SPND 10-Q Quarter ended Sept. 30, 2019

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED September 30, 2019

or

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE

SECURITIES EXCHANGE ACT OF 1934

Commission File No. 000-18774

SPINDLETOP OIL & GAS CO.

(Exact name of registrant as specified in its charter)

(972-644-2581)

(Registrant’s telephone number, including area code)

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

Indicate by check mark if the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act. Yes [ ] No [ X ]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [ X ]

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 Company was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] 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 (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files. Yes [ X ] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a

non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act).

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 [ X ]

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEEDING FIVE YEARS:

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes [ ] No [ ]

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer's classes of common, as of the latest practicable date.

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SPINDLETOP OIL & GAS CO. AND SUBSIDIARIES

FORM 10-Q

For the quarter ended September 30, 2019

Index to Consolidated Financial Statements and Schedules

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Part I - Financial Information

Item 1. - Financial Statements

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SPINDLETOP OIL & GAS CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. BASIS OF PRESENTATION AND ORGANIZATION

The accompanying financial statements are presented in accordance with the requirements of Form 10-Q and consequently do not include all of the disclosures normally required by generally accepted accounting principles or those normally made in the Company's annual Form 10-K filing. Accordingly, the reader of this Form 10-Q may wish to refer to the Company's Form 10-K for the year ended December 31, 2018 for further information.

The consolidated financial statements presented herein include the accounts of Spindletop Oil & Gas Co., a Texas corporation ("the Company") and its wholly owned subsidiaries, Prairie Pipeline Co., a Texas corporation and Spindletop Drilling Company, a Texas corporation. All significant inter-company transactions and accounts have been eliminated.

In the opinion of management, the accompanying unaudited interim financial statements contain all material adjustments, consisting only of normal recurring adjustments necessary to present fairly the financial condition, the results of operations and changes in cash flows of the Company and its consolidated subsidiaries for the interim periods presented. Although the Company believes that the disclosures are adequate to make the information presented not misleading, certain information and footnote disclosures, including a description of significant accounting policies normally included in financial statements prepared in accordance with generally accepted accounting principles generally accepted in the United States of America, have been condensed or omitted pursuant to such rules and regulations.

Subsequent Events

Management has evaluated subsequent events through November 19, 2019, the date on which the financial statements were available to be issued.

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Item 2. - Management's Discussion and Analysis of Financial Condition and

Results of Operations

WARNING CONCERNING FORWARD LOOKING STATEMENTS

The following discussion should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this report.

This Report on Form 10-Q may contain forward-looking statements within the meaning of the federal securities laws, principally, but not only, under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” We caution investors that any forward-looking statements in this report, or which management may make orally or in writing from time to time, are based on management’s beliefs and on assumptions made by, and information currently available to, management. When used, the words “anticipate,” “believe,” “expect,” “intend,” “may,” “might,” “plan,” “estimate,” “project,” “should,” “will,” “result” and similar expressions which do not relate solely to historical matters are intended to identify forward-looking statements. These statements are subject to risks, uncertainties, and assumptions and are not guarantees of future performance, which may be affected by known and unknown risks, trends, uncertainties, and factors, that are beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, or projected. We caution you that while forward-looking statements reflect our good faith beliefs when we make them, they are not guarantees of future performance and are impacted by actual events when they occur after we make such statements. We expressly disclaim any responsibility to update our forward-looking statements, whether as a result of new information, future events or otherwise. Accordingly, investors should use caution in relying on past forward-looking statements, which are based on results and trends at the time they are made, to anticipate future results or trends.

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Some of the risks and uncertainties that may cause our actual results, performance or achievements to differ materially from those expressed or implied by forward-looking statements include, among others, the factors listed and described at Item 1A “Risk Factors” in the Company’s Annual Report on Form 10-K, which investors should review. There have been no changes from the risk factors previously described in the Company’s Form 10-K for the fiscal year ended December 31, 2018 (the “Form 10-K”).

Uncertainties regarding the global economic and financial environment could lead to an extended national or global economic recession. A slowdown in economic activity caused by a recession would likely reduce national and worldwide demand for oil and natural gas and result in lower commodity prices for long periods of time. Costs of exploration, development and production have not yet adjusted to current economic conditions, or in proportion to the significant reduction in product prices. Prolonged, substantial decreases in oil and natural gas prices would likely have a material adverse effect on the Company’s business, financial condition, and results of operations, and could further limit the Company's access to liquidity and credit, and could hinder its ability to satisfy its capital requirements.

In the past several years, capital and credit markets have experienced volatility and disruption. Given the levels of market volatility and disruption, the availability of funds from those markets may diminish substantially. Further, arising from concerns about the stability of financial markets generally and the solvency of borrowers specifically, the cost of accessing the credit markets has increased as many lenders have raised interest rates, enacted tighter lending standards, or altogether ceased to provide funding to borrowers.

