RSRV 10-Q
Reserve Petroleum Co (RSRV)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
| | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number
THE RESERVE PETROLEUM COMPANY
(Exact Name of Registrant as Specified in Its Charter)
| | |
| (State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) |
| ( | |
| (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 |
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. ☑
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). ☑
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 ☐ | |
| 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 is a shell company (as defined in Rule 12b-2 of the Exchange Act).
As of November 5, 2021,
TABLE OF CONTENTS
PART I – FINANCIAL INFORMATION
| Page | ||
| Item 1. | Consolidated Financial Statements | 2 |
| Index to Consolidated Financial Statements | ||
| Consolidated Balance Sheets – September 30, 2021 and December 31, 2020 | 2 | |
| Consolidated Statements of Operations – Three and Nine Months Ended September 30, 2021 and 2020 | 4 | |
| Consolidated Statements of Stockholders’ Equity – Three and Nine Months Ended September 30, 2021 and 2020 | 5 | |
| Condensed Consolidated Statements of Cash Flows – Nine Months Ended September 30, 2021 and 2020 | 6 | |
| Notes to Consolidated Financial Statements | 7 | |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 11 |
| Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 16 |
| Item 4. | Controls and Procedures | 16 |
| PART II – OTHER INFORMATION | ||
| Item 1. | Legal Proceedings | 17 |
| Item 1A. | Risk Factors | 17 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 17 |
| Item 3. | Defaults Upon Senior Securities | 17 |
| Item 4. | Mine Safety Disclosures | 17 |
| Item 5. | Other Information | 17 |
| Item 6. | Exhibits | 18 |
PART I – FINANCIAL INFORMATION
| ITEM 1. |
CONSOLIDATED FINANCIAL STATEMENTS |
| THE RESERVE PETROLEUM COMPANY |
|||
| CONSOLIDATED BALANCE SHEETS |
| ASSETS |
| September 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| (Unaudited) | ||||||||
| Current Assets: | ||||||||
| Cash and Cash Equivalents | $ | $ | ||||||
| Available-for-Sale Debt Securities | --- | |||||||
| Equity Securities | ||||||||
| Refundable Income Taxes | ||||||||
| Accounts Receivable | ||||||||
| Notes Receivable | ||||||||
| Total Current Assets | ||||||||
| Investments: | ||||||||
| Equity Method Investments | ||||||||
| Other Investments | ||||||||
| Total Investments | ||||||||
| Property, Plant and Equipment: | ||||||||
| Oil and Gas Properties, at Cost, Based on the Successful Efforts Method of Accounting – | ||||||||
| Unproved Properties | ||||||||
| Proved Properties | ||||||||
| Oil and Gas Properties, Gross | ||||||||
| Less – Accumulated Depreciation, Depletion, Amortization and Valuation Allowance | ( | ) | ( | ) | ||||
| Oil and Gas Properties, Net | ||||||||
| Other Property and Equipment, at Cost | ||||||||
| Less – Accumulated Depreciation | ( | ) | ( | ) | ||||
| Other Property and Equipment, Net | ||||||||
| Total Property, Plant and Equipment | ||||||||
| Other Assets | ||||||||
| Total Assets | $ | $ | ||||||
| See Accompanying Notes |
| THE RESERVE PETROLEUM COMPANY |
|||
| CONSOLIDATED BALANCE SHEETS |
|||
| LIABILITIES AND STOCKHOLDERS’ EQUITY |
| September 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| (Unaudited) | ||||||||
| Current Liabilities: | ||||||||
| Accounts Payable | $ | $ | ||||||
| Other Current Liabilities | ||||||||
| Total Current Liabilities | ||||||||
| Long-Term Liabilities: | ||||||||
| Asset Retirement Obligation | ||||||||
| Dividends Payable | ||||||||
| Deferred Tax Liability, Net | ||||||||
| Total Long-Term Liabilities | ||||||||
| Total Liabilities | ||||||||
| Stockholders’ Equity: | ||||||||
| Common Stock | ||||||||
| Additional Paid-in Capital | ||||||||
| Retained Earnings | ||||||||
| Stockholders’ Equity Before Treasury Stock | ||||||||
| Less – Treasury Stock, at Cost | ( | ) | ( | ) | ||||
| Total Stockholders’ Equity | ||||||||
| Total Liabilities and Stockholders’ Equity | $ | $ | ||||||
| See Accompanying Notes |
| THE RESERVE PETROLEUM COMPANY |
|||||||
| CONSOLIDATED STATEMENTS OF OPERATIONS |
|||||||
| (Unaudited) |
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Operating Revenues: | ||||||||||||||||
| Oil and Gas Sales | $ | $ | $ | $ | ||||||||||||
| Lease Bonuses and Other | ||||||||||||||||
| Service Revenues | ( | ) | --- | --- | ||||||||||||
| Total Operating Revenues | ||||||||||||||||
| Operating Costs and Expenses: | ||||||||||||||||
| Production | ||||||||||||||||
| Exploration | ||||||||||||||||
| Depreciation, Depletion, Amortization and Valuation Provisions | ||||||||||||||||
| General, Administrative and Other | ||||||||||||||||
| Total Operating Costs and Expenses | ||||||||||||||||
| Income/(Loss) from Operations | ( | ) | ( | ) | ||||||||||||
