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 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 during the preceding twelve 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 (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 is a large accelerated
filer, an accelerated filer or a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated
filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check
one):
If an emerging growth company, indicate by check mark if the registrant
has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided
pursuant to Section 13(a) 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 changes to the risk factors previously described in the Company’s Form 10-K. for
the fiscal year ended December 31, 2019 (the “Form 10-K”), including significant global economic and pandemic factors
occurring during the first quarter of 2020 and continuing into the second quarter of 2020 which are described in the following
two paragraphs.
At the end of 2019, a novel strain of coronavirus (“COVID-19”)
was reported in China. In the first quarter of 2020 and continuing currently, COVID-19 has spread to other countries including
the U.S. This pandemic has drastically weakened the global demand for oil, putting unprecedented pressure on the price of oil.
In addition, the delay through the end of the first quarter of 2020 of the Organization of Petroleum Exporting Countries and Russia
to agree on production cuts, caused oil prices to drop dramatically in the first quarter of 2020 to as low as $6.00 per barrel
which is approximately one-tenth of the oil price at the beginning of 2020. Additionally, subsequent to the end of the first quarter
of 2020, for the first time ever, the price of a barrel of oil plunged below zero dollars on the West Texas Intermediate Crude
Index going as low as negative $37.63 due to concerns about dwindling capacity to store all the crude oil produced in excess
of demand.
During the first quarter of 2020 and continuing subsequent to the
end of the quarter, attempts at containment of COVID-19 have resulted in decreased economic activity which has adversely affected
the broader global economy. As the economy has dramatically stalled, the demand for oil and natural gas has substantially weakened.
Many countries around the world, as well as the majority of the states in the United States, ordered their citizens to stay home
in order to contain the spread of the virus. As part of the “shelter in place” and “stay at home” orders,
fewer businesses than normal are open and less people are going to work which has reduced the demand for oil and natural gas. Airlines
have dramatically cut back on flights as the number of passengers has fallen off. Fewer cars on the road and planes in the sky
mean far less demand for oil. At this time, the full extent to which COVID-19 will negatively impact the global economy and our
business is uncertain, but pandemics or other significant public health events will most likely have a material adverse effect
on our business and results of operations.
10
The Company has felt the negative effects of these plummeting product
prices and in an effort to reduce expenses, the Company reduced the number of employees in its workforce by 22%, effective March
31, 2020, and implemented company-wide reductions in compensation for Company employees, including key and technical employees
and officers, effective April 1, 2020. To further reduce expenses, the Company is shutting-in wells that are not profitable in
this current low price environment. The Company is forecasting that oil and natural gas prices will remain low through at least
the second quarter of 2020, which the Company believes will cause an operating loss for the second quarter of 2020 in spite of
the Company’s cost cutting measures. Operating losses are very likely to continue until oil and natural gas prices return
to substantially higher levels on a continued basis.
Other 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.
There could be adverse legislation 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.
11
Results of Operations
Three months ended March 31, 2020 compared to the three months
ended March 31, 2019
Oil and gas revenues for the first quarter of
2020 were $744,000, as compared to $1,165,000 for the same period in 2019, a decrease of approximately $421,000 or 36.1%.
Oil sales for the first three months of 2020 were approximately $490,000
compared to approximately $616,000 in the first quarter of 2019, a decrease of approximately $126,000 or 20.5%. Of this net decrease
in oil sales, volumes for the first quarter of 2020 were approximately 9,100 bbls, compared to 10,200 bbls during the first quarter
of 2019, a decrease of approximately 1,100 bbls, or 10.8%.
Average oil prices received were $45.26 per bbl in the first quarter
of 2020 compared to $48.27 per bbl in the first three months of 2019, a decrease of approximately $3.01per bbl or 6.2%.
Natural gas revenues for the first three months of 2020 were $254,000
compared to $549,000 for the same period in 2019, a decrease of $295,000 or 53.7%. Natural gas sales volumes for the first quarter
of 2020 were approximately 202,000 mcf compared to approximately 208,000 mcf during the first quarter of 2019, a decrease of approximately
6,000 mcf or 2.9%.
Average natural gas prices received were $1.26 per mcf in the first
quarter of 2020 as compared to $2.64 per mcf in the first quarter of 2019, a decrease of approximately $1.38 per mcf or 52.3%.
Revenues from lease operations was $75,000 in the first quarter of
2020 compared to $55,000 in the first quarter of 2019, an increase of approximately $20,000 or 36.4%. This increase is due primarily
to higher field operations income related to workovers. Revenues from lease operations are derived from field supervision charged
to operated leases along with operator overhead charges to operated leases.
Revenues from gas gathering, compression and equipment rental for
the first quarter of 2020 was $27,000 compared to $33,000 in the first quarter of 2019, a decrease of approximately $6,000, or
18.2%. This was due primarily to a decrease in natural gas volume sold through PPC.
Real estate income was approximately $64,000 during the first quarter
of 2020 compared to $60,000 for the first three months of 2019, an increase of approximately $4,000, or 6.7%. The increase was
due to new tenants leasing space at the Company’s corporate office building.
Interest income was approximately $44,000 during the first quarter
of 2020, compared to approximately $71,000 during the same period in 2019, a decrease of approximately $27,000 or 38.0%. The decrease
in interest income was due to declining interest rates on depository accounts.
Other revenues for the first three months of 2020 were approximately
$10,000 as compared to $11,000 for the same time period in 2019, a decrease of $1,000, or 9.1%.
Lease operating expenses in the first quarter of 2020 were $292,000
as compared to $328,000 in the first quarter of 2019, a net decrease of approximately $36,000, or 11.0%. Of this net decrease,
approximately $16,000 is due to decreases in operating expenses billed by third-party operators on non-operated properties, as
well as approximately $20,000 of overall net decreases in operating expenses on various operated properties.
Production taxes, gathering and marketing expenses in the first quarter
of 2020 were approximately $134,000 as compared to $194,000 for the first quarter of 2019, a decrease of approximately $60,000
or 30.9%. These decreases related directly to the decreases in oil and gas revenues as described in the above paragraphs.
12
Pipeline and rental expenses for the first quarter of 2020 were approximately
$3,000 compared to approximately $3,000 for the same time period in 2019.
Real estate expenses in the first quarter of 2020 were approximately
$38,000 compared to $39,000 during the same period in 2019, a decrease of approximately $1,000 or 2.6%.
Depreciation, depletion, and amortization expense for the first quarter
of 2020 was $101,000 as compared to $122,000 for the first quarter of 2019, a decrease of $21,000, or 17.2%. For the first quarter
of 2020, $86,000 of the amount was for amortization of the full cost pool of capitalized acquisition, exploration, and development
costs as compared with $107,000 for the first quarter of 2019, a decrease of $21,000 or 19.6%. The Company re-evaluated its proved
oil and gas reserve quantities as of December 31, 2019. 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 4.184% for the first quarter of 2020 was calculated and applied to the Company’s
full cost pool of capitalized oil and gas properties as compared to 3.191% for the first quarter of 2019.
Asset Retirement Obligation (“ARO”) expense for the first
three months of 2020 was approximately $30,000 as compared to approximately $47,000 for the same time period in 2019, a decrease
of $17,000, or 36.2%. 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 2020
were approximately $722,000 as compared to approximately $708,000 for the first quarter of 2019, an increase of approximately $14,000
or 2.0%.
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.