Ring Energy, Inc. — 2018 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2018; filed February 28, 2019. Ring is a Texas-focused oil and gas exploration and production company operating in the Permian Basin, principally in Andrews and Gaines counties (Central Basin Platform) and Reeves and Culberson counties (Delaware Basin).
Financial and operating performance
| Metric | 2018 | 2017 |
|---|---|---|
| Revenue | $120.1 million | $66.7 million |
| Operating income | $20.0 million | $16.0 million |
| Net income | $9.0 million | $1.8 million |
| Diluted earnings per share | $0.15 | $0.03 |
| Cash provided by operations | $70.4 million | $42.8 million |
| Oil and gas production sold | 2.23 million BOE | 1.44 million BOE |
- Revenue rose about 80%, driven by higher oil volumes and prices. Oil sales were $116.7 million; natural gas sales were $3.4 million. Average realized oil price increased to $56.99 per barrel from $48.97.
- Production costs increased to $27.8 million, or $12.45 per BOE, from $16.0 million, or $11.11 per BOE. Production taxes were $5.6 million, or $2.52 per BOE.
- Operating results included a $14.2 million non-cash full-cost ceiling impairment. Derivative results included an $11.2 million realized loss and a $4.0 million unrealized gain. Net income nevertheless increased, primarily with higher revenue and a lower tax provision than in 2017.
- Investing activities used $203.4 million, mainly for development. Cash ended the year at $3.4 million, down from $15.0 million. Current assets were $16.8 million versus current liabilities of $51.9 million, producing negative working capital of approximately $35.1 million.
- Revolver borrowings were $39.5 million at year-end; the borrowing base was $175 million, under a facility with a $500 million maximum commitment and June 2020 maturity. The company reported compliance with its covenants. Total liabilities were $104.5 million, including $13.1 million of asset retirement obligations.
Material changes and reserves
- Proved reserves increased to 36.6 million BOE from 31.9 million BOE. Reserves were 76% oil; 61% were proved developed producing, 6% proved developed non-producing, and 33% proved undeveloped.
- Year-end reserve value was $541.6 million of pre-tax PV10 and $455.9 million of standardized discounted future net cash flows. PV10 is a non-GAAP measure; neither valuation is necessarily market value.
- Ring spent $214.7 million on property acquisition, exploration and development costs in 2018, including $198.9 million of development costs. It drilled 57 gross development wells and reported no dry development wells.
- Shares outstanding increased from 54.2 million to 63.2 million, including 6.2 million shares issued in a public offering and 2.6 million shares issued in a property acquisition.
- Fourth-quarter 2018 revenue was $27.6 million and net loss was $7.1 million, compared with fourth-quarter 2017 revenue of $23.3 million and net loss of $4.5 million. The annual filing reports the $14.2 million ceiling impairment for 2018 but does not separately identify its quarterly amount.
Outlook, risks and unusual items
- Management intends to grow production and reserves through drilling existing acreage and pursuing acquisitions. The filing does not provide a formal production, capital-spending or earnings forecast. It estimated development costs of $55.1 million in 2019 for scheduled reserve conversions.
- After year-end, Ring drew an additional $45 million on its credit facility. On February 25, 2019, it agreed to acquire approximately 37,206 net acres for $300 million ($270 million cash and $30 million stock), subject to customary adjustments, with closing expected early in the second quarter of 2019. The company planned to finance the transaction through an amended facility; a lender commitment contemplated a $425 million borrowing base and a five-year term.
- Commodity-price volatility, drilling and reserve-estimation uncertainty, rising operating costs, and the need for continued capital are significant risks. About one-third of proved reserves were undeveloped and require future investment. A large portion of PUD reserves was removed from estimates following a shift away from waterflood and primary development toward horizontal development.
- Customer concentration is high: Oxy and Plains accounted for 85% and 11% of 2018 oil and gas revenue; Oxy represented 90% of year-end receivables. The company had no commodity hedges outstanding at December 31, 2018, after prior collars expired or were terminated; termination of 2019 collars cost $3.4 million.
- Other exposures include variable-rate debt and borrowing-base redeterminations, dependence on third-party natural-gas gathering, environmental and operational hazards, and potential lease expirations. Ring reported no material pending or threatened litigation, no off-balance-sheet financing arrangements, and no expected cash dividends. Management and the auditor reported effective internal controls; the auditor issued an unqualified opinion on the financial statements.
Important facts for investors to verify
- Confirm the final closing terms, funding, debt capacity and resulting leverage for the $300 million Wishbone acquisition.
- Review liquidity and covenant headroom after the post-year-end $45 million draw and planned acquisition financing.
- Assess whether operating cash flow can support development spending and scheduled PUD conversions without additional equity or borrowing.
- Examine reserve revisions, especially the waterflood-related removals, and the assumptions underlying PV10 and standardized reserve values.
- Verify realized price and volume disclosures: the filing reports 2018 average natural-gas pricing as both $3.23 and $3.05 per Mcf in different sections, so the text does not provide a consistent value.
- Monitor customer receivable concentration, production-cost inflation, commodity prices and the absence of active hedges.