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EX-32.2 - EX-32.2 - PANHANDLE OIL & GAS INCphx-ex322_6.htm
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EX-31.2 - EX-31.2 - PANHANDLE OIL & GAS INCphx-ex312_9.htm
EX-31.1 - EX-31.1 - PANHANDLE OIL & GAS INCphx-ex311_8.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, 2017

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

incorporation or organization)

(I.R.S. Employer

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, smaller reporting company, or an emerging growth company.  See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer

    

Accelerated filer

    

Non-accelerated filer

    

Smaller reporting company

    

Emerging growth company    

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    

 

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

Outstanding shares of Class A Common stock (voting) at February 8, 2018: 16,708,960


INDEX

 

 

Part I

 

Financial Information

Page

 

 

 

 

 

 

 

 

Item 1

 

Condensed Financial Statements

1

 

 

 

 

 

 

 

 

 

 

Condensed Balance Sheets – December 31, 2017, and September 30, 2017

1

 

 

 

 

 

 

 

 

 

 

Condensed Statements of Operations – Three months ended December 31, 2017 and 2016

2

 

 

 

 

 

 

 

 

 

 

Statements of Stockholders’ Equity – Three months ended December 31, 2017 and 2016

3

 

 

 

 

 

 

 

 

 

 

Condensed Statements of Cash Flows – Three months ended December 31, 2017 and 2016

4

 

 

 

 

 

 

 

 

 

 

Notes to Condensed Financial Statements

5

 

 

 

 

 

 

 

 

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

17

 

 

 

 

 

 

 

 

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.

“EBITDA” earnings before interest, taxes, depreciation and amortization (including impairment). This is a Non-GAAP measure.

“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 smaller proportionate share (as compared to a working interest) of production.

“SEC” the United States Securities and Exchange Commission.

“undeveloped acreage” 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 2018 mean the fiscal year ended September 30, 2018.

Fiscal quarter references

All references to quarters in this report, unless otherwise noted, refer to the Company’s fiscal quarter based on a fiscal year end of September 30. For example, references to first quarter mean the quarter of October 1 through December 31.

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, 2017

 

 

September 30, 2017

 

Assets

 

(unaudited)

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

568,427

 

 

$

557,791

 

Oil, NGL and natural gas sales receivables (net of allowance for uncollectable accounts)

 

 

7,355,784

 

 

 

7,585,485

 

Refundable income taxes

 

 

465,371

 

 

 

489,945

 

Assets held for sale

 

 

-

 

 

 

557,750

 

Derivative contracts, net

 

 

-

 

 

 

544,924

 

Other

 

 

312,733

 

 

 

253,480

 

Total current assets

 

 

8,702,315

 

 

 

9,989,375

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

Producing oil and natural gas properties

 

 

435,482,235

 

 

 

434,571,516

 

Non-producing oil and natural gas properties

 

 

7,424,270

 

 

 

7,428,927

 

Other

 

 

1,497,079

 

 

 

1,067,894

 

 

 

 

444,403,584

 

 

 

443,068,337

 

Less accumulated depreciation, depletion and amortization

 

 

(249,047,342

)

 

 

(246,483,979

)

Net properties and equipment

 

 

195,356,242

 

 

 

196,584,358

 

 

 

 

 

 

 

 

 

 

Investments

 

 

242,083

 

 

 

170,486

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

204,300,640

 

 

$

206,744,219

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

1,063,042

 

 

$

1,847,230

 

Derivative contracts, net

 

 

334,877

 

 

 

-

 

Accrued liabilities and other

 

 

1,783,169

 

 

 

1,690,789

 

Total current liabilities

 

 

3,181,088

 

 

 

3,538,019

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

 

50,400,000

 

 

 

52,222,000

 

Deferred income taxes, net

 

 

18,313,007

 

 

 

31,051,007

 

Asset retirement obligations

 

 

3,223,872

 

 

 

3,196,889

 

Derivative contracts, net

 

 

-

 

 

 

28,765

 

 

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Class A voting common stock, $.0166 par value; 24,000,000 shares authorized,

   16,863,004 issued at December 31, 2017, and September 30, 2017

 

 

280,938

 

 

 

280,938

 

Capital in excess of par value

 

 

2,186,538

 

