Ring Energy, Inc.
Q1 2021 Earnings Call Transcript

Published: 11 May 2021

[Operator:]

Good day, and welcome to the Ring Energy First Quarter 2021 Earnings Conference Call. All participants will be in a listen-only mode. . After today's presentation, there will be an opportunity to ask questions. . Please note, today's event is being recorded. I would now like to turn the conference over to David Fowler, Investor Relations Coordinator. Please go ahead sir.

[David Fowler:]

Thank you, Rocco, and thank you everyone for joining us this morning. We appreciate you taking the time to join us and for your interest in Ring Energy. We will begin our call with comments from Paul McKinney, our Chairman of the Board and CEO, who will provide an overview of key matters for the first quarter. We will then turn the call over to Travis Thomas, our Chief Financial Officer, who will review our detailed financial results. Paul will then discuss our future plans and outlook.

[Paul McKinney:]

Hey, thank you, David. And welcome everyone to our first quarter 2021 earnings call. Let me begin with a few key highlights of the period. By the challenges all of us in Texas faced in February with the unusually severe winter storm and its aftermath, we were pleased to still remain free cash flow positive during the quarter, even with an active drilling program underway. Continue to generate free cash flow allows to further pay down debt and increase our liquidity during the period. As you know, our first quarter sales volumes were significantly impacted by the winter storm. We sold 716,422 barrels of oil equivalent or 7,960 BOE per day, which is approximately 15% less than the fourth quarter. We incurred shut-in and deferral of more than 60% of our production for the majority of the storm with restoration of most of the production taking more than two weeks to complete. Our first quarter financial performance was also negatively impacted by additional costs to bring these wells back online. Further contributing to the decrease in sales volumes from the fourth quarter was temporary downtime associated with shutting-in offset wells during the completion operations of our for Northwest Shelf Phase 1 well, we completed during the quarter.

[Travis Thomas:]

Thanks Paul. For the first quarter of 2021, we generated revenues of $39.5 million and recorded a net loss of $19.1 million or $0.19 loss per share. Included in the loss for pre-tax items including $25.7 million for non-cash unrealized losses on hedges as a result of the change in oil prices, and $355,000 for share based compensation expense. Excluding these items, our adjusted net income was $7 million or a $0.07 gain per share. During the first quarter of 2021, we had $15.4 million of free cash flow from operations, $14.5 million in capital expenditures and $2 million in proceeds from the Vin Fisher transaction. The combined result was positive free cash flow of $2.9 million. The three months ended March 31st 2021, we had oil sales of 610,121 barrels and gas sales of 637,808 Mcf for a total of 716,422 Boe. As Paul discussed, our realized prices were significantly higher in the first quarter compared to the fourth quarter. This included first quarter average pricing of $58 per barrel of oil, and exceptionally high price of $6.46 per Mcf on natural gas for an average of $55.14 per Boe. Differential between our average oil price received and the weighted average NYMEX WTI was $0.37 per barrel in the first quarter of 2021. This was an improvement for an average fourth quarter differential of approximately $2. This was primarily a result of renegotiating our oil contracts to receive a better marketing adjustment at beginning of February. The WTI ETFs spread went from an average of $0.16 in the fourth quarter to an average of $1.08 in the first quarter, and the Argus CMA role went from an average of negative $0.35 in the fourth quarter to an average of negative 40.01 for the first quarter. For detailed discussions of our other income statement line items, please refer to our earnings release in 10-Q that was filed yesterday. Of course, I will be happy to answer any questions you may have during today's Q&A session. Echoing Paul's comments we're pleased to generate free cash flow once again during the first quarter of 2021 and further pay down debt of $7.5 million. We expect to continue to use much of our free cash flow for this purpose, with the cadence of debt pay down primarily driven by market conditions and the timing of capital spending. As of March 31 2021, we had $305.5 million drawn on our revolving credit facility and liquidity of $46.2 million, including $45.5 million available on the revolver and $1.7 million in cash.