Due to these potential capital and credit market conditions, the Company cannot be certain that funding will be available in amounts or on terms acceptable to the Company. The Company is evaluating whether current cash balances and cash flow from operations alone would be sufficient to provide working capital to fully fund the Company's operations. Accordingly, the Company is evaluating alternatives, such as joint ventures with third parties , or sales of interest in one or more of its properties. Such transactions, if undertaken, could result in a reduction in the Company's operating interests or require the Company to relinquish the right to operate the property. There can be no assurance that any such transactions can be completed or that such transactions will satisfy the Company's operating capital requirements. If the Company is not successful in obtaining sufficient funding or completing an alternative transaction on a timely basis on terms acceptable to the Company, the Company would be required to curtail its expenditures or restructure its operations, and the Company would be unable to continue its exploration, drilling, and recompletion program, any of which would have a material adverse effect on its business, financial condition, and results of operations.

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There could be adverse legislation which if passed, would significantly curtail our ability to attract investors and raise capital. Proposed changes in the Federal income tax laws which would eliminate or reduce the percentage depletion deduction and the deduction for intangible drilling and development costs for small independent producers, will significantly reduce the investment capital available to those in the industry as well as our Company. Lengthening the time to expense seismic costs will also have an adverse effect on our ability to explore and find new reserves.

Other sections of this report may also include suggested factors that could adversely affect our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risks may emerge from time to time and it is not possible for management to predict all such matters; nor can we assess the impact of all such matters on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. Investors should also refer to our quarterly reports on Form 10-Q for future periods and current reports on Form 8-K as we file them with the SEC, and to other materials we may furnish to the public from time to time through Forms 8-K or otherwise.

Results of Operations

Nine months ended September 30, 2019 compared to nine months ended September 30, 2018

Oil and gas revenues for the first nine months of 2019 were $3,501,000, as compared to $4,538,000 for the same period in 2018, a decrease of approximately $1,037,000 or 22.9%

Oil sales for the first nine months of 2019 were approximately $2,099,000 compared to approximately $2,718,000 for the first nine months of 2018, a decrease of approximately $619,000 or 22.8%. Oil sales volumes for the first nine months of 2019 were approximately 31,700 bbls compared to approximately 34,200 bbls during the same period in 2018, a decrease of approximately 2,500 bbls, or 7.3%.

Average oil prices received were $56.80 per bbl in the first nine months of 2019 compared to $63.87 per bbl in the first nine months of 2018, a decrease of approximately $7.07 per bbl or 11.7%.

Natural gas revenue for the first nine months of 2019 was $1,402,000 compared to $1,820,000 for the same period in 2018, a decrease of approximately $418,000, or 23.0%. Natural gas sales volumes for the first nine months of 2019 were approximately 692,000 mcf compared to approximately 656,000 mcf during the first nine months of 2018, an increase of approximately 36,000 mcf or 5.5%.

Average natural gas prices received were $2.03 per mcf in the first nine months of 2019 as compared to $2.78 per mcf in the same time period in 2018, a decrease of approximately $0.75 per mcf or 27.0%.

Revenues from lease operations were $249,000 in the first nine months of 2019 compared to $199,000 in the first nine months of 2018, an increase of approximately $50,000 or 25.1%. This increase is due primarily to an increase in field supervision charges. Revenues from lease operations are derived from field supervision charged to operated leases along with operator overhead charges to operated leases.

Revenues from gas gathering, compression and equipment rental for the first nine months of 2019 were $94,000 compared to $100,000 for the same period in 2018, a decrease of approximately $6,000 or 6.0%. These revenues are derived from gas volumes produced and transported through our gas gathering systems.

Real estate rental revenue was approximately $179,000 during the first nine months of 2019 compared to $173,000 for the first nine months of 2018, an increase of approximately $6,000, or 3.5%. Real estate rental revenue is derived from the leasing to third party tenants in the Company’s corporate office building.

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Interest income was $150,000 during the first nine months of 2019 as compared to $124,000 during the same period in 2018, an increase of approximately $26,000 or 21.0%. Interest income is derived from investments in both short-term and long-term certificates of deposit as well as money market accounts at banks.

Other revenues for the first nine months of 2019 were $49,000 as compared to $39,000 for the same time period in 2018, an increase of approximately $10,000 or 25.6%. The increase is due primarily to miscellaneous non-recurring accounting adjustments.

Lease operating expenses in the first nine months of 2019 were $1,239,000 as compared to $1,106,000 in the first nine months of 2018, a net increase of $133,000, or 12.0%. Approximately $30,000 of the increase is due to a net increase in operating expenses billed by third-party operators on non-operated properties. The remaining net increase of approximately $103,000 represents overall increases and decreases on various properties.

