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EX-32 - CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER AND CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER - RESERVE PETROLEUM COex32.htm
EX-31.1 - CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER - RESERVE PETROLEUM COex31-1.htm
EX-31.2 - CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER - RESERVE PETROLEUM COex31-2.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
FORM 10-Q


(Mark One)

þ           QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly Period Ended March 31, 2011
 
¨           TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 0-8157
 
THE RESERVE PETROLEUM COMPANY
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE
73-0237060
(State or Other Jurisdiction of Incorporation or Organization)
(I.R.S. Employer Identification No.)
 
6801 BROADWAY EXT., SUITE 300
OKLAHOMA CITY, OKLAHOMA  73116-9037
(405) 848-7551
(Address and telephone number, including area code, of registrant’s principal executive offices)


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.    Yes x No o

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 Noo

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 (Check one):
 

Large accelerated filer
o
 
Accelerated filer
o
 
Non-accelerated filer
o
 
Smaller reporting company
x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes o   No x

As of May 10, 2011, 161,184.64 shares of the Registrant’s $.50 par value common stock were outstanding.


 
 

 

 








PART I – FINANCIAL INFORMATION
 
 
 
 

 

 
1

 


 
ITEM 1.
FINANCIAL STATEMENTS


   
THE RESERVE PETROLEUM COMPANY
 
  BALANCE SHEETS  
  ASSETS  
             
             
   
March 31,
   
December 31,
 
   
2011
   
2010
 
   
(Unaudited)
   
(Derived from
 
         
audited financial
 
         
Statements)
 
             
Current Assets:
           
Cash and Cash Equivalents
  $ 4,567,347     $ 2,940,967  
Available-for-Sale Securities
    12,889,904       13,138,811  
Trading Securities
    440,502       414,124  
Refundable Income Taxes
    104,576       281,832  
Receivables
    1,417,481       1,800,659  
      19,419,810       18,576,393  
Investments:
               
Equity Investment
    500,840       485,968  
Other
    148,839       151,839  
      649,679       637,807  
Property, Plant and Equipment:
               
Oil and Gas Properties, at Cost,
               
Based on the Successful Efforts Method of Accounting –
               
Unproved Properties
    1,355,291       1,222,333  
Proved Properties
    26,996,262       26,323,648  
      28,351,553       27,545,981  
Less – Accumulated Depreciation, Depletion, Amortization and
               
Valuation Allowance
    19,149,614       18,709,551  
      9,201,939       8,836,430  
Other Property and Equipment, at Cost
    404,435       404,194  
                 
Less – Accumulated Depreciation and Amortization
    233,294       225,708  
      171,141       178,486  
Total Property, Plant and Equipment
    9,373,080       9,014,916  
Other Assets
    358,364       355,959  
Total Assets
  $ 29,800,933     $ 28,585,075  
                 
                 
See Accompanying Notes
               

 
2

 

  THE RESERVE PETROLEUM COMPANY  
  BALANCE SHEETS
 
  LIABILITIES AND STOCKHOLDERS’ EQUITY
 
             
             
   
March 31,
   
December 31,
 
   
2011
   
2010
 
   
(Unaudited)
   
(Derived from
 
         
audited financial
 
         
Statements)
 
             
Current Liabilities:
           
Accounts Payable
  $ 260,950     $ 177,628  
Other Current Liabilities – Deferred Income Taxes and Other
    263,371       256,354  
      524,321       433,982  
Long-Term Liabilities:
               
Asset Retirement Obligation
    884,551       848,631  
Dividends Payable
    1,413,830       1,453,070  
Deferred Tax Liability
    1,738,750       1,587,434  
      4,037,131       3,889,135  
Total Liabilities
    4,561,452       4,323,117  
                 
                 
                 
Stockholders’ Equity:
               
Common Stock
    92,368       92,368  
Additional Paid-in Capital
    65,000       65,000  
Retained Earnings
    25,888,115       24,895,712  
      26,045,483       25,053,080  
                 
Less – Treasury Stock, at Cost
    806,002       791,122  
Total Stockholders’ Equity
    25,239,481       24,261,958  
Total Liabilities and Stockholders’ Equity
  $ 29,800,933     $ 28,585,075  
                 
                 
See Accompanying Notes
               

 
3

 

