PrimeEnergy Corporation — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. The filing identifies the registrant as PrimeEnergy Corporation. The company is an independent U.S. oil and natural gas producer with a field-services business; interim financial statements are unaudited.
Financial performance and position
| Metric | Q2 2016 | Six months 2016 | Comparable 2015 |
|---|---|---|---|
| Total revenue | $14.1 million | $27.2 million | $19.5 million Q2; $42.3 million six months |
| Net income (loss), consolidated | $4.3 million | $3.1 million | $(1.8) million Q2; $(2.1) million six months |
| Net income (loss) attributable to PrimeEnergy | $2.5 million | $0.7 million | $(1.9) million Q2; $(1.9) million six months |
| Basic EPS attributable to PrimeEnergy | $1.10 | $0.29 | $(0.84) Q2; $(0.83) six months |
| Cash from operations | $4.9 million | $8.5 million for six months |
- Six-month oil and gas sales fell 40.4% to $15.8 million. Oil production declined 20% and gas production 11%; realized oil and gas prices also decreased year over year.
- Q2 operating income was $6.5 million and six-month operating income was $5.3 million, both including substantial gains on asset sales and exchanges: $11.4 million in Q2 and $16.3 million for six months. Excluding these gains, reported costs exceeded revenue in both periods.
- Operating expenses declined, including six-month lease operating expense of $15.5 million (down 15%) and G&A of $4.3 million (down 34%). Management attributed reductions to lower activity and costs, workforce measures, vendor-rate reductions, and deferred discretionary repairs.
- Six-month capital expenditures were $12.2 million, exceeding operating cash flow; property-sale proceeds were $16.3 million. Cash and cash equivalents increased to $18.6 million from $9.8 million at year-end; restricted cash was a further $3.3 million.
- At June 30, total assets were $233.2 million, total liabilities $167.8 million, and equity $65.3 million. Current assets of $29.6 million exceeded current liabilities of $25.7 million.
- Long-term bank debt was $93.0 million, with $3.1 million current debt. The company reported $88 million outstanding under its revolving facility at June 30, plus equipment-loan balances of approximately $8.1 million. Interest expense for the first half was $1.8 million.
Changes, outlook, and risks
- Results improved from losses in 2015, but the improvement was materially affected by asset dispositions. Lower commodity prices, lower production, and weaker field-service activity pressured recurring revenue. No commodity derivative gains or losses were recognized in 2016; 2015 included material realized gains and unrealized losses.
- The credit facility borrowing base was $95 million at June 30, but lenders reset it to $80 million effective July 22. The company paid down $8 million in July to comply. The facility matures July 2017; the next borrowing-base review was scheduled for November 2016. Oil and gas properties secure the facility, and management reported covenant compliance and expected continued compliance for the next 12 months.
- The July credit amendment required hedging forecast production for November 2016 through December 2018. Entered swaps covered oil at $48.00–$52.02 per barrel and gas at $2.97–$3.11 per MMBtu, depending on period.
- Management said 2016 capital spending would reflect lower commodity prices and available cash flow, with borrowing, asset sales, or joint ventures possible to address funding needs. It was in discussions with financial partners and reserved the ability to adjust capital plans. No specific full-year capital budget or earnings guidance is provided.
- Development plans are conditional on market conditions. The Apache Upton County program could involve about 60 wells and $470 million of total costs, with PrimeEnergy’s estimated share about $120 million; drilling was limited to acreage-maintenance wells until prices recover. Potential later-2016 drilling included two Apache wells (PrimeEnergy share about $4.5 million), two Martin County wells (share about $4.4 million), and an Oklahoma well (share about $1.8 million).
- The company received about $16 million from non-core acreage farm-outs and agreed in August to sell additional West Texas acreage for about $10 million, with closing expected in Q3 2016. Management cited commodity-price volatility, production and reserve uncertainty, drilling costs and technical risks, and the possibility of borrowing-base reductions. Partnership obligations, environmental matters, and ordinary-course legal proceedings were also discussed; management did not expect material adverse effects.
Important facts for investors to verify
- How much reported profitability depended on the $16.3 million first-half asset-sale gain, and whether comparable gains recur.
- Post-redetermination borrowing-base headroom, repayment capacity, covenant terms, and outcome of the November 2016 review.
- Cash generation and liquidity relative to planned drilling, equipment debt payments, and the facility’s July 2017 maturity.
- Actual proceeds and closing of the planned $10 million acreage sale, and the timing and economics of joint-venture drilling.
- Production trends, realized prices, field-services utilization, and reserve changes; management removed all but one PUD location from its year-end reserve report because of financing uncertainty.