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U.S. SECURITIES AND EXCHANGE COMMISSION |
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Washington, D.C. 20549 |
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________________________________ |
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FORM 10-Q |
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/X/ Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act of 1934 |
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For the Quarterly Period Ended September 30, 2004 |
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or |
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/ / Transition Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 |
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For the Transition Period From __________ to ___________ |
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______________________________ |
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Commission File Number 0-7406 |
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______________________________ |
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PrimeEnergy Corporation |
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(Exact name of registrant as specified in its charter) |
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Delaware |
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(State or other jurisdiction of incorporation or organization) |
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84-0637348 |
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(IRS employer identification number) |
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One Landmark Square, Stamford, Connecticut 06901 |
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(Address of principal executive offices) |
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(203) 358-5700 |
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(Registrant's telephone number, including area code) |
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(Former name, former address and former fiscal year, if changed since last report) |
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Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / |
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Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Acts). Yes ___ NO /X/ |
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The number of shares outstanding of each class of the Registrant's Common Stock as of November 11, 2004 was: Common Stock, $0.10 par value, 3,530,082 shares. |
2
See accompanying notes to the consolidated financial statements.
3
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PrimeEnergy Corporation
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September 30, 2004 (Unaudited) |
December 31, 2003 (Audited) |
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LIABILITIES and STOCKHOLDERS' EQUITY |
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Current liabilities: |
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Accounts payable |
$ |
10,149,000 |
$ |
8,528,000 |
Current portion of other long-term obligations |
17,000 |
692,000 |
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Accrued liabilities: |
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Payroll, benefits, interest and other |
3,769,000 |
3,504,000 |
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Due to related parties |
1,084,000 |
933,000 |
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---------------- |
------------------ |
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Total current liabilities |
15,019,000 |
13,657,000 |
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Long-term bank debt |
31,872,000 |
26,613,000 |
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Other long-term obligations |
2,000 |
12,000 |
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Asset retirement obligation |
300,000 |
300,000 |
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Deferred income taxes |
6,780,000 |
4,237,000 |
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---------------- |
------------------ |
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Total liabilities |
53,973,000 |
44,819,000 |
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---------------- |
------------------ |
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Stockholders' equity: |
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Preferred stock, $.10 par value, |
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authorized 5,000,000 shares, none issued |
-- |
-- |
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Common stock, $.10 par value, authorized |
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10,000,000 shares; issued 7,694,970 in 2004 and 2003 |
769,000 |
769,000 |
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Paid in capital |
11,024,000 |
11,024,000 |
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Retained earnings |
19,520,000 |
15,378,000 |
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---------------- |
------------------ |
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31,313,000 |
27,171,000 |
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Treasury stock, at cost, 4,114,558 common shares |
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at 2004 and 4,065,768 common shares at 2003 |
(15,263,000) |
(13,735,000) |
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---------------- |
------------------ |
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Total stockholders' equity |
16,050,000 |
13,436,000 |
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---------------- |
---------------- |
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Total liabilities and equity |
$ |
70,023,000 |
$ |
58,255,000 |
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=========== |
=========== |
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See accompanying notes to the consolidated financial statements.
4
See accompanying notes to the consolidated financial statements.
5
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PrimeEnergy Corporation |
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2004 |
2003 |
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Revenue: |
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Oil and gas sales |
$ |
10,510,000 |
$ |
7,709,000 |
District operating income |
4,963,000 |
4,218,000 |
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Administrative revenue |
369,000 |
429,000 |
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Interest and other income |
67,000 |
108,000 |
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-------------- |
-------------- |
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Total revenue |
15,909,000 |
12,464,000 |
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-------------- |
-------------- |
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Costs and expenses: |
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Lease operating expense |
3,534,000 |
3,214,000 |
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District operating expense |
4,113,000 |
3,513,000 |
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Depreciation and depletion of oil and gas properties |
3,188,000 |
1,678,000 |
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General and administrative expense |
1,879,000 |
1,666,000 |
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Exploration costs |
175,000 |
157,000 |
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Interest expense |
316,000 |
195,000 |
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-------------- |
-------------- |
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Total costs and expenses |
13,205,000 |
10,423,000 |
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-------------- |
-------------- |
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Income from operations |
2,704,000 |
2,041,000 |
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Gain on sale and exchange of assets |
(2,000) |
44,000 |
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-------------- |
-------------- |
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Net income before income taxes |
2,702,000 |
2,085,000 |
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Provision for income taxes |
946,000 |
320,000 |
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-------------- |
-------------- |
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Net income |
$ |
1,756,000 |
$ |
1,765,000 |
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========= |
========= |
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Basic income per common share |
$ |
0.50 |
$ |
0.48 |
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Diluted income per common share |
$ |
0.41 |
$ |
0.41 |
See notes to consolidated financial statements.
