CKX Lands, Inc. — Form 10-Q Summary
Business Context and Reporting Period
CKX Lands, Inc. owns and manages land and mineral interests in southwest Louisiana. Its income is derived primarily from oil and gas royalties and lease income, timber sales, surface payments, and land sales. The company is passive in oil and gas production and does not operate wells. This report covers the three and six months ended June 30, 2021; financial statements are unaudited.
CKX had 1,942,495 common shares outstanding as of August 6, 2021. Management stated that disclosure controls were effective as of June 30, 2021 and that no material changes occurred in internal control over financial reporting.
Financial Results and Key Metrics
| Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 |
|---|---|---|---|---|
| Total revenue | $211,306 | $188,697 | $366,182 | $369,088 |
| Income from operations | $232,832 | $204,092 | $681,159 | $260,047 |
| Net income | $174,348 | $211,790 | $601,155 | $270,172 |
| Basic and diluted EPS | $0.09 | $0.11 | $0.31 | $0.14 |
| Net margin | 82.5% | 112.3% | 164.2% | 73.2% |
Six-month revenue was essentially flat year over year, while net income increased substantially because of a larger gain on land sales and lower general and administrative expense. Reported margins are significantly affected by these land-sale gains and are not representative of recurring operating margins.
- Second-quarter oil and gas revenue increased 46.0% to $99,202, primarily from higher oil and gas prices. Six-month oil and gas revenue declined 18.4% to $149,347 because production volumes decreased despite higher average prices.
- Second-quarter timber revenue increased to $49,414 from $3,747; six-month timber revenue increased to $102,941 from $11,635. Management attributed the increase to wet weather that restricted harvesting in 2020 and recognition of an expired stumpage agreement.
- Second-quarter surface revenue decreased 46.4% to $62,690, and six-month surface revenue decreased 34.7% to $113,894, primarily because of lower one-time right-of-way income.
- General and administrative expense decreased 23.2% in the quarter to $148,316 and 25.2% for the six months to $251,399. Declines in officer salaries, property management fees, legal fees, and contract services were partly offset by higher property taxes, insurance, and transfer agent fees.
- Gain on sale of land was $184,045 in the second quarter and $590,265 for the six months, compared with $220,800 and $253,907, respectively, in the prior-year periods.
Cash Flow, Liquidity, Debt, and Balance Sheet
- Cash and cash equivalents were $7.13 million at June 30, 2021, compared with $6.46 million at December 31, 2020.
- Total current assets were $7.77 million versus current liabilities of $299,498, indicating substantial short-term liquidity. Equity investment in mutual funds totaled $502,757.
- Total assets were $16.88 million and stockholders’ equity was $16.39 million at June 30, 2021.
- The company had no outstanding debt at June 30, 2021 or December 31, 2020. Deferred income tax payable was $187,664.
- Operating cash flow was negative $64,018 for the first six months, compared with positive $92,042 in 2020. The principal reason was the larger gain on land sales, which increased net income but does not represent operating cash flow.
- Investing cash flow was positive $730,999, primarily from $745,237 of proceeds from sales of fixed assets, partly offset by $14,114 of timber reforestation costs.
- Cash increased $666,981 during the six months, ending at $7.13 million. Management stated that cash and cash equivalents were adequate for projected operations and possible land acquisitions.
Material Changes, Outlook, and Risks
- The company completed and recorded plats for three ranchette-style subdivisions totaling 39 lots on approximately 575 acres. Eighteen lots had been sold by June 30, 2021; one additional lot was sold after quarter-end, one sale was pending, and the remaining lots were being marketed.
- For the first six months, land-sale gains arose from sales of 14 pieces of land, including 12 subdivision lots and unimproved land, compared with four land sales in the prior-year period.
- The Board continues to evaluate land acquisitions, asset dispositions, business combinations, reinvestment opportunities, and other strategic alternatives. The filing provides no specific transaction, earnings, revenue, or capital allocation guidance.
- Oil and gas revenue is exposed to commodity prices, production volumes, well depletion, producer activity, and the eventual depletion or uneconomic production of reserves. CKX does not have access to reserve information because it does not operate the wells.
- Timber revenue varies with weather, timber stand age, regional stumpage agreements, and timber prices. Surface revenue can be volatile because it includes non-recurring items such as pipeline rights-of-way and temporary worksite rentals.
- COVID-19 had not caused significant operational disruption through the reporting date, but management stated that future effects on the business and financial results remain uncertain.
- Related-party surface revenue was $19,166 for the six months, representing payments under an option-to-lease agreement with Stream Wetlands Services, LLC. A company director and officer is also president of Stream Wetlands. The option was renewed through February 28, 2022 for $38,333, with a further one-year extension available for an additional $38,333.
- No impairment charges, dividends, off-balance-sheet arrangements, or material legal proceedings were reported in the filing.
Investor Verification Checklist
- Verify the sustainability of earnings excluding the $590,265 six-month land-sale gain and other non-recurring surface and land-sale activity.
- Monitor oil and gas production volumes, commodity prices, producing-well counts, and the effect of reserve depletion on future royalty income.
- Confirm the timing, pricing, profitability, and remaining inventory of the subdivision lot sales.
- Assess the recurring versus non-recurring components of timber and surface revenue.
- Review the related-party lease option and associated governance considerations.
- Confirm cash concentration and insurance exposure because cash deposits exceeded FDIC insurance limits at individual institutions in aggregate, although the company maintained balances across seven financial institutions.