Form 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
10-Q
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2022
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 Resources 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, Texas77024
(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)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading
Symbol(s)
Name of each exchange
on which registered
Common Stock, $0.10 par value
PNRG
NASDAQ
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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation
S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule
12b-2
of the Exchange Act.
Large Accelerated Filer ☐ Accelerated Filer ☐
Non-Accelerated Filer ☒ Smaller Reporting Company ☒
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2
of the Exchange Act). Yes ☐ No ☒
The number of shares outstanding of each class of the Registrant's Common Stock as of August 15, 2022 was: Common Stock, $0.10 par value 1,936,000 shares.
PrimeEnergy Resources Corporation
Index to Form
10-Q
June 30, 2022
Page
3
4
5
6
7-12
13-22
23
23
24
24
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24
25-26
27
2
PART I-FINANCIAL INFORMATION
Item 1.
FINANCIAL STATEMENTS
PRIMEENERGY RESOURCES CORPORATION
C
ONDENSED
C
ONSOLIDATED
B
ALANCE
S
HEETS
-
Unaudited
(Thousands of dollars)
June 30,

2022
December 31,

2021
ASSETS
Current Assets
Cash and cash equivalents
$ 11,067 $ 10,347
Accounts receivable, net
17,651 14,208
Prepaid obligations
482 733
Other current assets
40 40
Total Current Assets
29,240 25,328
Property and Equipment
Oil and gas properties at cost
541,419 539,484
Less: Accumulated depletion and depreciation
(373,000 ) (359,742 )
168,419 179,742
Field and office equipment at cost
27,175 27,080
Less: Accumulated depreciation
(22,760 ) (22,159 )
4,415 4,921
Total Property and Equipment, Net
172,834 184,663
Derivative asset long-term and other assets
898 923
Total Assets
$ 202,972 $ 210,914
LIABILITIES AND EQUITY
,
Current Liabilities
Accounts payable
$ 6,355 $ 7,282
Accrued liabilities
7,481 7,821
Due to related parties
12 52
Current portion of asset retirement and other long-term obligations
1,576 1,630
Derivative liability short-term
9,791 4,935
Total Current Liabilities
25,215 21,720
Long-Term Bank Debt
- 36,000
Asset Retirement Obligations
12,726 13,222
Derivative Liability Long-Term
- 650
Deferred Income Taxes
45,028 38,743
Other Long-Term Obligations
1,974 1,488
Total Liabilities
84,943 111,823
Commitments and Contingencies
Equity
Common stock, $.10 par value; 2022 and 2021: Authorized: 2,810,000 shares, outstanding 2022: 1,952,645 shares; outstanding 2021: 1,992,077 shares
.
281 281
Paid-in
capital
7,555 7,555
Retained earnings
151,027 128,902
Treasury stock, at cost; 2022: 857,355 shares; 2021: 817,923
(40,834 ) (37,647 )
Total Equity
118,029 99,091
Total Liabilities and Equity
$ 202,972 $ 210,914
3
PRIMEENERGY RESOURCES CORPORATION
C
ONDENSED
C
ONSOLIDATED
S
TATEMENTS
OF
O
PERATIONS
- Unaudited
Three and six months ended June 30, 2022 and 2021
(Thousands of dollars, except per share amounts)
Three Months Ended

June 30,
Six Months Ended

June 30,
2022
2021
2022
2021
Revenues
Oil sales
$ 25,838 $ 10,664 $ 52,143 $ 19,934
Natural gas sales
4,657 2,292 8,403 3,950
Natural gas liquids sales
4,422 2,404 8,273 4,149
Realized (loss) on derivative instruments, net
(5,888 ) (701 ) (9,707 ) (913 )
Field service income
3,736 2,375 6,976 3,800
Unrealized gain (loss) on derivative instruments, net
2,933 (5,057 ) (4,206 ) (5,968 )
Other income
- - 29 29
Total Revenues
35,698 11,977 61,911 24,981
Costs and Expenses
Lease operating expense
9,213 4,434 17,934 8,901
Field service expense
3,540 1,837 6,540 3,255
Depreciation, depletion, amortization and accretion on discounted liabilities
7,021 6,610 14,199 13,107
General and administrative expense
2,418 2,184 9,090 4,200
Total Costs and Expenses
22,192 15,065 47,763 29,463
Gain on Sale and Exchange of Assets
845 106 14,836 106
Income (Loss) from Operations
14,351 (2,982 ) 28,984 (4,376 )
Other Income (Expense)
Interest Expense
(150 ) (484 ) (499 ) (1,007 )
Income (Loss) Before Provision for (Benefit from) Income Taxes
14,201 (3,466 ) 28,485 (5,383 )
(Benefit) Provision for Income Taxes
3,218 (1,054 ) 6,360 (1,514 )
Net (Loss) Income
10,983 (2,412 ) 22,125 (3,869 )
Less: Net (Loss) Attributable to
Non-Controlling
Interests
- (9 ) - (11 )
Net Income (Loss) Attributable to PrimeEnergy
$
10,983
$
(2,403 ) $ 22,125 $ (3,858 )
Basic Income (Loss) Per Common Share
$ 5.57 $ (1.20 ) $ 11.18 $ (1.93 )
Diluted Income (Loss) Per Common Share
$ 4.02 $ (1.20 ) $ 8.08 $ (1.93 )
The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements
4
PRIMEENERGY RESOURCES CORPORATION
C
ONDENSED
C
ONSOLIDATED
S
TATEMENT
OF
E
QUITY
- Unaudited
Six months Ended June 30, 2022 and 2021
(Thousands of dollars)

Common Stock
Additional

Paid-In

Capital
Retained

Earnings
Treasury

Stock
Total

Stockholders'

Equity -

PrimeEnergy
Non-

Controlling

Interest
Total

Equity
Shares

Outstanding
Common

Stock
Balance at December 31, 2021
1,992,077 $ 281 $ 7,555 $ 128,902 $ (37,647 ) $ 99,091 $ - $ 99,091
Purchase 39,432 shares of Common stock
(39,432 ) - - - (3,187 ) (3,187 ) - (3,187 )
Net Income
- - - 22,125 - 22,125 - 22,125
Balance at June 30, 2022
1,952,645 $ 281 $ 7,555 $ 151,027 $ (40,834 ) $ 118,029 $ - $ 118,029
Balance at December 31, 2020
1,994,177 $ 281 $ 7,541 $ 126,804 $ (37,502 ) $ 97,124 $ 874 $ 97,998
Net Loss
- - - (3,858 ) - (3,858 ) (11 ) (3,869 )
Balance at June 30, 2021
1,994,177 $ 281 $ 7,541 $ 122,946 $ (37,502 ) $ 93,266 $ 863 $ 94,129
The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements
5
PRIMEENERGY RESOURCES CORPORATION
C
ONDENSED
C
ONSOLIDATED
S
TATEMENTS
OF
C
ASH
F
LOWS
- Unaudited
Six Months Ended June 30, 2022 and 2021
(Thousands of dollars)

