PRIMEENERGY RESOURCES CORP - Quarter Report: 2005 June (Form 10-Q)
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U.S. SECURITIES AND EXCHANGE COMMISSION |
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Washington, D.C. 20549 |
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________________________________ |
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FORM 10-Q |
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/X/ Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act of 1934 |
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For the Quarterly Period Ended June 30, 2005 |
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Or |
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/ / Transition Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 |
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For the Transition Period From __________ to ___________ |
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______________________________ |
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Commission File Number 0-7406 |
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______________________________ |
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PrimeEnergy Corporation |
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(Exact name of registrant as specified in its charter) |
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Delaware |
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(State or other jurisdiction of incorporation or organization) |
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84-0637348 |
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(IRS employer identification number) |
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One Landmark Square, Stamford, Connecticut 06901 |
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(Address of principal executive offices) |
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(203) 358-5700 |
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(Registrant's telephone number, including area code) |
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(Former name, former address and former fiscal year, if changed since last report) |
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Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / |
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Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Acts). Yes ___ NO /X/ |
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The number of shares outstanding of each class of the Registrant's Common Stock as of August 10, 2005 was: Common Stock, $0.10 par value, 3,370,250 shares. |
2
See accompanying notes to the consolidated financial statements.
3
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PrimeEnergy Corporation |
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June 30, 2005 (Unaudited) |
December 31, 2004 (Audited) |
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LIABILITIES and STOCKHOLDERS' EQUITY |
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Current liabilities: |
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Accounts payable |
$ |
14,394,000 |
$ |
9,941,000 |
Accrued liabilities |
4,382,000 |
3,228,000 |
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Due to related parties |
722,000 |
600,000 |
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---------------- |
---------------- |
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Total current liabilities |
19,498,000 |
13,769,000 |
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Long-term bank debt |
38,800,000 |
29,900,000 |
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Asset retirement obligation |
1,847,000 |
390,000 |
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Deferred income taxes |
10,420,000 |
7,630,000 |
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---------------- |
---------------- |
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Total liabilities |
70,565,000 |
51,689,000 |
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---------------- |
---------------- |
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Stockholders' equity: |
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Preferred stock, $.10 par value, |
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authorized 5,000,000 shares, none issued |
-- |
-- |
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Common stock, $.10 par value, authorized |
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10,000,000 shares; issued 7,694,970 in 2005 and 2004 |
769,000 |
769,000 |
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Paid in capital |
11,024,000 |
11,024,000 |
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Retained earnings |
27,227,000 |
22,653,000 |
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---------------- |
---------------- |
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39,020,000 |
34,446,000 |
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Treasury stock, at cost, 4,320,354 common shares |
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at 2005 and 4,202,745 common shares at 2004 |
(18,562,000) |
(16,209,000) |
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---------------- |
---------------- |
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Total stockholders' equity |
20,458,000 |
18,237,000 |
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---------------- |
--------------- |
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Total liabilities and equity |
$ |
91,023,000 |
$ |
69,926,000 |
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======== |
========= |
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See accompanying notes to the consolidated financial statements.
4
See accompanying notes to the consolidated financial statements.
5
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PrimeEnergy Corporation (unaudited)
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2005 |
2004 |
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Revenue: |
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Oil and gas sales |
$ |
12,295,000 |
$ |
10,502,000 |
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Field service income |
3,759,000 |
2,908,000 |
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Administrative overhead fees |
1,828,000 |
1,564,000 |
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Loss on derivative instruments, net |
(285,000) |
-- |
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Interest and other income |
(2,000) |
11,000 |
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---------------- |
---------------- |
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Total revenue |
17,595,000 |
14,985,000 |
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---------------- |
---------------- |
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Costs and expenses: |
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Lease operating expense |
4,862,000 |
3,990,000 |
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Field service expense |
3,173,000 |
2,450,000 |
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Depreciation, depletion and amortization |
3,034,000 |
3,043,000 |
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General and administrative expense |
2,224,000 |
1,747,000 |
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Exploration costs |
9,000 |
1,516,000 |
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---------------- |
---------------- |
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Total costs and expenses |
13,302,000 |
12,746,000 |
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---------------- |
---------------- |
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Income from operations |
4,293,000 |
2,239,000 |
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Interest expense |
474,000 |
265,000 |
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Gain on sale and exchange of assets |
40,000 |
48,000 |
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---------------- |
---------------- |
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Net income before income taxes |
3,859,000 |
2,022,000 |
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Provision for income taxes |
1,544,000 |
790,000 |
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---------------- |
---------------- |
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Net income |
$ |
2,315,000 |
$ |
1,232,000 |
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========== |
========== |
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Basic income per common share |
$ |
0.68 |
$ |
0.34 |
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Diluted income per common share |
$ |
0.56 |
$ |
0.29 |
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See accompanying notes to the consolidated financial statements.
