RESERVE PETROLEUM CO - Quarter Report: 2023 September (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the Quarterly Period Ended September 30, 2023
| o | 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, OK 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 | ||||||
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. þYes oNo
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). þYes oNo
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 o | Accelerated filer o | Non-accelerated filer þ | |||||||||||||||
Smaller reporting company þ | Emerging growth company o | ||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). oYes þNo
As of November 3, 2023, 155,850 shares of the Registrant’s $0.50 par value common stock were outstanding.
TABLE OF CONTENTS
PART I – FINANCIAL INFORMATION
| Page | ||||||||
1
PART I – FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THE RESERVE PETROLEUM COMPANY
CONSOLIDATED BALANCE SHEETS (1)
(Unaudited)
ASSETS
| September 30, 2023 | December 31, 2022 | ||||||||||
| Current Assets: | |||||||||||
| Cash and Cash Equivalents | $ | 4,628,905 | $ | 7,299,224 | |||||||
| Available-for-Sale Debt Securities | 4,284,711 | 4,208,648 | |||||||||
| Equity Securities | 2,534,031 | 2,302,959 | |||||||||
| Refundable Income Taxes | 543,861 | 120,230 | |||||||||
| Accounts Receivable | 2,400,996 | 2,318,183 | |||||||||
| Total Current Assets | 14,392,504 | 16,249,244 | |||||||||
| Investments: | |||||||||||
| Equity Method Investments | 2,828,174 | 2,469,644 | |||||||||
| Other Investments | 5,191,303 | 5,085,806 | |||||||||
| Total Investments | 8,019,477 | 7,555,450 | |||||||||
| Property, Plant and Equipment: | |||||||||||
| Oil and Gas Properties, at Cost, | |||||||||||
| Based on the Successful Efforts Method of Accounting – | |||||||||||
| Unproved Properties | 2,935,369 | 1,846,543 | |||||||||
| Proved Properties | 68,807,147 | 65,328,501 | |||||||||
| Oil and Gas Properties, Gross | 71,742,516 | 67,175,044 | |||||||||
| Less – Accumulated Depreciation, Depletion, Amortization and Valuation Allowance | (54,276,277) | (52,773,978) | |||||||||
| Oil and Gas Properties, Net | 17,466,239 | 14,401,066 | |||||||||
| Other Property and Equipment, at Cost | 754,966 | 758,256 | |||||||||
| Less – Accumulated Depreciation | (269,524) | (236,883) | |||||||||
| Other Property and Equipment, Net | 485,442 | 521,373 | |||||||||
| Total Property, Plant and Equipment, Net | 17,951,681 | 14,922,439 | |||||||||
| Total Assets | $ | 40,363,662 | $ | 38,727,133 | |||||||
See accompanying notes to unaudited consolidated financial statements
2
THE RESERVE PETROLEUM COMPANY
CONSOLIDATED BALANCE SHEETS, CONTINUED (1)
(Unaudited)
LIABILITIES AND EQUITY
| September 30, 2023 | December 31, 2022 | ||||||||||
| Current Liabilities: | |||||||||||
| Accounts Payable | $ | 1,452,918 | $ | 399,735 | |||||||
| Other Current Liabilities | 389,416 | 75,675 | |||||||||
| Note Payable, Current Portion | 140,708 | 136,637 | |||||||||
| Total Current Liabilities | 1,983,042 | 612,047 | |||||||||
| Long-Term Liabilities: | |||||||||||
| Asset Retirement Obligation | 2,858,128 | 2,809,257 | |||||||||
| Deferred Tax Liability, Net | 1,995,854 | 1,619,595 | |||||||||
| Note Payable, Less Current Portion | 1,194,879 | 1,300,872 | |||||||||
| Total Long-Term Liabilities | 6,048,861 | 5,729,724 | |||||||||
| Total Liabilities | 8,031,903 | 6,341,771 | |||||||||
| Equity: | |||||||||||
| Common Stock | 92,368 | 92,368 | |||||||||
| Additional Paid-in Capital | 65,000 | 65,000 | |||||||||
| Retained Earnings | 33,792,440 | 33,828,418 | |||||||||
| Equity Before Treasury Stock | 33,949,808 | 33,985,786 | |||||||||
| Less – Treasury Stock, at Cost | (1,795,887) | (1,749,858) | |||||||||
| Total Equity Applicable to The Reserve Petroleum Company | 32,153,921 | 32,235,928 | |||||||||
| Non-Controlling Interests | 177,838 | 149,434 | |||||||||
| Total Equity | 32,331,759 | 32,385,362 | |||||||||
| Total Liabilities and Equity | $ | 40,363,662 | $ | 38,727,133 | |||||||
(1) Amounts presented include balances held by our consolidated variable interest entities (“VIEs”), Grand Woods and TWS, as further discussed in Note 5 – Non-Controlling Interest and Variable Interest Entities. As of September 30, 2023, total assets and liabilities of Grand Woods, which are included in the consolidated balance sheets, were $2,229,448 and $1,336,243, respectively, including $57,620 of cash. Grand Woods' note holder has partial recourse against the Company. As of September 30, 2023, total assets and liabilities of TWS, which are included in the consolidated balance sheets, were $671,193 and $349,516, respectively, including $222,270 of cash.
