Ring Energy, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. The unaudited consolidated statements cover Ring Energy and its subsidiary. The company owns oil and natural gas properties in Texas and Kansas.
Financial performance
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Oil and gas revenue | $6.05 million | $5.97 million |
| Operating income (loss) | $(1.55) million | $1.80 million |
| Net income (loss) | $(0.98) million | $1.16 million |
| Basic and diluted EPS | $(0.04) | $0.05 |
| Cash from operating activities | $(6.05) million | $7.53 million |
| Cash used in investing activities | $(9.79) million | $(22.10) million |
| Cash from financing activities | $10.06 million | $(0.04) million |
Revenue was nearly flat despite higher production volumes, as lower realized commodity prices offset volume growth. Oil volume increased to 137,090 barrels from 63,944; average realized oil price fell 53% to $43.76 per barrel. Natural gas volume increased to 19,848 Mcf from 8,617 Mcf; average realized price fell 52% to $2.36 per Mcf.
Operating expenses rose to $7.60 million from $4.17 million. Production costs increased to $1.87 million from $0.77 million, including higher costs from additional wells and severe winter weather; production cost per BOE rose to $13.30 from $11.79. DD&A increased to $3.65 million from $1.53 million, primarily due to higher production. General and administrative expense was $1.73 million versus $1.56 million. The resulting operating margin was approximately negative 25.6%, versus positive 30.2% a year earlier. The net loss included a $0.57 million income-tax benefit.
Financial position and liquidity
At March 31, 2015, cash was $2.85 million, down from $8.62 million at year-end 2014. Current assets were $8.85 million and current liabilities $6.93 million, implying a current ratio of approximately 1.28. Total assets were $167.58 million and total liabilities $25.29 million. Long-term debt was $10.00 million, compared with none at December 31, 2014.
Operating cash use was driven in part by a $9.33 million reduction in accounts payable. Capital spending totaled $9.79 million, including $8.67 million to develop oil and gas properties. The company drew $10.00 million under its secured revolving credit facility. The facility has a $150 million maximum commitment and a $40 million initial borrowing base, matures July 1, 2019, and is secured by substantially all company assets. The company reported compliance with its covenants at March 31, including a maximum 4.0-to-1 leverage ratio and minimum 1.0-to-1 current ratio.
Changes, outlook, risks, and other matters
- The company shifted from prior-year profit and positive operating cash flow to a net loss and operating cash outflow. Management attributed the earnings decline primarily to lower oil and gas prices.
- Management said oil and gas prices had declined significantly and forecast prices for the remainder of 2015 had also fallen. The filing provides no specific production, earnings, or capital-spending guidance.
- Management expects production taxes to remain relatively steady absent rate changes or acquisitions. It noted G&A may rise as the company grows and hires personnel.
- Key risks include commodity-price volatility, reduced cash available for development, possible lower borrowing capacity after borrowing-base redeterminations, drilling and reserve-estimation risks, gathering and transportation constraints, customer concentration, and environmental and regulatory requirements.
- Three customers accounted for 94% of Q1 oil and gas revenue; the largest represented 50%. The same customers represented 85% of accounts receivable. Sales are generally unsecured. The company also reported $3.00 million of joint-interest receivables.
- The company reported no known environmental claims or proceedings involving it or acquired properties and no off-balance-sheet arrangements. Standby letters of credit totaled $145,000, with no amounts drawn.
- Management concluded disclosure controls and procedures were effective as of period-end. The interim statements are unaudited and should be read with the 2014 Form 10-K.
Important facts for investors to verify
- Whether subsequent oil and gas prices, production volumes, and realized pricing support cash generation after the sharp year-over-year price declines.
- Cash needs for planned development and acquisitions, and the company’s capacity to fund them without further borrowing or equity issuance.
- Results of credit-facility borrowing-base redeterminations, available borrowing capacity, interest costs, and continued covenant compliance.
- Trends in operating costs, production per BOE, and DD&A, as well as any impairment effects from lower commodity-price assumptions.
- Customer concentration and collectability of oil and gas and joint-interest receivables.
- The filing’s market-risk section refers to $10 million outstanding “as of May 31, 2015,” a date after the March 31 reporting period; verify the applicable measurement date and balance.