Quarterly Report (10-q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

 

(Mark One)

 

☑

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2021

☐

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 000-08157

THE RESERVE PETROLEUM COMPANY

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware	73-0237060
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

 

6801 BROADWAY EXT., SUITE 300 OKLAHOMA CITY, Oklahoma 73116-9037 [phone]

(Address and telephone number, including area code, of registrant’s principal executive offices)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
None	None	None

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☑Yes ☐No

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☑Yes ☐No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

 

Large accelerated filer ☐

Accelerated filer ☐

Non-accelerated filer ☐

Smaller reporting company ☑

Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐Yes ☑No

 

As of August 6, 2021, 156,561 shares of the Registrant’s $0.50 par value common stock were outstanding.

 

 

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TABLE OF CONTENTS

 

 

PART I – FINANCIAL INFORMATION

 

		Page
Item 1.	Consolidated Financial Statements	2
	Index to Consolidated Financial Statements
	Consolidated Balance Sheets – June 30, 2021 and December 31, 2020	2
	Consolidated Statements of Operations – Three and Six Months Ended June 30, 2021 and 2020	4
	Consolidated Statements of Stockholders’ Equity –  Three and Six Months Ended June 30, 2021 and 2020	5
	Condensed Consolidated Statements of Cash Flows – Six Months Ended June 30, 2021 and 2020	6
	Notes to Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	15
Item 4.	Controls and Procedures	15
	PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	15
Item 1A.	Risk Factors	15
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	15
Item 3.	Defaults Upon Senior Securities	15
Item 4.	Mine Safety Disclosures	16
Item 5.	Other Information	16
Item 6.	Exhibits	16

 

 

1

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PART I – FINANCIAL INFORMATION

 

 

ITEM 1.         CONSOLIDATED FINANCIAL STATEMENTS

 

 

THE RESERVE PETROLEUM COMPANY

CONSOLIDATED BALANCE SHEETS

ASSETS

 

 

		June 30,				December 31,
		2021				2020
		(Unaudited)
Current Assets:
Cash and Cash Equivalents		$	3,380,512			$	16,187,085
Available-for-Sale Debt Securities			---				1,515,234
Equity Securities			15,456,539				2,536,482
Refundable Income Taxes			87,404				218,204
Accounts Receivable			816,708				794,162
Notes Receivable			344,326				278,569
Total Current Assets			20,085,489				21,529,736
Investments:
Equity Method Investments			1,604,976				604,991
Other Investments			2,375,053				2,415,399
Total Investments			3,980,029				3,020,390
Property, Plant and Equipment:
Oil and Gas Properties, at Cost, Based on the Successful Efforts Method of Accounting –
Unproved Properties			1,975,737				1,883,055
Proved Properties			56,062,159				55,095,961
Oil and Gas Properties, Gross			58,037,896				56,979,016
Less – Accumulated Depreciation, Depletion, Amortization and Valuation Allowance			(50,590,461	)			(49,684,584	)
Oil and Gas Properties, Net			7,447,435				7,294,432
Other Property and Equipment, at Cost			657,820				279,240
Less – Accumulated Depreciation			(98,894	)			(96,532	)
Other Property and Equipment, Net			558,926				182,708
Total Property, Plant and Equipment			8,006,361				7,477,140
Other Assets			549,053				120,445
Total Assets		$	32,620,932			$	32,147,711

 

See Accompanying Notes

 

2

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THE RESERVE PETROLEUM COMPANY

CONSOLIDATED BALANCE SHEETS

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

			June 30,				December 31,
			2021				2020
			(Unaudited)
Current Liabilities:
Accounts Payable			$	126,445			$	248,054
Other Current Liabilities				48,467				15,443
Total Current Liabilities				174,912				263,497
Long-Term Liabilities:
Asset Retirement Obligation				1,833,038				1,810,729
Dividends Payable				549,053				119,546
Deferred Tax Liability, Net				563,317				568,627
Total Long-Term Liabilities				2,945,408				2,498,902
Total Liabilities				3,120,320				2,762,399
Stockholders’ Equity:
Common Stock				92,368				92,368
Additional Paid-in Capital				65,000				65,000
Retained Earnings				31,040,582				30,920,837
Stockholders’ Equity Before Treasury Stock				31,197,950				31,078,205
Less – Treasury Stock, at Cost				(1,697,338	)			(1,692,893	)
Total Stockholders’ Equity				29,500,612				29,385,312
Total Liabilities and Stockholders’ Equity			$	32,620,932			$	32,147,711

 

See Accompanying Notes

 

3

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THE RESERVE PETROLEUM COMPANY

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

 