See accompanying notes to unaudited consolidated financial statements
3
THE RESERVE PETROLEUM COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Operating Revenues: | |||||||||||||||||||||||
| Oil and Gas Sales | $ | 3,008,485 | $ | 3,322,974 | $ | 8,651,381 | $ | 10,795,151 | |||||||||||||||
| Lease Bonuses and Other | 183,797 | 13,471 | 183,797 | 155,272 | |||||||||||||||||||
| Water Well Drilling Services | 109,424 | 281,974 | 385,006 | 826,662 | |||||||||||||||||||
| Total Operating Revenues | 3,301,706 | 3,618,419 | 9,220,184 | 11,777,085 | |||||||||||||||||||
| Operating Costs and Expenses: | |||||||||||||||||||||||
| Production | 1,094,178 | 873,848 | 3,160,518 | 2,477,893 | |||||||||||||||||||
| Exploration | 106,151 | 284,635 | 679,720 | 278,612 | |||||||||||||||||||
| Water Well Drilling Services | 373,657 | 259,861 | 688,227 | 614,576 | |||||||||||||||||||
| Depreciation, Depletion, Amortization and Valuation Provision | 483,731 | 271,435 | 1,799,061 | 871,122 | |||||||||||||||||||
| Gain on Disposition of Oil and Gas Properties | — | — | — | (199,025) | |||||||||||||||||||
| General, Administrative and Other | 578,135 | 466,911 | 1,893,893 | 1,447,649 | |||||||||||||||||||
| Total Operating Costs and Expenses | 2,635,852 | 2,156,690 | 8,221,419 | 5,490,827 | |||||||||||||||||||
| Income from Operations | 665,854 | 1,461,729 | 998,765 | 6,286,258 | |||||||||||||||||||
| Equity Income/(Loss) in Investees | 22,781 | (8,227) | 81,414 | (111,105) | |||||||||||||||||||
| Interest Expense | (17,130) | — | (51,179) | — | |||||||||||||||||||
| Other Income/(Loss), Net | 92,479 | (55,009) | 850,021 | (1,617,765) | |||||||||||||||||||
| Income Before Income Taxes and Non-Controlling Interest | 763,984 | 1,398,493 | 1,879,021 | 4,557,388 | |||||||||||||||||||
| Income Tax Provision/(Benefit): | |||||||||||||||||||||||
| Current | 51,655 | 655,691 | 1,981 | 68,723 | |||||||||||||||||||
| Deferred | 94,820 | (288,450) | 376,259 | 946,024 | |||||||||||||||||||
| Total Income Tax Provision | 146,475 | 367,241 | 378,240 | 1,014,747 | |||||||||||||||||||
| Net Income | $ | 617,509 | $ | 1,031,252 | $ | 1,500,781 | $ | 3,542,641 | |||||||||||||||
| Less: Net Loss Attributable to Non-Controlling Interest | (7,395) | — | (23,945) | — | |||||||||||||||||||
| Net Income Attributable to Common Stockholders | $ | 624,904 | $ | 1,031,252 | $ | 1,524,726 | $ | 3,542,641 | |||||||||||||||
| Per Share Data | |||||||||||||||||||||||
| Net Income Attributable to Common Stockholders, Basic | $ | 4.01 | $ | 6.60 | $ | 9.77 | $ | 22.69 | |||||||||||||||
| Cash Dividends Declared and/or Paid | $ | — | $ | — | $ | 10.00 | $ | 10.00 | |||||||||||||||
| Weighted Average Shares Outstanding, Basic | 155,908 | 156,161 | 156,051 | 156,165 | |||||||||||||||||||
See accompanying notes to unaudited consolidated financial statements
4
THE RESERVE PETROLEUM COMPANY
CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited)
| Common Stock | Additional Paid-in Capital | Retained Earnings | Treasury Stock | Non- Controlling Interests | Total | ||||||||||||||||||||||||||||||
| Three Months Ended September 30, 2023 | |||||||||||||||||||||||||||||||||||
| Balance as of June 30, 2023 | $ | 92,368 | $ | 65,000 | $ | 33,167,536 | $ | (1,762,887) | $ | 181,988 | $ | 31,744,005 | |||||||||||||||||||||||
| Net Income/(Loss) | — | — | 624,904 | — | (7,395) | 617,509 | |||||||||||||||||||||||||||||
| Dividends Declared | — | — | — | — | — | — | |||||||||||||||||||||||||||||
| Purchase of Treasury Stock | — | — | — | (33,000) | — | (33,000) | |||||||||||||||||||||||||||||
| Contributions | — | — | — | — | 3,245 | 3,245 | |||||||||||||||||||||||||||||
| Balance as of September 30, 2023 | $ | 92,368 | $ | 65,000 | $ | 33,792,440 | $ | (1,795,887) | $ | 177,838 | $ | 32,331,759 | |||||||||||||||||||||||
| Three Months Ended September 30, 2022 | |||||||||||||||||||||||||||||||||||
| Balance as of June 30, 2022 | $ | 92,368 | $ | 65,000 | $ | 32,339,056 | $ | (1,749,858) | $ | — | $ | 30,746,566 | |||||||||||||||||||||||
| Net Income | — | — | 1,031,252 | — | — | 1,031,252 | |||||||||||||||||||||||||||||
| Dividends Declared | — | — | — | — | — | — | |||||||||||||||||||||||||||||
| Purchase of Treasury Stock | — | — | — | — | — | — | |||||||||||||||||||||||||||||
| Change in Non-Controlling Interests | — | — | — | — | 114,338 | 114,338 | |||||||||||||||||||||||||||||
| Balance as of September 30, 2022 | $ | 92,368 | $ | 65,000 | $ | 33,370,308 | $ | (1,749,858) | $ | 114,338 | $ | 31,892,156 | |||||||||||||||||||||||
| Nine Months Ended September 30, 2023 | |||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2022 | $ | 92,368 | $ | 65,000 | $ | 33,828,418 | $ | (1,749,858) | $ | 149,434 | $ | 32,385,362 | |||||||||||||||||||||||
| Net Income/(Loss) | — | — | 1,524,726 | — | (23,945) | 1,500,781 | |||||||||||||||||||||||||||||
| Dividends Declared | — | — | (1,560,704) | — | — | (1,560,704) | |||||||||||||||||||||||||||||
| Purchase of Treasury Stock | — | — | — | (46,029) | — | (46,029) | |||||||||||||||||||||||||||||
| Contributions | — | — | — | — | 52,349 | 52,349 | |||||||||||||||||||||||||||||
| Balance as of September 30, 2023 | $ | 92,368 | $ | 65,000 | $ | 33,792,440 | $ | (1,795,887) | $ | 177,838 | $ | 32,331,759 | |||||||||||||||||||||||
| Nine Months Ended September 30, 2022 | |||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2021 | $ | 92,368 | $ | 65,000 | $ | 31,389,240 | $ | (1,747,778) | $ | — | $ | 29,798,830 | |||||||||||||||||||||||
| Net Income | — | — | 3,542,641 | — | — | 3,542,641 | |||||||||||||||||||||||||||||
| Dividends Declared | — | — | (1,561,573) | — | — | (1,561,573) | |||||||||||||||||||||||||||||
| Purchase of Treasury Stock | — | — | — | (2,080) | — | (2,080) | |||||||||||||||||||||||||||||
| Change in Non-Controlling Interests | — | — | — | — | 114,338 | 114,338 | |||||||||||||||||||||||||||||
| Balance as of September 30, 2022 | $ | 92,368 | $ | 65,000 | $ | 33,370,308 | $ | (1,749,858) | $ | 114,338 | $ | 31,892,156 | |||||||||||||||||||||||
See accompanying notes to unaudited consolidated financial statements
5
THE RESERVE PETROLEUM COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Nine Months Ended September 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| Cash Provided by/(Applied to) Operating Activities: | |||||||||||
| Net Income | $ | 1,500,781 | $ | 3,542,641 | |||||||
| Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: | |||||||||||
| Depreciation, Depletion, Amortization and Valuation Provisions | 1,799,061 | 871,122 | |||||||||
| Depreciation Attributable to TWS | 56,177 | 47,526 | |||||||||
| Gain on Asset Sales | — | (248,848) | |||||||||
| Expired Leases | — | 158,794 | |||||||||
| Cash Distributions from Equity Method Investees | 24,000 | — | |||||||||
| Gain on Equity Method and Other Investments | (217,236) | (11,781) | |||||||||
| Net (Gain)/Loss on Equity Securities | (97,151) | 1,968,880 | |||||||||
| Deferred Income Tax Expense | 376,259 | 946,024 | |||||||||
| Change in Receivables | (506,444) | (278,110) | |||||||||
