Item 9A. Controls and Procedures
Item 9A.
CONTROLS AND PROCEDURES.
As of the end of the period covered by this Annual Report on Form 10-K, our principal executive officer
and principal financial officer have evaluated the effectiveness of our disclosure controls and procedures (Disclosure Controls). Disclosure Controls, as defined in Rule 13a-15(e)
of the Securities Exchange Act of 1934, as amended (the Exchange Act), are procedures that are designed with the objective of ensuring that information required to be disclosed in our reports filed under the Exchange Act, such as this
Annual Report, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commissions rules and forms. Disclosure Controls are also designed with the objective of ensuring that such
information is accumulated and communicated to our management, including the chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
39
Table of Contents
Our management, including the chief executive officer and chief financial officer, does not
expect that our Disclosure Controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are
met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be
faulty, and that breakdowns can occur because of simple error or mistake. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design
will succeed in achieving its stated goals under all potential future conditions.
Members of our management, including our chief
executive officer and chief financial officer, have evaluated the effectiveness of our disclosure controls and procedures, as defined by paragraph (e) of Exchange Act Rules 13a-15 or 15d-15, as of December 31, 2020 the end of the period covered by this Report. Based upon that evaluation, these officers concluded that our disclosure controls and procedures were effective as of
December 31, 2020.
Managements Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is a process designed to provide reasonable assurance that assets are
safeguarded against loss from unauthorized use or disposition, transactions are executed in accordance with appropriate management authorization and accounting records are reliable for the preparation of financial statements in accordance with U.S.
generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
Management assessed the effectiveness of our internal control over financial reporting as of
December 31, 2020. Management based this assessment on criteria for effective internal control over financial reporting described in Internal Control Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Managements assessment included an evaluation of the design of our internal control over financial reporting and testing of the operational effectiveness of its internal control over
financial reporting. Management reviewed the results of its assessment with the Audit Committee of our Board of Directors.
Based on
this assessment, management believes that the Company maintained effective internal control over financial reporting as of December 31, 2020.
This Annual Report does not include an attestation report of the Companys registered public accounting firm regarding internal control
over financial reporting. Managements report was not subject to attestation by the Companys registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only
managements report in this Annual Report.
There have been no changes in our internal controls over financial reporting during the
fourth fiscal quarter ended December 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
Item 9B.
OTHER INFORMATION.
None.
40
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PART III
Item 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
Information relating to the Companys Directors, nominees for Directors and executive officers will be included in the Companys
definitive proxy statement relating the Companys Annual Meeting of Stockholders to be held in June, 2021, and which is incorporated herein by reference.
Item 11.
EXECUTIVE COMPENSATION.
Information relating to executive compensation will be included in the Companys definitive proxy statement relating to the Companys
Annual Meeting of Stockholders to be held in June, 2021, and which is incorporated herein by reference.
Item 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
Information relating to security ownership of certain beneficial owners and management will be included in the
Companys definitive proxy statement relating to the Companys Annual Meeting of Stockholders to be held in June, 2021, and which is incorporated herein by reference.
Item 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
Information relating to certain transactions by Directors and executive officers of the Company will be included in the Companys
definitive proxy statement relating to the Companys Annual Meeting of Stockholders to be held in June, 2021, and which is incorporated herein by reference.
Item 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Information relating to principal accountant fees and services will be included in the Companys definitive proxy statement relating to
the Companys Annual Meeting of Stockholders to be held in June, 2021, and which is incorporated herein by reference.
41
Table of Contents
PART IV
Item 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
The following documents are filed as part of this Report:
1.
Financial statements (Index to Consolidated Financial Statements at page
F-1 of this Report)
2.
Financial Statement Schedules (Index to Consolidated Financial Statements Supplementary Information at
page F-1 of this Report)
3.
Exhibits:
42
Table of Contents
Exhibit No.
3.1
Certificate of Incorporation of PrimeEnergy Resources Corporation, as amended and restated of December
21, 2018, (filed as Exhibit 3.1 of PrimeEnergy Resources Corporation Form 8-K on December 27, 2018, and incorporated herein by reference).
3.2
Bylaws of PrimeEnergy Resources Corporation as amended and restated as of April
24, 2020 (filed as Exhibit 3.2 of PrimeEnergy Resources Corporation Form 8-K on April 27, 2020 and incorporated herein by reference).
10.18
Composite copy of Non-Statutory Option Agreements (Incorporated by reference to Exhibit 10.18 of PrimeEnergy
Resources Corporation Form 10-K for the year ended December 31, 2004).
10.22.5.10
Third Amended and Restated Credit Agreement dated as of February
15, 2017 among PrimeEnergy Resources Corporation, as Borrower, Compass Bank, as Administrative Agent and Lender, Wells Fargo, National Association, as Document Agent, the Lenders Party Hereto (Compass Bank, Wells Fargo, National Association, Citibank, N.A.)
and BBVA Compass Bank, as Letter of Credit Issuer and Sole Lead Arranger and Sole Bookrunner (Incorporated by reference to Exhibit 10.22.5.10 to PrimeEnergy Resources Corporation Form 10-K for the year ended
December 31, 2016).
10.22.5.10.1
THIRD AMENDMENT TO THIRD AMENDED AND RESTATED CREDIT AGREEMENT dated as of January
8, 2019, among PRIMEENERGY RESOURCES CORPORATION, as Borrower, THE LENDERS PARTY HERETO, COMPASS BANK, as Administrative Agent, WELLS FARGO BANK, NATIONAL ASSOCIATION, as Documentation Agent, and BBVA COMPASS, as Sole Lead Arranger and Sole Book Runner
(Incorporated by reference to Exhibit 10.22.5.10.3 to PrimeEnergy Resources Corporation Form 10-K for the year ended December 31, 2018).
10.22.5.10.2
SECOND AMENDMENT TO THIRD AMENDED AND RESTATED CREDIT AGREEMENT dated as of July
17, 2018 among PRIMEENERGY CORPORATION, as Borrower, THE LENDERS PARTY HERETO, COMPASS BANK, as Administrative Agent, WELLS FARGO BANK, NATIONAL ASSOCIATION, as Documentation Agent, and BBVA COMPASS, as Sole Lead Arranger and Sole Book Runner, (Incorporated
by reference to Exhibit 10.22.5.10.2 to PrimeEnergy Corporation Form 10-Q for the quarter ended June 30, 2018).
10.22.5.10.3
THIRD AMENDMENT TO THIRD AMENDED AND RESTATED CREDIT AGREEMENT dated as of January
8, 2019, among PRIMEENERGY RESOURCES CORPORATION, as Borrower, THE LENDERS PARTY HERETO, COMPASS BANK, as Administrative Agent, WELLS FARGO BANK, NATIONAL ASSOCIATION, as Documentation Agent, and BBVA COMPASS, as Sole Lead Arranger and Sole Book Runner
(Incorporated by reference to Exhibit 10.22.5.10.3 to PrimeEnergy Resources Corporation Form 10-K for the year ended December 31, 2018).
10.22.5.10.4
FOURTH AMENDMENT TO THE THIRD AMENDED AND RESTATED CREDIT AGREEMENT dated as of May
8, 2020 among PRIMEENERGY RESOURCES CORPORATION, as Borrower, THE LENDERS PARTY HERETO, BBVA USA (f/k/a COMPASS BANK), as Administrative Agent, WELLS FARGO BANK, NATIONAL ASSOCIATION, as Documentation Agent, and BBVA USA, as Sole Lead Arranger and Sole
Book Runner (Incorporated by reference to 10.22.5.10.4 to PrimeEnergy Resources Corporation Form 10-Q for the quarter ended September 30, 2020).
10.22.5.10.5
FIFTH AMENDMENT TO THIRD AMENDED AND RESTATED CREDIT AGREEMENT dated as of September
4, 2020, among PRIMEENERGY RESOURCES CORPORATION, as Borrower, THE LENDERS PARTY HERETO, BBVA USA (f/k/a COMPASS BANK,) as Administrative Agent, WELLS FARGO BANK, NATIONAL ASSOCIATION, as Documentation Agent, and BBVA USA, as Sole Lead Arranger and Sole
Book Runner (Incorporated by reference to 10.22.5.10.5 to PrimeEnergy Resources Corporation Form 10-Q for the quarter ended September 30, 2020).
