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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, 2020 (the “Form 10-K”), including significant global economic and pandemic factors occurring during the first six months
of 2021 and continuing into the third quarter of 2021 which are described in the following two paragraphs.
The COVID-19 pandemic and the measures being taken
to address and limit the spread of the virus adversely affected the economies and financial markets of the world, resulting in an economic
downturn beginning in early 2020 that negatively impacted global demand and prices for crude oil and condensate, natural gas liquids (NGLs)
and natural gas. The effects of COVID-19 mitigation efforts, including the wide availability of vaccines, combined with the waning intensity
of the pandemic, have resulted in increased demand and prices for crude oil and condensate. In the first six months of 2021, demand and
prices for crude oil and condensate returned to near pre-pandemic levels. . Uncertainty related to variants of the COVID-19 virus may cause a fluctuation
in demand and prices for crude oil and condensate in the third quarter of 2021 and beyond.
In early 2021, the members of the Organization of Petroleum
Exporting Countries and Russia (OPEC+) met and agreed to taper off certain of their production curtailments (agreed to in April 2020)
through March 2021. Subsequent to the meeting, Saudi Arabia announced that it would unilaterally cut its production by an additional one
million barrels per day in February 2021 and March 2021. In April 2021, OPEC+ indicated it would continue to ease production curtailments
starting in May 2021 as it expected the intensity of the COVID-19 pandemic would subside and containment measures would be scaled back,
leading to expected increases in demand for crude oil production in the second half of 2021.
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.
11
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 factors that may affect the demand for oil and natural gas, and therefore
impact our results, include technological improvements in energy efficiency; seasonal weather patterns; increased competitiveness of,
or government policy support for, alternative energy sources; changes in technology that alter fuel choices, such as technological advances
in energy storage that make wind and solar more competitive for power generation; changes in consumer preferences for our products, including
consumer demand for alternative fueled or electric transportation or alternatives to plastic products; and broad-based changes in personal
income levels.
Commodity prices and margins also vary depending on a number of factors
affecting supply. For example, increased supply from the development of new oil and gas supply sources and technologies to enhance recovery
from existing sources tend to reduce commodity prices to the extent such supply increases are not offset by commensurate growth in demand.
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.
12
Results of Operations
Six months ended June 30, 2021 compared to six months
ended June 30, 2020
Oil and gas revenues for the first six months of 2021 were $1,958,000, as
compared to $1,092,000 for the same period in 2020, an increase of approximately $866,000 or 79.3%
Oil sales for the first six months of 2021 were approximately $837,000 compared
to approximately $608,000 for the first six months of 2020, an increase of approximately $229,000 or 37.7%. Oil sales volumes for the
first six months of 2021 were approximately 13,335, compared to approximately 12,300 bbls during the same period in 2020, an increase
of approximately 1,035 bbls, or 8.41%.
Average oil prices received were $55.10 per bbl in the first half of 2021
compared to $38.78 per bbl in the first half of 2020, an increase of approximately $16.32 per bbl or 42.08%.
Natural gas revenue for the first six months of 2021 was $1,121,000 compared
to $484,000 for the same period in 2020, an increase of approximately $637,000 or 131.6%. Natural gas sales volumes for the first six
months of 2021 were approximately 367,000 mcf compared to approximately 392,000 mcf during the first six months of 2020, a decrease of
approximately 25,000 mcf or 6.4%.
Average natural gas prices received were $3.05 per mcf in the first six
months of 2021 as compared to $1.23 per mcf in the same time period in 2020, an increase of approximately $1.82 per mcf or 148.0%.
In general, revenues from oil and gas producing operations experienced a
significant increase for the six months ended 2021 compared to the same period in 2020. In addition, the second quarter results from operations
also experienced a significant increase over the same period in 2020 as well as an increase in operations during the first quarter of
2021. The increases result in part from increased oil and gas prices, as well as increases in crude oil production. A significant number
of both operated wells and non-operated wells were shut-in during the second quarter of 2020 due to historic low oil and gas prices and
most of these wells were returned to production and producing as of June 30, 2021.
Revenues from lease operations were $116,000 in the first six months of
2021 compared to $119,000 in the first six months of 2020, a decrease of approximately $3,000 or 2.5%. This decrease is due to a decrease
in field supervision charges. Revenues from lease operations are derived from field supervision charged to operated leases along with
operator overhead charged to operated leases.
