PrimeEnergy Resources Corporation — Q1 2020 Form 10-Q
Business context and reporting period. The unaudited quarter ended March 31, 2020. PrimeEnergy is an oil and gas producer with field-services operations. It filed 45 days late under SEC COVID-19 relief, citing restricted office access and disruption to financial-reporting work. Amounts below are in millions of dollars unless otherwise noted.
Financial results and liquidity
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Total revenue | $26.108 | $24.419 |
| Oil, gas and NGL sales | $12.800 | $23.877; down 46.4% |
| Operating income (loss) | $0.398 | ($2.790) |
| Net loss attributable to PrimeEnergy | ($0.170); ($0.09) per share | ($3.038); ($1.49) per share |
| Cash from operations | $7.380 | ($0.246) |
| Capital expenditures | $1.583 | $5.213 |
| Cash and cash equivalents at quarter-end | $6.215 | $1.015 at December 31, 2019 |
| Bank debt | $53.500 | $53.500 at December 31, 2019 |
- Operating margin was approximately 1.5%; net loss attributable to the company was approximately 0.7% of revenue.
- Total revenue increased despite sharply lower commodity sales, primarily because unrealized derivative gains were $6.556 million, versus losses of $5.752 million a year earlier. Realized derivative gains were $1.197 million.
- Oil and gas sales prices and volumes weakened: oil price averaged $45.77/barrel, down 13.3%, while oil production fell 34.3% to 234,000 barrels. Gas price fell 61.7% to $0.90/Mcf; NGL price fell 51.1% to $9.79/barrel.
- Cash rose $5.2 million during the quarter. Investing cash outflow was $1.471 million; financing cash outflow was $0.709 million, including $0.709 million of treasury-stock purchases. The filing does not report a defined free-cash-flow measure.
- Current assets were $23.293 million and current liabilities $69.921 million, including $53.5 million of debt classified as current. The resulting current ratio was approximately 0.33. At December 31, 2019, the corresponding ratio was approximately 1.05, when the debt was classified as long-term.
- The revolving facility had a $72 million borrowing base, $53.5 million drawn and $18.5 million available. Its stated maturity is February 15, 2021; oil and gas properties secure the debt. The company reported covenant compliance.
Material changes, outlook and risks
- Oil, gas and NGL sales declined $11.077 million year over year. Lower commodity prices and production contributed; the company also cited natural decline and shut-ins of high-lifting-cost properties. Lease operating expense fell 21.4%, while general and administrative expense rose 12.5% to $7.736 million, primarily due to wages and benefits.
- Management described COVID-19, reduced energy demand and the 2020 oil-price collapse as major uncertainties and said it could not estimate their full-year financial impact. Prolonged low prices could reduce the borrowing base, require deficiency repayments, lower reserves and cause further property impairment.
- In response, the company reduced operating costs, planned temporary shut-ins of marginal wells through May and June, reduced its workforce, and said it would suspend stock repurchases in the current price environment. The 2020 capital budget amount is not clearly stated; management said spending could be adjusted and cash shortfalls funded through the credit facility.
- Six West Texas horizontal wells drilled in early 2020 were expected to be completed and producing in Q4 2020. The filing gives differing cost estimates for the company’s share of these wells ($19.4 million in one discussion and approximately $21 million in another). A separate Pioneer-operated well was expected to be completed in Q2, with estimated company cost of about $0.58 million. Future drilling depends on cash flow, credit availability and commodity conditions.
- In May 2020, subsidiaries received $1.75 million in Paycheck Protection Program loans bearing 1% interest. Forgiveness was uncertain; any unforgiven amount must be repaid under the notes’ terms.
- Derivatives are not designated for hedge accounting, so mark-to-market changes flow through earnings and can create substantial reported volatility. Contracts also expose the company to counterparty risk and may limit participation in price increases.
- Other risks include reserve-estimate uncertainty, drilling cost overruns and operating risks. Management did not expect environmental or ordinary-course legal matters to materially affect the company; no legal proceedings were reported. The filing states that disclosure controls were effective and that no material first-quarter change in internal control occurred.
Important facts for investors to verify
- Whether the July 2020 borrowing-base review reduced the $72 million base, and whether any repayment or covenant pressure followed.
- Subsequent oil and gas prices, production levels and the effects of well shut-ins on cash generation and reserves.
- Actual completion timing and total company costs for the West Texas wells, including the filing’s differing estimates of $19.4 million and approximately $21 million.
- PPP loan forgiveness outcomes and repayment obligations for any unforgiven balance.
- Updated reserve values and any impairment charges; year-end 2019 PV-10 was $100.031 million versus $161.901 million at year-end 2018, and the standardized measure was $81.612 million versus $137.909 million.