PRIMEENERGY RESOURCES CORP - Quarter Report: 2006 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, 2006 |
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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 84-0637348 |
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(State or other jurisdiction of incorporation or organization) (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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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to so such filings required for the past 90 days. Yes [X] No [ ] |
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act). (Check One). Large Accelerated Filer [ ] Accelerated Filer [ ] Non-Accelerated Filer [ X ] |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ] |
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The number of shares outstanding of each class of the Registrant's Common Stock as of August 14, 2006 was: Common Stock, $0.10 par value, 3,257,977 shares. |
2
See accompanying notes to the consolidated financial statements.
3
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PrimeEnergy Corporation |
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June 30, 2006 (Unaudited) |
December 31, 2005 (Audited) |
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LIABILITIES and STOCKHOLDERS' EQUITY |
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Current liabilities: |
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Accounts payable |
$ |
24,024,000 |
$ |
15,105,000 |
Current portion of asset retirement and other long term obligations |
1,086,000 |
378,000 |
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Accrued liabilities |
5,604,000 |
8,606,000 |
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Due to related parties |
626,000 |
1,432,000 |
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--------------- |
---------------- |
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Total current liabilities |
31,340,000 |
25,521,000 |
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Long-term bank debt |
55,930,000 |
28,050,000 |
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Asset retirement obligations |
2,744,000 |
2,216,000 |
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Deferred income taxes |
18,062,000 |
13,860,000 |
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--------------- |
---------------- |
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Total liabilities |
108,076,000 |
69,647,000 |
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--------------- |
---------------- |
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Minority Interest |
1,313,000 |
-- |
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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 2006 and 2005 |
769,000 |
769,000 |
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Paid in capital |
11,024,000 |
11,024,000 |
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Retained earnings |
57,906,000 |
48,608,000 |
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--------------- |
---------------- |
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69,699,000 |
60,401,000 |
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Treasury stock, at cost, 4,411,153 common shares |
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at 2006 and 4,367,155 common shares at 2005 |
(23,317,000) |
(20,665,000) |
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--------------- |
---------------- |
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Total stockholders' equity |
46,382,000 |
39,736,000 |
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--------------- |
--------------- |
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Total |
$ |
155,771,000 |
$ |
109,383,000 |
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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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2006 |
2005 |
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Revenue: |
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Oil and gas sales |
$ |
16,211,000 |
$ |
12,295,000 |
Field service income |
5,141,000 |
3,759,000 |
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Administrative overhead fees |
2,880,000 |
1,828,000 |
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Loss on derivative instruments, net |
-- |
(285,000) |
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Interest and other income |
99,000 |
(2,000) |
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---------------- |
---------------- |
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Total revenue |
24,331,000 |
17,595,000 |
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---------------- |
---------------- |
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Costs and expenses: |
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Lease operating expense |
4,825,000 |
4,862,000 |
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Field service expense |
3,779,000 |
3,173,000 |
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Depreciation, depletion and amortization |
3,974,000 |
3,034,000 |
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General and administrative expense |
4,000,000 |
2,224,000 |
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Exploration costs |
49,000 |
9,000 |
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---------------- |
---------------- |
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Total costs and expenses |
16,627,000 |
13,302,000 |
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---------------- |
---------------- |
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Income from operations |
7,704,000 |
4,293,000 |
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Interest expense |
208,000 |
474,000 |
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Gain on sale and exchange of assets |
83,000 |
40,000 |
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---------------- |
---------------- |
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Net income before income taxes |
7,579,000 |
3,859,000 |
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Provision for income taxes |
2,259,000 |
1,544,000 |
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---------------- |
---------------- |
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Net income |
$ |
5,320,000 |
$ |
2,315,000 |
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========= |
========= |
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Basic income per common share |
$ |
1.61 |
$ |
0.68 |
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Diluted income per common share |
$ |
1.31 |
$ |
0.56 |
See accompanying notes to the consolidated financial statements.