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2021				2020				2021				2020
Operating Revenues:
Oil and Gas Sales		$	1,486,844			$	600,631			$	3,087,298			$	1,796,893
Lease Bonuses and Other			9,000				---				9,000				82,221
Service Revenues			75,477				---				75,477				---
Total Operating Revenues			1,571,321				600,631				3,171,775				1,879,114
Operating Costs and Expenses:
Production			487,414				387,729				1,013,973				938,296
Exploration			12,957				31,705				29,147				75,170
Depreciation, Depletion, Amortization and Valuation Provisions			148,389				90,920				393,514				1,616,924
General, Administrative and Other			617,255				436,878				1,190,926				889,003
Total Operating Costs and Expenses			1,266,015				947,232				2,627,560				3,519,393
Income/(Loss) from Operations			305,306				(346,601	)			544,215				(1,640,279	)
Equity Loss in Investees			(1,100	)			(3,314	)			(15	)			(38,514	)
Other Income, Net			389,291				271,691				476,235				292,502
Income/(Loss) Before Income Taxes			693,497				(78,224	)			1,020,435				(1,386,291	)
Income Tax Provision/(Benefit):
Current			219,311				(166,101	)			123,108				14,209
Deferred			(168,985	)			16,009				(5,310	)			(330,412	)
Total Income Tax Provision/(Benefit)			50,326				(150,092	)			117,798				(316,203	)
Net Income/(Loss)		$	643,171			$	71,868			$	902,637			$	(1,070,088	)
Per Share Data
Net Income/(Loss), Basic and Diluted		$	4.11			$	0.46			$	5.77			$	(6.83	)
Cash Dividends Declared and/or Paid		$	5.00			$	5.00			$	5.00			$	5.00
Weighted Average Shares Outstanding, Basic and Diluted			156,567				156,615				156,567				156,615

 

See Accompanying Notes

 

4

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THE RESERVE PETROLEUM COMPANY CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited)

 

 

		Common Stock				Additional Paid-in Capital				Retained Earnings				Treasury Stock				Total
Three Months Ended June 30, 2021
Balance as of March 31, 2021		$	92,368			$	65,000			$	31,180,303			$	(1,694,478	)		$	29,643,193
Net Income			---				---				643,171				---				643,171
Dividends Declared			---				---				(782,892	)			---				(782,892	)
Purchase of Treasury Stock			---				---				---				(2,860	)			(2,860	)
Balance as of June 30, 2021		$	92,368			$	65,000			$	31,040,582			$	(1,697,338	)		$	29,500,612
Three Months Ended June 30, 2020
Balance as of March 31, 2020		$	92,368			$	65,000			$	32,518,213			$	(1,690,293	)		$	30,985,288
Net Income			---				---				71,868				---				71,868
Dividends Declared			---				---				(783,077	)			---				(783,077	)
Purchase of Treasury Stock			---				---				---				---				---
Balance as of June 30, 2020		$	92,368			$	65,000			$	31,807,004			$	(1,690,293	)		$	30,274,079
Six Months Ended June 30, 2021
Balance as of December 31, 2020		$	92,368			$	65,000			$	30,920,837			$	(1,692,893	)		$	29,385,312
Net Income			---				---				902,637				---				902,637
Dividends Declared			---				---				(782,892	)			---				(782,892	)
Purchase of Treasury Stock			---				---				---				(4,445	)			(4,445	)
Balance as of June 30, 2021		$	92,368			$	65,000			$	31,040,582			$	(1,697,338	)		$	29,500,612
Six Months Ended June 30, 2020
Balance as of December 31, 2019		$	92,368			$	65,000			$	33,660,169			$	(1,690,293	)		$	32,127,244
Net Loss			---				---				(1,070,088	)			---				(1,070,088	)
Dividends Declared			---				---				(783,077	)			---				(783,077	)
Purchase of Treasury Stock			---				---				---				---				---
Balance as of June 30, 2020		$	92,368			$	65,000			$	31,807,004			$	(1,690,293	)		$	30,274,079

 

See Accompanying Notes

 

5

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THE RESERVE PETROLEUM COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

		Six Months Ended
		June 30,
		2021				2020
Net Cash Provided by Operating Activities		$	874,504			$	793,023
Cash Provided by/(Applied to) Investing Activities:
Maturity of Available-for-Sale Debt Securities			1,515,234				18,517,910
Purchase of Available-for-Sale Debt Securities			---				(6,564,302	)
Proceeds from Disposal of Property, Plant and Equipment			22,000				10,898
Purchase of Property, Plant and Equipment			(903,903	)			(164,641	)
Purchase of Equity Method and Other Investments			(1,200,337	)			(12,415	)
Sale of Equity Securities			1,063,813				973,112
Purchase of Equity Securities			(13,390,547	)			(926,170	)
Net Cash Provided by/(Applied to) Investing Activities			(12,893,740	)			11,834,392
Cash Applied to Financing Activities:
Dividends Paid to Stockholders			(782,892	)			(783,077	)
Purchase of Treasury Stock			(4,445	)			---
Total Cash Applied to Financing Activities			(787,337	)			(783,077	)
Net Change in Cash and Cash Equivalents			(12,806,573	)			11,844,338
Cash and Cash Equivalents, Beginning of Period			16,187,085				2,738,338
Cash and Cash Equivalents, End of Period		$	3,380,512			$	14,582,676

 

See Accompanying Notes

 

6

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THE RESERVE PETROLEUM COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

June 30, 2021

(Unaudited)

 

 

 

Note 1 – BASIS OF PRESENTATION

 

In these notes the term “Company” refers to The Reserve Petroleum Company and its consolidated wholly owned subsidiary, Trinity Water Services, LLC, an Oklahoma limited liability company formed in March 2021 to provide initial capital, including the purchase of water well drilling equipment and startup costs, for a joint venture with TWS South, LLC, a Texas limited liability company. The Company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and include the accounts of The Reserve Petroleum Company and its subsidiaries, after elimination of all material intercompany balances and transactions.