| Change in Accounts Payable and Other Current Liabilities | 148,604 | (133,679) | |||||||||
| Other | 54,664 | (12,102) | |||||||||
| Net Cash Provided by Operating Activities | $ | 3,138,715 | $ | 6,850,467 | |||||||
| Cash Provided by/(Applied to) Investing Activities: | |||||||||||
| Maturity of Available-for-Sale Debt Securities | $ | 6,054,655 | $ | — | |||||||
| Purchase of Available-for-Sale Debt Securities | (6,130,718) | (885,986) | |||||||||
| Proceeds from Disposal of Property, Plant and Equipment | 37,678 | 510,377 | |||||||||
| Purchase of Property, Plant and Equipment | (3,709,631) | (9,394,596) | |||||||||
| Purchase of Investments | (632,106) | (1,220,342) | |||||||||
| Return on Other Investments | 361,316 | 109,450 | |||||||||
| Sale of Equity Securities | 724,472 | 3,383,880 | |||||||||
| Purchase of Equity Securities | (858,394) | (2,962,240) | |||||||||
| Cash Acquired in Consolidation of Grand Woods | — | 88,670 | |||||||||
| Net Cash Applied to Investing Activities | $ | (4,152,728) | $ | (10,370,787) | |||||||
See accompanying notes to unaudited consolidated financial statements
6
THE RESERVE PETROLEUM COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(Unaudited)
| Nine Months Ended September 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| Cash Provided by/(Applied to) Financing Activities: | |||||||||||
| Dividends Paid to Stockholders | $ | (1,560,704) | $ | (1,561,573) | |||||||
| Purchase of Treasury Stock | (46,029) | (2,080) | |||||||||
| Payments of Note Payable | (101,922) | — | |||||||||
| Capital Contributions from Non-Controlling Interests | 52,349 | — | |||||||||
| Total Cash Applied to Financing Activities | (1,656,306) | (1,563,653) | |||||||||
| Net Change in Cash and Cash Equivalents | (2,670,319) | (5,083,973) | |||||||||
| Cash and Cash Equivalents, Beginning of Period | 7,299,224 | 10,129,157 | |||||||||
| Cash and Cash Equivalents, End of Period | $ | 4,628,905 | $ | 5,045,184 | |||||||
| Supplemental Disclosures of Cash Flow Information: | |||||||||||
| Interest Paid | $ | 42,386 | $ | 46,251 | |||||||
| Income Taxes Paid (Net of Refunds Received) | $ | 334,200 | $ | (228,701) | |||||||
| Supplemental Schedule of Noncash Investing and Financing Activities: | |||||||||||
| Net Increase in Accounts Payable for Property, Plant and Equipment Additions | $ | (1,254,723) | $ | (88,564) | |||||||
See accompanying notes to unaudited consolidated financial statements
7
THE RESERVE PETROLEUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2023
(Unaudited)
Note 1 – BASIS OF PRESENTATION
The Reserve Petroleum Company, a Delaware corporation, is an independent oil and gas company engaged in oil and natural gas exploration, development and minerals management with areas of concentration in Arkansas, Kansas, Oklahoma, South Dakota, Texas and Wyoming, a single business segment. The Company is also engaged in investments and joint ventures that are not significant business segments. The Company’s consolidated subsidiaries consist of Grand Woods Development, LLC (“Grand Woods”), an Oklahoma limited liability company and wholly owned Trinity Water Services, LLC, an Oklahoma limited liability company, which has a water well drilling joint venture agreement with TWS South, LLC, a Texas limited liability company (Collectively, “TWS”). Unless otherwise specified or the context otherwise requires, all references in these notes to “the Company,” “its,” “our,” and “we” are to The Reserve Petroleum Company and its consolidated subsidiaries.
The Company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and the rules and regulations of the Securities and Exchange Commission (“SEC”). The consolidated financial statements include the accounts of The Reserve Petroleum Company and its subsidiaries in which the Company holds a controlling interest, reflecting ownership of a majority of the voting interest, as of the financial statement date. Additionally, the Company consolidates Variable Interest Entities (“VIEs”) under certain criteria discussed further below. All intercompany accounts and transactions have been eliminated in consolidation. When necessary, reclassifications that are not material to the consolidated financial statements are made to prior period financial information to conform to the current year presentation.
Beginning with the period ended September 30, 2023, the Company changed its presentation method on the statement of cash flows from the direct method to the indirect method. The indirect method is predominantly used in practice, provides a useful link to income statements and balance sheets, is more familiar to financial statement users and is the less costly approach to prepare. The Company has recast the Consolidated Statements of Cash Flows and related disclosures for the period ended September 30, 2022, to conform to the indirect presentation method in the current period.
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, 2022, as filed with the Securities and Exchange Commission (hereinafter the “2022 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.
Variable Interest Entities
The Company decides at the inception of each arrangement whether an entity in which an investment is made or in which we have other variable interests is considered a VIE. Generally, an entity is a VIE if (1) the entity does not have sufficient equity at risk to finance its activities without additional subordinated financial support from other parties, (2) the entity’s investors lack any characteristics of a controlling financial interest or (3) the entity was established with non-substantive voting rights. The Company consolidates VIEs when the Company is deemed to be the primary beneficiary. The primary beneficiary of a VIE is generally the party that both: (1) has the power to make decisions that most significantly affect the economic performance of the VIE and (2) has the obligation to absorb losses or the right to receive benefits that in either case could potentially be significant to the VIE. If the Company is not deemed to be the primary beneficiary of a VIE, the Company accounts for the investment or other variable interests in a VIE in accordance with applicable GAAP.
8
Non-Controlling Interests
When the Company consolidates an entity, 100% of the assets, liabilities, revenues and expenses of the subsidiary are included in the consolidated financial statements. For those consolidated entities in which the Company’s ownership is less than 100%, the Company records a non-controlling interest as a component of equity on the consolidated balance sheets, which represents the third-party ownership in the net assets of the respective consolidated subsidiary. Additionally, the portion of the net income or loss attributable to the non-controlling interest is reported as net income (loss) attributable to non-controlling interest on the consolidated statements of income. Changes in ownership interests in an entity that do not result in deconsolidation are generally recognized within equity. See Note 5 for additional details on non-controlling interests.
