Item 1. Financial Statements
Item 1.
FINANCIAL STATEMENTS
PRIMEENERGY RESOURCES CORPORATION
C ONDENSED
C ONSOLIDATED
B ALANCE
S HEETS
–
Unaudited
(Thousands of dollars)
June 30,
2022
December 31,
2021
ASSETS
Current Assets
Cash and cash equivalents
$
11,067
$
10,347
Accounts receivable, net
17,651
14,208
Prepaid obligations
482
733
Other current assets
40
40
Total Current Assets
29,240
25,328
Property and Equipment
Oil and gas properties at cost
541,419
539,484
Less: Accumulated depletion and depreciation
( 373,000
)
( 359,742
)
168,419
179,742
Field and office equipment at cost
27,175
27,080
Less: Accumulated depreciation
( 22,760
)
( 22,159
)
4,415
4,921
Total Property and Equipment, Net
172,834
184,663
Derivative asset long-term and other assets
898
923
Total Assets
$
202,972
$
210,914
LIABILITIES AND EQUITY
,
Current Liabilities
Accounts payable
$
6,355
$
7,282
Accrued liabilities
7,481
7,821
Due to related parties
12
52
Current portion of asset retirement and other long-term obligations
1,576
1,630
Derivative liability short-term
9,791
4,935
Total Current Liabilities
25,215
21,720
Long-Term Bank Debt
—
36,000
Asset Retirement Obligations
12,726
13,222
Derivative Liability Long-Term
—
650
Deferred Income Taxes
45,028
38,743
Other Long-Term Obligations
1,974
1,488
Total Liabilities
84,943
111,823
Commitments and Contingencies
Equity
Common stock, $ .10 par value; 2022 and 2021: Authorized: 2,810,000 shares, outstanding 2022: 1,952,645 shares; outstanding 2021: 1,992,077 shares .
281
281
Paid-in
capital
7,555
7,555
Retained earnings
151,027
128,902
Treasury stock, at cost; 2022: 857,355 shares; 2021: 817,923
( 40,834
)
( 37,647
)
Total Equity
118,029
99,091
Total Liabilities and Equity
$
202,972
$
210,914
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PRIMEENERGY RESOURCES CORPORATION
C ONDENSED
C ONSOLIDATED
S TATEMENTS
OF
O PERATIONS
– Unaudited
Three and six months ended June 30, 2022 and 2021
(Thousands of dollars, except per share amounts)
Three Months Ended
June 30,
Six Months Ended
June 30,
2022
2021
2022
2021
Revenues
Oil sales
$
25,838
$
10,664
$
52,143
$
19,934
Natural gas sales
4,657
2,292
8,403
3,950
Natural gas liquids sales
4,422
2,404
8,273
4,149
Realized (loss) on derivative instruments, net
( 5,888
)
( 701
)
( 9,707
)
( 913
)
Field service income
3,736
2,375
6,976
3,800
Unrealized gain (loss) on derivative instruments, net
2,933
( 5,057
)
( 4,206
)
( 5,968
)
Other income
—
—
29
29
Total Revenues
35,698
11,977
61,911
24,981
Costs and Expenses
Lease operating expense
9,213
4,434
17,934
8,901
Field service expense
3,540
1,837
6,540
3,255
Depreciation, depletion, amortization and accretion on discounted liabilities
7,021
6,610
14,199
13,107
General and administrative expense
2,418
2,184
9,090
4,200
Total Costs and Expenses
22,192
15,065
47,763
29,463
Gain on Sale and Exchange of Assets
845
106
14,836
106
Income (Loss) from Operations
14,351
( 2,982
)
28,984
( 4,376
)
Other Income (Expense)
Interest Expense
( 150
)
( 484
)
( 499
)
( 1,007
)
Income (Loss) Before Provision for (Benefit from) Income Taxes
14,201
( 3,466
)
28,485
( 5,383
)
(Benefit) Provision for Income Taxes
3,218
( 1,054
)
6,360
( 1,514
)
Net (Loss) Income
10,983
( 2,412
)
22,125
( 3,869
)
Less: Net (Loss) Attributable to Non-Controlling
Interests
—
( 9
)
—
( 11
)
Net Income (Loss) Attributable to PrimeEnergy
$
10,983
$
( 2,403
)
$
22,125
$
( 3,858
)
Basic Income (Loss) Per Common Share
$
5.57
$
( 1.20
)
$
11.18
$
( 1.93
)
Diluted Income (Loss) Per Common Share
$
4.02
$
( 1.20
)
$
8.08
$
( 1.93
)
The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements
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PRIMEENERGY RESOURCES CORPORATION
C ONDENSED
C ONSOLIDATED
S TATEMENT
OF
E QUITY
– Unaudited
Six months Ended June 30, 2022 and 2021
(Thousands of dollars)
Common Stock
Additional
Paid-In
Capital
Retained
Earnings
Treasury
Stock
Total
Stockholders’
Equity –
PrimeEnergy
Non-
Controlling
Interest
Total
Equity
Shares
Outstanding
Common
Stock
Balance at December 31, 2021
1,992,077
$
281
$
7,555
$
128,902
$
( 37,647
