Ring Energy, Inc. — Q3 2013 Form 10-Q
Business context and period: Unaudited results for the three and nine months ended September 30, 2013. Ring owns oil and natural gas properties in Texas and Kansas. The filing notes that Stanford Energy, Inc. was the accounting acquirer in the June 2012 combination; historical statements therefore include Stanford for all periods presented and Ring from June 28, 2012.
Financial results
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Oil and gas revenue | $2.82 million | $0.37 million | $5.26 million | $1.05 million |
| Net loss | $131,493 | $631,453 | $1.99 million | $1.80 million |
| Loss per share, basic and diluted | $0.01 | $0.06 | $0.13 | $0.29 |
| Cash provided by operating activities | Not presented quarterly | $5.05 million | $510,642 | |
| Cash used in investing activities | Not presented quarterly | $21.56 million | $5.01 million | |
| Cash from financing activities | Not presented quarterly | $18.98 million | $14.34 million |
- Revenue and production: Q3 oil sales volume rose to 26,609 barrels from 4,386; realized oil price increased 23% to $104.65 per barrel. Nine-month oil volume rose to 55,116 barrels from 11,653, and realized oil price increased 6% to $94.18. Gas volumes increased, while realized gas prices declined in both comparisons.
- Costs and profitability: Q3 total operating costs and expenses were $2.96 million, above revenue, but the net loss narrowed year over year as increased production lifted sales. Nine-month net loss widened, primarily due to higher stock-based and cash compensation, partly offset by revenue growth. General and administrative expense included share-based compensation of $896,325 for Q3 and $2.60 million for the nine-month period.
- Cash flow: Nine-month operating cash flow benefited materially from a $4.06 million increase in accounts payable; accounts receivable used $1.30 million. Capital expenditures totaled $21.48 million for property purchases and development, plus $82,805 for office equipment.
- Balance sheet and liquidity: At September 30, cash was $7.87 million, current assets $9.66 million, and current liabilities $5.25 million. Working capital was approximately $4.41 million. Total assets were $52.72 million and stockholders’ equity $45.79 million. No borrowings were outstanding under the revolving facility; $9.855 million was available, subject to its terms.
- Debt and commitments: The bank revolver provides up to $10 million, bears interest at prime plus 0.75% with a 4% minimum, and matures April 10, 2014. Two stockholders are jointly and severally obligated for outstanding borrowings. Standby letters of credit totaled $145,000 and were undrawn.
Material changes and outlook
- Revenue growth primarily reflected higher production following drilling in late 2012 and in the second and third quarters of 2013. Lease operating expense per BOE declined substantially, to $10.32 in Q3 and $10.99 for nine months, as production increased.
- Ring raised approximately $18.54 million net from a June 2013 private placement of 3,528,580 shares at $5.50 per share; it also issued 100,000 shares in January for $450,000. Shares outstanding were 17,801,313 at November 4, 2013.
- After quarter-end, Ring entered a joint development agreement with Torchlight Energy Resources for approximately 17,000 Kansas acres. Torchlight is to fund drilling and completion costs until it has matched approximately $6.2 million of Ring’s Kansas lease costs; afterward, the parties share ongoing development costs, production, and revenue equally. Ring will operate the acreage.
- No formal earnings or production guidance is provided. Management says it intends to pursue producing or developed undrilled properties, but additional acquisitions may require capital beyond available resources and could require debt or equity financing.
- Key risks include volatile commodity prices, dependence on a single customer, drilling and reserve-estimation uncertainty, access to capital, transportation constraints, environmental and regulatory requirements, competition, and reliance on key personnel. Management reported no known environmental demands or proceedings and no off-balance-sheet arrangements. Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting.
Most important facts to verify
- Customer concentration: one customer accounted for 96% of nine-month oil and gas revenue and 98% of accounts receivable at September 30.
- Quality of operating cash flow, given the sizable accounts-payable increase and the company’s substantial development spending.
- Revolver availability, covenants, April 2014 maturity, and the stockholders’ guarantee arrangement.
- Terms, timing, and funding mechanics of the Torchlight Kansas development agreement, including the approximately $6.2 million cost-match threshold.
- Production and reserve performance supporting the sharply higher revenue and lower operating cost per BOE, and the effect of commodity-price changes.
- Future dilution and compensation expense: 2,562,500 options were outstanding, with approximately $5.16 million of unrecognized compensation cost at quarter-end.