Ring Energy, Inc. — FY 2016 Form 10-K
Reporting period: Year ended December 31, 2016. Ring is a U.S. oil and gas exploration and production company focused on Texas and Kansas, particularly the Permian Basin. This annual filing includes fourth-quarter results but is not a standalone quarterly report.
Business context and operating performance
- 2016 production was 878,066 BOE, up 18% from 743,363 BOE in 2015. Average daily production was 2,406 BOE, and December 2016 production averaged 2,551 BOE per day.
- Proved reserves totaled 27.7 million BOE, approximately 90% oil. About 32% were proved developed producing, 5% developed non-producing, and 63% proved undeveloped (PUD); effectively all reserves were in Texas.
- Ring drilled 3 horizontal and 9 vertical development wells in Texas during 2016; 3 horizontal and 8 vertical wells were placed on production by year-end.
Financial results and liquidity
| Metric | 2016 | 2015 |
|---|---|---|
| Oil and gas revenue | $30.85 million | $31.01 million |
| Net income (loss) | ($37.64 million) | ($9.05 million) |
| Net loss per share | ($0.97) | ($0.32) |
| Cash from operating activities | $11.21 million | $9.40 million |
| Cash used in investing activities | $38.34 million | $109.66 million |
| Cash at year-end | $71.09 million | $4.43 million |
| Working capital | $66.12 million | ($2.62 million) |
- Oil and gas revenue was nearly flat year over year: lower oil prices were largely offset by higher oil and gas sales volumes. Average realized oil price fell to $39.28 per barrel from $44.90; gas price rose to $2.50 per Mcf from $2.48. Average production cost declined to $11.24 per BOE from $13.40.
- The $37.64 million net loss included a $56.51 million non-cash full-cost ceiling impairment, versus $9.31 million in 2015. The impairment followed the sharp decline in commodity prices; it reduced reported earnings and property carrying value but is not a cash outflow.
- Pre-tax PV10 of proved reserves was $217.3 million; the GAAP standardized measure was $159.8 million, down from $172.7 million in 2015. The filing attributes the decline principally to lower prices and changes in estimated cash-flow timing.
- At year-end, no borrowings were outstanding on the secured revolving credit facility; its borrowing base was $60 million, subject to redetermination. Ring reported compliance with its covenants. Total liabilities were $17.06 million, including $7.96 million of asset retirement obligations.
- Financing cash flow was $93.78 million, including $139.57 million of net common-stock proceeds and $45.90 million of net credit-facility repayments. Shares outstanding increased from 30.39 million to 49.11 million during 2016.
Changes, outlook, and risks
- Management said it would pace development to operating cash flow while commodity prices remained low and volatile, and continue pursuing suitable acquisitions. The filing provides no formal earnings or production guidance.
- The reserve report estimates $140.5 million of future development costs for proved reserves, with $64.8 million associated with 2017. These are reserve-development estimates, not a stated capital-expenditure commitment.
- Ring had no production hedges at December 31, 2016. Oil and gas prices are the primary market risk; the company also cited reserve-development funding needs, impairment risk, operational and environmental hazards, and reliance on third-party transportation and purchasers.
- Two customers accounted for 92% of 2016 oil and gas revenue and 91% of year-end receivables. Management believed alternative buyers were available, but the concentration creates counterparty exposure.
- The company reported no material pending or threatened litigation and no off-balance-sheet financing arrangements. Its auditor gave an unqualified opinion on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Reconcile inconsistent figures in the filing: the balance sheet reports total assets of $307.60 million, while selected financial data lists $308.93 million; the MD&A cash-flow discussion cites 2015 cash of $8.71 million, while the audited balance sheet and cash-flow statement report $4.43 million.
- Review the $56.51 million ceiling-test impairment, its assumptions, and the sensitivity of the borrowing base and reserves to commodity prices.
- Assess whether operating cash flow can support planned development, particularly the conversion of the large PUD reserve base and the estimated $64.8 million 2017 development cost.
- Monitor customer concentration, the $60 million borrowing-base redeterminations, and dilution following the 2016 equity offerings and outstanding stock options.