)
$
99,091
$
—
$
99,091
Purchase 39,432 shares of Common stock
( 39,432
)
—
—
—
( 3,187
)
( 3,187
)
—
( 3,187
)
Net Income
—
—
—
22,125
—
22,125
—
22,125
Balance at June 30, 2022
1,952,645
$
281
$
7,555
$
151,027
$
( 40,834
)
$
118,029
$
—
$
118,029
Balance at December 31, 2020
1,994,177
$
281
$
7,541
$
126,804
$
( 37,502
)
$
97,124
$
874
$
97,998
Net Loss
—
—
—
( 3,858
)
—
( 3,858
)
( 11
)
( 3,869
)
Balance at June 30, 2021
1,994,177
$
281
$
7,541
$
122,946
$
( 37,502
)
$
93,266
$
863
$
94,129
The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements
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PRIMEENERGY RESOURCES CORPORATION
C ONDENSED
C ONSOLIDATED
S TATEMENTS
OF
C ASH
F LOWS
– Unaudited
Six Months Ended June 30, 2022 and 2021
(Thousands of dollars)
2022
2021
Cash Flows from Operating Activities:
Net Income (loss)
$
22,125
$
( 3,869
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation, depletion, amortization and accretion on discounted liabilities
14,199
13,107
Gain on sale and exchange of assets
( 14,836
)
( 106
)
Unrealized loss on derivative instruments, net
4,206
5,968
Deferred income taxes
6,285
( 1,514
)
Changes in assets and liabilities:
Accounts receivable
( 3,443
)
( 3,022
)
Due to related parties
( 40
)
( 38
)
Prepaids and other assets
251
( 939
)
Accounts payable
( 927
)
3,327
Accrued liabilities
( 340
)
( 1,490
)
Net Cash Provided by Operating Activities
27,480
11,424
Cash Flows from Investing Activities:
Capital expenditures, including exploration expense
( 2,409
)
( 3,729
)
Proceeds from sale of properties and equipment
14,836
106
Net Cash Provided by (Used in) Investing Activities
12,427
( 3,623
)
Cash Flows from Financing Activities:
Purchase of stock for treasury
( 3,187
)
—
Proceeds from long-term bank debt and other long-term obligations
—
3,000
Repayment of long-term bank debt and other long-term obligations
( 36,000
)
( 8,000
)
Net Cash Used in Financing Activities
( 39,187
)
( 5,000
)
Net Increase in Cash and Cash Equivalents
720
2,801
Cash and Cash Equivalents at the Beginning of the Period
10,347
996
Cash and Cash Equivalents at the End of the Period
$
11,067
$
3,797
Supplemental Disclosures:
Income taxes paid
$
75
$
—
Interest paid
$
481
$
1,009
The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements
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PRIMEENERGY RESOURCES CORPORATION
N OTES
TO
C ONDENSED
C ONSOLIDATED
F INANCIAL
S TATEMENTS
June 30, 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 June 30, 2022 and December 31, 2021, the condensed consolidated results of operations, cash flows and equity for the six
months ended June 30, 2022 and 2021.
As of June 30, 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.
In the second quarter of 2022, the Company sold 241 net acres in Canadian County, Oklahoma for $ 845,000 .
(3) Additional Balance Sheet Information:
Certain balance sheet amounts are comprised of the following:
(Thousands of dollars)
June 30,
2022
December 31,
2021
Accounts Receivable
:
Joint interest billing
$
2,975
$
1,902
Trade receivables
1,638
1,429
Oil and gas sales
12,454
11,154
Other
955
94
18,022
14,579
Less: Allowance for doubtful accounts
( 371
)
( 371
)
Total
$
17,651
$
14,208
Accounts Payable:
Trade
$
2,991
$
2,390
Royalty and other owners
2,246
2,802
Partner advances
1,062
1,209
Other
56
881
Total
$
6,355
$
7,282
Accrued Liabilities:
Compensation and related expenses
$
4,367
$
3,919
Property costs
2,216
2,901
Taxes
813
893
Other
85
108
Total
$
7,481
$
7,821
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(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 was completed on July 5, 2022. The Company’s borrowings under this credit facility approximates fair value because the interest rates are variable and reflective of market rates.
On June 30, 2022, the Company had no borrowings outstanding under its revolving credit facility and $ 50 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 5.98 % for the six months ended June 30, 2022 as compared to 5.31 % for the six months ended June 30, 2021.
