UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

(Mark One)

 

☒

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

 

For the Quarterly Period Ended June 30, 2014

 

☐

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

 

Commission File Number 0-8157

 

THE RESERVE PETROLEUM COMPANY

 (Exact Name of Registrant as Specified in Its Charter)

 

DELAWARE	73-0237060
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)
6801 Broadway ext., Suite 300  Oklahoma City, Oklahoma 73116-9037  (405) 848-7551
(Address and telephone number, including area code, of registrant’s principal executive offices)

 

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

 

Indicate by check mark whether the registrant has submitted electronically 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 ☐

 

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

☐

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☒

 

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

 

As of August 8, 2014, 158,826 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,
		2014				2013
		(Unaudited)				(Derived from
						audited financial
						statements)
Current Assets:
Cash and Cash Equivalents		$	12,640,482			$	10,764,506
Available-for-Sale Securities			6,654,786				6,653,823
Trading Securities			581,540				586,708
Refundable Income Taxes			183,436				336,620
Receivables			2,342,569				2,449,048
Prepaid Seismic			—				6,232
			22,402,813				20,796,937
Investments:
Equity Investment			383,073				613,558
Other			151,839				151,839
			534,912				765,397
Property, Plant and Equipment:
Oil and Gas Properties, at Cost,
Based on the Successful Efforts Method of Accounting –
Unproved Properties			1,696,270				1,601,180
Proved Properties			49,328,166				47,968,895
			51,024,436				49,570,075
Less – Accumulated Depreciation, Depletion, Amortization and
Valuation Allowance			33,041,240				31,170,203
			17,983,196				18,399,872
Other Property and Equipment, at Cost			434,549				427,056
Less – Accumulated Depreciation			323,913				305,302
			110,636				121,754
Total Property, Plant and Equipment			18,093,832				18,521,626
Other Assets			377,255				376,982
Total Assets		$	41,408,812			$	40,460,942

 

See Accompanying Notes

 

 

THE RESERVE PETROLEUM COMPANY

BALANCE SHEETS

LIABILITIES AND STOCKHOLDERS’ EQUITY

        

		June 30,				December 31,
		2014				2013
		(Unaudited)				(Derived from
						audited financial
						statements)
Current Liabilities:
Accounts Payable		$	481,539			$	367,622
Other Current Liabilities – Deferred Income Taxes and Other			406,644				337,624
			888,183				705,246
Long-Term Liabilities:
Asset Retirement Obligation			1,559,186				1,510,864
Dividends Payable			1,528,033				1,369,966
Deferred Tax Liability, Net			3,338,462				3,548,035
			6,425,681				6,428,865
Total Liabilities			7,313,864				7,134,111
Stockholders’ Equity:
Common Stock			92,368				92,368
Additional Paid-in Capital			65,000				65,000
Retained Earnings			35,229,550				34,363,292
			35,386,918				34,520,660
Less – Treasury Stock, at Cost			1,291,970				1,193,829
Total Stockholders’ Equity			34,094,948				33,326,831
Total Liabilities and Stockholders’ Equity		$	41,408,812			$	40,460,942

 

See Accompanying Notes

 

 

THE RESERVE PETROLEUM COMPANY

STATEMENTS OF INCOME

(Unaudited)

 