Production taxes, gathering and marketing expenses in the first nine months of 2019 were approximately $592,000 as compared to $616,000 for the first nine months of 2018, a decrease of approximately $24,000 or 3.9%. The commensurate decrease related to decreased oil and gas revenue noted above was offset by higher gathering and processing expenses for liquid products charged by third parties.

Pipeline and rental expenses for the first nine months of 2019 were $25,000 compared to $43,000 for the same time period in 2018, a decrease of $18,000, or 41.9%. The decrease is due to non-recurring repairs in 2018.

Real estate expenses in the first nine months of 2019 were approximately $104,000 compared to $114,000 during the same period in 2018, a decrease of approximately $10,000 or 8.8%. The decrease is due to a timing difference for insurance payments between periods.

Depreciation, depletion, and amortization expenses for first nine months of 2019 were $407,000 as compared to $433,000 for the same period in 2018, a decrease of approximately $26,000, or 6.0%. $362,000 of the amount for the first nine months of 2019 was for amortization of the full cost pool of capitalized costs compared to $388,000 for the same period of 2018, a decrease of approximately $26,000 or 6.7%. The Company re-evaluated its proved oil and natural gas reserve quantities as of December 31, 2018. This re-evaluated reserve base was adjusted for the first nine months as of September 30, 2019 by estimating variances in average prices of oil and natural gas that occurred during the period, adding estimated quantities of oil and natural gas reserves acquired during the period, and deducting oil and natural gas reserves that were produced or sold during the period. A depletion rate of 3.191% for the first quarter of 2019, a depletion rate of 3.554% for the second quarter, and a depletion rate of 3.727% for the third quarter of 2019 was calculated and applied to the Company’s full cost pool of capitalized oil and natural gas properties compared to rates of 2.636%, 3.320%, and 2.751% for the first three quarters of 2018 respectively.

Asset Retirement Obligation (“ARO”) expense for the first nine months of 2019 was approximately $142,000 as compared to approximately $27,000 for the same time period in 2018, an increase of approximately $115,000. ARO is a calculation of the estimated present value to plug producing properties compared to the estimate made in the previous year. This recalculation was made after the Company re-evaluated its proved oil and natural gas reserves at the end of 2018.

General and administrative expenses for the first nine months of 2019 were approximately $2,212,000 as compared to approximately $1,920,000 for the same time period of 2018, an increase of approximately $292,000 or 15.2%. Approximately half of the increase comes from increased salary, wages, benefits, and other personnel costs. The remaining half of the increase is due to the timing of expenditures for office, computer, and other general and administrative expenses.

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Three months ended September 30, 2019 compared to three months ended September 30, 2018

Oil and natural gas revenues for the three months ended September 30, 2019 were $1,126,000, compared to $1,268,000 for the same time period in 2018, a decrease of approximately $142,000, or 11.2%.

Oil sales for the third quarter of 2019 were approximately $749,000 compared to approximately $757,000 for the same period of 2018, a decrease of approximately $8,000 or 1.1%. Oil volumes sold for the third quarter of 2019 were approximately 11,300 bbls compared to approximately 11,000 bbls during the same period of 2018, an increase of approximately 300 bbls or 2.7%.

Average oil prices received were approximately $54.84 per bbl in the third quarter of 2019 compared to $57.61 per bbl during the same period of 2018, a decrease of approximately $2.77 per bbl, or 4.8%.

Natural gas revenues for the third quarter of 2019 were $377,000 compared to $511,000 for the same period in 2018, a decrease of $134,000 or 26.2%. Natural gas volumes sold for the third quarter of 2019 were approximately 249,000 mcf compared to approximately 223,000 mcf during the same period of 2018, an increase of approximately 26,000 mcf, or 11.7%.

Average natural gas prices received were approximately $1.62 per mcf in the third quarter of 2019 as compared to approximately $2.74 per mcf during the same period in 2018, a decrease of approximately $1.12 or 40.9%.

Revenues from lease operations for the third quarter of 2019 were approximately $62,000 compared to approximately $69,000 for the third quarter of 2018, a decrease of approximately $7,000 or 10.1%. This decrease is due primarily to a decrease in field supervision charges during the third quarter of 2019. Revenues from lease operations are derived from field supervision charged to operated leases along with operator overhead charges to operated leases.

Revenues from gas gathering, compression and equipment rental for the third quarter of 2019 were approximately $28,000, compared to approximately $39,000 for the same period in 2018, a decrease of approximately $11,000 or 28.2%. These revenues are derived from gas volumes produced and transported through our gas gathering systems.

