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 September 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 November 11, 1997 was: Common Stock, $0.10 par
value, 4,626,309 shares.
PrimeEnergy Corporation
Index to Form 10-QSB
September 30, 1997
Part I - Financial Information
Consolidated Balance Sheets - September 30, 1997 and
December 31, 1996 3-4
Consolidated Statements of Operations for the nine months
ended September 30, 1997 and 1996 5
Consolidated Statements of Operations for the three months
ended September 30, 1997 and 1996 6
Consolidated Statement of Stockholders' Equity for the
nine months ended September 30, 1997 7
Consolidated Statements of Cash Flows for the nine months
ended September 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
PrimeEnergy Corporation
Consolidated Balance Sheets
September 30, 1997 and December 31, 1996
September 30, December 31,
1997 1996
(Unaudited) (Audited)
Current assets:
Cash and cash equivalents $ 3,525,000 $ 3,316,000
Restricted cash and cash
equivalents (Note 2) 920,000 663,000
Accounts receivable (Note 3) 4,242,000 5,052,000
Due from related parties (Note 10) 2,008,000 2,184,000
Other current assets 282,000 266,000
Prepaid expenses 130,000 150,000
Deferred income taxes 119,000 119,000
---------- ----------
Total current assets 11,226,000 11,750,000
---------- ----------
Property and equipment, at cost(Notes 1 and 4):
Oil and gas properties (successful
efforts method):
Developed 39,343,000 36,645,000
Undeveloped 161,000 179,000
Furniture, fixtures and equipment
including leasehold improvements 5,891,000 5,269,000
---------- ----------
45,395,000 42,093,000
Accumulated depreciation and depletion (23,627,000) (21,860,000)
---------- ----------
Net property and equipment 21,768,000 20,233,000
---------- ----------
Other assets 600,000 607,000
Due from affiliates 325,000 325,000
---------- ----------
Total assets $ 33,919,000 $32,915,000
========== ==========
See accompanying notes to the consolidated financial statements.
PrimeEnergy Corporation
Consolidated Balance Sheets
September 30, 1997 and December 31, 1996
September 30, December 31,
1997 1996
(Unaudited) (Audited)
Current liabilities:
Current portion of other long-term
obligations (Note 6) $ 38,000 $ 73,000
Accounts payable 6,333,000 5,297,000
Accrued liabilities:
Payroll, Benefits and related Items 1,180,000 494,000
Taxes (Note 1) 20,000 11,000
Drilling costs 951,000 234,000
Interest and other 678,000 774,000
Due to related parties (Note 10) 1,958,000 1,064,000
---------- ----------
Total current liabilities 11,158,000 7,947,000
---------- ----------
Long-term bank debt (Note 5) 15,855,000 17,400,000
Other long-term obligations (Note 6) -- 243,000
Deferred income taxes (Note 1) 240,000 240,000
Payable for encumbered treasury
stock (Note 7) -- 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) 713,000 (53,000)
Encumbered treasury stock (Note 7) -- (621,000)
---------- ----------
12,361,000 10,974,000
Treasury stock, at cost, 2,956,061
common shares in 1997 and 2,650,398
common shares in 1996 (5,695,000) (4,510,000)
---------- ----------
Total stockholders' equity 6,666,000 6,464,000
---------- ----------
Total liabilities and equity $33,919,000 $32,915,000
========== ===========
See accompanying notes to the consolidated financial statements.
PrimeEnergy Corporation
Consolidated Statements of Operations
Nine Months Ended September 30, 1997 and 1996
(Unaudited)
1997 1996
Revenue:
Oil and gas sales $ 11,195,000 $ 7,005,000
District operating income 8,331,000 7,289,000
Administrative revenue (Note 10) 1,290,000 1,212,000
Reporting and management fees (Note 10) 247,000 263,000
Interest and other income 109,000 117,000
---------- ----------
Total revenue 21,172,000 15,886,000
---------- ----------
Costs and expenses:
Lease operating expense 5,132,000 3,966,000
District operating expense 6,115,000 5,419,000
Depreciation and depletion of
oil and gas properties 3,989,000 2,671,000
General and administrative expense 2,228,000 2,599,000
Exploration costs 2,257,000 266,000
Interest expense (Notes 5 and 6) 840,000 682,000
---------- ----------
Total costs and expenses 20,561,000 15,603,000
---------- ----------
Income from operations 611,000 283,000
Gain on sale and exchange of assets 240,000 155,000
---------- ----------
Net income before income taxes 851,000 438,000
Provision for income taxes 85,000 44,000
---------- ----------
Net income $ 766,000 $ 394,000
========== ==========
Primary income per common share (Note 11) $0.14 $0.07
==== ====
Fully diluted income per common share (Note 11) $0.14 $0.07
==== ====
See accompanying notes to the consolidated financial statements.
