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EX-31.2 - CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO - RESERVE PETROLEUM COex31-2.htm
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
FORM 10-Q
 
(Mark One)
 
 x   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly Period Ended June 30, 2013
 
 o   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 o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):
 
Large accelerated filer
o
 
Accelerated filer
o
 
Non-accelerated filer
o
 
Smaller reporting company
x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No x
 
As of August 9, 2013, 159,609.306 shares of the Registrant’s $.50 par value common stock were outstanding.
 
 
 

 
 
PART I – FINANCIAL INFORMATION
 
ITEM 1.
FINANCIAL STATEMENTS
 
THE RESERVE PETROLEUM COMPANY
 
BALANCE SHEETS
 
ASSETS  
   
   
June 30,
   
December 31,
 
   
2013
   
2012
 
   
(Unaudited)
   
(Derived from
 
         
audited financial
 
         
statements)
 
             
Current Assets:
           
Cash and Cash Equivalents
  $ 11,110,007     $ 10,842,311  
Available-for-Sale Securities
    6,653,721       6,652,590  
Trading Securities
    469,769       389,335  
Refundable Income Taxes
    191,756       518,077  
Receivables
    2,526,807       1,736,169  
Prepaid Expenses
    12,213        
                 
      20,964,273       20,138,482  
                 
Investments:
               
Equity Investment
    599,114       594,855  
Other
    151,839       151,839  
                 
      750,953       746,694  
                 
Property, Plant and Equipment:
               
Oil and Gas Properties, at Cost, Based on the Successful Efforts Method of Accounting –
               
Unproved Properties
    1,057,623       874,367  
Proved Properties
    42,503,901       39,329,747  
                 
      43,561,524       40,204,114  
                 
Less – Accumulated Depreciation, Depletion, Amortization and Valuation Allowance
    27,242,184       25,726,672  
                 
      16,319,340       14,477,442  
                 
Other Property and Equipment, at Cost
    426,553       425,024  
                 
Less – Accumulated Depreciation
    286,929       268,095  
                 
      139,624       156,929  
                 
Total Property, Plant and Equipment
    16,458,964       14,634,371  
              -  
Other Assets
    365,824       363,722  
                 
Total Assets
  $ 38,540,014     $ 35,883,269  
 
See Accompanying Notes
 
 
1

 
 
THE RESERVE PETROLEUM COMPANY
 
BALANCE SHEETS
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
   
   
June 30,
   
December 31,
 
   
2013
   
2012
 
   
(Unaudited)
   
(Derived from
 
         
audited financial
 
         
statements)
 
             
Current Liabilities:
           
Accounts Payable
  $ 523,094     $ 519,654  
Other Current Liabilities – Deferred Income Taxes and Other
    442,037       207,430  
                 
      965,131       727,084  
                 
Long-Term Liabilities:
               
Asset Retirement Obligation
    1,240,996       1,162,078  
Dividends Payable
    1,608,352       1,535,568  
Deferred Tax Liability, Net
    3,815,842       3,274,807  
                 
      6,665,190       5,972,453  
                 
Total Liabilities
    7,630,321       6,699,537  
                 
Stockholders’ Equity:
               
Common Stock
    92,368       92,368  
Additional Paid-in Capital
    65,000       65,000  
Retained Earnings
    31,791,907       29,898,866  
                 
      31,949,275       30,056,234  
                 
Less – Treasury Stock, at Cost
    1,039,582       872,502  
                 
Total Stockholders’ Equity
    30,909,693       29,183,732  
                 
Total Liabilities and Stockholders’ Equity
  $ 38,540,014     $ 35,883,269  
 
See Accompanying Notes
 
 
2

 
 
THE RESERVE PETROLEUM COMPANY
 
STATEMENTS OF INCOME
 
(Unaudited)
 
                         
   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2013
   
2012
   
2013
   
2012
 
Operating Revenues:
                       
Oil and Gas Sales
  $ 4,956,399     $ 2,964,869     $ 8,780,715     $ 6,346,602  
Lease Bonuses and Other
    135,604       99,811       157,673       232,312  
                                 
      5,092,003       3,064,680       8,938,388       6,578,914  
                                 
Operating Costs and Expenses:
                               
Production
    681,933       521,389       1,409,438       1,141,537  
Exploration
    53,677       81,340       295,480       98,954  
Depreciation, Depletion, Amortization and Valuation Provisions
    923,338       879,793       1,796,293       1,612,925  
General, Administrative and Other
    408,941       388,831       840,912       830,931  
                                 
