Ring Energy, Inc. — Q3 2017 Form 10-Q
Business context and period: Ring Energy is a Texas-focused oil and natural gas producer. This unaudited quarterly filing covers the three and nine months ended September 30, 2017; comparisons are with the corresponding 2016 periods.
Financial results and liquidity
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Oil and gas revenue | $16.64 million | $7.82 million | $43.39 million | $21.02 million |
| Operating income (loss) | $4.29 million | $(9.12) million | $9.42 million | $(58.47) million |
| Net income (loss) | $3.07 million | $(5.94) million | $6.26 million | $(37.16) million |
| Basic and diluted EPS | $0.06 | $(0.14) | $0.12 | $(1.00) |
| Operating cash flow | Not separately presented | Not separately presented | $28.30 million | $4.90 million |
- Q3 oil revenue growth reflected oil sales volume rising to 346,900 barrels from 174,707 and realized oil price increasing 13% to $46.17 per barrel. For the nine months, oil volume increased to 893,562 barrels from 527,010 and realized price rose 27% to $46.56. Gas volumes declined in both comparisons.
- Production costs were $4.26 million in Q3 and $10.48 million year to date. LOE was $11.20 per BOE in Q3 versus $10.94; year-to-date LOE was $10.62 per BOE versus $10.94. Production taxes were approximately 5% of revenue in both periods.
- DD&A was $4.82 million in Q3 and $13.43 million year to date, up from $2.57 million and $8.54 million, respectively, mainly due to higher production.
- Cash was $40.88 million at September 30, 2017, down from $71.09 million at December 31, 2016. Current assets were $49.72 million and current liabilities $21.64 million. No borrowings were outstanding under the credit facility; the stated borrowing base was $60 million, within a $500 million maximum facility. The company reported covenant compliance.
- Year-to-date investing cash outflow was $117.62 million, including $26.92 million for property purchases and $87.58 million for development. Financing cash inflow was $59.10 million, primarily from the common-stock offering. Net cash decreased $30.21 million.
- Total liabilities were $29.85 million, including $8.62 million of asset retirement obligations. The filing reports no interest expense for 2017 year to date.
Material changes and notable items
- Results improved substantially versus 2016, when Ring recorded ceiling-test impairments of $9.65 million in Q3 and $56.51 million for the first nine months. No such impairment was recorded in 2017. The filing attributes the earnings improvement to the absence of that noncash charge, higher sales volumes from development activity, and higher realized oil prices.
- Capital investment increased significantly versus the first nine months of 2016, when oil and gas property purchase and development outlays totaled $22.35 million. Cash was also supported by a July 2017 common-stock offering: approximately $62.2 million gross and $59.2 million net proceeds. By September 30, approximately $40.7 million had been spent on leasing and development, with approximately $18.5 million remaining.
- Common shares outstanding increased to 54,145,901 from 49,113,063 at year-end 2016. The filing reports $2.76 million of share-based compensation for the first nine months of 2017.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Outlook, risks and contingencies
- No quantified production, revenue, earnings, or capital-spending guidance is provided. Management says future results and growth depend heavily on oil and gas prices, development success, and access to capital; acquisitions may require additional financing.
- Ring entered WTI oil costless collars covering 1,000 barrels per day: $49 floor/$55.35 ceiling for Q4 2017 and $49/$54.60 for 2018. After quarter-end it added collars for another 1,000 barrels per day for 2018 at a $51 floor/$54.80 ceiling. These limit downside exposure but also cap some upside; derivative counterparties include credit-facility lenders.
- Customer concentration is significant: two purchasers represented 73% and 23% of nine-month revenue and 85% and 11% of receivables at September 30. Oil and gas sales are generally unsecured. The company also held cash above federally insured limits.
- Key disclosed risks include volatile commodity prices, drilling and reserve-estimation uncertainty, development costs, dependence on gathering and transportation providers, competition, environmental and regulatory requirements, and reliance on key personnel. Management notes lower prices can reduce cash flow, borrowing capacity, and economically recoverable reserves, and may trigger property impairment.
- Twenty-three wells were expected to be plugged within 12 months at an estimated aggregate cost of $414,000. Standby letters of credit totaled $280,000; none had been drawn. Management reported no known environmental demands, claims, or proceedings related to the company or acquired properties.
Important facts for investors to verify
- Whether increased oil volumes and realized prices are sustainable, and how production performance and per-BOE costs evolve.
- Available liquidity after the elevated development program, the next borrowing-base redetermination, and any future financing needs.
- Customer concentration, purchaser payment performance, and the company’s exposure to cash held above insured limits.
- Hedge volumes, collar settlements, counterparty exposure, and the extent to which hedges constrain upside.
- Reserve assumptions and sensitivity of future ceiling tests and asset values to commodity prices.