10.22.5.10.6
10.22. SIXTH AMENDMENT TO THIRD AMENDED AND RESTATED CREDIT AGREEMENT dated as of FEBRUARY
11, 2021, among PRIMEENERGY RESOURCES CORPORATION, as Borrower, THE GUARANTORS PARTY HERETO, THE LENDERS PARTY, HERETO, BBVA USA, as Administrative Agent and BBVA USA, as Sole Lead Arranger and Sole Book Runner (Incorporated by reference to Exhibit 10.22.5.10.6
to PrimeEnergy Resources Corporation Form 8-K dated February 12, 2021).
10.22.5.11
Amended, Restated and Consolidated Guaranty dated as of February
15, 2017, among PrimeEnergy Management Corporation, Prime Operating Company, Eastern Oil Well Service Company, Southwest Oilfield Construction Company, EOWS Midland Company and Prime Offshore L.L.C. in favor of Compass Bank, as Administrative Agent for
the Lenders (Incorporated by reference to Exhibit 10.22.5.11 to PrimeEnergy Resources Corporation Form 10-K for the year ended December 31, 2016).
10.22.5.12
Amended, Restated and Consolidated Pledge and Security Agreement dated as of February
15, 2017, among PrimeEnergy Resources Corporation, PrimeEnergy Management Corporation, Prime Operating Company, Eastern Oil Well Service Company, Southwest Oilfield Construction Company, EOWS Midland Company and Prime Offshore L.L.C. and Compass Bank, as
Administrative Agent for the Secured Parties (Incorporated by reference to Exhibit 10.22.5.12 to PrimeEnergy Resources Corporation Form 10-K for the year ended December 31,
2016).
43
Table of Contents
10.22.5.13
Amended, Restated and Consolidated Deed of Trust, Mortgage, Security Agreement, Assignment of Production and Financing Statement Dated as of
May 5, 2017 (Incorporated by reference to Exhibit 10.22.5.13 to PrimeEnergy Resources Corporation Form 10-Q for the quarter ended March 31, 2017).
10.22.5.14
Deed of Trust, Mortgage, Security Agreement, Assignment of Production and Financing Statement Dated as of May
5, 2017 (Incorporated by reference to Exhibit 10.22.5.14 to PrimeEnergy Resources Corporation Form 10-Q for the quarter ended March 31, 2017).
10.22.5.15
Amended, Restated and Consolidated Mortgage of Oil and Gas Property, Security Agreement, Assignment of Production and Financing Statement Dated
as of May 5, 2017 (Incorporated by reference to Exhibit 10.22.5.15 to PrimeEnergy Resources Corporation Form 10-Q for the quarter ended March 31, 2017).
14
PrimeEnergy Resources Corporation Code of Business Conduct and Ethics, as amended December
16, 2011 (Incorporated by reference to Exhibit 14 of PrimeEnergy Resources Corporation Form 10-K for the year ended December 31, 2011).
21
Subsidiaries (filed herewith).
23
Consent of Ryder Scott Company, L.P. (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).
99.1
Summary Reserve Report dated March 23, 2020, of Ryder Scott Company, L.P. (filed herewith).
101.INS
XBRL (eXtensible Business Reporting Language) Instance Document (filed herewith)
101.SCH
XBRL Taxonomy Extension Schema Document (filed herewith)
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document (filed herewith)
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document (filed herewith)
101.LAB
XBRL Taxonomy Extension Label Linkbase Document (filed herewith)
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document (filed herewith)
44
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to
be signed on its behalf by the undersigned, thereunto duly authorized, on the 23 rd , day of April 2021.
PrimeEnergy Resources Corporation
By:
/s/ Charles E. Drimal, Jr.
Charles E. Drimal, Jr.
Chairman, Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below
by the following persons on behalf of the Registrant and in the capacities indicated and on the 23 rd day of April 2021.
/s/ Charles E. Drimal, Jr.
Charles E. Drimal, Jr.
Chairman, Chief Executive Officer and President;
The Principal Executive Officer
/s/ Beverly A. Cummings
Beverly A. Cummings
Director, Executive Vice President and Treasurer;
The Principal Financial Officer
/s/ Clint Hurt
Clint Hurt
Director
/s/ Thomas S. T. Gimbel
Thomas S. T. Gimbel
Director
/s/ H. Gifford Fong
H. Gifford Fong
Director
45
Table of Contents
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
F-2
Financial Statements
Consolidated Balance Sheet As of December
31, 2020 and 2019
F-5
Consolidated Statement of Operations
For the years ended December 31, 2020 and 2019
F-6
Consolidated Statement of Equity
For the years ended December 31, 2020 and 2019
F-7
Consolidated Statement of Cash Flows
For the years ended December 31, 2020 and 2019
F-8
Notes to Consolidated Financial Statements
F-9
Supplementary Information:
Capitalized Costs Relating to Oil and Gas Producing Activities, years ended December 31,
2020 and 2019
F-22
Costs Incurred in Oil and Gas Property Acquisition, Exploration and Development
Activities, years ended December 31, 2020 and 2019
F-22
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil
and Gas Reserves, years ended December 31, 2020 and 2019
F-22
Standardized Measure of Discounted Future Net Cash Flows and
Changes Therein Relating to Proved Oil and Gas Reserves, years ended December 31, 2020 and 2019
F-23
Reserve Quantity Information, years ended December 31, 2020 and
2019
F-24
Results of Operations from Oil and Gas Producing Activities, years ended December 31,
2020 and 2019
F-24
Notes to Supplementary Information
F-25
F-1
Table of Contents
INDEPENDENT AUDITORS REPORT
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
PrimeEnergy
Resources Corporation and Subsidiaries:
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of PrimeEnergy Resources Corporation and Subsidiaries (the Company) as of
December 31, 2020 and 2019, the related consolidated statements of operations, equity, and cash flows for each of the years then ended, and the related notes (collectively referred to as the financial statements). In our opinion,
the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years then ended, in conformity with
accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on the Companys financial
statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the
U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in
accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The
Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for
the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and
performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used
and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters
communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to
the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are
not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Depreciation, Depletion and Amortization and Impairment of Property and Equipment
Description of
the
Matter
At December 31, 2020, the carrying value of the Companys property and equipment was $191.1 million and depreciation, depletion and amortization (DD&A) expense was $27.3 million for the year then ended. As
described in Note 1, the Company follows the successful efforts method of accounting for its oil and gas properties. Under the successful efforts method, costs of acquiring undeveloped oil and gas leasehold acreage, including
lease bonuses, brokers fees and other related costs are capitalized. Provisions for impairment of undeveloped oil and gas leases are based on periodic evaluations. Annual lease rentals and exploration expenses, including geological and
geophysical expenses and exploratory dry hole costs, are charged against income as incurred. Costs of drilling and equipping productive wells, including development dry holes and related production facilities, are capitalized. All other property and
equipment are carried at cost. Depreciation and depletion of oil and gas production equipment and properties are determined under the unit-of-production method based on
estimated proved developed recoverable oil and gas reserves. Depreciation of all other equipment is determined under the straight-line method using various rates based on useful lives generally ranging from 5 to 10 years. The cost of assets and
related accumulated depreciation is removed from the accounts when such assets are disposed of, and any related gains or losses are reflected in current earnings.
F-2
Table of Contents
Interest costs related to financing major oil and gas projects in progress are capitalized until the projects are evaluated or until the
projects are substantially complete and ready for their intended use if the projects are evaluated and successful
The Company reviews long-lived assets, including oil and gas properties, for impairment whenever events or changes in circumstances indicate that the carrying
amounts may not be recovered. If the carrying amounts are not expected to be recovered by undiscounted cash flows, the assets are impaired, and an impairment loss is recorded. The amount of impairment is based on the estimated fair value of the
assets determined by discounting anticipated future net cash flows.
Proved oil and
gas reserves directly impact financial accounting estimates, including depreciation, depletion and amortization. Proved reserves represent estimated quantities of natural gas, crude oil, condensate, and natural gas liquids that geological and
engineering data demonstrate, with reasonable certainty, to be recoverable in future years from known reservoirs under economic and operating conditions existing at the time the estimates were made. The process of estimating quantities of proved oil
and gas reserves is very complex, requiring significant subjective decisions in the evaluation of all available geological, engineering and economic data for each reservoir. The data for a given reservoir may also change substantially over time as a
result of numerous factors including, but not limited to, additional development activity, evolving production history and continual reassessment of the viability of production under varying economic conditions. Consequently, material revisions
(upward or downward) to existing reserve estimates may occur from time to time.
