PrimeEnergy Corporation — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015; unaudited. The filing identifies the registrant as PrimeEnergy Corporation.
Business context
PrimeEnergy is an independent U.S. oil and natural gas producer, with oilfield servicing operations and properties primarily in Texas, Oklahoma, West Virginia, New Mexico, Colorado and Louisiana. It also manages affiliated partnerships and trusts.
Financial performance and position
- Q2 revenue: $19.5 million, down from $29.3 million in Q2 2014. Oil and gas sales were $14.3 million, field service income $5.5 million, and administrative fees $2.1 million. Revenue includes realized and unrealized derivative results.
- Q2 earnings: Operating loss was $1.9 million versus operating income of $6.2 million a year earlier. Net loss attributable to PrimeEnergy was $1.9 million, or $0.84 per share, versus net income of $3.2 million, or $1.37 per share.
- First-half results: Revenue was $42.3 million versus $59.7 million in 2014. Operating loss was $1.2 million versus income of $12.5 million; net loss attributable to PrimeEnergy was $1.9 million, or $0.83 per share, compared with net income of $6.0 million, or $2.55 per share.
- Margins and costs: First-half costs and expenses were $44.7 million, exceeding revenue; the filing does not present a defined operating-margin measure. Lease operating expense fell 18% to $18.2 million and field service expense fell 16% to $8.9 million for the first half. Depreciation, depletion, amortization and accretion rose 2% to $11.1 million.
- Cash flow: First-half operating cash flow was $8.5 million, down from $29.1 million. Capital expenditures, including exploration, were $7.8 million; net investing cash use was $6.1 million. Cash fell by $3.2 million to $6.1 million. Restricted cash was an additional $3.7 million and primarily related to oil and gas revenue payments.
- Liquidity and debt: Current assets were $31.1 million and current liabilities $28.1 million, a $3.0 million working-capital surplus. Balance-sheet current and long-term bank debt totaled $97.1 million. The revolver had $86.0 million outstanding and $26.5 million available against a $112.5 million borrowing base; equipment loans added approximately $11.1 million. The facility matures July 2017 and is secured by substantially all oil and gas properties.
- Other balance-sheet measures: Total assets were $247.8 million, total liabilities $173.0 million and total equity $74.9 million at June 30, 2015. Asset retirement obligations were $12.1 million.
Material changes versus prior period
- Oil and gas sales fell 45% in Q2 and 47% for the first half, principally because realized prices declined sharply. First-half oil prices at the wellhead fell 48% and gas prices fell 52%; production volumes increased modestly overall.
- Field service income declined 17% in Q2 and 18% for the first half due to lower rates and somewhat reduced utilization.
- First-half derivative results included $9.4 million of realized gains and $9.1 million of unrealized losses. Mark-to-market movements can materially affect reported revenue and earnings.
- Net cash from operations decreased substantially year over year. Debt repayments exceeded borrowings during the first half, and the company repurchased 19,915 shares for $1.3 million.
Outlook, risks and notable items
- Management planned approximately $25 million of 2015 drilling expenditures, primarily in West Texas, and shifted emphasis from vertical to horizontal wells. A West Texas program was expected to involve up to four wells in its initial phase at an estimated net cost of about $10 million.
- Management described a potential Apache joint-venture development of approximately 60 horizontal wells over 36–48 months, with estimated total program costs of about $470 million and PrimeEnergy’s anticipated share of about $120 million. Timing and well count may change with commodity-market conditions.
- Management said it was in compliance with credit-facility covenants and expected continued compliance over the next 12 months. The borrowing base is reviewed semi-annually and could be reduced based on reserve valuations, potentially limiting availability or requiring repayment.
- Commodity-price volatility, production performance, reserve estimation, drilling costs and the ability to replace reserves are identified risks. Derivatives reduce some price exposure but may limit gains from price increases, create counterparty risk and generate earnings volatility.
- The company reported no legal proceedings and stated that environmental and ordinary-course legal matters were not expected to have a material adverse effect. It reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether realized commodity prices, production and field-service activity recover, and how much cost reduction is sustainable.
- The size, terms and valuation sensitivity of outstanding commodity hedges, including the impact of unrealized derivative losses.
- Borrowing-base redeterminations, covenant headroom, debt maturities and actual revolver availability.
- Actual spending, well results and PrimeEnergy’s funding obligations under the proposed horizontal drilling program.
- Whether management’s stated 2015 drilling plans and capital expenditure expectations changed after June 30, 2015.