Ring Energy, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; filed May 6, 2024. Unaudited interim results. Ring is an independent oil and gas producer focused on the Permian Basin of Texas.
Financial and operating results
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Oil, gas and NGL revenue | $94.5 million | $88.1 million | Up 7% |
| Net income | $5.5 million | $32.7 million | Down 83% |
| Diluted EPS | $0.03 | $0.17 | Down |
| Operating income | $37.6 million | $35.7 million | Up 6% |
| Cash from operations | $45.2 million | $43.7 million | Up $1.5 million |
| Cash used in investing | $39.5 million | $55.5 million | Use decreased |
| Capital spending to develop oil and gas properties | $38.9 million | $36.9 million | Up $2.0 million |
| Production | 1.732 million Boe | 1.646 million Boe | Up 5% |
Revenue growth reflected higher oil volumes and realized prices: oil sales rose 10%, with average oil price increasing to $75.72 per barrel from $73.36. Total revenue per Boe increased 2% to $54.56. Natural gas revenue turned negative at $0.8 million, versus positive revenue of $1.1 million, as realized gas pricing fell to negative $0.55/Mcf; the company attributed this largely to processing fees and weak regional prices. NGL sales declined 12% as lower prices more than offset higher volumes.
Operating income margin was approximately 39.8% of revenue, versus 40.5% a year earlier. Net income fell sharply primarily because derivative contracts produced a $19.0 million loss, compared with a $9.5 million gain in Q1 2023. The 2024 derivative result included a $17.6 million unrealized mark-to-market loss and a $1.5 million realized loss. Interest expense increased 11% to $11.5 million; the weighted-average borrowing rate rose to 9.3% from 8.2%.
Balance sheet and liquidity
- Cash was $1.4 million at March 31, compared with $0.3 million at year-end 2023.
- Revolving credit debt was $422 million, down $3 million from year-end. The facility has a $600 million borrowing base, matures in August 2026, and had approximately $178 million of unused capacity after letters of credit.
- The company reported compliance with credit facility covenants. It reported no off-balance-sheet financing arrangements.
- Accounts payable was $99.1 million; current assets were $58.7 million and current liabilities were $118.4 million. The filing states the company believes operating cash flow can fund operations and service debt.
- Cash from operations exceeded investing cash outflows by $5.7 million; financing activities used $4.6 million, including the net credit-facility paydown.
Material changes, outlook and risks
Ring drilled and completed 11 wells in Q1 (excluding one salt-water disposal well): two horizontal wells on the Northwest Shelf, three horizontal wells and six vertical wells on the Central Basin Platform. Management says its priorities are to maximize cash flow, reduce debt, develop production, and pursue acquisitions and asset sales that it believes can strengthen returns and the balance sheet. No numerical full-year production, capital-spending or earnings guidance is provided in the filing.
Management cited commodity-price volatility, constrained Permian natural-gas takeaway capacity, inflation in operating and capital costs, and higher interest rates. A 1 percentage-point change in the credit facility rate would change annual interest expense by an estimated $4.2 million. The facility requires hedging at least 50% of projected proved-developed-producing production over a rolling 24 months, subject to stated conditions. Commodity hedges may limit gains when prices rise; as of March 31, derivative liabilities totaled $27.5 million gross, versus derivative assets of $8.8 million gross.
Sales and receivables are concentrated: three purchasers accounted for 61%, 13% and 12% of quarterly revenue, and 59%, 12% and 11% of production receivables, respectively. Management considers replacement purchasers available, but purchasers are unsecured. The filing reports no material subsequent events through May 6, no Q1 ceiling-test impairment, and no material changes in internal control; management concluded disclosure controls were effective.
Important facts for investors to verify
- Whether negative realized natural-gas pricing and regional takeaway constraints persist, and their effect on realized revenue.
- How much of forecast production is hedged, the hedge settlement exposure, and the effect of rising commodity prices on derivative valuations.
- The upcoming semiannual borrowing-base redetermination and continued covenant compliance, given $422 million of debt and variable-rate borrowing costs.
- Whether operating cash flow can fund planned development, debt reduction and any acquisitions without additional borrowing or asset sales.
- Whether production growth and field costs remain on plan as legacy production declines and inflation affects operations.