PRIMEENERGY RESOURCES CORP
For the period ended Mar 31, 2024. Filed May 17, 2024.
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A company's report for each of its first three quarters. The financial statements are not audited. It shows how the business has moved since the last annual report, and what management says changed.
Mar 31, 2024 · Filed May 17, 2024
Contents
Item 1. Financial Statements
| Consolidated Balance Sheets – March 31, 2024 and December 31, 2023 | 1 |
|---|---|
| Consolidated Statements of Income – For the three months ended March 31, 2024 and 2023 | 2 |
| Consolidated Statements of Equity – For the three months ended March 31, 2024 and 2023 | 3 |
| Consolidated Statements of Cash Flows – For the three months ended March 31, 2024 and 2023 | 4 |
| Notes to Consolidated Financial Statements – March 31, 2024 | 5-8 |
| Item 2. Management’s Discussion and Analysis of Financial Conditions and Results of Operation | 9-17 |
| 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 |
| Signatures | 20 |
Definitions of Certain Terms and Conventions Used Herein
Within this Report, the following terms and conventions have specific meanings:
Measurements.
| ● | “Bbl” means a standard barrel containing 42 United States gallons. |
| ● | “BOE” means a barrel of oil equivalent and is a standard convention used to express oil and gas volumes on a comparable oil equivalent basis. Gas equivalents are determined under the relative energy content method by using the ratio of six thousand cubic feet of gas to one Bbl of oil or natural gas liquid. |
| ● | “BOEPD” means BOE per day. |
| ● | “Btu” means British thermal unit, which is a measure of the amount of energy required to raise the temperature of one pound of water one degree Fahrenheit. |
| ● | “MBbl” means one thousand Bbls. |
| ● | “MBOE” means one thousand BOEs. |
| ● | “Mcf” means one thousand cubic feet and is a measure of gas volume. |
| ● | “MMcf” means one million cubic feet. |
Indices.
| ● | “Brent” means Brent oil price, a major trading classification of light sweet oil that serves as a benchmark price for oil worldwide. |
| ● | “WAHA” is a benchmark pricing hub for West Texas gas. |
| ● | “WTI” means West Texas Intermediate, a light sweet blend of oil produced from fields in western Texas and is a grade of oil used as a benchmark in oil pricing. General terms and conventions. |
| ● | “DD&A” means depletion, depreciation and amortization. |
| ● | “ESG” means environmental, social and governance. |
| ● | “GAAP” means accounting principles generally accepted in the United States of America. |
| ● | “GHG” means greenhouse gases. |
| ● | “LNG” means liquefied natural gas. |
| ● | “NGLs” means natural gas liquids, which are the heavier hydrocarbon liquids that are separated from the gas stream; such liquids include ethane, propane, isobutane, normal butane and natural gasoline. |
| ● | “NYMEX” means the New York Mercantile Exchange. |
| ● | “OPEC” means the Organization of Petroleum Exporting Countries. |
| ● | “PrimeEnergy” or the “Company” means PrimeEnergy Resources Corporation and its subsidiaries. |
| ● | “Proved developed reserves” means reserves that can be expected to be recovered through existing wells with existing equipment and operating methods or in which the cost of the required equipment is relatively minor compared to the cost of a new well. |
| ● | “Proved reserves” means those quantities of oil and gas, which, by analysis of geosciences and engineering data, can be estimated with reasonable certainty to be economically producible – from a given date forward, from known reservoirs, and under existing economic conditions, operating methods, and government regulations – prior to the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation. The project to extract the hydrocarbons must have commenced or the operator must be reasonably certain that it will commence the project within a reasonable time. |
| (i) | The area of the reservoir considered as proved includes: (A) The area identified by drilling and limited by fluid contacts, if any, and (B) Adjacent undrilled portions of the reservoir that can, with reasonable certainty, be judged to be continuous with it and to contain economically producible oil or gas on the basis of available geoscience and engineering data. |
| (ii) | In the absence of data on fluid contacts, proved quantities in a reservoir are limited by the lowest known hydrocarbons as seen in a well penetration unless geoscience, engineering or performance data and reliable technology establishes a lower contact with reasonable certainty. |
| (iii) | Where direct observation from well penetrations has defined a highest known oil elevation and the potential exists for an associated gas cap, proved oil reserves may be assigned in the structurally higher portions of the reservoir only if geoscience, engineering or performance data and reliable technology establish the higher contact with reasonable certainty. |
| (iv) | Reserves which can be produced economically through application of improved recovery techniques (including, but not limited to, fluid injection) are included in the proved classification when: (A) Successful testing by a pilot project in an area of the reservoir with properties no more favorable than in the reservoir as a whole, the operation of an installed program in the reservoir or an analogous reservoir, or other evidence using reliable technology establishes the reasonable certainty of the engineering analysis on which the project or program was based; and (B) The project has been approved for development by all necessary parties and entities, including governmental entities. |
| (v) | Existing economic conditions include prices and costs at which economic producibility from a reservoir is to be determined. The price shall be the average during the 12-month period prior to the ending date of the period covered by the report, determined as an unweighted arithmetic average of the first-day-of-the-month price for each month within such period, unless prices are defined by contractual arrangements, excluding escalations based upon future conditions. |