PrimeEnergy Corporation
Consolidated Statements of Operations
Three Months Ended September 30, 1997 and 1996
(Unaudited)
1997 1996
Revenue:
Oil and gas sales $ 3,477,000 $ 2,996,000
District operating income 2,884,000 2,547,000
Administrative revenue (Note 10) 438,000 386,000
Reporting and management fees (Note 10) 86,000 85,000
Interest and other income 41,000 30,000
---------- ----------
Total revenue 6,926,000 6,044,000
---------- ----------
Costs and expenses:
Lease operating expense 1,752,000 1,568,000
District operating expense 2,013,000 1,838,000
Depreciation and depletion of
oil and gas properties 1,406,000 1,171,000
General and administrative expense 612,000 810,000
Exploration costs 907,000 75,000
Interest expense (Notes 5 and 6) 273,000 315,000
---------- ----------
Total costs and expenses 6,963,000 5,777,000
---------- ----------
Income (loss) from operations (37,000) 267,000
Gain on sale and exchange of assets 93,000 40,000
---------- ----------
Net income before income taxes 56,000 307,000
Provision for income taxes 6,000 23,000
---------- ----------
Net income $ 50,000 $ 284,000
========== ==========
Primary income per common share (Note 11) $0.01 $0.05
==== ====
Fully diluted income per common share (Note 11) $0.01 $0.05
==== ====
See accompanying notes to the consolidated financial statements.
PrimeEnergy Corporation
Consolidated Statement of Stockholders' Equity
Nine Months Ended September 30, 1997
<TABLE>
<CAPTION>
Retained
Add'l Earnings Encumbered
Common Stock 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 88,712 shares of -- -- -- -- -- -- --
common stock (564,000) (564,000)
Amortization of (621,000) 621,000 --
Encumbered Treasury Stock
(Note 7)
Net income 766,000 -- -- 766,000
----------- -------- ------------ ---------- ----------- ---------- ----------
Balance at March 31, 1997 $7,597,970 $760,000 $10,888,000 $ 713,000 ($5,695,000) $ 0 $6,666,000
=========== ========= ============ ========= ============ ========= ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
7
PrimeEnergy Corporation
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1997 and 1996
(Unaudited)
1997 1996
Net cash provided by operating activities $ 9,137,000 $ 3,204,000
---------- ----------
Cash flows from investing activities:
Additions to property and equipment (6,878,000) (9,974,000)
Proceeds from sale of property
and equipment 932,000 232,000
Increase in note receivable -- (40,000)
Proceeds from payments on note receivable 26,000 --
---------- ----------
Net cash (used in) investing activities (5,920,000) (9,782,000)
---------- ----------
Cash flows from financing activities:
Purchase of treasury stock (1,185,000) (458,000)
Increase in long-term bank debt and
other long-term obligations 22,320,000 22,728,000
Repayment of long-term bank debt and
other long-term obligations (24,143,000) (14,990,000)
---------- ----------
Net cash provided by (used in)
financing activities (3,008,000) 7,280,000
---------- ----------
Net increase in cash and
cash equivalents 209,000 702,000
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 $ 3,525,000 $ 1,711,000
========== ==========
See accompanying notes to the consolidated financial statements.
8
PrimeEnergy Corporation
Notes to Consolidated Financial Statements
September 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, 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 affiliated 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.
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 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.