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2014				2013				2014				2013
Operating Revenues:
Oil and Gas Sales		$	5,103,967			$	4,956,399			$	10,379,177			$	8,780,715
Lease Bonuses and Other			414,592				135,604				615,534				157,673
			5,518,559				5,092,003				10,994,711				8,938,388
Operating Costs and Expenses:
Production			817,889				681,933				1,662,489				1,409,438
Exploration			559,906				53,677				1,217,377				295,480
Depreciation, Depletion, Amortization and Valuation Provisions			1,102,494				923,338				1,970,126				1,796,293
General, Administrative and Other			433,423				408,941				871,664				840,912
			2,913,712				2,067,889				5,721,656				4,342,123
Income from Operations			2,604,847				3,024,114				5,273,055				4,596,265
Other Income, Net			211,357				108,004				195,799				162,369
Income Before Provision for Income Taxes			2,816,204				3,132,118				5,468,854				4,758,634
Income Tax Provision / (Benefit):
Current			720,433				328,624				1,623,195				556,334
Deferred			24,262				549,847				(200,553	)			705,642
Total Provision for Income Taxes			744,695				878,471				1,422,642				1,261,976
Net Income		$	2,071,509			$	2,253,647			$	4,046,212			$	3,496,658
Per Share Data
Net Income, Basic and Diluted		$	13.03			$	14.04			$	25.43			$	21.77
Cash Dividends Declared and / or Paid		$	20.00			$	10.00			$	20.00			$	10.00
Weighted Average Shares Outstanding,
Basic and Diluted			159,006				160,532				159,116				160,639

 

See Accompanying Notes

 

 

THE RESERVE PETROLEUM COMPANY

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

 

		Six Months Ended
		June 30,
		2014				2013
Net Cash Provided by Operating Activities		$	7,216,668			$	5,457,450
Cash Flows Applied to Investing Activities:
Purchases of Available-for-Sale Securities			(6,654,786	)			(6,653,721	)
Maturity of Available-for-Sale Securities			6,653,823				6,652,589
Proceeds from Disposal of Property, Plant and Equipment			21,188				43,007
Purchase of Property, Plant and Equipment			(2,528,483	)			(3,550,216	)
Cash Distribution from Equity Investee			287,595				16,500
Net Cash Applied to Investing Activities			(2,220,663	)			(3,491,841	)
Cash Flows Applied to Financing Activities:
Dividends Paid to Stockholders			(3,021,888	)			(1,530,833	)
Purchase of Treasury Stock			(98,141	)			(167,080	)
Total Cash Applied to Financing Activities			(3,120,029	)			(1,697,913	)
Net Change in Cash and Cash Equivalents			1,875,976				267,696
Cash and Cash Equivalents, Beginning of Period			10,764,506				10,842,311
Cash and Cash Equivalents, End of Period		$	12,640,482			$	11,110,007

 

See Accompanying Notes

 

 

THE RESERVE PETROLEUM COMPANY 

NOTES TO FINANCIAL STATEMENTS

 

June 30, 2014 

(Unaudited)

 

Note 1 – BASIS OF PRESENTATION

 

The accompanying balance sheet as of December 31, 2013, 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, 2013.

 

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/(Loss), Net:

 

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2014				2013				2014				2013
Net Realized and Unrealized Gain/(Loss) on Trading Securities		$	39,942			$	44,720			$	(5,983	)		$	79,794
Gain on Asset Sales			14,745				28,789				15,868				32,472
Interest Income			4,477				7,240				9,809				13,084
Equity Earnings in Investee			29,865				5,492				57,110				20,759
Other Income			133,586				30,419				141,516				33,638
Interest and Other Expenses			(11,258	)			(8,656	)			(22,521	)			(17,378	)
Other Income, Net		$	211,357			$	108,004			$	195,799			$	162,369

  

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 2014 and 2013, 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.

 

 

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, 2013		$	1,510,864
Liabilities incurred for new wells			32,272
Liabilities settled (wells sold or plugged)			(6,251	)
Accretion expense			22,301
Balance at June 30, 2014		$	1,559,186

  

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, 2014 and December 31, 2013, the Company’s assets reported at fair value on a recurring basis are summarized as follows:

  

		June 30, 2014
		Level 1 Inputs				Level 2 Inputs				Level 3 Inputs
Financial Assets:
Available-for-Sale Securities –
U.S. Treasury Bills Maturing in 2014		$	—			$	6,654,786			$	—
Trading Securities:
Domestic Equities			424,479				—				—
International Equities			145,621				—				—
Others			11,440				—				—

 

