PRIMEENERGY RESOURCES CORP - Quarter Report: 2021 September (Form 10-Q)

Yes

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule of the Exchange Act).    Yes  ☐    No  ☒

During May 2020, Prime Operating Company and Eastern Oil Well Services Corporation, subsidiaries of the Company received loan proceeds in the amount of $1.28 million and $0.47 million, respectively, under the Paycheck Protection Program (the “PPP”) of the CARES Act, which was enacted March 27, 2020. The PPP Loans are evidenced by a promissory note in favor of the Lender, which bears interest at the rate of 1.00% per annum. No payments of principal or interest are due under the note until the date on which the amount of loan forgiveness (if any) under the CARES Act, which can be up to 10 months after the end of the related notes covered period (which is defined as 24 weeks after the date of the loan) (the “Deferral Period”). The note may be prepaid at any time prior to maturity with no prepayment penalties. Funds from the PPP Loans may be used only for payroll and related costs, costs used to continue group health care benefits, mortgage payments, rent, utilities, and interest on other debt obligations that were incurred prior to February 15, 2020 (the “Qualifying Expenses”). Under the terms of the PPP Loans, certain amounts thereunder may be forgiven if they are used for Qualifying Expenses as described in and in compliance with the CARES Act. The Company utilized the PPP Loan proceeds exclusively for Qualifying Expenses during the coverage period and has submitted its application for forgiveness in accordance with the terms of the CARES Act and related guidance. In the event the PPP Loan or any portion thereof is forgiven, the amount forgiven is applied to the outstanding principal.

The Company leases office facilities under operating leases and recognizes lease expense on a straight-line basis over the lease term. Leases assets and liabilities are initially recorded at commencement date based on the present value of lease payments over the lease term.  most of the Company’s lease contracts do not provide an implicit discount rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The weighted average discount rate used was 5.5%. Certain leases may contain variable costs above the minimum required payments and are not included in the assets or liabilities. Leases may include renewal, purchase or termination options that can extend or shorten the term of the lease. The exercise of those options is at the Company’s sole discretion and is evaluated at inception and throughout the contract to determine if a modification of the lease term is required. Leases with an initial term of 12 months or less are not recorded on the balance sheet.

In May 1989, stock options were granted by the Company to four key executive officers for the purchase of shares of common stock. At September 30, 2021 and 2020, remaining options held by two key executive officers on 767,500 shares were outstanding and exercisable at prices ranging from $1.00 to $1.25. According to their terms, the options have no expiration date.

(Thousands of dollars)
Net Liabilities – December 31, 2020		$	(671	)
Total realized and unrealized (gains) losses:
Included in earnings (a)			(10,058	)
Purchases, sales, issuances and settlements			2,895
Net Liabilities — September 30, 2021		$	(7,834	)

(a)	Derivative instruments are reported in revenues as realized gain/loss and on a separately reported line item captioned unrealized gain/loss on derivative instruments.

				Fair Value
(Thousands of dollars)		Balance Sheet Location		September  30,   2021				December 31, 2020
Asset Derivatives:
Derivatives not designated as cash-flow hedging instruments:
Natural gas commodity contracts		Derivative asset long-term and other assets			—			$	97
Total				$	—			$	97
Liability Derivatives:
Derivatives not designated as cash-flow hedging instruments:
Crude oil commodity contracts		Derivative liability short-term		$	(3,994	)		$	(428	)
Natural gas commodity contracts		Derivative liability short-term			(2,183	)			(296	)
Crude oil commodity contracts		Derivative liability long-term			(1,178	)			—
Natural gas commodity contracts		Derivative liability long-term			(479	)			(44	)
Total				$	(7,834	)		$	(768	)
Total derivative instruments				$	(7,834	)		$	(671	)

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

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

Our  interest.

