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PNRG > SEC Filings for PNRG > Form 10-Q on 5-Nov-2013All Recent SEC Filings

Show all filings for PRIMEENERGY CORP

Form 10-Q for PRIMEENERGY CORP


5-Nov-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 have invested approximately $14 million completing wells drilled in 2012 and continuing our drilling programs in our West Texas and Mid-Continent regions. Thru October 31, 2013, we have participated in the drilling of 18 gross (10.25 net) wells. Twelve of these wells are currently producing, 3 are currently being completed and 3 wells are currently drilling. We intend to drill a total of approximately 25 gross (14 net) wells this year, primarily in the West Texas and Mid-Continent areas at a net cost of approximately $20 million.


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RESULTS OF OPERATIONS

2013 and 2012 Compared

We reported net income attributable to PrimeEnergy for the three and nine months ended September 30, 2013 of $2.23 million, or $0.92 per share and $10.58 million, or $4.32 per share, respectively as compared to $1.34 million, or $0.51 per share and $10.09 million, or $3.81 per share for the three and nine months ended September 30, 2012, respectively. Net income increased by $0.89 million or 66% and $0.50 million or 5% for the three and nine months ended September 30, 2013 as compared to the same periods during 2012 primarily due to increases in oil and gas sales and field service income and decreased depreciation and depletion expense partially offset by increases in realized and unrealized losses on derivative instruments and increases in lease operating and field service expenses. Oil and gas sales increased by $4.14 million and $5.76 million for the three and nine months ended September 30, 2013, respectively as compared to the same periods in 2012 largely due to an increased production volumes and increases in commodity prices during the three and nine months ended September 30, 2013 as compared to production volumes and commodity prices during the three and nine months ended September 30, 2012. Field service income increased by $1.88 million and $3.00 million for the three and nine months ended September 30, 2013, respectively as compared to the same periods in 2012 with the addition of new service equipment during 2013. Depreciation and depletion decreased by $0.71 million and $3.52 million for the three and nine months ended September 30, 2013, respectively as compared to the same periods 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. Net realized and unrealized losses on derivative instruments increased by $2.46 million and $5.43 million for the three and nine months ended September 30, 2013, respectively as compared to the same periods in 2012 largely due to an increase in future crude oil commodity prices during the 2013 periods as compared to crude fixed price oil commodity contracts held at December 31, 2012 and 2011. Primarily due to recent drilling success in West Texas and resulting increase in activities with new wells coming on line, lease operating expenses increased by $1.98 million and $3.49 million for the three and nine months ended September 30, 2013, respectively as compared to the same periods in 2012. Field service expenses increased by $1.25 million and $2.20 million for the three and nine months ended September 30, 2013, respectively as compared to the same periods in 2012 corresponding to the increase in field service income and new service equipment added in 2013.

The significant components of net income are discussed below.

Oil and gas sales increased $4.14 million, or 19% from $21.81 million for the three months ended September 30, 2012 to $25.95 million for the three months ended September 30, 2013 and increased $5.76 million, or 9% from $65.68 million for the nine months ended September 30, 2012 to $71.44 million for the nine months ended September 30, 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 increased an average of $16.69 per barrel, or 19% and $2.82 per barrel, or 3% on crude oil during the three and nine months ended September 30, 2013, respectively from the same periods in 2012 while our average well head price for natural gas increased $0.30 per mcf, or 6% and $0.45 per mcf, or 10% during the three and nine months ended September 30, 2013, respectively from the same periods in 2012.

Our crude oil production increased by 3,000 barrels, or 2% from 185,000 barrels for the third quarter 2012 to 188,000 barrels for the third quarter 2013 and increased by 19,000 barrels, or 4% from 541,000 barrels for the nine months ended September 30, 2012 to 560,000 barrels for the nine months ended September 30, 2013. Our natural gas production increased by 51,000 mcf, or 4% from 1,191,000 mcf for the third quarter 2012 to 1,242,000 mcf for the third quarter 2013 and increased by 174,000 mcf, or 5% from 3,493,000 mcf for the nine months ended September 30, 2012 to 3,667,000 mcf for the nine months ended September 30, 2013. The net increase in crude oil and natural gas production volumes are a result of our continued drilling success in our West Texas and Mid-Continent regions as we place new wells into production, partially offset by the natural decline of existing properties.

The following table summarizes the primary components of production volumes and average sales prices realized for the three and nine months ended September 30, 2013 and 2012 (excluding realized gains and losses from derivatives).

                                    Three Months Ended September 30,                  Nine Months Ended September 30,
                                                                Increase /                                       Increase /
                                  2013            2012          (Decrease)         2013            2012          (Decrease)
Barrels of Oil Produced            188,000         185,000            3,000         560,000         541,000           19,000
Average Price Received        $     104.95     $     88.26     $      16.69     $     94.66     $     91.84     $       2.82

Oil Revenue (In 000's)        $     19,807     $    16,288     $      3,519     $    53,031     $    49,717     $      3,314

Mcf of Gas Produced              1,242,000       1,191,000           51,000       3,667,000       3,493,000          174,000
Average Price Received        $       4.94     $      4.64     $       0.30     $      5.02     $      4.57     $       0.45

Gas Revenue (In 000's)        $      6,141     $     5,525     $        616     $    18,411     $    15,961     $      2,450

Total Oil & Gas Revenue (In
000's)                        $     25,948     $    21,813     $      4,135     $    71,442     $    65,678     $      5,764

Realized net gains (losses) on derivative instruments include net gains of $0.24 million and net losses of $1.44 million on the settlements of natural gas and crude oil derivatives, respectively for the third quarter 2013 and net gains of $0.04 million on the settlements of crude oil derivatives for the third quarter 2012. Realized net gains on derivative instruments include net gains of $0.57 million and net losses of $1.70 million on the settlements of natural gas and crude oil derivatives, respectively for the nine months


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ended September 30, 2013 and net gains of $0.38 million on the settlements of crude oil derivatives for the nine months ended September 30, 2012. In the nine months ended September 30, 2012, we unwound and monetized crude oil swaps with original settlement dates from January 2012 through December 2013 for net proceeds of $1.03 million. The gains associated with these early settlement transactions are included in realized gain on derivative instruments for the nine months ended September 30, 2012.