		December 31, 2013
		Level 1 Inputs				Level 2 Inputs				Level 3 Inputs
Financial Assets:
Available-for-Sale Securities –
U.S. Treasury Bills Maturing in 2014		$	—			$	6,653,823			$	—
Trading Securities:
Domestic Equities			389,766				—				—
International Equities			179,509				—				—
Others			17,433				—				—

  

 

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 $32,272 in 2014 and $61,726 in 2013 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, 2014 and December 31, 2013, 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 – SUBSEQUENT EVENTS

 

On July 30, 2014 the Company received $659,255 as a bonus for a lease of 366 net acres of owned minerals in Lee County, Texas. This amount will be reflected as lease bonus revenue in the 2014 third quarter results included in the Company’s Form 10-Q Quarterly Report for the period ending September 30, 2014.

 

 

Note 8 – NEW ACCOUNTING PRONOUNCEMENTS

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”). ASU 2014-09 clarifies the principles for recognizing revenue and develops a common revenue standard under U.S. GAAP under which an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 is effective for the Company for interim and annual periods beginning on or after December 15, 2016. Management is currently assessing the impact ASU 2014-09 will have on the Company, but it is not expected to have a material effect on the Company’s financial position, results of operations or cash flows.

 

No other accounting pronouncements were issued and none became effective since December 31, 2013 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, 2013 as filed with the Securities and Exchange Commission (hereinafter, the “2013 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 2013 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 2014, the Company continued to fund its business activity through the use of internal sources of cash.

 

 

The Company had cash provided by operations of $7,216,668 and cash provided by the maturities of available-for-sale securities of $6,653,823. Additional cash of $308,783 was provided by property dispositions and investment distributions for total cash provided of $14,179,274. The Company utilized cash for the purchase of available-for-sale securities of $6,654,786, property additions of $2,528,483 and financing activities of $3,120,029 for total cash applied of $12,303,298. Cash and cash equivalents increased $1,875,976 (17%) to $12,640,482.

 

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, 2013. A discussion of these items follows.

 

Refundable income taxes decreased $153,184 (46%) to $183,436 from $336,620 due to the first half 2014 current income tax provision of $1,623,195, offset by estimated tax payments of $1,470,011 for the same period.

 

Accounts payable increased $113,917 (31%) to $481,539 from $367,622. The increase was due entirely to the increased drilling activity at June 30, 2014 compared to December 31, 2013.

 

Deferred income taxes and other liabilities increased $69,020 (20%) to $406,644 from $337,624 due to an increase of $60,000 in ad valorem tax accruals and an increase of $9,020 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.

 

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 $7,216,668 in 2014, an increase of $1,759,218 (32%) from the comparable period in 2013. The increase was primarily due to increased operating revenue, partially offset by increased exploration costs. For more information see “Operating Revenues” and “Exploration Costs” below.

 

Cash applied to the purchase of property additions in 2014 was $2,528,483, a decrease of $1,021,733 (29%) from cash applied in 2013 of $3,550,216. In both 2014 and 2013, 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 2013 Form 10-K would not be representative of the Company’s current position.

 

Material Changes in Results of Operations Six Months Ended June 30, 2014, Compared with Six Months Ended June 30, 2013

 

Net income increased $549,554 (16%) to $4,046,212 in 2014 from $3,496,658 in 2013. Net income per share, basic and diluted, increased $3.66 (17%) to $25.43 in 2014 from $21.77 in 2013.

 

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 $1,598,462 (18%) to $10,379,177 in 2014 from $8,780,715 in 2013. The $1,598,462 increase is due to higher natural gas sales of $777,922; higher crude oil sales of $562,635; and an increase in miscellaneous oil and gas product sales of $257,905.

 

The $562,635 (9%) increase in oil sales to $6,608,766 in 2014 from $6,046,131 in 2013 was the result of an increase in both the volume sold and the average price per barrel (Bbl). The volume of oil sold increased 353 Bbls to 70,555 Bbls in 2014, resulting in a positive volume variance of $30,404. This volume increase was the net result of an increase of 24,103 Bbls for production that began after June 30, 2013, offset by a decline of 23,750 Bbls from older properties. The average price per Bbl increased $7.54 to $93.67 per Bbl in 2014, resulting in a positive price variance of $532,231.

