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Reserve Petroleum Co (RSRV) SEC Filing 10-Q Quarterly Report for the period ending Wednesday, March 31, 2021

Reserve Petroleum Co

CIK: 83350 Ticker: RSRV
Document And Entity Information - shares
3 Months Ended
Mar. 31, 2021
May 07, 2021
Document Information [Line Items]  
Entity Registrant NameRESERVE PETROLEUM CO 
Entity Central Index Key0000083350 
Current Fiscal Year End Date--12-31 
Entity Filer CategoryNon-accelerated Filer 
Entity Current Reporting StatusYes 
Entity Emerging Growth Companyfalse 
Entity Small Businesstrue 
Entity Interactive Data CurrentYes 
Entity Common Stock, Shares Outstanding (in shares) 156,583
Entity Shell Companyfalse 
Document Type10-Q 
Document Period End DateMar. 31, 2021 
Document Fiscal Year Focus2021 
Document Fiscal Period FocusQ1 
Amendment Flagfalse 
Title of 12(g) SecurityCOMMON STOCK ($0.50 PAR VALUE) 
 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 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, 2021

 

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

 

Commission File Number 000-08157

 

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)

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

None

None

None

 

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 every Interactive Data File required to be submitted 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 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 ☐

Accelerated filer ☐

Non-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 7, 2021, 156,583 shares of the registrant’s $0.50 par value common stock were outstanding.

 

 

 

 

TABLE OF CONTENTS

 

 

PART I FINANCIAL INFORMATION
    Page
     
Item 1.  Consolidated Financial Statements 2
     
  Index to Consolidated Financial Statements  
  Consolidated Balance Sheets – March 31, 2021 and December 31, 2020 2
  Consolidated Statements of Operations – Three Months Ended March 31, 2021 and 2020 4
  Consolidated Statements of Stockholders’ Equity – Three Months Ended March 31, 2021 and 2020 5
  Condensed Consolidated Statements of Cash Flows – Three Months Ended March 31, 2021 and 2020 6
  Notes to Consolidated Financial Statements 7
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 11
     
Item 3. Quantitative and Qualitative Disclosures about Market Risk 14
     
Item 4. Controls and Procedures 14
     
     
     
PART II OTHER INFORMATION
     
Item 1. Legal Proceedings 14
     
Item 1A.  Risk Factors 14
     
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds 14
     
Item 3.  Defaults Upon Senior Securities 14
     
Item 4. Mine Safety Disclosures 15
     
Item 5.  Other Information 15
     
Item 6. Exhibits 15

 

1

 

 

PART I FINANCIAL INFORMATION

 

 

ITEM 1.         CONSOLIDATED FINANCIAL STATEMENTS

 

 

THE RESERVE PETROLEUM COMPANY

CONSOLIDATED BALANCE SHEETS

ASSETS

 

   

March 31,

   

December 31,

 
   

2021

   

2020

 
   

(Unaudited)

         
                 

Current Assets:

               

Cash and Cash Equivalents

  $ 17,126,644     $ 16,187,085  

Available-for-Sale Debt Securities

    ---       1,515,234  

Equity Securities

    2,931,339       2,536,482  

Refundable Income Taxes

    314,875       218,204  

Accounts Receivable

    800,090       794,162  

Notes Receivable

    278,569       278,569  
                 

Total Current Assets

    21,451,517       21,529,736  
                 

Investments:

               

Equity Method Investments

    616,076       604,991  

Other Investments

    2,415,399       2,415,399  
                 

Total Investments

    3,031,475       3,020,390  
                 

Property, Plant and Equipment:

               

Oil and Gas Properties, at Cost,

               

Based on the Successful Efforts Method of Accounting –

               

Unproved Properties

    1,981,299       1,883,055  

Proved Properties

    55,290,626       55,095,961  
                 

Oil and Gas Properties, Gross

    57,271,925       56,979,016  
                 

Less – Accumulated Depreciation, Depletion, Amortization and Valuation Allowance

    (49,847,652 )     (49,684,584 )
                 

Oil and Gas Properties, Net

    7,424,273       7,294,432  
                 

Other Property and Equipment, at Cost

    609,240       279,240  
                 

Less – Accumulated Depreciation

    (107,185 )     (96,532 )
                 

