Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2013

Or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From                      to                     

Commission File Number 0-7406

 

 

PrimeEnergy Corporation

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   84-0637348

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. employer

Identification No.)

9821 Katy Freeway, Houston, Texas 77024

(Address of principal executive offices)

(713) 735-0000

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

 

 

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 such filings required for the past 90 days.    Yes  x    No  ¨

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 S-T (§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  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if smaller reporting company)    Smaller reporting company   x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The number of shares outstanding of each class of the Registrant’s Common Stock as of August 5, 2013 was: Common Stock, $0.10 par value 2,415,706 shares.

 

 

 


Table of Contents

PrimeEnergy Corporation

Index to Form 10-Q

June 30, 2013

 

     Page  
Part I - Financial Information   

Item 1. Financial Statements

  

Condensed Consolidated Balance Sheets – June 30, 2013 and December 31, 2012

     3   

Condensed Consolidated Statements of Operations – For the three and six months ended  June 30, 2013 and 2012

     4   

Condensed Consolidated Statements of Comprehensive Income – For the six months ended June  30, 2013 and 2012

     5   

Condensed Consolidated Statement of Equity – For the six months ended June 30, 2013

     6   

Condensed Consolidated Statements of Cash Flows – For the six months ended June 30, 2013 and 2012

     7   

Notes to Condensed Consolidated Financial Statements – June 30, 2013

     8-14   

Item 2. Management’s Discussion and Analysis of Financial Conditions and Results of Operation

     15-18   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     18   

Item 4. Controls and Procedures

     18   
Part II - Other Information   

Item 1. Legal Proceedings

     19   

Item 1A. Risk Factors

     19   

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     19   

Item 3. Defaults Upon Senior Securities

     19   

Item 4. Reserved

     19   

Item 5. Other Information

     19   

Item 6. Exhibits

     20-21   
Signatures      22   

 

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Table of Contents

PART I—FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

PRIMEENERGY CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS – Unaudited

(Thousands of dollars, except per share amounts)

 

     June 30,
2013
    December 31,
2012
 

ASSETS

    

Current Assets

    

Cash and cash equivalents

   $ 9,279      $ 8,602   

Restricted cash and cash equivalents

     3,542        4,672   

Accounts receivable, net

     17,919        13,212   

Other current assets

     3,370        3,966   
  

 

 

   

 

 

 

Total Current Assets

     34,110        30,452   

Property and Equipment, at cost

    

Oil and gas properties (successful efforts method), net

     189,374        187,928   

Field and office equipment, net

     9,836        8,922   
  

 

 

   

 

 

 

Total Property and Equipment, Net

     199,210        196,850   

Other Assets

     3,428        784   
  

 

 

   

 

 

 

Total Assets

   $ 236,748      $ 228,086   
  

 

 

   

 

 

 

LIABILITIES AND EQUITY

    

Current Liabilities

    

Accounts payable

   $ 17,347      $ 19,568   

Accrued liabilities

     7,382        7,618   

Current portion of asset retirement and other long-term obligations

     2,596        2,148   

Derivative liability short-term

     880        994   

Due to related parties

     74        67   
  

 

 

   

 

 

 

Total Current Liabilities

     28,279        30,395   

Long-Term Bank Debt

     121,250        122,000   

Asset Retirement Obligations

     7,976        6,864   

Derivative Liability Long-Term

     —          431   

Deferred Income Taxes

     28,696        24,194   
  

 

 

   

 

 

 

Total Liabilities

     186,201        183,884   

Commitments and Contingencies

    

Equity

    

Common stock, $.10 par value; Authorized: 4,000,000 shares, issued: 3,836,397 shares

     383        383   

Paid-in capital

     6,707        6,690   

Retained earnings

     74,697        66,345   

Accumulated other comprehensive income (loss), net

     168        (35

Treasury stock, at cost; 1,418,140 shares and 1,325,837 shares

     (38,847     (36,113
  

 

 

   

 

 

 

Total Stockholders’ Equity – PrimeEnergy

     43,108        37,270   

Non-controlling interest

     7,439        6,932   
  

 

 

   

 

 

 

Total Equity

     50,547        44,202   
  

 

 

   

 

 

 

Total Liabilities and Equity

   $ 236,748      $ 228,086   
  

 

 

   

 

 

 

The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements

 

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PRIMEENERGY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS – Unaudited

(Thousands of dollars, except per share amounts)

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2013     2012      2013      2012  

Revenues

          

Oil and gas sales

   $ 24,135      $ 20,834       $ 45,494       $ 43,865   

Realized gain (loss) on derivative instruments, net

     (166     222         74         341   

Field service income

     6,245        5,337         11,576         10,452   

Administrative overhead fees

     2,540        2,110         4,657         4,274   

Unrealized gain on derivative instruments, net

     4,480        8,877         2,397         5,098   

Other income

     46        46         52         103   
  

 

 

   

 

 

    

 

 

    

 

 

 

Total Revenues

     37,280        37,426         64,250         64,133   

Costs and Expenses

          

Lease operating expense

     10,996        9,973         20,979         19,473   

Field service expense

     5,168        4,363         9,703         8,748   

Depreciation, depletion, amortization and accretion on discounted liabilities

     6,269        7,124         11,152         13,962   

General and administrative expense

     4,348        3,797         8,388         7,686   

Exploration costs

     —          5         1         10   
  

 

 

   

 

 

    

 

 

    

 

 

 

Total Costs and Expenses

     26,781        25,262         50,223         49,879   

Gain on Sale and Exchange of Assets

     699        2         1,759         706   
  

 

 

   

 

 

    

 

 

    

 

 

 

Income from Operations

     11,198        12,166         15,786         14,960   

Other Income and Expenses

          

Less: Interest expense

     1,085        831         2,158         1,587   

Add: Interest income

     —          38         2         48   
  

 

 

   

 

 

    

 

 

    

 

 

 

Income Before Provision for Income Taxes

     10,113        11,373         13,630         13,421   

Provision for Income Taxes

     3,555        3,814         4,708         4,201   
  

 

 

   

 

 

    

 

 

    

 

 

 

Net Income

     6,558        7,559         8,922         9,220   

Less: Net Income Attributable to Non-Controlling Interests

     464        136         570         474   
  

 

 

   

 

 

    

 

 

    

 

 

 

Net Income Attributable to PrimeEnergy

   $ 6,094      $ 7,423       $ 8,352       $ 8,746   
  

 

 

   

 

 

    

 

 

    

 

 

 

Basic Income Per Common Share

   $ 2.51      $ 2.81       $ 3.39       $ 3.28   
  

 

 

   

 

 

    

 

 

    

 

 

 

Diluted Income Per Common Share

   $ 1.92      $ 2.20       $ 2.61       $ 2.57   
  

 

 

   

 

 

    

 

 

    

 

 

 

The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements

 

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PRIMEENERGY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME – Unaudited

Six Months Ended June 30, 2013 and 2012

(Thousands of dollars)

 

