Business Context and Reporting Period
Company: New Concept Energy, Inc. (NCE)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2010
Business Overview: NCE operates two primary segments: oil and gas exploration/production in Ohio and West Virginia, and a single retirement community (Pacific Pointe) in Oregon. The company focuses on reworking existing wells and acquiring undervalued energy assets. As of December 31, 2010, it operated 121 producing wells.
Key Financial Metrics
| Metric (in thousands) | 2010 | 2009 |
|---|---|---|
| Total Revenue | $4,213 | $4,098 |
| Operating Expenses | $4,257 | $6,827 |
| Operating Profit (Loss) | $(44) | $(2,729) |
| Net Earnings (Loss) | $(11) | $(2,210) |
| Net Cash from Operating Activities | $104 | $736 |
| Cash and Cash Equivalents | $59 | $155 |
| Total Assets | $24,067 | $25,121 |
| Total Liabilities | $5,796 | $6,839 |
| Long-Term Debt | $2,984 | $2,332 |
| Asset Retirement Obligation | $2,573 | $2,450 |
Oil & Gas Specifics:
- Proved Reserves (Dec 31, 2010): 6.95 million Mcf Gas, 72 thousand Bbls Oil.
- Standardized Measure of Discounted Future Net Cash Flows: $12.4 million.
- Average Sales Price (2010): $6.37 per Mcf.
- Average Production Cost (2010): $4.92 per Mcf.
Material Changes vs. Prior Period
- Profitability Improvement: The company significantly reduced its operating loss from $(2.7) million in 2009 to $(44) thousand in 2010. This was driven by a $2.6 million decrease in operating expenses, primarily due to the absence of a $1.7 million non-cash impairment charge on oil and gas properties recorded in 2009.
- Revenue Growth: Total revenue increased by 2.8% to $4.2 million, attributed to higher occupancy rates at the retirement facility.
- Cash Flow Decline: Net cash provided by operating activities dropped to $104,000 from $736,000 in 2009, despite improved operating income, due to changes in working capital and interest receivables.
- Debt Increase: Long-term debt increased by approximately $652,000, largely due to the accretion of non-interest-bearing obligations related to the 2008 acquisition of Mountaineer State Energy.
Guidance, Outlook, Risks, and Contingencies
Outlook and Strategy: Management intends to focus on oil and gas investments, specifically reworking existing wells and drilling new wells in strategic locations. A "behind-the-pipe" drilling schedule was tentatively scheduled for 2011, subject to market conditions. The retirement community is expected to remain a profitable, albeit non-core, part of operations.
Legal Contingencies:
- Chesapeake Litigation: In March 2011, Chesapeake received a summary judgment award of $686,874 plus legal fees against NCE regarding a joint operating agreement dispute. NCE intends to appeal. The company notes it has claims to $196,000 in historical gas sales held by Chesapeake and has recorded an estimated value of $491,108 for its interest in the wells.
- Sterling Bankruptcy: NCE is named as a defendant in a lawsuit filed by the Sterling Exploration bankruptcy trustee alleging conspiracy and breach of fiduciary duty. Management believes the case lacks merit.
Risks:
- Customer Concentration: One purchaser (Dominion Field Services) accounts for approximately 86% of natural gas production sales.
- Related Party Exposure: The company holds a significant note receivable of $10.1 million from a related party (Prime Income Asset Management, Inc.).
- Commodity Prices: Reserves estimates and profitability are highly sensitive to natural gas and oil prices.
Investor Verification Checklist
- Related Party Receivables: Verify the collectability of the $10.1 million note receivable from Prime Income Asset Management, Inc., which represents a significant portion of total assets.
- Legal Exposure: Monitor the status of the Chesapeake summary judgment appeal and the Sterling bankruptcy litigation to assess potential cash outflows.
- Customer Concentration: Assess the risk associated with the loss of the single purchaser representing 86% of gas sales.
- Reserve Estimates: Review the independent engineer's report (Lee Keeling & Associates) regarding the 6.95 million Mcf of proved gas reserves and the $12.4 million standardized measure of future cash flows.
- Liquidity Position: Evaluate the company's ability to fund future drilling plans given the low cash balance of $59,000 and reliance on operating cash flow.