The Reserve Petroleum Company is engaged principally in the exploration for and the development of oil and natural gas properties. Other business segments are not significant factors in the Company's operations. The Company is a corporation organized under the laws of the State of Delaware in 1931.
OIL AND NATURAL GAS PROPERTIES
For a summary of certain data relating to the Company's oil and gas properties including production, undeveloped acreage, producing and dry wells drilled and recent activity, see Item 2, "Description of Property". For a discussion and analysis of current and prior years' revenue and related costs of oil and gas operations, and a discussion of liquidity and capital resource requirements, see Item 6, "Management's Discussion and Analysis or Plan of Operation".
MINERAL PROPERTY MANAGEMENT
The Company owns non-producing mineral interests in approximately 268,393 gross acres equivalent to 92,540 net acres. These mineral interests are located in nine states with 56,215 net acres in the states of Oklahoma and Texas, the area of concentration for the Company in its present exploration and development programs.
Management continually reviews various industry reports and other sources for activity (leasing, drilling, significant discoveries, etc.) in areas where the Company has mineral ownership. Based on its analysis of any activity and assessment of the potential risk relative to the particular area, management may negotiate a lease or farmout agreement and accept a royalty interest, or it may choose to participate as a working interest owner and pay its proportionate share of costs for any exploration or development drilling.
A substantial amount of the Company's oil and gas revenue has resulted from its mineral property management. In 2005, $4,635,747 (57%) of oil and gas sales was from royalty interests as compared to $2,024,362 (52%) in 2004. As a result of its mineral ownership, in 2005 the Company had royalty interests in 23 gross (.48 net) wells which were drilled and completed as producing wells. See the following paragraphs for a discussion of mineral interests in which the Company chooses to participate as a working interest owner.
DEVELOPMENT PROGRAM
The development of a drilling program is usually initiated in one of three ways. The Company may participate as a working interest owner with a third party operator in the development of non-producing mineral interests which it owns; along with a joint interest operator, it may participate in drilling additional wells on its producing leaseholds; or if its exploration program discussed below results in a successful exploratory well, it may participate in the development of additional wells on the exploratory prospect. In 2005, the Company participated in the drilling of twenty-three development wells with nineteen wells (2.17 net) completed as producers, two as dry holes and two in the process of completion.
EXPLORATION PROGRAM
The Company's exploration program is normally conducted by purchasing interests in prospects developed by independent third parties, participating in third party exploration of Company-owned non-producing minerals, developing its own exploratory prospects, or a combination of the above.
The Company normally acquires interests in exploratory prospects from someone in the industry with whom management has conducted business in the past and/or if management has confidence in the quality of the geological and geophysical information presented for evaluation by Company personnel. If evaluation indicates the prospect is within the Company's risk limits, the Company may negotiate to acquire an interest in the prospect and participate in a non-operating capacity.
The Company develops exploratory drilling prospects by identification of an area of interest, development of geological and geophysical information and purchase of leaseholds in the area. The Company may then attempt to sell an interest in the prospect to one or more companies in the petroleum industry with one of the purchasing companies functioning as operator.
For a summation of exploratory wells drilled in 2005 or planned for in 2006, see Item 6, "Management's Discussion and Analysis of Financial Condition or Plan of Operation," subheading, "Update of Oil and Gas Exploration Activity from December 31, 2004."
CUSTOMERS
In 2005, the Company had two customers whose total purchases were greater than 10% of revenues from oil and gas sales. XTO Energy purchases were $910,108 or 11.3% of total oil and gas sales. Burlington Resources purchases were $833,363, or 10.3% of total oil and gas sales. The Company sells most of its oil and gas under short-term sales contracts that are based on the spot market price. A minor amount of oil and gas sales are made under fixed price contracts having terms of more than one year.
COMPETITION
The oil and gas industry is highly competitive in all of its phases. There are numerous circumstances within the industry and related market place that are out of the Company's control such as cost and availability of alternative fuels, the level of consumer demand, the extent of other domestic production of oil and gas, the price and extent of importation of foreign oil and gas, the cost of and proximity of pipelines and other transportation facilities, the cost and availability of drilling rigs, regulation by state and Federal authorities and the cost of complying with applicable environmental regulations. The
Company is a very minor factor in the industry and must compete with other persons and companies having far greater financial and other resources. The Company's ability to participate in and/or develop viable prospects, and secure the financial participation of other persons or companies in exploratory drilling on these prospects is limited.
