ADAMS RESOURCES & ENERGY, INC. (Form: 10-K, Received: 03/06/2020 16:52:05)

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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

☑ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2019

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___ to ___.

Commission file number: 1-7908

ADAMS RESOURCES & ENERGY, INC.

(Exact name of Registrant as Specified in Its Charter)

Delaware

74-1753147

(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer Identification No.)

17 SOUTH BRIAR HOLLOW LANE, SUITE 100, HOUSTON, Texas 77027

(Address of Principal Executive Offices) (Zip Code)

(713) 881-3600

(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.10 Par Value

NYSE American LLC

Securities to be registered pursuant to Section 12(g) of the Act: None.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o Accelerated filer þ Non-accelerated filer o Smaller reporting company ☑ Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No þ

The aggregate market value of the Company’s voting and non-voting common shares held by non-affiliates as of the close of business on June 28, 2019 was $74,219,902 based on the closing price of $34.28 per one share of common stock as reported on the NYSE American LLC for such date. There were 4,235,533 shares of Common Stock outstanding at March 2, 2020.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the Annual Meeting of Shareholders to be held May 6, 2020 are incorporated by reference into Part III of this annual report on Form 10-K.

Table of Contents

ADAMS RESOURCES & ENERGY, INC.

TABLE OF CONTENTS

Page

Number

PART I

Item 1 and 2.

Business and Properties.

Item 1A.

Risk Factors.

Item 1B.

Unresolved Staff Comments.

Item 3.

Legal Proceedings.

Item 4.

Mine Safety Disclosures.

PART II

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Item 6.

Selected Financial Data.

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk.

Item 8.

Financial Statements and Supplementary Data.

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

Item 9A.

Controls and Procedures.

Directors, Executive Officers and Corporate Governance.

Item 11.

Executive Compensation.

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

Item 13.

Certain Relationships and Related Transactions, and Director Independence.

Item 14.

Principal Account ing Fees and Services.

PART IV

Item 15.

Exhibits, Financial Statement Schedules.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

This annual report on Form 10-K for the year ended December 31, 2019 (our “annual report”) contains various forward-looking statements and information that are based on our beliefs, as well as assumptions made by us and information currently available to us. When used in this document, words such as “anticipate,” “project,” “expect,” “plan,” “seek,” “goal,” “estimate,” “forecast,” “intend,” “could,” “should,” “would,” “will,” “believe,” “may,” “potential” and similar expressions and statements regarding our plans and objectives for future operations are intended to identify forward-looking statements. Although we believe that our expectations reflected in such forward-looking statements are reasonable, we cannot give any assurances that such expectations will prove to be correct. Forward-looking statements are subject to a variety of risks, uncertainties and assumptions as described in more detail under Part I, Item 1A of this annual report. If one or more of these risks or uncertainties materialize, or if underlying assumptions prove incorrect, our actual results may vary materially from those anticipated, estimated, projected or expected. You should not put undue reliance on any forward-looking statements. The forward-looking statements in this annual report speak only as of the date hereof. Except as required by federal and state securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or any other reason.

PART I

Items 1 and 2. Business and Properties.

General

Adams Resources & Energy, Inc. (“AE”) is a publicly traded Delaware corporation organized in 1973, the common shares of which are listed on the NYSE American LLC (“NYSE American”) under the ticker symbol “AE”. We, through our subsidiaries, are primarily engaged in the business of crude oil marketing, transportation and storage in various crude oil and natural gas basins in the lower 48 states of the United States (“U.S.”). We also conduct tank truck transportation of liquid chemicals and dry bulk primarily in the lower 48 states of the U.S. with deliveries into Canada and Mexico, and with terminals in the Gulf Coast region of the U.S. Our headquarters are located in 27,932 square feet of office space located at 17 South Briar Hollow Lane, Suite 100, Houston, Texas 77027, and the telephone number of that address is (713) 881-3600. Unless the context requires otherwise, references to “we,” “us,” “our,” the “Company” or “AE” are intended to mean the business and operations of Adams Resources & Energy, Inc. and its consolidated subsidiaries.

We operate and report in two business segments: (i) crude oil marketing, transportation and storage, and (ii) tank truck transportation of liquid chemicals and dry bulk. We exited the upstream crude oil and natural gas exploration and production business during 2017 with the sale of our upstream crude oil and natural gas exploration and production assets.

For detailed financial information regarding our business segments, see Note 10 in the Notes to Consolidated Financial Statements included under Part II, Item 8 of this annual report.

2019 Developments

Asset Acquisition

On May 6, 2019, we completed the purchase of the assets of EH Transport, Inc. and affiliates (collectively, “EH Transport”), a Houston, Texas based bulk carrier trucking company, for approximately $6.4 million. This acquisition added approximately 39 tractors and 51 trailers to our existing transportation fleet, and is included in our transportation segment. See Note 7 in the Notes to Consolidated Financial Statements included under Part II, Item 8 of this annual report for further information.

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Business Segments

Crude Oil Marketing

Our crude oil marketing segment consists of the operations of our wholly owned subsidiary, GulfMark Energy, Inc. (“GulfMark”). Our crude oil marketing activities generate revenue from the sale and delivery of crude oil purchased either directly from producers or from others on the open market. We also derive revenue from third party transportation contracts. We purchase crude oil and arrange sales and deliveries to refiners and other customers, primarily onshore in Texas, Oklahoma, North Dakota, Michigan and Louisiana.

Our crude oil marketing activities includes a fleet of 256 tractor-trailer rigs, the majority of which we own and operate, used to transport crude oil. We also maintain approximately 179 pipeline inventory locations or injection stations. We have the ability to barge crude oil from four crude oil storage facilities along the Intercoastal Waterway of Texas and Louisiana, and we have access to approximately 691,000 barrels of storage capacity at the dock facilities in order to access waterborne markets for our products.

The following table shows the age of our owned and leased tractors and trailers within our crude oil marketing segment at December 31, 2019:


	Tractors ⁽¹⁾	Trailers

Model Year:
2020	35	—
2019	38	—
2018	15	—
2017	4	—
2015	85	29
2014	29	34
2013	26	39
2012	17	31
2011	7	110
2010 and earlier	—	69
Total	256	312

____________________

(1)Includes thirty 2019 tractors and fifteen 2018 tractors that we lease from a third party under a finance lease agreement. See Note 16 in the Notes to Consolidated Financial Statements for further information.

We purchase crude oil at the field (wellhead) level. Volume and price information were as follows for the periods indicated:


	Year Ended December 31,
	2019		2018		2017
Field level purchase volumes – per day ^{(1) (2)}
Crude oil – barrels	107,383		79,361		67,447

Average purchase price
Crude oil – per barrel	$	56.28	$	64.53	$	49.88

____________________

(1)Reflects the volume purchased from third parties at the field level of operations.

(2)Effective October 1, 2018, in connection with the Red River acquisition, we entered into a new revenue contract to purchase crude oil. The 2018 amount includes the additional volumes purchased during the fourth quarter of 2018.

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Field level purchase volumes depict our day-to-day operations of acquiring crude oil at the wellhead, transporting crude oil, and delivering it to market sales points. We held crude oil inventory at a weighted average composite price as follows at the dates indicated (in barrels):


	December 31,
	2019				2018					2017
		Average			Average			Average
	Barrels	Price		Barrels	Price		Barrels	Price

Crude oil inventory	426,397	$	61.93	415,523	$	54.82	198,011	$	61.57

We deliver physical supplies to refinery customers or enter into commodity exchange transactions from time to time to protect from a decline in inventory valuation. During the year ended December 31, 2019, we had sales to two customers that comprised approximately 37.3 percent and 11.4 percent, respectively, of total consolidated revenues. We believe alternative market outlets for our commodity sales are readily available and a loss of any of these customers would not have a material adverse effect on our operations. See Note 18 in the Notes to Consolidated Financial Statements for further information regarding credit risk.

Operating results for our crude oil marketing segment are sensitive to a number of factors. These factors include commodity location, grades of product, individual customer demand for grades or location of product, localized market price structures, availability of transportation facilities, actual delivery volumes that vary from expected quantities, and the timing and costs to deliver the commodity to the customer.

Transportation

Our transportation segment consists of the operations of our wholly owned subsidiary, Service Transport Company (“STC”). STC transports liquid chemicals and, to a lesser extent, dry bulk on a “for hire” basis throughout the continental U.S., and into Canada and Mexico. We do not own any of the products that we haul; rather we act as a third party carrier to deliver our customers’ products from point A to point B, using predominately our employees and our owned tractors and trailers. However, we also use contracted independent owner operators to provide transportation services. Transportation services are provided to customers under multiple load contracts in addition to loads covered under STC’s standard price list. Our customers include major oil and chemical companies and large and mid-sized industrial companies.

On May 6, 2019, we completed the EH Transport asset acquisition, which added new customers and new product lines to our transportation segment portfolio. As a result of the acquisition, in addition to general chemical products, we haul liquefied petroleum gas, asphalt and bleach for customers.

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The following table shows the age of our owned and leased tractors and trailers within our transportation segment at December 31, 2019:


	Tractors ^{(1) (2)}	Trailers ⁽²⁾

Model Year:
2020	128	70
2019	82	—
2018	1	—
2016	29	6
2015	20	76
2014	1	35
2013	18	—
2012	—	30
2011	2	—
2008 and earlier	—	390
Total	281	607

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(1)Excludes 61 contracted independent owner operator tractors.

(2)In May 2019, we acquired 39 tractors and 51 trailers in connection with our EH Transport acquisition. Of the 39 tractors purchased as part of the acquisition, 35 tractors were sold through December 31, 2019, and as such, are not included in the numbers of units noted in the table.

Miles traveled was as follows for the periods indicated (in thousands):


	Year Ended December 31,
	2019	2018	2017

Mileage	20,535	19,177	21,836

During 2019, STC opened a truck terminal in Charlotte, North Carolina as a result of customer demand. STC also operates truck terminals in Houston, Corpus Christi, Nederland and Freeport, Texas; in Baton Rouge (St. Gabriel), St. Rose and Boutte, Louisiana; and in Mobile (Saraland), Alabama. Transportation operations are headquartered at a terminal facility situated on 26.5 acres that we own in Houston, Texas. This property includes maintenance facilities, administrative offices and terminal facility, tank wash rack facilities and a water treatment system. The St. Gabriel, Louisiana and the Corpus Christi, Texas terminals are situated on 11.5 acres and 3.5 acres, respectively, that we own, and both include an office building, maintenance bays and tank cleaning facilities. Pursuant to regulatory requirements, STC holds a Hazardous Materials Certificate of Registration issued by the U.S. Department of Transportation (“DOT”).

