PrimeEnergy Corporation — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Unaudited interim results; amounts below are in millions of dollars unless otherwise noted. The filing identifies the registrant as PrimeEnergy Corporation.
Business context and financial performance
PrimeEnergy is an independent U.S. oil and natural gas company, with producing and non-producing properties across several states and oilfield services operations. Its results reflect commodity prices and production, acquisitions and drilling, and mark-to-market changes in derivatives.
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Total revenue | $37.28 | $37.43 | $64.25 | $64.13 |
| Oil and gas sales | $24.14 | $20.83 | $45.49 | $43.87 |
| Income from operations | $11.20 | $12.17 | $15.79 | $14.96 |
| Net income | $6.56 | $7.56 | $8.92 | $9.22 |
| Net income attributable to PrimeEnergy | $6.09 | $7.42 | $8.35 | $8.75 |
| Basic / diluted earnings per share | $2.51 / $1.92 | $2.81 / $2.20 | $3.39 / $2.61 | $3.28 / $2.57 |
Q2 operating margin was approximately 30.0% (32.5% in 2012); six-month operating margin was approximately 24.6% (23.3%). Q2 net income attributable to PrimeEnergy fell 18% year over year, while the six-month figure fell 5%.
- Production and pricing: Q2 oil production rose 4% to 188,000 barrels and gas production rose 8% to 1.235 million mcf. Six-month volumes rose 4% for oil and 5% for gas. Wellhead oil price increased 7% in Q2 to $92.73/barrel but declined 5% for the six-month period to $89.43; gas price increased 22% in Q2 to $5.49/mcf and 12% for six months to $5.06.
- Cash flow: Six-month operating cash flow was $16.88, versus $26.08 in 2012. Investing used $12.67, including $14.82 of capital expenditures and $2.15 of asset-sale proceeds. Financing used $3.53. Cash and cash equivalents increased $0.68 to $9.28; restricted cash was an additional $3.54.
- Debt and liquidity: Revolver borrowings were $121.25 at June 30, against a $145.0 borrowing base, leaving $23.7 available. Weighted-average borrowing rate was 3.57%. Total assets were $236.75, total liabilities $186.20, and total equity $50.55. The company reported compliance with credit covenants.
Material changes versus prior comparable period
- Oil and gas sales increased 16% in Q2 and 4% for six months, supported by higher production and natural gas prices. Field service income rose 17% and 11%, respectively.
- Unrealized derivative gains were lower year over year: $4.48 in Q2 versus $8.88, and $2.40 for six months versus $5.10. The smaller gains were a principal reason for lower Q2 earnings.
- Lease operating expense increased 10% in Q2 and 8% for six months; G&A rose 15% and 9%. DD&A and accretion declined 12% in Q2 and 20% for six months, largely due to lower depletion rates following offshore property abandonments in 2012. Interest expense increased 31% in Q2 and 36% for six months, reflecting higher average debt.
- Six-month capital expenditures fell to $14.82 from $51.71 in 2012. The company repurchased 92,303 shares for $2.73 during the first half, at an average $29.62 per share.
Outlook, risks, contingencies and unusual items
- Management planned approximately 20 gross (12 net) wells in 2013, primarily in West Texas, at an estimated net cost of $20. By July 31, six gross (3.55 net) wells had been drilled, five producing and one awaiting completion; two gross (1.11 net) wells were drilling.
- On July 31, the company executed a $10.0 equipment financing facility at an effective annual rate of 3.95%, repayable in 60 monthly payments of $184,000. In August it used the proceeds to reduce revolver borrowings.
- Commodity derivatives are not hedge-accounted, so fair-value changes affect reported earnings and can make revenue volatile. Derivative fair values are Level 3 measurements using significant unobservable inputs. Interest-rate swaps covering $75 of debt were scheduled to begin settling in January 2014.
- Key stated risks include oil and gas price volatility, drilling cost overruns and technical challenges, reserve-estimate uncertainty, production variability, and the ability to replace and grow reserves. The borrowing base is redetermined semi-annually and may change with reserve valuations; properties secure the facility.
- Asset retirement obligations were $10.57 at June 30, including a $1.52 revision to estimated liabilities during the first half. The company noted uncertainty in plugging and abandonment estimates. It also manages affiliated partnerships and may be liable for their obligations if partnership assets are insufficient; management said their cash reserves were expected to cover obligations. Management did not expect environmental or ordinary-course legal matters to have a material adverse effect; no legal proceedings were reported.
- No specific production or earnings guidance was provided. Management described continued drilling, potential acquisitions and investment in field-service equipment as dependent on prospects, market conditions and available opportunities.
Important facts for investors to verify
- Whether production growth and the planned 2013 drilling program are delivered within the stated cost estimate.
- Current borrowing-base availability, covenant compliance and the impact of reserve redeterminations, including the post-quarter equipment financing and revolver paydown.
- How commodity prices and Level 3 derivative valuations affect realized cash flows and reported earnings; review the hedge positions and settlement periods.
- Drivers of operating-cost growth and revisions to asset retirement obligations, plus the adequacy of affiliated partnership reserves.
- Cash conversion and capital allocation, including drilling spending, share repurchases and the reduction in operating cash flow versus 2012.