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Ring Energy: Oil Sales Up 90%, Cash Flow Up 180%, And Growth Continues To Accelerate

Summary

  • The latest stock offering put the cash balance back above $70 million.
  • Management is adding a second rig at a time when most of the industry is cutting back.
  • Management grows by selling equity, so there is no long-term debt on the balance sheet.
  • The IRR includes the cost of the lease per location. This results in a far more realistic return to shareholders of the well profitability.
  • Management is making a ton of money from the San Andres. The company has yet to fully exploit either the Delaware Basin or the Wolfcamp. Both could add a lot of value to the stock.

Cash-laden Ring Energy (REI) is going to hit the gas peddle and shareholders are going to love it. This company has grown using equity financing. So the balance sheet is debt free.

“Based on the continuing positive results of the Company’s horizontal drilling program, the majority of the Company’s revised budget will be allocated to Ring’s Central Basin Platform (“CBP”). Management had previously announced a preliminary 2017 CAPEX budget in November 2016 of approximately $70 million which included the drilling of up to 22 new horizontal wells, and in July 2017, the extension of the contract on the current drilling rig through year-end 2017. Under the revised CAPEX budget, the Company plans to add a second drilling rig in mid-August 2017. Management estimates that under the two rig program, the Company will drill approximately 20 additional new horizontal wells in 2017 on its CBP asset, bringing the estimated total of new horizontal wells to be drilled in 2017 on its CBP asset to approximately 42.”

The new capital budget is $120 million plus the company has about $500 million line of credit that is unused. So there is plenty of ability to expand or make more acquisitions. While many in the industry are decreasing their capital budgets, this company has the cost structure, and a lot of infrastructure in place to make money in this environment. This company is already reporting PROFITS and it is going to be in a position to report a whole lot more profits in the near future.

Source: Ring Energy Second Quarter, 2017, Press Release

Production has increased about 25% over the first quarter. Management has placed a fair amount of administrative personnel in place to handle the accelerating growth. So administrative expenses per BOE should decline considerably as production climbs. The same will probably happen for the other costs shown except production taxes which vary with the sale price.

Depreciation, depletion and amortization not only reflects a combination of old and new well costs but also the supporting infrastructure. At least part of the infrastructure cost is fixed over a certain volume range. So continuing production improvements and the infrastructure in place already will lead to future decline in non-cash charges per BOE.

The BOE production equivalent did not increase quite as much as the oil increasing because the production mix shifted more towards oil. So gas production actually declined a little bit. Oil sales actually increased 90%. That rate of increase may not slow much when the second rig is added in mid-August. This company will probably show impressive growth for the next year.

The company sold nearly 5 million shares just a few weeks ago to finance that second rig. The proceeds of $59.2 million probably put the cash balance back over $70 million when using the quarter ending balance. Shares outstanding were about 50 million at the end of the second quarter. So the latest stock sale adds about another 10% to shares outstanding but will nearly double the number of wells drilled by year-end. That will offset the dilutive effects of the additional shares. There will be no quarterly earnings setback from this stock offering.

Source: Ring Energy Second Quarter, 2017, Press Release

Cash flows from operating activities before changes in working capital were about $8.8 million for the three-month period (a 180% increase) and $16 million for the year-to-date period. As shown above, if the working capital accounts are considered, the cash flow increase from operations is far more dramatic. When the relatively small production amount is considered, the cash flow is tremendous from these new wells.

WPX Energy (WPX), a company that spent a lot of money to enter the Permian, has production of nearly 90 MBOED but cash flow from operating activities of $22 million in the first quarter. Adjustments can be made to the cash flow, but the production is clearly producing a lot less cash per BOE than the production of Ring Energy. WPX lost more than $600 million last year and still has some debt to pay. More dilution could be in the near future. The Ring Energy losses of the past year are nothing on the scale of WPX and cash flow will cover growth and maintenance expenses much more rapidly.

Approach Resources (AREX) is another competitor with a similar cash flow of $8.8 million in the first quarter. But production was 11.4 MBOED because the production of Approach has more gas and natural gas liquids. Approach Resources will benefit from increased profitability as its water handling system increases the volumes handled from increasing production. Unlike Ring Energy, Approach Resources has more than $300 million of debt, so the company does need to increase production to handle the debt load. But the assets are in place.

Ring Energy has no debt. Therefore, the company is in a far better position to weather a commodity price downturn. Management simply stops drilling and waits out the downturn. Management also has a line of credit to take advantage of any distressed sales. There are no debt obligations. Wells are very cheap so any lease retention activities will not be expensive. In fact, a vertical well would hold the lease for production at very minimal expense.

