U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________
FORM 10-QSB
/X/ Quarterly Report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Quarterly Period Ended September 30, 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 November 12, 1999 was: Common Stock, $0.10 par value, 4,395,207
shares.
<PAGE>
PrimeEnergy Corporation
Index to Form 10-QSB
September 30, 1999
Part I - Financial Information
Consolidated Balance Sheets - September 30, 1999 and
December 31, 1998 3-4
Consolidated Statements of Operations for the nine months
ended September 30, 1999 and 1998 5
Consolidated Statements of Operations for the three months
ended September 30, 1999 and 1998 6
Consolidated Statement of Stockholders' Equity for the
nine months ended September 30, 1999 7
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1999 and 1998 8
Notes to Consolidated Financial Statements 9-16
Management's Discussion and Analysis of Financial Condition
and Results of Operations 17-21
Part II - Other Matters 22
Signatures 23
2
<PAGE>
PrimeEnergy Corporation
Consolidated Balance Sheets
September 30, 1999 and December 31, 1998
September 30, December 31,
1999 1998
(Unaudited) (Audited)
ASSETS:
Current assets:
Cash and cash equivalents $ 3,016,000 $ 1,167,000
Restricted cash and cash
equivalents (Note 2) 1,240,000 1,080,000
Accounts receivable (Note 3) 3,339,000 2,890,000
Due from related parties (Note 8) 3,147,000 2,952,000
Other current assets 279,000 79,000
Prepaid expenses 115,000 351,000
Deferred income taxes 18,000 18,000
---------- ----------
Total current assets 11,154,000 8,537,000
---------- ----------
Property and equipment, at cost (Notes 1 and 4):
Oil and gas properties (successful
efforts method):
Developed 46,430,000 40,582,000
Undeveloped 53,000 1,284,000
Furniture, fixtures and equipment
including leasehold improvements 6,283,000 6,571,000
---------- ----------
52,766,000 48,437,000
Accumulated depreciation and depletion (33,040,000) (29,310,000)
---------- ----------
Net property and equipment 19,726,000 19,127,000
---------- ----------
Other assets 626,000 622,000
Due from affiliates 325,000 325,000
---------- ----------
Total assets $ 31,831,000 $28,611,000
========== ==========
See accompanying notes to the consolidated financial statements.
3
<PAGE>
PrimeEnergy Corporation
Consolidated Balance Sheets
September 30, 1999 and December 31, 1998
September 30, December 31,
1999 1998
(Unaudited) (Audited)
LIABILITIES and STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 6,067,000 $ 6,315,000
Accrued liabilities:
Payroll, benefits and related items 1,061,000 552,000
Interest and other 786,000 832,000
Due to related parties (Note 8) 866,000 731,000
---------- ----------
Total current liabilities 8,780,000 8,430,000
---------- ----------
Long-term bank debt (Note 5) 20,000,000 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 (1,167,000) (721,000)
---------- ----------
10,496,000 10,942,000
Treasury stock, at cost, 3,184,763
common shares in 1999 and 3,158,376
common shares in 1998 (7,463,000) (7,323,000)
---------- ----------
Total stockholders' equity 3,033,000 3,619,000
---------- ----------
Total liabilities and equity $ 31,831,000 $28,611,000
========== ==========
See accompanying notes to the consolidated financial statements.
