Ring Energy, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2015. The interim financial statements are unaudited. Ring owns oil and gas interests in Texas and Kansas.
Financial performance and liquidity
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Oil and gas revenue | $8.98 million | $11.20 million | $15.02 million | $17.17 million |
| Operating income (loss) | $1.02 million | $4.46 million | ($0.53 million) | $6.26 million |
| Net income (loss) | $0.53 million | $2.82 million | ($0.44 million) | $3.99 million |
| Net income (loss) per diluted share | $0.02 | $0.11 | ($0.02) | $0.16 |
- Revenue declined about 20% in Q2 and 13% for the six-month period. Higher production volumes were outweighed by lower realized prices.
- Q2 operating and net margins were approximately 11% and 6%, compared with 40% and 25% a year earlier. The six-month periods shifted from positive operating and net margins to losses.
- Six-month operating cash flow was negative $2.92 million, versus positive $13.03 million in 2014. Investing used $89.82 million, including $76.68 million for property acquisitions and $12.82 million for development. Financing provided $89.88 million, including $48.92 million net equity proceeds and $40.90 million in borrowing. Cash ended the period at $5.77 million, down from $8.62 million at year-end 2014.
- At June 30, current assets were $13.59 million and current liabilities $7.00 million, implying working capital of $6.59 million and a current ratio of about 1.94. Long-term debt was $40.90 million; total liabilities were $58.94 million. The company reported compliance with its credit covenants.
- The secured revolving facility has a $500 million maximum commitment, a $100 million initial borrowing base and a June 2020 maturity. The borrowing base is subject to redetermination, beginning November 2015.
Material changes and transactions
- In June, Ring acquired properties in the Ford West Field and Ford Geraldine Unit in Texas for $75 million cash, assuming approximately $0.69 million of accounts payable and recording $2.18 million of asset retirement obligations. The assets include 14,645 gross acres and a 98% average working interest.
- The acquisition was funded with the June public offering of 4.5 million shares at $11.50 per share, generating $48.92 million net. An additional 100,000 shares were sold under the over-allotment option in July for approximately $1.09 million net.
- Q2 oil volume rose to 165,759 barrels from 118,533; the average realized oil price fell 44% to $52.52 per barrel. Six-month oil volume rose to 302,848 barrels from 182,477; average realized price fell 48% to $48.55. Natural gas volumes also rose, while realized prices fell.
- Production costs increased to $12.15 per BOE in Q2 from $9.00, and to $12.66 per BOE for six months from $9.99. Management attributed increases to additional wells and ad valorem taxes. Six-month DD&A rose to $6.86 million from $5.01 million, while the depletion rate declined to $20.91 per BOE from $26.80.
Outlook, risks and contingencies
- The filing provides no formal earnings or production guidance. Management said lower oil and gas prices and reduced price forecasts for the rest of 2015 could pressure revenue, cash flow, borrowing capacity, economic reserves and asset values. Ring intends to pursue producing or developed properties, but acquisitions may require additional capital.
- Key exposures include volatile commodity prices, variable-rate debt, drilling and operating risks, transportation constraints, environmental and regulatory requirements, and concentration of customers. Three customers represented 88% of six-month revenue; those customers represented 85% of accounts receivable at June 30.
- A shareholder class action filed July 10 alleges fiduciary-duty breaches related to credit-agreement change-of-control provisions. The agreement was amended; Ring says it will seek dismissal, believes it has meritorious defenses and expects associated costs to be immaterial.
- A 1% change in the credit facility interest rate would change annual interest expense by an estimated $409,000 at the June 30 borrowing level. Ring reported no interest-rate derivatives and no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether acquired properties deliver expected production, costs and cash flow, and how the acquisition affects reserves and the borrowing base.
- Subsequent commodity prices, realized pricing, production volumes and per-BOE operating costs.
- Available liquidity after acquisition spending, the November 2015 borrowing-base redetermination, and ongoing covenant compliance.
- Customer concentration and collection of oil-sale and joint-interest receivables.
- Developments in the shareholder lawsuit and any resulting costs or changes to credit-facility terms.