U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________
FORM 10-QSB
/X/ Quarterly Report Under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Quarterly Period Ended March 31, 1998
or
/ / Transition Report Under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition Period From __________ to ___________
______________________
Commission File Number 0-7406
______________________
PrimeEnergy Corporation
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
84-0637348
(IRS employer identification number)
One Landmark Square, Stamford, Connecticut 06901
(Address of principal executive offices)
(203) 358-5700
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed
since last report)
Check whether the issuer (1) filed all reports required to be filed
by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the past 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
/X/ No / /
The number of shares outstanding of each class of the Registrant's
Common Stock as of May 12, 1998 was: Common Stock, $0.10 par value,
4,485,494 shares.
PrimeEnergy Corporation
Index to Form 10-QSB
March 31, 1998
Part I - Financial Information
Consolidated Balance Sheets - March 31, 1998 and
December 31, 1997 3-4
Consolidated Statements of Operations for the three months
ended March 31, 1998 and 1997 5
Consolidated Statement of Stockholders' Equity for the
three months ended March 31, 1998 6
Consolidated Statements of Cash Flows for the three months
ended March 31, 1998 and 1997 7
Notes to Consolidated Financial Statements 8-15
Management's Discussion and Analysis of Financial Condition
and Results of Operations 16-20
Part II - Other Matters 21
Signatures 22
2
PrimeEnergy Corporation
Consolidated Balance Sheets
March 31, 1998 and December 31, 1997
March 31, December 31,
1998 1997
(Unaudited) (Audited)
Current assets:
Cash and cash equivalents $ 5,566,000 $ 2,987,000
Restricted cash and cash
equivalents (Note 2) 932,000 885,000
Accounts receivable (Note 3) 3,323,000 4,480,000
Due from related parties (Note 8) 2,275,000 2,454,000
Other current assets 219,000 175,000
Prepaid expenses 49,000 107,000
Deferred income taxes 121,000 121,000
---------- ----------
Total current assets 12,485,000 11,209,000
---------- ----------
Property and equipment, at cost(Notes 1 and 4):
Oil and gas properties (successful
efforts method):
Developed 42,295,000 41,427,000
Undeveloped -- 231,000
Furniture, fixtures and equipment
including leasehold improvements 5,887,000 5,757,000
---------- ----------
48,182,000 47,415,000
Accumulated depreciation and depletion (26,127,000) (24,885,000)
---------- ----------
Net property and equipment 22,055,000 22,530,000
---------- ----------
Other assets 613,000 604,000
Due from affiliates 325,000 325,000
---------- ----------
Total assets $ 35,478,000 $34,668,000
========== ==========
See accompanying notes to the consolidated financial statements.
3
PrimeEnergy Corporation
Consolidated Balance Sheets
March 31, 1998 and December 31, 1997
March 31, December 31,
1998 1997
(Unaudited) (Audited)
Current liabilities:
Accounts payable $ 7,984,000 $ 6,333,000
Accrued liabilities:
Payroll, benefits and related items 836,000 530,000
Taxes (Note 1) 25,000 27,000
Interest and other 515,000 646,000
Due to related parties (Note 8) 1,258,000 1,389,000
---------- ----------
Total current liabilities 10,618,000 8,925,000
---------- ----------
Long-term bank debt (Note 5) 18,850,000 18,865,000
Deferred income taxes (Note 1) 262,000 262,000
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 1998 and 1997 760,000 760,000
Paid in capital 10,888,000 10,888,000
Retained earnings 1,098,000 971,000
---------- ----------
12,746,000 12,619,000
Treasury stock, at cost, 3,113,430
common shares in 1998 and 2,989,161
common shares in 1997 (6,998,000) (6,003,000)
---------- ----------
Total stockholders' equity 5,748,000 6,616,000
---------- ----------
Total liabilities and equity $35,478,000 $34,668,000
=========== ===========
See accompanying notes to the consolidated financial statements.
