PANHANDLE OIL & GAS INC (Form: 10-Q, Received: 05/09/2007 16:21:08)

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


þ		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the period ended March 31, 2007


o		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 001-31759

PANHANDLE OIL AND GAS INC.

(Exact name of registrant as specified in its charter)


OKLAHOMA		73-1055775

(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

Grand Centre Suite 300, 5400 N Grand Blvd., Oklahoma City, Oklahoma 73112

(Address of principal executive offices)

Registrant’s telephone number including area code (405) 948-1560

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.

þ Yes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer þ Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

o Yes þ No

Outstanding shares of Class A Common stock (voting) at May 4, 2007: 8,422,529

INDEX


	Page
Part I Financial Information

Item 1 Condensed Consolidated Financial Statements

Condensed Consolidated Balance Sheets – March 31, 2007 and September 30, 2006		1

Condensed Consolidated Statements of Operations – Three months and six months ended March 31, 2007 and 2006		2

Consolidated Statement of Stockholders’ Equity – Six months ended March 31, 2007		3

Condensed Consolidated Statements of Cash Flows – Six months ended March 31, 2007 and 2006		4

Notes to Condensed Consolidated Financial Statements		5-7

Item 2 Management’s discussion and analysis of financial condition and results of operations		7-12

Item 3 Quantitative and qualitative disclosures about market risk		13

Item 4 Controls and procedures		13

Part II Other Information		13

Item 4 Submission of matters to a vote of security holders		13-14

Item 6 Exhibits and reports on Form 8-K		14

Signatures		14
Articles of Incorporation
Certification under Section 302
Certification under Section 302
Certification under Section 906
Certification under Section 906

PART 1 FINANCIAL INFORMATION

PANHANDLE OIL AND GAS INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Information at March 31, 2007 is unaudited)


	March 31, 2007		September 30, 2006
Assets
Current assets:
Cash and cash equivalents	$	865,235	$	434,353
Oil and gas sales receivables		6,902,860		6,471,623
Income tax receivables and other		1,949,640		1,889,636

Total current assets		9,717,735		8,795,612

Properties and equipment, at cost, based on successful efforts accounting:
Producing oil and gas properties		111,622,862		103,129,158
Non-producing oil and gas properties		10,476,098		11,273,373
Other		583,443		562,047

		122,682,403		114,964,578
Less accumulated depreciation, depletion and amortization		60,031,226		53,654,385

Net properties and equipment		62,651,177		61,310,193

Investments		543,928		596,280
Other		214,805		247,157


Total assets	$	73,127,645	$	70,949,242


Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	1,581,091	$	1,564,176
Accrued liabilities:
Interest		14,071		15,649
Fair value of natural gas collar contracts		21,991		—
Other		326,926		218,069
Long-term debt due within one year		1,499,946		2,000,004

Total current liabilities		3,444,025		3,797,898

Long-term debt		1,868,555		1,166,649
Deferred income taxes		16,211,250		15,498,750
Asset retirement obligations and other non-current liabilities		1,585,188		1,420,248

Stockholders’ equity:
Class A voting common stock, $.0166 par value; 24,000,000 shares authorized, 8,422,529 issued and outstanding at March 31, 2007 and 12,000,000 shares authorized, 8,422,529 issued and outstanding at September 30, 2006		140,375		140,375
Capital in excess of par value		1,924,587		1,924,587
Deferred directors’ compensation		1,317,229		1,202,569
Retained earnings		46,636,436		45,798,166

Total stockholders’ equity		50,018,627		49,065,697


Total liabilities and stockholders’ equity	$	73,127,645	$	70,949,242

(1)

PANHANDLE OIL AND GAS INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


	Three Months Ended March 31,					Six Months Ended March 31,
	2007			2006		2007			2006
Revenues:
Oil and gas sales	$	8,455,378		$	8,347,054	$	16,536,586		$	20,052,018
Lease bonuses and rentals		54,946			114,791		170,757			208,267
Realized gains on natural gas collar contracts		49,200			—		49,200
Unrealized losses on natural gas collar contracts		(627,011	)		—		(21,991	)		—
Gain on sales, interest and other		126,151			82,843		178,380			346,826
Income of partnerships		85,069			183,818		162,696			329,074

		8,143,733			8,728,506		17,075,628			20,936,185

Costs and expenses:
Lease operating expenses		833,591			691,896		1,733,559			1,522,165
Production taxes		541,509			514,059		1,042,237			1,255,477
Exploration costs		45,444			149,247		719,411			181,791
Depreciation, depletion, and amortization		4,166,471			2,300,105		6,859,939			4,588,191
Provision for impairment		1,577,266			107,743		1,629,833			136,395
Loss on sale of assets		223,520			94,275		255,917			94,275
General and administrative		995,466			960,442		2,142,714			1,716,659
Interest expense		31,862			67,979		86,477			127,354

		8,415,129			4,885,746		14,470,087			9,622,307

Income (loss) before provision (benefit) for income taxes		(271,396	)		3,842,760		2,605,541			11,313,878

Provision (benefit) for income taxes		(52,651	)		1,189,000		840,793			3,766,000


Net income (loss)	$	(218,745	)	$	2,653,760	$	1,764,748		$	7,547,878


Earnings (loss) per common share (Note 4)	$	(0.03	)	$	0.31	$	0.21		$	0.89


Dividends declared per share of common stock and paid in period	$	0.07		$	0.08	$	0.11		$	0.105

(2)

PANHANDLE OIL AND GAS INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(Unaudited)

Six Months Ended March 31, 2007


	Class A voting				Capital in		Deferred
	Common Stock				Excess of		Directors’		Retained
	Shares		Amount		Par Value		Compensation		Earnings			Total
Balances at September 30, 2006		8,422,529	$	140,375	$	1,924,587	$	1,202,569	$	45,798,166		$	49,065,697

Net Income		—		—		—		—		1,764,748			1,764,748

Dividends ($.11 per share)		—		—		—		—		(926,478	)		(926,478	)

Increase in deferred directors’ compensation charged to expense		—		—		—		114,660		—			114,660


Balances at March 31, 2007		8,422,529	$	140,375	$	1,924,587	$	1,317,229	$	46,636,436		$	50,018,627

(3)

PANHANDLE OIL AND GAS INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Six months ended March 31,
	2007			2006
Cash flows from operating activities:
Net income	$	1,764,748		$	7,547,878
Adjustments to reconcile net income to net cash provided by operating activities:
Unrealized losses on natural gas collar contracts		21,991			—
Depreciation, depletion, amortization		6,859,939			4,588,191
Provision for impairment		1,629,833			136,395
Deferred income taxes		712,500			950,530
Lease bonus income		(32,757	)		(55,258	)
Exploration costs		719,411			181,791
(Gain) or loss on sale of assets		66,711			(180,194	)
Equity in earnings of partnerships		(162,696	)		(329,074	)
Directors’ deferred compensation		114,660			102,007
Cash provided by changes in assets and liabilities:
Oil and gas sales receivables		(431,237	)		83,558
Income tax receivables and other		(24,424	)		(1,267,391	)
Accounts payable		(1,281,586	)		(484,968	)
Accrued directors’ deferred compensation		—			(281,897	)
Accrued interest payable		(1,578	)		(3,335	)
Other accrued liabilities		108,857			(10,194	)
Income taxes payable		—			(599,669	)

Total adjustments		8,299,624			2,830,492

Net cash provided by operating activities		10,064,372			10,378,370

Cash flows from investing activities:
Capital expenditures, including dry hole costs		(9,610,041	)		(10,466,411	)
Proceeds from leasing of fee mineral acreage		153,908			289,192
Investments in partnerships		11,280			—
Distributions received from partnerships		203,768			370,146
Proceeds from sale of assets		332,225			92,485

Net cash used in investing activities		(8,908,860	)		(9,714,588	)

Cash flows from financing activities:
Borrowings under credit facility		5,365,337			—
Payments of loan principal		(5,163,489	)		(1,000,002	)
Payments of dividends		(926,478	)		(883,144	)

Net cash used in financing activities		(724,630	)		(1,883,146	)


Increase (decrease) in cash and cash equivalents		430,882			(1,219,364	)
Cash and cash equivalents at beginning of period		434,353			1,638,833

Cash and cash equivalents at end of period	$	865,235		$	419,469


Supplemental Schedule of Noncash Investing and Financing Activities:
Receivable from sale of assets	$	176,381		$	—

Reclassification of deferred compensation as equity	$	—		$	1,053,408

Additions and revisions, net, to asset retirement obligations	$	197,697		$	—

Additions to properties and equipment included in accounts payable	$	1,298,501		$	1,492,703

(See accompanying notes)

(4)

PANHANDLE OIL AND GAS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1: Accounting Principles and Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q as prescribed by the Securities and Exchange Commission, and include the Company’s wholly owned subsidiary, Wood Oil Company (Wood). Management of Panhandle Oil and Gas Inc. (formerly Panhandle Royalty Company) believes that all adjustments necessary for a fair presentation of the consolidated financial position and results of operations for the periods have been included. All such adjustments are of a normal recurring nature. The consolidated results are not necessarily indicative of those to be expected for the full year. The Company’s fiscal year runs from October 1 through September 30.

NOTE 2: Income Taxes

The Company’s provision (benefit) for income taxes is reflective of excess percentage depletion, reducing the Company’s effective tax rate from the federal statutory rate.

NOTE 3: Stockholders’ Equity

On December 13, 2005, the Company’s Board of Directors declared a 2-for-1 stock split of outstanding Class A common stock. The Class A common stock split was effected in the form of a stock dividend, distributed on January 9, 2006 to shareholders of record on December 29, 2005.

All references to number of shares and per share information in the accompanying consolidated financial statements have been adjusted to reflect the stock split.

NOTE 4: Earnings per Share

Earnings per share is calculated using net income (loss) divided by the weighted average number of common shares outstanding (including unissued, vested directors’ shares (72,165 and 63,786 for fiscal 2007 and 2006, respectively) after October 19, 2005 – see Note 7) during the period.

NOTE 5: Long-term Debt

In October 2006, the Company refinanced its credit facility with BancFirst of Oklahoma City, Oklahoma with a credit facility from Bank of Oklahoma (BOK). The BOK Agreement consisted of a term loan in the amount of $2,500,000 and a revolving loan in the amount of $50,000,000 which is subject to a semi-annual borrowing base determination. The current borrowing base under the BOK Agreement is $10,000,000. The term loan matures on September 1, 2007, and the revolving loan matures on October 31, 2009. Monthly payments, which began December 1, 2006, on the term loan are $250,000, plus accrued interest. Borrowings under the revolving loan are due at maturity. The term loan bears interest at 30 day LIBOR plus .75%. The revolving loan bears interest at the national prime rate minus from 1.375% to .75%, or 30 day LIBOR plus from 1.375% to 2.0%. The interest rate charged will be based on the percent of the value advanced of the calculated loan value of Panhandle’s oil and gas reserves. The interest rate spread from LIBOR or prime increases as a larger percent of the loan value of Panhandle’s oil and gas properties is advanced. At March 31, 2007 the interest rate for the term note was 6.07% and for the revolving loan was 6.695%.

NOTE 6: Deferred Compensation Plan for Directors

No shares were issued under the Plan in the 2007 period. Effective October 19, 2005 the Plan was amended such that upon retirement, termination or death of the director or upon a change in control of the Company, the shares accrued under the Plan will be issued to the director. This amendment removed the conversion to cash option available under the Plan, which eliminated the requirement to adjust the deferred compensation liability for changes in the market value of the Company’s common stock after October 19, 2005. The adjustment of the liability to market value of the shares at the closing price on October 19, 2005 resulted in a credit to general and administrative expense of approximately $288,000. This change reduced volatility in the Company’s earnings resulting from the charges to expense caused by market value changes in the Company’s common stock. The deferred compensation obligation at the date of the Plan’s amendment was reclassified to stockholders’ equity.

(5)

NOTE 7: Capitalized Costs

Oil and gas properties include costs of $557,809 on exploratory wells which were drilling and/or testing at March 31, 2007.

NOTE 8: Derivatives

The Company accounts for its derivative contracts under Financial Accounting Standards Board Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended, (SFAS No. 133). Under the provision of SFAS No. 133, the Company is required to recognize all derivative instruments as either assets or liabilities in the consolidated balance sheet at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and resulting designation. For derivatives designated as cash flow hedges and meeting the effectiveness guidelines of SFAS No. 133, changes in fair value are recognized in other comprehensive income (loss) until the hedged item is recognized in earnings. Hedge effectiveness is required to be measured at least quarterly based on relative changes in fair value between the derivative contract and hedged item during the period of hedge designation. The ineffective portion of a derivative’s change in fair value is recognized currently in earnings. For derivative instruments not designated as hedging instruments, the change in fair value is recognized in earnings during the period of change as a change in derivative fair value. Amounts recorded in unrealized gains (losses) on derivative activities do not represent cash gains or losses. Rather, these amounts are temporary valuation swings in contracts that are not entitled to receive hedge accounting treatment.

The Company had not, through fiscal 2006, entered into derivative instruments to hedge the price risk on its oil or gas production. Beginning in fiscal year 2007, the Company has entered in costless collar arrangements intended to reduce the Company’s exposure to short-term fluctuations in the price of natural gas. Collar contracts set a minimum price, or floor and provide for payments to the Company if the basis adjusted price falls below the floor or require payments by the Company if the basis adjusted price rises above the ceiling. These arrangements cover only a portion of the Company’s production and provide only partial price protection against declines in natural gas prices. These economic hedging arrangements may expose the Company to risk of financial loss and limit the benefit of future increases in prices. The derivative instruments will settle based on the prices below which are tied to indexes for certain pipelines in Oklahoma.

In December 2006, the Company entered into the following three natural gas collar contracts.


