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, 1999
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, 1999 was: Common Stock, $0.10 par value, 4,431,954
shares.
PrimeEnergy Corporation
Index to Form 10-QSB
March 31, 1999
Part I - Financial Information
Consolidated Balance Sheets - March 31, 1999 and
December 31, 1998 3-4
Consolidated Statements of Operations for the three months
ended March 31, 1999 and 1998 5
Consolidated Statement of Stockholders' Equity for the
three months ended March 31, 1999 6
Consolidated Statements of Cash Flows for the three months
ended March 31, 1999 and 1998 7
Notes to Consolidated Financial Statements 8-16
Management's Discussion and Analysis of Financial Condition
and Results of Operations 17-22
Part II - Other Matters 23
Signatures 24
PrimeEnergy Corporation
Consolidated Balance Sheets
March 31, 1999 and December 31, 1998
March 31, December 31,
1999 1998
(Unaudited) (Audited)
ASSETS:
Current assets:
Cash and cash equivalents $ 1,080,000 $ 1,167,000
Restricted cash and cash
equivalents (Note 2) 1,279,000 1,080,000
Accounts receivable (Note 3) 2,980,000 2,890,000
Due from related parties (Note 8) 4,243,000 2,952,000
Other current assets 382,000 79,000
Prepaid expenses 39,000 351,000
Deferred income taxes 18,000 18,000
---------- ----------
Total current assets 10,021,000 8,537,000
---------- ----------
Property and equipment, at cost (Notes 1 and 4):
Oil and gas properties (successful
efforts method):
Developed 42,562,000 40,582,000
Undeveloped 521,000 1,284,000
Furniture, fixtures and equipment
including leasehold improvements 6,556,000 6,571,000
---------- ----------
49,639,000 48,437,000
Accumulated depreciation and depletion (30,189,000) (29,310,000)
---------- ----------
Net property and equipment 19,450,000 19,127,000
---------- ----------
Other assets 624,000 622,000
Due from affiliates 325,000 325,000
---------- ----------
Total assets $ 30,420,000 $28,611,000
========== ==========
See accompanying notes to the consolidated financial statements.
PrimeEnergy Corporation
Consolidated Balance Sheets
March 31, 1999 and December 31, 1998
March 31, December 31,
1999 1998
(Unaudited) (Audited)
LIABILITIES and STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 6,261,000 $ 6,315,000
Accrued liabilities:
Payroll, benefits and related items 691,000 552,000
Interest and other 912,000 832,000
Due to related parties (Note 8) 355,000 731,000
---------- ----------
Total current liabilities 8,219,000 8,430,000
---------- ----------
Long-term bank debt (Note 5) 19,075,000 16,505,000
Deferred income taxes (Note 1) 18,000 57,000
Stockholders' equity:
Preferred stock, $.10 par, authorized
10,000,000 shares; none issued -- --
Common stock, $.10 par value, authorized
15,000,000 shares; issued 7,607,970
in 1999 and 1998 761,000 761,000
Paid in capital 10,902,000 10,902,000
Accumulated deficit (1,171,000) (721,000)
---------- ----------
10,492,000 10,942,000
Treasury stock, at cost, 3,168,876
common shares in 1999 and 3,158,376
common shares in 1998 (7,384,000) (7,323,000)
---------- ----------
Total stockholders' equity 3,108,000 3,619,000
---------- ----------
Total liabilities and equity $ 30,420,000 $28,611,000
========== ==========
See accompanying notes to the consolidated financial statements.
