RING ENERGY, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations analyzes the major elements of our Balance Sheets and Statements of Operations. This section should be read in conjunction with our Annual Report on Form 10-K for the year endedDecember 31, 2021 and our interim unaudited financial statements and accompanying notes to these financial statements.
Overview
Ring Energy, Inc. ("Ring," the "Company," "our," "we," "us," or similar terms) is a growth oriented independent exploration and production company and is engaged in oil and natural gas development, production, acquisition, and exploration activities currently focused inTexas andNew Mexico . Our primary drilling operations target the oil and liquids rich producing formations in the Northwest Shelf, the Central Basin Platform, and theDelaware Basin , all of which are part of thePermian Basin . Our corporate headquarters are inThe Woodlands, Texas .
Recent Developments
Stronghold Purchase Agreement
OnJuly 1, 2022 , the Company, as buyer, andStronghold Energy II Operating, LLC , aDelaware limited liability company ("Stronghold OpCo") andStronghold Energy II Royalties, LP , aDelaware limited partnership ("Stronghold RoyaltyCo", together with Stronghold OpCo, collectively, "Stronghold"), as seller, entered into a purchase and sale agreement (the "Purchase Agreement"). The Purchase Agreement provides that the Company will acquire (the "Stronghold Acquisition") interests in oil and gas leases and related property of Stronghold located in the Central Basin Platform ofTexas for a purchase price (the "Purchase Price") of approximately$465 million , of which$215 million will be in cash,$20 million in assumed derivative liabilities, and the remainder will be in the form of stock consideration which is expected to consist of (i) 21,339,986 shares of common stock, par value$0.001 per share of the Company ("Common stock") and (ii) 153,176 shares of newly created Series A Convertible Preferred Stock, par value$0.001 ("Preferred Stock"). Each share of Preferred Stock is automatically convertible into 277.7778 shares of common stock upon stockholder approval of the conversion. The Purchase Price is subject to customary purchase price adjustments with an effective date ofJune 1, 2022 . OnJuly 5, 2022 , in connection with the Purchase Agreement, the Company deposited$46.5 million in cash into a third-party escrow account as a deposit pursuant to the Purchase Agreement, which will be credited against the Purchase Price upon the closing of the Stronghold Acquisition. The Company expects the Stronghold Acquisition to close in the third quarter of 2022.
Business Description and Plan of Operation
We are focused on delivering competitive and sustainable returns to our stockholders by developing, acquiring, exploring for, and commercializing oil and natural gas resources vital to the world's health and welfare. Successfully achieving Ring's mission requires a firm commitment to operating safely in a socially responsible and environmentally friendly manner, while ensuring the Company conducts its business with honesty and integrity. Specifically, our business strategy is to increase our stockholders' value through the following:
Growing production and reserves by developing our oil-rich resource base
through conventional and horizontal drilling. In an effort to maximize its
? value and resource potential, Ring intends to drill and develop its acreage
base in both the Northwest Shelf and Central Basin Platform assets, allowing
Ring to execute on its plan of operating within its generated cash flow on an
annual basis.
In the first quarter of 2022, Ring contracted a rig onJanuary 31, 2022 , and drilled and completed three 1-mile horizontal Central Basin Platform wells and one 1.5-mile horizontal Central Basin Platform well and drilled two 1-mile horizontal wells in the Northwest Shelf. The Company has a working interest of 100% in all wells drilled in the first quarter 2022. The newly completed wells resulted in minimal contribution to first quarter production but were situated to provide a strong contribution to the next quarter. In addition to the six drilled wells and four new wells placed into production, during the first quarter, the Company continued its program of conversions from electrical submersible pumps to rod pumps "CTRs", with four conversions in the Northwest Shelf. 26 Table of Contents During the second quarter of 2022, Ring drilled a total of nine wells, completed seven wells, and began the completion process on four wells, all in the Northwest Shelf. Two of the wells completed were 1-mile horizontal wells that were drilled in the first quarter with both wells at a working interest of 100%. In addition, there were three 1-mile horizontal wells with a working interest of 100% and two 1.5-mile horizontal wells with a working interest of approximately 98.7% that were drilled and completed in the second quarter. Ring also drilled and began the completion process on an additional four 1-mile horizontal wells. Two of the wells have a working interest of 100%, one has a working interest of 87.5%, and the fourth has a working interest of 75%. In addition to the nine drilled wells and seven new wells placed into production, during the second quarter, the Company continued its program of conversions from electrical submersible pumps to rod pumps ("CTRs"), with three conversions in the Northwest Shelf and one conversion in the Central Basin Platform. During 2022, the Company expects to drill 25 to 33 and complete 25 to 30 horizontal wells in the Northwest Shelf and Central Basin Platform assets.
