Ring Energy, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Financial statements are unaudited. Ring is an oil and gas exploration and production company operating in Texas and New Mexico.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Oil and gas revenue | $51.3 million | $29.9 million | $93.1 million | $59.8 million |
| Operating income | $17.6 million | $9.4 million | $27.9 million | $20.3 million |
| Net income | $12.4 million | $4.7 million | $23.5 million | $10.4 million |
| Diluted EPS | $0.18 | $0.08 | $0.36 | $0.17 |
| Operating margin | 34.4% | 31.4% | 29.9% | 34.0% |
| Net margin | 24.1% | 15.8% | 25.2% | 17.4% |
- Q2 oil revenue rose to $50.8 million; natural gas revenue was $0.5 million. Oil volume increased 90% to 893,304 barrels, while realized oil price declined 8% to $56.86/barrel. Natural gas volume increased, but realized price declined 69% to $0.95/Mcf.
- For the first half, oil volume increased to 1.71 million barrels, while realized oil price fell 12% to $53.74/barrel. Natural gas realized price declined 53% to $1.51/Mcf.
- Production costs rose with expanded production, but LOE per BOE declined to $11.71 in Q2 and $11.24 for the first half. Production taxes remained about 5% of revenue. DD&A increased with production and the acquired asset base.
- Operating cash flow was $35.4 million for the first half, compared with $33.3 million in 2018. Investing cash outflow was $349.2 million, including $268.1 million for property purchases and $81.1 million for development. Financing cash inflow was $321.0 million, primarily credit-facility borrowings. Ending cash was $10.6 million.
- At June 30, cash was $10.6 million, current assets $38.6 million, and current liabilities $67.8 million, implying a $29.1 million working-capital deficit. Revolver debt was $360.5 million; the borrowing base was $425 million under a facility with a $1 billion maximum and maturity through April 2024. The company reported covenant compliance. Borrowings carried a 5.10% weighted-average rate.
Material changes and notable items
- Revenue and earnings growth were primarily attributed to the April 2019 Wishbone acquisition, effective for accounting purposes February 1. The acquired properties comprised 38,230 net acres, with average working interest of 77% and net revenue interest of 58%. Consideration was approximately $264 million cash plus 4,581,001 shares; 2,538,071 shares remained in escrow for potential indemnification claims.
- Acquisition-related costs of approximately $4.1 million were expensed in G&A. G&A for the first half rose to $11.5 million from $6.2 million.
- Reported first-half net income included a $4.47 million tax-provision reduction related to excess tax benefits from share-based compensation. The acquisition pro forma comparison shows Q2 2019 net income of $12.4 million versus $13.0 million for pro forma Q2 2018, and first-half 2019 net income of $23.5 million versus $24.7 million for pro forma 2018.
- Shares outstanding increased to approximately 67.8 million from 63.2 million at year-end, principally due to acquisition consideration.
Outlook, risks and contingencies
- No specific production, earnings, or capital-spending guidance is provided. Management said it plans to develop its acreage using horizontal and vertical drilling and continues to evaluate acquisitions, with future transactions potentially requiring additional debt or equity capital.
- Oil collars cover 5,500 barrels/day for April–December 2019 and 2,000 barrels/day for 2020; puts are $50/barrel and call prices range from $65.40 to $70.20. These collars limit some downside exposure but also cap upside on hedged volumes. All hedged volumes were with lenders under the credit facility.
- Key risks include commodity-price volatility, variable-rate debt, reserve and drilling uncertainty, transportation access and costs, environmental and regulatory obligations, and the ability to fund development and acquisitions. A 1% interest-rate change was estimated to affect annualized interest expense by approximately $3.6 million on June 30 borrowings.
- Customer concentration is significant: two customers represented 80% of first-half revenue and 74% of accounts receivable. Sales are generally unsecured. The filing reports no known material environmental claims involving the company or acquired properties; routine legal matters may arise, but outcomes cannot be predicted.
- The Tulsa office lease is with an entity owned by the board chairman and a director. The filing reports no material change in internal control over financial reporting and effective disclosure controls.
Investor facts to verify
- Acquisition contribution to production, cash generation, and the company’s pro forma performance, as well as the status of escrowed shares and any indemnification claims.
- Remaining borrowing capacity after borrowing-base adjustments, upcoming redeterminations, covenant headroom, and the impact of variable interest rates.
- Whether operating cash flow can support planned development spending and working-capital needs without additional financing.
- Realized commodity prices, hedge settlements and coverage, and the effects of customer concentration and transportation constraints.
- Reserve estimates, acquisition valuation adjustments, and potential environmental, plugging, and abandonment liabilities.