New Concept Energy, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2012. The unaudited consolidated statements cover New Concept Energy and its majority-owned subsidiaries. The company operates oil and gas properties in Ohio and West Virginia and a 114-resident retirement community in Oregon.
Financial performance and position
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | $988,000 vs. $1,013,000 | $1,952,000 vs. $2,022,000 |
| Operating income (loss) | $(217,000) vs. $(24,000) | $(1,426,000) vs. $(87,000) |
| Net income (loss) | $(169,000) vs. $66,000 | $(1,436,000) vs. $163,000 |
| Net loss per share | $(0.09) vs. $0.03 | $(0.74) vs. $0.08 |
Six-month revenue declined approximately 3.5% year over year. The implied operating margin was approximately negative 73% in 2012 versus negative 4% in 2011, primarily because of a $912,000 oil and gas property impairment. The quarter's implied operating margin was approximately negative 22%.
- Segment revenue: Six-month oil and gas revenue increased to $615,000 from $560,000, while retirement-community revenue declined to $1,337,000 from $1,462,000.
- Costs: Six-month oil and gas operating expense rose to $924,000 from $700,000, principally due to higher depletion. Retirement-property operating and lease expenses were $1,181,000 versus $1,095,000. Corporate general and administrative expense increased to $293,000 from $250,000, largely due to legal fees.
- Cash flow: Six-month operating cash flow was reported as $(3,000) in the MD&A, compared with $83,000 provided in 2011. Investing cash flow was $(32,000), and financing cash flow was $20,000. Cash declined to $100,000 at June 30 from $109,000 at year-end 2011.
- Liquidity: Current assets were $321,000 against current liabilities of $492,000, implying a current ratio of approximately 0.65. Accounts receivable from oil and gas sales increased to $216,000 from $167,000.
- Debt and obligations: Notes payable were $2.329 million, related-party payables were $1.312 million, and the asset-retirement obligation was $2.770 million at June 30. Total liabilities were $7.393 million versus $6.972 million at December 31, 2011.
- Equity: Stockholders’ equity declined to $5.042 million from $6.478 million, reflecting the six-month loss. The company reported 1,946,935 common shares outstanding as of August 13, 2012.
Material changes versus the prior comparable period
- Net income of $163,000 in the first six months of 2011 changed to a net loss of $1.436 million in 2012.
- Oil and gas revenue benefited by approximately $130,000 from wells drilled in late 2011 but was reduced by approximately $75,000 because of lower natural gas prices.
- Retirement-community revenue fell primarily because of lower resident occupancy.
- Interest income fell to zero from $239,000 after the company fully reserved a note receivable and related accrued interest because of collectability concerns.
- Interest expense increased to $118,000 from $62,000 due to financing obtained in late 2011 to drill wells.
- Oil and gas property, net, declined to $9.930 million from $11.141 million, principally reflecting depletion and the impairment charge.
Outlook, risks, contingencies, and unusual items
- In April 2012, the company entered into a gas-price agreement providing $4.53 per Mcf for five years through April 2017. Despite the fixed price, application of the required full-cost accounting ceiling test resulted in a $912,000 impairment because of reserve valuation assumptions.
- Management stated that natural gas oversupply and depressed prices may persist and does not anticipate a near-term increase in realized gas prices. No formal earnings or revenue guidance was provided.
- The company faces a material litigation risk in the Carlton Energy matter. A Texas appellate decision reinstated a $66.5 million actual-damages award and exemplary damages against the company as an alleged alter ego. The company petitioned the Texas Supreme Court and maintains that it should have no liability; the ultimate exposure is unresolved.
- Chesapeake obtained a summary judgment award of $686,874 plus legal fees relating to disputed well costs. The company has appealed, has recorded a $491,000 liability, and Chesapeake is withholding the company’s share of gas proceeds pending resolution.
- Management identified risks including access to debt or equity financing, commodity prices, occupancy and rental rates, operating costs, competition, permitting and construction delays, and the ability to maintain cash flow.
- Nearly all debt carries fixed interest rates, so management considers interest-rate exposure minimal. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Reconcile the statement of cash flows with the MD&A: the table labels operating cash flow as $3,000 provided or used, while the MD&A describes $(3,000) used.
- Assess liquidity, including only $100,000 of cash, current liabilities exceeding current assets, and the company’s ability to fund operations and obligations.
- Review the potential impact of the Carlton litigation and the Chesapeake judgment, including whether recorded liabilities adequately reflect possible exposure.
- Evaluate the sustainability of oil and gas production, the $4.53 per Mcf price arrangement, reserve assumptions, and future full-cost ceiling-test impairment risk.
- Monitor retirement-community occupancy and revenue trends, which declined materially year over year.
- Consider the effect of the unresolved note receivable, related-party obligations, asset-retirement obligation, and accumulated deficit of $53.817 million.