PrimeEnergy Corporation
Consolidated Statements of Operations
Three Months Ended March 31, 1999 and 1998
(Unaudited)
1999 1998
Revenue:
Oil and gas sales $ 1,929,000 $ 2,907,000
District operating income 2,858,000 2,680,000
Administrative revenue (Note 8) 399,000 433,000
Reporting and management fees (Note 8) 84,000 77,000
Interest and other income 44,000 80,000
---------- ----------
Total revenue 5,314,000 6,177,000
---------- ----------
Costs and expenses:
Lease operating expense 1,364,000 1,460,000
District operating expense 2,020,000 2,225,000
Depreciation and depletion of
oil and gas properties 805,000 1,123,000
General and administrative expense 621,000 826,000
Exploration costs 687,000 63,000
Interest expense (Note 5) 307,000 365,000
---------- ----------
Total costs and expenses 5,804,000 6,092,000
---------- ----------
Income (loss) from operations (490,000) 85,000
Gain on sale and exchange of assets 3,000 30,000
---------- ----------
Net income (loss) before income taxes (487,000) 145,000
(Benefit) provision for income taxes (37,000) 18,000
---------- ----------
Net income (loss) $ (450,000) $ 127,000
========== ==========
Basic income (loss) per common
share (Notes 1 and 9) $(0.10) $0.03
==== ====
Diluted income (loss) per common
share (Notes 1 and 9) $(0.10) $0.02
==== ====
See accompanying notes to the consolidated financial statements.
PrimeEnergy Corporation
Consolidated Statement of Stockholders' Equity
Three Months Ended March 31, 1999
<TABLE>
<CAPTION>
Additional
Commom Stock Paid In Retained Treasury
Shares Amount Capital Earnings Stock Total
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 7,607,970 $761,000 $10,902,000 ($721,000) ($7,323,000) $3,619,000
Purchased 10,500 shares of
common stock (61,000) (61,000)
Net loss (450,000) (450,000)
--------- -------- ----------- ---------- ----------- ----------
Balance at March 31, 1999 7,607,970 $761,000 $10,902,000 ($1,171,000) ($7,384,000) $3,108,000
========= ======== =========== =========== =========== ==========
</TABLE>
See accompanying notes to the consolidated financial statements.
Consolidated Statements of Cash Flows
Three Months Ended March 31, 1999 and 1998
(Unaudited)
1999 1998
Net cash provided by (used in)
operating activities $(569,000) $6,054,000
---------- ----------
Cash flows from investing activities:
Capital Expenditures,
including dry hole costs (2,035,000) (2,754,000)
Proceeds from sale of property
and equipment 3,000 289,000
Proceeds from payments on note receivable 5,000 --
---------- ----------
Net cash (used in) investing
activities (2,027,000) (2,465,000)
---------- ----------
Cash flows from financing activities:
Purchase of treasury stock (61,000) (995,000)
Increase in long-term bank debt and
other long-term obligations 7,565,000 8,870,000
Repayment of long-term bank debt and
other long-term obligations (4,995,000) (8,885,000)
---------- ----------
Net cash provided by (used in)
financing activities 2,509,000 (1,010,000)
---------- ----------
Net increase (decrease) in cash and cash
equivalents (87,000) 2,579,000
Cash and cash equivalents at the
beginning of the period 1,167,000 2,987,000
---------- ----------
Cash and cash equivalents at the
end of the period $ 1,080,000 $5,566,000
========== ==========
See accompanying notes to the consolidated financial statements.
PrimeEnergy Corporation
Notes to Consolidated Financial Statements
March 31, 1999
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 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 1,564 wells and
owns non-operating interests in 494 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.
Certain items on the prior year income and cash flow statements
have been reclassified to conform with current year
classification.
Principles of Consolidation-
The consolidated financial statements include the accounts of
PrimeEnergy Corporation and its wholly-owned subsidiaries. All
material inter-company accounts and transactions between these
entities have been eliminated. Oil and gas properties include
ownership interests in affiliated partnerships. The statement of
operations includes the Company's proportionate share of revenue
and expenses related to oil and gas interests owned by the
partnerships.
Use of Estimates-
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Estimates of oil and gas reserves, as determined by independent
petroleum engineers, are continually subject to revision based on
price, production history and other factors. Depletion expense,
which is computed based on the units of production method, could
be significantly impacted by changes in such estimates.
