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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2012

Or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From              to             

Commission File 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)

 

(I.R.S. employer

Identification No.)

9821 Katy Freeway, Houston, Texas 77024

(Address of principal executive offices)

(713) 735-0000

(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  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if 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 8, 2012 was: Common Stock, $0.10 par value 2,580,911 shares.

 

 

 


Table of Contents

PrimeEnergy Corporation

Index to Form 10-Q

September 30, 2012

 

   

Page

Part I - Financial Information

 

Item 1. Financial Statements

 

Condensed Consolidated Balance Sheets – September 30, 2012 and December 31, 2011

  3

Condensed Consolidated Statements of Operations – Nine and Three Months Ended  September 30, 2012 and 2011

  4

Condensed Consolidated Statement of Stockholders’ Equity – Nine Months Ended September  30, 2012

  5

Condensed Consolidated Statements of Comprehensive Income – Nine Months Ended September  30, 2012 and 2011

  6

Condensed Consolidated Statements of Cash Flows – Nine Months Ended September 30, 2012 and 2011

  7

Notes to Condensed Consolidated Financial Statements – September 30, 2012

  8-13

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

  14-17

Item 3. Quantitative and Qualitative Disclosures About Market Risk

  17

Item 4. Controls and Procedures

  17

Part II - Other Information

 

Item 1. Legal Proceedings

  18

Item 1A. Risk Factors

  18

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

  18

Item 3. Defaults Upon Senior Securities

  18

Item 4. Reserved

  18

Item 5. Other Information

  18

Item 6. Exhibits

  19-20

Signatures

  21

 

2


Table of Contents

PART I—FINANCIAL INFORMATION

 

Item 1. FINANCIAL STATEMENTS

PRIMEENERGY CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS Unaudited

(Thousands of dollars)

 

     September 30,
2012
    December 31,
2011
 

ASSETS

    

Current Assets

    

Cash and cash equivalents

   $ 10,620      $ 8,661   

Restricted cash and cash equivalents

     4,866        5,142   

Accounts receivable, net

     18,158        16,506   

Other current assets

     3,531        9,194   
  

 

 

   

 

 

 

Total Current Assets

     37,175        39,503   

Property and Equipment, at cost

    

Oil and gas properties (successful efforts method), net

     174,869        136,750   

Field and office equipment, net

     8,148        7,945   
  

 

 

   

 

 

 

Total Property and Equipment, Net

     183,017        144,695   

Other Assets

     1,055        614   
  

 

 

   

 

 

 

Total Assets

   $ 221,247      $ 184,812   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Current Liabilities

    

Accounts payable

   $ 25,607      $ 29,538   

Accrued liabilities

     8,264        8,963   

Current portion of asset retirement and other long-term obligations

     2,592        12,854   

Derivative liability short-term

     837        2,046   

Due to related parties

     475        67   
  

 

 

   

 

 

 

Total Current Liabilities

     37,775        53,468   

Long-Term Bank Debt

     110,000        69,800   

Asset Retirement Obligations

     7,434        6,416   

Derivative Liability Long-Term

     543        1,461   

Deferred Income Taxes

     22,652        17,914   
  

 

 

   

 

 

 

Total Liabilities

     178,404        149,059   

Stockholders’ Equity

    

Common stock, $.10 par value; 2012 and 2011: Authorized: 4,000,000 shares, issued: 3,836,397 shares; outstanding 2012: 2,594,135 shares; 2011: 2,701,869 shares

     383        383   

Paid-in capital

     6,605        6,446   

Retained earnings

     61,377        51,289   

Accumulated other comprehensive loss, net

     (50     —     

Treasury stock, at cost; 2012: 1,242,262 shares; 2011: 1,134,528 shares

     (33,825     (31,120
  

 

 

   

 

 

 

Total Stockholders’ Equity – PrimeEnergy

     34,490        26,998   

Non-controlling interest

     8,353        8,755   
  

 

 

   

 

 

 

Total Stockholders’ Equity

     42,843        35,753   
  

 

 

   

 

 

 

Total Liabilities and Stockholders’ Equity

   $ 221,247      $ 184,812   
  

 

 

   

 

 

 

The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements

 

3


Table of Contents

PRIMEENERGY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS Unaudited

(Thousands of dollars, except per share amounts)

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2012     2011      2012      2011  

Revenues

          

Oil and gas sales

   $ 21,813      $ 21,757       $ 65,678       $ 65,236   

Realized gain on derivative instruments, net

     38        4,295         379         4,431   

Field service income

     4,892        5,407         15,344         15,181   

Administrative overhead fees

     2,141        2,150         6,415         6,488   

Unrealized gain (loss) on derivative instruments, net

     (2,649     12,511         2,449         9,015   

Other income

     25        20         128         69   
  

 

 

   

 

 

    

 

 

    

 

 

 

Total Revenues

     26,260        46,140         90,393         100,420   

Costs and Expenses

          

Lease operating expense

     9,347        9,711         28,820         26,520   

Field service expense

     4,275        4,393         13,023         12,537   

Depreciation, depletion, amortization and accretion on discounted liabilities

     5,884        22,899         19,846         40,930   

General and administrative expense

     3,823        3,179         11,509         10,216   

Exploration costs

     —          7         10         15   
  

 

 

   

 

 

    

 

 

    

 

 

 

Total Costs and Expenses

     23,329        40,189         73,208         90,218   

Gain on Sale and Exchange of Assets

     14        1,375         720         1,608   
  

 

 

   

 

 

    

 

 

    

 

 

 

Income from Operations

     2,945        7,326         17,905         11,810   

Other Income and Expenses

          

Less: Interest expense

     947        685         2,534         3,035   

Add: Interest income

     24        2         72         87   
  

 

 

   

 

 

    

 

 

    

 

 

 

Income Before Provision for Income Taxes

     2,022        6,643         15,443         8,862   

Provision for Income Taxes

     464        1,899         4,665         2,357   
  

 

 

   

 

 

    

 

 

    

 

 

 

Net Income

     1,558        4,744         10,778         6,505   

Less: Net Income Attributable to Non-Controlling Interests

     216        471         690         1,412   
  

 