Estimates of oil and gas reserves, as determined by independent petroleum engineers, are continually subject to revision based on price, production history and
other factors. Depletion expense, which is computed based on the units of production method, could be significantly impacted by changes in such estimates. Additionally, U.S. generally accepted accounting principles require that if the expected
future undiscounted cash flows from an asset are less than its carrying cost, that asset must be written down to its fair market value. As the fair market value of an oil and gas property will usually be significantly less than the total
undiscounted future net revenues expected from that asset, slight changes in the estimates used to determine future net revenues from an asset could lead to the necessity of recording a significant impairment of that asset.
Auditing the Companys DD&A and impairment calculations is complex because of
the use of independent petroleum engineers and the evaluation of managements determination of the inputs described above used by the engineers in estimating oil and gas reserves.
How We Addressed the Matter in Our Audit
We obtained an understanding and evaluated the design of the Companys controls over its process to calculate DD&A and impairment,
including managements controls over the completeness and accuracy of the financial data utilized by the engineers in estimating oil and gas reserves.
Our audit procedures included, among others, evaluating the professional qualifications and objectivity of the Companys independent petroleum engineers
responsible for the preparation of the proved oil and gas reserve estimates for select properties. In addition, we compared the Companys recent production with its reserve estimates for properties that have significant production or
significant reserve quantities and inquired of disproportionate ratios that did not align with our expectations. We also tested the mathematical accuracy of the DD&A and impairment calculations, including comparing the oil and gas reserve
amounts used in the calculations to the Companys reserve reports.
F-3
Table of Contents
Accounting for Asset Retirement Obligations
Description of
the
Matter
At December 31, 2020, the asset retirement obligation (ARO) balance totaled $13.7 million. As further described in Note 5, the
Companys ARO primarily represents the estimated present value of the amount the Company will incur to plug, abandon, and remediate producing properties at the end of their productive lives, in accordance with applicable state laws. The Company
determined its asset retirement obligation by calculating the present value of estimated cash flows related to the liability. The asset retirement obligation is recorded as a liability at its estimated present value at its inception, with an
offsetting increase to producing properties. Periodic accretion of discount of the estimated liability is recorded as an expense in the statement of operations.
The Companys 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 Companys wells, the costs to ultimately retire the wells may vary significantly from previous estimates.
Auditing the Companys ARO is complex and highly judgmental because of the significant estimation by management in determining the obligation. In
particular, the estimate was sensitive to significant subjective assumptions such as retirement cost estimates and the estimated timing of settlements, which are both affected by expectations about future market and economic
conditions.
How We Addressed the Matter in Our Audit
We obtained an understanding and evaluated the design of the Companys internal controls over its ARO estimation process, including managements review of the significant assumptions that have a material effect on the
determination of the obligations. To test the ARO for the Company, our audit procedures included, among others, assessing the significant assumptions and inputs used in the valuation, such as retirement cost estimates and timing of settlement
assumptions. Additionally, we compared the ARO against historical results, reviewed the reasonableness of the discount rate utilized in the estimate, considered the reasonableness of the current and long-term portion of the obligation by comparing
the accretion expense trends, and considered the completeness of the properties included in the estimate by comparing to the Companys reserve reports.
GRASSI & CO., CPAs, P.C.
We have served as the Companys auditor since 1989.
New
York, New York
April 23, 2021
F-4
Table of Contents
PRIMEENERGY RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Thousands of dollars)
As of December 31,
2020
2019
ASSETS
Current Assets
Cash and cash equivalents
$
996
$
1,015
Accounts receivable, net
7,221
14,360
Prepaid obligations
590
625
Derivative asset short-term
272
Other current assets
104
127
Total Current Assets
8,911
16,399
Property and Equipment
Oil and gas properties at cost
520,488
527,729
Less: Accumulated depletion and depreciation
(335,390
)
(322,409
)
185,098
205,320
Field and office equipment at cost
26,797
27,542
Less: Accumulated depreciation
(20,842
)
(20,762
)
5,955
6,780
Total Property and Equipment, Net
191,053
212,100
Derivative asset long-term and other assets
520
866
Total Assets
$
200,484
$
229,365
LIABILITIES AND EQUITY
Current Liabilities
Accounts payable
$
5,217
$
6,634
Accrued liabilities
6,787
6,836
Due to related parties
38
Current portion of long-term debt
487
Current portion of asset retirement and other long-term obligations
868
1,369
Derivative liability short-term
723
753
Total Current Liabilities
14,120
15,592
Long-Term Bank Debt
38,267
53,500
Asset Retirement Obligations
12,891
20,330
Deferred Income Taxes
36,367
35,924
Other Long-Term Obligations
841
656
Total Liabilities
102,486
126,002
Commitments and Contingencies
Equity
Common stock, $.10 par value; 2020 and 2019: Authorized: 2,810,000 shares, outstanding 2020:
1,994,177 shares; outstanding 2019: 1,998,978 shares.
281
281
Paid-in capital
7,541
7,505
Retained earnings
126,804
129,120
Treasury stock, at cost; 2020: 815,823 shares; 2019: 811,022 shares
(37,502
)
(36,792
)
Total Stockholders Equity PrimeEnergy
97,124
100,114
Non-controlling interest
874
3,249
Total Equity
97,998
103,363
Total Liabilities and Equity
$
200,484
$
229,365
The accompanying Notes are an integral part of these Consolidated Financial Statements
F-5
Table of Contents
PRIMEENERGY RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Thousands of dollars, except per share amounts)
For the Year Ended
December 31,
2020
2019
Revenues
Oil sales
$
27,865
$
68,366
Natural gas sales
4,202
6,539
Natural gas liquids sales
4,906
9,110
Realized gain (loss) on derivative instruments, net
6,173
(1,371
)
Field service income
11,120
19,214
Administrative overhead fees
4,163
5,659
Unrealized (loss) on derivative instruments
(190
)
(2,777
)
Other income
182
84
Total Revenues
58,421
104,824
Costs and Expenses
Lease operating expense
23,028
33,461
Field service expense
9,006
15,446
Depreciation, depletion, amortization and accretion on discounted liabilities
28,176
36,156
General and administrative expense
15,027
15,639
Total Costs and Expenses
75,237
100,702
Gain on Sale and Exchange of Assets
15,836
4,574
(Loss) Income from Operations
(980
)
8,696
Other Income and Expenses
Less: Interest expense
1,902
3,635
Add: Interest income
2
19
(Loss) Income Before (Benefit from) Provision for Income Taxes
(2,880
)
5,080
(Benefit from) Provision for Income Taxes
(517
)
1,421
Net (Loss) Income
(2,363
)
3,659
Less: Net (Loss) Income Attributable to Non-Controlling
Interest
(47
)
183
Net (Loss) Income Attributable to PrimeEnergy
$
(2,316
)
$
3,476
Basic (Loss) Income Per Common Share
$
(1.16
)
$
1.72
Diluted (Loss) Income Per Common Share
$
(1.16
)
$
1.25
The accompanying Notes are an integral part of these Consolidated Financial Statements
F-6
Table of Contents
PRIMEENERGY RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EQUITY
(Thousands of dollars, except share amounts)
Shares
Outstanding
Common
Stock
Additional
Paid-In
Capital
Retained
Earnings
Treasury
Stock
Total
Stockholders
Equity
PrimeEnergy
Non-
Controlling
Interest
Total
Equity
Balance at December 31, 2018
2,039,919
$
281
$
7,388
$
125,644
$
(31,304
)
$
102,009
$
3,994
$
106,003
Purchase 40,941 shares of common stock
(40,941
)
(5,488
)
(5,488
)
(5,488
)
Net income
3,476
3,476
183
3,659
Purchase of non-controlling interest
117
117
(616
)
(499
)
Distributions to non-controlling interest
(312
)
(312
)
Balance at December 31, 2019
1,998,978
$
281
$
7,505
$
129,120
$
(36,792
)
$
100,114
$
3,249
$
103,363
Purchase 4,801 shares of common stock
(4,801
)
(710
)
(710
)
(710
)
Net loss
(2,316
)
(2,316
)
(47
)
(2,363
)
Purchase of non-controlling interest
36
36
(58
)
(22
)
Distributions to non-controlling interest
(2,270
)
(2,270
)
Balance at December 31, 2020
1,994,177
$
281
$
7,541
$
126,804
$
(37,502
)
$
97,124
$
874
$
97,998
The accompanying Notes are an integral part of these Consolidated Financial Statements
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PRIMEENERGY RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Thousands of dollars)
For the Year Ended
December 31,
2020
2019
Cash Flows from Operating Activities:
Net (Loss) Income
$
(2,363
)
$
3,659
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation, depletion, amortization and accretion on discounted liabilities
28,176
36,156
Gain on sale of properties
