SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
-------- --------
Commission file number 0-9408
PRIMA ENERGY CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 84-1097578
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1801 BROADWAY, SUITE 500, DENVER CO 80202
(Address of principal executive offices) (Zip Code)
(303) 297-2100
(Registrant's telephone number, including area code)
NO CHANGE
(Former name, former address and former fiscal year, if changed from last
report.)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 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 [ ]
As of October 30, 1998, the Registrant had 5,772,556 shares of Common
Stock, $0.015 Par Value, outstanding.
<PAGE>
PRIMA ENERGY CORPORATION
INDEX
-----
Part I - Financial Information Page
- ------------------------------ ----
Item 1. Financial Statements
Unaudited consolidated balance sheets . . . . . . . . . . . . 3
Unaudited consolidated statements of income . . . . . . . . . 5
Unaudited consolidated statements of cash flows . . . . . . . . 6
Notes to unaudited consolidated financial statements . . . . . 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . 12
Cautionary Statement for Purposes of the "Safe Harbor" Provisions
of the Private Securities Litigation Reform Act of 1995 . . . 17
Part II - Other Information
- ---------------------------
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . 18
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
<PAGE>
PRIMA ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
------
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------ ------------
CURRENT ASSETS
Cash and cash equivalents................... $ 5,233,000 $ 5,644,000
Available for sale securities, at market.... 2,332,000 1,866,000
Receivables (net of allowance for doubtful
accounts: 9/30/98,$48,000;12/31/97,$49,000) 3,852,000 5,681,000
Tubular goods inventory..................... 728,000 882,000
Other....................................... 335,000 183,000
---------- ----------
Total current assets..................... 12,480,000 14,256,000
---------- ----------
OIL AND GAS PROPERTIES, at cost, accounted
for using the full cost method............. 79,544,000 67,945,000
Less accumulated depreciation,
depletion and amortization................. (31,221,000) (26,875,000)
---------- ----------
Oil and gas properties - net.......... 48,323,000 41,070,000
---------- ----------
PROPERTY AND EQUIPMENT, at cost
Oilfield service equipment.................. 4,055,000 3,504,000
Furniture and equipment..................... 792,000 711,000
Field office, shop and land................. 433,000 356,000
---------- ----------
5,280,000 4,571,000
Less accumulated depreciation............... (2,772,000) (2,460,000)
---------- ----------
Property and equipment - net............. 2,508,000 2,111,000
---------- ----------
OTHER ASSETS................................ 553,000 484,000
---------- ----------
$63,864,000 $57,921,000
========== ==========
See accompanying notes to unaudited consolidated financial statements.
3
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PRIMA ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS (cont'd.)
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
CURRENT LIABILITIES
Accounts payable............................ $ 690,000 $ 3,250,000
Amounts payable to oil and gas
property owners ........................... 1,403,000 1,220,000
Production taxes payable.................... 1,571,000 1,279,000
Accrued and other liabilities............... 345,000 421,000
Current portion of note payable............. 120,000 120,000
Deferred tax liability...................... 14,000 14,000
---------- ----------
Total current liabilities............. 4,143,000 6,304,000
NOTE PAYABLE................................ 120,000 240,000
PRODUCTION TAXES, non-current............... 717,000 1,280,000
DEFERRED TAX LIABILITY...................... 8,788,000 6,883,000
---------- ----------
Total liabilities..................... 13,768,000 14,707,000
---------- ----------
STOCKHOLDERS' EQUITY
Preferred stock, $0.001 par value,
2,000,000 shares authorized;
no shares issued or outstanding........... 0 0
Common stock, $0.015 par value,
12,000,000 shares authorized;
5,835,556 shares issued................... 87,000 87,000
Additional paid-in capital.................. 4,408,000 4,385,000
Retained earnings........................... 46,343,000 39,485,000
Unrealized gain on available for
sale securities........................... 45,000 44,000
Treasury stock - 63,000 shares, at cost..... (787,000) (787,000)
---------- ----------
Total stockholders' equity............ 50,096,000 43,214,000
---------- ----------
$63,864,000 $57,921,000
========== ==========
See accompanying notes to unaudited consolidated financial statements.
