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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
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 NO. 0-7406
PRIMEENERGY CORPORATION
(Exact name of Small Business Issuer in its charter)
DELAWARE 84-0637348
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE LANDMARK SQUARE
STAMFORD, CONNECTICUT 06901
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (203) 358-5700
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.10 PER SHARE
(Title of Class)
Indicate by check mark whether 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
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-B is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
The Registrant's revenues for its most recent fiscal year were $23,226,000.
The aggregate market value of the voting stock of the Registrant held
by non-affiliates, computed on the average bid and asked prices of such stock
in the over-the-counter market, as of March 20, 1997, was $5,151,453.
The number of shares outstanding of each class of the Registrant's
Common Stock as of March 20, 1997, was: Common Stock, $0.10 par value,
4,687,749.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's proxy statement to be furnished to
stockholders in connection with its Annual Meeting of Stockholders to be held
in June, 1997, are incorporated by reference in Part III hereof.
Transitional Small Business Disclosure Format (check one) YES NO X
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PRIMEENERGY CORPORATION
FORM 10-KSB ANNUAL REPORT
FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1996
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
GENERAL
PrimeEnergy Corporation (the "Company") was organized in March, 1973,
under the laws of the State of Delaware.
The Company is engaged generally in the oil and gas business through
the acquisition, development, and production of crude oil and natural gas, and
to a lesser degree, exploratory drilling operations. The Company's properties
are located primarily in Oklahoma, Texas, West Virginia, New Mexico, Montana
and Wyoming. The Company's wholly-owned subsidiary, PrimeEnergy Management
Corporation ("PEMC"), acts as the managing general partner in 51 exploration
and development limited partnerships, joint ventures and asset and income fund
limited partnerships (the "Partnerships") of which six are publicly held, and
acts as the managing trustee of two asset and income business trusts (the
"Trusts"). The Company, through its wholly-owned subsidiaries, Prime Operating
Company and Eastern Oil Well Service Company, acts as operator and provides
well servicing support operations for many of the oil and gas wells in which
the Partnerships, the Trusts and the Company have an interest, primarily in
West Virginia, Oklahoma and Texas. In addition, through a subsidiary,
Southwest Oilfield Construction Company, the Company provides site preparation
and construction services for oil and gas drilling and re-working operations,
both in connection with the Company's activities and providing contract
services for third parties. The Company is also active in the acquisition of
producing oil and gas properties through joint ventures with industry partners
and private investors.
THE PARTNERSHIPS AND TRUSTS
A substantial portion of the assets and revenues of PEMC are derived
from the interests of PEMC in the oil and gas properties acquired by the
Partnerships and Trusts. As the managing general partner in each of the
Partnerships and managing trustee of the Trusts, PEMC receives approximately
from 5% to 12% of the net revenues of each Partnership and Trust as a carried
interest in the Partnership's and Trust's properties.
Since 1975, PEMC has sponsored a total of 59 limited partnerships, 22
of which were offered publicly and 37 of which were offered in private
placements and two Delaware business trusts, both of which were offered
publicly. The aggregate number of limited partners in the Partnerships and
beneficial owners in the Trusts now administered by PEMC is about 10,200. The
Partnership and Trust interests were sold by broker-dealers which are members
of the National Association of Securities Dealers, Inc. through a managing
dealer. The total funds contributed to the Partnerships and Trusts was about
$157,550,000.
A significant portion of the Company's business is now conducted
through the Partnerships and Trusts, either through its ownership of interests
in various properties derived through the Partnerships and Trusts, or as
operator of oil and gas wells in which the Partnerships and Trusts have
interests.
PEMC, as managing general partner of the Partnerships, and managing
trustee of the Trusts, is responsible for all Partnership and Trust activities,
including the review and analysis of oil and gas properties for
<PAGE> 3
acquisition, the drilling of development wells and the production and sale of
oil and gas from productive wells. PEMC also provides administration,
accounting and tax preparation for the Partnerships and Trusts. PEMC is liable
for all debts and liabilities of the Partnerships and Trusts, to the extent
that the assets of a given limited partnership or trust are not sufficient to
satisfy its obligations.
JOINT VENTURES
PEMC organizes and the Company participates in various joint ventures
formed for the purpose of acquiring and developing oil and gas assets. The
Company receives varying interests in the net revenues of each joint venture as
a carried interest in the joint venture properties.
Since 1987, PEMC has organized approximately $15 million of joint
venture capital. The Company's participation in the joint ventures varies from
none to approximately 50%. The Company's carried interest ranges from 5 to 10%
depending on the proportion of funds contributed by outside investors.
WELL OPERATIONS
The Company's operations are conducted through a central office in
Houston, Texas, and district offices in Houston and Midland, Texas, Oklahoma
City, Oklahoma, and Charleston, West Virginia. The Company currently operates
about 1,762 oil and gas wells, 522 through the Houston office, 231 through the
Midland office, 494 through the Oklahoma City office and 515 through the
Charleston, West Virginia office. Substantially all of the wells operated by
the Company are wells in which the Company, the Partnerships, the Trusts or the
joint ventures have an interest.
The Company operates wells pursuant to operating agreements which
govern the relationship between the Company as operator and the other owners of
working interests in the properties, including the Partnerships, Trusts and
joint venture participants. For each operated well, the Company receives
monthly fees which are competitive in the areas of operations and also is
reimbursed for expenses incurred in connection with well operations.
EXPLORATION AND ACQUISITION ACTIVITIES; OTHER MATTERS
The Company's focus is on the acquisition and development of producing
oil and gas properties. The Company will continue to engage in exploratory
operations and will continue to engage in development drilling of properties in
which it has an interest. The Company attempts to assume the position of
operator in all acquisitions of producing properties.
RECENT ACTIVITIES
Activities commenced in the Company's 1995 Development Program
continued and expanded in 1996. In January, the Company participated in the
initial 3D seismic survey, conducted along the Gulf Coast of Texas. During
1996, the Company drilled 6 wells on this survey. Five of these wells were
completed as gas wells. Throughout 1996, the Company and its partners expanded
their leasehold positions and conducted additional 3D seismic surveys. This
acreage is currently being evaluated for drilling potential. The Company's
joint venture partners have continued to participate in the expansion of this
development and exploration program. The Company's interest in these activities
ranges from 37 to 52 percent.
During 1996, the 1995 Development Program also attempted recompletions
on five wells in the Tansil, Yates and Seven Rivers Formations of the Jalmat
Field of Lea County, New Mexico. Three of these wells successfully established
commercial production with an average initial production of 29 barrels of oil
per day. Two recompletion attempts were unsuccessful. The Company owns 46
percent of these properties.
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In January of 1996, the Company participated in the completion of a
well in the Caterina field of Dimmit County, Texas. The well was successfully
completed as a gas well in the Olmos Formation with an initial production rate
of 20 barrels of oil per day and 50 Mcf of gas per day. The Company owns 40
percent of this property.
In February of 1996, the Company operated and participated in the
drilling of one well in the Indio field of Zapata County, Texas. The well was
successfully completed as a gas well in the Olmos Formation with an initial
flow rate of approximately 775 Mcf per day. The Company owns 22.5 percent of
this property.
In February of 1996, the Company operated and participated in the
drilling of a well in Acadia Parish, Louisiana. This well was drilled to
11,330' and successfully completed as a gas well in the Upper Bathysiphon sand
with an initial production rate of 1,500 Mcf of natural gas per day and 40
barrels of condensate per day. During the initial 30 days of production the
well changed to an oil well producing approximately 200 barrels of oil per day
and 210 Mcf of natural gas per day. In December of 1996, the Company operated
and participated in the drilling of second well in Acadia Parish, Louisiana.
This well was drilled to 11,750' and successfully completed as a gas well in
the Marg 7 sand with an initial production rate of 1,936 Mcf of natural gas per
day and 6 barrels of condensate per day. The Company owns 13.56 percent of
these properties.
In May of 1996, the Company completed the acquisition of various
interests in 145 gross (45 net) active wells previously owned by Saratoga
Resources, Inc., from Internationale Nederlanden (U.S.) Capital Corporation for
$7,180,000. The Company serves as operator for 132 of these wells. These
properties are located primarily in eight counties along the Gulf Coast of
Texas. The Company began development activities in the third quarter of 1996,
with the deepening of three wells in the Segno field of Polk County, Texas. Two
were successfully completed as producers and one was plugged and abandoned. The
two producers had a combined initial production of approximately 23 barrels of
oil per day. Additionally, in October 1996, the S.F. Wing No. 82 well was
drilled in the Segno field. The well was completed in the Yegua formation at an
initial production rate of approximately 90 Barrels of oil per day and 500 Mcf
of gas per day. The Company owns 20 percent of these wells. Also in October
1996, the Company participated in the drilling of the Fling Point No. 1H, which
was drilled as a horizontal well in the Brookeland field, of Sabine County,
Texas. This well was completed in the Austin Chalk Formation at an initial
production rate of approximately 2,500 Mcf of gas per day. The Company owns 8
percent of this well.
During 1996, the Company participated in the drilling and completion
or workover operation of 23 gross (1.37 net) wells operated by other companies.
The Company spent approximately $420,000 on these projects. At year-end, 9
gross (0.48 net) wells were successfully completed as producers, six were
unsuccessful and 8 were either drilling or waiting on completion. The
successfully completed wells had an aggregate initial production rate of
approximately 430 gross (17 net) barrels of oil per day and 13,931 gross (1,022
net) Mcf of gas per day.
In the first quarter of 1997, the Company has continued to expand its
3D seismic development and exploration program. The Company participated in a
survey over 17,680 acres that it has under option to lease. The Company has
leased acreage and plans to drill at least two wells as it continues to
evaluate the results of this survey. The Company has also continued to develop
acreage evaluated in the initial 3D survey and has drilled and completed a
successful gas well during March, 1997.
Since January 1, 1997, and to the date of this Report, the Company has
not participated in the acquisition or disposition of any material producing
oil and gas properties. The Company is actively engaged in negotiations
regarding acquisition and disposition candidates. In some cases acquisitions
are in various stages of due diligence review. Management cannot predict with
certainty which, if any, of these transactions will ultimately close.
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The Company will continue to evaluate prospects for leasehold
acquisitions and for exploration and development operations in areas in which
it owns interests and is actively pursuing the acquisition of producing
properties.
In order to diversify and broaden its asset base, the Company will
consider acquiring the assets or stock in other entities and companies in the
oil and gas business. The main objective of the Company in making any such
acquisitions will be to acquire income producing assets so as to increase the
Company's net worth and increase the Company's oil and gas reserve base.
The Company presently owns producing and non-producing properties
located primarily in Colorado, Kansas, Oklahoma, Louisiana, Mississippi,
Montana, New Mexico, Texas, West Virginia and Wyoming. The Company does not own
any significant properties other than its leasehold, mineral and royalty
interests and related pipeline and gas gathering systems, and does not own any
drilling equipment or refinery or marketing facilities. All of the Company's
oil and gas properties and interests are located in the continental United
States.
During the recent past, the supply of gas has exceeded demand on a
cyclical basis, and the Company is subject to a combination of shut-in and/or
reduced takes of gas production during summer months. Prolonged shut-ins could
result in reduced field operating income from properties in which the Company
acts as operator.
Exploration for oil and gas requires substantial expenditures
particularly in exploratory drilling in undeveloped areas, or "wildcat
drilling". As is customary in the oil and gas industry, substantially all of
the Company's exploration and development activities are conducted through
joint drilling and operating agreements with others engaged in the oil and gas
business.
Summaries of the Company's oil and gas drilling activities, oil and
gas production, and undeveloped leasehold, mineral and royalty interests are
set forth under Item 2., "Description of Property," below. Summaries of the
Company's oil and gas reserves, future net revenue and present value of future
net revenue are also set forth under Item 2., "Description of Property --
Reserves" below.
REGULATION
The Company's oil and gas operations are subject to a wide variety of
federal, state and local regulations. Administrative agencies in such
jurisdictions may promulgate and enforce rules and regulations relating to,
among other things, drilling and spacing of oil and gas wells, production
rates, prevention of waste, conservation of natural gas and oil, pollution
control, and various other matters, all of which may affect the Company's
future operations and production of oil and gas. The Company's natural gas
production and prices received for natural gas are regulated by the Federal
Energy Regulatory Commission ("FERC"), the Natural Gas Act of 1938 ("NGA") and
the Natural Gas Policy Act of 1978 ("NGPA") and various state regulations. The
Company is also subject to state drilling and proration regulations affecting
its drilling operations and production rates.
The FERC continues to regulate interstate natural gas pipeline
transportation rates and service conditions pursuant to the NGA and NGPA.
Federal regulation of interstate transporters affects the marketing of natural
gas produced by the Company as well as the revenues received by the Company for
sales of such natural gas. Since the latter part of 1985, through its Order
Nos. 436, 500 and 636 rulemakings, the FERC has endeavored to make natural gas
transportation accessible to gas buyers and sellers on an open and
non-discriminatory basis. The FERC's efforts have significantly altered the
marketing and pricing of natural gas. No prediction can be made as to what
additional legislation may be proposed, if any, affecting the competitive
status of a gas producer, restricting the prices at which a producer may sell
its gas, or the market demand for gas, nor can it be predicted which proposals,
including those presently under consideration, if enacted, might be effective.
Additional proposals and proceedings that might affect the natural gas
industry are considered from time to time by Congress, the FERC, state
regulatory bodies and the courts. The Company cannot predict when or if any
such proposals might become effective, or their effect, if any, on the
Company's operations. The natural gas industry historically has been very
heavily regulated; therefore, there is no assurance that the less stringent
regulatory approach recently pursued by the FERC and Congress will continue
indefinitely into the future.
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In the event the Company conducts operations on federal, state or
Indian oil and gas leases, such operations must comply with numerous regulatory
restrictions, including various nondiscrimination statutes, and certain of such
operations must be conducted pursuant to certain on-site security regulations
and other appropriate permits issued by the Bureau of Land Management ("BLM")
or Minerals Management Service ("MMS") or other appropriate federal or state
agencies.