THE RESERVE PETROLEUM COMPANY
 
STATEMENTS OF INCOME
 
(Unaudited)
 
             
             
   
Three Months Ended
 
   
March 31,
 
   
2011
   
2010
 
             
Operating Revenues:
           
Oil and Gas Sales
  $ 2,554,527     $ 2,872,712  
Lease Bonuses and Other
    64,696       101,690  
      2,619,223       2,974,402  
Operating Costs and Expenses:
               
Production
    456,137       479,820  
Exploration
    34,622       205,787  
Depreciation, Depletion, Amortization and Valuation Provisions
    452,438       367,959  
General, Administrative and Other
    396,275       390,351  
      1,339,472       1,443,917  
Income from Operations
    1,279,751       1,530,485  
                 
Other Income, Net
    38,450       35,421  
Income Before Provision for Income Taxes
    1,318,201       1,565,906  
Provision for Income Taxes:
               
Current
    213,464       83,195  
Deferred
    112,333       310,184  
Total Provision for Income Taxes
    325,797       393,379  
Net Income
  $ 992,404     $ 1,172,527  
Per Share Data:
               
Net Income, Basic and Diluted
  $ 6.16     $ 7.25  
Weighted Average Shares Outstanding, Basic and Diluted
    161,216       161,672  
                 
                 
See Accompanying Notes
               

 
4

 

THE RESERVE PETROLEUM COMPANY
 
CONDENSED STATEMENTS OF CASH FLOWS
 
(Unaudited)
 
             
             
   
Three Months Ended
 
   
March 31,
 
   
2011
   
2010
 
             
             
Net Cash Provided by Operating Activities
  $ 2,080,723     $ 1,740,433  
Cash Flows Applied to Investing Activities::
               
Purchases of Available-for-Sale Securities
    (1,849,690 )     (2,097,598 )
Maturity of Available-for-Sale Securities
    2,098,597       2,096,318  
Proceeds from Disposal of Property
    1,323       11,636  
Purchase of Property, Plant and Equipment
    (653,453 )     (515,019 )
Cash Distribution from Investment
    3,000       ---  
Net Cash Applied to Investing Activities
    (400,223 )     (504,663 )
Cash Flows Applied to Financing Activities:
               
Dividends Paid to Stockholders
    (39,240 )     (42,667 )
Purchase of Treasury Stock
    (14,880 )     (4,480 )
Total Cash Applied to Financing Activities
    (54,120 )     (47,147 )
Net Change in Cash and Cash Equivalents
    1,626,380       1,188,623  
                 
Cash and Cash Equivalents, Beginning of Period
    2,940,967       1,051,141  
Cash and Cash Equivalents, End of Period
  $ 4,567,347     $ 2,239,764  
Supplemental Disclosures of Cash Flow Information,
               
Cash Paid During the Periods for:
               
Interest
  $ 3,849     $ 3,855  
Income Taxes
  $ 36,208     $ 305,000  
                 
                 
See Accompanying Notes
               

 
5

 

THE RESERVE PETROLEUM COMPANY
NOTES TO FINANCIAL STATEMENTS

March 31, 2011
(Unaudited)



Note 1 – BASIS OF PRESENTATION

The accompanying balance sheet as of December 31, 2010, which has been derived from audited financial statements, the unaudited interim financial statements and these notes have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, certain disclosures normally included in financial statements prepared in accordance with the accounting principles generally accepted in the United States of America (“GAAP”) have been omitted. The accompanying financial statements and notes thereto should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010.

In the opinion of Management, the accompanying financial statements reflect all adjustments (consisting only of normal recurring accruals), which are necessary for a fair statement of the results of the interim periods presented. The results of operations for the current interim periods are not necessarily indicative of the operating results for the full year.


