Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended September 30, 2009

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   84-0637348

(State or other jurisdiction of

incorporation or organization)

 

(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)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filings required for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer” and “smaller reporting company” in Rule 12-B of the Exchange Act.

 

Large Accelerated Filer   ¨    Accelerated Filer   ¨
Non-Accelerated Filer   ¨  (Do not check if a smaller reporting company)    Smaller Reporting Company   x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The number of shares outstanding of each class of the Registrant’s Common Stock as of November 10, 2009 was: Common Stock, $0.10 par value, 3,034,697 shares.

 

 

 


Table of Contents

PrimeEnergy Corporation

Index to Form 10-Q

September 30, 2009

 

         Page

Part I - Financial Information

  

Item 1. Financial Statements

  

Consolidated Balance Sheet – September 30, 2009 and December 31, 2008

   3-4

Consolidated Statement of Operations for the nine and three months ended  September 30, 2009 and 2008

   5

Consolidated Statement of Stockholders’ Equity for the nine months ended September  30, 2009

   7

Consolidated Statement of Comprehensive Income (Loss) for the nine months ended September  30, 2009 and 2008

   8

Consolidated Statement of Cash Flows for the nine months ended September 30, 2009 and 2008

   9

Notes to Consolidated Financial Statements

   10-18

Item  2. Management’s Discussion and Analysis of Financial Conditions and Results of Operation

   19-20

Item 3. Quantitative and Qualitative Disclosures About Market Risk

   21

Item 4. Controls and Procedures

   21

Part II - Other Information

   22

Item 1. Legal Proceedings

   22

Item 1A. Risk Factors

   22

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

   22

Item 3. Defaults Upon Senior Securities

   22

Item 4. Submission of Matters to a Vote of Security Holders

   22

Item 5. Other Information

   22

Item 6. Exhibits

   23

Signatures

   26

 

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Table of Contents

PART I—FINANCIAL INFORMATION

 

Item 1. FINANCIAL STATEMENTS

PrimeEnergy Corporation

Consolidated Balance Sheet

September 30, 2009 and December 31, 2008

 

     September 30,
2009
   December 31,
2008
     (Unaudited)    (Audited)

ASSETS

     

Current assets:

     

Cash and cash equivalents

   $ 14,321,000    $ 11,808,000

Restricted cash and cash equivalents

     5,111,000      8,027,000

Accounts receivable (net)

     9,913,000      18,257,000

Due from related parties

     99,000      678,000

Prepaid expenses

     1,520,000      1,302,000

Derivative contracts

     395,000      1,755,000

Inventory at cost

     4,610,000      4,532,000

Deferred income taxes

     745,000      30,000
             

Total current assets

     36,714,000      46,389,000
             

Property and equipment, at cost

     

Oil and gas properties (successful efforts method), net

     188,098,000      212,149,000

Field service equipment and other, net

     7,391,000      8,316,000
             

Net property and equipment

     195,489,000      220,465,000

Other assets

     582,000      976,000
             

Total assets

   $ 232,785,000    $ 267,830,000
             

See accompanying notes to the consolidated financial statements.

 

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PrimeEnergy Corporation

Consolidated Balance Sheet

September 30, 2009 and December 31, 2008

 

     September 30,
2009
    December 31,
2008
 
     (Unaudited)     (Audited)  

LIABILITIES and STOCKHOLDERS’ EQUITY

    

Current liabilities:

    

Current bank debt

   $ 6,000,000      $ 16,970,000   

Accounts payable

     21,835,000        26,715,000   

Current portion of asset retirement and other long-term obligation

     3,446,000        1,461,000   

Derivative liability short term

     752,000        387,000   

Accrued liabilities

     5,456,000        10,477,000   

Due to related parties

     338,000        233,000   
                

Total current liabilities

     37,827,000        56,243,000   

Long-term bank debt

     88,100,000        87,170,000   

Indebtedness to related parties

     20,000,000        20,000,000   

Asset retirement obligation

     17,365,000        18,650,000   

Derivative liability long term

     157,000        146,000   

Deferred income taxes

     21,618,000        25,688,000   
                

Total liabilities

     185,067,000        207,897,000   
                

Stockholders’ equity: (Note 13)

    

Common stock, $.10 par value; 2009: Authorized: 4,000,000 shares, issued: 3,836,397 shares; 2008: Authorized: 10,000,000 shares, issued: 7,694,970 shares

     383,000        769,000   

Paid in capital

     5,445,000        11,024,000   

Retained earnings

     57,437,000        73,426,000   

Accumulated other comprehensive income, net

     (394,000     1,009,000   
                
     62,871,000        86,228,000   

Treasury stock, at cost; 2009: 800,000 shares; 2008: 4,647,316 shares

     (25,272,000     (36,940,000
                

Total stockholders’ equity

     37,599,000        49,288,000   

Non-controlling interest

     10,119,000        10,645,000   
                

Total equity

     47,718,000        59,933,000   
                

Total liabilities and equity

   $ 232,785,000      $ 267,830,000   
                

See accompanying notes to the consolidated financial statements.

 

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PrimeEnergy Corporation

Consolidated Statement of Operations

Nine Months Ended September 30, 2009 and 2008

(Unaudited)

 

     2009     2008

Revenue:

    

Oil and gas sales

   $ 49,975,000      $ 108,574,000

Field service income

     12,923,000        18,760,000

Administrative overhead fees

     6,271,000        6,791,000

Gain on derivative instruments

     179,000        —  

Other income

     15,000        332,000
              

Total revenue

     69,363,000        134,457,000
              

Costs and expenses:

    

Lease operating expense

     25,054,000        32,313,000

Field service expense

     11,667,000        14,787,000

Depreciation, depletion and amortization

     31,584,000        50,840,000

Loss on settlement of asset retirement obligation

     1,722,000        —  

General and administrative expense

     8,498,000        11,184,000

Exploration costs

     13,000        458,000
              

Total costs and expenses

     78,538,000        109,582,000
              

Gain on sale and exchange of assets

     212,000        98,000
              

Income (loss) from operations

     (8,963,000     24,973,000

Other income and expenses:

    

Less: Interest expense

     5,297,000        6,185,000

Add: Interest income

     45,000        354,000
              

Income (loss) before provision (benefit) for income taxes

     (14,215,000     19,142,000

Provision (benefit) for income taxes

     (4,775,000     4,640,000
              

Net income (loss)

     (9,440,000     14,502,000
              

Less: Net income attributable to non-controlling interest

     527,000        5,680,000
              

Net income (loss) attributable to PrimeEnergy

   $ (9,967,000   $ 8,822,000
              

Basic income (loss) per common share

   $ (3.28   $ 2.88

Diluted income (loss) per common share

   $ (3.28   $ 2.31

See accompanying notes to the consolidated financial statements.

 

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PrimeEnergy Corporation

Consolidated Statement of Operations

Three Months Ended September 30, 2009 and 2008

(Unaudited)

 

     2009     2008

Revenue:

    

Oil and gas sales

   $ 17,426,000      $ 33,926,000

Field service income

     3,741,000        6,011,000

Administrative overhead fees

     1,954,000        2,292,000

Gain on derivative instruments

     179,000        —  

Other income

     —         135,000
              

Total revenue

     23,300,000        42,364,000
              

Costs and expenses:

    

Lease operating expense

     8,376,000        11,153,000

Field service expense

     3,463,000        5,204,000

Depreciation, depletion and amortization

     9,452,000        15,211,000

Loss on settlement of asset retirement obligation

     111,000        —  

General and administrative expense

     2,878,000        3,894,000

Exploration costs

     13,000        159,000
              

Total costs and expenses

     24,293,000        35,621,000
              

Gain on sale and exchange of assets

     12,000        20,000
              

Income (loss) from operations

     (981,000     6,763,000

Other income and expenses:

    

Less: Interest expense

     2,162,000        1,809,000

Add: Interest income

     7,000        93,000
              

Income (loss) before provision (benefit) for income taxes

     (3,136,000     5,047,000

Provision (benefit) for income taxes

     (1,165,000     1,189,000
              

Net income (loss)

     (1,971,000     3,858,000
              

Less: Net income attributable to non-controlling interest

     344,000        1,786,000
              

Net income (loss) attributable to PrimeEnergy

   $ (2,315,000   $ 2,072,000
              

Basic income (loss) per common share

   $ (.76   $ .68

Diluted income (loss) per common share

   $ (.76   $ .54

See accompanying notes to the consolidated financial statements.

 

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PrimeEnergy Corporation

Consolidated Statement of Stockholders’ Equity

Nine Months Ended September 30, 2009

(Unaudited)

 

     Common Stock     Paid in
Capital
    Retained
Earnings
    Accumulated
Other
Comprehensive
Income/(Loss)
    Treasury Stock     Total
Stockholders’
Equity
    Non-
Controlling
Interest
    Total Equity  
     Shares     Amount                

Balance at December 31, 2008

   7,694,970      $ 769,000      $ 11,024,000      $ 73,426,000      $ 1,009,000      $ (36,940,000   $ 49,288,000      $ 10,645,000      $ 59,933,000   

Purchased 6,782 shares of common stock

               (268,000     (268,000       (268,000

Retired 3,858,573 shares of treasury stock

   (3,858,573     (386,000     (5,528,000     (6,022,000       11,936,000        —            —     

Net loss

           (9,967,000         (9,967,000     527,000        (9,440,000

Other comprehensive loss, net of taxes

             (1,403,000       (1,403,000       (1,403,000

Purchase of non-controlling interests

         (51,000           (51,000     (98,000     (149,000

Distributions to non-controlling interests

                   (955,000     (955,000
                                                                      

Balance at September 30, 2009

   3,836,397      $ 383,000      $ 5,445,000      $ 57,437,000      $ (394,000   $ (25,272,000   $ 37,599,000      $ 10,119,000      $ 47,718,000   
                                                                      

See accompanying notes to the consolidated financial statements.

 

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PrimeEnergy Corporation

Consolidated Statement of Comprehensive Income (Loss)

 

     Quarter Ended
September 30,
2009
    Quarter Ended
September 30,
2008
 

Net income (loss)

   $ (9,967,000   $ 8,822,000   

Other comprehensive income (loss), net of taxes:

    

Reclassification adjustment for settled contracts, net of taxes of $344,000 and $4,191,000, respectively

     611,000        (7,450,000

Changes in fair value of hedge positions, net of taxes of $1,133,000 and $1,713,000, respectively

     (2,014,000     3,046,000   
                

Total other comprehensive loss

     (1,403,000     (4,404,000
                

Comprehensive income (loss)

     (11,370,000     4,418,000   
                

Less: Comprehensive income attributable to non-controlling interest

     (527,000     (5,680,000
                

Comprehensive income (loss) attributable to common stockholders

   $ (10,843,000   $ 10,098,000   
                

See accompanying notes to the consolidated financial statements.

 

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PrimeEnergy Corporation

Consolidated Statements of Cash Flows

Nine Months Ended September 30, 2009 and 2008

(Unaudited)

 

     2009     2008  

Cash flows from operating activities:

    

Net income (loss)

   $ (9,967,000   $ 8,822,000   

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

    

Depreciation, depletion, amortization and accretion on discounted liabilities

     31,584,000        50,840,000   

(Gain) loss on sale of properties

     (212,000     (98,000

Unrealized gain on derivative instruments

     (179,000     —     

Provision for deferred taxes

     (4,393,000     1,527,000   

Loss on settlement of asset retirement obligation

     1,722,000        —     

Non-controlling interest in earnings of partnerships

     527,000        5,680,000   

Changes in assets and liabilities:

    

(Increase) decrease in accounts receivable

     8,344,000        (1,081,000

(Increase) decrease in due from related parties

     580,000        7,000   

(Increase) decrease in inventories

     (78,000     327,000   

(Increase) decrease in prepaid expenses and other assets

     909,000        (2,237,000

Increase (decrease) in accounts payable

     (1,768,000     5,595,000   

Increase (decrease) in accrued liabilities

     (94,000     5,178,000   

Increase (decrease) in due to related parties

     103,000        1,185,000   
                

Net cash provided by operating activities:

     27,078,000        75,745,000   
                

Cash flows from investing activities:

    

Capital expenditures, including exploration expense

     (10,055,000     (45,076,000

Proceeds from sale of property and equipment

     212,000        98,000   
                

Net cash (used in) investing activities

     (9,843,000     (44,978,000
                

Cash flows from financing activities:

    

Purchase of treasury stock

     (268,000     (4,425,000

Purchase of non-controlling interests

     (149,000     —     

Proceeds from long-term bank debt and other long-term obligations

     33,899,000        88,075,000   

Repayment of long-term bank debt and other long-term obligations

     (47,249,000     (113,137,000

Distributions to non-controlling interest

     (955,000     (2,765,000
                

Net cash (used in) financing activities

     (14,722,000     (32,252,000
                

Net increase (decrease) in cash and cash equivalents

     2,513,000        (1,485,000

Cash and cash equivalents at the beginning of the period

     11,808,000        25,373,000   
                

Cash and cash equivalents at the end of the period

   $ 14,321,000      $ 23,888,000   
                

See accompanying notes to the consolidated financial statements.

 

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PrimeEnergy Corporation

Notes to Consolidated Financial Statements

September 30, 2009

(1) Interim Financial Statements:

The accompanying consolidated financial statements of PrimeEnergy Corporation (“PEC”), with the exception of the consolidated balance sheet at December 31, 2008, have not been audited by independent public accountants. In the opinion of management, the accompanying financial statements reflect all adjustments necessary to present fairly our financial position at September 30, 2009, net income (loss), comprehensive income (loss) and cash flows for the applicable nine and three months ended September 30, 2009 and 2008. All such adjustments are of a normal recurring nature. Certain amounts presented in prior period financial statements have been reclassified for consistency with current period presentation. The results for interim periods are not necessarily indicative of annual results. Subsequent events have been evaluated through November 12, 2009, which is also the date that the financial statements were issued.

Recently Adopted Accounting Standards

In July 2009, the Financial Accounting Standards Board (FASB) issued Accounting Standards Codification (the Codification), “Generally Accepted Accounting Principles,” establishing the accounting standards codification and the hierarchy of generally accepted accounting principles (GAAP) as the sole source of authoritative non-governmental U.S. GAAP. The Codification was not intended to change U.S. GAAP; however, references to various accounting pronouncements and literature will now differ from what was previously being used in practice. Authoritative literature is now referenced by topic rather than by type of standard. As of July 1, 2009, the FASB no longer issues Statements, Interpretations, Staff Positions or EITF Abstracts. The FASB now communicates new accounting standards by issuing an Accounting Standards Update (ASU). All guidance in the codification has an equal level of authority. The Codification is effective for financial statements that cover interim and annual periods ending after September 15, 2009, and supersedes all accounting standards in U.S. GAAP, aside from those issued by the SEC. There was no impact on the Company’s financial position, results of operations or cash flows as a result of the Codification.

On January 1, 2009, we adopted the guidance “Non-controlling Interests in Consolidated Financial Statements” to establish accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. This guidance defines a non-controlling interest, previously called a minority interest, as the portion of equity in a subsidiary not attributable, directly or indirectly, to a parent. The guidance requires, among other items, that a non-controlling interest be included in the consolidated statement of financial position within equity separate from the parent’s equity; consolidated net income to be reported at amounts inclusive of both the parent’s and non-controlling interest’s shares and, separately, the amounts of consolidated net income attributable to the parent and non-controlling interest all on the consolidated income statement; and if a subsidiary is deconsolidated, any retained non-controlling equity investment in the former subsidiary be measured at fair value and a gain or loss be recognized in net income based on such fair value. The adoption of the guidance resulted in changes to our presentation for non-controlling interests but did not have a material impact on the Company’s results of operations and financial condition. Certain prior period balances have been restated to reflect the changes required by the guidance.

In August 2009, the FASB issued guidance on the measurement of liabilities at fair value. The guidance provides clarification that in circumstances in which a quoted market price in an active market for an identical liability is not available, an entity is required to measure fair value using a valuation technique that uses the quoted price of an identical liability when traded as an asset or, if unavailable, quoted prices for similar liabilities or similar assets when traded as assets. If none of this information is available, an entity should use a valuation technique in accordance with existing fair valuation principles. There was no impact on the Company’s financial position, results of operations or cash flows as a result of the adoption of this guidance.

In April 2009, the FASB amended guidance regarding determining fair value when the volume and level of activity for an asset or liability has significantly decreased and identifying transactions that are not orderly. If an entity determines that either the volume or level of activity for an asset or liability has significantly decreased from normal conditions, or that price quotations or observable inputs are not associated with orderly transactions, increased analysis and management judgment will

 

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PrimeEnergy Corporation

Notes to Consolidated Financial Statements

September 30, 2009

 

be required to estimate fair value. The objective in fair value measurement remains unchanged from what is prescribed in the guidance and should be reflective of the current exit price. Disclosures in interim and annual periods must include inputs and valuation techniques used to measure fair value, along with any changes in valuation techniques and related inputs during the period. In addition, disclosures for debt and equity securities must be provided on a more disaggregated basis. These amendments became effective for interim and annual reporting periods ending after June 15, 2009 and did not have a material impact on the Company’s financial position, results of operations or cash flows.

In April 2009, the FASB amended “Financial Instruments” to require disclosures about fair value of financial instruments for publicly traded companies for both interim and annual periods. Historically, these disclosures were only required annually. The interim disclosures are intended to provide financial statement users with more timely and transparent information about the effects of current market conditions on an entity’s financial instruments that are not otherwise reported at fair value. These amendments became effective for interim reporting periods ending after June 15, 2009. Comparative disclosures are only required for periods ending after the initial adoption. There was no material impact on the Company’s financial position, results of operations or cash flows as a result of the adoption.

In April 2009, the FASB amended the other-than-temporary impairment guidance for debt securities in “Investments-Debt and Equity Securities” to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. There were no amendments made to the recognition and measurement guidance for equity securities, but a new method of recognizing and reporting for debt securities was established. Disclosure requirements for impaired debt and equity securities have been expanded significantly and are now required quarterly, as well as annually. These amendments became effective for interim and annual reporting periods ending after June 15, 2009 and did not have a material impact on the Company’s financial position, results of operations or cash flows. Comparative disclosures are only required for periods ending after the initial adoption.

In June 2009, the FASB amended “Subsequent Events” to require entities to disclose the date through which they have evaluated subsequent events and whether the date corresponds with the release of their financial statements. In addition, a new concept of financial statements being “available to be issued” was introduced. These amendments became effective for interim and annual periods ending after June 15, 2009 and did not have any impact on the Company’s financial position, results of operations or cash flows.

Recently Issued Accounting Pronouncements

In June 2009, the FASB issued changes to “Transfers and Servicing” which will require entities to provide more information about sales of securitized financial assets and similar transactions, particularly if the seller retains some risk to the assets. These changes will be effective at the beginning of the first fiscal year beginning after November 15, 2009. As the Company does not anticipate having any of these types of transactions in the near future, these changes are not expected to have any impact on its financial position, results of operations or cash flows.

In December 2008, the SEC issued Release No. 33-8995, “Modernization of Oil and Gas Reporting,” which amends the oil and gas disclosures for oil and gas producers contained in Regulations S-K and S-X, as well as adding a section to Regulation S-K (Subpart 1200) to codify the revised disclosure requirements in Securities Act Industry Guide 2, which is being phased out. The goal of Release No. 33-8995 is to provide investors with a more meaningful and comprehensive understanding of oil and gas reserves. Energy companies affected by Release No. 33-8995 will be required to price proved oil and gas reserves using the un-weighted arithmetic average of the price on the first day of each month within the 12-month period prior to the end of the reporting period, unless prices are defined by contractual arrangements, excluding escalations based on future conditions. SEC Release No. 33-8995 is effective beginning January 1, 2010. The Company is currently evaluating what impact Release No. 33-8995 may have on its financial position, results of operations or cash flows.

(2) Significant Acquisitions, Dispositions and Property Activity

The Company makes an annual offer to repurchase the interests of the partners and trust unit holders in certain of the Partnerships and Trusts. The Company purchased such interests in an amount totaling $149,000 for the nine months ended September 30, 2009 and $481,000 for the year ended December 31, 2008.

(3) Restricted Cash and Cash Equivalents:

Restricted cash and cash equivalents include $5,111,000 and $8,027,000 at September 30, 2009 and December 31, 2008, respectively, of cash primarily pertaining to undistributed revenue payments. There were corresponding accounts payable recorded at September 30, 2009 and December 31, 2008 for these liabilities.

 

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PrimeEnergy Corporation

Notes to Consolidated Financial Statements

September 30, 2009

 

(4) Additional Balance Sheet Information

Certain balance sheet amounts are comprised of the following:

 

     September 30, 2009     December 31, 2008  

Accounts Receivable:

    

Joint interest billing

   $ 2,226,000      $ 2,244,000   

Trade receivables

     1,578,000        7,270,000   

Oil and gas sales

     6,723,000        8,426,000   

Other

     192,000        608,000   
                
     10,719,000        18,548,000   

Allowance for doubtful accounts

     (806,000     (291,000
                
   $ 9,913,000      $ 18,257,000   
                

Accounts Payable:

    

Trade

   $ 7,042,000      $ 9,753,000   

Royalty and other owners

     9,221,000        13,215,000   

Other

     5,572,000        3,747,000   
                

Total

   $ 21,835,000      $ 26,715,000   
                

Accrued Liabilities:

    

Compensation and related expenses

   $ 2,623,000      $ 2,185,000   

Property cost

     1,010,000        5,582,000   

Income tax

     107,000        504,000   

Other

     1,716,000        2,206,000   
                

Total

   $ 5,456,000      $ 10,477,000   
                

(5) Property and Equipment:

Property and equipment at September 30, 2009 and December 31, 2008 consisted of the following:

 

     September 30,
2009
    December 31,
2008
 

Proved oil and gas properties, at cost

   $ 432,034,000      $ 427,174,000   

Unproved oil and gas properties, at cost

     2,442,000        2,409,000   

Accumulated depletion and depreciation

     (246,378,000     (217,434,000
                
   $ 188,098,000      $ 212,149,000   

Field service equipment and other

     19,431,000        19,513,000   

Accumulated depreciation

     (12,040,000     (11,197,000
                
   $ 7,391,000      $ 8,316,000   
                

Total net property and equipment

   $ 195,489,000      $ 220,465,000   
                

 

12


Table of Contents

PrimeEnergy Corporation

Notes to Consolidated Financial Statements

September 30, 2009

 

(6) Long-Term Bank Debt:

The Company has credit facilities totaling $360 million, consisting of a $200 million credit facility through Guaranty Bank (the offshore facility) and a $160 million credit facility through a syndicate of banks led by Guaranty Bank (the onshore facility). The offshore facility’s maturity date is 2010 and onshore credit facility matures in 2011. On August 21, 2009, Guaranty Bank was closed by the Office of Thrift Suspension. Subsequently, the Federal Deposit Insurance Corporation (FDIC) was named Receiver. All deposit accounts have been transferred to BBVA Compass.

Availability under the credit facilities is based on the loan value assigned to PEC’s oil and gas properties. The determination of the Borrowing Base is made by the lenders taking into consideration the estimated value of PEC’s oil and gas properties in accordance with the lenders’ customary practices for oil and gas loans. This process involves reviewing PEC’s estimated proved reserves and their valuation. The Borrowing Base is re-determined semi-annually, and the available borrowing amount could be increased or decreased as a result of such redetermination. In addition, PEC and the lenders each have discretion at any time to have the Borrowing Base re-determined. A revision to PEC’s reserves may prompt such a request on the part of the lenders, which could possibly result in a reduction in the Borrowing Base and availability under the credit facilities. If outstanding borrowings under either of the credit facilities exceed the applicable portion of the Borrowing Base, PEC would be required to repay the excess amount within a prescribed period. If the Company is unable to pay the excess amount, it would cause an event of default.

The credit facilities include terms and covenants that require the Company to maintain, as defined, a minimum current ratio, tangible net worth, debt coverage ratio and interest coverage ratio, and restrictions are placed on the payment of dividends and the amount of treasury stock the Company may purchase. The credit facilities are collateralized by substantially all of the Company’s assets. The Company is required to mortgage, and grant a security interest in, consolidated proved oil and gas properties. PEC also pledged the stock of several subsidiaries to the lenders to secure the credit facilities.

During June 2009 the Borrowing Base of the credit facility was amended. The onshore facility Borrowing Base was reduced to $100 million with a subsequent monthly Borrowing Base reduction of $2 million which is scheduled to begin December 1, 2009. The offshore facility Borrowing Base was reduced to $10 million with a principal payment of $3.37 million paid on July 1, 2009 followed by monthly payments and Borrowing Base reduction of $500,000 which began in August 2009. The Company’s borrowing rates, in both facilities, have a floor of 2% plus applicable margin rates that vary between 3% to 5%, depending on which facility, the value of current borrowing and the actual available Borrowing Base.

At September 30, 2009, the borrowing base was $100 million and the outstanding balance of the Company’s bank debt was $85.6 million under the onshore credit facility at a weighted average interest rate of 5.21%. Under the offshore credit facility, the outstanding balance was $8.5 million, with no further availability, at a weighted average interest rate of 5.22%. Total outstanding bank debt was $94.1 million at September 30, 2009. The combined average interest rates paid on outstanding bank borrowings subject to interest at the bank’s base rate and on outstanding bank borrowings bearing interest based upon the LIBO rate were 5.21% during 2009 as compared to 5.72% during 2008.

The Company entered into interest rate hedge agreements to help manage interest rate exposure. These contracts include interest rate swaps. Interest rate swap transactions generally involve the exchange of fixed and floating rate interest payment obligations without the exchange of the underlying principal amounts. The Company entered into interest swap agreements for a period of two years, beginning in April 2008, related to $60 million of Company bank debt resulting in a fixed rate of 2.375% plus the Company’s current applicable margin. The underlying debt contracts above are re-priced quarterly based upon the three-month LIBO rates, the Company’s floor of 2% and the applicable margin per the onshore credit facility.

Indebtedness to related parties—non-current:

During the second quarter 2008, the Company’s offshore subsidiary entered into a subordinated credit facility with a private lender with an availability of $50 million. The private lender had specific collateral pledged under a separate credit agreement. The private lender is a member of the Company’s Board of Directors. Effective June 30, 2009, the private lender agreed to release the pledged collateral under this credit facility in favor of the offshore credit facility in exchange for a second lien position on all of the assets of the offshore subsidiary and a pledge from PEC to pay the outstanding balance under the facility in full after PEC’s current bank debt is paid off and not take on any additional debt on its existing asset base. This amended facility will mature in January 2012, which will be accelerated if there is a change in control or management of PrimeEnergy Corporation, and bears interest at a rate of 10% per annum. As of September 30, 2009 advances from this facility amounted to $20 million.

 

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PrimeEnergy Corporation

Notes to Consolidated Financial Statements

September 30, 2009

 

(7) Other Long-Term Obligations and Commitments:

Operating Leases:

The Company has several non-cancelable operating leases, primarily for rental of office space, that have a term of more than one year.

 

     Operating Leases

2009 (October 1 through December 31,)

   $ 170,000

2010

     743,000

2011

     384,000

2012

     121,000

Thereafter

     —  
      

Total minimum payments

   $ 1,418,000
      

Asset Retirement Obligation:

A reconciliation of the liability for plugging and abandonment costs for the nine months ended September 30, 2009 and the year ended December 31, 2008 is as follows:

 

     September 30,
2009
    December 31,
2008
 

Asset retirement obligation – beginning of period

   $ 19,541,000      $ 17,361,000   

Liabilities incurred

     —          627,000   

Liabilities settled

     (1,617,000     (1,292,000

Accretion expense

     1,278,000        1,395,000   

Revisions in estimated liabilities

     —          1,450,000   
                

Asset retirement obligation – end of period

   $ 19,202,000      $ 19,541,000   
                

The Company’s liability is determined using significant assumptions, including current estimates of plugging and abandonment costs, annual inflation of these costs, the productive life of wells and the risk-adjusted interest rate. Changes in any of these assumptions can result in significant revisions to the estimated asset retirement obligation. Revisions to the asset retirement obligation are recorded with an offsetting charge to producing properties, resulting in prospective changes to depreciation, depletion and amortization expense and accretion of discount. Because of the subjectivity of assumptions and the relatively long life of most of the wells, the costs to ultimately retire the wells may vary significantly from previous estimates.

(8) Contingent Liabilities:

PrimeEnergy Management Corporation, a wholly-owned subsidiary, acts as the managing general partner for 18 limited partnerships and 2 trusts (collectively, the “Partnerships”). The Company, as managing general partner of the affiliated Partnerships, is responsible for all Partnership activities, including the drilling of development wells and the production and sale of oil and gas from productive wells. The Company also provides the administration, accounting and tax preparation work for the Partnerships, and 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 of September 30, 2009, the affiliated Partnerships have established cash reserves in excess of their debts and liabilities and the Company believes these reserves will be sufficient to satisfy Partnership obligations.

The Company is subject to environmental laws and regulations. Management believes that future expenses, before recoveries from third parties, if any, will not have a material effect on the Company’s financial condition. This opinion is based on expenses incurred to date for remediation and compliance with laws and regulations which have not been material to the Company’s results of operations.

From time to time, the Company is party to certain legal actions and claims arising in the ordinary course of business. While the outcome of these events cannot be predicted with certainty, management does not expect these matters to have a materially adverse effect on the financial position or results of operations of the Company.

(9) Stock Options and Other Compensation:

In May 1989, non-statutory stock options were granted by the Company to four key executive officers for the purchase of shares of common stock. At September 30, 2009 and December 31, 2008, options on 767,500 were outstanding and exercisable at prices ranging from $1.00 to $1.25, and having no expiration date.

 

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PrimeEnergy Corporation

Notes to Consolidated Financial Statements

September 30, 2009

 

(10) Related Party Transactions:

The Company makes an annual offer to repurchase the interests of the partners and trust unit holders in certain of the Partnerships and Trusts. The Company purchased such interests in an amount totaling $149,000 for the nine months ending September 30, 2009 and $481,000 for the year ending December 31, 2008.

Treasury stock purchases in any reported period may include shares acquired from a related party. There were no related party treasury stock purchases during the nine month period ending September 30, 2009. Purchases from related parties in 2008 included 70,000 shares purchased for a total consideration of $3,500,000.

Receivables from related parties consist of reimbursable general and administrative costs, lease operating expenses and reimbursement for property development and related costs. These receivables are due from joint venture partners, which may include members of the Company’s Board of Directors.

Payables owed to related parties primarily represent receipts collected by the Company as agent for the joint venture partners, which may include members of the Company’s Board of Directors, for oil and gas sales net of expenses. Also included in due to related parties is the amount of accrued interest owed to the related party, a member of the Company’s Board of Directors, with whom the Company’s offshore subsidiary entered into a credit agreement. The agreement provides for a loan of $20 million at a rate of 10% annum and is secured by a second lien position of all of the assets of the offshore subsidiary. Included at September 30, 2009 was $164,000 of accrued interest on the related party loan.

(11) Financial Instruments

Fair Value Measurements:

The FASB Codification established a formal framework for measuring fair values of assets and liabilities in financial statements that are already required by GAAP to be measured at fair value. As defined in the Codification, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The transaction is based on a hypothetical transaction in the principal or most advantageous market considered from the perspective of the market participant that holds the asset or owes the liability.

The Company utilizes market data or assumptions that market participants who are independent, knowledgeable and willing and able to transact would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated or generally unobservable. The Company attempts to utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. The Company is able to classify fair value balances based on the observability of those inputs. The Codification establishes a formal fair value hierarchy based on the inputs used to measure fair value. The hierarchy gives the highest priority to level 1 measurements and the lowest priority to level 3 measurements, and accordingly, level 1 measurement should be used whenever possible. For further information regarding the fair value hierarchy, refer to Note 11 of the Notes to the Consolidated Financial Statements in the Company’s Form 10-K for the year ended December 31, 2008.

In accordance with the Codification, the Company has classified its assets and liabilities into these levels depending upon the data relied on to determine the fair values. The fair values of the Company’s interest rate swaps, natural gas and crude oil price collars and swaps are designated as Level 3. The following fair value hierarchy table presents information about the Company’s assets and liabilities measured at fair value on a recurring basis as of September 30, 2009:

 

     Quoted Prices in
Active Markets
For Identical
Assets (Level 1)
   Significant
Other
Observable
Inputs (Level 2)
   Significant
Unobservable
Inputs (Level 3)
    Balance as of
September 30,
2009
 

Assets:

          

Commodity derivative contracts

         $ 472,000      $ 472,000   
                      

Total assets

         $ 472,000      $ 472,000   
                      

Liabilities:

          

Commodity derivative contracts

         $ (515,000   $ (515,000

Interest rate derivative contracts

   —      —        (394,000     (394,000
                      

Total liabilities

   —      —      $ (909,000   $ (909,000
                      

 

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Table of Contents

PrimeEnergy Corporation

Notes to Consolidated Financial Statements

September 30, 2009

 

The following table sets forth a reconciliation of changes in the fair value of financial assets and liabilities classified as level 3 in the fair value hierarchy.

 

Net assets as of January 1, 2009

   $ 1,578,000   

Total realized and unrealized losses:

  

Included in earnings (a)

     611,000   

Included in other comprehensive income

     (2,805,000

Purchases, sales, issuances and settlements, net

     179,000   
        

Net liabilities as of September 30, 2009

   $ (437,000
        

 

(a) Amounts reported in net income are classified as oil and gas sales for commodity derivative instruments reported as cash flow hedges prior to July 1, 2009 and as a reduction to interest expense for interest rate swap instruments. Derivative instruments for periods after July 1, 2009 will be reported in oil and gas sales as realized gain/loss and on a separately reported line item captioned unrealized gain/loss on derivative instruments.

Assuming no change in interest prices, after September 30, 2009, the Company would expect to reclassify to the Statement of Operations, over the next 12 months, $394,000 in after-tax loss associated with interest rate swaps. This reclassification represents the net short-term payable associated with open swaps currently not reflected in earnings at September 30, 2009 related to anticipate interest expense.

Derivative Instruments:

In March 2008, the FASB issued guidance and amended the disclosure requirements of “Derivatives and Hedging.” Entities are now required to provide greater transparency about how and why the entity uses derivative instruments, how the instruments and related hedged items are accounted for under the Codification and how the instruments and related hedged items affect the financial position, results of operations and cash flows of the entity.

The Company is exposed to commodity price and interest rate risk, and management considers periodically the Company’s exposure to cash flow variability resulting from the commodity price changes and interest rate fluctuations. Futures, swaps and options are used to manage the Company’s exposure to commodity price risk inherent in the Company’s oil and gas production operations. The Company does not apply hedge accounting to any of its commodity based derivatives. The application of hedge accounting for commodities was discontinued for periods after July 1, 2009. As a result, both realized and unrealized gains and losses associated with derivative instruments are recognized in earnings. If the derivatives previously reported as cash flow hedges had losses or gains not yet settled, these items would be reported in accumulated other comprehensive income until settlement occurs and reclassified appropriately from accumulated other comprehensive income into the statement of operations.

Interest rate swaps derivatives continue to be treated as cash-flow hedges and are used to fix or float interest rates on existing debt. The value of these interest rate swaps at September 30, 2009 is located in accumulated other comprehensive income and settlement of the swaps is recorded within interest expense.

 

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Table of Contents

PrimeEnergy Corporation

Notes to Consolidated Financial Statements

September 30, 2009

 

Effect of derivative instruments on the Consolidated Balance Sheet:

 

    

Asset Derivatives

  

Liability Derivatives

 
    

Balance Sheet Location

   Fair Value   

Balance Sheet Location

   Fair Value  

Derivatives designated as cash-flow hedges

           

Interest Rate Swap Derivatives

      $ —      Derivative liability short term    $ (616,000
                     

Derivatives not designated as cash-flow hedge instruments

           

Natural Gas Commodity Contracts

   Current derivative contracts      37,000      

Natural Gas Commodity Contracts

   Other assets      13,000      

Natural Gas Commodity Contracts

         Derivative liability short term      (136,000

Natural Gas Commodity Contracts

         Derivative liability long term      (45,000

Crude Oil Commodity Contracts

   Current derivative contracts      115,000      

Crude Oil Commodity Contracts

   Other assets      64,000      

Crude Oil Commodity Contracts

   Current derivative contracts      243,000      

Crude Oil Commodity Contracts

         Derivative liability long term      (112,000
                     
      $ 472,000       $ (909,000
                     

Effect of derivative instruments on the Consolidated Statement of Operations:

 

    

Location of gain/loss reclassified
from OCI into income

   Amount of gain/loss
reclassified from accumulated
OCI into income
 

Derivatives designated as cash-flow hedges

     

Interest Rate Swap Derivatives

   Interest expense    $ (564,000

Crude Oil Commodity Contracts

   Oil and gas sales      1,519,000   
           
      $ 955,000   
           
    

Location of gain/loss recognized in
income

   Amount of gain/loss
recognized in income
 

Derivatives not designated as cash-flow hedge instruments

     

Natural Gas Commodity Contracts

   Gain on derivative instruments    $ (131,000

Crude Oil Commodity Contracts

   Gain on derivative instruments    $ 310,000   
           
      $ 179,000   
           

 

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Table of Contents

PrimeEnergy Corporation

Notes to Consolidated Financial Statements

September 30, 2009

 

(12) Earnings (Loss) Per Share:

Basic earnings (loss) per share are computed by dividing earnings available or loss attributable to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflect earnings 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:

 

     Nine Months Ended September 30, 2009     Nine Months Ended September 30, 2008
     Net
Income/(loss)
    Number of
Shares
   Per Share
Amount
    Net Income    Number of
Shares
   Per Share
Amount

Net income (loss) per common share

   $ (9,967,000   3,040,675    $ (3.28   $ 8,822,000    3,066,684    $ 2.88

Effect of dilutive securities:

               

Options

             754,030   
                                       

Diluted net income (loss) per common share

   $ (9,967,000   3,040,675    $ (3.28   $ 8,822,000    3,820,714    $ 2.31
                                       

 

     Three Months Ended September 30, 2009     Three Months Ended September 30, 2008
     Net
Income/(loss)
    Number of
Shares
   Per Share
Amount
    Net Income    Number of
Shares
   Per Share
Amount

Net income (loss) per common share

   $ (2,315,000   3,036,446    $ (.76   $ 2,072,000    3,050,331    $ 0.68

Effect of dilutive securities:

               

Options

             755,496   
                                       

Diluted net income (loss) per common share

   $ (2,315,000   3,036,446    $ (.76   $ 2,072,000    3,805,827    $ 0.54
                                       

 

(a) The dilutive effect of 767,500 outstanding stock purchase options is not considered for the nine and three month periods ended September 30, 2009, due to the losses incurred for such periods.

 

(13) Shareholder’s Equity:

The Company has in place a stock repurchase program whereby it may purchase outstanding shares of its common stock from time-to-time, in open market transactions or negotiated sales. The Company uses the cost method to account for its treasury share purchases. Effective July 1, 2009, pursuant to a vote of the shareholders amending the Articles of Incorporation, the authorized shares of common stock were reduced from 10,000,000 to 4,000,000, and the class of Preferred Stock of the Company, no shares of which have been issued, was eliminated. The amendment was filed with the Secretary of State in Delaware. The cost of the cancelled shares was determined by use of the first-in, first-out valuation method. The cost of the reacquired shares was $11,936,000. The cost was allocated between the par value ($0.10) of the shares cancelled; the excess of cost over the par value to paid in capital based upon the average per share amount of paid in capital ($1.43) for all shares from the original issuance; and the excess was charged to retained earnings.

 

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Table of Contents
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

Cash flow provided by operations for the nine month period ended September 30, 2009 was $27,078,000. Excluding the effects of significant unforeseen expenses or other income, our cash flow from operations fluctuates primarily because of variations in oil and gas production and prices or changes in working capital accounts. Our oil and gas production will vary based on actual well performance but may be curtailed due to factors beyond our control. Hurricanes in the Gulf of Mexico may shut down our production for the duration of the storm’s presence in the Gulf or damage production facilities so that we cannot produce from a particular property for an extended amount of time. In addition, downstream activities on major pipelines in the Gulf of Mexico can also cause us to shut-in production for various lengths of time.

Our realized oil and gas prices vary due to world political events, supply and demand of products, product storage levels, and weather patterns. We sell the vast majority of our production at spot market prices. Accordingly, product price volatility will affect our cash flow from operations. To mitigate price volatility we sometimes lock in prices for some portion of our production through the use of financial instruments. The Company is a participant in nine oil and three gas commodity derivative financial instruments which were effective prior to September 30, 2009.

 

Commodity

 

Derivative

Type

 

Contract

Price

  

Total

Volumes

  

Contract

Period

Crude Oil

  Collar   $60.00 / 77.40    57,000 bbls    2009

Crude Oil

  Collar   $65.00 / 86.50    12,000 bbls    2009

Crude Oil

  Collar   $65.00 / 80.90    204,000 bbls    2010

Crude Oil

  Collar   $65.00 / 84.14    36,000 bbls    2010

Crude Oil

  Collar   $65.00 / 84.00    45,000 bbls    2011

Crude Oil

  Collar   $70.00 / 81.80    120,000 bbls    2010

Crude Oil

  Collar   $70.00 / 86.30    30,999 bbls    2011

Crude Oil

  Collar   $70.00 / 89.30    227,997 bbls    2011

Crude Oil

  Collar   $70.00 / 92.85    168,000 bbls    2012

Natural Gas

  Swap   $6.04    1,200,000 mmbtu    2010

Natural Gas

  Swap   $6.13    600,000 mmbtu    2010

Subsequent to the quarter end, the Company entered into two gas and one oil commodity derivative financial instruments listed in the table set forth below.

 

Commodity

  

Derivative

Type

  

Contract

Price

  

Total

Volumes

  

Contract

Period

Crude Oil

   Collar    $70.00 / 111.80    108,000 bbls    2012

Crude Oil

   Collar    $80.00 / 97.50    240,000 bbls    2013

Natural Gas

   Swap    $6.06    600,000 mmbtu    2010

Natural Gas

   Swap    $6.81    480,000 mmbtu    2011

The Company’s activities include development and exploratory drilling. The Company’s strategy is to develop a balanced portfolio of drilling prospects that includes lower risk wells with a high probability of success and higher risk wells with greater economic potential.

The Company’s strategy in 2009 is to continue to reduce its outstanding debt which decreased by $30,860,000 in 2008 and approximately $10 million in 2009. This decreased leveraged position will better provide the Company the ability to participate in a significant acquisition, should the opportunity arise this year.

The Company has in place both a stock repurchase program and a limited partnership interest repurchase program. Spending under these programs in 2008 was $5.03 million. The Company expects to expend substantially less in 2009 because of the drop in energy prices. For the nine months ended September 30, 2009, the Company spent only $417,000 under these programs.

 

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Table of Contents
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

 

The Company currently maintains two bank credit facilities totaling $360 million, with a combined current borrowing base of $110 million. The bank reviews the borrowing base semi-annually and, at their discretion, may decrease or propose an increase to the borrowing base relative to a redetermined estimate of proved oil and gas reserves. Our oil and gas properties are pledged as collateral for the line of credit and we are subject to certain financial covenants defined in the agreement. We are currently in compliance with these financial covenants. If we do not comply with these covenants on a continuing basis, the lenders have the right to refuse to advance additional funds under the facility and/or declare all principal and interest immediately due and payable.

In April 2008, the Company entered into an amended and restated credit agreement related to the offshore credit facility allowing for a subordinated credit facility with a private lender and the release of certain collateral which was then pledged to the new lender under a separate credit agreement.

Effective June 30, 2009, the private lender agreed to release the pledged collateral under this credit facility in favor of the offshore credit facility in exchange for a second lien position on all of the assets of the offshore subsidiary and a pledge from PEC to not take on any additional debt in excess of $112 million on its existing onshore asset base. This amended facility will mature in January 2012, which will be accelerated if there is a change in control or management of PrimeEnergy Corporation, and bears interest at a rate of 10% per annum.

It is the goal of the Company to increase its oil and gas reserves and production through the acquisition and development of both onshore and offshore oil and gas properties. The Company also continues to explore and consider opportunities to further expand its oilfield servicing revenues through additional investment in field service equipment. However, the majority of the Company’s capital spending is discretionary, and the ultimate level of expenditures will be dependent on the Company’s assessment of the oil and gas business environment, the number and quality of oil and gas prospects available, the market for oilfield services, and oil and gas business opportunities in general.

RESULTS OF OPERATIONS

Revenues and net income (loss) during the nine month period ended September 30, 2009, as compared to the same periods in 2008 reflect the increased oil and decreased gas sales, presented below, offset by depreciation and depletion of oil and gas properties. The table summarizes production volumes and average sales prices realized (including realized gains and losses from derivatives).

 

     Nine Months Ended September 30,     Three Months Ended September 30,  
     2009    2008    Increase /
(Decrease)
    2009    2008    Increase /
(Decrease)
 

Barrels of Oil Produced

     495,000      469,000      26,000        154,000      149,000      5,000   

Average Price Received

   $ 55.20    $ 95.05    $ (39.85   $ 65.45    $ 96.89    $ (31.44
                                            

Oil Revenue

   $ 27,324,000    $ 44,577,000    $ (17,253,000   $ 10,080,000    $ 14,437,000    $ (4,357,000
                                            

Mcf of Gas Produced

     5,425,000      6,838,000      (1,413,000     1,752,000      2,115,000      (363,000

Average Price Received

   $ 4.18    $ 9.36    $ (5.18   $ 4.19    $ 9.21    $ (5.02
                                            

Gas Revenue

   $ 22,651,000    $ 63,997,000    $ (41,346,000   $ 7,346,000    $ 19,489,000    $ (12,143,000
                                            

Total Oil & Gas Revenue

   $ 49,975,000    $ 108,574,000    $ (58,599,000   $ 17,426,000    $ 33,926,000    $ (16,500,000
                                            

Oil and gas prices received excluding the impact of derivatives were:

 

     Nine Months Ended September 30,     Three Months Ended September 30,  
     2009    2008    Increase /
(Decrease)
    2009    2008    Increase /
(Decrease)
 

Oil Price

   $ 52.13    $ 111.46    $ (59.33   $ 65.44    $ 116.19    $ (50.75

Gas Price

   $ 4.18    $ 9.95    $ (5.77   $ 4.19    $ 10.22    $ (6.03

The increase in oil production is due to properties added during 2008 from our 2008 West Texas drilling program offset by the natural decline of existing properties. The decrease in gas production is primarily due to the natural decline of the offshore properties.

Lease operating expense for the nine months of 2009 decreased by $7,259,000, or 22%, compared to 2008 due to overall price decreases in oil field services combined with reduced production taxes related to reduced commodity prices.

General and administrative expenses decreased $2,686,000, or 24%, in the first nine months of 2009 as compared to 2008 due to reductions in personnel costs.

 

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Field Service income and expense for the nine months of 2009 decreased $5,837,000 and $3,120,000, or 31% and 21%, respectively, compared to 2008. These decreases reflect lower rates, utilization and labor costs during 2009.

Depreciation, depletion and amortization expense for the first nine months of 2009 decreased to $31,584,000 in 2009 from $50,840,000 in 2008. This decrease is primarily related to the decrease in offshore production during the first nine months of 2009.

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.

 

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is a smaller reporting company and no response is required pursuant to this Item.

 

Item 4. CONTROLS AND PROCEDURES

As of the end of the current reported period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rules 13a-15 and 15d-15 of the Securities Exchange Act of 1934 (the “Exchange Act”). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective, in all material respects, with respect to the recording, processing, summarizing and reporting, within the time periods specified in the Commission’s rules and forms, of information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act.

There were no significant changes in the Company’s internal control over financial reporting that occurred during the third quarter of 2009 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II—OTHER INFORMATION

 

Item 1. LEGAL PROCEEDINGS

Not Applicable

 

Item 1A. RISK FACTORS

The Company is a smaller reporting company and no response is required pursuant to this Item.

 

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

There were no sales of equity securities by the Company during the period covered by this report.

During the nine months ended September 30, 2009, the Company purchased the following shares of common stock as treasury shares.

 

Name

   Number of Shares    Average Price
Paid per share
   Maximum
Number of Shares
that May Yet Be
Purchased Under
The Plan (1)

January

   1,803    $ 42.82    194,920

February

   2,209    $ 34.18    192,711

March

   1,824    $ 39.38    190,887

April

   946    $ 45.77    189,941

May

   —        —      189,941

June

   —      $ —      189,941

July

   —      $ —      189,941

August

   —      $ —      189,941

September

   —      $ —      189,941
          

Total/Average

   6,782    $ 39.49   
          

 

(1) In December 1993, we announced that our board of directors authorized a stock repurchase program whereby we may purchase outstanding shares of our common stock from time-to-time, in open market transactions or negotiated sales. A total of 2,700,000 shares have been authorized, to date, under this program. Through September 30, 2009 we repurchased a total of 2,510,059 shares under this program for $33,928,627 at an average price of $13.52 per share. Additional purchases may occur as market conditions warrant. We expect future purchases will be funded with internally generated cash flow or from working capital.

 

Item 3. DEFAULTS UPON SENIOR SECURITIES

None

 

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

 

Item 5. OTHER INFORMATION

None

 

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Item 6. EXHIBITS

The following exhibits are filed as a part of this Report:

 

Exhibit No.

    
3.1    Restated Certificate of Incorporation of PrimeEnergy Corporation (effective July 1, 2009) (Incorporated by reference to Exhibit 3.1 to PrimeEnergy Corporation Form 10-Q for the quarter ended June 30, 2009)
3.2    Bylaws of PrimeEnergy Corporation (Incorporated by reference to Exhibit 3.2 of PrimeEnergy Corporation Form 10-K for the year ended December 31, 2004)
10.3.1    Adoption Agreement #003 dated 4/23/2002, MassMutual Life Insurance Company Flexinvest Prototype Non-Standardized 401(k) Profit-Sharing Plan; EGTRRA Amendment to the PrimeEnergy employees 401(k) Savings Plan; MassMutual Retirement Services Flexinvest Defined Contribution Prototype Plan; Protected Benefit Addendum; Addendum to the Administrative Services Agreement Loan Agreement; Addendum to Administrative Services Agreement GUST Restatement Provisions; General Trust Agreement (Incorporated by reference to Exhibit 10.3.1 of PrimeEnergy Corporation Form 10-K for the year ended December 31, 2002)
10.3.2    First Amendment to the PrimeEnergy Corporation Employees 401(k) Savings Plan (Incorporated by reference to Exhibit 10.3.2 of PrimeEnergy Corporation Form 10-K for the year ended December 31, 2006)
10.4    Amended and Restated Agreement of Limited Partnership, FWOE Partners L.P., dated as of August 22, 2005 (Incorporated by reference to Exhibit 10.3 of PrimeEnergy Corporation Form 8-K for events of August 22, 2005)
10.4.1    Contribution Agreement between F-W Oil Exploration L.L.C. and FWOE Partners L.P. dated as of August 22, 2005 (Incorporated by reference to exhibit 10.4 of PrimeEnergy Corporation Form 8-K for events of August 22, 2005)
10.18    Composite copy of Non-Statutory Option Agreements (Incorporated by reference to Exhibit 10.18 of PrimeEnergy Corporation Form 10-K for the year ended December 31, 2004)
10.22.5    Amended and Restated Credit Agreement among PrimeEnergy Corporation, PrimeEnergy Management Corporation, Prime Operating Company, Eastern Oil Well Service Company, Southwest Oilfield Construction Company, EOWS Midland Company and Guaranty Bank, FSB as Agent and Letter of Credit Issuer and BNP Paribas, as Co-Documentation Agent and JPMorgan Chase Bank, N.A., as Co-Documentation Agent and the Lenders Signatory hereto, December 28, 2006 (Incorporated by reference to Exhibit 10.22.5 of PrimeEnergy Corporation Form 10-K for the year ended December 31, 2006)
10.22.5.1    Letter from BNP Paribas regarding Amended and Restated Credit Agreement effective as of December 28, 2006, among PrimeEnergy Corporation, et al, and Guaranty Bank, FSB (Incorporated by reference to Exhibit 10.22.5.1 of PrimeEnergy Corporation Form 10-K for the year ended December 31, 2006)
10.22.5.2    First Amendment to Amended and Restated Credit Agreement between PrimeEnergy Corporation, PrimeEnergy Management Corporation, Prime Operating Company, Eastern Oil Well Service Company, Southwest Oilfield Construction Company, EOWS Midland Company and Guaranty Bank, FSB as Agent and Letter of Credit Issuer BNP Paribas, as Co-Documentation Agent and JPMorgan Chase Bank, N.A. as Co-Documentation Agent and the Lenders Signatory Hereto, dated July 17, 2007. (Incorporated by reference to Exhibit 10.22.5.2 of PrimeEnergy Corporation Form 10-K for the year ended December 31, 2008)

 

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10.22.5.3    Second Amendment to Amended and Restated Credit Agreement between PrimeEnergy Corporation, PrimeEnergy Management Corporation, Prime Operating Company, Eastern Oil Well Service Company, Southwest Oilfield Construction Company, EOWS Midland Company and Guaranty Bank, FSB as Agent and Letter of Credit Issuer BNP Paribas, as Co-Documentation Agent and JPMorgan Chase Bank, N.A. as Co-Documentation Agent and the Lenders Signatory Hereto, dated October 9, 2007. (Incorporated by reference to Exhibit 10.22.5.3 of PrimeEnergy Corporation Form 10-K for the year ended December 31, 2008)
10.22.5.4    Third Amendment to Amended and Restated Credit Agreement between PrimeEnergy Corporation, PrimeEnergy Management Corporation, Prime Operating Company, Eastern Oil Well Service Company, Southwest Oilfield Construction Company, EOWS Midland Company and Guaranty Bank, FSB as Agent and Letter of Credit Issuer and the Lenders Signatory Hereto, effective January 22, 2008. (Incorporated by reference to Exhibit 10.22.5.4 of PrimeEnergy Corporation Form 10-K for the year ended December 31, 2008)
10.22.5.5    Fourth Amendment to Amended and Restated Credit Agreement between PrimeEnergy Corporation, PrimeEnergy Management Corporation, Prime Operating Company, Eastern Oil Well Service Company, Southwest Oilfield Construction Company, EOWS Midland Company and Guaranty Bank, FSB as Agent and Letter of Credit Issuer and the Lenders Signatory Hereto, effective February 8, 2008. (Incorporated by reference to Exhibit 10.22.5.5 of PrimeEnergy Corporation Form 10-K for the year ended December 31, 2008)
10.22.5.6    Fifth Amendment to Amended and Restated Credit Agreement between PrimeEnergy Corporation, PrimeEnergy Management Corporation, Prime Operating Company, Eastern Oil Well Service Company, Southwest Oilfield Construction Company, EOWS Midland Company and Guaranty Bank, FSB as Agent and Letter of Credit Issuer and the Lenders Signatory Hereto, effective October 30, 2008. (Incorporated by reference to Exhibit 10.22.5.6 of PrimeEnergy Corporation Form 10-K for the year ended December 31, 2008)
10.22.5.7    Sixth Amendment to Amended and Restated Credit Agreement Among PrimeEnergy Corporation, PrimeEnergy Management Corporation, Prime Operating Company, Eastern Oil Well Service Company, Southwest Oilfield Construction Company, EOWS Midland Company and Guaranty Bank, FSB, as Agent and Letter of Credit Issuer and the Lenders Signatory Hereto, effective June 19, 2009. (Incorporated by reference to Exhibit 10.22.5.7 to PrimeEnergy Corporation Form 10-Q for the quarter ended June 30, 2009)
10.23.2    Amended and Restated Security Agreement between PrimeEnergy Corporation, PrimeEnergy Management Corporation, Prime Operating Company, Eastern Oil Well Service Company, Southwest Oilfield Construction Company, EOWS Midland Company, (debtor) and Guaranty Bank, FSB as Agent (secured party) December 28, 2006 (Incorporated by reference to Exhibit 10.23.2 of PrimeEnergy Corporation Form 10-K for the year ended December 31, 2006)
10.23.3    Amended and Restated Security Agreement (Membership Pledge) by PrimeEnergy Corporation in favor of Guaranty Bank, FSB as Agent December 28, 2006 (Incorporated by reference to Exhibit 10.23.3 of PrimeEnergy Corporation Form 10-K for the year ended December 31, 2006)
10.23.4    Amended and Restated Security Agreement between PrimeEnergy Corporation, PrimeEnergy Management Corporation, Prime Operating Company, Eastern Oil Well Service Company, Southwest Oilfield Construction Company, EOWS Midland Company, (debtor) and Guaranty Bank, FSB as Agent (secured party) December 28, 2006 (Incorporated by reference to Exhibit 10.23.4 of PrimeEnergy Corporation Form 10-K for the year ended December 31, 2006)
10.23.5    Amended and Restated Security Agreement between Eastern Oil Well Service Company, EOWS Midland Company, (debtor) and Guaranty Bank, FSB as Agent (secured party) December 28, 2006 (Incorporated by reference to Exhibit 10.23.5 of PrimeEnergy Corporation Form 10-K for the year ended December 31, 2006)
10.23.6    Security Agreement between Eastern Oil Well Service Company, EOWS Midland Company, (debtor) and Guaranty Bank, FSB as Agent (secured party) December 28, 2006 (Incorporated by reference to Exhibit 10.23.6 of PrimeEnergy Corporation Form 10-K for the year ended December 31, 2006)
10.23.7    Amended and Restated Security Agreement between Southwest Oilfield Construction Company, (debtor) and Guaranty Bank, FSB as Agent (secured party) December 28, 2006 (Incorporated by reference to Exhibit 10.23.7 of PrimeEnergy Corporation Form 10-K for the year ended December 31, 2006)

