PrimeEnergy Resources Corporation — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. The interim financial statements are unaudited. Unless otherwise noted, amounts are in millions of dollars; operating statement and cash flow comparisons are year over year.
Business context
PrimeEnergy is an independent oil and natural gas producer with field services operations, primarily in Texas and Oklahoma. It operates and participates in oil and gas properties and uses commodity derivatives to manage price exposure. Management says results depend substantially on commodity prices, production, operating performance, and access to capital.
Financial performance and liquidity
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Total revenue | $26.213 | $13.004 |
| Oil, gas and NGL sales, before derivatives | $33.902 | $12.673 |
| Net derivative losses, realized and unrealized | $10.958 | $1.123 |
| Operating income (loss) | $14.633 | $(1.394) |
| Net income (loss) attributable to PrimeEnergy | $11.142 | $(1.455) |
| Basic / diluted earnings (loss) per share | $5.62 / $4.07 | $(0.73) / $(0.73) |
| Cash provided by operating activities | $9.355 | $4.732 |
| Capital expenditures | $1.784 | $0.660 |
- Reported operating income includes a $13.991 million gain on asset sales and exchanges. Excluding that gain, operating income was approximately $0.642 million.
- Oil sales rose to $26.305 million from $9.270 million; gas sales were $3.746 million versus $1.658 million; NGL sales were $3.851 million versus $1.745 million. Higher production and realized prices contributed to the increases.
- Production sold increased year over year: oil volumes 67%, natural gas 17%, and NGLs 21%. Average prices before derivative effects increased for each product.
- Operating cash flow plus proceeds from property sales totaled $23.346 million. The property sale proceeds were $13.991 million; investing cash flow was $12.207 million after capital expenditures.
- Cash declined to $4.076 million from $10.347 million at year-end 2021, largely reflecting $27.000 million of bank-debt repayments and $0.833 million spent on treasury-stock purchases. Total cash decreased $6.271 million.
- At March 31, bank debt was $9.000 million, with $41.000 million available under the $50 million borrowing base. On May 20, the company reported no borrowings. The facility matures February 11, 2023; borrowing-base review and maturity extension were scheduled for June 2022.
- Current assets were $24.999 million and current liabilities $30.189 million, implying negative working capital of approximately $5.190 million. Total liabilities were $96.087 million and equity $109.400 million.
- Derivative liabilities totaled $12.761 million, compared with $5.585 million at December 31, 2021. Derivative contracts generated $10.958 million of losses in the quarter, recognized in earnings without hedge accounting.
Material changes and operating activity
- The company sold 1,809 net leasehold acres in Reagan and Midland Counties, Texas, in two transactions for approximately $14.0 million gross proceeds, retaining certain overriding royalty interests.
- Oil, gas and NGL sales increased 168% year over year, reflecting higher commodity prices and additional production from West Texas wells placed online in late 2021 and Oklahoma wells brought online in January 2022.
- General and administrative expense increased to $6.672 million from $2.016 million, primarily due to higher employee compensation and benefits. Lease operating expense increased to $8.721 million from $4.467 million, while field service expense rose to $3.000 million from $1.418 million.
- At quarter-end, the company had four West Texas horizontal wells in progress with SEM Operating Company. It also committed to participate in four Oklahoma wells with Ovintiv; the filing expected the eight wells to be completed and online around July 2022.
Outlook, risks and contingencies
- Management planned further 2022 drilling, including 23 proposed West Texas wells in addition to the eight wells already underway. The company estimated approximately $76 million of investment across 31 wells, subject to available operating cash flow and credit-facility capacity. This is a plan/estimate, not a firm spending commitment.
- Management expected the June 2022 borrowing-base review to increase the $50 million base by approximately 50%; this was an expectation, not a completed lender decision. The facility is secured by substantially all oil and gas properties and includes financial and operational covenants. The company reported covenant compliance and expected continued compliance over the next 12 months.
- Commodity prices, regional price differentials, production variability, derivative losses, borrowing-base reductions, and project costs or timing could affect cash flows and capital plans. Derivatives can limit benefits from price increases, and mark-to-market accounting can add earnings volatility.
- The company stated that interim results are not necessarily indicative of full-year results and provided no specific consolidated earnings or revenue guidance.
- Management did not expect environmental matters or ordinary-course legal proceedings to materially adversely affect the company; the filing reports no legal proceedings. The company is subject to plugging and abandonment obligations, whose estimates depend on assumptions about costs, inflation, well lives, and discount rates.
Most important facts for investors to verify
- How much of Q1 earnings was attributable to the $13.991 million asset-sale gain, and whether operating performance is sustainable without it.
- The timing, completion, production, and actual spending for the planned horizontal wells, including the estimated $76 million investment.
- The outcome and terms of the June borrowing-base review and maturity extension, and subsequent facility borrowings or repayments.
- Future realized commodity prices, production volumes, regional differentials, and the financial impact of the company’s derivative positions.
- The drivers and persistence of higher compensation and G&A costs, and the company’s liquidity position given negative working capital and low quarter-end cash.