10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the period ended December 31, 2005

o 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 305, 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.

þ Yes            o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer þ Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

o Yes            þ No

Outstanding shares of Class A Common stock (voting) at February 4, 2006: 8,410,886

INDEX

	Page
Part I Financial Information
Item 1 Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets – December 31, 2005 and September 30, 2005	1
Condensed Consolidated Statements of Income – Three months ended December 31, 2005 and 2004	2
Consolidated Statement of Stockholders’ Equity – Three months ended December 31, 2005	3
Condensed Consolidated Statements of Cash Flows – Three months ended December 31, 2005 and 2004	4
Notes to Condensed Consolidated Financial Statements	5-6
Item 2 Management’s discussion and analysis of financial condition and results of operations	6-9
Item 3 Quantitative and qualitative disclosures about market risk	9-10
Item 4 Controls and procedures	10
Part II Other Information	10
Item 6 Exhibits and reports on Form 8-K	10
Signatures	10
Certification under Section 302
Certification under Section 302
Certification under Section 906
Certification under Section 906

PART 1 FINANCIAL INFORMATION

PANHANDLE ROYALTY COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS
(Information at December 31, 2005 is unaudited)

	December 31, 2005		September 30, 2005
Assets
Current Assets:
Cash and cash equivalents	$	2,986,666	$	1,638,833
Oil and gas sales receivable		8,807,304		6,641,447
Income tax and other receivable		44,750		2,647
Prepaid expenses		92,261		18,873
Total current assets		11,930,981		8,301,800
Properties and equipment, at cost, based on successful efforts accounting:
Producing oil and gas properties		90,435,400		85,393,626
Non-producing oil and gas properties		10,263,176		10,165,367
Other		526,725		524,721
		101,225,301		96,083,714
Less accumulated depreciation, depletion and amortization		46,043,441		43,787,403
Net properties and equipment		55,181,860		52,296,311
Investment in partnerships		375,888		396,424
Marketable securities and other assets		247,157		247,157
Total Assets	$	67,735,886	$	61,241,692
Liabilities and Stockholders’ Equity
Current Liabilities:
Accounts payable	$	1,407,970	$	700,242
Accrued liabilities:
Deferred compensation		—		1,335,305
Interest		21,854		23,129
Other		893,034		173,445
Income taxes payable		2,102,158		599,669
Current portion of long-term debt		2,000,004		2,000,004
Total current liabilities		6,425,020		4,831,794
Long-term debt		2,666,652		3,166,653
Deferred income taxes		13,673,750		13,321,750
Other non-current liabilities		1,255,111		1,286,145
Stockholders’ Equity:
Class A voting common stock, $.0166 par value; 12,000,000, shares authorized, 8,410,886 issued and outstanding at December 31, 2005 and 8,410,886 at September 30, 2005		140,182		140,182
Capital in excess of par value		1,715,206		1,715,206
Deferred compensation		1,069,030		—
Retained earnings		40,790,935		36,779,962
Total Stockholders’ Equity		43,715,353		38,635,350
Total Liabilities and Stockholders’ Equity	$	67,735,886	$	61,241,692

(1)

PANHANDLE ROYALTY COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

	Three Months Ended December 31,
	2005		2004
Revenues:
Oil and gas sales	$	11,704,964	$	8,308,863
Lease bonuses and rentals		93,476		41,337
Interest and other		263,983		59,192
Equity in income of partnerships		145,256		82,968
		12,207,679		8,492,360
Costs and expenses:
Lease operating expenses		830,269		719,116
Production taxes		741,418		556,299
Exploration costs		32,544		264,276
Depreciation, depletion, amortization and impairment		2,316,738		1,916,836
General and administrative		756,217		1,314,456
Interest expense		59,375		105,033
		4,736,561		4,876,016
Income before provision for income taxes		7,471,118		3,616,344
Provision for income taxes		2,577,000		1,168,000
Net income	$	4,894,118	$	2,448,344
Basic earnings per common share (Note 4)	$	0.58	$	0.29
Diluted earnings per common share (Note 4)	$	0.58	$	0.29
Dividends declared per share of common stock and paid in quarter	$	0.025	$	0.025
Dividends declared per share of common stock for and to be paid or were paid in the quarter ended in the quarter ended March 31(Note 6)	$	0.08	$	0.05

