CKX Lands, Inc. Form 10-Q Summary
Business Context and Reporting Period
CKX Lands, Inc. is a Louisiana landholding company whose revenue is derived primarily from oil and gas royalties and lease-related income, timber sales, and surface payments. The company does not operate oil and gas wells. This report covers the three and nine months ended September 30, 2018, compared with the corresponding 2017 periods. The financial statements are unaudited.
- Shares outstanding: 1,942,495 as of November 9, 2018.
- Reportable segments: oil and gas, timber, and surface operations.
- The company is classified as a smaller reporting company and is not a shell company.
Financial Results and Key Metrics
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Total revenue | $257,696 | $197,323 | $998,423 | $793,099 |
| Income from operations | $75,916 | $80,543 | $1,351,697 | $364,506 |
| Income before taxes | $102,217 | $92,008 | $1,403,873 | $396,546 |
| Net income | $85,400 | $51,298 | $1,074,464 | $309,398 |
| Basic and diluted earnings per share | $0.04 | $0.03 | $0.55 | $0.16 |
- Q3 revenue increased 30.6%; nine-month revenue increased 25.9%.
- Approximate net margins were 33.1% in Q3 2018 versus 26.0% in Q3 2017, and 107.6% for the first nine months of 2018 versus 39.0% in the prior-year period. The nine-month margin was significantly affected by an $881,654 gain on sale of land and equipment.
- Oil and gas revenue was $178,640 in Q3, up 35.0%, but $464,895 for nine months, essentially flat with 2017. Q3 oil revenue rose 58.9%, while gas revenue declined 29.1%.
- Timber revenue was $56,929 in Q3 and $411,936 for nine months, compared with zero and $8,966, respectively, in the comparable 2017 periods.
- Surface revenue declined 65.9% in Q3 and 61.8% for nine months, primarily because pipeline right-of-way revenue received in 2017 did not recur in 2018.
- General and administrative expense increased 17.3% in Q3 and 9.9% for nine months, primarily because of officer bonuses related to land dispositions and higher accounting and professional fees.
Cash Flow, Liquidity, Debt, and Balance Sheet
- Cash and restricted cash increased to $1,992,461 at September 30, 2018, from $1,652,404 at December 31, 2017.
- Certificates of deposit totaled $4,095,000, including $2,150,000 classified as current and $1,945,000 classified as long term. Maturities extend through August 2020.
- Total assets were $15,522,343, compared with $14,723,737 at year-end 2017. Stockholders’ equity was $15,156,926, compared with $14,315,561.
- Current liabilities were $177,753, and total liabilities were $365,417. The company reported no outstanding borrowings.
- An unsecured revolving credit facility provides borrowing capacity of up to $1,000,000, bears interest at 4.25%, and matures June 25, 2019. No amount was drawn at September 30, 2018.
- Net cash provided by operating activities was $98,089, down from $276,845 in the prior-year period. Management attributed the reduction primarily to the effect of the land-sale gain in the operating cash flow reconciliation.
- Net cash provided by investing activities was $475,067, including $996,494 of proceeds from asset sales, $2,662,890 of certificate-of-deposit maturities, and $3,145,000 of certificate-of-deposit purchases.
- Net cash used in financing activities was $233,099, consisting of dividends paid.
- The company paid a $0.12 per-share dividend totaling $233,099 in April 2018. Future dividends will be considered annually based in part on operating cash flow and economic conditions.
Material Changes, Outlook, Risks, and Unusual Items
- The major earnings driver for the first nine months was the $881,654 gain on sale of land and equipment; this is nonrecurring and materially boosted operating income and net income.
- Four parcels of land were sold in the first quarter through a planned Section 1031 deferred exchange. The exchange was not completed because identified replacement properties were deemed unacceptable after preliminary due diligence. Restricted funds of $873,355 were released in August 2018, leaving no restricted cash at September 30.
- Management stated that available cash, cash equivalents, and certificates of deposit are adequate for projected operations and possible land acquisitions.
- Oil and gas income is exposed to commodity prices, production declines, the discovery and depletion of wells, and producer activity. The company has small royalty interests in 31 producing fields and does not have access to reserve information because it does not operate the wells.
- Timber revenue depends on stumpage agreements, timber stand age, weather, regional markets, and timber prices. Surface revenue, including pipeline and utility right-of-way payments, can be significant but is unpredictable and nonrecurring.
- The company adopted the new revenue recognition standard and the restricted-cash cash-flow presentation standard in the first quarter of 2018. Management reported no cumulative-effect adjustment and no change to restricted-cash presentation.
- A related party, Stream Wetlands Services, LLC, holds an option exercisable through February 28, 2019, to lease certain company lands. A company director is the related party’s president.
- Beginning in August 2018, the company rented office space and administrative services from a law firm in which its president is a partner; $6,571 was recorded for the three and nine months ended September 30, 2018.
- Management reported effective disclosure controls and procedures and no significant changes in internal control over financial reporting.
Investor Verification Checklist
- Verify the sustainability of reported earnings excluding the $881,654 land-sale gain.
- Assess whether timber revenue growth can continue and whether surface revenue will recover without recurring pipeline right-of-way payments.
- Review oil and gas production declines, commodity-price sensitivity, and the lack of company-controlled reserve data.
- Confirm the maturity schedule, liquidity, and credit quality of the $4.095 million certificate-of-deposit portfolio.
- Evaluate the company’s dividend policy and capacity to fund future land acquisitions while maintaining dividends.
- Review the failed Section 1031 exchange, related-party arrangements, customer concentration, and potential tax consequences of land dispositions.