CKX Lands, Inc. — Form 10-Q Summary
Reporting period: Three months ended March 31, 2020; filed May 7, 2020. CKX owns land and derives revenue from oil and gas royalties, timber sales, and surface leases and other surface-related activities. The financial statements are unaudited.
Financial performance and position
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Total revenue | $180,391 | $153,475 | +17.5% |
| Income from operations | $55,955 | $89,360 | -37.4% |
| Income before taxes | $73,830 | $115,884 | -36.3% |
| Net income | $58,382 | $105,721 | -44.8% |
| Basic and diluted EPS | $0.03 | $0.05 | Decreased |
| Operating margin | 31.0% | 58.2% | Decreased |
| Net margin | 32.4% | 68.9% | Decreased |
| Cash flow from operations | $21,743 | $(40,010) | Improved |
| Cash flow from investing | $(434,876) | $305,807 | Decreased |
- Revenue mix: Oil and gas revenue was $115,050, up 22.1%; surface revenue was $57,453, up 28.3%; timber revenue was $7,888, down 45.5%.
- Oil and gas drivers: Oil revenue increased 153.2% to $96,225, supported by net oil production of 1,586 barrels versus 650 and an average price of $60.68 per barrel versus $58.45. Gas revenue declined 65.6% to $17,977 as production and the average price per MCF decreased.
- Profitability: General and administrative expense increased $23,086, while the gain on sale of land declined to $33,107 from $75,926. Interest income also declined to $17,875 from $26,524.
- Liquidity: Cash was $2.87 million, certificates of deposit were $3.16 million, and mutual fund investments were approximately $0.50 million at March 31, 2020. Current assets were $6.76 million versus current liabilities of $0.30 million, implying a current ratio of approximately 22.2x.
- Capital structure: Total liabilities were $492,019 and stockholders’ equity was $15.51 million. The filing reports no borrowings. An unsecured $1.0 million revolving credit line expired and was not extended because management believes available cash is sufficient.
- Cash movement: Cash decreased $413,133 during the quarter, primarily because $1.21 million of certificates of deposit were purchased, partly offset by $744,000 of maturities and $33,265 of fixed-asset sale proceeds.
- Share count and dividends: Weighted-average and period-end shares were 1,942,495. No dividends were declared or paid.
Material changes versus Q1 2019
- Revenue grew primarily from substantially higher oil production and higher surface lease pricing.
- Net income fell despite higher revenue because the prior period benefited from a much larger land-sale gain, while general and administrative costs increased.
- Operating cash flow improved from a $40,010 use of cash to $21,743 provided, but investing cash flow turned negative due mainly to increased certificate-of-deposit purchases.
- Timber revenue declined because wet weather limited customers’ harvesting activity.
- Accrued royalty revenue was reduced approximately 33% during the quarter to reflect lower oil prices in February and March 2020.
Outlook, risks, contingencies, and unusual items
- Management stated that cash, cash equivalents, and certificates of deposit are adequate for projected operations and possible land acquisitions.
- CKX is developing three ranchette-style subdivisions covering approximately 575 acres and 39 lots. Two lots had been sold, one sale was pending, and the remaining lots were being marketed at the filing date. A third subdivision was expected to be completed in the third quarter of 2020.
- COVID-19 had not caused significant first-quarter operating disruption, but management could not predict its future effects. Risks include lower oil and gas prices, reduced activity by exploration companies, timber mills and other counterparties, depressed land values, and disruption from the company’s dependence on one employee and third parties.
- Oil and gas revenue is volatile and dependent on commodity prices, production, and third-party operators. CKX does not operate wells and does not have access to reserve information; existing reserves will eventually be depleted.
- The company reported no impairment charge, no material off-balance-sheet arrangements, and effective disclosure controls as of March 31, 2020.
- Related-party items included $9,583 of surface revenue from Stream Wetlands Services, LLC and $8,263 of office, administrative, legal, and related expenses paid to a law firm in which the company’s president is a partner.
Important facts for investors to verify
- Whether COVID-19, subsequent oil-price movements, and operating restrictions materially affected results after March 31, 2020.
- The sustainability of the Q1 oil production increase and the impact of lower gas prices and production.
- The timing, costs, demand, and expected returns from the subdivision development and remaining lot sales.
- The concentration of revenue among major customers and the company’s reliance on third-party operators, timber mills, lessees, and service providers.
- The maturity schedule and liquidity terms of the $3.16 million certificate-of-deposit portfolio, along with the absence of a replacement revolving credit facility.
- Whether future land-sale gains or other nonrecurring items could materially affect quarterly earnings comparability.