CKX Lands, Inc. Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2011; filed March 22, 2012. CKX owns and manages approximately 12,505 net acres in Southwest Louisiana and earns passive income from oil and gas royalties, mineral leases, agriculture rentals and timber sales. The company does not explore for or operate oil and gas wells.
Financial Performance and Position
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Total revenue | $1,984,914 | $1,671,354 | +18.8% |
| Oil and gas revenue | $1,802,205 | $1,406,122 | +28.2% |
| Income from operations | $1,310,681 | $1,058,896 | +23.8% |
| Income before taxes | $1,376,712 | $1,295,785 | +6.2% |
| Net income | $951,777 | $916,883 | +3.8% |
| Net income per share | $0.49 | $0.47 | +4.3% |
| Operating margin | 66.0% | 63.4% | Improved |
| Net margin | 48.0% | 54.9% | Declined |
| Operating cash flow | $1,008,543 | $774,569 | +30.2% |
- Oil and gas represented 90.8% of revenue in 2011, compared with 84.1% in 2010. Royalty revenue increased 31.9%, while lease rentals increased 5.8% and geophysical revenue increased substantially from a low base.
- Timber revenue declined 39.6% to $100,385 because of weak housing-market conditions and lower sales volume. Agriculture revenue declined 16.8% to $82,324.
- Cash and cash equivalents were $4.125 million; short- and long-term certificates of deposit totaled $975,625. Securities available for sale declined from $783,772 at year-end 2010 to zero at year-end 2011.
- Total assets were $10.995 million and stockholders’ equity was $10.662 million at December 31, 2011.
- Total liabilities were $333,052, consisting primarily of current payables and deferred income taxes. The company had no borrowings outstanding and maintained an unused $1.0 million unsecured line of credit.
- Cash used in investing activities was $1.535 million, principally for land and timber acquisitions. Cash dividends paid were $543,899, or $0.28 per share.
Material Changes Versus 2010
- Revenue growth was driven by higher oil and gas royalty income and increased oil production revenue, partially offset by lower gas production and sharply lower timber and agriculture revenue.
- Net income increased only 3.8% despite higher operating income because 2010 included substantially higher gains on sales of securities: $155,553 in 2010 versus $10,688 in 2011.
- Capital expenditures increased materially to $1.837 million from $615,077. The company purchased approximately 320 acres with standing timber during the first quarter and approximately 800 acres during the fourth quarter.
- Cash declined by $1.057 million during 2011, compared with a $1.205 million increase in 2010, primarily because land and timber purchases exceeded operating cash generation.
- Timber assets increased to $1.147 million from $557,253, while land increased to $4.431 million from $3.192 million.
Guidance, Outlook, Risks and Unusual Items
- Management expected additional opportunities to purchase timberland with mineral potential in 2012 and expected timber revenue to remain approximately flat because of continued weak housing conditions. Agriculture income was also expected to remain flat.
- The company had 22 non-producing mineral leases covering approximately 2,078 gross acres, or 714 net acres, and expected some could be drilled if oil and gas prices improved. No reserve estimates are available because CKX does not operate the wells.
- Future results depend heavily on third-party exploration and development, commodity prices, production depletion and the discovery of new oil and gas reserves. Oil and gas revenue concentration also creates customer risk; five customers represented approximately 57.5% of 2011 revenue.
- Management stated that current operating cash flow, cash, investments and the available credit line were adequate for operations, potential land purchases and regular dividends.
- The company paid a regular quarterly dividend of $0.07 per share and declared another $0.07 dividend on March 22, 2012. No special dividend was paid in 2011 or 2010.
- Management concluded that disclosure controls were effective, but assessed internal control over financial reporting as ineffective because it could not assess Walker Louisiana Properties’ controls and lacked compensating controls. No remediation plan had been identified as of the report date.
- Walker Louisiana Properties is material to CKX and is partially owned by CKX. The company also states that it maintains cash balances at one financial institution, with only $250,000 insured by the FDIC.
- The independent auditor issued an unqualified opinion on the financial statements but did not opine on internal control over financial reporting.
Investor Verification Items
- Verify the sustainability of oil and gas royalty revenue, including production depletion, third-party drilling activity and the absence of company-controlled reserve estimates.
- Assess exposure to the five largest customers and the effect of losing any major operator or underlying production.
- Review the material weakness in internal control related to Walker Louisiana Properties and monitor whether a remediation plan is implemented.
- Reconcile 2011 land and timber acquisitions, capital expenditures and the resulting decline in cash.
- Evaluate dividend sustainability against operating cash flow, planned land purchases and commodity-price volatility.
- Review concentration of uninsured cash deposits and the terms and availability of the unused $1.0 million credit line.