1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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 June 30, 2008
OR
/ / 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 0-5525
PYRAMID OIL COMPANY
(Exact name of registrant as specified in its charter)
CALIFORNIA 94-0787340
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2008 - 21ST. STREET,
BAKERSFIELD, CALIFORNIA 93301
(Address of principal executive offices) (Zip Code)
(661) 325-1000
(Registrant's telephone number, including area code)
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 [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.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the close of the period covered by this report.
(Class) (Outstanding at June 30,2008)
COMMON STOCK WITHOUT PAR VALUE 4,677,728
2
PART I - FINANCIAL STATEMENTS
Item 1. Financial Statements
PYRAMID OIL COMPANY
BALANCE SHEETS
ASSETS
June 30, December 31,
2008 2007
(Unaudited) (Audited)
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents $1,381,425 $ 618,448
Short-term investments 1,505,325 1,478,979
Trade accounts receivable 1,059,244 643,340
Interest receivable 2,225 2,251
Employee loan receivable 600 --
Crude oil inventory 74,857 71,298
Prepaid expenses 84,393 170,913
Deferred taxes 64,000 --
------------ ------------
TOTAL CURRENT ASSETS 4,172,069 2,985,229
------------ ------------
PROPERTY AND EQUIPMENT, at cost
Oil and gas properties and equipment
(successful efforts method) 15,593,748 14,734,929
Capitalized asset retirement costs 310,579 310,579
Drilling and operating equipment 2,073,137 2,050,556
Land, buildings and improvements 1,045,649 1,010,847
Automotive, office and other
property and equipment 1,162,324 1,141,451
------------ ------------
20,185,437 19,248,362
Less: accumulated depletion,
depreciation, amortization
and valuation allowance (14,394,669) (14,040,610)
------------ ------------
5,790,768 5,207,752
------------ ------------
OTHER ASSETS
Deposits 250,000 250,000
Other assets 7,380 7,380
Assets held for resale 9,633 9,633
------------ ------------
$10,229,850 $8,459,994
============ ============
The Accompanying Notes Are an Integral Part of These Financial Statements.
3
PYRAMID OIL COMPANY
BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30, December 31,
2008 2007
(Unaudited) (Audited)
------------ ------------
CURRENT LIABILITIES:
Accounts payable $ 98,350 $ 108,500
Accrued professional fees 53,223 54,165
Accrued taxes, other than income taxes -- 61,684
Accrued payroll and related costs 64,444 57,647
Accrued royalties payable 280,643 212,916
Accrued insurance 26,399 65,999
Accrued income taxes 190,206 145,815
Current maturities of long-term debt 24,734 26,868
------------ ------------
TOTAL CURRENT LIABILITIES 737,999 733,594
------------ ------------
LONG-TERM DEBT, net of current maturities 32,707 44,542
------------ ------------
DEFERRED TAXES 25,000 --
------------ ------------
LIABILITY FOR SHARE BASED COMPENSATION -- 67,000
------------ ------------
LIABILITY FOR ASSET RETIREMENT OBLIGATION 1,022,524 1,010,903
------------ ------------
COMMITMENTS (Note 3)
STOCKHOLDERS' EQUITY:
Preferred stock - no par value;
10,000,000 authorized shares;
no shares issued or outstanding -- --
Common stock - no par value;
50,000,000 authorized shares;
4,677,728 shares issued and
outstanding 1,137,010 1,071,610
Retained earnings 7,274,610 5,532,345
------------ ------------
8,411,620 6,603,955
------------ ------------
$10,229,850 $8,459,994
============ ============
The Accompanying Notes Are an Integral Part of These Financial Statements.
4 PYRAMID OIL COMPANY
STATEMENTS OF OPERATIONS
(UNAUDITED)
Three months ended June 30,
---------------------------
2008 2007
------------ ------------
REVENUES $2,123,186 $1,110,413
------------ ------------
COSTS AND EXPENSES:
Operating expenses 461,477 408,650
Exploration costs -- 816
General and administrative 209,088 175,775
Taxes, other than income
and payroll taxes 21,100 21,455
Provision for depletion,
depreciation and amortization 191,239 120,907
Accretion expense 5,811 5,490
Other costs and expenses 56,020 15,360
------------ ------------
944,735 748,453
------------ ------------
OPERATING INCOME 1,178,451 361,960
------------ ------------
OTHER INCOME (EXPENSE):
Interest income 19,934 18,391
Other income 9,152 8,381
Interest expense (593) (1,783)
------------ ------------
28,493 24,989
------------ ------------
INCOME BEFORE INCOME TAX PROVISION 1,206,944 386,949
Income taxes
Current 182,850 29,600
Deferred 116,100 --
----------- ------------
298,950 29,600
------------ ------------
NET INCOME $907,994 $357,349
============ ============
The Accompanying Notes are an Integral Part of These Financial Statements.
