UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
 
 FORM
10-Q/A
 
  T
              Quarterly
      Report under Section 13 or 15(d) of the Securities Exchange Act of
      1934
  For
the Quarterly Period Ended September 30, 2008
 Or
  o
              Transition
      Report Under 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 incorporation or organization)
                (IRS
      employer identification
number)
  One
Landmark Square, Stamford, Connecticut 06901
 (Address
of principal executive offices)
  (203)
358-5700
 (Registrant’s
telephone number, including area code)
  (Former
name, former address and former fiscal year, if changed since last
report)
 
 Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filings required for the
past 90 days.    Yes  x    No   ̈
  Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer, or a smaller reporting company.
See the definitions of “large accelerated filer” and “smaller reporting company”
in Rule 12-B of the Exchange Act.
  Large
      Accelerated Filer
                      o
                      Accelerated
      Filer
                      oNon-Accelerated
      Filer
                      o
                      Smaller
      Reporting Company
                      x
  Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).  Yes   ̈    No  x
  The
number of shares outstanding of each class of the Registrant’s Common Stock as
of November 7, 2008 was: Common Stock, $0.10 par value, 3,049,406
shares.
   1
  PrimeEnergy
Corporation
 Index to Form 10-Q
 September
30, 2008
  Part
      I – Financial InformationItem
      1. Financial Statements (restated)Consolidated Balance Sheets – September 30, 2008 and
      December 31, 2007
                    3-4Consolidated Statements of Operations for the nine and three
      months ended September 30, 2008 and 2007
                    5-6Consolidated Statement of Stockholders’ Equity for the nine
      months ended September 30, 2008
                    7Consolidated Statements of Cash Flows for the nine months
      ended September 30, 2008 and 2007
                    8Notes to Consolidated Financial
    Statements
                    9-17Item
      2. Management’s Discussion and Analysis of Financial
      Conditions and Results of Operation
                    18-19Item
      3. Quantitative and Qualitative Disclosures About Market
      Risk
                    20Item
      4T. Controls and Procedures
                    20Part
      II – Other InformationItem
      1. Legal Proceedings
                    21Item
      1A. Risk Factors
                    21Item
      2. Unregistered Sales of Equity Securities and Use
      of Proceeds
                    21Item
      3. Defaults Upon Senior Securities
                    21Item
      4. Submission of Matters to a Vote of Security
      Holders
                    22Item
      5. Other Information
                    22Item
      6. Exhibits
                    23Signatures
                    24
 2
 Table of Contents
  EXPLANATORY
NOTE
 
 This
Amendment No. 1 on Form 10-Q/A (the “Form 10-Q/A”) amends the Quarterly Report
on Form 10-Q for the quarter ended September 30, 2008 filed by PrimeEnergy
Corporation (the “Company”), originally filed with the Securities and Exchange
Commission on November 19, 2008. The Form 10-Q/A includes amended and restated
consolidated financial statements and related financial information for the year
ended December 31, 2007 and the quarters ended September 30, 2008 and 2007. This
information is disclosed in Note 2 to the consolidated financial
statements.
 
 The
restatements reflect the update of the previously reported unaudited restated
December 31, 2007 Balance Sheet with the audited restated December 31, 2007
Balance Sheet and adjusts the September 30, 2008 Financial Statements to reflect
the effects of the audited December 31, 2007 restatement.
 
 The
following items are included in this amendment:
 
 PART I
-      ITEM 1. Financial Statements
 ITEM 2. Management’s Discussion and
Analysis of Financial Condition and Results of Operations
 
 All other
information contained in the original Form 10-Q remains unchanged. However, the
entire report with all Items is included in this Form 10-Q/A-1 for the
convenience of the reader. This Amendment No.1 on Form 10-Q/A does not reflect
events occurring after the filing of our Report on Form 10-Q on November 19,
2008 or include, or otherwise modify or update, the disclosure contained therein
in any way except as expressly indicated above.
  3
 Table of Contents
  PrimeEnergy
Corporation
 Consolidated
Balance Sheets
 September
30, 2008 and December 31, 2007
  September
      30,2008Unaudited
      and Restated)
                              
                              
                              December
      31,2007
      (Audited
      and Restated)ASSETSCurrent
      assets:Cash
      and cash equivalents
                              
                              $
                              23,888,000
                              
                              
                              $
                              25,373,000Restricted
      cash and cash equivalents
                              
                              
                              7,863,000
                              
                              
                              
                              3,633,000Accounts
      receivable (net)
                              
                              
                              23,393,000
                              
                              
                              
                              21,311,000Due
      from related parties
                              
                              
                              92,000
                              
                              
                              
                              32,000Prepaid
      expenses
                              
                              
                              1,470,000
                              
                              
                              
                              1,391,000Derivative
      contracts
                              
                              
                              1,426,000
                              
                              
                              
                              1,332,000Inventory
      at cost
                              
                              
                              6,017,000
                              
                              
                              
                              3,705,000Deferred
      income tax
                              
                              
                              1,649,000
                              
                              
                              
                              1,582,000Total
      current assets
                              
                              
                              65,798,000
                              
                              
                              
                              58,359,000Property
      and equipment, at costOil
      and gas properties (successful efforts method), net
                              
                              
                              221,836,000
                              
                              
                              
                              237,852,000Field
      and office equipment
                              
                              
                              8,927,000
                              
                              
                              
                              8,209,000Net
      property and equipment
                              
                              
                              230,763,000
                              
                              
                              
                              246,061,000Other
      assets
                              
                              
                              821,000
                              
                              
                              
                              1,245,000Total
      assets
                              
                              $
                              297,382,000
                              
                              
                              $
                              305,665,000
 
 See
accompanying notes to the consolidated financial statements.
  4
 Table of Contents
  PrimeEnergy
Corporation
 Consolidated
Balance Sheets
 September
30, 2008 and December 31, 2007
 September,2008
                                              (Unaudited
      and Restated)
                                            
                                            
                                            December
      31,2007
                                              (Audited
      and Restated)LIABILITIES
      and STOCKHOLDERS' EQUITYCurrent
      liabilities:Current
      bank debt
                                            
                                            $
                                            24,900,000
                                            
                                            
                                            $
                                            34,950,000Accounts
      payable
                                            
                                            
                                            31,072,000
                                            
                                            
                                            
                                            26,780,000Current
      portion of asset retirement and other long term obligation
                                            
                                            
                                            2,849,000
                                            
                                            
                                            
                                            1,065,000Derivative
      liability short term
                                            
                                            
                                            4,618,000
                                            
                                            
                                            
                                            4,340,000Accrued
      liabilities
                                            
                                            
                                            12,766,000
                                            
                                            
                                            
                                            10,032,000Due
      to related parties
                                            
                                            
                                            1,175,000
                                            
                                            
                                            
                                            520,000Total
      current liabilities
                                            
                                            
                                            77,380,000
                                            
                                            
                                            
                                            77,687,000Long-term
      bank debt
                                            
                                            
                                            85,500,000
                                            
                                            
                                            
                                            120,050,000Indebtedness
      to related parties
                                            
                                            
                                            20,000,000
                                            
                                            
                                            
                                            --Asset
      retirement obligation
                                            
                                            
                                            17,747,000
                                            
                                            
                                            
                                            16,936,000Derivative
      liability long term
                                            
                                            
                                            9,650,000
                                            
                                            
                                            
                                            3,369,000Deferred
      income taxes
                                            
                                            
                                            25,137,000
                                            
                                            
                                            
                                            26,022,000Total
      liabilities
                                            
                                            
                                            235,414,000
                                            
                                            
                                            
                                            244,064,000Minority
      interest
                                            
                                            
                                            13,303,000
                                            
                                            
                                            
                                            12,929,000Stockholders'
      equity:Preferred
      stock, $.10 par value, authorized 5,000,000 shares, none
      issued
                                            
                                            
                                            --
                                            
                                            
                                            
                                            --Common
      stock, $.10 par value, authorized10,000,000 shares; issued
      7,694,970 in 2008 and 2007
                                            
                                            
                                            769,000
                                            
                                            
                                            
                                            769,000Paid
      in capital
                                            
                                            
                                            11,024,000
                                            
                                            
                                            
                                            11,024,000Retained
      earnings
                                            
                                            
                                            81,707,000
                                            
                                            
                                            
                                            72,885,000Accumulated
      other comprehensive income(loss), net
                                            
                                            
                                            (8,022,000
                                            )
                                            
                                            
                                            (3,618,000
                                            )85,478,000
                                            
                                            
                                            
                                            81,060,000Treasury
      stock, at cost, 4,644,829 common shares at 2008 and 4,558,484
      common shares at 2007
                                            
                                            
                                            (36,813,000
                                            )
                                            
                                            
                                            (32,388,000
                                            )Total
      stockholders' equity
                                            
                                            
                                            48,665,000
                                            
                                            
                                            
                                            48,672,000Total
      liabilities and stockholders, equity
                                            
                                            $
                                            297,382,000
                                            
                                            
                                            $
                                            305,665,000
 See
accompanying notes to the consolidated financial
statements.
  5
 Table of Contents
  PrimeEnergy
Corporation
 Consolidated
Statements of Operations
 Nine
Months Ended September 30, 2008 and 2007
 (Unaudited)
 2008
                                                                Restated
                                                              
                                                              
                                                              2007
                                                                RestatedRevenue:Oil
      and gas sales
                                                              
                                                              $
                                                              108,574,000
                                                              
                                                              
                                                              $
                                                              87,804,000Field
      service income
                                                              
                                                              
                                                              18,760,000
                                                              
                                                              
                                                              
                                                              18,179,000Administrative
      overhead fees
                                                              
                                                              
                                                              6,791,000
                                                              
                                                              
                                                              
                                                              7,126,000Other
      income
                                                              
                                                              
                                                              332,000
                                                              
                                                              
                                                              
                                                              181,000Total
      revenue
                                                              
                                                              
                                                              134,457,000
                                                              
                                                              
                                                              
                                                              113,290,000Costs
      and expenses:Lease
      operating expense
                                                              
                                                              
                                                              32,313,000
                                                              
                                                              
                                                              
                                                              25,829,000Field
      service expense
                                                              
                                                              
                                                              14,787,000
                                                              
                                                              
                                                              
                                                              13,341,000Depreciation,
      depletion and amortization
                                                              
                                                              
                                                              50,840,000
                                                              
                                                              
                                                              
                                                              42,741,000General
      and administrative expense
                                                              
                                                              
                                                              11,184,000
                                                              
                                                              
                                                              
                                                              10,301,000Exploration
      costs
                                                              
                                                              
                                                              458,000
                                                              
                                                              
                                                              
                                                              525,000Total
      costs and expenses
                                                              
                                                              
                                                              109,582,000
                                                              
                                                              
                                                              
                                                              92,737,000Add
      gain/(loss) on sale and exchange of assets
                                                              
                                                              
                                                              98,000
                                                              
                                                              
                                                              
                                                              581,000Income
      from operations
                                                              
                                                              
                                                              24,973,000
                                                              
                                                              
                                                              
                                                              21,134,000Other
      income and expensesLess:  Interest
      expense
                                                              
                                                              
                                                              6,185,000
                                                              
                                                              
                                                              
                                                              7,845,000Add
      interest income
                                                              
                                                              
                                                              354,000
                                                              
                                                              
                                                              
                                                              670,000Less:  Minority
      interest
                                                              
                                                              
                                                              5,680,000
                                                              
                                                              
                                                              
                                                              3,076,000Income
      before provision for income taxes
                                                              
                                                              
                                                              13,462,000
                                                              
                                                              
                                                              
                                                              10,883,000Provision
      for income taxes
                                                              
                                                              
                                                              4,640,000
                                                              
                                                              
                                                              
                                                              3,918,000Net
      income
                                                              
                                                              $
                                                              8,822,000
                                                              
                                                              
                                                              $
                                                              6,965,000Basic
      income per common share
                                                              
                                                              $
                                                              2.88
                                                              
                                                              
                                                              $
                                                              2.19Diluted
      income per common share
                                                              
                                                              $
                                                              2.31
                                                              
                                                              
                                                              $
                                                              1.77
 
 See
accompanying notes to the consolidated financial statements.
  6
 Table of Contents
  PrimeEnergy
Corporation
 Consolidated
Statements of Operations
 Three
Months Ended September, 2008 and 2007
 (Unaudited)
 2008
                                                                Restated
                                                              
                                                              
                                                              2007
                                                                RestatedRevenue:Oil
      and gas sales
                                                              
                                                              $
                                                              33,926,000
                                                              
                                                              
                                                              $
                                                              35,570,000Field
      service income
                                                              
                                                              
                                                              6,011,000
                                                              
                                                              
                                                              
                                                              6,379,000Administrative
      overhead fees
                                                              
                                                              
                                                              2,292,000
                                                              
                                                              
                                                              
                                                              2,314,000Other
      income
                                                              
                                                              
                                                              135,000
                                                              
                                                              
                                                              
                                                              15,000Total
      revenue
                                                              
                                                              
                                                              42,364,000
                                                              
                                                              
                                                              
                                                              44,278,000Costs
      and expenses:Lease
      operating expense
                                                              
                                                              
                                                              11,153,000
                                                              
                                                              
                                                              
