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EX-31.1 - EX-31.1 - PANHANDLE OIL & GAS INCphx-20140630ex3111f6367.htm
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EX-32.2 - EX-32.2 - PANHANDLE OIL & GAS INCphx-20140630ex3224858c7.htm
EX-31.2 - EX-31.2 - PANHANDLE OIL & GAS INCphx-20140630ex3123d614d.htm

 

 

 

 

 

 

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

 

 

FORM 10-Q

 

 

 

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the period ended

June  30, 2014

 

 

 

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from

__________to__________                                                             

 

 

 

 

Commission File Number

001-31759

 

 

 

PANHANDLE OIL AND GAS INC.

(Exact name of registrant as specified in its charter)

 

 

 

OKLAHOMA

 

73-1055775

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

 

 

 

 

 

Grand Centre Suite 300, 5400 N Grand Blvd., Oklahoma City, Oklahoma  73112

(Address of principal executive offices)

 

 

 

Registrant's telephone number including area code

 (405) 948-1560

 

 

 

 

 

 

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    

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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

Yes    

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 definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes    

No    

 

 

 

Outstanding shares of Class A Common stock (voting) at August 7, 2014:

8,238,628

 

 

 

 

 

 

 

 

 


 

INDEX

 

 

 

 

 

 

Part I

Financial Information

Page

 

 

 

 

 

Item 1

Condensed Financial Statements

 

 

 

 

 

 

Condensed Balance Sheets – June  30, 2014 and September 30, 2013

 

 

 

 

 

 

Condensed Statements of Operations – Three and nine months ended June  30, 2014 and 2013

 

 

 

 

 

 

Statements of Stockholders’ Equity – Nine months ended June  30, 2014 and 2013

 

 

 

 

 

 

Condensed Statements of Cash Flows – Nine months ended June  30, 2014 and 2013

 

 

 

 

 

 

Notes to Condensed Financial Statements

 

 

 

 

 

Item 2

Management's discussion and analysis of financial condition and results of operations

12 

 

 

 

 

 

Item 3

Quantitative and qualitative disclosures about market risk

17 

 

 

 

 

 

Item 4

Controls and procedures

18 

 

 

 

 

Part II

Other Information

18 

 

 

 

 

 

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

18 

 

 

 

 

 

Item 6

Exhibits and reports on Form 8-K

18 

 

 

 

 

 

Signatures

19 

 

 

 


 

 

The following defined terms are used in this report:

 

“Bbl” means barrel.

 

“Board” means board of directors.

 

“BTU” means British Thermal Units. 

 

“Company” refers to Panhandle Oil and Gas Inc.

 

“DD&A” means depreciation, depletion and amortization.

 

“ESOP” refers to the Panhandle Oil and Gas Inc. Employee Stock Ownership and 401(k) Plan, a tax qualified, defined contribution plan.

 

“FASB” means the Financial Accounting Standards Board.

 

“G&A” means general and administrative costs.

 

“Independent Consulting Petroleum Engineer(s)” or “Independent Consulting Petroleum Engineering Firm” refers to DeGolyer and MacNaughton of Dallas, Texas.

 

“LOE” means lease operating expense.

 

“Mcf” means thousand cubic feet.

 

“Mcfe” means natural gas stated on an Mcf basis and crude oil and natural gas liquids converted to a thousand cubic feet of natural gas equivalent by using the ratio of one Bbl of crude oil or natural gas liquids to six Mcf of natural gas.

 

“Mmbtu” means million BTU.

 

“minerals”,  “mineral acres” or “mineral interests” refers to fee mineral acreage owned in perpetuity by the Company.

 

“NGL” means natural gas liquids.

 

“NYMEX” refers to the New York Mercantile Exchange.

 

“Panhandle” refers to Panhandle Oil and Gas Inc.

 

“play” is a term applied to identified areas with potential oil and/or natural gas reserves.

 

royalty interest” refers to well interests in which the Company does not pay a share of the costs to drill, complete and operate a well, but receives a much smaller proportionate share (as compared to a working interest) of production.

 

 “SEC” refers to the United States Securities and Exchange Commission.

 

“working interest” refers to well interests in which the Company pays a share of the costs to drill, complete and operate a well and receives a proportionate share of production.

 

“WTI” refers to West Texas Intermediate.

 

Fiscal year references 

All references to years in this report, unless otherwise noted, refer to the Company’s fiscal year end of September 30. For example, references to 2014 mean the fiscal year ended September 30, 2014.

