PrimeEnergy Corporation — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2011; unaudited. The filing identifies the registrant as PrimeEnergy Corporation.
Business context
The company owns and operates oil and gas properties across several U.S. states and provides oilfield services. Its portfolio includes producing and non-producing properties, and its operations include drilling, acquisitions, production, and well servicing.
Financial performance
| Metric | Three months 2011 | Three months 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Total revenue | $35.510 million | $32.914 million | $54.281 million | $65.261 million |
| Oil and gas sales | $22.171 million | $21.529 million | $43.616 million | $43.834 million |
| Income from operations | $6.377 million | $11.057 million | $4.485 million | $18.630 million |
| Net income attributable to PrimeEnergy | $3.203 million | $6.235 million | $0.821 million | $9.675 million |
| Diluted earnings per share | $0.92 | $1.68 | $0.23 | $2.59 |
- Six-month total revenue fell largely amid a swing in unrealized derivative results: a $3.496 million loss in 2011 versus a $9.243 million gain in 2010. These mark-to-market amounts are not equivalent to cash receipts.
- Six-month oil and gas sales were nearly unchanged. Higher oil prices were offset by lower oil and gas production and lower gas revenue. Oil production was 303,000 barrels versus 328,000; gas production was 2.409 million Mcf versus 3.071 million.
- Second-quarter oil and gas sales and field-service income increased year over year, but operating income and attributable net income declined. Depreciation, depletion, amortization and accretion rose to $11.995 million from $7.291 million in the quarter.
- Six-month operating costs and expenses were $50.029 million, including $18.031 million of depreciation, depletion, amortization and accretion. Field-service income rose to $9.774 million from $7.843 million, with field-service expense also higher at $8.144 million versus $6.533 million.
- Net cash provided by operations was $19.449 million versus $22.794 million. Capital expenditures, including exploration, were $15.773 million versus $7.861 million; net cash used in investing was $15.540 million.
Liquidity, debt and balance sheet
- At June 30, cash and cash equivalents were $14.503 million, down from $32.792 million at year-end; restricted cash was $7.267 million. Current assets were $39.688 million and current liabilities $43.840 million, a working-capital deficit of $4.152 million.
- Long-term bank debt was $71.850 million, compared with $73.100 million at December 31, 2010. The company reported $53.1 million available under its credit facility and said it was in compliance with financial covenants.
- The company repaid its offshore subsidiary’s related-party loan, including accrued interest, in June. Related-party indebtedness declined from $20.0 million at year-end to zero.
- Total assets were $186.880 million and total liabilities $153.449 million at June 30, 2011.
- Operating, investing and financing activities resulted in an $18.289 million decrease in cash during the six months.
Material changes, outlook and risks
- A June 22 amendment increased the credit facility borrowing base from $100 million to $125 million, raised the permitted hedge percentage from 85% to 90% of proved developed producing reserves for the next four calendar years, and allowed a one-time advance to repay the offshore related-party debt. Monthly borrowing-base reductions of $2 million are scheduled to begin December 15, 2011.
- The company drilled 15 gross (10.4 net) West Texas wells in the first half, all successfully completed. Management planned approximately 30 wells during 2011, primarily in West Texas; its discussion also describes a plan to drill in excess of 30 wells (20 net).
- Management cited commodity-price volatility, production declines, drilling cost overruns and technical difficulties, uncertain reserve estimates, operational hazards, and the ability to replace and expand reserves as risks. Hurricanes and pipeline disruptions may also curtail Gulf of Mexico production.
- Derivative contracts expose the company to counterparty risk and may limit gains from rising commodity prices. The company does not apply hedge accounting to commodity derivatives, so mark-to-market gains and losses can create earnings volatility.
- Asset-retirement obligations were $17.755 million. Estimates depend on assumptions about plugging costs, inflation, well lives and discount rates; actual retirement costs may differ materially.
- Management stated that environmental matters and ordinary-course legal proceedings were not expected to have a material adverse effect. It also reported effective disclosure controls and no material change in internal control over financial reporting during the first half.
Investor verification points
- Check how much of reported earnings and revenue reflects noncash derivative fair-value changes versus realized production economics.
- Verify the drivers and sustainability of declining oil and gas volumes, particularly offshore gas production, and the expected impact of the drilling program.
- Review the credit agreement, borrowing-base redeterminations, covenant headroom and scheduled borrowing-base reductions.
- Assess liquidity after the cash decline, capital spending, share repurchases and repayment of related-party debt.
- Evaluate assumptions underlying proved reserves and the $17.755 million asset-retirement obligation.