SPND.. $3.75..Liquidity and Capital Resources
The Company's operating capital needs, as well as its capital spending program are generally funded from cash flow generated by operations. Because future cash flow is subject to a number of variables, such as the level of production and the sales price of oil and natural gas, the Company can provide no assurance that its operations will provide cash sufficient to maintain current levels of capital spending. Accordingly, the Company may be required to seek additional financing from third parties in order to fund its exploration and development programs.
Results of Operations
2012 Compared to 2011
Oil revenue for 2012 was approximately $7,116,000 compared to $4,084,000 for 2011, an increase of approximately $3,032,000 or 74%. Oil prices increased to an average of $89.49 per barrel in 2012 from an average of $83.85 per bbl in 2011, an increase of $5.63 per bbl or 7%. In addition to the increase in prices, oil sales increased to 79,514 bbls from approximately 48,708 bbls in 2011, an increase of 30,814 bbls or 63%. The increase in oil revenue and sales is predominantly due to participation in new wells during the last half 2012.
Gas revenue for 2012 was approximately $2,882,000 compared to $3,916,000 for 2011, a decrease of approximately $1,034,000 or 26%. Gas sales increased to approximately 792,000 mcf in 2012 from approximately 734,000 mcf in 2011, an increase of 58,000 mcf or 8%. The net increase in natural gas sales was due to the participation in, and the acquisition of new wells. Gas prices, however, decreased to an average of $3.64 per mcf in 2012, a decrease of $1.70 or 32% from an average of $5.34 per mcf in 2011.
Revenue from lease operations was $359,000 for 2012, an increase of $70,000 or 24% from $289,000 in 2011. This was due primarily to an increase in field supervision charges on operated wells of approximately $44,000 as a result of workover activity during 2012. In addition there was an increase in administrative overhead billed to working interest owners of approximately $26,000 due primarily to an increase in COPAS overhead rates billed
Revenue from gas gathering for 2012 was $145,000, a decrease of $27,000 or 16% from $172,000 in 2011. This was due primarily to a decrease in natural gas volume sold through Prairie Pipeline.
Real estate income for 2012 was $242,000, down 44% or $194,000 from $436,000 in 2011. This was due primarily to the expiration of a large lease contract in late 2011 which was not renewed and some lease renewal incentives.
Interest income for 2012 was approximately $78,000, a decrease of approximately $5,000 from approximately $83,000 in 2011 or 6%. Overall interest rates on deposit accounts at most of the banks in which the Company is a depositor, have decreased over prior years.
Other income for 2012 was $1,284,000, as compared to $360,000 in 2011, an increase of $924,000 or 257%. This change is due to the increase in cash received for farm-out agreements in 2012 over that received during 2011. From time to time, the Company farms out some of its leasehold acreage to non-affiliated third parties for exploration and development drilling. Generally, the Company receives a one-time payment for the agreement. The revenues from these farm-out agreements vary in size and frequency and should not be considered as regularly recurring revenues that the Company receives.
Lease operations expense for 2012 was $2,631,000 as compared to $2,444,000 in 2011, a net increase of approximately $187,000, or 8%. Of this net increase, approximately $112,000 is due to increased workover activity, approximately $78,000 is due to new properties added since 2011, and a reduction of approximately $31,000 is due to a decrease in expenses from non-operated properties. The remaining $28,000 represents net increases and decreases on various properties due to general price increases and changes in levels of workover activity. These increases were offset by a one-time payment covering expenses from 2002 to 2011 associated with the acquisition of the working interest in the Davis Heirs #1 well during the first quarter of 2011.
Production taxes, gathering, transportation and marketing expenses for 2012 were approximately $891,000 compared to $809,000 in 2011, a net increase of $82,000. This 10% net increase is the result of an increase in severance taxes based on the increase in oil revenues. This increase was offset by an overall decrease in severance taxes based on decreased gas revenues and severance tax exemptions on certain of the Company's gas wells. Gathering and transportation charges increased due to a net increase in gas volumes sold during the period, which was offset by an overall decrease in marketing and other deductions.