(2)

PANHANDLE ROYALTY COMPANY

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(Unaudited)

Three Months Ended December 31, 2005

	Class A voting				Capital in
	Common Stock				Excess of		Deferred		Retained
	Shares		Amount		Par Value		Compensation		Earnings			Total
Balances at September 30, 2005		8,410,886	$	140,182	$	1,715,206	$	—	$	36,779,962		$	38,635,350
Net Income		—		—		—		—		4,894,118			4,894,118
Dividends ($.105 per share)		—		—		—		—		(883,145	)		(883,145	)
Increase in deferred compensation:
Reclassification		—		—		—		1,053,408		—			1,053,408
Charged to expense		—		—		—		15,622		—			15,622
Balances at December 31, 2005		8,410,886	$	140,182	$	1,715,206	$	1,069,030	$	40,790,935		$	43,715,353

(3)

PANHANDLE ROYALTY COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

	Three months ended December 31,
	2005			2004
Cash flows from operating activities:
Net income	$	4,894,118		$	2,448,344
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, depletion, amortization and impairment		2,316,738			1,916,836
Deferred income taxes		352,000			400,500
Lease bonus income		(31,034	)		(2,112	)
Exploration costs		32,544			264,276
Gain on sale of assets		(182,521	)		(16,637	)
Equity in earnings of partnerships		(145,256	)		(82,968	)
Directors’ deferred compensation		(266,275	)		298,053
Cash provided by changes in assets and liabilities:
Receivables		(2,210,607	)		(1,379,887	)
Prepaid expenses and other assets		(73,388	)		(82,099	)
Accounts payable and accrued liabilities		753,171			157,288
Income taxes payable		1,502,489			663,353
Total adjustments		2,047,861			2,136,603
Net cash provided by operating activities		6,941,979			4,584,947
Cash flows from investing activities:
Capital expenditures including dry hole costs		(5,314,956	)		(4,411,562	)
Proceeds from leasing of fee mineral acreage		176,066			—
Distributions received from partnerships		165,792			113,765
Proceeds from sale of assets		89,227			769,266
Net cash used in investing activities		(4,883,871	)		(3,528,531	)
Cash flows from financing activities:
Borrowings under debt agreement		—			3,800,000
Payments of loan principal		(500,001	)		(4,825,001	)
Payments of dividends		(210,274	)		(209,489	)
Net cash used in financing activities		(710,275	)		(1,234,490	)
Increase (decrease) in cash and cash equivalents		1,347,833			(178,074	)
Cash and cash equivalents at beginning of period		1,638,833			642,343
Cash and cash equivalents at end of period	$	2,986,666		$	464,269
Supplemental Schedule of Noncash Investing and Financing Activities:
Dividends declared and unpaid	$	672,871		$	419,085
Reclassification of deferred compensation as equity	$	1,069,030		$	—

(See accompanying notes)

(4)

PANHANDLE ROYALTY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 1: Accounting Principles and Basis of Presentation

     The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q as prescribed by the Securities and Exchange Commission, and include the Company’s wholly owned subsidiary, Wood Oil Company (Wood). Management of Panhandle Royalty Company believes that all adjustments necessary for a fair presentation of the consolidated financial position and 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. The Company’s fiscal year runs from October 1 through September 30.

NOTE 2: Income Taxes

     The Company’s provision for income taxes is reflective of excess percentage depletion, reducing the Company’s effective tax rate from the federal statutory rate.

NOTE 3: Stockholders’ Equity

     On December 13, 2005, the Company’s Board of Directors declared a 2-for-1 stock split of outstanding Class A common stock. The Class A common stock split was effected in the form of a stock dividend, distributed on January 9, 2006 to shareholders of record on December 29, 2005.

