PRIMEENERGY RESOURCES CORP 10-Q

Item 1. FINANCIAL STATEMENTS PRIMEENERGY RESOURCES CORPORATION C ONDENSED C ONSOLIDATED B ALANCE S HEETS – Unaudited (Thousands of dollars) March 31, 2022 December 31, 2021 ASSETS Current Assets Cash and cash equivalents $ 4,076 $ 10,347 Accounts receivable, net 20,679 14,208 Prepaid obligations 168 733 Derivative asset 36 — Other current assets 40 40 Total Current Assets 24,999 25,328 Property and Equipment Oil and gas properties at cost 541,264 539,484 Less: Accumulated depletion and depreciation ( 366,371 ) ( 359,742 ) 174,893 179,742 Field and office equipment at cost 27,351 27,080 Less: Accumulated depreciation ( 22,538 ) ( 22,159 ) 4,813 4,921 Total Property and Equipment, Net 179,706 184,663 Derivative asset long-term and other assets 782 923 Total Assets $ 205,487 $ 210,914 LIABILITIES AND EQUITY Current Liabilities Accounts payable $ 9,096 $ 7,282 Accrued liabilities 6,709 7,821 Due to related parties — 52 Current portion of asset retirement and other long-term obligations 1,623 1,630 Derivative liability short-term 12,761 4,935 Total Current Liabilities 30,189 21,720 Long-Term Bank Debt 9,000 36,000 Asset Retirement Obligations 12,894 13,222 Derivative Liability Long-Term — 650 Deferred Income Taxes 41,886 38,743 Other Long-Term Obligations 2,118 1,488 Total Liabilities 96,087 111,823 Commitments and Contingencies Equity Common stock, $ .10 par value; 2022 and 2021: Authorized: 2,810,000 shares, outstanding 2022: 1,980,889 ; outstanding 2021: 1,992,077 281 281 Paid-in capital 7,555 7,555 Retained earnings 140,044 128,902 Treasury stock, at cost; 2022: 829,111 shares; 2021: 817,923 ( 38,480 ) ( 37,647 ) Total Equity 109,400 99,091 Total Liabilities and Equity $ 205,487 $ 210,914 3 Table of Contents PRIMEENERGY RESOURCES CORPORATION C ONDENSED C ONSOLIDATED S TATEMENTS OF O PERATIONS – Unaudited Three Months Ended March 31, 2022 and 2021 (Thousands of dollars, except per share amounts) 2022 2021 Revenues Oil sales $ 26,305 $ 9,270 Natural gas sales 3,746 1,658 Natural gas liquids sales 3,851 1,745 Realized (loss) on derivative instruments, net ( 3,819 ) ( 212 ) Field service income 3,240 1,425 Unrealized (loss) on derivative instruments, net ( 7,139 ) ( 911 ) Other income 29 29 Total Revenues 26,213 13,004 Costs and Expenses Lease operating expense 8,721 4,467 Field service expense 3,000 1,418 Depreciation, depletion, amortization and accretion on discounted liabilities 7,178 6,497 General and administrative expense 6,672 2,016 Total Costs and Expenses 25,571 14,398 Gain on Sale and Exchange of Assets 13,991 — Income (Loss) from Operations 14,633 ( 1,394 ) Other Income (Expense) Interest Expense ( 349 ) ( 523 ) Income (Loss) Before Provision for (Benefit from) Income Taxes 14,284 ( 1,917 ) Provision for (Benefit from) Income Taxes 3,142 ( 460 ) Net Income (Loss) 11,142 ( 1,457 ) Less: Net (Loss) Attributable to Non-Controlling Interests — ( 2 ) Net Income (Loss) Attributable to PrimeEnergy Resources $ 11,142 $ ( 1,455 ) Basic Income (Loss) Per Common Share $ 5.62 $ ( 0.73 ) Diluted Income (Loss) Per Common Share $ 4.07 $ ( 0.73 ) The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements 4 Table of Contents PRIMEENERGY RESOURCES CORPORATION C ONDENSED C ONSOLIDATED S TATEMENT OF E QUITY – Unaudited Three Months Ended March 31, 2022 and 2021 (Thousands of dollars) 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, 2021 1,992,077 $ 281 $ 7,555 $ 128,902 $ ( 37,647 ) $ 99,091 $ — $ 99,091 Purchase 11,188 shares of common stock ( 11,188 ) $ — $ — $ — $ ( 833 ) $ ( 833 ) $ — $ ( 833 ) Net Income — — — 11,142 — 11,142 — 11,142 Balance at March 31, 2022 1,980,889 $ 281 $ 7,555 $ 140,044 $ ( 38,480 ) $ 109,400 $ — $ 109,400 Balance at December 31, 2020 1,994,177 $ 281 $ 7,541 $ 126,804 $ ( 37,502 ) $ 97,124 $ 874 $ 97,998 Net (Loss) — — — ( 1,455 ) — ( 1,455 ) ( 2 ) ( 1,457 ) Balance at March 31, 2021 1,994,177 $ 281 $ 7,541 $ 125,349 $ ( 37,502 ) $ 95,669 $ 872 $ 96,541 The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements 5 Table of Contents PRIMEENERGY RESOURCES CORPORATION C ONDENSED C ONSOLIDATED S TATEMENTS OF C ASH F LOWS – Unaudited Three Months Ended March 31, 2022 and 2021 (Thousands of dollars) 2022 2021 Cash Flows from Operating Activities: Net Income (Loss) $ 11,142 $ ( 1,457 ) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation, depletion, amortization and accretion on discounted liabilities 7,178 6,497 Gain on sale and exchange of assets ( 13,991 ) — Unrealized loss on derivative instruments, net 7,139 911 Deferred income taxes 3,143 ( 460 ) Changes in assets and liabilities: Accounts receivable ( 6,471 ) ( 156 ) Due to related parties ( 52 ) — Prepaids and other assets 565 ( 872 ) Accounts payable 1,814 ( 231 ) Accrued liabilities ( 1,112 ) 500 Net Cash provided by Operating Activities 9,355 4,732 Cash Flows from Investing Activities: Capital expenditures, including exploration expense ( 1,784 ) ( 660 ) Proceeds from sale of properties and equipment 13,991 — Net Cash Provided by (Used in) Investing Activities 12,207 ( 660 ) Cash Flows from Financing Activities: Purchase of stock for treasury ( 833 ) — Proceeds from long-term bank debt — 3,000 Repayment of long-term bank debt ( 27,000 ) ( 4,050 ) Net Cash (Used in) Financing Activities ( 27,833 ) ( 1,050 ) Net (Decrease) Increase in Cash and Cash Equivalents ( 6,271 ) 3,022 Cash and Cash Equivalents at the Beginning of the Period 10,347 996 Cash and Cash Equivalents at the End of the Period $ 4,076 $ 4,018 Supplemental Disclosures: Income taxes paid $ — $ — Interest paid $ 240 $ 355 The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements 6 Table of Contents PRIMEENERGY RESOURCES CORPORATION N OTES TO C ONDENSED C ONSOLIDATED F INANCIAL S TATEMENTS March 31, 2022 (1) Basis of Presentation: The accompanying condensed consolidated financial statements of PrimeEnergy Resources Corporation (“PrimeEnergy” 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, 2021. 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 March 31, 2022 and December 31, 2021, the condensed consolidated results of operations, cash flows and equity for the three months ended March 31, 2022 and 2021. As of March 31, 2022, PrimeEnergy’s significant accounting policies are consistent with those discussed in Note 1—Description of Operations and Significant Accounting Policies of its consolidated financial statements contained in PrimeEnergy’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021. 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. (2) Acquisitions and Dispositions In the first quarter of 2022, the Company sold 1,809 net leasehold acres in Reagan and Midland Counties, Texas through two separate transactions receiving gross proceeds of $ 14.0 million. (3) Additional Balance Sheet Information: Certain balance sheet amounts are comprised of the following: (Thousands of dollars) March 31, 2022 December 31, 2021 Accounts Receivable: Joint interest billing $ 3,025 $ 1,902 Trade receivables 1,768 1,429 Oil and gas sales 16,152 11,154 Other 105 94 21,050 14,579 Less: Allowance for doubtful accounts ( 371 ) ( 371 ) Total $ 20,679 $ 14,208 Accounts Payable: Trade $ 3,983 $ 2,390 Royalty and other owners 3,290 2,802 Partner advances 1,063 1,209 Other 760 881 Total $ 9,096 $ 7,282 Accrued Liabilities: Compensation and related expenses $ 3,865 $ 3,919 Property costs 1,731 2,901 Taxes 813 893 Other 300 108 Total $ 6,709 $ 7,821 7 Table of Contents (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 . Under 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 Company’s financial statements and the estimated value of the Company’s 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 Company’s oil and gas properties. The 2017 