 

The $777,922 (30%) increase in gas sales to $3,378,998 in 2014 from $2,601,076 in 2013 was the net result of an increase in the average price per thousand cubic feet (MCF), offset by a decline in the volume sold. The volume of gas sold decreased 25,718 MCF to 719,832 MCF from 745,550 MCF in 2013, for a negative volume variance of $89,756. The decrease in gas volumes sold was the net result of approximately 206,000 MCF of production declines from older wells, especially in Arkansas, partially offset by production of approximately 180,000 MCF from wells that first produced after June 30, 2013. The average price per MCF increased $1.20 to $4.69 per MCF from $3.49 per MCF in 2013, resulting in a positive price variance of $867,678.

 

 

Sales from the Robertson County, Texas royalty interest properties provided approximately 22% of the Company’s first half 2014 gas sales volumes and about 27% of the first half 2013 gas sales volumes. See discussion on page 11 of the 2013 Form 10-K under the subheading “Operating Revenues” for more information about these properties. Sales from Arkansas working interest properties provided approximately 19% of the Company’s first half 2014 gas sales volumes and about 33% of the first half 2013 gas sales volumes.

 

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 $391,413 in 2014 as compared to $133,508 in 2013.

 

The Company received lease bonuses of $614,894 in the first half of 2014 for leases on its owned minerals. Lease bonuses for the first half of 2013 were $157,033. In 2014, 89% of the bonuses were for leases on owned minerals in Texas and the remainder were for owned minerals in Oklahoma. In 2013, 85% of the bonuses were for Oklahoma leases and 15% were for Texas leases.

 

Operating Costs and Expenses. Operating costs and expenses increased $1,379,533 (32%) to $5,721,656 in 2014 from $4,342,123 in 2013. Material line item changes are discussed and analyzed in the following paragraphs.

 

Production Costs. Production costs increased $253,051 (18%) to $1,662,489 in 2014 from $1,409,438 in 2013. Lease operating expense and transportation and compression expense increased $166,619 (15%) to $1,242,344 in 2014 from $1,075,725 in 2013 due primarily to new wells that first produced after June 30, 2013. Production taxes increased $86,432 (26%) to $420,145 in 2014 from $333,713 in 2013 due primarily to the increased oil and gas sales revenues described above in the “Operating Revenues” section.

 

Exploration Costs. Total exploration expense increased $921,897 (312%) to $1,217,377 in 2014 from $295,480 in 2013. Dry hole costs increased $553,623 to $556,560 in 2014 from $2,937 in 2013. Geological and geophysical expense increased $368,273 to $660,816 in 2014 from $292,543 in 2013.

 

The following is a summary as of July 29, 2014, updating both exploration and development activity from December 31, 2013, for the period ended June 30, 2014.

 

The Company participated with its 18% working interest in the drilling of three development wells on a Barber County, Kansas prospect. Two of the wells were completed as commercial gas producers and the third as a commercial oil producer. Three additional development wells will be drilled on the prospect in 2014. Capitalized costs for the period were $292,262, including $79,042 in prepaid drilling costs.

 

The Company participated with 16% and 8% working interests in the drilling of two development wells on a Woods County, Oklahoma prospect. Both wells were completed as commercial oil and gas producers. Capitalized costs for the period were $175,200, including $5,613 in prepaid drilling costs.

 

The Company participated with its 18% working interest in the drilling of a development well on a Woods County, Oklahoma prospect. The well was completed as a commercial gas producer. Capitalized costs for the period were $131,400, including $54,938 in prepaid drilling costs.

 

The Company participated with an 11.8% 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 $85,775, including $46,579 in prepaid drilling costs.

