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U.S. SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-K
 (Mark One)
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2006
 Or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the Transition Period From                    to
 Commission File Number 0-7406
 PrimeEnergy Corporation
 (Exact name of registrant as specified in its charter)
 Delaware
    
    84-0637348(state or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)One Landmark Square,Stamford, CT
    
    06901(Address of principal executive offices)
    
    (Zip Code)
 (203) 358-5700
 None
 Common Stock, par value $.10 per share
  Yes o No þ
  Yes o No þ
  Yes þ No o
  þ
  o o þ
  Yes o No þ
   DOCUMENTS INCORPORATED BY REFERENCE




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##### 



TABLE OF CONTENTS
 PART IItem 1. BUSINESS
    
    
    3Item 1A. RISK FACTORS
    
    
    12Item 1B. UNRESOLVED STAFF COMMENTS
    
    
    16Item 2. PROPERTIES
    
    
    16Item 3. LEGAL PROCEEDINGS
    
    
    19Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    19PART IIItem 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
    
    
    20Item 6. SELECTED FINANCIAL DATA
    
    
    21Item 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
    
    
    21Item 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
    
    
    25Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
    
    
    27Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
    
    
    27Item 9A. CONTROLS AND PROCEDURES
    
    
    27Item 9B. OTHER INFORMATION
    
    
    27PART IIIItem 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
    
    
    28Item 11. EXECUTIVE COMPENSATION
    
    
    28Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
    
    
    28Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND
DIRECTOR INDEPENDENCE
    
    
    28Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
    
    
    28PART IVItem 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
    
    
    29SIGNATURES
    
    
    
    
    32First Amendment to the 401(k) Savings PlanAmended and Restated Credit AgreementLetter Regarding Amended and Restated Credit AgreementAmended and Restated Security AgreementAmended and Restated Security Agreement (Membership Pledge)Amended and Restated Security AgreementAmended and Restated Security AgreementSecurity AgreementAmended and Restated Security AgreementAmended and Restated Security AgreementCredit Agreement - PrimeEnergy CorporationCredit Agreement - Guaranty Bank, FSBSubordination AgreementSecurity AgreementMortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of ProductionPledge AgreementCompletion and Liquidity Maintenance AgreementPut Right AgreementCode of Business Conduct and EthicsSubsidiariesConsent of Ryder Scott & Company L.P.Certification of CEO Pursuant to Rule 13(a)-14(a)/15d-14(a)Certification of CFO Pursuant to Rule 13(a)-14(a)/15d-14(a)Certification of CEO Pursuant to Section 1350Certification of CFO Pursuant to Section 1350
  2




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PrimeEnergy Corporation
 FORM 10-K ANNUAL REPORT
For the Fiscal Year Ended
December 31, 2006
 
 PART I
 
 Item 1. BUSINESS.
 General
    Exploration, Development and Recent Activities
   3




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Significant 2006 activity
        Well Operations
  4




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The Partnerships, Trusts and Joint Ventures
   Regulation
     5




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6




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Taxation
   Competition and Markets
  7




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Oil Purchasers:Texon Distributing L.P.
    
    
    36
    %Plains All American Inc.
    
    
    38
    %TEPPCO Crude Oil, L.L.C.
    
    
    11
    %Gas Purchasers:Unimark LLC
    
    
    25
    %Cokinos Energy Corporation
    
    
    23
    %
  Environmental Matters
  
    
    restrict the types, quantities and concentration of various substances that can be
released into the environment in connection with drilling and production activities;
    
    limit or prohibit drilling activities on certain lands lying within wilderness, wetlands
and other protected areas; and
    
    Impose substantial liabilities for pollution resulting from our operations.
  8




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
    
    unit production expenses primarily related to the control and limitation of air
emissions and the disposal of produced water;
    
    capital costs to drill exploration and development wells primarily related to the
management and disposal of drilling fluids and other oil and natural gas exploration
wastes; and
    
    Capital costs to construct, maintain and upgrade equipment and facilities.
   
    
    to remove or remediate previously disposed wastes, including wastes disposed or released
by prior owners or operators;
    
    To clean up contaminated property, including contaminated groundwater; or to perform
remedial operations to prevent future contamination.
   9




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11




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Employees
  
 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.
   
    
    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
  12




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Drilling natural gas and oil wells is a high-risk activity.
  
    
    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.
  
    
    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.
  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.
  13




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
    
    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.
  Our future performance depends on our ability to find or acquire additional natural gas and
oil reserves that are economically recoverable.
    We face a variety of hazards and risks that could cause substantial financial losses.
  
    
    blowouts, cratering and explosions;
    
    mechanical problems;
    
    uncontrolled flows of natural gas, oil or well fluids;
    
    formations with abnormal pressures;
 14




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
    
    pollution and other environmental risks; and
    
    natural disasters.
   We have limited control over the activities on properties we do not operate.
  Terrorist activities and the potential for military and other actions could adversely affect
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 .
  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.
  15




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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.
  The loss of key personnel could adversely affect our ability to operate.
  We are subject to complex laws and regulations, including environmental regulations, which can
adversely affect the cost, manner or feasibility of doing business.
  
 Item 1 B. UNRESOLVED STAFF COMMENTS.
  
 Item 2. PROPERTIES.
     16




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2006
    
    2005
    
    2004
    
    2003
    
    2002Gross
    
    Net
    
    Gross
    
    Net
    
    Gross
    
    Net
    
    Gross
    
    Net
    
    Gross
    
    NetExploratory:Oil
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    .500
    
    
    
    2
    
    
    
    .400
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    1.000Gas
    
    
    5
    
    
    
    3.750
    
    
    
    11
    
    
    
    3.510
    
    
    
    10
    
    
    
    2.850
    
    
    
    4
    
    
    
    1.565
    
    
    
    1
    
    
    
    .250Dry
    
    
    1
    
    
    
    .400
    
    
    
    1
    
    
    
    1.000
    
    
    
    4
    
    
    
    1.594
    
    
    
    6
    
    
    
    1.400
    
    
    
    4
    
    
    
    2.500Development:Oil
    
    
    41
    
    
    
    22.141
    
    
    
    17
    
    
    
    8.500
    
    
    
    
    
    
    
    
    
    
    
    6
    
    
    
    2.561
    
    
    
    2
    
    
    
    1.250Gas
    
    
    28
    
    
    
    11.664
    
    
    
    15
    
    
    
    7.790
    
    
    
    7
    
    
    
    3.993
    
    
    
    8
    
    
    
    4.478
    
    
    
    10
    
    
    
    7.590Dry
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    2.410
    
    
    
    2
    
    
    
    1.594
    
    
    
    1
    
    
    
    .500
    
    
    
    6
    
    
    
    5.300Total:Oil
    
    
    41
    
    
    
    22.141
    
    
    
    18
    
    
    
    9.000
    
    
    
    2
    
    
    
    .400
    
    
    
    6
    
    
    
    2.560
    
    
    
    3
    
    
    
    2.250Gas
    
    
    33
    
    
    
    15.414
    
    
    
    26
    
    
    
    11.300
    
    
    
    17
    
    
    
    6.843
    
    
    
    12
    
    
    
    6.042
    
    
    
    11
    
    
    
    7.840Dry
    
    
    1
    
    
    
    .400
    
    
    
    5
    
    
    
    3.410
    
    
    
    6
    
    
    
    2.722
    
    
    
    7
    
    
    
    1.900
    
    
    
    10
    
    
    
    7.80075
    
    
    
    37.955
    
    
    
    49
    
    
    
    23.710
    
    
    
    25
    
    
    
    9.965
    
    
    
    25
    
    
    
    10.504
    
    
    
    24
    
    
    
    17.890
 Oil and Gas Production
  Gross
    
    NetProducing wells (1)Oil Wells
    
    
    842
    
    
    
     264.70Gas Wells
    
    
    1,177
    
    
    
    386.51Producing Acres
    
    
    294,568.05
    
    
    
    90,810.59
 
 (1)
    
    A gross well or gross acre is a well or an acre in which a working interest is owned. A net
well or net is the sum of the fractional revenue interests owned in gross wells or gross
acres. Wells are classified by their primary product. Some wells produce both oil and gas.  2006
    
    2005
    
    2004
    
    2003
    
    2002Oil (barrels)
    
    
    379,000
    
    
    
    361,000
    
    
    
    371,000
    
    
    
    370,000
    
    
    
    321,000Gas (Mcf)
    
    
    5,695,000
    
    
    
    4,758,000
    
    
    
    5,138,000
    
    
    
    3,991,000
    
    
    
    3,540,000
  2006
    
    2005
    
    2004
    
    2003
    
    2002Average sales price per barrel
    
    $
    61.47
    
    
    $
    52.91
    
    
    
    40.45
    
    
    
    28.90
    
    
    
    23.37Average sales price Per Mcf
    
    $
    6.78
    
    
    $
    7.33
    
    
    
    5.64
    
    
    
    4.80
    
    
    
    3.06Average production costs per net
equivalent barrel (1)
    
    $
    15.84
    
    
    $
    16.10
    
    
    
    12.17
    
    
    
    12.42
    
    
    
    11.80
 
 (1)
    
    Net equivalent barrels are computed at a rate of 6 Mcf per barrel. 17




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Undeveloped Acreage
  Leasehold
    
    
    Mineral
    
    
    RoyaltyInterests
    
    
    Interests
    
    
    InterestsGross
    
    
    Net
    
    
    Gross
    
    
    Net
    
    
    Gross
    
    
    NetState
    
    Acres
    
    
    Acres
    
    
    Acres
    
    
    Acres
    
    
    Acres
    
    
    AcresColorado
    
    
    
    
    
    
    
    
    
    
    799
    
    
    
    23Gulf of Mexico
    
    
    130,316
    
    
    
    74,573Montana
    
    
    
    
    
    
    
    
    
    
    13,984
    
    
    
    59
    
    
    
    786
    
    
    