5 PYRAMID OIL COMPANY
STATEMENTS OF OPERATIONS
(UNAUDITED)
Three months ended June 30,
---------------------------
2008 2007
------------ ------------
EARNINGS PER COMMON SHARE - Post Split
Basic and Diluted Income
Per Common Share $ 0.19 $ 0.08
============ ============
Basic and diluted weighted average number
of common shares outstanding 4,677,728 4,677,728
============ ============
EARNINGS PER COMMON SHARE - Pre-Split
Basic and Diluted Income
Per Common Share $ 0.24 $ 0.10
============ ============
Basic and diluted weighted average number
of common shares outstanding 3,741,721 3,741,721
============ ============
The Accompanying Notes are an Integral Part of These Financial Statements.
6 PYRAMID OIL COMPANY
STATEMENTS OF OPERATIONS
(UNAUDITED)
Six months ended June 30,
---------------------------
2008 2007
------------ ------------
REVENUES $3,713,082 $1,936,593
------------ ------------
COSTS AND EXPENSES:
Operating expenses 884,283 771,313
Exploration costs ( 28,812) 5,651
General and administrative 441,600 450,929
Taxes, other than income
and payroll taxes 56,610 48,611
Provision for depletion,
depreciation and amortization 354,059 218,577
Accretion expense 11,621 11,121
Other costs and expenses 75,572 24,052
------------ ------------
1,794,933 1,530,254
------------ ------------
OPERATING INCOME 1,918,149 406,339
------------ ------------
OTHER INCOME (EXPENSE):
Interest income 42,011 42,180
Other income 18,814 11,981
Interest expense (1,234) (1,797)
------------ ------------
59,591 52,364
------------ ------------
INCOME BEFORE INCOME TAX PROVISION 1,977,740 458,703
Income taxes
Current 274,475 43,425
Deferred ( 39,000) --
----------- ------------
235,475 43,425
------------ ------------
NET INCOME $1,742,265 $415,278
============ ============
The Accompanying Notes are an Integral Part of These Financial Statements.
7 PYRAMID OIL COMPANY
STATEMENTS OF OPERATIONS
(UNAUDITED)
Six months ended June 30,
---------------------------
2008 2007
------------ ------------
EARNINGS PER COMMON SHARE - Post Split
Basic and Diluted Income
Per Common Share $ 0.37 $ 0.09
============ ============
Basic and diluted weighted average number
of common shares outstanding 4,677,728 4,677,728
============ ============
EARNINGS PER COMMON SHARE - Pre-Split
Basic and Diluted Income
Per Common Share $ 0.47 $ 0.11
============ ============
Basic and diluted weighted average number
of common shares outstanding 3,741,721 3,741,721
============ ============
The Accompanying Notes are an Integral Part of These Financial Statements.
8 PYRAMID OIL COMPANY
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six months ended June 30,
---------------------------
2008 2007
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $1,742,265 $ 415,278
Adjustments to reconcile net income
to cash provided by (used in)
operating activities:
Provision for depletion,
depreciation and amortization 354,059 218,577
Accretion expense 11,621 11,121
Exploration costs (28,812) 5,651
Severance award agreement ( 1,600) 67,400
Deferred taxes ( 39,000) --
Changes in assets and liabilities:
Increase in trade accounts
and interest receivable (415,879) ( 94,165)
Increase in crude oil inventories (3,559) (3,567)
Decrease in prepaid expenses 86,521 76,026
Increase (decrease) in accounts
Payable and accrued liabilities 6,539 (90,250)
--------- --------
Net cash provided by operating activities 1,712,155 606,071
--------- --------
The Accompanying Notes Are an Integral Part of These Financial Statements.
