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EX-32.2 - EX-32.2 - PANHANDLE OIL & GAS INCphx-ex322_10.htm
EX-32.1 - EX-32.1 - PANHANDLE OIL & GAS INCphx-ex321_8.htm
EX-31.2 - EX-31.2 - PANHANDLE OIL & GAS INCphx-ex312_9.htm
EX-31.1 - EX-31.1 - PANHANDLE OIL & GAS INCphx-ex311_7.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, 2019

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

Securities registered pursuant in Section 12(b) of the Act:

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Class A Common Stock, $0.01666 par value

 

PHX

 

New York Stock Exchange

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 5, 2020: 16,344,169


INDEX

 

 

Part I

 

Financial Information

Page

 

 

 

 

 

 

 

 

Item 1

 

Condensed Financial Statements

1

 

 

 

 

 

 

 

 

 

 

Condensed Balance Sheets – December 31, 2019, and September 30, 2019

1

 

 

 

 

 

 

 

 

 

 

Condensed Statements of Operations – Three months ended December 31, 2019 and 2018  

2

 

 

 

 

 

 

 

 

 

 

Statements of Stockholders’ Equity – Three months ended December 31, 2019 and 2018

3

 

 

 

 

 

 

 

 

 

 

Condensed Statements of Cash Flows – Three months ended December 31, 2019 and 2018

4

 

 

 

 

 

 

 

 

 

 

Notes to Condensed Financial Statements

5

 

 

 

 

 

 

 

 

Item 2

 

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

13

 

 

 

 

 

 

 

 

Item 3

 

Quantitative and qualitative disclosures about market risk

18

 

 

 

 

 

 

 

 

Item 4

 

Controls and procedures

18

 

 

 

 

 

 

Part II

 

Other Information

 

 

 

 

 

 

 

 

 

Item 2

 

Unregistered Sales of Equity Securities and Use of Proceeds

19

 

 

 

 

 

 

 

 

Item 6

 

Exhibits

19

 

 

 

 

 

 

 

 

Signatures

20

 


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.

“GAAP” generally accepted accounting principles.

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

“held by production” or “HBP” an oil and natural gas lease continued into effect into its secondary term for so long as a producing oil and/or natural 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.

“NRI” net revenue interest.

“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 2020 mean the fiscal year ended September 30, 2020.

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, 2019

 

 

September 30, 2019

 

Assets

 

(unaudited)

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

268,707

 

 

$

6,160,691

 

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

 

 

4,321,486

 

 

 

4,377,646

 

Refundable income taxes

 

 

1,917,515

 

 

 

1,505,442

 

Derivative contracts, net

 

 

774,106

 

 

 

2,256,639

 

Other

 

 

776,672

 

 

 

177,037

 

Total current assets

 

 

8,058,486

 

 

 

14,477,455

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

Producing oil and natural gas properties

 

 

358,110,146

 

 

 

354,718,398

 

Non-producing oil and natural gas properties

 

 

19,131,441

 

 

 

14,599,023

 

Other

 

 

1,731,037

 

 

 

1,722,080

 

 

 

 

378,972,624

 

 

 

371,039,501

 

Less accumulated depreciation, depletion and amortization

 

 

(260,155,491

)

 

 

(259,314,590

)

Net properties and equipment

 

 

118,817,133

 

 

 

111,724,911

 

 

 

 

 

 

 

 

 

 

Investments

 

 

202,172

 

 

 

205,076

 

 

 

 

 

 

 

 

 

 

Derivative contracts, net

 

 

371

 

 

 

237,505

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

127,078,162

 

 

$

126,644,947

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

670,175

 

 

$

665,160

 

Accrued liabilities and other

 

 

1,824,408

 

 

 

2,433,466

 

Total current liabilities

 

 

2,494,583

 

 

 

3,098,626

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

 

35,000,000

 

 

 

35,425,000

 

Deferred income taxes, net

 

 

6,634,007

 

 

 

5,976,007

 

Asset retirement obligations

 

 

2,840,639

 

 

 

2,835,781

 

 

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Class A voting common stock, $0.01666 par value; 24,000,000 shares authorized;

   16,897,306 issued at December 31, 2019, and at September 30, 2019

 

 

281,509

 

 

 

281,509

 

Capital in excess of par value

 

 

3,033,678

 

 

 

2,967,984

 

Deferred directors' compensation

 

 

2,641,993

 

 

 

2,555,781

 

Retained earnings

 

 

82,420,516

 

 

 

81,848,301

 

 

 

 

88,377,696

 

 

 

87,653,575

 

Less treasury stock, at cost; 553,137 shares at December 31, 2019, and 558,051 shares

   at September 30, 2019

 

 

(8,268,763

)

 

 

(8,344,042

)

Total stockholders' equity

 

 

80,108,933

 

 

 

79,309,533

 

Total liabilities and stockholders' equity

 

$

127,078,162

 

 

$

126,644,947

 

 

(See accompanying notes)

(1)


 

PANHANDLE OIL AND GAS INC.