6
PrimeEnergy Corporation
Consolidated Statement of Stockholders' Equity
Six Months Ended June 30, 2005
(unaudited)
Common Stock |
Paid In |
Retained |
Treasury |
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Shares |
Amount |
Capital |
Earnings |
Stock |
Total |
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Balance at December 31, 2004 |
7,694,970 |
$ 769,000 |
11,024,000 |
22,653,000 |
(16,209,000) |
$ 18,237,000 |
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Purchased 117,609 shares of |
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common stock |
(2,353,000) |
(2,353,000) |
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Net income |
4,574,000 |
4,574,000 |
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----------- |
---------- |
------------- |
------------- |
-------------- |
--------------- |
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Balance at June 30, 2005 |
7,694,970 |
$ 769,000 |
11,024,000 |
27,227,000 |
(18,562,000) |
20,458,000 |
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======= |
====== |
======== |
========= |
========= |
========= |
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See accompanying notes to the consolidated financial statements.
7
See accompanying notes to the consolidated financial statements.
8
PrimeEnergy Corporation
Notes to Consolidated Financial Statements
June 30, 2005
(1) Interim Financial Statements:
The accompanying consolidated financial statements of PrimeEnergy Corporation, with the exception of the consolidated balance sheet at December 31, 2004, have not been audited by independent public accountants. In the opinion of management, the accompanying financial statements reflect all adjustments necessary to present fairly our financial position at June 30, 2005 and our income and cash flows for the six months ended June 30, 2005 and 2004. All such adjustments are of a normal recurring nature. Certain amounts presented in prior period financial statements have been reclassified for consistency with current period presentation. The results for interim periods are not necessarily indicative of annual results.
Recently Issued Accounting Pronouncements
In April 2005, the FASB issued Staff Position No. FAS (FSP) 19-1, "Accounting for Suspended Well Costs." FSP 19-1 amended SFAS No. 19, "Financial Accounting and Reporting by Oil and Gas Producing Companies," to provide for the continued capitalization of exploratory well costs beyond one year of the drilling commencement date when the well has found a sufficient quantity of reserves to justify its completion as a producing well and the enterprise is making sufficient progress assessing the reserves and the economic and operating viability of the project. FSP 19-1 also amends SFAS No. 19 to require additional disclosures of suspended exploratory well costs in the notes to the financial statements for annual and interim periods when there has been a significant change from the previous reporting period. The guidance of FSP 19- 1 is effective for the first reporting period beginning after April 5, 2005 and is to be applied prospectively. PrimeEnergy does not expect FSP 19-1 will have a material impact on its financial statements.
In May 2005, the Financial Accounting Standard Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 154, "Accounting Changes and Error Corrections-a replacement of APB Opinion No. 20 and FASB Statement No. 3." In order to enhance financial reporting consistency between periods, SFAS 154 modifies the requirements for the accounting and reporting of the direct effects of changes in accounting principles. Under APB Opinion 20, the cumulative effect of voluntary changes in accounting principle was recognized in Net Income in the period of the change. Unlike the treatment previously prescribed by APB Opinion 20, retrospective application is now required, unless it is not practical to determine the specific effects in each period or the cumulative effect. If the period specific effects cannot be determined, it is required that the new accounting principle must be retrospectively applied in the earliest period possible to the balance sheet accounts and a corresponding adjustment be made to the opening balance of retained earnings or another equity account.
9
PrimeEnergy Corporation
Notes to Consolidated Financial Statements
June 30, 2005
(1) Interim Financial Statements: (Continued)
If the cumulative effect cannot be determined, it is necessary to apply the new accounting principles prospectively at the earliest practical date. If it is not feasible to retrospectively apply the change in principle, the reason that this is not possible and the method used to report the change is required to be disclosed. The statement also provides that changes in accounting for depreciation, depletion or amortization should be treated as changes in accounting estimate inseparable from a change in accounting principle and that disclosure of the preferability of the change is required. SFAS 154 is effective for accounting changes made in fiscal years beginning after December 15, 2005.