Note 2 – REVENUE RECOGNITION
A portion of oil and natural gas sales recorded in the consolidated statements of income are the result of estimated volumes and pricing for oil and natural gas payments not yet received for the period. For the nine months ended September 30, 2023 and 2022, that estimate represented $1,686,369 and $1,713,154, respectively, of oil and natural gas sales included in the consolidated statements of income.
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 natural gas sales:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Oil Sales | $ | 2,484,260 | $ | 1,891,312 | $ | 7,023,759 | $ | 6,872,518 | |||||||||||||||
| Natural Gas Sales | 459,963 | 1,302,751 | 1,431,795 | 3,528,247 | |||||||||||||||||||
| Miscellaneous Oil and Gas Product Sales | 64,262 | 128,911 | 195,827 | 394,386 | |||||||||||||||||||
| $ | 3,008,485 | $ | 3,322,974 | $ | 8,651,381 | $ | 10,795,151 | ||||||||||||||||
Note 3 – OTHER INCOME/(LOSS), NET
The following is an analysis of the components of Other Income/(Loss), Net:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
Net Realized and Unrealized Gain/(Loss), Equity Securities | $ | (40,080) | $ | (238,964) | $ | 97,151 | $ | (1,968,880) | |||||||||||||||
| Gain on Other Asset Sales | — | 49,823 | — | 49,823 | |||||||||||||||||||
| Interest Income | 112,568 | 29,556 | 348,133 | 46,755 | |||||||||||||||||||
| Dividend Income | 13,906 | 16,544 | 40,794 | 200,670 | |||||||||||||||||||
| Income from Other Investments | 20,917 | 28,260 | 350,014 | 84,715 | |||||||||||||||||||
| Miscellaneous Income/(Expenses) | (14,832) | 59,772 | 13,929 | (30,848) | |||||||||||||||||||
Other Income/(Loss), Net | $ | 92,479 | $ | (55,009) | $ | 850,021 | $ | (1,617,765) | |||||||||||||||
9
Note 4 – INVESTMENTS AND RELATED COMMITMENTS AND CONTINGENT LIABILITIES, INCLUDING GUARANTIES
The Company’s Equity Method Investments include:
Broadway Sixty-Eight, LLC (“Broadway 68”), an Oklahoma limited liability company, with a 33% ownership, owns and operates an office building in Oklahoma City, Oklahoma. The Company leases its corporate office from Broadway 68 on a month-to-month basis under the terms of the modified lease agreement. Rent expense for lease of the corporate office from Broadway 68 was $35,606 and $26,084 during the nine months ended September 30, 2023 and 2022, respectively. The Company’s investment in Broadway 68 totaled $124,054 and $115,093 at September 30, 2023, and December 31, 2022, respectively.
Broadway Seventy-Two, LLC (“Broadway 72”), an Oklahoma limited liability company, with a 40% ownership, was acquired in 2021. Broadway 72 owns and operates a commercial building in Oklahoma City, Oklahoma. The Company’s investment in Broadway 72 totaled $1,100,827 and $1,080,465 at September 30, 2023, and December 31, 2022, 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 guarantied 20% of a $860,000 development loan that matures July 15, 2025, and 20% of a construction loan of $585,000 that matures July 25, 2024. The Company’s investment in QSN totaled $291,511 and $284,249 at September 30, 2023, and December 31, 2022, respectively. The Company does not anticipate the need to perform on the guaranties of the loans.
Stott's Mill, with a 50% ownership, was acquired in May 2022. Stott's Mill consists of two residential lots in a developing subdivision located in Basalt, Colorado. The Company’s investment in Stott's Mill totaled $708,179 and $688,575 at September 30, 2023, and December 31, 2022, respectively.
Victorum BRH2 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 receives quarterly distributions on an 11% annualized return on investment. The Company’s investment in BHR2 totaled $301,442 and $300,754 at September 30, 2023, and December 31, 2022, respectively.
Victorum BRH3 Investment, LLC (“BRH3”), with a 27.27% ownership, was acquired in November 2022. BRH3 serves as a special purpose investment vehicle to hold an investment in Berry-Rock. The Company receives quarterly distributions on an 11% annualized return on investment. The Company’s investment in BRH3 totaled $302,161 and $301,261 at September 30, 2023, and December 31, 2022, respectively.
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 $77,377 at September 30, 2023, and December 31, 2022.
Cloudburst International, Inc. (“Cloudburst”), with a 12.99% 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 $1,596,007 at September 30, 2023, and December 31, 2022.
Genlith, Inc. (“Genlith”), with a 5.15% 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 $311,958 and $460,000 at September 30, 2023, and December 31, 2022, respectively.
Chilean Cobalt Corp. ("C3") is a spin-off from Genlith that has submitted an S-1 filing with the SEC to become a publicly traded entity. The Company owns 740,211 of S-1 Registered Shares of C3, representing less than 2% of outstanding shares, and entered into a twelve month lock-up agreement on May 11, 2023, whereby the Company agreed that it will not attempt to sell, transfer, or otherwise dispose of the Registered Shares, subject to a "trickle" into market, except at a rate not to exceed 30,000 shares per month on a non-cumulative basis. The Company's investment in C3 totaled $148,042 at September 30, 2023.
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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. In March 2023, OKC sold 10 acres, resulting in a gain of $290,000 for the Company. There was no basis adjustment in accordance with the sale and there is approximately 13 acres of land remaining. The Company’s investment in OKC totaled $82,482 at September 30, 2023, and December 31, 2022.
Grand Woods holds approximately 26.56 acres of undeveloped real estate in northeast Oklahoma City. The accumulated costs of the land totaled $2,171,828 at September 30, 2023, and December 31, 2022. See Note 5 for information related to Grand Woods.
Victorum Capital Club (“VCC”) invests in and manages special purpose investment vehicles that hold investments in various startup companies. The Company participates with minority ownership in an assortment of investments held with VCC. The Company’s investment in VCC special purpose investment vehicles totaled $357,259 at September 30, 2023, and December 31, 2022.
VCC Venture Fund I, LP (“VCC Venture”), with less than 2% ownership, serves as a limited partnership to be used for investments in start-up entities and is managed by Victorum Capital Club. The Company committed to a $250,000 investment in VCC Venture. The Company’s investment in VCC Venture totaled $62,500 and $31,250 at September 30, 2023, and December 31, 2022, respectively. The balance at September 30, 2023, represents 25% of the Company's capital commitment.