[Paul McKinney:]

Thank you, Travis. While we clearly had to navigate some significant operational challenges during the first quarter as a result of the winter storm that crippled much of Texas for several days in February, we remain focused on the execution of our work program and more importantly, our strategic vision. If you recall, during the fourth quarter and full year 2020 earnings call in mid-March, we provided a detailed discussion of our strategy and how we expect to achieve sustainable long-term success for the benefit of our shareholders. First, we emphasize that our future success is dependent on our ability to attract, develop and retain the best people. We also define what we mean by operational excellence, and why we believe it is important to pursue operational excellence with a sense of urgency as a fundamental aspect that defines our culture. This includes executing our operations in a safe and environmentally responsible manner. Being quick to apply advanced technologies where it makes sense, delivering low costs, consistent and efficient execution of our drilling campaigns and our work programs, continuously seeking ways to improve our margins and reduce our operating cash costs on a per barrel basis. All of these things are vital to our future success.

[Q - Jeffrey Campbell:]

Good morning.

[Paul McKinney:]

Hey, good morning, Jeff. How are you?

[Jeffrey Campbell:]

I'm fine. Let me second the congratulations to Dave while we're at it.

[David Fowler:]

Thank you, Jeff.

[Jeffrey Campbell:]

My first question is bearing in mind the storm and produce volumes during the first quarter of 2021. What are you guys doing to catch up considering the 2021 guidance remains unchanged?

[Paul McKinney:]

David I'm going to turn that over to Marinos Baghdati, our Executive Vice President of Operations.

[Marinos Baghdati:]

Good morning. If we look at the total Boe production we've had to-date and what we're estimating April and May to be, then what we need starting June 1 forward is around 9400 to 9500 Boe per day in order to meet our 9000 Boe per day average for the year guidance. And we think we can get there with the Phase 2 drilling program and the addition of the 200 Boe per day that is currently shut-in due to the purchaser in this VP area.

[Jeffrey Campbell:]

Okay, great, thanks. I appreciate that color. And David, on the M&A front, you just said that you opened up the data room for the Delaware Basin sale. I was just wondering if the stronger oil prices and increased industrial activity that we're starting to see how that you feel that supports the sale broadly. And also is an increasing specific interest in this saltwater disposal assets that you're contemplating making available to third-parties?

[David Fowler:]

Well, yes, you're right on both accounts. But I tell you what I'm going to turn this question over to our Executive Vice President of Engineering and Corporate Strategy, Alex Dyes. Alex, do you want to take that?

[Alex Dyes:]

Yes. Good morning. So yes, we've seen a renewed interest, obviously, with the prices coming up. And looking more activity in the Delaware Basin, the saltwater disposal asset that we currently have does have an increased value. So right now, we just have spent some time getting the field up-to-date. And as Paul mentioned, we're getting it back onto the market as of tomorrow, and we'll run accelerated process and hopefully report back in the near future.

[Jeffrey Campbell:]

Okay, great. Thank you.

[Operator:]

And our next question today comes from Neal Dingmann with Truist Securities Please go ahead.

[Neal Dingmann:]

Good morning. Paul, my first one is for you as a team, just you mentioned about just going after the highest sort of return locations in order to generate that free cash flow. Can you talk a little bit about that, I guess, started two prong there, one, how many kind of locations you all identify when you're thinking about this, right now the portfolio still seems you have quite a few? And then secondly, how you plan to balance, I'd like to hear a little more how you plan to balance that, obviously, we want to see free cash flow, we'd like to see you mentioned the earlier answer about keeping that production flat. So if you could talk a little on that? Thank you.

[Paul McKinney:]

Yes, very good. And as you know, we do have a very handsome inventory of high-rate return opportunities, not only the Northwest Shelf, but although not quite as attractive but at these prices today, our Central Basin Platform opportunities also are economic. But one of the things that we committed to our shareholders, we committed to ourselves, because we think it's just good business practice. And we also committed to our banks that we were going to remain disciplined until we brought our debt level down to certain levels. As you know, our credit agreement has a four debt-to-EBITDA ratio covenant. That's above what we consider conforming levels, we would like to get our bank debt and our balance sheet improved to the point where we're well below 3.5 to 2.5. And so during this time period where we still are subject to the potential liabilities of having this much debt, we're going to remain disciplined. And so, yes, we could pour it on, what that does, and also accumulates debt, and if prices were to fall back down to 2020 levels, I just - I would hate to be put into a tough situation again. So we're laser focused on strengthening the balance sheet, reducing our debt. And when we get our debt levels down, then the balancing act will shift a little bit more towards growth, and also generating returns for our shareholders. I hope that answered your question, Neal?

[Neal Dingmann:]

No, that did. And then you don't have I know, in the past, you've had some workover and various other opportunities to maybe not boost production, but certainly mitigate decline. I'm just kind of curious, now the portfolios are still opportunities that are, have you already performed most of those, and that will keep the production, the baseline production flat already?