4
PrimeEnergy Corporation
Consolidated Statements of Operations
Three Months Ended March 31, 1998 and 1997
(Unaudited)
1998 1997
Revenue:
Oil and gas sales $ 2,952,000 $ 4,277,000
District operating income 2,680,000 2,653,000
Administrative revenue (Note 8) 433,000 363,000
Reporting and management fees (Note 8) 77,000 82,000
Interest and other income 35,000 33,000
---------- ----------
Total revenue 6,177,000 7,408,000
---------- ----------
Costs and expenses:
Lease operating expense 1,490,000 1,650,000
District operating expense 2,225,000 2,116,000
Depreciation and depletion of
oil and gas properties 1,123,000 1,290,000
General and administrative expense 826,000 806,000
Exploration costs 63,000 643,000
Interest expense (Note 5) 365,000 276,000
---------- ----------
Total costs and expenses 6,092,000 6,781,000
---------- ----------
Income from operations 85,000 627,000
Gain on sale and exchange of assets 60,000 22,000
---------- ----------
Net income before income taxes 145,000 649,000
Provision for income taxes 18,000 65,000
---------- ----------
Net income $ 127,000 $ 584,000
========== ==========
Basic income per common share (Note 9) $0.03 $0.12
===== =====
Diluted income per common share (Note 9) $0.02 $0.11
===== =====
See accompanying notes to the consolidated financial statements
5
PrimeEnergy Corporation
Consolidated Statement of Stockholders' Equity
Three Months Ended March 31, 1998
<TABLE>
<CAPTION>
Additional
Paid In Retained Treasury
Shares Amount Capital Earnings Stock Total
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 7,597,970 $760,000 $10,888,000 $971,000 ($6,003,000) $6,616,000
Purchased 124,269 shares
of common stock (995,000) (995,000)
Net income 127,000 127,000
--------- -------- ----------- ---------- ----------- ----------
Balance at March 31, 1998 7,597,970 $760,000 $10,888,000 $1,098,000 ($6,998,000) $5,748,000
========= ======== =========== ========== ============ ==========
</TABLE>
See accompanying notes to the consolidated financial statements.
6
PrimeEnergy Corporation
Consolidated Statements of Cash Flows
Three Months Ended March 31, 1998 and 1997
(Unaudited)
1998 1997
Net cash provided by operating activities $ 4,418,000 $ 4,261,000
---------- ----------
Cash flows from investing activities:
Additions to property and equipment (1,148,000) (1,306,000)
Proceeds from sale of property
and equipment 319,000 24,000
Proceeds from payments on note receivable -- 20,000
---------- ----------
Net cash (used in) investing
activities (829,000) (1,262,000)
---------- ----------
Cash flows from financing activities:
Purchase of treasury stock (995,000) (445,000)
Increase in long-term bank debt and
other long-term obligations 8,870,000 7,405,000
Repayment of long-term bank debt and
other long-term obligations (8,885,000) (10,496,000)
---------- ----------
Net cash (used in)financing
activities (1,010,000) (3,536,000)
---------- ----------
Net increase (decrease) in cash and
cash equivalents 2,579,000 (537,000)
Cash and cash equivalents at the
beginning of the period 2,987,000 3,316,000
---------- ----------
Cash and cash equivalents at the
end of the period $ 5,566,000 $ 2,779,000
========== ==========
See accompanying notes to the consolidated financial statements.
7
PrimeEnergy Corporation
Notes to Consolidated Financial Statements
March 31, 1998
1) Description of Operations and Significant Accounting Policies:
Nature of Operations-
The Company is engaged in oil and gas exploration and drilling, and
the development, acquisition and production of oil and natural gas
properties. The Company owns leasehold, mineral and royalty interests
in producing and non-producing oil and gas properties across the
continental United States, primarily in Texas, Oklahoma and West
Virginia. The Company operates approximately 1,650 wells and owns
non-operating interests in approximately 900 additional wells.
Additionally, the Company provides well-servicing support operations,
site preparation and construction services for oil and gas drilling
and rework operations, both in connection with the Company's
activities and in providing contract services for third parties. The
Company is publicly traded on NASDAQ under the symbol "PNRG".
The markets for the Company's products are highly competitive, as oil
and gas are commodity products and prices depend upon numerous
factors beyond the control of the Company, such as economic,
political and regulatory developments and competition from
alternative energy sources.
Principles of Consolidation-
The consolidated financial statements include the accounts of
PrimeEnergy Corporation and its wholly-owned subsidiaries. All
material inter-company accounts and transactions between these
entities have been eliminated. Oil and gas properties include
ownership interests in affiliated partnerships. The statement of
operations includes the Company's proportionate share of revenue and
expenses related to oil and gas interests owned by the partnerships.