The Mineral Leasing Act of 1920 ("Mineral Act") prohibits direct or
indirect ownership of any interest in federal onshore oil and gas leases by a
foreign citizen of a country that denies "similar or like privileges" to
citizens of the United States. Such restrictions on citizens of a
"non-reciprocal" country include ownership or holding or controlling stock in a
corporation that holds a federal onshore oil and gas lease. If this restriction
is violated, the corporation's lease can be canceled in a proceeding instituted
by the United States Attorney General. Although the regulations of the BLM
(which administers the Mineral Act) provide for agency designations of
non-reciprocal countries, there are presently no such designations in effect.
The Company owns interests in federal onshore oil and gas leases. It is
possible that Common Stock could be acquired by citizens of foreign countries,
which at some time in the future might be determined to be non-reciprocal under
the Mineral Act.
TAXATION
The Company's oil and gas operations are affected by federal income
tax laws applicable to the petroleum industry. The Company is permitted to
deduct currently, rather than capitalize, intangible drilling and development
costs incurred or borne by it. As an independent producer, the Company is also
entitled to a deduction for percentage depletion with respect to the first
1,000 barrels per day of domestic crude oil (and/or equivalent units of
domestic natural gas) produced by it, if such percentage depletion exceeds cost
depletion. Generally, this deduction is computed based upon the lesser of 100%
of the net income, or 15% of the gross income from a property, without
reference to the basis in the property. The amount of the percentage depletion
deduction so computed which may be deducted in any given year is limited to 65%
of taxable income. Any percentage depletion deduction disallowed due to the 65%
of taxable income test may be carried forward indefinitely.
The Company is entitled to credits for producing fuel from a
non-conventional source under Section 29 of the Internal Revenue Code,
primarily from certain of the Company's operations in West Virginia.
The Company has been subject to the alternative minimum tax in each of
its taxable years since 1988. The primary factors which have caused it to be
subject to this tax in prior years were the former preference for percentage
depletion in excess of the cost basis of an oil and gas property, the former
adjusted current earnings adjustment for intangible drilling costs, and the
limitation of the Section 29 credits allowable to the excess of regular tax
over tentative alternative minimum tax. The Company is subject to alternative
minimum tax in the current year primarily due to the Company's Section 29
credits. The Company is allowed a credit carry forward for the amount of
alternative minimum tax paid. This credit, which may be used to offset regular
tax liability in years where it exceeds the tentative alternative minimum tax,
can be carried forward indefinitely.
See Notes 1 and 10 to the consolidated financial statements included
in this Report for a discussion of accounting for income taxes and availability
of federal tax net operating loss carryforwards.
COMPETITION AND MARKETS
The business of acquiring producing properties and nonproducing leases
suitable for exploration and development is highly competitive. Competitors of
the Company in its efforts to acquire both producing and non-producing
properties include oil and gas companies, independent concerns, income programs
and individual producers and operators, many of which have financial resources,
staffs and facilities substantially greater than those available to the
Company. Furthermore, domestic producers of oil and gas must not only compete
with each other in marketing their output, but must also compete with producers
of imported oil and gas and alternative energy sources such as coal, nuclear
power and hydroelectric power. Competition among petroleum companies for
favorable oil and gas properties and leases can be expected to increase.
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The availability of a ready market for any oil and gas produced by the
Company at acceptable prices per unit of production will depend upon numerous
factors beyond the control of the Company, including the extent of domestic
production and importation of oil and gas, the proximity of the Company's
producing properties to gas pipelines and the availability and capacity of such
pipelines, the marketing of other competitive fuels, fluctuation in demand,
governmental regulation of production, refining, transportation and sales,
general national and worldwide economic conditions, and pricing, use and
allocation of oil and gas and their substitute fuels. There is no assurance
that the Company will be able to market all of the oil or gas produced by it or
that favorable prices can be obtained for the oil and gas production.
The Company does not currently own or lease any bulk storage
facilities or pipelines other than adjacent to and used in connection with
producing wells and the interests in certain gas gathering systems. While the
Company is not dependent on any one purchaser of its production, oil and gas
revenue in 1996 generated from sales to Scurlock Permian Corp. ("Scurlock") and
Basis Petroleum, Inc. (formerly named "Philbro Energy Corp") each individually
represented about 12% of the Company's total revenue from oil and gas sales.
The sales to Basis Petroleum were not made under any contractual arrangements;
however, the Company believes that the purchaser will continue to purchase oil
and gas products and, if not, could be replaced by other purchasers. Sales to
Scurlock were made under an oil purchasing agreement at prices that are
adjusted semi-annually, based upon posted crude oil prices.
ENVIRONMENTAL MATTERS
Over the past 20 years, the petroleum industry has been affected by a
wide variety of environmental issues. Throughout the 1970's and 1980's federal
and state environmental regulations have been enacted that affect all aspects
of the Company's operations. These regulations have primarily focused on
correcting existing environmental concerns and implementing preventive controls
to reduce future pollution.
The Company's activities are subject to existing federal, state and
local laws and regulations governing environmental quality and pollution
control. It is anticipated that, absent the occurrence of an extraordinary
event, compliance with existing federal, state and local laws, rules and
regulations regulating the release of materials in the environment or otherwise
relating to the protection of the environment will not have a material effect
upon the operations, capital expenditures, earnings or the competitive position
of the Company. The Company cannot predict what effect additional regulation or
legislation, enforcement policies thereunder, and claims for damages to
property, employees, other persons and the environment resulting from the
Company's operations or ownership of its property could have on its activities.
Activities of the Company with respect to natural gas facilities,
including the operation and construction of pipelines, plants and other
facilities for transporting, processing, treating or storing natural gas and
other products, are subject to stringent environmental regulation by state and
federal authorities including the Environmental Protection Agency ("EPA"). Such
regulation can increase the cost of planning, designing, installing and
operating such facilities. In most instances, the regulatory requirements
relate to water and air pollution control measures. Although the Company
believes that compliance with environmental regulations will not have a
material adverse effect on it, risks of substantial costs and liabilities are
inherent in natural gas facility operations, and there can be no assurance that
significant costs and liabilities will not be incurred. Moreover, it is
possible that other developments, such as stricter environmental laws and
regulations, and claims for damages to property or persons resulting from
operation of natural gas facilities, would result in substantial costs and
liabilities to the Company.
The Company currently owns or leases, and has in the past owned or
leased, numerous properties that have been used for production of oil and gas
for many years. Although the Company has utilized operating and disposal
practices that were standard in the industry at the time, hydrocarbons or other
wastes may have been disposed of or released on or under the properties owned
or leased by the Company. In addition, many of these properties have been
operated by third parties over whom the Company had no control as to such
entities' treatment of hydrocarbons or other wastes and the manner in which
such substances may have been disposed of or released. State and federal laws
applicable to oil and gas wastes and properties have gradually become more
strict. Under these new laws, the Company could be required to remove or
remediate previously disposed wastes
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(including wastes disposed of or released by prior owners or operators) or
property contamination (including groundwater contamination) or to perform
remedial plugging operations to prevent future contamination.
The Company may generate wastes, including hazardous wastes, that are
subject to the Federal Resource Conservation and Recovery Act and comparable
state statutes. The EPA has limited the disposal options for certain hazardous
wastes and is considering the adoption of stricter disposal standards for
nonhazardous wastes. Furthermore, certain wastes generated by the Company's
oil and gas operations that are currently exempt from treatment as "hazardous
wastes" may in the future be designated as "hazardous wastes," and therefore be
subject to more rigorous and costly operating and disposal requirements.
In addition, legislation has been proposed in Congress from time to
time that would reclassify certain oil and gas exploration and production
wastes as "hazardous wastes," which would make the reclassified wastes subject
to much more stringent handling, disposal and clean-up requirements. If such
legislation were to be enacted, it could have a significant impact on the
operating costs of the Company, as well as the oil and gas industry in general.
Initiatives to further regulate the disposal of oil and gas wastes are also
pending in certain states, and these various initiatives could have a similar
impact on the Company.
The Federal Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA"), also known as the "Superfund" law, imposes joint and
several liability, without regard to fault or the legality of the original
conduct, on certain classes of persons with respect to the release of a
"hazardous substance" into the environment. These persons include the current
owner and operator of a site and persons that disposed of or arranged for the
disposal of the hazardous substances found at a site. CERCLA also authorizes
the EPA and, in some cases, third parties to take actions in response to
threats to the public health or the environment and to seek to recover from the
responsible classes of persons the costs of such action. In the course of its
operations, the Company may have generated and may generate wastes that fall
within CERCLA's definition of "hazardous substances." The Company may also be
an owner of sites on which "hazardous substances" have been released by
previous owners or operators. The Company may be responsible under CERCLA for
all or part of the costs to clean up sites at which such wastes have been
released. Neither the Company nor, to its knowledge, its predecessors has been
named a potentially responsible person under CERCLA nor does the Company know
of any prior owners or operators of its properties that are named as
potentially responsible parties related to their ownership or operation of such
property.
The Company has a proactive environmental policy that management feels
benefits the Company through increased operating profits, improved landowner
relations and an overall enhanced Company image. To this end, the Company has
also adopted a stringent environmental evaluation prior to purchasing a
property. This pre-acquisition assessment, usually referred to as an
Environmental Site Assessment, typically consists of a historical review of the
property combined with a site inspection and limited testing, when necessary.
The objective of this pre-acquisition assessment is to document conditions at
the time of acquisition and to assign liability to the seller for past
operations.
EMPLOYEES
At March 20, 1997, the Company had 155 full-time and 14 part-time
employees, 28 of whom were employed by the Company at its principal offices in
Stamford, Connecticut, 30 in Houston, Texas, at the offices of Prime Operating
Company and Eastern Oil Well Service Company, and 111 employees who were
primarily involved in the district operations of the Company in Houston and
Midland, Texas, Oklahoma City, Oklahoma and Charleston, West Virginia.
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ITEM 2. DESCRIPTION OF PROPERTY.
The Company's executive offices and those of PEMC, are located at One
Landmark Square, Stamford, Connecticut, in leased premises of about 11,500
square feet. The executive offices of Prime Operating Company and Eastern Oil
Well Service Company are located in leased premises in Houston, Texas, and the
offices of Southwest Oilfield Construction Company are in Oklahoma City,
Oklahoma.
The Company maintains district offices in Houston and Midland, Texas,
Oklahoma City, Oklahoma, and Charleston, West Virginia, and has field offices
in Carrizo Springs and Midland, Texas, Kingfisher and Yukon, Oklahoma, and
Arnoldsburg, West Virginia, all in leased space. The Company has no other
facilities other than its leased offices, and other than its oil and gas
properties and related equipment, the Company owns no physical properties.
Substantially all of the Company's oil and gas properties are subject
to a mortgage given to collateralize indebtedness of the Company, or are
subject to being mortgaged upon request by the Company's lender for additional
collateral.
The information set forth below concerning the Company's properties,
activities, and oil and gas reserves include the Company's interests in the
Partnerships, Trusts and joint ventures.
OIL AND GAS DRILLING ACTIVITIES
The following table sets forth the exploratory and development
drilling experience with respect to wells in which the Company participated
during the five years ended December 31, 1996.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
GROSS NET GROSS NET GROSS NET GROSS NET GROSS NET
----- --- ----- --- ----- --- ----- --- ----- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Exploratory:
. . . . . . . . . Oil -- -- -- -- -- -- 1 .009 -- --
. . . . . . . . . Gas -- -- -- -- -- -- 3 .375 -- --
. . . . . . . . . Dry 1 1 -- -- -- -- 2 .150 1 .178
Development:
. . . . . . . . . Oil 3 .740 8 1.046 4 .346 3 .600 6 .762
. . . . . . . . . Gas 17 1.292 3 .235 2 .121 13 .257 -- --
. . . . . . . . . Dry 1 .371 2 .350 4 .215 1 .090 -- --
Total:
. . . . . . . . . Oil 3 .740 8 1.046 4 .346 4 .609 6 .762
. . . . . . . . . Gas 17 1.292 3 .235 2 .121 16 .632 -- --
. . . . . . . . . Dry 2 1.371 2 .350 4 .215 3 .240 1 .178
-- ----- -- ----- --- - ---- -- ----- -- ----
22 3.403 13 1.631 10 .682 23 1.481 7 .94
== ===== == ===== === = ==== == ===== == ====
</TABLE>
OIL AND GAS PRODUCTION
As of December 31, 1996, the Company had ownership interests in the
following numbers of gross and net producing oil and gas wells and gross and
net producing acres(1).
<TABLE>
<CAPTION>
GROSS NET
----- ---
<S> <C> <C>
Producing wells (2):
Oil Wells . . . . . . . . . . . . . . . . . . . 1,486 180.20
Gas Wells . . . . . . . . . . . . . . . . . . . 1,328 162.19
Producing Acres . . . . . . . . . . . . . . . . . 234,197 40,262
</TABLE>
- ----------
9
<PAGE> 10
(1) A gross well or gross acre is a well or an acre in which a working
interest is owned. A net well or net acre is the sum of the fractional
revenue interests owned in gross wells or gross acres. Wells are
classified by their primary product. Some wells produce both oil and
gas.
(2) Includes the Company's interest in 64 gross multiple completion wells.
The following table shows the Company's net production of crude oil
and natural gas for each of the five years ended December 31, 1996. "Net"
production is net after royalty interests of others are deducted and is
determined by multiplying the gross production volume of properties in which
the Company has an interest by percentage of the leasehold, mineral or royalty
interest owned by the Company.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Oil (barrels) . . . . . . 249,000 155,000 143,000 149,000 180,000
Gas (Mcf) . . . . . . . . 2,888,000 1,952,000 1,408,000 1,332,000 1,689,000
</TABLE>
The following table sets forth the Company's average sales price per
barrel of crude oil and average sales prices per one thousand cubic feet
("Mcf") of gas, together with the Company's average production costs per unit
of production for the five years ended December 31, 1996.
