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EX-31.1 - EX-31.1 - PANHANDLE OIL & GAS INCphx-20151231xex311.htm
EX-32.2 - EX-32.2 - PANHANDLE OIL & GAS INCphx-20151231xex322.htm
EX-32.1 - EX-32.1 - PANHANDLE OIL & GAS INCphx-20151231xex321.htm
EX-31.2 - EX-31.2 - PANHANDLE OIL & GAS INCphx-20151231xex312.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

December  31, 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 February 8, 2016:

16,578,411

 

 

 

 

 

 

 

 

 


 

INDEX

 

 

 

 

 

 

Part I

Financial Information

Page

 

 

 

 

 

Item 1

Condensed Financial Statements

 

 

 

 

 

 

Condensed Balance Sheets – December  31, 2015, and September 30, 2015

 

 

 

 

 

 

Condensed Statements of Operations – Three months ended December 31, 2015 and 2014

 

 

 

 

 

 

Statements of Stockholders’ Equity – Three months ended December 31, 2015 and 2014

 

 

 

 

 

 

Condensed Statements of Cash Flows – Three months ended December 31, 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

15 

 

 

 

 

 

Item 4

Controls and procedures

16 

 

 

 

 

Part II

Other Information

 

 

 

 

 

 

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

16 

 

 

 

 

 

Item 6

Exhibits and reports on Form 8-K

16 

 

 

 

 

 

Signatures

17 

 

 

 


 

 

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 economic 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 an 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 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 2016 mean the fiscal year ended September 30, 2016.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

 

September 30, 2015

Assets

(unaudited)

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

$

1,503,691 

 

$

603,915 

Oil, NGL and natural gas sales receivables (net of

 

5,540,926 

 

 

7,895,591 

allowance for uncollectable accounts)

 

 

 

 

 

Refundable income taxes

 

 -

 

 

345,897 

Refundable production taxes

 

474,839 

 

 

476,001 

Derivative contracts, net

 

636,114 

 

 

4,210,764 

Other

 

911,340 

 

 

252,016 

Total current assets

 

9,066,910 

 

 

13,784,184 

 

 

 

 

 

 

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

 

 

 

 

 

Producing oil and natural gas properties

 

441,316,100 

 

 

441,141,337 

Non-producing oil and natural gas properties

 

7,694,635 

 

 

8,293,997 

Other

 

1,055,935 

 

 

1,393,559 

 

 

450,066,670 

 

 

450,828,893 

Less accumulated depreciation, depletion and amortization

 

(234,432,151)

 

 

(228,036,803)

Net properties and equipment

 

215,634,519 

 

 

222,792,090 

 

 

 

 

 

 

Investments

 

173,423 

 

 

2,248,999 

Total assets

$

224,874,852 

 

$

238,825,273 

 

 

 

 

 

 

Liabilities and Stockholders' Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

$

2,397,076 

 

$

2,028,746 

Deferred income taxes

 

863,100 

 

 

1,517,100 

Income taxes payable

 

1,073,551 

 

 

 -

Accrued liabilities and other

 

1,491,077 

 

 

1,330,901 

Total current liabilities

 

5,824,804 

 

 

4,876,747 

 

 

 

 

 

 

Long-term debt

 

57,000,000 

 

 

65,000,000 

Deferred income taxes

 

36,025,907 

 

 

39,118,907 

Asset retirement obligations

 

2,861,160 

 

 

2,824,944 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

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

 

 

 

 

 

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

 

 

 

 

 

December 31, 2015, and September 30, 2015

 

280,938 

 

 

280,938 

Capital in excess of par value

 

2,915,219 

 

 

2,993,119 

Deferred directors' compensation

 

3,170,219 

 

 

3,084,289 

Retained earnings

 

121,309,373 

 

 

125,446,473 

 

 

127,675,749 

 

 

131,804,819 

Less treasury stock, at cost; 284,593 shares at December 31,

 

 

 

 

 

2015, and 302,623 shares at September 30, 2015

 

(4,512,768)

 

 

(4,800,144)

Total stockholders' equity

 

123,162,981 

 

 

127,004,675 

Total liabilities and stockholders' equity

$

224,874,852 

 

$

238,825,273 

 

 

 

(See accompanying notes)

(1)


 

PANHANDLE OIL AND GAS INC.