First Contract:
Production volume covered		30,000 mmbtu/month
Period covered		January through December of 2007
Prices		Floor of $6.00 and a ceiling of $9.20
Second Contract:
Production volume covered		40,000 mmbtu/month
Period covered		January through December of 2007
Prices		Floor of $6.00 and a ceiling of $9.20
Third Contract:
Production volume covered		30,000 mmbtu/month
Period covered		January through December of 2007
Prices		Floor of $6.00 and a ceiling of $10.20

(6)

In March 2007, the Company entered into the following three additional natural gas collar contracts.


First Contract:
Production volume covered		20,000 mmbtu/month
Period covered		April through September of 2007
Prices		Floor of $7.00 and a ceiling of $7.85
Second Contract:
Production volume covered		30,000 mmbtu/month
Period covered		April through September of 2007
Prices		Floor of $7.00 and a ceiling of $7.45
Third Contract:
Production volume covered		20,000 mmbtu/month
Period covered		April through September of 2007
Prices		Floor of $7.00 and a ceiling of $7.45

While the Company believes that its derivative contracts are effective in achieving the risk management objective for which they were intended, the Company has elected not to complete all of the documentation requirements necessary under SFAS No. 133 to permit these derivative contracts to be accounted for as cash flow hedges. The Company’s fair value of derivative contracts was ($21,991) as of March 31, 2007 (none as of March 31, 2006) resulting in net unrealized losses of $21,991 and realized gains of $49,200 in the six months ended March 31, 2007.

NOTE 9: Exploration Costs

Certain non-producing leases (aggregate carrying value of $177,954) which expired in March and April of 2007 and certain non-producing leases (aggregate carrying value of $45,897) which will expire in June and August of 2007 were fully impaired in fiscal 2007 and charged to exploration costs. In addition, one large cost exploratory dry hole ($493,776 in cost) was charged to exploration costs in 2007.

NOTE 10: Reserve Estimation

Changes in crude oil and natural gas reserve estimates affect the Company’s calculation of depreciation, depletion and amortization, provision for abandonment and assessment of the need for asset impairments. On an annual basis, with a semi-annual update, the Company’s consulting engineer (the Company employed a new consulting engineer beginning with the March 31, 2007 semi-annual update), with assistance from Company geologists, prepares estimates of crude oil and natural gas reserves. As required by the guidelines and definitions established by the SEC, these estimates are based on current crude oil and natural gas pricing. Crude oil and natural gas prices are volatile and largely affected by worldwide production and consumption and are outside the control of management.

In the March 31, 2007 reserve report, changes in approximately fifty of the Company’s over 1,250 working interest wells reserve evaluations were reduced significantly enough by the Company’s new consulting engineer to result in significant additional DD&A charges on those wells, which total approximately $1,400,000.

The net carrying value of the Company’s oil and gas properties is compared to the estimated future net cash flows from those properties on a field by field basis. Those fields on which the carrying value exceeds the estimated future net cash flows are then impaired to the 10% discounted amount of the estimated future net cash flows, the Company’s assumed fair value of those fields. Projected future crude oil and natural gas pricing assumptions are based on NYMEX futures contract prices adjusted for an average Oklahoma sales price differential. These prices are then used in the above discussed calculation of estimated future net cash flows. Lower reserve estimates, and associated estimated future net cash flow, on certain wells with declining production resulted in $1,100,000 of impairment on one western Oklahoma field.

ITEM 2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS AND RISK FACTORS

Forward-Looking Statements for fiscal 2007 and later periods are made in this document. Such statements represent estimates by management based on the Company’s historical operating trends, its proved oil and gas reserves and other information currently available to management. The Company cautions that the forward-looking statements provided herein are subject to all the risks and uncertainties incident to the acquisition, development and marketing of, and exploration for oil and gas reserves. These risks include, but are not limited to, oil and natural gas price risk, drilling and equipment cost risk,

(7)

field services cost risk, environmental risks, drilling risk, reserve quantity risk and operations and production risk. For all the above reasons, actual results may vary materially from the forward-looking statements and there is no assurance that the assumptions used are necessarily the most likely to occur.

LIQUIDITY AND CAPITAL RESOURCES

At March 31, 2007, the Company had positive working capital of $6,273,710, as compared to positive working capital of $4,997,714 at September 30, 2006. The increase results from increased cash and oil and gas sales receivable and a decrease in debt due within one year.

Cash flow remains strong. Additions to properties and equipment for oil and gas activities for the 2007 six-month period amounted to $10,908,542. Management currently expects to commit to capital expenditures for oil and gas activities of approximately $31,000,000 for fiscal 2007. The substantial increase in capital spending is a result of continued high drilling activity combined with the implementation of management’s strategy to participate in new wells with larger interests to increase the Company’s average overall working interest percentage. Drilling in the Woodford Shale unconventional resource play in southeast Oklahoma is and will continue to be a large component of expected capital additions for the next several years. As drilling activity remains high, costs for drilling rigs, well equipment and services also remain high, and are expected to remain so for the remainder of fiscal 2007. Any acquisitions of oil and gas properties would further increase the capital addition amount.

The Company has historically funded capital additions, overhead costs and dividend payments from operating cash flow and has utilized, at times, the revolving line-of-credit facility to help fund these expenditures. With the uncertainty of natural gas prices, and their effect on cash flow, some amounts have been and will be in the next several quarters borrowed on a temporary basis under the Company’s credit facility. The Company has substantial availability under its bank debt facility and the availability could be increased, if needed. In addition, the Company has entered into natural gas collar contracts (discussed in Note 8 above) to help guard against potential negative price fluctuations which would reduce capital available for drilling new oil and gas wells.

RESULTS OF OPERATIONS

THREE MONTHS ENDED MARCH 31, 2007 – COMPARED TO THREE MONTHS ENDED MARCH 31, 2006

Overview:

The Company recorded a second quarter 2007 net loss of $218,745, or $.03 per share, as compared to a net income of $2,653,760 or $.31 per share in the 2006 quarter. The 2007 loss is principally the result of non-cash charges, including; impairment charges of approximately $1,100,000 on one field in western Oklahoma which continues to have production declines resulting in reduced estimated future cash flows, approximately fifty of the Company’s over 1,250 working interest wells reserve evaluations were reduced which resulted in significant additional DD&A charges totaling approximately $1,400,000, and the Company recognized an unrealized loss on the natural gas collar contracts in place of $627,011 in the quarter.

Revenues:

Total revenues decreased $584,773 or 7% for the 2007 quarter. The decrease was primarily the result of $627,011 unrealized losses on natural gas collar contracts. A $108,324 increase in oil and gas sales resulted from a 14% increase in gas sales volumes for the 2007 quarter offset by an 8% decline in gas sales prices. Both oil sales volumes and average oil sales prices decreased in the 2007 quarter. The table below outlines the Company’s production and average sales prices for oil and natural gas for the three month periods of fiscal 2007 and 2006:


	BARRELS		AVERAGE		MCF		AVERAGE		MCFE
	SOLD		PRICE		SOLD		PRICE		SOLD
Three months ended 3/31/07		21,877	$	55.68		1,173,779	$	6.17		1,305,041
Three months ended 3/31/06		23,964	$	61.45		1,029,529	$	6.68		1,173,313

The continuing increase in drilling expenditures and the Company’s stated goal of increasing its working interests in new wells drilled continues to result in increased production volumes for gas, as compared to fiscal 2006. The Company’s drilling continues to be concentrated on gas production. New wells coming on line are replacing the decline in production of older wells, and the Company expects to continue to have additional new production come on line in the last six months of 2007.

(8)


Quarter ended	Barrels Sold		MCF Sold		MCFE
3/31/07		21,877		1,173,779		1,305,041
12/31/06		22,567		1,198,955		1,334,357
9/30/06		26,701		1,216,720		1,376,926
6/30/06		21,473		1,005,976		1,134,814
3/31/06		23,964		1,029,529		1,173,313

Unrealized Losses on Natural Gas Collar Contracts:

The Company’s fair value of derivative contracts was ($21,991) as of March 31, 2007 (none as of March 31, 2006) resulting in an unrealized loss of $627,011 in the three months ended March 31, 2007. The Company received a cash payment of $49,200 in February 2007 under the contracts.

Gain on sales, interest, income of partnerships and other:

These items increased $43,308 in the 2007 period as compared to the 2006 period as a class action lawsuit settlement of approximately $65,000 was received in the 2007 period. Partnership income continues to be reduced in 2007 due to lower natural gas prices and partnership expenditures.

Lease Operating Expenses (LOE):

LOE increased $141,695 or 21% in the 2007 quarter to $.64 per mcfe, as compared to $.59 per mcfe in the 2006 quarter. The increase in per mcfe amounts result from the continuing increase in general oilfield service and supply prices.

Production Taxes:

Production taxes increased $27,450 or 5% in the 2007 quarter. The increase is the result of the larger oil and gas revenues in the 2007 quarter, as production taxes are paid as a percentage of these revenues, and production tax refunds received reducing expenses in the 2006 quarter.

Exploration Costs:

These costs decreased $103,803 in the 2007 quarter as there were no dry holes in the quarter as compared to one dry hole in the 2006 quarter. The 2007 costs related to expired leasehold.

Depreciation, Depletion and Amortization (DD&A):

DD&A increased $1,866,366 or 81% in the 2007 quarter to $3.19 per mcfe as compared to $1.96 per mcfe in the 2006 quarter. Approximately fifty of the Company’s over 1,250 working interest wells reserve evaluations were reduced significantly enough by the Company’s new consulting engineer to result in significant additional DD&A charges on those wells, which total approximately $1,400,000. Due to these reserve reductions, elevated DD&A costs are expected on these wells through the remainder of fiscal 2007. Finally, the overall general price increases in drilling costs, completion costs and equipment costs the last few years continues to increase DD&A costs.

Provision for Impairment:

The provision for impairment increased $1,469,523 in the 2007 quarter. Approximately $1,100,000 of the impairment provision relates to one field in western Oklahoma, in which the majority of the wells were drilled in the 2003-2006 time period. These wells continue to suffer production declines and thus lower reserve estimates which then decrease future cash flow estimates which cause the asset carrying value impairment.

General and Administrative Costs (G&A):

G&A costs increased $35,024 or 4% in the 2007 quarter principally due to increased personnel related costs.

Income Taxes:

The 2007 quarter benefit for income taxes decreased net loss. The Company utilizes excess percentage depletion to reduce its effective tax rate from the federal statutory rate. The effective tax rate estimate was 31% for the 2006 period.

(9)

SIX MONTHS ENDED MARCH 31, 2007 – COMPARED TO SIX MONTHS ENDED MARCH 31, 2006

Overview:

The Company recorded a six month period 2007 net income of $1,764,748, or $.21 per share, as compared to a net income of $7,547,878 or $.89 per share in the 2006 period.

Revenues:

Total revenues decreased $3,860,557 or 18% for the 2007 period. The decrease is principally the result of a 28% decline in the average sales price for natural gas in the 2007 period somewhat offset by a 14% increase in natural gas sales volumes in the 2007 period. The Company currently expects natural gas prices to remain relatively flat for the upcoming summer months with oil prices expected to somewhat trend upward during the summer months. Oil sales volumes decreased 9% and the average sales price decreased 5%. The table below outlines the Company’s production and average sales prices for oil and natural gas for the six month periods of fiscal 2007 and 2006:


	BARRELS		AVERAGE		MCF		AVERAGE		MCFE
	SOLD		PRICE		SOLD		PRICE		SOLD
Six months ended 3/31/07		44,444	$	56.32		2,372,734	$	5.91		2,639,398
Six months ended 3/31/06		48,965	$	59.25		2,076,446	$	8.26		2,370,236

The continuing increase in drilling activities and the Company’s stated goal of increasing its working interests in new wells drilled is expected to continue to result in increased production volumes of natural gas in fiscal 2007 as compared to fiscal 2006. New drilling continues to be concentrated on gas production. During the last year, new wells coming on line have more than replaced the decline in production of older wells. The Company expects to continue to have additional production come on line in future periods of 2007.

Production by quarter for the last five quarters was as follows:


Quarter ended	Barrels Sold		MCF Sold		MCFE
3/31/07		21,877		1,173,779		1,305,041
12/31/06		22,567		1,198,955		1,334,357
9/30/06		26,701		1,216,720		1,376,926
6/30/06		21,473		1,005,976		1,134,814
3/31/06		23,964		1,029,529		1,173,313

Unrealized Losses on Natural Gas Collar Contracts:

The Company’s fair value of derivative contracts was ($21,991) as of March 31, 2006 (none as of September 30, 2006) resulting in unrealized losses of $21,991 in the six months ended March 31, 2007.

Gain on sales, interest, income of partnerships and other:

These items decreased $168,446 in the 2007 period as compared to the 2006 period as certain fee mineral acreage was sold in the 2006 period resulting in a gain of approximately $80,000 and a class action lawsuit settlement of approximately $123,000 was also recorded in the 2006 period. Partnership income continues to be reduced in 2007 due to lower natural gas prices and partnership expenditures.

Lease Operating Expenses (LOE):

LOE increased $211,394 or 14% in the 2007 period to $.66 per mcfe, as compared to $.64 per mcfe in the 2006 period. The increase in per mcfe amounts result from the continuing increase in general oilfield service and supply prices.

Production Taxes:

Production taxes decreased $213,240 or 17% in the 2007 period. The decrease is the result of the reduction in oil and gas revenues in the 2007 period, as production taxes are paid as a percentage of these revenues.

Exploration Costs:

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These costs increased $537,620 in the 2007 period. This increase is principally the result of one exploratory dry hole drilled in the 2007 period in the Mystic Bayou prospect in Louisiana and a charge to exploration costs of approximately $197,000 for leasehold with the lease terms expiring in the 2007 period.

