CKX Lands, Inc. — 2021 Q1 Form 10-Q Summary
Business Context and Reporting Period
CKX Lands, Inc. owns and manages land and derives income from oil and gas royalties, timber sales, and surface payments. It does not operate oil and gas wells. This unaudited report covers the three months ended March 31, 2021, with comparison to the same period in 2020. The company is a non-accelerated filer and smaller reporting company.
Financial Highlights
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Total revenue | $154,876 | $180,391 |
| Income from operations | $448,327 | $55,955 |
| Net income | $426,807 | $58,382 |
| Basic and diluted EPS | $0.22 | $0.03 |
| Operating cash flow | $(150,975) | $21,743 |
| Investing cash flow | $523,122 | $(434,876) |
| Cash and cash equivalents at period-end | $6,835,402 | $2,867,156 |
- Revenue declined 14.1% year over year. Oil and gas revenue decreased 56.4% to $50,145; timber revenue increased 578.6% to $53,527; and surface revenue decreased 10.9% to $51,204.
- Net income increased 631.0%, primarily because of a $406,220 gain on the sale of land versus a $33,107 gain in the prior-year quarter.
- Reported operating margin was approximately 289% and net margin approximately 276%, both substantially distorted by the land-sale gain. Excluding the gain, the filing does not present a non-GAAP operating or net margin.
- General and administrative expense declined by $40,038, primarily due to lower officer salaries, property management fees, auditing fees, and rent, partially offset by higher property taxes.
- Current assets were $7.57 million, compared with current liabilities of $295,190. The company reported no outstanding debt at March 31, 2021 or December 31, 2020.
- Stockholders’ equity increased to $16.21 million from $15.79 million at year-end 2020, reflecting first-quarter net income.
Material Changes Versus the Prior Comparable Period
- Oil and gas production declined to 753 net barrels from 1,586 and to 4,456 MCF of gas from 7,398. Oil prices also decreased to $48.43 per barrel from $60.68, while gas prices increased to $2.90 per MCF from $2.43.
- Oil and gas revenue fell primarily because of lower production and lower oil prices. The company received oil and gas revenue from 64 wells versus 77 wells in the prior-year quarter.
- Timber revenue increased because the prior-year quarter was affected by wet weather that limited customers’ harvesting activity. Current-quarter timber revenue consisted largely of a recognized expired timber stumpage agreement, resulting in relatively low related costs.
- Operating cash flow turned negative because the large land-sale gain is removed in the cash-flow reconciliation and because of changes in operating assets and liabilities.
- Investing cash flow became positive primarily from $537,360 of proceeds from fixed-asset sales. The company spent $14,114 on timber reforestation.
Guidance, Outlook, Risks, and Unusual Items
- The filing provides no formal financial guidance. Management states that cash and cash equivalents are adequate for projected operations and possible land acquisitions.
- Management continues to pursue additional real estate acquisitions in southwest Louisiana and is developing ranchette-style subdivisions. Three subdivisions contain 39 lots; 15 had been sold by March 31, 2021, with one additional sale completed after quarter-end and two sales pending as of the report date.
- Oil and gas income is inherently variable because it depends on third-party production, commodity prices, exploration and development activity, and eventual depletion of reserves. The company does not have access to reserve information for the wells.
- Timber revenue depends on stumpage agreements, timber stand age, weather, and regional timber prices. Surface income can vary based on lease bonuses, rights-of-way, and temporary worksite rentals.
- COVID-19 had not caused significant operational disruption through the filing date, but management stated that future effects remain uncertain.
- Hurricanes Laura and Delta damaged or temporarily affected certain southwest Louisiana properties and oil and gas production. Management determined that the effects were immaterial and recorded no impairment charge.
- Surface revenue of $9,583 in each period was related-party revenue from Stream Wetlands Services, LLC. The company renewed the related option to lease agreement for 12 months on February 28, 2021 for a $38,333 payment.
- No dividends were declared, no impairment charges were recorded, and no off-balance-sheet arrangements were reported. Management concluded that disclosure controls were effective as of March 31, 2021.
Important Facts for Investors to Verify
- Determine the sustainability of earnings excluding the $406,220 land-sale gain.
- Review the causes and expected persistence of the sharp decline in oil and gas production and revenue.
- Assess the timing, pricing, costs, and remaining inventory of the 24 unsold subdivision lots.
- Evaluate liquidity concentration, since cash is held across seven financial institutions and deposits above FDIC insurance limits may be exposed to institutional risk.
- Review related-party transactions and the continuing Stream Wetlands option arrangement.
- Monitor commodity prices, third-party well activity, timber markets, weather exposure, hurricane impacts, and potential future land acquisitions.