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, 2009 was $27,078,000. 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 is a participant in nine oil and three gas commodity derivative financial instruments which were effective prior to September 30, 2009.

                       Derivative      Contract           Total        Contract
          Commodity       Type          Price            Volumes        Period
          Crude Oil      Collar     $60.00 / 77.40     57,000 bbls       2009
          Crude Oil      Collar     $65.00 / 86.50     12,000 bbls       2009
          Crude Oil      Collar     $65.00 / 80.90    204,000 bbls       2010
          Crude Oil      Collar     $65.00 / 84.14     36,000 bbls       2010
          Crude Oil      Collar     $65.00 / 84.00     45,000 bbls       2011
          Crude Oil      Collar     $70.00 / 81.80    120,000 bbls       2010
          Crude Oil      Collar     $70.00 / 86.30     30,999 bbls       2011
          Crude Oil      Collar     $70.00 / 89.30    227,997 bbls       2011
          Crude Oil      Collar     $70.00 / 92.85    168,000 bbls       2012
         Natural Gas      Swap          $6.04        1,200,000 mmbtu     2010
         Natural Gas      Swap          $6.13         600,000 mmbtu      2010

Subsequent to the quarter end, the Company entered into two gas and one oil commodity derivative financial instruments listed in the table set forth below.

                       Derivative      Contract           Total       Contract
          Commodity       Type           Price           Volumes       Period
          Crude Oil      Collar     $70.00 / 111.80   108,000 bbls      2012
          Crude Oil      Collar     $80.00 / 97.50    240,000 bbls      2013
         Natural Gas      Swap           $6.06        600,000 mmbtu     2010
         Natural Gas      Swap           $6.81        480,000 mmbtu     2011

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.

The Company's strategy in 2009 is to continue to reduce its outstanding debt which decreased by $30,860,000 in 2008 and approximately $10 million in 2009. This decreased leveraged position will better provide the Company the ability to participate in a significant acquisition, should the opportunity arise this year.

The Company has in place both a stock repurchase program and a limited partnership interest repurchase program. Spending under these programs in 2008 was $5.03 million. The Company expects to expend substantially less in 2009 because of the drop in energy prices. For the nine months ended September 30, 2009, the Company spent only $417,000 under these programs.

The Company currently maintains two bank credit facilities totaling $360 million, with a combined current borrowing base of $110 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.

In April 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.

Effective June 30, 2009, the private lender agreed to release the pledged collateral under this credit facility in favor of the offshore credit facility in exchange for a second lien position on all of the assets of the offshore subsidiary and a pledge from PEC to not take on any additional debt in excess of $112 million on its existing onshore asset base. This amended facility will mature in January 2012, which will be accelerated if there is a change in control or management of PrimeEnergy Corporation, and bears interest at a rate of 10% per annum.

It is the goal of the Company to increase its oil and gas reserves and production through the acquisition and development of both onshore and offshore 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 (loss) during the nine month period ended September 30,
2009, as compared to the same periods in 2008 reflect the increased oil and
decreased gas sales, presented below, offset by 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 30,
                                                             Increase /                                       Increase /
                                 2009           2008         (Decrease)            2009           2008        (Decrease)
Barrels of Oil Produced           495,000         469,000          26,000           154,000        149,000           5,000
Average Price Received       $      55.20   $       95.05   $      (39.85 )    $      65.45   $      96.89   $      (31.44 )

Oil Revenue                  $ 27,324,000   $  44,577,000   $ (17,253,000 )    $ 10,080,000   $ 14,437,000   $  (4,357,000 )

Mcf of Gas Produced             5,425,000       6,838,000      (1,413,000 )       1,752,000      2,115,000        (363,000 )
Average Price Received       $       4.18   $        9.36   $       (5.18 )    $       4.19   $       9.21   $       (5.02 )

Gas Revenue                  $ 22,651,000   $  63,997,000   $ (41,346,000 )    $  7,346,000   $ 19,489,000   $ (12,143,000 )

Total Oil & Gas Revenue      $ 49,975,000   $ 108,574,000   $ (58,599,000 )    $ 17,426,000   $ 33,926,000   $ (16,500,000 )

Oil and gas prices received excluding the impact of derivatives were:

                                         Nine Months Ended September 30,                 Three Months Ended September 30,
                                                                   Increase /                                       Increase /
                                       2009            2008        (Decrease)          2009            2008         (Decrease)
Oil Price                           $     52.13    $     111.46   $     (59.33 )    $     65.44    $     116.19    $     (50.75 )
Gas Price                           $      4.18    $       9.95   $      (5.77 )    $      4.19    $      10.22    $      (6.03 )

The increase in oil production is due to properties added during 2008 from our 2008 West Texas drilling program offset by the natural decline of existing properties. The decrease in gas production is primarily due to the natural decline of the offshore properties.

Lease operating expense for the nine months of 2009 decreased by $7,259,000, or 22%, compared to 2008 due to overall price decreases in oil field services combined with reduced production taxes related to reduced commodity prices.

General and administrative expenses decreased $2,686,000, or 24%, in the first nine months of 2009 as compared to 2008 due to reductions in personnel costs.

Field Service income and expense for the nine months of 2009 decreased $5,837,000 and $3,120,000, or 31% and 21%, respectively, compared to 2008. These decreases reflect lower rates, utilization and labor costs during 2009.

Depreciation, depletion and amortization expense for the first nine months of 2009 decreased to $31,584,000 in 2009 from $50,840,000 in 2008. This decrease is primarily related to the decrease in offshore production during the first nine months of 2009.

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.