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EX-32.2 - EX-32.2 - PANHANDLE OIL & GAS INCphx-20150630xex322.htm
EX-31.1 - EX-31.1 - PANHANDLE OIL & GAS INCphx-20150630xex311.htm
EX-32.1 - EX-32.1 - PANHANDLE OIL & GAS INCphx-20150630xex321.htm
EX-31.2 - EX-31.2 - PANHANDLE OIL & GAS INCphx-20150630xex312.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, 2015

 

 

 

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 6, 2015:

16,546,376

 

 

 

 

 

 

 

 

 


 

INDEX

 

 

 

 

 

 

Part I

Financial Information

Page

 

 

 

 

 

Item 1

Condensed Financial Statements

 

 

 

 

 

 

Condensed Balance Sheets – June  30, 2015, and September 30, 2014

 

 

 

 

 

 

Condensed Statements of Operations – Three and nine months ended June 30, 2015 and 2014

 

 

 

 

 

 

Statements of Stockholders’ Equity – Nine months ended June 30, 2015 and 2014

 

 

 

 

 

 

Condensed Statements of Cash Flows – Nine months ended June 30, 2015 and 2014

 

 

 

 

 

 

Notes to Condensed Financial Statements

 

 

 

 

 

Item 2

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

11 

 

 

 

 

 

Item 3

Quantitative and qualitative disclosures about market risk

17 

 

 

 

 

 

Item 4

Controls and procedures

18 

 

 

 

 

Part II

Other Information

 

 

 

 

 

 

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

18 

 

 

 

 

 

Item 6

Exhibits and reports on Form 8-K

19 

 

 

 

 

 

Signatures

19 

 

 

 


 

 

The following defined terms are used in this report:

 

“Bbl” barrel.

“Board” board of directors.

“BTU” British Thermal Units.

“Company” Panhandle Oil and Gas Inc.

“completion” the process of treating a drilled well followed by the installation of permanent equipment for the production of crude oil and/or natural gas.

“DD&A” depreciation, depletion and amortization.

“dry hole” exploratory or development well that does not produce crude oil and/or natural gas in economically producible quantities.

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

“exploratory well” a well drilled to find a new field or to find a new reservoir in a field previously found to be productive of crude oil or natural gas in another reservoir.

“FASB” the Financial Accounting Standards Board.

“field” an area consisting of a single reservoir or multiple reservoirs all grouped on, or related to, the same individual geological structural feature or stratigraphic condition. The field name refers to the surface area, although it may refer to both the surface and the underground productive formations.

“G&A” general and administrative costs.

“gross acres” the total acres in which a working interest is owned.

“held by production” or “HBP” an oil and gas lease continued into effect into its secondary term for so long as a producing oil and/or gas well is located on any portion of the leased premises or lands pooled therewith.

“horizontal drilling” a drilling technique used in certain formations where a well is drilled vertically to a certain depth and then drilled horizontally within a specified interval.

“IDC” intangible drilling costs. 

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

“LOE” lease operating expense.

“Mcf” thousand cubic feet.

“Mcfe” 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” million BTU.

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

“net acres” the sum of the fractional working interests owned in gross acres.

“NGL” natural gas liquids.

“NYMEX” New York Mercantile Exchange.

“Panhandle” Panhandle Oil and Gas Inc.

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

“proved reserves” the quantities of crude oil and natural gas, which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible from a given date forward, from known reservoirs and under existing economic conditions, operating methods, and government regulations prior to the time at which contracts providing the right to operate expire, unless evidence indicates renewal is reasonably certain.

“royalty interest” 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” the United States Securities and Exchange Commission.

“undeveloped acreage” lease acreage on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of crude oil and/or natural gas.

“working interest” 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” 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 2015 mean the fiscal year ended September 30, 2015.