Reduction of long-term debt and de-leveraging of asset. Ring intends to reduce
its long-term debt primarily through the use of free cash flow from operations
and potentially through the sale of non-core assets. The Company believes that
with its attractive field level margins, it is well positioned to maximize the
? value of its assets and de-lever its balance sheet. The Company also believes
through potential accretive acquisitions and strategic asset dispositions, it
can accelerate the strengthening of its balance sheet. During the six months
ended
down
balance down to
Employ industry leading drilling and completion techniques. Ring's executive
team intends to utilize new and innovative technological advancements for
completion optimization, comprehensive geological evaluation, and reservoir
engineering analysis to generate value and to build future development
? opportunities. These technological advancements have led to a low-cost
structure that helps maximize the returns generated by our drilling programs.
Given the current commodity environment, labor market and inflationary
pressures, Ring also expects improved execution efficiencies by implementing a
continuous drilling program throughout 2022.
Pursue strategic acquisitions with exceptional upside potential. Ring has a
history of acquiring leasehold positions that it believes to have additional
resource potential that meet its targeted returns on invested capital and
comparable to its existing inventory of drilling locations. The Company pursues
an acquisition strategy designed to increase reserves at attractive finding
? costs and complement existing core properties. Management intends to continue
to pursue strategic acquisitions and structure the potential transactions
financially, so they improve balance sheet metrics and are accretive to
shareholders. The executive team, with its extensive experience in the Permian
Basin, has many relationships with operators and service providers in the
region. Ring believes that leveraging its management's relationships will be a
competitive advantage in identifying potential acquisition targets.
Executive Summary - 2022 Developments and Highlights
COVID-19 and Geopolitical Impact
In December of 2020, theFood and Drug Administration authorized the use of the COVID-19 vaccination inthe United States . The shots were first administered to front line workers and the elderly but were soon made available to all adults. The daily new infections peaked in the first quarter of 2021 and have seen an overall steady decline, giving states the ability to reopen to certain extents. InMarch 2021 , the Federal Government passed a$1.9 trillion coronavirus relief package which included direct payments to qualifying individuals, extended unemployment benefits, and provided state and local assistance. During 2021, the demand for oil and natural gas increased as the economy recovered from the effects of the COVID-19 pandemic which strengthened energy prices. Although both oil and natural gas prices have exceeded pre-pandemic levels, volatility due to new and emerging variants of the COVID-19 virus,OPEC actions, the Russian-Ukrainian war, and other factors affecting the global supply and demand of oil and natural gas have continued into 2022. It is not clear whether these issues will continue to cause volatile energy prices and further challenges to our business.
Oil and Natural Gas Revenues
Our oil and natural gas producing properties are located in thePermian Basin . Oil sales represented approximately 94% and 96% of our total revenue for the three months endedJune 30, 2022 and 2021, respectively. Gas was a higher percentage of revenue in the three months endedJune 30, 2022 due to the significant increase in gas sales volumes as well as increased product prices. Oil had an average realized price of$109.24 per barrel, compared to$65.00 per barrel for the same period in 2021. Gas prices had an average realized price of$7.29 per Mcf for the quarter, compared to$3.90 per Mcf for the same period in 2021. 27 Table of Contents Commodity Risk Management EffectiveFebruary 1, 2022 we entered into swaps for 1,000 barrels of oil per day for the remainder of calendar year 2022 at a weighted average price of$84.61 per barrel. Additionally, we entered into deferred premium commodity put options onJune 28 and 29, 2022. In total, we had swaps for 3,129 barrels of oil per day for the month ofJanuary 2022 , we had swaps for 4,129 barrels of oil per day for February throughJune 2022 , and we have swaps and put options for a total of 5,129 barrels of oil per day for July throughDecember 2022 , with a weighted average price of$59.08 per barrel for the next two quarters in 2022. We have put options in place for 1,500 barrels per day from January throughDecember 2023 with a weighted average price of$75.70 per barrel, and we have put options in place for 500 barrels per day from January throughJune 2024 with a weighted average price of$66.43 per barrel. Our 2022 derivative financial instruments resulted in a total non-cash fair value gain of approximately$12.2 million during the three months endedJune 30, 2022 and cash paid for derivative settlements of approximately$19.6 million , for a total loss on derivative contracts of approximately$7.4 million .
Borrowing Base
The Company's borrowing base remained at$350 million during the second quarter of 2022, with the minimum hedged barrels of oil per day at 3,100. We paid down$10 million of debt in each of the first and second quarters of 2022 and had$270 million of principal outstanding on our Credit Facility as ofJune 30, 2022 . As our borrowing base is subject to a semi-annual redetermination, our available borrowings and liquidity could be impacted by a redetermination later in 2022.