| Equity Loss in Investees | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other Income/(Loss), Net | ( | ) | ||||||||||||||
| Income/(Loss) Before Income Taxes | ( | ) | ( | ) | ||||||||||||
| Income Tax Provision/(Benefit): | ||||||||||||||||
| Current | ( | ) | ( | ) | ( | ) | ||||||||||
| Deferred | ( | ) | ||||||||||||||
| Total Income Tax Provision/(Benefit) | ( | ) | ( | ) | ||||||||||||
| Net Income/(Loss) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| Per Share Data | ||||||||||||||||
| Net Income/(Loss), Basic and Diluted | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| Cash Dividends Declared and/or Paid | $ | --- | $ | --- | $ | $ | ||||||||||
| Weighted Average Shares Outstanding, Basic and Diluted | ||||||||||||||||
| See Accompanying Notes |
| THE RESERVE PETROLEUM COMPANY CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited) |
| Common Stock | Additional Paid-in Capital | Retained Earnings | Treasury Stock | Total | ||||||||||||||||
| Three Months Ended September 30, 2021 | ||||||||||||||||||||
| Balance as of June 30, 2021 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||
| Net Income | --- | --- | --- | |||||||||||||||||
| Dividends Declared | --- | --- | --- | --- | --- | |||||||||||||||
| Purchase of Treasury Stock | --- | --- | --- | --- | --- | |||||||||||||||
| Balance as of September 30, 2021 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||
| Three Months Ended September 30, 2020 | ||||||||||||||||||||
| Balance as of June 30, 2020 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||
| Net Loss | --- | --- | ( | ) | --- | ( | ) | |||||||||||||
| Dividends Declared | --- | --- | --- | --- | --- | |||||||||||||||
| Purchase of Treasury Stock | --- | --- | --- | --- | --- | |||||||||||||||
| Balance as of September 30, 2020 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||
| Nine Months Ended September 30, 2021 | ||||||||||||||||||||
| Balance as of December 31, 2020 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||
| Net Income | --- | --- | --- | |||||||||||||||||
| Dividends Declared | --- | --- | (782,892 | ) | --- | (782,892 | ) | |||||||||||||
| Purchase of Treasury Stock | --- | --- | --- | ( | ) | ( | ) | |||||||||||||
| Balance as of September 30, 2021 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||
| Nine Months Ended September 30, 2020 | ||||||||||||||||||||
| Balance as of December 31, 2019 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||
| Net Loss | --- | --- | ( | ) | --- | ( | ) | |||||||||||||
| Dividends Declared | --- | --- | (783,077 | ) | --- | (783,077 | ) | |||||||||||||
| Purchase of Treasury Stock | --- | --- | --- | --- | --- | |||||||||||||||
| Balance as of September 30, 2020 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||
| See Accompanying Notes |
| THE RESERVE PETROLEUM COMPANY |
|||
| CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS |
|||
| (Unaudited) |
| Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2021 | 2020 | |||||||
| Net Cash Provided by Operating Activities | $ | $ | ||||||
| Cash Provided by/(Applied to) Investing Activities: | ||||||||
| Maturity of Available-for-Sale Debt Securities | ||||||||
| Purchase of Available-for-Sale Debt Securities | --- | ( | ) | |||||
| Proceeds from Disposal of Property, Plant and Equipment | ||||||||
| Purchase of Property, Plant and Equipment | ( | ) | ( | ) | ||||
| Sale of Equity Method and Other Investments | ||||||||
| Purchase of Equity Method and Other Investments | ( | ) | ( | ) | ||||
| Sale of Equity Securities | ||||||||
| Purchase of Equity Securities | ( | ) | ( | ) | ||||
| Net Cash Provided by/(Applied to) Investing Activities | ( | ) | ||||||
| Cash Applied to Financing Activities: | ||||||||
| Dividends Paid to Stockholders | ( | ) | ( | ) | ||||
| Purchase of Treasury Stock | ( | ) | --- | |||||
| Total Cash Applied to Financing Activities | ( | ) | ( | ) | ||||
| Net Change in Cash and Cash Equivalents | ( | ) | ||||||
| Cash and Cash Equivalents, Beginning of Period | ||||||||
| Cash and Cash Equivalents, End of Period | $ | $ | ||||||
| See Accompanying Notes |
THE RESERVE PETROLEUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)
Note 1 – BASIS OF PRESENTATION
In these notes the term “Company” refers to The Reserve Petroleum Company and its consolidated wholly owned subsidiary, Trinity Water Services, LLC, an Oklahoma limited liability company formed in March 2021 to provide initial capital, including the purchase of water well drilling equipment and startup costs, for a joint venture with TWS South, LLC, a Texas limited liability company. The Company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and include the accounts of The Reserve Petroleum Company and its subsidiary, after elimination of all material intercompany balances and transactions.
