PrimeEnergy Corporation — 2016 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2016. This is an annual report, not a standalone fourth-quarter report. The filing identifies the registrant as PrimeEnergy Corporation.
Business context and financial performance
PrimeEnergy is a U.S. independent oil and natural gas producer, operator and well-services provider, with assets concentrated in Texas, Oklahoma, West Virginia and other U.S. states. West Texas accounted for 66% of year-end proved reserves. Management shifted toward horizontal drilling and emphasized preserving liquidity.
| Metric | 2016 | 2015 |
|---|---|---|
| Total revenue | $56.8 million | $79.1 million |
| Oil and gas sales | $38.3 million | $45.6 million |
| Operating income (loss) | $11.0 million | $(16.2) million |
| Net income (loss) attributable to PrimeEnergy | $3.4 million; $1.50 per basic share | $(12.8) million; $(5.53) per basic share |
| Cash from operations | $11.0 million | $21.2 million |
| Cash and cash equivalents | $6.6 million | $9.8 million |
| Total assets | $214.7 million | $226.3 million |
Operating income included a $32.4 million gain on asset sales and exchanges, compared with $1.4 million in 2015. The filing does not present a standard operating-margin measure; net income attributable to PrimeEnergy was approximately 6.1% of 2016 total revenue.
Operations, reserves and material year-over-year changes
- Oil and gas sales fell 16.1%. Oil production declined 6.9% to 670,000 barrels and gas production declined 3.2% to 4.546 Bcf. Average prices excluding derivative effects were $39.78 per barrel of oil and $2.56 per Mcf of gas.
- Field-service income decreased 26.3% to $15.4 million, partly reflecting lower service rates. Lease operating expense declined 21.9% to $27.5 million; field-service expense fell 29.0% to $12.5 million; and general and administrative expense fell 36.6% to $7.8 million.
- Year-end proved reserves were 7.674 million BOE, down from 10.204 million BOE in 2015. Proved developed reserves were 6.539 million BOE and proved undeveloped reserves were 1.135 million BOE. The standardized measure of discounted future net cash flows was $52.2 million versus $58.8 million; disclosed PV-10 was $57.2 million.
- Capital expenditures, including exploration expense, were $20.8 million. The company received $35.2 million from property and equipment sales; separately, it reported $34.4 million of 2016 proceeds from acreage sale and farmout agreements.
Liquidity, debt and financing
At December 31, 2016, current assets were $18.1 million and current liabilities were $27.2 million. Cash flow from operations decreased to $11.0 million. Cash declined by $3.2 million during the year; investing activities provided $14.4 million while financing activities used $28.6 million, including $39.9 million of debt repayments.
Year-end borrowings were approximately $69.2 million, including bank and equipment financing. The prior credit facility had an $80 million borrowing base, $63 million drawn under the revolving facility and $17 million available at year-end. A February 2017 amendment established a $300 million facility with a $75 million borrowing base and maturity in February 2021. As of March 31, 2017, the company reported $24.8 million outstanding and $40.2 million available. Oil and gas properties secure the facility, which includes financial covenants; management reported compliance and expected continued compliance over the following 12 months. The borrowing base was scheduled for review in June 2017.
Outlook, risks and unusual items
- Management’s 2017 capital program was designed around expected cash flow, with any shortfall to be funded through the revolver. The company may adjust spending, sell non-strategic assets or pursue joint ventures. It was also discussing external financing partners.
- Plans included continued horizontal development. Apache’s broader Upton County project contemplated approximately 60 wells and about $470 million of total development spending; PrimeEnergy estimated its share at approximately $120 million, with timing and activity dependent on commodity markets.
- Commodity-price volatility, production declines, reserve-estimate uncertainty, drilling and completion risks, borrowing-base reductions and covenant compliance are significant risks. Hedging limits upside and introduces counterparty exposure; commodity derivatives are not hedge-accounted, contributing mark-to-market earnings volatility.
- Customer concentration is notable: two oil buyers accounted for 40.72% and 15.18% of oil sales, and two gas buyers accounted for 34.18% and 11.87% of gas sales. The filing states there are no long-term purchase agreements.
- Asset retirement obligations rose to $17.5 million from $11.7 million, including a $5.5 million upward revision attributed to lower commodity prices and higher field costs shortening the expected productive life of marginal wells.
- The company reported no legal proceedings and said management did not expect ordinary-course legal matters or environmental compliance costs to materially affect its financial position. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor did not provide an internal-control attestation.
Important facts for investors to verify
- Reconcile the filing’s differing descriptions of year-end PUD locations: it refers to 18 locations with AFEs and definitive plans, but elsewhere describes 20 PUD wells and 1.135 million BOE of PUD reserves.
- Confirm the credit facility’s March 2017 availability, including any letters of credit or other borrowing-base constraints, and review the June 2017 borrowing-base redetermination and covenant headroom.
- Assess the sustainability of positive earnings given the $32.4 million asset-sale gain, falling operating cash flow and continued declines in production and proved reserves.
- Validate planned drilling capital requirements, especially PrimeEnergy’s projected share of Apache’s development, against cash flow, asset-sale proceeds and available borrowing capacity.
- Review commodity-hedge positions, counterparty exposure and the effect of mark-to-market accounting, alongside oil and gas purchaser concentration.