STC is a recognized certified partner with the American Chemistry Council’s Responsible Care Management System (“RCMS”). The scope of this RCMS certification covers the carriage of bulk liquids throughout STC’s area of operations as well as the tank trailer cleaning facilities and equipment maintenance. STC’s quality management process is one of its major assets. The practice of using statistical process control covering safety, on-time performance and customer satisfaction aids continuous improvement in all areas of quality service. Certified RCMS partners serve the chemical industry and implement and monitor the seven Codes of Management Practices. The seven codes address compliance and continuing improvement in (1) Community Awareness and Emergency Response, (2) Pollution Prevention, (3) Process Safety, (4) Distribution, (5) Employee Health and Safety, (6) Product Stewardship, and (7) Security.

STC is a Charter Partner in the EPA’s SmartWay Transport Partnership, a national voluntary program developed by the EPA and freight industry representatives to reduce greenhouse gasses and air pollution and promote cleaner, more efficient ground freight transportation.

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Our strategy is to build long-term relationships with our customers based upon the highest level of customer service, safety and reliability. We believe that our commitment to safety, flexibility, size and capabilities provide us with a competitive advantage over other carriers.

Investment in Unconsolidated Affiliates

We own an approximate 15 percent equity interest (less than 3 percent voting interest) in VestaCare, Inc., a California corporation (“VestaCare”), through Adams Resources Medical Management, Inc. (“ARMM”), a wholly owned subsidiary. We acquired our interest in VestaCare in April 2016 for a $2.5 million cash payment, which we impaired during the third quarter of 2017. VestaCare provides an array of software as a service (SaaS) electronic payment technologies to medical providers, payers and patients including VestaCare’s most recent product offering, VestaPay™. VestaPay™ allows medical care providers to structure fully automated and dynamically updating electronic payment plans for their patients. We do not currently have any plans to pursue additional medical-related investments. See Note 9 in the Notes to Consolidated Financial Statements for further information.

Competition

In all phases of our operations, we encounter strong competition from a number of entities. Many of these competitors possess financial resources substantially in excess of ours and may have a more expansive geographic footprint than we have. We face competition principally in establishing trade credit, pricing of available materials, quality of service and location of service. Our strategy is to build long-term partnerships with our customers based upon the safety of our operations, reliability and superior customer service.

Our crude oil marketing segment competes with major crude oil companies and other large industrial concerns that own or control significant refining, midstream and marketing facilities. These major crude oil companies may offer their products to others on more favorable terms than those available to us.

In the trucking industry, the tank lines transportation business is extremely competitive and fragmented. Price, service and location are the major competitive factors in each local market.

Seasonality

In the trucking industry, revenue has historically followed a seasonal pattern for various commodities and customer businesses. Peak freight demand has historically occurred in the months of September, October and November. After the December holiday season and during the remaining winter months, freight volumes are typically lower as many customers reduce shipment levels. Operating expenses have historically been higher in the winter months primarily due to decreased fuel efficiency, increased cold weather-related maintenance costs of revenue equipment, and increased insurance claim costs attributable to adverse winter weather conditions. Revenue can also be impacted by weather, holidays and the number of business days that occur during a given period, as revenue is directly related to the available working days of shippers.

Although our crude oil marketing business is not materially affected by seasonality, certain aspects of our operations are impacted by seasonal changes, such as tropical weather conditions, energy demand in connection with heating and cooling requirements and the summer driving season.

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Regulatory Matters

We are subject to an extensive variety of evolving federal, state and local laws, rules and regulations governing the storage, transportation, manufacture, use, discharge, release and disposal of product and contaminants into the environment, or otherwise relating to the protection of the environment. Below is a non-exclusive listing of the environmental laws that potentially impact our business.

•The Solid Waste Disposal Act, as amended by the Resource Conservation and Recovery Act of 1976, as amended.

•The Clean Water Act of 1972, as amended.

•The Clean Air Act of 1970, as amended.

•The Toxic Substances Control Act of 1976, as amended.

•The Emergency Planning and Community Right-to-Know Act.

•The Occupational Safety and Health Act of 1970, as amended.

•Texas Clean Air Act.

•Texas Solid Waste Disposal Act.

•Texas Water Code.

•Texas Oil Spill Prevention and Response Act of 1991, as amended.

Railroad Commission of Texas (“RRC”)

The RRC regulates, among other things, the drilling and operation of crude oil and natural gas wells, the operation of crude oil and natural gas pipelines, the disposal of crude oil and natural gas production wastes, and certain storage of crude oil and natural gas. RRC regulations govern the generation, management and disposal of waste from these crude oil and natural gas operations and provide for the cleanup of contamination from crude oil and natural gas operations.

Louisiana Office of Conservation

The Louisiana Office of Conservation has primary statutory responsibility for regulation and conservation of crude oil, natural gas, and other natural resources in the State of Louisiana. Their objectives are to (i) regulate the exploration and production of crude oil, natural gas and other hydrocarbons, (ii) control and allocate energy supplies and distribution thereof, and (iii) protect public safety and the environment from oilfield waste, including the regulation of underground injection and disposal practices.

State and Local Government Regulation

Many states are authorized by the U.S. Environmental Protection Agency (“EPA”) to enforce regulations promulgated under various federal statutes. In addition, there are numerous other state and local authorities that regulate the environment, some of which impose more stringent environmental standards than federal laws and regulations. The penalties for violations of state law vary, but typically include injunctive relief and recovery of damages for injury to air, water or property as well as fines for non-compliance.

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Trucking Activities

Our crude oil marketing and transportation businesses operate truck fleets pursuant to the authority of the DOT and various state authorities. Trucking operations must be conducted in accordance with various laws relating to pollution and environmental control as well as safety requirements prescribed by states and by the DOT. Matters such as weight and dimension of equipment are also subject to federal and state regulations. These regulations also require mandatory drug testing of drivers and require certain tests for alcohol levels in drivers and other safety personnel. The trucking industry is subject to possible regulatory and legislative changes, such as increasingly stringent environmental requirements or limits on vehicle weight and size. Regulatory change may affect the economics of the industry by requiring changes in operating practices or by changing the demand for private and common or contract carrier services or the cost of providing truckload services. In addition, our tank wash facilities are subject to increasingly stringent local, state and federal environmental regulations.

We have implemented security procedures for drivers and terminal facilities. Satellite tracking transponders installed in the power units are used to communicate emergencies to us and to maintain constant information as to the unit’s location. If necessary, our terminal personnel will notify local law enforcement agencies. In addition, we are able to advise a customer of the status and location of their loads. Remote cameras and enhanced lighting coverage in the staging and parking areas have augmented terminal security. We have a focus on safety in the communities in which we operate, including leveraging camera technology to enhance driver behavior and awareness. Our crude oil marketing and transportation businesses are Charter Partners in the EPA’s SmartWay Transport Partnership, a national voluntary program developed by the EPA and freight industry representatives to reduce greenhouse gasses and air pollution and promote cleaner, more efficient ground freight transportation.

Regulatory Status and Potential Environmental Liability

Our operations and facilities are subject to numerous federal, state and local environmental laws and regulations including those described above, as well as associated permitting and licensing requirements. We regard compliance with applicable environmental regulations as a critical component of our overall operation, and devote significant attention to providing quality service and products to our customers, protecting the health and safety of our employees, and protecting our facilities from damage. We believe we have obtained or applied for all permits and approvals required under existing environmental laws and regulations to operate our current business. We are not subject to any pending or threatened environmental litigation or enforcement actions which could materially and adversely affect our business.

We have, where appropriate, implemented operating procedures at each of our facilities designed to assure compliance with environmental laws and regulation. However, given the nature of our business, we are subject to environmental risks, and the possibility remains that our ownership of our facilities and our operations and activities could result in civil or criminal enforcement and public as well as private actions against us, which may necessitate or generate mandatory cleanup activities, revocation of required permits or licenses, denial of application for future permits, and/or significant fines, penalties or damages, any and all of which could have a material adverse effect on us. See “Item 1A. Risk Factors” for further discussion. At December 31, 2019, we are not aware of any unresolved environmental issues for which additional accounting accruals are necessary.

Employees

At December 31, 2019, we employed 664 persons. None of our employees are represented by a union. We believe our employee relations are satisfactory.

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Federal and State Taxation

We are subject to the provisions of the Internal Revenue Code of 1986, as amended (the “Code”). In accordance with the Code, we computed our income tax provision based on a 21 percent tax rate for the year ended December 31, 2019. We conduct a significant amount of business within the State of Texas. Texas operations are subject to a one-half percent state tax on its revenues net of cost of goods sold as defined by the state. We believe we are currently in compliance with all federal and state tax regulations.

Available Information

We electronically file certain documents with the U.S. Securities and Exchange Commission (“SEC”). We file Annual Reports on Form 10-K; Quarterly Reports on Form 10-Q; and Current Reports on Form 8-K (as appropriate); along with any related amendments and supplements thereto.

We also make available free of charge our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, simultaneously with or as soon as reasonably practicable after filing such materials with, or furnishing such materials to, the SEC, and on our website www.adamsresources.com. The information on our website, or information about us on any other website, is not incorporated by reference into this report.

Item 1A. Risk Factors.

An investment in our common stock involves certain risks. If any of the following key risks were to occur, it could have a material adverse effect on our financial position, results of operations and cash flows. In any such circumstance and others described below, the trading price of our securities could decline and you could lose part or all of your investment.

Economic developments could damage our operations and materially reduce our profitability and cash flows.

Potential disruptions in the credit markets and concerns about global economic growth could have a significant adverse impact on global financial markets and commodity prices. These factors could contribute to a decline in our stock price and corresponding market capitalization. If commodity prices experience a period of rapid decline, or a prolonged period of low commodity prices, our future earnings will be reduced. We currently do not have bank debt obligations. If the capital and credit markets experience volatility and the availability of funds become limited, our customers and suppliers may incur increased costs associated with issuing commercial paper and/or other debt instruments and this, in turn, could adversely affect our ability to secure supply and make profitable sales.

General economic conditions could reduce demand for chemical based trucking services.

Customer demand for our products and services is substantially dependent upon the general economic conditions for the U.S., which are cyclical in nature. In particular, demand for liquid chemical truck transportation services is dependent on activity within the petrochemical sector of the U.S. economy. Chemical sector demand typically varies with the housing and auto markets as well as the relative strength of the U.S. dollar to foreign currencies. A relatively strong U.S. dollar exchange rate may be adverse to our transportation operation since it tends to suppress export demand for petrochemicals. Conversely, a weak U.S. dollar exchange rate tends to stimulate export demand for petrochemicals.

