Ring Energy, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. The interim financial statements are unaudited. Ring is an oil and natural gas exploration and production company operating in the Permian Basin of Texas and New Mexico.
Financial and operating performance
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Oil and natural gas revenue | $68.2 million | $39.5 million |
| Operating income | $38.2 million | $16.3 million |
| Net income (loss) | $7.1 million | $(19.1) million |
| Operating cash flow | $24.4 million | $15.7 million |
| Cash used in investing activities | $14.2 million | $10.2 million |
| Cash used in financing activities | $10.5 million | $7.4 million |
| Cash at quarter-end | $2.1 million | $1.7 million |
| Revolving credit facility outstanding | $280.0 million | Not stated here |
- Revenue rose about 73%, primarily reflecting higher oil prices and increased production. Oil revenue was $63.4 million and gas revenue $4.8 million. Oil volume was 676,215 barrels; natural gas volume was 732,283 Mcf.
- Average realized oil price increased to $93.80 per barrel from $58.00; gas price was $6.49 per Mcf versus $6.46. Total production increased to 798,262 Boe from 716,422 Boe.
- Calculated operating margin was approximately 56% of revenue, compared with 41% a year earlier; calculated net margin was approximately 10%, versus a net loss in Q1 2021.
- Operating costs totaled $30.0 million, including $9.0 million of lease operating expense and $5.5 million of general and administrative expense. G&A increased from $2.9 million, including higher share-based compensation, staffing, insurance and legal costs.
- Derivative contracts generated a $27.6 million loss, comprising approximately $13.5 million of unrealized fair-value loss and $14.1 million of cash settlements. Interest expense was $3.4 million.
- At March 31, total assets were $704.1 million and total liabilities $394.8 million. Current assets of $39.4 million were below current liabilities of $97.8 million; the balance-sheet working-capital deficit was approximately $58.4 million. The company reported compliance with its credit-facility covenants.
Material changes and notable items
- Ring moved from a $19.1 million loss to $7.1 million net income. Management attributed the improvement to higher sales volumes and prices, the prior-year impact of Winter Storm Uri, and a lower total derivative loss.
- Operating cash flow increased by $8.8 million year over year. Development spending increased, while Ring paid down $10.0 million of credit-facility principal during the quarter.
- Derivative liabilities rose to $42.7 million from $29.2 million at December 31, 2021. Derivatives reduce some exposure to falling prices but also limit gains when prices rise.
- No oil and gas property ceiling-test write-down was recorded in either comparable quarter.
- After quarter-end, holders exercised 6,453,907 pre-funded warrants for $0.80 per share, issuing the same number of common shares. The filing reported 106,700,836 shares outstanding as of May 10, 2022.
Outlook, risks and contingencies
- Ring expected to drill 25–33 and complete 25–30 horizontal wells in 2022, and anticipated production growth through the year. It had drilled six wells and placed four new wells into production during Q1; the new wells contributed minimally to that quarter’s production.
- Management planned to prioritize high-return capital spending, maximize free cash flow, reduce debt and consider strategic acquisitions and asset sales. Planned 2022 capital expenditures were expected to be significantly higher than 2021; no specific dollar guidance was provided.
- The $350 million borrowing base was subject to semiannual redetermination. The facility matures in April 2024, is secured by substantially all company assets, and bears variable-rate interest. The reported weighted-average borrowing rate was 4.3%; a one-percentage-point rate change would affect annualized interest expense by approximately $2.8 million at quarter-end debt levels.
- Commodity prices, drilling outcomes, service costs and inflation, transportation access, reserve estimates, regulation, weather, geopolitical developments and COVID-19-related effects could affect results. Three customers represented 70%, 13% and 5% of quarterly revenue; sales are generally unsecured.
- Standby letters of credit totaled approximately $760,000; none had been drawn. The filing describes legal matters in the ordinary course and refers to the 2021 Form 10-K for related proceedings. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether realized oil and gas prices, production volumes and operating costs support the projected drilling program and higher 2022 capital spending.
- Current hedge volumes, prices and settlement exposure; the filing reports different figures for the new 1,000-barrel-per-day swap and the portfolio-wide weighted-average hedge price.
- Liquidity and covenant headroom, including the effect of the next borrowing-base redetermination and the balance-sheet working-capital deficit.
- Debt reduction plans, variable-rate exposure and the ability to fund investment while maintaining liquidity.
- The impact of post-quarter warrant exercises on shares outstanding and potential dilution from remaining warrants and equity awards.