6
PrimeEnergy Corporation
Consolidated Statement of Stockholders' Equity
Six Months Ended June 30, 2006
(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 164,410 shares of |
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common stock |
(4,456,000) |
(4,456,000) |
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Net income |
25,955,000 |
25,955,000 |
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----------- |
---------- |
------------- |
--------------- |
-------------- |
--------------- |
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Balance at December 31, 2005 |
7,694,970 |
$ 769,000 |
11,024,000 |
48,608,000 |
(20,665,000) |
$ 39,736,000 |
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Purchased 43,998 shares of |
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common stock |
(2,652,000) |
(2,652,000) |
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Net income |
9,298,000 |
9,298,000 |
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----------- |
---------- |
------------- |
------------- |
-------------- |
--------------- |
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Balance at June 30, 2006 |
7,694,970 |
$ 769,000 |
11,024,000 |
57,906,000 |
(23,317,000) |
$ 46,382,000 |
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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, 2006
(1) Interim Financial Statements:
The accompanying consolidated financial statements of PrimeEnergy Corporation, with the exception of the consolidated balance sheet at December 31, 2005, 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, 2006 and our income and cash flows for the six months ended June 30, 2006 and 2005. 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.
(2) Significant Acquisitions, Dispositions and Property Activity
In August 2005, the Company completed a transaction involving its interests in certain offshore Gulf of Mexico properties effective April 1, 2005 (the "Partners transaction"). Prime Offshore L.L.C. ("Prime Offshore"), formerly F-W Oil Exploration L.L.C., a subsidiary of the Company, entered into a limited partnership agreement (the "Partners Agreement"), wherein Prime Offshore is the General Partner of FWOE Partners L.P. ("Partners") formed for the acquisition, development and operation of oil and gas properties and pipelines, equipment, facilities and fixtures appurtenant thereto, in off-shore Gulf of Mexico (the "Properties"). Prior to entering into the Partners Agreement, Prime Offshore had distributed interests in the Properties to the minority shareholders of Prime Offshore and the Company purchased all of the outstanding shares of such minority shareholders for $250,000, resulting in the Company's 100% ownership of Prime Offshore.
Prime Offshore contributed all of its interest in the Properties to Partners in exchange for an initial 20% General Partner interest in Partners and a cash distribution of $43.2 million. Partners purchased the interests previously distributed to the former minority shareholders for $27.7 million. The entire $70.9 million expended by Partners was funded by a cash contribution by the Limited Partner. The cash distribution includes adjustments for estimated net revenues from the effective date of April 1, 2005, estimated capital expenditures and other typical closing adjustments.
In July 2005, the Company completed the sale of certain leasehold and exploration rights in prospects generated in the Company's onshore Texas 2-d Seismic Exploration Program in exchange for a cash payment of $3.5 million.
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 $214,635 for the six months ending June 30, 2006 and $1,217,416 for the year ending December 31, 2005. 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.
9
PrimeEnergy Corporation
Notes to Consolidated Financial Statements
June 30, 2006
(3) Restricted Cash and Cash Equivalents:
Restricted cash and cash equivalents include $2,851,000 and $1,797,000 at June 30, 2006 and December 31, 2005, respectively, of cash primarily pertaining to undistributed royalty payments. There were corresponding accounts payable recorded at June 30, 2006 and December 31, 2005 for these liabilities.