2022
2021
Cash Flows from Operating Activities:
Net Income (loss)
$ 22,125 $ (3,869 )
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation, depletion, amortization and accretion on discounted liabilities
14,199 13,107
Gain on sale and exchange of assets
(14,836 ) (106 )
Unrealized loss on derivative instruments, net
4,206 5,968
Deferred income taxes
6,285 (1,514 )
Changes in assets and liabilities:
Accounts receivable
(3,443 ) (3,022 )
Due to related parties
(40 ) (38 )
Prepaids and other assets
251 (939 )
Accounts payable
(927 ) 3,327
Accrued liabilities
(340 ) (1,490 )
Net Cash Provided by Operating Activities
27,480 11,424
Cash Flows from Investing Activities:
Capital expenditures, including exploration expense
(2,409 ) (3,729 )
Proceeds from sale of properties and equipment
14,836 106
Net Cash Provided by (Used in) Investing Activities
12,427 (3,623 )
Cash Flows from Financing Activities:
Purchase of stock for treasury
(3,187 ) -
Proceeds from long-term bank debt and other long-term obligations
- 3,000
Repayment of long-term bank debt and other long-term obligations
(36,000 ) (8,000 )
Net Cash Used in Financing Activities
(39,187 ) (5,000 )
Net Increase in Cash and Cash Equivalents
720 2,801
Cash and Cash Equivalents at the Beginning of the Period
10,347 996
Cash and Cash Equivalents at the End of the Period
$ 11,067 $ 3,797
Supplemental Disclosures:
Income taxes paid
$ 75 $ -
Interest paid
$ 481 $ 1,009
The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements
6
PRIMEENERGY RESOURCES CORPORATION
N
OTES
TO
C
ONDENSED
C
ONSOLIDATED
F
INANCIAL
S
TATEMENTS
June 30, 2022
(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, 2021. 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 June 30, 2022 and December 31, 2021, the condensed consolidated results of operations, cash flows and equity for the
six
months ended June 30, 2022 and 2021.
As of June 30, 2022, 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, 2021. 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.
(2) Acquisitions and Dispositions
In the first quarter of 2022, the Company sold 1,809 net leasehold acres in Reagan and Midland Counties, Texas through two separate transactions receiving gross proceeds of $14.0 million.
In the second quarter of 2022, the Company sold 241 net acres in Canadian County, Oklahoma for $845,000
.
(3) Additional Balance Sheet Information:
Certain balance sheet amounts are comprised of the following:

(Thousands of dollars)
June 30,

2022
December 31,

2021
Accounts Receivable
:
Joint interest billing
$ 2,975 $ 1,902
Trade receivables
1,638 1,429
Oil and gas sales
12,454 11,154
Other
955 94
18,022 14,579
Less: Allowance for doubtful accounts
(371 ) (371 )
Total
$ 17,651 $ 14,208
Accounts Payable:
Trade
$ 2,991 $ 2,390
Royalty and other owners
2,246 2,802
Partner advances
1,062 1,209
Other
56 881
Total
$ 6,355 $ 7,282
Accrued Liabilities:
Compensation and related expenses
$ 4,367 $ 3,919
Property costs
2,216 2,901
Taxes
813 893
Other
85 108
Total
$ 7,481 $ 7,821
7
(4) Long-Term Debt:
Bank Debt:
On February 15, 2017, the Company and its lenders entered into a Third Amended and Restated Credit Agreement (the "2017 Credit Agreement") with a maturity date of February 15, 2021. Under the 2017 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 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 credit facility is secured by substantially all of the Company's oil and gas properties. The 2017 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, commodity hedge agreements, and loans and investments in its consolidated subsidiaries and limited partnerships.
On December 20, 2021 the company entered into a Seventh Amendment to the 2017 Credit Agreement and Citibank N.A was appointed as successor administrative agent replacing PNC Bank. Under this amendment the Company's borrowing base is $50 million. Borrowings under the 2017 Credit Agreement will bear interest at alternate base rate (ABR) plus an applicable margin ranging from 2.00% to 3.00% or at the Company's option, at a rate equal to the secured overnight financing rate (SOFR rate) as administered by the SOFR Administrator, in this case the Federal Reserve Bank of New York, plus an applicable margin ranging from 3.00% to 4.00%. The 2017 Credit Agreement matures February 11, 2023. The current borrowing base review and maturity extension was completed on July 5, 2022. The Company's borrowings under this credit facility approximates fair value because the interest rates are variable and reflective of market rates.
On June 30, 2022, the Company had no borrowings outstanding under its revolving credit facility and $50 million was available for future borrowings. The combined weighted average interest rate paid on outstanding bank borrowings subject to ABR base rate and SOFR interest was 5.98% for the six months ended June 30, 2022 as compared to 5.31% for the six months ended June 30, 2021.
On July 5, 2022 , the Company and its lenders entered into a Fourth Amended and Restated Credit Agreement (the "2022 Credit Agreement") with a maturity date of June 1, 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 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.
As of August 15, 2022 the Company has no borrowings outstanding under its current revolving 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. Leased assets and liabilities are initially recorded at commencement date based on the present value of lease payments over the lease term. A new finance lease for office equipment is included in property and equipment, other current liabilities and other long-term liabilities this quarter. 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 5.5%. 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. Leases with an initial term of 12 months or less are not recorded on the balance sheet.
Operating lease costs for the six months ended June 30, 2022 was $306 thousand. Cash payments included in the operating lease cost for the six months ended June 30, 2022 was $324 thousand. The weighted-average remaining operating lease terms is 9 months.
The Company amended certain leases for office space in Texas providing for payments of $349,000 in 2022, $251,000 in 2023, $106,000 in 2024 and $27,000 in 2025.
Rent expense for office space six months ended June 30, 2022 and 2021 was $392,000 and $328,000, respectively.
8
The payment schedule for the Company's operating lease obligations as of June 30, 2022 is as follows:

(Thousands of dollars)
Operating

Leases
2022
$ 349
2023
$ 251
2024
$ 106
2025
27
Total undiscounted lease payments
$ 733
Less: Amount associated with discounting
(66 )
Net operating lease liabilities
$ 667
Asset Retirement Obligation:
A reconciliation of the liability for plugging and abandonment costs for the
six
months ended June 30, 2022 is as follows:

(Thousands of dollars)
June 30,

2022
Asset retirement obligation at December 31, 2021
$ 14,295
Liabilities settled
(835 )
Accretion expense
339
Asset retirement obligation at June 30, 2022
$ 13,799
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 to four key executive officers for the purchase of shares of common stock. At June 30, 2022 and 2021, 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:
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.
9
(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 following fair value hierarchy table presents information about the Company's assets and liabilities measured at fair value on a recurring basis at June 30, 2022 and December 31, 2021:
June 30, 2022
Quoted Prices in

Active Markets

For Identical

Assets (Level 1)
Significant

Other

Observable

Inputs (Level 2)
Significant

Unobservable

Inputs (Level 3)
Balance at

June 30,

2022
(Thousands of dollars)
Assets
Commodity derivative contracts
$
-
$
-
$
-
$
-
Total assets
$
-
$
-
$
-
$
-
Liabilities
Commodity derivative contracts
$
-
$
-
$
(9,791
)
$
(9,791
)
Total liabilities
$
-
$
-
$
(9,791
)
$
(9,791
)

