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EX-31.1 - CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER - RESERVE PETROLEUM COex31-1.htm
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EX-32 - CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER - RESERVE PETROLEUM COex32.htm
EX-31.2 - CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER - RESERVE PETROLEUM COex31-2.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q
 
(Mark One)

þ           QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly Period Ended September 30, 2013
 
¨           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 þ 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   þ 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
þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes o   No þ

As of November 8, 2013, 159,441 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
 
             
             
   
September 30,
   
December 31,
 
   
2013
   
2012
 
   
(Unaudited)
   
(Derived from
 
         
audited financial
 
         
statements)
 
             
Current Assets:
           
Cash and Cash Equivalents
  $ 13,172,411     $ 10,842,311  
Available-for-Sale Securities
    6,653,721       6,652,590  
Trading Securities
    570,388       389,335  
Refundable Income Taxes
          518,077  
Receivables
    2,443,874       1,736,169  
Prepaid Expenses
    8,287        
      22,848,681       20,138,482  
Investments:
               
Equity Investment
    610,853       594,855  
Other
    151,839       151,839  
      762,692       746,694  
                 
Property, Plant and Equipment:
               
Oil and Gas Properties, at Cost, Based on the Successful Efforts Method of Accounting –
               
Unproved Properties
    1,111,132       874,367  
Proved Properties
    43,545,985       39,329,747  
      44,657,117       40,204,114  
 
               
Less – Accumulated Depreciation, Depletion, Amortization and Valuation Allowance
    28,637,061       25,726,672  
      16,020,056       14,477,442  
Other Property and Equipment, at Cost
    426,712       425,024  
                 
Less – Accumulated Depreciation
    295,173       268,095  
      131,539       156,929  
Total Property, Plant and Equipment
    16,151,595       14,634,371  
Other Assets
    365,904       363,722  
Total Assets
  $ 40,128,872     $ 35,883,269  
                 
See Accompanying Notes
               

 
1

 

THE RESERVE PETROLEUM COMPANY
BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS EQUITY
 
   
September 30,
   
December 31,
 
   
2013
   
2012
 
   
(Unaudited)
   
(Derived from
 
         
audited financial
 
         
statements)
 
             
Current Liabilities:
           
Accounts Payable
  $ 366,547     $ 519,654  
Income Taxes Payable
    453,132        
Other Current Liabilities – Deferred Income Taxes and Other
    450,945       207,430  
      1,270,624       727,084  
                 
Long-Term Liabilities:
               
Asset Retirement Obligation
    1,268,454       1,162,078  
Dividends Payable
    1,490,912       1,535,568  
Deferred Tax Liability, Net
    3,679,849       3,274,807  
      6,439,215       5,972,453  
Total Liabilities
    7,709,839       6,699,537  
                 
Stockholders’ Equity:
               
Common Stock
    92,368       92,368  
Additional Paid-in Capital
    65,000       65,000  
Retained Earnings
    33,437,319       29,898,866  
      33,594,687       30,056,234  
                 
Less – Treasury Stock, at Cost
    1,175,654       872,502  
Total Stockholders’ Equity
    32,419,033       29,183,732  
Total Liabilities and Stockholders’ Equity
  $ 40,128,872     $ 35,883,269  
                 
See Accompanying Notes
               

 
2

 

THE RESERVE PETROLEUM COMPANY
STATEMENTS OF INCOME
(Unaudited)
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2013
   
2012
   
2013
   
2012
 
Operating Revenues:
                       
Oil and Gas Sales
  $ 4,679,450     $ 3,061,322     $ 13,460,165     $ 9,407,923  
Lease Bonuses and Other
    16,016       167,063       173,689       399,375  
      4,695,466       3,228,385       13,633,854       9,807,298  
                                 
Operating Costs and Expenses:
                               
Production
    725,910       595,196       2,135,349       1,736,733  
Exploration
    52,864       86,141       348,344       185,095  
Depreciation, Depletion, Amortization and Valuation Provisions
    1,547,272       717,724       3,343,565       2,330,648  
General, Administrative and Other
    351,456       366,790       1,192,367       1,197,722  
      2,677,502       1,765,851       7,019,625       5,450,198  
                                 
Income from Operations
    2,017,964       1,462,534       6,614,229       4,357,100  
                                 
Other Income, Net
    116,256       19,933       278,625       514,128  
Income Before Provision for Income Taxes
    2,134,220       1,482,467       6,892,854       4,871,228  
                                 
Income Tax Provision / (Benefit):
                               