On July 5, 2022 , the Company and its lenders entered into a Fourth Amended and Restated Credit Agreement (the “2022 Credit Agreement”) with a maturity date of June 1, 2026. Under the 2022 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 initial borrowing base of the agreement is $ 75 million. The credit facility is secured by substantially all of the Company’s oil and gas properties. The 2022 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, and commodity hedge agreements.
As of August 15, 2022 the Company has no borrowings outstanding under its current 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. Leased 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 six months ended June 30, 2022 was $ 306 thousand. Cash payments included in the operating lease cost for the six months ended June 30, 2022 was $ 324 thousand. The weighted-average remaining operating lease terms is 9 months.
The Company amended certain leases for office space in Texas providing for payments of $ 349,000 in 2022, $ 251,000 in 2023, $ 106,000 in 2024 and $ 27,000 in 2025.
Rent expense for office space six months ended June 30, 2022 and 2021 was $ 392,000 and $ 328,000 , respectively.
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The payment schedule for the Company’s operating lease obligations as of June 30, 2022 is as follows:
(Thousands of dollars)
Operating
Leases
2022
$
349
2023
$
251
2024
$
106
2025
27
Total undiscounted lease payments
$
733
Less: Amount associated with discounting
( 66
)
Net operating lease liabilities
$
667
Asset Retirement Obligation:
A reconciliation of the liability for plugging and abandonment costs for the six
months ended June 30, 2022 is as follows:
(Thousands of dollars)
June 30,
2022
Asset retirement obligation at December 31, 2021
$
14,295
Liabilities settled
( 835
)
Accretion expense
339
Asset retirement obligation at June 30, 2022
$
13,799
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 June 30, 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.
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(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 June 30, 2022 and December 31, 2021:
June 30, 2022
Quoted Prices in
Active Markets
For Identical
Assets (Level 1)
Significant
Other
Observable
Inputs (Level 2)
Significant
Unobservable
Inputs (Level 3)
Balance at
June 30,
2022
(Thousands of dollars)
Assets
Commodity derivative contracts
$
—
$
—
$
—
$
—
Total assets
$
—
$
—
$
—
$
—
Liabilities
Commodity derivative contracts
$
—
$
—
$
( 9,791
)
$
( 9,791
)
Total liabilities
$
—
$
—
$
( 9,791
)
$
( 9,791
)
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.
The following table sets forth a reconciliation of changes in the fair value of financial assets and liabilities classified as Level 3 in the fair value hierarchy for the six months ended June 30, 2022.
(Thousands of dollars)
Net Liabilities – December 31, 2021
$
( 5,585
)
Total realized and unrealized (gains) losses:
Included in earnings (a)
( 13,913
)
Purchases, sales, issuances and settlements
9,707
Net Liabilities — June 30, 2022
$
( 9,791
)
(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.
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Table of Contents
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 June 30, 2022 and December 31, 2021:
Fair Value
(Thousands of dollars)
Balance Sheet Location
June 30,
2022
December 31,
2021
Liability Derivatives:
Derivatives not designated as cash-flow hedging instruments:
Crude oil commodity contracts
Derivative liability short-term
$
( 7,722
)
$
( 3,992
)
Natural gas commodity contracts
Derivative liability short-term
( 2,069
)
( 943
)
Crude oil commodity contracts
Derivative liability long-term
—
( 490
)
Natural gas commodity contracts
Derivative liability long-term
—
( 160
)
Total derivative instruments
$
( 9,791
)
$
( 5,585
)
The following table sets forth the effect of derivative instruments on the consolidated statements of operations for the six months ended June 30, 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
$
( 966
)
$
( 1,085
)
Crude oil commodity contracts
Unrealized (loss) on derivative instruments, net
( 3,240
)
( 4,883
)
Natural gas commodity contracts
Realized (loss) on derivative instruments, net
( 1,986
)
( 277
)
Crude oil commodity contracts
Realized (loss) on derivative instruments, net
( 7,721
)
( 636
)
$
( 13,913
)
$
( 6,681
)
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(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:
Six Months Ended June 30,
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
$
22,125
1,979,690
$
11.18
$
( 3,858
)
1,994,177
$
( 1.93
)
Effect of dilutive securities:
Options (a)
—
756,879
—
—
Diluted
$
22,125
2,736,569
$
8.08
$
( 3,858
)
1,994,177
$
( 1.93
)
Three Months Ended June 30,
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
$
10,983
1,972,979
$
5.57
$
( 2,403
)
1,994,177
$
( 1.20
)
Effect of dilutive securities:
Options (a)
—
757,185
—
—
Diluted
$
10,983
2,730,164
$
4.02
$
( 2,403
)
1,994,177
$
( 1.20
)
(a)
The effect of the 767,500 outstanding stock options is anti-dilutive for the three and six months ended June 30, 2021 due to the net loss for these periods.
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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.