Note 2 – OTHER INCOME, NET

The following is an analysis of the components of Other Income, Net for the three months ended March 31, 2011 and 2010:

   
Three Months Ended
 
   
March 31,
 
   
2011
   
2010
 
Net Realized and Unrealized Gain on Trading Securities
  $ 26,328     $ 6,749  
Gain on Asset Sales
    1,323       11,170  
Interest Income
    6,288       8,131  
Equity Earnings in Investees
    14,872       12,880  
Other Income
    48       7,409  
Interest and Other Expenses
    (10,409 )     (10,918 )
Other Income, Net
  $ 38,450     $ 35,421  


Note 3 –
INVESTMENTS AND RELATED COMMITMENTS AND CONTINGENT LIABILITIES, INCLUDING GUARANTEES

 
Equity Invstment consists of a 33% ownership interest in Broadway Sixty-Eight, Ltd. (the “Partnership”), an Oklahoma limited partnership, which owns and operates an office building in Oklahoma City, Oklahoma. Although the Company invested as a limited partner, it agreed, jointly and severally, with all other limited partners to reimburse the general partner for any losses suffered from operating the Partnership. The indemnity agreement provides no limitation to the maximum potential future payments. To date, no monies have been paid with respect to this agreement.

 
6

 

Note 4 – PROVISION FOR INCOME TAXES

In 2011 and 2010, the effective tax rate was less than the statutory rate, primarily as the result of allowable depletion for tax purposes in excess of the cost basis in oil and gas properties and the corporate graduated tax rate structure.

Note 5 – ASSET RETIREMENT OBLIGATION

The Company records the fair value of its estimated liability to retire its oil and natural gas producing properties in the period in which it is incurred (typically the date of first sale).  The estimated liability is calculated by obtaining current estimated plugging costs from the well operators and inflating it over the life of the property.  Current year inflation rate used is 4.06%.  When the liability is first recorded, a corresponding increase in the carrying amount of the related long-lived asset is also recorded.  Subsequently, the asset is amortized to expense over the life of the property and the liability is increased annually for the change in its present value which is currently 3.25%.
 
A reconciliation of the Company’s asset retirement obligation liability is as follows:

Bakance at December 31, 2010
  $ 848,631  
Liabilities incurred for new wells
    29,417  
Accretion expense
    6,503  
Balance at March 31, 2011
  $ 884,551  


Note 6 – FAIR VALUE MEASUREMENTS

Inputs used to measure fair value are organized into a fair value hierarchy based on how observable the inputs are. Level 1 inputs consist of quoted prices in active markets for identical assets. Level 2 inputs are inputs, other than quoted prices, for similar assets that are observable. Level 3 inputs are unobservable inputs.

Recurring Fair Value Measurements

Certain of the Company’s assets are reported at fair value in the accompanying balance sheets on a recurring basis. The Company determined the fair value of the available-for-sale securities using quoted market prices for securities with similar maturity dates and interest rates.  At March 31, 2011 and December 31, 2010, the Company’s assets reported at fair value on a recurring basis are summarized as follows:

   
March 31, 2011
 
   
Level 1 Inputs
   
Level 2 Inputs
   
Level 3 Inputs
 
Financial Assets:
                 
Available-for-Sale Securities
  $ ---     $ 12,889,904     $ ---  
Trading Securities
  $ 440,502     $ ---     $ ---  


   
December 31, 2010
 
   
Level 1 Inputs
   
Level 2 Inputs
   
Level 3 Inputs
 
Financial Assets:
                 
Available-for-Sale Securities
  $ ---     $ 13,138,811     $ ---  
Trading Securities
  $ 414,124     $ ---     $ ---  

Non-recurring Fair Value Measurements

The Company’s asset retirement obligation incurred annually represents a non-recurring fair value liability. The fair value of this non-financial liability incurred in the quarter ended March 31, was $29,417 in 2011 and $24,165 in 2010 and was calculated using Level 3 inputs. See Note 5 above for more information about this liability and the inputs used for calculating fair value.

 
7

 

Fair Value of Financial Instruments

The Company’s financial instruments consist primarily of cash and cash equivalents, trade receivables, marketable securities, trade payables and dividends payable. At March 31, 2011 and December 31, 2010, the historical cost of cash and cash equivalents, trade receivables, trade payables and dividends payable are considered to be representative of their respective fair values due to the short-term maturities of these items.


Note 7 – NEW ACCOUNTING PRONOUNCEMENTS

There were no accounting pronouncements issued or that became effective since December 31, 2010 that were directly applicable to the Company.


ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This discussion and analysis should be read with reference to a similar discussion in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010 as filed with the Securities and Exchange Commission (hereinafter, the “2010 Form 10-K”), as well as the financial statements included in this Form 10-Q. 

