<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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 March 31, 1999
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 April 30, 1999, the Registrant had 5,673,429 shares of Common Stock,
$0.015 Par Value, outstanding.
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<PAGE>
PRIMA ENERGY CORPORATION
INDEX
<TABLE>
PART I - FINANCIAL INFORMATION Page
----
<S> <C>
Item 1. Financial Statements
Unaudited consolidated balance sheets . . . . . . . . . . . . . . . . . . . . . . . . 3
Unaudited consolidated statements of income . . . . . . . . . . . . . . . . . . . . . 5
Unaudited consolidated statements of comprehensive income . . . . . . . . . . . . . . 6
Unaudited consolidated statements of cash flows . . . . . . . . . . . . . . . . . . . 7
Notes to unaudited consolidated financial statements . . . . . . . . . . . . . . . . . 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . 11
Item 3. Quantitative and Qualitative Disclosures
About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
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 . . . . . . . . . . . . . . . . . . . . . . . . . 17
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
</TABLE>
<PAGE>
PRIMA ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS
MARCH 31, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents............................................. $ 996,000 $ 2,522,000
Cash held in like-kind exchange escrow................................ 25,951,000 0
Available for sale securities, at market.............................. 2,279,000 2,391,000
Receivables (net of allowance for doubtful
accounts: 3/31/99, $47,000; 12/31/98, $47,000)...................... 3,667,000 4,696,000
Tubular goods inventory............................................... 548,000 612,000
Other................................................................. 195,000 452,000
------------ ------------
Total current assets............................................ 33,636,000 10,673,000
------------ ------------
OIL AND GAS PROPERTIES, at cost, accounted
for using the full cost method...................................... 63,491,000 86,081,000
Less accumulated depreciation,
depletion and amortization.......................................... (34,277,000) (33,135,000)
------------ ------------
Oil and gas properties - net.................................... 29,214,000 52,946,000
------------ ------------
PROPERTY AND EQUIPMENT, at cost
Oilfield service equipment............................................ 5,271,000 4,353,000
Furniture and equipment............................................... 829,000 815,000
Field office, shop and land........................................... 455,000 439,000
------------ ------------
6,555,000 5,607,000
Less accumulated depreciation......................................... (3,114,000) (2,946,000)
------------ ------------
Property and equipment - net.................................... 3,441,000 2,661,000
------------ ------------
OTHER ASSETS.......................................................... 257,000 586,000
------------ ------------
$ 66,548,000 $ 66,866,000
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
<PAGE>
PRIMA ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS (cont'd.)
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
----------- -----------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable................................................ $ 892,000 $ 2,122,000
Amounts payable to oil and gas property owners.................. 822,000 973,000
Ad valorem and production taxes payable......................... 1,489,000 1,552,000
Accrued and other liabilities................................... 616,000 439,000
Current portion of notes payable................................ 304,000 120,000
----------- -----------
Total current liabilities................................. 4,123,000 5,206,000
NOTE PAYABLE.................................................... 120,000 120,000
AD VALOREM TAXES, non-current................................... 1,464,000 1,088,000
DEFERRED TAX LIABILITY.......................................... 9,346,000 9,144,000
----------- -----------
Total liabilities......................................... 15,053,000 15,558,000
----------- -----------
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...................................... 4,417,000 4,417,000
Retained earnings............................................... 49,065,000 47,550,000
Accumulated other comprehensive income (loss)................... (37,000) 51,000
Treasury stock, 158,987 and 63,787 shares at cost............... (2,037,000) (797,000)
----------- -----------
Total stockholders' equity................................ 51,495,000 51,308,000
----------- -----------
$66,548,000 $66,866,000
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE>
PRIMA ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------
1999 1998
---------- -----------
<S> <C> <C>
REVENUES
Oil and gas sales....................................... $3,826,000 $ 4,150,000
Trading revenues........................................ 417,000 1,649,000
Oilfield services....................................... 1,032,000 1,128,000
Management and operator fees............................ 240,000 252,000
Interest and dividend income............................ 274,000 134,000
Settlement income and other............................. 0 3,865,000
---------- -----------
5,789,000 11,178,000
---------- -----------
EXPENSES
Depreciation, depletion and amortization................ 1,309,000 1,505,000
Lease operating expense................................. 493,000 504,000
Production taxes........................................ 302,000 345,000
Cost of trading......................................... 354,000 1,410,000