 

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, 2015

 

September 30, 2014

Assets

(unaudited)

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

$

925,219 

 

$

509,755 

Oil, NGL and natural gas sales receivables

 

9,455,779 

 

 

16,227,469 

Refundable production taxes

 

585,961 

 

 

625,996 

Derivative contracts, net

 

5,402,106 

 

 

1,650,563 

Other

 

196,397 

 

 

354,828 

Total current assets

 

16,565,462 

 

 

19,368,611 

 

 

 

 

 

 

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

 

 

 

 

 

Producing oil and natural gas properties

 

438,750,515 

 

 

418,237,512 

Non-producing oil and natural gas properties

 

8,703,427 

 

 

10,260,717 

Other

 

1,390,339 

 

 

1,317,725 

 

 

448,844,281 

 

 

429,815,954 

Less accumulated depreciation, depletion and amortization

 

(222,231,830)

 

 

(204,731,661)

Net properties and equipment

 

226,612,451 

 

 

225,084,293 

 

 

 

 

 

 

Investments

 

2,087,629 

 

 

1,936,421 

Derivative contracts, net

 

 -

 

 

251,279 

Total assets

$

245,265,542 

 

$

246,640,604 

 

 

 

 

 

 

Liabilities and Stockholders' Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

$

5,948,158 

 

$

7,034,773 

Deferred income taxes

 

745,100 

 

 

600,100 

Income taxes payable

 

1,041,846 

 

 

523,843 

Accrued liabilities and other

 

1,017,544 

 

 

1,290,858 

Total current liabilities

 

8,752,648 

 

 

9,449,574 

 

 

 

 

 

 

Long-term debt

 

65,500,000 

 

 

78,000,000 

Deferred income taxes

 

40,072,907 

 

 

37,363,907 

Asset retirement obligations

 

2,786,229 

 

 

2,638,470 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

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

 

 

 

 

 

24,000,000 shares authorized, 16,863,004 issued at

 

 

 

 

 

June 30, 2015, and September 30, 2014

 

280,938 

 

 

280,938 

Capital in excess of par value

 

2,879,000 

 

 

2,861,343 

Deferred directors' compensation

 

3,014,024 

 

 

3,110,351 

Retained earnings

 

127,002,060 

 

 

118,794,188 

 

 

133,176,022 

 

 

125,046,820 

Less treasury stock, at cost; 316,628 shares at June 30,

 

 

 

 

 

2015, and 372,364 shares at September 30, 2014

 

(5,022,264)

 

 

(5,858,167)

Total stockholders' equity

 

128,153,758 

 

 

119,188,653 

Total liabilities and stockholders' equity

$

245,265,542 

 

$

246,640,604 

 

All share and per share amounts were adjusted for the 2-for-1 stock split, effective on October 8, 2014.

 

 

(See accompanying notes)

(1)


 

PANHANDLE OIL AND GAS INC.

CONDENSED STATEMENTS OF OPERATIONS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

Nine Months Ended June 30,

 

2015

 

2014

 

2015

 

2014

Revenues:

(unaudited)

 

(unaudited)

Oil, NGL and natural gas sales

$

11,443,590 

 

$

19,534,545 

 

$

43,400,839 

 

$

59,115,928 

Lease bonuses and rentals

 

1,663,402 

 

 

137,476 

 

 

1,945,743 

 

 

353,422 

Gains (losses) on derivative contracts

 

(1,443,472)

 

 

(1,427,165)

 

 

11,706,955 

 

 

(3,511,095)

Income from partnerships

 

85,368 

 

 

130,121 

 

 

373,555 

 

 

565,523 

 

 

11,748,888 

 

 

18,374,977 

 

 

57,427,092 

 

 

56,523,778 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

Lease operating expenses

 

4,071,634 

 

 

2,961,750 

 

 

13,233,980 

 

 

9,930,147 

Production taxes

 

362,548 

 

 

593,941 

 

 

1,384,217 

 

 

1,871,538 

Exploration costs

 

19,911 

 

 

6,956 

 

 

48,368 

 

 

70,140 

Depreciation, depletion and amortization

 

5,729,460 

 

 

5,314,777 

 

 

17,680,069 

 

 

15,562,630 

Provision for impairment

 

132,118 

 

 

 -

 

 

3,532,760 

 

 

430,143 

Loss (gain) on asset sales and other

 

(18,459)

 

 

3,897 

 

 

(27,586)