Current
    650,894       14,009       1,207,228       627,604  
Deferred
    (162,085 )     316,727       543,557       634,907  
Total Provision for Income Taxes
    488,809       330,736       1,750,785       1,262,511  
                                 
Net Income
  $ 1,645,411     $ 1,151,731     $ 5,142,069     $ 3,608,717  
                                 
Per Share Data
                               
Net Income, Basic and Diluted
  $ 10.30     $ 7.16     $ 32.07     $ 22.42  
                                 
Cash Dividends Declared and/or Paid
  $     $     $ 10.00     $ 10.00  
                                 
Weighted Average Shares Outstanding,
                               
Basic and Diluted
    159,695       160,920       160,321       160,946  
                                 
See Accompanying Notes
                               

 
3

 

THE RESERVE PETROLEUM COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
 
   
Nine Months Ended
 
   
September 30,
 
   
2013
   
2012
 
             
Net Cash Provided by Operating Activities
  $ 9,173,877     $ 6,698,435  
                 
Cash Flows Applied to Investing Activities:
               
Purchases of Available-for-Sale Securities
    (6,653,721 )     (6,652,196 )
Maturity of Available-for-Sale Securities
    6,652,590       6,654,838  
Proceeds from Disposal of Property, Plant and Equipment
    42,640       493,763  
Purchase of Property, Plant and Equipment
    (4,950,362 )     (5,504,763 )
Cash Distribution from Equity Investee
    16,500        
Net Cash Applied to Investing Activities
    (4,892,353 )     (5,008,358 )
                 
Cash Flows Applied to Financing Activities:
               
Dividends Paid to Stockholders
    (1,648,272 )     (1,602,073 )
Purchase of Treasury Stock
    (303,152 )     (17,080 )
Total Cash Applied to Financing Activities
    (1,951,424 )     (1,619,153 )
Net Change in Cash and Cash Equivalents
    2,330,100       70,924  
                 
Cash and Cash Equivalents, Beginning of Period
    10,842,311       10,150,742  
Cash and Cash Equivalents, End of Period
  $ 13,172,411     $ 10,221,666  
                 
See Accompanying Notes
               

 
4

 

THE RESERVE PETROLEUM COMPANY
NOTES TO FINANCIAL STATEMENTS

September 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 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 for the three months and nine months ended September 30, 2013 and 2012:

   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2013
   
2012
   
2013
   
2012
 
 
                       
Net Realized and Unrealized Gain (Loss) on Trading Securities
  $ 100,173     $ (12,102 )   $ 179,967     $ (3,278 )
Gain on Asset Sales
    766       12,682       33,238       447,255  
Interest Income
    4,171       8,479       17,255       24,595  
Equity Earnings in Investee
    11,739       11,799       32,498       49,959  
Other Income
    8,142       6,604       41,780       22,477  
Interest and Other Expenses
    (8,735 )     (7,529 )     (26,113 )     (26,880 )
                                 
Other Income, Net
  $ 116,256     $ 19,933     $ 278,625     $ 514,128  
 
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 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. 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
    80,588  
Accretion expense
    25,788  
Balance at September 30, 2013
  $ 1,268,454  
 
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 September 30, 2013 and December 31, 2012, the Company’s assets reported at fair value on a recurring basis are summarized as follows:

   
September 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
    418,613              
International Equities
    128,830              
Others
    22,945              
 
   
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 nine months ended September 30, was $80,588 in 2013 and $113,204 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 September 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 nine months 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 $9,173,877 and cash provided by the maturities of available-for-sale securities of $6,652,590. Additional cash of $59,140 was provided by property dispositions and an investment distribution for total cash provided of $15,885,607. The Company utilized cash for the purchase of available-for-sale securities of $6,653,721; property additions of $4,950,362 and financing activities of $1,951,424 for total cash applied of $13,555,507. Cash and cash equivalents increased $2,330,100 to $13,172,411.

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 $181,053 (47%) from $389,335 to $570,388. The increase was the result of a $140,089 increase in the trading securities’ market value plus $40,964 of net income from these securities.

Refundable income taxes declined $971,209 from $518,077 to a $453,132 payable. This decrease was due primarily to the current income tax provision for the nine months ended September 30, 2013 of $1,207,228, offset by estimated tax payments of $250,000 for the same period.

Receivables increased $707,705 (41%) to $2,443,874 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.

Accounts payable decreased $153,107 (29%) to $366,547 from $519,654. This decrease was due primarily to a decline in drilling activity at September 30, 2013 versus December 31, 2012.