6
PrimeEnergy Corporation
Consolidated Statement of Stockholders' Equity
Nine Months Ended September 30, 2004
(unaudited)
Common Stock |
Paid In |
Retained |
Treasury |
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Shares |
Amount |
Capital |
Earnings |
Stock |
Total |
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Balance at December 31, 2003 |
7,694,970 |
$ 769,000 |
11,024,000 |
15,378,000 |
(13,735,000) |
$ 13,436,000 |
Purchased 87,967 shares of |
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common stock |
(1,528,000) |
(1,528,000) |
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Net income |
4,142,000 |
4,142,000 |
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----------- |
---------- |
------------- |
------------- |
-------------- |
--------------- |
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Balance at September 30, 2004 |
7,694,970 |
$ 769,000 |
11,024,000 |
19,520,000 |
(15,263,000) |
16,050,000 |
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======= |
====== |
======== |
========= |
========= |
========= |
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See accompanying notes to the consolidated financial statements.
7
See accompanying notes to the consolidated financial statements.
8
PrimeEnergy Corporation
Notes to Consolidated Financial Statements
September 30, 2004
(1) Description of Operations and Significant Accounting Policies:
Nature of Operations:
PrimeEnergy Corporation ("PEC"), a Delaware corporation, was organized in March 1973. The Company is engaged in the exploration, development, acquisition and production of oil and natural gas properties. The Company owns leasehold, mineral and royalty interests in producing and non-producing oil and gas properties across the United States, including Colorado, Kansas, Louisiana, Mississippi, Montana, Nebraska, New Mexico, North Dakota, Oklahoma, Texas, Utah, West Virginia and Wyoming and the Gulf of Mexico. The Company owns and operates 1,533 wells and owns non-operating interests in over 770 additional wells. Additionally, the Company provides well-servicing support operations, site-preparation and construction services for oil and gas drilling and re-working operations, both in connection with the Company's activities and providing contract services for third parties. The Company is publicly traded on the NASDAQ under the symbol "PNRG."
PEC owns Eastern Oil Well Service Company ("EOWSC"), EOWS Midland Company("EMID") and Southwest Oilfield Construction Company ("SOCC"), all of which perform oil and gas field servicing. PEC 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. Field service revenues and the administrative overhead fees earned as operator are reported as 'District operating income' on the consolidated statement of operations. PEC also owns PrimeEnergy Management Corporation ("PEMC"), which acts as the managing general partner, providing administration, accounting and tax preparation services for 18 private and publicly-held limited partnerships and 2 trusts (collectively, the "Partnerships"). During 2003 PEC acquired a sixty percent interest in F-W Oil Exploration LLC, ("FW"), which owns and operates properties in the Gulf of Mexico. PrimeEnergy Corporation and its subsidiaries are herein referred to as the "Company.
"
The markets for the Company's 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.
Basis of Presentation:
The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10 -Q and Article 10 of Regulation S-X.
9
PrimeEnergy Corporation
Notes to Consolidated Financial Statements
September 30, 2004
Principles of Consolidation:
The consolidated financial statements include the accounts of PrimeEnergy Corporation, its subsidiaries and the Partnerships, using the proportionate consolidation method, whereby the Company's proportionate share of each entity's assets, liabilities, revenue and expenses are included in the appropriate classifications in the consolidated financial statements. Inter-company balances and transactions are eliminated in preparing the consolidated financial statements.
Use of Estimates:
The preparation of financial statements in conformity with 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.
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, FAS 144 requires that if the expected future cash flow from an asset is 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 future net revenue expected from that property, small changes in the estimated future net revenue 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. Costs incurred by the Company related to the exploration, development and acquisition of oil and gas properties on behalf of the Partnerships or joint ventures are deferred and charged to the related entity upon the completion of the acquisition.
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 recoverable oil and gas reserves. Depreciation of all other equipment is determined under the straight-line method using various rates based on useful lives. 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.
10
PrimeEnergy Corporation
Notes to Consolidated Financial Statements
September 30, 2004
Asset Retirement Obligation:
Effective January 1, 2003, the Company adopted SFAS No. 143, Accounting for Asset Retirement Obligations. The Company's asset retirement obligation primarily represents the estimated present value of the amount the Company will incur to plug, abandon and remediate the Company's producing properties (including removal of its offshore platforms) at the end of their productive lives, in accordance with applicable federal and state laws. The Company determined its asset retirement obligation by calculating the present value of estimated cash flows related to the liability. The retirement obligation is recorded as a liability at its estimated present value as of the asset's inception, with an offsetting increase to producing properties. Periodic accretion of discount of the estimated liability is recorded as an expense in the income statement.