| ● | “Proved undeveloped reserves” means reserves that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required for recompletion. |
| (i) | Reserves on undrilled acreage shall be limited to those directly offsetting development spacing areas that are reasonably certain of production when drilled, unless evidence using reliable technology exists that establishes reasonable certainty of economic producibility at greater distances. |
| (ii) | Undrilled locations can be classified as having proved undeveloped reserves only if a development plan has been adopted indicating that they are scheduled to be drilled within five years, unless the specific circumstances, justify a longer time. |
| (iii) | Under no circumstances shall estimates for proved undeveloped reserves be attributable to any acreage for which an application of fluid injection or other improved recovery technique is contemplated, unless such techniques have been proved effective by actual projects in the same reservoir or an analogous reservoir, or by other evidence using reliable technology establishing reasonable certainty. |
| ● | “SEC” means the United States Securities and Exchange Commission. |
| ● | “Standardized Measure” means the after-tax present value of estimated future net cash flows of proved reserves, determined in accordance with the rules and regulations of the SEC, using prices and costs employed in the determination of proved reserves and a 10 percent discount rate. |
| ● | “U.S.” means United States. |
| ● | With respect to information on the working interest in wells, drilling locations and acreage, “net” wells, drilling locations and acres are determined by multiplying “gross” wells, drilling locations and acres by the Company’s working interest in such wells, drilling locations or acres. Unless otherwise specified, wells, drilling locations and acreage statistics quoted herein represent gross wells, drilling locations or acres. |
| ● | “WASP” means weighted average sales price. |
| ● | All currency amounts are expressed in U.S. dollars. |
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This information in this Annual Report on Form 10-K (this“Report”) contains forward-looking statements that involve risks and uncertainties. When used in this document, the words“believes,”* “plans,” “expects,” “anticipates,” “forecasts,” “models,” “intends,” “continue,” “may,” “will,” “could,” “should,” “future,” “potential,” “estimate,” or the negative of such terms and similar expressions as they relate to the Company are intended to identify forward-looking statements, which are generally not historical in nature. The forward-looking statements are based on PrimeEnergy Resources Corporation*“The Company”* current expectations, assumptions, estimates and projections about the Company and the industry in which the Company operates. Although the Company believes that the expectations and assumptions reflected in the forward-looking statements are reasonable as and when made, they involve risks and uncertainties that are difficult to predict and, in many cases, beyond the Company*’s control. In addition, the Company may be subject to currently unforeseen risks that may have a material adverse effect on it.
These risks and uncertainties include, among other things, volatility of commodity prices; product supply and demand; the impact of armed conflict (including the conflicts in Ukraine and the Middle East) or political instability on economic activity and oil and gas supply and demand; competition; the ability to obtain drilling, environmental and other permits and the timing thereof; the effect of future regulatory or legislative actions on The Company or the industry in which it operates, including potential changes to tax rates or laws, new restrictions on development activities or potential changes in regulations limiting produced water disposal; the ability to obtain approvals from third parties and negotiate agreements with third parties on mutually acceptable terms; potential liability resulting from pending or future litigation; the costs, including the potential impact of cost increases due to inflation and supply chain disruptions, and results of development and operating activities; the impact of a widespread outbreak of an illness on global and U.S. economic activity, oil and gas demand, and global and U.S. supply chains; availability of equipment, services, resources and personnel required to perform the Company’s development and operating activities; access to and availability of transportation, processing, fractionation, refining, storage and export facilities; The Company’s ability to replace reserves, implement its business plans or complete its development activities as scheduled; the Company’s ability to achieve its emissions reductions, flaring and other ESG goals; access to and cost of capital; the financial strength of (i) counterparties to The Company’s credit facility and derivative contracts, (ii) issuers of The Company’s investment securities and (iii) purchasers of The Company’s oil, NGL and gas production and downstream sales of purchased commodities; uncertainties about estimates of reserves, identification of drilling locations and the ability to add proved reserves in the future; the assumptions underlying forecasts, including forecasts of production, operating cash flow, well costs, capital expenditures, rates of return, expenses, and cash flow from downstream purchases and sales of oil and gas, net of firm transportation commitments; quality of technical data; environmental and weather risks, including the possible impacts of climate change on the Company’s operations and demand for its products; cybersecurity risks; the risks associated with the ownership and operation of the Company’s well services business and acts of war or terrorism. In addition, the Company may be subject to currently unforeseen risks that may have a materially adverse effect on it.