 

The accompanying balance sheet as of December 31, 2020, which has been derived from audited financial statements, the unaudited interim consolidated financial statements and these notes have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, certain disclosures normally included in financial statements prepared in accordance with the accounting principles generally accepted in the United States of America (“GAAP”) have been omitted. The accompanying consolidated financial statements and notes thereto should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 as filed with the Securities and Exchange Commission (hereinafter, the “2020 Form 10-K”).

 

In the opinion of management, the accompanying consolidated financial statements reflect all adjustments (consisting only of normal recurring accruals), which are necessary for a fair statement of the results of the interim periods presented. The results of operations for the current interim periods are not necessarily indicative of the operating results for the full year.

 

Reclassifications

 

Certain amounts in the 2020 financial statements have been reclassified to conform to the 2021 presentation. The amounts were not material to the consolidated financial statements and had no effect on previously reported net income.

 

 

Note 2 – REVENUE RECOGNITION

 

A portion of oil and gas sales recorded in the consolidated statements of operations are the result of estimated volumes and pricing for oil and gas product not yet received for the period. For the six months ended June 30, 2021 and 2020, that estimate represented approximately $395,331 and $82,497, respectively, of oil and gas sales included in the consolidated statements of operations.

 

The Company’s disaggregated revenue has two primary revenue sources which are oil sales and natural gas sales. The following is an analysis of the components of oil and gas sales:

 

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2021				2020				2021				2020
Oil Sales		$	1,028,216			$	352,231			$	2,017,443			$	1,186,824
Natural Gas Sales			405,809				229,176				956,645				550,030
Miscellaneous Oil and Gas Product Sales			52,819				19,224				113,210				60,039
		$	1,486,844			$	600,631			$	3,087,298			$	1,796,893

 

7

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Note 3 – OTHER INCOME, NET

 

The following is an analysis of the components of Other Income, Net:

 

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2021				2020				2021				2020
Net Realized and Unrealized Gain on Equity Securities		$	527,439			$	219,357			$	598,160			$	149,389
Gain/(Loss) on Asset Sales			(193,055	)			7,269				(193,055	)			13,953
Interest Income			6,061				55,785				13,158				135,902
Agricultural Rental Income			5,600				---				5,600				---
Dividend Income			62,774				107				82,426				236
Income from Other Investments			---				---				---				13,548
Interest and Other Expenses			(19,528	)			(10,827	)			(30,054	)			(20,526	)
Other Income, Net		$	389,291			$	271,691			$	476,235			$	292,502

 

 

 

Note 4 – EQUITY METHOD AND OTHER INVESTMENTS AND RELATED COMMITMENTS AND CONTINGENT LIABILITIES, INCLUDING GUARANTEES

 

The Company’s Equity Method Investments include:

 

Broadway Sixty-Eight, LLC (“Broadway”), an Oklahoma limited liability company, with a 33% ownership. Broadway owns and operates an office building in Oklahoma City, Oklahoma. The Company leases its corporate office from Broadway on a month-to-month basis under the terms of the modified lease agreement. Rent expense for lease of the corporate office from Broadway was approximately $17,400 during the six months ended June 30, 2021 and 2020. The Company’s investment in Broadway totaled $163,315 and $142,917 at June 30, 2021 and December 31, 2020, respectively.

 

Broadway Seventy-Two, LLC (“Broadway 72”), an Oklahoma limited liability company, with a 40% ownership, was acquired March 29, 2021. Broadway 72 owns and operates a commercial building in Oklahoma City, Oklahoma. The Company’s investment in Broadway 72 totaled $994,572 at June 30, 2021.

 

Grand Woods Development, LLC (“Grand Woods”), an Oklahoma limited liability company, with a 47% ownership, was acquired in 2015. Grand Woods owns approximately 26.56 acres of undeveloped real estate in northeast Oklahoma City. The Company has guaranteed $1,200,000 of a $1,579,500 development loan that matures November 23, 2021. The Company holds notes receivable of $344,255 from Grand Woods. The Company’s investment in Grand Woods totaled $159,663 and $179,615 at June 30, 2021 and December 31, 2020, respectively.

 

QSN Office Park, LLC (“QSN”), an Oklahoma limited liability company, with a 20% ownership, was acquired in 2016. QSN is constructing and selling office buildings in a new office park. The Company has guaranteed 20% of a $1,100,000 development loan that matures July 15, 2023 and 20% of a $550,000 construction loan that matures March 9, 2027. The Company’s investment in QSN totaled $287,426 and $282,459 at June 30, 2021 and December 31, 2020, respectively.

 

The Company’s Other Investments primarily include:

 

Bailey Hilltop Pipeline, LLC (“Bailey”), with a 10% ownership, was acquired in 2008. Bailey is a gas gathering system pipeline for the Bailey Hilltop Prospect oil and gas properties in Grady County, Oklahoma. The Company’s investment in Bailey totaled $80,377 at June 30, 2021 and December 31, 2020.