     2013      2012  

Net Income

   $ 8,922       $ 9,220   

Other Comprehensive Income, net of taxes:

     

Changes in fair value of hedge positions, net of taxes of $114 and $0, respectively

     203         —     
  

 

 

    

 

 

 

Total other comprehensive income

     203         —     
  

 

 

    

 

 

 

Comprehensive Income

     9,125         9,220   

Less: Comprehensive Income Attributable to Non-Controlling Interest

     570         474   
  

 

 

    

 

 

 

Comprehensive Income Attributable to PrimeEnergy

   $ 8,555       $ 8,746   
  

 

 

    

 

 

 

The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements

 

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PRIMEENERGY CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF EQUITY – Unaudited

Six Months Ended June 30, 2013

(Thousands of dollars)

 

     Common Stock      Additional
Paid in
     Retained      Accumulated
Other
Comprehensive
    Treasury     Total
Stockholders’
Equity –
   

Non-

Controlling

    Total  
     Shares      Amount      Capital      Earnings      Income (Loss)     Stock     PrimeEnergy     Interest     Equity  

Balance at December 31, 2012

     3,836,397       $ 383       $ 6,690       $ 66,345       $ (35   $ (36,113   $ 37,270      $ 6,932      $ 44,202   

Repurchase 92,303 shares of common stock

     —           —           —           —           —          (2,734     (2,734     —          (2,734

Net income

     —           —           —           8,352         —          —          8,352        570        8,922   

Other comprehensive income, net of taxes

     —           —           —           —           203        —          203        —          203   

Repurchase of non-controlling interests

     —           —           17         —           —          —          17        (24     (7

Distributions to non-controlling interests

     —           —           —           —           —          —          —          (39     (39
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2013

     3,836,397       $ 383       $ 6,707       $ 74,697       $ 168      $ (38,847   $ 43,108      $ 7,439      $ 50,547   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements

 

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PRIMEENERGY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS – Unaudited

Six Months Ended June 30, 2013 and 2012

(Thousands of dollars)

 

     2013     2012  

Cash Flows from Operating Activities:

    

Net income

   $ 8,922      $ 9,220   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation, depletion, amortization and accretion on discounted liabilities

     11,152        13,962   

Gain on sale of properties

     (1,759     (706

Unrealized gain on derivative instruments, net

     (2,397     (5,098

Provision for deferred income taxes

     4,374        4,215   

Changes in assets and liabilities:

    

Increase in accounts receivable

     (4,707     (3,533

Decrease in other assets

     93        5,037   

Increase (decrease) in accounts payable

     (1,091     1,834   

Increase in accrued liabilities

     2,239        863   

Increase in due to related parties

     49        287   
  

 

 

   

 

 

 

Net Cash Provided by Operating Activities

     16,875        26,081   
  

 

 

   

 

 

 

Cash Flows from Investing Activities:

    

Capital expenditures, including exploration expense

     (14,815     (51,714

Proceeds from sale of property and equipment

     2,147        845   
  

 

 

   

 

 

 

Net Cash Used in Investing Activities

     (12,668     (50,869
  

 

 

   

 

 

 

Cash Flows from Financing Activities:

    

Purchase of stock for treasury

     (2,734     (1,935

Purchase of non-controlling interests

     (7     (47

Proceeds in long-term bank debt and other long-term obligations

     27,250        62,000   

Repayment of long-term bank debt and other long-term obligations

     (28,000     (34,307

Distribution to non-controlling interests

     (39     (867
  

 

 

   

 

 

 

Net Cash Provided by (Used in) in Financing Activities

     (3,530     24,844   
  

 

 

   

 

 

 

Net Increase in Cash and Cash Equivalents

     677        56   

Cash and Cash Equivalents at the Beginning of the Period

     8,602        8,661   
  

 

 

   

 

 

 

Cash and Cash Equivalents at the End of the Period

   $ 9,279      $ 8,717   
  

 

 

   

 

 

 

Supplemental Disclosures:

    

Income taxes paid (refunded)

   $ (94   $ 541   

Interest paid

   $ 2,147      $ 1,619   

The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements

 

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PRIMEENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2013

(Unaudited)

(1) Basis of Presentation:

The accompanying condensed consolidated financial statements of PrimeEnergy Corporation (“PEC” or the “Company”) have not been audited by independent public accountants. Pursuant to applicable Securities and Exchange Commission (“SEC”) rules and regulations, the accompanying interim financial statements do not include all disclosures presented in annual financial statements and the reader should refer to the Company’s Form 10-K for the year ended December 31, 2012. In the opinion of management, the accompanying interim condensed consolidated financial statements contain all material adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the Company’s condensed consolidated balance sheets as of June 30, 2013 and December 31, 2012, the condensed consolidated results of operations for the three and six months ended June 30, 2013 and 2012, and the condensed consolidated results of cash flows and equity for the six months ended June 30, 2013 and 2012. 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. For purposes of disclosure in the condensed consolidated financial statements, subsequent events have been evaluated through the date the statements were issued.

Recently Issued Accounting Pronouncements

In December 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-11, “Disclosures about Offsetting Assets and Liabilities.” This ASU requires enhanced disclosures including both gross and net information about financial and derivative instruments eligible for offset or subject to an enforceable master netting arrangement or similar agreement. This new guidance is effective for annual reporting periods beginning on or after January 1, 2013 and subsequent interim periods. In January 2013, the FASB issued ASU 2013-01, “Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities.” ASU 2013-01 clarifies the scope of ASU 2011-11 to apply to derivative instruments that are offset or subject to an enforceable master netting arrangement or similar agreement. This clarified guidance is effective for annual reporting periods beginning on or after January 1, 2013 and subsequent interim periods. The revised requirements of ASU 2011-11 and ASU 2013-01 impacted the disclosures associated with the Company’s derivative instruments (Note 11) and did not have a material impact on the Company’s condensed consolidated financial position, results of operations or cash flows.

In February 2013, the FASB issued ASU 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income” (“AOCI”). ASU 2013-02 requires a rollforward of changes in AOCI by component and information about significant reclassifications from AOCI to net earnings to be presented in one location, either on the face of the financial statements or in the notes. This new guidance is effective for fiscal years beginning after December 15, 2012 and subsequent interim periods. The revised disclosure requirements of ASU 2013-02 are reflected in Note 11. The requirements of ASU 2013-02 did not have a material impact on the Company’s condensed consolidated financial position, results of operations or cash flows.

(2) Acquisitions and Dispositions:

Historically the Company has repurchased the interests of the partners and trust unit holders in the eighteen oil and gas limited partnerships (the “Partnerships”) and the two asset and business income trusts (the “Trusts”) managed by the Company as general partner and as managing trustee, respectively. The Company purchased such interests in amounts totaling $7,000 and $47,000 for the six months ended June 30, 2013 and 2012, respectively.