REGULATION
The Company's operations are affected in varying degrees by political developments and Federal and state laws and regulations. Although released from Federal price controls, interstate sales of natural gas are subject to regulation by the Federal Energy Regulatory Commission (FERC). Oil and gas operations are affected by environmental laws and other laws relating to the petroleum industry and both are affected by constantly changing administrative regulations. Rates of production of oil and gas have for many years been subject to a variety of conservation laws and regulations, and the petroleum industry is frequently affected by changes in the Federal tax laws.
Generally, the respective state regulatory agencies supervise various aspects of oil and gas operations within the state and transportation of oil and gas sold intrastate.
ENVIRONMENTAL PROTECTION
The operation of the various producing properties in which the Company has an interest is subject to Federal, state and local provisions regulating discharge of materials into the environment, the storage of oil and gas products, and the contamination of subsurface formations. The Company's lease operations and exploratory activity have been and will continue to be affected by regulation in future periods. However, the known effect to date has not been material as to capital expenditures, earnings or industry competitive position, nor are estimated expenditures for environmental compliance expected to be material in the coming year. Such expenditures produce no increase in productive capacity or revenue and require more of management's time and attention, a cost which cannot be estimated with any assurance of certainty.
OTHER BUSINESS
See Item 6, "Management's Discussion and Analysis of Plan of Operation", subheading, "Equity Investments" and Item 7, "Notes to Financial Statements," Notes 2 and 7 for a discussion of other business including guarantees.
EMPLOYEES
At December 31, 2005, the Company had eight employees, including officers. See the Proxy Statement for additional information. During 2005, all the Company's employees devoted a portion of their time to duties with affiliated companies and the Company was reimbursed for the affiliates' share of compensation directly from those companies. See Item 6, "Management's Discussion and Analysis or Plan of Operation, subheading "Certain Relationships and Related Transactions" and Item 7, "Notes to Financial Statements," Note 12, for additional information.
OIL AND NATURAL GAS PROPERTIES
For a summary of certain data relating to the Company's oil and gas properties including production, undeveloped acreage, producing and dry wells drilled and recent activity, see Item 2, "Description of Property". For a discussion and analysis of current and prior years' revenue and related costs of oil and gas operations, and a discussion of liquidity and capital resource requirements, see Item 6, "Management's Discussion and Analysis or Plan of Operation".
MINERAL PROPERTY MANAGEMENT
The Company owns non-producing mineral interests in approximately 268,393 gross acres equivalent to 92,540 net acres. These mineral interests are located in nine states with 56,215 net acres in the states of Oklahoma and Texas, the area of concentration for the Company in its present exploration and development programs.
Management continually reviews various industry reports and other sources for activity (leasing, drilling, significant discoveries, etc.) in areas where the Company has mineral ownership. Based on its analysis of any activity and assessment of the potential risk relative to the particular area, management may negotiate a lease or farmout agreement and accept a royalty interest, or it may choose to participate as a working interest owner and pay its proportionate share of costs for any exploration or development drilling.
A substantial amount of the Company's oil and gas revenue has resulted from its mineral property management. In 2005, $4,635,747 (57%) of oil and gas sales was from royalty interests as compared to $2,024,362 (52%) in 2004. As a result of its mineral ownership, in 2005 the Company had royalty interests in 23 gross (.48 net) wells which were drilled and completed as producing wells. See the following paragraphs for a discussion of mineral interests in which the Company chooses to participate as a working interest owner.
DEVELOPMENT PROGRAM
The development of a drilling program is usually initiated in one of three ways. The Company may participate as a working interest owner with a third party operator in the development of non-producing mineral interests which it owns; along with a joint interest operator, it may participate in drilling additional wells on its producing leaseholds; or if its exploration program discussed below results in a successful exploratory well, it may participate in the development of additional wells on the exploratory prospect. In 2005, the Company participated in the drilling of twenty-three development wells with nineteen wells (2.17 net) completed as producers, two as dry holes and two in the process of completion.