Results of Operations - For the Three Months Ended
Oil and natural gas sales. For the three months endedJune 30, 2022 , oil and natural gas sales revenue increased$37,201,773 to$84,961,875 , compared to$47,760,102 for the same period during 2021, primarily as a result of higher oil and natural gas prices, as well as increased production. Of this, oil sales increased$34,035,347 and natural gas sales increased$3,166,426 . For the three months endedJune 30, 2022 , oil sales volume increased 27,076 barrels to 729,484 barrels, compared to 702,408 barrels for the same period in 2021. The average realized per barrel of oil price increased 68% from$65.00 for the three months endedJune 30, 2021 , to$109.24 for the three months endedJune 30, 2022 . For the three months endedJune 30, 2022 , gas sales volume increased 182,339 thousand cubic feet (Mcf) to 723,196 Mcf, compared to 540,857 Mcf for the same period in 2021 due to workovers completed as well as new wells placed into production. The average realized natural gas price per Mcf increased 87% from$3.90 to$7.29 . The following table presents our sales revenues for the periods indicated:
For The Three Months
Ended June 30,
2022 2021
Operating Revenues
Oil $ 79,688,536 $ 45,653,189
Natural gas 5,273,339 2,106,913
Total operating revenues $ 84,961,875 $ 47,760,102
Lease operating expenses. Total lease operating expenses increased approximately
12% from $7,424,488 for the three months ended June 30, 2021 , to $8,301,443 for
the three months ended June 30, 2022 primarily due to a significant increase to
labor costs and industry wide inflationary pressures. Total lease operating
expenses ("LOE") expressed on a per barrel of oil equivalent ("Boe") basis
increased approximately 4% from $9.37 per Boe for the three months ended June
30, 2021 , to $9.77 per Boe for the three months ended June 30, 2022 primarily
due to the same causes during the three months ended June 30, 2022 .
Gathering, transportation and processing costs. Our total gathering,
transportation and processing costs decreased approximately 39% from $897,166
for the three months ended June 30, 2021 to $549,389 for the three months ended
June 30, 2022 , due primarily to a change in cost recognition due to a
modification of the contract agreement. Specifically, beginning May 1, 2022 , the
Company and its processing entity modified the contract so that the Company no
longer maintained ownership of the gas through processing. Accordingly, the
Company from that point on accounts for any such fees and deductions as a direct
reduction of the sales transaction price. Total gathering, transportation and
processing costs expressed on a per Boe basis decreased approximately 43% from
$1.13 per Boe for the three months ended June 30, 2021 to $0.65 per Boe for the
three months ended June 30, 2022 primarily due to the aforementioned change
in
cost recognition.
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Ad valorem taxes. Our ad valorem taxes increased approximately 35% from $703,775
for the three months ended June 30, 2021 to $949,239 for the three months ended
June 30, 2022 primarily due to the increase in taxation commodity price from the
prior year. Expressed on a per Boe basis, these costs increased approximately
26% from $0.89 per Boe for the three months ended June 30, 2021 to $1.12 for the
three months ended June 30, 2022 .
Oil and natural gas production taxes. Production taxes as a percentage of oil
and natural gas sales increased slightly to 4.9% for the three months ended June
30, 2022 compared to 4.6% for the second quarter of 2021. We expect these rates
to stay relatively steady.
Depreciation, depletion and amortization. Our depreciation, depletion and
amortization expense increased by $1,474,078 to $10,749,204 for the three months
ended June 30, 2022 , compared to $9,275,126 during the same period in 2021 due
to higher 2022 production volumes. Average depreciation, depletion and
amortization was $12.65 per Boe for the three months ended June 30, 2022 and
$11.70 per Boe for the three months ended June 30, 2021 .
Asset retirement obligation accretion. Accretion of asset retirement obligations
("AROs") increased by $2,290 to $186,303 for the three months ended June 30,
2022 , compared to $184,013 for the three months ended June 30, 2021 because of
more wells added.
General and administrative expense. General and administrative expense increased
to $5,832,302 for the three months ended June 30, 2022 compared to $3,757,152
for the three months ended June 30, 2021 . Within this change, we isolate
share-based compensation, which increased to $1,899,245 for the three months
ended June 30, 2022 compared to $351,775 for the three months ended June 30,
2021 , primarily as the result of grants of equity awards in 2021 and 2022
pursuant to the Ring Energy, Inc. 2021 Omnibus Incentive Plan (the "2021 Plan")
and subsequent grants in 2021 and 2022. For the three months ended June 30,
2022 , general and administrative expenses excluding share-based compensation
were higher due to increased salaries and wages, insurance costs, and rental
costs. Hiring of 12 additional full-time employees in addition to awards under
the Annual Incentive Plan ("AIP") resulted in an increase of $291,652 in
salaries and wages. Review of insurance coverages led to adjusting the coverage
(i.e., cyber insurance, director & officer insurance) with a cost increase in
total of $137,089 . Other cost increases included $94,737 in additional rent
expense due to the rent abatement for The Woodlands office for the first nine
months of 2021.
