UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

 

(Mark One)

 

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

 

For the Quarterly Period Ended March 31, 2019

 

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

 

Commission File Number 0-8157

 

THE RESERVE PETROLEUM COMPANY

(Exact Name of Registrant as Specified in Its Charter)

 

DELAWARE

73-0237060

(State or Other Jurisdiction of Incorporation or Organization)

(I.R.S. Employer Identification No.)

 

 

6801 Broadway ext., Suite 300

Oklahoma City, Oklahoma 73116-9037

(405) 848-7551

 

(Address and telephone number, including area code, of registrant’s principal executive offices)

 

 

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☑Yes ☐No

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☑Yes ☐No

 

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

 

Large accelerated filer ☐

Non-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). ☐Yes ☑No

 

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

   

 

As of May 3, 2019, 156,689 shares of the registrant’s $.50 par value common stock were outstanding.

 

 

 
 

 

TABLE OF CONTENTS

 

 

 

PART I – FINANCIAL INFORMATION

 

    Page
     

Item 1.

Financial Statements

2

     

 

Index to Financial Statements

 

 

Balance Sheets – March 31, 2019 and December 31, 2018

2

 

Statements of Income – Three Months Ended March 31, 2019 and 2018

4

  Statements of Stockholders’ Equity – Three Months Ended March 31, 2019 and 2018 5

 

Condensed Statements of Cash Flows – Three Months Ended March 31, 2019 and 2018

6

 

Notes to Financial Statements

7

     

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

10

     

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

13

     

Item 4.

Controls and Procedures

13

     
     
PART II – OTHER INFORMATION
     

Item 1.

Legal Proceedings

14

     

Item 1A.

Risk Factors

14

     

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

14

     

Item 3.

Defaults Upon Senior Securities

14

     

Item 4.

Mine Safety Disclosures

14

     

Item 5.

Other Information

14

     

Item 6.

Exhibits

15

 

1

 
 
 

 

PART I FINANCIAL INFORMATION

 

ITEM 1.

FINANCIAL STATEMENTS

 

THE RESERVE PETROLEUM COMPANY

BALANCE SHEETS

 

ASSETS

 

   

March 31,

   

December 31,

 
   

2019

   

2018

 
   

(Unaudited)

   

(Derived from

 
           

audited financial

 
           

statements)

 

Current Assets:

               

Cash and Cash Equivalents

  $ 3,025,623     $ 6,428,499  

Available-for-Sale Debt Securities

    19,702,622       16,249,414  

Equity Securities

    543,102       454,058  

Refundable Income Taxes

    ---       16,387  

Accounts Receivable

    904,696       846,419  

Notes Receivable

    218,158       218,158  
                 

Total Current Assets

    24,394,201       24,212,935  
                 

Investments:

               

Equity Method Investments

    811,384       881,860  

Other Investments

    1,691,116       1,689,249  
                 

Total Investments

    2,502,500       2,571,109  
                 

Property, Plant and Equipment:

               

Oil and Gas Properties, at Cost, Based on the Successful Efforts Method of Accounting –

               

Unproved Properties

    2,415,455       2,249,113  

Proved Properties

    55,045,718       54,789,836  
                 

Oil and Gas Properties, Gross

    57,461,173       57,038,949  
                 

Less – Accumulated Depreciation, Depletion, Amortization and Valuation Allowance

    46,235,754       46,008,467  
                 

Oil and Gas Properties, Net

    11,225,419       11,030,482  
                 

Other Property and Equipment, at Cost

    403,718       403,718  
                 

Less – Accumulated Depreciation

    256,887       249,333  
                 

Other Property and Equipment, Net

    146,831       154,385  
                 

Total Property, Plant and Equipment

    11,372,250       11,184,867  
                 

Total Assets

  $ 38,268,951     $ 37,968,911  

 

See Accompanying Notes

 

2

 

 

THE RESERVE PETROLEUM COMPANY

BALANCE SHEETS

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

   

March 31,

   

December 31,

 
   

2019

   

2018

 
   

(Unaudited)

   

(Derived from

 
           

audited financial

 
           

statements)

