U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________
FORM 10-QSB
/X/ Quarterly Report Under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Quarterly Period Ended June 30, 1997
or
/ / Transition Report Under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition Period From __________ to ___________
______________________
Commission File Number 0-7406
______________________
PrimeEnergy Corporation
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
84-0637348
(IRS employer identification number)
One Landmark Square, Stamford, Connecticut 06901
(Address of principal executive offices)
(203) 358-5700
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since
last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
past 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
The number of shares outstanding of each class of the Registrant's
Common Stock as of August 12, 1997 was: Common Stock, $0.10 par
value, 4,659,249 shares.
<PAGE>
PrimeEnergy Corporation
Index to Form 10-QSB
June 30, 1997
Part I - Financial Information
Consolidated Balance Sheets - June 30, 1997 and
December 31, 1996 3-4
Consolidated Statements of Operations for the six months
ended June 30, 1997 and 1996 5
Consolidated Statements of Operations for the three months
ended June 30, 1997 and 1996 6
Consolidated Statement of Stockholders' Equity for the
six months ended June 30, 1997 7
Consolidated Statements of Cash Flows for the six months
ended June 30, 1997 and 1996 8
Notes to Consolidated Financial Statements 9-17
Management's Discussion and Analysis of Financial Condition
and Results of Operations 18-23
Part II - Other Matters 24
Signatures 25
2
<PAGE>
PrimeEnergy Corporation
Consolidated Balance Sheets
June 30, 1997 and December 31, 1996
June 30, December 31,
1997 1996
(Unaudited) (Audited)
Current assets:
Cash and cash equivalents $ 2,376,000 $ 3,316,000
Restricted cash and cash
equivalents (Note 2) 963,000 663,000
Accounts receivable (Note 3) 4,252,000 5,052,000
Due from related parties (Note 10) 1,919,000 2,184,000
Other current assets 268,000 266,000
Prepaid expenses 161,000 150,000
Deferred income taxes 119,000 119,000
---------- ----------
Total current assets 10,058,000 11,750,000
---------- ----------
Property and equipment, at cost(Notes 1 and 4):
Oil and gas properties (successful
efforts method):
developed 35,891,000 36,645,000
undeveloped 58,000 179,000
Furniture, fixtures and equipment
including leasehold improvements 5,628,000 5,269,000
---------- ----------
41,577,000 42,093,000
Accumulated depreciation and depletion (22,239,000) (21,860,000)
---------- ----------
Net property and equipment 19,338,000 20,233,000
---------- ----------
Other assets 597,000 607,000
Due from affiliates 325,000 325,000
---------- ----------
Total assets $ 30,318,000 $32,915,000
========== ==========
See accompanying notes to the consolidated financial statements.
3
<PAGE>
PrimeEnergy Corporation
Consolidated Balance Sheets
June 30, 1997 and December 31, 1996
June 30, December 31,
1997 1996
(Unaudited) (Audited)
Current liabilities:
Current portion of other long-term
obligations (Note 6) $ 55,000 $ 73,000
Accounts payable 4,466,000 5,297,000
Accrued liabilities:
Payroll, Benefits and related Items 901,000 494,000
Taxes (Note 1) 17,000 11,000
Interest and other 829,000 774,000
Due to related parties (Note 10) 1,737,000 1,298,000
---------- ----------
Total current liabilities 8,005,000 7,947,000
---------- ----------
Long-term bank debt (Note 5) 15,050,000 17,400,000
Other long-term obligations (Note 6) 1,000 243,000
Deferred income taxes (Note 1) 240,000 240,000
Payable for encumbered treasury
stock (Note 7) 158,000 621,000
Stockholders' equity:
Preferred stock, $.10 par, authorized
10,000 shares; none issued -- --
Common stock, $.10 par value, authorized
15,000,000 shares; issued 7,597,970
in 1996 and 1995 760,000 760,000
Paid in capital 10,888,000 10,888,000
Retained earnings (accumulated deficit) 661,000 (53,000)
Encumbered treasury stock (Note 7) (158,000) (621,000)
---------- -----------
12,151,000 10,974,000
Treasury stock, at cost, 2,874,313
common shares in 1997 and 2,650,398
common shares in 1996 (5,287,000) (4,510,000)
---------- ----------
Total stockholders' equity 6,864,000 6,464,000
---------- ----------
Total liabilities and equity $30,318,000 $32,915,000
========== ==========
See accompanying notes to the consolidated financial statements.
