| PRIMEENERGY CORP Item 1A RISK FACTORS Natural gas and oil prices fluctuate widely, and low prices for an extended period of time are likely to have a material adverse impact on our business |
| Our revenues, operating results, financial condition and ability to borrow funds or obtain additional capital depend substantially on prevailing prices for natural gas and, to a lesser extent, oil |
| Lower commodity prices may reduce the amount of natural gas and oil that we can produce economically |
| Historically, natural gas and oil prices and markets have been volatile, with prices fluctuating widely, and they are likely to continue to be volatile |
| Depressed prices in the future would have a negative impact on our future financial results |
| Because our reserves are predominantly natural gas, changes in natural gas prices may have a particularly large impact on our financial results |
| Prices for natural gas and oil are subject to wide fluctuations in response to relatively minor changes in the supply of and demand for natural gas and oil, market uncertainty and a variety of additional factors that are beyond our control |
| These factors include: • the level of consumer product demand; • weather conditions; • political conditions in natural gas and oil producing regions, including the Middle East; • the ability of the members of the Organization of Petroleum Exporting Countries to agree to and maintain oil price and production controls; • the price of foreign imports; • actions of governmental authorities; • pipeline capacity constraints; • inventory storage levels; • domestic and foreign governmental regulations; • the price, availability and acceptance of alternative fuels; and • overall economic conditions 9 _________________________________________________________________ [39]Table of Contents These factors and the volatile nature of the energy markets make it impossible to predict with any certainty the future prices of natural gas and oil |
| If natural gas prices decline significantly for a sustained period of time, the lower prices may adversely affect our ability to make planned expenditures, raise additional capital or meet our financial obligations |
| Drilling natural gas and oil wells is a high-risk activity |
| Our growth is materially dependent upon the success of our drilling program |
| Drilling for natural gas and oil involves numerous risks, including the risk that no commercially productive natural gas or oil reservoirs will be encountered |
| The cost of drilling, completing and operating wells is substantial and uncertain, and drilling operations may be curtailed, delayed or cancelled as a result of a variety of factors beyond our control, including: • unexpected drilling conditions, pressure or irregularities in formations; • equipment failures or accidents; • adverse weather conditions; • compliance with governmental requirements; and • shortages or delays in the availability of drilling rigs or crews and the delivery of equipment |
| Our future drilling activities may not be successful and, if unsuccessful, such failure will have an adverse effect on our future results of operations and financial condition |
| Our overall drilling success rate or our drilling success rate for activity within a particular geographic area may decline |
| We may ultimately not be able to lease or drill identified or budgeted prospects within our expected time frame, or at all |
| We may not be able to lease or drill a particular prospect because, in some cases, we identify a prospect or drilling location before seeking an option or lease rights in the prospect or location |
| Similarly, our drilling schedule may vary from our capital budget |
| The final determination with respect to the drilling of any scheduled or budgeted wells will be dependent on a number of factors, including: • the results of exploration efforts and the acquisition, review and analysis of the seismic data; • the availability of sufficient capital resources to us and the other participants for the drilling of the prospects; • the approval of the prospects by other participants after additional data has been compiled; • economic and industry conditions at the time of drilling, including prevailing and anticipated prices for natural gas and oil and the availability of drilling rigs and crews; • our financial resources and results; and • the availability of leases and permits on reasonable terms for the prospects |
| These projects may not be successfully developed and the wells, if drilled, may not encounter reservoirs of commercially productive natural gas or oil |
| Reserve estimates depend on many assumptions that may prove to be inaccurate |
| Any material inaccuracies in our reserve estimates or underlying assumptions could cause the quantities and net present value of our reserves to be overstated |
| Reserve engineering is a subjective process of estimating underground accumulations of natural gas and crude oil that cannot be measured in an exact manner |
| The process of estimating quantities of proved reserves is complex and inherently uncertain, and the reserve data included in this document are only estimates |
| The process relies on interpretations of available geologic, geophysic, engineering and production data |
| As a result, estimates of different engineers may vary |
| In addition, the extent, quality and reliability of this technical data can vary |
| The differences in the reserve estimation process are substantially due to the geological conditions in which the wells are drilled |
