PRIMEENERGY RESOURCES CORP 10-Q

Item 1. FINANCIAL STATEMENTS PRIMEENERGY RESOURCES CORPORATION C ONSOLIDATED B ALANCE S HEETS – Unaudited ( Thousands of dollars, except share data ) March 31, 2023 December 31, 2022 ASSETS Current Assets Cash and cash equivalents $ 13,723 $ 26,543 Accounts receivable, net 11,151 12,147 Prepaid obligations 16,139 32,839 Due from related parties 373 388 Derivative asset — 210 Other current assets 38 38 Total Current Assets 41,424 72,165 Property and Equipment Oil and gas properties at cost 584,701 555,280 Less: Accumulated depletion and depreciation ( 391,882 ) ( 385,811 ) 192,819 169,469 Field and office equipment at cost 27,086 27,246 Less: Accumulated depreciation ( 22,940 ) ( 22,728 ) 4,146 4,518 Total Property and Equipment, Net 196,965 173,987 Derivative asset long-term and other assets 951 985 Total Assets $ 239,340 $ 247,137 LIABILITIES AND EQUITY Current Liabilities Accounts payable $ 15,935 $ 11,451 Accrued liabilities 26,135 25,750 Current portion of asset retirement and other long-term obligations 2,172 2,566 Derivative liability short-term — 1,190 Total Current Liabilities 44,242 40,957 Long-Term Bank Debt — 11,000 Asset Retirement Obligations 13,708 13,525 Deferred Income Taxes 40,387 39,968 Other Long-Term Obligations 1,988 1,334 Total Liabilities 100,325 106,784 Commitments and Contingencies Equity Common stock, $ .10 par value; 2023 and 2022: Authorized: 2,810,000 shares, outstanding 2023: 1,869,560 ; outstanding 2022: 1,901,000 shares 281 281 Paid-in capital 7,555 7,555 Retained earnings 178,976 177,566 Treasury stock, at cost; 2023: 940,440 shares; 2022: 909,000 ( 47,797 ) ( 45,049 ) Total Equity 139,015 140,353 Total Liabilities and Equity $ 239,340 $ 247,137 The accompanying Notes are an integral part of these Consolidated Financial Statements 1 Table of Contents PRIMEENERGY RESOURCES CORPORATION C ONSOLIDATED S TATEMENTS OF O PERATIONS – Unaudited Three Months Ended March 31, 2023 and 2022 (Thousands of dollars, except per share amounts) 2023 2022 Revenues Oil sales $ 14,578 $ 26,305 Natural gas sales 1,752 3,746 Natural gas liquids sales 2,394 3,851 Realized loss on derivative instruments, net ( 566 ) ( 3,819 ) Field service income 3,474 2,958 Unrealized gain (loss) on derivative instruments, net 980 ( 7,139 ) Other income 38 29 Total Revenues 22,650 25,931 Costs and Expenses Lease operating expense 7,974 8,719 Field service expense 3,167 2,720 Depreciation, depletion, amortization 6,422 7,008 Accretion of discount on asset retirement obligations 183 170 General and administrative expense 3,102 6,672 Total Costs and Expenses 20,848 25,289 Gain on Sale and Exchange of Assets 51 13,991 Income from Operations 1,853 14,633 Other Income (Expense) Interest Expense ( 182 ) ( 349 ) Interest Income 114 — Income Before Provision for Income Taxes 1,785 14,284 Provision for Income Taxes 375 3,142 Net Income $ 1,410 $ 11,142 Basic Income Per Common Share $ 0.75 $ 5.62 Diluted Income Per Common Share $ 0.53 $ 4.07 The accompanying Notes are an integral part of these Consolidated Financial Statements 2 Table of Contents PRIMEENERGY RESOURCES CORPORATION C ONSOLIDATED S TATEMENTS OF E QUITY – Unaudited Three Months Ended March 31, 2023 and 2022 ( Thousands of dollars, except share amounts ) Shares Outstanding Common Stock Additional Paid-In Capital Retained Earnings Treasury Stock Total Equity Balance at December 31, 2021 1,992,077 $ 281 $ 7,555 $ 128,902 $ ( 37,647 ) $ 99,091 Purchase 11,188 shares of common stock ( 11,188 ) $ — $ — $ — $ ( 833 ) $ ( 833 ) Net Income — — — 11,142 — 11,142 Balance at March 31, 2022 1,980,889 $ 281 $ 7,555 $ 140,044 $ ( 38,480 ) $ 109,400 Balance at December 31, 2022 1,901,000 $ 281 $ 7,555 $ 177,566 $ ( 45,049 ) $ 140,353 Purchase 31,440 shares of common stock ( 31,440 ) — — — ( 2,748 ) ( 2,748 ) Net Income — — — 1,410 — 1,410 Balance at March 31, 2023 1,869,560 $ 281 $ 7,555 $ 178,976 $ ( 47,797 ) $ 139,015 The accompanying Notes are an integral part of these Consolidated Financial Statements 3 Table of Contents PRIMEENERGY RESOURCES CORPORATION C ONSOLIDATED S TATEMENTS OF C ASH F LOWS – Unaudited Three Months Ended March 31, 2023 and 2022 (Thousands of dollars) 2023 2022 Cash Flows from Operating Activities: Net Income $ 1,410 $ 11,142 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion, amortization and accretion on discounted liabilities 6,605 7,178 Gain on sale and exchange of assets ( 51 ) ( 13,991 ) Unrealized (gain) loss on derivative instruments, net ( 980 ) 7,139 Deferred income taxes 419 3,143 Changes in assets and liabilities: Accounts receivable 996 ( 6,471 ) Due from related parties 15 ( 52 ) Prepaids obligations 16,700 565 Other long-term obligations 654 — Accounts payable 4,484 1,814 Accrued liabilities 385 ( 1,112 ) Net Cash Provided by Operating Activities 30,637 9,355 Cash Flows from Investing Activities: Capital expenditures, including exploration