0000083350 RESERVE PETROLEUM CO false --12-31 Q1 2023 300,754 301,261 77,377 1,596,007 460,000 82,482 2,171,828 357,259 31,250 0 Amounts presented include balances held by our consolidated variable interest entities (“VIEs”), Grand Woods and TWS, as further discussed in Note 5 – Non-Controlling Interest and Variable Interest Entities. As of March 31, 2023, total assets and liabilities of Grand Woods, which are included in the consolidated balance sheets, were $2,222,323 and $1,403,674, respectively, including $50,495 of cash. Grand Woods noteholder has partial recourse to the Company. As of March 31, 2023, total assets and liabilities of TWS, which are included in the consolidated balance sheets, were $625,092 and $5,155, respectively, including $306,479 of cash. 50,495 306,479 2,222,323 625,092 1,403,674 5,155 00000833502023-01-012023-03-31 xbrli:shares 00000833502023-05-04 iso4217:USD 00000833502023-03-31 00000833502022-12-31 0000083350us-gaap:OilAndGasMember2023-01-012023-03-31 0000083350us-gaap:OilAndGasMember2022-01-012022-03-31 00000833502022-01-012022-03-31 0000083350rsrv:GrandWoodsMember2023-01-012023-03-31 0000083350rsrv:GrandWoodsMember2022-01-012022-03-31 iso4217:USDxbrli:shares 0000083350us-gaap:CommonStockMember2022-12-31 0000083350us-gaap:AdditionalPaidInCapitalMember2022-12-31 0000083350us-gaap:RetainedEarningsMember2022-12-31 0000083350us-gaap:TreasuryStockCommonMember2022-12-31 0000083350us-gaap:NoncontrollingInterestMember2022-12-31 0000083350us-gaap:CommonStockMember2023-01-012023-03-31 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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 March 31, 2023

 

☐

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

Commission File Number 000-08157

 

logo01.jpg

 

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

(405) 848-7551

(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 financial 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 May 4, 2023, 156,156 shares of the registrant’s $0.50 par value common stock were outstanding.

 

 
 
 

 

 

TABLE OF CONTENTS

 

PART I – FINANCIAL INFORMATION
 

 

 Page

Item 1.

Consolidated Financial Statements (Unaudited)

2
 

Consolidated Balance Sheets

2
 

Consolidated Statements of Income

4
 

Consolidated Statements of Equity

5
 

Condensed Consolidated Statements of Cash Flows

6
 

Notes to Consolidated Financial Statements

7

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

13

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

15

Item 4.

Controls and Procedures

15
     
     

PART II – OTHER INFORMATION
     

Item 1.

Legal Proceedings

16

Item 1A.

Risk Factors

16

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

16

Item 3.

Defaults Upon Senior Securities

16

Item 4.

Mine Safety Disclosures

16

Item 5.

Other Information

16

Item 6.

Exhibits

16

 

1
 

 

 

PART I – FINANCIAL INFORMATION

 

ITEM 1.         CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

THE RESERVE PETROLEUM COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS(1)

(Unaudited)

 

  

March 31,

  

December 31,

 
  

2023

  

2022

 
ASSETS        

Current Assets:

        

Cash and Cash Equivalents

 $6,671,884  $7,299,224 

Available-for-Sale Debt Securities

  5,369,536   4,208,648 

Equity Securities

  2,790,105   2,302,959 

Refundable Income Taxes

  108,941   120,230 

Accounts Receivable

  1,666,056   2,318,183 

Total Current Assets

  16,606,522   16,249,244 
         

Investments:

        

Equity Method Investments

  2,815,349   2,469,644 

Other Investments

  4,785,053   5,085,806 

Total Investments

  7,600,402   7,555,450 
         

Property, Plant and Equipment:

        

Oil and Gas Properties, at Cost, Based on the Successful Efforts Method of Accounting –

        

Unproved Properties

  1,887,613   1,846,543 

Proved Properties

  65,965,768   65,328,501 

Oil and Gas Properties, Gross

  67,853,381   67,175,044 
         

Less – Accumulated Depreciation, Depletion, Amortization and Valuation Allowance

  (53,430,956)  (52,773,978)
         

Oil and Gas Properties, Net

  14,422,425   14,401,066 
         

Other Property and Equipment, at Cost

  758,256   758,256 
         

Less – Accumulated Depreciation

  (265,679)  (236,883)
         

Other Property and Equipment, Net

  492,577   521,373 
         

Total Property, Plant and Equipment, Net

  14,915,002   14,922,439 
         

Total Assets

 $39,121,926  $38,727,133 

 

(1)

Amounts presented include balances held by our consolidated variable interest entities (“VIEs”), Grand Woods and TWS, as further discussed in Note 5 – Non-Controlling Interest and Variable Interest Entities. As of March 31, 2023, total assets and liabilities of Grand Woods, which are included in the consolidated balance sheets, were $2,222,323 and $1,403,674, respectively, including $50,495 of cash. Grand Woods noteholder has partial recourse to the Company. As of March 31, 2023, total assets and liabilities of TWS, which are included in the consolidated balance sheets, were $625,092 and $5,155, respectively, including $306,479 of cash.

