10QSB 1 d89731e10qsb.txt FORM 10QSB FOR QUARTER ENDING JUNE 30, 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 June 30, 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 August 6, 2001: 2,060,060 --------- 2 INDEX
Page Part I. Financial Information Item 1. Consolidated Financial Statements Condensed Consolidated Balance Sheets - June 30, 2001 (unaudited) and September 30, 2000 ...................................... 1 Condensed Consolidated Statements of Income - Three months and nine months ended June 30, 2001 and 2000 (unaudited) ............................... 2 Condensed Consolidated Statements of Cash Flows - Nine months ended June 30, 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 6. Reports on Form 8-K ........................................ 6
3 PART I. FINANCIAL INFORMATION PANHANDLE ROYALTY COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS (Information at June 30, 2001 is unaudited)
June 30, September 30, 2001 2000 ----------- ------------- Assets Current assets: Cash and cash equivalents $ 754,470 $ 815,912 Oil and gas sales and other receivables 1,873,758 1,955,590 Prepaid expenses 13,366 3,817 ----------- ----------- Total current assets 2,641,594 2,775,319 Properties and equipment, at cost, based on successful efforts accounting Producing oil and gas properties 33,234,119 27,282,697 Non producing oil and gas properties 6,694,046 6,154,159 Other 283,228 280,877 ----------- ----------- 40,211,393 33,717,733 Less accumulated depreciation, depletion and amortization 21,713,891 20,390,441 ----------- ----------- Net properties and equipment 18,497,502 13,327,292 Other assets 107,716 107,716 ----------- ----------- $21,246,812 $16,210,327 =========== =========== Liabilities and Stockholders' Equity Current liabilities: Accounts payable 829,267 358,288 Accrued liabilities and gas imbalance liability 556,456 401,156 Dividends payable 7,742 7,742 Income taxes payable 34,863 249,327 Deferred income taxes 23,000 46,000 ----------- ----------- Total current liabilities 1,451,328 1,062,513 Deferred income taxes 2,882,000 1,794,000 Deferred lease bonus 34,040 Stockholders' equity Class A voting Common Stock, $.0333 par value; 6,000,000 shares authorized, 2,060,060 issued and outstanding at June 30,2001 and 2,060,206 at September 30, 2000 68,669 68,673 Capital in excess of par value 606,425 608,280 Retained earnings 16,204,350 12,676,861 ----------- ----------- Total stockholders' equity 16,879,444 13,353,814 ----------- ----------- $21,246,812 $16,210,327 =========== ===========
(1) 4 PANHANDLE ROYALTY COMPANY CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Ended June 30, Nine Months Ended June 30, 2001 2000 2001 2000 ----------- ----------- ----------- ----------- Revenues: Oil and gas sales $ 2,881,407 $ 2,376,330 $10,185,294 $ 6,162,192 Lease bonuses and rentals 10,188 8,996 14,457 70,195 Interest 11,071 4,322 39,936 8,892 Other 15,937 20,845 94,112 61,161 ----------- ----------- ----------- ----------- 2,918,603 2,410,493 10,333,799 6,302,440 Costs and expenses: Lease operating expenses 230,701 215,644 665,915 566,317 Production taxes 210,420 175,763 690,776 448,621 Exploration costs 200,359 90,773 514,466 328,422 Depreciation, depletion, amortization and impairment 435,859 385,358 1,323,450 1,284,279 General and administrative 472,550 284,382 1,484,098 996,489 Interest expense 779 4,833 779 15,593 ----------- ----------- ----------- ----------- 1,550,668 1,156,753 4,679,484 3,639,721 ----------- ----------- ----------- ----------- Income before provision for income taxes 1,367,935 1,253,740 5,654,315 2,662,719 Provision for income taxes 340,000 310,000 1,550,000 632,000 ----------- ----------- ----------- ----------- Net income $ 1,027,935 $ 943,740 $ 4,104,315 $ 2,030,719 =========== =========== =========== =========== Basic earnings per share (Note 3) $ .50 $ .46 $ 1.99 $ .99 =========== =========== =========== =========== Diluted earnings per share (Note 3) $ .49 $ .46 $ 1.97 $ .98 =========== =========== =========== =========== Dividends declared per share of common stock $ .07 $ .07 $ .28 $ .21 =========== =========== =========== ===========
(2) 5 PANHANDLE ROYALTY COMPANY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended June 30, 2001 2000 ----------- ----------- Cash flows from operating activities: Net income $ 4,104,315 $ 2,030,719 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion and amortization 1,323,450 1,284,279 Deferred income taxes 1,065,000 350,000 Exploration costs 514,466 328,422 Deferred lease bonus 34,040 -- Cash provided (used) by changes in assets and liabilities: Oil and gas sales and income tax receivable 81,832 (461,479) Prepaid expenses and other assets (9,549) (8,025) Income taxes payable (214,464) 30,999 Accounts payable, accrued liabilities, gas imbalance liability and dividends payable 626,279 (120,564) ----------- ----------- Total adjustments 3,421,054 1,403,632 ----------- ----------- Net cash provided by operating activities 7,525,369 3,434,351 Cash flows from investing activities: Purchase of and development of properties and equipment (7,008,126) (2,891,956) ----------- ----------- Net cash used in investing activities (7,008,126) (2,891,956) Cash flows from financing activities: Borrowings under line of credit -- 500,000 Payments of loan principal -- (400,000) Acquisition and cancellation of Company's common shares (1,859) (70,909) Payment of dividends (576,826) (433,292) ----------- ----------- Net cash used by financing activities (578,685) (404,201) ----------- ----------- Increase (decrease) in cash and cash equivalents (61,442) 138,194 Cash and cash equivalents at beginning of period 815,912 213,207 ----------- ----------- Cash and cash equivalents at end of period $ 754,470 $ 351,401 =========== =========== Supplemental disclosure of cash flow information: Interest paid $ 779 $ 16,368 Income taxes paid 699,464 251,001 ----------- ----------- $ 700,243 $ 267,369 =========== ===========