4
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PRIMA ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- -----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
REVENUES
Oil and gas sales....... $ 4,034,000 $ 3,536,000 $12,310,000 $13,430,000
Trading revenues........ 655,000 3,808,000 3,235,000 12,779,000
Oilfield services....... 910,000 757,000 3,027,000 2,402,000
Management and
operator fees.......... 269,000 257,000 783,000 768,000
Interest and
dividend income........ 104,000 142,000 375,000 406,000
Other................... 5,000 61,000 3,862,000 149,000
---------- ---------- ---------- ----------
5,977,000 8,561,000 23,592,000 29,934,000
---------- ---------- ---------- ----------
EXPENSES
Depreciation, depletion
and amortization....... 1,646,000 1,156,000 4,785,000 3,849,000
Lease operating expense. 503,000 407,000 1,524,000 1,305,000
Production taxes........ 289,000 232,000 953,000 988,000
Cost of trading......... 733,000 3,625,000 3,177,000 12,157,000
Cost of oilfield service 632,000 525,000 2,089,000 1,718,000
General & administrative 571,000 441,000 1,548,000 1,354,000
---------- ---------- ---------- ----------
4,374,000 6,386,000 14,076,000 21,371,000
---------- ---------- ---------- ----------
INCOME BEFORE
INCOME TAXES........... 1,603,000 2,175,000 9,516,000 8,563,000
PROVISION FOR
INCOME TAXES........... 353,000 598,000 2,658,000 2,355,000
---------- ---------- ---------- ----------
NET INCOME.............. $ 1,250,000 $ 1,577,000 $ 6,858,000 $ 6,208,000
========== ========== ========== ==========
BASIC NET INCOME
PER SHARE.............. $ 0.22 $ 0.27 $ 1.19 $ 1.08
DILUTED NET INCOME ========== ========== ========== ==========
PER SHARE.............. $ 0.21 $ 0.27 $ 1.16 $ 1.05
========== ========== ========== ==========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING.... 5,772,556 5,757,556 5,771,796 5,773,754
WEIGHTED AVERAGE COMMON ========== ========== ========== ==========
SHARES OUTSTANDING
ASSUMING DILUTION..... 5,914,965 5,889,243 5,917,083 5,890,091
========== ========== ========== ==========
See accompanying notes to unaudited consolidated financial statements.
5
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PRIMA ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1998 1997
---------- ----------
OPERATING ACTIVITIES
Net income.................................... $ 6,858,000 $ 6,208,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, depletion and amortization... 4,785,000 3,849,000
Deferred income taxes...................... 1,904,000 1,762,000
Other...................................... (643,000) (84,000)
Changes in current assets and liabilities:
Receivables............................... 1,829,000 800,000
Inventory................................. 154,000 (711,000)
Other current assets...................... (152,000) 90,000
Payables.................................. (2,085,000) (1,805,000)
Accrued and other liabilities............. (76,000) (205,000)
---------- ----------
Net cash provided by
operating activities.................... 12,574,000 9,904,000
---------- ----------
INVESTING ACTIVITIES
Additions to oil and gas properties........... (11,599,000) (8,287,000)
Purchases of other property................... (944,000) (1,003,000)
Purchases of available for sale securities.... (491,000) (324,000)
Proceeds from sales of property............... 118,000 215,000
Proceeds from sales of available for
sale securities.............................. 28,000 112,000
---------- ----------
Net cash used by investing activities...... (12,888,000) (9,287,000)
---------- ----------
FINANCING ACTIVITIES
Proceeds from issuance of common stock........ 23,000 0
Borrowings.................................... 0 360,000
Repayment of long-term debt................... (120,000) 0
Treasury stock purchased...................... 0 (404,000)
---------- ----------
Net cash used by financing activities....... (97,000) (44,000)
---------- ----------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS........................... (411,000) 573,000
CASH AND CASH EQUIVALENTS, beginning of period 5,644,000 7,029,000
---------- ----------
CASH AND CASH EQUIVALENTS, end of period...... $ 5,233,000 $ 7,602,000
========== ==========
See accompanying notes to unaudited consolidated financial statements.
6
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PRIMA ENERGY CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
The financial information contained herein is unaudited but includes
all adjustments (consisting of only normal recurring accruals) which, in
the opinion of management, are necessary to present fairly the information
set forth. The consolidated financial statements should be read in
conjunction with the Notes to Consolidated Financial Statements which are
included in the Annual Report on Form 10-K of Prima Energy Corporation for
the year ended December 31, 1997.
The results for interim periods are not necessarily indicative of
results to be expected for the fiscal year of the Company ending December
31, 1998. The Company believes that the nine month report filed on Form
10-Q is representative of its financial position, its results of operations
and its cash flows for the periods ended September 30, 1998 and 1997
covered thereby.
2. BASIS OF PRESENTATION
The accompanying consolidated financial statements include the
accounts of Prima Energy Corporation and its subsidiaries, herein
collectively referred to as "Prima" or the "Company." All significant
intercompany transactions have been eliminated. Certain amounts in prior
years have been reclassified to conform with the classifications at
September 30, 1998.
3. NOTE PAYABLE
The Company has one note payable as follows:
September 30, December 31,
1998 1997
------------- ------------
Total.................... $ 240,000 $ 360,000
Less, current portion.... 120,000 120,000
-------- --------
Long term................ $ 120,000 $ 240,000
======== ========
The note is dated June 10, 1997 and is due on June 10, 2000, with interest
at an annual rate of 8%. Payments of principal and accrued interest on the
note are to be made in three equal annual installments on the anniversary
date of the note. The note financed the purchase of oilfield service
equipment by Action Oilfield Services, Inc., a wholly owned subsidiary.
