Ring Energy, Inc. — Q2 2017 Form 10-Q
Business context and reporting period: Ring Energy is an oil and natural gas producer with properties in Texas. This unaudited quarterly report covers the three and six months ended June 30, 2017; interim results are not necessarily indicative of full-year results.
Financial performance and position
- Revenue: Q2 oil and gas revenue was $14.5 million, up from $7.1 million in Q2 2016. First-half revenue was $26.7 million, versus $13.2 million. The increases reflected higher oil volumes and realized prices. Q2 oil volume rose to 306,402 barrels from 160,925; average realized oil price increased 10% to $45.34/barrel. For the first half, oil volume rose to 546,662 barrels and realized price increased 35% to $46.81/barrel.
- Profit: Q2 net income was $1.9 million ($0.04 per diluted share), compared with a $15.9 million net loss in Q2 2016. First-half net income was $3.2 million ($0.06 per diluted share), versus a $31.2 million loss. The filing attributes the improvement primarily to increased sales and no ceiling-test impairment in 2017.
- Operating costs and margins: Production costs were $3.5 million in Q2 and $6.2 million for the first half; production taxes were approximately 5% of revenue. Lease operating expense per BOE decreased to $10.40 in Q2 and $10.26 for the first half. DD&A increased to $5.1 million in Q2 and $8.6 million for the first half, mainly due to higher production. The filing does not report a consolidated operating or net margin percentage.
- Cash flow and spending: First-half operating cash flow was $18.1 million, versus cash used of $3.0 million in 2016. Investing cash outflow was $76.9 million, including $24.7 million for property purchases and $49.2 million for development. Cash declined by $59.0 million to $12.1 million from $71.1 million at year-end 2016.
- Liquidity and debt: At June 30, cash was $12.1 million and current assets were $21.4 million, compared with current liabilities of $24.5 million. Accounts payable was the reported current liability. No borrowings were outstanding under the revolving credit facility, which had a $60 million borrowing base; management reported compliance with its covenants. Total liabilities were $33.0 million, including $8.4 million of asset retirement obligations.
- Equity: Stockholders’ equity was $297.0 million. The company reported 49.2 million shares outstanding at June 30; 54.1 million were outstanding as of August 8.
Changes versus the prior comparable period
- Revenue more than doubled in both the quarter and first half, supported by substantially higher oil production and improved realized prices. Natural gas volumes declined, while realized gas prices increased.
- Net results turned profitable in 2017. The comparison is materially affected by noncash ceiling-test impairment charges recorded in 2016: $25.5 million in Q2 and $46.9 million in the first half; none was recorded in the 2017 periods.
- First-half capital investment rose to $76.9 million from $8.4 million in 2016, contributing to the sharp reduction in cash.
- First-half operating cash flow improved from a use of $3.0 million to a source of $18.1 million. G&A increased to $5.2 million for the first half, primarily due to higher stock-based compensation.
Outlook, risks, and notable items
- No specific earnings, production, or capital-spending guidance is provided. Management says it intends to pursue producing properties and/or developed undrilled properties, but acquisitions may require additional capital.
- On July 21, 2017, after quarter-end, Ring completed a public offering of 4,977,658 shares at $12.50 per share, generating approximately $59.2 million in net proceeds. This subsequent financing is not included in June 30 cash.
- Ring had no oil or gas hedges at June 30 and sells production under market-sensitive contracts. Management identifies commodity-price volatility, development and drilling risks, financing needs, transportation constraints, regulation, environmental obligations, and competition as material risks.
- Two customers accounted for 68% and 27% of first-half oil and gas revenue and 86% and 11% of accounts receivable, respectively. Sales are generally unsecured. Cash exceeded federally insured limits.
- The company reported no off-balance-sheet arrangements and no material changes in internal control during the quarter. Management concluded disclosure controls were effective.
Important facts for investors to verify
- Whether production growth and improved realized prices can be sustained, and how commodity-price changes affect revenue, reserves, and the borrowing base.
- How the large first-half development and acquisition outlays affect liquidity, and the intended use of the post-quarter $59.2 million net offering proceeds.
- The status and terms of the credit facility’s borrowing-base redetermination and covenant calculations, particularly given current liabilities exceeding current assets on the reported balance sheet.
- The degree of continued reliance on the two major purchasers and the collectability and timing of concentrated receivables.
- Whether future full-cost ceiling tests result in impairment charges; such write-downs are noncash and cannot be reversed under the disclosed accounting policy.