In the third quarter of 2021, the Company and Apache Corporation completed nine new Kashmir wells in Upton County, Texas: three each in the Upper Wolfcamp, Jo Mill, and Lower Spraberry reservoirs. Six of these had been drilled in the spring of 2020 and three were drilled early in 2021. The Company owns 47.5% working interest in these wells and has invested approximately $24 million in their drilling and completions. All nine wells are producing as of October 4, 2021. We believe the additional production from these wells will have a significant impact on the Company’s cash flow in the fourth quarter of 2021.

Our interests in proved developed and undeveloped oil and gas properties, including the interests held by the Partnerships, have been evaluated by Ryder Scott Company, L.P. for each of the three years ended December 31, 2020. The professional qualifications of the technical persons primarily responsible for overseeing the preparation of the reserve estimates can be found in Exhibit 99.1, the Ryder Scott Company, L.P. Report on Registrant’s Reserves Estimates. In matters related to the preparation of our reserve estimates, our district managers report to the Engineering Data manager, who maintains oversight and compliance responsibility for the internal reserve estimate process and provides oversight for the annual preparation of reserve estimates of 100% of our reserves by our independent third-party engineers, Ryder Scott Company, L.P. The members of our district and central groups consist of degreed engineers and geologists with between approximately twenty and thirty-five years of industry experience, and between eight and twenty-five years of experience managing our reserves. Our Engineering Data manager, the technical person primarily responsible for overseeing the preparation of reserves estimates, has over thirty years of experience, holds a Bachelor’s degree in Geology and an MBA in finance, and is a member of the Society of Petroleum Engineers and American Association of Petroleum Geologist. See Part II, Item 8 “Financial Statements and Supplementary Data”, for additional discussions regarding proved reserves and their related cash flows.

On reserves.

The PV 10 Value represents the discounted future net cash flows attributable to our proved oil and gas reserves before income tax, discounted at 10%. Although this measure is not in accordance with U.S. generally accepted accounting principles (“GAAP”), we believe that the presentation of the PV10 Value is relevant and useful to investors because it presents the discounted future net cash flow attributable to proved reserves before taking into account corporate future income taxes and the current tax structure. We use this measure when assessing the potential return on investment related to oil and gas properties. The PV10 of future income taxes represents the sole reconciling item between this PV10 Value versus the GAAP measure presented in the standardized measure of discounted cash flow. A reconciliation of these values is presented in the last three columns of the table above. The standardized measure of discounted future net cash flows represents the present value of future cash flows attributable to proved oil and natural gas reserves after income tax, discounted at 10%.

“Proved developed” oil and gas reserves are reserves that can be expected to be recovered from existing wells with existing equipment and operating methods. “Proved undeveloped” oil and gas reserves are reserves that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required for recompletion. Our reserves include amounts attributable to interests in the Partnerships. These interests represent less than 10% of our reserves.

Maintaining a strong balance sheet and ample liquidity are key components of our business strategy. For 2021, we will continue our focus on preserving financial flexibility and ample liquidity as we manage the risks facing our industry. Our 2021 capital budget is reflective of current commodity prices and has been established based on an expectation of available cash flows, with any cash flow deficiencies expected to be funded by borrowings under our revolving credit facility. As we have done historically to preserve or enhance liquidity, we may adjust our capital program throughout the year, divest assets, or enter into strategic joint ventures.

In the third quarter of 2021, the Company, together with Apache Corporation, completed nine new horizontal wells on the Kashmir tract in Upton County, Texas. These nine wells include three laterals in each of the Upper Wolfcamp, Jo Mill, and Lower Spraberry reservoirs. All nine wells were on production by October 4, 2021. The Company has an average of 47.5% working interest in these nine wells with a total investment of approximately $24 million. We believe the additional income from these wells will have a significant impact on the Company’s fourth-quarter cash flow. In addition to the Middle and Upper Wolfcamp, the Jo Mill and the Lower Spraberry, which we now consider fully developed, we believe there is future development potential in the Middle Spraberry reservoir on this 1280 acre block. This reservoir will likely be developed with four laterals. The approximate completed cost of four wells in the Middle Spraberry is $30.2 million, with the Company’s share being $14.2 million.