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PYRAMID OIL COMPANY
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six months ended June 30,
---------------------------
2008 2007
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures $(908,263) $(613,527)
Redemption of certificate of deposit -- 200,000
Increase in short-term investments ( 26,346) ( 23,316)
-------- ---------
Net cash used in investing activities (934,609) (436,843)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit -- 150,000
Principal payments on line of credit -- (150,000)
Loans to employees (2,100) (2,000)
Principal payments on loans to employees 1,500 500
Principal payments on long-term debt ( 13,969) ( 19,587)
-------- --------
Net cash used in financing activities (14,569) (21,087)
-------- --------
Net increase in cash 762,977 148,141
Cash at beginning of period 618,448 619,001
--------- ---------
Cash at end of period $1,381,425 $ 767,142
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the six months for interest $ 1,234 $ 1,797
======== ========
Cash paid during the six months for income taxes $230,085 $ 1,125
======== ========
The Accompanying Notes Are an Integral Part of These Financial Statements.
10 PYRAMID OIL COMPANY
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2008
(UNAUDITED)
1. Summary of Significant Accounting Policies
The financial statements include the accounts of Pyramid Oil Company (the
Company). Such financial statements included herein have been prepared by the
Company, without an audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although the Company believes that the
disclosures are adequate to make the information presented not misleading.
A summary of the Company's significant accounting policies is contained in its
December 31, 2007 Form 10-KSB which is incorporated herein by reference. The
financial data presented herein should be read in conjunction with the
Company's December 31, 2007 financial statements and notes thereto, contained
in the Company's Form 10-KSB.
In the opinion of the Company, the unaudited financial statements, contained
herein, include all adjustments necessary to present fairly the Company's
financial position as of June 30, 2008 and December 31, 2007 and the results
of its operations and its cash flows for the six month periods ended June 30,
2008 and 2007. The results of operations for an interim period are not
necessarily indicative of the results to be expected for a full year.
Income taxes: When tax returns are filed, it is highly certain that some
positions taken would be sustained upon examination by the taxing authorities,
while others are subject to uncertainty about the merits of the position taken
or the amount of the position that would be ultimately sustained. The benefit
of a tax position is recognized in the financial statements in the period
during which, based on all available evidence, management believes it is more
likely than not that the position will be sustained upon examination,
including the resolution of appeals or litigation processes, if any. Tax
positions taken are not offset or aggregated with other positions. Tax
positions that meet the more-likely-than-not recognition threshold are
measured as the largest amount of tax benefit that is more than 50 percent
likely of being realized upon settlement with the applicable taxing authority.
The portion of the benefits associated with tax positions taken that exceeds
the amount measured as described above is reflected as a liability for
unrecognized tax benefits in the accompanying balance sheets along with any
associated interest and penalties that would be payable to the taxing
authorities upon examination.
Interest associated with unrecognized tax benefits are classified as interest
expense and penalties are classified in selling, general and administrative
expenses in the statements of income.
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2. Impact of Recent Accounting Pronouncements
In September 2006, the Financial Accounting Standards Boards (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value
Measurement, which defines fair value, establishes a framework for measuring
fair value and expands disclosures about fair value measurements. SFAS No.
157 focuses on creating consistency and comparability in fair value
measurements. With the exception of certain nonfinancial assets and
liabilities, SFAS No. 157 is effective for financial assets and liabilities
that are measured at fair value within the financial statements for fiscal
years beginning after November 15, 2007, and interim periods within those
fiscal years. In February 2008, the FASB issued FASB Staff Position (FSP)
No. FAS 157-2 to defer SFAS No. 157's effective date for all nonfinancial
assets and liabilities, except those items recognized or disclosed at fair
value on an annual or more frequently recurring basis, until years beginning
after November 15, 2008. We currently are evaluating the impact that the
provisions of SFAS No. 157 for nonfinancial assets and liabilities may have on
our financial statements.
In February 2007, the FASB issued SFAS No.159, The Fair Value Option for
Financial Assets and Financial Liabilities, Including an Amendment of FASB
Statement No. 115, which permits an entity to measure certain financial
assets and financial liabilities at fair value. The objective of SFAS No. 159
is to improve financial reporting by allowing entities to reduce volatility in
reported earnings, caused by the measurement of related assets and liabilities
using different attributes, without having to apply complex hedge accounting
rules. Under SFAS No. 159, entities that elect the fair value option will
report unrealized gains and losses in earnings as of each subsequent reporting
date. The fair value option may be elected on an instrument-by-instrument
basis with a few exceptions, as long as it is applied to the instrument in its
entirety. The fair value option election is irrevocable, unless a new
election date occurs. SFAS No. 159 is effective as of the beginning of the
first fiscal year that begins after November 15, 2007. We adopted SFAS No.
