New Concept Energy, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2014. The company operates oil and gas properties in Ohio and West Virginia and leases and operates a 114-resident independent-living retirement community in Oregon. It had 153 producing wells, 31 non-producing wells, approximately 19,375 developed acres and 49 employees at year-end.
Financial performance and position
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Revenue | $4.363 million | $4.222 million | +3.3% |
| Operating expenses | $5.253 million | $5.064 million | +3.7% |
| Operating loss | $890,000 | $842,000 | Loss increased |
| Net income (loss) | $(779,000) | $426,000 | Declined $1.205 million |
| Basic and diluted EPS | $(0.40) | $0.22 | Declined |
| Operating margin | $(20.4%) | $(19.9%) | Weakened |
| Net margin | $(17.9%) | 10.1% | Turned negative |
| Cash from operating activities | $(282,000) | $1.602 million | Declined $1.884 million |
| Cash used in investing activities | $954,000 | $401,000 | Increased |
| Cash and cash equivalents | $300,000 | $1.621 million | Declined $1.321 million |
| Total assets | $12.274 million | $13.308 million | Declined |
| Total debt | $2.309 million | $2.380 million | Declined |
| Total liabilities | $5.981 million | $6.236 million | Declined |
| Stockholders’ equity | $6.293 million | $7.072 million | Declined |
Current assets were $698,000 compared with current liabilities of $1.783 million, implying a current ratio of approximately 0.39. The company reported fixed-rate debt, with bank debt bearing interest of approximately 5% to 5.5%. An asset retirement obligation of $2.770 million remained unchanged.
Business and segment developments
- Oil and gas revenue was $1.489 million, compared with $1.477 million in 2013. Production declined to 159,000 Mcf of natural gas and 10,459 barrels of oil from 194,000 Mcf and 12,404 barrels, respectively.
- Average realized natural gas pricing increased to $4.53 per Mcf from $4.23; average oil pricing declined to $90.82 per barrel from $96.00.
- Oil and gas operations generated a segment loss of $474,000, compared with a $675,000 loss in 2013, excluding corporate results and other allocations.
- Retirement-community revenue increased to $2.874 million from $2.745 million, primarily from rate increases. December occupancy declined to 85.5% from 90.0%, while the average monthly rate declined to $2,235 from $2,290.
- Corporate general and administrative expense increased to $823,000 from $500,000, principally because of consulting fees related to oil and gas operations and acquisition opportunities.
- The company acquired 7.4 acres of undeveloped land in DeSoto, Texas, for approximately $624,000 for investment and potential multifamily development.
Material changes and unusual items
- The 2014 loss reflects operating expenses exceeding revenue and the absence of the significant affiliate note-receivable recovery recognized in 2013. The 2013 results included a $1.562 million bad-debt recovery.
- No oil and gas impairment charge was recorded in 2014, compared with a $200,000 full-cost ceiling impairment charge in 2013. A $912,000 impairment charge was recorded in 2012.
- Interest expense declined to $91,000 from $114,000 as debt owed to former oil and gas owners was reduced.
- Cash declined substantially because of the operating cash outflow, $954,000 of investing expenditures and $85,000 of financing cash outflow. Investing included $650,000 for real estate held for investment.
- The company paid $791,960 in February 2014 to satisfy a Chesapeake judgment bond. It continues to claim approximately 70,000 Mcf of gas withheld from production; BHP Billiton began paying the company from current production in 2014.
Reserves, liquidity, outlook and risks
Independent engineers estimated proved reserves at December 31, 2014 of approximately 2.866 million Mcf of gas and 139,000 barrels of oil, with approximately 33% classified as proved developed reserves. The reported PV-10 was approximately $10.8 million, down from $12.2 million in 2013. The company spent $129,000 on oil and gas development in 2014.
Management intends to pursue acquisitions of undervalued or distressed oil and gas businesses and additional leases, subject to financing availability and oil and gas prices. It expects to retain its existing retirement community but does not currently intend to acquire or operate additional retirement facilities. No formal quantitative revenue, earnings or production guidance is provided.
- Liquidity is constrained by only $300,000 of cash, negative operating cash flow and current liabilities substantially exceeding current assets.
- The company sells most natural gas to one purchaser and all oil to one purchaser, creating concentration risk.
- Commodity-price volatility, declining production, reserve-estimation uncertainty and full-cost ceiling-test requirements could materially affect results and asset values.
- The retirement community faces competition from other facilities, home healthcare, community programs and nursing homes. Labor costs may rise with minimum-wage increases.
- The company is subject to a potentially significant Carlton Energy litigation matter. A Texas appellate decision imposed a judgment of approximately $66.5 million plus exemplary damages under an alter-ego theory; the company is awaiting a Texas Supreme Court ruling, disputes liability and has recorded no provision. The auditor noted that the outcome cannot presently be determined.
- Debt is collateralized by oil and gas leases and real property and equipment. The filing lists future lease payments of approximately $2.063 million through 2017.
- The company has approximately $7.4 million of net operating loss carryforwards, but maintains a full valuation allowance against deferred tax assets because realization is uncertain.
- Approximately 42% of common stock was beneficially controlled by a related shareholder group, giving it significant voting influence and the ability to impede a change in control.
Important facts for investors to verify
- Reconcile the reported cash decline, negative operating cash flow and near-term debt obligations with available liquidity and financing sources.
- Review the complete Carlton Energy litigation docket and potential exposure, including why no liability was accrued.
- Assess the status and collectability of the approximately 70,000 Mcf gas claim against the current operator.
- Validate reserve quantities, PV-10 assumptions and sensitivity to commodity prices and production declines.
- Examine related-party arrangements, including shared services, debt reductions and historical affiliate receivables.
- Confirm retirement-community occupancy trends, lease obligations and the effect of the January 2017 lease expiration.
- Review the filing’s debt maturity schedule and clarify the presentation of the amount shown for 2014 versus subsequent annual maturities.