Depreciation, Depletion and Amortization (DD&A):

DD&A increased $2,271,748 or 50% in the 2007 period to $2.60 per mcfe as compared to $1.94 per mcfe in the 2006 period. Approximately fifty of the Company’s over 1,250 working interest wells reserve evaluations were reduced significantly enough by the Company’s new consulting engineer to result in significant additional DD&A charges on those wells, which total approximately $1,400,000. Due to these reserve reductions, elevated DD&A costs are expected on these wells through the remainder of fiscal 2007. Finally, the overall general price increases in drilling costs, completion costs and equipment costs the last few years continues to increase DD&A costs.

Provision for Impairment:

The provision for impairment increased $1,493,438 in the 2007 period. Approximately $1,100,000 of the impairment provision relates to one field in western Oklahoma, in which the majority of the wells were drilled in the 2003-2006 time period. These wells continue to suffer production declines and thus lower reserve estimates which then decrease future cash flow estimates which cause the asset carrying value impairment.

General and Administrative Costs (G&A):

G&A costs increased $426,055 or 25% in the 2007 period. The increase is principally the result of an amendment to the Directors’ Deferred Compensation Plan (the Plan). Effective October 19, 2005 the Plan was amended such that upon retirement, termination or death of the director or upon a change in control of the Company, the shares accrued under the Plan will be issued to the director. This amendment removed the conversion to cash option available under the Plan, which eliminated the requirement to adjust the deferred compensation liability for changes in the market value of the Company’s common stock after October 19, 2005. The adjustment of the liability to market value of the shares at the closing price on October 19, 2005 resulted in a credit to G&A of approximately $282,000 in the 2006 period. In addition, the deferred compensation liability after the October 19, 2005 adjustment was reclassified to stockholders’ equity. Other G&A costs increasing in the 2007 period included personnel related costs, professional fees and shareholder reporting expenses.

Income Taxes:

The 2007 period provision for income taxes decreased due to reduced income before provision for income taxes. The Company utilizes excess percentage depletion to reduce its effective tax rate from the federal statutory rate. The effective tax rate estimate was 32% for the 2007 period and 33% for the 2006 period.

CRITICAL ACCOUNTING POLICIES

Preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. However, the accounting principles used by the Company generally do not change the Company’s reported cash flows or liquidity. Generally, accounting rules do not involve a selection among alternatives, but involve a selection of the appropriate policies for applying the basic principles. Interpretation of the existing rules must be done and judgments made on how the specifics of a given rule apply to the Company.

The more significant reporting areas impacted by management’s judgments and estimates are crude oil and natural gas reserve estimation, impairment of assets, oil and gas sales revenue accruals and provision for income tax. Management’s judgments and estimates in these areas are based on information available from both internal and external sources, including engineers, geologists, consultants and historical experience in similar matters. Actual results could differ from the estimates as additional information becomes known. The oil and gas sales revenue accrual is particularly subject to estimates due to the Company’s status as a non-operator on all of its properties. Production information obtained from well operators is substantially delayed. This causes the estimation of recent production, used in the oil and gas revenue accrual, to be subject to some variations.

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Oil and Gas Reserves

Of these judgments and estimates, management considers the estimation of crude oil and nature gas reserves to be the most significant. These estimates affect the unaudited standardized measure disclosures, as well as DD&A and impairment calculations. Changes in crude oil and natural gas reserve estimates affect the Company’s calculation of depreciation, depletion and amortization, provision for abandonment and assessment of the need for asset impairments. On an annual basis, with a semi-annual update, the Company’s consulting engineer (the Company employed a new consulting engineer beginning with the March 31, 2007 semi-annual update), with assistance from Company geologists, prepares estimates of crude oil and natural gas reserves based on available geologic and seismic data, reservoir pressure data, core analysis reports, well logs, analogous reservoir performance history, production data and other available sources of engineering, geological and geophysical information. As required by the guidelines and definitions established by the SEC, these estimates are based on current crude oil and natural gas pricing. Crude oil and natural gas prices are volatile and largely affected by worldwide production and consumption and are outside the control of management. Projected future crude oil and natural gas pricing assumptions are used by management to prepare estimates of crude oil and natural gas reserves used in formulating management’s overall operating decisions in the exploration and production segment.

Successful Efforts Method of Accounting

The Company has elected to utilize the successful efforts method of accounting for its oil and gas exploration and development activities. Exploration expenses, including geological and geophysical costs, rentals and exploratory dry holes, are charged against income as incurred. Costs of successful wells and related production equipment and developmental dry holes are capitalized and amortized by property using the unit-of-production method as oil and gas is produced. This accounting method may yield significantly different operating results than the full cost method.

Impairment of Assets

All long-lived assets, principally oil and gas properties, are monitored for potential impairment when circumstances indicate that the carrying value of the asset may be greater than its estimated future net cash flows. The evaluations involve significant judgment since the results are based on estimated future events, such as inflation rates, future sales prices for oil and gas, future production costs, estimates of future oil and gas reserves to be recovered and the timing thereof, the economic and regulatory climates and other factors. The need to test a property for impairment may result from significant declines in sales prices or unfavorable adjustments to oil and gas reserves. Any assets held for sale are reviewed for impairment when the Company approves the plan to sell. Estimates of anticipated sales prices are highly judgmental and subject to material revision in future periods. Because of the uncertainty inherent in these factors, the Company can not predict when or if future impairment charges will be recorded.

Oil and Gas Sales Revenue Accrual

The Company does not operate any of its oil and gas properties, and it primarily holds small interests in several thousand wells. Thus, obtaining timely production data from the well operators is extremely difficult. This requires the Company to utilize past production receipts and estimated sales price information to estimate its oil and gas sales revenue accrual at the end of each quarterly period. The oil and gas accrual can be impacted by many variables, including initial high production rates of new wells and subsequent rapid decline rates of those wells and rapidly changing market prices for natural gas. This could lead to an over or under accrual of oil and gas sales at the end of any particular quarter. Based on past history, the estimated accrual has been materially accurate.

Income Taxes

The estimation of the amounts of income tax to be recorded by the Company involves interpretation of complex tax laws and regulations as well as the completion of complex calculations, including the determination of the Company’s percentage depletion deduction. Although the Company’s management believes its tax accruals are adequate, differences may occur in the future depending on the resolution of pending and new tax matters.

The above description of the Company’s critical accounting policies is not intended to be an all-inclusive discussion of the uncertainties considered and estimates made by management in applying accounting principles and policies. Results may vary significantly if different policies were used or required and if new or different information becomes known to management.

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ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company’s results of operations and operating cash flows can be significantly impacted by changes in market prices for oil and gas. Based on the Company’s 2006 production, a $.10 per Mcf change in the price received for natural gas production would result in a corresponding $430,000 annual change in pre-tax operating cash flow. A $1.00 per barrel change in the price received for oil production would result in a corresponding $97,100 annual change in pre-tax operating cash flow. Cash flows could also be impacted, to a lesser extent, by changes in the market interest rates related to the revolving credit facility which bears interest at an annual variable interest rate equal to the national prime rate minus from 1.375% to .75% or 30 day LIBOR plus from 1.375% to 2.0%. At March 31, 2007 the Company had $1,868,555 outstanding under this facility. The Company has a $2,500,000 term loan with an outstanding balance of $1,499,946 at March 31, 2007 maturing on September 1, 2007. The interest rate is 30 day LIBOR plus .75%. Based on total debt outstanding at March 31, 2007 a .5% change in interest rates would result in a $16,800 annual change in pre-tax operating cash flow.

The Company periodically utilizes certain derivative contracts, including collars, to reduce its exposure to unfavorable changes in natural gas prices. Volumes under such contracts do not exceed expected production. The Company’s collars contain a fixed floor price and a fixed ceiling price. If market prices exceed the ceiling price or fall below the floor, then the Company will receive the difference between the floor and market price or pay the difference between the ceiling and market price. If market prices are between the ceiling and the floor, then no payments or receipts related to the collars are required. The Company had not, through fiscal 2006, entered into derivative instruments to hedge the price risk on its oil or gas production. Beginning in fiscal year 2007, the Company has entered in costless collar arrangements intended to reduce the Company’s exposure to short-term fluctuations in the price of natural gas. Collar contracts set a minimum price, or floor and provide for payments to the Company if the basis adjusted price falls below the floor or require payments by the Company if the basis adjusted price rises above the ceiling. These arrangements cover only a portion of the Company’s production and provide only partial price protection against declines in natural gas prices. These economic hedging arrangements may expose the Company to risk of financial loss and limit the benefit of future increases in prices. The derivative instruments will settle based on the prices below which are tied to indexes for certain pipelines in Oklahoma.

ITEM 4 CONTROLS AND PROCEDURES

The Company maintains “disclosure controls and procedures,” as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, that are designed to ensure that information required to be disclosed in reports the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that such information is collected and communicated to management, including the Company’s Co-President/Chief Executive Officer and Co-President/Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating its disclosure controls and procedures, management recognized that no matter how well conceived and operated, disclosure controls and procedures can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. The Company’s disclosure controls and procedures have been designed to meet, and management believes that they do meet, reasonable assurance standards. Based on their evaluation as of the end of the fiscal period covered by this report, the Chief Operating Officer and Chief Financial Officer have concluded that, subject to the limitations noted above, the Company’s disclosure controls and procedures were effective to ensure that material information relating to the Company, including its consolidated subsidiary, is made known to them. There were no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting made during the fiscal quarter or subsequent to the date the assessment was completed.

PART II OTHER INFORMATION

ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

	(a)		The annual meeting of shareholders was held on March 8, 2007.

	(b)		Three directors were elected for three-year terms at the meeting. The directors elected and the results of voting were as follow:


	SHARES
Directors	FOR		WITHHELD
Bruce M. Bell		6,451,211		35,457
Robert O. Lorenz		6,454,680		31,988
Robert E. Robotti		6,447,275		39,373

(c)

Two proposals were also voted upon (i) a proposal to increase the authorized shares of the Company’s Class A

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common stock from 12,000,000 shares to 24,000,000 shares, (ii) a proposal to change the Company’s name to Panhandle Oil and Gas Inc.


	SHARES
	FOR		AGAINST		ABSTAINING
Proposal (i)		6,176,747		233,731		76,190
Proposal (ii)		6,079,462		348,949		58,257

ITEM 6 EXHIBITS AND REPORT ON FORM 8-K

(a) EXHIBITS – Exhibit 3(i) – Articles of Incorporation

Exhibit 31.1 and 31.2 – Certification under Section 302 of the Sarbanes-Oxley Act of 2002

Exhibit 32.1 and 32.2 – Certification under Section 906 of the Sarbanes-Oxley Act of 2002

SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



		PANHANDLE OIL AND GAS INC.

May 7, 2007		/s/ Michael C. Coffman

Date		Michael C. Coffman, Co-President,
		Chief Financial Officer and Treasurer

May 7, 2007		/s/ Ben D. Hare

Date		Ben D. Hare, Co-President
		and Chief Operating Officer

May 7, 2007		/s/ Lonnie J. Lowry

Date		Lonnie J. Lowry, Vice President
		and Chief Accounting Officer

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EXHIBIT INDEX

Exhibit 3(i) – Articles of Incorporation

Exhibit 3 (i)

CERTIFICATE OF AMENDMENT
TO
ARTICLES OF INCORPORATION
OF
PANHANDLE ROYALTY COMPANY

We, the undersigned officers of Panhandle Royalty Company, an Oklahoma corporation (the “Corporation”), in order to effect an amendment to the Articles of Incorporation of the Corporation, hereby certify as follows:

1. The amendment set forth herein was duly adopted in accordance with the procedures set forth in Section 1077 of the Oklahoma General Corporation Act.

2. The Articles of Incorporation of the Corporation are hereby amended as follows:

ARTICLE ONE of the Articles of Incorporation of the Corporation is amended in its entirety to read as follows:

“The name of the corporation is Panhandle Oil and Gas Inc.”

ARTICLE FIVE of the Articles of Incorporation of the Corporation is amended in its entirety to read as follows:

“The total number of shares of capital stock which the Corporation shall have authority to issue is twenty-four million five hundred shares (24,000,500) , divided into twenty-four million (24,000,000) shares of Class A Common Stock of the par value of $0.01666 per share and five hundred (500) shares of Class B Common Stock of the par value of one and no/100 Dollars per share.

With respect to all matters as to which the holders of Class A Common Stock are entitled to vote, each holder of Class A Common Stock shall be entitled to one vote for each share of Class A Common stock that is registered in such shareholder’s name on the applicable record date, except as may be otherwise required by law, Class B Common Stock shall be nonvoting stock of the Corporation.”

3. The remaining provisions of the Articles of incorporation not amended hereby shall remain unchanged and in full force and effect.

IN WITNESS WHEREOF, the undersigned officers have signed this Certificate of Amendment to the Articles of Incorporation on this 2nd day of April, 2007.


ATTEST:

/s/ Jann Giebler

Jann Giebler, Asst. Secretary

CHANGE OR DESIGNATION
OF
REGISTERED AGENT
AND/OR REGISTERED OFFICE
(OKLAHOMA CORPORATION)

TO: OKLAHOMA SECRETARY OF STATE
2300 N. Lincoln Blvd, Room 101, State Capital Building
Oklahoma City, OK 73 105-4897

PLEASE NOTE: This form MUST be filed with a letter from the Oklahoma Tax Commission, Franchise Tax Department, stating that the franchise tax, due yearly, has been paid for the current fiscal year.

The undersigned, for the purpose of changing its registered agent and/or registered office pursuant to Section 1023/1026 of the Oklahoma General Corporation Act, hereby certifies:

1. The name of the corporation is: PANHANDLE ROYALTY COMPANY.

2. The name of the registered agent and the street address of the registered office in the State of Oklahoma is:

(P.O. BOXES ARE NOT ACCEPTABLE)

IN WITNESS WHEREOF, said corporation has caused this certificate to be signed by it President or Vice President and attested to by its Secretary or Assistant Secretary, this ___ day of March, 2006.