4
<PAGE>
PrimeEnergy Corporation
Consolidated Statements of Operations
Six Months Ended June 30, 1997 and 1996
(Unaudited)
1997 1996
Revenue:
Oil and gas sales $ 7,717,000 $ 4,009,000
District operating income 5,447,000 4,742,000
Administrative revenue (Note 10) 852,000 827,000
Reporting and management fees (Note 10) 160,000 178,000
Interest and other income 69,000 85,000
---------- ----------
Total revenue 14,245,000 9,841,000
---------- ----------
Costs and expenses:
Lease operating expense 3,380,000 2,398,000
District operating expense 4,101,000 3,581,000
Depreciation and depletion of
oil and gas properties 2,583,000 1,500,000
General and administrative expense 1,617,000 1,791,000
Exploration costs 1,351,000 190,000
Interest expense (Notes 5 and 6) 566,000 367,000
---------- ----------
Total costs and expenses 13,598,000 9,827,000
---------- ----------
Income from operations 647,000 14,000
Gain on sale and exchange of assets 146,000 116,000
---------- ----------
Net income before income taxes 793,000 130,000
Provision for income taxes 79,000 21,000
---------- ----------
Net income $ 714,000 $ 109,000
========== ==========
Primary income per common share (Note 11) $0.13 $0.02
==== ====
Fully diluted income per common share (Note 11) $0.13 $0.02
==== ====
See accompanying notes to consolidated financial statements.
5
<PAGE>
PrimeEnergy Corporation
Consolidated Statements of Operations
Three Months Ended June 30, 1997 and 1996
(Unaudited)
1997 1996
Revenue:
Oil and gas sales $ 3,440,000 $ 2,388,000
District operating income 2,794,000 2,448,000
Administrative revenue (Note 10) 488,000 441,000
Reporting and management fees (Note 10) 79,000 91,000
Interest and other income 36,000 27,000
---------- ----------
Total revenue 6,837,000 5,395,000
---------- ----------
Costs and expenses:
Lease operating expense 1,730,000 1,361,000
District operating expense 1,986,000 1,816,000
Depreciation and depletion of
oil and gas properties 1,293,000 876,000
General and administrative expense 809,000 1,103,000
Exploration costs 708,000 6,000
Interest expense (Notes 5 and 6) 291,000 229,000
---------- ----------
Total costs and expenses 6,817,000 5,391,000
---------- ----------
Income from operations 20,000 4,000
Gain on sale and exchange of assets 124,000 71,000
---------- ----------
Net income before income taxes 144,000 75,000
Provision for income taxes 14,000 2,000
---------- ----------
Net income $ 130,000 $ 73,000
========== ==========
Primary income per common share (Note 11) $0.02 $0.01
==== ====
Fully diluted income per common share (Note 11) $0.02 $0.01
==== ====
See accompanying notes to consolidated financial statements.
6
<PAGE>
PrimeEnergy Corporation
Consolidated Statement of Stockholders' Equity
Six Months Ended June 30, 1997
<TABLE>
<CAPTION>
Retained
Additional Earnings Encumbered
Paid In (Accumulated Treasury Treasury
Shares Amount Capital Deficit) Stock Stock Total
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 7,597,970 $760,000 $10,888,000 ($53,000) ($4,510,000) ($621,000) $6,464,000
Purchased 62,322
shares of common stock ($314,000) ($314,000)
Amortization Of Encumbered
treasury stock ($463,000) $463,000 --
(Note 7)
Net income -- -- -- $714,000 -- 714,000
Balance at June 30, 1997 7,597,970 $760,000 $10,888,000 $661,000 ($5,287,000) ($158,000) $6,864,000
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE>
PrimeEnergy Corporation
Consolidated Statements of Cash Flows
Six Months Ended June 30, 1997 and 1996
(Unaudited)
1997 1996
Net cash provided by operating activities $ 4,373,000 $ 1,953,000
---------- ----------
Cash flows from investing activities:
Additions to property and equipment (2,794,000) (8,318,000)
Proceeds from sale of property
and equipment 828,000 190,000
Proceeds from payments on note receivable 40,000 --
---------- ----------
Net cash (used in) investing activities (1,926,000) (8,128,000)
---------- ----------
Cash flows from financing activities:
Purchase of treasury stock (777,000) (165,000)
Increase in long-term bank debt and
other long-term obligations 14,690,000 13,403,000
Repayment of long-term bank debt and
other long-term obligations (17,300,000) (6,767,000)
---------- ----------
Net cash provided by (used in)
financing activities (3,387,000) 6,471,000
---------- ----------
Net increase (decrease) in cash and
cash equivalents (940,000) 296,000
Cash and cash equivalents at the
beginning of the period 3,316,000 1,009,000
---------- ----------
Cash and cash equivalents at the
end of the period $ 2,376,000 $ 1,305,000
========== ==========
See accompanying notes to consolidated financial statements.
8
<PAGE>
PrimeEnergy Corporation
Notes to Consolidated Financial Statements
June 30, 1997
1) Description of Operations and Significant Accounting
Policies:
Nature of Operations-
The Company is engaged in oil and gas exploration and
drilling, and the development, acquisition and production of
oil and natural gas properties. The Company owns leasehold,
mineral and royalty interests in producing and non-
producing oil and gas properties across the continental
United States, including Colorado, Kansas, Louisiana,
Mississippi, Montana, Nebraska, Nevada, New Mexico, North
Dakota, Oklahoma, Texas, Utah, West Virginia and Wyoming.
