Ring Energy, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. The interim financial statements are unaudited. Comparative Q1 2019 figures are identified as restated. Ring is a Permian Basin oil and gas producer operating in Texas and New Mexico.
Financial results and position
- Revenue: Oil and gas sales were $39.6 million, down 5.3% from $41.8 million. Oil revenue was $38.6 million; natural gas revenue was $0.9 million.
- Production and realized prices: Oil volume rose to 855,603 barrels from 812,565, while average realized oil price fell 10% to $45.16 per barrel. Natural gas volume rose to 765,551 Mcf from 396,264; average realized gas price declined 48% to $1.22 per Mcf.
- Profit: Operating income was $10.1 million, compared with $10.2 million. Net income was $43.8 million, or $0.64 per diluted share, versus $4.3 million, or $0.07 per share. The increase chiefly reflects a $47.1 million unrealized derivative gain and $3.3 million realized derivative gain, not higher operating income.
- Costs and margins: Production costs rose to $10.4 million, but declined to $10.56 per BOE from $10.71. General and administrative expense fell to $3.0 million from $6.8 million, primarily because Q1 2019 included acquisition-related costs. Interest expense increased to $4.2 million from $0.8 million. Operating margin was approximately 25.5% of revenue.
- Cash flow: Operating cash flow was $27.5 million, versus $9.8 million. Investing cash outflow was $24.9 million, versus $55.6 million, mainly reflecting lower property development spending. Cash increased $2.5 million to $12.5 million.
- Debt and liquidity: Revolver borrowings were $366.5 million, unchanged from year-end 2019; total liabilities were $443.0 million. Current assets were $64.8 million and current liabilities $40.4 million. The $425 million borrowing base was subject to a May 2020 redetermination, then in process. Ring reported covenant compliance at March 31.
Material changes and operating developments
- Revenue declined despite higher oil and gas volumes, as lower commodity prices offset production growth. Management attributed the revenue decrease primarily to lower prices.
- Q1 capital spending on oil and gas properties fell to $24.9 million from $55.6 million in the prior-year quarter. Ring drilled and completed four Northwest Shelf horizontal wells in Q1 and reported an average initial production rate of 558 BOE per day for six wells with filed initial potentials.
- Ring reduced its 2020 capital budget by approximately 63% from its initial plan and suspended further drilling pending greater confidence that oil prices had stabilized. It shifted its focus to cost reductions and cash preservation.
- After quarter-end, Ring drew $21.5 million on the revolver on April 13, bringing borrowings to $388 million. On April 9, it agreed to sell approximately 20,000 net acres of Delaware Basin assets for $31.5 million; closing was expected in about 60 days, subject to customary conditions.
Outlook, risks, and unusual items
- Management said cash, hedge cash flows, and expected credit-facility availability should fund operations and debt service for at least the next 12 months. It also cautioned that the pandemic, oil-market volatility, and financial-market instability could materially harm cash flows, liquidity, and financial condition; the filing states that the full impact could not be estimated.
- Oil-price collars covered 5,500 barrels per day for 2020, with a $50-per-barrel floor and contract ceilings of $58.25–$65.83. Collars covered 4,500 barrels per day for 2021, with floors of $40–$45 and ceilings of $52.71–$55.35. These financial hedges limit some downside but also cap gains above the ceilings.
- The CARES Act generated tax benefits reflected in the quarter. The $47.1 million unrealized derivative gain was based on fair-value changes and substantially drove reported net income; it should not be treated as operating cash flow.
- COVID-19, the OPEC+ price conflict, weak demand, and storage constraints could pressure prices, production, and the ability to sell or store output. Management warned that further shut-ins were possible and that reduced drilling could affect production in 2021 and later.
- The revolver is secured by substantially all assets and includes leverage and current-ratio covenants. Management warned that prolonged weak industry conditions could make covenant compliance more difficult; the borrowing-base redetermination could affect availability. Interest expense is exposed to variable rates.
- Two customers represented 49% and 29% of Q1 revenue and 48% and 35% of accounts receivable, respectively. The filing also discloses ordinary-course legal matters but no specific material proceeding.
- Management reported disclosure controls were effective and said additional quarterly procedures were implemented to address a material weakness identified in 2019, which it believed had been remediated.
Important facts for investors to verify
- Outcome of the May 2020 borrowing-base redetermination, resulting revolver availability, and covenant headroom.
- Whether the Delaware Basin sale closed, the net proceeds received, and how proceeds were used to reduce debt.
- Actual hedge settlements, production volumes, and realized prices as market conditions evolved; distinguish cash hedge results from fair-value gains.
- Whether storage or market-access constraints caused production shut-ins, and the effect of curtailed drilling on future production and cash flows.
- Whether the stated 12-month liquidity outlook remained supportable given commodity prices, debt draws, operating cash flow, and capital spending.
- Effects of the 2019 restatement and the claimed remediation of the material weakness; review the related 2019 filing and subsequent disclosures.