Cost of oilfield services............................... 667,000 864,000
General and administrative.............................. 574,000 521,000
---------- -----------
3,699,000 5,149,000
---------- -----------
INCOME BEFORE INCOME TAXES.............................. 2,090,000 6,029,000
PROVISION FOR INCOME TAXES.............................. 575,000 1,890,000
---------- -----------
NET INCOME.............................................. $1,515,000 $ 4,139,000
---------- -----------
---------- -----------
BASIC NET INCOME PER SHARE.............................. $ 0.26 $ 0.72
---------- -----------
---------- -----------
DILUTED NET INCOME PER SHARE............................ $ 0.26 $ 0.70
---------- -----------
---------- -----------
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING........................................... 5,745,186 5,770,250
---------- -----------
---------- -----------
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING ASSUMING DILUTION......................... 5,832,440 5,893,829
---------- -----------
---------- -----------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
5
<PAGE>
PRIMA ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
1999 1998
---------- ----------
<S> <C> <C>
Net income........................................................ $1,515,000 $4,139,000
---------- ----------
Other comprehensive income:
Unrealized gain (loss) on available-for-sale securities........... (140,000) 3,000
Deferred income tax expense related to unrealized
gain on available-for-sale securities............................ 52,000 (1,000)
---------- ----------
(88,000) 2,000
---------- ----------
COMPREHENSIVE INCOME.............................................. $1,427,000 $4,141,000
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
6
<PAGE>
PRIMA ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------
1999 1998
------------ -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income ........................................................... $ 1,515,000 $ 4,139,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization........................... 1,309,000 1,505,000
Deferred income taxes.............................................. 254,000 1,552,000
Other.............................................................. 376,000 338,000
Changes in current assets and liabilities:
Receivables...................................................... 1,029,000 1,355,000
Inventory........................................................ 64,000 16,000
Other current assets............................................. 257,000 64,000
Payables......................................................... (1,444,000) (2,128,000)
Accrued and other liabilities.................................... 176,000 183,000
------------ -----------
Net cash provided by operating activities...................... 3,536,000 7,024,000
------------ -----------
INVESTING ACTIVITIES
Additions to oil and gas properties................................... (3,361,000) (2,699,000)
Purchases of other property........................................... (763,000) (178,000)
Purchases of available for sale securities............................ (28,000) (28,000)
Proceeds from sales of oil & gas and other property................... 26,281,000 15,000
Increase in cash held in like-kind exchange escrow.................... (25,951,000) 0
------------ -----------
Net cash used in investing activities.......................... (3,822,000) (2,890,000)
------------ -----------
FINANCING ACTIVITIES
Treasury stock purchased.............................................. (1,240,000) 0
Proceeds from issuance of common stock................................ 0 23,000
------------ -----------
Net cash provided by (used in) financing activities............ (1,240,000) 23,000
------------ -----------
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS................................................ (1,526,000) 4,157,000
CASH AND CASH EQUIVALENTS, beginning of period........................ 2,522,000 5,644,000
------------ -----------
CASH AND CASH EQUIVALENTS, end of period.............................. $ 996,000 $ 9,801,000
------------ -----------
------------ -----------
Supplemental schedule of noncash investing and financing activities:
The Company purchased oilfield service assets in March 1999. A summary of the transaction is
as follows:
Fair value of assets acquired......................................... $ 460,000
Cash paid............................................................. 276,000
------------
Note payable issued to seller......................................... $ 184,000
------------
------------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
7
<PAGE>
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, 1998.
The results for interim periods are not necessarily indicative of results
to be expected for the fiscal year of the Company ending December 31, 1999.
The Company believes that the three 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 March 31, 1999 and 1998.
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 March 31, 1999.
3. NOTES PAYABLE AND LINE OF CREDIT
The Company's notes payable consist of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------- ------------
<S> <C> <C>
Total....................................... $424,000 $240,000
Less, current portion....................... 304,000 120,000
-------- --------
Long term................................... $120,000 $120,000
-------- --------
-------- --------
</TABLE>
The Company has two notes payable at March 31, 1999. The first note is
dated June 10, 1997 and is due on June 10, 2000. Payments of principal and
accrued interest (8% per annum) 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. The note balance was $240,000 at March 31, 1999.