 

 

31,086 

Interest expense

 

383,047 

 

 

40,697 

 

 

1,195,056 

 

 

40,697 

General and administrative

 

1,565,575 

 

 

1,825,374 

 

 

5,374,206 

 

 

5,349,921 

 

 

12,245,834 

 

 

10,747,392 

 

 

42,421,070 

 

 

33,286,302 

Income (loss) before provision (benefit) for income taxes

 

(496,946)

 

 

7,627,585 

 

 

15,006,022 

 

 

23,237,476 

 

 

 

 

 

 

 

 

 

 

 

 

Provision (benefit) for income taxes

 

232,000 

 

 

2,505,000 

 

 

4,797,000 

 

 

7,534,000 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

$

(728,946)

 

$

5,122,585 

 

$

10,209,022 

 

$

15,703,476 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted earnings (loss) per common share (Note 3)

$

(0.04)

 

$

0.31 

 

$

0.61 

 

$

0.94 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

Common shares

 

16,514,435 

 

 

16,474,040 

 

 

16,504,512 

 

 

16,470,372 

Unissued, directors' deferred compensation shares

 

246,893 

 

 

255,670 

 

 

256,084 

 

 

252,102 

 

 

16,761,328 

 

 

16,729,710 

 

 

16,760,596 

 

 

16,722,474 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per share of

 

 

 

 

 

 

 

 

 

 

 

common stock and paid in period

$

0.04 

 

$

0.04 

 

$

0.12 

 

$

0.12 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

All share and per share amounts were adjusted for the 2-for-1 stock split, effective on October 8, 2014.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(See accompanying notes)

 

 

(2)


 

PANHANDLE OIL AND GAS INC.

STATEMENTS OF STOCKHOLDERS’ EQUITY

 

Nine Months Ended June 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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, 2014

 

16,863,004 

 

$

280,938 

 

$

2,861,343 

 

$

3,110,351 

 

$

118,794,188 

 

(372,364)

 

$

(5,858,167)

 

$

119,188,653 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchase of treasury stock

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

(12,719)

 

 

(242,313)

 

 

(242,313)

Restricted stock awards

 

 -

 

 

 -

 

 

740,043 

 

 

 -

 

 

 -

 

 -

 

 

 -

 

 

740,043 

Net income

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

10,209,022 

 

 -

 

 

 -

 

 

10,209,022 

Dividends ($.12 per share)

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(2,001,150)

 

 -

 

 

 -

 

 

(2,001,150)

Distribution of restricted stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

to officers and directors

 

 -

 

 

 -

 

 

(738,432)

 

 

 -

 

 

 -

 

46,083 

 

 

725,858 

 

 

(12,574)

Distribution of deferred directors'

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

compensation

 

 -

 

 

 -

 

 

16,046 

 

 

(328,415)

 

 

 -

 

22,372 

 

 

352,358 

 

 

39,989 

Increase in deferred directors'

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

compensation charged to expense

 

 -

 

 

 -

 

 

 -

 

 

232,088 

 

 

 -

 

 -

 

 

 -

 

 

232,088 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at June 30, 2015

 

16,863,004 

 

$

280,938 

 

$

2,879,000 

 

$

3,014,024 

 

$

127,002,060 

 

(316,628)

 

$

(5,022,264)

 

$

128,153,758 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

16,863,004 

 

$

280,938 

 

$

2,447,424 

 

$

2,756,526 

 

$

96,454,449 

 

(400,496)

 

$

(6,283,851)

 

$

95,655,486 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchase of treasury stock

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

(7,444)

 

 

(122,044)

 

 

(122,044)

Restricted stock awards

 

 -

 

 

 -

 

 

499,791 

 

 

 -

 

 

 -

 

 -

 

 

 -

 

 

499,791 

Net income

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

15,703,476 

 

 -

 

 

 -

 

 

15,703,476 

Dividends ($.12 per share)

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(1,995,812)

 

 -

 

 

 -

 

 

(1,995,812)

Distribution of restricted stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

to officers and directors

 

 -

 

 

 -

 

 

(320,014)

 

 

 -

 

 

 -

 

22,192 

 

 

337,198 

 

 

17,184 

Increase in deferred directors'

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

compensation charged to expense

 

 -

 

 

 -

 

 

 -

 

 

269,608 

 

 

 -

 

 -

 

 

 -

 

 

269,608 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at June 30, 2014

 

16,863,004 

 

$

280,938 

 

$

2,627,201 

 

$

3,026,134 

 

$

110,162,113 

 

(385,748)

 

$

(6,068,697)

 

$

110,027,689 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

All share and per share amounts were adjusted for the 2-for-1 stock split, effective on October 8, 2014.

