Results Of Operations
The following discussion should be read in conjunction with the financial
statements and notes thereto appearing elsewhere in this report.
This Report on Form 10-K may contain forward-looking statements within the
meaning of the federal securities laws, principally, but not only, under the
caption "Management's Discussion and Analysis of Financial Condition and Results
of Operations." We caution investors that any forward-looking statements in this
report, or which management may make orally or in writing from time to time, are
based on management's beliefs and on assumptions made by, and information
currently available to, management. When used, the words "anticipate,"
"believe," "expect," "intend," "may," "might," "plan," "estimate," "project,"
"should," "will," "result" and similar expressions which do not relate solely to
historical matters are intended to identify forward-looking statements. These
statements are subject to risks, uncertainties, and assumptions and are not
guarantees of future performance, which may be affected by known and unknown
risks, trends, uncertainties, and factors, that are beyond our control. Should
one or more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
anticipated, estimated, or projected. We caution you that while forward-looking
statements reflect our good faith beliefs when we make them, they are not
guarantees of future performance and are impacted by actual events when they
occur after we make such statements. We expressly disclaim any responsibility to
update our forward-looking statements, whether as a result of new information,
future events or otherwise. Accordingly, investors should use caution in relying
on past forward-looking statements, which are based on results and trends at the
time they are made, to anticipate future results or trends.
Some of the risks and uncertainties that may cause our actual results,
performance or achievements to differ materially from those expressed or implied
by forward-looking statements include, among others, the factors listed and
described at Item 1A "Risk Factors" in the Company's Annual Report on Form 10-K
discussed above, which investors should review.
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Other sections of this report may also include suggested factors that could
adversely affect our business and financial performance. Moreover, we operate in
a very competitive and rapidly changing environment. New risks may emerge from
time to time and it is not possible for management to predict all such matters;
nor can we assess the impact of all such matters on our business or the extent
to which any factor, or combination of factors, may cause actual results to
differ materially from those contained in any forward-looking statements. Given
these uncertainties, investors should not place undue reliance on
forward-looking statements as a prediction of actual results. Investors should
also refer to our quarterly reports on Form 10-Q for future periods and current
reports on Form 8-K as we file them with the SEC, and to other materials we may
furnish to the public from time to time through Forms 8-K or otherwise.
Oil and Gas Properties
The Company follows the full cost method of accounting for its oil and gas
properties. Accordingly, all costs associated with acquisition, exploration and
development of oil and natural gas reserves are capitalized in cost centers on a
country-by-country basis. For each cost center, capitalized costs, less
accumulated amortization and related deferred income taxes, shall not exceed an
amount (the cost center ceiling) equal to the sum of:
a) The present value of estimated future net revenues computed by applying
current prices of oil and natural gas reserves (with consideration of price
changes only to the extent provided by contractual arrangements) to estimated
future production of proved oil and gas reserves as of the date of the latest
balance sheet presented, less estimated future expenditures (based on current
costs) to be incurred in developing and producing the proved reserves computed
using a discount factor of ten percent and assuming continuation of existing
economic conditions; plus
b) The cost of properties not being amortized; plus
c) The lower of cost or estimated fair market value of unproven properties
included in the costs being amortized; less
d) Income tax effects related to differences between the book and tax basis of
the properties.
If unamortized costs capitalized within a cost center, less related deferred
income taxes, exceed the cost center ceiling (as defined), the excess is charged
to expense and separately disclosed during the period in which the excess
occurs. Amounts required to be written off will not be reinstated for any
subsequent increase in the cost center ceiling. All of the Company's oil and gas
properties are located within the United States and are accounted for in one
cost center.
In order to test the cost center ceiling, the Company prepares a "Standardized
Measure of Discounted Future Net Cash Flows and Changes Therein Relating to
Proved Oil and Natural Gas Reserves (Unaudited)" as of the end of each calendar
year ("the Reserve Report"). The Company prepared its annual Reserve Report as
of December 31, 2019.
