PrimeEnergy Resources Corporation — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Financial statement amounts are in thousands of dollars unless stated otherwise. The interim statements are unaudited.
Business context
PrimeEnergy is an independent U.S. oil and natural gas producer, with properties primarily in Texas and Oklahoma, and also operates field-service businesses. It relies on operating cash flow and a reserve-based revolving credit facility for liquidity. Its results are sensitive to commodity prices, production, regional price differentials, and derivative valuations.
Financial performance and liquidity
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenue | $19.0 million | $11.8 million | $47.7 million | $45.2 million |
| Oil, gas and NGL sales, excluding derivatives | $18.1 million | $8.9 million | $46.1 million | $26.3 million |
| Operating income (loss) | ($0.9 million) | $8.8 million | ($5.2 million) | ($1.1 million) |
| Net income (loss) attributable to PrimeEnergy | ($1.2 million) | $6.5 million | ($5.0 million) | $65,000 |
| Basic earnings (loss) per share | ($0.58) | $3.26 | ($2.52) | $0.03 |
- For the nine-month period, oil and gas sales rose 75.2% as higher realized prices more than offset lower oil and NGL volumes. Oil production fell 10.8%; gas volumes increased 17.5%. Realized average prices rose 64.8% for oil, 177.1% for gas and 159.3% for NGLs.
- Nine-month operating cash flow was $18.8 million, versus $17.9 million. Capital expenditures were $11.3 million; investing cash outflow was $11.2 million. Cash increased to $3.6 million from $1.0 million at year-end 2020.
- At September 30, current assets were $19.3 million and current liabilities $26.7 million; the resulting current ratio is approximately 0.72, calculated from the reported balances.
- The balance sheet reported $32.2 million of long-term bank debt and $1.4 million of current debt. Separately, the company disclosed $31.5 million drawn on its revolving facility, at a weighted-average rate of 5.35%, with $8.5 million available under its $40 million borrowing base. The facility matures February 2023.
- Total liabilities were $109.2 million and total equity $93.0 million. The derivative liability was $7.8 million, compared with a net derivative asset of $97,000 and derivative liability of $768,000 at year-end 2020.
Changes versus the prior comparable period
- Despite higher commodity sales, PrimeEnergy recorded losses in Q3 and for the first nine months of 2021. Nine-month results included $10.1 million of net realized and unrealized derivative losses, compared with $6.1 million of gains in 2020.
- The 2020 comparison benefited from a $15.0 million gain on asset sales; no comparable asset sales occurred in 2021. General and administrative expense fell to $7.5 million from $12.9 million, primarily reflecting lower wages and benefits and 2020 staff reductions.
- Nine-month lease operating expense increased to $17.8 million from $16.4 million, attributed mainly to returning higher-lifting-cost properties to production and higher production taxes. Depreciation, depletion, amortization and accretion declined to $20.0 million from $24.5 million.
- The company repaid $8.0 million and borrowed $3.0 million under long-term debt and other obligations during the first nine months of 2021.
Outlook, risks and other notable items
- Management said its 2021 capital budget is based on expected cash flows, with any shortfall potentially funded by the revolving facility. It may adjust spending, sell non-strategic assets or pursue joint ventures to preserve liquidity; it also reported discussions with potential financial partners.
- Nine Kashmir horizontal wells in Upton County were completed in Q3 and producing by October 4, 2021. PrimeEnergy holds a 47.5% working interest and reported approximately $24 million invested. Management expects these wells to materially support Q4 cash flow; that is a forward-looking expectation, not a reported result.
- Four Oklahoma wells in which the company has an 11.25% interest were being completed and were expected to begin production in December 2021. Multiple additional development opportunities are described, but their timing, well count, costs and participation depend on commodity markets and financing; they are not assured commitments.
- Commodity prices, production performance, regional differentials, borrowing-base redeterminations and hedging can affect results and liquidity. Derivatives are not hedge-accounted, so fair-value changes flow through earnings; management notes hedges can limit the benefit of price increases and expose the company to counterparty credit risk.
- The lender was reviewing the borrowing base, then $40 million; management expected a $50 million borrowing base. The company said it was complying with covenants and expected continued compliance over the next 12 months, while warning a reduction in the borrowing base could limit borrowing or require repayment.
- PPP loans totaling approximately $1.75 million remained subject to a forgiveness application submitted by the company; the filing does not state the forgiveness outcome. The company is also responsible for certain affiliated partnership liabilities to the extent partnership assets are insufficient. Management did not expect environmental matters or ordinary-course litigation to have a material adverse effect; legal proceedings were reported as none.
- No formal earnings or production guidance is provided. Management said disclosure controls were effective and reported no material changes in internal control over financial reporting during the first nine months of 2021.
Important facts for investors to verify
- Whether the borrowing-base review resulted in the anticipated increase, and whether facility availability and covenant headroom remain adequate.
- Actual production and cash contribution from the Kashmir wells, compared with management’s Q4 expectation.
- Derivative exposures, valuation assumptions and cash settlements, given the substantial increase in reported derivative liabilities and Level 3 valuation inputs.
- The status of PPP loan forgiveness and the effect, if any, of unforgiven amounts on debt service.
- Funding, timing and economics of planned development projects, including whether capital spending can be supported without straining liquidity.
- Updated reserves, production and development costs: the reserve data cited in the filing are as of December 31, 2020, not September 30, 2021.