Ring Energy, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2020. The interim financial statements are unaudited; 2019 comparative results are identified as restated. Ring is a Permian Basin oil and gas producer operating in Texas and New Mexico.
Financial performance and key metrics
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Oil and gas revenue | $31.5 million | $50.3 million | $81.7 million | $143.5 million |
| Operating income (loss) | $6.5 million | $14.3 million | $(140.3) million | $42.2 million |
| Net income (loss) | $(2.0) million | $8.9 million | $(93.2) million | $24.5 million |
| Net income (loss) per share | $(0.03) | $0.13 | $(1.37) | $0.37 |
| Operating cash flow | Not separately presented | Not separately presented | $44.9 million | $62.6 million |
- Revenue declined 37% in Q3 and 43% for the nine-month period year over year. For Q3, oil sales volume fell to 781,626 barrels from 906,874, and realized oil price fell 29% to $38.80 per barrel. Nine-month oil volume fell 21% and realized price fell 29% to $38.40 per barrel.
- Q3 production totaled 878,480 BOE versus 1,028,812 BOE a year earlier. Reported production was restored to 9,219 net BOEPD in Q3 after broad curtailments in late April and May.
- Q3 operating margin was approximately 21% of revenue, down from 28% a year earlier. Lease operating expense declined to $11.02/BOE from $15.04/BOE, which management attributed to operating efficiencies. Nine-month results include a $147.9 million non-cash ceiling-test impairment of oil and gas properties; no impairment was recorded in Q3.
- Cash and cash equivalents were $17.9 million at September 30, 2020, versus $10.0 million at year-end 2019. Operating cash flow was down 28% year over year. Investing cash outflow was $30.3 million, including $34.8 million of property purchases and development spending, partly offset by $4.5 million of divestiture proceeds.
- Debt was $360.0 million under the revolving credit facility, compared with $366.5 million at year-end 2019. The borrowing base was reduced to $375 million in June; the borrowing-base redetermination scheduled for November was later extended to December. Weighted-average borrowing cost was 4.5%; a 1 percentage-point rate change would affect annualized interest expense by about $3.6 million.
- Current assets were $42.8 million and current liabilities $25.9 million. Ring reported compliance with credit covenants at quarter-end. Stockholders’ equity was $432.8 million, down from $523.5 million at year-end.
Material changes versus prior comparable periods
- Q3 shifted from net income to a net loss as lower commodity prices and revenue, plus a $6.2 million unrealized derivative loss, outweighed cost reductions and realized hedge gains.
- Nine-month net loss principally reflects the $147.9 million impairment following lower commodity-price assumptions. The impairment also reduced the depletion rate used in future periods.
- Ring curtailed most production from late April through early June, resumed production as prices and differentials improved, and reported full production for Q3. Nine-month oil and gas sales volumes were affected by the curtailments and delayed sales of some produced volumes.
- Compared with 2019, nine-month operating cash flow declined by $17.7 million. Capital spending was substantially lower than the prior year, which included the Wishbone acquisition.
Outlook, risks and unusual items
- Management suspended its 2020 capital program amid COVID-19-related demand weakness and commodity-price volatility, after drilling four horizontal wells in Q1. The company said it was considering whether to resume drilling in Q4; no firm production or earnings guidance is provided. Management’s focus is cost reduction and cash preservation, and it said cash, operating and hedge cash flows, and credit-facility availability should fund operations and debt service for at least 12 months.
- Management reduced the 2020 drilling and completion budget by approximately 70% from the beginning-of-year plan. Fewer wells may affect production in 2021 and later periods. Further oil-price weakness could cause additional property impairments.
- Oil hedges included 5,500 barrels per day at a $50 floor for August–December 2020 and 4,500 barrels per day of 2021 collars with floors of $40–$45 and ceilings of approximately $52.71–$55.35. Derivative gains and losses are recognized in earnings; Q3 included a $1.7 million realized gain and $6.2 million unrealized loss. All hedged volumes were with lenders under the credit facility.
- After quarter-end, Ring completed equity offerings issuing 13.1 million common shares, 16.7 million pre-funded warrants and 29.8 million common warrants. Gross proceeds were approximately $20.8 million; anticipated net proceeds were approximately $19.1 million. These securities represent substantial potential dilution.
- After quarter-end, several senior executives and directors departed, and Paul D. McKinney became Chairman and CEO. A planned sale of Delaware Basin assets failed to close; termination had been initiated unless an agreement could be reached. Ring also entered natural-gas swaps for 2021 and 2022.
- Key risks include oil and gas price volatility, COVID-19 and demand uncertainty, credit-facility redeterminations and covenant compliance, access to capital, customer concentration, operational and environmental risks, and potential additional impairments. Two customers represented 78% of nine-month revenue; one accounted for 85% of accounts receivable at quarter-end.
- The filing states that disclosure controls were effective and that procedures were implemented to remediate a material weakness identified in 2019. The cover-page response to whether required Exchange Act reports were filed during the preceding 12 months is marked “No.”
Important facts for investors to verify
- Current borrowing-base availability, covenant headroom and the outcome of the extended December 2020 redetermination.
- Final net proceeds and dilution from the post-quarter equity, pre-funded warrant and common warrant issuances.
- Status and potential proceeds of the failed Delaware Basin asset sale, and whether reduced capital spending affects production and cash flow.
- Commodity-price assumptions and reserve data underlying the $147.9 million impairment, as well as exposure to further write-downs.
- The “No” cover-page filing-status response and the nature and remediation status of the 2019 material weakness.