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 June 1997, the Financial Accounting Standards Board released
Statement No. 130, "Reporting Comprehensive Income" and Statement
No. 131, "Disclosures about Segments of an Enterprise and Related
Information." Both statements become effective for fiscal years
beginning after December 15, 1997 with early adoption permitted.
These statements require disclosure of certain components of
changes in equity and certain information about operating segments
and geographic areas of operation. No decision has been made as
to when the Company will adopt the statements. These statements
will not have any effect on the results of operations or financial
position.
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.
(2) Restricted Cash and Cash Equivalents:
Restricted cash and cash equivalents includes $920,000 and
$663,000 at September 30, 1997 and December 31, 1996,
respectively, of cash primarily pertaining to unclaimed royalty
payments. There were corresponding accounts payable recorded at
September 30, 1997 and December 31, 1996 for these liabilities.
(3) Accounts Receivable
Accounts receivable at September 30, 1997 and December 31, 1996
consisted of the following:
September 30, December 31,
1997 1996
Joint Interest Billing $ 1,373,000 $ 1,533,000
Trade Receivables 225,000 126,000
Oil and Gas Sales 2,579,000 3,337,000
Other 93,000 99,000
--------- ---------
4,270,000 5,095,000
Less, Allowance for doubtful
accounts (28,000) ( 43,000)
--------- ---------
$ 4,242,000 $ 5,052,000
========= =========
(4) Property and equipment
Property and equipment at September 30, 1997 and December 31, 1996
consisted of the following:
September 30, December 31,
1997 1996
Developed oil and gas
properties at cost $39,343,000 $36,645,000
Undeveloped oil and gas
properties at cost 161,000 179,000
Less, accumulated depletion
and depreciation (20,017,000) (18,661,000)
------------ ------------
19,487,000 18,163,000
------------ ------------
Furniture, fixtures and
and equipment 5,891,000 5,269,000
Less, accum. depreciation (3,610,000) (3,199,000)
---------- ----------
2,281,000 2,070,000
---------- ----------
Total net property and
equipment $21,768,000 $20,233,000
========== ==========
(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. In September, 1997, the borrowing base was again
revised to $20 million.
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 September 30, 1997 and December
31, 1996 consisted of the following:
September 30, December 31,
1997 1996
Subordinated debentures due
December 31, 1998 $ -- $ 225,000
Capital lease obligations 38,000 91,000
--------- ---------
38,000 316,000
Less, current portion (38,000) (73,000)
--------- ---------
$ -- $ 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.
14
(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. As of September 30, 1997, the treasury stock
purchased under this agreement was fully paid for and un-
encumbered.
(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 September 30, 1997 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
September 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.
(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
interests in the oil and gas properties owned 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 September 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:
Nine Months Ended Three Months Ended
September 30, September 30,
1997 1996 1997 1996
Primary 5,451,264 5,771,766 5,469,184 5,773,127
========= ========= ========= =========
Fully diluted 5,491,587 5,851,693 5,471,240 5,786,545
========= ========= ========= =========
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 entered into a credit agreement with Bank One, Texas
NA providing for a revolving line of credit on a $50 million
master promissory note. Den norske Bank, AS is a 25% syndication
partner in the line. The borrowing base is non-reducing and is
revised every six months by the banks. The most recent re-
determination of the credit line occurred in September of 1997,
at which time the borrowing base under the agreement was set at
$20,000,000. The increase in the Company's credit line is
attributable to increased reserves resulting from the acquisition
of the Saratoga properties and the success of the 3D Seismic
Drilling Program. As of September 30, 1997, the Company had
$4,145,000 available under this line of credit.
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 bank's base rate, as
defined, monthly, or 2 1/4% over the published LIBO rate.
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.
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's goal is 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.
The Company has experienced significantly increased cash flow in
1997 as compared to 1996, primarily due to the Saratoga
acquisition and the success of the 3D Seismic drilling and
development program (3D Seismic Program), both of which are
discussed further below. This increased cash flow has been used
primarily to fund exploration and property development costs. The
Company began drilling several wells near the end of the third
quarter, and several of these projects were in progress as of
September 30, 1997. Costs incurred but not yet paid on these
projects through September 30, 1997 total approximately $951,000,
and it is estimated that an additional $1,183,000 in costs have
been or will be incurred in the fourth quarter to complete these
projects, including $869,000 attributable to an exploratory well,
the results of which are not yet known, and $229,000 attributable
to a successful gas well completed in October 1997. These costs
can be expected to lead to higher average debt levels in the
fourth quarter of 1997.
