CKX Lands, Inc. — Fiscal 2019 Form 10-K Summary
Business context and reporting period
CKX Lands, Inc. filed an annual report for the fiscal year ended December 31, 2019. The company owns and manages approximately 13,972 net acres in Louisiana, generating revenue from oil and gas royalties and lease fees, timber sales, and surface uses such as agriculture, hunting, commercial leases, and rights-of-way. CKX does not operate oil and gas wells and relies on unrelated third parties for exploration and production.
The company reports three segments: oil and gas, timber, and surface. It has one part-time employee and common stock listed on the NYSE American under the symbol CKX.
Financial performance and liquidity
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Total revenue | $811,271 | $1,194,763 | -32.1% |
| Oil and gas revenue | $500,426 | $576,976 | -13.3% |
| Timber revenue | $72,847 | $454,177 | -84.0% |
| Surface revenue | $237,998 | $163,610 | +45.5% |
| Income from operations | $191,606 | $1,368,351 | -86.0% |
| Net income | $249,933 | $1,115,060 | -77.6% |
| Basic and diluted EPS | $0.13 | $0.57 | -$0.44 |
| Cash flow from operations | $194,711 | $241,562 | -19.4% |
Net income margin was approximately 30.8% in 2019 versus 93.3% in 2018. Operating margin was approximately 23.6% in 2019 versus 114.5% in 2018; the prior-year margin was materially elevated by an $881,654 gain on land and equipment sales. The 2019 gain on land and equipment sales was $80,876.
At December 31, 2019, cash was $3.28 million, certificates of deposit were $2.70 million, mutual fund investments were $0.50 million, and total current assets were $6.62 million. Total assets were $15.86 million and stockholders’ equity was $15.45 million. Total liabilities were $415,075, including $187,664 of deferred income tax payable. CKX had no outstanding debt at year-end; its $1.0 million unsecured revolving credit facility expired June 25, 2019 and was not extended.
Net cash provided by investing activities was $1.22 million, principally reflecting certificate-of-deposit maturities, partially offset by purchases of certificates of deposit and mutual funds. Net cash used in financing activities was zero in 2019; no dividend was declared or paid. The company states that cash, cash equivalents, and certificates of deposit are adequate for projected operations and possible land acquisitions.
Material changes versus the prior comparable period
- Total revenue declined $383,492, primarily because of an $381,330 reduction in timber revenue and a $76,550 reduction in oil and gas revenue.
- Timber revenue fell sharply because wet weather made harvesting difficult. Timber represented approximately 9% of 2019 revenue versus 38% in 2018.
- Oil and gas revenue represented approximately 62% of 2019 revenue versus 49% in 2018. Oil revenue declined 21.3%, while gas revenue increased 21.7%.
- Net oil production decreased to 6,272 barrels from 6,956 barrels, while net gas production increased to 32,107 MCF from 25,776 MCF. Average oil price declined to $61.16 per barrel from $68.57; average gas price declined to $3.40 per MCF from $3.48.
- Surface revenue increased 45.5%, driven by lease bonuses, delay rentals, and higher per-acre lease charges.
- General and administrative expense increased $43,719 to $618,919, primarily due to higher contract services, accounting, SEC filing, and legal fees, partly offset by lower salaries.
- Cash increased $1.42 million to $3.28 million, while operating cash flow declined $46,851.
Guidance, outlook, commentary, risks, and unusual items
Management provided no quantified earnings or revenue guidance. For 2020, CKX expected to evaluate acquisitions and divestitures of commercial, agricultural, and timber lands, potentially including properties outside southwest Louisiana and commercial or residential development opportunities. Management planned to continue marketing timber and seeking additional stumpage agreements, while noting depressed stumpage prices and the adverse effect of 2019 rainfall on harvesting.
- Revenue is concentrated in oil and gas royalties and depends on third-party operators discovering and producing new wells to offset depletion. CKX does not have access to reserve information.
- Commodity prices for oil, natural gas, timber, and agricultural products can materially affect revenue, cash flow, and financial condition.
- Properties and timberland are concentrated in southwest Louisiana and are exposed to hurricanes, flooding, storms, fire, and other weather events.
- Environmental liabilities could arise from current or historical oil and gas activity, even where operators are responsible for compliance and remediation.
- Five customers accounted for approximately 41.26% of 2019 revenue; loss of significant customers or revenue streams could materially affect results.
- The company relies on third-party managers for certain timberland properties and has only one part-time employee, who serves as principal executive and financial officer.
- Management reported that previously identified material weaknesses in internal control and disclosure controls were remediated during 2019 and concluded that controls were effective as of December 31, 2019. Limited internal staffing remains a risk.
- The company has no regular dividend policy. It paid $0.12 per share in 2018 but paid no dividend in 2019.
- A January 2020 agreement granted Driftwood Pipeline, LLC an option to purchase land in which CKX owns a one-sixth interest. CKX received a $50,000 deposit and could receive an additional $150,000 if the option is exercised; the option expires after three years unless exercised earlier.
- Related-party arrangements included surface revenue from Stream Wetlands Services, LLC, whose president is a CKX director, and approximately $33,914 of 2019 office, administrative, and related expenses paid to a law firm in which CKX’s president is a partner.
Important facts for investors to verify
- Confirm the audited balance-sheet current liabilities of $227,411; the MD&A section states $217,412, creating an internal inconsistency.
- Assess the sustainability of earnings excluding the 2019 land-sale gain and the unusually large 2018 land-sale gain.
- Monitor oil and gas production, commodity prices, third-party drilling activity, and the absence of disclosed reserve information.
- Evaluate whether timber harvesting normalizes after 2019 weather disruptions and whether depressed stumpage prices persist.
- Review customer concentration, related-party transactions, environmental exposure, and southwest Louisiana weather risk.
- Confirm the company’s future dividend decision, liquidity needs, land acquisition plans, and the status of the Driftwood Pipeline option.
- Note that the independent auditor audited the financial statements but was not engaged to provide an opinion on internal control over financial reporting.