 

Cloudburst International, Inc. (“Cloudburst”), with a 12.99% ownership, was acquired in 2019. Cloudburst owns exclusive rights to a water purification process technology that is being developed and currently tested. The Company’s investment in Cloudburst totaled $1,596,007 and $1,496,007 at June 30, 2021 and December 31, 2020, respectively.

 

Genlith, Inc. (“Genlith”), with a 1.8% ownership, was acquired in July 2020. Genlith identifies and structures investments in the new energy economy through corporate ventures, advisory and fund management. The Company’s investment in Genlith totaled $500,000 at June 30, 2021 and December 31, 2020.

 

8

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Ocean’s NG (“Ocean”), with a 12.44% ownership, was acquired in 2015. Ocean developed underground Compressed Natural Gas (“CNG”) storage and delivery systems for retail sales of CNG. In May 2021, due to a shift in demand of CNG, Ocean entered into an agreement to sell existing patents. The Company’s share of that sale was $5,520, which resulted in a loss of $223,698 on the investment. The Company’s investment in Ocean totaled $0 and $229,218 at June 30, 2021 and December 31, 2020, respectively.

 

OKC Industrial Properties, LC (“OKC”), with a 10% ownership, was acquired in 1992. OKC originally owned approximately 260 acres of undeveloped land in north Oklahoma City and over time has sold all but approximately 23 acres. The Company’s investment in OKC totaled $69,482 at June 30, 2021 and December 31, 2020.

 

VCC Smarter Firms Investment, LLC (“VCC Smarter Firms”), with a 5.63% ownership, was acquired in May 2021. VCC Smarter Firms serves as a special purpose investment vehicle to hold an investment in Smarter Firms, Inc. (“Smarter Firms”). Smarter Firms provides SaaS integrated analytics and advanced reporting solutions for law firms. The Company’s investment in VCC Smarter Firms totaled $20,000 at June 30, 2021.

 

VCC Homebase Investment, LLC (“VCC Homebase”), with a 7.29% ownership, was acquired in June 2021. VCC Homebase serves as a special purpose investment vehicle to hold an investment in Homebase, LLC (“Homebase”). Homebase is a smart apartment solution connecting buildings with future ready access control, internet, and property management. The Company’s investment in VCC Homebase totaled $100,337 at June 30, 2021.

 

 

Note 5 – PROVISION FOR INCOME TAXES

 

In 2021 and 2020, the effective tax rate differed from the statutory rate, primarily as a result of allowable depletion for tax purposes in excess of the cost basis in oil and gas properties.

 

Excess federal percentage depletion, which is limited to certain production volumes and by certain income levels, reduces estimated taxable income projected for any year. The federal excess percentage depletion estimates will be updated throughout the year until finalized with the detail well-by-well calculations at year-end. When a provision for income taxes is recorded, federal excess percentage depletion benefits decrease the effective tax rate. When a benefit for income taxes is recorded, federal excess percentage depletion benefits increase the effective tax rate. The benefit of federal excess percentage depletion is not directly related to the amount of pre-tax income recorded in a period. Accordingly, in periods where a recorded pre-tax income is relatively small, the proportional effect of these items on the effective tax rate may be significant.

 

 

Note 6 – ASSET RETIREMENT OBLIGATION

 

The Company records the fair value of its estimated liability to retire its oil and natural gas producing properties in the period in which it is incurred (typically the date of first sale). The estimated liability is calculated by obtaining current estimated plugging costs from the well operators and inflating it over the life of the property. Current year inflation rate used is 4.08%. When the liability is first recorded, a corresponding increase in the carrying amount of the related long-lived asset is also recorded. Subsequently, the asset is amortized to expense over the life of the property and the liability is increased annually for the change in its present value which is currently 3.25%.

 

A reconciliation of the Company’s asset retirement obligation liability is as follows:

 

Balance at December 31, 2020		$	1,810,729
Liabilities incurred for new wells (net of revisions)			---
Liabilities settled (wells sold or plugged)			---
Revision to estimate			402
Accretion expense			21,907
Balance at June 30, 2021		$	1,833,038

 

9

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Note 7 – FAIR VALUE MEASUREMENTS

 

The Company uses a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:

 

Level 1 – Unadjusted quoted prices for identical assets or liabilities in active markets.

 

Level 2 – Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and model-derived valuations whose inputs or significant value drivers are observable.

 

Level 3 – Unobservable inputs that reflect the Company’s own assumptions.

