Business context and reporting period
PrimeEnergy Corporation (the registrant named in the filing) filed this unaudited Form 10-Q for the quarter ended September 30, 2011. It is an independent U.S. oil and natural gas company, with producing and non-producing properties primarily in Texas, Oklahoma, West Virginia, the Gulf of Mexico, New Mexico, Colorado, and Louisiana, as well as oilfield service equipment. Unless otherwise noted, financial amounts below are in U.S. dollars.
Financial performance and position
For the three and nine months ended September 30, 2011, respectively:
| Metric | Q3 2011 | Q3 2010 | 9M 2011 | 9M 2010 |
|---|---|---|---|---|
| Total revenue | $46.1 million | $24.1 million | $100.4 million | $89.4 million |
| Operating income | $7.3 million | $2.9 million | $11.8 million | $21.5 million |
| Net income attributable to PrimeEnergy | $4.3 million | $0.8 million | $5.1 million | $10.5 million |
| Diluted earnings per share | $1.23 | $0.22 | $1.46 | $2.84 |
| Cash provided by operating activities | Not separately presented | $31.1 million | $37.7 million |
At September 30, 2011, cash and cash equivalents were $13.0 million and restricted cash was $7.3 million. Total current assets were $39.1 million versus current liabilities of $47.5 million. Long-term bank debt was $69.5 million; the company reported $55.5 million available under its $125 million borrowing base. Stockholders’ equity totaled $37.1 million.
Material changes versus prior comparable periods
- Q3 revenue and attributable income rose substantially year over year, while nine-month attributable income fell by about half. Revenue includes large noncash derivative gains, so the increase does not solely reflect operating growth.
- Oil and gas sales increased 16% in Q3 and 7% for the first nine months. Nine-month oil production declined 3% and gas production declined 19%; higher realized prices partly offset lower volumes. Q3 oil production rose 8%, while gas production fell 13%.
- Nine-month depreciation, depletion, amortization, and accretion increased 69% to $40.9 million. The company attributed $14.4 million of the nine-month increase to a higher depletion rate on offshore properties following a reduction in estimated remaining economic reserves.
- Operating cash flow declined to $31.1 million from $37.7 million, while investing outflows increased to $25.1 million from $7.9 million, largely reflecting higher capital expenditures. Cash declined from $32.8 million at year-end 2010 to $13.0 million.
- Bank debt fell from $73.1 million at December 31, 2010; the $20.0 million related-party loan was repaid in June 2011. The amended facility raised the borrowing base from $100 million to $125 million.
Outlook, commentary, risks, and unusual items
- Management said it drilled 21 gross (13.8 net) West Texas wells in the first nine months, all successfully completed, and intended to drill approximately 30 wells during 2011, primarily in West Texas. The filing provides no numerical earnings or revenue guidance.
- Management cited oil and gas prices, production performance, drilling results, acquisitions, and working capital as drivers of cash flow. It highlighted risks including commodity-price volatility, drilling cost overruns and technical difficulties, reserve-estimate uncertainty, natural declines, Gulf of Mexico hurricanes and pipeline disruptions, and the ability to replace and expand reserves.
- Derivative instruments materially affected reported results: Q3 included $12.5 million of unrealized gains; nine-month results included $9.0 million. In August, the company unwound oil swaps and collars for $3.4 million in proceeds, recognizing the related gain. After quarter-end, it unwound gas swaps for $2.9 million in proceeds; those contracts had a $3.1 million unrealized gain at September 30. Derivatives are not hedge-accounted, creating earnings volatility; hedging may also limit gains from higher prices and expose the company to counterparty risk.
- Management said the credit facility was in covenant compliance. Oil and gas properties secure the facility, and the lenders may adjust the borrowing base following reserve reviews. The company also noted that plugging and abandonment estimates depend on assumptions and may change significantly.
- The company reported no legal proceedings and said it did not expect environmental or ordinary-course legal matters to have a material adverse effect. It stated that affiliated partnerships held cash reserves in excess of their debts and liabilities. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- How offshore reserve revisions and the higher depletion rate affect future production, asset values, and earnings.
- The composition and timing of derivative gains, post-quarter gas-swap monetization, remaining hedge coverage, and exposure to commodity prices and counterparties.
- Borrowing-base redeterminations, covenant headroom, available credit, and the company’s liquidity after capital spending and debt repayments.
- Whether drilling activity can offset declines in gas and offshore production, and whether the stated 2011 drilling plan was achieved.
- Changes in asset-retirement obligations and the assumptions behind plugging and abandonment estimates.