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 March 31, 2018

☐     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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

 

Large accelerated filer ☐	Non-accelerated filer ☐ (Do not check if a smaller reporting company)	Accelerated filer ☐
Smaller reporting company ☑          Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

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 May 4, 2018, 157,550 shares of the registrant’s $.50 par value common stock were outstanding.

 

 

TABLE OF CONTENTS
		Page
PART I – FINANCIAL INFORMATION
Item 1.	Financial Statements	2
	Index to Financial Statements
	Balance Sheets – March 31, 2018 and December 31, 2017	2
	Statements of Income – Three Months Ended March 31, 2018 and 2017	4
	Condensed Statements of Cash Flows – Three Months Ended March 31, 2018 and 2017	5
	Notes to Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	9
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	12
Item 4.	Controls and Procedures	12
PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	13
Item 1A.	Risk Factors	13
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	13
Item 3.	Defaults Upon Senior Securities	13
Item 4.	Mine Safety Disclosures	13
Item 5.	Other Information	13
Item 6.	Exhibits	14

 

 

PART I – FINANCIAL INFORMATION

 

 

ITEM 1.

FINANCIAL STATEMENTS

 

 

THE RESERVE PETROLEUM COMPANY

BALANCE SHEETS

ASSETS

 

 

 

 

See Accompanying Notes

 

 

THE RESERVE PETROLEUM COMPANY

BALANCE SHEETS

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

See Accompanying Notes

 

 

THE RESERVE PETROLEUM COMPANY

STATEMENTS OF INCOME

(Unaudited)

 

 

 

 

See Accompanying Notes

 

 

THE RESERVE PETROLEUM COMPANY

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

See Accompanying Notes

 

 

THE RESERVE PETROLEUM COMPANY

NOTES TO FINANCIAL STATEMENTS

 

March 31, 2018

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

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 2017 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 2017 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 quarter of 2018, the Company continued to fund its business activity through the use of internal sources of cash. The Company had net cash provided by operations of $845,649. The Company utilized cash for property additions of $818,594, equity investments of $48,731 and financing activities of $63,176 for total cash applied of $930,501. Cash and cash equivalents decreased $84,852 to $4,682,958.

 

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, 2017. A discussion of these items follows.

 

Trading securities increased $29,512 (5%) from $559,936 to $589,448. The increase was the result of a $7,278 decrease in the trading securities’ market value plus $36,790 of net gain from these securities.

 

Refundable income taxes increased $65,907 (20%) to $392,737 from $326,830. This increase was due to the $65,904 current tax benefit as of March 31, 2018.

 

Accounts payable increased $154,200 (66%) to $389,207 from $235,007 due to an increase in the drilling and exploration activity in the quarter ended March 31, 2018 compared to the quarter ended December 31, 2017.

 

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 $845,649 in 2018, a decrease of $272,025 (24%) from the comparable period in 2017. The decrease was primarily due to $440,000 of investment income in 2017, offset by lease bonus income in 2018. For more information see “Operating Revenues” and “Other Income, Net” below.

 

Cash applied to the purchase of property additions in 2018 was $818,594, an increase of $374,852 (84%) from cash applied in 2017 of $443,742. For both 2018 and 2017, 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 2017 Form 10-K would not be representative of the Company’s current position.

 

Material Changes in Results of Operations Three Months Ended March 31, 2018, Compared with Three Months Ended March 31, 2017

 

Net income decreased $256,900 (49%) to $270,594 in 2018 from $527,494 in 2017. Net income per share, basic and diluted, decreased $1.62 to $1.72 in 2018 from $3.34 in 2017.

 

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 decreased $2,195 to $1,579,281 in 2018 from $1,581,476 in 2017. Of the $2,195 decrease, crude oil sales increased $72,086; natural gas sales decreased $82,271; and miscellaneous oil and gas product sales increased $7,990.

