RING ENERGY, INC. quarterly report, Q1 FY2015

Ring Energy, Inc. — Q1 2015 Form 10-Q

Reporting period: Three months ended March 31, 2015. The unaudited consolidated statements cover Ring Energy and its subsidiary. The company owns oil and natural gas properties in Texas and Kansas.

Financial performance

MetricQ1 2015Q1 2014
Oil and gas revenue$6.05 million$5.97 million
Operating income (loss)$(1.55) million$1.80 million
Net income (loss)$(0.98) million$1.16 million
Basic and diluted EPS$(0.04)$0.05
Cash from operating activities$(6.05) million$7.53 million
Cash used in investing activities$(9.79) million$(22.10) million
Cash from financing activities$10.06 million$(0.04) million

Revenue was nearly flat despite higher production volumes, as lower realized commodity prices offset volume growth. Oil volume increased to 137,090 barrels from 63,944; average realized oil price fell 53% to $43.76 per barrel. Natural gas volume increased to 19,848 Mcf from 8,617 Mcf; average realized price fell 52% to $2.36 per Mcf.

Operating expenses rose to $7.60 million from $4.17 million. Production costs increased to $1.87 million from $0.77 million, including higher costs from additional wells and severe winter weather; production cost per BOE rose to $13.30 from $11.79. DD&A increased to $3.65 million from $1.53 million, primarily due to higher production. General and administrative expense was $1.73 million versus $1.56 million. The resulting operating margin was approximately negative 25.6%, versus positive 30.2% a year earlier. The net loss included a $0.57 million income-tax benefit.

Financial position and liquidity

At March 31, 2015, cash was $2.85 million, down from $8.62 million at year-end 2014. Current assets were $8.85 million and current liabilities $6.93 million, implying a current ratio of approximately 1.28. Total assets were $167.58 million and total liabilities $25.29 million. Long-term debt was $10.00 million, compared with none at December 31, 2014.

Operating cash use was driven in part by a $9.33 million reduction in accounts payable. Capital spending totaled $9.79 million, including $8.67 million to develop oil and gas properties. The company drew $10.00 million under its secured revolving credit facility. The facility has a $150 million maximum commitment and a $40 million initial borrowing base, matures July 1, 2019, and is secured by substantially all company assets. The company reported compliance with its covenants at March 31, including a maximum 4.0-to-1 leverage ratio and minimum 1.0-to-1 current ratio.

Changes, outlook, risks, and other matters

  • The company shifted from prior-year profit and positive operating cash flow to a net loss and operating cash outflow. Management attributed the earnings decline primarily to lower oil and gas prices.
  • Management said oil and gas prices had declined significantly and forecast prices for the remainder of 2015 had also fallen. The filing provides no specific production, earnings, or capital-spending guidance.
  • Management expects production taxes to remain relatively steady absent rate changes or acquisitions. It noted G&A may rise as the company grows and hires personnel.
  • Key risks include commodity-price volatility, reduced cash available for development, possible lower borrowing capacity after borrowing-base redeterminations, drilling and reserve-estimation risks, gathering and transportation constraints, customer concentration, and environmental and regulatory requirements.
  • Three customers accounted for 94% of Q1 oil and gas revenue; the largest represented 50%. The same customers represented 85% of accounts receivable. Sales are generally unsecured. The company also reported $3.00 million of joint-interest receivables.
  • The company reported no known environmental claims or proceedings involving it or acquired properties and no off-balance-sheet arrangements. Standby letters of credit totaled $145,000, with no amounts drawn.
  • Management concluded disclosure controls and procedures were effective as of period-end. The interim statements are unaudited and should be read with the 2014 Form 10-K.

Important facts for investors to verify

  • Whether subsequent oil and gas prices, production volumes, and realized pricing support cash generation after the sharp year-over-year price declines.
  • Cash needs for planned development and acquisitions, and the company’s capacity to fund them without further borrowing or equity issuance.
  • Results of credit-facility borrowing-base redeterminations, available borrowing capacity, interest costs, and continued covenant compliance.
  • Trends in operating costs, production per BOE, and DD&A, as well as any impairment effects from lower commodity-price assumptions.
  • Customer concentration and collectability of oil and gas and joint-interest receivables.
  • The filing’s market-risk section refers to $10 million outstanding “as of May 31, 2015,” a date after the March 31 reporting period; verify the applicable measurement date and balance.