Ring Energy, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Unaudited results; Ring operates oil and gas properties in the Permian Basin of Texas.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Oil and gas revenue | $29.9 million | $14.5 million | $59.8 million | $26.7 million |
| Operating income | $9.4 million | $2.6 million | $20.3 million | $5.1 million |
| Net income | $4.7 million | $1.9 million | $10.4 million | $3.2 million |
| Diluted EPS | $0.08 | $0.04 | $0.17 | $0.06 |
| Cash from operations | Not provided by quarter | Not provided by quarter | $33.3 million | $18.1 million |
- Q2 revenue rose about 106% year over year; net income increased about 147%. For the first half, revenue rose about 124% and net income about 226%.
- Q2 oil sales volume increased to 469,446 barrels from 306,402; realized oil price rose 36% to $61.70 per barrel. Gas volume increased to 319,056 Mcf, while realized gas price declined 6% to $3.02 per Mcf.
- First-half oil volume rose to 949,310 barrels from 546,662, and realized oil price increased 31% to $61.21 per barrel. Gas volume rose to 529,087 Mcf; realized gas price was approximately flat at $3.24 per Mcf.
- Q2 operating and net margins were approximately 31% and 16%, respectively; first-half margins were approximately 34% and 17%.
- First-half production costs were $12.4 million, versus $6.2 million; general and administrative expense was $6.2 million, versus $5.2 million. Management attributed higher costs primarily to increased activity and compensation expenses.
Cash flow, liquidity, and capital
- At June 30, cash was $13.4 million, down from $15.0 million at year-end 2017. Current assets were $26.5 million and current liabilities $42.7 million, a reported-balance-sheet working capital deficit of approximately $16.2 million.
- First-half operating cash flow was $33.3 million. Investing cash outflow was $116.7 million, including $113.5 million to develop oil and gas properties and $3.3 million to purchase properties.
- The February public offering generated $81.8 million net proceeds from 6.164 million shares sold at $14 per share. The filing says the proceeds had been expended on oil and gas leasing and development by June 30. Shares outstanding increased from 54.2 million at year-end to 60.4 million.
- The revolving facility had a $175 million borrowing base, increased from $60 million in June, within a $500 million maximum commitment; it matures June 26, 2020 and is secured by substantially all company assets. No amounts were drawn at quarter-end, and the company reported covenant compliance. The facility requires a maximum 4.0:1 total leverage ratio and minimum 1.0:1 current ratio.
- Total liabilities were $52.6 million, including $9.8 million in asset retirement obligations and $5.9 million in derivative liabilities. No conventional borrowings were outstanding.
Changes, outlook, and risks
- Higher production volumes from development activity and higher oil prices drove the improvement in revenue and net income. First-half development spending increased substantially from the prior-year period.
- Oil collars covered 2,000 barrels per day for 2018, with floors of $49 and $51 per barrel and ceilings of $54.60 and $54.80. Ring reported first-half realized derivative losses of $3.9 million and unrealized losses of $1.9 million; management expected additional realized losses in each remaining 2018 quarter at then-current prices. The collars limit downside exposure but also cap gains above their ceilings.
- No specific production, earnings, or capital-spending guidance is stated. Management said oil and gas prices had risen since mid-2017, but warned that a substantial or prolonged decline could harm cash flow, borrowing capacity, reserves, and asset values. Other risks include drilling and development costs, service availability, transportation constraints, environmental and regulatory requirements, and competition.
- Customer and credit concentration is significant: the filing identifies two purchasers as representing 84% and 13% of oil and gas sales and 86% and 11% of accounts receivable, respectively. Sales are generally unsecured. The company also disclosed cash above federally insured limits.
- A $250,000 standby letter of credit supports the company’s Texas operations; no amount had been drawn. The filing discusses ordinary-course legal matters but reports no specific material proceeding or quantified loss.
- Management reported disclosure controls effective as of quarter-end and no material change in internal control over financial reporting during the quarter.
Important facts to verify
- Reconcile first-half operating cash flow: the cash flow statement reports $33.28 million for 2018 and $18.12 million for 2017, while MD&A gives $18.32 million for 2017.
- Reconcile depreciation, depletion and amortization: the statements of operations report $9.14 million for Q2 and $17.65 million for the first half of 2018, while MD&A cites $9.31 million and $17.97 million, respectively.
- Confirm the customer concentration period and figures: the notes and MD&A describe the 84%/13% sales concentration with differing period references.
- Assess liquidity and development funding needs alongside the working capital deficit, capital-spending pace, borrowing-base redeterminations, and the possibility of future equity or debt financing.
- Review the economic impact of the 2018 oil collars, including realized losses and the upside price caps, and monitor commodity prices and customer receivable exposure.