Source: Ring Energy Corporate Investor Presentation, August, 2017

This company provides a lot of extras in the IRR calculation. The most noticeable by far is the effect of the acreage cost per location. Right now management is only drilling the San Andres and so management has conservatively (meaning the higher cost) estimated the location cost per well. That gives investors a very good idea of prospective profitability. Finding and development costs are also included. Contributor Raw Energy, in his “Bottom Of The Barrel Club” articles has often noted several major exclusions from well profitability calculations.

Adding an estimated lease cost goes a long way to providing the true profitability of the well. Numerous articles have documented the high cost of Permian acreage. When that acreage is paid for using equity, then the acquisition price does not have to be repaid by management. But a failure to include that acreage cost in the well rate of return results in abnormally high IRR’s that the shareholders will never see.

Parsley Energy (PEpurchased a lot of leases for stock. But whenever the company calculates the IRR’s, those lease costs per location is not included. Based upon the prices paid for the acreage, a neutral observer can bet that location cost is far higher than what is shown for Ring Energy and that location cost would decrease the well profitability substantially. Rumors of lease purchases that cost $1 million to $2 million per location abound. The Parsley Energy balance sheet is in decent shape because equity was used. But that is small comfort to the shareholders who will not realize the advertised IRR as anything approaching shareholder profits because the lease acreage cost per location was not in the IRR.

Source: Ring Energy Corporate Investor Presentation, August, 2017

Management has been exploring a relatively ignored part of the Permian. As a result, acreage acquisition has been cheap and the wells are relatively profitable. One sign of excellent management is adding value where no one else saw any value. This management is doing an excellent job of that.

There are other formations on the company acreage such as the Wolfcamp. But the relatively shallow wells of the San Andreas have resulted in very cheap well costs and excellent returns. This gives management quite a bit of drilling flexibility as well as the ability to grow under some very hostile industry conditions. That is why the company is accelerating growth as much of the industry is very publicly cutting back.

But now the company has some acreage in the Delaware Basin that management will increase future activity. Like the current acreage, management has been whipping the infrastructure into shape and maximizing the current production. That took awhile with the San Andres acreage. But now the increasing and profitable production has been worth the effort.

Management will use the same deliberate technique with this acreage. Note that not all the acreage has the room for horizontal wells. So management will drill vertical wells whenever they are profitable enough to drill.

Source: Ring Energy Corporate Investor Presentation, August 2017

Several key players have built oil and gas explorations company before. That adds to the safety of the investment considerably. By many measures the stock is not cheap. But with management continually reporting growth of 80% to 100%, this stock is unlikely to get cheaper anytime soon. The company has the financing in place to grow rapidly for the foreseeable future. Cash flow is growing fast enough that total fiscal year cash flow could exceed more than one-third of the capital budget by year-end. A lot will depend upon the commodity prices and the timing of beginning production.

The current market value (including the latest share sale) of the common stock is about $750 million. Quarterly cash flow could easily exceed $20 million a quarter by year-end. A two rig program could quickly double that quarterly figure next year. For this fast growing company, that would provide more than enough support for the current stock price. Unlike several Permian players, investors don’t have to wait years for the cash flow to support the stock market value of the company. In this case, it should be months at the most. Cash flow next year could easily double the final figure this year.

That would provide more than enough impetus for this stock to double over 12 months. Plus as the returns in the San Andres become public, the company acreage could appreciate in value considerably before management tries more well known intervals such as the Wolfcamp.

The age of management plus the history of selling the last company make this company a likely acquisition candidate in the future at management’s price. This management definitely knows what it is doing and shareholders are going to reap the benefits. Don’t expect this stock to be on the bargain table anytime soon. Management is just beginning to realize the value of these leases, so there is going to be a lot of good news in the future.

Disclaimer: I am not an investment advisor, and this is not a recommendation to buy or sell a security. Investors are recommended to read all of the company’s filings and press releases as well as do their own research to determine if the company fits their own investment objectives and risk portfolios.

Disclaimer

This is not an offer to buy or sell securities. Oil investment carries with it very high risks. The information contained within this site has not been nor will it be verified by Envestor First and is subject to change at any time. We are not a United States Securities Dealer or Broker or United States Investment Adviser. Do your own due diligence and consult with a licensed professional before making any investment decisions. Please read our full disclaimer before making any decisions.