CONDENSED STATEMENTS OF OPERATIONS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended December 31,

 

2015

 

2014

Revenues:

(unaudited)

Oil, NGL and natural gas sales

$

9,055,288 

 

$

19,519,700 

Lease bonuses and rentals

 

2,425,504 

 

 

29,291 

Gains (losses) on derivative contracts

 

(34,936)

 

 

11,250,265 

Income from partnerships

 

16,269 

 

 

199,914 

 

 

11,462,125 

 

 

30,999,170 

Costs and expenses:

 

 

 

 

 

Lease operating expenses

 

3,566,536 

 

 

4,785,350 

Production taxes

 

321,841 

 

 

622,512 

Exploration costs

 

27,790 

 

 

25,352 

Depreciation, depletion and amortization

 

6,957,652 

 

 

6,139,019 

Provision for impairment

 

3,733,273 

 

 

2,191,997 

Loss (gain) on asset sales and other

 

(269,706)

 

 

(1,982)

Interest expense

 

360,562 

 

 

402,733 

General and administrative

 

1,912,079 

 

 

1,958,428 

Bad debt expense (recovery)

 

19,216 

 

 

 -

 

 

16,629,243 

 

 

16,123,409 

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

 

(5,167,118)

 

 

14,875,761 

 

 

 

 

 

 

Provision (benefit) for income taxes

 

(2,368,000)

 

 

4,642,000 

 

 

 

 

 

 

Net income (loss)

$

(2,799,118)

 

$

10,233,761 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

$

(0.17)

 

$

0.61 

 

 

 

 

 

 

Basic and diluted weighted average shares outstanding:

 

 

 

 

 

Common shares

 

16,563,942 

 

 

16,494,805 

Unissued, directors' deferred compensation shares

 

255,060 

 

 

262,121 

 

 

16,819,002 

 

 

16,756,926 

 

 

 

 

 

 

Dividends declared per share of

 

 

 

 

 

common stock and paid in period

$

0.04 

 

$

0.04 

 

 

 

 

 

 

Dividends declared per share of

 

 

 

 

 

common stock and to be paid in quarter ended March 31

$

0.04 

 

$

0.04 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(See accompanying notes)

(2)


 

 

PANHANDLE OIL AND GAS INC.

STATEMENTS OF STOCKHOLDERS’ EQUITY

 

Three Months Ended December 31, 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, 2015

 

16,863,004 

 

$

280,938 

 

$

2,993,119 

 

$

3,084,289 

 

$

125,446,473 

 

(302,623)

 

$

(4,800,144)

 

$

127,004,675 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchase of treasury stock

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

(7,477)

 

 

(117,165)

 

 

(117,165)

Restricted stock awards

 

 -

 

 

 -

 

 

371,407 

 

 

 -

 

 

 -

 

 -

 

 

 -

 

 

371,407 

Net income (loss)

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(2,799,118)

 

 -

 

 

 -

 

 

(2,799,118)

Dividends ($.08 per share)

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(1,337,982)

 

 -

 

 

 -

 

 

(1,337,982)

Distribution of restricted stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

to officers and directors

 

 -

 

 

 -

 

 

(449,307)

 

 

 -

 

 

 -

 

25,507 

 

 

404,541 

 

 

(44,766)

Increase in deferred directors'

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

compensation charged to expense

 

 -

 

 

 -

 

 

 -

 

 

85,930 

 

 

 -

 

 -

 

 

 -

 

 

85,930 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at December 31, 2015

 

16,863,004 

 

$

280,938 

 

$

2,915,219 

 

$

3,170,219 

 

$

121,309,373 

 

(284,593)

 

$

(4,512,768)

 

$

123,162,981 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended December 31, 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, 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

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

(7,177)

 

 

(120,611)

 

 

(120,611)

Restricted stock awards

 

 -

 

 

 -

 

 

165,111 

 

 

 -

 

 

 -

 

 -

 

 

 -

 

 

165,111 

Net income (loss)

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

10,233,761 

 

 -

 

 

 -

 

 

10,233,761 

Dividends ($.08 per share)

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(1,333,023)

 

 -

 

 

 -

 

 

(1,333,023)

Distribution of restricted stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

to officers and directors

 

 -

 

 

 -

 

 

(436,303)

 

 

 -

 

 

 -

 

23,983 

 

 

377,502 

 

 

(58,801)

Increase in deferred directors'

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

compensation charged to expense

 

 -

 

 

 -

 

 

 -

 

 

101,589 

 

 

 -

 

 -

 

 

 -

 

 

101,589 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at December 31, 2014

 

16,863,004 

 

$

280,938 

 

$

2,590,151 

 

$

3,211,940 

 

$

127,694,926 

 

(355,558)

 

$

(5,601,276)

 

$

128,176,679 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(See accompanying notes)

 

 

(3)


 

PANHANDLE OIL AND GAS INC.

