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PNRG > SEC Filings for PNRG > Form 10-Q on 8-May-2013All Recent SEC Filings

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Form 10-Q for PRIMEENERGY CORP


8-May-2013

Quarterly Report


Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Report may contain statements relating to the future results of the Company that are considered "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995 (the "PSLRA"). In addition, certain statements may be contained in the Company's future filings with the SEC, in press releases, and in oral and written statements made by or with the approval of the Company that are not statements of historical fact and constitute forward-looking statements within the meaning of the PSLRA. Such forward-looking statements, in addition to historical information, which involve risk and uncertainties, are based on the beliefs, assumptions and expectations of management of the Company. Words such as "expects", 'believes", "should", "plans", "anticipates", "will", "potential", "could", "intend", "may", "outlook", "predict", "project", "would", "estimates", "assumes", "likely" and variations of such similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve risks and uncertainties and are based on a number of assumptions that could ultimately prove inaccurate and, therefore, there can be no assurance that they will prove to be accurate. Actual results and outcomes may vary materially from what is expressed or forecast in such statements due to various risks and uncertainties. These risks and uncertainties include, among other things, the possibility of drilling cost overruns and technical difficulties, volatility of oil and gas prices, competition, risks inherent in the Company's oil and gas operations, the inexact nature of interpretation of seismic and other geological and geophysical data, imprecision of reserve estimates, and the Company's ability to replace and expand oil and gas reserves. Accordingly, stockholders and potential investors are cautioned that certain events or circumstances could cause actual results to differ materially from those projected. The forward looking statements are made as of the date of this report and other than as required by the federal securities laws, the Company assumes no obligation to update the forward-looking statement or to update the reasons why actual results could differ from those projected in the forward-looking statements.

The following discussion is intended to assist you in understanding our results of operations and our present financial condition. Our Condensed Consolidated Financial Statements and the accompanying Notes to the Condensed Consolidated Financial Statements included elsewhere in this Report contains additional information that should be referred to when reviewing this material.

OVERVIEW

We are an independent oil and natural gas company engaged in acquiring, developing and producing oil and natural gas. We presently own producing and non-producing properties located primarily in Texas, Oklahoma, West Virginia, the Gulf of Mexico, New Mexico, Colorado and Louisiana. In addition, we own a substantial amount of well servicing equipment. All of our oil and gas properties and interests are located in the United States. Assets in our principal focus areas include mature properties with long-lived reserves and significant development opportunities as well as newer properties with development and exploration potential. We believe our balanced portfolio of assets and our ongoing hedging program position us well for both the current commodity price environment and future potential upside as we develop our attractive resource opportunities. Our primary sources of liquidity are cash generated from our operations and our credit facility.

We attempt to assume the position of operator in all acquisitions of producing properties and will continue to evaluate prospects for leasehold acquisitions and for exploration and development operations in areas in which we own interests. We continue to actively pursue the acquisition of producing properties. In order to diversify and broaden our asset base, we will consider acquiring the assets or stock in other entities and companies in the oil and gas business. Our main objective in making any such acquisitions will be to acquire income producing assets so as to build stockholder value through consistent growth in our oil and gas reserve base on a cost-efficient basis.

Our cash flows depend on many factors, including the price of oil and gas, the success of our acquisition and drilling activities and the operational performance of our producing properties. We use derivative instruments to manage our commodity price risk. This practice may prevent us from receiving the full advantage of any increases in oil and gas prices above the maximum fixed amount specified in the derivative agreements and subjects us to the credit risk of the counterparties to such agreements. Since all of our derivative contracts are accounted for under mark-to-market accounting, we expect continued volatility in gains and losses on mark-to-market derivative contracts in our consolidated income statement as changes occur in the NYMEX price indices.

RECENT ACTIVITIES

During 2013, we continued our drilling program in our West Texas and Mid-Continent regions. Thru April 30, 2013, we have participated in the drilling of 2 gross (0.14 net) wells, both successful and currently awaiting completion. In addition we have 1 gross (0.42 net) well currently drilling. We intend to drill a total of approximately 30 gross (20 net) wells this year, primarily in the West Texas area at a net cost of $36 million.


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RESULTS OF OPERATIONS

2013 and 2012 Compared

We reported net income attributable to PrimeEnergy for the three months ended March 31, 2013 of $2.26 million, or $0.90 per share as compared to $1.32 million, or $0.49 per share for the three months ended March 31, 2012. Net income increased in 2013 by $0.94 million or 71% primarily due to decreased depreciation and depletion expenses and a decrease in unrealized losses on derivative instruments partially offset by slight decreases in oil and gas sales and increased lease operating expenses and income tax provisions. Depreciation and depletion decreased by $1.96 million for the three months ended March 31, 2013 as compared to the same period in 2012 largely due to decreased depletion rates associated with our offshore properties as several of our offshore properties were plugged and abandoned during 2012. Oil and gas sales decreased by $1.67 million for the three months ended March 31, 2013 as compared to the same period in 2012 largely due to a decrease in crude oil commodity prices during the three months ended March 31, 2013 as compared to crude oil commodity prices during the three months ended March 31, 2012. Unrealized losses on derivative instruments decreased by $1.70 million for the three months ended March 31, 2013 as compared to the same period in 2012 largely due to a decrease in future crude oil commodity prices during the 2013 periods as compared to crude oil commodity contracts held at December 31, 2012 and 2011.