 

Recurring Fair Value Measurements

 

Certain of the Company’s assets are reported at fair value in the accompanying consolidated balance sheets on a recurring basis. The Company determined the fair value of equity securities and available-for-sale debt securities using quoted market prices, and where applicable, securities with similar maturity dates and interest rates. At June 30, 2021 and December 31, 2020, the Company’s assets reported at fair value on a recurring basis are summarized as follows:

 

		June 30, 2021
		Level 1 Inputs				Level 2 Inputs				Level 3 Inputs
Financial Assets:
Equity Securities:
Domestic Equities		$	13,212,319			$	---			$	---
International Equities			1,660,430				---				---
Others			583,790				---				---
		$	15,456,539			$	---			$	---

 

 

		December 31, 2020
		Level 1 Inputs				Level 2 Inputs				Level 3 Inputs
Financial Assets:
Available-for-Sale Debt Securities – U.S. Treasury Bills Maturing in 2021		$	---			$	1,515,234			$	---
Equity Securities:
Domestic Equities			1,506,514				---				---
International Equities			630,494				---				---
Others			399,474				---				---
		$	2,536,482			$	1,515,234			$	---

 

Non-Recurring Fair Value Measurements

 

The Company’s asset retirement obligation annually represents a non-recurring fair value liability. The fair value of the non-financial liability incurred in the six months ended June 30, 2020 was $4,206, with none in 2021 and was calculated using Level 3 inputs. See Note 6 above for more information about this liability and the inputs used for calculating fair value.

 

The impairment loss in the six months ended June 30, 2020 was $1,312,328, with none in 2021. This also relates to non-recurring fair value expenses calculated using Level 3 inputs. See Note 8 below for a description of the impairment loss calculation.

 

Fair Value of Financial Instruments

 

The Company’s financial instruments consist primarily of cash and cash equivalents, trade receivables, marketable securities, trade payables and dividends payable. At June 30, 2021 and December 31, 2020, the historical cost of cash and cash equivalents, trade receivables, trade payables and dividends payable are considered to be representative of their respective fair values due to the short-term maturities of these items.

 

10

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Note 8 - LONG-LIVED ASSETS IMPAIRMENT LOSS

 

Certain oil and gas producing properties have been deemed to be impaired because the assets, evaluated on a property-by-property basis, are not expected to recover their entire carrying value through future cash flows. There were no impairments recorded in the three months ended June 30, 2021 or 2020. Impairment losses totaled $1,312,328 for the six months ended June 30, 2020, with none in 2021, and are included in the consolidated statements of operations in the line item Depreciation, Depletion, Amortization and Valuation Provisions. The impairments were calculated by reducing the carrying value of the individual properties to an estimated fair value equal to the discounted present value of the future cash flow from these properties. Forward pricing was used for calculating future revenue and cash flow.

 

 

Note 9 – NEW ACCOUNTING PRONOUNCEMENTS

 

See the “New Accounting Pronouncements” disclosures on page 25 of the 2020 Form 10-K. There were no other accounting pronouncements issued or that have become effective since December 31, 2020.

 

 

 

ITEM 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

This discussion and analysis should be read with reference to Management’s Discussion and Analysis of Financial Condition and Results of Operations in the 2020 Form 10-K, as well as the consolidated financial statements included in this Form 10-Q.

 

Forward-Looking Statements

 

This discussion and analysis includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements give the Company’s current expectations of future events. They include statements regarding the drilling of oil and gas wells, the production that may be obtained from oil and gas wells, cash flow and anticipated liquidity and expected future expenses.

 

Although management believes the expectations in these and other forward-looking statements are reasonable, we can give no assurance they will prove to have been correct. They can be affected by inaccurate assumptions or by known or unknown risks and uncertainties. Factors that would cause actual results to differ materially from expected results are described under “Forward-Looking Statements” on page 3 of the 2020 Form 10-K.

 

We caution you not to place undue reliance on these forward-looking statements, which speak only as of the date of this Form 10-Q, and we undertake no obligation to update this information because of new information, future developments, or otherwise. You are urged to carefully review and consider the disclosures made in this and our other reports filed with the Securities and Exchange Commission that attempt to advise interested parties of the risks and factors that may affect our business.

 

Financial Conditions and Results of Operations

 

COVID-19

 

In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. Governments have tried to slow the spread of the virus by imposing social distancing guidelines, travel restrictions and stay-at-home orders, which caused a significant decrease in activity in the global economy and the demand for oil and to a lesser extent natural gas. As a result, the price for oil decreased significantly. While oil prices have recovered, there is still ongoing volatility in world demand in the market.

 

Our profitability has been and will likely continue to be significantly affected by this volatility. A decline in commodity prices and our future estimated production levels could lead to additional material impairments of our long-lived assets, equity method investments and right-of-use assets. It is likely that additional impairments could be triggered if the COVID-19 pandemic leads to a reduction in global economic activity and demand for energy. We continue to evaluate all cash management strategies, maintaining conservative choices in short-term investments to protect cash reserves and liquidity.

 

Liquidity and Capital Resources

 

Please refer to the Consolidated Balance Sheets and the Condensed Consolidated Statements of Cash Flows in this Form 10-Q to supplement the following discussion. In the first half of 2021, the Company continued to fund its business activity using internal sources of cash. The Company had net cash provided by operations of $874,504, cash provided by the maturities of available-for-sale debt securities of $1,515,234, sales of equity securities and investments of $1,063,813 and cash provided by property dispositions of $22,000 for total cash provided of $3,475,551. The Company utilized cash for property additions of $903,903, the purchase of equity securities and investments of $14,590,884 and financing activities of $787,337 for cash applied of $16,282,124. Cash and cash equivalents decreased $12,806,573 (79%) to $3,380,512 due to a shift in the Company cash management and investment strategy.