    5Nebraska
    
    
    
    
    
    
    
    
    
    
    2,553
    
    
    
    331North Dakota
    
    
    
    
    
    
    
    
    
    
    640
    
    
    
    1Oklahoma
    
    
    6,118
    
    
    
    3,765
    
    
    
    320
    
    
    
    1Texas
    
    
    13,470
    
    
    
    6,828
    
    
    
    680
    
    
    
    16New Mexico
    
    
    188
    
    
    
    62Wyoming
    
    
    1,000
    
    
    
    125
    
    
    
    5,043
    
    
    
    35
    
    
    
    140
    
    
    
    35TOTAL
    
    
    151,092
    
    
    
    85,353
    
    
    
    24,019
    
    
    
    466
    
    
    
    926
    
    
    
    40
 Reserves
  Reserve CategoryProved Developed
    
    Proved Undeveloped
    
    TotalAs of
    
    Oil
    
    Gas
    
    Oil
    
    Gas
    
    Oil
    
    Gas12-31
    
    (bbls)
    
    (Mcf)
    
    (bbls)
    
    (Mcf)
    
    (bbls)
    
    (Mcf)2002
    
    
    2,319,000
    
    
    
    29,917,000
    
    
    
    
    
    
    
    
    
    
    
    2,319,000
    
    
    
    29,917,0002003
    
    
    2,865,000
    
    
    
    34,045,000
    
    
    
    40,000
    
    
    
    4,960,000
    
    
    
    2,905,000
    
    
    
    39,005,0002004
    
    
    2,926,000
    
    
    
    37,728,000
    
    
    
    6,000
    
    
    
    7,142,000
    
    
    
    2,932,000
    
    
    
    44,870,0002005
    
    
    3,504,000
    
    
    
    43,976,000
    
    
    
    183,000
    
    
    
    968,000
    
    
    
    3,687,000
    
    
    
    44,944,0002006
    
    
    4,009,000
    
    
    
    66,754,000
    
    
    
    219,000
    
    
    
    2,479,000
    
    
    
    4,228,000
    
    
    
    69,233,000
  Proved Developed
    
    Proved Undeveloped
    
    TotalPresent Value
    
    
    
    
    
    Present Value 10
    
    
    
    
    
    Present Value 10
    
    Present Value 10
    
    StandardizedAs of
    
    Future Net
    
    Of Future
    
    Future Net
    
    Of Future
    
    Future Net
    
    Of Future
    
    Of Future
    
    Measure of12-31
    
    Revenue
    
    Net Revenue
    
    Revenue
    
    Net Revenue
    
    Revenue
    
    Net Revenue
    
    Income Taxes
    
    Discounted Cash flow2002
    
    $
    97,600,000
    
    
    
    56,855,000
    
    
    
    
    
    
    
    
    
    
    
    97,600,000
    
    
    
    56,855,000
    
    
    
    14,079,000
    
    
    
    42,776,0002003
    
    $
    141,194,000
    
    
    
    85,695,000
    
    
    
    22,891,000
    
    
    
    17,401,000
    
    
    
    164,085,000
    
    
    
    103,096,000
    
    
    
    29,844,000
    
    
    
    73,252,0002004
    
    $
    177,916,000
    
    
    
    107,116,000
    
    
    
    33,484,000
    
    
    
    26,796,000
    
    
    
    211,400,000
    
    
    
    133,912,000
    
    
    
    39,501,000
    
    
    
    94,411,0002005
    
    $
    349,816,000
    
    
    
    201,883,000
    
    
    
    12,510,000
    
    
    
    6,663,000
    
    
    
    362,326,000
    
    
    
    208,546,000
    
    
    
    63,067,000
    
    
    
    145,479,0002006
    
    $
    360,665,000
    
    
    
    242,216,000
    
    
    
    13,836,000
    
    
    
    7,077,000
    
    
    
    374,501,000
    
    
    
    249,293,000
    
    
    
    50,670,000
    
    
    
    198,623,000
 18




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Item 3. LEGAL PROCEEDINGS
  
 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
  19




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PART II
 
 Item 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES.
 The following performance graph and related information shall not be deemed soliciting
material or to be filed with the Securities and Exchange Commission, nor shall such information
be incorporated by reference into any future filing under the Securities Act of 1933 or Securities
Exchange Act of 1934, each as amended, except to the extent that PrimeEnergy Corporation
specifically incorporates it by reference into such filing.
  Comparison of Five Year Cumulative Total Return
PrimeEnergy Corporation Stock Price vs. NASDAQ AND NASDAQ E&P INDICES
 Value of Investment of $100 on December 31, 2001
 
 As of December 31
    
    2001
    
    2002
    
    2003
    
    2004
    
    2005
    
    2006PrimeEnergy Corporation
    
    $
    100.0
    
    
    $
    100.5
    
    
    $
    183.5
    
    
    $
    262.2
    
    
    $
    645.7
    
    
    $
    810.3NASDAQ Market Index
    
    
    100.0
    
    
    
    69.1
    
    
    
    103.4
    
    
    
    112.5
    
    
    
    114.9
    
    
    
    126.2Peer Group Index
    
    
    100.0
    
    
    
    99.3
    
    
    
    175.4
    
    
    
    272.2
    
    
    
    420.0
    
    
    
    468.5
  2006
    
    High
    
    Low
    
    2005
    
    High
    
    LowFirst Quarter
    
    $
    83.42
    
    
    $
    48.83
    
    
    First Quarter
    
    $
    22.99
    
    
    $
    19.50Second Quarter
    
    $
    86.75
    
    
    $
    66.35
    
    
    Second Quarter
    
    $
    47.09
    
    
    $
    19.77Third Quarter
    
    $
    81.26
    
    
    $
    59.09
    
    
    Third Quarter
    
    $
    52.49
    
    
    $
    28.12Fourth Quarter
    
    $
    72.98
    
    
    $
    64.05
    
    
    Fourth Quarter
    
    $
    52.52
    
    
    $
    36.00
    20




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Issuer Purchases of Equity Securities
  Maximum Number ofShares that May YetNumber of
    
    Average Price Paid
    
    Be Purchased Under The2006 Month
    
    Shares
    
    per share
    
    ProgramJanuary
    
    
    21,890
    
    
    
    49.74
    
    
    
    154,994February
    
    
    1,503
    
    
    
    56.80
    
    
    
    153,491March
    
    
    1,243
    
    
    
    61.97
    
    
    
    152,248April
    
    
    
    
    
    
    
    
    
    
    152,248May
    
    
    9,362
    
    
    
    75.79
    
    
    
    142,886June
    
    
    10,000
    
    
    
    70.00
    
    
    
    132,886July
    
    
    10,041
    
    
    
    63.98
    
    
    
    122,845August
    
    
    21,298
    
    
    
    69.00
    
    
    
    101,547September
    
    
    5,924
    
    
    
    77.74
    
    
    
    95,623October
    
    
    18,832
    
    
    
    70.02
    
    
    
    376,791November
    
    
    7,313
    
    
    
    69.18
    
    
    
    369,478December
    
    
    3,584
    
    
    
    67.65
    
    
    
    365,894Total/Average/Remainder
    
    
    110,990
    
    
    
    65.89
 
 Item 6. SELECTED FINANCIAL DATA
  2006
    
    2005
    
    2004
    
    2003
    
    2002Revenues
    
    $
    92,419,000
    
    
    $
    75,946,000
    
    
    
    62,428,000
    
    
    
    46,719,000
    
    
    
    34,186,000Income from operations
    
    $
    27,584,000
    
    
    $
    22,151,000
    
    
    
    11,359,000
    
    
    
    8,047,000
    
    
    
    2,168,000Net income
    
    $
    18,300,000
    
    
    $
    25,955,000
    
    
    
    7,275,000
    
    
    
    5,702,000
    
    
    
    1,757,000Income per common share
    
    $
    5.52
    
    
    $
    7.64
    
    
    
    2.04
    
    
    
    1.56
    
    
    
    0.47Diluted net income per common share
    
    $
    4.50
    
    
    $
    6.27
    
    
    
    1.70
    
    
    
    1.31
    
    
    
    0.40Total assets
    
    $
    291,572,000
    
    
    $
    109,383,000
    
    
    
    69,926,000
    
    
    
    58,255,000
    
    
    
    44,887,000Long-term obligations
    
    $
    168,141,000
    
    
    $
    44,126,000
    
    
    
    30,290,000
    
    
    
    26,925,000
    
    
    
    23,734,000Cash dividends
    
    None
    
    
    None
    
    
    None
    
    
    None
    
    
    None
 
 Item 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Liquidity And Capital Resources:
  21




---



##### Table of Contents



Critical Accounting Estimates:
 Proved Oil and Gas Reserves
  22




---



##### Table of Contents



Depreciation, Depletion and Amortization for Oil and Gas Properties
   Repurchase of limited partners interests
  Results of Operations:
 2006 as compared to 2005
  Oil and gas sales
 2006
    
    
    2005
    
    
    Increase (Decrease)Barrels of Oil Produced
    
    
    379,000
    
    
    
    361,000
    
    
    
    18,000Average Price Received (rounded)
    
    $
    61.47
    
    
    $
    52.91
    
    
    $
    8.56Oil Revenue
    
    $
    23,300,000
    
    
    $
    19,100,000
    
    
    $
    4,200,000Mcf of Gas Produced
    
    
    5,695,000
    
    
    
    4,758,000
    
    
    
    937,000Average Price Received (rounded)
    
    $
    6.78
    
    
    $
    7.33
    
    
    $
    (0.55
    )Gas Revenue
    
    $
    38,625,000
    
    
    $
    34,888,000
    
    
    $
    3,737,000Total Oil & Gas Revenue
    
    $
    61,924,000
    
    
    $
    53,988,000
    
    
    $
    7,936,000
 Changes in Production
 Field Service Income
 Lease operating expenses
 General and administrative expenses
 23




