Ring Energy, Inc. — 2014 Form 10-K Summary
Business context and reporting period
Annual report for the fiscal year ended December 31, 2014, filed March 16, 2015. Ring is a Midland-based oil and gas exploration and production company focused on the Central Basin Platform in Andrews and Gaines Counties, Texas, with additional acreage in Kansas. Operations are oil-weighted; substantially all proved reserves are in Texas.
Financial and operating performance
| Metric | 2014 | 2013 |
|---|---|---|
| Oil and gas revenue | $38.1 million | $10.3 million |
| Operating income (loss) | $12.6 million | $(0.4) million |
| Net income (loss) | $8.4 million | $(0.5) million |
| Diluted earnings (loss) per share | $0.33 | $(0.03) |
| Cash from operations | $33.7 million | $8.1 million |
| Cash at year-end | $8.6 million | $52.4 million |
| Working capital | $(1.2) million | $49.1 million |
- Production rose to 463,495 BOE from 115,681 BOE. Average daily production for December 2014 was reported at 1,935 BOE/d.
- Average realized oil price declined to $83.06 per barrel from $92.81; gas price declined to $3.53 per Mcf from $3.82. Production costs were $10.77 per BOE, versus $10.44.
- Capital spending and property acquisitions used $106.2 million of investing cash in 2014, including $90.2 million for development and $15.1 million for property purchases.
- Year-end total assets were $167.6 million, liabilities $25.1 million, and stockholders’ equity $142.5 million. No borrowings were outstanding under the credit facility at year-end.
- Proved reserves totaled 10.41 million BOE, up from 7.27 million BOE. Approximately 98% were oil; 35% were proved developed producing, 8% developed non-producing, and 57% proved undeveloped. Pre-tax PV10 was $281.7 million and the standardized measure was $196.3 million.
- Fourth-quarter 2014 revenue was $10.0 million and net income was $2.7 million, compared with fourth-quarter 2013 revenue of $5.1 million and net income of $1.5 million.
Material changes versus the prior comparable period
- Revenue increased about 269%, primarily from higher oil volumes following acquisitions and development; lower realized prices partly offset the volume gains.
- Net income improved from a loss to profit. Higher production, depletion and amortization, and income tax expense accompanied the growth; 2014 income tax provision was $4.2 million.
- Cash from operations increased, but cash declined substantially as the company funded an accelerated development program and acquisitions. Capitalized oil and gas properties increased to $166.0 million from $58.0 million.
- The company issued 2.0 million shares in a 2014 private placement, generating $28.5 million net. Shares outstanding were 25.7 million at March 10, 2015.
Outlook, risks, contingencies, and unusual items
- Management plans to develop existing acreage, convert undeveloped reserves, pursue acquisitions, and adjust capital spending to cash flow and commodity prices. It identified 239 proved vertical drilling locations and 2,480 additional potential locations based on 10-acre spacing. Kansas drilling was temporarily paused for a 3-D seismic evaluation.
- The reserve report estimates $113.1 million of future development spending, including $48.9 million in 2015 and $64.1 million in 2016. These estimates depend on reserve, price, cost, funding, and development-timing assumptions.
- Commodity-price declines are a central risk. Management stated the oil price used in its ceiling-test sensitivity would need to fall below $69.99 per barrel to trigger impairment of producing properties under that analysis; no ceiling-test impairment had been recorded. Reserve values and PV10 are estimates, not market values.
- A $150 million senior secured revolving facility was established in July 2014 with an initial $40 million borrowing base, subject to redetermination and financial covenants. The filing reports a subsequent $5 million draw after year-end. The facility is secured by substantially all company assets.
- Liquidity risks include negative year-end working capital, substantial planned development spending, borrowing-base redeterminations, and dependence on operating cash flow or external financing. The filing also reports $1.5 million of future operating lease payments.
- Customer concentration is material: two purchasers accounted for approximately 75% and 18% of 2014 oil and gas revenue and 45% and 37% of year-end accounts receivable. The filing states alternative buyers are available, but receivables are generally unsecured.
- Other risks include reserve-estimation uncertainty, drilling and operating hazards, environmental and regulatory costs, transportation access, and limited insurance coverage. No material litigation or off-balance-sheet financing arrangements were reported. The independent auditor gave unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- How the post-year-end $5 million credit-facility draw and subsequent borrowing-base determinations affect liquidity and planned capital spending.
- Whether the company can execute the forecast PUD development schedule and fund the associated $113.1 million of estimated costs.
- The sensitivity of reserve values, ceiling-test headroom, and borrowing availability to lower oil prices; verify the SEC pricing assumptions behind reported reserve values.
- Production growth, well-level returns, and realized oil prices after the sharp late-2014 market decline.
- Purchaser concentration and collection of receivables, as well as dilution from outstanding options and future equity financing.