 

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Discussion of Significant Changes in Working Capital. In addition to the changes in cash and cash equivalents discussed above, there were other changes in working capital line items from December 31, 2020. A discussion of these items follows.

 

Equity securities increased $12,920,057 (509%) to $15,456,539 as of June 30, 2021 from $2,536,482 at December 31, 2020. The increase was the result of $12,326,734 in net purchases and a $593,323 net increase in the equity securities’ market value.

 

Refundable income taxes decreased $130,800 (60%) to $87,404 as of June 30, 2021 from $218,204 at December 31, 2020.

 

Notes receivable increased $65,757 (24%) to $344,326 as of June 30, 2021 from $278,569 at December 31, 2020. The increase was the result of added notes receivable to Grand Woods, LLC (“Grand Woods”), an equity method investee. See Note 4 to the accompanying financial statements for additional information about Grand Woods.

 

Accounts payable and other current liabilities decreased $88,585 (34%) to $174,912 as of June 30, 2021 from $263,497 at December 31, 2020, primarily due to timing differences in the processing of accounts payable and other current liabilities.

 

Discussion of Significant Changes in the Condensed Consolidated Statements of Cash Flows. As noted in the first paragraph above, net cash provided by operating activities was $874,504 in the six months ended June 30, 2021, an increase of $81,481 (10%) from the comparable period in 2020 of $793,023. For more information see “Operating Revenues” and “Other Income” below.

 

Cash applied to the purchase of property additions in 2021 was $903,903 in the six months ended June 30, 2021, an increase of$739,262 from cash applied in the comparable period in 2020 of $164,641. See the subheading “Exploration Costs” in the “Results of Operations” section below for additional information.

 

Conclusion. Management is unaware of any additional material trends, demands, commitments, events, or uncertainties, which would impact liquidity and capital resources to the extent that the discussion presented in the 2020 Form 10-K would not be representative of the Company’s current position.

 

Results of Operations – Six Months Ended June 30, 2021

 

Net income/(loss) increased $1,972,725 to a net income of $902,637 in the six months ended June 30, 2021 from net loss of $(1,070,088) in the comparable period in 2020. Net income/(loss) per share, basic and diluted, increased $12.60 to net income per share of $5.77 in the six months ended June 30, 2021 from net loss of $(6.83) per share in the comparable period in 2020.

 

A discussion of revenue from oil and gas sales and other significant line items in the consolidated statements of operations follows.

 

Operating Revenues. Revenues from oil and gas sales increased $1,290,405 (72%) to $3,087,298 in 2021 from $1,796,893 in 2020. This was due to increases in crude oil sales of $830,619, natural gas sales of $406,615 and sales of miscellaneous products of $53,171.

 

The $830,619 (70%) increase in oil sales to $2,017,443 in the six months ended June 30, 2021 from $1,186,824 in the comparable period in 2020 was the net result of an increase in the volume sold and an increase in the average price per barrel (Bbl). The volume of oil sold increased 2,881 Bbls to 36,041 Bbls in the six months ended June 30, 2021, resulting in a positive volume variance of $103,094. The average price per Bbl increased $20.19 to $55.98 per Bbl in the six months ended June 30, 2021 from $35.79 per Bbl in the comparable period in 2020, resulting in a positive price variance of $727,525.

 

The $406,615 (74%) increase in gas sales to $956,645 in the six months ended June 30, 2021 from $550,030 in the comparable period in 2020 was the result of a decrease in the volume sold and an increase in the average price per thousand cubic feet (MCF). The volume of gas sold decreased 22,229 MCF to 323,101 MCF in the six months ended June 30, 2021 from 345,330 MCF in the comparable period in 2020, for a negative volume variance of $35,343. The average price per MCF increased $1.37 to $2.96 per MCF in the six months ended June 30, 2021 from $1.59 per MCF in the comparable period in 2020, resulting in a positive price variance of $441,958.

 

Sales from the Robertson County, Texas royalty interest properties provided approximately 28% of the Company’s gas sales volumes for the six months ended June 30, 2021 and 26% of the gas sales volumes for the comparable period in 2020. See discussion on page 10 of the 2020 Form 10-K under the subheading “Operating Revenues” for more information about these properties. Sales from Arkansas working interest properties provided approximately 13% of the Company’s gas sales volumes for the six months ended June 30, 2021 and approximately 11% of the gas sales volumes for the comparable period in 2020.

 

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For both oil and gas sales, the price change was mostly the result of a change in the spot market prices upon which most of the Company’s oil and gas sales are based. These spot market prices have had significant fluctuations in the past and these fluctuations are expected to continue.

 

Sales of miscellaneous products were $113,210 in the six months ended June 30, 2021 compared to $60,039 in the comparable period in 2020.

 

The Company received lease bonuses of $9,000 in the six months ended June 30, 2021 for leases on its owned minerals with $82,221 in the comparable period in 2020.

 

Operating Costs and Expenses. Operating costs and expenses decreased $891,833 (25%) to $2,627,560 in the six months ended June 30, 2021 from $3,519,393 in the comparable period in 2020. Material line item changes are discussed and analyzed in the following paragraphs.

