MANAGEMENT’S
DISCUSSION AND ANALYSIS
(Unaudited)
This
discussion and analysis should be read with reference to a similar discussion
in
the Company’s December 31, 2006, Form 10-KSB filed with the Securities and
Exchange Commission, as well as the condensed financial statements included
in
this Form 10-QSB.
Forward
Looking Statements.
This
discussion and analysis includes forward looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Forward looking statements give the Company’s
current expectations of future events. They include statements
regarding the drilling of oil and gas wells, cash flow and anticipated liquidity
and expected future expenses.
Although
management believes the expectations in these and other forward looking
statements are reasonable, we can give no assurance they will prove to have
been
correct. They can be affected by inaccurate assumptions or by known
or unknown risks and uncertainties. Factors that would cause actual
results to differ materially from expected results are described under “Forward
Looking Statements” on page 8 of the Company’s Form 10-KSB for the year ended
December 31, 2006.
We
caution you not to place undue reliance on these forward looking statements,
which speak only as of the date of this report, and we undertake no obligation
to update this information. You are urged to carefully review and
consider the disclosures made in this and our other reports filed with the
Securities and Exchange Commission that attempt to advise interested parties
of
the risks and factors that may affect our business.
Financial
Conditions and Results of Operations
Item
1.
Liquidity
and Capital Resources.
Please
refer to the Condensed Balance Sheets on pages 2 and 3 and the Condensed
Statements of Cash Flow on page 5 of this Form 10-QSB to supplement the
following discussion. In the first nine months of 2007, the
Company continued to fund its business activity through the use of internal
sources of cash. In addition to net cash provided by operations of
$7,373,939, the Company also had cash provided by the maturities of available
for sale securities of $12,426,068, by property dispositions of $11,319, and
distributions from equity investments of $31,000, for total cash provided by
internal sources of $19,842,326. The Company utilized cash for
the purchase of available for sale securities of $15,202,608, oil and gas
property additions of $3,071,053, and financing activities of $1,007,453, for
total cash applied of $19,281,114. The excess cash provided over cash
applied increased cash and cash equivalents by $561,212.
Discussion
of Significant Changes in Working Capital.
In addition to the
changes in cash and cash equivalents discussed above, there
were other significant changes in balance sheets working capital line items
from
December 31, 2006. A discussion of these items follows.
Available
for Sale Securities increased $2,776,540 (37%) to $10,249,792 from $7,473,252
as
part of the excess cash from operations was used to purchase additional
securities.
Trading
Securities increased $30,637 (11%) in 2007 to $320,366 from
$289,729. Most of the increase was due to an increase in the
unrealized gains associated with the carrying value of these
investments.
Receivables
decreased $426,256 (16%) to $2,190,139 in 2007 from $2,616,395. This
change was the net result of an decrease of $555,503 in accruals of oil and
gas
sales occurring before October 1, 2007, which were not received by the Company
at September 30, offset by an increase in interest and other receivables of
$129,247. The oil and gas sales accrual decrease was primarily due to the
receipt in April, 2007 of approximately $1,000,000 of gas revenues from two
Robertson County, Texas wells. These revenues had been estimated and
accrued from date of first sales, or 17 months for one of the wells and 9 months
for the other. This decrease was offset by an increase of about
$444,000 in the regular revenue accruals due to increased average monthly oil
and gas production volumes and prices for September 30, 2007 versus December
31,
2006. See the discussion of revenues under subheading “Operating
Revenues”, below in Item 2 for more information about the increased sales of oil
and natural gas.
Accounts
payable increased $136,667 (127%) to $244,093 in 2007 from
$107,426. At the end of both periods, the accounts payable balance
generally was for costs of oil and gas exploration and
production. The increase in payables at September 30, 2007 was due to
increased drilling activity in which the Company was participating.
Income
taxes payable increased $165,498 to $112,951 in 2007 from a receivable of
$52,547. The increase is due to increased income taxes and the timing of the
estimated tax payments. See additional comments under the “Provision
for Income Taxes” below in Item 2.
