CKX Lands, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2013. The interim financial statements are unaudited and prepared under U.S. GAAP. CKX Lands owns land and derives revenue primarily from oil and gas royalties, lease rentals, geophysical activities, surface-use arrangements, and timber.
Financial Results and Position
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Total revenue | $582,401 | $726,660 | $1,573,973 | $2,467,032 |
| Income from operations | $416,527 | $518,295 | $1,068,564 | $1,898,909 |
| Net income | $293,691 | $357,156 | $753,683 | $1,387,574 |
| Net income per share | $0.15 | $0.18 | $0.39 | $0.71 |
| Dividends per share | $0.07 | $0.07 | $0.21 | $0.21 |
- Margins: Operating margin was approximately 71.5% in Q3 2013 and 67.9% for the first nine months; net margin was approximately 50.4% and 47.9%, respectively.
- Cash and liquidity: Cash and cash equivalents were $4.51 million at September 30, 2013, compared with $5.83 million at December 31, 2012. Certificates of deposit were $2.42 million, up from $741,384. Combined cash and certificates of deposit totaled approximately $6.93 million.
- Debt and liabilities: Total liabilities were $265,660, including $83,842 of current liabilities and $181,818 of deferred income tax payable. The filing does not report outstanding borrowings. The available bank line of credit was increased from $1.0 million to $5.0 million during the quarter ended June 30, 2013.
- Equity: Stockholders’ equity was $12.71 million, compared with $12.36 million at December 31, 2012.
- Cash flow: Nine-month operating cash flow was $767,709, versus $1.13 million in 2012. Investing activities used $1.68 million, primarily because of $2.42 million invested in certificates of deposit. Financing activities used $407,924 for dividends. Ending cash was $4.51 million.
Material Changes Versus the Prior Comparable Period
- Nine-month revenue declined $893,059, or approximately 36%, primarily because oil and gas revenue decreased $733,845 and surface revenue decreased $204,434.
- Oil and gas revenue fell to $1.37 million from $2.10 million. Gas production declined to 34,306 MCF from 60,206 MCF, although the average gas price increased to $4.37 per MCF from $3.34. Oil production declined to 9,744 barrels from 15,074 barrels, while the average oil price decreased to $104.38 per barrel from $106.20.
- Surface revenue decreased mainly because the prior-year period included a large, non-recurring pipeline right-of-way agreement.
- Timber revenue increased to $82,724 from $37,504. The company is marketing timber on approximately 350 acres following recent improvement in timber prices.
- Nine-month net income declined $633,891, or approximately 46%, and operating income declined $830,345. The 2012 results included a $124,000 gain on a land sale, which did not recur in 2013.
- Oil and gas production costs decreased $97,795 because of lower revenue and new production exempt from severance tax until well costs are recovered. General and administrative expense increased $34,020, primarily from property management costs that management does not expect to recur.
- The company declared and paid $0.07 per share for the third quarter. Dividends paid during the first nine months totaled $407,924.
Guidance, Outlook, Risks, and Unusual Items
- Management expects to be able to continue paying a quarterly dividend of $0.07 per share and may declare additional dividends depending on liquidity, capital resources, and suitable timberland opportunities.
- Management believes available cash, investments, operating cash flow, and the available credit line will be sufficient for operating needs and strategic acquisitions.
- Subsequent to September 30, 2013, the company purchased 120 acres in southwest Louisiana; approximately 80 acres contain 20- to 40-year-old pine timber.
- Oil and gas revenue is generated from wells operated by other companies and is therefore exposed to oil and gas price changes and fluctuations in third-party operating activity.
- Interim results are not necessarily indicative of full-year results. The filing identifies no applicable items under Part II, Items 1–5, and management concluded that disclosure controls were effective.
Investor Verification Items
- Verify the sustainability of oil and gas production, royalty revenue, commodity prices, and activity by third-party well operators.
- Assess the effect of the non-recurring 2012 pipeline right-of-way revenue and land-sale gain on year-over-year comparisons.
- Confirm the terms, availability, and any outstanding balance under the $5.0 million bank line of credit.
- Evaluate whether the $0.07 quarterly dividend remains supported by recurring operating cash flow and liquidity.
- Review the strategic and financial impact of the 120-acre acquisition and the company’s timber harvesting plans.