Results of Operations
WARNING CONCERNING FORWARD LOOKING STATEMENTS
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-Q 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.
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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,
which investors should review. There have been no changes from the risk factors
previously described in the Company's Form 10-K for the fiscal year ended
December 31, 2018 (the "Form 10-K").
Uncertainties regarding the global economic and financial environment could lead
to an extended national or global economic recession. A slowdown in economic
activity caused by a recession would likely reduce national and worldwide demand
for oil and natural gas and result in lower commodity prices for long periods of
time. Costs of exploration, development and production have not yet adjusted to
current economic conditions, or in proportion to the significant reduction in
product prices. 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.
In the past several years, capital and credit markets have experienced
volatility and disruption. Given the levels of market volatility and disruption,
the availability of funds from those markets may diminish substantially.
Further, arising from concerns about the stability of financial markets
generally and the solvency of borrowers specifically, the cost of accessing the
credit markets has increased as many lenders have raised interest rates, enacted
tighter lending standards, or altogether ceased to provide funding to borrowers.
Due to these potential capital and credit market conditions, the Company cannot
be certain that funding will be available in amounts or on terms acceptable to
the Company. The Company is evaluating whether current cash balances and cash
flow from operations alone would be sufficient to provide working capital to
fully fund the Company's operations. Accordingly, the Company is evaluating
alternatives, such as joint ventures with third parties, or sales of interest in
one or more of its properties. Such transactions, if undertaken, could result in
a reduction in the Company's operating interests or require the Company to
relinquish the right to operate the property. There can be no assurance that any
such transactions can be completed or that such transactions will satisfy the
Company's operating capital requirements. If the Company is not successful in
obtaining sufficient funding or completing an alternative transaction on a
timely basis on terms acceptable to the Company, the Company would be required
to curtail its expenditures or restructure its operations, and the Company would
be unable to continue its exploration, drilling, and recompletion program, any
of which would have a material adverse effect on its business, financial
condition, and results of operations.
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There could be adverse legislation which if passed, would significantly curtail
our ability to attract investors and raise capital. Proposed changes in the
Federal income tax laws which would eliminate or reduce the percentage depletion
deduction and the deduction for intangible drilling and development costs for
small independent producers, will significantly reduce the investment capital
available to those in the industry as well as our Company. Lengthening the time
to expense seismic costs will also have an adverse effect on our ability to
explore and find new reserves.
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.
Results of Operations
Nine months ended September 30, 2019 compared to nine months ended September 30,
2018
Oil and gas revenues for the first nine months of 2019 were $3,501,000, as
compared to $4,538,000 for the same period in 2018, a decrease of approximately
$1,037,000 or 22.9%
Oil sales for the first nine months of 2019 were approximately $2,099,000
compared to approximately $2,718,000 for the first nine months of 2018, a
decrease of approximately $619,000 or 22.8%. Oil sales volumes for the first
nine months of 2019 were approximately 31,700 bbls compared to approximately
34,200 bbls during the same period in 2018, a decrease of approximately 2,500
bbls, or 7.3%.
Average oil prices received were $56.80 per bbl in the first nine months of 2019
compared to $63.87 per bbl in the first nine months of 2018, a decrease of
approximately $7.07 per bbl or 11.7%.
Natural gas revenue for the first nine months of 2019 was $1,402,000 compared to
$1,820,000 for the same period in 2018, a decrease of approximately $418,000, or
23.0%. Natural gas sales volumes for the first nine months of 2019 were
approximately 692,000 mcf compared to approximately 656,000 mcf during the first
nine months of 2018, an increase of approximately 36,000 mcf or 5.5%.
Average natural gas prices received were $2.03 per mcf in the first nine months
of 2019 as compared to $2.78 per mcf in the same time period in 2018, a decrease
of approximately $0.75 per mcf or 27.0%.
Revenues from lease operations were $249,000 in the first nine months of 2019
compared to $199,000 in the first nine months of 2018, an increase of
approximately $50,000 or 25.1%. This increase is due primarily to an increase in
field supervision charges. Revenues from lease operations are derived from field
supervision charged to operated leases along with operator overhead charges to
operated leases.
Revenues from gas gathering, compression and equipment rental for the first nine
months of 2019 were $94,000 compared to $100,000 for the same period in 2018, a
decrease of approximately $6,000 or 6.0%. These revenues are derived from gas
volumes produced and transported through our gas gathering systems.
Real estate rental revenue was approximately $179,000 during the first nine
months of 2019 compared to $173,000 for the first nine months of 2018, an
increase of approximately $6,000, or 3.5%. Real estate rental revenue is derived
from the leasing to third party tenants in the Company's corporate office
building.