| The process also requires certain economic assumptions, some of which are mandated by the SEC, such as natural gas and oil prices |
| Additional assumptions include drilling and operating expenses, capital expenditures, taxes and availability of funds |
| The accuracy of a reserve estimate is a function of: • the quality and quantity of available data; • the interpretation of that data • the accuracy of various mandated economic assumptions; and • the judgment of the persons preparing the estimate |
| 10 _________________________________________________________________ [40]Table of Contents Results of drilling, testing and production subsequent to the date of an estimate may justify revising the original estimate |
| Accordingly, initial reserve estimates often vary from the quantities of natural gas and crude oil that are ultimately recovered, and such variances may be material |
| Any significant variance could reduce the estimated quantities and present value of our reserves |
| You should not assume that the present value of future net cash flows from our proved reserves is the current market value of our estimated natural gas and oil reserves |
| In accordance with SEC requirements, we base the estimated discounted future net cash flows from our proved reserves on prices and costs in effect on the date of the estimate, holding the prices and costs constant throughout the life of the properties |
| Actual future prices and costs may differ materially from those used in the net present value estimate, and future net present value estimates using then current prices and costs may be significantly less than the current estimate |
| In addition, the 10prca discount factor we use when calculating discounted future net cash flows for reporting requirements in compliance with the Financial Accounting Standards Board in Statement of Financial Accounting Standards Nodtta 69 may not be the most appropriate discount factor based on interest rates in effect from time to time and risks associated with us or the natural gas and oil industry in general |
| Our future performance depends on our ability to find or acquire additional natural gas and oil reserves that are economically recoverable |
| In general, the production rate of natural gas and oil properties declines as reserves are depleted, with the rate of decline depending on reservoir characteristics |
| Unless we successfully replace the reserves that we produce, our reserves will decline, eventually resulting in a decrease in natural gas and oil production and lower revenues and cash flow from operations |
| Our future natural gas and oil production is, therefore, highly dependent on our level of success in finding or acquiring additional reserves |
| We may not be able to replace reserves through our exploration, development and exploitation activities or by acquiring properties at acceptable costs |
| Low natural gas and oil prices may further limit the kinds of reserves that we can develop economically |
| Lower prices also decrease our cash flow and may cause us to decrease capital expenditures |
| Exploration, development and exploitation activities involve numerous risks that may result in dry holes, the failure to produce natural gas and oil in commercial quantities and the inability to fully produce discovered reserves |
| We are continually identifying and evaluating opportunities to acquire natural gas and oil properties |
| We may not be able to successfully consummate any acquisition, to acquire producing natural gas and oil properties that contain economically recoverable reserves, or to integrate the properties into our operations profitably |
| We face a variety of hazards and risks that could cause substantial financial losses |
| Our business involves a variety of operating risks, including: • blowouts, cratering and explosions; • mechanical problems; • uncontrolled flows of natural gas, oil or well fluids; • formations with abnormal pressures; • pollution and other environmental risks; and • natural disasters |
| In addition, we conduct operations in shallow offshore areas, which are subject to additional hazards of marine operations, such as capsizing, collision and damage from severe weather |
| Any of these events could result in injury or loss of human life, loss of hydrocarbons, significant damage to or destruction of property, environmental pollution, regulatory investigations and penalties, impairment of our operations and substantial losses to us |
| Our operation of natural gas gathering and pipeline systems also involves various risks, including the risk of explosions and environmental hazards caused by pipeline leaks and ruptures |
| We have limited control over the activities on properties we do not operate |
| We have limited ability to influence or control the operation or future development of these non-operated properties or the amount of capital expenditures that we are required to fund with respect to them |
| The failure of an operator of our wells to adequately perform operations, an operator’s breach of the applicable 11 _________________________________________________________________ [41]Table of Contents agreements or an operator’s failure to act in ways that are in our best interest could reduce our production and revenues |
| Our dependence on the operator and other working interest owners for these projects and our limited ability to influence or control the operation and future development of these properties could materially adversely affect the realization of our targeted returns on capital in drilling or acquisition activities and lead to unexpected future costs |
