Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2012, for Ring Energy, Inc. (Ring). The filing reflects the consolidation of Stanford Energy, Inc. (Stanford), which was acquired by Ring on June 28, 2012, via a stock-for-stock exchange. Under accounting rules, Stanford is deemed the accounting acquirer; thus, the historical financial statements presented are those of Stanford, adjusted for the transaction. The company operates in the oil and natural gas sector, primarily in the Permian Basin of Texas.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2012 | Six Months Ended June 30, 2011 |
|---|---|---|
| Oil and Gas Revenues | $670,525 | $109,434 |
| Net Loss | $(1,171,651) | $(16,913) |
| Net Cash Used in Operating Activities | $(508,998) | $(16,581) |
| Net Cash Used in Investing Activities | $(681,169) | $(2,088,988) |
| Net Cash Provided by Financing Activities | $7,793,133 | $2,123,428 |
| Cash and Cash Equivalents (Ending) | $6,614,338 | $21,443 |
| Total Assets | $14,143,202 | $6,742,885 |
| Total Liabilities | $5,880,760 | $10,849,395 |
| Stockholders' Equity | $8,262,442 | $(4,106,510) |
Debt and Liquidity: The company maintains a revolving line of credit of up to $10 million. As of June 30, 2012, $5,000,000 was outstanding (classified as current), with $4,950,000 available. The interest rate was 4.00%.
Material Changes vs. Prior Period
- Revenue Growth: Oil and gas revenues increased by approximately 512% year-over-year, driven by higher production volumes from acquisitions (Fisher I, Miocene, and Fisher II properties) despite a decrease in average realized oil prices (from $98.36 to $90.64 per barrel).
- Expense Surge: General and administrative expenses increased significantly to $1,154,499 (from $28,856), primarily due to $445,234 in share-based compensation and contract staff costs.
- Net Loss Expansion: Net loss widened to $(1,171,651) from $(16,913), largely attributable to the increase in compensation expenses and interest expense ($187,846 vs. $8,754).
- Balance Sheet Transformation: Total assets more than doubled to $14.1 million, and the company moved from a stockholders' deficit of $(4.1) million to equity of $8.3 million. This shift was driven by the issuance of common stock to Ring Energy shareholders valued at $13.1 million and cash proceeds from the transaction.
Guidance, Outlook, and Risks
Management Commentary: Management intends to acquire producing or developed undrilled properties rather than exploratory ones. The company plans to continue leasing mineral interests and developing properties. Five new wells were drilled subsequent to the reporting period and are expected to be completed in the third quarter.
Risks and Contingencies:
- Market Risk: The company is highly sensitive to volatile oil and natural gas prices. A substantial decline could materially adversely affect financial position and reserves.
- Customer Concentration: Three customers represented 98% of oil and gas revenues during the six months ended June 30, 2012.
- Derivative Liability: The company holds a derivative put option liability of $183,328 related to prior acquisitions, which is remeasured to fair value each period.
- Environmental: Operations are subject to federal and state regulations; non-compliance could result in fines or operational injunctions.
Subsequent Events: Following June 30, 2012, the company sold 691,412 shares of common stock in private placements for gross proceeds of approximately $3.1 million.
Investor Verification Checklist
- Verify the sustainability of the $6.6 million cash balance given the net operating cash burn of $509,000 for the six-month period.
- Confirm the valuation assumptions used for the derivative put option liability ($183,328) and its impact on future earnings.
- Assess the impact of the significant increase in share-based compensation ($445,234) on future profitability as options vest.
- Review the status of the five wells drilled post-period and their expected contribution to production volumes.
- Monitor the concentration risk associated with the top three customers representing nearly all revenue.