(4) Additional Balance Sheet Information
Certain balance sheet amounts are comprised of the following:
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June 30, 2006 |
December 31, 2005 |
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Accounts Receivable: |
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Joint Interest Billing |
$ |
6,751,000 |
$ |
3,100,000 |
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Trade Receivables |
2,496,000 |
1,922,000 |
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Oil and Gas Sales |
7,135,000 |
9,926,000 |
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Other |
351,000 |
2,154,000 |
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--------------- |
---------------- |
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$ |
16,733,000 |
$ |
17,102,000 |
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Less, Allowance for doubtful accounts |
(605,000) |
(605,000) |
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-------------- |
---------------- |
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$ |
16,128,000 |
$ |
16,497,000 |
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========= |
========= |
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Accounts Payable: |
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Trade |
$ |
15,539,000 |
$ |
6,476,000 |
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Royalty and other owners |
6,909,000 |
7,310,000 |
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Other |
1,576,000 |
1,319,000 |
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---------------- |
---------------- |
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Total |
$ |
24,024,000 |
$ |
15,105,000 |
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========= |
========= |
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Accrued Liabilities: |
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Payroll and benefits |
$ |
3,495,000 |
$ |
1,632,000 |
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Interest |
268,000 |
342,000 |
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Other |
1,841,000 |
6,632,000 |
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--------------- |
---------------- |
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Total |
$ |
5,604,000 |
$ |
8,606,000 |
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========= |
========= |
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10
PrimeEnergy Corporation
Notes to Consolidated Financial Statements
June 30, 2006
(5) Property and Equipment:
Property and equipment at June 30, 2006 and December 31, 2005 consisted of the following:
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June 30, |
December 31, |
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2006 |
2005 |
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Proved oil and gas properties, at cost |
$ |
158,404,000 |
$ |
125,248,000 |
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Unproved oil and gas properties, at cost |
15,166,000 |
6,166,000 |
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Less, accumulated depletion |
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and depreciation |
(71,789,000) |
(65,234,000) |
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---------------- |
--------------- |
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$ |
101,781,000 |
$ |
66,180,000 |
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Field service equipment and other |
13,603,000 |
11,427,000 |
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Less, accumulated depreciation |
(7,797,000) |
(7,461,000) |
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---------------- |
--------------- |
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$ |
5,806,000 |
$ |
3,966,000 |
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|
---------------- |
--------------- |
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Total net property and equipment |
$ |
107,587,000 |
$ |
70,146,000 |
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========= |
======== |
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Total interest costs incurred during the first half of 2006 were $1,044,000. Of this amount, the Company capitalized $383,000. Capitalized interest is included as part of the cost of oil and gas properties. The capitalized rates are based upon the Company's weighted-average cost of borrowings used to finance the expenditures.
(6) Long-Term Bank Debt:
At June 30, 2006, the Company had $55.93 million outstanding under its revolving credit facilities. The Company maintains two separate facilities with its Lender, a $62 million facility which can be expanded to $162 million, secured by the Company's onshore oil and gas properties and field service equipment and a $23.5 million facility, which can be expanded to $80 million, maintained by the Company's subsidiary, Prime Offshore LLC, secured by certain offshore oil and gas properties. The available credit lines are subject to adjustment from time to time on the basis of the projected present value (as determined by the bank's petroleum engineer) of estimated cash flows from certain proved oil and gas reserves and assets of the company.
The onshore credit facility provides for interest on outstanding borrowings at the banks base rate, payable monthly or at rates 2% over the London Inter-Bank Offered Rate (LIBO rate) payable at the end of the period, and the term of the facility expires in March 2009. The offshore credit facility provides for interest on outstanding borrowings at rates ranging from 0.5% to 1.5% above the banks base rate, payable monthly or at rates ranging from 2% to 3.5% over the London Inter-Bank Offered Rate (LIBO rate) payable at the end of the period, and the term of the facility expires in July 2009. The agreements require the Company to maintain, as defined, a minimum current ratio, tangible net worth, debt coverage ratio and interest coverage ratio, and restrictions are placed on the payment of dividends and the amount of treasury stock the Company may purchase.
11
PrimeEnergy Corporation
Notes to Consolidated Financial Statements
June 30, 2006
(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 7.195% during the first six months of 2006 as compared to 5.31% during the same period of 2005. Outstanding borrowings were $55,930,000 as of June 30, 2006 and $28,050,000 as of December 31, 2005.