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 our 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 our wells, the costs to ultimately retire our wells may vary significantly from previous estimates.
Income Taxes:
The Company records income taxes in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." SFAS No. 109 is an asset and liability approach to accounting for income taxes, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns.
Deferred tax liabilities or assets are established for temporary differences between financial and tax reporting bases and are subsequently adjusted to reflect changes in the rates expected to be in effect when the temporary differences reverse. A valuation allowance is established for any deferred tax asset for which realization is not likely.
11
PrimeEnergy Corporation
Notes to Consolidated Financial Statements
September 30, 2004
General and Administrative Expenses:
General and administrative expenses represent costs and expenses associated with the operation of the Company. Certain of the Partnerships sponsored by the Company reimburse general and administrative expenses incurred on their behalf.
Income Per Common Share:
Income per share of common stock has been computed based on the weighted average number of common shares outstanding during the respective periods in accordance with SFAS No. 128, "Earnings per Share."
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 Company's 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 Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities", which established new accounting and reporting requirements for derivative instruments and hedging activities. SFAS No. 133, as amended by SFAS No. 138, requires that all derivative instruments subject to the requirements of the statement 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 the effectiveness guidelines of SFAS No. 133, 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 relat
ive 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.
12
PrimeEnergy Corporation
Notes to Consolidated Financial Statements
September 30, 2004
Recently Issued Accounting Standards:
In January 2003, the FASB issued Financial Interpretation No. 46, "Consolidation of Variable Interest Entities' an interpretation of ARB No. 51" (FIN 46). FIN 46 is an interpretation of Accounting Research Bulletin 51, "Consolidated Financial Statements", and addresses consolidation by business enterprises of variable interest entities (VIE's). The primary objective of FIN 46 is to provide guidance on the identification of, and financial reporting for, entities over which control is achieved through means other than voting rights; such entities are known as VIE's. FIN 46 requires an enterprise to consolidate a variable interest entity if that enterprise has a variable interest that will absorb a majority of the entity's expected losses if they occur, receive a majority of the entity's expected residual return if they occur, or both. An enterprise shall consider the rights and obligations conveyed by its variable interests in making this determination. This guidance applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. The adoption of this interpretation did not have an effect on the Company's financial position or results of operations.
Recently Issued Accounting Pronouncements:
An issue, EITF Issue 04-2, had arisen for companies engaged in oil and gas exploration and production regarding the application of SFAS No. 141 and SFAS No. 142 as they relate to mineral rights held under lease or other contractual arrangements, and as to whether costs associated with these rights should be classified as intangible assets on the balance sheet, apart from other capitalized oil and gas property costs, and to provide specific footnote disclosure. In March 2004, the Emerging Issues Task Force of the FASB reached a consensus that mineral rights are tangible assets. In April 2004, the FASB ratified the EITF's consensus by issuing FASB Staff Position (FSP) 141-1 and 142-1, which amend SFAS No. 141 and SFAS No. 142 to address the inconsistency between the EITF consensus on EITF Issue No. 04-02 and SFAS No. 141 and SFAS No. 142. The FSP is effective for reporting periods beginning after April 29, 2004 and defines mineral rights as tangible assets. These staff positions will have no impact on our consolidated financial statements.
(2) Significant Acquisitions and Dispositions
As more fully described in Note 7, the Company is committed to offer to repurchase the interests of the partners and trust unit holders in certain of the Partnerships. The Company purchased such interests in an amount totaling $1,627,450 for the nine months ending September 30, 2004 and $695,673 for the year ending December 31, 2003. The Company's proportionate share of assets, liabilities and results of operations related to the interests in the Partnerships are included in the consolidated financial statements.
13
PrimeEnergy Corporation
Notes to Consolidated Financial Statements
September 30, 2004
(2) Significant Acquisitions and Dispositions continued
F-W Oil Exploration L.L.C. Acquisition:
Effective August 15, 2003 the Company acquired a sixty percent interest in F-W Oil Exploration L.L.C., a licensed Gulf of Mexico operator for a cost of $4,000,000. As of that date FW had approximately 80,000 net acres to develop and a 12.5% working interest in two producing blocks in the Gulf of Mexico. The Company's proportionate share of FW's assets, liabilities and results of operations for the effective period are included in the consolidated financial statements.
(3) Restricted Cash and Cash Equivalents:
Restricted cash and cash equivalents includes $1,379,000 and $1,479,000 at September 30, 2004 and December 31, 2003, respectively, of cash primarily pertaining to undistributed royalty payments. There were corresponding accounts payable recorded at September 30, 2004 and December 31, 2003 for these liabilities.