Deferred
income taxes and other current liabilities decreased $130,414 (22%) to $451,648
in 2007 from $582,062. The decrease was the net result of a $198,439
decrease in the current deferred tax liability, offset by a $68,025 increase
in
the estimated ad valorem tax accruals at September 30, 2007. The
deferred tax liability decrease was due to the lower revenue accruals discussed
in the “Receivables” change above.
Discussion
of Significant Changes in the Condensed Statement of Cash
Flows.
As noted in a paragraph above, net cash provided by
operating activities was $7,373,939 in 2007. This was an increase of
$3,741,433 from the comparable period in 2006. The
increase was mostly the result of an increase in operating revenues partially
offset by increases in operating expenses and in estimated federal income taxes
paid. For more information see “Operating Revenues” and “Operating
Costs and Expenses”, in Item 2 below.
Available
for sale securities at September 30, 2007 and December 31, 2006 are comprised
entirely of US treasury bills with six month maturities. During the
nine months ended September 30, 2007, $12,426,068 of these securities matured
and the cash was used to purchase new securities. As discussed above
in the working capital changes, $2,776,540 of excess cash provided by operating
activities was used to purchase additional securities.
The
cash
provided by property dispositions in 2007 was $11,319, a decrease of $628,180
from cash provided in 2006 of $639,499. The decrease was due
primarily to a combination of proceeds of $95,000 from the sale of the Company’s
working interest in a fully depreciated producing property in March, 2006 and
proceeds of $529,992 from the sale of the non-producing leasehold in a Hughes
County prospect in September, 2006. No similar sales occurred in
2007.
The
cash
provided by distributions from equity investments in 2007 was $31,000, an
increase of $10,750 from cash provided in 2006 of $20,250. The increase was
due
primarily to increased distributions from equity investees for increased
proceeds from the sale of real estate investments in 2007 versus
2006.
Cash
applied to the purchase of property additions in 2007 was $3,071,053, an
increase of $1,261,172 from cash applied in 2006 of $1,809,881. In
both 2006 and 2007, all of cash applied to property additions was related to
oil
and gas exploration and development activity. See the subheading
“Exploration Costs”, in Item 2 below for additional information.
Cash
applied for dividend payments in 2007 was $886,973, an increase of $288,903
from
$598,070 in 2006. This was due to an increase in the dividend per
share to $6.00 in 2007 from $4.00 in 2006.
Conclusion.
Other
than the royalty interest properties discussed below in Item 2 under
subheading “Operating Revenues” management is
unaware of any additional material trends, demands, commitments, events or
uncertainties which would impact liquidity and capital resources to the extent
that the discussion presented in Form 10-KSB for December 31, 2006 would not
be
representative of the Company’s current position
.
Item
2.
Material
Changes in Results of Operations Nine Months Ended September 30, 2007, Compared
with Nine Months Ended
September
30, 2006.
Please
refer to the Condensed Statements of Operations on page 4 of this Form 10-QSB
to
supplement the following discussion. The Company had net income of
$5,409,147 in 2007 compared to net income of $3,756,203 in 2006, an increase
of
$1,652,944. The increase in net income was the combined result of a
$3,071,260 (43%) increase in operating revenues, partially offset by a $759,699
(31%) increase in operating costs and expenses and a $1,575 decrease in other
income. The net effect of these changes was an increase in income
before income taxes of $2,309,986 (44%). This increase in pretax income resulted
in a $657,042 (46%) increase in the provision for income
taxes.
A
discussion of revenue from oil and gas sales and other significant line items
in
the condensed statements of operations follows.
Operating
Revenues
. Revenues from oil, gas and plant product
sales were $9,889,003 in 2007, an increase of $2,812,881 (40%) from $7,076,122
in 2006. Revenues from crude oil and natural gas sales were $9,772,129 in 2007,
an increase of $2,775,501 (40%) from $6,996,628 in 2006. Sales of
miscellaneous products were $116,874 in 2007 and $79,494 in 2006.
