Ring Energy, Inc. — Q1 2021 Form 10-Q
Business context and reporting period. Ring Energy is an independent oil and gas producer operating in the Permian Basin of Texas and New Mexico. This unaudited quarterly report covers the three months ended March 31, 2021; comparisons are with Q1 2020 unless otherwise noted.
Financial results and key metrics
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Oil and gas revenue | $39.5 million | $39.6 million |
| Operating income | $16.3 million | $10.1 million |
| Net income (loss) | ($19.1 million) | $43.8 million |
| Basic and diluted EPS | ($0.19) | $0.64 |
| Cash from operating activities | $15.7 million | $27.5 million |
| Cash and cash equivalents at period end | $1.7 million | $3.6 million at Dec. 31, 2020 |
| Revolving credit borrowings at period end | $305.5 million | $313.0 million at Dec. 31, 2020 |
| Total liabilities | $394.2 million | $368.7 million at Dec. 31, 2020 |
- Production was 716,422 BOE, down about 27% from 983,195 BOE. Oil volume fell to 610,121 barrels from 855,603; natural gas volume declined to 637,808 Mcf from 765,551.
- Average realized oil price rose to $58.00 per barrel from $45.16; gas price rose to $6.46 per Mcf from $1.22. Total realized price increased to $55.14 per BOE from $40.25.
- Lease operating expense was $8.2 million, or $11.48 per BOE, compared with $8.4 million, or $8.57 per BOE. DD&A declined to $8.1 million from $13.7 million.
- Investing activities used $10.2 million, including $11.9 million for development, partly offset by $2.0 million of divestiture proceeds. Financing activities used $7.4 million; the company paid down a net $7.5 million on its credit facility. Cash declined by $1.9 million.
- Current assets of $24.8 million were below current liabilities of $66.9 million. The credit facility borrowing base was $350 million; the company reported compliance with its covenants at quarter-end.
Material changes and notable items
- Revenue was nearly unchanged: higher realized prices largely offset lower production. Oil revenue decreased $3.3 million while gas revenue increased $3.2 million.
- The company reported a $19.1 million net loss versus $43.8 million net income a year earlier. The principal swing was derivative accounting: Q1 2021 included a $31.6 million total derivative-contract loss, versus a $50.4 million gain in Q1 2020. The filing separately describes a $25.7 million noncash fair-value loss and $5.9 million of realized losses in Q1 2021.
- A February Texas winter storm shut in or deferred more than 60% of production for most of the storm. Restoration took more than two weeks; downtime and repair costs raised LOE per BOE. Higher gas prices partly offset the impact.
- In a sale-and-exchange transaction involving Andrews County properties, Ring received $2.0 million and reduced asset-retirement obligations by $2.9 million, while adding $0.7 million of obligations for acquired wells.
- During the quarter, 13.4 million pre-funded warrants and 184,800 common warrants were exercised. At March 31, 29.6 million common warrants remained outstanding. Common shares outstanding rose to 99.3 million from 85.6 million at year-end.
- Ring moved its headquarters to The Woodlands, Texas, closed its Tulsa office, and appointed Travis Thomas as CFO on March 24.
Outlook, risks and contingencies
- Management said 2021 capital expenditures are planned to be 40%–60% above 2020 levels and that production would likely improve. The company intends to prioritize projects with attractive returns and operate within generated cash flow. Its stated program includes drilling up to six to eight horizontal wells and completing eight to ten; four Northwest Shelf wells were completed and online in Q1.
- Management plans to pursue debt reduction through operating cash flow and strategic asset sales, while continuing to evaluate acquisitions. The May semiannual borrowing-base redetermination could affect borrowing availability and liquidity.
- Oil hedges covered 4,500 barrels per day in 2021 through collars and swaps; 2022 swaps covered 2,250 barrels per day. Ring unwound its remaining 2021 and 2022 gas swaps on March 30, receiving $581,424. Derivatives may cushion price declines but can limit gains when prices rise; fair-value movements can materially affect reported earnings.
- Key risks include oil and gas price volatility, production and drilling uncertainty, access to capital and covenant compliance, weather and COVID-19 impacts, reserve-estimate uncertainty, environmental and regulatory obligations, transportation constraints, and customer concentration. Three customers accounted for 88% of Q1 revenue; one represented 82% of receivables.
- The company reported no oil and gas property ceiling-test impairment in Q1 2021 or Q1 2020. It recorded a full $54.4 million valuation allowance against net deferred tax assets and no Q1 income tax expense or benefit. Legal matters are described as arising in the ordinary course; the filing does not specify a quantified material loss contingency.
- Management concluded disclosure controls and procedures were effective at quarter-end. The interim financial statements are unaudited, and management cautioned that Q1 results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Liquidity after the borrowing-base redetermination, including actual undrawn capacity, letters of credit, and compliance with the facility’s financial covenants.
- Cash generation and planned capital spending relative to management’s 2021 production and debt-reduction objectives.
- Production recovery after the winter storm and the persistence of elevated LOE per BOE.
- Hedge volumes, settlement cash flows, and the impact of commodity-price changes on both liquidity and reported earnings.
- Potential dilution from the 29.6 million outstanding common warrants and other equity awards.
- Customer concentration, receivable collections, and the company’s ability to maintain reliable oil and gas transportation.