      2,067,889       1,871,353       4,342,123       3,684,347  
                                 
Income from Operations
    3,024,114       1,193,327       4,596,265       2,894,567  
                                 
Other Income, Net
    108,004       413,844       162,369       494,195  
                                 
Income Before Provision for Income Taxes
    3,132,118       1,607,171       4,758,634       3,388,762  
                                 
Provision for Income Taxes:
                               
Current
    328,624       288,829       556,334       613,595  
Deferred
    549,847       206,243       705,642       318,180  
                                 
Total Provision for Income Taxes
    878,471       495,072       1,261,976       931,775  
                                 
Net Income
  $ 2,253,647     $ 1,112,099     $ 3,496,658     $ 2,456,987  
                                 
Per Share Data
                               
Net Income, Basic and Diluted
  $ 14.04     $ 6.91     $ 21.77     $ 15.26  
                                 
                                 
Cash Dividends Declared and / or Paid
  $ 10.00     $ 10.00     $ 10.00     $ 10.00  
                                 
Weighted Average Shares Outstanding,
                               
Basic and Diluted
    160,532       160,937       160,639       160,959  
 
See Accompanying Notes
 
 
3

 
 
THE RESERVE PETROLEUM COMPANY
 
CONDENSED STATEMENTS OF CASH FLOWS
 
(Unaudited)
 
             
   
Six Months Ended
 
   
June 30,
 
   
2013
   
2012
 
             
Net Cash Provided by Operating Activities
  $ 5,457,450     $ 4,721,443  
                 
Cash Flows Applied to Investing Activities:
               
Purchases of Available-for-Sale Securities
    (6,653,721 )     (6,652,196 )
Maturity of Available-for-Sale Securities
    6,652,589       6,654,837  
Proceeds from Disposal of Property, Plant and Equipment
    43,007       35,795  
Purchase of Property, Plant and Equipment
    (3,550,216 )     (3,283,882 )
Cash Distribution from Equity Investee
    16,500        
                 
Net Cash Applied to Investing Activities
    (3,491,841 )     (3,245,446 )
                 
Cash Flows Applied to Financing Activities:
               
Dividends Paid to Stockholders
    (1,530,833 )     (1,573,116 )
Purchase of Treasury Stock
    (167,080 )     (15,640 )
                 
Total Cash Applied to Financing Activities
    (1,697,913 )     (1,588,756 )
                 
Net Change in Cash and Cash Equivalents
    267,696       (112,759 )
                 
Cash and Cash Equivalents, Beginning of Period
    10,842,311       10,150,742  
                 
Cash and Cash Equivalents, End of Period
  $ 11,110,007     $ 10,037,983  
 
See Accompanying Notes
 
 
4

 
 
THE RESERVE PETROLEUM COMPANY
NOTES TO FINANCIAL STATEMENTS
 
June 30, 2013
(Unaudited)
 
Note 1 – BASIS OF PRESENTATION
 
The accompanying balance sheet as of December 31, 2012, 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 fiscal year ended December 31, 2012.
 
In the opinion of Management, the accompanying financial statements reflect all adjustments (consisting 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 for the three months and six months ended June 30, 2013 and 2012:
 
   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2013
   
2012
   
2013
   
2012
 
                         
Net Realized and Unrealized Gain (Loss) on Trading Securities
  $ 44,720     $ (54,053 )   $ 79,794     $ 8,824  
Gain on Asset Sales
    28,789       431,643       32,472       434,573  
Interest Income
    7,240       8,766       13,084       16,116  
Equity Earnings in Investee
    5,492       19,866       20,759       38,160  
Other Income
    30,419       15,599       33,638       15,873  
Interest and Other Expenses
    (8,656 )     (7,977 )     (17,378 )     (19,351 )
                                 
Other Income, Net
  $ 108,004     $ 413,844     $ 162,369     $ 494,195  
 
Note 3 – INVESTMENTS AND RELATED COMMITMENTS AND CONTINGENT LIABILITIES, INCLUDING GUARANTEES
 
Equity Investment consists of a 33% ownership interest in Broadway Sixty-Eight, Ltd. (the “Partnership”), an Oklahoma limited partnership, which owns and operates an office building in Oklahoma City, Oklahoma. Although the Company invested as a limited partner, it agreed, jointly and severally, with all other limited partners to reimburse the general partner for any losses suffered from operating the Partnership. The indemnity agreement provides no limitation to the maximum potential future payments. To date, no monies have been paid with respect to this agreement.
 