Other Property and Equipment, Net

    502,055       182,708  
                 

Total Property, Plant and Equipment

    7,926,328       7,477,140  
                 

Other Assets

    106,646       120,445  
                 

Total Assets

  $ 32,515,966     $ 32,147,711  

 

See Accompanying Notes

 

2

 

THE RESERVE PETROLEUM COMPANY

CONSOLIDATED BALANCE SHEETS

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

   

March 31,

   

December 31,

 
   

2021

   

2020

 
   

(Unaudited)

         
                 

Current Liabilities:

               

Accounts Payable

  $ 187,085     $ 248,054  

Other Current Liabilities

    24,656       15,443  
                 

Total Current Liabilities

    211,741       263,497  
                 

Long-Term Liabilities:

               

Asset Retirement Obligation

    1,822,084       1,810,729  

Dividends Payable

    106,646       119,546  

Deferred Tax Liability, Net

    732,302       568,627  
                 

Total Long-Term Liabilities

    2,661,032       2,498,902  
                 

Total Liabilities

    2,872,773       2,762,399  
                 
                 
                 
                 

Stockholders’ Equity:

               

Common Stock

    92,368       92,368  

Additional Paid-in Capital

    65,000       65,000  

Retained Earnings

    31,180,303       30,920,837  
                 

Stockholders’ Equity Before Treasury Stock

    31,337,671       31,078,205  
                 

Less – Treasury Stock, at Cost

    (1,694,478 )     (1,692,893 )
                 

Total Stockholders’ Equity

    29,643,193       29,385,312  
                 

Total Liabilities and Stockholders’ Equity

  $ 32,515,966     $ 32,147,711  

 

See Accompanying Notes

 

3

 

 

THE RESERVE PETROLEUM COMPANY

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

   

Three Months Ended

 
   

March 31,

 
   

2021

   

2020

 
                 

Operating Revenues:

               

Oil and Gas Sales

  $ 1,600,454     $ 1,196,262  

Lease Bonuses and Other

    ---       82,221  
                 

Total Operating Revenues

    1,600,454       1,278,483  
                 

Operating Costs and Expenses:

               

Production

    526,559       550,567  

Exploration

    16,190       43,465  

Depreciation, Depletion, Amortization and Valuation Provisions

    245,125       1,526,004  

General, Administrative and Other

    573,671       452,125  
                 

Total Operating Costs and Expenses

    1,361,545       2,572,161  
                 

Income/(Loss) from Operations

    238,909       (1,293,678 )
                 

Equity Income/(Loss) in Investees

    1,085       (35,200 )
                 

Other Income, Net

    86,944       20,811  
                 

Income/(Loss) Before Income Taxes

    326,938       (1,308,067 )
                 

Income Tax Provision/(Benefit):

               

Current

    (96,203 )     180,310  

Deferred

    163,675       (346,421 )
                 

Total Income Tax Provision/(Benefit)

    67,472       (166,111 )
                 

Net Income/(Loss)

  $ 259,466     $ (1,141,956 )
                 

Per Share Data:

               

Net Income/(Loss), Basic and Diluted

  $ 1.66     $ (7.29 )
                 
                 

Weighted Average Shares Outstanding, Basic and Diluted

    156,583       156,615  

 

See Accompanying Notes

 

4

 

 

THE RESERVE PETROLEUM COMPANY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

 

   

Common

Stock

   

Additional

Paid-in

Capital

   

Retained

Earnings

   

Treasury

Stock

   

Total

 
                                         

Three Months Ended March 31, 2021

                                       

Balance as of December 31, 2020

  $ 92,368     $ 65,000     $ 30,920,837     $ (1,692,893 )   $ 29,385,312  

Net Income/(Loss)

    ---       ---       259,466       ---       259,466  

Dividends Declared

    ---       ---       ---       ---       ---  

Purchase of Treasury Stock

    ---       ---       ---       (1,585 )     (1,585 )

Balance as of March 31, 2021

  $ 92,368     $ 65,000     $ 31,180,303     $ (1,694,478 )   $ 29,643,193  
                                         

Three Months Ended March 31, 2020

                                       

Balance as of December 31, 2019

  $ 92,368     $ 65,000     $ 33,660,169     $ (1,690,293 )   $ 32,127,244  

Net Income/(Loss)