---



##### Table of Contents



Depreciation and depletion
 Exploration costs
 Interest expense
 Income tax expense
  2005 as compared to 2004
  Oil and gas sales
 2005
    
    
    2004
    
    
    Increase (Decrease)Barrels of Oil Produced
    
    
    361,000
    
    
    
    371,000
    
    
    
    (10,000
    )Average Price Received (rounded)
    
    $
    52.91
    
    
    $
    40.45
    
    
    $
    12.46Oil Revenue
    
    $
    19,100,000
    
    
    $
    15,006,000
    
    
    $
    4,094,000Mcf of Gas Produced
    
    
    4,758,000
    
    
    
    5,138,000
    
    
    
    (380,000
    )Average Price Received (rounded)
    
    $
    7.33
    
    
    $
    5.64
    
    
    $
    1.69Gas Revenue
    
    $
    34,888,000
    
    
    $
    28,961,000
    
    
    $
    5,297,000Total Oil & Gas Revenue
    
    $
    53,988,000
    
    
    $
    43,967,000
    
    
    $
    10,021,000
 Changes in Production
 Field Service Revenue
 Lease operating expenses
 24




---



##### Table of Contents



General and administrative expenses
 Depreciation and depletion
 Exploration costs
 Interest expense
 Income tax expense
  
 Item 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
  Derivative Instruments and Hedging Activity.
  Hedges on Production  Collars.
  25




---



##### Table of Contents



Hedges on Production  Swaps.
   Crude Oil Price CollarVolume
    
    
    Weighted Average Price
    
    
    Net UnrealizedIn
    
    
    Floor/Ceiling/Third Tier
    
    
    (Loss)/GainContract Period
    
    Mbbl
    
    
    (per Bbl)
    
    
    (In thousands)First Quarter 2007
    
    
    39
    
    
    $
    65/ $79.25/ $100.00Second Quarter 2007
    
    
    33
    
    
    $
    65/ $79.25/ $100.00Third Quarter 2007
    
    
    28
    
    
    $
    65/ $79.25/ $100.00Fourth Quarter 2007
    
    
    22
    
    
    $
    65/ $79.25/ $100.00Full Year 2007
    
    
    122
    
    
    
    
    
    
    $
    173,000First Quarter 2008
    
    
    23
    
    
    $
    65/  $79.25/  $100.00Second Quarter 2008
    
    
    21
    
    
    $
    65/  $79.25/  $100.00Third Quarter 2008
    
    
    20
    
    
    $
    65/  $79.25/  $100.00Fourth Quarter 2008
    
    
    18
    
    
    $
    65/  $79.25/  $100.00Full Year 2008
    
    
    82
    
    
    
    
    
    
    $
    
  Natural Gas Price SwapsNet UnrealizedVolume
    
    
    
    Weighted Average
    
    
    GainContract Period
    
    in Mmcf
    
    
    Price (per Mcf)
    
    
    (In thousandsFirst Quarter 2007
    
    
    905
    
    
    $
    10.25
    
    
    $
    3,393Second Quarter 2007
    
    
    880
    
    
    
    8.32
    
    
    
    1,287Third Quarter 2007
    
    
    720
    
    
    
    8.51
    
    
    
    955Fourth Quarter 2007
    
    
    275
    
    
    
    9.53
    
    
    
    276Full Year 2007
    
    
    2,780
    
    
    $
    9.12
    
    
    $
    5,911First Quarter 2008
    
    
    75
    
    
    $
    9.02
    
    
    $
    43Second Quarter 2008
    
    
    75
    
    
    
    9.02
    
    
    
    101Third Quarter 2008
    
    
    75
    
    
    
    9.02
    
    
    
    85Fourth Quarter 2008
    
    
    75
    
    
    
    9.02
    
    
    
    27Full Year 2008
    
    
    300
    
    
    $
    9.02
    
    
    $
    256
  26




---



##### Table of Contents



Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
  
 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
  
 Item 9A. CONTROLS AND PROCEDURES.
 (a) Evaluation of disclosure controls and procedures.
   (b) Changes in internal control over financial reporting.
   
 Item 9B. OTHER INFORMATION.
  27




---



##### Table of Contents



PART III
 
 Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
  
 Item 11. EXECUTIVE COMPENSATION.
  
 Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS.
  
 Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE.
  
 Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
  28




---



##### Table of Contents



PART IV
 
 Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
     3.1
    
    Restated Certificate of Incorporation of PrimeEnergy Corporation
(Incorporated by reference to Exhibit 3.1 of PrimeEnergy
Corporation Form 10-K for the year ended December 31, 2004)3.2
    
    Bylaws of PrimeEnergy Corporation (Incorporated by reference to
Exhibit 3.2 of PrimeEnergy Corporation Form 10-K for the year ended
December 31, 2004)10.3.1
    
    Adoption Agreement #003 dated 4/23/2002, MassMutual Life Insurance
Company Flexinvest Prototype Non-Standardized 401(k) Profit-Sharing
Plan; EGTRRA Amendment to the PrimeEnergy employees 401(k) Savings
Plan; MassMutual Retirement Services Flexinvest Defined
Contribution Prototype Plan; Protected Benefit Addendum; Addendum
to the Administrative Services Agreement Loan Agreement; Addendum
to Administrative Services Agreement GUST Restatement Provisions;
General Trust Agreement (Incorporated by reference to Exhibit
10.3.1 of PrimeEnergy Corporation Form 10-K for the year ended
December 31, 2002) (1)10.3.2
    
    First Amendment to the PrimeEnergy Corporation Employees 401(k) Savings
Plan (filed herewith)10.4
    
    Amended and Restated Agreement of Limited Partnership, FWOE
Partners L.P., dated as of August 22, 2005 (Incorporated by
reference to Exhibit 10.3 of PrimeEnergy Corporation Form 8-K for
events of August 22, 2005)10.4.1
    
    Contribution Agreement between F-W Oil Exploration L.L.C. and FWOE
Partners L.P. dated as of August 22, 2005 (Incorporated by
reference to exhibit 10.4 of PrimeEnergy Corporation Form 8-K for
events of August 22, 2005)10.18
    
    Composite copy of Non-Statutory Option Agreements (Incorporated by
reference to Exhibit 10.18 of PrimeEnergy Corporation Form 10-K for
the year ended December 31, 2004) (1)
 29




---



##### Table of Contents



10.22.5
    
    Amended and Restated Credit Agreement among PrimeEnergy
Corporation, PrimeEnergy Management Corporation, Prime Operating Company, Eastern Oil Well Service
Company, Southwest Oilfield Construction Company, EOWS Midland
Company and Guaranty Bank, FSB as Agent and Letter of Credit Issuer
and BNP Paribas, as Co-Documentation Agent and JPMorgan Chase Bank,
N.A., as Co-Documentation Agent and the Lenders Signatory hereto,
December 28, 2006 (filed herewith)10.22.5.1
    
    Letter from BNP Paribas regarding Amended and Restated Credit Agreement effective as of
December 28, 2006, among PrimeEnergy Corporation, et al, and Guaranty Bank, FSB (filed herewith)10.23.2
    
    Amended and Restated Security Agreement between
PrimeEnergy Corporation, PrimeEnergy Management Corporation, Prime Operating Company, Eastern
Oil Well Service Company, Southwest Oilfield Construction Company,
EOWS Midland Company, (debtor) and
Guaranty Bank, FSB as
Agent (secured party) December 28, 2006 (filed herewith)10.23.3
    
    Amended and Restated Security Agreement (Membership Pledge) by PrimeEnergy Corporation in favor of Guaranty Bank, FSB
as
Agent December 28, 2006 (filed herewith)10.23.4
    
    Amended and Restated Security Agreement between
PrimeEnergy Corporation, PrimeEnergy Management Corporation, Prime Operating Company, Eastern
Oil Well Service Company, Southwest Oilfield Construction Company,
EOWS Midland Company, (debtor) and
Guaranty Bank, FSB as
Agent (secured party) December 28, 2006 (filed herewith)10.23.5
    
    Amended and Restated Security Agreement between Eastern
Oil Well Service Company, EOWS Midland Company,(debtor) and Guaranty
Bank, FSB as
Agent (secured party) December 28, 2006 (filed herewith)10.23.6
    
    Security Agreement between Eastern Oil Well Service
Company, EOWS Midland Company,(debtor) and Guaranty Bank, FSB as
Agent (secured party) December 28, 2006 (filed herewith)10.23.7
    
    Amended and Restated Security Agreement between
Southwest Oilfield Construction Company, (debtor) and Guaranty Bank,
FSB as Agent (secured party) December 28, 2006 (filed herewith)10.23.8
    
    Amended and Restated Security Agreement effective between EOWS
Midland Company, (debtor) and Guaranty Bank, FSB as
Agent (secured party) December 28, 2006 (filed herewith)10.25
    
    Credit Agreement dated as of June 1, 2006 (but effective for all purposes as of August 22,
2005), between Prime Offshore L.L.C. as Borrower and PrimeEnergy
Corporation as Lender (filed herewith)10.26
    
    Credit Agreement dated June 29, 2006 between Prime Offshore L.L.C. and Guaranty
Bank, FSB as Agent and a Lender (filed herewith)10.26.1
    
    Subordination Agreement effective as of June 29, 2006, between Prime Offshore L.L.C.,
PrimeEnergy Corporation, and Guaranty Bank, FSB (filed herewith)10.27
    
    Security Agreement effective June 29, 2006 between Prime Offshore L.L.C., and
Guaranty Bank, FSB (debtor) and Guaranty Bank, FSB as Agent (secured
party) (filed herewith)10.27.1
    
    Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of
Production effective as of June 29, 2006, from Prime Offshore L.L.C. and Guaranty Bank, FSB
(filed herewith)10.27.2
    
    Pledge Agreement as of June 29, 2006, between Guaranty Bank, FSB and Prime
Offshore L.L.C. (filed herewith)10.28
    
