Business Context and Reporting Period
Company: Ring Energy, Inc.
Filing Type: Form 8-K (Current Report)
Date of Report: December 14, 2009
Reporting Period: Events occurring through December 10, 2009
Context: The company reported on the results of its initial drilling project, the Eastland #1 well, in Howard County, Texas. The company holds a 25% working interest (18.75% net revenue interest) in a 440-acre lease.
Key Financial Metrics
- Drilling and Completion Costs: Approximately $252,000 incurred for the Eastland #1 well.
- Impairment Charge: The company determined the initial drilling and completion costs of approximately $252,000 are fully impaired.
- Initial Investment Recovery: The initial investment of $35,750 for the lease acquisition is projected to be recovered in less than five years.
- Liquidity: Approximately $1,000,000 in liquid assets remaining.
- Production Estimate: Estimated future production is 1-3 barrels of crude oil equivalents per day.
Material Changes and Operational Results
The Eastland #1 well was drilled to approximately 7,800 feet in the Penn Reef formation but was deemed non-commercial in that zone. The company subsequently completed a shallower zone in the Lower Spraberry formation, which yielded a marginally commercial well. Initial production commenced in November 2009. Due to marginal production at current oil prices, the company concluded it would not amortize the $252,000 drilling and completion costs over a commercially reasonable period, necessitating a full write-down of these specific costs. The company noted that the overall acquisition costs for the lease are not deemed financially impaired at this time.
Outlook, Risks, and Management Commentary
- Future Plans: The company has no immediate future plans for alternative drilling or further activities on the subject lease.
- Capital Availability: With approximately $1,000,000 in liquid assets, the company retains the ability to engage in future drilling and completion activities.
- Risks and Contingencies: The company will continue to monitor the fair value of its investment, which may require additional impairments in the future. The filing notes that these matters will be more fully reported in the annual report on Form 10-K.
Investor Verification Checklist
- Verify the full extent of the $252,000 impairment charge in the upcoming Form 10-K.
- Confirm the current status of the 1-3 barrels per day production rate and its sustainability.
- Review the company's capital allocation strategy given the $1,000,000 liquid asset position and lack of immediate drilling plans.
- Monitor for any additional impairment charges related to the fair value of the lease investment.