[Paul McKinney:]

Go ahead, Marinos.

[Marinos Baghdati:]

Yes, we're continuing to push us through our workover and capital program and in order to kind of maintain production. So yes, those are still placed in our work program and are being performed.

[Paul McKinney:]

Yes, just to add to that. The larger the production base, and the larger group of wells that you manage, workover opportunities are just things that come along with age and with more knowledge people work in the area. And so workovers will continue to be an active component of our capital spending program. These types of projects tend to have higher rates of return they require a lot less capital then drilling programs or major infrastructure programs and that kind of thing. And so now you can, you can expect to see us continue that the level or the participation of the percentage of our actual capital program from one year to an extra one quarter to the next is really going to be a function of what opportunities actually present themselves during that time period.

[Neal Dingmann:]

Very good. Thanks for the details guys.

[Operator:]

And our next question comes from Noel Parks with Tuohy Brothers. Please go ahead.

[Noel Parks:]

Good morning.

[Paul McKinney:]

Hey, good morning, Noel.

[Noel Parks:]

I also wanted to touch on the topic of inventory. We are enjoying these oil prices in the 60s rest of 2021 strip I think is in the 60s. And I think 2022 is maybe 57 or something like that. So if with your location count, in your slides, you sort of describe the PUDs probably possible in the prospective locations, the last group being, of course, a much bigger bucket. Is it fair, if we assume 50 or better realized or that one 55 that are realized pricing going forward? Is it fair to think about, how many of those might find their way back, gradually up at here, just in rough terms with this better pricing environment? And I guess, just connected to that. Do you think there's any fresh technical evaluation that would be required in looking at those at this point?

[Paul McKinney:]

Well, I'm going to tag team that with Alex. But before I get started, you got to remember our PUD inventory is something that is defined using SEC rules for determining reserves. So first of all, you have, offset rules and all that kind of stuff. But the bigger thing that drives the number of PUD in one area or another, this last year really was a remarkably low price that we use for determining the reserves. Current price is considerably higher. And so the inventory that we listed as proved undeveloped was largely due to the price that we were required to use to determine them. So they may end up falling over into another category. And so we do enjoy very sizeable inventory, both in the Northwest Shelf and in the Central Basin Platform. I think any anyone that really understands how the economics and mechanics work associated with the accounting and reporting and disclosure of proven undeveloped locations under SEC rules, they understand what those limitations are. And so I think it would be safe to say that we have a bigger inventory today at today's prices, then those SEC prices. Alex is there anything you want to add.

[Alex Dyes:]

The only thing I would add is, since we took over as a management team, we did bring in a new, both engineering and geologic review and technical review. So that's an ongoing process. And so we'll high grade more and more of those locations that you're talking about. Prices they'll become more economical than others. So, but we also want to make sure that we maintain a very capital disciplined approach. So we'll take those quarter-to-quarter and we'll add that inventory as needed.

[Noel Parks:]

Great, thanks. And just my second one, do you have a rough sense of when you might have the borrowing base results? And any sort of intelligence from the banks as far as where they're looking at the price that going into it?

[Paul McKinney:]

Yes, and so we are - that process is ongoing. So I would hate to really share too much. They have already shared with us the bank price deck that we'll be using is higher than what we used in the last quarter. That's a good thing. Everything is going along very smoothly, and we should complete this redetermination this month. And we'll have more disclose when that occurs. But right now, it's just going on as a normal process. And everything seems to be going on very smoothly.

[Noel Parks:]

Great, thanks a lot.

[Operator:]

And our next question today comes from Mark Oleynik, a Private Investor. Please go ahead.

[Paul McKinney:]

Good morning, Mark.

[Unidentified Analyst:]

Good morning. Sorry, I had my mute on. Good morning. Thanks for taking my call. I know you're working on lots of good things. And I know you touched on this generally, that regarding returns to the investors, can you put any timeline on when you think you might get to the point where there would be dividends? And maybe as a connected topic is there, I know a lot of money gets spent on the hedging. Is that any rethinking given to the hedging strategy about the money that gets spent on that or is that still going to stay the same?

