Ring Energy, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Unaudited. Ring Energy is a Texas-focused exploration and production company operating primarily in the Permian Basin.
Financial results and key metrics
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Oil, gas and NGL revenue | $93.7 million | $94.4 million | $261.1 million | $247.6 million |
| Operating income | $39.6 million | $53.6 million | $104.9 million | $145.9 million |
| Net income (loss) | $(7.5) million | $75.1 million | $54.0 million | $124.1 million |
| Diluted EPS | $(0.04) | $0.49 | $0.28 | $0.92 |
| Operating margin | 42.2% | 56.7% | 40.2% | 58.9% |
| Net cash from operations | — | — | $142.4 million | $133.3 million |
Operating and net margins are calculated as the reported income measure divided by oil, gas and NGL revenue. Q3 production was 1.61 million Boe, up 32%; nine-month production was 4.83 million Boe, up 68%. Q3 average realized price was $58.16/Boe, down 25%; nine-month average was $54.07/Boe, down 37%.
At September 30, cash was $0.14 million, accounts receivable $45.8 million, and current liabilities $151.9 million. Revolver borrowings were $428.0 million; the $600 million borrowing base left $171.2 million available after letters of credit. The facility matures August 2026. The company reported covenant compliance. Nine-month investing cash outflow was $170.9 million and financing cash inflow was $24.9 million. Capitalized development spending was $113.0 million.
Material changes and drivers
- Q3 revenue was nearly flat year over year: higher oil sales were offset by much lower realized natural gas and NGL prices. Oil price averaged $81.69/Bbl versus $92.64; natural gas averaged $0.36/Mcf versus $4.89.
- Q3 operating expenses rose to $54.1 million from $40.8 million. Lease operating expense increased 38%, while DD&A increased 54%, reflecting higher production, acquired properties and a higher depletion rate.
- Q3 derivative contracts produced a $39.2 million loss, including a $33.9 million unrealized loss, compared with a $32.9 million gain in Q3 2022. Interest expense rose 62% to $11.4 million; management cited higher average debt and higher rates. These items drove the quarterly net loss despite positive operating income.
- For the first nine months, revenue rose 5% as production growth more than offset lower realized prices. Net income fell to $54.0 million, including derivative losses of $26.5 million and higher interest expense of $32.3 million. Results included a $10.5 million discrete tax benefit from releasing federal valuation allowance.
- The company acquired Central Basin Platform properties from Founders in August for total recorded consideration of approximately $64.6 million, including a deferred cash payment valued at $14.7 million. It sold Delaware Basin assets in May and operated New Mexico assets in September; sale proceeds and final purchase-price adjustments are subject to customary settlements. Share count increased to 195.4 million at quarter-end, partly reflecting warrant exercises.
Outlook, risks and contingencies
Management’s stated priorities are to develop producing assets, allocate capital to projects expected to provide attractive returns, generate cash flow and reduce debt; it also expects to continue evaluating strategic acquisitions and non-core asset sales. The filing provides no specific production, spending or earnings guidance. Management believes operating cash flow can fund operations and debt service, while acknowledging that volatility or prolonged weakness in commodity prices could materially affect cash flow.
Key risks include oil and gas price and basis volatility, constrained Permian gas takeaway capacity and potentially negative regional gas pricing, inflation in operating and development costs, rising variable-rate borrowing costs, drilling and reserve-estimation uncertainty, and purchaser concentration. Three buyers represented 89% of nine-month sales and 85% of production receivables. Derivatives reduce some price downside but can limit gains; fair-value changes flow through earnings, and all derivative counterparties were lenders under the credit facility. The company had $42.0 million of derivative liabilities at quarter-end. No material subsequent events were reported, and no material legal-proceeding developments were disclosed.
Important facts for investors to verify
- Whether production growth and realized oil, gas and NGL pricing support operating cash flow after capital spending, interest and derivative settlements.
- The effect of the November borrowing-base redetermination, variable interest rates and the company’s ability to manage $428 million of revolver debt and near-term liquidity.
- Hedge volumes, contract floors and ceilings, deferred premiums, and the potential impact of future mark-to-market movements on reported earnings.
- Final Founders acquisition and divestiture adjustments, including the $15 million deferred payment due December 15, 2023, and the expected impact of asset sales on production and obligations.
- Purchaser concentration, Permian gas takeaway constraints, and the assumptions underlying reserve values and depletion expense.