Ring Energy, Inc. — Q3 2016 Form 10-Q
Business and period: Ring Energy is an oil and natural gas producer with properties in Texas and Kansas. This unaudited filing covers the three and nine months ended September 30, 2016; comparisons below are with the corresponding 2015 periods unless otherwise noted.
Key financial results
| Metric | Three months ended Sept. 30, 2016 | Nine months ended Sept. 30, 2016 |
|---|---|---|
| Oil and gas revenue | $7.82 million | $21.02 million |
| Operating loss | $9.12 million | $58.47 million |
| Net loss | $5.94 million | $37.16 million |
| Loss per share, basic and diluted | $0.14 | $1.00 |
| Operating cash flow | Not separately presented for the quarter | $4.90 million provided |
| Investing cash flow | Not separately presented for the quarter | $22.36 million used |
- For the nine-month period, the company recorded a $56.51 million non-cash ceiling-test impairment, including $9.65 million in Q3. The impairment reflected lower commodity prices and their effect on estimated proved reserves and future net cash flows.
- At September 30, cash was $2.25 million, current assets were $6.16 million, and current liabilities were $7.44 million, implying a working-capital deficit of about $1.28 million. Total assets were $227.33 million and stockholders’ equity was $211.90 million.
- No credit-facility borrowings were outstanding. The facility’s borrowing base had been reduced to $60 million in May 2016; it matures in 2020 and is secured by substantially all company assets. Ring reported compliance with its covenants.
- The nine-month cash-flow statement reports a $2.18 million decrease in cash. Capital spending was $22.36 million. Financing included $61.06 million of common-stock proceeds, $5.00 million of notes payable proceeds, and $50.90 million of revolving-credit principal repayments.
Changes versus prior-year periods
- Revenue declined 9% in Q3 and 11% for the nine months, based on the statements of operations. Q3 oil revenue fell while gas revenue rose. Nine-month oil and gas sales volumes increased, but realized oil prices fell 22% to $36.72 per barrel; realized gas prices fell 10% to $2.42 per Mcf.
- Q3 net loss widened from $1.14 million to $5.94 million, primarily because of the impairment. Nine-month net loss widened from $1.58 million to $37.16 million, reflecting the impairment and lower realized commodity prices.
- Lease operating expense per BOE fell to $10.94 from $13.98 in Q3 and from $13.18 for the nine-month comparison. Nine-month total lease operating expense was approximately flat. DD&A declined, in part because of lower depletion rates and the reduced property cost base following impairments.
- The April 2016 public offering of 11.5 million shares generated $61.06 million in net proceeds. The company used proceeds to repay $50.9 million of credit-facility debt and fund leasing, development, and working capital. Shares outstanding rose to 41.92 million at September 30, from 30.39 million at December 31, 2015.
Outlook, risks, and unusual items
- The filing provides no specific earnings, production, or capital-spending guidance. Management says it intends, where possible, to pursue producing properties and developed undrilled properties, but acquisitions may require additional financing and reduce cash available.
- Commodity-price volatility is a central risk: all production was sold under market-price or price-sensitive contracts, and the company had no oil or gas hedges at September 30. Lower prices could further reduce revenue, borrowing capacity, economically recoverable reserves, and property values, and could cause additional impairments.
- Two customers represented 91% of nine-month oil and gas revenue and 86% of accounts receivable. Management did not expect losing one customer alone to have a material adverse effect, citing other available purchasers, but sales are unsecured and concentrated.
- Other disclosed risks include access to capital, drilling and operating hazards, transportation constraints, reserve-estimation uncertainty, competition, key-person dependence, and environmental and regulatory requirements. The company disclosed $280,000 of standby letters of credit, none drawn.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter.
Investor verification points
- Reconcile the cash-flow disclosure: the cash-flow statement reports $4.90 million of cash provided by operations, while MD&A describes operating cash flow as $4.90 million used.
- Check the nine-month 2015 revenue comparator: the statements report $23.65 million, while MD&A gives $23.56 million in one passage.
- Review the impairment assumptions, including SEC ceiling-test prices, reserve estimates, and sensitivity to future commodity prices.
- Monitor the November borrowing-base redetermination, covenant headroom, working-capital deficit, and the company’s need for capital to fund development or acquisitions.
- Assess customer concentration, production volumes and realized prices, and potential effects of further commodity-price or regulatory changes.