In the second quarter of 2021, the Company participated with Ovintiv LLC in the drilling of four horizontal wells located in Canadian County, Oklahoma. These four laterals are in the process of being completed and are expected to be on production in December of this year. The Company has an 11.25% working interest in each well and expects to invest approximately $1.98 million in these wells.

In West Texas, in addition to the Kashmir Tract described above, we are actively developing a contiguous 3,260 acre Area of Mutual Interest (AMI) in Upton County with our joint venture partner Apache Corporation. In this acreage block, the Company has leasehold interest of between 14% and 56% depending on the particular lease and depth being developed. Development has been in the Wolfcamp “B” reservoir where we have 33 horizontal wells currently producing. We believe this reservoir is fully developed and the next phase of development for this block is of the shallower Upper Wolfcamp, Jo Mill, and Lower Spraberry reservoirs. These reservoirs have been by near-offset completions. PrimeEnergy and Apache are planning an initial three wells to be drilled in 2022 that will each be three miles in length. The Company has 36 horizontals laid out for the development of these three reservoirs,18 of which are designed as three-mile laterals. In addition to these reservoirs, there is a Middle Spraberry target that will likely be developed in the future with 12 horizontal wells. In total, we anticipate 48 horizontal wells will develop these four reservoirs with a cost estimate of $146 million net to the Company. The actual number of wells that are eventually drilled, as well as the cost and the timing of drilling, will vary based upon many factors including commodity market conditions.

Also in the Permian Basin, we are developing a block with ConocoPhillips in Martin County, Texas. In 2016 and 2017, four horizontal wells were drilled and have been producing from the Wolfcamp. The Company owns between 35% and 38% interest in various leases of this joint venture acreage where ConocoPhillips is the operator. No near-term additional drilling plans have been received, however, development of offset acreage by other operators has demonstrated the potential for good economic production from multiple landing zones on our acreage block.

The Company maintains a Credit Agreement with a maturity date of February 15, 2023, providing for a credit facility totaling $300 million, with a borrowing base of $40 million. At September 30, 2021, the Company had $31.5 million in outstanding borrowings and $8.5 million in availability under this 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 estimate of proved oil and gas reserves. The current borrowing base review is in progress and expected to be set at $50 million. Our oil and gas properties are pledged as collateral for the line of credit and we are subject to certain financial and operational covenants defined in the agreement. We are currently in compliance with these covenants and expect to be in compliance over the next twelve months. 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. Our borrowing base may decrease as a result of lower natural gas or oil prices, operating difficulties, declines in reserves, lending requirements or regulations, the issuance of new indebtedness or for other reasons set forth in our revolving credit agreement. In the event of a decrease in our borrowing base due to declines in commodity prices or otherwise, our ability to borrow under our revolving credit facility may be limited and we could be required to repay any indebtedness in excess of the borrowing base.

The successful development of these reservoirs has proven the productive potential of these reservoirs on our nearby AMI block with Apache Corporation in Upton County, Texas. Here the Company holds between 14% and 56% interest and is planning the drilling of an initial three wells to be drilled in 2022. These three will each be three-mile-long laterals. The future development will likely be the drilling of 48 horizontal wells targeting four reservoirs from the Wolfcamp “A” through the Middle Spraberry. The cost of such development will be approximately $370 million with the Company’s share being approximately $146 million. The actual number of wells that will be drilled, the cost, and the timing of drilling will vary based upon many factors, including commodity market conditions.

increased $9.2 million, or 103.9% to $18.1 million for the three months ended September 30, 2021 from $8.9 million for the three months ended September 30, 2020 and $19.8 million, or 75.2% to $46.1 million for the nine months ended September 30, 2021 from $26.3 million for the nine months ended September 30, 2020.