CONDENSED STATEMENTS OF OPERATIONS

 

 

 

Three Months Ended December 31,

 

 

 

2019

 

 

2018

 

Revenues:

 

(unaudited)

 

Oil, NGL and natural gas sales

 

$

7,593,838

 

 

$

12,210,719

 

Lease bonuses and rental income

 

 

527,699

 

 

 

514,557

 

Gains (losses) on derivative contracts

 

 

(817,894

)

 

 

4,506,780

 

Gain on asset sales

 

 

3,272,888

 

 

 

9,096,938

 

 

 

 

10,576,531

 

 

 

26,328,994

 

Costs and expenses:

 

 

 

 

 

 

 

 

Lease operating expenses

 

 

2,564,672

 

 

 

3,104,570

 

Production taxes

 

 

327,281

 

 

 

608,951

 

Depreciation, depletion and amortization

 

 

2,955,701

 

 

 

3,813,686

 

Interest expense

 

 

370,665

 

 

 

539,370

 

General and administrative

 

 

2,223,028

 

 

 

1,938,840

 

Loss on asset sales and other expense (income)

 

 

(10,930

)

 

 

16,637

 

 

 

 

8,430,417

 

 

 

10,022,054

 

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

 

 

2,146,114

 

 

 

16,306,940

 

 

 

 

 

 

 

 

 

 

Provision (benefit) for income taxes

 

 

254,000

 

 

 

3,571,000

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

1,892,114

 

 

$

12,735,940

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted earnings (loss) per common share (Note 5)

 

$

0.11

 

 

$

0.75

 

 

 

 

 

 

 

 

 

 

Basic and diluted weighted average shares outstanding:

 

 

 

 

 

 

 

 

Common shares

 

 

16,339,673

 

 

 

16,745,076

 

Unissued, directors' deferred compensation shares

 

 

180,864

 

 

 

213,932

 

 

 

 

16,520,537

 

 

 

16,959,008

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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, 2019

 

 

 

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, 2019

 

 

16,897,306

 

 

$

281,509

 

 

$

2,967,984

 

 

$

2,555,781

 

 

$

81,848,301

 

 

 

(558,051

)

 

$

(8,344,042

)

 

$

79,309,533

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,892,114

 

 

 

-

 

 

 

-

 

 

 

1,892,114

 

Purchase of treasury stock

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(632

)

 

 

(7,635

)

 

 

(7,635

)

Restricted stock awards

 

 

-

 

 

 

-

 

 

 

148,515

 

 

 

-

 

 

 

 

 

 

 

-

 

 

 

-

 

 

 

148,515

 

Dividends ($0.08 per share)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(1,319,899

)

 

 

-

 

 

 

-

 

 

 

(1,319,899

)

Distribution of restricted stock

   to officers and directors

 

 

-

 

 

 

-

 

 

 

(82,821

)

 

 

-

 

 

 

-

 

 

 

5,546

 

 

 

82,914

 

 

 

93

 

Increase in deferred directors'

   compensation charged to

   expense

 

 

-

 

 

 

-

 

 

 

-

 

 

 

86,212

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

86,212

 

Balances at December 31, 2019

 

 

16,897,306

 

 

$

281,509

 

 

$

3,033,678

 

 

$

2,641,993

 

 

$

82,420,516

 

 

 

(553,137

)

 

$

(8,268,763

)

 

$

80,108,933

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended December 31, 2018

 

 

 

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, 2018

 

 

16,896,881

 

 

$

281,502

 

 

$

2,824,691

 

 

$

2,950,405

 

 

$

125,266,945

 

 

 

(145,467

)

 

$

(2,558,338

)

 

 

128,765,205

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

12,735,940

 

 

 

-

 

 

 

-

 

 

 

12,735,940

 

Purchase of treasury stock

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(74,457

)