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Difficulty in attracting and retaining drivers could negatively affect our operations and limit our growth.

There is substantial competition for qualified personnel, particularly drivers, in the trucking industry. We operate in geographic areas where there is currently a shortage of drivers. Regulatory requirements, including electronic logging, and an improving U.S. jobs market, could continue to reduce the number of eligible drivers in our markets. Any shortage of drivers could result in temporary under-utilization of our equipment, difficulty in meeting our customers’ demands and increased compensation levels, each of which could have a material adverse effect on our business, results of operations and financial condition. A loss of qualified drivers could lead to an increased frequency in the number of accidents, potential claims exposure and, indirectly, insurance costs.

Difficulty in attracting qualified drivers could also require us to limit our growth. Our strategy is to grow in part by expanding existing customer relationships into new markets. However, we may have difficulty finding qualified drivers on a timely basis when presented with new customer opportunities, which could result in our inability to accept or service this business or could require us to increase the wages we pay in order to attract drivers. If we are unable to hire qualified drivers to service business opportunities in new markets, we may have to temporarily send drivers from existing terminals to those new markets, causing us to incur significant costs relating to out-of-town driver pay and expenses. In making acquisitions and converting private fleets, some of the drivers in those fleets may not meet our standards, which would require us to find qualified drivers to replace them. If we are unable to find and retain such qualified drivers on terms acceptable to us, we may be forced to forego opportunities to expand or maintain our business.

Our business is dependent on the ability to obtain trade and other credit.

Our future development and growth depends, in part, on our ability to successfully obtain credit from suppliers and other parties. Trade credit arrangements are relied upon as a significant source of liquidity for capital requirements not satisfied by operating cash flow. If global financial markets and economic conditions disrupt and reduce stability in general, and the solvency of creditors specifically, the availability of funding from credit markets, would be reduced as many lenders and institutional investors would enact tighter lending standards, refuse to refinance existing debt on terms similar to current debt or, in some cases, cease to provide funding to borrowers. These issues coupled with weak economic conditions would make it more difficult for us, our suppliers and our customers to obtain funding. If we are unable to obtain trade or other forms of credit on reasonable and competitive terms, the ability to continue our marketing businesses, pursue improvements, and continue future growth will be limited. We cannot assure you that we will be able to maintain future credit arrangements on commercially reasonable terms.

Fluctuations in crude oil prices could have an adverse effect on us.

Our future financial condition, revenues, results of operations and future rate of growth are materially affected by crude oil prices that historically have been volatile and are likely to continue to be volatile in the future. Crude oil prices depend on factors outside of our control. These factors include:

•supply and demand for crude oil and expectations regarding supply and demand;

•political conditions in other crude oil-producing countries, including the possibility of insurgency or war in such areas;

•economic conditions in the U.S. and worldwide;

•the impact of public health epidemics, like the coronavirus outbreak beginning in 2020 impacting China and other areas;

•governmental regulations and taxation;

•the impact of energy conservation efforts;

•the price and availability of alternative fuel sources;

•weather conditions;

•availability of local, interstate and intrastate transportation systems; and

•market uncertainty.

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Potentially escalating diesel fuel prices could have an adverse effect on us.

As an integral part of our crude oil marketing and transportation businesses, we operate approximately 540 tractors, and diesel fuel costs are a significant component of our operating expenses. These costs generally fluctuate with increasing and decreasing world crude oil prices. In our transportation segment, we typically incorporate a fuel surcharge provision in our customer contracts. During periods of high prices, we attempt to recoup rising diesel fuel costs through the pricing of our services; however to the extent these costs escalate, our operating earnings will generally be adversely affected.

The financial soundness of customers could affect our business and operating results.

Constraints in the financial markets and other macro-economic challenges that might affect the economy of the U.S. and other parts of the world could cause our customers to experience cash flow concerns. As a result, if our customers’ operating and financial performance deteriorates, or if they are unable to make scheduled payments or obtain credit, customers would not be able to pay, or may delay payment of, accounts receivable owed to us. Any inability of current and/or potential customers to pay for services may adversely affect our financial condition and results of operations.

Counterparty credit default could have an adverse effect on us.

Our revenues are generated under contracts with various counterparties, and our results of operations could be adversely affected by non-performance under the various contracts. A counterparty’s default or non-performance could be caused by factors beyond our control. A default could occur as a result of circumstances relating directly to the counterparty, or due to circumstances caused by other market participants having a direct or indirect relationship with the counterparty. We seek to mitigate the risk of default by evaluating the financial strength of potential counterparties; however, despite mitigation efforts, contractual defaults may occur from time to time.

Revenues are generated under contracts that must be renegotiated periodically.

Substantially all of our revenues are generated under contracts which expire periodically or which must be frequently renegotiated, extended or replaced. Whether these contracts are renegotiated, extended or replaced is often subject to factors beyond our control. These factors include sudden fluctuations in crude oil and natural gas prices, counterparty ability to pay for or accept the contracted volumes and, most importantly, an extremely competitive marketplace for the services we offer. We cannot assure you that the costs and pricing of our services can remain competitive in the marketplace or that we will be successful in renegotiating our contracts.

Anticipated or scheduled volumes will differ from actual or delivered volumes.

Our crude oil marketing business purchases initial production of crude oil at the wellhead under contracts requiring us to accept the actual volume produced. The resale of this production is generally under contracts requiring a fixed volume to be delivered. We estimate our anticipated supply and match that supply estimate for both volume and pricing formulas with committed sales volumes. Since actual wellhead volumes produced will rarely equal anticipated supply, our marketing margins may be adversely impacted. In many instances, any losses resulting from the difference between actual supply volumes compared to committed sales volumes must be absorbed by us.

Environmental liabilities and environmental regulations may have an adverse effect on us.

Our business is subject to environmental hazards such as spills, leaks or any discharges of petroleum products and hazardous substances. These environmental hazards could expose us to material liabilities for property damage, personal injuries, and/or environmental harms, including the costs of investigating and rectifying contaminated properties.

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Environmental laws and regulations govern many aspects of our business, such as transportation and waste management. Compliance with environmental laws and regulations can require significant costs or may require a decrease in business activities. Moreover, noncompliance with these laws and regulations could subject us to significant administrative, civil, and/or criminal fines and/or penalties, as well as potential injunctive relief. See discussion under “Item 1 and 2. Business and Properties — Regulatory Matters,” and in the sections that follow, for additional detail.

Our operations could result in liabilities that may not be fully covered by insurance.

Transportation of hazardous materials involves certain operating hazards such as automobile accidents, explosions, fires and pollution. Any of these operating hazards could cause serious injuries, fatalities or property damage, which could expose us to liability. The payment of any of these liabilities could reduce, or even eliminate, the funds available for other areas.

Consistent with the industry standard, our insurance policies provide limited coverage for losses or liabilities relating to pollution, with broader coverage provided for sudden and accidental occurrences. Insurance might be inadequate to cover all liabilities. Obtaining insurance for our line of business can become difficult and costly. Typically, when insurance cost escalates, we may reduce our level of coverage, and more risk may be retained to offset cost increases. If substantial liability is incurred and damages are not covered by insurance or exceed policy limits, our operation and financial condition could be materially adversely affected.

We could be adversely affected by changes in tax laws or regulations.

The Internal Revenue Service, the U.S. Treasury Department, Congress and the states frequently review federal or state income tax legislation. We cannot predict whether, when, or to what extent new federal or state tax laws, regulations, interpretations or rulings will be adopted. Any such legislative action may prospectively or retroactively modify tax treatment and, therefore, may adversely affect taxation of us.

Our business is subject to changing government regulations.

Federal, state or local government agencies may impose environmental, labor or other regulations that increase costs and/or terminate or suspend operations. Our business is subject to federal, state and local laws and regulations. These regulations relate to, among other things, transportation of crude oil and natural gas. Existing laws and regulations could be changed, and any changes could increase costs of compliance and costs of operations.

Current and future litigation could have an adverse effect on us.

We are currently involved in certain administrative and civil legal proceedings as part of the ordinary course of our business. Moreover, as incidental to operations, we sometimes become involved in various lawsuits and/or disputes. Lawsuits and other legal proceedings can involve substantial costs, including the costs associated with investigation, litigation and possible settlement, judgment, penalty or fine. Although we maintain insurance to mitigate these costs, we cannot assure you that costs associated with lawsuits or other legal proceedings will not exceed the limits of insurance policies. Our results of operations could be adversely affected if a judgment, penalty or fine is not fully covered by insurance.

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Climate change legislation or regulations restricting emissions of “greenhouse gases” (“GHGs”) could result in increased operating costs and reduced demand for the crude oil we market and transport.

More stringent laws and regulations relating to climate change and GHGs may be adopted and could cause us to incur material expenses to comply with such laws and regulations. In the absence of comprehensive federal legislation on GHG emission control, the EPA attempted to require the permitting of GHG emissions; although the Supreme Court struck down the permitting requirements, it upheld the EPA’s authority to control GHG emissions when a permit is required due to emissions of other pollutants. The EPA also requires the reporting of GHG emissions from specified large GHG emission sources including onshore and offshore crude oil and natural gas production facilities and onshore crude oil and natural gas processing, transmission, storage and distribution facilities. Reporting of GHG emissions from such large facilities is required on an annual basis. We do not presently operate any such large GHG emission sources but, if we were to do so in the future, we would incur costs associated with evaluating and meeting this reporting obligation.

In May 2016, the EPA finalized rules to reduce methane emissions from new, modified or reconstructed sources in the crude oil and natural gas sector. The EPA later proposed in June 2017 to stay the rules for two years. Both the stay and the underlying rules have been the subject of litigation. In September 2018, the EPA proposed revisions to the 2016 rules. Regarding existing sources in the crude oil and natural gas section, the EPA announced in March 2016 that it intended to develop rules to reduce methane emissions for existing sources, although the EPA later announced in March 2017 that it no longer intends to pursue regulation of methane emissions from existing sources. In November 2016, the Bureau of Land Management (“BLM”) issued final rules to reduce methane emissions from venting, flaring and leaks during crude oil and natural gas operations on public lands, which the BLM later revised in rules promulgated in September 2018. Several states are pursuing similar measures to regulate emissions of methane from new and existing sources within the crude oil and natural gas source category.