 

References to oil and natural gas properties

References to oil and natural gas properties inherently include natural gas liquids associated with such properties.

 

 

 

 

 

 

PART 1   FINANCIAL INFORMATION

PANHANDLE OIL AND GAS INC.

CONDENSED BALANCE SHEETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2014

 

September 30, 2013

Assets

(unaudited)

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

$

1,511,057 

 

$

2,867,171 

Oil, NGL and natural gas sales receivables

 

15,070,653 

 

 

13,720,761 

Refundable income taxes

 

3,160,243 

 

 

 -

Refundable production taxes

 

760,947 

 

 

662,051 

Derivative contracts, net

 

 -

 

 

425,198 

Other

 

3,660,589 

 

 

129,998 

Total current assets

 

24,163,489 

 

 

17,805,179 

 

 

 

 

 

 

Properties and equipment at cost, based on successful efforts accounting:

 

 

 

 

 

Producing oil and natural gas properties

 

408,816,025 

 

 

304,889,145 

Non-producing oil and natural gas properties

 

9,544,840 

 

 

8,932,905 

Other

 

1,305,473 

 

 

737,368 

 

 

419,666,338 

 

 

314,559,418 

Less accumulated depreciation, depletion and amortization

 

(198,439,791)

 

 

(186,641,291)

Net properties and equipment

 

221,226,547 

 

 

127,918,127 

 

 

 

 

 

 

Investments

 

1,653,406 

 

 

1,574,642 

Refundable production taxes

 

159,845 

 

 

540,482 

Total assets

$

247,203,287 

 

$

147,838,430 

 

 

 

 

 

 

Liabilities and Stockholders' Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

$

8,031,138 

 

$

8,409,634 

Derivative contracts, net

 

1,944,091 

 

 

 -

Deferred income taxes

 

9,100 

 

 

127,100 

Income taxes payable

 

 -

 

 

751,992 

Accrued liabilities and other

 

1,111,910 

 

 

1,011,865 

Total current liabilities

 

11,096,239 

 

 

10,300,591 

 

 

 

 

 

 

Long-term debt

 

85,852,794 

 

 

8,262,256 

Deferred income taxes

 

37,308,907 

 

 

31,226,907 

Asset retirement obligations

 

2,855,520 

 

 

2,393,190 

Derivative contracts, net

 

62,138 

 

 

 -

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

Class A voting common stock, $.0166 par value;

 

 

 

 

 

24,000,000 shares authorized, 8,431,502 issued at

 

 

 

 

 

June 30, 2014, and September 30, 2013

 

140,524 

 

 

140,524 

Capital in excess of par value

 

2,767,615 

 

 

2,587,838 

Deferred directors' compensation

 

3,026,134 

 

 

2,756,526 

Retained earnings

 

110,162,113 

 

 

96,454,449 

 

 

116,096,386 

 

 

101,939,337 

Less treasury stock, at cost; 192,874 shares at June 30,

 

 

 

 

 

2014, and 200,248 shares at September 30, 2013

 

(6,068,697)

 

 

(6,283,851)

Total stockholders' equity

 

110,027,689 

 

 

95,655,486 

Total liabilities and stockholders' equity

$

247,203,287 

 

$

147,838,430 

 

(See accompanying notes)

(1)


 

PANHANDLE OIL AND GAS INC.

CONDENSED STATEMENTS OF OPERATIONS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

Nine Months Ended June 30,

 

2014

 

2013

 

2014

 

2013

Revenues:

(unaudited)

 

(unaudited)

Oil, NGL and natural gas sales

$

19,534,545 

 

$

15,827,137 

 

$

59,115,928 

 

$

42,686,935 

Lease bonuses and rentals

 

137,476 

 

 

24,146 

 

 

353,422 

 

 

539,479 

Gains (losses) on derivative contracts

 

(1,427,165)

 

 

1,714,832 

 

 

(3,511,095)

 

 

796,166 

Income from partnerships

 

130,121 

 

 

164,330 

 

 

565,523 

 

 

470,286 

 

 

18,374,977 

 

 

17,730,445 

 

 

56,523,778 

 

 

44,492,866 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

Lease operating expenses

 

2,961,750 

 

 

3,105,709 

 

 

9,930,147 

 

 

9,040,613 

Production taxes

 

593,941 

 

 

460,902 

 

 

1,871,538 

 

 

1,177,341 

Exploration costs

 

6,956 

 

 

25,648 

 

 

70,140 

 

 

