Ring Energy, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. The interim financial statements are unaudited. Ring owns oil and natural gas properties in Texas and Kansas.
Financial results and liquidity
| Metric | Q1 2017 | Q1 2016 / comparison |
|---|---|---|
| Oil and gas revenue | $12.24 million | $6.09 million; up $6.15 million (about 101%) |
| Operating income (loss) | $2.50 million | $(23.83) million |
| Net income (loss) | $1.28 million; $0.03 per diluted share | $(15.28) million; $(0.50) per diluted share |
| Cash from operations | $11.02 million provided | $1.74 million used |
| Cash and cash equivalents | $55.42 million at March 31 | $71.09 million at December 31, 2016 |
| Capital spending | $26.54 million cash investing outflow; management reports $31.24 million of capital expenditures | $3.90 million cash investing outflow |
| Debt and credit availability | No borrowings outstanding; $60 million borrowing base under the revolving facility | Facility matures June 2020 |
Current assets were $60.58 million and current liabilities were $18.56 million at quarter-end. The company reported compliance with its credit-facility covenants. The facility has a $500 million maximum commitment, but the borrowing base—not that maximum—was $60 million. Total liabilities were $26.89 million, including $8.33 million of asset retirement obligations.
Changes and operating drivers
- Oil sales volume increased 48,882 barrels to 240,260 barrels; realized oil price rose 67% to $48.69 per barrel. Natural gas volume fell to 168,349 Mcf from 256,748 Mcf, while realized price rose 65% to $3.25 per Mcf.
- Higher oil volume and prices, and higher gas prices, drove revenue growth. Lease operating expense increased to $2.71 million but fell to $10.08 per BOE from $10.64, which management attributed to higher production and improved efficiencies.
- Q1 2017 included no ceiling-test impairment, compared with a $21.41 million non-cash impairment in Q1 2016. This was a major reason for the year-over-year improvement in earnings.
- General and administrative expense rose $621,000 to $2.84 million, primarily due to increased stock-based compensation. DD&A increased modestly to $3.47 million.
- Cash declined by $15.67 million during the quarter, as operating cash flow was more than offset by investment spending. The cash-flow statement also reports $4.70 million of drilling-project expenditures financed through current liabilities, helping explain the difference between cash investing outflows and management’s capital-expenditure figure.
Outlook, risks, and other items
- The filing gives no specific production, earnings, or capital-spending guidance. Management says it intends to pursue producing or developed undrilled properties, but acquisitions could require capital beyond available resources and may require debt or equity financing.
- Ring had no oil or gas hedges at March 31, 2017. Revenue, reserves, borrowing capacity, and cash flow are exposed to volatile commodity prices; all production was sold under market-sensitive contracts.
- Two customers accounted for 61% and 34% of Q1 revenue and 73% and 24% of quarter-end accounts receivable, respectively, creating significant customer concentration risk.
- Other disclosed risks include drilling and development uncertainty, access to capital and services, transportation constraints, environmental and regulatory requirements, competition, and reliance on key personnel. The company reported no known environmental claims or proceedings and no off-balance-sheet arrangements.
- Standby letters of credit totaled $280,000; none had been drawn. Management concluded disclosure controls were effective and reported no material changes in internal control over financial reporting during the quarter.
- Adoption of stock-compensation accounting guidance resulted in a $416,860 Q1 adjustment to income tax provision and a $1.60 million adjustment to beginning deferred taxes and retained loss. Management reported no Q1 ceiling-test write-down.
Important facts for investors to verify
- Whether higher oil prices and volumes, and improved lease operating cost per BOE, persist in subsequent quarters.
- How the May 2017 borrowing-base redetermination affected the reported $60 million availability, and whether covenant compliance continues.
- The composition and timing of capital spending, including the $4.70 million of drilling expenditures recorded in current liabilities, and the effect of investment on cash reserves.
- Exposure to the two major customers and the company’s ability to maintain sales, collections, and transportation arrangements.
- Future commodity-price assumptions and reserve estimates used in ceiling tests, which could trigger non-cash impairments if prices weaken.