The
$1,510,708 (91%) increase in oil sales to $3,175,930 in 2007 from $1,665,222
in
2006 was the net result of an increase in volume of oil sold offset by a decline
in the average price per barrel (Bbl). The volume sold increased 26,586 Bbls
to
53,254 Bbls in 2007 resulting in a positive volume variance of $1,660,030.
The
average price per Bbl decreased $2.80 to $59.64 per Bbl resulting in a negative
price variance of $(149,322).
The
increase in oil volumes sold was mostly due to production from new wells in
Harding County, South Dakota and Woods County, Oklahoma that first produced
after September 30, 2006 and the increased working interest discussed in
“Exploration Costs” below.
The
$1,264,793 (24%) increase in gas sales to $6,596,199 in 2007 from $5,331,406
in
2006 was the net result of an increase in the volume of gas sold offset by
a
decline in the average price per thousand cubic feet (MCF). The volume sold
increased 224,758 MCF to 1,039,090 MCF resulting in a positive volume variance
of $1,472,165. The average price per MCF declined $0.20 to $6.35 per MCF
resulting in a negative price variance of $(207,372).
The
Robertson County, Texas royalty interest properties continue to account for
a
significant portion of the gas volumes sold in 2007. The first nine
months of 2007 sales include approximately 549,000 MCF and $3,517,000 of
gas sales from these wells versus 342,000 MCF and $2,050,000 of sales for the
first nine months of 2006. The first nine months of 2007 sales from these wells
also include an adjustment of 154,056 MCF and $956,935 received in September,
2007. The adjustment was for gas sales from two royalty interest wells in the
same producing unit (one that began producing in October, 2005 and the other
in
June, 2006). A portion of the Company’s interest had been in suspense due to a
potential title problem; however, in September the purchaser decided to release
the revenues attributable to that interest. The payment included production
from
the date of first production on each well through July, 2007. The purchaser
continues to pay this interest currently along with the undisputed interest
in
this producing unit. See sub-heading “Operating Revenues” on page 15
of the Company’s 2006 Form 10-KSB for more information about these
properties. The remaining increase in gas volumes sold was the result
of production from other new properties which first produced after September
30,
2006.
For
both
oil and gas sales, the price change was mostly the result of a change in the
spot market prices upon which most of the Company’s oil and gas sales are
based. Spot market prices have had significant fluctuations in the
past and these fluctuations are expected to continue.
Other
operating revenues increased $258,379 (254%) to $360,235 in 2007 from $101,856
in 2006. The increase is due to a combination of an increase in lease bonuses
of
$74,433 (73%) to $176,289 in 2007 from $101,856 in 2006 and $183,946 in coal
royalties for the first nine months of 2007, with no similar amounts in 2006.
The first coal royalties were received and recorded in the fourth quarter of
2006. See sub-heading “Operating Revenues” on page 14 of the Company’s 2006 Form
10-KSB for more information about these coal royalties.
Operating
Costs and Expenses
. Operating costs and expenses increased
$759,699 (31%) to $3,191,599 in 2007 from $2,431,900 in
2006. The increase was the net result of an increase in production
costs of $517,011, a decrease in exploration costs charged to expense of
$246,288, an increase in depreciation, depletion, amortization and valuation
provisions (DD&A) of $242,696 and an increase in general administrative and
other expense (G&A) of $246,280. The significant changes in these line items
will be discussed below.
Production
Costs.
Production costs increased $517,011 (71%) in 2007 to
$1,244,733 from $727,722 in 2006. Part of this increase was due to a gross
production tax increase of $217,092 (95%) to $446,433 in 2007 from $229,341
in
2006. Most of this increase is the result of increased 2007 oil and
gas sales over 2006. The remaining increase is a result of lower production
tax
refunds received in 2007 versus 2006 on the Robertson County wells. These
refunds were due to a Texas program used as an incentive to encourage operators
to drill deep or tight sands gas wells and are not permanent but are for
a
limited number of months of production. Gross production taxes are state
taxes
usually calculated as a percentage of gross oil and gas revenue and therefore
will fluctuate with the dollar amount of oil and gas sales. The remaining
lease
operating expense and transportation and compression expense increased
by
$299,919 (60%) to $798,300 in 2007 from $498,381 in 2006. Of this increase,
transportation and compression expense increased $194,330 (201%) to $291,141
in
2007 from $96,811 in 2006. Most of this increase is associated with Robertson
County, Texas production and a new purchaser for these wells in 2007 versus
2006. Lease operating expense increased $105,589 (26%) to $507,159 in
2007 from $401,570 in 2006. Most of this increase is due to operating
expense on new wells in Harding County, South Dakota and Woods County,
Oklahoma
which first produced after September 30, 2006.