 

See accompanying notes to unaudited consolidated financial statements

 

2
 

 

THE RESERVE PETROLEUM COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS(1)

(Unaudited)

 

  

March 31,

  

December 31,

 
  

2023

  

2022

 
LIABILITIES AND EQUITY        

Current Liabilities:

        

Accounts Payable

 $325,231  $399,735 

Other Current Liabilities

  17,430   75,675 

Note Payable, Current Portion

  137,866   136,637 

Total Current Liabilities

  480,527   612,047 
         

Long-Term Liabilities:

        

Asset Retirement Obligation

  2,821,685   2,809,257 

Deferred Tax Liability, Net

  1,741,508   1,619,595 

Note Payable, Less Current Portion

  1,265,808   1,300,872 

Total Long-Term Liabilities

  5,829,001   5,729,724 
         

Total Liabilities

  6,309,528   6,341,771 
         
         

Commitments and Contingencies

          
         

Equity:

        

Common Stock

  92,368   92,368 

Additional Paid-in Capital

  65,000   65,000 

Retained Earnings

  34,241,077   33,828,418 
         

Equity Before Treasury Stock

  34,398,445   33,985,786 
         

Less – Treasury Stock, at Cost

  (1,749,858)  (1,749,858)
         

Total Equity Applicable to The Reserve Petroleum Company

  32,648,587   32,235,928 
         

Non-Controlling Interests

  163,811   149,434 
         

Total Equity

  32,812,398   32,385,362 
         

Total Liabilities and Equity

 $39,121,926  $38,727,133 

 

(1)

Amounts presented include balances held by our consolidated variable interest entities (“VIEs”), Grand Woods and TWS, as further discussed in Note 5 – Non-Controlling Interest and Variable Interest Entities. As of March 31, 2023, total assets and liabilities of Grand Woods, which are included in the consolidated balance sheets, were $2,222,323 and $1,403,674, respectively, including $50,495 of cash. Grand Woods noteholder has partial recourse to the Company. As of March 31, 2023, total assets and liabilities of TWS, which are included in the consolidated balance sheets, were $625,092 and $5,155, respectively, including $306,479 of cash.

 

See accompanying notes to unaudited consolidated financial statements

 

3
 

 

 

THE RESERVE PETROLEUM COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

  

Three Months Ended

 
  

March 31,

 
  

2023

  

2022

 

Operating Revenues:

        

Oil and Gas Sales

 $2,935,441  $3,433,824 

Lease Bonuses and Other

  -   37,654 

Water Well Drilling Services

  164,200   275,534 

Total Operating Revenues

  3,099,641   3,747,012 
         

Operating Costs and Expenses:

        

Production

  1,056,749   778,175 

Exploration

  374,348   (53,781)

Water Well Drilling Services

  166,573   149,521 

Depreciation, Depletion, Amortization and Valuation Provisions

  952,887   335,046 

Gain on Disposition of Oil and Gas Properties

  -   (198,746)

General, Administrative and Other

  595,435   534,167 

Total Operating Costs and Expenses

  3,145,992   1,544,382 
         

Income/(Loss) from Operations

  (46,351)  2,202,630 
         

Equity Income/(Loss) in Investees

  31,656   (83,457)
         

Interest Expense

  (16,953)  - 
         

Other Income/(Loss), Net

  568,833   (65,106)
         

Income Before Income Taxes and Non-Controlling Interest

  537,185   2,054,067 
         

Income Tax Provision:

        

Current

  11,534   51,170 

Deferred

  121,913   317,418 
         

Total Income Tax Provision

  133,447   368,588 
         

Net Income

 $403,738  $1,685,479 
         

Less: Net Loss Attributable to Non-Controlling Interest

  (8,921)  - 
         

Net Income Attributable to Common Stockholders

 $412,659  $1,685,479 
         

Per Share Data:

        

Net Income Attributable to Common Stockholders, Basic

 $2.64  $10.79 
         
         