60,827 

Depreciation, depletion and amortization

 

5,314,777 

 

 

5,192,544 

 

 

15,562,630 

 

 

17,090,187 

Provision for impairment

 

 -

 

 

7,400 

 

 

430,143 

 

 

225,841 

Loss (gain) on asset sales, interest and other

 

44,594 

 

 

29,789 

 

 

71,783 

 

 

(138,921)

General and administrative

 

1,825,374 

 

 

1,585,285 

 

 

5,349,921 

 

 

5,127,025 

 

 

10,747,392 

 

 

10,407,277 

 

 

33,286,302 

 

 

32,582,913 

Income before provision for income taxes

 

7,627,585 

 

 

7,323,168 

 

 

23,237,476 

 

 

11,909,953 

 

 

 

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

2,505,000 

 

 

2,253,000 

 

 

7,534,000 

 

 

3,669,000 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

$

5,122,585 

 

$

5,070,168 

 

$

15,703,476 

 

$

8,240,953 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted earnings per common share (Note 3)

$

0.61 

 

$

0.61 

 

$

1.88 

 

$

0.99 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

Common shares

 

8,237,020 

 

 

8,163,520 

 

 

8,235,186 

 

 

8,247,642 

Unissued, directors' deferred compensation shares

 

127,835 

 

 

116,762 

 

 

126,051 

 

 

113,259 

 

 

8,364,855 

 

 

8,280,282 

 

 

8,361,237 

 

 

8,360,901 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per share of

 

 

 

 

 

 

 

 

 

 

 

common stock and paid in period

$

0.08 

 

$

0.07 

 

$

0.24 

 

$

0.21 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(See accompanying notes)

 

 

(2)


 

PANHANDLE OIL AND GAS INC.

STATEMENTS OF STOCKHOLDERS’ EQUITY

 

Nine Months Ended June 30, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A voting

 

Capital in

 

Deferred

 

 

 

 

 

 

 

 

 

 

Common Stock

 

Excess of

 

Directors'

 

Retained

 

Treasury

 

Treasury

 

 

 

 

 

Shares

 

Amount

 

Par Value

 

Compensation

 

Earnings

 

Shares

 

Stock

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at September 30, 2013

 

8,431,502 

 

$

140,524 

 

$

2,587,838 

 

$

2,756,526 

 

$

96,454,449 

 

(200,248)

 

$

(6,283,851)

 

$

95,655,486 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchase of treasury stock

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

(3,722)

 

 

(122,044)

 

 

(122,044)

Restricted stock awards

 

 -

 

 

 -

 

 

499,791 

 

 

 -

 

 

 -

 

 -

 

 

 -

 

 

499,791 

Net income

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

15,703,476 

 

 -

 

 

 -

 

 

15,703,476 

Dividends ($.24 per share)

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(1,995,812)

 

 -

 

 

 -

 

 

(1,995,812)

Distribution of restricted stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

to officers and directors

 

 -

 

 

 -

 

 

(320,014)

 

 

 -

 

 

 -

 

11,096 

 

 

337,198 

 

 

17,184 

Increase in deferred directors'

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

compensation charged to expense

 

 -

 

 

 -

 

 

 -

 

 

269,608 

 

 

 -

 

 -

 

 

 -

 

 

269,608 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at June 30, 2014

 

8,431,502 

 

$

140,524 

 

$

2,767,615 

 

$

3,026,134 

 

$

110,162,113 

 

(192,874)

 

$

(6,068,697)

 

$

110,027,689 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended June 30, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A voting

 

Capital in

 

Deferred

 

 

 

 

 

 

 

 

 

 

Common Stock

 

Excess of

 

Directors'

 

Retained

 

Treasury

 

Treasury

 

 

 

 

 

Shares

 

Amount

 

Par Value

 

Compensation

 

Earnings

 

Shares

 

Stock

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at September 30, 2012

 

8,431,502 

 

$

140,524 

 

$

2,020,229 

 

$

2,676,160 

 

$

84,821,395 

 

(181,310)

 

$

(5,806,162)

 

$

83,852,146 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchase of treasury stock

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

(42,206)

 

 

(1,214,638)

 

 

(1,214,638)

Restricted stock awards

 

 -

 

 

 -

 

 

541,937 

 

 

 -

 

 

 -

 

 -

 

 

 -

 

 

541,937 

Net income

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

8,240,953 

 

 -

 

 

 -

 

 

8,240,953 

Dividends ($.21 per share)

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(1,746,217)

 