Exploration
Costs
. Total exploration expense decreased $246,288
(63%) to $142,266 in 2007. The decrease is due primarily to decreases
in geology expenses of $88,169 (98%) to $1,755 and dry hole expenses of $153,579
(52%) to $140,176 in 2007 versus 2006.
The
following is a summary as of November 2, 2007, updating both exploration and
development activity from December 31, 2006.
The
Company participated with its 18% working interest in the drilling of three
step-out wells on a Barber County, Kansas prospect. The first was
started in May 2007 and completed in June 2007 as a commercial gas
well. The second was started in May 2007 and completed in July 2007
as a commercial oil and gas well. The third was drilled in September
2007 and a completion attempt is currently in progress. Capitalized
costs were $255,793 as of September 30, 2007, including $39,158 in prepaid
drilling costs.
In
July
2007 the Company purchased an 18% interest in 5,020 net acres of leasehold
in
Barber County, Kansas for $54,217. This acreage adjoins the previous
prospect to the east. A step-out well was drilled in September 2007
and a completion attempt is currently in progress. Total capitalized
costs were $68,816 as of September 30, 2007, including $31,415 in prepaid
drilling costs.
The
Company has a 4.32% interest in a Harding County, South Dakota waterflood
unit. The Company’s interest increased from 0.96% on January 1, 2007
with the start of Phase II. At the beginning of the year there were
six horizontal wells in the unit producing oil and one horizontal water
injector. In April 2007 an additional lateral was drilled from one of
the producing wells. Another producer was converted to a water
injector in July 2007. Capitalized costs as of September 30, 2007
were $244,573. Of these costs, $222,072 was for the investment
adjustment associated with the change in interest described above.
The
Company participated with a fee mineral interest in the drilling of a step-out
horizontal well in Harding County, South Dakota. The Company has a
14.6% working interest in the well which was started in March 2007 and completed
in June 2007 as a commercial oil producer. In April 2007 the Company
participated with its 10.9% working interest in the drilling of an extension
of
a lateral in a previously drilled horizontal oil well. The Company
participated with an 18.8% working interest in the drilling of another step-out
horizontal well which was started in June 2007 and completed in September 2007
as a commercial oil producer. Capitalized costs as of September 30,
2007 were $970,270.
The
Company participated with its 18% working interest in the drilling of three
step-out wells on a Woods County, Oklahoma prospect. The first and
second wells were started in June 2007 and completed in September
2007. The third well was started in July 2007 and completed in
October 2007. All three appear to be commercial oil and gas
producers. Capitalized costs totaled $340,200 as of September 30,
2007, including $46,324 in prepaid drilling costs.
In
December 2005 the Company purchased a 10% interest in a Grady County, Oklahoma
prospect. A 3-D seismic survey was conducted and four prospective
structures were identified. Additional acreage was
acquired. An exploratory well was started in May 2007 and completed
in September 2007. Preliminary testing indicates commercial gas and
gas condensate production. The well is currently shut in awaiting the
construction of pipeline and surface facilities. A second exploratory
well was started in August 2007 and completed in September 2007 as a dry
hole. An additional exploratory well is scheduled to start in
November 2007. Total capitalized drilling costs as of September 30,
2007 were $362,187. A total of $130,950 has been expensed as dry hole
costs for the unsuccessful exploratory well.
