New Concept Energy, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Unaudited quarterly report for the three and nine months ended September 30, 2013, filed November 12, 2013. The company operates oil and gas properties in Ohio and West Virginia and a 114-resident retirement community in Oregon. It had 1,946,935 common shares outstanding as of November 6, 2013.
Key Financial Metrics
| Metric | Three Months 2013 | Three Months 2012 | Nine Months 2013 | Nine Months 2012 |
|---|---|---|---|---|
| Revenue | $1.018 million | $0.976 million | $3.088 million | $2.928 million |
| Operating income (loss) | $(0.254) million | $(0.154) million | $(0.717) million | $(1.581) million |
| Net income | $0.133 million | $1.520 million | $0.302 million | $0.084 million |
| Net income per common share | $0.07 | $0.78 | $0.16 | $0.04 |
| Operating margin | (24.9%) | (15.8%) | (23.2%) | (54.0%) |
Oil and gas revenue increased to $324,000 in the quarter and $1.048 million year to date, primarily from new wells drilled in late 2012. Retirement-community revenue was broadly stable at $694,000 for the quarter and $2.040 million year to date.
Cash and equivalents were $1.276 million at September 30, 2013, compared with $398,000 at December 31, 2012. Current assets were $1.516 million versus current liabilities of $461,000. Total debt comprised $53,000 of current debt and $2.334 million of long-term notes payable. The company also reported a $2.770 million asset retirement obligation.
For the nine months, the consolidated cash-flow statement reported $1.077 million of net cash provided by operating activities, $232,000 used in investing activities, and $33,000 provided by financing activities, resulting in an $878,000 increase in cash. The MD&A text incorrectly describes operating cash flow as “used”; the statement of cash flows reports cash provided.
Material Changes Versus Prior Comparable Period
- Nine-month revenue increased 5.5%, while quarterly revenue increased 4.3%.
- Quarterly net income fell sharply from $1.520 million to $133,000 because the prior-year quarter included a $1.700 million related-party bad-debt recovery compared with $410,000 in 2013.
- Nine-month net income increased to $302,000 from $84,000. The improvement included a $1.143 million related-party receivable recovery in 2013 and the absence of the $912,000 oil and gas property impairment recorded in 2012.
- Oil and gas operating expenses increased to $495,000 for the quarter and $1.444 million year to date, with depletion and other operating costs contributing to the increase.
- Corporate general and administrative expense increased to $170,000 for the quarter and $513,000 year to date, primarily because of legal fees.
- Interest expense declined to $24,000 for the quarter and $97,000 year to date, compared with $52,000 and $170,000, respectively.
- Accumulated deficit improved from $52.213 million at December 31, 2012 to $51.911 million at September 30, 2013.
Guidance, Outlook, Risks, Contingencies and Unusual Items
- The company provided no specific financial guidance. It cautioned that nine-month results are not necessarily indicative of full-year results.
- Natural gas oversupply and depressed market prices remain significant risks. Under a contract, the company receives $4.53 per Mcf through April 2017; prior application of full-cost accounting produced a $912,000 reduction in oil and gas property value.
- A related-party receivable of approximately $10 million had been fully reserved. The company recognized $1.143 million of recovery income during the first nine months of 2013 as a related party waived reimbursement for expenses incurred on the company’s behalf.
- In the Carlton litigation, the Texas Court of Appeals imposed potentially substantial liability by treating the company as an alter ego of another defendant. The Texas Supreme Court granted review and heard oral arguments in September 2013; the parties were awaiting a ruling at the filing date. Management disputes liability and believes the judgment could ultimately result in no company liability.
- In the Chesapeake dispute, a judgment of approximately $686,874 plus legal fees was largely affirmed on appeal. The company is pursuing an offset for gas revenues allegedly retained by Chesapeake and has recorded a liability it believes is sufficient for the net obligation.
- Nearly all debt bears fixed interest rates, so management reports minimal interest-rate risk. Other risks include commodity prices, retirement-community occupancy and pricing, operating costs, financing availability, litigation, and regulatory or environmental matters.
- Management concluded that disclosure controls were effective and reported no material change in internal control over financial reporting.
Important Facts for Investors to Verify
- Confirm the final outcome and potential financial exposure from the Carlton litigation and the company’s expected resolution of the Chesapeake judgment.
- Assess the sustainability of earnings excluding related-party receivable recoveries and other unusual income.
- Reconcile the cash-flow presentation, particularly the inconsistency between the statement of cash flows and MD&A regarding operating cash flow.
- Evaluate oil and gas reserve values, production trends, depletion, and sensitivity to natural gas prices under the full-cost accounting ceiling test.
- Review liquidity relative to debt, the $2.770 million asset retirement obligation, and ongoing capital requirements.
- Monitor retirement-community occupancy, rental rates, labor and maintenance costs, and the company’s ability to offset inflationary pressures.