Executive Summary / Key Takeaways

• The Reserve Petroleum Company operates a core independent oil and gas exploration and production business alongside a diverse portfolio of investments spanning real estate, venture capital, and other sectors.
• Recent financial performance, particularly in Q1 2025, shows significant improvement driven primarily by strong results in the Oil and Gas segment due to favorable volume and price dynamics, despite a strategic exit from the water well drilling business.
• While lacking the scale and advanced technological moats of larger E&P competitors, RSRV leverages cost leadership and regulatory compliance expertise to maintain a niche position in its operating regions.
• The company maintains a solid liquidity position, funding operations internally and strategically deploying cash towards oil and gas property acquisitions, funded in part by reducing its equity securities portfolio.
• Key factors for investors to monitor include the volatility of oil and gas prices, the success of ongoing exploration and development activities, the performance and strategic management of the diverse investment portfolio, and the resolution of the outstanding lawsuit related to the terminated water well drilling venture.

Setting the Scene: A Hybrid Model in the Energy Landscape

The Reserve Petroleum Company stands as an independent player in the oil and gas exploration and production (E&P) sector, primarily focused on regions across Arkansas, Kansas, Oklahoma, South Dakota, Texas, and Wyoming. However, RSRV distinguishes itself from many pure-play E&P firms through a long-standing practice of managing a diverse investment portfolio alongside its core energy operations. This dual focus has shaped the company's trajectory, evolving from early interests in real estate and infrastructure like the 1977 acquisition of a stake in an Oklahoma City office building (Broadway Sixty-Eight) and the 1992 investment in undeveloped land (OKC Industrial Properties), to more recent ventures in water purification technology (Cloudburst International), new energy investments (Genlith), and various startup entities through venture funds (VCC Venture Fund I, Cortado Ventures Fund II-A, Cypress MWC).

Within the broader energy landscape, RSRV operates as a smaller entity compared to industry giants like Occidental Petroleum (OXY), Devon Energy (DVN), Chevron (CVX), and Exxon Mobil (XOM). These larger competitors command significant market share and benefit from economies of scale and substantial investments in advanced technologies that enhance operational efficiency and extraction capabilities. RSRV, with its limited workforce and focus on a specific number of producing properties, does not compete on the same scale or technological frontier as these majors. Its competitive positioning relies instead on a more localized, agile approach, emphasizing cost leadership in its niche operations and leveraging expertise in regulatory compliance. While larger players deploy sophisticated AI-driven exploration and highly efficient extraction processes, RSRV's operational advantages appear to stem from potentially lower overhead and simplified operations in mature fields, alongside a focus on navigating regulatory environments efficiently. The company's investment in Cloudburst International represents an interest in emerging technology, but it is part of the diverse investment portfolio rather than a core technological differentiator for RSRV's primary oil and gas business.

Recent Performance: Riding the O&G Wave

The first quarter of 2025 demonstrated a significant uplift in RSRV's financial performance, largely propelled by its core Oil and Gas segment. Net income for the three months ended March 31, 2025, surged to $1.77 million, a substantial 143% increase from $726,516 in the comparable period of 2024. This improvement was primarily a function of dynamics within the company's operating revenues and costs.

Oil and gas sales, the primary revenue driver, increased by 28% to $3.85 million in Q1 2025, up from $3.01 million in Q1 2024. This growth was a result of mixed trends in volume and price. Oil sales saw an 8% increase to $2.64 million, driven by a higher volume sold (39,904 Bbls vs. 33,290 Bbls), contributing a positive volume variance of $486,790. However, this was partially offset by a decrease in the average price per barrel, which fell from $73.60 to $66.23, resulting in a negative price variance of $294,253. Natural gas sales experienced a more dramatic 118% increase to $1.12 million, benefiting from both higher volume sold (263,936 MCF vs. 206,928 MCF, a positive volume variance of $141,950) and a significant rise in the average price per MCF, climbing from $2.49 to $4.26, yielding a substantial positive price variance of $467,420. These figures underscore the company's sensitivity to volatile spot market prices, a key risk factor.

Adding to the positive revenue picture in Q1 2025 was a gain of $492,282 from the disposition of unproved, non-producing oil and gas leasehold properties, a gain not present in the prior year period.

Conversely, the water well drilling services business, which contributed $615,480 in revenue and $378,589 in expenses in Q1 2024, generated no revenue or expenses in Q1 2025. This cessation followed the termination of the agreement with TWS South, LLC in April 2024 due to a breach. This exit resulted in a deconsolidation loss and necessitated recording an allowance for credit losses of $465,977 against related accounts receivable due to uncertainty surrounding a related lawsuit.

Operating costs and expenses saw an overall decrease of 17% to $2.24 million. Production costs increased by 9% to $1.05 million, primarily due to higher gas deductions, other costs, and gross production taxes. Exploration costs decreased by 34% to $104,279, mainly from lower dry hole and plugging costs, though partially offset by increases in geological/geophysical expenses and cancelled leases. Depreciation, Depletion, Amortization, and Valuation Provision (DDA) saw a significant 78% increase to $907,878, reflecting increased production and reserves from new wells. Equity income in investees also rose by 66% to $39,180, contributing modestly to the bottom line.