December 31, 2021
Quoted Prices in

Active Markets

For Identical

Assets (Level 1)
Significant

Other

Observable

Inputs (Level 2)
Significant

Unobservable

Inputs (Level 3)
Balance at

December 31,

2021
(Thousands of dollars)
Assets
Commodity derivative contracts
$
-
$
-
$
-
$
-
Total assets
$
-
$
-
$
-
$
-
Liabilities
Total liabilities
$
-
$
-
$
(5,585
)
$
(5,585
)
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 LIBOR 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 were not provided.
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 six months ended June 30, 2022.
(Thousands of dollars)
Net Liabilities - December 31, 2021
$ (5,585 )
Total realized and unrealized (gains) losses:
Included in earnings (a)
(13,913 )
Purchases, sales, issuances and settlements
9,707
Net Liabilities - June 30, 2022
$ (9,791 )
(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.
10
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 balance sheets at June 30, 2022 and December 31, 2021:
Fair Value
(Thousands of dollars)
Balance Sheet Location
June 30,

2022
December 31,

2021
Liability Derivatives:
Derivatives not designated as cash-flow hedging instruments:
Crude oil commodity contracts
Derivative liability short-term
$ (7,722 ) $ (3,992 )
Natural gas commodity contracts
Derivative liability short-term (2,069 ) (943 )
Crude oil commodity contracts
Derivative liability long-term - (490 )
Natural gas commodity contracts
Derivative liability long-term - (160 )
Total derivative instruments
$ (9,791 ) $ (5,585 )
The following table sets forth the effect of derivative instruments on the consolidated statements of operations for the six months ended June 30, 2022 and 2021:

Location of gain/loss recognized in income
Amount of gain/loss

recognized in income
(Thousands of dollars)
2022
2021
Derivatives not designated as cash-
flow hedge instruments:
Natural gas commodity contracts
Unrealized (loss) on derivative instruments, net
$ (966 ) $ (1,085 )
Crude oil commodity contracts
Unrealized (loss) on derivative instruments, net
(3,240 ) (4,883 )
Natural gas commodity contracts
Realized (loss) on derivative instruments, net
(1,986 ) (277 )
Crude oil commodity contracts
Realized (loss) on derivative instruments, net
(7,721 ) (636 )
$ (13,913 ) $ (6,681 )
11
(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 financial statements:

Six Months Ended June 30,
2022
2021
Net
Income

(In

000's)
Weighted

Average

Number of

Shares

Outstanding
Per

Share

Amount
Net

Loss

(In

000's)
Weighted

Average

Number of

Shares

Outstanding
Per

Share

Amount
Basic
$ 22,125 1,979,690 $ 11.18 $ (3,858 ) 1,994,177 $ (1.93 )
Effect of dilutive securities:
Options (a)
- 756,879 - -
Diluted
$ 22,125 2,736,569 $ 8.08 $ (3,858 ) 1,994,177 $ (1.93 )
Three Months Ended June 30,
2022
2021
Net

Income
(In

000's)
Weighted

Average

Number of

Shares

Outstanding
Per

Share

Amount
Net

Loss

(In

000's)
Weighted

Average

Number of

Shares

Outstanding
Per

Share

Amount
Basic
$ 10,983 1,972,979 $ 5.57 $ (2,403 ) 1,994,177 $ (1.20 )
Effect of dilutive securities:
Options (a)
- 757,185 - -
Diluted
$ 10,983 2,730,164 $ 4.02 $ (2,403 ) 1,994,177 $ (1.20 )
(a)
The effect of the 767,500 outstanding stock options is anti-dilutive for the three and six months ended June 30, 2021 due to the net loss for these periods.
12
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 contain 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, and Oklahoma. We also own a 12.5% over-riding royalty interest in over 30,000 acres in the state of West Virginia. In addition, we own a substantial amount of well-servicing equipment and, through a wholly owned offshore company, a
60-mile-long
pipeline offshore on the shallow shelf of Texas. We also hold a 30% interest in a limited partnership which owns a 138,000 square foot retail shopping center on ten acres in Prattville, Alabama. 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 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.
In addition to developing our oil and natural gas reserves, we continue to actively pursue the acquisition of producing properties. We attempt to assume the position of operator in all acquisitions of producing properties and will continue to evaluate properties for leasehold acquisition and for exploration and development operations in areas in which we own interests. To diversify and broaden our asset base, we will consider acquiring the assets or stock in other entities in the oil and gas business. Our main objective in making any such acquisitions will be to acquire income-producing assets or developable leasehold acreage to build stockholder value through consistent growth and development of our oil and gas reserve base on a cost-effective 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 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 statement of operations as changes occur in the NYMEX price indices.
Our financial results depend on many factors, particularly the price of natural gas and crude oil and our ability to market our production on economically attractive terms. Commodity prices are affected by many factors outside of our control, including changes in market supply and demand, which are impacted by weather conditions, pipeline capacity constraints, inventory storage levels, basis differentials and other factors. In addition, our realized prices are further impacted by our derivative and hedging activities.
We derive our revenue and cash flow principally from the sale of oil, natural gas and NGLs. As a result, our revenues are determined, to a large degree, by prevailing prices for crude oil, natural gas and NGLs. We sell our oil and natural gas on the open market at prevailing market prices or through forward delivery contracts. Because some of our operations are located outside major markets, we are directly impacted by regional prices regardless of Henry Hub, WTI or other major market pricing. The market price for oil, natural gas and NGLs is dictated by supply and demand; consequently, we cannot accurately predict or control the price we may receive for our oil, natural gas and NGLs. Index prices for oil, natural gas and NGL's have improved since the lows of 2020, however, we expect prices to remain volatile and consequently cannot determine with any degree of certainty what effect increases or decreases in these prices will have on our capital program, production volumes or revenue.
We are the operator of the majority of our developed and undeveloped acreage which is nearly all held by production. In the Permian Basin of West Texas and eastern New Mexico the Company maintains an acreage position of approximately 17,228 gross (10,720 net) acres, 97% of which is located in Reagan, Upton, Martin, and Midland counties of Texas where our current West Texas horizontal drilling activities are focused. We believe this acreage has significant resource potential in the Spraberry and Wolfcamp intervals for additional horizontal drilling that could support the drilling of as many as 250 additional horizontal wells. In Oklahoma we maintain an acreage position of approximately 47,760 gross (10,410 net) acres. Our Oklahoma horizontal development is focused primarily in Canadian, Kingfisher, Grady, and Garvin counties. We believe approximately 5,800 net acres in these counties hold significant additional resource potential that could support the drilling of as many as 50 new horizontal wells based on an estimate of four wells per multi-section drilling unit, two in the Mississippian and two in the Woodford Shale. Should we choose to participate with a working interest in future development, our share of these future capital expenditures would be approximately $34.6 million at an average 10% ownership level.
Future development plans are established based on various factors, including the expectation of available cash flows from operations and availability of funds under our revolving credit facility.
13
District Information
The following table represents certain reserves and well information as of December 31, 2021.
Gulf