Use of Estimates-
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Estimates of oil and gas reserves, as determined by independent
petroleum engineers, are continually subject to revision based on
8
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,
SFAS No. 121 requires that, if the expected future cash flow from an
asset is less than its carrying cost, that asset must be written down
to its fair market value. As the fair market value of a property is
generally substantially less than the total future cash flow expected
from the asset, small changes in the estimated future net revenue
from an asset could lead to the necessity of recording a significant
impairment.
The Company has significant deferred tax assets which have been fully
reserved against based upon the assumption that at current and
expected future levels of taxable income, and considering the Section
29 credits the Company expects to generate, the availability of these
carryforwards will not lead to significant reductions in the
Company's tax liability as compared to what it would pay if such
carryforwards did not exist. Increases in estimates of future
taxable income could lead to significant reductions in the amount of
this reserve, which could have a material effect on the net income of
the Company.
Property and Equipment-
The Company follows the "successful efforts" method of accounting for
its oil and gas properties. Under the successful efforts method,
costs of acquiring undeveloped oil and gas leasehold acreage,
including lease bonuses, brokers' fees and other related costs are
capitalized. Provisions for impairment of undeveloped oil and gas
leases are based on periodic evaluations. Annual lease rentals and
exploration expenses, including geological and geophysical expenses
and exploratory dry hole costs, are charged against income as
incurred.
All other property and equipment are carried at cost. Depreciation
and depletion of oil and gas production equipment and properties are
determined under the unit-of-production method based on estimated
proved recoverable oil and gas reserves. Depreciation of all other
equipment is determined under the straight-line method using various
rates based on useful lives. The cost of assets and related
accumulated depreciation is removed from the accounts when such
assets are disposed of, and any related gains or losses are reflected
in current earnings.
Income Taxes-
The Company records income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for
Income Taxes". SFAS No. 109 is an asset and liability approach to
accounting for income taxes, which requires the recognition of
deferred tax assets and liabilities for the expected future
consequences of events that have been recognized in the Company's
9
financial statements or tax returns.
Deferred tax liabilities or assets are established for temporary
differences between financial and tax reporting bases and are
subsequently adjusted to reflect changes in the rates expected to be
in effect when the temporary differences reverse. A valuation
allowance is established for any deferred tax asset for which
realization is not likely.
General and Administrative Expenses-
General and administrative expenses represent costs and expenses
associated with the operation of the Company. Certain partnerships
and trusts sponsored by the Company reimburse general and
administrative expenses incurred on their behalf.
Income per share-
Income per share of common stock has been computed based on the
weighted average number of common shares and common stock equivalents
outstanding during the respective periods in accordance with SFAS No.
128, "Earnings per Share," described below in Recently Issued
Accounting Standards.
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. Cash activity related to hedging
transactions is treated as operating activity on the Statements of
Cash Flows.
Recently Issued Accounting Standards-
In June 1997, the Financial Accounting Standards Board released
Statement No. 130, "Reporting Comprehensive Income" and Statement No.
10
131, "Disclosures about Segments of an Enterprise and Related
Information." These statements require disclosure of certain
components of changes in equity and certain information about
operating segments and geographic areas of operation. Both of these
statements were adopted by the Company as of January, 1998. These
statements had no effect on the results of operations or financial
position.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings per Share" (EPS). SFAS No. 128 replaces the standards for
computing earnings per share previously established by APB No. 15,
"Earnings per Share" by replacing the primary EPS with a presentation
of "basic EPS" and requiring dual presentation of basic and diluted
EPS on the face of the income statement. SFAS No. 128 requires
companies to adopt its provisions for fiscal years ending after
December 15, 1997 and requires restatement of all prior period EPS
data, if necessary. Earnings per share information has been
presented on the financial statements and its computations disclosed
in footnote 9 in accordance with SFAS No. 128.
(2) Restricted Cash and Cash Equivalents:
Restricted cash and cash equivalents includes $932,000 and $885,000
at March 31, 1998 and December 31, 1997, respectively, of cash
primarily pertaining to unclaimed royalty payments. There were
corresponding accounts payable recorded at March 31, 1998 and
December 31, 1997 for these liabilities.