Revenues from gas gathering, compression and equipment rental for the first
six months of 2021 were $39,000 compared to $45,000 for the same period in 2020, a decrease of approximately $6,000 or 13.3%. These revenues
are derived from gas volumes produced and transported through our gas gathering systems.
Real estate revenue was approximately $114,000 during the first six months
of 2021 compared to $134,000 for the first six months of 2020, a decrease of approximately $20,000, or 14.9%. The decrease is due to lease
re-negotiations and loss of tenants.
Interest income was $81,000 during the first six months of 2021 as compared
to $103,000 during the same period in 2020, a decrease of approximately $22,000 or 21.4%. Interest income has decreased due to lower interest
rates than in 2020.
Other revenues for the first six months of 2021 were $18,000 as compared
to $19,000 for the same time period in 2020, a decrease of approximately $1,000 or 5.3%.
Lease operating expenses in the first six months of 2021 were $522,000 as
compared to $462,000 in the first six months of 2020, a net increase of $60,000, or 13.0%. Of this overall net increase, approximately
$62,000 is due to net decreases in operating expenses billed by third-party operators on non-operated properties. Approximately $122,000
represents net increases associated with costs to return shut-in wells to production, as well as increases in well expenditures on various
operated properties.
Production taxes, gathering and marketing expenses in the first six months
of 2021 were approximately $335,000 as compared to $256,000 for the first six months of 2020, an increase of approximately $79,000, or
30.9%. This increase relates directly to the increase in oil and gas revenues as described in the above paragraphs.
13
Pipeline and rental expenses for the first six months of 2021 were $9,000
compared to $4,000 for the same time period in 2020, an increase of approximately $5,000. The increase in 2021 is due to repair and maintenance
expenses.
Real estate expenses in the first six months of 2021 were approximately
$65,000 compared to $67,000 during the same period in 2020, a decrease of approximately $2,000 or 3.0%.
Depreciation, depletion, and amortization expenses for first six months
of 2021 were $215,000 as compared to $135,000 for the same period in 2020, an increase of $80,000, or 59.3%. $184,000 of the amount for
the first six months of 2021 was for amortization of the full cost pool of capitalized costs compared to $105,000 for the same period
of 2020, an increase of $79,000 or 75.2%. The Company re-evaluated its proved oil and natural gas reserve quantities as of December 31,
2020. This re-evaluated reserve base was reduced for oil and gas reserves that were produced or sold during the first six months of 2021
and adjusted for newly acquired reserves or for changes in estimated production curves and future price assumptions.
A depletion rate of 6.403% for the first quarter of 2021 and a depletion
rate of 5.432% for the second quarter of 2021 was calculated and applied to the Company’s full cost pool of capitalized oil and
natural gas properties compared to rates of 4.184% and 0.813% for the first two quarters of 2020 respectively.
Asset Retirement Obligation (“ARO”) expense for the first six
months of 2021 was approximately $70,000 as compared to approximately $60,000 for the same time period in 2020, an increase of approximately
$10,000 or 16.7%. 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 six months of 2021 were
approximately $992,000 as compared to approximately $1,391,000 for the same period in 2020, a decrease of approximately $399,000 or 28.7%.
Three months ended June 30, 2021, compared to three months
ended June 30, 2020
Oil and natural gas revenues for the three months ended June 30, 2021 were
$1,064,000, compared to $348,000 for the same time period in 2020, an increase of $716,000, or 205.7%.
Oil sales for the second quarter of 2021 were approximately $415,000 compared
to approximately $118,000 for the same period of 2020, an increase of approximately $297,000 or 252.0%. Oil volumes sold for the second
quarter of 2021 were approximately 4,735 bbls compared to approximately 3,200 bbls during the same period of 2020, an increase of approximately
1,535 bbl or 48.0%.
Average oil prices received were approximately $59.53 per bbl in the second
quarter of 2021 compared to $23.46 per bbl during the same period of 2020, an increase of approximately $36.07 per bbl, or 153.8%.
Natural gas revenues for the second quarter of 2021 were $649,000 compared
to $230,000 for the same period in 2020, an increase of $419,000 or 182.2%. Natural gas volumes sold for the second quarter of 2021 were
approximately 177,000 mcf compared to approximately 190,000 mcf during the same period of 2020, a decrease of approximately 13,000 mcf,
or 6.8%.
