New Concept Energy, Inc. 2017 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2017, with audited comparative information for 2016 and 2015. New Concept Energy operates oil and gas wells and mineral leases in Ohio and West Virginia through wholly owned subsidiaries. At year-end, it had 153 producing wells, 31 non-producing wells and approximately 19,375 developed acres. The Pacific Pointe retirement-community lease terminated on March 30, 2017 after the property owner sold the facility; its results are presented as a discontinued operation.
Financial performance and condition
| Metric | 2017 | 2016 | Change or observation |
|---|---|---|---|
| Oil and gas revenue | $791,000 | $764,000 | Up $27,000, or approximately 4% |
| Oil and gas operating expenses | $1.027 million | $1.181 million | Down $154,000 |
| Corporate general and administrative expense | $408,000 | $352,000 | Up $56,000 |
| Oil and gas property impairment | $2.626 million | — | Non-cash full-cost ceiling-test charge |
| Operating loss | $3.270 million | $769,000 | Significantly increased due primarily to impairment |
| Net loss | $3.246 million | Net income of $48,000 | Loss per share was $1.59 versus earnings per share of $0.02 |
| Cash flow from continuing operations | $202,000 | $(314,000) | Improved by $516,000 |
| Cash and cash equivalents | $419,000 | $113,000 | Increased by $306,000 |
| Total assets | $4.205 million | $7.178 million | Declined primarily from the impairment |
| Total liabilities | $3.569 million | $3.459 million | Increased modestly |
| Stockholders’ equity | $636,000 | $3.719 million | Declined substantially due to the net loss |
Current assets were $522,000 versus current liabilities of $556,000, indicating a $34,000 working-capital deficit. Debt consisted of approximately $359,000 of bank debt before $35,000 of deferred borrowing costs, with $81,000 of principal due in 2018. The loans bear fixed rates of approximately 5% to 5.5% and are collateralized by oil and gas leases, real property and equipment. The asset retirement obligation was $2.770 million and remained unchanged.
2017 production was 178,000 Mcf of natural gas and 5,100 barrels of oil, compared with 155,000 Mcf and 4,200 barrels in 2016. Average realized prices were $3.81 per Mcf and $46.96 per barrel, compared with $4.23 and $41.58, respectively, in 2016.
Material changes versus the prior comparable period
- Revenue increased modestly as higher production more than offset lower average natural-gas prices. The 2016 comparison included a one-time $30,000 fee.
- Oil and gas operating expenses decreased, principally because depreciation and depletion declined by approximately $174,000.
- The company recorded a $2.626 million non-cash impairment charge after the full-cost ceiling test, reflecting revaluation of non-producing reserves. This was the principal driver of the 2017 net loss.
- Long-term debt declined, interest expense fell to $24,000 from $38,000, and $73,000 of principal was repaid.
- The company issued 90,000 common shares for approximately $163,000, increasing shares outstanding to 2,036,935 at year-end from 1,946,935.
- Cash increased by $306,000, supported by positive operating cash flow, $90,000 of financing cash inflow and limited investing activity.
- Proved reserves declined to approximately 830,000 Mcf of gas and 69,000 barrels of oil from beginning-of-year proved developed and undeveloped reserves of 3.219 million Mcf and 149,000 barrels. The filing attributes the reserve changes principally to revisions and production.
Outlook, risks, contingencies and unusual items
Management intends to pursue acquisitions of undervalued or distressed oil and gas businesses and additional leases, subject to available financing and commodity prices. The company anticipates drilling four wells during 2018 and 2019 at an estimated cost of approximately $370,000 per well, although expansion activity has previously been suspended while awaiting greater oil and gas price stability.
- The business is exposed to fluctuations in oil and gas prices, production performance, reserve estimates and the availability and cost of drilling equipment, contractors and qualified personnel.
- The company sells most natural gas to one purchaser and all oil to one purchaser; loss of a purchaser could materially affect results.
- Proved reserve estimates and the $2.7 million PV-10 are sensitive to commodity prices, production trends, operating costs, development costs and the 10% discount rate. PV-10 is not management’s estimate of current market value.
- The company had approximately $9.8 million of net operating-loss carryforwards expiring between 2018 and 2033, but maintained a full valuation allowance because realization was not considered more likely than not.
- The company disclosed a $2.770 million asset retirement obligation for plugging, abandonment and reclamation activities.
- In the Carlton litigation, a $31.16 million damages verdict was reinstated against other parties. An August 2017 arrangement was reached, subject to another appeal; management believes New Concept will have no financial responsibility and that the matter will not materially adversely affect the company.
- At December 31, 2017, $343,496 of cash exceeded FDIC insurance limits.
- The auditor issued an unqualified opinion on the financial statements and noted significant related-party transactions and balances. Management reported effective internal control over financial reporting, but the auditor was not required to provide an attestation report.
Most important facts for investors to verify
- Whether the company can sustain positive operating cash flow despite revenue below recurring operating and corporate expenses before non-cash charges.
- The assumptions supporting the major 2017 impairment, reserve revisions and reported $2.7 million PV-10.
- The timing and funding of the proposed four-well drilling program and any required external financing.
- Liquidity relative to the $556,000 of current liabilities, the $81,000 2018 debt maturity and the substantial asset retirement obligation.
- The final resolution and financial consequences, if any, of the Carlton litigation.
- Customer concentration, commodity-price sensitivity and the company’s ability to replace declining production.
- The effect of the 90,000-share issuance and the company’s continuing accumulated deficit of approximately $58.4 million.