                                                              8,816,000Field
      service expense
                                                              
                                                              
                                                              5,204,000
                                                              
                                                              
                                                              
                                                              4,291,000Depreciation,
      depletion and amortization
                                                              
                                                              
                                                              15,211,000
                                                              
                                                              
                                                              
                                                              22,130,000General
      and administrative expense
                                                              
                                                              
                                                              3,894,000
                                                              
                                                              
                                                              
                                                              3,251,000Exploration
      costs
                                                              
                                                              
                                                              159,000
                                                              
                                                              
                                                              
                                                              106,000Total
      costs and expenses
                                                              
                                                              
                                                              35,621,000
                                                              
                                                              
                                                              
                                                              38,594,000Add
      gain/(loss) on sale and exchange of assets
                                                              
                                                              
                                                              20,000
                                                              
                                                              
                                                              
                                                              (30,000
                                                              )Income
      from operations
                                                              
                                                              
                                                              6,763,000
                                                              
                                                              
                                                              
                                                              5,654,000Other
      income and expensesLess:  Interest
      expense
                                                              
                                                              
                                                              1,809,000
                                                              
                                                              
                                                              
                                                              3,333,000Add
      interest income
                                                              
                                                              
                                                              93,000
                                                              
                                                              
                                                              
                                                              175,000Less:  Minority
      interest
                                                              
                                                              
                                                              1,786,000
                                                              
                                                              
                                                              
                                                              1,162,000Income
      before provision for income taxes
                                                              
                                                              
                                                              3,261,000
                                                              
                                                              
                                                              
                                                              1,334,000Provision
      for income taxes
                                                              
                                                              
                                                              1,189,000
                                                              
                                                              
                                                              
                                                              480,000Net
      income
                                                              
                                                              $
                                                              2,072,000
                                                              
                                                              
                                                              $
                                                              854,000Basic
      income per common share
                                                              
                                                              $
                                                              0.68
                                                              
                                                              
                                                              $
                                                              0.27Diluted
      income per common share
                                                              
                                                              $
                                                              0.54
                                                              
                                                              
                                                              $
                                                              0.22
 
 See
accompanying notes to the consolidated financial
statements.
  7
 Table of Contents
  PrimeEnergy
Corporation
 Consolidated
Statement of Stockholders’ Equity
 Nine
Months Ended September 30, 2008
 (Unaudited)
  Common
      StockShares
                
                
                Amount
                
                
                Paid
      InCapital
                
                
                RetainedEarnings
                
                
                AccumulatedOtherComprehensiveIncome/Loss
                
                
                TreasuryStock
                
                
                TotalBalance
      at December 31, 2007
                
                
                7,694,970
                
                
                $
                769,000
                
                
                $
                11,024,000
                
                
                $
                72,885,000
                
                
                $
                (3,618,000
                )
                
                $
                (32,388,000
                )
                
                $
                48,672,000Purchased
      86,345 shares of common Stock
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (4,425,000
                )
                
                
                (4,425,000
                )Net
      income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                8,822,000
                
                
                
                
                
                
                
                
                
                
                
                8,822,000Other
      comprehensive income, net of taxes
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (4,404,000
                )
                
                
                
                
                
                
                (4,404,000
                )Balance
      at September 30, 2008
                
                
                7,694,970
                
                
                $
                769,000
                
                
                $
                11,024,000
                
                
                $
                81,707,000
                
                
                $
                (8,022,000
                )
                
                $
                (36,813,000
                )
                
                $
                48,665,000
  See
accompanying notes to the consolidated financial statements.
  8
 Table of Contents
  PrimeEnergy
Corporation
 Consolidated
Statements of Cash Flows
 Nine
Months Ended September 30, 2008 and 2007
 (Unaudited)
 2008
                                                    Restated
                                                  
                                                  
                                                  2007
                                                    RestatedCash
      flows from operating activities:Net
      income
                                                  
                                                  $
                                                  8,822,000
                                                  
                                                  
                                                  $
                                                  6,965,000Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation,
      depletion, amortization and accretionOn
      discounted liabilities
                                                  
                                                  
                                                  50,840,000
                                                  
                                                  
                                                  
                                                  42,741,000Dry
      hole and abandonment expense
                                                  
                                                  
                                                  --
                                                  
                                                  
                                                  
                                                  318,000Gain
      on sale of properties
                                                  
                                                  
                                                  (98,000
                                                  )
                                                  
                                                  
                                                  (581,000
                                                  )Provision
      for deferred taxes
                                                  
                                                  
                                                  1,527,000
                                                  
                                                  
                                                  
                                                  3,774,000Minority
      Interest in earnings of Partnership
                                                  
                                                  
                                                  5,680,000
                                                  
                                                  
                                                  
                                                  3,076,000Changes
      in assets and liabilities:(Increase)
      decrease in accounts receivable
                                                  
                                                  
                                                  (1,081,000
                                                  )
                                                  
                                                  
                                                  11,930,000(Increase)
      decrease in due from related parties
                                                  
                                                  
                                                  7,000
                                                  
                                                  
                                                  
                                                  949,000(Increase)
      decrease in inventories
                                                  
                                                  
                                                  327,000
                                                  
                                                  
                                                  
                                                  598,000(Increase)
      decrease in prepaid expenses and other assets
                                                  
                                                  
                                                  (2,237,000
                                                  )
                                                  
                                                  
                                                  8,000Increase
      (decrease) in accounts payable
                                                  
                                                  
                                                  5,595,000
                                                  
                                                  
                                                  
                                                  (5,635,000
                                                  )Increase
      (decrease) in accrued liabilities
                                                  
                                                  
                                                  5,178,000
                                                  
                                                  
                                                  
                                                  3,834,000Increase
      (decrease) in due to related parties
                                                  
                                                  
                                                  1,185,000
                                                  
                                                  
                                                  
                                                  1,011,000Net
      cash provided by operating activitiesNet
      cash provided by operating activities:
                                                  
                                                  
                                                  75,745,000
                                                  
                                                  
                                                  
                                                  68,988,000Cash
      flows from investing activities:Capital
      expenditures, including exploration expense
                                                  
                                                  
                                                  (45,076,000
                                                  )
                                                  
                                                  
                                                  (94,620,000
                                                  )Proceeds
      from sale of property and equipment
                                                  
                                                  
                                                  98,000
                                                  
                                                  
                                                  
                                                  581,000Net
      cash (used in) investing activities
                                                  
                                                  
                                                  (44,978,000
                                                  )
                                                  
                                                  
                                                  (94,039,000
                                                  )Cash
      flows from financing activities:Purchase
      of treasury stock
                                                  
                                                  
                                                  (4,425,000
                                                  )
                                                  
                                                  
                                                  (3,669,000
                                                  )Proceeds
      from long-term bank debt
                                                  
                                                  
                                                  88,075,000
                                                  
                                                  
                                                  
                                                  83,574,000Repayment
      of long-term bank debt
                                                  
                                                  
                                                  (113,137,000
                                                  )
                                                  
                                                  
                                                  (64,710,000
                                                  )Distribution
      to minority interest
                                                  
                                                  
                                                  (2,765,000
                                                  )
                                                  
                                                  
                                                  (1,974,000
                                                  )Net
      cash provided by (used in) financing activities
                                                  
                                                  
                                                  (32,252,000
                                                  )
                                                  
                                                  
                                                  13,221,000Net
      increase (decrease) in cash and cash equivalents
                                                  
                                                  
                                                  (1,485,000
                                                  )
                                                  
                                                  
                                                  (11,830,000
                                                  )Cash
      and cash equivalents at the beginning of the period
                                                  
                                                  
                                                  25,373,000
                                                  
                                                  
                                                  
                                                  29,056,000Cash
      and cash equivalents at the end of the period
                                                  
                                                  $
                                                  23,888,000
                                                  
                                                  
                                                  $
                                                  17,226,000
 See
accompanying notes to the consolidated financial statements.
  9
 Table of Contents
  PrimeEnergy
Corporation and Subsidiaries
 Notes to
Consolidated Financial Statements
 September
30, 2008
  (1)
Interim Financial Statements:
  The
accompanying consolidated financial statements of PrimeEnergy Corporation have
not been audited by independent public accountants. In the opinion of
management, the accompanying financial statements reflect all adjustments
necessary to present fairly our financial position at September 30, 2008 and our
income and cash flows for the nine months ended September 30, 2008 and 2007. All
such adjustments are of a normal recurring nature. Certain amounts presented in
prior period financial statements have been reclassified for consistency with
current period presentation. The results for interim periods are not necessarily
indicative of annual results.
  Effective
January 1, 2008, the Company adopted those provisions of Statement of Financial
Accounting Standards (SFAS) No. 157, “Fair Value Measurements,” that were
required to be adopted. There was no financial statement impact upon adoption on
January 1, 2008. For further information regarding the adoption of SFAS No. 157,
please refer to Note 12 of the Notes to the Consolidated Financial
Statements.
  SFAS No.
159, “The Fair Value Option for Financial Assets and Financial Liabilities,
including an amendment of FASB Statement No. 115,” became effective on January
1, 2008 and permits companies to choose, at specified dates, to measure certain
eligible financial instruments at fair value. The provisions of SFAS No. 159
apply only to entities that elect to use the fair value option and to all
entities with available-for-sale and trading securities. At the effective date,
companies may elect the fair value option for eligible items that exist at that
date, and the effect of the first remeasurement to fair value must be reported
as a cumulative-effect adjustment to the opening balance of retained earnings.
Since the Company has not elected to adopt the fair value option for eligible
items, SFAS No. 159 has not had an impact on its financial position or results
of operations.
  Recently
Issued Accounting Standards:
  In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles” which identifies a consistent framework for selecting
accounting principles to be used in preparing financial statements for
nongovernmental entities that are presented in conformity with United States
generally accepted accounting principles (GAAP). The current GAAP hierarchy was
criticized due to its complexity, ranking position of FASB Statements of
Financial Accounting Concepts and the fact that it is directed at auditors
rather than entities. The statement specifies that the reporting entity, not the
auditors, is responsible for its compliance with GAAP. SFAS No. 162 will be
effective 60 days following the SEC’s approval of the Public Company Accounting
Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in
Conformity with Generally Accepted Accounting Principles. The Company does not
believe that SFAS No. 162 will have an impact on its financial position, results
of operations or cash flows. The Company will adopt SFAS 162 when it becomes
effective.
  10
 Table of Contents
  PRIMEENERGY
CORPORATION and SUBSIDIARIES
 NOTES to
CONSOLIDATED FINANCIAL STATEMENTS, Continued
  In March
2008, the FASB issued SFAS No. 161, “Disclosure about Derivative Instruments and
Hedging Activities, an amendment of FASB Statement No. 133.” SFAS No. 161 amends
and expands the disclosure requirements of SFAS No. 133 with the intent to
provide users of financial statements with an enhanced understanding of: (i) how
and why an entity uses derivative instruments; (ii) how derivative instruments
and related hedged items are accounted for under SFAS No. 133 and its related
interpretations; and (iii) how derivative instruments and related hedged items
affect an entity’s financial position, financial performance and cash flows.
This statement is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008, with early application
encouraged. We are in the process of evaluating the impact of SFAS No. 161 on
our consolidated financial statements.
  In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interest in
Consolidated Financial Statements, an amendment of Accounting Research Bulletin
(ARB) No. 51.” SFAS No. 160 clarifies that a noncontrolling interest (previously
commonly referred to as a minority interest) in a subsidiary is an ownership
interest in the consolidated entity and should be reported as equity in the
consolidated financial statements. The presentation of the consolidated income
statement has been changed by SFAS No. 160, and consolidated net income
attributable to both the parent and the noncontrolling interest is now required
to be reported separately. Previously, net income attributable to the
noncontrolling interest was typically reported as an expense or other deduction
in arriving at consolidated net income and was often combined with other
financial statement amounts. In addition, the ownership interests in
subsidiaries held by parties other than the parent must be clearly identified,
labeled, and presented in the equity in the consolidated financial statements
separately from the parent’s equity. Subsequent changes in a parent’s ownership
interest while the parent retains its controlling financial interest in its
subsidiary should be accounted for consistently, and when a subsidiary is
deconsolidated, any retained noncontrolling equity interest in the former
subsidiary must be initially measured at fair value. Expanded disclosures,
including a reconciliation of equity balances of the parent and noncontrolling
interest are also required. SFAS No. 160 is effective for fiscal years, and
interim periods within those fiscal years, beginning on or after December 15,
2008 and earlier adoption is prohibited. Prospective application is required. We
are in the process of evaluating the impact of SFAS No. 160 on our consolidated
financial statements.
  In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations.” SFAS
No. 141(R) was issued in an effort to continue the movement toward the greater
use of fair values in financial reporting and increased transparency through
expanded disclosures. It changes how business acquisitions are accounted for and
will impact financial statements at the acquisition date and in subsequent
periods. Certain of these changes will introduce more volatility into earnings.
The acquirer must now record all assets and liabilities of the acquired business
at fair value, and related transaction and restructuring costs will be expensed
rather than the previous method of being capitalized as part of the acquisition.
SFAS No. 141(R) also impacts the annual goodwill impairment test associated with
acquisitions, including those that close before the effective date of SFAS No.
141(R). The definitions of a “business” and a “business combination” have been
expanded, resulting in more transactions qualifying as business combinations.
SFAS No. 141(R) is effective for fiscal years, and interim periods within those
fiscal years, beginning on or after December 31, 2008 and earlier adoption is
prohibited. We cannot predict the impact that the adoption of SFAS No. 141(R)
will have on our financial position, results of operations or cash flows with
respect to any acquisitions completed after December 31, 2008.
  11
 Table of Contents
  PRIMEENERGY
CORPORATION and SUBSIDIARIES
 NOTES to
CONSOLIDATED FINANCIAL STATEMENTS, Continued
  In June
2008, the Financial Accounting Standards Board (FASB) issued FASB Staff Position
(FSP) No. Emerging Issues Task Force (EITF) 03-6-1, “Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating
Securities.” Under this FSP, unvested share-based payment awards that contain
non-forfeitable rights to dividends or dividend equivalents, whether they are
paid or unpaid, are considered participating securities and should be included
in the computation of earnings per share pursuant to the two-class method. FSP
No. EITF 03-6-1 is effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods within those years. In
addition, all prior period earnings per share data presented should be adjusted
retrospectively and early application is not permitted. The Company does not
believe that FSP No. EITF 03-6-1 will have a material impact on its financial
position, results of operations or cash flows.
  (2)
Restatement
  The
restatements reflect the changes resulting from the update of the previously
filed unaudited restated December 31, 2007 Balance Sheet to the audited restated
December 31, 2007 Balance Sheet.
  The
effects of the restatement on reported amounts for the periods ended September
30, 2008, December 31, 2007, and September 30, 2007 are presented below in the
following tables:
  12
 Table of Contents
  PRIMEENERGY
CORPORATION and SUBSIDIARIES
 NOTES to
CONSOLIDATED FINANCIAL STATEMENTS, Continued
 RESTATED
CONSOLIDATED BALANCE SHEETS
 
