CKX Lands, Inc. 2012 Third-Quarter Form 10-Q Summary
Business Context and Reporting Period
CKX Lands, Inc. filed an unaudited Form 10-Q for the quarter and nine months ended September 30, 2012. The company owns timberland and mineral interests and generates revenue primarily from oil and gas royalties, lease rentals and geophysical activity, with additional agriculture and timber operations. Oil and gas production is operated by other companies.
Financial Performance and Position
| Metric | Quarter Ended Sept. 30, 2012 | Quarter Ended Sept. 30, 2011 | Nine Months 2012 | Nine Months 2011 |
|---|---|---|---|---|
| Total revenue | $726,660 | $670,890 | $2,467,032 | $1,333,406 |
| Income from operations | $518,295 | $482,138 | $1,898,909 | $834,670 |
| Net income | $357,156 | $345,387 | $1,387,574 | $641,117 |
| Net income per share | $0.18 | $0.18 | $0.71 | $0.33 |
| Dividends per share | $0.07 | $0.07 | $0.21 | $0.21 |
- For the first nine months, revenue increased approximately 85%, operating income increased approximately 128%, and net income increased approximately 116% year over year.
- Approximate operating margin was 77.0% for the first nine months of 2012 versus 62.6% in 2011; net margin was approximately 56.3% versus 48.1%.
- Quarterly revenue increased approximately 8%, while quarterly net income increased approximately 3%. Quarterly operating margin was approximately 71.3%, compared with 71.9% in the prior-year quarter.
- Oil and gas revenue was $2,102,106 for the first nine months, up $901,920. Agriculture revenue was $327,422, up from $46,588, primarily because of a pipeline right-of-way fee. Timber revenue declined to approximately $37,503 from $86,632.
- Net cash provided by operating activities was $1,126,986, compared with $700,028 in the prior-year period. Investing activities provided $257,020, while dividends used $399,811. Net cash increased $984,195 to $5,109,103.
- At September 30, 2012, total assets were $11,935,213, including $5,109,103 of cash and cash equivalents and $741,384 of certificates of deposit. Total liabilities were $285,533 and stockholders’ equity was $11,649,680.
- The filing reports no borrowings or interest payments; liquidity was primarily supported by cash, certificates of deposit and operating cash flow.
Material Changes Versus the Prior Comparable Period
- Oil production increased by approximately 7,795 barrels to 15,074 barrels, while the average oil price increased 2.95% to $106.20 per barrel.
- Gas production increased to 60,205 MCF from 48,372 MCF, but the average gas price declined 33.92% to $3.34 per MCF. Gas revenue nevertheless increased overall due to royalty and production changes.
- Oil and gas production costs increased by $93,443, primarily reflecting higher revenue and related severance taxes. General and administrative expense also increased, primarily because of higher property management fees related to staffing changes at WLP.
- The company sold 80 acres of land for $160,000 during the first quarter and recorded a $124,000 gain. The planned tax-deferred Section 1031 exchange was not completed, and $159,000 held by the qualified intermediary was returned in July 2012; the gain was recognized as current for tax purposes.
- Certificates of deposit declined from $1,215,625 at December 31, 2011 to $741,384 at September 30, 2012, while cash and cash equivalents increased from $4,124,908 to $5,109,103.
Guidance, Outlook, Risks and Unusual Items
- Management stated that cash, investments and operating cash flow should be sufficient for operating requirements and strategic acquisitions.
- Management anticipated continuing the regular quarterly dividend of $0.07 per share and noted that additional dividends may be considered based on liquidity, capital resources and suitable timberland with mineral potential.
- Oil and gas revenue provides most of the company’s income and is subject to fluctuations in commodity prices and the operating decisions of third-party well operators.
- Timber harvesting has been limited because timber prices have remained depressed; harvesting is generally limited to internal maintenance, age-class management and storm protection.
- The interim financial statements include only normal recurring adjustments and are not necessarily indicative of full-year results. Management reported effective disclosure controls and no significant changes in internal control over financial reporting.
Important Facts for Investors to Verify
- Confirm the sustainability of the substantial year-to-date revenue and earnings increase, particularly the contribution from the pipeline right-of-way fee and higher oil production.
- Monitor oil and gas prices, production volumes and third-party operator activity, including the effect of materially lower gas pricing.
- Evaluate the recurring nature of the $124,000 land-sale gain and the related tax impact.
- Assess the company’s ability to maintain the $0.07 quarterly dividend and any potential additional dividends while preserving acquisition and operating liquidity.
- Review the complete annual filing for details regarding mineral reserves, land holdings, operator concentration, contingencies and any commitments not described in this interim filing.