Additionally, 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
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, trusts and joint ventures 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. Costs relating to the drilling of wells that
ultimately result in dry holes, and are therefore written off to
expense, are treated as investing activities.
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 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133 ("SFAS No.
133"), "Accounting for Derivative Instruments and Hedging
Activities". SFAS No. 133 establishes accounting and reporting
standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be
recorded in the balance sheet as either an asset or liability
measured at its fair value. It also requires that changes in the
derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and
losses to offset related results on the hedged item in the income
statement, and requires that a company must formally document,
designate, and assess the effectiveness of transactions that
receive hedge accounting. SFAS No. 133 is effective for fiscal
years beginning after June 15, 1999 and cannot be applied
retroactively. The Company has not yet quantified the impacts of
adopting SFAS No. 133 on its financial statements and has not
determined the timing of or method of adoption of SFAS No. 133.
However, SFAS No. 133 could increase volatility in earnings and
other comprehensive income.
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130 ("SFAS 130"),
"Reporting Comprehensive Income." SFAS 130 requires companies to
disclose comprehensive income and its components. The Company
currently has no items of other comprehensive income and
therefore SFAS 130 does not apply.
(2) Restricted Cash and Cash Equivalents:
Restricted cash and cash equivalents includes $1,279,000 and
$1,080,000 at March 31, 1999 and December 31, 1998, respectively,
of cash primarily pertaining to unclaimed royalty payments. There
were corresponding accounts payable recorded at March 31, 1999 and
December 31, 1998 for these liabilities.
(3) Accounts Receivable
Accounts receivable at March 31, 1999 and December 31, 1998
consisted of the following:
March 31, December 31,
1999 1998
Joint Interest Billing $ 1,444,000 $ 1,395,000
Trade Receivables 453,000 264,000
Oil and Gas Sales 1,147,000 1,287,000
Other 63,000 71,000
--------- ---------
3,107,000 3,017,000
Less, Allowance for doubtful
accounts (127,000) (127,000)
--------- ---------
$ 2,980,000 $ 2,890,000
========= =========
(4) Property and equipment
Property and equipment at March 31, 1999 and December 31, 1998
consisted of the following:
March 31, December 31,
1999 1998
Developed oil and gas
properties at cost $42,562,000 $40,582,000
Undeveloped oil and gas
properties at cost 521,000 1,284,000
Less, accumulated depletion
and depreciation (25,881,000) (25,077,000)
------------ ------------
17,202,000 16,789,000
------------ ------------
Furniture, fixtures and
equipment 6,556,000 6,571,000
Less, accumulated depreciation (4,308,000) (4,233,000)
---------- ----------
2,248,000 2,338,000
---------- ----------
Total net property and
equipment $19,450,000 $19,127,000
========== ==========
5) Long-Term Bank Debt
During 1998 and 1999, the Company was party to a line of credit
agreement with a bank with a non-reducing borrowing base of $20
million. In February 1999, the credit agreement was revised to
require that the $20 million borrowing base, reestablished on
October 14, 1998, would begin reducing monthly by $300,000
beginning February 1, 1999. Twenty-five percent of the borrowing
is syndicated to a second bank. The credit agreement provides
for interest on outstanding borrowings at the bank's base rate,
as defined, payable monthly, or at rates ranging from 1 1/2% to 2%
over the London Inter-Bank Offered Rate (LIBO rate) depending
upon the Company's utilization of the available line of credit,
payable at the end of the applicable interest period.