Prima maintains an $8,000,000 unsecured line of credit with a
commercial bank. The line of credit, which matures on May 1, 1999, bears
interest at the bank's prime rate (8.25% at September 30, 1998), with
interest payable monthly. At December 31, 1997 and September 30, 1998,
there were no amounts outstanding under the line of credit.
7
<PAGE>
4. HEDGING ACTIVITIES
The Company's marketing and trading activities consist of marketing
the Company's own production, marketing the production of others from wells
operated by the Company, and natural gas trading activities that consist of
the purchase and resale of natural gas. Crude oil and natural gas futures,
options and swaps are used from time to time in order to hedge the price of
a portion of the Company's production, as well as to hedge the margins on
natural gas purchased for resale. This is done to mitigate the risk of
fluctuating oil and natural gas prices which can adversely affect operating
results. These transactions have been entered into with major financial
institutions, thereby minimizing credit risk. The Company hedged
approximately 0% and 39% of its oil production for the first nine months of
1998 and 1997, respectively, and hedged approximately 46% and 40% of its
natural gas production in these same periods. Hedging gains and losses
were $(77,000) and $486,000 for the nine months ended September 30, 1998
and 1997, respectively, and were included in oil and gas revenues at the
time the hedged volumes were sold. At September 30, 1998, the Company had
sold natural gas futures contracts as follows:
Volume Unrealized
Remaining Term Price (MMBtu) Loss
- ----------------------------- ------- --------- ----------
October 1998 $ 1.600 50,000 $ (2,500)
October 1998 1.535 50,000 (5,750)
October 1998 to February 1999 1.855 1,000,000 (203,000)
In a typical futures contract agreement, the Company receives the
difference between a fixed price per unit of production and the index
price, if the index price is lower. If the index price is higher, the
Company pays the difference. Current hedging agreements are settled on a
monthly basis. All current contracts specify the third party index to be
the "Inside FERC" first of the month spot price for Colorado Interstate Gas
Co.
At September 30, 1998, the Company had no open futures transactions
that did not correspond to anticipated physical transactions.
During June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133 "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133
establishes standards for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred
to as derivatives) and for hedging activities. SFAS 133 requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair
value. The accounting for changes in the fair value of a derivative (gains
and losses) depends on the intended use of the derivative and the resulting
designation. The Company is required to adopt SFAS 133 on January 1, 2000.
The Company has not completed the process of evaluating the impact that
will result from adopting SFAS 133.
8
<PAGE>
5. TERMINATION OF NATURAL GAS SUPPLY CONTRACT
In December 1997, Prima agreed to terminate its long-term, fixed-
price with annual escalation contract to supply natural gas to Colorado
Power Partnership ("CPP"), effective October 31, 1998, for $3,850,000 and
other consideration. The payment and closing was completed in January
1998. The proceeds were included in other revenues in the statement of
income for the nine months ended September 30, 1998. Initial sales to CPP
began in the fall of 1990 and the contract was to expire in the year 2005.
From January 1, 1998 through October 31, 1998, Prima agreed to supply
100% of CPP's gas requirements. The agreement specified a price of $2.72
per MMBtu from January 1, 1998 through March 31, 1998, and a spot related
index price from April 1, 1998 through October 31, 1998. Release of the
dedication of natural gas reserves in the Wattenberg Area in northeast
Colorado to the CPP contract was effective November 1, 1998.
6. COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130 "Reporting
Comprehensive Income" ("SFAS 130"). SFAS 130 establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general purpose financial
statements. SFAS 130 requires that all items that are required to be
recognized under accounting standards as components of comprehensive income
be reported in a financial statement that is displayed with the same
prominence as other financial statements. Prima adopted SFAS 130 on
January 1, 1998. Prima's comprehensive income for the three months ended
September 30, 1998 and 1997 was $1,251,000 and $1,609,000, respectively,
compared to net income for the three months ended September 30, 1998 and
1997 of $1,250,000 and $1,577,000, respectively. Prima's comprehensive
income for the nine months ended September 30, 1998 and 1997 was $6,859,000
and $6,272,000, respectively, compared to net income for the nine months
ended September 30, 1998 and 1997 of $6,858,000 and $6,208,000,
respectively. The difference between comprehensive income and net income
is due to unrealized gains in the Company's portfolio of available for sale
securities.
7. SEGMENT REPORTING
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders in the second
year of adoption. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers. Prima
is required to adopt SFAS 131 in its 1998 annual financial statements and
in its interim financial statements beginning in 1999. Prima has not
completed the process of evaluating the impact that will result from
adopting SFAS 131 or the manner that will be used to disclose the required
information in its annual financial statements.
9
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8. ISSUANCE OF COMMON STOCK
Pursuant to the provisions of the Prima Energy Corporation 1993 Stock
Incentive Plan, during the first quarter of 1998, 2,500 shares of Prima's
common stock were issued upon the exercise of stock options for total
proceeds of $23,000.
