Ring Energy, Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. The interim financial statements are unaudited. Ring owns oil and gas properties in Texas and Kansas.
Financial performance and position
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Oil and gas revenue | $8.63 million | $10.93 million | $23.65 million | $28.10 million |
| Operating income (loss) | $(1.47) million | $2.72 million | $(2.00) million | $8.99 million |
| Net income (loss) | $(1.14) million | $1.73 million | $(1.58) million | $5.71 million |
| Basic loss/earnings per share | $(0.04) | $0.07 | $(0.06) | $0.23 |
- Cash flow: Nine-month operating cash flow was $2.58 million, down from $21.99 million. Investing cash outflow was $99.16 million, primarily for property purchases and development; financing provided $91.07 million.
- Liquidity and debt: Cash was $3.12 million at September 30, down from $8.62 million at year-end 2014. Current assets were $8.82 million and current liabilities $7.53 million. Long-term debt was $40.90 million, all outstanding under the revolving credit facility. The company reported compliance with facility covenants.
- Assets and equity: Total assets were $251.87 million, versus $167.64 million at year-end 2014; stockholders’ equity was $193.09 million. The increase in assets principally reflects the acquisition described below.
- Costs: Nine-month production costs rose to $6.99 million from $3.20 million; DD&A rose to $11.53 million from $9.50 million. Production taxes were about 5% of revenue in both comparable periods. The filing reports Q3 DD&A of $4.67 million in the financial statements; MD&A gives $4.77 million including depreciation, so the presentation differs.
Material changes and transactions
- Revenue fell 21% for Q3 and 16% for the nine-month period year over year, despite higher production volumes. Management attributed the declines primarily to lower realized commodity prices: Q3 oil price per barrel fell 48% to $45.24; nine-month oil price fell 48% to $47.31. Nine-month realized gas price fell 36% to $2.70 per Mcf.
- Oil volumes increased to 181,069 barrels for Q3 and 483,918 barrels for nine months; gas volumes also increased substantially. Management attributed higher operating costs to acquisitions, additional wells, and ad valorem taxes.
- In June, Ring acquired 14,645 gross acres in the Ford West Field and Ford Geraldine Unit in Texas for $75 million cash, assuming approximately $0.74 million of accounts payable and receiving approximately $0.29 million of receivables. Acquisition-related costs were about $0.13 million.
- Ring raised approximately $50.04 million net from a 2015 public stock offering, issuing 4.6 million shares including the over-allotment. The initial proceeds funded the acquisition; over-allotment proceeds funded development. Shares outstanding were 30,391,342 at November 9, 2015.
Outlook, risks, and contingencies
- No specific earnings or production guidance is provided. Management said it intends to pursue producing or developed properties, but additional acquisitions may require capital beyond available resources and could require more debt or equity financing.
- Management noted that oil and gas prices and forecasts had declined. Lower or sustained low prices could reduce revenue, cash flow, borrowing capacity, economically recoverable reserves, and property values, and could lead to impairment.
- The $100 million borrowing base is subject to semiannual redetermination, beginning November 1, 2015; the facility’s stated maximum is $500 million and maturity is June 2020. Interest rates are variable. Ring estimated a 1 percentage-point rate increase would add about $409,000 to annual interest expense at the reported debt level.
- Three customers accounted for 46%, 27%, and 17% of nine-month revenue. Two accounted for 50% and 36% of accounts receivable. Sales are generally unsecured, creating customer concentration and collection risk.
- A putative shareholder class action concerning credit-agreement provisions was dismissed on October 27, 2015. The plaintiff may seek attorneys’ fees; Ring intends to oppose an award and expects any fees to be immaterial. The company also had $280,000 in undrawn standby letters of credit for Texas and Kansas.
- Other disclosed risks include commodity-price volatility, transportation constraints, drilling and acquisition risks, competition, environmental and regulatory requirements, and dependence on key personnel. Management reported effective disclosure controls as of period-end.
Important facts for investors to verify
- Subsequent borrowing-base redetermination and its effect on available liquidity and covenant headroom.
- Production, realized prices, operating costs, and cash generation from the Texas acquisition and existing properties.
- Capital spending plans and funding needs given low cash, reduced operating cash flow, and acquisition ambitions.
- Customer receivable concentration and collection experience, as well as any developments in the dismissed lawsuit or attorneys’ fee request.
- The DD&A presentation difference between the Q3 financial statements and MD&A, and the impact of commodity prices on reserve economics and potential impairment.