    ---       ---       (1,141,956 )     ---       (1,141,956 )

Dividends Declared

    ---       ---       ---       ---       ---  

Purchase of Treasury Stock

    ---       ---       ---       ---       ---  

Balance as of March 31, 2020

  $ 92,368     $ 65,000     $ 32,518,213     $ (1,690,293 )   $ 30,985,288  

 

See Accompanying Notes

 

5

 

 

THE RESERVE PETROLEUM COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

   

Three Months Ended

 
   

March 31,

 
   

2021

   

2020

 
                 
                 

Net Cash Provided by Operating Activities

  $ 408,694     $ 689,907  
                 

Cash Provided by/(Applied to) Investing Activities:

               

Maturity of Available-for-Sale Debt Securities

    1,515,234       6,499,519  

Purchase of Available-for-Sale Debt Securities

    ---       (6,564,302 )

Proceeds from Disposal of Property, Plant and Equipment

    ---       10,898  

Purchase of Property, Plant and Equipment

    (637,236 )     (54,238 )

Purchase of Equity Method and Other Investments

    (10,000 )     (12,415 )

Sale of Equity Securities

    700,602       292,677  

Purchase of Equity Securities

    (1,036,150 )     (355,881 )
                 

Net Cash Provided by/(Applied to) Investing Activities

    532,450       (183,742 )
                 

Cash Applied to Financing Activities:

               

Purchase of Treasury Stock

    (1,585 )     ---  
                 

Total Cash Applied to Financing Activities

    (1,585 )     ---  
                 

Net Change in Cash and Cash Equivalents

    939,559       506,165  
                 

Cash and Cash Equivalents, Beginning of Period

    16,187,085       2,738,338  
                 

Cash and Cash Equivalents, End of Period

  $ 17,126,644     $ 3,244,503  

 

See Accompanying Notes

 

6

 

THE RESERVE PETROLEUM COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

March 31, 2021

(Unaudited)

 

 

 

Note 1 – BASIS OF PRESENTATION

 

In these notes the term “Company” refers to The Reserve Petroleum Company and its consolidated wholly owned subsidiary, Trinity Water Services, LLC, an Oklahoma limited liability company formed in March 2021 to provide initial capital, including the purchase of water well drilling equipment and startup costs, for a joint venture with TWS South, LLC, a Texas limited liability company. The Company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and include the accounts of The Reserve Petroleum Company and its subsidiaries, after elimination of all material intercompany balances and transactions.

 

The accompanying balance sheet as of December 31, 2020, which has been derived from audited financial statements, the unaudited interim consolidated 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 consolidated 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 year ended December 31, 2020 as filed with the Securities and Exchange Commission (hereinafter, the “2020 Form 10-K”).

 

In the opinion of management, the accompanying consolidated 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.

 

Reclassifications

 

Certain amounts in the 2020 financial statements have been reclassified to conform to the 2021 presentation. The amounts were not material to the financial statements and had no effect on previously reported net income.

 

 

Note 2 – REVENUE RECOGNITION

 

A portion of oil and gas sales recorded in the consolidated statements of operations are the result of estimated volumes and pricing for oil and gas product not yet received for the period. For the three months ended March 31, 2021 and 2020, that estimate represented approximately $426,160 and $177,935, respectively, of oil and gas sales included in the consolidated statements of operations.

 

The Company’s disaggregated revenue has two primary revenue sources which are oil sales and natural gas sales. The following is an analysis of the components of oil and gas sales:

 

   

Three Months Ended

 
   

March 31,

 
   

2021

   

2020

 

Oil Sales

  $ 989,228     $ 834,593  

Natural Gas Sales

    550,836       320,854  

Miscellaneous Oil and Gas Product Sales

    60,390       40,815  
    $ 1,600,454     $ 1,196,262  

 

7

 

 

Note 3 – OTHER INCOME, NET

 

The following is an analysis of the components of Other Income, Net:

 

   

Three Months Ended

 
   

March 31,

 
   

2021

   

2020

 

Net Realized and Unrealized Gain/(Loss) on Equity Securities

  $ 70,722     $ (69,968 )

Gain on Asset Sales

    ---       6,685  

Interest Income

    7,097       80,116  

Dividend Income

    19,653       129  

Income from Other Investments

    ---       13,548  

Interest and Other Expenses

    (10,528 )     (9,699 )