Reserve estimates are prepared in accordance with standard Security and Exchange
Commission guidelines. The estimated net future net cash flows for 2019, 2018,
and 2017, were computed using a 12-month average price, calculated as the
un-weighted arithmetic average of the first-day-of-the month price for each
month of the year. Lease operating costs, compression, dehydration,
transportation, ad valorem taxes, severance taxes, and federal income taxes were
deducted. Costs and prices were held constant and were not escalated over the
life of the properties. No deductions were made for interest. The annual
discount of estimated future cash flows is defined, for use herein, as future
cash flows discounted at 10% per year, over the expected period of realization.
These Reserve Reports do not purport to present the fair market value of a
company's oil and gas properties. An estimate of such value should consider,
among other factors, anticipated future prices of oil and natural gas, the
probability of recoveries in excess of existing proved reserves, the value of
probable reserves and acreage prospects, and perhaps different discount rates.
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It should be noted that estimates of reserve quantities, especially from new
discoveries, are inherently imprecise and subject to substantial revision.
Accordingly, the estimates are expected to change as more current information
becomes available. It is reasonably possible that, because of changes in market
conditions or the inherent imprecision of these reserve estimates, that the
estimates of future cash inflows, future gross revenues, the amount of oil and
natural gas reserves, the remaining estimated lives of the oil and natural gas
properties, or any combination of the above may be increased or reduced in the
near term. If reduced, the carrying amount of capitalized oil and gas properties
may be reduced materially in the near term.
During the year ended December 31, 2019, average quarterly natural gas prices
per mcf for the Company were $2.64, $2.10, $1.62, and $2.07 respectively. During
the year ended December 31, 2018, average quarterly natural gas prices per mcf
for the Company were $3.03, $2.55, $2.74, and $2.93 respectively. Average
quarterly natural gas prices per mcf for the Company for the year ended December
31, 2017 were $2.25, $2.79, $2.83, and $2.82 respectively.
During the year ended December 31, 2019, average quarterly crude oil prices per
bbl for the Company were $48.27, $54.67, $54.84, and $51.42 respectively. During
the year ended December 31, 2018, average quarterly crude oil prices per bbl for
the Company were $51.95, $65.00, $57.61, and $52.48 respectively. Average
quarterly crude oil prices per bbl for the Company for the year ended December
31, 2017 were $46.24, $44.42, $44.06, and $49.72 respectively.
The increases or decreases in the Company's product prices have a direct effect
on its cash flow, profits, projected development and drilling schedules, and the
estimated net present value of its proved reserves. Prolonged, substantial
decreases in oil and natural gas prices would likely have a material adverse
effect on the Company's business, financial condition, and results of
operations, and could further limit the Company's access to liquidity and
credit, and could hinder its ability to satisfy its capital requirements.
We may incur impairments to our crude oil and natural gas properties in 2020 if
prices do not increase. The possibility and amount of any future impairment is
difficult to predict, and will depend, in part, upon future crude oil and
natural gas prices to be utilized in the ceiling test, estimates of proved
reserves and future capital expenditures and operating costs. We cannot assure
you that we will not experience write-downs in the future. If commodity prices
decline or if any of our proved reserves are revised downward, a write-down of
the carrying value of our oil and gas properties may be required.
Liquidity and Capital Resources
The Company's operating capital needs, as well as its capital spending program,
are generally funded from cash flow generated by operations. Because future cash
flow is subject to a number of variables, such as the level of production and
the sales price of oil and natural gas, the Company can provide no assurance
that its operations will provide cash sufficient to maintain current levels of
capital spending. Substantial decreases in crude oil and natural gas prices
would likely have a material adverse effect on the Company's business, financial
condition, and results of operations, and could further limit the Company's
access to liquidity and credit, and could hinder its ability to satisfy its
capital requirements. Accordingly, the Company may be required to seek
additional financing from third parties in order to fund its exploration and
development programs.
As noted in our Results of Operations discussion below, the Company has focused
on lowering costs through headcount reduction by attrition and spending only on
essential general and administrative expenditures. In order to raise additional
revenue, the Company is pursuing the acquisition of new operated and
non-operated reserves through acquisitions of producing properties and drilling
ventures. The Company believes that it is well positioned to take advantage of
the declining prices for existing wells with its cash reserves and ability to
borrow in order to effect any acquisition.