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 sixteen wells as part of the 3D
Seismic Program, twelve of which have been completed as
commercial gas wells, with production from the Miocene formation.
Seven of these wells are located in the South Powderhorn field in
Calhoun County, Texas, and contributed significantly to cash flow
in the first nine months of 1997. Four other wells located in
Matagorda County, Texas began sales in the third quarter of 1997.
A successful well drilled on acreage adjacent to the South
Powderhorn acreage began production in the fourth quarter of
1997.
During 1996, the Company entered into an agreement to purchase
400,000 shares of its common stock for a total consideration of
$1,144,000. Of this amount, $523,000 was paid in 1996, and
$621,000 was paid in 1997. The Company also spent $564,000 during
the first nine months 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.
The Company spent $8,187,000 on exploration, development and
acquisition of oil and gas properties during the first nine
months of 1997. This includes $5,389,000 spent in connection with
the 3D Seismic Program, and $1,057,000 spent to buy limited
partner interests in partnerships in which the Company is a
general partner. Additionally, the Company spent approximately
$708,000 on trucks, automobiles and equipment used in connection
with field service operations, and an additional $169,000 on
computer and related equipment and software.
RESULTS OF OPERATIONS
Net income increased to $766,000 for the nine months ended
September 30, 1997 as compared to $394,000 for the first nine
months of 1996. This increase is primarily attributable to
sharply higher income from oil and gas properties due to higher
prices, a full nine months of revenue from the Saratoga
properties in 1997, and revenue from the South Powderhorn wells.
This increased income was largely offset by spending of
$2,257,000 on exploration costs in 1997 as compared to $266,000
in 1996
Third quarter 1997 net income of $50,000 represented a decline of
$234,000 from the third quarter 1996 amount of $284,000.
Increased oil and gas income and lower general and administrative
costs were offset by an increase of $832,000 in exploration
costs.
As of the date of this report, the Company was in the process of
drilling a deep exploratory well to test the Frio formation. The
results of this well are expected to be known by December 1997.
The Company's share of drilling costs on this well are expected
to total approximately $1,700,000. If the well was determined to
be a dry hole, this amount would be charged to expense in the
fourth quarter of 1997. The Company is currently involved in or
considering several exploration projects, and the results of this
well could significantly affect the extent of the Company's
spending on exploration and development over the next year.
Oil and gas sales of $11,195,000 for the first nine months of
1997 represented a 60% increase over sales in the same period in
1996. Third quarter 1997 sales of $3,477,000 represent a 16%
increase over 1996 third quarter sales. The South Powderhorn
field, developed as part of the Company's 3D Seismic Program,
contributed $2,463,000 to revenue in the first nine months of
1997, as opposed to $226,000 in the same period in 1996. The
Saratoga properties purchased in May of 1996 contributed
$2,514,000 to revenue in the first nine months of 1997, as
compared to $1,565,000 contributed through September 1996. Four
gas wells drilled by the Company on the Ramrod prospect in Texas
contributed $49,000 to revenue in the third quarter of 1997. The
average price received for directly owned oil production declined
to $19.56 per barrel in 1997 as compared to $20.04 in the first
nine months of 1996. Average gas prices increased substantially
to $2.45 per MCF received in the first nine months of 1997 as
compared to $2.20 per MCF received during the comparable period
in 1996. On a third quarter to third quarter basis, oil prices
declined from an average of $21.23 per barrel in 1996 to $17.23
in 1997, while gas prices increased to $2.39 per MCF in 1997 as
compared to $2.23 in 1996.
Oil and gas sales related to PEMC's interests in the Partnerships
increased approximately 40%, or $526,000, between the first nine
months of 1997 and the first nine months of 1996. Third quarter
1997 sales increased by $65,000 or 66%, as compared to the third
quarter of 1996. These increases are primarily due to the fact
that the Company has made substantial purchases of limited
partner interests during the past year. As the Company intends to
continue to purchase substantial additional interests, the trend
of increased revenue from these entities can be expected to
continue in the short term.