The
Company participated in the development of a Hughes County, Oklahoma prospect
which was sold in September 2006 with the Company retaining an 8.75% interest
in
the prospect acreage. An exploratory horizontal well was started in
January 2007 and a second in February 2007. Both wells have been
drilled; however, completion attempts of both have failed to establish
commercial production. The Company has only a reversionary working
interest in these wells and therefore has no cost exposure. The
operator plans to sell the prospect and has requested that the Company
renegotiate the original deal to make it more marketable.
The
Company participated in the drilling of four development wells on a Woods
County, Oklahoma prospect in which it has a 16% interest. The first
well (Company working interest 13%) was started in March 2007 and completed
in
April 2007. The second well (same interest) was started in April 2007
and completed in May 2007. The third well (16% interest) was started
in May 2007 and the fourth well (12% interest) in June 2007. Both
were completed in July 2007. All four wells are commercial oil and
gas producers. An additional well (12% interest) will be drilled in
2007. Total costs to date are $373,445, including $6,209 in prepaid
drilling costs.
In
May
2007 the Company purchased a 16% interest in a Woods County, Oklahoma prospect
for $80,800. The Company participated with a 10.3% working interest
in the drilling of an exploratory well which was started in June 2007 and
completed in July 2007 in a zone that has since proved to be
noncommercial. The well is currently being evaluated for a completion
attempt in a shallower zone. The Company participated with a 16%
working interest in a second exploratory well which was drilled in October
2007. A completion attempt is currently in progress. Total drilling
costs as of September 30, 2007 were $76,321 including $1,075 in prepaid drilling
costs.
In
April
2007 the Company agreed to participate with an 18% interest in the development
of nine prospects along a trend in Comanche and Kiowa Counties,
Kansas. Acquisition of acreage is currently in progress.
In
August
2007 the Company purchased a 16% interest in 8,301 acres of leasehold on a
Harper County, Kansas prospect for $79,690. A 3-D seismic survey is
scheduled to commence in December 2007. Following the acquisition,
processing and evaluation of the seismic data decisions about drilling will
be
made.
In
October 2007 the Company purchased an 8% interest in a marginal well and the
associated 640 acres of leasehold in Woods County, Oklahoma for
$60,000. The well was recompleted in October 2007 and is currently
being tested. Additional development drilling is likely.
In
October 2007 the Company agreed to purchase an 18% interest in a Logan County,
Oklahoma prospect for $13,680. An exploratory well will be drilled in
the first quarter of 2008.
Depreciation,
Depletion & Amortization (DD&A).
DD&A increased
$242,696 (39%) to $870,589 in 2007 from $627,893 in 2006. The change
was primarily the net result of a $263,149 (50%) increase to $791,938 for the
depreciation of lease and well equipment, leasehold depletion and amortization
of intangible drilling costs on successful wells offset by a decline of $19,749
in the provision for leasehold impairment. The increase for depreciation and
amortization is due to costs related to wells which first produced after
September 30, 2006 as the Company uses the units of production method for
calculating these expenses.
General,
Administrative and Other Expenses (G&A).
G&A increased
$246,280 (36%) to $934,011 in 2007 from $687,731 in 2006. Part of the
increase was due to ad valorem, franchise and other taxes increases of $132,546
(101%) to $264,383 in 2007. The remainder of the increase was due
primarily to increased salaries and benefits of about $86,000 and dues and
subscriptions (energy and engineering information services) of about
$23,000.
Other
Income, Net.
This line item decreased $1,575 to $446,252 in
2007 from $447,827 in 2006. See Note 2 to the accompanying condensed financial
statements for an analysis of the components of this item. Explanations for
variances of the more significant components follow.
Trading
securities gains in 2007 were $28,289 as compared to gains of $20,349 in 2006,
an increase of $7,940. In 2007 the Company had unrealized gains of
$32,751 from adjusting securities held at September 30 to estimated fair market
value, and net realized trading losses of $4,462. In 2006 the Company
had unrealized gains of $20,081 and realized gains of $268.