[Paul McKinney:]

Yes, if you don't mind Mark, I'm going to take your two points in reverse order. So let's talk about hedges. Last fall, when we entered in our hedges that was in November, when we started, three weeks prior to layering our first hedge for 2021 the oil price is $35. If you recall back in those days, we had already done the analysis and determined, what was the price level that we needed, that would guarantee our ability to fund the work program that would maintain our production or slowly grow it, but also provide us a cash flow so that we could ensure that we could pay down debt at a level that meets or exceeded the bank requirements. And that price was $45. And so when we had the opportunity to lock-in the cash flows, during that time period, you got to remember, people were just talking about COVID vaccines, so we were talking about all these other different things, we had no idea what 2021 was going to show, we had more confidence that 2022 would be better than 2021. The 2021, we just wanted to make sure that we could ensure that we had those cash flows, and we were not unlike a lot of different companies. And so going back to your question, at that point, we were in a defensive position in our opinion, and that we were going to take whatever steps that were necessary to secure those cash flows. And if we were fortunate to have you in a higher price environment, we were willing to forego the additional revenue, just to make sure that we could guarantee the debt repayment and to our banks, and that we could have a work program to sustain our production and maintain our liquidity. That was really, really important. Well, as you know, and I'm glad you actually pointed this out, things have changed. And so as we go forward, now we're looking at using our future hedges and the hedging that we'll do, in the future will be more opportunistic. And so now we'll be looking at it from standpoint, not only do we want to make sure that we ensure our capital work programs, but now we'll be looking at the marketplace in a more opportunistic way. So that we actually can capture and retain the upside for our shareholders. And so we are right now in the process as we go through 2021 and going into 2022, we are now switching from a defensive hedging strategy, more to an opportunistic hedging strategy.

[Unidentified Analyst:]

Alright, thank you. The other part of that question was any timeline on when you think you might do dividends?

[Paul McKinney:]

At this point, I can't really tell you that, here's the thing. That depends on several things, first of all. And so the healthier we get our balance sheet, and the quicker we can get that balance sheet to a healthy position, the quicker we'll be able to do either stock buybacks or variable dividends or perhaps continue with strategic acquisitions that generate real returns for our shareholders. But, and so what are the things that will contribute to getting that balance sheet in a stronger position. Well, the sale of our Delaware assets will contribute to that, the success and being able to use equity and bringing down one or two of these asset acquisitions in an accretive manner that strengthens the balance sheet, increases the cash flow, so we can pay down our debt even more. Once we get to a position where we agree that our balance sheet is strong enough, we will at that point - one of the things I said in the last call, if you look at the amount of our cash flow that we're allocating to paying down debt, when we're in a position where we no longer need to do that. That'll be about the time where we can take that amount of cash flow, we can turn that into real returns for our shareholders. And so it's really difficult for me to tell you when that'll happen. Stay tuned, watch us, we'll be reporting on that. You'll get a clearer vision for that. And so the more success we had in terms of accelerating the repair of our balance sheet, the quicker we'll get to the point where we're generating and delivering real returns to our shareholders.

[Unidentified Analyst:]

Cool. I appreciate the answers. Thank you.

[Paul McKinney:]

You're welcome.

[Operator:]

Our next question comes from Jeffrey Campbell with Alliance Global Partners. Please go ahead.

[Jeffrey Campbell:]

Great, thanks for taking my follow-up. Paul first thing, when you're looking at the attractive assets, as you've alluded to as potential acquisitions, are you willing to go outside your current sphere of operations, are you focusing primarily on your Central Basin Platform, Northwest Shelf backyard?

[Paul McKinney:]

The answer is yes to both. So first of all, we are focused in the area where we currently have operations. And it just makes a lot of sense to do that. Because I already have an outstanding field operating team, if I can take that field operating management team and spread them over more wells and more production, I reduce my costs on a per well basis. And so we are focused in the Permian Basin where we currently operate. However, we're more focused on the right types of properties that generate the right types of returns, if we can buy producing properties in the core of some other basin that delivers the same type of returns that have undeveloped opportunities that have the same type of economics, we would be interested in that as well. And we've worked all over North America; we know the basins in the United States very well. We know what those would be. But right now, we are focused in the area that we currently operate, because it makes all the sense because you can combine all the synergies and have a few more things working for you.

[Jeffrey Campbell:]

Okay, thanks for that color. And if I can add one more onto this theme. You're definitely emphasizing increasing EBITDA with acquired production when you're talking about leverage and so forth. Just wondering, are you concerned with adding inventory as well as production, or, if the price is right, and the returns are great, you'd be willing to mainly acquire a producing asset without a lot of undeveloped upside?