 

   

 

 

    

 

 

    

 

 

 

Net Income Attributable to PrimeEnergy

   $ 1,342      $ 4,273       $ 10,088       $ 5,093   
  

 

 

   

 

 

    

 

 

    

 

 

 

Basic Income Per Common Share

   $ 0.51      $ 1.56       $ 3.81       $ 1.85   
  

 

 

   

 

 

    

 

 

    

 

 

 

Diluted Income Per Common Share

   $ 0.40      $ 1.23       $ 2.98       $ 1.46   
  

 

 

   

 

 

    

 

 

    

 

 

 

The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements

 

4


Table of Contents

PRIMEENERGY CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY – Unaudited

Nine Months Ended September 30, 2012

(Thousands of dollars)

 

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

Balance at December 31, 2011

     3,836,397       $ 383       $ 6,446       $ 51,289       $ —        $ (31,120   $ 26,998      $ 8,755      $ 35,753   

Purchase 107,734 shares of common stock

     —           —           —           —           —          (2,705     (2,705     —          (2,705

Net income

     —           —           —           10,088         —          —          10,088        690        10,778   

Other comprehensive loss, net of taxes

     —           —           —           —           (50     —          (50     —          (50

Purchase of non-controlling interests

     —           —           159         —           —          —          159        (225     (66

Distributions to non-controlling interests

     —           —           —           —           —          —          —          (867     (867
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2012

     3,836,397       $ 383       $ 6,605       $ 61,377       $ (50   $ (33,825   $ 34,490      $ 8,353      $ 42,843   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements

 

5


Table of Contents

PRIMEENERGY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME – Unaudited

Nine Months Ended September 30, 2012 and 2011

(Thousands of dollars)

 

     2012     2011  

Net Income

   $ 10,778      $ 6,505   

Other Comprehensive Loss, net of taxes:

    

Changes in fair value of hedge positions, net of taxes of $28 and $0, respectively

     (50     —     
  

 

 

   

 

 

 

Total other comprehensive loss

     (50     —     
  

 

 

   

 

 

 

Comprehensive Income

     10,728        6,505   

Less: Comprehensive Income Attributable to Non-controlling Interest

     690        1,412   
  

 

 

   

 

 

 

Comprehensive Income Attributable to PrimeEnergy

   $ 10,038      $ 5,093   
  

 

 

   

 

 

 

The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements

 

6


Table of Contents

PRIMEENERGY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS – Unaudited

Nine Months Ended September 30, 2012 and 2011

(Thousands of dollars)

 

     2012     2011  

Cash Flows from Operating Activities:

    

Net income

   $ 10,778      $ 6,505   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation, depletion, amortization and accretion on discounted liabilities

     19,846        40,930   

Gain on sale of properties

     (720     (1,608

Unrealized gain on derivative instruments, net

     (2,449     (9,015

Provision for deferred income taxes

     4,738        2,114   

Changes in assets and liabilities:

    

(Increase) decrease in accounts receivable

     (1,652     42   

(Increase) decrease in other assets

     5,476        (24

Decrease in accounts payable

     (3,655     (8,078

Increase in accrued liabilities

     605        229   

Increase in due to related parties

     426        41   
  

 

 

   

 

 

 

Net Cash Provided by Operating Activities

     33,393        31,136   
  

 

 

   

 

 

 

Cash Flows from Investing Activities:

    

Capital expenditures, including exploration expense

     (68,620     (26,913

Proceeds from sale of properties and equipment

     881        1,855   
  

 

 

   

 

 

 

Net Cash Used in Investing Activities

     (67,739     (25,058
  

 

 

   

 

 

 

Cash Flows from Financing Activities:

    

Purchase of stock for treasury

     (2,705     (1,633

Purchase of non-controlling interests

     (66     (192

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

     85,300        64,831   

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

     (45,357     (68,134

Repayment of indebtedness to related party

     —          (20,000

Distribution to non-controlling interests

     (867     (694
  

 

 

   

 

 

 

Net Cash Provided (Used) in Financing Activities

     36,305        (25,822
  

 

 

   

 

 

 

Net Increase (Decrease) in Cash and Cash Equivalents

     1,959        (19,744

Cash and Cash Equivalents at the Beginning of the Period

     8,661        32,792   
  

 

 

   

 

 

 

Cash and Cash Equivalents at the End of the Period

   $ 10,620      $ 13,048   
  

 

 

   

 

 

 

Supplemental Disclosures:

    

Income taxes paid during the period

   $ 536      $ 1,211   

Income tax refunds received during the period

   $ —        $ 41   

Interest paid during the period

   $ 2,534      $ 3,400   

Increase (decrease) in accrued expenses relating to property during the period

   $ (1,304   $ 579   

The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements

 

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Table of Contents

PRIMEENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2012

(Unaudited)

(1) Interim Financial Statements:

The accompanying condensed consolidated financial statements of PrimeEnergy Corporation (“PEC” or the “Company”) have not been audited by independent public accountants. During the interim periods, the Company follows the same accounting policies as used and described in its Annual Report on Form 10-K for the year ended December 31, 2011. In accordance with applicable Securities and Exchange Commission (“SEC”) rules and regulations, the accompanying interim financial statements do not include all disclosures presented in annual financial statements and the reader should refer to the Company’s Form 10-K for the year ended December 31, 2011 filed with the SEC on March 29, 2012. In the opinion of management, the accompanying interim condensed consolidated financial statements contain all material adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the Company’s Condensed Consolidated Balance Sheets as of September 30, 2012 and December 31, 2011, the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2012 and 2011, the Condensed Consolidated Statement of Stockholders’ Equity for the nine months ended September 30, 2012, the Condensed Consolidated Statements of Comprehensive Income for the nine months ended September 30, 2012 and 2011, and the Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2012 and 2011. 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. For purposes of disclosure in the condensed consolidated financial statements, subsequent events have been evaluated through the date the statements were issued.

Recently Issued Accounting Pronouncements

There are no new significant accounting standards applicable to the Company that have been issued but not yet adopted as of the nine months ended September 30, 2012.

