Ring Energy, Inc. — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013. The interim consolidated financial statements are unaudited. Ring owns oil and gas interests in Texas and Kansas. Stanford Energy is the accounting predecessor, so the historical periods reflect Stanford’s results before Ring’s June 28, 2012 combination; comparisons may not represent identical business scope.
Financial performance and position
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Oil and gas revenue | $1.292 million | $0.343 million | $2.444 million | $0.671 million |
| Net loss | $0.890 million | $0.541 million | $1.856 million | $1.172 million |
| Loss per share, basic and diluted | $0.06 | $0.15 | $0.13 | $0.33 |
| Cash provided by (used in) operating activities | Not provided by quarter in the filing | $1.370 million | $(0.509) million |
Q2 oil sales volume was 14,261 barrels versus 4,004; realized oil price rose 5% to $89.02 per barrel. Gas volume increased to 7,092 MCF from 612 MCF, while realized gas price fell 36% to $3.10 per MCF. For the first half, oil volume was 28,506 barrels and realized price was $84.41 per barrel; gas volume was 12,849 MCF and realized price was $2.91 per MCF.
At June 30, cash was $18.432 million, total current assets $18.989 million, and current liabilities $2.031 million. Total assets were $48.489 million. Accounts payable was the only current liability shown; the company reported no borrowings outstanding. Its $10 million revolving facility had $9.855 million available, with maturity extended to April 10, 2014. The facility carries a minimum 4% interest rate and has restrictive covenants; two stockholders are jointly and severally obligated for outstanding borrowings.
First-half investing cash outflow was $7.330 million, including $7.276 million for property purchases and development. Financing provided $18.987 million, primarily from equity issuance. Cash increased $13.028 million during the half. The filing reports no cash interest paid in 2013.
Changes and drivers
- Revenue growth reflected higher production, principally from acquisitions and drilling completed in 2012. First-half realized prices were lower than the prior year for both oil and gas.
- Production costs were broadly flat in dollars but lower per BOE: $13.89 in Q2 versus $53.11, and $11.61 for the half versus $48.15. Management attributed the lower unit costs to higher production.
- General and administrative expense increased to $1.500 million in Q2 and $3.067 million for the half, primarily due to higher stock-based compensation and employee and contract staff compensation. Stock-based compensation was $1.702 million in the first half, versus $0.445 million a year earlier.
- Depreciation, depletion and amortization rose to $0.397 million in Q2 and $0.740 million for the half, reflecting higher production and an increase in the depletion rate from $19.87 to $23.33 per BOE.
- Net loss increased in dollars, while loss per share decreased because weighted-average shares increased substantially. The company issued 3,528,580 shares in a June private placement at $5.50 per share, in addition to 100,000 shares sold in January. Shares outstanding were 17,801,313 at August 6, 2013.
Outlook, risks and unusual items
The filing gives no quantified earnings, production or capital-spending guidance. Management said it intends to pursue producing properties and/or developed undrilled properties, potentially requiring capital beyond available resources and possibly additional debt or equity. Management cautioned that acquisition costs may be incurred without a completed transaction.
- Customer concentration: One customer accounted for 95% of first-half oil and gas revenue and 91% of accounts receivable at June 30.
- Commodity and operating exposure: Results depend on volatile oil and gas prices, production, reserve estimates, drilling outcomes, service availability, and the performance of third-party operators. The company also cited transportation constraints and gatherers’ influence over gathering costs.
- Regulatory and environmental exposure: Oil and gas operations, including hydraulic fracturing, are subject to evolving federal, state and local requirements. Compliance or changes in regulation could raise costs or disrupt operations. The filing reported no known environmental demands, claims or proceedings involving the company or acquired properties.
- Asset retirement obligation: The liability rose from $0.496 million at year-end to $0.799 million, including a $0.212 million estimate revision and $0.067 million of new obligations.
- Equity compensation: 2,562,500 options were outstanding and excluded from diluted loss per share as anti-dilutive. Unrecognized option compensation cost was approximately $6.051 million, expected to be recognized over a weighted-average 2.7 years.
- The company reported cash above federally insured limits. Its financial statements note that interim results are not necessarily indicative of full-year results. Management concluded disclosure controls were effective and reported no material change in internal control during the quarter.
Important facts for investors to verify
- Whether production growth and lower unit operating costs continue, and how realized prices and production volumes develop.
- Whether the single-customer revenue and receivables concentration changes, and what alternatives exist for gathering and transportation.
- Expected acquisition and development spending, funding needs, and the availability and covenant capacity of the revolving credit facility.
- The continuing impact of stock-based compensation, option dilution, and future share issuance on reported losses and per-share results.
- Reserve estimates, depletion and impairment assumptions, and the basis for the asset retirement obligation estimate.