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Results of Operations
2019 Compared to 2018
Oil and natural gas revenues for the year ended December 31, 2019 were
$4,631,000 compared to $5,848,000 for the year ended December 31, 2018, a
decrease of $1,217,000 or 20.8%.
Oil revenue for 2019 was approximately $2,726,000 compared to $3,350,000 for
2018, a decrease of approximately $624,000 or 18.6%. Oil prices decreased to an
average of $55.76 per barrel in 2019 from an average of $62.09 per barrel in
2018, a decrease of $6.33 per barrel or 10.2%. Oil sales decreased to 41,919
barrels from approximately 43,136 barrels in 2018, a decrease of 1,217 barrels
or 2.8%.
Natural gas revenue for 2019 was approximately $1,905,000 compared to $2,498,000
for 2018, a decrease of approximately $593,000 or 23.7%. Natural gas sales
increased to approximately 916,000 mcf in 2019 from approximately 875,000 mcf in
2018, an increase of approximately 41,000 mcf or 4.7%. Natural gas prices
decreased to an average of $2.08 per mcf in 2019, a decrease of $0.78 or 27.3%
from an average of $2.86 per mcf in 2018.
The decrease in oil revenue is due to a decrease in crude oil prices and a
decrease in volumes sold during 2019 compared to 2018. Oil production from
operated properties increased slightly during 2019, but decreases in oil
production on non-operated properties contributed to the overall production
decrease. The decrease in natural gas revenue during 2019 is due to the decrease
in natural gas pricing. Natural gas volumes sold increased during 2019 compared
to 2018; however, the 27% decrease in pricing resulted in an overall decrease in
natural gas revenue.
Revenue from lease operations was approximately $315,000 for 2019, compared to
approximately $258,000 in 2018, an increase of approximately $57,000 or 22.1%.
Revenue from lease operations results from field supervision charges on operated
wells as well as administrative overhead billed to working interest owners.
Revenues from gas gathering, compression, and equipment rental for 2019 were
approximately $125,000, a decrease of $11,000 or 8.1% from approximately
$136,000 in 2018. The decrease was due primarily to a decrease in natural gas
volume sold through PPC as wells were shut in due to low natural gas pricing.
Equipment rental revenue also decreased as wells were shut in during 2019.
Real estate rental revenue for 2019 was approximately $248,000, an increase of
$16,000 or 6.9% from approximately $232,000 in 2018. The increase was due to
scheduled tenant rent increases at the Company's corporate office building.
Interest income for 2019 was approximately $193,000, an increase of $12,000 from
approximately $181,000 in 2018 or 6.6%. The increase in interest income was due
to the Company investing its funds in both long-term and short-term certificates
of deposit and depository accounts paying higher rates of interest than those
received in prior years.
Other revenue for 2019 was $75,000, as compared to $79,000 in 2018, a decrease
of $4,000 or 5.1%.
Lease operating expenses 2019 were $1,754,000 as compared to $1,656,000 in 2018,
a net increase of approximately $98,000, or 5.9%. There were both increases and
decreases within different segment categories of lease operating expenses.
Amounts billed by third-party operators as operating expenses on non-operated
properties increased by approximately $77,000 due to large workovers and
unitization expenses. The remaining increase of $21,000 represents net increases
and decreases on various properties due to general price fluctuations and levels
of operation activity.
Production taxes, gathering, and marketing expenses for 2019 were approximately
$828,000 compared to $835,000 in 2018, a decrease of approximately $7,000, or
0.8%. This decrease was directly related to the decrease in oil and natural gas
production and revenues.
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Pipeline and rental expenses for 2019 were $32,000 compared to $49,000 for 2018,
a decrease of $17,000, or 34.7%. The decrease is primarily due to substantially
lower levels of compressor repairs in 2019 as compared to 2018.
Real estate expenses in 2019 were approximately $179,000 compared to $196,000
during the same period in 2018, a decrease of approximately $17,000 or 8.7%. The
decrease is primarily due to lower property taxes and utilities in 2019 as
compared to 2018.
