CKX Lands, Inc. 2020 Form 10-K Summary
Business context and reporting period
CKX Lands, Inc. filed an annual report for the fiscal year ended December 31, 2020. The company owns and manages approximately 13,941 net acres in Louisiana and generates revenue from oil and gas royalties and leases, timber sales, and surface uses such as agriculture, hunting, commercial leases, and rights of way. CKX does not operate oil and gas wells and relies on unrelated third parties for exploration and production. The filing is an annual report; it does not provide a separate fourth-quarter financial statement.
CKX had one part-time employee, its President and Treasurer, and 1,942,495 common shares outstanding at December 31, 2020 and March 24, 2021. The stock trades on the NYSE American under the symbol CKX.
Financial performance and condition
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Total revenue | $671,944 | $811,271 | Down 17.2% |
| Oil and gas revenue | $257,247 | $500,426 | Down 48.6% |
| Timber revenue | $134,720 | $72,847 | Up 84.9% |
| Surface revenue | $279,977 | $237,998 | Up 17.6% |
| Income from operations | $379,053 | $191,606 | Up 97.8% |
| Income before taxes | $438,224 | $301,188 | Up 45.5% |
| Net income | $339,383 | $249,933 | Up 35.8% |
| Basic and diluted EPS | $0.17 | $0.13 | Up $0.04 |
| Cash flow from operations | $140,165 | $194,711 | Down 28.0% |
Net margin was approximately 50.5% in 2020 versus 30.8% in 2019. Operating margin was approximately 56.4%, but results benefited substantially from a $354,577 gain on land sales, compared with an $80,876 gain in 2019. Excluding that gain, recurring operating performance was materially weaker than the reported operating income suggests.
Oil and gas represented 38% of revenue, compared with 62% in 2019. Net oil production declined to 5,043 barrels from 6,272, while the average oil price declined to $45.32 per barrel from $61.16. Net gas production declined to 12,376 MCF from 32,107, and the average gas price declined to $2.13 per MCF from $3.40.
At December 31, 2020, cash and cash equivalents were $6.46 million, mutual funds were $502,595, current assets were $7.07 million, and total assets were $16.32 million. Current liabilities were $342,195 and total liabilities were $529,859. The company had no outstanding debt, and its $1.0 million revolving credit facility had expired without extension in 2019. The current ratio was approximately 20.7 times, and stockholders’ equity was $15.79 million.
Net cash provided by investing activities was $3.04 million, principally reflecting certificate-of-deposit maturities of $4.68 million, purchases of certificates of deposit of $1.99 million, and $359,082 of proceeds from fixed-asset sales. The company reported no financing cash flows, no dividend declarations, and no off-balance-sheet arrangements.
Material changes versus the prior comparable period
- Revenue declined $139,327, driven by a $243,179 reduction in oil and gas revenue.
- Timber and surface revenue increased by $61,873 and $41,979, respectively, partially offsetting the oil and gas decline.
- General and administrative expense decreased $13,696, while oil and gas and timber costs also declined.
- Gain on land sales increased to $354,577 from $80,876. The 2020 gain included sales of eight tracts, including six subdivision lots and a sale to a local government for roadway construction.
- Operating cash flow declined despite higher net income, primarily because the larger land-sale gain is a noncash reconciliation item.
- Cash increased to $6.46 million from $3.28 million, while certificates of deposit declined from $2.70 million to zero after maturities.
- The company closed six of 39 ranchette subdivision lots by December 31, 2020. By the filing date, it had sold seven additional lots and had five pending sales.
Guidance, outlook, risks, contingencies, and unusual items
Management provided no quantified financial guidance for 2021. CKX expects to continue evaluating land acquisitions and divestitures, including possible commercial and residential development, and to market timber and pursue additional stumpage agreements. Management noted that stumpage prices remained depressed and that some timber was sold at salvage prices following Hurricanes Laura and Delta.
The company stated that Hurricane Laura damaged a portion of its timber and temporarily interrupted oil and gas production. Management determined that no timber impairment was required and that the operational effect was immaterial. Hurricane Delta was determined to have minimal effects. The timber impairment assessment was identified as the audit’s critical audit matter because it involved significant estimates of timber volumes, prices, and future cash flows.
Major risks include commodity-price and production declines, depletion of oil and gas reserves, dependence on third-party operators and timber managers, customer concentration, hurricanes and flooding, environmental liabilities, regional concentration in southwest Louisiana, real estate-market risk, and the potential effects of COVID-19. The company does not have access to reserve information for its royalty interests.
Approximately 48.64% of 2020 revenue came from eight customers. Loss of significant customers or revenue streams could materially affect results. A related-party option-to-lease arrangement generated $38,333 of surface revenue in 2020; the counterparty’s president is also CKX’s President and Treasurer. No legal proceedings were pending at December 31, 2020. Management reported effective disclosure controls and effective internal control over financial reporting.
Important facts for investors to verify
- Verify the audited financial statements and the substantial contribution of the $354,577 land-sale gain to 2020 earnings.
- Assess whether oil and gas production, prices, and royalty revenue can stabilize after the 48.6% revenue decline.
- Review the sustainability and timing of subdivision lot sales and related development costs.
- Evaluate the effect of hurricane damage, salvage timber sales, and depressed stumpage prices on future timber income and asset values.
- Review customer and revenue concentration, including the related-party surface revenue arrangement.
- Consider the operational concentration created by one employee and reliance on third-party operators and property managers.
- Confirm cash availability, deposit concentration above FDIC insurance limits, absence of debt, and the company’s policy regarding irregular rather than regular dividends.