CKX Lands, Inc. Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2012. The filing is an annual report and does not provide a separate fourth-quarter income statement. Filed March 21, 2013.
Business Context
CKX owns and manages approximately 12,525 net acres in Louisiana. It earns royalties and lease income from oil and gas, agriculture rentals, and timber sales, but does not explore for or produce oil and gas, actively farm, or manage timber operations. Oil and gas accounted for 86.35% of 2012 revenue, compared with 90.80% in 2011.
The company had four part-time employees and approximately 1,942,495 shares outstanding as of March 21, 2013.
Financial Performance and Liquidity
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Total revenue | $3,262,987 | $1,984,914 | +64.39% |
| Income from operations | $2,510,860 | $1,310,681 | +91.57% |
| Income before taxes | $2,649,835 | $1,376,712 | +92.47% |
| Net income | $2,236,597 | $951,777 | +134.16% |
| Net income per share | $1.15 | $0.49 | Increase |
| Operating margin | 77.0% | 66.0% | Improved |
| Net margin | 68.5% | 48.0% | Improved |
| Cash flow from operations | $1,986,025 | $1,008,543 | +96.9% |
| Cash and cash equivalents | $5,832,167 | $4,124,908 | +41.4% |
| Total assets | $12,585,420 | $10,994,969 | +14.5% |
| Total liabilities | $222,692 | $333,052 | -33.1% |
Current assets were $6,902,621 and certificates of deposit totaled $741,384 at year-end. Management stated that operating cash flow, cash and investments, certificates of deposit, and an unused $1 million unsecured bank line were adequate for operations, potential land purchases, and regular dividends. The company had no borrowings under the line of credit.
Cash flow benefited from strong operating results and $257,020 of net investing cash inflow. Dividends paid were $543,899, equal to $0.28 per share. The company continued its quarterly $0.07 dividend policy.
Material Changes Versus 2011
- Oil and gas revenue increased 56.34% to $2,817,606, primarily from higher oil production, plant revenue, and royalty revenue. Gas production increased, but the average gas price declined to $2.84 per MCF from $5.08.
- Net oil production increased to 19,585 barrels from 10,909 barrels, while the average oil price was broadly stable at $105.51 per barrel versus $104.73.
- Agriculture revenue increased to $345,267 from $82,324, mainly due to a pipeline right-of-way grant. Management identified this increase as nonrecurring and expected agriculture income to return toward 2011 levels.
- Timber revenue was essentially flat at $100,114, reflecting depressed lumber-market conditions.
- Net income included a $431,535 after-tax extraordinary gain from a Deepwater Horizon settlement claim. The total claim was $808,865, and net cash received after professional fees and reimbursement was $687,535.
- The company sold 80 acres for $160,000 and recorded a $124,000 gain. It also purchased 100 acres during 2012.
- Capital expenditures declined materially to $136,221 from $1,837,318 in 2011, while investing cash flow changed from a $1,535,427 use to a $257,020 source.
- In the fourth quarter, CKX withdrew from the Walker Louisiana Properties joint venture. The entity continued to provide property-management services on a third-party basis, and management reported that related internal-control issues were remediated.
Outlook, Risks, and Unusual Items
- Management continued seeking timberland with mineral potential and expected additional acquisition opportunities in 2013 at reasonable values.
- Fifteen non-producing mineral leases covered approximately 1,785 gross acres, or 521 net acres. Management expected some could be drilled if oil and gas prices improved.
- Timber prices were expected to remain depressed, with timber revenue anticipated to remain approximately flat.
- Leasing and geophysical activity was expected to remain flat.
- The principal business risk is dependence on third-party operators to discover and develop new production to replace depletion from existing oil and gas properties. CKX does not have access to reserve information.
- Commodity-price volatility directly affects revenue and income. The company also faces significant customer concentration: Gulfmark Energy represented approximately 48.50% of 2012 revenue, Swift Energy Operating LLC 9.06%, and Riceland Petroleum Company 6.01%.
- Oil and gas reserves will eventually deplete, and the filing does not provide a clear estimate of the depletion timeline.
- The company maintained cash at one financial institution; deposits above the $250,000 FDIC insurance limit were exposed to institutional concentration risk.
- No material legal proceedings or known material contingencies were reported, and the company reported no off-balance-sheet arrangements.
- The board declared a further $0.07-per-share dividend on March 21, 2013, payable April 18, 2013.
Investor Verification Checklist
- Verify the sustainability of the 2012 earnings increase after excluding the $431,535 after-tax Deepwater Horizon settlement gain and the $124,000 land-sale gain.
- Assess production declines, new drilling, reserve replacement, and operator activity because CKX lacks direct control over exploration and does not receive reserve information.
- Review exposure to Gulfmark Energy and other concentrated customers, including the effect of any production interruption or payment failure.
- Monitor natural-gas prices, oil prices, timber markets, and agriculture revenue following the nonrecurring pipeline right-of-way grant.
- Confirm the continuation of the $0.07 quarterly dividend against future operating cash flow and land-acquisition requirements.
- Review the Deepwater Horizon claim, including contingent fees paid to the attorney and accountant, who was also the company’s chief financial officer.
- Evaluate internal-control disclosures after the withdrawal from the Walker Louisiana Properties joint venture; management reported controls were effective at December 31, 2012, but the auditor did not provide an ICFR attestation.