The following discussion of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and the notes to those financial statements appearing elsewhere in this Report.
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.
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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 December 31, 2020, the Company has closed on the sale of six of the 39 lots. As of the date of this report the Company sold an additional seven lots, has five 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.
Summary of Fiscal Year 2020 Results
During the year ended December 31, 2020, the Company experienced a substantial
decline in oil and gas revenue compared to the year ended December 31, 2019.
This was primarily due to decreased production as well as lower average sale
prices, partially as a result of the COVID-19 pandemic. Timber and surface
sales increased approximately 33% as compared to fiscal year 2019. The Company
had a much higher gain on the sale of land and a minimal decrease in general and
administrative expenses for fiscal year 2020 as compared to fiscal year 2019.
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Results of Operations - for the years ended December 31, 2020 and 2019
Revenue
Total revenues for 2020 were $671,944, a decrease of approximately 17% when
compared with 2019 revenues of $811,271. Total revenue consists of oil and gas,
timber, and surface revenues. Components of revenues for the year ended December
31, 2020 as compared to 2019, are as follows:
Years Ended December 31,
Change from Percent Change
2020 2019 Prior Year from Prior Year
Revenues:
Oil and gas $ 257,247 $ 500,426 $ (243,179 ) (48.6 )%
Timber sales 134,720 72,847 61,873 84.9 %
Surface revenue 279,977 237,998 41,979 17.6 %
Total revenues $ 671,944 $ 811,271 $ (139,327 ) (17.2 )%
Oil and Gas
Oil and gas revenues were 38% and 62% of total revenues for 2020 and 2019, respectively. A breakdown of oil and gas revenues for the years ended December 31, 2020 as compared to 2019 are as follows:
Years Ended December 31,
Percent
Change
Change from from Prior
2020 2019 Prior Year Year
Oil $ 228,571 $ 383,578 $ (155,007 ) (40.4 )%
Gas 26,361 109,164 (82,803 ) (75.9 )%
Lease and geophysical 2,315 7,684 (5,369 ) (69.9 )%
Total revenues $ 257,247 $ 500,426 $ (243,179 ) (48.6 )%
CKX received oil and/or gas revenues from 94 and 101 wells during the years ended December 31, 2020 and 2019, respectively.
The following schedule summarizes barrels and MCF produced and average price per barrel and per MCF for the years ended December 31, 2020 and 2019:
Years Ended
December 31,
2020 2019
Net oil produced (Bbl)(2) 5,043 6,272Average oil sales price (per Bbl)(1,2) $ 45.32 $ 61.16 Net gas produced (MCF)
12,376 32,107
Average gas sales price (per MCF)(1) $ 2.13 $ 3.40
(1) Before deduction of production costs and severance taxes (2) Excludes plant products
Oil revenues decreased for the year ended December 31, 2020, as compared to
2019, by $155,007. Gas revenues decreased for the year ended December 31, 2020,
as compared to 2019, by $82,803. As indicated from the schedule above, the
decrease in oil revenues was due to a decrease in 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 and a decrease in the average price
per MCF. Management believes the decrease in oil and gas revenues is a factor of
the extreme weakness in oil and gas markets due to the COVID-19 pandemic.
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The following eight fields produced 92.31% of the Company's oil and gas revenues
in 2020. The following table shows the number of barrels of oil (Bbl Oil) and
MCF of gas (MCF Gas) produced from these fields.
Field Bbl Oil (1) MCF Gas
Gonzales County 1,591 691
South Bear Head Creek 1161 3,418
Reeves 590 367
Castor Creek 512 0
South Lake Charles 270 2877
Cowards Gully 336 153
Lake Arthur 77 2158
North Indian Village 171 1,440
The following eight fields produced 92.33% of the Company's oil and gas revenues
in 2019. The following table shows the number of barrels of oil (Bbl Oil) and
MCF of gas (MCF Gas) produced from these fields.