Note 4 – PROVISION FOR INCOME TAXES
 
In 2013 and 2012, the effective tax rate was less than the statutory rate, primarily as a result of allowable depletion for tax purposes in excess of the cost basis in oil and gas properties and the corporate graduated tax rate structure.
 
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 are 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. 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.
 
 
5

 
 
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, 2012
  $ 1,162,078  
Liabilities incurred for new wells
    61,726  
Accretion expense
    17,192  
Balance at June 30, 2013
  $ 1,240,996  
 
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.
 
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 securities using quoted market prices for securities with similar maturity dates and interest rates. At June 30, 2013 and December 31, 2012, the Company’s assets reported at fair value on a recurring basis are summarized as follows:
 
   
June 30, 2013
 
   
Level 1 Inputs
   
Level 2 Inputs
   
Level 3 Inputs
 
Financial Assets:
                 
Available-for Sale Securities –
                 
U.S. Treasury Bills Maturing in 2013
  $     $ 6,653,721     $  
Trading Securities:
                       
Domestic Equities
    274,835              
International Equities
    132,638              
Others
    62,296              
 
   
December 31, 2012
 
   
Level 1 Inputs
   
Level 2 Inputs
   
Level 3 Inputs
 
Financial Assets:
                 
Available-for Sale Securities –
                 
U.S. Treasury Bills Maturing in 2013
  $     $ 6,652,590     $  
Trading Securities:
                       
Domestic Equities
    211,103              
International Equities
    115,106              
Others
    63,126              
 
 
6

 
 
Non-Recurring 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 six months ended June 30, was $61,726 in 2013 and $48,465 in 2012 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.
 
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 June 30, 2013 and December 31, 2012, 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
 
There were no accounting pronouncements issued and none that became effective since December 31, 2012 that were directly applicable to the Company.
 
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 Company’s Annual Report on Form 10-K for the year ended December 31, 2012 as filed with the Securities and Exchange Commission (hereinafter, the “2012 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 2012 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. 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
 
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 half of 2013, the Company continued to fund its business activity through the use of internal sources of cash. The Company had cash provided by operations of $5,457,450 and cash provided by the maturities of available-for-sale securities of $6,652,589. Additional cash of $59,507 was provided by property dispositions and an investment distribution for total cash provided of $12,169,546. The Company utilized cash for the purchase of available-for-sale securities of $6,653,721, property additions of $3,550,216 and financing activities of $1,697,913 for total cash applied of $11,901,850. Cash and cash equivalents increased $267,676 (2%) to $11,110,007.

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, 2012. A discussion of these items follows.
 
 
7

 
 
Trading securities increased $80,434 (21%) from $389,335 to $469,769. The increase was the net result of an $83,826 increase in the trading securities market value, offset by $3,392 of net losses from these securities.

Refundable income taxes decreased $326,321 (63%) to $191,756 from $518,077 due mostly to the first half 2013 current income tax provision of $556,334, net of a $250,000 estimated tax payment in June 2013.

Receivables increased $790,638 (46%) to $2,526,807 from $1,736,169. This increase was due almost entirely to an increase in sales receivable. Sales variances are discussed in the "Results of Operations" section below.
 
Deferred income taxes and other liabilities increased $234,607 (113%) to $442,037 from $207,430 due to an increase of $70,000 in ad valorem tax accruals and an increase of $136,106 in current deferred income taxes. Ad valorem (property) taxes are primarily for Texas properties and are accrued for the first three quarters each year to be paid in the fourth quarter. The current deferred income tax liability increase is related to the increased sales receivable.

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 $5,455,997 in 2013, an increase of $734,554 (16%) from the comparable period in 2012. The increase was primarily due to increased oil and gas sales revenue, partially offset by increased operating costs. For more information see "Operating Revenues" and "Operating Costs and Expenses" below.

Cash applied to the purchase of property additions in 2013 was $3,550,216, an increase of $266,334 (8%) from cash applied in 2012 of $3,283,882. In both 2013 and 2012, 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.

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 2012 Form 10-K would not be representative of the Company's current position.

Material Changes in Results of Operations Six Months Ended June 30, 2013, Compared with Six Months Ended June 30, 2012

Net income increased $1,039,671 (42%) to 3,496,658 in 2013 from $2,456,987 in 2012. Net income per share, basic and diluted, increased $6.51 to $21.77 in 2013 from $15.26 in 2012.

