PrimeEnergy Corporation — Q1 2013 Form 10-Q
Business context and period: The filing covers the three months ended March 31, 2013, compared with Q1 2012. PrimeEnergy is an independent U.S. oil and natural gas producer with field services operations. Financial statement amounts below are in millions of dollars unless noted.
Key financial results
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Total revenue | $26.97 | $26.71 |
| Oil and gas sales | $21.36 | $23.03 |
| Operating income | $4.59 | $2.79 |
| Net income attributable to PrimeEnergy | $2.26 | $1.32 |
| Basic / diluted earnings per share | $0.90 / $0.70 | $0.49 / $0.39 |
| Cash provided by operating activities | $11.41 | $10.28 |
| Capital expenditures, including exploration | $11.52 | $20.70 |
- Operating margin was approximately 17.0% of reported revenue, versus 10.5% in Q1 2012; net income attributable to PrimeEnergy was approximately 8.4% of revenue, versus 5.0%.
- At March 31, cash and cash equivalents were $8.01 million, with another $4.54 million restricted. Current assets were $28.78 million and current liabilities $31.27 million.
- Bank debt was $122.0 million, unchanged from year-end 2012. The $250 million revolving facility had a $145 million borrowing base and $23 million available; weighted-average borrowing rate was 3.57%. The company reported covenant compliance.
Changes and operating drivers
- Net income attributable to PrimeEnergy rose 71%. Management attributed the improvement mainly to lower depletion and depreciation expense and smaller unrealized derivative losses, partly offset by lower oil and gas sales, higher lease operating costs, and higher income tax expense.
- Oil and gas sales declined 7% as average oil price received fell 14% to $86.08 per barrel. Oil production increased 4% to 184,000 barrels; gas production increased 3% to 1.19 million Mcf, while the average gas price rose 1% to $4.62 per Mcf.
- Reported revenue includes derivative effects: unrealized derivative losses were $2.08 million, compared with $3.78 million in Q1 2012. Realized derivative gains were $0.24 million, versus $0.12 million. Management noted that mark-to-market accounting can cause earnings volatility.
- Lease operating expense increased 5% to $9.98 million. Depreciation, depletion, amortization and accretion declined 29% to $4.88 million, primarily due to lower depletion rates after offshore properties were plugged and abandoned during 2012. Interest expense increased 41% to $1.07 million.
- Investing cash outflow was $10.34 million. Financing cash outflow was $1.67 million, including $1.63 million spent repurchasing 56,641 shares. Cash declined by $0.60 million during the quarter.
Outlook, risks and contingencies
- Management planned approximately 30 gross (20 net) wells in 2013, primarily in West Texas, at an estimated net cost of $36 million. Through April 30, two gross (0.14 net) wells had been drilled successfully and were awaiting completion; one gross (0.42 net) well was drilling.
- The company identified operating and financial sensitivities including oil and gas prices, production performance, drilling costs and results, reserve estimates, and the ability to replace and expand reserves. Commodity hedges can limit participation in price increases and introduce counterparty exposure.
- The borrowing base is redetermined semi-annually and may be reduced based on lenders’ reserve assessments, potentially reducing liquidity or requiring repayment if borrowings exceed the applicable borrowing base. Oil and gas properties secure the facility.
- Asset retirement obligations were $9.21 million. Management said estimates depend on assumptions about plugging costs, inflation, well lives and discount rates, and actual costs may differ significantly.
- As managing general partner of affiliated partnerships, the company may be responsible for partnership liabilities if partnership assets are insufficient; management said partnership cash reserves exceeded their obligations and were expected to be sufficient. Management did not expect environmental matters or ordinary-course legal proceedings to materially affect results or financial position; the filing reports no legal proceedings in Part II.
- No specific commodity-price or earnings guidance was provided. Management described its forward-looking statements as subject to substantial risks and uncertainties.
Important facts for investors to verify
- Whether drilling activity and the planned $36 million net program deliver expected production, reserves and returns.
- Current borrowing-base availability, covenant headroom and exposure to future reserve-based borrowing-base reductions.
- Production volumes and realized prices, including the effects and valuation of commodity derivatives.
- Oil and gas reserve estimates and the assumptions underlying asset retirement obligations.
- Whether the reported earnings improvement persists after accounting for lower oil sales, higher operating costs, taxes and derivative volatility.