Business context and reporting period
PrimeEnergy Corporation’s unaudited Form 10-Q covers the quarter and six months ended June 30, 2014. The company is an independent U.S. oil and gas producer with oilfield services operations. The filing describes properties primarily in Texas, Oklahoma, West Virginia, the Gulf of Mexico, New Mexico, Colorado and Louisiana.
Financial performance and position
Amounts below are in millions of dollars unless stated otherwise.
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Total revenue | $29.3 | $37.3 | $59.7 | $64.3 |
| Income from operations | $6.2 | $11.2 | $12.5 | $15.8 |
| Net income attributable to PrimeEnergy | $3.2 | $6.1 | $6.0 | $8.4 |
| Basic / diluted EPS | $1.37 / $1.04 | $2.51 / $1.92 | $2.55 / $1.93 | $3.39 / $2.61 |
Q2 operating margin was approximately 21% versus 30% a year earlier; six-month operating margin was approximately 21% versus 25%. The reported revenue and margins include derivative gains and losses.
- Production and sales: Six-month oil and gas sales rose 10% to $50.3 million. Oil production increased 3% to 383,000 barrels and average realized oil price before derivatives rose 6% to $94.73 per barrel. Gas production declined 3% to 2.345 million Mcf while average realized gas price increased 18% to $5.96 per Mcf.
- Cash flow and investment: Six-month operating cash flow was $29.1 million, compared with $16.9 million in 2013. Capital expenditures were $20.7 million versus $14.8 million; net cash from investing activities was negative $16.1 million. Cash and cash equivalents were $10.3 million at June 30, excluding restricted cash of $3.6 million.
- Debt and liquidity: Balance-sheet current and long-term debt totaled approximately $111.2 million. The revolving facility had a $160 million borrowing base, $102.8 million outstanding and $57.2 million available; the filing reports a $250 million facility commitment. Working capital was negative approximately $7.2 million. The company said it was in compliance with loan covenants and expected to remain compliant over the next 12 months.
- Other balance-sheet items: Total assets were $251.2 million and total equity $59.1 million at June 30, 2014. Derivative liabilities were $7.1 million, compared with $2.3 million at December 31, 2013.
Material changes versus the prior comparable period
Net income attributable to PrimeEnergy fell 47% in Q2 and 28% for the six-month period. Management attributed the declines mainly to materially higher realized and unrealized derivative losses, partly offset by higher oil and gas sales, increased field-service income, asset-sale gains and lower income-tax provisions. Six-month derivative results were a net loss of $8.9 million, versus a net gain of $2.5 million in 2013; unrealized commodity derivative losses were $6.0 million.
Six-month field-service income rose 15% to $13.4 million, reflecting equipment additions and improved rates, while related expenses increased 9%. Lease operating expense increased 6% for the six months, primarily due to labor and water-disposal costs associated with new wells. General and administrative expense declined 10%. The company recorded $4.0 million of gains on asset sales and exchanges in the first half, including $3.2 million in the first quarter from non-essential oil and gas interests and field-service equipment.
Long-term bank debt declined from $120.0 million at year-end 2013 to $109.3 million at June 30, although total current liabilities increased. The company repurchased 24,842 treasury shares for $1.29 million and spent $0.21 million to repurchase non-controlling interests during the first half.
Outlook, commentary, risks and contingencies
- Drilling plans: Management planned approximately 20 gross (8 net) wells in 2014, primarily in West Texas and Oklahoma, at an estimated net cost of $30 million. Through July 24, the company had participated in 14 gross (3.8 net) wells; eight were producing and the remainder were drilling or awaiting completion. It also expected to start a West Texas horizontal program in late Q4 2014 through Q1 2015, with up to nine wells and an estimated net cost of approximately $35 million.
- Financing after quarter-end: On July 29, 2014, the company executed $6 million of equipment financing facilities. It planned to draw $4.8 million in August to repay revolving credit borrowings; the remaining $1.2 million was available for future equipment purchases.
- Commodity and valuation risks: The company sells most production at spot prices and uses derivatives to manage commodity exposure. Derivatives can limit gains from rising prices and expose the company to counterparty risk. Commodity derivatives are not hedge-accounted, so mark-to-market changes affect reported earnings. Derivative valuations use Level 3 inputs, including unobservable basis differentials and volatility factors.
- Credit and operating risks: The borrowing base is redetermined semi-annually and may be reduced based on reserve valuations, potentially limiting availability or requiring repayment. Management cited drilling-cost overruns, technical difficulties, commodity-price volatility, competition, reserve-estimation uncertainty and the ability to replace and expand reserves as risks.
- Contingencies: As general partner, the company may be liable for affiliated partnership obligations to the extent partnership assets are insufficient; management said partnership cash reserves exceeded obligations. Management did not expect environmental matters or ordinary-course legal proceedings to materially affect financial condition or results. The filing reports no legal proceedings and no material control changes; management concluded disclosure controls were effective.
- Guidance: No earnings or production guidance was provided. The filing’s drilling plans and estimated costs are management expectations, not guarantees.
Important facts for investors to verify
- How much of future earnings and cash flow may be affected by the company’s commodity derivative positions, including the increase in net derivative liabilities and the use of Level 3 valuations.
- Whether the borrowing base remains sufficient after future redeterminations, and how the revolving facility, equipment loans and planned additional financing affect total debt and liquidity.
- Whether drilling and horizontal-well plans proceed on schedule and within the stated net-cost estimates, and whether production growth offsets natural decline and higher operating costs.
- How much reported first-half performance depended on the $4.0 million of asset-sale gains and working-capital movements, including the increase in accrued liabilities.
- The full-year implications of the filing’s interim results, which management cautions are not necessarily indicative of annual results.