    Completion and Liquidity Maintenance Agreement effective as of June 29, 2006, between
PrimeEnergy Corporation, Guaranty Bank, FSB, and Prime Offshore, L.L.C. (filed herewith)10.29
    
    Put Right Agreement effective as of June 29, 2006, by and among PrimeEnergy Corporation and
Prime Offshore L.L.C. (filed herewith)14
    
    PrimeEnergy Corporation Code of
Business Conduct and Ethics (filed herewith)21
    
    Subsidiaries (filed herewith)23
    
    Consent of Ryder Scott & Company L.P. (filed herewith)31.1
    
    Certification of Chief Executive Officer pursuant to
Rule 13(a)-14(a)/15d-14(a) of the Securities Exchange Act of 1934,
as amended (filed herewith)31.2
    
    Certification of Chief Financial Officer pursuant to
Rule 13(a)-14(a)/15d-14(a) of the Securities Exchange Act of 1934,
as amended (filed herewith)
 30




---



##### Table of Contents



32.1
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, adopted pursuant to Section 906 of the
Sarbanes-OxleyAct 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-OxleyAct of 2002 (filed herewith)
 
 (1)
    
    Management contract or compensatory plan or arrangement required to be filed as an Exhibit to
this Form 10-K 31




---



##### Table of Contents



SIGNATURES
  PrimeEnergy CorporationBy:
    /s/ CHARLES E. DRIMAL, JRCharles E. Drimal, Jr.President  /s/ CHARLES E.DRIMAL, JR.

Charles E. Drimal, Jr.
    
    
    
    Director and President;
The Principal Executive Officer/s/ BEVERLY A. CUMMINGS

Beverly A. Cummings
    
    
    
    Director, Vice President and
Treasurer; The Principal
Financial and Accounting Officer/s/ MATTHIAS ECKENSTEIN

Matthias Eckenstein
    
    
    
    Director/s/ H. GIFFORD FONG

H. Gifford Fong
    
    
    
    Director/s/ THOMAS S.T. GIMBEL

Thomas S.T. Gimbel
    
    
    
    Director/s/ CLINT HURT

Clint Hurt
    
    
    
    Director/s/ JAN K. SMEETS

Jan K. Smeets
    
    
    
    Director
 32




---



##### Table of Contents



INDEX TO FINANCIAL STATEMENTS
 Report of Independent Registered Public Accounting Firm
    
    
    F-2Financial StatementsConsolidated Balance Sheets  December 31, 2006 and 2005
    
    
    F-3Consolidated Statements of Operations  for the years ended December 31, 2006, 2005 and 2004
    
    
    F-5Consolidated Statement of Stockholders Equity  for the years ended December 31, 2006, 2005
and 2004
    
    
    F-6Consolidated Statements of Cash Flows  for the years ended December 31, 2006, 2005 and 2004
    
    
    F-7Notes to Consolidated Financial Statements
    
    
    F-8Supplementary Information:Capitalized Costs Relating to Oil and Gas Producing Activities, years ended December 31,
2006, 2005 and 2004
    
    
    F-20Costs Incurred in Oil and Gas Property Acquisition, Exploration and Development
Activities, years ended December 31, 2006, 2005 and 2005
    
    
    F-20Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas
Reserves, years ended December 31, 2006, 2005 and 2004
    
    
    F-21Standardized Measure of Discounted Future Net Cash Flows and Changes Therein Relating
to Proved Oil an Gas Reserves, years ended December 31, 2006, 2005 and 2004
    
    
    F-22Reserve Quantity Information, years ended December 31, 2006, 2005 and 2004
    
    
    F-23Results of Operations from Oil and Gas Producing Activities, years ended December 31,
2006, 2005 and 2004
    
    
    F-24Notes to Supplementary Information
    
    
    F-25
 F-1




---



##### Table of Contents



F-2




---



##### Table of Contents



2006
    
    
    2005ASSETS:Current assets:Cash and cash equivalents
    
    $
    24,653,000
    
    
    $
    11,119,000Restricted cash and cash equivalents
    
    
    2,528,000
    
    
    
    1,797,000Accounts receivable, net
    
    
    32,970,000
    
    
    
    16,558,000Due from related parties
    
    
    655,000
    
    
    
    985,000Prepaid expenses
    
    
    1,269,000
    
    
    
    7,517,000Derivative contracts
    
    
    6,085,000
    
    
    
    Inventory at cost
    
    
    3,521,000
    
    
    
    388,000Deferred income taxes
    
    
    
    
    
    
    454,000Total current assets
    
    
    71,681,000
    
    
    
    38,818,000Property and equipment, at cost:Proved oil and gas properties at cost
    
    
    284,698,000
    
    
    
    125,248,000Unproved oil and gas properties at cost
    
    
    5,047,000
    
    
    
    6,166,000Less, accumulated depletion and depreciation
    
    
    (78,005,000
    )
    
    
    (65,234,000
    )211,740,000
    
    
    
    66,180,000Field and office equipment
    
    
    15,793,000
    
    
    
    11,450,000Less, accumulated depreciation
    
    
    (8,351,000
    )
    
    
    (7,484,000
    )7,442,000
    
    
    
    3,966,000Total net property and equipment
    
    
    219,182,000
    
    
    
    70,146,000Other assets
    
    
    729,000
    
    
    
    419,000Total assets
    
    $
    291,592,000
    
    
    $
    109,383,000
  F-3




---



##### Table of Contents



2006
    
    
    2005LIABILITIES and STOCKHOLDERS EQUITY:Current liabilities:Accounts payable
    
    $
    42,658,000
    
    
    $
    14,642,000Current portion of asset retirement and
other long-term obligations
    
    
    314,000
    
    
    
    1,246,000Current portion of deferred taxes liability
    
    
    1,961,000
    
    
    
    Accrued liabilities
    
    
    22,030,000
    
    
    
    8,606,000Due to related parties
    
    
    477,000
    
    
    
    1,027,000Total current liabilities
    
    
    67,440,000
    
    
    
    25,521,000Long-term bank debt
    
    
    136,460,000
    
    
    
    28,050,000Asset retirement obligations
    
    
    6,314,000
    
    
    
    2,216,000Deferred income taxes
    
    
    25,367,000
    
    
    
    13,860,000Total liabilities
    
    
    235,581,000
    
    
    
    69,647,000Minority Interest
    
    
    1,313,000
    
    
    
    Stockholders equity:Preferred stock, $.10 par value,
authorized 5,000,000 shares; none issuedCommon stock, $.10 par value, authorized
10,000,000 shares; issued 7,694,970 in
2006 and 2005
    
    
    769,000
    
    
    
    769,000Paid in capital
    
    
    11,024,000
    
    
    
    11,024,000Retained earnings
    
    
    66,908,000
    
    
    
    48,608,000Accumulated other comprehensive income
    
    
    3,976,000
    
    
    
    82,677,000
    
    
    
    60,401,000Treasury stock, at cost 4,478,145 common
shares in 2006 and 4,367,155 in 2005
    
    
    (27,979,000
    )
    
    
    (20,665,000
    )Total stockholders equity
    
    
    54,698,000
    
    
    
    39,736,000Total liabilities and stockholders equity
    
    $
    291,592,000
    
    
    $
    109,383,000
  F-4




---



##### Table of Contents



2006
    
    
    2005
    
    
    2004Revenue:Oil and gas sales
    
    $
    61,924,000
    
    
    $
    53,988,000
    
    
    $
    43,967,000Field service income
    
    
    20,319,000
    
    
    
    15,182,000
    
    
    
    11,965,000Administrative overhead fees
    
    
    9,704,000
    
    
    
    7,068,000
    
    
    
    6,317,000Loss on derivative instruments, net
    
    
    
    
    
    
    (415,000
    )
    
    
    Interest and other income
    
    
    472,000
    
    
    
    123,000
    
    
    
    179,00092,419,000
    
    
    
    75,946,000
    
    
    
    62,428,000Costs and expenses:Lease operating expense
    
    
    21,040,000
    
    
    
    18,573,000
    
    
    
    14,939,000Field service expense
    
    
    15,796,000
    
    
    
    12,791,000
    
    
    
    10,939,000Depreciation, depletion and amortization
    
    
    14,437,000
    
    
    
    11,274,000
    
    
    
    12,156,000General and administrative expense
    
    
    12,400,000
    
    
    
    10,493,000
    
    
    
    7,536,000Exploration costs
    
    
    1,162,000
    
    
    
    664,000
    
    
    
    5,499,00064,835,000
    
    
    
    53,795,000
    
    
    
    51,069,000Income from operations
    
    
    27,584,000
    
    
    
    22,151,000
    
    
    
    11,359,000Other income and expense:Less interest expense
    
    
    2,091,000
    
    
    
    1,531,000
    
    
    
    1,136,000Add gain on sale and exchange of assets
    
    
    3,017,000
    
    
    
    20,334,000
    
    
    
    75,000Income before provision for income taxes
    
    
    28,510,000
    
    
    
    40,954,000
    
    
    
    10,298,000Provision for income taxes
    
    
    10,210,000
    
    
    
    14,999,000
    
    
    
    3,023,000Net income
    
    $
    18,300,000
    
    
    $
    25,955,000
    
    
    $
    7,275,000Basic net income per common share
    
    $
    5.52
    
    
    $
    7.64
    
    
    $
    2.04Diluted net income per common share
    
    $
    4.50
    
    
    $
    6.27
    
    
    $
    1.70
  F-5




---



##### Table of Contents



AccumulatedAdditional
    
    
    
    
    
    
    OtherCommon Stock
    
    Paid In
    
    
    Retained
    
    
    comprehensive
    
    
    TreasuryShares
    
    
    Amount
    
    
    Capital
    
    
    Earnings
    
    
    Income
    
    
    Stock
    
    
    TotalBalance at December 31, 2003
    
    
    7,694,970
    
    
    $
    769,000
    
    
    $
    11,024,000
    
    
    $
    15,378,000
    
    
    