     All references to number of shares and per share information in the accompanying consolidated financial statements have been adjusted to reflect the stock split.

NOTE 4: Earnings per Share

     The following table sets forth the number of shares utilized in the computation of basic and diluted earnings per share, giving consideration to certain shares that may be issued under the Non-Employee Directors Deferred Compensation Plan, to the extent dilutive. The weighted average shares outstanding, potentially dilutive shares and earnings per share for fiscal 2005 have been restated to reflect the 2-for-1 stock split discussed in Note 3.

	Three months ended December 31,
	2005		2004
Denominator:
For basic earnings per share
Weighted average shares		8,410,886		8,379,774
Effect of potential diluted shares:
Directors’ deferred compensation shares		62,978		101,744
Denominator for diluted earnings per share - adjusted weighted average shares and potential shares		8,473,864		8,481,518

NOTE 5: Long-term Debt

     The Company has a loan agreement with BancFirst, Oklahoma City, OK (the Agreement). The Agreement provides for a term loan in the amount of $10,000,000 and a revolving loan in the amount of $15,000,000, which is subject to a semi-annual borrowing base determination. The current borrowing base under the revolving loan is $8,000,000 which can be re-determined semi-annually. The term loan matures on April 1, 2008, and the revolving loan matures on March 30, 2008. Monthly payments on the term loan are $166,667, plus accrued interest. Interest on the term loan is fixed at 4.56% until maturity. The revolving loan bears interest at the national prime rate minus ³/4% (6.5% at December 31, 2005) or Libor (for one, three or six month periods), plus 1.80%. At December 31, 2005, the Company had $4,666,656 outstanding under the term loan and had no balance outstanding under the revolving loan.

(5)

NOTE 6: Dividends

     On October 19, 2005, the Company’s Board of Directors declared a $.025 per share dividend that was paid on December 12, 2005. On December 13, 2005, the Company’s Board of Directors approved payment of a $.03 per share regular dividend and a $.05 per share additional non-recurring dividend to be paid on March 10, 2006 to shareholders of record on February 27, 2006.

NOTE 7: Deferred Compensation Plan for Directors

     No shares were issued under the Plan in the 2006 quarter. Effective October 19, 2005 the Plan was amended such that upon retirement, termination or death of the director or upon a change in control of the Company, the shares accrued under the Plan will be issued to the director. This amendment removed the conversion to cash option available under the Plan, which eliminated the requirement to adjust the deferred compensation liability for changes in the market value of the Company’s common stock after October 19, 2005. The adjustment of the liability to market value of the shares at the closing price on October 19, 2005 resulted in a credit to general and administrative expense of $287,847. This change will reduce volatility in the Company’s earnings resulting from the charges to expense caused by market value changes in the Company’s common stock. The deferred compensation obligation at the date of the Plan’s amendment was reclassified to stockholders’ equity.

ITEM 2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS AND RISK FACTORS

     Forward-Looking Statements for fiscal 2006 and later periods are made in this document. Such statements represent estimates by 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 December 31, 2005, the Company had positive working capital of $5,505,961, as compared to positive working capital of $3,470,006 at September 30, 2005. Oil and gas sales receivable has increased due to higher oil and natural gas prices and the directors’ deferred compensation liability was reclassified to equity. These items were offset by an increase in income taxes payable, an increase in accrued liabilities other, which includes the March 2006 dividend payable of approximately $673,000 declared in December 2005 and an increase in accounts payable. The provision for income taxes increased as the result of higher earnings and the exhaustion of tax depletion carry forward deductions. Cash flow from operating activities remains strong, increasing 51% over last year’s first quarter.

     Capital expenditures for oil and gas activities for the 2006 three-month period amounted to $5,314,956, as compared to $4,411,562 for the 2005 period. Management currently expects capital expenditures for oil and gas activities to be in excess of $17,000,000 for fiscal 2006. The substantial increase in capital expenditures is a result of increased drilling activity brought on by higher market prices for oil and gas and increases in the costs of drilling and equipping wells. As drilling activity has increased, costs for drilling rigs and well equipment have increased, and are expected to remain so for the remainder of fiscal 2006. Acquisitions of oil and gas properties, if any, would further increase the capital expenditure amount.

