ITEM 1 - BUSINESS
GENERAL BUSINESS DESCRIPTION
Pyramid Oil Company is a California corporation that has been in the oil and gas business continuously, since it was incorporated on October 9, 1909. Pyramid Oil Company, hereinafter referred to as "Pyramid" or the "Company," is engaged in the business of exploration, development and production of crude oil and natural gas.
Pyramid acquires interests in land and producing properties through acquisition and lease on which it drills and/or operates crude oil or natural gas wells in efforts to discover and/or to produce oil and gas. Crude oil and natural gas produced from these properties are sold to various refineries and pipeline companies. The majority of all oil and gas properties that Pyramid owns and operates is for its own account. Pyramid also participates in specific joint ventures with other companies in the development of oil and gas properties. Pyramid's interests in these properties will vary depending on the availability of said interests and their locations. Although the Company owns some minor oil and gas interests in New York, Wyoming and Texas, all of the Company's operations and major revenue producing properties are in California.
The Company's executive offices are located at 2008 21st Street, Bakersfield, California, 93301, telephone (661) 325-1000, facsimile (661) 325-0100.
DESCRIPTION OF BUSINESS - OIL AND GAS OPERATIONS
EXPLORATION AND DEVELOPMENT
Pyramid operates in a highly competitive industry wherein many companies, from large multinational companies to small independent producers, are competing for a finite amount of oil and gas resources. The Company seeks out properties to explore for oil and gas by drilling and also seeks out producing oil and gas properties that can be purchased and operated. Management
believes that under the right economic conditions, several of the producing properties that the Company owns could have further developmental potential. Certain oil properties currently owned and operated by the Company may be receptive to enhanced oil recovery procedures under certain economic conditions.
OIL AND GAS PRODUCTION OPERATIONS
Pyramid owns and operates 27 oil and gas leases (properties) located within Kern and Santa Barbara Counties in the State of California. Nine of these properties were not operated during 2010. All of these properties were shut-down before 2010. No other properties were shut-down during 2010. Most of these properties are capable of producing oil or natural gas, although not all of these properties are considered profitable under certain economic conditions. There are no proved reserves attributed to these properties at December 31, 2010. All of the shut-in properties had been written-down in prior periods.
During 2010, the Company operated 18 leases within California, 14 of these leases had total annual gross oil production exceeding 1,000 barrels per lease. Production activities primarily consist of the daily pumping of oil from a well(s) into tanks, maintaining the production facilities both at the well and tank settings, preparing and shipping the crude oil to buyers. Daily operations differ from one property to another, depending on the number of wells, the depth of the wells, the gravity of the oil produced and the location of the property. All of Pyramid's oil production is classified as primary recovery production at this time; although certain properties may be conducive to secondary recovery operations in the future, depending on the prevailing price of oil.
Primary recovery of oil and gas is by means of natural flow(s) or artificial lift of oil and gas from a single well bore. Natural gas and petroleum fluids enter the well bore by means of reservoir pressure or gravity flow; fluids and gases are moved to the surface by natural pressure or by means of artificial lift (pumping). In secondary recovery operations, liquids or gases are injected into the reservoirs for the purpose of augmenting reservoir energy or increasing reservoir temperatures. Secondary recovery operations, usually, but not always, are done after the primary-recovery phase has passed.
The Company employs field personnel (i.e., pumpers, rig crews, roustabouts and equipment operators) that perform basic daily activities associated with producing oil and gas. Daily operations include inspections of surface facilities and equipment, gauging, reporting and shipping oil, and routine maintenance and repair activities on wells, production facilities and equipment. The Company owns and maintains various pieces of equipment necessary for employees to perform various repair and maintenance tasks on Company properties. Such equipment consists of service rigs, mobile pumps, vacuum trucks, hot oil truck, backhoe, trucks and trailers.
Occasionally, the Company drills new wells or redrills existing wells on properties owned by the Company in an attempt to increase oil and gas production. In the last five years, the Company has utilized the services of outside drilling contractors for drilling new wells and redrilling existing wells. Maintenance and repairs of existing wells to maintain or increase oil and gas production are carried out by Company personnel on a continuing basis. Most maintenance and repair work is performed with Company rigs.
Economic factors associated with the price of oil and gas and the productive output of wells determine the number of active wells the Company operates. Under certain economic conditions, the Company has the potential to operate approximately 122 wells, and of these, approximately 54 were in operation during 2010. The Company also owns other oil and gas interests outside of California that it does not operate. These interests are located in Wyoming, Texas and New York.
MARKETING OF CRUDE OIL AND NATURAL GAS
The Company sells its crude oil to ConocoPhillips and Kern Oil & Refining, accounting for approximately 50% and 46%, respectively, of the Company's crude oil and gas sales in 2010. While revenue from these customers is significant, and the loss of any one could have an adverse effect on the Company, it is management's opinion that the oil and gas it produces could be sold to other crude oil purchasers, refineries or pipeline companies. ConocoPhillips, and its predecessors, and Kern Oil have been customers of the Company for over twenty years. Natural gas is sold to companies in the area of operations. The Company sells its oil pursuant to short-term contracts. Accordingly, the amount of oil the Company sells is dependent upon market demand. Market demand for Pyramid's production is subject to various influences and can never be assured, especially in an era of changing prices. The base values for crude oil the Company sells is set by major oil companies in response to area and market strengths and international influences. Types and qualities of crude oil vary substantially in base values posted by crude oil buyers in various areas of the country. The Company's crude oil sales are not seasonal, but uniform throughout the year.
COMPETITION AND INDUSTRY CONDITIONS
The profitability of the Company's operations depends primarily on the production of oil and gas in commercially profitable quantities. Oil and gas properties often fail to provide a return sufficient to repay the substantial sums of money required for their acquisition, exploration and development. The acquisition, exploration and development of oil and gas properties is a highly competitive business. Many entities with which the Company competes have significantly greater financial and staff resources. Such competitive disadvantages could materially and adversely affect the Company's ability to acquire new properties or develop existing properties.
REGULATIONS
The Company's business is affected by numerous governmental laws and regulations, including energy, environmental, conservation, tax and other laws and regulations relating to the petroleum industry. Changes in any of these laws and regulations could have a material and adverse effect on the Company's business and financial stability. In view of the many uncertainties with respect to current laws and regulations, including their applicability to the Company, the Company cannot predict the overall effect of such laws and regulations on future operations.
TAXATION
The operations of the Company, as is the case in the petroleum industry generally, are significantly affected by Federal tax laws. Federal, as well as state, tax laws have many provisions applicable to corporations which could affect the future tax liability of the Company.
ENVIRONMENTAL
The Company's activities are subject to existing federal and state laws and regulations governing environmental quality and pollution control. These laws may require the acquisition of permits relating to certain ongoing operations, for drilling, emissions, waste water disposal and other air and water quality controls. In view of the uncertainty and unpredictability of environmental statutes and regulations, the Company cannot ensure that such laws and regulations will not materially and adversely affect the business of the
Company. The Company does not currently anticipate any material effect on its capital expenditures or earnings as the result of governmental regulations, enacted or proposed, concerning environmental protection or the discharge of material into the environment. The Company is actively pursuing an ongoing policy of upgrading and restoring older properties to comply with current and proposed environmental regulations.
COMMITMENTS AND CONTINGENCIES
The Company is liable for future dismantlement and abandonment costs associated with its oil and gas properties. These costs include down-hole plugging and abandonment of wells, future site restoration, post closure and other environmental exit costs. The costs of future dismantlement and abandonment have been accrued and recorded in the financial statements. See Note 10 of Notes to Financial Statements included in Item 8 of this Form 10-K.
OTHER
The Company employed twelve full-time and two part-time people as of December 31, 2010. Three full-time and two part-time people were office or administrative personnel, and the rest of whom were field personnel. The Company contracts for additional labor services when needed. The Company is not a party to any union or labor contracts.
The Company had no material research and development costs for the three years ended December 31, 2010.
All of the Company's revenues during 2010 were derived from domestic sources.
The Company does not have any patents or trademarks, and it does not believe that its business or operations are dependent upon owning any patents or trademarks.
ITEM 1A
ITEM 1A - RISK FACTORS
In addition to other information in this annual report, the following risk factors should be carefully considered in evaluating the Company's business because such factors may have a significant impact on the Company's business, operating results, liquidity and financial condition. As a result of the risk factors set forth below, actual results could differ materially from those projected in any forward-looking statements. Additional risks and uncertainties not presently known to us, or that we currently consider to be immaterial, may also impact the Company's business, operating results, liquidity and financial condition. If any such risks occur, the Company's business, operating results, liquidity and financial condition could be materially affected in an adverse manner. Under such circumstances, the trading price of the Company's securities could decline, and you may lose all or part of your investment in the Company.
RISKS RELATING TO THE COMPANY'S BUSINESS AND THE OIL AND GAS INDUSTRY
THE COMPANY'S FUTURE PERFORMANCE IS DEPENDENT UPON THE COMPANY'S ABILITY TO CONTINUE TO IDENTIFY, ACQUIRE AND DEVELOP ADDITIONAL OIL AND GAS PROPERTIES, THE FAILURE OF WHICH COULD RESULT IN UNDER USE OF CAPITAL AND LOSSES.
The Company's future performance depends upon the Company's ability to continue to identify, acquire and develop additional oil and gas reserves that are economically recoverable. The Company's success will depend upon the Company's ability to continue to acquire working and revenue interests in
properties upon which oil and gas reserves are ultimately discovered in commercial quantities, and the Company's ability to develop additional prospects that contain proven oil and gas reserves to the point of production. The successful acquisition and development of oil and gas properties requires an assessment of recoverable reserves, future oil and gas prices and operating costs, potential environmental and other liabilities, and other factors. Such assessments are necessarily inexact and their accuracy inherently uncertain. In addition, no assurance can be given that the Company's future exploitation and development activities will result in the discovery of additional reserves.
THE COMPANY HAS A VERY SMALL MANAGEMENT TEAM AND THE LOSS OF ANY MEMBER OF THE COMPANY'S TEAM MAY PREVENT US FROM IMPLEMENTING THE COMPANY'S BUSINESS PLAN IN A TIMELY MANNER.
The Company currently has two executive officers and a small number of full time employees and consultants upon whom the Company's success largely depends. We do not maintain key person life insurance policies on the Company's executive officers or consultants, the loss of whom could seriously harm the Company's business, financial condition and results of operations. In such an event, we may not be able to recruit personnel to replace the Company's executive officers or consultants in a timely manner, or at all, or on acceptable terms.
THE OIL AND GAS INDUSTRY IS HIGHLY COMPETITIVE, AND THE COMPANY MAY NOT HAVE SUFFICIENT RESOURCES TO COMPETE EFFECTIVELY.
The oil and gas industry is highly competitive. The Company competes with oil and natural gas companies and other individual producers and operators, many of which have substantially greater financial and other resources than the Company. The Company's larger competitors, by reason of their size and relative financial strength, can more easily access capital markets than the Company can and may enjoy a competitive advantage in the recruitment of qualified personnel. Competitors may be able to absorb the burden of any changes in laws and regulations in the jurisdictions in which the Company does business and handle longer periods of reduced prices for oil and gas more easily than we can. The Company's competitors may be able to pay more for oil and gas leases and properties and may be able to define, evaluate, bid for and purchase a greater number of leases and properties than the Company can. Further, these companies may enjoy technological advantages and may be able to implement new technologies more rapidly than the Company can. The Company's ability to acquire additional properties in the future will depend upon the Company's ability to conduct efficient operations, evaluate and select suitable properties, implement advanced technologies and consummate transactions in a highly competitive environment.