(15,836
)
(4,574
)
Unrealized loss (gain) on derivative instruments
190
2,777
Provision for deferred income taxes
443
3,096
Changes in assets and liabilities:
Accounts receivable
7,139
601
Due to related parties
38
(5
)
Prepaid expenses and other assets
58
15
Accounts payable
(1,417
)
(2,919
)
Accrued liabilities
(49
)
(11,595
)
Net Cash Provided by Operating Activities
16,379
27,211
Cash Flows from Investing Activities:
Capital expenditures, including exploration expense
(10,523
)
(18,046
)
Proceeds from sale of properties and equipment
10,862
4,579
Net Cash (Used in) provided by Investing Activities
339
(13,467
)
Cash Flows from Financing Activities:
Purchase of stock for treasury
(710
)
(5,488
)
Purchase of non-controlling interests
(742
)
(499
)
Increase in long-term bank debt and other long-term obligations
6,755
25,000
Repayment of long-term bank debt and other long-term obligations
(21,983
)
(37,745
)
Distribution to non-controlling interest
(57
)
(312
)
Net Cash (used in) provided by Financing Activities
(16,737
)
(19,044
)
Cash and Cash Equivalents Period Decrease
(19
)
(5,300
)
Cash and Cash Equivalents at the Beginning of the Year
1,015
6,315
Cash and Cash Equivalents at the End of the Year
$
996
$
1,015
Supplemental Disclosures:
Income taxes paid during the year
$
1
$
65
Interest paid during the year
$
2,052
$
3,659
Non-Cash Disclosures:
Purchase of non-controlling interest
$
36
$
111
Distribution of non-controlling interest in liquidated partnerships
$
1,550
$
The accompanying Notes are an integral part of these Consolidated Financial Statements
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Table of Contents
PRIMEENERGY RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Operations and Significant Accounting Policies
Nature of Operations:
PrimeEnergy Resources Corporation (PERC), a Delaware corporation, was organized in March 1973 and is engaged in the development,
acquisition and production of oil and natural gas properties. PrimeEnergy Resources Corporation and its subsidiaries are herein referred to as the Company. The Company owns leasehold, mineral and royalty interests in producing and non-producing oil and gas properties across the United States, primarily in Oklahoma, and Texas. The Company operates approximately 760 active wells and owns non-operating
interests and royalties in approximately 800 additional wells. Additionally, the Company provides well-servicing support operations, site-preparation and construction services for oil and gas drilling and reworking operations, both in connection
with the Companys activities and providing contract services for third parties. The Company is publicly traded on the NASDAQ under the symbol PNRG. PERC owns Eastern Oil Well Service Company (EOWSC) and EOWS Midland
Company (EMID) which perform oil and gas field servicing. PERC also owns Prime Operating Company (POC), which serves as operator for most of the producing oil and gas properties owned by the Company and affiliated entities.
PrimeEnergy Management Corporation (PEMC), a wholly-owned subsidiary, acts as the managing general partner, providing administration, accounting and tax preparation services for 1 limited partnership and 1 trust (collectively, the
Partnerships). The markets for the Companys products are highly competitive, as oil and gas are commodity products and prices depend upon numerous factors beyond the control of the Company, such as economic, political and
regulatory developments and competition from alternative energy sources.
Effects of Coronavirus on Business:
On March 11, 2020, the World Health Organization declared the outbreak of the Coronavirus
(COVID-19), which continues to spread throughout the U.S. and the world, a pandemic. The outbreak is having an impact on the global economy, resulting in rapidly changing market and economic
conditions. Similar to many businesses in the energy sector, our business has been impacted by the recent COVID-19 outbreak and associated restrictions that have been implemented. The Company temporarily
implemented social distancing requirements and work from home accommodations where appropriate.
The oversupply in the oil markets and
related price volatility, depending on its duration may have an adverse impact on cash flows from operations and the valuation of capitalized costs related to oil and gas producing activities. The full extent to which
COVID-19 will impact the Companys results will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the
virus and the actions to contain or treat its impact.
Consolidation and Presentation:
The consolidated financial statements include the accounts of PrimeEnergy Resources Corporation, its subsidiaries and the Partnerships, using
the full consolidation method for those partnerships which are controlled by the Company. The Companys reserve estimates are based on the full consolidation method. DD&A expense and evaluation of impairment may differ from the Partnership
as the Companys cost basis for the Partnership interests acquired may be different than the cost basis at the Partnership level for properties acquired by the Partnership. All significant intercompany balances and transactions are eliminated
in preparing the consolidated financial statements.
Reclassifications:
Certain reclassifications have been made to prior year statements to conform with the current year presentation. These reclassifications have
no impact on net income and no material impact on any other financial statement captions.
Subsequent Events:
Subsequent events have been evaluated through the date that the consolidated financial statements were issued. During this period, there were
no material subsequent items requiring disclosure other than as stated in footnote 4 to these financial statements.
Use of
Estimates:
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
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Table of Contents
Estimates of oil and gas reserves, as determined by independent petroleum engineers, are
continually subject to revision based on price, production history and other factors. Depletion expense, which is computed based on the units of production method, could be significantly impacted by changes in such estimates. Additionally, U.S.
generally accepted accounting principles require that if the expected future undiscounted cash flows from an asset are less than its carrying cost, that asset must be written down to its fair market value. As the fair market value of an oil and gas
property will usually be significantly less than the total undiscounted future net revenues expected from that asset, slight changes in the estimates used to determine future net revenues from an asset could lead to the necessity of recording a
significant impairment of that asset.
Property and Equipment:
The Company follows the successful efforts method of accounting for its oil and gas properties. Under the successful efforts
method, costs of acquiring undeveloped oil and gas leasehold acreage, including lease bonuses, brokers fees and other related costs are capitalized. Provisions for impairment of undeveloped oil and gas leases are based on periodic evaluations.
Annual lease rentals and exploration expenses, including geological and geophysical expenses and exploratory dry hole costs, are charged against income as incurred. Costs of drilling and equipping productive wells, including development dry holes
and related production facilities, are capitalized. All other property and equipment are carried at cost. Depreciation and depletion of oil and gas production equipment and properties are determined under the unit-of-production method based on estimated proved developed recoverable oil and gas reserves. Depreciation of all other equipment is determined under the straight-line method using various rates based on
useful lives generally ranging from 5 to 10 years. The cost of assets and related accumulated depreciation is removed from the accounts when such assets are disposed of, and any related gains or losses are reflected in current earnings.
Capitalization of Interest:
Interest costs related to financing major oil and gas projects in progress are capitalized until the projects are evaluated or until the
projects are substantially complete and ready for their intended use if the projects are evaluated and successful.
Impairment of
Long-Lived Assets:
The Company reviews long-lived assets, including oil and gas properties, for impairment whenever events or
changes in circumstances indicate that the carrying amounts may not be recovered. If the carrying amounts are not expected to be recovered by undiscounted cash flows, the assets are impaired, and an impairment loss is recorded. The amount of
impairment is based on the estimated fair value of the assets determined by discounting anticipated future net cash flows.
Fair
Value:
The Company follows the authoritative guidance that establishes a formal framework for measuring fair values of assets and
liabilities in financial statements that are already required by U.S. generally accepted accounting principles to be measured at fair value. The guidance defines fair value as the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement date (exit price). The transaction is based on a hypothetical transaction in the principal or most advantageous market considered from the perspective of the market
participant that holds the asset or owes the liability.