Cortado Ventures Fund II-A, LP (“Cortado II-A”), with less than 2% ownership, serves as a limited partnership to be used for investments in start-up entities and is managed by Cortado Capital II, LLC. The Company committed to a $1,000,000 investment in Cortado II-A on June 20, 2023. The Company’s investment in Cortado II-A totaled $375,000 at September 30, 2023, which represents 37.50% of the Company's capital commitment.
Note 5 – NON-CONTROLLING INTEREST AND VARIABLE INTEREST ENTITIES
TWS and Grand Woods are accounted for as consolidated VIEs. The Company owns an 80.37% interest in Grand Woods in the form of 47.08 Class A units and 546,735 Class C units, with the remaining non-controlling member interests held by other members, including 8.72% owned by executive officers of the Company. Grand Woods holds approximately 26.56 acres of undeveloped real estate in northeast Oklahoma City.
On September 15, 2022, Grand Woods entered into an agreement (“the 2022 Agreement”) with its members that resulted in the Company having the power to direct the activities significant to Grand Woods and becoming the primary beneficiary; therefore, consolidation of Grand Woods became required and effective for the period ended September 30, 2022. The Company is the only guarantor of $1,200,000 of a note payable held by Grand Woods. See Note 6 for terms and guaranty of debt held by Grand Woodss, which is included in the consolidated balance sheets. As a result of the Company’s guaranty of $1,200,000 of Grand Woods debt, the note holder has partial recourse to the Company for the consolidated VIE’s liabilities.
The following table presents the summarized assets and liabilities of Grand Woods and TWS included in the consolidated balance sheets as of September 30, 2023, and December 31, 2022. The assets of Grand Woods and TWS in the table below may only be used to settle obligations of Grand Woods or TWS, respectively.
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The assets and liabilities in the table below include third party assets and liabilities only and exclude intercompany balances that eliminate in consolidation.
| September 30, 2023 | |||||||||||||||||
Grand Woods | TWS | Total | |||||||||||||||
| Assets: | |||||||||||||||||
| Cash | $ | 57,620 | $ | 222,270 | $ | 279,890 | |||||||||||
| Accounts Receivable | — | 126,158 | 126,158 | ||||||||||||||
| Total Current Assets | 57,620 | 348,428 | 406,048 | ||||||||||||||
| Other Investments (Land) | 2,171,828 | — | 2,171,828 | ||||||||||||||
| Other Property and Equipment, at Cost | — | 471,219 | 471,219 | ||||||||||||||
| Less – Accumulated Depreciation | — | (148,454) | (148,454) | ||||||||||||||
| Other Property and Equipment, Net | — | 322,765 | 322,765 | ||||||||||||||
| Total Assets | $ | 2,229,448 | $ | 671,193 | $ | 2,900,641 | |||||||||||
| Liabilities: | |||||||||||||||||
| Accounts Payable | $ | 656 | $ | 10,531 | $ | 11,187 | |||||||||||
| Note Payable, Current Portion | 140,708 | — | 140,708 | ||||||||||||||
| Deferred Revenue | — | 338,985 | 338,985 | ||||||||||||||
| Total Current Liabilities | 141,364 | 349,516 | 490,880 | ||||||||||||||
| Note Payable, Less Current Portion | 1,194,879 | — | 1,194,879 | ||||||||||||||
| Total Liabilities | $ | 1,336,243 | $ | 349,516 | $ | 1,685,759 | |||||||||||
| December 31, 2022 | |||||||||||||||||
| Grand Woods | TWS | Total | |||||||||||||||
| Assets: | |||||||||||||||||
| Cash | $ | 24,050 | $ | 281,654 | $ | 305,704 | |||||||||||
| Accounts Receivable | — | 72,716 | 72,716 | ||||||||||||||
| Total Current Assets | 24,050 | 354,370 | 378,420 | ||||||||||||||
| Other Investments (Land) | 2,171,828 | — | 2,171,828 | ||||||||||||||
| Other Property and Equipment, at Cost | — | 419,044 | 419,044 | ||||||||||||||
| Less – Accumulated Depreciation | — | (92,278) | (92,278) | ||||||||||||||
| Other Property and Equipment, Net | — | 326,766 | 326,766 | ||||||||||||||
| Total Assets | $ | 2,195,878 | $ | 681,136 | $ | 2,877,014 | |||||||||||
| Liabilities: | |||||||||||||||||
| Accounts Payable | $ | 12,910 | $ | 58,694 | $ | 71,604 | |||||||||||
| Note Payable, Current Portion | 136,637 | — | 136,637 | ||||||||||||||
| Total Current Liabilities | 149,547 | 58,694 | 208,241 | ||||||||||||||
| Note Payable, Less Current Portion | 1,300,872 | — | 1,300,872 | ||||||||||||||
| Total Liabilities | $ | 1,450,419 | $ | 58,694 | $ | 1,509,113 | |||||||||||
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Note 6 – NOTE PAYABLE
Grand Woods has a note payable (“the Note”) that was used for the purchase and development of property. The Note has a 4% interest rate and matures November 23, 2026. The Note has scheduled payments of principal and interest in the amount of $16,034 per month, with a balloon payment of any unpaid principal balance due on November 23, 2026. The balance of the Note at September 30, 2023, and December 31, 2022, is $1,335,587 and $1,437,509, respectively, of which 140,708 is classified as current at September 30, 2023. Interest paid on the Note, in the nine months ended September 30, 2023, totaled $42,386, with none in 2022. The Note is secured by the underlying property and a $1,200,000 guaranty issued by the Company. Covenants of the Note include a pay down requirement that states that sales of parcels will require a pay down on the loan of 90% of the net proceeds received from the purchaser less capital gains tax obligation. The remaining 10% shall be held in an operating reserve account for operating expenses and the use in payment of taxes. No distributions to partners, except for taxes, are permitted throughout the term of the loan. The intent of the Grand Woods investment manager and members is that proceeds from the sale of all, or part of, the property will be used to reduce or eliminate the Note. The Company does not anticipate the need to perform on the guaranty of the Note.
Below is a schedule of future principal payments on the outstanding Note at September 30, 2023:
| Years Ending December 31, | Principal Payments | ||||
| 2023 | 34,715 | ||||
| 2024 | 142,136 | ||||
| 2025 | 148,155 | ||||
| 2026 | 1,010,581 | ||||
| Total | $ | 1,335,587 | |||
Note 7 – PROVISION FOR INCOME TAXES
In 2023 and 2022, the effective tax rate differed from the statutory rate, primarily as a result of allowable depletion for tax purposes in excess of the cost basis in oil and natural 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.