 

Current Liabilities:

               

Accounts Payable

  $ 168,032     $ 318,387  

Income Taxes Payable

    27,718       ---  

Other Current Liabilities

    42,743       25,243  
                 

Total Current Liabilities

    238,493       343,630  
                 

Long-Term Liabilities:

               

Asset Retirement Obligation

    1,793,393       1,774,114  

Dividends Payable

    1,034,183       1,057,483  

Deferred Tax Liability, Net

    1,332,725       1,210,271  
                 

Total Long-Term Liabilities

    4,160,301       4,041,868  
                 

Total Liabilities

    4,398,794       4,385,498  
                 
                 
                 
                 

Stockholders’ Equity:

               

Common Stock

    92,368       92,368  

Additional Paid-in Capital

    65,000       65,000  

Retained Earnings

    35,355,997       35,023,662  
                 

Stockholders’ Equity Before Treasury Stock

    35,513,365       35,181,030  
                 

Less – Treasury Stock, at Cost

    1,643,208       1,597,617  
                 

Total Stockholders’ Equity

    33,870,157       33,583,413  
                 

Total Liabilities and Stockholders’ Equity

  $ 38,268,951     $ 37,968,911  

 

See Accompanying Notes

 

3

 
 

 

THE RESERVE PETROLEUM COMPANY

STATEMENTS OF INCOME

(Unaudited)

 

   

Three Months Ended

 
   

March 31,

 
   

2019

   

2018

 
                 

Operating Revenues:

               

Oil and Gas Sales

  $ 1,592,711     $ 1,579,281  

Lease Bonuses and Other

    7,528       145,862  
                 

Total Operating Revenues

    1,600,239       1,725,143  
                 

Operating Costs and Expenses:

               

Production

    558,707       606,767  

Exploration

    3,219       77,645  

Depreciation, Depletion, Amortization and Valuation Provisions

    234,841       326,332  

General, Administrative and Other

    452,860       450,534  
                 

Total Operating Costs and Expenses

    1,249,627       1,461,278  
                 

Income from Operations

    350,612       263,865  
                 

Other Income, Net

    140,558       90,399  
                 

Income Before Income Tax Provision

    491,170       354,264  
                 

Income Tax Provision/(Benefit):

               

Current

    36,381       (65,904 )

Deferred

    122,454       149,574  
                 

Total Income Tax Provision

    158,835       83,670  
                 

Net Income

  $ 332,335     $ 270,594  
                 

Per Share Data:

               

Net Income, Basic and Diluted

  $ 2.12     $ 1.72  
                 
                 

Weighted Average Shares Outstanding, Basic and Diluted

    157,114       157,623  

 

See Accompanying Notes

 

4

 
 

 

THE RESERVE PETROLEUM COMPANY

STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

 

           

Additional

                         
   

Common

   

Paid-in

   

Retained

   

Treasury

         
   

Stock

   

Capital

   

Earnings

   

Stock

   

Total

 

Three Months Ended March 31, 2019

                                       
                                         

Balance as of December 31, 2018

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

Net Income

    ---       ---       332,335       ---       332,335  

Dividends Declared

    ---       ---       ---       ---       ---  

Purchase of Treasury Stock

    ---       ---       ---       (45,591 )     (45,591 )

Balance as of March 31, 2019

  $ 92,368     $ 65,000     $ 35,355,997     $ (1,643,208 )   $ 33,870,157  
                                         

Three Months Ended March 31, 2018

                                       
                                         

Balance as of December 31, 2017

  $ 92,368     $ 65,000     $ 33,497,463     $ (1,532,813 )   $ 32,122,018  

Net Income

    ---       ---       270,594       ---       270,594  

Dividends Declared

    ---       ---       ---       ---       ---  

Purchase of Treasury Stock

    ---       ---       ---       (12,954 )     (12,954 )

Balance as of March 31, 2018

  $ 92,368     $ 65,000     $ 33,768,057     $ (1,545,767 )   $ 32,379,658  

 

See Accompanying Notes

 

5

 
 

 

THE RESERVE PETROLEUM COMPANY

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

 

