PrimeEnergy Corporation — Form 10-Q summary
Reporting period: Quarter and nine months ended September 30, 2018. The filing’s interim financial statements are unaudited; amounts below are in millions of dollars unless otherwise stated. PrimeEnergy is an independent U.S. oil and natural gas producer, with field services operations and properties primarily in Texas, Oklahoma, and West Virginia.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $29.4 | $17.2 | $80.3 | $59.2 |
| Operating income (loss) | $6.5 | ($2.7) | $11.9 | $40.4 |
| Net income (loss) attributable to PrimeEnergy | $4.4 | ($2.0) | $7.1 | $20.6 |
| Basic EPS | $2.10 | ($0.92) | $3.38 | $9.29 |
| Operating cash flow | Not provided separately for quarter | Not provided separately for quarter | $25.5 | $21.4 |
- Oil, gas, and NGL sales were $27.0 million in Q3 and $73.8 million year to date, up 114% and 89%, respectively. Q3 oil production increased 75%, and NGL production increased 68%; nine-month oil and NGL volumes rose 55% and 84%. Natural gas volumes fell 4% in Q3 but rose 5% year to date.
- For the first nine months, oil sales increased to $57.7 million from $27.5 million and NGL sales to $9.6 million from $3.9 million; natural gas sales declined to $6.5 million from $7.7 million. Higher oil and NGL prices and production from newer West Texas wells drove growth.
- Q3 operating margin was approximately 22%, versus a loss in the prior-year quarter; nine-month operating margin was approximately 15%, compared with 68% in 2017. These margins include gains on asset sales and derivative marks: 2017 benefited from a $42.1 million asset-sale gain, versus $3.2 million in 2018.
- Nine-month lease operating expense rose to $26.9 million from $21.1 million, and G&A to $10.8 million from $6.9 million. Interest expense increased to $2.6 million from $1.7 million. Management attributed cost increases to new wells, vendor-rate and production-tax increases, personnel costs, and higher borrowing costs.
Cash, debt, and liquidity
- At September 30, cash was $7.7 million, total assets $248.2 million, and total equity $103.1 million. Current assets of $23.3 million were below current liabilities of $37.6 million, a working-capital deficit of approximately $14.2 million.
- Reported long-term bank debt was $56.6 million, with $0.9 million current debt; the company also disclosed $1.025 million outstanding on equipment loans. The revolving facility’s borrowing base was $90 million, with $33.5 million available at September 30. The revolver matures February 2021 and is secured by substantially all oil and gas properties. Revolver borrowings carried a 5.22% weighted-average rate at quarter-end.
- Nine-month operating cash flow of $25.5 million exceeded the $21.4 million reported in 2017. Capital expenditures were $29.3 million; investing cash use was $26.7 million, compared with $6.9 million of investing cash provided in 2017. Financing cash flow was $0.4 million provided, and cash declined by $0.8 million to $7.7 million.
- PrimeEnergy repurchased 107,565 shares for $6.3 million during the nine months. It reported compliance with credit covenants and expected to remain compliant over the next 12 months; the next borrowing-base review was scheduled for December 2018.
Changes, outlook, and notable items
- Year-to-date income was substantially lower than in 2017, principally because the prior year included much larger asset-sale gains. In 2018, commodity derivatives produced an $11.1 million net loss for the nine months, compared with a $3.0 million gain in 2017. Derivatives are not hedge-accounted, so unrealized fair-value movements affect reported earnings.
- Management described 2018 capital spending as based on expected cash flows, with any shortfall expected to be funded through the revolver. It may adjust the capital program, sell non-strategic assets, or pursue joint ventures to preserve liquidity, and said it was discussing potential funding with financial partners. No formal earnings or production guidance was provided.
- Development plans include eight West Texas horizontal wells in which the company holds a 49% interest, with approximately $22.7 million of expected company investment and anticipated startup in Q1 2019. Management also described substantial potential future drilling with Apache in Upton County; timing, well count, and costs depend on commodity markets and operating results. Oklahoma and other regional activity was also planned.
- Commodity prices, production and well performance, drilling costs and technical risks, reserve estimates, and the ability to replace reserves are identified as uncertainties. Hedging can limit gains if prices rise and exposes the company to counterparty risk. A decline in the borrowing base could constrain borrowing or require repayment of excess debt.
- Asset-retirement obligations totaled $22.5 million; management noted that estimates depend on uncertain long-term cost, inflation, well-life, and discount-rate assumptions. The company also bears contingent responsibility for affiliated partnerships’ liabilities to the extent partnership assets are insufficient. Management did not expect environmental or ordinary-course legal matters to have a material adverse effect; the filing reports no legal proceedings.
- The company adopted ASC 606 in 2018 with no material earnings impact. It said it could not yet reasonably estimate the balance-sheet impact of adopting the new lease standard, but did not expect a significant impact.
Important facts for investors to verify
- December 2018 borrowing-base redetermination, covenant headroom, and actual revolver availability.
- Cash needs and expected returns for planned drilling, including the scale and timing of future Apache-led development.
- Production growth and operating-cost trends, especially whether added volumes can offset higher lease operating expenses.
- Derivative positions, contract fair values, hedge volumes and prices, and the effect of mark-to-market movements on earnings and realized prices.
- The sustainability of earnings excluding asset-sale gains and derivative valuation changes, and the cash-flow effect of capital spending and share repurchases.