(3) Accounts Receivable
Accounts receivable at March 31, 1998 and December 31, 1997 consisted
of the following:
March 31, December 31,
1998 1997
Joint Interest Billing $ 1,209,000 $ 1,601,000
Trade Receivables 199,000 213,000
Oil and Gas Sales 1,739,000 2,630,000
Other 202,000 62,000
--------- ---------
3,349,000 4,506,000
Less, Allowance for doubtful
accounts (26,000) (26,000)
--------- ---------
$ 3,323,000 $ 4,480,000
========= =========
11
(4) Property and equipment
Property and equipment at March 31, 1998 and December 31, 1997
consisted of the following:
March 31, December 31,
1998 1997
Developed oil and gas
properties at cost $42,295,000 $41,427,000
Undeveloped oil and gas
properties at cost -- 231,000
Less, accumulated depletion
and depreciation (22,428,000) (21,397,000)
------------ ------------
19,867,000 20,261,000
------------ ------------
Furniture, fixtures and
and equipment 5,887,000 5,757,000
Less, accumulated depreciation (3,699,000) (3,488,000)
---------- ----------
2,188,000 2,269,000
---------- ----------
Total net property and
equipment $22,055,000 $22,530,000
========== ==========
5) Long-Term Bank Debt
At December 31, 1996, the Company was party to a line of credit
agreement with a bank with a non-reducing borrowing base of $19
million. Twenty-five percent of the borrowing is syndicated to a
second bank. At the beginning of 1997, the agreement provided for
interest at 1/2% over the bank's base rate as defined, or 2-3/4% over
the London Inter-Bank Offered Rate (LIBO) rate for the interest
period in question, payable at the end of the interest period.
On February 6, 1997, the bank extended the borrowing base to $21
million. The credit agreement was also amended to provide for
interest on outstanding borrowings at the bank's base rate, as
defined, or 2 1/4% over the LIBO rate. Effective in May, 1997, the
bank revised the borrowing base to $20.5 million due to the sale of
properties by the Company. In September, 1997, the borrowing base
was again revised to $20 million.
Effective January 2, 1998, the credit agreement was amended to
implement an interest rate schedule that is based upon the aggregate
principal amount of loans outstanding as a percentage of the
borrowing base. The amendment provides for interest on outstanding
borrowings at the bank's base rate, as defined, or from 1 1/2% to 2%
over the LIBOR rate depending upon the Company's utilization of the
available line of credit.
12
Advances pursuant to the agreement are limited to the borrowing base
as defined in the agreement. Most of the Company's oil and gas
properties as well as certain receivables and equipment were pledged
as security under this agreement. Under the Company's credit
agreement, the Company is required to maintain, as defined, a minimum
current ratio, tangible net worth, debt coverage ratio and interest
coverage ratio.
(6) Contingent Liabilities:
PEMC, as managing general partner of the affiliated partnerships and
trusts (the "Partnerships"), is responsible for all Partnership
activities, including the review and analysis of oil and gas
properties for acquisition, the drilling of development wells and the
production and sale of oil and gas from productive wells. PEMC also
provides the administration, accounting and tax preparation work for
the Partnerships. PEMC is liable for all debts and liabilities of
the affiliated Partnerships, to the extent that the assets of a given
limited Partnership are not sufficient to satisfy its obligations.
As a general partner, PEMC is committed to offer to purchase the
limited partners' interests in certain of its managed Partnerships at
various annual intervals. Under the terms of a partnership
agreement, PEMC is not obligated to purchase an amount greater than
10% of the total partnership interest outstanding. In addition, PEMC
will be obligated to purchase interests tendered by the limited
partners only to the extent of one-hundred fifty (150) percent of the
revenues received by it from such partnership in the previous year.
Purchase prices are based upon annual reserve reports of independent
petroleum engineering firms discounted by a risk factor. Based upon
historical production rates and prices, management estimates that if
all such offers were to be accepted, the maximum annual future
purchase commitment would be approximately $500,000. In recent
years, the Company has chosen to repurchase limited partnership
interests in excess of its commitment.
(7) 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. Such options are exercisable, on a cumulative basis, as to
twenty percent of the shares subject to option in each year,
beginning one year after the granting of the option. At March 31,
1998 and 1997, options on 802,500 shares were outstanding and
exercisable at prices ranging from $1.00 to $1.25. On January 27,
1983, the Company adopted the 1983 Incentive Stock Option Plan. At
March 31, 1998 and 1997, options on 123,000 and 124,000 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
13
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 formed during the time the agreement was in effect. The
President 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.