 -

 

 

 -

 

 

(1,746,217)

Distribution of deferred directors'

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

compensation

 

 -

 

 

 -

 

 

(82,547)

 

 

(297,154)

 

 

 -

 

12,361 

 

 

394,687 

 

 

14,986 

Increase in deferred directors'

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

compensation charged to expense

 

 -

 

 

 -

 

 

 -

 

 

288,759 

 

 

 -

 

 -

 

 

 -

 

 

288,759 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at June 30, 2013

 

8,431,502 

 

$

140,524 

 

$

2,479,619 

 

$

2,667,765 

 

$

91,316,131 

 

(211,155)

 

$

(6,626,113)

 

$

89,977,926 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(See accompanying notes)

 

 

(3)


 

PANHANDLE OIL AND GAS INC.

CONDENSED STATEMENTS OF CASH FLOWS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended June 30,

 

2014

 

2013

Operating Activities

(unaudited)

Net income (loss)

$

15,703,476 

 

$

8,240,953 

Adjustments to reconcile net income (loss) to net cash provided

 

 

 

 

 

by operating activities:

 

 

 

 

 

Depreciation, depletion and amortization

 

15,562,630 

 

 

17,090,187 

Impairment

 

430,143 

 

 

225,841 

Provision for deferred income taxes

 

5,964,000 

 

 

2,651,000 

Exploration costs

 

70,140 

 

 

60,827 

Gain from leasing fee mineral acreage

 

(352,930)

 

 

(538,133)

Net (gain) loss on sales of assets

 

152,766 

 

 

(208,750)

Income from partnerships

 

(565,523)

 

 

(470,286)

Distributions received from partnerships

 

734,825 

 

 

603,249 

Directors' deferred compensation expense

 

269,608 

 

 

288,759 

Restricted stock awards

 

499,791 

 

 

541,937 

Cash provided (used) by changes in assets and liabilities:

 

 

 

 

 

Oil, NGL and natural gas sales receivables

 

(1,349,892)

 

 

(3,885,005)

Fair value of derivative contracts

 

2,431,427 

 

 

(987,249)

Refundable production taxes

 

281,741 

 

 

253,048 

Other current assets

 

(25,098)

 

 

78,889 

Accounts payable

 

443,438 

 

 

(48,038)

Income taxes receivable

 

(3,160,243)

 

 

325,715 

Income taxes payable

 

(751,992)

 

 

50,854 

Accrued liabilities

 

100,229 

 

 

(80,584)

Total adjustments

 

20,735,060 

 

 

15,952,261 

Net cash provided by operating activities

 

36,438,536 

 

 

24,193,214 

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

Capital expenditures, including dry hole costs

 

(26,693,851)

 

 

(20,576,359)

Acquisition of working interest properties

 

(86,759,445)

 

 

 -

Acquisition of minerals and overrides

 

(56,250)

 

 

(783,750)

Proceeds from leasing fee mineral acreage

 

381,280 

 

 

557,196 

Investments in partnerships

 

(248,066)

 

 

(607,702)

Proceeds from sales of assets

 

92,000 

 

 

870,610 

Net cash used in investing activities

 

(113,284,332)

 

 

(20,540,005)

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

Borrowings under debt agreement

 

95,112,044 

 

 

9,353,651 

Payments of loan principal

 

(17,521,506)

 

 

(10,663,399)

Purchases of treasury stock

 

(122,044)

 

 

(1,214,638)

Payments of dividends

 

(1,995,812)

 

 

(1,746,217)

Excess tax benefit on stock-based compensation

 

17,000 

 

 

15,000 

Net cash provided by (used in) financing activities

 

75,489,682 

 

 

(4,255,603)

 

 

 

 

 

 

Increase (decrease) in cash and cash equivalents

 

(1,356,114)

 

 

(602,394)

Cash and cash equivalents at beginning of period

 

2,867,171 

 

 

1,984,099 

Cash and cash equivalents at end of period

$

1,511,057 

 

$

1,381,705 

 

 

 

 

 

 

Supplemental Schedule of Noncash Investing and Financing Activities:

 

 

 

 

 

Additions to asset retirement obligations

$

370,536 

 

$

119,166 

 

 

 

 

 

 

Gross additions to properties and equipment

$

109,182,119 

 

$

21,660,852 

Net (increase) decrease in accounts payable for

 

 

 

 

 

properties and equipment additions

 

4,327,427 

 

 

(300,743)

Capital expenditures and acquisitions, including dry hole costs

$

113,509,546 

 

$

21,360,109 

 

 

 

 (See accompanying notes)

 

(4)


 

PANHANDLE OIL AND GAS INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 1: Accounting Principles and Basis of Presentation

 

The accompanying unaudited condensed financial statements of Panhandle Oil and Gas Inc. have been prepared in accordance with the instructions to Form 10-Q as prescribed by the SEC. Management of the Company believes that all adjustments necessary for a fair presentation of the financial position and results of operations and cash flows for the periods have been included. All such adjustments are of a normal recurring nature. The results are not necessarily indicative of those to be expected for the full year. The Company’s fiscal year runs from October 1 through September 30.