 As
      Reported
                      September 2008
                    
                    
                    Adjustments (a)
                    
                    
                    As
      Restated
                      September 2008ASSETS:Current
      assets:Cash
      and cash equivalents
                    
                    $
                    23,888,000
                    
                    
                    $
                    --
                    
                    
                    $
                    23,888,000Restricted
      cash and cash equivalents
                    
                    
                    7,863,000
                    
                    
                    
                    --
                    
                    
                    
                    7,863,000Accounts
      receivable, net
                    
                    
                    23,697,000
                    
                    
                    
                    (304,000
                    )
                    
                    
                    23,393,000Due
      from related parties
                    
                    
                    941,000
                    
                    
                    
                    (849,000
                    )
                    
                    
                    92,000Prepaid
      expenses
                    
                    
                    1,470,000
                    
                    
                    
                    --
                    
                    
                    
                    1,470,000Derivative
      contracts
                    
                    
                    1,426,000
                    
                    
                    
                    --
                    
                    
                    
                    1,426,000Inventory
      at cost
                    
                    
                    6,015,000
                    
                    
                    
                    2,000
                    
                    
                    
                    6,017,000Deferred
      income tax
                    
                    
                    1,651,000
                    
                    
                    
                    (2,000
                    )
                    
                    
                    1,649,000Total
      current assets
                    
                    
                    66,951,000
                    
                    
                    
                    (1,153,000
                    )
                    
                    
                    65,798,000Property
      and equipment, at cost:Oil
      and gas properties (successful efforts method), net
                    
                    
                    221,741,000
                    
                    
                    
                    95,000
                    
                    
                    
                    221,836,000Field
      service equipment
                    
                    
                    8,927,000
                    
                    
                    
                    --
                    
                    
                    
                    8,927,000Total
      net property and equipment
                    
                    
                    230,668,000
                    
                    
                    
                    95,000
                    
                    
                    
                    230,763,000Other
      assets
                    
                    
                    812,000
                    
                    
                    
                    9,000
                    
                    
                    
                    821,000Total
      assets
                    
                    $
                    298,431,000
                    
                    
                    $
                    (1,049,000
                    )
                    
                    $
                    297,382,000
  13
 Table of Contents
  PRIMEENERGY
CORPORATION and SUBSIDIARIES
 NOTES to
CONSOLIDATED FINANCIAL STATEMENTS, Continued
 RESTATED
CONSOLIDATED BALANCE SHEETS
 
 As
      Reported
                                                    September 2008
                                                  
                                                  
                                                  Adjustment (a)
                                                  
                                                  
                                                  As
      Restated September
    2008LIABILITIES
      and STOCKHOLDERS’ EQUITY:Current
      liabilities:Current
      bank debt
                                                  
                                                  $
                                                  24,900,000
                                                  
                                                  
                                                  $
                                                  --
                                                  
                                                  
                                                  $
                                                  24,900,000Accounts
      payable
                                                  
                                                  
                                                  31,398,000
                                                  
                                                  
                                                  
                                                  (326,000
                                                  )
                                                  
                                                  
                                                  31,072,000Current
      portion of asset retirement and other long-term
obligations
                                                  
                                                  
                                                  2,847,000
                                                  
                                                  
                                                  
                                                  2,000
                                                  
                                                  
                                                  
                                                  2,849,000Derivative
      liability short term
                                                  
                                                  
                                                  4,618,000
                                                  
                                                  
                                                  
                                                  --
                                                  
                                                  
                                                  
                                                  4,618,000Accrued
      liabilities
                                                  
                                                  
                                                  12,752,000
                                                  
                                                  
                                                  
                                                  14,000
                                                  
                                                  
                                                  
                                                  12,766,000Due
      to related parties
                                                  
                                                  
                                                  2,018,000
                                                  
                                                  
                                                  
                                                  (843,000
                                                  )
                                                  
                                                  
                                                  1,175,000Total
      current liabilities
                                                  
                                                  
                                                  78,533,000
                                                  
                                                  
                                                  
                                                  (1,153,000
                                                  )
                                                  
                                                  
                                                  77,380,000Long-term
      bank debt
                                                  
                                                  
                                                  85,500,000
                                                  
                                                  
                                                  
                                                  --
                                                  
                                                  
                                                  
                                                  85,500,000Indebtedness
      to related parties
                                                  
                                                  
                                                  20,000,000
                                                  
                                                  
                                                  
                                                  --
                                                  
                                                  
                                                  
                                                  20,000,000Asset
      retirement obligations
                                                  
                                                  
                                                  17,747,000
                                                  
                                                  
                                                  
                                                  --
                                                  
                                                  
                                                  
                                                  17,747,000Derivative
      liability long term
                                                  
                                                  
                                                  9,650,000
                                                  
                                                  
                                                  
                                                  --
                                                  
                                                  
                                                  
                                                  9,650,000Deferred
      income taxes
                                                  
                                                  
                                                  25,137,000
                                                  
                                                  
                                                  
                                                  --
                                                  
                                                  
                                                  
                                                  25,137,000Total
      liabilities
                                                  
                                                  
                                                  236,567,000
                                                  
                                                  
                                                  
                                                  (1,153,000
                                                  )
                                                  
                                                  
                                                  235,414,000Minority
      interest
                                                  
                                                  
                                                  13,199,000
                                                  
                                                  
                                                  
                                                  104,000
                                                  
                                                  
                                                  
                                                  13,303,000Stockholders’
      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
      2008 and 2007
                                                  
                                                  
                                                  769,000
                                                  
                                                  
                                                  
                                                  --
                                                  
                                                  
                                                  
                                                  769,000Paid
      in capital
                                                  
                                                  
                                                  11,024,000
                                                  
                                                  
                                                  
                                                  --
                                                  
                                                  
                                                  
                                                  11,024,000Retained
      earnings
                                                  
                                                  
                                                  81,707,000
                                                  
                                                  
                                                  
                                                  --
                                                  
                                                  
                                                  
                                                  81,707,000Accumulated
      other comprehensive income (loss), net
                                                  
                                                  
                                                  (8,022,000
                                                  )
                                                  
                                                  
                                                  --
                                                  
                                                  
                                                  
                                                  (8,022,000
                                                  )85,478,000
                                                  
                                                  
                                                  
                                                  --
                                                  
                                                  
                                                  
                                                  85,478,000Treasury
      stock, at cost 4,644,829 common shares in 2008 and 4,558,544 in
      2007
                                                  
                                                  
                                                  (36,813,000
                                                  )
                                                  
                                                  
                                                  --
                                                  
                                                  
                                                  
                                                  (36,813,000
                                                  )Total
      stockholders’ equity
                                                  
                                                  
                                                  48,665,000
                                                  
                                                  
                                                  
                                                  --
                                                  
                                                  
                                                  
                                                  48,665,000Total
      liabilities and stockholders’ equity
                                                  
                                                  $
                                                  298,431,000
                                                  
                                                  
                                                  $
                                                  (1,049,000
                                                  )
                                                  
                                                  $
                                                  297,382,000
  14
 Table of Contents
  PRIMEENERGY
CORPORATION and SUBSIDIARIES
 NOTES to
CONSOLIDATED FINANCIAL STATEMENTS, Continued
 RESTATED
CONSOLIDATED STATEMENTS OF OPERATIONS
 As
      Reported
                    
                    
                    
                    
                    
                    As
      RestatedSeptember 2008
                    
                    
                    Adjustments (a)
                    
                    
                    September 2008Revenue:Oil
      and gas sales
                    
                    $
                    108,574,000
                    
                    
                    $
                    --
                    
                    
                    $
                    108,574,000Field
      service income
                    
                    
                    18,765,000
                    
                    
                    
                    (5,000
                    )
                    
                    
                    18,760,000Administrative
      overhead fees
                    
                    
                    6,791,000
                    
                    
                    
                    --
                    
                    
                    
                    6,791,000Other
      income
                    
                    
                    332,000
                    
                    
                    
                    --
                    
                    
                    
                    332,000134,462,000
                    
                    
                    
                    (5,000
                    )
                    
                    
                    134,457,000Costs
      and expenses:Lease
      operating expense
                    
                    
                    32,313,000
                    
                    
                    
                    --
                    
                    
                    
                    32,313,000Field
      service expense
                    
                    
                    14,787,000
                    
                    
                    
                    --
                    
                    
                    
                    14,787,000Depreciation,
      depletion and amortization
                    
                    
                    50,809,000
                    
                    
                    
                    31,000
                    
                    
                    
                    50,840,000General
      and administrative expense
                    
                    
                    11,184,000
                    
                    
                    
                    --
                    
                    
                    
                    11,184,000Exploration
      costs
                    
                    
                    458,000
                    
                    
                    
                    --
                    
                    
                    
                    458,000109,551,000
                    
                    
                    
                    31,000
                    
                    
                    
                    109,582,000Add
      gain on sale and exchange of assets
                    
                    
                    98,000
                    
                    
                    
                    --
                    
                    
                    
                    98,000Income
      from operations
                    
                    
                    25,009,000
                    
                    
                    
                    (36,000
                    )
                    
                    
                    24,973,000Other
      income and expense:Less:  Interest
      expense
                    
                    
                    6,185,000
                    
                    
                    
                    --
                    
                    
                    
                    6,185,000Add
      interest income
                    
                    
                    349,000
                    
                    
                    
                    5,000
                    
                    
                    
                    354,000Less:  Minority
      interest
                    
                    
                    5,711,000
                    
                    
                    
                    (31,000
                    )
                    
                    
                    5,680,000Income
      before provision for income taxes
                    
                    
                    13,462,000
                    
                    
                    
                    --
                    
                    
                    
                    13,462,000Provision
      for income taxes
                    
                    
                    4,640,000
                    
                    
                    
                    --
                    
                    
                    
                    4,640,000Net
      income
                    
                    $
                    8,822,000
                    
                    
                    $
                    --
                    
                    
                    $
                    8,822,000Basic
      net income per common share
                    
                    $
                    2.88
                    
                    
                    $
                    0.00
                    
                    
                    $
                    2.88Diluted
      net income per common share
                    
                    $
                    2.31
                    
                    
                    $
                    0.00
                    
                    
                    $
                    2.31
 15
 Table of Contents
  PRIMEENERGY
CORPORATION and SUBSIDIARIES
 NOTES to
CONSOLIDATED FINANCIAL STATEMENTS, Continued
 RESTATED
CONSOLIDATED STATEMENTS of CASH FLOWS
 
 As
      Reported
                    September 2008
                  
                  
                  Adjustments (a)
                  
                  
                  As
      Restated
                    September 2008Cash
      flows from operating activities:Net
      income
                  
                  $
                  8,822,000
                  
                  
                  $
                  --
                  
                  
                  $
                  8,822,000Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation,
      depletion, amortization and accretion on discounted
      liabilities
                  
                  
                  50,809,000
                  
                  
                  
                  31,000
                  
                  
                  
                  50,840,000Dry
      hole and abandonment costs
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  --Gain
      on sale of properties
                  
                  
                  (98,000
                  )
                  
                  
                  --
                  
                  
                  
                  (98,000
                  )Provision
      for deferred income taxes
                  
                  
                  1,527,000
                  
                  
                  
                  --
                  
                  
                  
                  1,527,000Minority
      interest in earnings of partnerships
                  
                  
                  5,711,000
                  
                  
                  
                  (31,000
                  )
                  