The accompanying balance sheet as of December 31, 2020, which has been derived from audited financial statements, the unaudited interim consolidated financial statements and these notes have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, certain disclosures normally included in financial statements prepared in accordance with the accounting principles generally accepted in the United States of America (“GAAP”) have been omitted. The accompanying consolidated financial statements and notes thereto should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 as filed with the Securities and Exchange Commission (hereinafter, the “2020 Form 10-K”).
In the opinion of management, the accompanying consolidated financial statements reflect all adjustments (consisting only of normal recurring accruals), which are necessary for a fair statement of the results of the interim periods presented. The results of operations for the current interim periods are not necessarily indicative of the operating results for the full year.
Reclassifications
Certain amounts in the 2020 financial statements have been reclassified to conform to the 2021 presentation. The amounts were not material to the consolidated financial statements and had no effect on previously reported net income.
Note 2 – REVENUE RECOGNITION
A portion of oil and gas sales recorded in the consolidated statements of operations are the result of estimated volumes and pricing for oil and natural gas product produced and sold, but for which proceeds have not yet been received for the period. For the nine months ended September 30, 2021 and 2020, that estimate represented $
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:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Oil Sales | $ | $ | $ | $ | ||||||||||||
| Natural Gas Sales | ||||||||||||||||
| Miscellaneous Oil and Gas Product Sales | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
Note 3 – OTHER INCOME/(LOSS), NET
The following is an analysis of the components of Other Income/(Loss), Net:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Net Realized and Unrealized Gain/(Loss) on Equity Securities | $ | ( | ) | $ | $ | $ | ||||||||||
| Gain/(Loss) on Asset Sales | ( | ) | ||||||||||||||
| Interest Income | ||||||||||||||||
| Agricultural Rental Income | --- | |||||||||||||||
| Dividend Income | ||||||||||||||||
| Income from Other Investments | --- | --- | --- | |||||||||||||
| Interest and Other Miscellaneous | ||||||||||||||||
| Income/Expenses | ( | ) | ( | ) | ( | ) | ||||||||||
| Other Income/(Loss), Net | $ | ( | ) | $ | $ | $ | ||||||||||
Note 4 – 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 68”), an Oklahoma limited liability company, with a
Broadway Seventy-Two, LLC (“Broadway 72”), an Oklahoma limited liability company, with a
Grand Woods Development, LLC (“Grand Woods”), an Oklahoma limited liability company, with a
QSN Office Park, LLC (“QSN”), an Oklahoma limited liability company, with a
The Company’s Other Investments primarily include:
Bailey Hilltop Pipeline, LLC (“Bailey”), with a
Cloudburst International, Inc. (“Cloudburst”), with a
Genlith, Inc. (“Genlith”), with a
Ocean’s NG (“Ocean”), with a
OKC Industrial Properties, LC (“OKC”), with a
VCC Accern Investment, LLC (“VCC Accern”), with a
VCC Homebase Investment, LLC (“VCC Homebase”), with a
Victorum BHR2 Investment, LLC (“BHR2”), with a 16.3% ownership, was acquired in August 2021. BHR2 serves as a special purpose investment vehicle to hold an investment in Berry-Rock Capital, LP (“Berry-Rock”). Berry-Rock is a provider of a rent-to-own program for individuals unable to qualify for a mortgage. The Company’s investment in BHR2 totaled $
VCC Mamenta Investment, LLC (“VCC Mamenta”), with a
Note 5 – PROVISION FOR INCOME TAXES
In 2021 and 2020, the effective tax rate differed from the statutory rate, primarily because of allowable depletion for tax purposes in excess of the cost basis in oil and gas properties.
Excess federal percentage depletion, which is limited to certain production volumes and by certain income levels, reduces estimated taxable income projected for any year. The federal excess percentage depletion estimates will be updated throughout the year until finalized with the detail well-by-well calculations at year-end. When a provision for income taxes is recorded, federal excess percentage depletion benefits decrease the effective tax rate. 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, the proportional effect of these items on the effective tax rate may be significant.
Note 6 – ASSET RETIREMENT OBLIGATION
The Company records the fair value of its estimated liability to retire its oil and natural gas producing properties in the period in which it is incurred (typically the date of first sale). The estimated liability is calculated by obtaining current estimated plugging costs from the well operators and inflating it over the life of the property. Current year inflation rate used is
A reconciliation of the Company’s asset retirement obligation liability is as follows:
| Balance at December 31, 2020 | $ | |||
| Liabilities incurred for new wells (net of revisions) | ||||
| Liabilities settled (wells sold or plugged) | ) | |||
| Revision to estimate | ||||
| Accretion expense | ||||
| Balance at September 30, 2021 | $ |
Note 7 – 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.
