New Concept Energy, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2018, filed March 29, 2019. The filing reports annual results and unaudited quarterly data, including fourth-quarter 2018. Amounts below are in thousands unless otherwise noted.
Business Context
New Concept Energy operates oil and gas wells and mineral leases in Ohio and West Virginia through wholly owned subsidiaries. At year-end, it had 153 producing wells, 44 non-producing wells and approximately 19,375 to 20,000 acres of developed mineral interests. The company reports one primary business segment: oil and gas operations.
Financial Performance and Position
| Metric | 2018 | 2017 |
|---|---|---|
| Oil and gas revenue | $682 | $791 |
| Operating expenses | $1,197 | $4,061 |
| Operating loss | $(515) | $(3,270) |
| Net loss attributable to common shares | $(484) | $(3,246) |
| Loss per common share | $(0.21) | $(1.59) |
| Operating cash flow | $(637) | $202 |
| Investing cash flow | $(3,960) | $14 |
| Financing cash flow | $4,539 | $90 |
| Cash and cash equivalents | $361 | $419 |
| Total assets | $7,882 | $4,205 |
| Total liabilities | $3,121 | $3,569 |
| Stockholders’ equity | $4,761 | $636 |
Revenue declined approximately 14% year over year, primarily because of lower natural gas pricing. Production fell to approximately 130,000 Mcf of natural gas and 4,200 barrels of oil from 178,000 Mcf and 5,100 barrels, respectively, in 2017. Average realized prices were $2.91 per Mcf and $61.46 per barrel in 2018, compared with $3.81 per Mcf and $46.96 per barrel in 2017.
Operating expenses excluding the 2017 impairment declined to $1,197 from $1,435 on a comparable basis. Oil and gas operating expenses were $844, corporate general and administrative expenses were $353, and depreciation, depletion and amortization was $253. The approximate operating margin was negative 75.4% in 2018; the approximate net margin was negative 71.0%.
The company had current assets of $4,496 and current liabilities of $150, producing reported working capital of approximately $4,346. Current assets included $4,017 of a related-party note receivable from American Realty Investors, Inc. Cash declined by $58 during 2018 despite the equity financing and ended at $361.
Debt consisted of approximately $260 of net notes payable, including $59 classified as current, with stated interest rates of approximately 5% to 5.5%. The company also reported a $2,770 asset retirement obligation. Debt is generally fixed-rate, limiting exposure to changes in market interest rates.
Material Changes Versus the Prior Comparable Period
- On December 4, 2018, the company issued 3,000,000 common shares to related party Realty Advisors, Inc. for $4,500 in cash, increasing equity by approximately $4,440 after issuance costs.
- The issuance increased shares outstanding to approximately 5.132 million and gave Realty Advisors approximately 59.6% ownership, resulting in a change in control.
- Of the offering proceeds, $4,000 was loaned to related party American Realty Investors, Inc. under a 6% note maturing September 30, 2019.
- Net loss improved substantially from $(3,246) to $(484), primarily because 2017 included a $2,626 non-cash full-cost ceiling-test impairment of oil and gas properties. No comparable impairment was recorded in 2018.
- Operating cash flow deteriorated from positive $202 to negative $637, while investing cash flow declined to negative $3,960, principally because of the related-party note issuance.
- Total liabilities declined by $448, largely reflecting lower accounts payable and debt. Equity increased from $636 to $4,761 after the stock issuance.
- Fourth-quarter 2018 revenue was $138 and the quarterly loss allocable to common shareholders was $55, or approximately $0.00 per share as presented in the filing.
Reserves, Outlook, Risks and Unusual Items
Independent engineers estimated year-end proved reserves of approximately 180,000 Mcf of natural gas and 27,541 barrels of oil, plus probable and possible natural gas reserves of approximately 1,566,000 Mcf and 522,000 Mcf, respectively. The filing reports a standardized measure or PV-10 of approximately $2.971 million in the supplemental reserve information; another narrative disclosure states approximately $2.9 million.
Management suspended expansion activity in recent years pending greater oil and gas price stability but stated that it anticipated drilling four wells during 2019 and 2020 at an estimated cost of $370 per well. Execution depends on financing and commodity prices.
Key risks include volatile oil and gas prices, dependence on a limited number of purchasers, competition for leases, drilling equipment and personnel, reserve-estimation uncertainty, and the potential for future full-cost ceiling-test impairments. The company sells most natural gas to one purchaser and all oil to one purchaser.
The company has approximately $9.9 million of net operating loss carryforwards, but maintains a full valuation allowance because realization of the related deferred tax asset is not considered more likely than not.
In Carlton litigation, a $31.16 million damages verdict was reinstated against other defendants. Management states that the company should have no financial responsibility under an August 2017 arrangement and does not expect a material adverse effect, subject to the outcome of another appeal. The independent auditor highlighted significant related-party transactions and balances.
The company paid no common dividends and repurchased no shares during 2018. Management reported effective disclosure controls and internal control over financial reporting; the auditor was not required to provide an attestation opinion on internal controls.
Important Facts Investors Should Verify
- Whether American Realty Investors, Inc. repaid the $4,017 related-party note receivable when it matured in September 2019 and whether the stated 6% return was received.
- The effect of Realty Advisors’ control position on governance, related-party transactions, strategy and minority shareholder rights.
- Whether planned 2019–2020 drilling occurred, including funding sources and actual cost per well.
- Current production volumes, realized commodity prices, purchaser concentration and reserve revisions.
- Whether future commodity prices could trigger another full-cost ceiling-test impairment.
- The company’s ability to fund negative operating cash flow, asset retirement obligations and ongoing debt payments.
- The final outcome of the Carlton litigation and any potential liability despite management’s stated assessment.
- The discrepancy between the narrative PV-10 disclosure of approximately $2.9 million and the supplemental table showing $2.971 million.