The Company utilizes market data or assumptions that market participants who are
independent, knowledgeable and willing and able to transact would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market
corroborated or generally unobservable. The Company attempts to utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. The Company is able to classify fair value balances based on the
observability of those inputs. The guidance establishes a formal fair value hierarchy based on the inputs used to measure fair value. The hierarchy gives the highest priority to Level 1 inputs, which consist of unadjusted quoted prices for
identical instruments in active markets. Level 2 inputs consist of quoted prices for similar instruments. Level 3 valuations are derived from inputs that are significant and unobservable; hence, these valuations have the lowest priority.
Asset Retirement Obligation:
The asset retirement obligation primarily represents the estimated present value of the amount the Company will incur to plug, abandon and
remediate producing properties at the end of their productive lives, in accordance with applicable state laws. The Company determined its asset retirement obligation by calculating the present value of estimated cash flows related to the liability.
The asset retirement obligation is recorded as a liability at its estimated present value at its inception, with an offsetting increase to producing properties. Periodic accretion of discount of the estimated liability is recorded as an expense in
the statement of operations.
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Table of Contents
Income Taxes:
The Company follows the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are
recorded for the estimated future tax consequences attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured
using the tax rate in effect for the year in which those temporary differences are expected to turn around. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the year of the enacted rate change. A valuation
allowance is established to reduce deferred tax assets if it is more likely than not that the related tax benefits will not be realized. As of December 31, 2020, and 2019, we had no valuation allowance.
The Company is required to make judgments, including estimating reserves for potential adverse outcomes regarding tax positions that the
Company has taken. The Company accounts for uncertainty in income taxes using a recognition and measurement threshold for tax positions taken or expected to be taken in a tax return. The effective tax rate and the tax basis of assets and liabilities
reflect managements estimates of the ultimate outcome of various tax uncertainties.
General and Administrative Expenses:
General and administrative expenses represent cost and expenses associated with the operation of the Company.
Earnings Per Common 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.
Statements of Cash Flows:
For purposes of the consolidated statements of cash flows, the Company considers short-term, highly liquid investments with original maturities
of less than ninety days to be cash equivalents.
Concentration of Credit Risk:
The Company maintains significant banking relationships with financial institutions in the State of Texas. The Company limits its risk by
periodically evaluating the relative credit standing of these financial institutions. The Companys oil and gas production purchasers consist primarily of independent marketers and major gas pipeline companies.
Hedging:
The
Company periodically enters into oil and gas financial instruments to manage its exposure to oil and gas price volatility. The oil and gas reference prices upon which the price hedging instruments are based reflect various market indices that have a
high degree of historical correlation with actual prices received by the Company.
The financial instruments are accounted for in
accordance with applicable accounting standards for derivative instruments and hedging activities. Such standards require that applicable derivative instruments be measured at fair market value and recognized as assets or liabilities in the balance
sheet. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation is generally established at the inception of a derivative. For derivatives designated as cash flow hedges
and meeting applicable effectiveness guidelines, changes in fair value, to the extent effective, are recognized in other comprehensive income until the hedged item is recognized in earnings. Hedge effectiveness is measured at least quarterly
based on the relative changes in fair value between the derivative contract and the hedged item over time. Any change in fair value of a derivative resulting from ineffectiveness or an excluded component of the gain/loss is recognized immediately in
the statement of operations.
New Pronouncements Issued But Not Yet Adopted:
In October 2020, the FASB issued ASU 2020-10, Codification Improvements, which clarifies or
improves disclosure requirements for various topics to align with Securities and Exchange Commission (SEC) regulations. This update is effective for the Company beginning in the first quarter of 2021 and will be applied retrospectively. The adoption
and implementation of this ASU will not have a material impact on the Companys financial statements.
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Table of Contents
In March 2020, the FASB issued ASU 2020-04,
Reference Rate Reform (Topic 848), which provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by the discontinuation of the London Interbank Offered Rate
(LIBOR) or by another reference rate expected to be discontinued. In January 2021, the FASB issued ASU 2021-01, which clarified the scope and application of the original guidance. The guidance was effective
beginning March 12, 2020 and can be applied prospectively through December 31, 2022. The Company is evaluating whether to apply any of these expedients and, if elected, will adopt these standards when LIBOR is discontinued.
2. Acquisitions and Dispositions
Historically, the Company has repurchased the non-controlling interests of the partners and trust unit holders in certain of the Partnerships,
which consist primarily of oil and gas interests. The Company purchased such non-controlling interests in an amount totaling $22,000 in 2020 and $499,000 in 2019. Such purchases resulted in the non-cash acquisition of non-controlling equity
interests of $36,000 and $111,000 respectively. In 2020 the Company liquidated three partnerships for total cash payments of $720,000 resulting in the non-cash distribution of non-controlling interest of $1,550 million.
During 2020 the Company acquired 232 net acres, along with 15% to 16.6% working interest ownership in 53 oil and gas wells and one commercial
salt water disposal well operated by the Company, all located in Reagan County, Texas, for $343,000. In addition, we acquired 9.36 net acre in Upton County, Texas at a cost of $5,100.
During 2020 and 2019 the Company sold or farmed out interests in certain non-core undeveloped and
developed oil and natural gas properties through a number of individually negotiated transactions in exchange for cash and a royalty or working interest in Oklahoma, Texas, New Mexico, Wyoming and West Virginia. Proceeds under these agreements were
approximately $10.9 million and $4.3 million, respectively.
F-12
Table of Contents
3. Additional Balance Sheet Information
Accounts receivable at December 31, 2020 and 2019 consisted of the following:
December 31,
(Thousands of dollars)
2020
2019
Joint interest billings
$
2,475
$
3,339
Trade receivables
1,073
2,246
Oil and gas sales
3,469
7,284
Tax refund receivable
1,720
Other
802
189
7,819
14,778
Less: Allowance for doubtful accounts
(598
)
(418
)
Total
$
7,221
$
14,360
Accounts payable at December 31, 2020 and 2019 consisted of the following:
December 31,
(Thousands of dollars)
2020
2019
Trade
$
876
$
261
Royalty and other owners
3,569
5,251
Partner advances
193
205
Other
579
917
Total
$
5,217
$
6,634
Accrued liabilities at December 31, 2020 and 2019 consisted of the following:
December 31,
(Thousands of dollars)
2020
2019
Compensation and related expenses
$
3,331
$
3,620
Property costs
2,056
2,829
Taxes
1,016
Other
384
387
Total
$
6,787
$
6,836
4. Long-Term Debt
Bank Debt:
On
February 15, 2017, the Company and its lenders entered into a Third Amended and Restated Credit Agreement (the 2017 Credit Agreement) with a maturity date of February 15, 2021. The Second Amended and Restated Credit Agreement
and subsequent amendments were amended and restated by the 2017 Credit Agreement. Pursuant to the terms and conditions of the 2017 Credit Agreement, the Company has a revolving line of credit and letter of credit facility of up to $300 million
subject to a borrowing base that is determined semi-annually by the lenders based upon the Companys financial statements and the estimated value of the Companys oil and gas properties, in accordance with the Lenders customary
practices for oil and gas loans. The credit facility is secured by substantially all of the Companys oil and gas properties. The 2017 Credit Agreement includes terms and covenants that require the Company to maintain a minimum current ratio,
total indebtedness to EBITDAX (earnings before depreciation, depletion, amortization, taxes, interest expense and exploration costs) ratio and interest coverage ratio, as defined, and restrictions are placed on the payment of dividends, the amount
of treasury stock the Company may purchase, commodity hedge agreements, and loans and investments in its consolidated subsidiaries and limited partnerships.
On December 22, 2017, the Company and its lenders entered into a First Amendment to the 2017 Credit Agreement. The credit agreement
includes the addition of a new lender and retains all other aspects of the original credit agreement. As of the effective date of this amendment the Companys borrowing base was increased to $85 million.
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Table of Contents
On July 17, 2018, the Company and its lenders entered into a Second Amendment to the
2017 Credit Agreement. The credit agreement includes modifications for the borrowing base utilization margins and rates by type of borrowing, revises minimum quantifications for individual borrowings, reduces the overall percentage required for
commodity hedge agreements, modifies the requirements placed on the Companys ability to purchase equity interests and retains all other aspects of the original credit agreement. As of the effective date of this amendment the Companys
borrowing base was increased to $90 million.