9. EARNINGS PER SHARE
During February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
("SFAS 128"). SFAS 128 establishes standards for computing and presenting
earnings per share ("EPS"), and supersedes APB Opinion No. 15 and its
related interpretations. It replaces the presentation of primary EPS with
a presentation of basic EPS, which excludes dilution, and requires dual
presentation of basic and diluted EPS for all entities with complex capital
structures. Diluted EPS is computed similarly to fully diluted EPS
pursuant to Opinion No. 15. SFAS 128 is effective for periods ending after
December 15, 1997, including interim periods, and requires restatement of
all prior period EPS data presented. The Company adopted SFAS 128
effective December 31, 1997, and has restated all prior period EPS data
presented to give retroactive effect to the new accounting standard.
Basic net income per share is computed by dividing net income by the
weighted average common shares outstanding during the period. Diluted net
income per share includes the potential dilution that could occur upon
exercise of options to acquire common stock, computed using the treasury
stock method. The treasury stock method assumes that the increase in the
number of shares issued is reduced by the number of shares which could have
been repurchased by the Company with the proceeds from the exercise of the
options (which were assumed to have been at the average market price of the
common shares during the reporting period).
The following table reconciles the numerator and denominator used in
the calculation of basic and diluted net income per share.
Income Shares Per Share
(Numerator) (Denominator) Amount
--------- ----------- ---------
Quarter Ended September 30, 1998:
Basic Net Income per Share..... $1,250,000 5,772,556 $ 0.22
=====
Effect of Stock Options........ 142,409
--------- ---------
Diluted Net Income per Share... $1,250,000 5,914,965 $ 0.21
========= ========= =====
Quarter Ended September 30, 1997:
Basic Net Income per Share..... $1,577,000 5,757,556 $ 0.27
=====
Effect of Stock Options........ 131,687
--------- ---------
Diluted Net Income per Share... $1,577,000 5,889,243 $ 0.27
========= ========= =====
10
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Income Shares Per Share
(Numerator) (Denominator) Amount
--------- ----------- ---------
Nine Months Ended September 30, 1998:
Basic Net Income per Share..... $6,858,000 5,771,796 $ 1.19
=====
Effect of Stock Options........ 145,287
--------- ---------
Diluted Net Income per Share... $6,858,000 5,917,083 $ 1.16
========= ========= =====
Nine Months Ended September 30, 1997:
Basic Net Income per Share..... $6,208,000 5,773,754 $ 1.08
=====
Effect of Stock Options........ 116,337
--------- ---------
Diluted Net Income per Share... $6,208,000 5,890,091 $ 1.05
========= ========= =====
The Board of Directors of Prima approved a three for two stock split
of the Company's common stock to shareholders of record on February 20,
1997, which was distributed March 4, 1997. As a result, the number of
shares of common stock outstanding increased from 3,860,396 to 5,790,556 on
the distribution date. All share and per share amounts included in these
financial statements have been restated to show the retroactive effects of
the stock split. During 1997, the shareholders of Prima approved an
increase in the number of authorized shares of common stock from 8,000,000
to 12,000,000 shares.
11
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PRIMA ENERGY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
- -------------------------------
The Company's principal internal sources of liquidity are cash flows
generated from operating activities and existing cash and cash equivalents.
Net cash provided by operating activities for the nine months ended
September 30, 1998 was $12,574,000 compared to $9,904,000 for the same nine
month period of 1997. Net working capital at September 30, 1998 was
$8,337,000 compared to $7,952,000 at December 31, 1997. Current
liabilities at September 30, 1998 decreased from December 31, 1997 levels
by $2,161,000, while current assets decreased by $1,776,000 for the same
period. The Company received proceeds from the sales of securities and
property totaling $146,000 during the period.
The Company has external borrowing capacity through an $8,000,000
unsecured line of credit with a commercial bank, all of which is available
to be drawn.
The Company invested $12,543,000 in property and equipment during the
nine months ended September 30, 1998 compared to $9,290,000 for the 1997
nine month period. The Company expended $8,384,000 during the 1998 nine
month period for its proportionate share of the costs of drilling,
completing and recompleting or restimulating wells, $2,835,000 for
purchases of undeveloped acreage, $380,000 for purchases of producing
properties and $944,000 for other property and equipment. These
expenditures compare to $6,940,000 for well costs, $1,321,000 for
undeveloped acreage, $26,000 for producing properties and $1,003,000 for
other property and equipment in the 1997 nine month period.
