New Concept Energy, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2013; filed March 28, 2014. The filing includes unaudited fourth-quarter data. New Concept Energy operates oil and gas properties in Ohio and West Virginia and leases and operates Pacific Pointe Retirement Inn in Oregon.
Business Context and Operations
- Oil and gas operations included 152 producing wells, 31 non-producing wells and approximately 19,375 developed acres at year-end.
- 2013 production was 194,000 Mcf of natural gas and 12,404 barrels of oil, compared with 178,000 Mcf and 8,115 barrels in 2012.
- One well drilled in late 2013 was expected to be completed in early 2014.
- Pacific Pointe has capacity for 114 residents. December 2013 occupancy was 90.0%, compared with 92.1% in December 2012; the average monthly resident rate increased to $2,290 from $2,225.
- The Company employed 52 people at December 31, 2013.
Financial Performance and Position
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Revenue | $4.222 million | $3.944 million | +$278,000 |
| Operating expenses | $5.064 million | $5.766 million | -$702,000 |
| Operating loss | $(842,000) | $(1.822 million) | Improved $980,000 |
| Net income | $426,000 | $168,000 | +$258,000 |
| Basic and diluted EPS | $0.22 | $0.09 | +$0.13 |
| Operating cash flow | $1.602 million | $501,000 | +$1.101 million |
- Oil and gas revenue increased to $1.477 million from $1.182 million, while retirement-facility revenue declined modestly to $2.745 million from $2.762 million.
- Oil and gas revenue benefited from higher production and prices. Average realized prices were $4.23 per Mcf of gas and $96.00 per barrel of oil, versus $3.59 and $92.43, respectively, in 2012.
- Oil and gas operations remained unprofitable after production costs, depletion and impairment. The segment reported a $675,000 operating loss, while the retirement facility generated $248,000 of segment operating income.
- Net income included a $1.562 million recovery related to a previously reserved affiliate note receivable. This non-operating recovery materially contributed to reported profitability.
- The Company recorded a $200,000 non-cash impairment charge for two Arkansas wells under the full-cost ceiling test, versus a $912,000 charge in 2012.
- Cash and cash equivalents increased to $1.621 million from $398,000. Current assets were $2.019 million and current liabilities were $1.271 million, implying working capital of approximately $748,000.
- Total assets were $13.308 million and stockholders’ equity was $7.072 million at year-end.
- Total debt was approximately $2.380 million, consisting principally of $1.499 million owed in connection with the Mountaineer acquisition and $881,000 of bank debt. Scheduled 2014 principal maturities were $903,000.
- The asset retirement obligation was $2.770 million. The Company paid no common-stock dividends in 2013 or 2012.
Material Changes Versus the Prior Comparable Period
- Revenue increased 7.0%, primarily from higher oil and gas production and prices.
- Operating loss narrowed substantially because of lower impairment charges, reduced corporate expenses and lower interest expense.
- Operating cash flow more than tripled, although the increase was supported by working-capital changes and non-cash items, including the affiliate receivable recovery.
- Oil and gas properties, net, declined to $9.190 million from $9.717 million despite $240,000 of development spending.
- Proved reserves increased to approximately 2.887 million Mcf of gas and 173,000 barrels of oil from 2.849 million Mcf and 103,000 barrels. Proved developed reserves increased to 719,000 Mcf of gas and 105,000 barrels of oil.
- The standardized measure of discounted future net cash flows from proved reserves increased to $12.221 million from $10.724 million. Elsewhere, the filing refers to PV-10 of approximately $12.2 million and, in Note A, approximately $11.3 million; the filing text does not clearly reconcile the difference.
Fourth-Quarter Information
- Fourth-quarter 2013 revenue was $1.134 million, compared with $1.016 million in the fourth quarter of 2012.
- Fourth-quarter 2013 net income was $124,000, or $0.06 per share, compared with $84,000, or $0.04 per share, in the fourth quarter of 2012.
- The fourth quarter included the $200,000 oil and gas impairment charge.
Guidance, Outlook, Risks and Unusual Items
- Management intends to pursue acquisitions of undervalued or distressed oil and gas businesses and additional leases, while retaining its interest in Pacific Pointe. No quantified earnings, production or capital-spending guidance was provided.
- The Company sells most natural gas to one purchaser and all oil to one purchaser, creating customer-concentration risk.
- Oil and gas results are exposed to commodity prices, reserve-estimation changes, drilling and equipment availability, regulatory requirements and competition from larger, better-capitalized operators.
- Pacific Pointe faces competition from retirement communities, home-health providers, community programs and nursing homes. Labor costs may be affected by minimum-wage increases.
- A Texas appellate ruling imposed potential liability on the Company in the Carlton litigation under an alter-ego theory for approximately $66.5 million of actual damages plus exemplary damages. The matter was before the Texas Supreme Court after oral arguments in September 2013; the Company disputed liability and recorded no provision. The auditor stated that the outcome was uncertain and could change in the near term.
- The Company paid $791,960 in February 2014 to satisfy the Chesapeake judgment. It continues to pursue compensation for an estimated 70,000 Mcf of gas withheld by Chesapeake.
- Related-party arrangements resulted in approximately $1.6 million of Company obligations to Pillar being forgiven in exchange for reducing the affiliate receivable from Prime Income Asset Management. The Company recorded the related recovery through the affiliate arrangement.
- The Company had approximately $7.4 million of net operating loss carryforwards expiring between 2014 and 2027, but maintained a full valuation allowance against deferred tax assets. No income tax expense was recorded.
- Management concluded disclosure controls and internal control over financial reporting were effective; the independent auditor did not provide an internal-control attestation because the Company was not required to have one.
Important Facts for Investors to Verify
- Reconcile the reported reserve PV-10 figures of $12.2 million and $11.3 million.
- Assess the likelihood and potential financial impact of the Carlton litigation, for which no liability was recorded.
- Verify the treatment and collectability of the related-party affiliate receivable and the recurring nature of the related-party debt-forgiveness recoveries.
- Review the $903,000 of scheduled 2014 debt maturities against expected operating cash flow and liquidity.
- Determine whether oil and gas operations can become profitable before future depletion, development costs, asset-retirement obligations and potential ceiling-test impairments.
- Monitor dependence on single purchasers, commodity prices, Pacific Pointe occupancy and the January 2017 expiration of its principal facility lease.