Weighted Average Shares Outstanding, Basic

  156,157   156,173 

 

See accompanying notes to unaudited consolidated financial statements

 

4
 

 

 

THE RESERVE PETROLEUM COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY

(Unaudited)

  

 

  

Common

Stock

  

Additional

Paid-in

Capital

  

Retained

Earnings

  

Treasury

Stock

  

Non-

Controlling

Interests

  

Total

 
                         

Three Months Ended March 31, 2023

                        

Balance as of December 31, 2022

 $92,368  $65,000  $33,828,418  $(1,749,858) $149,434  $32,385,362 

Net Income/(Loss)

  -   -   412,659   -   (8,921)  403,738 

Purchase of Treasury Stock

  -   -   -   -   -   - 
Contributions and Accrued Dividends  -   -   -   -   23,298   23,298 

Balance as of March 31, 2023

 $92,368  $65,000  $34,241,077  $(1,749,858) $163,811  $32,812,398 
                         

Three Months Ended March 31, 2022

                        

Balance as of December 31, 2021

 $92,368  $65,000  $31,389,240  $(1,747,778) $-  $29,798,830 

Net Income

  -   -   1,685,479   -   -   1,685,479 

Purchase of Treasury Stock

  -   -   -   -   -   - 

Balance as of March 31, 2022

 $92,368  $65,000  $33,074,719  $(1,747,778) $-  $31,484,309 

 

See accompanying notes to unaudited consolidated financial statements

 

5
 

 

 

THE RESERVE PETROLEUM COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

  

Three Months Ended

 
  

March 31,

 
  

2023

  

2022

 
         

Net Cash Provided by Operating Activities

 $1,503,765  $1,441,668 
         

Cash Provided by/(Applied to) Investing Activities:

        

Maturity of Available-for-Sale Debt Securities

  1,151,966   - 

Purchase of Available-for-Sale Debt Securities

  (2,312,854)  - 

Proceeds from Disposal of Property, Plant and Equipment

  -   457,898 

Purchase of Property, Plant and Equipment

  (847,636)  (1,069,680)

Purchase of Equity Method and Other Investments

  (25,846)  (174,006)

Cash Distributions from Other Investments

  320,998   8,318 

Sale of Equity Securities

  151,518   628,126 

Purchase of Equity Securities

  (556,029)  (1,520,591)
         

Net Cash Applied to Investing Activities

  (2,117,883)  (1,669,935)
         

Cash Applied to Financing Activities:

        

Payments of Note Payable

  (33,835)  - 

Capital Contributions from Non-Controlling Interests

  20,613   - 
         

Total Cash Applied to Financing Activities

  (13,222)  - 
         

Net Change in Cash and Cash Equivalents

  (627,340)  (228,267)
         

Cash and Cash Equivalents, Beginning of Period

  7,299,224   10,129,157 
         

Cash and Cash Equivalents, End of Period

 $6,671,884  $9,900,890 

 

See accompanying notes to unaudited consolidated financial statements

 

6
 

 

THE RESERVE PETROLEUM COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

March 31, 2023

(Unaudited)

 

 

 

Note 1 – BASIS OF PRESENTATION

 

The Reserve Petroleum Company, a Delaware corporation, is an independent oil and gas company engaged in oil and natural gas exploration, development and minerals management with areas of concentration in Arkansas, Kansas, Oklahoma, South Dakota, Texas and Wyoming, a single business segment. The Company is also engaged in investments and joint ventures that are not significant business segments. The Company’s consolidated subsidiaries consist of Grand Woods Development, LLC (“Grand Woods”), an Oklahoma limited liability company and Trinity Water Services, LLC, an Oklahoma limited liability company, which has a water well drilling joint venture agreement (“JVA”) with TWS South, LLC, a Texas limited liability company (Collectively, “TWS”). Unless otherwise specified or the context otherwise requires, all references in these notes to “the Company,” “its,” “our,” and “we” are to The Reserve Petroleum Company and its consolidated subsidiaries.

 

The Company’s consolidated financial statements have been prepared in accordance with the accounting principles generally accepted in the United States of America (“GAAP”) and the rules and regulations of the Securities and Exchange Commission (“SEC”). The consolidated financial statements include the accounts of The Reserve Petroleum Company and its subsidiaries in which the Company holds a controlling interest, reflecting ownership of a majority of the voting interest, as of the financial statement date. Additionally, the Company consolidates Variable Interest Entities (“VIEs”) under certain criteria discussed further below. All intercompany accounts and transactions have been eliminated in consolidation. When necessary, reclassifications that are not material to the consolidated financial statements are made to prior period financial information to conform to the current year presentation.