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Interest income was $150,000 during the first nine months of 2019 as compared to
$124,000 during the same period in 2018, an increase of approximately $26,000 or
21.0%. Interest income is derived from investments in both short-term and
long-term certificates of deposit as well as money market accounts at banks.
Other revenues for the first nine months of 2019 were $49,000 as compared to
$39,000 for the same time period in 2018, an increase of approximately $10,000
or 25.6%. The increase is due primarily to miscellaneous non-recurring
accounting adjustments.
Lease operating expenses in the first nine months of 2019 were $1,239,000 as
compared to $1,106,000 in the first nine months of 2018, a net increase of
$133,000, or 12.0%. Approximately $30,000 of the increase is due to a net
increase in operating expenses billed by third-party operators on non-operated
properties. The remaining net increase of approximately $103,000 represents
overall increases and decreases on various properties.
Production taxes, gathering and marketing expenses in the first nine months of
2019 were approximately $592,000 as compared to $616,000 for the first nine
months of 2018, a decrease of approximately $24,000 or 3.9%. The commensurate
decrease related to decreased oil and gas revenue noted above was offset by
higher gathering and processing expenses for liquid products charged by third
parties.
Pipeline and rental expenses for the first nine months of 2019 were $25,000
compared to $43,000 for the same time period in 2018, a decrease of $18,000, or
41.9%. The decrease is due to non-recurring repairs in 2018.
Real estate expenses in the first nine months of 2019 were approximately
$104,000 compared to $114,000 during the same period in 2018, a decrease of
approximately $10,000 or 8.8%. The decrease is due to a timing difference for
insurance payments between periods.
Depreciation, depletion, and amortization expenses for first nine months of 2019
were $407,000 as compared to $433,000 for the same period in 2018, a decrease of
approximately $26,000, or 6.0%. $362,000 of the amount for the first nine months
of 2019 was for amortization of the full cost pool of capitalized costs compared
to $388,000 for the same period of 2018, a decrease of approximately $26,000 or
6.7%. The Company re-evaluated its proved oil and natural gas reserve quantities
as of December 31, 2018. This re-evaluated reserve base was adjusted for the
first nine months as of September 30, 2019 by estimating variances in average
prices of oil and natural gas that occurred during the period, adding estimated
quantities of oil and natural gas reserves acquired during the period, and
deducting oil and natural gas reserves that were produced or sold during the
period. A depletion rate of 3.191% for the first quarter of 2019, a depletion
rate of 3.554% for the second quarter, and a depletion rate of 3.727% for the
third quarter of 2019 was calculated and applied to the Company's full cost pool
of capitalized oil and natural gas properties compared to rates of 2.636%,
3.320%, and 2.751% for the first three quarters of 2018 respectively.
Asset Retirement Obligation ("ARO") expense for the first nine months of 2019
was approximately $142,000 as compared to approximately $27,000 for the same
time period in 2018, an increase of approximately $115,000. ARO is a calculation
of the estimated present value to plug producing properties compared to the
estimate made in the previous year. This recalculation was made after the
Company re-evaluated its proved oil and natural gas reserves at the end of 2018.
General and administrative expenses for the first nine months of 2019 were
approximately $2,212,000 as compared to approximately $1,920,000 for the same
time period of 2018, an increase of approximately $292,000 or 15.2%.
Approximately half of the increase comes from increased salary, wages, benefits,
and other personnel costs. The remaining half of the increase is due to the
timing of expenditures for office, computer, and other general and
administrative expenses.
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Three months ended September 30, 2019 compared to three months ended September
30, 2018
Oil and natural gas revenues for the three months ended September 30, 2019 were
$1,126,000, compared to $1,268,000 for the same time period in 2018, a decrease
of approximately $142,000, or 11.2%.
Oil sales for the third quarter of 2019 were approximately $749,000 compared to
approximately $757,000 for the same period of 2018, a decrease of approximately
$8,000 or 1.1%. Oil volumes sold for the third quarter of 2019 were
approximately 11,300 bbls compared to approximately 11,000 bbls during the same
period of 2018, an increase of approximately 300 bbls or 2.7%.
Average oil prices received were approximately $54.84 per bbl in the third
quarter of 2019 compared to $57.61 per bbl during the same period of 2018, a
decrease of approximately $2.77 per bbl, or 4.8%.
Natural gas revenues for the third quarter of 2019 were $377,000 compared to
$511,000 for the same period in 2018, a decrease of $134,000 or 26.2%. Natural
gas volumes sold for the third quarter of 2019 were approximately 249,000 mcf
compared to approximately 223,000 mcf during the same period of 2018, an
increase of approximately 26,000 mcf, or 11.7%.