    
    
    
    $
    (13,735,000
    )
    
    $
    13,436,000Purchased 136,977 shares of
common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,474,000
    )
    
    
    (2,474,000
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,275,000
    
    
    
    
    
    
    
    
    
    
    
    7,275,000Balance at December 31, 2004
    
    
    7,694,970
    
    
    $
    769,000
    
    
    $
    11,024,000
    
    
    $
    22,653,000
    
    
    $
    
    
    
    $
    (16,209,000
    )
    
    $
    18,237,000Purchased 164,410 shares of
common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,456,000
    )
    
    
    (4,456,000
    )Net Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25,955,000
    
    
    
    
    
    
    
    
    
    
    
    25,955,000Balance at December 31, 2005
    
    
    7,694,970
    
    
    $
    769,000
    
    
    $
    11,024,000
    
    
    $
    48,608,000
    
    
    $
    
    
    
    $
    (20,655,000
    )
    
    $
    39,736,000Purchased 110,990 shares of
common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,314,000
    )
    
    
    (7,314,000
    )Net Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,300,000
    
    
    
    
    
    
    
    
    
    
    
    18,300,000Other comprehensive income,
net of taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,976,000
    
    
    
    
    
    
    
    3,976,000Balance as of December 31,
2006
    
    
    7,694,970
    
    
    $
    769,000
    
    
    $
    11,024,000
    
    
    $
    66,908,000
    
    
    $
    3,976,000
    
    
    $
    (27,979,000
    )
    
    $
    54,698,000
  F-6




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##### Table of Contents



2006
    
    
    2005
    
    
    2004Cash flows from operating activities:Net income
    
    $
    18,300,000
    
    
    $
    25,955,000
    
    
    $
    7,275,000Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation, depletion, amortization and accretion
on discounted liabilities
    
    
    14,437,000
    
    
    
    11,274,000
    
    
    
    12,156,000Dry hole and abandonment costs
    
    
    510,000
    
    
    
    262,000
    
    
    
    5,499,000Gain on sale of properties
    
    
    (3,017,000
    )
    
    
    (20,334,000
    )
    
    
    (75,000
    )Stock based compensation expense
    
    
    1,313,000
    
    
    
    
    
    
    
    Provision for deferred income taxes
    
    
    11,557,000
    
    
    
    6,230,000
    
    
    
    3,358,000Changes in assets and liabilities:(Increase) decrease in accounts receivable
    
    
    (16,411,000
    )
    
    
    (7,803,000
    )
    
    
    (1,586,000
    )(Increase) decrease in due from related parties
    
    
    330,000
    
    
    
    (985,000
    )
    
    
    209,000(Increase) decrease in inventories
    
    
    (3,133,000
    )
    
    
    
    
    
    
    (Increase) decrease in prepaid expenses
    
    
    6,435,000
    
    
    
    (7,181,000
    )
    
    
    (111,000
    )(Increase) decrease in other assets
    
    
    (53,000
    )
    
    
    (139,000
    )
    
    
    (137,000
    )Increase (decrease) in accounts payable
    
    
    3,716,000
    
    
    
    5,510,000
    
    
    
    1,016,000Increase (decrease) in accrued liabilities
    
    
    (1,450,000
    )
    
    
    5,385,000
    
    
    
    (276,000
    )Increase (decrease) in due to related parties
    
    
    (552,000
    )
    
    
    431,000
    
    
    
    (333,000
    )Net cash provided by operating activities
    
    
    31,982,000
    
    
    
    18,605,000
    
    
    
    26,995,000Cash flows from investing activitiesCapital expenditures, including exploration expense
    
    
    (121,345,000
    )
    
    
    (54,440,000
    )
    
    
    (24,696,000
    )Proceeds from sale of properties and equipment
    
    
    3,017,000
    
    
    
    46,796,000
    
    
    
    75,000Net cash used in investing activities
    
    
    (118,328,000
    )
    
    
    (7,644,000
    )
    
    
    (24,621,000
    )Cash flows from financing activitiesPurchase of stock for treasury
    
    
    (7,314,000
    )
    
    
    (4,456,000
    )
    
    
    (2,474,000
    )Increase in long-term bank debt and other long-term
obligations
    
    
    198,362,000
    
    
    
    65,570,000
    
    
    
    32,522,000Repayment of long-term bank debt and other long-term
obligations
    
    
    (91,168,000
    )
    
    
    (67,432,000
    )
    
    
    (29,837,000
    )Net cash provided by (used in) financing activities
    
    
    99,880,000
    
    
    
    (6,318,000
    )
    
    
    211,000Net increase in cash and cash equivalents
    
    
    13,534,000
    
    
    
    4,643,000
    
    
    
    2,585,000Cash and cash equivalents at the beginning of the period
    
    
    11,119,000
    
    
    
    6,476,000
    
    
    
    3,891,000Cash and cash equivalents at the end of the period
    
    $
    24,653,000
    
    
    $
    11,119,000
    
    
    $
    6,476,000Supplemental disclosures:Income taxes paid during the year
    
    $
    5,713,000
    
    
    $
    5,076,000
    
    
    $
    Net income tax refunds received during the year
    
    $
    
    
    
    $
    
    
    
    $
    172,000Interest paid during the year
    
    $
    2,091,000
    
    
    $
    1,531,000
    
    
    $
    953,000
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##### Table of Contents



1.
    
    Description of Operations and Significant Accounting PoliciesNature of Operations:PrimeEnergy Corporation (PEC), a Delaware corporation, was organized in March 1973. The
Company is engaged in the development, acquisition and production of oil and natural gas
properties. The Company owns leasehold, mineral and royalty interests in producing and
non-producing oil and gas properties across the United States, including Colorado, Kansas,
Louisiana, Mississippi, Montana, Nebraska, New Mexico, North Dakota, Oklahoma, Texas, Utah, West
Virginia and Wyoming and the Gulf of Mexico. The Company operates 1,545 wells and owns
non-operating interests in over 856 additional wells. Additionally, the Company provides
well-servicing support operations, site-preparation and construction services for oil and gas
drilling and reworking operations, both in connection with the Companys activities and
providing contract services for third parties. The Company is publicly traded on the NASDAQ
under the symbol PNRG. PEC owns Eastern Oil Well Service Company (EOWSC), EOWS Midland
Company (EMID) and Southwest Oilfield Construction Company (SOCC), all of which perform oil
and gas field servicing. PEC also owns Prime Operating Company (POC), which serves as operator
for most of the producing oil and gas properties owned by the Company and affiliated entities.
PEC also owns Prime Offshore L.L.C. (Prime Offshore) formerly F-W Oil Exploration LLC, which
owns and operates properties in the Gulf of Mexico. PrimeEnergy Corporation and its subsidiaries
are herein referred to as the Company. PrimeEnergy Management Corporation (PEMC), a
wholly-owned subsidiary, acts as the managing general partner, providing administration,
accounting and tax preparation services for 18 limited partnerships and 2 trusts (collectively,
the Partnerships). The markets for the Companys products are highly competitive, as oil and
gas are commodity products and prices depend upon numerous factors beyond the control of the
Company, such as economic, political and regulatory developments and competition from
alternative energy sources.Consolidation and Presentation:The consolidated financial statements include the accounts of PrimeEnergy Corporation, its
subsidiaries and the Partnerships, using the proportionate consolidation method, whereby our
proportionate share of each entitys assets, liabilities, revenue and expenses are included in
the appropriate classifications in the consolidated financial statements. Inter-company
balances and transactions are eliminated in preparing the consolidated financial statements.
These reclassifications had no effect on the Companys net income (loss) or stockholders
equity.Use of Estimates:The preparation of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.Estimates of oil and gas reserves, as determined by independent petroleum engineers, are
continually subject to revision based on price, production history and other factors. Depletion
expense, which is computed based on the units of production method, could be significantly
impacted by changes in such estimates. Additionally, FAS 144 requires that if the expected
future cash flow from an asset is less than its carrying cost, that asset must be written down
to its fair market value. As the fair market value of an oil and gas property will usually be
significantly less than the total future net revenue expected from that property, small changes
in the estimated future net revenue from an asset could lead to the necessity of recording a
significant impairment of that asset.
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##### Table of Contents



Property and Equipment:
  Capitalization of Interest:
  Impairment of Long-Lived Assets:
  Asset Retirement Obligation:
 Accounting for Asset Retirement
Obligations
 Income Taxes:
  F-9




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General and Administrative Expenses:
  Income Per Common Share:
  Statements of cash flows:
  Concentration of Credit Risk:
  Hedging:
   F-10




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Recently Issued Accounting Pronouncements
      F-11




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##### Table of Contents



to address diversity in the accounting practices of quantifying misstatements and the potential
for improper amounts on the balance sheet. Prior to the issuance of SAB No. 108, the two
methods used for quantifying the effects of financial statement errors were the roll-over and
iron curtain methods. Under the roll-over method, the primary focus is the income statement,
including the reversing effect of prior year misstatements. The criticism of this method is
that misstatements can accumulate on the balance sheet. On the other hand, the iron curtain
method focuses on the effect of correcting the ending balance sheet, with less importance on the
reversing effects of prior year errors in the income statement. SAB No. 108 establishes a dual
approach which requires the quantification of the effect of financial statement errors on each
financial statement, as well as related disclosures. Public companies are required to record
the cumulative effect of initially adopting the dual approach method in the first year ending
after November 16, 2006 by recording any necessary corrections to asset and liability balances
with an offsetting adjustment to the opening balance of retained earnings. The use of this
cumulative effect transition method also requires detailed disclosures of the nature and amount
of each error being corrected and how and when they arose. The Company is currently evaluating
the impact SAB No. 108 may have on its financial position, results of operations and cash flows.In February 2007, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities (SFAS 159). This statement permits entities to choose to measure many financial
instruments and certain other items at fair value. This statement expands the use of fair value
measurement and applies to entities that elect the fair value option. The fair value option
established by this Statement permits all entities to choose to measure eligible items at fair
value at specified election dates. SFAS 159 is effective as of the beginning of an entitys
first fiscal year that begins after November 15, 2007. We have not determined the effect, if
any, the adoption of this statement will have on our financial position or results of operations
        .2.
    
