PrimeEnergy Resources Corporation — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; balance-sheet comparisons are June 30, 2019 versus December 31, 2018. Financial amounts below are in millions unless otherwise stated. The interim financial statements are unaudited.
Business context
PrimeEnergy is an independent oil and natural gas producer, with properties primarily in Texas, Oklahoma and West Virginia, and also operates well-servicing and other field-service businesses. Its principal development focus is the Permian Basin and Oklahoma’s SCOOP/STACK area.
Financial performance and liquidity
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $31.5 | $22.4 | $56.0 | $50.9 |
| Income from operations | $8.2 | $0.1 | $5.5 | $5.4 |
| Net income attributable to PrimeEnergy | $5.8 | $(0.6) | $2.7 | $2.7 |
| Basic / diluted EPS | $2.85 / $2.07 | $(0.27) / $(0.27) | $1.35 / $0.98 | $1.29 / $0.95 |
| Cash from operations | — | $13.7 | $7.4 | |
| Capital expenditures | — | $11.4 | $18.7 |
- Q2 operating margin was approximately 26%; six-month operating margin was approximately 10%, calculated using reported total revenue. Revenue includes realized and unrealized derivative results.
- At June 30, cash was $2.8; current assets were $21.4 and current liabilities $24.0 (derived current ratio approximately 0.89). Total assets were $245.0 and total liabilities $139.5.
- Bank debt was $62.0 at June 30, against a $90.0 borrowing base, leaving $28.0 available. The facility’s stated maximum commitment is $300.0. As of August 1, borrowings were $64.5 and availability $25.5. The company reported covenant compliance and expected compliance over the next 12 months.
- Six-month operating cash flow exceeded capital expenditures, but cash fell from $6.3 at year-end to $2.8, reflecting investing and financing outflows. The company repurchased 22,411 shares for $3.0 during the half-year.
Changes versus the prior comparable period
- Q2 total revenue increased about 41% and PrimeEnergy reported a profit versus a year-earlier quarterly loss. A major contributor was the derivative result: a $2.9 unrealized gain in Q2 2019 versus a $4.1 unrealized loss in Q2 2018.
- For the first half, total revenue increased about 10%, while attributable net income was essentially flat at $2.7. The six-month derivative loss narrowed to $3.7 from $7.5.
- First-half oil production rose 18% to 688,000 barrels; gas production rose 20% to 2.243 million Mcf; and NGL production rose 35% to 288,000 barrels. Lower realized prices partly offset higher volumes: unhedged average oil, gas and NGL prices fell 11%, 31% and 32%, respectively.
- Lease operating expense declined to $16.2 from $17.3, while DD&A and accretion increased to $18.6 from $15.8, reflecting new-well production. G&A rose to $9.8 from $8.5. Asset-sale gains declined to $1.7 from $2.7.
- Six-month operating cash flow increased to $13.7 from $7.4, while capital spending declined to $11.4 from $18.7. Bank debt declined to $62.0 from $65.5 at year-end.
Outlook, management commentary and risks
- No specific earnings or production guidance is provided. Management says the 2019 capital budget reflects lower commodity prices and expected cash flows; any shortfall may be funded through the revolving facility. The company may adjust capital spending, sell non-strategic assets or pursue joint ventures, and said it was discussing potential financing partners.
- Management reported strong early results from eight West Texas Middle Wolfcamp wells and three newly completed wells in shallower intervals. It cited potential follow-on drilling, but timing, well count and costs depend on commodity conditions and other factors. In Oklahoma, certain additional wells were expected to be completed and brought on production in Q3 2019.
- Permian gas prices were unusually weak, at times negative, during parts of Q2 because takeaway capacity was constrained. Management expected improvement when the third-party Gulf Coast Express pipeline entered service, anticipated in late September 2019.
- Commodity derivatives are not designated for hedge accounting; fair-value changes therefore add earnings volatility. The company also notes that hedges can limit upside in rising markets and create counterparty risk. At June 30, derivative assets were $1.1 and liabilities $1.7, a net liability of $0.6.
- Key risks include oil and gas price volatility, production and reserve uncertainty, drilling costs and technical results, borrowing-base reductions, covenant compliance, and the company’s contingent responsibility for affiliated partnerships’ liabilities. Management did not expect environmental or ordinary-course legal matters to materially affect results; no legal proceedings were reported.
- The borrowing base is reviewed semi-annually; the next review was scheduled for December 2019. A reduction could limit borrowing or require repayment of debt exceeding the revised base. Oil and gas properties secure the facility.
Most important facts for investors to verify
- Whether production growth and new-well performance persist, and whether initial well results translate into expected returns and reserve additions.
- Actual realized commodity prices, especially Permian gas pricing after pipeline capacity changes, and the effect of hedges on realized cash flows.
- The December 2019 borrowing-base determination, available liquidity, debt levels and ongoing compliance with credit covenants.
- Capital-spending commitments for potential West Texas and Oklahoma drilling, and the funding assumptions behind management’s plans.
- The extent to which reported earnings changes reflect operating performance versus derivative mark-to-market movements and asset-sale gains.