Average natural gas prices received were approximately $1.62 per mcf in the
third quarter of 2019 as compared to approximately $2.74 per mcf during the same
period in 2018, a decrease of approximately $1.12 or 40.9%.
Revenues from lease operations for the third quarter of 2019 were approximately
$62,000 compared to approximately $69,000 for the third quarter of 2018, a
decrease of approximately $7,000 or 10.1%. This decrease is due primarily to a
decrease in field supervision charges during the third quarter of 2019. Revenues
from lease operations are derived from field supervision charged to operated
leases along with operator overhead charges to operated leases.
Revenues from gas gathering, compression and equipment rental for the third
quarter of 2019 were approximately $28,000, compared to approximately $39,000
for the same period in 2018, a decrease of approximately $11,000 or 28.2%. These
revenues are derived from gas volumes produced and transported through our gas
gathering systems.
Real estate rental revenue was approximately $60,000 during the third quarter of
2019 compared to $57,000 for the same time period of 2018, an increase of
approximately $3,000 or 5.3%. Real estate rental revenue is derived from the
leasing to third party tenants in the Company's corporate office building.
Interest income for the third quarter of 2019 was approximately $37,000 as
compared with approximately $36,000 for the same period in 2018, an increase of
approximately $1,000 or 2.8%. Interest income is derived from investments in
both short-term and long-term certificates of deposit as well as money market
accounts at banks.
Other revenues for third quarter of 2019 were approximately $27,000 as compared
with approximately $10,000 for the same period in 2018, an increase of
approximately $17,000 or 170.0%. The increase is due primarily to miscellaneous
non-recurring accounting adjustments.
Lease operating expenses in the third quarter of 2019 were $418,000 as compared
to $368,000 in the third quarter of 2018, a net increase of approximately
$50,000, or 13.6%. Approximately $12,000 of the increase is due to a net
increase in operating expenses billed by third-party operators on non-operated
properties. The remaining net increase of $38,000 represents overall increases
and decreases on various properties.
Production taxes, gathering, transportation and marketing expenses for the third
quarter of 2019 were approximately $204,000 as compared to $120,000 during the
third quarter of 2018, a net increase of approximately $84,000 or 70.0%. The
commensurate decrease related to decreased oil and gas revenue noted above was
offset by higher gathering and processing expenses for liquid products charged
by third parties.
Pipeline and rental expenses for the third quarter of 2019 were $6,000 compared
to $6,000 for the same time period in 2018.
Real estate expenses during the third quarter 2019 were approximately $32,000
compared to approximately $41,000 for the same period in 2018, a decrease of
approximately $9,000 or 22.0%. The decrease is due to a timing difference for
insurance payments between periods.
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Depreciation, depletion, and amortization expenses for the third quarter of 2019
were $137,000 as compared to $141,000 for the same period in 2018, a decrease of
approximately $4,000, or 2.8%. $123,000 of the amount for the third quarter of
2019 was for amortization of the full cost pool of capitalized costs compared to
$126,000 for the third quarter of 2018, a decrease of approximately $3,000 or
2.4%. The Company re-evaluated its proved oil and natural gas reserve quantities
as of December 31, 2018. This re-evaluated reserve base was adjusted for the
first nine months as of September 30, 2019 by estimating variances in average
prices of oil and natural gas that occurred during the period, adding estimated
quantities of oil and natural gas reserves acquired during the period, and
deducting oil and natural gas reserves that were produced or sold during the
period. A depletion rate of 3.191% for the first quarter of 2019, a depletion
rate of 3.554% for the second quarter, and a depletion rate of 3.727% for the
third quarter of 2019 was calculated and applied to the Company's full cost pool
of capitalized oil and natural gas properties compared to rates of 2.636%,
3.320%, and 2.751% for the first three quarters of 2018 respectively.
Asset Retirement Obligation ("ARO") expense for the third quarter of 2019 was
approximately $48,000 as compared to approximately $9,000 for the same time
period in 2018, an increase of approximately $39,000. ARO is a calculation of
the estimated present value to plug producing properties compared to the
estimate made in the previous year. This recalculation was made after the
Company re-evaluated its proved oil and natural gas reserves at the end of 2018.
General and administrative expenses for the third quarter of 2019 were $721,000
compared to $619,000 for the same period in 2018, an increase of approximately
$102,000 or 16.5%. Approximately one-quarter of the increase comes from
increased salary, wages, benefits, and other personnel costs. The remaining
three-quarters of the increase is due to the timing of expenditures for office,
computer, and other general and administrative expenses.
Financial Condition and Liquidity
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. Accordingly, the Company may be required to seek additional
financing from third parties in order to fund its exploration and development
programs.
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SPINDLETOP OIL & GAS CO. 