    Significant Acquisitions and DispositionsAs more fully described in Note 7, the Company is committed to offer to repurchase the interests
of the partners and trust unit holders in certain of the Partnerships. The Company purchased
such interests in an amount totaling $526,000 in 2006, $1,217,000 in 2005. The Companys
proportionate share of assets, liabilities and results of operations related to the interests in the Partnerships are included in the
consolidated financial statements.In August 2005, the Company completed a transaction involving its interests in certain offshore
Gulf of Mexico properties effective April 1, 2005 (the Partners transaction). Prime Offshore
L.L.C. (Prime Offshore) formerly, F-W Oil Exploration L.L.C., a subsidiary of the Company,
entered into a limited partnership agreement (the Partners Agreement), wherein Prime Offshore
is the General Partner of FWOE Partners L.P. (Partners) formed for the acquisition,
development and operation of oil and gas properties and pipelines, equipment, facilities and
fixtures appurtenant thereto, in off-shore Gulf of Mexico (the Properties). Prior to entering
into the Partners Agreement, Prime Offshore had distributed interests in the Properties to the
minority shareholders of Prime Offshore and the Company purchased all of the outstanding shares
of such minority shareholders for $250,000, resulting in the Companys 100% ownership of Prime
Offshore.Prime Offshore contributed all of its interest in the Properties to Partners in exchange for an
initial 20% General Partner interest in Partners and a cash distribution of $43.2 million.
Partners purchased the interests previously distributed to the former minority shareholders for
$27.7 million. The entire $70.9 million expended by Partners was funded by a cash contribution
by the Limited Partner. The cash distribution includes adjustments for estimated net revenues
from the effective date of April 1, 2005, estimated capital expenditures and other typical
closing adjustments.In July 2005, the Company completed the sale of certain leasehold and exploration rights in
prospects generated in the Companys onshore Texas 2-d Seismic Exploration Program in exchange
for a cash payment of $3.5 million.
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##### Table of Contents



3.
    
    Additional Balance Sheet InformationAccounts receivable at December 31, 2006 and 2005, consisted of the following:
 December 31,2006
    
    
    2005Joint interest billing
    
    $
    13,054,000
    
    
    $
    3,904,000Trade receivables
    
    
    2,367,000
    
    
    
    1,922,000Oil and gas sales
    
    
    8,764,000
    
    
    
    9,183,000Income tax receivable
    
    
    3,023,000
    
    
    
    Other
    
    
    5,912,000
    
    
    
    2,154,00033,120,000
    
    
    
    17,163,000Less: allowance for doubtful accounts
    
    
    (150,000
    )
    
    
    (605,000
    )Total
    
    $
    32,970,000
    
    
    $
    16,558,000
 Accrued Liabilities at December 31, 2006 and 2005,
consisted of the following:
 December 31,2006
    
    
    2005Compensation
and related expenses
    
    $
    1,584,000
    
    
    $
    1,632,000Property
costs
    
    
    16,188,000
    
    
    
    1,961,000Income tax
    
    
    270,000
    
    
    
    4,275,000Other
    
    
    3,988,000
    
    
    
    738,000Total
    
    $
    22,030,000
    
    
    $
    8,606,000
 4.
    
    Property and EquipmentTotal interest costs incurred during 2006 was $4,555,000. Of this amount, the Company
capitalized $2,464,000. Capitalized interest is included as part of the cost of oil and gas
properties. The capitalized rates are based upon the Companys weighted-average cost of
borrowings used to finance the expenditures.5.
    
    Long-Term Bank Debt  DebtThe Company currently has credit facilities totaling $360 million, consisting of a $200 million
credit facility through Guaranty Bank (the offshore facility) and a $160 million credit facility
through a syndicate of banks led by Guaranty Bank (the onshore facility). The credit facilities
mature in 2008 and 2009 . Availability under the credit facilities is based on the loan value
assigned to Primes oil and gas properties. At December 31, 2006, the borrowing bases and
outstanding balances were $82 million under the onshore credit facility at a weighted average
interest rate of 8.18%, and $54.5 million under the offshore credit facility at a weighted
average interest rate of 10.15%. Currently, the borrowing base and outstanding balance under
the onshore credit facility is $82 million and $72 million, respectively, and the borrowing
base and outstanding balance under the offshore credit facility is $74.5 million.The determination of the Borrowing Base is made by the lenders taking into consideration the
estimated value of Primes oil and gas properties in accordance with the lenders customary
practices for oil and gas loans. This process involves reviewing Primes estimated proved
reserves and their valuation. The Borrowing Base is redetermined semi-annually, and the
available borrowing amount could be increased or decreased as a result of such redeterminations.
In addition, Prime and the lenders each have discretion at any time to have the Borrowing Base
redetermined. A revision to Primes reserves may prompt such a request on the part of the
lenders, which could possibly result in a reduction in the Borrowing Base and availability under
the credit facilities. If outstanding borrowings under either of the credit facilities exceed
the applicable portion of the Borrowing Base, Prime would be required to repay the excess
amount within a prescribed period. If we are unable to pay the excess amount, it would cause an
event of default.The credit facilities include terms and covenants that require the Company to maintain, as
defined, a minimum current ratio, tangible net worth, debt coverage ratio and interest coverage
ratio, and restrictions are placed on the payment of dividends and the amount of treasury stock
the Company may purchase.
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##### Table of Contents



The credit facilities are collateralized by substantially all of the Companys assets. The
Company is required to mortgage, and grant a security interest in, consolidated proved oil and
gas properties. Prime also pledged the stock of several subsidiaries to the lenders to secure
the credit facilities.6.
    
    CommitmentsOperating Leases:The Company has several noncancelable operating leases, primarily for rental of office
space, that have a term of more than one year. The future minimum lease payment for the
operating leases are as follows.
 OperatingLeases2007
    
    $
    553,0002008
    
    
    529,0002009
    
    
    525,0002010
    
    
    30,000Thereafter
    
    
    Total minimum payments
    
    $
    1,637,000
 Asset Retirement Obligation:
  2006
    
    
    2005Asset retirement obligation  beginning of period
    
    $
    2,594,000
    
    
    $
    390,000Liabilities incurred
    
    
    3,033,000
    
    
    
    1,456,000Liabilities settled
    
    
    (348,000
    )
    
    
    (116,000
    )Accretion expense
    
    
    125,000
    
    
    
    80,000Revisions in estimated liabilities
    
    
    1,036,000
    
    
    
    784,000Asset retirement obligation  end of period
    
    $
    6,440,000
    
    
    $
    2,594,000
 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 our 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 our
wells, the costs to ultimately retire our wells may vary significantly from previous estimates.7.
    
    Contingent LiabilitiesThe Company, as managing general partner of the affiliated Partnerships, is responsible for all
Partnership activities, including the drilling of development wells and the production and sale
of oil and gas from productive wells. The Company also provides the administration, accounting
and tax preparation work for the Partnerships, and is liable for all debts and liabilities of
the affiliated Partnerships, to the extent that the assets of a given limited Partnership are
not sufficient to satisfy its obligations. As of December 31, 2006, the affiliated Partnerships
have established cash reserves in excess of their debts and liabilities and the Company believes
these reserves will be sufficient to satisfy Partnership obligations.
 F-14




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##### Table of Contents



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.As a general partner, the Company is committed to offer to purchase the limited partners
interest in certain of its managed Partnerships at various annual intervals. Under the terms of
a partnership agreement, the Company is not obligated to purchase an amount greater than 10% of
the total partnership interest outstanding. In addition, the Company will be obligated to
purchase interests tendered by the limited partners only to the extent of one hundred fifty
percent of the revenues received by it from such partnership in the previous year. Purchase
prices are based upon annual reserve reports of independent petroleum engineering firms
discounted by a risk factor. Based upon historical production rates and prices, management
estimates that if all such offers were to be accepted, the maximum annual future purchase
commitment would be less than $500,000.The Company owns approximately a 27% interest in a limited partnership which owns a shopping
center in Alabama. The Company is a guarantor on a mortgage secured by the shopping center. The
Company believes the cash flow from the center is sufficient to service the mortgage. The market
value of the center is currently substantially higher than the balance owed on the mortgage. If
the partnership were unable to pay its obligations under the mortgage agreement, the maximum
amount the Company is committed to pay is $50,000.8.
    
    Stock Options and Other CompensationIn 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 December 31, 2006 and 2005, options on
767,500 shares were outstanding and exercisable at prices ranging from $1.00 to $1.25.9.
    
