CKX Lands, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2012. The unaudited interim financial statements were prepared under U.S. GAAP. CKX Lands is primarily a landowner receiving oil and gas royalties, lease rentals, and geophysical revenue, with additional agriculture and timber activities.
Financial Results and Key Metrics
| Metric | Three Months Ended June 30, 2012 | Three Months Ended June 30, 2011 | Six Months Ended June 30, 2012 | Six Months Ended June 30, 2011 |
|---|---|---|---|---|
| Total revenue | $805,262 | $355,572 | $1,740,372 | $662,516 |
| Income from operations | $623,111 | $190,950 | $1,380,613 | $352,532 |
| Net income | $418,646 | $163,928 | $1,030,418 | $295,730 |
| Net income per share | $0.22 | $0.08 | $0.53 | $0.15 |
| Dividends per share | $0.07 | $0.07 | $0.14 | $0.14 |
- Margins: Operating margin was approximately 77.4% for the quarter and 79.3% for the six months. Net margin was approximately 52.0% and 59.2%, respectively.
- Revenue mix: Six-month oil and gas revenue was $1,425,324, agriculture revenue was $310,043, and timber revenue was $5,005.
- Cash flow: Six-month net cash provided by operating activities was $785,537, compared with $206,418 in the prior-year period. Investing activities used $9,928, and dividends paid used $271,949. Net cash increased by $503,660.
- Liquidity: Cash and cash equivalents were $4,628,568 at June 30, 2012. Current assets were $5,617,789, including $501,384 of current certificates of deposit and $159,003 held in a 1031 trust account. Management reported current assets excluding restricted cash and non-current certificates of deposit of $5,938,786.
- Capital structure: Total liabilities were $240,229, consisting primarily of trade payables, accrued expenses, and deferred income tax payable. The filing does not report interest-bearing debt.
- Equity: Stockholders’ equity was $11,420,386, compared with $10,661,917 at December 31, 2011. Shares outstanding were 1,942,495.
Material Changes Versus the Prior Comparable Period
- Six-month revenue increased by $1,077,856, or approximately 163%, to $1,740,372.
- Oil and gas revenue increased by $790,711, primarily from higher royalty revenue, increased oil production, and higher average oil prices. Oil production increased by approximately 5,924 barrels, while the average oil price increased 9.17% to $109.22 per barrel.
- Gas production increased to 42,868 MCF from 32,665 MCF, but the average gas price declined 26.80% to $3.47 per MCF.
- Agriculture revenue increased to $310,043 from $24,464, primarily because of a pipeline right-of-way fee.
- Oil and gas production costs increased by $71,735, generally in line with higher oil and gas revenue. General and administrative expenses were broadly stable.
- Six-month net income increased by $734,688, or approximately 248%, to $1,030,418. The improvement included a $124,000 gain from the sale of 80 acres of land.
- Cash flow from operations increased by $579,119, while investing cash usage declined substantially from $547,872 to $9,928.
- The company adopted ASU 2011-05, changing the presentation of net income and other comprehensive income.
Outlook, Risks, Contingencies, and Unusual Items
- Management stated that available cash and investments, together with operating cash flow, should be sufficient for operating requirements and strategic acquisitions.
- Management anticipated continuing the quarterly $0.07-per-share dividend and noted that additional dividends may be declared depending on liquidity, capital resources, and available timberland with mineral potential.
- Most revenue is derived from oil and gas properties operated by third parties. Results therefore remain sensitive to oil and gas prices and to the operating decisions of those companies.
- The company sold 80 acres for $160,000 in the first quarter and recognized a $124,000 gain. The transaction was initially structured as a Section 1031 exchange. In July 2012, the company determined the exchange could not be completed and received the $159,000 held by the intermediary.
- Timber prices remained depressed, and the company limited harvesting primarily to internal maintenance, age-class management, and storm-protection activities.
- Tax years 2008 through 2011 remained subject to examination. Management stated that no reserve for uncertain tax positions was required and that no interest or penalties were anticipated.
- Management concluded that disclosure controls were effective and reported no significant changes in internal control over financial reporting.
- Interim results are not necessarily indicative of full-year results.
Investor Verification Items
- Verify the sustainability of the sharp increase in oil and gas revenue, particularly royalty revenue, oil production, and oil prices.
- Assess exposure to oil and gas price volatility and reliance on third-party well operators.
- Confirm the treatment and cash receipt associated with the failed Section 1031 exchange and related tax consequences.
- Review the basis for the substantial increase in agriculture revenue from the pipeline right-of-way fee and determine whether it is recurring.
- Confirm dividend capacity and the board’s policy regarding the regular $0.07-per-share dividend and possible additional dividends.
- Reconcile cash, certificates of deposit, and the 1031 trust account, and verify that the reported liquidity excludes restricted or non-current amounts as described.