159 on January 1, 2008 and elected not to apply the fair value option.
In April 2008, the FASB issued Financial Statement Position (FSP) No. EITF 03-
6-1, Determining Whether Instruments Granted in Share-Based Payment
Transactions Are Participating Securities. FSP No. EITF 03-6-1 states that
all outstanding unvested share-based payment awards that contain rights to
nonforfeitable dividends participate in undistributed earnings with common
shareholders and should be included in basic and diluted earnings per share
calculations. FSP No. EITF 03-6-1 is effective for fiscal years, and interim
periods within those fiscal years, beginning after December 15, 2008. We
currently are evaluating the impact of adoption that FSP No. EITF 03-6-1 may
have on our financial statements.
In April 2008, the FASB issued FSP No. FAS 142-3, Determination of the Useful
Life of Intangible Assets. FSP No. FAS 142-3 amends the factors that should
be considered in developing renewal or extension assumptions used to determine
the useful life of a recognized intangible asset under SFAS No. 142, Goodwill
and Other Intangible Assets. The intent of this FSP is to improve the
consistency between the useful life of a recognized intangible asset under
12
SFAS No. 142 and the period of expected cash flows used to measure the fair
value of the asset under SFAS No. 141(R) and other GAAP. FSP No. FAS 142-3 is
effective for fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2008. We do not expect the adoption of FSP No.
FAS 142-3 to have an impact on our financial statements.
In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally
Accepted Accounting Principles. SFAS No. 162 identifies the sources of
accounting principles and the framework for selecting the principles used in
the preparation of financial statements of nongovernmental entities that are
presented in conformity with GAAP in the United States. SFAS No. 162 will be
effective 60 days after the SEC's approval of the Public Company Accounting
Oversight Board (PCAOB's) amendments to AU Section 411. We do not expect
the adoption of SFAS No. 162 to have an impact on our financial statements.
3. Dividends
No cash dividends were paid during the six months ended June 30, 2008 and
2007.
4. Income Taxes
The Company adopted the provisions of FASB Interpretation No. 48, Accounting
for Uncertainty in Income Taxes, on January 1, 2007. As a result of the
implementation of FIN 48, the Company made a comprehensive review of its
portfolio of tax positions in accordance with recognition standards
established by FIN 48. As a result of the implementation of Interpretation
48, the Company recognized no material adjustments to liabilities or
stockholders equity.
The Company files income tax returns in the U.S. federal jurisdiction,
California and New York states. With few exceptions, the Company is no longer
subject to U.S. federal tax examination for the years before 2004. State
jurisdictions that remain subject to examination range from 2003 to 2007. The
Company does not believe there will be any material changes in its
unrecognized tax positions over the next 12 months.
The Company policy is to recognize interest and penalties accrued on any
unrecognized tax benefits as a component of income tax expense. As of the
date of adoption of FIN 48, the Company did not have any accrued interest or
penalties associated with any unrecognized tax benefits, nor was any interest
expense recognized during the quarter.
5. Commitments
In February 2002, the Company entered into an employment agreement with
John H. Alexander pursuant to which Mr. Alexander agreed to serve as the
Company's Vice President. On June 3, 2004, Mr. Alexander was appointed as the
Company's President and Chief Executive Officer. The employment agreement is
for an initial term of six years, which term automatically renews annually if
written notice is not tendered.
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Pursuant to the employment agreement, the Company may terminate Mr.
Alexander's employment with or without cause at any time before its term
expires upon providing written notice. In the event the Company terminates
Mr. Alexander's employment without cause, Mr. Alexander would be entitled to
receive a severance amount equal to his annual base salary and benefits for
the balance of the term of his employment agreement. In the event of
termination by reason of Mr. Alexander's death or permanent disability, his
legal representative will be entitled to receive his annual salary and
benefits for the remaining term of his employment agreement. In the event of,
or termination following, a change in control of the Company, as defined in
the agreement, Mr. Alexander would be entitled to receive his annual salary
and benefits for the remainder of the term of his agreement. In the event
that Mr. Alexander is terminated the Company would incur approximately
$600,000 in costs.