The Company operates approximately 1,743 wells and owns non-
operating interests in approximately 909 additional wells.
Additionally, the Company provides well-servicing support
operations, site preparation and construction services for
oil and gas drilling and rework operations, both in
connection with the Company's activities and in providing
contract services for third parties. The Company is
publicly traded on NASDAQ under the symbol "PNRG".
The markets for the Company's products are highly
competitive, as oil and gas are commodity products and
prices depend upon numerous factors beyond the control of
the Company, such as economic, political and regulatory
developments and competition from alternative energy
sources.
Principles of Consolidation-
The consolidated financial statements include the accounts
of PrimeEnergy Corporation and its wholly-owned
subsidiaries. All material inter-company accounts and
transactions between these entities have been eliminated.
Oil and gas properties include ownership interests in the
Partnerships. The statement of operations includes the
Company's proportionate share of revenue and expenses
related to oil and gas interests owned by the partnerships.
Use of Estimates-
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results
could differ from those estimates.
9
<PAGE>
Estimates of oil and gas reserves, as determined by
independent petroleum engineers, are continually subject to
revision based on price, production history and other
factors. Depletion expense, which is computed based on the
units of production method, could be significantly impacted
by changes in such estimates. Additionally, FAS 121
requires that, if the expected future cash flow from an
asset is less than its carrying cost, that asset must be
written down to its fair market value. As the fair market
value of a property is generally substantially less than the
total future cash flow expected from the asset, small
changes in the estimated future net revenue from an asset
could lead to the necessity of recording a significant
impairment. The Company has significant deferred tax assets
which have been fully reserved against based upon the
assumption that at current and expected future levels of
taxable income, and considering the Section 29 credits the
Company expects to generate, the availability of these
carryforwards will not lead to significant reductions in the
Company's tax liability as compared to what it would pay if
such carryforwards did not exist. Increases in estimates of
future taxable income could lead to significant reductions
in the amount of this reserve, which could have a material
effect on the net income of the Company.
Property and Equipment-
The Company follows the "successful efforts" method of
accounting for its oil and gas properties. Under the
successful efforts method, costs of acquiring undeveloped
oil and gas leasehold acreage, including lease bonuses,
brokers' fees and other related costs are capitalized.
Provisions for impairment of undeveloped oil and gas leases
are based on periodic evaluations. Annual lease rentals and
exploration expenses, including geological and geophysical
expenses and exploratory dry hole costs, are charged against
income as incurred.
All other property and equipment are carried at cost.
Depreciation and depletion of oil and gas production
equipment and properties are determined under the unit-of-
production method based on estimated proved recoverable oil
and gas reserves. Depreciation of all other equipment is
determined under the straight-line method using various
rates based on useful lives. The cost of assets and related
accumulated depreciation is removed from the accounts when
such assets are disposed of, and any related gains or losses
are reflected in current earnings.
Effective January 1, 1996, the Company adopted the
provisions of Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long Lived Assets to Be Disposed Of" ("SFAS No.
121"). Prior to the adoption of SFAS No. 121, the total
amount of unamortized capitalized cost was limited to the
aggregated undiscounted value of future net revenues, based
on current prices and cost. SFAS No. 121 requires that long-
lived assets held and used by a company, including oil and
gas properties accounted for under the successful
10
<PAGE>
efforts method of accounting, be reviewed for impairment
whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. The
Company determines whether an impairment has occurred by
estimating the undiscounted expected future net cash flows
of its oil and gas properties at a field level and compares
such cash flows to the carrying amount of the oil and gas
properties to determine if the carrying amount is
recoverable. For those oil and gas properties for which the
carrying amount exceeds the undiscounted estimated future
cash flows, an impairment is determined to exist. The
carrying amount of such properties is adjusted to their
estimated net fair value based on discounted cash flows. The
Company recognized a non-cash charge of $184,000 related to
the impairment oil and gas properties during 1996, which was
included in depreciation, depletion and amortization
expense.
Income Taxes-
The Company records income taxes in accordance with
Statement of Financial Accounting Standards ("SFAS") No.
109, "Accounting for Income Taxes". SFAS No. 109 is an
asset and liability approach to accounting for income taxes,
which requires the recognition of deferred tax assets and
liabilities for the expected future consequences of events
that have been recognized in the company's financial
statements or tax returns.
Deferred tax liabilities or assets are established for
temporary differences between financial and tax reporting
bases and are subsequently adjusted to reflect changes in
the rates expected to be in effect when the temporary
differences reverse. A valuation allowance is established
for any deferred tax asset for which realization is not
likely.
General and Administrative Expenses-
General and administrative expenses represent costs and
expenses associated with the operation of the Company.
Certain partnerships and trusts sponsored by the Company
reimburse general and administrative expenses incurred on
their behalf.
