Ring Energy, Inc. — Q1 2023 Form 10-Q
Business context and reporting period. Unaudited results for the three months ended March 31, 2023, compared with Q1 2022. Ring is a Permian Basin-focused oil and gas exploration and production company. Production and revenue benefited from the Stronghold acquisition, completed in August 2022.
Key financial results
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Oil, gas and NGL revenue | $88.1 million | $68.2 million |
| Operating income | $35.7 million | $38.2 million |
| Net income | $32.7 million | $7.1 million |
| Diluted earnings per share | $0.17 | $0.06 |
| Net cash provided by operating activities | $43.7 million | $24.4 million |
| Cash at period end | $1.7 million | $2.1 million |
- Revenue increased 29%; total production rose 106% to 1.65 million Boe. Oil revenue grew to $83.6 million as higher volumes more than offset lower realized oil prices. Natural gas revenue fell to $1.1 million amid lower prices; NGL revenue was $3.4 million. The shift to three-stream reporting beginning July 2022 affects product comparisons.
- Operating margin was approximately 40.5% of revenue, down from 56.0% in Q1 2022. Net margin was approximately 37.1%, up from 10.4%, reflecting a $9.5 million derivative gain versus a $27.6 million derivative loss in the prior-year quarter.
- Lease operating expense was $17.5 million, or $10.61 per Boe, compared with $9.0 million, or $11.22 per Boe. DD&A rose to $21.3 million from $9.8 million. General and administrative expense increased to $7.1 million from $5.5 million.
- Interest expense rose to $10.4 million from $3.4 million; the weighted-average borrowing rate was 8.2% versus 4.3%.
- Investing cash outflow was $55.5 million, including $36.9 million for development and $18.5 million of Stronghold-related payments. Financing cash inflow was $9.8 million, including $7.0 million of net revolving-credit borrowings.
- At March 31, total assets were $1.28 billion, total liabilities $582.2 million, and stockholders’ equity $699.2 million. Current assets of $58.5 million were below current liabilities of $110.4 million. The filing reports $422.0 million outstanding on the revolving credit facility and $177.2 million of unused availability, including the effect of standby letters of credit.
Material changes and unusual items
- Stronghold-related production drove the substantial production and revenue growth. The company paid $15.0 million of deferred consideration and $3.5 million of post-close settlement during the quarter; management said these payments contributed to higher debt.
- Derivative results included a $10.1 million unrealized gain and approximately $0.7 million of net cash settlement payments. The gain materially supported reported earnings but is not equivalent to operating cash generation.
- During Q1, 4.5 million warrants were exercised at $0.80 per share, producing $3.6 million. After quarter-end, warrant amendments reduced the exercise price to $0.62 for 14.5 million warrants exercised in April, generating approximately $9.0 million gross proceeds; about 78,200 warrants remained outstanding.
- The company drilled and completed six horizontal wells in the Northwest Shelf, three vertical wells in the Central Basin Platform, and completed six Central Basin Platform vertical recompletions.
Outlook, risks and contingencies
- No quantified full-year 2023 financial or production guidance is provided in the filing. Management says it will prioritize free cash flow, prudent capital allocation, debt reduction and liquidity, while pursuing high-return development and potentially strategic acquisitions or non-core asset sales.
- The company states it believes cash on hand and operating cash flow will fund operations and debt service. It was in compliance with credit-facility covenants at March 31. The facility matures in August 2026; its $600 million borrowing base is subject to redetermination. Covenant terms include a maximum leverage ratio of 3.0 to 1.0 and a minimum current ratio of 1.0 to 1.0, as defined in the agreement.
- Commodity-price volatility, variable-rate debt and customer concentration are material exposures. Three customers accounted for 90% of Q1 sales and 92% of accounts receivable; a 1 percentage-point change in borrowing rates was estimated to change annual interest expense by $4.2 million. The company uses commodity hedges, which can limit gains when prices rise.
- A pending Texas lawsuit seeks return of a $5.5 million forfeited property-sale deposit plus damages and costs. Ring disputes the claims and is defending and counterclaiming; the filing does not provide a clear estimate of potential loss.
- Management assessed disclosure controls as effective and reported no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether acquisition-related production growth and realized commodity prices sustain operating cash flow and per-Boe costs.
- How much reported earnings depends on non-cash derivative fair-value changes, and the cash-flow impact of future hedge settlements.
- Debt, borrowing-base availability, interest costs and covenant headroom as the company funds development and targets deleveraging.
- Customer concentration, the outcome and potential financial exposure of the $5.5 million deposit litigation, and the proceeds and dilution implications of warrant exercises.