PrimeEnergy Resources Corporation — FY 2019 Form 10-K
Reporting period: Year ended December 31, 2019; the filing was signed May 6, 2020. This is an annual report, not a standalone fourth-quarter report. The company is a U.S. oil and gas producer and well-services provider, with operations concentrated in Texas, Oklahoma, and West Virginia.
Financial and operating results
| Metric | 2019 | 2018 |
|---|---|---|
| Total revenue | $104.8 million | $118.1 million |
| Oil, gas and NGL sales, excluding derivative gains/losses | $84.0 million | $93.2 million |
| Net income attributable to PrimeEnergy | $3.5 million; $1.72 basic EPS | $14.5 million; $6.96 basic EPS |
| Cash from operating activities | $27.2 million | $39.1 million |
| Capital expenditures, per cash flow statement | $18.0 million | $47.1 million |
| Year-end cash | $1.0 million | $6.3 million |
| Year-end revolving-credit borrowings | $53.5 million | $65.5 million |
- Production rose year over year: oil to 1.242 million barrels (+4.6%), NGLs to 574,000 barrels (+24.0%), and natural gas to 4.397 Bcf (+17.7%). Lower realized prices more than offset volume growth. Oil, NGL and gas prices before derivatives fell 9.0%, 42.9% and 35.3%, respectively.
- Field-service income increased 8.4% to $19.2 million. Lease operating expense declined 4.4% to $33.5 million, while general and administrative expense rose 15.4% to $15.6 million.
- Derivative instruments produced a net loss of $4.1 million in 2019, versus a $1.2 million gain in 2018, including unrealized mark-to-market losses. Total revenue therefore includes significant derivative-related volatility.
- At year-end, total proved reserves were 14.235 million BOE, 75% proved developed. The standardized measure of discounted future net cash flows was $81.6 million, down from $137.9 million in 2018; pre-tax PV-10 was $100.0 million versus $161.9 million.
Changes and financial position
- Net income fell substantially from 2018, primarily reflecting weaker realized commodity prices and derivative results, despite higher production. Asset-sale gains increased to $4.6 million from $3.7 million.
- Operating cash flow decreased by $11.9 million. Cash used in investing fell to $13.5 million from $43.8 million, while financing activities used $19.0 million in 2019. The company repurchased $5.5 million of stock during the year.
- At December 31, the revolving facility had a $72 million borrowing base and $18.5 million of availability; lender commitments were $300 million. The facility matures February 15, 2021, is secured by oil and gas properties, and contains financial and operational covenants. The borrowing base had been reduced from $100 million early in 2019.
- Current assets were $16.4 million and current liabilities $15.6 million. Total liabilities were $126.0 million, including $53.5 million of bank debt and $20.3 million of asset-retirement obligations.
Outlook, risks and unusual items
- Management reported a sharp oil-price decline and demand disruption following the COVID-19 outbreak and 2020 market events. The full impact on 2020 results, liquidity and asset values could not be estimated. The company shut in marginal wells, reviewed further short-term shut-ins, reduced its workforce from 173 employees at year-end to 114, and sought to reduce costs.
- Management said the 2020 capital program would reflect commodity prices and available cash flow, with any shortfall expected to be funded by the revolving facility. It may also adjust spending, sell non-strategic assets or pursue joint ventures. No specific consolidated 2020 capital-budget amount is stated in the supplied filing text.
- The next borrowing-base review was scheduled for June 2020. Management warned that prolonged low prices could cause further borrowing-base reductions, required repayments, reserve reductions and additional property impairment. As of April 15, 2020, borrowings remained $53.5 million with $18.5 million available.
- Planned development entails material future spending and depends on prices, cash flow, financing and partner-operated activity. Six West Texas wells were expected to begin production in the fourth quarter of 2020, with the company’s share of their cost estimated at approximately $21 million.
- Commodity-price exposure, hedging counterparty performance, customer concentration, shut-ins, reserve-estimation uncertainty, environmental and regulatory obligations, and reliance on third-party operators are significant risks. Apache accounted for 53.98% of oil sales and 39.09% of natural gas and liquids sales in 2019; there were no long-term purchase agreements with these customers.
- The company applied for assistance under the CARES Act but stated there was no assurance it would receive funds. It reported no material legal proceedings. The independent auditor issued an unqualified opinion on the financial statements; management concluded disclosure controls and internal control over financial reporting were effective.
Investor verification priorities
- Confirm subsequent borrowing-base determinations, facility maturity or refinancing, covenant compliance, and any required repayments.
- Review actual 2020 commodity prices, production, shut-ins, cash flow, capital spending and workforce changes against management’s discussion.
- Verify reserve revisions, impairment charges and the assumptions underlying reserve values and standardized discounted cash flows.
- Check whether planned wells were completed on schedule and within budget, and assess funding obligations for partner-operated development.
- Assess hedge volumes, realized and mark-to-market results, counterparty exposure, and the effect of customer concentration on collections and sales.