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Average sales price
per barrel . . . . . . . . . . . . . . . . $ 21.11 16.53 15.22 16.30 18.30
Average sales price
per Mcf . . . . . . . . . . . . . . . . . $ 2.36 1.85 2.36 2.51 2.64
Average production
costs per net equivalent
barrel (1) . . . . . . . . . . . . . . . . $ 8.09 8.92 10.14 10.70 7.93
</TABLE>
- ----------
(1) Net equivalent barrels are computed at a rate of 6 Mcf per barrel.
10
<PAGE> 11
UNDEVELOPED ACREAGE
The following table sets forth the approximate gross and net
undeveloped acreage in which the Company has leasehold, mineral and royalty
interests as of December 31, 1996. "Undeveloped acreage" is that acreage on
which wells have not been drilled or completed to a point that would permit the
production of commercial quantities of oil and gas, regardless of whether or
not such acreage contains proved reserves.
<TABLE>
<CAPTION>
LEASEHOLD MINERAL ROYALTY
INTERESTS INTERESTS INTERESTS
--------- --------- ---------
GROSS NET GROSS NET GROSS NET
STATE ACRES ACRES ACRES ACRES ACRES ACRES
----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Colorado . . . . . . . . . 10,345 935 799 23 -- --
Kansas . . . . . . . . . . 323 16 -- -- -- --
Louisiana . . . . . . . . . 266 16 -- -- -- --
Montana . . . . . . . . . . -- -- 13,984 59 786 5
Nebraska . . . . . . . . . -- -- 2,553 331 -- --
Oklahoma . . . . . . . . . -- -- 320 1 -- --
Texas . . . . . . . . . . . 17,888 7,736 640 3 -- --
Wyoming . . . . . . . . . . 1,000 125 5,043 35 140 35
------ ----- ------ --- --- --
TOTAL . . . . . . . . . . . 29,822 8,828 23,339 452 928 40
====== ===== ====== === === ==
</TABLE>
RESERVES
The Company's interests in proved developed and undeveloped oil and
gas properties have been evaluated by Ryder Scott Company for the years ended
December 31, 1992, 1993, 1994, 1995 and 1996. All of the Company's reserves are
located within the continental United States. The following table summarizes
the Company's oil and gas reserves at each of the respective dates (figures
rounded):
<TABLE>
<CAPTION>
RESERVE CATEGORY
----------------
PROVED DEVELOPED PROVED UNDEVELOPED TOTAL
---------------- ------------------ -----
AS OF OIL GAS OIL GAS OIL GAS
12-31 (BBLS) (MCF) (BBLS) (MCF) (BBLS) (MCF)
----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
1992 . . . . . . 863,000 7,934,000 72,000 821,000 935,000 8,755,000
1993 . . . . . . 512,000 8,351,000 76,000 922,000 588,000 9,273,000
1994 . . . . . . 799,000 9,675,000 2,000 129,000 801,000 9,804,000
1995 . . . . . . 905,000 13,549,000 -- 52,000 905,000 13,601,000
1996 . . . . . . 1,453,000 19,036,000 13,000 29,000 1,466,000 19,065,000
</TABLE>
The estimated future net revenue (using current prices and costs as of
those dates, exclusive of income taxes) and the present value of future net
revenue (at a 10% discount for estimated timing of cash flow) for the
11
<PAGE> 12
Company's proved developed and proved undeveloped oil and gas reserves at the
end of each of the five years ended December 31, 1996, are summarized as
follows (figures rounded):
<TABLE>
<CAPTION>
PROVED DEVELOPED PROVED UNDEVELOPED TOTAL
---------------- ------------------ -----
PRESENT PRESENT PRESENT
VALUE OF VALUE OF VALUE OF
FUTURE FUTURE FUTURE FUTURE FUTURE FUTURE
AS OF NET NET NET NET NET NET
12-31 REVENUE REVENUE REVENUE REVENUE REVENUE REVENUE
----- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
1992 . . . $ 12,219,000 7,727,000 1,503,000 999,000 13,722,000 8,726,000
1993 . . . $ 11,307,000 6,576,000 460,000 221,000 11,767,000 6,797,000
1994 . . . $ 10,396,000 6,839,000 156,000 75,000 10,552,000 6,914,000
1995 . . . $ 15,727,000 9,530,000 39,000 18,000 15,766,000 9,548,000
1996 . . . $ 51,077,000 35,025,000 273,000 167,000 51,350,000 35,192,000
</TABLE>
"Proved developed" oil and gas reserves are reserves that can be
expected to be recovered from existing wells with existing equipment and
operating methods. "Proved undeveloped" oil and gas reserves are reserves that
are expected to be recovered from new wells on undrilled acreage, or from
existing wells where a relatively major expenditure is required for
recompletion.
Since January 1, 1996, the Company has not filed any estimates of its
oil and gas reserves with, nor were any such estimates included in any reports
to, any federal authority or agency, other than the Securities and Exchange
Commission, except Form EIA-23, Annual Survey of Domestic Oil and Gas Reserves,
filed with The Energy Information Administration of the U.S. Department of
Energy.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to, nor is any of its property the subject
of, any legal proceedings, actual or threatened involving any claim for damages
which exceed 10 percent of the Company's current assets.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
No matters were submitted during the fourth quarter of the fiscal year
ended December 31, 1996, to a vote of the Company's security-holders through
the solicitation of proxies or otherwise.
12
<PAGE> 13
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is traded in the NASDAQ Stock Market,
trading symbol "PNRG". The high and low bid quotations for each quarterly
period during the two years ended December 31, 1996, were as follows:
<TABLE>
<CAPTION>
1995 HIGH LOW 1996 HIGH LOW
---- ---- --- ---- ---- ---
<S> <C> <C> <C> <C> <C>
First Quarter . . . . . . . $ 2.19 $ 2.19 First Quarter . . . . . . . . $ 2.44 $ 2.38
Second Quarter . . . . . . 2.19 2.19 Second Quarter . . . . . . . . 4.00 2.44
Third Quarter . . . . . . . 2.50 2.19 Third Quarter . . . . . . . . 4.00 3.25
Fourth Quarter . . . . . . 2.38 2.38 Fourth Quarter . . . . . . . . 4.75 3.88
</TABLE>
The above quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commissions, and may not represent actual transactions.
The approximate number of record holders of the Company's Common Stock
as of March 20, 1997, was 1,266.
No dividends have been declared or paid during the past two years on
the Company's Common Stock. Provisions of the Company's line of credit
agreement restrict the Company's ability to pay dividends. Such dividends may
be declared out of funds legally available therefore, when and as declared by
the Company's Board of Directors.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
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 acquisition and development. By increasing its reserve base,
the Company's borrowing ability is increased due to additional properties
available as collateral. Capital expenditures during 1996 were financed by
borrowings and internally generated funds coupled with cash balances available
at the prior year-end.
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. 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 (LIBO) Rate. The
borrowing base will be revised every six months by the banks.
As of December 31, 1996, the borrowing base under the agreement was
$19,250,000 and the Company had $1,850,000 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. The line of
credit was increased to $21,000,000, reflecting the increase in the Company's
reserve and operating base due to the purchase
13
<PAGE> 14
and development of the Saratoga properties and the success of the 3D seismic
development and exploration program.
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 tangible net worth, and
certain debt, interest coverage and current ratios, and restrictions are placed
on the Company's ability to pay dividends and purchase treasury stock.
In May of 1996, the Company purchased from Internationale Nederlanden
(U.S.) Capital Corporation properties formerly owned by Saratoga Resources,
Inc. for $7,180,000. During 1996, a further $720,000 was spent on the
development of these properties.
Company spending related to its 3D seismic development and exploration
program totaled $3,410,000 during 1996. The Company has, to date, drilled
eight wells as part of this program, seven of which have been completed as
producing gas wells. The Company intends to continue expanding this program in
1997. Expenditures during the first quarter of 1997 included approximately
$570,000, related to conducting a 3D seismic survey to identify prospects for
exploratory drilling, which will be charged to expense.
In total, during 1996, the Company spent approximately $12,910,000 on
the acquisition and development of its oil and gas interests. This amount
includes $211,000 of dry hole costs and $538,000 to buy back limited
partnership interests from investors in its oil and gas partnerships.
Additionally, the Company spent approximately $542,000 on trucks and
automobiles used in connection with field service operations, and an additional
$236,000 on computer related equipment and software.
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 and $621,000 is due in 1997. An additional
$398,000 was spent to acquire treasury stock in open market transactions.
Most of the Company's capital spending is discretionary and the
ultimate level of spending will be dependent on the company's assessment of the
gas and oil business environment, the number of oil and gas prospects, and oil
and gas business opportunities in general. The Company plans to continue with
its recompletion and development program on existing properties, while pursuing
the Company's primary objective of increasing reserves through the acquisition,
development and exploration of new properties.
The Company's operations and financial condition over the past several
years have been affected by a very volatile domestic and foreign market for
crude oil and gas. Price reductions shorten the economic life of properties,
and, as a result, some properties may not be economical to operate if price
deterioration should occur. Other properties might not support major
expenditures under such conditions. Capital expenditures are constantly
scrutinized to reasonably ensure the economic viability of a project.
The Company is subject to a combination of shut-in and/or reduced
takes of gas production during summer months. Prolonged shut-ins could result
in reduced field operating income from properties in which the Company acts as
operator.
RESULTS OF OPERATIONS
1996 Compared to 1995
Net income increased to $939,000 in 1996 as compared to $527,000 in 1995. This
large increase was primarily caused by sharply higher oil and gas revenue
caused by production from the properties acquired in the Saratoga acquisition
and wells drilled in the 3D seismic development and exploration project, as
well as higher oil and gas
14
<PAGE> 15
prices received in the fourth quarter of 1996. Oil and gas prices have declined
significantly between December 31, 1996, and the date of this report.
As a result of the Saratoga acquisition and the success of the
Company's recent drilling, oil and gas revenue accounted for 48% of total
revenue in 1996 as compared to 33% in 1995. This percentage is likely to
increase in 1997 as these properties contribute a full year of production. 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. The risk
inherent in these activities, coupled with the requirement that certain costs
incurred in these activities must be expensed as incurred, can be expensed to
lead to greater volatility in earnings in the future.
Oil and gas sales increased 87% in 1996, going from $6,024,000 in 1995
to $11,238,000 in 1996. This large increase is due primarily to the
contributions of the Saratoga properties acquired in May of 1996 and wells
drilled in the third quarter as part of the Company's 3D seismic development
program combined with sharply higher oil and gas prices. The Saratoga
properties contributed a total of $2,676,000 in oil and gas revenue in 1996.
The wells from the 3D seismic development program have contributed $823,000.
The average oil price per barrel received for directly owned
production in 1996 was $21.24 as compared to $16.53 per barrel in 1995 and the
average gas price was $2.34 in 1996 as compared to $1.85 per Mcf in 1995.
Oil and gas sales related to PEMC's carried interest in the
Partnerships and other ventures increased approximately 56% or $1,476,000 in
1996 as compared to 1995. Factors leading to this increase include
substantially higher oil and gas prices received by those entities, the
acquisition of new properties and the development of existing properties by
those entities, and the purchase by PEMC of substantial additional interests in
these Partnerships over the last year.
Lease operating expenses increased 44%, or $1,809,000 in 1996 as
compared to 1995. This increase is primarily attributable to the $1,142,000 in
lease operating expenses incurred on the Saratoga properties purchased during
1996. Average lifting costs on directly owned properties declined to $8.87 per
barrel of oil equivalent, primarily because the wells drilled as part of the
Company's 3D seismic program produced 54,000 barrel of oil equivalents, while
adding only $98,000 to lease operating expense.
Depreciation and depletion of oil and gas properties increased 76% or
$1,853,000 in 1996 as compared to 1995. Depletion on the newly acquired
Saratoga properties contributed $1,153,000 to depletion expense in 1996.
District operating revenue and expense totals for 1996 were relatively
flat when compared to 1995. Revenues increased $171,000 (1.75%) to $9.8
million while expenses increased $40,000 (less than 1%) to $7.4 million. These
results are the net effect of several changes in the Company's activities. The
primary increase in both revenue and expense results from the addition of the
Saratoga properties to the Gulf Coast district. Activity related to servicing
these properties and the expansion of activity related to the 3D seismic
program, which is also concentrated in the Gulf Coast district, offset by a
decrease in equipment utilization on existing Gulf Coast properties, resulted
in net additions of $500,000 and $300,000 in revenues and expense,
respectively, generated by that district. The offsetting declines in district
operating revenue and expense resulted primarily from organizational changes
made in both the Appalachian and Mid-continent districts. The Company has
reduced the costs incurred in servicing the operated properties by
restructuring the field organization and reducing personnel. The reduction in
these costs is reflected in reduced billings and related revenues in both
districts.
Administrative revenue which represents the Company's reimbursement of
general and administrative overhead expended on behalf of the Partnerships (see
Note 12 to the consolidated financial statements), declined 13% in 1996 as
compared to 1995. Administrative revenues received in both years from certain
Partnerships are
15
<PAGE> 16
substantially less than the amounts allocable to those Partnerships under the
Partnership agreements. The lower amounts reflect PEMC's continuing efforts to
reduce costs, both incurred and those allocated to the Partnerships.
Reporting and management fees are earned from providing the accounting
and reporting functions for certain of the Partnerships.
The Company receives reimbursement for costs incurred related to the
evaluation and acquisition of properties on behalf of its related partnerships
and other joint venture partners. To the extent that these property
acquisition costs are expended at the district level, the reimbursements are
recorded as a reduction of total district operating expenses. When expenses
are incurred at the corporate headquarters level, such reimbursements are
recorded as a reduction of the total general and administrative expenses.
During 1996 and 1995, the Company's total reimbursements for property
acquisition costs were approximately $1,783,000 and $1,616,000 respectively.