Field Bbl Oil (1) MCF Gas
South Bear Head Creek 1,821 1,757
South Jennings 447 9,298
Coward Gully 682 403
South Lake Charles 600 6,299
Castor Creek 686 25
Gonzales County 557 566
South Elton 159 2738
Pine Prairie 211 1,345
The Company was a lessor in the following non-producing mineral leases:
Activity 2020 2019 Bonus lease 1 1 Delay lease 0 2 Gross acres 200 200 Net acres 33 33 Lease and geophysical revenues decreased for the year ended December 31, 2020, as compared to 2019, by $5,369. These revenues are dependent on oil and gas producers' activities, are not predictable and can vary significantly from year to year. Timber Timber revenues were 20% and 9% of total revenues for 2020 and 2019, respectively. Timber revenues increased for the year ended December 31, 2020, as compared to the year ended December 31, 2019, by $61,873. The increase in timber revenues was due to some holders of timber contracts determining to harvest timber on Company lands and favorable weather conditions for harvesting. Surface
Surface revenues were 42% and 29% of total revenues for 2020 and 2019, respectively. Surface revenues increased for the year ended December 31, 2020, as compared to 2019, by $41,979. This increase is due to an increase in the price per acre charge for leases.
Costs and Expenses Oil and gas costs decreased for the year ended December 31, 2020 as compared to 2019 by $28,075. These variances are due to the normal variations in year to year costs, which correlate directly with variations in revenues.
Timber costs decreased for the year ended December 31, 2020 as compared to 2019 by $11,735. This is primarily due to decreased timber management costs.
General and administrative expenses decreased for the year ended December 31,
2020 as compared to 2019 by $13,696. This is primarily due to decreased costs to
prepare and file SEC reports, salaries, contract services and director's fees,
partially offset by an increase in property management expense.
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--------------------------------------------------------------------------------Gain on Sale of Land and Equipment
Gain on sale of land and equipment was $354,577 and $80,876 for the years ended December 31, 2020 and 2019, respectively. For the year ended December 31, 2020, this consisted of a gain on sale of eight tracts of land including six lots in subdivisions and one sale to local government for roadway construction. Outlook for Fiscal Year 2021 The Company will continue to consider and evaluate commercial, agricultural and timber lands, and other business opportunities for acquisitions and to evaluate its current holdings for divestiture. The Company will consider purchases outside of southwest Louisiana and will consider developing its properties for commercial or residential purposes. The Company will continue to actively market its timber. Weather in 2020 was generally better for timber harvesting than in 2019. Due to Hurricanes Laura and Delta in 2020 the Company sold some of its timber at salvage prices. Stumpage prices have remained depressed when compared to recent historical prices. The Company will seek to enter into additional stumpage agreements. The Company began directly managing its lands in 2017, except for approximately 5,030 acres of timber property in which the Company owns an undivided 1/6 interest, which is managed by Walker Louisiana Properties. The Company believes direct land management and continuing economic activity in southwest Louisiana will be a catalyst for increased surface revenue.
Liquidity and Capital Resources
Sources of Liquidity
The Company's current assets totaled $7,073,076 and current liabilities equaled $342,195 at December 31, 2020.
The Company entered into an unsecured revolving line of credit with Hancock Whitney Bank on June 25, 2018. The line of credit permitted the Company to draw a maximum aggregate amount of $1,000,000. Borrowings under the line of credit bore interest at a rate of 4.25%. The line of credit expired on June 25, 2019 and was not extended. As of December 31, 2020, and 2019, 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 operating activities decreased by $54,546 to $140,165 for the year ended December 31, 2020, compared to $194,711 for the year ended December 31, 2019. The decrease in cash provided by operating activities was attributable primarily to the change on the gain on the sale of land. Net cash provided by investing activities was $3,042,801 and $1,224,842 for the year ended December 31, 2020, and 2019, respectively. For the year ended December 31, 2020, this included purchases of certificates of deposit of $1,985,920, purchases of mutual funds of $3,960, and costs of reforesting timber of $9,321 offset by proceeds from maturity of certificates of deposit of $4,682,920 and proceeds from the sale of fixed assets of $359,082. For the year ended December 31, 2019, this included purchases of certificates of deposit of $2,456,000, purchases of mutual funds of $255,578 and costs of reforesting timber of $26,815, offset by proceeds from maturity of certificates of deposit of $3,854,000, and proceeds from the sale of fixed assets of $109,235.
Net cash used in financing activities was $0 and $0 for the year ended December 31, 2020, and 2019, respectively.
Significant Accounting Policies
For a discussion of significant accounting policies, see Note 1 in the notes to our audited financial statements included elsewhere in this Form 10-K.
Off Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, financings, or other relationships with unconsolidated entities or other persons, also known as "special purpose entities" (SPEs).
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