Average natural gas prices received were approximately $2.93 per mcf in
the second quarter of 2021 as compared to approximately $1.06 per mcf during the same period in 2020, an increase of approximately $1.87
or 176.42%.
Revenues from lease operations for the second quarter of 2021 were approximately
$59,000 compared to approximately $44,000 for the second quarter of 2020, an increase of approximately $15,000 or 34.1%. This increase
is due to an increase in field activity, supervision and operator overhead as economic conditions improved during the second quarter of
2021. Revenues from lease operations are derived from field supervision charged to operated leases along with operator overhead charged
to operated leases.
Revenues from gas gathering, compression and equipment rental for the second
quarter of 2021 were approximately $5,000, compared to approximately $18,000 for the same period in 2020, a decrease of approximately
$13,000 or 72.2%. These revenues are derived from gas volumes produced and transported through our gas gathering systems.
Real estate revenue was approximately $55,000 during the second quarter
of 2021 compared to $70,000 for the same period in 2020, a decrease of approximately $15,000 or 21.4%. The decrease is due to lease re-negotiations
and loss of tenants.
14
Interest income for the second quarter of 2021 was approximately $35,000
as compared with approximately $59,000 for the same period in 2020, a decrease of approximately $24,000 or 40.7%. Interest income is derived
from investments in both short-term and long-term certificates of deposit as well as money market accounts at banks.
Other revenues for second quarter of 2021 were approximately $9,000 as compared
with approximately $9,000 for the same period in 2020.
Lease operating expenses in the second quarter of 2021 were $399,000 as
compared to $170,000 in the second quarter of 2020, a net increase of approximately $229,000, or 134.7%. Of this net increase, approximately
$ 223,000 is from overall increases and decreases in well expenditures on various operated properties. Approximately $6,000 are due to
net increases in net operating expenses billed by third-party operators on non-operated properties. This increase results from returning
operated wells which were shut-in back to production as well as an increase in the cost of labor and materials to operate the leases during
the second quarter of 2021.
Production taxes, gathering, transportation and marketing expenses for the
second quarter of 2021 were approximately $206,000 as compared to $122,000 during the second quarter of 2020, a net increase of approximately
$84,000 or 68.9%. These increases relate directly to the increase in oil and gas revenues as described in the above paragraphs.
Pipeline and rental expenses for the second quarter of 2021 were $6,000
compared to $1,000 for the same time period in 2020, an increase of approximately $5,000. The increase is due to repair and maintenance
expenses incurred in the second quarter of 2021.
Real estate expenses during the second quarter 2021 were approximately $33,000
compared to approximately $29,000 for the same period in 2020, an increase of approximately $4,000 or 13.8%. This increase is due to an
increase in the cost of materials and labor for repairs and maintenance in the second quarter of 2021.
Depreciation, depletion, and amortization expenses for the second quarter
of 2021 were $96,000 as compared to $34,000 for the same period in 2020, an increase of $62,000, or 182.4%. $82,000 of the amount for
the second quarter of 2021 was for amortization of the full cost pool of capitalized costs compared to $19,000 for the second quarter
of 2020, an increase of $63,000 or 30.2%. The Company re-evaluated its proved oil and natural gas reserve quantities as of December 31,
2020. This re-evaluated reserve base was reduced for oil and gas reserves that were produced or sold during the first six months of 2021
and adjusted for newly acquired reserves or for changes in estimated production curves and future price assumptions. A depletion rate
of 6.403% for the first quarter of 2021 and a depletion rate of 5.432% for the second quarter of 2021 was calculated and applied to the
Company’s full cost pool of capitalized oil and natural gas properties compared to rates of 4.184% and 0.813% for the first two
quarters of 2020 respectively
Asset Retirement Obligation (“ARO”) expense for the second quarter
of 2021 was approximately $35,000 as compared to approximately $30,000 for the same time period in 2020, an increase of approximately
$5,000 or 16.7%. 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 second quarter of 2021 were
$455,000 compared to $669,000 for the same period in 2020, a decrease of approximately $214,000 or 32.0%. Approximately 38.0% of the decrease
comes from decreased salary, wages, benefits, and other personnel costs. The remaining 62.0% of the decrease is due to insurance, office,
computer, and other expenses.
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 several 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
to fund its exploration and development programs.
15