Accordingly, no assurances can be given that the actual events and results will not be materially different than the anticipated results described in the forward-looking statements. See“Part I, Item 1. Business—* Competition,” “Part I, Item 1. Business—Regulation,” “Part I, Item 1A. Risk Factors,” “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and*“Part II, Item 7A. Quantitative and Qualitative Disclosures About Market Risk”* in this Report for a description of various factors that could materially affect the ability of to achieve the anticipated results described in the forward-looking statements. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof. The Company undertakes no duty to publicly update these statements except as required by law.*
PART I—FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS–** Unaudited **
(Thousands of dollars, except share data)
| March 31, 2024 | December 31, 2023 | |
|---|---|---|
| ASSETS | ||
| Current Assets | ||
| Cash and cash equivalents | $1,750 | $11,061 |
| Accounts receivable, net | 29,534 | 20,301 |
| Prepaid obligations | 791 | 376 |
| Other current assets | 38 | 38 |
| Total Current Assets | 32,113 | 31,776 |
| Property and Equipment | ||
| Oil and gas properties at cost | 713,352 | 659,792 |
| Less: Accumulated depletion and depreciation | (416,964) | (406,913) |
| 296,388 | 252,879 | |
| Field and office equipment at cost | 27,298 | 26,955 |
| Less: Accumulated depreciation | (23,984) | (23,715) |
| 3,314 | 3,240 | |
| Total Property and Equipment, Net | 299,702 | 256,119 |
| Other Assets | 1,081 | 673 |
| Total Assets | $332,896 | $288,568 |
| LIABILITIES AND EQUITY | ||
| Current Liabilities | ||
| Accounts payable | $11,595 | $15,424 |
| Accrued property cost | 61,945 | 33,264 |
| Accrued liabilities | 13,754 | 15,349 |
| Due to related parties | 44 | 80 |
| Current portion of asset retirement and other long-term obligations | 1,138 | 692 |
| Total Current Liabilities | 88,476 | 64,809 |
| Long-Term Bank Debt | 4,000 | - |
| Asset Retirement Obligations | 14,649 | 14,707 |
| Deferred Income Taxes | 55,523 | 47,236 |
| Other Long-Term Obligations | 828 | 866 |
| Total Liabilities | 163,476 | 127,618 |
| Commitments and Contingencies | ||
| Equity | ||
| Common stock, $.10 par value; 2024 and 2023: Authorized: 2,810,000 shares, outstanding 2024: 1,790,245; outstanding 2023: 1,820,100 shares | 281 | 281 |
| Paid-in capital | 7,555 | 7,555 |
| Retained earnings | 216,988 | 205,669 |
| Treasury stock, at cost; 2024: 1,019,755 shares; 2023: 989,900 | (55,404) | (52,555) |
| Total Equity | 169,420 | 160,950 |
| Total Liabilities and Equity | $332,896 | $288,568 |
CONSOLIDATED STATEMENTS OFINCOME–** Unaudited **
(Thousands of dollars, except per share amounts)
| 2024 | 2023 | |
|---|---|---|
| Revenues and other income: | ||
| Oil | $33,299 | $14,578 |
| Natural gas | 1,358 | 1,752 |
| Natural gas liquids | 4,365 | 2,394 |
| Field service | 3,399 | 3,474 |
| Interest and other income, net | 138 | 152 |
| Gain on derivative instruments, net | - | 414 |
| Gain on disposition of assets, net | 431 | 51 |
| 42,990 | 22,815 | |
| Costs and expenses: | ||
| Oil and gas production | 9,130 | 5,470 |
| Production and advalorem taxes | 2,953 | 2,504 |
| Field service | 2,801 | 3,167 |
| Depreciation, depletion and amortization | 10,320 | 6,422 |
| Accretion of discount on asset retirement obligations | 171 | 183 |
| General and administrative | 3,057 | 3,102 |
| Interest | 215 | 182 |
| 28,647 | 21,030 | |
| Income before income taxes | 14,343 | 1,785 |
| Income tax provision | 3,024 | 375 |
| Net income attributable to common stockholders | $11,319 | $1,410 |
| Net Income per share attributable to Common Stockholders: | ||
