CKX Lands, Inc. 2017 Second-Quarter Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2017. The financial statements are unaudited and prepared under U.S. GAAP. CKX Lands owns land and generates revenue through oil and gas royalties and lease rentals, timber, and surface-use agreements. The company had 1,942,495 common shares outstanding.
Financial Performance and Position
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenue | $397,005 | $139,648 | $595,776 | $427,956 |
| Income from operations | $254,755 | $(21,685) | $283,963 | $114,149 |
| Income before taxes | $265,118 | $(14,679) | $304,538 | $132,500 |
| Net income | $213,480 | $3,570 | $258,100 | $102,364 |
| Basic and diluted earnings per share | $0.11 | $0.00 | $0.13 | $0.05 |
- Six-month revenue increased 39.2% year over year, led by oil and gas revenue of $333,362, up 60.1%, and surface revenue of $253,448, up 156.3%. Timber revenue fell 92.6% to $8,966.
- Approximate net margins were 53.8% for the second quarter and 43.3% for the six months, compared with 2.6% and 23.9%, respectively, in the prior-year periods.
- Six-month operating income increased $169,814, or approximately 148.8%. General and administrative expense increased $20,618, primarily from higher legal, officer compensation, and director fees.
- Oil and gas revenue growth reflected higher oil and gas prices, increased oil production, and higher lease revenue. Net oil production was 4,305 barrels versus 4,090; average oil price was $50.40 per barrel versus $34.33. Net gas production was 23,746 MCF versus 23,982; average gas price was $3.38 per MCF versus $2.25.
- At June 30, 2017, cash and cash equivalents were $1.52 million, current certificates of deposit were $2.40 million, and non-current certificates of deposit were $1.21 million. Total assets were $14.49 million.
- Current liabilities were $143,735 and total liabilities were $442,654, including $298,919 of deferred income tax payable. The filing does not disclose traditional funded debt or borrowings.
- Stockholders’ equity was $14.05 million, compared with $13.99 million at December 31, 2016.
Cash Flow and Liquidity
| Six-month cash flow | 2017 | 2016 |
|---|---|---|
| Cash provided by operating activities | $162,083 | $115,373 |
| Cash provided by investing activities | $469,460 | $143,746 |
| Cash from financing activities | $(194,250) | $6,507 |
| Net increase in cash | $437,293 | $265,626 |
| Ending cash and cash equivalents | $1,518,481 | $3,033,050 |
Management stated that cash and certificates of deposit were adequate for projected operations and possible land acquisitions. Investing cash flow primarily reflected certificate-of-deposit maturities exceeding purchases. The company paid a $0.10-per-share dividend during the first quarter of 2017, totaling $194,250, and expects to evaluate dividends annually based on prior-year operating cash flow and economic conditions.
Material Changes, Outlook, and Unusual Items
- Management expects oil and gas activity to remain improved compared with 2016, but emphasized that royalty, lease, and production revenue depends on commodity prices and activities of third-party operators.
- Timber revenue declined because no harvesting occurred under outstanding stumpage agreements, which management attributed partly to heavy rains.
- Surface revenue benefited primarily from a pipeline right-of-way agreement and an option-to-lease agreement. These revenues are not predictable and may vary materially between periods.
- On April 17, 2017, the company entered into an option-to-lease agreement with Stream Wetlands Services, LLC for $38,333. The agreement provides an exclusive evaluation and marketing right through February 28, 2018, with extension rights. A company director is Stream’s president. The company cannot estimate any additional potential benefit because the underlying project award and scope remain uncertain.
- On July 13, 2017, after quarter-end, the company agreed to purchase approximately 44,000 rentable square feet of commercial real estate in Sulphur, Louisiana for $2.725 million. The transaction remained subject to a 90-day feasibility period and board approval and may involve an IRS Section 1031 exchange.
- Disclosure controls and procedures were assessed as effective, and no significant changes to internal control over financial reporting were reported.
Investor Verification Checklist
- Verify the sustainability and concentration of oil and gas royalties, including exposure to commodity prices and third-party operator activity.
- Confirm the timing and economic significance of future timber harvesting and surface-use agreements.
- Review the related-party option-to-lease arrangement with Stream Wetlands Services, LLC and the uncertainty of any resulting lease revenue.
- Determine whether the proposed $2.725 million Sulphur commercial real estate acquisition closed, how it was financed, and its effect on liquidity and future income.
- Reconcile the certificate-of-deposit balances, dividend policy, and available liquidity against planned acquisitions.
- Assess the deferred tax liability, customer concentration, and the effect of interim revenue variability on full-year results.