PrimeEnergy Corporation — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; interim financial statements are unaudited. The filing identifies the registrant as PrimeEnergy Corporation.
Financial performance and position
- Revenue: $26.71 million, up from $18.77 million in Q1 2011. Oil and gas sales rose 9% to $23.03 million; field service income increased 11% to $5.12 million. Total revenue includes a $3.78 million unrealized derivative loss, versus a $9.51 million loss a year earlier.
- Profit: Net income was $1.66 million, including $0.34 million attributable to non-controlling interests; net income attributable to PrimeEnergy was $1.32 million, or $0.49 basic and $0.39 diluted per share. Q1 2011 had a $1.91 million consolidated net loss and a $2.38 million loss attributable to PrimeEnergy.
- Operating results: Operating income was $2.79 million versus an operating loss of $1.89 million. Reported operating margin was approximately 10.5% of total revenue; the revenue base includes derivative mark-to-market losses. Interest expense was $0.76 million, down from $1.21 million.
- Cash flow: Operating cash flow was $10.28 million. Investing cash outflow was $19.97 million, including $20.70 million of capital expenditures; financing provided $13.88 million. Cash increased $4.19 million to $12.86 million. Free cash flow after capital expenditures was approximately negative $10.42 million.
- Liquidity and debt: Current assets were $41.43 million versus current liabilities of $49.64 million, a working capital deficit of $8.21 million. Cash plus restricted cash totaled $18.29 million; $5.43 million was restricted. Bank debt was $84.50 million, up from $69.80 million at year-end. The $125 million borrowing base left $40.5 million available; weighted-average borrowing rate was 3.84%. The company reported covenant compliance.
- Balance sheet: Total assets were $199.42 million and total liabilities $162.57 million. Net property and equipment was $157.38 million. Derivative liabilities totaled $7.29 million, compared with $3.51 million at December 31, 2011.
Changes, operations, and outlook
- Crude oil production increased 13% to 177,000 barrels, and average realized wellhead oil price rose 11% to $100.46 per barrel. Natural gas production decreased 1% to 1.155 million Mcf, while average price fell 24% to $4.57 per Mcf.
- Management attributed the return to profitability mainly to higher operating revenues and smaller unrealized derivative losses. Higher lease operating costs, DD&A, and G&A partly offset the improvement. Lease operating expense increased 20% to $9.50 million; G&A increased 28% to $3.89 million.
- Through April 30, the company had drilled 12 gross wells, with 11 successful completions. It planned approximately 35 gross wells (30 net) in 2012, primarily in West Texas, and acquired additional Gulf Coast producing-property interests for $6.32 million in February.
- The company began plugging and abandoning a substantial portion of its offshore properties under a fixed-price contract, with completion expected in 2012. It had deposited a net $6.0 million with the contractor. Recorded asset-retirement obligations were $19.97 million at March 31.
- Commodity derivatives are not hedge-accounted; fair-value changes flow through earnings and can cause substantial reported volatility. In Q1, the company unwound crude oil swaps for $0.66 million of proceeds, with the related gain included in realized derivative gains.
- Management cited commodity-price volatility, drilling cost overruns and technical risks, uncertainty in reserve estimates, and the ability to replace or expand reserves among risks to future results. No specific financial forecast was provided.
- Management said it expected Partnership reserves to be sufficient for obligations and did not expect environmental or ordinary-course legal matters to materially affect results. No legal proceedings were reported. Disclosure controls were deemed effective, with no material internal-control changes reported.
Investor verification priorities
- Verify the effect of derivative positions and mark-to-market accounting on reported revenue, earnings, and the $7.29 million derivative liability.
- Assess whether operating cash flow and remaining borrowing-base availability can support planned drilling, acquisitions, and offshore abandonment costs.
- Review borrowing-base redetermination terms, covenant headroom, and the increase in bank debt during the quarter.
- Track results and costs of the 2012 drilling program, Gulf Coast acquisition, and offshore plugging contract, including final abandonment obligations.
- Confirm the reported production, realized prices, and cost trends—especially declining gas prices and rising lease operating and administrative expenses.