(2) Significant Acquisitions, Dispositions and Property Activity
As more fully described in Note 8, the Company is committed to offer to repurchase the interests of the partners and trust unit holders in certain of the Partnerships. The Company purchased such interests in an amount totaling $335,596 for the six months ending June 30, 2005 and $2,038,305 for the year ending December 31, 2004. The Company's proportionate share of assets, liabilities and results of operations related to the interests in the Partnerships are included in the consolidated financial statements.
Properties under evaluation include $7.5 million invested in one offshore well completed and tested during the third quarter of 2004, however, early production tests have been inconclusive as to the commercial viability of this prospect. Additional expenditures during 2005 will be required to determine whether production rates and ultimate recoverable reserves are sufficient to warrant the costs of setting a platform and installing production facilities.
(3) Restricted Cash and Cash Equivalents:
Restricted cash and cash equivalents include $2,232,000 and $1,864,000 at June 30 2005 and December 31, 2004, respectively, of cash primarily pertaining to undistributed royalty payments. There were corresponding accounts payable recorded at June 30, 2005 and December 31, 2004 for these liabilities.
10
PrimeEnergy Corporation
Notes to Consolidated Financial Statements
June 30, 2005
(4) Additional Balance Sheet Information
Certain balance sheet amounts are comprised of the following:
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June 30, |
December 31, |
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2005 |
2004 |
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Accounts Receivable: |
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Joint Interest Billing |
$ |
1,687,000 |
$ |
1,048,000 |
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Trade Receivables |
1,867,000 |
1,728,000 |
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Oil and Gas Sales |
5,357,000 |
6,181,000 |
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Other |
554,000 |
324,000 |
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--------------- |
---------------- |
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$ |
9,465,000 |
$ |
9,281,000 |
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Less, Allowance for doubtful accounts |
(587,000) |
(587,000) |
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-------------- |
---------------- |
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$ |
8,878,000 |
$ |
8,694,000 |
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========= |
========= |
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Accounts Payable: |
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Trade |
$ |
7,749,000 |
$ |
3,617,000 |
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Royalty and other owners |
5,075,000 |
5,105,000 |
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Other |
1,570,000 |
1,219,000 |
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---------------- |
---------------- |
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Total |
$ |
14,394,000 |
$ |
9,941,000 |
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========= |
========= |
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Accrued Liabilities: |
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Payroll and benefits |
$ |
2,644,000 |
$ |
1,367,000 |
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Interest |
266,000 |
183,000 |
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Other |
1,472,000 |
1,678,000 |
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---------------- |
---------------- |
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Total |
$ |
4,382,000 |
$ |
3,228,000 |
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========= |
========= |
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11
PrimeEnergy Corporation
Notes to Consolidated Financial Statements
June 30, 2005
(5) Property and Equipment:
Property and equipment at June 30, 2005 and December 31, 2004 consisted of the following:
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June 30, |
December 31, |
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2005 |
2004 |
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Proved oil and gas properties, at cost |
$ |
102,564,000 |
$ |
95,018,000 |
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Unproved oil and gas properties, at cost |
28,908,000 |
13,149,000 |
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Less, accumulated depletion |
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and depreciation |
(65,684,000) |
(60,098,000) |
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---------------- |
--------------- |
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$ |
65,788,000 |
$ |
48,069,000 |
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Field service equipment and other |
10,065,000 |
9,610,000 |
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Less, accumulated depreciation |
(6,802,000) |
(6,307,000) |
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---------------- |
--------------- |
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$ |
3,263,000 |
$ |
3,303,000 |
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---------------- |
--------------- |
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Total net property and equipment |
$ |
69,051,000 |
$ |
51,372,000 |
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========= |
======== |
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(6) Long-Term Bank Debt:
The Company's lender provides funds for onshore and offshore activities under two separate credit agreements. The current borrowing base of the Company under both agreements is $62.0 million of which $38.8 million was outstanding as of June 30, 2005. The bank reviews each 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.
The Company's oil and gas properties as well as certain receivables and equipment are pledged as security under the loan agreements. The agreements contain financial covenants requiring the maintenance of, as defined, a minimum current ratio, tangible net worth, debt coverage and interest coverage ratio and restrictions are placed on the payment of dividends and the amount of treasury stock the Company may purchase.
Effective March 2005, we agreed with our lenders to increase the Company's onshore borrowing base to $41 million. As of June 30, 2005, $22 million was borrowed under this agreement. Borrowings under this agreement mature March 2007.
