CKX Lands, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2019; financial statements are unaudited. CKX owns and manages land and derives revenue from oil and gas royalties, timber sales, and surface leases and related activities. The company does not operate oil and gas wells. There were 1,942,495 common shares outstanding as of November 1, 2019.
Financial Results and Position
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Total revenue | $228,337 | $257,696 | $598,620 | $998,423 |
| Income from operations | $54,563 | $75,916 | $142,297 | $1,351,697 |
| Income before taxes | $83,075 | $102,217 | $226,821 | $1,403,873 |
| Net income | $57,970 | $85,400 | $186,962 | $1,074,464 |
| Operating margin | 23.9% | 29.5% | 23.8% | 135.4% |
| Net margin | 25.4% | 33.1% | 31.2% | 107.6% |
Revenue mix: Q3 oil and gas revenue was $174,097, timber revenue was $16,717, and surface revenue was $37,523, including $9,583 from a related party. Nine-month revenue was $408,029 from oil and gas, $31,198 from timber, and $159,393 from surface activities.
Cash flow and liquidity: Nine-month operating cash flow was $75,314, compared with $98,089 in the prior-year period. Investing cash flow was $1,004,310, primarily reflecting certificate-of-deposit maturities of $2,390,000, purchases of certificates of deposit of $1,468,000, and $109,235 of proceeds from fixed-asset sales. Cash increased by $1,079,624 to $2,940,360.
At September 30, 2019, current assets were $6,560,546 versus current liabilities of $226,781. Cash, certificates of deposit, and mutual-fund investments totaled approximately $6.36 million. Total assets were $15,798,929 and stockholders’ equity was $15,384,484. The company had no outstanding debt. Its $1.0 million unsecured revolving credit line expired June 25, 2019 and was not extended.
Material Changes Versus Prior Comparable Period
- Q3 revenue decreased 11.4% to $228,337; nine-month revenue decreased 40.0% to $598,620.
- Nine-month timber revenue declined 92.4% because wet weather limited harvesting; Q3 timber revenue declined 70.6% for the same reason.
- Nine-month oil and gas revenue declined 12.2%, primarily because oil revenue fell 18.8% as average oil prices decreased to $62.19 per barrel from $67.29. Gas revenue increased 27.5%.
- Nine-month surface revenue increased 31.1%, reflecting lease bonuses, delay rentals, and higher per-acre lease charges.
- Nine-month net income fell 82.6%, largely because the prior-year period included an $881,654 gain on land sales versus an $80,876 gain in 2019.
- General and administrative expense increased 17.1% for the nine-month period, primarily due to higher contract services, accounting, SEC filing, and legal fees.
- No dividend was declared or paid during the first nine months of 2019, compared with $233,099 paid during the first nine months of 2018.
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. The filing provides no quantitative earnings or revenue guidance.
- Oil and gas revenue is exposed to commodity prices, production changes, exploration and development decisions by third-party operators, and eventual depletion of reserves. CKX does not operate the wells and does not have access to reserve information.
- Timber revenue varies with weather, timber stand age, regional stumpage markets, harvesting activity, and timber prices. Wet weather materially reduced 2019 harvesting.
- Surface revenue includes recurring leases and less-predictable nonrecurring rights-of-way and temporary workspace arrangements.
- Management concluded that disclosure controls and procedures were not effective as of September 30, 2019 because of material weaknesses in internal control over financial reporting, including insufficient staffing, lack of segregation of duties, and insufficient evidence of review and oversight of certain financial processes, including outsourced processes.
- The company adopted the new lease standard effective January 1, 2019 and determined that adoption had no impact on its financial statements.
- Related-party arrangements include surface revenue from Stream Wetlands Services, LLC, whose president is a company director, and office, administrative, and legal services purchased from a law firm in which the company’s president is a partner.
- The company reported no legal proceedings, off-balance-sheet arrangements, or impairment charges for the nine months ended September 30, 2019.
Investor Verification Items
- Verify the sustainability and volatility of oil and gas royalties, including commodity prices, production volumes, well activity, and depletion trends.
- Assess whether timber harvesting and revenue can normalize after the weather-related disruption.
- Review the material internal-control weaknesses and management’s remediation plans.
- Evaluate the concentration of liquidity in certificates of deposit and mutual funds, including maturity dates and deposit insurance limits.
- Review the company’s dividend policy and the absence of 2019 dividends.
- Reconcile the $80,876 2019 land-sale gain and the substantially larger $881,654 prior-year gain when comparing earnings quality.