(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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2006 |
262,000 |
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2007 |
499,000 |
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2008 |
451,000 |
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2009 |
275,000 |
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Thereafter |
8,000 |
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----------------- |
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Total minimum payments |
$ |
1,495,000 |
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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, 2006 and the year ended December 31, 2005 is as follows:
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June 30, 2006 |
December 31, 2005 |
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Asset retirement obligation - beginning of period |
$ |
2,594,000 |
$ |
390,000 |
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Liabilities incurred |
516,000 |
1,456,000 |
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Liabilities settled |
(78,000) |
(116,000) |
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Accretion expense |
33,000 |
80,000 |
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Change in estimate |
8,000 |
784,000 |
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--------------- |
--------------- |
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Asset retirement obligation - end of period |
$ |
3,073,000 |
$ |
2,594,000 |
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======== |
========= |
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12
PrimeEnergy Corporation
Notes to Consolidated Financial Statements
June 30, 2006
(7) Other Long-Term Obligations and Commitments continued:
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.
Field Equipment Commitments:
As of June 30, 2006, the Company has a commitment to purchase certain field equipment requiring payments during 2006 totaling $1,533,000.
(8) Contingent Liabilities:
The Company, as managing general partner of the affiliated Partnerships, is responsible for all Partnership activities, including 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. As of June 30, 2006, the affiliated Partnerships have established cash reserves in excess of their debts and liabilities and the Company believes these reserves will be sufficient to satisfy Partnership 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 less than $500,000.
13
PrimeEnergy Corporation
Notes to Consolidated Financial Statements
June 30, 2006
(8) Contingent Liabilities continued:
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 $125,000.
(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, 2006 and 2005, options on 767,500 were outstanding and exercisable at prices ranging from $1.00 to $1.25.
In January 2006, the company issued shares of one of its subsidiaries to two key executives. The Company recognized compensation expense of $1,313,000 reflecting the fair market value of the shares.
(10) Related Party Transactions:
PrimeEnergy Management Corporation (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 $214,635 in the first half of 2006 and $1,217,746 in 2005.
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 primarily represents receipts collected by the Company as agent, for oil and gas sales net of expenses. The amount of such receipts due the affiliated Partnerships was $626,000 and $1,432,000 at June 30, 2006 and December 31, 2005, respectively.
Receivables from related parties consist of reimbursable general and administrative costs, lease operating expenses and reimbursement for property development and related costs. Due from related parties was $635,000 at June 30, 2006 and $985,000 at December 31, 2005.
14
PrimeEnergy Corporation
Notes to Consolidated Financial Statements
June 30, 2006
(11) 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 common stock had been converted to common stock. The following reconciles amounts reported in the financial statements:
|
Six Months Ended |
Six Months Ended |
|||||||||
|
June 30, 2006 |
June 30 , 2005 |
|||||||||
|
Net Income |
Number of |
Per Share |
Net |
Number of |
Per Share |
|||||
|
Shares |
Amount |
Income |
Shares |
Amount |
||||||
|
Net income per |
||||||||||
|
common share |
$ |
9,298,000 |
3,302,192 |
$ |
2.82 |
$ |
4,574,000 |
3,445,895 |
$ |
1.33 |
|
Effect of dilutive |
||||||||||
|
securities: |
||||||||||
|
Options |
755,544 |
728,310 |
||||||||
|
----------- |
------------- |
-------- |
----------- |
------------- |
-------- |
|||||
|
Diluted net income |
||||||||||
|
per common share |
$ |
9,298,000 |
4,057,736 |
$ |
2.29 |
$ |
4,574,000 |
4,174,205 |
$ |
1.10 |
|
========= |
========= |
===== |
========= |
========= |
===== |
|||||
|
Three Months Ended |
Three Months Ended |
|||||||||
|
June 30, 2006 |
June 30, 2005 |
|||||||||
|
Net Income |
Number of |
Per Share |
Net |
Number of |
Per Share |
|||||
|
Shares |
Amount |
Income |
Shares |
Amount |
||||||
|
Net income per |
||||||||||
|
common share |
$ |
5,320,000 |
3,295,293 |
$ |
1.61 |
$ |
2,315,000 |
3,411,695 |
$ |
0.68 |
|
Effect of dilutive |
||||||||||
|
securities: |
||||||||||
|
Options |
757,067 |
731,405 |
||||||||
|
------------- |
-------------- |
-------- |
------------- |
-------------- |
-------- |
|||||
|
Diluted net income |
||||||||||
|
per common share |
$ |
5,320,000 |
4,052,360 |
$ |
1.31 |
$ |
2,315,000 |
4,143,100 |
$ |
0.56 |
|
========= |
======== |
===== |
========= |
======== |
===== |
|||||
15
PrimeEnergy Corporation
June 30, 2006
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, 2006 was $20,858,000. 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.