4
<PAGE>
PrimeEnergy Corporation
Consolidated Statements of Operations
Nine Months Ended September 30, 1999 and 1998
(Unaudited)
1999 1998
Revenue:
Oil and gas sales $ 7,717,000 $ 8,859,000
District operating income 8,587,000 8,271,000
Administrative revenue (Note 8) 1,240,000 1,291,000
Reporting and management fees (Note 8) 254,000 226,000
Interest and other income 149,000 311,000
---------- ----------
Total revenue 17,947,000 18,958,000
---------- ----------
Costs and expenses:
Lease operating expense 4,264,000 4,825,000
District operating expense 6,486,000 6,324,000
Depreciation and depletion of
oil and gas properties 3,680,000 3,841,000
General and administrative expense 2,173,000 2,446,000
Exploration costs 831,000 113,000
Interest expense (Note 5) 1,006,000 1,062,000
---------- ----------
Total costs and expenses 18,440,000 18,611,000
---------- ----------
Income (loss) from operations (493,000) 347,000
Gain on sale and exchange of assets 16,000 35,000
---------- ----------
Net income (loss) before income taxes (477,000) 382,000
(Benefit) provision for income taxes (31,000) 38,000
---------- ----------
Net income (loss) $ (446,000) $ 344,000
========== ==========
Basic income (loss) per common
share (Notes 1 and 9) $(0.10) $0.08
==== ====
Diluted income (loss) per common
share (Notes 1 and 9) $(0.10) $0.07
==== ====
See accompanying notes to the consolidated financial statements.
5
<PAGE>
PrimeEnergy Corporation
Consolidated Statements of Operations
Three Months Ended September 30, 1999 and 1998
(Unaudited)
1999 1998
Revenue:
Oil and gas sales $ 3,246,000 $ 2,866,000
District operating income 2,724,000 2,726,000
Administrative revenue (Note 8) 396,000 442,000
Reporting and management fees (Note 8) 98,000 80,000
Interest and other income 48,000 94,000
---------- ----------
Total revenue 6,512,000 6,208,000
---------- ----------
Costs and expenses:
Lease operating expense 1,536,000 1,600,000
District operating expense 2,249,000 2,019,000
Depreciation and depletion of
oil and gas properties 1,443,000 1,411,000
General and administrative expense 924,000 800,000
Exploration costs 10,000 18,000
Interest expense (Note 5) 350,000 348,000
---------- ----------
Total costs and expenses 6,512,000 6,196,000
---------- ----------
Income from operations -- 12,000
Gain on sale and exchange of assets 2,000 --
---------- ----------
Net income before income taxes 2,000 12,000
Provision for income taxes -- 1,000
---------- ----------
Net income $ 2,000 $ 11,000
========== ==========
Basic income per common
share (Notes 1 and 9) $0.00 $0.00
==== ====
Diluted income per common
share (Notes 1 and 9) $0.00 $0.00
==== ====
See accompanying notes to the consolidated financial statements.
6
<PAGE>
PrimeEnergy Corporation
Consolidated Statement of Stockholders' Equity
Nine Months Ended September 30, 1999
<TABLE>
<CAPTION>
Retained
Additional Earnings
Common Stock Paid In (Accumulated Treasury
Shares Amount Capital Deficit) 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 26,387 shares of
common stock (140,000) (140,000)
Net loss (446,000) (446,000)
--------- -------- ----------- ---------- ---------- ---------
Balance at September 30, 1999 7,607,970 $761,000 $10,902,000 ($1,167,000) ($7,463,000) $3,033,000
========= ======== =========== ========== ========== ==========
</TABLE>
See accompanying notes to the consolidated financial statements.
7
<PAGE>
PrimeEnergy Corporation
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1999 and 1998
(Unaudited)
1999 1998
Net cash provided by
operating activities $4,583,000 $ 6,143,000
---------- ----------
Cash flows from investing activities:
Capital Expenditures,
including dry hole costs (6,159,000) (4,073,000)
Proceeds from sale of property
and equipment 56,000 303,000
Proceeds from payments on note receivable 14,000 --
---------- ---------
Net cash (used in) investing
activities (6,089,000) (3,770,000)
---------- ---------
Cash flows from financing activities:
Purchase of treasury stock (140,000) (1,291,000)
Increase in long-term bank debt and
other long-term obligations 17,205,000 22,391,000
Repayment of long-term bank debt and
other long-term obligations (13,710,000) (22,856,000)
Proceeds from exercised stock options -- 15,000
---------- ---------
Net cash provided by (used in)
financing activities 3,355,000 (1,741,000)
---------- ---------
Net increase in cash and cash
equivalents 1,849,000 632,000
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 $ 3,016,000 $ 3,619,000
========== =========
See accompanying notes to the consolidated financial statements.