(4) Additional Balance Sheet Information
Certain balance sheet amounts are comprised of the following:
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September 30, |
December 31, |
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2004 |
2003 |
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Accounts Receivable: |
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Joint Interest Billing |
$ |
1,344,000 |
$ |
1,174,000 |
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Trade Receivables |
2,016,000 |
1,607,000 |
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Oil and Gas Sales |
5,072,000 |
3,878,000 |
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Other |
411,000 |
906,000 |
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--------------- |
---------------- |
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$ |
8,843,000 |
$ |
7,565,000 |
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Less, Allowance for doubtful accounts |
(457,000) |
(457,000) |
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-------------- |
---------------- |
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$ |
8,386,000 |
$ |
7,108,000 |
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========= |
========= |
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Other Current Assets: |
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Field service inventory |
$ |
285,000 |
$ |
278,000 |
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Other |
-- |
19,000 |
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---------------- |
---------------- |
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Total |
$ |
285,000 |
$ |
297,000 |
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========= |
========= |
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14
PrimeEnergy Corporation
Notes to Consolidated Financial Statements
September 30, 2004
(5) Property and Equipment:
Property and equipment at September 30, 2004 and December 31, 2003 consisted of the following:
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September 30, |
December 31, |
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2004 |
2003 |
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(unaudited) |
(audited) |
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Proved oil and gas properties at cost |
$ |
103,768,000 |
$ |
91,012,000 |
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Unproved oil and gas properties at cost |
7,765,000 |
3,091,000 |
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Less, accumulated depletion |
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and depreciation |
(60,415,000) |
(53,196,000) |
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---------------- |
---------------- |
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$ |
50,177,000 |
$ |
40,907,000 |
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Furniture, fixtures and equipment |
9,701,000 |
9,389,000 |
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Less, accumulated depreciation |
(6,434,000) |
(5,964,000) |
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---------------- |
---------------- |
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$ |
3,267,000 |
$ |
3,425,000 |
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---------------- |
---------------- |
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Total net property and equipment |
$ |
53,444,000 |
$ |
44,332,000 |
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========== |
========== |
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(6) Long-Term Bank Debt:
As of December 2002 the Company entered in to a credit agreement with a new primary lender. The Company and the lender agreed to amend and restate in its entirety the credit agreement dated April 26, 1995 between the Company and its predecessor lender. This agreement will continue to provide for borrowings under a Master Note. Advances under the agreement, as amended, are limited to the borrowing base as defined in the agreement. The borrowing base is re-determined by the lender on a semi-annual basis.
As of September 2003 the credit agreement was amended to add FW as an additional borrower. As of February 2004 the agreement was amended in conjunction with the semi-annual borrowing base determination. Pursuant to this amendment the borrowing base, including the Term Loan, was increased to $47,066,662 and the maturities were extended to March 31, 2007. Advances to FW and FW's liability to the lender in accordance with this amendment are limited to $10,120,000. The Company's oil and gas properties as well as certain receivables and equipment are pledged as security under the loan agreement. The agreement requires the Company to maintain, as defined, a minimum current ratio, tangible net worth, debt coverage ratio and interest coverage ratio, and restrictions are placed on the payment of dividends and the amount of treasury stock the Company may purchase.
15
PrimeEnergy Corporation
Notes to Consolidated Financial Statements
September 30, 2004
(6) Long-Term Bank Debt: continued
The combined average interest rates paid on outstanding borrowings subject to interest at the bank's base rate and on outstanding borrowings bearing interest based upon the LIBO rate were 3.33% during the first nine months of 2004 as compared to 4.01% during the same period of 2003. As of September 30, 2004 the weighted average for the company including FW was 3.32%. As of September 30, 2004 and December 31, 2003, the total outstanding borrowings were $31,872,000 and $27,280,000, respectively with an additional $10,679,993 and $133,333 available. FW did not have any additional available bank borrowings as of September 30, 2004. As of September 30, 2004 all outstanding balances are non-current.
(7) Other Long-Term Obligations and Commitments:
Operating Leases:
The Company has several non-cancelable operating leases, primarily for rental of office space, that have a term of more than one year.
Capital Leases:
The Company has two capital leases for office equipment. Future minimum lease payments as of September 30, 2004 under operating and capital leases are as follows:
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Operating Leases |
Capital Leases |
||||
|
2004 |
100,000 |
9,000 |
|||
|
2005 |
349,000 |
11,000 |
|||
|
2006 |
344,000 |
||||
|
2007 |
195,000 |
||||
|
Thereafter |
203,000 |
||||
|
----------------- |
------------- |
||||
|
Total minimum payments |
$ |
1,191,000 |
20,000 |
||
|
========== |
|||||
|
Less imputed interest |
(1,000) |
||||
|
------------- |
|||||
|
Present value of minimum |
|||||
|
Lease payments |
$ |
19,000 |
|||
|
======== |
|||||
|
Current portion of other long-term obligations |
$ |
17,000 |
|||
|
Other Long term obligations |
$ |
2,000 |
|||
|
======== |
|||||
16
PrimeEnergy Corporation
Notes to Consolidated Financial Statements
September 30, 2004
(8) Contingent Liabilities:
The Company, as managing general partner of the affiliated Partnerships, is responsible for all Partnership activities, including the review and analysis of oil and gas properties for acquisition, 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.