EXPLORATION PROGRAM
The Company's exploration program is normally conducted by purchasing interests in prospects developed by independent third parties, participating in third party exploration of Company-owned non-producing minerals, developing its own exploratory prospects, or a combination of the above.
The Company normally acquires interests in exploratory prospects from someone in the industry with whom management has conducted business in the past and/or if management has confidence in the quality of the geological and geophysical information presented for evaluation by Company personnel. If evaluation indicates the prospect is within the Company's risk limits, the Company may negotiate to acquire an interest in the prospect and participate in a non-operating capacity.
The Company develops exploratory drilling prospects by identification of an area of interest, development of geological and geophysical information and purchase of leaseholds in the area. The Company may then attempt to sell an interest in the prospect to one or more companies in the petroleum industry with one of the purchasing companies functioning as operator.
For a summation of exploratory wells drilled in 2005 or planned for in 2006, see Item 6, "Management's Discussion and Analysis of Financial Condition or Plan of Operation," subheading, "Update of Oil and Gas Exploration Activity from December 31, 2004."
CUSTOMERS
In 2005, the Company had two customers whose total purchases were greater than 10% of revenues from oil and gas sales. XTO Energy purchases were $910,108 or 11.3% of total oil and gas sales. Burlington Resources purchases were $833,363, or 10.3% of total oil and gas sales. The Company sells most of its oil and gas under short-term sales contracts that are based on the spot market price. A minor amount of oil and gas sales are made under fixed price contracts having terms of more than one year.
COMPETITION
The oil and gas industry is highly competitive in all of its phases. There are numerous circumstances within the industry and related market place that are out of the Company's control such as cost and availability of alternative fuels, the level of consumer demand, the extent of other domestic production of oil and gas, the price and extent of importation of foreign oil and gas, the cost of and proximity of pipelines and other transportation facilities, the cost and availability of drilling rigs, regulation by state and Federal authorities and the cost of complying with applicable environmental regulations. The
Company is a very minor factor in the industry and must compete with other persons and companies having far greater financial and other resources. The Company's ability to participate in and/or develop viable prospects, and secure the financial participation of other persons or companies in exploratory drilling on these prospects is limited.
REGULATION
The Company's operations are affected in varying degrees by political developments and Federal and state laws and regulations. Although released from Federal price controls, interstate sales of natural gas are subject to regulation by the Federal Energy Regulatory Commission (FERC). Oil and gas operations are affected by environmental laws and other laws relating to the petroleum industry and both are affected by constantly changing administrative regulations. Rates of production of oil and gas have for many years been subject to a variety of conservation laws and regulations, and the petroleum industry is frequently affected by changes in the Federal tax laws.
Generally, the respective state regulatory agencies supervise various aspects of oil and gas operations within the state and transportation of oil and gas sold intrastate.
ENVIRONMENTAL PROTECTION
The operation of the various producing properties in which the Company has an interest is subject to Federal, state and local provisions regulating discharge of materials into the environment, the storage of oil and gas products, and the contamination of subsurface formations. The Company's lease operations and exploratory activity have been and will continue to be affected by regulation in future periods. However, the known effect to date has not been material as to capital expenditures, earnings or industry competitive position, nor are estimated expenditures for environmental compliance expected to be material in the coming year. Such expenditures produce no increase in productive capacity or revenue and require more of management's time and attention, a cost which cannot be estimated with any assurance of certainty.
OTHER BUSINESS
See Item 6, "Management's Discussion and Analysis of Plan of Operation", subheading, "Equity Investments" and Item 7, "Notes to Financial Statements," Notes 2 and 7 for a discussion of other business including guarantees.
EMPLOYEES
At December 31, 2005, the Company had eight employees, including officers. See the Proxy Statement for additional information. During 2005, all the Company's employees devoted a portion of their time to duties with affiliated companies and the Company was reimbursed for the affiliates' share of compensation directly from those companies. See Item 6, "Management's Discussion and Analysis or Plan of Operation, subheading "Certain Relationships and Related Transactions" and Item 7, "Notes to Financial Statements," Note 12, for additional information.