 

The Company participated with its 10.5% working interest in the drilling of an exploratory well on a Cimarron County, Oklahoma prospect. The well was completed as a dry hole. Costs expensed to dry hole costs were $60,502.

 

The Company participated with a 7.5% working interest in the drilling of three horizontal development wells on a Woods County, Oklahoma prospect. Completions are in progress on all three wells. Capitalized costs for the period were $262,589.

 

The Company participated with a 9% working interest in the drilling of two horizontal development wells on a Roger Mills County, Oklahoma prospect. Completions are in progress on both wells. Capitalized costs for the period were $151,454.

 

The Company will participate with its 10.5% working interest in the drilling of an exploratory well on a Logan County, Oklahoma prospect starting in the third quarter of 2014.

 

 

The Company participated with a 6.6% working interest in the drilling of an exploratory well on a Garvin County, Oklahoma prospect. The deep objectives were non-productive and the lower portion of the hole was plugged. The Company is participating with a 12.8% working interest in a completion attempt of a shallow zone. Capitalized costs for the period were $83,793, including $9,182 in prepaid drilling costs. Costs of $482,882 were expensed to dry hole costs.

 

The Company is participating with its 10.5% interest in the purchase of a producing oil well and two salt water disposal wells on a Seminole County, Oklahoma prospect. One of the disposal wells will be recompleted as an oil producer. Previous plans to drill a producing well have been delayed indefinitely, and the previously planned disposal well will not be drilled since it is no longer needed. Prepaid costs for the period were $233,897.

 

The Company participated with 10.7% and 10.3% working interests in the drilling of two development wells and with a 10.3% working interest in an unsuccessful re-entry and washdown attempt on a Woods County, Oklahoma prospect. One of the wells was completed as a commercial oil and gas producer and a completion is in progress on the other. The Company will participate with 7% and 10.3% interests in two additional development wells starting in November 2014. Capitalized costs for the period were $154,552, including $81,325 in prepaid drilling costs. Costs expensed to dry hole costs for the re-entry were $13,862.

 

In February 2014, the Company purchased a 10% interest in 250 net acres of leasehold on a McClain County, Oklahoma prospect for $11,875. The Company participated in the drilling of an exploratory well. A completion is in progress. Capitalized costs for the period were $49,354.

 

In March 2014, the Company purchased a 14% interest in 1,705 net acres of leasehold and 70 square miles of 3-D seismic data on a Creek County, Oklahoma prospect for $684,376. Seismic interpretation and additional leasehold acquisition are in progress. Eight potential structures have been identified and exploratory drilling will start in the second half of 2014. Additional leasehold costs for the period were $24,946.

 

In July 2014, the Company agreed to purchase a 14% interest in 160 net acres of leasehold on a Creek County, Oklahoma prospect for $24,500. An exploratory well will be drilled starting in September 2014.

 

Depreciation, Depletion, Amortization and Valuation Provision (DD&A). DD&A increased $173,833 (10%) to $1,970,126 in 2014 from $1,796,293 in 2013. The increase was due to an increase of approximately $100,000 in current year depreciation expense on oil and gas properties and lease impairments of approximately $74,000.

 

Other Income, Net. This line item increased $33,430 (21%) to $195,799 in 2014 from $162,369 in 2013. 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.

 

Losses on trading securities in 2014 were $(5,983) as compared to gains of $79,794 in 2013, a decrease of $85,777. In 2014, the Company had realized gains of $18,779 and unrealized losses of $(24,762) from adjusting the securities to estimated fair market value. In 2013, the Company had realized losses of $(4,032) and unrealized gains of $83,826.

 

Other income increased $107,878 to $141,516 in 2014 from $33,638 in 2013. Most of the increase was due to $130,701 of class action lawsuit settlements in 2014 with no similar amounts in 2013. This increase was offset by a $23,000 decrease in other investment income to $10,000 in 2014 from $33,000 in 2013.