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Note 8 – ASSET RETIREMENT OBLIGATION
The Company records the fair value of its estimated liability to retire its oil and natural gas producing properties in the period in which it is incurred (typically the date of first sale). The estimated liability is calculated by obtaining current estimated plugging costs from the well operators and inflating it over the life of the property. Current year inflation rate used is 4.08%. When the liability is first recorded, a corresponding increase in the carrying amount of the related long-lived asset is also recorded. Subsequently, the asset is amortized to expense over the life of the property and the liability is increased annually for the change in its present value which is currently 3.25%.
A reconciliation of the Company’s asset retirement obligation liability is as follows:
| Balance at December 31, 2022 | $ | 2,809,257 | |||
| Liabilities settled (wells sold or plugged) | (5,793) | ||||
| Accretion expense | 54,664 | ||||
| Balance at September 30, 2023 | $ | 2,858,128 | |||
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.
Recurring Fair Value Measurements
Certain assets of the Company 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.
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At September 30, 2023, and December 31, 2022, the Company’s assets reported at fair value on a recurring basis are summarized as follows:
| September 30, 2023 | |||||||||||||||||
| Level 1 Inputs | Level 2 Inputs | Level 3 Inputs | |||||||||||||||
| Financial Assets: | |||||||||||||||||
Available-for-Sale Debt Securities – U.S. | |||||||||||||||||
Treasury Bills Maturing within 1 Year | $ | — | $ | 4,284,711 | $ | — | |||||||||||
| Equity Securities: | |||||||||||||||||
| Domestic Equities | 2,216,117 | — | — | ||||||||||||||
| International Equities | 151,810 | — | — | ||||||||||||||
| Others | 166,104 | — | — | ||||||||||||||
| $ | 2,534,031 | $ | 4,284,711 | $ | — | ||||||||||||
| December 31, 2022 | |||||||||||||||||
| Level 1 Inputs | Level 2 Inputs | Level 3 Inputs | |||||||||||||||
| Financial Assets: | |||||||||||||||||
| Available-for-Sale Debt Securities – U.S. | |||||||||||||||||
| Treasury Bills Maturing within 1 Year | $ | — | $ | 4,208,648 | $ | — | |||||||||||
| Equity Securities: | |||||||||||||||||
| Domestic Equities | 1,720,410 | — | — | ||||||||||||||
| International Equities | 448,405 | — | — | ||||||||||||||
| Others | 134,144 | — | — | ||||||||||||||
| $ | 2,302,959 | $ | 4,208,648 | $ | — | ||||||||||||
Non-Recurring Fair Value Measurements
The Company’s asset retirement obligation annually represents a non-recurring fair value liability, for which there were no liabilities incurred in the nine months ended September 30, 2023 or 2022. See Note 8 above for more information about this liability and the inputs used for calculating fair value.
Impairment losses recorded on oil and gas assets in the nine months ended September 30, 2023 were $443,456, with none in the comparable period in 2022. This also relates to non-recurring fair value measurements calculated using Level 3 inputs. Certain oil and natural 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, when recorded, are included in the consolidated statements of income in the line-item Depreciation, Depletion, Amortization and Valuation Provision. Impairments are 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 flow from these properties. Forward pricing is used for calculating future revenue and cash flow.
Fair Value of Financial Instruments
The Company’s other financial instruments consist primarily of cash and cash equivalents, trade receivables, and trade payables. At September 30, 2023, and December 31, 2022, the historical cost of cash and cash equivalents, trade receivables and trade payables are considered to be representative of their respective fair values due to the short-term maturities of these items.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion and analysis should be read with reference to ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS in the 2022 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 2022 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.
LIQUIDITY AND CAPITAL RESOURCES
Please refer to the consolidated balance sheets and the consolidated statements of cash flows in this Form 10-Q to supplement the following discussion. In the first nine months of 2023, the Company continued to fund its business activity using internal sources of cash. The Company had net cash provided by operating activities of $3,138,715 in the nine months ended September 30, 2023. The Company had sales of equity securities of $724,472, cash provided by property dispositions of $37,678, return on other investments of $361,316, primarily related to the sale of property in OKC Industrial Properties, LC, and maturity of available-for-sale debt securities of $6,054,655 for total cash provided by investing activities of $7,178,121. The Company utilized cash for the purchase of property of $3,709,631, the purchase of equity securities of $858,394, purchase of equity method and other investments of $632,106, and purchase of available-for-sale debt securities of $6,130,718 for cash applied to investing activities of $11,330,849. The Company paid $1,560,704 in stockholder dividends, $46,029 for the purchase of treasury stock, and $101,922 in payments on the Grand Woods note payable, for total cash applied to financing activities of $1,708,655. Cash provided by financing activities included Grand Woods Class C non-controlling interest contributions of $52,349. Cash and cash equivalents decreased $2,670,319 (37%) to $4,628,905 at September 30, 2023, from $7,299,224 at December 31, 2022.
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, 2022. A discussion of these items follows.
Equity securities increased $231,072 (10%) to $2,534,031 as of September 30, 2023, from $2,302,959 at December 31, 2022. The increase was the result of $133,922 in net purchases and a $97,150 net increase in market value.
Accounts receivable increased $82,813 (4%) to $2,400,996 as of September 30, 2023, from $2,318,183 at December 31, 2022. This was primarily due to increased oil and natural gas prices on expected production accrued.
Refundable income taxes increased $423,631 (352%) to $543,861 as of September 30, 2023, from $120,230 at December 31, 2022, primarily resulting from a decrease in taxable income over payments made.
Accounts payable increased $1,053,183 (263%) to $1,452,918 as of September 30, 2023, from $399,735 at December 31, 2022, primarily due to timing differences in the processing of accounts payable.
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Other current liabilities increased $313,741 (415%) to $389,416 as of September 30, 2023, from $75,675 at December 31, 2022, primarily due to a net increase in deferred revenue of $263,985 and an increase in accrued property taxes of $49,830.
Discussion of Significant Changes in the Consolidated Statements of Cash Flows. As noted in the first paragraph above, net cash provided by operating activities was $3,138,715 in the nine months ended September 30, 2023, a decrease of $3,711,752 (54%) from cash provided by operations in the comparable period in 2022 of $6,850,467. For more information see “Operating Revenues” and “Other Income/(Loss)” below.
Cash applied to the purchase of property, plant and equipment in the nine months ended September 30, 2023, was $3,709,631, a decrease of $5,684,965 (61%) from cash applied to the purchase of property, plant and equipment in the comparable period in 2022 of $9,394,596. See the subheading “Exploration Costs” in the “Results of Operations” section below for additional information.