(3) Restricted Cash and Cash Equivalents:

Restricted cash and cash equivalents include $3.31 million and $4.44 million at June 30, 2013 and December 31, 2012, respectively, of cash primarily pertaining to oil and gas revenue payments. There were corresponding accounts payable recorded at June 30, 2013 and December 31, 2012 for these liabilities. Both the restricted cash and the accounts payable are classified as current on the accompanying condensed consolidated balance sheets.

 

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(4) Additional Balance Sheet Information:

Certain balance sheet amounts are comprised of the following:

 

(Thousands of dollars)    June 30,
2013
    December 31,
2012
 

Accounts Receivable:

    

Joint interest billing

   $ 4,971      $ 2,189   

Trade receivables

     2,277        1,580   

Oil and gas sales

     10,283        9,362   

Other

     715        436   
  

 

 

   

 

 

 
     18,246        13,567   

Less: Allowance for doubtful accounts

     (327     (355
  

 

 

   

 

 

 

Total

   $ 17,919      $ 13,212   
  

 

 

   

 

 

 

Accounts Payable:

    

Trade

   $ 1,906      $ 3,968   

Royalty and other owners

     9,162        9,652   

Prepaid drilling deposits

     417        306   

Other

     5,862        5,642   
  

 

 

   

 

 

 

Total

   $ 17,347      $ 19,568   
  

 

 

   

 

 

 

Accrued Liabilities:

    

Compensation and related expenses

   $ 4,563      $ 2,517   

Property costs

     2,003        4,549   

Other

     816        552   
  

 

 

   

 

 

 

Total

   $ 7,382      $ 7,618   
  

 

 

   

 

 

 

(5) Property and Equipment:

Property and equipment at June 30, 2013 and December 31, 2012 consisted of the following:

 

(Thousands of dollars)    June 30,
2013
    December 31,
2012
 

Proved oil and gas properties, at cost

   $ 349,377      $ 338,204   

Less: Accumulated depletion and depreciation

     (160,003     (150,276
  

 

 

   

 

 

 

Oil and Gas Properties, Net

   $ 189,374      $ 187,928   
  

 

 

   

 

 

 

Field and office equipment

   $ 25,398      $ 23,974   

Less: Accumulated depreciation

     (15,562     (15,052
  

 

 

   

 

 

 

Field and Office Equipment, Net

   $ 9,836      $ 8,922   
  

 

 

   

 

 

 

Total Property and Equipment, Net

   $ 199,210      $ 196,850   
  

 

 

   

 

 

 

(6) Long-Term Bank Debt:

Bank Debt:

Effective July 30, 2010 the Company entered into a Second Amended and Restated Credit Agreement between Compass Bank as agent and a syndicated group of lenders (“Credit Agreement”). The Credit Agreement has a revolving line of credit and letter of credit facility of up to $250 million with a final maturity date of July 30, 2017. The credit facility is secured by substantially all of the Company’s oil and gas properties. The credit facility is subject to a borrowing base determined by the lenders taking into consideration the estimated value of PEC’s oil and gas properties in accordance with the lenders’ customary practices for oil and gas loans. This process involves reviewing PEC’s estimated proved reserves and their valuation. The borrowing base is redetermined semi-annually, and the available borrowing amount could be increased or decreased as a result of such redetermination. In addition, PEC and the lenders each have at their discretion the right to request the borrowing base be redetermined with a maximum of one such request each year. A revision to PEC’s reserves may prompt such a request on the part of the lenders, which could possibly result in a reduction in the borrowing base and availability under the credit facility. At any time if the sum of the outstanding borrowings and letter of credit exposures exceed the applicable portion of the borrowing base, PEC would be required to repay the excess amount within a prescribed period.

At June 30, 2013, the credit facility borrowing base was $145.0 million with no required monthly reduction amount. The borrowings made within the credit facility may be placed in a base rate loan or LIBO rate loan. The Company’s borrowing rates in the credit facility provide for base rate loans at the prime rate (3.25% at June 30, 2013) plus applicable margin utilization rates that range from 1.75% to 2.00%, and LIBO rate loans at LIBO published rates plus applicable utilization rates (2.75% to 3.00% at June 30, 2013). At June 30, 2013, the Company had in place one base rate loan and one LIBO rate loan with effective rates of 5.00% and 2.95%, respectively.

 

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At June 30, 2013, the Company had a total of $121.3 million of borrowings outstanding under its revolving credit facility at a weighted-average interest rate of 3.57% and $23.7 million available for future borrowings. The combined weighted average interest rate paid on outstanding bank borrowings subject to base rate and LIBO interest was 3.57% for the six months ended June 30, 2013 as compared to 3.90% for the six months ended June 30, 2012.

The Company entered into interest rate hedge agreements to help manage interest rate exposure. These contracts include interest rate swaps. Interest rate swap transactions generally involve the exchange of fixed and floating rate interest payment obligations without the exchange of the underlying principal amounts. In July 2012, the Company entered into interest swap agreements for a period of two years, which commence in January 2014, related to $75 million of the Company’s bank debt resulting in a fixed rate of 0.563% plus the Company’s current applicable margin.

(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. The future minimum lease payments for the rest of fiscal 2013 and thereafter for the operating leases are as follows:

 

(Thousands of dollars)    Operating
Leases
 

2013

   $ 332   

2014

     261   

2015

     122   
  

 

 

 

Total minimum payments

   $ 715   
  

 

 

 

Rent expense for office space for the six months ended June 30, 2013 and 2012 was $376,000 and $399,000, respectively.

Asset Retirement Obligation:

A reconciliation of the liability for plugging and abandonment costs for the six months ended June 30, 2013 is as follows:

 

(Thousands of dollars)       

Asset retirement obligation – December 31, 2012

   $ 9,012   

Liabilities incurred

     90   

Liabilities settled

     (234

Accretion expense

     180   

Revisions in estimated liabilities

     1,524   
  

 

 

 

Asset retirement obligation – June 30, 2013

   $ 10,572   
  

 

 

 

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 a 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 the Company’s wells, the costs to ultimately retire the wells may vary significantly from previous estimates.

(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, 2013, 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.

From time to time, the Company is party to certain legal actions 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.

 

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(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, 2013 and 2012, 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.

(10) Related Party Transactions:

The Company, as managing general partner or managing trustee, makes an annual offer to repurchase the interests of the partners and trust unit holders in certain of the Partnerships or Trusts. The Company purchased such interests in amounts totaling $7,000 and $47,000 for the six months ended June 30, 2013 and 2012, respectively.

Treasury stock purchases in any reported period may include shares from a related party, which may include members of the Company’s Board of Directors.

Receivables from related parties consist of reimbursable general and administrative costs, lease operating expenses and reimbursement for property development and related costs. These receivables are due from joint venture partners, which may include members of the Company’s Board of Directors.

Payables owed to related parties primarily represent receipts collected by the Company as agent for the joint venture partners, which may include members of the Company’s Board of Directors, for oil and gas sales net of expenses.