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 are
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, 1999 and 1998, 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, 1999 and 1998, options on 111,000
shares were exercisable at $1.50 per share 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 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 provided 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 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, 1999 and December 31, 1998
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:
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1999 March 31, 1998
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 (loss) per
common share $(450,000) 4,443,561 $(0.10) $127,000 4,502,171 $0.03
Effect of dilutive
securities: Options* -- -- -- -- 794,655 (0.01)
_________ __________ ______ ________ _________ _____
Diluted net income
(loss) per common share $(450,000) 4,443,561 $(0.10) $127,000 5,296,826 $0.02
======== ========== ===== ======== ========= =====
</TABLE>
* For the three months ended March 31, 1999, the number of options excluded
from diluted loss per share calculations were 726,721 as the conversion of
these would have had an anti-dilutive effect on net loss per share.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This discussion should be read in conjunction with the financial
statements of the Company and notes thereto. The Company's
subsidiaries are defined in Note 1 of the financial statements. PEMC
is the managing general partner or managing trustee in several Limited
Partnerships and Trusts (collectively, the "Partnerships").
LIQUIDITY AND CAPITAL RESOURCES
The Company feels that it has the ability to generate sufficient
amounts of cash to meet long-term liquidity needs, as well as debt
service. The Company's goal is to generate increased cash flows by
increasing its reserve base through continued acquisition, 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 1999 were financed by
borrowings and internally generated funds coupled with cash balances
available at the prior year-end.
During 1998 and 1999, the Company was party to a line of credit
agreement with a bank with a non-reducing borrowing base of $20
million. In February 1999, the credit agreement was revised to require
that the $20 million borrowing base, reestablished on October 14,
1998, would begin reducing monthly by $300,000 beginning February 1,
1999. Twenty-five percent of the borrowing is syndicated to a second
bank. The credit agreement provides for interest on outstanding
borrowings at the bank's base rate, as defined, payable monthly, or at
rates ranging from 1 1/2% to 2% over the London Inter-Bank Offered Rate
(LIBO rate) depending upon the Company's utilization of the available
line of credit, payable at the end of the applicable interest period.
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 are pledged as
security under this agreement. Under the Company's credit agreement,
the Company is required to maintain, as defined, minimum current,
tangible net worth, debt coverage and interest coverage ratios.
As of March 31, 1999, the Company had $19,075,000 outstanding against
a line of credit of $19,400,000.
The Company spent approximately $1,903,000 on the acquisition,
exploration and development of oil and gas properties in the first
quarter of 1999, including $98,000 spent to repurchase limited partner
interests from investors in the oil and gas partnerships.
The Company also spent approximately $122,000 on field service
equipment and $19,000 on computer hardware and software in the first
quarter of 1999.
The Company spent $61,000 in the first quarter of 1999 to acquire
treasury stock in open market transactions.
During 1998, the Company organized a 1998 Drilling Program which
included participation by several joint venture partners. Six wells
have been drilled as part of this program. As of the date of this
report, two of the wells are producing, three wells have been
determined to be dry holes, and one well is currently being evaluated.
Substantially all of the costs associated with the three dry holes have
been written off to expense as of March 31, 1999.
The Company is currently participating in the development of the Ramrod
field in South East Texas. The Company was carried for it's share of
drilling costs on the Saint Andrew # 1 well, but will be responsible
for a portion of the completion costs, as well as it's share of the
cost of a frac job to be performed. One zone on this well has
established commercial production, and is hoped that a second zone will
be productive after the frac job is completed. The Company also
participated in the drilling of the Saint George # 2 well, for which
it's share of costs will be approximately $1,300,000. There are
currently plans to frac two zones on this well, and it is hoped that
both of these zones will then produce in commercial quantities. The
costs of these two wells had not been paid as of March 31, 1999.
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 availability of capital,
the number of oil and gas prospects, and oil and gas business
opportunities in general.
RESULTS OF OPERATIONS
The Company had a loss of $450,000 for the three months ended March 31,
1999 as compared to income $127,000 in the first quarter of 1998. The
1999 loss is primarily attributable to extremely low oil and gas prices
in the first quarter of 1999, and $687,000 in exploration costs
incurred.
