RING ENERGY, INC. annual report, FY2017

Ring Energy, Inc. — FY 2017 Form 10-K

Reporting period: Fiscal year ended December 31, 2017; filed March 15, 2018. Ring is a Texas-focused oil and gas exploration and production company operating in the Permian Basin, principally in Andrews and Gaines counties and in Reeves and Culberson counties.

Financial and operating results

Metric	FY 2017	FY 2016
Oil and gas revenue	$66.7 million	$30.9 million
Operating income (loss)	$16.0 million	($57.0 million)
Net income (loss)	$1.8 million	($37.6 million)
Net earnings (loss) per diluted share	$0.03	($0.97)
Cash from operations	$42.8 million	$11.2 million
Cash at year-end	$15.0 million	$71.1 million

Production increased 64% to 1.44 million BOE, or 3,941 BOE per day on average. Oil production rose to 1.31 million barrels; natural gas production declined to 761,517 Mcf.
Average realized prices increased to $48.97 per barrel of oil and $3.23 per Mcf of gas, from $39.28 and $2.50, respectively, in 2016. Average production cost declined slightly to $11.11 per BOE; production taxes increased to $2.19 per BOE.
Operating margin was approximately 24% of revenue and net margin approximately 3%. Results benefited from higher volumes and prices and no ceiling-test impairment, compared with a $56.5 million noncash impairment in 2016.
2017 operating cash flow funded only part of investment: investing cash outflow was $157.9 million, including $124.7 million of development costs and $28.7 million for proved-property acquisitions. The company raised $59.0 million net through a common-stock offering. Cash declined by $56.1 million during the year.
Year-end working capital was negative $19.3 million. Current assets were $29.1 million and current liabilities $48.4 million, including $44.5 million of accounts payable and $4.0 million of derivative liabilities.
No credit-facility borrowings were outstanding at year-end; the borrowing base was $60 million. Total liabilities were $57.5 million, including $9.1 million of asset retirement obligations. Ring reported compliance with facility covenants.

Reserves, capital and material changes

Proved reserves were 31.95 million BOE at year-end, approximately 91% oil; about 45% were proved developed producing, 10% developed non-producing and 45% proved undeveloped. Reserves increased from 27.74 million BOE in 2016.
Estimated year-end reserve value was $382.1 million pre-tax PV10 and $322.5 million standardized measure. These are reserve-based estimates, not market valuations. The reserve report used average prices of $47.934 per barrel of oil and $3.614 per Mcf of gas.
Ring drilled 47 horizontal development wells, five vertical development wells and three science wells in 2017. Twenty horizontal wells had been drilled but not yet completed and producing at year-end.
Revenue more than doubled, reflecting both higher oil volumes and improved realized prices. Net income returned to positive territory from a substantial 2016 loss; the absence of the prior-year impairment was a major comparison benefit.
Despite positive annual net income, the fourth quarter recorded a $4.5 million net loss on $23.3 million revenue. Quarterly results included a $4.0 million unrealized derivative loss for the year, largely reflected in the fourth-quarter result.

Outlook, risks and unusual items

Management intends to grow reserves and production through development drilling, converting undeveloped reserves, and acquisitions. The reserve plan estimates $57.8 million of development costs for 2018; this is a reserve-development estimate, not formal company-wide earnings or production guidance.
After year-end, Ring drew $10 million on its credit facility and completed an offering of 6.164 million shares at $14 per share, generating approximately $81.8 million net. The offering increased shares outstanding from 54.2 million at year-end to 60.4 million as of March 14, 2018.
Ring entered 2018 with costless oil collars covering 2,000 barrels per day: 1,000 BOPD with a $49 floor and $54.60 ceiling, and 1,000 BOPD with a $51 floor and $54.80 ceiling. These limit exposure to both falling and rising prices on hedged volumes.
The Tax Cuts and Jobs Act led to a provisional $6.6 million deferred-tax-asset adjustment and contributed to the $10.4 million 2017 income-tax provision. The filing says the tax accounting remained subject to measurement-period refinement.
Key risks include commodity-price volatility, development and reserve-estimation uncertainty, significant capital needs for undeveloped reserves, possible full-cost ceiling impairments, and customer concentration. Two customers accounted for 76% and 18% of annual revenue; Oxy represented 88% of year-end receivables. Plains began purchasing volumes previously sold to Enterprise in December 2017.
The company reported no material pending or threatened litigation and no known environmental claims or proceedings involving it or acquired properties. It maintains insurance for some, but not all, operational risks. The auditor gave an unqualified opinion on the financial statements and internal controls.

Important facts for investors to verify

Whether production growth, well completions and reserve conversions generate operating cash sufficient to support planned development and reduce reliance on external financing.
The status and terms of the subsequent $10 million credit-facility draw, remaining borrowing availability, covenant headroom and borrowing-base redeterminations.
The realized economics and performance of the 20 horizontal wells awaiting completion at year-end, and the assumptions behind the 2018 reserve-development schedule.
How commodity prices, reserve revisions and future development costs affect the full-cost ceiling test and the reported reserve values.
Customer concentration, receivable collection and the practical effect of shifting Enterprise volumes to Plains; also review the costs and consequences of the oil collars.
The dilution and use of proceeds from the post-year-end equity offering, alongside the company’s continued capital requirements and lack of expected cash dividends.