During the first nine months of 1998, the Company participated in the
drilling of 34 wells (eight during the third quarter) and the restimulation
or recompletion of 19 wells (10 during the third quarter). In the Denver
Basin during the second quarter of 1998, the Company commenced an
approximate 35 well 1998 recompletion and/or restimulation program in the
Wattenberg Field. The ten additional wells which were restimulated during
the third quarter have been successfully placed back on production. The
Company has restimulated an additional six wells as of November 6, 1998 and
currently anticipates restimulating approximately 75 additional wells over
the next fifteen months. The Company is targeting wells which qualify for
Section 29 tax credits. This credit of approximately $.65 per Mcf is
applicable to natural gas produced through the year 2002. At Denver
International Airport, the Company successfully completed its third well
during the third quarter of 1998. The well was completed for 250 Mcf of
natural gas per day and 10 barrels of oil per day, which was less than
anticipated. Two additional wells were drilled and cased in late October
and early November 1998 on this acreage to further evaluate the potential
for development in this area. The Company is currently developing the
completion procedures for these wells. During the third quarter of 1998,
Prima has participated in the drilling of three additional wells (.34 net)
at the Bonny Field, all of which are productive.
Prima has continued to increase its net acreage position in the Powder
River Basin of Wyoming and Montana. Since June 30, 1998 and up through
November 6, 1998, the Company has acquired approximately 23,700 net acres in
12
<PAGE>
the Powder River Basin, bringing its total acreage in the basin to
approximately 121,000 net acres. The Company drilled one new well in the
Powder River Basin during the second quarter of 1998. That well, the Cedar
Draw Federal 10-44, was successfully completed in the Muddy Formation at an
approximate depth of 9,500 feet during the third quarter. It is currently
producing at rates averaging 750 Mcf of natural gas and 20 barrels of oil
per day. The Company drilled two additional Muddy wells in the Cedar Draw
area during the third quarter, both of which were waiting on completion as
of November 6, 1998. Prima's Powder River Basin acreage includes
approximately 85,000 net acres within the emerging coal bed methane play.
During the second and third quarters of 1998, three coal bed methane wells
were drilled to depths of about 400 feet to begin to evaluate this acreage.
Future coal bed methane development will depend upon several factors,
including the completion of an environmental impact study and availability
of pipeline capacity.
During 1998, the Company completed the NW Cave Gulch 25-43 well in the
Wind River Basin. Prima operates this well in which it owns a 24% working
interest. The well commenced production in late June, and is currently
producing at rates averaging 3,500 Mcf of natural gas and 20 barrels of oil
per day. The Company currently anticipates that some additional
behind-pipe reserves in this well will be completed before the end of 1998.
The Cave Gulch Federal 1-29 LAK, which suffered a blowout on August 13,
1998 due to downhole casing failure, continued to vent to the atmosphere as
of November 6, 1998. The gas stream was ignited and continues to burn.
The well was producing about 45,000 Mcf of natural gas per day at the time
of the blowout. In July 1998, an offset to this well, the Cave Gulch
Federal 4-19 LAK commenced drilling. The operator of both of these wells
elected to convert the 4-19 LAK to a relief well. The operator has
indicated that attempts to "kill" the blow-out well will commence around
year end.
The Company regularly reviews opportunities for acquisition of assets
or companies related to the oil and gas industry which could expand or
enhance its existing business. The Company expects its operations,
including acquisition, drilling, completion and recompletion well costs,
will be financed by funds provided by operations, working capital,
borrowings on the line of credit, various cost-sharing arrangements, or
from other financing alternatives.
Year 2000 Compliance Program
- ----------------------------
The Year 2000 Issue is the result of computer applications being
written using two digits rather than four to define the applicable year.
As the year 2000 approaches, such applications may be unable to accurately
process certain data-based information. The Company believes it has
identified the significant internal computer applications that will require
modification to ensure Year 2000 compliance. Internal and external
resources are being used to make the required modifications and test
compliance. Modification and compliance is proceeding as scheduled and the
Company expects that the modifications should be completed by December 31,
1998. At that time, the Company's internal computer applications are
expected to be Year 2000 compliant.
An assessment of the readiness of external companies with whom the
Company does business, such as customers and vendors, is ongoing. Third
parties with whom the Company has material relationships have been
contacted regarding their Year 2000 issues and responses are being
monitored to determine the potential affect on Prima.
The failure to correct a material Year 2000 problem could result in an
interruption in, or failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the
Company's results of operations, liquidity and financial condition. The
13
<PAGE>
Company has not yet determined the potential adverse affect that
Year 2000 risks may have on its financial condition, liquidity or results
of operations. The Company's program is expected to significantly reduce
the Company's level of uncertainty about Year 2000 issues and, in
particular, about Year 2000 compliance and readiness of its third party
vendors and associates. The Company believes that, with the modification
of its business systems and completion of its assessment program as
scheduled, the possibility of significant interruptions of normal
operations should be reduced. The cost of Year 2000 compliance has not
been specifically tracked but is not anticipated to be material to the
Company's financial position or results of operations in any given year.
Results of Operations
- ---------------------
For the quarter ended September 30, 1998, the Company earned net
income of $1,250,000, or $.21 per diluted share, on revenues of $5,977,000,
compared to net income of $1,577,000, or $.27 per diluted share on revenues
of $8,561,000 for the comparable quarter of 1997. Expenses were $4,374,000
for the 1998 third quarter compared to $6,386,000 for the 1997 third
quarter. Revenues decreased $2,584,000, or 30%, expenses decreased
$2,012,000, or 32%, and net income decreased $327,000, or 21%.
