Indicate by check mark if the registrant is a well-known seasoned
issuer as defined in Rule 405 of the Securities Act. Yes [ ] No [ X ]
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [ X ]
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 Company was required to file such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes [ X ] No [ ]
Indicate by check mark whether the registrant has submitted electronically
and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule
405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files. Yes [ X ] No [ ]
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions
of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2
of the Exchange Act).
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the
Exchange Act. Yes [ ] No [ X ]
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution
of securities under a plan confirmed by a court. Yes [ ] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common, as of the latest practicable date.
Item 2. - Management's Discussion and Analysis of Financial Condition
and
Results of Operations
WARNING CONCERNING FORWARD LOOKING STATEMENTS
The following discussion should be read in conjunction with the financial
statements and notes thereto appearing elsewhere in this report.
This Report on Form 10-Q may contain forward-looking statements within
the meaning of the federal securities laws, principally, but not only, under the caption “Management’s Discussion and
Analysis of Financial Condition and Results of Operations.” We caution investors that any forward-looking statements in this
report, or which management may make orally or in writing from time to time, are based on management’s beliefs and on assumptions
made by, and information currently available to, management. When used, the words “anticipate,” “believe,”
“expect,” “intend,” “may,” “might,” “plan,” “estimate,”
“project,” “should,” “will,” “result” and similar expressions which do not relate
solely to historical matters are intended to identify forward-looking statements. These statements are subject to risks, uncertainties,
and assumptions and are not guarantees of future performance, which may be affected by known and unknown risks, trends, uncertainties,
and factors, that are beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, or projected. We caution you
that while forward-looking statements reflect our good faith beliefs when we make them, they are not guarantees of future performance
and are impacted by actual events when they occur after we make such statements. We expressly disclaim any responsibility to update
our forward-looking statements, whether as a result of new information, future events or otherwise. Accordingly, investors should
use caution in relying on past
forward-looking statements, which are based on results and trends
at the time they are made, to anticipate future results or trends.
Some of the risks and uncertainties that may cause our actual results,
performance or achievements to differ materially from those expressed or implied by forward-looking statements include, among others,
the factors listed and described at Item 1A “Risk Factors” in the Company’s Annual Report on Form 10-K, which
investors should review. There have been no changes from the risk factors previously described in the Company’s Form 10-K
for the fiscal year ended December 31, 2015 (the “Form 10-K”).
Uncertainties regarding the global economic and financial environment
could lead to an extended national or global economic recession. A slowdown in economic activity caused by a recession would likely
reduce national and worldwide demand for oil and natural gas and result in lower commodity prices for
long periods of time.
Costs of exploration, development and production have not yet adjusted to current economic conditions, or in proportion to the
significant reduction in product prices. Prolonged,
substantial decreases in oil and natural gas prices would likely
have a material adverse effect on the Company’s business, financial condition, and results of operations, and could further
limit the Company's access to liquidity and credit, and could hinder its ability to satisfy its capital requirements.
In the past several years, capital and credit markets have experienced
volatility and disruption. Given the levels of market volatility and disruption, the availability of funds from those markets may
diminish substantially. Further, arising from concerns about the stability of financial markets generally and the solvency of borrowers
specifically, the cost of accessing the credit markets has increased as many lenders have raised interest rates, enacted tighter
lending standards, or altogether ceased to provide funding to borrowers.
Due to these potential capital and credit market conditions, the
Company cannot be certain that funding will be available in amounts or on terms acceptable to the Company. The Company is evaluating
whether current cash balances and cash flow from operations alone would be sufficient to provide working capital to fully fund
the Company's operations. Accordingly, the Company is evaluating alternatives, such as joint ventures with third parties
,
or
sales of interest in one or more of its properties. Such transactions, if undertaken, could result in a reduction in the Company's
operating interests or require the Company to relinquish the right to operate the property. There can be no assurance that any
such transactions can be completed or that such transactions will satisfy the Company's operating capital requirements. If the
Company is not successful in obtaining sufficient funding or completing an alternative transaction on a timely basis on terms acceptable
to the Company, the Company would be required to curtail its expenditures or restructure its operations, and the Company would
be unable to continue its exploration, drilling, and recompletion program, any of which would have a material adverse effect on
its business, financial condition, and results of operations.