(11) Financial Instruments:

Fair Value Measurements:

Authoritative guidance on fair value measurements defines fair value, establishes a framework for measuring fair value and stipulates the related disclosure requirements. The Company follows a three-level hierarchy, prioritizing and defining the types of inputs used to measure fair value. The fair values of the Company’s interest rate swaps, natural gas and crude oil price collars and swaps are designated as Level 3. The following fair value hierarchy table presents information about the Company’s assets and liabilities measured at fair value on a recurring basis as of June 30, 2013 and December 31, 2012:

 

June 30, 2013

   Quoted Prices in
Active Markets
For Identical
Assets (Level 1)
     Significant
Other
Observable
Inputs (Level 2)
     Significant
Unobservable
Inputs (Level 3)
    Balance as of
June 30,
2013
 
(Thousands of dollars)                           

Assets

          

Commodity derivative contracts

   $ —         $ —         $ 3,188      $ 3,188   

Interest rate derivative contracts

     —           —           328        328   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ —         $ —         $ 3,516      $ 3,516   
  

 

 

    

 

 

    

 

 

   

 

 

 

Liabilities

          

Commodity derivative contracts

   $ —         $ —         $ (814   $ (814

Interest rate derivative contracts

     —           —           (66     (66
  

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities

   $ —         $ —         $ (880   $ (880
  

 

 

    

 

 

    

 

 

   

 

 

 

 

December 31, 2012

   Quoted Prices in
Active Markets
For Identical
Assets (Level 1)
     Significant
Other
Observable
Inputs (Level 2)
     Significant
Unobservable
Inputs (Level 3)
    Balance as of
December 31,
2012
 
(Thousands of dollars)                           

Assets

          

Commodity derivative contracts

   $ —         $ —         $ 1,347      $ 1,347   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ —         $ —         $ 1,347      $ 1,347   
  

 

 

    

 

 

    

 

 

   

 

 

 

Liabilities

          

Commodity derivative contracts

   $ —         $ —         $ (1,371   $ (1,371

Interest rate derivative contracts

     —           —           (54     (54
  

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities

   $ —         $ —         $ (1,425   $ (1,425
  

 

 

    

 

 

    

 

 

   

 

 

 

The derivative contracts were measured based on quotes from the Company’s counterparties. Such quotes have been derived using valuation models that consider various inputs including current market and contractual prices for the underlying instruments, quoted forward prices for natural gas and crude oil, volatility factors and interest rates, such as a LIBOR curve for a similar length of time as the derivative contract term as applicable. These estimates are verified using comparable NYMEX futures contracts or are compared to multiple quotes obtained from counterparties for reasonableness.

 

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The significant unobservable inputs for Level 3 derivative contracts include basis differentials and volatility factors. An increase (decrease) in these unobservable inputs would result in an increase (decrease) in fair value, respectively. The Company does not have access to the specific assumptions used in its counterparties’ valuation models. Consequently, additional disclosures regarding significant Level 3 unobservable inputs were not provided.

The following table sets forth a reconciliation of changes in the fair value of financial assets and liabilities classified as Level 3 in the fair value hierarchy for the six months ended June 30, 2013.

 

(Thousands of dollars)       

Net liabilities – December 31, 2012

   $ (78

Total realized and unrealized gains / losses:

  

Included in earnings (a)

     2,471   

Included in other comprehensive gain

     316   

Purchases, sales, issuances and settlements

     (73
  

 

 

 

Net assets – June 30, 2013

   $ 2,636   
  

 

 

 

 

(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, and interest rate swap instruments are reported as a reduction to interest expense.

Derivative Instruments:

The Company is exposed to commodity price and interest rate risk, and management considers periodically the Company’s exposure to cash flow variability resulting from the commodity price changes and interest rate fluctuations. Futures, swaps and options are used to manage the Company’s exposure to commodity price risk inherent in the Company’s oil and gas production operations. The Company does not apply hedge accounting to any of its commodity based derivatives. Both realized and unrealized gains and losses associated with derivative instruments are recognized in earnings.

Interest rate swap derivatives are treated as cash-flow hedges and are used to fix or float interest rates on existing debt. The value of these interest rate swaps at June 30, 2013 and December 31, 2012 is located in accumulated other comprehensive income (loss), net of tax. Settlement of the swaps, currently scheduled to begin in January 2014, will be recorded within interest expense.

The following table sets forth the effect of derivative instruments on the condensed consolidated balance sheets at June 30, 2013 and December 31, 2012:

 

          Fair Value  
(Thousands of dollars)   

Balance Sheet Location

   June 30,
2013
    December 31,
2012
 

Asset Derivatives:

       

Derivatives designated as cash-flow hedging instruments:

       

Interest rate swap contracts

   Other assets    $ 329      $ —     

Derivatives not designated as cash-flow hedging instruments:

       

Crude oil commodity contracts

   Other current assets      221        189   

Natural gas commodity contracts

   Other current assets      553        1,040   

Crude oil commodity contracts

   Other assets      2,363        118   

Natural gas commodity contracts

   Other assets      50        —     
     

 

 

   

 

 

 

Total

      $ 3,516      $ 1,347   
     

 

 

   

 

 

 

Liability Derivatives:

       

Derivatives designated as cash-flow hedging instruments:

       

Interest rate swap contracts

   Derivative liability short-term    $ (66   $ —     

Interest rate swap contracts

   Derivative liability long-term      —          (54

Derivatives not designated as cash-flow hedging instruments:

       

Crude oil commodity contracts

   Derivative liability short-term      (814     (994

Crude oil commodity contracts

   Derivative liability long-term      —          (377
     

 

 

   

 

 

 

Total

      $ (880   $ (1,425
     

 

 

   

 

 

 

Total derivative instruments

      $ 2,636      $ (78
     

 

 

   

 

 

 

 

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The following table sets forth the offsetting of asset and liability derivatives in the condensed consolidated balance sheets at June 30, 2013 and December 31, 2012:

 

(Thousands of dollars)    June 30,
2013
    December 31,
2012
 

Asset Derivatives:

    

Gross amount of recognized assets

   $ 4,706      $ 4,209   

Gross amounts offset in the balance sheet

     (1,190     (2,862
  

 

 

   

 

 

 

Net amount

   $ 3,516      $ 1,347   
  

 

 

   

 

 

 

Liability Derivatives:

    

Gross amount of recognized liabilities

   $ (2,070   $ (4,287

Gross amounts offset in the balance sheet

     1,190        2,862   
  

 

 

   

 

 

 

Net amount

   $ (880   $ (1,425
  

 

 

   

 

 

 

Total derivative instruments

   $ 2,636      $ (78
  

 

 

   

 

 

 

The following table sets forth the effect of derivative instruments on the condensed consolidated statement of operations for the six months ended June 30, 2013 and 2012:

 

    

Location of gain/loss recognized
in income

   Amount of gain/loss
recognized in income
 
(Thousands of dollars)       2013     2012  

Derivatives not designated as cash-flow hedge instruments

       

Natural gas commodity contracts

   Unrealized loss on derivative instruments, net    $ (437   $ —     

Crude oil commodity contracts

   Unrealized gain on derivative instruments, net      2,834        5,098   

Natural gas commodity contracts

   Realized gain on derivative instruments, net      331        —     

Crude oil commodity contracts (a)

   Realized gain (loss) on derivative instruments, net      (257     341   
     

 

 

   

 

 

 
      $ 2,471      $ 5,439   
     

 

 

   

 

 

 

 

(a) During the six months ended June 30, 2012, the Company unwound and monetized crude oil swaps with original settlement dates from January 2012 through December 2013 for net proceeds of $1,030,000. The $1,030,000 gain associated with these early settlement transactions is included in realized gain on derivative instruments for the six months ended June 30, 2012.

