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PNRG > SEC Filings for PNRG > Form 10-Q on 7-May-2014All Recent SEC Filings

Show all filings for PRIMEENERGY CORP

Form 10-Q for PRIMEENERGY CORP


7-May-2014

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 statements 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 contain 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 2014, we continued our drilling program in our West Texas and Mid-Continent regions. It is our goal to increase our oil and gas reserves and production through the acquisition and development of oil and gas properties. Based upon the results of horizontal wells drilled by us and other offsetting operators and historical vertical well performance, we have decided to reduce the number of vertical wells in our drilling program and drill more horizontal wells. We believe horizontal development of our resource base will provide the opportunity to improve returns relative to vertical drilling by accessing a larger base of reserves in target zones with a lateral wellbore. Through April 30, 2014, we have participated in the drilling of 5 gross (1.8 net) wells; 3 of these wells are currently producing and 2 are awaiting completion. We intend to drill a total of approximately 25 gross (12 net) wells this year, primarily in the West Texas area at a net cost of $60 million.


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RESULTS OF OPERATIONS

2014 and 2013 Compared

We reported net income attributable to PrimeEnergy for the three months ended March 31, 2014 of $2.81 million, or $1.18 per share as compared to $2.26 million, or $0.90 per share for the three months ended March 31, 2013. Net income increased in 2014 by $0.55 million or 24% primarily due to increases in oil and gas sales and field service income and a gain on the sale of non-essential oil and gas interests partially offset by increases in realized losses on derivative instruments, lease operating expenses and field service expenses as well as related increases in net income attributable to non-controlling interests and income tax provisions. Operating revenues increased $3.42 million for the three months ended March 31, 2014 as compared to the same period in 2013 largely due to increased commodity prices realized in 2014 and an increase in field service income with the addition of new service equipment during the latter periods of 2013 partially offset by an increase in losses on derivative instruments in 2014. Lease operating and field service expenses increased $1.92 million and $0.99 million, respectively, for the three months ended March 31, 2014 as compared to the same period in 2013 primarily from increased labor costs and an increase in services provided. During the three months ended March 31, 2014 we recognized gains on the sale of non-essential oil and gas interests and field service equipment of $3.17 million as compared to $1.06 million during the same period in 2013.

The significant components of net income are discussed below.

Oil and gas sales increased $2.84 million, or 13% from $21.36 million for the three months ended March 31, 2013 to $24.20 million for the three months ended March 31, 2014. 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 $8.07 per barrel, or 9% on crude oil during the three months ended March 31, 2014 from the same period in 2013 while our average well head price for natural gas increased $1.51 per mcf, or 33% during the three months ended March 31, 2014 from the same period in 2013.

Our crude oil production decreased slightly by 2,000 barrels, or 1% from 184,000 barrels for the first quarter 2013 to 182,000 barrels for the first quarter 2014. Our natural gas production decreased by 37,000 mcf, or 3% from 1,190,000 mcf for the first quarter 2013 to 1,153,000 mcf for the first quarter 2014. The net decrease in crude oil and natural gas production volumes are a result of the natural decline of existing properties.

The following table summarizes the primary components of production volumes and average sales prices realized for the three months ended March 31, 2014 and 2013 (excluding realized gains and losses from derivatives).

                                                 Three Months Ended March 31,
                                                                          Increase /
                                            2014            2013          (Decrease)
    Barrels of Oil Produced                  182,000         184,000           (2,000 )
    Average Price Received               $     94.15     $     86.08     $       8.07

    Oil Revenue (In 000's)               $    17,133     $    15,864     $      1,269
    Mcf of Gas Produced                    1,153,000       1,190,000          (37,000 )
    Average Price Received               $      6.13     $      4.62     $       1.51

    Gas Revenue (In 000's)               $     7,068     $     5,495     $      1,573

    Total Oil & Gas Revenue (In 000's)   $    24,201     $    21,359     $      2,842

Realized net gains on derivative instruments include net losses of $0.24 million and $0.75 million on the settlements of natural gas and crude oil derivatives, respectively for the first quarter 2014 and 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. In the first quarter of 2014, we unwound and monetized natural gas swaps with original settlement dates from January 2015 through December 2015 for net proceeds of $0.28 million. The $0.28 million gain associated with these early settlement transactions is included in realized gain on derivative instruments for the three months ended March 31, 2014.