Other Income, Net

  $ 86,944     $ 20,811  

 

 

Note 4 –  EQUITY METHOD AND OTHER INVESTMENTS AND RELATED COMMITMENTS AND CONTINGENT LIABILITIES, INCLUDING GUARANTEES

 

The Company’s Equity Method Investments include:

 

Broadway Sixty-Eight, LLC (“Broadway 68”), an Oklahoma limited liability company, with a 33% ownership. Broadway 68 owns and operates an office building in Oklahoma City, Oklahoma. The Company leases its corporate office from Broadway 68 on a month-to-month basis under the terms of the modified lease agreement. Rent expense for lease of the corporate office from Broadway 68 was approximately $8,700 during the three months ended March 31, 2021 and 2020. The Company’s investment in Broadway 68 totaled $152,902 and $142,917 at March 31, 2021 and December 31, 2020, respectively.

 

Broadway Seventy-Two, LLC (“Broadway 72”), an Oklahoma limited liability company, with a 40% ownership, was acquired March 29, 2021. Broadway 72 owns and operates a commercial building in Oklahoma City, Oklahoma. The Company’s investment in Broadway 72 totaled $10,000 at March 31, 2021. At March 31, 2021, the Company had a $990,000 commitment to fund its remaining investment in Broadway 72. Subsequent to March 31, 2021, Broadway 72 executed the purchase of the building resulting in the Company funding the additional $990,000 investment.

 

Grand Woods Development, LLC (“Grand Woods”), an Oklahoma limited liability company, with a 47% ownership, was acquired in 2015. Grand Woods owns approximately 26.56 acres of undeveloped real estate in northeast Oklahoma City. The Company has guaranteed $1,200,000 of a $1,579,500 loan for which the proceeds were used to purchase a portion of the undeveloped real estate acreage. The loan matures May 23, 2021. The Company holds notes receivable of $278,569 from Grand Woods. The Company’s investment in Grand Woods totaled $163,874 and $179,615 at March 31, 2021 and December 31, 2020, respectively.

 

QSN Office Park (“QSN”), an Oklahoma limited liability company, with a 20% ownership, was acquired in 2016. QSN is constructing and selling office buildings in a new office park. The Company has guaranteed 20% of a $550,000 loan for which a portion of the proceeds were used to build a speculative office building. The loan matures March 9, 2027. The Company’s investment in QSN totaled $289,300 and $282,459 at March 31, 2021 and December 31, 2020, respectively.

 

The Company’s Other Investments primarily include:

 

Bailey Hilltop Pipeline (“Bailey”), with a 10% ownership, was acquired in 2008. Bailey is a gas gathering system pipeline for the Bailey Hilltop Prospect oil and gas properties in Grady County, Oklahoma. The Company’s investment in Bailey totaled $80,377 at March 31, 2021 and December 31, 2020.

 

Cloudburst International, Inc. (“Cloudburst”), with an 13.39% ownership, was acquired in 2019. Cloudburst owns exclusive rights to a water purification process technology that is being developed and currently tested. The Company’s investment in Cloudburst totaled $1,496,007 at March 31, 2021 and December 31, 2020.

 

Genlith, Inc. (“Genlith”), with a 1.8% ownership, was acquired in July 2020. Genlith identifies and structures investments in the new energy economy through corporate ventures, advisory and fund management. The Company’s investment in Genlith totaled $500,000 at March 31, 2021 and December 31, 2020.

 

8

 

Ocean’s NG (“Ocean”), with a 12.44% ownership, was acquired in 2015. Ocean is developing an underground Compressed Natural Gas (“CNG”) storage and delivery system for retail sales of CNG. The Company’s investment in Ocean totaled $229,218 at March 31, 2021 and December 31, 2020.

 

OKC Industrial Properties (“OKC”), with a 10% ownership, was acquired in 1992. OKC originally owned approximately 260 acres of undeveloped land in north Oklahoma City and over time has sold all but approximately 23 acres. The Company’s investment in OKC totaled $69,482 at March 31, 2021 and December 31, 2020.

 

 

Note 5 – PROVISION FOR INCOME TAXES

 

In 2021 and 2020, the effective tax rate differed from the statutory rate, primarily as a result of allowable depletion for tax purposes in excess of the cost basis in oil and gas properties.