THE COMPANY'S EXPLORATION, DEVELOPMENT AND PRODUCTION ACTIVITIES ARE SUBJECT TO CERTAIN ENVIRONMENTAL REGULATIONS WHICH MAY AFFECT THE COMPANY'S COSTS OF OPERATIONS.
In general, the Company's exploration and production activities are subject to certain federal, state and local laws and regulations relating to environmental quality and pollution control. Such laws and regulations increase the costs of these activities and may prevent or delay the commencement or continuance of a given operation. Specifically, the Company is subject to legislation regarding emissions into the environment, water discharges and storage and disposition of hazardous wastes. However, such laws and regulations are frequently changed and any such changes may have material adverse effects on the Company's activities. The Company is unable to predict the ultimate cost of compliance with such laws and regulations. Generally, environmental requirements do not appear to affect the Company any differently or to any greater or lesser extent than other companies in the industry. To date the Company has not been required to spend any material amounts on compliance with environmental regulations. However, the Company may be
required to do so in future and this may affect the Company's ability to expand or maintain the Company's operations.
ANY CHANGE TO GOVERNMENT REGULATION/ADMINISTRATIVE PRACTICES MAY HAVE A NEGATIVE IMPACT ON THE COMPANY'S ABILITY TO OPERATE AND THE COMPANY'S PROFITABILITY.
The business of oil and gas exploration and development is subject to substantial regulation under federal, state, local and foreign laws relating to the exploration for, and the development, upgrading, marketing, pricing, taxation, and transportation of oil and gas and related products and other matters. Amendments to current laws and regulations governing operations and activities of oil and gas exploration and development operations could have a material adverse impact on the Company's business. In addition, there can be no assurance that income tax laws, royalty regulations and government incentive programs related to the Company's oil and gas properties and the oil and gas industry generally, will not be changed in a manner which may adversely affect the Company's progress and cause delays, inability to explore and develop or abandonment of these interests.
Permits, leases, licenses, and approvals are required from a variety of regulatory authorities at various stages of exploration and development. There can be no assurance that the various government permits, leases, licenses and approvals sought will be granted in respect of the Company's activities or, if granted, will not be cancelled or will be renewed upon expiry. There is no assurance that such permits, leases, licenses, and approvals will not contain terms and provisions which may adversely affect the Company's exploration and development activities.
THE COMPANY IS REQUIRED TO REPLACE, MAINTAIN OR EXPAND THE COMPANY'S OIL AND GAS RESERVES IN ORDER TO PREVENT THE COMPANY'S FUTURE RESERVES AND PRODUCTION FROM DECLINING, WHICH WOULD ADVERSELY AFFECT FUTURE CASH FLOWS AND INCOME.
In general, production from oil and gas properties declines over time as reserves are depleted, with the rate of decline depending on reservoir characteristics. The Company's future oil and gas production is highly dependent upon the Company's ability to economically find, develop, acquire and maintain reserves in commercial quantities.
To the extent cash flow from operations is reduced, either by a decrease in prevailing prices for oil and gas or an increase in finding and development costs, and external sources of capital become limited or unavailable, the Company's ability to make the necessary capital investment to maintain or expand the Company's asset base of oil and gas reserves would be impaired. Even with sufficient available capital, the Company's future exploration and development activities may not result in additional proved reserves, and we might not be able to drill productive wells at acceptable costs.
THE OIL AND GAS EXPLORATION AND PRODUCTION INDUSTRY IS HISTORICALLY A CYCLICAL INDUSTRY AND MARKET FLUCTUATIONS IN THE PRICES OF OIL AND GAS COULD ADVERSELY AFFECT THE COMPANY'S BUSINESS.
Prices for oil and gas tend to fluctuate significantly in response to factors beyond the Company's control. These factors include:
- weather conditions in the United States and where the Company's property interests are located;
- economic conditions, including demand for petroleum-based products, in the United States and the rest of the world;
- actions by OPEC, the Organization of Petroleum Exporting Countries; political instability in the Middle East and other major oil and gas producing regions;
- governmental regulations;
- domestic tax policy;
- the price of foreign imports of oil and gas;
- the cost of exploring for, producing and delivering oil and gas;
- the discovery rate of new oil and gas reserves;
- the rate of decline of existing and new oil and gas reserves;
- available pipeline and other oil and gas transportation capacity;
- the ability of oil and gas companies to raise capital;
- the overall supply and demand for oil and gas; and
- the availability of alternate fuel sources.
Changes in commodity prices may significantly affect the Company's capital resources, liquidity and expected operating results. Price changes will directly affect revenues and can indirectly impact expected production by changing the amount of funds available to reinvest in exploration and development activities. Reductions in oil and gas prices not only reduce revenues and profits, but could also reduce the quantities of reserves that are commercially recoverable. Significant declines in prices could result in non-cash charges to earnings due to impairment.
Changes in commodity prices may also significantly affect the Company's ability to estimate the value of producing properties for acquisition and divestiture and often cause disruption in the market for oil and gas producing properties, as buyers and sellers have difficulty agreeing on the value of the properties. Price volatility also makes it difficult to budget for and project the return on acquisitions and the development and exploitation of projects. We expect that commodity prices will continue to fluctuate significantly in the future.
EXPLORATORY AND DEVELOPMENTAL DRILLING AND PRODUCTION OPERATIONS INVOLVES MANY RISKS THAT ARE OUTSIDE THE COMPANY'S CONTROL AND WHICH MAY RESULT IN A MATERIAL ADVERSE EFFECT ON THE COMPANY'S BUSINESS, FINANCIAL CONDITION OR RESULTS OF OPERATIONS.
The business of exploring for, developing and producing oil and gas involves a substantial risk of investment loss. Drilling and operating oil and gas wells involves the risk that the wells may be unproductive or that, although productive, the wells may not produce oil or gas in economic quantities. Other hazards, such as unusual or unexpected geological formations, pressures, fires, blowouts, power outages, gas leakage, loss of circulation of drilling fluids or other conditions may substantially delay or prevent completion of any well. Adverse weather conditions can also hinder drilling operations. A productive well may become uneconomic if water or other deleterious substances are encountered that impair or prevent the production of oil or gas from the well. In addition, production from any well may be unmarketable if it is impregnated with water or other deleterious substances. There can be no assurance that oil and gas will be economically produced from all properties in which the Company has interests.
AT TIMES THE COMPANY PARTICIPATES IN JOINT VENTURES WHEREIN THE COMPANY IS DEPENDANT UPON THE EFFORTS OF VARIOUS THIRD PARTIES THAT THE COMPANY DOES NOT CONTROL AND, AS A RESULT, THE COMPANY MAY NOT BE ABLE TO CONTROL THE TIMING OF DEVELOPMENT EFFORTS, ASSOCIATED COSTS, OR THE RATE OF PRODUCTION OF RESERVES (IF ANY).
The success of the Company's business interests in certain joint ventures, where the Company owns less than a majority interest depends upon the efforts of various third parties that the Company does not control. As a result, the Company may have limited ability to exercise influence over certain joint venture decisions, operations or costs in certain joint venture activities. The Company's dependence on the operator and, where applicable, other working interest owners for these projects and the Company's limited ability to influence operations and associated costs could prevent the Company from realizing targeted returns on capital in drilling or acquisition activities. The success and timing of development and exploitation activities on joint venture properties operated by others depend upon a number of factors that will be largely outside of the Company's control, including:
- the timing and amount of capital expenditures;
- the operator's expertise and financial resources;
- approval of other participants in drilling wells;
- selection of technology;
- the rate of production of the reserves; and
- the availability of suitable drilling rigs, drilling equipment, production and transportation infrastructure, and qualified operating personnel.
The Company relies upon various consultants and service companies to provide us with technical assistance and services. The Company relies upon the services of geologists, geophysicists, chemists, engineers and other scientists to explore and analyze oil and gas prospects to determine a method in which the oil and gas prospects may be developed in a cost-effective manner. Although the Company's management has relationships with a number of third-party service providers, we cannot assure you that we will be able to continue to rely on such consultants or services in the future.
RISKS RELATED TO THE COMPANY'S COMMON STOCK
THE VALUE OF THE COMPANY'S COMMON STOCK MAY BE ADVERSELY AFFECTED BY MARKET VOLATILITY
The trading price of the Company's common stock fluctuates and may be influenced by many factors, including:
- The Company's operating and financial performance and prospects;
- The depth and liquidity of the market for the Company's common stock;
- Investor perception of the Company and the industry and markets in which the Company operates;
- The Company's inclusion in, or removal from, any equity market indices;
- Changes in earnings estimates or buy/sell recommendations by analysts; and
- General financial, domestic, international, economic and other market conditions.
THE COMPANY'S ABILITY TO RAISE CAPITAL IN THE FUTURE MAY BE LIMITED, AND THE COMPANY'S FAILURE TO RAISE CAPITAL WHEN NEEDED COULD PREVENT THE COMPANY FROM EXECUTING ITS GROWTH STRATEGY
The timing and amount of the Company's working capital and capital expenditure requirements may vary significantly depending on many factors, including future oil and gas prices and the amount of the Company's future oil and gas production.
If the Company's capital resources are not sufficient to satisfy its liquidity needs, the Company may seek to sell additional equity or obtain additional debt financing. The sale of additional equity would result in dilution to the Company's shareholders. Additional debt would result in increased expenses and could result in covenants that would restrict the Company's operations. In addition, the Company may not be able to obtain additional financing, if required, in amounts on or terms acceptable to the Company, or at all.
THE COMPANY'S BY-LAWS DO NOT CONTAIN ANTI-TAKEOVER PROVISIONS AND THUS THE COMPANY'S MANAGEMENT AND DIRECTORS MAY CHANGE IF THERE IS A TAKE-OVER OF THE COMPANY.
We do not currently have a shareholder rights plan or any anti-takeover provisions in the Company's by-laws. Without any anti-takeover provisions, there is no deterrent for a take-over of the Company. If there is a take-over of the Company, the Company's management and directors may change.
ITEM 1B
ITEM 1B - UNRESOLVED STAFF COMMENTS
None
ITEM 2
ITEM 2 - PROPERTIES
(a) DESCRIPTION OF PROPERTIES
The principal assets of the Company consist of proven and unproven oil and gas properties, oil and gas production related equipment and developed and undeveloped real estate holdings. The Company's oil and gas properties are located exclusively in the continental United States, in California, Wyoming, Texas and New York.
The general business description and the description of the Company's oil and natural gas operations are described on page 4 under Item 1. Business. Information required by Subpart 1200 of Regulation S-K (Disclosure by Registrants Engaged in Oil and Gas Producing Activities) is also contained in Item 1. and in Item 8. Financial Statements and Supplementary Data, Supplemental Information - Oil and Gas Producing Activities is on pages 51 to 56. The preceding information is incorporated by reference into this Item 2.
Developed oil and gas properties are those on which sufficient wells have been drilled to economically recover the estimated reserves calculated for the property. Undeveloped properties do not presently have sufficient wells to recover the estimated reserves. The Company had proved undeveloped reserves of 77,700, 96,000 and 9,500 at December 31, 2010, 2009 and 2008, respectively. The Company had no significant proved undeveloped properties at December 31, 2007, and 2006.