General and administrative expense increased by 13%, or $387,000
between 1996 and 1995. This increase is primarily due to $340,000 in
non-capitalized costs incurred in connection with Saratoga acquisition, as well
as a general increase in costs reflecting an increase in the scope of the
Company's operations.
Exploration costs of $483,000 consist of $211,000 of dry hole costs
and $272,000 of seismic and other costs related to properties on which
exploratory wells will be drilled in 1997.
Interest expense increased 48% or $327,000 in 1996 as compared to
1995. This increase is primarily due to higher debt levels related to the
purchase of the Saratoga properties in May of 1996.
The Company recorded $175,000 in gains on the sale of assets during
1996. This amount is primarily attributable to the sale of a large number of
fully depleted wells and equipment sold for salvage during 1996.
1995 Compared to 1994
Net income declined slightly between 1994 and 1995 from $577,000 to
$527,000, as the effect of significantly lower gas prices was partially offset
by lower payroll and related costs and profit related to properties acquired
later in 1994. Due to lower weighted average shares outstanding, caused by
significant purchases of treasury stock during the year, net income per share
remained constant at 9 cents per share.
Oil and gas sales of $6 million increased 16% compared to 1994 due to
increases in both oil and gas production offset by the decline in gas prices.
Average oil prices received increased from $15.22 per barrel in 1994 to $16.53
per barrel in 1995, while average gas prices received declined from $2.36 per
Mcf to $1.85 per Mcf. Oil production was up 8.5% and gas production was up
38.6% reflecting the production from acquisitions the Company made at the end
of 1994.
Approximately 17% of the Company's 1995 oil and gas sales were made
under a fixed price gas contract which expired in March of 1996. Under this
contract, which covered production from one field, the Company received an
average price which was approximately 75 cents per Mcf greater than the spot
price which the Company is currently receiving. The Company will take steps to
control operating expenses on this property to minimize, to the extent
possible, the effect of the decline in revenue on net income.
District operating income of $9.7 million increased 3% compared to
1994. Income is derived through the operation of wells owned by the Company as
well as those owned by the Partnerships. The district offices of the Company
are responsible for the operation and maintenance of these properties. The
increase in revenue compared to 1994 is largely due to a full year of revenues
from the 1994 Excelco acquisition partially offset by declines in revenue from
the Appalachian district.
16
<PAGE> 17
Administrative revenue represents the Company's reimbursement of
general and administrative overhead expended on behalf of the Partnerships (see
Note 12 to the consolidated financial statements). Administrative revenues
received in both 1995 and 1994 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, both
incurred and those allocated to the Partnerships.
Reporting and management fees are earned from providing the accounting
and reporting functions for certain of the Partnerships. Overall fees declined
5% compared to 1994 due to PEMC's efforts to control costs incurred by the
Partnerships.
Interest and other income decreased by approximately $34,000 compared
to 1994. This decrease is primarily due to lower balances available for
investment during 1995 as the Company utilized excess working capital for debt
reduction.
Lease operating expenses increased 14% compared to 1994. This increase
reflects the full year of operating expenses on the Excelco and Walker
properties acquired in 1994. Average lifting costs, (lease operating expenses
per equivalent unit of production) decreased from $10.14 per equivalent unit in
1994 to $8.92 per equivalent unit in 1995 primarily due to lower lifting costs
on recent acquisitions.
The Company receives reimbursement for costs incurred related to the
evaluation and acquisition of properties on behalf of its related partnerships
and other joint venture partners. To the extent that these property acquisition
costs are expended at the district level, the reimbursements are recorded as a
reduction of total district operating expenses. When expenses are incurred at
the PEMC level, such reimbursements are recorded as a reduction of total
general and administrative expenses. During 1995 and 1994, the Company's total
reimbursements for property acquisition costs were approximately $1.6 million
and $1.5 million respectively.
District operating expenses of $7.4 million increased $372,000, or 5%
compared to 1994. This increase is largely the result of the growth of the
Company's operating and well servicing businesses, and is relatively consistent
with the increase in district operating income. Reimbursement of property
acquisition costs at the district level decreased from $425,000 in 1994 to
$300,000 in 1995. Management believes that the Company is now positioned such
that significant additions may be made to operated wells without significant
cost increases within existing district offices.
General and administrative expenses of $2.9 million decreased $515,000
or 15% compared to 1994. This decrease is primarily related to the increase in
reimbursement of property acquisition costs at the corporate level, from $1.1
million in 1994 to $1.3 million in 1995, as well as overall lower payroll
related expenses. Additionally, the Company discontinued sponsoring public
investment vehicles in 1994 and accordingly, expenses in 1994 included a charge
of $90,000 related to prepaid marketing fees. No such charge was incurred in
1995.
Depreciation and depletion of oil and gas properties of $2.4 million
increased 31% compared to 1994 due to primarily a full year of production from
properties acquired at the end of 1994, partially offset by the effect of
higher year-end oil and gas prices lowering depletion rates.
Exploration costs increased from $17,000 in 1994 to $50,000 in 1995 as
a result of dry hole costs incurred during 1995. The 1994 costs relate to dry
hole costs incurred on the 1994-I Development Program. In the first quarter of
1996, the Company incurred approximately $130,000 of costs for the drilling of
a dry hole.
Interest expense increased 31% compared to 1994 due to additional
amounts borrowed at the end of 1994 to finance acquisition activity.
17
<PAGE> 18
Income tax expense for the year of $69,000 resulted in an effective
rate of 11.6%. This low rate is primarily due to the utilization of net
operating loss and percentage depletion deduction carryforwards.
ITEM 7. FINANCIAL STATEMENTS.
Included on pages F-1 through F-28 of this Report. The Index to
Financial Statements is at page 24 of this Report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
The Company engaged Pustorino, Puglisi & Co. as the principal
accountants for the Company with respect to the audit of the Company's
financial statements for the year ended December 31, 1996, and the report on
the financial statements included in this Report. The appointment of Pustorino,
Puglisi & Co. was effective October 29, 1996, upon approval of the Executive
Committee of the Board of Directors. Coopers & Lybrand acted as the principal
accountants for the Company with respect to the audit of the Company's
financial statements for the years ended December 31, 1995, and 1994.
Coopers & Lybrand was dismissed effective October 29, 1996, upon the
recommendation of the Executive Committee of the Board of Directors of the
Company. There were no disagreements with Coopers & Lybrand on any matters of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure in connection with the audit of the Company's two most
recent audited fiscal years, being the years ended December 31, 1995 and 1994,
or any subsequent interim period. The audit reports of Coopers & Lybrand
contained no adverse opinion or any disclaimer of opinion, nor were their
reports qualified or modified as to uncertainty, audit scope or accounting
principles.
Due to a billing dispute, Coopers & Lybrand has refused to perform the
"keeping current procedures" necessary to reissue their opinion on the 1995
financial statements. That opinion is therefore not included in this Report.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
Information relating to the Company's Directors, nominees for
Directors and executive officers is included in the Company's definitive proxy
statement relating to the Company's Annual Meeting of Stockholders to be held
in June, 1997, which will be filed with the Securities and Exchange Commission
within 120 days of December 31, 1996, and which is incorporated herein by
reference.
ITEM 10. EXECUTIVE COMPENSATION.
Information relating to executive compensation is included in the
Company's definitive proxy statement relating to the Company's Annual Meeting
of Stockholders to be held in June, 1997, which will be filed with the
Securities and Exchange Commission within 120 days of December 31, 1996, and
which is incorporated herein by reference.
18
<PAGE> 19
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information relating to security ownership of certain beneficial
owners and management is included in the Company's definitive proxy statement
relating to the Company's Annual Meeting of Stockholders to be held in June,
1997, which will be filed with the Securities and Exchange Commission within
120 days of December 31, 1996, and which is incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information relating to certain transactions by Directors and
executive officers of the Company is included in the Company's definitive proxy
statement relating to the Company's Annual Meeting of Stockholders to be held
in June, 1997, which will be filed with the Securities and Exchange Commission
within 120 days of December 31, 1996, and which is incorporated herein by
reference.
19
<PAGE> 20
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
NO.
-----
3.1 -- Certificate of Incorporation as amended, of PrimeEnergy
Corporation. (Incorporated herein by reference to
Exhibit 3.1 of PrimeEnergy Corporation Form 10-KSB for
the year ended December 31, 1994)
3.2 -- Bylaws of PrimeEnergy Corporation. (Incorporated herein
by reference to Exhibit 3.2 of PrimeEnergy Corporation
Form 10-KSB for the year ended December 31, 1994)
10.1 -- PrimeEnergy Corporation 1983 Incentive Stock Option Plan
(Incorporated herein by reference to Exhibit 10.1 of
PrimeEnergy Corporation Form 10-KSB for the year ended
December 31, 1994) (1)
10.3 -- Massachusetts Mutual Flexinvest 401 (k) Plan as amended
and restated. (Incorporated herein by reference to
Exhibit 10.3 of PrimeEnergy Corporation Form 10-KSB for
the year ended December 31, 1994) (1)
10.7 -- Credit Agreement dated April 26, 1995, between
PrimeEnergy Corporation, PrimeEnergy Management
Corporation and Bank One, Texas, National Association.
(Incorporated herein by reference to Exhibit 10.7 to
PrimeEnergy Corporation Form 8-K dated April 26, 1995)
10.7.1 -- First Amendment to Credit Agreement Among PrimeEnergy
Corporation and PrimeEnergy Management Corporation, as
Borrowers, Bank One, Texas, National Association, as
Agent, and the Lenders Signatory Hereto, effective as of
October 6, 1995. (Incorporated herein by reference to
Exhibit 10.7.1 to PrimeEnergy Corporation Form 10-KSB
for the year ended December 31, 1995)
10.7.2 -- Second Amendment to Credit Agreement Among PrimeEnergy
Corporation and PrimeEnergy Management Corporation, as
Borrowers, Bank One, Texas, National Association, as
Agent, and the Lenders Signatory Hereto, effective as of
February 6, 1997. (filed herewith)
10.8 -- Mortgage, Deed of Trust, Indenture, Security Agreement,
Financing Statement and Assignment of Production dated
May 27, 1994, as ratified and amended April 26, 1995,
between PrimeEnergy Corporation, PrimeEnergy Management
Corporation and Bank One, Texas, National Association.
(Incorporated herein by reference to Exhibit 10.8 to
PrimeEnergy Corporation Form 8-K dated April 26, 1995)
10.15 -- Employment Agreement between K.R.M. Petroleum
Corporation and Charles E. Drimal, Jr. (Incorporated
herein by reference to Exhibit 10.15 of PrimeEnergy
Corporation Form 10-KSB for the year ended December 31,
1994) (1)
10.17 -- Amended Marketing Agreement between PrimeEnergy
Management Corporation and Charles E. Drimal, Jr.
(Incorporated herein by reference to Exhibit 10.17 of
PrimeEnergy Corporation Form 10-KSB for the year ended
December 31, 1994) (1)
20
<PAGE> 21
10.18 -- Composite copy of Non-Statutory Option Agreements.(1)
(Incorporated herein by reference to Exhibit 10.18 to
PrimeEnergy Corporation Form 10-KSB for the year ended
December 31, 1994) (1)
10.19 -- Purchase and Sale Agreement dated as of May 7, 1996, by
and between Internationale Nederlanden (U.S.) Capital
Corporation and PrimeEnergy Corporation (Incorporated
herein by reference to Exhibit 10.19 to PrimeEnergy
Corporation Form 8-K dated May 29, 1996)
10.20 -- Assignment, Conveyance and Bill of Sale dated as of May
7, 1996, by Saratoga Resources, Inc., a Texas
corporation, et al., to PrimeEnergy Corporation
(Incorporated herein by reference to Exhibit 10.20 to
PrimeEnergy Corporation Form 8-K dated May 29, 1996)
22 -- Subsidiaries. (filed herewith)
24 -- Consent of Ryder Scott Company. (filed herewith)
27 -- Financial Data Schedule. (filed herewith)
- ----------
(1) Management contract or compensatory plan or arrangement required to be
filed as an Exhibit to this Form 10-KSB.
(b) Reports on Form 8-K:
Form 8-K dated October 29, 1996, was filed to report the engagement of
Pustorino, Puglisi & Co. as the principal accountants for the Company,
replacing Coopers & Lybrand, as described under Item 4. Changes in Registrant's
Certifying Accountant.
21
<PAGE> 22
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on the 31st day of
March, 1997.
PrimeEnergy Corporation
By: /s/ CHARLES E. DRIMAL, JR.
------------------------------
Charles E. Drimal, Jr.
President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated and on the 31st day of March, 1997.
/s/ CHARLES E. DRIMAL, JR. Director and President;
- ------------------------------ The Principal Executive Officer
Charles E. Drimal, Jr.
/s/ BEVERLY A. CUMMINGS Director, Vice President and Treasurer;
- ------------------------------ The Principal Financial and Accounting
Beverly A. Cummings Officer
/s/ BENNIE H. WALLACE, JR. Director, and Vice President
- ------------------------------
Bennie H. Wallace, Jr.
/s/ SAMUEL R. CAMPBELL Director
- ------------------------------
Samuel R. Campbell
/s/ JAMES E. CLARK Director
- ------------------------------
James E. Clark
/s/ CHARLES E. DRIMAL, SR. Director
- ------------------------------
Charles E. Drimal, Sr.