                  
                  5,680,000Changes
      in assets and liabilities:(Increase)
      decrease in accounts receivable
                  
                  
                  (1,081,000
                  )
                  
                  
                  --
                  
                  
                  
                  (1,081,000
                  )(Increase)
      decrease in due from related parties
                  
                  
                  7,000
                  
                  
                  
                  --
                  
                  
                  
                  7,000(Increase)
      decrease in inventories
                  
                  
                  325,000
                  
                  
                  
                  2,000
                  
                  
                  
                  327,000(Increase)
      decrease in prepaid expenses and other assets
                  
                  
                  (2,244,000
                  )
                  
                  
                  7,000
                  
                  
                  
                  (2,237,000
                  )Increase
      (decrease) in accounts payable
                  
                  
                  5,573,000
                  
                  
                  
                  22,000
                  
                  
                  
                  5,595,000Increase
      (decrease) in accrued liabilities
                  
                  
                  5,194,000
                  
                  
                  
                  (16,000
                  )
                  
                  
                  5,178,000Increase
      (decrease) in due to related parties
                  
                  
                  1,191,000
                  
                  
                  
                  (6,000
                  )
                  
                  
                  1,185,000Net
      cash provided by operating activities
                  
                  
                  75,736,000
                  
                  
                  
                  9,000
                  
                  
                  
                  75,745,000Cash
      flows from investing activitiesCapital
      expenditures, including exploration expense
                  
                  
                  (41,087,000
                  )
                  
                  
                  (3,989,000
                  )
                  
                  
                  (45,076,000
                  )Proceeds
      from sale of properties and equipment
                  
                  
                  98,000
                  
                  
                  
                  --
                  
                  
                  
                  98,000Net
      cash used in investing activities
                  
                  
                  (40,989,000
                  )
                  
                  
                  (3,989,000
                  )
                  
                  
                  (44,978,000
                  )Cash
      flows from financing activitiesPurchase
      of stock for treasury
                  
                  
                  (4,425,000
                  )
                  
                  
                  --
                  
                  
                  
                  (4,425,000
                  )Increase
      in long-term bank debt and other long-term obligations
                  
                  
                  88,075,000
                  
                  
                  
                  --
                  
                  
                  
                  88,075,000Repayment
      of long-term bank debt and other long-term obligations
                  
                  
                  (113,137,000
                  )
                  
                  
                  --
                  
                  
                  
                  (113,137,000
                  )Distribution
      to minority interest
                  
                  
                  (2,685,000
                  )
                  
                  
                  (80,000
                  )
                  
                  
                  (2,765,000
                  )Net
      cash provided by (used in) financing activities
                  
                  
                  (32,172,000
                  )
                  
                  
                  (80,000
                  )
                  
                  
                  (32,252,000
                  )Net
      increase(decrease) in cash and cash equivalents
                  
                  
                  2,575,000
                  
                  
                  
                  (4,060,000
                  )
                  
                  
                  (1,485,000
                  )Cash
      and cash equivalents at the beginning of the period
                  
                  
                  21,313,000
                  
                  
                  
                  4,060,000
                  
                  
                  
                  25,373,000Cash
      and cash equivalents at the end of the period
                  
                  $
                  23,888,000
                  
                  
                  $
                  --
                  
                  
                  $
                  23,888,000
 16
 Table of Contents
  PRIMEENERGY
CORPORATION and SUBSIDIARIES
 NOTES to
CONSOLIDATED FINANCIAL STATEMENTS, Continued
 RESTATED
CONSOLIDATED BALANCE SHEETS
  As
      Reported December 2007
                  
                  
                  Adjustments (a)
                  
                  
                  As
      RestatedDecember 2007ASSETS:Current
      assets:Cash
      and cash equivalents
                  
                  $
                  25,373,000
                  
                  
                  $
                  --
                  
                  
                  $
                  25,373,000Restricted
      cash and cash equivalents
                  
                  
                  3,633,000
                  
                  
                  
                  --
                  
                  
                  
                  3,633,000Accounts
      receivable, net
                  
                  
                  21,456,000
                  
                  
                  
                  (145,000
                  )
                  
                  
                  21,311,000Due
      from related parties
                  
                  
                  218,000
                  
                  
                  
                  (186,000
                  )
                  
                  
                  32,000Prepaid
      expenses
                  
                  
                  1,391,000
                  
                  
                  
                  --
                  
                  
                  
                  1,391,000Derivative
      contracts
                  
                  
                  1,332,000
                  
                  
                  
                  --
                  
                  
                  
                  1,332,000Inventory
      at cost
                  
                  
                  3,705,000
                  
                  
                  
                  --
                  
                  
                  
                  3,705,000Deferred
      income tax
                  
                  
                  1,582,000
                  
                  
                  
                  --
                  
                  
                  
                  1,582,000Total
      current assets
                  
                  
                  58,690,000
                  
                  
                  
                  (331,000
                  )
                  
                  
                  58,359,000Property
      and equipment, at cost:Oil
      and gas properties (successful efforts method), net
                  
                  
                  237,724,000
                  
                  
                  
                  128,000
                  
                  
                  
                  237,852,000Field
      and office equipment
                  
                  
                  8,209,000
                  
                  
                  
                  --
                  
                  
                  
                  8,209,000Total
      net property and equipment
                  
                  
                  245,933,000
                  
                  
                  
                  128,000
                  
                  
                  
                  246,061,000Other
      assets
                  
                  
                  1,236,000
                  
                  
                  
                  9,000
                  
                  
                  
                  1,245,000Total
      assets
                  
                  $
                  305,859,000
                  
                  
                  $
                  (194,000
                  )
                  
                  $
                  305,665,000
  17
 Table of Contents
 PRIMEENERGY
CORPORATION and SUBSIDIARIES
 NOTES to
CONSOLIDATED FINANCIAL STATEMENTS, Continued
 RESTATED
CONSOLIDATED BALANCE SHEETS
 
 As
      ReportedDecember 2007
                    
                    
                    Adjustment (a)
                    
                    
                    As
      RestatedDecember 2007LIABILITIES
      and STOCKHOLDERS’ EQUITY:Current
      liabilities:Current
      bank debt
                    
                    $
                    34,950,000
                    
                    
                    $
                    --
                    
                    
                    $
                    34,950,000Accounts
      payable
                    
                    
                    26,945,000
                    
                    
                    
                    (165,000
                    )
                    
                    
                    26,780,000Current
      portion of asset retirement and other long-term
obligations
                    
                    
                    1,065,000
                    
                    
                    
                    --
                    
                    
                    
                    1,065,000Derivative
      liability short term
                    
                    
                    4,340,000
                    
                    
                    
                    --
                    
                    
                    
                    4,340,000Accrued
      liabilities
                    
                    
                    10,018,000
                    
                    
                    
                    14,000
                    
                    
                    
                    10,032,000Due
      to related parties
                    
                    
                    700,000
                    
                    
                    
                    (180,000
                    )
                    
                    
                    520,000Total
      current liabilities
                    
                    
                    78,018,000
                    
                    
                    
                    (331,000
                    )
                    
                    
                    77,687,000Long-term
      bank debt
                    
                    
                    120,050,000
                    
                    
                    
                    --
                    
                    
                    
                    120,050,000Asset
      retirement obligations
                    
                    
                    16,936,000
                    
                    
                    
                    --
                    
                    
                    
                    16,936,000Derivative
      liability long term
                    
                    
                    3,369,000
                    
                    
                    
                    --
                    
                    
                    
                    3,369,000Deferred
      income taxes
                    
                    
                    26,022,000
                    
                    
                    
                    --
                    
                    
                    
                    26,022,000Total
      liabilities
                    
                    
                    244,395,000
                    
                    
                    
                    (331,000
                    )
                    
                    
                    244,064,000Minority
      interest
                    
                    
                    12,792,000
                    
                    
                    
                    137,000
                    
                    
                    
                    12,929,000Stockholders’
      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
      2007 and 2006
                    
                    
                    769,000
                    
                    
                    
                    --
                    
                    
                    
                    769,000Paid
      in capital
                    
                    
                    11,024,000
                    
                    
                    
                    --
                    
                    
                    
                    11,024,000Retained
      earnings
                    
                    
                    72,885,000
                    
                    
                    
                    --
                    
                    
                    
                    72,885,000Accumulated
      other comprehensive income (loss), net
                    
                    
                    (3,618,000
                    )
                    
                    
                    --
                    
                    
                    
                    (3,618,000
                    )81,060,000
                    
                    
                    
                    --
                    
                    
                    
                    81,060,000Treasury
      stock, at cost 4,639,191 common shares in 2007 and 4,558,54 in
      2006
                    
                    
                    (32,388,000
                    )
                    
                    
                    --
                    
                    
                    
                    (32,388,000
                    )Total
      stockholders’ equity
                    
                    
                    48,672,000
                    
                    
                    
                    --
                    
                    
                    
                    48,672,000Total
      liabilities and stockholders’ equity
                    
                    $
                    305,859,000
                    
                    
                    $
                    (194,000
                    )
                    
                    $
                    305,665,000
  18
 Table of Contents
  PRIMEENERGY
CORPORATION and SUBSIDIARIES
 NOTES to CONSOLIDATED FINANCIAL
STATEMENTS, Continued
 RESTATED
CONSOLIDATED STATEMENTS OF OPERATIONS
 
 As Reported September 2007
                    
                    
                    Adjustments (a)
                    
                    
                    As Restated September 2007Revenue:Oil
      and gas sales
                    
                    $
                    87,804,000
                    
                    
                    $
                    --
                    
                    
                    $
                    87,804,000Field
      service income
                    
                    
                    18,179,000
                    
                    
                    
                    --
                    
                    
                    
                    18,179,000Administrative
      overhead fees
                    
                    
                    7,126,000
                    
                    
                    
                    --
                    
                    
                    
                    7,126,000Other
      income
                    
                    
                    181,000
                    
                    
                    
                    --
                    
                    
                    
                    181,000113,290,000
                    
                    
                    
                    --
                    
                    
                    
                    113,290,000Costs
      and expenses:Lease
      operating expense
                    
                    
                    25,829,000
                    
                    
                    
                    --
                    
                    
                    
                    25,829,000Field
      service expense
                    
                    
                    13,341,000
                    
                    
                    
                    --
                    
                    
                    
                    13,341,000Depreciation,
      depletion and amortization
                    
                    
                    42,713,000
                    
                    
                    
                    28,000
                    
                    
                    
                    42,741,000General
      and administrative expense
                    
                    
                    10,301,000
                    
                    
                    
                    --
                    
                    
                    
                    10,301,000Exploration
      costs
                    
                    
                    525,000
                    
                    
                    
                    --
                    
                    
                    
                    525,00092,709,000
                    
                    
                    
                    28,000
                    
                    
                    
                    92,737,000Add
      gain on sale and exchange of assets
                    
                    
                    581,000
                    
                    
                    
                    --
                    
                    
                    
                    581,000Income
      from operations
                    
                    
                    21,162,000
                    
                    
                    
                    (28,000
                    )
                    
                    
                    21,134,000Other
      income and expense:Less:  Interest
      expense
                    
                    
                    7,845,000
                    
                    
                    
                    --
                    
                    
                    
                    7,845,000Add
      interest income
                    
                    
                    670,000
                    
                    
                    
                    --
                    
                    
                    
                    670,000Less:  Minority
      interest
                    
                    
                    3,104,000
                    
                    
                    
                    (28,000
                    )
                    
                    
                    3,076,000Income
      before provision for income taxes
                    
                    
                    10,883,000
                    
                    
                    
                    --
                    
                    
                    
                    10,883,000Provision
      for income taxes
                    
                    
                    3,918,000
                    
                    
                    
                    --
                    
                    
                    
                    3,918,000Net
      income
                    
                    $
                    6,965,000
                    
                    
                    $
                    --
                    
                    
                    $
                    6,965,000Basic
      net income per common share
                    
                    $
                    2.19
                    
                    
                    $
                    0.00
                    
                    
                    $
                    2.19Diluted
      net income per common share
                    
                    $
                    1.77
                    
                    
                    $
                    0.00
                    
                    
                    $
                    1.77
 19
 Table of Contents
  PRIMEENERGY
CORPORATION and SUBSIDIARIES
 NOTES to
CONSOLIDATED FINANCIAL STATEMENTS, Continued
 RESTATED
CONSOLIDATED STATEMENTS of CASH FLOWS
 
 As
      ReportedSeptember 2007
                  
                  
                  Adjustments (a)
                  
                  
                  As
      RestatedSeptember 2007Cash
      flows from operating activities:Net
      income
                  
                  $
                  6,965,000
                  
                  
                  $
                  --
                  
                  
                  $
                  6,965,000Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation,
      depletion, amortization and accretion on discounted
      liabilities
                  
                  
                  42,713,000
                  
                  
                  
                  28,000
                  
                  
                  
                  42,741,000Dry
      hole and abandonment costs
                  
                  
                  318,000
                  
                  
                  
                  --
                  
                  
                  
                  318,000Gain
      on sale of properties
                  
                  
                  (581,000
                  )
                  
                  
                  --
                  
                  
                  
                  (581,000
                  )Provision
      for deferred income taxes
                  
                  
                  3,774,000
                  
                  
                  
