Ring Energy, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. Ring Energy is a Permian Basin oil and gas exploration and production company operating in Texas and New Mexico. The filing was signed March 16, 2020. Unless noted, amounts are U.S. dollars.
Financial and operating performance
| Metric | 2019 | 2018 | Change / context |
|---|---|---|---|
| Oil and gas revenue | $195.7 million | $120.1 million | Up 63%; mainly higher volumes following the Wishbone acquisition |
| Net income | $29.5 million | $9.0 million | Basic and diluted EPS were $0.44, versus $0.15 |
| Operating income | $60.1 million | $20.0 million | Operating margin was approximately 30.7%, versus 16.6% |
| Operating cash flow | $106.6 million | $70.4 million | Investing cash outflow was $423.0 million; financing cash inflow was $323.1 million |
| Production sold | 3.95 million BOE | 2.23 million BOE | Up 77%; year-end December daily production was 11,498 BOE/d |
| Average realized price | $54.27/bbl oil; $1.54/Mcf gas; $49.56/BOE total | $56.99/bbl oil; $3.05/Mcf gas | Oil and gas prices declined; natural gas price fell substantially |
| Production cost | $12.28/BOE | $12.45/BOE | Lower per BOE despite higher aggregate costs |
Net margin was approximately 15.1%. Interest expense increased to $13.9 million from $0.4 million, principally due to higher credit-facility borrowings. Income tax provision was $13.8 million, including a stated $4.0 million excess tax expense related to share-based compensation. No ceiling-test impairment was recorded in 2019; 2018 included a $14.2 million non-cash impairment.
Balance sheet, liquidity and reserves
- At December 31, 2019, cash was $10.0 million, current assets $38.7 million and current liabilities $59.1 million, giving negative working capital of $20.4 million.
- Credit-facility borrowings were $366.5 million, up from $39.5 million at year-end 2018. The borrowing base was $425 million, under a facility with a stated $1 billion maximum and maturity through April 2024. The facility is secured by substantially all company assets. Ring reported compliance with its covenants.
- Total liabilities were $449.5 million; stockholders’ equity was $523.5 million. Asset retirement obligations were $16.8 million.
- Proved reserves were 81.1 million BOE, approximately 88% oil. Reserves were 53% proved developed producing, 5% proved developed non-producing and 42% proved undeveloped. The independent-engineer reserve report showed pre-tax PV10 of approximately $1.103 billion and standardized measure of discounted future net cash flows of $923.2 million. PV10 is a non-GAAP measure, and neither valuation should be treated as market value.
Material changes and significant items
- Wishbone acquisition: Completed in April 2019, adding Northwest Shelf properties and 49,754 gross (38,230 net) acres. The acquisition added approximately 45.3 million BOE of year-end proved reserves. The filing reports approximately $276.1 million cash paid and shares issued as consideration; acquisition accounting recorded approximately $304.4 million of oil and gas properties. Part of the issued stock remained in escrow for potential indemnification claims.
- Growth and funding: Year-end acreage increased to 166,363 gross (122,396 net) acres. Capital spending and the acquisition materially increased property assets and debt; year-end shares outstanding were 67.99 million, versus 63.23 million a year earlier.
- Reserve revisions: Reserve growth primarily reflected the acquisition, but estimates also included notable downward revisions from well performance and commodity prices. SEC pricing assumptions for year-end reserves were $52.41/bbl oil and $1.47/Mcf gas.
- Quarterly restatement: Ring restated its first-, second- and third-quarter 2019 interim financial statements for errors in income-tax calculations related to equity compensation. The nine-month net income adjustment was a reduction of $8.9 million. The company identified a material weakness in interim financial reporting controls and said it would add annual-review procedures and third-party review. Management nevertheless concluded annual internal control over financial reporting was effective as of December 31, 2019; the auditor issued an unqualified opinion on the financial statements and internal controls.
Outlook, risks and contingencies
- Ring’s preliminary 2020 plan contemplated 18 Northwest Shelf horizontal wells, but after the sharp oil-price decline it said it had drilled the four wells planned for the first quarter and would cease further drilling until commodity prices stabilized. It also planned to operate within internally generated cash flow and was marketing Delaware Basin assets to reduce debt. No specific financial guidance was provided.
- COVID-19 concerns and the Russia-Saudi Arabia oil price conflict were cited as drivers of market uncertainty and lower oil prices. Management warned that prolonged price weakness could impair revenues, liquidity, reserve values, borrowing capacity and planned capital spending.
- At year-end, 2020 WTI costless collars covered 5,500 barrels/day, with a $50 floor and ceilings of $58.25–$65.83 (average $61.06). Subsequent to year-end, Ring added 2021 collars covering 4,500 barrels/day, with floors of $40–$45 and ceilings of $52.71–$55.35. These contracts limit some downside but also cap potential upside.
- Customer concentration remained substantial: Phillips 66, Oxy and NGL Crude accounted for 42%, 36% and 7% of 2019 revenue and 47%, 31% and 9% of year-end receivables, respectively. The company said alternative purchasers were available.
- Other principal risks include the high proportion of undeveloped reserves and their required development capital, semiannual borrowing-base redeterminations, variable-rate debt, commodity volatility, operational and environmental hazards, and reliance on third-party gathering and transport infrastructure. The filing reports no material litigation pending or threatened.
- After year-end, the company reported that its $3.0 million derivative liability at December 31, 2019 had become an asset by March 16, 2020 following a significant decline in oil prices; the filing text does not provide a clear value for that subsequent asset.
Investor verification priorities
- Confirm the scale and terms of the Wishbone acquisition, remaining escrow shares and the resulting contribution to production, reserves and debt.
- Monitor borrowing-base redeterminations, covenant headroom, interest costs, negative working capital and progress on asset sales or deleveraging.
- Assess the planned suspension of drilling, actual 2020 capital spending and the economic viability of developing the substantial PUD reserve inventory.
- Review reserve assumptions, revisions and development-cost estimates. The filing contains an apparent conflicting statement describing year-end pre-tax PV10 as “approximately $6 million”; its reserve tables and repeated disclosures report approximately $1.103 billion, so the discrepancy should be checked against the filed exhibits.
- Track remediation of the interim tax-control material weakness and verify the restated quarterly results and associated equity-compensation tax calculations.
- Evaluate hedge coverage, counterparties and limits on upside, alongside customer and receivable concentration and the impact of commodity-price changes.