Ring Energy, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. The interim financial statements are unaudited. Ring is an oil and gas exploration and production company operating in the Permian Basin of Texas and New Mexico.
Financial performance
- Q3 revenue: $50.3 million, up 54% from $32.7 million in Q3 2018. Net income was $9.9 million ($0.15 per diluted share), versus $5.7 million ($0.09) a year earlier.
- Nine-month revenue: $143.5 million, up 55% from $92.5 million. Net income was $33.4 million ($0.50 per diluted share), versus $16.1 million ($0.27).
- Operating income and margins: Q3 operating income was $14.3 million, about 28.5% of revenue, compared with $9.6 million, or 29.4%, in Q3 2018. Nine-month operating income was $42.2 million, about 29.4% of revenue, versus $29.9 million, or 32.4%. Net margins were about 19.6% and 23.2% in 2019 for the quarter and nine months, respectively, compared with 17.4% for both 2018 periods.
- Production and pricing: Q3 oil sales volume rose to 906,874 barrels from 555,020; average realized oil price fell 4% to $54.59 per barrel. Nine-month oil volume rose to 2.61 million barrels from 1.50 million, while realized price fell 9% to $54.03. Gas volumes increased, but realized gas prices fell 70% in Q3 to $1.14/Mcf and 60% for the nine months to $1.35/Mcf.
- Costs: Q3 production costs increased to $15.5 million, or $15.04/BOE, from $7.2 million, or $12.00/BOE. Nine-month costs rose to $36.5 million, or $12.59/BOE, from $19.6 million, or $11.98/BOE. Management cited acquisition-related production and a change in classification of certain gas processing fees. Nine-month G&A rose to $15.3 million, including about $4.1 million of acquisition costs.
- Cash flow and investment: Nine-month operating cash flow was $62.6 million, up from $52.0 million. Investing cash outflow was $385.3 million, including $263.3 million for property purchases and $122.0 million for development. Cash was $7.6 million at September 30, 2019, versus $3.4 million at year-end 2018.
- Debt and liquidity: Revolver borrowings were $366.5 million, up from $39.5 million at December 31, 2018. The amended facility has a $425 million borrowing base, a $1 billion maximum commitment, and an April 2024 maturity. Ring reported covenant compliance. Current assets were $33.8 million and current liabilities $52.3 million; the filing does not provide a clear conventional liquidity ratio that reconciles to the facility covenant definition.
- Balance sheet and equity: Total assets were $962.8 million and stockholders’ equity was $526.7 million. Shares outstanding were 67.8 million at September 30, up from 63.2 million at year-end, primarily reflecting acquisition consideration.
Material changes and unusual items
- In April 2019, Ring completed its Wishbone acquisition, effective February 1, adding 38,230 net acres, with 77% average working interest and 58% average net revenue interest. Adjusted consideration was approximately $291 million: about $264 million cash and 4.58 million shares. Acquired properties and related production drove much of the revenue and volume growth.
- Interest expense rose to $4.6 million in Q3 and $9.6 million for the nine months, mainly due to acquisition-related revolver borrowing; comparable 2018 expense was $41,000 and $85,000.
- Derivative fair-value gains were $1.9 million in Q3 and $3.1 million for the nine months; there were no realized derivative gains or losses in 2019. New oil collars covered 5,500 barrels per day through December 2019 and 2,000 barrels per day during 2020, with $50 floors and call prices ranging from $65.40 to $70.20.
- Ring adopted lease accounting in 2019, recognizing operating and financing lease assets and liabilities. It also reported $16.7 million of asset retirement obligations at quarter-end.
Outlook, risks, and contingencies
- Management plans to develop its acreage with horizontal and vertical drilling and continue evaluating acquisitions. The filing provides no quantified earnings, production, or capital-spending guidance.
- Key risks include volatile oil and gas prices, reserve and drilling uncertainty, capital needs, borrowing-base redeterminations, variable interest rates, transportation constraints, regulation and environmental obligations, and acquisition integration.
- Two customers accounted for 39% and 38% of nine-month revenue and 34% and 41% of accounts receivable at quarter-end. Sales are generally unsecured. Derivative counterparties are lenders under the credit facility.
- The filing reports no known environmental claims involving Ring or the acquired properties, but notes potential cleanup, fines, and operating restrictions for violations. Standby letters of credit totaled $1.0 million; surety bonds totaled about $0.5 million. No amounts had been drawn under the letters of credit.
- Disclosure controls were reported effective, with no material changes in internal control over financial reporting during the quarter. The filing states no additional subsequent events requiring disclosure.
Important facts for investors to verify
- Review acquisition economics and operating performance on a comparable basis; the filing’s pro forma nine-month 2019 net income was $33.4 million versus $38.1 million pro forma for 2018.
- Confirm borrowing-base availability and covenant calculations following the November 1, 2019 redetermination, as well as the effect of acquisition debt and interest costs.
- Check the filing’s interest-rate sensitivity disclosure: it states that a 1% rate change on $366.5 million of borrowings changes annual interest expense by about $36.65 million. That amount does not reconcile arithmetically to 1% of the stated balance, which is approximately $3.67 million.
- Assess realized commodity pricing, customer concentration, collar volumes and terms, and the impact of lower gas prices and processing-cost classification on margins and cash generation.