                  --
                  
                  
                  
                  3,774,000Minority
      interest in earnings of partnerships
                  
                  
                  3,104,000
                  
                  
                  
                  (28,000
                  )
                  
                  
                  3,076,000Changes
      in assets and liabilities:(Increase)
      decrease in accounts receivable
                  
                  
                  11,930,000
                  
                  
                  
                  --
                  
                  
                  
                  11,930,000(Increase)
      decrease in due from related parties
                  
                  
                  950,000
                  
                  
                  
                  (1,000
                  )
                  
                  
                  949,000(Increase)
      decrease in inventories
                  
                  
                  598,000
                  
                  
                  
                  --
                  
                  
                  
                  598,000(Increase)
      decrease in prepaid expenses and other assets
                  
                  
                  (1,000
                  )
                  
                  
                  9,000
                  
                  
                  
                  8,000Increase
      (decrease) in accounts payable
                  
                  
                  (5,656,000
                  )
                  
                  
                  21,000
                  
                  
                  
                  (5,635,000
                  )Increase
      (decrease) in accrued liabilities
                  
                  
                  3,848,000
                  
                  
                  
                  (14,000
                  )
                  
                  
                  3,834,000Increase
      (decrease) in due to related parties
                  
                  
                  1,017,000
                  
                  
                  
                  (6,000
                  )
                  
                  
                  1,011,000Net
      cash provided by operating activities
                  
                  
                  68,979,000
                  
                  
                  
                  9,000
                  
                  
                  
                  68,988,000Cash
      flows from investing activitiesCapital
      expenditures, including exploration expense
                  
                  
                  (90,208,000
                  )
                  
                  
                  (4,412,000
                  )
                  
                  
                  (94,620,000
                  )Proceeds
      from sale of properties and equipment
                  
                  
                  581,000
                  
                  
                  
                  --
                  
                  
                  
                  581,000Net
      cash used in investing activities
                  
                  
                  (89,627,000
                  )
                  
                  
                  (4,412,000
                  )
                  
                  
                  (94,039,000
                  )Cash
      flows from financing activitiesPurchase
      of stock for treasury
                  
                  
                  (3,669,000
                  )
                  
                  
                  --
                  
                  
                  
                  (3,669,000
                  )Increase
      in long-term bank debt and other long-term obligations
                  
                  
                  83,574,000
                  
                  
                  
                  --
                  
                  
                  
                  83,574,000Repayment
      of long-term bank debt and other long-term obligations
                  
                  
                  (64,710,000
                  )
                  
                  
                  --
                  
                  
                  
                  (64,710,000
                  )Distribution
      to minority interest
                  
                  
                  (1,974,000
                  )
                  
                  
                  --
                  
                  
                  
                  (1,974,000
                  )Net
      cash provided by (used in) financing activities
                  
                  
                  13,221,000
                  
                  
                  
                  --
                  
                  
                  
                  13,221,000Net
      increase(decrease) in cash and cash equivalents
                  
                  
                  (7,427,000
                  )
                  
                  
                  (4,403,000
                  )
                  
                  
                  (11,830,000
                  )Cash
      and cash equivalents at the beginning of the period
                  
                  
                  24,653,000
                  
                  
                  
                  4,403,000
                  
                  
                  
                  29,056,000Cash
      and cash equivalents at the end of the period
                  
                  $
                  17,226,000
                  
                  
                  $
                  --
                  
                  
                  $
                  17,226,000
  20
 Table of Contents
  PRIMEENERGY
CORPORATION and SUBSIDIARIES
 NOTES to
CONSOLIDATED FINANCIAL STATEMENTS, Continued
 
 Explanatory
Note to Restated Consolidated Statements of Operations, Balance Sheets and
Statements of Cash Flows
  a)
              The
      adjustments reflect the changes related to the updated audited restated
      December 31, 2007 Financial
Statements.
  (3)
Significant Acquisitions, Dispositions and Property Activity
  The
Company makes an annual 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 $468,000 for the nine months ending September
30, 2008 and $371,000 for the year ending December 31, 2007.
  (4)
Restricted Cash and Cash Equivalents:
  Restricted
cash and cash equivalents include $7,863,000 and $3,633,000 at September 30,
2008 and December 31, 2007, respectively, of cash primarily pertaining to
undistributed revenue payments. There were corresponding accounts payable
recorded at September 30, 2008 and December 31, 2007 for these
liabilities.
  21
 Table of Contents
  PRIMEENERGY
CORPORATION and SUBSIDIARIES
 NOTES to
CONSOLIDATED FINANCIAL STATEMENTS, Continued
  (5)
Additional Balance Sheet Information (restated)
  Certain
balance sheet amounts are comprised of the following:
  September
      30, 2008
                      
                      
                      December
      31, 2007Accounts
      Receivable:Joint
      interest billing
                      
                      $
                      7,048,000
                      
                      
                      $
                      3,192,000Trade
      receivables
                      
                      
                      2,461,000
                      
                      
                      
                      2,352,000Oil
      and gas sales
                      
                      
                      13,932,000
                      
                      
                      
                      14,785,000Income
      tax receivable
                      
                      
                      —
                      
                      
                      
                      795,000Other
                      
                      
                      245,000
                      
                      
                      
                      415,000$
                      23,686,000
                      
                      
                      $
                      21,539,000Less,
      allowance for doubtful accounts
                      
                      
                      (293,000
                      )
                      
                      
                      (228,000
                      )$
                      23,393,000
                      
                      
                      $
                      21,311,000Accounts
      Payable:Trade
                      
                      $
                      6,621,000
                      
                      
                      $
                      12,364,000Royalty
      and other owners
                      
                      
                      19,127,000
                      
                      
                      
                      11,209,000Other
                      
                      
                      5,324,000
                      
                      
                      
                      3,207,000Total
                      
                      $
                      31,072,000
                      
                      
                      $
                      26,780,000Accrued
      Liabilities:Compensation
      and related expenses
                      
                      $
                      4,094,000
                      
                      
                      
                      1,687,000Property
      cost
                      
                      
                      2,807,000
                      
                      
                      
                      4,551,000Income
      tax
                      
                      
                      2,264,000
                      
                      
                      
                      —Other
                      
                      
                      3,601,000
                      
                      
                      
                      3,794,000Total
                      
                      $
                      12,766,000
                      
                      
                      $
                      10,032,000
  22
 Table of Contents
  PRIMEENERGY
CORPORATION and SUBSIDIARIES
 NOTES to
CONSOLIDATED FINANCIAL STATEMENTS, Continued
  (6)
Property and Equipment (restated):
  Property
and equipment at September 30, 2008 and December 31, 2007 consisted of the
following:
  September 30,
      2008
                                            
                                            
                                            December 31,
      2007Proved
      oil and gas properties, at cost
                                            
                                            $
                                            413,667,000
                                            
                                            
                                            $
                                            378,908,000Unproved
      oil and gas properties, at cost
                                            
                                            
                                            285,000
                                            
                                            
                                            
                                            4,458,000Less,
      accumulated depletion and depreciation
                                            
                                            
                                            (192,116,000
                                            )
                                            
                                            
                                            (145,514,000
                                            )$
                                            221,836,000
                                            
                                            
                                            $
                                            237,852,000Field
      service equipment and other
                                            
                                            
                                            19,949,000
                                            
                                            
                                            
                                            18,029,000Less,
      accumulated depreciation
                                            
                                            
                                            (11,022,000
                                            )
                                            
                                            
                                            (9,820,000
                                            )$
                                            8,927,000
                                            
                                            
                                            $
                                            8,209,000Total
      net property and equipment
                                            
                                            $
                                            230,763,000
                                            
                                            
                                            $
                                            246,061,000
  Total
interest incurred during the year ended December 31, 2007 was $12,984,000. Of
this amount, the Company capitalized $1,922,000. 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
expenditures. There was no interest capitalized during the nine months of
2008.
  (7)
Long-Term Debt:
  Bank
Debt:
  The
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 offshore facility’s maturity date is 2009 and
onshore credit facility matures in 2011.
  Availability
under the credit facilities is based on the loan value assigned to Prime’s oil
and gas properties. 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 re-determined 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 re-determined. 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.
 23
 Table of Contents
  PRIMEENERGY
CORPORATION and SUBSIDIARIES
 NOTES to
CONSOLIDATED FINANCIAL STATEMENTS, Continued
  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. 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.
  During
the second quarter 2008, the Company entered into an amended and restated credit
agreement related to the offshore credit facility allowing for a subordinated
credit facility with a private lender and the release of certain collateral
which was then pledged to the new lender under a separate credit
agreement.
  At
September 30, 2008, the borrowing bases and outstanding balances of the
Company’s bank debt were $96 million and $85.5 million, respectively, under the
onshore credit facility at a weighted average interest rate of 5.58%, and $24.9
million under the offshore credit facility at a weighted average interest rate
of 6.0%. Total outstanding bank debt was $110.4 million at September 30, 2008.
The combined average interest rates paid on outstanding bank borrowings subject
to interest at the bank’s base rate and on outstanding bank borrowings bearing
interest based upon the LIBO rate were 5.72% during the nine months of 2008 as
compared to 8.73% during the same period of 2007. The Company’s onshore
borrowing base was increased from $96 million to $112 million effective October
30, 2008.
  The
Company entered into interest rate hedge agreements to help manage interest rate
exposure. These contracts include interest rate swaps. Interest rate swap
transactions generally involve the exchange of fixed and floating rate interest
payment obligations without the exchange of the underlying principal amounts.
The Company entered into interest swap agreements for a period of two years,
beginning in April 2008, related to $60 million of Company bank debt resulting
in a fixed rate of 4.375%. The underlying debt contracts above are repriced
quarterly based upon the three-month LIBO rates.
  Indebtedness to related
parties – noncurrent:
  During
the second quarter 2008, the Company’s offshore subsidiary entered into a
subordinated credit facility with a private lender with an availability of $50
million. The private lender has specific collateral pledged under a separate
credit agreement. The private lender is a member of the Company’s Board of
Directors. The current advances of this credit facility are $20 million. The
facility matures in January 2010. The new loan bears interest at the rate of 10%
per annum.
  24
 Table of Contents
  PRIMEENERGY
CORPORATION and SUBSIDIARIES
 NOTES to
CONSOLIDATED FINANCIAL STATEMENTS, Continued
  (8) Other
Long-Term Obligations and Commitments:
  Operating
Leases:
  The
Company has several non-cancelable operating leases, primarily for rental of
office space, that have a term of more than one year.
  Operating
      Leases2008
                                      
                                      $
                                      148,0002009
                                      
                                      
                                      350,0002010
                                      
                                      
                                      71,0002011
                                      
                                      
                                      5,000Thereafter
                                      
                                      
                                      —Total
      minimum payments
                                      
                                      $
                                      574,000
  Asset
Retirement Obligation: (restated)
  A
reconciliation of our liability for plugging and abandonment costs for the Nine
Months Ended September 30, 2008 and the year ended December 31, 2007 is as
follows:
  September 30,
      2008
                                
                                
                                December 31,
      2007Asset
      retirement obligation – beginning of period
                                
                                $
                                17,361,000
                                
                                
                                $
                                7,047,000Liabilities
      incurred
                                
                                
                                318,000
                                
                                
                                
                                468,000Liabilities
      settled
                                
                                
                                (461,000
                                )
                                
                                
                                (367,000
                                )Accretion
      expense
                                
                                
                                946,000
                                
                                
                                
                                461,000Revisions
      in estimated liabilities
                                
                                
                                1,390,000
                                
                                
                                