/s/ MATTHIAS ECKENSTEIN Director
- ------------------------------
Matthias Eckenstein
/s/ H. GIFFORD FONG Director
- ------------------------------
H. Gifford Fong
22
<PAGE> 23
/s/ THOMAS S.T. GIMBEL Director
- ------------------------------
Thomas S.T. Gimbel
/s/ CLINT HURT Director
- ------------------------------
Clint Hurt
/s/ ROBERT DE ROTHSCHILD Director
- ------------------------------
Robert de Rothschild
/s/ JARVIS K. SLADE Director
- ------------------------------
Jarvis J. Slade
/s/ JAN K. SMEETS Director
- ------------------------------
Jan K. Smeets
Director
- ------------------------------
Gaines Wehrle
/s/ MICHAEL WEHRLE Director
- ------------------------------
Michael Wehrle
23
<PAGE> 24
INDEX TO FINANCIAL STATEMENTS
Financial Statements (Included herein at pages F-1 through F-28):
Report of Independent Public Accountants, F-1
Financial Statements:
Consolidated Balance Sheets -- December 31, 1996 and 1995, F-2
Consolidated Statements of Operations -- for the years ended December
31, 1996 and 1995, F-4
Consolidated Statements of Stockholders' Equity -- for the years ended
December 31, 1996 and 1995, F-5
Consolidated Statements of Cash Flows -- for the years ended December
31, 1996 and 1995, F-6
Notes to Consolidated Financial Statements, F-7
Supplementary Information: F-21
Capitalized Costs Relating to Oil and Gas Producing Operations,
December 31, 1996 and 1995, F-22
Costs Incurred in Oil and Gas Property Acquisition,
Exploration and Development Activities, years ended December
31, 1996 and 1995, F-22
Standardized Measure of Discounted Future Net Cash Flows
Relating to Proved Oil and Gas reserves, years ended December
31, 1996 and 1995, F-23
Standardized Measure of Discounted Future Net Cash Flows and
Changes Therein Relating to Proved Oil and Gas Reserves, years
ended December 31, 1996 and 1995, F-24
Reserve Quantity Information, years ended December 31, 1996
and 1995, F-25
Results of Operations from Oil and Gas Producing Activities,
years ended December 31, 1996 and 1995, F-26
Notes to Supplementary Information, F-27
<PAGE> 25
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of PrimeEnergy Corporation:
We have audited the accompanying consolidated balance sheet of PrimeEnergy
Corporation and Subsidiaries as of December 31, 1996, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on the
financial statements based on our audit. The financial statements for 1995 were
audited by another auditor, whose opinion dated March 20, 1996 was unqualified.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of PrimeEnergy
Corporation and Subsidiaries as of December 31, 1996, and the consolidated
results of their operations and their cash flows for the year then ended, in
conformity with generally accepted accounting principles.
Pustorino, Puglisi & Co., LLP
New York, New York
March 28, 1997
<PAGE> 26
PRIMEENERGY CORPORATION and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,316,000 $ 1,009,000
Restricted cash and cash
equivalents (Note 13) 663,000 713,000
Accounts receivable, net (Note 3) 5,052,000 2,311,000
Due from related parties (less allowance for
doubtful accounts of $800,000 in 1996
and $725,000 in 1995) (Note 12) 2,184,000 2,939,000
Prepaid expenses 150,000 151,000
Other current assets 266,000 597,000
Deferred income taxes (Notes 1 and 10) 119,000 198,000
------------ ------------
Total current assets 11,750,000 7,918,000
------------ ------------
Property and equipment, at cost (Notes 1 and 2):
Oil and gas properties (successful
efforts method):
Proved 36,645,000 25,024,000
Unproved 179,000 --
Furniture, fixtures and equipment
including leasehold improvements 5,269,000 4,696,000
------------ ------------
42,093,000 29,720,000
Accumulated depreciation and depletion (21,860,000) (17,766,000)
------------ ------------
Net property and equipment 20,233,000 11,954,000
------------ ------------
Other assets (Note 12) 607,000 487,000
Due from affiliates (Note 12) 325,000 325,000
------------ ------------
Total assets $ 32,915,000 $ 20,684,000
============ ============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F-2
<PAGE> 27
PRIMEENERGY CORPORATION and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
LIABILITIES and STOCKHOLDERS' EQUITY:
Current liabilities:
Current portion of other long-term
obligations (Note 5) $ 73,000 $ 202,000
Accounts payable (Note 15) 5,297,000 2,691,000
Accrued liabilities:
Payroll, Benefits and Related Items 494,000 522,000
Taxes (Notes 1 and 10) 11,000 26,000
Interest and other 774,000 617,000
Due to related parties (Note 12) 1,298,000 1,319,000
------------ ------------
Total current liabilities 7,947,000 5,377,000
------------ ------------
Long-term bank debt (Note 4) 17,400,000 7,400,000
Other long-term obligations (Note 5) 243,000 507,000
Deferred income taxes (Notes 1 and 10) 240,000 333,000
Payable for encumbered treasury
stock (Note 6) 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
Accumulated deficit (53,000) (992,000)
Encumbered treasury stock (Note 6) (621,000) --
------------ ------------
10,974,000 10,656,000
Treasury stock, at cost, 2,650,398
common shares in 1996 and 2,361,961
common shares in 1995 (4,510,000) (3,589,000)
------------ ------------
Total stockholders' equity 6,464,000 7,067,000
------------ ------------
Total liabilities and equity $ 32,915,000 $ 20,684,000
============ ============
</TABLE>
The accompanying notes are integral part of the
consolidated financial statements.
F-3
<PAGE> 28
PRIMEENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS of OPERATIONS
for the years ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Revenue:
Oil and gas sales $11,238,000 $ 6,024,000
District operating income 9,846,000 9,675,000
Administrative revenue (Note 12) 1,621,000 1,866,000
Reporting and management fees (Note 12) 350,000 356,000
Interest income 129,000 108,000
Other income 42,000 30,000
----------- -----------
23,226,000 18,059,000
----------- -----------
Costs and expenses:
Lease operating expense 5,909,000 4,100,000
District operating expense 7,407,000 7,367,000
Depreciation and depletion of
oil and gas properties 4,283,000 2,430,000
General and administrative expense 3,328,000 2,940,000
Exploration costs 483,000 50,000
Interest expense (Notes 4 and 5) 1,002,000 675,000
----------- -----------
22,412,000 17,562,000
----------- -----------
Income from operations 814,000 497,000
Other income:
Gain on sale and exchange of assets 175,000 99,000
----------- -----------
Income before provision for income taxes 989,000 596,000
Provision for income taxes 50,000 69,000
----------- -----------
Net income $ 939,000 $ 527,000
=========== ===========
Net income per common share (Note 1) $ 0.17 $ 0.09
=========== ===========
Weighted average number of shares of common stock
and common stock equivalents outstanding 5,584,542 5,975,903
=========== ===========
</TABLE>
The accompanying notes are integral part of the
consolidated financial statements.
F-4
<PAGE> 29
PRIMEENERGY CORPORATION and SUBSIDIARIES
CONSOLIDATED STATEMENT of STOCKHOLDERS' EQUITY
for the years ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
Additional Retained 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, 1994 7,597,970 $760,000 $10,888,000 ($1,519,000) ($2,532,000) $ -- $7,597,000
Purchased 442,923 shares of
common stock (1,057,000) (1,057,000)
Net income 527,000 527,000
------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 7,597,970 760,000 10,888,000 (992,000) (3,589,000) -- 7,067,000
Purchased 105,388 shares of
common stock (398,000) (398,000)
Purchased 400,000 shares of
encumbered treasury stock
(Note 10) (523,000) (621,000) (1,144,000)
Net income 939,000 939,000
------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 7,597,970 $760,000 $10,888,000 ($53,000) ($4,510,000) $621,000) $6,464,000
======================================================================================================
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F-5
<PAGE> 30
PRIMEENERGY CORPORATION and SUBSIDIARIES
CONSOLIDATED STATEMENTS of CASH FLOWS
for the years ended December 31, 1996 and 1995
--------
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 939,000 $ 527,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization 5,039,000 3,190,000
Gain on sale of properties (175,000) (99,000)
Provision of deferred income taxes (14,000) 14,000
Changes in assets and liabilities
(Increase) in accounts receivable (2,741,000) (218,000)
(Increase) decrease in due from related parties 755,000 (519,000)
(Increase) decrease in other assets 252,000 (421,000)
(Increase) decrease in prepaid expenses 1,000 (42,000)
Decrease (increase) in account payable 2,656,000 (276,000)
Increase in accrued liabilities 114,000 348,000
Increase (decrease) in due to related parties (21,000) 1,002,000
------------ ------------
Net cash provided by operating activities 6,805,000 3,506,000
------------ ------------
Cash flows from investing activities:
Proceeds from sale of properties and equipment 291,000 248,000
Additions to property and equipment (13,434,000) (3,068,000)
(Increase) in notes receivable (40,000) --
------------ ------------
Net cash used in investing activities (13,183,000) (2,820,000)
------------ ------------
Cash flows from financing activities:
Purchase of stock for treasury (921,000) (1,057,000)
Repayment of long-term bank debt and other
long-term obligations (20,677,000) (13,970,000)
Increase in long-term bank debt and other
long-term obligations 30,283,000 13,569,000
Distributions to related parties -- (580,000)
------------ ------------
Net cash provided by (used in) financing activities 8,685,000 (2,038,000)
------------ ------------
Net increase (decrease) in cash 2,307,000 (1,352,000)
Cash and cash equivalents, beginning of year 1,009,000 2,361,000
------------ ------------
Cash and cash equivalents, end of year $ 3,316,000 $ 1,009,000
============ ============
Supplemental disclosures:
Income taxes paid during the year $ 79,000 $ 53,000
Interest paid during the year $ 905,000 $ 684,000
</TABLE>
Supplemental information of non-cash investing and financial activities:
During 1996, the Company purchased treasury stock in return for a note in
amount of $1,144,000. (Note 6)
The accompanying notes are an integral part of the
consolidated financial statements.
F-6
<PAGE> 31
PRIMEENERGY CORPORATION and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
---------
1. DESCRIPTION OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations:
PrimeEnergy Corporation ("PEC"), a Delaware corporation, was organized
in March 1973. PrimeEnergy Management Corporation ("PEMC"), a
wholly-owned subsidiary, acts as the managing general partner,
providing administration, accounting and tax preparation services for
53 private and publicly-held limited partnerships and trusts (the
"Partnerships"). PEC owns Eastern Oil Well Service Company ("EOWSC")
and Southwest Oilfield Construction Company ("SOCC"), both of which
perform oil and gas field servicing. PEC also owns Prime Operating
Company ("POC") which serves as operator for most of the producing oil
and gas properties owned by the Company and affiliated entities.
PrimeEnergy Corporation and its wholly-owned subsidiaries are herein
referred to as the "Company."
The Company is engaged in 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 1,762 wells and owns non-operating
interests in approximately 1,052 additional wells. Additionally, the
Company provides well-servicing support operations, site-preparation
and construction services for oil and gas drilling and re-working
operations, both in connection with the Company's activities and
providing contract services for third parties. The Company is publicly
traded on the NASDAQ under the symbol "PNRG."
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.
F-7
<PAGE> 32
PRIMEENERGY CORPORATION and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
---------
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 an oil and gas property
will usually be significantly less than the total future net revenue
expected from that property, small changes in the estimated future net
revenue from an asset could lead to the necessity of recording a
significant impairment of that asset.
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.
Costs of drilling and equipping productive wells, including
development dry holes and related production facilities are
capitalized. Costs incurred by the Company related to the acquisition
of producing oil and gas properties on behalf of related partnerships,
trusts or joint ventures are deferred and charged to the related
entity upon the completion of the acquisition. To the extent that the
Company acquires an interest in the property, an appropriate
allocation of internal costs are capitalized as part of the depletable
base of the property.
F-8
<PAGE> 33
PRIMEENERGY CORPORATION and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
---------
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 is 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 tax
consequences of events that have been recognized in the Company's
financial statements or tax returns.
Deferred tax liabilities or assets are established for temporary
differences between financial and tax reporting bases and are
subsequently adjusted to reflect changes in the rates expected to be
in effect when the temporary differences reverse. A valuation
allowance is established for any deferred tax asset for which
realization is not likely.
F-9
<PAGE> 34
PRIMEENERGY CORPORATION and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
---------
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 Common 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.
Fair Value of Financial Instruments:
The Company estimates that the fair value of financial instruments
reported herein approximates their carrying value.
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.
F-10
<PAGE> 35
PRIMEENERGY CORPORATION and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
---------
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.
2. SIGNIFICANT ACQUISITIONS AND DISPOSITIONS
1996
Saratoga Property Acquisition:
In May 1996, the Company completed the acquisition of various
interests in 145 active wells previously owned by Saratoga Resources,
Inc. from Internationale Nederlandend (U.S.) Capital Corporation
(herein referred to as "ING") for $7,180,000. The Company serves as
operator for 132 of these wells. These properties are located
primarily in eight counties along the Gulf Coast of Texas. These
properties also include additional development potential. Pursuant to
the purchase and sale agreement, ING has retained a net profits
interest in the development of these properties, subject to
performance hurdles.
During 1996, wells were drilled on properties acquired in the Saratoga
Property Acquisition. In October 1996, the S.F. Wing No. 82 well was
drilled in the Segno field of Polk County, Texas. The well was
completed in the Yegua Formation at an initial production rate of
approximately 90 Barrels of oil per day and 500 MCF of gas per day.
The Company owns 20% of this property. Also in October 1996, the Fling
Point No. 1H was drilled as a horizontal well in the Brookeland field,
of Sabine County, Texas. This well was completed in the Austin Chalk
Formation at an initial production rate of approximately 2,500 MCF of
gas per day. The Company owns eight percent of this property.
The purchase of Saratoga, described above, constitutes a significant
acquisition. The following unaudited proforma data presents financial
information as if the Saratoga acquisition was made at the beginning
of the periods indicated:
<TABLE>
<CAPTION>
December 31,
---------------------------
1996 1995
------------ ------------
<S> <C> <C>
Revenue $ 24,318,000 $ 21,114,000
============ ============
Net income $ 1,218,000 $ 635,000
============ ============
Net income per common share $ .22 $ .11
============ ============
</TABLE>
F-11
<PAGE> 36
PRIMEENERGY CORPORATION and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
---------
These proforma results have been prepared for comparative purposes
only and do not purport to be indicative of what would have occurred
had the acquisition been made at the beginning of 1996 and 1995 or of
results which may occur in the future.