[Paul McKinney:]

There you go. So, I would be willing to consider production. But typically, there would have to be an advantage, we would have to have some kind of advantage in terms of being able to significantly reduce operating costs or creates some additional value. But I really do get excited about an opportunity that brings in with it, undeveloped opportunities that have similar economics as our existing portfolio. And so that's where, I really get excited. But I'm not saying that other investments that are just producing properties would be off the table. Because again, we look at ourselves as a logical aggregator and consolidator of assets out here in the Central Basin Platform. Many of these assets are a little older. But we've also believed that we're a low cost operator. And as we go throughout 2021, and 2022, we're continuing to work on that very issue. We believe that being the low cost operator is going to be a key attribute to anyone who's going to be a successful aggregator out here on the Central Basin Platform and Southern Shelf.

[Jeffrey Campbell:]

Okay, great. Yes. And that makes perfect sense. Thanks very much for the follow-up.

[Paul McKinney:]

We got time for one more.

[Operator:]

Absolutely. Our final question today comes from Jack Yedu , a private investor. Please go ahead.

[Unidentified Analyst:]

Yes, thank you. In your $44 million to $48 million CapEx program for this year, which I know includes the money you spent in Q1. And after putting online the three space two wells later this month. Are you guys planning to put online any more wells between the end of May and the end of the year?

[Paul McKinney:]

I'm going to turn that over to Marinos he'll talk a little bit more about our drilling and other capital programs.

[Marinos Baghdati:]

Yes, past the second quarter with the three wells of Phase 2. Once we bring those online, we have plans in dollars allocated in our capital budget to add two to three more wells.

[Unidentified Analyst:]

Okay. And the other question I have is respect to hedging for 2022. If I remember, right, you have about 500 barrels or about 5.5% of your production hedge for 2022, other than being opportunistic, which obviously makes sense. Do you have any kind of schedule in mind in terms of adding more 2022 hedges?

[Paul McKinney:]

I'll turn that over to Travis.

[Travis Thomas:]

Yes. So we added the 500 barrels this year. But in total, we've got 2250, I believe. And we're also looking at another idea right now that we haven't put in place to unlock some upside potential in 2021. So potentially, we could take the ceiling off of one of our callers and put 1500 barrels per day for the balance of 2021 and push that out into 2022 into a swap that would be higher than our average pricing that we have now. That would add to that balance at a decent rate. But that would also free up cash flow actual cash dollars for this year and give us more time next year just to add more production to kind of heat that up.

[Paul McKinney:]

So this kind of goes back to what we were talking about a little earlier. We're at the point in time now with the stronger oil prices that our strategy is significantly changing. Last year, when prices were up and down from $43 or $35 and we didn't know when the pandemic induced economic downturn that really caused us a sharp downward pressure on all worldwide oil prices. At that point, we just want to make sure we can guarantee on our cash flows. But now we're looking at everything from an opportunistic standpoint. What Travis just describes is an opportunity or strategy change that we're actually looking at right now. We're actually in the conversations with the traders about finalizing that deal. And so you can see more of that going forward. But with respect to 2022, we're still studying that we're still reviewing those with our board and our risk committee. And so we'll be announcing more on that as time goes on throughout the rest of this year.

[Unidentified Analyst:]

Great, thank you very much for that color.

[Paul McKinney:]

You're welcome.

[Operator:]

Ladies and gentlemen, I'd like to turn the conference back over to Paul McKinney, for any final remarks.

[Paul McKinney:]

Again, everyone, thank you very much for your interest in Ring. We're really, really excited about the future here. And the economy is starting to open up. People are going places, we're seeing the opening up of the economy influencing energy prices, and energy prices have risen, I would love to see them continue to rise. Of course, many of us in the industry would like to see that. But our work programs right now, are mainly described by discipline, I mean, we are going to continue to remain disciplined until we get our balance sheet in the order that we think it needs to be. We think that's the right thing to do for our shareholders, we think is the right thing to do for our business; it's the right thing to do to manage our risk. And once we get our balance sheets squared away, at that point, look out, because we're going to be looking to start drilling our wells that we have in the inventory, we'll be looking to make more strides and additional strides in pursuing acquisitions. MD&A activity will also increase, we have full line of sight on growing this company. And we'd like to ensure that we keep all of you as invested partners. And so thank you very much for your interest. And we look forward to talking to you again soon.

[Operator:]

Thank you. So this concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.