Ring Energy, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; filed March 16, 2021. Ring is a Permian Basin oil and gas producer operating in Texas and New Mexico. This annual filing includes fourth-quarter results, but is not a standalone quarterly report.
Financial and Operating Performance
| Metric | FY2020 | FY2019 |
|---|---|---|
| Oil and gas revenue | $113.0 million | $195.7 million |
| Net income (loss) | $(253.4) million | $29.5 million |
| Cash from operations | $72.2 million | $106.6 million |
| Capital development spending | $42.5 million | $152.1 million |
| Year-end cash | $3.6 million | $10.0 million |
| Year-end credit facility borrowings | $313.0 million | $366.5 million |
| Negative working capital | $16.1 million | $20.4 million |
- Revenue fell 42% year over year, primarily as oil sales volume declined to 2.80 million barrels from 3.54 million and the average realized oil price fell to $38.95 per barrel from $54.27. Average natural gas price was $1.57 per Mcf versus $1.54.
- Average production was 8,790 BOE/day, down from 10,819 BOE/day. Production costs, including ad valorem taxes, declined to $11.49 per BOE from $12.28; production taxes were $1.63 per BOE versus $2.31.
- The $253.4 million net loss included a $277.5 million non-cash full-cost ceiling impairment. Other notable items included $22.5 million of realized derivative gains and $5.5 million of forfeited deposits from a terminated sale of Delaware Basin assets. Interest expense increased to $17.6 million from $13.9 million.
- Debt was reduced during the year: the company reported $80 million of repayments and $26.5 million of new credit-facility borrowings. The borrowing base was reduced from $425 million to $350 million; year-end debt was approximately 89% of that base. The company reported covenant compliance at year-end, with amended leverage limits including a 4.25-to-1 maximum for the quarter ending March 31, 2021.
- Fourth-quarter revenue was $31.4 million and net loss was $160.3 million. Quarterly results were affected by the impairment; the filing does not provide a clear quarter-specific impairment amount.
Material Changes and Reserves
- In response to the 2020 oil-price collapse and COVID-19 demand shock, Ring cut its planned capital budget by about 70%, suspended drilling for much of the year, and curtailed or shut in most production outside the Delaware Basin from late April into early June. It drilled six Northwest Shelf wells during 2020; all were productive, with two completed in 2021.
- Year-end proved reserves were 76.5 million BOE, down from 81.1 million BOE; 57.5% were proved developed and 42.5% proved undeveloped. Oil represented approximately 87% of reserves. The SEC benchmark oil price used for reserve estimates fell to $36.04 per barrel from $52.19, while standardized discounted future net cash flows declined to $555.9 million from $923.2 million.
- The October 2020 equity and warrant offerings generated $20.8 million gross proceeds and $19.4 million net proceeds. The offerings and subsequent warrant exercises increased potential share dilution. The filing reports 85.6 million shares outstanding at year-end and 99.2 million as of March 16, 2021.
- Leadership changed substantially in the second half of 2020: Paul McKinney became CEO and Chairman effective October 1, with additional executive and board transitions.
Outlook, Risks, and Other Disclosures
- Management’s priorities are free cash flow, cost and capital discipline, debt reduction, and maintaining or modestly growing production. Ring intended to focus 2021 drilling primarily on the Northwest Shelf; no quantified production, spending, or earnings guidance is provided.
- Year-end hedges covered 9,000 barrels of oil per day for 2021 and 1,750 for 2022, plus 6,000 and 5,000 MMBtu/day of natural gas, respectively. 2021 oil collars had an average floor of $42.22 and ceiling of $54.57 per barrel; oil swaps averaged $45.42 in 2021 and $44.84 in 2022. Natural gas swaps were $2.991 and $2.7255 per MMBtu, respectively. Hedges limit exposure to both falling and rising prices and carry counterparty and volume risks.
- Key risks include volatile commodity prices, borrowing-base reductions and covenant constraints, substantial undeveloped reserves and associated development funding needs, customer concentration, environmental and regulatory changes, and operational and reserve-estimation uncertainty. Phillips 66 accounted for 68% of annual sales and 80% of year-end receivables.
- Subsequent events: a January 2021 Andrews County sale-and-exchange transaction provided $2 million cash and was described as reducing plugging obligations while adding future drilling acreage. In January 2021 the company also entered a Woodlands office sublease. No material litigation was disclosed.
- The auditor issued unqualified opinions on the financial statements and internal control; reserve estimation and deferred-tax-asset valuation were identified as critical audit matters. Management said a material weakness identified in 2019 was remediated and controls were effective at year-end.
Investor Verification Priorities
- Reconcile the annual earnings-per-share disclosure: the statements report a $253.4 million net loss but display positive basic and diluted EPS of $3.48, while quarterly EPS is negative. Verify the correct annual EPS in the filed financial statements or subsequent filings.
- Assess debt-service capacity, borrowing-base redeterminations, covenant headroom, and the company’s ability to fund planned development with low cash and negative working capital.
- Review the assumptions behind the $277.5 million impairment, reserve revisions, future PUD development schedule, and reserve values based on the low SEC benchmark prices.
- Check actual 2021 production, capital spending, hedge settlements, and share dilution against management’s stated priorities and year-end hedging position.