Business Context and Reporting Period
Company: Ring Energy, Inc. (Nevada Corporation)
Filing Type: Form 10-K (Annual Report)
Period Ended: September 30, 2009
Business Overview: Ring Energy is a development-stage entity that transitioned from mining to oil and gas exploration in March 2008. In May 2009, the company acquired a 25% working interest in the Anderson Project in Howard County, Texas. The company drilled its first well, Eastland #1, which was completed in late 2009. The well is currently producing marginally (1-4 barrels of oil equivalent per day) and has been deemed an impaired asset.
Key Financial Metrics
| Metric | 2009 | 2008 |
|---|---|---|
| Revenue | $0 | $0 |
| Net Loss | $(334,055) | $(124,464) |
| Operating Expenses | $122,997 | $123,760 |
| Impairment Loss | $(241,860) | $0 |
| Interest/Dividend Income | $30,802 | $1,137 |
| Cash and Cash Equivalents | $1,050,915 | $87,296 |
| Total Assets | $1,087,277 | $1,394,138 |
| Total Liabilities | $27,749 | $941 |
| Stockholders' Equity | $1,059,528 | $1,393,197 |
Liquidity: The company holds approximately $1.05 million in cash, representing 97% of total assets. Working capital is approximately $995,000. The company has no long-term debt obligations.
Material Changes vs. Prior Period
- Asset Composition: Total assets decreased by 22% ($306,861) primarily due to the recognition of a $241,860 impairment charge on the Anderson Project oil and gas interest. In 2008, assets were heavily weighted toward available-for-sale securities ($1.25M), which were liquidated in 2009 to fund operations and exploration.
- Profitability: Net loss increased significantly from $124,464 in 2008 to $334,055 in 2009. This deterioration was driven almost entirely by the impairment loss, which accounted for 72% of the net loss.
- Operations: The company moved from a pre-exploration stage in 2008 to active drilling and completion in 2009. However, the initial well (Eastland #1) failed to meet commercial expectations in the primary target zone, resulting in the impairment.
- Capital Structure: No new equity was issued in 2009. The company raised $1.5 million via a private placement in 2008, which funded the 2009 activities.
Outlook, Risks, and Management Commentary
- Impairment and Future Costs: Management determined the Eastland #1 well is marginally commercial. An additional impairment of approximately $20,000 is expected for costs incurred in Q4 2009. The remaining carrying value of the asset is estimated at $25,780, which will be amortized based on production.
- Liquidity and Capital Needs: Management believes current cash reserves (~$1M) are sufficient for ongoing operations (approx. $5,000/month) and further exploration of the current prospect. However, future capital raising via equity sales may be necessary for new acquisitions, which would result in dilution.
- Going Concern: The financial statements include a note stating substantial doubt exists regarding the company's ability to continue as a going concern due to the lack of operating revenue and history of losses.
- Risks: Key risks include the high probability of dry holes or non-commercial wells, reliance on a single part-time executive (CEO/President), limited trading volume for common stock, and exposure to volatile oil and gas commodity prices.
- Guidance: The company has no formal guidance but is reviewing alternatives for further development within the existing prospect or seeking new opportunities.
Investor Verification Checklist
- Impairment Validity: Verify the operator's estimate of the remaining recoverable value ($25,780) and the justification for the $241,860 impairment charge.
- Production Data: Confirm the actual production rates (1-4 BOE/day) and the commercial viability of the Lower Spraberry formation completion.
- Cash Burn Rate: Monitor the monthly operating expenses to ensure the $1M cash reserve lasts as projected without immediate need for dilutive financing.
- Management Concentration: Assess the risks associated with relying on a single part-time executive (Mr. Steve Owens) for all operational and financial decisions.
- Stock Liquidity: Review the OTCBB trading volume and bid-ask spreads, as the company notes trading is extremely limited and may not reflect intrinsic value.