Income per share-
Income per share of common stock has been computed based on
the weighted average number of common shares and common
stock equivalents outstanding during the respective periods.
Statements of cash flows-
For purposes of the consolidated statements of cash flows,
the Company considers short-term, highly liquid investments
with original maturities of less than ninety days to be cash
equivalents.
11
<PAGE>
Concentration of Credit Risk-
The Company maintains significant banking relationships with
financial institutions in the State of Texas. The Company
limits its risk by periodically evaluating the relative
credit standing of these financial institutions. The
Company's oil and gas production purchasers consist
primarily of independent marketers and major gas pipeline
companies.
Hedging-
From time to time, the Company may enter into futures
contracts in order to reduce its exposure related to changes
in oil and gas prices. In accordance with Statement of
Financial Accounting Standards No. 80, any gain or loss on
such contracts is treated as an adjustment to oil and gas
revenue.
Recently Issued Accounting Standards-
In October 1995, FAS Statement No. 123, "Accounting for
Stock-Based Compensation", was issued, effective January 1,
1996. The Company will continue to measure compensation
costs for its employee stock compensation as prescribed by
APB Opinion No. 25, "Accounting for Stock Issued to
Employees", and comply with the disclosure requirements of
FAS Statement No. 123 rather than record compensation
expense in accordance with the new standard. Recording
compensation expense in accordance with the standard would
not have a significant effect on the Company's results of
operations.
In October 1996, the American Institute of Certified Public
Accountants issued Statement of Position (SOP) 96-1,
"Environmental Remediation Liabilities". SOP 96-1 was
adopted by the Company on January 1, 1997. It requires,
among other things, that environmental remediation
liabilities be accrued when the criteria of SFAS No. 5,
"Accounting for Contingencies", have been met. SOP 96-1
also provides guidance with respect to the measurement of
the remediation liabilities. Such accounting is consistent
with the Company's current method of accounting for
environmental remediation costs. Therefore adoption of SOP
96-1 will not have a material impact on the Company's
financial position or results of operations.
In February 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards ("SFAS")
No. 128, "Earnings per Share" (EPS). SFAS No. 128 replaces
the standards for computing earnings per share previously
established by APB No. 15, "Earnings per Share" by replacing
the primary EPS with a presentation of "basic EPS" and
requiring dual presentation of basic and diluted EPS on the
face of the income statement. SFAS No. 128 requires
companies to adopt its provisions for fiscal years ending
after December 15, 1997 and requires restatement of all
prior period EPS data, if necessary. Earlier application is
not permitted.
12
<PAGE>
(2) Restricted Cash and Cash Equivalents:
Restricted cash and cash equivalents includes $963,000 and
$663,000 at June 30, 1997 and December 31, 1996,
respectively, of cash primarily pertaining to unclaimed
royalty payments. There were corresponding accounts payable
recorded at June 30, 1997 and December 31, 1996 for these
liabilities.
13
<PAGE>
(3) Accounts Receivable
Accounts receivable at June 30, 1997 and December 31, 1996 consisted
of the following:
June 30, December 31,
1997 1996
Joint Interest Billing $ 1,383,000 $ 1,533,000
Trade Receivables 170,000 126,000
Oil and Gas Sales 2,631,000 3,337,000
Other 96,000 99,000
--------- ---------
4,280,000 5,095,000
Less, Allowance for doubtful
accounts (28,000) ( 43,000)
--------- ---------
$ 4,252,000 $ 5,052,000
========= =========
(4) Property and equipment
Property and equipment at June 30, 1997 and December 31, 1996
consisted of the following:
June 30, December 31,
1997 1996
Developed oil and gas
properties at cost $35,891,000 $35,952,000
Undeveloped oil and gas
properties at cost 58,000 872,000
Less, accumulated depletion
and depreciation (18,826,000) (18,661,000)
------------ ------------
17,123,000 18,163,000
------------ ------------
Furniture, fixtures and
and equipment 5,628,000 5,269,000
Less, accum. depreciation (3,413,000) (3,199,000)
---------- ----------
2,215,000 2,070,000
---------- ----------
Total net property and
equipment $19,338,000 $20,233,000
========== ==========
14
<PAGE>
(5) Long-Term Bank Debt
At December 31, 1996, the Company was party to a line of
credit agreement with a bank with a non-reducing borrowing
base of $19 million. Twenty-five percent of the borrowing
is syndicated to a second bank. During 1996, the agreement
provided for interest at 1/2% over the bank's base rate as
defined, or 2-3/4% over the London Inter-Bank Offered Rate
(LIBO) rate for the interest period in question, payable at
the end of the interest period.
On February 6, 1997, the bank extended the borrowing base to
$21 million. The credit agreement was also amended to
provide for interest on outstanding borrowings at the bank's
base rate, as defined, or 2 1/4% over the LIBO rate.