 

Certain amounts and disclosures have been condensed or omitted from these financial statements pursuant to the rules and regulations of the SEC. Therefore, these condensed financial statements should be read in conjunction with the financial statements and related notes thereto included in the Company’s 2013 Annual Report on Form 10-K. 

 

NOTE 2: Income Taxes

 

The Company’s provision for income taxes differs from the statutory rate primarily due to estimated federal and state benefits generated from estimated excess federal and Oklahoma percentage depletion, which are permanent tax benefits.

 

Both excess  federal percentage depletion, which is limited to certain production volumes and by certain income levels, and excess Oklahoma percentage depletion, which has no limitation on production volume, reduce estimated taxable income or add to estimated taxable loss projected for any year. The federal and Oklahoma excess percentage depletion estimates will be updated throughout the year until finalized with detailed well-by-well calculations at fiscal year-end. Federal and Oklahoma excess percentage depletion, when a provision for income taxes is recorded, decreases the effective tax rate, while the effect is to increase the effective tax rate when a benefit for income taxes is recorded. The benefits of federal and Oklahoma excess percentage depletion are not directly related to the amount of pre-tax income recorded in a period. Accordingly, in periods where a recorded pre-tax income or loss is relatively small, the proportional effect of these items on the effective tax rate may be significant. The effective tax rate for the nine months ended June 30, 2014, was 32% as compared to 31% for the nine months ended June 30, 2013.  The effective tax rate for the quarter ended June 30, 2014, was 33% as compared to 31% for the quarter ended June 30, 2013. 

 

NOTE 3: Basic and Diluted Earnings per Share

 

Basic and diluted earnings per share is calculated using net income divided by the weighted average number of voting common shares outstanding, including unissued, vested directors’ deferred compensation shares during the period. 

 

NOTE 4: Long-term Debt

 

On June 17, 2014, the closing date of the Eagle Ford Shale asset acquisition, the Company increased its credit facility with a group of banks headed by Bank of Oklahoma (BOK) from $80,000,000 to $200,000,000, increased the borrowing base from $35,000,000 to $130,000,000 and extended the maturity date to November 30, 2018. The Company incurred $542,500 of debt issuance costs to increase its credit facility. These costs were capitalized and will be amortized over the term of the facility. The credit facility is subject to a semi-annual borrowing base determination, wherein BOK applies their own current pricing forecast and an 8% discount rate to the Company’s proved reserves as calculated by the Company’s Independent Consulting Petroleum Engineering Firm. The facility is secured by certain of the Company’s properties with a carrying value of $163,288,413 at June 30, 2014. The interest rate is based on BOK prime plus from 0.375% to 1.125%, or 30 day LIBOR plus from 1.875% to 2.625%. The election of BOK prime or LIBOR is at the Company’s discretion. The interest rate spread from BOK prime or LIBOR will be charged based on the ratio of the loan balance to the borrowing base. The interest rate spread from LIBOR or the prime rate increases as a larger percent of the borrowing base is advanced. At June 30, 2014, the effective interest rate was 2.58%.

 

The Company’s debt is recorded at the carrying amount on its balance sheet. The carrying amount of the Company’s revolving credit facility approximates fair value because the interest rates are reflective of market rates.

 

Since the bank charges a customary non-use fee of 0.25% annually of the unused portion of the borrowing base, the Company has not requested the bank to increase its borrowing base beyond $130,000,000. Determinations of the borrowing base are made semi-annually or whenever the bank, in its sole discretion, believes that there has been a material change in the value of the oil and natural gas properties. While the Company believes the availability could be increased (if needed), increases are at the discretion of the bank. The loan agreement contains customary covenants which, among other things, require periodic financial and reserve reporting and limit the Company’s incurrence of indebtedness, liens, dividends and acquisitions of treasury stock, and require the Company to maintain certain financial ratios. At June 30, 2014, the Company

(5)


 

was in compliance with the covenants of the BOK agreement.