     The Company has historically funded capital expenditures, overhead costs and dividend payments from operating cash flow and has utilized, at times, the revolving line-of-credit facility to help fund these expenditures. The increased cash flow from higher prices being received for natural gas and oil should allow the Company to fund all expenditures from cash flow. However, minor amounts may be borrowed on a temporary basis under the Company’s credit facility. The Company has substantial availability under its bank debt facility and the availability could be increased, if needed.

(6)

RESULTS OF OPERATIONS

THREE MONTHS ENDED DECEMBER 31, 2005 – COMPARED TO THREE MONTHS ENDED DECEMBER 31, 2004

Overview:

     The Company recorded a first quarter 2006 net income of $4,894,118, or $.58 per diluted share, as compared to a net income of $2,448,344 or $.29 per diluted share in the 2005 quarter. The improved results were due to increased sales prices for both oil and natural gas offset by decreased oil and gas sales volumes and a 121% increase in the provision for income taxes.

Revenues:

     Total revenues increased $3,715,319 or 44% for the 2006 quarter. The increase was the result of a $3,396,101 increase in oil and natural gas sales revenues. The increase in oil and gas sales revenues resulted from a 23% and 61% increase in the average sales price for oil and natural gas, respectively. Oil sales volumes decreased 20% while gas sales volumes decreased 7%. Part of this decline is the result of the Company selling non-core assets during fiscal 2005 which equaled approximately 3% of production on an annualized basis. The table below outlines the Company’s production and average sales prices for oil and natural gas for the three month periods of fiscal 2006 and 2005:

	BARRELS		AVERAGE		MCF		AVERAGE
	SOLD		PRICE		SOLD		PRICE
Three months ended 12/31/05		25,001	$	57.15		1,046,917	$	9.82
Three months ended 12/31/04		31,453	$	46.45		1,123,068	$	6.10

     The continuing increase in drilling expenditures and the Company’s stated goal of increasing its working interests in new wells drilled should result in increased production volumes for gas, as compared to fiscal 2005, for the remainder of the year. The Company’s drilling continues to be concentrated on gas production. As indicated in the table below natural gas production has been increasing for the last three quarters.

Quarter ended	Barrels Sold		MCF Sold
12/31/05		25,001		1,046,917
9/30/05		23,496		999,860
6/30/05		23,055		979,020
3/31/05		23,577		909,278

     The Company is a non-operator and obtaining timely production data from most operators is not possible. This causes the Company to utilize past production receipts to estimate its oil and gas sales revenue accrual at the end of each quarterly period. The oil and gas sales accrual estimates are impacted by many variables including the initial high production from and the possible rapid decline rates of certain new wells and varying prices for oil and gas. In April, 2005 the Company determined that its oil and gas revenue accrual estimate at December 31, 2004 was higher than actual production proceeds received to date for the accrual period. The higher than actual oil and gas revenue accrual estimate was as a result of the above variables. The effect of the accrual estimate change for the three months ended December 31, 2004 was that revenues and net income were approximately $700,000 and $300,000 higher, respectively, than actual results for those periods. Likewise, for the three months ended March 31, 2005, revenues and net income were lower by such amounts.

Lease Operating Expenses (LOE):

     LOE increased $111,153 or 15% in the 2006 quarter. The increase is a result of new wells going on line in the 2006 quarter, as new wells normally have high operating costs the first several months of production, the continuing increase in the number of wells in which the Company has an interest, general price increases and ad valorem taxes.

Production Taxes:

     Production taxes increased $185,119 or 33% in the 2006 quarter. The increase is the result of the large increase in oil and gas revenues in the 2006 quarter, as production taxes are paid as a percentage of these revenues.