In addition, the U.S. Congress has considered legislation to reduce emissions of GHGs, and many states and regions have already taken legal measures to reduce or measure GHG emission levels, often involving the planned development of GHG emission inventories and/or regional cap and trade programs. Most of these cap and trade programs require major sources of emissions or major producers of fuels to acquire and surrender emission allowances. The number of allowances available for purchase is reduced each year in an effort to reduce overall GHG emissions, and the cost of these allowances could escalate significantly over time. In the markets in which we currently operate, our operations are not affected by such GHG cap and trade programs. On an international level, almost 200 nations agreed in December 2015 to an international climate change agreement in Paris, France that calls for countries to set their own GHG emissions targets and to be transparent about the measures each country will use to achieve its GHG emissions targets. Although the present administration announced in June 2017 its intention to withdraw from the Paris accord, such withdrawal has not yet been finalized. Further, several states and local governments remain committed to the principles of the international climate agreement in their effectuation of policy and regulations. It is not possible at this time to predict how or when the U.S. might impose restrictions on GHGs as a result of the international climate change agreement. The adoption and implementation of any legislation or regulatory programs imposing GHG reporting obligations on, or limiting emissions of GHGs from, our equipment and operations could require us to incur costs to reduce emissions of GHGs associated with our operations including costs to operate and maintain our facilities, install new emission controls on our facilities, acquire allowances to authorize our GHG emissions, pay any taxes related to GHG emissions and administer and manage a GHG emissions program. Such programs also could adversely affect demand for the crude oil that we market and transport.

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We are subject to risks associated with climate change.

In an interpretative guidance on climate change disclosures, the SEC indicates that climate change could have an effect on the severity of weather (including hurricanes and floods), sea levels, the arability of farmland and water availability and quality. If such effects were to occur, our operations have the potential to be adversely affected. Potential adverse effects could include disruption of our marketing and transportation activities, including, for example, damages to our facilities from powerful winds or floods, or increases in our costs of operation or reductions in the efficiency of our operations, as well as potentially increased costs for insurance coverages in the aftermath of such effects. Significant physical effects of climate change could also have an indirect effect on our financing and operations by disrupting the transportation or process related services provided by companies or suppliers with whom we have a business relationship. In addition, the demand for and consumption of our products and services (due to change in both costs and weather patterns), and the economic health of the regions in which we operate, could have a material adverse effect on our business, financial condition, results of operations and cash flows. We may not be able to recover through insurance some or any of the damages, losses or costs that may result from potential physical effects of climate change.

Cyber-attacks or other disruptions to our information technology systems could lead to reduced revenue, increased costs, liability claims, fines or harm to our competitive position.

We are subject to cybersecurity risks and may incur increasing costs in connection with our efforts to enhance and ensure security and in response to actual or attempted cybersecurity attacks. Substantial aspects of our business depend on the secure operation of our computer systems and websites. Security breaches could expose us to a risk of loss, misuse or interruption of sensitive and critical information and functions, including our own proprietary information and that of our customers, suppliers and employees. Such breaches could result in operational impacts, reputational harm, competitive disadvantage, litigation, regulatory enforcement actions and liability. While we devote substantial resources to maintaining adequate levels of cybersecurity, we cannot assure you that we will be able to prevent all of the rapidly evolving types of cyberattacks. Actual or anticipated attacks and risks may cause us to incur increasing costs for technology, personnel and services to enhance security or to respond to occurrences.

We have programs, processes and technologies in place to attempt to prevent, detect, contain, respond to and mitigate security-related threats and potential incidents. We undertake ongoing improvements to our systems, connected devices and information-sharing products in order to minimize vulnerabilities, in accordance with industry and regulatory standards; however, the techniques used to obtain unauthorized access change frequently and can be difficult to detect. Anticipating, identifying or preventing these intrusions or mitigating them if and when they occur is challenging and makes us more vulnerable to cyber-attacks than other companies not similarly situated.

If our security measures are circumvented, proprietary information may be misappropriated, our operations may be disrupted, and our computers or those of our customers or other third parties may be damaged. Compromises of our security may result in an interruption of operations, violation of applicable privacy and other laws, significant legal and financial exposure, damage to our reputation, and a loss of confidence in our security measures.

Item 1B. Unresolved Staff Comments.

None.

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Item 3. Legal Proceedings.

From time to time as incidental to our operations, we may become involved in various lawsuits and/or disputes. Primarily as an operator of an extensive trucking fleet, we are a party to motor vehicle accidents, workers’ compensation claims and other items of general liability as would be typical for the industry. We are currently unaware of any claims against us that are either outside the scope of insurance coverage or that may exceed the level of insurance coverage and could potentially represent a material adverse effect on our financial position or results of operations.

See Note 17 in the Notes to Consolidated Financial Statements for further discussion.

Item 4. Mine Safety Disclosures.

Not applicable.

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Our common stock is traded on the NYSE American under the ticker symbol “AE”. As of March 2, 2020, there were approximately 127 shareholders of record of our common shares. We have paid dividends to our common shareholders each year since 1994. Our Board of Directors expects to continue paying dividends in the near future, although the declaration, amount and timing of any dividends falls within the sole discretion of our Board, whose decision will depend on many factors, including our financial condition, earnings, capital requirements and other factors that our Board may deem relevant.

Unregistered Sales of Securities

None.

Issuer Purchases of Equity Securities

None.

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Performance Graph

The following graph compares the total shareholder return performance of our common stock with the performance of: (i) the Standard & Poor’s 500 Stock Index (“S&P 500”) and (ii) the S&P 500 Integrated Oil and Gas Index (“S&P Integrated Oil & Gas”). The graph assumes that $100 was invested in our common stock and each comparison index beginning on December 31, 2014 and that all dividends were reinvested on a quarterly basis on the ex-dividend dates. The graph was prepared under the applicable rules of the SEC based on data supplied by Research Data Group. The stock performance shown on the graph is not necessarily indicative of future price performance.

The information under the caption “Performance Graph” above is not deemed to be “filed” as part of the Annual Report on Form 10-K, and is not subject to the liability provisions of Section 18 of the Exchange Act. Such information will not be deemed incorporated by reference into any filing we make under the Securities Act unless we explicitly incorporate it into such filing at such time.


	December 31,
	2014		2015		2016		2017		2018		2019

Adams Resources & Energy, Inc.	$	100.00	$	78.31	$	82.79	$	92.88	$	84.37	$	85.34
S&P 500	100.00		101.38		113.51		138.29		132.23		173.86
S&P Integrated Oil & Gas	100.00		86.14		106.94		109.16		95.00		101.84

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Item 6. Selected Financial Data.

The following table presents our selected historical consolidated financial data. This information has been derived from and should be read in conjunction with our audited financial statements included under Part II, Item 8 of this annual report, which presents our audited balance sheets as of December 31, 2019 and 2018 and related consolidated statements of operations, cash flows and shareholders’ equity for the three years ended December 31, 2019, 2018 and 2017, respectively. As presented in the table, amounts are in thousands (except per share data).


	Year Ended December 31,
	2019		2018		2017		2016		2015
Statements of operations data:
Revenues:
Marketing	$	1,748,056	$	1,694,437	$	1,267,275	$	1,043,775	$	1,875,885
Transportation	63,191		55,776		53,358		52,355		63,331
Oil and natural gas ⁽¹⁾	—		—		1,427		3,410		5,063
Total revenues	1,811,247		1,750,213		1,322,060		1,099,540		1,944,279

Costs and expenses:
Marketing	1,723,216		1,681,045		1,247,763		1,016,733		1,841,893
Transportation	53,392		48,169		48,538		45,154		52,076
Oil and natural gas ⁽¹⁾	—		—		948		2,084		6,931
Oil and natural gas property impairments ⁽²⁾	—		—		3		313		12,082
General and administrative	10,198		8,937		9,707		10,410		9,939
Depreciation, depletion and amortization	16,641		10,654		13,599		18,792		23,717

Operating earnings (losses)	7,800		1,408		1,502		6,054		(2,359)

Loss on deconsolidation of subsidiary ⁽¹⁾	—		—		(3,505)		—		—
Impairment of investment in unconsolidated
affiliate ⁽³⁾	—		—		(2,500)		—		—
Gain on dissolution of investment ⁽⁴⁾	573		—		—		—		—
Interest income (expense), net	2,130		2,046		1,076		580		314

Earnings (losses) from continuing operations	10,503		3,454		(3,427)		6,634		(2,045)

Income tax (provision) benefit	(2,296)		(509)		2,945		(2,691)		770

Earnings (losses) before investment in
unconsolidated affiliate	8,207		2,945		(482)		3,943		(1,275)

Losses from investment in unconsolidated
affiliate, net of tax ⁽⁵⁾	—		—		—		(1,430)		—
Net (losses) earnings	$	8,207	$	2,945	$	(482)	$	2,513	$	(1,275)

Earnings (losses) per share:
From continuing operations	$	1.94	$	0.70	$	(0.11)	$	0.94	$	(0.30)
From investment in unconsolidated
affiliate	—		—		—		(0.34)		—
Basic and diluted earnings (losses)
per share	$	1.94	$	0.70	$	(0.11)	$	0.60	$	(0.30)

Dividends per common share	$	0.94	$	0.88	$	0.88	$	0.88	$	0.88

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	December 31,
	2019		2018		2017		2016		2015
Balance sheet data:
Cash and cash equivalents	$	112,994	$	117,066	$	109,393	$	87,342	$	91,877
Total assets	330,842		278,870		282,704		246,872		243,215
Long-term debt	—		—		—		—		—
Shareholders’ equity	151,641		146,598		147,119		151,312		152,510
Dividends on common shares	3,976		3,711		3,711		3,711		3,712

________________________

(1)During 2017, we deconsolidated our upstream crude oil and natural gas exploration and production subsidiary, Adams Resources Exploration Company (“AREC”) upon its bankruptcy filing. We recognized an impairment related to the bankruptcy, deconsolidation and sale of substantially all of the assets of AREC during 2017.

(2)During 2015, we recognized an impairment of $10.3 million on producing properties, and an impairment of $1.8 million on non-producing properties.

(3)During 2017, we recognized an impairment on our medical investment in VestaCare.

(4)During 2019, we recognized a gain related to the dissolution of our investment in AREC.

(5)During 2016, we recognized losses and an impairment on our medical investment in Bencap LLC (“Bencap”). Other than our remaining ownership interest in VestaCare, we have no other medical-related investments, and we currently do not have any plans to pursue additional medical-related investments.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following information should be read in conjunction with our Consolidated Financial Statements and accompanying notes included under Part II, Item 8 of this annual report. Our financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States (“U.S.”).