 

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(12) Earnings 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 in gain periods. The following reconciles amounts reported in the financial statements:

 

     Six Months Ended June 30,  
     2013      2012  
     Net Income
(In 000’s)
     Weighted
Average
Number of
Shares
Outstanding
     Per Share
Amount
     Net Income
(In 000’s)
     Weighted
Average
Number of
Shares
Outstanding
     Per Share
Amount
 

Basic

   $ 8,352         2,465,740       $ 3.39       $ 8,746         2,664,934       $ 3.28   

Effect of dilutive securities:

                 

Options

     —           739,322            —           733,265      
  

 

 

    

 

 

       

 

 

    

 

 

    

Diluted

   $ 8,352         3,205,062       $ 2.61       $ 8,746         3,398,199       $ 2.57   
  

 

 

    

 

 

       

 

 

    

 

 

    

 

     Three Months Ended June 30,  
     2013      2012  
     Net Income
(In 000’s)
     Weighted
Average
Number of
Shares
Outstanding
     Per Share
Amount
     Net Income
(In 000’s)
     Weighted
Average
Number of
Shares
Outstanding
     Per Share
Amount
 

Basic

   $ 6,094         2,432,717       $ 2.51       $ 7,423         2,637,825       $ 2.81   

Effect of dilutive securities:

                 

Options

     —           743,230            —           734,079      
  

 

 

    

 

 

       

 

 

    

 

 

    

Diluted

   $ 6,094         3,175,947       $ 1.92       $ 7,423         3,371,904       $ 2.20   
  

 

 

    

 

 

       

 

 

    

 

 

    

 

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Report may contain statements relating to the future results of the Company that are considered “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995 (the “PSLRA”). In addition, certain statements may be contained in the Company’s future filings with the SEC, in press releases, and in oral and written statements made by or with the approval of the Company that are not statements of historical fact and constitute forward-looking statements within the meaning of the PSLRA. Such forward-looking statements, in addition to historical information, which involve risk and uncertainties, are based on the beliefs, assumptions and expectations of management of the Company. Words such as “expects”, ‘believes”, “should”, “plans”, “anticipates”, “will”, “potential”, “could”, “intend”, “may”, “outlook”, “predict”, “project”, “would”, “estimates”, “assumes”, “likely” and variations of such similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve risks and uncertainties and are based on a number of assumptions that could ultimately prove inaccurate and, therefore, there can be no assurance that they will prove to be accurate. Actual results and outcomes may vary materially from what is expressed or forecast in such statements due to various risks and uncertainties. These risks and uncertainties include, among other things, the possibility of drilling cost overruns and technical difficulties, volatility of oil and gas prices, competition, risks inherent in the Company’s oil and gas operations, the inexact nature of interpretation of seismic and other geological and geophysical data, imprecision of reserve estimates, and the Company’s ability to replace and expand oil and gas reserves. Accordingly, stockholders and potential investors are cautioned that certain events or circumstances could cause actual results to differ materially from those projected. The forward looking statements are made as of the date of this report and other than as required by the federal securities laws, the Company assumes no obligation to update the forward-looking statement or to update the reasons why actual results could differ from those projected in the forward-looking statements.

The following discussion is intended to assist you in understanding our results of operations and our present financial condition. Our Condensed Consolidated Financial Statements and the accompanying Notes to the Condensed Consolidated Financial Statements included elsewhere in this Report contains additional information that should be referred to when reviewing this material.

OVERVIEW

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

We attempt to assume the position of operator in all acquisitions of producing properties and will continue to evaluate prospects for leasehold acquisitions and for exploration and development operations in areas in which we own interests. We continue to actively pursue the acquisition of producing properties. In order to diversify and broaden our asset base, we will consider acquiring the assets or stock in other entities and companies in the oil and gas business. Our main objective in making any such acquisitions will be to acquire income producing assets so as to build stockholder value through consistent growth in our oil and gas reserve base on a cost-efficient basis.

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

RECENT ACTIVITIES

During 2013, we have invested approximately $6 million completing wells drilled in 2012 and continued our drilling program in our West Texas and Mid-Continent regions. Thru July 31, 2013, we have participated in the drilling of 6 gross (3.55 net) wells; 5 of these wells are currently producing and one is awaiting completion. In addition we have 2 gross (1.11 net) wells currently drilling. We intend to drill a total of approximately 20 gross (12 net) wells this year, primarily in the West Texas area at a net cost of $20 million.

 

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RESULTS OF OPERATIONS

2013 and 2012 Compared

We reported net income attributable to PrimeEnergy for the three and six months ended June 30, 2013 of $6.09 million, or $2.51 per share and $8.35 million, or $3.39 per share, respectively as compared to $7.42 million, or $2.81 per share and $8.75 million, or $3.28 per share for the three and six months ended June 30, 2012, respectively. Net income decreased by $1.33 million or 18% and $0.40 million or 5% for the three and six months ended June 30, 2013 as compared to the same periods during 2012 primarily due to a decrease in unrealized gains on derivative instruments and slight increases in lease operating expenses partially offset by increases in oil and gas sales and decreased depreciation and depletion expense. Unrealized gains on derivative instruments decreased by $4.40 million and $2.70 million for the three and six months ended June 30, 2013, respectively as compared to the same periods in 2012 largely due to a decrease in future crude oil commodity prices during the 2013 periods as compared to crude oil commodity contracts held at December 31, 2012 and 2011. Oil and gas sales increased by $3.30 million and $1.63 million for the three and six months ended June 30, 2013, respectively as compared to the same periods in 2012 largely due to an increased production volumes and increases in natural gas commodity prices during the three and six months ended June 30, 2013 as compared to production volumes and natural gas commodity prices during the three and six months ended June 30, 2012. Depreciation and depletion decreased by $0.86 million and $2.81 million for the three and six months ended June 30, 2013, respectively as compared to the same periods in 2012 largely due to decreased depletion rates associated with our offshore properties as several of our offshore properties were plugged and abandoned during 2012.

The significant components of net income are discussed below.