Effective in May, 1997, the bank revised the borrowing base
to $20.5 million due to the sale of properties by the
Company.
Advances pursuant to the agreement are limited to the
borrowing base as defined in the agreement. Most of the
Company's oil and gas properties as well as certain
receivables and equipment were pledged as security under
this agreement. Under the Company's credit agreement, the
Company is required to maintain, as defined, a minimum
current ratio, tangible net worth, debt coverage ratio and
interest coverage ratio.
(6) Other Long-Term Obligations:
Other long-term obligations at June 30, 1997 and December 31,
1996 consisted of the following:
June 30, December 31,
1997 1996
Subordinated debentures due
December 31, 1998 $ -- $ 225,000
Capital lease obligations 56,000 91,000
--------- ---------
56,000 316,000
Less, current portion (55,000) (73,000)
--------- ---------
$ 1,000 $ 243,000
========= =========
The secured subordinated debentures, paid in full as of June
30, 1997, were held by affiliated Partnerships in which PEMC
is a general partner. Interest was payable at 9.25% through
1995, 6.5% through 1996 and 1% above year end money market
rates thereafter.
15
<PAGE>
(7) Encumbered Treasury Stock
In June of 1996, the Company entered into an agreement to
purchase 400,000 shares of the Company's common stock from
McJunkin Corporation. The Company agreed to make 15 monthly
payments of $80,000 beginning on June 1, 1996, with the
shares held in escrow until such payments have been made.
The shares are classified as encumbered treasury stock on
the balance sheet, and will be un-encumbered in proportion
to the payments made under the agreement. The liability for
future payments under the note, less imputed interest, is
shown as "Payable for Encumbered Treasury Stock" on the
balance sheet.
(8) Contingent Liabilities:
PEMC, as managing general partner of the affiliated
Partnerships, is responsible for all Partnership activities,
including the review and analysis of oil and gas properties
for acquisition, the drilling of development wells and the
production and sale of oil and gas from productive wells.
PEMC also provides the administration, accounting and tax
preparation work for the Partnerships. PEMC is liable for
all debts and liabilities of the affiliated Partnerships, to
the extent that the assets of a given limited Partnership
are not sufficient to satisfy its
obligations.
As a general partner, PEMC is committed to offer to purchase
the limited partners' interests in certain of its managed
Partnerships at various annual intervals. Under the terms
of a partnership agreement, PEMC is not obligated to
purchase an amount greater than 10% of the total partnership
interest outstanding. In addition, PEMC will be obligated
to purchase interests tendered by the limited partners only
to the extent of one-hundred fifty (150) percent of the
revenues received by it from such partnership in the
previous year. Purchase prices are based upon annual
reserve reports of independent petroleum engineering firms
discounted by a risk factor. Based upon historical
production rates and prices, management estimates that if
all such offers were to be accepted, the maximum annual
future purchase commitment would be approximately $500,000.
(9) Stock Options and Other Compensation:
In May 1989, non-statutory stock options were granted by the
Company to four key executive officers for the purchase of
shares of common stock. In each case such options are for a
term of ten years ending May 15, 1999, and are exercisable,
on a cumulative basis, as to twenty percent of the shares
subject to option in each year, beginning one year after the
granting of the option. At March 31, 1995, options on
802,500 shares were outstanding and exercisable at prices
ranging from $1.00 to $1.25. On January 27, 1983, the
Company adopted the 1983 Incentive Stock Option Plan. At
June 30, 1997 and 1996, options on 124,000 and 134,000
shares were exercisable at $1.50 per share, respectively,
and no additional shares were available for granting.
16
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(10) Related Party Transactions:
PEMC is a general partner in several oil and gas
Partnerships in which certain directors have limited and
general partnership interests. A substantial portion of
the assets and revenues of PEMC are derived from its
sponsorship of the Partnerships and the interests of PEMC in
the oil and gas properties acquired by the Partnerships. As
the managing general partner in each of the Partnerships,
PEMC receives approximately 5% to 12% of the net revenues of
each Partnership as a carried interest in the Partnerships'
properties.
The Partnership agreements allow PEMC to receive management
fees for various services to the Partnerships as well as
reimbursement for property acquisition and development costs
incurred on behalf of the Partnerships and general and
administrative overhead, which is reported in the statements
of operations as administrative revenue. In 1991, the
Company loaned approximately $325,000 at 12% interest to a
real estate limited partnership of which a Company Officer
and Director is a general partner. This loan is secured by
a mortgage on the underlying real estate in the partnership
and the Company received a 23% equity participation in the
partnership. The loan agreement provides for interest
payments on a quarterly basis provided the cash flow from
operations of the limited partnership are sufficient to pay
interest for the quarter. If cash flows are not sufficient,
the accrued interest is added to the principal. This loan is
included in other non-current assets on the balance sheet.
Due to related parties at June 30, 1997 and December 31,
1996 primarily represent receipts collected by the Company,
as agent, from oil and gas sales net of expenses.