Coast
Mid-

Continent
West

Texas
Other
Total
Proved Reserves as of December 31, 2021 (MBoe)
Developed
906 2,383 8,957 6 12,252
Undeveloped
- - - - -
Total
906 2,383 8,957 6 12,252
Average Net Daily Production (Boe per day)
336 747 2,878 3 3,964
Gross Productive Wells (Working Interest and ORRI Wells)
207 549 576 200 1,532
Gross Productive Wells (Working Interest Only)
189 400 530 88 1,207
Net Productive Wells (Working Interest Only)
105 189 263 6 564
Gross Operated Productive Wells
137 195 321 - 653
Gross Operated Water Disposal, Injection and Supply wells
7 44 6 - 57
In several of our producing regions we have field service groups to service our operated wells and locations as well as third-party operators in the area. These services consist of well service support, site preparation and construction services for drilling and workover operations. Our operations are performed utilizing workover or swab rigs, water transport trucks, saltwater disposal facilities, various land excavating equipment and trucks we own and that are operated by our field employees.
Gulf Coast Region
Our activities in the Gulf Coast region are primarily production and development of our existing operated properties concentrated in east and southeast Texas. This region is managed from our office in Houston, Texas. Principal producing intervals are in the Wilcox, San Miguel, Olmos, and Yegua formations at depths ranging from 3,000 to 12,500 feet. As of December 31, 2021, we had 207 producing wells (105 net) in the Gulf Coast region, of which 137 wells are operated by us. The Average net daily production in our Gulf Coast Region in 2021 was 336 Boe. At December 31, 2021, we had 906 MBoe of proved reserves in the Gulf Coast region, which represented 7% of our total proved reserves. We maintain an acreage position of over 11,000 gross (3,447 net) acres in this region, primarily in Dimmit and Polk counties. We operate a field service group in this region from a field office in Carrizo Springs, Texas utilizing four workover rigs, twenty-three water transport trucks, two saltwater disposal wells and several trucks and excavating equipment. Services including well service support, site preparation and construction services for drilling and workover operations are provided to third-party operators as well as utilized in our own operated wells and locations. The Company also owns, through its wholly owned offshore company, a
60-mile-long
pipeline on the shallow shelf of Texas that is currently idle, but may someday have value. As of June 30, 2022, the Gulf Coast region has no operated wells in the process of being drilled, no waterfloods in the process of being installed and no other related activities of material importance.
Mid-Continent
Region
Our
Mid-Continent
activities are concentrated in central Oklahoma. This region is managed from our office in Oklahoma City, Oklahoma. As of December 31, 2021, we had 549 producing wells (189 net) in the
Mid-Continent
area, of which 195 wells are operated by us. Principal producing intervals are in the Roberson, Avant, Skinner, Sycamore, Bromide, McLish, Hunton, Mississippian, Oswego, Red Fork, and Chester formations at depths ranging from 1,100 to 10,500 feet. Average net daily production in our
Mid-Continent
Region in 2021 was 747 Boe. At December 31, 2021, we had 2,383 MBoe of proved reserves in the
Mid-Continent
area, representing 20% of our total proved reserves. We maintain an acreage position of approximately 47,760 gross (10,410 net) acres in this region, primarily in Canadian, Kingfisher, Grant, Major, and Garvin counties. Our
Mid-Continent
region is actively participating with third-party operators in the horizontal development of lands that include Company owned interests in several counties in the Stack and Scoop plays of Oklahoma where drilling primarily targets reservoirs of the Mississippian and Woodford formations.
In the first half of 2022, in the
Mid-Continent
region, the Company participated with 9.38% interest in the drilling of four horizontal wells in Canadian County, Oklahoma operated by Ovintiv
Mid-Continent
Inc. All four wells have been completed and are online as of August 1
st
. The resulting reserves of this new drilling will be an addition to our 2021
year-end
reserve base.
14
West Texas Region
Our West Texas activities are concentrated in the Spraberry and Wolfcamp shale plays of the Permian Basin encompassing eight counties in West Texas. The oil produced from these shales is West Texas Intermediate Sweet and the gas is primarily casing-head gas with an average energy content of 1,400 Btu. The horizontal target depths range from 7,600 feet to 12,500 feet. This region is managed from our office in Midland, Texas.
As of December 31, 2021, we had 576 wells (263 net) in the West Texas area, of which 321 wells are operated by us. Average net daily production in Our West Texas Region in 2021 was 2,878 Boe. At December 31, 2021, we had 8,957 MBoe of proved reserves in the West Texas area, or 73% of our total proved reserves. We maintain an acreage position of approximately 17,228 gross (10,720 net) acres in the Permian Basin in West Texas, primarily in Reagan, Upton, Martin, and Midland counties and believe this acreage has significant resource potential for horizontal drilling in the Spraberry, Jo Mill, and Wolfcamp intervals. We operate a field service group in this region utilizing nine workover rigs, four hot oiler trucks, one kill truck, and two roustabout trucks. Services, including well service support, site preparation, and construction services for drilling and workover operations, are provided to third-party operators as well as utilized in our own operated wells and locations.
In the first half of 2022, the Company participated with 10.3% interest in the drilling of four
1.5-mile-long
horizontal wells in Irion County, Texas operated by SEM Operating Company, LLC. All four wells have been drilled and completed and are expected to start production in August of 2022.
In addition to the eight wells drilled in the first half of 2022, the Company has received proposals for 24 new horizontal wells in West Texas: fifteen planned for the second half of 2022 and eleven for the first quarter of 2023. In the fourth quarter of this year, we expect to participate with 27% interest in the drilling of five
2.5-mile-long
horizontal wells in Martin County, Texas with ConocoPhillips and to participate with 25% interest in the drilling of ten
2-mile-long
horizontals with Hibernia Energy III, LLC. In the first quarter of 2023, we anticipate the start of nine
2.5-mile-long
horizontals with BTA Oil Producers, LLC in Reagan County, and two
3-mile-long
horizontals with Apache Corporation in Upton County. The Company will participate with an average of approximately 42% interest in the BTA wells and 47% in the Apache wells. These proved undeveloped drilling plans were added in 2022 and therefore are not represented in the
year-end
2021 reserves report.
Reserve Information:
Our interests in proved developed and undeveloped oil and gas properties, including the interests held by the Partnerships, have been evaluated by Ryder Scott Company, L.P. for each of the three years ended December 31, 2021. The professional qualifications of the technical persons primarily responsible for overseeing the preparation of the reserve estimates can be found in Exhibit 99.1, the Ryder Scott Company, L.P. Report on Registrant's Reserves Estimates. In matters related to the preparation of our reserve estimates, our district managers report to the Engineering Data manager, who maintains oversight and compliance responsibility for the internal reserve estimate process and provides oversight for the annual preparation of reserve estimates of 100% of our
year-end
reserves by our independent third-party engineers, Ryder Scott Company, L.P. The members of our district and central groups consist of degreed engineers and geologists with between approximately twenty and thirty-five years of industry experience, and between eight and twenty-five years of experience managing our reserves. Our Engineering Data manager, the technical person primarily responsible for overseeing the preparation of reserves estimates, has over thirty years of experience, holds a Bachelor degree in Geology and an MBA in finance and is a member of the Society of Petroleum Engineers and American Association of Petroleum Geologist. See Part II, Item 8 "Financial Statements and Supplementary Data", for additional discussions regarding proved reserves and their related cash flows. All of our reserves are located within the continental United States. The following table summarizes our oil and gas reserves at each of the respective dates:
Reserve Category
Proved Developed
Proved Undeveloped
Total
As of December 31,
Oil