   

Three Months Ended

 
   

March 31,

 
   

2019

   

2018

 
                 
                 

Net Cash Provided by Operating Activities

  $ 692,487     $ 845,649  
                 

Cash Provided by/(Applied to) Investing Activities:

               

Maturity of Available-for-Sale Debt Securities

    2,473,604       ---  

Purchase of Available-for-Sale Debt Securities

    (5,926,812 )     ---  

Purchase of Property, Plant and Equipment

    (570,260 )     (818,594 )

Other Investments

    (1,867 )     (48,731 )
                 

Net Cash Applied to Investing Activities

    (4,025,335 )     (867,325 )
                 

Cash Applied to Financing Activities:

               

Dividends Paid to Stockholders

    (24,437 )     (50,222 )

Purchase of Treasury Stock

    (45,591 )     (12,954 )
                 

Total Cash Applied to Financing Activities

    (70,028 )     (63,176 )
                 

Net Change in Cash and Cash Equivalents

    (3,402,876 )     (84,852 )
                 

Cash and Cash Equivalents, Beginning of Period

    6,428,499       4,767,810  
                 

Cash and Cash Equivalents, End of Period

  $ 3,025,623     $ 4,682,958  

 

See Accompanying Notes

 

6

 

 

THE RESERVE PETROLEUM COMPANY

NOTES TO FINANCIAL STATEMENTS

 

March 31, 2019

(Unaudited)

 

 

 

 

Note 1 – BASIS OF PRESENTATION

 

The accompanying balance sheet as of December 31, 2018, which has been derived from audited financial statements, the unaudited interim 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 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, 2018 as filed with the Securities and Exchange Commission (hereinafter, the “2018 Form 10-K”).

 

In the opinion of management, the accompanying 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.

 

 

Note 2 – OTHER INCOME, NET

 

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

 

   

Three Months Ended

 
   

March 31,

 
   

2019

   

2018

 

Net Realized and Unrealized Gain on Equity Securities

  $ 88,738     $ 28,724  

Gain on Asset Sales

    ---       1,215  

Interest Income

    132,527       53,617  

Equity Earnings/(Losses) in Investees

    (70,476 )     1,485  

Other Income

    1,309       17,284  

Interest and Other Expenses

    (11,540 )     (11,926 )

Other Income, Net

  $ 140,558     $ 90,399  

 

 

Note 3 –

EQUITY METHOD AND OTHER INVESTMENTS AND RELATED COMMITMENTS AND CONTINGENT LIABILITIES, INCLUDING GUARANTEES

 

The Company’s Equity Method Investments include:

 

Broadway Sixty-Eight, LLC (“Broadway”), an Oklahoma limited liability company, with a 33% ownership. Broadway owns and operates an office building in Oklahoma City, Oklahoma. The Company leases its corporate office from Broadway on a month-to-month basis under the terms of the modified lease agreement. Rent expense for lease of the corporate office from Broadway was approximately $7,800 and $7,500 during the three months ended March 31, 2019 and 2018, respectively. The Company’s investment in Broadway totaled $182,687 and $172,722 at March 31, 2019 and December 31, 2018, respectively.

 

Grand Woods Development, LLC (the “LLC”), an Oklahoma limited liability company, with a 47% ownership, was acquired in 2015. The LLC owns approximately 26.56 acres of undeveloped real estate in northeast Oklahoma City. The Company has guaranteed $1,000,000 of a $1,595,750 loan for which the proceeds were used to purchase a portion of the undeveloped real estate acreage. The loan matures October 31, 2020. The Company’s investment in the LLC totaled $360,408 and $438,303 at March 31, 2019 and December 31, 2018, respectively. The Company also holds a note receivable of $43,158 from the LLC.

 

QSN Office Park (“QSN”), an Oklahoma limited liability company, with a 20% ownership, was acquired in 2016. QSN is constructing and selling office buildings in a new office park. The Company has guaranteed a $1,300,000 loan for which a portion of the proceeds were used to build a speculative office building. The loan matures March 26, 2021. The Company’s investment in QSN totaled $268,289 and $270,835 at March 31, 2019 and December 31, 2018, respectively.