The second note is for $184,000. It is dated March 10, 1999 and is due
in one annual installment of principal and accrued interest (8% per annum) on
March 10, 2000. The note financed the purchase of oilfield service equipment
by Action Energy Services, a newly formed wholly owned subsidiary.
8
<PAGE>
Prima maintains an $8,000,000 unsecured line of credit with a commercial
bank. The line of credit, which matures on May 1, 2001, bears interest at
the bank's prime rate (7.75% at March 31, 1999), with interest payable
monthly. At December 31, 1998 and March 31, 1999, there were no amounts
outstanding under the line of credit.
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 did not hedge any
of its oil production in the first quarters of 1999 or 1998, and hedged
approximately 21% and 51% of its natural gas production in these same
periods. Hedging gains and losses were $55,000 and $(126,000) for the
quarters ended March 31, 1999 and 1998, respectively, and were included in
oil and gas revenues at the time the hedged volumes were sold. At March 31,
1999, the Company had open oil futures contracts for May 1999 (10,000
barrels) and June 1999 (10,000 barrels), with unrealized losses of $10,000
and $11,000, respectively.
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.
5. EARNINGS PER SHARE
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).
9
<PAGE>
The following table reconciles the numerator and denominator used in the
calculation of basic and diluted net income per share.
<TABLE>
<CAPTION>
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ----------
<S> <C> <C> <C>
Quarter Ended March 31, 1999:
Basic Net Income per Share......................... $1,515,000 5,745,186 $ 0.26
------
------
Effect of Stock Options............................ 87,254
---------- ---------
Diluted Net Income per Share....................... $1,515,000 5,832,440 $ 0.26
---------- --------- ------
---------- --------- ------
Quarter Ended March 31, 1998:
Basic Net Income per Share......................... $4,139,000 5,770,250 $ 0.72
------
------
Effect of Stock Options............................ 123,579
---------- ---------
Diluted Net Income per Share....................... $4,139,000 5,893,829 $ 0.70
---------- --------- ------
---------- --------- ------
</TABLE>
During the quarter ended March 31, 1999, the Company repurchased
95,200 shares for $1,240,000 as treasury stock pursuant to a stock repurchase
program whereby the Board of Directors has authorized the repurchase of up to
5% of the Company's common stock, depending upon market conditions, the
Company's financial condition, anticipated capital requirements and
liquidity, among other factors.
6. SALE OF OIL AND GAS PROPERTIES
The Company sold certain of its oil and gas properties and related assets
on January 21, 1999, for approximately $26,000,000 (subject to certain
closing and post closing adjustments). The assets sold consisted of all of
the Company's interest in 16,253 gross acres and 135 producing wells and
related equipment in the Bonny Field in Yuma County, Colorado. Prima also
sold its 15.5% interest in the Bonny Gathering Company joint venture, which
owned the pipeline, gathering, compression and dehydration facilities at the
Bonny Field. Prima had served as the managing venturer and operator of Bonny
Gathering Company since initial development of the field in 1982.
The sales proceeds have been placed in a like-kind exchange escrow
account with Norwest Bank Colorado, National Association as escrow agent.
The Company intends to identify and close on certain qualifying properties
pursuant to the like-kind exchange provisions of Section 1031 of the Internal
Revenue Code of 1986. Pursuant to these tax provisions, Prima must identify
the qualifying properties within 45 days and close within 180 days of the
closing of the Bonny Field transaction. On March 5, 1999, the Company filed a
listing of qualifying properties with the escrow agent. This list included
oil and gas properties and other real estate properties. There is no
assurance the Company will be able to close on these properties within the
applicable time limit. To the extent the Company does not close on
qualifying properties, the unexpended funds will be disbursed from the escrow
account to Prima and will be subject to federal and state income taxes of
approximately $6 million after utilization of minimum tax credit
carryforwards..
The Company has reflected the proceeds received attributable to the
producing wells and leasehold interests as a credit to the carrying value of
its oil and gas properties, as the properties sold were less than 25% of the
Company's proved reserves.