 

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. When a benefit for income taxes is recorded, federal excess percentage depletion benefits increase 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 6 – 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, 2020

  $ 1,810,729  

Liabilities incurred for new wells (net of revisions)

    ---  

Liabilities settled (wells sold or plugged)

    ---  

Revision to estimate

    401  

Accretion expense

    10,954  

Balance at March 31, 2021

  $ 1,822,084  

 

 

Note 7 – FAIR VALUE MEASUREMENTS

 

The Company uses a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:

 

Level 1 – Unadjusted quoted prices for identical assets or liabilities in active markets.

 

Level 2 – Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and model-derived valuations whose inputs or significant value drivers are observable.

 

Level 3 – Unobservable inputs that reflect the Company’s own assumptions.

 

9

 

Recurring Fair Value Measurements

 

Certain of the Company’s assets are reported at fair value in the accompanying consolidated balance sheets on a recurring basis. The Company determined the fair value of equity securities and available-for-sale debt securities using quoted market prices, and where applicable, securities with similar maturity dates and interest rates.

 

At March 31, 2021 and December 31, 2020, the Company’s assets reported at fair value on a recurring basis are summarized as follows:

 

   

March 31, 2021

 
   

Level 1 Inputs

   

Level 2 Inputs

   

Level 3 Inputs

 

Financial Assets:

                       

Available-for-Sale Debt Securities –

                       

U.S. Treasury Bills Maturing in 2021

  $ ---     $ ---     $ ---  

Equity Securities:

                       

Domestic Equities

    1,814,951       ---       ---  

International Equities

    570,493       ---       ---  

Others

    545,895       ---       ---  
    $ 2,931,339     $ ---     $ ---  

 

 

   

December 31, 2020

 
   

Level 1 Inputs

   

Level 2 Inputs

   

Level 3 Inputs

 

Financial Assets:

                       

Available-for-Sale Debt Securities –

                       

U.S. Treasury Bills Maturing in 2021

  $ ---     $ 1,515,234     $ ---  

Equity Securities:

                       

Domestic Equities

    1,506,514       ---       ---  

International Equities

    630,494       ---       ---  

Others

    399,474       ---       ---  
    $ 2,536,482     $ 1,515,234     $ ---  

 

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 three months ended March 31, 2020 was $4,206, with none in 2021, and was calculated using Level 3 inputs. See Note 6 above for more information about this liability and the inputs used for calculating fair value.

 

The impairment loss in the quarter ended March 31, 2020 was $1,312,328, with none in 2021. This also represents non-recurring fair value expense calculated using Level 3 inputs. See Note 8 below for a description of the impairment loss calculation.

 

Fair Value of Financial Instruments

 

The Company’s financial instruments consist primarily of cash and cash equivalents, trade receivables, trade payables and dividends payable. At March 31, 2021 and December 31, 2020, 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 8 – LONG-LIVED ASSETS IMPAIRMENT LOSS

 

Certain oil and gas producing properties have been deemed to be impaired because the assets, evaluated on a property-by-property basis, are not expected to recover their entire carrying value through future cash flows. Impairment losses totaled $1,312,328 for the quarter ended March 31, 2020, with none in 2021, and are included in the statements of operation in the line item Depreciation, Depletion, Amortization and Valuation Provisions. The impairments were calculated by reducing the carrying value of the individual properties to an estimated fair value equal to the discounted present value of the future cash flow from these properties. Forward pricing was used for calculating future revenue and cash flow.

 

 

Note 9 – NEW ACCOUNTING PRONOUNCEMENTS

 

See the “New Accounting Pronouncements” disclosures on page 25 of the 2020 Form 10-K. There were no other accounting pronouncements issued or that have become effective since December 31, 2020.

 

10

 

 

 

 

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 2020 Form 10-K, as well as the consolidated financial statements included in this Form 10-Q.

 

Forward-Looking Statements

 

This discussion and analysis includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements give the Company’s current expectations of future events. They include statements regarding the drilling of oil and gas wells, the production that may be obtained from oil and gas wells, cash flow and anticipated liquidity and expected future expenses.