The Company had proved undeveloped reserves of 77,700 barrels of crude oil at December 31, 2010. These reserves are attributable to three wells that the Company plans to drill in 2011. The Company projected that it would cost approximately $1,596,000 to drill and complete these wells in 2011. One of these wells the Pike 1-H, a horizontal well, was spudded in March of 2011. The Company is drilling this well in conjunction with a joint-venture partner. The Company is the operator of the joint venture.
The Company had proved undeveloped reserves of 96,000 barrels of crude oil at December 31, 2009. These reserves are attributable to three wells that the Company planned to drill in 2010. The Company projected that it would cost approximately $1,550,000 to drill and complete these wells in 2010. Two of these wells were drilled in 2010. The Anderson No. 10 well was drilled in the first quarter of 2010 at a cost of $481,000. This well was completed and placed into production in the first quarter of 2010 and is currently under production. The second well was drilled in the second quarter of 2010. The CLI No. 4-H, was not completed due to the absence of hydrocarbons and was abandoned as a dry-hole. The cost to drill this well was $867,000. A valuation allowance of $867,000 was recorded in the first and second quarter against the costs of this well.
The Company had proved undeveloped reserves of 9,500 barrels of gas (which represents the crude oil equivalent of 57,000 MCF's, gas production is converted to equivalent barrels at the rate of 6 MCF per barrel, representing the estimated relative energy content of gas to oil) at December 31, 2008. This represents the reserves attributable to a well that was drilled in 2008 on the properties of the Texas natural gas joint venture. Additional work costing approximately $86,000 was expended to develop these reserves in 2009. The results of this effort in 2009 did not generate the anticipated results. A valuation allowance has been recorded against the full capitalized costs of this well.
The Company had proved undeveloped reserves of 79,600 barrels of crude oil at December 31, 2007. These reserves are attributable to two wells that the Company planned to drill in 2008. The Company drilled one of these wells, a development well, in 2008 on the Santa Fe lease. This well was completed and placed on production in 2008. The production results from this well were non- economic and the well was shut-in during 2008. The costs to drill and complete this well were approximately $645,000. A valuation allowance was recorded in 2008 against the costs of this well. The other well that was forecast to be drilled in 2008 was not drilled. The Company reduced its capital budget in 2008 due to lower crude oil sales prices that were experienced during 2008. The reserves for this well were not carried forward into 2009 reserves.
The Company has no material amounts of proved undeveloped reserves that have remained undeveloped for five years or more after disclosure as proved undeveloped reserves.
(b) OIL AND GAS PROPERTIES
The Company's estimated future net recoverable oil and gas reserves from proved reserves, both developed and undeveloped properties, were assembled by MHA Petroleum Consultants, independent petroleum engineers, and are as follows:
The Company's estimated future net recoverable oil and gas reserves, noted in the table above, have not been filed with any other Federal authority or agency since January 1, 2010.
Using the 12 month average of the first-of-the-month oil and gas prices and year-end lease operating expenses, the estimated value of future net revenues before income taxes to be derived from Pyramid's proved developed oil and gas reserves, discounted at 10%, were $13,068,000 at December 31, 2010, $9,158,000 at December 31, 2009, $4,106,000 at December 31, 2008, $27,414,000 at December 31, 2007, and $12,358,000 at December 31, 2006.
Pyramid participates in the drilling of developmental wells, no single one of which would cause a significant change in the net reserve figure.
In December 2008, the SEC issued its final rule, Modernization of Oil and Gas Reporting, which is effective for reporting 2009 reserve information. In January 2010, the FASB issued its authoritative guidance on extractive activities for oil and gas to align its requirements with the SEC's final rule. We adopted the guidance as of December 31, 2009 in conjunction with our year-end reserve report as a change in accounting principle. Under the SEC's final rule, prior period reserves were not restated.
INTERNAL CONTROLS OVER RESERVE ESTIMATION
Our proved reserve information as of December 31, 2010 included in this Annual Report on Form 10-K was estimated by our independent petroleum consultant, MHA Petroleum Consultants, LLC, in accordance with generally accepted petroleum engineering and evaluation principles and definitions and guidelines established by the SEC. For the company's estimation procedures, credentials and statement of independence, see the MHA Petroleum Consultants, LLC, report filed herein on Exhibit 99.1. The technical persons responsible for preparing the reserves estimates presented herein meet the requirements regarding qualifications, independence, objectivity and confidentiality set forth in the Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserve Information promulgated by the Society of Petroleum Engineers. MHA Petroleum Consultants, LLC, and their predecessors have been preparing the Company's reserve information for over twenty years and thus, are very familiar with the Company's operations and their oil and gas properties.
John H. Alexander, President and Lee Christianson, CFO, provide company data (such as well ownership interests, oil and gas prices, production volumes and well operating costs) to MHA Petroleum Consultants, LLC, and are the primary Company employees responsible for reviewing MHA Petroleum Consultants, LLC, use of our data and MHA Petroleum Consultants, LLC, estimation of our reserves. Mr. Alexander and an employee who is a petroleum engineer provide MHA Petroleum Consultants, LLC, with technical data (such as well logs, geological information and well histories). Mr. Alexander and Mr. Christianson have been with the Company for over twenty years. Mr. Alexander has over forty years experience in the oil and gas exploration and production industry.
John Alexander and Lee Christianson review the preliminary MHA Petroleum Consultants, LLC, reserve estimates and the financial inputs in the estimates. Mr. Christianson, CFO, calculates the disclosed changes in reserve estimates and the disclosed changes in the Standardized Measure relating to proved oil and gas reserves. Mr. Christianson has over thirty years experience in oil and gas accounting.
Our company codes of business conduct and ethics are general internal controls for preventing and detecting errors or fraud by our employees responsible for the reserve estimation procedures and disclosure in our filings with the SEC.
Pyramid's net oil and gas production after royalty and other working interests for the past five years ending December 31, were as follows.
Pyramid's average sales prices per barrel or per MCF of crude oil and natural gas, respectively, and production costs per equivalent barrel (gas production is converted to equivalent barrels at the rate of 6 MCF per barrel, representing the estimated relative energy content of gas to oil) for the past five years ending December 31, were as follows:
The average selling price of the Company's crude oil at December 31, 2010, was approximately $88.72 per barrel and the average selling price of the Company's natural gas at December 31, 2010, was approximately $4.22 per MCF.
As of December 31, 2010, Pyramid had the following gross and net position in wells and proved acres:
(1) "Gross wells" represents the total number of wells in which the Company has a working interest. "Net wells" represents the number of gross wells multiplied by the percentage of the working interests therein held by the Company.
(2) "Gross acreage" represents all acres in which the Company has a working interest. "Net acres" represents the aggregate of the working interests of the Company in the gross acres.
The Company drilled two new wells in 2010, the Anderson No.10 well and the CLI No. 4-H. The Anderson No. 10 well was drilled in the first quarter of 2010 and completed as a producing well. The CLI No. 4-H was drilled in the second quarter of 2010 and was abandoned as a dry-hole. The Company recorded a valuation allowance of $867,468 during the second quarter of 2010 to offset the costs of drilling and abandoning this well. The Company also redrilled two existing wells during the fourth quarter of 2010, the Wilson No.3 and the Alexander/Abadie No. 1. Both of these wells are currently under production. These wells had previously been shut-in for a number of years. At December 31, 2010, the Company recorded a valuation allowance of $237,647 against the costs of redrilling the Alexander/Abadie No. 1 well. The Company also recorded a valuation allowance of $117,412 at December 31, 2010 for one of its Texas joint venture wells.
The Company drilled one well in 2008 on the Santa Fe lease. This well was completed and placed on production during 2008. After this well was placed on production, it was determined that it was not economic to produce and the well is currently shut-in. The Company also participated as a non-operator, along with a group of partners, in the drilling of two natural gas wells in Texas, one each in 2008 and 2009. The gas well that was drilled in 2008 was placed into production. The gas well that was drilled in 2009 was not placed into production until the first quarter of 2010.
The Company drilled two wells in 2007 on the Anderson lease. Both of these wells are currently in production and deemed economic. The Company drilled four new wells in 2006, two on the Santa Fe lease, one on the Anderson lease and one joint-venture exploratory well. The well on the Anderson lease and one of the wells on the Santa Fe lease are producing wells. The other well on the Santa Fe lease was completed and placed into production. It was determined to be un-economic and is shut-in. The Company participated with one other oil company as the operator in the drilling of the joint venture well in 2006. This well was a dry-hole and was abandoned in 2006.
"Unproven" oil and gas properties are those on which the presence of commercial quantities of reserves of crude oil or natural gas has not been established.
"Undeveloped" acreage exists on those oil and gas properties where economically recoverable reserves are estimated to exist in proved reservoirs from wells to be drilled in the future.
As of December 31, 2010, Pyramid held positions in unproven acreage in the following locations:
(c) REAL PROPERTY OWNED
Pyramid owned the following real property as of December 31, 2010, all located in California.
County of Kern Mullaney yard 20 acres Miller property 112 acres Ranton property 80 acres City of Bakersfield 3 lots
Located on the three lots of real property in the city of Bakersfield is the Company's executive offices. This property was acquired by the Company in 1986. The office building located on this property is a one story structure with approximately 4,200 square feet in good condition.
ITEM 3
ITEM 3 - LEGAL PROCEEDINGS
The Company is subject to potential litigation within the normal course of business. The resolution in any reporting period of such litigation could have a material impact on Pyramid's financial position or results of operations for that period. Pyramid is not party to any proceedings or actions which management believes might have a material effect upon its financial position or results of operations.
ITEM 4
ITEM 4 - (REMOVED AND RESERVED)
PART II
ITEM 5
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The common stock of Pyramid is traded on the NYSE Amex under the symbol "PDO". The following are high and low sales prices for each quarter of 2010 and 2009, and reflect inter-dealer prices without retail markup, markdown or commission.
At December 31, 2010, the Company had 232 shareholders of record, and an unknown number of additional holders whose stock is held in "street name".
The Company did not repurchase any securities during 2010, or issue any securities during 2010 that were not registered under the Securities Act of 1933.
The Company did not declare or pay any cash dividends on its common stock during the preceding two fiscal years and does not anticipate paying any cash dividends in the foreseeable future.
ITEM 6
ITEM 6 - SELECTED FINANCIAL DATA
The following selected financial data is not necessarily indicative of our future financial position or results of future operations, and should be read in conjunction with Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations and the Financial Statements and Notes thereto included in Item 8, Financial Statements and Supplementary Data of this Annual Report on Form 10-K.
ITEM 7
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
IMPACT OF CHANGING PRICES
Average prices increased by approximately $19.24 per equivalent crude oil and gas barrel sold during 2010 as compared with average prices for 2009. In 2010 there were 245 separate crude oil price changes, as compared with 247 price changes in 2009. The difference between the highest ($90.20) and lowest ($64.95) posted prices in 2010 was $25.25 per barrel. By comparison, this same differential in 2009 was $50.85 per barrel.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and short-term investments of $4,594,000 at December 31, 2010, for a net decrease of $189,000, when compared to December 31, 2009. Short-term investments consist of certificates of deposit having original maturities of three months or more. During 2010, operating activities generated cash of $1,728,000. During 2010, cash was consumed by purchase of short-term investments of $550,000, capital spending of $2,258,000 and principal payments on the Company's long-term debt totaling $21,000. During 2010, cash was provided by redemption of short-term investments of $680,000, proceeds from the sale of fixed assets of $321,000 and proceeds from the issuance of long term debt of $40,000. The components of the changes in cash for 2010 are described in the Statements of Cash Flows included in Item 8 of this Form 10-K. Adequate funds were available to carry out all necessary oil and gas operations and to maintain its equipment. A $500,000 line of credit, unused at December 31, 2010, also provided additional liquidity during 2010.