 

 

(1,140,559

)

 

 

(1,140,559

)

Restricted stock awards

 

 

-

 

 

 

-

 

 

 

159,469

 

 

 

-

 

 

 

 

 

 

 

-

 

 

 

-

 

 

 

159,469

 

Dividends ($0.08 per share)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(1,347,789

)

 

 

-

 

 

 

-

 

 

 

(1,347,789

)

Distribution of restricted stock

   to officers and directors

 

 

425

 

 

 

7

 

 

 

(159,869

)

 

 

-

 

 

 

-

 

 

 

9,194

 

 

 

160,022

 

 

 

160

 

Distribution of deferred

   directors' compensation

 

 

-

 

 

 

-

 

 

 

(8

)

 

 

8

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Increase in deferred directors'

   compensation charged to

   expense

 

 

-

 

 

 

-

 

 

 

-

 

 

 

80,287

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

80,287

 

Balances at December 31, 2018

 

 

16,897,306

 

 

$

281,509

 

 

$

2,824,283

 

 

$

3,030,700

 

 

$

136,655,096

 

 

 

(210,730

)

 

$

(3,538,875

)

 

$

139,252,713

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(See accompanying notes)

(3)


 

PANHANDLE OIL AND GAS INC.

CONDENSED STATEMENTS OF CASH FLOWS

 

 

 

Three months ended December 31,

 

 

 

2019

 

 

2018

 

Operating Activities

 

(unaudited)

 

Net income (loss)

 

$

1,892,114

 

 

$

12,735,940

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

Depreciation, depletion and amortization

 

 

2,955,701

 

 

 

3,813,686

 

Provision for deferred income taxes

 

 

658,000

 

 

 

4,314,000

 

Gain from leasing fee mineral acreage

 

 

(523,384

)

 

 

(514,557

)

Proceeds from leasing fee mineral acreage

 

 

537,777

 

 

 

528,374

 

Net (gain) loss on sales of assets

 

 

(3,272,888

)

 

 

(9,096,938

)

Directors' deferred compensation expense

 

 

86,213

 

 

 

80,287

 

Fair value of derivative contracts

 

 

1,719,667

 

 

 

(6,206,181

)

Restricted stock awards

 

 

148,515

 

 

 

159,469

 

Other

 

 

8,896

 

 

 

7,163

 

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

 

 

 

 

 

 

 

 

Oil, NGL and natural gas sales receivables

 

 

56,160

 

 

 

(77,414

)

Other current assets

 

 

(407,610

)

 

 

(261,308

)

Accounts payable

 

 

(73,831

)

 

 

(2,971

)

Income taxes receivable

 

 

(412,073

)

 

 

(754,153

)

Other non-current assets

 

 

1,090

 

 

 

28,899

 

Accrued liabilities

 

 

(1,275,906

)

 

 

(744,553

)

Total adjustments

 

 

206,327

 

 

 

(8,726,197

)

Net cash provided by operating activities

 

 

2,098,441

 

 

 

4,009,743

 

 

 

 

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(105,265

)

 

 

(1,445,939

)

Acquisition of minerals and overrides

 

 

(10,172,594

)

 

 

(423,000

)

Proceeds from sales of assets

 

 

3,376,049

 

 

 

9,096,938

 

Net cash provided (used) by investing activities

 

 

(6,901,810

)

 

 

7,227,999

 

 

 

 

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

 

 

 

Borrowings under debt agreement

 

 

4,774,297

 

 

 

3,832,557

 

Payments of loan principal

 

 

(5,199,297

)

 

 

(13,332,557

)

Purchases of treasury stock

 

 

(7,635

)

 

 

(1,140,559

)

Payments of dividends

 

 

(655,980

)

 

 

(673,892

)

Net cash provided (used) by financing activities

 

 

(1,088,615

)

 

 

(11,314,451

)

 

 

 

 

 

 

 

 

 

Increase (decrease) in cash and cash equivalents

 

 

(5,891,984

)

 

 

(76,709

)

Cash and cash equivalents at beginning of period

 

 

6,160,691

 

 

 

532,502

 

Cash and cash equivalents at end of period

 

$

268,707

 

 

$

455,793

 

 

 

 

 

 

 

 

 

 

Supplemental Schedule of Noncash Investing and Financing Activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared and unpaid

 

$

663,919

 

 

$

673,897

 

Additions to asset retirement obligations

 

$

4

 

 

$

5,371

 

 

 

 

 

 

 

 

 

 

Gross additions to properties and equipment

 

$

10,164,680

 

 

$

1,894,741

 

 

 

 

 

 

 

 

 

 

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

 

 

113,179

 

 

 

(25,802

)

Capital expenditures and acquisitions

 

$

10,277,859

 

 

$

1,868,939

 

 

 

(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 2019 Annual Report on Form 10-K.