 

Although management believes the expectations in these and other forward-looking statements are reasonable, we can give no assurance they will prove to have been correct. They can be affected by inaccurate assumptions or by known or unknown risks and uncertainties. Factors that would cause actual results to differ materially from expected results are described under “Forward-Looking Statements” on page 3 of the 2020 Form 10-K.

 

We caution you not to place undue reliance on these forward-looking statements, which speak only as of the date of this Form 10-Q, and we undertake no obligation to update this information because of new information, future developments, or otherwise. You are urged to carefully review and consider the disclosures made in this and our other reports filed with the Securities and Exchange Commission that attempt to advise interested parties of the risks and factors that may affect our business.

 

Financial Conditions and Results of Operations

 

COVID-19

 

In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. Governments have tried to slow the spread of the virus by imposing social distancing guidelines, travel restrictions and stay-at-home orders, which caused a significant decrease in activity in the global economy and the demand for oil and to a lesser extent natural gas. As a result, the price for oil decreased significantly. While oil prices have recovered to pre-pandemic levels, world demand has not and there is still ongoing volatility in the market.

 

Our profitability has been and will likely continue to be significantly affected by this volatility. A decline in commodity prices and our future estimated production levels could lead to additional material impairments of our long-lived assets, equity method investments and right-of-use assets. It is likely that additional impairments could be triggered if the COVID-19 pandemic leads to a continued and sustained reduction in global economic activity and demand for energy. We continue to evaluate all cash management strategies, maintaining conservative choices in short-term investments to protect cash reserves and liquidity.

 

Liquidity and Capital Resources

 

Please refer to the Consolidated Balance Sheets and the Condensed Consolidated Statements of Cash Flows in this Form 10-Q to supplement the following discussion. In the first quarter of 2021, the Company continued to fund its business activity using internal sources of cash. The Company had net cash provided by operations of $408,694. The Company had maturities of available-for-sale debt securities of $1,515,234 and sales of equity securities of $700,602 for total cash provided by investing activities of $2,215,836. The Company utilized cash for the purchase of property of $637,236, purchase of equity method investments of $10,000 and purchase of equity securities of $1,036,150 for total cash applied of $1,683,386. Cash and cash equivalents increased $939,559 (6%) to $17,126,644.

 

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, 2020. A discussion of these items follows.

 

Equity securities increased $394,857 (16%) to $2,931,339 as of March 31, 2021 from $2,536,482 at December 31, 2020. The increase was the result of $335,548 in net purchases, a $4,008 decrease in the equity securities’ market value and a $63,317 net gain from these securities.

 

Refundable income taxes increased $96,671 (44%) to $314,875 as of March 31, 2021 from $218,204 at December 31, 2020.

 

Accounts payable decreased $60,969 (25%) to $187,085 as of March 31, 2021 from $248,054 at December 31, 2020 due to timing differences in the processing of accounts payable.

 

11

 

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 $408,694 in the three months ended March 31, 2021, a decrease of $281,213 (41%) from the comparable period in 2020 of $689,907. For more information see “Operating Revenues” and “Other Income, Net” below.

 

Cash applied to the purchase of property additions in the three months ended March 31, 2021 was $637,236, an increase of $582,998 from cash applied in the comparable period in 2020 of $54,238. For 2021, cash applied to property additions related to oil and gas exploration and development activity was $307,236 and $330,000 was related to equipment purchases. See the subheading “Exploration Costs” in the “Results of Operations” section below for additional information.

 

Cash applied to the purchase of equity securities in the three months ended March 31, 2021 was $1,036,150, compared to $355,881 in the comparable period in 2020. Cash provided by the sale of equity securities in the three months ended March 31, 2021 was $700,602, compared to $292,677 in the comparable period in 2020. The Company is increasing equity securities as part of a strategy to offset the loss of interest income in the depressed available-for-sale debt securities environment.

 

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 2020 Form 10-K would not be representative of the Company’s current position.

 

Results of Operations

 

Net income increased $1,401,422 to a net income of $259,466 in the three months ended March 31, 2021 from a net loss of $(1,141,956) in the comparable period in 2020. Net income/(loss) per share, basic and diluted, increased $8.95 to a net income per share of $1.66 in the three months ended March 31, 2021 from a net loss per share of $(7.29) in the comparable period in 2020.

 

A discussion of revenue from oil and gas sales and other significant line items in the consolidated statements of operations follows.