(MBbls)
NGLs

(MBbls)
Gas

(MMcf)
Total

(MBoe)
Oil

(MBbls)
NGLs

(MBbls)
Gas

(MMcf)
Total

(MBoe)
Oil

(MBbls)
NGLs

(MBbls)
Gas

(MMcf)
Total

(MBoe)
2019 4,381 2,914 19,995 10,268 1,833 1,017 4,547 3,608 6,214 3,931 24,542 14,235
2020 2,684 2,258 13,633 7,214 1,784 787 3,897 3,221 4,468 3,045 17,530 10,435
2021 5,386 2,882 23,902 12,252 - - - - 5,386 2,882 23,902 12,252
(a)
In computing total reserves on a barrels of oil equivalent (Boe) basis, gas is converted to oil based on its relative energy content at the rate of six Mcf of gas to one barrel of oil and NGLs are converted based upon volume; one barrel of natural gas liquids equals one barrel of oil.
15
In 2019, in West Texas, we participated in the initial three shallow horizontals on our Kashmir tract with one of each of these wells completed in the Wolfcamp "A", Jo Mill, and Lower Spraberry. The Company has 48% interest in two of these wells and 5.3% in one well. All three wells were brought on production in May of 2019.
In 2020, in West Texas we participated in the drilling of seven wells: one for 8.6% interest which was brought into production in July of 2020, and six wells with an average 47.5% interest that were drilled but not completed at
year-end
and therefore classified as Proved Undeveloped in the
year-end
reserve report. The Company invested approximately $8.0 million in these seven wells in 2020. Also in 2020, proved producing reserves were added in West Texas through the addition of 11 horizontal wells completed in Midland County, Texas, in which we receive 0.56% to 1% over-riding royalty interest.
In 2021, in West Texas, we participated with Apache in the drilling of three additional horizontals on the Kashmir Tract in Upton County, Texas and completed these three wells in September of 2021 along with six other wells drilled in 2020 on the same lease that were drilled but uncompleted at
year-end
2020. The Company has an average of 47.8% interest in these nine wells and invested approximately $30 million in these horizontal wells.
In our Oklahoma, Scoop-Stack play, in 2019, we participated in the drilling and completion of six wells on our WM Wallace tract for 7.67% interest, and nine wells, included on our Slash, Osborn, and Leon tracts, with an average 1.34% interest. In addition, three wells drilled in Oklahoma in 2018, were completed in 2019 converting 24 Mboe of reserves to proved developed. Also in Oklahoma, six wells designated as
Shut-in
on December 31, 2018, were brought into production in 2019: five located on our Ruthie tract, and one on our Braum tract.
In 2019, in our Gulf Coast region, we added production through the recompletion of three vertical wells in Polk County, Texas: one operated by the Company in which we have 72.5% interest, and two operated by Unit Petroleum in which the Company owns 2.81% working interest and 3.77% net revenue interest. In 2020, the Company successfully recompleted one additional operated well in the Segno field with a 72.5% interest.
At December 31, 2020, in total, the Company had 3,221 Mboe of proved undeveloped reserves attributable to 13 wells operated by others, 10 of which were drilled but not completed by
year-end
2020, and three that were not drilled until 2021. The three new horizontals along with the six uncompleted wells at
year-end
were brought online in late September and early October of 2021. These successful new wells are on our Kashmir tract in Upton County, Texas operated by Apache Corporation. These nine PUD wells at
year-end
2020 accounted for 3,127 Mboe of the total undeveloped reserves where the Company has an average 47.5% interest and invested approximately $30 million dollars in these wells. The four other PUD wells, drilled but not completed at
year-end
2020, are located in Grady County, Oklahoma and accounted for 95 Mboe of the total undeveloped reserves.
At December 31, 2021, the Company had 159 Mboe of proved developed
shut-in
reserves attributable to three horizontal wells drilled and completed in Canadian County, Oklahoma in December of 2021, but not yet online. Three of the four wells were successfully completed and online in January, 2022, while one well had completion issues and has been temporarily abandoned. Regarding the four drilled but uncompleted PUD wells in Grady County, Oklahoma noted in the paragraph above, reserves previously attributed to these wells were not included in the 2021
year-end
reserve report as the operator has no near-term plans for their completion.
In the first half of 2022, in our West Texas horizontal drilling program, we participated with 10.3% interest in the drilling of four horizontal wells with SEM Operating Company and have received proposals for an additional 24 horizontal wells, 15 of those to begin in the fourth quarter of this year. In total, the Company is likely to invest approximately $75 million in these 28 wells. In Oklahoma, thus far in 2022, the Company is participating for 9.38% interest with Ovintiv
Mid-Continent
in the drilling of four wells on our Bohlman tract in Canadian County, Oklahoma. These four wells and the four SEM wells in West Texas are anticipated to be online in August of this year. In the first quarter of 2023, we intent to participate with Apache in the drilling of two
3-mile-long
horizontals in Upton County, Texas and with BTA Oil Producers in the drilling of nine 2.5 mile-long horizontals in Reagan County, Texas. Additional drilling and future development plans will be established based on an expectation of available cash flows from operations and availability of funds under our revolving credit facility.
We employ technologies to establish proved reserves that have been demonstrated to provide consistent results capable of repetition. The technologies and economic data being used in the estimation of our proved reserves include, but are not limited to, electrical logs, radioactivity logs, geologic maps, production data, and well-test data. The estimated reserves of wells with sufficient production history are estimated using appropriate decline curves. Estimated reserves of producing wells with limited production history and for undeveloped locations are estimated using performance data from analogous wells in the area. These wells are considered analogous based on production performance from the same formation and with similar completion techniques.
16
The estimated future net revenue (using current prices and costs as of those dates) and the present value of future net revenue (at a 10% discount for estimated timing of cash flow) for our proved developed and proved undeveloped oil and gas reserves at the end of each of the three years ended December 31, 2021, are summarized as follows (in thousands of dollars):
Proved Developed
Proved Undeveloped
Total
As of December 31,
Future Net