Forward Looking Statements

This discussion and analysis includes forward looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward looking statements give the Company’s current expectations of future events. They include statements regarding the drilling of oil and gas wells, the production that may be obtained from oil and gas wells, cash flow and anticipated liquidity and expected future expenses.

Although management believes the expectations in these and other forward looking statements are reasonable, we can give no assurance they will prove to have been correct. They can be affected by inaccurate assumptions or by known or unknown risks and uncertainties. Factors that would cause actual results to differ materially from expected results are described under “Forward Looking Statements” on page 8 of the 2010 Form 10-K.

We caution you not to place undue reliance on these forward looking statements, which speak only as of the date of this report, and we undertake no obligation to update this information. You are urged to carefully review and consider the disclosures made in this and our other reports filed with the Securities and Exchange Commission that attempt to advise interested parties of the risks and factors that may affect our business.


Financial Conditions and Results of Operations

Liquidity and Capital Resources

Please refer to the Balance Sheets and the Condensed Statements of Cash Flows in this Form 10-Q to supplement the following discussion. In the first quarter of 2011, the Company continued to fund its business activity through the use of internal sources of cash. The Company had cash provided by operations of $2,080,723 and cash provided by the maturities of available-for-sale securities of $2,098,597. Additional cash was provided by property dispositions of $1,323 and a cash distribution of $3,000 from an investment for total cash provided of $4,183,643. The Company utilized cash for the purchase of available-for-sale securities of $1,849,690; property additions of $653,453; and financing activities of $54,120 for total cash applied of $2,557,263. Cash and cash equivalents increased $1,626,380 (55%) to $4,567,347.

Discussion of Significant Changes in Working Capital. In addition to the changes in cash and cash equivalents discussed above, there were other changes in working capital line items from December 31, 2010. A discussion of these items follows.

Refundable income taxes decreased $177,256 (63%) to $104,576 from $281,832 due to the first quarter 2011 current income tax provision of $213,464 offset by $36,208 of estimated state income tax payments.


 
8

 

Receivables decreased $383,178 (21%) to $1,417,481 in 2011 from $1,800,659 in 2010. The decrease was due primarily to receivables for sales accruals at March 31, 2011 that have declined about $380,000 from the quarter ended December 31, 2010. Additional information about the decrease in sales for 2011 is included in the “Results of Operations” section that follows.

Accounts payable increased $83,322 (47%) to $260,950 from $177,628 due primarily to increased drilling activity in the quarter ended March 31, 2011 compared to the quarter ended December 31, 2010.

Discussion of Significant Changes in the Condensed Statements of Cash Flows. As noted in the first paragraph above, net cash provided by operating activities was $2,080,723 in 2011, an increase of $340,290 (20%) from the comparable period in 2010. The increase was primarily the result of an increase in cash flows from oil and gas sales and declines in operating expenses and income taxes paid. For more information see “Operating Revenues” and “Operating Costs and Expenses” below.

Purchases of available-for-sale securities were $1,849,690 in 2011, a decrease of $247,908 (12%) from the comparable period in 2010. Included in the maturities of these securities during the quarter ended March 31, 2011 of $2,098,597 was a $250,000 certificate of deposit that was not renewed.

Cash applied to the purchase of property additions in 2011 was $653,453, an increase of $138,434 (27%) from cash applied in 2010 of $515,019. For both 2011 and 2010, cash applied to property additions was mostly related to oil and gas exploration and development activity. The increase in property additions for 2011 is mostly due to the increased exploration and development drilling activity in the first quarter of 2011 versus 2010. See the subheading “Exploration Costs” in the “Results of Operations” section below for additional information.

Conclusion. Management is unaware of any additional material trends, demands, commitments, events or uncertainties, which would impact liquidity and capital resources to the extent that the discussion presented in the 2010 Form 10-K would not be representative of the Company’s current position.

Material Changes in Results of Operations Three Months Ended March 31, 2011, Compared with Three Months Ended March 31, 2010

Net income decreased $180,123 (15%) to $992,404 in 2011 from $1,172,527 in 2010. Net income per share, basic and diluted, decreased $1.09 to $6.16 in 2011 from $7.25 in 2010.

A discussion of revenue from oil and gas sales and other significant line items in the statements of income follows.

