CKX Lands, Inc. — Form 10-Q Summary
Business Context and Reporting Period
CKX Lands, Inc. owns and manages land and mineral interests in southwest Louisiana. Its income is generated primarily from oil and gas royalties and related lease activity, timber sales, surface rentals, and land sales. The company is passive in oil and gas production and does not operate wells.
This report covers the three and nine months ended September 30, 2021, compared with the corresponding 2020 periods. The financial statements are unaudited. The company had 1,942,495 common shares outstanding as of November 5, 2021.
Financial Performance and Position
| Metric | Three Months Ended September 30, 2021 | Three Months Ended September 30, 2020 | Nine Months Ended September 30, 2021 | Nine Months Ended September 30, 2020 |
|---|---|---|---|---|
| Total revenue | $173,546 | $160,842 | $539,729 | $529,930 |
| Income from operations | $277,700 | $73,331 | $958,858 | $333,378 |
| Income before taxes | $281,322 | $80,245 | $971,933 | $388,548 |
| Net income | $188,509 | $50,054 | $789,664 | $320,226 |
| Basic and diluted EPS | $0.10 | $0.03 | $0.41 | $0.16 |
- Revenue increased 7.9% in the third quarter and 1.8% for the nine-month period.
- Calculated net margins were approximately 108.6% and 146.3% for the three- and nine-month 2021 periods, respectively, versus approximately 31.1% and 60.4% in the comparable 2020 periods. These unusually high margins reflect gains on land sales rather than recurring operating revenue.
- Land-sale gains were $261,316 in the third quarter and $851,582 for the nine months, compared with $41,331 and $295,238, respectively, in 2020.
- Cash and cash equivalents were $7.39 million at September 30, 2021, up from $6.46 million at December 31, 2020. Mutual fund investments were $502,794.
- Total assets were $17.09 million, including $9.09 million of net property and equipment. Total liabilities were $511,629, and the company reported no outstanding debt.
- Current assets of $8.00 million substantially exceeded current liabilities of $323,965, representing a calculated current ratio of approximately 24.7 times.
- Stockholders’ equity increased to $16.58 million from $15.79 million at year-end 2020, primarily from nine-month net income. No dividends were declared.
Cash Flow and Liquidity
- Operating activities used $63,893 during the first nine months of 2021, compared with $176,539 provided in 2020. The 2021 use was primarily attributable to the large land-sale gain, which is excluded from operating cash flow.
- Investing activities provided $988,570, principally from $1.01 million of proceeds from fixed-asset sales. Uses included $17,650 for timber reforestation, $4,063 for land purchases, and $199 for mutual fund purchases.
- Cash increased by $924,677 during the nine months to $7.39 million. Management stated that available cash is adequate for projected operations and possible land acquisitions.
- The company paid $171,423 in income taxes during the period and no interest.
Material Changes Versus the Prior Comparable Period
- Third-quarter oil and gas revenue increased 113.0% to $108,208, driven by higher oil and gas prices and higher net oil production. Average oil price increased to $60.94 per barrel from $37.28; average gas price increased to $3.28 per MCF from $1.57.
- Nine-month oil and gas revenue increased 10.2% to $257,555, despite lower oil and gas production volumes, because average realized prices were higher.
- Third-quarter timber revenue fell 79.9% to $11,936 due to normal variation in customer harvesting. Nine-month timber revenue rose 61.7% to $114,877, partly reflecting weather-related harvesting limitations in 2020 and recognition of an expired stumpage agreement.
- Nine-month surface revenue declined 25.7% to $167,297 because of lower one-time right-of-way income. Third-quarter surface revenue increased 5.5% due to a new one-time lease.
- General and administrative expense increased 16.2% in the third quarter, primarily from higher legal, SEC filing, and property tax costs. It decreased 14.2% for the nine months, primarily because of lower officer salaries, property management fees, and contract services.
- During the first nine months, the company recognized gains on the sale of 17 pieces of land, including 14 subdivision lots and unimproved land, compared with six land sales in the prior-year period.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- The filing provides no quantitative earnings or revenue guidance. Management cautions that nine-month results are not necessarily indicative of full-year or future results.
- The company is developing ranchette-style subdivisions comprising 39 lots on approximately 575 acres. It had closed on 19 lots as of September 30, 2021, sold one additional lot by the report date, and was marketing the remaining lots.
- Oil and gas revenue is exposed to commodity-price volatility, production declines, producer activity, and eventual depletion of reserves. CKX does not operate the wells and does not have access to reserve information.
- Timber revenue depends on harvesting activity, timber stand age, regional stumpage prices, and weather. Surface revenue can vary significantly because of non-recurring rights-of-way and worksite arrangements.
- COVID-19 had not caused significant operational disruption through the filing date, but management stated that future effects on the business and financial results remain uncertain.
- The company maintains cash at seven financial institutions; amounts above FDIC insurance limits may create concentration risk, although management believes exposure is not significant.
- The company renewed a related-party option-to-lease agreement with Stream Wetlands Services, LLC through February 28, 2022 for $38,333, with an option for a further one-year extension for an additional $38,333. The company’s president is also president of Stream Wetlands.
- No material litigation, off-balance-sheet arrangements, impairment charges, or changes in internal control were reported. Management concluded that disclosure controls were effective as of September 30, 2021.
Important Facts for Investors to Verify
- Separate recurring operating performance from the $851,582 nine-month land-sale gain and other non-recurring land-sale activity.
- Assess the sustainability of oil and gas revenue given higher commodity prices, lower production volumes, changing well counts, and eventual reserve depletion.
- Review the remaining subdivision inventory, sales pace, realized margins, and future development costs.
- Confirm cash availability, uninsured deposit exposure, and the absence of debt or other financing commitments.
- Evaluate the effect of related-party transactions, including the Stream Wetlands option-to-lease agreement.
- Monitor the variability of timber, surface, lease, and geophysical revenue and the potential impact of COVID-19 or regional economic conditions.