For the nine months ended September 30, 1998, the Company earned net
income of $6,858,000, or $1.16 per diluted share, on revenues of
$23,592,000, compared to net income of $6,208,000, or $1.05 per diluted
share on revenues of $29,934,000 for the nine months ended September 30,
1997. Expenses were $14,076,000 for the 1998 nine month period compared to
$21,371,000 for the 1997 nine month period. Revenues decreased $6,342,000,
or 21%, expenses decreased $7,295,000, or 34%, and net income increased
$650,000, or 10%. The decline in revenues for both the quarter and nine
months of 1998 was due to a decline in trading revenues and to lower
product prices received for oil and natural gas. The decline in product
prices was partially offset by increased oil and natural gas production.
Oil and gas sales for the quarter ended September 30, 1998 were
$4,034,000 compared to $3,536,000 for the same quarter of 1997, an increase
of $498,000 or 14%. The Company's net natural gas production was 1,662,000
Mcf and 1,280,000 Mcf for the third quarters of 1998 and 1997,
respectively, an increase of 382,000 Mcf or 30%. Its net oil production
was 69,000 barrels compared to 61,000 barrels for the same periods, an
increase of 8,000 barrels or 13%. The average price received for natural
gas production for the third quarter of 1998 was $1.91 per Mcf compared to
$1.88 per Mcf for the third quarter of 1997. Approximately 5% and 6% of
the natural gas production for the three months ended September 30, 1998
and 1997, respectively, was attributable to production sold under a fixed
contract price of $5.90 per MMBtu. The average price received for the
Company's natural gas production exclusive of the fixed price contract gas
was $1.69 per Mcf for the 1998 quarter compared to $1.64 per Mcf for the
1997 quarter. The average price received for oil in the third quarter of
1998 was $12.47 per barrel compared to $18.67 per barrel for the third
quarter of 1997, a decrease of $6.20 per barrel or 33%. During the third
quarter of 1998, the Company hedged approximately 44% of its natural gas
production. Net hedging gains of $116,000 are included in oil and gas
revenues for this period, which increased the average price received per
Mcf of natural gas by $0.07. No oil production was hedged during this
period. During the third quarter of 1997, the Company hedged approximately
33% of its oil production and 41% of its natural gas production. Net
hedging losses of $54,000 are included in oil and gas revenues for this
period, which increased the average price received per barrel of oil by
$.09 and decreased the average price received per Mcf of natural gas by
$0.05.
14
<PAGE>
Oil and gas sales for the nine months ended September 30, 1998 were
$12,310,000 compared to $13,430,000 for the nine months ended September 30,
1997, a decrease of $1,120,000 or 8%. The Company's net natural gas
production was 4,819,000 Mcf and 4,025,000 Mcf for the first nine months of
1998 and 1997, respectively, an increase of 794,000 Mcf or 20%. Its net
oil production was 208,000 barrels compared to 190,000 barrels for the same
nine month periods, an increase of 18,000 barrels or 9%. The average price
received for natural gas production was $1.98 per Mcf for the nine months
ended September 30, 1998 compared to $2.37 per Mcf for the nine months
ended September 30, 1997, a decrease of $0.39 per Mcf or 16%.
Approximately 5% of the natural gas production for the nine months ended
September 30, 1997 and 1996 was attributable to production sold under a
fixed contract price of $5.90 per MMBtu. The average price received for
the Company's natural gas production exclusive of the fixed price contract
gas was $1.78 per Mcf for the nine months ended September 30,1998 compared
to $2.18 per Mcf for the same period of 1997. The average price received
for oil for the first nine months of 1998 was $13.35 per barrel compared to
$20.39 per barrel for the same period of 1997, a decrease of $7.04 per
barrel or 35%. During the nine months ended September 30, 1998, the
Company hedged approximately 46% of its natural gas production. Hedging
losses of $77,000 are included in oil and gas revenues for this period,
which decreased the average price received per Mcf of natural gas by $0.02
During the nine months ended September 30, 1997, the Company hedged
approximately 39% of its oil production and 40% of its natural gas
production. Hedging gains of $486,000 are included in oil and gas revenues
for this period, which increased the average price received per barrel of
oil by $0.67 and the average price received per Mcf of natural gas by
$0.09.
Lease operating expenses and production taxes ("LOE") were $792,000
for the third quarter of 1998 compared to $639,000 for the 1997 quarter, an
increase of $153,000 or 24%. Depreciation, depletion and amortization
("DD&A") was $1,646,000 and $1,156,000 for the same periods, an increase of
$490,000 or 42%. Production for the quarter ended September 30, 1998 was
345,000 barrels of oil equivalent ("BOE") compared to 274,000 BOE for the
quarter ended September 30, 1997, an increase of 71,000 BOE or 26%. LOE
per equivalent barrel of production was $2.29 for the third quarter of 1998
compared to $2.23 for the comparable quarter of 1997. DD&A applicable to
oil and gas properties was $4.30 per equivalent barrel of production for
the 1998 period compared to $3.81 per equivalent barrel of production for
the 1997 period. Depreciation of other property and equipment was $162,000
and $113,000 for the quarters ended September 30, 1998 and 1997,
respectively.
