PrimeEnergy Corporation (registrant named in filing) — Q1 2017 Form 10-Q
Business context and period. Independent U.S. oil and natural gas producer and field-services provider. This unaudited report covers the three months ended March 31, 2017, compared with Q1 2016; balance-sheet comparisons are with December 31, 2016. Unless noted otherwise, financial figures below are in millions of dollars.
Financial performance and position
- Revenue: $20.48 million, up from $13.16 million. Oil and gas sales rose 74% to $12.44 million; field-service income fell 11% to $3.76 million. Revenue also included a $2.80 million unrealized derivative gain and a $0.23 million realized derivative loss.
- Profit: Net income was $28.01 million, of which $22.30 million was attributable to PrimeEnergy; diluted EPS was $7.35 (basic EPS $9.77). Q1 2016 had a $1.18 million consolidated net loss and a $1.86 million loss attributable to PrimeEnergy, or $(0.81) per share.
- Major nonrecurring contributor: Gain on sale and exchange of assets was $41.60 million, versus $4.92 million a year earlier. The company reported $46.4 million of proceeds from Q1 sales and farm-outs of non-core properties.
- Costs and margins: Total costs and expenses were $19.80 million, versus $19.28 million. DD&A and accretion rose 50% to $7.94 million; lease operating expense fell 11% to $7.14 million, and G&A fell 29% to $1.74 million. Results were also affected by lower field-service utilization and rates.
- Production and prices: Oil production increased 8% to 175,000 barrels; gas production increased 0.6% to 1.112 million Mcf. Average realized prices excluding derivatives were $49.52 per barrel and $3.39 per Mcf, compared with $28.91 and $2.21. Including derivatives, reported prices were $49.12 per barrel and $3.25 per Mcf.
- Cash flow: Operating cash flow was $16.63 million, compared with $1.16 million. Investing cash flow was positive $27.57 million, including $46.44 million of property and equipment sale proceeds, against $18.87 million of capital expenditures. Financing cash flow was negative $38.76 million, principally reflecting $38.67 million of debt repayments. Cash rose to $12.01 million from $6.57 million; restricted cash was an additional $3.54 million.
- Debt and liquidity: Total debt was approximately $30.6 million, comprising $24.8 million drawn under the revolver and about $5.8 million of equipment loans. The new credit agreement provides a $300 million facility, with a $75 million borrowing base; $50.2 million was available at quarter-end. Current assets were $24.84 million and current liabilities $47.77 million. Accrued liabilities increased to $30.58 million from $8.18 million, including income tax accruals of $10.96 million and property costs of $10.71 million.
Material changes, outlook, and risks
- Management attributed the year-over-year improvement to higher oil and gas prices and production, asset-sale gains, and lower operating and G&A costs. The large reported profit was substantially influenced by the asset-sale gain and derivative mark-to-market gains.
- In February 2017, the company extended its revolving credit facility maturity to February 2021. The facility is secured by substantially all oil and gas properties, has financial covenants, and its borrowing base is subject to semiannual lender review. Management reported covenant compliance and expected continued compliance over the next 12 months; the next borrowing-base review was scheduled for June 2017.
- Management planned continued drilling, including an expected 27 West Texas horizontal wells in 2017. It described substantial prospective development with Apache and other partners, but timing and investment depend on drilling schedules and commodity prices. The filing does not provide a consolidated 2017 capital-budget amount or earnings guidance.
- The company said it may adjust capital spending, sell non-strategic assets, or pursue joint ventures to preserve liquidity. It was in discussions with financial partners regarding development funding and potential revolver repayment if borrowing capacity were constrained.
- Commodity prices, production performance, reserve estimates, drilling costs and technical results are key risks. Derivatives can limit benefits from price increases and introduce counterparty exposure; unrealized commodity-derivative gains and losses create earnings volatility. A lower borrowing base could restrict borrowing or require repayment.
- Management said environmental and ordinary-course legal matters were not expected to materially affect financial condition or results; the legal-proceedings item reports none. Asset-retirement estimates depend on cost, inflation, well-life and discount-rate assumptions and may change materially.
Most important facts to verify
- How much of the $41.60 million asset-sale gain is nonrecurring, and how it reconciles with the $46.4 million sale and farm-out proceeds.
- Whether the $16.63 million operating cash flow is sustainable, given the quarter’s large increase in accrued liabilities and the impact of working capital.
- Results of the June 2017 borrowing-base review, covenant headroom, and any resulting change to the $75 million borrowing base or $50.2 million availability reported at quarter-end.
- Actual drilling expenditures, well outcomes, and the company’s share of the planned partner-led development program.
- Commodity hedge volumes and prices, derivative valuation assumptions, and the sensitivity of earnings and liquidity to oil and gas prices.