(2) Acquisitions and Dispositions:

Historically the Company has repurchased the interests of the partners and trust unit holders in the eighteen oil and gas limited partnerships (the “Partnerships”) and the two asset and business income trusts (the “Trusts”) managed by the Company as general partner and as managing trustee, respectively. The Company purchased such interests in an amount totaling $66,000 and $192,000 for the nine months ended September 30, 2012 and 2011, respectively.

(3) Restricted Cash and Cash Equivalents:

Restricted cash and cash equivalents include $4.59 million and $4.39 million at September 30, 2012 and December 31, 2011, respectively, of cash primarily pertaining to oil and gas revenue payments. There were corresponding accounts payable recorded at September 30, 2012 and December 31, 2011 for these liabilities. Both the restricted cash and the accounts payable are classified as current on the Condensed Consolidated Balance Sheets.

(4) Additional Balance Sheet Information:

Certain balance sheet amounts are comprised of the following:

 

(Thousands of dollars)    September 30,
2012
    December 31,
2011
 

Accounts Receivable:

    

Joint interest billing

   $ 5,845      $ 2,347   

Trade receivables

     1,771        1,558   

Oil and gas sales

     10,535        9,876   

Other

     393        3,146   
  

 

 

   

 

 

 
     18,544        16,927   

Less: Allowance for doubtful accounts

     (386     (421
  

 

 

   

 

 

 

Total

   $ 18,158      $ 16,506   
  

 

 

   

 

 

 

Accounts Payable:

    

Trade

   $ 4,940      $ 5,853   

Royalty and other owners

     11,168        13,645   

Prepaid drilling deposits

     698        779   

Other

     8,801        9,261   
  

 

 

   

 

 

 

Total

   $ 25,607      $ 29,538   
  

 

 

   

 

 

 

 

8


Table of Contents
(Thousands of dollars)    September 30,
2012
     December 31,
2011
 

Accrued Liabilities:

     

Compensation and related expenses

   $ 4,451       $ 2,137   

Property costs

     3,003         5,117   

Income tax

     —           362   

Other

     810         1,347   
  

 

 

    

 

 

 

Total

   $ 8,264       $ 8,963   
  

 

 

    

 

 

 

(5) Property and Equipment:

Property and equipment at September 30, 2012 and December 31, 2011 consisted of the following:

 

(Thousands of dollars)    September 30,
2012
    December 31,
2011
 

Proved oil and gas properties, at cost

   $ 321,732      $ 492,393   

Less: Accumulated depletion and depreciation

     (146,863     (355,643
  

 

 

   

 

 

 

Oil and Gas Properties, Net

   $ 174,869      $ 136,750   
  

 

 

   

 

 

 

Field and office equipment

   $ 22,707      $ 21,553   

Less: Accumulated depreciation

     (14,559     (13,608
  

 

 

   

 

 

 

Field and Office Equipment, Net

   $ 8,148      $ 7,945   
  

 

 

   

 

 

 

Total Property and Equipment, Net

   $ 183,017      $ 144,695   
  

 

 

   

 

 

 

(6) Long-Term Bank Debt:

Bank Debt:

Effective July 30, 2010 the Company entered into a Second Amended and Restated Credit Agreement between Compass Bank as agent and a syndicated group of lenders (“Credit Agreement”). The Credit Agreement has a revolving line of credit and letter of credit facility of up to $250 million with a final maturity date of July 30, 2017. The credit facility is secured by substantially all of the Company’s oil and gas properties. The credit facility is subject to a borrowing base determined 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 at their discretion the right to request the borrowing base be re-determined with a maximum of one such request each year. 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 facility. At any time if the sum of the outstanding borrowings and letter of credit exposures exceed the applicable portion of the borrowing base, PEC would be required to repay the excess amount within a prescribed period.

As of September 30, 2012, the credit facility borrowing base was $125.0 million with no required monthly reduction amount. The borrowings made within the credit facility may be placed in a base rate loan or LIBO rate loan. The Company’s borrowing rates in the credit facility provide for base rate loans at the prime rate (3.25% at September 30, 2012) plus applicable margin utilization rates that range from 1.00% to 2.00%, and LIBO rate loans at LIBO published rates plus applicable utilization rates that range from 2.00% to 3.00%. As of September 30, 2012, the Company had in place one base rate loan and one LIBO rate loan with effective rates of 5.00% and 2.99%, respectively.

At September 30, 2012, the Company had $110.00 million of borrowings outstanding under its revolving credit facility at a weighted-average interest rate of 3.62% and $15.00 million available for future borrowings. The combined weighted average interest rates paid on outstanding bank borrowings subject to base rate and LIBO interest were 3.80% for the nine months ended September 30, 2012 as compared to 5.04% for the nine months ended September 30, 2011.

 

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(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. The future minimum lease payments for the rest of the fiscal 2012 and thereafter for the operating leases are as follows:

 

(Thousands of dollars)    Operating
Leases
 

2012

   $ 165   

2013

     662   

2014

     261   

2015

     122   
  

 

 

 

Total minimum payments

   $ 1,210   
  

 

 

 

Rent expense for office space for the nine months ended September 30, 2012 and 2011 was $581,000 and $588,000, respectively.

Asset Retirement Obligation:

A reconciliation of the liability for plugging and abandonment costs for the nine months ended September 30, 2012 is as follows:

 

(Thousands of dollars)       

Asset retirement obligation – December 31, 2011

   $ 19,013   

Liabilities incurred

     640   

Liabilities settled

     (14,800

Accretion expense

     1,599   

Revisions in estimated liabilities

     3,574   
  

 

 

 

Asset retirement obligation – September 30, 2012

   $ 10,026   
  

 

 

 

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 a 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 change 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 Company’s wells, the costs to ultimately retire the wells may vary significantly from previous estimates.

In December 2011, the Company entered into a fixed price contract for the plugging and abandonment of a substantial portion of its offshore properties. In connection with this contract, the Company deposited a net $6.0 million with the contractor which is reflected in prepaid obligations at December 31, 2011. All work under this contract was completed by September 30, 2012.

