Ring Energy, Inc. — Q3 2018 Form 10-Q
Business and period: Ring Energy is a Midland-based oil and gas exploration and production company focused on Texas, with production from the Permian Basin. This unaudited report covers the quarter and nine months ended September 30, 2018; comparisons are with the corresponding 2017 periods unless noted.
Financial results and liquidity
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Oil and gas revenue | $32.7 million | $16.6 million | $92.5 million | $43.4 million |
| Operating income | $9.6 million | $4.3 million | $29.9 million | $9.4 million |
| Net income | $5.7 million | $3.1 million | $16.1 million | $6.3 million |
| Diluted EPS | $0.09 | $0.06 | $0.27 | $0.12 |
- Q3 operating and net margins were approximately 29% and 17%; nine-month operating and net margins were approximately 32% and 17%, respectively.
- Q3 oil sales volume rose to 555,020 barrels from 346,900; realized oil price increased 23% to $57.00 per barrel. Nine-month oil volume rose to 1,504,330 barrels from 893,562; realized price increased 28% to $59.65.
- Operating cash flow for the first nine months was $52.0 million, versus $28.3 million. Investing cash outflow was $162.1 million, including $162.2 million for oil and gas property purchases and development. The resulting operating-cash-flow-less-property-spending shortfall was approximately $110.2 million.
- Cash was $3.8 million at September 30, 2018, down from $15.0 million at December 31, 2017. Financing included $81.8 million of net common-stock proceeds and $17.0 million of revolving-credit draws.
- Current assets were $17.6 million and current liabilities $48.9 million. The company reported $17.0 million outstanding on its revolving credit facility and $6.4 million of current derivative liabilities. Total liabilities were $76.1 million; stockholders’ equity was $457.6 million.
- Lease operating expense increased to $7.2 million in Q3 and $19.6 million for the nine months; cost per BOE rose to $12.00 and $11.98, respectively. DD&A and G&A also increased year over year.
Material changes and management commentary
- Revenue and earnings growth reflected higher production volumes from development activity and higher realized oil prices. Nine-month revenue more than doubled year over year.
- Capital spending increased substantially versus 2017 as the company expanded development. The report does not provide numerical production guidance or a formal earnings outlook.
- Management said that, at then-current prices, additional realized derivative losses were expected during the remainder of 2018.
- The credit facility has a $175 million borrowing base, following an increase from $60 million in June 2018, and matures June 26, 2020. Borrowing-base redeterminations occur semiannually. Ring reported compliance with its covenants at September 30, including a maximum 4.0-to-1 leverage ratio and minimum 1.0-to-1 current ratio.
Risks, contingencies, and unusual items
- 2018 commodity collars covered 2,000 barrels of oil per day, with floors of $49 and $51 and ceilings of $54.60 and $54.80 per barrel. Ring recorded realized derivative losses of $2.7 million in Q3 and $6.6 million for the nine months, plus unrealized losses of $0.6 million and $2.5 million, respectively.
- After quarter-end, Ring terminated its 2019 collars covering 2,000 barrels per day by paying $3.438 million. The filing identifies this as a subsequent event.
- Customer concentration is high: two buyers represented 84% and 12% of nine-month revenue and 88% and 7% of accounts receivable at quarter-end. Receivables are generally unsecured.
- Key risks include oil and gas price volatility, development and drilling costs, access to capital, reserve estimates, transportation constraints, environmental and regulatory requirements, and reliance on key personnel. The filing says a sustained price decline could impair properties and adversely affect cash flows and borrowing capacity.
- The company disclosed a $250,000 standby letter of credit for Texas operations, with no draws. It described legal matters as arising in the normal course but did not identify a specific material proceeding. Management assessed disclosure controls as effective and reported no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether production growth and realized prices can support development spending while cash remains low and capital needs remain high.
- The effects of the 2019 collar termination payment and the company’s future commodity-hedging strategy.
- Borrowing-base availability and covenant headroom following the next scheduled redetermination.
- Exposure to the two principal purchasers, including collection timing and any change in customer concentration.
- Whether higher operating costs and DD&A persist, and how future commodity prices affect profitability, reserves, and liquidity.