 

7

 

 

The Company’s Other Investments primarily include:

 

OKC Industrial Properties (“OKC”), with a 10% ownership, was acquired in 1992. OKC originally owned approximately 260 acres of undeveloped land in north Oklahoma City and over time has sold all but approximately 46 acres. The Company’s investment in OKC totaled $56,164 at March 31, 2019 and December 31, 2018.

 

Bailey Hilltop Pipeline (“Bailey”), with a 10% ownership, was acquired in 2008. Bailey is a gas gathering system pipeline for the Bailey Hilltop Prospect oil and gas properties in Grady County, Oklahoma. The Company’s investment in Bailey totaled $80,377 at March 31, 2019 and December 31, 2018.

 

Cloudburst Solutions (“Solutions”), with a 10.625% ownership, was acquired with an initial investment of $500,000 in 2014, and additional investments of $750,000 and $44,375 in 2016 and 2018, respectively. Solutions owns exclusive rights to a water purification process technology that is being developed and currently tested. The Company’s investment in Solutions totaled $1,294,375 at March 31, 2019 and December 31, 2018. The Company also holds a note receivable of $175,000 from Solutions.

 

Ocean’s NG (“Ocean”), with a 12.44% ownership, was acquired in 2015. Ocean is developing an underground Compressed Natural Gas (“CNG”) storage and delivery system for retail sales of CNG. The Company’s investment in Ocean totaled $219,885 and $218,018 at March 31, 2019 and December 31, 2018, respectively.

 

 

Note 4 – PROVISION FOR INCOME TAXES

 

On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act (“Tax Act”), which substantially revised numerous areas of U.S. federal income tax law, including reducing the tax rate for corporations from a maximum rate of 35% to a flat rate of 21% and eliminating the corporate alternative minimum tax (AMT). The various estimates included in determining our tax provision as of December 31, 2018 remain provisional through the three months ended March 31, 2019 and may be adjusted through subsequent events such as the filing of our 2018 federal income tax return and the issuance of additional guidance such as new Treasury Regulations.

 

In 2019 and 2018, 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 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 5 – 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, 2018

  $ 1,774,114  

Liabilities incurred for new wells (net of revisions)

    8,352  

Liabilities settled (wells sold or plugged)

    ---  

Accretion expense

    11,398  

Revision to estimate

    (471 )

Balance at March 31, 2019

  $ 1,793,393  

 

 

Note 6 – FAIR VALUE MEASUREMENTS

 

Inputs used to measure fair value are organized into a fair value hierarchy based on the observability of the inputs. Level 1 inputs consist of quoted prices in active markets for identical assets. Level 2 inputs are inputs, other than quoted prices, for similar assets that are observable. Level 3 inputs are unobservable inputs.

 

8

 

 

Recurring Fair Value Measurements

 

Certain of the Company’s assets are reported at fair value in the accompanying balance sheets on a recurring basis. The Company determined the fair value of the available-for-sale debt securities using quoted market prices for securities with similar maturity dates and interest rates. At March 31, 2019 and December 31, 2018, the Company’s assets reported at fair value on a recurring basis are summarized as follows:

 

   

March 31, 2019

 
   

Level 1 Inputs

   

Level 2 Inputs

   

Level 3 Inputs

 

Financial Assets:

                       

Available-for-Sale Debt Securities –

                       

U.S. Treasury Bills Maturing in 2019

  $ ---     $ 19,702,622     $ ---  

Equity Securities:

                       

Domestic Equities

    337,010       ---       ---  

International Equities

    193,672       ---       ---  

Others

    12,420       ---       ---  

 

 

   

December 31, 2018

 
   

Level 1 Inputs

   

Level 2 Inputs

   

Level 3 Inputs

 

Financial Assets:

                       

Available-for-Sale Debt Securities –

                       

U.S. Treasury Bills Maturing in 2019

  $ ---     $ 16,249,414     $ ---  

Equity Securities:

                       

Domestic Equities

    259,843       ---       ---  

International Equities

    179,083       ---       ---  

Others

    15,132       ---       ---  

 

Non- R ecurring 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 quarter ended March 31, 2019 was $8,352 with $5,408 in 2018, and was calculated using Level 3 inputs. See Note 5 above for more information about this liability and the inputs used for calculating fair value.