On January 8, 2019, the Company and its lenders entered into a Third Amendment to
the 2017 Credit Agreement. The credit agreement includes additions for a Beneficial Ownership Certification on the effective date of the amendment. The agreement includes further clarifications for potential LIBOR loan market rate issues, swap
agreement modifications and retains all other aspects of the original credit agreement. As of the effective date of this amendment the Companys borrowing base was increased to $100 million. Pursuant to borrowing base redeterminations on
June 26, 2019 and December 18, 2019, the borrowing base was set at $90 million and $72 million, respectively.
On
May 8, 2020, the Company and its lenders entered into a Fourth Amendment to the 2017 Credit Agreement which added loans under the Paycheck Protection Program to the Permitted loans, as defined in the agreement.
On September 4, 2020, the Company and its lenders entered into a Fifth Amendment to the 2017 Credit Agreement. As of the effective date
of this amendment the Companys borrowing base was decreased to $50 million. The amendment included an automatic reduction of $666,666.67 to the borrowing base on October 1, 2020, November 1, 2020, and December 1, 2020. The
amendment also revised the applicable borrowing base utilization percentages for Eurodollar and ABR loans with a range of 2.5% to 3.5% and 1.5% to 2.5%, respectively. The agreement also adjusted percentages of title and mortgage guarantees supported
by the oil and gas properties presented to the administrative agent at each borrowing redetermination as supported by the required reserve report.
On December 31, 2020, the Company had a total of $37 million of borrowings outstanding under its revolving credit facility at a
weighted-average interest rate of 4.00% and $11 million was available for future borrowings. The combined weighted average interest rate paid on outstanding bank borrowings subject to base rate and LIBO interest was 3.95% for the year ended
December 31, 2020 as compared to 5.34% for year ended December 31, 2019.
On February 11, 2021, the Company and its lenders
entered into a Sixth Amendment to the 2017 Credit Agreement. Under this amendment the Companys borrowing base is $40 million. Borrowings under the 2017 Credit Agreement will bear interest at a base rate plus an applicable margin ranging
from 2.00% to 3.00% or at the Companys option, at LIBOR plus an applicable margin ranging from 3.00% to 4.00%. The 2017 Credit Agreement will mature on February 11, 2023. The Companys borrowings under this credit facility
approximates fair value because the interest rates are variable and reflective of market rates.
Paycheck Protection Program Loans
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 24-week coverage period and will submit 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.
To the extent, if any, that any or all of the
PPP loans are not forgiven, beginning one month following expiration of the Deferral Period, and continuing monthly until 24 months from the date of each applicable Note (the Maturity Date), the Company is obligated to make monthly
payments of principal and interest to the Lender with respect to any unforgiven portion of the Note, in such equal amounts required to fully amortize the principal amount outstanding on such Note as of the last day of the applicable Deferral Period
by the applicable Maturity Date. The Company accounts for these loans on the balance sheet as financial liabilities reported within the following lines: Current portion of long-term debt in the amount of $487 thousand and included as part of
the long-term bank debt in the amount of $1.267 million.
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Table of Contents
Equipment Loans:
On July 29, 2014, the Company entered into additional equipment financing facilities (Additional Equipment Loans) totaling
$6.0 million with JP Morgan Chase Bank. In August 2014, the Company drew down $4.8 million of this facility that is secured by field service equipment, carries an interest rate of 3.40% per annum, requires monthly payments (principal
and interest) of $87,800, and has a final maturity date of July 31, 2019. The remaining $1.2 million under the Additional Equipment Loans was available for interim draws to finance the acquisition of any future field service equipment. In
December 2014, the Company made an interim draw of an additional $0.5 million on this facility that is secured by recently purchased field service equipment. Interim draws on this facility carried a floating interest rate; payable monthly at
the LIBO published rate plus 2.50% and on June 26, 2015 converted into a fixed term loan, with a rate of 3.50% and requiring monthly payments (principal and interest) of $8,700 with a final maturity date of June 26, 2020.
On January 12, 2018, the Company made a principal payment towards the third interim loan in the amount of $20,858. Effective with the
payment due of January 26, 2018 the required monthly payments (principal and interest) on this loan changed to $7,986 with a continuing effective rate of 3.50% and a final maturity of June 26, 2020.
On May 23, 2019, the Company made its final payment towards both the second and third loans. At this time, all equipment loans were paid
in full and the field service equipment liens secured by these loans were cancelled and all titles returned to the Company.
5. Commitments
Operating Leases:
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. A finance lease for office equipment is included in property and equipment, other current liabilities and other
long-term liabilities. As most of the Companys 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
right-of-use 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 Companys 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.
Operating lease costs for the twelve months ended December 31, 2020 were $574 thousand. Cash payments included in the
operating lease cost for twelve months ended December 31, 2020 were $616 thousand. The weighted-average remaining operating lease terms is 2.5 months. The amortization and interest expense for financing lease amounted to $7,165 and the
cash payment for the lease was $7,655 and the lease term remaining was for 4 months.
The payment schedule for the Companys
operating and financing lease obligations as of December 31, 2020 is as follows:
(Thousands of dollars)
Operating
Leases
Financing
Leases
2021
$
106
$
2
Total undiscounted lease payments
$
106
$
2
Less: Amount associated with discounting
(10
)
(0
)
Net operating lease liabilities
$
96
$
2
The Company amended certain leases for office space in Texas and Oklahoma providing for payments of
$461 thousand and $89 thousand in 2020 and 2021, respectively.
Rent expense for office space for the years ended
December 31, 2020 and 2019 was $663,000 and $594,000, respectively.
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Table of Contents
Asset Retirement Obligation:
A reconciliation of the liability for plugging and abandonment costs for the years ended December 31, 2020 and 2019 is as follows:
Year Ended December 31,
(Thousands of dollars)
2020
2019
Asset retirement obligation at beginning of period
$
21,118
$
21,334
Liabilities incurred
4
4
Liabilities settled
(1,286
)
(1,442
)
Liabilities divested
(5,731
)
Accretion expense
856
1,120
Revisions in estimated liabilities
(1,301
)
102
Asset retirement obligation at end of period
$
13,660
$
21,118
The Companys 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 Companys wells, the costs to ultimately retire the wells may vary significantly from previous estimates.
6. 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.
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 Companys 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
Companys 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.
7. 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 December 31, 2020 and 2019, options 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.
8. Income Taxes
The components of the
provision (benefit) for income taxes for the years ended December 31, 2020 and 2019 are as follows:
Year Ended December 31,
(Thousands of dollars)
2020
2019
Current:
Federal
$
950
$
(1,798
)
State
80
123
Total current
1,030
(1,675
)
Deferred:
Federal
(1,491
)
3,536
F-16
Table of Contents
Year Ended December 31,
(Thousands of dollars)
2020
2019
State
(56
)
(440
)
Total deferred
(1,547
)
3,096
Total income tax provision
$
(517
)
$
1,421
At December 31,
(Thousands of dollars)
2020
2019
Deferred Tax Assets:
Accrued liabilities
$
(584
)
$
614
Allowance for doubtful accounts
136
95
Derivative Contracts
153
110
Alternative minimum tax credits
1,720
State Net operating loss carry-forwards
760
821
Total deferred tax assets
465
3,360
Deferred Tax Liabilities:
Basis differences relating to managed partnerships
544
2,109
Depletion and depreciation
36,288
37,173
Total deferred tax liabilities
39,832
39,282
Net deferred tax liabilities
$
36,367
$
35,922
F-17
Table of Contents
The total provision for income taxes for the years ended December 31, 2020 and 2019
varies from the federal statutory tax rate as a result of the following:
Year Ended December 31,
(Thousands of dollars)
2020
2019
Expected tax expense
$
(595
)
$
1,028
Executive Compensation
703
597
State income tax, net of federal benefit
63
(303
)
Percentage depletion
(182
)
(341
)
AMT and Marginal Well Credits
(502
)
436
Other, net
(4
)
4
Total income tax provision (benefit)
$
(517
)
$
1,421
Deferred income taxes reflect the impact of temporary differences between the amount of assets and liabilities
recognized for financial reporting purposes and such amounts recognized for tax purposes.