The Obama administration has set forth budget proposals which if
passed, would significantly curtail our ability to attract investors and raise capital. Proposed changes in the Federal income
tax laws which would eliminate or reduce the percentage depletion deduction and the deduction for intangible drilling and development
costs for small independent producers, will significantly reduce the investment capital available to those in the industry as well
as our Company. Lengthening the time to expense seismic costs will also have an adverse effect on our ability to explore and find
new reserves.
Other sections of this report may also include suggested factors
that could adversely affect our business and financial performance. Moreover, we operate in a very competitive and rapidly changing
environment. New risks may emerge from time to time and it is not possible for management to predict all such matters; nor can
we assess the impact of all such matters on our business or the extent to which any factor, or combination of factors, may cause
actual results to differ materially from those contained in any forward-looking statements. Given these uncertainties, investors
should not place undue reliance on forward-looking statements as a prediction of actual results. Investors should also refer to
our quarterly reports on Form 10-Q for future periods and current reports on Form 8-K as we file them with the SEC, and to other
materials we may furnish to the public from time to time through Forms 8-K or otherwise.
Results of Operations
Three months ended March 31, 2016 compared to the three months
ended March 31, 2015
Oil and gas revenues for the first quarter of
2016 were $643,000, as compared to $1,229,000 for the same period in 2015, a decrease of approximately $586,000 or 47.68%.
Natural gas revenues for the first three months of 2016 were $246,000
compared to $460,000 for the same period in 2015, a decrease of $214,000 or 46.52%. Natural gas sales volumes for the first quarter
of 2016 were approximately 138,000 mcf compared to approximately 172,000 mcf during the first quarter of 2015, a decrease of approximately
34,000 mcf or 19.77%. In general this decrease was due primarily to a significant decrease in natural gas prices discussed below,
and to a natural decline in production. In addition, several wells that went down were shut in rather than repaired which contributed
to an overall decline in gas production between the periods.
Average natural gas prices received were $1.34 per mcf in the first
quarter of 2016 as compared to $2.67 per mcf in the first quarter of 2015, a decrease of approximately $1.33 per mcf or 49.81%.
Oil sales for the first three months of 2016 were approximately $397,000
compared to approximately $769,000 in the first quarter of 2015, a decrease of approximately $372,000 or 48.37%. Of this net decrease
in oil sales, volumes for the first quarter of 2016 were approximately 9,000 bbls, compared to 16,600 bbls during the first quarter
of 2015, a decrease of approximately 7,600 bbls, or 45.78%. This decrease was due primarily to a significant decrease in oil prices
discussed below, and to a decline in oil production between the two periods related to several non-operated horizontal wells in
East Texas in which the Company owns working and royalty interests.
Average oil prices received were $30.62 per bbl in the first quarter
of 2016 compared to $46.33 per bbl in the first three months of 2015, a decrease of approximately $15.71 per bbl or 33.91%.
The primary reason for the decrease in natural gas and oil revenues
during the first quarter of 2016 as compared to the first quarter of 2015 is the decline in prices at which we sell our oil and
natural gas products. The prices for our products have decreased significantly in conjunction with the overall decline in oil and
gas prices worldwide starting in the fourth quarter of 2014. The Company has experienced a similar decline in the selling prices
of its products. Average quarterly natural gas prices per mcf for the Company in for the year ended December 31, 2014 were $4.64,
$4.71, $4.45, and $4.06, respectively. Average quarterly natural gas prices per mcf for the Company in for the year ended December
31, 2015 were $2.67, $2.46, $2.31, and $2.45, respectively. Average quarterly crude oil prices per bbl for the Company for the
year ended December 31, 2014 were $113.76, $100.55, $98.05, and $83.03 respectively. Average quarterly crude oil prices per bbl
for the Company for the year ended December 31, 2015 were $46.33; $54.48, $45.68, and $41.03 respectively. During the first quarter
of 2016, crude oil prices for West Texas Intermediate fell into the mid-twenty dollar per bbl range. Natural gas prices for the
same period have decreased into the sub-two dollar per mcf range. These decreases in the Company’s product prices have a
direct effect on its cash flow and profits.
Revenues from lease operations was $90,000 in the first quarter of
2016 compared to $103,000 in the first quarter of 2015, a decrease of $13,000 or 12.62%. This decrease is due to decreases in field
supervision charged to operated leases along with a small decrease in operator overhead charges to operated leases.
