PrimeEnergy Corporation (10-Q) — Quarter Ended March 31, 2015
The filing is for PrimeEnergy Corporation, an independent U.S. oil and natural gas producer and oilfield-services provider. It covers the first quarter of 2015 and compares results with the first quarter of 2014; interim financial statements are unaudited. The filing describes operations across several U.S. states and reports production primarily from oil and gas properties.
Financial performance and position
Amounts are in millions of dollars unless otherwise stated.
| Metric | Q1 2015 | Q1 2014 or prior date |
|---|---|---|
| Total revenue | $22.80 | $30.39 |
| Operating income | $0.74 | $6.33 |
| Net income (loss), consolidated | $(0.22) | $3.77 |
| Net income attributable to PrimeEnergy | $0.013; $0.01 per basic share | $2.81; $1.18 per basic share |
| Operating cash flow | $1.33 | $11.13 |
| Capital expenditures, including exploration | $4.53 | $7.86 |
| Cash and cash equivalents at quarter-end | $5.68 unrestricted; $3.88 restricted | $9.21 unrestricted at Dec. 31, 2014 |
| Total current assets / current liabilities | $36.55 / $30.60 | $43.81 / $38.69 at Dec. 31, 2014 |
| Debt | $101.84 total current and long-term debt | $101.39 at Dec. 31, 2014 |
Reported revenue includes realized and unrealized derivative results. Revenue fell 25%; operating margin was about 3.2%, versus 20.8% a year earlier. The company reported a consolidated loss, while a $0.23 million loss attributable to non-controlling interests resulted in $0.013 million of income attributable to PrimeEnergy. Cash flow from operations declined sharply, partly reflecting lower earnings and a $5.91 million reduction in accrued liabilities. Quarter-end working capital was approximately $5.96 million.
At March 31, the revolving credit facility had a $130 million borrowing base, $90 million outstanding, and $40 million available. The broader facility commitment was $250 million. Equipment financing outstanding was $11.8 million, included in the reported debt. The company said it was in compliance with credit covenants and expected continued compliance over the next 12 months.
Changes versus the prior comparable quarter
- Oil and gas sales decreased 49% to $12.30 million. Production increased 7% for oil and 3% for natural gas, but average unhedged wellhead prices declined 52% for oil to $44.80 per barrel and 50% for gas to $3.04 per Mcf.
- Realized derivative gains were $5.14 million, compared with a $1.00 million loss in Q1 2014; unrealized derivative losses were $2.47 million, versus $1.98 million. Derivatives therefore partly offset lower commodity sales, while mark-to-market accounting continued to add earnings volatility.
- Field-service income declined 18% to $5.54 million, attributed to lower rates and somewhat reduced utilization. Lease operating expense declined 22% to $9.24 million; field-service expense fell 19% to $4.49 million; and general and administrative expense fell 24% to $3.37 million.
- Asset-sale gains were $0.49 million, down from $3.17 million. Interest expense decreased 13% to $0.94 million. Operating cash flow fell to $1.33 million from $11.13 million.
Outlook, risks, and notable items
- Management planned approximately $30 million of drilling expenditures in 2015, primarily in West Texas, while shifting the program toward horizontal wells based on expected relative returns. The filing does not provide earnings or production guidance.
- The initial Apache joint-venture phase contemplated up to four West Texas wells at an estimated company net cost of approximately $10 million. The broader potential program was described as about 60 horizontal wells over 36–48 months, with approximately $470 million of total cost and an estimated $120 million company share; timing and well count may vary with commodity-market conditions.
- Management cited commodity-price volatility, drilling cost overruns and technical difficulties, reserve-estimate uncertainty, competition, and the ability to replace and expand reserves as risks. The semiannual borrowing-base review could reduce borrowing availability; the oil and gas properties secure the credit facility.
- Commodity derivatives mitigate some price exposure but may limit gains if prices rise and expose the company to counterparty credit risk. Their fair values are Level 3 measurements using significant unobservable inputs; the company said it cannot access counterparties’ specific model assumptions.
- Asset-retirement obligations were $12.22 million at quarter-end. Management said environmental and ordinary-course legal matters were not expected to have a material adverse effect; affiliated partnerships had reserves management believed sufficient for their obligations.
- The company repurchased 19,260 common shares for $1.28 million during the quarter. It also reported that drilling continued in West Texas and the Mid-Continent, including a first Apache joint-venture well spudded March 17, 2015.
Important facts for investors to verify
- Whether production growth and planned horizontal drilling can offset substantially lower realized commodity prices and sustain cash generation.
- Current hedge volumes, contract terms, settlement profile, counterparty exposure, and the effect of derivative fair-value changes on reported revenue and earnings.
- The outcome of the next borrowing-base redetermination, covenant headroom, and whether planned capital spending can be funded while maintaining liquidity.
- The company’s actual share and timing of Apache-program costs, and whether the stated multi-year development scope proceeds under prevailing market conditions.
- Cash-flow and working-capital trends, particularly the effect of the sharp decline in accrued liabilities and the remaining level of discretionary spending and repurchases.