The Company's activities include development and exploratory drilling. The Company's 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.
As of June 30, 2006, the Company had net capitalized costs related to oil and gas properties of $101.78 million, including $15.16 million of undeveloped properties. Additions during the first six months of 2006 totaled $42.16 million.
We expect to continue to make significant capital expenditures over the next several years as part of our long-term growth strategy.
16
PrimeEnergy Corporation
June 30, 2006
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Our offshore exploration and development budget for 2006 is $80 million including facility construction and installation. As of June 2006, the Company has incurred costs of $34.4 million related to equipment and drilling operations in the Gulf of Mexico as part of our program to develop our offshore properties. Three wells have been drilled and are in various stages of testing and completion. We have budgeted $20 million for onshore exploration and development in our core operating areas. The Company has expended approximately $7.7 million on thirty-one wells drilled in these areas during the six months ending June 30, 2006. The Company's net working interest in the majority of these wells is approximately 50%. Fourteen of these wells are currently producing and the remaining wells are in varying stages of completion.
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 2006. During the first half of 2006 the Company spent $214,635 to repurchase limited partnership interests from investors in its oil and gas partnerships and $2,652,000 to repurchase shares of its treasury stock.
The Company has committed to purchase or refurbish field rigs throughout 2006 totaling $2.26 million. These rigs are expected to be placed in service during the third quarter of 2006.
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.
Effective June 2006, the Company's consolidated borrowing base was increased to $85.5 million. As of June 30, 2006, $55.93 million was borrowed under the facility. 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 defined in the agreements. 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.
17
PrimeEnergy Corporation
June 30, 2006
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
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, 2006, as compared to the same periods in 2005 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 / |
|||||
|
2006 |
2005 |
(Decrease) |
2006 |
2005 |
(Decrease) |
|
|
Barrels of Oil Produced |
184,000 |
176,000 |
8,000 |
100,000 |
91,000 |
9,000 |
|
Average Price Received |
$61.64 |
$47.47 |
$14.45 |
$63.71 |
$48.98 |
$14.73 |
|
--------------- |
--------------- |
-------------- |
--------------- |
--------------- |
-------------- |
|
|
Oil Revenue |
$11,357,000 |
8,354,000 |
3,003,000 |
6,371,000 |
4,457,000 |
$1,914,000 |
|
--------------- |
--------------- |
-------------- |
--------------- |
--------------- |
-------------- |
|
|
MCF of Gas Produced |
2,826,000 |
2,511,000 |
315,000 |
1,486,000 |
1,231,000 |
255,000 |
|
Average Price Received |
$7.19 |
$5.98 |
$1.21 |
$6.62 |
$6.37 |
$0.25 |
|
--------------- |
--------------- |
-------------- |
--------------- |
--------------- |
-------------- |
|
|
Gas Revenue |
$20,313,000 |
15,027,000 |
5,286,000 |
9,840,000 |
7,838,000 |
$2,002,000 |
|
--------------- |
--------------- |
-------------- |
--------------- |
--------------- |
-------------- |
|
|
Total Oil & Gas Revenue |
$31,670,000 |
23,381,000 |
8,289,000 |
16,211,000 |
12,295,000 |
$3,916,000 |
|
======== |
======== |
======== |
======== |
======== |
========= |
|
Changes in production are due to production from properties added during 2005 and 2006 offset by the natural decline of existing properties.