The Company believes that its existing current assets and the amount of cash it anticipates it will generate from current operations will be sufficient to fund the anticipated liquidity and capital resource needs of the Company for the fiscal year ended December 31, 2010. In addition to its current assets, the Company also has a credit facility for $500,000 available in the event that it needs other resources to fund its liquidity and capital resource needs. Although the Company may increase its capital expenditures during the current fiscal year to enhance its current oil production capacities, it does not anticipate that such expenditures would exceed the amount of liquidity currently available to the Company. The Company's beliefs that its existing assets and the cash expected to be generated from operations will be sufficient during the current fiscal year are based on the following:
As of December 31, 2010, the amount of cash, cash equivalents, and short term investments was equal to $4,594,000 in the aggregate.
As of December 31, 2010 the Company had approximately $5,665,000 in current assets, and only $626,000 of current liabilities.
As of December 31, 2010, the Company had long-term debt of $27,000 (net of current maturities).
The Company is not a party to any off-balance sheet arrangements and does not engage in trading activities involving non-exchange traded contracts. In addition, the Company has no financial guarantees, debt or lease agreements or other arrangements that could trigger a requirement for an early payment or that could change the value of the Company's assets. Management continues to examine various alternatives for increasing capital resources including, among other things, participation with industry and/or private partners in drilling and exploration prospects and specific rework of existing properties to enhance production and expansion of its sales of crude oil and natural gas in California. If necessary, Pyramid could sell certain nonessential assets to raise capital for the benefit of these programs.
The Company drilled two new wells and re-drilled two existing wells in 2010. The Company participated as a non-operator in the drilling of a natural gas well in Texas during 2009. The Company drilled two wells in the years ended December 31, 2008 and 2007. The Company drilled four wells in the year ended December 31, 2006. One of the wells drilled in 2006 was an exploratory well which was abandoned due to non-economic production of crude oil.
The Company's proved developed producing crude oil reserves increased by approximately 49,500 barrels at December 31, 2010. The increase in crude oil reserves is due primarily to revisions of previous estimates. The increase in reserves due to revisions of estimates is due primarily to higher net average crude prices (after production taxes and operating expenses) for 2010. Certain oil and gas properties projected recoverable reserves and net revenues
increased due to the higher net average prices.
The Company's proved developed producing crude oil reserves decreased by 63,000 barrels at December 31, 2009. The decrease is due primarily to production of approximately 57,000 barrels of crude oil during 2009. The remaining decline of 6,000 barrels in the reserves is due to revisions of previous estimates. The Company did not drill any crude oil wells during 2009.
The Company's proved developed producing natural gas reserves decreased by 56,000 MCF's at December 31, 2009. The decrease is due primarily to revisions of previous estimates. The estimates of gas reserves for the Texas gas prospect decreased by approximately 40,000 MCF's due to unfavorable production results from a gas well that was drilled in 2008 by the Texas joint venture.
The Company's crude oil reserves for the year ended December 31, 2008 decreased due primarily to a decrease in crude oil sales prices. Proved developed producing crude oil reserves decreased by 213,000 barrels at December 31, 2008. The crude oil prices at the end of a given year are one of the most significant factors used to determine the value of crude oil reserves. The average prices at December 31, 2008 declined by approximately $53.00 per barrel compared with the average prices at December 31, 2007. Based on these prices, many of the Company's leases were uneconomic and no reserves were attributed to these leases.
The Company's crude oil reserves for the year ended December 31, 2007 increased due primarily to revision of previous estimates. The drilling of two new wells in 2007 and higher average crude oil prices at December 31, 2007, combined to generate higher year-end reserves of proved developed producing properties. Proved developed producing crude oil reserves increased by 120,600 barrels at December 31, 2007.
The Company's gas reserves increased by approximately 267,000 MCF's for the year ended December 31, 2007. The increase is due to the Company's investment in a joint venture gas prospect in Texas.
The Company's crude oil reserves for the year ended December 31, 2006 increased due primarily to the drilling of four wells in 2006.
Certain properties that the Company owns have become uneconomic and have been shut-in. When these properties are not operated, any reserves that could be assigned to these properties are not included in the year-end engineering report of total Company reserves. Another major factor that directly affects the Company's future reserve base is the price of crude oil at December 31, of any given year. The year-end price of oil and gas has a significant impact on the estimated future net recoverable oil and gas reserves from proved developed properties. At certain depressed price levels, some of the Company's oil and gas properties are not economical to operate and thus its year-end engineering reserve reports do not assign any oil and gas reserves to these properties. Conversely, if year-end prices should increase to a certain level, the reserves on these leases would be economic to produce and would increase the Company's reserves.
FORWARD-LOOKING INFORMATION
Looking forward into 2011, crude oil prices have increased by approximately $24.20 per barrel as of March 28, 2011, compared to prices at December 31, 2010. There have been 58 separate price changes since December 31, 2010.
In late February 2011, the Company began operations on its initial joint venture horizontal well in Taft, California. The Company is partnered with Victory Oil Company, which owns the land adjacent to Pyramid's. The well was drilled to a depth of approximately 3,600 feet, with a 917-foot lateral crossing both companies' properties. Based on the lateral intervals open to production, the ownership split of this well is expected to be 68% to the Company and 32% to Victory. A pumping unit is currently being moved on site and the well will begin commercial production shortly thereafter. Flow rates for the well will be announced following production testing, which is expected sometime in April.
On March 21, 2011, drilling operations were commenced on Pyramid's joint venture prospect located in Menard County, Texas. Log analysis of this well indicated that the well would not be commercially viable, and was plugged and abandoned. The Company owns a 30% interest in the joint venture.
Pyramid is currently evaluating the feasability of drilling a new well and re- entering a previously drilled well on its Kern County, California properties during the second quarter of 2011. Actual timing of these projects will be dependent on drilling rig availability.
The Company continues to seek and evaluate opportunities within the energy sector, to enhance the value of the Company. The Company's growth in 2011 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 exploration 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 2011, 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 2010. 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.
ANALYSIS OF SIGNIFICANT CHANGES IN RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR THE FISCAL YEAR ENDED DECEMBER 31, 2010 COMPARED TO THE FISCAL YEAR ENDED DECEMBER 31, 2009
REVENUES
Oil and Gas Sales
The increase in revenues of $1,203,316 is due primarily to higher average prices combined with higher crude oil production for 2010. The average price of the Company's oil and gas for 2010 increased by $19.24 per equivalent barrel when compared to the same period for 2009. Crude oil production/sales increased by approximately 1,000 barrels for 2010.
Gain on Sale of Fixed Assets
On July 28, 2010, the Company entered into a Purchase and Sale Agreement for the sale of a portion of its Texas joint venture leaseholds. Pursuant to the agreement, the Company agreed to sell to the buyers 5% of the working interest of the Company's Texas joint venture, subject to certain prior agreements and encumbrances. The purchase price for the assigned interest is $320,566. After the sale, the Company continues to own a 7.5% working interest in the assets. The Company recognized a gain on the sale of the Texas leasehold interests in the amount of $320,566. The leasehold interests had been previously fully amortized.
OPERATING EXPENSES
Operating expenses increased by $165,171 for 2010 when compared to the same period for 2009. During 2010, the cost to produce an equivalent barrel of crude oil was $26.56 per barrel, an increase of $2.35 per barrel when compared with production costs for the same period of 2009. The increase in lease operating expenses is caused by many factors. These include higher costs for parts and supplies, contract operations, waste water disposal, equipment rental, chemicals, equipment fuel and production equipment repair and maintenance.
Parts and supplies increased by $73,146 due to an increase in lease and well maintenance activities during 2010. Contract operations increased by $31,743 due primarily to increased activity on the Texas gas prospect. Waste water disposal increased by $26,770 due to higher costs at the Company's Delaney Tunnell lease. Equipment rental increased by $25,063 due primarily to maintenance activities on the Company's Mullaney lease and the rental of a crude oil storage tanks for a new well that was drilled on the Anderson lease and the redrill of the Wilson No. 3 well. The cost of chemicals increased by $21,896 due to increased usage of chemicals. Equipment fuel increased by $14,452 due to an increase in lease and well maintenance activities and higher per unit costs of fuel. Production equipment repair and maintenance increased by $14,305 due to an increase in maintenance activities.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses decreased by $49,779 for 2010 when compared with the same period of 2009. Accounting services decreased by $77,276 due primarily to lower audit fees. Officers salaries decreased by $25,000. During June of 2009, the Board of Directors approved the payment of a bonus of $25,000 to Mr. Alexander, President. No bonuses were paid during 2010. These were offset by higher costs for administrative salaries, consulting services, directors and officers liability insurance and computer supplies and services.
Administrative salaries increased by $24,064 due to the hiring of a part-time employee effective August 1, 2009. Consulting services increased by $13,886 due to fees paid to a third-party geologist that is reviewing the Company's oil and gas properties for potential well drilling locations. Directors and officers liability insurance premiums increased by $7,838. Computer supplies and services increased by $6,337.
PROVISION FOR DEPLETION, DEPRECIATION AND AMORTIZATION
The provision for depletion, depreciation and amortization increased by $63,356 for 2010 when compared with the same period for 2009. The increase is due primarily to an increase in depletion of the Company's oil and gas properties. The per barrel depletion rates for 2010 are higher than the comparable rates for 2009. During the fourth quarter of 2010, the Company recorded additional depletion expense of $27,010 due primarily to a decline in reserves on two of the Company's oil and gas properties.
VALUATION ALLOWANCES
During the second quarter of 2010, the Company commenced the drilling of a horizontal well on one of its Mountain View properties in Kern County, California. The well was drilled to its objective but did not encounter adequate hydrocarbons to warrant completion of the well. The Company recorded a valuation allowance of $867,468 for the costs that had been incurred for the drilling of this well. During the fourth quarter of 2010, the Company recorded a valuation allowance of $355,059 against two oil and gas properties. On one of the properties, a well was redrilled in the fourth quarter of 2010 and the projected future reserves were not sufficient to support the costs incurred in the redrilling of this well. The Company also recorded a valuation allowance for one of its Texas gas prospect wells.
ANALYSIS OF SIGNIFICANT CHANGES IN RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR THE FISCAL YEAR ENDED DECEMBER 31, 2009 COMPARED TO THE FISCAL YEAR ENDED DECEMBER 31, 2008
REVENUES
OIL AND GAS SALES
The decrease in revenues of $3,298,733 is due primarily to lower average prices combined with lower crude oil production/sales for 2009. Oil and gas sales decreased by 50% for the year ended December 31, 2009, when compared
with the same period for 2008. The average price of the Company's oil and gas decreased by approximately $36.40 per equivalent barrel for 2009 when compared to 2008. Crude oil production/sales decreased by approximately 12,600 barrels. The decrease in crude oil production is primarily the result of the decline in production on the Company's Anderson and Santa Fe leases.