Oil and gas sales increased $3.30 million, or 16% from $20.83 million for the three months ended June 30, 2012 to $24.14 million for the three months ended June 30, 2013 and increased $1.63 million, or 4% from $43.87 million for the six months ended June 30, 2012 to $45.49 million for the six months ended June 30, 2013. Crude oil and natural gas sales vary due to changes in volumes of production sold and realized commodity prices. Our realized prices at the well head increased an average of $5.69 per barrel, or 7% and decreased $4.26 per barrel, or 5% on crude oil during the three and six months ended June 30, 2013, respectively from the same periods in 2012 while our average well head price for natural gas increased $0.99 per mcf, or 22% and $0.53 per mcf, or 12% during the three and six months ended June 30, 2013, respectively from the same periods in 2012.

Our crude oil production increased by 8,000 barrels, or 4% from 180,000 barrels for the second quarter 2012 to 188,000 barrels for the second quarter 2013 and increased by 15,000 barrels, or 4% from 357,000 for the six months ended June 30, 2012 to 372,000 barrels for the six months ended June 30, 2013. Our natural gas production increased by 88,000 mcf, or 8% from 1,147,000 mcf for the second quarter 2012 to 1,235,000 mcf for the second quarter 2013 and increased by 123,000 mcf , or 5% from 2,302,000 mcf for the six months ended June 30, 2012 to 2,425,000 mcf for the six months ended June 30, 2013. The net increase in crude oil and natural gas production volumes are a result of our continued drilling success in West Texas and the Gulf Coast regions as we place new wells into production, partially offset by the natural decline of existing properties and reduction of our primary natural gas producing offshore properties.

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

 

     Three Months Ended June 30,      Six Months Ended June 30,  
     2013      2012      Increase /
(Decrease)
     2013      2012      Increase /
(Decrease)
 

Barrels of Oil Produced

     188,000         180,000         8,000         372,000         357,000         15,000   

Average Price Received

   $ 92.73       $ 87.04       $ 5.69       $ 89.43       $ 93.69       $ (4.26
  

 

 

    

 

 

       

 

 

    

 

 

    

Oil Revenue (In 000’s)

   $ 17,360       $ 15,674       $ 1,686       $ 33,224       $ 33,429       $ (205

Mcf of Gas Produced

     1,235,000         1,147,000         88,000         2,425,000         2,302,000         123,000   

Average Price Received

   $ 5.49       $ 4.50       $ 0.99       $ 5.06       $ 4.53       $ 0.53   
  

 

 

    

 

 

       

 

 

    

 

 

    

Gas Revenue (In 000’s)

   $ 6,775       $ 5,160       $ 1,615       $ 12,270       $ 10,436       $ 1,834   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Oil & Gas Revenue (In 000’s)

   $ 24,135       $ 20,834       $ 3,301       $ 45,494       $ 43,865       $ 1,629   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Realized net gains (losses) on derivative instruments include net losses of $0.04 million and $0.13 million on the settlements of natural gas and crude oil derivatives, respectively for the second quarter 2013 and net gains of $0.22 million on the settlements of crude oil derivatives for the second quarter 2012. Realized net gains on derivative instruments include net gains of $0.33 million and net losses of $0.26 million on the settlements of natural gas and crude oil derivatives, respectively for the six months ended June 30, 2013 and net gains of $0.34 million on the settlements of crude oil derivatives for the six months ended June 30, 2012. In the three and six months ended June 30, 2012, we unwound and monetized crude oil swaps with original settlement dates from January 2012 through December 2013 for net proceeds of $0.37 million and $1.03 million, respectively. The gains associated with these early settlement transactions are included in realized gain on derivative instruments for the three and six months ended June 30, 2012.

 

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Table of Contents

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

 

     Three Months Ended June 30,      Six Months Ended June 30,  
     2013      2012      Increase
(Decrease)
     2013      2012      Increase
(Decrease)
 

Oil Price

   $ 92.07       $ 86.21       $ 5.86       $ 88.74       $ 91.76       $ (3.02

Gas Price

   $ 5.45       $ 4.50       $ 0.95       $ 5.20       $ 4.53       $ 0.67   

We do not apply hedge accounting to any of our commodity based derivatives, thus changes in the fair market value of commodity contracts held at the end of a reported period, referred to as mark-to-market adjustments, are recognized as unrealized gains and losses in the accompanying consolidated statements of operations. As oil and natural gas prices remain volatile, mark-to-market accounting treatment creates volatility in our revenues. During the three and six months ended June 30, 2013, we recognized net unrealized gains of $1.12 million and net unrealized losses of $0.43 million, respectively associated with natural gas fixed swap contracts and net unrealized gains of $3.36 million and $2.83 million, respectively associated with crude oil fixed swaps and collars due to market fluctuations in natural gas and crude oil futures market prices between December 31, 2012 and June 30, 2013. During the three and six months ended June 30, 2012, we recognized $8.88 million and $5.10 million, respectively in net unrealized gains associated with crude oil fixed swaps and collars due to a decrease in crude oil futures market prices between December 31, 2011 and June 30, 2012.

Field service income increased $0.91 million, or 17% from $5.34 million for the second quarter 2012 to $6.25 million for the second quarter 2013 and $1.13 million, or 11% from $10.45 million for the six months ended June 30, 2012 to $11.58 million for the six months ended June 30, 2013. This underlying increase is a result of adding service equipment and the market allowing us to charge slightly higher rates to customers. Workover rig services represent the bulk of our field service operations, and those rates have all increased between the periods in our most active districts. However water hauling and disposal services in our South Texas district were slightly down during the six months ended June 30, 2013 due to increased competition in the area.

Lease operating expense increased $1.03 million, or 10% from $9.97 million for the second quarter 2012 to $11.00 million for the second quarter 2013 and $1.51 million, or 8% from $19.47 million for the six months ended June 30, 2012 to $20.98 million for the six months ended June 30, 2013. This underlying increase is primarily due to higher pumper / labor costs, chemical expenses and salt water disposal costs associated with new wells coming on line from the recent drilling success in West Texas and increased expensed workovers across all districts, partially offset by decreased operating expenses on the offshore properties during the first six months of 2013 as compared to the same periods of 2012.

Field service expense increased $0.81 million, or 19% from $4.36 million for the second quarter 2012 to $5.17 million for the second quarter 2013 and $0.95 million, or 11% from $8.75 million for the six months ended June 30, 2012 to $9.70 million for the six months ended June 30, 2013. Field service expenses primarily consist of salaries and vehicle operating expenses which have increased during the three and six months ended June 30, 2013 over the same periods of 2012 as a direct result of increased services and utilization of the equipment.

Depreciation, depletion, amortization and accretion on discounted liabilities decreased $0.85 million, or 12% from $7.12 million for the second quarter 2012 to $6.27 million for the second quarter 2013 and $2.81 million, or 20% from $13.96 million for the six months ended June 30, 2012 to $11.15 million for the six months ended June 30, 2013. This decrease is primarily due to decreased depletion rates recognized during the three and six months ended June 30, 2013 associated with offshore properties as our offshore properties were plugged and abandoned during 2012.