ATTEST:
/s/ Lonnie Lowry

Secretary Lonnie Lowry (PLEASE PRINT NAME)

CERTIFICATE OF AMENDMENT
TO
ARTICLES OF INCORPORATION
OF
PANHANDLE ROYALTY COMPANY

1. The amendment set forth herein was duly adopted in accordance with the procedures set forth in Section 1077 of the Oklahoma General Corporation Act.

2. The Articles of Incorporation of the Corporation are hereby amended as follows:

ARTICLE FIVE of the Articles of Incorporation of the Corporation is amended and restated in its entirety to read as follows:

“The total number of shares of capital stock which the Corporation shall have authority to issue is twelve million five hundred shares (12,000,500), divided into twelve million (12,000,000) shares of Class A Common Stock of the par value of $0.01666 per share and five hundred (500) shares of Class B Common Stock of the par value of one and no/100 Dollars ($1.00) per share.

With respect to all matters as to which the holders of Class A Common Stock are entitled to vote, each holder of Class A Common Stock shall be entitled to one vote for each share of Class A Common stock that is registered in such shareholder’s name on the applicable record date, except as may be otherwise required by law. Class B Common Stock shall be nonvoting stock of the Corporation.”

3. Effective as of the close of business on April 1, 2004, there shall occur a split of the outstanding shares of the Corporation’s Class A Common Stock on a two (2) shares for one (1) share basis such that each one (1) share of Class A Common Stock, par value three and one-third cents (3 1/30) per share, of the Corporation outstanding immediately prior to the two-for-one stock split shall be converted into two (2) shares of Class A Common Stock, par value $001666 per share, of the Corporation, all without any further action of the Corporation or the holders of Class A Common Stock. Each certificate representing shares of Class A Common Stock as of the effective time of the two-for-one stock split shall continue to represent the same number of shares of Class A Common Stock, as are reflected on such certificate but on a post-split basis, and the holders of record thereof shall be entitled to receive from the Corporation certificates representing the additional aggregate number of shares of Class A Common Stock to which each such record holder is entitled as a result of the two-for-one stock split.

4. The remaining provisions of the Articles of Incorporation not amended hereby shall remain unchanged and in full force and effect.

5. This Certificate of Amendment shall be effective as of the close of business on April 1, 2004 (C.S.T.).

IN WITNESS WHEREOF, the undersigned officers have signed this Certificate of Amendment to the Articles of Incorporation on this 2nd day of March, 2004.


ATTEST:

/s/ Michael C. Coffman

Michael C. Coffman, Secretary

CERTIFICATE OF AMENDMENT
TO
ARTICLES OF INCORPORATION
OF
PANHANDLE ROYALTY COMPANY

1. The amendment set forth herein was duly adopted in accordance with the procedures set forth in Section 1077 of the Oklahoma General Corporation Act.

2. The Articles of Incorporation of the Corporation are hereby amended as follows:

(i)

ARTICLE THREE of the Articles of Incorporation of the Corporation is amended and restated in its entirety to read as follows:

			The duration of this corporation is perpetual.

	(ii)		ARTICLE FIVE of the Articles of Incorporation is amended and restated in its entirety to read as follows:

			The total number of shares of capital stock which the Corporation shall have authority to issue is six million five hundred shares (6,000,500), divided into six million (6,000,000) shares of Class A Common Stock of the par value of three and one-third cents ( 3 ¹ / ₃ ¢ ) per share and five hundred (500) shares of Class B Common Stock of the par value of one and no/100 Dollars ($1.00) per share.

			With respect to all matters as to which the holders of Class A Common Stock are entitled to vote, each holder of Class A Common Stock shall be entitled to one vote for each share of Class A Common Stock that is registered in such shareholder’s name on the applicable record date, except as may be otherwise required by law. Class B Common Stock shall be nonvoting stock of the corporation.

	(iii)		A new ARTICLE NINE shall be added to the Articles of Incorporation to read as follows:

			No merger, consolidation, liquidation or dissolution of the corporation, nor any action that would result in the same or other disposition of all or substantially all of the assets of the corporation shall be valid unless first approved by the affirmative vote of

			the holders of at least sixty-six and two-thirds percent (66-2/3%) of the outstanding shares of capital stock then entitled to vote on such matters; provided, however, that if any such action has been approved prior to the vote by the shareholders by a two-thirds of the corporation’s whole Board, the affirmative vote of the holders of a majority of the outstanding shares of capital stock then entitled to vote on such matters shall be required, to the extent such shareholder approval is otherwise required by the Oklahoma General Corporation Act.

			The provisions set forth in this Article may not be repealed, altered or amended, in any respect whatsoever, unless such repeal, alteration or amendment is approved by either (a) the affirmative vote of holders of sixty- six and two-thirds percent (66-2/3%) of the shares of capital stock of the corporation then issued and outstanding and entitled to vote on such matters, or (b) the affirmative vote of two-thirds of the whole Board of the corporation and the affirmative vote of holders of a majority of the shares of the corporation’s capital stock then issued and outstanding and entitled to vote on such matters.

3. The remaining paragraphs of Articles of Incorporation shall remain in full force and effect and shall not be affected by this amendment.

IN WITNESS WHEREOF, the undersigned officers have signed this Certificate of Amendment on this 7th day of May, 1999.


ATTEST:

/s/ Michael C. Coffman

Michael C. Coffman, Secretary

AGREEMENT AND PLAN OF MERGER BETWEEN PANHANDLE
ROYALTY COMPANY, AN OKLAHOMA CORPORATION (“PANHANDLE”),
AND NEW MEXICO OSAGE COOPERATIVE ROYALTY COMPANY, A
NEW MEXICO CORPORATION (“NMO”) EFFECTIVE MARCH 31, 1988

FILING CERTIFICATE
(Oklahoma)

The undersigned, being the President and Secretary of Panhandle Royalty Company, an Oklahoma corporation (“Panhandle”) hereby certify that:

	1.		An originally executed and acknowledged copy of the Agreement and Plan of Merger between Panhandle and NMO is attached to this Filing Certificate for filing pursuant to Section 1082 of the Oklahoma General Corporation Act.

	2.		The Agreement and Plan of Merger has been adopted and approved by NMO in accordance with the laws of the state of New Mexico.

	3.		The Agreement and Plan of Merger has been adopted by Panhandle pursuant to the provisions of Section 1081(F) of the Oklahoma General Corporation Act and as of this date, the outstanding shares of Panhandle are such as to render Section 1081(F) applicable and allow the Agreement and Plan of Merger to be adopted by Panhandle by action of its Board of Directors and without any vote of its shareholders.

	4.		Pursuant to Section 1007(D) of the Oklahoma General Corporation Act, the Agreement and Plan of Merger shall not be effective on the date of filing but will be effective as of March 31, 1988.

Dated as of this 15th day of March, 1988.


		PANHANDLE ROYALTY COMPANY,

		By:		/s/ Rex U. Lollar

				Rex Lollar, President

		By:		/s/ Albert F. Schrempp

				Albert F. Schrempp, Secretary

AGREEMENT AND PLAN 0F MERGER

THIS AGREEMENT AND PLAN OF MERGER, dated as of November 6, 1987 is by and between PANHANDLE ROYALTY COMPANY, an Oklahoma corporation (“PRC”) , and NEW MEXICO-OSAGE COOPERATIVE ROYALTY COMPANY, a New Mexico corporation (the “Company”) (PRC and the Company are hereinafter collectively referred to as the “Constituent Corporations”).

WHEREAS, this Agreement and Plan of Merger has been approved by a majority of the Board of Directors of the Company and the Board has approved recommending to the Company’s stockholders the adoption of the Merger Agreement and approval of the merger; and

WHEREAS, the Merger Agreement will be submitted to the stockholders of the Company for adoption pursuant to the applicable provisions of the New Mexico Corporation Statutes (“NMCS”) , upon the terms and subject to the conditions hereof; and

WHEREAS, the Merger Agreement has been approved by a majority of the Board of Directors of PRC; and

WHEREAS, subject to the terms and conditions herein, the parties desire that the Company be merged with and into PRC , which merger shall constitute a reorganization as defined in Section 368 of the Internal Revenue Code of 1986, as amended.

The parties hereto agree as follows:

1. The Merger .

1.1 Effective Time of the Merger . The Merger shall become effective in accordance with the terms of a certificate of merger filed with applicable governmental agencies. The time the merger becomes effective is hereinafter referred to as the Effective Time.” The parties shall use their best efforts to cause the Effective Time to occur on or as soon as possible after all conditions precedent have been fulfilled; provided the Merger Agreement has not been terminated or abandoned pursuant to the provisions of Section 9 hereof.

1.2 Surviving Corporation . At the Effective Time the Company shall be merged with and into the PRC. PRC shall be the surviving corporation (the “Surviving Corporation”) and it shall continue its corporate existence under the laws of the State of Oklahoma.

1.3 Certificate of Incorporation . The Certificate of Incorporation of PRC at the Effective Time shall be the Certificate of Incorporation of the Surviving Corporation until thereafter amended as provided by law.

1.4 By-laws . The By-laws of PRC at the Effective Time shall be the By-laws of the Surviving Corporation until amended as therein provided.

1.5 Directors and Officers . The Board of Directors and officers of PRC at the Effective Time shall be the Board of Directors and officers of the Surviving Corporation upon and following the Effective Time.

1.6 Taking of Necessary Action; Further Action . PRC and the Company, respectively, shall take all such action as may be necessary or appropriate in order to effectuate the Merger as promptly as possible, subject to all of the terms and conditions hereof. Each party will furnish the other such information within its knowledge as the other may reasonably request in order to prepare such filings and other documents as this Agreement and the transactions contemplated hereby may require. If, at any time after the Effective Time, any further action is necessary or desirable to carry out the purposes of this Agreement or to vest the Surviving Corporation with full right, title and possession to all assets, property, rights, privileges, powers and franchises of either of PRC or the Company, the officers and directors of such corporation are fully authorized in the name of their corporation or otherwise to take, and shall take, all such action.

2. Conversion of Shares .

2.1 Status and Conversion of Shares . At the Effective Time, by virtue of the Merger and without any action on the part of the holder of any shares of either the Company or PRC:

(a) Each share of PRC common stock outstanding immediately prior to the Effective Time shall be converted into one share of common stock in the Surviving Corporation.

(b) Each share of the Company’s common stock outstanding immediately prior to the Effective Time (excluding (i) shares of the Company’s common stock held by the Company as treasury shares, which shall cease to exist and be cancelled, and (ii) shares of Dissenting common stock, as hereinafter defined), shall be converted into and shall represent solely the right to receive, upon surrender of the certificate theretofore evidencing such share either: (i) $2,310 per share cash, without interest, in accordance with the provisions hereof; or (ii) 210 shares of common stock of the Surviving Corporation (“Common Stock”). Provided however, no more than 45% of the outstanding shares of the Company’s common stock may be converted into a right to receive cash (included in such 45% will be shareholders receiving cash pursuant to Section 2.1(c) and Section 3.2 hereof). Such election to receive either cash or Common Stock is at the option of the shareholders of the Company; provided that, if more than 45% of the outstanding shares of the Company’s common stock elect to receive cash, all shareholders electing to receive cash will receive a combination of cash and shares of Common Stock in the Surviving Corporation on a pro rata basis to insure that no more than 45% of the outstanding shares of common stock of the Company receive cash. Each Shareholder of the Company shall be required to notify the Surviving Corporation of its election to receive either cash or stock within ninety (90) days after the consummation of the merger. Any shareholder who fails to notify the Surviving Corporation within such time period of its election will be deemed to have elected to receive stock. Any such election shall be irrevocable.

(c) No fractional shares will be issued. In lieu of issuing fractional shares, the shareholder may elect to either: (i) receive cash, or (ii) pay the additional cash amount necessary to receive a full share of common stock in PRC.

2.2 Paying Agent and Payment Procedure .

(a) Promptly after the Effective Time such bank as the Surviving Corporation may designate (the “Paying Agent”), will send a notice and transmittal form to each holder of a certificate theretofore evidencing shares of the Company’s common stock (other than certificates representing Dissenting common stock), advising such holder of the effectiveness of the Merger and the procedure for surrendering to the Paying Agent (who may appoint forwarding agents with the approval of the Surviving Corporation) such certificate for exchange into the right to receive payment in cash or Common Stock as provided herein. Each such holder, upon surrender of the certificate to the Paying Agent in accordance with such transmittal form (or upon presentation of such other documentation as shall be satisfactory to the Paying Agent), shall receive the appropriate payment in exchange for such certificate. In no event shall the holder of any such surrendered certificate be entitled to receive interest on any of the funds to be received in the Merger.

(b) At the Effective Time, the Surviving Corporation will cause to be available to the Paying Agent the amount of cash and shares of Common Stock of the Surviving Company necessary to fund the payment for each share of the Company’s common stock. The Paying Agent shall, pursuant to irrevocable instructions, make the payments and issue the Common Stock referred to herein. Such funds and shares of Common Stock shall not be used for any other purpose, except as provided herein. If cash or shares of Common Stock are deposited in respect of shares of common stock that subsequently become Dissenting common stock (as hereinafter defined), the Paying Agent shall promptly return to the Surviving Corporation the appropriate amount of funds and shares of Common Stock.

(c) If payment for shares of the Company’s common stock is to be made to other than the registered holder, it shall be a condition of the payment that the certificate so surrendered be properly endorsed or otherwise in proper form for transfer and that the person requesting such payment shall pay to the Paying Agent any transfer or other taxes required by reason of the delivery of cash to a person other than the registered holder of the certificates surrendered, or shall establish to the satisfaction of the Paying Agent that such tax has been paid or is not applicable.

(d) Six months following the Effective Time, the Paying Agent shall deliver to the Surviving Corporation any cash and shares of Common Stock not theretofore disbursed to holders of certificates representing shares of the Company’s common stock and thereafter the former holder of such shares of the Company’s common stock shall look to the Surviving Corporation (subject to abandoned property, escheat or other similar laws) only as a general creditor thereof with respect to the consideration which would have been exchanged therefor.

