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
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( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from to
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Commission File Number 0-9116
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PANHANDLE ROYALTY COMPANY
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(Exact name of registrant as specified in its charter)
OKLAHOMA 73-1055775
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(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
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(Address of principal executive offices)
Registrant's telephone number including area code (405) 948-1560
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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
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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)
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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)
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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)
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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)
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Net cash used by financing activities (578,685) (404,201)
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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)
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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)
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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
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Date H W Peace II, President
and Chief Executive Officer
August 10, 2001 /s/ Michael C. Coffman
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Date Michael C. Coffman,
Vice President,
Chief Financial Officer and
Secretary and Treasurer
(7)