Credit Agreement includes terms and covenants that require the Company to maintain a minimum current ratio and total indebtedness to EBITDAX (earnings before depreciation, depletion, amortization, taxes, interest expense and exploration costs) 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 20, 2021 the company entered into a Seventh Amendment to the 2017 Credit Agreement and Citibank N.A was appointed as successor administrative agent replacing PNC Bank. Under this amendment the Company’s borrowing base is $ 50 million. Borrowings under the 2017 Credit Agreement will bear interest at alternate base rate (ABR) plus an applicable margin ranging from 2.00 % to 3.00 % or at the Company’s option, at a rate equal to the secured overnight financing rate (SOFR rate) as administered by the SOFR Administrator, in this case the Federal Reserve Bank of New York, plus an applicable margin ranging from 3.00 % to 4.00 %. The 2017 Credit Agreement matures February 11, 2023 . The current borrowing base review and maturity extension is schedule for June 2022. The Company’s borrowings under this credit facility approximates fair value because the interest rates are variable and reflective of market rates. On March 31, 2022, the Company had a total of $ 9 million of borrowings outstanding under its revolving credit facility at a weighted-average interest rate of 6.74 % and $ 41 million was available for future borrowings. The combined weighted average interest rate paid on outstanding bank borrowings subject to ABR base rate and SOFR interest was 6.30 % for the quarter ended March 31, 2022 as compared to 5.27 % for the quarter ended March 31, 2021. On May 20, 2022, there were no outstanding borrowings under the Company’s revolving credit facility. (5) Other Long-Term Obligations and 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 new finance lease for office equipment is included in property and equipment, other current liabilities and other long-term liabilities this quarter. As most of the Company’s lease contracts do not provide an implicit discount rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The weighted average discount rate used was 5.5 %. Certain leases may contain variable costs above the minimum required payments and are not included in the 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 Company’s sole discretion and is evaluated at inception and throughout the contract to determine if a modification of the lease term is required. Leases with an initial term of 12 months or less are not recorded on the balance sheet. Operating lease costs for the quarter ended March 31, 2022 were $ 142 thousand. Cash payments included in the operating lease cost for the quarter ended March 31, 2022 were $ 150 thousand. The weighted-average remaining operating lease terms are 12 months. The Company amended certain leases for office space in Texas providing for payments of $ 451,000 in 2022 and $ 150,000 in 2023. Rent expense for office space the quarter ended March 31, 2022 and 2021 was $ 177,000 and $ 163,000 , respectively. 8 Table of Contents The payment schedule for the Company’s operating lease obligations as of March 31, 2022 is as follows: (Thousands of dollars) Operating Leases 2022 $ 451 2023 150 Total undiscounted lease payments $ 601 Less: Amount associated with discounting ( 51 ) Net operating lease liabilities $ 550 Asset Retirement Obligation: A reconciliation of the liability for plugging and abandonment costs for the three months ended March 31, 2022 is as follows: (Thousands of dollars) March 31, 2022 Asset retirement obligation at December 31, 2021 $ 14,295 Liabilities incurred — Liabilities settled ( 498 ) Accretion expense 170 Asset retirement obligation at March 31, 2022 $ 13,967 9 Table of Contents 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.