(8) Contingent Liabilities:

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, 2012, 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 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, 2012 and 2011, remaining options held by two key executive officers on 767,500 shares were outstanding and exercisable at prices ranging from $1.00 to $1.25. According to their terms, the options have no expiration date.

 

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(10) Related Party Transactions:

The Company, as managing general partner or managing trustee, makes an annual offer to repurchase the interests of the partners and trust unit holders in certain of the Partnerships or Trusts. The Company purchased such interests in amounts totaling $66,000 and $192,000 for the nine months ended September 30, 2012 and 2011, respectively.

Treasury stock purchases in any reported period may include shares from a related party, which may include members of the Company’s Board of Directors. In April 2012, the Company purchased 45,179 shares of common stock as treasury shares from a Director for $1.13 million.

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.

(11) Financial Instruments:

Fair Value measurements:

Authoritative guidance on fair value measurements defines fair value, establishes a framework for measuring fair value and stipulates the related disclosure requirements. The Company follows a three-level hierarchy, prioritizing and defining the types of inputs used to measure fair value. 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, 2012 and December 31, 2011:

 

September 30, 2012

(Thousands of dollars)

   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,
2012
 

Assets

          

Commodity derivative contracts

   $ —         $ —         $ 244      $ 244   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ —         $ —         $ 244      $ 244   
  

 

 

    

 

 

    

 

 

   

 

 

 

Liabilities

          

Commodity derivative contracts

   $ —         $ —         $ (1,302   $ (1,302

Interest rate derivative contracts

     —           —           (78     (78
  

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities

   $ —         $ —         $ (1,380   $ (1,380
  

 

 

    

 

 

    

 

 

   

 

 

 

 

December 31, 2011

(Thousands of dollars)

   Quoted Prices in
Active Markets
For Identical
Assets (Level 1)
     Significant
Other
Observable
Inputs (Level 2)
     Significant
Unobservable
Inputs (Level 3)
    Balance as of
December 31,
2011
 

Assets

          

Commodity derivative contracts

   $ —         $ —         $ —        $ —     
  

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ —         $ —         $ —        $ —     
  

 

 

    

 

 

    

 

 

   

 

 

 

Liabilities

          

Commodity derivative contracts

   $ —         $ —         $ (3,507   $ (3,507
  

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities

   $ —         $ —         $ (3,507   $ (3,507
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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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 for the nine months ended September 30, 2012.

 

(Thousands of dollars)       

Net liabilities – December 31, 2011

   $ (3,507

Total realized and unrealized gains or losses:

  

Unrealized gains included in earnings, net (a)

     2,828   

Included in other comprehensive loss

     (78

Realized gains from purchases, sales, issuances and settlements, net

     (379
  

 

 

 

Net liabilities – September 30, 2012

   $ (1,136
  

 

 

 

 

(a) Derivative instruments are reported in revenues as realized gain/loss and on a separately reported line item captioned unrealized gain/loss on derivative instruments.

Derivative Instruments:

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. Both realized and unrealized gains and losses associated with derivative instruments are recognized in earnings.

Interest rate swap derivatives are treated has 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, 2012 is located in accumulated other comprehensive loss, net of tax. Settlement of the swaps, currently scheduled to begin in January 2014, will be recorded within interest expense.

The following table sets forth the effect of derivative instruments on the condensed consolidated balance sheets as of September 30, 2012 and December 31, 2011:

 

          Fair Value  
(Thousands of dollars)   

Balance Sheet Location

   September 30,
2012
    December 31,
2011
 

Asset Derivatives:

       

Derivatives not designated as cash-flow hedging instruments:

       

Crude oil commodity contracts

  

Other assets

   $ 244      $ —     
     

 

 

   

 

 

 

Total

      $ 244      $ —     
     

 

 

   

 

 

 

Liability Derivatives:

       

Derivatives designated as cash-flow hedging instruments:

       

Interest rate swap contracts

   Derivative liability long-term    $ (78   $ —     

Derivatives not designated as cash-flow hedging instruments:

       

Crude oil commodity contracts

   Derivative liability short-term    $ (837   $ (2,046

Crude oil commodity contracts

   Derivative liability long-term      (465     (1,461
     

 

 

   

 

 

 

Total

      $ (1,380   $ (3,507
     

 

 

   

 

 

 

Total derivative instruments

      $ (1,136   $ (3,507
     

 

 

   

 

 

 

 

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The following table sets forth the effect of derivative instruments on the condensed consolidated statement of operations for the nine-month periods ended September 30, 2012 and 2011:

 

    

Location of gain/loss recognized
in income

   Amount of gain/loss
recognized in income
 
(Thousands of dollars)       2012      2011  

Derivatives not designated as cash-flow hedge instruments

        

Natural gas commodity contracts

   Unrealized gain on derivative instruments, net    $ —         $ 106   

Crude oil commodity contracts

   Unrealized gain on derivative instruments, net      2,449         8,909   

Natural gas commodity contracts

   Realized gain on derivative instruments, net      —           2,969   

Crude oil commodity contracts (a)

   Realized gain on derivative instruments, net      379         1,462   
     

 

 

    

 

 

 
      $ 2,828       $ 13,446   
     

 

 

    

 

 

 

 

(a) In August 2011, the Company unwound and monetized crude oil swaps and collars with original settlement dates from September 2011 through December 2014 for net proceeds of $3.4 million. The $3.4 million gain associated with these early settlement transactions is included in realized gain on derivative instruments for the three and nine months ended September 30, 2011. In January 2012, March 2012 and May 2012, the Company unwound and monetized crude oil swaps with original settlement dates from January 2012 through December 2013 for net proceeds of $1.03 million. The gains associated with these early settlement transactions is included in realized gain on derivative instruments for the nine months ended September 30, 2012.