 

NOTE 5: Deferred Compensation Plan for Directors

 

The Company has a deferred compensation plan for non-employee directors (the Plan). The Plan provides that each eligible director can individually elect to be credited with future unissued shares of Company stock rather than cash for Board and committee chair retainers, Board meeting fees and Board committee meeting fees. These unissued shares are credited to each director’s deferred fee account at the closing market price of the stock on the date earned. Upon retirement, termination or death of the director, or upon a change in control of the Company, the unissued shares credited under the Plan will be issued to the director.

 

NOTE 6: Restricted  Stock  Plan

 

On March 11, 2010, shareholders approved the Panhandle Oil and Gas Inc. 2010 Restricted Stock Plan (2010 Stock Plan), which made available 100,000 shares of common stock to provide a long-term component to the Company’s total compensation package for its officers and to further align the interest of its officers with those of its shareholders. On March 5, 2014, shareholders approved an amendment to increase the number of shares of common stock reserved for issuance under the 2010 Stock Plan from 100,000 shares to 250,000 shares and to allow the grant of shares of restricted stock to our directors. The 2010 Stock Plan, as amended, is designed to provide as much flexibility as possible for future grants of restricted stock so that the Company can respond as necessary to provide competitive compensation in order to retain, attract and motivate directors and officers of the Company and to align their interests with those of the Company’s shareholders.

 

Effective May 14, 2014, the board of directors approved for management, at their discretion, to purchase the Company’s common stock, from time to time, up to an amount equal to the aggregate number of shares of common stock awarded pursuant to the Company’s 2010 Restricted Stock Plan, contributed by the Company to its ESOP and credited to the accounts of directors pursuant to the Deferred Compensation Plan for Non-Employee Directors.

 

On December 21, 2013, the Company awarded 6,093 non-performance based shares and 18,279 performance based shares of the Company’s common stock as restricted stock to certain officers. The restricted stock vests at the end of three years and contains nonforfeitable rights to receive dividends and voting rights during the vesting period. The non-performance and performance based shares had a fair value on their award date of $199,788 and $294,889, respectively, and will be recognized as compensation expense ratably over the vesting period. The fair value of the performance based shares on their award date is calculated by simulating the Company’s stock price and stock price return utilizing a Monte Carlo model covering the period from the grant date through the end of the performance period (December 21, 2013, through December 21, 2016).

 

On May 29, 2014, the Company awarded 3,918 non-performance based shares of the Company’s common stock as restricted stock to its non-employee directors.  One-quarter of the restricted stock vested immediately on May 29, 2014, and an additional quarter vested on June 30, 2014. The remainder will vest over the next six months. The restricted stock contains nonforfeitable rights to receive dividends and voting rights during the vesting period. These non-performance based shares had a fair value on their award date of $210,120.

 

The following table summarizes the Company’s pre-tax compensation expense for the three and nine months ended June 30, 2014 and 2013, related to the Company’s performance based and non-performance based restricted stock.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

June 30,

 

June 30,

 

2014

 

2013

 

2014

 

2013

Performance based, restricted stock

$

76,520 

 

$

81,822 

 

$

226,800 

 

$

263,583 

Non-performance based, restricted stock

 

161,097 

 

 

60,208 

 

 

272,991 

 

 

278,354 

Total compensation expense

$

237,617 

 

$

142,030 

 

$

499,791 

 

$

541,937 

 

A summary of the Company’s unrecognized compensation cost for its unvested performance based and non-performance based restricted stock and the weighted-average periods over which the compensation cost is expected to be recognized are shown in the following table.

 

 

(6)


 

 

 

 

 

 

 

 

 

 

As of June 30, 2014

 

Unrecognized Compensation Cost

 

Weighted Average Period (in years)

Performance based, restricted stock

$

350,815 

 

1.62 

Non-performance based, restricted stock

 

364,545 

 

1.26 

Total

$

715,360 

 

 

 

Upon vesting, shares are expected to be issued out of shares held in treasury.