Lease operating expense for the six months of 2006 increased by $825,000 compared to 2005 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 increased by $2,500,000, in the first six months of 2006 as compared to 2005 including $1,313,000 representing the fair market value of subsidiary stock issued to two key executives.
18
PrimeEnergy Corporation
June 30, 2006
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Field Service income and expense for the six months of 2006 increased $2,802,000 and $1,632,000, respectively, compared to 2005. These increases reflect higher utilization of equipment combined with an upward trend in rates during 2005 and 2006.
Administrative overhead fees increased by $1,155,000 reflecting the COPAS escalation combined with fees related to the operation of properties owned by FWOE Partners L.P.
Depreciation, depletion and amortization expense increased to $7,291,000 in 2006 compared to $6,133,000 in 2005. This increase is related to the additional capital expended during 2005 and 2006 combined with increased production.
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 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 second quarter of 2006, a hypothetical 2.5% increase in the applicable interest rates would have increased interest expense for the six months ended June 30, 2006 by approximately $359,600.
19
PrimeEnergy Corporation
June 30, 2006
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(continued)
Oil and gas prices have historically been extremely volatile, and have been particularly so in recent years. The Company did not enter into significant hedging transactions during the six month period ending June 30, 2006. The Company had no open hedging transactions at June 30, 2006 or December 31, 2005. 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.
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 which may result in changes to our internal control over financial reporting.
20
PrimeEnergy Corporation
June 30, 2006
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, 2006, the Company purchased the following shares of common stock as treasury shares.
|
2006 Month |
Number of Shares |
Average Price Paid per share |
Maximum Number of Shares that May Yet Be Purchased Under The Plan (1) |
||
|
January |
21,890 |
$ 49.23 |
159,994 |
||
|
February |
1,503 |
53.15 |
153,491 |
||
|
March |
1,243 |
62.10 |
152,248 |
||
|
April |
-- |
-- |
152,248 |
||
|
May |
9,362 |
$76.59 |
142,886 |
||
|
June |
10,000 |
$70.00 |
132,886 |
||
|
----------- |
|||||
|
Total/Average |
43,998 |
$60.27 |
|||
|
====== |
- 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, 2006 a total of 2,267,114 shares were purchased under this program for $20,037,903 at an average price of $8.84 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
21
PrimeEnergy Corporation
June 30, 2006
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of the Company was held on May 25, 2006. 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 2,637,207. 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 |
2,515,134 |
123,073 |
|
|
Charles E. Drimal, Jr. |
2,514,274 |
122,933 |
|
|
Matthias Eckenstein |
2,634,227 |
2,980 |
|
|
H. Gifford Fong |
2,512,012 |
125,195 |
|
|
Thomas S. T. Gimbel |
2,634,227 |
2,980 |
|
|
Clint Hurt |
2,634,227 |
2,980 |
|
|
Jan K. Smeets |
2,634,167 |
3,040 |
|
|
Gaines Wehrle |
2,632,827 |
4,380 |
None
None
Item 6. EXHIBITS AND REPORTS ON FORM 8K
No reports on form 8K were filed by the Company during the three months ended June 30, 2006.
22
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 14, 2006 |
/s/ Charles E. Drimal, Jr. |
|
(Date) |
------------------------------ |
|
|
Charles E. Drimal, Jr. |
|
President |
|
|
Principal Executive Officer |
|
|
|
|
|
August 14, 2006 |
/s/ Beverly A. Cummings |
|
(Date) |
------------------------------- |
|
Beverly A. Cummings |
|
|
Executive Vice President |
|
|
|
Principal Financial and Accounting Officer |
23