(12) Earnings Per Share:

Basic earnings per share are computed by dividing earnings available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflect per share amounts that would have resulted if dilutive potential common stock had been converted to common stock in gain periods. The following reconciles amounts reported in the financial statements:

 

     Nine Months Ended September 30,  
     2012      2011  
     Net Income
(In 000’s)
     Weighted
Average
Number of
Shares
Outstanding
     Per Share
Amount
     Net Income
(In 000’s)
     Weighted
Average
Number of
Shares
Outstanding
     Per Share
Amount
 

Basic

   $ 10,088         2,645,924       $ 3.81       $ 5,093         2,758,388       $ 1.85   

Effect of dilutive securities:

                 

Options

     —           734,680            —           733,063      
  

 

 

    

 

 

       

 

 

    

 

 

    

Diluted

   $ 10,088         3,380,604       $ 2.98       $ 5,093         3,491,451       $ 1.46   
  

 

 

    

 

 

       

 

 

    

 

 

    
     Three Months Ended September 30,  
     2012      2011  
     Net Income
(In 000’s)
     Weighted
Average
Number of
Shares
Outstanding
     Per Share
Amount
     Net Income
(In 000’s)
     Weighted
Average
Number of
Shares
Outstanding
     Per Share
Amount
 

Basic

   $ 1,342         2,608,319       $ 0.51       $ 4,273         2,744,177       $ 1.56   

Effect of dilutive securities:

                 

Options

     —           737,162            —           730,617      
  

 

 

    

 

 

       

 

 

    

 

 

    

Diluted

   $ 1,342         3,345,481       $ 0.40       $ 4,273         3,474,794       $ 1.23   
  

 

 

    

 

 

       

 

 

    

 

 

    

 

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

This report may contain statements relating to the future results of the Company that are considered “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995 (the “PSLRA”). In addition, certain statements may be contained in the Company’s future filings with the SEC, in press releases, and in oral and written statements made by or with the approval of the Company that are not statements of historical fact and constitute forward-looking statements within the meaning of the PSLRA. Such forward-looking statements, in addition to historical information, which involve risk and uncertainties, are based on the beliefs, assumptions and expectations of management of the Company. Words such as “expects”, ‘believes”, “should”, “plans”, “anticipates”, “will”, “potential”, “could”, “intend”, “may”, “outlook”, “predict”, “project”, “would”, “estimates”, “assumes”, “likely”’ “and variations of such similar expressions are intended to identify such forward-looking statements. 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. The forward looking statements are made as of the date of this report and other than as required by the federal securities laws, the Company assumes no obligation to update the forward-looking statement or to update the reasons why actual results could differ from those projected in the forward-looking statements.

The following discussion is intended to assist you in understanding our results of operations and our present financial condition. Our Condensed Consolidated Financial Statements and the accompanying Notes to the Condensed Consolidated Financial Statements included elsewhere in this Report contains additional information that should be referred to when reviewing this material.

OVERVIEW

We are an independent oil and natural gas company engaged in acquiring, developing and producing oil and natural gas. We presently own producing and non-producing properties located primarily in Texas, Oklahoma, West Virginia, the Gulf of Mexico, New Mexico, Colorado and Louisiana. In addition, we own a substantial amount of well servicing equipment. All of our oil and gas properties and interests are located in the United States. Assets in our principal focus areas include mature properties with long-lived reserves and significant development opportunities as well as newer properties with development and exploration potential. We believe our balanced portfolio of assets and our ongoing hedging program position us well for both the current commodity price environment and future potential upside as we develop our attractive resource opportunities. Our primary sources of liquidity are cash generated from our operations and our credit facility.

We attempt to assume the position of operator in all acquisitions of producing properties and will continue to evaluate prospects for leasehold acquisitions and for exploration and development operations in areas in which we own interests. We continue to actively pursue the acquisition of producing properties. In order to diversify and broaden our asset base, we will consider acquiring the assets or stock in other entities and companies in the oil and gas business. Our main objective in making any such acquisitions will be to acquire income producing assets so as to build stockholder value through consistent growth in our oil and gas reserve base on a cost-efficient basis.

Our cash flows depend on many factors, including the price of oil and gas, the success of our acquisition and drilling activities and the operational performance of our producing properties. We use derivative instruments to manage our commodity price risk. This practice may prevent us from receiving the full advantage of any increases in oil and gas prices above the maximum fixed amount specified in the derivative agreements and subjects us to the credit risk of the counterparties to such agreements. Since all of our derivative contracts are accounted for under mark-to-market accounting, we expect continued volatility in gains and losses on mark-to-market derivative contracts in our consolidated income statement as changes occur in the NYMEX price indices.

RECENT ACTIVITIES

During 2012, we continued our drilling program in our West Texas and Mid-Continent regions. Thru October 31, 2012, we have drilled a total of 36 gross (27.25 net) wells, with 33 gross (26.00 net) wells having successful completions, and 2 gross (1.22 net) wells under evaluation. In addition we have 2 gross (0.61 net) wells currently drilling. We intend to drill a total of approximately 40 gross (29 net) wells this year, primarily in the West Texas area.

In February 2012, we closed the acquisition of additional working interest in producing properties which we operate. These properties are located in our Gulf Coast region and were acquired at a net cost of $6.32 million.

During 2012, we began plugging and abandoning the majority of our offshore oil and gas properties. This work was completed by September 30, 2012.

 

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Table of Contents

RESULTS OF OPERATIONS

2012 and 2011 Compared

We reported net income for the three and nine months ended September 30, 2012 of $1.34 million, or $0.51 per share and $10.09 million, or $3.79 per share, respectively as compared to $4.27 million, or $1.56 per share and $5.09 million, or $1.85 per share for the three and nine months ended September 30, 2011, respectively. Net income decreased by $2.93 million for the three months ended September 30, 2012 as compared to the same period during 2011 primarily due to a decrease in unrealized and realized gains on derivative instruments partially offset by decreased depreciation and depletion expenses and income tax provisions. Net income increased by $5.00 million for the nine months ended September 30, 2012 as compared to the same period during 2011 primarily due to decreased depreciation and depletion expenses partially offset by a decrease in unrealized and realized gains on derivative instruments and increased lease operating expenses and income tax provisions. Unrealized gain (loss) on derivative instruments decreased by $15.16 million and $6.57 million for the three and nine months ended September 30, 2012, respectively as compared to the same periods in 2011 largely due to an increase in future crude oil commodity prices during the 2012 periods as compared to crude oil commodity contracts held at the end of the reported periods. Depreciation and depletion decreased by $17.02 million and $21.08 million for the three and nine months ended September 30, 2012, respectively as compared to the same periods in 2011 largely due to decreased depletion rates associated with our offshore properties as several of our offshore properties entered into the last phase of their productive lives.

The significant components of net income are discussed below.

Oil and gas sales increased slightly from $21.76 million for the three months ended September 30, 2011 to $21.81 million for the three months ended September 30, 2012 and increased $0.44 million, or 1% from $65.24 million for the nine months ended September 30, 2011 to $65.68 million for the nine months ended September 30, 2012. Crude oil and natural gas sales vary due to changes in volumes of production sold and realized commodity prices. Our realized prices at the well head increased an average of $4.40 per barrel, or 5% and $1.65 per barrel, or 2% on crude oil during the three and nine months ended September 30, 2012, respectively from the same periods in 2011 while our average well head price for natural gas decreased $2.13 per mcf, or 31% and $1.90 per mcf, or 29% during the three and nine months ended September 30, 2012, respectively from the same periods in 2011.

Our crude oil production increased by 30,000 barrels, or 19% from 155,000 barrels for the third quarter 2011 to 185,000 barrels for the third quarter 2012 and increased by 83,000 barrels, or 18% from 458,000 barrels for the nine months ended September 30, 2011 to 541,000 barrels for the nine months ended September 30, 2012. Our natural gas production decreased by 103,000 mcf, or 8% from 1,294,000 mcf for the third quarter 2011 to 1,191,000 mcf for the third quarter 2012 and decreased by 210,000 mcf, or 6% from 3,703,000 mcf for the nine months ended September 30, 2011 to 3,493,000 mcf for the nine months ended September 30, 2012. The crude oil production variances are a result of our recent drilling success in West Texas and drilling and acquisition activities in the Gulf Coast regions as we place new wells into production, partially offset by the natural decline of existing properties. The natural gas volume decreases are primarily due to the natural decline of the primary natural gas producing offshore properties, partially offset by production from wells in the West Texas region recently placed into production.

The following table summarizes the primary components of production volumes and average sales prices realized for the three and nine months ended September 30, 2012 and 2011 (excluding realized gains and losses from derivatives).

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2012      2011      Increase /
(Decrease)
    2012      2011      Increase /
(Decrease)
 

Barrels of Oil Produced

     185,000         155,000         30,000        541,000         458,000         83,000   

Average Price Received

   $ 88.26       $ 83.86       $ 4.40      $ 91.84       $ 90.19       $ 1.65   
  

 

 

    

 

 

      

 

 

    

 

 

    

Oil Revenue (In 000’s)

   $ 16,288       $ 13,001       $ 3,287      $ 49,717       $ 41,283       $ 8,434   

Mcf of Gas Produced

     1,191,000         1,294,000         (103,000     3,493,000         3,703,000         (210,000

Average Price Received

   $ 4.64       $ 6.77       $ (2.13   $ 4.57       $ 6.47       $ (1.90
  

 

 

    

 

 

      

 

 

    

 

 

    

Gas Revenue (In 000’s)

   $ 5,525       $ 8,756       $ (3,231   $ 15,961       $ 23,953       $ (7,992
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total Oil & Gas Revenue (In 000’s)

   $ 21,813       $ 21,757       $ 56      $ 65,678       $ 65,236       $ 442   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Realized net gains on derivative instruments include net gains of $0.04 million on the settlements of crude oil derivatives for the third quarter 2012 and net gains of $3.30 million and $1.00 million on the settlements of crude oil and natural gas derivatives, respectively, for the third quarter 2011. Realized net gains on derivative instruments include net gains of $0.38 million on the settlements of crude oil derivatives for the nine months ended September 30, 2012 and net gains of $1.46 million and $2.97 million on the settlements of crude oil and natural gas derivatives, respectively, for the nine months ended September 30, 2011. In August 2011, we unwound and monetized crude oil swaps and collars with original settlement dates from September 2011 thru December 2014 for net proceeds of $3.40 million. The $3.40 million gain associated with these early settlement transactions is included in realized gain on derivative instruments for the three and nine months ended September 30, 2011. In the nine months ended September 30, 2012, we unwound and monetized crude oil swaps with original settlement dates from January 2012 through December 2013 for net proceeds of $1.03 million. The gains associated with these early settlement transactions is included in realized gain on derivative instruments for the nine months ended September 30, 2012.

 

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Table of Contents

Oil and gas prices received including the impact of derivatives but excluding the early settlement transactions were:

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2012      2011      Increase
(Decrease)
    2012      2011      Increase
(Decrease)
 

Oil Price

   $ 88.46       $ 83.22       $ 5.24      $ 90.63       $ 85.96       $ 4.67   

Gas Price

   $ 4.64       $ 7.54       $ (2.90   $ 4.57       $ 7.27       $ (2.70

We do not apply hedge accounting to any of our commodity based derivatives, thus changes in the fair market value of commodity contracts held at the end of a reported period, referred to as mark-to-market adjustments, are recognized as unrealized gains and losses in the accompanying consolidated statements of operations. As oil and natural gas prices remain volatile, mark-to-market accounting treatment creates volatility in our revenues. During the three months ended September 30, 2012, we recognized unrealized losses of $2.65 million and a net unrealized gain of $2.45 million for the nine months ended September 30, 2012 associated with crude oil fixed swaps and collars due to market fluctuations in crude oil futures market prices between December 31, 2011 and September 30, 2012. During the three months ended September 30, 2011, we recognized $12.51 million in unrealized gains. This unrealized gain consists of $11.40 million associated with crude oil fixed swaps and collars due to a decrease in crude oil futures market prices between June 30, 2011 and September 30, 2011 and $1.11 million associated with natural gas fixed swap contracts due to decreased natural gas futures market prices between June 30, 2011 and September 30, 2011. For the nine months ended September 30, 2011, we recognized $9.01 million in unrealized gains primarily associated with crude oil fixed swaps and collars due to a decrease in crude oil futures market prices between December 31, 2010 and September 30, 2011.