                                9,752,000Asset
      retirement obligation – end of period
                                
                                $
                                19,554,000
                                
                                
                                $
                                17,361,000
  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.
  25
 Table of Contents
  PRIMEENERGY
CORPORATION and SUBSIDIARIES
 NOTES to
CONSOLIDATED FINANCIAL STATEMENTS, Continued
  (9)
Contingent Liabilities:
  The
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
September 30, 2008, 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.
  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.
  (10)
Stock Options and Other Compensation:
  In May
1989, non-statutory stock options were granted by the Company to four key
executive officers for the purchase of shares of common stock. At September 30,
2008 and 2007, options on 767,500 were outstanding and exercisable at prices
ranging from $1.00 to $1.25.
  (11)
Related Party Transactions:
  The
Company, as managing general partner or managing trustee, makes an annual offer
to repurchase the interest of the partners and trust unit holders in certain of
the Partnerships or Trusts.  The Company purchased such interests in
an amount totaling $468,000 during the nine months of 2008 and $371,000 during
2007.
  Treasury
stock purchases in 2008 and 2007 included shares acquired from related
parties.  Purchases from related parties included 70,000 shares
purchased for a total consideration of $3,500,000 during the nine months of 2008
and a total of 31,700 shares purchased for a total consideration of $1,743,500
in 2007.
  Receivables
from related parties consist of reimbursable general and administrative costs,
lease operating expenses and reimbursement for property development and related
costs.  These receivables are due from joint venture partners, which
may include members of the Company’s Board of Directors.
  Payables
owed to related parties primarily represents receipts collected by the Company
as agent, for the joint venture partners, which may include members of the
Company’s Board of Directors, for oil and gas sales net of expenses. As of
September 30, 2008, also in due to related parties is the amount of accrued
interest owed to the related party, a member of the Company’s Board of
Directors, with whom the Company’s offshore subsidiary entered into a credit
agreement.  The agreement provides for a loan of $20 million at a rate
of 10% per annum and is secured by certain oil and gas properties and the
Company’s interest in a limited partnership which owns a shopping center in
Alabama.  Also included in due to related parties is an amount of
prepayments by two members of the Company’s Board of Director for their
participation in a project with the Company’s offshore
subsidiary.  Included at September 30, 2008 was $164,000 of accrued
interest on the related party loan and $331,000 of prepayment for costs not yet
incurred on the project
  26
 Table of Contents
  PRIMEENERGY
CORPORATION and SUBSIDIARIES
 NOTES to
CONSOLIDATED FINANCIAL STATEMENTS, Continued
  (12)
Financial Instruments
  Adoption
of SFAS No. 157
  In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which
establishes a formal framework for measuring fair values of assets and
liabilities in financial statements that are already required by United States
generally accepted accounting principles to be measured at fair value. SFAS No.
157 clarifies guidance in FASB Concepts Statement (CON) No. 7 which discusses
present value techniques in measuring fair value. Additional disclosures are
also required for transactions measured at fair value. SFAS No. 157 is effective
for fiscal years beginning after November 15, 2007, and interim periods within
those fiscal years. In February 2008, the FASB issued FASB Staff Position (FSP)
No. FAS 157-2, “Effective Date of FASB Statement No. 157,” which granted a one
year deferral (to fiscal years beginning after November 15, 2008, and interim
periods within those fiscal years) for certain non-financial assets and
liabilities to comply with SFAS No. 157. The Company will adopt the provisions
of SFAS No. 157 covered under FSP No. 157-2 on January 1, 2009. Additionally, in
February 2008, the FASB issued FSP No. FAS 157-1, “Application of FASB Statement
No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That
Address Fair Value Measurements for Purposes of Lease Classification or
Measurement under Statement 13,” which amends SFAS No. 157 to exclude SFAS No.
13 and related pronouncements that address fair value measurements for purposes
of lease classification and measurement. FSP No. FAS 157-1 is effective upon the
initial adoption of SFAS No. 157. The Company has adopted SFAS No. 157 and the
related FSPs discussed above which did not have an impact on its financial
position or results of operations for the quarter ended September 30,
2008.
  As
defined in SFAS No. 157, fair value is the price that would be received to sell
an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date (exit price). The transaction is
based on a hypothetical transaction in the principal or most advantageous market
considered from the perspective of the market participant that holds the asset
or owes the liability.
  The
valuation techniques that can be used under SFAS No. 157 are the market
approach, income approach or cost approach. The market approach uses prices and
other information for market transactions involving identical or comparable
assets or liabilities, such as matrix pricing. The income approach uses
valuation techniques to convert future amounts to a single discounted present
amount based on current market conditions about those future amounts, such as
present value techniques, option pricing models (i.e. Black-Scholes model) and
binomial models (i.e. Monte-Carlo model). The cost approach is based on current
replacement cost to replace an asset.
  27
 Table of Contents
  PRIMEENERGY
CORPORATION and SUBSIDIARIES
 NOTES to
CONSOLIDATED FINANCIAL STATEMENTS, Continued
  The
Company utilizes market data or assumptions that market participants who are
independent, knowledgeable and willing and able to transact would use in pricing
the asset or liability, including assumptions about risk and the risks inherent
in the inputs to the valuation technique. These inputs can be readily
observable, market corroborated or generally unobservable. The Company attempts
to utilize valuation techniques that maximize the use of observable inputs and
minimize the use of unobservable inputs. The Company is able to classify fair
value balances based on the observability of those inputs. SFAS No. 157
establishes a formal fair value hierarchy based on the inputs used to measure
fair value. The hierarchy gives the highest priority level 1 measurements and
the lowest priority to level 3 measurements, and accordingly, level 1
measurements should be used whenever possible.
  The three
levels of the fair value hierarchy as defined by SFAS No. 157 are as
follows:
 •
              Level
      1: Valuations utilizing quoted, unadjusted prices for identical assets or
      liabilities in active markets that the Company has the ability to access.
      This is the most reliable evidence of fair value and does not require a
      significant degree of judgment. Examples include exchange-traded
      derivatives and listed equities that are actively
  traded.
  •
              Level
      2: Valuations utilizing quoted prices in markets that are not considered
      to be active or financial instruments for which all significant inputs are
      observable, either directly or indirectly for substantially the full term
      of the asset or liability. Financial instruments that are valued using
      models or other valuation methodologies are included. Models used should
      primarily be industry-standard models that consider various assumptions
      and economic measures, such as interest rates, yield curves, time value,
      volatilities, contract terms, current market prices, credit risk or other
      market-corroborated inputs. Examples include most over-the-counter
      derivatives (non-exchange traded), physical commodities, most structured
      notes and municipal and corporate
bonds.
  •
              Level
      3: Valuations utilizing significant, unobservable inputs. This provides
      the least objective evidence of fair value and requires a significant
      degree of judgment. Inputs may be used with internally developed
      methodologies and should reflect an entity’s assumptions using the best
      information available about the assumptions that market participants would
      use in pricing an asset or liability. Examples include certain corporate
      loans, real-estate and private equity investments and long-dated or
      complex over-the-counter
derivatives.
 Depending on the particular
      asset or liability, input availability can vary depending on factors such
      as product type, longevity of a product in the market and other particular
      transaction conditions. In some cases, certain inputs used to measure fair
      value may be categorized into different levels of the fair value
      hierarchy. For disclosure purposes under SFAS No. 157, the lowest level
      that contains significant inputs used in valuation should be chosen. Per
      SFAS No. 157, the Company has classified its assets and liabilities into
      these levels depending upon the data relied on to determine the fair
      values. The fair values of the Company’s natural gas and crude oil price
      collars and swaps are valued based upon quotes obtained from
      counterparties to the agreements and are designated as Level
      3.
  28
 Table of Contents
  PRIMEENERGY
CORPORATION and SUBSIDIARIES
 NOTES to
CONSOLIDATED FINANCIAL STATEMENTS, Continued
  The
following fair value hierarchy table presents information about the Company’s
assets and liabilities measured at fair value on a recurring basis as of
September 30, 2008:
  Quoted
      Prices inActive
      MarketsFor
      IdenticalAssets(Level
1)
                                                                                        
                                                                                        
                                                                                        SignificantOtherObservableInputs (Level
      2)
                                                                                        
                                                                                        
                                                                                        SignificantUnobservableInputs (Level
      3)
                                                                                        
                                                                                        
                                                                                        Balance
      as ofSeptember
      30,2008AssetsInterest
      Rate and Commodity Derivative Contracts
                                                                                        
                                                                                        
                                                                                        —
                                                                                        
                                                                                        
                                                                                        
                                                                                        —
                                                                                        
                                                                                        
                                                                                        $
                                                                                        1,730,000
                                                                                        
                                                                                        
                                                                                        $
                                                                                        1,730,000Total
      Assets
                                                                                        
                                                                                        
                                                                                        —
                                                                                        
                                                                                        
                                                                                        
                                                                                        —
                                                                                        
                                                                                        
                                                                                        $
                                                                                        1,730,000
                                                                                        
                                                                                        
                                                                                        $
                                                                                        1,730,000LiabilitiesCommodity
      Derivative Contracts
                                                                                        
                                                                                        
                                                                                        —
                                                                                        
                                                                                        
                                                                                        
                                                                                        —
                                                                                        
                                                                                        
                                                                                        $
                                                                                        (14,268,000
                                                                                        )
                                                                                        
                                                                                        $
                                                                                        (14,268,000
                                                                                        )Total
      Liability
                                                                                        
                                                                                        
                                                                                        —
                                                                                        
                                                                                        
                                                                                        
                                                                                        —
                                                                                        
                                                                                        
                                                                                        $
                                                                                        (14,268,000
                                                                                        )
                                                                                        
                                                                                        $
                                                                                        (14,268,000
                                                                                        )
  The
derivative contracts were measured based on quotes from the Company’s
counterparties. Such quotes have been derived using a model that considers
various inputs including current market and contractual prices for the
underlying instruments, quoted forward prices for natural gas and crude oil,
volatility factors and interest rates, such as a LIBOR curve for a similar
length of time as the derivative contract term. Although the Company utilizes
multiple quotes to assess the reasonableness of its values, the Company has not
attempted to obtain sufficient corroborating market evidence to support
classifying these derivative contracts as Level 2.
  The
following table sets forth a reconciliation of changes in the fair value of
financial assets and liabilities classified as level 3 in the fair value
hierarchy.
  Net
      liabilities as of January 1,
      2008
                                    
                                    $
                                    (3,618,000
                                    )Total
      realized and unrealized
      losses:Included
      in earnings
      (a)
                                    
                                    
                                    (7,449,000
                                    )Included
      in other comprehensive
      income
                                    
                                    
                                    (2,040,000
                                    )Purchases,
      sales, issuances and settlements,
      net
                                    
                                    
                                    569,000Net
      liabilities as of September 30,
      2008
                                    
                                    $
                                    (12,538,000
                                    )
  29
 Table of Contents
  PRIMEENERGY
CORPORATION and SUBSIDIARIES
 NOTES to
CONSOLIDATED FINANCIAL STATEMENTS, Continued
  (a)
              Amounts
      reported in net income are classified as oil and gas sales for commodity
      derivative instruments and as a reduction to interest expense for interest
      rate swap instruments.
  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
September 30, 2008, the Company had eleven cash flow hedges open: one natural
gas price swap arrangement and ten crude oil collar arrangements. At September
30, 2008, $12.5 million ($8.02 million net of tax) unrealized loss was recorded
in Accumulated Other Comprehensive Income, $4.6 million and $9.6 million
short-term and long-term derivative payable and $1.72 million in short-term
derivative assets. Also included in Accumulated Other Comprehensive Income is
unrealized gain on interest rate swaps of $779,000 ($499,000 net of
tax).
  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
September 30, 2008, natural gas price swaps cover 555 Mmcf of production at a
weighted average price of $9.76 for 2009. The oil price collar covers 645 Mbbl
of production at a floor price ranging from $60.00 to $65.00, a ceiling price
ranging from $77.40 to $86.50 and a third-tier call of $100 on one collar
arrangement.
  Assuming
no change in commodity prices, after September 30, 2008, the Company would
expect to reclassify to the Statement of Operations, over the next 12 months,
$2.347 million in after-tax loss associated with commodity hedges. This
reclassification represents the net short-term payables associated with open
positions currently not reflected in earnings at September 30, 2008 related to
anticipated remaining 2008 production and 2009 production through
September.
  Assuming
no change in interest rates after September 30, 2008, the Company would expect
to reclassify to the statement of operations $195,000 in after tax gains
associated with the interest rate swaps. This reclassification represents
interest swaps which will expire within one year of September 30,
2008.
  The
Company entered into interest rate hedge agreements to help manage interest rate
exposure. These contracts include interest rate swaps. Interest rate swap
transactions generally involve the exchange of fixed and floating rate interest
payment obligations without the exchange of the underlying principal amounts.
The Company entered into interest swap agreements for a period of two years,
beginning in April 2008, related to $60 million of Company bank debt resulting
in a fixed rate of 4.375%. The underlying debt contracts above are repriced
quarterly based upon the three-month LIBO rates.
  30
 Table of Contents
  PRIMEENERGY
CORPORATION and SUBSIDIARIES
 NOTES to
CONSOLIDATED FINANCIAL STATEMENTS, Continued
  Crude Oil Price
      CollarContract
      Period
                                                                                                  
                                                                                                  VolumeInMbbl
                                                                                                  
                                                                                                  
                                                                                                  Weighted
      Average PriceFloor/Ceiling/Third
      Tier(per
Bbl)
                                                                                                  
                                                                                                  
                                                                                                  Net
      Unrealized(Loss)/Gain(In
      thousands)Fourth
      Quarter 2008
                                                                                                  
                                                                                                  
                                                                                                  18
                                                                                                  
                                                                                                  
                                                                                                  $
                                                                                                  65.00/
                                                                                                  
                                                                                                  
                                                                                                  $
                                                                                                  79.25/
                                                                                                  
                                                                                                  
                                                                                                  $
                                                                                                  100.00Fourth
      Quarter 2008
                                                                                                  
                                                                                                  
                                                                                                  51
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  $
                                                                                                  60.00/
                                                                                                  
                                                                                                  
                                                                                                  $
                                                                                                  81.25Fourth
      Quarter 2008
                                                                                                  
                                                                                                  
                                                                                                  15
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  $
                                                                                                  60.00/
                                                                                                  
                                                                                                  
                                                                                                  $
                                                                                                  78.00Full
      Year 2008
                                                                                                  
                                                                                                  
                                                                                                  84
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  $
                                                                                                  (1,074
                                                                                                  )First
      Quarter 2009
                                                                                                  
                                                                                                  
                                                                                                  51
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  $
                                                                                                  60.00/
                                                                                                  
                                                                                                  
                                                                                                  $
                                                                                                  79.70First
      Quarter 2009
                                                                                                  
                                                                                                  
                                                                                                  6
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  $
                                                                                                  60.00/
                                                                                                  
                                                                                                  
                                                                                                  $
                                                                                                  77.75First
      Quarter 2009
                                                                                                  
                                                                                                  
                                                                                                  12
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  $
                                                                                                  65.00/
                                                                                                  
                                                                                                  
                                                                                                  $
                                                                                                  86.50Second
      Quarter 2009
                                                                                                  
                                                                                                  
                                                                                                  17
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  $
                                                                                                  60.00/
                                                                                                  
                                                                                                  
                                                                                                  $
                                                                                                  79.70Second
      Quarter 2009
                                                                                                  
                                                                                                  
                                                                                                  38
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  $
                                                                                                  60.00/
                                                                                                  
                                                                                                  
                                                                                                  $
                                                                                                  77.40Second
      Quarter 2009
                                                                                                  
                                                                                                  
                                                                                                  2
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  $
                                                                                                  60.00/
                                                                                                  
                                                                                                  
                                                                                                  $
                                                                                                  77.75Second
      Quarter 2009
                                                                                                  
                                                                                                  
                                                                                                  12
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  $
                                                                                                  65.00/
                                                                                                  
                                                                                                  
                                                                                                  $
                                                                                                  86.50Third
      Quarter 2009
                                                                                                  
                                                                                                  
                                                                                                  57
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  $
                                                                                                  60.00/
                                                                                                  
                                                                                                  
                                                                                                  $
                                                                                                  77.40Third
      Quarter 2009
                                                                                                  
                                                                                                  
                                                                                                  12
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  $
                                                                                                  65.00/
                                                                                                  
                                                                                                  
                                                                                                  $
                                                                                                  86.50Fourth
      Quarter 2009
                                                                                                  
                                                                                                  
                                                                                                  57
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  $
                                                                                                  60.00/
                                                                                                  
                                                                                                  
                                                                                                  $
                                                                                                  77.40Fourth
      Quarter 2009
                                                                                                  
                                                                                                  
                                                                                                  12
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  $
                                                                                                  65.00/
                                                                                                  
                                                                                                  
                                                                                                  $
                                                                                                  86.50Full
      Year 2009
                                                                                                  
                                                                                                  
                                                                                                  276
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  $
                                                                                                  (3,976
                                                                                                  )First
      Quarter 2010
                                                                                                  
                                                                                                  
                                                                                                  51
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  $
                                                                                                  65.00/
                                                                                                  
                                                                                                  
                                                                                                  $
                                                                                                  80.90First
      Quarter 2010
                                                                                                  
                                                                                                  
                                                                                                  9
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  $
                                                                                                  65.00/
                                                                                                  
                                                                                                  
                                                                                                  $
                                                                                                  84.14Second
      Quarter 2010
                                                                                                  
                                                                                                  
                                                                                                  51
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  $
                                                                                                  65.00/
                                                                                                  
                                                                                                  
                                                                                                  $
                                                                                                  80.90Second
      Quarter 2010
                                                                                                  
                                                                                                  
                                                                                                  9
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  $
                                                                                                  65.00/
                                                                                                  
                                                                                                  
                                                                                                  $
                                                                                                  84.14Third
      Quarter 2010
                                                                                                  
                                                                                                  
                                                                                                  51
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  $
                                                                                                  65.00/
                                                                                                  
                                                                                                  
                                                                                                  $
                                                                                                  80.90Third
      Quarter 2010
                                                                                                  
                                                                                                  
                                                                                                  9
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  $
                                                                                                  65.00/
                                                                                                  
                                                                                                  
                                                                                                  $
                                                                                                  84.14Fourth
      Quarter 2010
                                                                                                  
                                                                                                  
                                                                                                  51
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  $
                                                                                                  65.00/
                                                                                                  
                                                                                                  
                                                                                                  $
                                                                                                  80.90Fourth
      Quarter 2010
                                                                                                  
                                                                                                  
                                                                                                  9
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  $
                                                                                                  65.00/
                                                                                                  
                                                                                                  
                                                                                                  $
                                                                                                  84.14Full
      Year 2010
                                                                                                  
                                                                                                  
                                                                                                  240
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  $
                                                                                                  (3,496
                                                                                                  )First
      Quarter 2011
                                                                                                  
                                                                                                  
                                                                                                  45
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  $
                                                                                                  65.00/
                                                                                                  
                                                                                                  
                                                                                                  $
                                                                                                  84.14Full
      Year 2011
                                                                                                  
                                                                                                  
                                                                                                  45
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  $
                                                                                                  (609
                                                                                                  )
 31
 Table of Contents
  PRIMEENERGY
CORPORATION and SUBSIDIARIES
 NOTES to CONSOLIDATED FINANCIAL
STATEMENTS, Continued
  At
September 30, 2008, we had one natural gas price swap contract covering our
first quarter 2009 production as follows:
  Natural Gas Price
      SwapsContract
      Period
                                  
                                  Volumein Mmcf
                                  
                                  
                                  Weighted
      AveragePrice (per
      Mcf)
                                  
                                  
                                  Net
      UnrealizedGain(In
      thousands)First
      Quarter 2009
                                  
                                  
                                  555
                                  
                                  
                                  $
                                  9.76
                                  
                                  
                                  $
                                  609Full
      Year 2009
                                  
                                  
                                  555
                                  
                                  
                                  $
                                  9.76
                                  
                                  
                                  $
                                  609
  We are
exposed to market risk on these open contracts, to the extent of changes in
market prices of natural gas and crude oil. However, the market risk exposure on
these hedged contracts is generally offset by the gain or loss recognized upon
the ultimate sale of the commodity that is hedged.
  The
preceding paragraphs contain forward-looking information concerning future
production and projected gains and losses, which may be impacted both by
production and by changes in future market prices of energy commodities. See
“Forward-Looking Information” for further details.
  (13)
Income Per Share:
  Basic
earnings per share are computed by dividing earnings available to common
stockholders by the weighted average number of common shares outstanding during
the period. Diluted earnings per share reflect per share amounts that would have
resulted if dilutive potential common stock had been converted to common stock.
The following reconciles amounts reported in the financial
statements:
  Nine Months Ended September 30,
      2008
                                
                                
                                Nine Months Ended September 30,
      2007NetIncome
                                
                                
                                Number
      ofShares
                                
                                
                                Per
      ShareAmount
                                
                                
                                NetIncome
                                
                                
                                Number
      ofShares
                                
                                
                                Per
      ShareAmountNet
      income per common share
                                
                                $
                                8,822,000
                                
                                
                                
                                3,066,684
                                
                                
                                $
                                2.88
                                
                                
                                $
                                6,965,000
                                
                                
                                
                                3,184,363
                                
                                
                                $
                                2.19Effect
      of dilutive securities:Options
                                
                                
                                
                                
                                
                                
                                754,030
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                752,988Diluted
      net income per common share
                                
                                $
                                8,822,000
                                
                                
                                
                                3,820,714
                                
                                
                                $
                                2.31
                                
                                
                                $
                                6,965,000
                                
                                
                                
                                3,937,351
                                
                                
                                $
                                1.77
  32
 Table of Contents
  PRIMEENERGY
CORPORATION and SUBSIDIARIES
 NOTES to
CONSOLIDATED FINANCIAL STATEMENTS, Continued
  Three
      Months EndedSeptember 30,
      2008
                                        
                                        
                                        Three
      Months EndedSeptember 30,
      2007NetIncome
                                        
                                        
                                        Number
      ofShares
                                        
                                        
                                        Per
      ShareAmount
                                        
                                        
                                        NetIncome
                                        
                                        
                                        Number
      ofShares
                                        
                                        
                                        Per
      ShareAmountNet
      income per Common share
                                        
                                        $
                                        2,072,000
                                        
                                        
                                        
                                        3,050,331
                                        
                                        
                                        $
                                        0.68
                                        
                                        
                                        $
                                        854,000
                                        
                                        
                                        
                                        3,167,893
                                        
                                        
                                        $
                                        0.27Effect
      of dilutive Securities:Options
                                        
                                        
                                        
                                        
                                        
                                        
                                        755,496
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        752,875Diluted
      net income per common share
                                        
                                        $
                                        2,072,000
                                        
                                        
                                        
                                        3,805,827
                                        
                                        
                                        $
                                        0.54
                                        
                                        
                                        $
                                        854,000
                                        
                                        
                                        
                                        3,920,678
                                        
                                        
                                        $
                                        0.22
 33
 Table of Contents
  PrimeEnergy
Corporation
 September
30, 2008
  Item
      2.
              MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
      CONDITION AND RESULTS OF OPERATIONS
  This
discussion should be read in conjunction with the financial statements of the
Company and notes thereto.
  LIQUIDITY
AND CAPITAL RESOURCES
 Cash flow
provided by operations for the nine month period ended September 30, 2008 was
$75,745,000. Excluding the effects of significant unforeseen expenses or other
income, our cash flow from operations fluctuates primarily because of variations
in oil and gas production and prices or changes in working capital accounts. Our
oil and gas production will vary based on actual well performance but may be
curtailed due to factors beyond our control. Hurricanes in the Gulf of Mexico
may shut down our production for the duration of the storm’s presence in the
Gulf or damage production facilities so that we cannot produce from a particular
property for an extended amount of time. In addition, downstream activities on
major pipelines in the Gulf of Mexico can also cause us to shut-in production
for various lengths of time.
  Our
realized oil and gas prices vary due to world political events, supply and
demand of products, product storage levels, and weather patterns. We sell the
vast majority of our production at spot market prices. Accordingly, product
price volatility will affect our cash flow from operations. To mitigate price
volatility we sometimes lock in prices for some portion of our production
through the use of financial instruments.
  The
Company’s activities include development and exploratory drilling. The Company’s
strategy is to develop a balanced portfolio of drilling prospects that includes
lower risk wells with a high probability of success and higher risk wells with
greater economic potential.
  For 2008
we budgeted $60 million for exploration and development in our core operating
areas. As of November 2008, the Company has committed approximately $50 million
on wells in these areas that have been spudded since January 1, 2008. We expect
to continue to make significant capital expenditures over the next several years
as part of our long-term growth strategy.
  If our
exploratory drilling results in significant new discoveries, we will have to
expend additional capital in order to finance the completion, development, and
potential additional opportunities generated by our success. We believe that,
because of the additional reserves resulting from the successful wells and our
record of reserve growth in recent years, we will be able to access sufficient
additional capital through additional bank financing.
  The
Company has in place both a stock repurchase program and a limited partnership
interest repurchase program. Spending under these programs in 2007 was $4.8
million. As of September 30, 2008 the Company has expended approximately $4.89
million on these programs. The amount of treasury stock the Company may purchase
is restricted by debt covenants with the Company’s primary lender.
  The
Company currently maintains two credit facilities with a bank totaling $360
million, with a combined current borrowing base of $133.9 million. The bank
reviews the borrowing base semi-annually and, at their discretion, may decrease
or propose an increase to the borrowing base relative to a redetermined estimate
of proved oil and gas reserves. Our oil and gas properties are pledged as
collateral for the line of credit and we are subject to certain financial
covenants defined in the agreement. We are currently in compliance with these
financial covenants. If we do not comply with these covenants on a continuing
basis, the lenders have the right to refuse to advance additional funds under
the facility and/or declare all principal and interest immediately due and
payable.
  34
 Table of Contents
  PrimeEnergy
Corporation
 September
30, 2008
  Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS  (continued)
  During
the second quarter of 2008, the Company’s offshore subsidiary arranged a
subordinated credit facility with a private lender controlled by a director of
the Company. The facility provides availability of $50 million and is secured by
properties released by the bank and pledged under this agreement. The current
advances under this credit facility are $20 million due January
2010.
  It is the
goal of the Company to increase its oil and gas reserves and production through
the acquisition and development of oil and gas properties. The Company also
continues to explore and consider opportunities to further expand its oilfield
servicing revenues through additional investment in field service equipment.
However, the majority of the Company’s capital spending is discretionary, and
the ultimate level of expenditures will be dependent on the Company’s assessment
of the oil and gas business environment, the number and quality of oil and gas
prospects available, the market for oilfield services, and oil and gas business
opportunities in general.
  RESULTS
OF OPERATIONS
 Revenues
and net income during the nine month period ended September 30, 2008, as
compared to the same periods in 2007, reflect the increased oil and gas sales,
presented below, offset by exploration costs and depreciation and depletion of
oil and gas properties. The table summarizes production volumes and average
sales prices realized (including realized gains and losses from
derivatives).
  Nine
      Months Ended
                                      September
    30
                                    
                                    
                                    Three
      Months Ended
                                      September
    302008
                                    
                                    
                                    2007
                                    
                                    
                                    Increase
      /
                                      (Decrease)
                                    
                                    
                                    2008
                                    
                                    
                                    2007
                                    
                                    
                                    Increase
      /
                                      (Decrease)Barrels
      of Oil Produced
                                    
                                    
                                    469,000
                                    
                                    
                                    
                                    419,000
                                    
                                    
                                    
                                    50,000
                                    
                                    
                                    
                                    149,000
                                    
                                    
                                    
                                    155,000
                                    
                                    
                                    