Recurring Fair Value Measurements
Certain of the Company’s assets are reported at fair value in the accompanying consolidated 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. At September 30, 2021 and December 31, 2020, the Company’s assets reported at fair value on a recurring basis are summarized as follows:
| September 30, 2021 | ||||||||||||
| Level 1 Inputs | Level 2 Inputs | Level 3 Inputs | ||||||||||
| Financial Assets: | ||||||||||||
| Equity Securities: | ||||||||||||
| Domestic Equities | $ | $ | --- | $ | --- | |||||||
| International Equities | --- | --- | ||||||||||
| Others | --- | --- | ||||||||||
| $ | $ | --- | $ | --- | ||||||||
| December 31, 2020 | ||||||||||||
| Level 1 Inputs | Level 2 Inputs | Level 3 Inputs | ||||||||||
| Financial Assets: | ||||||||||||
| Available-for-Sale Debt Securities – U.S. Treasury Bills Maturing in 2021 | $ | --- | $ | $ | --- | |||||||
| Equity Securities: | ||||||||||||
| Domestic Equities | --- | --- | ||||||||||
| International Equities | --- | --- | ||||||||||
| Others | --- | --- | ||||||||||
| $ | $ | $ | --- | |||||||||
Non-Recurring Fair Value Measurements
The Company’s asset retirement obligation annually represents a non-recurring fair value liability. The fair value of the non-financial liability incurred in the nine months ended September 30, 2021 and 2020 was $
The impairment loss in the nine months ended September 30, 2021 and 2020 was $
Fair Value of Financial Instruments
The Company’s financial instruments consist primarily of cash and cash equivalents, trade receivables, marketable securities, trade payables and dividends payable. At September 30, 2021 and December 31, 2020, the historical cost of cash and cash equivalents, trade receivables, trade payables and dividends payable are considered to be representative of their respective fair values due to the short-term maturities of these items.
Note 8 – 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 for the nine months ended September 30, 2021 and 2020 totaled $
Note 9 – NEW ACCOUNTING PRONOUNCEMENTS
See the “New Accounting Pronouncements” disclosures on page 25 of the 2020 Form 10-K. There were no other accounting pronouncements issued or that have become effective since December 31, 2020.
Note 10 – RELATED PARTY TRANSACTIONS
The Company purchased working interest properties of Mid-American Oil Company, an affiliated company, for $
| ITEM 2. |
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
This discussion and analysis should be read with reference to a similar discussion in the 2020 Form 10-K, as well as the consolidated financial statements included in this Form 10-Q.
Forward-Looking Statements
This discussion and analysis includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements give the Company’s current expectations of future events. They include statements regarding the drilling of oil and natural gas wells, the production that may be obtained from oil and natural gas wells, cash flow and anticipated liquidity and expected future expenses.
Although management believes the expectations in these and other forward-looking statements are reasonable, we can give no assurance they will prove to have been correct. They can be affected by inaccurate assumptions or by known or unknown risks and uncertainties. Factors that would cause actual results to differ materially from expected results are described under “Forward-Looking Statements” on page 3 of the 2020 Form 10-K.
We caution you not to place undue reliance on these forward-looking statements, which speak only as of the date of this Form 10-Q, and we undertake no obligation to update this information because of new information, future developments, or otherwise. You are urged to carefully review and consider the disclosures made in this and our other reports filed with the Securities and Exchange Commission that attempt to advise interested parties of the risks and factors that may affect our business.
Financial Conditions and Results of Operations
COVID-19
In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. Governments have tried to slow the spread of the virus by imposing social distancing guidelines, travel restrictions and stay-at-home orders, which caused a significant decrease in activity in the global economy and the demand for oil and to a lesser extent natural gas. As a result, the price for oil decreased significantly. While oil prices have recovered, there is still ongoing volatility in world demand in the market.
Our profitability was significantly affected by this volatility. A decline in commodity prices and our future estimated production levels could lead to additional material impairments of our long-lived assets and equity method investments. Additional impairments could be triggered if the COVID-19 pandemic leads to a reduction in global economic activity and demand for energy. We continue to evaluate all cash management strategies and maintain conservative choices in short-term investments to protect cash reserves and liquidity.
Liquidity and Capital Resources
Please refer to the Consolidated Balance Sheets and the Condensed Consolidated Statements of Cash Flows in this Form 10-Q to supplement the following discussion. In the first nine months of 2021, the Company continued to fund its business activity using internal sources of cash. The Company had net cash provided by operations of $2,443,204, and cash provided by the maturities of available-for-sale debt securities of $1,515,234, sales of securities and investments of $1,799,967, and cash provided by property dispositions of $18,490 for total cash provided of $5,776,895. The Company utilized cash for property additions of $2,281,064, the purchase of equity securities and investments of $15,805,713, and financing activities of $787,337 for total cash applied of $18,874,114. Cash and cash equivalents decreased $13,097,219 to $3,089,866.
Discussion of Significant Changes in Working Capital. In addition to the changes in cash and cash equivalents discussed above, there were other changes in working capital line items from December 31, 2020. A discussion of these items follows.
Equity securities increased $12,782,256 (504%) to $15,318,738 as of September 30, 2021 from $2,536,482 at December 31, 2020. The increase was the result of $12,433,754 in net purchases and a $348,502 net increase in the equity securities’ market value. The changes were the result of a shift in cash and investment strategy and funds from available-for-sale debt securities were used to provide access to capital for other projects and investments.