 

 

2,726,444

 

Deferred directors' compensation

 

 

3,568,293

 

 

 

3,459,909

 

Retained earnings

 

 

125,767,547

 

 

 

113,330,216

 

 

 

 

131,803,316

 

 

 

119,797,507

 

Less treasury stock, at cost; 154,044 shares at December 31, 2017, and 184,988 shares

   at September 30, 2017

 

 

(2,620,643

)

 

 

(3,089,968

)

Total stockholders' equity

 

 

129,182,673

 

 

 

116,707,539

 

Total liabilities and stockholders' equity

 

$

204,300,640

 

 

$

206,744,219

 

 

(See accompanying notes)

(1)


 

PANHANDLE OIL AND GAS INC.

CONDENSED STATEMENTS OF OPERATIONS

 

 

 

Three Months Ended December 31,

 

 

 

2017

 

 

2016

 

Revenues:

 

(unaudited)

 

Oil, NGL and natural gas sales

 

$

12,887,419

 

 

$

8,899,218

 

Lease bonuses and rentals

 

 

96,959

 

 

 

837,958

 

Gains (losses) on derivative contracts

 

 

(493,852

)

 

 

(2,700,533

)

 

 

 

12,490,526

 

 

 

7,036,643

 

Costs and expenses:

 

 

 

 

 

 

 

 

Lease operating expenses

 

 

3,626,709

 

 

 

3,049,415

 

Production taxes

 

 

488,990

 

 

 

367,845

 

Depreciation, depletion and amortization

 

 

5,275,824

 

 

 

4,834,263

 

Loss (gain) on asset sales and other

 

 

(295,658

)

 

 

(4,339

)

Interest expense

 

 

431,579

 

 

 

292,369

 

General and administrative

 

 

1,888,143

 

 

 

1,842,482

 

 

 

 

11,415,587

 

 

 

10,382,035

 

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

 

 

1,074,939

 

 

 

(3,345,392

)

 

 

 

 

 

 

 

 

 

Provision (benefit) for income taxes

 

 

(12,710,000

)

 

 

(1,107,000

)

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

13,784,939

 

 

$

(2,238,392

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

0.81

 

 

$

(0.13

)

 

 

 

 

 

 

 

 

 

Basic and diluted weighted average shares outstanding:

 

 

 

 

 

 

 

 

Common shares

 

 

16,685,032

 

 

 

16,604,149

 

Unissued, directors' deferred compensation shares

 

 

263,255

 

 

 

274,035

 

 

 

 

16,948,287

 

 

 

16,878,184

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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, 2017

 

 

 

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, 2017

 

 

16,863,004

 

 

$

280,938

 

 

$

2,726,444

 

 

$

3,459,909

 

 

$

113,330,216

 

 

 

(184,988

)

 

$

(3,089,968

)

 

$

116,707,539

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

13,784,939

 

 

 

-

 

 

 

-

 

 

 

13,784,939

 

Purchase of treasury stock

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(13,404

)

 

 

(272,100

)

 

 

(272,100

)

Issuance of treasury shares to ESOP

 

 

-

 

 

 

-

 

 

 

2,009

 

 

 

-

 

 

 

-

 

 

 

283

 

 

 

4,726

 

 

 

6,735

 

Restricted stock awards

 

 

-

 

 

 

-

 

 

 

194,050

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

194,050

 

Dividends ($.08 per share)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(1,347,608

)

 

 

-

 

 

 

-

 

 

 

(1,347,608

)

Distribution of restricted stock

   to officers and directors

 

 

-

 

 

 

-

 

 

 

(735,965

)

 

 

-

 

 

 

-

 

 

 

44,065

 

 

 

736,699

 

 

 

734

 

Increase in deferred directors'

   compensation charged to

   expense

 

 

-

 

 

 

-

 

 

 

-

 

 

 

108,384

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

108,384

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at December 31, 2017

 

 

16,863,004

 

 

$

280,938

 

 

$

2,186,538

 

 

$

3,568,293

 

 

$

125,767,547

 

 

 

(154,044

)

 

$

(2,620,643

)

 

$

129,182,673

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended December 31, 2016

 

 

 

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, 2016

 

 

16,863,004

 

 

$

280,938

 

 