Revenue
Present

Value 10

Of Future

Net

Revenue
Future Net

Revenue
Present

Value 10

Of Future

Net

Revenue
Future Net

Revenue
Present

Value 10

Of Future

Net

Revenue
Present

Value 10

Of Future

Income

Taxes
Standardized

Measure of

Discounted

Cash flow
2019
$ 116,592 $ 82,155 $ 42,700 $ 17,876 $ 159,292 $ 100,031 $ 18,419 $ 81,612
2020
$ 43,886 $ 34,717 $ 37,346 $ 21,823 $ 81,232 $ 56,539 $ 14,920 $ 41,619
2021
$ 275,227 $ 171,906 $ - $ - $ 275,227 $ 171,906 $ 36,100 $ 135,806
The PV 10 Value represents the discounted future net cash flows attributable to our proved oil and gas reserves before income tax, discounted at 10%. Although this measure is not in accordance with U.S. generally accepted accounting principles ("GAAP"), we believe that the presentation of the PV10 Value is relevant and useful to investors because it presents the discounted future net cash flow attributable to proved reserves prior to taking into account corporate future income taxes and the current tax structure. We use this measure when assessing the potential return on investment related to oil and gas properties. The PV10 of future income taxes represents the sole reconciling item between this
non-GAAP
PV10 Value versus the GAAP measure presented in the standardized measure of discounted cash flow. A reconciliation of these values is presented in the last three columns of the table above. The standardized measure of discounted future net cash flows represents the present value of future cash flows attributable to proved oil and natural gas reserves after income tax, discounted at 10%.
"Proved developed" oil and gas reserves are reserves that can be expected to be recovered from existing wells with existing equipment and operating methods. "Proved undeveloped" oil and gas reserves are 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. Our reserves include amounts attributable to
non-controlling
interests in the Partnerships. These interests represent less than 10% of our reserves.
In accordance with U.S. generally accepted accounting principles, product prices are determined using the twelve-month average oil and gas index prices, calculated as the unweighted arithmetic average for the first day of the month price for each month, adjusted for oilfield or gas gathering hub and wellhead price differentials (e.g. grade, transportation, gravity, sulfur, and basic sediment and water) as appropriate. Also, in accordance with SEC specifications and U.S. generally accepted accounting principles, changes in market prices subsequent to December 31 are not considered.
While it may be reasonably anticipated that the prices received for the sale of our production may be higher or lower than the prices used in this evaluation, as described above, and the operating costs relating to such production may also increase or decrease from existing levels, such possible changes in prices and costs were, in accordance with rules adopted by the SEC, omitted from consideration in making this evaluation for the SEC case. Actual volumes produced, prices received and costs incurred may vary significantly from the SEC case.
Natural gas prices, based on the twelve-month average of the first of the month Henry Hub index price, were $3.598 per MMBtu in 2021 as compared to $1.985 per MMBtu in 2020, and $2.581 per MMBtu in 2019. Oil prices, based on the NYMEX first of the month average price, were $66.56 per barrel in 2021 as compared to $39.57 per barrel in 2020, and $55.69 per barrel in 2019. Since January 1, 2021, we have not filed any estimates of our oil and gas reserves with, nor were any such estimates included in any reports to, any federal authority or agency, other than the Securities and Exchange Commission.
RECENT ACTIVITIES
The Company's activities include development and exploratory drilling. Our strategy is to develop the Company's extensive oil and gas reserves primarily through horizontal drilling. This strategy includes targeting reservoirs with high initial production rates and cash flow as well as targeting reservoirs with lower initial production rates but with higher expected return on investment. We believe that with today's technology, horizontal development of our reserves provides superior economic results as compared to vertical development, by delivering higher production rates through greater contact and stimulation of a larger volume of reservoir rock while minimizing the surface footprint required to develop those same reserves.
17
Maintaining a strong balance sheet and ample liquidity are key components of our business strategy. In 2022, we will continue our focus on preserving financial flexibility and ample liquidity as we manage the risks facing our industry. Our capital budget for the year 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 our revolving credit facility. As we have done historically to preserve or enhance liquidity, we may adjust our capital program throughout the year, divest
non-strategic
assets, or enter into strategic joint ventures.
In the third quarter of 2021, nine
two-mile
horizontal wells in Upton County, Texas, operated by Apache Corporation, were completed and brought into production. In the fourth quarter of 2021, three
two-mile
horizontal wells operated by Ovintiv
Mid-Continent
in Canadian County, Oklahoma were completed and brought online in January 2022. The Company has an average of 47.5% interest in the nine wells completed with Apache and 11.25% interest in the three wells completed with Ovintiv.
Through the second quarter of 2022, the Company has participated with SEM Operating Company LLC in the drilling of four 7,900' horizontal wells in Irion County, Texas with 10.3% interest, and participated with Ovintiv
Mid-Continent
Inc in the drilling of four 10,000'-long horizontal wells in Canadian County, Oklahoma with 9.38% interest. All eight of these wells are in the process of being completed and are expected to be producing in August of this year. An additional 15 wells are planned to begin development in the fourth quarter of 2022; five with ConocoPhillips, and ten with Hibernia Energy III. In the first quarter of 2023, we are planning the drilling of two horizontals in Upton County, Texas, with Apache Corporation and nine horizontals with BTA Oil Producers in Reagan County, Texas.
Since the start of our West Texas horizontal drilling program in 2015, we have participated in 81 wells and invested approximately $130 million in horizontal drilling in the Permian Basin. This includes the four wells currently in progress with SEM Operating Company in Irion County, Texas.
In Upton County, Texas, we are developing a contiguous 3,260 acre block with our joint venture partner, Apache Corporation. In this block the Company has 2,600 leasehold acres with interest between 14% and 56% depending on the particular lease and depth being developed. In 2018, eight successful wells were drilled horizontally by Apache Corporation in the Wolfcamp "B" of this block with the Company participating for 49% interest and this is believed to be full development of the Wolfcamp "B" reservoir. Together with Apache, we are planning development of the Upper Wolfcamp, Jo Mill, and Lower Spraberry reservoirs of this block. These shallower reservoirs have been
proven-up
on our offset 1,300 acre Kashmir tract. It is expected that as many as 54 additional horizontals will be developed on this 3,260 acres in the near future. This development is estimated to cost approximately $370.6 million, with the Company's share being approximately $170.8 million. Two
3-mile-long
horizontals have been slated for the first quarter of 2023. In addition to the 54 prospective wells to be drilled for these three reservoirs, a fourth target reservoir, the Middle Spraberry, is also prospective for future development. The potential of the Middle Spraberry on the 3,260 acre block is for 18 horizontal wells to be drilled and completed at a gross cost of approximately $126.3 million with the Company's share being approximately $61.8 million. The actual number of wells that are eventually drilled as well as the cost and the timing of drilling will vary based upon many factors, including commodity market conditions.
In addition to the 3,260 acre block being developed, as described above, the Company has also been developing an offsetting 1,300 acre block in Upton County, Texas, with Apache Corporation as operator. In the second quarter of 2019 three horizontal wells were completed and brought on production from reservoirs above the Middle Wolfcamp: one in the Wolfcamp "A", one in the Jo Mill, and one in the Lower Spraberry, confirming the economic viability of these reservoirs on our acreage. Prime holds 47.5% working interest in these reservoirs. As a result of the success of the initial three wells, nine additional horizontals followed and were completed in the third quarter of 2021. Our average 47.5% share of the cost of these nine horizontal wells was approximately $26.7 million in total. In addition to the Wolfcamp "A", Jo Mill and Lower Spraberry, that are now considered fully developed on the tract, four locations in the Middle Spraberry will be considered for future development at an estimated gross cost of approximately $30.2 million with the Company's share being approximately $14.2 million.
Also in the Permian Basin of West Texas, we are developing a 965 acre block with ConocoPhillips in Martin County, Texas. In 2016 and 2017, four horizontal wells were drilled, completed, and put on production. The Company owns 35% to 38% interest in this joint venture acreage where we have potential to drill as many as 36 additional wells.
As mentioned above, in West Texas, the Company is participating for 10.3% interest with SEM Operating Company in four 7,900'-long horizontal wells in Irion County, Texas. We anticipate an investment of $2.55 million in these wells and for them to begin production in August. Also planned for this year is the drilling of ten
2-mile-long
horizontals in Hibernia Energy, III, LLC, in Reagan County, Texas and the drilling of five 2.5 mile long horizontal wells with ConocoPhillips in Martin County. The Company intends to participate for approximately 25% interest in the ten wells with Hibernia and for 27% interest in the five wells with Connoco Phillips. Our expected investment in the drilling and completion of these wells is $32 million.
18
In Oklahoma, we are focused on development of our reserves in Canadian, Grady, Kingfisher, Garfield, Major, and Garvin counties where we have approximately 5,800 net leasehold acres in the Scoop/Stack Play. In 2019, we participated for an average of 4.6% interest with Newfield Exploration in twelve successful wells in Canadian County on our Slash and Wallace tracts. In 2021, we participated for 11.25% interest with Ovintiv
Mid-Continent
Inc. in four wells on our Peters tract, in Canadian County. Three of these wells were successfully completed in December 2021 and online in January 2022, while one well had completion issues and has been temporarily abandoned. At today's product prices, payout of the Company's $2.3 million investment in these four wells occurred in four months.
In April 2022, in Oklahoma, the Company and Ovintiv
Mid-Continent
began drilling four horizontal wells on our Bohlman tract in the same area as the successful Peters wells. All four of the Bohlman wells have been drilled, completed, and are flowing back. The Company is participating with 9.38% interest with an approximate investment $2.2 million
We believe our 5,800 net leasehold acres in Oklahoma have the resource potential to support the drilling of as many as 50 new horizontal wells based on an estimate of four wells per multi-section drilling unit: two in the Mississippian and two in the Woodford Shale. Should we choose to participate in future development, our share of the capital expenditures would be approximately $34.6 million at an average 10% ownership level; the Company will otherwise sell its rights for cash, or cash plus a royalty or working interest.
RESULTS OF OPERATIONS
2022 and 2021 Compared
We reported net income of $22.1 million, or $11.18 per share and $11 million, or $5.57 per share for the six and three months ended June 30, 2022, respectively, as compared to net losses of $3.9 million, or $1.93 per share and $2.4 million, or $1.20 per share for the six and three months ended June 30, 2021, respectively. Current year net income reflects increases in production and commodity price increases over the three and six months ended June 30, 2021, fluctuations in gains related to the sale of assets and changes related to the valuation of derivative instruments. The significant components of income and expense are discussed below.
Oil, gas and NGLs sales
increased $19.6 million, or 127.3% from $15.4 million for the three months ended June 30, 2021 to $34.9 million for the three months ended June 30, 2022, and $40.8 million, or 145.5% from $28.0 million for the six months ended June 30, 2021 to $68.8 million for the six months ended June 30, 2022.
19
The following tables summarizes the primary components of production volumes and average sales prices realized for the three and six months ended June 30, 2022 and 2021 (excluding realized gains and losses from derivatives).
Six months ended June 30,
2022
2021
Increase /

