ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited financial statements and related notes included in this Quarterly Report on Form 10-Q and the audited financial statements and notes thereto as of and for the year ended December 31, 2020 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, filed on March 25, 2021.
Cautionary Statement
This Management’s Discussion and Analysis includes a number of forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that reflect our current views with respect to future events and financial performance. Forward-looking statements are often identified by words like “believe,” “expect,” “plan,” “estimate,” “anticipate,” “intend,” “project,” “will,” “predicts,” “seeks,” “may,” “would,” “could,” “potential,” “continue,” “ongoing,” “should” and similar expressions, or words which, by their nature, refer to future events. You should not place undue certainty on these forward-looking statements, which apply only as of the date of this Form 10-Q. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or from our predictions, including those risks described in our Annual Report on Form 10-K, this Form 10-Q and in our other public filings. We undertake no obligation to update or revise publicly any forward-looking statements, whether because of new information, future events, or otherwise.
Overview
CKX Lands, Inc., a Louisiana corporation, began operations in 1930 under the name Calcasieu Real Estate & Oil Co., Inc. It was originally organized as a spin-off by a bank operating in southwest Louisiana. The purpose of the spin-off was to form an entity to hold non-producing mineral interests which regulatory authorities required the bank to charge off. Over the years, as some of the mineral interests began producing, the Company used part of the proceeds to acquire land. In 1990, the Company made its largest acquisition when it was one of four purchasers who bought a fifty percent undivided interest in approximately 35,575 acres in southwest Louisiana.
Today the Company’s income is derived from mineral royalties, timber sales and surface payments from its lands. CKX receives income from royalty interests and mineral leases related to oil and gas production, timber sales, and surface rents. Although CKX is active in the management of its land and planting and harvesting its timber, CKX is passive in the production of income from oil and gas production in that CKX does not explore for oil and gas or operate wells. These oil and gas activities are performed by unrelated third parties.
CKX leases its property to oil and gas operators and collects income through its land ownership in the form of oil and gas royalties and lease rentals and geophysical revenues. The Company’s oil and gas income fluctuates as new oil and gas production is discovered on Company land and then ultimately depletes or becomes commercially uneconomical to produce. The volatility in the daily commodity pricing of a barrel of oil or a thousand cubic feet, or “MCF,” of gas will also cause fluctuations in the Company’s oil and gas income.
CKX has small royalty interests in 20 different producing oil and gas fields. The size of each royalty interest is determined by the Company’s net ownership in the acreage unit for the well. CKX’s royalty interests range from 0.0045% for the smallest to 7.62% for the largest. As the Company does not own or operate the wells, it does not have access to any reserve information. Eventually, the oil and gas reserves under the Company’s current land holdings will be depleted.
Timber income is derived from sales of timber on Company lands. The timber income will fluctuate depending on our ability to secure stumpage agreements in the regional markets, timber stand age, and/or stumpage commodity prices. Timber is a renewable resource that the Company actively manages.
Surface income is earned from various recurring and non-recurring sources. Recurring surface income is earned from lease arrangements for farming, recreational and commercial uses. Non-recurring surface income can include such activities as pipeline right of ways, and temporary worksite rentals.
In managing its lands, the Company relies on and has established relationships with real estate, forestry, environmental and agriculture consultants as well as attorneys with legal expertise in general corporate matters, real estate, and minerals.
The Company actively searches for additional real estate for purchase in Louisiana with a focus on southwest Louisiana and on timberland and agricultural land. When evaluating unimproved real estate for purchase, the Company will consider numerous characteristics including but not limited to, timber fitness, agriculture fitness, future development opportunities and/or mineral potential. When evaluating improved real estate for purchase, the Company will consider characteristics including, but not limited to, geographic location, quality of existing revenue streams, and/or quality of the improvements.
Recent Developments
In the first quarter of 2019, the Company began developing several ranchette-style subdivisions on certain of its lands in Calcasieu and Beauregard Parishes using existing road rights of way. The Company has identified demand in those areas for ranchette-style lots, which consist of more than three acres each, and the Board of Directors and management believe this project will allow the Company to realize a return on its investment in the applicable lands after payment of expenses. The Company has completed and recorded plats for two subdivisions and obtained approval to complete a third subdivision during the first quarter of 2021. The three subdivisions are located on approximately 415 acres in Calcasieu Parish and approximately 160 acres in Beauregard Parish, and contain an aggregate of 39 lots. As of March 31, 2021, the Company has closed on the sale of 15 of the 39 lots. As of the date of this report the Company sold one additional lot, has two sales pending, and it is actively marketing the remaining lots.
