PrimeEnergy Resources Corporation — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Unaudited condensed consolidated statements; dollar amounts below are in millions unless otherwise noted.
Business context
PrimeEnergy explores, develops and produces oil, natural gas and NGLs, with most proved reserves in West Texas. It also provides oilfield field services. Its strategy emphasizes horizontal drilling, particularly in the Permian Basin. Results are sensitive to commodity prices, production, regional price differentials and derivative valuations.
Financial results and liquidity
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Total revenue | $13.7 | $7.3 | $28.6 | $33.4 |
| Oil, gas and NGL sales | $15.4 | $4.7 | $28.0 | $17.5 |
| Operating loss | $3.0 | $10.3 | $4.4 | $9.9 |
| Net loss attributable to PrimeEnergy | $2.4 | $6.3 | $3.9 | $6.4 |
| Loss per share | $1.20 | $3.14 | $1.93 | $3.23 |
For the first half, operating cash flow was $11.4 million, compared with $8.8 million a year earlier. Capital expenditures, including exploration, were $3.7 million versus $6.0 million; cash at June 30 was $3.8 million, up from $1.0 million at year-end 2020.
At June 30, total assets were $198.5 million and total liabilities $104.4 million. Long-term bank debt was $32.7 million, in addition to $1.1 million of current debt. The revolving facility had a $40 million borrowing base, $32 million outstanding and $8 million available; the outstanding facility balance bore a 5.22% weighted-average rate. The facility matures February 2023 and is secured by substantially all oil and gas properties. Management reported covenant compliance and expected compliance for the next twelve months.
Changes versus the prior comparable period
- First-half oil, gas and NGL sales increased 60.6%, led by higher realized prices, while production volumes declined: oil down 13.2%, gas down 20.4% and NGLs down 8.5%.
- First-half total revenue fell despite higher commodity sales because derivative results swung from a $6.9 million gain in 2020 to a $6.9 million loss in 2021. Unrealized derivative losses were $6.0 million for the first half of 2021.
- First-half net loss narrowed to $3.9 million from $6.4 million. Lower general and administrative costs, lease operating expense and DD&A contributed; G&A declined about 50% to $5.1 million, which management attributed to staff reductions and lower compensation and benefits.
- Operating cash flow rose by $2.6 million year over year. Bank borrowings were reduced by $5.0 million net during the first half.
Outlook, commentary and risks
- Management said the 2021 capital budget is based on expected operating cash flows and current commodity prices. Any cash-flow shortfall may be funded under the revolving facility; the company may also adjust spending, sell non-strategic assets or pursue joint ventures.
- In Upton County, nine Apache-partnered horizontal wells, with PrimeEnergy holding an average 47.5% interest and an estimated $27.8 million net investment, were completed and being placed on production as of August 23, 2021. Other disclosed development concepts involve substantial potential spending, including approximately $146 million net for a 48-well AMI program; timing and scope depend on commodity markets and available funding.
- The next borrowing-base review was scheduled for October 2021. A reduction in the borrowing base could limit availability or require repayment of borrowings above the revised base. Management was discussing potential funding with financial partners.
- Commodity derivatives are not designated for hedge accounting, so mark-to-market changes flow through earnings. They reduce some price exposure but may limit upside and introduce counterparty risk. At June 30, derivative liabilities totaled $6.6 million; the fair-value estimates were Level 3 and included unobservable inputs.
- The company had applied for forgiveness of $1.75 million in PPP loans; any unforgiven portion would require repayment. Asset retirement obligations were $14.4 million. The company also bears potential liability for affiliated partnerships’ obligations to the extent their assets are insufficient. Management did not expect environmental or ordinary-course legal matters to have a material adverse effect; no legal proceedings were reported.
- The filing gives no formal earnings or production guidance. Management cautioned that commodity prices remain volatile and interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- October borrowing-base determination, covenant headroom and the $8 million of reported facility availability.
- Actual production and cash generation from the nine recently completed Upton County wells, relative to their estimated $27.8 million net cost.
- Whether PPP loans are forgiven and the resulting repayment obligations, if any.
- Commodity derivative positions, subsequent fair-value changes, and the sensitivity of earnings and cash flows to prices and regional basis differentials.
- Timing, funding and expected returns for the company’s large prospective drilling programs, given current liquidity and substantial potential capital requirements.