General and administrative expense increased $0.55 million, or 15% from $3.80 million for the three months ended June 30, 2012 to $4.35 million for the three months ended June 30, 2013 and $0.70 million, or 9% from $7.69 million for the six months ended June 30, 2012 to $8.39 million for the six months ended June 30, 2013. This increase in 2013 is largely due to increased personnel costs in 2013. The largest component of these personnel costs was salaries and employee related taxes and insurance.

Gain on sale and exchange of assets of $1.76 million and $0.71 million for the six months ended June 30, 2013 and June 30, 2012, respectively consists of sales of non-essential oil and gas interests and field service equipment.

Interest expense increased $0.25 million, or 31% from $0.83 million for the second quarter 2012 to $1.08 million for the second quarter 2013 and $0.57 million, or 36% from $1.59 million for the six months ended June 30, 2012 to $2.16 million for the six months ended June 30, 2013. This increase relates to an increase in average debt outstanding during the three and six months ended June 30, 2013 as compared to the same periods of 2012 slightly offset by a decrease in weighted average interest rates during the 2013 periods.

A provision for income taxes of $3.56 million, or an effective tax rate of 37% was recorded for the second quarter 2013 verses a provision of $3.81 million, or an effective tax rate of 34% for the second quarter 2012 and a provision of $4.71 million, or an effective tax rate of 36% was recorded for the six months ended June 30, 2013 verses a provision of $4.20 million, or an effective tax rate of 32% for the six months ended June 30, 2012. Our provision for income taxes varies from the federal statutory tax rate of 34% primarily due to state taxes and percentage depletion deductions. We are entitled to percentage depletion on certain of our wells, which is calculated without reference to the basis of the property. To the extent that such depletion exceeds a property’s basis it creates a permanent difference, which lowers our effective rate.

 

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LIQUIDITY AND CAPITAL RESOURCES

Our primary capital resources are cash provided by our operating activities and our credit facility.

Net cash provided by our operating activities for the six months ended June 30, 2013 was $16.88 million compared to $26.08 million for the six months ended June 30, 2012. Excluding the effects of significant unforeseen expenses or other income, our cash flow from operations fluctuates primarily because of variations in oil and gas production and prices or changes in working capital accounts. Our oil and gas production will vary based on actual well performance but may be curtailed due to factors beyond our control.

Our realized oil and gas prices vary due to world political events, supply and demand of products, product storage levels, and weather patterns. We sell the vast majority of our production at spot market prices. Accordingly, product price volatility will affect our cash flow from operations. To mitigate price volatility we sometimes lock in prices for some portion of our production through the use of derivatives.

If our exploratory drilling results in significant new discoveries, we will have to expend additional capital in order to finance the completion, development, and potential additional opportunities generated by our success. We believe that, because of the additional reserves resulting from the successful wells and our record of reserve growth in recent years, we will be able to access sufficient additional capital through bank financing.

We have in place both a stock repurchase program and a limited partnership interest repurchase program under which we expect to continue spending during 2013. For the six month period ended June 30, 2013, we have spent $2.74 million under these programs.

We currently maintain a revolving credit facility totaling $250 million, with a current borrowing base of $145 million and $23.75 million in availability at June 30, 2013. The bank reviews the borrowing base semi-annually and, at their discretion, may decrease or propose an increase to the borrowing base relative to a redetermined estimate of proved oil and gas reserves. Our oil and gas properties are pledged as collateral for the line of credit and we are subject to certain financial and operational covenants defined in the agreement. We are currently in compliance with these covenants. If we do not comply with these covenants on a continuing basis, the lenders have the right to refuse to advance additional funds under the facility and/or declare all principal and interest immediately due and payable.

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

It is our goal to increase our oil and gas reserves and production through the acquisition and development of oil and gas properties. Our activities include development and exploratory drilling. Our strategy is to develop a balanced portfolio of drilling prospects that includes lower risk wells with a high probability of success and higher risk wells with greater economic potential. We continue our drilling programs in our West Texas and Mid-Continent regions. During 2013, we intend to drill a total of approximately 20 gross (12 net) wells, primarily in the West Texas area, at a net cost of $20 million. We also continue to explore and consider opportunities to further expand our oilfield servicing revenues through additional investment in field service equipment. However, the majority of our capital spending is discretionary, and the ultimate level of expenditures will be dependent on our assessment of the oil and gas business environment, the number and quality of oil and gas prospects available, the market for oilfield services, and oil and gas business opportunities in general.

 

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is a smaller reporting company and no response is required pursuant to this Item.

 

Item 4. CONTROLS AND PROCEDURES

As of the end of the current reported period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rules 13a-15 and 15d-15 of the Securities Exchange Act of 1934 (the “Exchange Act”). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective with respect to the recording, processing, summarizing and reporting, within the time periods specified in the Commission’s rules and forms, of information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act.

There were no changes in the Company’s internal control over financial reporting that occurred during the first six months of 2013 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II—OTHER INFORMATION

 

Item 1. LEGAL PROCEEDINGS

None.

 

Item 1A. RISK FACTORS

The Company is a smaller reporting company and no response is required pursuant to this Item.

 

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

There were no sales of equity securities by the Company during the period covered by this report.

During the six months ended June 30, 2013, the Company purchased the following shares of common stock as treasury shares.

 

2013 Month

   Number of
Shares
     Average Price
Paid per share
     Maximum
Number of Shares
that May Yet Be
Purchased Under
The Program at
Month - End (1)
 

January

     2,712       $ 25.06         461,392   

February

     6,710       $ 26.78         454,682   

March

     47,219       $ 29.17         407,463   

April

     15,177       $ 30.38         392,286   

May

     16,416       $ 31.26         375,870   

June

     4,069       $ 33.21         371,801   
  

 

 

    

 

 

    

Total/Average

     92,303       $ 29.62      
  

 

 

    

 

 

    

 

(1) In December 1993, we announced that the Board of Directors authorized a stock repurchase program whereby we may purchase outstanding shares of the common stock from time-to-time, in open market transactions or negotiated sales. On October 31, 2012, the Board of Directors of the Company approved an additional 500,000 shares of the Company’s stock to be included in the stock repurchase program. A total of 3,500,000 shares have been authorized to date under this program. Through June 30, 2013, a total of 3,128,199 shares have been repurchased under this program for $47,503,916 at an average price of $15.19 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

 

Item 4. RESERVED

 

Item 5. OTHER INFORMATION

None

 

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Item 6. EXHIBITS

The following exhibits are filed as a part of this report:

 