For The Three Months
Ended June 30,
2022 2021
General and administrative expense (excluding Share-based
compensation) $ 3,933,057 $ 3,405,377
Share-based compensation 1,899,245 351,775
General and administrative expense$ 5,832,302
Interest expense. Interest expense decreased
(Loss) on derivative contracts. In the Statements of Operations, the total loss on derivative contracts decreased by approximately 79%, from$35,277,240 for the three months endedJune 30, 2021 to$7,457,018 for the three months endedJune 30, 2022 . Underlying this overall change in loss were changes within the realized and unrealized portions of the derivative instruments. We experienced an increase of$7,180,932 in realized losses from$12,436,333 during the three months endedJune 30, 2021 to$19,617,265 during the three months endedJune 30, 2022 due to an increase in oil prices. The Company records all derivative instruments on the Balance Sheets as either an asset or liability measured at fair value. Changes in fair value are recognized currently in earnings unless certain specific hedge accounting criteria are met. The unrealized (mark to market) loss decreased from$22,840,907 during the three months endedJune 30, 2021 to an unrealized gain of$12,160,246 during the three months endedJune 30, 2022 due to fewer barrels of oil being hedged as well as newly entered into put contracts with an asset position, net of deferred premiums. Net income (loss). For the three months endedJune 30, 2022 , the Company achieved net income of$41,944,422 , compared to a net loss of$15,887,159 for the three months endedJune 30, 2021 . The primary difference was the higher sales volumes and revenue in 2022 compared to 2021 resulting from increased workovers and drilling activities, and the significantly higher oil prices in 2022, as well as a lower loss on derivative contracts in the second quarter 2022 due to fewer barrels of oil being hedged. 29
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Sales volumes and commodity prices received
The following table presents our sales volumes and received pricing information for the periods indicated:
For the Three Months
Ended June 30,
2022 2021
Oil volume (Bbls) 729,484 702,408
Natural gas volume (Mcf) 723,196 540,857 Total Production (Boe)(1) 850,017 792,551
Average Sales Price Oil price (per Bbl)$ 109.24 $ 65.00 Gas price (per Mcf)$ 7.29 $ 3.90 Total per Boe$ 99.95 $ 60.26
(1) Boe is calculated using six Mcf of natural gas as the equivalent of one barrel of oil.
Results of Operations - For the Six Months Ended
Oil and natural gas sales. For the six months endedJune 30, 2022 , oil and natural gas sales revenue increased$65,880,273 to$153,142,907 , compared to$87,262,634 for the same period during 2021, primarily as a result of higher oil and natural gas prices, as well as increased production. Of this, oil sales increased$62,081,393 and natural gas sales increased$3,798,880 . For the six months endedJune 30, 2022 , oil sales volume increased 93,549 barrels to 1,405,699 barrels, compared to 1,312,150 barrels for the same period in 2021. The average realized per barrel of oil price increased 65% from$61.74 for the six months endedJune 30, 2021 , to$101.81 for the six months endedJune 30, 2022 . For the six months endedJune 30, 2022 , gas sales volume increased 276,813 thousand cubic feet (Mcf) to 1,455,479 Mcf, compared to 1,178,666 Mcf for the same period in 2021. The average realized natural gas price per Mcf increased 30% from$5.28 to$6.89 . The following table presents our sales revenues for the periods indicated:
For The Six Months
Ended June 30,
2022 2021
Operating Revenues
Oil $ 143,119,163 $ 81,037,770
Natural gas 10,023,744 6,224,864
Total operating revenues $ 153,142,907 $ 87,262,634
Lease operating expenses. Total lease operating expenses increased approximately
10% from $15,651,063 for the six months ended June 30, 2021 , to $17,254,608 for
the six months ended June 30, 2022 primarily due to a significant increase to
labor costs and industry wide inflationary pressures. Total LOE expressed on a
per Boe basis increased approximately 1% from $10.37 per Boe for the six months
ended June 30, 2021 , to $10.47 per Boe for the six months ended June 30, 2022
primarily due to the same causes during the six months ended June 30, 2022 .
Gathering, transportation and processing costs. Our total gathering,
transportation and processing costs slightly increased by approximately 1% from
$1,832,185 for the six months ended June 30, 2021 to $1,846,247 for the six
months ended June 30, 2022 , due to increased produced volumes in 2022, offset by
May and June costs being mapped as a reduction to oil and natural gas sales
revenues, due to the processing entity beginning to take control of
transportation at the wellhead beginning May 1, 2022 . Total gathering,
transportation and processing costs expressed on a per Boe basis decreased
approximately 8% from $1.21 per Boe for the six months ended June 30, 2021 to
$1.12 per Boe for the six months ended June 30, 2022 due to increased Boe as
well as the change in recognition effective May 1, 2022 .
Ad valorem taxes. Our ad valorem taxes increased approximately 32% from
$1,441,026 for the six months ended June 30, 2021 to $1,901,193 for the six
months ended June 30, 2022 primarily due to the increase in taxation commodity
price from the prior year. Expressed on a per Boe basis, these costs increased
approximately 22% from $0.95 per Boe for the six months ended June 30, 2021 to
$1.15 for the six months ended June 30, 2022 .