Deferred income taxes and other liabilities increased $243,515 (117%) to $450,945 from $207,430. The increase is partly due to an increase of $105,000 in ad valorem tax accruals. 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. Current deferred income taxes accounted for the remaining $138,515 increase.

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 $9,173,877 in 2013, an increase of $2,475,442 (37%) from the comparable period in 2012. The increase was primarily due to increased oil and gas sales revenue, partly offset by increased production, exploration and current income tax expense for 2013 compared to 2012. For more information see “Operating Revenues” and “Operating Costs and Expenses” below.

Property disposal proceeds in 2013 were $42,640, a decrease of $451,123 from the comparable period in 2012. The decrease was primarily due to 2012 sales of non-producing leaseholds in Oklahoma and Kansas with no similar sales in 2013.

Cash applied to the purchase of property, plant and equipment in 2013 was $4,950,362, a decrease of $554,401 (10%) from cash applied in 2012 of $5,504,763. In both 2013 and 2012, cash applied to property, plant and equipment additions was mostly related to oil and gas exploration and development activity. The change is due to decreased drilling activity in 2013 compared to 2012. 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 Nine Months Ended September 30, 2013, Compared with Nine Months Ended September 30, 2012

Net income increased $1,533,352 (42%) to $5,142,069 in 2013 from $3,608,717 in 2012. Net income per share, basic and diluted, increased $9.65 to $32.07 in 2013 from $22.42 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 $4,052,242 (43%) to $13,460,165 in 2013 from $9,407,923 in 2012. Of the $4,052,242 increase, crude oil sales increased $2,432,978; natural gas sales increased $1,643,652; and miscellaneous oil and gas product sales decreased $24,388.

The $2,432,978 (35%) increase in oil sales to $9,465,205 in 2013 from $7,032,227 in 2012 was the result of increases in the volume sold and the average price per barrel (Bbl). The volume of oil sold increased 25,415 Bbls to 104,803 Bbls in 2013, resulting in a positive volume variance of $2,251,261. The average price per Bbl increased $1.73 to $90.31 per Bbl in 2013, resulting in a positive price variance of $181,717. The increase in oil volumes sold was mostly due to production of 36,324 Bbls from new wells in Oklahoma, Texas and Kansas, offset partially by production declines from older wells.

The $1,643,652 (77%) increase in gas sales to $3,772,088 in 2013 from $2,128,436 in 2012 was the result of increases in the volume sold and the average price per thousand cubic feet (MCF). The volume of gas sold increased 295,633 MCF to 1,079,197 MCF from 783,564 MCF in 2012, for a positive volume variance of $804,122. The average price per MCF increased $0.78 to $3.50 per MCF from $2.72 per MCF in 2012, resulting in a positive price variance of $839,531. The net increase in gas volumes sold was due to 385,000 MCF of production from several new working and royalty interest wells, offset by a decline in sales from older properties. Robertson County, Texas royalty interest properties and Arkansas working interest wells accounted for 281,000 MCF (73%) of the increase in sales volumes for the new wells.
 
 
8

 
 
Sales from the Robertson County, Texas royalty interest properties provided approximately 23% of the Company’s first nine months 2013 and 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.

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 $222,872 in 2013 compared to $247,260 in 2012.

The Company received lease bonuses of $172,246 in 2013 for leases on its owned minerals compared to $179,245 in 2012.

Coal royalties were $1,443 for the first nine months of 2013 compared to $220,130 for 2012 for coal mined during these periods on North Dakota 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 $1,569,427 to $7,019,625 in 2013 from $5,450,198 in 2012. Material line item changes are discussed and analyzed in the following paragraphs.

Production Costs. Production costs increased $398,616 (23%) in 2013 to $2,135,349 from $1,736,733 in 2012. Lease operating expense and transportation and compression expense increased $341,886 in 2013 to $1,642,207 from $1,300,321 in 2012. This increase was due to wells that first produced after September 30, 2012. Production taxes increased $56,729 to $493,141 in 2013 from $436,412 in 2012. This increase was due to higher oil and natural gas sales revenue.

Exploration Costs. Total exploration expense increased $163,249 (88%) to $348,344 in 2013 from $185,095 in 2012. The increase is due to an increase in geological and geophysical expense, offset by a decline in dry hole costs. Geological and geophysical expenses totaled $293,495 in 2013 as compared to none in 2012. Dry hole costs declined $130,246 in 2013 to $54,849 from $185,095 in 2012.

The following is a summary as of November 1, 2013, updating both exploration and development activity from December 31, 2012, for the period ended September 30, 2013.