PrimeEnergy Corporation and each of its subsidiaries are borrowers under a credit agreement with the Company's lender, as more fully described in Footnote 5. The pledge of properties owned by FW is limited to the amounts available to FW. The Company's assets are pledged as security under that agreement to all outstanding borrowings including FW's. The lender reviews the assets of FW in conjunction with the semi-annual borrowing base determinations and limits amounts available to FW to a level consistent with the ability of FW to repay such borrowings. The Company is liable to the extent that the assets of FW are not sufficient to satisfy FW's obligations under the agreement. Based on the borrowing base determination as of February 2004 the maximum additional amount the Company would be committed to pay is $4,048,000.
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.
As a general partner, the Company is committed to offer to purchase the limited partners' interest in certain of its managed Partnerships at various annual intervals. Under the terms of a partnership agreement, the Company is not obligated to purchase an amount greater than 10% of the total partnership interest outstanding. In addition, the Company will be obligated to purchase interests tendered by the limited partners only to the extent of one hundred fifty percent of the revenues received by it from such partnership in the previous year. Purchase prices are based upon annual reserve reports of independent petroleum engineering firms discounted by a risk factor. Based upon historical production rates and prices, management estimates that if all such offers were to be accepted, the maximum annual future purchase commitment would be less than $500,000.
17
PrimeEnergy Corporation
Notes to Consolidated Financial Statements
September 30, 2004
(8) Contingent Liabilities continued:
The Company owns approximately a 27% interest in a limited partnership which owns a shopping center in Alabama. The Company is a guarantor on a mortgage secured by the shopping center. The Company believes the cash flow from the center is sufficient to service the mortgage. The market value of the center is currently substantially higher than the balance owed on the mortgage. If the partnership were unable to pay its obligations under the mortgage agreement, the maximum amount the Company is committed to pay is $250,000.
(9) Stock Options and Other Compensation:
In May 1989, non-statutory stock options were granted by the Company to four key executive officers for the purchase of shares of common stock. At September 30, 2004 and 2003, options on 767,500 were outstanding and exercisable at prices ranging from $1.00 to $1.25.
PEMC has a marketing agreement with its current President to provide assistance and advice to PEMC in connection with the organization and marketing of oil and gas partnerships and joint ventures and other investment vehicles of which PEMC is to serve as general or managing partner. The President is still entitled to a percentage of the Company's carried interest depending on total capital raised and annual performance of some of the remaining Partnerships and joint ventures.
(10) Related Party Transactions:
PEMC acts as the managing general partner, providing administration, accounting and tax preparation services for the Partnerships. Certain directors have limited and general partnership interests in several of these Partnerships. As the managing general partner in each of the Partnerships, PEMC receives approximately 5% to 15% of the net revenues of each Partnership as a carried interest in the Partnerships' properties. As more fully described in Note 7, the Company is committed to offer to repurchase the interests of the partners and trust unit holders in certain of the Partnerships. The Company purchased such interests in an amount totaling $1,627,450 in first nine months of 2004 and $695,673 in year ending December 31,2003.
The Partnership agreements allow PEMC to receive management fees for various services to the Partnerships as well as a reimbursement for property acquisition and development costs incurred on behalf of the Partnerships and general and administrative overhead, which is reported in the statements of operations as administrative revenue.
18
PrimeEnergy Corporation
Notes to Consolidated Financial Statements
September 30, 2004
(10) Related Party Transactions continued:
Due to related parties at September 30, 2004 and December 31, 2003 primarily represents receipts collected by the Company as agent, from oil and gas sales net of expenses. The amount of such receipts due the affiliated Partnerships was $1,081,000 and $933,000 respectively. Receivables from related parties consist of reimbursable general and administrative costs, lease operating expenses and reimbursements for property acquisitions, development, and related costs.
Treasury stock purchases as of September 30, 2004 and for the year ending December 31, 2003 included shares acquired from related parties. Purchases from related parties include a total of 37,350 shares purchased for a total consideration of $398,838 in 2003, and 35,000 shares purchased for a total consideration of $606,100 in first nine months 2004.
