Ring Energy, Inc. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. The interim financial statements are unaudited. Ring owns oil and natural gas properties in Texas and Kansas.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Oil and gas revenue | $10.93 million | $2.82 million | $28.10 million | $5.26 million |
| Net income (loss) | $1.73 million | $(0.13) million | $5.71 million | $(1.99) million |
| Basic EPS | $0.07 | $(0.01) | $0.23 | $(0.13) |
| DD&A expense | $4.49 million | $0.92 million | $9.50 million | $1.66 million |
- Q3 net margin was approximately 15.8%; nine-month net margin was approximately 20.3%, calculated as net income divided by revenue.
- For Q3, oil volume rose to 124,526 barrels from 26,609; realized oil price fell 16% to $87.58 per barrel. Gas volume and realized price also fell, to 8,192 Mcf and $2.92 per Mcf.
- For the first nine months, oil volume increased to 307,003 barrels from 55,116; realized oil price declined 3% to $91.21 per barrel. Gas volume and realized price increased to 23,951 Mcf and $4.24 per Mcf.
- Production costs were $1.35 million in Q3 and $3.20 million for nine months; production taxes were about 5% of revenue in both comparable periods. Management attributed higher operating costs and DD&A primarily to additional drilling and production.
Cash flow, liquidity and capital
- Nine-month operating cash flow was $21.99 million, versus $5.05 million in 2013. Investing cash outflow was $74.01 million, including $73.38 million for property purchases and development.
- Cash declined to $29.07 million at September 30, 2014, from $52.35 million at December 31, 2013. Financing provided $28.74 million, largely from common-stock issuance.
- Current assets were $33.65 million and current liabilities $9.16 million, implying a current ratio of approximately 3.7. The company reported no outstanding borrowings under its credit facility; it had no balance-sheet debt listed in the presented liabilities.
- In July, Ring entered a senior secured revolving facility with a $150 million maximum commitment, a $40 million initial borrowing base, and a July 2019 maturity. The borrowing base is subject to periodic redetermination. Covenants include a maximum 4.0:1 leverage ratio and minimum 1.0:1 current ratio.
- In June, Ring sold 2,000,001 shares at $15 each for $30.0 million gross proceeds; offering costs were $1.47 million. Shares outstanding were 25,725,001 as of November 5, 2014.
Material changes and unusual items
- Revenue increased substantially year over year, chiefly due to higher oil production from the drilling program, while realized oil prices were lower. Ring moved from losses in the 2013 comparison periods to profit in 2014.
- Property and equipment rose to $121.57 million net from $55.42 million at year-end 2013, reflecting acquisitions and development activity. February’s RAW Properties acquisition involved $6.51 million cash consideration; subsequent additional acreage interests cost $1.91 million.
- Deferred income taxes were $4.06 million at September 30, compared with $0.70 million at year-end. The nine-month income tax provision was $3.35 million.
- Asset retirement obligations increased to $2.79 million from $1.18 million, including obligations acquired and incurred during the period.
Outlook, risks and contingencies
The filing provides no quantified production, revenue, earnings, or capital-spending guidance. Management said it intends to pursue producing or developed-undrilled properties, and cautioned that acquisitions and development may require more capital than currently available. Additional financing could involve debt or equity; future results are not assured.
- Key exposures include volatile oil and gas prices, drilling and reserve-estimation risks, access to capital, borrowing-base redeterminations, and environmental and regulatory requirements. All production is sold under market-price or price-sensitive contracts; the company reported no hedging positions in the provided text.
- Two customers accounted for 80% and 14% of nine-month oil and gas revenue and 62% and 23% of accounts receivable, respectively. The company does not require customer collateral.
- Ring reported $95,000 of standby letters of credit, none drawn, and no known environmental demands, claims, litigation, or administrative proceedings involving the company or acquired properties.
- Management concluded disclosure controls were effective at period-end. The filing states there were no off-balance-sheet arrangements.
Most important facts for investors to verify
- Whether production growth and realized pricing can sustain profitability, particularly given the Q3 oil-price decline and higher DD&A.
- The current borrowing base after redeterminations, covenant headroom, and potential financing needs for planned acquisitions and development.
- The durability of cash generation relative to the elevated capital program and the concentration of revenue and receivables among two customers.
- Reserve estimates, future depletion and impairment exposure, and the costs and obligations associated with acquired and developed properties.