10
<PAGE>
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 operations and existing cash and cash equivalents. Net cash
provided by operating activities for the three months ended March 31, 1999
was $3,536,000 compared to $7,024,000 for the same three month period of
1998. Net working capital at March 31, 1999 was $3,562,000 (net of
$25,951,000 held in a like-kind exchange escrow account) compared to
$5,467,000 at December 31, 1998. Current liabilities at March 31, 1999
decreased from December 31, 1998 amounts by $1,083,000, while current assets
decreased by $2,988,000 (net of the funds held in a like-kind exchange escrow
account) for the same period. Cash flow from operations in the first quarter
of 1998 benefited from a contract settlement payment of $3,850,000, due to
the early termination of a gas supply contract.
The Company has external borrowing capacity of $8,000,000 through an
unsecured line of credit with a commercial bank, all of which is available to
be drawn. On January 21, 1999, Prima closed on the sale of all of its
interest in the Bonny Field acreage, wells, and gathering system for
approximately $26 million. Prima placed the proceeds from this sale in a
like-kind exchange escrow account with a qualified intermediary with the
intent of identifying and closing on certain qualifying properties pursuant
to like-kind exchange provisions of Section 1031 of the Internal Revenue
Code. These qualifying properties include oil and gas properties and other
real estate properties. In the event the Company is unable to close on
qualifying properties pursuant to these requirements, the proceeds will be
taxable.
The Company invested $4,124,000 in property and equipment during the
quarter ended March 31, 1999, compared to $2,877,000 for the 1998 quarter.
The Company expended $2,605,000 during the 1999 quarter for its proportionate
share of the costs of drilling, completing and refracturing wells, $689,000
for undeveloped acreage, $67,000 for developed properties and $763,000 for
other property and equipment. These expenditures compare to $2,315,000 for
well costs, $384,000 for undeveloped acreage and $178,000 for other equipment
in the 1998 quarter. The Company also expended $1,240,000 for the purchase of
treasury stock during the first quarter of 1999.
During the first quarter of 1999, the Company participated in the
refracturing of nineteen gross (16.2 net) wells in the Wattenberg Area of the
Denver Basin. All of these wells have been successfully completed and placed
back on production. Production increases have averaged 180 Mcf of natural
gas and 8 barrels of oil per day. Current plans are to refrac or recomplete
an additional 37 wells in this area during the remainder of 1999, and to
drill approximately 9 new wells in the Wattenberg Area and on leases at
Denver International Airport, at an estimated combined gross capital
expenditure of $6.2 million. To date in the second quarter, five additional
refrac wells have been completed and placed on production.
11
<PAGE>
The Company drilled and set pipe on an offset well in the Cedar Draw area
of the Powder River Basin of Wyoming during the first quarter of 1999. This
well, the Cedar Draw Federal 11-21, in which Prima owns a 100% working
interest, is currently scheduled to be completed in June of 1999. The
Company anticipates drilling three additional 10,000 foot Muddy Formation
test wells in this area during the remainder of 1999, at an estimated capital
expenditure of $2.5 million.
The Company continues to participate in the development of the Cave Gulch
area in the Wind River Basin of Wyoming. Prima participated in the drilling
of three non-operated wells during the first quarter of 1999 and in the
completion of a well which was drilled in December 1998. Prima's working
interests in these wells range from 6% to 15%. Three of the four wells were
producing as of May 10, 1999 and one was drilling.
During the first quarter of 1999, the Company acquired additional
undeveloped acreage, primarily by adding to its acreage position in the
Powder River Basin, where the Company owns about 100,000 acres in the
burgeoning coalbed methane play.
During March of 1999, the Company formed a new subsidiary oilfield
service company, Action Energy Services ("AES"). AES is a Wyoming
corporation formed to provide services for Prima and other parties in the
Powder River Basin area. AES acquired the assets of Star Drilling Company
for $460,000 and other service equipment for $283,000 during the first
quarter of 1999. AES anticipates generating its first revenues during the
second quarter of this year.
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 ISSUE
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 date-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 June 30, 1999. At that time, the
Company's internal computer applications are expected to be Year 2000
compliant.
An assessment of the readiness of third parties 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 effect on Prima. The Company's operations would be impacted by
various third parties abilities to be Year 2000 compliant.
