CKX Lands, Inc. — 2017 Q3 Form 10-Q Summary
Business context and reporting period
CKX Lands, Inc. owns land and derives revenue primarily from royalty interests and lease rentals related to oil and gas, timber operations, and surface-use agreements. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2017, compared with the corresponding 2016 periods. The company reported 1,942,495 common shares outstanding and is classified as a smaller reporting company.
Financial performance and condition
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Total revenue | $197,323 | $210,043 | $793,099 | $637,999 |
| Income from operations | $80,543 | $16,835 | $364,506 | $130,984 |
| Income before taxes | $92,008 | $29,233 | $396,546 | $161,733 |
| Net income | $51,298 | $21,371 | $309,398 | $123,735 |
| Basic and diluted EPS | $0.03 | $0.01 | $0.16 | $0.06 |
- Nine-month revenue increased 24.3% year over year. Oil and gas revenue rose 29.4% to $465,710, surface revenue rose 109.2% to $318,423, and timber revenue fell 92.9% to $8,966.
- Q3 revenue declined 6.1% year over year, but operating income increased substantially because of lower general and administrative costs and a $28,561 gain on sale of land.
- Nine-month operating margin was approximately 46.0%, compared with 20.5% in 2016. Net margin was approximately 39.0%, compared with 19.4% in 2016. These comparisons include the 2017 land-sale gain.
- Net cash provided by operating activities was $276,845 for the first nine months, versus $183,106 in 2016.
- Net cash used in investing activities was $61,317, compared with $2.17 million in 2016, primarily reflecting lower property purchases and certificates-of-deposit activity.
- Cash, cash equivalents, and restricted proceeds held in a 1031 trust account totaled $1.10 million at September 30, 2017. Cash and cash equivalents were $1.07 million, and restricted 1031 proceeds were $33,821.
- Certificates of deposit totaled $4.09 million, including $2.18 million classified as current and $1.91 million classified as non-current.
- Total assets were $14.65 million, compared with $14.42 million at December 31, 2016. Total liabilities were $546,356, including $310,012 of deferred income tax payable. The filing reports no debt borrowings.
- Current assets were $3.49 million versus current liabilities of $236,344, indicating substantial reported current liquidity.
- Stockholders’ equity increased to $14.10 million from $13.99 million after $309,398 of net income and $194,250 of dividends paid.
Material changes versus the prior comparable period
- Oil and gas revenue increased despite lower production: net oil production declined to 6,037 barrels from 6,413, and net gas production declined to 33,056 MCF from 37,348 MCF. Average oil price increased to $49.20 per barrel from $38.01, while average gas price increased to $3.42 per MCF from $2.33.
- Oil and gas revenue benefited from higher commodity prices and increased lease activity. Revenue was received from 93 wells versus 114 wells in the prior-year period.
- Timber revenue declined because of limited harvesting, heavy rains, and depressed single-family home building activity.
- Surface revenue increased primarily from a pipeline right-of-way agreement and an option-to-lease agreement.
- General and administrative expense declined by $17,032 for the nine-month period, primarily from lower officer salaries, partly offset by higher legal and director fees.
- Capital expenditures fell to $127,722 from $2.40 million in the prior-year period, including $38,934 for timber and $88,788 for general corporate assets.
Guidance, outlook, risks, contingencies, and unusual items
- Management stated that oil and gas activity, including production and lease rentals, is expected to improve compared with 2016 based on available public information. No quantified earnings or revenue guidance was provided.
- Management believes cash and certificates of deposit are adequate for projected operations and possible land acquisitions.
- Oil and gas revenue depends on commodity prices and activities of third-party operators and can fluctuate significantly. Timber and surface revenue are also described as unpredictable and variable.
- On April 17, 2017, the company entered into an option-to-lease agreement with Stream Wetlands Services, LLC, receiving $38,333 for an exclusive evaluation and marketing right through February 28, 2018. A company director is Stream’s president. The potential financial benefit from any subsequent project could not be estimated.
- On July 13, 2017, the company agreed to purchase commercial real estate in Sulphur, Louisiana. The proposed transaction was initially approximately 44,000 rentable square feet for $2.725 million. The company anticipated amending the agreement to approximately 29,600 square feet and a $2.055 million purchase price, subject to acceptable changes to encumbrances, due diligence, and board approval.
- The company declared and paid a $0.10-per-share dividend during the first quarter of 2017. Future dividends will be considered annually based on prior-year operating cash flow, economic conditions, and other factors.
- The financial statements are unaudited and interim results are not necessarily indicative of full-year results. The company reported effective disclosure controls and no significant changes in internal control over financial reporting.
Important facts for investors to verify
- Verify the final status, funding, and accounting treatment of the proposed Sulphur commercial real estate acquisition and any related 1031 exchange.
- Assess the sustainability of improved earnings after excluding the $31,452 nine-month gain on land sale and considering highly variable surface and timber revenue.
- Monitor oil and gas prices, third-party operator activity, well counts, production volumes, and royalty and lease-rental trends.
- Review the related-party option-to-lease arrangement with Stream Wetlands Services, including any future project award, lease terms, and related-party disclosures.
- Confirm dividend policy and the company’s capacity to fund dividends, acquisitions, and ongoing operations from operating cash flow and liquid investments.