Business context and reporting period
Ring Energy, Inc. filed this unaudited Form 10-Q for the quarter ended September 30, 2022. The company explores for and produces oil and natural gas in the Permian Basin of Texas and New Mexico. Results cover the three and nine months ended September 30, 2022, compared with the corresponding 2021 periods.
On August 31, 2022, Ring completed its acquisition of approximately 37,000 net acres in the Central Basin Platform from Stronghold. The stated fair value of consideration was approximately $395.7 million, funded with cash, common and preferred stock, and a deferred cash payment. Ring recorded the transaction as an asset acquisition.
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Oil, natural gas and NGL revenue | $94.4 million | $49.4 million | $247.6 million | $136.6 million |
| Income from operations | $53.6 million | $24.4 million | $145.9 million | $63.9 million |
| Net income (loss) | $75.1 million | $14.2 million | $124.1 million | $(20.8) million |
| Diluted earnings (loss) per share | $0.49 | $0.12 | $0.92 | $(0.21) |
| Cash from operating activities | Not separately provided here | Not separately provided here | $133.3 million | $49.5 million |
Q3 production was 1.22 million Boe, up from 0.76 million Boe. Average realized oil price rose to $92.64 per barrel from $69.61; Q3 gas price was $4.89 per Mcf versus $5.86, and NGL price was $25.68 per barrel. Q3 operating expenses totaled $40.8 million. The reported operating margin, calculated as operating income divided by revenue, was approximately 56.7%, compared with 49.4% a year earlier.
Q3 net income included a $32.9 million derivative gain, including a $47.7 million unrealized fair-value gain partly offset by realized derivative losses of $14.9 million. For the first nine months, derivative contracts produced a net loss of $2.2 million; cash paid for derivative settlements was $48.6 million. Earnings therefore reflect significant derivative mark-to-market and settlement effects.
At September 30, Ring had $0.9 million cash, $435.0 million outstanding on its revolving credit facility, and a $600 million borrowing base. Current assets were $65.2 million and current liabilities $126.7 million. Nine-month investing cash outflow was $268.3 million, including $183.4 million of Stronghold acquisition payments and $83.8 million for property development. Nine-month financing cash inflow was $133.5 million. The company reported compliance with its credit agreement covenants.
Material changes versus the prior comparable period
- Q3 revenue nearly doubled, supported by higher oil prices, increased production and the addition of Stronghold production from September 1. Nine-month revenue increased approximately 81%.
- Q3 net income rose substantially, but the comparison was influenced by the large derivative gain. Nine-month results shifted from a net loss to net income, alongside higher sales and a much smaller derivative loss than in 2021.
- Q3 lease operating expense increased to $13.0 million from $7.0 million; management cited higher production, labor costs and industry inflation. General and administrative expense increased to $7.4 million from $4.4 million, including acquisition costs, increased compensation and share-based expense.
- Debt increased from $290 million at December 31, 2021 to $435 million at September 30, 2022, principally in connection with the acquisition. The borrowing base rose from $350 million to $600 million.
- Beginning July 1, Ring separately reported NGL revenue and volumes. A processing-contract change effective May 1 also moved certain gathering, transportation and processing charges from expense to a reduction of revenue; comparisons of gas revenue and related costs are affected.
Outlook, commentary and risks
Management said it would focus on maximizing free cash flow, controlling costs, directing capital to projects it expects to earn attractive returns, and reducing debt. The filing provides no specific forward production, capital expenditure or earnings guidance. Management expected ongoing oil-price volatility and noted that the borrowing base is subject to semiannual redetermination.
Ring’s hedges seek to limit some commodity-price downside but can constrain gains when prices rise. Other material risks include variable-rate debt and interest expense, inflation in operating costs, dependence on a concentrated customer base, transportation access and pricing, environmental and regulatory obligations, and possible changes in commodity prices, reserves or borrowing capacity. Two customers accounted for a substantial share of revenue and receivables; the filing gives differing percentages for the second customer in separate disclosures.
Subsequent to quarter-end, stockholders approved conversion of the preferred shares issued for Stronghold into approximately 42.5 million common shares on October 27, 2022. Ring also registered 63.9 million common shares for possible resale by certain stockholders; the filing warns that sales could pressure the share price. The company reported effective disclosure controls and no material change in internal control over financial reporting during the nine-month period.
Important facts for investors to verify
- How much of reported earnings and operating cash flow is sustainable apart from derivative fair-value movements and cash settlements.
- Stronghold’s contribution to production, operating costs and cash generation, and the final acquisition-related cash adjustments and deferred payment.
- Available borrowing capacity after letters of credit, covenant headroom, interest-rate exposure and the outcome of subsequent borrowing-base redeterminations.
- The effect of preferred-stock conversion, potential resale of the registered shares, and remaining warrants on dilution and the public float.
- The customer concentration disclosure: one section reports the second-largest customer at 4% of nine-month revenue, while another reports 14%; confirm the correct figure.
- Comparability of natural gas and NGL revenue and costs following the three-stream reporting and processing-contract changes.