New Concept Energy, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2013. Amounts are in thousands except per-share and share data. The financial statements are unaudited.
Business Context and Reporting Period
The company operates oil and gas wells and mineral leases in Ohio and West Virginia and leases and operates a 114-resident retirement community in King City, Oregon. It is a smaller reporting company with 1,946,935 common shares outstanding as of August 9, 2013.
Key Financial Metrics
| Metric | Three Months 2013 | Three Months 2012 | Six Months 2013 | Six Months 2012 |
|---|---|---|---|---|
| Revenue | $1,050 | $988 | $2,070 | $1,952 |
| Operating earnings (loss) | $(232) | $(217) | $(463) | $(1,426) |
| Net income (loss) | $138 | $(169) | $169 | $(1,436) |
| Net income (loss) per share | $0.07 | $(0.09) | $0.09 | $(0.74) |
| Operating margin | (22.1%) | (22.0%) | (22.4%) | (73.1%) |
| Net margin | 13.1% | (17.1%) | 8.2% | (73.6%) |
Revenue mix: Oil and gas revenue was $384 for the quarter and $724 for the six months, compared with $325 and $615, respectively, in the prior-year periods. Retirement-community revenue was $666 for the quarter and $1,346 for the six months, compared with $663 and $1,337.
Cash flow: Six-month operating cash flow was $732, compared with $3 in the prior-year period. Investing cash flow was $(169), including $57 of oil and gas investment and $112 of fixed-asset additions. Financing cash flow was $(1). Cash increased to $960 at June 30, 2013 from $398 at December 31, 2012.
Liquidity: Current assets were $1,202 and current liabilities were $417, implying working capital of $785 and a current ratio of approximately 2.9. Accounts receivable from oil and gas sales were $236.
Debt and obligations: Current debt was $48 and notes payable, less current portion, were $2,321. The balance sheet also included a $2,770 asset retirement obligation and $541 of other long-term liabilities. Nearly all debt carries fixed interest rates, limiting interest-rate exposure.
Balance sheet: Total assets were $12,864 versus $12,484 at December 31, 2012. Stockholders’ equity increased to $6,815 from $6,646, primarily reflecting the year-to-date net income.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue increased 6.3%, while six-month revenue increased 6.0%, primarily because of new oil wells drilled in late 2012.
- Quarterly net income improved from a $169 loss to $138 of income; six-month results improved from a $1,436 loss to $169 of income.
- The improvement included recovery of previously reserved bad-debt expense of $394 in the quarter and $733 for the six months, related to an approximately $10 million note receivable that had been fully reserved in a prior year.
- Operating losses remained substantial. Quarterly operating loss increased to $232 from $217, while six-month operating loss improved largely because the prior-year period included a $912 impairment of oil and gas properties.
- Oil and gas operating expenses increased to $493 for the quarter and $949 for the six months. Management attributed the increase principally to higher depletion and other non-payroll costs.
- Retirement-community operating expenses increased to $383 for the quarter and $769 for the six months, primarily due to higher non-payroll expenses.
- Corporate general and administrative expense increased to $170 for the quarter and $343 for the six months, primarily because of legal fees.
- Interest expense declined to $24 for the quarter and $73 for the six months, compared with $56 and $118, respectively, due to lower accrued interest on obligations associated with the oil and gas subsidiary.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- No quantitative financial guidance was provided. Management cautioned that six-month results are not necessarily indicative of full-year results.
- Natural gas oversupply and low market prices remain significant risks. The company has a gas-price agreement providing $4.53 per MCF through April 2017, but applying required accounting assumptions resulted in a prior $912 impairment of oil and gas properties.
- Management’s full-cost accounting, reserve estimates, depletion, impairment testing, doubtful-account estimates, and deferred-tax valuation allowance involve significant judgment. A 100% valuation allowance was recorded against the deferred-tax asset because realization was not considered more likely than not.
- In the Carlton Energy litigation, the Texas Court of Appeals imposed substantial liability on the company under an alter-ego theory. The Texas Supreme Court granted review in March 2013 and was scheduled to hear oral arguments in September 2013. The company denies liability and believes the trial-court judgment favorable to it could be reinstated.
- In the Chesapeake litigation, a judgment of approximately $686.9 plus $65 of legal fees was substantially affirmed after appeal. The company is pursuing an offset for its share of gas revenues retained by Chesapeake and has recorded a liability it believes is sufficient for the net obligation.
- The company reported no material environmental liabilities and stated that other ordinary-course lawsuits are not expected to materially affect financial condition, results, or cash flows.
- Disclosure controls were deemed effective, and no material change in internal control over financial reporting was reported during the quarter.
Investor Verification Checklist
- Verify the collectability and accounting treatment of the approximately $10 million note receivable and the $394 quarterly/$733 year-to-date bad-debt recoveries.
- Review the status, potential exposure, and accounting reserves related to the Carlton and Chesapeake litigation.
- Assess sustainability of operating cash flow excluding unusual recoveries and the effect of continued natural gas price weakness.
- Reconcile oil and gas reserve values, depletion assumptions, the $912 impairment recorded in the prior-year period, and the $4.53 per MCF gas-price arrangement.
- Evaluate retirement-community occupancy, rental rates, operating costs, and lease obligations.
- Confirm debt maturities, asset retirement obligations, and the company’s ability to fund required capital expenditures and legal costs.