Business Context and Reporting Period
Company: New Concept Energy, Inc. (formerly CabelTel International Corporation)
Filing Type: Form 10-K (Annual Report)
Reporting Period: Fiscal year ended December 31, 2008
Business Overview: The Company operates two primary segments: oil and gas production and a retirement community. In September 2008, the Company acquired Mountaineer State Energy, Inc., adding 94 producing gas wells and 121 non-producing wells in Ohio and West Virginia. The Company also leases and operates the Pacific Pointe Retirement Inn in Oregon.
Key Financial Metrics
| Metric (in thousands) | 2008 | 2007 |
|---|---|---|
| Total Revenue | $3,560 | $2,984 |
| Operating Expenses | $3,702 | $2,956 |
| Operating Profit (Loss) | $(142) | $28 |
| Net Income (Continuing Ops) | $15,495 | $689 |
| Net Income (Total) | $15,495 | $62 |
| Earnings Per Share (Basic) | $8.92 | $0.06 |
| Total Assets | $24,058 | $9,786 |
| Long-Term Debt | $1,026 | $6,921 |
| Cash and Cash Equivalents | $190 | $172 |
| Short-Term Notes Receivable (Related Party) | $10,632 | $2,200 |
Oil & Gas Specifics: Proved reserves of 6.0 million Mcf; PV-10 value of $9.6 million. Average sales price was $8.10 per Mcf with production costs of $4.58 per Mcf.
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 19% to $3.56 million, driven by the September 2008 acquisition of oil and gas assets which contributed $672,000 in net revenue. Real estate revenue remained relatively flat at $2.89 million.
- Profitability Surge: Net income jumped from $62,000 in 2007 to $15.5 million in 2008. This increase is primarily attributable to a one-time gain on sale of assets of $16.4 million resulting from the sale of mineral rights in Arkansas in May 2008.
- Debt Reduction: Long-term debt decreased significantly from $6.9 million to $1.0 million. The Company used proceeds from the mineral rights sale to pay down existing debt obligations.
- Asset Base Expansion: Total assets more than doubled to $24.1 million due to the acquisition of oil and gas properties ($10.7 million) and an increase in related-party notes receivable.
- Operating Loss: Despite the high net income, core operations generated a loss of $142,000, compared to a profit of $28,000 in 2007, due to increased operating expenses associated with the new oil and gas segment and corporate administration.
Guidance, Outlook, Risks, and Contingencies
- Outlook: Management intends to focus on oil and gas and energy-related investments, pursuing acquisitions of undervalued or distressed businesses. The Company plans to sell excess land and equipment acquired in the Mountaineer transaction.
- Legal Contingency: The Company is involved in litigation with Chesapeake Exploration Limited Partnership regarding a $556,217 invoice for drilling costs. Management intends to defend the action vigorously. An affiliated entity, Source Rock Energy of Arkansas, LLC, has agreed to fully indemnify the Company for any losses.
- Tax Contingency: The IRS commenced an audit of the acquired entities (CESI) in 2002, which was halted. The bankruptcy plan allows the IRS two years to complete an audit. Management believes no material adjustments will be found, and any payments would reduce future obligations to former owners.
- Concentration Risk: The Company has only one purchaser for its oil and natural gas production. The loss of this purchaser could have a material impact.
- Related Party Transactions: Significant portions of the Company's assets are tied up in notes receivable from related parties (totaling over $10.6 million). The Company also has long-term debt obligations to former shareholders of the acquired entity, valued at $1.0 million, with payments deferred for up to five years.
Investor Verification Checklist
- Quality of Earnings: Verify that the $15.5 million net income is driven almost entirely by the $16.4 million one-time gain on the sale of Arkansas mineral rights, rather than recurring operational cash flow.
- Liquidity vs. Cash: Note that while Total Assets are $24 million, Cash and Cash Equivalents are only $190,000. The majority of current assets ($10.6 million) are notes receivable from related parties, which may not be immediately liquid.
- Debt Structure: Confirm the terms of the $1.0 million long-term debt owed to former shareholders of the acquired entity, specifically the deferral of payments and the reliance on future cash flow.
- Reserve Estimates: Review the independent engineer's report on the 6.0 million Mcf proved reserves, as valuation is highly sensitive to natural gas prices and reserve estimates.
- Related Party Exposure: Assess the risk associated with the $10.6 million in notes receivable from related parties (Eurenergy Resources Corporation and Prime Income Asset Management, Inc.) and the likelihood of collection.