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 $2,434,113 (38%) to $8,780,715 in 2013 from $6,346,602 in 2012. The $2,434,113 increase is a combination of higher natural gas sales of $1,208,746 and higher crude oil sales of $1,257,108, offset by a decrease in miscellaneous oil and gas product sales of $31,741.

The $1,257,108 (26%) increase in oil sales to $6,046,131 in 2013 from $4,789,023 in 2012 was the net result of an increase in the volume sold and a decrease in the average price per barrel (Bbl). The volume of oil sold increased 17,364 Bbls to 70,202 Bbls in 2013, resulting in a positive volume variance of $1,573,811. This volume increase was the net result of an increase of about 29,000 Bbls for production that began after June 30, 2012, offset by a decline of about 11,600 Bbls from older properties. The average price per Bbl decreased $4.51 to $86.13 per Bbl in 2013, resulting in a negative price variance of $316,703.

The $1,208,746 (87%) increase in gas sales to $2,601,076 in 2013 from $1,392,330 in 2012 was the result of an increase in both the average price per thousand cubic feet (MCF) and the volume sold. The volume of gas sold increased 237,389 MCF to 745,550 MCF from 508,160 MCF in 2012, for a positive volume variance of $650,432. This volume increase was the net result of an increase of about 330,000 MCF for production from wells that began producing after June 30, 2012, offset by a decline of about 93,000 MCF from older properties. The average price per MCF increased $0.75 to $3.49 per MCF from $2.74 per MCF in 2012, resulting in a positive price variance of $558,314. Of the increased gas sales volumes from new wells, about 202,000 MCF were from Arkansas properties.

Sales from the Robertson County, Texas royalty interest properties provided approximately 27% of the Company's first half 2013 gas sales volumes and about 33% of the first half 2012 gas sales volumes. See discussion on page 12 of the 2012 Form 10-K under the subheading "Operating Revenues" for more information about these properties.

 
8

 
 
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 $133,508 in 2013 as compared to $165,249 in 2012.

The Company received lease bonuses of $157,033 in the first half of 2013 for leases on its owned minerals. Lease bonuses for the first half of 2012 were $20,209.

Coal royalties were $640 for the first half of 2013, compared to $212,103 for 2012, for coal mined during these periods on North Dakota leases. No coal has been mined in 2013 from the Company's mineral leases. See subheading "Operating Revenues" on page 12 of the 2012 Form 10-K for more information about this property.

Operating Costs and Expenses. Operating costs and expenses increased $657,776 (18%) to $4,342,123 in 2013 from $3,684,347 in 2012. Material line item changes are discussed and analyzed in the following paragraphs.

Production Costs. Production costs increased $267,901 (23%) in 2013 to $1,409,438 from $1,141,537 in 2012. Lease operating expense and transportation and compression expense increased $221,557 (26%) in 2013 to $1,075,725 from $854,168 in 2012 due to lease operating expense on wells that first produced after June 30, 2012. Production taxes increased $46,344 (16%) to $333,713 in 2013 from $287,369 in 2012 due to the increased oil and gas sales revenues described above in the "Operating Revenues" section.

Exploration Costs. Total exploration expense increased $196,526 (199%) to $295,480 in 2013 from $98,954 in 2012. Dry hole costs decreased $96,017 (97%) in 2013 to $2,937 from $98,954 in 2012. This decrease was offset by an increase in geological and geophysical expense of $292,543 from zero in 2012.

The following is a summary as of July 26, 2013, updating both exploration and development activity from December 31, 2012, for the period ended June 30, 2013.

The Company participated with its 18% working interest in the drilling of four development wells on a Barber County, Kansas prospect. Two of these wells were completed as commercial gas producers and completions are in progress on the other two. Three additional development wells are planned for the remainder of 2013. Capitalized costs for the period were $288,633, including $152,444 in prepaid drilling costs.

The Company participated with a 14% working interest in the drilling of two step-out wells on a Woods County, Oklahoma prospect. Both wells have been completed and are being tested. The Company will participate with 8%, 8%, 15% and 15% working interests in the drilling of four additional step-out wells starting in August 2013. Capitalized costs for the period were $179,900, including $130,366 in prepaid drilling costs.

The Company participated with a 13.7% working interest in the drilling of two development wells on a Woods County, Oklahoma prospect. Both wells were completed as commercial oil and gas producers. The Company will participate with 13.7% and 17.9% working interests in the drilling of two additional development wells starting in September 2013. Capitalized costs for the period were $190,265, including $1,767 in prepaid drilling costs.

The Company participated with its 16% working interest in the drilling of a step-out well on a Woods County, Oklahoma prospect. The well was completed as a marginal oil and gas producer. Capitalized costs were $71,118 for the period.

