New Concept Energy, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2015; filed August 13, 2015. Financial statements are unaudited and amounts are generally in thousands, except per-share data. The company operates oil and gas properties in Ohio and West Virginia and a 114-resident retirement community in Oregon.
Key Financial Metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | $1,003,000 | $1,892,000 |
| Operating income (loss) | $(252,000) | $(642,000) |
| Net income (loss) | $110,000 | $424,000 |
| Net income (loss) per share | $0.06 | $0.22 |
| Operating margin | (25.1%) | (33.9%) |
| Net margin | 11.0% | 22.4% |
- Revenue mix: Six-month oil and gas revenue was $431,000, while retirement-community revenue was $1,461,000.
- Cash flow: Six-month operating cash flow was $340,000, investing cash flow was $30,000, and financing cash flow was $(233,000). Cash increased from $300,000 at December 31, 2014 to $437,000 at June 30, 2015.
- Liquidity: Current assets were $936,000 versus current liabilities of $1,192,000, implying a current ratio of approximately 0.79x.
- Debt and obligations: Current notes payable were $775,000 and long-term notes payable were $1,305,000. The balance sheet also included a $2,770,000 asset retirement obligation. Total liabilities were $5,267,000.
- Assets and equity: Total assets were $11,984,000 and stockholders’ equity was $6,717,000 at June 30, 2015. The accumulated deficit was $52,142,000.
Material Changes Versus the Prior Comparable Period
- Three-month revenue declined 17.3% from $1,213,000 to $1,003,000; six-month revenue declined 17.1% from $2,282,000 to $1,892,000.
- Oil and gas revenue declined 46.6% for the quarter and 48.0% for the six months, primarily because of lower oil prices. First-quarter weather also hampered operations.
- Retirement-community revenue increased modestly to $744,000 for the quarter and $1,461,000 for the six months, primarily due to rate increases.
- Quarterly net results improved from a $99,000 loss to $110,000 of income, and six-month results improved from a $139,000 loss to $424,000 of income. The improvement was principally driven by a $386,000 quarterly and $1,124,000 six-month recovery of a previously fully reserved receivable.
- Operating losses worsened to $252,000 for the quarter and $642,000 for the six months, reflecting weak oil and gas results and higher retirement-community operating costs.
- Corporate general and administrative expense declined to $155,000 for the quarter and $309,000 for the six months, primarily because of lower legal costs.
- Accounts payable declined from $673,000 at year-end to $165,000 at June 30, while cash increased by $137,000.
Outlook, Risks, Contingencies, and Unusual Items
- Oil and gas outlook: Management expects natural-gas oversupply and depressed market prices to persist. Under a price-fixing agreement, the company receives $4.53 per MCF through April 2017.
- Land sale: On June 30, 2015, the company sold a portion of undeveloped land for $580,000, consisting of $116,000 in cash and a $415,000 note receivable over 10 years. The property was sold at book value, and the cash proceeds were used to repay bank debt.
- Litigation: In the Carlton Energy litigation, the Texas Supreme Court ruled that the company was an alter ego of another defendant, rejected reinstatement of a $66.5 million damages award as speculative, and remanded the case for further proceedings regarding possible actual damages. Management believes an unfavorable outcome is reasonably possible but that the potential exposure is fully secured by alternative security deposited with the court. The ultimate liability remains uncertain.
- Liquidity risk: Current liabilities exceeded current assets, and the company continues to have debt repayments, asset retirement obligations, and capital requirements for its oil and gas operations.
- Accounting sensitivity: Oil and gas properties are accounted for under the full-cost method and are subject to a quarterly ceiling test based on discounted future net revenues. Commodity prices and reserve estimates could materially affect carrying values.
- Tax assets: The company maintained a 100% valuation allowance against its deferred tax asset because realization was not considered more likely than not.
- Other risks: The filing cites risks involving oil and gas pricing, occupancy and market rates at the retirement community, labor and maintenance costs, financing availability, competition, permitting, construction and environmental matters. Nearly all debt bears fixed interest rates, limiting interest-rate exposure.
Investor Verification Points
- Verify the collectability and accounting treatment of the $1,124,000 receivable recovery and its nonrecurring effect on reported earnings.
- Monitor the Carlton litigation, including any subsequent damages determination and the adequacy of deposited security.
- Reconcile current liabilities, debt maturities, and asset retirement obligations against available cash and operating cash flow.
- Assess the sustainability of oil and gas production and pricing, including the $4.53 per MCF fixed-price arrangement and exposure to oil prices.
- Review retirement-community occupancy, rate increases, operating costs, and lease obligations.
- Confirm the effect of the land-sale note receivable and the timing of related cash collections.
- Evaluate potential oil and gas full-cost ceiling-test impairment if commodity prices or reserve estimates deteriorate.