    Income TaxesThe components of the provision for income taxes for the years ended December 31, 2006, 2005
and 2004 are as follows:
 2006
    
    
    2005
    
    
    2004Federal:Current
    
    $
    (1,814,000
    )
    
    $
    8,011,000
    
    
    $
    187,000Deferred
    
    
    11,408,000
    
    
    
    5,429,000
    
    
    
    2,074,000State:Current
    
    
    467,000
    
    
    
    803,000
    
    
    
    266,000Deferred
    
    
    149,000
    
    
    
    756,000
    
    
    
    496,000Total
    
    $
    10,210,000
    
    
    $
    14,999,000
    
    
    $
    3,023,000
 F-15




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##### Table of Contents



December 31,
    
    
    December 31,2006
    
    
    2005Current assets:Compensation and benefits
    
    $
    56,000
    
    
    $
    226,000Allowance for doubtful accounts
    
    
    252,000
    
    
    
    229,000Total current deferred income tax assets
    
    $
    308,000
    
    
    $
    455,000Current liabilities:Unrealized gain on hedging transactions
    
    $
    2,270,000
    
    
    $
    3⁄4Net current deferred tax liability (Asset)
    
    $
    1,962,000
    
    
    $
    (455,000
    )Noncurrent assets:Alternative minimum tax credits
    
    $
    7,328,000
    
    
    
    Net Operating Loss Carryfowards
    
    
    903,000
    
    
    
    3⁄4Percentage Depletion Carryfowards
    
    
    351,000
    
    
    
    3⁄4Total noncurrent assets
    
    $
    8,582,000
    
    
    $
    3⁄4Noncurrent liabilities:Basis differences relating to partnerships
    
    $
    1,213,000
    
    
    $
    835,000Depletion and depreciation
    
    
    32,639,000
    
    
    
    13,025,000Unrealized gain on hedging transactions
    
    
    96,000
    
    
    
    3⁄4Total noncurrent liabilities
    
    $
    33,948,000
    
    
    $
    13,860,000Net noncurrent deferred income tax liabilities
    
    $
    25,366,000
    
    
    $
    13,860,000
 The total provision for income taxes for the years ended December 31, 2006, 2005 and 2004
varies from the federal statutory tax rate as a result of the following:
 December 31,
    
    
    December 31,
    
    
    December 31,2006
    
    
    2005
    
    
    2004Expected tax expense
    
    $
    9,693,000
    
    
    $
    14,013,000
    
    
    $
    3,501,000State income tax, net of
federal benefit
    
    
    411,000
    
    
    
    1,029,000
    
    
    
    503,000Percentage depletion
    
    
    (352,000
    )
    
    
    (429,000
    )
    
    
    (811,000
    )Executive Compensation
    
    
    542,000
    
    
    
    467,000
    
    
    
    Other, Net
    
    
    (84,000
    )
    
    
    (81,000
    )
    
    
    (170,000
    )Tax expense
    
    $
    10,210,000
    
    
    $
    14,999,000
    
    
    $
    3,023,000
 Deferred income taxes reflect the impact of temporary differences between the amount of assets
and liabilities recognized for financial reporting purposes and such amounts recognized for tax
purposes. Differences relating to oil and gas properties owned through Prime Offshore are
reflected under Depletion and Depreciation, while basis differences relating to the managed
partnerships are reflected under Basis differences relating to managed partnershipsDue primarily to the current deduction of intangible drilling costs, the company will have a
federal net operating loss (NOL) in 2006, which will be carried back to the 2004 and 2005 tax
years resulting in a refund of $2,623,000. As intangible drilling costs are a preference item
for the alternative minimum tax (AMT), the Company will have a current year liability based on
the AMT. Absent the NOL carryback, the Company would have a current federal income tax expense
of $809,000. The result of combining these amounts is a current tax benefit of $1,814,000.
 F-16




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The NOL carryback to 2004 and 2005 will reduce the Companys regular tax to zero, so that the
remaining liability for those years will be based solely on the amount of the AMT. The Company
will get AMT credit carryforwards for the amount of such liability.In 2006, $2,366,000 of deferred tax relating to unrealized gains on hedging transactions was
charged directly to shareholders equity.The Company is entitled to percentage depletion on certain of its wells, which is calculated
without reference to the basis of the property. To the extent that such depletion exceeds a
propertys basis, it creates a permanent difference which lowers the Companys effective rate.10.
    
    Segment Information and Major CustomersThe Company operates in one industry  oil and gas exploration, development, operation and
servicing. The Companys oil and gas activities are entirely in the United States.The Company sells its oil and gas production to a number of purchasers. Listed below are the
percent of the Companys total oil and gas sales made to each of the customers whose purchases
represented more than 10% of the Companys oil and gas sales in the year 2006.
 Oil Purchasers:
    
    
    
    
    
    Gas Purchasers:Texon Distributing L.P.
    
    
    36
    %
    
    Unimark LLC
    
    
    25
    %Plains All American Inc.
    
    
    38
    %
    
    Cokinos Energy Corporation
    
    
    23
    %TEPPCO Crude Oil, L.L.C.
    
    
    11
    %
 Although there are no long-term oil and gas purchasing agreements with these purchasers, the
Company believes that they will continue to purchase its oil and gas products and, if not, could
be replaced by other purchasers.11.
    
    Derivative Instruments and Hedging Activity:The Company periodically enters into derivative commodity instruments to hedge its exposure
to price fluctuations on natural gas and crude oil production. At December 31, 2006, the
Company had three cash flow hedges open: two natural gas price swap arrangements and one crude
oil collar arrangement. At December 31, 2006, $6.34 million
($3.98 million net of tax) unrealized
gain was recorded in Accumulated Other Comprehensive Income, along with a $6.08 million
short-term derivative receivable and a $260,000 thousand long-term derivative receivable. The
change in the fair value of derivatives designated as hedges that is effective is initially
recorded to Accumulated Other Comprehensive Income. The ineffective portion, if any, of the
change in the fair value of derivatives designated as hedges, and the change in fair value of
all other derivatives, is recorded currently in earnings as a component of oil and gas sales.As of December 31, 2006, natural gas price swaps cover 3,080 Mmcf of production at a weighted
average price of $9.22. The oil price three-way collar covers 206
Mbbl of production at a floor price
of $65.00, a ceiling of $79.25 and a third-tier call of $100.Assuming no change in commodity prices, after December 31, 2006, the Company would expect
to reclassify to the Statement of Operations, over the next 12 months, $3.89 million in
after-tax income associated with commodity hedges. This reclassification represents the net
short-term receivable associated with open positions currently not reflected in earnings at
December 31, 2006 related to anticipated 2007 production.
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12.
    
    Related Party TransactionsPEMC acts as the managing general partner, providing administration, accounting and tax
preparation services for the Partnerships. Certain directors have limited and general
partnership interests in several of these Partnerships. As the managing general partner in each
of the Partnerships, PEMC receives approximately 5% to 15% of the net revenues of each
Partnership as a carried interest in the Partnerships properties. As more fully described in
Note 7, the Company is committed to offer to repurchase the interests of the partners and trust
unit holders in certain of the Partnerships. The Company purchased such interests in an amount
totaling $526,000 in 2006 and $1,217,000 in 2005.The Partnership agreements allow PEMC to receive reimbursement for property acquisition and
development costs and general and administrative overhead, incurred on behalf of the
Partnerships.Due to related parties at December 31, 2006 and 2005, primarily represents receipts collected
by the Company as agent, for oil and gas sales net of expenses. The amount of such receipts
payable to the affiliated Partnerships was $477,000 and $1,246,000 at December 31, 2006 and
2005, respectively. Receivables from related parties consist of reimbursable general and
administrative costs, lease operating expenses and reimbursements for property development, and
related costs. Due from related parties was $655,000 and $985,000 as of December 31, 2006 and
2005 respectively. Treasury stock purchases in 2006 and 2005 included shares acquired from
related parties. Purchases from related parties include a total of 40,259 shares purchased for
a total consideration of $2,623,564 in 2006 and 92,432 shares purchased for a total
consideration of $2,098,640 in 2005.During 2005, the Company purchased certain equipment from a managing member of FWOE Exploration
L.L.C. for $1,200,000.13.
    
    Restricted Cash and Cash EquivalentsRestricted cash and cash equivalents includes $2,526,000 and $1,797,000 at December 31, 2006
and 2005, respectively, of cash primarily pertaining to unclaimed royalty payments. There were
corresponding accounts payable recorded at December 31, 2006 and 2005 for these liabilities.14.
    
    Salary Deferral PlanThe Company maintains a salary deferral plan (the Plan) in accordance with Internal Revenue
Code Section 401(k), as amended. The Plan provides for discretionary and matching contributions
which approximated $366,000 and $319,500 in 2006 and 2005, respectively.15.
    
    Earnings per ShareBasic 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. The following reconciles amounts reported in the financial
statements:
 F-18




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##### Table of Contents



Year ended December 31, 2006Number of
    
    
    Per shareNet Income
    
    
    Shares
    
    
    AmountNet income per common share
    
    $
    18,300,000
    
    
    
    3,314,003
    
    
    $
    5.52Effect of dilutive securities:Options
    
    
    
    
    
    
    755,682Diluted net income per common share
    
    $
    18,300,000
    
    
    
    4,069,685
    
    
    $
    4.50
 Year ended December 31, 2005Number of
    
    
    Per shareNet Income
    
    
    Shares
    
    
    AmountNet income per common share
    
    $
    25,955,000
    
    
    
    3,397,820
    
    
    $
    7.64Effect of dilutive securities:Options
    
    
    
    
    
    
    742,589Diluted net income per common share
    
    $
    25,955,000
    
    
    
    4,140,409
    
    
    $
    6.27
 Year ended December 31, 2004Number of
    
    
    Per shareNet Income
    
    
    Shares
    
    
    AmountNet income per common share
    
    $
    7,275,000
    
    
    
    3,569,751
    
    
    $
    2.04Effect of dilutive securities:Options
    
    
    
    
    
    
    722,283Diluted net income per common share
    
    $
    7,275,000
    
    
    
    4,292,034
    
    
    $
    1.70
 16.
    
