PrimeEnergy Corporation — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2013. The interim financial statements are unaudited. The filing identifies the registrant as PrimeEnergy Corporation.
Business context and financial results
PrimeEnergy is a U.S. oil and natural gas producer, with oilfield field-service operations and properties primarily in Texas, Oklahoma, West Virginia, the Gulf of Mexico, New Mexico, Colorado and Louisiana. Unless noted otherwise, financial amounts below are in millions of dollars.
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Total revenue | $29.98 | $26.26 | $94.23 | $90.39 |
| Income from operations | $4.85 | $2.95 | $20.63 | $17.91 |
| Net income | $2.62 | $1.56 | $11.54 | $10.78 |
| Net income attributable to PrimeEnergy | $2.23 | $1.34 | $10.58 | $10.09 |
| Basic / diluted EPS | $0.92 / $0.71 | $0.51 / $0.40 | $4.32 / $3.32 | $3.81 / $2.98 |
For the nine-month period, operating margin was approximately 21.9% versus 19.8% in 2012; Q3 operating margin was approximately 16.2% versus 11.2%. These are calculated as income from operations divided by total revenue. The filing does not report a separate gross-margin measure.
Cash flow, liquidity and debt
- Nine-month operating cash flow was $30.71 million, compared with $33.39 million in 2012. Capital expenditures, including exploration, were $22.46 million; operating cash flow less these expenditures was approximately $8.25 million, before asset-sale proceeds and other investing items.
- Cash and cash equivalents were $11.52 million at September 30, 2013; restricted cash was an additional $3.27 million. Current assets were $35.47 million and current liabilities $34.00 million, or approximately $1.47 million of working capital.
- Balance-sheet bank debt was approximately $116.85 million, including the current portion; the comparable December 31, 2012 balance was $122.00 million. The company also disclosed $107.0 million outstanding on its revolving facility and $9.8 million on equipment financing.
- The revolving facility had a $145 million borrowing base, $38 million available, and a July 2017 maturity. Oil and gas properties secure the facility; management said the company was in covenant compliance. The $10 million equipment loan, entered into in July 2013 at 3.95%, is secured by field-service equipment.
- Total assets were $238.50 million and total equity $52.55 million at September 30, 2013. The current ratio was approximately 1.04.
Material changes and operating trends
- Nine-month revenue rose 4.2% and net income attributable to PrimeEnergy rose 4.9%; Q3 parent-attributable net income increased 66% year over year.
- Oil and gas sales increased 8.8% for the nine months to $71.44 million. Production rose 4% for oil to 560,000 barrels and 5% for gas to 3.667 million Mcf. Average unhedged wellhead prices increased 3% for oil and 10% for gas year over year for the nine-month period.
- Field-service income increased 20% for the nine months to $18.35 million, which management attributed to added equipment and higher rates. Field-service expenses also increased 17% to $15.22 million.
- Lease operating expense increased 12% to $32.31 million, driven mainly by labor, chemicals, new wells and workovers. Depreciation, depletion, amortization and accretion declined 18% to $16.33 million, largely due to lower depletion rates on offshore properties after properties were plugged and abandoned in 2012.
- Derivative results worsened: the filing reports a $2.60 million net derivative loss for the first nine months of 2013, versus a $2.83 million gain in 2012. Q3 included a $1.20 million realized loss and a $3.87 million unrealized loss. Commodity derivative fair value was a net liability of $1.58 million at period-end.
- Interest expense increased 25% for the nine months to $3.16 million. The effective income-tax rate was 36%, compared with 32% in the prior-year period.
Outlook, risks and other disclosures
- Management planned approximately 25 gross (14 net) wells during 2013, primarily in West Texas and the Mid-Continent, at an estimated net cost of approximately $20 million. Through October 31, the company had participated in 18 gross (10.25 net) wells: 12 producing, three being completed and three drilling. These are plans and activity updates, not a formal earnings forecast.
- Management cited drilling and acquisition opportunities, reserve growth and oilfield-service investment as priorities. It noted that future spending is discretionary and depends on prospects, market conditions and business opportunities.
- Key risks discussed include oil and gas price volatility, production and well-performance variability, drilling cost overruns and technical difficulties, reserve-estimate uncertainty, ability to replace reserves, and borrowing-base reductions. Commodity derivatives can limit gains from higher prices and create counterparty exposure; mark-to-market accounting adds earnings volatility.
- Asset-retirement obligations were $10.44 million before current/noncurrent balance-sheet classification. Management noted estimates depend on assumptions about abandonment costs, inflation, well lives and discount rates. It said environmental expenses and ordinary-course legal matters were not expected to have a material adverse effect; the legal-proceedings section reports none.
- The company repurchased 97,682 shares for $2.98 million during the nine months. Management reported disclosure controls were effective and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether production growth and well results support management’s stated 2013 drilling plan and reserve-growth objectives.
- Oil and gas price exposure, hedge volumes and terms, and the effect of derivative mark-to-market losses on reported earnings and cash flows.
- Revolving-facility borrowing-base levels, covenant headroom and liquidity after planned capital spending and repurchases.
- The drivers and sustainability of higher operating costs, field-service margins and lower depletion expense.
- Asset-retirement estimates and the assumptions underlying reserve and property valuations.