Refundable income taxes decreased $100,689 (46%) to $117,515 as of September 30, 2021 from $218,204 at December 31, 2020. The change was the result of net income from increased oil and natural gas prices reducing federal income tax receivables as of September 30, 2021.
Accounts receivable increased $575,158 (72%) to $1,369,320 as of September 30, 2021 from $794,162 at December 31, 2020. The increase was the result of an increase in oil and gas receivables of $776,793, primarily resulting from increased oil and natural gas prices. These were offset by a net decrease in trade and other accounts receivable of $201,635, primarily resulting from a sale of an investment at the end of December 2020.
Notes receivable increased $65,757 (24%) to $344,326 as of September 30, 2021 from $278,569 at December 31, 2020. The increase was the result of added notes receivable from Grand Woods, LLC (“Grand Woods”), an equity method investee. See Note 4 to the accompanying consolidated financial statements for additional information about Grand Woods.
Accounts payable and other current liabilities increased $57,099 (22%) to $320,596 as of September 30, 2021 from $263,497 at December 31, 2020, due to increases of $128,775 in deferred revenues related to unearned drilling revenue in the joint venture with TWS South, LLC, and $38,259 in accrued property taxes, offset by net decreases of $109,935 resulting from timing differences in the processing of accounts payable and other current liabilities.
Discussion of Significant Changes in the Condensed Consolidated Statements of Cash Flows. As noted in the first paragraph above, net cash provided by operating activities was $2,443,204 in the nine months ended September 30, 2021, an increase of $1,533,426 (169%) from cash provided in the comparable period in 2020 of $909,778. For more information see “Operating Revenues” and “Operating Costs and Expenses” below.
Cash applied to the purchase of property, plant and equipment in the nine months ended September 30, 2021 was $2,281,064, an increase of $839,321 (58%) from cash applied in the comparable period in 2020 of $1,441,743. In both 2021 and 2020, cash applied to property, plant and equipment additions was mostly related to oil and gas exploration and development activity. See the subheading “Exploration Costs” in the “Results of Operations” section below for additional information.
Cash applied to purchase of available-for-sale debt securities in the nine months ended September 30, 2020 was $8,079,535, with none in 2021. Cash provided by the maturity of available-for-sale debt securities in the nine months ended September 30, 2021 was $1,515,234, a decrease of $23,566,977 (94%) from cash provided in the comparable period in 2020 of $25,082,211. Cash applied to equity method and other investments in the nine months ended September 30, 2021 was $1,596,742, an increase of $1,084,327 (212%) from cash applied in the comparable period of 2020 of $512,415. These changes were the result of a shift in cash and investment strategy and funds from available-for-sale debt securities were used to provide access to capital for other projects and investments. For details on equity method and other investments, see Note 4 – EQUITY METHOD AND OTHER INVESTMENTS AND RELATED COMMITMENTS AND CONTINGENT LIABILITIES, INCLUDING GUARANTEES.
Conclusion. Management is unaware of any additional material trends, demands, commitments, events or uncertainties, which would impact liquidity and capital resources to the extent that the discussion presented in the 2020 Form 10-K would not be representative of the Company’s current position.
Results of Operations – Nine Months Ended September 30, 2021
Net income/(loss) increased $3,352,492 to income of $1,545,356 in the nine months ended September 30, 2021 from a loss of $1,807,136 in the comparable period in 2020. Net income/(loss) per share, basic and diluted, increased $21.41 to income of $9.87 in the nine months ended September 30, 2021 from a loss of $11.54 in the comparable period in 2020.
A discussion of revenue from oil and natural gas sales and other significant line items in the consolidated statements of operations follows.
Operating Revenues. Revenues from oil and gas sales increased $3,330,999 (111%) to $6,324,026 in the nine months ended September 30, 2021 from $2,993,027 in the comparable period in 2020. The $3,330,999 increase is due to an increase in crude oil sales of $2,371,928, natural gas sales of $742,309, and miscellaneous oil and natural gas product sales of $216,762.
The $2,371,928 (121%) increase in oil sales to $4,324,787 in the nine months ended September 30, 2021 from $1,952,859 in the comparable period in 2020 was the net result of an increase in the volume sold and an increase in the average price per barrel (Bbl). The volume of oil sold increased 15,005 Bbls to 69,561 Bbls in the nine months ended September 30, 2021, resulting in a positive volume variance of $537,166. The average price per Bbl increased $26.37 to $62.17 per Bbl in the nine months ended September 30, 2021 from $35.80 per Bbl in the comparable period in 2020, resulting in a positive price variance of $1,834,762.
The $742,309 (78%) increase in gas sales to $1,689,962 in the nine months ended September 30, 2021 from $947,653 in the comparable period in 2020 was the result of a decrease in the volume sold and an increase in the average price per thousand cubic feet (MCF). The volume of natural gas sold decreased 58,710 MCF to 505,218 MCF in the nine months ended September 30, 2021 from 563,928 MCF in the comparable period in 2020, for a negative volume variance of $98,633. The average price per MCF increased $1.67 to $3.35 per MCF in the nine months ended September 30, 2021 from $1.68 per MCF in the comparable period in 2020, resulting in a positive price variance of $840,942.