CONDENSED STATEMENTS OF CASH FLOWS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended December 31,

 

2015

 

2014

Operating Activities

(unaudited)

Net income (loss)

$

(2,799,118)

 

$

10,233,761 

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

 

 

 

 

 

by operating activities:

 

 

 

 

 

Depreciation, depletion and amortization

 

6,957,652 

 

 

6,139,019 

Impairment

 

3,733,273 

 

 

2,191,997 

Provision for deferred income taxes

 

(3,747,000)

 

 

1,184,000 

Exploration costs

 

27,790 

 

 

25,352 

Gain from leasing fee mineral acreage

 

(2,425,131)

 

 

(29,162)

Net (gain) loss on sales of assets

 

(271,080)

 

 

 -

Income from partnerships

 

(16,269)

 

 

(199,914)

Distributions received from partnerships

 

36,253 

 

 

256,017 

Directors' deferred compensation expense

 

85,930 

 

 

101,589 

Restricted stock awards

 

371,407 

 

 

165,111 

Bad debt expense (recovery)

 

19,216 

 

 

 -

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

 

 

 

 

 

Oil, NGL and natural gas sales receivables

 

2,335,449 

 

 

2,672,119 

Fair value of derivative contracts

 

3,574,650 

 

 

(10,431,194)

Refundable production taxes

 

1,162 

 

 

13,205 

Other current assets

 

(659,324)

 

 

99,085 

Accounts payable

 

(484,882)

 

 

565,409 

Income taxes receivable

 

345,897 

 

 

 -

Income taxes payable

 

1,073,551 

 

 

2,891,600 

Accrued liabilities

 

(509,208)

 

 

(692,505)

Total adjustments

 

10,449,336 

 

 

4,951,728 

Net cash provided by operating activities

 

7,650,218 

 

 

15,185,489 

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

Capital expenditures, including dry hole costs

 

(1,286,114)

 

 

(14,901,631)

Proceeds from leasing fee mineral acreage

 

2,693,812 

 

 

29,798 

Investments in partnerships

 

44,842 

 

 

(173,103)

Proceeds from sales of assets

 

627,547 

 

 

 -

Net cash provided by (used in) investing activities

 

2,080,087 

 

 

(15,044,936)

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

Borrowings under debt agreement

 

2,958,515 

 

 

12,335,774 

Payments of loan principal

 

(10,958,515)

 

 

(11,620,667)

Purchases of treasury stock

 

(117,165)

 

 

(120,611)

Payments of dividends

 

(668,364)

 

 

(666,199)

Excess tax benefit on stock-based compensation

 

(45,000)

 

 

(59,000)

Net cash provided by (used in) financing activities

 

(8,830,529)

 

 

(130,703)

 

 

 

 

 

 

Increase (decrease) in cash and cash equivalents

 

899,776 

 

 

9,850 

Cash and cash equivalents at beginning of period

 

603,915 

 

 

509,755 

Cash and cash equivalents at end of period

$

1,503,691 

 

$

519,605 

 

 

 

 

 

 

Supplemental Schedule of Noncash Investing and Financing Activities:

 

 

 

 

 

Dividends declared and unpaid

$

669,618 

 

$

666,824 

Additions to asset retirement obligations

$

4,524 

 

$

26,452 

 

 

 

 

 

 

Gross additions to properties and equipment

$

3,455,245 

 

$

13,469,206 

Net (increase) decrease in accounts payable for

 

 

 

 

 

properties and equipment additions

 

(2,169,131)

 

 

1,432,425 

Capital expenditures and acquisitions, including dry hole costs

$

1,286,114 

 

$

14,901,631 

 

 

 

 (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 2015 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. Excess percentage depletion, both federal and Oklahoma, can only be taken in the amount that it exceeds cost depletion which is calculated on a unit-of-production basis.