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Oil and natural gas production taxes. Production taxes as a percentage of oil and natural gas sales increased slightly to 4.8% for the six months endedJune 30, 2022 compared to 4.6% for the same period in 2021. We expect these rates to stay relatively steady. Depreciation, depletion and amortization. Our depreciation, depletion and amortization expense increased by$3,147,207 to$20,530,491 for the six months endedJune 30, 2022 , compared to$17,383,284 during the same period in 2021 due to higher 2022 production volumes. Average depreciation, depletion and amortization was$12.46 per Boe for the six months endedJune 30, 2022 and$11.52 per Boe for the six months endedJune 30, 2021 . Asset retirement obligation accretion. Accretion of AROs decreased$3,212 to$374,545 for the six months endedJune 30, 2022 , compared to$377,757 for the six months endedJune 30, 2021 because of fewer wells added compared to those plugged and abandoned. Operating lease expense. Operating lease expense decreased$189,127 to$167,180 for the six months endedJune 30, 2022 , compared to$356,307 for the six months endedJune 30, 2021 due to the change in treatment of the compressor leases beginningApril 1, 2021 . General and administrative expense. General and administrative expense increased to$11,354,579 for the six months endedJune 30, 2022 compared to$6,670,143 for the six months endedJune 30, 2021 . Within this change, we isolate share-based compensation, which increased to$3,421,155 for the six months endedJune 30, 2022 compared to$707,269 for the six months endedJune 30, 2021 , primarily as the result of grants of equity awards in 2021 and 2022 pursuant to the 2021 Plan. For the six months endedJune 30, 2022 , general and administrative expenses excluding share-based compensation were higher due to increased salaries and wages, insurance costs, and software costs. Hiring of 12 additional full-time employees in addition to awards under the AIP resulted in an increase of$1,187,507 in salaries and wages. Review of insurance coverages led to adjusting the coverage (i.e., cyber insurance, director & officer insurance) with a cost increase in total of$323,443 . Other cost increases were$199,552 in acquisition-related costs,$177,533 in rent expenses due to the rent abatement forThe Woodlands office for the first nine months of 2021, as well as various others. For The Six Months Ended June 30, 2022 2021 General and administrative expense (excluding Share-based compensation)$ 7,933,424 $ 5,962,874 Share-based compensation 3,421,155
707,269
General and administrative expense$ 11,354,579
Interest expense. Interest expense decreased$718,838 to$6,677,660 for the six months endedJune 30, 2022 , compared to$7,396,498 for the six months endedJune 30, 2021 due to a$29.2 million lower average daily loan balance. (Loss) on derivative contracts. In the Statements of Operations, the total loss on derivative contracts decreased by approximately 48%, from$66,865,879 for the six months endedJune 30, 2021 to$35,053,159 for the six months endedJune 30, 2022 . Underlying this overall change in loss were changes within the realized and unrealized portions of the derivative instruments. We experienced an increase of$15,375,642 in realized losses from$18,357,124 during the six months endedJune 30, 2021 to$33,732,766 during the six months endedJune 30, 2022 due to an increase in oil prices. The Company records all derivative instruments on the Balance Sheets as either an asset or liability measured at fair value. Changes in fair value are recognized currently in earnings unless certain specific hedge accounting criteria are met. The unrealized (mark to market) loss decreased from$48,508,755 during the six months endedJune 30, 2021 to$1,320,393 during the six months endedJune 30, 2022 due to fewer barrels of oil being hedged, as well as newly entered into put contracts with an asset position, net of deferred premiums. Net income (loss). For the six months endedJune 30, 2022 , the Company achieved net income of$49,056,465 , compared to a net loss of$34,953,252 for the six months endedJune 30, 2021 . The primary difference was the higher sales volumes and revenue in 2022 compared to 2021 resulting from increased workovers and drilling activities, and the significantly higher oil prices in 2022, as well as a lower loss on derivative contracts due to fewer barrels of oil being hedged. 31 Table of Contents
Sales volumes and commodity prices received
The following table presents our sales volumes and received pricing information for the periods indicated:
For the Six Months
Ended June 30,
2022 2021
Oil volume (Bbls) 1,405,699 1,312,150
Natural gas volume (Mcf) 1,455,479 1,178,666 Total Production (Boe)(1) 1,648,279 1,508,594
Average Sales Price Oil price (per Bbl)$ 101.81 $ 61.74 Gas price (per Mcf)$ 6.89 $ 5.28 Total per Boe$ 92.91 $ 57.83
(1) Boe is calculated using six Mcf of natural gas as the equivalent of one barrel of oil.