OPERATING EXPENSES
Operating expenses decreased by $530,167 for the year ended December 31, 2009, when compared with the same period for 2008. Operating expenses decreased by 27% for the year ended December 31, 2009. The cost to produce an equivalent barrel of crude oil during 2009 was approximately $24.21 per barrel, a decrease of approximately $3.03 per barrel when compared with production costs for 2008. The decrease in lease operating expenses is caused by many factors. These include lower costs for labor, parts and supplies, pump repairs, equipment rental and equipment fuel. The Company has reduced its maintenance activities as a result of the lower crude oil sales prices.
Company labor as a component of total operating expenses decreased by approximately 8% due to a reduction in overtime hours worked, a reduction in hourly labor rates, a reduction in personnel and a reduction in bonuses paid. Parts and supplies as a component of total operating expenses decreased by approximately 6% due to a reduction in maintenance activities. Pump repairs as a component of total operating expenses were lower by approximately 3% due to the decline in maintenance work during 2009 and the replacement of down-hole pumps in prior years with more expensive pumps that are more efficient and have better longevity. Equipment rental costs as a component of total operating expenses were lower by approximately 3% during 2009 due to the discontinuance of the rental of crude oil storage tanks for the Santa Fe and Anderson leases. Equipment fuel as a component of total operating expenses was lower by approximately 3% due to lower overall maintenance activities and lower prices for gasoline and diesel during 2009.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses decreased by $77,114 for the year ended December 31, 2009 when compared with the same period of 2008. Accounting services decreased by approximately $54,400 due primarily to lower costs incurred for SOX-404 internal control compliance and tax related matters.
PROVISION FOR DEPLETION, DEPRECIATION AND AMORTIZATION
The provision for depletion, depreciation and amortization decreased by $304,430 for the twelve months ended December 31, 2009, when compared with the same period for 2008. The decrease is due primarily to a decrease in depletion of the Company's oil and gas properties in the amount of $318,202. The decrease in depletion is due to a decrease in crude oil production for 2009 and a decrease in the depletable base due to the write-down of certain oil and properties in 2008.
CRITICAL ACCOUNTING POLICIES
COSTS INCURRED IN OIL AND GAS PRODUCING ACTIVITIES
The Company has adopted the "successful efforts" method of accounting for its oil and gas exploration and development activities, as set forth in FASB ASC Topic No. 932.
The Company initially capitalizes expenditures for oil and gas property acquisitions until they are either determined to be successful (capable of commercial production) or unsuccessful. The carrying value of all undeveloped oil and gas properties is evaluated periodically and reduced if such carrying value appears to have been impaired. Leasehold costs relating to successful oil and gas properties remain capitalized while leasehold costs which have been proven unsuccessful are charged to operations in the period the leasehold costs are proven unsuccessful. Costs of carrying and retaining unproved properties are expensed as incurred.
The costs of drilling and equipping development wells are capitalized, whether the wells are successful or unsuccessful. The costs of drilling and equipping exploratory wells are capitalized until they are determined to be either successful or unsuccessful. If the wells are successful, the costs of the wells remain capitalized. If, however, the wells are unsuccessful, the capitalized costs of drilling the wells, net of any salvage value, are charged to operations in the period the wells are determined to be unsuccessful.
The Company adopted FASB ASC Topic No. 360-10-15, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" (the Statement). The Statement specifies when an impairment loss should be recognized and how impairment losses should be measured for long-lived assets to be held and used and for long-lived assets to be disposed of. In accordance with the Statement, the costs of proved oil and gas properties and equipment are periodically assessed on a lease by lease basis to determine if such costs exceed undiscounted future cash flows, and if conditions warrant an impairment reserve will be provided based on the estimated future discounted cash flows. The Company recorded an impairment reserve of $1,222,527, $358,757 and $1,162,379 at December 31, 2010, 2009 and 2008, respectively (see Note 6 of Notes to Financial Statements included in Item 8 of this Form 10-K). The accumulated impairment reserve was $3,991,960 and $2,769,430 at December 31, 2010 and 2009, respectively.
DEPLETION, DEPRECIATION, AND AMORTIZATION
Depletion of leasehold costs of producing oil and gas properties is provided on the unit-of-production method, by individual property unit, based on estimated recoverable proved reserves. Depreciation and amortization of the costs of producing wells and related equipment are provided on the unit-of-production method, by individual property unit, based on estimated recoverable proved developed reserves. Amortization of the costs of undeveloped oil and gas properties is based on the Company's experience, giving consideration to the holding periods of leaseholds. The average depletion per equivalent barrel of crude oil produced for 2010, 2009 and 2008 were $29.89, $14.97 and $27.86, respectively.
Drilling and operating equipment, buildings, automotive, office and other property and equipment and leasehold improvements are stated at cost. Depreciation and amortization are computed using the straight-line method over the shorter of the estimated useful lives or the applicable lease terms (range of 3 to 19 years). Any permanent impairment of the carrying value of property and equipment is provided for at the time such impairments become known.
RECENT ACCOUNTING PRONOUNCEMENTS
In January 2010, the FASB issued Accounting Standards Update 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. This guidance amends the disclosure requirements related to recurring and nonrecurring fair value measurements and requires new disclosures on the transfers of assets and liabilities between Level 1 (quoted prices in active market for identical assets or liabilities) and Level 2 (significant other observable inputs) of the fair value measurement hierarchy, including the reasons and the timing of the transfers. Additionally, the guidance requires a roll forward of activities on purchases, sales, issuance and settlements of the assets and liabilities measured using significant unobservable inputs (Level 3 fair value measurements). The guidance became effective for the reporting period beginning January 1, 2010, except for the disclosure on the roll forward activities for Level 3 fair value measurements, which will become effective for the reporting period beginning January 1, 2011. Other than requiring additional disclosures, adoption of this new guidance has not and is not expected to have a significant impact on our consolidated financial statements. The Company's adoption of this updated guidance was not significant to our consolidated financial statements.
In February 2010, the FASB issued updated guidance related to subsequent events. As a result of this updated guidance, public filers must still evaluate subsequent events through the issuance date of their financial statements, however, they are not required to disclose the date in which subsequent events were evaluated in their financial statements disclosures. This amended guidance became effective upon its issuance on February 24, 2010 at which time the Company adopted this updated guidance.
ITEM 7A
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable.
ITEM 8
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PYRAMID OIL COMPANY
DECEMBER 31, 2010
Page
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM . . . . . . 28
FINANCIAL STATEMENTS:
Balance sheets - December 31, 2010 and 2009 . . . . . . . . . . 29-30 Statements of operations - years ended December 31, 2010, 2009 and 2008 . . . . . . . . . . . . . . 31-32 Statements of shareholders' equity - years ended December 31, 2010, 2009 and 2008 . . . . . . . . . . . . . . 33 Statements of cash flows - years ended December 31, 2010, 2009 and 2008 . . . . . . . . . . . 34-35 Notes to financial statements . . . . . . . . . . . . . . . . . 36
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders Pyramid Oil Company Bakersfield, California
We have audited the balance sheets of Pyramid Oil Company (the Company) as of December 31, 2010 and 2009, and the related statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2010. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provided a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Pyramid Oil Company as of December 31, 2010 and 2009, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2010, in conformity with U.S. generally accepted accounting principles.
SINGERLEWAK LLP
Los Angeles, California March 30, 2011
FINANCIAL STATEMENTS PYRAMID OIL COMPANY BALANCE SHEETS ASSETS
PYRAMID OIL COMPANY BALANCE SHEETS LIABILITIES AND SHAREHOLDERS' EQUITY
PYRAMID OIL COMPANY STATEMENTS OF OPERATIONS
PYRAMID OIL COMPANY STATEMENTS OF OPERATIONS
PYRAMID OIL COMPANY
STATEMENTS OF SHAREHOLDERS' EQUITY
PYRAMID OIL COMPANY STATEMENTS OF CASH FLOWS
PYRAMID OIL COMPANY STATEMENTS OF CASH FLOWS (CONTINUED)
PYRAMID OIL COMPANY NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2010
1. SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Pyramid Oil Company (the Company), a California Corporation, has been in the oil and gas business continuously for 101 years since it was incorporated on October 9, 1909. The Company is in the business of exploration, development and production of crude oil and natural gas. The Company operated and has interests in 27 oil and gas leases in Kern and Santa Barbara Counties in the State of California. The Company also owns oil and gas interests in Wyoming, Texas and New York that it does not operate. The Company grants short-term credit to its customers and historically receives payment within 30 days.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents principally consist of demand deposits and certificates of deposits having original maturities of three months or less. At December 31, 2010, the Company had approximately $1,200,000 of cash and cash equivalents that were not fully insured by the FDIC.
INVESTMENTS
Investments consist of certificates of deposit having original maturities of three months or more and are valued at cost.
INVENTORY
Inventories of crude oil and condensate are valued at the lower of cost, predominately on a first-in, first-out (FIFO) basis, or market, and include certain costs directly related to the production process.
DEPOSITS
In April 2004, the Company replaced its state of California oil and gas blanket performance surety bond, with a cash bond in the form of an irrevocable certificate of deposit in the amount of $250,000.
PYRAMID OIL COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2010
COSTS INCURRED IN OIL AND GAS PRODUCING ACTIVITIES
The Company has adopted the "successful efforts" method of accounting for its oil and gas exploration and development activities, as set forth in FASB ASC Topic No. 932.
The Company initially capitalizes expenditures for oil and gas property acquisitions until they are either determined to be successful (capable of commercial production) or unsuccessful. The carrying value of all undeveloped oil and gas properties is evaluated periodically and reduced if such carrying value appears to have been impaired. Leasehold costs relating to successful oil and gas properties remain capitalized while leasehold costs which have been proven unsuccessful are charged to operations in the period the leasehold costs are proven unsuccessful. Costs of carrying and retaining unproved properties are expensed as incurred.
The costs of drilling and equipping development wells are capitalized, whether the wells are successful or unsuccessful. The costs of drilling and equipping exploratory wells are capitalized until they are determined to be either successful or unsuccessful. If the wells are successful, the costs of the wells remain capitalized. If, however, the wells are unsuccessful, the capitalized costs of drilling the wells, net of any salvage value, are charged to operations in the period the wells are determined to be unsuccessful.
The Company adopted FASB ASC Topic No. 360-10-15, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" (the Statement). The Statement specifies when an impairment loss should be recognized and how impairment losses should be measured for long-lived assets to be held and used and for long-lived assets to be disposed of. In accordance with the Statement, the costs of proved oil and gas properties and equipment are periodically assessed on a lease by lease basis to determine if such costs exceed undiscounted future cash flows, and if conditions warrant an impairment reserve will be provided based on the estimated future discounted cash flows. The Company recorded an impairment reserve of $1,222,527, $358,757 and $1,162,379 at December 31, 2010, 2009 and 2008, respectively (see Note 6). The accumulated impairment reserve was $3,991,960 and $2,769,430 at December 31, 2010 and 2009, respectively.