$

3,191,056

 

 

$

3,403,213

 

 

$

112,482,284

 

 

 

(262,708

)

 

$

(4,165,672

)

 

$

115,191,819

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(2,238,392

)

 

 

-

 

 

 

-

 

 

 

(2,238,392

)

Purchase of treasury stock

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(17,119

)

 

 

(407,677

)

 

 

(407,677

)

Restricted stock awards

 

 

-

 

 

 

-

 

 

 

180,412

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

180,412

 

Dividends ($.08 per share)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(1,340,359

)

 

 

-

 

 

 

-

 

 

 

(1,340,359

)

Distribution of restricted stock

   to officers and directors

 

 

-

 

 

 

-

 

 

 

(895,402

)

 

 

-

 

 

 

-

 

 

 

56,166

 

 

 

895,949

 

 

 

547

 

Increase in deferred directors'

   compensation charged to

   expense

 

 

-

 

 

 

-

 

 

 

-

 

 

 

105,818

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

105,818

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at December 31, 2016

 

 

16,863,004

 

 

$

280,938

 

 

$

2,476,066

 

 

$

3,509,031

 

 

$

108,903,533

 

 

 

(223,661

)

 

$

(3,677,400

)

 

$

111,492,168

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(See accompanying notes)

(3)


 

PANHANDLE OIL AND GAS INC.

CONDENSED STATEMENTS OF CASH FLOWS

 

 

 

Three months ended December 31,

 

 

 

2017

 

 

2016

 

Operating Activities

 

(unaudited)

 

Net income (loss)

 

$

13,784,939

 

 

$

(2,238,392

)

 

 

 

 

 

 

 

 

 

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation, depletion and amortization

 

 

5,275,824

 

 

 

4,834,263

 

Provision for deferred income taxes

 

 

(12,738,000

)

 

 

(1,107,000

)

Gain from leasing fee mineral acreage

 

 

(96,843

)

 

 

(837,732

)

Proceeds from leasing fee mineral acreage

 

 

98,692

 

 

 

847,578

 

Net (gain) loss on sales of assets

 

 

272,236

 

 

 

-

 

Directors' deferred compensation expense

 

 

108,384

 

 

 

105,818

 

Restricted stock awards

 

 

194,050

 

 

 

180,412

 

Other

 

 

(3,237

)

 

 

298

 

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

 

 

 

 

 

 

 

 

Oil, NGL and natural gas sales receivables

 

 

229,701

 

 

 

(239,558

)

Fair value of derivative contracts

 

 

851,036

 

 

 

2,516,263

 

Other current assets

 

 

(59,253

)

 

 

145,640

 

Accounts payable

 

 

(86,404

)

 

 

(90,474

)

Income taxes receivable

 

 

24,574

 

 

 

(14,166

)

Other non-current assets

 

 

(79,552

)

 

 

-

 

Accrued liabilities

 

 

(577,564

)

 

 

(419,299

)

Total adjustments

 

 

(6,586,356

)

 

 

5,922,043

 

Net cash provided by operating activities

 

 

7,198,583

 

 

 

3,683,651

 

 

 

 

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(4,984,880

)

 

 

(2,174,523

)

Investments in partnerships

 

 

5,393

 

 

 

(17,571

)

Proceeds from sales of assets

 

 

557,750

 

 

 

-

 

Net cash provided (used) by investing activities

 

 

(4,421,737

)

 

 

(2,192,094

)

 

 

 

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

 

 

 

Borrowings under debt agreement

 

 

8,272,575

 

 

 

4,436,304

 

Payments of loan principal

 

 

(10,094,795

)

 

 

(4,836,304

)

Purchases of treasury stock

 

 

(272,100

)

 

 

(407,677

)

Payments of dividends

 

 

(671,890

)

 

 

(670,104

)

Net cash provided (used) by financing activities

 

 

(2,766,210

)

 

 

(1,477,781

)

 

 

 

 

 

 

 

 

 

Increase (decrease) in cash and cash equivalents

 

 

10,636

 

 

 

13,776

 

Cash and cash equivalents at beginning of period

 

 

557,791

 

 

 

471,213

 

Cash and cash equivalents at end of period

 

$

568,427

 

 

$

484,989

 

 

 

 