Field service income decreased $0.52 million, or 10% from $5.41 million for the third quarter 2011 to $4.89 million for the third quarter 2012 and increased $0.16 million, or 1% from $15.18 million for the nine months ended September 30, 2011 to $15.34 million for the nine months ended September 30, 2012. This underlying increase is a result of upturns in utilization of equipment and the market allowing us to charge slightly higher rates to customers. Workover rig services represent the bulk of our field service operations, and those rates all increased in our most active districts. Water hauling and disposal services have also increased in our South Texas district, however were slightly down during the third quarter of 2012 due to one of our disposal wells being shut in during the period as a major workover was completed.

Lease operating expense decreased $0.36 million, or 4% from $9.71 million for the third quarter 2011 to $9.35 million for the third quarter 2012 and increased $2.30 million, or 9% from $26.52 million for the nine months ended September 30, 2011 to $28.82 million for the nine months ended September 30, 2012. This underlying increase is primarily due to higher pumper / labor costs, chemical expenses and salt water disposal costs associated with new wells coming on line from the recent drilling success in West Texas and increased expensed workovers across all districts, partially offset by decreased operating expenses on the offshore properties during the first nine months of 2012 as compared to the same period of 2011.

Field service expense decreased $0.12 million, or 3% from $4.39 million for the third quarter 2011 to $4.27 million for the third quarter 2012 and increased $0.48 million, or 4% from $12.54 million for the nine months ended September 30, 2011 to $13.02 million for the nine months ended September 30, 2012. Field service expenses primarily consist of salaries and vehicle operating expenses which have increased during the nine months ended September 30, 2012 over the same period of 2011 as a direct result of increased services and utilization of the equipment.

Depreciation, depletion, amortization and accretion on discounted liabilities decreased $17.02 million, or 74% from $22.90 million for the third quarter 2011 to $5.88 million for the third quarter 2012 and $21.08 million, or 52% from $40.93 million for the nine months ended September 30, 2011 to $19.85 million for the nine months ended September 30, 2012. This decrease is primarily due to decreased depletion rates recognized during the first nine months of 2012 associated with offshore properties as several of our offshore properties entered into the last phase of their productive lives.

General and administrative expense increased $0.64 million, or 20% from $3.18 million for the three months ended September 30, 2011 to $3.82 million for the three months ended September 30, 2012 and increased $1.29 million, or 13% from $10.22 million for the nine months ended September 30, 2011 to $11.51 million for the nine months ended September 30, 2012. This increase in 2012 is largely due to increased personnel costs in 2012. The largest component of these personnel costs was salaries, however rent, audit related costs and employee related taxes and insurance also contributed to the increase.

Gain on sale and exchange of assets of $0.72 million for the nine months ended September 30, 2012 consists of sales of non-essential field service equipment. Gain on sale and exchange of assets of $1.61 million for the nine months ended September 30, 2011 consists of $0.50 million related to our Korean Joint Venture combined with $1.11 million related to sales of non-essential field service equipment and sales of non-producing acreage and non-core producing properties.

Interest expense increased $0.26 million, or 38% from $0.69 million for the third quarter 2011 to $0.95 million for the third quarter 2012 and decreased $0.51 million, or 17% from $3.04 million for the nine months ended September 30, 2011 to $2.53 million for the nine months ended September 30, 2012. This decrease includes the reduction of interest expense of $0.79 million for the nine

 

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months ended September 30, 2012 associated with interest on the subordinated credit facility with a related party private lender which was paid off in June 2011. The remaining increase for the three and nine months ended September 30, 2012 relate to reduced weighted average interest rates substantially offset by an increase in average debt outstanding during the 2012 periods.

A provision for income taxes of $0.46 million, or an effective tax rate of 26% was recorded for the three months ended September 30, 2012 verses a provision of $1.90 million, or an effective tax rate of 31% for the three months ended September 30, 2011. A provision for income taxes of $4.67 million, or an effective tax rate of 32% was recorded for the nine months ended September 30, 2012 verses a provision of $2.36 million, or an effective tax rate of 32% for the nine months ended September 30, 2011. Our provision for income taxes varies from the federal statutory tax rate of 34% primarily due to state taxes and percentage depletion deductions. We are entitled to percentage depletion on certain of our wells, which is calculated without reference to the basis of the property. To the extent that such depletion exceeds a property’s basis it creates a permanent difference, which lowers our effective rate. The lower effective tax rate in 2012 is primarily due to larger percentage depletion deductions in excess of basis.

LIQUIDITY AND CAPITAL RESOURCES

Our primary capital resources are cash provided by our operating activities and our credit facility.

Net cash provided by our operating activities for the nine month period ended September 30, 2012 was $33.39 million. 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.

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.

Our activities include development and exploratory drilling. Our 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. During 2012, we plan on drilling approximately 40 wells (29 net), mainly in the Permian Basin in West Texas and in the central Oklahoma area.

In February 2012 we invested a net $6.32 million to acquire additional working interest in producing properties that we operate in our Gulf Coast region. It is our goal to increase our oil and gas reserves and production through the acquisition and development of oil and gas properties. We also continue to explore and consider opportunities to further expand our oilfield servicing revenues through additional investment in field service equipment. However, the majority of our capital spending is discretionary, and the ultimate level of expenditures will be dependent on our 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.

We have in place both a stock repurchase program and a limited partnership interest repurchase program under which we expect to continue spending during 2012. For the nine month period ended September 30, 2012, we have spent $2.77 million under these programs.

We currently maintain a credit facility totaling $250 million, with a current borrowing base of $125 million and $15.00 million in availability at September 30, 2012. 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 and operational covenants defined in the agreement. We are currently in compliance with these 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.

 

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 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 changes in the Company’s internal control over financial reporting that occurred during the first nine months of 2012 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

None.

 

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, 2012, the Company purchased the following shares of common stock as treasury shares.