(8) Related Party Transactions:
PEMC is a general partner in several oil and gas Partnerships in
which certain directors have limited and general partnership
interests. A substantial portion of the assets and revenues of PEMC
are derived from its interests in the oil and gas properties owned by
the Partnerships. As the managing general partner in each of the
Partnerships, PEMC receives approximately 5% to 12% of the net
revenues of each Partnership as a carried interest in the
Partnerships' properties.
The Partnership agreements allow PEMC to receive management fees for
various services to the Partnerships as well as reimbursement for
property acquisition and development costs incurred on behalf of the
Partnerships and general and administrative overhead, which is
reported in the statements of operations as administrative revenue.
In 1991, the Company loaned approximately $325,000 at 12% interest to
a real estate limited partnership of which a Company Officer and
Director is a general partner. This loan is secured by a mortgage on
the underlying real estate in the partnership and the Company
received a 23% equity participation in the partnership. The loan
agreement provides for interest payments on a quarterly basis
provided the cash flow from operations of the limited partnership are
sufficient to pay interest for the quarter. If cash flows are not
sufficient, the accrued interest is added to the principal. This loan
is included in other non-current assets on the balance sheet.
Due to related parties at March 31, 1998 and December 31, 1997
primarily represent receipts collected by the Company, as agent, from
oil and gas sales net of expenses. Receivables from affiliates
consist of reimbursable general and administrative costs, lease
operating expenses and reimbursements for property acquisitions,
development and related costs.
(9) Income per share:
Basic earnings per share are computed by dividing earnings available
to common stockholders by the weighted average number of common
shares outstanding during the period. Diluted earnings per share
reflect per share amounts that would have resulted if dilutive
potential common stock had been converted to common stock. The
following reconciles amounts reported in the financial statements:
14
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1998 March 31, 1997
Net Number of Per Share Net Number of Per Share
Income Shares Amount Income Shares Amount
<S> <C> <C> <C> <C> <C> <C>
Net income per
common share $127,000 4,502,171 $0.03 $584,000 4,701,793 $0.12
Effect of dilutive
securities: Options -- 794,655 (0.01) -- 705,243 (0.01)
___________ ________ ______ ________ _______ _______
Diluted net income
per common share $127,000 5,296,826 $0.02 $584,000 5,407,036 $0.11
======== ========= ===== ======== ========= =====
</TABLE>
15
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This discussion should be read in conjunction with the financial
statements of the Company and notes thereto.
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's goal is to generate increased cash flows by increasing its
reserve base through continued acquisitions, exploration and development.
By increasing its reserve base, the Company's borrowing ability is
increased due to additional properties available as collateral. Capital
expenditures during 1998 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 $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 Rate (LIBOR). The borrowing base is revised
every six months by the bank.
As of March 31, 1998, the borrowing base under the agreement was
$20,000,000 and the Company had $1,135,000 available under this line of
credit. During most of 1997, the interest rate on this line of credit
was the banks base rate, as defined, monthly, or 2 1/4% over the published
LIBOR rate, payable at the end of the applicable interest period.
Effective February 2, 1998, this agreement was amended so that the
interest rate on the LIBO Rate Loan will vary from 1 1/2% to 2% above the
published LIBOR rate depending on the portion of the Company's credit
line being utilized. Based on current and expected levels of borrowing,
it is anticipated that the rate charged to the Company on these loans
will be at 2% above the published LIBOR rate for most or all of 1998.
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.
The Company spent approximately $1,157,000 on the acquisition,
exploration and development of oil and gas properties in the first
16
quarter of 1998, including $141,000 spent to repurchase limited partners
interests from investors in the oil and gas partnerships.
The Company also spent approximately $181,000 on field service equipment
and $9,000 on computer hardware and software in the first quarter of
1998.
In January, 1998, the Company purchased 53,334 shares of its stock for
treasury from Stanford University and 53,334 shares from the University
of California. The total combined cost of these two purchases was
$853,000. The Company spent an additional $142,000 in the first quarter
of 1998 to acquire treasury stock in open market transactions.