Sales from the Robertson County, Texas royalty interest properties provided approximately 28% of the Company’s gas sales volumes for both the nine months ended September 30, 2021 and for the comparable period in 2020. See discussion on page 10 of the 2020 Form 10-K, under the subheading “Operating Revenues,” for more information about these properties. Sales from Arkansas working interest properties provided approximately 10% of the Company’s gas sales volumes for the nine months ended September 30, 2021 and 11% of the gas sales volumes for the comparable period in 2020.
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 due to the impact of COVID-19 on demand for oil and gas products.
Sales of miscellaneous oil and gas products were $309,277 in the nine months ended September 30, 2021 as compared to $92,515 in the comparable period in 2020, primarily related to increased oil prices and increased drilling that resulted in more gas liquids.
The Company received lease bonuses of $9,000 in the nine months ended September 30, 2021 for leases on its owned minerals compared to $82,221 in the comparable period in 2020.
Operating Costs and Expenses. Operating costs and expenses decreased $733,193 (13%) to $4,926,305 in the nine months ended September 30, 2021 from $5,659,498 in the comparable period of 2020. Material line-item changes are discussed and analyzed in the following paragraphs.
Production costs increased $444,162 (32%) to $1,814,861 in the nine months ended September 30, 2021 from $1,370,699 in the comparable period in 2020. Lease operating expenses increased $223,954, primarily due to increased drilling and workovers resulting from oil and gas price increases. Hauling, compression, and other costs increased by $97,277 due to higher production and increased postproduction costs on select wells. Gross production taxes increased $122,931, due to increased production of oil and natural gas.
Exploration costs increased $307,029 (201%) to $460,002 in the nine months ended September 30, 2021 from $152,973 in the comparable period in 2020, due to increases of $400,787 in geological and geophysical and other expenses, offset by decreases in $73,953 in dry hole and plugging costs, and a $19,805 decrease in land costs associated with mineral acquisitions in the prior year.
The following is a summary as of November 8, 2021, updating both exploration and development activity from December 31, 2020, for the period ended September 30, 2021.
The Company is participating with its 16% interest in drilling on a Creek County, Oklahoma 3-D seismic project. At the start of 2021 there were six active prospects within the project. Exploratory wells were drilled on two of the prospects and both were completed as dry holes. A total of five development wells were drilled on two other prospects. All five wells have been completed and appear to be commercial oil producers. Capitalized costs for the period were $198,056. Dry hole costs of $35,514 have been or will be written off to expense.
The Company owns a 40% 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 participated 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 results of the re-entry were inconclusive, and further work on the thermal recovery project has been postponed. The Company is participating with a 20% interest in the purchase and re-processing of two seismic lines on the acreage in an attempt to develop gas prospects. Capitalized costs for the period were $25,096.
The Company is participating with a 14.85% interest in a 3-D seismic project covering approximately 35,000 acres in San Patricio County, Texas. At the start of 2021 there were six active prospects within the project. An exploratory well was drilled and completed on one of these in 2020, testing gas at a commercial rate. It has been shut in awaiting pipeline construction, which is now complete. The Company participated in the re-completion of another well and in the conversion of an abandoned producer to a saltwater disposal well. It also participated in the construction of a water system connecting all three existing project wells, which have been shut in, to the disposal facility. All three wells will be put back on production shortly. An additional exploratory well will be drilled starting in November or December 2021. Capitalized costs for the period were $117,752.
The Company has been participating with a 50% interest in the development of a Nolan County, Texas prospect. The Company and its partner have acquired 3,200 net acres of leasehold and three producing wells on the prospect and have negotiated a sale of a portion of their interest. The Company will participate with a 20.4% working interest in the drilling of an exploratory horizontal well on the prospect in the first quarter of 2022. Geological costs for the period were $33,750 and capitalized costs were $222,448.
The Company participated in the completion of four horizontal development wells that were drilled in 2020 on fee minerals located in Kingfisher County, Oklahoma. The Company has a 3.2% working interest in three of the wells and a 3.5% working interest in the fourth. All four wells were completed as commercial oil and gas producers. Actual costs of $354,278 for the period were offset by prepaid costs from 2020 for a net capitalized amount of $0.
The Company participated with its 3% working interest in the drilling of a development well on a Hitchcock County, Nebraska prospect. The well has been completed and appears to be a commercial oil producer. Capitalized costs for the period were $6,178.
The Company participated with its 22% working interest in the drilling of a development well on a Barber County, Kansas prospect. The well has been completed, testing gas at a commercial rate. It is shut in awaiting pipeline construction. Capitalized costs for the period were $103,820.
In July 2021, the Company acquired a 20% interest in 960 net acres of leasehold on a Finney County, Kansas prospect. An exploratory well has been drilled on the prospect and a completion is in progress. Geological costs for the period were $25,000 and capitalized costs were $75,000.
In August 2021, the Company purchased a 10% interest in 4,250.3 net acres of leasehold, five active producing wells, one active injection well and thirteen inactive wells on a Logan County, Oklahoma prospect for $305,644. An exploratory horizontal well has been drilled on the prospect and a completion is in progress. The Company also participated with its prospect interest in the purchase of an approximately 75% interest in eight horizontal producing wells and a saltwater disposal well for $303,000 in October 2021, primarily to acquire the disposal well. Additional capitalized costs for the period were $275,000.
