This discussion and analysis should be read with reference to Management's
Discussion and Analysis of Financial Condition and Results of Operations in the
2021 Form 10-K, as well as the consolidated financial statements included in
this Form 10-Q.
Forward-Looking Statements
This discussion and analysis includes forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Forward-looking statements give the Company's
current expectations of future events. They include statements regarding the
drilling of oil and 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 3 of the 2021 Form 10-K.
We caution you not to place undue reliance on these forward-looking statements,
which speak only as of the date of this Form 10-Q, and we undertake no
obligation to update this information because of new information, future
developments, or otherwise. You are urged to carefully review and consider the
disclosures made in this and our other reports filed with the Securities and
Exchange Commission that attempt to advise interested parties of the risks and
factors that may affect our business.
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
Executive Overview
The military conflict between Russia and Ukraine and related economic sanctions
imposed on Russia has impacted existing supply shortages, causing oil and
natural gas prices to increase during the first half of 2022. We cannot predict
how the conflict will affect oil and natural gas prices in the future.
LIQUIDITY AND CAPITAL RESOURCES
Please refer to the Consolidated Balance Sheets and the Condensed Consolidated
Statements of Cash Flows in this Form 10-Q to supplement the following
discussion. In the first half of 2022, the Company continued to fund its
business activity using internal sources of cash. The Company had net cash
provided by operations of $4,391,434, cash provided by sales of equity
securities and investments of $2,140,210 and cash provided by property
dispositions of $457,898 for total cash provided of $6,989,542. The Company
utilized cash for property additions of $3,083,402, the purchase of equity
securities and other investments of $3,438,324 and financing activities of
$1,563,653 for cash applied of $8,085,379. Cash and cash equivalents decreased
$1,095,837 (11%) to $9,033,320 at June 30, 2022 compared to $10,129,157 at
December 31, 2021.
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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, 2021. A discussion of these items
follows.
Equity securities decreased $1,380,023 (15%) to $7,762,334 as of June 30, 2022
from $9,142,357 at December 31, 2021. The decrease was the result of $230,241 in
net purchases and a $1,610,264 net decrease in market value.
Accounts receivable increased $962,173 (71%) to $2,325,136 as of June 30, 2022
from $1,362,963 at December 31, 2021. The increase was primarily due to
increased oil and gas prices and activity. There was also an increase in water
well drilling accounts receivable of $136,012 (453%) to $166,012 as of June 30,
2022 from $30,000 at December 31, 2021.
Refundable income taxes increased $295,917 (84%) to $646,844 as of June 30, 2022
from $350,927 at December 31, 2021.
Notes Receivable of $472,445 from Grand Woods Development, LLC ("Grand Woods"),
an equity method investee, was converted to equity. See Note 4 to the
accompanying financial statements for additional information on Grand Woods.
Accounts payable and other current liabilities increased $195,657 (37%) to
$719,325 as of June 30, 2022 from $523,668 at December 31, 2021, primarily due
to timing differences in the processing of accounts payable and other current
liabilities.
Discussion of Significant Changes in the Condensed Consolidated Statements of
Cash Flows. As noted in the first paragraph above, net cash provided by
operating activities was $4,391,434 in the six months ended June 30, 2022, an
increase of $3,516,930 (402%) from the comparable period in 2021 of $874,504.
For more information see "Operating Revenues" and "Other Income/(Loss)" below.
Cash applied to the purchase of property additions in 2022 was $3,083,402 in the
six months ended June 30, 2022, an increase of$2,179,499 from cash applied in
the comparable period in 2021 of $903,903. See the subheading "Exploration
Costs" in the "Results of Operations" section below for additional information.
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 2021 Form 10-K
would not be representative of the Company's current position.
RESULTS OF OPERATIONS
Results of Operations - Six Months Ended June 30, 2022
Net income increased $1,608,752 (178%) to $2,511,389 in the six months ended
June 30, 2022 from $902,637 in the comparable period in 2021. Net income, basic,
increased $10.31 to $16.08 per share in the six months ended June 30, 2022 from
$5.77 per share in the comparable period in 2021.