2.3 Closing of the Company Transfer Books . At the Effective Time, the stock transfer books of the Company shall be closed and no transfer of shares of the Company’s common stock theretofore outstanding shall thereafter be made.

3. Dissenting Stockholders .

3.1 Perfecting Dissent . Each outstanding share of the Company’s common stock as to which a written demand for appraisal is delivered to the Surviving Corporation in accordance with the provisions of §53-15-4 of the NMCS (“Dissenter Sections”) and as to which the written demand is not withdrawn and the right to appraisal is not lost shall thereafter neither be entitled to vote for any purpose nor be entitled to the payment of dividends or other distributions (except dividends or other distributions payable to stockholders of record at a date prior to the Effective Time). Each such share of the Company’s common stock (hereinafter called “Dissenting common stock”) shall not be converted into or represent a right to receive consideration pursuant to the terms of the Merger. Any stockholder duly filing such notice is hereinafter called a “Dissenting Stockholder.”

3.2 Payment to Dissenters . Each Dissenting Stockholder who becomes entitled, pursuant to the provisions of the Dissenter Sections of the NMCS, to payment of the fair value of his shares of the Company’s common stock shall receive payment therefor from the Surviving Corporation (but only after the amount thereof shall have been agreed upon or finally determined pursuant to such provisions).

3.3 Loss or Revocation of Dissent . Each share of Dissenting common stock for which the Dissenting Stockholder thereof shall fail to perfect or shall effectively withdraw or lose his right to appraisal of and payment therefor under the applicable provisions of the NMCS shall be converted into and shall represent the right to receive payment as otherwise set forth herein.

3.4 Company Action Respecting Dissenters . The Company shall give PRC prompt notice upon receipt by the Company of any written demand for appraisal. The Company agrees that prior to the Effective Time of the Merger it will not, except with the prior written consent of PRC, voluntarily make any payment with respect to, or settle or offer to settle, any such demand for appraisal by a Dissenting Stockholder, and then only to the extent so agreed to by PRC in such writing.

4. Representations and Warranties of the Company . The Company hereby represents and warrants to PRC as follows:

4.1 Organization and Qualification . The Company is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation, with all requisite corporate power and authority to own, operate and lease its properties and to carry on its business as it is now being conducted.

4.2 Authority Relative to this Agreements . The Company has the necessary corporate power and authority to enter into this Merger Agreement and to carry out its obligations hereunder. The execution and delivery of this Merger Agreement by the Company and the consummation of the transactions contemplated herein have been duly authorized by its Board of Directors and the Board

has directed that this Merger Agreement be submitted to the Company’s stockholders for approval. This Merger Agreement has been duly executed and delivered by the Company and constitutes a valid and binding obligation in accordance with its terms. Except for the approval of its stockholders (and subject to such other conditions provided herein or contemplated hereby), no other corporate proceedings on the part of the Company are necessary for the execution and delivery of this Merger Agreement and the transactions contemplated herein. Neither the execution and delivery of this Merger Agreement nor the consummation of the transactions contemplated hereby nor compliance by the Company with any of the provisions hereof will (i) violate, or conflict with, or result in a breach of any provisions of, or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under or result in the termination of or accelerate the performance required by, or result in the creation of any lien, security interest, charge or encumbrance upon any of the properties or assets of the Company under any of the terms, conditions or provisions of the Certificate of Incorporation or By-laws of the Company or any note, bond, mortgage, indenture, deed of trust, license, lease, agreement or other instrument or obligations to which the Company is a party, or by which the Company or any of its properties or assets may be bound or affected, or (ii) violate any order, writ, injunction, decree, statute, rule or regulation applicable to the Company or any of its properties or assets.

4.3 Capital Stock . As of the date hereof, the authorized capital stock of the Company consists of 2,229 shares of the Company’s common stock, $1.00 par value, of which 226.710804251 shares are validly issued and outstanding and no shares of such stock are held in the Company’s treasury. All of the outstanding shares of the common stock of the Company have been validly issued and are fully paid and nonassessable with no personal liability attaching to the ownership thereof. There are no outstanding rights, options, warrants, contracts or conversion privileges which would require the issuance (or transfer from treasury) by the Company of any of its shares of capital stock.

4.4 Consents and Approvals of Governmental Authorities . Except for (i) any necessary filings with the Securities and Exchange Commission (“SEC”); and (ii) compliance with applicable state corporation, securities or blue sky laws, to the best of the Company’s knowledge, no consent, approval or authorization of, or declaration, filing or registration with, any governmental or regulatory authority is required to be made or obtained by the Company in connection with the execution and delivery of this Agreement by the Company, the performance by the Company of its obligations hereunder and the consummation of the transactions contemplated hereby, other than consents, approvals, authorizations, declarations, filings or registrations which the failure to make or obtain, either individually or in the aggregate, would not have a material adverse effect upon the Company taken as a whole.

4.5 Employee Plans . The Company does not currently have and has not within the past twelve (12) months had any employee benefit plans as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”).

4.6 Financial Information . The Company has delivered to PRC complete and accurate income statements for each of the three calendar years ended December 31, 1986 inclusive (the “Reports”). The Reports fairly present the results of operations or other information included therein to the Company for the periods therein set forth.

4.7 No Undisclosed Liabilities or Obligations . To the best of the Company’s knowledge, the Company does not have any liabilities or obligations of any nature (whether absolute, accrued, contingent or otherwise and whether due or to become due) other than liabilities and obligations fully reflected or reserved against in the Reports or disclosed in the notes thereto or as set forth on Schedule 4.7 hereto.

4.8 Assets . The Company has delivered to PRC a complete and accurate list and brief description of oil and gas properties and mineral interests (the “Assets”) held by the the Company. The Company warrants marketable title to the Assets, limited to the period during which the Company has held title thereto. And, to the best of the Company’s knowledge, all of the Assets are free and clear of all liens, encumbrances, mortgages, assessments, rights of way, security interests, use restrictions, exceptions, variances, reservations or other limitations as might in any respect interfere with or impair the present and continued use thereof in the usual and normal conduct of the business of the Company. All of such Assets are in good operating condition and repair (ordinary wear and tear excepted) and substantially conform with all applicable ordinances, regulations and other laws and requirements.

4.9 Litigation . There are no claims, actions, proceedings, or investigations of any nature pending, or to the knowledge of the Company, threatened, affecting or relating to the Company or any “affiliate” (as such term is defined in the Securities Act of 1933 (the “Securities Act”)) of the Company in their official capacities which, if adversely determined, would adversely affect the properties, assets or business of the Company, or any such claims, actions, proceedings or investigation challenging the validity or propriety of the transactions contemplated in this Merger Agreement nor does the Company know of or have any reason to know of any basis for any such claim, action, proceeding or investigation. Neither the Company nor any of its assets or properties are subject to any order, judgment, decree or governmental restriction which may adversely affect its business or assets or its ability to acquire any property or to conduct business in any area or which may interfere with the transactions contemplated by this Merger Agreement.

4.10 Patents, Trademarks, Trade Names . The Company does not own or have any rights to any patents, patent applications, trademarks (either registered, common law or registration applied for), trade names or copyrights.

4.11 Compliance with Applicable Law . To the best of the Company’s knowledge, the Company has at all times held all licenses, permits and authorizations necessary for the lawful conduct of its business, and has complied with, and, to the best of its knowledge, the Company is not in default in any respect under, the applicable statutes, laws, ordinances, rules and regulations of all federal, state, local and foreign governmental bodies, agencies and subdivision having, asserting or claiming jurisdiction over it or over any part of its operations (including, without limitation, local health, environmental, oil and gas pricing and zoning laws), and knows of no violation thereof.

4.12 Taxes and Tax Returns . To the best of the Company’s knowledge, the Company has duly filed all federal, state and local tax returns required to be filed by it (all such returns being true, correct and complete when filed) and has duly paid or made provisions for the payment of all taxes which have been incurred or are due and payable pursuant to such returns or pursuant to any

assessment with respect to taxes in such jurisdictions, whether or not in connection with such returns. The amounts set up as reserves for taxes, if any, on the Company’s Balance Sheet are sufficient in the aggregate for the payment of all unpaid federal, state and local taxes, whether or not disputed, accrued for or applicable for all years and periods ended as of the date hereof for which the Company may be liable. There are no pending questions relating to, or claims asserted for, taxes or assessments of the Company, nor are there outstanding agreements or waivers extending the statutory period of limitation applicable to any federal income tax return for any period. Proper and accurate amounts have been withheld by the Company from its employees for all periods in full and complete compliance with the tax withholding provisions of applicable federal and state laws. Proper and accurate federal, state, local and other returns have been filed by the Company for all periods for which returns were due with respect to income tax withholding, social security and unemployment taxes; and the amounts shown on such returns to be due and payable have been paid in full or adequate provision therefor has been included in the Company’s Balance Sheet.

4.13 Material Contracts .

(a) Schedule 4.13 annexed hereto contains a complete and accurate list of all material contracts, agreements and commitments to which the Company is a party or by which it is bound, including, without limitation, (i) contracts for the employment of any officer, individual employee, professional person, firm or corporation or independent contractor; (ii) collective bargaining or union agreements; (iii) bank loan or other credit agreements; (iv) bonus, retirement, welfare, pension or retirement arrangements, health or other incentive plan or agreement; (v) leases for real or personal property (reference may be made to the list described in Section 4.8); (vi) contracts or commitments for the purchase of any capital assets or drilling operations; and (vii) other contracts, agreements or commitments, except only (A) contracts, agreements and commitments made by the Company in the ordinary course of business which are terminable by the Company without penalty on not more than thirty (30) days’ prior written notice; and (B) contracts which involve payments of not more than $5,000 in the aggregate. Copies of all such contracts, agreements and commitments have been previously delivered by the Company to PRC. To the best of the Company’s knowledge, all such agreements are valid agreements, and no conditions exist which, with the lapse of time or notice and the lapse of time, constitute or would constitute a default under any of such agreements.

(b) The Company did not maintain, contribute to, nor during the last five (5) years, terminate, any retirement, pension, deferred compensation, profit—sharing, stock purchase or similar plan, whether formal or not, and whether legally binding or not, covering any employee or officer of the Company.

4.14 Absence of Certain Changes.

(a) Since July 14, 1987, to the best of the Company’s knowledge, there has not been:

(i) any material adverse change in the condition (financial or otherwise), business, assets, liabilities, earnings or prospects of the Company;

(ii) any loss, damage, destruction or other casualty to any of the properties or assets of the Company (whether or not covered by insurance);

(iii) (A) any increase in the compensation payable or to become payable by the Company to any of its officers, employees, agents or consultants, or (B) any bonus, percentage Compensation, service award or other like benefit, granted, made or accrued to the credit of any such officer, employee, agent or consultant, or (C) any welfare, pension, retirement or similar payment or arrangement made or agreed to by the Company;

(iv) (A) any sale, issuance, grant of option, warrant or call, or other commitment or agreement of any character by the Company relating to its common stock, or (B) any purchase, redemption or agreement to purchase any Company common stock, or (C) any payment or distribution to the holders of the Company common stock;

(v) any change in any method of accounting or accounting practice by the Company;

(vi) discharge or satisfaction of any lien or encumbrance or payment of any obligation or liability (whether absolute, accrued, contingent or otherwise) other than current liabilities shown on the Company’s Balance Sheet or current liabilities incurred since July 14, 1987 in the ordinary course of business;

(vii) any mortgage, pledge, lien, grant of security interest, charge or other encumbrance on any of its assets, tangible or intangible by the Company;

(viii) any capital expenditures or commitments by the Company to make any capital expenditures for additions to property or equipment, or entry by the Company into any other transaction other than in the ordinary course of business;

(ix) any extraordinary losses incurred by the Company, whether or not in the ordinary course of business; or

(x) any other event or condition of any character which has adversely affected the business, operations, properties, assets or condition, financial or otherwise, of the Company.

4.15 Management.

(a) Schedule 4.15 annexed hereto is a complete and accurate list of (i) the amounts being paid to all present or former directors, officers, employees, consultants or agents of the Company for the year ended December 31, 1986 and to be paid for the year ending December 31, 1987; (ii) all outstanding loans or advances to or from any such person listed in subsection (i) above or any “affiliate” or “associate” (as such terms are defined in the rules and regulations promulgated under the Securities Act) of any such person of the Company, and the amount of any such loans or

advances during the past thirty-six (36) months; (iii) all transactions since December 31, 1985 between the Company and any entity controlled by an “affiliate” or “associate” of the Company; and (iv) a list of the current officers and directors of the Company, the number of shares of the Company common stock owned beneficially, directly or indirectly, or of record, or both, by each such person and the family relationship, if any, among such persons.

(b) All transactions described in Schedule 4.15 by reason of Section 4.15(a) (iii) are on terms and conditions substantially similar to those which the Company would have had, had the other party to the agreement not been related.

4.16 Bank Accounts, Etc . Schedule 4.16 annexed hereto is a complete and accurate list of all bank accounts, credit arrangements and brokerage arrangements maintained by the Company and all persons authorized to sign or act on behalf of the Company with respect thereto, and all safe deposit boxes and other similar custodial arrangements. The Company does not have outstanding any power of attorney or any obligations or liabilities (whether absolute, accrued, contingent or otherwise), as guarantor, surety, co-signer, endorser, co-maker, indemnitor or otherwise in respect to the obligations of any person, corporation, partnership, joint venture, association, organization or other entity.