 

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10.23.8    Amended and Restated Security Agreement effective between EOWS Midland Company, (debtor) and Guaranty Bank, FSB as Agent (secured party) December 28, 2006 (Incorporated by reference to Exhibit 10.23.8 of PrimeEnergy Corporation Form 10-K for the year ended December 31, 2006)
10.25    Credit Agreement dated as of June 1, 2006 (but effective for all purposes as of August 22, 2005), between Prime Offshore L.L.C. as Borrower and PrimeEnergy Corporation as Lender (Incorporated by reference to Exhibit 10.25 of PrimeEnergy Corporation Form 10-K for the year ended December 31, 2006)
10.26.1    Subordination Agreement effective as of June 29, 2006, between Prime Offshore L.L.C., PrimeEnergy Corporation, and Guaranty Bank, FSB (Incorporated by reference to Exhibit 10.26.1 of PrimeEnergy Corporation Form 10-K for the year ended December 31, 2006)
10.26.2    Amended and Restated Credit Agreement among Prime Offshore L.L.C. between Guaranty Bank, FSB, as agent and the Lenders party hereto effective March 31, 2008. (Incorporated by reference to Exhibit 10.26.2 to PrimeEnergy Corporation Form 10-Q for the quarter ended June 30, 2008)
10.26.3    Consent, Waiver and First Amendment to Amended and Restated Credit Agreement Among Prime Offshore L.L.C., Guaranty Bank, FSB, as Agent and the Lenders Party Hereto, effective June 30, 2009. (Incorporated by reference to Exhibit 10.26.3 to PrimeEnergy Corporation Form 10-Q for the quarter ended June 30, 2009)
10.27    Security Agreement effective June 29, 2006 between Prime Offshore L.L.C., and Guaranty Bank, FSB (debtor) and Guaranty Bank, FSB as Agent (secured party) (Incorporated by reference to Exhibit 10.27 of PrimeEnergy Corporation Form 10-K for the year ended December 31, 2006)
10.27.1    Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production from Prime Offshore L.L.C. for the benefit of Guaranty Bank, FSB, Agent, effective June 30, 2009. (Incorporated by reference to Exhibit 10.27.1 to PrimeEnergy Corporation Form 10-Q for the quarter ended June 30, 2009)
10.27.2    Pledge Agreement as of June 29, 2006, between Guaranty Bank, FSB and Prime Offshore L.L.C. (Incorporated by reference to Exhibit 10.27.2 of PrimeEnergy Corporation Form 10-K for the year ended December 31, 2006)
10.27.3    Subordinated Promissory Note dated effective March 31, 2008 in the face principal amount of up to $50,000,000 executed by Prime Offshore L.L.C. and payable to Artic Management Corporation. (Incorporated by reference to Exhibit 10.27.3 to PrimeEnergy Corporation Form 10-Q for the quarter ended June 30, 2008)
10.27.3.1    Loan Modification effective 30th day of June, 2009 by and between Artic Management Corporation, Prime Offshore L.L.C. and PrimeEnergy Corporation. (Incorporated by reference to Exhibit 10.27.3.1 to PrimeEnergy Corporation Form 10-Q for the quarter ended June 30, 2009)
10.27.4    Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production Dated effective as of March 31, 2008 from Prime Offshore L.L.C. to Mathias Eckenstein TTEE for Artic Management Corporation (first lien). (Incorporated by reference to Exhibit 10.27.4 to PrimeEnergy Corporation Form 10-Q for the quarter ended June 30, 2008)
10.27.5    Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production Dated effective as of March 31, 2008 from Prime Offshore L.L.C. to Mathias Eckenstein TTEE for Artic Management Corporation (second lien). (Incorporated by reference to Exhibit 10.27.5 to PrimeEnergy Corporation Form 10-Q for the quarter ended June 30, 2008)
10.27.6    Pledge Agreement dated as effective March 31, 2008 between Prime Offshore L.L.C. and Artic Management Corporation (General Partner Interest in FWOE Partners L.P.) (Incorporated by reference to Exhibit 10.27.6 to PrimeEnergy Corporation Form 10-Q for the quarter ended June 30, 2008)
10.27.7    Pledge Agreement made effective June 30, 2009, by and between Prime Offshore L.L.C. and Guaranty Bank, FSB, as Agent. (Incorporated by reference to Exhibit 10.27.7 to PrimeEnergy Corporation Form 10-Q for the quarter ended June 30, 2009)
10.27.8    Subordination of Liens and Security Interests effective June 30, 2009, by Artic Management Corporation for the benefit of Guaranty Bank, FSB, as Agent. (Incorporated by reference to Exhibit 10.27.8 to PrimeEnergy Corporation
Form 10-Q for the quarter ended June 30, 2009
10.28    Completion and Liquidity Maintenance Agreement effective as of June 29, 2006, between PrimeEnergy Corporation, Guaranty Bank, FSB, and Prime Offshore, L.L.C. (Incorporated by reference to Exhibit 10.28 of PrimeEnergy Corporation Form 10-K for the year ended December 31, 2006)
10.29    Put Right Agreement effective as of June 29, 2006, by and among PrimeEnergy Corporation and Prime Offshore L.L.C. (Incorporated by reference to Exhibit 10.29 of PrimeEnergy Corporation Form 10-K for the year ended December 31, 2006)
31.1    Certification of Chief Executive Officer pursuant to Rule 13(a)-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended (filed herewith).
31.2    Certification of Chief Financial Officer pursuant to Rule 13(a)-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended (filed herewith).
32.1    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
32.2    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).

 

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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, 2009  

/s/ Charles E. Drimal, Jr.

(Date)   Charles E. Drimal, Jr.
  President
  Principal Executive Officer
November 12, 2009  

/s/ Beverly A. Cummings

(Date)   Beverly A. Cummings
  Executive Vice President
  Principal Financial Officer
November 12, 2009  

/s/ Lynne Pizor

(Date)   Lynne Pizor
  Controller, Principal Accounting Officer

 

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