Operating Revenues. Revenues from oil and gas sales decreased $318,185 (11%) to $2,554,527 in 2011 from $2,872,712 in 2010. Of the $318,185 change, crude oil sales increased $188,498; natural gas sales decreased $467,842; and miscellaneous oil and gas product sales decreased $38,841.

The $188,499 (15%) increase in oil sales to $1,457,404 in 2011 from $1,268,905 in 2010 was the result of an increase in the average price per barrel (Bbl), offset by a decline in the volume sold. The volume of oil sold declined 855 Bbls to 17,095 Bbls in 2011, resulting in a negative volume variance of $60,440. The average price per Bbl increased $14.56 to $85.25 per Bbl in 2011, resulting in a positive price variance of $243,938. The decrease in oil volumes sold was due to a combination of normal production declines from older producing wells offset by increased production on new 2011 wells of about 4,000 Bbls.

The $467,842 (31%) decrease in gas sales to $1,055,843 in 2011 from $1,523,685 in 2010 was the result of a decrease in the average price per thousand cubic feet (MCF) and a decrease in the volume sold. The volume of gas sold decreased 17,177 MCF to 260,586 MCF from 277,763 MCF in 2010, for a negative volume variance of $94,214. This decline was entirely due to a decline in sales from the Robertson County, Texas royalty interest properties discussed below. The average price per MCF decreased $1.43 to $4.05 MCF in 2011 from $5.48 per MCF in 2010, resulting in a negative price variance of $373,628.

Sales from the Robertson County, Texas royalty interest properties provided approximately 45% of the Company’s first quarter 2011 gas sales volumes and about 52% of the first quarter 2010 gas sales volumes. See discussion on page 13 of the 2010 Form 10-K under the subheading “Operating Revenues” for more information about these properties.

For both oil and gas sales, the price change was mostly the result of a change in the spot market prices, upon which most of the Company’s oil and gas sales are based. These spot market prices have had significant fluctuations in the past and these fluctuations are expected to continue.

Sales of miscellaneous oil and gas products were $41,281 in 2011 as compared to $80,122 in 2010.

 
9

 

The Company received lease bonuses of $11,427 in the first quarter of 2011 for leases on its owned minerals. Lease bonuses for the first quarter of 2010 were $45,545. Most of the decrease was due to fewer leases and lease extensions in Texas in 2011 compared to 2010.

Coal royalties were $53,269 for the first quarter of 2011, compared to $56,145 for 2010, for coal mined during these periods on North Dakota leases. See subheading “Operating Revenues” on page 12 of the 2010 Form 10-K for more information about this property.

Operating Costs and Expenses. Operating costs and expenses decreased $104,445 (7%) to $1,339,472 in 2011 from $1,443,917 in 2010. Material line item changes will be discussed and analyzed in the following paragraphs.

Production Costs. Production costs decreased $23,683 (5%) in 2011 to $456,137 from $479,820 in 2010. Of this decrease, production taxes decreased $23,001 (18%) to $107,075 in 2011 from $130,076 in 2010. This decline was due entirely to the decreased oil and gas sales revenues described above in the “Operating Revenues” section.

Exploration Costs. Total exploration expense decreased $171,165 (83%) to $34,622 in 2011 from $205,787 in 2010. The decline was due to no geological and geophysical expense in 2011 versus $200,580 in 2010, offset by an increase in dry hole costs of $29,415 (565%) in 2011 to $34,622 from $5,207 in 2010. The 2010 geological and geophysical expense relates mostly to seismic costs for a Hodgeman County, Kansas prospect.

The following is a summary as of May 6, 2011, updating both exploration and development activity from December 31, 2010, for the period ended March 31, 2011.

The Company participated with its 18% working interest in the completion of three development wells on a Barber County, Kansas prospect (these wells were drilled in 2010). Two of the wells were completed as commercial oil and gas producers and the third is currently being tested.

The Company participated with a 12% working interest in the drilling of two step-out wells on a Woods County, Oklahoma prospect. Completion attempts are in progress on both wells. Prepaid drilling costs for the period were $105,600.

The Company participated in the completion of two step-out wells (10.5% and 9.6% working interests) on a Woods County, Oklahoma prospect (these wells were drilled in 2010). Both wells were completed as commercial oil and gas producers. Total capitalized costs for the period were $62,904.

