Business Context and Reporting Period
CKX Lands, Inc. is a Louisiana landholding company that earns income from oil and gas royalties, timber sales, and surface leases. It owns approximately 13,699 net acres, principally in southwest Louisiana, and does not operate oil and gas wells. The filing is a Form 10-K for the fiscal year ended December 31, 2022, filed March 31, 2023.
The company operates with two part-time employees and has three reportable segments: oil and gas, timber, and surface. It had 1,974,427 shares outstanding as of March 31, 2023. The stock trades on NYSE American under the symbol CKX.
Key Financial Metrics
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Total revenue | $1,105,494 | $744,545 | +48.5% |
| Oil and gas revenue | $596,755 | $364,907 | +63.5% |
| Timber revenue | $219,974 | $151,102 | +45.6% |
| Surface revenue | $288,765 | $228,536 | +26.4% |
| Operating income (loss) | $(1,842,540) | $1,063,310 | Declined $2,905,850 |
| Net income (loss) | $(1,317,718) | $819,349 | Declined $2,137,067 |
| Basic and diluted EPS | $(0.67) | $0.42 | Declined $1.09 |
| Operating cash flow | $413,691 | $(263,673) | Improved $677,364 |
| Investing cash flow | $(498,765) | $1,210,291 | Declined $1,709,056 |
| Financing cash flow | $(176,592) | $0 | Share repurchases |
The net loss margin was approximately 119% of revenue, compared with a net profit margin of approximately 110% in 2021. The operating loss was driven primarily by general and administrative expense of $2,875,718, including $2,308,537 of share-based compensation.
At December 31, 2022, current assets were $8,307,928, current liabilities were $267,176, and total assets were $17,687,590. Cash and cash equivalents were $7,148,207, and certificates of deposit were $1,004,603. The company reported no outstanding debt. Management stated that cash and cash equivalents were adequate for projected operations and possible land acquisitions. The implied current ratio was approximately 31:1.
Investing cash outflows included $1,000,000 of certificate-of-deposit purchases, $16,461 of reforestation costs, and $12,271 of property and equipment purchases, partially offset by $511,559 of mutual fund sale proceeds and $18,972 from asset sales. Cash declined by $261,666 during 2022 to $7,148,207.
Material Changes Versus the Prior Comparable Period
- Revenue increased $360,949, led by higher oil and gas prices and production, improved timber demand, and greater regional economic activity supporting surface revenue.
- Oil and gas revenue increased 63.5%. Average oil price increased to $96.48 per barrel from $63.92, while average gas price increased to $7.31 per MCF from $3.55. Net gas production increased to 14,891 MCF from 10,410 MCF, while net oil production declined to 4,719 barrels from 5,072 barrels.
- Oil and gas revenues were received from 95 wells in 2022 versus 73 wells in 2021.
- General and administrative expense increased by approximately $2.2 million, primarily because of the first grant of stock-based compensation.
- Gain on sale of land declined to $18,972 from $1,025,735. The 2021 gain included sales of 19 tracts, while 2022 included two tracts.
- The company granted awards covering all 357,000 shares available under its stock incentive plan. During 2022, 46,206 shares vested and were issued, and 14,274 shares were withheld for employee tax obligations. No additional awards may be granted under the plan.
- Stockholders’ equity increased to $17,420,414 despite the net loss, primarily because of $2,308,537 of additional paid-in capital from share-based compensation. The company repurchased 10,166 shares for $176,592.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
Management did not provide quantitative 2023 revenue or earnings guidance. For 2023, it expects to continue evaluating acquisitions and divestitures involving commercial, agricultural, timber, and other properties, including potential development for commercial or residential use. It will continue marketing timber and seeking additional stumpage agreements. Management reported that stumpage prices improved year over year and expressed optimism that they would continue improving.
The company has completed three ranchette-style subdivisions containing 39 lots and had sold 21 lots as of December 31, 2022. One additional sale was pending as of the filing date, with the remaining lots being marketed.
- Revenue is exposed to oil, natural gas, and timber price volatility, production depletion, third-party drilling activity, and the absence of reserve information because CKX does not operate the wells.
- Approximately 66.16% of 2022 revenue came from eight customers. The loss of receipts from these customers or related revenue streams could materially affect results.
- Properties are concentrated in southwest Louisiana and are exposed to hurricanes, flooding, fires, drought, and other weather events. Hurricane Laura previously damaged approximately 33% of standing timber and temporarily interrupted oil and gas production.
- The company may face environmental investigation, remediation, or property-related liabilities arising from current or historical oil and gas activities, even where it did not cause the contamination.
- The company relies on third parties for oil and gas operations, timber management, mills, and other revenue-generating activities.
- Management concluded that internal control over financial reporting was not effective as of December 31, 2022 because of a material weakness related to the valuation and service-period methodology for share-based compensation. Management stated that it adopted a compliant methodology and believes the weakness was eliminated, but the filing reports the control deficiency for 2022.
- The independent auditor issued an unqualified opinion on the financial statements and reported no critical audit matters. The auditor did not express an opinion on internal control over financial reporting because such an audit was not required for the company.
- The company has no regular dividend policy and declared no dividends in 2022 or 2021. No legal proceedings were pending as of December 31, 2022, and no off-balance-sheet arrangements were reported.
Important Facts for Investors to Verify
- Verify the sustainability of higher oil and gas revenue, including commodity prices, production volumes, well activity, and third-party operator plans.
- Assess the recurring versus non-recurring components of surface revenue and the timing and profitability of remaining subdivision lot sales.
- Review the $2.3 million share-based compensation charge, the valuation methodology correction, remaining unrecognized compensation expense of $1,065,465, and the remediation of the material weakness.
- Confirm customer concentration and the exposure of revenue and cash flow to a limited number of oil and gas and timber customers.
- Evaluate the liquidity and investment structure, including uninsured cash balances, certificates of deposit, and the absence of debt.
- Monitor hurricane, flooding, timber damage, environmental, commodity-price, and oil and gas depletion risks affecting the concentrated Louisiana land portfolio.
- Review the company’s future capital allocation decisions, including potential acquisitions, property development, divestitures, share repurchases, and any future financing.