During the first quarter of 1998, the Company sold its interests in a
group of wells located in Southeast New Mexico for $157,000, and its
interest in the Guerra Field located in Webb County Texas, for $105,000.
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
oil and gas business, the number of oil and gas prospects, and oil and
gas business opportunities in general. The St. George #1 well, drilled
as part of the Company's 3D seismic exploration and development program,
was completed to a depth of 14,010' in the Frio formation, and had first
sales on March 13, 1998. This well, in which the Company owns a 29%
revenue interest, is currently producing approximately 8,000 Mcf of gas
and 160 barrels of condensate per day. The Company is closely monitoring
this well, and based on this analysis there could be multiple exploration
and development opportunities. The Company is also preparing to drill
two prospects in Lafayette Parish, Louisiana. The amount of the
Company's investment is these two prospects has not yet been determined.
RESULTS OF OPERATIONS
Net income was $127,000 in the first quarter of 1998 as compared to
$584,000 in the first quarter of 1997. This drop is primarily
attributable to sharply lower prices received for oil and gas production,
partly offset by lower exploration costs.
Oil and gas sales of $2,952,000 in the first quarter of 1998 represent a
decline of 31% from the same period in 1997. The Company's total
production from all sources, including its share of the Partnerships'
production, declined by 7% between these two periods. Ignoring first
quarter 1997 production from wells sold before the first quarter of 1998,
total production was flat, as production from newly drilled wells and
increased ownership interests in the Partnerships were offset by normal
production declines on existing properties, and the reduced interest in
the South Powderhorn Field, discussed below. The average
price received for a barrel of oil declined by more than a third,
dropping to $13.94 in 1998 as compared to $21.47 in 1997. Average gas
17
prices also declined sharply to $2.19 in 1998 as compared to $2.92 in
1997. These price declines caused gross revenue to be $1,100,000 less
than it would have been had the Company received the same average prices
in 1998 as it did in the first quarter of 1997.
The purchase of the Company's South Powderhorn property, located in
Calhoun County, Texas, was subject to a provision wherein the seller
obtains a 25% working interest in the property at such time as the
Company and its joint venture partners have received net cash from the
property equal to 200% of their costs (Payout). This Payout occurred in
January of 1998, and production attributable to the Company's interest
which reverted to the seller was approximately 65,000 Mcf in the first
quarter of 1998.
First sales from the St. George #1 well occurred on March 12, 1998. This
well, in which the company owns a 29% revenue interest, is currently
producing approximately 8,000 Mcf and 160 barrels of condensate per day,
and is expected to make significant contributions to oil and gas revenue
in the second quarter of 1998.
Lease operating expenses (LOE) declined by 10%, or $160,000, to
$1,490,000 in the first quarter of 1998. Approximately $100,000 of this
amount is attributable to the LOE incurred in 1997 on wells that had been
sold before the first quarter of 1998, and the remainder is due
primarily to fewer workovers being performed in 1998.
Administrative revenue, which represents the reimbursement of general and
administrative overhead expended on behalf of the Partnerships and the
Company's joint venture partners increased to $433,000 in the first
quarter of 1998, as compared to $363,000 during the same period in 1997.
In both years, amounts received from partnerships are substantially less
than the amounts allocable to these partnerships under the partnership
agreements.
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. In both the first quarter of 1998
and the first quarter of 1997, reimbursable costs incurred were
approximately $300,000.
District operating expense of $2,225,000 in the first quarter of 1998
represents a 5% increase over the first quarter 1997 expense. This
increase is partly due to higher depreciation expense relating to
equipment purchased during 1997.
18
Depreciation, depletion and amortization of oil and gas properties of
$1,123,000 in the first quarter of 1998 represents a 13% decline from the
1997 expense for the same period. This decline is partly attributable to
a 7% decline in production between the two periods. A full quarter of
production from the St. George #1 well in the second quarter of 1998 is
expected to add significantly to depletion expense.
Exploration costs were $63,000 in the first quarter of 1998 as compared
to $643,000 during the same period in 1997. The 1997 costs consisted
primarily of a 3D seismic shoot. The Company has plans to drill several
exploratory wells during the remainder of 1998, which would be charged to
exploration expense if they were dry holes, and is also considering
participating in 3D seismic shoots in an attempt to identify additional
locations for exploratory drilling. It is therefore possible that
exploration costs during the remainder of 1998 will be significantly in
excess of the first quarter 1998 amount.
