10QSB 1 d86974e10qsb.txt FORM 10QSB FOR QUARTER ENDING MARCH 31, 2001 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB (X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the period ended March 31, 2001 ------------------------------------------------------- ( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to ---------------------- ------------------- Commission File Number 0-9116 ---------------------------------------------------------- PANHANDLE ROYALTY COMPANY -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) OKLAHOMA 73-1055775 -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) Grand Centre Suite 210, 5400 N Grand Blvd., Oklahoma City, Oklahoma 73112 -------------------------------------------------------------------------------- (Address of principal executive offices) Registrant's telephone number including area code (405) 948-1560 ------------------------------- 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. x Yes No ---- ---- Outstanding shares of Class A Common stock (voting) at May 3, 2001: 2,060,060 --------- 2 INDEX
Part I. Financial Information Item 1. Consolidated Financial Statements Page Condensed Consolidated Balance Sheets - March 31, 2001 (unaudited) and September 30, 2000 ..................................................................1 Condensed Consolidated Statements of Income - Three months and six months ended March 31, 2001 and 2000 (unaudited) .........................................................................2 Condensed Consolidated Statements of Cash Flows - Six months ended March 31, 2001 and 2000 (unaudited) .........................................................................3 Notes to Condensed Consolidated Financial Statements (unaudited) ..............................................................4 Item 2. Management's discussion and analysis of financial condition and results of operations .................................................5 Part II. Other Information Item 4. Submission of matters to a vote of security holders ..........................................6 Item 6. Reports on Form 8-K ..........................................................................6
3 PART I. FINANCIAL INFORMATION PANHANDLE ROYALTY COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS (Information at March 31, 2001 is unaudited)
March 31, September 30, Assets 2000 2000 -------------- -------------- Current assets: Cash and cash equivalents $ 697,712 $ 815,912 Oil and gas sales and other receivables 2,525,851 1,955,590 Prepaid expenses 22,179 3,817 -------------- -------------- Total current assets 3,245,742 2,775,319 Properties and equipment, at cost, based on successful efforts accounting Producing oil and gas properties 30,963,176 27,282,697 Non producing oil and gas properties 6,511,654 6,154,159 Other 281,924 280,877 -------------- -------------- 37,756,754 33,717,733 Less accumulated depreciation, depletion and amortization 21,278,032 20,390,441 -------------- -------------- Net properties and equipment 16,478,722 13,327,292 Other assets 107,716 107,716 -------------- -------------- $ 19,832,180 $ 16,210,327 ============== ============== Liabilities and Stockholders' Equity Current liabilities: Accounts payable, accrued liabilities and gas imbalance liability $ 1,191,552 $ 759,444 Dividends payable 7,743 7,742 Income taxes payable 132,863 249,327 Deferred income taxes 23,000 46,000 -------------- -------------- Total current liabilities 1,355,158 1,062,513 Deferred income taxes 2,444,000 1,794,000 Deferred lease bonus 37,308 -- Stockholders' equity Class A voting Common Stock, $.0333 par value; 6,000,000 shares authorized, 2,060,060 issued and outstanding at March 31,2001 and 2,060,206 at September 30, 2000 68,669 68,673 Capital in excess of par value 606,425 608,280 Retained earnings 15,320,620 12,676,861 -------------- -------------- Total stockholders' equity 15,995,714 13,353,814 -------------- -------------- $ 19,832,180 $ 16,210,327 ============== ==============
(1) 4 PANHANDLE ROYALTY COMPANY CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Ended March 31, Six Months Ended March 31, 2001 2000 2001 2000 -------------- -------------- -------------- -------------- Revenues: Oil and gas sales $ 3,883,831 $ 2,158,123 $ 7,303,887 $ 3,785,862 Lease bonuses and rentals 1,584 60,759 4,269 61,199 Interest 16,060 3,157 28,865 4,570 Other 39,500 18,947 78,175 40,316 -------------- -------------- -------------- -------------- 3,940,975 2,240,986 7,415,196 3,891,947 Costs and expenses: Lease operating expenses 231,536 196,165 435,214 350,673 Production taxes 268,889 155,708 480,356 272,858 Exploration costs 97,984 151,898 314,107 237,649 Depreciation, depletion, amortization and impairment 423,954 419,044 887,591 898,921 General and administrative 544,541 306,274 1,011,547 712,107 Interest expense - 9,177 - 10,760 -------------- -------------- -------------- -------------- 1,566,904 1,238,266 3,128,815 2,482,968 -------------- -------------- -------------- -------------- Income before provision for income taxes 2,374,071 1,002,720 4,286,381 1,408,979 Provision for income taxes 684,000 280,000 1,210,000 322,000 -------------- -------------- -------------- -------------- Net income $ 1,690,071 $ 722,720 $ 3,076,381 $ 1,086,979 ============== ============== ============== ============== Basic earnings per share (Note 4) $ .82 $ .35 $ 1.49 $ .53 ============== ============== ============== ============== Diluted earnings per share (Note 4) $ .81 $ .35 $ 1.48 $ .52 ============== ============== ============== ============== Dividends declared per share of common stock $ .07 $ .07 $ .21 $ .14 ============== ============== ============== ==============
(2) 5 PANHANDLE ROYALTY COMPANY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six months ended March,31 2001 2000 ------------- ------------- Cash flows from operating activities: Net income $ 3,076,381 $ 1,086,979 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion and amortization 887,591 898,921 Deferred income taxes 650,000 - Exploration costs 314,107 237,649 Deferred lease bonus 37,308 - Cash provided (used) by changes in assets and liabilities: Oil and gas sales and income tax receivable (570,261) (189,167) Prepaid expenses and other assets (18,362) (15,713) Income taxes payable (139,464) 170,999 Accounts payable, accrued liabilities, gas imbalance liability and dividends payable 432,108 (20,946) ------------- ------------- Total adjustments 1,593,027 1,081,743 ------------- ------------- Net cash provided by operating activities 4,669,408 2,168,722 Cash flows from investing activities: Purchase of and development of properties and equipment (4,353,127) (2,234,556) ------------- ------------- Net cash used in investing activities (4,353,127) (2,234,556) Cash flows from financing activities: Borrowings under line of credit - 500,000 Payments of loan principal - (200,000) Acquisition and cancellation of Company's common shares (1,859) (70,195) Payment of dividends (432,622) (289,532) ------------- ------------- Net cash provided (used) by financing activities (434,481) (59,727) ------------- ------------- Decrease in cash and cash equivalents (118,200) (125,561) Cash and cash equivalents at beginning of period 815,912 213,207 ------------- ------------- Cash and cash equivalents at end of period $ 697,712 $ 87,646 ============= ============= Supplemental disclosure of cash flow information: Interest paid $ -- $ 9,985 Income taxes paid 699,464 151,001 ------------- ------------- $ 699,464 $ 160,986 ============= =============
(See accompanying notes) (3) 6 PANHANDLE ROYALTY COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. The consolidated results presented for the three-month and six-month periods ended March 31, 2001 and 2000 are unaudited, but management of Panhandle Royalty Company believes that all adjustments necessary for a fair presentation of the consolidated results of operations for the periods have been included. All such adjustments are of a normal recurring nature. The consolidated results are not necessarily indicative of those to be expected for the full year. 2. The Company utilizes tight gas sands production tax credits to reduce its federal income tax liability, if any. These credits are scheduled to be available through the year 2002. The Company's provision for income taxes is also reflective of excess percentage depletion, reducing the Company's effective tax rate from the federal statutory rate. 3. The Company's diluted earnings per share calculation takes into account certain shares that may be issued under the Non-Employee Director's Deferred Compensation Plan. The following table sets forth the computation of basic and diluted earnings per share:
Three months ended March 31, Six months ended March 31, ------------------------------- ------------------------------- 2001 2000 2001 2000 -------------- -------------- -------------- -------------- Numerator for primary and diluted earnings per share: Net income (loss) $ 1,690,071 $ 722,720 $ 3,076,381 $ 1,086,979 -------------- -------------- -------------- -------------- Denominator: For basic earnings per share Weighted average shares 2,060,060 2,057,546 2,060,115 2,057,265 Effect of potential diluted shares: Directors deferred compensation shares 23,824 19,918 23,278 18,603 -------------- -------------- -------------- -------------- Denominator for diluted earnings per share - adjusted weighted average shares and potential shares 2,083,884 2,077,464 2,083,393 2,075,868 ============== ============== ============== ============== Basic earnings (loss) per share $ .82 $ .35 $ 1.49 $ .53 ============== ============== ============== ============== Diluted earnings (loss) per share $ .81 $ .35 $ 1.48 $ .52 ============== ============== ============== ==============
4. The Company has a $5,000,000 line of credit with BancFirst in Oklahoma City, OK. This facility matures on December 31, 2002. At March 31, 2001, the Company had no balance outstanding under the BancFirst facility. 5. Approximately 90% of the Company's share of gas produced from the Potato Hills Field is currently being sold under a fixed price contract by the operator of the wells. A contract price of $2.68 per MMBTU was fixed until October 31, 2000. Effective November 1, 2000, several different contracts were in place through March 2001, which had a floor price of approximately $3.69 and a ceiling price of approximately $8.40 per MMBTU. For the period from April through September 2001, contracts provide for an average floor price of $4.97 and an average ceiling price of $5.84 per MMBTU. For the six-month period ended March 31, 2001, these contracts reduced gas revenues approximately $180,000. (4) 7 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS AND RISK FACTORS Forward-Looking Statements for 2001 and later periods are made in this document. Such statements represent estimates of management based on the Company's historical operating trends, its proved oil and gas reserves and other information currently available to management. The Company cautions that the forward-looking statements provided herein are subject to all the risks and uncertainties incident to the acquisition, development and marketing of, and exploration for oil and gas reserves. These risks include, but are not limited to, oil and natural gas price risk, environmental risks, drilling risk, reserve quantity risk and operations and production risk. For all the above reasons, actual results may vary materially from the forward-looking statements and there is no assurance that the assumptions used are necessarily the most likely to occur. LIQUIDITY AND CAPITAL RESOURCES At March 31, 2001, the Company had positive working capital of $1,890,584, as compared to $1,712,806 at September 30, 2000. Cash flow from operating activities increased 115% to $4,669,408 for the 2001 six-month period as compared to the fiscal 2000 six-month period. This increase was primarily a result of increased oil and gas sales revenues during the 2001 six-month period, which is discussed in detail in Results of Operations. Capital expenditures for oil and gas activities for the first six-months of fiscal 2001, amounted to $4,353,127 as compared to $2,234,556 in the first six-months of fiscal 2000. This increased level of expenditures was the result of significantly increased market prices for gas and oil causing a large increase in the number of new wells being drilled. The Company relies on third parties to operate drilling and producing wells and simply pays it's proportionate share of costs as wells are drilled, completed and producing. The Company expects this increased level of capital expenditures to continue for the last six-months of fiscal 2001. Remaining projected costs at March 31, 2001, for wells proposed or actually drilling was approximately $4,247,000. The Company has historically funded drilling and other capital expenditures, overhead costs and dividend payments from operating cash flow. Management anticipates there will be sufficient funds available from projected cash flow and the line-of-credit, if needed, to meet all expected costs and capital obligations for the remainder of fiscal 2001. The Company has equity available should a large acquisition of oil and gas properties, or a company purchase, increase capital expenditures to a level above available cash flow and bank financing. RESULTS OF OPERATIONS Revenues increased significantly for the three-month and six-month periods ended March 31, 2001, as compared to the same periods in fiscal 2000. These increases were a result of increased gas and oil sales prices offset somewhat by decreased sales volumes of both gas and oil. The chart below outlines the Company's production and average sales prices for oil and gas for the three and six-month periods of fiscal 2001 and 2000.
BARRELS AVERAGE MCF AVERAGE SOLD PRICE SOLD PRICE ------- -------- ---------- --------- Three months ended 3/31/01 14,128 $ 27.42 520,854 $ 6.71 Three months ended 3/31/00 18,857 $ 26.94 675,822 $ 2.44 Six months ended 3/31/01 33,843 $ 30.03 1,074,641 $ 5.85 Six months ended 3/31/00 34,178 $ 25.56 1,201,222 $ 2.42
As shown in the above chart, gas sales prices increased dramatically for both the three-month and six- month periods of fiscal 2001 and oil prices increased, but at a much smaller percentage. Sales volumes of gas decreased for both the three-month and six-month periods of fiscal 2001, as compared to fiscal 2000 periods. These decreases are the result of normal production decline of the Company's wells, and specifically a decline in the Potato Hills Field production in the 2001 second quarter as compared to the 2000 second quarter. In addition, due to the substantial increase in drilling activity in this fiscal year, the completion and placing on production of new wells drilled is very slow, as a result of manpower and equipment restraints. (5) 8 Thus, new production is not coming on line at a pace fast enough to overcome the decline of older wells. However, gas production volumes and oil production volumes should increase somewhat, in the last two quarters of fiscal 2001, as compared to quarter ended March 31, 2001, as new wells come on line. Gas prices are expected to decline to around the $4.00 to $5.00 level during the summer months, with oil prices remaining in the mid $20 range. Thus, the Company's oil and gas sales revenues for the third and fourth quarter are expected to be somewhat less than the second quarter of fiscal 2001. Costs and expenses increased 27% and 26% respectively, for the three-month and six-month periods ended March 31, 2001, as compared to the same periods of fiscal 2000. These increases were principally the result of increased production taxes (which are calculated as a percentage of oil and gas sales revenue from each well) on the increased oil and gas sales revenues in the fiscal 2001 periods and increased general and administrative costs (G&A). Approximately $123,000 of the increase in G&A costs is related to the Non-Employee Director's Deferred Compensation Plan. During the quarter ended March 31, 2001, the Company's share price increased from $14.00 per share to $19.00 per share. This increase in share price caused recognition of a current period expense based on shares that could currently be issued under the terms of the Plan. The Non-Employee Director's have received these potential shares, rather than a cash payment, for their director's fees. In addition, personnel related expenses (including salary, insurance costs, payroll taxes and ESOP expenses), consultant fees and legal costs increased in the fiscal 2001 periods as compared to the 2000 periods. The Company's provision for income taxes increased substantially in the 2001 periods due to an increase in income before taxes, as discussed above. The provision for income taxes differs from the statutory rate due to benefits from tight gas sands production tax credits and percentage depletion. Earnings benefited from the significant increase in oil and gas sales revenues, explained above. It currently appears earnings for the remainder of fiscal 2001, will benefit from the continuing escalated market prices for gas and oil in fiscal 2001, as compared to fiscal 2000 prices. However, should additional exploratory drilling projects result in non-productive wells, thus increasing exploration costs, or the market price of gas or oil decline, earnings would be negatively impacted. PART II. OTHER INFORMATION Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) The annual meeting of shareholders was held on February 23, 2001. (b) Two directors were elected for three year terms at the meeting. Also, ratification of the selection of Ernst & Young LLP as independent auditors for the Company was voted upon. The directors elected and the results of voting were as follows:
Shareholders --------------------------------- For Against Withheld --- -------- -------- Directors Michael A. Cawley 1,482,889 18,819 Ray H. Potts 1,484,548 17,631 Auditors Ernst & Young LLP 1,500,835 189 9,939
Item 6. EXHIBITS AND REPORT ON FORM 8-K (a) FORM 8-K - There were no reports on FORM 8-K filed for the three months ended March 31, 2001. (6) 9 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PANHANDLE ROYALTY COMPANY May 8, 2001 /s/ H W Peace II ---------------- -------------------------------------- Date H W Peace II, President and Chief Executive Officer May 8, 2001 /s/ Michael C. Coffman ---------------- -------------------------------------- Date Michael C. Coffman, Vice President, Chief Financial Officer and Secretary and Treasurer (7)