 

 

 

 

 

 

 

 

 

 

(See accompanying notes)

 

 

(3)


 

PANHANDLE OIL AND GAS INC.

CONDENSED STATEMENTS OF CASH FLOWS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended June 30,

 

2015

 

2014

Operating Activities

(unaudited)

Net income (loss)

$

10,209,022 

 

$

15,703,476 

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

 

 

 

 

 

by operating activities:

 

 

 

 

 

Depreciation, depletion and amortization

 

17,680,069 

 

 

15,562,630 

Impairment

 

3,532,760 

 

 

430,143 

Provision for deferred income taxes

 

2,854,000 

 

 

5,964,000 

Exploration costs

 

48,368 

 

 

70,140 

Gain from leasing fee mineral acreage

 

(1,973,773)

 

 

(352,930)

Net (gain) loss on sales of assets

 

 -

 

 

152,766 

Income from partnerships

 

(373,555)

 

 

(565,523)

Distributions received from partnerships

 

535,400 

 

 

734,825 

Directors' deferred compensation expense

 

232,088 

 

 

269,608 

Restricted stock awards

 

740,043 

 

 

499,791 

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

 

 

 

 

 

Oil, NGL and natural gas sales receivables

 

6,771,690 

 

 

(1,349,892)

Fair value of derivative contracts

 

(3,500,264)

 

 

2,431,427 

Refundable production taxes

 

40,035 

 

 

281,741 

Other current assets

 

158,431 

 

 

(25,098)

Accounts payable

 

148,384 

 

 

443,438 

Income taxes receivable

 

 -

 

 

(3,160,243)

Income taxes payable

 

518,003 

 

 

(751,992)

Accrued liabilities

 

(272,899)

 

 

100,229 

Total adjustments

 

27,138,780 

 

 

20,735,060 

Net cash provided by operating activities

 

37,347,802 

 

 

36,438,536 

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

Capital expenditures, including dry hole costs

 

(23,613,349)

 

 

(26,693,851)

Acquisition of working interest properties

 

(308,180)

 

 

(86,759,445)

Acquisition of minerals and overrides

 

 -

 

 

(56,250)

Proceeds from leasing fee mineral acreage

 

2,018,707 

 

 

381,280 

Investments in partnerships

 

(313,053)

 

 

(248,066)

Proceeds from sales of assets

 

 -

 

 

92,000 

Net cash used in investing activities

 

(22,215,875)

 

 

(113,284,332)

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

Borrowings under debt agreement

 

23,013,234 

 

 

95,112,044 

Payments of loan principal

 

(35,513,234)

 

 

(17,521,506)

Purchases of treasury stock

 

(242,313)

 

 

(122,044)

Payments of dividends

 

(2,001,150)

 

 

(1,995,812)

Excess tax benefit on stock-based compensation

 

27,000 

 

 

17,000 

Net cash provided by (used in) financing activities

 

(14,716,463)

 

 

75,489,682 

 

 

 

 

 

 

Increase (decrease) in cash and cash equivalents

 

415,464 

 

 

(1,356,114)

Cash and cash equivalents at beginning of period

 

509,755 

 

 

2,867,171 

Cash and cash equivalents at end of period

$

925,219 

 

$

1,511,057 

 

 

 

 

 

 

Supplemental Schedule of Noncash Investing and Financing Activities:

 

 

 

 

 

Additions to asset retirement obligations

$

52,017 

 

$

370,536 

 

 

 

 

 

 

Gross additions to properties and equipment

$

22,686,530 

 

$

109,182,119 

Net (increase) decrease in accounts payable for

 

 

 

 

 

properties and equipment additions

 

1,234,999 

 

 

4,327,427 

Capital expenditures and acquisitions, including dry hole costs

$

23,921,529 

 

$

113,509,546 

 

 

 

 (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 2014 Annual Report on Form 10-K.