 

NOTE 7: Oil, NGL and Natural Gas Reserves

 

Management considers the estimation of the Company’s crude oil, NGL and natural gas reserves to be the most significant of its judgments and estimates. Changes in crude oil, NGL and natural gas reserve estimates affect the Company’s calculation of DD&A, provision for abandonment and assessment of the need for asset impairments. On an annual basis, with a semi-annual update, the Company’s Independent Consulting Petroleum Engineer, with assistance from Company staff, prepares estimates of crude oil, NGL and natural gas reserves based on available geological and seismic data, reservoir pressure data, core analysis reports, well logs, analogous reservoir performance history, production data and other available sources of engineering, geological and geophysical information. Between periods in which reserves would normally be calculated, the Company updates the reserve calculations utilizing appropriate prices for the current period. The estimated oil, NGL and natural gas reserves were computed using the 12-month average price calculated as the unweighted arithmetic average of the first-day-of-the-month oil, NGL and natural gas price for each month within the 12-month period prior to the balance sheet date, held flat over the life of the properties. However, projected future crude oil, NGL and natural gas pricing assumptions are used by management to prepare estimates of crude oil, NGL and natural gas reserves and future net cash flows used in asset impairment assessments and in formulating management’s overall operating decisions. Crude oil, NGL and natural gas prices are volatile and affected by worldwide production and consumption and are outside the control of management.

 

NOTE 8: Impairment

 

All long-lived assets, principally oil and natural gas properties, are monitored for potential impairment when circumstances indicate that the carrying value of the asset may be greater than its estimated future net cash flows. The evaluations involve significant judgment since the results are based on estimated future events, such as inflation rates, future sales prices for oil, NGL and natural gas, future production costs, estimates of future oil, NGL and natural gas reserves to be recovered and the timing thereof, the economic and regulatory climates and other factors. The need to test a property for impairment may result from significant declines in sales prices or unfavorable adjustments to oil, NGL and natural gas reserves. Between periods in which reserves would normally be calculated, the Company updates the reserve calculations utilizing updated projected future price decks current with the period. For the three months ended June 30, 2014 and 2013, the assessment resulted in impairment provisions of $0 and $7,400, respectively. For the nine months ended June 30, 2014 and 2013, the assessment resulted in impairment provisions of $430,143 and $225,841, respectively. A reduction in oil, NGL or natural gas prices, or a decline in reserve volumes, could lead to additional impairment that may be material to the Company.

 

NOTE 9: Capitalized Costs

 

As of June 30, 2014 and 2013, non-producing oil and natural gas properties include costs of $888,505 and $0, respectively, on exploratory wells which were drilling and/or testing. 

 

NOTE 10: Derivatives

 

The Company has entered into fixed swap contracts and costless collar contracts. These instruments are intended to reduce the Company’s exposure to short-term fluctuations in the price of oil and natural gas. Fixed swap contracts set a fixed price and provide payments to the Company if the index price is below the fixed price, or require payments by the Company if the index price is above the fixed price. Collar contracts set a fixed floor price and a fixed ceiling price and provide payments to the Company if the index price falls below the floor or require payments by the Company if the index price rises above the ceiling. These contracts cover only a portion of the Company’s natural gas and oil production and provide only partial price protection against declines in natural gas and oil prices. These derivative instruments may expose the Company to risk of financial loss and limit the benefit of future increases in prices. All of the Company’s derivative contracts are with Bank of Oklahoma and are secured. The derivative instruments have settled or will settle based on the prices below.

 

(7)


 

Derivative contracts in place as of June 30, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Production volume

 

 

 

 

Contract period

 

covered per month

 

Index

 

Contract price

Natural gas costless collars

 

 

 

 

 

 

July - December 2014

 

140,000 Mmbtu

 

NYMEX Henry Hub

 

$3.75 floor / $4.50 ceiling

 

 

 

 

 

 

 

Natural gas fixed price swaps

 

 

 

 

 

 

July - December 2014

 

140,000 Mmbtu

 

NYMEX Henry Hub

 

$4.11

April - September 2014

 

50,000 Mmbtu

 

NYMEX Henry Hub

 

$4.20

April - September 2014

 

50,000 Mmbtu

 

NYMEX Henry Hub

 

$4.18

April - September 2014

 

50,000 Mmbtu

 

NYMEX Henry Hub

 

$4.21

May - October 2014

 

30,000 Mmbtu

 

NYMEX Henry Hub

 

$4.30

October - December 2014

 

40,000 Mmbtu

 

NYMEX Henry Hub

 

$4.61

 

 

 

 

 

 

 

Oil costless collars

 

 

 

 

 

 

January - December 2014

 

4,000 Bbls

 

NYMEX WTI

 

$85.00 floor / $100.00 ceiling

July - December 2014

 

5,000 Bbls

 

NYMEX WTI

 

