Ring Energy, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. The interim consolidated financial statements are unaudited. Ring owns oil and natural gas interests in Texas and Kansas; results are primarily exposed to production levels and commodity prices.
Financial results and liquidity
| Metric | Q1 2014 | Q1 2013 / prior date |
|---|---|---|
| Oil and gas revenue | $5.97 million | $1.15 million |
| Income (loss) before tax | $1.85 million | $(0.97) million |
| Net income (loss) | $1.16 million | $(0.97) million |
| Diluted earnings (loss) per share | $0.05 | $(0.07) |
| Cash provided by (used in) operations | $7.53 million | $(0.37) million |
| Cash used in investing activities | $22.10 million | $1.48 million |
| Cash and cash equivalents | $37.73 million | $52.35 million at Dec. 31, 2013 |
| Current assets / current liabilities | $40.66 million / $9.67 million | $56.31 million / $7.23 million at Dec. 31, 2013 |
Revenue grew about 418% year over year. Net margin was approximately 19.5% (derived from reported net income and revenue). Oil sales volume rose to 63,944 barrels from 14,245; average realized oil price increased 16% to $92.71 per barrel. Natural gas sales volume was 8,617 Mcf versus 5,757 Mcf, and average realized price increased 83% to $4.88 per Mcf. Production costs increased to $771,100 from $141,255; LOE rose to $11.79 per BOE from $9.29. DD&A increased to $1.53 million from $343,608, mainly with higher production. G&A was broadly flat at $1.56 million.
Capital spending on property purchases, development, and equipment totaled $22.10 million. Operating cash flow less these investing outflows was approximately negative $14.58 million; cash declined $14.62 million during the quarter. Operating cash flow included favorable working-capital movements, including a $2.44 million increase in accounts payable.
At March 31, Ring had no borrowings under its revolving credit facility; $9.855 million was available under the $10 million facility, subject to its terms. The facility bore interest at prime plus 0.25% and matured October 30, 2015. Total liabilities were $12.86 million, including $9.67 million current liabilities, $1.39 million deferred taxes, and $1.80 million asset retirement obligations. The filing reports no separate debt balance outstanding.
Material changes and developments
- The company acquired Permian Basin properties in Andrews County, Texas, for $6.51 million cash, adding interests in 11 producing leases, 907 net acres, and 660 net acres of non-producing leasehold.
- Property purchase and development spending increased substantially from Q1 2013. Management attributed revenue and profit growth primarily to higher production from its drilling program, alongside higher realized prices.
- On May 7, 2014, the company disclosed an amendment effective May 1 increasing its revolving credit borrowing base to $25 million. The filing does not state the amount available under the amended facility.
- At March 31, one customer, HollyFrontier Refining and Marketing, accounted for 90% of oil and gas revenue and 90% of accounts receivable.
Outlook, risks, and contingencies
The filing provides no quantified earnings, production, or capital-spending guidance. Management said compensation and other G&A may increase as the company grows and hires, and stated that future acquisitions could require substantially more capital than available cash, potentially requiring debt or equity financing. Management’s stated preference is to pursue producing or developed-undrilled properties rather than exploratory properties.
Key risks include volatile oil and gas prices, drilling and development costs and outcomes, reserve-estimate uncertainty, access to financing, transportation and gathering costs, environmental and regulatory requirements, and reliance on key personnel. All production is sold under price-sensitive or market-price contracts; the company uses no interest-rate derivatives. Customer concentration creates collection risk, and cash exceeded federally insured limits. Standby letters of credit totaled $145,000 and had not been drawn. The company reported no known environmental claims or proceedings and no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether production growth and realized pricing can be sustained, and the economics and results of the drilling program.
- The extent of continued dependence on HollyFrontier and the collectability and timing of customer receivables.
- Current availability, borrowing-base conditions, covenants, and maturity terms of the amended $25 million facility.
- Whether operating cash flow can fund development and acquisitions without materially reducing liquidity or requiring new financing.
- Reserve estimates, future depletion and impairment exposure, and plugging and abandonment obligations.