Adoption of New Accounting Pronouncements

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which will supersede the lease requirements in Topic 840, Leases by requiring lessees to recognize lease assets and lease liabilities classified as operating leases on the balance sheet. See Note 2: Impact of ASC 842 Adoption for further details related the Company’s adoption of this standard.

The FASB recently issued ASU 2018-11, Leases (Topic 842), Targeted Improvements, which would allow entities to apply the transition provisions of the new standard at the adoption date instead of at the earliest comparative period presented in the financial statements, and will also allow entities to continue to apply the legacy guidance in Topic 840, including disclosure requirements, in the comparative period presented in the year the new leases standard is adopted. Entities that elect this option would still adopt the new leases standard using a modified retrospective transition method, but would recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption, if any, rather than in the earliest period presented.

New Accounting Pronouncements yet to be Adopted

In June 2016, the FASB issued ASU 2016-13, Financial InstrumentsCredit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This standard changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The standard will replace the currently required incurred loss approach with an expected loss model for instruments measured at amortized cost. The standard is effective for interim and annual periods beginning after December 15, 2019, and shall be applied using a modified retrospective approach resulting in a cumulative effect adjustment to retained earnings upon adoption. This standard will be effective for Panhandle starting October 1, 2020. The Company is evaluating the new standard and is currently in the process of estimating its financial statement impact at this time; however, the impact is not expected to be material. Historically, the Company's credit losses on oil, NGL and natural gas sales receivables have been immaterial.

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.

(5)


 

NOTE 2: Impact of ASC 842 Adoption

On October 1, 2019, the Company adopted ASU 2016-02, Leases (Topic 842) using the modified retrospective method. This ASU, as subsequently amended by ASU 2081-01, ASU 2018-10, ASU 2018-11, ASU 2018-20, requires the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under the previous guidance. The Company elected the adoption practical expedient under ASU2018-11, and used October 1, 2019, the beginning of the period of adoption, as its date of initial application. The Company elected the set of practical expedients upon transition which will retain the lease classification for leases and any unamortized initial direct costs that existed prior to the adoption of the standard.

The Company’s operating lease right-of-use (“ROU”) assets and operating lease obligations were less than 1% of the Company's total assets as of December 31, 2019, had remaining terms of less than 12 months and were not considered material to the Company; and therefore the adoption of the standard had no related impact on the balance sheets as of October 1, 2019. There was no related impact on the statement of operations. The standard had no impact on the Company’s debt covenant compliance under existing agreements.

The Company determines if an arrangement is a lease at inception by considering whether (i) explicitly or implicitly identified assets have been deployed in the agreement and (ii) the Company obtains substantially all of the economic benefits from the use of that underlying asset and directs how and for what purpose the asset is used during the term of the agreement. As of December 31, 2019, none of the Company’s leases were classified as financing leases. Operating lease liabilities represent the Company’s obligation to make lease payments arising from the lease.

ROU assets represent the Company’s right to use an underlying asset for the lease term and operating lease liabilities represent the Company’s obligation to make lease payments arising from the lease. ROU assets are recognized at commencement date and consist of the present value of remaining lease payments over the lease term, initial direct costs, prepaid lease payments less any lease incentives. Operating lease liabilities are recognized at commencement date based on the present value of remaining lease payments over the lease term. The Company uses the implicit rate, when readily determinable, or its incremental borrowing rate based on the information available at commencement date to determine the present value of lease payments.

The lease terms may include periods covered by options to extend the lease when it is reasonably certain that the Company will exercise that option and periods covered by options to terminate the lease when it is not reasonably certain that the Company will exercise that option. Lease expense for lease payments will be recognized on a straight-line basis over the lease term. The Company made an accounting policy election to not recognize leases with terms, including applicable options, of less than twelve months on the balance sheets and recognize those lease payments in the statements of operations on a straight-line basis over the lease term. In the event that the Company’s assumptions and expectations change, it may have to revise its ROU assets and operating lease liabilities.

