New Concept Energy, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Quarterly report for the three months ended March 31, 2013, filed May 9, 2013. New Concept Energy operates oil and gas wells and mineral leases in Ohio and West Virginia and leases and operates a 114-resident retirement community in Oregon. The financial statements are unaudited and presented in thousands, except per-share data.
Financial Performance and Position
| Metric | Q1 2013 | Q1 2012 / Prior Period |
|---|---|---|
| Total revenue | $1.020 million | $964,000 |
| Oil and gas revenue | $340,000 | $290,000 |
| Retirement community revenue | $680,000 | $674,000 |
| Operating income (loss) | $(231,000) | $(1.209 million) |
| Net income (loss) | $31,000 | $(1.267 million) |
| Basic and diluted EPS | $0.02 | $(0.65) |
| Cash from operating activities | $380,000 | $(8,000) |
| Cash and cash equivalents | $688,000 | $398,000 at Dec. 31, 2012 |
- Total revenue increased approximately 6% year over year. The operating margin was approximately negative 22.6%, while net margin was approximately 3.0%.
- Current assets were $877,000 versus current liabilities of $469,000, implying a current ratio of approximately 1.9x.
- Total assets were $12.641 million. Oil and gas properties, net, were $9.558 million.
- Current debt was $156,000 and long-term notes payable were $2.234 million. The company also reported a $2.770 million asset retirement obligation and $491,000 of other long-term liabilities.
- Investing cash outflows were $83,000, primarily for equipment and capitalized drilling costs. Financing cash outflows were $7,000 for loan repayments.
- Shares outstanding and weighted-average basic shares were approximately 1.947 million.
Material Changes Versus the Prior Comparable Period
- Net results improved by $1.298 million, from a $1.267 million loss to $31,000 of income.
- The prior-year period included a $912,000 impairment of oil and gas properties and $34,000 of asset-retirement-obligation accretion; neither expense was recorded in Q1 2013.
- Q1 2013 included a $339,000 recovery of previously reserved bad-debt expense related to an approximately $10 million note receivable. This nonrecurring or unusual item materially supported reported profitability and operating cash flow.
- Oil and gas revenue increased $50,000, primarily from new wells drilled in late 2012. Oil and gas operating expenses declined $15,000, although depletion expense increased $44,000.
- Retirement community revenue was broadly stable, while related operating and lease expenses increased to $622,000 from $597,000.
- Corporate general and administrative expense increased to $173,000 from $159,000, primarily due to legal fees.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- The filing provides no formal financial guidance. Management cautions that quarterly results are not necessarily indicative of full-year results.
- Management expects natural-gas oversupply and depressed prices to persist. Under an agreement entered into in April 2012, the company receives $4.53 per Mcf for gas for five years through April 2017.
- The company uses full-cost accounting for oil and gas properties; future ceiling tests, reserve estimates, prices, depletion, and impairment assessments could materially affect reported results.
- The company has a significant Carlton Energy litigation exposure. The Texas Court of Appeals had imposed liability based on an alter-ego theory, but the Texas Supreme Court granted review in March 2013 and scheduled oral arguments for September 2013. The filing states that the ultimate liability is uncertain and that the trial-court judgment could be reinstated with no company liability.
- Chesapeake litigation resulted in a judgment that was largely affirmed on appeal. As of March 31, 2013, the company recorded a net liability of $491,000 and was pursuing an offset for gas revenues allegedly retained by Chesapeake.
- Other risks include retirement-community occupancy and pricing, operating costs, commodity prices, financing availability, interest rates, permitting and construction delays, competition, and potential legal or environmental liabilities.
- Nearly all debt bears fixed interest rates, limiting exposure to interest-rate changes. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Facts Investors Should Verify
- Whether the $339,000 bad-debt recovery is collectible and nonrecurring, and the status of the underlying approximately $10 million note receivable.
- The outcome and potential financial exposure from the Carlton Energy Supreme Court proceedings.
- The final amount recoverable from Chesapeake and whether the recorded $491,000 liability adequately reflects the dispute.
- Oil and gas reserve volumes, depletion assumptions, the full-cost ceiling-test cushion, and sensitivity to commodity prices after the $4.53 per Mcf pricing agreement expires.
- Retirement-community occupancy, lease obligations, operating margins, and the company’s ability to fund debt service, capital expenditures, and asset-retirement obligations.
- Whether improved cash flow and profitability can continue without impairment reversals, litigation recoveries, or other unusual items.