(7)

Exploration Costs:

     These costs decreased $231,732 in the 2006 quarter. This decrease is principally the result of one exploratory dry hole drilled in the fiscal 2005 quarter. In the 2006 first quarter the Company had no high cost exploratory wells which resulted in dry holes. In addition, some of the Company’s leasehold was deemed worthless or the lease term expired in the 2005 quarter.

Depreciation, Depletion, Amortization (DD&A) and Impairment:

     DD&A increased $371,250 or 19% in the 2006 quarter. The increase is a result of higher costs on newly completed wells resulting from increased ownership percentages and general price increases, which must be depreciated. In addition, one well with remaining basis of $166,000 was fully amortized during the quarter as it was abandoned due to continued uneconomic production volumes. There was no impairment charge in the 2005 quarter as compared to $28,652 in the 2006 quarter.

General and Administrative Costs (G&A):

     G&A costs decreased $558,239 or 42% in the 2006 quarter. The decrease is the result of an amendment to the Directors’ Deferred Compensation Plan (the Plan). Effective October 19, 2005 the Plan was amended such that upon retirement, termination or death of the director or upon a change in control of the Company, the shares accrued under the Plan will be issued to the director. This amendment removed the conversion to cash option available under the Plan, which eliminated the requirement to adjust the deferred compensation liability for changes in the market value of the Company’s common stock after October 19, 2005. The adjustment of the liability to market value of the shares at the closing price on October 19, 2005 resulted in a credit to G&A of approximately $288,000 as compared to a charge of approximately $282,000 in the first quarter of 2005, resulting in a $570,000 change between the quarters. In addition, the deferred compensation liability after the October 19, 2005 adjustment was reclassified to stockholders’ equity.

Interest Expense:

     Interest expense decreased in the 2006 quarter due to lower outstanding debt balances.

Income Taxes:

     The 2006 quarter provision for income taxes increased due to substantially increased income before provision for income taxes. The Company utilizes excess percentage depletion to reduce its effective tax rate from the federal statutory rate. The effective tax rate estimate was 34% for the 2006 period and 32% for the 2005 period.

CRITICAL ACCOUNTING POLICIES

     Preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. However, the accounting principles used by the Company generally do not change the Company’s reported cash flows or liquidity. Generally, accounting rules do not involve a selection among alternatives, but involve a selection of the appropriate policies for applying the basic principles. Interpretation of the existing rules must be done and judgments made on how the specifics of a given rule apply to the Company.

     The more significant reporting areas impacted by management’s judgments and estimates are crude oil and natural gas reserve estimation, impairment of assets, oil and gas sales revenue accruals and tax accruals. Management’s judgments and estimates in these areas are based on information available from both internal and external sources, including engineers, geologists and historical experience in similar matters. Actual results could differ from the estimates as additional information becomes known. The oil and gas sales revenue accrual is particularly subject to estimates due to the Company’s status as a non-operator on all of its properties. Production information obtained from well operators is substantially delayed. This causes the estimation of recent production, used in the oil and gas revenue accrual, to be subject to some variations.

(8)

Oil and Gas Reserves

     Of these judgments and estimates, management considers the estimation of crude oil and nature gas reserves to be the most significant. These estimates affect the unaudited standardized measure disclosures, as well as DD&A and impairment calculations. Changes in crude oil and natural gas reserve estimates affect the Company’s calculation of depreciation, depletion and amortization, provision for abandonment and assessment of the need for asset impairments. On an annual basis, with a limited scope semi-annual update, the Company’s consulting engineer, with assistance from Company geologists, prepares estimates of crude oil and natural gas reserves based on available geologic and seismic data, reservoir pressure data, core analysis reports, well logs, analogous reservoir performance history, production data and other available sources of engineering, geological and geophysical information. As required by the guidelines and definitions established by the SEC, these estimates are based on current crude oil and natural gas pricing. Crude oil and natural gas prices are volatile and largely affected by worldwide production and consumption and are outside the control of management. Projected future crude oil and natural gas pricing assumptions are used by management to prepare estimates of crude oil and natural gas reserves used in formulating management’s overall operating decisions in the exploration and production segment.