 

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, 2022 as filed with the Securities and Exchange Commission (hereinafter, the “2022 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 presentation 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.

 

Variable Interest Entities

 

The Company decides at the inception of each arrangement whether an entity in which an investment is made or in which we have other variable interests is considered a VIE. Generally, an entity is a VIE if (1) the entity does not have sufficient equity at risk to finance its activities without additional subordinated financial support from other parties, (2) the entity’s investors lack any characteristics of a controlling financial interest or (3) the entity was established with non-substantive voting rights.

 

The Company consolidates VIEs when the Company is deemed to be the primary beneficiary. The primary beneficiary of a VIE is generally the party that both: (1) has the power to make decisions that most significantly affect the economic performance of the VIE and (2) has the obligation to absorb losses or the right to receive benefits that in either case could potentially be significant to the VIE. If the Company is not deemed to be the primary beneficiary of a VIE, the Company accounts for the investment or other variable interests in a VIE in accordance with applicable GAAP.

 

Non-Controlling Interests

 

When the Company consolidates an entity, 100% of the assets, liabilities, revenues and expenses of the subsidiary are included in the consolidated financial statements. For those consolidated entities in which the Company’s ownership is less than 100%, the Company records a non-controlling interest as a component of equity on the consolidated balance sheets, which represents the third-party ownership in the net assets of the respective consolidated subsidiary. Additionally, the portion of the net income or loss attributable to the non-controlling interest is reported as net income (loss) attributable to non-controlling interest on the consolidated statements of income. Changes in ownership interests in an entity that do not result in deconsolidation are generally recognized within equity. See Note 5 for additional details on non-controlling interests.

 

7
 
 
 

Note 2 – REVENUE RECOGNITION

 

A portion of oil and gas sales recorded in the consolidated statements of income are the result of estimated volumes and pricing for oil and natural gas payments not yet received for the period. For the three months ended March 31, 2023 and 2022, that estimate represented approximately $1,580,027 and $1,064,818, respectively, of oil and natural gas sales included in the consolidated statements of income.

 

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 natural gas sales:

 

  

Three Months Ended

 
  

March 31,

 
  

2023

  

2022

 

Oil Sales

 $2,344,037  $2,352,133 

Natural Gas Sales

  535,401   936,808 

Miscellaneous Oil and Gas Product Sales

  56,003   144,883 
  $2,935,441  $3,433,824 

 

 

Note 3 – OTHER INCOME/(LOSS), NET

 

The following is an analysis of the components of Other Income/(Loss), Net:

 

  

Three Months Ended

 
  

March 31,

 
  

2023

  

2022

 

Net Realized and Unrealized Gain/(Loss) on Equity Securities

 $82,635  $(146,076)

Interest Income

  113,818   7,529 

Dividend Income

  10,300   96,302 

Income from Other Investments

  309,697   8,318 

Miscellaneous Income and Expenses

  52,383   (31,179)

Other Income/(Loss), Net

 $568,833  $(65,106)

 

 

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 68”), an Oklahoma limited liability company, with a 33% ownership. Broadway 68 owns and operates an office building in Oklahoma City, Oklahoma. The Company leases its corporate office from Broadway 68 on a month-to-month basis under the terms of the modified lease agreement. Rent expense for lease of the corporate office from Broadway 68 was approximately $11,200 and $8,700 during the three months ended March 31, 2023 and 2022, respectively. The Company’s investment in Broadway 68 totaled $129,631 and $115,093 at March 31, 2023 and December 31, 2022, 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 $1,090,740 and $1,080,465 at March 31, 2023 and December 31, 2022, 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 $978,931 development loan that matures July 15, 2023 and 20% of a $488,575 construction loan that matures March 9, 2027. The Company’s investment in QSN totaled $288,992 and $284,249 at March 31, 2023 and December 31, 2022, respectively. The Company does not anticipate the need to perform on the guarantees of the loans.

 

Stott’s Mill (“Stott’s Mill”), with a 50% ownership, was acquired in May 2022. Stott’s Mill consists of two residential lots in a developing subdivision located in Basalt, CO. The Company’s investment in Stott’s Mill totaled $703,971 and $688,575 at March 31, 2023 and December 31, 2022, respectively.