6. Income Tax Provision
The Company recognized a net income tax expense of $235,475 for the first six
months of 2008, compared to income tax expense of $43,425 for the same period
in 2007. The current tax provision has increased due primarily to higher
income as a result of significant market increases in the price of oil for the
six months ended June 30, 2008. Income tax benefits were realized by the
Company due to the utilization of statutory depletion allowance carryovers
that became available to the Company as a result of the significant market
increases in the price of oil. Income tax benefits were realized as a result
of adjustments to the Company's deferred tax asset valuation allowance
account.
Net income tax benefit for the first six months was calculated as follows:
Federal State Total
-------- --------- --------
Current tax provision $ 216,900 $ 57,575 $ 274,475
Deferred tax benefit ( 30,000) ( 9,000) ( 39,000)
------- ------- -------
$ 186,900 $ 48,575 $ 235,475
======= ====== =======
Deferred income taxes are recognized using the asset and liability method by
applying income tax rates to cumulative temporary differences based on when
and how they are expected to affect the tax returns. Deferred tax assets and
liabilities are adjusted for income tax rate changes. Deferred income tax
assets have been offset by a valuation allowance of $1,333,000 as of June 30,
2008. Management reviews deferred income taxes regularly throughout the year,
and accordingly makes any necessary adjustments to properly reflect the
valuation allowance based upon current financial trends and projected results.
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7. Stock Split
On June 5, 2008, the Company's Board of Directors approved a 5 for 4 stock
split payable on July 3, 2008, to shareholders of record as of June 24, 2008.
The effective date of the split is July 7, 2008.
Common Stock
---------
Shares outstanding at June 30, 2008 3,741,721
Shares issued 5 for 4 stock split July 3, 2008 936,007
---------
Shares outstanding at July 7, 2008 4,677,728
=========
All share and per share data for the periods presented have been retroactively
restated to reflect this stock split.
9. Severance Award Agreement
On January 9, 2007, the Company and John Alexander entered into a Severance
Award Agreement pursuant to which the Company awarded Mr. Alexander a
supplemental payment in connection with his future severance of employment
with the Company. Mr. Alexander serves as the Company's Chief Executive
Officer. Pursuant to the Severance Award Agreement and following the
termination of Mr. Alexander's employment, he will be entitled to receive (at
the Company's option) 25,000 shares of the Company's common stock or the
then-fair market value of the shares. As of June 30, 2008, the Company
intended to deliver the Company's common shares for the Severance Award.
10. Incentive and Retention Plan
On January 9, 2007, the Company's Board of Directors adopted an Incentive and
Retention Plan pursuant to which the Company's officers and other employees
selected by the Company's Compensation Committee are entitled to receive
payments if they are employed by the Company as of the date of a 'Corporate
Transaction,' as defined in the Incentive and Retention Plan. A 'Corporate
Transaction' includes certain mergers involving the Company, sales of Company
assets, and other changes in the control of the Company, as specified in the
Incentive and Retention Plan. In general, the amount that is payable to each
plan participant will equal the number of plan units that have been granted to
him or her, multiplied by the increase in the value of the Company between
January 9, 2007 and the date of a Corporate Transaction. There has been no
Corporate Transaction since the adoption of the Incentive and Retention Plan.
15
11. Related-party Transaction
Effective January 1, 1990, John H. Alexander, an officer and director of the
Company participated with a group of investors that acquired the mineral and
fee interest on one of the Company's oil and gas leases (Santa Fe Energy
lease) in the Carneros Creek field after the Company declined to participate.
The thirty-three percent interest owned by Mr. Alexander represents a minority
interest in the investor group. Royalties on oil and gas production from this
property paid to the investor group approximated $201,000 during the first six
months of 2008.
12. Investor Relations Consultants
On March 12, 2008, the Company entered into an agreement with Pfeiffer High
Investor Relations, Inc. (PHIR) pursuant to which PHIR will serve as an
investor relations consultant to the Company. PHIR will receive a monthly fee
of $5,000 and will be reimbursed for approved out-of-pocket expenses. The
agreement also provides for the payment of a 1.5% finder's fee to PHIR upon
the closing of a specified transaction, such as a merger, a sale of assets or
a sale of equity securities, if PHIR is responsible for initiating the
transaction.
If Company and PHIR mutually decide to extend the agreement after its initial
six-month term, the Company will grant to PHIR's two principals, for a total
purchase price of $20.00, fully vested warrants to purchase a total of 20,000
shares of the Company's common stock at an exercise price of $4.00 per share.