Receivables from affiliates consist of reimbursable general
and administrative costs, lease operating expenses and
reimbursements for property acquisitions and related costs.
(11) Income per share:
The weighted average number of common shares and common
stock equivalents outstanding used in the income per share
calculation are as follows:
Six Months Ended Three Months Ended
June 30, June 30,
1997 1996 1997 1996
Primary 5,430,215 5,760,762 5,442,542 5,773,484
========= ========= ========= =========
Fully diluted 5,491,785 5,866,990 5,479,361 5,853,040
========= ========= ========= =========
17
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This discussion should be read in conjunction with the financial
statements of the Company and notes thereto. The Company's
subsidiaries are defined in Note 1 of the financial statements.
PEMC is the managing general partner or managing trustee in
several Limited Partnerships and Trusts (collectively, the
"Partnerships").
LIQUIDITY AND CAPITAL RESOURCES
The Company feels that it has the ability to generate sufficient
amounts of cash to meet long-term liquidity needs, as well as
debt service. The Company expects to generate increased cash
flows by increasing its reserve base through continued
acquisitions and development. By increasing its reserve base, the
Company's borrowing ability is increased due to additional
properties available as collateral.
On April 26, 1995, the Company entered into a revised credit
agreement with Bank One, Texas NA providing for a $12.5 million
revolving line of credit on a $50 million master promissory note.
This new agreement introduced Den norske Bank, AS as a 25%
syndication partner in the line, once the Company reaches
borrowings of $12.5 million for over one month. The agreement
also provides for a lower floating rate compared to previous
agreements as well as the ability to borrow based upon the London
Inter-Bank Offered Rate (LIBO). The borrowing base is non-
reducing and is revised every six months by the banks.
During 1996, the interest rate on this line of credit was 1/2%
over the bank's base rate, as defined, monthly, or 2 3/4% over
the published LIBO rate, payable at the end of the applicable
interest period. Effective February 6, 1997, the agreement was
amended, lowering the interest rate to the banks base rate, as
defined, monthly, or 2 1/4% over the published LIBO rate.
Pursuant to the semi-annual redetermination of the borrowing
base, the Company's line of credit was increased to $21,000,000.
This increase reflected the increase in the companies reserve
base due to the purchase and development of properties acquired
in Saratoga acquisition, and the success of the company's 3D
seismic drilling program. In May of 1997 the line of credit was
reduced to $20,500,000 due to the sale of oil and gas properties
located in New Mexico. As of June 30, 1997, the Company had
$5,000,000 available under this line of credit.
Most of the Company's oil and gas properties as well as certain
receivables and equipment are pledged as security under the
agreement. The Company is required to maintain, as defined, a
minimum current ratio, tangible net worth, and debt and interest
coverage ratios, and restrictions are placed on the Company's
ability to pay dividends and purchase treasury stock.
18
<PAGE>
During 1996, the Company entered into an agreement to purchase
400,000 shares of its common stock for total consideration of
$1,144,000. Of this amount, $523,000 was paid in 1996, $463,000
was paid during the first half of 1997, and $158,000 was paid in
the third quarter of 1997. The Company also spent $314,000 during
the first half of 1997 to acquire treasury stock in open market
transactions. In June of 1997 the Company's board of directors
approved the purchase of an additional 500,000 shares of treasury
stock, to be purchased from time to time and as conditions
permit.
During the second quarter of 1997 the Company sold a group of
outside operated wells located in New Mexico for $680,000, and,
in a separate transaction, a group of operated properties also
located in New Mexico for $167,000. Both of these transactions
were effective April 1, 1997. The net cash flow received from
these properties in the first quarter of 1997 was $105,000.
In May of 1996, the Company purchased from Internationale
Nederlanden (U.S.) Capital Corporation properties formerly owned
by Saratoga Resources Inc. (the Saratoga Properties) for
$7,180,000. The addition of these properties has significantly
increased the Company's cash flow.
The Company has, to date, drilled ten wells as part of it's 3D
seismic exploration and development program (3D seismic program),
nine of which have been completed as commercial gas wells. Seven
of these wells are located in the South Powderhorn field in
Calhoun County Texas, and contributed significantly to cash flow
in the first half of 1997. The two other wells began sales in
July of 1997.
The company spent $3,511,000 on exploration and development of
its oil and gas properties during the first half of 1997. This
includes $2,437,000 spent in connection with the 3D seismic
program, and $476,000 spent to buy back limited partner interests
in partnerships in which the Company is a general partner.
Additionally, the Company spent approximately $73,000 on trucks,
automobiles and equipment used in connection with field service
operations, and an additional $65,000 on computer and related
equipment and software.
The Company's primary source of working capital during the first
three months of 1997 was through internally generated funds
coupled with cash balances at the prior year-end. Net cash
provided by operations was used primarily to repay bank debt and
continue property development.