Effective April 2005, the offshore credit agreement was amended to increase the borrowing base related to proved reserves and add separate facilities to provide capital for construction projects and letters of credit. The Company's offshore borrowing base under this agreement is $21.0 million of which $18.80 million was outstanding as of June 30, 2005. Borrowings under this agreement mature March 2008.
12
PrimeEnergy Corporation
Notes to Consolidated Financial Statements
June 30, 2005
(6) Long-Term Bank Debt: (Continued)
The combined average interest rates paid on outstanding borrowings subject to interest at the bank's base rate and on outstanding borrowings bearing interest based upon the LIBO rate were 5.31% during the first six months of 2005 as compared to 3.2% during the same period of 2004.
(7) Other Long-Term Obligations and Commitments:
Operating Leases:
The Company has several non-cancelable operating leases, primarily for rental of office space, that have a term of more than one year.
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Operating Leases |
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2005 |
204,000 |
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2006 |
403,000 |
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2007 |
240,000 |
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2008 |
192,000 |
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Thereafter |
16,000 |
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----------------- |
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Total minimum payments |
$ |
1,055,000 |
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========== |
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Asset Retirement Obligation:
A reconciliation of our liability for plugging and abandonment costs for the six months ended June 30, 2005 is as follows:
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Asset retirement obligation -beginning of period |
$ |
390,000 |
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Liabilities incurred |
1,571,000 |
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Liabilities settled |
136,000 |
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Accretion expense |
29,000 |
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Change in estimate |
(7,000) |
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----------------- |
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Asset retirement obligation -end of period |
$ |
1,847,000 |
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========== |
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The Company's liability is determined using significant assumptions, including current estimates of plugging and abandonment costs, annual inflation of these costs, the productive life of wells and our risk-adjusted interest rate. Changes in any of these assumptions can result in significant revisions to the estimated asset retirement obligation. Revisions to the asset retirement obligation are recorded with an offsetting change to producing properties, resulting in prospective changes to depreciation, depletion and amortization expense and accretion of discount. Because of the subjectivity of assumptions and the relatively long life of most of our wells, the costs to ultimately retire our wells may vary significantly from previous estimates.
13
PrimeEnergy Corporation
Notes to Consolidated Financial Statements
June 30, 2005
(8) Contingent Liabilities:
The Company, as managing general partner of the affiliated Partnerships, is responsible for all Partnership activities, including the review and analysis of oil and gas properties for acquisition, the drilling of development wells and the production and sale of oil and gas from productive wells. The Company also provides the administration, accounting and tax preparation work for the Partnerships, and is liable for all debts and liabilities of the affiliated Partnerships, to the extent that the assets of a given limited Partnership are not sufficient to satisfy its obligations.
The Company is subject to environmental laws and regulations. Management believes that future expenses, before recoveries from third parties, if any, will not have a material effect on the Company's financial condition. This opinion is based on expenses incurred to date for remediation and compliance with laws and regulations which have not been material to the Company's results of operations.
As a general partner, the Company is committed to offer to purchase the limited partners' interest in certain of its managed Partnerships at various annual intervals. Under the terms of a partnership agreement, the Company is not obligated to purchase an amount greater than 10% of the total partnership interest outstanding. In addition, the Company will be obligated to purchase interests tendered by the limited partners only to the extent of one hundred fifty percent of the revenues received by it from such partnership in the previous year. Purchase prices are based upon annual reserve reports of independent petroleum engineering firms discounted by a risk factor. Based upon historical production rates and prices, management estimates that if all such offers were to be accepted, the maximum annual future purchase commitment would be approximately $500,000.
The Company owns approximately a 27% interest in a limited partnership which owns a shopping center in Alabama. The Company is a guarantor on a mortgage secured by the shopping center. The Company believes the cash flow from the center is sufficient to service the mortgage. The market value of the center is currently substantially higher than the balance owed on the mortgage. If the partnership were unable to pay its obligations under the mortgage agreement, the maximum amount the Company is committed to pay is $200,000.
(9) Stock Options and Other Compensation:
In May 1989, non-statutory stock options were granted by the Company to four key executive officers for the purchase of shares of common stock. At June 30, 2005 and 2004, options on 767,500 were outstanding and exercisable at prices ranging from $1.00 to $1.25.