On December 22, 2017, the U.S. enacted
into legislation the Tax Cuts and Jobs Act (2017 Tax Act). Under the 2017 Tax Act, the company may use alternative minimum tax (AMT) credits to fully offset any regular tax liability. In addition, a portion of the AMT credit which exceeds the
regular tax liability is refundable in future years. The refundable portion was 50% of any excess credit in the years 2019 through 2020 and 100% in 2021. The Company expected to receive a refund of $1.720 million in 2020 based on refundable
credits claimed on the 2019 return, and additional $1.720 million refunds of previously paid taxes on its tax returns for the years 2020 and 2021. On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief and Economic
Security Act (CARES Act). The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer social security payments, net operating loss carryback periods, AMT credit refunds,
modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. Under the CARES Act the refundable portion of AMT credits was increased to 100% therefore the Company
received a full refund of such credits in 2020.
The Company is entitled to percentage depletion on certain of its wells, which is
calculated without reference to the basis of the property. To the extent that such depletion exceeds a propertys basis, it creates a permanent difference, which lowers the Companys effective rate. The availability of the percentage
depletion deduction is phased out as an entitys production exceeds certain levels, and based on the Companys increasing production the percentage depletion deduction is becoming less significant.
The Company is allowed a credit against the Texas Franchise Tax based on net operating losses incurred in prior periods. The credits allowed
are $89 thousand in the years 2020 through 2026. Any credits not utilized in a given year due to the allowable credit exceeding the tax liability may be carried forward. No credit may be carried forward past 2026. The value of the credit is
calculated net of the federal income tax effect.
The Company has not recorded any provision for uncertain tax positions. The Company
files income tax returns in the U.S. federal jurisdiction and various state and local jurisdictions. The 2004, 2005, 2006, 2009 and 2017 federal income tax returns have been audited by the Internal Revenue Service. Returns for unexamined earlier
years may be examined and adjustments made to the amount of percentage depletion and AMT credit carryforwards flowing from those years into an open tax year, although in general no assessment of income tax may be made for those years on which the
statute has closed. State returns for the years 2018 through 2020 remain open for examination by the relevant taxing authorities
9. Segment
Information and Major Customers
The Company operates in one industry oil and gas exploration, development, operation and
servicing. The Companys oil and gas activities are entirely in the United States.
F-18
Table of Contents
The Company sells its oil and natural gas and liquids production to a number of direct
purchasers under direct contracts or through other operators under joint operating agreements. Listed below are the purchasers of the Companys production which represented more than 10% of the Companys sales in the year 2020.
Oil:
Apache Corporation
47
%
Plains All American Inc.
19
%
Natural gas and liquids:
Apache Corporation
42
%
Targa Pipeline Mid-Continent West Tex, LLC
12
%
Although there are no long-term oil and gas purchasing agreements with these purchasers, the Company believes
that they will continue to purchase its oil and gas products and, if not, could be replaced by other purchasers.
10. 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 Companys 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 Companys assets and liabilities measured at fair value on a recurring basis at December 31, 2020 and
December 31, 2019:
December 31, 2020
Quoted Prices in
Active Markets
For Identical
Assets (Level 1)
Significant
Other
Observable
Inputs (Level 2)
Significant
Unobservable
Inputs (Level 3)
Balance at
December 31,
2020
(Thousands of dollars)
Assets
Commodity derivative contracts
$
$
$
97
$
97
Total assets
$
$
$
97
$
97
Liabilities
Commodity derivative contracts
$
$
$
(768
)
$
(768
)
Total liabilities
$
$
$
(768
)
$
(768
)
December 31, 2019
Quoted Prices in
Active Markets
For Identical
Assets (Level 1)
Significant
Other
Observable
Inputs (Level 2)
Significant
Unobservable
Inputs (Level 3)
Balance at
December 31,
2019
(Thousands of dollars)
Assets
Commodity derivative contracts
$
$
$
272
$
272
Total assets
$
$
$
272
$
272
Liabilities
Commodity derivative contract
$
$
$
(753
)
$
(753
)
Total liabilities
$
$
$
(753
)
$
(753
)
The derivative contracts were measured based on quotes from the Companys 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.
F-19
Table of Contents
The significant unobservable inputs for Level 3 derivative contracts include basis
differentials and volatility factors. An increasee (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 year ended December 2020.
(Thousands of dollars)
Net Liabilities December 31, 2019
$
(481
)
Total realized and unrealized (gains) losses:
Included in earnings (a)
5,983
Purchases, sales, issuances and settlements
(6,173
)
Net Liabilities December 31, 2020
$
(671
)
(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.
Derivative Instruments:
The Company is exposed to commodity price and interest rate risk, and management considers periodically the Companys exposure to cash
flow variability resulting from the commodity price changes and interest rate fluctuations. Futures, swaps and options are used to manage the Companys exposure to commodity price risk inherent in the Companys 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 commodity derivative instruments are recognized in earnings.
The following table sets forth the effect of derivative instruments on the consolidated balance sheets at December 31, 2020 and 2019:
Fair Value
(Thousands of dollars)
Balance Sheet Location
December 31,
2020
December 31,
2019
Asset Derivatives:
Derivatives not designated as cash-flow hedging instruments:
Natural gas commodity contracts
Derivative asset short-term
$
$
146
Natural gas liquid contracts
Derivative asset short-term
Crude oil commodity contracts
Derivative asset short-term
126
Natural gas commodity contracts
Derivative asset long-term and
other assets
97
Crude oil commodity contracts
Derivative asset short-term
and other assets
Total
$
97
$
272
Liability Derivatives:
Derivatives not designated as cash-flow hedging instruments:
Crude oil commodity contracts
Derivative liability short-term
$
(428
)
$
(715
)
Natural gas commodity contracts
Derivative liability short-term
(296
)
(38
)
Natural gas liquid contracts
Derivative liability short-term
Natural gas commodity contracts
Derivative liability long-term
(44
)
Total
$
(768
)
$
(753
)
Total derivative instruments
$
(671
)
$
(481
)
F-20
Table of Contents
The following table sets forth the effect of derivative instruments on the consolidated
statements of operations for the years ended December 31, 2020 and 2019:
Location of gain/loss recognized in income
Amount of gain/loss
recognized in income
(Thousands of dollars)
2020
2019
Derivatives not designated as cash-flow hedge instruments:
Natural gas commodity contracts
Unrealized gain on derivative
instruments, net
(351
)
123
Crude oil commodity contracts
Unrealized gain (loss) on
derivative instruments, net
161
(2,776
)
Natural gas liquids contracts
Unrealized (loss) on
derivative instruments, net
(124
)
Natural gas commodity contracts
Realized (loss) gain on
derivative instruments, net
476
90
Crude oil commodity contracts
Realized gain (loss) on
derivative instruments, net
5,697
(1,814
)
$
5,983
$
(4,148
)
11. 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 an amount totaling $742,000 during 2020 and $499,000 during 2019.
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 Companys Board of Directors, during a specific reporting year, for oil and gas sales net of expenses.
12. Salary Deferral
Plan
The Company maintains a salary deferral plan (the Plan) in accordance with Internal Revenue Code Section 401(k),
as amended. The Plan provides for matching contributions, of which $341,000 and $412,000 were made in 2020 and 2019, respectively.
13. 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:
Year Ended December 31,
2020
2019
Net Income
(In 000s)
Weighted
Average
Number of
Shares
Outstanding
Per Share
Amount
Net Income
(In 000s)
Weighted
Average
Number of
Shares
Outstanding
Per Share
Amount
Basic
$
(2,316
)
1,994,425
$
(1.16
)
$
3,476
2,019,502
$
1.72
Effect of dilutive securities:
Options
761,233
Diluted
$
(2,316
)
1,994,425
$
(1.16
)
$
3,476
2,780,735
$
1.25
(a)
The effect of the 767,000 outstanding stock options is antidilutive for the year ended December 31,
2020, due to net loss for this period.
