Ring Energy, Inc. — 2012 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2012. Ring is an oil and natural gas acquisition, development, and production company operating in Texas and Kansas. On June 28, 2012, Ring acquired Stanford Energy in a stock-for-stock transaction; Stanford was the accounting acquirer, so the reported periods reflect a reorganization and are not fully comparable.
Financial and operating highlights
| Metric | 2012 | Comparison / context |
|---|---|---|
| Oil and gas sales | $1.76 million | Up from $485,630 across the 2011 successor and predecessor periods combined; the 2012 filing’s comparison periods are not like-for-like. |
| Net income (loss) | $(1.67) million | 2011 successor reported income of $63,165; predecessor reported income of $8,322 for a separate four-month period. |
| Operating income (loss) | $(2.03) million | Costs and operating expenses were $3.79 million. |
| Oil and gas production | 20,531 barrels of oil and 6,480 Mcf of gas | 21,611 BOE total, or 59 BOE/day on an annual average basis; 2011 reported 5,297 barrels, 2,369 Mcf, and 5,692 BOE. |
| Average realized prices | Oil: $84.50/barrel; gas: $3.50/Mcf | 2011: $88.50/barrel and $7.11/Mcf. |
| Production costs | $36.37/BOE | Down from $43.04/BOE in 2011; production taxes were $3.84/BOE. |
| Operating cash flow | $(31,851) | Investing cash outflow was $10.38 million; financing cash inflow was $15.80 million. |
| Cash and working capital | $5.40 million cash; $4.69 million working capital | At year-end 2011, cash was $11,372 and working capital was negative $253,362. |
| Debt and liquidity | No revolving-line balance at year-end | $9.95 million remained available under the $10 million facility, with $145,000 in standby letters of credit. The facility matured May 10, 2013 after an extension. |
| Assets and equity | $28.51 million total assets; $26.20 million stockholders’ equity | Year-end 2011 total assets were $6.74 million and equity was negative $4.11 million. |
Changes, reserves, and capital
- Sales rose primarily because oil volume increased with acquisitions and development, despite lower realized oil and gas prices. General and administrative expense rose to $2.39 million, including $944,681 of share-based compensation; depreciation, depletion, and amortization increased to $506,786.
- Ring incurred $16.45 million in 2012 acquisition and development costs, including $9.87 million for proved properties and $6.58 million for development. It drilled five producing oil wells and one saltwater-disposal well; all were reported successful.
- Year-end proved reserves were approximately 3.94 million BOE, about 93% oil. Approximately 10% were proved developed producing, 12% developed non-producing, and 78% proved undeveloped. Reserves increased from approximately 2.79 million BOE in 2011, with acquisitions and revisions contributing to the increase.
- Estimated year-end reserve value was $106.0 million pre-tax PV-10 and approximately $71.4 million standardized measure. These are reserve valuation measures, not market value or available cash. Estimated future development costs were $66.8 million; the filing projects $22.6 million for 2013 and $44.2 million for 2014 to develop reserves.
- Funding included $13.01 million of net common-stock offering proceeds and $4.49 million in shares issued for property acquisitions. The company stated it would manage capital spending to cash flow and continue to pursue acquisitions.
Outlook, risks, and unusual matters
- Management’s strategy is to develop existing properties and pursue acquisitions, with spending adjusted for commodity prices and cash flow. The development schedule is an estimate, not a guarantee of funding or execution.
- Key risks include oil and gas price volatility, drilling and reserve-estimation uncertainty, and the substantial share of reserves that remains undeveloped and requires significant capital. Management’s sensitivity analysis stated that oil prices would need to fall below approximately $51 per barrel, holding gas-price assumptions constant, for the producing-property ceiling test to result in impairment.
- Three purchasers represented 50%, 25%, and 23% of 2012 revenue; one customer accounted for 94% of year-end receivables. Management believed alternative purchasers were available, but the concentration creates counterparty exposure.
- Management concluded disclosure controls and internal control over financial reporting were ineffective at December 31, 2012, citing insufficient accounting staff, inadequate segregation of duties, and insufficient technical accounting expertise. Management planned to add personnel and expertise during 2013. The auditor did not provide an internal-control attestation.
- The company reported no material litigation, no off-balance-sheet financing arrangements, and no material fourth-quarter adjustments. It reported $496,286 in asset-retirement obligations and $456,807 in future minimum operating lease payments.
- The independent auditor issued an unqualified opinion on the financial statements. The filing also describes subsequent share issuances, expanded authorized share and incentive-plan capacity, and additional option grants after year-end.
Important facts for investors to verify
- Confirm the 2011 comparison basis: selected-data tables show $63,165 of successor income, while combining the separate predecessor period produces $71,487; neither comparison is a full-year like-for-like measure.
- Reconcile reported 2012 loss per share: the selected financial data shows $(0.24), while the audited statements report $(0.21).
- Check the exact standardized-measure total: the filing reports both $71,358,246 and $71,358,446 in different locations, and reserve totals vary by one BOE in places.
- Assess whether the planned reserve-development costs can be funded from operations or additional financing, and whether the largely undeveloped reserve base converts to production as expected.
- Review the remediation of the disclosed material weaknesses, customer and receivables concentration, credit-facility maturity and availability, and subsequent equity and option issuances for dilution and liquidity implications.