14
PrimeEnergy Corporation
Notes to Consolidated Financial Statements
June 30, 2005
(10) Related Party Transactions:
PEMC acts as the managing general partner, providing administration, accounting and tax preparation services for the Partnerships. Certain directors have limited and general partnership interests in several of these Partnerships. As the managing general partner in each of the Partnerships, PEMC receives approximately 5% to 15% of the net revenues of each Partnership as a carried interest in the Partnerships properties. As more fully described in Note 8, the Company is committed to offer to repurchase the interests of the partners and trust unit holders in certain of the Partnerships. The Company purchased such interests in an amount totaling $335,596 in the first half of 2005 and $2,038,305 in first half 2004.
The Partnership agreements allow PEMC to receive reimbursement for property acquisition and development costs and general and administrative overhead, incurred on behalf of the Partnerships.
Due to related parties at December 31, 2004 primarily represents receipts collected by the Company as agent, from oil and gas sales net of expenses. The amount of such receipts due the affiliated Partnerships was $722,000 and $600,000 at June 30, 2005 and December 31, 2004, respectively.
(11) Derivative Instruments:
During April 2005, we purchased put floors on 80% of the gas production attributed to our offshore proved and producing gas reserves for the 24-month period beginning January 1, 2006 for a total consideration of approximately $493,000. These derivatives were not held for trading purposes and are not designated as cash flow hedges. The estimated fair value of all derivative instruments is based on quoted market prices. Any change in fair value is included in Loss on derivative instruments on the Consolidated Statements of Operations.
A recap for the period of time, number of MMBtu's and gas prices is as follows:
|
Period of Time |
MMBTU of Natural Gas |
Floor |
|
January 2006 - December 2006 |
828,000 |
$6.00 |
|
January 2007 - December 2007 |
654,000 |
$5.50 |
15
PrimeEnergy Corporation
Notes to Consolidated Financial Statements
June 30, 2005
(12) Income per Share:
Basic earnings per share are computed by dividing earnings available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflect per share amounts that would have resulted if dilutive potential options had been converted to common stock. The following reconciles amounts reported in the financial statements:
|
Six Months Ended |
Six Months Ended |
|||||||||
|
June 30, 2005 |
June 30 , 2004 |
|||||||||
|
Net Income |
Number of |
Per Share |
Net |
Number of |
Per Share |
|||||
|
Shares |
Amount |
Income |
Shares |
Amount |
||||||
|
Net income per |
||||||||||
|
common share |
$ |
4,574,000 |
3,445,895 |
$ |
1.33 |
$ |
2,386,000 |
3,605,903 |
$ |
0.66 |
|
Effect of dilutive |
||||||||||
|
securities: |
||||||||||
|
Options |
728,310 |
713,500 |
||||||||
|
----------- |
------------- |
-------- |
----------- |
------------- |
-------- |
|||||
|
Diluted net income |
||||||||||
|
per common share |
$ |
4,574,000 |
4,174,205 |
$ |
1.10 |
$ |
2,386,000 |
4,319,403 |
$ |
0.55 |
|
========= |
========= |
===== |
========= |
========= |
===== |
|||||
|
Three Months Ended |
Three Months Ended |
|||||||||
|
June 30, 2005 |
June 30, 2004 |
|||||||||
|
Net Income |
Number of |
Per Share |
Net |
Number of |
Per Share |
|||||
|
Shares |
Amount |
Income |
Shares |
Amount |
||||||
|
Net income per |
||||||||||
|
common share |
$ |
2,315,000 |
3,411,695 |
$ |
0.68 |
$ |
1,232,000 |
3,591,621 |
$ |
0.34 |
|
Effect of dilutive |
||||||||||
|
securities: |
||||||||||
|
Options |
731,405 |
722,286 |
||||||||
|
------------- |
-------------- |
-------- |
------------- |
-------------- |
-------- |
|||||
|
Diluted net income |
||||||||||
|
per common share |
$ |
2,315,000 |
4,143,100 |
$ |
0.56 |
$ |
1,232,000 |
4,313,907 |
$ |
0.29 |
|
========= |
======== |
===== |
========= |
======== |
===== |
|||||
16
PrimeEnergy Corporation
June 30, 2005
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion should be read in conjunction with the financial statements of the Company and notes thereto. The Company's subsidiaries are defined in Note 1 of the financial statements.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow provided by operations for the six month period ended June 30, 2005 was $18,263,000 The Company has the ability to supplement cash requirements with borrowings under credit agreements maintained with the Company's lender.