8
<PAGE>
PrimeEnergy Corporation
Notes to Consolidated Financial Statements
September 30, 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.
9
<PAGE>
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
10
<PAGE>
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".
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-
11
<PAGE>
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.
(2) Restricted Cash and Cash Equivalents:
Restricted cash and cash equivalents includes $1,240,000 and
$1,080,000 at September 30, 1999 and December 31, 1998,
respectively, of cash primarily pertaining to unclaimed royalty
payments. There were corresponding accounts payable recorded at
September 30, 1999 and December 31, 1998 for these liabilities.
(3) Accounts Receivable
12
<PAGE>
Accounts receivable at September 30, 1999 and December 31, 1998
consisted of the following:
September 30, December 31,
1999 1998
Joint Interest Billing $ 1,537,000 $ 1,395,000
Trade Receivables 465,000 264,000
Oil and Gas Sales 1,445,000 1,287,000
Other 20,000 71,000
--------- ---------
3,467,000 3,017,000
Less, Allowance for doubtful
accounts (128,000) (127,000)
--------- ---------
$ 3,339,000 $ 2,890,000
========= =========
(4) Property and equipment
Property and equipment at September 30, 1999 and December 31, 1998
consisted of the following:
September 30, December 31,
1999 1998
Developed oil and gas
properties at cost $46,430,000 $40,582,000
Undeveloped oil and gas
properties at cost 53,000 1,284,000
Less, accumulated depletion
and depreciation (28,738,000) (25,077,000)
------------ ------------
17,745,000 16,789,000
------------ ------------
Furniture, fixtures and
equipment 6,283,000 6,571,000
Less, accumulated depreciation (4,302,000) (4,233,000)
---------- ----------
1,981,000 2,338,000
---------- ----------
Total net property and
equipment $19,726,000 $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. Effective September 22, 1999, the
credit agreement was amended, revising the borrowing base to $23.7
13
<PAGE>
million, which is to be reduced monthly by $350,000 beginning on
October 1, 1999. 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
September 30, 1999 and 1998, options on 802,500 shares were
14
<PAGE>
outstanding and exercisable at prices ranging from $1.00 to $1.25.
On January 27, 1983, the Company adopted the 1983 Incentive Stock
Option Plan. At September 30, 1999 and 1998, options on 103,000
and 111,000 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 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 September 30, 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:
15
<PAGE>
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>
Nine Months Ended Nine Months Ended
September 30, 1999 September 30, 1998
--------------------------------- -------------------------------
Net Number of Per Share Net Number of Per Share
Loss Shares Amount Income Shares Amount
<S> <C> <C> <C> <C> <C> <C>
Net income (loss) per
common share $(446,000) 4,434,128 $(0.10) $344,000 4,478,235 $0.08
Effect of dilutive securities:
Options ** 774,698 (0.01)
________ _________ _____ _______ __________ _____
Diluted net income
(loss) per common share ($446,000) 4,434,128 $(0.10) $344,000 5,252,933 $0.07
========= ========== ======= ======= ========= =====
</TABLE>
** For the nine months ended September 30, 1999, the number of
options excluded from diluted loss per common share calculations
were 709,109 as the conversion of these would have an anti-dilutive
effect on net loss per share.
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
September 30, 1999 September 30, 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 per
common share $ 2,000 4,431,220 $ 0.00 $ 11,000 4,459,165 $0.00
Effect of dilutive securities:
Options ** 708,041 764,774
________ _________ _____ _______ __________ _____
Diluted net income
(loss) per common share $ 2,000 5,139,261 $(0.00) $ 11,000 5,223,939 $0.00
========= ========== ======= ======= ========= =====
</TABLE>
16
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This discussion should be read in conjunction with the financial
statements of the Company and notes thereto. The Company's subsidiaries
are defined in Note 1 of the financial statements. PEMC is the managing
general partner or managing trustee in several Limited Partnerships and
Trusts (collectively, the "Partnerships").
