Ring Energy, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2012. The unaudited statements principally reflect Stanford Energy, Inc., Ring’s accounting acquirer; Ring’s June 28, 2012 stock-for-stock transaction means prior-period comparisons are not fully like-for-like.
Financial performance and position
| Metric | 2012 period | Comparable period / balance |
|---|---|---|
| Revenue | $374,739 for Q3; $1,045,264 for nine months | Q3 2011: $162,527. Nine-month 2011: $271,960 as described in MD&A; the statements present separate predecessor and successor periods. |
| Net income (loss) | Q3: $(631,453), or $(0.06) per share; nine months: $(1,803,104), or $(0.29) per share | Q3 2011: $126,876; nine-month 2011: $109,963 in MD&A, with predecessor/successor presentation affecting comparability. |
| Operating costs | Q3 total costs and operating expenses: $1,027,672; nine months: $2,775,410. G&A was $671,438 and $1,825,937, respectively. | G&A increases were attributed mainly to share-based compensation and contract staff. |
| Cash flow | Net cash from operations: $510,642; investing outflow: $5,014,880; financing inflow: $14,339,116; ending cash: $9,846,250. | MD&A reports operating cash flow of $515,038, differing from the statement amount. |
| Liquidity and debt | Current assets: $10,097,772; current liabilities: $1,798,474. No revolving-line balance or note payable was reported at September 30. | $9,950,000 was available under the $10 million credit facility, including the effect of $50,000 in standby letters of credit. Rate was 4%; maturity extended to May 10, 2013. |
| Equity and assets | Total assets: $22,228,092; stockholders’ equity: $20,126,329; oil and gas properties, net: $12,130,320. | At December 31, 2011, total assets were $6,742,885 and stockholders’ deficit was $(4,106,510). |
Material changes and operating commentary
- Q3 revenue rose $212,212 year over year, principally due to higher production following 2011 acquisitions. Oil volume increased to 4,386 barrels from 1,871; realized oil price rose to $85.28 per barrel from $83.22. Gas volume and realized price declined.
- Nine-month revenue increased to $1,045,264, primarily from higher production. Oil volume was 11,653 barrels versus 2,983; realized oil price was $88.62 per barrel versus $88.87. Gas price fell 51% to $3.77 per MCF.
- Production costs increased with acquired properties and work to improve property condition. Management said salt-water disposal costs included $74,755 in Q3 and $183,448 year to date, and expected those costs to end once its disposal well was operational.
- Management identified compensation expense as the primary reason for the shift from profit to loss. Share-based compensation was $707,090 for the nine months, with approximately $1,580,789 of unrecognized option compensation cost remaining.
- The company reported no cash borrowings on its revolving facility at quarter-end, after paying $9,244,428 on the line during the nine months. Equity issuance and the Ring transaction were major financing sources.
Outlook, risks and unusual items
- No specific revenue, earnings, production, or capital-spending guidance is provided. Management intends to pursue producing or developed-undrilled properties, but says acquisitions may require additional debt or equity financing and may not be completed.
- Key exposures include volatile oil and gas prices, development and acquisition uncertainty, environmental and plugging obligations, and dependence on existing gatherers. Three customers accounted for 36%, 35%, and 27% of nine-month oil and gas revenue.
- The company reported a $303,289 asset-retirement obligation and a $130,104 fair-value liability for put options on shares issued in a property acquisition. A $50,000 standby letter of credit was outstanding, with no draw reported.
- After quarter-end, Ring sold 327,223 shares for gross proceeds of $1,472,504 and agreed to acquire additional Permian Basin properties for $1,990,000, comprising $1,000,000 cash and 220,000 shares.
- Management stated that disclosure controls were effective and that no material change in internal control over financial reporting occurred during the quarter.
Important facts for investors to verify
- Reconcile the filing’s differing operating-cash-flow figures ($510,642 in the cash-flow statement versus $515,038 in MD&A) and the predecessor/successor basis of prior-period results.
- Confirm the status and timing of the salt-water disposal well and whether the cited disposal costs are actually eliminated.
- Review credit-facility covenants, the May 2013 maturity, and the consequences if further acquisition funding is needed.
- Assess customer concentration, commodity-price sensitivity, environmental exposure, and the adequacy of asset-retirement estimates.
- Reconcile post-quarter share issuances and the reported November 5 share count of 13,541,011 with the September 30 balance and disclosed subsequent placement.