own a working interest, have not been included because the information required for the estimation of such reserves is not available. The Company’s share of production from its net royalty interests was 28,425 Bbls of oil and 304,749 MCF of gas for 2020 and 28,006 Bbls of oil and 340,386 MCF of gas for 2019.

 

 

2.

The preceding table sets forth estimates of the Company’s proved oil and gas reserves, together with the changes in those reserves, as prepared by the Company’s engineer for 2020 and 2019. The Company engineer’s qualifications set forth in the Proxy Statement and as incorporated into Item 10 of this Form 10-K, are incorporated herein by reference. All reserves are located within the United States.

 

 

3.

The Company emphasizes that the reserve volumes shown are estimates, which by their nature are subject to revision in the near term. The estimates have been made by utilizing geological and reservoir data, as well as actual production performance data available to the Company. These estimates are reviewed annually and are revised upward or downward as warranted by additional performance data. The Company’s engineer is not independent, but strives to use an objective approach in calculating the Company’s working interest reserve estimates.

 

 

4.

The Company’s internal controls relating to the calculation of its working interests’ reserve estimates include review and testing of the accounting data flowing into the calculation of the reserve estimates. In addition, the average oil and natural gas product prices calculated in the engineer’s 2020 summary reserve report was tested by comparison to 2020 average sales price information from the accounting records.

 

33

 

 

SUPPLEMENTAL SCHEDULE 2

 

 

 

THE RESERVE PETROLEUM COMPANY

STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS

RELATING TO PROVED WORKING INTEREST

OIL AND GAS RESERVES

(Unaudited)

 

  

At December 31,

 
  

2020

  

2019

 

Future Cash Inflows

 $9,701,762  $21,416,636 

Future Production and Development Costs

  (5,910,324)  (11,272,849)

Future Asset Retirement Obligation

  (1,551,502)  (1,788,739)

Future Income Tax Expense

  602,785   (294,018)

Future Net Cash Flows

  2,842,721   8,061,030 

10% Annual Discount for Estimated Timing of Cash Flows

  (911,074)  (2,581,559)

Standardized Measure of Discounted Future Net Cash Flows

 $1,931,647  $5,479,471 

 

 

Estimates of future net cash flows from the Company’s proved working interests in oil and gas reserves are shown in the table above. These estimates, which by their nature are subject to revision in the near term, were based on an average monthly product price received by the Company for 2019 and 2020, with no escalation. The development and production costs are based on year-end cost levels, assuming the continuation of existing economic conditions. Cash flows are further reduced by estimated future asset retirement obligations and estimated future income tax expense calculated by applying the current statutory income tax rates to the pretax net cash flows, less depreciation of the tax basis of the properties and depletion applicable to oil and gas production.

 

34

 

 

SUPPLEMENTAL SCHEDULE 3

 

 

 

THE RESERVE PETROLEUM COMPANY

CHANGES IN STANDARDIZED MEASURE OF

DISCOUNTED FUTURE NET CASH FLOWS FROM

PROVED WORKING INTEREST RESERVE QUANTITIES

(Unaudited)

 

  

Year Ended December 31,

 
  

2020

  

2019

 

Standardized Measure, Beginning of Year

 $5,479,471  $7,860,726 

Sales and Transfers, Net of Production Costs

  (652,984)  (1,836,618)

Net Change in Sales and Transfer Prices, Net of Production Costs

  (3,294,788)  (1,962,275)

Extensions, Discoveries and Improved Recoveries, Net of Future Production and Development Costs

  ---   816,539 

Revisions of Quantity Estimates

  (499,405)  (259,068)

Accretion of Discount

  1,020,164   1,020,105 

Purchases of Reserves in Place

  ---   318,332 

Net Change in Income Taxes

  655,408   276,171 

Net Change in Asset Retirement Obligation

  (56,447)  1,823 

Changes in Production Rates (Timing) and Other

  (719,772)  (756,264)

Standardized Measure, End of Year

 $1,931,647  $5,479,471 

 

35

 

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

None.

 

ITEM 9A.

CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures

 

As defined in Rules 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.