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. Hurricanes in the Gulf of Mexico may shut down our production for the duration of the storm's presence in the Gulf or damage production facilities so that we cannot produce from a particular property for an extended amount of time. In addition, downstream activities on major pipelines in the Gulf of Mexico can also cause us to shut-in production for various lengths of time.
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 financial instruments. During April 2005, we purchased put floors on 80% of the gas production attributed to our offshore proved and producing gas reserves for the 24-month period beginning January 1, 2006 for a total consideration of approximately $493,000. These derivatives were not held for trading purposes and are not designated as cash flow hedges. The estimated fair value of all derivative instruments is based on quoted market prices. Any change in fair value is included in Loss on derivative instruments on the Consolidated Statements of Operations.
A recap for the period of time, number of MMBtu's and gas prices is as follows:
|
Period of Time |
MMBTU of Natural Gas |
Floor |
|
January 2006 - December 2006 |
828,000 |
$6.00 |
|
January 2007 - December 2007 |
654,000 |
$5.50 |
We expect to continue to make significant capital expenditures over the next several years as part of our long-term growth strategy. We have budgeted $25 million for drilling expenditures in 2005. We project that we will spend $10 million drilling in the Gulf of Mexico and have committed approximately $16 million for offshore pipelines and production facilities.
17
PrimeEnergy Corporation
June 30, 2005
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
As of December 31, 2004, our offshore properties had net proved reserves of 10.2 BCFE and net capitalized costs of $18.7 million. Approximately 70% of these reserves are undeveloped and will require substantial capital expenditures during 2005. As of June 2005, the Company has spent approximately $8.0 million drilling four successful wells as part of our program to develop these properties and approximately $10.0 million related to pipeline and facility construction.
Spending on onshore exploration and development projects in our core operating areas for 2005 is budgeted at $15 million. As of June 30, 2005, the Company has participated in the drilling of twenty-one successful wells, one dry hole and has one well in progress.
The Company has in place both a stock repurchase program and a limited partnership interest repurchase program. Under these programs the Company expects to expend approximately $5 million in 2005. During the first half of 2005 the Company spent $335,596 to repurchase limited partnership interests from investors in its oil and gas partnerships and $2,353,000 to repurchase shares of its treasury stock.
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 success and our record of reserve growth in recent years, we will be able to access sufficient additional capital through additional bank financing.
The Company's lender provides funds for onshore and offshore activities under two separate credit agreements. The current borrowing base of the Company under both agreements is $62.0 million of which $38.8 million was outstanding as of June 30, 2005. 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 covenants defined in the agreement. We are currently in compliance with these financial 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.
18
PrimeEnergy Corporation
June 30, 2005
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Effective March 2005, we agreed with our lenders to increase the Company's onshore borrowing base to $41 million. As of June 30, 2005, $22 million was borrowed under this agreement. Effective April 2005 the offshore credit agreement was amended to increase the borrowing base related to proved reserves and add separate facilities to provide capital for construction projects and letters of credit. The Company's offshore borrowing base under this agreement is $21.0 million of which $18.8 million was outstanding at June 30, 2005. Pursuant
to this agreement the Company agreed to enter into commodity hedge agreements for not less than 80% of gas production attributable to proved and producing gas reserves for the 24-month period beginning January 1, 2006, with minimum floor prices of $6.00 MMBtu during the year 2006 and $5.50 MMBtu during the year 2007.
It is the goal of the Company to increase its oil and gas reserves and production through the acquisition and development of oil and gas properties. The Company also continues to explore and consider opportunities to further expand its oilfield servicing revenues through additional investment in field service equipment. However, the majority of the Company's capital spending is discretionary, and the ultimate level of expenditures will be dependent on the Company's 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.
RESULTS OF OPERATIONS
Revenues and net income during the six and three month periods ended June 30, 2005, as compared to the same periods in 2004 reflect the increased oil and gas sales, presented below, offset by exploration costs and depreciation and depletion of oil and gas properties.
