CKX Lands, Inc. 2014 Form 10-K Summary
Business Context and Reporting Period
CKX Lands, Inc. is a Louisiana-based landowner and manager. It owns approximately 13,025 net acres, primarily in southwest Louisiana, and earns revenue from oil and gas royalties and lease rentals, timber sales, and surface uses such as farming, rights of way, and hunting. The Company does not explore for or operate oil and gas wells. The filing covers the fiscal year ended December 31, 2014; it is not a quarterly filing, although the requested period is identified as 2014 Q4.
CKX had 1,942,495 shares outstanding as of March 20, 2015 and three part-time employees. Its common stock trades on the NYSE MKT under the symbol CKX.
Financial Results and Key Metrics
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Total revenue | $2,618,741 | $2,113,828 | +23.9% |
| Oil and gas revenue | $1,483,780 | $1,807,320 | -17.9% |
| Timber revenue | $698,773 | $166,637 | +$532,136 |
| Surface revenue | $436,188 | $139,871 | +$296,317 |
| Income from operations | $1,908,750 | $1,368,641 | +39.5% |
| Income before taxes | $1,926,007 | $1,385,615 | +39.0% |
| Net income | $1,284,874 | $969,771 | +32.5% |
| Net income per share | $0.66 | $0.50 | +32.0% |
| Cash flow from operations | $1,440,361 | $1,178,501 | +22.2% |
| Cash and cash equivalents | $5,225,594 | $4,529,051 | +$696,543 |
| Total assets | $13,826,652 | $13,046,606 | +6.0% |
| Total liabilities | $285,663 | $258,006 | +10.7% |
| Stockholders’ equity | $13,540,989 | $12,788,600 | +5.9% |
Operating margin was approximately 72.9% in 2014 versus 64.7% in 2013. Net margin was approximately 49.1% versus 45.9%. The filing does not present a separately identified EBITDA measure.
Liquidity remained strong, with current assets of $7.1 million, including $5.2 million of cash and $1.68 million of short-term certificates of deposit. The Company also held $240,000 of long-term certificates of deposit. It had no outstanding balance on its $5.0 million unsecured line of credit and reported no debt other than a $224,426 deferred income tax payable and ordinary trade payables and accrued expenses.
Investing activities used $211,333 of cash, including $286,727 of timber purchases and $425,956 of land purchases and improvements. Financing activities used $532,485, primarily for $543,899 of dividends. The Company paid a regular dividend of $0.07 per share quarterly, or $0.28 per share for the year.
Material Changes Versus the Prior Comparable Period
- Total revenue increased $504,913, driven by substantially higher timber and surface revenue.
- Oil and gas revenue declined $323,540. Royalty revenue decreased 20.4%, partly offset by a 28.9% increase in lease rental revenue.
- Timber revenue increased more than fourfold because the Company harvested timber during the year in response to acceptable timber prices.
- Surface revenue increased $296,317, primarily from two right-of-way agreements. Management stated that this revenue is not recurring.
- Gas production increased to 46,457 MCF from 42,117 MCF, while net oil production declined to 10,593 barrels from 13,273 barrels. Average gas price increased to $5.05 per MCF from $4.42; average oil price declined to $98.03 per barrel from $104.62.
- Net income increased $315,103, while operating cash flow increased $261,860.
- The Company purchased 380 acres of timberland during 2014, including a 180-acre purchase used in connection with a tax-deferred Section 1033 exchange.
Guidance, Outlook, Risks and Unusual Items
- Management expected 2015 oil and gas revenue to be significantly below 2014 levels because oil and gas prices fell sharply late in 2014 and early in 2015, and operators were reportedly reducing exploration and production capital budgets.
- Timber revenue was expected to remain approximately flat with 2014, assuming timber prices remained stable or improved.
- Management continued to seek timberland with mineral potential and expected acceptable acquisitions at reasonable values to remain possible. The Company may consider acquisitions outside southwest Louisiana.
- There were 28 non-producing mineral leases covering approximately 3,243.91 gross acres, or 599.48 net acres. Management believed some could eventually be drilled and produce revenue, but no guarantee was provided.
- The principal risks are dependence on third parties for oil and gas exploration and production, depletion of existing reserves, commodity-price volatility, customer concentration, and natural disasters affecting timberland.
- Approximately 74.42% of 2014 revenue came from six customers. Loss of receipts from any of these customers or revenue streams could materially affect the Company.
- Two 2014 right-of-way agreements generated nonrecurring surface revenue. The Company also recorded $11,414 of dividend reversions and a $42,609 deferred tax expense related to the Section 1033 exchange.
- The Company reported no material legal proceedings, material contingencies, or off-balance-sheet arrangements. Management assessed disclosure controls and internal control over financial reporting as effective.
Important Facts for Investors to Verify
- Confirm the sustainability of 2014’s unusually large timber and surface revenue increases, particularly the nonrecurring right-of-way proceeds.
- Monitor oil and gas prices, operator drilling activity, production depletion, and the timing of development on non-producing leases.
- Review customer concentration and the exposure represented by the six customers contributing approximately 74.42% of revenue.
- Verify the Company’s ability to maintain the $0.07 quarterly dividend as oil and gas revenue declines.
- Assess the valuation and future cash-generation potential of the Company’s land, timber, and mineral interests, noting that CKX does not have access to reserve information for its royalty interests.
- Review the Section 1033 exchange, deferred tax liability, related-party payments, and the absence of an independent auditor attestation on internal control over financial reporting.