(11) Income 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. The following reconciles amounts reported in the financial statements:
|
Nine Months Ended |
Nine Months Ended |
|||||||||
|
September 30, 2004 |
September 30 , 2003 |
|||||||||
|
Net Income |
Number of |
Per Share |
Net |
Number of |
Per Share |
|||||
|
Shares |
Amount |
Income |
Shares |
Amount |
||||||
|
Net income per |
||||||||||
|
common share |
$ |
4,142,000 |
3,585,299 |
$ |
1.16 |
$ |
4,657,000 |
3,670,799 |
$ |
1.27 |
|
Effect of dilutive |
||||||||||
|
securities: |
||||||||||
|
Options |
723,705 |
676,851 |
||||||||
|
----------- |
------------- |
-------- |
----------- |
------------- |
-------- |
|||||
|
Diluted net income |
||||||||||
|
per common share |
$ |
4,142,000 |
4,309,004 |
$ |
0.96 |
$ |
4,657,000 |
4,347,650 |
$ |
1.07 |
|
========= |
========= |
===== |
========= |
========= |
===== |
|||||
|
Three Months Ended |
Three Months Ended |
|||||||||
|
September 30, 2004 |
September 30, 2003 |
|||||||||
|
Net Income |
Number of |
Per Share |
Net |
Number of |
Per Share |
|||||
|
Shares |
Amount |
Income |
Shares |
Amount |
||||||
|
Net income per |
||||||||||
|
common share |
$ |
1,756,000 |
3,544,538 |
$ |
0.50 |
$ |
1,765,000 |
3,652,045 |
$ |
0.48 |
|
Effect of dilutive |
||||||||||
|
securities: |
||||||||||
|
Options |
724,877 |
684,885 |
||||||||
|
------------- |
-------------- |
-------- |
------------- |
------------- |
-------- |
|||||
|
Diluted net income |
||||||||||
|
per common share |
$ |
1,756,000 |
4,269,415 |
$ |
0.41 |
$ |
1,765,000 |
4,336,930 |
$ |
0.41 |
|
========= |
======== |
===== |
========= |
======= |
===== |
|||||
19
PrimeEnergy Corporation
September 30, 2004
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion should be read in conjunction with the financial statements of the Company and notes thereto. The Company's subsidiaries are defined in Note 1 of the financial statements.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow provided by operations for the nine month period ended September 30, 2004 was $19,059,000. We expect sufficient cash flow to be provided by operations during the remaining quarter of 2004 because of higher projected production from new properties, combined with oil and gas prices consistent throughout the first nine months of 2004.
Excluding the effects of significant unforeseen expenses or other income, our cash flow from operations fluctuates primarily because of variations in oil and gas production and prices or changes in working capital accounts. Our oil and gas production will vary based on actual well performance but may be curtailed due to factors beyond our control. Hurricanes in the Gulf of Mexico may shut down our production for the duration of the storm's presence in the Gulf or damage production facilities so that we cannot produce from a particular property for an extended amount of time. In addition, downstream activities on major pipelines in the Gulf of Mexico can also cause us to shut-in production for various lengths of time.
Our realized oil and gas prices vary due to world political events, supply and demand of products, product storage levels, and weather patterns. We sell the vast majority of our production at spot market prices. Accordingly, product price volatility will affect our cash flow from operations. To mitigate price volatility we sometimes lock in prices for some portion of our production through the use of financial instruments. Currently we have no such arrangements in place.
We expect to continue to make significant capital expenditures over the next several years as part of our long-term growth strategy. We currently have budgeted $20 million for drilling expenditures in 2004. Expenditures related to budgeted projects totaled $15,800,000 as of September 30, 2004 and were funded by internal cash flow combined with bank borrowing. This includes $7,342,000 invested in one offshore well completed and tested during the third quarter of 2004, however early production tests have been inconclusive as to the commercial viability of this prospect. Additional expenditures during the fourth quarter will be required to determine whether the production rates and ultimate recoverable reserves are sufficient to warrant the costs of setting a platform and installing production facilities. If this well is determined to be noncommercial, the write-off of this investment in the fourth quarter will have a significant negative impact on the Company's earnings and it is possibl e that the Company will incur a loss for the year ending December 2004.
In additions to our exploration and development expenditures, during 2004 the Company spent $1,627,450 to repurchase limited partnership interests from investors in its oil and gas partnerships and spent $1,528,000 to repurchase shares of its treasury stock.
If our exploratory drilling results in significant new discoveries, we will have to expend additional capital in order to finance the completion, development, and potential additional
20
PrimeEnergy Corporation
September 30, 2004
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
opportunities generated by our success. We believe that, because of the additional reserves resulting from the success and our record of reserve growth in recent years, we will be able to access sufficient additional capital through additional bank financing.
