CKX Lands, Inc. Form 10-Q Summary
Business Context and Reporting Period
CKX Lands, Inc. owns and manages land in southwest Louisiana and derives revenue primarily from oil and gas royalties, timber sales, and surface leases. The company does not operate oil and gas wells. This unaudited Form 10-Q covers the three and nine months ended September 30, 2020, compared with the corresponding 2019 periods.
The company reported 1,942,495 common shares outstanding as of November 6, 2020 and is a smaller reporting company listed on NYSE American under the symbol CKX.
Financial Performance and Position
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 |
|---|---|---|
| Total revenue | $160,842, down 29.6% | $529,930, down 11.5% |
| Income from operations | $73,331 | $333,378 |
| Net income | $50,054, down 13.7% | $320,226, up 71.3% |
| Basic and diluted EPS | $0.03 | $0.16 |
| Net margin | 31.1%, compared with 25.4% | 60.4%, compared with 31.2% |
| Operating cash flow | Not separately reported for the quarter | $176,539, compared with $75,314 |
Oil and gas revenue was $50,811 for the quarter and $233,789 year to date. Timber revenue was $59,416 for the quarter and $71,052 year to date. Surface revenue, including related-party revenue, was $50,615 for the quarter and $225,089 year to date.
At September 30, 2020, cash and cash equivalents were $5.26 million, certificates of deposit were $1.19 million, and mutual fund investments were $0.50 million. Total current assets were $7.09 million versus current liabilities of $0.37 million. Total assets were $16.32 million and stockholders’ equity was $15.77 million.
The company reported no debt. Its $1.0 million unsecured revolving credit facility expired and was not renewed because management believed available cash was sufficient. Net cash provided by investing activities was $1.80 million, primarily reflecting certificate-of-deposit maturities and proceeds from asset sales. No dividends were declared during the nine months.
Material Changes Versus the Prior Comparable Period
- Third-quarter revenue declined primarily because oil and gas revenue fell 70.8% to $50,811. Net oil production declined to 1,260 barrels from 2,308, and the average oil price declined to $37.28 per barrel from $63.05. Net gas production declined to 2,227 MCF from 9,274, while the average gas price declined to $1.57 per MCF from $3.02.
- Year-to-date oil and gas revenue declined 42.7% to $233,789, reflecting lower production and commodity prices.
- Timber revenue increased 127.7% year to date to $71,052, and surface revenue increased 41.2% to $225,089.
- Year-to-date net income increased by $133,264, despite lower revenue, primarily because of a $295,238 gain on land sales versus an $80,876 gain in 2019 and lower operating expenses.
- General and administrative expense declined to $121,426 for the quarter and $457,637 year to date, compared with $143,198 and $471,668, respectively.
- Current liabilities increased to $366,528 from $227,411 at December 31, 2019, primarily due to higher unearned revenue, payables and accrued expenses, and income taxes payable.
Guidance, Outlook, Risks and Unusual Items
The filing provides no formal quantitative earnings or revenue guidance. Management states that cash, cash equivalents, and certificates of deposit are adequate for projected operations and possible land acquisitions.
The company is developing three ranchette-style subdivisions containing 39 lots across approximately 575 acres. Five lots had been sold and nine sales were pending as of the filing date; the company was marketing the remaining lots and expected to complete a third subdivision in the fourth quarter of 2020.
COVID-19 materially weakened oil and gas markets and may continue to affect commodity prices, production activity, timber mills, customers, land values, and third-party operators. The company has only one employee and depends substantially on third parties for revenue generation.
Hurricane Laura damaged approximately one-third of the company’s timber and temporarily interrupted oil and gas production. Management determined that no timber impairment was required and believed the production interruption had a minimal effect. Hurricane Delta made landfall on October 9, 2020; the company was still assessing potential damage but believed the effects on assets and operations were minimal.
The company recorded a $295,238 year-to-date gain on sales of six land parcels, including five subdivision lots and one sale to a local government for roadway construction. Such gains are variable and are not recurring operating revenue. The filing also discloses related-party surface revenue of $28,749 year to date and an option-to-lease arrangement with an entity led by a company director and officer.
Management concluded that disclosure controls and procedures were effective as of September 30, 2020, with no material changes in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Whether oil and gas production volumes and prices recover from the sharp year-over-year declines and how much revenue remains exposed to commodity-market volatility.
- The final financial and operational effects of Hurricanes Laura and Delta, including timber damage, production interruptions, and any later impairment or insurance recoveries.
- The timing and collectability of the nine pending subdivision sales and the sustainability of land-sale gains.
- The company’s ability to fund operations and acquisitions without a revolving credit facility, particularly as certificates of deposit mature and liquidity is redeployed.
- The extent and terms of related-party transactions, including the option-to-lease agreement and related-party surface revenue.
- The effect of COVID-19 on oil and gas operators, timber customers, surface lessees, land values, and the company’s single-employee operating structure.