4.17 Registration Statement; Proxy Materials . None of the information (other than the information to be furnished by PRC to be included in the Registration Statement on Form S-4) (the Registration Statement”) to be filed with the SEC and none of the information furnished or to be furnished to PRC by the Company for inclusion in the proxy statement referred to in Section 7.2 hereof (the “Proxy Statement”) , which is to be included in and as part of the Registration Statement, will, at the respective times the Registration Statement becomes effective and the Proxy Statement is mailed, be false or misleading with respect to any material fact, or omit to state any material fact necessary in order to make the statements therein not misleading or, in the case of the Proxy Statement or any amendment thereof or supplement thereto, at the time of the meeting of the Company stockholders referred to in Section 7.2 hereof, necessary to correct any statement in any earlier communications (of which copies have been furnished by the Company) with respect to the solicitation of any proxy in connection with which the Proxy Statement is mailed.

4.18 Disclosure . To the best of the Company’s knowledge, all facts material to the assets, business, operations and financial condition and prospects of the Company have been disclosed to PRC in writing. No representation or warranty contained in this Merger Agreement, and no statement contained in any Schedule, certificate, list or other writing furnished to PRC pursuant to the provisions hereof, contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements herein or therein not misleading. Except as referred to in this Agreement or the Schedules hereto, the Company does not have any knowledge of any existing facts or developments of any kind, which the Company has reason to believe would materially and adversely affect the assets, business, operations and financial condition and prospects of the Company.

5. Representations and Warranties of PRC . PRC hereby represents and warrants to the Company as follows:

5.1 Organization, Qualifications and Capitalization . PRC is a corporation duly organized, validly existing and in good standing under the laws of the State of Oklahoma and has the corporate power to carry on its business as it is now being conducted. As of the date hereof, PRC has 1,000,000 shares of authorized common stock, $.l0 par value (the “PRC Common Stock”).

5.2 Authority Relative to this Agreement . PRC has the necessary corporate power and authority to enter into this Merger Agreement and to carry out its obligations hereunder. The execution and delivery of this Merger Agreement and the consummation of the transactions contemplated herein have been duly authorized by the Board of Directors of PRC, and no other corporate proceedings are necessary to authorize this Merger Agreement and the transactions contemplated herein. This Merger Agreement has been duly executed and delivered by PRC and constitutes a valid and binding obligation of PRC in accordance with its terms.

6. Conduct of Business of the Company Pending the Merger . From and after the date hereof and prior to the Effective Time of the Merger, the Company covenants and agrees to conduct operations according to its ordinary and usual course of business and, unless PRC shall otherwise agree in writing or unless heretofore disclosed by the Company to PRC in writing:

6.1 Change Certificate or Capitalization or Pay Dividends . The Company shall not (i) amend its Certificate of Incorporation or By-Laws; or (ii) split, combine or reclassify its outstanding shares of capital stock; or (iii) declare, set aside or pay any dividend of any type with respect to the capital stock of the Company;

6.2 Issuance of New Securities . The Company shall not issue or agree to issue any additional shares of its capital stock or any other securities exchangeable or convertible into shares of its capital stock, other than shares issuable upon exercise of options currently outstanding under any stock option plan in accordance with the terms thereof in effect on the date hereof;

6.3 Preserve Business Intact . The Company shall use its best efforts to preserve intact the business organization of the Company to preserve the good will of those having business relationships with it and to preserve its rights under its contracts, agreements, licenses, permits, registrations, filings, patents, trademarks, service marks, where a notice, approval, consent or other action may be required prior to the Merger in order to effect such succession;

6.4 Employment Agreements . The Company shall not enter into any employment agreement; and

6.5 Bonus Plans . The Company shall not adopt any bonus, profit sharing, pension, stock option or similar plan, trust or other arrangement for the benefit of employees, including, but not limited to, any action to vest any benefits in any such plan in any of the participants thereunder to the extent not otherwise vested pursuant to said plan as in effect on the date hereof.

7. Additional Covenants and Agreements.

7.1 Access and Information . The Company and PRC shall each afford to the other and to the others’ accountants, counsel and other representatives full access during normal business hours

throughout the period prior to the Effective Time to all of its properties, books, contracts, commitments and records and, during such period, each shall furnish promptly to the other (i) a copy of each report, schedule and other document filed or received by it pursuant to the requirements of federal or state securities laws, and (ii) all other information concerning its business, properties and personnel as such other party may reasonably request, provided that no investigation pursuant to this Section 7.1 shall affect the representations and warranties contained herein, the conditions to the obligations of the parties to consummate the Merger.

7.2 Stockholders’ Approval; Proxy Statement . The Company agrees that this Agreement shall be submitted and, subject to the fiduciary duties of the Board of Directors of the Company, recommended for approval by the holders of common stock at a meeting of stockholders of the Company, which shall be called and held as soon as practicable after the execution of this Agreement. As soon as practicable after the date hereof, the Company shall prepare and PRC shall cooperate with the Company in such preparation of a proxy statement and form of proxy relating to the Meeting. The term “Proxy Statement” shall mean such proxy statement initially mailed to the Company’s stockholders and all amendments or supplements thereto, if any, similarly filed arid mailed. The Company and PRC each shall use their best efforts to obtain and furnish the information required to be included in the Proxy Statement. The information provided and to be provided by the Company and PRC, respectively, for use in the Proxy Statement shall not, either on the date the Proxy Statement is first mailed to the Company’s stockholders or on the date of the Meeting or on the Closing Date, be false or misleading in any material respect or omit to state any material fact necessary to make such information not false or misleading, and the Company and PRC each agree to correct any such information provided by it for use in the Proxy Statement which shall have become false or misleading.

7.3 Expenses .

(a) The Company shall indemnify and hold PRC and any of its affiliates harmless from and against any and all reasonable expenses (including the payment of attorneys’, accountants’ and investment bankers’ fees and expenses) that they may have incurred in connection with the Merger if the Merger is not consummated because the Board of Directors of the Company receives and elects to accept an offer from another party to acquire the Company or a majority of the Company’s shares of common stock.

(b) The Company shall bear twenty—five percent (25%) of all reasonable expenses incurred in connection with the Merger (including but not limited to the payment of attorneys’, and accountants’ fees and expenses whether by PRC or by the Company) up to an aggregate of $10,000 if the Merger is not consummated due to a failure by the Company to fulfill a condition precedent to PRC’s obligations hereunder or if this Merger Agreement is terminated pursuant to Section 9.1 hereof.

8. Conditions to the Merger .

8.1 Conditions to Obligations of the Company to Effect the Merger . The obligations of the Company to effect the Merger shall be subject to the fulfillment at or prior to the Effective Time of the Merger of the following conditions:

(a) PRC shall have performed its respective covenants and agreements contained in this Merger Agreement required to be performed on or prior to the Effective Time of the Merger; the representations and warranties of PRC contained in this Merger Agreement shall be true in all material respects on and as of the Effective Time of the Merger (except as contemplated or permitted by this Merger Agreement); and the Company shall have received a certificate of the President or a Vice President and the Treasurer of PRC, certifying to each of the foregoing effects.

(b) PRC shall have obtained any and all permits, authorizations, consents or approvals of federal and state securities commissions and of any other public body or authority, domestic or foreign, required, in the opinion of counsel for the Company, for the lawful consummation of the Merger.

8.2 Conditions to Obligations of PRC to Effect the Merger . The obligations of PRC to effect the Merger shall be subject to the fulfillment at or prior to the Effective Time of the Merger of the following conditions:

(a) The holders of the outstanding shares of the Company’s common stock shall have adopted the Merger Agreement in the manner required by the NMCS and the Company’s Certificate of Incorporation; and

(b) The Company shall have performed its covenants and agreements contained in this Merger Agreement required to be performed on or prior to the Effective Time of the Merger; the representations and warranties of the Company contained in this Merger Agreement shall be true in all material respects on and as of the Effective Time of the Merger (except as contemplated or permitted by this Merger Agreement); and PRC shall have received a certificate of the President or a Vice President of the Company certifying to each of the foregoing effects.

(c) PRC shall have received an opinion from Bob Strand, Esq., counsel to the Company, dated the Effective Time of the merger, satisfactory to PRC, substantially to the effect that:

(i) the Company has taken all requisite corporate action to approve and adopt this Merger Agreement; and

(ii) the Merger, when consummated will have been effected in accordance with the applicable statutory provisions,

(d) The Company shall have obtained any and all consents or waivers from other parties to loan agreement, licenses or other contracts material to the Company’s business, and the Company shall have obtained any and all permits, authorizations consents or approvals of state securities commissions and of any other public body or authority, domestic or foreign, required, in the Opinion of counsel for PRC, for the lawful consummation of the Merger.

(e) Except as Previously disclosed by the Company in writing to PRC, since July 14, 1987 there shall not have occurred:

(i) any change, or any development involving a prospective change, which may materially and adversely affect the business, financial condition or operations of the Company, taken as a whole;

(ii) any declaration or setting aside for payment of any dividend (whether in cash, stock or property) with respect to the capital stock of the Company;

(iii) any new borrowing or capital expenditure or commitment (other than borrowings and capital expenditures or commitments through the date hereof in the ordinary course of business and consistent with past practice);

(iv) any damage, destruction or loss, whether or not covered by insurance, materially and adversely affecting the business or properties of the Company taken as a whole;

(v) any material change in the accounting methods or principles used for financial reporting purposes by the Company,. except as may have been required by a change in generally accepted accounting principles or as may have been concurred with by the Company’s independent public accountants; or

(vi) any agreement whether in writing or otherwise, to take any action described in this Section.

(f) The Company shall be determined by PRC to have good and marketable title to all of its material properties and assets (real, personal and mixed, tangible and intangible), including, without limitation, all the properties and assets which it purports to own as reflected on the balance sheet of the Company dated December 31, 1986 (the Balance Sheet) or acquired after the date thereof (except for properties and assets sold since the date of the Balance Sheet in the ordinary course of business and consistent with past practice). None of the properties or assets reflected on the Balance Sheet shall be subject to any mortgage, pledge, lien, security interest, encumbrance, claim, or charge of any kind except (i) statutory liens not yet delinquent, (ii) liens that do not materially detract from or materially interfere with the present use of the properties or assets subject thereto or affected thereby, or otherwise materially impair present business operations of such properties, (iii) liens shown on the Balance Sheet as securing specified liabilities or obligations with respect to which no default exists, (iv) liens arising in the ordinary course of business and consistent with past practice since the date of the Balance Sheet and disclosed in writing to PRC, (v) liens for taxes not yet delinquent or the validity of which are being contested in good faith by appropriate actions, and (vi) liens reflected in the financial statements for the year ended December 31, 1986.

(g) Except as previously disclosed by the Company to PRC there shall be no suit, action or proceeding pending or, to the knowledge of the Company, threatened, or affecting the Company which can reasonably be expected to materially and adversely affect the business, financial condition or operations of the Company, taken as a whole, nor shall there be any judgment, decree, injunction, rule, order or investigation of any court, governmental department, commission, agency, instrumentality or arbitrator outstanding against the Company having, or which, insofar as can be foreseen, in the future is likely to have, any such effect.

(h) All leases pursuant to which the Company is lessee or lessor shall be valid and effective in accordance with their respective terms; there shall be no existing defaults thereunder which would materially adversely affect the financial condition, business or results of operations of the Company taken as a whole; and no event shall have occurred which (whether with or without notice, lapse of time or the happening or occurrence of any other event) would constitute such a default by the Company.

(i) The Company shall. own, or be licensed or otherwise have the full right to use, all patents, trademarks, trade names, copyrights, technology, know-how and processes used in or necessary for the conduct of their respective businesses as currently conducted which are material to the financial condition, results of operations or business of the Company taken as a whole.

(j) Neither the Company nor any of their officers, directors or employees shall have employed any broker or finder or incurred any liability for any brokerage fees, commissions or finders’ fee in connection with the transactions contemplated herein.

(k) The Company shall have received all approvals, authorizations, consents, licenses, franchises, orders and other permits of all governmental or regulatory agencies, whether federal, state or local, the absence of which would materially impair the operation of the business of the Company taken as a whole as it is now being conducted.

9. Termination, Amendment and Waiver .

9.1 Termination . This Merger Agreement may be terminated at any time prior to the Effective Time of the Merger, whether before or after approval by the stockholders of the Company:

(a) by mutual written consent of the Boards of Directors of PRC and the Company;

(b) by the Board of Directors of PRC if the meeting of of the Company’s shareholders to consider the Merger Agreement is not held by May 30, 1988, or the Effective Time shall not have occurred on or before June 15, 1988;

(c) by the Board of Directors of PRC if the holders of more than 10% of the shares of the Company’s common stock outstanding immediately prior to the meeting shall have demanded appraisal of their shares in the manner required under the Dissenter Sections of the NMCS and not withdrawn (or deemed to have withdrawn) their demand;

(d) by either PRC or the Company, if any court of competent jurisdiction in the United States or other United States governmental body shall have issued an order, decree or ruling or taken any other action restraining, enjoining or otherwise prohibiting the transactions contemplated by this Agreement and such order, decree, ruling or other action shall have become final and nonappealable; and

9.2 Effect of Termination. In the event of termination of this Merger Agreement by either the Company or PRC as provided in Section 9.1, this Merger Agreement shall forthwith become void and there shall be no liability on the part of the Company or PRC or their respective officers or directors except as provided in Section 7.3 hereof.

9.3 Amendment . This Merger Agreement may be amended by the parties hereto, by action taken by their respective Boards of Directors, at any time before or after approval hereof by the stockholders of the Company, but, after any such approval, no ) amendment shall be made without the further approval of such stockholders if such amendment would reduce the price to be paid for shares of the Company’s common stock or would, or in the opinion of the Board of Directors of the Company, in any way materially adversely affect the rights of such stockholders. This Merger Agreement may not be amended except by an instrument in writing signed on behalf of each of the parties hereto.

9.4 Extension; Waiver . At any time prior to the Effective Time of the Merger, the parties hereto, by action taken by their respective Boards of Directors, may (i) extend the time for the performance of any of the obligations or other acts of the other parties hereto, (ii) waive any inaccuracies in the representations and warranties contained herein or in any document delivered pursuant hereto and (iii) waive compliance with any of the agreements or conditions contained herein except that the condition contained in Section 8.2(a) may not be waived. Any agreement on the part of a party hereto to any such extension or waiver shall be valid if set forth in an instrument in writing signed on behalf of such party.