 

2012 Month

   Number of
Shares
     Average Price
Paid per share
     Maximum
Number of Shares
that May Yet Be
Purchased Under
The Program at
Month - End (1)
 

January

     8,119       $ 22.25         147,294   

February

     4,563       $ 22.73         142,731   

March

     6,938       $ 24.69         135,793   

April

     52,579       $ 24.98         83,214   

May

     3,200       $ 23.80         80,014   

June

     3,633       $ 24.65         76,381   

July

     1,180       $ 27.33         75,201   

August

     21,972       $ 26.76         53,229   

September

     5,550       $ 27.09         47,679   
  

 

 

    

 

 

    

Total/Average

     107,734       $ 25.11      
  

 

 

    

 

 

    

 

(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. The Board of Directors of the Company approved an additional 300,000 shares of the Company’s stock to be included in the stock repurchase program effective May 20, 2010. As of September 30, 2012, a total of 3,000,000 shares have been authorized under this program and we had repurchased a total of 2,952,321 shares for $42,482,400 at an average price of $14.39 per share. On October 31, 2012, the Board of Directors of the Company approved an additional 500,000 shares of the Company’s stock to be included in the stock repurchase program. 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. RESERVED

 

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 to PrimeEnergy Corporation Form 10-Q for the quarter ended June 30, 2010)
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 to 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 to 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 to PrimeEnergy Corporation Form 10-K for the year ended December 31, 2004)
10.22.5.9    Second Amended and Restated Credit Agreement dated July 30, 2010, by and among PrimeEnergy Corporation, the Guarantors Party Hereto (PrimeEnergy Management Corporation, Prime Operating Company, Eastern Oil Well Service Company, Southwest Oilfield Construction Company, and EOWS Midland Company), Compass Bank (successor in interest to Guaranty Bank, FSB) As Administrative Agent and Letter of Credit Issuer, BBVA Compass, As Sole Lead Arranger and Sole Bookrunner and The Lenders Signatory Hereto (BNP Paribas, JPMorgan Chase Bank, N.A. and Amegy Bank National Association) (Incorporated by reference to Exhibit 10.22.5.9 to PrimeEnergy Corporation Form 10-Q for the quarter ended June 30, 2010)
10.22.5.9.1    First Amendment To Second Amended and Restated Credit Agreement Among PrimeEnergy Corporation, The Guarantors Party Hereto (PrimeEnergy Management Corporation, Prime Operating Company, Eastern Oil Well Service Company, Southwest Oilfield Construction Company, E O W S Midland Company), Compass Bank (successor in interest to Guaranty Bank, FSB), As Administrative Agent, Letter of Credit Issuer and Collateral Agent and The Lenders Signatory Hereto (Compass Bank, BNP Paribas, JPMorgan Chase Bank, N.A., Amegy Bank National Association) effective September 30, 2010 (Incorporated by reference to Exhibit 10.22.5.9.1 to PrimeEnergy Corporation Form 10-Q for the quarter ended September 30, 2010).
10.22.5.9.2    Second Amendment To Second Amended and Restated Credit Agreement Among PrimeEnergy Corporation, The Guarantors Party Hereto (PrimeEnergy Management Corporation, Prime Operating Company, Eastern Oil Well Service Company, Southwest Oilfield Construction Company, E O W S Midland Company), Compass Bank (successor in interest to Guaranty Bank, FSB), As Administrative Agent, Letter of Credit Issuer and Collateral Agent and The Lenders Signatory Hereto (Compass Bank, BNP Paribas, JPMorgan Chase Bank, N.A., Amegy Bank National Association) effective June 22, 2011 (Incorporated by reference to Exhibit 10.22.5.9.2 to PrimeEnergy Corporation Form 10-Q for the quarter ended June 30, 2011).
10.22.5.9.3    Third Amendment To Second Amended and Restated Credit Agreement Among PrimeEnergy Corporation, The Guarantors Party Hereto (PrimeEnergy Management Corporation, Prime Operating Company, Eastern Oil Well Service Company, Southwest Oilfield Construction Company, E O W S Midland Company), Compass Bank (successor in interest to Guaranty Bank, FSB), As Administrative Agent, Letter of Credit Issuer and Collateral Agent and The Lenders Signatory Hereto (Compass Bank, BNP Paribas, JPMorgan Chase Bank, N.A., Amegy Bank National Association) effective December 8, 2011 (Incorporated by reference to Exhibit 10.22.5.9.3 to PrimeEnergy Corporation Form 10-K for the year ended December 31, 2011).
10.22.5.9.4    Fourth Amendment To Second Amended and Restated Credit Agreement Among PrimeEnergy Corporation, The Guarantors Party Hereto (PrimeEnergy Management Corporation, Prime Operating Company, Eastern Oil Well Service Company, Southwest Oilfield Construction Company, E O W S Midland Company), Compass Bank (successor in interest to Guaranty Bank, FSB), As Administrative Agent, Letter of Credit Issuer and Collateral Agent and The Lenders Signatory Hereto (Compass Bank, BNP Paribas, JPMorgan Chase Bank, N.A., Amegy Bank National Association) effective June 25, 2012 (Incorporated by reference to Exhibit 10.22.5.9.4 to PrimeEnergy Corporation Form 10-Q for the quarter ended June 30, 2012).
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 to 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).

 

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Exhibit

No.

   
  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).
101.INS(1)   XBRL (eXtensible Business Reporting Language) Instance Document
101.SCH(1)   XBRL Taxonomy Extension Schema Document
101.CAL(1)   XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF(1)   XBRL Taxonomy Extension Definition Linkbase Document
101.LAB(1)   XBRL Taxonomy Extension Label Linkbase Document
101.PRE(1)   XBRL Taxonomy Extension Presentation Linkbase Document

 

(1) 

XBRL information (the Interactive Data File) is deemed not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.

 

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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 9, 2012  

/s/ Charles E. Drimal, Jr.

(Date)   Charles E. Drimal, Jr.
  President
  Principal Executive Officer
November 9, 2012  

/s/ Beverly A. Cummings

(Date)   Beverly A. Cummings
  Executive Vice President
  Principal Financial Officer

 

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