 

Management of the Company, with the participation of the Principal Executive Officer and Principal Financial Officer, evaluated the effectiveness of the Company's disclosure controls and procedures and concluded that the Company's disclosure controls and procedures were effective as of December 31, 2020.

 

Management's Annual Report on Internal Control over Financial Reporting

 

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting for the Company as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. This system is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.

 

The Company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) 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 Company are being made only in accordance with authorizations of management and the directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the financial statements and provide reasonable assurance as to the detection of fraud.

 

Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable assurance and may not prevent or detect misstatements. Further, because of changes in conditions, effectiveness of internal controls over financial reporting may vary over time.

 

With the participation of the Principal Executive Officer and Principal Financial Officer, the Company’s management conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting, based on the framework and criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, the Company’s management concluded that the Company's internal control over financial reporting was effective as of December 31, 2020.

 

This Annual Report on Form 10-K does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. As the Company is a Smaller Reporting Company, Management’s report was not subject to attestation by the Company’s independent registered public accounting firm.

 

Changes in Internal Control over Financial Reporting

 

Management of the Company, with the participation of the Principal Executive Officer and Principal Financial Officer, evaluated the internal control over financial reporting and concluded that no change in the Company’s internal control over financial reporting occurred during the fourth quarter ended December 31, 2020, that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

 

36

 

 

ITEM 9B.

OTHER INFORMATION

 

None.

 

 

PART III

 

ITEM 10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

Information regarding directors and executive officers, Section 16(a) Beneficial Ownership Reporting Compliance, the Company’s Code of Ethics, Corporate Governance and any other information called for by this item is incorporated by reference to the Proxy Statement.

 

ITEM 11.

EXECUTIVE COMPENSATION

 

Information regarding executive compensation called for by this Item is incorporated by reference to the Proxy Statement.

 

ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

Information regarding security ownership of certain beneficial owners and management and related stockholder matters called for by this Item is incorporated by reference to the Proxy Statement.

 

ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

 

See Item 8, Note 12 to Financial Statements. Information regarding the independence of our directors and other information called for by this Item is incorporated by reference to the Proxy Statement.

 

ITEM 14.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

Information regarding fees billed to the Company by its independent registered public accounting firm is incorporated by reference to the Proxy Statement.

 

37

 

PART IV

 

ITEM 15.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

 

The following documents are exhibits to this Form 10-K. Each document marked by an asterisk is filed electronically herewith.

 

Exhibit

Number

Description

  

3.1

Restated Certificate of Incorporation dated June 1, 2012 is incorporated by reference to Exhibit 3.1 of The Reserve Petroleum Company’s Annual Report 10-K (Commission File No. 0-8157) filed March 28, 2013.

  

3.2

Amended By-Laws dated November 16, 2004, are incorporated by reference to Exhibit 3.2 of The Reserve Petroleum Company’s Annual Report on Form 10-KSB (Commission File No. 0-8157) filed March 31, 2006.

  

4.1*

Description of Company’s common securities registered under Section 12 of the Exchange Act.

  

14

Code of Ethics for Senior Officers incorporated by reference to Exhibit 14 of The Reserve Petroleum Company’s Annual Report on Form 10-KSB (Commission File No. 0-8157) filed March 31, 2006, amended January 1, 2018.

  

31.1*

Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as amended.

  

31.2*

Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as amended.

  

32*

Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350.

  

101.INS*

XBRL Instance Document

  

101.SCH*

XBRL Taxonomy Extension Schema Document

  

101.CAL*

XBRL Taxonomy Calculation Linkbase Document

  

101.DEF*

XBRL Taxonomy Definition Linkbase Document

  

101.LAB*

XBRL Taxonomy Label Linkbase Document

  

101.PRE*

XBRL Taxonomy Presentation Linkbase Document

 

   
 

* Filed electronically herewith.

 

 

ITEM 16.

FORM 10-K SUMMARY

 

None.

 

38

 

SIGNATURES

 

 

 

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

  THE RESERVE PETROLEUM COMPANY 
  (Registrant) 
    
    

 

 

 

 

 

 

b03.jpg 

 

 

 

 

Date: March 31, 2021

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:

 

 

 

 

 

 

b04.jpg 

 

 b05.jpg

 

 

 

39