 

8
 
 

Victorum BHR2 Investment, LLC (“BHR2”), with a 16.3% ownership, was acquired in August 2021. BHR2 serves as a special purpose investment vehicle to hold an investment in Berry-Rock Capital, LP (“Berry-Rock”). Berry-Rock is a provider of a rent-to-own program for individuals unable to qualify for a mortgage. The Company’s investment in BHR2 totaled $300,754 at March 31, 2023 and December 31, 2022.

 

Victorum BRH3 Investment, LLC (“BRH3”), with a 27.27% ownership, was acquired in November 2022. BRH2 serves as a special purpose investment vehicle to hold an investment in Berry-Rock Capital, LP (“Berry-Rock”). Berry-Rock is a provider of a rent-to-own program for individuals unable to qualify for a mortgage. The Company’s investment in BRH3 totaled $301,261 at March 31, 2023 and December 31, 2022.

 

The Company’s Other Investments primarily include:

 

Bailey Hilltop Pipeline (“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 $77,377 at March 31, 2023 and December 31, 2022.

 

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 at March 31, 2023 and December 31, 2022.

 

Genlith, Inc. (“Genlith”), with a 5.15% 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 $460,000 at March 31, 2023 and December 31, 2022.

 

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 13 acres. The Company’s investment in OKC totaled $82,482 at March 31, 2023 and December 31, 2022.

 

Grand Woods holds approximately 26.56 acres of undeveloped real estate in northeast Oklahoma City. The accumulated costs of the land totaled $2,171,828 at March 31, 2023 and December 31, 2022. See Note 7 for information related to Grand Woods.

 

Victorum Capital Club (“VCC”) invests in and manages special investment vehicles that hold investments in various startup companies. The Company participates with minority ownership in an assortment of investments held with VCC. The Company’s investment in VCC special investment vehicles totaled $357,259 at March 31, 2023 and December 31, 2022.

 

VCC Venture Fund I, LP (“VCC Venture”), serves as a limited partnership to be used for investments in start-up entities and is managed by Victorum Capital Club. The Company committed to a $250,000 investment in VCC Venture. The Company’s investment in VCC Venture totaled $31,250 at March 31, 2023 and December 31, 2022, which represents 12.50% of the Company’s capital commitment.

 

 

Note 5 – NON-CONTROLLING INTEREST AND VARIABLE INTEREST ENTITIES

 

TWS and Grand Woods are accounted for as consolidated VIEs. The Company owns an 80.37% interest in Grand Woods in the form of 47.08 Class A units and 546,735 Class C units, with the remaining non-controlling member interests held by other members, including 8.72% owned by executive officers of the Company. Grand Woods holds approximately 26.56 acres of undeveloped real estate in northeast Oklahoma City.

 

On September 15, 2022, Grand Woods entered into an agreement (“the 2022 Agreement”) with its members that resulted in the Company having the power to direct the activities significant to Grand Woods and becoming the primary beneficiary; therefore, consolidation of Grand Woods became required and effective for the period ending September 30, 2022. The Company is the only guarantor of $1,200,000 of a note payable held by Grand Woods. See Note 6 for terms and guarantee of debt held by Grand Woods, which is included in the consolidated balance sheets. As a result of the Company’s guarantee of $1,200,000 of Grand Woods debt, the noteholder has partial recourse to the Company for the consolidated VIE’s liabilities.

 

The following table presents the summarized assets and liabilities of Grand Woods and TWS included in the consolidated balance sheets as of March 31, 2023 and December 31, 2022. The assets of Grand Woods and TWS in the table below may only be used to settle obligations of Grand Woods or TWS, respectively.

 

9
 
 

The assets and liabilities in the table below include third party assets and liabilities only and exclude intercompany balances that eliminate in consolidation.

 

  March 31, 2023 
          
  

Grand Woods

  

TWS

  

Total

 

Assets:

            

Cash

 $50,495  $306,479  $356,974 

Accounts Receivable

  -   10,000   10,000 

Other Investments (Land)

  2,171,828   -   2,171,828 

Total Current Assets

  2,222,323   316,479   2,538,802 

Other Property and Equipment, at cost

  -   419,044   419,044 

Less – Accumulated Depreciation

  -   (110,431)  (110,431)

Other Property and Equipment, Net

  -   308,613   308,613 

Total Assets

 $2,222,323  $625,092  $2,847,415 

Liabilities:

            

Accounts Payable

 $-  $5,155  $5,155 

Note Payable, Current Portion

  137,866   -   137,866 

Total Current Liabilities

  137,866   5,155   143,021 

Note Payable, Less Current Portion

  1,265,808   -   1,265,808 

Total Liabilities

 $1,403,674  $5,155  $1,408,829 

 

 