Oil and gas sales of $1,929,000 for the first quarter of 1999
represented a 34% decrease over sales in the first quarter of 1998. In
the first quarter of 1999 average oil and gas prices were $10.87 per
barrel and $1.89 per Mcf as compared to $13.94 per barrel and $2.19 per
Mcf in the first quarter of 1998. First quarter 1999 production totaled
58,093 barrels of oil and 686,278 Mcf of gas as compared to 69,418
barrels of oil and 885,438 Mcf of gas during the comparable period in
1998.
In November 1998, the Company sold one-half of its interest in the
Ramrod property, and turned over operations of the property to the
purchaser. In December, the most significant well on this property, the
Saint George # 1, had to be shut in for remedial work and did not
produce in significant quantities in the first quarter of 1999. Total
production from the Ramrod property was 23,000 Mcf of gas and 100
barrels of oil in the first quarter of 1999 as compared to 89,000 Mcf
of gas and 1,000 barrels of oil in 1998. The Saint George # 1 has since
come back on line, but is producing at a lesser rate than before the
remedial work was performed.
The Company's South Powderhorn property produced 85,000 Mcf of gas in
the first quarter of 1999 as compared to 195,000 Mcf in 1998, due to a
sharp natural decline curve on this property.
The Francis Martin # 1 well, which was drilled as part of the Company's
1998 drilling program, had first production on January 28th 1999, and
contributed 92,000 Mcf to the Company's production in the first quarter
of 1999. The Company owns a 13.44% revenue interest in this well, which
is currently producing at a rate of over 14,000 Mcf per day. The
Company's participation in this well was subject to a provision wherein
its ownership interest is reduced at such time as it has received cash
flow equal to it's capital costs expended on the well. It's interest is
further reduced when additional levels of cash flow are met.
The Company has hedged its gas production for the months of June, July
and August 1999, at a price of $2.36 per Mcf.
District operating income increased by $178,000, or 7%, between the
first quarter of 1999 and the first quarter of 1998, primarily due to
an increase in work performed for third parties.
Administrative revenue for the first quarter of 1999 declined by 8% as
compared to 1998. Amounts received in both years from certain
Partnerships are substantially less than the amounts allocable to those
Partnerships under the Partnership agreements. The lower amounts
reflect PEMC's efforts to limit costs incurred and the amounts
allocated to the Partnerships.
Lease operating expense for the first quarter of 1999 declined by 7%,
or $96,000, compared to the first quarter of 1998.
The Company receives reimbursement for costs incurred related to the
evaluation, acquisition and development of properties in which
interests are owned by its joint venture partners, related
partnerships, and trusts. To the extent that these costs are expended
at the district level, the reimbursements reduce total district
operating expenses. To the extent such expenses are incurred by PEMC,
such reimbursements reduce total general and administrative expenses.
Such reimbursement totaled approximately $500,000 in the first quarter
of 1999 as compared to $300,000 for the same period in 1998.
District operating expense decreased 9%, or $205,000 in the first
quarter of 1999 as compared to the same period in 1998.
General and administrative expenses decreased by 25% in the first
quarter of 1999 as compared to the same period in 1998.
The lower lease operating, district operating and general and
administrative expenses all relate to efforts by the Company to reduce
costs in response to extremely low oil and gas prices.
Depreciation and depletion of oil and gas properties decreased
$318,000, or 28%, in the first quarter of 1999 as compared to the
first quarter of 1998, primarily due to lower production.
Exploration costs were $687,000 in the first quarter of 1999 as
compared to $63,000 during the same period in 1998. The 1999 costs
consist primarily of the cost of two dry holes drilled as part of the
Company's 1998 Drilling Program.
Interest expense during the first quarter of 1999 decreased
approximately 16% to $307,000 as average debt levels decreased.