    Selected Quarterly Financial Information (Unaudited)
 Fourth
    
    Third
    
    Second
    
    First2006
    
    Quarter
    
    Quarter
    
    Quarter
    
    QuarterRevenue
    
    $
    21,177,000
    
    
    $
    24,842,000
    
    
    $
    24,331,000
    
    
    $
    22,752,000Operating income
    
    
    3,879,000
    
    
    
    9,050,000
    
    
    
    7,704,000
    
    
    
    6,951,000Net income
    
    
    2,393,000
    
    
    
    6,609,000
    
    
    
    5,320,000
    
    
    
    3,978,000Net income per common share
    
    $
    0.74
    
    
    $
    2.02
    
    
    $
    1.61
    
    
    $
    1.20Diluted net income per common share
    
    $
    0.60
    
    
    $
    1.64
    
    
    $
    1.31
    
    
    $
    .98
 Fourth
    
    Third
    
    Second
    
    First2005
    
    Quarter
    
    Quarter
    
    Quarter
    
    QuarterRevenue
    
    $
    22,967,000
    
    
    $
    19,293,000
    
    
    $
    17,595,000
    
    
    $
    16,091,000Operating income
    
    
    9,344,000
    
    
    
    4,426,000
    
    
    
    4,293,000
    
    
    
    4,088,000Net income
    
    
    6,827,000
    
    
    
    14,554,000
    
    
    
    2,315,000
    
    
    
    2,259,000Net income per
common share
    
    $
    2.02
    
    
    $
    4.32
    
    
    $
    0.68
    
    
    $
    0.65Diluted net income per common share
    
    $
    1.65
    
    
    $
    3.54
    
    
    $
    0.56
    
    
    $
    0.54
 F-19




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##### Table of Contents



PRIMEENERGY CORPORATION and SUBSIDIARIES
 
 SUPPLEMENTARY INFORMATION
 
  
   
  2006
    
    
    2005
    
    
    2004Developed oil and gas properties
    
    $
    284,698,000
    
    
    $
    125,248,000
    
    
    $
    95,018,000Undeveloped oil and gas properties
    
    
    5,047,000
    
    
    
    6,166,000
    
    
    
    13,149,000289,745,000
    
    
    
    131,414,000
    
    
    
    108,167,000Accumulated depreciation, depletion
and valuation allowance
    
    
    78,005,000
    
    
    
    65,234,000
    
    
    
    60,098,000Net capitalized costs
    
    $
    281,740,000
    
    
    $
    66,180,000
    
    
    $
    48,069,000
 
    
  2006
    
    
    2005
    
    
    2004Acquisition of Properties Developed
    
    $
    1,408,000
    
    
    $
    1,569,000
    
    
    $
    2,038,000Undeveloped
    
    $
    5,047,000
    
    
    $
    6,166,000
    
    
    $
    10,058,000Exploration Costs
    
    $
    17,429,000
    
    
    $
    664,000
    
    
    $
    5,499,000Development Costs
    
    $
    135,609,000
    
    
    $
    44,745,000
    
    
    $
    7,101,000
  F-20




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##### Table of Contents



2006
    
    
    2005
    
    
    2004Future cash inflows
    
    $
    641,744,000
    
    
    $
    618,621,000
    
    
    $
    378,639,000Future production and
development costs
    
    
    (267,243,000
    )
    
    
    (256,672,000
    )
    
    
    (167,155,000
    )Future income tax expenses
    
    
       (86,915,000
    )
    
    
    (109,571,000
    )
    
    
    (62,819,000
    )Future net cash flows
    
    
        287,586,000
    
    
    
    252,378,000
    
    
    
    148,665,00010% annual discount for
estimated timing of cash flow
    
    
    (88,963,000
    )
    
    
    (106,899,000
    )
    
    
    (54,254,000
    )Standardized measure of
discounted future net cash flows
    
    $
        198,623,000
    
    
    $
    145,479,000
    
    
    $
    94,411,000
  F-21




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##### Table of Contents



For Year Ended December 31,
    
    2006
    
    
    2005
    
    
    2004Sales of oil and gas produced, net
of production costs
    
    $
    (40,884,000
    )
    
    $
    (35,415,000
    )
    
    $
    (29,028,000
    )Net changes in prices and production costs
    
    
    (55,367,000
    )
    
    
    47,729,000
    
    
    
    22,178,000Extensions, discoveries and improved
recovery
    
    
    147,292,000
    
    
    
    64,175,000
    
    
    
    18,792,000Revisions of previous quantity estimates
    
    
    (1,742,000
    )
    
    
    32,060,000
    
    
    
    9,904,000Reserves purchased, net of development
costs
    
    
    383,000
    
    
    
    927,000
    
    
    
    2,238,000Net change in development costs
    
    
    1,870,000
    
    
    
    7,914,000
    
    
    
    (14,000
    )Reserves sold
    
    
    
    
    
    
    (64,246,000
    )
    
    
    Accretion of discount
    
    
    20,855,000
    
    
    
    13,391,000
    
    
    
    6,459,000Net change in income taxes
    
    
    (13,427,000
    )
    
    
    (23,567,000
    )
    
    
    (9,656,000
    )Changes in production rates (timing) and
other
    
    
    (5,836,000
    )
    
    
    8,100,000
    
    
    
    286,000Net change
    
    
    53,144,000
    


    
    
    51,068,000
    
    
    
    21,159,000Standardized measure of discounted future
net cash flow:Beginning of year
    
    
    145,479,000
    
    
    
    94,411,000
    
    
    
    73,252,000End of year
    
    $
    198,623,000
    
    
    $
    145,479,000
    
    
    $
    94,411,000
  F-22




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##### Table of Contents



2006
    
    
    2005
    
    
    2004Oil
    
    
    Gas
    
    
    Oil
    
    
    Gas
    
    
    Oil
    
    
    Gas(bbls.)
    
    
    (Mcf)
    
    
    (bbls.)
    
    
    (Mcf)
    
    
    (bbls.)
    
    
    (Mcf)Proved developed
and undeveloped
reserves:Beginning of year
    
    
    3,687,000
    
    
    
    44,944,000
    
    
    
    2,932,000
    
    
    
    44,870,000
    
    
    
    2,905,000
    
    
    
    39,005,000Extensions,
discoveries and
improved recovery
    
    
    812,000
    
    
    
    31,394,000
    
    
    
    807,000
    
    
    
    11,087,000
    
    
    
    42,000
    
    
    
    7,268,000Revisions of
previous estimates
    
    
    91,000
    
    
    
    (1,602,000
    )
    
    
    373,000
    
    
    
    5,929,000
    
    
    
    268,000
    
    
    
    2,806,000Purchases
    
    
    17,000
    
    
    
    192,000
    
    
    
    25,000
    
    
    
    517,000
    
    
    
    88,000
    
    
    
    929,000Reserves sold
    
    
    
    
    
    
    
    
    
    
    (89,000
    )
    
    
    (12,701,000
    )
    
    
    
    
    
    
    Production
    
    
    (379,000
    )
    
    
    (5,695,000
    )
    
    
    (361,000
    
    
    
    (4,758,000
    )
    
    
    (371,000
    )
    
    
    (5,138,000
    )End of year
    
    
    4,228,000
    
    
    
    69,233,000
    
    
    
    3,687,000
    
    
    
    44,944,000
    
    
    
    2,932,000
    
    
    
    44,870,000Proved developed
reserves
    
    
    4,009,000
    
    
    
    66,754,000
    
    
    
    3,504,000
    
    
    
    43,976,000
    
    
    
    2,926,000
    
    
    
    37,728,000
  F-23




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##### Table of Contents



2006
    
    
    2005
    
    
    2004Revenue:Oil and gas sales
    
    $
    61,924,000
    
    
    $
    53,988,000
    
    
    $
    43,967,000Costs and expenses:Lease operating expense
    
    
    21,040,000
    
    
    
    18,573,000
    
    
    
    14,939,000Exploration costs
    
    
    1,162,000
    
    
    
    664,000
    
    
    
    5,499,000Depreciation and
Depletion
    
    
    12,771,000
    
    
    
    10,125,000
    
    
    
    11,021,000Income tax expense
    
    
    9,652,000
    
    
    
    9,604,000
    
    
    
    3,023,00044,625,000
    
    
    
    38,966,000
    
    
    
    34,482,000Results of operations from
producing activities
(excluding corporate
overhead and interest costs)
    
    $
    17,299,000
    
    
    $
    15,022,000
    
    
    $
    9,485,000
  F-24




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##### Table of Contents



1.
    
    Presentation of Reserve Disclosure InformationReserve disclosure information is presented in accordance with the provisions of Statement of
Financial Accounting Standards No. 69 (SFAS 69), Disclosures About Oil and Gas Producing
Activities.2.
    
    Determination of Proved ReservesThe estimates of the Companys proved reserves were determined by an independent petroleum
engineer in accordance with the provisions of SFAS 69. The estimates of proved reserves are
inherently imprecise and are continually subject to revision based on production history,
results of additional exploration and development and other factors. Estimated future net
revenues were computed by reserves, less estimated future development and production costs
based on current costs.3.
    
    Results of Operations from Oil and Gas Producing ActivitiesThe results of operations from oil and gas producing activities were prepared in accordance
with the provisions of SFASW 69. General and administrative expenses, interest costs and other
unrelated costs are not deducted in computing results of operations from oil and gas
activities.4.
    
    Standardized Measure of Discounted Future Net Cash Flows and Changes Therein Relating to
Proved Oil and Gas ReservesThe standardized measure of discounted future net cash flows relating to proved oil and gas
reserves and the changes of standardized measure of discounted future net cash flows relating
to proved oil and gas reserves were prepared in accordance with the provisions of SFAS 69.Future cash inflows are computed as described in Note 2 by applying current prices to year-end
quantities of proved reserves.Future production and development costs are computed estimating the expenditures to be incurred
in developing and producing the oil and gas reserves at year-end, based on year-end costs and
assuming continuation of existing economic conditions.Future income tax expenses are calculated by applying the year-end U.S. tax rate to future
pre-tax cash inflows relating to proved oil and gas reserves, less the tax basis of properties
involved. Future income tax expenses give effect to permanent differences and tax credits and
allowances relating to the proved oil and gas reserves.Future net cash flows are discounted at a rate of 10% annually (pursuant to SFAS 69) to derive
the standardized measure of discounted future net cash flows. This calculation does not
necessarily represent an estimate of fair market value or the present value of such cash flows
since future prices and costs can vary substantially from year-end and the use of a 10%
discount figure is arbitrary.
 F-25