 

There was no long-lived asset impairment loss for the first quarter for either 2019 or 2018. This also represents non-recurring fair value expense calculated using Level 3 inputs. See Note 10 – LONG-LIVED ASSETS IMPAIRMENT LOSS on page 31 of the 2018 Form 10-K for a description of the impairment loss calculation.

 

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 March 31, 2019 and December 31, 2018, 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 7 – NEW ACCOUNTING PRONOUNCEMENTS

 

On January 1, 2019, the Company adopted ASU No. 2016-02, Leases . The Company currently has no significant capital or operating leases. The new guidance is not applicable for leases with a term of 12 months or less, nor is it applicable for oil and gas leases. The Company’s building lease is a month to month contract. The new guidance does not have any impact on the Company’s financial position, results of operations or cash flows.

 

See the “New Accounting Pronouncements” disclosures on page 26 of the 2018 Form 10-K. There were no other accounting pronouncements issued or that have become effective since December 31, 2018.

 

 

Note 8 – REVENUE RECOGNITION

 

The Financial Accounting Standards Board (FASB) issued Revenue from Contracts with Customers (Topic 606) superseding virtually all existing revenue recognition guidance. We adopted this new standard in the first quarter of 2018 using the modified retrospective approach. Adoption of the new standard did not require an adjustment to the opening balance of equity and did not have an impact on income from operations, earnings per share or cash flows.

 

9

 

 

The Company’s revenues are primarily derived from its interests in the sale of oil and natural gas production. Each barrel of oil or thousand cubic feet of natural gas delivered is considered a separate performance obligation. The Company recognizes revenue from its interests in the sales of oil and natural gas in the period that its performance obligations to provide oil and natural gas to customers are satisfied. Performance obligations are satisfied when the Company has no further obligations to perform related to the sale and the customer obtains control of product. The sales of oil and natural gas are made under contracts which the third-party operators of the wells have negotiated with customers, which typically include variable consideration that is based on pricing tied to local indices and volumes delivered in the current month. The Company receives payment from the sale of oil and natural gas production from one to three months after delivery. At the end of each month as performance obligations are satisfied, the variable consideration can be reasonably estimated and amounts due from customers are accrued in accounts receivable in the balance sheets. Variances between the Company’s estimated revenue and actual payments are recorded in the month the payment is received, however, differences have been and are insignificant. Accordingly, the variable consideration is not constrained. A portion of oil and gas sales recorded in the statements of income are the result of estimated volumes and pricing for oil and gas product not yet received for the period. For the periods ending March 31, 2019 and 2018, that estimate represented approximately $293,653 and $264,543, respectively, of oil and gas sales included in the statements of income.

 

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

 

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

 

The Company’s disaggregated revenue has two primary revenue sources which are oil sales and natural gas sales. Oil sales for the three months ended March 31, 2019 and 2018 were $981,931 and $980,786, respectively. Natural gas sales for the three months ended March 31, 2019 and 2018 were $565,112 and $541,273, respectively. Miscellaneous oil and gas product sales for the three months ended March 31, 2019 and 2018 were $45,668 and $57,222, respectively.

 

 

 

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 2018 Form 10-K, as well as the 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 gas wells, the production that may be obtained from oil and 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 8 of the 2018 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.

 

10

 

 

Financial Conditions and Results of Operations

 

Liquidity and Capital Resources

 

Please refer to the Balance Sheets and the Condensed Statements of Cash Flows in this Form 10-Q to supplement the following discussion. In the first quarter of 2019, the Company continued to fund its business activity through the use of internal sources of cash. The Company had net cash provided by operations of $692,487 and cash provided by the maturities of available-for-sale debt securities of $2,473,604 for total cash provided of $3,166,091. The Company utilized cash for the purchase of available-for-sale debt securities of $5,926,812, property additions of $570,260, other investment activity of $1,867 and financing activities of $70,028 for total cash applied of $6,568,967. Cash and cash equivalents decreased $3,402,876 (53%) to $3,025,623.