 

On September 11, 2014, the Company’s Board of Directors declared a 2-for-1 stock split of the outstanding Class A Common Stock. The Class A Common Stock split was effected in the form of a stock dividend and was distributed on October 8, 2014, to stockholders of record on September 24, 2014. All references to number of shares and per share information in the accompanying financial statements have been adjusted to reflect this stock split. 

 

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, 2015, was 32% as compared to 32% for the nine months ended June 30, 2014.  The effective tax rate for the quarter ended June 30, 2015, was -47% as compared to 33% for the quarter ended June 30, 2014. The higher estimated effective tax rate as of the end of the 2015 third quarter of 32%, as compared to 29% estimated at the end of the 2015 second quarter, resulted in a tax provision recorded during the 2015 third quarter. When a tax provision is recorded in a quarter with net loss (as opposed to a net income) before provision for income taxes, the result is a negative effective tax rate for the quarter, as was the case for the 2015 third quarter. 

 

NOTE 3: Basic and Diluted Earnings (Loss) per Share

 

Basic and diluted earnings (loss) per share is calculated using net income (loss) 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

 

The Company has a $200,000,000 credit facility with a group of banks headed by Bank of Oklahoma (BOK) with a borrowing base of  $120,000,000 and a maturity date of November 30, 2018. 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 $169,668,808 at June 30, 2015. 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, 2015, the effective interest rate was 2.31%.

 

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.

 

(5)


 

On June 19, 2015, the borrowing base was adjusted by the banks from $130,000,000 to $120,000,000. Determinations of the borrowing base are made semi-annually or whenever the banks, in their discretion, believe that there has been a material change in the value of the oil and natural gas properties. 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, 2015, the Company was in compliance with the covenants of the loan agreement.

 

NOTE 5: Deferred Compensation Plan for Non-Employee Directors

 

Annually, non-employee directors may elect to be included in the Deferred Compensation Plan for Non-Employee Directors. The Deferred Compensation Plan for Non-Employee Directors provides that each outside director may individually elect to be credited with future unissued shares of Company common stock rather than cash for all or a portion of the annual retainers, Board meeting fees and committee meeting fees, and may elect to receive shares, when issued, over annual time periods up to ten years. These unissued shares are recorded to each director’s deferred compensation account at the closing market price of the shares (i) on the dates of the Board and committee meetings, and (ii) on the payment dates of the annual retainers. Only upon a director’s retirement, termination, death, or a change-in-control of the Company will the shares recorded for such director under the Deferred Compensation Plan for Non-Employee Directors be issued to the director. The promise to issue such shares in the future is an unsecured obligation of the Company.

 

NOTE 6: Restricted Stock Plan

 

In March 2010, shareholders approved the Panhandle Oil and Gas Inc. 2010 Restricted Stock Plan (2010 Stock Plan), which made available 200,000 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. In March 2014, shareholders approved an amendment to increase the number of shares of common stock reserved for issuance under the 2010 Stock Plan from 200,000 shares to 500,000 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 in May 2014, the board of directors adopted resolutions to allow 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 Amended 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 March 4, 2015, the Company awarded 11,828 non-performance based shares and 35,485 performance based shares of the Company’s common stock as restricted stock to certain officers. The restricted stock vests at the end of a  three year period 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 $213,969 and $432,207, respectively. The Company recognized $243,441 of compensation expense on the award date for performance based shares for officers that were eligible for retirement. The remaining fair value for the performance based awards as well as the entire fair value of the non-performance based awards 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 prices as compared to the Dow Jones Select Oil Exploration and Production Index (DJSOEP) prices utilizing a Monte Carlo model covering the performance period (December 10, 2014, through December 10, 2017).

