Business context and reporting period
PrimeEnergy Resources Corporation is an independent U.S. oil and natural gas producer, operator and well-services provider, with properties primarily in Texas, Oklahoma and West Virginia. This Form 10-K reports the fiscal year ended December 31, 2018, with 2017 comparisons. The filing’s introductory text identifies the 2018 year, although one body-page heading incorrectly refers to the fiscal year ended December 31, 2019.
Financial and operating performance
| Metric | 2018 | 2017 |
|---|---|---|
| Total revenue | $118.1 million | $89.3 million |
| Oil, gas and NGL sales | $93.2 million | $66.9 million |
| Income from operations | $21.0 million | $42.0 million |
| Net income attributable to PrimeEnergy | $14.5 million | $42.0 million |
| Basic earnings per share | $6.96 | $18.99 |
| Net cash provided by operating activities | $39.1 million | $40.1 million |
| Capital expenditures, including exploration expense | $47.1 million | $59.4 million |
| Cash and cash equivalents at year-end | $6.3 million | $8.4 million |
| Revolving credit borrowings at year-end | $65.5 million | $47.7 million |
- Oil production rose 18.2% to 1.187 million barrels; NGL production increased 51.8% to 463,000 barrels; natural gas production increased 4.6% to 3.735 Bcf. Oil and gas sales increased 39.4%.
- Average realized prices before derivatives increased for oil to $60.46 per barrel, but declined for NGLs to $13.12 per barrel and gas to $2.30 per Mcf. Including derivatives, realized prices were $57.39 per barrel of oil, $18.17 per barrel of NGLs and $3.37 per Mcf of gas.
- Reported operating income included a $3.7 million gain on asset sales in 2018, compared with $41.3 million in 2017. The much smaller prior-year-comparable asset-sale gain was a major factor in the decline in reported operating and net income despite higher production and sales.
- Operating cash flow was slightly lower year over year. Investing activities used $43.8 million; financing activities provided $2.7 million. The company spent $8.0 million on stock repurchases in 2018.
- At December 31, current assets were $23.7 million and current liabilities were $30.5 million. The resulting working-capital deficit was approximately $6.7 million. The revolving facility had a $90 million borrowing base at year-end and $24.5 million of availability; a January 2019 amendment raised the base to $100 million. As of March 31, 2019, borrowings were $73.5 million, with $26.5 million available.
- Proved reserves increased to 12.665 million BOE from 10.672 million BOE; 12.622 million BOE were proved developed. The standardized measure of discounted future net cash flows was $137.9 million, up from $106.9 million in 2017. These reserve-based measures are estimates, not market values.
Changes, outlook and key risks
- Growth reflected successful horizontal drilling in West Texas and Oklahoma, acquisitions and increased production. The company completed 28 gross wells (6.1 net) in 2018; 14 were producing at year-end and 14 were shut in, with management reporting that these began production in the first quarter of 2019.
- Management’s 2019 priorities were preserving liquidity and financial flexibility while continuing horizontal development. The capital budget was based on expected cash flow, with any shortfall expected to be funded by revolving-credit borrowings. The filing does not provide a clear total 2019 capital-budget figure.
- Management described potential additional drilling in West Texas and Oklahoma, conditional on test results, commodity prices, financing and other factors. These opportunities are not a firm commitment or assured production outlook. Management noted that lower oil prices and West Texas pipeline constraints had slowed drilling activity in early 2019.
- Commodity prices, production and reserves, drilling results, transportation capacity, borrowing-base redeterminations and compliance with credit covenants are material risks. In 2018, Apache accounted for 50.9% of oil sales and 35.6% of gas sales; there were no long-term purchase agreements with the major purchasers.
- Other disclosed exposures include hedging-counterparty and mark-to-market volatility, environmental and regulatory obligations, wastewater disposal and induced-seismicity rules, climate-related regulation, operational hazards, cybersecurity, and limited control over non-operated properties. Environmental insurance is limited, and the company does not carry business-interruption insurance.
- The company reported compliance with credit covenants and expected continued compliance over the next 12 months. Its oil and gas properties secure the revolving facility; a borrowing-base reduction could limit borrowing or require repayment. No dividends were paid, and the credit agreement restricts dividend payments.
Important facts for investors to verify
- Confirm the correct reporting period and resolve the filing’s isolated 2019 fiscal-year heading against the 2018 Form 10-K cover and audited statements.
- Reconcile the MD&A’s net-income comparison with the audited statements: attributable net income is $14.529 million for 2018 and $41.998 million for 2017, while consolidated net income is $14.665 million and $47.434 million, respectively.
- Assess how much earnings and reserve-value growth depends on commodity prices, derivative fair-value changes, and asset-sale gains; review the assumptions used in the reserve report and standardized measure.
- Review the current borrowing base, outstanding debt, covenant headroom, 2019 capital spending and liquidity needs, including the timing and funding of prospective drilling.
- Evaluate purchaser concentration, pipeline and market access, and the economic results of the West Texas and Oklahoma wells expected to enter production in 2019.