A discussion of revenue from oil and gas sales and other significant line items
in the consolidated statements of income follows.
Operating Revenues. Revenues from oil and gas sales increased $4,384,879 (142%)
to $7,472,177 in 2022 from $3,087,298 in 2021. This was due to increases in
crude oil sales of $2,963,763, natural gas sales of $1,268,851 and sales of
miscellaneous products of $152,265.
The $2,963,763 (147%) increase in oil sales to $4,981,206 in the six months
ended June 30, 2022 from $2,017,443 in the comparable period in 2021 was the net
result of an increase in the volume sold and an increase in the average price
per barrel (Bbl). The volume of oil sold increased 12,443 Bbls to 48,484 Bbls in
the six months ended June 30, 2022, resulting in a positive volume variance of
$696,535. The average price per Bbl increased $46.76 to $102.74 per Bbl in the
six months ended June 30, 2022 from $55.98 per Bbl in the comparable period in
2021, resulting in a positive price variance of $2,267,228.
The $1,268,851 (133%) increase in natural gas sales to $2,225,496 in the six
months ended June 30, 2022 from $956,645 in the comparable period in 2021 was
the result of an increase in the volume sold and an increase in the average
price per thousand cubic feet (MCF). The volume of natural gas sold increased
27,953 MCF to 351,054 MCF in the six months ended June 30, 2022 from 323,101 MCF
in the comparable period in 2021, for a positive volume variance of $82,763. The
average price per MCF increased $3.38 to $6.34 per MCF in the six months ended
June 30, 2022 from $2.96 per MCF in the comparable period in 2021, resulting in
a positive price variance of $1,186,088.
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 products were $265,475 in the six months ended June 30,
2022 compared to $113,210 in the comparable period in 2021, lease bonuses
increased $132,801 to $141,801 in the six months ended June 30, 2022 for leases
on its owned minerals with $9,000 in the comparable period in 2021.
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The Company had water well drilling revenues of $544,688 in the six months ended
June 30, 2022 related to water well drilling through TWSTX, with $75,477 in the
comparable period in 2021.
Operating Costs and Expenses. Operating costs and expenses increased $721,820
(28%) to $3,334,137 in the six months ended June 30, 2022 from $2,612,317 in the
comparable period in 2021. Material line-item changes are discussed and analyzed
in the following paragraphs.
Production Costs. Production costs increased $590,072 (58%) in the six months
ended June 30, 2022 to $1,604,045 from $1,013,973 in the comparable period in
2021. The increase was the result of an increase in gross production taxes and
transportation costs of $302,523 and increases in lease operating expense and
other costs of $287,549.
Exploration Costs. Exploration costs decreased $35,170 to $(6,023) in the six
months ended June 30, 2022 from $29,147 in the comparable period in 2021. This
change was the result of an increase in geological, geophysical cost of $20,991,
an increase in dry hole costs, P&A and other costs of $102,632, offset by an
adjustment to leaseholds of $(158,793).
The following is a summary as of August 6, 2022, updating both exploration and
development activity from December 31, 2021, for the period ended June 30, 2022.
The Company participated with its 14.85% working interest in the drilling of
exploratory wells on two San Patricio County, Texas prospects. One well has been
completed as a commercial gas producer and the other is awaiting completion.
Leasehold costs for the period were $2,439. Additional capitalized costs were
$469,364.
The Company participated with its 18% working interest in the drilling of an
exploratory horizontal well on a Nolan County, Texas prospect. The well has been
drilled and completed and is currently awaiting the installation of electricity.
An old well has been re-entered and converted to a saltwater disposal well.
Geological costs for the period were $20,625. Actual leasehold costs of $160,036
for the period were offset by $457,898 of proceeds from the sell down of the
Company's interest for net leasehold costs of $(297,862). Additional capitalized
costs were $860,982.
The Company participated with its 3% working interest in the drilling of a
step-out well and with a 2.25% working interest in a development well on a
Hitchcock County, Nebraska prospect. A completion attempt of the first well was
uneconomic, and it is currently shut in. A completion of the second well is in
progress. Capitalized costs for the period were $14,321.