LIQUIDITY AND CAPITAL RESOURCES
The Company feels that it has the ability to generate sufficient amounts
of cash to meet long-term liquidity needs, as well as debt service. The
Company'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 has been party to a line of credit
agreement with a bank. 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. Effective September 22, 1999, the borrowing base was
revised to $23.7 million, which is to be reduced monthly by $350,000
beginning on October 1, 1999. The borrowing base is to be redetermined
semi-annually, based on the value of the Company's reserves and cash
flow from operations. 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.
As of September 30, 1999, the Company had $20,000,000 outstanding
against the line of credit of $23,700,000.
The Company spent approximately $6,664,000 on the acquisition,
exploration and development of oil and gas properties in the first nine
months of 1999, including $766,000 spent to repurchase limited partner
interests from investors in partnerships. On October 29, 1999, the
Company entered into a letter of intent to purchase oil and gas
properties located in Oklahoma for $1,750,000 plus additional
compensation, dependent on the performance of the properties purchased.
17
<PAGE>
The Company already owns significant working interests in the properties
being purchased, which it currently manages and operates for the seller.
The Company anticipates closing on this transaction in November 1999.
The Company also spent approximately $286,000 on field service equipment
and $89,000 on computer hardware and software in the first nine months
of 1999.
The Company spent $140,000 in the first nine months of 1999 to acquire
treasury stock in open market transactions. Additionally, the Company
spent another $140,000 on treasury stock purchases in October 1999.
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. Three of these wells were
completed successfully and three were dry holes. Substantially all of
the costs associated with the three dry holes have been written off to
expense as of September 30, 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 $446,000 for the nine months ended September
30, 1999 as compared to income of $344,000 in the first nine months of
1998. The 1999 loss is primarily attributable to extremely low oil and
gas prices in the beginning of 1999, and $831,000 in exploration costs
incurred. Net income was $2,000 in the third quarter of 1999, as
compared to $11,000 in the third quarter of 1998.
Oil and gas sales of $7,717,000 for the first nine months of 1999
represented a 13% decrease over sales in the first nine months of 1998.
For first nine months of 1999, average oil and gas prices were $14.49
per barrel and $2.24 per Mcf as compared to $12.76 per barrel and $2.27
per Mcf in the same period of 1998. Production for the first nine months
of 1999 totaled 183,000 barrels of oil and 2,267,000 Mcf of gas as
compared to 213,000 barrels of oil and 2,711,000 Mcf of gas during the
comparable period in 1998.
Third quarter 1999 oil and gas revenue increased by $380,000 as compared
to the same period in 1998 as higher prices more than offset a decline
in production. Third quarter 1999 average prices were $17.07 per barrel
of oil and $2.61 per Mcf of gas, as compared to $11.89 per barrel and
$2.24 per Mcf in the third quarter of 1998. Hedging transactions
covering third quarter production lowered the average price received for
oil by $2.51 per barrel, as compared to prices received in the field.
The Company has not hedged any of its future production. Third quarter
1999 production totaled 64,800 barrels and 818,000 Mcf as compared to
72,000 barrels and 897,000 Mcf during the same 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
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<PAGE>
purchaser. In December of 1998, the most significant well on this
property, the Saint George # 1, experienced mechanical problems and is
currently producing at a significantly reduced rate. The Company's
production from the Ramrod property was 85,000 Mcf of gas and 700
barrels of oil in the first nine months of 1999 as compared to 569,000
Mcf of gas and 8,500 barrels of oil in the first nine months of 1998.
The Company's production from its South Powderhorn property was 223,000
Mcf of gas in the first nine months 1999 as compared to 473,000 Mcf
during the same period 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 401,000 Mcf to the Company's production in the first nine
months of 1999. The Company's participation in this well was subject to
a provision wherein its ownership interest was reduced at such time as
it has received cash flow equal to its capital costs expended on the
well. This payout was reached in August.
