CKX Lands, Inc. — Form 10-K Summary
Business Context and Reporting Period
Annual report for the fiscal year ended December 31, 2013, filed March 21, 2014. CKX owns and manages approximately 12,645 net acres in southwest Louisiana, generating income from oil and gas royalties and lease fees, surface leases, and timber sales. The company does not explore for or produce oil and gas, actively farm, or manage timber operations. It had three part-time employees and was classified as a smaller reporting company.
Financial Performance and Position
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Total revenue | $2.114 million | $3.263 million | Down 35.2% |
| Operating income | $1.369 million | $2.511 million | Down 45.5% |
| Income before taxes | $1.386 million | $2.650 million | Down 47.7% |
| Net income | $970 thousand | $2.237 million | Down 56.6% |
| Net income per share | $0.50 | $1.15 | Down $0.65 |
| Cash flow from operations | $1.179 million | $1.986 million | Down 40.7% |
Approximate margins were 64.8% operating margin and 45.9% net margin in 2013, compared with 76.9% and 68.5%, respectively, in 2012. The filing does not present EBITDA.
- Oil and gas revenue was $1.807 million, or 85.5% of total revenue, versus $2.818 million, or 86.4%, in 2012. Royalty revenue declined 32.9%; lease rental revenue declined 55.3%; and geophysical revenue fell to zero.
- Surface revenue declined to $140 thousand from $345 thousand, primarily because a 2012 pipeline right-of-way payment was nonrecurring.
- Timber revenue increased to $167 thousand from $100 thousand as timber prices improved.
- Net gas production declined to 42,117 MCF from 92,791 MCF, while the average gas price increased to $4.42 per MCF from $2.84. Net oil production declined to 13,273 barrels from 19,653 barrels; the average oil price was $104.62 per barrel versus $105.51.
- Cash and cash equivalents were $4.529 million, certificates of deposit were $2.421 million, and total current assets were $7.208 million at year-end.
- Total liabilities were $258 thousand, including a $182 thousand deferred tax liability. The company had no balance outstanding on its $5.0 million unsecured line of credit and reported no material debt.
- Stockholders’ equity was $12.789 million and total assets were $13.047 million.
- Capital expenditures and timber and land purchases totaled $258 thousand. Investing cash flow was negative $1.938 million, primarily due to purchases of certificates of deposit and timber and land.
- Cash dividends were $0.28 per share for the year, or $544 thousand in total. The company stated its intent to continue quarterly dividends of $0.07 per share, subject to liquidity and capital resources.
Material Changes Versus the Prior Comparable Period
- The principal deterioration was the 35.2% revenue decline, driven by lower oil and gas production, reduced leasing activity, and the absence of 2012 geophysical and pipeline-related revenue.
- Net income was additionally lower because 2012 included a $432 thousand after-tax Deepwater Horizon settlement gain and a $124 thousand land-sale gain; neither recurred in 2013.
- Operating expenses were broadly stable at $745 thousand versus $752 thousand, but depreciation and depletion increased to $102 thousand from $16 thousand, largely reflecting timber depletion.
- Operating cash flow declined but remained positive at $1.179 million. Cash decreased by $1.303 million because investment purchases and dividends exceeded operating cash generation.
- CKX purchased 120 acres of timberland during 2013 and reported 23 non-producing mineral leases covering approximately 453 net acres.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management expected 2014 leasing activity to remain steady, with potential support from horizontal and deeper wells and LNG-export expansion.
- Management anticipated increased timber revenue if prices remained acceptable and higher right-of-way revenue from southwest Louisiana pipeline projects, including an agreement expected to close in the first quarter of 2014.
- The company planned to continue searching for timberland with mineral potential, although management expected suitable land to become more difficult to acquire at reasonable values.
- The major risk is dependence on third-party operators to discover and develop new oil and gas production to offset depletion. CKX does not have access to reserve information, and the filing provides no proved-reserve quantities.
- Commodity-price volatility directly affects revenue and earnings. Oil and gas revenues represented 85.5% of 2013 revenue, and approximately 71.7% of total revenue came from six producers. Loss of a significant customer or underlying production could materially affect results.
- Environmental compliance is primarily the responsibility of well operators, but landowners could potentially face responsibility if an operator abandons a well without following required procedures.
- Management reported no material legal proceedings, contingencies, or off-balance-sheet arrangements. The auditor issued an unqualified opinion on the financial statements; the auditor did not provide an ICFR attestation because the company qualified for the smaller-reporting-company exemption.
- Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2013.
Important Facts for Investors to Verify
- Verify the sustainability of oil and gas production, particularly the concentration in the South Bear Head Creek, Cowards Gully, and South Jennings fields.
- Review producer-level concentration, including the six producers responsible for approximately 71.7% of 2013 revenue.
- Assess whether expected 2014 pipeline right-of-way payments and mineral leasing activity occurred and whether they offset declining royalty production.
- Confirm the availability and terms of the $5.0 million unsecured credit line and the company’s continued ability to fund dividends and land purchases.
- Evaluate the absence of reserve information and the long-term depletion risk of the company’s oil and gas royalty base.
- Review the 2012 Deepwater Horizon settlement and related-party contingent fees as nonrecurring items that affect year-over-year comparability.