Revenues from gas gathering, compression and equipment rental for
the first quarter of 2016 was $30,000 compared to $31,000 in the first quarter of 2015, a decrease of $1,000 or 3.23%.
Real estate income was approximately $78,000 during the first quarter
of 2016 compared to $60,000 for the first three months of 2015, an increase of approximately $18,000, or 30.00%. This increase
was due to the addition of a new tenant at the Company’s corporate office building effective in December of 2015.
Interest income was approximately $18,000 during the first quarter
of 2016, compared to approximately $16,000 during the same period in 2015, an increase of approximately $2,000 or 12.5%. Interest
income is derived from investments in both short-term and long-term certificates of deposit.
Other revenues for the first three months of 2016 were approximately
$34,000 as compared to approximately $17,000 for the same time period in 2015, an increase of $17,000, or 100.0%.
Lease operating expenses in the first quarter of 2016 were $247,000
as compared to $440,000 in the first quarter of 2015, a net decrease of approximately $193,000, or 43.86%. Of this net decrease,
approximately $143,000 is due to decreases in operating expenses billed by third-party operators on non-operated properties. A
decrease of approximately $15,000 was due to several wells that were divested during 2015.
The remaining $35,000 represented an overall decrease in well expenditures
on various properties.
Production taxes, gathering and marketing expenses in the first quarter
of 2016 were approximately $100,000 as compared to $137,000 for the first quarter of 2015, a decrease of approximately $37,000
or 27.01%. These decreases related directly to the decline in oil and gas revenues as described in the above paragraphs.
Pipeline and rental expenses for the first quarter of 2016 were approximately
$10,000 compared to approximately $8,000 for the same time period in 2015, an increase of $2,000, or 25.0%.
Real estate expenses in the first quarter of 2016 was approximately
$39,000 compared to $46,000 during the same period in 2015, a decrease of approximately $7,000 or 15.22% due to a decrease in utilities
expense between periods and other reductions in operating costs.
Depreciation, depletion, and amortization expense for the first quarter
of 2016 was $253,000 as compared to $410,000 for the first quarter of 2015, a decrease of $157,000, or 38.29%. $236,000 of the
amount for the first quarter of 2016 was for amortization of the full cost pool of capitalized acquisition, exploration, and development
costs as compared with $391,000 for the first quarter of 2015, a decrease of $155,000 or 39.64%. The Company re-evaluated its proved
oil and gas reserve quantities as of December 31, 2015. This re-evaluated reserve base was reduced for oil and gas reserves that
were produced or sold during the quarter and adjusted for newly acquired reserves or for changes in estimated production curves
and future price assumptions. A depletion rate of 3.350% for the first quarter of 2016 was calculated and applied to the Company’s
full cost pool of capitalized oil and gas properties as compared to 2.929% for the first quarter of 2015. Although the depletion
rate for the first quarter of 2016 is greater than the depletion rate for the same period in 2015, the decrease of $155,000 in
expense noted above is due to the depletion rate of 3.350% being applied to a smaller undepleted full cost pool after it was reduced
by an impairment charge of $5,116,000 at December 31, 2015.
Asset Retirement Obligation (“ARO”) expense for the first
three months of 2016 was approximately $9,000 as compared to approximately $10,000 for the same time period in 2015, a decrease
of $1,000, or 10.0%. The ARO expense is calculated to be the discounted present value of the estimated future cost to plug and
abandon the Company’s producing wells.
General and administrative expenses for the first quarter of 2016
were approximately $687,000 as compared to approximately $844,000 for the first quarter of 2015, a decrease of $157,000 or 18.6%.
The decrease is due to a reduction in the number of personnel employed by the Company during 2015, and the reduction in related
salary, payroll taxes, benefits and other direct employee costs.
Financial Condition and Liquidity
The Company's operating capital needs, as well as its capital spending
program are generally funded from cash flow generated by operations. Because future cash flow is subject to a number of variables,
such as the level of production and the sales price of oil and natural gas, the Company can provide no assurance that its operations
will provide cash sufficient to maintain current levels of capital spending. Accordingly, the Company may be required to seek additional
financing from third parties in order to fund its exploration and development programs.