The Company's production related to its ownership interests in the
partnerships increased by 4,600 barrels and 74,000 Mcf in the first nine
months of 1999 as compared to the same period last year, as the Company
purchased substantial additional interests in these entities.
District operating income increased by $316,000, or 4%, between the
first nine months of 1999 and the same period in 1998, primarily due to
an increase in work performed on properties not operated by the Company
during the first six months of the year. District operating income was
relatively flat in the third quarter of 1999 as compared to the same
period last year.
Administrative revenue for the first nine months of 1999 declined by 4%
or $51,000, as compared to the same period in 1998, and by 10%, or
$46,000, in the third quarter of 1999 as compared to the third quarter
of 1998. Amounts received in both years from certain Partnerships
managed by the Company are substantially less than the amounts allocable
to those Partnerships under the Partnership agreements. The lower
amounts reflect the Company's efforts to limit costs incurred and the
amounts allocated to the Partnerships.
Lease operating expense for the first nine months of 1999 declined by
12%, or $561,000, as compared to the same period in 1998. Third quarter
1999 lease operating expense declined by 4%, or $64,000. These
reductions are due to the Company's efforts to reduce costs in response
to the extremely low oil and gas prices experienced in the first part of
the year, as well as decreased production.
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
19
<PAGE>
totaled approximately $1,100,000 both in the first nine months of 1999
and the same period in 1998.
District operating expense increased by 3%, or $162,000, in the first
nine months of 1999 as compared to the same period in 1998. This
increase is consistent with the increase in district operating income.
General and administrative expenses decreased by 11%, or $273,000, in
the first nine months of 1999 as compared to the same period in 1998.
This reduction is due to the Company's efforts to reduce costs in
response to the extremely low oil and gas prices experienced in the
first part of the year. In the third quarter of 1999 as compared to the
third quarter of 1998, general and administrative expense rose by
$124,000, primarily caused by a $74,000 increase in the Company's share
of the costs incurred by the partnerships. The Company purchased
substantial additional interests in the partnerships during the year.
Depreciation and depletion of oil and gas properties decreased $161,000,
or 4%, in the first nine months of 1999 as compared to the same period
1998, primarily due to lower production.
Exploration costs were $831,000 in the first nine months of 1999, as
compared to $113,000 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 nine months of 1999 decreased
approximately 5% to $1,006,000 as average debt levels decreased, but was
relatively unchanged in the third quarter of 1999 as compared to the
same period in 1998.
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 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, conducted an
internal review of all systems and contacted 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
20
<PAGE>
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
intends to continue identification, 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 compliant
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 and to refine this plan throughout 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.
21
<PAGE>
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 September 30, 1999.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
PrimeEnergy Corporation
(Registrant)
November 12, 1999 /s/ Charles E. Drimal,Jr.
(Date) --------------------------
Charles E. Drimal, Jr.
President
Principal Executive Officer
November 12, 1999 /s/ Beverly A. Cummings
(Date) --------------------------
Beverly A. Cummings
Executive Vice President
Principal Financial and
Accounting Officer
23
<PAGE>
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<LEGEND>
F1 Retained Earnings (1,167)
F1 Treasury Stock (7,463)
F1 Additional Paid In Capital 10,902
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
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<RECEIVABLES> 3,467
<ALLOWANCES> 128
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<CURRENT-ASSETS> 11,154
<PP&E> 52,766
<DEPRECIATION> 33,040
<TOTAL-ASSETS> 31,831
<CURRENT-LIABILITIES> 8,780
<BONDS> 20,000
0
0
<COMMON> 761
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<TOTAL-LIABILITY-AND-EQUITY> 31,831
<SALES> 7,717
<TOTAL-REVENUES> 17,947
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<INCOME-PRETAX> (477)
<INCOME-TAX> (31)
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