| Terrorist activities and the potential for military and other actions could adversely affect our business |
| The threat of terrorism and the impact of military and other action have caused instability in world financial markets and could lead to increased volatility in prices for natural gas and oil, all of which could adversely affect the markets for our operations |
| Future acts of terrorism could be directed against companies operating in the United States |
| The US government has issued public warnings that indicate that energy assets might be specific targets of terrorist organizations |
| These developments have subjected our operations to increased risk and, depending on their ultimate magnitude, could have a material adverse effect on our business |
| Our ability to sell our natural gas and oil production could be materially harmed if we fail to obtain adequate services such as transportation and processing |
| The sale of our natural gas and oil production depends on a number of factors beyond our control, including the availability and capacity of transportation and processing facilities |
| Our failure to obtain these services on acceptable terms could materially harm our business |
| Competition in our industry is intense, and many of our competitors have substantially greater financial and technological resources than we do, which could adversely affect our competitive position |
| Competition in the natural gas and oil industry is intense |
| Major and independent natural gas and oil companies actively bid for desirable natural gas and oil properties, as well as for the equipment and labor required to operate and develop these properties |
| Our competitive position is affected by price, contract terms and quality of service, including pipeline connection times, distribution efficiencies and reliable delivery record |
| Many of our competitors have financial and technological resources and exploration and development budgets that are substantially greater than ours |
| These companies may be able to pay more for exploratory projects and productive natural gas and oil properties and may be able to define, evaluate, bid for and purchase a greater number of properties and prospects than our financial or human resources permit |
| In addition, these companies may be able to expend greater resources on the existing and changing technologies that we believe are and will be increasingly important to attaining success in the industry |
| We may have hedging arrangements that expose us to risk of financial loss and limit the benefit to us of increases in prices for natural gas and oil |
| From time to time, when we believe that market conditions are favorable, we use certain derivative financial instruments to manage price risks associated with our production in all of our regions |
| While there are many different types of derivatives available, in 2005 we primarily employed natural gas put option agreements to attempt to manage price risk |
| These hedging arrangements limit the benefit to us of increases in prices |
| We will continue to evaluate the benefit of employing derivatives in the future |
| The loss of key personnel could adversely affect our ability to operate |
| Our operations are dependent upon a relatively small group of key management and technical personnel, and one or more of these individuals could leave our employment |
| The unexpected loss of the services of one or more of these individuals could have a detrimental effect on us |
| In addition, our drilling success and the success of other activities integral to our operations will depend, in part, on our ability to attract and retain experienced geologists, engineers and other professionals |
| Competition for experienced geologists, engineers and some other professionals is extremely intense |
| If we cannot retain our technical personnel or attract additional experienced technical personnel, our ability to compete could be harmed |
| We are subject to complex laws and regulations, including environmental regulations, which can adversely affect the cost, manner or feasibility of doing business |
| Our operations are subject to extensive federal, state and local laws and regulations, including tax laws and regulations and those relating to the generation, storage, handling, emission, transportation and discharge of materials into the environment |
| These laws and 12 _________________________________________________________________ [42]Table of Contents regulations can adversely affect the cost, manner or feasibility of doing business |
| Many laws and regulations require permits for the operation of various facilities, and these permits are subject to revocation, modification and renewal |
| Governmental authorities have the power to enforce compliance with their regulations, and violations could subject us to fines, injunctions or both |
| These laws and regulations have increased the costs of planning, designing, drilling, installing and operating natural gas and oil facilities |
| In addition, we may be liable for environmental damages caused by previous owners of property we purchase or lease |
| Risks of substantial costs and liabilities related to environmental compliance issues are inherent in natural gas and oil operations |
| It is possible that other developments, such as stricter environmental laws and regulations, and claims for damages to property or persons resulting from natural gas and oil production, would result in substantial costs and liabilities |