New Concept Energy, Inc. — 2017 First-Quarter Form 10-Q Summary
Business Context and Reporting Period
New Concept Energy, Inc. operates oil and gas wells and mineral leases in Ohio and West Virginia through wholly owned subsidiaries. The company also operated a 114-resident retirement center in Oregon until March 30, 2017, when the facility was sold by its owner and the lease terminated. The retirement-center activity is reported as discontinued operations. The filing covers the three months ended March 31, 2017, and was signed May 15, 2017.
Financial Results and Key Metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Oil and gas revenue | $195,000 | $219,000 | Down $24,000 |
| Operating expenses | $356,000 | $563,000 | Down $207,000 |
| Operating loss | $(161,000) | $(344,000) | Improved $183,000 |
| Loss from continuing operations | $(172,000) | $(351,000) | Improved $179,000 |
| Discontinued operations income | $13,000 | $55,000 | Down $42,000 |
| Net loss applicable to common shares | $(159,000) | $(296,000) | Improved $137,000 |
| Basic and diluted loss per share | $(0.08) | $(0.15) | Improved $0.07 |
- Operating loss as a percentage of reported oil and gas revenue was approximately 82.6%; net loss as a percentage of that revenue was approximately 81.5%. These percentages are not fully representative of consolidated activity because the retirement-center results are presented in discontinued operations.
- Oil and gas operating expenses declined to $256,000 from $396,000, principally due to lower payroll and general operating costs. Corporate general and administrative expense declined to $100,000 from approximately $167,000-$169,000 as presented in different portions of the filing.
- Net cash provided by operating activities was $429,000, compared with $109,000 in the prior-year quarter. Depreciation, depletion and amortization was $148,000, and the company recorded a $24,000 write-off of retirement-center assets.
- Investing cash flow was $(12,000), consisting primarily of a $10,000 investment in undeveloped land and $2,000 of fixed-asset additions. Financing cash flow was $(10,000) from notes-payable repayments.
- Cash and cash equivalents increased to $520,000 at March 31, 2017 from $113,000 at December 31, 2016, but remained below the $547,000 reported at March 31, 2016.
- Total assets were $7.291 million. Oil and gas properties, net, were $5.551 million.
- Current liabilities were $668,000 on the consolidated balance sheet, versus current assets of $715,000, implying a current ratio of approximately 1.1. The MD&A states current liabilities of $688,000, creating an unexplained $20,000 inconsistency.
- Notes payable totaled $382,000, including $89,000 classified as current and $293,000 as long-term. The asset retirement obligation was $2.770 million.
- Shareholders’ equity declined to $3.560 million from $3.719 million, primarily reflecting the quarterly net loss. Common shares outstanding remained 1,946,935.
Material Changes Versus the Prior Comparable Period
- Oil and gas revenue decreased approximately 11%, attributed to changes in production and the prices received for oil.
- Oil and gas operating costs decreased approximately 35%, while corporate general and administrative expense decreased approximately 40%.
- The continuing-operations loss narrowed by approximately 51%, and the consolidated net loss narrowed by approximately 46%.
- Operating cash flow increased by $320,000, helped by noncash depreciation and changes in operating liabilities and other assets.
- The Oregon retirement-center operations were discontinued following termination of the lease on March 30, 2017. Discontinued operations contributed $13,000 in the quarter, compared with $55,000 in Q1 2016.
- Cash increased substantially from year-end despite the continuing operating loss, primarily because of operating cash inflows and working-capital changes.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management states that quarterly results are not necessarily indicative of full-year 2017 results and provides no quantitative earnings or revenue guidance.
- The company expects natural-gas oversupply and depressed market prices to persist. A gas-price agreement provided $4.53 per Mcf for the five years ending April 2017; the filing does not clearly state the post-April 2017 pricing arrangement.
- The company uses the full-cost method for oil and gas properties and is subject to quarterly ceiling tests. A decline in reserve values or commodity prices could require an impairment charge.
- A deferred tax asset is fully offset by a valuation allowance because management could not conclude that realization was more likely than not.
- Carlton Energy Group litigation remains unresolved. The filing indicates potential damages in a range of approximately $32 million, while management believes any adverse outcome is fully secured by alternative security exceeding $56 million and that the company’s maximum exposure would be significantly lower. The ultimate outcome and exposure remain uncertain.
- Other ordinary-course lawsuits are not expected by management to materially affect financial condition, results of operations, or cash flows.
- Nearly all debt bears fixed interest rates, limiting exposure to changes in market interest rates.
- Management reported that disclosure controls were effective and that no material change occurred in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Reconcile the $668,000 current-liability balance-sheet figure with the $688,000 amount stated in MD&A.
- Confirm the terms and continuation of gas pricing after the $4.53-per-Mcf agreement expired in April 2017.
- Review the Carlton litigation docket, security arrangements, and potential residual exposure to the company.
- Assess the sustainability of positive operating cash flow given the continuing operating losses and reliance on working-capital movements and noncash adjustments.
- Evaluate the effect of the retirement-center disposition on future revenue, expenses, cash flow, asset balances, and comparative reporting.
- Review oil and gas reserve values, production volumes, commodity-price assumptions, and future full-cost ceiling-test exposure.