CKX LANDS, INC. annual report, FY2015

CKX Lands, Inc. Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2015; filed March 29, 2016. CKX is a Louisiana landowner and manager with approximately 13,195 net acres, generating income from oil and gas royalties and lease fees, timber, and surface leases. The company does not explore for or operate oil and gas wells. It had three part-time employees and was classified as a smaller reporting company.

Financial Performance and Position

Metric	2015	2014	Change
Total revenue	$1.062 million	$2.619 million	Down 59.44%
Operating income	$650,698	$1.909 million	Down 65.92%
Income before taxes	$673,806	$1.926 million	Down 65.02%
Net income	$463,028	$1.285 million	Down 63.97%
Basic and diluted EPS	$0.24	$0.66	Down $0.42
Cash flow from operations	$441,974	$1.440 million	Down 69.31%

Net margin was approximately 43.6%, compared with 49.1% in 2014. Operating margin was approximately 61.3%, compared with 72.9% in 2014. The 2015 results included a $172,352 gain on the sale of land and $23,108 of interest income.

Oil and gas revenue was $786,204, down 47.01%, and represented 74.02% of total revenue versus 56.66% in 2014.
Timber revenue was $52,028, down from $698,773 because no new stumpage agreements were closed during 2015; 2015 revenue was earned under a 2014 agreement expiring in June 2016.
Surface revenue was $223,869, down from $436,188, primarily because two 2014 right-of-way agreements did not recur.
Average gas price declined to $3.33 per MCF from $5.05, while average oil price declined to $51.67 per barrel from $98.03. Gas production increased, while oil production was broadly unchanged excluding plant products.
Capital and investing activity included $265,982 of land purchases and improvements, $21,535 of timber purchases, and net purchases of certificates of deposit totaling $2.604 million. Ending cash and cash equivalents were $2.767 million versus $5.226 million.
Total assets were $14.157 million, including $6.201 million of current assets and $6.756 million of property and equipment. Total liabilities were $347,169, including a $292,767 deferred tax liability.
CKX had no outstanding borrowings. Its unsecured $5.0 million line of credit was available at year-end, matured May 15, 2016, and carried interest at 2.75% plus ICE LIBOR if drawn.
Dividends paid were $194,250, or $0.10 per share, versus $543,899, or $0.28 per share, in 2014. The board discontinued the prior regular/extra dividend framework and will consider prior-year operating cash flow and current economic conditions.

Material Changes Versus 2014

Revenue fell sharply because of lower oil and gas prices, reduced lease rental income, substantially lower timber revenue, and the absence of nonrecurring 2014 right-of-way revenue.
Net income declined by $821,846, while operating cash flow declined by $998,387.
Cash decreased by $2.458 million, primarily reflecting certificate-of-deposit purchases, land investment, and dividends.
CKX purchased approximately 200 acres of timberland in 2015 and reviewed more than 6,000 acres for potential acquisition.
The company reclassified $375,516 of treasury stock as authorized but unissued shares under the Louisiana Business Corporation Act, eliminating the treasury stock balance.
Management reported no legal proceedings, material contingencies, impairment charges, or off-balance-sheet arrangements.

Outlook, Risks, and Unusual Items

Management expects 2016 oil and gas revenue to be equal to or below 2015 levels because of depressed commodity prices and anticipated reductions in producer exploration and production spending.
Management expects higher timber revenue in 2016 and believes surface revenue could increase with economic activity in southwest Louisiana, although the potential increase was not quantified.
The principal risk is dependence on third-party operators to discover and develop new oil and gas production as existing production depletes. CKX does not have access to reserve information.
Commodity-price volatility directly affects oil, gas, and timber income. The company stated that if 2015 oil and gas prices had returned to 2014 averages, pretax income would have been approximately 79.21% higher.
Revenue is concentrated among a limited number of customers; approximately 72.21% of 2015 revenue came from eight customers. Loss of material customer relationships or revenue streams could materially affect results.
Timber assets are exposed to hurricanes, tornadoes, high winds, heavy rain, fire, and other natural disasters.
Operators are responsible for environmental compliance, but CKX could potentially bear responsibility if an operator abandons a well improperly. Management did not expect a material effect.
A $172,352 land-sale gain was recognized in 2015, with the transaction structured as a tax-deferred Section 1031 exchange. The proceeds were applied to the purchase of approximately 200 acres.
Management assessed disclosure controls and internal control over financial reporting as effective. The auditor expressed an opinion on the financial statements but did not provide an internal-control attestation.

Investor Verification Priorities

Verify the sustainability of oil and gas royalty revenue given lower prices, production depletion, and the absence of company-controlled reserve data.
Review customer concentration and the exposure to the eight customers comprising approximately 72.21% of 2015 revenue.
Assess the timing and economics of new timber stumpage agreements and the likelihood of improved 2016 timber revenue.
Confirm the status, renewal, and terms of the $5.0 million unsecured credit line after its stated May 15, 2016 maturity.
Evaluate dividend capacity under the revised policy, particularly in light of lower operating cash flow.
Review the tax treatment and remaining deferred tax liability associated with the 2015 Section 1031 exchange and other deferred gains.
Confirm the effect of cash and certificate-of-deposit allocations on liquidity, including deposits exceeding FDIC insurance limits.