The Company participated with its 18% working interest in the drilling of seven development wells on a Barber County, Kansas prospect. Two of these wells were completed as commercial gas producers, one as a commercial oil and gas producer and one as a marginal oil producer. Completions are in progress on the other three wells. Capitalized costs for the period were $521,079, including $184,250 in prepaid drilling costs.

The Company participated with 14%, 14% and 8% working interests in the drilling of three step-out wells on a Woods County, Oklahoma prospect. The first two wells were completed as commercial oil and gas producers and the third is awaiting completion. The Company will participate with 8%, 15% and 15% working interests in the drilling of three additional step-out wells starting in January 2014. Capitalized costs for the period were $240,843, including $39,049 in prepaid drilling costs.

The Company participated with 13.7% working interests in the drilling of three development wells and with a 17.9% interest in the drilling of a fourth on a Woods County, Oklahoma prospect. Two of these wells were completed as commercial oil and gas producers and completions are in progress on the other two. Capitalized costs for the period were $349,689, including $152,120 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 $74,772 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 $121,954.

The Company participated with its 8.3% interest in the drilling of two additional horizontal wells in a Harding County, South Dakota waterflood unit. Both wells were completed as commercial oil producers. Capitalized costs for the period were $417,126.
 
 
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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 $123,090.

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 producing oil. They appear to be marginal wells, but are still being tested. Capitalized costs for the period were $954,176, including $217,530 in prepaid drilling costs. A $300,000 impairment loss was recorded for the horizontal well in the third quarter operating results.

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 $592,251.

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 $268,653.

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 $29,400 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 has been drilled and completed, testing oil. It is under evaluation for the installation of pumping equipment and surface facilities. A second exploratory well will be drilled starting in November 2013. Seismic costs of $91,822 were expensed for the period. Capitalized costs were $117,138, including $97,628 in prepaid drilling costs.

Starting in January 2013, the Company has purchased a 14% interest in 12,404 net acres of leasehold on a Ford and Gray Counties, Kansas prospect for $167,097. A 3-D seismic survey was conducted on the prospect. The Company participated in the drilling of an exploratory well that was completed as a dry hole. A second exploratory well will be drilled in November 2013. Dry hole costs for the period were $36,691. 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 $77,000.

In July 2013, the Company purchased an 18% interest in 1440 net acres of leasehold on a Meade County, Kansas prospect for $24,624. The Company participated in the drilling of an exploratory well that was completed as a dry hole. The leasehold cost was written off to impairment expense. Dry hole costs for the period were $12,808.

The Company participated with a 7.5% working interest in the drilling of a step-out horizontal well on a Woods County, Oklahoma prospect. The well was completed as a commercial oil and gas producer. Capitalized costs for the period were $295,252.

The Company participated with a 9% working interest in the drilling of a step-out horizontal well on a Roger Mills County, Oklahoma prospect. A completion is in progress.

In September 2013, the Company paid $4,320 to renew and extend its 18% interest in 320 net acres of leasehold on a Kiowa County, Kansas prospect. The Company participated in the drilling of an exploratory well that is awaiting completion. A second exploratory well will be drilled in November 2013. Prepaid drilling costs for the period were $51,750.

Depreciation, Depletion, Amortization and Valuation Provision (DD&A). DD&A increased $1,012,917 (44%) in 2013 to $3,343,565 from $2,330,648 in 2012. The change was primarily the result of an increase of $694,702 in depreciation expense on oil and gas properties due to increased production volumes and well investment costs. In addition, impairment losses on long-lived assets increased $300,000 for some marginal horizontal wells completed in 2013.

Other Income, Net. This line item decreased $235,503 (46%) to $278,625 in 2013 from $514,128 in 2012. See Note 2 to the accompanying financial statements for an analysis of the components of this item. Explanations for variances of the more significant components follow.
 
 
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Trading securities gains in 2013 were $179,967 as compared to losses of $3,278 in 2012, an increase of $183,245. In 2013, the Company had unrealized gains of $140,089 from adjusting securities, held at September 30, to estimated fair market value and net realized trading gains of $39,878. In 2012, the Company had unrealized losses of $8,681 and net realized trading gains of $5,404.

Gain on asset sales decreased $414,017 to $33,238 in 2013 from $447,255 in 2012. The decrease was due to fewer sales of the Company’s interest in non-producing leaseholds.