JOINT VENTURE INVESTMENTS
The Company participates in two joint ventures as a non-operator. The properties are located in New York and Texas, both are primarily gas properties. The Company has a minority interests in both joint ventures. The Company's interest in the New York gas wells range from 19 to 38 percent. The Company's interest in the Texas joint venture wells range from 6.25 to 12.5 percent. The Company records its share of revenues, expenses and capital costs as provided to the Company by the joint-venture operators. The accounting polices for the joint venture properties are consistent with the accounting policies that the Company uses for its wholly-owned properties.
PYRAMID OIL COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2010
DEPLETION, DEPRECIATION, AND AMORTIZATION
Depletion of leasehold costs of producing oil and gas properties is provided on the unit-of-production method, by individual property unit, based on estimated recoverable proved reserves. Depreciation and amortization of the costs of producing wells and related equipment are provided on the unit-of-production method, by individual property unit, based on estimated recoverable proved developed reserves. Amortization of the costs of undeveloped oil and gas properties is based on the Company's experience, giving consideration to the holding periods of leaseholds. The average depletion per equivalent barrel of crude oil produced for 2010, 2009 and 2008 were $29.89, $14.97 and $27.86, respectively.
Drilling and operating equipment, buildings, automotive, office and other property and equipment and leasehold improvements are stated at cost. Depreciation and amortization are computed using the straight-line method over the shorter of the estimated useful lives or the applicable lease terms (range of 3 to 19 years). Any permanent impairment of the carrying value of property and equipment is provided for at the time such impairments become known.
STOCK-BASED COMPENSATION
We account for share-based awards in accordance with the provisions of FASB ASC Topic No. 718, Compensation - Stock Compensation (ASC 718). Accordingly, we measure share-based compensation expense at the grant date, based on the fair value of the award, and recognize the expense over the employee's requisite service period using the straight-line method. The measurement of share-based compensation expense is based on several criteria including but not limited to the valuation model used and associated input factors, such as expected term of the award, stock price volatility, risk free interest rate and award forfeiture rate. These inputs are subjective and are determined using management's judgment. If differences arise between the assumptions used in determining share-based compensation expense and the actual factors, which become known over time, we may change the input factors used in determining future share-based compensation expense. Any such changes could materially impact our results of operations in the period in which the changes are made and in periods thereafter. We elected to adopt the alternative transition method for calculating the tax effects of share-based compensation and continue to use the simplified method in developing the expected term used for our valuation of share-based compensation in accordance with ASC 718.
MAINTENANCE AND REPAIRS
Maintenance, repairs and replacement expenditures are charged to operations as incurred, while major renewals and betterments are capitalized and depreciated over their useful lives.
RETIREMENT OR DISPOSAL OF PROPERTIES AND EQUIPMENT
Costs and accumulated depletion, depreciation, amortization and valuation allowances of property and equipment retired, abandoned, or otherwise disposed of are removed from the accounts upon disposal, and any resulting gain or loss is included in operations in the year of disposition. However, upon disposal of a portion of an oil and gas property, any proceeds received are treated as a recovery of cost and no gain or loss is recognized in the year of disposition.
PYRAMID OIL COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2010
INCOME TAXES
The Company uses the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date.
The Company adopted the provisions of FASB ASC Topic No. 740-10-25, Accounting for Uncertainty in Income Taxes, on January 1, 2007 (ASC 740-10-25). As a result of the implementation of ASC 740-10-25, the company made a comprehensive review of its portfolio of tax positions in accordance with recognition standards established by ASC 740-10-25. As a result of the implementation of ASC 740-10-25, the Company recognized no material adjustments to liabilities or stockholders equity.
The Company files income tax returns in the U.S. Federal jurisdiction, and California and New York states. With few exceptions, the Company is no longer subject to U.S. Federal tax examination for the years prior to 2007. State jurisdictions that remain subject to examination range from 2006 to 2009. The Company does not believe there will be any material changes in its unrecognized tax positions over the next 12 months.
The Company's 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 ASC 740-10-25, the Company did not have any accrued interest or penalties associated with any unrecognized tax benefits, nor was any interest expense recognized during the year ended December 31, 2010.
CONCENTRATION OF CREDIT RISK
The Company sells its crude oil to ConocoPhillips and Kern Oil & Refining, accounting for approximately 50%, and 46%, respectively, of the Company's crude oil and gas sales in 2010. Crude oil sales were approximately 55% and 42% attributable to ConocoPhillips and Kern Oil and Refining, respectively at December 31, 2009. While revenue from these customers is significant, and the loss of any one could have a short-term adverse effect on the Company, it is management's opinion that the oil and gas it produces could be sold to other crude oil purchasers, refineries or pipeline companies. Trade receivables were approximately 48% and 52% attributable to ConocoPhillips and Kern Oil and Refining respectively at December 31, 2010. Trade receivables were approximately 55% and 44% attributable to ConocoPhillips and Kern Oil and Refining respectively at December 31, 2009.
PYRAMID OIL COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2010
RECENT ACCOUNTING PRONOUNCEMENTS
In January 2010, the FASB issued Accounting Standards Update 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. This guidance amends the disclosure requirements related to recurring and nonrecurring fair value measurements and requires new disclosures on the transfers of assets and liabilities between Level 1 (quoted prices in active market for identical assets or liabilities) and Level 2 (significant other observable inputs) of the fair value measurement hierarchy, including the reasons and the timing of the transfers. Additionally, the guidance requires a roll forward of activities on purchases, sales, issuance and settlements of the assets and liabilities measured using significant unobservable inputs (Level 3 fair value measurements). The guidance became effective for the reporting period beginning January 1, 2010, except for the disclosure on the roll forward activities for Level 3 fair value measurements, which will become effective for the reporting period beginning January 1, 2011. Other than requiring additional disclosures, adoption of this new guidance has not and is not expected to have a significant impact on our consolidated financial statements. The Company's adoption of this updated guidance was not significant to our consolidated financial statements.
In February 2010, the FASB issued updated guidance related to subsequent events. As a result of this updated guidance, public filers must still evaluate subsequent events through the issuance date of their financial statements, however, they are not required to disclose the date in which subsequent events were evaluated in their financial statements disclosures. This amended guidance became effective upon its issuance on February 24, 2010 at which time the Company adopted this updated guidance.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior financial statements to conform to the 2010 presentation.
REVENUE RECOGNITION
The Company recognizes sales when: (1) persuasive evidence of an arrangement exists; (2) product delivery has occurred; (3) pricing is fixed or determinable; and (4) collection is reasonably assured. To satisfy these criteria, the Company: (1) has crude oil sales contracts with its crude oil purchasers; (2) records revenue based upon receipt of evidence of shipment of crude oil and when risk of loss and title transfer has occurred; (3) the Company's crude oil contracts specify the pricing terms which are fixed and determinable; (4) validates creditworthiness through past payment history and other financial date. Sales rebates, discounts and customer returns are not applicable to the oil and gas industry.
TRADE ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
Our accounts receivable are unsecured and are at risk to the extent such amounts become uncollectible. The Company has had the same two major customers for approximately 20 years with no history of non-payment or default. Pursuant to the terms of the crude oil sales contracts, the Company receives payment around the 20th of the month following crude oil shipments. The Company has established a nominal allowance for doubtful accounts due to the Company's evaluation of its customers past payment history, creditworthiness and other financial data.
PYRAMID OIL COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2010
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost less accumulated depreciation and amortization. Depreciation is recorded on the straight-line basis over the estimated useful lives of the assets, which range from 3 to 19 years. Maintenance and repairs are charged to operations as incurred, while significant improvements are capitalized. Upon retirement or disposition of property, the asset and related accumulated depreciation or amortization is removed from the accounts and any resulting gain or loss is charged to operations. The carrying value of property and equipment is assessed periodically and/or when factors indicating impairment are present. We recognize impairment losses when the expected cash flows are less than the asset's carrying value, in which case the asset is written down to its estimated fair value.
2. FAIR VALUE MEASUREMENTS
Effective January 1, 2008, the Company adopted the authoritative guidance on fair value measurements. Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. As a basis for considering such assumptions, the guidance establishes a three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:
Level 1 - Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 - Include other inputs that are directly or indirectly observable in the marketplace.
Level 3 - Unobservable inputs which are supported by little or no market activity.
The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
In accordance with this guidance, we measure our cash equivalents and short- term investments at fair value. Our cash equivalents and short-term investments are classified within Level 1. Cash equivalents and short-term investments are valued primarily using quoted market prices utilizing market observable inputs. At December 31, 2010, cash equivalents and short term investments consisted of certificates of deposit measured at fair value on a recurring basis. Fair values of our certificates of deposit were $3,463,138, of which $404,610 was included in cash equivalents and $3,058,528 were included in short-term investments at December 31, 2010. Fair values of our certificates of deposit were $3,684,895, of which $340,833 was included in cash equivalents and $3,344,061 were included in short-term investments at December 31, 2009.
Effective January 1, 2009, the Company adopted, the FASB staff position that delayed the guidance on fair value measurements for non financial assets and non financial liabilities. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements.
PYRAMID OIL COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2010
3. LONG-TERM DEBT AND LINE OF CREDIT
Long-term debt at December 31, 2010 and 2009, is summarized as follows:
At December 31, 2010 approximately $42,000 of gross property and equipment was pledged as collateral to secure $40,000 principal amount of long-term debt.
Maturities of long-term debt are as follows:
At December 31, 2010, the Company had an unsecured line of credit with a bank, under which the Company may borrow up to $500,000 through May 31, 2011. Interest on any borrowing is accrued at the bank's index rate plus 0.50 percentage points. The bank's index rate was 4.75% at December 31, 2010.
PYRAMID OIL COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2010
4. INCOME TAXES
Income tax provision (benefit) consists of the following:
Differences exist between certain accounting policies and related provisions included in federal income tax rules. The amounts by which these differences and other factors cause the total income tax provision to differ from an amount computed by applying the federal statutory income tax rate to financial income is set forth in the following reconciliation:
PYRAMID OIL COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2010
The components of net deferred tax asset (liability) are as follows:
The tax effect of significant temporary differences representing deferred tax assets and (liabilities) are as follows:
At December 31, 2010, a valuation allowance has been provided against the statutory depletion carryover due to the uncertainty of its future utilization.
PYRAMID OIL COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2010
The Company believes that its estimate of deferred tax assets and determination to record a valuation allowance against the statutory depletion carryover are critical accounting estimates because they are subject to, among other things, an estimate of future taxable income, which is susceptible to change and dependent upon events that may or may not occur, and because the impact of recording a valuation allowance may be material to the assets reported on the balance sheet and results of operations.
At December 31, 2010, the Company has Federal income tax net operating loss carrybacks/carryforwards of approximately $88,000. For California franchise tax purposes, as of December 31, 2010, the Company has net operating loss carryforwards of approximately $15,000.
At December 31, 2010, the Company has, for Federal income tax purposes, a statutory depletion carryover of approximately $4,544,000, which currently has no expiration date.
The Company adopted the provisions of FASB ASC Topic No. 740-10-25 (ASC 740- 10-25), Accounting for Uncertainty in Income Taxes, on January 1, 2007. As a result of the implementation of ASC 740-10-25, the company made a comprehensive review of its portfolio of tax positions in accordance with recognition standards established by ASC 740-10-25. As a result of the implementation of ASC 740-10-25, the Company recognized no material adjustments to liabilities or stockholders equity.