Effective February 2004, we agreed with our lenders to increase the borrowing base from $28,999,996 to $47,066,662 and to extend the maturity of the loan facility from March 2005 to March 2007. As of September 30, 2004, $35,920,000 was borrowed under the facility.
The banks review the borrowing base semi-annually and, at their discretion, may decrease or propose an increase to the borrowing base relative to a re-determined estimate of proved oil and gas reserves. Our oil and gas properties are pledged as collateral for the line of credit and we are subject to certain financial covenants defined in the agreement. We are currently in compliance with these financial covenants. If we do not comply with these covenants on a continuing basis, the lenders have the right to refuse to advance additional funds under the facility and/or declare all principal and interest immediately due and payable.
It is the goal of the Company to increase its oil and gas reserves and production through the acquisition and development of oil and gas properties. The Company also continues to explore and consider opportunities to further expand its oilfield servicing revenues through additional investment in field service equipment. However, the majority of the Company's capital spending is discretionary, and the ultimate level of expenditures will be dependent on the Company's assessment of the oil and gas business environment, the number and quality of oil and gas prospects available, the market for oilfield services, and oil and gas business opportunities in general.
RESULTS OF OPERATIONS
Revenues and net income during the three and nine month periods ended September 30, 2004 as compared to the same periods in 2003 reflect the increased oil and gas sales, presented below, offset by exploration costs and depreciation and depletion of oil and gas properties.
|
Nine months Ended |
Three Months Ended |
|||||
|
September 30, |
September 30, |
|||||
|
------------------------------------------------------ |
------------------------------------------------------- |
|||||
|
Increase / |
Increase / |
|||||
|
2004 |
2003 |
(Decrease) |
2004 |
2003 |
(Decrease) |
|
|
Barrels of Oil Produced |
280,000 |
265,747 |
14,253 |
82,000 |
112,747 |
(30,747) |
|
Average Price Received |
$36.95 |
$28.99 |
$5.64 |
$41.54 |
$26.2332 |
$15.30 |
|
--------------- |
--------------- |
-------------- |
--------------- |
--------------- |
-------------- |
|
|
Oil Revenue |
$10,346,000 |
$7,704,000 |
$2,642,000 |
$3,406,000 |
$2,958,000 |
$448,000 |
|
--------------- |
--------------- |
-------------- |
--------------- |
--------------- |
-------------- |
|
|
MCF of Gas Produced |
3,761,000 |
2,651,035 |
1,109,965 |
1,321,000 |
1,050,035 |
270,965 |
|
Average Price Received |
$5.28 |
$5.07 |
$0.21 |
$5.38 |
$4.5249 |
$0.85 |
|
--------------- |
--------------- |
-------------- |
--------------- |
--------------- |
-------------- |
|
|
Gas Revenue |
$19,848,000 |
$13,443,000 |
$6,405,000 |
$7,104,000 |
$4,751,000 |
$2,353,000 |
|
--------------- |
--------------- |
-------------- |
--------------- |
--------------- |
-------------- |
|
|
Total Oil & Gas Revenue |
$30,194,000 |
$21,147,000 |
$9,047,000 |
$10,510,000 |
$7,709,000 |
$2,801,000 |
|
======== |
======== |
======== |
======== |
======== |
========= |
|
21
PrimeEnergy Corporation
September 30, 2004
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Changes in production are due to production from properties added during 2003 and the first nine months of 2004, offset by the natural decline of existing properties.
Lease operating expense for the first nine months of 2004 increased by 21.06%, or $1,838,000, compared to the first nine months of 2003 due to increased production tax expense related to the change in revenue, and the lease operating expenses of new properties.
General and administrative expenses increased by $654,000, in the first nine of 2004 as compared to the first nine of 2003, reflecting the addition of FW's expenses in 2004.
District operating income and expenses increased 7% and 3%, respectively, in comparison to the prior year reflecting the increased utilization of our field service equipment.
Depreciation and depletion of oil and gas properties increased by $3,779,000 for the nine months ended September 30, 2004 as compared to the same period in the previous year. This increase is related to the additional cost basis and production of producing properties added during 2003 and the first nine months of 2004.
Exploration costs of $3,378,000 in the first nine months of 2004, include costs incurred in the drilling of two dry holes, one located in the Gulf of Mexico and one in Clay County, West Virginia. Exploration costs of $474,000 in the first nine months of 2003 were incurred in the drilling of dry holes in Harris and Walker County, Texas.
Tax expense increased by $676,000 for the first nine months of 2004 as compared to the first nine months of 2003, reflecting the changes to net income coupled with changes in various allowable deductions for 2004.
