New Concept Energy, Inc. — FY2012 Form 10-K Summary
Business context and reporting period
New Concept Energy, Inc. reported for the year ended December 31, 2012. The company operates two primary segments: oil and gas properties in Ohio and West Virginia, and Pacific Pointe Retirement Inn, a 114-resident independent-living facility in Oregon. At year-end, oil and gas operations included 152 producing wells, 31 non-producing wells and approximately 19,375 developed acres.
Financial performance and condition
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Revenue | $3.944 million | $3.901 million | 1.1% increase |
| Operating expenses | $5.766 million | $5.762 million | Approximately flat |
| Operating loss | $(1.822) million | $(1.861) million | Improved by $39,000 |
| Net income (loss) | $168,000 | $(11.793) million | Improved by $11.961 million |
| Basic diluted EPS | $0.09 | $(6.06) | Improved |
| Operating cash flow | $501,000 | $566,000 | Decreased $65,000 |
| Capital and other investing cash flow | $(209,000) | $(1.336) million | Lower investment spending |
| Cash and cash equivalents | $398,000 | $109,000 | Increased $289,000 |
| Total assets | $12.484 million | $13.450 million | Decreased $966,000 |
| Total liabilities | $5.838 million | $6.972 million | Decreased $1.134 million |
| Long-term debt | $2.857 million | $3.431 million | Decreased $574,000 |
Current assets were $610,000 versus current liabilities of $211,000, producing reported working capital of approximately $399,000. Notes payable totaled $2.366 million, with $93,000 due in 2013, $414,000 in 2014 and $1.391 million in 2015. The asset retirement obligation was $2.770 million. The company had approximately $6 million of net operating loss carryforwards and maintained a full valuation allowance against its deferred tax asset.
Oil and gas production increased to 259,000 Mcf of natural gas and 6,396 barrels of oil from 215,000 Mcf and 5,074 barrels in 2011. Average natural gas pricing declined to $3.65 per Mcf from $5.29, while oil pricing was broadly stable. Pacific Pointe reported December 2012 occupancy of 92.1% and an average monthly rate of $2,225, compared with 90.5% occupancy and $2,191 in December 2011.
Material changes versus the prior comparable period
- Revenue was broadly stable overall, as higher oil and gas revenue was partly offset by lower retirement-facility revenue.
- Operating loss remained substantial, primarily because of a $912,000 non-cash oil and gas full-cost ceiling impairment charge. The comparable 2011 impairment was $1.428 million.
- Net income benefited from a $2.076 million recovery or reduction of the previously reserved related-party note receivable. This included a $1.7 million gain in the third quarter and an additional $376,000 gain in the fourth quarter from agreements involving PIAMI and Pillar.
- Interest income fell to zero from $360,000 because the company stopped accruing interest on the impaired PIAMI receivable.
- Oil and gas depletion increased materially, contributing to a $390,000 increase in oil and gas operating expenses. The filing reports depletion expense of $614,000 in 2012 versus $294,000 in 2011.
- Investment spending declined to $209,000 from $1.336 million, including $103,000 invested in oil and gas properties versus $1.074 million in 2011.
- Proved reserves at year-end were approximately 2.849 Bcf of natural gas and 103,000 barrels of oil. The reported standardized measure of discounted future net cash flows was $10.724 million, down from $12.418 million.
- For the fourth quarter of 2012, revenue was $1.016 million and net income was $84,000, compared with fourth-quarter 2011 revenue of $876,000 and a net loss of $11.899 million.
Guidance, outlook, commentary and risks
Management did not provide quantitative earnings or revenue guidance. Its strategy is to pursue undervalued or distressed oil and gas businesses and additional leases, while maintaining the Oregon retirement facility and focusing longer-term efforts on energy-related investments. In early 2012, the company entered into a five-year agreement to sell gas at an agreed price.
- Oil and gas results remain sensitive to commodity prices, reserve estimates, production declines, depletion and full-cost ceiling tests. Most wells are mature, and most production is sold to one gas purchaser and one oil purchaser.
- The company is subject to significant concentration and competitive risks in acquiring leases, drilling services, equipment and qualified personnel.
- The retirement facility operates under a lease expiring January 31, 2017, with minimum remaining payments reported at approximately $4.890 million. Its profitability depends on occupancy, pricing, labor costs and competition.
- A Texas Supreme Court case could expose the company to a judgment based on an alleged alter-ego relationship with Eurenergy. The Court of Appeals had imposed liability based on $66.5 million of actual damages plus exemplary damages, but the company appealed and the Supreme Court granted review in March 2013. No liability was accrued because management and counsel believed the judgment was erroneous; the auditor noted that the outcome could change in the near term.
- The company recorded a net liability of $491,000 related to the Chesapeake litigation after the Texas Supreme Court denied further review in February 2013. The company is pursuing recovery for unpaid gas proceeds.
- The company’s 2012 profit was materially affected by unusual related-party debt reductions and is not representative of operating profitability. The company had previously fully reserved a related-party note receivable with a balance that had been approximately $10 million.
- Debt bears fixed interest rates, limiting exposure to changes in market rates, but cash resources are modest relative to operating, lease, debt and potential litigation obligations.
Most important facts for investors to verify
- Reconcile the reported 2012 net income to the $2.076 million related-party note recovery and determine whether any further recoveries are probable.
- Review the status and potential exposure of the Carlton litigation, including whether any reserve or disclosure changes occurred after March 29, 2013.
- Assess the company’s ability to fund debt maturities, retirement-facility lease payments and oil and gas abandonment obligations from operating cash flow.
- Validate proved reserve quantities, pricing assumptions, the $10.724 million standardized measure and the sensitivity of the full-cost ceiling test to commodity prices.
- Confirm the sustainability of oil and gas production and the economic effect of the five-year gas sales agreement.
- Review related-party arrangements with PIAMI, Pillar, Arcadian and affiliated entities, including governance approvals and remaining balances.
- Note that the filing’s auditor gave an unqualified opinion on the financial statements but did not provide an attestation opinion on internal control over financial reporting.