The Company feels that it has the ability to generate sufficient
amounts of cash to meet long-term liquidity needs, as well as
debt service. The Company expects to generate increased cash
flows by increasing its reserve base through continued
exploration, development of existing properties, and acquisitions
19
<PAGE>
of producing properties. By increasing its reserve base, the
Company's borrowing ability is increased due to additional
properties available as collateral.
20
<PAGE>
RESULTS OF OPERATIONS
Net income increased to $714,000 for the six months ended June
30, 1997 as compared to $109,000 for the first six months of
1996, and to $130,000 for the quarter ended June 30, 1997 as
compared to $73,000 for the comparable period in 1996. These
increases are due primarily to the contributions to income made
by the Saratoga and 3D Drilling Program properties, as well as
sharply higher prices received for oil and gas production during
1997. These increases to net income come in spite of the fact
that the Company expensed $1,351,000 in exploration costs in the
first six months of 1997, including $708,000 spent in the second
quarter.
As a result of the Saratoga acquisition and the success of the
Company's recent drilling, oil and gas revenue accounted for 54%
of total revenue in the first half of 1997 as compared to 41% in
the comparable period in 1996. As oil and gas prices can be
highly volatile, this may lead to greater variability in the
Company's profitability and cash flow in the future. In addition,
the Company has greatly increased its drilling and exploration
activities, and has plans to drill several exploratory wells in
the last half of 1997, including a well which will test the Frio
formation on the Texas gulf coast for which the Company's share
of drilling costs is expected to be in excess of $1 million. The
risk inherent in these activities, coupled with the requirement
that certain costs incurred in these activities be expensed as
incurred, can be expected to lead to greater volatility in
earnings in the future.
Oil and gas sales of $7,717,000 for the first half of 1997
represented a 92% increase over sales in the first half of 1996.
Second quarter 1997 sales of $3,440,000 represent a 44% increase
over 1996 second quarter sales. The South Powderhorn field,
developed as part of the Company's 3D seismic program,
contributed $799,000 and $723,000 in the first and second
quarters of 1997, respectively. The Saratoga properties purchased
in May of 1996 contributed $1,074,000 and $736,000 in the first
and second quarters of 1997 respectively, as compared to $570,000
in the two months those properties were owned during the second
quarter of 1996. Average prices received for directly owned oil
production increased substantially to $20.42 per barrel in 1997
as compared to $18.54 in the first half of 1996. Average gas
prices also increased substantially to $2.48 per MCF received in
the first half of 1997 as compared to $2.17 per MCF received
during the comparable period in 1996.
Oil and gas sales related to PEMC's carried interest in the
Partnerships and other ventures increased approximately 39%, or
$336,000, between the first half of 1997 and the first half of
1996, primarily due to substantially higher oil and gas prices
received by those entities, along with the fact that the Company
has made substantial purchases of limited partner interests
during the past year. As the Company continues to purchase
substantial additional interests, the trend of increased revenue
21
<PAGE>
from these entities can be expected to continue in the short
term.
District operating income increased by $705,000, or 15%, between
the first half of 1997 and the first half of 1996, primarily due
to income generated from operation of the Saratoga properties.
Administrative revenue for the first half of 1997 increased by
$25,000, or 3% as compared to the same period in 1996. Amounts
received in both years from certain partnerships are
substantially less than the amounts allocable to those
Partnerships under the Partnership agreements. The lower amounts
reflect PEMC's efforts to limit costs incurred and those
allocated to the Partnerships.
Lease operating expense for the first half of 1997 increased by
41% or $982,000 compared to the first half of 1996. Second
quarter 1997 lease operating expense of $1,730,000 represented an
increase of $369,000, or 27%, over the second quarter 1996
amount. In both cases the increases are primarily due to the
Saratoga properties which had expenses of $346,000 and $323,000
respectively in the first and second quarters of 1997, as
compared to $214,000 during the two months the properties were
owned during the second quarter of 1996. For directly owned
properties average lifting cost per barrel of oil equivalent
decreased to $7.19 in the first half of 1997 from $12.43 in the
first half of 1996, due to lower per unit costs on the Saratoga
properties and especially the South Powderhorn field, which
produced 106,000 barrel of oil equivalents at an average cost of
$2.20 per unit. Lease operating expenses related to PEMC's
interests in the partnerships and other ventures increased
$336,000 for the six months, primarily due to additional
interests in these partnerships purchased by PEMC during the past
year.
The Company receives reimbursement for costs incurred related to
the evaluation, acquisition and development of properties on
behalf of its related partnerships, trusts, and other joint
venture partners. To the extent that these costs are expended at
the district level, the reimbursements reduce total district
operating expenses. To the extent such expenses are incurred by
PEMC, such reimbursements reduce total general and administrative
expenses. Such reimbursement totaled approximately $750,000 in
the first half of 1997 as compared to $600,000 for the same
period in 1996. This increase is primarily due to an increase in
drilling and exploration activities involving joint venture
partners, particularly in connection with the Company's 3D
seismic program.