 

The $72,086 (8%) increase in oil sales to $980,786 in 2018 from $908,700 in 2017 was the net result of an increase in the average price per barrel (Bbl) offset by a decrease in the volume sold. The volume of oil sold decreased 2,732 Bbls to 16,667 Bbls in 2018, resulting in a negative volume variance of $128,014. The average price per Bbl increased $12.01 to $58.85 per Bbl in 2018, resulting in a positive price variance of $200,100. The decrease in oil volumes sold was mostly due to production declines from older wells partially offset by production of 1,114 Bbls from new wells.

 

The $82,271 (13%) decrease in gas sales to $541,273 in 2018 from $623,544 in 2017 was the net result of a decrease in the average price per thousand cubic feet (MCF) offset by an increase in the volume sold. The volume of gas sold increased 2,124 MCF to 198,678 MCF in 2018 from 196,554 MCF in 2017, for a positive volume variance of $6,733. The increase in gas volumes sold was mostly due to production of 6,085 MCF from new wells offset by production declines from older wells. The average price per MCF decreased $0.45 to $2.72 per MCF in 2018 from $3.17 per MCF in 2017, resulting in a negative price variance of $89,004.

 

Sales from the Robertson County, Texas royalty interest properties provided approximately 29% of the Company’s first quarter gas sales volumes for 2018 and 22% of the first quarter gas sales volumes for 2017. See discussion on page 11 of the 2017 Form 10-K under the subheading “Operating Revenues” for more information about these properties. Sales from Arkansas working interest properties provided approximately 10% of the Company’s first quarter 2018 gas sales volumes and about 12% of the first quarter 2017 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 $57,222 in 2018 compared to $49,232 in 2017.

 

 

The Company received lease bonuses of $145,862 in the first quarter of 2018 for leases on its owned minerals with none in the first quarter of 2017.

 

Operating Costs and Expenses. Operating costs and expenses decreased $47,955 (3%) to $1,461,278 in 2018 from $1,509,233 in 2017.

 

Production Costs. Production costs increased $80,068 (15%) in 2018 to $606,767 from $526,699 in 2017. This increase was primarily the result of an increase of $89,203 in lease operating expenses offset by a decrease of $15,982 in handling expenses.

 

Exploration Costs. Total exploration expense decreased $71,861 (48%) to $77,645 in 2018 from $149,506 in 2017. The decrease was mostly due to a decrease of $132,904 in dry hole costs and an increase in geological and geophysical expense of $89,297.

 

The following is a summary as of May 2, 2018, updating both exploration and development activity from December 31, 2017, for the period ended March 31, 2018.

 

The Company participated with its 8.4% working interest in the drilling of an exploratory well on a Thomas County, Kansas prospect. The well was completed as a dry hole. No additional drilling is planned on the prospect. Dry hole costs for the period were $2,056 and an impairment expense of $19,258 was taken against the leasehold.

 

The Company participated with its 10.5% working interest in the drilling of an exploratory well on a Thomas County, Kansas prospect. The well was completed as a dry hole. No additional drilling is planned on the prospect. Dry hole costs for the period were $2,904 and an impairment expense of $684 was taken against the leasehold.

 

The Company participated with its 18% working interest in the drilling of two step-out wells (one a re-entry) on a Kiowa County, Kansas prospect. Both wells have been completed and are being tested. Actual costs of $77,883 for the period were offset by prepaid costs from 2017 for a net capitalized amount of $0.

 

The Company participated with its 14% working interest in the drilling of two injection wells on a Hansford County, Texas waterflood unit. One well has been completed and is injecting water and the other missed the reservoir and was plugged. There are three other injection wells and two producing wells in the unit. Actual costs of $168,472 for the period were offset by $103,936 of prepaid costs from 2017 for a net capitalized amount of $64,536.

 

The Company is participating with its 14% interest in the reworking of previously acquired 3-D seismic and in the acquisition of additional leasehold on a Creek County, Oklahoma prospect. Capitalized costs for the period were $3,901 and seismic costs were $1,632.