The Company is working to identify additional undeveloped acres owned by the Company in Southwest Louisiana that would likewise be suitable for residential subdivisions.
On August 27, 2020, Hurricane Laura made landfall in Cameron, Louisiana as a major Category 4 hurricane. The hurricane caused widespread property damage, flooding, power outages, and water and communication service interruptions. The Company holds 13,941 acres of land in Southwest Louisiana across 11 parishes with 10,495 acres classified as timber lands. Ten of these parishes are included in the Federal Emergency Management Agency’s disaster declaration related to Hurricane Laura. A percentage of the Company’s timber was damaged during the storm and oil and gas production was temporarily interrupted. No other business operations were affected by the storm. The Company assessed and determined that that the Company did not incur an impairment loss on the value of its timber and determined the temporary interruption had an immaterial effect on its financial condition and results of operations.
On October 9, 2020, Hurricane Delta made landfall in Creole, Louisiana as a Category 2 hurricane. The hurricane caused property damage, flooding, power outages, and water and communication service interruptions. The Company holds property in seven of the parishes included in the Federal Emergency Management Agency’s disaster declaration related to the hurricane. The Company assessed the damage to its timber and the effects of any temporary interruption in oil and gas production on its lands and determined that the effects of the hurricane on its assets and operations were minimal.
Results of Operations
Summary of Results
The Company’s results of operations for the three months ended March 31, 2021 were driven primarily by a higher gain on the sale of land in the first quarter of 2021, offset by lower general and administrative expenses. The higher gain on sale of land in the first quarter of 2021 is due to the variable nature of land sales. The decrease in general and administrative expenses in the first quarter of 2021 was attributable to decreases in officer salaries, property management fees, auditing fees and rent expense offset by an increase in property taxes.
Revenue – Three Months Ended March 31, 2021
Total revenues for the three months ended March 31, 2021 were $154,876, a decrease of approximately 14% when compared with the same period in 2020. Total revenue consists of oil and gas, timber, and surface revenues. Components of revenues for the three months ended March 31, 2021 as compared to 2020, are as follows:
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|
Three Months Ended March 31,
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|
|
|
|
|
|
|
|
|
|
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2021
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|
|
2020
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|
|
Change from
Prior Year
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Percent Change
from Prior Year
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|
Revenues:
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|
|
|
|
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|
|
|
|
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Oil and gas
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$
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50,145
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$
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115,050
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|
$
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(64,905
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)
|
|
|
(56.4
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)%
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|
Timber sales
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|
53,527
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7,888
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|
|
|
45,639
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|
|
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578.6
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%
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|
Surface revenue
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|
51,204
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|
|
|
57,453
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|
|
|
(6,249
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)
|
|
|
(10.9
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)%
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|
Total revenues
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$
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154,876
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|
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$
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180,391
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|
|
$
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(25,515
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)
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|
|
(14.1
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)%
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Oil and Gas
Oil and gas revenues were 32% and 64% of total revenues for the three months ended March 31, 2021 and 2020, respectively. A breakdown of oil and gas revenues for the three months ended March 31, 2021 as compared to the three months ended March 31, 2020 is as follows:
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Three Months Ended March 31,
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2021
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2020
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Change from
Prior Year
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|
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Percent Change
from Prior Year
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|
|
Oil
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|
$
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36,479
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|
|
$
|
96,225
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|
|
$
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(59,746
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)
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|
|
(62.1
|
)%
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|
Gas
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|
12,921
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|
|
|
17,977
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|
|
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(5,056
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)
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|
|
(28.1
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)%
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|
Lease and geophysical
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|
745
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|
|
|
848
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|
|
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(103
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)
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|
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(12.1
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)%
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|
Total revenues
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|
$
|
50,145
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|
|
$
|
115,050
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|
|
$
|
(64,905
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)
|
|
|
(56.4
|
)%
|
CKX received oil and/or gas revenues from 64 and 77 wells during the three months ended March 31, 2021 and 2020, respectively.
