Ring Energy, Inc. — Q1 2018 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2018, compared with Q1 2017. Ring produces oil and natural gas from properties in the Permian Basin of Texas.
Financial performance
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Oil and gas revenue | $29.9 million | $12.2 million |
| Operating income | $10.9 million | $2.5 million |
| Net income | $5.7 million | $1.3 million |
| Diluted earnings per share | $0.10 | $0.03 |
| Net cash from (used in) operations | $(13.7) million | $11.0 million |
| Capital expenditures for oil and gas properties | $36.1 million | $23.7 million |
- Revenue rose 144%, driven by higher oil volumes and realized prices. Oil sales volume increased to 479,864 barrels from 240,260 barrels; average realized oil price rose 25% to $60.73 per barrel. Natural gas volume increased to 210,031 Mcf from 168,349 Mcf, and realized price rose 10% to $3.58 per Mcf.
- Operating margin was approximately 36.6% versus 20.4%; net margin was approximately 19.0% versus 10.4%.
- Production costs increased to $5.8 million from $2.7 million; lease operating expense rose to $11.23 per BOE from $10.08. DD&A increased to $8.5 million from $3.5 million, primarily due to higher production.
- Q1 2018 operating cash flow was negative despite higher earnings, principally reflecting a $32.7 million cash outflow from accounts payable changes. Investing cash outflow was $36.1 million.
Balance sheet and liquidity
- At March 31, 2018, cash was $47.0 million, current assets $61.3 million, current liabilities $29.6 million, and working capital approximately $31.7 million; the current ratio was approximately 2.1.
- Total assets were $484.2 million and stockholders’ equity was $445.2 million. The company reported no revolver borrowings. Its secured credit facility had a $60 million borrowing base, matures June 26, 2020, and is subject to periodic redetermination. Ring reported compliance with its covenants.
- Cash increased from $15.0 million at year-end, mainly due to a February public offering. The offering of 6.164 million shares at $14 per share generated $81.8 million net proceeds. By March 31, approximately $34.8 million had been spent on oil and gas leasing and development, with approximately $47.0 million remaining.
Material changes, outlook and risks
- Revenue and earnings improved substantially year over year, while development spending rose and operating cash flow turned negative. Share count increased following the offering.
- Ring had 2018 WTI costless collars covering 2,000 barrels per day: 1,000 barrels daily with a $49 floor/$54.60 ceiling and 1,000 with a $51 floor/$54.80 ceiling. Derivative losses were $1.5 million realized and $0.8 million unrealized in Q1. Management said additional realized losses were expected in each remaining 2018 quarter at then-current prices; collars also limit upside above their ceilings.
- The filing provides no specific production, revenue, earnings, or capital-spending guidance. Management described plans to pursue acquisitions and development, but noted acquisitions may require substantially more capital and reduce cash available.
- Key risks include volatile commodity prices, drilling and development costs and results, access to capital, reserve and impairment estimates, transportation constraints, regulation and environmental obligations, and dependence on key personnel. Two customers accounted for 97% of revenue and 97% of accounts receivable combined. Cash exceeded federally insured limits.
- Asset retirement obligations were $9.4 million. A $250,000 Texas standby letter of credit was outstanding but undrawn. Management reported disclosure controls effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the production-volume and realized-price gains can be sustained and how they affect unit costs and margins.
- Cash conversion and working-capital movements, particularly the large accounts-payable outflow, alongside planned development spending.
- Current borrowing-base availability and any redetermination, covenant, or financing changes after March 31, 2018.
- Hedge settlements and exposure to prices outside collar ranges, including management’s expectation of further realized losses.
- Customer concentration, transportation capacity and costs, reserve assumptions, and any subsequent operational, environmental, or acquisition developments.
The interim financial statements are unaudited; the filing cautions that Q1 results are not necessarily indicative of full-year results.