Capital Resources and Liquidity
As ofJune 30, 2022 , the Company had cash on hand of$2,223,289 , compared to$2,408,316 as ofDecember 31, 2021 . The Company had net cash provided by operating activities for the six months endedJune 30, 2022 of$65,162,415 , compared to$32,010,680 for the same period in 2021 due to higher year to date revenues, which resulted in more cash received from customers. The Company used net cash in investing activities of$50,330,117 for the six months endedJune 30, 2022 , compared to$21,221,609 for the same period in 2021, driven by an increase in capital expenditures to develop oil and natural gas properties. Net cash used in financing activities was$15,017,325 for the six months endedJune 30, 2022 during which time$20,000,000 was the net pay down of principal on our Credit Facility. We will continue to focus on maximizing free cash flow in 2022 through a combination of cost control measures and prudent capital allocation, which includes prioritizing our capital to projects we believe will provide high rates of return in the current commodity price environment. In response to higher commodity prices, we began implementing a continuous drilling program and as such, expect planned capital expenditures for 2022 to be significantly higher than 2021 levels. With the increased level of capital expenditures, we expect that oil and natural gas production will increase throughout 2022. We will continue our pursuit of acquisitions and business combinations, seeking opportunities that we believe will provide high margin properties with attractive returns at current commodity prices. During 2022, we will remain focused on maximizing free cash flow, reducing our debt level, and maximizing our liquidity which we believe will result in greater stockholder value.
Availability of Capital Resources under Credit Facility
InApril 2019 , the Company amended and restated its Credit Agreement withSunTrust Bank (now Truist), as lender, issuing bank and administrative agent for several banks and other financial institutions and lenders (the "Administrative Agent"), (as amended and restated, the "Credit Facility"). The amendment and restatement of the Credit Agreement, among other things, increased the maximum borrowing amount to$1 billion , extended the maturity date throughApril 2024 and made other modifications to the terms of the Credit Facility. This Credit Facility was amended onJune 25, 2021 ,June 10, 2021 ,December 23, 2020 andJune 17, 2020 . TheJune 10, 2021 amendment, among other things, modified the definition for "Fall 2020 Borrowing Base Hedges," from 4,000 barrels of oil per day to 3,100 barrels of oil per day for calendar year 2022, and reaffirmed the borrowing base at$350 million . The amendment onJune 25, 2021 incorporated contractual fallback language for US dollar LIBOR denominated syndicated loans, which language provides for the transition away from LIBOR to an alternative reference rate. The Credit Facility is secured by a first lien on substantially all of the Company's assets. The borrowing base is subject to periodic redeterminations, mandatory reductions, and further adjustments from time to time. The borrowing base is redetermined semi-annually each May and November and will be reduced in certain circumstances such as the sale or disposition of certain oil and gas properties of the Company and the cancellation of certain hedging positions. 32
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The Credit Facility allows for Eurodollar Loans and Base Rate Loans (as respectively defined in the Credit Facility). The interest rate on each Eurodollar Loan will be the adjusted LIBOR for the applicable interest period plus a margin between 2.5% and 3.5% per annum (depending on the then-current level of borrowing base usage). The annual interest rate on each Base Rate Loan is (a) the greatest of (i) the Administrative Agent's prime lending rate, (ii) the Federal Funds Rate (as defined in the Credit Facility) plus 0.5% per annum, (iii) the adjusted LIBOR determined on a daily basis for an interest period of one month, plus 1.00% per annum and (iv) 0.00% per annum, plus (b) a margin between 1.5% and 2.5% (depending on the then-current level of borrowing base usage). The Credit Facility contains certain covenants, which, among other things, require the maintenance of (i) a total Leverage Ratio (outstanding debt to adjusted earnings before interest, taxes, depreciation and amortization) of not more than 4.0 to 1.0 and (ii) a minimum ratio of Current Assets to Current Liabilities (as such terms are defined in the Credit Facility) of 1.0 to 1.0. The Credit Facility also contains other customary affirmative and negative covenants and events of default. As ofJune 30, 2022 ,$270,000,000 was outstanding on the Credit Facility and we were in compliance with all of our covenants.