Gain on sale of assets of $60,000 in the first quarter of 1998 consists
of net gains of $28,000 on the sale of producing properties and $32,000
in receipts from the sale of equipment on fully depleted wells in excess
of the plugging costs of those wells.
Interest expense of $365,000 in the first quarter of 1998 represents a
32% increase over the first quarter 1997 amount of $276,000. This
increase is due to higher debt levels caused by the Company's spending on
the exploration, development and acquisition of oil and gas properties
during 1997.
Many existing computer applications use two digits rather than four to
define the applicable year, raising the possibility that software may
erroneously assume that a date using "00" as the year refers to the year
1900 rather than the year 2000.
The Company's existing software will properly handle all dates including
dates beyond December 31, 1999 and the Company does not expect any
significant operational difficulties or unusual costs to result from the
year 2000 issue. While it is not possible at this time to determine what
effect the year 2000 issue might have on the Company's customers,
suppliers, or joint venture partners, the Company does not believe the
potential problems associated with the year 2000 issue will have a
material effect on it financial position.
This Report contains forward-looking statements that are based on
management's current expectations, estimates and projections. Words such
as "expects,", "anticipates," "intends," "plans," "believes," "projects"
and "estimates," and variations of such words and similar expressions are
intended to identify such forward-looking statements. These statements
constitute "forward-looking statements" within the meaning of Section 27A
of the Securities Act of 1933, and are subject to the safe harbors
created thereby. These statements are not guarantees of future
performance and involve risks and uncertainties and are based on a number
of assumptions that could ultimately prove
19
inaccurate and, therefore, there can be no assurance that they will prove
to be accurate. Actual results and outcomes may vary materially from
what is expressed or forecast in such statements due to various risks and
uncertainties. These risks and uncertainties include, among other
things, volatility of oil and gas prices, competition, risks inherent in
the Company's oil and gas operations, the inexact nature of
interpretation of seismic and other geological and geophysical data,
imprecision of reserve estimates, the Company's ability to replace and
expand oil and gas reserves, and such other risks and uncertainties
described from time to time in the Company's periodic reports and filings
with the Securities and Exchange Commission. Accordingly, stockholders
and potential investors are cautioned that certain events or
circumstances could cause actual results to differ materially from those
projected.
20
PART II - OTHER MATTERS
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
period covered by this report.
Item 5. OTHER INFORMATION
Exhibit 27 - Financial Data Schedule is attached to the electronic
filing of this report only.
Item 6. EXHIBITS AND REPORTS ON FORM 8K
No reports on form 8K were filed by the Company during the three
months ended March 31, 1998.
21
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
PrimeEnergy Corporation
(Registrant)
May 14, 1998 /s/ Charles E. Drimal,Jr.
(Date) --------------------------
Charles E. Drimal, Jr.
President
Principal Executive Officer
May 14, 1998 /s/ Beverly A. Cummings
(Date) --------------------------
Beverly A. Cummings
Executive Vice President
Principal Financial and
Accounting Officer
22
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extract from the
PrimeEnergy Corporation first quarter 1998 Form 10QSB, and is qualified in its
entirety by reference to that document.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 6498
<SECURITIES> 0
<RECEIVABLES> 3349
<ALLOWANCES> 26
<INVENTORY> 0
<CURRENT-ASSETS> 12485
<PP&E> 48182
<DEPRECIATION> 26127
<TOTAL-ASSETS> 35478
<CURRENT-LIABILITIES> 10618
<BONDS> 18850<F1>
760
0
<COMMON> 0
<OTHER-SE> 4988<F2>
<TOTAL-LIABILITY-AND-EQUITY> 35478
<SALES> 0
<TOTAL-REVENUES> 6177
<CGS> 0
<TOTAL-COSTS> 5727
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 365
<INCOME-PRETAX> 145
<INCOME-TAX> 18
<INCOME-CONTINUING> 127
<DISCONTINUED> 0
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<CHANGES> 0
<NET-INCOME> 127
<EPS-PRIMARY> 0.03
<EPS-DILUTED> 0.02
<FN>
<F1>Current portion long term debt
<F2> Retained Earnings 1098
<F2> Additional Paid In Capital 10888
<F2> Treasury Stock 6998
</TABLE>
