CKX Lands, Inc. — Form 10-Q Summary
Business Context and Reporting Period
CKX Lands, Inc. owns land and derives revenue primarily from oil and gas royalties, lease rentals, geophysical activities, surface uses, and timber sales. This report covers the quarter and six months ended June 30, 2013. The interim financial statements are unaudited and should be read with the company’s 2012 Form 10-K and prior-year Form 10-Q.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2013 | Three Months Ended June 30, 2012 | Six Months Ended June 30, 2013 | Six Months Ended June 30, 2012 |
|---|---|---|---|---|
| Total revenue | $456,007 | $805,262 | $991,572 | $1,740,372 |
| Income from operations | $310,254 | $623,111 | $652,037 | $1,380,613 |
| Net income | $216,451 | $418,646 | $459,992 | $1,030,418 |
| Net income per share | $0.11 | $0.22 | $0.24 | $0.53 |
| Operating margin | 68.0% | 77.4% | 65.8% | 79.3% |
| Net margin | 47.5% | 52.0% | 46.4% | 59.2% |
For the six months, oil and gas revenue was $847,004, surface revenue was $89,427, and timber revenue was $55,141. Oil and gas production included 21,655 MCF of gas at an average $4.22 per MCF and 5,753 barrels of oil at an average $104.15 per barrel, before production and severance taxes.
Net cash provided by operating activities was $539,052 for the first six months of 2013, compared with $785,537 in the prior-year period. Investing activities used $1,002,115, primarily reflecting a net $999,616 investment in certificates of deposit. Financing activities used $271,949 for dividends. Cash and cash equivalents decreased from $5,832,167 at December 31, 2012 to $5,097,155 at June 30, 2013.
Certificates of deposit totaled $1,741,000, bringing cash and certificates of deposit to $6,838,155. Total current assets were $7,120,740, compared with current liabilities of $58,615. Total liabilities were $240,433, including $181,818 of deferred income tax payable. The filing does not disclose outstanding debt; management reported that the bank line of credit was increased from $1 million to $5 million during the quarter.
Stockholders’ equity was $12,550,771 at June 30, 2013. The company paid $271,949 in dividends during the first six months, or $0.14 per share, including $0.07 per share for the quarter.
Material Changes Versus the Prior Comparable Period
- Six-month revenue decreased $748,800, or approximately 43.0%, primarily due to lower oil and gas and surface revenue.
- Oil and gas revenue declined $578,320. Royalty revenue decreased $574,129; gas production fell by 21,213 MCF and oil production declined by approximately 4,243 barrels.
- Average gas prices increased 21.52% to $4.22 per MCF, but lower production more than offset the price improvement. Average oil prices decreased 4.58% to $104.15 per barrel.
- Surface revenue decreased $220,616, largely because the prior-year period included a substantial, non-recurring pipeline right-of-way agreement.
- Timber revenue increased from $5,005 to $55,141, primarily from timber damage associated with right-of-way agreements.
- Six-month operating income decreased $728,576, or approximately 52.8%, and net income decreased $570,426, or approximately 55.4%. The prior-year period included a $124,000 gain on sale of land and other assets.
- General and administrative expense increased $38,444, primarily due to property management expenses that management did not expect to recur. Oil and gas production costs decreased $70,462 because of lower oil and gas revenue.
Guidance, Outlook, Risks, and Unusual Items
Management stated that available cash, investments, and operating cash flow should be sufficient for operating needs and strategic acquisitions. The company anticipated continuing its quarterly $0.07-per-share dividend, while noting that additional dividends could be considered based on liquidity, capital resources, and suitable timberland opportunities.
Management is evaluating whether improved timber prices justify changing its historically limited timber-harvesting approach. No formal revenue or earnings guidance was provided.
Oil and gas revenue represents a significant portion of net income and cash flow, and all such revenue comes from wells operated by other companies on CKX-owned property. Results therefore remain exposed to oil and gas price changes, production levels, and the operating decisions of third-party operators.
The 2012 land sale generated a $124,000 gain. The related planned Section 1031 exchange was not completed, and proceeds held by the qualified intermediary were returned to the company in July 2012. The 2013 filing contains no comparable gain.
Management concluded that disclosure controls and procedures were effective at June 30, 2013, and reported no significant changes in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether reduced oil and gas production and royalty revenue represent a temporary fluctuation or a continuing trend.
- The production volumes, commodity prices, operator activity, and revenue concentration underlying future oil and gas cash flow.
- The recurrence and timing of surface revenue, particularly pipeline right-of-way agreements.
- The terms, availability, and covenants of the expanded $5 million bank line of credit; the filing does not clearly state whether any amount was drawn.
- The sustainability of the $0.07-per-share quarterly dividend and the potential for additional dividends or strategic acquisitions.
- The company’s future timber-harvesting plans and the effect of timber prices on revenue and depletion expense.
- Whether the decline in operating margin and net margin persists as non-recurring 2012 revenue and gain items roll off.