The Company files income tax returns in the U.S. Federal jurisdiction, and California and New York states. With few exceptions, the Company is no longer subject to U.S. Federal tax examination for the years prior to 2007. State jurisdictions that remain subject to examination range from 2006 to 2009. 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 ASC 740-10-25, the Company did not have any accrued interest or penalties associated with any unrecognized tax benefits, nor was any interest expense recognized during the year ended December 31, 2010.
5. 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 $195,000, $188,500 and $462,800 in 2010, 2009 and 2008, respectively.
As a director, Mr. Alexander has abstained from voting on any of the above matters that have been brought before the Board of Directors, involving the Santa Fe lease. See Note 13 for discussion of severance awards entered into with Mr. Alexander.
PYRAMID OIL COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2010
6. FOURTH QUARTER RESULTS (UNAUDITED)
During the fourth quarter of 2010, the Company made adjustments to the carrying value of some of one of its oil and gas properties. The Company recorded a valuation allowance in the amount of $237,647 at December 31, 2010 to reflect the change in the projected future discounted net cash flows for this property, as the result of the analysis of the Company's oil and gas reserves by independent consultants. During the fourth quarter of 2010, the Company recorded a valuation allowance of $117,412 against one of the Company's joint venture wells in Texas. The Company also recorded additional depletion of $27,010 on its oil and gas properties as a result of the analysis of the Company's oil and gas reserves by independent consultants at December 31, 2010.
During the fourth quarters of 2009 and 2008, the Company made adjustments to the carrying value of some of its oil and gas properties. The Company recorded a valuation allowance in the amount of $358,757 and $1,162,379, as of December 31, 2009 and 2008, respectively, to reflect the change in the projected future undiscounted net cash flows for the properties, as the result of the analysis of the Company's oil and gas reserves by independent consultants. The adjustment at December 31, 2009, of $358,727, is due to write-downs of the Company's investment in two natural gas wells drilled by the Texas joint venture. The economic results from the first well during 2009 and the projected future discounted net cash flows from the second well did not support the costs that had been capitalized at December 31, 2009.
During the fourth quarter of 2008, the Company recorded additional depletion of approximately $60,000 on its oil and gas properties as a result of the analysis of the Company's oil and gas reserves by independent consultants.
7. COMMITMENTS AND CONTINGENCIES
The Company is liable for future dismantlement and abandonment costs associated with its oil and gas properties. These costs include down-hole plugging and abandonment of wells, future site restoration, post closure and other environmental exit costs. The costs of future dismantlement and abandonment have been accrued and recorded in the financial statements. See Note 10, Assets Retirement Obligations.
The Company is subject to potential litigation within the normal course of business. In management's opinion, the resolution of such litigation would not have a material adverse effect upon the Company's financial position or the results of its operations. The Company did not have any pending litigation at December 31, 2010.
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.
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
PYRAMID OIL COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2010
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.
The Company has been notified by the United States Environmental Protection Agency (EPA) of a final settlement offer to settle its potential liability as a generator of waste containing hazardous substances that was disposed of at a waste disposal site in Santa Barbara County. The Company has responded to the EPA by indicating that the waste contained petroleum products that fall within the exception to the definition of hazardous substances for petroleum-related substances of the pertinent EPA regulations. Management has concluded that under both Federal and State regulations no reasonable basis exists for any valid claim against the Company. As such, the likelihood of any settlement is deemed remote.
8. GAIN ON SALE OF FIXED ASSETS
On July 28, 2010, the Company entered into a Purchase and Sale Agreement for the sale of a portion of its Texas joint venture leaseholds. Pursuant to the agreement, the Company agreed to sell to the buyers 5% of the working interest of the Company's Texas joint venture, subject to certain prior agreements and encumbrances. The purchase price for the assigned interest is $320,566. After the sale, the Company continues to own a 7.5% working interest in the assets. The Company recognized a gain on the sale of the Texas leasehold interests in the amount of $320,566. The leasehold interests had been previously fully amortized.
9. DEFINED CONTRIBUTION PLAN
The Company has a defined contribution plan (Simple IRA) available to all employees meeting certain service requirements. Employees may contribute up to a maximum of $6,000 of their compensation to the plan. The Company will make a contribution to the plan in an amount equal to the employees contributions up to 3% of their salaries. Contributions of $9,521, $10,428 and $12,834 were made during the years ended December 31, 2010, 2009 and 2008, respectively.
10. ASSETS RETIREMENT OBLIGATIONS
The Company recognizes a liability at discounted fair value for the future retirement of tangible long-lived assets and associated assets retirement cost associated with the petroleum and natural gas properties. The fair value of the liability is capitalized as part of the cost of the related asset and amortized to expense over its useful life. The liability accretes until the date of expected settlement of the retirement obligations. The related accretion expense is recognized in the statement of operations. The provision will be revised for the effect of any changes to timing related to cash flow or undiscounted abandonment costs. Actual expenditures incurred for the purpose of site reclamation are charged to the asset retirement obligations to the extent that the liability exists on the balance sheet. Differences between the actual costs incurred and the fair value of the liability recorded are recognized in income in the period the actual costs are incurred.
PYRAMID OIL COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2010
There are no legally restricted assets for the settlement of asset retirement obligations. The Company has recognized deferred tax benefits of approximately $482,700 for the asset retirement obligations as of December 31, 2010. A reconciliation of the Company's asset retirement obligations from the periods presented are as follows:
11. 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.
12. WARRANTS ISSUED
Effective, November 13, 2008, the Company's Board of Directors approved the issuance of warrants to Pfeiffer High Investor Relations, Inc. (PHIR). The Company approved the issuance of warrants to purchase 25,000 shares of common stock at an exercise price of $3.20 per share. The warrants will have a two-year term, will be assignable and will have piggyback registration rights and cashless exercise provisions. The Company valued the warrants using the Black-Scholes model using inputs of a 2 year expected life, 135% volatility and a 1.19% risk free interest rate. The Company recorded stock based compensation of $69,000 for the period ended December 31, 2008. The Company has adopted FASB ASC Topic No. 718 (ASC 718) which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees, directors and consultants based on estimated fair values. ASC 718 requires companies to estimate the fair value of the award that is ultimately expected to vest to be recognized as expense. ASC 718 requires companies to estimate the fair value of share-based payment awards on the date of the grant using an option-pricing model. The value of the award that is ultimately expected to vest is recognized as expense over the requisite service periods.
PYRAMID OIL COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2010
The Company's determination of fair value of share-based payment awards on the date of grant uses the Black-Scholes model, which is affected by the Company's stock price as well as assumptions regarding a number of complex and subjective variables. These variables include, but are not limited to, the expected stock price volatility over the expected term of the awards, and actual and projected option exercise behaviors. The Company estimated expected volatility using historical data. The fair value of each warrant was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:
Risk-free interest rate 1.19% Expected term (years) 2.0 Volatility 135% Expected annual dividends - Stock price at November 13, 2008 $3.96
The following table summarizes the warrant activity for the twelve months ended December 31, 2010:
Number Weighted-Average of Warrants Exercise Price ----------- ----------------
Outstanding, December 31, 2009 25,000 $3.20
Granted -- -- Exercised -- -- Cancelled -- -- ------ ---- Outstanding, December 31 , 2010 25,000 $3.20 ====== ====
The following summarizes the warrants issued, outstanding and exercisable as of December 31, 2010:
Grant Date November, 2008 Strike Price $3.20 Expiration Date November, 2011 Warrants Remaining 25,000 Proceeds if Exercised $80,000 Call Feature None
During 2010, the Company's Board of Directors approved the extension of the expiration date of the warrants from November of 2010 to November of 2011. The Company recorded stock based compensation of $9,783 for the period ended December 31, 2010 as a result of the extension of the expiration date of the warrants.
13. SEVERANCE AWARD AGREEMENTS
On September 15, 2010, 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 and recorded an increase to stockholders' equity of $113,500. 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 September 30, 2010, the Company intended to deliver the Company's common shares for the Severance Award; the Company's
PYRAMID OIL COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2010
common shares for the Severance Award; therefore, in accordance with SFAS 123(R), management classified the share-based compensation as stockholders' equity at December 31, 2010
On June 4, 2009, 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 and recorded an increase to stockholders' equity of $209,935. 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, 2009, the Company intended to deliver the Company's common shares for the Severance Award; therefore, in accordance with FASB ASC Topic 718, Compensation-Stock Compensation, management classified the share-based compensation as stockholders' equity at June 30, 2009.
On December 30, 2008, 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 and recorded an increase to stockholders' equity of $100,000. 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 December 31, 2008, the Company intended to deliver the Company's common shares for the Severance Award; therefore, in accordance with FASB ASC Topic 718, Compensation-Stock Compensation, management classified the share-based compensation as stockholders' equity.
14. 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. REGISTRATION STATEMENT ON FORM S-3
The Company filed a shelf registration statement on Form S-3 with the Securities and Exchange Commission (SEC) on December 22, 2009, that became effective on January 14, 2010. The registration statement is designed to provide the Company the flexibility to offer and sell from time to time up to $20 million of the Company's common stock. The Company may offer and sell such securities through one or more methods of distribution, subject to market conditions and the Company's capital needs. The terms of any offering under the shelf registration statement will be established at the time of such offering and will be described in a prospectus supplement filed with the SEC prior to the completion of the offering. The Company has not filed any supplemental prospectus with the SEC or sold any common stock under this registration statement.
PYRAMID OIL COMPANY SUPPLEMENTAL INFORMATION (UNAUDITED) OIL AND GAS PRODUCING ACTIVITIES DECEMBER 31, 2010
FASB ASC Topic 932, Extraction Activities - Oil and Gas, requires disclosure of certain financial data for oil and gas operations and reserve estimates of oil and gas. This information, presented here, is intended to enable the reader to better evaluate the operations of the Company. All of the Company's oil and gas reserves are located in the United States.
The aggregate amounts of capitalized costs relating to oil and gas producing activities and the related accumulated depletion, depreciation, and amortization and valuation allowances as of December 31, 2010, 2009 and 2008 were as follows:
PYRAMID OIL COMPANY SUPPLEMENTAL INFORMATION (UNAUDITED) DECEMBER 31, 2010
The estimated quantities and the change in proved reserves, both developed and undeveloped, for the Company are as follows:
The foregoing estimates have been prepared by the Company from data prepared by an independent petroleum engineer in respect to certain producing properties. Revisions in previous estimates can result from analysis of new information, as well as from additional production experience or from a change in economic factors. The primary factor that has impacted the revisions of previous estimates of crude oil and natural gas reserves noted above is from a change in crude oil and natural gas prices used to determine the valuation of year-end reserves. Higher crude oil and natural gas prices cause certain oil and gas leases to become more profitable, thus generating additional reserves. Net average crude oil prices (average crude oil sales prices net of operating costs, production taxes and development costs) used to value the year-end reserves increased by approximately $12.60 per barrel at December 31, 2010 and by $21.90 per barrel at December 31, 2009. The crude oil prices used for valuation purposes decreased by approximately $53.00 per barrel at December 31, 2008.
The decrease in revisions of previous estimates for natural gas reserves at December 31, 2010, is due primarily to one of the Company's Texas joint venture wells. During 2010, this well started producing exclusively crude oil due to work that was done on this well in 2010. Natural gas prices used to value the year-end reserves decreased by approximately $3.16 per MCF at December 31, 2009. The revisions of previous estimates (decrease of 228,000 MCF's) of natural gas reserves at December 31, 2008 is due primarily to the Texas natural gas joint venture. The natural gas well that was drilled in 2008 did not yield the volumes that were initially projected.