 

Provision for Income Taxes. The provision for income taxes increased $160,666 (13%) to $1,422,642 in 2014 from $1,261,976 in 2013. The increase was due to the higher income before income taxes of $710,220 (15%) to $5,468,854 in 2014 from $4,758,634 in 2013. Of the 2014 income tax provision, the estimated current tax expense was $1,623,195 and the estimated deferred tax benefit was $(200,553). Of the 2013 income tax provision, the current and deferred tax expenses were $556,334 and $705,642, respectively. See Note 4 to the accompanying financial statements for additional information on income taxes.

 

Material Changes in Results of Operations Three Months Ended June 30, 2014, Compared with Three Months Ended June 30, 2013.

 

Net income decreased $182,138 (8%) to $2,071,509 in 2014 from $2,253,647 in 2013. The material changes in the results of operations, which caused the decrease in net income, are discussed below.

 

Operating Revenues. Revenues from oil and gas sales increased $147,568 (3%) to $5,103,967 in 2014 from $4,956,399 in 2013. The increase was the net result of a decrease in oil sales of $188,890 (5%) to $3,351,947; an increase in gas sales of $269,178 (20%) to $1,625,050; and an increase in sales of miscellaneous products of $67,280 to $126,970.

 

 

The $188,890 decrease in oil sales was the result of a decrease in the volume of oil sold of 5,460 Bbls to 35,021 Bbls, for a negative volume variance of $477,586, and an increase in the average price received of $8.24 per Bbl to $95.71, for a positive price variance of $288,696.

 

The $269,178 increase in gas sales was the result of an increase in the volume of gas sold of 11,532 MCF, for a positive volume variance of $45,897, and an increase in the average price of $0.63 per MCF to $4.61, for a positive price variance of $223,281.

 

Other operating revenues increased $278,988 (206%) to $414,592 in 2014 from $135,604 in 2013. This increase was due to an increase in lease bonuses for minerals in various Oklahoma and Texas Counties of $278,988 to $413,952 in 2014 from $134,964 in 2013. Coal royalties of $640 were received in 2014 and 2013.

 

Production Expense. Production expense increased $135,956 (20%) to $817,889 in 2014 from $681,933 in 2013. Lease operating expense and transportation and compression expense increased $99,225 to $609,877 in 2014 from $510,652 in 2013. Production taxes increased $36,731 to $208,012 in 2014 from $171,281 in 2013.

 

Other Income, Net. This line item increased $103,353 (96%) to $211,357 in 2014 from $108,004 in 2013. 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.

  

Other income increased $103,167 to $133,586 in 2014 from $30,419 in 2013. Most of the increase was due to $123,186 of class action lawsuit settlements in 2014 with no similar amounts in 2013. This increase was offset by a $20,000 decrease in other investment income to $10,000 in 2014 from $30,000 in 2013.

 

Provision for Income Taxes. Provision for income taxes decreased $133,776 (15%) to $744,695 in 2014 from $878,471 in 2013. 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, 2014.

 

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.

 

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, 2014.

 

 

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 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, 2014 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 

PART II – OTHER INFORMATION

 

ITEM 1.

LEGAL PROCEEDINGS

 

During the quarter ended June 30, 2014, 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, 2014	27	$ 227	—	—
May 1 to May 31, 2014	18	$ 230	—	—
June 1 to June 30, 2014	86	$ 330	—	—
Total	131	$ 295	—	—

 

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.

 

 

ITEM 6.

EXHIBITS

 

The following documents are exhibits to this Form 10-Q. Each document marked by an asterisk is filed electronically herewith.

  

Exhibit Number		Description
31.1*		Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as amended.
31.2*		Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as amended.
32*		Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350.
101.INS*		XBRL Instance Document
101.SCH*		XBRL Taxonomy Extension Schema Document
101.CAL*		XBRL Taxonomy Calculation Linkbase Document
101.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 13, 2014	/s/ Cameron R. McLain
	Cameron R. McLain,
	Principal Executive Officer
Date: August 13, 2014	/s/ James L. Tyler
	James L. Tyler
	Principal Financial Officer

14

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