The warrants will have a two-year term, will be assignable and will have
piggyback registration rights and cashless exercise provisions.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD LOOKING INFORMATION
Crude oil prices have decreased by approximately $24.25 per barrel as of
August 8, 2008, when compared to prices at June 30, 2008.
The Company's Board of Directors recently approved a five-for-four (5 for 4)
stock split, which was paid to shareholders on July 3, 2008. Management
believes the 25% increase in the number of outstanding shares and the larger
public float will help attract additional shareholders.
The Company is currently waiting on the arrival of a drilling rig at its
Anderson property in California. The rig will be utilized to drill a new
developmental well in the Carneros Creek field, and drilling is expected to
begin late in the third quarter of 2008. The well has been designed
to penetrate the point-of-rocks formation at a depth of approximately 3,100
feet.
16
During the week of August 4, 2008, the Company was notified by the Operator of
its Texas joint venture that the pipeline and hook-up to the gas sales line
has been completed, and the well was scheduled to be cleaned out and put on
production during the week of August 11, 2008. The Company intends to issue a
news release after gas sales have commenced.
The Company's growth in 2008 will be highly dependant on the amount of success
the Company has in its operations and capital investments, including the
outcome of wells that have not yet been drilled. The Company's capital
investment program may be modified during the year due to explorations and
development successes or failures, market conditions and other variables. The
production and sales of oil and gas involves many complex processes that are
subject to numerous uncertainties, including reservoir risk, mechanical
failures, human error and market conditions.
The Company has positioned itself, over the past several years, to withstand
various types of economic uncertainties, with a program of consolidating
operations on certain producing properties and concentrating on properties
that provide the major revenue sources. The drilling of a new well and
several limited work-overs of certain wells have allowed the Company to
maintain its crude oil reserves for the last three years. The Company expects
to maintain its reserve base in 2008, by drilling new wells and routine
maintenance of its existing wells.
The Company may be subject to future costs necessary for compliance with the
new implementation of air and water environmental quality requirements of the
various state and federal governmental agencies. The requirements and costs
are unknown at this time, but management believes that costs could be
significant in some cases. As the scope of the requirements become more
clearly defined, management may be better equipped to determine the true costs
to the Company.
The Company continues to absorb the costs for various state and local fees and
permits under new environmental programs, the sum of which were not material
during 2007. The Company retains outside consultants to assist the Company in
maintaining compliance with these regulations. The Company is actively
pursuing an ongoing policy of upgrading and restoring older properties to
comply with current and proposed environmental regulations. The costs of
upgrading and restoring older properties to comply with environmental
regulations have not been determined. Management believes that these costs
will not have a material adverse effect upon its financial position or results
of operations.
Portions of the Quarterly Report, including Management's Discussion and
Analysis, contain forward-looking statements within the meaning of the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the Company's actual results
and performance in future periods to be materially different from any future
results or performance suggested in forward-looking statements in this
release. Such forward-looking statements speak only as of the date of this
report and the Company expressly disclaims any obligation to update or revise
17
any forward-looking statements found herein to reflect any changes in Company
expectations or results or any change in events. Factors that could cause
results to differ materially include, but are not limited to: the timing and
extent of changes in commodity prices of oil, gas and electricity,
environmental risk, drilling and operational costs, uncertainties about
estimates of reserves and government regulations.
ANALYSIS OF SIGNIFICANT CHANGES IN RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR THE QUARTER ENDED JUNE 30, 2008
COMPARED TO THE QUARTER ENDED JUNE 30, 2007
REVENUES
Oil and gas revenues increased by 91% for the three months ended June 30,
2008 when compared with the same period for 2007. Oil and gas revenues
increased by 93% due to higher average crude oil prices for the second quarter
of 2008. The average price of the Company's oil and gas for the second
quarter of 2008 increased by approximately $57.19 per equivalent barrel when
compared to the same period of 2007. Revenues decreased by 2% due to lower
crude oil production/shipments. The Company's net revenue share of crude oil
production/sales decreased by approximately 326 barrels for the second
quarter of 2008.
OPERATING EXPENSES
Operating expenses increased by approximately 13% for the second quarter of
2008. The cost to produce an equivalent barrel of crude oil increased by
approximately $3.33 (total cost of approximately $25.56 per equivalent barrel)
for the second quarter of 2008 when compared with the second quarter of 2007.