Depreciation and amortization expense for 2019 was $456,000 compared to $499,000
for 2018, a decrease of $43,000 or 8.6%. Amortization of the full cost pool of
oil and natural gas assets for 2019 was $394,000 compared to $439,000 for the
year ended 2018, a decrease of $45,000 or 10.3%. The Company re-evaluated its
proved oil and gas reserves as of December 31, 2019, and decreased its estimated
total proved reserves by approximately 421,000 BOE to 982,000 BOE at the end of
2019 compared to 1,403,000 BOE at the end of 2018, a decrease of approximately
30.0%. Sales of oil and natural gas products during 2019 increased by
approximately 6,000 BOE from approximately 195,000 BOE in 2019 to approximately
189,000 BOE in 2018, an increase of 3.2 %. (See Footnote 17 to the Financial
Statements). This resulted in an increase in the depletion rate factor from
11.868% in 2018 on an unamortized full cost pool base of $3,700,000 to a
depletion rate factor of 16.543% on an unamortized full cost pool base of
$2,382,000 in 2019. The net decrease in the unamortized full cost pool base of
$1,318,000 was due in part to accumulated depletion of $439,000 from 2018. In
addition, $918,000 of proceeds from sales of properties was credited to the full
cost pool in accordance with GAAP.
Asset Retirement Obligation ("ARO") accretion expense for 2019 was $120,000 down
from $189,000 in 2018, a decrease of $69,000 or 36.5%. The ARO calculation is
based on the Company's annual reserve report and takes into consideration the
changes between years of the Company's estimated obligation to plug its
interests in existing wells. This estimated future cost is discounted using a
10% discount factor based on the estimated life of each property. Changes are
incorporated as applicable into the full cost pool and the carrying value of the
liability. Accretion expense measures and incorporates changes due to the
passage of time into the carrying amount of the liability.
General and administrative expenses for 2019 were approximately $2,967,000 as
compared to approximately $2,943,000 for 2018, an increase of approximately
$24,000 or 0.8%.
2018 Compared to 2017
Oil and natural gas revenues for the year ended December 31, 2018 were
$5,848,000 compared to $4,495,000 for the year ended December 31, 2017, an
increase of $1,353,000 or 30.1%.
Oil revenue for 2018 was approximately $3,350,000 compared to $2,717,000 for
2017, an increase of approximately $633,000 or 23.3%. Average oil prices
increased to an average of $62.09 per barrel in 2018 from an average of $47.70
per barrel in 2017, an increase of $14.39 per barrel or 30.2%. Oil sales
decreased to 43,136 barrels from approximately 51,082 barrels in 2017, a
decrease of 7,946 barrels or 15.6%.
Natural gas revenue for 2018 was approximately $2,498,000 compared to $1,778,000
for 2017, an increase of approximately $720,000 or 40.5%. Natural gas sales
increased to approximately 875,000 mcf in 2018 from approximately 620,000 mcf in
2017, an increase of approximately 255,000 mcf or 41.1%. Natural gas prices
decreased to an average of $2.86 per mcf in 2018, a decrease of $0.01 or 0.3%
from an average of $2.87 per mcf in 2017.
The increase in oil revenue is predominantly due to an increase in crude oil
prices during 2018 compared to 2017. In addition, the increase in natural gas
revenue is primarily due to natural gas production increases related to
producing wells acquired during the fourth quarter of 2017.
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Revenue from lease operations was approximately $258,000 for 2018, compared to
approximately $394,000 in 2017, a decrease of approximately $136,000 or 34.5%.
Revenue from lease operations results from field supervision charges on operated
wells as well as administrative overhead billed to working interest owners.
Revenues from gas gathering, compression, and equipment rental for 2018 were
approximately $136,000, an increase of $10,000 or 7.9% from approximately
$126,000 in 2017. The increase was due primarily to an increase in natural gas
volume sold through PPC.
Real estate rental revenue for 2018 was approximately $232,000, a decrease of
$42,000 or 15.3% from approximately $274,000 in 2017. The decrease was due to an
increase in vacancies at the Company's corporate office building.