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

                           Three Months Ended                       Nine Months Ended
                              September 30,                           September 30,
                                            Increase                                Increase
                    2013        2012       (Decrease)       2013        2012       (Decrease)
       Oil Price   $ 97.32     $ 88.46     $      8.86     $ 91.63     $ 90.63     $      1.00
       Gas Price   $  5.13     $  4.64     $      0.49     $  5.18     $  4.57     $      0.61

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 and nine months ended September 30, 2013, we recognized net unrealized losses of $0.06 million and $0.49 million, respectively associated with natural gas fixed swap contracts and net unrealized losses of $3.81 million and $0.98 million, respectively 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 September 30, 2013. During the three months ended September 30, 2012, we recognized unrealized losses of $2.65 million and a net unrealized gain of $2.45 million for the nine months ended September 30, 2012 associated with crude oil fixed swaps and collars due to market fluctuations in crude oil futures market prices between December 31, 2011 and September 30, 2012.

Field service income increased $1.88 million, or 38% from $4.89 million for the third quarter 2012 to $6.77 million for the third quarter 2013 and $3.00 million, or 20% from $15.34 million for the nine months ended September 30, 2012 to $18.35 million for the nine months ended September 30, 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.

Lease operating expense increased $1.98 million, or 21% from $9.35 million for the third quarter 2012 to $11.33 million for the third quarter 2013 and $3.49 million, or 12% from $28.82 million for the nine months ended September 30, 2012 to $32.31 million for the nine months ended September 30, 2013. This underlying increase is primarily due to higher pumper / labor costs and chemical expenses 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 nine months of 2013 as compared to the same periods of 2012.

Field service expense increased $1.25 million, or 29% from $4.27 million for the third quarter 2012 to $5.52 million for the third quarter 2013 and $2.20 million, or 17% from $13.02 million for the nine months ended September 30, 2012 to $15.22 million for the nine months ended September 30, 2013. Field service expenses primarily consist of salaries and vehicle operating expenses which have increased during the three and nine months ended September 30, 2013 over the same periods of 2012 as a direct result of increased services and utilization of the equipment.

Depreciation, depletion, amortization and accretion on discounted liabilities decreased $0.71 million, or 12% from $5.88 million for the third quarter 2012 to $5.18 million for the third quarter 2013 and $3.52 million, or 18% from $19.85 million for the nine months ended September 30, 2012 to $16.33 million for the nine months ended September 30, 2013. This decrease is primarily due to decreased depletion rates recognized during the three and nine months ended September 30, 2013 associated with offshore properties as our offshore properties were plugged and abandoned during 2012, partially offset by increased depletion expenses related to new wells coming on line from the recent drilling success in West Texas.

General and administrative expense increased $0.04 million, or 1% from $3.82 million for the three months ended September 30, 2012 to $3.86 million for the three months ended September 30, 2013 and $0.74 million, or 6% from $11.51 million for the nine months ended September 30, 2012 to $12.25 million for the nine months ended September 30, 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 $2.52 million and $0.72 million for the nine months ended September 30, 2013 and September 30, 2012, respectively consists of sales of non-essential oil and gas interests and field service equipment.

Interest expense increased $0.05 million, or 6% from $0.95 million for the third quarter 2012 to $1.00 million for the third quarter 2013 and $0.62 million, or 25% from $2.53 million for the nine months ended September 30, 2012 to $3.16 million for the nine months ended September 30, 2013. This increase relates to an increase in average debt outstanding during the three and nine months ended September 30, 2013 as compared to the same periods of 2012 slightly offset by a decrease in weighted average interest rates during the 2013 periods.


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A provision for income taxes of $1.28 million, or an effective tax rate of 35% was recorded for the third quarter 2013 verses a provision of $0.46 million, or an effective tax rate of 26% for the third quarter 2012 and a provision of $5.94 million, or an effective tax rate of 36% was recorded for the nine months ended September 30, 2013 verses a provision of $4.67 million, or an effective tax rate of 32% for the nine months ended September 30, 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 nine months ended September 30, 2013 was $30.71 million compared to $33.39 million for the nine months ended September 30, 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.

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 nine month period ended September 30, 2013, we have spent $2.99 million under these programs.

We currently maintain a revolving credit facility totaling $250 million, with a final maturity date of July 30, 2017 and a current borrowing base of $145 million and $38.00 million in availability at September 30, 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.

On July 31, 2013, we executed an equipment financing facility totaling $10.0 million with an effective annual interest rate of 3.95% and requiring 60 monthly payments of $184,000. Our field service equipment is pledged as collateral for this facility. In August 2013, we used the $10.0 million in proceeds from this equipment facility to pay down on our revolving credit facility.

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 25 gross (14 net) wells, primarily in the West Texas and Mid-Continent areas at a net cost of approximately $20 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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