PrimeEnergy Resources Corporation — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Financial statement amounts below are in millions of dollars unless stated otherwise. The interim statements are unaudited.
Business context
PrimeEnergy is an independent oil and natural gas producer and field-services provider, with U.S. properties primarily in Texas, Oklahoma, and West Virginia. Its development focus includes horizontal drilling in the Permian Basin and Oklahoma’s SCOOP/STACK areas.
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $28.2 | $29.4 | $84.1 | $80.3 |
| Operating income | $4.0 | $6.5 | $9.5 | $11.9 |
| Net income attributable to PrimeEnergy | $2.5 | $4.4 | $5.2 | $7.1 |
| Diluted earnings per share | $0.91 | $1.54 | $1.90 | $2.49 |
- Nine-month oil and gas sales were $67.3 million, down 8.8%; production rose for oil (10.5%), gas (27.8%), and NGLs (33.2%), but lower realized prices more than offset volume growth. For the quarter, oil and gas sales fell 25.7%.
- Nine-month field-service income increased 9.3% to $14.4 million. Lease operating expense fell 9.1% to $24.4 million, while field-service expense, DD&A and accretion, and G&A increased.
- Cash from operations was $21.5 million versus $25.5 million. Capital expenditures were $16.1 million versus $29.3 million; operating cash flow less capital expenditures was approximately $5.4 million, compared with negative $3.8 million.
- Cash was $4.4 million at September 30. Current assets of $24.4 million exceeded current liabilities of $20.8 million. Total assets were $243.3 million and total liabilities $136.4 million.
- Revolving bank debt was $61.5 million at September 30, at a weighted-average rate of 5.15%. The borrowing base was $90 million, leaving $28.5 million available. At November 1, the company reported $59 million outstanding and $31 million available. Equipment loans were fully repaid in May 2019.
Material changes and operating developments
- Profitability declined despite increased production: lower oil, gas, and NGL prices reduced sales, while higher DD&A and G&A and lower asset-sale gains also weighed on results.
- Management said Permian gas prices were exceptionally weak, at times negative, due to takeaway constraints; it expected conditions to improve following the Gulf Coast Express pipeline’s September 2019 start-up.
- New horizontal wells contributed to production growth. Three Kashmir wells produced 137,800 gross barrels in their first 120 days. The company reported strong initial performance from eight West Texas wells brought online in February 2019.
- The company repurchased 31,226 shares for $4.1 million during the first nine months. It also purchased $0.3 million of affiliated partnership interests.
- Commodity derivatives produced a $1.8 million net loss for the first nine months, versus an $11.1 million loss in 2018. The contracts are not hedge-accounted, so fair-value changes affect reported earnings.
Outlook, risks, and contingencies
- No specific consolidated earnings or production guidance is provided. The 2019 capital program was based on lower commodity prices and expected cash flows; management said shortfalls could be funded with revolver borrowings. It may adjust capital spending, sell non-core assets, or pursue joint ventures.
- Management described substantial potential drilling opportunities, including up to 375 additional horizontal wells in the Permian and 105 in Oklahoma. These are prospective opportunities, not committed development plans; timing and investment depend on commodity prices, available cash, and financing.
- Management reported compliance with credit covenants and expected continued compliance over the next 12 months. The borrowing base was subject to semiannual review, with the next review scheduled for December 2019. A reduction could restrict borrowing or require repayment of excess debt.
- Risks identified include commodity-price volatility, drilling cost overruns and technical difficulties, operational risks, reserve-estimate uncertainty, and the ability to replace or expand reserves. Derivatives can limit gains from higher prices and create counterparty risk.
- The company is responsible for certain affiliated partnership obligations to the extent partnership assets are insufficient. Management did not expect environmental matters or ordinary-course legal actions to have a material adverse effect; the filing reports no legal proceedings.
- Management stated disclosure controls were effective and there were no material changes to internal control over financial reporting. Adoption of the new lease standard had no material financial-statement impact.
Important facts for investors to verify
- Track realized commodity prices and whether pipeline capacity improves Permian gas realizations; assess the effect on cash flow and derivative results.
- Review the December 2019 borrowing-base redetermination, covenant headroom, and the company’s ability to fund planned development without materially increasing debt.
- Compare subsequent well production and capital costs with management’s reported initial results and projected returns.
- Verify the scale and timing of future drilling plans and reconcile differing figures in the filing for the prospective 80-well offset program: one passage estimates gross cost of $648 million and company share of $281 million, while another states $748 million and $284 million.
- Monitor working-capital movements: accrued liabilities declined by $9.4 million during the nine months and were a significant use of operating cash flow.