Successful Efforts Method of Accounting

     The Company has elected to utilize the successful efforts method of accounting for its oil and gas exploration and development activities. Exploration expenses, including geological and geophysical costs, rentals and exploratory dry holes, are charged against income as incurred. Costs of successful wells and related production equipment and developmental dry holes are capitalized and amortized by property using the unit-of-production method as oil and gas is produced. This accounting method may yield significantly different operating results than the full cost method.

Impairment of Assets

     All long-lived assets, principally oil and gas properties, are monitored for potential impairment when circumstances indicate that the carrying value of the asset may be greater than its future net cash flows. The evaluations involve significant judgment since the results are based on estimated future events, such as inflation rates, future sales prices for oil and gas, future production costs, estimates of future oil and gas reserves to be recovered and the timing thereof, the economic and regulatory climates and other factors. The need to test a property for impairment may result from significant declines in sales prices or unfavorable adjustments to oil and gas reserves. Any assets held for sale are reviewed for impairment when the Company approves the plan to sell. Estimates of anticipated sales prices are highly judgmental and subject to material revision in future periods. Because of the uncertainty inherent in these factors, the Company can not predict when or if future impairment charges will be recorded.

Oil and Gas Sales Revenue Accrual

     The Company does not operate any of its oil and gas properties, and it primarily holds small interests in several thousand wells. Thus, obtaining timely production data from the well operators is extremely difficult. This requires the Company to utilize past production receipts to estimate its oil and gas sales revenue accrual at the end of each quarterly period. The oil and gas accrual can be impacted by many variables, including initial high production rates of new wells and subsequent rapid decline rates of those wells. This could lead to an over or under accrual of oil and gas sales at the end of any particular quarter. Based on past history, the estimated accrual has been materially accurate.

Income Taxes

     The estimation of the amounts of income tax to be recorded by the Company involves interpretation of complex tax laws and regulations as well as the completion of complex calculations, including the determination of the Company’s percentage depletion deduction. Although the Company’s management believes its tax accruals are adequate, differences may occur in the future depending on the resolution of pending and new tax matters.

     The above description of the Company’s critical accounting policies is not intended to be an all-inclusive discussion of the uncertainties considered and estimates made by management in applying accounting principles and policies. Results may vary significantly if different policies were used or required and if new or different information becomes known to management.

ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     The Company’s results of operations and operating cash flows can be significantly impacted by changes in market prices for oil and gas. Based on the Company’s 2005 production, a $.10 per Mcf change in the price received for natural gas production would result in a corresponding $401,000 annual change in pre-tax operating cash flow. A $1.00 per barrel change

(9)

in the price received for oil production would result in a corresponding $101,500 annual change in pre-tax operating cash flow. Cash flows could also be impacted, to a lesser extent, by changes in the market interest rates related to the revolving credit facility which bears interest at an annual variable interest rate equal to either the national prime rate minus ³/4% or LIBOR for one, three or six month periods, plus 1.8%. However, at December 31, 2005, the Company had no balance outstanding under this facility. The Company has a $10,000,000 term loan with an outstanding balance of $4,666,656 at December 31, 2005 maturing on April 1, 2008. The interest rate is fixed at 4.56% until maturity.

ITEM 4 CONTROLS AND PROCEDURES

     The Company maintains “disclosure controls and procedures,” as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, that are designed to ensure that information required to be disclosed in reports the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that such information is collected and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating its disclosure controls and procedures, management recognized that no matter how well conceived and operated, disclosure controls and procedures can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. The Company’s disclosure controls and procedures have been designed to meet, and management believes that they do meet, reasonable assurance standards. Based on their evaluation as of the end of the fiscal period covered by this report, the Chief Executive Officer and Chief Financial Officer have concluded that, subject to the limitations noted above, the Company’s disclosure controls and procedures were effective to ensure that material information relating to the Company, including its consolidated subsidiary, is made known to them. There were no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting made during the fiscal quarter or subsequent to the date the assessment was completed.

