PrimeEnergy Corporation — FY2015 Form 10-K
Reporting period: Year ended December 31, 2015; comparison is FY2014. The filing identifies the registrant as PrimeEnergy Corporation (NASDAQ: PNRG), an independent U.S. oil and gas producer with well-servicing operations. It operates primarily in Texas, Oklahoma, West Virginia, New Mexico, Colorado and Louisiana. This is an annual report, not a standalone fourth-quarter report.
Financial and operating highlights
| Metric | FY2015 | FY2014 |
|---|---|---|
| Total revenue | $79.1 million | $144.6 million |
| Oil and gas sales | $45.6 million | $91.0 million |
| Net income (loss) attributable to PrimeEnergy | $(12.8) million; $(5.53) per share | $27.0 million; $11.45 per share |
| Net cash provided by operating activities | $21.2 million | $56.2 million |
| Capital expenditures, including exploration | $14.6 million | $38.8 million |
| Cash and cash equivalents at year-end | $9.8 million | $9.2 million |
| Total debt at year-end | Approximately $95.6 million | Approximately $101.4 million |
| Proved reserves | 10.204 million Boe | 37.197 million Boe |
| Standardized measure of discounted future net cash flows | $58.8 million | $343.3 million |
Oil and gas production was 720,000 barrels of oil and 4.696 million Mcf of gas, versus 759,000 barrels and 4.741 million Mcf in 2014. Realized prices excluding derivatives were $45.74 per barrel of oil and $2.71 per Mcf of gas. Average production cost was $21.24 per net Boe, excluding production taxes. The filing does not provide a clear consolidated profit-margin or EBITDA figure.
At year-end, current assets were $24.2 million and current liabilities were $23.0 million. Cash included $3.5 million of restricted cash. The credit facility had a $250 million commitment but a $95 million borrowing base; $86 million was drawn under the revolver, leaving $9 million available at December 31. The company also had equipment loans. Oil and gas properties collateralize the revolving facility.
Material changes versus FY2014
- Total revenue fell about 45%, while oil and gas sales declined 61.7%. Oil prices received excluding derivatives fell 44%; gas prices fell 46.4%. Production volumes were down modestly.
- The company moved from $27.0 million of attributable net income to a $12.8 million attributable net loss. Consolidated net loss was $13.2 million, compared with consolidated net income of $29.1 million in 2014.
- Derivative results were volatile: FY2015 included $21.2 million of realized gains and $16.9 million of unrealized losses, versus $0.1 million of realized gains and $17.6 million of unrealized gains in FY2014.
- Operating cash flow declined by $35.0 million. Capital expenditures fell to $14.6 million from $38.8 million, and debt declined by approximately $5.8 million.
- Proved reserves fell approximately 72.6%, from 37.197 million to 10.204 million Boe. Nearly all proved undeveloped reserves were removed from the year-end report because financing for the related drilling was uncertain. The standardized measure decreased by $284.5 million, principally reflecting lower prices and reserve revisions.
- Field-service income fell 20.5%; lease operating expense fell 19.9%, and general and administrative expense fell 15.2%. Depreciation, depletion, amortization and accretion expense rose 18%.
Outlook, risks and other notable matters
- Management’s 2016 priorities are liquidity preservation and financial flexibility. The capital budget reflects lower commodity prices, but the filing does not state a clear total budget amount. Cash-flow shortfalls may be funded with revolver borrowings; management may also adjust spending, sell non-core assets or pursue joint ventures and other financing.
- The company and Apache planned a larger Upton County, Texas horizontal program of about 60 wells and approximately $470 million of total costs; PrimeEnergy’s anticipated share was about $120 million. Drilling was limited to wells needed to maintain acreage until prices recover. Two planned wells were estimated to cost PrimeEnergy $6 million, subject to financing. In early 2016, two Martin County wells had been drilled and cased for $8.3 million, of which PrimeEnergy’s share was $8.1 million, and awaited completion.
- In the first quarter of 2016, acreage farm-outs generated $3.7 million, with another $1.0 million expected. These are post-year-end developments.
- Commodity-price declines, a possible borrowing-base reduction, reserve uncertainty and covenant compliance are key financial risks. The borrowing base is redetermined semi-annually; a reduction could restrict borrowing or require repayment of excess debt. Management reported compliance with covenants and expected continued compliance over the next 12 months.
- Other material risks include drilling and reserve-estimation uncertainty, dependence on hydraulic fracturing, environmental and regulatory exposure, operational hazards and insurance limitations, hedging-counterparty risk, and customer concentration. Three oil purchasers accounted for 79.4% of oil sales, and one gas purchaser accounted for 23.3% of gas sales; there were no long-term purchase agreements.
- The company reported no legal proceedings. It noted potential environmental liabilities and that, as managing general partner, it may be liable for partnership debts to the extent partnership assets are insufficient. Management did not expect these matters to have a material adverse effect.
- Disclosure controls and internal control over financial reporting were assessed as effective at December 31, 2015. The independent auditor issued an unqualified opinion on the financial statements; it did not audit internal control effectiveness.
Important facts for investors to verify
- Confirm the latest borrowing-base redetermination, revolver availability, debt maturities and covenant headroom, particularly given the July 2017 facility maturity.
- Assess whether operating cash flow and available financing can support planned 2016 spending and the company’s share of joint-venture commitments.
- Review the drivers and assumptions behind the sharp reserve and standardized-measure reductions, including price assumptions and reserve revisions.
- Separate realized cash settlements from non-cash mark-to-market derivative gains and losses when evaluating earnings and future price protection.
- Check subsequent production, completion results and actual costs for the Upton and Martin County wells, and whether further development proceeds as planned.
- Evaluate customer concentration, receivable collectability, environmental obligations and the adequacy and limits of insurance coverage.