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
Company
12
<PAGE>
has not yet determined the potential adverse effect 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.
To mitigate Year 2000 compliance issues at year end, the Company will
back up all internal computer data to ensure the ability to restore that
information. The Company will have hard copies of all important internal
computer information and hard copies of the detail of any assets held by
third parties such as banks and investment brokers. If the Company is
unable to produce its wells or transport or sell its production due to Year
2000 compliance issues, wells will be shut-in until normal operations can be
resumed.
RESULTS OF OPERATIONS
For the quarter ended March 31, 1999, the Company earned net income of
$1,515,000, or $.26 per diluted share, on revenues of $5,789,000, compared to
net income of $4,139,000, or $.70 per diluted share on revenues of
$11,178,000 for the comparable quarter of 1998. Expenses were $3,699,000 for
the 1999 quarter compared to $5,149,000 for the 1998 quarter. Revenues
decreased $5,389,000, or 48%, expenses decreased $1,450,000, or 28% and net
income decreased $2,624,000, or 63%. During the first quarter of 1998, the
Company recorded non-recurring revenues of $3,850,000 ($2,500,000 after
taxes) from the early termination of a gas sales agreement.
Oil and gas sales for the quarter ended March 31, 1999 were $3,826,000
compared to $4,150,000 for the same period of 1998, a decrease of $324,000 or
8%. The decrease is attributable to significantly lower oil and gas prices,
which were partially offset by increased production for both oil and natural
gas. The Company's net natural gas production was 1,748,000 Mcf and
1,510,000 Mcf for the first quarters of 1999 and 1998, respectively, an
increase of 238,000 Mcf or 16%. The Company's net oil production was 81,000
barrels compared to 68,000 barrels for the same periods, an increase of
13,000 barrels or 19%. Net production on a BOE basis increased 17% from
319,000 BOE to 372,000 BOE.
The average price received for natural gas production was $1.66 per Mcf
for the 1999 quarter compared to $2.10 per Mcf for the 1998 quarter, a
decrease of $0.44 per Mcf or 21%. Approximately 5% of the natural gas
production at March 31, 1998 was attributable to production sold under a
fixed contract price of $5.90 per MMBtu. The average price for the Company's
natural gas production exclusive of the fixed price contract gas was $1.91
for the 1998 quarter. The wells subject to the fixed price contract were
sold by the Company effective January 1, 1999. The average price received
for oil in 1999 was $11.42 per barrel compared to $14.49 per barrel for the
same period of 1998, a decrease of $3.07 per barrel or 21%. During the first
quarter of 1999, the Company hedged approximately 21% of its natural gas
production. Hedging gains of $55,000 are included in oil and gas revenues
for this period, which increased the average price received per Mcf of
natural gas by $0.03. No oil production was hedged during the first quarter
of 1999. During the first quarter of 1998, the Company hedged approximately
51% of its natural gas production.
13
<PAGE>
Hedging losses of $126,000 are included in oil and gas revenues for this
period, which decreased the average price received per Mcf of natural gas by
$0.08. No oil production was hedged during the first quarter of 1998.
Lease operating expenses and production taxes ("LOE") were $795,000 for
the 1999 quarter compared to $849,000 for the 1998 quarter, a decrease of
$54,000 or 6%. Depreciation, depletion and amortization ("DD&A") was
$1,309,000 for the first quarter of 1999 compared to $1,505,000 for the first
quarter of 1998, a decrease of $196,000 or 13%. Production for the quarter
ended March 31, 1999 was 372,000 BOE compared to 319,000 BOE for the quarter
ended March 31, 1998. LOE per equivalent barrel of production was $2.13 for
the first quarter of 1999 compared to $2.66 for the comparable quarter of
1998. The rates for 1998 were higher than those experienced in 1999 due to
workover expenses and additional production taxes resulting from higher
product prices. DD&A applicable to oil and gas properties was $3.07 per
equivalent barrel of production for the 1999 quarter compared to $4.30 per
equivalent barrel of production for the 1998 quarter. The DD&A rate is lower
in 1999 due to the lower net carrying value of oil and gas properties
resulting from the crediting of proceeds from the sale of the Bonny wells to
the full cost pool. Depreciation of other property and equipment was
$167,000 and $131,000 for the quarters ended March 31, 1999 and 1998,
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 $417,000 for the three months ended March
31, 1999, a $1,232,000, or 75% decrease from the $1,649,000 reported for the
three months ended March 31, 1998. The Company marketed 180,000 MMBtus for
the first quarter of 1999 compared to 598,000 MMBtus marketed during the
comparable quarter of 1998, a decrease of 418,000 or 70%. Costs of trading
were $354,000 for the 1999 quarter compared to $1,410,000 for the 1998
quarter, a decrease of $1,056,000 or 75%. 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 and
rental equipment, and other related activities. Revenues from third parties
were $1,032,000 for the quarter ended March 31, 1999 compared to $1,128,000
for the comparable quarter of 1998. This $96,000, or 9%, decrease in
revenues was attributable to a higher percentage of work being performed on
Prima wells, which is eliminated in the consolidated financial statements.