PYRAMID OIL COMPANY SUPPLEMENTAL INFORMATION (UNAUDITED) DECEMBER 31, 2010
The reserve estimates are believed to be reasonable and consistent with presently known physical data concerning size and character of the reservoirs and are subject to change as additional knowledge concerning the reservoirs becomes available.
The present value of estimated future net revenues of proved developed reserves, discounted at 10%, were as follows:
FASB ASC Topic 932, Extraction Activities - Oil and Gas, requires certain disclosures of the costs and results of exploration and production activities and established a standardized measure of oil and gas reserves and the year-to-year changes therein.
In addition to the foregoing disclosures, FASB ASC Topic 932 established a "Standardized Measure of Discounted Future Net Cash Flows and Changes Therein Relating to Proved Oil and Gas Reserves".
Costs incurred, both capitalized and expensed, of oil and gas property acquisition, exploration and development for the years ended December 31, 2010, 2009 and 2008 were as follows:
PYRAMID OIL COMPANY SUPPLEMENTAL INFORMATION (UNAUDITED) DECEMBER 31, 2010
The results of operations for oil and gas producing activities for the years ended December 31, 2010, 2009 and 2008 were as follows:
The standardized measure of discounted estimated future net cash flows relating to proved oil and gas reserves for the years ended December 31, 2010, 2009 and 2008 were as follows:
PYRAMID OIL COMPANY SUPPLEMENTAL INFORMATION (UNAUDITED) DECEMBER 31, 2010
The principal changes in the standardized measure of discounted future net cash flows during the years ended December 31, 2010, 2009 and 2008 were as follows:
Estimated future cash inflows are computed by applying year-end prices of oil and gas to year-end quantities of proved reserves. Estimated future development and production costs are determined by estimating the expenditures to be incurred in developing and producing the proved oil and gas reserves, as well as certain abandonment costs, based on year-end cost estimates and assuming continuation of existing economic conditions. Estimated future income tax expense is calculated by applying the year-end effective tax rate to estimated future pretax net cash flows related to proved oil and gas reserves, less the tax basis of the properties involved.
These estimates are furnished and calculated in accordance with requirements of the Financial Accounting Standards Board and the Securities and Exchange Commission. Because of the unpredictable variances in expenses and capital forecasts, crude oil and natural gas price changes being largely influenced and controlled by United States and foreign governmental actions, and the fact that the basis for such estimates vary significantly, management believes the usefulness of these projections is limited. Estimates of future net cash flows do not represent management's assessment of future profitability or future actual cash flows of the Company. It should be recognized that applying current costs and prices and a ten percent standard discount rate allows for comparability but does not convey absolute value. The discounted amounts arrived at are only one measure of financial quantification of proved reserves.
PYRAMID OIL COMPANY SUPPLEMENTAL INFORMATION (UNAUDITED) DECEMBER 31, 2010
The standardized measure of discounted future cash flows before income taxes increased by $3,910,000 at December 31, 2010. The increase in income taxes offset discounted future cash flows by $1,106,000 for a net increase in future cash flows of $2,804,000 after income taxes as of December 31, 2010. The major factor contributing to the increase in cash flows is higher net average crude oil prices (average crude oil sales prices net of operating costs, production taxes and development costs). During 2010 Net average crude oil prices increased by approximately $12.60 per barrel. This price increase contributed to an increase in discounted cash flows due to price changes of $4,962,000 and a change in quantity estimates of $2,016,000.
The standardized measure of discounted future cash flows before income taxes increased by $5,051,000 at December 31, 2009. The increase in income taxes offset discounted future cash flows by $1,489,000 for a net increase in future cash flows of $3,562,000 after income taxes as of December 31, 2009. The major factor contributing to the increase in cash flows is higher average crude oil prices. Average crude oil prices at December 31, 2009, increased by approximately $21.90 per barrel. This price increase contributed to an increase in discounted cash flows due to price changes of $2,784,000 and a change in quantity estimates of $3,297,000. The increase in estimated discounted future income taxes is due to the increase in the value of the Company's oil and gas reserves due to the higher crude oil prices.
The standardized measure of discounted future cash flows before income taxes decreased by $23,308,000 at December 31, 2008. The decrease in income taxes offset discounted future cash flows by $7,561,000 for a net decrease in future cash flows of $15,747,000 after income taxes as of December 31, 2008. The major factor contributing to the decrease in cash flows is lower crude oil prices. Average crude oil prices at December 31, 2008, decreased by approximately $53.00 per barrel. This price decrease contributed to a decrease in discounted cash flows due to price changes of $19,066,000 and a decrease in quantity estimated revisions of $4,023,000. The decrease in estimated discounted future income taxes is due to the decrease in the value of the Company's oil and gas reserves due to the lower crude oil prices.
PYRAMID OIL COMPANY SUPPLEMENTAL INFORMATION (UNAUDITED) QUARTERLY RESULTS
(a) Reflects a valuation allowance of $867,468 recorded during the second quarter of 2010 for the write-down of the costs of drilling a well in the second quarter of 2010 that was abandoned as a dry-hole.
(b) Reflects valuation allowances of $355,000 and $359,000 at December 31, 2010 and 2009, respectively, due to the write-down of certain oil and gas properties (see Note 6 of Notes to Financial Statements included in Item 8 of this Form 10-K).
ITEM 9
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
ITEM 9A
ITEM 9A - CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that the Company files with the Securities and Exchange Commission (the SEC) under the Securities Exchange Act of 1934 (the Exchange Act) is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and that such information is accumulated and communicated to the Company's management, including the principal executive and financial officers, as appropriate, to allow for timely decisions regarding required disclosure. As required by SEC Rule 13a-15(b), the Company carried out an evaluation, under the supervision and with the participation of its management, including it principal executive and financial officers, of the effectiveness of the design and operation of the Company's disclosure controls and procedures as of the end of the period covered by this Annual Report. Based on the foregoing, the Company's principal executive and financial officers concluded that the Company's disclosure controls and procedures are effective to ensure that the information required to be disclosed in the Company's reports filed or submitted under the Exchange Act is timely recorded, processed and reported within the time periods specified in the SEC's rules and forms.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
This report is provided by the Company's management pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 and the SEC rules promulgated thereunder. Management is responsible for establishing and maintaining adequate internal control over financial reporting and for assessing the effectiveness of internal control over financial reporting.
The Company's control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the Untied States. The Company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company's assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States, and that the Company's receipts and expenditures are being made only in accordance with authorizations of the Company's management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisitions, use, or disposition of the Company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management has assessed the Company's internal control over financial reporting as of December 31, 2010 based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on the assessment of the Company's internal control over financial reporting, management has concluded that, as of December 31, 2010 the Company's internal control over
financial reporting was effective.
Pursuant to applicable law, this annual report is not required to include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting.
There has been no change in the Company's internal control over financial reporting during the Company's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
ITEM 9B
ITEM 9B - OTHER INFORMATION
The Company is aware of no information that was required to be disclosed in a report on Form 8-K during the fourth quarter of 2010 but was not reported.
PART III
ITEM 10
ITEM 10 - DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The Company hereby incorporates by reference the information to be contained under the section entitled "Directors and Executive Officers" or a similarly entitled section from its definitive Proxy Statement to be filed with the Securities and Exchange Commission in connection with its 2011 Annual Meeting of Shareholders.
The Company has adopted a code of ethics that is applicable to all of its directors, officers and employees. A copy of the code is available at no charge to any person who sends a request for a copy to the Corporate Secretary, Pyramid Oil Company, P.O. Box 832, Bakersfield, California 93302.
ITEM 11
ITEM 11 - EXECUTIVE COMPENSATION
The Company hereby incorporates by reference the information to be contained under the section entitled "Compensation of Directors and Executive Officers" or a similarly entitled section from its definitive Proxy Statement to be filed with the Securities and Exchange Commission in connection with its 2011 Annual Meeting of Shareholders.
ITEM 12
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The Company hereby incorporates by reference the information to be contained under the section entitled "Voting Securities and Principal Holders Thereof" or a similarly entitled section from its definitive Proxy Statement to be filed with the Securities and Exchange Commission in connection with its 2011 Annual Meeting of Shareholders.
ITEM 13
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
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 $188,500 in 2010, $188,500 in 2009 and $462,800 in 2008.
As a director, Mr. Alexander has abstained from voting on any of the above matters that have been brought before the Board of Directors involving the Santa Fe lease.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The Company hereby incorporates by reference the information contained under the section entitled ''Principal Accounting Fees and Services'' or a similarly entitled section from its definitive Proxy Statement to be filed with the Securities and Exchange Commission in connection with its 2011 Annual Meeting of Shareholders.
PART IV
ITEM 15
ITEM 15 - EXHIBITS AND FINANCIAL SCHEDULES
3.1 Restated Articles of Incorporation of Pyramid Oil Company (previously filed by the registrant on December 17, 2009 as Exhibit 3.1 to the registrant's Current Report on Form 8-K, and incorporated herein by reference).
3.2 Amended and Restated Bylaws of Pyramid Oil Company (previously filed by the registrant on December 17, 2009 as Exhibit 3.2 to the registrant's Current Report on Form 8-K, and incorporated herein by reference).
10.1 Employment Agreement of John H. Alexander, dated February 21, 2002 (previously filed by the registrant on March 29, 2002 as Exhibit 10.4 to the registrant's Quarterly Report on Form 10-QSB, and incorporated herein by reference).
10.2 Severance Award Agreement of John H. Alexander, dated January 9, 2007 (previously filed by the registrant on January 16, 2007 as Exhibit 99.1 to the registrant's Current Report on Form 8-K, and incorporated herein by reference).
10.3 Severance Award Agreement of John H. Alexander, dated December 30, 2008 (previously filed by the registrant on January 6, 2009 as Exhibit 10.1 to the registrant's Current Report on Form 8-K, and incorporated herein by reference).
10.4 Severance Award Agreement of John H. Alexander, dated June 4, 2009.
10.5 Severance Award Agreement of John H. Alexander, dated September 21, 2010 (previously filed by the registrant on November 12, 2010 as Exhibit 10.1 to the registrant's Quarterly Report on Form 10-Q, and incorporated herein by reference).
23.1 Consent of SingerLewak LLP.
23.2 Consent of MHA Petroleum Consultants, LLC.
31.1 Certification of Chief Executive Officer Pursuant to 15 U.S.C. Section 7241, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to 15 U.S.C. Section 7241, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.1 Report dated February 23, 2010 of MHA Petroleum Consultants, LLC, independent petroleum engineers.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
March 30, 2011 By: JOHN H. ALEXANDER ---------------------- John H. Alexander Director/President Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
JOHN H. ALEXANDER Director/President March 30, 2011 --------------------------- Chief Executive Officer John H. Alexander
MICHAEL D. HERMAN Director March 30, 2011 --------------------------- Chairman of the Board Michael D. Herman
GARY L. RONNING Director March 30, 2011 --------------------------- Gary L. Ronning
JOHN E. TURCO Director March 30, 2011 --------------------------- John E. Turco
LEE G. CHRISTIANSON Corporate Secretary/ March 30, 2011 --------------------------- Principal Accounting and Lee G. Christianson Financial Officer