PrimeEnergy Corporation — Q2 2012 Form 10-Q
Business context and period. The filing is for the quarter and six months ended June 30, 2012. The registrant named in the filing is PrimeEnergy Corporation. It is an independent U.S. oil and gas company, with oilfield services operations. Financial statement amounts below are in millions of dollars unless stated otherwise; interim statements are unaudited.
Financial performance
| Metric | Three months ended June 30, 2012 | Six months ended June 30, 2012 | Comparable 2011 period |
|---|---|---|---|
| Total revenue | $37.43 | $64.13 | $35.51 quarter; $54.28 six months |
| Income from operations | $12.17 | $14.96 | $6.38 quarter; $4.49 six months |
| Net income attributable to PrimeEnergy | $7.42 | $8.75 | $3.20 quarter; $0.82 six months |
| Diluted earnings per share | $2.20 | $2.57 | $0.92 quarter; $0.23 six months |
| Operating margin, calculated as operating income / total revenue | 32.5% | 23.3% | 18.0% quarter; 8.3% six months |
- Oil and gas sales were $20.83 million in Q2 and $43.87 million for the half year. Six-month oil sales rose 1%, while gas sales declined: gas prices fell 28% and production fell 4% year over year. Q2 oil and gas sales declined 7%, as lower prices and gas volumes outweighed increased oil production.
- Reported revenue includes mark-to-market derivative results. Unrealized derivative gains were $8.88 million in Q2 and $5.10 million for the half year, versus gains of $6.01 million and losses of $3.50 million, respectively, in 2011. These non-cash valuation changes materially affect period comparisons.
- For the first half, operating cash flow was $26.08 million; capital expenditures, including exploration, were $51.71 million, leaving a $25.63 million shortfall before asset-sale proceeds. Investing cash flow was negative $50.87 million, financing cash flow positive $24.84 million, and cash increased $0.06 million to $8.72 million.
- At June 30, cash was $8.72 million and restricted cash $5.43 million. Current assets of $38.46 million were below current liabilities of $43.27 million. Bank debt was $97.75 million, up from $69.80 million at year-end. The $125 million borrowing base left $27.25 million available; the company said it was in compliance with covenants. The facility is secured by substantially all oil and gas properties.
- Equity was $42.12 million. Net oil and gas properties were $163.49 million, compared with $136.75 million at year-end.
Material changes and business developments
- First-half attributable net income increased to $8.75 million from $0.82 million. Management attributed the improvement principally to derivative gains and lower depletion and depreciation, partly offset by higher lease operating costs and income taxes. The reported net-income improvement therefore should be considered alongside underlying commodity sales and derivative valuation movements.
- First-half oil production rose 18% to 357,000 barrels, while gas production fell 4% to 2.302 million Mcf. Management linked oil growth to drilling and Gulf Coast activity, and gas declines mainly to natural decline in offshore properties.
- Lease operating expense rose 16% to $19.47 million for the half year, reflecting salt-water disposal, production taxes, and chemicals for new wells. DD&A and accretion declined 23% to $13.96 million, primarily because of lower depletion rates on offshore properties.
- Field-service income increased 7% to $10.45 million for the half year, with management citing improved equipment utilization and rates. The company acquired additional working interests in Gulf Coast producing properties for a net $6.32 million in February.
- Through July 31, 2012, the company had drilled 20 gross (16.30 net) wells, with 19 gross (16.27 net) successful completions, and one well still drilling. It planned approximately 35 gross (30 net) wells for 2012, mainly in West Texas.
Outlook, risks, contingencies, and unusual items
- Management described operating cash flow and the credit facility as primary liquidity sources. Capital spending is largely discretionary and depends on business conditions and available prospects. The company planned continued drilling, acquisitions, and share repurchases.
- Commodity-price volatility, production and reserve uncertainty, drilling cost overruns, technical difficulties, and the ability to replace or expand reserves were identified as risks. Derivatives may limit gains when prices rise; mark-to-market accounting can make reported revenue and earnings volatile. The company sells most production at spot prices.
- Offshore plugging and abandonment work was substantially completed by June 30. The asset retirement obligation declined from $19.01 million to $9.77 million, including $14.58 million of liabilities settled and $3.57 million of estimate revisions. The company noted that retirement-cost estimates rely on significant assumptions and can vary.
- Management said affiliated partnership cash reserves were expected to cover their obligations, and it did not expect environmental matters or ordinary-course legal actions to materially affect financial condition or results. Legal proceedings were reported as none.
- The company repurchased 79,032 treasury shares for approximately $1.94 million during the half year; this included 45,179 shares bought from a director in April for $1.13 million. No specific earnings guidance was provided.
Important facts for investors to verify
- How much of reported earnings growth is attributable to cash-generating operations versus non-cash derivative gains and depletion-rate changes.
- Whether planned drilling delivers the expected production and reserve growth, and how declining offshore gas production affects the portfolio.
- Borrowing-base redeterminations, covenant compliance, and liquidity headroom given the current-liability deficit and substantial planned capital expenditures.
- The final costs and settlement of offshore plugging obligations, and the assumptions underlying asset retirement estimates.
- The filing metadata supplied with the request identifies “PrimeEnergy Resources Corp,” while this 10-Q names “PrimeEnergy Corporation”; verify the intended issuer.