Business Context and Reporting Period
New Concept Energy, Inc. filed its Form 10-K for the fiscal year ended December 31, 2016, including fourth-quarter information. The company primarily 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, 31 non-producing wells and approximately 19,375 developed acres. The company also operated Pacific Pointe Retirement Inn in Oregon, but that operation was classified as discontinued because its lease terminated on March 30, 2017.
Financial Performance and Condition
| Metric | 2016 | 2015 |
|---|---|---|
| Revenue from continuing operations | $764,000 | $820,000 |
| Operating expenses | $1.533 million | $5.122 million |
| Operating income (loss) | $(769,000) | $(4.302 million) |
| Income (loss) from continuing operations | $44,000 | $(2.954 million) |
| Income (loss) from discontinued operations | $4,000 | $332,000 |
| Net income (loss) | $48,000 | $(2.622 million) |
| Basic and diluted earnings per share | $0.02 | $(1.35) |
| Cash flow from continuing operations | $(314,000) | $566,000 |
| Cash and cash equivalents | $113,000 | $473,000 |
| Total assets | $7.178 million | $8.875 million |
| Total liabilities | $3.459 million | $5.204 million |
| Total debt | $392,000 | $2.042 million |
| Stockholders’ equity | $3.719 million | $3.671 million |
Operating margin was approximately negative 101% in 2016, compared with approximately negative 525% in 2015. Net margin was approximately 6% in 2016, compared with approximately negative 320% in 2015; the 2016 result was substantially affected by non-operating and unusual items. Current assets were $438,000 versus current liabilities of $393,000, providing limited reported working-capital coverage.
Oil and gas production declined to 155,000 Mcf of natural gas and 4,200 barrels of oil in 2016, from 161,000 Mcf and 6,100 barrels in 2015. Average realized prices were $4.23 per Mcf and $41.58 per barrel in 2016. Proved reserves were approximately 3.2 million Mcf of gas and 149,000 barrels of oil, with a reported PV-10 of approximately $6.3 million.
Material Changes Versus the Prior Comparable Period
- Revenue declined by approximately $56,000, primarily because of lower production volumes; 2016 revenue included a one-time $30,000 fee.
- Oil and gas operating expenses decreased to $1.181 million from $1.800 million, while corporate general and administrative expense declined to $352,000 from $605,000.
- The 2015 results included a $2.717 million non-cash full-cost ceiling impairment charge; no comparable impairment was recorded in 2016.
- The company settled acquisition-related non-interest-bearing obligations for $650,000, versus a carrying amount of approximately $1.538 million, recognizing an $888,000 gain. Total debt fell by approximately $1.650 million.
- Cash declined by $360,000 during 2016. Investing cash flow was positive $686,000, principally reflecting $700,000 of proceeds from the sale of land, while financing cash flow was negative $732,000 from debt repayments.
- Pacific Pointe revenue declined to $2.665 million from $2.997 million, and average December occupancy declined to 78.00% from 88.91%. The retirement facility generated only $4,000 of discontinued-operation income in 2016 versus $332,000 in 2015.
Outlook, Risks, Contingencies and Unusual Items
- Management intends to pursue acquisitions of undervalued or distressed oil and gas businesses and additional leases, but expansion is dependent on financing availability and oil and gas prices. Expansion activity on existing acreage had been suspended until commodity prices improved.
- The company sells most natural gas to one purchaser and all oil to one purchaser, creating customer-concentration risk. Commodity-price volatility, production declines, competition for leases and equipment, and regulatory and environmental obligations remain significant risks.
- The balance sheet includes a $2.770 million asset-retirement obligation related to well plugging and site reclamation.
- The company reported approximately $9.3 million of net operating loss carryforwards, but maintained a full valuation allowance because realization of the related deferred tax benefit was not considered more likely than not.
- In the Carlton Energy litigation, the Texas Court of Appeals reinstated an actual-damages award of approximately $31.16 million in August 2016, with a motion for rehearing pending at the filing date. Management expects a possible new trial and believes any adverse outcome is secured by a court deposit exceeding $56 million. No liability was accrued; the auditors noted that the outcome remains uncertain and could change in the near term.
- The fourth quarter reported $888,000 of debt-settlement gain and $50,000 of land-sale gain, producing $738,000 of continuing-operations income for the quarter despite operating losses. These gains are not indicative of recurring profitability.
- No dividends were paid in 2016 or 2015, and the company had no share repurchase program activity.
Most Important Facts to Verify
- Whether the Carlton litigation will result in a new trial, an enforceable judgment, or any liability beyond the deposited security.
- Whether $113,000 of cash and $438,000 of current assets are sufficient to fund operations and debt maturities after the retirement-community lease termination.
- The sustainability of oil and gas production, realized prices, reserve estimates and the reported $6.3 million PV-10.
- Whether operating cash flow can return to positive levels without additional asset sales or financing.
- The terms and remaining collateral support for the $392,000 of debt and the company’s $2.770 million asset-retirement obligation.
- The effect of discontinuing Pacific Pointe on future revenue, expenses and liquidity.