PrimeEnergy Corporation — FY2013 Form 10-K
Reporting period: Year ended December 31, 2013; compared primarily with FY2012. The filing identifies the registrant as PrimeEnergy Corporation, not “PrimeEnergy Resources Corp” as stated in the request metadata.
Business context
Independent U.S. oil and natural gas producer, with properties concentrated in West Texas, Oklahoma, West Virginia, Texas Gulf Coast and other U.S. areas. The company also operates well-service and field-construction businesses. West Texas represented 80% of year-end proved reserves. It operated approximately 1,609 wells and held interests in additional non-operated properties.
Financial and operating performance
| Metric | FY2013 | FY2012 |
|---|---|---|
| Total revenue | $125.1 million | $121.0 million |
| Oil and gas sales | $92.8 million | $87.8 million |
| Net income attributable to PrimeEnergy | $12.3 million; $5.04 basic EPS | $15.1 million; $5.74 basic EPS |
| Operating cash flow | $35.7 million | $39.7 million |
| Capital expenditures, including exploration | $33.9 million | $86.3 million |
| Year-end total assets | $242.9 million | $228.1 million |
| Year-end total equity | $53.1 million | $44.2 million |
FY2013 consolidated net income was $13.4 million before $1.2 million attributable to non-controlling interests. Oil production fell 2% to 730,000 barrels; gas production increased 4% to 4.897 million Mcf. Average realized prices, excluding derivative effects, rose 5% for oil to $93.75 per barrel and 12% for gas to $4.97 per Mcf. Production cost averaged $25.21 per net equivalent barrel, up from $23.14.
Field-service income increased 22% to $24.9 million, while field-service expense rose 20% to $21.0 million. Lease operating expense rose 10% to $43.8 million. Operating income was $24.5 million, down from $25.1 million. Interest expense increased to $4.2 million; the effective tax rate was 36% versus 31%.
Liquidity, debt and reserves
At December 31, cash and cash equivalents were $9.5 million, with another $2.1 million restricted; current assets were $32.7 million and current liabilities $30.5 million. The company reported $112.5 million outstanding on its revolving credit facility and $9.4 million on the equipment loan at year-end; the balance sheet reports total current and long-term debt of approximately $121.9 million. The revolver borrowing base was $140 million, with $27.5 million available. The $250 million facility matures in July 2017 and is secured by oil and gas properties; the equipment loan is secured by field-service equipment. Management said the company was in covenant compliance.
Proved reserves increased 18% to 30.25 million Boe, with 47% developed and 53% undeveloped. The 10%-discounted pre-tax PV-10 was $335.8 million; the GAAP standardized measure after tax was $238.2 million, up from $213.3 million in 2012. These reserve valuations use prescribed year-end assumptions and are not estimates of market value.
Material changes, outlook and risks
- Attributable net income fell 18%, mainly from lower derivative gains and higher operating and field-service costs; higher commodity sales and service income partly offset the decline. Derivatives recorded a $1.3 million realized net loss and $0.6 million unrealized net loss in 2013, versus gains in 2012.
- Cash from operations declined by $4.0 million. Capital expenditures fell substantially year over year; 2013 acquisition, exploration and development spending was $25.9 million, and field-service equipment investment was about $8 million.
- Management planned approximately 20 gross (11 net) wells in 2014, primarily in West Texas, at an estimated net cost of $60 million. It planned to shift toward more horizontal drilling and expected continued stock and partnership-interest repurchases. Spending is discretionary and depends on operating and market conditions.
- Commodity prices, drilling results and reserve-estimate uncertainty, cost overruns, access to transportation and processing, environmental and hydraulic-fracturing regulation, and insurance gaps are significant risks. Plains All American and Sunoco bought 52% and 28% of oil sales; Atlas Pipeline and Unimark bought 40% and 13% of gas sales. There were no long-term purchase agreements.
- Management reported no material subsequent events and no material expected effect from environmental matters or ordinary-course legal actions; Item 3 reported no legal proceedings. The company may be liable for affiliated partnership obligations if their assets are insufficient, though it believed partnership reserves were adequate. Asset-retirement obligations were $10.5 million, increased in part by revised estimates and regulatory requirements.
- Commodity derivatives are marked to market through earnings, creating volatility and limiting gains if prices rise. The filing also notes a $10 million equipment loan entered in July 2013, with $8.9 million outstanding as of March 20, 2014.
Most important facts to verify
- Confirm the registrant identity and reconcile the request’s “PrimeEnergy Resources Corp” name with the filing’s PrimeEnergy Corporation.
- Review the full audited statements and debt agreements for borrowing-base redetermination, covenant headroom, collateral and repayment terms; year-end debt balances and the later March 2014 equipment-loan balance should be distinguished.
- Assess the assumptions, development schedule and funding needs behind the 53% proved-undeveloped reserve share and the planned $60 million 2014 drilling program.
- Evaluate derivative positions, counterparty exposure and the effect of commodity-price changes on earnings and cash flow; note that key derivative fair values use Level 3 inputs.
- Monitor customer concentration, operating-cost increases, environmental and abandonment obligations, and the company’s ability to fund investment while repurchasing shares. No common-stock dividend was paid, and the credit agreement restricts dividends.
The financial statements received an unqualified audit opinion. Management assessed disclosure controls and internal control over financial reporting as effective at year-end; the filing did not include an auditor attestation on internal control.