 

Operating Revenues. Revenues from oil and gas sales increased $404,192 (34%) to $1,600,454 in the three months ended March 31, 2021 from $1,196,262 in 2020. Of the $404,192 increase, crude oil sales increased $154,365; natural gas sales increased $229,982; and miscellaneous oil and gas product sales increased $19,575.

 

The $154,635 (19%) increase in oil sales to $989,228 in the three months ended March 31, 2021 from $834,593 in the comparable period in 2020 was the result of an increase in the volume sold and an increase in the average price per barrel (Bbl). The volume of oil sold increased 1,460 Bbls to 18,841 Bbls in the three months ended March 31, 2021, resulting in a positive volume variance of $70,109 compared to the comparable period in 2020. The average price per Bbl increased $4.48 to $52.50 per Bbl in the three months ended March 31, 2021, resulting in a positive price variance of $84,526 compared to the comparable period in 2020.

 

The $229,982 (72%) increase in gas sales to $550,836 in the three months ended March 31, 2021 from $320,854 in the comparable period in 2020 was the result of a decrease in the volume sold and an increase in the average price per thousand cubic feet (MCF). The volume of gas sold decreased 7,877 MCF to 181,820 MCF in the three months ended March 31, 2021 from 189,687 MCF in the comparable period in 2020, for a negative volume variance of $(13,312). The average price per MCF increased $1.34 to $3.03 per MCF in the three months ended March 31, 2021 from $1.69 per MCF in the comparable period in 2020, resulting in a positive price variance of $243,294.

 

Sales from the Robertson County, Texas royalty interest properties provided approximately 24% of the Company’s gas sales volumes for the three months ended March 31, 2021 and 28% of the gas sales volumes for the comparable period in 2020. See discussion on page 11 of the 2020 Form 10-K under the subheading “Operating Revenues” for more information about these properties. Sales from Arkansas working interest properties provided approximately 12% of the Company’s gas sales volumes for the three months ended March 31, 2021 and about 11% of the gas sales volumes for the comparable period in 2020.

 

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 increased $19,575 (48%) to $60,390 in the three months ended March 31, 2021 from $40,815 in the comparable period in 2020.

 

The Company received no lease bonuses in the three months ended March 31, 2021 for leases on its owned minerals compared to $82,221 in the comparable period in 2020.

 

12

 

Operating Costs and Expenses. Operating costs and expenses decreased $1,210,616 (47%) to $1,361,545 in the three months ended March 31, 2021 from $2,572,161 in the comparable period in 2020. The decrease was primarily due to the significant impairments in the 2020 period.

 

Production Costs. Production costs decreased $24,008 (4%) to $526,559 in the three months ended March 31, 2021 from $550,567 in the comparable period in 2020. This decrease was primarily the result of a decrease of $67,171 in lease operating expense, offset by an increase of $32,093 in production tax and an increase of $10,952 in hauling and compression expenses.

 

Exploration Costs. Total exploration expense decreased $27,275 (63%) to $16,190 in the three months ended March 31, 2021 from $43,465 in the comparable period in 2020.

 

The following is a summary as of May 7, 2021, updating both exploration and development activity from December 31, 2020, for the period ended March 31, 2021.

 

The Company is participating with its 14% interest in drilling on a Creek County, Oklahoma 3-D seismic project. At the start of 2021 there were six active prospects within the project. An exploratory well was drilled on one of the prospects and completed as a dry hole. A development well was drilled on another prospect and a completion is in progress. An additional exploratory well and four additional development wells are expected to be drilled starting in May 2021. Prepaid costs for the period were $35,978.

 

The Company owns a 35% interest in 16,472.55 net acres of leasehold on a Crockett and Val Verde Counties, Texas prospect. Most of the acreage is underlain by a shallow heavy oil zone. The Company is participating with a 17.5% interest in the re-entry, completion and testing of a previously drilled test well on the prospect with the intention of conducting a thermal recovery pilot test. Prepaid costs for the period were $26,722.

 

The Company has been participating with a 13% interest in a 3-D seismic project covering approximately 35,000 acres in San Patricio County, Texas. At the start of 2021 there were six active prospects within the project. An exploratory well was drilled and completed on one of these in 2020, testing gas at a commercial rate. It is shut in awaiting pipeline construction. The Company is participating in the conversion of an abandoned producer to a saltwater disposal well that will handle water from this well and two other previously drilled producers on the project, and any future wells drilled in the area. Additional exploratory well proposals are anticipated in 2021. Prepaid costs for the period were $28,578.

