PrimeEnergy Resources Corporation — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. The interim financial statements are unaudited. Dollar figures below are in millions unless noted.
Business context
PrimeEnergy is an independent oil and natural gas producer, with properties primarily in Texas and Oklahoma, plus oilfield field-services operations. Its results are driven by production, commodity prices, development spending and asset sales. The company is pursuing horizontal drilling, principally in West Texas.
Financial performance and position
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $29.6 | $35.5 | $52.3 | $61.4 |
| Operating income | $13.2 | $14.4 | $15.0 | $29.0 |
| Net income | $10.1 | $11.0 | $11.5 | $22.1 |
| Basic EPS | $5.35 | $5.57 | $6.14 | $11.18 |
| Diluted EPS | $3.82 | $4.02 | $4.37 | $8.08 |
- Revenue mix and prices: Q2 oil and gas sales (including NGLs) were $25.0 million, down 28.5% year over year; field-service revenue rose to $4.6 million from $3.5 million. For the first half, oil and gas sales fell 36.5% to $43.7 million. Lower realized prices were the primary factor: first-half oil averaged $72.49/bbl versus $102.64, gas $1.77/Mcf versus $5.35, and NGLs $20.57/bbl versus $39.40. First-half oil volume declined 3.5%, while gas and NGL volumes increased.
- Profit drivers: First-half operating income fell by about 48%, reflecting lower oil and gas sales and a smaller asset-sale gain ($6.1 million versus $14.8 million). Net income also reflects derivative valuation changes. Q2 asset-sale gain was $6.1 million, compared with $0.8 million a year earlier. Management cited lower employee compensation and benefits as the main reason first-half G&A declined to $5.4 million from $9.1 million.
- Cash flow and investment: First-half operating cash flow was $35.4 million, up from $27.5 million. Capital expenditures were $47.0 million, versus $2.4 million in the prior-year period; property-sale proceeds were $6.5 million. Financing used $16.4 million, including $15.0 million of debt repayments and $5.4 million of treasury-stock purchases. Cash declined to $5.1 million from $26.5 million at year-end. Operating cash flow plus property-sale proceeds was $41.9 million, versus $42.3 million.
- Balance sheet and liquidity: At June 30, cash was $5.1 million, current assets $37.4 million and current liabilities $39.7 million; working capital was negative $2.4 million. Total liabilities were $97.3 million and equity $146.5 million. Bank debt was zero at June 30. The $300 million revolving facility is subject to a borrowing base: $60 million at June 30, increased to $65 million effective July 24. No borrowings were outstanding as of August 14. The company reported compliance with its debt covenants.
- Margins: The filing does not provide a clearly stated operating-margin or production-margin measure. Reported operating income includes gains on asset sales.
Material changes and developments
- Compared with first-half 2022, oil and gas revenue declined substantially as realized commodity prices fell; production volumes were mixed. New wells contributed to higher Q2 oil production versus Q2 2022, according to management.
- The company bought 60,500 shares for approximately $5.3 million in the first half and reported 1,840,500 shares outstanding at June 30. The board authorized an additional 300,000 shares for the repurchase program in June.
- During Q2, PrimeEnergy acquired 55 net acres in Reagan County for $0.6 million and sold 320 non-core acres there for $6.0 million. It also reported a July sale of a Martin County tract for $0.9 million and the July 1 divestiture of 38 marginally productive Oklahoma wells.
Outlook, commentary and risks
- Management said its 2023 plan targets drilling and completing approximately 40 wells, with development spending expected to exceed $100 million in 2023. It also described approximately $200 million of net investment for near-term drilling through 2024 and an estimated $400 million of horizontal development over several years. These are plans and estimates, not guaranteed commitments or formal earnings guidance.
- The company expects to fund its program with operating cash flow and available credit; it may adjust capital spending, sell non-strategic assets or pursue joint ventures to preserve liquidity. A further borrowing-base review was scheduled for December 2023.
- Commodity prices remain a key risk. The company said its most recent commodity derivatives expired in March 2023 and it did not then intend to enter new contracts unless required by its credit facility. Derivatives are not hedge-accounted, so fair-value changes affect reported earnings.
- Other cited risks include production and reserve uncertainty, operating and service-cost increases, permitting and regulatory changes, transportation and processing access, environmental and weather events, and counterparty, financing and cybersecurity risks. Asset-retirement obligations totaled $14.9 million; estimates depend on costs, well lives, inflation and discount-rate assumptions.
- Management said environmental and ordinary-course legal matters were not expected to have a material adverse effect; the filing reports no legal proceedings. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported.
Important facts for investors to verify
- Whether new West Texas wells achieve expected production, timing and returns, and whether the planned 2023–2024 drilling program stays within budget.
- How lower oil, gas and NGL prices affect realized revenue, operating cash flow and the December borrowing-base review.
- Whether working-capital needs and planned repurchases remain manageable alongside elevated development spending and low reported cash.
- Actual performance and remaining development obligations for proved undeveloped reserves; the reserve data cited in this filing are year-end 2022 figures.
- The diluted-EPS presentation and the effects of the company’s substantial outstanding options: the filing reports 767,500 options outstanding and exercisable, with exercise prices of $1.00 to $1.25.