|
Six months Ended |
Three Months Ended |
|||||
|
June 30, |
June 30, |
|||||
|
------------------------------------------------------ |
------------------------------------------------------- |
|||||
|
Increase / |
Increase / |
|||||
|
2005 |
2004 |
(Decrease) |
2005 |
2004 |
(Decrease) |
|
|
Barrels of Oil Produced |
176,000 |
198,000 |
(22,000) |
91,000 |
101,000 |
(10,000) |
|
Average Price Received |
$47.47 |
$35.05 |
$12.42 |
$48.98 |
$37.17 |
$11.81 |
|
--------------- |
--------------- |
-------------- |
--------------- |
--------------- |
-------------- |
|
|
Oil Revenue |
$8,354,000 |
$6,940,000 |
$1,414,000 |
$4,457,000 |
$3,754,000 |
$703,000 |
|
--------------- |
--------------- |
-------------- |
--------------- |
--------------- |
-------------- |
|
|
MCF of Gas Produced |
2,511,000 |
2,440,000 |
71,000 |
1,231,000 |
1,254,000 |
(23,000) |
|
Average Price Received |
$5.98 |
$5.22 |
$0.76 |
$6.37 |
$5.38 |
$0.98 |
|
--------------- |
--------------- |
-------------- |
--------------- |
--------------- |
-------------- |
|
|
Gas Revenue |
$15,027,000 |
$12,744,000 |
$2,283,000 |
$7,838,000 |
$6,748,000 |
$1,090,000 |
|
--------------- |
--------------- |
-------------- |
--------------- |
--------------- |
-------------- |
|
|
Total Oil & Gas Revenue |
$23,381,000 |
$19,684,000 |
$3,697,000 |
$12,295,000 |
$10,502,000 |
$1,793,000 |
|
======== |
======== |
======== |
======== |
======== |
========= |
|
Changes in production are due to production from properties added during 2004 offset by the natural decline of existing properties.
19
PrimeEnergy Corporation
June 30, 2005
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Lease operating expense for the three-month and six-month periods ending June 2005 increased by $872,000 and $1,742,000, respectively, compared to 2004 due to increased production tax expense related to the change in revenue, lease operating expenses of new properties, and overall price increases in oil field services.
General and administrative expenses for the three-month and six-month periods ending June 2005 increased by $477,000 and $717,000, respectively, compared to 2004, reflecting the increased ownership of the Partnerships acquired during 2004.
Field Service income for the three-month and six-month periods ending June 2005 increased by $851,000 and $1,268,000, respectively, compared to 2004 and the related Field Service expense the three-month and six-month periods ending June 2005 increased by $723,000 and $927,000, respectively, compared to 2004. These increases reflect higher utilization of equipment combined with an upward trend in rates during 2005.
Administrative overhead fees for the three-month and six-month periods ending June 2005 increased by $264,000 and $637,000, respectively, compared to 2004 reflecting the COPAS escalation combined with reduction of discounts on marginal properties.
Depreciation, depletion and amortization expense for the six-month period ending June 2005 increased by $561,000 compared to 2004. This increase is related to the additional capital expended during 2004 combined with increased production.
Exploration costs of $271,000 in the first half of 2005 were incurred in the drilling of one dry hole in Oklahoma. Exploration costs of $3,203,000 in the first half of 2004 were incurred in the drilling of two dry holes, one located in the Gulf of Mexico and one in Clay County, West Virginia.
This Report contains forward-looking statements that are based on management's current expectations, estimates and projections. Words such as "expects," "anticipates," "intends," "plans," "believes," "projects" and "estimates," and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, and are subject to the safe harbors created thereby. 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
20
PrimeEnergy Corporation
June 30, 2005
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued
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.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to interest rate risk on its line of credit, which has variable rates based upon the lenders base rate, as defined, and the London Inter-Bank Offered rate. Based on the weighted average balances outstanding during the first half of 2005, a hypothetical 2.5% increase in the applicable interest rates would have increased interest expense for the six months ended June 30, 2005 by approximately $378,000.
Oil and gas prices have historically been extremely volatile, and have been particularly so in recent years. Declines in domestic oil and gas prices could have a material adverse effect on the Company's revenues, operating results, estimates of economically recoverable reserves and the net revenue there from. To mitigate price volatility we sometimes lock in prices for some portion of our production through the use of financial instruments. During April 2005, we purchased put floors on 80% of the gas production attributed to our offshore proved and producing gas reserves for the 24-month period beginning January 1, 2006 for a total consideration of approximately $493,000. These derivatives were not held for trading purposes and are not designated as cash flow hedges. The estimated fair value of all derivative instruments is based on quoted market prices. Any change in fair value is included in Loss on derivative instruments on the Consolidated Statements of Operations.