The following schedule summarizes barrels and MCF produced and average price per barrel and per MCF for the three months ended March 31, 2021 and 2020:
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Three Months Ended
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March 31,
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2021
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2020
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Net oil produced (Bbl)(2)
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|
753
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|
|
|
1,586
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|
|
Average oil sales price (per Bbl)(1,2)
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|
$
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48.43
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|
|
$
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60.68
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|
Net gas produced (MCF)
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|
4,456
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|
|
|
7,398
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|
Average gas sales price (per MCF)(1)
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$
|
2.90
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|
|
$
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2.43
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|
(1) Before deduction of production costs and severance taxes
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(2) Excludes plant products
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Oil revenues decreased for the three months ended March 31, 2021, as compared to the three months ended March 31, 2020, by $59,746. Gas revenues decreased for the three months ended March 31, 2021, as compared to the same period in 2020, by $5,056. As indicated from the schedule above, the decrease in oil revenues was due to a decrease in the net oil produced and a decrease in the average oil sales price per barrel. The decrease in gas revenues was due to a decrease in net gas produced partially offset by an increase in the average price per MCF.
Lease and geophysical revenues decreased for the three months ended March 31, 2021, as compared to the three months ended March 31, 2020, by $103. These revenues are dependent on oil and gas producers’ activities, are not predictable and can vary significantly from year to year.
Timber
Timber revenue was $53,527 and $7,888 for the three months ended March 31, 2021 and 2020, respectively. The increase in timber revenues was due to wet weather during the first quarter of fiscal 2020 that limited customers’ ability to harvest timber.
Surface
Surface revenues decreased for the three months ended March 31, 2021, as compared to the three months ended March 31, 2020, by $6,249. This decrease is due to a reduction in oil and gas lease bonus.
Costs and Expenses – Three Months Ended March 31, 2021
Oil and gas costs decreased for the three months ended March 31, 2021 as compared to the three months ended March 31, 2020 by $3,516.
Timber costs decreased for the three months ended March 31, 2021 as compared to the three months ended March 31, 2020 by $1,493. Timber costs are related to timber revenue, however, timber revenue during the quarter consisted mostly of a recognized expired timber stumpage agreement. Therefore, costs in the current quarter are lower.
General and administrative expenses decreased for the three months ended March 31, 2021 as compared to the three months ended March 31, 2020 by $40,038. This is primarily due to a decrease in officer salaries, property management fees, auditing fees and rent expense offset by an increase in property taxes.
Gain on Sale of Land
Gain on sale of land and equipment was $406,220 and $33,107 for the three months ended March 31, 2021 and 2020, respectively.
Liquidity and Capital Resources
Sources of Liquidity
Current assets totaled $7,570,488 and current liabilities equaled $295,190 at March 31, 2021.
As of March 31, 2021 and December 31, 2020, the Company had no outstanding debt.
In the opinion of management, cash and cash equivalents are adequate for projected operations and possible land acquisitions.
Analysis of Cash Flows
Net cash provided by (used in) operating activities was ($150,975) and $21,743 for the three months ended March 31, 2021 and March 31, 2020, respectively. The change was attributable primarily to the increase on the gain on the sale of land partially offset by the increase in net income.
Net cash provided by (used in) investing activities was $523,122 and ($434,876) for the three months ended March 31, 2021, and 2020, respectively. For the three months ended March 31, 2021, this primarily resulted from proceeds from the sale of fixed assets of $537,360, offset by purchases of mutual funds of $124 and costs of reforesting timber of $14,114. For the three months ended March 31, 2020, this primarily resulted from purchases of certificates of deposit of $1,210,163 and purchases of mutual funds of $1,978, offset by proceeds from maturity of certificates of deposit of $744,000 and the proceeds from the sale of fixed assets of $33,265.
Significant Accounting Polices and Estimates
There were no changes in our significant accounting policies and estimates during the three months ended March 31, 2021 from those set forth in “Significant Accounting Policies and Estimates” in our Annual Report on Form 10-K for the year ended December 31, 2020.
Recent Accounting Pronouncements
See Note 1, Basis of Presentation and Recent Accounting Pronouncements, to our condensed financial statements included in this report for information regarding recently issued accounting pronouncements that may impact our financial statements.
Off-Balance Sheet Arrangements
During the three months ended March 31, 2021, we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities that would have been established for the purpose of facilitating off-balance sheet arrangements.
ITEM 3. NOT APPLICABLE
