RESERVE PETROLEUM CO (RSRV) stock intrinsic value fair value estimate & owner earnings analysis

The Reserve Petroleum Company is a small Oklahoma City oil and gas company with three parts. First, it owns mineral rights - 88,868 net acres of not-yet-producing minerals across 12 states, concentrated in Arkansas, Kansas, Oklahoma, South Dakota and Texas - which earn royalties when others drill (about $3.4 million, or 21% of 2025 oil and gas sales). Second, it buys small non-operated working interests in wells drilled by other operators (it took part in 49 gross wells in 2025, usually at a few percent each). Third, it holds a side portfolio of listed stocks, private and equity-method investments, cash, and an 80% stake in 26.56 acres of undeveloped Oklahoma City land (Grand Woods). There is essentially no stock compensation and the share count has slowly shrunk through buybacks, to about 151,600 shares. What changed since our previous analysis: we now measure the cash the oil business produces after the drilling needed just to stand still, and we value the investment portfolio separately at its balance-sheet amount. From 2022 to 2025 the company spent $42 million on drilling, far more than the $20 million of depletion and write-downs charged over the same years, and production roughly doubled, from about 204,000 barrels of oil equivalent in 2021 to 417,000 in 2025 (oil 192,387 barrels; gas 1.35 billion cubic feet). Revenue cannot separate growth spending from upkeep here, because revenue swings with oil and gas spot prices. So we treated spending up to the year's depletion, depreciation and impairment charge as upkeep and the excess as growth. That rule fits the 2016-2021 record, when production was roughly flat and drilling ran at or below that charge. It also agrees with what the company paid to add reserves in 2024-2025, about $15-17 per barrel of oil equivalent, applied to its 2025 working-interest production. Owner earnings per share on this basis were $5.67, $3.71, $16.33, $5.72, -$3.98, $7.81, $43.70, -$3.28, $17.67 and $26.81 for 2016 through 2025. The starting level is set from 2022-2025, the years since the drilling program reshaped the business. That window runs from the 2022 price peak to the 2023 dip, and its median is about $22 per share. We take three things off that figure. (1) Investment dividends and equity-investee payouts, about $1.40 a share, because we count the portfolio separately. (2) The tax deferral that comes only from growth drilling, about $3 a share in 2025; most of the $1.25 million of 2025 deferred tax came from deducting new-well drilling costs, and that saving would shrink if growth drilling stopped. (3) Rounding. The result is a sustainable level of about $18 a share. 2025 actual owner earnings grew 52%. The base case assumes no growth: year one at $22, reflecting a strong first half of 2026 (revenue $10.9 million versus $7.3 million a year earlier, and operating income of $4.2 million in six months versus $4.3 million for all of 2025), then $18. We give no credit for further production growth. The drilling program is only four years old and has been funded partly by selling investments, so it is not yet a proven, repeatable engine. What keeps earnings going past year 10: perpetual mineral ownership, and a record of holding production with upkeep spending. Proved working-interest reserves rose to 702,928 barrels of oil and 4.96 billion cubic feet of gas at the end of 2025, with additions beating production. But that is under five years of output, so earnings fade after year 10 in every case. The filings' own after-tax 10% value of proved working-interest reserves is $18.2 million (about $120 a share), before royalties and before overhead. That supports our base value of the oil business. Base case: $18 a share sustained for ten years after the $22 first year, then fading 3% a year. The oil business is worth about $36 million ($237 a share). Add cash above operating needs, listed stocks ($4.4 million), equity-method investments ($1.8 million), other investments ($3.8 million) and the Grand Woods land at book ($2.3 million): together about $94 a share. Then subtract what is owed: the 4% Grand Woods note of about $1.0 million, which comes due as a balloon on November 23, 2026 and which the company guarantees up to $1.2 million, plus the outside partners' share of Grand Woods - about $8 a share in total. Result: about $323 a share. Bear case: the newer shale wells decline quickly, and drilling results weaken. In 2025, 6 of 10 exploratory wells were dry, impairments ran $1.5-1.9 million a year in 2024-2025, and oil discoveries alone did not replace oil produced in either year. Prices also sit at the low end of recent years. Owner earnings drop to about $9 a share for ten years, still above the 2016-2021 median, since production is now twice as large, then fade 10% a year. The business is worth about $14 million ($92 a share). Investments are marked down 20-40%, and the 2022 securities loss of $1.6 million shows that can happen. Less the $8 a share owed, the bear case comes to about $157. Bull case: wells in progress at year-end 2025 (2 exploratory, 6 development) plus the strong 2026 run-rate hold earnings near $32 a share for two years, then $24 through year 10, fading 2% a year after that. The business is worth about $53 million ($348 a share); with investments and less the debt, about $435. What would make this wrong: a lasting fall in oil and gas prices; drilling success falling short of what it costs to replace production; or management spending portfolio cash on drilling that earns less than its cost. Upkeep spending equal to depletion is a judgement; the filings do not disclose a maintenance budget. Margin-of-safety price: $160, roughly the bear value. From that price, the base case together with the roughly $10-a-share annual dividend implies about 20% a year over four to five years. The bear case implies roughly break-even. The margin is needed because results swing with commodity prices and the shares trade thinly.