Overview of Business

Adams Resources & Energy, Inc. (“AE”), a Delaware corporation organized in 1973, and its subsidiaries are primarily engaged in the business of crude oil marketing, transportation and storage in various crude oil and natural gas basins in the lower 48 states of the U.S. We also conduct tank truck transportation of liquid chemicals and dry bulk primarily in the lower 48 states of the U.S. with deliveries into Canada and Mexico, and with terminals in the Gulf Coast region of the U.S.

Results of Operations

Crude Oil Marketing

Our crude oil marketing segment revenues, operating earnings and selected costs were as follows for the periods indicated (in thousands):


	Year Ended December 31,
	2019		2018		Change ⁽¹⁾		2017		Change ⁽¹⁾

Revenues	$	1,748,056	$	1,694,437	3.2	%	$	1,267,275	33.7	%
Operating earnings	16,099		7,008		129.7	%	11,700		(40.1	%)
Depreciation and amortization	8,741		6,384		36.9	%	7,812		(18.3	%)
Driver compensation	22,754		14,567		56.2	%	13,058		11.6	%
Insurance	7,772		6,248		24.4	%	4,509		38.6	%
Fuel	8,979		7,435		20.8	%	5,278		40.9	%

____________________

(1)Represents the percentage increase (decrease) from the prior year.

Volume and price information were as follows for the periods indicated:


	Year Ended December 31,
	2019		2018		2017
Field level purchase volumes – per day ^{(1) (2)}
Crude oil – barrels	107,383		79,361		67,447

Average purchase price
Crude oil – per barrel	$	56.28	$	64.53	$	49.88

____________________

(1)Reflects the volume purchased from third parties at the field level of operations.

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2019 compared to 2018. Crude oil marketing revenues increased by $53.6 million during the year ended December 31, 2019 as compared to 2018, primarily as a result of higher crude oil volumes, which increased revenues by approximately $456.1 million, partially offset by a decrease in the market price of crude oil, which decreased revenues by approximately $402.5 million. The average crude oil price received was $64.53 for 2018, which decreased to $56.28 for 2019. Volumes increased approximately 28,000 barrels per day during the year ended December 31, 2019 as compared to 2018 primarily as a result of the acquisition of a trucking company that owned approximately 113 tractors and 126 trailers operating in the Red River area in North Texas and South Central Oklahoma (the “Red River acquisition”) on October 1, 2018. The purchase price for Red River volumes is based on a contractual price for volumes in North Texas and Oklahoma, which has been slightly lower than the purchase price for legacy volumes. Revenues from legacy volumes are based upon the market price in our other market areas, primarily in the Gulf Coast.

Our crude oil marketing operating earnings for the year ended December 31, 2019 increased by $9.1 million as compared to 2018, primarily as a result of inventory liquidation gains of $3.7 million in 2019 as compared to inventory valuation losses of $5.4 million in 2018 (as shown in the following table) and increases in crude oil volumes in 2019, partially offset by a decrease in the average market price of crude oil. During 2019, volumes increased as activity in certain marketing areas increased primarily as a result of increased wellhead purchases.

Driver compensation increased by $8.2 million during the year ended December 31, 2019 as compared to 2018, primarily as a result of an increase in the number of drivers in 2019 as compared to 2018 due to the Red River acquisition on October 1, 2018. In connection with the Red River acquisition, we hired over one hundred additional drivers.

Insurance costs increased by $1.5 million during the year ended December 31, 2019 as compared to 2018, primarily due to a higher driver count and additional miles driven in 2019, including as a result of the Red River acquisition in 2018. Fuel costs increased by $1.5 million during the year ended December 31, 2019 as compared to 2018 consistent with the higher driver count in the current year and additional miles driven, primarily as a result of the additional drivers hired for the Red River assets.

Depreciation and amortization expense increased by $2.4 million during the year ended December 31, 2019 as compared to 2018, primarily as a result of the acquisition of the Red River assets, consisting of approximately 113 tractors and 126 trailers on October 1, 2018, which resulted in an increase in depreciation expense. In addition, we purchased 43 new tractors and other field equipment during 2019, and retired 48 tractors.

2018 compared to 2017. Crude oil marketing revenues increased by $427.2 million during the year ended December 31, 2018 as compared to 2017, primarily as a result of an increase in the market price of crude oil, which increased revenues by approximately $172.8 million, and higher crude oil volumes, which increased revenues by approximately $254.4 million. The average crude oil price received was $49.88 for 2017, which increased to $64.53 for 2018. On October 1, 2018, we acquired trucking assets in the Red River area of North Texas and South Central Oklahoma, and subsequently entered into a new revenue agreement, which increased our crude oil volumes during the fourth quarter of 2018.

Our crude oil marketing operating earnings for the year ended December 31, 2018 decreased by $4.7 million as compared to 2017, primarily as a result of inventory valuation losses of $5.4 million (as shown in the following table), partially offset by increases in crude oil volumes and the average market price of crude oil. During 2018, volumes increased as activity in certain marketing areas increased primarily as a result of increased wellhead purchases.

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Driver compensation increased by $1.5 million during the year ended December 31, 2018 as compared to 2017, primarily as a result of the increase in crude oil marketing volumes in 2018. Insurance costs increased by $1.7 million during the year ended December 31, 2018 as compared to 2017, primarily as a result of higher insurance costs during 2018, including higher insurance as a result of the Red River acquisition in 2018. Fuel costs increased by $2.2 million during the year ended December 31, 2018 as compared to 2017 consistent with increased marketing volumes and higher crude oil prices during 2018, and an increase in the price of diesel fuel during 2018 as compared to 2017.

Depreciation and amortization expense decreased by $1.4 million during the year ended December 31, 2018 as compared to 2017, primarily as a result of certain tractors, trailers and other field equipment being fully depreciated during 2017.

Field Level Operating Earnings (Non-GAAP Financial Measure). Inventory valuations and forward commodity contract (derivatives or mark-to-market) valuations are two significant factors affecting comparative crude oil marketing segment operating earnings. As a purchaser and shipper of crude oil, we hold inventory in storage tanks and third-party pipelines. During periods of increasing crude oil prices, we recognize inventory liquidation gains while during periods of falling prices, we recognize inventory liquidation and valuation losses.

Crude oil marketing operating earnings can be affected by the valuations of our forward month commodity contracts (derivative instruments). These non-cash valuations are calculated and recorded at each period end based on the underlying data existing as of such date. We generally enter into these derivative contracts as part of a pricing strategy based on crude oil purchases at the wellhead (field level). The valuation of derivative instruments at period end requires the recognition of non-cash “mark-to-market” gains and losses.

The impact of inventory liquidations and derivative valuations on our crude oil marketing segment operating earnings is summarized in the following reconciliation of our non-GAAP financial measure for the periods indicated (in thousands):


	Year Ended December 31,
	2019		2018		2017

As reported segment operating earnings ⁽¹⁾	$	16,099	$	7,008	$	11,700
Add (subtract):
Inventory liquidation gains	(3,749)		—		(3,372)
Inventory valuation losses	—		5,363		—
Derivative valuation (gains) losses	24		(2)		27
Field level operating earnings ⁽²⁾	$	12,374	$	12,369	$	8,355

____________________

(1)Segment operating earnings included inventory liquidation gains of $3.7 million and $3.3 million, respectively, for the years ended December 31, 2019 and 2017, and inventory valuation losses of $5.4 million for the year ended December 31, 2018.

(2)The use of field level operating earnings is unique to us, not a substitute for a GAAP measure and may not be comparable to any similar measures developed by industry participants. We utilize this data to evaluate the profitability of our operations.

Field level operating earnings and field level purchase volumes depict our day-to-day operation of acquiring crude oil at the wellhead, transporting the product and delivering the product to market sales points. Field level operating earnings increased during the year ended December 31, 2019 as compared to 2018, primarily due to higher revenues resulting from higher crude oil volumes, partially offset by a decrease in the market price of crude oil.

Field level operating earnings increased during the year ended December 31, 2018 as compared to 2017, primarily due to higher revenues resulting from an increase in the market price of crude oil, higher crude oil volumes and improved market conditions.

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We held crude oil inventory at a weighted average composite price as follows at the dates indicated (in barrels and price per barrel):


	December 31,
	2019				2018					2017
		Average			Average			Average
	Barrels	Price		Barrels	Price		Barrels	Price

Crude oil inventory	426,397	$	61.93	415,523	$	54.82	198,011	$	61.57

Historically, prices received for crude oil have been volatile and unpredictable with price volatility expected to continue. See “Item 1A. Risk Factors.”

Transportation

Our transportation segment revenues, operating earnings and selected costs were as follows for the periods indicated (in thousands):


	Year Ended December 31,
	2019		2018		Change ⁽¹⁾		2017		Change ⁽¹⁾

Revenues	$	63,191	$	55,776	13.3	%	$	53,358	4.5	%
Operating earnings (losses)	$	1,899	$	3,337	(43.1	%)	$	(544)	(713.4	%)
Depreciation and amortization	$	7,900	$	4,270	85.0	%	$	5,364	(20.4	%)
Driver commissions	$	10,774	$	11,680	(7.8	%)	$	11,546	1.2	%
Insurance	$	5,938	$	4,716	25.9	%	$	5,452	(13.5	%)
Fuel	$	6,279	$	6,988	(10.1	%)	$	6,401	9.2	%
Maintenance expense	$	3,849	$	5,347	(28.0	%)	$	6,061	(11.8	%)
Mileage (000s)	20,535		19,177		7.1	%	21,836		(12.2	%)

____________________

(1)Represents the percentage increase (decrease) from the prior year.

Our revenue rate structure includes a component for fuel costs in which fuel cost fluctuations are largely passed through to the customer over time. Revenues, net of fuel cost, were as follows for the periods indicated (in thousands):


	Year Ended December 31,
	2019		2018		2017

Total transportation revenue	$	63,191	$	55,776	$	53,358
Diesel fuel cost	(6,279)		(6,988)		(6,401)
Revenues, net of fuel cost ⁽¹⁾	$	56,912	$	48,788	$	46,957

____________________

(1)Revenues, net of fuel cost, is a non-GAAP financial measure and is utilized for internal analysis of the results of our transportation segment.

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2019 compared to 2018. Transportation revenues increased $7.4 million during the year ended December 31, 2019 as compared to 2018, primarily as a result of the EH Transport asset acquisition (see Note 7 in the Notes to Consolidated Financial Statements), increased miles traveled in 2019, and higher transportation rates in full effect in 2019 as a result of negotiations during 2018 with customers. Revenues, net of fuel cost, increased by $8.1 million during the year ended December 31, 2019 as compared to 2018, primarily as a result of the higher transportation revenues and miles traveled during 2019. Although the overall market has softened from 2018 levels, transportation activity has continued to increase for our transportation segment as we continue to pursue our strategy of streamlining operations and diversifying offerings in our transportation segment. We continue to work with customers to maintain our increased transportation rates as well as streamline operations in low margin areas.

