The Reserve Petroleum Company
|Jun 8, 2012|
The Reserve Petroleum Company (ticker: RSRV) was founded in 1931 and is headquartered in Oklahoma City, Oklahoma. Mr. Mason McLain, 85, has served as chairman since 1955. Mr. McLain's brother Robert, 82, and his sons Cameron and Kyle also serve on the board of directors. Cameron McLain serves as CEO, a role he assumed when Mason McLain stepped down in 2009. Reserve Petroleum explores for and produces oil and natural gas, primarily in Oklahoma and Texas. The company also significant mineral properties.
As a general rule, I shy away from commodities producers. These companies are profoundly affected by changes in commodities prices, which I have absolutely no expertise in predicting. Oil and natural gas are almost completely fungible products, so producers are left to compete on price alone. Furthermore, explorers take on significant risk and commit huge amounts of capital with no assurance of profits. A series of dry wells or a single uneconomical acquisition can destroy serious value.
What's more, the commodities complex seems to attract far more than its share of stock promoters, snake oil salesmen and con artists. Mark Twain supposedly described a gold mine as a "hole in the ground with a liar on top." I think the same can be said of an oil well.
Amid the wreckage of hundreds of bankrupt or nearly-so exploration companies on the unlisted market, Reserve Petroleum stands out for its consistent successes. Over several decades, the McLains have proven to be canny oilmen and ethical businessmen. Year after year the company has increased its proven reserves while producing profitably. The company has paid generous dividends to shareholders while gradually repurchasing stock. The upshot for shareholders over the last decade was an astounding 1,500% return, including reinvested dividends. Obviously, the commodities boom of the 2000s provided a strong tailwind, but Reserve Petroleum strongly outpaced the SPDR Energy Index ETF's total return of about 200% over the same period.
Over the last decade, Reserve Petroleum has shown consistent profitability and free cash flow.
The company's operating and net margins are excellent. By comparison, Exxon Mobil's average net margin over the last five years was 8.6% and Chevron's was 8.8%. The company keeps a tight lid on SG&A expenses, averaging just 10.9% of revenue over the last five years.
The company's operational efficiency carries over to its balance sheet. Reserve Petroleum eschews debt completely, and traditionally holds large reserves invested in government bonds. At quarter's end, these excess investments amounted to just over $117 per share, fully 36.5% of market capitalization.
Reserve Petroleum's exploration efforts have been extremely productive, resulting in large additions to proven reserves year after year.
Proven reserves for both oil and natural gas hit all time highs in the most year. The company's reserves were primarily natural gas a decade ago, but proven oil reserves grew much more quickly since then.
Reserve Petroleum recently traded with a bid/ask spread of $292/$350. At the mid-point of $324, the company had a market cap of $52.2 million and a trailing P/E ratio of 9.3. This seems like a reasonable value for a debt-free and well-managed exploration and production company, but it ignores Reserve Petroleum's $18.84 million in cash and securities. Net of those excess assets, the company trades at a trailing P/E ratio of 5.9.
The company seems likely to be in good hands for the foreseeable future. Both the younger McLain brothers are in their mid-50s and stand to lead the company for decades to come. Encouragingly, management's pay is very reasonable. Together, the company's four most highly compensated officers earned just over $524,000 in 2011. For an old, unlisted family firm, insiders own surprisingly little of the company, just 29.4% of shares outstanding. The company has around 1,500 beneficial owners, far more than most firms I examine. This diffuse ownership and lack of a single controlling shareholder may discourage management from using the company as a piggy bank, as so often happens in these situations. To their credit, the McLains seem committed to good corporate governance, even posting corporate governance plans on the company website.
Investors wishing to purchase the company's stock must be patient. The stock trades with a very wide spread, and often weeks go by with no transactions whatsoever. Still, I think Reserve Petroleum is a reasonably priced operator with attractive assets and competent management.