 

 

 

 

 

 

Supplemental Schedule of Noncash Investing and Financing Activities:

 

 

 

 

 

 

 

 

Dividends declared and unpaid

 

$

675,718

 

 

$

670,255

 

Additions to asset retirement obligations

 

$

12,026

 

 

$

594

 

 

 

 

 

 

 

 

 

 

Gross additions to properties and equipment

 

$

4,287,096

 

 

$

3,370,574

 

 

 

 

 

 

 

 

 

 

Net (increase) decrease in accounts payable for properties and equipment additions

 

 

697,784

 

 

 

(1,196,051

)

Capital expenditures and acquisitions

 

$

4,984,880

 

 

$

2,174,523

 

 

 

(See accompanying notes)

(4)


 

PANHANDLE OIL AND GAS INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1: Basis of Presentation and Accounting Principles

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 2017 Annual Report on Form 10-K.

New Accounting Pronouncements yet to be Adopted

In February 2016, the FASB issued its new lease accounting guidance in ASU 2016-02, Leases (Topic 842). Under the new guidance, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: 1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and 2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. The new lease guidance simplified the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. Lessees will no longer be provided with a source of off-balance sheet financing. The guidance is effective for us beginning October 1, 2019, including interim periods within the fiscal year. Early application is permitted for all public business entities upon issuance. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. We are assessing the potential impact that this standard will have on our financial statements.

In January 2016, the FASB issued ASU 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 us beginning October 1, 2018, including interim periods within the fiscal year. We are assessing the potential impact that this standard will have on our financial statements.

In May 2014, the FASB issued 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 beginning October 1, 2018. 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 and utilizes a cumulative effect adjustment to retained earnings in the period of adoption to account for prior period effects rather than restating previously reported results. Panhandle intends to use the modified retrospective method upon adoption. We are currently evaluating the potential impact that this standard will have on our financial statements.

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.

NOTE 2: Income Taxes

The Tax Cuts and Jobs Act was enacted on December 22, 2017. The Act reduces the US federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings. As of December 31, 2017, we have not completed our accounting for the tax effects of enactment of the Act; however, in certain cases, as described below, we have made a reasonable estimate of the

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effects on our existing deferred tax balances. Based on these estimates, we recognized a provisional amount, which is included as a component of income tax expense from continuing operations. In all cases, we will continue to make and refine our calculations as additional analysis is completed.

We remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. However, we are still analyzing certain aspects of the Act and refining our calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. The provisional amount recorded related to the remeasurement of our deferred tax balance was $12,652,000.

The Company has a year end of September 30. Because this differs from a normal calendar year end, we have calculated the current year’s federal tax provision using a blended rate of 24.53% to adjust for one quarter of our fiscal year being under the old rate of 35% and the remaining three quarters being under the new rate of 21%. The impact of using a blended rate versus the old rate in the current quarter resulted in a federal tax benefit of $112,546.

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. The adoption of ASU 2016-09 (in 2017) will also increase volatility in the effective tax rate going forward. Excess tax benefits and deficiencies of stock based compensation will be recognized as income tax expense (benefit) in the statement of operations prospectively versus additional paid in capital in the equity section of the balance sheet as was previously required.

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 expected for the year, decreases the effective tax rate, while the effect is to increase the effective tax rate when a benefit for income taxes is expected for the year. The benefits of federal and Oklahoma excess percentage depletion and excess tax benefits and deficiencies of stock based compensation are not directly related to the amount of pre-tax income (loss) 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, 2017, was a 1,182% benefit as compared to a 33% benefit for the quarter ended December 31, 2016.

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 $80,000,000 and a maturity date of November 30, 2022. The credit facility is subject to a semi-annual borrowing base determination, wherein BOK applies their commodity pricing forecast to the Company’s reserve forecast and determines a borrowing base. The facility is secured by certain of the Company’s properties with a net book value of $148,600,818 at December 31, 2017. The interest rate is based on BOK prime plus from 0.375% to 1.250%, or 30 day LIBOR plus from 1.875% to 2.750%. 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 the ratio of loan balance to the borrowing base increases. At December 31, 2017, the effective interest rate was 3.62%.

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.