expense ( 30,149 ) ( 1,784 ) Proceeds from sale of properties and equipment 440 13,991 Net Cash (Used in) Provided by Investing Activities ( 29,709 ) 12,207 Cash Flows from Financing Activities: Purchase of stock for treasury ( 2,748 ) ( 833 ) Repayment of long-term bank debt and other long-term obligations ( 11,000 ) ( 27,000 ) Net Cash (Used in) Financing Activities ( 13,748 ) ( 27,833 ) Net (Decrease) in Cash and Cash Equivalents ( 12,820 ) ( 6,271 ) Cash and Cash Equivalents at the Beginning of the Period 26,543 10,347 Cash and Cash Equivalents at the End of the Period $ 13,723 $ 4,076 Supplemental Disclosures: Interest paid $ 167 $ 240 The accompanying Notes are an integral part of these Consolidated Financial Statements 4 Table of Contents PRIMEENERGY RESOURCES CORPORATION N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS March 31, 2023 (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, 2022. In the opinion of management, the accompanying interim consolidated financial statements contain all material adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the Company’s consolidated balance sheets as of March 31, 2023, and December 31, 2022, the consolidated results of operations, cash flows and equity for the three months ended March 31, 2023, and 2022. As of March 31, 2023, 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, 2022. 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 consolidated financial statements, subsequent events have been evaluated through the date the statements were issued. (2) Acquisitions and Dispositions In the first quarter of 2023, the Company sold 7.8 surface acres in Midland County, Texas receiving gross proceeds of $ 436,050 and recognizing a gain of $ 47,000 . 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, 2023 December 31, 2022 Accounts Receivable: Joint interest billing $ 1,821 $ 1,806 Trade receivables 1,874 1,762 Oil and gas sales 7,698 8,894 Other 61 21 11,454 12,483 Less: Allowance for doubtful accounts ( 303 ) ( 336 ) Total $ 11,151 $ 12,147 Accounts Payable: Trade $ 10,146 $ 5,142 Royalty and other owners 3,279 3,600 Partner advances 1,112 1,111 Other 1,398 1,598 Total $ 15,935 $ 11,451 Accrued Liabilities: Compensation and related expenses $ 4,665 $ 9,743 Property costs 10,933 6,413 Taxes 9,333 9,352 Other 1,204 242 Total $ 26,135 $ 25,750 5 Table of Contents (4) Long-Term Debt: Bank Debt: The Company maintains a revolving corporate credit facility (the “Credit Facility”) with a group of financial institutions with aggregate loan commitments of $ 300 million, subject to a borrowing base that is determined semi-annually, with a maturity date of June 1, 2026 . As of December 31, 2022, the borrowing base was $ 75 million and the Company had $ 11 million outstanding borrowings under the Credit Facility. The Credit Facility requires 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, and places restrictions on the payment of dividends, the amount of treasury stock the Company may purchase, and commodity hedge agreements. As of March 31, 2023, the Company was in compliance with its debt covenants. Borrowings bear interest, at the option of the Company, based on a rate per annum equal to the greatest of (a) the Prime Rate in effect on such day, (b) the Federal Funds Rate in effect on such day plus 0.50 % and (c) Adjusted Term SOFR (secured overnight financing rate as administered by the Federal Reserve Bank of New York) for a one-month tenor in effect on such day plus 1.00 %, or a Term SOFR. Both options are subject to an additional margin, determined based upon the utilization of the borrowing base then in effect, ranging from 2.25 % to 4.25 % per annum. The Company also pays commitment fees on undrawn amounts under the Credit Facility of 0.50 % per annum. Borrowings under the Credit Facility are secured by substantially all of the Company’s oil and gas properties. Effective January 20, 2023, in lieu of a formal amendment, a borrowing base letter authorized by all lenders and Prime of the 2022 Credit Agreement resulted in an adjustment to decrease the amount of the Borrowing Base available from $ 75 million to $ 60 million until such time as the next redetermination date as required by the agreement. As of March 31, 2023, the borrowing base was $ 60 million and the Company had no outstanding borrowings under the 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, current portion of asset retirement and other long-term obligations 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 7.82 %. 