 

Production Costs increased $75,677 (8%) in the six months ended June 30, 2021 to $1,013,973 from $938,296 in the comparable period in 2020. The increase was the result of an increase in gross production taxes and transportation costs of $78,784, offset by decreases in lease operating expense and other costs of $3,107.

 

Exploration Costs decreased $46,023 (61%) to $29,147 in the six months ended June 30, 2021 from $75,170 in the comparable period in 2020. The decrease was the result of a $26,135 decrease in dry hole, plugging and abandonment costs, as well as a decrease of $19,888 in geological, geophysical and other costs.

 

The following is a summary as of August 6, 2021, updating both exploration and development activity from December 31, 2020, for the period ended June 30, 2021.

 

The Company is participating with its 14% interest in drilling on a Creek County, Oklahoma 3-D seismic project. At the start of 2021 there were six active prospects within the project. An exploratory well was drilled on one of the prospects and completed as a dry hole. A total of five development wells were drilled on two other prospects. One well was completed as a commercial oil producer, two have completions in progress and two are awaiting completion. An additional exploratory well is expected to be drilled in the third quarter. Capitalized costs for the period were $180,830. Dry hole costs of $14,650 were written off to expense.

 

The Company owns a 35% interest in 16,472.55 net acres of leasehold on a Crockett and Val Verde Counties, Texas prospect. Most of the acreage is underlain by a shallow heavy oil zone. The Company is participating with a 17.5% interest in the re-entry, completion and testing of a previously drilled test well on the prospect with the intention of conducting a thermal recovery pilot test. Capitalized costs for the period were $26,798.

 

The Company has been participating with a 13% interest in a 3-D seismic project covering approximately 35,000 acres in San Patricio County, Texas. At the start of 2021, there were six active prospects within the project. An exploratory well was drilled and completed on one of these in 2020, testing gas at a commercial rate. It has been shut in awaiting pipeline construction, which is now in progress. The Company participated in the re-completion of another well and is participating in the conversion of an abandoned producer to a saltwater disposal well. Additional exploratory well proposals are anticipated in 2021. Capitalized costs for the period were $33,325.

 

The Company has been participating with a 50% interest in the development of a Nolan County, Texas prospect. The Company and its partner have acquired 3,182 net acres of leasehold and three producing wells on the prospect and are currently involved in efforts to sell a portion of their interest. Once sufficient interest has been placed, an exploratory horizontal well is expected to be drilled on the prospect. Geological costs for the period were $22,500 and capitalized costs were $222,185.

 

The Company participated in the completion of four horizontal development wells that were drilled in 2020 on fee minerals located in Kingfisher County, Oklahoma. The Company has a 3.2% working interest in three of the wells and a 3.5% working interest in the fourth. All four wells were completed as commercial oil and gas producers. Actual costs of $337,687 for the period were offset by prepaid costs from 2020.

 

The Company has entered into an agreement to purchase the working interest properties of Mid-American Oil Company, an affiliated company, for $500,469 plus adjustments effective July 1, 2021. The Company already owns working interests in almost all of these properties. The purchase is expected to take place in August 2021.

 

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Depreciation, Depletion, Amortization and Valuation Provision (DD&A). DD&A decreased $1,223,410 (76%) to $393,514 in the six months ended June 30, 2021 from $1,616,924 in the comparable period in 2020. This was primarily due to the $1,312,328 long-lived assets impairment in the comparable period in 2020.

 

General, Administrative and Other (G&A). G&A increased $301,923 (34%) to $1,190,926 in the six months ended June 30, 2021 from $889,003 in the comparable period in 2020. The increase was primarily due to expenses of approximately $108,000 related to costs in new consolidated entities and costs related to the implementation of new accounting software in 2021.

 

Other Income, Net. This line item increased $183,733 (63%) to $476,235 in the six months ended June 30, 2021 from $292,502 in the comparable period in 2020. See Note 3 to the accompanying financial statements for the analysis of the various components of this line item.

 

Income Tax Provision/(Benefit). Income tax benefit decreased $434,001 to a tax provision of $117,798 in the six months ended June 30, 2021 from a tax benefit of $(316,203) in the comparable period in 2020. Of the 2021 tax provision, estimated current tax expense was $123,108 and estimated deferred tax credit was $5,310. Of the 2020 income tax benefit, the estimated current tax expense was $14,209 and the estimated deferred tax credit was $(330,412). See Note 5 to the accompanying financial statements for additional information on income taxes.

 

Results of Operations – Three Months Ended June 30, 2021

 

Net income increased $571,303 to $643,171 in the three months ended June 30, 2021 from $71,868 in the comparable period in 2020. The material changes in the results of operations, which caused the increase in net income, are discussed below.

 

Operating Revenues. Revenues from crude oil and natural gas sales increased $886,213 (148%) to $1,486,844 in the three months ended June 30, 2020 from $600,631 in the comparable period in 2020. This was due to increases in crude oil sales of $675,985, natural gas sales of $176,633 and sales of miscellaneous products of $31,595.