  December 31, 2022 
          
  

Grand Woods

  

TWS

  

Total

 

Assets:

            

Cash

 $24,050  $281,654  $305,704 

Accounts Receivable

  -   72,716   72,716 

Other Investments (Land)

  2,171,828   -   2,171,828 

Total Current Assets

  2,195,878   354,370   2,550,248 

Other Property and Equipment, at cost

  -   419,044   419,044 

Less – Accumulated Depreciation

  -   (92,278)  (92,278)

Other Property and Equipment, Net

  -   326,766   326,766 

Total Assets

 $2,195,878  $681,136  $2,877,014 

Liabilities:

            

Accounts Payable

 $-  $58,742  $58,742 

Note Payable, Current Portion

  136,637   -   136,637 

Total Current Liabilities

  136,637   58,742   195,379 

Note Payable, Less Current Portion

  1,300,872   -   1,300,872 

Total Liabilities

 $1,437,509  $58,742  $1,496,251 

 

 

Note 6 – NOTE PAYABLE

 

Grand Woods has a note payable (“the Note”) that was used for the purchase and development of property. The Note has a 4% interest rate and matures November 23, 2026. The Note has scheduled payments of principal and interest in the amount of $16,043 per month, with a balloon payment of any unpaid principal balance due on November 23, 2026. The balance of the Note at March 31, 2023 and December 31, 2022 is $1,403,674 and $1,437,509, respectively, of which $137,866 is classified as current at March 31, 2023. Interest paid on the Note in the period ending March 31, 2023 totaled $14,268. The Note is secured by the underlying property and a $1,200,000 guaranty issued by the Company. Covenants of the Note include a pay down requirement that states that sales of parcels will require a pay down on the loan of 90% of the net proceeds received from the purchaser less capital gains obligation. The remaining 10% shall be held in an operating reserve account for operating expenses and the use in payment of taxes. No distributions to partners, except for taxes, are permitted throughout the term of the loan. The intent of the Grand Woods investment manager and members is that proceeds from the sale of all, or part of, the property will be used to reduce or eliminate the Note. The Company does not anticipate the need to perform on the guarantee of the Note.

 

10
 
 

Below is a schedule of future principal payments on the outstanding Note at March 31, 2023:

 

Years Ending December 31,

 

Principal Payments

 

2023

 $102,802 

2024

  142,136 

2025

  148,155 

2026

  1,010,581 
  $1,403,674 

 

 

Note 7 – PROVISION FOR INCOME TAXES

 

In 2023 and 2022, 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 natural 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 8 – 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, 2022

 $2,809,257 

Liabilities settled (wells sold or plugged)

  (5,793)

Accretion expense

  18,221 

Balance at March 31, 2023

 $2,821,685 

 

 

Note 9 – 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.

 

11
 
 

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 March 31, 2023 and December 31, 2022, the Company’s assets reported at fair value on a recurring basis are summarized as follows:

 

  

March 31, 2023

 
  

Level 1 Inputs

  

Level 2 Inputs

  

Level 3 Inputs

 

Financial Assets:

            

Available-for-Sale Debt Securities – U.S. Treasury Bills Maturing within 1 Year

 $-  $5,369,536  $- 

Equity Securities:

            

Domestic Equities

  2,374,520   -   - 

International Equities

  286,086   -   - 

Others

  129,499   -   - 
  $2,790,105  $5,369,536  $- 

 

  

December 31, 2022

 
  

Level 1 Inputs

  

Level 2 Inputs

  

Level 3 Inputs

 

Financial Assets:

            

Available-for-Sale Debt Securities – U.S. Treasury Bills Maturing within 1 Year

 $-  $4,208,648  $- 

Equity Securities:

            

Domestic Equities

  1,720,410   -   - 

International Equities

  448,405   -   - 

Others

  134,144   -   - 
  $2,302,959  $4,208,648  $- 

 

Non-Recurring Fair Value Measurements

 

The Company’s asset retirement obligation annually represents a non-recurring fair value liability, for which there were no liabilities incurred in the periods ending March 31, 2023 or 2022. See Note 7 above for more information about this liability and the inputs used for calculating fair value.

 

The impairment loss in the quarter ended March 31, 2023 was $443,456, with none in 2022. This also represents non-recurring fair value measurements calculated using Level 3 inputs. See Note 10 below for a description of the impairment loss calculation.

 

Fair Value of Other Financial Instruments

 

The Company’s other financial instruments consist primarily of cash and cash equivalents, trade receivables, trade payables and dividends payable. At March 31, 2023 and December 31, 2022, the historical cost of cash and cash equivalents, trade receivables and trade payables are considered to be representative of their respective fair values due to the short-term maturities of these items.

