Ring Energy, Inc. — Q2 2016 Form 10-Q
Business context and period. Ring Energy is an oil and natural gas company with properties in Texas and Kansas. This unaudited quarterly report covers the three and six months ended June 30, 2016; results are not necessarily indicative of full-year performance.
Financial performance
| Metric | Three months ended June 30, 2016 | Six months ended June 30, 2016 |
|---|---|---|
| Oil and gas revenue | $7.1 million, down from $9.0 million | $13.2 million, down from $15.0 million |
| Operating income (loss) | $(25.5) million, versus $1.0 million | $(49.3) million, versus $(0.5) million |
| Net income (loss) | $(15.9) million, versus $0.5 million | $(31.2) million, versus $(0.4) million |
| Net cash used in operating activities | Not reported separately | $(3.0) million, compared with $(2.9) million |
- Q2 oil sales volume declined about 3% year over year to 160,925 barrels; realized oil price fell 22% to $41.22 per barrel. Gas volume rose to 201,992 Mcf, while realized price fell 19% to $2.33 per Mcf.
- For the first half, oil volume increased to 352,303 barrels and gas volume to 458,740 Mcf, but lower realized prices—oil down 29% to $34.69 per barrel and gas down 24% to $2.13 per Mcf—more than offset the volume gains.
- Q2 lease operating expense was $2.2 million, or $11.31 per BOE, compared with $12.15 per BOE a year earlier. First-half expense was $4.7 million, or $10.94 per BOE, versus $12.66 per BOE.
- Cash was $8.3 million at June 30, compared with $4.4 million at December 31, 2015. Total current assets were $12.5 million and current liabilities $3.6 million.
- No revolving-credit balance or long-term debt was outstanding at June 30. The borrowing base had been reduced from $100 million to $60 million in May; the facility matures in 2020. The company reported compliance with its covenants.
- First-half investing cash outflow was $8.4 million, versus $89.8 million in 2015. Financing provided $15.3 million, including $61.1 million net proceeds from an April stock offering, partly offset by $50.9 million of revolver principal repayment.
Material changes and unusual items
- Ring recorded a noncash full-cost ceiling-test impairment of $25.5 million in Q2 and $46.9 million for the first half; there was no comparable impairment in 2015. The charge drove reported operating and net losses and reduced the carrying value of oil and gas properties. Management said it would lower future DD&A rates; the impairment cannot be reversed in later periods.
- The April offering issued 11.5 million shares at $5.60 each, producing $61.1 million net proceeds. The proceeds repaid the $50.9 million revolver balance and supported interest and other capital needs. Shares outstanding increased to 41.9 million at June 30 from 30.4 million at year-end.
- First-half G&A increased to $4.1 million from $3.8 million; Q2 G&A decreased to $1.9 million from $2.0 million.
- Two customers accounted for 49% and 43% of first-half oil and gas revenue and 45% and 39% of accounts receivable, respectively. The company had no commodity hedges and sold production under market-sensitive contracts.
Outlook, risks, and contingencies
The filing provides no quantified earnings, production, or capital-spending guidance. Management said it intends to pursue producing or developed properties, but noted that acquisitions could require more capital than currently available and might require debt or further equity issuance.
- Key risks include volatile commodity prices, future financing needs, borrowing-base redeterminations, production and reserve uncertainty, drilling and operating hazards, transportation access and costs, and environmental and regulatory requirements.
- Management warned that lower or extended depressed commodity prices could reduce revenue, economically recoverable reserves, borrowing capacity, and property values, and could cause further impairments.
- Standby letters of credit totaling $280,000 support operations in Texas and Kansas; none had been drawn. Ring reported no known environmental demands, claims, or proceedings involving the company or acquired properties.
- Management assessed disclosure controls as effective at June 30, 2016; it reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How current and future commodity prices affect realized revenue, reserve economics, and the full-cost ceiling-test calculation.
- The next borrowing-base redetermination, revolver availability, covenant headroom, and the impact of further asset-value changes.
- Whether operating cash flow and cash on hand can support planned development and acquisitions without additional financing or dilution.
- The sustainability of production volumes and per-BOE operating costs, and the concentration of sales and receivables among two customers.
- The assumptions and reserve estimates underlying the $46.9 million first-half impairment and the resulting future depletion expense.