3D Seismic Development and Exploration Program:
Capital committed under the 1995 Development Program was expended
during 1996 on the initial phase of this development and exploration
program. The Company has continued to expand this program with
additional 3D seismic surveys, leasehold acquisitions and drilling.
Outside investors have continued to participate in the subsequent
phases. The Company's interest in these activities ranges from 37% to
52%.
Other:
As more fully described in Note 8, PEMC is committed to offer to
repurchase the interests of the limited partners and trust unitholders
in certain managed limited partnerships and trusts. During 1996, PEMC
purchased such interests in an amount totaling $538,000.
1995
1995 Development Program:
During 1995, PEMC obtained commitments of $3.0 million, primarily from
outside investors, to be used to finance the development of several
acquisition, drilling and recompletion prospects. During 1995, the
Company committed to spending $1.25 million on this program in which
it owns a 41.7% interest. Each investor owns a proportional interest
in each prospect equal to the amount invested as a percentage of the
total raised. PEMC retains a 10% carried interest in the net revenues
attributable to the prospects, excluding PEC's direct interest.
Other:
As more fully described in Note 8, PEMC is committed to offer to
repurchase the interests of the limited partners and trust unitholders
in certain managed limited partnerships and trusts. During 1995, PEMC
purchased such interests in an amount totaling $486,000.
F-12
<PAGE> 37
PRIMEENERGY CORPORATION and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
---------
3. ACCOUNTS RECEIVABLE
Accounts receivable at December 31, 1996 and 1995 consisted of the
following:
<TABLE>
<CAPTION>
December 31,
--------------------------
1996 1995
----------- -----------
<S> <C> <C>
Joint interest billing $ 1,533,000 $ 918,000
Trade receivables 126,000 98,000
Oil and gas sales 3,337,000 994,000
Other 99,000 399,000
----------- -----------
5,095,000 2,409,000
Less, allowance for doubtful accounts (43,000) (98,000)
----------- -----------
$ 5,052,000 $ 2,311,000
=========== ===========
</TABLE>
4. LONG-TERM BANK DEBT
During 1994, the Company entered into a $4.8 million revolving line of
credit with the bank which refinanced an existing outstanding loan to
PEC. In May of 1994, the line was increased to $4.99 million and
increased again in November to $8.0 million to facilitate acquisitions
of oil and gas properties. The borrowing base, as defined under this
agreement, was $7.9 million as of December 31, 1994.
On April 26, 1995, the Company entered into a new credit agreement
with the same bank, extending the borrowing base to a non-reducing
$12.5 million and syndicating 25% of the borrowings to a second bank.
During 1995 and 1996, the new agreement provided for interest at 1/2%
over the bank's base rate, as defined, and payable monthly, or 2 3/4%
over the London Inter-Bank Offered Rate (LIBO rate) for the interest
period requested, payable at the end of the interest period. The
average interest rates paid on outstanding borrowings subject to
interest at 1/2% over the bank's base rate during 1996 and 1995 were
8.79% and 9.52%, respectively. During the same periods, the average
rates paid on outstanding borrowings bearing interest at 2 3/4% over
the LIBO rate were 8.33% and 8.67%, respectively. As of December 31,
1996 and 1995, the total outstanding borrowings were $17.4 million and
$7.4 million, respectively, of which $12.6 million and $4.7 million
accrued interest at the LIBO rate option.
Advances pursuant to the agreement are limited to the borrowing base
as defined in the agreement. As of December 31, 1996, the borrowing
base was $19 million. 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,
and is prohibited from the payment of dividends.
F-13
<PAGE> 38
PRIMEENERGY CORPORATION and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
---------
On February 6, 1997, the bank extended the borrowing base to a
non-reducing $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.
5. OTHER LONG-TERM OBLIGATIONS
Other long-term obligations at December 31, 1996 and 1995 consist of
the following:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Subordinated debentures $ 225,000 $ 225,000
Installment notes payable -- 321,000
Capital lease obligations 91,000 163,000
--------- ---------
316,000 709,000
Less, current portion (73,000) (202,000)
--------- ---------
$ 243,000 $ 507,000
========= =========
</TABLE>
The secured subordinated debentures are held by affiliated
Partnerships in which PEMC is a general partner and mature in
December, 1998. Interest was payable at 9.25% through 1995, 6.5%
through 1996 and 1% above year-end money market rates thereafter. The
installment notes, bearing interest at rates ranging from 8.5% to
11.25% during 1995, were fully paid during 1996.
6. 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 to be held in escrow until
such payments have been made. The shares are classified as encumbered
treasury stock on the balance sheet, and will be unencumbered 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.
F-14
<PAGE> 39
PRIMEENERGY CORPORATION and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
---------
7. COMMITMENTS
Operating Leases:
The Company has several noncancelable operating leases, primarily for
rental of office space and equipment, that have a term of more than
one year. Future minimum lease payments under operating leases are as
follows:
<TABLE>
<S> <C> <C>
1997 $ 418,000
1998 382,000
1999 45,000
------------
$ 845,000
============
</TABLE>
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.
The Company is subject to environment laws and regulations. Management
believes that future expenses, before recoveries from third parties,
if any, will not have a material effect on the Company's financial
condition. This opinion is based on expenses incurred to date for
remediation and compliance with laws and regulations which have not
been material to the Company's results of operations.
As a general partner, PEMC is committed to offer to purchase the
limited partners' interest in certain of its managed Partnerships at
various annual intervals. Under the terms of a partnership agreement,
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.
The Company and its subsidiaries are involved in a number of lawsuits,
all of which have arisen in the ordinary course of business. The
Company believes that any ultimate
F-15
<PAGE> 40
PRIMEENERGY CORPORATION and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
---------
liability resulting from the settlement of any of these lawsuits will
not have a material adverse effect on its financial position or
results of operations.
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 December 31, 1996, 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 December 31, 1996 and 1995, options on 124,000 and
134,000 shares were exercisable at $1.50 per share, respectively, and
no additional shares were available for granting.
PEMC has a marketing agreement with its current President to provide
assistance and advice to PEMC in connection with the organization and
marketing of oil and gas partnerships and joint ventures and other
investment vehicles of which PEMC is to serve as general or managing
partner. The Company had a similar agreement with its former Chairman.
Although that agreement has expired, the former Chairman is still
entitled to receive certain payments relating to partnerships and
joint ventures formed during the time the agreement was in effect.
Each individual is entitled to a percentage of the Company's carried
interest depending on total capital raised and annual performance of
the Partnerships and Joint ventures.
10. INCOME TAXES
The components of the provision for income taxes for the year ended
December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
Federal: 1996 1995
---------- ----------
<S> <C> <C>
Current $ 23,000 $ 24,000
Deferred -- --
State:
Current 40,000 32,000
Deferred (13,000) 13,000
---------- ----------
$ 50,000 $ 69,000
========== ==========
</TABLE>
F-16
<PAGE> 41
PRIMEENERGY CORPORATION and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
---------
The components of net deferred tax assets (liabilities) are as
follows:
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
----------- -----------
<S> <C> <C>
Current assets:
Compensation and benefits $ 102,000 $ 90,000
Allowance for doubtful accounts 17,000 29,000
Other accrued liabilities -- 79,000
----------- -----------
119,000 198,000
Noncurrent assets:
Depreciation 74,000 --
Due from related parties reserve 316,000 286,000
Net operating loss carryforwards 747,000 871,000
Percentage depletion carryforwards 1,116,000 1,142,000
Alternative minimum tax credits 729,000 705,000
Less, Valuation allowance (1,607,000) (1,715,000)
----------- -----------
1,375,000 1,289,000
----------- -----------
Noncurrent liabilities:
Basis differences relating to limited partnerships (813,000) (901,000)
Depletion (802,000) (558,000)
Depreciation -- (163,000)
----------- -----------
(1,615,000) (1,622,000)
----------- -----------
Net deferred tax liabilities: $ (121,000) $ (135,000)
=========== ===========
</TABLE>
The total provision for income taxes for the years ended December 31,
1996 and 1995 varies from the federal statutory tax rate as a result
of the following:
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
----------- -----------
<S> <C> <C>
Expected statutory tax rate 34.0% 34.0%
State income tax, net of federal benefit 2.7% 7.6%
Effect of utilizing net operating loss carryforwards (12.6%) (6.4%)
Percentage depletion (9.9%) (23.6%)
Intangible drilling costs (9.1%) --
----------- -----------
5.1% 11.6%
=========== ===========
</TABLE>
At December 31, 1996, the Company had federal tax net operating loss
carryforwards for both regular income tax purposes and alternative
minimum tax ("AMT") purposes of $2,196,000. Due to the change in
control of the Company on October 7, 1987, the Company is limited in
utilizing its annual net operating loss carryforwards. Based on the
current ownership and IRS statutes, the annual amount available to the
Company is approximately $366,000. Net loss carryforwards expire
beginning in 1997 through 2002.
F-17
<PAGE> 42
PRIMEENERGY CORPORATION and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
---------
This applies to the alternative minimum tax net operating loss
carryforwards, which can be used to offset 90% of AMT income in future
years. The Company has percentage depletion carryforwards of
approximately $2,790,000 for regular tax purposes and $2,555,000 for
alternative minimum tax purposes. The Company has approximately
$706,000 in alternative minimum tax credit carryforwards.
Both the percentage depletion deductions and the alternative minimum
tax credits may be carried forward indefinitely for tax purposes.
11. SEGMENT INFORMATION AND MAJOR CUSTOMERS
The Company operates in one industry - oil and gas exploration,
development and operation. The Company's oil and gas activities are
entirely in the continental United States.
The Company sells its oil and gas production to a number of
purchasers. While the Company is not dependent on any one purchaser of
its production, oil and gas revenue in 1996 and 1995 included sales to
one purchaser for $1,378,000 and $1,222,000, respectively, which
represented approximately 12% and 20% of the Company's total revenue
from oil and gas sales. In 1996, $1,401,000 of revenue was generated
from sales to another purchaser, representing an additional 12% of the
Company's total oil and gas revenue. In 1995, $957,000 of revenue from
sales to a third purchaser represented 16% of the Company's total oil
and gas revenue. The above sales were made under various contractual
arrangements, some of which are month-to-month; however, the Company
believes that these purchasers will continue to purchase oil and gas
products and, if not, could be replaced by other purchasers.
12. 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 a reimbursement for
property acquisition and development costs incurred on behalf of the
Partnerships and general and administrative overhead, which is
reported in the statements of operations as administrative revenue.
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. During
F-18
<PAGE> 43
PRIMEENERGY CORPORATION and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
---------
1996, the principal of the loan was increased by $40,000,
representing additional funds disbursed to the limited partnership in
May and August. This loan is secured by a second 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, then the
accrued interest is added to the principal. Amounts due, included in
other non-current assets on the balance sheet, were $520,000 and
$425,000 at December 31, 1996 and 1995, respectively.
Due to related parties at December 31, 1996 and December 31, 1995
primarily represent receipts collected by the Company, as agent, from
oil and gas sales net of expenses. The amount of such receipts due the
affiliated partnerships was $1,298,000 and $1,319,000 at December 31,
1996 and 1995, respectively. Receivables from affiliates consist of
reimbursable general and administrative costs, lease operating
expenses and reimbursements for property acquisitions, development,
and related costs.
As discussed in note 6 above, 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 McJunkin Corporation is a major
shareholder in the Company.
13. RESTRICTED CASH AND CASH EQUIVALENTS
Restricted cash and cash equivalents includes $663,000 and $467,000 at
December 31, 1996 and December 31, 1995, respectively, of cash
primarily pertaining to unclaimed royalty payments. There were
corresponding accounts payable recorded at December 31, 1996 and
December 31, 1995 for these liabilities.
Restricted cash at December 31, 1995, also includes $246,000 relating
to the 1994-I and 1995-I Development Programs.
14. SALARY DEFERRAL PLAN
The Company maintains a salary deferral plan (the "Plan") in
accordance with Internal Revenue Code Section 401(k), as amended. The
Plan provides for discretionary and matching contributions which
approximated $207,000 and $197,000 in 1996 and 1995, respectively.
F-19
<PAGE> 44
15. ACCOUNTS PAYABLE
A summary of accounts payable at December 31, 1996 and 1995 is as
follows:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Deposits - Development Programs $ -- $ 246,000
Payables to unaffiliated interests 5,221,000 2,365,000
Overdraft payable to bank -- 27,000
Other 76,000 53,000
---------- ----------
$5,297,000 $2,691,000
========== ==========
</TABLE>
The Deposits - Development Programs represented funds raised which
were committed to the development of certain properties identified in
the programs (see Note 13).
16. SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
Year Ended
December 31, Fourth Third Second First
1996 Quarter Quarter Quarter Quarter
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenue $23,226,000 $ 7,341,000 $ 6,044,000 $ 5,395,000 $ 4,446,000
Operating income 814,000 533,000 267,000 4,000 10,000
Net income 939,000 546,000 284,000 73,000 36,000
Net income per common
share $ .17 $ .10 $ .05 $ .01 $ .01
</TABLE>
<TABLE>
<CAPTION>
Year Ended
December 31, Fourth Third Second First
1995 Quarter Quarter Quarter Quarter
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenue $18,059,000 $ 4,812,000 $ 4,357,000 $ 4,521,000 $ 4,369,000
Operating income 497,000 14,000 87,000 192,000 204,000
Net income 527,000 57,000 83,000 151,000 236,000
Net income per common
share $ .09 $ .01 $ .01 $ .03 $ .04
</TABLE>
F-20
<PAGE> 45
PRIMEENERGY CORPORATION AND SUBSIDIARIES
SUPPLEMENTARY INFORMATION
-----
(UNAUDITED)
F-21
<PAGE> 46
PRIMEENERGY CORPORATION and SUBSIDIARIES
CAPITALIZED COSTS RELATING to OIL and GAS PRODUCING ACTIVITIES
December 31, 1996 and 1995
---------
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Developed oil and gas properties $35,952,000 $25,024,000
Undeveloped oil and gas properties-- 872,000 --
----------- -----------
36,824,000 25,024,000
Accumulated depreciation, depletion and
valuation allowance 18,661,000 14,956,000
----------- -----------
Net capitalized costs (1) $18,163,000 $10,068,000
=========== ===========
</TABLE>
(1) Includes $160,000 in 1996 and $177,000 in 1995 related to the net cost of
gas gathering facilities.