A recap for the period of time, number of MMBtu's and gas prices is as follows:
|
Period of Time |
MMBTU of Natural Gas |
Floor |
|
January 2006 - December 2006 |
828,000 |
$6.00 |
|
January 2007 - December 2007 |
654,000 |
$5.50 |
21
PrimeEnergy Corporation
June 30, 2005
Item 4. INTERNAL CONTROLS AND PROCEDURES.
(a) Evaluation of disclosure controls and procedures.
Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934 as of the end of the period covered by this Quarterly Report on Form 10-Q. The evaluation included certain internal control areas in which we have made and are continuing to make changes to improve and enhance controls. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Based on that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.
(b) Changes in internal control over financial reporting.
There were no changes in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management is currently in the process of comprehensively documenting and further analyzing our system of internal control over financial reporting. We are in the process of designing enhanced processes and controls to address any issues identified through this review. We plan to continue this initiative as well as prepare for our first management report on internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act of 2002 for the annual period ending December 31, 2006, which may result in changes to our internal control over financial reporting.
22
PrimeEnergy Corporation
June 30, 2005
PART II - OTHER INFORMATION
From time to time, the Company is party to certain legal actions and claims arising in the ordinary course of business. While the outcome of these events cannot be predicted with certainty, management does not expect these matters to have a materially adverse effect on the financial position or results of operations of the Company.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
.
During the six months ended June 30, 2005, the Company purchased the following shares of common stock as treasury shares.
|
2005 Month |
Number of Shares |
Average Price Paid per share |
Maximum Number of Shares that May Yet Be Purchased Under The Plan (1) |
||
|
January |
14,375 |
$ 19.53 |
326,919 |
||
|
February |
--- |
---- |
326,919 |
||
|
March |
--- |
---- |
326,919 |
||
|
April |
74,731 |
$20.00 |
252,188 |
||
|
May |
14,003 |
$20.10 |
238,185 |
||
|
June |
14,500 |
$20.36 |
223,685 |
||
|
----------- |
|||||
|
Total/Average |
117,609 |
$20.00 |
|||
|
====== |
(1) In December 1993, we announced that our board of directors authorized a stock repurchase program whereby we may purchase outstanding shares of our common stock from time-to-time, in open market transactions or negotiated sales. A total of 2,400,000 shares have been authorized, to date, under this program. Through June 30, 2005 a total of 2,176,315 under this program for $15,582,144 at an average price of $7.16 per share. Additional purchases of shares may occur as market conditions warrant. We expect future purchases will be funded with internally generated cash flow or from working capital.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
23
PrimeEnergy Corporation
June 30, 2005
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of the company was held on June 3, 2005. The only matter submitted to the stockholders was the election of eight Directors (named below), nominated by management, all of whom were currently serving as Directors. Proxies were solicited pursuant to Regulation 14A under the Securities Act of 1934, definitive copies of which were filed with the Commission. There was no solicitation in opposition to management's nominees, and all of the Directors nominated for the re-election were elected. The number of shares of the Company's common stock voted at the Annual Meeting was 2,501,759. Those persons nominated and elected as Directors, and the number of shares voting for or withheld for each, is shown below. There were no abstentions or broker non-votes.
|
For |
Withheld |
||
|
Beverly A. Cummings |
2,384,576 |
117,183 |
|
|
Charles E. Drimal, Jr. |
2,383,126 |
118,633 |
|
|
Matthias Eckenstein |
2,351,374 |
150,385 |
|
|
H. Gifford Fong |
2,498,309 |
3,450 |
|
|
Thomas S. T. Gimbel |
2,498,019 |
3,740 |
|
|
Clint Hurt |
2,498,019 |
3,740 |
|
|
Jan K. Smeets |
2,497,219 |
4,540 |
|
|
Gaines Wehrle |
2,350,759 |
151,000 |
None
Item 6. EXHIBITS AND REPORTS ON FORM 8K
No reports on form 8K were filed by the Company during the six months ended June 30, 2005.
24
Pursuant to the requirements of the Securities and Exchange Act of 1934, Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
PrimeEnergy Corporation |
|
|
|
(Registrant) |
|
|
|
|
August 11, 2005 |
/s/ Charles E. Drimal, Jr. |
|
(Date) |
------------------------------ |
|
|
Charles E. Drimal, Jr. |
|
President |
|
|
Principal Executive Officer |
|
|
|
|
|
August 11, 2005 |
/s/ Beverly A. Cummings |
|
(Date) |
------------------------------- |
|
Beverly A. Cummings |
|
|
Executive Vice President |
|
|
|
Principal Financial and Accounting Officer |
25