Exhibit No.      
3.1    Restated Certificate of Incorporation of PrimeEnergy Corporation (effective July 1, 2009) (Incorporated by reference to Exhibit 3.1 to PrimeEnergy Corporation Form 10-Q for the quarter ended June 30, 2009)
3.2    Bylaws of PrimeEnergy Corporation (Incorporated by reference to Exhibit 3.2 to PrimeEnergy Corporation Form 10-Q for the quarter ended June 30, 2010)
10.4    Amended and Restated Agreement of Limited Partnership, FWOE Partners L.P., dated as of August 22, 2005 (Incorporated by reference to Exhibit 10.3 to PrimeEnergy Corporation Form 8-K for events of August 22, 2005)
10.4.1    Contribution Agreement between F-W Oil Exploration L.L.C. and FWOE Partners L.P. dated as of August 22, 2005 (Incorporated by reference to exhibit 10.4 to PrimeEnergy Corporation Form 8-K for events of August 22, 2005)
10.18    Composite copy of Non-Statutory Option Agreements (Incorporated by reference to Exhibit 10.18 to PrimeEnergy Corporation Form 10-K for the year ended December 31, 2004)
10.22.5.9    Second Amended and Restated Credit Agreement dated July 30, 2010, by and among PrimeEnergy Corporation, the Guarantors Party Hereto (PrimeEnergy Management Corporation, Prime Operating Company, Eastern Oil Well Service Company, Southwest Oilfield Construction Company, and EOWS Midland Company), Compass Bank (successor in interest to Guaranty Bank, FSB) As Administrative Agent and Letter of Credit Issuer, BBVA Compass, As Sole Lead Arranger and Sole Bookrunner and The Lenders Signatory Hereto (BNP Paribas, JPMorgan Chase Bank, N.A. and Amegy Bank National Association) (Incorporated by reference to Exhibit 10.22.5.9 to PrimeEnergy Corporation Form 10-Q for the quarter ended June 30, 2010)
10.22.5.9.1    First Amendment To Second Amended and Restated Credit Agreement Among PrimeEnergy Corporation, The Guarantors Party Hereto (PrimeEnergy Management Corporation, Prime Operating Company, Eastern Oil Well Service Company, Southwest Oilfield Construction Company, E O W S Midland Company), Compass Bank (successor in interest to Guaranty Bank, FSB), As Administrative Agent, Letter of Credit Issuer and Collateral Agent and The Lenders Signatory Hereto (Compass Bank, BNP Paribas, JPMorgan Chase Bank, N.A., Amegy Bank National Association) effective September 30, 2010 (Incorporated by reference to Exhibit 10.22.5.9.1 to PrimeEnergy Corporation Form 10-Q for the quarter ended September 30, 2010).
10.22.5.9.2    Second Amendment To Second Amended and Restated Credit Agreement Among PrimeEnergy Corporation, The Guarantors Party Hereto (PrimeEnergy Management Corporation, Prime Operating Company, Eastern Oil Well Service Company, Southwest Oilfield Construction Company, E O W S Midland Company), Compass Bank (successor in interest to Guaranty Bank, FSB), As Administrative Agent, Letter of Credit Issuer and Collateral Agent and The Lenders Signatory Hereto (Compass Bank, BNP Paribas, JPMorgan Chase Bank, N.A., Amegy Bank National Association) effective June 22, 2011 (Incorporated by reference to Exhibit 10.22.5.9.2 to PrimeEnergy Corporation Form 10-Q for the quarter ended June 30, 2011).
10.22.5.9.3    Third Amendment To Second Amended and Restated Credit Agreement Among PrimeEnergy Corporation, The Guarantors Party Hereto (PrimeEnergy Management Corporation, Prime Operating Company, Eastern Oil Well Service Company, Southwest Oilfield Construction Company, E O W S Midland Company), Compass Bank (successor in interest to Guaranty Bank, FSB), As Administrative Agent, Letter of Credit Issuer and Collateral Agent and The Lenders Signatory Hereto (Compass Bank, BNP Paribas, JPMorgan Chase Bank, N.A., Amegy Bank National Association) effective December 8, 2011 (Incorporated by reference to Exhibit 10.22.5.9.3 to PrimeEnergy Corporation Form 10-K for the year ended December 31, 2011).
10.22.5.9.4    Fourth Amendment To Second Amended and Restated Credit Agreement Among PrimeEnergy Corporation, The Guarantors Party Hereto (PrimeEnergy Management Corporation, Prime Operating Company, Eastern Oil Well Service Company, Southwest Oilfield Construction Company, E O W S Midland Company), Compass Bank (successor in interest to Guaranty Bank, FSB), As Administrative Agent, Letter of Credit Issuer and Collateral Agent and The Lenders Signatory Hereto (Compass Bank, BNP Paribas, JPMorgan Chase Bank, N.A., Amegy Bank National Association) effective June 25, 2012 (Incorporated by reference to Exhibit 10.22.5.9.4 to PrimeEnergy Corporation Form 10-Q for the quarter ended June 30, 2012).

 

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Exhibit No.     
10.22.5.9.5   Fifth Amendment To Second Amended and Restated Credit Agreement Among PrimeEnergy Corporation, The Guarantors Party Hereto (PrimeEnergy Management Corporation, Prime Operating Company, Eastern Oil Well Service Company, Southwest Oilfield Construction Company, E O W S Midland Company, Prime Offshore L.L.C.), Compass Bank (successor in interest to Guaranty Bank, FSB), As Administrative Agent, Letter of Credit Issuer and Collateral Agent and The Lenders Signatory Hereto (Compass Bank, Wells Fargo Bank National Association, JPMorgan Chase Bank, N.A., Amegy Bank National Association, KeyBank National Association) effective November 26, 2012 (Incorporated by reference to Exhibit 10.22.5.9.5 to PrimeEnergy Corporation Form 10-K for the year ended December 31, 2012).
10.22.5.9.6   Sixth Amendment To Second Amended and Restated Credit Agreement Among PrimeEnergy Corporation, The Guarantors Party Hereto (PrimeEnergy Management Corporation, Prime Operating Company, Eastern Oil Well Service Company, Southwest Oilfield Construction Company, E O W S Midland Company, Prime Offshore L.L.C.), Compass Bank (successor in interest to Guaranty Bank, FSB), As Administrative Agent, Letter of Credit Issuer and Collateral Agent and The Lenders Signatory Hereto (Compass Bank, Wells Fargo Bank National Association, JPMorgan Chase Bank, N.A., Amegy Bank National Association, KeyBank National Association) effective June 28, 2013 (filed herewith).
31.1   Certification of Chief Executive Officer pursuant to Rule 13(a)-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended (filed herewith).
31.2   Certification of Chief Financial Officer pursuant to Rule 13(a)-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended (filed herewith).
32.1   Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
32.2   Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
101.INS (1)   XBRL (eXtensible Business Reporting Language) Instance Document
101.SCH (1)   XBRL Taxonomy Extension Schema Document
101.CAL (1)   XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF (1)   XBRL Taxonomy Extension Definition Linkbase Document
101.LAB (1)   XBRL Taxonomy Extension Label Linkbase Document
101.PRE (1)   XBRL Taxonomy Extension Presentation Linkbase Document

 

(1) 

XBRL information (the Interactive Data File) is deemed not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.

 

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SIGNATURES

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 7, 2013

    /s/ Charles E. Drimal, Jr.

(Date)

    Charles E. Drimal, Jr.
    President
    Principal Executive Officer

August 7, 2013

    /s/ Beverly A. Cummings

(Date)

    Beverly A. Cummings
    Executive Vice President
    Principal Financial Officer

 

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