| Basic | $6.27 | $0.75 |
| Diluted | $4.41 | $0.53 |
| Weighted average shares Outstanding: | ||
| Basic | 1,806,687 | 1,888,895 |
| Diluted | 2,565,951 | 2,647,220 |
CONSOLIDATED STATEMENTS OF EQUITY–** Unaudited **
(Thousands of dollars, except share amounts)
| Shares Outstanding | Common Stock | Additional Paid-In Capital | Retained Earnings | Treasury Stock | Total Equity | |
|---|---|---|---|---|---|---|
| Balance at December 31, 2022 | 1,901,000 | $281 | $7,555 | $177,566 | $(45,049) | $140,353 |
| Purchase of treasury stock | (31,440) | — | — | — | (2,748) | (2,748) |
| Net Income | — | — | — | 1,410 | — | 1,410 |
| Balance at March 31, 2023 | 1,869,560 | $281 | $7,555 | $178,976 | $(47,797) | $139,015 |
| Balance at December 31, 2023 | 1,820,100 | $281 | $7,555 | $205,669 | $(52,555) | $160,950 |
| Purchase of treasury stock | (29,855) | — | — | — | (2,849) | (2,849) |
| Net Income | — | — | — | 11,319 | — | 11,319 |
| Balance at March 31, 2024 | 1,790,245 | $281 | $7,555 | $216,988 | $(55,404) | $169,420 |
CONSOLIDATED STATEMENTS OF CASH FLOWS–** Unaudited **
(Thousands of dollars)
| 2024 · 2023 | ||||
|---|---|---|---|---|
| Cash Flows from Operating Activities: | ||||
| Net Income | $11,319 | $1,410 | ||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||
| Depreciation, depletion, amortization and accretion on discounted liabilities | 10,320 | 6,422 | ||
| Accretion of discount on asset retirement obligations | 171 | 183 | ||
| Gain on sale and exchange of assets | (431) | (51) | ||
| Unrealized gain on derivative instruments, net | - | (980) | ||
| Deferred income taxes | 8,287 | 419 | ||
| Changes in assets and liabilities: | - | |||
| Accounts receivable | (9,233) | 996 | ||
| Due from related parties | - | 15 | ||
| Due to related parties | (36) | - | ||
| Prepaids obligations | (415) | 16,700 | ||
| Accounts payable | (3,829) | 4,484 | ||
| Accrued property costs | 28,681 | 4,520 | ||
| Accrued liabilities | (1,595) | (4,135) | ||
| Other long-term liabilities | (38) | 654 | ||
| Net Cash Provided by Operating Activities | 43,201 | 30,637 | ||
| Cash Flows from Investing Activities: | ||||
| Capital expenditures, including exploration expense | (54,094) | (30,149) | ||
| Proceeds from sale of properties and equipment | 431 | 440 | ||
| Net Cash (Used in) Investing Activities | (53,663) | (29,709) | ||
| Cash Flows from Financing Activities: | ||||
| Purchase of stock for treasury | (2,849) | (2,748) | ||
| Proceeds from long-term bank debt | 14,000 | - | ||
| Repayment of long-term bank debt and other long-term obligations | (10,000) | (11,000) | ||
| Net Cash Provided by (Used in) Financing Activities | 1,151 | (13,748) | ||
| Net (Decrease) in Cash and Cash Equivalents | (9,311) | (12,820) | ||
| Cash and Cash Equivalents at the Beginning of the Period | 11,061 | 26,543 | ||
| Cash and Cash Equivalents at the End of the Period | $1,750 | $13,723 | ||
| Supplemental Disclosures: | ||||
| Income taxes paid during the year | $ | - | $ | - |
| Interest paid | $170 | $167 | ||
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2024
(1) Basis of Presentation:
The accompanying condensed consolidated financial statements of PrimeEnergy Resources Corporation (“PrimeEnergy” or the “Company”) have not been audited by independent public accountants. Pursuant to 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, 2023. In the opinion of management, the accompanying interim consolidated financial statements contain all material adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the Company’s consolidated balance sheets as of March 31, 2024, and December 31, 2023, the consolidated results of operations, cash flows and equity for the three months ended March 31, 2024, and 2023.