$90.00 floor / $97.00 ceiling

 

 

 

 

 

 

 

Oil fixed price swaps

 

 

 

 

 

 

January - December 2014

 

3,000 Bbls

 

NYMEX WTI

 

$94.50

July - December 2014

 

4,000 Bbls

 

NYMEX WTI

 

$95.25

July - December 2014

 

5,000 Bbls

 

NYMEX WTI

 

$94.20

January - March 2015

 

6,000 Bbls

 

NYMEX WTI

 

$92.85

June - December 2014

 

4,000 Bbls

 

NYMEX WTI

 

$99.40

January - June 2015

 

7,000 Bbls

 

NYMEX WTI

 

$96.80

January - June 2015

 

5,000 Bbls

 

NYMEX WTI

 

$97.40

April - December 2015

 

5,000 Bbls

 

NYMEX WTI

 

$94.56

July - December 2015

 

7,000 Bbls

 

NYMEX WTI

 

$93.91

 

 

Derivative contracts in place as of September 30, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Production volume

 

 

 

 

Contract period

 

covered per month

 

Index

 

Contract price

Natural gas costless collars

 

 

 

 

 

 

February - December 2013

 

80,000 Mmbtu

 

NYMEX Henry Hub

 

$3.75 floor / $4.25 ceiling

February - December 2013

 

50,000 Mmbtu

 

NYMEX Henry Hub

 

$3.75 floor / $4.30 ceiling

February - December 2013

 

100,000 Mmbtu

 

NYMEX Henry Hub

 

$3.75 floor / $4.05 ceiling

November 2013 - April 2014

 

160,000 Mmbtu

 

NYMEX Henry Hub

 

$4.00 floor / $4.55 ceiling

 

 

 

 

 

 

 

Natural gas fixed price swaps

 

 

 

 

 

 

March - October 2013

 

100,000 Mmbtu

 

NYMEX Henry Hub

 

$3.505

March - October 2013

 

70,000 Mmbtu

 

NYMEX Henry Hub

 

$3.400

April - December 2013

 

40,000 Mmbtu

 

NYMEX Henry Hub

 

$3.655

May - November 2013

 

100,000 Mmbtu

 

NYMEX Henry Hub

 

$4.320

 

 

 

 

 

 

 

Oil costless collars

 

 

 

 

 

 

March - December 2013

 

3,000 Bbls

 

NYMEX WTI

 

$90.00 floor / $102.00 ceiling

March - December 2013

 

4,000 Bbls

 

NYMEX WTI

 

$90.00 floor / $101.50 ceiling

May - December 2013

 

2,000 Bbls

 

NYMEX WTI

 

$90.00 floor / $97.50 ceiling

January - June 2014

 

4,000 Bbls

 

NYMEX WTI

 

$90.00 floor / $101.50 ceiling

 

 

 

 

 

 

 

Oil fixed price swaps

 

 

 

 

 

 

September - December 2013

 

4,000 Bbls

 

NYMEX WTI

 

$105.25

 

 

(8)


 

The Company has elected not to complete all of the documentation requirements necessary to permit these derivative contracts to be accounted for as cash flow hedges. The Company’s fair value of derivative contracts was a net liability of $2,006,229 as of June 30, 2014, and a net asset of $425,198 as of September 30, 2013.

 

 

The fair value amounts recognized for the Company’s derivative contracts executed with the same counterparty under a master netting arrangement may be offset. The Company has the choice to offset or not, but that choice must be applied consistently. A master netting arrangement exists if the reporting entity has multiple contracts with a single counterparty that are subject to a contractual agreement that provides for the net settlement of all contracts through a single payment in a single currency in the event of default on or termination of any one contract. Offsetting the fair values recognized for the derivative contracts outstanding with a single counterparty results in the net fair value of the transactions being reported as an asset or a liability in the Condensed Balance Sheets. The Company has chosen to present the fair values of its derivative contracts under master netting agreements using a net fair value presentation.

 

The following table summarizes and reconciles the Company's derivative contracts’ fair values at a gross level back to net fair value presentation on the Company's Condensed Balance Sheets at June 30, 2014, and September 30, 2013. The Company adopted the accounting guidance requiring additional disclosures for balance sheet offsetting of assets and liabilities effective January 1, 2013. The Company has offset all amounts subject to master netting agreements in the Company's Condensed Balance Sheets at June 30, 2014, and September 30, 2013.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6/30/2014

 

9/30/2013

 

 

Fair Value (a)

 

Fair Value (a)