Derivative Financial Instruments
During February and March of 2020, the Company entered into derivative contracts in the form of costless collars of WTI Crude Oil prices in order to protect the Company's cash flow from price fluctuation and maintain its capital programs. "Costless collars" are the combination of two options, a put option (floor) and a call option (ceiling) with the options structured so that the premium paid for the put option will be offset by the premium received from selling the call option. The trades were for a total 4,500 barrels of oil per day for the period ofJanuary 2021 throughDecember 2021 . In November and December of 2020, the Company entered into swap contracts with a weighted average of$45.42 for 4,500 barrels per day for 2021 and 1,750 barrels per day for 2022 with a weighted average of$44.84 . In January and February of 2021, we entered into swap contracts for 500 barrels per day for 2022 for a weighted average price of$48.53 . Similar to costless collars, there is no cost to enter into the swap contracts. On swap contracts, there is no spread and payments will be made or received based on the difference between WTI and the swap contract price. In November of 2020, we entered into natural gas swap contracts for 6,000 MMBtu per day at$2.991 and 5,000 MMBtu per day at$2.726 for 2021 and 2022, respectively. OnMarch 30, 2021 , we unwound all remaining gas swaps for 2021 and 2022 for a realized value of$581,424 . In May of 2021, we bought back a 1,500 barrels of oil per day call option forJune 1 through December 31, 2021 and entered into an approximate 879 Bbls/d calendar 2022 swap contract for no net cost. This allowed us to unlock additional upside to increase our cash flow for the remainder of 2021, while retaining the put to protect our downside. EffectiveFebruary 1, 2022 , the Company entered into a derivative contract with a Credit Facility lender for 1,000 barrels of oil per day for the remainder of 2022 (total notional quantity of 334,000 barrels). Fixed swap prices vary by month, ranging from$90.78 per barrel in February to$80.01 per barrel by the end of the year, with a weighted average swap price of$84.61 per barrel.
Near the end of the second quarter 2022, on
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The following table reflects the prices of contracts outstanding as of June 30,
2022 :
Type of Barrels Swap Strike Deferred
Date entered into Period covered Contract per day Index price price premium
Oil derivative contracts:
12/04/2020 Calendar year 2022 Swap 500 WTI $ 44.22
12/07/2020 Calendar year 2022 Swap 500 WTI 44.75
12/10/2020 Calendar year 2022 Swap 500 WTI 44.97
12/17/2020 Calendar year 2022 Swap 250 WTI 45.98
01/04/2021 Calendar year 2022 Swap 250 WTI 47.00
02/04/2021 Calendar year 2022 Swap 250 WTI 50.05
05/11/2021 Calendar year 2022 Swap 879 (1) WTI 49.03
02/01/2022 02/01/2022 - 12/31/2022 Swap 1,000 WTI 82.01
06/28/2022 07/01/2022 - 09/30/2022 Put 1,000 WTI $ 107.90 $ 6.95
06/28/2022 10/01/2022 - 12/31/2022 Put 1,000 WTI 100.60 11.71
06/28/2022 01/01/2023 - 03/31/2023 Put 1,000 WTI 95.75 13.96
06/28/2022 04/01/2023 - 06/30/2023 Put 1,000 WTI 92.70 15.20
06/28/2022 07/01/2023 - 09/30/2023 Put 1,000 WTI 90.00 16.00
06/28/2022 10/01/2023 - 12/31/2023 Put 1,000 WTI 87.70 16.53
06/29/2022 01/01/2023 - 03/31/2023 Put 500 WTI 95.25 14.25
06/29/2022 04/01/2023 - 06/30/2023 Put 500 WTI 91.85 15.58
06/29/2022 07/01/2023 - 09/30/2023 Put 500 WTI 89.10 16.45
06/29/2022 10/01/2023 - 12/31/2023 Put 500 WTI 86.90 16.93
06/29/2022 01/01/2024 - 03/31/2024 Put 500 WTI 84.70 17.15
06/29/2022 04/01/2024 - 06/30/2024 Put 500 WTI 82.80 17.49
The notional quantity per the swap contract entered into on
an annual basis.
Derivative financial instruments are recorded at fair value and included as either assets or liabilities in the accompanying Balance Sheets. Any gains or losses resulting from changes in fair value of outstanding derivative financial instruments and from the settlement of derivative financial instruments are recognized in earnings and included as a component of other income (expense) in the accompanying Statements of Operations. The use of derivative transactions involves the risk that the counterparties, which generally are financial institutions, will be unable to meet the financial terms of such transactions. AtJune 30, 2022 , 100% of our volumes subject to derivative instruments are with lenders under our Credit Facility.
Capital Resources for Future Acquisition and Development Opportunities
We continuously evaluate potential acquisitions and development opportunities. To the extent possible, we intend to acquire producing properties with lower risk undeveloped drilled properties rather than properties with higher-risk exploratory opportunities. We do not intend to limit our evaluation to any one state, but we presently have no intention to acquire offshore properties or properties located outside ofthe United States . The pursuit of and the acquisition of accretive oil and gas properties may require substantially greater capital than we currently have available and obtaining additional capital may require that we obtain either short-term or long-term debt or sell our equity or both. Furthermore, it may be necessary for us to retain outside consultants and others in our endeavors to locate desirable oil and gas properties. 34 Table of Contents The process of acquiring one or more additional oil and gas properties would impact our financial position and reduce our cash position. The types of costs that we may incur include the costs to retain consultants specializing in the purchase of oil and gas properties, obtaining petroleum engineering reports relative to the oil and gas properties that we are investigating, legal fees associated with any such acquisitions including title reports,SEC reporting expenses, and negotiating definitive agreements. Additionally, accounting fees may be incurred relative to obtaining and evaluating historical and pro forma information regarding such oil and gas properties. Even though we may incur such costs, there is no assurance that we will ultimately be able to consummate a transaction resulting in our acquisition of oil and gas producing properties.