As of March 31, 2024, PrimeEnergy’s significant accounting policies are consistent with those discussed in Note 1—Description of Operations and Significant Accounting Policies of its consolidated financial statements contained in PrimeEnergy’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023. 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 consolidated financial statements, subsequent events have been evaluated through the date the statements were issued.
(2) Acquisitions and Dispositions
In the first quarter of 2024, the Company sold 48 net acres in Lea County, New Mexico, along with minor working interest in 23 wells, receiving gross proceeds of $375,600, and early in the second quarter of 2024, the Company has sold an additional 12 net acres in Lea County for proceeds of $150,600.
In the first quarter of 2023, the Company sold 7.8 surface acres in Midland County, Texas receiving gross proceeds of $436,050 and recognizing a gain of $47,000.
(3) Additional Balance Sheet Information:
Certain balance sheet amounts are comprised of the following:
| (Thousands of dollars) | March 31, 2024 | December 31, 2023 |
|---|---|---|
| Accounts Receivable: | ||
| Joint interest billing | $2,794 | $2,560 |
| Trade receivables | 2,197 | 2,345 |
| Oil and gas sales | 18,699 | 14,457 |
| Taxes | 6,341 | 1,458 |
| Other | 177 | 155 |
| 30,208 | 20,975 | |
| Less: Allowance for credit losses | (674) | (674) |
| Total | $29,534 | $20,301 |
| Accounts Payable: | ||
| Trade | $6,042 | $9,847 |
| Royalty and other owners | 4,372 | 4,405 |
| Partner advances | 946 | 946 |
| Other | 235 | 226 |
| Total | $11,595 | $15,424 |
| Accrued Liabilities: | ||
| Compensation and related expenses | $8,943 | $10,324 |
| Taxes | 795 | 929 |
| Lease operating costs | 3,745 | 3,898 |
| Other | 271 | 198 |
| Total | $13,754 | $15,349 |
(4) Long-Term Debt:
Bank Debt:
On July 5,* 2022,* the Company and its lenders entered into aFourth Amended and Restated Credit Agreement (the “2022 Credit Agreement”) with a maturity date of June1, 2026. Under the 2022 Credit Agreement, the Company has a revolving line of credit and letter of credit facility of up to $300 million* * subject to a borrowing base that is determined semi-annually by the lenders based upon the Company’s consolidated financial statements and the estimated value of the Company’s oil and gas properties, in accordance with the Lenders’ customary practices for oil and gas loans. The initial borrowing base of the agreement is*$75 million. The credit facility is secured by substantially all of the Company’s oil and gas properties. The 2022 *Credit Agreement includes terms and covenants that require the Company to maintain a minimum current ratio and total indebtedness to EBITDAX (earnings before depreciation, depletion, amortization, taxes, interest expense and exploration costs) ratio, as defined, and restrictions are placed on the payment of dividends, the amount of treasury stock the Company may purchase, and commodity hedge agreements.
Effective January 20,* 2023,* in lieu of a formal amendment, a borrowing base letter authorized by all lenders and the Company of the 2022* Credit Agreement resulted in an adjustment to decrease the amount of the Borrowing Base available from $75 million to $60 million *until such time as the next redetermination date as required by the agreement.
Effective July 24,* 2023,* in lieu of a formal amendment, a borrowing base letter authorized by all lenders and the Company of the 2022* Credit Agreement resulted in an adjustment to increase the amount of the Borrowing Base available from $60 million to $65 *million until such time as the next redetermination date as required by the agreement.
As of December 31,* 2023,* the borrowing base was $65 million and the Company hadno outstanding borrowings under the Credit Facility.
Effective February 9,* 2024,* the Company and its lenders entered into the Second* Amendment to the 2022 Credit Agreement. This amendment included an increase of the Borrowing Base from $65 million to *$85 million and will remain in effect until the next scheduled redetermination date in accordance with the Credit Agreement.
As of March 31,* 2024 the Company had $4 million of outstanding borrowings and $81 *million available under the credit facility. As of May 15, 2024, the Company had $2 million of outstanding borrowings and $83 million available under the credit facility.
(5) Other Long-Term Obligations and Commitments:
Operating Leases:
The Company leases office facilities under operating leases and recognizes lease expense on a straight-line basis over the lease term. Lease assets and liabilities are initially recorded at commencement date based on the present value of lease payments over the lease term. As most of the Company’s lease contracts do not provide an implicit discount rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The weighted average discount rate used was 9.71%. Certain leases may contain variable costs above the minimum required payments and are not included in the right-of-use assets or liabilities. Leases may include renewal, purchase or termination options that can extend or shorten the term of the lease. The exercise of those options is at the Company’s sole discretion and is evaluated at inception and throughout the contract to determine if a modification of the lease term is required.