 

 

Note 10 – LONG-LIVED ASSETS IMPAIRMENT LOSS

 

Certain oil and natural 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. Impairment losses recorded for the period ending March 31, 2023 were $443,456, with none in 2022. Impairment losses are included in the consolidated statements of income in the line-item Depreciation, Depletion, Amortization and Valuation Provisions. Impairments are 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 is used for calculating future revenue and cash flow.

 

12
 
 
 

ITEM 2.

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

 

This discussion and analysis should be read with reference to ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS in the 2022 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 natural gas wells, the production that may be obtained from oil and natural 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 2022 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

 

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 quarter of 2023, the Company continued to fund its business activity using internal sources of cash. The Company had net cash provided by operations of $1,503,765 in the three months ending March 31, 2023. The Company had sales of equity securities of $151,518, cash distributions from other investments of $320,998, and maturity of available-for-sale debt securities of $1,151,966 for total cash provided by investing activities of $1,624,482 in the three months ending March 31, 2023. The Company utilized cash for the purchase of property of $847,636, purchase of equity method and other investments of $25,846, purchase of equity securities of $556,029, and purchase of available-for-sale debt securities of $2,312,854, for total cash applied of $3,742,365 in the three months ending March 31, 2023. Cash and cash equivalents decreased $627,340 (9%) to $6,671,884 at March 31, 2023 from $7,299,224 at December 31, 2022.

 

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, 2022. A discussion of these items follows.

 

Available-for-sale debt securities increased $1,160,888 (26%) to $5,369,536 in the three months ended March 31, 2023, from $4,208,648 at December 31, 2022. This was the result of the Company’s shift in cash management and investment strategy to increase available-for-sale debt securities to capitalize on increased interest rates.

 

Equity securities increased $487,146 (21%) to $2,790,105 as of March 31, 2023 from $2,302,959 at December 31, 2022. The increase was the result of $404,511 in net purchases and a $82,635 increase in market value.

 

Refundable income taxes decreased $11,289 (9%) to $108,941 as of March 31, 2023 from $120,230 at December 31, 2022.

 

Accounts receivable decreased $652,127 (28%) to $1,666,056 as of March 31, 2023 from $2,318,183 at December 31, 2022. The decrease was primarily related to decreased production and decreased oil and natural gas prices during the period ending March 31, 2023.

 

Discussion of Significant Changes in the Condensed Statements of Cash Flows. As noted in the first paragraph above, net cash provided by operating activities was $1,503,765 in the three months ended March 31, 2023, an increase of $62,097 (4%) from the comparable period in 2022 of $1,441,668. For more information see “Operating Revenues” and “Other Income, Net” below.

 

13
 

 

Cash applied to the purchase of property additions in the three months ended March 31, 2023 was $847,636, a decrease of $222,044 (21%) from cash applied in the comparable period in 2022 of $1,069,680. For 2023, cash applied to property additions was all related to oil and natural gas exploration and development activity. See the subheading “Exploration Costs” in the “Results of Operations” section below for additional information.

 

Cash applied to the purchase of equity securities in the three months ended March 31, 2023 was $556,029, compared to $1,520,591 in the comparable period in 2022. Cash provided by the sale of equity securities in the three months ended March 31, 2023 was $151,518, compared to $628,126 in the comparable period in 2022.

 

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 2022 Form 10-K would not be representative of the Company’s current position.

 

RESULTS OF OPERATIONS

 

Net income decreased $1,281,741 (76%) to $403,738 in the three months ended March 31, 2023 from $1,685,479 in the comparable period in 2022. Net income per share, basic, decreased $8.15 to a net income per share of $2.64 in the three months ended March 31, 2023 from a net income per share of $10.79 in the comparable period in 2022.

 

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

 

Operating Revenues. Revenues from oil and gas sales decreased $498,383 (15%) to $2,935,441 in the three months ended March 31, 2023 from $3,433,824 in 2022. Of the $498,383 decrease, crude oil sales decreased $8,096; natural gas sales decreased $401,407; and miscellaneous oil and gas product sales decreased $88,880.

 

The $8,096 (<1%) decrease in oil sales to $2,344,037 in the three months ended March 31, 2023 from $2,352,133 in the comparable period in 2022 was the result of an increase in the volume sold and a decrease in the average price per barrel (Bbl). The volume of oil sold increased 7,639 Bbls to 32,678 Bbls in the three months ended March 31, 2023, resulting in a positive volume variance of $717,572 compared to the comparable period in 2022. The average price per Bbl decreased $22.21 to $71.73 per Bbl in the three months ended March 31, 2023, resulting in a negative price variance of $(725,668) compared to the comparable period in 2022.