 

The Company has been participating with a 50% interest in the development of a Nolan County, Texas prospect. The Company and its partner have acquired 3,182 net acres of leasehold and three producing wells on the prospect and are currently involved in efforts to sell a portion of their interest. Once sufficient interest has been placed, an exploratory horizontal well will be drilled on the prospect. Geological costs for the period were $11,250 and capitalized costs were $222,714.

 

The Company is participating in the completion of four horizontal development wells that were drilled in 2020 on fee minerals located in Kingfisher County, Oklahoma. The Company has a 3.2% working interest in three of the wells and a 3.5% working interest in the fourth. Actual costs of $2,543 for the period were offset by prepaid costs from 2020 for a net capitalized amount of $0.

 

Depreciation, Depletion, Amortization and Valuation Provision (DD&A). DD&A decreased $1,280,879 (84%) to $245,125 in the three months ended March 31, 2021 from $1,526,004 in the comparable period in 2020. The decrease was from long-lived asset impairments in the 2020 period of $1,312,328 due to historically low oil futures prices at March 31, 2020.

 

General, Administrative and Other (G&A). G&A increased $121,546 (27%) to $573,671 in the three months ended March 31, 2021from $452,125 in the comparable period in 2020. The increase was primarily due to accounting services and consulting costs related to implementation of new accounting software.

 

Other Income, Net. Other Income, Net increased $66,133 to $86,944 in the three months ended March 31, 2021 from $20,811 in the comparable period in 2020. See Note 3 to the accompanying consolidated financial statements for the various components of Other Income, Net.

 

Income Tax Provision. In the three months ended March 31, 2021, the Company had an estimated income tax provision of $67,472 as the result of a deferred tax provision of $163,675 and a current tax benefit of $96,203. In the comparable period in 2020, the Company had an estimated income tax benefit of $166,111 as the result of a deferred tax benefit of $346,421 and a current tax provision of $180,310. See Note 5 to the accompanying consolidated financial statements for additional information on income taxes.

 

13

 

Off-Balance Sheet Arrangement

 

The Company’s off-balance sheet arrangements relate to Broadway Sixty-Eight, LLC, an Oklahoma limited liability company, Broadway Seventy-Two, LLC, an Oklahoma limited liability company, Grand Woods Development, LLC, an Oklahoma limited liability company, and QSN Office Park, LLC, an Oklahoma limited liability company. The Company does not have actual or effective control of these entities. Management of these entities could at any time make decisions in their own best interest, which could materially affect the Company’s net income or the value of the Company’s investment. For more information about these entities and the related off-balance sheet arrangements, see Note 4 to the accompanying consolidated financial statements.

 

 

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, 2021.

 

Internal Control over Financial Reporting

 

There were no changes in the Company’s internal control over financial reporting during the quarter ended March 31, 2021 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting (as such term is defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) during the quarter ended March 31, 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

 

 

PART II OTHER INFORMATION

 

 

ITEM 1.

LEGAL PROCEEDINGS

 

During the quarter ended March 31, 2021, 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

 

None.

 

 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

 

None.

 

14

 

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.DEF*

 

XBRL Taxonomy Definition Linkbase Document

101.LAB*

 

XBRL Taxonomy Label Linkbase Document

101.PRE*

 

XBRL Taxonomy Presentation Linkbase Document

       
   

* Filed electronically herewith.

 

 

15

 

 

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 17, 2021

 

/s/ Cameron R. McLain

 

 

 

Cameron R. McLain,

 

 

 

Principal Executive Officer

 

 

 

 

 

Date:       May 17, 2021

 

/s/ Lawrence R. Francis

 

 

 

Lawrence R. Francis

 

 

 

Principal Financial Officer

 

 

16

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Ticker: RSRV
CIK: 83350
Form Type: 10-Q Quarterly Report
Accession Number: 0001437749-21-012377
Submitted to the SEC: Mon May 17 2021 6:08:00 AM EST
Accepted by the SEC: Mon May 17 2021
Period: Wednesday, March 31, 2021
Industry: Crude Petroleum And Natural Gas

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