Cash applied to the purchase of available-for-sale debt securities in the nine months ended September 30, 2023, was $6,130,718, with $885,986 in the comparable period in 2022. Cash provided by the maturity of available-for-sale debt securities in the nine months ended September 30, 2023, was $6,054,655, with none in the comparable period in 2022. Cash applied to equity method and other investments in the nine months ended September 30, 2023, was $632,106, a decrease of $588,236 (48%) from cash applied in the comparable period of 2022 of $1,220,342.
Off-Balance Sheet Arrangements. The Company is a guarantor of 20% of a $860,000 development loan that matures July 15, 2025, and 20% of a construction loan of $585,000 that matures July 25, 2024 held by QSN Office Park, LLC. The Company is committed to a $250,000 investment in VCC Venture Fund I, LP, of which $62,500 (25%) is invested at September 30, 2023. The Company is committed to a $1,000,000 investment in Cortado Ventures Fund II-A, of which $375,000 (37.50%) is invested at September 30, 2023. For more information about these entities and the related off-balance sheet arrangements, see Note 4 and Note 5 to the accompanying consolidated financial statements.
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 2022 Form 10-K would not be representative of the Company’s current position.
RESULTS OF OPERATIONS
Results of Operations – Nine Months Ended September 30, 2023
Net income attributable to common stockholders decreased $2,017,915 (57%) to $1,524,726 in the nine months ended September 30, 2023, from $3,542,641 in the comparable period in 2022. Net income per share attributable to common stockholders, basic, decreased $12.92 to $9.77 in the nine months ended September 30, 2023, from $22.69 in the comparable period in 2022. A discussion of revenue from oil and natural gas sales and other significant line items in the consolidated statements of income follows.
Operating Revenues. Revenues from oil and natural gas sales decreased $2,143,770 (20%) to $8,651,381 in the nine months ended September 30, 2023, from $10,795,151 in the comparable period in 2022. The decrease is due to an increase in oil sales of $151,241, a decrease in natural gas sales of $2,096,452, and a decrease in miscellaneous oil and natural gas product sales of $198,559.
The $151,241 (2%) increase in oil sales to $7,023,759 in the nine months ended September 30, 2023, from $6,872,518 in the comparable period in 2022 was the result of an increase in the volume sold and a decrease in the average price per barrel (Bbl). The volume of oil sold increased 25,816 Bbls to 94,900 Bbls in the nine months ended September 30, 2023, resulting in a positive volume variance of $2,568,165. The average price per Bbl decreased $25.47 to $74.01 per Bbl in the nine months ended September 30, 2023, from $99.48 per Bbl in the comparable period in 2022, resulting in a negative price variance of $2,416,924.
The $2,096,452 (59%) decrease in natural gas sales to $1,431,795 in the nine months ended September 30, 2023, from $3,528,247 in the comparable period in 2022 was the result of a decrease in the volume sold and a decrease in the average price per thousand cubic feet ("MCF"). The volume of natural gas sold decreased 2,041 MCF to 522,559 MCF in the nine months ended September 30, 2023, from 524,600 MCF in the comparable period in 2022, resulting in a negative
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volume variance of $13,736. The average price per MCF decreased $3.99 to $2.74 per MCF in the nine months ended September 30, 2023, from $6.73 per MCF in the comparable period in 2022, resulting in a negative price variance of $2,082,716.
For both oil and natural 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 natural gas sales are based. These spot market prices have had significant fluctuations in the past and these fluctuations are expected to continue.
Sales of miscellaneous oil and natural gas products were $195,827 in the nine months ended September 30, 2023, compared to $394,386 in the comparable period in 2022, primarily due to decreased prices.
The Company had water well drilling revenues of $385,006 in the nine months ended September 30, 2023, related to water well drilling through TWS, with $826,662 in the comparable period in 2022. The decrease was due to downtime resulting from a rig mechanical failure that has since been repaired.
The Company received $183,797 for leases on its owned minerals in the nine months ended September 30, 2023, compared to $155,272 in the comparable period in 2022.
Operating Costs and Expenses. Operating costs and expenses increased $2,730,592 (50%) to $8,221,419 in the nine months ended September 30, 2023, from $5,490,827 in the comparable period of 2022.
Production Costs. Production costs increased $682,625 (28%) to $3,160,518 in the nine months ended September 30, 2023, from $2,477,893 in the comparable period in 2022. Lease operating expenses increased $819,509 (54%), primarily due to increased producing properties from acquisitions and workovers to increase production. Hauling, compression, and other costs decreased by $82,256 (21%). Gross production taxes decreased $54,628 (10%) due to decreased revenues from oil and natural gas.
Exploration Costs. Exploration costs increased $401,108 (144%) to $679,720 in the nine months ended September 30, 2023, from $278,612 in the comparable period in 2022, primarily due to a decrease of $192,652 in geological and geophysical and other expenses, and increases of $434,967 in dry hole and plugging costs, and $158,793 in leasehold impairments.
Water Well Drilling Costs. Water well drilling costs increased $73,651 (12%) to $688,227 in the nine months ended September 30, 2023, from $614,576 in the comparable period in 2022. These costs consist of contract labor, equipment rental and maintenance, fuel costs, and other operating supplies related to the drilling of water wells through TWS.
Depreciation, Depletion, Amortization and Valuation Provision (DD&A). DD&A increased $927,939 (107%) to $1,799,061 in the nine months ended September 30, 2023, from $871,122 in the comparable period in 2022, due to an increase in long-lived assets impairments of $443,456 resulting from decreased oil and natural gas prices, and a $484,483 net increase in depletion, depreciation, and amortization due to the increase in properties through acquisition.
Gain on Disposition of Oil and Gas Properties. The Company had no gains on oil and gas property sales in the nine months ended September 30, 2023, compared to $199,025 in the comparable period in 2022. The prior period gain was primarily due to the sale of 29.75% ownership of assets in a Nolan County, Texas prospect.
General, Administrative and Other (G&A). G&A increased $446,244 (31%) to $1,893,893 in the nine months ended September 30, 2023, from $1,447,649 in the comparable period in 2022. Due to the divestiture of an affiliate, overhead increased 10% due to higher allocation rates to the Company. Increases include human resources of $138,631 primarily due to increased salaries, consulting of $81,439 and regulatory costs of $57,898, primarily due to expenses related to acquisitions from and managed services agreement with an affiliate, information technology of $66,458 primarily due to implementation of new financial reporting and SEC filing software of $50,000, real estate taxes of $21,964, repairs and maintenance of $21,633, and $58,221 in all other G&A accounts.