The Company participated with its 16% working interest in the drilling of a step-out well on a Hodgeman County, Kansas prospect. The well is currently awaiting a completion attempt. An exploratory well will also be drilled in 2011. Prepaid drilling costs for the period were $36,800.

The Company will participate in the drilling of two additional horizontal wells in a Harding County, South Dakota waterflood unit in which it has an 8.3% working interest. Both wells will be drilled in 2011. Total capitalized costs for the unit for the period were $8,765.

In May 2011, the Company purchased a 16% interest in 866.67 net acres of leasehold on a Beaver County, Oklahoma prospect for $52,291. The Company is participating with a 13% working interest in an exploratory well that is currently drilling.

The Company is participating with fee mineral interests in the drilling of two horizontal development wells in Faulkner County, Arkansas. One well, in which the Company has a 3.4% interest, has been drilled and a completion attempt is in progress. The other well (2.2% interest) is currently drilling. Capitalized costs for the period were $138,810, including $73,188 in prepaid drilling costs.

The Company participated with its 16% working interest in the drilling of a step-out well on a Woods County, Oklahoma prospect. A completion attempt is currently in progress. Prepaid drilling costs for the period were $40,000.

The Company participated with its 10.5% working interest in the drilling of an exploratory well on a Custer County, Oklahoma prospect. The well has been completed and is currently being tested. Capitalized costs for the period were $185,112.
 
The Company agreed to purchase a 10.5% interest in 1,553 net acres of leasehold on a Custer County, Oklahoma prospect for $59,321. An exploratory well is planned for 2011.

 
10

 

The Company participated with its 18% working interest in the drilling of two exploratory wells on two Rice County, Kansas prospects. Both wells were completed as dry holes. Dry hole costs for the period were $53,875.

In February 2011, the Company purchased 18% interests in two prospects in Ness and Hodgeman Counties, Kansas for $17,798. The Company participated in the drilling of an exploratory well on each prospect. Completion attempts are in progress on both wells. Prepaid drilling costs for the period were $108,450.

In March 2011, the Company purchased a 10.5% interest in 3,197 net acres of leasehold on a Garfield County, Oklahoma prospect for $117,474. An exploratory horizontal well will be drilled in 2011.

In May 2011, the Company purchased a 7% interest in 640 net acres of leasehold on a Custer County, Oklahoma prospect for $22,400. An exploratory horizontal well will be drilled in 2011.

In May 2011, the Company purchased a 7% interest in 2,529 net acres of leasehold on a Grayson County, Texas prospect for $132,782. An exploratory horizontal well will be drilled in 2011.

Depreciation, Depletion, Amortization and Valuation Provision (DD&A). DD&A increased $84,479 (23%) in 2011 to $452,438 from $367,959 in 2010. The change was mostly the result of an increase of $57,035 in the depreciation of tangible and intangible lease and well costs on successful wells. This increase was due to depreciation of asset costs for successful wells that first produced after March 31, 2010. The remaining $27,444 increase for 2011 was primarily due to specific undeveloped leasehold impairments, with no similar impairments in 2010.

Other Income, Net. This line item increased $3,029 (9%) to $38,450 in 2011 from $35,421 in 2010. See Note 2 to the accompanying financial statements for the analysis of the various components of this line item.

Trading securities gains in 2011 were $26,328 as compared to gains of $6,749 in 2010, an increase of $19,579. In 2011, the Company had realized gains of $6,395 and unrealized gains of $19,933 from adjusting the securities to estimated fair market value. In 2010, the Company had realized gains of $2,456 and unrealized gains of $4,293.

Interest income decreased $1,843 to $6,288 in 2011 from $8,131 in 2010. The decrease was mostly the result of a decrease in the average rate of return on available-for-sale securities in 2011 versus 2010.

Equity earnings in investees increased $1,992 to $14,872 in 2011 from $12,880 in 2010. The following is the Company’s share of earnings for the three months ended March 31, 2011 and 2010:

   
Earnings
 
   
2011
   
2010
 
Broadway Sixty-Eight, Ltd.
  $ 14,872     $ 10,260  
JAR Investments, LLC
    ---       2,620  
    $ 14,872     $ 12,880  

See Note 7 in the 2010 Form 10-K for information about the 2010 disposition of JAR Investments, LLC. See Note 3 to the accompanying financial statements and “Off-Balance Sheet Arrangement” below for additional information, including a guarantee pertaining to Broadway Sixty-Eight, Ltd.