10. Miscellaneous .

10.1 Survival of Representations and Warranties and Agreements . If the Merger does not become effective and this Merger Agreement is terminated in accordance with its terms, all representations, warranties and agreements in this Merger Agreement or in any instrument delivered pursuant to this Merger Agreement shall not survive except for the covenants and agreements contained in Section 7.3 hereof. If the Merger becomes effective as provided by this Merger Agreement, all representations and warranties of this Merger Agreement or in any instrument delivered pursuant to this Merger Agreement shall survive the Merger.

10.2 Closing . The closing of the transaction contemplated by this Merger Agreement shall take place at the offices of Panhandle Royalty Company, 2525 Northwest Expressway, Oklahoma City, Oklahoma, as soon as practical on the later of (a) the day of the meeting of NMO shareholders; and (b) the day on which the last of the conditions set forth in Section 8 are fulfilled or waived; or (c) at such other time and place as the parties hereto shall agree. The time and date on which the closing of

the transaction contemplated by this Merger Agreement occurs is herein called the “Effective Time.” As soon as practicable thereafter, the parties shall cause the Effective Time to occur.

10.3 Notice . All notices and other communications hereunder shall be in writing and shall be deemed given if delivered personally or mailed by registered or certified mail (return receipt requested) to the parties at the address listed on the signature page hereof (or at such other address for a party as shall be specified by like notice).

10.4 Counterparts . This Merger Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same Agreement.

10.5 Governing Law . This Merger shall be governed in all respects by the laws of the State of Oklahoma.

10.6 Remedies . If, by reason of the breach of any agreement contained herein, the Merger is not consummated as contemplated hereby, the party injured by such breach, shall be entitled to pursue any and all other remedies to which it may be entitled. Such remedies shall be cumulative and the pursuit by the injured party of any of its remedies shall not be deemed an election among such remedies or the waiver of any other remedy.

10.7 Entire Agreement . This Merger Agreement constitutes the entire agreement among the parties hereto and supersedes all prior agreements and understandings, written or oral, among the parties hereto with respect to the subject matter hereof.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed by their respective officers thereunto duly authorized all as of the date first written above.


ATTEST:	PANHANDLE ROYALTY COMPANY

/s/ Albert F. Schrempp	By:	/s/ Rex U. Lollar

Secretary		Title: Rex U. Lollar
Albert F. Schrempp		President

ATTEST:	NEW MEXICO-OSAGE COOPERATIVE
	ROYALTY COMPANY

/s/	By:	/s/

Secretary	Title:

FEE: $5.00

FILE IN DUPLICATE

STATEMENT OF CHANGE OF REGISTERED OFFICE AND/OR AGENT


STATE OF Oklahoma			)
			)
COUNTY OF Oklahoma			)

TO THE SECRETARY OP STATE OF THE STATE OF OKLAHOMA:

The undersigned corporation, organized and existing under the laws of the State of Oklahoma, for the purpose of changing its registered agent or its registered office, or both, in Oklahoma, as provided by the “Business Corporation Act” of Oklahoma. represents that:

1. The name of the corporation is: Panhandle Royalty Company.

2. The present registered office (including Street and number) is: Suite 610, Coury Center, 2525 N.W. Expressway, Okla. City, OK 74112.

3. The registered office (POST OFF BOX NOT ACCEPTABLE) is changed to: Grand Centre, Suite 210, 5400 N. Grand Blvd., Okla. City, OK 743112.

4. The name and address of its present registered agent is: Wanda C. Tucker, Suite 610, Coury Center, 2525 N. W. Expressway, Okla. City, OK 73112.

5. The name and address (if Domestic Corporation must be identical to registered office) of its new registered agent is: Wanda C. Tucker, Grand Centre, Suite 210, 5400 N. Grand Blvd., Okla. City, OK 73112

6. Such change was authorized by resolution duly adopted by the Board of Directors.

IN WITNESS WHEREOF, the undersigned corporation has caused this statement to be executed in its name by its President, attested by its Secretary, this 19th day of November, 1982.


(CORPORATE SEAL)	Panhandle Royalty Company

	(Exact Corporate Name)

	By	/s/ Rex U. Lollar

		Its President Rex U. Lollar


ATTEST:

/s/ Albert F. Schrempp

Its Secretary Albert F. Schrempp


STATE OF Oklahoma	)
	)	ss
COUNTY OF Oklahoma	)

Before me, a Notary Public in and for said County and State, on this 19th day of November, l982, personally appeared Rex U. Lollar, to me known to be the identical person who subscribed the name of the maker thereof to the foregoing Statement, as its President, and acknowledged to me that he executed the same as his free and voluntary act and deed, and as the free and voluntary act and deed of such corporation, for the uses and purposes therein set forth.



	/s/ V’nita K. Durant
	NOTARY PUBLIC V’nita K. Durant

(NOTARIAL SEAL)

My Commission expires 11-9-85



		AMENDED ARTICLES OF INCORPORATION		FEE: $25.00
				(Minimum)

PLEASE NOTE: This form must be filed with a letter from the Oklahoma Tax Commission stating the franchise tax has been paid for the current fiscal year. If the authorized capital is increased in excess of Twenty-five Thousand Dollars ($25,000.00) the filing fee shall be an amount equal to one-tenth of one percent (1/10 of 1%) of such increase.

TO THE SECRETARY OF STATE OF THE STATE OF OKLAHOMA:


We, the undersigned,	Address	City and State
	610 Coury Center,
Panhandle Royalty Company	2525 NW Expressway	Oklahoma City, OK 73112

being persons legally competent to amend the Articles of Incorporation pursuant to the provisions of the “Business Corporation Act” of the State of Oklahoma, do hereby execute and submit the following amended Articles of Incorporation.

(1) The name of the corporation is Panhandle Royalty Company (If the corporate name is changed, please show the former name also).

(2) A. No Change, As Filed X

B. As Amended — The address of the registered office in Oklahoma is ___, City of ___, and the name of the registered agent at such address is ___.

(3) A. No Change, As Filed X

B. As Amended -The duration of the corporation is ___years.

(4) A. No Change, As Filed X

B. As Amended — The purpose or purposes for which the corporation is formed are:

(5) A. No Change, As filed ___

B. As Amended — The aggregate number of the authorized shares itemized by class, par value of shares, shares without par value, and series, if any, within a class is:


CLASS	SERIES	NUMBER OF SHARES	PAR VALUE — NO PAR VALUE

A Common	(Voting)	1,000,000	Ten cents
B Common	(Non-Voting)	500	One dollar

(6) A. No Change, As filed X

B. As Amended — The amount of stated capital with which the corporation shall have is $___, which has been fully paid in (must be at least $500.)

(7) A. No Change, As filed X

B. As Amended — The number and class of shares to be allotted by the corporation consideration to be received therefor are:


CLASS SERIES	NUMBER OF SHARES	CONSIDERATION TO BE RECEIVED

(8) A. No Change, As filed X

B. As Amended — The number of directors is ___.

PLEASE COMPLETE ONE OF THE FOLLOWING , (9) (10) or (11), depending upon the method of Execution of the amended Articles of Incorporation.

(9) IF SUCH AMENDMENT BE BY THE CORPORATION UPON THE APPROVAL 0F THE SHAREHOLDERS, SUCH AMENDED ARTICLES SHALL FURTHER SET FORTH: (a) Such amendment was proposed by a resolution of the Board of Directors on the 14th day of December, 1981

(b) The amendment was adopted by a vote of the shareholders in accordance with the provisions of 18 O.S. 1971, 1.153.

(c) The meeting of the shareholders of the corporation at which the amendment was adopted was held at 2525 NW Expressway. Oklahoma City OK.

(d) Notice of the meeting was given by the Secretary in writing for a period of 30 days in advance of the meeting.

(e) The class and number of shares voted for and against such amendment was:


CLASS	NUMBER OF SHARES		VOTED FOR		VOTED AGAINST

A Common		70,408		39,911		4,105
B Common		500		500		0


(Corporate Seal)		Panhandle Royalty Company

		Exact Corporate Name

ATTEST:

/s/ Albert F. Schrempp		/s/ Rex U. Lollar

by its Secretary		by its President

(10) IF SUCH AMENDMENT BE BY THE INCORPORATORS, SUCH AMENDED ARTICLES SHALL FURTHER SET FORTH:

(a) No shares of the corporation have been allotted.

(b) The corporation has not begun .or transacted any business or incurred any indebtedness except such business or indebtedness as shall have been incidental to its organization or to the obtaining of subscriptions or payment for its shares; and

(c) No subscriptions have been taken and no shares have been subscribed for; OR Subscriptions have been taken and ___shares subscribed for, and the sub scribers for at least two/thirds of such number of shares have signed and filed with the Incorporators-Secretary of the corporation their written consent to the amendment. As provided for in 18 O.S. 1971, § 1.152.


(Majority of Incorporators must sign)


(Notarial Seal)


		NOTARY PUBLIC

My Commission expires .

(11) IF SUCH AMENDMENT BE BY THE BOARD OF DIRECTORS, SUCH AMENDED ARTICLES SHALL FURTHER SET FORTH;

(a) The general nature of the amendment is ___. (b) As provided for in 18 0.5. 1971, § 1.162, a resolution of amendment was adopted at a meeting duly called on the ___ day of ___, 19 ___.


(Majority of Incorporators must sign)



(Corporate Seal)

Subscribed and sworn to before me this ___ day of ___, 19___.


(Notarial Seal)

		NOTARY PUBLIC

My Commission expires .

ARTICLES OF MERGER

TO THE SECRETARY OF STATE
OF THE STATE OF OKLAHOMA:

The undersigned corporation, pursuant to §§ 165-169 of the “Business Corporations Act” of the State of Oklahoma, hereby executes the following Articles of Merger:

ARTICLE ONE

1. The names of the constituent corporations merged and the names of the states, territories, or countries under the laws of which such corporations are incorporated are:


NAME OF CORPORATION		PLACE OF INCORPORATION

Panhandle Cooperative Royalty Company		Oklahoma

Panhandle Royalty Company		Oklahoma

2. No constituent corporation is a foreign corporation.

3. The respective addresses of the Registered offices in Oklahoma of the constituent corporations are:

Panhandle Cooperative Royalty Company, Suite 610, 2525 N. W. Expressway, Oklahoma City, Oklahoma 73112.

Panhandle Royalty Company, Suite 610, 2525 N. W. Expressway, Oklahoma City, Oklahoma 73112.

ARTICLE TWO

1. The name of the surviving Oklahoma corporation shall be Panhandle Royalty Company.

2. The address of its Registered office in Oklahoma is Suite 610, 2525 N. W. Expressway, Oklahoma City, Oklahoma 73112; and the name and full address of its registered agent is Wanda Tucker, Suite 610, 2525 N. W. Expressway, Oklahoma City, Oklahoma 73112.

3. Its period of duration is 50 years.

4. Its purposes are:

To acquire, manage, explore and produce by whatever means prudent and necessary, mineral rights of whatsoever kind and nature, including oil and gas and its kindred substances and derivatives; also including other minerals of every nature, whether liquid, gaseous or solid, which

may be obtained by mining, drilling or otherwise, wherever found; to construct buildings, pipe lines, or processing equipment considered necessary to explore, develop, process and market same to the best advantage of the company.

5. The aggregate number of shares which the corporation is authorized to allot is 100,500 divided into 2 classes. The designation of each class, the number of shares of each class, and the par value of the shares of each class are as follows:


CLASS	NO. OF SHARES		PAR VALUE

A Common (VOTING)		100,000	$	1.00

B Common (NON VOTING)		500	$	1.00

The corporation has no shares of any preferred or special class, and no shares will be allotted in series.

6. The amount of stated capital of the surviving corporation is $500.00.

7. The class and number of shares to be allotted by the corporation before it shall commence business, and the consideration to be received by the corporation therefor,

are:


CLASS	NUMBER OF SHARES		CONSIDERATION

A Common		500	$	500.00

8. The present number of directors of the surviving corporation is seven.

9. There are provisions limiting or denying the shareholders the preemptive right to acquire additional shares of the corporation which are “No shareholder shall have preemptive rights”.

10. There are no provisions inconsistent with law and regulation of the affairs of the corporation.

ARTICLE THREE

1. Certified copies of the resolutions of each constituent corporation, as provided for in sub-sections “b” and “c” of §165 of the “Business Corporations Act” are hereto attached.

2. Certified copies of the resolutions of each constituent corporation as provided for in sub-sections “a” and “b” of §166 of the “Business Corporations Act” are contained in the certified resolutions referenced in paragraph 1, above, attached hereto.

3. A copy of the notice to the shareholders of each constituent corporation required under sub-section “a” (2) of §166 of the “Business Corporations Act” is hereto attached.