The Company participated with its 20% working interest in the drilling of two
step-out wells on a Finney County, Kansas prospect. The first well was completed
as a commercial oil producer and a completion is in progress on the second.
Capitalized costs for the period were $223,981.
In January 2022, the Company purchased a 20% interest in 1,536 net acres of
leasehold on another Finney County, Kansas prospect for $41,150. An exploratory
well was drilled on the prospect and completed as a dry hole. Dry hole costs for
the period were $86,715.
The Company participated with its 10% working interest in the drilling of a
development horizontal well on a Logan County, Oklahoma prospect. The well was
completed as a commercial oil and gas producer. The Company is participating in
the drilling of four additional development horizontal wells on the prospect.
Three of the wells have been drilled with casing set and drilling is in progress
on the fourth. The four wells will be completed simultaneously. Capitalized
costs for the period were $1,007,011, including $6,120 of prospect leasehold
costs.
The Company participated with a 1% working interest in the drilling of a
development horizontal well on fee minerals located in Ellis County, Oklahoma.
The well was completed as a commercial oil and gas producer. Capitalized costs
for the period were $67,354.
The Company participated with its 19% working interest in the drilling of a
development well on a Woods County, Oklahoma prospect. A completion is in
progress. Capitalized costs for the period were $133,000.
The Company participated with a 0.3% interest in the drilling of an exploratory
horizontal well on leasehold in Stephens County, Oklahoma. A completion is in
progress. Capitalized costs for the period were $20,941.
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The Company will participate with a 4.6% interest in the drilling of an
exploratory horizontal well on leasehold in Dewey County, Oklahoma starting in
August 2022. Prepaid costs for the period were $272,385.
In April 2022, the Company purchased a 5% interest in leasehold, minerals and
seismic on a Grayson County, Texas prospect for $364,773. Additional leasehold
costs for the period were $2,556. In July 2022, the Company purchased an
additional 1% interest in the prospect for $72,955. An exploratory well will be
drilled on the prospect starting in September 2022.
In July 2022, the Company agreed to purchase a 10% interest in 8,831 net acres
of leasehold and 59 wells (39 producers) in Campbell County, Wyoming for
$2,700,000. The transaction will close at the end of August 2022.
In July 2022, the Company agreed to purchase a 10% interest in 639.2 net acres
of leasehold on a Dewey County, Oklahoma prospect for $63,920. An exploratory
horizontal well will be drilled on the prospect starting in October 2022.
The Company will purchase the working interest properties of Mesquite Minerals,
Inc., an affiliated company, for $963,667 effective July 1, 2022. This amount is
preliminary and subject to adjustment. The Company already owns working
interests in these properties.
At this time, the oil and gas industry is experiencing severe shortages of
personnel, equipment and materials. The pending activity discussed above may or
may not proceed as scheduled or in a timely manner, depending on the ability of
our operators to secure the needed services and materials.
Water Well Drilling Costs. Water well drilling costs increased $253,493 (216%)
to $370,617 in the six months ended June 30, 2022 from $117,124 in the
comparable period in 2021. These costs consist of contract labor, equipment
rental and maintenance, fuel costs, and other operating supplies related to the
drilling of water wells through TWSTX.
Depreciation, Depletion, Amortization and Valuation Provision (DD&A). DD&A
increased $236,932 (60%) to $630,446 in the six months ended June 30, 2022 from
$393,514 in the comparable period in 2021, primarily due to an increase in
capitalized drilling costs in the current period.
Gain on Disposition of Oil and Gas Properties. The Company had an increase in
gains on oil and gas property sales of $199,025 in the six months ended June 30,
2022 compared to $15,243 gain in the comparable period in 2021. The current
period gain was primarily due to the sale of 50% ownership of assets in a Nolan
County, Texas prospect.
General, Administrative and Other (G&A). G&A decreased $139,725 (13%) to
$934,077 in the six months ended June 30, 2022 from $1,073,802 in the comparable
period in 2021. The decrease was primarily due to a decrease in accounting
services and consulting costs related to implementation of new accounting
software.
