Ring Energy, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. The interim financial statements are unaudited. Ring is an oil and gas exploration and production company operating in Texas and New Mexico, with production concentrated in the Permian Basin.
Financial results and liquidity
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Oil and gas revenue | $41.8 million | $29.9 million |
| Income from operations | $10.2 million | $10.9 million |
| Net income | $11.1 million | $5.7 million |
| Basic / diluted earnings per share | $0.18 / $0.17 | $0.10 / $0.10 |
| Cash provided by (used in) operations | $9.8 million | $(13.7) million |
| Cash used in investing activities | $(55.6) million | $(36.1) million |
Revenue less investing cash outflows was approximately $(45.8) million in Q1 2019; this is a simple comparison, not a reported free-cash-flow measure. Cash declined to $2.6 million from $3.4 million at December 31, 2018. Capital expenditures for purchases and development of oil and gas properties totaled $55.6 million.
At March 31, 2019, total assets were $925.2 million, total liabilities $450.7 million, and stockholders’ equity $474.5 million. The revolving credit facility balance was $84.5 million. Current assets were $36.5 million and current liabilities $93.0 million. The filing states Ring complied with its credit covenants; its covenant-defined current ratio may differ from the simple balance-sheet ratio.
Operating costs included $9.4 million of production costs, $2.1 million of production taxes, $12.9 million of depreciation, depletion and amortization, and $6.8 million of general and administrative expense. Operating income was about 24.5% of revenue, compared with about 36.6% in Q1 2018. Interest expense was $0.8 million and the company recorded a $0.3 million unrealized derivative loss. The income statement reports a $2.0 million income-tax benefit.
Changes from the prior comparable period
- Revenue increased 40%, primarily because of the Wishbone acquisition, whose results were included from February 1, 2019. Oil sales volume rose to 812,565 barrels from 479,864 barrels, while average realized oil price fell 17% to $50.30 per barrel. Natural gas volume increased, but its average realized price fell 39% to $2.19 per Mcf.
- Production costs rose in total with higher production and the acquisition, but declined per BOE to $10.71 from $11.23. G&A increased by $3.7 million, principally reflecting approximately $3.5 million of acquisition-related costs.
- Net income nearly doubled, while operating income declined modestly as operating costs grew faster than revenue. The tax benefit and lower derivative losses also affected the year-over-year net-income comparison.
- Operating cash flow improved from cash usage in Q1 2018, while investing outflows increased. Q1 2018 financing included $81.8 million of net stock-offering proceeds; Q1 2019 financing included $45.0 million of credit-facility borrowings.
Acquisition, outlook, and risks
Ring completed the Wishbone acquisition on April 9, 2019, for approximately $291 million of adjusted consideration, described as approximately $264 million cash plus 4,581,001 shares. The acquired properties comprise 49,754 gross (38,230 net) acres, with average working and net revenue interests of 77% and 58%. Because Ring obtained control effective February 1, the acquisition and related liabilities were reflected in the March 31 statements. At closing, the equity consideration was issued and the cash obligation was settled in conjunction with an amended and restated credit facility.
The April 9 amended facility increased the maximum facility amount to $1 billion and the borrowing base to $425 million, extended the term to five years, and retained substantially similar covenants. These are post-quarter events and should be distinguished from March 31 balances, when the borrowing base was $175 million and the facility balance was $84.5 million.
Management plans to develop its acreage through horizontal and vertical drilling and to continue evaluating acquisitions. The filing provides no specific production, capital-spending, or earnings guidance. Ring entered Q1 costless oil collars covering 3,500 barrels per day for April–December 2019, with $50 floors and ceilings ranging from $66 to $68.71; it added further 2019 and 2020 collars after quarter-end. Hedging limits downside price exposure but also caps some upside.
Principal risks include oil and gas price volatility, funding and borrowing-base availability, variable interest rates, drilling and reserve-estimation uncertainty, transportation constraints, environmental and regulatory obligations, and customer concentration. Two customers represented 51% and 32% of Q1 revenue and 40% and 26% of period-end accounts receivable, respectively. The company also disclosed a $250,000 standby letter of credit, no known material environmental proceedings, and ordinary-course legal matters whose outcomes cannot be predicted. Management concluded disclosure controls were effective and reported no material Q1 change in internal control over financial reporting.
Important facts for investors to verify
- Acquisition funding, final purchase-price allocation, acquired-property contribution to production and cash flow, and any later valuation adjustments.
- Post-acquisition borrowings, liquidity, borrowing-base redeterminations, covenant calculations, and the effect of the enlarged credit facility on interest expense.
- Whether operating cash generation can support drilling and development spending, particularly given low quarter-end cash and substantial investment outflows.
- Commodity prices, realized differentials, hedge volumes and settlements, and customer concentration and collectability.
- Reserve estimates, future impairment exposure, and environmental, plugging and abandonment obligations.