The significant components of net income are discussed below.

Oil and gas sales decreased $1.67 million, or 7% from $23.03 million for the three months ended March 31, 2012 to $21.36 million for the three months ended March 31, 2013. Crude oil and natural gas sales vary due to changes in volumes of production sold and realized commodity prices. Our realized prices at the well head decreased an average of $14.38 per barrel, or 14% on crude oil during the three months ended March 31, 2013 from the same period in 2012 while our average well head price for natural gas increased $0.05 per mcf, or 1% during the three months ended March 31, 2013 from the same period in 2012.

Our crude oil production increased by 7,000 barrels, or 4% from 177,000 barrels for the first quarter 2012 to 184,000 barrels for the first quarter 2013. Our natural gas production increased by 35,000 mcf, or 3% from 1,155,000 mcf for the first quarter 2012 to 1,190,000 mcf for the first quarter 2013. The net increase in crude oil and natural gas production volumes are a result of our continued drilling success in West Texas and the Gulf Coast regions as we place new wells into production, partially offset by the natural decline of existing properties and reduction of our primary natural gas producing offshore properties.

The following table summarizes the primary components of production volumes and average sales prices realized for the three months ended March 31, 2013 and 2012 (excluding realized gains and losses from derivatives).

                                                 Three Months Ended March 31,
                                                                          Increase /
                                            2013            2012          (Decrease)
    Barrels of Oil Produced                  184,000         177,000            7,000
    Average Price Received               $     86.08     $    100.46     $     (14.38 )

    Oil Revenue (In 000's)               $    15,864     $    17,755     $     (1,891 )
    Mcf of Gas Produced                    1,190,000       1,155,000           35,000
    Average Price Received               $      4.62     $      4.57     $       0.05

    Gas Revenue (In 000's)               $     5,495     $     5,276     $        219

    Total Oil & Gas Revenue (In 000's)   $    21,359     $    23,031     $     (1,672 )

Realized net gains on derivative instruments include net gains of $0.37 million and net losses of $0.13 million on the settlements of natural gas and crude oil derivatives, respectively for the first quarter 2013 and net gains of $0.12 million on the settlements of crude oil derivatives for the first quarter 2012. In the first quarter of 2012, we unwound and monetized crude oil swaps with original settlement dates from January 2012 through December 2013 for net proceeds of $0.66 million. The $0.66 million gain associated with these early settlement transactions is included in realized gain on derivative instruments for the three months ended March 31, 2012.

Oil and gas prices received including the impact of derivatives but excluding the early settlement transactions were:

                                    Three Months Ended March 31,
                                                             Increase
                                 2013           2012        (Decrease)
                  Oil Price   $    85.35       $ 97.40     $     (12.05 )
                  Gas Price   $     4.93       $  4.57     $       0.36

We do not apply hedge accounting to any of our commodity based derivatives, thus changes in the fair market value of commodity contracts held at the end of a reported period, referred to as mark-to-market adjustments, are recognized as unrealized gains and losses in the accompanying consolidated statements of operations. As oil and natural gas prices remain volatile, mark-to-market accounting treatment creates volatility in our revenues. During the three months ended March 31, 2013, we


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recognized net unrealized losses of $1.55 million associated with natural gas fixed swap contracts and $0.53 million associated with crude oil fixed swaps and collars due to market fluctuations in natural gas and crude oil futures market prices between December 31, 2012 and March 31, 2013. During the three months ended March 31, 2012, we recognized $3.78 million in net unrealized losses associated with crude oil fixed swaps and collars due to an increase in crude oil futures market prices between December 31, 2011 and March 31, 2012.

Field service income increased $0.21 million, or 4% from $5.12 million for the first quarter 2012 to $5.33 million for the first quarter 2013. This underlying increase is a result of adding service equipment and the market allowing us to charge slightly higher rates to customers. Workover rig services represent the bulk of our field service operations, and those rates have all increased between the periods in our most active districts. However water hauling and disposal services in our South Texas district were slightly down during the first quarter of 2013 due to increased competition in the area.

