PrimeEnergy Resources Corporation — Q3 2020 Form 10-Q
Business context and reporting period. This unaudited quarterly filing covers the three and nine months ended September 30, 2020, compared with the same 2019 periods. PrimeEnergy produces oil, natural gas and NGLs, operates oilfield services, and holds acreage primarily in West Texas and Oklahoma. It reported 1,994,177 common shares outstanding as of November 13, 2020.
Key financial metrics
Amounts below are in millions of dollars except per-share data. Interim results are not necessarily indicative of full-year results.
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $11.8 | $28.2 | $45.2 | $84.1 |
| Income (loss) from operations | $8.8 | $4.0 | $(1.1) | $9.5 |
| Net income (loss) attributable to PrimeEnergy | $6.5 | $2.5 | $0.065 | $5.2 |
| Basic earnings per share | $3.26 | $1.25 | $0.03 | $2.61 |
| Operating cash flow | Not separately presented | Not separately presented | $17.9 | $21.5 |
- Nine-month oil, gas and NGL sales were $26.3 million, down 60.9% from $67.3 million. Oil production was 538,000 barrels versus 1,012,000; the reported average oil price was $38.41 per barrel versus $54.72.
- Nine-month operating costs and expenses were $61.2 million versus $76.5 million. Lease operating expense fell to $16.4 million from $24.4 million, reflecting shut-in high-cost properties and lower production taxes.
- Nine-month results included a $15.0 million gain on asset sales and a $6.1 million net realized derivative gain. Derivatives are marked to market without commodity hedge accounting, contributing to earnings volatility.
- Cash and cash equivalents were $4.1 million at September 30, 2020, versus $1.0 million at December 31, 2019. Current assets were $10.3 million and current liabilities $53.7 million, a working-capital deficit of approximately $43.4 million.
- Operating cash flow of $17.9 million and capital expenditures of $13.1 million imply approximately $4.7 million of operating cash flow after capital expenditures. Investing cash outflow was $2.4 million; financing cash outflow was $12.5 million.
- At September 30, the revolving credit facility had $40 million outstanding at a 3.99% weighted-average rate, with $10 million available under a $50 million borrowing base. The balance sheet reported $40.3 million of current debt and $1.5 million of long-term bank debt. Subsidiaries also received $1.75 million of PPP loans.
- Total assets were $208.7 million versus $229.4 million at year-end 2019; total equity was $102.6 million versus $103.4 million. Net property and equipment declined to $197.9 million from $212.1 million.
Material changes versus the prior comparable period
- Total revenue fell 58% in Q3 and 46% for the first nine months. Lower commodity prices and production contributed to the decline; field-service income also fell, reflecting lower utilization and customer rates.
- Despite lower Q3 revenue, Q3 net income attributable to PrimeEnergy increased to $6.5 million from $2.5 million, helped by a $14.8 million quarterly gain on sale and exchange of assets. For the nine months, the company reported only $65,000 of attributable net income, compared with $5.2 million in 2019.
- Oil production and the average oil price both decreased year over year for the first nine months. The company also reported reduced gas and NGL sales; the filing’s MD&A production table contains apparent inconsistencies in some gas/NGL labels and values, so those details are not summarized here.
- The September 2020 credit amendment reduced the borrowing base to $50 million, with automatic monthly reductions beginning October 1. By November 25, the company reported a $48 million borrowing base, $40 million outstanding and $8 million available.
- In Q3, the company sold approximately 1,950 acres of undeveloped deep rights in Reagan County for expected total compensation of $10.7 million and sold operated West Virginia properties, retaining an overriding royalty interest. The West Virginia sale included 456 producing wells and approximately 35,000 leasehold acres.
Outlook, commentary and risks
- Management cited COVID-19 demand disruption and the 2020 oil-price decline as sources of uncertainty, with potential adverse effects on cash flow, reserves, asset values, liquidity and borrowing-base capacity. It said it could not estimate the full-year impact.
- In response, the company reduced operating costs, shut in marginal wells, reduced workforce, adjusted capital spending and suspended its stock repurchase program in the current price environment. No formal earnings or production guidance is provided.
- The credit facility matures February 15, 2021, is secured by substantially all oil and gas properties, and includes financial and operational covenants. Management said the company was in compliance and expected to remain compliant over the next twelve months; lenders may restrict advances or accelerate repayment following a continuing covenant breach.
- Management said it was discussing potential financing with financial partners, including to support development and, if needed, repay the revolver. The filing describes substantial possible future development spending, but timing and participation depend on commodity conditions, cash flow and credit availability.
- PPP loan forgiveness is uncertain. Any unforgiven amounts would require repayment under the loan terms. The company also bears contingent responsibility for certain affiliated partnership liabilities; management did not expect environmental matters or ordinary-course legal actions to have a material adverse effect.
- Commodity derivatives expose the company to counterparty and price risk and can limit gains from rising prices. Fair values use Level 3 inputs, including unobservable basis differentials and volatility factors.
Important facts for investors to verify
- Whether the company can refinance or repay the revolver at its February 2021 maturity, and how subsequent borrowing-base reductions affect availability and covenant headroom.
- Current production, realized commodity prices, and the extent to which hedges and asset sales are supporting cash flow and reported earnings.
- Whether PPP loans qualify for forgiveness and the repayment burden if any portion is not forgiven.
- The timing, cost and funding plan for planned horizontal wells, and whether development commitments remain feasible under prevailing commodity prices.
- Proceeds and final terms of the West Virginia and Reagan County asset sales, including retained royalty interests and any related obligations.