 

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. Due to the lower expected 2016 oil and natural gas prices, fiscal 2016 percentage depletion is not expected to exceed cost depletion as much as in past years. Therefore, the permanent tax benefit in 2016 is not expected to be as significant as in 2015. 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 quarter ended December 31, 2015, was 46% as compared to 31% for the quarter ended December 31, 2014.  

 

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 current borrowing base of  $100,000,000 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 commodity 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 net book value of $185,342,249 at December 31, 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 December 31, 2015, the effective interest rate was 2.43%.

 

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.

 

On December  10, 2015, the borrowing base was adjusted by the banks from $120,000,000  to $100,000,000. 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 place certain limits on the Company’s incurrence of indebtedness, liens, payment of dividends and acquisitions of treasury stock, and require the Company to maintain certain financial ratios. At December 31, 2015, the Company was in compliance with the covenants of the loan 

(5)


 

agreement and has $43,000,000 of availability under its outstanding credit facility.

 

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 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 December 9, 2015, the Company awarded 13,482 non-performance based shares and 40,446 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 $223,397 and $376,915, respectively. The Company recognized $211,363 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 9, 2015, through December 9, 2018).

 

On December 31, 2015, the Company awarded 12,996 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, 2016. 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 months ended December 31, 2015 and 2014, related to the Company’s performance based and non-performance based restricted stock.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

December 31,

 

2015

 

2014

Performance based, restricted stock

$

269,510 

 

$

64,174 

Non-performance based, restricted stock

 

101,897 

 

 

100,937 

Total compensation expense

$

371,407 

 

$

165,111 

 

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 December 31, 2015

 

Unrecognized Compensation Cost

 

Weighted Average Period (in years)

Performance based, restricted stock

$

329,001 

 

2.28 

Non-performance based, restricted stock

 

593,336 

 

1.91 

Total

$

922,337 

 

 

 

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 drilling and completion costs; 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 to reflect any material changes since the prior report was issued and then utilizes updated projected future price decks current with the period. For the three months ended December 31, 2015 and 2014, the assessment resulted in impairment provisions of $3,733,273 and $2,191,997, respectively. The impairment provision for the three months ended December 31, 2015,  is principally the result of lower projected future prices for oil, NGL and natural gas. A further reduction in oil, NGL and natural gas prices or a decline in reserve volumes may lead to additional impairment in future periods that may be material to the Company.

 

NOTE 9: Capitalized Costs

 

As of December 31, 2015 and 2014, non-producing oil and natural gas properties include costs of $14,520 and $908,872, respectively, on exploratory wells which were drilling and/or testing. 

 

NOTE 10: Derivatives

 

The Company has entered into commodity price derivative agreements including 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 settle based on the prices below.

 

(7)


 

Derivative contracts in place as of December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Production volume

 

 

 

 

Contract period

 

covered per month

 

Index

 

Contract price

Natural gas costless collars

 

 

 

 

 

 

December 2015 - May 2016

 

80,000 Mmbtu

 

NYMEX Henry Hub

 

$2.50 floor / $3.10 ceiling

January - September 2016

 

80,000 Mmbtu

 

NYMEX Henry Hub

 

$2.15 floor / $2.50 ceiling

April - October 2016

 

200,000 Mmbtu

 

NYMEX Henry Hub

 

$1.95 floor / $2.40 ceiling

January - March 2016

 

100,000 Mmbtu

 

NYMEX Henry Hub

 

$1.75 floor / $1.90 ceiling

February - March 2016

 

100,000 Mmbtu

 

NYMEX Henry Hub

 

$2.00 floor / $2.60 ceiling

June - September 2016

 

80,000 Mmbtu

 

NYMEX Henry Hub

 

$2.15 floor / $2.90 ceiling

 

 

 

 

 

 

 

Natural gas fixed price swaps

 

 

 

 

 

 

January - September 2016

 

80,000 Mmbtu

 

NYMEX Henry Hub

 

$2.43

 

 

 

 

 

 

 

 

Derivative contracts in place as of September 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 - 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

 

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 $636,114 as of December 31, 2015, and a net asset of $4,210,764 as of September 30, 2015.