NOTE 3: Revenues

Lease bonus income

The Company generates lease bonus revenue by leasing its mineral interests to exploration and production companies. A lease agreement represents the Company's contract with a third party and generally conveys the rights to any oil, NGL or natural gas discovered, grants the Company a right to a specified royalty interest and requires that drilling and completion operations commence within a specified time period. Control is transferred to the lessee and the Company has satisfied its performance obligation when the lease agreement is executed, such that revenue is recognized when the lease bonus payment is received. The Company accounts for its lease bonuses as conveyances in accordance with the guidance set forth in ASC 932, and it recognizes the lease bonus as a cost recovery with any excess above its cost basis in the mineral being treated as a gain. The excess of lease bonus above the mineral basis is shown in the lease bonuses and rental income line item on the Company’s Statements of Operations.

Oil and natural gas derivative contracts – See Note 10 for discussion of the Company’s accounting for derivative contracts.

Revenues from Contracts with Customers

Oil, NGL and natural gas sales

Sales of oil, NGL and natural gas are recognized when production is sold to a purchaser at a fixed or determinable price, delivery has occurred, control has transferred and collectability of the revenue is probable. Oil is priced on the delivery date based upon prevailing prices published by purchasers with certain adjustments related to oil quality and physical location. The price the Company receives for natural gas and NGL is tied to a market index, with certain adjustments based on, among other factors, whether a well delivers to a gathering or transmission line, quality and heat content of natural gas, and prevailing supply and demand

(6)


 

conditions, so that the price of natural gas fluctuates to remain competitive with other available natural gas supplies. These market indices are determined on a monthly basis. Each unit of commodity is considered a separate performance obligation; however, as consideration is variable, the Company utilizes the variable consideration allocation exception permitted under the standard to allocate the variable consideration to the specific units of commodity to which they relate.

Disaggregation of oil, NGL and natural gas revenues

The following table presents the disaggregation of the Company's oil, NGL and natural gas revenues for the three months ended December 31, 2019 and 2018.

 

 

Three Months Ended December 31, 2019

 

 

 

Royalty Interest

 

 

Working Interest

 

 

Total

 

Oil revenue

 

$

1,413,211

 

 

$

2,052,301

 

 

$

3,465,512

 

NGL revenue

 

 

222,777

 

 

 

392,106

 

 

$

614,883

 

Natural gas revenue

 

 

1,273,113

 

 

 

2,240,330

 

 

$

3,513,443

 

Oil, NGL and natural gas sales

 

$

2,909,101

 

 

$

4,684,737

 

 

$

7,593,838

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended December 31, 2018

 

 

 

Royalty Interest

 

 

Working Interest

 

 

Total

 

Oil revenue

 

$

2,294,102

 

 

$

2,184,878

 

 

$

4,478,980

 

NGL revenue

 

 

441,227

 

 

 

1,013,608

 

 

$

1,454,835

 

Natural gas revenue

 

 

2,031,112

 

 

 

4,245,792

 

 

$

6,276,904

 

Oil, NGL and natural gas sales

 

$

4,766,441

 

 

$

7,444,278

 

 

$

12,210,719

 

Performance obligations

The Company satisfies the performance obligations under its oil and natural gas sales contracts upon delivery of its production and related transfer of title to purchasers. Upon delivery of production, the Company has a right to receive consideration from its purchasers in amounts that correspond with the value of the production transferred.

Allocation of transaction price to remaining performance obligations

Oil, NGL and natural gas sales

As the Company has determined that each unit of product generally represents a separate performance obligation, future volumes are wholly unsatisfied and disclosure of the transaction price allocated to remaining performance obligations is not required. The Company has utilized the practical expedient in ASC 606 which permits the Company to allocate variable consideration to one or more but not all performance obligations in the contract if the terms of the variable payment relate specifically to the Company’s efforts to satisfy that performance obligation and allocating the variable amount to the performance obligation is consistent with the allocation objective under ASC 606. Additionally, the Company will not disclose variable consideration subject to this practical expedient.