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

                                    Three Months Ended March 31,
                                                              Increase
                                2014             2013        (Decrease)
                 Oil Price   $    90.01       $    85.35     $      4.66
                 Gas Price   $     5.68       $     4.93     $      0.75

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 condensed 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, 2014, we recognized net unrealized losses of $0.50 million associated with natural gas fixed swap contracts and $1.48 million in net unrealized


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losses associated with crude oil fixed swaps and collars due to an increase in natural gas and crude oil futures market prices between December 31, 2013 and March 31, 2014. During the three months ended March 31, 2013, we 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.

Field service incomeincreased $1.44 million, or 27% from $5.33 million for the first quarter 2013 to $6.77 million for the first quarter 2014. This underlying increase is a result of adding service equipment during the latter periods of 2013 and the market allowing us to charge slightly higher rates to customers. Workover rig services represent the bulk of our field service operations, and with the upgrading of our rigs during late 2013 those rates have all increased between the periods in our most active districts. In addition, income from water hauling and disposal services in our South Texas district have generally recovered from a slight down turn during the first quarter of 2013 due to increased competition in the area, and income from hot oiler services have increased in our West Texas district with the addition of service equipment in the area.

Lease operating expense increased $1.93 million, or 19% from $9.98 million for the first quarter 2013 to $11.91 million for the first quarter 2014. This underlying increase is primarily due to higher pumper / labor costs and salt water disposal costs associated with new wells coming on line from the recent drilling success in West Texas during the first three months of 2014 as compared to the same period of 2013.

Field service expense increased $0.99 million, or 22% from $4.54 million for the first quarter 2013 to $5.53 million for the first quarter 2014. Field service expenses primarily consist of salaries and vehicle operating expenses which have increased during the three months ended March 31, 2014 over the same period of 2013 as a direct result of increased services and utilization of the equipment.

Depreciation, depletion, amortization and accretion on discounted liabilities increased $0.47 million, or 10% from $4.88 million for the first quarter 2013 to $5.35 million for the first quarter 2014. This increase is primarily due to increased depletion rates recognized during the first three months of 2014 associated with the recent drilling success in West Texas as compared to the same period of 2013.

General and administrative expense increased $0.41 million, or 10% from $4.04 million for the three months ended March 31, 2013 to $4.45 million for the three months ended March 31, 2014. This increase in 2014 is largely due to increased personnel costs in 2014. The largest component of these personnel costs was salaries and employee related taxes and insurance.

Gain on sale and exchange of assets of $3.17 million and $1.06 million for the three months ended March 31, 2014 and March 31, 2013, respectively consists of sales of non-essential oil and gas interests and field service equipment.

Interest expense increased $0.01 million, or less than 1% from $1.07 million for the first quarter 2013 to $1.08 million for the first quarter 2014. This increase relates to a slight increase in weighted average interest rates due to our Equipment Loan entered into in July 2013 substantially offset by a decrease in average debt outstanding during the first quarter 2014 as compared to the same period of 2013.

A provision for income taxes of $1.48 million, or an effective tax rate of 34% was recorded for the three months ended March 31, 2014 versus a provision of $1.15 million, or an effective tax rate of 34% for the three months ended March 31, 2013. Our provision for income taxes can vary 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 would have the effect of lowering 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, 2014 was $11.13 million compared to $11.41 million for the three months ended March 31, 2013. 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 currently maintain a credit facility totaling $250 million, with a current borrowing base of $140 million and $31.50 million in availability at March 31, 2014. 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. 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. We are currently in compliance with these covenants and expect to be in compliance over the next twelve months.

In July 2013, we obtained a $10 million loan secured by most of our field service equipment used in our field service operations. We used the funds from that loan to pay down our credit facility, and as a result, freed up additional funds under the credit facility for future acquisitions, development and operations. As of April 20, 2014 we had a total of $8.8 million outstanding on this loan.

It is our goal to increase our oil and gas reserves and production through the acquisition and development of oil and gas properties. During 2014 we continued our drilling program in our West Texas and Mid-Continent regions. Based upon the results of horizontal wells drilled by us and other offsetting operators and historical vertical well performance, we have decided to reduce the number of vertical wells in our drilling program and drill more horizontal wells. We believe horizontal development of our resource base will provide the opportunity to improve returns relative to vertical drilling by accessing a larger base of reserves in target zones with a lateral wellbore. During 2014, we intend to drill a total of approximately 25 gross (12 net) wells, primarily in the West Texas area, at a net cost of $60 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.

We have in place both a stock repurchase program and a limited partnership interest repurchase program under which we expect to continue spending during 2014. For the three month period ended March 31, 2014, we have spent $1.09 million under these programs.

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