The Company participated with its 16% working interest in the drilling of two step-out wells on a Hodgeman County, Kansas prospect. Both wells were completed as commercial oil producers. Capitalized costs for the period were $176,000, including $58,629 in prepaid drilling costs.

The Company is participating with its 8.3% interest in two additional horizontal wells in a Harding County, South Dakota waterflood unit. Both wells have been drilled and are awaiting completion. Capitalized costs for the period were $228,465.

The Company participated with its 10.5% working interest in the drilling of a step-out horizontal well on a Garfield County, Oklahoma prospect. The well was completed as a commercial oil and gas producer. Capitalized costs for the period were $121,786.

 
9

 
 
The Company participated with its 7% working interest in the drilling of two exploratory wells on a Grayson County, Texas prospect. The first well was drilled and completed as a horizontal well. For geologic reasons, the planned horizontal section of the second well was not drilled and it was completed as a vertical well. Both wells are being tested. Capitalized costs for the period were $888,914, including $268,708 in prepaid drilling costs.

The Company participated with fee mineral interests in completion operations on two exploratory horizontal wells in Beaver County, Oklahoma (the wells were drilled in 2012). The Company has interests of 12.6% and 10.2% in the wells, which were both completed as commercial oil producers. Capitalized costs for the period were $582,525.

The Company participated with a 5.7% working interest in the drilling of a horizontal development well on a Dewey County, Oklahoma prospect. The well was completed as a commercial oil and gas producer. Capitalized costs for the period were $263,163.

The Company participated with its 16% interest in a 3-D seismic survey on a Hodgeman County, Kansas prospect. An exploratory well was drilled and completed as a marginal oil producer. Capitalized costs for the period were $88,000, including $45,824 in prepaid drilling costs. Seismic costs of $15,533 were expensed.

The Company participated with its 10.5% interest in a 3-D seismic survey on a Cimarron County, Oklahoma prospect. An exploratory well will be drilled starting in August 2013. Seismic costs of $91,822 were expensed for the period.

In January 2013, the Company purchased a 14% interest in 11,647.61 net acres of leasehold on a Ford and Gray Counties, Kansas prospect for $154,913. A 3-D seismic survey was conducted on the prospect. The Company is participating in an exploratory well that is currently drilling. Prepaid drilling costs for the period were $39,481. Seismic costs of $185,187 were expensed.

In April 2013, the Company agreed to participate in the development of a prospect in Grayson County, Texas with an 8.75% interest. Acreage acquisition is in progress. Prospect costs for the period were $29,750.

In July 2013, the Company purchased an 18% interest in 1440 net acres of leasehold on a Meade County, Kansas prospect for $24,624. An exploratory well will be drilled in August 2013.

The Company will participate with a 7.5% working interest in the drilling of a step-out horizontal well on a Woods County, Oklahoma prospect in the second half of 2013.

The Company will participate with a 9% working interest in the drilling of a step-out horizontal well on a Roger Mills County, Oklahoma prospect in the second half of 2013.

Depreciation, Depletion, Amortization and Valuation Provision (DD&A). DD&A increased $183,368 (11%) in 2013 to $1,796,293 from $1,612,925 in 2012. The increase was mostly due to the combination of an increase of approximately $397,000 in current year depreciation expense on oil and gas properties, offset by a 2012 impairment loss of $200,000 with no similar amounts in 2013.

Other Income, Net. This line item decreased $331,826 to $162,369 in 2013 from $494,195 in 2012. See Note 2 to the accompanying financial statements for the analysis of the various components of this line item. Components with significant changes are discussed in the following paragraphs.

Gains on trading securities in 2013 were $79,794 as compared to gain of $8,824 in 2012, an increase of $70,970. In 2013, the Company had realized losses of $4,032 and unrealized gains of $83,826 from adjusting the securities to estimated fair market value. In 2012, the Company had realized losses of $8,525 and unrealized gains of $17,349.

Gain on asset sales decreased $402,101 to $32,472 in 2013 from $434,573 in 2012. The decrease was due mostly to a $406,000 gain from sales of the Company's interest in some non-producing leaseholds in Oklahoma and Kansas in 2012 with no similar sales in 2013.

Provision for Income Taxes. The provision for income taxes increased $330,201 to $1,261,976 in 2013 from $931,775 in 2012. The increase was due to the higher income before income taxes of $1,369,872 to $4,758,634 in 2013 from $3,388,762 in 2012. Of the 2013 income tax provision, the estimated current tax expense was $556,334 and the estimated deferred tax expense was $705,642. Of the 2012 income tax provision, the current and deferred tax expenses were $613,595 and $318,180, respectively. See Note 4 to the accompanying financial statements for additional information on income taxes.