Our transportation operating earnings for the year ended December 31, 2019 decreased by $1.4 million as compared to 2018, primarily due to higher depreciation and amortization expense related to the EH Transport asset acquisition and new assets placed into service and higher insurance expense as a result of more miles traveled during the current year, partially offset by higher revenues as noted above, and lower other operating expenses.

Fuel costs decreased by $0.7 million during the year ended December 31, 2019 as compared to 2018, primarily as a result of an decrease in the price of diesel during 2019 as compared to 2018, partially offset by an increase in miles traveled. Depreciation and amortization expense increased by $3.6 million during the year ended December 31, 2019 as compared to 2018, primarily as a result of the acquisition of the assets of EH Transport during the second quarter of 2019 and the purchase of new tractors in 2018 and 2019. Maintenance expense decreased $1.5 million during the year ended December 31, 2019 as compared to 2018, as a result of the purchase of new tractors and the retirement of older tractors, as the age of our fleet has decreased.

2018 compared to 2017. Transportation revenues increased $2.4 million during the year ended December 31, 2018 as compared to 2017, primarily as a result of a new transportation agreement entered into in January 2018 and higher transportation rates in 2018. Revenues, net of fuel cost, increased by $1.8 million during the year ended December 31, 2018 as compared to 2017, primarily as a result of higher revenues in 2018, partially offset by an increase in the price of diesel fuel and lower miles traveled during 2018.

Our transportation operating earnings for the year ended December 31, 2018 increased by $3.9 million as compared to 2017, primarily due to higher revenues as noted above, partially offset by higher other operating expenses and higher fuel costs as a result of an increase in the price of diesel in 2018.

Fuel costs increased by $0.6 million during the year ended December 31, 2018 as compared to 2017, primarily as a result of an increase in the price of diesel during 2018 as compared to 2017, partially offset by a decrease in miles traveled. Depreciation and amortization expense decreased by $1.1 million during the year ended December 31, 2018 as compared to 2017, primarily as a result of certain tractors, trailers and field equipment being fully depreciated during 2017, partially offset by the purchase of new tractors in the second, third and fourth quarters of 2018, which will result in increased depreciation expense in future periods. Maintenance expense decreased $0.7 million during the year ended December 31, 2018 as compared to 2017, as a result of the purchase of new tractors and the retirement of older tractors, as the age of our fleet has decreased.

Our operating results for 2017 were also adversely impacted by Hurricane Harvey, which affected the Gulf Coast area in late August and early September of 2017, resulting in decreased revenues and lower mileage during 2017.

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Equipment additions and retirements for the transportation fleet were as follows for the periods indicated:

Year Ended December 31,

2019

2018

2017

New tractors purchased ⁽¹⁾

151 units

60 units

—

Tractors retired ⁽¹⁾

107 units

67 units

21 units

New trailers purchased ⁽¹⁾

77 units

—

Trailers retired

20 units

12 units

—

________________

(1)2019 amounts do not include 39 tractors and 51 trailers purchased in connection with the EH Transport acquisition in May 2019. Of the 39 tractors purchased as part of the EH Transport acquisition, 35 tractors have been retired and are not included in the number of units noted in the table.

The sales of retired equipment produced gains of approximately $0.5 million, $0.8 million and less than $0.1 million during the years ended December 31, 2019, 2018 and 2017, respectively.

Our customers are primarily in the domestic petrochemical industry. Customer demand is affected by low natural gas prices (a basic feedstock cost for the petrochemical industry) and high export demand for petrochemicals. During 2017, the competitive landscape in the transportation sector remained difficult and led to lower revenues in this segment. During late 2017, we saw an increase in customer demand for chemical tank trucking, and we worked to capture those opportunities. During 2018, we began a strategy of streamlining operations and diversifying offerings in our transportation segment. We have continued to work with customers to increase our transportation rates as well as streamlining operations in low margin areas.

Crude Oil and Natural Gas

Prior to AREC’s bankruptcy filing, our upstream crude oil and natural gas exploration and production segment revenues and operating earnings were primarily a function of crude oil and natural gas prices and volumes. We accounted for our upstream operations under the successful efforts method of accounting. As a result of AREC’s bankruptcy filing in April 2017 and our loss of control of this subsidiary, we deconsolidated AREC effective with its bankruptcy filing and recorded our investment in AREC under the cost method of accounting. Our results for 2017 for this segment are only for the period from January 1, 2017 through April 30, 2017, the period in which AREC was consolidated.

Our upstream crude oil and natural gas exploration and production segment revenues, operating earnings and selected costs were as follows for the period from January 1, 2017 through April 30, 2017 (in thousands):



Revenues	$	1,427
Operating earnings	53
Depreciation and depletion	423
Prospect impairments	3

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Volume and price information were as follows for the period from January 1, 2017 through April 30, 2017 (volumes in thousands):


Crude oil:
Volume – barrels	11,643
Average price per barrel	$	49.44

Natural gas:
Volume – Mcf	189,488
Average price per Mcf	$	2.86

Natural gas liquids:
Volume – barrels	11,204
Average price per barrel	$	26.77

During the period from January 1, 2017 through April 30, 2017, we participated in the drilling of six wells in the Permian Basin and one well in the Haynesville Shale with no dry holes.

Capitalized crude oil and natural gas property costs were amortized in expense as the underlying crude oil and natural gas reserves were produced (units-of-production method).

General and Administrative Expense

General and administrative expenses increased by $1.3 million during the year ended December 31, 2019 as compared to 2018, primarily due to the receipt in 2018 of approximately $0.6 million in insurance proceeds related to Hurricane Harvey insurance claims, which reduced expenses in the prior year, and higher outside service fees, audit fees and personnel costs in 2019, partially offset by lower insurance costs and legal fees.

General and administrative expenses decreased by $0.8 million during the year ended December 31, 2018 as compared to 2017, primarily due to the receipt in 2018 of approximately $0.6 million in insurance proceeds related to Hurricane Harvey insurance claims, which reduced expenses, lower personnel costs in 2018, and the reversal in 2017 of certain legal accruals of approximately $0.7 million related to legal matters. 2017 also included approximately $1.0 million of additional personnel expenses related to a voluntary early retirement program for certain employees. These decreases in expenses were partially offset by an increase in expenses related to the amortization of equity awards (see Note 14 in the Notes to Consolidated Financial Statements) and an increase in legal and outside service fees in 2017.

Gain on Dissolution of Investment and Investments in Unconsolidated Affiliates

AREC. In April 2017, we deconsolidated AREC effective with its bankruptcy filing on April 21, 2017 and recorded our investment in AREC under the cost method of accounting. Based upon bids received in the auction process (see Note 4 in the Notes to Consolidated Financial Statements for further information), we determined that the fair value of our investment in AREC was expected to be lower than its net book value immediately prior to the deconsolidation. As a result, during the second quarter of 2017, we recorded a non-cash charge of approximately $1.6 million associated with the deconsolidation of AREC, which reflected the excess of the net assets of AREC over its estimated fair value based on an expected sales transaction price of approximately $5.0 million, net of estimated transaction costs. During the third quarter of 2017, as a result of the sale of substantially all of AREC’s assets, we recognized an additional loss of $1.9 million, which represented the difference between the net proceeds we expected to be paid upon settlement of the bankruptcy, net of anticipated remaining closing costs identified as part of the liquidation plan, and the book value of our cost method investment.

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During 2019, we received a cash payment from AREC totaling approximately $1.0 million, related to the final settlement of its bankruptcy and dissolution. Of the amount received, approximately $0.4 million was offset against a receivable that had been set up as of December 31, 2018 and $0.6 million was recorded as a gain in our consolidated statements of operations.

VestaCare. During the third quarter of 2017, we reviewed our investment in VestaCare and determined that the current projected operating results did not support the carrying value of our investment. As a result, we recognized a pre-tax impairment charge of $2.5 million during the third quarter of 2017 and wrote-off our investment in VestaCare.

Income Taxes

Provision for (benefit from) income taxes is based upon federal and state tax rates, and variations in amounts are consistent with taxable income in the respective accounting periods.

On December 22, 2017, the Tax Cut and Jobs Act was enacted into law resulting in a reduction in the federal corporate income tax rate from 35 percent to 21 percent for years beginning in 2018. At December 31, 2019 and 2018, we had deferred tax liabilities of approximately $6.3 million and $4.2 million, respectively.

See Note 13 in the Notes to Consolidated Financial Statements for further information.

Liquidity and Capital Resources

Liquidity

Our liquidity is from our cash balance and net cash provided by operating activities and is therefore dependent on the success of future operations. If our cash inflow subsides or turns negative, we will evaluate our investment plan accordingly and remain flexible.

At December 31, 2019, 2018 and 2017, we had no bank debt or other forms of debenture obligations. We maintain cash balances in order to meet the timing of day-to-day cash needs. Cash and working capital, the excess of current assets over current liabilities, were as follows at the dates indicated (in thousands):


	December 31,
	2019		2018		2017

Cash and cash equivalents	$	112,994	$	117,066	$	109,393
Working capital	87,747		106,323		116,087

We believe current cash balances, together with expected cash generated from future operations, and the ease of financing tractor and trailer additions through leasing arrangements (should the need arise) will be sufficient to meet our short-term and long-term liquidity needs.

We utilize cash from operations to make discretionary investments in our crude oil marketing and transportation businesses. With the exception of operating and finance lease commitments primarily associated with storage tank terminal arrangements, leased office space and tractors, our future commitments and planned investments can be readily curtailed if operating cash flows decrease. See “Other Items” below for information regarding our operating and finance lease obligations.

The most significant item affecting future increases or decreases in liquidity is earnings from operations, and these earnings are dependent on the success of future operations. See “Part I, Item 1A. Risk Factors.”

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Cash Flows from Operating, Investing and Financing Activities

Our consolidated cash flows from operating, investing and financing activities were as follows for the periods indicated (in thousands):


	Year Ended December 31,
	2019		2018		2017

Cash provided by (used in):
Operating activities	$	46,899	$	31,014	$	26,096
Investing activities	(36,037)		(19,135)		(216)
Financing activities	(5,673)		(4,206)		(3,829)

Operating activities. Net cash flows provided by operating activities for the year ended December 31, 2019 increased by $15.9 million when compared to 2018. This increase was primarily due to an increase in revenues and a decrease in general and administrative expenses, partially offset by increased operating expenses, and the timing of collections of accounts receivable and payments of accounts payable.