Pipeline and rental operation expenses were approximately $26,000 in 2012 compared to approximately $25,000 in 2011, an increase of approximately $1,000 or 4%. This was due mainly to an increase in the costs associated with compressor and pipeline repairs.
Real estate operations expenses for 2012 were $185,000, down from $225,000 in 2011. This 18% decrease of $40,000 was primarily due to operating efficiencies, from the reduced usage of the building as the result of the expiration of the lease noted above.
Depreciation and amortization expense for 2012 was $1,647,000 compared to $1,152,000 for 2011, an increase of $495,000, or 43%. The Company re-evaluated its proved oil and gas reserves as of December 31, 2012, and decreased its estimated total proved reserves by approximately 203,000 BOE to 1,588,000 BOE at the end of 2012 compared to 1,791,000 BOE at the end of 2011, a decrease of approximately 11%. Sales of oil and gas products during 2012 increased by approximately 40,000 BOE from approximately 171,000 BOE in 2011 to approximately 211,000 BOE in 2012, an increase of approximately 23%. (See Footnote 18 to the Financial Statements). This resulted in an increase in the depletion rate factor from 8.718% in 2011 on an unamortized full cost pool base of $11,843,000 to a depletion rate factor of 11.754% on an unamortized full cost pool base of $13,464,000 in 2012. The net increase in the unamortized full cost pool base of $1,621,000 was due primarily to an increase in the amounts capitalized in the full cost pool of approximately $2,654,000 less the increase in accumulated depletion of $1,032,479.
Asset Retirement Obligation ("ARO") accretion expense for 2012 was $40,000 up from $34,000 in 2011; an increase of $6,000 or 17%. The ARO calculation is based on the Company's annual reserve report and takes into consideration the changes between years of the Company's estimated obligation to plug its interest in existing wells. This estimated future cost is discounted using a 10% discount factor based on the estimated life of each property. Changes are incorporated as applicable into the full cost pool and the carrying value of the liability. Accretion expense measures and incorporates changes due to the passage of time into the carrying amount of the liability.
General and administrative expenses for 2012 were $3,719,000 compared to $3,275,000 for 2011, an increase of approximately $444,000 between years or 14%. This increase is due mainly to payroll and associated employee benefit costs during 2012.
Interest expense for 2012 was $29,000, down from $55,000 in 2011; a decrease of $26,000 or 47%. The reason for the reduction is the decreasing loan balance on which interest is paid, and that the interest rate on the loan was adjusted from 6.11% in December, 2011 to 3.61% for future years.
2011 Compared to 2010
Oil revenue for 2011 was approximately $4,084,000 compared to $2,368,000 for 2010, an increase of approximately $1,716,000 or 72%. Oil prices increased to an average of $83.85 per barrel in 2011 from an average of $74.35 per bbl in 2010, an increase of $9.50 per bbl or 13%. In addition to the increase in prices, oil sales increased to 48,708 bbls from approximately 31,526 bbls in 2010, an increase of 17,182 bbls or 55%. The increase in oil revenue and sales is predominantly due to properties acquired or drilled in 2011.
Gas revenue for 2011 was approximately $3,916,000 compared to $3,934,000 for 2010, a decrease of approximately $18,000 or 0.5%. Gas sales decreased to approximately 734,000 mcf in 2011 from approximately 824,000 mcf in 2010, a reduction of 90,000 mcf or 11%. Gas prices, however, increased to an average of $5.34 per mcf in 2011, an increase of $0.45 or 9% from an average of $4.89 per mcf in 2010.
Revenue from lease operations was $289,000 for 2011, a decrease of $30,000 or 9% from $319,000 in 2010. This decrease was a result of lower pumper fees and field supervision costs charged to operated properties between the two years.
Revenue from gas gathering for 2011 was $172,000, a decrease of $7,000 or 4% from $179,000 in 2010. This was due primarily to the decrease in gas volume sold.
Real estate income for 2011 was $436,000, down 3% or $12,000 from $448,000 in 2010. This was due primarily to the expiration of a rental contract in late 2011 which was not renewed and some lease renewal incentives.
Interest income for 2011 was $83,000, a decrease of $75,000 from $158,000 in 2010 or 47%. Overall interest rates on deposit accounts at most of the banks in which the Company is a depositor, have decreased significantly over prior years.
