PrimeEnergy Resources Corporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019, compared with Q1 2018; balance-sheet comparisons are to December 31, 2018. Interim financial statements are unaudited. PrimeEnergy is an independent U.S. oil and natural gas producer, with properties primarily in Texas, Oklahoma, and West Virginia, and also operates field-services businesses. Unless noted otherwise, dollar amounts are in millions.
Financial performance
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Total revenue | $24.42 | $28.47 |
| Operating income (loss) | $(2.79) | $5.25 |
| Net income (loss) attributable to PrimeEnergy | $(3.04) | $3.29 |
| Basic and diluted earnings (loss) per share | $(1.49) | $1.53 basic; $1.14 diluted |
| Cash from operating activities | $(0.25) | $(1.59) |
| Capital expenditures, including exploration | $5.21 | $10.73 |
Reported operating and net margins were approximately (11.4)% and (12.4)%, respectively, based on total revenue. Revenue includes derivative mark-to-market results: Q1 2019 included a $5.75 million unrealized derivative loss, compared with a $1.82 million loss in Q1 2018. Oil, gas, and NGL sales excluding derivative gains and losses totaled $23.88 million, down about 4.7% year over year.
Production volumes increased: oil rose 10% to 356,000 barrels, natural gas rose 5% to 948,000 Mcf, and NGLs rose 42% to 142,000 barrels. Lower realized prices partly offset higher volumes: oil averaged $52.80 per barrel, gas $2.36 per Mcf, and NGLs $20.02 per barrel, all below Q1 2018.
Liquidity, debt, and balance sheet
- Cash was $8.25 million at March 31, up from $6.32 million at year-end. Current assets were $31.45 million and current liabilities $30.78 million; the resulting current ratio was approximately 1.02.
- Long-term bank debt was $73.52 million, with a further $0.44 million current portion. The revolving facility had a $100 million borrowing base; $73.5 million was drawn and $26.5 million available at quarter-end. The stated weighted-average borrowing rate was 5.44%.
- At May 14, the company reported $71.5 million drawn and $28.5 million available. Equipment-loan balances were to be paid off by June 1, 2019, according to management.
- Operating cash flow was negative, while financing provided $6.73 million, principally from $8.0 million of bank borrowings. Cash capital spending exceeded operating cash flow.
- Total assets were $258.53 million and total liabilities $156.55 million at March 31. The filing reports $597,000 of operating-lease assets and liabilities following adoption of the new lease standard.
Changes, outlook, and risks
- The $7.33 million year-over-year deterioration in net income reflected the larger unrealized derivative loss, weaker commodity prices, lower gains on asset sales, and higher expenses. Asset-sale gains declined to $0.67 million from $2.47 million.
- Lease operating expense fell to $8.08 million from $8.58 million; field-service income increased to $4.73 million from $4.22 million, while field-service expense rose to $3.67 million from $3.21 million. DD&A and accretion increased to $9.26 million from $7.92 million. G&A increased to $6.88 million from $5.98 million.
- Management said the 2019 capital budget reflects lower commodity prices and expected available cash flow; any shortfall may be funded through the revolver. The company may adjust spending, sell non-strategic assets, or pursue joint ventures. No total dollar amount for the 2019 capital budget is provided in the filing text.
- Development activity includes eight West Texas wells brought on production in February, in which the company holds a 49.3% interest, and three additional West Texas wells expected online in June. Seven Oklahoma wells were expected to be completed and placed on production in Q2. Further development depends on results, costs, commodity markets, and available funding.
- The next borrowing-base review was scheduled for June 2019. Management said the company was in compliance with covenants and expected to remain compliant for the next 12 months, but a borrowing-base reduction could restrict availability or require repayment of excess borrowings.
- Commodity-price volatility, production performance, drilling costs and technical risks, reserve-estimate uncertainty, and counterparty exposure on derivatives are identified risks. Management expects no material adverse effect from disclosed environmental or ordinary-course legal matters; the filing reports no legal proceedings.
Important facts for investors to verify
- How much of the Q1 loss was caused by non-cash derivative remeasurement, and what commodity exposure remains under the hedge portfolio?
- Whether the June borrowing-base review changed the $100 million borrowing base, availability, or covenant headroom.
- Actual completion timing, costs, and production results for the West Texas and Oklahoma wells, and the resulting capital requirements.
- Whether commodity prices and working-capital movements improve operating cash generation enough to support planned spending and repurchases.
- The MD&A contains apparent inconsistencies or typographical errors, including an incorrect reference to the loss period and a stated G&A increase percentage that does not match the reported dollar amounts; investors should rely on the financial statements and confirm the intended discussion.