Provision for Income Taxes. The provision for income taxes increased $488,274 (39%) to $1,750,785 in 2013 from $1,262,511 in 2012. This increase was due primarily to the $2,021,626 (42%) increase in pretax income to $6,892,854 in 2013 from $4,871,228 in 2012. Of the 2013 income tax provision, the estimated current tax expense was $1,207,228 and the estimated deferred tax expense was $543,557. Of the 2012 income tax provision, the estimated current and deferred expenses were $627,604 and $634,907, respectively. See Note 4 to the accompanying financial statements for a discussion of the provision for income taxes.

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

Net income increased $493,680 (43%) to $1,645,411 in 2013 from $1,151,731 in 2012. The significant changes in the statements of income are discussed below.

Operating Revenues. Revenues from oil and gas sales increased $1,618,128 (53%) to $4,679,450 in 2013 from $3,061,322 in 2012. The increase was the result of an increase in gas sales of $434,907 (59%) to $1,171,012; an increase in oil sales of $1,175,870 (52%) to $3,419,074; and an increase in miscellaneous oil and gas product sales of $7,352 to $89,364.

The increase in gas sales was the result of an increase in the average price of $0.84 per MCF to $3.51, for a positive price variance of $279,396, and an increase in the volume of gas sold of 58,244 MCF to 333,647 MCF, for a positive volume variance of $155,511. See the “Results of Operations” section above for the nine for additional discussion of gas sales variances.

The increase in oil sales was the result of an increase in the average price received of $14.32 per Bbl to $98.81, for a positive price variance of $495,641, and an increase in the volume of oil sold of 8,051 Bbls to 34,601 Bbls, for a positive volume variance of $680,229. See the “Results of Operations” section above for the nine months for additional discussion of the oil sales increase.

Other operating revenues declined $151,047 to $16,016, primarily due to a decrease in lease bonuses of $143,825 to $15,213 for 2013.

Operating Costs and Expenses. Operating costs and expenses increased $911,651 (52%) to $2,677,502 in 2013 from $1,765,851 in 2012. The increase was the net result of an increase in production costs of $130,714; a decrease in exploration costs charged to expense of $33,277; an increase in depreciation, depletion, amortization and valuation provisions (DD&A) of $829,548; and a decrease in general administrative and other expense (G&A) of $15,334. The significant changes in these line items are discussed below.

Production Costs. Production costs increased $130,714 to $725,910 in 2013 from $595,196 in 2012. Most of the increase is due to higher lease operating expenses for 2013 versus 2012, related primarily to the new wells that first produced after September 30, 2012. For more information about these changes, see the production costs discussion in the “Results of Operations” section above for the nine months.
 
Exploration Costs. Exploration costs charged to operations decreased $33,277 to $52,864 in 2013 from $86,141 in 2012 as a result of lower dry hole costs. See the exploration costs discussion in the “Results of Operations” section above for the nine months.

Depreciation, Depletion & Amortization (DD&A). DD&A increased $829,548 to $1,547,272 from $717,724 in 2012. The primary reason for the increase was an impairment loss of $500,000 charged to operations in the quarter ending September 30, 2013 with no similar loss in 2012. See DD&A discussion in the “Results of Operations” section above for the nine months for more explanation of the increase.

Other Income, Net. See Note 2 to the accompanying financial statements for an analysis of the components of other income, net. In 2013, this line item increased $96,323 to income of $116,256 from $19,933 in 2012. Explanations for variances of the more significant components follow.

Trading securities gains in 2013 were $100,173 compared to losses of $12,102 in 2012. The gains and losses were primarily unrealized.
 
 
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Provision for Income Taxes. The provision for income taxes increased $158,073 to $488,809 in 2013 from $330,736 in 2012 due to the $651,753 increase in pretax income in 2013 from 2012. See discussions above in the “Results of Operations” section and Note 4 to the accompanying financial statements for additional explanation 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 the “Results of Operations” section above for the nine months ended September 30, 2013.

Off-Balance Sheet Arrangements

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.
 
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 SECs 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 issuers 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 September 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 September 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 September 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
July 1 to July 31, 2013
188
 
$   230.00
August 1 to August 31, 2013
323
 
$   230.00
September 1 to September 30, 2013
81
 
$   230.00
Total
 592
 
$   230.00
 
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
     
31.1*
 
     
31.2*
 
     
32*
 
     
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:   November 14, 2013      /s/ Cameron R. McLain  
       
Cameron R. McLain,
 
       
Principal Executive Officer
 
           
Date:   November 14, 2013      /s/ James L. Tyler  
       
James L. Tyler
 
       
Principal Financial Officer
 
 
 
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