 
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Material Changes in Results of Operations Three Months Ended June 30, 2013 Compared with Three Months Ended June 30, 2012.

Net income increased $1,141,548 to $2,253,647 in 2013 from $1,112,099 in 2012. The material changes in the results of operations, which caused the increase in net income, are discussed below.

Operating Revenues. Revenues from oil and gas sales increased $1,991,530 to $4,956,399 in 2013 from $2,964,869 in 2012. The increase was the net result of an increase in oil sales of $1,219,575 (53%) to $3,540,837; an increase in gas sales of $792,820 (141%) to $1,355,871; and a decrease in sales of miscellaneous products of $20,865 to $59,691.

The $1,219,575 increase in oil sales was the result of an increase in the volume of oil sold of 13,752 Bbls to 40,482 Bbls, for a positive volume variance of $1,194,255, and an increase in the average price received of $0.63 per Bbl to $87.47, for a positive price variance of $25,320.
 
The $792,820 increase in gas sales was the result of an increase in the volume of gas sold of 114,576 MCF, for a positive volume variance of $285,427, and an increase in the average price of $1.49 per MCF to $3.98, for a positive price variance of $507,393.

Other operating revenues increased $35,793 to $135,604 in 2013 from $99,811 in 2012. This increase was the net result of an increase in lease bonuses for minerals in various Oklahoma and Texas Counties of $132,745 to $134,963 in 2013 from $2,219 in 2012, offset by a decline in coal royalties of $96,952 to $640 in 2013 from $97,592 in 2012.

Production Expense. Production expense increased $160,544 to $681,933 in 2013 from $521,389 in 2012. Lease operating expense and transportation and compression expense increased $113,493 to $510,652 in 2013 from $397,159 in 2012. Production taxes increased $47,051 to $171,281 in 2013 from $124,230 in 2012.

Other Income, Net. This line item decreased $305,840 to $108,004 in 2013 from $413,844 in 2012. See Note 2 to the accompanying financial statements for an analysis of the components of other income, net. Components with significant changes are discussed in the following paragraphs.

Trading securities gains in 2013 were $44,720 compared to losses of $54,053 in 2012; primarily unrealized gains in 2013 and unrealized losses in 2012.

Gain on asset sales decreased $402,854 to $28,789 in 2013 from a gain of $431,643 in 2012. The decrease was due to the gain from sales of the Company's interest in some non-producing leaseholds in Oklahoma and Kansas in 2012 discussed in "Item 2." above, for the six months ended June 30, 2013, with no similar sales in 2013.

Provision for Income Taxes. Provision for income taxes increased $383,399 to $878,471 in 2013 from $495,072 in 2012. See discussion above in "Item 2." and Note 4 to the accompanying financial statements for a discussion of the changes in the provision for income taxes.

There were no additional material changes between the quarters, which were not covered in the discussion in "Item 2." above, for the six months ended June 30, 2013.

Off-Balance Sheet Arrangement

The Company's off-balance sheet arrangement relates to Broadway Sixty-Eight, Ltd., an Oklahoma limited partnership. The Company does not have actual or effective control of this entity. Management of this entity could at any time make decisions in its own best interest, which could materially affect the Company's net income or the value of the Company's investment.

For more information about this entity, see Note 3 to the accompanying financial statements.

ITEM 3.              QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

 
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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 June 30, 2013.

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;

 
(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 adverse 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 June 30, 2013 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

 
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PART II – OTHER INFORMATION
 
ITEM 1.
LEGAL PROCEEDINGS

During the quarter ended June 30, 2013, 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 Programs1
   
Approximate Dollar Value
of Shares that May Yet Be Purchased Under the Plans
or Programs1
 
April 1 to April 30, 2013
    16       $180.00              
May 1 to May 31, 2013
    307       $230.00              
June 1 to June 30, 2013
    349       $230.00              
Total
    672       $229.00              
 
1The 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 stockholders 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.

 
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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
       
   
Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended.
       
   
Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended.
       
   
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.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: August 14, 2013   /s/ Cameron R. McLain   
    Cameron R. McLain,
    Principal Executive Officer
 
Date: August 14, 2013   /s/ James L. Tyler  
    James L. Tyler
   
Principal Financial Officer
                                                                                                                                    
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