For the quarter ended March 31, 1999, 26% of the fees billed by Action were
for Company owned wells compared to 9% for the quarter ended March 31, 1998.
Costs of oilfield services were $667,000 for the quarter ended March 31, 1999
compared to $864,000 for the same quarter of 1998, a decrease of $197,000 or
23% which is largely attributable to the elimination of costs associated with
the Company's wells in the consolidated financial statements.
Management and operator fees are earned pursuant to the Company's roles
as operator for oil and natural gas wells (approximately 375 at March 31,
1999 and 1998), located primarily in the Wattenberg Field area of Weld
County, Colorado, and as managing venturer of a joint venture which owned 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,
14
<PAGE>
and the amount of drilling activity during the period. Fees for the first
quarter of 1999 were $240,000 compared to $252,000 for the same period of
1998, a decrease of $12,000 or 5%. In January 1999, the Company sold its
interest in the Bonny Field assets, but continued to provide various services
to the new owner through March 31, 1999. Management and operator fees
attributable to the Bonny Field system were $66,000 and $101,000 for 1999 and
1998, respectively.
General and administrative expenses were $574,000 for the quarter ended
March 31, 1999 compared to $521,000 for the quarter ended March 31, 1998, an
increase of $53,000 or 10%. The Company's general and administrative costs
have increased due to expansion of the Company's areas of activity.
The provision for income taxes decreased $1,315,000 to $575,000 for the
three months ended March 31, 1999 compared to $1,890,000 for the three months
ended March 31, 1998. The decrease was attributable to the decrease in income
before income taxes, which totaled $2,090,000 for the 1999 quarter compared
to $6,029,000 for the 1998 quarter, a decrease of $3,939,000, or 65%. The
effective income tax rate decreased from 31.4% for the 1998 quarter to 27.5%
for the 1999 quarter. Effective tax rates are affected by amounts of
permanent differences between 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, 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
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 primary 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.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary market risks relate to changes in the prices
received from sales of oil and natural gas. The Company's primary risk
management strategy is to partially mitigate the risk of adverse changes in
its cash flows caused by deceases in oil and natural gas prices by entering
into derivative commodity instruments, including commodity futures contracts
and price swaps. By hedging only a portion of its market risk exposures, the
Company is able to participate in the increased earnings and cash flows
associated with increases in oil and natural gas prices; however, it is
exposed to risk on the unhedged portion of its oil and natural gas
production.
Historically, the Company has attempted to hedge the exposure related to
its forecasted oil and natural gas production in amounts which it believes
are prudent based on the prices of available derivatives and, in the case of
production hedges, the Company's deliverable volumes. The Company does not
use or hold derivative instruments for trading purposes nor does it use
derivative instruments with leveraged features. The Company's derivative
instruments are designed and
15
<PAGE>
effective as hedges against its identified risks, and do not of themselves
expose the Company to market risk because any adverse change in the cash
flows associated with the derivative instrument is accompanied by an
offsetting change in the cash flows of the hedged transaction.
Note 4 to the unaudited consolidated financial statements provides
further disclosure with respect to derivatives and related accounting
policies.