Net cash flows provided by operating activities for the year ended December 31, 2018 increased by $4.9 million when compared to 2017. This increase was primarily due to an increase in revenues and a decrease in general and administrative expenses, partially offset by increased operating expenses.

At various times each month, we may make cash prepayments and/or early payments in advance of the normal due date to certain suppliers of crude oil within our crude oil marketing operations. Crude oil supply prepayments are recouped and advanced from month to month as the suppliers deliver product to us. In addition, in order to secure crude oil supply, we may also “early pay” our suppliers in advance of the normal payment due date of the twentieth of the month following the month of production. These “early payments” reduce cash and accounts payable as of the balance sheet date. We also require certain customers to make similar early payments or to post cash collateral with us in order to support their purchases from us. Early payments and cash collateral received from customers increases cash and reduces accounts receivable as of the balance sheet date.

Early payments were as follows at the dates indicated (in thousands):


	December 31,
	2019		2018		2017

Early payments received	$	54,108	$	38,539	$	20,078


Early payments to suppliers	—		—		6,100

We rely heavily on our ability to obtain open-line trade credit from our suppliers especially with respect to our crude oil marketing operations. During 2019, we received several early payments from certain customers in our crude oil marketing operations. Our cash balance increased by approximately $4.1 million at December 31, 2019 relative to the year ended December 31, 2018 primarily as a result of the timing of the receipt of these early payments received during each year.

Investing activities. Net cash flows used in investing activities for the year ended December 31, 2019 increased by $16.9 million when compared to 2018. This increase was primarily due to an increase of $24.0 million in capital spending for property and equipment (see “Capital Projects” below) and a decrease of $0.2 million in insurance and state collateral refunds in 2019. These increases in net cash flows used in investing activities were partially offset by a decrease in cash paid for asset acquisitions ($5.6 million was paid in 2019 for the purchase of the EH Transport assets in May 2019 in our transportation segment while $10.3 million was paid in 2018 for the purchase of the Red River assets in October 2019 in our crude oil marketing segment (see Note 7 in the Notes to Consolidated Financial Statements for further information)), an increase of $1.6 million in cash proceeds from the sales of assets and the receipt of $1.0 million in cash proceeds related to the final settlement of AREC’s bankruptcy in 2019 (see Note 4 in the Notes to Consolidated Financial Statements for further information).

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Net cash flows used in investing activities for the year ended December 31, 2018 increased by $18.9 million when compared to 2017. This increase was primarily due to the payment of $10.3 million for the purchase of Red River assets in our crude oil marketing segment (see Note 7 in the Notes to Consolidated Financial Statements for further information), an increase of $9.1 million in capital spending for property and equipment (see “Capital Projects” below) and the receipt of $2.8 million in proceeds in 2017 related to the partial settlement of AREC’s bankruptcy. These increases in net cash flows used in investing activities were partially offset by an increase of $1.9 million in insurance and state collateral refunds and an increase of $1.3 million in cash proceeds from the sales of assets.

Financing activities. Cash used in financing activities for the year ended December 31, 2019 increased by $1.5 million when compared to 2018. This increase was primarily due to an increase of $1.2 million in principal repayments made for finance lease obligations in our crude oil marketing segment for certain of our tractors and a tank storage and throughput arrangement. See “Other Items” below for information regarding our finance lease obligations. During the years ended December 31, 2019 and 2018, we paid aggregate cash dividends of $0.94 per common share, or a total of $4.0 million, and $0.88 per common share, or a total of $3.7 million, respectively.

Cash used in financing activities for the year ended December 31, 2018 increased by $0.4 million when compared to 2017. This increase was primarily due to an increase of $0.4 million in principal repayments made for finance lease obligations in our crude oil marketing segment for certain of our tractors. During each of the years ended December 31, 2018 and 2017, we paid cash dividends of $0.88 per common share, or a total of $3.7 million.

Capital Projects

We use cash from operations and existing cash balances to make discretionary investments in our crude oil marketing and transportation businesses. Capital spending for the past five years was as follows for the periods indicated (in thousands):


	Year Ended December 31,
	2019		2018		2017		2016		2015

Crude oil marketing ^{(1) (2)}	$	7,249	$	1,540	$	468	$	1,321	$	2,126
Transportation ⁽³⁾	28,472		10,178		351		6,868		6,579
Crude oil and natural gas exploration	—		—		1,825		295		2,369
Medical management	—		—		—		4,700		—
Other	22		13		—		—		—
Capital spending	$	35,743	$	11,731	$	2,644	$	13,184	$	11,074

_______________

(1)Our crude oil marketing segment amounts for the years ended December 31, 2019, 2018 and 2017, do not include approximately $4.1 million, $2.9 million and $1.8 million, respectively, of tractors acquired under finance leases.

(2)2018 amount does not include approximately $10.3 million of capital spending related to the Red River acquisition.

(3)2019 amount does not include approximately $6.4 million of capital spending related to the EH Transport acquisition.

Crude oil marketing. During 2015, 2016 and 2017, capital expenditures were primarily related to the purchase of tractors, trailers and other field equipment, and spending was reduced as a result of the low crude oil prices. During 2018, capital expenditures were primarily related to construction of a pipeline connection and a truck loading/unloading facility. During 2019, capital expenditures were primarily related to the purchase of 43 tractors and other field equipment.

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Transportation. During 2015, capital expenditures were primarily related to the purchase of tractors and trailers, and during 2016, for improvements to our existing Houston terminal facility and for tractors. Spending was curtailed in 2017, and in late 2017, we began to see increased demand in our transportation segment. As a result, we began to pursue a strategy of streamlining operations and diversifying offerings in this segment. Beginning in 2018, we implemented a plan to improve the age of our transportation fleet. During 2018, we purchased 60 new tractors, and during 2019, we purchased 152 new tractors and 77 new trailers.

Crude oil and natural gas exploration and production. During 2017, we exited the crude oil and natural gas exploration and production business with the April 2017 bankruptcy filing and subsequent sale of our crude oil and natural gas assets.

Medical management. During 2016, we invested $4.7 million in two medical-related investments, Bencap and VestaCare. During 2016, we wrote off our investment in Bencap, and in February 2017, we forfeited our interest in the entity. During 2017, we wrote off our investment in VestaCare, but continue to own an approximate 15 percent equity interest in the entity. We currently do not have any plans to pursue additional medical-related investments.

Other Items

Contractual Obligations

The following table summarizes our significant contractual obligations at December 31, 2019 (in thousands):


			Payments due by period
Contractual Obligations	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years

Finance lease obligations ⁽¹⁾	$	7,023	$	2,426	$	3,918	$	679	$	—
Operating lease obligations ⁽²⁾	10,717		2,660		4,170		3,444		443
Purchase obligations:
Crude oil marketing — crude oil ⁽³⁾	145,824		145,824		—		—		—
Crude oil marketing — tractors ⁽⁴⁾	940		940		—		—		—

Total contractual obligations	$	164,504	$	151,850	$	8,088	$	4,123	$	443

___________________

(1)Amounts represent our principal contractual commitments, including interest, outstanding under finance leases for certain tractors and tank storage and throughput arrangements in our crude oil marketing segment.

(2)Amounts represent rental obligations under non-cancelable operating leases and terminal arrangements with terms in excess of one year.

(3)Amount represents commitments to purchase certain quantities of crude oil substantially in January 2020 in connection with our crude oil marketing activities. These commodity purchase obligations are the basis for commodity sales, which generate the cash flow necessary to meet these purchase obligations.

(4)Amount represents commitments to purchase six new tractors in our crude oil marketing segment.

We maintain certain lease arrangements with independent truck owner-operators for use of their equipment and driver services on a month-to-month basis. In addition, we enter into office space and certain lease and terminal access contracts in order to provide tank storage and dock access for our crude oil marketing business. These storage and access contracts require certain minimum monthly payments for the term of the contracts.

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Rental expense was as follows for the periods indicated (in thousands):


	Year Ended December 31,
	2019		2018		2017

Rental expense	$	14,662	$	11,078	$	12,073

Insurance

Our primary insurance needs are workers’ compensation, automobile and umbrella liability coverage for our trucking fleet and medical insurance for our employees. See Note 17 in the Notes to Consolidated Financial Statements for further information. Insurance costs were as follows for the periods indicated (in thousands):


	Year Ended December 31,
	2019		2018		2017

Insurance costs	$	14,149	$	11,374	$	10,438

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements that have or are reasonably expected to have a material current or future effect on our financial position, results of operations or cash flows.

Related Party Transactions

For information regarding our related party transactions, see Note 11 in the Notes to Consolidated Financial Statements included under Part II, Item 8 of this annual report.

Recent Accounting Developments

For information regarding recent accounting developments, see Note 2 in the Notes to Consolidated Financial Statements included under Part II, Item 8 of this annual report.

Outlook

Our focus in 2020 will be to continue to expand our core businesses while delivering value to our shareholders. We will work to achieve positive results in markets with strong competition and margin pressures throughout all segments of our business.

Our major objectives for 2020 are as follows:

•Crude oil marketing – We look forward to naming a new President of GulfMark that will help us continue to focus on increasing margins to maximize cash flow and capturing midstream opportunities in an increasingly volatile market. In addition, we will look for opportunities to increase our trucking fleet to add to our overall ability to gather and distribute crude oil.

•Transportation – With the appointment of our new President of STC, we plan to continue to increase truck utilization, upgrade our fleet quality and enhance driver retention and recruitment. The transportation segment is uniquely positioned to take advantage of major downstream infrastructure projects that are taking place across the Gulf Coast. We plan to look for ways to expand our terminal footprint to put us in a position to better compete for new business.

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•Strategic business development – Collectively with new subsidiary presidents and our newly appointed CEO, we will deploy a disciplined investment approach to growth in our two core segments and funding new growth opportunities that are adjacent and complimentary to existing operating activities.

Critical Accounting Policies and Estimates

In our financial reporting processes, we employ methods, estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of our financial statements. These methods, estimates and assumptions also affect the reported amounts of revenues and expenses for each reporting period. Investors should be aware that actual results could differ from these estimates if the underlying assumptions prove to be incorrect. The following sections discuss the use of estimates within our critical accounting policies and estimates.