District operating income increased by $1,042,000, or 14%,
between the first nine months of 1997 as compared to the same
period in 1996, primarily due to income generated from operating
the Saratoga properties for a full nine months in 1997. An
increase in field services performed for third parties on
properties not operated by the Company contributed to a 13%
increase in district operating income in the third quarter of
1997 as compared to the third quarter of 1996.
Administrative revenue for the first nine months of 1997
increased by $78,000, or 6% as compared to the same period in
1996, and by $52,000 or 13% in the third quarter of 1997 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 nine months of 1997
increased by 29% or $1,166,000 compared to the first nine months
of 1996. Third quarter 1997 lease operating expense of $1,752,000
represented an increase of $184,000, or 12%, over the third
quarter 1996 amount. For directly owned properties, the average
lifting cost per barrel of oil equivalent decreased to $7.29 in
the first nine months of 1997 from $9.02 in the first nine months
of 1996, due to lower per unit costs on the Saratoga properties
and especially the South Powderhorn field, which produced 152,000
barrel of oil equivalents at an average cost of $2.37 per unit.
Lease operating expenses related to PEMC's interests in the
partnerships and other ventures increased $377,000 for the nine
months and $178,000 for the three 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 $1,200,000 in
the first nine months of 1997 as compared to $1,125,000 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 $696,000 or 13% in the
first nine months of 1997 as compared to the same period in 1996,
primarily due to costs associated with the operation of the
Saratoga properties. An increase in field services performed for
third parties on properties not operated by the Company
contributed to a 10% increase in district operating expense in
the third quarter of 1997 as compared to the third quarter of
1996.
In the first nine months of 1997 as compared to the same period
in 1996, general and administrative expenses decreased $371,000,
or 14%. 1997 third quarter expense was $198,000 or 24% 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
$1,318,000, or 49% in the first nine months of 1997 as compared
to the comparable period of 1996, and $235,000 or 20% in the
third quarter of 1997 as compared to the third quarter of 1996.
Depletion on the South Powderhorn and Saratoga properties is
responsible for these increases.
Substantially all of the $2,257,000 in exploration costs incurred
in the first nine months of 1997 are in connection with the
Company's 3D Seismic Program. This amount includes $643,000 of
3D seismic and other geological and geophysical costs relating to
acreage on which the Company has drilled four successful gas
wells to date. It also includes $580,000 spent to purchase 3D
seismic covering an area which is currently being evaluated in
hopes of identifying future drilling prospects. The largest part
of the $907,000 incurred in the third quarter of 1997 is $789,000
spent on the drilling of a deep exploratory well. As of the date
of this report, the Company was in the process of drilling a deep
exploratory well designed to test the Frio formation, the results
of which will likely be known by December, 1997. The Company's
share of the drilling costs of this well will be approximately
$1,700,000, which will be charged to expense if the well is a dry
hole.
Interest expense during the first nine months of the year
increased approximately 23% as average debt levels increased
primarily due to the Saratoga acquisition in May of 1996.
Interest expense was 13% less in the third quarter of 1997 than
in the third quarter of 1996, as increased cash flow was used to
reduce debt and average interest rates declined slightly.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10Q contains forward-looking
statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Actual results, events and
circumstances could differ materially from the amounts indicated
in such statements due to several factors including, but not
limited to, oil and gas prices, drilling and operations
performance, uncertainty about estimates of reserves,
environmental risks, governmental regulations, and access to
capital.
PART II - OTHER MATTERS
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during
the period covered by this report.
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 nine
months ended September 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)
November 14, 1997 /s/ Charles E. Drimal,Jr.
(Date) -------------------------
- -
Charles E. Drimal, Jr.
President
Principal Executive
Officer
November 14, 1997 /s/ Beverly A. Cummings
(Date) -------------------------
- -
Beverly A. Cummings
Executive Vice President
Principal Financial and
Accounting Officer
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This schedule contains summary financial information extracted from
PrimeEnergy Corporation's form 10QSB and is qualified in its entirety by
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