 

The $401,407 (43%) decrease in natural gas sales to $535,401 in the three months ended March 31, 2023 from $936,808 in the comparable period in 2022 was the result of a decrease in the average price per thousand cubic feet (MCF) and a decrease in the volume sold. The volume of natural gas sold decreased 8,305 MCF to 161,853 MCF in the three months ended March 31, 2023 from 170,158 MCF in the comparable period in 2022, for a negative volume variance of $(45,725). The average price per MCF decreased $2.20 to $3.31 per MCF in the three months ended March 31, 2023 from $5.51 per MCF in the comparable period in 2022, resulting in a negative price variance of $(355,682).

 

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 oil and gas products decreased $88,880 (61%) to $56,003 in the three months ended March 31, 2023 from $144,883 in the comparable period in 2022.

 

Lease bonuses and other decreased $37,654 to $0 in the three months ended March 31, 2023 from $37,654 in the comparable period in 2022.

 

The Company had water well drilling revenues of $164,200 in the three months ended March 31, 2023 related to water well drilling through TWS, with $275,534 in the comparable period in 2022.

 

Operating Costs and Expenses. Operating costs and expenses increased $1,601,610 (104%) to $3,145,992 in the three months ended March 31, 2023 from $1,544,382 in the comparable period in 2022. The increase was primarily due to increased oil production and drilling activity in the 2023 period.

 

Production Costs. Production costs increased $278,574 (36%) to $1,056,749 in the three months ended March 31, 2023 from $778,175 in the comparable period in 2022. This increase was the result of an increase of $361,925 in lease operating expense due to several new wells in progress, an increase of $5,502 in production tax and a decrease of $88,853 in hauling, compression and other expenses.

 

Exploration Costs. Total exploration expense increased $428,129 to $374,348 in the three months ended March 31, 2023 from $(53,781) in the comparable period in 2022. This change was the result of an increase in geological and geophysical costs of $38,271, an increase in dry hole costs, P&A and other costs of $229,623 and increase in canceled and expired leases of $160,235.

 

14
 

 

Depreciation, Depletion, Amortization and Valuation Provision (DD&A). DD&A increased $617,841 (184%) to $952,887 in the three months ended March 31, 2023 from $335,046 in the comparable period in 2022, primarily due to impairment of long lived assets of $443,456 in the current period.

 

General, Administrative and Other (G&A). G&A increased $61,268 (11%) to $595,435 in the three months ended March 31, 2023 from $534,167 in the comparable period in 2022. The increase was due to an increase in payroll costs of $47,759, added costs of $17,543 related to Grand Woods and a net increase in other G&A accounts of $4,034.

 

Other Income/(Loss), Net. Other income increased $633,939 to $568,833 in the three months ended March 31, 2023 from loss of $(65,106) in the comparable period in 2022. The Company collected $290,000 on the sale of a portion of property held in OKC Industrial Properties, LC during the period ended March 31, 2023. The remaining increase was the result of increases in interest, equity securities gains, and other income. See Note 3 to the accompanying consolidated financial statements for the various components of Other Income/(Loss), Net.

 

Income Tax Provision. In the three months ended March 31, 2023, the Company had an estimated income tax provision of $133,447 as the result of a deferred tax provision of $121,913 and a current tax provision of $11,534. In the comparable period in 2022, the Company had an estimated income tax provision of $368,588 as the result of a deferred tax provision of $317,418 and a current tax provision of $51,170. See Note 5 to the accompanying consolidated financial statements for additional information on income taxes.

 

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, 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 March 31, 2023.

 

Internal Control over Financial Reporting

 

There were no changes in the Company’s internal control over financial reporting during the quarter ended March 31, 2023 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).

 

15
 

 

PART II – OTHER INFORMATION

 

ITEM 1.

LEGAL PROCEEDINGS

 

During the quarter ended March 31, 2023, the Company did not have any material legal proceedings brought against it or its properties.

 

 

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.

 

 

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.

 

16
 

 

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:         May 15, 2023

 

/s/ Cameron R. McLain

 

 

 

Cameron R. McLain,

 

 

 

Principal Executive Officer

 
       
       
       
Date:         May 15, 2023   /s/ Lawrence R. Francis  
    Lawrence R. Francis  
    Principal Financial Officer  

 

 

17
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