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 three months ended March 31, 2023, and 2022 were $ 165 thousand and $ 142 thousand, respectively. Cash payments included in the operating lease cost for the three months ended March 31, 2023, and 2022 were $ 178 thousand and $ 150 thousand, respectively. The weighted average remaining operating lease terms as of March 31, 2023, and 2022 were 9.63 months and 12 months, respectively. The Company acquired and amended certain leases for office space in Texas providing for payments of $ 561,000 in 2023, $ 275,000 in 2024, and $ 45,000 in 2025. Rent expense for office space the quarter ended March 31, 2023 and 2022 was $ 141,000 and $ 177,000 , respectively. The payment schedule for the Company’s operating lease obligations as of March 31, 2023 is as follows: (Thousands of dollars) Operating Leases 2023 $ 561 2024 275 2025 45 Total undiscounted lease payments $ 881 Less: Amount associated with discounting ( 63 ) Total net operating lease liabilities $ 818 Less: Current portion included in Current portion of asset retirement and Other Long-Term Obligations 661 Non-Current portion included in Other Long-Term Obligations $ 157 6 Table of Contents Asset Retirement Obligation: A reconciliation of the liability for plugging and abandonment costs for the three months ended March 31, 2023 is as follows: (Thousands of dollars) March 31, 2023 Asset retirement obligation at December 31, 2022 $ 15,443 Liabilities settled ( 407 ) Accretion of discount 183 Asset retirement obligation at March 31, 2023 $ 15,219 Less current portion of asset retirement obligations ( 1,511 ) Asset retirement obligations, long-term $ 13,708 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, 2023 and 2022, 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: Amounts due to or from related parties primarily represent receipts or expenses, related to oil and gas properties, collected or paid by the Company as agent for the joint venture partners, which may include members of the Company’s Board of Directors. (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, 2023 and December 31, 2022: March 31, 2023 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, 2023 (Thousands of dollars) Assets Commodity derivative contracts $ — $ — $ — $ — Total assets $ — $ — $ — $ — 7 Table of Contents March 31, 2023 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, 2023 (Thousands of dollars) Liabilities Commodity derivative contracts $ — $ — $ — $ — Total liabilities $ — $ — $ — $ — December 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 December 31, 2022 (Thousands of dollars) Assets Commodity derivative contracts $ — $ — $ 210 $ 210 Total assets $ — $ — $ 210 $ 210 Liabilities Commodity derivative contracts $ — $ — $ ( 1,190 ) $ ( 1,190 ) Total liabilities $ — $ — $ ( 1,190 ) $ ( 980 ) 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. 8 Table of Contents 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 three months ended March 31, 2023. (Thousands of dollars) Net Liabilities – December 31, 2022 $ ( 980 ) Total realized and unrealized gains (losses): Included in earnings (a) 414 Purchases, sales, issuances and settlements 566 Net Liabilities — March 31, 2023 $ — (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, 2023 and December 31, 2022: Fair Value (Thousands of dollars) Balance Sheet Location March 31, 2023 December 31, 2022 Asset Derivatives: Derivatives not designated as cash-flow hedging instruments: Crude oil commodity contract Other current assets $ — $ 162 Natural gas commodity contract Other current assets — 48 Total $ — $ 210 Liability Derivatives: Derivatives not designated as cash-flow hedging instruments: Crude oil commodity contracts Derivative liability short-term $ — $ ( 931 ) Natural gas commodity contracts Derivative liability short-term — ( 259 ) Crude oil commodity contracts Derivative liability long-term — — Natural gas commodity contracts Derivative liability long-term — — Total $ — $ ( 1,190 ) Total derivative instruments $ — $ ( 980 ) 9 Table of Contents The following table sets forth the effect of derivative instruments on the consolidated statements of operations for the three months ended March 31, 2023 and 2022: Amount of gain/loss recognized in income (Thousands of dollars) Location of gain/loss recognized in income 2023 2022 Derivatives not designated as cash-flow hedge instruments: Natural gas commodity contracts Unrealized gain (loss) on derivative instruments, net 211 ( 1,948 ) Crude oil commodity contracts Unrealized gain (loss) on derivative instruments, net 769 ( 5,191 ) Natural gas commodity contracts Realized gain (loss) on derivative instruments, net 24 ( 620 ) Crude oil commodity contracts Realized loss on derivative instruments, net ( 590 ) ( 3,199 ) $ 414 $ ( 10,958 ) (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 th e consolidated fin ancial statements: Quarter Ended March 31, 2023 2022 Net Income (In 000’s) Weighted Average Number of Shares Outstanding Per Share Amount Net Income (In 000’s) Weighted Average Number of Shares Outstanding Per Share Amount Basic $ 1,410 1,888,895 $ 0.75 $ 11,142 1,980,878 $ 5.62 Effect of dilutive securities: Options 758,325 756,544 Diluted $ 1,410 2,647,220 $ 0.53 $ 11,142 2,737,422 $ 4.07 10 Table of Contents