​​​​​​​ (6) Contingent Liabilities: 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. (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 March 31, 2022 and 2021, 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. (8) Related Party Transactions: 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. 10 Table of Contents (9) 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 at March 31, 2022 and December 31, 2021: March 31, 2022 Quoted Prices in Active Markets For Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Balance at March 31, 2022 (Thousands of dollars) Assets Commodity derivative contracts $ — $ — $ 36 $ 36 Total assets $ — $ — $ 36 $ 36 Liabilities Commodity derivative contracts $ — $ — $ ( 12,761 ) $ ( 12,761 ) Total liabilities $ — $ — $ ( 12,761 ) $ ( 12,761 ) December 31, 2021 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, 2021 (Thousands of dollars) Assets Commodity derivative contracts $ — $ — $ — $ — Total assets $ — $ — $ — $ — Liabilities Total liabilities $ — $ — $ ( 5,585 ) $ ( 5,585 ) 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. 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. 11 Table of Contents 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 quarter ended March 31, 2022. (Thousands of dollars) Net Liabilities – December 31, 2021 $ ( 5,585 ) Total realized and unrealized (gains) losses: Included in earnings (a) ( 10,958 ) Purchases, sales, issuances and settlements 3,818 Net Liabilities — March 31, 2022 $ ( 12,725 ) (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 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 commodity derivative instruments are recognized in earnings. The following table sets forth the effect of derivative instruments on the consolidated balance sheets at March 31, 2022 and December 31, 2021: Fair Value (Thousands of dollars) Balance Sheet Location March 31, 2022 December 31, 2021 Asset Derivatives: Derivatives not designated as cash-flow hedging instruments: Crude Oil commodity contracts Derivative asset short-term $ 36 $ — Total $ 36 $ — Liability Derivatives: Derivatives not designated as cash-flow hedging instruments: Crude oil commodity contracts Derivative liability short-term $ ( 9,711 ) $ ( 3,992 ) Natural gas commodity contracts Derivative liability short-term ( 3,050 ) ( 943 ) Crude oil commodity contracts Derivative liability long-term — ( 490 ) Natural gas commodity contracts Derivative liability long-term — ( 160 ) Total $ ( 12,761 ) $ ( 5,585 ) Total derivative instruments $ ( 12,725 ) $ ( 5,585 ) 12 Table of Contents The following table sets forth the effect of derivative instruments on the consolidated statements of operations for the quarters ended March 31, 2022 and 2021: Location of gain/loss recognized in income Amount of gain/loss recognized in income (Thousands of dollars) 2022 2021 Derivatives not designated as cash-flow hedge instruments: Natural gas commodity contracts Unrealized (loss) on derivative instruments, net $ ( 1,948 ) $ ( 15 ) Crude oil commodity contracts Unrealized (loss) on derivative instruments, net ( 5,191 ) ( 896 ) Natural gas commodity contracts Realized (loss) on derivative instruments, net ( 620 ) ( 60 ) Crude oil commodity contracts Realized (loss) on derivative instruments, net ( 3,199 ) ( 152 ) $ ( 10,958 ) $ ( 1,123 ) (10) 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: Quarter Ended March 31, 2022 2021 Net Income (In 000’s) Weighted Average Number of Shares Outstanding Per Share Amount Net Loss (In 000’s) Weighted Average Number of Shares Outstanding Per Share Amount Basic $ 11,142 1,980,878 $ 5.62 $ ( 1,455 ) 1,994,197 $ ( 0.73 ) Effect of dilutive securities: Options(a) 756,544 Diluted $ 11,142 2,737,422 $ 4.07 $ ( 1,455 ) 1,994,197 $ ( 0.73 ) (a) The effect of the 767,000 outstanding stock options is antidilutive for the quarter ended March 31, 2021, due to net loss for this period. 13 Table of Contents