PrimeEnergy Resources Corporation (NASDAQ:PNRG) is an independent oil and natural gas company engaged in acquiring, developing, and producing oil and natural gas. The company's operations are primarily located in the United States, with a focus on mature properties with long-lived reserves and significant development opportunities, as well as newer properties with development and exploration potential.
Business Overview
PrimeEnergy's balanced portfolio of assets positions the company well for the current commodity price environment and future potential upside as it develops its attractive resource opportunities. The company's primary sources of liquidity are cash generated from operations, its credit facility, and existing cash on its balance sheet. In addition to developing its oil and natural gas reserves, PrimeEnergy continues to actively pursue the acquisition of producing properties, with the goal of assuming the position of operator in all acquisitions.
The company's cash flows depend on many factors, including the price of oil and gas, the success of its acquisition and drilling activities, and the operational performance of its producing properties. PrimeEnergy has previously used derivative instruments to manage its commodity price risk, but the company currently has no active derivative contracts and does not intend to enter into future derivative contracts unless required to do so for its bank line of credit or if it believes it would significantly benefit from near-term price stability.
Financials
For the fiscal year ended December 31, 2023, PrimeEnergy reported annual net income of $28,103,000, annual revenue of $123,125,000, annual operating cash flow of $109,015,000, and annual free cash flow of -$4,764,000. These financial results demonstrate the company's ability to generate strong cash flows from its operations, despite the challenges faced by the industry.
In the first quarter of 2024, PrimeEnergy reported net income of $11,319,000, or $6.27 per share, compared to $1,410,000, or $0.75 per share, in the same period of 2023. The increase in net income was primarily driven by changes in oil, gas, and NGLs sales related to increases in production combined with slightly increased oil commodity prices and lower gas and natural gas liquid commodity prices.
Oil, gas, and NGLs sales increased 108.4% to $39 million for the three months ended March 2024, up from $18.7 million in the same period of 2023. This increase was due to higher production volumes, particularly in the company's West Texas operations, as well as slightly higher oil prices, partially offset by lower natural gas and NGL prices.
Operational Highlights
PrimeEnergy's development, exploitation, exploration, and production activities are primarily concentrated in three key regions: the Gulf Coast, the Mid-Continent, and West Texas.
Gulf Coast Region
In the Gulf Coast region, which is managed from the company's office in Houston, Texas, PrimeEnergy had 114 producing wells (21 net) as of December 31, 2023, with average net daily production of 173 Boe. The company maintains an acreage position of over 7,468 gross (4,699 net) acres in this region, primarily in Colorado, Newton, and Polk counties.
Mid-Continent Region
PrimeEnergy's Mid-Continent activities are concentrated in central Oklahoma, managed from the company's office in Oklahoma City. As of December 31, 2023, the company had 511 producing wells (132 net) in the Mid-Continent area, with average net daily production of 831 Boe. The company maintains an acreage position of approximately 46,960 gross (10,137 net) acres in this region, primarily in Canadian, Kingfisher, Grant, Major, and Garvin counties.
West Texas Region
The company's West Texas activities are concentrated in the Permian Basin, managed from its office in Midland, Texas. As of December 31, 2023, PrimeEnergy had 647 wells (275 net) in the West Texas area, with average net daily production of 6,172 Boe. The company maintains an acreage position of approximately 16,407 gross (9,341 net) acres in the Permian Basin, primarily in Reagan, Upton, and Martin counties, which it believes has significant resource potential for horizontal drilling in the Spraberry, Jo Mill, and Wolfcamp intervals.
Horizontal Development
PrimeEnergy's strategy is to develop its extensive oil and gas reserves primarily through horizontal drilling, which the company believes provides superior economic results compared to vertical development. In 2023, the company participated with five operators in the drilling and completion of 35 horizontal wells, 32 of which were located in West Texas and three in Oklahoma. The company invested approximately $91 million in these wells and their production facilities, with nearly all of the investment going towards the West Texas operations.
Looking ahead, PrimeEnergy expects to complete 54 new horizontal wells in 2024, investing approximately $140 million. The company is also preparing to invest approximately $95 million in an additional 23 horizontal wells to be drilled and completed in 2025. Furthermore, the company has identified 28 horizontal locations for future development in West Texas that it anticipates will be drilled in the 2026-2027 timeframe, requiring a net investment of approximately $67 million.
Liquidity
Maintaining a strong balance sheet and ample liquidity are key components of PrimeEnergy's business strategy. As of March 31, 2024, the company had $4 million in outstanding borrowings and $81 million in availability under its $300 million revolving credit facility, which has a current borrowing base of $85 million.
The company's capital budget for 2024 is reflective of current commodity prices and has been established based on an expectation of available cash flows, with any cash flow deficiencies expected to be funded by borrowings under the revolving credit facility. PrimeEnergy may adjust its capital program throughout the year, divest non-strategic assets, or enter into strategic joint ventures to preserve or enhance liquidity as needed.
Reserves and Production
PrimeEnergy's oil and gas properties are evaluated annually by Ryder Scott Company, L.P., an independent third-party engineering firm. As of December 31, 2023, the company had total proved reserves of 29,046 MBoe, of which 13,558 MBoe were proved developed and 15,488 MBoe were proved undeveloped.
The company's average net daily production in 2023 was 7,181 Boe, with the majority of production coming from the West Texas region. PrimeEnergy's production mix in 2023 was approximately 41% oil, 28% NGLs, and 31% natural gas.
Risks and Challenges
PrimeEnergy, like other oil and gas companies, faces a variety of risks and challenges, including volatility in commodity prices, competition, regulatory changes, and operational challenges. The company's financial performance is heavily dependent on the prices of oil, natural gas, and NGLs, which can be subject to significant fluctuations due to global supply and demand dynamics, geopolitical events, and other factors beyond the company's control.
Additionally, PrimeEnergy's operations are subject to various environmental laws and regulations, which can result in increased costs and potential liabilities. The company also faces the risk of unsuccessful drilling and exploration activities, which could impact its ability to replace reserves and maintain production levels.
Outlook
PrimeEnergy has not provided specific financial guidance for the full year 2024. However, the company has indicated that it will continue to focus on preserving financial flexibility and liquidity as it manages the risks facing the industry. The company's 2024 capital budget reflects current commodity prices and is based on an expectation of available cash flows, with any cash flow deficiencies expected to be funded by borrowings under the revolving credit facility.
Conclusion
PrimeEnergy Resources Corporation is a well-positioned independent oil and gas company with a balanced portfolio of assets and a focus on disciplined execution. The company's strong cash flow generation, ample liquidity, and strategic approach to horizontal development position it well to navigate the challenges facing the industry and capitalize on future opportunities. As PrimeEnergy continues to execute its growth strategy, investors should closely monitor the company's operational and financial performance, as well as its ability to effectively manage the risks and challenges inherent in the oil and gas industry.