Ring Energy, Inc. — 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. This filing is an annual report; the supplied text does not provide a clear standalone fourth-quarter income statement.
Business context
Ring is an independent oil and gas producer focused on the Permian Basin, operating in the Northwest Shelf, Central Basin Platform and Delaware Basin. At year-end, it reported 124,217 gross (102,175 net) acres, 1,056 gross (888 net) producing wells and 138.1 million Boe of proved reserves. The Stronghold acquisition, completed August 31, added approximately 37,000 net acres in the Central Basin Platform.
Key financial and operating metrics
| Metric | 2022 | 2021 |
|---|---|---|
| Oil, gas and NGL revenue | $347.2 million | $196.3 million |
| Operating income | $191.7 million | $95.8 million |
| Net income | $138.6 million | $3.3 million |
| Operating cash flow | $197.0 million | $72.7 million |
| Capital spending and acquisition cash outflows | $308.9 million net investing outflow | $51.2 million net investing outflow |
| Year-end revolving debt | $415.0 million | $290.0 million |
| Year-end cash | $3.7 million | $2.4 million |
| Working capital | Negative $78.0 million | Negative $46.9 million |
| Average production | 12,364 Boe/d | 8,518 Boe/d |
Oil sales rose to $321.1 million, with realized oil price increasing to $92.80 per barrel from $67.56 and oil volumes rising to 3.46 million barrels. Total production increased 45%, mainly from Stronghold and development activity. Total average realized price was $76.95/Boe versus $63.14/Boe. Lease operating expense rose to $10.57/Boe from $9.75; production taxes rose to $3.80/Boe from $2.93. G&A, including stock compensation, increased to $27.1 million, including $2.1 million of acquisition-related costs.
Net income benefited from higher sales and lower derivative losses than in 2021, partly offset by higher operating costs, depletion, G&A, interest and taxes. Derivative contracts produced a $21.5 million loss in 2022, versus a $77.9 million loss in 2021; 2022 included $62.5 million of realized settlement losses and a $41.0 million unrealized gain. The filing reports no ceiling-test impairment in 2022 or 2021; 2020 included a $277.5 million non-cash impairment.
Year-end liquidity was reported at approximately $188 million, comprising $184.2 million of undrawn facility availability and $3.7 million cash. The $600 million borrowing base is subject to semiannual redetermination; the facility matures in August 2026. The company reported covenant compliance at year-end. Annual interest rate was 5.8%; management estimated a 1 percentage-point rate change would affect annual interest expense by about $4.2 million. Proved reserves increased 78% to 138.1 million Boe; 65% were proved developed and 35% proved undeveloped. Standardized measure of discounted future net cash flows was $2.27 billion; pre-tax PV-10 was $2.77 billion, both reserve estimates rather than market valuations.
Material changes versus prior year
- Stronghold expanded the asset base and contributed to higher production and reserves. Total acquisition consideration was approximately $394.0 million, including cash, common and convertible preferred shares, and assumed liabilities; preferred shares converted into 42.5 million common shares.
- Revenue increased 77% and operating cash flow rose from $72.7 million to $197.0 million. Production grew 45%; oil prices and volumes both increased.
- Debt increased by $125 million year over year. The renewed credit agreement raised the borrowing base to $600 million, extended maturity to 2026 and transitioned the reference rate to SOFR.
- Common shares outstanding increased to 175.5 million at year-end from 100.2 million, largely due to acquisition consideration. The filing also identifies potential resale of 63.9 million acquisition shares and outstanding warrants as stock-price overhang.
- Beginning July 2022, Ring reported NGLs separately from natural gas; comparisons of gas and NGL volumes and prices are affected by this presentation change.
Outlook, risks and unusual items
No specific production, revenue or earnings guidance is provided in the supplied filing text. Management says it intends to balance debt reduction with development spending to maintain or grow production, fund the capital program primarily from operating cash flow, and consider strategic acquisitions and non-core asset sales. It expected inflationary pressure on operating and capital costs to continue in 2023. The 2023 PUD development plan estimates approximately $102.8 million of development costs.
- Commodity-price volatility, inflation, higher interest rates, drilling execution, reserve-estimate uncertainty and the ability to fund development could affect results and liquidity. Hedging limits some downside exposure but can constrain gains; the credit agreement requires hedging of a portion of projected production.
- Environmental and climate rules, methane fees, permitting, water availability and wastewater disposal requirements could increase costs or delay operations. The company operates mainly in Texas and New Mexico and reported only 240 net federal-land acres.
- Three customers accounted for 86% of 2022 sales; Phillips represented 69% of year-end receivables. This creates customer concentration and collection risk.
- A lawsuit over a failed proposed asset sale seeks return of a $5.5 million forfeited deposit plus damages and fees. Ring says it considers the claims without merit and is defending the case; the filing text does not provide a clear estimate of potential loss.
- After year-end, Ring paid Stronghold the $15.0 million deferred consideration and distributed an approximately $8.3 million escrow holdback. Warrant exercises in February and March 2023 generated approximately $3.6 million in proceeds.
- Auditors gave unqualified opinions on the financial statements and internal controls; management also concluded controls were effective. Reserve estimation and valuation of acquired properties were identified as a critical audit matter.
Investor verification points
- Reconcile acquisition consideration, associated cash outflows, assumed liabilities and the subsequent $15.0 million payment and $8.3 million holdback distribution.
- Assess debt-service capacity, borrowing-base redetermination exposure, covenant headroom and sensitivity to commodity prices and interest rates.
- Review the production, costs and reserve contribution from Stronghold, including assumptions behind the 48.0 million Boe of proved undeveloped reserves and planned development spending.
- Evaluate hedge volumes, prices, settlement cash flows and the extent to which hedges limit participation in higher commodity prices.
- Monitor customer concentration, the EPUS litigation, potential share sales and warrant exercises, and the effect of the three-stream reporting change on comparisons.