 

On March 4, 2015, the Company awarded 10,200 non-performance based shares of the Company’s common stock as restricted stock to its non-employee directors. The restricted stock vests quarterly over one year starting on March 31, 2015. 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 $210,018.

 

The following table summarizes the Company’s pre-tax compensation expense for the three and nine months ended June 30, 2015 and 2014, related to the Company’s performance based and non-performance based restricted stock.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

June 30,

 

June 30,

 

2015

 

2014

 

2015

 

2014

Performance based, restricted stock

$

103,747 

 

$

76,520 

 

$

423,053 

 

$

226,800 

Non-performance based, restricted stock

 

105,053 

 

 

161,097 

 

 

316,990 

 

 

272,991 

Total compensation expense

$

208,800 

 

$

237,617 

 

$

740,043 

 

$

499,791 

 

A summary of the Company’s unrecognized compensation cost for its unvested performance based and non-

(6)


 

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.

 

 

 

 

 

 

 

 

 

 

 

As of June 30, 2015

 

Unrecognized Compensation Cost

 

Weighted Average Period (in years)

Performance based, restricted stock

$

278,702 

 

1.80 

Non-performance based, restricted stock

 

359,796 

 

1.54 

Total

$

638,498 

 

 

 

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 retirement of assets 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, 2015 and 2014, the assessment resulted in impairment provisions of $132,118 and $0, respectively. For the nine months ended June 30, 2015 and 2014, the assessment resulted in impairment provisions of $3,532,760 and $430,143, respectively. The impairment provisions for the three and nine months ended June 30, 2015, are principally the result of lower projected future prices for oil, NGL and natural gas. 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, 2015 and 2014, non-producing oil and natural gas properties include costs of $355,567 and $888,505, 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 under its credit facility with Bank of Oklahoma. The derivative instruments have settled or will

(7)


 

settle based on the prices below.

 

Derivative contracts in place as of June 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Production volume

 

 

 

 

Contract period

 

covered per month

 

Index

 

Contract price

Natural gas costless collars

 

 

 

 

 

 

January - December 2015

 

100,000 Mmbtu

 

NYMEX Henry Hub

 

$3.50 floor / $4.10 ceiling

January - December 2015

 

70,000 Mmbtu

 

NYMEX Henry Hub

 

$3.25 floor / $4.00 ceiling

April - September 2015

 

70,000 Mmbtu

 

NYMEX Henry Hub

 

$3.50 floor / $4.05 ceiling

April - October 2015

 

50,000 Mmbtu

 

NYMEX Henry Hub

 

$3.50 floor / $4.00 ceiling

May - October 2015

 

70,000 Mmbtu

 

NYMEX Henry Hub

 

$3.50 floor / $3.95 ceiling

 

 

 

 

 

 

 

Oil costless collars

 

 

 

 

 

 

July - December 2015

 

10,000 Bbls

 

NYMEX WTI

 

$80.00 floor / $86.50 ceiling

 

 

 

 

 

 

 

Oil fixed price swaps

 

 

 

 

 

 

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, 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

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

June - December 2014

 

4,000 Bbls

 

NYMEX WTI

 

$99.40

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

January - June 2015

 

7,000 Bbls

 

NYMEX WTI

 

$96.80

January - June 2015

 

5,000 Bbls

 

NYMEX WTI

 

$97.40

January - June 2015

 

4,000 Bbls

 

NYMEX WTI

 

$97.25

April - December 2015

 

5,000 Bbls

 

NYMEX WTI

 

$94.56

July - December 2015

 

7,000 Bbls

 

NYMEX WTI

 

$93.91

 

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 asset of $5,402,106 as of June 30, 2015, and a net asset of $1,901,842 as of September 30, 2014.

 

 

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

(8)


 

liability in the Condensed Balance Sheets.

 

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, 2015, and September 30, 2014.  The Company has offset all amounts subject to master netting agreements in the Company's Condensed Balance Sheets at June 30, 2015, and September 30, 2014.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2015

 

September 30, 2014

 

 

Fair Value (a)

 

Fair Value (a)

 

 

Commodity Contracts

 

Commodity Contracts