PrimeEnergy Resources Corporation — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. This is an annual filing, not a standalone fourth-quarter report. PrimeEnergy is a U.S. independent oil and natural gas producer, with properties primarily in Texas and Oklahoma, and also operates wells and provides oilfield services.
Financial and operating performance
| Metric | 2020 | 2019 |
|---|---|---|
| Total revenue | $58.4 million | $104.8 million |
| Oil, gas and NGL sales | $37.0 million | $84.0 million |
| Operating income (loss) | ($1.0) million | $8.7 million |
| Net income (loss) attributable to PrimeEnergy | ($2.3) million; ($1.16) per share | $3.5 million; $1.72 per share |
| Cash from operating activities | $16.4 million | $27.2 million |
| Capital expenditures, including exploration expense | $10.5 million | $18.0 million |
| Cash and cash equivalents at year-end | $1.0 million | $1.0 million |
| Revolving credit borrowings at year-end | $37.0 million | $53.5 million |
- Total revenue fell 44%; oil, gas and NGL sales fell 56%. Production declined across all three products: oil by 41%, NGLs by 24%, and natural gas by 23%.
- Average unhedged realized prices decreased year over year: oil to $38.02 per barrel from $55.04, NGLs to $11.22 from $15.87, and gas to $1.24 per Mcf from $1.49. Including derivatives, realized oil averaged $45.79 per barrel.
- Field service income fell 42% to $11.1 million. Lower lease operating and field-service expenses, lower DD&A, and reduced G&A partly offset falling sales and production. Asset-sale gains rose to $15.8 million from $4.6 million.
- Calculated operating margin was approximately negative 1.7% in 2020, versus 8.3% in 2019; net margin was approximately negative 4.0% versus 3.5%. These ratios use reported total revenue.
- Working capital was approximately negative $5.2 million at year-end, based on current assets of $8.9 million and current liabilities of $14.1 million. Total liabilities were $102.5 million and total equity was $98.0 million.
- Net cash used in financing was $16.7 million, including $22.0 million of debt repayments, partly offset by $6.8 million of new borrowings and other obligations. Year-end bank debt includes $37.0 million on the revolver and PPP loans.
Material changes and asset position
- Proved reserves decreased 27% to 10.435 million Boe from 14.235 million Boe; 69% were proved developed. The filing attributes reserve changes to production, commodity prices, and revisions to prior estimates.
- Standardized measure of discounted future net cash flows declined to $41.6 million from $81.6 million. The company’s non-GAAP PV-10 measure was $56.5 million at year-end 2020, versus $100.0 million in 2019.
- PrimeEnergy sold deep rights covering about 1,950 net acres in Reagan County for approximately $10.8 million in proceeds. It reported $15.8 million of total gains on asset sales and exchanges.
- West Texas accounted for about 79% of proved reserves and 3,178 Boe per day of 2020 average net production. Company-wide average net production was 4,265 Boe per day.
- Production was sold to a concentrated group of buyers: Apache accounted for 47% of oil sales and 42% of gas and liquids sales; Plains All American accounted for 19% of oil sales, and Targa for 12% of gas and liquids sales. The company reports no long-term purchase agreements with these buyers.
Liquidity, outlook, risks and unusual items
- The credit facility has a stated commitment of $300 million, but availability is governed by a reserve-based borrowing base. The borrowing base was reduced to $40 million in a February 2021 amendment; as of April 15, 2021, borrowings were $35.95 million with $4.05 million available. The facility matures February 11, 2023, is secured by oil and gas properties, and has financial and operational covenants. Management reported compliance and expected compliance over the next 12 months.
- Management says the 2021 capital budget reflects commodity prices and expected cash flows; the filing does not provide a clear total budget amount. Any cash-flow shortfall may be funded through the revolver. Management may adjust spending, sell non-strategic assets, or pursue joint ventures, and said it was discussing financing partners.
- Nine Upton County horizontal wells, including six drilled in 2020 and three drilled in early 2021, were expected to be completed and on production by the end of the second quarter of 2021. PrimeEnergy’s average working interest is 47.5%, with an estimated share of cost of approximately $26–27 million. Further development on nearby acreage could require substantial investment; timing and costs depend on prices, available cash, and financing.
- The company’s 2021 hedge schedule includes oil swaps at $53.60 per barrel for 157,500 barrels and oil puts with a $35 floor for 30,000 barrels. Gas swaps cover 1.219 million MMBtu at $2.48 in 2021. Hedge volumes and prices vary by year; derivative fair-value changes are recorded in earnings without hedge accounting.
- Key risks include volatile commodity prices, COVID-19-related demand and market disruption, declining production and reserves, borrowing-base reductions and covenant compliance, drilling and reserve-estimation uncertainty, third-party purchaser and operator exposure, and environmental, climate, hydraulic-fracturing, water-disposal and permitting requirements. The company also notes that insurance does not cover all operational or environmental risks.
- The company received $1.75 million in Paycheck Protection Program loans in 2020 and reported using proceeds for qualifying expenses; forgiveness was to be sought. Verify the subsequent forgiveness outcome.
- Management reported effective disclosure controls and internal control over financial reporting as of December 31, 2020. The auditor issued an unqualified opinion on the financial statements; it did not provide an internal-control attestation. The filing reports no material legal proceedings.
Important facts for investors to verify
- Current borrowing-base availability, covenant headroom, and the impact of subsequent reserve reviews or commodity-price changes.
- Actual completion, production timing, costs, and realized performance of the nine Upton County wells, plus funding for planned development.
- Whether production declines and reserve revisions continue, and how updated prices affect reserve values and impairment risk.
- Cash generation after capital spending, the sustainability of asset-sale proceeds, and the company’s ability to meet debt and plugging obligations.
- Hedge coverage, counterparties, and the difference between hedge-adjusted realized prices and future market exposure.
- Customer concentration, including the absence of long-term sales contracts, and the status of PPP loan forgiveness.