Operating lease costs for the three months ended March 31, 2024 and 2023 were $179,000 and $165,000, respectively. Cash payments included in the operating lease cost for the three months ended March 31, 2024 and 2023 were $191,000 and $178,000, respectively. The weighted-average remaining operating lease terms as of March 31, 2024 and 2023 were 7.81 months and 9.63 months, respectively. As of March 31, 2024, the Company had certain leases for office space in Texas which included future payments of $601,000 for 2024 and $149,000 for 2025.
All current leases have been included within the current balance sheet and the Company has not entered into any new leases since the reporting date. Rent expense for office space for the three months ended March 31, 2024 and 2023 was $204,000 and $141,000, respectively.
The payment schedule for the Company’s operating lease obligations as of March 31, 2024 is as follows:
| (Thousands of dollars) · Operating Leases | ||
|---|---|---|
| 2024 | $601 | |
| 2025 | 149 | |
| Total undiscounted lease payments | $750 | |
| Less: Amount associated with discounting | (58) | |
| Total net operating lease liabilities | $692 | |
| Less: Current portion asset retirement and other long-term obligations | 692 | |
| Non-current portion included in Other long-term obligations | $ | - |
Asset Retirement Obligation:
A reconciliation of the liability for plugging and abandonment costs for the three months ended March 31, 2024 is as follows:
| (Thousands of dollars) | March 31, 2024 |
|---|---|
| Asset retirement obligation at December 31, 2023 | $15,153 |
| Liabilities settled | (229) |
| Accretion of discount | 171 |
| Asset retirement obligation at March 31, 2024 | $15,095 |
| Less current portion of asset retirement obligations | 446 |
| Asset retirement obligations, long-term | $14,649 |
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.
(6) Contingent Liabilities:
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.
(7) Stock Options and Other Compensation:
In May 1989, non-statutory stock options were granted by the Company tofour key executive officers for the purchase of shares of common stock. At March 31, 2024 and 2023, 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.
(8) Related Party Transactions:
Amounts due to or from related parties primarily represent receipts or expenses, related to oil and gas properties, collected or paid by the Company as agent for the joint venture partners, which may include members of the Company’s Board of Directors.
(9) 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 derivative contracts were measured based on quotes from the Company’s counterparties. Such quotes have been derived using valuation models that consider various inputs including current market and contractual prices for the underlying instruments, quoted forward prices for natural gas and crude oil, volatility factors and interest rates, such as a curve for a similar length of time as the derivative contract term as applicable. These estimates are verified using comparable NYMEX futures contracts or are compared to multiple quotes obtained from counterparties for reasonableness.
The significant unobservable inputs for Level 3 derivative contracts include basis differentials and volatility factors. An increase (decrease) in these unobservable inputs would result in an increase (decrease) in fair value, respectively. The Company does not have access to the specific assumptions used in its counterparties’ valuation models. Consequently, additional disclosures regarding significant Level 3 unobservable inputs would not be provided. As of the balance sheet reporting dates of March 31, 2024 and December 31, 2023, the Company had no active 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 commodity derivative instruments are recognized in earnings.
The following table sets forth the effect of derivative instruments on the consolidated statements of income for the three months ended March 31, 2024 and 2023:
| Amount of gain/loss recognized in income | |||
|---|---|---|---|
| (Thousands of dollars) | Location of gain/loss recognized in income | 2024 | 2023 |
| Derivatives not designated as cash-flow hedge instruments: | |||
| Natural gas commodity contracts | Gain on derivative instruments, net | - | 235 |
| Crude oil commodity contracts | Gain on derivative instruments, net | - | 179 |
| $ | - | $414 | |
(10) 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 consolidated financial statements:
| Quarter Ended March 31, | ||||||
|---|---|---|---|---|---|---|
| 2024 | 2023 | |||||
| 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 | $11,319 | 1,806,687 | $6.27 | $1,410 | 1,888,895 | $0.75 |
| Effect of dilutive securities: | ||||||
| Options | 759,264 | 758,325 | ||||
| Diluted | $11,319 | 2,565,951 | $4.41 | $1,410 | 2,647,220 | $0.53 |
The text of this filing, as the company filed it with the SEC, without its images or exhibits. This is not investment advice.