Real estate rental revenue was approximately $60,000 during the third quarter of 2019 compared to $57,000 for the same time period of 2018, an increase of approximately $3,000 or 5.3%. Real estate rental revenue is derived from the leasing to third party tenants in the Company’s corporate office building.

Interest income for the third quarter of 2019 was approximately $37,000 as compared with approximately $36,000 for the same period in 2018, an increase of approximately $1,000 or 2.8%. Interest income is derived from investments in both short-term and long-term certificates of deposit as well as money market accounts at banks.

Other revenues for third quarter of 2019 were approximately $27,000 as compared with approximately $10,000 for the same period in 2018, an increase of approximately $17,000 or 170.0%. The increase is due primarily to miscellaneous non-recurring accounting adjustments.

Lease operating expenses in the third quarter of 2019 were $418,000 as compared to $368,000 in the third quarter of 2018, a net increase of approximately $50,000, or 13.6%.  Approximately $12,000 of the increase is due to a net increase in operating expenses billed by third-party operators on non-operated properties. The remaining net increase of $38,000 represents overall increases and decreases on various properties.

Production taxes, gathering, transportation and marketing expenses for the third quarter of 2019 were approximately $204,000 as compared to $120,000 during the third quarter of 2018, a net increase of approximately $84,000 or 70.0%. The commensurate decrease related to decreased oil and gas revenue noted above was offset by higher gathering and processing expenses for liquid products charged by third parties.

Pipeline and rental expenses for the third quarter of 2019 were $6,000 compared to $6,000 for the same time period in 2018.

Real estate expenses during the third quarter 2019 were approximately $32,000 compared to approximately $41,000 for the same period in 2018, a decrease of approximately $9,000 or 22.0%. The decrease is due to a timing difference for insurance payments between periods.

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Depreciation, depletion, and amortization expenses for the third quarter of 2019 were $137,000 as compared to $141,000 for the same period in 2018, a decrease of approximately $4,000, or 2.8%. $123,000 of the amount for the third quarter of 2019 was for amortization of the full cost pool of capitalized costs compared to $126,000 for the third quarter of 2018, a decrease of approximately $3,000 or 2.4%. The Company re-evaluated its proved oil and natural gas reserve quantities as of December 31, 2018. This re-evaluated reserve base was adjusted for the first nine months as of September 30, 2019 by estimating variances in average prices of oil and natural gas that occurred during the period, adding estimated quantities of oil and natural gas reserves acquired during the period, and deducting oil and natural gas reserves that were produced or sold during the period. A depletion rate of 3.191% for the first quarter of 2019, a depletion rate of 3.554% for the second quarter, and a depletion rate of 3.727% for the third quarter of 2019 was calculated and applied to the Company’s full cost pool of capitalized oil and natural gas properties compared to rates of 2.636%, 3.320%, and 2.751% for the first three quarters of 2018 respectively.

Asset Retirement Obligation (“ARO”) expense for the third quarter of 2019 was approximately $48,000 as compared to approximately $9,000 for the same time period in 2018, an increase of approximately $39,000. ARO is a calculation of the estimated present value to plug producing properties compared to the estimate made in the previous year. This recalculation was made after the Company re-evaluated its proved oil and natural gas reserves at the end of 2018.

General and administrative expenses for the third quarter of 2019 were $721,000 compared to $619,000 for the same period in 2018, an increase of approximately $102,000 or 16.5%. Approximately one-quarter of the increase comes from increased salary, wages, benefits, and other personnel costs. The remaining three-quarters of the increase is due to the timing of expenditures for office, computer, and other general and administrative expenses.

Financial Condition and Liquidity

The Company's operating capital needs, as well as its capital spending program are generally funded from cash flow generated by operations. Because future cash flow is subject to a number of variables, such as the level of production and the sales price of oil and natural gas, the Company can provide no assurance that its operations will provide cash sufficient to maintain current levels of capital spending. Accordingly, the Company may be required to seek additional financing from third parties in order to fund its exploration and development programs.

Item 4. - Controls and Procedures

(a) As of the end of the period covered by this report, Spindletop Oil & Gas Co. carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Principal Executive Officer and Principal Financial and Accounting Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Exchange Act Rule 13a-15 and 15d-15. Based upon the evaluation, the Company's Principal Executive Officer and Principal Financial and Accounting Officer concluded that the Company's disclosure controls and procedures were effective as of the end of the period covered by the report.

(b) There have been no changes in the Company's internal controls over financial reporting during the quarter ended September 30, 2019 that have materially affected, or are reasonably likely to materially affect the Company's internal controls over financial reporting.

Part II – Other Information

Item 5. – Other Information

None.

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Item 6. - Exhibits

The following exhibits are filed herewith or incorporated by reference as indicated.

____________________________

* filed herewith

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Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.