Equity Income/(Loss) in Investees. Equity income/(loss) in investees increased $192,519 to income of $81,414 in the nine months ended September 30, 2023, from a loss of $111,105 in the comparable period in 2022. Income was made up of income of $16,499 in Broadway Sixty-Eight, LLC (“Broadway 68”), income of $27,130 in Broadway Seventy-Two, LLC (“Broadway 72”), losses of $12,572 in QSN Office Park, LLC (“QSN”), and income of $27,576 from Victorum BRH2
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Investment, LLC and Victorum BRH3 Investment, LLC. See Note 4 to the accompanying financial statements for additional information on equity method investments.
Other Income/(Loss), Net. Other income, net was $850,021 in the nine months ended September 30, 2023, as compared to other loss, net of $1,617,765 in the comparable period in 2022. See Note 3 to the accompanying consolidated financial statements for an analysis of the components of this line item.
Income Tax Provision. Income tax provision decreased $636,507 (63%) to $378,240 in the nine months ended September 30, 2023, from $1,014,747 in the comparable period in 2022. Of the 2023 tax provision, estimated current tax provision was $1,981 and estimated deferred tax provision was $376,259. Of the 2022 income tax provision, the estimated current tax provision was $68,723 and the estimated deferred tax provision was $946,024. See Note 7 to the accompanying consolidated financial statements for additional information on income taxes.
Results of Operations – Three Months Ended September 30, 2023
Net income attributable to common stockholders decreased $406,348 (39%) to $624,904 in the three months ended September 30, 2023, from $1,031,252 in the comparable period in 2022. The significant changes in the consolidated statements of income are discussed below. Net income per share attributable to common stockholders, basic decreased $2.60 to $4.01 in the three months ended September 30, 2023, from $6.60 in the comparable period in 2022.
Operating Revenues. Revenues from oil and gas sales decreased $314,489 (9%) to $3,008,485 in the three months ended September 30, 2023, from $3,322,974 in the comparable period in 2022. The decrease is due to an increase in oil sales of $592,948, a decrease in natural gas sales of $842,788, and a decrease in miscellaneous oil and gas product sales of $64,649.
The $592,948 (31%) increase in oil sales to $2,484,260 in the three months ended September 30, 2023, from $1,891,312 in the comparable period in 2022 was the result of an increase in the volume sold and a decrease in the average price per barrel (Bbl). The volume of oil sold increased 10,799 Bbls to 31,399 Bbls in the three months ended September 30, 2023, resulting in a positive volume variance of $991,442. The average price per Bbl decreased $12.69 to $79.12 per Bbl in the three months ended September 30, 2023, from $91.81 per Bbl in the comparable period in 2022, resulting in a negative price variance of $398,494.
The $842,788 (65%) decrease in natural gas sales to $459,963 in the three months ended September 30, 2023, from $1,302,751 in the comparable period in 2022 was the result of a decrease in the volume sold and a decrease in the average price per MCF. The volume of natural gas sold decreased 1,155 MCF to 172,391 MCF in the three months ended September 30, 2023, from 173,546 MCF in the comparable period in 2022, resulting in a negative volume variance of $8,677. The average price per MCF decreased $4.84 to $2.67 per MCF in the three months ended September 30, 2023, from $7.51 per MCF in the comparable period in 2022, resulting in a negative price variance of $834,111.
Operating Costs and Expenses. Operating costs and expenses increased $479,162 (22%) to $2,635,852 in the three months ended September 30, 2023, from $2,156,690 in the comparable period in 2022. The increase was primarily the net result of an increase in production costs of $220,330; a decrease in exploration costs charged to expense of $178,484; an increase in water well drilling costs of $113,796; an increase in DD&A of $212,296; and an increase in G&A of $111,224. G&A increases were due to increases in costs in overhead allocation, human resources of $41,101, consulting of $10,076, regulatory of $4,002, real estate taxes of $3,956, repairs and maintenance of $1,579, with increases in information technology of $55,883, and $5,374 in all other G&A accounts.
Equity Income/(Loss) in Investees. Equity income/(loss) in investees increased $31,008 to income of $22,781 in the three months ended September 30, 2023, from a loss of $8,227 in the comparable period in 2022. See Note 4 to the accompanying financial statements for additional information on equity method investments.
Other Income/(Loss), Net. Other income/(loss), net increased $147,488 in the three months ended September 30, 2023, to income of $92,479 from losses of $55,009 in the comparable period in 2022. See Note 3 to the accompanying consolidated financial statements for an analysis of the components of this item.
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Income Tax Provision/(Benefit). Income tax provision decreased $220,766 (60%) to $146,475 in the three months ended September 30, 2023, from $367,241 in the comparable period in 2022. Of the 2023 tax provision, estimated current tax provision was $51,655 and estimated deferred tax provision was $94,820. Of the 2022 income tax provision, the estimated current tax provision was $655,691 and the estimated deferred tax benefit was $288,450. See discussions above in “Results of Operations” section and Note 7 to the accompanying consolidated financial statements for additional explanation of the changes in the provision for income taxes.
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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, 2023.
Internal Control over Financial Reporting
There were no changes in the Company’s internal control over financial reporting during the quarter ended September 30, 2023, 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).
PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As of September 30, 2023, the Company was not party to, and its properties were not subject to, any material legal proceedings.
ITEM 1A. RISK FACTORS
Not applicable.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES, USE OF PROCEEDS, AND PURCHASES OF EQUITY SECURITIES
| Period | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (1) | ||||||||||
| July 1 to July 31, 2023 | 220 | 150 | --- | --- | ||||||||||
| August 1 to August 31, 2023 | 0 | 150 | --- | --- | ||||||||||
| September 1 to September 30, 2023 | 0 | 150 | --- | --- | ||||||||||
| Total | 220 | $150 | --- | --- | ||||||||||
(1) Prior to September 1, 2023, the Company had no formal equity security purchase program or plan. Most purchases resulted from requests made by stockholders receiving small odd lot share quantities as the result of probate transfers. On September 22, 2023, the Board of Directors ("the Board") approved a formal stock repurchase program, effective September 1, 2023, wherein the Company may repurchase up to 15,000 shares of outstanding stock of The Reserve Petroleum Company.
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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* | ||||||||
| 31.2* | ||||||||
| 32* | ||||||||
| 101.INS* | Inline XBRL Instance Document | |||||||
| 101.SCH* | Inline XBRL Taxonomy Extension Schema Document | |||||||
| 101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |||||||
| 101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase Document | |||||||
| 101.LAB* | Inline XBRL Taxonomy Extension Label Linkbase Document | |||||||
| 101.PRE* | Inline XBRL Taxonomy Extension 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 14, 2023 | /s/ Cameron R. McLain | |||||||
Cameron R. McLain | ||||||||
| Principal Executive Officer | ||||||||
Date: November 14, 2023 | /s/ Lawrence R. Francis | |||||||
| Lawrence R. Francis | ||||||||
| Principal Financial Officer | ||||||||
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