The Investment Portfolio and Capital Allocation

Beyond its core E&P activities, RSRV actively manages a diverse portfolio of equity method and other investments. These include stakes in real estate ventures (office buildings, office parks, residential lots), energy infrastructure (gas gathering pipeline), and interests in various investment vehicles focused on venture capital and new energy technologies. While these investments are not the primary driver of operating revenue, they represent a significant component of the company's asset base ($5.77 million in total investments at March 31, 2025) and contribute to overall income through equity earnings, interest, dividends, and gains. The company's investment in Cloudburst International, focused on water purification technology, falls within this diverse portfolio, highlighting RSRV's interest in adjacent or emerging sectors, though it is not a core technological moat for its E&P business.

Financially, RSRV maintains a solid liquidity position, funding its business activities internally. Cash and cash equivalents increased by $1.31 million (33%) in the first quarter of 2025, reaching $5.23 million.

Net cash provided by operating activities was $1.91 million, an increase from the prior year period. Investing activities saw cash applied totaling $550,987, reflecting purchases of property, plant, and equipment ($2.34 million, primarily oil and gas properties) and other investments ($106,275), partially offset by proceeds from asset disposals ($1.58 million) and sales of equity securities ($803,515). The company explicitly stated a strategy to reduce its equity security portfolio to fund oil and gas operations and property purchases, indicating a strategic allocation of capital towards its core business.

Financing activities in Q1 2025 primarily involved principal payments on the Grand Woods note payable and purchases of treasury stock, partially offset by non-controlling interest contributions.

The company also has off-balance sheet arrangements, including guaranties totaling 20% of two loans ($860,000 and $585,000) held by QSN Office Park, LLC, an equity method investee. Additionally, RSRV has unfunded commitments totaling $1.22 million across three investment vehicles (VCC Venture Fund I, Cortado Ventures Fund II-A, and Cypress MWC). Management has stated they do not anticipate needing to perform on the loan guaranties.

Competitive Landscape and Strategic Positioning

Operating in the shadow of industry behemoths, RSRV's competitive strategy is necessarily different. It cannot compete on the sheer scale or technological sophistication of companies like Chevron or Exxon Mobil, whose integrated operations and advanced processes result in significantly lower costs per barrel and higher efficiencies. While RSRV's competitive advantages appear rooted in cost leadership and regulatory compliance expertise, these are operational and strategic rather than proprietary technological moats in E&P. Its cost efficiency may allow it to operate profitably in niche or mature fields where larger players might find it uneconomical, potentially achieving lower operating costs per unit. Its regulatory expertise could facilitate smoother project execution in complex environments.

However, the disadvantages of its small scale are evident in metrics like potentially higher costs per barrel compared to larger, more efficient operators. The lack of advanced technology means RSRV may not benefit from the same levels of extraction efficiency or data analytics capabilities as its larger rivals. This positions RSRV as a price-taker in the market, highly susceptible to commodity price volatility, unlike integrated majors with downstream operations that can partially hedge against E&P price swings.

RSRV's strategic response appears to be a focus on its core O&G assets in specific regions, complemented by the management of its diverse investment portfolio. The recent move to divest equity securities to fund O&G property purchases reinforces this focus. While the investment portfolio provides diversification and potential alternative income streams, the core profitability remains tied to the cyclical and competitive E&P sector. Customer and supplier dynamics are likely influenced by RSRV's smaller scale, potentially leading to less favorable terms compared to larger players with greater purchasing power and market influence.

Outlook and Risks

Management's outlook is cautious and acknowledges the inherent volatility of the oil and gas market. They explicitly anticipate that fluctuations in spot market prices, which heavily influence RSRV's sales, will continue. The termination of the water well drilling business means there will be no future revenues from this segment. Beyond these points, specific quantitative guidance for future periods was not provided. Management indicated they are unaware of additional material trends or uncertainties that would significantly impact liquidity.

However, several risks remain pertinent to the investment thesis. The dependence on management's ability to effectively run operations, generate revenue, and control expenses is critical, particularly given the company's small size. The significant fluctuations in oil and gas spot market prices represent a major external risk that can directly and materially impact operating revenues and profitability, as demonstrated by the price variances in Q1 2025. Exploration costs, a substantial component of capital expenditures, carry inherent uncertainty due to the imprecise nature of estimating success rates under the successful efforts method of accounting. Finally, the ongoing lawsuit related to the terminated water well drilling business introduces legal and financial uncertainty, particularly regarding the collectibility of the associated accounts receivable and the potential for contingent liabilities exceeding the currently recorded allowance.

Conclusion

The Reserve Petroleum Company presents a unique investment profile, combining a focused independent oil and gas operation with an actively managed, diverse investment portfolio. The recent performance in Q1 2025 highlights the potential profitability of its core E&P business under favorable market conditions, demonstrating strong growth in both oil and natural gas sales volumes and, particularly for gas, price realization. The strategic decision to exit the water well drilling venture, while resulting in a near-term loss and legal uncertainty, allows for greater focus on the primary energy assets.

While RSRV lacks the scale and technological advantages of larger competitors, it appears to leverage operational cost efficiencies and regulatory expertise to navigate its specific market niches. The diverse investment portfolio offers an additional layer to the company's financial structure, providing potential supplementary income and asset management opportunities.

For investors considering RSRV, the core narrative centers on the performance of its oil and gas assets in a volatile commodity market, underpinned by a capital allocation strategy that is increasingly prioritizing investment back into this core business. Key factors to watch will be the company's ability to sustain operational performance, manage its cost structure effectively, navigate the inherent risks of exploration and price volatility, and successfully manage its varied investment holdings and associated liabilities. The resolution of the TWS lawsuit also remains a near-term point of attention. RSRV's story is one of a small, focused energy player seeking to create value through both traditional E&P activities and opportunistic investments, operating in a landscape dominated by much larger, more technologically advanced entities.