CKX LANDS, INC. quarterly report, Q3 FY2016

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CKX Lands, Inc. — Form 10-Q Summary

Business context and reporting period

CKX Lands, Inc. owns land and related mineral, timber, and surface-use interests in the United States. Its three operating segments are oil and gas, timber, and surface activities. This unaudited report covers the quarter and nine months ended September 30, 2016, with comparisons to the corresponding 2015 periods.

Financial performance and position

  • Third-quarter revenue: $210,043, down 40.5% from $353,231. Oil and gas revenue was $151,752, timber revenue was $4,992, and surface revenue was $53,299.
  • Third-quarter net income: $21,371, down 84.6% from $138,716. Net margin was approximately 10.2%, compared with 39.3% in the prior-year quarter.
  • Nine-month revenue: $637,999, down 27.6% from $881,467. Oil and gas revenue declined 46.5%, while timber revenue increased 547.2% and surface revenue declined 19.5%.
  • Nine-month net income: $123,735, down 70.8% from $424,114. Net margin was approximately 19.4%, compared with 48.1% in 2015.
  • Nine-month operating income: $130,985, compared with $607,700 in 2015. The prior period included a $172,352 gain on sale of land.
  • Cash flow: Operating activities generated $183,106, versus $448,652 in 2015. Investing activities used $2,171,040, primarily for land, timber, equipment, and other asset purchases of $2,401,040. Financing activities provided $6,507 from dividend reversions.
  • Liquidity: Cash and cash equivalents were $785,997. Certificates of deposit totaled $4,294,000, including $3,814,000 classified as current. Current assets were $4,743,473 versus current liabilities of $139,427.
  • Debt: The balance sheet reports no debt. The company stated that it has an available bank line of credit of $3 million.
  • Assets and equity: Total assets were $14,378,460, including $9,154,987 of net property and equipment. Stockholders’ equity was $13,940,009.

Material changes versus the prior comparable period

  • Oil and gas revenue fell because of lower production, lower average commodity prices, and reduced lease and geophysical revenue. Net oil production declined to 6,413 barrels from 8,805, and net gas production declined to 36,094 MCF from 45,700.
  • Average oil price declined to $38.01 per barrel from $53.46, while average gas price declined to $2.33 per MCF from $3.44.
  • Oil and gas revenue was received from 114 wells, compared with 129 wells in 2015.
  • Timber revenue increased primarily from a 2014 stumpage agreement. The company also received a $52,300 advance under a new 24-month stumpage agreement; harvesting had not occurred because of heavy rains.
  • Surface revenue declined because of the timing of pipeline right-of-way agreements.
  • General and administrative expense increased by $74,669 for the nine-month period, primarily due to higher officer compensation, property taxes associated with land acquisitions, property manager fees, and director fees, partly offset by lower professional fees.
  • Capital expenditures increased substantially to $2,401,040 from $287,517, including approximately $1.88 million of general corporate asset purchases and $519,721 of timber-related expenditures.
  • The company purchased approximately 1,129 acres during the first nine months, including substantial land and timber interests in Beauregard and Calcasieu Parishes, Louisiana.
  • No cash dividends were paid in 2016 through September 30. The company recognized $6,507 of dividends that reverted because they were not claimed within one year.

Guidance, outlook, risks, contingencies, and unusual items

  • Management expects oil and gas activity to remain depressed compared with 2015, based on commodity prices, demand, and industry activity. The filing does not provide formal quantitative earnings or revenue guidance.
  • Oil and gas revenue is dependent on wells operated by other companies and is subject to fluctuations in commodity prices, production, and operator activity.
  • Pipeline, utility, surface-use, and other right-of-way revenue is unpredictable and can vary materially between periods.
  • Management believes cash, certificates of deposit, and operating cash flow are sufficient for operating requirements and strategic acquisitions.
  • On October 16, 2016, the company entered into a memorandum of understanding with Stream Wetlands Services, LLC, a related party whose president is a CKX director. CKX received $37,667 for a six-month non-exclusive right to evaluate and market certain company lands for wetlands-related beneficial use. Any future lease or project benefit remains uncertain.
  • The interim financial statements include normal recurring adjustments, are unaudited, and may not be indicative of full-year results.
  • Management reported that disclosure controls were effective at September 30, 2016, with no significant changes in internal control over financial reporting.

Important facts for investors to verify

  1. Whether oil and gas production, prices, and operator activity continue to decline and how that affects recurring cash flow.
  2. The composition, maturity, and liquidity of the $4.294 million in certificates of deposit.
  3. The nature and expected returns of the approximately $2.4 million of 2016 land, timber, and corporate asset purchases.
  4. Whether timber harvesting under the new stumpage agreement begins and how the $52,300 advance is recognized.
  5. The outcome of the related-party wetlands opportunity and any subsequent lease or project agreement.
  6. The sustainability of dividends, given lower operating cash flow and the board’s stated dependence on prior-year cash flows and economic conditions.