 

The $675,985 (192%) increase in oil sales to $1,028,216 in the three months ended June 30, 2021 from $352,231 in the comparable period in 2020 was the net result of an increase in the volume sold and an increase in the average price per barrel (Bbl). The volume of oil sold increased 1,420 Bbls to 17,199 Bbls in the three months ended June 30, 2021, resulting in a positive volume variance of $31,709. The average price per Bbl increased $37.46 to $59.78 per Bbl in the three months ended June 30, 2021 from $22.32 per Bbl in the comparable period in 2020, resulting in a positive price variance of $644,276.

 

The $176,633 (77%) increase in gas sales to $405,809 in the three months ended June 30, 2021 from $229,176 in the comparable period in 2020 was the result of a decrease in the volume sold and an increase in the average price per thousand cubic feet (MCF). The volume of gas sold decreased 14,352 MCF to 141,281 MCF in the three months ended June 30, 2021 from 155,633 MCF in the comparable period in 2020, for a negative volume variance of $21,134. The average price per MCF increased $1.40 to $2.87 per MCF in the three months ended June 30, 2021 from $1.47 per MCF in the comparable period in 2020, resulting in a positive price variance of $197,767.

 

Operating Costs and Expenses. Operating costs and expenses increased $318,783 (34%) to $1,266,015 in the three months ended June 30, 2021 from $947,232 in the comparable period in 2020. This was mostly due to an increase in production costs of $99,685 and an increase in G&A expense of $180,377, an increase in the Depreciation, Depletion, Amortization and Valuation provision of $57,469, and a decrease in exploration costs of $18,748. There were no long-lived assets impairments for the three months ended June 30, 2021 or June 30, 2020. See Note 10 – LONG-LIVED ASSETS IMPAIRMENT LOSS on page 29 of the 2020 Form 10-K for a description of the impairment loss calculation.

 

Other Income, Net. This line item increased $117,600 (43%) to $389,291 in the three months ended June 30, 2021 from $271,691 in the comparable period in 2020. See Note 3 to the accompanying consolidated financial statements for an analysis of the components of other income, net.

 

Income Tax Provision/(Benefit). Income tax benefit decreased $200,418 to a tax provision of $50,326 in the three months ended June 30, 2021 from a tax benefit of $(150,092) in the comparable period in 2020. See discussion above in “Item 2.” and Note 5 to the accompanying consolidated financial statements for a discussion of the changes in the provision for income taxes.

 

There were no additional material changes between the quarters, which were not covered in the discussion in “Item 2.” above, for the six months ended June 30, 2021.

 

14

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Off-Balance Sheet Arrangements

 

The Company’s off-balance sheet arrangements relate to Broadway Sixty-Eight, LLC, an Oklahoma limited liability company, Broadway Seventy-Two, LLC, an Oklahoma limited liability company, Grand Woods Development, LLC, an Oklahoma limited liability company, and QSN Office Park, LLC, an Oklahoma limited liability company. The Company does not have actual or effective control of these entities. Management of these entities could at any time make decisions in their own best interest, which could materially affect the Company’s net income or the value of the Company’s investment. For more information about these entities and the related off-balance sheet arrangements, see Note 4 to the accompanying consolidated financial statements.

 

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable.

 

 

ITEM 4.

CONTROLS AND PROCEDURES

 

As defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the "Exchange Act"), the term “disclosure controls and procedures” means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.

 

The Company’s Principal Executive Officer and Principal Financial Officer evaluated the effectiveness of the Company’s disclosure controls and procedures. Based on this evaluation, they concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2021.

 

Internal Control over Financial Reporting

 

There were no changes in the Company’s internal control over financial reporting during the quarter ended June 30, 2021 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting (as such term is defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) during the quarter ended June 30, 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

 

 

 

PART II – OTHER INFORMATION

 

 

ITEM 1.

LEGAL PROCEEDINGS

 

As of June 30, 2021, the Company was not party to, and its properties were not subject to, any material legal proceedings.

 

 

ITEM 1A.

RISK FACTORS

 

Not applicable.

 

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.

 

 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

 

None.

 

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ITEM 4.

MINE SAFETY DISCLOSURES

 

Not applicable.

 

 

ITEM 5.

OTHER INFORMATION

 

None.

 

 

ITEM 6.

EXHIBITS

 

The following documents are exhibits to this Form 10-Q. Each document marked by an asterisk is filed electronically herewith.

 

Exhibit Number		Description
31.1*		Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as amended.
31.2*		Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as amended.
32*		Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350.
101.INS*		Inline XBRL Instance Document
101.SCH*		Inline XBRL Taxonomy Extension Schema Document
101.CAL*		Inline XBRL Taxonomy Calculation Linkbase Document
101.DEF*		Inline XBRL Taxonomy Definition Linkbase Document
101.LAB*		Inline XBRL Taxonomy Label Linkbase Document
101.PRE*		Inline XBRL Taxonomy Presentation Linkbase Document
104		Cover Page Interactive Data File (Formatted as Inline XBRL and contained in Exhibit 101)

 

* Filed electronically herewith.

 

 

SIGNATURES

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized.

 

 

		THE RESERVE PETROLEUM COMPANY
		(Registrant)
Date:  August 16, 2021		/s/ Cameron R. McLain
		Cameron R. McLain,
		Principal Executive Officer
Date:  August 16, 2021		/s/ Lawrence R. Francis
		Lawrence R. Francis
		Principal Financial Officer

 

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