PART II OTHER INFORMATION

ITEM 6 EXHIBITS AND REPORT ON FORM 8-K

(a)	EXHIBITS	–	Exhibit 31.1 and 31.2 – Certification under Section 302 of the Sarbanes-Oxley Act of 2002
			Exhibit 32.1 and 32.2 – Certification under Section 906 of the Sarbanes-Oxley Act of 2002
(b)	Form 8-K	–	Dated December 14, 2005, Other Events, press release concerning a 2 for 1 stock split and dividend payments.
	Form 8-K	–	Dated December 16, 2005, Press release concerning officer retirement and appointment of new officers.

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
February 6, 2006	/s/ H W Peace II
Date	H W Peace II, President
	and Chief Executive Officer
February 6, 2006	/s/ Michael C. Coffman
Date	Michael C. Coffman,
	Vice President,
	Chief Financial Officer and
	Secretary and Treasurer

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EX-31.1

EXHIBIT 31.1

CERTIFICATION

I, H W Peace II, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Panhandle Royalty Company (the Company);
2.	Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3.	Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of, the Company as of, and for, the periods presented in this quarterly report;
4.	The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Company and we have:

a).	designed such disclosure controls and procedures, or caused such disclosure controls to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b).	evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on our evaluation; and
c).	disclosed in this quarterly report any change in the Company’s internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and

5. The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting to the Company’s auditors and the audit committee of the Company’s board of directors:

a).	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information;
b).	any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.

/s/ H W Peace II

H W Peace II

Chief Executive Officer

Date: February 6, 2006

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EX-31.2

EXHIBIT 31.2

CERTIFICATION

I, Michael C. Coffman, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Panhandle Royalty Company (the Company);
2.	Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3.	Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of, the Company as of, and for, the periods presented in this quarterly report;
4.	The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Company and we have:

a).	designed such disclosure controls and procedures, or caused such disclosure controls to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b).	evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on our evaluation; and
c).	disclosed in this quarterly report any change in the Company’s internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and

5. The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting to the Company’s auditors and the audit committee of the Company’s board of directors:

a).	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information;
b).	any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.

/s/ Michael C. Coffman

Michael C. Coffman

Chief Financial Officer

Date: February 6, 2006

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EX-32.1

EXHIBIT 32.1

Panhandle Royalty Company
5400 North Grand Blvd. Suite #305
Oklahoma City, OK 73112

CERTIFICATION OF CHIEF EXECUTIVE OFFICER
REGARDING PERIODIC REPORT CONTAINING
FINANCIAL STATEMENTS

I, H W Peace II, Chief Executive Officer of Panhandle Royalty Company, (the “Issuer”), in compliance with 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, hereby certify in connection with the Issuer’s Quarterly Report on Form 10-Q for the period that ended December 31, 2005 as filed with the Securities and Exchange Commission (the “Report”) that:

(1)	The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and
(2)	The information contained in this Report fairly presents, in all material respects, the financial condition and results of operations of the Issuer.

/s/ H W Peace II

H W Peace II

President &

Chief Executive Officer

February 6, 2006

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EX-32.2

EXHIBIT 32.2

Panhandle Royalty Company
5400 North Grand Blvd. Suite #305
Oklahoma City, OK 73112

CERTIFICATION OF CHIEF EXECUTIVE OFFICER
REGARDING PERIODIC REPORT CONTAINING
FINANCIAL STATEMENTS

I, Michael C. Coffman, Chief Financial Officer of Panhandle Royalty Company, (the “Issuer”), in compliance with 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, hereby certify in connection with the Issuer’s Quarterly Report on Form 10-Q for the period that ended December 31, 2005 as filed with the Securities and Exchange Commission (the “Report”) that:

(1)	The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and
(2)	The information contained in this Report fairly presents, in all material respects, the financial condition and results of operations of the Issuer.

/s/ Michael C. Coffman

Michael C. Coffman

Vice President &

Chief Financial Officer

February 6, 2006

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