The Company purchased the working interest properties of Mid-American Oil Company, an affiliated company, for $500,469 effective July 1, 2021. The Company already owns working interests in most of these properties. For more information regarding this transaction, see Note 10 – RELATED PARTY TRANSACTIONS.
Depreciation, depletion, amortization and valuation provision (DD&A) decreased $1,919,461 (67%) to $950,507 in the nine months ended September 30, 2021 from $2,869,968 in the comparable period in 2020, primarily due to a decrease in long-lived assets impairments of $2,242,320 resulting from increased oil and natural gas prices. There was a $146,281 net increase in depletion, depreciation, and amortization due to increased production, and we had non-producing leasehold impairments totaling $176,578. See Note 10 – LONG-LIVED ASSETS IMPAIRMENT LOSS on page 29 of the 2020 Form 10-K for a description of the impairment loss calculation.
General, administrative and other (G&A) increased $435,077 (34%) to $1,700,935 in the nine months ended September 30, 2021 from $1,265,858 in the comparable period in 2020. The increase was primarily due to expenses of $216,413 related to new costs in the joint venture with TWS South, LLC and $134,487 in consulting, SOX compliance and audit costs related to the implementation of new accounting software. The Company experienced human resource turnover with multiple retirements of long-term employees resulting in a net increase of approximately $23,000 in human resource costs and accounting service fees. The remainder of the increase was a net increase of approximately $61,177 in all other G&A account activity.
Other Income/(Loss), Net. Other income decreased $10,183 (3%) to $376,781 in the nine months ended September 30, 2021 from $386,964 in the comparable period in 2020. See Note 3 to the accompanying consolidated financial statements for an analysis of the components of this item.
Income Tax Provision/(Benefit). Income taxes increased $658,064 to a provision of $210,878 in the nine months ended September 30, 2021 from a benefit of $447,186 in the comparable period in 2020. Of the 2021 tax provision, estimated current tax provision was $117,983 and estimated deferred tax provision was $92,895. Of the 2020 income tax benefit, the estimated current tax benefit was $188,592 and the estimated deferred tax benefit was $258,594. See Note 5 to the accompanying consolidated financial statements for additional information on income taxes.
Results of Operations – Three Months Ended September 30, 2021
Net income/(loss) increased $1,379,767 to income of $642,719 in the three months ended September 30, 2021 from loss of $737,048 in the comparable period in 2020. The significant changes in the consolidated statements of operations are discussed below. Net income/(loss) per share, basic and diluted, increased $8.81 to income of $4.10 in the three months ended September 30, 2021 from a loss of $4.71 in the comparable period in 2020.
Operating Revenues. Revenues from oil and gas sales increased $2,040,594 (171%) to $3,236,728 in the three months ended September 30, 2021 from $1,196,134 in the comparable period in 2020. The $2,040,594 increase is due to an increase in crude oil sales of $1,541,309, natural gas sales of $335,694 and miscellaneous oil and gas product sales of $163,591.
The $1,541,309 (201%) increase in oil sales to $2,307,344 in the three months ended September 30, 2021 from $766,035 in the comparable period in 2020 was the net result of an increase in the volume sold and an increase in the average price per barrel (Bbl). The volume of oil sold increased 12,124 Bbls to 33,521 Bbls in the three months ended September 30, 2021, resulting in a positive volume variance of $434,064. The average price per Bbl increased $33.03 to $68.83 per Bbl in the three months ended September 30, 2021 from $35.80 per Bbl in the comparable period in 2020, resulting in a positive price variance of $1,107,245.
The $335,694 (84%) increase in gas sales to $733,317 in the three months ended September 30, 2021 from $397,623 in the comparable period in 2020 was the result of a decrease in the volume sold and an increase in the average price per thousand cubic feet (MCF). The volume of gas sold decreased 36,482 MCF to 182,116 MCF in the three months ended September 30, 2021 from 218,598 MCF in the comparable period in 2020, for a negative volume variance of $66,360. The average price per MCF increased $2.21 to $4.03 per MCF in the three months ended September 30, 2021 from $1.82 per MCF in the comparable period in 2020, resulting in a positive price variance of $402,054.
Operating Costs and Expenses. Operating costs and expenses increased $158,640 (7%) to $2,298,745 in the three months ended September 30, 2021 from $2,140,105 in the comparable period in 2020. The increase was the net result of an increase in production costs of $368,485; an increase in exploration costs charged to expense of $353,052; a decrease in DD&A of $696,051; and an increase in G&A of $133,154. The significant changes in these line items are discussed below.
Production costs increased $368,485 (85%) to $800,888 in the three months ended September 30, 2021 from $432,403 in the comparable period in 2020. Lease operating expenses increased $227,180, primarily due to increased drilling and workovers resulting from oil and gas price increases. Hauling, compression, and other costs increased by $87,742 due to higher production and increased postproduction costs on select wells. Gross production taxes increased $53,563, due to increased production of oil and natural gas.