(See accompanying notes) PANHANDLE ROYALTY COMPANY (3) 6 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. The consolidated results presented for the three-month and nine-month periods ended June 30, 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 June 30, Nine Months Ended June 30, --------------------------- -------------------------- 2001 2000 2001 2000 ----------- ----------- ----------- ----------- Numerator for primary and diluted earnings per share: Net income $1,027,935 $ 943,740 $4,104,315 $2,030,719 ---------- ---------- ---------- ---------- Denominator: For basic earnings per share Weighted average shares 2,060,060 2,053,662 2,060,096 2,056,068 Effect of potential diluted shares: Directors deferred compensation shares 24,407 20,797 22,411 18,766 ---------- ---------- ---------- ---------- Denominator for diluted earnings per share - adjusted weighted average shares and potential shares 2,084,467 2,074,459 2,082,507 2,074,834 ========== ========== ========== ========== Basic earnings per share $ .50 $ .46 $ 1.99 $ .99 ========== ========== ========== ========== Diluted earnings per share $ .49 $ .46 $ 1.97 $ .98 ========== ========== ========== ==========
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 June 30, 2001, the Company had no balance outstanding under the BancFirst facility. 5. Approximately 72% 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 nine-month period ended June 30, 2001, these contracts reduced gas revenues approximately $147,000. 6. On August 9, 2001, the Company signed an agreement and plan of merger to acquire privately held Wood Oil Company of Tulsa, Oklahoma. Wood Oil, subsequent to the merger will become a wholly owned subsidiary of Panhandle. The purchase price of $25,000,000 (which will include approximately $4.5 million of net working capital) is subject to pre-closing adjustments. Closing is expected to be on October 1, 2001. The Company will finance the acquisition with bank debt, a portion of which will be immediately retired with Wood Oil cash. A new $20,000,000 term loan agreement with BancFirst will be utilized. The initial term of the facility will be five years with the existing $5,000,000 line-of-credit remaining in place. (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 June 30, 2001, the Company had positive working capital of $1,190,266, as compared to $1,712, 806 at September 30, 2000. Cash flow from operating activities increased 119% to $7,525,369, for the 2001 nine-month period as compared to the fiscal 2000 nine-month period. This increase was primarily a result of increased oil and gas sales revenues during the 2001 nine-month period, which is discussed in detail in Results of Operations. Capital expenditures for oil and gas activities for the first nine-months of fiscal 2001 amounted to $7,008,126 compared to $2,891,956 in the first nine-months of fiscal 2000. This increased level of expenditures was the result of significantly increased market prices for natural gas and oil in fiscal 2001, causing a large increase in the number of new wells being drilled. As the Company relies on third parties to operate all drilling and producing wells, the level of and timing of capital expenditures is influenced heavily by market conditions for natural gas and oil. Current expectations are that this increased level of capital expenditures will continue for the remainder of fiscal 2001 and into fiscal 2002. Remaining projected costs, at June 30, 2001, for wells proposed or actually drilling, were approximately $5,058,000. 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 operating costs and capital obligations. On August 9, 2001, the Company signed an agreement and plan of merger to acquire privately held Wood Oil Company of Tulsa, Oklahoma. Wood Oil, subsequent to the merger will become a wholly owned subsidiary of Panhandle. The purchase price of $25,000,000 (which will include approximately $4.5 million of net working capital) is subject to pre-closing adjustments. Closing is expected to be on October 1, 2001. The Company will finance the acquisition with bank debt, a portion of which will be immediately retired with Wood Oil cash. A new $20,000,000 term loan agreement with BancFirst will be utilized. The initial term of the facility will be five years with the existing $5,000,000 line-of-credit remaining in place. RESULTS OF OPERATIONS Revenues increased significantly for the three-month and nine-month periods ended June 30, 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 nine-month periods of fiscal 2001 and 2000.