F-21
Table of Contents
PRIMEENERGY RESOURCES CORPORATION AND SUBSIDIARIES
SUPPLEMENTARY INFORMATION
CAPITALIZED COSTS RELATING TO
OIL AND GAS PRODUCING ACTIVITIES
(Unaudited)
As of December 31,
(Thousands of dollars)
2020
2019
Proved Developed oil and gas properties
$
520,488
$
527,729
Proved Undeveloped oil and gas properties
Total Capitalized Costs
520,488
527,729
Accumulated depreciation, depletion and valuation allowance
335,390
322,409
Net Capitalized Costs
$
185,098
$
205,320
COSTS INCURRED IN OIL AND GAS PROPERTY ACQUISITION,
EXPLORATION AND DEVELOPMENT ACTIVITIES
(Unaudited)
Year Ended December 31,
(Thousands of dollars)
2020
2019
Development Costs
$
9,339
$
15,348
STANDARDIZED MEASURE OF DISCOUNTED FUTURE
NET CASH FLOWS RELATING TO PROVED OIL AND GAS RESERVES
(Unaudited)
As of December 31,
(Thousands of dollars)
2020
2019
Future cash inflows
$
221,090
$
423,839
Future production costs
(100,691
)
(202,169
)
Future development costs
(39,167
)
(62,379
)
Future income tax expenses
(15,135
)
(29,678
)
Future Net Cash Flows
66,097
129,613
10% annual discount for estimated timing of cash flows
(24,479
)
(48,001
)
Standardized Measure of Discounted Future Net Cash Flows
$
41,619
$
81,612
See accompanying Notes to Supplementary Information
F-22
Table of Contents
STANDARDIZED MEASURE OF DISCOUNTED FUTURE
NET CASH FLOWS AND CHANGES THEREIN
RELATING TO PROVED OIL AND GAS RESERVES
(Unaudited)
The
following are the principal sources of change in the standardized measure of discounted future net cash flows during 2020 and 2019:
Year Ended December 31,
(Thousands of dollars)
2020
2019
Sales of oil and gas produced, net of production costs
$ (13,945)
$ (15,938)
Net changes in prices and production costs
(16,578
)
(42,409
)
Extensions, discoveries and improved recovery
314
31,276
Revisions of previous quantity estimates
(36,919
)
(3,319
)
Net change in development costs
20,724
(53,143
)
Reserves sold
(874
)
(113
)
Reserves purchased
218
174
Accretion of discount
8,161
13,791
Net change in income taxes
5,386
5,572
Changes in production rates (timing) and other
(6,480
)
7,812
Net change
(39,993
)
(56,297
)
Standardized measure of discounted future net cash flow:
Beginning of year
81,612
137,909
End of year
$
41,619
$
81,612
See accompanying Notes to Supplementary Information
F-23
Table of Contents
PRIMEENERGY RESOURCES CORPORATION AND SUBSIDIARIES
SUPPLEMENTARY INFORMATION
RESERVE QUANTITY INFORMATION
Years Ended December 31, 2020 and 2019
(Unaudited)
As of December 31,
2020
2019
Oil
(MBbls)
NGLs
(MBbls)
Gas
(MMcf)
Oil
(MBbls)
NGLs
(MBbls)
Gas
(MMcf)
Proved Developed Reserves:
Beginning of year
4,381
2,914
19,995
6,404
2,707
21,065
Extensions, discoveries and improved recovery
11
7
36
471
264
1,330
Revisions of previous estimates
(995
)
(239
)
(1,721
)
(1,260
)
506
2,033
Converted from undeveloped reserves
25
5
66
7
7
65
Reserves sold
(29
)
0
(1,400
)
(5
)
(120
)
Reserve purchased
24
8
38
6
4
19
Production
(733
)
(437
)
(3,381
)
(1,242
)
(574
)
(4,397
)
End of year
2,684
2,258
13,633
4,381
2,914
19,995
Proved Undeveloped Reserves:
Beginning of year
1,833
1,017
4,547
10
12
124
Extensions, discoveries and improved recovery
1,834
1,013
4,530
Revisions of previous estimates
(24
)
(224
(584
)
(4
)
(1
)
(42
)
Converted to developed reserves
(25
)
(5
)
(66
)
(7
)
(7
)
(65
)
End of year
1,784
787
3,897
1,833
1,017
4,457
Total Proved Reserves at the End of the Year
4,468
3,045
17,530
6,214
3,931
24,542
RESULTS OF OPERATIONS FROM OIL AND GAS PRODUCING ACTIVITIES
Years Ended December 31, 2020 and 2019
(Unaudited)
Year Ended December 31,
(Thousands of dollars)
2020
2019
Revenue:
Oil and gas sales
$
36,973
$
84,015
Costs and Expenses:
Lease operating expenses
23,028
33,461
Depreciation, depletion and accretion
25,921
34,616
Income tax expense
(2,515
)
1,421
Total Costs and Expenses
46,434
69,498
Results of Operations from Producing Activities (excluding corporate overhead and interest
costs)
$
(9,461
)
$
14,517
36,973, See accompanying Notes to Supplementary Information
F-24
Table of Contents
PRIMEENERGY RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO SUPPLEMENTARY INFORMATION
(Unaudited)
1. Presentation of Reserve
Disclosure Information
Reserve disclosure information is presented in accordance with U.S. generally accepted accounting principles.
The Companys reserves include amounts attributable to non-controlling interests in the Partnerships. These interests represent less than 10% of the Companys reserves.
2. Determination of Proved Reserves
The
estimates of the Companys proved reserves were determined by an independent petroleum engineer in accordance with U.S. generally accepted accounting principles. The estimates of proved reserves are inherently imprecise and are continually
subject to revision based on production history, results of additional exploration and development and other factors. Estimated future net revenues were computed by reserves, less estimated future development and production costs based on current
costs.
Proved reserve quantity estimates are subject to numerous uncertainties inherent in the estimation of quantities of proved
reserves and in the projection of future rates of production and the timing of development expenditures. The accuracy of such estimates is a function of the quality of available data and of engineering and geological interpretation and judgment.
Results of subsequent drilling, testing and production may cause either upward or downward revision of previous estimates. Further, the volumes considered to be commercially recoverable fluctuate with changes in prices and operating costs. The
Company emphasizes that proved reserve estimates are inherently imprecise and that estimates of new discoveries are more imprecise than those of currently producing oil and gas properties. Accordingly, these estimates are expected to change as
additional information becomes available in the future.
3. Results of Operations from Oil and Gas Producing Activities
The results of operations from oil and gas producing activities were prepared in accordance with U.S. generally accepted accounting principles.
General and administrative expenses, interest costs and other unrelated costs are not deducted in computing results of operations from oil and gas activities.
4. Standardized Measure of Discounted Future Net Cash Flows and Changes Therein Relating to Proved Oil and Gas Reserves
The standardized measure of discounted future net cash flows relating to proved oil and gas reserves and the changes of standardized measure of
discounted future net cash flows relating to proved oil and gas reserves were prepared in accordance with U.S. generally accepted accounting principles.
Future cash inflows are computed as described in Note 2 by applying current prices to year-end
quantities of proved reserves.
Future production and development costs are computed estimating the expenditures to be incurred in
developing and producing the oil and gas reserves at year-end, based on year-end costs and assuming continuation of existing economic conditions.
Future income tax expenses are calculated by applying the 2020 U.S. tax rate to future pre-tax cash
inflows relating to proved oil and gas reserves, less the tax basis of properties involved. Future income tax expenses give effect to permanent differences and tax credits and allowances relating to the proved oil and gas reserves.
Future net cash flows are discounted at a rate of 10% annually (pursuant to applicable guidance) to derive the standardized measure of
discounted future net cash flows. This calculation does not necessarily represent an estimate of fair market value or the present value of such cash flows since future prices and costs can vary substantially from
year-end and the use of a 10% discount figure is arbitrary.
F-25
Table of Contents
5. Changes in Reserves
The 2020 and 2019 extensions and discoveries reflect the drilling activity in the Companys West Texas and
Mid-Continent areas. The Company is employing technologies to establish proved reserves that have been demonstrated to provide consistent results capable of repetition. The technologies and economic data being
used in the estimation of its proved reserves include, but are not limited to, electrical logs, radioactivity logs, geologic maps, production data and well test data. The estimated reserves of wells with sufficient production history are estimated
using appropriate decline curves. Estimated reserves of producing wells with limited production history and for undeveloped locations are estimated using performance data from analogous wells in the area. These wells are considered analogous based
on production performance from the same formation and with similar completion techniques. Future development plans are reflective of the current commodity prices and have been established based on an expectation of available cash flows from
operations and availability under our revolving credit facility.
F-26
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.