Prior-period performance obligations and contract balances

The Company records revenue in the month production is delivered to the purchaser. As a non-operator, the Company has limited visibility into the timing of when new wells start producing and production statements may not be received for 30 to 90 days or more after the date production is delivered. As a result, the Company is required to estimate the amount of production delivered to the purchaser and the price that will be received for the sale of the product. The expected sales volumes and prices for these properties are estimated and recorded within the Oil, NGL and natural gas sales receivables line item in the accompanying balance sheets. The difference between the Company's estimates and the actual amounts received for oil, NGL and natural gas sales is recorded in the quarter that payment is received from the third party. For the three months ended December 31, 2019, and December 31, 2018, revenue recognized in these reporting periods related to performance obligations satisfied in prior reporting periods was immaterial and considered a change in estimate.

NOTE 4: Income Taxes

The Company’s provision for income taxes differs from the statutory rate primarily due to estimated federal and state benefits generated from 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

(7)


 

basis. Excess tax benefits and deficiencies of stock-based compensation are recognized as provision (benefit) for income taxes in the statements of operations.

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, 2019, was a 12% provision as compared to a 22% provision for the quarter ended December 31, 2018.

NOTE 5: Basic and Diluted Earnings (Loss) per Common Share

Basic and diluted earnings (loss) per common 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 6: Long-term Debt

The Company has a $200,000,000 credit facility with a group of banks headed by Bank of Oklahoma (BOK) with a borrowing base of $70,000,000 at December 31, 2019, a current borrowing base of $45,000,000 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 (wellbore only) with a net book value of $66,360,004 at December 31, 2019. The interest rate is based on BOK prime plus from 0.50% to 1.25%, or 30-day LIBOR plus from 2.00% to 2.75%. 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, 2019, the effective interest rate was 3.95%.

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 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. On January 31, 2020, the borrowing base was redetermined by the banks and reduced from $70,000,000 to $45,000,000. The drop in the borrowing base was mostly due to the continued decline in natural gas futures prices. To a lesser extent, the Company’s strategic decision to cease participating with a working interest going forward and the removal of all working interest PUDs as of September 30, 2019, also caused a reduction. 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 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 earnings) of no more than 4.0 to 1.0. At December 31, 2019, the Company was in compliance with the covenants of the loan agreement. Due to the redetermination, the availability under the facility has decreased from $35,000,000 at December 31, 2019, to $11,250,000 currently.

(8)


 

NOTE 7: 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 8: 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 attract, retain 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 stock repurchase 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.

Effective in May 2018, the board of directors approved an amendment to the Company’s existing stock repurchase program. As amended, the Repurchase Program will continue to allow the Company to repurchase up to $1.5 million of the Company’s common stock at management’s discretion. The Board added language to clarify that this is intended to be an evergreen program as the repurchase of an additional $1.5 million of the Company’s common stock is authorized and approved whenever the previous amount is utilized. In addition, the number of shares allowed to be purchased by the Company under the Repurchase Program is no longer capped at an amount equal to the aggregate number of shares of common stock (i) awarded pursuant to the Company’s Amended 2010 Restricted Stock Plan, (ii) contributed by the Company to its ESOP, and (iii) credited to the accounts of directors pursuant to the Deferred Compensation Plan for Non-Employee Directors.

On December 11, 2019, the Company awarded 10,038 time-based shares and 15,058 market-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. Upon vesting, the market-based shares that do not meet certain market performance criteria are forfeited. The time-based and market-based shares had a fair value on their award date of $122,062 and $160,401, respectively. The fair value for the time-based and the market-based awards will be recognized as compensation expense ratably over the vesting period. The fair value of the market-based shares on their award date is calculated by simulating the Company’s stock prices as compared to the S&P Oil & Gas Exploration & Production ETF (XOP) prices utilizing a Monte Carlo model covering the market performance period (December 11, 2019, through December 11, 2022).

Compensation expense for the restricted stock awards is recognized in G&A. Forfeitures of awards are recognized when they occur. The dilutive impact of all restricted stock plans is immaterial for all periods presented.

The following table summarizes the Company’s pre-tax compensation expense for the three months ended December 31, 2019 and 2018, related to the Company’s market-based and time-based restricted stock.

 

 

 

Three Months Ended

 

 

 

December 31,

 

 

 

2019

 

 

2018

 

Market-based, restricted stock

 

$

74,142

 

 

$

63,537

 

Time-based, restricted stock

 

 

74,373

 

 

 

95,932

 

Total compensation expense

 

$

148,515

 

 

$

159,469

 

(9)


 

 

A summary of the Company’s unrecognized compensation cost for its unvested market-based and time-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, 2019

 

 

 

Unrecognized Compensation Cost

 

 

Weighted Average Period (in years)

 

Market-based, restricted stock

 

$