The increase in operating expenses of approximately $53,000 was caused by many
factors. These include higher costs for down-hole pump repairs, equipment
fuel and equipment rental.
Down-hole pump repairs increased by 4.9% due to increased maintenance activity
on several of the Company's oil and gas properties. Equipment fuel costs
increased by 3.7% due primarily to the higher cost of gasoline and diesel
fuel. Equipment rental increased by 3.5% due primarily to the rental of crude
oil storage tanks for the Anderson and Santa Fe leases. These tanks were used
during and after the fracing of three wells on these leases.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased by approximately 19% for the
second quarter of 2008 when compared with the same period for 2007.
Professional fees increased by 8.3% for the three months ended June 30, 2008,
due to an increase in consulting services of 4.2%. This was the result of the
Company retaining a website design firm to redesign its website. In addition,
accounting/audit fees and legal fees each increased by 2%.
18
Salaries increased by 4.7% due primarily to an increase in salaries and the
hiring of a part-time employee that was effective July 1, 2007.
PROVISION FOR DEPLETION, DEPRECIATION AND AMORTIZATION
The provision for depletion, depreciation and amortization increased by 58%
for the second quarter of 2008, when compared with the same period for 2007.
The increase is due primarily to a 53.5% increase in depletion of the
Companies oil and gas properties. The increase in depletion is due primarily
to an increase in the depletable base of oil and gas properties which is due
to the drilling of three new wells in 2006 and one new well in 2007 and 2008.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2008
COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2007
REVENUES
Oil and gas revenues increased by 91.7% for the six months ended June 30, 2008
when compared with the same period for 2007. Oil and gas revenues increased
due to higher average crude oil prices for the first half of 2008. The
average price of the Company's oil and gas for the first six months of 2008
increased by approximately $47.81 per equivalent barrel when compared with the
same period for 2007. The Company's net revenue share of crude oil
production/sales increased by approximately 1,465 barrels for the six months
ended June 30, 2008. The increase in production is due primarily to the new
wells that had been drilled in prior years on the Company's Anderson lease.
OPERATING EXPENSES
Operating expenses increased by approximately 14.6% for the six months ended
June 30, 2008, when compared with the same period for 2007. The cost to
produce an equivalent barrel of crude oil increased by approximately $2.25 per
barrel (total cost of approximately $24.97 per equivalent barrel) for the six
months ended June 30, 2008. The increase in operating expenses of
approximately $113,000 was caused by many factors. These include higher costs
for down-hole pump repairs, labor, equipment fuel, parts and supplies,
equipment rental and insurance. This was offset by lower costs for contract
operations, gas engine repairs and outside services.
Down-hole pump repairs increased by 4.3% due to increased maintenance activity
on several of the Company's oil and gas properties. Labor costs increased by
approximately 4% due primarily to higher overtime hours worked and the
addition of two new field employees during the second quarter. Equipment fuel
costs increased by 3.3% due primarily to the higher cost of gasoline and
diesel fuel. Parts and supplies increased by 2.1% due primarily to increased
maintenance activity on the Company's Anderson oil gas property. Equipment
rental increased by 2.1% due primarily to the rental of crude oil storage
tanks for the Anderson and Santa Fe leases. These tanks were used during and
19
after the fracing of three wells on these leases. Insurance costs increased
by 2% due to higher premiums for workers' compensation and employee medical
insurance.
Contract operations decreased by 2.2% due to lower costs for the New York gas
properties that were shut-in during the first six months of 2008. Gas engine
repairs decreased by 1.2% and outside services decreased by 1.1%.
EXPLORATION COSTS
In the first quarter of 2008, the Company received a payment, from its joint
venture partner, in the amount of $28,812 for its share of certain tangible
completion equipment on an exploratory well that had been abandoned in 2006
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased by approximately 2% for the
six months ended June 30, 2008, when compared with the same period for 2007.
Professional fees increased by 8.8% due primarily to an increase in accounting
fees. Accounting services increased by 6.6% for the six months ended June 30,
2008, due primarily to an increase in fees for the annual engineering oil and
gas reserve report and the compliance costs associated with Sarbanes-Oxley
Section 404, management's report on internal controls over financial
reporting. In addition, the Company has also retained a third-party firm to
prepare its Federal and state tax returns and to review the Company's
preparation of its income tax provision. The remaining increase in
professional fees is primarily the result of the Company retaining a website
design firm to redesign its website.