                                    (6,000
                                    )Average
      Price Received
                                    
                                    $
                                    95.05
                                    
                                    
                                    $
                                    62.34
                                    
                                    
                                    $
                                    32.71
                                    
                                    
                                    $
                                    96.89
                                    
                                    
                                    $
                                    72.05
                                    
                                    
                                    $
                                    24.84Oil
      Revenue
                                    
                                    $
                                    44,577,000
                                    
                                    
                                    $
                                    26,120,000
                                    
                                    
                                    $
                                    18,457,000
                                    
                                    
                                    $
                                    14,437,000
                                    
                                    
                                    $
                                    11,167,000
                                    
                                    
                                    $
                                    3,270,000MCF
      of Gas Produced
                                    
                                    
                                    6,838,000
                                    
                                    
                                    
                                    8,362,000
                                    
                                    
                                    
                                    (1,524,000
                                    )
                                    
                                    
                                    2,115,000
                                    
                                    
                                    
                                    3,677,000
                                    
                                    
                                    
                                    (1,562,000
                                    )Average
      Price Received
                                    
                                    $
                                    9.36
                                    
                                    
                                    $
                                    7.38
                                    
                                    
                                    $
                                    1.98
                                    
                                    
                                    $
                                    9.21
                                    
                                    
                                    $
                                    6.64
                                    
                                    
                                    $
                                    2.57Gas
      Revenue
                                    
                                    $
                                    63,997,000
                                    
                                    
                                    $
                                    61,684,000
                                    
                                    
                                    $
                                    2,313,000
                                    
                                    
                                    $
                                    19,489,000
                                    
                                    
                                    $
                                    24,403,000
                                    
                                    
                                    $
                                    (4,914,000
                                    )Total
      Oil & Gas Revenue
                                    
                                    $
                                    108,574,000
                                    
                                    
                                    $
                                    87,804,000
                                    
                                    
                                    $
                                    20,770,000
                                    
                                    
                                    $
                                    33,926,000
                                    
                                    
                                    $
                                    35,570,000
                                    
                                    
                                    $
                                    (1,644,000
                                    )
  35
 Table of Contents
  PrimeEnergy
Corporation
 September
30, 2008
  Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS  (continued)
  Oil and
gas prices received excluding the impact of derivatives were;
  Nine
      Months Ended
                            September
    30
                          
                          
                          Three
      Months Ended
                            September
    302008
                          
                          
                          2007
                          
                          
                          Increase
      /
                            (Decrease)
                          
                          
                          2008
                          
                          
                          2007
                          
                          
                          Increase
      /
                            (Decrease)Oil
      Price
                          
                          $
                          111.46
                          
                          
                          $
                          61.65
                          
                          
                          $
                          49.81
                          
                          
                          $
                          116.19
                          
                          
                          $
                          72.09
                          
                          
                          $
                          44.10Gas
      Price
                          
                          $
                          9.95
                          
                          
                          $
                          6.73
                          
                          
                          $
                          3.22
                          
                          
                          $
                          10.22
                          
                          
                          $
                          6.20
                          
                          
                          $
                          4.02
  Changes
in production are due to production from properties added during 2007 and early
2008 offset by the natural decline of existing properties. The increase in oil
production is related to our onshore drilling program while the change in gas
production reflects the decline in production from our offshore
properties.
  Lease
operating expense for the nine months of 2008 increased by $6,484,000, 25.1%
compared to 2007 due to the addition of lease operating expenses of new
properties, increased production taxes related to higher prices and overall
price increases in oil field services.
  General
and administrative expenses for the nine months of 2008 increased by $883,000,
8.6% compared to 2007.
  Field
Service income and expense for the nine months of 2008 increased $581,000 and
$1,446,000, respectively, compared to 2007. These increases reflect the upward
trend in rates and costs during 2008.
  Depreciation
and depletion increased to $50,840,000 in 2008 from $42,741,000 in 2007. This
increase is directly attributed to the majority of the Company’s offshore
properties coming on line late 2007. These additions increased the overall
property basis and production for the company.
  This
Report contains forward-looking statements that are based on management’s
current expectations, estimates and projections. Words such as “expects,”
“anticipates,” “intends,” “plans,” “believes,” “projects” and “estimates,” and
variations of such words and similar expressions are intended to identify such
forward-looking statements. These statements constitute “forward-looking
statements” within the meaning of Section 27A of the Securities Act of 1933, and
are subject to the safe harbors created thereby. These statements are not
guarantees of future performance and involve risks and uncertainties and are
based on a number of assumptions that could ultimately prove inaccurate and,
therefore, there can be no assurance that they will prove to be accurate. Actual
results and outcomes may vary materially from what is expressed or forecast in
such statements due to various risks and uncertainties. These risks and
uncertainties include, among other things, the possibility of drilling cost
overruns and technical difficulties, volatility of oil and gas prices,
competition, risks inherent in the Company’s oil and gas operations, the inexact
nature of interpretation of seismic and other geological and geophysical data,
imprecision of reserve estimates, and the Company’s ability to replace and
expand oil and gas reserves. Accordingly, stockholders and potential investors
are cautioned that certain events or circumstances could cause actual results to
differ materially from those projected.
  36
 Table of Contents
  PrimeEnergy
Corporation
 September
30, 2008
  Item
      3.
              QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK
  Interest
rate and swap activity.
  The
Company is exposed to interest rate risk on its line of credit, which has
variable rates based upon the lenders base rate, as defined, and the London
Inter-Bank Offered rate. Based on the weighted average balances outstanding
during the first nine months of 2008, a hypothetical 2.5% increase in the
applicable interest rates would have increased interest expense for the nine
months ended September 30, 2008 by approximately $2,254,000.
  The
Company entered into interest rate hedge agreements to help manage interest rate
exposure. These contracts include interest rate swaps. Interest rate swap
transactions generally involve the exchange of fixed and floating rate interest
payment obligations without the exchange of the underlying principal amounts.
The Company entered into swap agreements for a period of two years, beginning in
April 2008, related to $60 million of Company bank debt resulting in a fixed
rate of 4.375%. The underlying debt contracts are repriced quarterly based upon
the three-month LIBOR rates.
  Derivative
Instruments and Hedging Activity.
  Our
hedging strategy is designed to reduce the risk of price volatility for our
production in the natural gas and crude oil markets. Our hedging arrangements
apply to only a portion of our production and provide only partial price
protection. These hedging arrangements limit the benefit to us of increases in
prices, but offer protection in the event of price declines. Further, if our
counterparties defaulted, this protection might be limited as we might not
receive the benefits of the hedges. Please read the discussion below and Note 12
of the Notes to Consolidated Financial Statements for a more detailed discussion
of our hedging arrangements.
  Hedges
on Production – Collars.
  From time
to time, we enter into natural gas and crude oil collar agreements with
counterparties to hedge price risk associated with a portion of our production.
These cash flow hedges are not held for trading purposes. Under the collar
arrangements, if the index price rises above the ceiling price, we pay the
counterparty. If the index price falls below the floor price, the counterparty
pays us. In the case of a three-way collar if the index price rises above the
third tier price, the counterparty pays us.
  Hedges
on Production – Swaps.
  From time
to time, we enter into natural gas and crude oil swap agreements with
counterparties to hedge price risk associated with a portion of our production.
These cash flow hedges are not held for trading purposes. Under the swap
agreements, if the index price rises above the swap price, we pay the
counterparty. If the index falls below the swap price, the counterparty pays
us.
  37
 Table of Contents
  PrimeEnergy
Corporation
 September
30, 2008
  ITEM
      4T.
              CONTROLS AND
PROCEDURES
  Evaluation
of Disclosure Controls and Procedures
  (a)
Management’s Quarterly Report on Internal Control Over Financial
Reporting.
  The
Company’s management is responsible for establishing and maintaining an adequate
system of internal control over financial reporting (as defined in Exchange Act
Rule 13a-15(f)). Under the supervision and with the participation of our senior
management, consisting of our chief executive officer and our chief financial
officer, we conducted an evaluation of the effectiveness of the design and
operation of our disclosure controls and procedures, as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended,
as of the end of the period covered by this report (the “Evaluation Date”).
Based on that evaluation, the Company’s management, including our chief
executive officer and chief financial officer, concluded that as of the
Evaluation Date our disclosure controls and procedures are effective such that
the information relating to us required to be disclosed in our Securities and
Exchange Commission (“SEC”) reports (i) is recorded, processed, summarized and
reported within the time periods specified in SEC rules and forms, and (ii) is
accumulated and communicated to our management, including our chief executive
officer and chief financial officer, as appropriate to allow timely decisions
regarding required disclosure.
  Our
internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements in accordance with generally accepted
accounting principles in the United States. Because of its inherent limitations,
internal control over financial reporting may not prevent or detect
misstatements. Therefore, even those systems determined to be effective can
provide only reasonable assurance of achieving their control objectives. In
evaluating the effectiveness of our internal control over financial reporting,
our management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control—Integrated
Framework. This quarterly report does not include an attestation report of our
registered public accounting firm regarding internal control over financial
reporting. Management’s report was not subject to attestation by our registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the Company to provide only management’s report
in this quarterly report.
  (b)
Changes in Internal Control over Financial Reporting.
  There
were no changes in our internal control over financial reporting that occurred
during the last fiscal quarter of the period covered by this report that have
materially affected or are reasonably likely to materially affect our internal
control over financial reporting.
  38
 Table of Contents
  PrimeEnergy
Corporation
 September
30, 2008
  PART
II—OTHER INFORMATION
  Item
      1.
              LEGAL PROCEEDINGS
  From time
to time, the Company is party to certain legal actions and claims arising in the
ordinary course of business. While the outcome of these events cannot be
predicted with certainty, management does not expect these matters to have a
materially adverse effect on the financial position or results of operations of
the Company.
  Item
      1A.
              RISK FACTORS
  Not
required
  Item
      2.
              UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
      PROCEEDS
  There
were no sales of equity securities during the period covered in this
Report.
  During
the nine months ended September 30, 2008, the Company purchased the following
shares of common stock as treasury shares.
  2008
    Month
                                            
                                            Number
      ofShares
                                            
                                            
                                            Average
      PricePaid per
      share
                                            
                                            
                                            Maximum
      Number of Sharesthat
      May Yet Be PurchasedUnder The Plan
      (1)January
                                            
                                            
                                            60,684
                                            
                                            
                                            $
                                            50.06
                                            
                                            
                                            
                                            224,871February
                                            
                                            
                                            558
                                            
                                            
                                            $
                                            54.68
                                            
                                            
                                            
                                            224,313March
                                            
                                            
                                            10,465
                                            
                                            
                                            $
                                            50.25
                                            
                                            
                                            
                                            213,848April
                                            
                                            
                                            5,500
                                            
                                            
                                            $
                                            58.05
                                            
                                            
                                            
                                            208,348May
                                            
                                            
                                            435
                                            
                                            
                                            $
                                            61.23
                                            
                                            
                                            
                                            207,913June
                                            
                                            
                                            6,726
                                            
                                            
                                            $
                                            55.62
                                            
                                            
                                            
                                            201,187July
                                            
                                            
                                            1,777
                                            
                                            
                                            $
                                            55.14
                                            
                                            
                                            
                                            199,410August
                                            
                                            
                                            200
                                            
                                            
                                            $
                                            64.04
                                            
                                            
                                            
                                            199,210September
                                            
                                            
                                            —
                                            
                                            
                                            $
                                            —
                                            
                                            
                                            
                                            199,210Total/Average
                                            
                                            
                                            86,345
                                            
                                            
                                            $
                                            51.24
 
 (1)
              In
      December 1993, we announced that our board of directors authorized a stock
      repurchase program whereby we may purchase outstanding shares of our
      common stock from time-to-time, in open market transactions or negotiated
      sales. A total of 2,700,000 shares have been authorized, to date, under
      this program. Through September 30, 2008 we repurchased a total of
      2,500,790 shares under this program for $33,533,761 at an average price of
      $13.41 per share. Additional purchases may occur as market conditions
      warrant. We expect future purchases will be funded with internally
      generated cash flow or from working
capital.
  39
 Table of Contents
  PrimeEnergy
Corporation
 September
30, 2008
  Item
      3.
              DEFAULTS UPON SENIOR
SECURITIES
  None
  Item
      4.
              SUBMISSION OF MATTERS TO A VOTE OF SECURITY
      HOLDERS
  None
  Item
      5.
              OTHER INFORMATION
  None
  Item
      6.
              EXHIBITS
  The
following documents are filed herewith as a part of this report:
  Exhibit
      No.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)32.1
                      Certification
      of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed
      herewith).32.2
                      Certification
      of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed
      herewith).
  40
 Table of Contents
  SIGNATURES
  Pursuant
to the requirements of the Securities and Exchange Act of 1934, Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
  PrimeEnergy
      Corporation(Registrant)March
      26, 2009
                      /s/
      Charles E. Drimal, Jr.(Date)
                      Charles
      E. Drimal, Jr.PresidentPrincipal
      Executive OfficerMarch
      26, 2009
                      /s/
      Beverly A. Cummings(Date)
                      Beverly
      A. CummingsExecutive
      Vice PresidentPrincipal
      Financial OfficerMarch
      26, 2009
                      /s/
      Lynne Pizor(Date)
                      Lynne
      PizorController,
      Principal Accounting
Officer