PrimeEnergy Corporation — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. The interim financial statements are unaudited. The filing identifies the registrant as PrimeEnergy Corporation.
Business context and results
PrimeEnergy is an independent oil and natural gas producer, with field-services operations and properties primarily in Texas, Oklahoma, and West Virginia. Its development focus includes horizontal drilling in the Permian Basin and Oklahoma.
| Metric | Three months ended June 30, 2018 | Six months ended June 30, 2018 | Comparable 2017 period |
|---|---|---|---|
| Total revenue | $22.4 million | $50.9 million | $21.5 million quarter; $42.0 million six months |
| Oil, gas and NGL sales | $21.7 million | $46.8 million | $14.0 million quarter; $26.4 million six months |
| Operating income | $0.1 million | $5.4 million | $0.8 million quarter; $43.0 million six months |
| Net income (loss) attributable to PrimeEnergy | $(0.6) million | $2.7 million | $0.4 million quarter; $22.7 million six months |
| Diluted earnings (loss) per share | $(0.27) | $0.95 | $0.12 quarter; $7.57 six months |
Six-month oil, gas and NGL sales rose 77%, supported by higher oil and NGL production and prices. Oil production increased 46% to 584,000 barrels; NGL volumes rose 94% to 213,000 barrels; natural gas volumes increased 10% to 1.871 million Mcf. Average realized oil price before derivatives rose 33% to $62.88 per barrel, while gas price fell 24% to $2.33 per Mcf. The six-month earnings comparison was heavily affected by the prior-year $41.7 million gain on asset sales, versus $2.7 million in 2018.
Cash flow, liquidity and debt
- At June 30, cash was $5.4 million, current assets $19.8 million, and current liabilities $31.5 million. Total assets were $242.8 million and total equity $101.4 million.
- Long-term bank debt was $59.7 million and current long-term debt $1.3 million. The company reported $59.5 million drawn on its revolving facility at June 30, with $25.5 million available under an $85 million borrowing base. A July 17 amendment subsequently raised the borrowing base to $90 million. MD&A also gives approximately $64 million of outstanding borrowings and $26 million available; these figures do not exactly match the June 30 debt and availability disclosures.
- The cash flow statement reports $7.4 million provided by operations, $16.6 million used in investing, and $6.2 million provided by financing during the first half. Cash declined $3.0 million to $5.4 million. Capital expenditures were $18.8 million; property and equipment sale proceeds were $2.1 million.
- Cash-flow disclosure inconsistency: MD&A says operating activities used $7.4 million, while the cash flow statement reports $7.4 million provided. Investors should verify the correct figure.
- Interest expense increased to $1.8 million for the first half from $1.1 million. The company reported covenant compliance and expected to remain in compliance over the next 12 months.
Material changes, outlook and risks
- Derivative results shifted materially: the company recorded a $7.5 million net derivative loss for the first half of 2018, compared with a $4.1 million gain in 2017. These instruments are not hedge-accounted, so mark-to-market changes add earnings volatility. The net derivative liability was $9.0 million at June 30, versus $3.0 million at year-end 2017.
- Lease operating expense rose 21% for the first half, primarily from new wells, vendor-rate increases, production taxes, and higher production. General and administrative expense rose to $8.5 million from $4.4 million, reflecting personnel costs and reduced reimbursements associated with lower asset-sale gains.
- Management planned 14 West Texas horizontal wells in 2018, including 11 additional wells in the second half, and anticipated participating in as many as five additional Oklahoma wells. Some new West Texas wells began production in July. Management noted that completion activity caused temporary shut-ins and frac hits in the second quarter.
- The 2018 capital budget was based on expected cash flows; any shortfall was expected to be funded through the revolving facility. Management said it might adjust capital spending, sell non-strategic assets, or pursue joint ventures to preserve liquidity, and was discussing potential financing partners.
- Development opportunities could require substantial future investment: the company estimated its share of approximately $284 million for potential future Apache-operated drilling on one Upton County block, subject to well count, cost, timing, and market conditions. These are prospective plans, not committed expenditures.
- Key risks include commodity-price and production volatility, borrowing-base redeterminations and covenant requirements, drilling cost overruns and technical results, reserve-estimate uncertainty, derivative counterparty exposure, and plugging and abandonment cost estimates. Management said environmental and ordinary-course legal matters were not expected to materially affect financial condition; no legal proceedings were reported.
- No specific earnings or production guidance was provided. Management described liquidity preservation and financial flexibility as priorities. The company adopted ASC 606 in 2018 with no material expected ongoing earnings effect; it could not yet reasonably estimate the impact of adopting the new lease standard.
Important facts for investors to verify
- Reconcile the conflicting MD&A and cash flow statement descriptions of operating cash flow.
- Confirm debt outstanding and undrawn availability at June 30 versus the post-quarter July 17 borrowing-base amendment; assess the November 2018 borrowing-base review and covenant headroom.
- Assess the effect of derivative positions and their Level 3 valuation assumptions on realized cash flows, reported earnings, and future production prices.
- Track actual drilling, completion costs, production performance, and funding needs against management’s 2018 plans and the larger prospective development opportunities.
- Separate recurring operating performance from the unusually large 2017 asset-sale gain when comparing earnings.