PrimeEnergy Corporation — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017; unaudited. The filing identifies the registrant as PrimeEnergy Corporation. Amounts below are in U.S. dollars; financial statement amounts are shown in millions unless noted.
Business context
PrimeEnergy is an independent oil and natural gas producer and field-services provider, with U.S. properties primarily in Texas, Oklahoma, West Virginia, New Mexico and Colorado. Its development activity includes horizontal drilling in West Texas and Oklahoma. The company says its main liquidity sources are operating cash flow, field services and sales of non-core acreage.
Financial performance and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenues | $17.2 | $16.5 | $59.2 | $43.7 |
| Oil and gas sales | $12.6 | $11.6 | $39.0 | $27.4 |
| Gain on sale/exchange of assets | $0.4 | $10.5 | $42.1 | $26.9 |
| Net income (loss), consolidated | $(1.9) | $4.7 | $26.3 | $7.8 |
| Net income (loss) attributable to PrimeEnergy | $(2.0) | $4.9 | $20.6 | $5.6 |
| Basic EPS | $(1.22) | $2.15 | $9.29 | $2.44 |
- Revenue and production: Nine-month oil and gas sales rose 42.5%, reflecting higher realized prices and increased production. Oil production increased 15.8% and gas production 4.8% year over year for the nine-month period. In Q3, oil production fell 4.5% while gas production rose 15.1%.
- Profit and margins: Q3 results turned to a loss despite higher oil and gas sales, in part because of higher depreciation, depletion, amortization and accretion and a much smaller asset-sale gain than in Q3 2016. Nine-month profit growth was substantially influenced by the $42.1 million asset-sale gain; reported results therefore do not represent recurring operating earnings alone.
- Cash flow and investment: Nine-month operating cash flow was $21.4 million, up from $5.0 million. Capital expenditures, including exploration, were $40.1 million; proceeds from property and equipment sales were $47.0 million. Financing cash outflow was $25.0 million. Cash and cash equivalents were $9.9 million at period-end, versus $6.6 million at year-end 2016; restricted cash was a further $4.2 million.
- Liquidity: Current assets were $25.5 million and current liabilities $35.5 million at September 30, 2017. The $300 million revolving facility had a $67 million borrowing base, $49.8 million outstanding and $17.2 million available. The company reported compliance with credit covenants and expected continued compliance over the next 12 months; the next borrowing-base review was scheduled for November 2017.
- Debt: Balance-sheet current and long-term debt totaled approximately $53.7 million, including bank and equipment debt. The revolving facility matures February 2021. Equipment loans had stated outstanding balances of approximately $1.8 million and $2.1 million, with maturities in 2018 and 2019/2020. Variable-rate bank borrowing costs increased year over year.
- Other balance-sheet changes: Total assets increased to $233.6 million from $214.7 million, while total equity rose to $82.7 million from $65.9 million. Accrued liabilities increased to $17.0 million from $8.2 million, mainly due to accrued property costs.
Material changes and operating developments
- During the first nine months, the company sold or farmed out non-core properties in West Texas, New Mexico and Oklahoma for $47 million in proceeds, while retaining royalty or working interests. It also acquired about 118 net mineral acres for $596,000.
- West Texas horizontal drilling had placed 28 wells on production by the end of Q3. The company reported that production from its horizontal wells was shut in during part of Q3 to accommodate offset-well completion work; 12 additional wells were brought online during Q4. Hurricane Harvey also caused some Gulf Coast production shut-ins.
- Field-service income increased 4.7% for the nine-month period, while field-service expense declined 4.5%. Nine-month DD&A and accretion rose 26.1%, reflecting increased production and the cost base of recently drilled and completed wells. Interest expense declined to $1.7 million from $2.8 million, which management attributed to lower revolving borrowings.
- The company repurchased 101,207 shares for $5.0 million during the first nine months. It also distributed $4.4 million to non-controlling interests.
Outlook, risks and contingencies
- The filing provides no quantified earnings or production guidance. Management said the 2017 capital budget was set based on expected cash flows and could be adjusted; shortfalls could be funded by the revolving facility. It also cited potential asset sales and strategic joint ventures as liquidity measures.
- Management described substantial future development opportunities, but timing and well counts depend on drilling schedules and commodity prices. Apache’s plans included five additional wells in Q1 2018, with an estimated $17 million company share of cost; longer-term development of the project was expected to require approximately $171 million of company capital. These are plans and estimates, not committed company-wide guidance.
- Commodity prices, production volumes, weather-related curtailments, operating performance and derivative valuations affect revenue and cash flow. Derivative contracts create mark-to-market earnings volatility and may limit participation in price increases. At September 30, net derivative liabilities were $0.5 million; nine-month derivative activity included a $3.1 million net gain recognized in earnings.
- A lower borrowing base could restrict additional borrowing or require repayment of debt above the revised base. Substantially all oil and gas properties secure the credit facility, which includes financial covenants and restrictions on items including share repurchases and dividends.
- Asset-retirement obligations totaled $17.7 million. Management noted that plugging-cost, inflation, well-life and discount-rate assumptions could materially affect estimates. The company is also responsible for affiliated partnership obligations to the extent partnership assets are insufficient, although it believed partnership reserves were adequate. Management did not expect environmental matters or ordinary-course legal actions to have a material adverse effect; the filing reported no legal proceedings.
Important facts for investors to verify
- How much of nine-month earnings and cash generation is repeatable apart from the $42.1 million gain on asset sales?
- What was the outcome of the November 2017 borrowing-base review, and did available credit or covenant headroom change?
- What are actual costs, timing and expected returns for the West Texas and Oklahoma drilling plans, including the estimated future capital commitments?
- How do production volumes, realized prices and derivative positions affect future cash flow, particularly if commodity prices or borrowing capacity weaken?
- What drove the increase in accrued property costs, and how will planned capital spending and share repurchases be funded?