22
PrimeEnergy Corporation
September 30, 2004
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
This Report contains forward-looking statements that are based on management's current expectations, estimates and projections. Words such as "expects," "anticipates," "intends," "plans," "believes," "projects" and "estimates," and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, and are subject to the safe harbors created thereby. These statements are not guarantees of future performance and involve risks and uncertainties and are based on a number of assumptions that could ultimately prove inaccurate and, therefore, there can be no assurance that they will prove to be accurate. Actual results and outcomes may vary materially from what is expressed or forecast in such statements due to various risks and uncertainties. These risks and uncertainties include, among other things, the possibility of drilling cos t overruns and technical difficulties, volatility of oil and gas prices, competition, risks inherent in the Company's oil and gas operations, the inexact nature of interpretation of seismic and other geological and geophysical data, imprecision of reserve estimates, and the Company's ability to replace and expand oil and gas reserves. Accordingly, stockholders and potential investors are cautioned that certain events or circumstances could cause actual results to differ materially from those projected.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to interest rate risk on its line of credit, which has variable rates based upon the lenders base rate, as defined, and the London Inter-Bank Offered rate. Based on the weighted average balances outstanding during the first half 2004, a hypothetical 2.5% increase in the applicable interest rates would have increased interest expense for the nine months ended September 30, 2004 by approximately $580,000.
Oil and gas prices have historically been extremely volatile, and have been particularly so in recent years. The Company did not enter into significant hedging transactions during the nine month period ending September 30, 2004. The company had no open hedging transactions at September 30, 2004 or December 31, 2003. Declines in domestic oil and gas prices could have a material adverse effect on the Company's revenues, operating results, estimates of economically recoverable reserves and the net revenue there from.
Item 4. INTERNAL CONTROLS AND PROCEDURES.
Based upon an evaluation within the 90 days prior to the filing date of this report, our Chief Executive Officer and Chief Financial Officer have each concluded that our disclosure controls and procedures as defined in Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934, as amended, are effective, as of the evaluation date, in timely alerting them to material information relating to our Company required to be included in our reports filed or submitted under the Exchange Act. Since the date of the evaluation, there have been no significant changes in our internal controls or in other factors that could significantly affect such controls, including any corrective actions with regard to significant deficiencies and material weaknesses.
23
PrimeEnergy Corporation
September 30, 2004
PART II - OTHER INFORMATION
From time to time, the Company is party to certain legal actions and claims 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.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the nine months ended September 30, 2004, the Company purchased the following shares of common stock as treasury shares.
|
2004 Month |
Number of Shares |
Average Price Paid per share |
Maximum Number of Shares that May Yet Be Purchsed Under The Plan (1) |
||
|
January |
--- |
---- |
478,271 |
||
|
February |
15,630 |
$ 15.39 |
462,641 |
||
|
March |
3,500 |
$ 14.56 |
459,141 |
||
|
April |
8,992 |
$ 17.01 |
450,149 |
||
|
May |
15,874 |
$ 18.08 |
434,275 |
||
|
June |
4,794 |
$ 18.09 |
429,481 |
||
|
July |
35,952 |
$ 18.12 |
393,529 |
||
|
August |
2,885 |
$ 18.09 |
390,644 |
||
|
September |
340 |
$ 18.11 |
390,304 |
||
|
----------- |
|||||
|
Total/Average |
87,967 |
$ 17.37 |
|||
|
====== |
(1) In December 1993, we announced that our board of directors authorized a stock repurchase program whereby we may purchase outstanding shares of our common stock from time-to-time, in open market transactions or negotiated sales. A total of 2,400,000 shares have been authorized, to date, under this program. Through September 30 2004 we repurchased a total of 2,009,696 shares under this program for $11,984,079 at an average price of $5.96 per share. Additional purchases of shares may occur as market conditions warrant. We expect future purchases will be funded with internally generated cash flow or from working capital.
24
PrimeEnergy Corporation
September 30, 2004
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
None
Item 6. EXHIBITS AND REPORTS ON FORM 8K
No reports on form 8K were filed by the Company during the nine months ended September 30, 2004.
25
Pursuant to the requirements of the Securities and Exchange Act of 1934, Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
PrimeEnergy Corporation |
|
|
|
(Registrant) |
|
|
|
|
November 12, 2004 |
/s/ Charles E. Drimal, Jr. |
|
(Date) |
------------------------------ |
|
|
Charles E. Drimal, Jr. |
|
President |
|
|
Principal Executive Officer |
|
|
|
|
|
November 12, 2004 |
/s/ Beverly A. Cummings |
|
(Date) |
------------------------------- |
|
Beverly A. Cummings |
|
|
Executive Vice President |
|
|
|
Principal Financial and Accounting Officer |
26