Interest income for 2018 was approximately $181,000, an increase of $14,000 from
approximately $167,000 in 2017 or 8.4%. The increase in interest income was due
to the Company investing its funds in both long-term and short-term certificates
of deposit and depository accounts paying higher rates of interest than those
received in prior years.
Other revenue for 2018 was $79,000, as compared to $148,000 in 2017, a decrease
of $69,000 or 46.6%. The reduction in 2018 is due in part to the recognition of
fees earned under a marketing agreement during 2017.
Lease operating expenses 2018 were $1,656,000 as compared to $1,542,000 in 2017,
a net increase of approximately $114,000, or 7.4%. There were both increases
and decreases within different segment categories of lease operating expenses.
Amounts billed by third-party operators as operating expenses on non-operated
properties decreased by approximately $50,000. There was an approximate $114,000
increase in expenses due to several wells that were acquired during late 2017.
Workover expenses decreased approximately $73,000 between years. There was an
increase of approximately $151,000 in 2018 over the prior year which included
recovery through insurance proceeds. The remaining $28,000 represents net
increases and decreases on various properties due to general price fluctuations
and levels of operation activity.
Production taxes, gathering, and marketing expenses for 2018 were approximately
$835,000 compared to $515,000 in 2017, an increase of approximately $320,000, or
62.1%. This increase was directly related to the increase in oil and natural gas
production and revenues, which have been partially offset by a decrease in
overall gathering and marketing expenses for non-operated leases.
Pipeline and rental expenses for 2018 were $49,000 compared to $40,000 for 2017,
an increase of $9,000, or 22.5%.
Real estate expenses in 2018 were approximately $196,000 compared to $183,000
during the same period in 2017, an increase of approximately $13,000 or 7.1%.
Depreciation and amortization expense for 2018 was $499,000 compared to $522,000
for 2017, a decrease of $23,000 or 4.4%. Amortization of the full cost pool of
oil and natural gas assets for 2018 was $439,000 compared to $457,000 for the
year ended 2017, a decrease of $18,000 or 3.9%. The Company re-evaluated its
proved oil and gas reserves as of December 31, 2018, and decreased its estimated
total proved reserves by approximately 102,000 BOE to 1,403,000 BOE at the end
of 2018 compared to 1,505,000 BOE at the end of 2017, a decrease of
approximately 6.8%. Sales of oil and natural gas products during 2018 increased
by 35,000 BOE from approximately 154,000 BOE in 2017 to approximately 189,000
BOE in 2018, an increase of approximately 22.7 %. (See Footnote 17 to the
Financial Statements). This resulted in an increase in the depletion rate factor
from 9.305% in 2017 on an unamortized full cost pool base of $4,922,000 to a
depletion rate factor of 11.868% on an unamortized full cost pool base of
$3,700,000 in 2018. The net decrease in the unamortized full cost pool base of
$1,222,000 was due to accumulated depletion of $457,000 from 2017. In addition,
$965,000 of proceed from sales of properties was credited to the full cost pool
in accordance with GAAP. Proceeds from the sales of properties were used to
acquire new properties whose purchase prices totaling $21,000 was added to the
full cost pool. Other capitalized additions during 2018 of $179,000 were also
added.
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Asset Retirement Obligation ("ARO") accretion expense for 2018 was $189,000 up
from $12,000 in 2017, an increase of $177,000 or 1475.0%. The ARO calculation is
based on the Company's annual reserve report and takes into consideration the
changes between years of the Company's estimated obligation to plug its interest
in existing wells. This estimated future cost is discounted using a 10% discount
factor based on the estimated life of each property. Changes are incorporated as
applicable into the full cost pool and the carrying value of the liability.
Accretion expense measures and incorporates changes due to the passage of time
into the carrying amount of the liability.
General and administrative expenses for 2018 were approximately $2,943,000 as
compared to approximately $2,560,000 for 2017, an increase of approximately
$383,000 or 15.0%. The increase was primarily due to increased salary, wages and
employee benefits as new employees were added in late 2017 and during 2018. The
Company also saw a significant increase in health insurance costs in 2018.
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