LOE was $2,477,000 for the nine months ended September 30, 1998
compared to $2,293,000 for the 1997 period, an increase of $184,000 or 8%.
DD&A was $4,785,000 and $3,849,000 for the same periods, an increase of
$936,000 or 24%. Production for the nine months ended September 30, 1998
was 1,011,000 BOE compared to 861,000 BOE for the nine months ended
September 30, 1997, an increase of 150,000 BOE or 17%. LOE per equivalent
barrel of production was $2.45 for the first nine months of 1998 compared
to $2.66 for the comparable period of 1997. DD&A applicable to oil and gas
properties was $4.30 per equivalent barrel of production for the 1998
period compared to $4.06 per equivalent barrel of production for the 1997
period. Depreciation of other property and equipment was $439,000 and
$352,000 for the nine months ended September 30, 1998 and 1997,
respectively.
Trading revenues and cost of trading represent the marketing of third
party natural gas by Prima Natural Gas Marketing, Inc., a wholly owned
subsidiary. Trading revenues were $655,000 for the three months ended
15
<PAGE>
September 30, 1998, a decrease of $3,153,000 or 83% from the $3,808,000
reported for the three months ended September 30, 1997. The Company
marketed 369,000 MMBtus for the third quarter of 1998 compared to
2,076,000 MMBtus marketed during the comparable quarter of 1997. Costs of
trading were $733,000 for the 1998 quarter compared to $3,625,000 for the
1997 quarter, a decrease of $2,892,000 or 80%. These decreases are
attributable to the previously announced termination of the gas supply
contract to a co-generation facility and to certain other buy-for-resale
contracts which terminated in the fall of 1997 and were not renewed.
Trading revenues were $3,235,000 for the nine months ended September
30, 1998, a decrease of $9,544,000 or 75% from the $12,779,000 reported for
the nine months ended September 30, 1997. The Company marketed 1,468,000
MMBtus for the nine month period of 1998 compared to 5,818,000 MMBtus
marketed during the comparable period of 1997. Costs of trading were
$3,177,000 for the 1998 nine month period compared to $12,157,000 for the
1997 nine month period, a decrease of $8,980,000 or 74%. Trading
activities fluctuate with natural gas markets and the Company's ability to
develop markets that meet the Company's trading criteria.
Oilfield services represent the revenues earned by Action Oilfield
Services, Inc., a wholly owned subsidiary. These revenues include well
servicing fees from completion and swab rigs, trucking, water hauling,
rental equipment and other related activities. Revenues were $910,000 for
the quarter ended September 30, 1998 compared to $757,000 for the
comparable quarter of 1997, an increase of $153,000, or 20%. Utilization
levels in the Wattenberg Field Area, where the service company is active,
continued to increase during the third quarter. The Company has also
purchased additional equipment which contributed to the increase in
revenues. For the quarters ended September 30, 1998 and 1997, 27% of the
fees billed by Action were for Company owned wells. Costs of oilfield
services were $632,000 for the quarter ended September 30, 1998 compared to
$525,000 for the same period of 1997, an increase of $107,000 or 20%
Oilfield services revenues were $3,027,000 for the nine months ended
September 30, 1998 compared to $2,402,000 for the comparable nine month
period of 1997, an increase of $625,000 or 26%. For the nine months ended
September 30, 1998, 20% of the fees billed by Action were for Company owned
wells compared to 22% for the nine months ended September 30, 1997.
Costs of oilfield services were $2,089,000 for the nine months ended
September 30, 1998 compared to $1,718,000 for the same period of 1997, an
increase of $371,000 or 22% The Company's share of fees paid to Action on
Company owned properties and the costs associated with providing the
services are eliminated in consolidation.
Management and operator fees are earned pursuant to the Company's
roles as operator for approximately 375 oil and natural gas wells located
primarily in the Wattenberg Field area of Weld County, Colorado and as
managing venturer and operator of a joint venture which owns gas gathering
and pipeline facilities in the Bonny Field in Yuma County, Colorado. The
Company is a working interest owner in each of the operated wells. The
Company is paid operating and management fees by the other working interest
owners in the properties. Fees fluctuate with the number of wells
operated, the percentage working interest in a property owned by third
parties, and the amount of drilling activity during the period. Fees for
the quarter ended September 30, 1998 were $269,000 compared to $257,000 for
the 1997 quarter, an increase of $12,000 or 5%. Fees for the nine months
ended September 30, 1998 were $783,000 compared to $768,000 for the 1997
nine month period, an increase of $15,000 or 2%.
