PrimeEnergy Resources Corporation — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. The interim financial statements are unaudited. Unless stated otherwise, amounts below are in millions of dollars; the filing presents financial statement amounts in thousands.
Business context
PrimeEnergy is an independent oil and natural gas producer, with properties primarily in Texas and Oklahoma, alongside field services and other interests. Its results are strongly affected by oil and gas prices, production, and commodity derivatives. The company’s 2021 year-end proved reserves were 12.252 million Boe, predominantly in West Texas; those figures are not a June 2022 reserve update.
Financial performance and liquidity
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Total revenue | $35.698 | $11.977 | $61.911 | $24.981 |
| Income (loss) from operations | $14.351 | $(2.982) | $28.984 | $(4.376) |
| Net income (loss) attributable to PrimeEnergy | $10.983 | $(2.403) | $22.125 | $(3.858) |
| Basic EPS | $5.57 | $(1.20) | $11.18 | $(1.93) |
| Operating cash flow | Not separately provided | Not separately provided | $27.480 | $11.424 |
- Q2 oil, gas and NGL sales, excluding derivative results, rose 127.3% to $34.917 million; first-half sales rose 145.5% to $68.819 million. First-half oil production increased 54.9% to 508,000 barrels, while realized prices excluding derivatives increased across oil, gas and NGLs.
- Operating margin, calculated as operating income divided by total revenue, was approximately 40.2% in Q2 and 46.8% for the first half; the comparable 2021 periods were negative. These comparisons include asset-sale gains and derivative effects in reported results.
- First-half investing cash flow was a $12.427 million inflow, including $14.836 million of property-sale proceeds, partly offset by $2.409 million of capital expenditures. Financing used $39.187 million, including $36.000 million of debt repayment and $3.187 million of share repurchases. Cash increased $0.720 million to $11.067 million.
- At June 30, total assets were $202.972 million, current assets $29.240 million and current liabilities $25.215 million. Total liabilities were $84.943 million and equity was $118.029 million. Bank debt was zero at quarter-end, compared with $36.000 million at December 31, 2021; short-term derivative liabilities were $9.791 million.
Changes and notable items
- The company swung from a first-half 2021 loss to first-half 2022 income, reflecting higher production and commodity prices, asset-sale gains, and changes in derivative valuation.
- Oil and gas sales increased substantially, but first-half realized and unrealized derivative losses totaled $13.913 million, versus $6.881 million in the prior-year period. Derivative contracts are not hedge-accounted, so mark-to-market changes flow through earnings.
- First-half asset sales generated $14.0 million gross proceeds from 1,809 net acres in Texas; a further 241 net acres in Oklahoma sold for $845,000 in Q2. The reported first-half gain on asset sales and exchanges was $14.836 million.
- Lease operating expense rose to $17.934 million for the first half, primarily from higher production taxes, workover activity and costs on returned-to-production properties. G&A increased to $9.090 million, primarily due to employee compensation and benefits.
Outlook, risks and contingencies
- Management described the 2022 capital program as dependent on expected operating cash flow and available credit, with spending adjustable as conditions change. The company reported eight wells being developed in the first half and anticipated them to begin production in August 2022; additional West Texas drilling was planned for late 2022 and 2023. The filing does not provide a formal earnings or production forecast.
- After quarter-end, on July 5, 2022, the company entered a new credit agreement with a $75 million initial borrowing base and maturity on June 1, 2026. The filing reported no borrowings as of August 15, 2022. The facility is secured by substantially all oil and gas properties and contains financial and operational covenants.
- Commodity prices are volatile, and derivatives may limit gains when market prices rise; derivative valuation depends partly on Level 3 inputs. The company also identifies potential borrowing-base reductions, operating and production variability, and uncertainty in plugging and abandonment estimates as risks.
- Management said it expected covenant compliance over the next 12 months. It reported no material expected adverse effect from environmental matters or ordinary-course legal proceedings; no legal proceedings were listed. Disclosure controls were deemed effective, with no material change in internal control reported.
Key facts for investors to verify
- How much of the earnings improvement is recurring operating performance versus asset-sale gains, commodity-price changes and derivative accounting?
- Whether planned drilling proceeds on schedule and within budget, and how the new wells affect production and cash generation.
- The size and economics of the hedge position, including potential effects on realized prices and future derivative liabilities.
- Available borrowing capacity, covenant headroom and the outcome of subsequent borrowing-base reviews under the new credit agreement.
- Whether share repurchases and planned capital spending remain supportable from internally generated cash flow, and how reserve and retirement-cost estimates evolve.