 

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, 2018. A discussion of these items follows.

 

Equity securities increased $89,044 (20%) to $543,102 as of March 31, 2019 from $454,058 at December 31, 2018. The increase was the result of a $150,324 increase in the equity securities’ market value offset by $61,280 of net loss from these securities.

 

Refundable income taxes decreased $16,387. This decrease was due to the $16,387 tax benefit at December 31, 2018 with none at March 31, 2019.

 

Accounts payable decreased $150,355 (47%) to $168,032 as of March 31, 2019 from $318,387 at December 31, 2018 due to a decrease in the drilling and exploration activity at March 31, 2019 versus December 31, 2018.

 

Discussion of Significant Changes in the Condensed Statements of Cash Flows. As noted in the first paragraph above, net cash provided by operating activities was $692,487 in the three months ended March 31, 2019, a decrease of $153,162 (18%) from the comparable period in 2018 of $845,649. The decrease was primarily due to a decrease in lease bonus income. For more information see “Operating Revenues” and “Other Income, Net” below.

 

Cash applied to the purchase of property additions in the three months ended March 31, 2019 was $570,260, a decrease of $248,334 (30%) from cash applied in the comparable period in 2018 of $818,594. For both 2019 and 2018, cash applied to property 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 other investments in the three months ended March 31, 2019 was $1,867, a decrease of $46,864 (96%) from cash applied in the comparable period in 2018 of $48,731. 

 

Cash applied to financing activities in the three months ended March 31, 2019 was $70,028, an increase of $6,852 (11%) from cash applied in the comparable period in 2018 of $63,176.

 

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 2018 Form 10-K would not be representative of the Company’s current position.

 

Material Changes in Results of Operations Three Months Ended March   31, 2019, Compared with Three Months Ended March   31, 2018

 

Net income increased $61,741 (23%) to $332,335 in the three months ended March 31, 2019 from $270,594 in the comparable period in 2018. Net income per share, basic and diluted, increased $0.40 to $2.12 in the three months ended March 31, 2019 from $1.72 in the comparable period in 2018.

 

A discussion of revenue from oil and gas sales and other significant line items in the statements of income follows.

 

Operating Revenues. Revenues from oil and gas sales increased $13,430 (1%) to $1,592,711 in the three months ended March 31, 2019 from $1,579,281 in 2018. Of the $13,430 increase, crude oil sales increased $1,145; natural gas sales increased $23,839; and miscellaneous oil and gas product sales decreased $11,554.

 

The $1,145 increase in oil sales to $981,931 in the three months ended March 31, 2019 from $980,786 in the comparable period in 2018 was the net result of a decrease in the average price per barrel (Bbl) offset by an increase in the volume sold. The volume of oil sold increased 2,077 Bbls to 18,744 Bbls in the three months ended March 31, 2019, resulting in a positive volume variance of $122,231 compared to the comparable period in 2018. The average price per Bbl decreased $6.46 to $52.39 per Bbl in the three months ended March 31, 2019, resulting in a negative price variance of $121,086 compared to the comparable period in 2018. The increase in oil volumes sold was due to production of 3,600 Bbls from new wells partially offset by production declines from older wells.

 

11

 

 

The $23,839 (4%) increase in gas sales to $565,112 in the three months ended March 31, 2019 from $541,273 in the comparable period in 2018 was the net result of an increase in the average price per thousand cubic feet (MCF) offset by a decrease in the volume sold. The volume of gas sold decreased 6,545 MCF to 192,133 MCF in the three months ended March 31, 2019 from 198,678 MCF in the comparable period in 2018, for a negative volume variance of $17,802 compared to the comparable period in 2018. The average price per MCF increased $0.22 to $2.94 per MCF in the three months ended March 31, 2019 from $2.72 per MCF in the comparable period in 2018, resulting in a positive price variance of $41,641 compared to the comparable period in 2018. The decrease in gas volumes sold was due to production of 9,700 MCF from new wells offset by production declines from older wells.