District operating expense increased by $520,000 or 15% in the
first half of 1997 as compared to the same period in 1996,
primarily due to costs associated with the operation of the
Saratoga properties.
First half 1997 general and administrative expenses decreased
$174,000, or 10% compared to the first half of 1996, and 1997
second quarter expense was 27% less than 1996. The higher 1996
amounts are primarily due to $190,000 in noncapitalizable costs
incurred in connection with the purchase of the Saratoga
properties which occurred in May of 1996, and lower property
acquisition cost reimbursement received in that year.
Depreciation and depletion of oil and gas properties increased
$492,000, or 49% in the first half of 1997 as compared to the
first half of 1996, and $417,000 or 48% in the second quarter of
1997 as compared to the second quarter of 1996. Depletion on the
South Powderhorn and Saratoga properties is responsible for these
increases.
In the first quarter of 1997 $643,000 of exploration costs were
incurred relating to an area in which the Company drilled two
successful gas wells during the second quarter of the year, and
plans to drill several more wells in the third quarter. $580,000
was spent in the second quarter of 1997 for the purchase and
study of 3D seismic covering an area which is currently being
evaluated in hopes of identifying future drilling prospects, and
$128,000 was spent on geological and geophysical costs relating
to other projects currently in progress. Exploration costs
through June of 1996 consisted of $190,000 spent on the drilling
of a dry hole in Victoria County Texas in the first quarter of
the year.
Interest expense during the first half of the year increased
approximately 54% as average debt levels increased due to the
Saratoga acquisition and the Company's increased spending on
exploration and property development.
23
<PAGE>
PART II - OTHER MATTERS
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of the Registrant was held on
June 18, 1997. The only matter submitted to the stockholders was
the election of fourteen Directors (named below), nominated by
management, all of whom were currently serving as Directors.
Proxies were solicited pursuant to Regulation 14A under the
Securities Act of 1934, definitive copies of which were filed
with the Commission. There was no solicitation in opposition to
management's nominees, and all of the Directors nominated for re-
election were elected. The persons nominated and elected as
Directors and the number of shares voting for or withheld for
each, is shown below. There were no abstentions or broker non-
votes.
Name For Withheld
Samuel R. Campbell 4,218,929 3,162
James E. Clark 4,218,929 3,162
Beverly A. Cummings 4,219,129 2,962
Charles E. Drimal, Jr. 4,219,129 2,962
Charles E. Drimal, Sr. 4,219,129 2,962
Matthias Eckenstein 4,218,929 3,162
H. Gifford Fong 4,219,129 2,962
Thomas S. T. Gimbel 4,219,129 2,962
Clint Hurt 4,219,129 2,962
Robert de Rothschild 4,219,129 2,962
Jarvis J. Slade 4,219,129 2,962
Jan K. Smeets 4,219,129 2,962
Bennie H. Wallace, Jr. 4,219,129 2,962
Gaines Wehrle 4,187,389 34,702
Michael H. Wehrle 4,187,389 34,702
24
<PAGE>
Item 5. OTHER INFORMATION
Exhibit 27 - Financial Data Schedule is attached to the
electronic filing of this report only.
Item 6. EXHIBITS AND REPORTS ON FORM 8K
No reports on form 8K were filed by the Company during the six
months ended June 30, 1997.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act
of 1934, Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
PrimeEnergy Corporation
(Registrant)
August 12, 1997 /s/ Charles E. Drimal,Jr.
(Date) -------------------------
- -
Charles E. Drimal, Jr.
President
Principal Executive
Officer
August 12, 1997 /s/ Beverly A. Cummings
(Date) -------------------------
- -
Beverly A. Cummings
Executive Vice President
Principal Financial and
Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
PrimeEnergy Corporations second quarter 1997 Form 10Q, and is qualified in
it's entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 3,339
<SECURITIES> 0
<RECEIVABLES> 4,280
<ALLOWANCES> 28
<INVENTORY> 0
<CURRENT-ASSETS> 10,058
<PP&E> 41,577
<DEPRECIATION> 22,239
<TOTAL-ASSETS> 30,318
<CURRENT-LIABILITIES> 8,005
<BONDS> 15,106<F1>
0
0
<COMMON> 760
<OTHER-SE> 6,104<F2>
<TOTAL-LIABILITY-AND-EQUITY> 30,318
<SALES> 0
<TOTAL-REVENUES> 14,245
<CGS> 0
<TOTAL-COSTS> 13,032
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 566
<INCOME-PRETAX> 793
<INCOME-TAX> 79
<INCOME-CONTINUING> 714
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 714
<EPS-PRIMARY> .13
<EPS-DILUTED> .13
<FN>
<F1>Current portion long term debt 55
<F2>Retained Earnings 661
Treasury Stock 5,445
</FN>
</TABLE>