Other Income/(Loss), Net. Other income/(loss), net was $(1,532,044) in the six
months ended June 30, 2022 as compared to $460,992 in the comparable period in
2021. See Note 3 to the accompanying financial statements for the analysis of
the various components of this line item.
Income Tax Provision. In the six months ended June 30, 2022 the Company had an
estimated income tax provision of $647,506 as the result of a deferred tax
provision of $1,234,474 and a current tax benefit of $586,968. In the comparable
period in 2021, the Company had an estimated income tax provision of $117,798 as
the result of a deferred tax benefit of $5,310 and a current tax provision of
$123,108. See Note 5 to the accompanying financial statements for additional
information on income taxes.
Results of Operations - Three Months Ended June 30, 2022
Net income increased $182,739 to $825,910 in the three months ended June 30,
2022 from $643,171 in the comparable period in 2021. The material changes in the
results of operations, which caused the increase in net income, are discussed
below.
Operating Revenues. Revenues from crude oil and natural gas sales increased
$2,551,509 (172%) to $4,038,353 in the three months ended June 30, 2022 from
$1,486,844 in the comparable period in 2021. This was due to increases in crude
oil sales of $1,600,857, natural gas sales of $882,879 and sales of
miscellaneous products of $67,773.
The $1,600,857 (156%) increase in oil sales to $2,629,073 in the three months
ended June 30, 2022 from $1,028,216 in the comparable period in 2021 was the net
result of an increase in the volume sold and an increase in the average price
per barrel (Bbl). The volume of oil sold increased 6,245 Bbls to 23,445 Bbls in
the three months ended June 30, 2022, resulting in a positive volume variance of
$373,354. The average price per Bbl increased $52.36 to $112.14 per Bbl in the
three months ended June 30, 2021 from $59.78 per Bbl in the comparable period in
2021, resulting in a positive price variance of $1,227,503.
The $882,879 (218%) increase in natural gas sales to $1,288,688 in the three
months ended June 30, 2022 from $405,809 in the comparable period in 2021 was
the result of an increase in the volume sold and an increase in the average
price per thousand cubic feet (MCF). The volume of natural gas sold increased
39,615 MCF to 180,896 MCF in the three months ended June 30, 2022 from 141,281
MCF in the comparable period in 2021, for a positive volume variance of
$113,788. The average price per MCF increased $4.25 to $7.12 per MCF in the
three months ended June 30, 2022 from $2.87 per MCF in the comparable period in
2021, resulting in a positive price variance of $769,091.
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Operating Costs and Expenses. Operating costs and expenses increased $538,983
(43%) to $1,789,755 in the three months ended June 30, 2022 from $1,250,772 in
the comparable period in 2021. This was mostly due to increases in costs related
to production of $338,456, exploration of $34,801, DD&A of $147,011 and water
well drilling of $103,972, offset by a decrease in G&A costs of $100,221, and a
decrease in gain of disposition of oil and gas properties of $14,964.
Other Income/(Loss), Net. Other income/(loss), net was $(1,466,938) in the three
months ended June 30, 2022 as compared to $374,048 in the comparable period in
2021. See Note 3 to the accompanying financial statements for the analysis of
the various components of this line item.
Income Tax Provision. Income tax provision increased $228,592 to $278,918 in the
three months ended June 30, 2022 from $50,326 in the comparable period in 2021.
See discussion above in "Item 2." and Note 5 to the accompanying consolidated
financial statements for a discussion of the changes in the provision for income
taxes.
Off-Balance Sheet Arrangements
The Company's off-balance sheet arrangements relate to Broadway Sixty-Eight,
LLC, an Oklahoma limited liability company, Broadway Seventy-Two, LLC, an
Oklahoma limited liability company, Grand Woods Development, LLC, an Oklahoma
limited liability company, and QSN Office Park, LLC, an Oklahoma limited
liability company. The Company does not have actual or effective control of
these entities. Management of these entities could at any time make decisions in
their own best interest, which could materially affect the Company's net income
or the value of the Company's investment. For more information about these
entities and the related off-balance sheet arrangements, see Note 4 to the
accompanying consolidated financial statements.
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