PrimeEnergy Resources Corporation — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Unaudited consolidated financial statements; dollar amounts below are in millions unless noted.
Business context and financial performance
PrimeEnergy produces oil, natural gas and natural gas liquids, operates field services businesses, and holds acreage primarily in West Texas, Oklahoma, the Gulf Coast and Appalachia. Results were sharply affected by the 2020 commodity-price collapse, COVID-19-related demand disruption, and lower production.
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue | $7.3 | $31.5 | $33.4 | $56.0 |
| Income (loss) from operations | ($10.3) | $8.2 | ($9.9) | $5.5 |
| Net income (loss) | ($6.8) | $5.8 | ($7.0) | $2.8 |
| Net income (loss) attributable to PrimeEnergy | ($6.3) | $5.8 | ($6.4) | $2.7 |
| Basic and diluted EPS | ($3.14) | $2.85 basic; $2.07 diluted | ($3.23) | $1.35 basic; $0.98 diluted |
For the first half, oil, gas and NGL sales totaled $17.5 million, down 63% from $47.3 million. Oil production fell 45% to 378,000 barrels and average oil price received fell 32% to $37.89 per barrel. Gas sales declined 61% to $1.4 million and NGL sales declined 67% to $1.7 million. Field service income decreased 30% to $6.7 million.
- Cash flow: Operating cash flow was $8.8 million, versus $13.7 million a year earlier. Capital expenditures, including exploration, were $6.0 million; operating cash flow less capital expenditures was approximately $2.8 million. Cash increased to $4.5 million from $1.0 million at year-end 2019.
- Liquidity and debt: At June 30, cash was $4.5 million and current liabilities were $68.0 million, including $53.5 million of debt classified as current. Bank debt was $53.5 million, with $18.5 million available under a $72 million borrowing base. The credit facility matures February 15, 2021 and is secured by substantially all oil and gas properties.
- Balance sheet: Total assets were $218.9 million, total liabilities $123.3 million, and total equity $95.7 million. Asset retirement obligations were $19.8 million long-term, with an additional $1.7 million current portion.
- Derivatives: First-half realized and unrealized commodity derivative gains totaled $6.9 million, compared with a $3.7 million loss in 2019. In Q2, the company reported a $4.8 million realized gain and a $5.6 million unrealized loss, for a net derivative loss of about $0.9 million.
Material changes versus prior comparable periods
- Q2 revenue fell 77% year over year, and the company moved from net income of $5.8 million to a $6.8 million net loss. First-half revenue fell 40%, with a shift from $2.8 million net income to a $7.0 million net loss.
- Lower oil and gas prices and production drove the sales decline. The company shut in marginal, higher-cost wells; reported first-half oil production declined substantially.
- Lease operating expense declined 23% in Q2 and 23% for the first half, reflecting well shut-ins and lower production taxes. Field service income and expense also declined amid lower utilization and rates.
- First-half capital expenditures decreased to $6.0 million from $11.4 million. Treasury stock purchases were $0.7 million, versus $3.0 million in the first half of 2019; management said it would suspend the stock repurchase program in the current price environment.
- At June 30, $53.5 million of bank debt was classified as current, compared with no current portion at December 31, 2019; $53.5 million was then shown as long-term debt.
Outlook, risks and unusual items
- Management said the semiannual borrowing-base review was in progress and expected a substantial reduction in available borrowing capacity because of lower commodity prices. It anticipated required paydowns in Q3 and Q4, to be funded by operating cash flows and acreage-sale proceeds. Management reported covenant compliance and expected compliance over the next 12 months.
- The company reduced operating costs, shut in marginal wells and reduced its workforce. Management could not estimate the full-year effect of COVID-19 and low commodity prices, and warned prolonged weakness could hurt cash flow, liquidity, reserve estimates and asset values, and lead to further borrowing-base reductions or impairments.
- After quarter-end, the company agreed to sell marginal West Virginia properties for $0.2 million, retaining an overriding royalty interest on about 31,000 undeveloped acres; the filing also reports the sale closed in early August. It reported an agreement to sell approximately 2,000 West Texas acres for about $10 million, expected to close in August, and separately described a planned sale of deep rights covering about 1,950 acres for approximately $10.7 million, targeted for closing by September 1. The filing does not clearly establish whether the two West Texas descriptions refer to separate transactions.
- Two subsidiaries received Paycheck Protection Program loans totaling $1.75 million at 1% interest. Forgiveness was uncertain; any unforgiven amount would require repayment under the loan terms.
- Development plans include six Apache-operated West Texas wells expected to be completed in Q4 2020, with the company’s anticipated share of cost approximately $19.4 million. Management said future spending would depend on commodity conditions, operating cash flow and credit availability; larger disclosed development opportunities could require substantial additional capital.
- Management stated it did not expect environmental or ordinary-course legal matters to materially affect financial condition or results. The filing reports no legal proceedings and no material changes to internal control over financial reporting.
Important facts for investors to verify
- Outcome of the borrowing-base redetermination, required debt repayments, facility renewal or refinancing before the February 2021 maturity, and covenant headroom.
- Whether West Texas asset-sale descriptions represent one or multiple transactions, and the final proceeds, closing dates and use of proceeds.
- Actual PPP loan forgiveness and repayment obligations if any balance is not forgiven.
- Commodity prices, production trends, shut-in volumes and the realized cash impact of derivative contracts; derivative valuations rely on Level 3 inputs.
- Whether anticipated well completions and development spending proceed as planned, given liquidity constraints and commodity-market conditions.
- Reserve and property-value changes, including any impairments, if depressed prices persist.