PrimeEnergy Corporation — Q2 2017 Form 10-Q
Business context and period: The filing covers the three and six months ended June 30, 2017. PrimeEnergy is an independent oil and natural gas producer with field-services operations and properties primarily in Texas, Oklahoma, West Virginia, New Mexico, Colorado, and Louisiana. The filing identifies the registrant as PrimeEnergy Corporation.
Financial performance
Amounts below are in millions of dollars except per-share figures, production volumes, and where otherwise noted.
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenue | $21.5 | $14.1 | $42.0 | $27.2 |
| Oil and gas sales | $14.0 | $8.7 | $26.4 | $15.8 |
| Income from operations | $0.8 | $6.5 | $43.0 | $5.3 |
| Consolidated net income | $0.2 | $4.3 | $28.2 | $3.1 |
| Net income attributable to PrimeEnergy | $0.4 | $2.5 | $22.7 | $0.7 |
| Basic / diluted EPS | $0.16 / $0.12 | $1.10 / $0.83 | $10.11 / $7.57 | $0.29 / $0.22 |
- Cash flow: Six-month operating cash flow was $14.5 million, versus $4.9 million. Investing activities provided $16.1 million, including $46.6 million of property-sale proceeds, partly offset by $30.5 million in capital expenditures. Financing used $29.5 million, primarily reflecting $66.8 million of debt repayments, partly offset by $42.0 million of borrowings. Cash ended at $7.7 million, compared with $6.6 million at year-end 2016.
- Costs and margins: Six-month lease operating expense declined to $14.3 million from $15.5 million; field-service expense declined to $6.0 million from $6.9 million. DD&A and accretion increased to $16.0 million from $11.6 million. The filing does not provide a clear standalone operating-margin measure; reported operating income includes gains on asset sales.
- Balance sheet and debt: Total assets were $230.0 million and total liabilities $140.6 million at June 30. Current assets were $23.3 million versus current liabilities of $38.1 million. Bank debt was $44.5 million, including its current portion, compared with $69.3 million at December 31, 2016. Separate equipment-loan balances totaled about $4.7 million. Stockholders’ equity attributable to PrimeEnergy was $76.7 million; total equity, including non-controlling interests, was $89.4 million.
- Liquidity: The revolving facility allows up to $300 million, subject to a borrowing base. At June 30 the borrowing base was $75 million, with $39.8 million drawn and $35.2 million available. The base was reduced to $67 million effective July 19; the filing does not state updated availability after that redetermination.
Material changes and operating developments
- Six-month oil and gas sales rose 66.9%, reflecting higher realized prices and increased oil volumes. Oil production rose 28.5% to 401,000 barrels; gas production declined 0.5% to 2.173 million Mcf. For Q2, oil production increased 50.7% while gas production declined 1.8%.
- Six-month net income attributable to PrimeEnergy increased substantially, chiefly because the company recorded $41.7 million in gains on asset sales and exchanges, versus $16.3 million in the comparable 2016 period. The gain was only $0.1 million in Q2 2017, compared with $11.4 million in Q2 2016, helping explain the lower quarterly operating income and earnings despite higher revenue.
- Commodity derivatives generated $4.4 million in six-month unrealized gains and a $0.2 million realized loss. Derivative fair value shifted from a net liability of $3.6 million at year-end to a net liability of $0.8 million at June 30. The company does not apply hedge accounting to commodity derivatives, so mark-to-market changes affect reported earnings.
- During the first half, the company sold or farmed out non-core properties for $46.6 million, acquired about 118 net mineral acres for $596,000, and repurchased 92,824 common shares for $4.6 million. Capital investment and horizontal drilling activity continued in West Texas and Oklahoma.
Outlook, risks, and contingencies
- No formal earnings or production guidance is provided. Management said the 2017 capital budget reflects current commodity prices and expected cash flows, with any shortfall potentially funded by the revolver; spending may be adjusted, and non-strategic assets may be sold or joint ventures pursued.
- Management anticipated three additional West Texas horizontal wells in the second half of 2017. It described substantial ongoing and planned development with Apache in Upton County, including an estimated $33 million company share of investment in 14 wells and about $15 million for six further wells planned later in 2017. Project timing and well counts depend on schedules and commodity prices.
- Management reported compliance with credit-facility covenants and expected continued compliance over the next 12 months. Risks include lower commodity prices or reserves reducing the borrowing base, potential repayment requirements, covenant breaches, production variability, and counterparty exposure under derivatives. The facility is secured by substantially all oil and gas properties.
- PrimeEnergy has hedges covering portions of production through 2019. Management noted hedging can limit participation in price increases. It also cited possible funding discussions with financial partners to support development or repay debt if borrowing capacity becomes constrained.
- The company is responsible for affiliated partnership liabilities if partnership assets are insufficient; it said partnership cash reserves were adequate. Management did not expect environmental matters or ordinary-course legal proceedings to materially affect financial condition or results. Asset-retirement estimates depend on assumptions that may change materially.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting during Q2. No legal proceedings, defaults on senior securities, or other information were reported. As a smaller reporting company, the registrant did not provide the specified market-risk and risk-factor disclosures in this filing.
Important facts for investors to verify
- How much of the $41.7 million first-half asset-sale gain is nonrecurring, and what production or cash flow the divested properties would otherwise have contributed.
- The effect of the July 2017 borrowing-base reduction from $75 million to $67 million on available liquidity, covenant headroom, and planned capital spending.
- Whether rising oil production and development spending can sustain operating cash flow as production from existing properties naturally declines.
- The sensitivity of earnings and realized cash prices to commodity prices, derivative settlements, mark-to-market changes, and derivative counterparties.
- The expected funding and timing of disclosed horizontal-well projects, including management’s stated company-share investment estimates.
- The balance-sheet presentation and current-period effect of the large increase in accrued liabilities, particularly property costs and income taxes.