Gain
on
asset sales decreased $154,690 to $5,208 in 2007 from a gain of
$159,898 in 2006. Most of this decrease was due to a $95,000 gain on
the sale of the Company’s working interest in a fully depreciated producing
property in March 2006 and a $50,400 gain from the sale of the Hughes County
leasehold prospect in September 2006. No similar sales occurred in
2007. See the cash flow changes section of “Item 1” above and the
exploration cost and activity discussion section in “Item 2” above for
additional information about the 2006 sales.
Interest
income increased $140,640 to $367,452 in 2007 from $226,812 in
2006. The increase was partly the result of an increase in the
effective yield of US treasury bills which comprise the Company’s available for
sale securities investments. However, most of the increase is due to
the average balance of these investments increasing in 2007 versus
2006.
Equity
earnings in investees increased $8,514 (25%) to $42,261 in 2007 from $33,747
in
2006. The following is the Company’s share of earnings for 2007 and
2006 per review of the entities’ unaudited financial statements for the nine
months ended September 30, 2007 and 2006:
|
|
|
Earnings (Losses)
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Broadway
Sixty-Eight, Ltd.
|
|
$
|
16,259
|
|
|
$
|
28,588
|
|
|
JAR
Investments, LLC
|
|
|
3,351
|
|
|
|
5,352
|
|
|
Millennium
Golf Properties, LLC
|
|
|
5,421
|
|
|
|
(193
|
)
|
|
OKC
Industrial Properties, LLC
|
|
|
17,230
|
|
|
|
----
|
|
|
|
|
$
|
42,261
|
|
|
$
|
33,747
|
|
The
OKC
Industrial Properties, LLC 2007 earnings of $17,230 represents a gain on the
sale of real estate. No similar gain occurred in
2006. See Note 3 to the accompanying condensed financial statements
for additional information, including guarantees, pertaining to Broadway
Sixty-Eight, Ltd., and JAR Investments, LLC.
See
Note
3, to the accompanying condensed financial statements, and “Off-Balance Sheet
Arrangements” below for additional information, including guarantees, pertaining
to Broadway Sixty-Eight, Ltd., and JAR Investments, LLC.
Provision
for Income Taxes.
The provision for income taxes increased $657,042 (46%) to
$2,094,744 in 2007 from $1,437,702 in 2006. This increase was due
primarily to the increase in pretax income to $7,503,891 in 2007 from $5,193,905
in 2006. Of the 2007 income tax provision, the estimated current tax
expense was $1,671,754 and the estimated deferred tax expense was
$422,990. Of the 2006 income tax provision, the estimated current and
deferred tax expenses were $1,159,519 and $278,183 respectively. See
Note 4 to the accompanying condensed financial statements for a discussion
of
the provision for income taxes.
Item
3.
Material
Changes in Results of Operations Three Months Ended September 30, 2007, Compared
with Three Months Ended
September
30, 2006.
Net
income increased $878,520 to $2,290,570 in 2007 from $1,412,050 in
2006. The material changes in the results of operations which caused
the increase in net income will be discussed below.
Operating
Revenues.
Revenues from oil, gas and plant product sales increased
$1,864,244 (83%) to $4,102,884 in 2007 from $2,238,640 in 2006. The
increase was the result of an increase in gas sales of $1,172,849 (74%) to
$2,750,967, an increase in oil sales of $673,711 (107%) to $1,302,074 and an
increase in sales of miscellaneous products of $17,684 to $49,843.
The
increase in gas sales was the result of an increase in the average price by
$0.59 per MCF to $6.33 for a positive price variance of $254,174, and an
increase in the volume of gas sold of 159,925 MCF to 434,647 MCF for a positive
volume variance of $918,675. Most of the gas sales volume and revenue
increase can be attributed to the Robertson County, Texas royalty interest
properties discussed under “Operating Revenues” in Item 2 above. These
properties accounted for approximately 306,500 MCF and $1,931,000 of the gas
sales for the third quarter of 2007 versus 152,000 MCF and $834,000 of gas
sales
for the third quarter of 2006. The third quarter 2007 gas sales also include
the
purchaser adjustment of 154,056 MCF and $956,935 received in September 2007
described in Item 2 above.
