PrimeEnergy Corporation — Form 10-Q, quarter ended September 30, 2016
The filing is for PrimeEnergy Corporation (the registrant named in the filing; the request metadata identifies PrimeEnergy Resources Corp.). It covers the three and nine months ended September 30, 2016. Financial statements are unaudited; amounts below are in millions of dollars unless stated otherwise.
Financial performance and position
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total revenue | $16.5 | $21.5 | $43.7 | $63.8 |
| Operating income (loss) | $8.4 | $(0.3) | $13.7 | $(1.5) |
| Net income (loss) | $4.7 | $(0.8) | $7.8 | $(2.9) |
| Net income (loss) attributable to PrimeEnergy | $4.9 | $(0.7) | $5.6 | $(2.6) |
| Basic earnings (loss) per share | $2.15 | $(0.28) | $2.44 | $(1.11) |
- For the first nine months, oil and gas sales were $27.4 million, down 26%; field service income was $11.6 million, down 30%; and administrative fees were $5.0 million, down 22%. Reported revenue also reflects derivative results.
- The $26.9 million nine-month gain on asset sales and exchanges (versus $1.4 million in 2015) materially supported operating income. Without this gain, operating performance would have been substantially weaker.
- Nine-month operating cash flow was $5.0 million, versus $13.8 million in 2015. Capital expenditures, including exploration, were $11.7 million. Investing cash flow was positive $16.5 million, primarily reflecting $28.2 million of property-sale proceeds. Financing cash outflow was $25.9 million, including $33.3 million of debt repayments.
- Cash and cash equivalents were $5.4 million at September 30, down from $9.8 million at year-end 2015; restricted cash was $3.1 million. Current assets were $16.9 million and current liabilities $90.8 million.
- Debt was approximately $71.3 million in total: $65 million outstanding on the revolver and about $6.3 million on equipment loans. The credit facility had an $80 million borrowing base and $15 million available. The facility matures July 30, 2017, so borrowings were classified as short-term. Nine-month interest expense was $2.8 million.
- Oil production rose 16% in Q3 to 199,000 barrels but fell 10% for the nine months to 511,000 barrels. Nine-month realized oil price fell 21% to $37.64 per barrel. Nine-month gas production fell 8% to 3.308 million Mcf and realized price fell 12% to $2.47 per Mcf.
Changes, outlook and risks
- Profitability improved from 2015 losses, primarily due to asset-sale gains and lower operating costs—not stronger nine-month production or commodity pricing. The company reported no realized commodity derivative gains or losses in 2016, compared with $14.9 million of realized gains in the first nine months of 2015.
- Management cited cost reductions in lease operations, field services and general and administrative expenses. Depreciation, depletion, amortization and accretion rose 13% for the nine months, reflecting recent horizontal drilling activity.
- The company received approximately $28 million from sales or farm-outs of acreage through September 30 and reported closing additional transactions for $4 million in Q4. It retained significant acreage, including more than 24,600 gross acres in the Permian Basin.
- Development plans include an Upton County program with Apache that could involve about 60 wells and approximately $470 million of total investment; PrimeEnergy estimates its share at about $120 million. Timing and well count depend on commodity markets. Additional West Texas, Martin County and Oklahoma wells were underway or planned.
- The credit agreement required hedging a portion of forecast production. Swaps covered stated monthly volumes for November–December 2016, 2017 and 2018 at oil prices of $48.00–$52.02 per barrel and gas prices of $2.97–$3.11 per MMBtu. Management cited commodity-price volatility, potential borrowing-base reductions, reserve uncertainty, drilling costs and execution risks. The next borrowing-base review was scheduled for December 2016.
- Management said it was in compliance with credit covenants and expected continued compliance over the next 12 months, while noting that a borrowing-base reduction could limit borrowing or require repayment. It also said it was discussing financing partners. No formal earnings guidance was provided.
- Management reported that environmental and ordinary-course legal matters were not expected to have a material adverse effect; the filing lists no legal proceedings. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Reconcile the MD&A statement of a $13.9 million nine-month tax provision with the financial statements, which report a $3.036 million provision; the filing text does not clearly explain this discrepancy.
- Assess the sustainability of reported earnings given the $26.9 million asset-sale gain and the decline in operating cash flow.
- Confirm the December 2016 borrowing-base outcome, covenant headroom, facility renewal or repayment plan, and liquidity available against near-term obligations.
- Track the timing, remaining funding requirements and expected returns of drilling programs, and compare actual acreage-sale proceeds with management’s plans.
- Review commodity-price exposure, hedge volumes and counterparty and valuation risks; derivative fair values rely on Level 3 inputs.