 

Sales from the Robertson County, Texas royalty interest properties provided approximately 32% of the Company’s gas sales volumes for the three months ended March 31, 2019 and 29% of the gas sales volumes for the comparable period in 2018. See discussion on page 11 of the 2018 Form 10-K under the subheading “Operating Revenues” for more information about these properties. Sales from Arkansas working interest properties provided approximately 12% of the Company’s gas sales volumes for the three months ended March 31, 2019 and about 11% of the gas sales volumes for the comparable period in 2018.

 

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.

 

Sales of miscellaneous oil and gas products were $45,668 in the three months ended March 31, 2019 compared to $57,222 in the comparable period in 2018.

 

The Company received lease bonuses of $7,528 in the three months ended March 31, 2019 for leases on its owned minerals compared to $145,862 in the comparable period in 2018.

 

Operating Costs and Expenses. Operating costs and expenses decreased $211,651 (14%) to $1,249,627 in the three months ended March 31, 2019 from $1,461,278 in the comparable period in 2018.

 

Production Costs. Production costs decreased $48,060 (8%) to $558,707 in the three months ended March 31, 2019 from $606,767 in the comparable period in 2018. This decrease was primarily the result of a decrease of $53,000 in lease operating expenses.

 

Exploration Costs. Total exploration expense decreased $74,426 (96%) to $3,219 in the three months ended March 31, 2019 from $77,645 in the comparable period in 2018. The decrease was due to a decrease of $109,484 in geological and geophysical expenses, offset by an increase in other expenses of $35,058.

 

The following is a summary as of May 3, 2019, updating both exploration and development activity from December 31, 2018, for the period ended March 31, 2019.

 

The Company is participating with a 9.5% working interest in the completion of a development well on a Woods County, Oklahoma prospect. The well was drilled in 2018. Capitalized costs for the period were $37,762.

 

The Company is participating with its 14% interest in the acquisition of additional leasehold on a Creek County, Oklahoma 3-D seismic prospect. It is likely that one or more exploratory wells will be drilled on the prospect in 2019. Leasehold costs for the period were $1,458.

 

The Company owns a 35% interest in 16,472.55 net acres of leasehold on a Crockett and Val Verde Counties, Texas prospect. The Company and its partners have entered into an agreement whereby a third party would drill two strat tests on the prospect, earning the option to drill three additional wells, purchase a 50% interest in the acreage and conduct a thermal recovery pilot test. The strat tests have been drilled and the third party has decided to proceed with the drilling of the additional wells.

 

The Company is participating with a 13% interest in a 3-D seismic prospect covering approximately 35,000 acres in San Patricio County, Texas. A 3-D seismic survey of the prospect area has been completed and thirteen prospects have been identified. An exploratory well was drilled on one prospect, resulting in a commercial oil and gas producer that is awaiting pipeline connection. Lease acquisition is in progress on seven prospects, and additional exploratory drilling is planned this year. Leasehold costs for the period were $4,138. Actual drilling costs of $140,384 for the period were offset by prepaid costs from 2018 for a net capitalized amount of $0.

 

The Company has been participating with a 50% interest in an attempt to develop shallow oil prospects in the Permian Basin. Lease acquisition is in progress on one prospect in Crane County, Texas. The Company will sell a portion of its interest prior to any drilling. Leasehold costs were $2,019 for the period.

 

The Company participated with its 16% working interest in the drilling of an exploratory well on a Barber County, Kansas prospect. The well has been completed and is being tested. Capitalized costs for the period were $57,133.

 

In October 2018, the Company entered into an agreement to acquire mineral rights in Tyler, Doddridge and Ritchie Counties, West Virginia. The Company is funding the acquisition of the mineral rights which will then be sold to a third party for a profit, with the Company retaining an interest in the minerals. Costs for the period were $198,186.

 

12

 

 

The Company is participating with its 10.5% working interest in the completion of an exploratory well on an Oldham County, Texas prospect. The well was drilled in 2018. Capitalized costs for the period were $144,160, including $13,125 of additional leasehold costs.

