Ring Energy, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. The unaudited interim statements cover the company’s oil and gas operations in the Permian Basin of Texas and New Mexico. Comparative 2019 figures are identified as restated.
Financial performance and key metrics
| Metric | Q2 2020 | First half 2020 | Comparable 2019 |
|---|---|---|---|
| Oil and gas revenue | $10.6 million | $50.2 million | Q2: $51.3 million; first half: $93.1 million |
| Net income (loss) | $(135.0) million | $(91.2) million | Q2: $11.3 million; first half: $15.6 million |
| Cash provided by operating activities | Not separately stated | $30.2 million | First half: $35.4 million |
| Capital spending on oil and gas properties | Not separately stated | $31.3 million | First half: $349.2 million |
- Q2 oil sales volume was 429,751 barrels, down from 893,304 barrels a year earlier; realized oil price fell 57% to $24.23 per barrel. First-half oil volume declined to 1,285,354 barrels and realized price fell 29% to $38.16 per barrel.
- Q2 lease operating costs were $7.1 million, or $14.16 per BOE, versus $11.6 million, or $11.71 per BOE, in Q2 2019. First-half costs were $17.5 million, or $11.77 per BOE, versus $21.0 million, or $11.24 per BOE.
- Q2 operating loss was $156.8 million, including a $147.9 million non-cash ceiling-test impairment. First-half operating loss was $146.8 million. The impairment was driven primarily by lower commodity prices and reduced reserve value.
- Cash was $17.2 million at June 30, versus $10.0 million at year-end 2019. Net property and equipment was $778.1 million, down from $929.2 million.
- Long-term revolving credit borrowings were $375.0 million, the full borrowing base, versus $366.5 million at December 31, 2019. The June amendment reduced the borrowing base from $425 million to $375 million. The company reported compliance with its covenants at June 30.
- First-half interest expense was $8.5 million, up from $5.0 million. Weighted-average borrowing interest rate was 4.5%; a one-percentage-point rate change would affect annual interest expense by about $3.75 million.
Material changes versus the prior period
- Revenue fell sharply amid lower oil prices and curtailed production. Q2 revenue declined about 79% year over year; first-half revenue declined about 46%.
- The company recorded no ceiling-test impairment in the comparable 2019 periods; the 2020 charge drove much of the reported net loss.
- Q2 derivative results included a $13.8 million realized gain and a $26.8 million unrealized loss. For the first half, realized gains were $17.1 million and unrealized gains were $20.3 million. These fair-value movements can materially affect reported earnings.
- First-half investing cash outflow was $31.3 million, substantially below the prior-year $349.2 million, which included the 2019 acquisition and greater development spending. Operating cash flow declined to $30.2 million from $35.4 million.
Outlook, risks and unusual items
- Management suspended further 2020 drilling pending greater commodity-price stability and said the drilling and completion budget had been cut about 70% from the beginning-of-year plan. It emphasized cost reduction and cash preservation; lower investment may affect production in 2021 and later.
- Most production, except Delaware Basin volumes, was curtailed from late April until early June. Production returned near April levels by quarter-end; management reported production approaching 9,000 net BOE per day in the first two weeks of July.
- Management said cash on hand, operating cash flow and hedge proceeds should fund operations and debt service for at least the next 12 months. This is dependent on volatile commodity prices, liquidity and credit availability; the borrowing base is subject to redetermination.
- Oil hedges included 5,500 barrels per day at a $50 floor for August–December 2020, subject to stated call-price ceilings, and 4,500 barrels per day of 2021 collars with floors of $40–$45. The company also reported a $33.24-per-barrel swap for 5,500 barrels per day for July 2020. Hedges limit downside exposure but also cap some upside and carry counterparty risk.
- A sale of about 20,000 net Delaware Basin acres remained pending. Upon closing, the borrowing base would automatically decline by $20 million, requiring repayment of that amount; management intended to use sale proceeds to reduce debt.
- COVID-19, weak demand, OPEC+ actions, storage and transportation constraints, customer concentration, possible further impairments, and refinancing or covenant risks are material uncertainties. Two customers represented 55% and 22% of first-half revenue; one represented 84% of receivables at quarter-end.
- In June, officers and directors returned and cancelled 2.265 million options; this resulted in $0.8 million of additional compensation expense. The filing also notes the 2019 interim statements had previously been restated.
- Management reported disclosure controls as effective and said additional quarterly review procedures addressed a material weakness identified in 2019. No specific material legal proceeding was described.
Important facts for investors to verify
- Whether the Delaware Basin sale closes, its net proceeds, and the required $20 million credit-facility repayment.
- The next borrowing-base redetermination, remaining covenant headroom, and the effect of being fully drawn against the current borrowing base.
- Actual production recovery, realized prices and differentials, and whether curtailments or storage constraints recur.
- Hedge volumes, terms, counterparty exposure, and how hedge settlements compare with production and cash needs.
- Whether further commodity-price declines trigger additional impairments or weaken the company’s stated 12-month liquidity outlook.
- The ongoing impact of the 2020 capital reduction on production, reserves and cash generation in 2021 and beyond.