 

 

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 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 December 31, 2015, and September 30, 2015.  The Company has offset all amounts subject to master netting agreements in the Company's Condensed Balance Sheets at December 31, 2015, and September 30, 2015.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

 

September 30, 2015

 

 

Fair Value (a)

 

Fair Value (a)

 

 

Commodity Contracts

 

Commodity Contracts

 

 

Current Assets

 

Current Liabilities

 

Current Assets

Gross amounts recognized

 

$

1,196,007 

 

$

559,893 

 

$

4,210,764 

Offsetting adjustments

 

 

(559,893)

 

 

(559,893)

 

 

 -

Net presentation on Condensed Balance Sheets

 

$

636,114 

 

$

 -

 

$

4,210,764 

(8)


 

 

 (a) See Fair Value Measurements section for further disclosures regarding fair value of financial instruments.

 

The fair value of derivative assets and derivative liabilities is adjusted for credit risk. The impact of credit risk was immaterial for all periods presented.

 

NOTE 11: Fair Value Measurements

 

Fair value is defined as the amount that would be received from the sale of an asset or paid for the transfer of a liability in an orderly transaction between market participants, i.e., an exit price. To estimate an exit price, a three-level hierarchy is used. The fair value hierarchy prioritizes the inputs, which refer broadly to assumptions market participants would use in pricing an asset or a liability, into three levels. Level 1 inputs are unadjusted quoted prices in active markets for identical assets and liabilities. Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the asset or liability. Level 2 inputs include the following: (i) quoted prices for similar assets or liabilities in active markets; (ii) quoted prices for identical or similar assets or liabilities in markets that are not active; (iii) inputs other than quoted prices that are observable for the asset or liability; or (iv) inputs that are derived principally from or corroborated by observable market data by correlation or other means. Level 3 inputs are unobservable inputs for the financial asset or liability.

 

The following table provides fair value measurement information for financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2015.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurement at December 31, 2015

 

 

Quoted Prices in Active Markets

 

Significant Other Observable Inputs

 

Significant Unobservable Inputs

 

Total Fair

 

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Value

Financial Assets (Liabilities):

 

 

 

 

 

 

 

 

 

 

 

 

Derivative Contracts - Swaps

 

$

 -

 

$

679,841 

 

$

 -

 

$

679,841 

Derivative Contracts - Collars

 

$

 -

 

$

 -

 

$

(43,727)

 

$

(43,727)

 

Level 2 – Market Approach - The fair values of the Company’s swaps are based on a third-party pricing model which utilizes inputs that are either readily available in the public market, such as natural gas curves, or can be corroborated from active markets. These values are based upon future prices, time to maturity and other factors. These values are then compared to the values given by our counterparties for reasonableness.

 

Level 3 – The fair values of the Company’s costless collar contracts are based on a pricing model which utilizes inputs that are unobservable or not readily available in the public market. These values are based upon future prices, volatility, time to maturity and other factors. These values are then compared to the values given by our counterparties for reasonableness.

 

The significant unobservable inputs for Level 3 derivative contracts include market volatility and credit risk of counterparties. Changes in these inputs will impact the fair value measurement of our derivative contracts. An increase (decrease) in the volatility of oil and natural gas prices will decrease (increase) the fair value of oil and natural gas derivatives and adverse changes to our counterparties’ creditworthiness will decrease the fair value of our derivatives.

 

The following table represents quantitative disclosures about unobservable inputs for Level 3 Fair Value Measurements.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Instrument Type

 

Unobservable Input

 

Range

 

Weighted Average

 

Fair Value December 31, 2015

 

 

 

 

 

 

 

 

 

 

Oil Collars

 

Oil price volatility curve

 

0.00%

 

0.00%

 

$

426,727 

Natural Gas Collars

 

Natural gas price volatility curve

 

0% - 28.26%

 

17.97%

 

$

(470,454)

 

A reconciliation of the Company’s derivative contracts classified as Level 3 measurements is presented below. All gains and losses are presented on the Gains (losses) on derivative contracts line item on our Statement of Operations.