BARRELS AVERAGE MCF AVERAGE SOLD PRICE SOLD PRICE --------- ------- --------- ------- Three months ended 6/30/01 15,886 $29.93 517,081 $4.65 Three months ended 6/30/00 20,795 $26.86 550,406 $3.30 Nine months ended 6/30/01 49,729 $30.00 1,591,722 $5.46 Nine months ended 6/30/00 54,973 $26.05 1,751,628 $2.70
As shown in the above chart, gas sales prices increased for both the three-month and nine-month periods of (5) 8 fiscal 2001 and oil prices increased, but at a much smaller percentage. Sales volumes of gas decreased for both the three-month and nine-month periods of fiscal 2001, as compared to the fiscal 2000 periods. These decreases are the result of normal production decline in the Company's wells, and specifically a decline in the Potato Hills Field production in the 2001 periods as compared to the 2000 periods which reflected significant initial production. In addition, due to the substantial increase in drilling activity in this fiscal year, and the resulting manpower and equipment shortages, the completion and placing on production of new wells drilled is slow. Thus, new production is not currently coming on line at a pace fast enough to overcome the decline of older wells. Gas prices are expected to decline to around the $3.00 to $3.50 level during the remaining summer months of fiscal 2001, with oil prices remaining in the mid $20 range. The Company's oil and gas sales revenues for the fourth quarter are expected to be comparable to somewhat less than the third quarter of fiscal 2001, unless, substantial new wells are placed on production. Costs and expenses increased 34% and 29% respectively, for the three-month and nine-month periods ended June 30, 2001, as compared to the same periods of fiscal 2000. These increases were mainly the result of increased production taxes, increased lease operating expenses, increased exploration costs and increased general and administrative costs. Production taxes are calculated as a percentage of oil and gas sales, thus, these costs increased with the increased oil and gas sales revenues in the 2001 periods. As the Company has been participating in the drilling of an ever increasing number of wells during the last several years, lease operating expenses increase steadily as these new wells are placed on production. In the third fiscal quarter of 2001, the Company paid an investment banking firm $150,000 to provide a valuation of the Company, strategic planning and other advice causing general and administrative costs to increase substantially as compared to the fiscal 2000 quarter. The nine-month 2001 period general and administrative expenses also included an $123,000 charge related to the Non-Employee Director's Deferred Compensation Plan reflecting the Company's share price increase 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 since the Non-Employee director's elected to receive these potential shares, rather than a cash payment for their director's fees. In addition, personnel related expenses (including salaries, insurance costs, payroll taxes and ESOP expenses) and legal costs increased in the fiscal 2001 periods as compared to the 2000 periods. Exploration costs increased in both 2001 periods as the Company is participating in more exploratory wells in fiscal 2001 than ever before. Dry hole costs resulting from the drilling of non-productive exploratory wells increased exploration costs in the 2001 periods. As the Company has increased its drilling activity, the risk and incurrence of future dry hole costs will continue. The Company's provision for income taxes increased substantially in the 2001 nine-month period 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 as explained above. It currently appears earnings for the remainder of fiscal 2001, will benefit, though to a lesser extent than the first nine months, from the 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 below the currently expected levels, earnings would be negatively impacted. 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 June 30, 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 August 10, 2001 /s/ H W Peace II -------------------- -------------------------------------- Date H W Peace II, President and Chief Executive Officer August 10, 2001 /s/ Michael C. Coffman -------------------- -------------------------------------- Date Michael C. Coffman, Vice President, Chief Financial Officer and Secretary and Treasurer (7)