(Decrease)
Increase /

(Decrease)
Barrels of Oil Produced
508,000 328,000 180,000 54.9 %
Average Price Received
$ 102.64 $ 60.77 $ 41.87 68.9 %
Oil Revenue (In 000's)
$ 52,143 $ 19,934 $ 32,209 161.6 %
Mcf of Gas Sold
1,577,000 1,445,000 132,000 9.1 %
Average Price Received
$ 5.35 $ 2.73 $ 2.62 96 %
Gas Revenue (In 000's)
$ 8,403 $ 3,950 $ 4,453 112.7 %
Barrels of Natural Gas Liquids Sold
210,000 195,000 15,000 7.7 %
Average Price Received
$ 39.40 $ 21.28 $ 18.12 85.2 %
Natural Gas Liquids Revenue (In 000's)
$ 8,273 $ 4,149 $ 4,124 99.4 %
Total Oil & Gas Revenue (In 000's)
$ 68,819 $ 28,033 $ 40,786 145.5 %
Three months ended June 30,
2022
2021
Increase /

(Decrease)
Increase /

(Decrease)
Barrels of Oil Produced
235,000 165,000 70,000 42.4 %
Average Price Received
$ 109.95 $ 64.63 $ 45.32 70.1 %
Oil Revenue (In 000's)
$ 25,838 $ 10,664 $ 15,174 142.3 %
Mcf of Gas Sold
800,000 780,000 20,000 2.6 %
Average Price Received
$ 5.86 $ 2.94 $ 2.92 99.3 %
Gas Revenue (In 000's)
$ 4,657 $ 2,292 $ 2,365 103.2 %
Barrels of Natural Gas Liquids Sold
106,000 109,000 (3,000 ) (2.8 )%
Average Price Received
$ 41.72 $ 22.06 $ 19.66 89.1 %
Natural Gas Liquids Revenue (In 000's)
$ 4,422 $ 2,404 $ 2,018 83.9 %
Total Oil & Gas Revenue (In 000's)
$ 34,917 $ 15,360 $ 19,557 127.3 %
Oil, Natural Gas and NGL Derivatives
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 condensed consolidated statements of operations. As oil and natural gas prices remain volatile,
mark-to-market
accounting treatment creates volatility in our revenues. The following table summarizes the results of our derivative instruments for the three and six months ended June 2022 and 2021:
Three Months Ended