Lease operating expense increased $0.48 million, or 5% from $9.50 million for the first quarter 2012 to $9.98 million for the first quarter 2013. This underlying increase is primarily due to higher pumper / labor costs, chemical expenses and salt water disposal costs associated with new wells coming on line from the recent drilling success in West Texas and increased expensed workovers across all districts, partially offset by decreased operating expenses on the offshore properties during the first three months of 2013 as compared to the same period of 2012.

Field service expense increased $0.15 million, or 3% from $4.39 million for the first quarter 2012 to $4.54 million for the first quarter 2013. Field service expenses primarily consist of salaries and vehicle operating expenses which have increased during the three months ended March 31, 2013 over the same period of 2012 as a direct result of increased services and utilization of the equipment.

Depreciation, depletion, amortization and accretion on discounted liabilitiesdecreased $1.96 million, or 29% from $6.84 million for the first quarter 2012 to $4.88 million for the first quarter 2013. This decrease is primarily due to decreased depletion rates recognized during the first three months of 2013 associated with offshore properties as our offshore properties were plugged and abandoned during 2012.

General and administrative expense increased $0.15 million, or 4% from $3.89 million for the three months ended March 31, 2012 to $4.04 million for the three months ended March 31, 2013. This increase in 2013 is largely due to increased personnel costs in 2013. The largest component of these personnel costs was salaries and employee related taxes and insurance.

Gain on sale and exchange of assets of $1.06 million and $0.70 million for the three months ended March 31, 2013 and March 31, 2012, respectively consists of sales of non-essential field service equipment.

Interest expense increased $0.31 million, or 41% from $0.76 million for the first quarter 2012 to $1.07 million for the first quarter 2013. This increase relates to an increase in average debt outstanding during the first quarter 2013 slightly offset by a decrease in weighted average interest rates during the 2013 period.

A provision for income taxes of $1.15 million, or an effective tax rate of 34% was recorded for the three months ended March 31, 2013 verses a provision of $0.39 million, or an effective tax rate of 23% for the three months ended March 31, 2012. Our provision for income taxes varies from the federal statutory tax rate of 34% primarily due to state taxes and percentage depletion deductions. We are entitled to percentage depletion on certain of our wells, which is calculated without reference to the basis of the property. To the extent that such depletion exceeds a property's basis it creates a permanent difference, which lowers our effective rate.

LIQUIDITY AND CAPITAL RESOURCES

Our primary capital resources are cash provided by our operating activities and our credit facility.

Net cash provided by our operating activities for the three months ended March 31, 2013 was $11.41 million compared to $10.28 million for the three months ended March 31, 2012. Excluding the effects of significant unforeseen expenses or other income, our cash flow from operations fluctuates primarily because of variations in oil and gas production and prices or changes in working capital accounts. Our oil and gas production will vary based on actual well performance but may be curtailed due to factors beyond our control.

Our realized oil and gas prices vary due to world political events, supply and demand of products, product storage levels, and weather patterns. We sell the vast majority of our production at spot market prices. Accordingly, product price volatility will affect our cash flow from operations. To mitigate price volatility we sometimes lock in prices for some portion of our production through the use of derivatives.

If our exploratory drilling results in significant new discoveries, we will have to expend additional capital in order to finance the completion, development, and potential additional opportunities generated by our success. We believe that, because of the additional reserves resulting from the successful wells and our record of reserve growth in recent years, we will be able to access sufficient additional capital through bank financing.


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We have in place both a stock repurchase program and a limited partnership interest repurchase program under which we expect to continue spending during 2013. For the three month period ended March 31, 2013, we have spent $1.63 million under these programs.

We currently maintain a credit facility totaling $250 million, with a current borrowing base of $145 million and $23.00 million in availability at March 31, 2013. The bank reviews the borrowing base semi-annually and, at their discretion, may decrease or propose an increase to the borrowing base relative to a redetermined estimate of proved oil and gas reserves. Our oil and gas properties are pledged as collateral for the line of credit and we are subject to certain financial and operational covenants defined in the agreement. We are currently in compliance with these covenants. If we do not comply with these covenants on a continuing basis, the lenders have the right to refuse to advance additional funds under the facility and/or declare all principal and interest immediately due and payable.

It is our goal to increase our oil and gas reserves and production through the acquisition and development of oil and gas properties. Our activities include development and exploratory drilling. Our strategy is to develop a balanced portfolio of drilling prospects that includes lower risk wells with a high probability of success and higher risk wells with greater economic potential. We continue our drilling programs in our West Texas and Mid-Continent regions. During 2013, we intend to drill a total of approximately 30 (20 net) wells, primarily in the West Texas area, at a net cost of $36 million. We also continue to explore and consider opportunities to further expand our oilfield servicing revenues through additional investment in field service equipment. However, the majority of our capital spending is discretionary, and the ultimate level of expenditures will be dependent on our assessment of the oil and gas business environment, the number and quality of oil and gas prospects available, the market for oilfield services, and oil and gas business opportunities in general.

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