16
<PAGE>
General and administrative expenses ("G&A") were $571,000 for the
quarter ended September 30, 1998 compared to $441,000 for the quarter ended
September 30, 1997, an increase of $130,000 or 29%. G&A was $1,548,000 for
the nine months ended September 30, 1998 compared to $1,354,000 for the
nine months ended September 30, 1997, an increase of $194,000 or 14%. The
Company's G&A costs have increased due to expansion of the Company's areas
of activity.
The provision for income taxes was $353,000 for the quarter ended
September 30, 1998 compared to $598,000 for the quarter ended September 30,
1997. Income before income taxes decreased $572,000 for the 1998 quarter
and the effective tax rate decreased to 22.0% from 27.5%. The provision
for the nine months ended September 30, 1998 was $2,658,000 compared to
$2,355,000 for the same nine month period of 1997. Income before income
taxes for the nine month period of 1998 increased by $953,000, and the
effective tax rate also increased to 28.0% from 27.5%. Effective tax rates
are affected by amounts of permanent differences in financial and taxable
income, consisting primarily of statutory depletion deductions and Section
29 tax credits.
Historically, oil and natural gas prices have been volatile and are
likely to continue to be volatile. Prices are affected by, among other
things, weather, market supply and demand factors, market uncertainty, and
actions of the United States and foreign governments and international
cartels. These factors are beyond the control of the Company. To the
extent that oil and natural gas prices decline, the Company's revenues,
cash flows, earnings and operations would be adversely impacted. The
Company is unable to accurately predict future oil and natural gas prices.
The Company's main source of revenues is from the sale of oil and
natural gas production. Levels of revenues and earnings are affected by
volumes of oil and natural gas production and by the prices at which oil
and natural gas are sold. As a result, the Company's operating results for
any period are not necessarily indicative of future operating results
because of fluctuations in oil and natural gas prices and production
volumes.
---------------------------------
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR"
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
"Managements Discussion and Analysis of Financial Condition and
Results of Operations" included in Item 2 of this Report contain "forward-
looking statements" and are made pursuant to the "safe harbor" provisions
of the Private Securities Litigation Reform Act of 1995. These statements
include, without limitation, statements relating to liquidity, financing of
operations, capital expenditures (both the amount and the source of funds),
continued volatility of oil and natural gas prices, future drilling plans
and other such matters. The words "anticipates," "intends," "expects" or
"believes" and similar expressions identify forward-looking statements.
Such statements are based on certain assumptions and analyses made by the
Company in light of its experience and its perception of historical trends,
current conditions, expected future developments and other factors it
believes are appropriate in the circumstances. Prima does not undertake to
update, revise or correct any of the forward-looking information. Factors
that could cause actual results to differ materially from the Company's
expectations expressed in the forward-looking statements include, but are
not limited to, the following: industry conditions, including availability
17
<PAGE>
of drilling rigs and other equipment and services; volatility of oil and
natural gas prices; hedging activities; operational risks (such as
blowouts, fires and loss of production); insurance coverage limitations;
potential liability imposed by government regulation (including
environmental regulation); the need to develop and replace its oil and
natural gas reserves; the substantial capital expenditures required to
recover its operations; risks related to exploration and developmental
drilling; and uncertainties about oil and natural gas reserve estimates.
For a more complete explication of these various factors, see "Cautionary
Statement for the Purposes of the 'Safe Harbor' Provisions of the Private
Securities Litigation Reform Act of 1995" included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1997, beginning on page
15.
---------------------------------
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits
--------
The following exhibits are filed herewith pursuant to rule 601 of
Regulation S-K or are incorporated by reference to previous filings.
Exhibit No. Document
27 Financial Data Schedules
(b) Reports on Form 8-K
-------------------
No reports on Form 8-K were filed during the Registrants' fiscal
quarter ended September, 30, 1998.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
PRIMA ENERGY CORPORATION
(Registrant)
Date November 16, 1998 By /s/ Richard H. Lewis
----------------- --------------------
Richard H. Lewis,
President and
Principal Financial Officer
19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
FORM 10-Q FOR PRIMA ENERGY CORPORATION FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 5,233,000
<SECURITIES> 2,332,000
<RECEIVABLES> 3,895,000
<ALLOWANCES> (43,000)
<INVENTORY> 728,000
<CURRENT-ASSETS> 12,480,000
<PP&E> 84,824,000
<DEPRECIATION> (33,993,000)
<TOTAL-ASSETS> 63,864,000
<CURRENT-LIABILITIES> 4,143,000
<BONDS> 120,000
0
0
<COMMON> 87,000
<OTHER-SE> 50,009,000
<TOTAL-LIABILITY-AND-EQUITY> 63,864,000
<SALES> 15,545,000
<TOTAL-REVENUES> 23,592,000
<CGS> 10,439,000
<TOTAL-COSTS> 12,528,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 9,516,000
<INCOME-TAX> 2,658,000
<INCOME-CONTINUING> 6,858,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,858,000
<EPS-PRIMARY> 1.19
<EPS-DILUTED> 1.16
</TABLE>
