CKX LANDS, INC. quarterly report, Q2 FY2020

CKX Lands, Inc. — Form 10-Q Summary

Business context and reporting period

CKX Lands, Inc. is a Louisiana landholding company deriving revenue from oil and gas royalties, timber sales, and surface leases and other surface activities. The company does not operate oil and gas wells and depends on third parties for production and related activities. This unaudited Form 10-Q covers the three and six months ended June 30, 2020, compared with the corresponding 2019 periods.

Shares outstanding: 1,942,495 as of August 6, 2020.
Operating segments: oil and gas, timber, and surface.
The company has one employee and nine directors.

Financial performance and position

Metric	Three months ended June 30, 2020	Three months ended June 30, 2019	Six months ended June 30, 2020	Six months ended June 30, 2019
Total revenue	$188,697	$216,808	$369,088	$370,283
Income from operations	$204,092	$(1,625)	$260,047	$87,735
Income before taxes	$234,473	$27,862	$308,303	$143,746
Net income	$211,790	$23,271	$270,172	$128,992
Basic and diluted EPS	$0.11	$0.01	$0.14	$0.07

Second-quarter net margin was approximately 112%; six-month net margin was approximately 73%. These margins were materially affected by gains on land sales.
Second-quarter operating income included a $220,800 gain on sale of land; the six-month gain was $253,907, compared with $80,876 in the prior-year period.
Oil and gas revenue was $67,929 in the quarter and $182,979 for six months. Six-month oil and gas revenue declined 21.8%, primarily because of lower gas production and pricing.
Surface revenue was $117,021 in the quarter and $174,474 for six months, increasing 58.6% and 43.2%, respectively, primarily because of higher per-acre lease charges.
Timber revenue was $3,747 in the quarter and $11,635 for six months.
General and administrative expense was $193,087 in the quarter and $336,209 for six months. Six-month expense increased $7,740 year over year.
At June 30, 2020, cash was $3.57 million, certificates of deposit were $2.75 million, mutual fund investments were $0.50 million, and total current assets were $7.00 million.
Total assets were $16.24 million and stockholders’ equity was $15.72 million. Total liabilities were $526,456, including $187,664 of deferred income tax payable.
The company had no outstanding debt reported. Its $1.0 million unsecured revolving credit line expired and was not renewed.

Cash flow and liquidity

Six-month operating cash flow was $92,042, compared with cash used in operations of $51,255 in 2019.
Six-month investing cash flow was $194,818, including $1.99 million of certificate-of-deposit purchases, $1.93 million of maturities, and $254,458 of proceeds from fixed-asset sales.
Cash and restricted cash increased by $286,860 to $3.57 million during the first six months.
Management stated that cash, cash equivalents, and certificates of deposit were adequate for projected operations and possible land acquisitions.
No dividends were declared or paid during either comparative six-month period.

Material changes versus the prior comparable period

Quarterly revenue decreased 13.0%, driven by a 52.5% decline in oil and gas revenue, partly offset by a 58.6% increase in surface revenue and new timber revenue.
Six-month revenue was essentially flat, decreasing 0.3%, as lower oil and gas and timber revenue was substantially offset by higher surface revenue.
Oil and gas revenue declines reflected lower commodity prices and production. For the quarter, average oil price decreased to $39.92 per barrel from $62.41 and average gas price decreased to $1.77 per MCF from $2.72. For six months, average oil price was $50.46 versus $61.43 and average gas price was $2.22 versus $4.19.
Net income increased 810.1% in the quarter and 109.4% for six months, primarily because of larger land-sale gains and improved operating results.
Current liabilities increased to $338,792 from $227,411 at December 31, 2019, primarily reflecting higher unearned revenue and income tax payable.
The company completed and recorded plats for two ranchette-style subdivisions and expected to complete a third in the third quarter of 2020. Five of 39 lots had been sold and four additional sales were pending as of the filing date.

Guidance, outlook, risks, contingencies, and unusual items

No formal financial guidance was provided. Management expects available cash and certificates of deposit to support projected operations and possible acquisitions.
Oil and gas revenue is inherently volatile and depends on third-party production, commodity prices, well depletion, and producer activity. The company has no access to reserve information because it does not operate the wells.
Timber revenue depends on stumpage agreements, timber stand age, weather, regional demand, and timber prices. Wet weather reduced harvesting activity during the first quarter of 2020.
Surface revenue includes both recurring leases and nonrecurring activities such as rights-of-way and temporary workspaces; nonrecurring revenue may fluctuate significantly.
COVID-19 had not caused significant operational disruption during the first six months, but management could not predict its future effect. Potential impacts include lower commodity prices, reduced third-party operations, weaker timber demand, lower land values, and management or director unavailability.
The company’s option-to-lease agreement with Stream Wetlands Services, LLC is exercisable through February 28, 2021. A company director and incoming president and treasurer, W. Gray Stream, is also president of Stream Wetlands.
The company paid $16,713 to a law firm affiliated with its immediate past president during the six months. These office and administrative services were scheduled to end July 31, 2020.
Management reported effective disclosure controls as of June 30, 2020, with no material changes in internal control over financial reporting during the quarter.

Important facts for investors to verify

Whether future earnings are sustainable without recurring land-sale gains, particularly the $253,907 gain recognized in the first six months.
The effect of oil and gas price, production, and well-count changes on royalty revenue.
The timing, pricing, costs, and remaining inventory of the 39 subdivision lots, including the four pending sales.
Whether COVID-19 affects third-party oil and gas operators, timber mills, surface lessees, land values, or management continuity.
The maturity and liquidity of the $2.75 million in certificates of deposit, which mature through the fourth quarter of 2020.
Related-party transactions involving Stream Wetlands and the affiliated law firm, including the effect of the July 2020 service transition.
Future dividend policy, as no dividends were declared during the reported periods and the board considers prior-year operating cash flow and economic conditions.