 

 

(9)


 

 

 

 

 

 

 

 

Derivatives

Balance of Level 3 as of October 1, 2015

$

1,891,249 

Total gains or (losses)

 

 

Included in earnings

 

(3,700,316)

Included in other comprehensive income (loss)

 

 -

Purchases, issuances and settlements

 

1,765,340 

Transfers in and out of Level 3

 

 -

Balance of Level 3 as of December 31, 2015

$

(43,727)

 

The following table presents impairments associated with certain assets that have been measured at fair value on a nonrecurring basis within Level 3 of the fair value hierarchy.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter Ended December 31,

 

 

 

2015

 

2014

 

 

 

Fair Value

 

Impairment

 

Fair Value

 

Impairment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Producing Properties (a)

 

$

3,152,454 

 

$

3,733,273 

 

$

2,322,760 

 

$

2,191,997 

 

 

(a) At the end of each quarter, the Company assesses the carrying value of its producing properties for impairment. This assessment utilizes estimates of future cash flows. Significant judgments and assumptions in these assessments include estimates of future oil and natural gas prices using a forward NYMEX curve adjusted for locational basis differentials, drilling plans, expected capital costs and an applicable discount rate commensurate with risk of the underlying cash flow estimates. These assessments identified certain properties with carrying value in excess of their calculated fair values.

 

At December 31, 2015, and September 30, 2015, the fair value of financial instruments approximated their carrying amounts. Financial instruments include long-term debt, which the valuation is classified as Level 3 and is based on a valuation technique that requires inputs that are both unobservable and significant to the overall fair value measurement. The fair value measurement of our long-term debt is valued using a discounted cash flow model that calculates the present value of future cash flows pursuant to the terms of the debt agreements and applies estimated current market interest rates. The estimated current market interest rates are based primarily on interest rates currently being offered on borrowings of similar amounts and terms. In addition, no valuation input adjustments were considered necessary relating to nonperformance risk for the debt agreements.

 

NOTE 12: Recently Issued Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2014-09-Revenue from Contracts with Customers, which will supersede nearly all existing revenue recognition guidance under GAAP. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. We are evaluating our existing revenue recognition policies to determine whether any contracts in the scope of the guidance will be affected by the new requirements. The standard is effective for us on October 1, 2018. Early adoption is not permitted. The standard allows for either “full retrospective” adoption, meaning the standard is applied to all of the periods presented, or “modified retrospective” adoption, meaning the standard is applied only to the most current period presented in the financial statements. We are currently evaluating the transition method that will be elected.

 

In April 2015, the FASB issued an accounting standards update on the presentation of debt issuance costs. The update requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs is not affected by the update. For public entities, the guidance is effective for reporting periods beginning after December 15, 2015, and it is not expected to have a material impact on our financial statements.

 

In August 2015, the FASB issued an accounting standards update which allows for line-of-credit arrangements to be handled consistently with the presentation of debt issuance costs update issued in April 2015. For public entities, the guidance is effective for reporting periods beginning after December 15, 2015, and it is not expected to have a material impact on our financial statements.

 

In November 2015, the FASB issued an accounting standards update on the presentation of deferred income tax assets and liabilities. The update requires that deferred income tax assets and liabilities be classified as noncurrent in the balance sheet.  For public entities, the guidance is effective for reporting periods beginning after December 15, 2016, including interim periods within those fiscal years. This update is not expected to have a material impact on our financial

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statements.

 

In January 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The new guidance is intended to improve the recognition and measurement of financial instruments. The new guidance is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.

 

Other accounting standards that have been issued or proposed by the FASB, or other standards-setting bodies, that do not require adoption until a future date are not expected to have a material impact on the financial statements upon adoption.

 

ITEM 2  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

 

FORWARD-LOOKING STATEMENTS AND RISK FACTORS

 

Forward-Looking Statements for fiscal 2016 and later periods are made in this document. Such statements represent estimates by management based on the Company’s historical operating trends, its proved oil, NGL and natural gas reserves and other information currently available to management. The Company cautions that the Forward-Looking Statements provided herein are subject to all the risks and uncertainties incident to the acquisition, development and marketing of, and exploration for oil, NGL and natural gas reserves. Investors should also read the other information in this Form 10-Q and the Company’s 2015 Annual Report on Form 10-K where risk factors are presented and further discussed. For all the above reasons, actual results may vary materially from the Forward-Looking Statements and there is no assurance that the assumptions used are necessarily the most likely to occur.

 

LIQUIDITY AND CAPITAL RESOURCES

 

The Company had positive working capital of $3,242,106 at December 31, 2015,  compared to $8,907,437 at September 30, 2015.

 

Liquidity:

 

Cash and cash equivalents were $1,503,691 as of December 31, 2015, compared to $603,915 at September 30, 2015,  an increase of $899,776. Cash flows for the three months ended December 31 are summarized as follows: