Business Context and Reporting Period
New Concept Energy, Inc. (NCE) filed a Form 10-Q for the quarterly and six-month periods ended June 30, 2009. The Company operates in two primary segments: oil and gas exploration and production in Ohio and West Virginia, and a retirement community facility in King City, Oregon. NCE is classified as a non-accelerated filer and a smaller reporting company.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2009 | Six Months Ended June 30, 2008 |
|---|---|---|
| Total Revenue | $2,117,000 | $1,403,000 |
| Net Income (Loss) | $(61,000) | $15,023,000 |
| Operating Cash Flow | $56,000 | $(286,000) |
| Cash and Equivalents (End of Period) | $63,000 | $159,000 |
| Total Assets | $24,329,000 | $24,058,000 |
| Total Liabilities | $3,898,000 | $3,566,000 |
| Long-term Debt | $1,143,000 | $1,026,000 |
| Accumulated Deficit | $(38,428,000) | $(38,367,000) |
Revenue Breakdown (Six Months 2009): Oil and gas operations generated $681,000, while real estate operations generated $1,436,000.
Liquidity: Current assets totaled $11.7 million against current liabilities of $2.4 million. The Company holds a significant related-party note receivable of approximately $10.7 million.
Material Changes Versus Prior Period
- Net Income Volatility: The Company reported a net loss of $61,000 for the six months ended June 30, 2009, a sharp decline from net income of $15.0 million in the same period in 2008. The 2008 income was driven by a one-time $16.4 million gain on the sale of leasehold interests, which did not recur in 2009.
- Oil and Gas Operations: Revenue from oil and gas operations ($681,000) and related expenses ($757,000) were recorded in 2009 following the acquisition of these assets. No such revenue or expenses existed in the comparable 2008 period.
- Real Estate Operations: Revenue increased slightly to $1.436 million from $1.403 million year-over-year, while operating expenses increased to $1.406 million from $1.1 million.
- Interest Income: Interest income increased to $294,000 from $250,000, attributed to a larger principal balance on related-party notes, despite lower prime lending rates.
- Interest Expense: Interest expense decreased significantly to $61,000 from $230,000, due to the payoff of interest-bearing debt in 2008 and reduced rates.
Outlook, Risks, and Contingencies
Management Commentary: Management noted that operating results for the first half of 2009 are not necessarily indicative of future results. The Company continues to pursue acquisitions and development of proved reserves using the full cost accounting method. Corporate general and administrative expenses decreased due to improved employee efficiencies.
Risks and Contingencies:
- Legal Dispute: Chesapeake Exploration Limited Partnership and Chesapeake Operating, Inc. filed a lawsuit in April 2007 regarding a joint operating agreement for two gas wells. Chesapeake invoiced the Company for $556,217 in additional costs, which the Company disputes as unreasonable and unnotified. The Company has requested a reconciliation of costs.
- Related Party Concentration: A significant portion of current assets ($10.7 million) consists of notes receivable from related parties (Eurenergy Resources Corporation and Prime Income Asset Management, Inc.). The collectability of these notes is a material risk.
- Deferred Tax Assets: The Company has established a 100% valuation allowance against its deferred tax assets due to uncertainty regarding future taxable income.
- Market Risk: The Company has minimal exposure to interest rate risk as nearly all debt is fixed-rate. However, oil and gas revenues are subject to commodity price fluctuations.
Investor Verification Checklist
- Verify the collectability and status of the $10.7 million related-party note receivable from Prime Income Asset Management, Inc.
- Review the status of the pending litigation with Chesapeake Exploration regarding the $556,217 disputed invoice.
- Assess the sustainability of the retirement community's occupancy rates and rental income given the increase in operating expenses.
- Confirm the Company's ability to maintain liquidity with only $63,000 in cash and cash equivalents.
- Monitor the impact of the new SEC oil and gas reporting rules (Release No. 33-8995) on future reserve disclosures and financial statements.