Ring Energy, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Ring is a Texas-focused oil and gas producer operating in the Permian Basin. The interim financial statements are unaudited.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Oil, gas and NGL revenue | $79.3 million | $85.0 million | $167.4 million | $153.1 million |
| Operating income | $29.7 million | $54.2 million | $65.3 million | $92.3 million |
| Net income | $28.8 million | $41.9 million | $61.5 million | $49.1 million |
| Diluted EPS | $0.15 | $0.32 | $0.32 | $0.39 |
Q2 revenue declined 7% year over year and net income declined 31%; first-half revenue increased 9% and net income increased 25%. Production rose 85% in Q2 and 95% in the first half, primarily reflecting the Stronghold acquisition and development activity. Lower realized oil prices and sharply weaker natural gas realizations offset volume growth. Q2 realized oil price was $72.30 per barrel versus $109.24; natural gas realization was negative $0.71 per Mcf, with reported sales reflecting processing and transportation fees and weak Permian gas pricing. NGLs were reported separately beginning July 2022, limiting direct year-over-year product comparisons.
Q2 operating costs increased, notably lease operating expense to $15.9 million from $8.3 million and DD&A to $20.8 million from $10.7 million. Higher volumes and acquired properties were key factors. First-half interest expense rose to $20.9 million from $6.7 million, reflecting higher average debt and borrowing rates. Derivative contracts generated a $3.3 million Q2 gain and a $12.7 million first-half gain, compared with losses of $7.5 million and $35.1 million in the respective 2022 periods.
Cash flow, debt and liquidity
First-half operating cash flow was $87.0 million, compared with $65.2 million in 2022. Investing cash use was $83.6 million, including $72.6 million to develop oil and gas properties and $18.5 million of Stronghold-related payments, partly offset by $8.0 million of proceeds from the Delaware property sale. Financing cash use was $5.4 million; the company reported an $18 million net reduction in revolving-credit principal. Cash ended the period at $1.75 million, down from $3.71 million at year-end 2022.
Revolving debt was $397 million, down from $415 million at December 31, 2022. Against a $600 million borrowing base, reported unused capacity was approximately $202.2 million, after standby letters of credit. The facility matures in August 2026, and the company reported compliance with its covenants at June 30. Current assets were $55.1 million and current liabilities were $100.9 million. The company said it expects to fund operations and service debt using cash on hand and operating cash flow, while prioritizing debt reduction, liquidity and capital returns from development.
Developments, outlook and risks
- Management plans to develop its Northwest Shelf and Central Basin Platform acreage, monitor costs, reduce debt and pursue strategic acquisitions and non-core asset sales. The filing provides no specific production, capital-spending or earnings guidance.
- On July 10, 2023, Ring agreed to acquire Founders’ Ector County assets for $75 million cash, subject to customary adjustments; $7.5 million was placed in escrow. The filing does not state that the acquisition had closed.
- Ring completed the Delaware Basin asset sale on May 11 for approximately $8.0 million, subject to final adjustments, and was relieved of approximately $2.3 million of asset retirement obligations.
- Commodity prices and regional gas takeaway constraints remain significant risks. Derivatives provide some downside protection but can limit gains; derivative counterparties are credit risk, and all contracts were with credit-facility lenders.
- Variable-rate debt exposes the company to interest-rate changes: a 1% rate change was estimated to affect annual interest expense by about $4.0 million. Management also identified risks including production and drilling uncertainty, cost inflation, liquidity and reserve-estimate changes.
- A $7.7 million federal tax valuation-allowance release contributed to the first-half tax benefit and increased reported earnings. A lawsuit seeks return of a $5.5 million forfeited deposit plus damages and costs; Ring contests the claims. Management reported disclosure controls were effective.
Important facts for investors to verify
- Whether the Founders acquisition closed, its final purchase price and funding impact on debt and liquidity.
- Gas realizations, processing and transportation charges, and whether Permian takeaway constraints persist.
- Debt paydown progress, borrowing-base redeterminations, covenant compliance and sensitivity to variable interest rates.
- The scale and economics of hedges, including their effect on realized cash flow and exposure to commodity-price changes.
- How much reported earnings depended on the tax valuation-allowance release and unrealized derivative gains.
- Final proceeds and adjustments for the Delaware sale and the status and potential exposure of the deposit litigation.