Exploration costs increased $353,052 (454%) to $430,855 in the three months ended September 30, 2021 from $77,803 in the comparable period in 2020. Most of the increase is due to a $420,675 increase in geological and geophysical costs, offset by $47,818 net decreases in dry hole, plug and abandonment costs, and a $19,805 decrease in land costs associated with mineral acquisitions in the prior year.
DD&A decreased $696,051 (56%) to $556,993 in the three months ended September 30, 2021 from $1,253,044 in the comparable period in 2020, primarily due to a decrease in long-lived assets impairments of $929,992 resulting from increased oil and natural gas prices. There was a $233,941 net increase in depletion, depreciation, and amortization due to increased production. See Note 10 – LONG-LIVED ASSETS IMPAIRMENT LOSS on page 29 of the 2020 Form 10-K for a description of the impairment loss calculation.
G&A increased $133,154 (35%) to $510,009 in the three months ended September 30, 2021 from $376,855 in the comparable period in 2020. The increase was primarily due to expenses of $99,289 related to new costs in the joint venture with TWS South, LLC and a $33,865 net increase in all other G&A account activity.
Other Income/(Loss), Net. Other income/(loss) decreased $193,916 (205%) in the three months ended September 30, 2021 to a loss of $99,454 from income of $94,462 in the comparable period in 2020. See Note 3 to the accompanying consolidated financial statements for an analysis of the components of this item.
Income Tax Provision/(Benefit). Income taxes increased $224,063 to a provision of $93,080 in the three months ended September 30, 2021 from a benefit of $130,983 in the comparable period in 2020. Of the 2021 tax provision, estimated current tax benefit was $5,125 and estimated deferred tax provision was $98,205. Of the 2020 income tax benefit, the estimated current tax benefit was $202,801 and the estimated deferred tax provision was $71,818. See discussions above in “Results of Operations” section and Note 5 to the accompanying consolidated financial statements for additional explanation of the changes in the provision for income taxes.
Off-Balance Sheet Arrangements
The Company’s off-balance sheet arrangements relate to Broadway Sixty-Eight, LLC, an Oklahoma limited liability company, Broadway Seventy-Two, LLC, an Oklahoma limited liability company, Grand Woods Development, LLC, an Oklahoma limited liability company, and QSN Office Park, LLC, an Oklahoma limited liability company. The Company does not have actual or effective control of these entities. Management of these entities could at any time make decisions in their own best interest, which could materially affect the Company’s net income or the value of the Company’s investment. For more information about these entities and the related off-balance sheet arrangements, see Note 4 to the accompanying consolidated financial statements.
| ITEM 3. |
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Not applicable.
| ITEM 4. |
CONTROLS AND PROCEDURES |
As defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the "Exchange Act"), the term “disclosure controls and procedures” means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.
The Company’s Principal Executive Officer and Principal Financial Officer evaluated the effectiveness of the Company’s disclosure controls and procedures. Based on this evaluation, they concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2021.
Internal Control over Financial Reporting
There were no changes in the Company’s internal control over financial reporting during the quarter ended September 30, 2021 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting (as such term is defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) during the quarter ended September 30, 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.
PART II – OTHER INFORMATION
| ITEM 1. |
LEGAL PROCEEDINGS |
During the quarter ended September 30, 2021, the Company did not have any material legal proceedings brought against it or its properties.
| ITEM 1A. |
RISK FACTORS |
Not applicable.
| ITEM 2. |
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
None.
| ITEM 3. |
DEFAULTS UPON SENIOR SECURITIES |
None.
| ITEM 4. |
MINE SAFETY DISCLOSURES |
Not applicable.
| ITEM 5. |
OTHER INFORMATION |
None.
| ITEM 6. |
EXHIBITS |
The following documents are exhibits to this Form 10-Q. Each document marked by an asterisk is filed electronically herewith.
| Exhibit Number |
Description |
||
| 31.1* |
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| 31.2* |
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| 32* |
|||
| 101.INS* |
Inline XBRL Instance Document |
||
| 101.SCH* |
Inline XBRL Taxonomy Extension Schema Document |
||
| 101.CAL* |
Inline XBRL Taxonomy Calculation Linkbase Document |
||
| 101.DEF* |
Inline XBRL Taxonomy Definition Linkbase Document |
||
| 101.LAB* |
Inline XBRL Taxonomy Label Linkbase Document |
||
| 101.PRE* |
Inline XBRL Taxonomy Presentation Linkbase Document |
||
| 104 | Cover Page Interactive Data File (Formatted as Inline XBRL and contained in Exhibit 101) | ||
| * Filed electronically herewith. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized.
| THE RESERVE PETROLEUM COMPANY | ||
| (Registrant) | ||
| Date: November 15, 2021 | /s/ Cameron R. McLain | |
| Cameron R. McLain, | ||
| Principal Executive Officer | ||
| Date: November 15, 2021 | /s/ Lawrence R. Francis | |
| Lawrence R. Francis | ||
| Principal Financial Officer | ||