PrimeEnergy Corporation — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; unaudited. The filing identifies the registrant as PrimeEnergy Corporation.
Business context
PrimeEnergy is a U.S. oil and natural gas producer with field services operations. Its producing and non-producing properties are primarily in Texas, Oklahoma, West Virginia, New Mexico, Colorado and Louisiana. It also operates oilfield service equipment and manages affiliated partnerships and trusts.
Financial performance and liquidity
| Metric | Q1 2016 | Q1 2015 / prior date |
|---|---|---|
| Total revenues | $13.162 million | $22.795 million |
| Oil and gas sales | $7.130 million | $12.298 million |
| Operating income (loss) | $(1.200) million | $0.736 million |
| Net income (loss) attributable to PrimeEnergy | $(1.860) million; $(0.81) per share | $0.013 million; $0.01 per share |
| Operating cash flow | $1.161 million | $1.329 million |
| Capital expenditures, including exploration | $7.920 million | $4.533 million |
| Cash and cash equivalents | $13.489 million | $9.750 million at Dec. 31, 2015 |
| Total assets | $232.759 million | $226.261 million at Dec. 31, 2015 |
| Total equity | $61.175 million | $62.901 million at Dec. 31, 2015 |
Revenue fell 42%. Calculated operating margin was approximately negative 9.1%, versus positive 3.2% in Q1 2015; the filing does not present a separate gross margin. The consolidated net loss was $1.178 million, while the loss attributable to PrimeEnergy was $1.860 million, reflecting income attributable to non-controlling interests.
Operating cash flow was below investment outlays. Investing activities used $3.004 million after $4.916 million of property and equipment sale proceeds; financing activities provided $5.582 million, and cash increased $3.739 million. Current assets were $27.220 million and current liabilities $25.318 million (calculated working capital: $1.902 million). Restricted cash of $3.513 million primarily related to oil and gas revenue payments and had corresponding payables.
Total debt was approximately $101.9 million, comprising $98.798 million of long-term bank debt and $3.088 million current debt. The revolving facility had a $95 million borrowing base, $93 million drawn and $2 million available at March 31; the stated facility limit was $250 million. The borrowing base is redetermined semi-annually and is secured by substantially all oil and gas properties. Management reported compliance with covenants and expected continued compliance over the next 12 months.
Changes versus the prior comparable period
- Oil and gas sales decreased $5.168 million. Average wellhead oil price fell 35% to $28.91 per barrel and gas price fell 27% to $2.21 per Mcf; oil production declined 16% to 162,000 barrels and gas production declined 7% to 1.105 million Mcf.
- No commodity derivative gains or losses were recorded in Q1 2016; all commodity derivative instruments had expired during 2015. Q1 2015 included $5.143 million of realized derivative gains and $2.466 million of unrealized losses.
- Field service income declined 24% to $4.224 million, due to lower utilization and customer rates. Lease operating expense declined 13%, field service expense 21%, and general and administrative expense 28%, reflecting lower service costs, reduced activity and cost-cutting measures.
- Gain on sale and exchange of assets rose to $4.916 million from $0.489 million, largely from sales of non-core interests and field service equipment. Interest expense decreased to $0.868 million from $0.939 million.
- Long-term bank debt increased from $92.581 million at year-end to $98.798 million. Cash rose from $9.750 million to $13.489 million.
Outlook, risks and unusual items
- No formal earnings or production guidance was provided. Management said the 2016 capital budget reflects lower commodity prices, will be adjusted as needed, and is based on expected cash flows; any shortfall may be funded with revolving-credit borrowings.
- The Upton County, Texas joint venture with Apache had drilled four wells through Q1. A broader program discussed could involve about 60 wells and $470 million of total spending, with PrimeEnergy’s estimated share about $120 million. The companies were limiting drilling to acreage-maintenance wells until prices recover; two later-year wells were contemplated, with PrimeEnergy’s share estimated at $3.6 million.
- In Martin County, Texas, two horizontal wells had been drilled and cased for $8.3 million, of which PrimeEnergy’s share was $8.1 million; they were awaiting completion. Farm-out agreements for non-core acreage generated $4.9 million in proceeds.
- Management removed all but one proved undeveloped reserve location from its year-end reserve report, citing uncertainty about financing and the requirement to schedule development within five years. It was discussing financing partners and could sell non-strategic assets or pursue joint ventures. Lower prices or reserve revisions could reduce the borrowing base and require repayment of excess borrowings.
- Key risks include oil and gas price volatility, production declines, drilling costs and technical results, reserve-estimate uncertainty, ability to replace reserves and access to capital. Derivatives may limit participation in price increases and create counterparty risk. PrimeEnergy also bears potential liabilities for affiliated partnerships if their assets are insufficient, and estimates asset-retirement obligations using assumptions that may change.
- Management said environmental compliance and remediation costs and ordinary-course legal matters were not expected to have a material adverse effect; the filing reports no legal proceedings. A $0.890 million income tax benefit was recorded for Q1 2016.
Important facts for investors to verify
- Updated borrowing-base determination, remaining availability, covenant compliance and any required debt repayment.
- Funding sources and expected timing for the Texas drilling programs, particularly the estimated $120 million PrimeEnergy share of the broader Apache program.
- Oil and gas prices, production trends, reserve revisions and the effect of removing most proved undeveloped locations.
- Sustainability of operating cash flow and liquidity given capital spending, debt levels and reliance on asset sales or external financing.
- Whether the $4.916 million asset-sale gains and $4.9 million farm-out proceeds are non-recurring, and how the absence of commodity hedges affects results.