Ring Energy, Inc. — 2015 Form 10-K
Business context and reporting period. This is an annual report for the fiscal year ended December 31, 2015, not a standalone fourth-quarter filing. Ring is a U.S. oil and gas exploration and production company focused on the Permian Basin in Texas, with additional acreage in Kansas. Its 2015 activity included acquiring 19,983 gross acres in Reeves and Culberson Counties, Texas.
Financial and operating performance
| Metric | 2015 | 2014 |
|---|---|---|
| Oil and gas revenue | $31.0 million | $38.1 million |
| Net income (loss) | $(9.1) million | $8.4 million |
| Operating income (loss) | $(13.3) million | $12.6 million |
| Net cash from operations | $9.8 million | $33.7 million |
| Cash at year-end | $4.4 million | $8.6 million |
| Credit-facility debt outstanding | $45.9 million | $0 |
| Current assets / current liabilities | $8.7 million / $11.3 million | $15.1 million / $16.3 million |
Production rose 60% to 743,363 BOE (2,037 BOE per day). Oil sales volume increased to 664,612 barrels, while natural gas sales volume increased to 472,509 Mcf. Average realized prices fell sharply: oil to $44.90 per barrel from $83.04, and gas to $2.48 per Mcf from $3.53. Total realized sales price declined to $41.72 per BOE from $81.18.
Operating costs increased: production cost was $13.40 per BOE versus $10.77. The reported operating margin was approximately negative 43% in 2015, compared with positive 33% in 2014; net margin was approximately negative 29%, compared with positive 22%. These margins are calculated from reported revenue and operating or net income.
Investing cash outflow was $110.1 million, principally for oil and gas property acquisitions and development. Financing provided $96.1 million, including $50.0 million net proceeds from a stock offering and $45.9 million of credit-facility borrowings. Year-end working capital was negative $2.6 million. The filing reports covenant compliance at year-end despite negative working capital.
Material changes versus the prior comparable period
- Revenue declined about 19% despite higher production, primarily because realized commodity prices fell.
- Ring moved from net income of $8.4 million to a net loss of $9.1 million. The 2015 loss included a $9.3 million non-cash full-cost ceiling-test impairment; no such impairment was recorded in 2014.
- Operating cash flow fell to $9.8 million from $33.7 million, while cash declined by $4.2 million during 2015.
- Year-end debt increased from zero to $45.9 million following draws on the revolving credit facility, including in connection with the Texas acquisition.
- Proved reserves grew to 24.4 million BOE from 10.4 million BOE, supported by acquisitions and reserve additions. However, the standardized measure of discounted future net cash flows fell to $172.7 million from $196.3 million, reflecting primarily lower prices and changes in estimated cash-flow timing.
Reserves, outlook, and risks
At year-end, proved reserves were approximately 91% oil; 65% were proved undeveloped and 33% proved developed producing. Pre-tax PV-10 was approximately $240.2 million, a non-GAAP measure, versus a standardized measure of $172.7 million. The reserve estimate used average prices of $48.173 per barrel of oil and $2.505 per Mcf of gas. These standardized reserve valuations are not estimates of current market value.
Management said it would scale back development while commodity prices remained low and unstable, manage capital spending around operating cash flow, and continue to pursue acquisitions meeting its financial and operational objectives. The filing gives estimated PUD-development costs of $61.9 million for 2016 and $55.0 million for 2017, but these are reserve-report estimates, not a firm spending commitment or company earnings guidance. No specific financial or production guidance is provided.
The $100 million borrowing base is subject to periodic redetermination; the facility matures June 26, 2020, is secured by substantially all company assets, and includes leverage and current-ratio covenants. Management warned that weaker commodity prices could reduce the borrowing base and trigger further property write-downs. Ring had no production hedges at year-end; a 1% interest-rate change was estimated to affect annual interest expense by about $459,000 at the outstanding balance.
Key risks include volatile oil and gas prices, the high proportion of undeveloped reserves and the capital needed to develop them, reserve-estimate uncertainty, impairment risk, customer concentration, and potential operational, environmental, regulatory, and transportation disruptions. Three customers represented 48%, 23%, and 20% of 2015 sales. The company said it was not aware of environmental claims or proceedings involving it or acquired properties. A 2015 shareholder lawsuit concerning credit-agreement provisions was dismissed; a subsequent settlement of attorney-fee claims was described as insignificant.
Auditor Eide Bailly LLP issued an unqualified opinion on the financial statements and stated that internal control over financial reporting was effective as of December 31, 2015. Management also concluded disclosure controls were effective.
Most important facts for investors to verify
- Whether the borrowing base, covenant headroom, and liquidity remain adequate after subsequent commodity-price and reserve-value changes.
- Actual realized prices, production, operating costs per BOE, and operating cash flow relative to the 2015 downturn.
- Whether the large PUD inventory can be developed on schedule and within the reserve report’s estimated costs, particularly given management’s cash-flow-based spending approach.
- The assumptions behind year-end proved reserves, PV-10, the standardized measure, and any subsequent impairment or borrowing-base redetermination.
- Customer and accounts-receivable concentration, and any material developments in the litigation settlement or other contingencies after the filing date.