New Concept Energy, Inc. — FY2011 Form 10-K Summary
Business Context and Reporting Period
Annual report for the year ended December 31, 2011, with selected unaudited fourth-quarter data. 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. Management stated that its strategic focus is primarily oil and gas and energy-related investments.
- Oil and gas assets: approximately 159 producing wells, 27 non-producing wells and approximately 20,000 acres as of March 30, 2012.
- 2011 activity: eight new oil wells drilled and continued reworking of older wells.
- Employees: 52, including 24 full-time and 28 part-time employees.
Financial Performance and Key Metrics
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Revenue | $3.901 million | $4.213 million | Down 7.4% |
| Operating expenses | $5.762 million | $4.257 million | Up 35.4% |
| Operating loss | $1.861 million | $44 thousand | Material deterioration |
| Net loss | $11.793 million | $11 thousand | Material deterioration |
| Basic and diluted loss per share | $6.05–$6.06 | $0.01 | Material deterioration |
| Operating cash flow | $566 thousand | $104 thousand | Up $462 thousand |
| Investing cash flow | $(1.336) million | $(267) thousand | Higher investment spending |
| Financing cash flow | $820 thousand | $67 thousand | Higher borrowing |
| Cash and equivalents | $109 thousand | $59 thousand | Up $50 thousand |
Operating margin was approximately negative 47.7% in 2011 versus negative 1.0% in 2010. Net margin was approximately negative 302% in 2011, primarily because of a $10.006 million bad-debt expense related to a related-party note receivable and a $1.428 million full-cost ceiling impairment of oil and gas properties.
- Oil and gas revenue declined to $1.020 million from $1.288 million, principally because natural gas prices declined during 2011. Reported average prices were $5.29 per Mcf of gas and $92.98 per barrel of oil.
- Retirement facility revenue was $2.881 million, compared with $2.925 million in 2010. The facility generated segment operating income of approximately $685 thousand.
- Oil and gas operations generated a segment operating loss of approximately $1.967 million, including the impairment charge.
- Current assets were $296 thousand versus current liabilities of $839 thousand, indicating negative working capital of approximately $543 thousand.
- Total assets declined to $13.450 million from $24.067 million, primarily because the $10.361 million related-party note and accrued interest were written off.
- Long-term debt was reported at $3.431 million in selected financial data. The balance sheet separately presented $2.249 million of notes payable, $691 thousand payable to related parties, and a $2.702 million asset retirement obligation.
- No common-stock dividends were paid in 2011 or 2010, and no shares were repurchased during the fourth quarter.
Fourth-Quarter 2011 Results
| Metric | Q4 2011 |
|---|---|
| Revenue | $876 thousand |
| Operating expense | $2.334 million |
| Other income/(expense), net | $(10.212) million |
| Net loss | $11.899 million |
| Basic loss per share | $6.10 |
The fourth-quarter loss was driven primarily by the $10 million reserve against the related-party note receivable.
Material Changes Versus the Prior Comparable Period
- Revenue decreased 7.4%, primarily from lower natural gas prices and lower oil and gas revenue.
- Operating expenses increased by $1.505 million, including the $1.428 million full-cost ceiling impairment.
- The company recorded a $10.006 million bad-debt expense after determining that the financial condition of Prime Income Asset Management, Inc. had deteriorated and collectability of the related-party note was no longer assured.
- Proved reserves declined substantially. Total proved reserves at year-end were approximately 2.552 billion cubic feet of gas and 104 thousand barrels of oil, compared with 6.954 billion cubic feet of gas and 72 thousand barrels of oil at year-end 2010. The company reported substantial downward revaluation of undeveloped reserves.
- Standardized measure of discounted future net cash flows declined to $11.141 million from $12.418 million.
- Capital spending on oil and gas properties increased to $1.074 million from $219 thousand, while financing proceeds increased to $851 thousand.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide quantitative earnings, revenue or production guidance. Management intends to pursue acquisitions of undervalued or distressed oil and gas businesses and additional leases, while retaining the Oregon retirement facility.
- Related-party receivable: A note from PIAMI had a reported balance of approximately $10.361 million at December 31, 2010. After $360 thousand of 2011 interest accruals and $715 thousand of payments during the first three quarters, the remaining receivable was fully reserved and written off in the fourth quarter.
- Carlton litigation: In February 2012, the Texas Court of Appeals overturned a favorable trial-court ruling and entered judgment against the company as an alleged alter ego of Eurenergy. The judgment could involve $66.5 million of actual damages plus exemplary damages. The company planned to petition the Texas Supreme Court, and no provision was recorded because management and counsel believed the judgment was erroneous. The auditor noted that the outcome was uncertain and could materially affect the company.
- Chesapeake dispute: The company recorded a $491 thousand liability related to a $686,874 summary judgment plus legal fees and appealed the ruling. Chesapeake was withholding the company’s share of gas proceeds pending resolution.
- Sterling litigation settlement: The company agreed to pay $225 thousand in the second quarter of 2012 to settle litigation related to an abandoned acquisition and prior bankruptcy proceedings.
- Commodity and customer concentration: The company sells most natural gas to one purchaser and all oil to one purchaser, creating counterparty and concentration risk. Production is generally sold at monthly spot prices rather than under long-term contracts.
- Reserve and impairment risk: Reserve estimates depend on commodity prices, production performance and engineering assumptions. The company uses full-cost accounting, under which future price or reserve changes can produce additional impairment charges.
- Liquidity: Cash was only $109 thousand at year-end, compared with $839 thousand of current liabilities. Debt maturities disclosed for 2012 totaled $47 thousand, but the filing also disclosed substantial lease, asset-retirement and litigation obligations.
- Other risks: The company faces competition for leases, drilling equipment and personnel, regulatory and environmental obligations, retirement-community competition, minimum-wage exposure and anti-takeover provisions. A group associated with Arcadian Energy beneficially controlled approximately 45% of common stock.
Important Facts for Investors to Verify
- Read the full Note K contingency disclosure and obtain the current status and potential exposure of the Carlton litigation, including whether the Texas Supreme Court accepted review.
- Reconcile the different debt presentations in the filing, including notes payable, related-party payables, asset-retirement obligations and future lease commitments.
- Assess whether the company has sufficient operating cash flow and financing access to fund oil and gas capital expenditures and near-term obligations.
- Review reserve-engineering assumptions, commodity-price sensitivity and the likelihood of further full-cost ceiling impairments.
- Confirm the collectability and governance implications of related-party transactions and the complete write-off of the PIAMI receivable.
- Verify current production, gas and oil prices, purchaser concentration and the status of the Chesapeake withholding dispute.
- Note that the filing reports management’s internal-control assessment as effective, but the independent auditor did not provide an attestation report on internal control over financial reporting.