 

The Company participated with 17.1% and 17.5% working interests in successful recompletions of two wells on a McClain County, Oklahoma prospect. Capital costs for the period were $15,596.

 

Depreciation, Depletion, Amortization and Valuation Provision (DD&A). DD&A decreased $91,491 (28%) to $234,841 in the three months ended March 31, 2019 from $326,332 in the comparable period in 2018. The decrease was due primarily to revisions in reserve estimates and $44,700 less impairment of non-producing leaseholds for 2019 versus 2018.

 

Other Income, Net. This line item increased $50,159 (55%) to $140,558 in the three months ended March 31, 2019 from $90,399 in the comparable period in 2018. See Note 2 to the accompanying financial statements for the various components of this line item.

 

Income Tax Provision. Income tax provision increased $75,165 (90%) to $158,835 in the three months ended March 31, 2019 from $83,670 in the comparable period in 2018. The increase was due to an increase in Income Before Income Tax Provision of $136,906 (39%) to $491,170 as compared to $354,264 in the comparable period in 2018. See Note 4 to the accompanying financial statements for additional information on income taxes.

 

Off-Balance Sheet Arrangement

 

The Company’s off-balance sheet arrangements relate to Broadway Sixty-Eight, LLC, an Oklahoma limited liability company, and Grand Woods Development, 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 3 to the accompanying 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 March 31, 2019.

 

 

Internal Control over Financial Reporting

 

As defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act, the term "internal control over financial reporting" means a process designed by, or under the supervision of, the issuer's principal executive and principal financial officers, or persons performing similar functions, and effected by the issuer's board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes, in accordance with generally accepted accounting principles and includes those policies and procedures that:

 

 

(1)

Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer;

 

13

 

 

 

(2)

Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the issuer are being made only in accordance with authorizations of management and directors of the issuer; and

 

 

(3)

Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the issuer's assets that could have a material effect on the financial statements.

 

The Company's management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. There were no changes in the Company’s internal control over financial reporting during the quarter ended March 31, 2019 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

 

 

 

PART I I OTHER INFORMATION

 

 

ITEM 1.

LEGAL PROCEEDINGS

 

During the quarter ended March 31, 2019, 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

 

ISSUER 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

 

January 1 to January 31, 2019

    47     $ 150       ---       ---  

February 1 to February 28, 2019

    164     $ 150       ---       ---  

March 1 to March 31, 2019

    93     $ 150       ---       ---  

Total

    304     $ 150       ---       ---  

 

1 The Company has no formal equity security purchase program or plan. The Company acts as its own transfer agent, and most purchases result from requests made by shareholders receiving small odd lot share quantities as the result of probate transfers.

 

 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

 

None.

 

 

ITEM 4.

MINE SAFETY DISCLOSURES

 

Not applicable.

 

 

ITEM 5.

OTHER INFORMATION

 

None.

 

14

 

 

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 *

 

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

     

31.2 *

 

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

     

32 *

 

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

     

101.INS *

 

XBRL Instance Document

101.SCH *

 

XBRL Taxonomy Extension Schema Document

101.CAL *

 

XBRL Taxonomy Calculation Linkbase Document

101.DEF *

 

XBRL Taxonomy Definition Linkbase Document

101.LAB *

 

XBRL Taxonomy Label Linkbase Document

101.PRE *

 

XBRL Taxonomy Presentation Linkbase Document

   

____________________________________

* Filed electronically herewith.

 

 

 

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:       May 15, 2019

 /s/ Cameron R. McLain

 

 

Cameron R. McLain,

 

 

Principal Executive Officer

 
     
     
     
     

Date:       May 15, 2019

 /s/ Lawrence R. Francis

 

 

Lawrence R. Francis

 

 

Principal Financial Officer

 

 

15

Reserve Petroleum (PK) (USOTC:RSRV)
Historical Stock Chart
From Aug 2020 to Sep 2020 Click Here for more Reserve Petroleum (PK) Charts.
Reserve Petroleum (PK) (USOTC:RSRV)
Historical Stock Chart
From Sep 2019 to Sep 2020 Click Here for more Reserve Petroleum (PK) Charts.