Fair Value Accounting

We enter into certain forward commodity contracts that are required to be recorded at fair value, and these contracts are recorded as either an asset or liability measured at its fair value. Changes in fair value are recognized immediately in earnings unless the derivatives qualify for, and we elect, cash flow hedge accounting. We had no contracts designated for hedge accounting during the years ended December 31, 2019, 2018 and 2017.

We utilize a market approach to valuing our commodity contracts. On a contract by contract, forward month by forward month basis, we obtain observable market data for valuing our contracts that typically have durations of less than 18 months. At December 31, 2019, all of our market value measurements were based on inputs based on observable market data (Level 2 inputs). See discussion under “Fair Value Measurements” in Note 2 and Note 12 in the Notes to Consolidated Financial Statements.

Our fair value contracts give rise to market risk, which represents the potential loss that may result from a change in the market value of a particular commitment. We monitor and manage our exposure to market risk to ensure compliance with our risk management policies. These risk management policies are regularly assessed to ensure their appropriateness given our objectives, strategies and current market conditions.

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable associated with crude oil marketing activities comprise approximately 90 percent of our total receivables, and industry practice requires payment for these sales to occur within 20 days of the end of the month following a transaction. Our customer makeup, credit policies and the relatively short duration of receivables mitigate the uncertainty typically associated with receivables management. We manage our crude oil marketing receivables by participating in a monthly settlement process with each of our counterparties. Ongoing account balances are monitored monthly, and we reconcile outstanding balances with counterparties. We also place great emphasis on collecting cash balances due.

We maintain and monitor our allowance for doubtful accounts. Our allowance for doubtful accounts is determined based on specific identification combined with a review of the general status of the aging of all accounts. We consider the following factors in our review of our allowance for doubtful accounts: (i) historical experience with customers, (ii) the perceived financial stability of customers based on our research, (iii) the levels of credit we grant to customers, and (iv) the duration of the receivable. We may increase the allowance for doubtful accounts in response to the specific identification of customers involved in bankruptcy proceedings and similar financial difficulties. On a routine basis, we review estimates associated with the allowance for doubtful accounts to ensure that we have recorded sufficient reserves to cover potential losses. Customer payments are regularly monitored. However, a degree of risk remains due to the custom and practices of the industry. See Note 2 in the Notes to Consolidated Financial Statements for further information.

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Liability and Contingency Accruals

From time to time as incidental to our operations, we become involved in various accidents, lawsuits and/or disputes. As an operator of an extensive trucking fleet, we are a party to motor vehicle accidents, worker compensation claims or other items of general liability as are typical for the industry. In addition, we have extensive operations that must comply with a wide variety of tax laws, environmental laws and labor laws, among others. Should an incident occur, we evaluate the claim based on its nature, the facts and circumstances and the applicability of insurance coverage. When our assessment indicates that it is probable that a liability has occurred and the amount of the liability can be reasonably estimated, we make appropriate accruals or disclosure. We base our estimates on all known facts at the time and our assessment of the ultimate outcome, including consultation with external experts and counsel. We revise these estimates as additional information is obtained or resolution is achieved.

During 2019, we received a notice from the IRS regarding a proposed penalty of approximately $1.2 million for our 2017 tax year information returns. See Note 17 in the Notes to Consolidated Financial Statements for further information. At December 31, 2019, we do not believe any of our outstanding legal matters would have a material adverse effect on our financial position, results of operations or cash flows.

Revenue Recognition

On January 1, 2018, we adopted Financial Accounting Standards Board Accounting Standards Codification 606, Revenue from Contracts with Customers (“ASC 606”) and all related Accounting Standards Updates by applying the modified retrospective approach to all contracts that were not completed on January 1, 2018. The new revenue standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The new revenue standard requires entities to recognize revenue through the application of a five-step model, which includes: identification of the contract; identification of the performance obligations; determination of the transaction price; allocation of the transaction price to the performance obligations; and recognition of revenue as the entity satisfies the performance obligations.

Our revenues are primarily generated from the marketing, transportation and storage of crude oil and other related products and the tank truck transportation of liquid chemicals and dry bulk. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in ASC 606. To identify the performance obligations, we considered all of the products or services promised in the contracts with customers, whether explicitly stated or implied based on customary business practices. Revenue is recognized when, or as, each performance obligation is satisfied under terms of the contract. Payment is typically due in full within 30 days of the invoice date.

For our crude oil marketing segment, most of our crude oil purchase and sale contracts qualify and are designated as non-trading activities, and we consider these contracts as normal purchases and sales activity. For normal purchases and sales, our customers are invoiced monthly based upon contractually agreed upon terms with revenue recognized in the month in which the physical product is delivered to the customer, generally upon delivery of the product to the customer. Revenue is recognized based on the transaction price and the quantity delivered.

The majority of our crude oil sales contracts have multiple distinct performance obligations as the promise to transfer the individual goods (e.g., barrels of crude oil) is separately identifiable from the other goods promised within the contracts. Our performance obligations are satisfied at a point in time. For normal sales arrangements, revenue is recognized in the month in which control of the physical product is transferred to the customer, generally upon delivery of the product to the customer.

For our transportation segment, each sales order associated with our master transportation agreements is considered a distinct performance obligation. The performance obligations associated with this segment are satisfied over time as the goods and services are delivered. See Note 3 in the Notes to Consolidated Financial Statements for further information.

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Item 7A. Quantitative and Qualitative Disclosures about Market Risk.

In the normal course of business, we are exposed to certain risks, including changes in interest rates and commodity prices.

Commodity Price Risk

Our major market risk exposure is in the pricing applicable to our crude oil marketing segment. Realized pricing is primarily driven by the prevailing spot prices applicable to crude oil. Commodity price risk in our crude oil marketing operations represents the potential loss that may result from a change in the market value of an asset or a commitment. From time to time, we enter into forward contracts to minimize or hedge the impact of market fluctuations on our purchases of crude oil. In each instance, we lock in a separate matching price support contract with a third party in order to minimize the risk of these financial instruments. Substantially all forward contracts fall within a six-month to eighteen-month term with no contracts extending longer than two years in duration.

Certain forward contracts are recorded at fair value, depending on our assessments of numerous accounting standards and positions that comply with GAAP in the U.S. The fair value of these contracts is reflected in the balance sheet as fair value assets and liabilities and any revaluation is recognized on a net basis in our results of operations (see Note 2 and Note 12 in the Notes to Consolidated Financial Statements for further information).

Historically, prices received for crude oil sales have been volatile and unpredictable with price volatility expected to continue. From January 1, 2018 through December 31, 2019, our crude oil monthly average wholesale purchase costs ranged from an average low of $43.42 per barrel to a monthly average high of $74.74 per barrel during the same period. A hypothetical ten percent additional adverse change in average crude oil prices, assuming no changes in volume levels, would have reduced earnings by approximately $2.7 million and $2.3 million for the years ended December 31, 2019 and 2018, respectively.

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Item 8. Financial Statements and Supplementary Data.

ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


			Page No.
Report of Independent Registered Public Accounting Firm			35

Consolidated Balance Sheets as of December 31, 2019 and 2018			36

Consolidated Statements of Operations for the Years Ended December 31, 2019, 2018 and 2017			37

Consolidated Statements of Cash Flows for the Years Ended December 31, 2019, 2018 and 2017			38

Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2019, 2018 and 2017			39

Notes to Consolidated Financial Statements
Note 1 – Organization and Basis of Presentation			40
Note 2 – Summary of Significant Accounting Policies			41
Note 3 – Revenue Recognition			47
Note 4 – Subsidiary Bankruptcy, Deconsolidation and Sale			49
Note 5 – Prepayments and Other Current Assets			50
Note 6 – Property and Equipment			51
Note 7 – Asset Acquisitions			52
Note 8 – Cash Deposits and Other Assets			54
Note 9 – Investments in Unconsolidated Affiliates			55
Note 10 – Segment Reporting			56
Note 11 – Transactions with Affiliates			58
Note 12 – Derivative Instruments and Fair Value Measurements			58
Note 13 – Income Taxes			61
Note 14 – Stock-Based Compensation Plan			63
Note 15 – Supplemental Cash Flow Information			66
Note 16 – Leases			66
Note 17 – Commitments and Contingencies			69
Note 18 – Concentration of Credit Risk			71
Note 19 – Quarterly Financial Information (Unaudited)			72
Note 20 – Oil and Gas Producing Activities (Unaudited)			72

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Report of Independent Registered Public Accounting Firm

To the Shareholders and Board of Directors

Adams Resources & Energy, Inc.:

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Adams Resources & Energy, Inc. and subsidiaries (the Company) as of December 31, 2019 and 2018, the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2019, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 6, 2020 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

Change in Accounting Principle

As discussed in Note 16 to the consolidated financial statements, the Company has changed its method of accounting for leases as of January 1, 2019 due to the adoption of Accounting Standards Codification 842, Leases.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ KPMG LLP

We have served as the Company’s auditor since 2017.

Houston, Texas

March 6, 2020

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ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)


	December 31,
	2019		2018
ASSETS
Current assets:
Cash and cash equivalents	$	112,994	$	117,066
Restricted cash	9,261		—
Accounts receivable, net of allowance for doubtful accounts of $141 and $153, respectively	94,534		85,197
Accounts receivable – related party	—		425
Inventory	26,407		22,779
Derivative assets	—		162
Income tax receivable	2,569		2,404
Prepayments and other current assets	1,559		1,557
Total current assets	247,324		229,590
Property and equipment, net	69,046		44,623
Operating lease right-of-use assets, net	9,576		—
Intangible assets, net	1,597		—
Cash deposits and other assets	3,299		4,657
Total assets	$	330,842	$	278,870

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	147,851	$	116,068
Accounts payable – related party	5		29
Derivative liabilities	—		139
Current portion of finance lease obligations	2,167		883
Current portion of operating lease liabilities	2,252		—
Other current liabilities	7,302		6,148
Total current liabilities	159,577		123,267
Other long-term liabilities:
Asset retirement obligations	1,573		1,525
Finance lease obligations	4,376		3,209
Operating lease liabilities	7,323		—
Deferred taxes and other liabilities	6,352		4,271
Total liabilities	179,201		132,272

Commitments and contingencies (Note 17)

Shareholders’ equity:
Preferred stock – $1.00 par value, 960,000 shares authorized, none outstanding	—		—
Common stock – $0.10 par value, 7,500,000 shares authorized, 4,235,533 and 4,217,596 shares outstanding, respectively	423		422
Contributed capital	12,778		11,948
Retained earnings	138,440		134,228
Total shareholders’ equity	151,641		146,598
Total liabilities and shareholders’ equity	$	330,842	$	278,870