Other income for 2011 was $360,000, as compared to $250,000 in 2010, an increase of $110,000 or 44%. The increase is due primarily to increases in farmouts and assignment of certain leases between years. In addition, amounts were brought into income from reconciliation efforts on accounts payable for non-operated properties. Amounts carried as payables were determined not to be liabilities and were taken to income.
Lease operating expenses increased to $2,444,000 in 2011 from $1,901,000 in 2010 an increase of $543,000 or 29%. Approximately $525,000 of this net increase comes from operated wells drilled or acquired in 2011 or late 2010. Another $185,000 comes from an increase in non-operated wells, the majority of which is due to the acquisition of a non-operated working interest in the Davis Heirs #1 which included expenses from a time period of 2002 to 2011. Expenses to plug non-economical wells decreased by $157,000 from 2010 and the remaining difference was the result of a net difference in workover costs between the two years.
Production taxes, gathering, transportation and marketing expenses for 2011 were approximately $809,000 compared to $712,000 in 2010, a net increase of $97,000. This 14% net increase is due an increase of approximately $116,000 in Severance Taxes paid on properties acquired in 2011 or late 2010. This amount is offset by a reduction in other revenue deductions of approximately $20,000.
Pipeline and rental operation expenses were $25,000 in 2011 from $33,000 in 2010 a decrease of $8,000 or 24%. This was due mainly to a decrease in the costs associated with compressor and pipeline repairs.
Real estate operations expenses for 2011 were $225,000, down from $246,000 in 2010. This 9% decrease of $21,000 was mainly due to the reduction of electricity costs after the Company changed electric carriers.
Depreciation and amortization expense for 2011 was $1,152,000 compared to $1,042,000 for 2010, an increase of $110,000, or 11%. The Company re-evaluated its proved oil and gas reserves as of December 31, 2011, and decreased its estimated total proved reserves by approximately 342,000 BOE to 1,791,000 BOE at the end of 2011 compared to 2,133,000 BOE at the end of 2010, a decrease of approximately 16.0%. Sales of oil and gas products during 2011 increased by approximately 2,000 BOE from approximately 169,000 BOE in 2010 to approximately 171,000 BOE in 2011, an increase of approximately 1.2%. (See Footnote 18 to the Financial Statements). This resulted in an increase in the depletion rate factor from 7.336% in 2010 on an unamortized full cost pot base of $12,496,000 to a depletion rate factor of 8.718% on an unamortized full cost pot base of $11,843,000 in 2011. The decrease in the unamortized full cost pot base of $653,000 was due primarily to a reduction of future development costs as calculated in the Company's reserve report between 2010 and 2011 of approximately $2,079,000.
Asset Retirement Obligation ("ARO") accretion expense for 2011 was $34,000 down from $48,000 in 2010; a decrease of $14,000 or 29%. The ARO calculation is based on the Company's annual reserve report and takes into consideration the changes between years of the Company's estimated obligation to plug its interest in existing wells. This estimated future cost is discounted using a 10% discount factor based on the estimated life of each property. Changes are incorporated as applicable into the full cost pot and the carrying value of the liability. Accretion expense measures and incorporates changes due to the passage of time into the carrying amount of the liability.
General and administrative expenses for 2011 were $3,275,000 compared to $3,467,000 for 2010, a decrease of approximately $192,000 between years or 6%. This decrease is due mainly to the reduction in payroll and associated employee benefit costs during 2011.
Interest expense for 2011 was $55,000, down from $84,000 in 2010; a decrease of $29,000 or 35%. The majority of this change is due to a Revenue Agent's Report assessed in late 2010 that was not incurred in 2011.
Certain Factors That Could Affect Future Operations
Certain information contained in this report, as well as written and oral statements made or incorporated by reference from time to time by the Company and its representatives in other reports, filings with the Securities and Exchange Commission, press releases, conferences, teleconferences or otherwise, may be deemed to be 'forward-looking statements' within the meaning of Section 21E of the Securities Exchange Act of 1934 and are subject to the 'Safe Harbor' provisions of that section.
AI