All derivative activity is carried out by personnel who have appropriate
skills, experience and supervision. The personnel involved in derivative
activity must follow prescribed trading limits and parameters that are
regularly reviewed by the Company's Chief Executive Officer. All hedges or
open positions are reviewed by the Chief Executive Officer before they are
committed to, and significant positions are reviewed by the Company's Board
of Directors. The Company uses only well-known, conventional derivative
instruments and attempts to manage its credit risk by entering into financial
contracts with reputable financial institutions.
Following are disclosures regarding the Company's market risk
instruments. Investors and other users are cautioned to avoid simplistic use
of these disclosures. Users should realize that the actual impact of future
commodity price movements will likely differ from the amounts disclosed below
due to ongoing changes in risk exposure levels and concurrent adjustments to
hedging positions. It is not possible to accurately predict future movements
in oil and natural gas prices.
The Company periodically hedges a portion of the price risk associated
with the sale of its oil and natural gas production through the use of
derivative commodity instruments, which consist of commodity futures
contracts and price swaps. These instruments reduce the Company's exposure
to decreases in oil and natural gas prices on the hedged portion of its
production by enabling it to effectively receive a fixed price on its oil and
natural gas sales. As of May 12, 1999, the Company had the following
derivative positions in place:
<TABLE>
<CAPTION>
Volume Unrealized
Type of Derivative (Bbls) or (Mcf) Term Gain/(Loss)
- ------------------------------ --------------- ----------------- -----------
<S> <C> <C> <C>
Oil futures 16,000 June 1999 $(13,620)
Oil futures 5,000 July 1999 2,700
Oil calls 10,000 July 1999 (3,050)
Natural gas calls 100,000 June 1999 (9,400)
Natural gas calls 100,000 July 1999 (5,800)
Natural gas calls 100,000 August 1999 (9,700)
Natural gas commodity swap 300,000 May-October 1999 (48,000)
Natural gas commodity swap 250,000 June-October 1999 (27,500)
</TABLE>
During the first quarter of 1999, the Company sold 81,000 barrels of oil.
A hypothetical decrease of $1.14 per barrel (10% of average first quarter
prices) would have decreased the Company's production revenues by $92,000 for
that period. The Company sold 1,748,000 Mcf of natural gas during the first
quarter of 1999. A hypothetical decrease of $.166 per Mcf (10% of average
first quarter prices) would have decreased the Company's production revenues
by $290,000 for that period.
16
<PAGE>
--------------------
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR"
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
"Management's Discussion and Analysis of Financial Condition and Results
of Operations" included in Item 2 of this Report contains "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 budget (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," "expects" or
"estimates" 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; 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, 1998, beginning on page 16.
--------------------
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
The following exhibit is filed herewith pursuant to Rule 601 of
Regulation S-K.
<TABLE>
<CAPTION>
EXHIBIT NO. DOCUMENT
<S> <C>
27 Financial Data Schedules
</TABLE>
(B) REPORTS ON FORM 8-K
A Form 8-K dated January 21, 1999, announced the sale of oil and gas
properties and related assets for $26 million. See Note 6 of the Notes to
Unaudited Consolidated Financial Statements for additional discussion of this
transaction.
17
<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 May 14, 1999 By /s/ Richard H. Lewis
--------------------------- -------------------------------
Richard H. Lewis,
President and
Principal Financial Officer
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR PRIMA ENERGY CORPORATION FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 26,947,000
<SECURITIES> 2,279,000
<RECEIVABLES> 3,714,000
<ALLOWANCES> (47,000)
<INVENTORY> 548,000
<CURRENT-ASSETS> 33,636,000
<PP&E> 70,046,000
<DEPRECIATION> (37,391,000)
<TOTAL-ASSETS> 66,548,000
<CURRENT-LIABILITIES> 4,123,000
<BONDS> 120,000
0
0
<COMMON> 87,000
<OTHER-SE> 51,408,000
<TOTAL-LIABILITY-AND-EQUITY> 66,548,000
<SALES> 4,243,000
<TOTAL-REVENUES> 5,789,000
<CGS> 2,458,000
<TOTAL-COSTS> 3,125,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,090,000
<INCOME-TAX> 575,000
<INCOME-CONTINUING> 1,515,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,515,000
<EPS-PRIMARY> 0.26
<EPS-DILUTED> 0.26
</TABLE>