COSTS INCURRED in OIL and GAS PROPERTY ACQUISTION,
EXPLORATION and DEVELOPMENT ACTIVITIES
Years ended December 31, 1996 and 1995
---------
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Acquisition of properties:
Developed $7,281,000 $1,128,000
Undeveloped 872,000 --
Exploration costs, excluding valuation allowance 483,000 50,000
Development costs 4,274,000 935,000
</TABLE>
See accompanying notes to supplementary information.
F-22
<PAGE> 47
PRIMEENERGY CORPORATION and SUBSIDIARIES
STANDARDIZED MEASURE of DISCOUNTED FUTURE
NET CASH FLOWS RELATING to PROVED OIL and GAS RESERVES
years ended December 31, 1996 AND 1995
---------
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Future cash inflows $ 95,679,000 $ 41,946,000
Future production and development costs (44,329,000) (26,181,000)
Future income tax expenses (6,488,000) (837,000)
------------ ------------
Future net cash flows 44,862,000 14,928,000
10% annual discount for estimated timing of cash flow (14,220,000) (5,794,000)
------------ ------------
Standardized measure of discounted
future net cash flow $ 30,642,000 $ 9,134,000
============ ============
</TABLE>
See accompanying notes to supplementary information.
F-23
<PAGE> 48
PRIMEENERGY CORPORATION and SUBSIDIARIES
STANDARDIZED MEASURE of DISCOUNTED FUTURE
NET CASH FLOWS and CHANGES THEREIN RELATING
to PROVED OIL and GAS RESERVES
years ended December 31, 1996 and 1995
----------
(Unaudited)
The following are the principal sources of change in the standardized measure
of discounted future net cash flows during 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Sales of oil and gas produced, net of production costs $ (5,329,000) $ (1,925,000)
Net changes in prices and production costs 7,803,000 409,000
Extensions, discoveries and improved recovery,
less recovery costs 7,897,000 335,000
Revisions of previous quantity estimates 4,827,000 2,272,000
Reserves purchases, net of development costs 9,783,000 883,000
Net change in development costs (26,000) 125,000
Reserves sold -- (15,000)
Accretion of discount 913,000 677,000
Net change in income taxes (4,200,000) (209,000)
Other (160,000) (191,000)
------------ ------------
Net change 21,508,000 2,361,000
Standardized measure of discounted future net cash flow:
Beginning of year 9,134,000 6,773,000
------------ ------------
End of year $ 30,642,000 $ 9,134,000
============ ============
</TABLE>
See accompanying notes to supplementary information
F-24
<PAGE> 49
PRIMEENERGY CORPORATION and SUBSIDIARIES
RESERVE QUANTITY INFORMATION
years ended December 31, 1996 and 1995
---------
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
------------------------------ --------------------------
Gas Oil Gas Oil
(Mcf) (bbls.) (Mcf) (bbls.)
<S> <C> <C> <C> <C>
Proved developed and undeveloped
reserves:
Beginning of year 13,600,000 905,000 9,804,000 801,000
Extensions, discoveries
and improved recovery 3,746,000 90,000 544,000 18,000
Revisions of previous
estimates (1) 1,012,000 (14,000) 3,646,000 137,000
Sales -- -- -- (5,000)
Purchases 3,595,000 734,000 1,558,000 109,000
Production (2,888,000) (249,000) (1,952,000) (155,000)
End of year 19,065,000 1,466,000 13,600,000 905,000
Proved developed reserves 19,036,000 1,453,000 13,549,000 905,000
</TABLE>
(1) Revisions during 1995 and 1996 relate primarily to changes in prices.
See accompanying notes to supplementary information
F-25
<PAGE> 50
PRIMEENERGY CORPORATION and SUBSIDIARIES
RESULTS of OPERATIONS from OIL and GAS PRODUCTING ACTIVITIES
years ended December 31, 1996 and 1995
---------
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Revenue:
Oil and gas sales $11,238,000 $ 6,024,000
----------- -----------
Costs and expenses:
Lease operating expense 5,909,000 4,100,000
Exploration costs 483,000 50,000
Depreciation and depletion 4,283,000 2,430,000
Income tax (benefit) expense -- (64,000)
----------- -----------
10,675,000 6,516,000
----------- -----------
Results of operations from producing activities
(excluding corporate overhead and interest costs) $ 563,000 $ (492,000)
=========== ===========
</TABLE>
See accompanying notes to supplementary information
F-26
<PAGE> 51
PRIMEENERGY CORPORATION and SUBSIDARIES
NOTES to SUPPLEMENTARY INFORMATION
---------
(Unaudited)
1. PRESENTATION OF RESERVE DISCLOSURE INFORMATION
Reserve disclosure information is presented in accordance with the
provisions of Statement of Financial Accounting Standards No. 69
("SFAS 69"), Disclosures About Oil and Gas Producing Activities
2. DETERMINATION OF PROVED RESERVES
The estimates of the Company's proved reserves were determined by an
independent petroleum engineer in accordance with the provisions of
SFAS 69. The estimates of proved reserves are inherently imprecise and
are continually subject to revision based on production history,
results of additional exploration and development and other factors.
Estimated future net revenues were computed by applying current prices
of oil and gas received by the Company to estimated future production
of reserves, less estimated future development and production costs,
based on current costs.
3. RESULTS OF OPERATIONS FROM OIL AND GAS PRODUCING ACTIVITIES
The results of operations from oil and gas producing activities were
prepared in accordance with the provisions of SFAS 69. General and
administrative expenses, interest costs and other unrelated costs are
not deducted in computing results of operations from oil and gas
activities.
4. STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS AND
CHANGES THEREIN RELATING TO PROVED OIL AND GAS RESERVES
The standardized measure of discounted future net cash flows relating
to proved oil and gas reserves and the changes of standardized measure
of discounted future net cash flows relating to proved oil and gas
reserves were prepared in accordance with the provisions of SFAS 69.
Future cash inflows are computed as described in Note 2 by applying
current prices to year-end quantities of proved reserves.
F-27
<PAGE> 52
Future production and development costs are computed estimating the
expenditures to be incurred in developing and producing the oil and
gas reserves at year-end, based on year-end costs and assuming
continuation of existing economic conditions.
Future income tax expenses are calculated by applying the year-end
U.S. tax rate to future pre-tax cash inflows relating to proved oil
and gas reserves, less the tax basis of properties involved. Future
income tax expenses give effect to permanent differences and tax
credits and allowances relating to the proved oil and gas reserves.
Future net cash flows are discounted at a rate of 10% annually
(pursuant to SFAS 69) to derive the standardized measure of discounted
future net cash flows. This calculation does not necessarily represent
an estimate of fair market value or the present value of such cash
flows since future prices and costs can vary substantially from
year-end and the use of a 10% discount figure is arbitrary.
F-28
<PAGE> 53
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
3.1 -- Certificate of Incorporation as amended, of PrimeEnergy
Corporation. (Incorporated herein by reference to
Exhibit 3.1 of PrimeEnergy Corporation Form 10-KSB for
the year ended December 31, 1994)
3.2 -- Bylaws of PrimeEnergy Corporation. (Incorporated herein
by reference to Exhibit 3.2 of PrimeEnergy Corporation
Form 10-KSB for the year ended December 31, 1994)
10.1 -- PrimeEnergy Corporation 1983 Incentive Stock Option Plan
(Incorporated herein by reference to Exhibit 10.1 of
PrimeEnergy Corporation Form 10-KSB for the year ended
December 31, 1994) (1)
10.3 -- Massachusetts Mutual Flexinvest 401 (k) Plan as amended
and restated. (Incorporated herein by reference to
Exhibit 10.3 of PrimeEnergy Corporation Form 10-KSB for
the year ended December 31, 1994) (1)
10.7 -- Credit Agreement dated April 26, 1995, between
PrimeEnergy Corporation, PrimeEnergy Management
Corporation and Bank One, Texas, National Association.
(Incorporated herein by reference to Exhibit 10.7 to
PrimeEnergy Corporation Form 8-K dated April 26, 1995)
10.7.1 -- First Amendment to Credit Agreement Among PrimeEnergy
Corporation and PrimeEnergy Management Corporation, as
Borrowers, Bank One, Texas, National Association, as
Agent, and the Lenders Signatory Hereto, effective as of
October 6, 1995. (Incorporated herein by reference to
Exhibit 10.7.1 to PrimeEnergy Corporation Form 10-KSB
for the year ended December 31, 1995)
10.7.2 -- Second Amendment to Credit Agreement Among PrimeEnergy
Corporation and PrimeEnergy Management Corporation, as
Borrowers, Bank One, Texas, National Association, as
Agent, and the Lenders Signatory Hereto, effective as of
February 6, 1997. (filed herewith)
10.8 -- Mortgage, Deed of Trust, Indenture, Security Agreement,
Financing Statement and Assignment of Production dated
May 27, 1994, as ratified and amended April 26, 1995,
between PrimeEnergy Corporation, PrimeEnergy Management
Corporation and Bank One, Texas, National Association.
(Incorporated herein by reference to Exhibit 10.8 to
PrimeEnergy Corporation Form 8-K dated April 26, 1995)
10.15 -- Employment Agreement between K.R.M. Petroleum
Corporation and Charles E. Drimal, Jr. (Incorporated
herein by reference to Exhibit 10.15 of PrimeEnergy
Corporation Form 10-KSB for the year ended December 31,
1994) (1)
10.17 -- Amended Marketing Agreement between PrimeEnergy
Management Corporation and Charles E. Drimal, Jr.
(Incorporated herein by reference to Exhibit 10.17 of
PrimeEnergy Corporation Form 10-KSB for the year ended
December 31, 1994) (1)
10.18 -- Composite copy of Non-Statutory Option Agreements.(1)
(Incorporated herein by reference to Exhibit 10.18 to
PrimeEnergy Corporation Form 10-KSB for the year ended
December 31, 1994) (1)
10.19 -- Purchase and Sale Agreement dated as of May 7, 1996, by
and between Internationale Nederlanden (U.S.) Capital
Corporation and PrimeEnergy Corporation (Incorporated
herein by reference to Exhibit 10.19 to PrimeEnergy
Corporation Form 8-K dated May 29, 1996)
10.20 -- Assignment, Conveyance and Bill of Sale dated as of May
7, 1996, by Saratoga Resources, Inc., a Texas
corporation, et al., to PrimeEnergy Corporation
(Incorporated
</TABLE>
<PAGE> 54
herein by reference to Exhibit 10.20 to PrimeEnergy
Corporation Form 8-K dated May 29, 1996)
22 -- Subsidiaries. (filed herewith)
24 -- Consent of Ryder Scott Company. (filed herewith)
27 -- Financial Data Schedule. (filed herewith)
- ----------
(1) Management contract or compensatory plan or arrangement required to be
filed as an Exhibit to this Form 10-KSB.
<PAGE> 1
EXHIBIT 10.7.2
===============================================================================
SECOND AMENDMENT TO CREDIT AGREEMENT
AMONG
PRIMEENERGY CORPORATION
AND
PRIMEENERGY MANAGEMENT CORPORATION,
AS BORROWERS,
BANK ONE, TEXAS, NATIONAL ASSOCIATION,
AS AGENT,
AND
THE LENDERS SIGNATORY HERETO
Effective as of February 6, 1997
===============================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
ARTICLE I DEFINITIONS .................................................. 1
1.01 Terms Defined Above ..................................... 1
1.02 Terms Defined in Agreement .............................. 1
1.03 References .............................................. 1
1.04 Articles and Sections ................................... 2
1.05 Number and Gender ....................................... 2
ARTICLE II AMENDMENTS ................................................... 2
2.01 Amendment of Section 1.2 ................................ 2
2.02 Amendment of Section 2.11(b) ............................ 2
2.03 Amendment of Section 2.16 ............................... 3
ARTICLE III CONDITIONS ................................................... 3
3.01 Receipt of Loan Documents ............................... 3
3.02 Accuracy of Representations and Warranties;
No Default or Event of Default .......................... 3
3.03 Payment of Fees and Expenses ............................ 3
3.04 Matters Satisfactory to Lenders ......................... 3
3.05 No Material Adverse Effect .............................. 3
ARTICLE IV REPRESENTATIONS AND WARRANTIES ............................... 4
4.01 Due Authorization ....................................... 4
4.02 Valid and Binding Obligations of Borrowers .............. 4
4.03 Representations and Warranties in Credit Agreement ...... 4
4.04 No Default or Event of Default .......................... 4
4.05 Ratification and Confirmation of Liens .................. 4
ARTICLE V MISCELLANEOUS ................................................ 5
5.01 Survival Upon Unenforceability .......................... 5
5.02 Rights of Third Parties ................................. 5
5.03 Amendments or Modifications ............................. 5
5.04 Ratification ............................................ 5
5.05 Expenses ................................................ 5
5.06 ENTIRE AGREEMENT; NO ORAL AGREEMENTS .................... 5
5.07 GOVERNING LAW ........................................... 5
5.08 JURISDICTION AND VENUE .................................. 6
5.09 Counterparts ............................................ 6
</TABLE>
i
<PAGE> 3
SECOND AMENDMENT TO CREDIT AGREEMENT
This SECOND AGREEMENT TO CREDIT AGREEMENT (this "Second Amendment") is
made and entered into effective as of February 6, 1997, by and among
PRIMEENERGY CORPORATION, a Delaware corporation ("PEC"), PRIMEENERGY MANAGEMENT
CORPORATION, a New York corporation ("PEMC," with PEC and PEMC being
individually referred to as a "Borrower" and collectively as the "Borrowers"),
BANK ONE, TEXAS, NATIONAL ASSOCIATION, a national banking association ("Bank
One"), and DEN NORSKE BANK AS, a Norwegian bank ("DNB," with Bank One, DNB, and
each other lender that becomes signatory, individually, together with its
successors and assigns, a 'Lender and, collectively, together with their
respective successors and assigns, the "Lenders"), and Bank One, as agent for
the Lenders (in such capacity, together with its successors in such capacity,
the "Agent").