June 30,
Six Months Ended

June 30,
2022
2021
2022
2021
($ in thousand)
Oil derivatives - realized losses
$ (4,522 ) $ (484 ) $ (7,721 ) $ (636 )
Oil derivatives - unrealized gains (losses)
1,951 (3,987 ) (3,240 ) (4,883 )
Total losses on oil derivatives
$ (2,571 ) $ (4,471 ) $ (10,961 ) $ (5,519 )
Natural gas derivatives - realized losses
$ (1,366 ) $ (217 ) $ (1,986 ) $ (277 )
Natural gas derivatives - unrealized gains (losses)
982 (1,070 ) (966 ) (1,085 )
Total losses on natural gas derivatives
$ (384 ) $ (1,287 ) $ (2,952 ) $ (1,362 )
Total losses on oil and natural gas derivatives
$ (2,955 ) $ (5,758 ) $ (13,913 ) $ (6,881 )
20
Prices received for the six months ended June 30, 2022 and 2021, respectively, including the impact of derivatives were:
2022
2021
Oil Price
$ 87.44 $ 58.84
Gas Price
$ 4.09 $ 2.54
NGLS Price
$ 39.40 $ 21.28
Field service income
increased $1.3 million or 54.2% from $2.4 million for the second quarter 2021 to $3.7 million for the second quarter 2022 and increased $3.2 million, or 84.2% from $3.8 million for the six months ended June 30, 2021 to $7.0 million for the six months ended June 30, 2022. These changes reflect the increase in utilization and rates resulting from the oil and gas price increases during these periods. Workover rig services, hot oil treatments, saltwater hauling and disposal represent the bulk of our field service operations.
Lease operating expense
increased $4.8 million or 109.1% from $4.4 million for the second quarter 2021 to $9.2 million for the second quarter 2022 and increased $9.0 million or 101.1% from $8.9 million for the six months ended June 30, 2021 to $17.9 million for the six months ended June 30, 2022. This increase is primarily due to higher production taxes related to higher commodity prices during 2022 combined with workover expenses and lease operating expense related to higher lifting cost properties returned to production.
Field service expense
increased $1.7 million or 94.4% from $1.8 million for the second quarter 2021 to $3.5 million for the second quarter 2022 and increased $3.2 million, or 97.0% from $3.3 million for the six months ended June 30, 2021 to $6.5 million for the six months ended June 30, 2022. Field service expenses primarily consist of wages and vehicle operating expenses which have fluctuated during the three and six months ended June 30, 2022 compared with the same periods of 2021. These changes reflect the increase in utilization and rates resulting from the oil and gas price increases during these periods.
Depreciation, depletion, amortization and accretion on discounted liabilities
increased $0.4 million, or 6.1% from $6.6 million for the second quarter 2021 to $7.0 million for the second quarter 2022 and $1.1 million, or 8.4% from $13.1 million for the six months ended June 30, 2021 to $14.2 million for the six months ended June 30, 2022. These increases reflect the change in the property basis combined with production increases in 2022.
General and administrative expense
increased $4.9 million, or 116.7% from $4.2 million for the six months ended June 30, 2021 to $9.1 million for the six months ended June 30, 2022, and increased $0.2 million, or 9.1% from $2.2 million for the three months ended June 30, 2021 to $2.4 million for the three months ended June 30, 2022. This increase in 2022 is primarily due to increased employee compensation and benefits.
Interest expense
decreased from $500 thousand for the second quarter 2021 to $150 thousand for the second quarter 2022 and from $1.0 million for the six months ended June 30, 2021 to $499 thousand for the six months ended June 30, 2022. This decrease reflects the increase in rates and lower current borrowings under our revolving credit agreement.
Income tax benefit
for the June 30, 2022 and 2021 periods varied due to the change in net income or loss for those periods.
LIQUIDITY AND CAPITAL RESOURCES
Maintaining a strong balance sheet and ample liquidity are key components of our business strategy. For 2022, we will continue our focus on preserving financial flexibility and ample liquidity as we manage the risks facing our industry. Our 2022 capital budget is reflective of 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 our revolving credit facility. As we have done historically to preserve or enhance liquidity, we may adjust our capital program throughout the year, divest assets, or enter into strategic joint ventures.
Our primary sources of liquidity are cash generated from our operations, through our producing oil and gas properties, field services business and sales of acreage. Net cash provided by operating activities and proceeds from the sale of properties for the six months ended June 30, 2022 was $42.3 million, compared to $11.5 million in the prior year.
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 control7.
21
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 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 derivatives.
Our credit agreement required us to hedge a portion of our production as forecasted for the PDP reserves included in our borrowing base review engineering reports. Accordingly, the Company has in place the following swap agreements for oil and natural gas.
2022
2023
2022
2023
Swap Agreements
Natural Gas (MMBTU)
591,000 254,000 $ 2.95 $ 3.60
Oil (barrels)
168,900 70,700 $ 61.66 $ 69.50
In the first quarter of 2022, the Company participated in the drilling of four wells with SEM Operating Company in Irion County, Texas for 10.3% interest and in April of this year began participating with Ovintiv
Mid-Continent
in four wells in Canadian County, Oklahoma with 9.38% interest. These eight wells have been completed and are expected to be on production in August of this year. In addition, the Company has received drilling proposals for an additional 24 horizontal wells to be drilled in West Texas with 15 of these slated to begin drilling this year. In total the Company is likely to invest approximately $77 million in these 32 wells. Additional drilling and future development plans will be established based on an expectation of available cash flows from operations and availability of funds under our revolving credit facility.
The Company maintains a Credit Agreement providing for a reserves-based line of credit totaling $300 million, with a current borrowing base of $75 million. As of August 15, 2022, the Company has no outstanding borrowings under this line. 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
re-determined
estimate of proved oil and gas reserves. The next borrowing base review is scheduled for December 2022. 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 and expect to be in compliance over the next twelve months. 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. Our borrowing base may decrease as a result of lower natural gas or oil prices, operating difficulties, declines in reserves, lending requirements or regulations, the issuance of new indebtedness or for other reasons set forth in our revolving credit agreement. In the event of a decrease in our borrowing base due to declines in commodity prices or otherwise, our ability to borrow under our revolving credit facility may be limited and we could be required to repay any indebtedness in excess of the
re-determined
borrowing base.
In the first quarter of 2022, the Company sold 1,809 net leasehold acres in Regan and Midland Counties, Texas through two transactions receiving gross proceeds of $14.0 million and retaining certain over-riding royalty interests.
In the second quarter of 2022, the Company sold 241 net acres in Canadian County, Oklahoma for proceeds of $845,000 and a retained over-riding royalty interest.
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.
The Company has a stock repurchase program in place, spending under this program during the first six months of 2022 was $3.2 million. The Company expects continued spending under the stock repurchase program in 2022.
22
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 six months of 2022 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
23
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.
2022 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
2,981 $ 76.21 144,740
February
5,948 $ 73.26 138,792
March
2,259 $ 75.36 136,533
April
3,426 $ 74.82 133,107
May
5,963 $ 82.37 127,144
June
18,855 $ 85.18 108,289
Total/Average
39,432 $ 80.82
(1)
In December 1993, we announced that the Board of Directors authorized a stock repurchase program whereby we may purchase outstanding shares of the common stock from
time-to-time,
in open market transactions or negotiated sales. On October 31, 2012 and June 13, 2018, the Board of Directors of the Company approved an additional 500,000 and 200,000 shares respectively, of the Company's stock to be included in the stock repurchase program. A total of 3,700,000 shares have been authorized, to date, under this program. Through June 30, 2022, a total of 3,593,811 shares have been repurchased under this program for $78,266,619 at an average price of $ 21.78 per share. Additional purchases of shares 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
24
Item 6.
EXHIBITS
The following exhibits are filed as a part of this report:
Exhibit No.
3.1 Certificate of Incorporation of PrimeEnergy Resources Corporation, as amended and restated of December 21, 2018, (filed as Exhibit 3.1 of PrimeEnergy Resources Corporation Form8-K on December 27, 2018, and incorporated herein by reference).
3.2 Bylaws of PrimeEnergy Resources Corporation as amended and restated as of April 24, 2020 (filed as Exhibit 3.2 of PrimeEnergy Resources Corporation Form8-K on April 27, 2020 and incorporated herein by reference).
10.18 Composite copy ofNon-Statutory Option Agreements (Incorporated by reference to Exhibit 10.18 of PrimeEnergy Resources Corporation Form10-K for the year ended December 31, 2004).
10.22.6 dated as of July 5, 2022, is amongPRIMEENERGY RESOURCES CORPORATION, a Delaware corporation (the "Borrower"), each of the Lenders from time to time party hereto andCITIBANK, N.A. (in its individual capacity, "Citibank"), as administrative agent for the Lenders (in such capacity, together with its successors in such capacity, the "Administrative Agent").
14 PrimeEnergy Resources Corporation Code of Business Conduct and Ethics, as amended December 16, 2011 (Incorporated by reference to Exhibit 14 of PrimeEnergy Resources Corporation Form10-K for the year ended December 31, 2011).
31.1 Certification of Chief Executive Officer pursuant to Rule13(a)-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended (filed herewith).
31.2 Certification of Chief Financial Officer pursuant to Rule13(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 Inline XBRL (eXtensible Business Reporting Language) Instance Document (filed herewith)
101.SCH Inline XBRL Taxonomy Extension Schema Document (filed herewith)
101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document (filed herewith)
101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document (filed herewith)
101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document (filed herewith)
101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document (filed herewith)
104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
25
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 Resources Corporation
(Registrant)
August 18, 2022
/s/ Charles E. Drimal, Jr.
(Date) Charles E. Drimal, Jr.
President
Principal Executive Officer
/s/ Beverly A. Cummings
August 18, 2022 Beverly A. Cummings
Executive Vice President
Principal Financial Officer
26

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PrimeEnergy Resources Corporation published this content on 19 August 2022 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 19 August 2022 10:03:07 UTC.