Provision for Income Taxes. The provision for income taxes decreased $67,582 to $325,797 in 2011 from $393,379 in 2010. The decrease was due to the decrease in income before income taxes of $247,705 to $1,318,201 in 2011 from $1,565,906 in 2010. Of the 2011 income tax provision, the estimated current tax expense was $213,464 and the estimated deferred tax expense was $112,333. Of the 2010 income tax provision, the current and deferred expenses were $83,195 and $310,184, respectively. See Note 4 to the accompanying financial statements for additional information on income taxes.

Off-Balance Sheet Arrangement

The Company’s off-balance sheet arrangement relates to Broadway Sixty-Eight, Ltd., an Oklahoma limited partnership. The Company does not have actual or effective control of this entity. Management of this entity could at any time make decisions in its own best interest, which could materially affect the Company’s net income or the value of the Company’s investment.
 
For more information about this entity, see Note 3 to the accompanying financial statements and the subheading “Other Income, Net,” above.

 
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ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.
 
 
ITEM 4T.
CONTROLS AND PROCEDURES

As defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the "Exchange Act"), the term “disclosure controls and procedures” means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer's management, including its principal executive and principal financial officers, or persons performing similar functions as appropriate, to allow timely decisions regarding required disclosure.

The Company’s Principal Executive Officer and Principal Financial Officer evaluated the effectiveness of the Company’s disclosure controls and procedures. Based on this evaluation, they concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2011.

Internal Control over Financial Reporting

As defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act, the term "internal control over financial reporting" means a process designed by, or under the supervision of, the issuer's principal executive and principal financial officers, or persons performing similar functions, and effected by the issuer's board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes, in accordance with generally accepted accounting principles and includes those policies and procedures that:

(1)  
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the issuer;
 

(2)  
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the issuer are being made only in accordance with authorizations of management and directors of the issuer; and
 

(3)  
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the issuer's assets that could have a material adverse effect on the financial statements.
 

The Company's management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. There were no changes in the Company’s internal control over financial reporting during the quarter ended March 31, 2011 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.


 
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PART II – OTHER INFORMATION

ITEM 1.
LEGAL PROCEEDINGS
 
During the current year, first quarter ended March 31, 2011, the Company did not have any material legal proceedings brought against it or its properties.


ITEM 1A.
RISK FACTORS

Not applicable.


ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 
ISSUER PURCHASES OF EQUITY SECURITIES
 
 
Period
 
Total Number
of Shares
Purchased
   
Average
Price Paid
Per Share
   
Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs1
   
Approximate Dollar Value
of Shares that May Yet Be
Purchased Under the
Plans or Programs1
 
 
January 1 to January 31, 2011
    46     $ 160.00       ---       ---  
 
February 1 to February 28, 2011
    39     $ 160.00       ---       ---  
 
March 1 to March 31, 2011
     8     $ 160.00       ---       ---  
 
Total
    93     $ 160.00       ---       ---  

1The Company has no formal equity security purchase program or plan. The Company acts as its own transfer agent, and most purchases
result from requests made by shareholders receiving small odd lot share quantities as the result of probate transfers.

 
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES

None.


ITEM 4.
(REMOVED AND RESERVED)


ITEM 5.
OTHER INFORMATION

None.


 
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 ITEM 6. EXHIBITS
 
The following documents are exhibits to this Form 10-Q. Each document marked by an asterisk is filed electronically herewith.

Exhibit
Number
 
 
Description
 
       
31.1*
 
Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as amended.
 
 
31.2*
 
Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as amended.
 
 
32*
 
Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350.
 



SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized.

       
   
THE RESERVE PETROLEUM COMPANY
 
    (Registrant)  
       
       
   
By:
/s/ Cameron R. McLain
 
Date:  May 16, 2011   Name:
Cameron R. McLain
 
    Title: Principal Executive Officer  
         
   
By:
/s/ James L. Tyler
 
Date:  May 16, 2011   Name:
James L. Tyler
 
    Title: Principal Financial and Accounting Officer  
       

 
 
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