WITNESSETH:
WHEREAS, the above named parties did execute and exchange counterparts of
that certain Credit Agreement dated April 26, 1995, as amended by First
Amendment to Credit Agreement dated effective as of October 6, 1995 (the
"Agreement"), to which reference is here made for all purposes;
WHEREAS, the parties subject to and bound by the Agreement are desirous
of amending the Agreement in the particulars hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
of the parties to the Agreement, as set forth therein, and the mutual covenants
and agreements of the parties hereto, as set forth in this Second Amendment,
the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
1.01 Terms Defined Above. As used herein, each of the terms "Agent,"
"Second Amendment, Bank One, Borrower," "Borrowers," "Credit Agreement," "DNB,"
"Lender", "Lenders," "PEC," and "PEMC" shall have the meaning assigned to such
term hereinabove.
1.02 Terms Defined in Agreement. As used herein, each term defined in the
Agreement shall have the meaning assigned thereto in the Agreement, unless
expressly provided herein to the contrary.
1.03 References. References in this Second Amendment to Article or
Section numbers shall be to Articles and Sections of this Second Amendment,
unless expressly stated herein to the contrary. References in this Second
Amendment to "hereby," "herein,"
<PAGE> 4
"hereinafter," "hereinabove," "hereinbelow," "hereof," and "hereunder" shall be
to this Second Amendment in its entirety and not only to the particular Article
or Section in which such reference appears.
1.04 Articles and Sections. This Second Amendment, for convenience only,
has been divided into Articles and Sections and it is understood that the
rights, powers, privileges, duties, and other legal relations of the parties
hereto shall be determined from this Second Amendment as an entirety and
without regard to such division into Articles and Sections and without regard
to headings prefixed to such Articles and Sections.
1.05 Number and Gender. Whenever the context requires, reference herein
made to the single number shall be understood to include the plural and
likewise the plural shall be understood to include the singular. Words denoting
sex shall be construed to include the masculine, feminine, and neuter, when
such construction is appropriate, and specific enumeration shall not exclude
the general, but shall be construed as cumulative. Definitions of terms defined
in the singular and plural shall be equally applicable to the plural or
singular, as the case may be.
ARTICLE II
AMENDMENTS
The Borrower and the Lender hereby amend the Agreement in the following
particulars:
2.01 Amendment of Section 1.2. Section 1.2 of the Agreement is hereby
amended as follows:
The following definitions are added or amended to read as follows:
"'Commitment Termination Date' shall mean July 1, 2000."
"'Final Maturity' shall mean July 1, 2000. "
"'Applicable Margin' shall mean, as to each Floating Rate Loan, zero
percent (O%), and as to each LIBO Rate Loan, two and one-quarter percent
(2 1/4%), which shall include any LIBO Rate Loans maturing subsequent to
February 6, 1997."
2.02 Amendment of Section 2.11 (b). The first two sentences of Section
2.11(b) are amended as follows:
"The Borrowing Base as of February 6, 1997, is acknowledged by the
Borrowers and the Lender to be $21,000,000. The Reserve
2
<PAGE> 5
Value as of February 6, 1997, is acknowledged by the Borrowers and the
Lender to be $9,175,000."
2.03 Amendment of Section 2.16. Section 2.16 is amended to add the
following:
"... The Borrower shall not be required to pay a facility fee on February
6, 1997, and such fee, if any, will be paid if the Borrowing Base as
determined on July 1, 1997, is in excess of $19,250,000 and the facility
fee will be one percent (1 %) of the excess over such sum."
ARTICLE III
CONDITIONS
The obligation of the Agent and the Lenders to amend the Credit Agreement
as provided herein is subject to the fulfillment of the following conditions
precedent:
3.01 Receipt of Loan Documents. The Agent shall have received multiple
counterparts, as requested by the Agent, of this Amendment, executed by the
Borrowers, which shall be in form and substance satisfactory to the Agent.
3.02 Accuracy of Representations and Warranties;, No Default or Event of
Default. The representations and warranties contained in Article IV of this
Amendment shall be true and correct in all material respects; and no Default or
Event of Default shall have occurred and be continuing.
3.03 Payment of Fees and Expenses. The Agent shall have received
reimbursement from the Borrowers, or special legal counsel for the Agent shall
have received payment from the Borrowers, for all reasonable fees and expenses
of counsel to the Lenders for which the Borrowers are responsible pursuant to
applicable provisions of this Amendment and the Credit Agreement for which
invoices have been presented as of or prior to the date hereof
3.04 Matters Satisfactory to Lenders. All matters incident to the
consummation of the transactions hereby contemplated shall be reasonably
satisfactory to the Lenders.
3.05 No Material Adverse Effect. No event or circumstance shall have
occurred since June 30, 1995, that could reasonably be expected to have a
Material Adverse Effect.
3
<PAGE> 6
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
To induce the Agent and the Lenders to enter into this Amendment and
amend the Credit Agreement as provided herein, the Borrowers represent and
warrant to the Agent and each Lender that:
4.01 Due Authorization. The execution and delivery by the Borrowers of
this Amendment and the performance of its obligations hereunder are within the
power of the Borrowers, are duly authorized by all necessary action on behalf
of the Borrowers, and do not and will not (a) require the consent of any
Governmental Authority, (b) contravene or conflict with any Requirement of Law
or the articles or certificate of incorporation, bylaws, or other
organizational or governing documents of the Borrowers, (c) contravene or
conflict with any indenture, instrument or other agreement to which either
Borrower is a party or by which its Property may be presently bound or
encumbered, or (d) result in or require the creation or imposition of any Lien
upon any of the properties or assets of either Borrower under any such
indenture, instrument or other agreement other than the Loan Documents.
4.02 Valid and Binding Obligations of Borrowers. This Amendment, when
duly executed and delivered, will be the legal, valid and binding obligation of
the Borrowers, enforceable in accordance with its terms (subject to any
applicable bankruptcy, insolvency or other laws of general application
affecting creditors' rights and judicial decisions interpreting any of the
foregoing).
4.03 Representations and Warranties in Credit Agreement. As of the date
hereof, all representations and warranties set forth in the Credit Agreement
are true and correct in all material respects, except to the extent such
representations and warranties relate solely to an earlier date.
4.04 No Default or Event of Default. No Default or Event of Default
exists.
4.05 Ratification and Confirmation of Liens. The Borrowers hereby ratify
and confirm all Liens created under the Security Instruments and acknowledge
and agree that all such Liens secure all Obligations.
4
<PAGE> 7
ARTICLE V
MISCELLANEOUS
5.01 Survival Upon Unenforceability. In the event any one or more of the
provisions contained in this Amendment shall, for any reason, be held to be
invalid, illegal or unenforceable in any respect, such invalidity, illegality,
or unenforceability shall not affect any other provision hereof.
5.02 Rights of Third Parties. All provisions herein are imposed solely
and exclusively for the benefit of the Agent, the Lenders and the Borrowers,
and their successors and permitted assigns. No other Person shall have any
right, benefit, priority, or interest hereunder or as a result hereof or have
standing to require satisfaction of provisions hereof in accordance with their
terms.
5.03 Amendments or Modifications. Neither this Amendment nor any
provision hereof may be changed, waived, discharged or terminated orally, but
only by an instrument in writing signed by the party against whom enforcement
of the change, waiver, discharge or termination is sought.
5.04 Ratification. Except as expressly amended by this Amendment and the
documents executed in connection herewith, the Credit Agreement and all other
Loan Documents shall remain in full force and effect. The Credit Agreement, as
hereby amended, and all rights and powers created thereby or thereunder and
under such other Loan Documents are in all respects ratified and confirmed.
5.05 Expenses. The Borrowers shall pay to the Agent for the benefit of
the Lenders promptly upon request all expenses incurred in connection with this
Amendment and the documents executed in connection herewith.
5.06 ENTIRE AGREEMENT; NO ORAL AGREEMENTS. THIS AMENDMENT CONSTITUTES THE
ENTIRE AGREEMENT OF THE PARTIES HERETO WITH RESPECT TO THE SUBJECT HEREOF AND
SUPERSEDES ANY PRIOR AGREEMENT BETWEEN THE PARTIES HERETO, WHETHER WRITTEN OR
ORAL, RELATING TO THE SUBJECT HEREOF. THIS WRITTEN AGREEMENT AND THE OTHER
WRITTEN LOAN DOCUMENTS REPRESENT, COLLECTIVELY, THE FINAL AGREEMENT AMONG THE
PARTIES HERETO AND THERETO AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO
UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES.
5.07 GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS (WITHOUT GIVING EFFECT TO
PRINCIPLES THEREOF RELATING TO CONFLICTS OF LAW); PROVIDED, HOWEVER, THAT
VERNON'S TEXAS CIVIL
5
<PAGE> 8
STATUTES, ARTICLE 5069, CHAPTER 15 (WHICH REGULATES CERTAIN REVOLVING CREDIT
LOAN ACCOUNTS AND REVOLVING TRIPARTY ACCOUNTS) SHALL NOT APPLY.
5.08 JURISDICTION AND VENUE. ALL ACTIONS OR PROCEEDINGS WITH RESPECT TO,
ARISING DIRECTLY OR INDIRECTLY IN CONNECTION WITH, OUT OF, RELATED TO OR FROM
THIS AMENDMENT MAY BE LITIGATED, AT THE SOLE DISCRETION AND ELECTION OF THE
AGENT, IN COURTS HAVING SITUS IN HOUSTON, HARRIS COUNTY, TEXAS. EACH BORROWER
HEREBY SUBMITS TO THE JURISDICTION OF ANY LOCAL, STATE OR FEDERAL COURT LOCATED
IN HOUSTON, HARRIS COUNTY, TEXAS, AND HEREBY WAIVES ANY RIGHTS IT MAY HAVE TO
TRANSFER OR CHANGE THE JURISDICTION OR VENUE OF ANY LITIGATION BROUGHT AGAINST
IT BY THE AGENT IN ACCORDANCE WITH THIS SECTION.
5.09 Counterparts. This Amendment may be signed in any number of
counterparts and by different parties in separate counterparts, each of which
shall be deemed an original but all of which together shall constitute one and
the same instrument.
IN WITNESS WHEREOF, the parties have caused this Amendment to be executed
by their respective duly authorized officers on the date first hereinabove
written.
BORROWER:
PRIMEENERGY CORPORATION
By:
-----------------------------
Beverly A. Cummings
Executive Vice President,
Treasurer and
Chief Financial Officer
BORROWER:
PRIMEENERGY MANAGEMENT
CORPORATION
By:
-----------------------------
Beverly A. Cummings
Executive Vice President,
Treasurer and
Chief Financial Officer
6
<PAGE> 9
AGENT AND LENDER:
BANK ONE, TEXAS, NATIONAL
ASSOCIATION
By:
-------------------------------
Kelly L. Elmore, III
Vice President
LENDER:
DEN NORSKE BANK AS
By:
-------------------------------
William V. Moyer
Vice President
By:
------------------------------
Name:
----------------------------
Title:
---------------------------
7
<PAGE> 1
Exhibit 22
Subsidiaries:
PrimeEnergy Management Corporation, a New York corporation 100% owned by
PrimeEnergy Corporation
Prime Operating Company, a Texas corporation 100% owned by PrimeEnergy
Corporation
Eastern Oil Well Service Company, a West Virginia corporation 100% owned by
PrimeEnergy Corporation
Southwest Oilfield Construction Company, an Oklahoma corporation, 100% owned
by PrimeEnergy Corporation
PrimeEnergy Depositary Corp., a New York corporation 100% owned by
PrimeEnergy Management Corporation
<PAGE> 1
EXHIBIT 24
[RYDER SCOTT COMPANY LETTERHEAD]
CONSENT OF RYDER SCOTT COMPANY
We consent to the use on form 10-KSB of PrimeEnergy Corporation of our
reserve report and all schedules, exhibits, and attachments thereto incorporated
by reference of Form 10-KSB and to any reference made to us on Form 10-KSB as a
result of such incorporation.
Very Truly Yours,
/s/ RYDER SCOTT COMPANY
PETROLEUM ENGINEERS
RYDER SCOTT COMPANY
PETROLEUM ENGINEERS
Denver, Colorado
March 15, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PRIME ENERGY
CORPORATION FORM 10-KSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 3,979
<SECURITIES> 0
<RECEIVABLES> 5,095
<ALLOWANCES> 43
<INVENTORY> 0
<CURRENT-ASSETS> 11,750
<PP&E> 42,093
<DEPRECIATION> 21,860
<TOTAL-ASSETS> 32,915
<CURRENT-LIABILITIES> 7,947
<BONDS> 17,716<F1>
0
0
<COMMON> 760
<OTHER-SE> 5,704<F2>
<TOTAL-LIABILITY-AND-EQUITY> 32,915
<SALES> 0
<TOTAL-REVENUES> 23,226
<CGS> 0
<TOTAL-COSTS> 21,410
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,002
<INCOME-PRETAX> 989
<INCOME-TAX> 50
<INCOME-CONTINUING> 939
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 939
<EPS-PRIMARY> 0.17
<EPS-DILUTED> 0.17
<FN>
<F1> F/S SUMMER SOURCE
CURRENT PORTION LT DEBT 73 CFS
<F2> F/S SUMMER SOURCE
ACCUM. DEFICIT 53 CFS
TREASURY STOCK 5,131 CFS
</FN>
</TABLE>
