RING ENERGY, INC. annual report, FY2013

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Ring Energy, Inc. — 2013 Form 10-K

Business context and reporting period: Annual report for the fiscal year ended December 31, 2013; financial statements are audited. Ring is an oil and gas exploration and production company focused on the Permian Basin in Texas and the Mississippi Lime in Kansas. Its strategy is to develop existing acreage and pursue acquisitions. The 2012 comparison reflects a smaller, earlier-stage business and should be considered in light of substantial growth and equity financing.

Financial and operating results

  • Revenue: Oil and gas sales were $10.32 million, up from $1.76 million in 2012. Oil sales were $10.18 million; natural gas sales were $0.14 million. Higher volumes and realized prices contributed: oil averaged $92.81 per barrel versus $84.50, and gas averaged $3.82 per Mcf versus $3.50.
  • Profit and costs: Net loss narrowed to $452,209 from $1.67 million; loss per share was $0.03 versus $0.21. Operating expenses totaled $10.71 million, including $6.68 million of general and administrative expense. G&A rose $4.29 million, primarily from higher stock-based compensation and salaries.
  • Production and unit costs: Production rose 435% to 115,681 BOE (317 BOE/day annual average), from 21,611 BOE. Average production cost fell to $10.44/BOE from $36.37; production taxes were $4.12/BOE. December 2013 average production was reported at 631 BOE/day.
  • Cash flow and investment: Operating cash flow was $8.12 million, compared with $31,851 used in 2012. Investing activities used $34.44 million, including $29.10 million of development spending and $5.19 million for proved-property acquisitions. Financing provided $73.27 million, largely from stock issuance. Cash increased to $52.35 million from $5.40 million.
  • Liquidity and debt: Working capital was $49.07 million; current liabilities were $7.23 million. No revolving credit borrowings were outstanding at year-end, and the filing reports a $10 million facility, with maturity extended to April 10, 2014. The filing gives differing year-end availability figures ($9.855 million in the notes and $9.905 million in MD&A); the exact amount is unclear.
  • Reserves: Proved reserves were 7.27 million BOE, approximately 94% oil; 72% were proved undeveloped. Reserve PV-10 was $198.4 million (pre-tax, non-GAAP) and the standardized measure was $133.9 million. Estimated future development costs for proved undeveloped reserves totaled $98.3 million, largely scheduled for 2014–2015.

Material changes versus 2012

  • Production and revenue expanded substantially, reflecting acquisitions and development; all 37 oil wells drilled and completed during 2013 were successful.
  • Development costs incurred rose to $29.80 million from $6.58 million. Proved reserves increased from 3.94 million BOE to 7.27 million BOE.
  • Net loss decreased, while G&A, depletion and share-based compensation increased with the company’s growth. Stock-based compensation expense was $3.49 million versus $0.94 million.
  • Cash rose following equity financings, including a December public offering of 5.75 million shares at $10 per share, generating $57.5 million gross and $54.2 million net. Shares outstanding increased to 23.58 million at year-end.
  • HollyFrontier represented 97% of 2013 oil and gas revenue and 99% of year-end accounts receivable; in 2012, three customers accounted for the majority of sales.

Outlook, risks and unusual items

  • Management plans to fund continued drilling and development from cash flow, adjust capital spending to commodity prices, and pursue complementary acquisitions. No specific earnings, production or capital-spending guidance is provided.
  • Ring’s development plan depends on converting a large undeveloped reserve base into production. Commodity-price declines, drilling results, cost overruns, reserve-estimate revisions and access to financing could impair that plan. Management stated its ceiling-test analysis indicated oil prices would need to fall below approximately $60 per barrel, with gas assumptions unchanged, for impairment of producing properties.
  • The company entered a Kansas development agreement with Torchlight Energy Resources: Torchlight is to fund drilling and completion costs up to approximately $6.2 million before the parties share ongoing development costs and production. A February 2014 payment brought receipts to approximately $3.09 million, or half the total expected contribution.
  • After year-end, Ring acquired Permian Basin assets for approximately $6.45 million cash, including developed acreage producing 42 BOE/day. Selling stockholders also received an effective resale registration for up to 3,528,580 shares; proceeds from those resales go to the sellers, not Ring.
  • Controls: Management concluded disclosure controls and internal control over financial reporting were ineffective at December 31, 2013 because accounting staffing was insufficient for adequate segregation of duties and review. Management said it engaged consultants and planned additional hiring; the external auditor did not attest to internal controls.
  • Operations face environmental, regulatory, insurance, gathering and transportation risks. The company reported no material pending or threatened litigation and no off-balance-sheet financing arrangements. It had no plan to pay dividends.

Important facts for investors to verify

  • Whether management addressed the reported material weakness and strengthened accounting staffing, review and segregation of duties.
  • Current credit-facility status and renewal or replacement after its April 10, 2014 maturity, including the discrepancy in reported year-end availability.
  • Actual drilling and conversion results against the approximately $98.3 million development-cost plan and the 2014–2015 reserve schedule.
  • Production, realized pricing and receivables concentration, particularly dependence on HollyFrontier.
  • Actual funding, development and production outcomes under the Torchlight agreement, and performance and integration of the February 2014 acquisition.
  • Reserve assumptions and revisions: PV-10 and standardized measure are estimates, not market value, and depend on prices, costs, timing and development assumptions.