The
increase in oil sales was the result of an increase in the average price
received of $0.59 per Bbl to $66.74 for a positive price variance of $11,616,
and an increase in the volume of oil produced by 10,009 Bbls to 19,508 Bbls
for
a positive volume variance of $662,095. See Item 2 above for the nine months
for
an explanation of the oil volume increase.
Other
operating revenues increased $69,423 to $123,513 primarily due to coal royalties
of $79,657 received in 2007 with no similar amount in 2006. See other operating
revenues discussion in Item 2 above for the nine months for additional
information about the coal royalties.
Operating
Costs and Expenses
. Operating costs and expenses increased
$620,899 (107%) to $1,200,726 in 2007 from $579,827 in 2006. The
increase was the net result of an increase in production costs of $288,981,
an
increase in exploration costs charged to expense of $130,139, an increase in
depreciation, depletion, amortization and valuation provisions (DD&A) of
$111,947 and an increase in general administrative and other expense (G&A)
of $89,832. The significant changes in these line items will be discussed
below.
Production
Costs.
Production costs increased $288,981 to $487,108 in 2007
from $198,127 in 2006. Part of the increase is due to higher lease
operating expense of about $61,000 and higher transportation and compression
expense of about $82,500 in 2007 versus 2006. The reasons for these increases
are the same as those for the nine months increase. The remaining increase
of
about $145,300 is due to higher production taxes for 2007 versus 2006. The
reasons for this increase are higher oil and gas sales in 2007 and a decrease
in
production tax refunds. For more information about all three of these increases
see the production costs discussion in Item 2 above for the nine
months.
Exploration
Costs.
Exploration costs charged to operations increased $130,139 to
$139,413 in 2007 from $9,274 in 2006 primarily as a result of higher dry hole
costs for the same period each year. See the exploration costs discussion in
Item 2 above for the nine months.
Depreciation,
Depletion & Amortization(DD&A).
DD&A increased $111,947 to
$264,378 from $152,431 in 2006. The increase in depreciation,
depletion and amortization expense is primarily due to costs for successful
wells which first produced after September 30, 2006 as the Company uses the
units of production method for calculating these expenses.
General,
Administrative and Other Expenses (G&A).
G&A increased $89,832 to
$309,827 in 2007 from $219,995 in 2006. This change is due primarily to ad
valorem and franchise tax increases of approximately $58,900 and salary and
benefit increases of approximately $30,900 in 2007.
Other
Income, Net.
See Note 2 to the accompanying condensed financial
statements for an analysis of the components of other income, net. In
2007, this line item decreased $41,748 to income of $153,785
from $195,533 in 2006. Most of the decrease was the
net result of a $51,090 decrease in the gain on asset sales to $4,623 from
$55,713 and a decrease in earnings from equity investments of $25,558 to $9,564
from $35,122 partially offset by an increase in interest income of $43,560
to
$128,841 from $85,281. See discussion of “Other Income, Net” in Item
2 above for the nine months for explanations of these variances.
Provision
for Income Taxes.
The provision for income taxes increased $392,520 to
$888,886 in 2007 from $496,366 in 2006. See discussions above
in Item 2 and Note 4 to the accompanying condensed financials for additional
explanation of the changes in the provision for income taxes.
There
were no additional material changes between the quarters which were not covered
in the discussion in Item 2 above for the nine months ended September 30,
2007.
Off-Balance
Sheet Arrangements
The
Company’s off-balance sheet arrangements consist of JAR Investments, LLC, an
Oklahoma limited liability company and Broadway Sixty-Eight, Ltd., an Oklahoma
limited partnership. The Company does not have actual or effective
control of either of these entities. Management of these entities
could at any time make decisions in their own best interest which could
materially affect the Company’s net income or the value of the Company’s
investments.
For
more
information about these entities, see Note 3, to the accompanying financial
statements and this management’s discussion and analysis in Item 2 above under,
“Other Income, Net”, for the nine months ended September 30, 2007.