PrimeEnergy Corporation — FY2017 Form 10-K
Reporting period: Year ended December 31, 2017. This is an annual filing, not a standalone fourth-quarter report; quarterly results are not clearly provided in the filing text. The registrant identifies itself as PrimeEnergy Corporation, an independent U.S. oil and natural gas producer and well-services provider, with properties primarily in Texas, Oklahoma and West Virginia.
Financial and operating performance
| Metric | 2017 | 2016 |
|---|---|---|
| Total revenues | $89.3 million | $56.8 million |
| Oil and gas sales | $66.9 million | $38.3 million |
| Net income attributable to PrimeEnergy | $42.0 million | $3.4 million |
| Net cash from operating activities | $40.1 million | $11.0 million |
| Capital expenditures | $59.4 million | $20.8 million |
| Cash and cash equivalents at year-end | $8.4 million | $10.1 million |
| Revolver borrowings at year-end | $47.7 million | $63.0 million |
- Consolidated net income was $47.4 million in 2017, including $5.4 million attributable to non-controlling interests. Basic and diluted earnings per share were $18.99 and $14.18, respectively.
- Operating income was $42.0 million. The filing reports a $41.3 million gain on sale and exchange of assets, compared with $32.4 million in 2016; 2017 sales included non-cash-flowing acreage.
- A $7.8 million income-tax benefit was recorded, principally reflecting the Tax Cuts and Jobs Act’s remeasurement of deferred tax balances. The filing identifies a $20.2 million tax benefit from that remeasurement.
- Oil production rose 49.9% to 1.004 million barrels; gas production rose 10.2% to 5.008 million Mcf. Average realized prices excluding derivatives increased to $49.84 per barrel and $3.36 per Mcf.
- Average production cost was $15.11 per net equivalent barrel, down from $18.21. Lease operating expense increased to $30.9 million; DD&A and accretion increased to $36.1 million.
- Proved reserves were 10.672 million Boe, approximately 93% developed, versus 7.674 million Boe in 2016. PV-10 was $117.7 million; the GAAP standardized measure of discounted future net cash flows was $106.9 million, versus $52.2 million in 2016.
- Year-end current assets were $26.6 million and current liabilities $47.2 million. The $300 million revolving facility had an $85 million borrowing base and $37.3 million availability at year-end. At March 31, 2018, borrowings were $62.5 million with $22.5 million available. The facility matures February 15, 2021; equipment financing was also outstanding.
Material changes versus 2016
- Revenue, production and realized commodity prices increased, and operating cash flow rose substantially. Management attributed higher production to drilling success in West Texas and Oklahoma.
- Net income improved sharply, but reported results also benefited materially from asset-sale gains and the one-time tax benefit. Capital spending increased to $59.4 million, exceeding operating cash flow; property-sale proceeds were $46.2 million.
- Bank borrowings declined from $63.0 million to $47.7 million at year-end, though rose to $62.5 million by March 2018. Cash declined by $1.7 million during 2017.
- Reserves increased, driven by extensions, discoveries, improved recovery and revisions; all 20 PUD wells reported at year-end 2016 were drilled and placed on production during 2017.
Outlook, commentary and risks
- Management said it would prioritize liquidity and financial flexibility in 2018. The capital program was based on expected cash flow, with deficits potentially funded by the revolver; spending could be adjusted, and asset sales or joint ventures considered.
- The company anticipated 11 West Texas horizontal wells in 2018, subject to finalized authorizations and plans. Apache’s later-2018 plans included eight wells for which PrimeEnergy estimated a roughly $24 million share; further Upton County development could require about $80 million of company capital over future phases. Timing, costs and well counts depend on commodity markets.
- Management reported compliance with credit covenants and expected continued compliance over the next 12 months. The borrowing base was subject to lender redetermination, scheduled for June 2018; a reduction could constrain borrowing or require repayment.
- Commodity-price volatility, drilling and reserve-estimation uncertainty, dependence on third-party operators, and the ability to replace reserves are key business risks. The filing also discusses hydraulic-fracturing, environmental and climate regulation, transportation access, customer concentration, hedging counterparty exposure, and uninsured operational and cybersecurity risks.
- Derivative contracts can limit gains when prices rise; mark-to-market accounting caused earnings volatility. The company reported 2018–2020 swaps with stated prices for oil, gas and NGLs.
- The company reported no material legal proceedings and said ordinary-course legal matters were not expected to materially affect financial position or results. It also reported no material environmental remediation liability expected, while noting inherent environmental risks.
Important facts for investors to verify
- How much of 2017 earnings and cash generation was repeatable versus attributable to asset dispositions and the tax-law remeasurement benefit.
- The timing, economics and funding plan for the 2018 drilling program and the larger prospective Apache joint-venture commitments.
- Availability under the revolver after the June 2018 borrowing-base review, covenant headroom, and the effect of borrowing-base changes on liquidity.
- Reserve assumptions and revisions, including the relationship between the $117.7 million PV-10 and the $106.9 million standardized measure; neither is a direct estimate of market value.
- Customer concentration and realized-price exposure, including hedge volumes, counterparties, and potential production or basis differences.
- Several acreage and interest figures in the supplied filing text appear inconsistent or garbled. Confirm the underlying filing and exhibits for the Oklahoma and Colorado/Kansas divestitures and stated ownership interests.