 

The Company owns a 35% interest in 16,472.55 net acres of leasehold on a Crockett and Val Verde Counties, Texas prospect. The Company is participating in the development of the prospect and is currently engaged in efforts to sell a portion of its interest.

 

The Company owns a 12.25% interest in 4,882.5 net acres of leasehold on a Crockett County, Texas prospect. An exploratory well was drilled on the prospect in 2017. The well has been completed and is being tested. Capitalized costs for the period were $1,974.

 

The Company is participating with a 13% interest in a 3-D seismic prospect covering approximately 35,000 acres in San Patricio County, Texas. A 3-D seismic survey of the prospect area has been completed and processing and analysis are in progress. Exploratory drilling will start sometime in 2018. Capitalized costs for the period were $7,794 and seismic costs were $107,752.

 

The Company participated with its 10.5% working interest in the completion of an exploratory well that was drilled in 2017 on a Lea County, New Mexico prospect. The well is being tested, but it appears to be a marginal oil producer. Capitalized costs for the period were $52,376.

 

The Company participated with its 7% working interest in the drilling of an exploratory well on a Summit County, Utah prospect. A completion is in progress. Capitalized costs for the period were $553,621.

 

The Company is participating with its 11.2% working interest in workovers on a group of wells that were purchased in 2017 on a Tyler County, Texas prospect. The workovers performed so far have been successful in significantly increasing production and others are planned. Capitalized costs for the period were $19,694.

 

 

Depreciation, Depletion, Amortization and Valuation Provision (DD&A). DD&A decreased $121,266 (27%) to $326,332 in 2018 from $447,598 in 2017. The decrease was due primarily to revisions in reserve estimates for 2018 versus 2017.

 

Other Income, Net. This line item decreased $434,931 (83%) to $90,399 in 2018 from $525,330 in 2017. See Note 2 to the accompanying financial statements for the various components of this line item.

 

Trading securities gains in 2018 were $28,724 compared to $42,872 in 2017, a decrease of $14,148. In 2018, the Company had realized gains of $36,002 and unrealized losses of $(7,278) from adjusting the securities to estimated fair market value. In 2017, the Company had realized losses of $(85,538) and unrealized gains of $128,410.

 

Other Income decreased $428,915 to $17,284 in 2018 from $446,199 in 2017 primarily due to income from an investment of $440,000 in 2017 with no similar amount in 2018.

 

Income Tax Provision. Income tax provision increased $13,591 (19%) to $83,670 in 2018 from $70,079 in 2017. Of the 2018 income tax net provision, the estimated deferred tax provision of $149,574 was offset by an estimated current tax benefit of $(65,904). Of the 2017 income tax provision, the current tax provision and deferred tax benefit were $72,427 and $(2,348), respectively. See Note 4 to the accompanying financial statements for additional information on income taxes.

 

Off-Balance Sheet Arrangement

 

The Company’s off-balance sheet arrangements relate to Broadway Sixty-Eight, Ltd., an Oklahoma limited partnership, and Grand Woods Development, LLC, an Oklahoma limited liability company. The Company does not have actual or effective control of these entities. Management of these entities could at any time make decisions in their own best interest, which could materially affect the Company’s net income or the value of the Company’s investment. For more information about these entities and the related off-balance sheet arrangements, see Note 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 March 31, 2018.

 

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 March 31, 2018 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 March 31, 2018, 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
January 1 to January 31, 2018			20			$	150				---				---
February 1 to February 28, 2018			44			$	150				---				---
March 1 to March 31, 2018			22			$	150				---				---
Total			86			$	150				---				---

 

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 shareholders 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
14*		Code of Ethics for Senior Officers amended January 1, 2018.
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.DEF*		XBRL Taxonomy Definition 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:     May 15, 2018	/s/ Cameron R. McLain,
	Cameron R. McLain,
	Principal Executive Officer
Date:     May 15, 2018	/s/ Lawrence R. Francis
	Lawrence R. Francis
	Principal Financial Officer

 

 

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