Determinations of the borrowing base are made semi-annually (usually June and December) 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. In October 2017, during the renegotiation of our credit facility, the borrowing base was redetermined by the banks and left unchanged at $80,000,000. 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. In addition, the Company is required to maintain certain financial ratios, a current ratio (as defined by the bank agreement – current assets includes availability under outstanding credit facility) of no less than 1.0 to 1.0 and a funded debt to EBITDA (trailing twelve months as defined by the bank agreement – traditional EBITDA with the unrealized gain or loss on derivative contracts also removed from

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earnings) of no more than 4.0 to 1.0. At December 31, 2017, the Company was in compliance with the covenants of the loan agreement and has $29,600,000 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. 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 be issued under the Deferred Compensation Plan for Non-Employee Directors. Directors may elect to receive shares, when issued, over annual time periods up to ten years. 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 as treasury shares 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 12, 2017, the Company awarded 9,700 non-performance based shares and 29,099 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 non-forfeitable 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 $203,700 and $330,043, respectively. The fair value for the non-performance and the 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 12, 2017, through December 12, 2020).

On December 31, 2017, the Company awarded 8,515 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, 2018. The restricted stock contains non-forfeitable 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 $174,985.

The following table summarizes the Company’s pre-tax compensation expense for the three months ended December 31, 2017 and 2016, related to the Company’s performance based and non-performance based restricted stock.

 

 

 

Three Months Ended

 

 

 

December 31,

 

 

 

2017

 

 

2016

 

Performance based, restricted stock

 

$

96,665

 

 

$

79,216

 

Non-performance based, restricted stock

 

 

97,385

 

 

 

101,196

 

Total compensation expense

 

$

194,050

 

 

$

180,412

 

 

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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.

 

 

 

As of December 31, 2017

 

 

 

Unrecognized Compensation Cost

 

 

Weighted Average Period (in years)

 

Performance based, restricted stock

 

$

500,996

 

 

 

2.38

 

Non-performance based, restricted stock

 

 

521,426

 

 

 

1.92

 

Total

 

$

1,022,422

 

 

 

 

 

 

NOTE 7: Properties and Equipment

Divestitures

During the first quarter of 2018, the Company sold 79 non-core marginal wells for $557,750 and recorded a loss on the sales of $272,236. The total gross asset value that was removed from the Balance Sheets due to these sales was approximately $17.9 million. All of the wells included in the Assets held for sale line item on the Balance Sheets at September 30, 2017, were sold during the first quarter of 2018.

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.

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 both the three months ended December 31, 2017 and 2016, the assessment resulted in no impairment provisions on producing properties . A significant 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.

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NOTE 8: 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.

Derivative contracts in place as of December 31, 2017

 

 

 

Production volume

 

 

 

 

Contract period

 

covered per month

 

Index

 

Contract price

Natural gas costless collars

 

 

 

 

 

 

January - March 2018

 

100,000 Mmbtu

 

NYMEX Henry Hub

 

$3.50 floor / $3.95 ceiling

January - March 2018

 

150,000 Mmbtu

 

NYMEX Henry Hub

 

$3.40 floor / $3.95 ceiling

January - December 2018

 

40,000 Mmbtu

 

NYMEX Henry Hub

 

$2.75 floor / $3.35 ceiling

January - December 2018

 

40,000 Mmbtu

 

NYMEX Henry Hub

 

$2.75 floor / $3.30 ceiling

April - December 2018

 

50,000 Mmbtu

 

NYMEX Henry Hub

 

$2.80 floor / $3.15 ceiling

Natural gas fixed price swaps

 

 

 

 

 

 

January - March 2018

 

50,000 Mmbtu

 

NYMEX Henry Hub

 

$3.700

January - March 2018

 

75,000 Mmbtu

 

NYMEX Henry Hub

 

$3.575

January - March 2018

 

100,000 Mmbtu

 

NYMEX Henry Hub

 

$3.520

January - December 2018

 

50,000 Mmbtu

 

NYMEX Henry Hub

 

$3.080

April - December 2018

 

40,000 Mmbtu

 

NYMEX Henry Hub

 

$2.910

July - December 2018

 

100,000 Mmbtu

 

NYMEX Henry Hub

 

$2.835

Oil costless collars

 

 

 

 

 

 

January - June 2018