Effects of Inflation and Pricing
The oil and natural gas industry is very cyclical and the demand for goods and services of oil field companies, suppliers and others associated with the industry puts pressure on the economic stability and pricing structure within the industry. Typically, as prices for oil and natural gas increase, so do all associated costs. Material changes in prices (inflation) will impact our revenue stream, estimates of future reserves, borrowing base calculations of bank loans and the value of properties in purchase and sale transactions. Material changes in prices can also impact the value of oil and natural gas companies and their ability to raise capital, borrow money and retain personnel. We anticipate business costs will vary in accordance with commodity prices for oil and natural gas, and the associated increase or decrease in demand for services related to production and exploration.We further expect that prices to explore, develop and produce oil and gas may increase depending in large part on government spending and regulations.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements, and it is not anticipated that the Company will enter into any off-balance sheet arrangements.
Disclosures About Market Risks
Like other natural resource producers, the Company faces market risks associated with the exploration and production of oil and natural gas. The most salient risk factors are the volatile prices of oil and gas, transportation of oil and natural gas, competition in the oil and natural gas industry, retention of key personnel, and environmental and regulatory concerns and obligations.
Oil and Gas Prices
The price we receive for our oil and natural gas will heavily influence our revenue, profitability, access to capital and future rate of growth. Oil and natural gas are commodities and, therefore, their prices are subject to wide fluctuations in response to relatively minor changes in supply and demand. The prices we receive for our production depend on numerous factors beyond our control. These factors include, without limitation, the following: worldwide and regional economic conditions impacting the global supply and demand for oil and natural gas; the price and quantity of imports of foreign oil and natural gas; the level of global oil and natural gas inventories; localized supply and demand fundamentals; the availability of refining capacity; price and availability of transportation and pipeline systems with adequate capacity; weather conditions, natural disasters and public health threats; governmental regulations; speculation as to the future price of oil and the speculative trading of oil and natural gas futures contracts; price and availability of competitors' supplies of oil and natural gas; energy conservation and environmental measures; technological advances affecting energy consumption; the price and availability of alternative fuels and energy sources; and domestic and international drilling activity.
A substantial or extended decline in oil or natural gas prices may result in impairments of our proved oil and gas properties and may materially and adversely affect our future business, financial condition, cash flows, and results of operations.
Transportation of
Ring is presently committed to using the services of the existing gatherers in
its present areas of production. This gives such gatherers certain short-term
relative monopolistic powers to set gathering and transportation costs.
Obtaining the services of an alternative gathering company would require
substantial additional costs since an alternative gatherer would be required to
lay new pipeline and/or obtain new rights-of-way.
35
Table of Contents
Competition in the Oil and Natural Gas Industry
We operate in a highly competitive environment for developing and acquiring properties, marketing oil and natural gas and securing equipment and trained personnel. As a relatively small oil and natural gas company, many large producers possess and employ financial, technical and personnel resources substantially greater than ours. Those companies may be able to develop and acquire more prospects and productive properties than our financial or personnel resources permit. It is also significant that more favorable prices can usually be negotiated for larger quantities of oil and/or gas product, such that Ring views itself as having a price disadvantage compared to larger producers.
Retention of Key Personnel
We depend to a large extent on the services of our officers. These individuals have extensive experience in the energy industry, as well as expertise in evaluating and analyzing producing oil and natural gas properties and drilling prospects, maximizing production from oil and natural gas properties, and developing and executing financing strategies. The loss of any of these individuals could have a material adverse effect on our operations and business prospects. Our success may be dependent on our ability to continue to hire, retain and utilize skilled executive and technical personnel.
Environmental and Regulatory Risks
Our business and operations are subject to and impacted by a wide array of federal, state, and local laws and regulations governing the exploration for and development, production, and marketing of oil and natural gas, the operation of oil and natural gas wells, taxation, and environmental and safety matters. Many laws and regulations require drilling permits and govern the spacing of wells, rates of production, water and waste use and disposal, prevention of waste, hydraulic fracturing, and other matters. From time to time, regulatory agencies have imposed price controls and limitations on production in order to conserve supplies of oil and natural gas. In addition, the production, handling, storage, transportation and disposal of oil and natural gas, byproducts thereof and other substances and materials produced or used in connection with oil and natural gas operations are subject to regulation under federal, state and local laws and regulations. Compliance with these regulations may constitute a significant cost and effort for Ring. In the event of a violation of environmental regulations, these environmental regulatory agencies have a broad range of alternative or cumulative remedies, including ordering a cleanup of any spills or waste material and restoration of the soil or water to conditions existing prior to the environmental violation; fines; or enjoining further drilling, completion, or production activities.
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