Ring Energy, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. The unaudited statements cover an oil and gas producer with properties in Texas and Kansas. Comparisons are with Q1 2015 unless noted.
Financial results and position
| Metric | Q1 2016 | Comparable / balance date |
|---|---|---|
| Oil and gas revenue | $6.09 million | $6.05 million in Q1 2015 |
| Net loss | $15.28 million | $0.98 million loss in Q1 2015 |
| Loss per share, basic and diluted | $0.50 | $0.04 in Q1 2015 |
| Operating cash flow | $(1.74) million | $(6.05) million in Q1 2015 |
| Capital expenditures / investing cash use | $(3.90) million | $(9.79) million in Q1 2015 |
| Cash | $3.81 million | $4.43 million at Dec. 31, 2015 |
| Long-term debt | $50.90 million | $45.90 million at Dec. 31, 2015 |
| Total liabilities | $65.70 million | $64.64 million at Dec. 31, 2015 |
A $21.41 million non-cash ceiling-test impairment drove the much larger loss. The company recorded a $8.97 million income-tax benefit. The filing does not provide a clear consolidated gross or operating margin measure; loss from operations was $23.83 million, versus a $1.55 million loss in Q1 2015.
Material changes and operating trends
- Revenue increased by $46,687, or less than 1%. Oil volume rose to 191,378 barrels from 137,090, while realized oil price fell 33% to $29.20 per barrel from $43.76.
- Natural gas volume increased to 256,748 Mcf from 19,848 Mcf, while realized price fell 17% to $1.97 per Mcf from $2.36. Higher volumes largely offset lower commodity prices.
- Production costs rose to $2.49 million from $1.87 million, primarily due to acquisitions; cost per BOE declined to $10.64 from $13.30, which management attributed mainly to higher production and improved efficiencies.
- Depreciation, depletion and amortization declined to $3.39 million from $3.65 million; the depletion rate fell to $14.16 per BOE from $25.65.
- General and administrative expense increased to $2.22 million from $1.73 million, primarily due to higher cash compensation.
Liquidity, debt and subsequent events
At March 31, the company had $50.9 million outstanding on a senior secured revolving facility, with a $100 million borrowing base and a $500 million maximum facility. It reported compliance with covenants, including a maximum 4.0-to-1.0 leverage ratio and minimum 1.0-to-1.0 current ratio. The facility was subject to semiannual borrowing-base redeterminations, and management warned that lower commodity prices could reduce the borrowing base. A 1% interest-rate increase was estimated to raise annual interest expense by $509,000.
On April 26, 2016, after quarter-end, Ring completed an offering of 11.5 million shares at $5.60 per share, generating approximately $61.1 million net proceeds. It used proceeds to repay the $50.9 million facility balance and related interest. Thus, the March 31 debt and cash figures do not reflect this repayment or the offering. The filing reports 41,896,942 shares outstanding on May 9, 2016.
Management said development would continue but be more limited while commodity prices remained low and unstable, with activity managed around operating cash flow. It discussed potential acquisitions but cautioned that acquiring additional properties could require capital beyond available resources. No formal numerical earnings or production guidance was provided.
Risks, contingencies and other notable items
- Oil and gas prices are volatile; all production was sold under market-sensitive contracts, and Ring had no commodity hedges at March 31. Q1 realized oil prices ranged from $24.78 to $33.57 per barrel and gas prices from $1.03 to $2.49 per Mcf.
- Revenue and receivables were highly concentrated: two customers accounted for 48% and 43% of Q1 revenue; three customers represented 43%, 40% and 15% of accounts receivable. Sales were generally unsecured.
- The impairment reflected the full-cost ceiling-test limit using the preceding 12-month average prices, adjusted for market differentials. Management noted the charge was non-cash, reduced current-period earnings and would lower future DD&A; such write-downs cannot be reversed.
- Other disclosed risks include borrowing-base reductions, drilling and operating hazards, transportation dependence, competition, reserve-estimate uncertainty, environmental and regulatory requirements, and reliance on key personnel. The company had $280,000 in undrawn standby letters of credit for Texas and Kansas.
- Management reported disclosure controls were effective and no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- How commodity prices, realized sales prices and production volumes have changed since quarter-end, and the effect on operating cash flow and reserve economics.
- The updated borrowing-base availability and covenant position after the April debt repayment and subsequent lender redeterminations.
- The basis and sensitivity of the $21.41 million ceiling-test impairment to commodity-price and reserve assumptions.
- Whether customer concentration, receivable collection and transportation arrangements have changed.
- Actual use of offering proceeds, share dilution and the company’s capital-spending plans relative to operating cash flow.