The Year 2000 (Y2K) issue is the definition and resolution of potential
problems resulting from computer application programs or imbedded chip
instruction sets utilizing two-digits, as opposed to four digits, to
define a specific year. Such date sensitive systems may be unable to
properly interpret dates, which could cause a system failure or other
computer errors, leading to disruptions in operations. In 1997, the
Company developed a three-phase program for the Y2K information systems
compliance. Phase I is to identify those systems with which the
company has exposure to Y2K issues. Phase II is to remediate systems
and replace equipment where required. Phase III, to be completed by
mid-1999, is the final testing of each major area of exposure to ensure
compliance. The Company has identified four major areas determined to
be critical for successful Y2K compliance: (1) financial and
informational system applications, (2) communications applications, (3)
oil and gas producing operations, and (4) third-party relationships.
The Company, in accordance with Phase I of the program, is in the
process of conducting an internal review of all systems and contacting
all software suppliers to determine major areas of exposure to Y2K
issues. The Company has completed the modifications to its core
financial and reporting systems and is continuing to test compliance in
this area. These modifications were made in conjunction with an upgrade
of the financial reporting applications provided by the Company's
software vendor. Conversion to the new system was completed during
1998. Due to the technology advances in the communications area the
Company has upgraded such equipment regularly over the past three
years. Y2K compliance was a specification requirement of each
installation. Consequently, the Company expects exposure in this area
to be limited to third party readiness. The Company is in the process
of identifying areas of exposure resulting from equipment used in its
oil and gas producing operations. The Company expects to complete
identification of critical systems by June 1999 and to continue
remediation and testing throughout 1999. In the third-party area, the
Company has received assurance from its significant service suppliers
that they intend to be Y2K complaint by 2000. The Company has
implemented a program to request Year 2000 certification or other
assurance from other third parties during 1999.
The Company recognizes that, notwithstanding the efforts described
above, the Company could experience disruptions to its operations or
administrative functions, including those resulting from non-compliant
systems utilized by unrelated third party governmental and business
entities. The Company is in the process of developing a contingency
plan in order to mitigate potential disruption to business operations.
The Company expects to complete this contingency plan by the second
quarter of 1999, but also expects to refine this plan throughout 1999.
Through 1998 and the first quarter of 1999 the Company has handled
identifying, remediating and testing systems for Year 2000 compliance
within the scope of routine upgrades and systems evaluations. The
Company expects to complete the review of oil and gas operations
exposure in the same manner, without incurring substantial additional
costs. However, information resulting from the oil and gas operations
review may indicate required expenditures not currently contemplated by
the Company.
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
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, the possibility of drilling cost overruns and technical
difficulties, 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, and the Company's ability to replace
and expand oil and gas reserves. Accordingly, stockholders and
potential investors are cautioned that certain events or circumstances
could cause actual results to differ materially from those projected.
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, 1999.
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 12, 1999 /s/ Charles E. Drimal,Jr.
(Date) --------------------------
Charles E. Drimal, Jr.
President
Principal Executive
Officer
May 12, 1999 /s/ Beverly A. Cummings
(Date) --------------------------
Beverly A. Cummings
Executive Vice President
Principal Financial and
Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extract from the
PrimeEnergy Corporation first quarter 1999 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-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 2359
<SECURITIES> 0
<RECEIVABLES> 3107
<ALLOWANCES> 127
<INVENTORY> 0
<CURRENT-ASSETS> 10021
<PP&E> 49639
<DEPRECIATION> 30189
<TOTAL-ASSETS> 30420
<CURRENT-LIABILITIES> 8219
<BONDS> 19075<F1>
761
0
<COMMON> 0
<OTHER-SE> 2347<F2>
<TOTAL-LIABILITY-AND-EQUITY> 30420
<SALES> 1929
<TOTAL-REVENUES> 5314
<CGS> 0
<TOTAL-COSTS> 5497
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 307
<INCOME-PRETAX> (487)
<INCOME-TAX> (37)
<INCOME-CONTINUING> (450)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (450)
<EPS-PRIMARY> (0.10)
<EPS-DILUTED> (0.10)
<FN>
<F1>Current portion long term debt
<F2>Retained Earnings (1171)
<F3>Treasury Stock 7384
</FN>
</TABLE>