4. As to each constituent corporation, the number of shares outstanding were:


	TOTAL NUMBER		TOTAL NUMBER
	SHARES SHARES		ENTITLED
NAME	OUTSTANDING		TO VOTE

Panhandle Cooperative Royalty Company		1404.2928		1404.2928

Panhandle Royalty Company		500		500

5. As to each corporation, the number of shares voted for and against the plan respectively were:


	TOTAL SHARES		TOTAL SHARES
NAME	VOTED FOR		VOTED AGAINST

Panhandle Cooperative Royalty Company		931.4667		31.8833

Panhandle Royalty Company		500		500

6. The names and respective addresses of the present officers, including the directors, of each constituent corporation are:

Panhandle Cooperative Royalty Company

President/Director:
R. R. Sheets, Suite 610, 2525 N.W. Expressway, Oklahoma City, OK 73112

Executive Vice President/Director:
Rex U. Lollar, Suite 610, 2525 N.W., Expressway, Oklahoma City, OK 73ll2

Vice President/Director:
Leroy Vick, Suite 610, 2525 N.W. Expressway, Oklahoma City, OK 73112

Secretary-Treasurer/Director:
Claude L. Kirkman, Suite 610, 2525 N.W. Expressway, Oklahoma City, OK 73112

Assistant Secretary:
Wanda Tucker, Suite 610, 2525 N.W. Expressway, Oklahoma City, OK 73112

Assistant Secretary and Assistant Treasurer:
Albert F. Schrempp, Suite 610, 2525 N.W. Expressway, Oklahoma City, OK 73112

Director:
Huff Kelly, Suite 610, 2525 N.W. Expressway, Oklahoma City, OK 73112

Director:
Ralph W. Dennis, Suite 610, 2525 N.W. Expressway, Oklahoma City, OK 73112

Director:
Leon Olson, Suite 610, 2525 N.W. Expressway, Oklahoma City, OK 73112

Panhandle Royalty Company

President/Director:
R. R. Sheets, Suite 610, 2525 N.W. Expressway, Oklahoma City, OK 73112

Executive Vice President/Director:
Rex U. Lollar, Suite 610, 2525 N.W. Expressway, Oklahoma City, OK 73112

Vice President/Director:
Leroy Vick, Suite 610, 2525 N.W. Expressway, Oklahoma City, OK 73112

Secretary-Treasurer/Director:
Claude L. Kirkman, Suite 610, 2525 N.W. Expressway, Oklahoma City, OK 73112

Assistant Secretary:
Wanda Tucker, Suite 610, 2525 N.W. Expressway, Oklahoma City, OK 73112

Assistant Secretary and Assistant Treasurer:
Albert F. Schrempp, Suite 610, 2525 N.W. Expressway, Oklahoma City, OK 73112

Director:
Huff Kelly, Suite 610, 2525 N.W. Expressway, Oklahoma City, OK 73112

Director:
Ralph W. Dennis, Suite 610, 2525 N.W. Expressway, Oklahoma City, OK 73112

Director:
Leon Olson, Suite 610, 2525 N.W. Expressway, Oklahoma City, OK 73112

7. Neither of the constituent corporations is a foreign corporation.

IN WITNESS WHEREOF, the surviving corporation has caused these Articles of Merger to be executed in its name, by its President, and attested by the Secretary, this 26 day of September, 1979.


	Panhandle Royalty Company
ATTEST:
	By:	/s/ R. R. Sheets

		President
/s/ Claude L. Kirkman

Secretary


STATE OF OKLAHOMA	)
	)	SS:
COUNTY OF OKLAHOMA	)

Before me, a Notary Public in and for said County and State, on this 26 day of September, 1979, personally appeared R. R. Sheets, to me known to be the identical person who subscribed the name of the maker thereof to the foregoing Articles of Merger as its President and acknowledged to me that he executed the same as his free and voluntary act and deed, and as the free and voluntary act and deed of such corporation, for the uses and purposes therein set forth.

Witness my hand and official seal the day and year last above written.


		/s/ Wanda C. Tucker

My Commission Expires:		Notary Public

Nov. 28, 1982



FORM NO. 5	FILE IN DUPLICATE	FEE: $3.00

STATEMENT OF CHANGE OF REGISTERED OFFICE AND/OR AGENT


STATE OF Oklahoma			)
			)
COUNTY OF Oklahoma			)

TO THE SECRETARY OF STATE OF THE STATE OF OKLAHOMA:

The undersigned corporation, organized and existing under the laws of the State of Oklahoma , for the purpose of changing its registered agent or its registered office, or both, in Oklahoma, as provided by the “Business Corporation Act” of Oklahoma, represents that:

1. The name of the corporation is: Panhandle Royalty Company.

2. The present registered office (including Street and number) is: 2525 N. W. Expressway, Suite 610, Oklahoma City, Okla. 73112.

3. The registered office (POST OFFICE BOX NOT ACCEPTABLE) is changed to: same.

4. The name and address of its present registered agent is: Lou L. McGee, 2525 N.W. Expressway , Suite 610, Okla. City, OK 73112.

5. The name and address (if Domestic Corporation must he identical to registered office) of its new registered agent is: Wanda C. Tucker 2525 N. W. Expressway, Suite 610, Okla. City, Okla. 73112.

6. Such change was authorized by resolution duly adopted by the Board of Directors.

IN WITNESS WHEREOF, the undersigned corporation has caused this statement to be executed in its name by its President, attested by its Asst. Secretary, this 27th day of April, 1979.


(CORPORATE SEAL)	PANHANDLE ROYALTY COMPANY

	(Exact Corporate Name)

	By	/s/ R. R. Sheets

		Its President, R.R. Sheets
ATTEST:

/s/ Albert F. Schrempp

Its Asst. SECRETARY, Albert F. Schrempp


STATE OF OKLAHOMA	)
	)	ss
COUNTY OF OKLAHOMA	)

Before me, a Notary Public in and for said County and State, on this 27th day of April, l979, personally appeared R. R. Sheets to me known to be the identical person who subscribed the name of the maker thereof to the foregoing Statement, as its President, and acknowledged to me that he executed the same as his free and voluntary act and deed, and as the free and voluntary act and deed of such corporation, for the uses and purposes therein set forth.



	/s/ Wanda C. Tucker
	NOTARY PUBLIC Wanda C. Tucker

(NOTARIAL SEAL)

My Commission expires Nov. 28, 1982

ARTICLES OF INCORPORATION
OF
PANHANDLE ROYALTY COMPANY


STATE OF OKLAHOMA	)
	)	SS:
COUNTY OF OKLAHOMA	)

TO THE SECRETARY OF STATE OF THE STATE OF OKLAHOMA

We, the undersigned incorporators, being persons legally competent to enter into contracts for the purpose of forming a corporation under “The Business Corporation Act” of the State of Oklahoma, do hereby adopt the following Articles of Incorporation:

ARTICLE ONE

The name of the corporation is PANHANDLE ROYALTY COMPANY.

ARTICLE TWO

The address of its registered office in the State of Oklahoma is 610 Coury Center, 2525 N. W. Expressway, Oklahoma City, Oklahoma 73112, and the name of its registered agent is Lou L. McGee, her address being the same as the registered office’s address.

ARTICLE THREE

The duration of this corporation is fifty years.

ARTICLE FOUR

The purpose for which this corporation is formed is to acquire, manage, explore, and produce by whatever means prudent and necessary, mineral rights of whatsoever kind and nature, including oil and gas and its kindred substances and derivatives; also including other minerals of every nature, whether liquid, gaseous or solid, which may be obtained by mining, drilling, or otherwise, wherever found; to construct buildings, storage facilities, pipe lines or processing equipment considered necessary to explore, develop, process and market same to the best advantage of the company.

ARTICLE FIVE

The aggregate number of shares which this corporation shall have the authority to allot is:

100,000 shares of Class A common at $1.00 par value; and,
500 shares of Class B common at $1.00 par value.

The designation of each class, the number of shares of each class and the par value of the shares of each class are as follows:


CLASS	NUMBER OF SHARES		PAR VALUE PER SHARE

A Common		100,000	$	1.00
B Common		500	$	1.00

Each holder of Class A Common Stock shall be entitled to one vote without regard to the number of shares owned by the shareholder. Class B Common Stock shall be nonvoting stock of the corporation.

ARTICLE SIX

The amount of stated capital with which it will begin business is $500.00, which has been fully paid in.

ARTICLE SEVEN

The number and class of shares to be allotted by the corporation before it shall begin business and the consideration to be received by the corporation therefor, are:


			CONSIDERATION TO
CLASS	NUMBER OF SHARES		BE RECEIVED

A Common		500	$	500.00

ARTICLE EIGHT

The number of directors to be elected at the first meeting of the shareholders is seven.

IN WITNESS WHEREOF, we have hereunto set our respective signatures at Oklahoma City, Oklahoma, on this 11th day of December, 1978.



	/s/ Jack G. Bush
	Jack G. Bush
	600 Oklahoma Mortgage Tower 5100 North Brookline Oklahoma City, OK 73112 (405) 947-8333



	/s/ James K. Larimore
	James K. Larimore
	600 Oklahoma Mortgage Tower 5100 North Brookline Oklahoma City, OK. 73112 (405) 947-8333



	/s/ Gary R. Underwood
	Gary R. Underwood
	600 Oklahoma Mortgage Tower 510 North Brookline Oklahoma City, OK 73112 (405) 947-8333


STATE OF OKLAHOMA	)
	)	SS:
COUNTY OF OKLAHOMA	)

Before me, a Notary public in and for said County and State on this 11th day of December, 1978, personally appeared Jack G. Bush, James K. Larimore and Gary R. Underwood, to me known to be the identical persons who executed the foregoing Articles of Incorporation and acknowledged to me that they executed the same as their free and voluntary act and deed for the uses and purposes therein set forth.

IN WITNESS WHEREOF, I have hereunto set my hand and seal the day and year above written.


My Commission Expires:
9/12/82		/s/ Linda S. Calnan

		Notary Public

AFFIDAVIT AS TO PAID IN CAPITAL


STATE OF OKLAHOMA	)
	)	SS:
COUNTY OF OKLAHOMA	)

Jack G. Bush, James K. Larimore and Gary R. Underwood, of lawful age, being first duly sworn, each deposes and says that the above-named affiants are the incorporators of PANHANDLE ROYALTY COMPANY, a proposed corporation and that the amount of stated capital with which said corporation will begin business, as set out in its attached Articles of Incorporation has been fully paid in.



	/s/ Jack G. Bush
	Jack G. Bush


	/s/ James K. Larimore
	James K. Larimore


	/s/ Gary R. Underwood
	Gary R. Underwood

Subscribed and sworn to before me this 11th day of December, 1978.


My Commission Expires:
9/12/82		/s/ Linda S. Calnan

		Notary Public



FORM NO. 11		FEE $3.00

CONSENT TO SIMILAR NAME

TO THE SECRETARY OF STATE, STATE OF OKLAHOMA:

The undersigned corporation, in compliance with Section 11(c) of the “Business Corporation Act” of the State of Oklahoma, hereby consents to the use of the name or a similar name.

1. The name of the consenting corporation is: Panhandle Cooperative Royalty Company and it is organized under the laws of the State of Oklahoma.

2. The consenting corporation is about to:

Change its name
Cease to do business X
Withdraw from Oklahoma
Be wound up

3. The name of the corporation to which this consent is given is Panhandle Royalty Company (about to be) organized under the laws of the State of Oklahoma.

IN WITNESS WHEREOF, this corporation has caused this consent to be executed this 11 day of December, 1978 .


		Panhandle Cooperative Royalty Company
				(Name of corporation)

		By		/s/ R. R. Sheets

				Its President

CORPORATE SEAL

Attest:


/s/ Lou L. McGee

Its Secretary

EXHIBIT 31.1

CERTIFICATION

I, Michael C. Coffman, certify that:

	1.		I have reviewed this quarterly report on Form 10-Q of Panhandle Oil and Gas Inc. (the Company);

	2.		Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

	3.		Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this quarterly report;

	4.		The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d -15(f), for the Company and we have:

	a).		designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

	b).		designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

	c).		evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and

	d).		disclosed in this quarterly report any change in the Company’s internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and

The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of the Company’s board of directors:

	a).		all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and

	b).		any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.


/s/ Michael C. Coffman

Michael C. Coffman Chief Financial Officer
Date: May 7, 2007

(15)

EXHIBIT 31.2

CERTIFICATION

I, Ben D. Hare, certify that:

	1.		I have reviewed this quarterly report on Form 10-Q of Panhandle Oil and Gas Inc. (the Company);

	2.		Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

	3.		Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this quarterly report;

	4.		The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d -15(f), for the Company and we have:

	a).		designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

	b).		designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

	c).		evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and

	d).		disclosed in this quarterly report any change in the Company’s internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and

	a).		all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and

	b).		any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.


/s/ Ben D. Hare

Ben D. Hare
Chief Operating Officer
Date: May 7, 2007

(16)

EXHIBIT 32.1

Panhandle Oil and Gas Inc.
5400 North Grand Blvd. Suite #300
Oklahoma City, OK 73112

CERTIFICATION OF CHIEF FINANCIAL OFFICER
REGARDING PERIODIC REPORT CONTAINING
FINANCIAL STATEMENTS

I, Michael C. Coffman, Chief Financial Officer of Panhandle Oil and Gas Inc., (the “Issuer”), in compliance with 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, hereby certify in connection with the Issuer’s Quarterly Report on Form 10-Q for the period that ended March 31, 2007 as filed with the Securities and Exchange Commission (the “Report”) that:

	(1)		The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and

	(2)		The information contained in this Report fairly presents, in all material respects, the financial condition and results of operations of the Issuer.


/s/ Michael C. Coffman

Michael C. Coffman President & Chief Financial Officer

May 7, 2007

(17)

EXHIBIT 32.2

Panhandle Oil and Gas Inc.
5400 North Grand Blvd. Suite #300
Oklahoma City, OK 73112

CERTIFICATION OF CHIEF OPERATING OFFICER
REGARDING PERIODIC REPORT CONTAINING
FINANCIAL STATEMENTS

I, Ben D. Hare, Chief Operating Officer of Panhandle Oil and Gas Inc., (the “Issuer”), in compliance with 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, hereby certify in connection with the Issuer’s Quarterly Report on Form 10-Q for the period that ended March 31, 2007 as filed with the Securities and Exchange Commission (the “Report”) that:

	(1)		The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and

	(2)		The information contained in this Report fairly presents, in all material respects, the financial condition and results of operations of the Issuer.


/s/ Ben D. Hare

Ben D. Hare President & Chief Operating Officer

May 7, 2007

(18)

PANHANDLE ROYALTY COMPANY,
an Oklahoma corporation

/s/ Michael C. Coffman

Michael C. Coffman,
Co-President