New Concept Energy, Inc. — 2019 Form 10-K Summary
Business Context and Reporting Period
Annual report for the year ended December 31, 2019. New Concept Energy operates oil and gas wells and mineral leases in Ohio and West Virginia through wholly owned subsidiaries. At year-end, it had 153 producing wells, 44 non-producing wells and approximately 19,375 developed acres. The company employed five people and relied substantially on contractors.
The company operates as a single primary segment: oil and gas. It sells most natural gas to one purchaser and all oil production to one purchaser. Its common stock trades on the NYSE American under the symbol GBR.
Financial Performance and Key Metrics
| ($ in thousands, except per-share data) | 2019 | 2018 | Change |
|---|---|---|---|
| Revenue | $590 | $682 | -13.5% |
| Operating expenses | $3,383 | $1,197 | +182.5% |
| Operating loss | $(2,793) | $(515) | Worsened |
| Net loss | $(2,352) | $(484) | Worsened |
| Basic loss per share | $(0.46) | $(0.21) | Worsened |
| Operating margin | -473.4% | -75.5% | Declined |
| Net margin | -398.6% | -71.0% | Declined |
| Cash flow from operations | $369 | $(637) | Improved |
- Oil and gas revenue declined to $590,000 from $682,000, primarily because of lower natural gas sales prices. Production was approximately 129,000 Mcf of gas and 4,000 barrels of oil, compared with 130,000 Mcf and 4,200 barrels in 2018.
- Average realized prices declined to $2.79 per Mcf from $2.91 and to $52.89 per barrel from $61.46.
- Oil and gas operating expenses decreased to $686,000 from $844,000, principally because depreciation and depletion declined by $166,000. Corporate expenses increased to $412,000 from $353,000, largely due to higher consulting costs.
- Interest and other income increased materially, including $257,000 of interest income versus $37,000 in 2018. The increase primarily reflected investment of proceeds from the 2018 stock issuance.
- The company recorded a $2.285 million non-cash impairment charge on oil and gas properties following an unsuccessful September 2019 well and a full-cost ceiling test. This charge was the principal driver of the operating loss.
- Cash and cash equivalents declined to $22,000 from $361,000. Current assets were $4.141 million versus current liabilities of $434,000, but approximately $4.005 million of current notes receivable was from a related party.
- Total assets declined to $5.790 million from $7.882 million, primarily because net oil and gas properties fell to $767,000 from $2.517 million after the impairment.
- Total debt was $221,000, consisting of $44,000 current and $177,000 long-term debt, compared with $260,000 at year-end 2018. Debt bears interest generally between 5% and 5.5% and is secured by oil and gas leases, real property and equipment.
- The asset retirement obligation remained $2.770 million. Total liabilities increased to $3.381 million from $3.121 million, while stockholders’ equity declined to $2.409 million from $4.761 million.
- No dividends were paid in 2019 or 2018. The company reported approximately $10.5 million of net operating loss carryforwards and maintained a full valuation allowance against the related deferred tax asset.
Material Changes Versus the Prior Comparable Period
- Revenue decreased 13.5%, reflecting lower natural gas pricing and modestly lower production.
- The company moved from a $515,000 operating loss in 2018 to a $2.793 million operating loss in 2019, primarily because of the $2.285 million oil and gas impairment.
- Net loss increased from $484,000 to $2.352 million, despite higher interest income and lower field operating costs.
- Operating cash flow improved from an outflow of $637,000 to an inflow of $369,000, partly because of non-cash impairment and working-capital changes.
- Investing cash outflow was $664,000, including $596,000 of dry-hole expenses and $68,000 of fixed-asset additions.
- Financing cash flow was a $44,000 outflow in 2019, compared with a $4.539 million inflow in 2018 from the sale of common stock and a $4.5 million issuance to Realty Advisors, Inc. That transaction resulted in a change of control, with Realty Advisors owning approximately 59.6% of the outstanding common stock.
- Proved reserves declined sharply. Reported year-end reserves were approximately 354 MMcf of gas and 29 MMBbls of oil, versus total reserves of 2,268 MMcf of gas and 28 MMBbls of oil in 2018. The filing attributes the gas reduction primarily to reserve revisions and the unsuccessful well.
- The standardized measure of discounted future net cash flows from proved reserves declined to approximately $950,000 from $2.971 million.
Guidance, Outlook, Risks and Unusual Items
The company provided no formal financial guidance. Management intends to continue evaluating acquisitions of undervalued or distressed oil and gas businesses and additional leases, but development activity remains dependent on financing and oil and gas prices. Expansion activity on existing acreage has generally been suspended until commodity prices stabilize.
- Liquidity depends on operating cash flow and collection of notes receivable, including the approximately $4.005 million related-party note that was classified as current and was payable upon maturity in September 2019. The filing states that management is reviewing asset sales and a possible private stock placement to increase cash reserves.
- The company sells production to a limited number of purchasers, creating customer-concentration risk. Commodity-price volatility can materially affect revenue, reserves and asset values.
- The full-cost accounting ceiling test and reserve estimates are highly sensitive to commodity prices, production declines, engineering assumptions and drilling results.
- The $2.285 million impairment followed a failed well and a reduction in estimated probable and possible reserves. The filing also identifies a $596,000 dry-hole investment outflow.
- COVID-19 was identified as a subsequent risk that could adversely affect economic activity, commodity markets and the company’s operations. The filing states that the ultimate impact was uncertain as of the report date.
- The company faces a $2.770 million asset retirement obligation for plugging, abandonment and reclamation activities.
- Legal proceedings are described as ordinary-course matters that management believes will not materially affect financial condition, results or cash flows.
- The independent auditor issued an unqualified opinion on the financial statements but included an emphasis concerning significant related-party transactions and balances. The auditor did not provide an opinion on internal control effectiveness because the company was not required to obtain such an attestation.
Most Important Facts for Investors to Verify
- Whether the approximately $4.005 million related-party note receivable was collected, refinanced or otherwise resolved after year-end.
- The company’s ability to fund near-term obligations given only $22,000 of cash and reliance on operating receipts, receivable collections, asset sales or additional equity financing.
- The accuracy and economic recoverability of the sharply reduced proved reserve base and the approximately $950,000 standardized measure.
- Whether oil and gas prices, production declines or additional drilling results could trigger further full-cost ceiling-test impairments.
- The implications of Realty Advisors’ approximately 59.6% controlling ownership and the related-party transactions involving Realty Advisors and Pillar.
- The status and expected cash cost of the $2.770 million asset retirement obligation.
- The effect of COVID-19 and subsequent commodity-market conditions on purchasers, pricing, production, liquidity and financing access.