Compensation costs decreased by 12% due primarily to the severance award
agreement (see footnote 9). The severance award agreement was effective
January 9, 2007 and was recorded in the first quarter of 2007.
PROVISION FOR DEPLETION, DEPRECIATION AND AMORTIZATION
The provision for depletion, depreciation and amortization increased by 62%
for the six months ended June 30, 2008, when compared with the same period for
2007. The increase is due primarily to a 57.5% increase in depletion of the
Company's oil and gas properties. The increase in depletion is due primarily
to an increase in the depletable base of oil and gas properties due to the
drilling of three new wells in 2006 and one new well in 2007 and 2008 and
higher crude oil production sales during the first six months of 2008.
20
LIQUIDITY AND CAPITAL RESOURCES
Cash increased by $762,977 for the six months ended June 30, 2007. During the
first half of 2008, operating activities provided cash of $1,712,155. This
was offset by capital expenditures of $908,263 and principal payments on
long-term debt totaling $13,969 during the first six months of 2008. See the
Statements of Cash Flows for additional detailed information. The Company had
available a line of credit of $500,000 and short-term investments of
$1,505,325 that could have provided additional liquidity during the first six
months of 2008.
IMPACT OF CHANGING PRICES
The Company's revenue is affected by crude oil prices paid by the major oil
companies. Average crude oil prices for the second quarter of 2008 increased
by approximately $57.19 when compared with the same period for 2007. Average
crude oil prices for the first six months of 2008 increased by approximately
$47.81 per equivalent barrel when compared with the same period for 2007. At
the end of the second quarter of 2008, crude oil prices had increased by
approximately $42.45 per barrel when compared with crude oil prices at
December 31, 2007.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
Item 4. CONTROLS AND PROCEDURES
Our Chief Executive Officer and Chief Financial Officer have concluded, based
on their evaluation as of the end of the period covered by this report, that
our disclosure controls and procedures (as defined in the Securities Exchange
Act of 1934 Rules 13a-15(e) and 15d-15(e)) are effective to ensure that
information required to be disclosed in the reports that we file or submit
under the Securities Exchange Act of 1934 is recorded, processed, summarized
and reported within the time periods specified in the Securities and Exchange
Commission's rules and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and
Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosures.
There was no change in our internal control over financial reporting that
occurred during the six months ended June 30, 2008 that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
21
PYRAMID OIL COMPANY
PART II - OTHER INFORMATION
Item 1. - Legal Proceedings
None
Item 1A. - Risk Factors
See the risk factors that are included in the Company's Annual Report on
Form 10KSB for the fiscal year ended December 31, 2007.
Item 2. - Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. - Defaults Upon Senior Securities
None
Item 4. - Submission of Matters to a Vote of Security Holders
On June 5, 2008, the Company held its Annual Meeting of Shareholders at
the Corporate Offices in Bakersfield, California. At the meeting the holders
of our outstanding common stock acted on the following matters:
(1) The shareholders voted for 5 directors, each to serve for a term of
one year. Each nominee received the following votes:
Name of Nominee Votes For Withheld
---------------- --------- --------
Michael D. Herman 3,499,822 27,072
John H. Alexander 3,499,822 27,072
Thomas W. Ladd 3,480,823 46,071
John E. Turco 3,480,823 46,071
Gary L. Ronning 3,500,823 26,071
(2) The shareholders voted for the ratification of the appointment of
SingerLewak, LLP as our independent auditors for our fiscal year
ending December 31, 2008. Votes cast were as follows:
Votes For 3,524,272
Votes Against 279
Abstain 2,343
Item 5. - Other Information -
None
22
Item 6. - Exhibits
a. Exhibits
3.1 Registrant's Amended Articles of Incorporation
31.1 Certification of the Registrant's Principal Executive Officer
under Exchange Act Rules 13a-14(a) and 15-d-14(a), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Registrant's Principal Financial Officer
under Exchange Act Rules 13a-14(a) and 15-d-14(a), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of the Registrant's Principal Executive Officer
under 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
32.2 Certification of the Registrant's Principal Financial Officer
under 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
23
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.
PYRAMID OIL COMPANY
(registrant)
Dated: August 12, 2008
JOHN H. ALEXANDER
---------------------
John H. Alexander
President
Dated: August 12, 2008
LEE G. CHRISTIANSON
---------------------
Lee G. Christianson
Chief Financial Officer