PrimeEnergy Corporation — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited. The filing identifies the registrant as PrimeEnergy Corporation, while the request metadata names PrimeEnergy Resources Corp. Unless otherwise noted, financial figures below are in millions of dollars.
Business context
PrimeEnergy is an independent oil and natural gas company, with producing and non-producing properties primarily in Texas, Oklahoma, and West Virginia, plus a well-services business. Its current horizontal drilling focus includes the Permian Basin and central Oklahoma.
Financial results and position
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Total revenue | $28.467 | $20.475; up 39% |
| Oil, gas, and NGL sales | $25.064 | $12.438; up 102% |
| Income from operations | $5.251 | $42.281 |
| Net income attributable to PrimeEnergy | $3.286 | $22.297 |
| Basic / diluted EPS | $1.53 / $1.14 | $9.77 / $7.35 |
| Operating cash flow | $(1.585) | $16.627 |
| Capital expenditures | $10.734 | $18.866 |
| Cash and cash equivalents, March 31 | $8.417 | $8.438 at Dec. 31, 2017 |
| Total assets | $245.148 | $246.765 at Dec. 31, 2017 |
Revenue included a $1.821 million unrealized derivative loss and a $0.495 million realized derivative loss. The 2017 comparison included a $41.602 million gain on asset sales, versus $2.472 million in Q1 2018; this is the principal reason prior-year operating income and earnings were much higher. Q1 2018 net income also reflected higher oil and NGL sales, partly offset by higher lease operating and general and administrative expenses. G&A rose to $5.976 million from $1.736 million; management attributed the increase to reduced reimbursements associated with lower asset-sale gains and higher personnel costs.
Oil production rose 85% to 323,000 barrels, gas sales increased 5% to 907,000 Mcf, and NGL sales rose 79% to 100,000 barrels. Average realized prices, excluding derivative effects, were $62.23 per oil barrel, $2.61 per Mcf of gas, and $26.00 per NGL barrel. The effective tax rate fell to 24.98% from 32.79%, primarily due to the Tax Cuts and Jobs Act.
Liquidity, debt, and cash flow
Current assets were $22.058 million and current liabilities were $30.633 million, a current ratio of approximately 0.72. The company reported $62.5 million outstanding on its revolving credit facility and $22.5 million of remaining availability against an $85 million borrowing base; the facility’s total commitment is $300 million. Reported balance-sheet debt was approximately $64.8 million, including current and long-term debt. The revolver’s weighted-average interest rate was 5.25%. Oil and gas properties secure the facility, which has financial and operational covenants; management said the company was in compliance and expected to remain so over the next 12 months.
Operating cash flow was negative despite positive earnings, with working-capital outflows including a $13.537 million decrease in accounts payable and a $4.264 million decrease in accrued liabilities. Investing activities used $8.918 million, while financing provided $10.482 million, including $27.3 million of debt proceeds and $13.439 million of repayments. Cash ended the quarter at $8.417 million.
Material changes, outlook, and risks
- During Q1, the company acquired 464 net mineral acres, 53 wells, and a commercial salt-water disposal well in Reagan County, Texas, for $6.080 million. It also sold non-core properties, including interests in Oklahoma, Colorado, and Kansas.
- The company repurchased 67,218 shares for $3.379 million, an average $50.27 per share. Management said it expected to continue stock and limited-partnership interest repurchases during 2018.
- No quantified earnings or revenue guidance was provided. Management described its 2018 capital budget as based on expected cash flows, with any shortfall expected to be funded by revolver borrowings; it may adjust capital spending, sell non-strategic assets, or pursue joint ventures.
- Management anticipated 12 West Texas horizontal wells in 2018, including three drilled, completed, and awaiting hookup as of May 14. Further Apache joint-venture drilling was planned, but well counts, timing, and costs could vary with commodity markets. Oklahoma activity also included two wells underway and potential participation in up to five additional wells.
- Commodity-price volatility, production performance, drilling costs and technical results, reserve estimation, and access to borrowing-base capacity are key risks. The next borrowing-base review was scheduled for June 2018; a reduction could constrain borrowing or require repayment. Derivative contracts can limit gains from price increases and expose the company to counterparty credit risk.
- Commodity derivatives were valued using Level 3 inputs. At March 31, their net fair-value liability was $4.856 million, compared with $3.034 million at year-end. The company reported no legal proceedings and said it did not expect environmental or ordinary-course legal matters to materially affect its financial position or results.
- The company adopted revenue-recognition guidance in 2018 with no material effect on net earnings anticipated. It had not yet adopted the new lease standard and said the financial impact could not then be reasonably estimated.
Important facts for investors to verify
- Confirm the registrant identity: the filing is for PrimeEnergy Corporation, not the name supplied in the request metadata.
- Review the earnings comparison excluding the unusually large Q1 2017 asset-sale gain, and assess the effect of unrealized derivative marks on reported revenue and earnings.
- Reconcile negative operating cash flow with working-capital movements and planned capital spending, acquisitions, and share repurchases.
- Monitor the June 2018 borrowing-base redetermination, covenant compliance, and the company’s available liquidity relative to development commitments.
- Check the disclosed basic and diluted EPS figures and share-count differences: the filing reports 2,102,176 shares outstanding at March 31 and 2,097,054 at May 11, 2018.