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 ended
Overview
Recent Developments Stronghold Acquisition
On
The fair value of consideration paid to Stronghold was approximately
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.
In the first quarter of 2022, Ring contracted a rig on
31
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 on 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.
In the third quarter of 2022, Ring completed and placed on production the four 1-mile horizontal wells in the Northwest Shelf on which the Company had begun the completion process during the second quarter of 2022. In the Central Basin Platform, the Company drilled and completed two 1.5-mile horizontal wells and one 1-mile horizontal well, each with a working interest of 100%. In the Northwest Shelf, the Company drilled and completed two 1-mile horizontal wells with a working interest of 100%. During the last month of the quarter, the Company drilled and began the completion process on three 1-mile horizontal wells in the Northwest Shelf, each with a working interest of 100%. In total, during the third quarter of 2022, Ring drilled eight horizontal wells, completed nine horizontal wells, and began the completion process on three horizontal wells. Ring performed three recompletions in the Central Basin Platform. In addition, the Company continued its CTR program, with five conversions in the Northwest Shelf and one conversion in the Central Basin Platform.
The table below sets forth our drilling and completion activities for 2022 by
quarter through
Wells Began
Wells Wells Completion
Quarter Area Drilled Completed Process CTRs Recompletions
1Q 2022 Central Basin Platform 4 4 - - -
Delaware Basin - - - - -
Northwest Shelf 2 - - 4 -
2Q 2022 Central Basin Platform - - - 1 -
Delaware Basin - - - - -
Northwest Shelf 9 7 4 3 -
3Q 2022 Central Basin Platform 3 3 - 1 3
Delaware Basin - - - - -
Northwest Shelf 5 6 3 5 -
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 three months
ended
borrowing base of
the Company had
month of September, the Company used free cash flow from operations to pay 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 from the
continuous drilling program throughout2022.
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
32
Table of Contents
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
with operators and service providers in the region. Ring believes that
leveraging the relationships of its management and board of directors will be a
competitive advantage in identifying potential acquisition targets.
Executive Summary - 2022 Developments and Highlights
COVID-19 and Geopolitical Uncertainties
In December of 2020, the
Oil, Natural Gas, and NGL Revenues
Our oil, natural gas, and NGL producing properties are located in the
Commodity Risk Management
Effective
For oil, we had derivative contracts for an average of 3,129 barrels of oil per
day for the month of
For natural gas, we had derivative contracts for an average of 11,061 MMBtu per
day during the month of
33
Table of Contents
Our 2022 derivative financial instruments resulted in a total non-cash fair
value gain of approximately
Borrowing Base
The Company's borrowing base increased from
Officers and Directors
Upon closing of the Stronghold Acquisition, Stronghold exercised its right to
designate two directors to the Board of Directors (the "Board"). On
Results of Operations - For the Three Months Ended
Oil, natural gas, and NGL sales. For the three months ended
The following table presents our sales revenues for the periods indicated (note that for periods prior toJuly 1, 2022 , sales for NGLs were presented with natural gas): For The Three Months Ended September 30, 2022 2021 Operating Revenues Oil$ 86,413,665 $ 45,889,548 Natural gas 4,655,002 3,486,628 Natural gas liquids 3,340,281 - Total operating revenues$ 94,408,948 $ 49,376,176
Lease operating expenses. Total lease operating expenses ("LOE") expressed on a
per barrel of oil equivalent ("Boe") basis increased approximately 18% from
Gathering, transportation and processing costs. Our total gathering,
transportation and processing costs decreased 100% from
34
Table of Contents
the Company from that point on accounts for any such fees and deductions as a
direct reduction of the sales transaction price. Accordingly, total gathering,
transportation and processing costs expressed on a per Boe basis decreased 100%
from
Ad valorem taxes. Our ad valorem taxes increased approximately 70% from
Oil and natural gas production taxes. Production taxes as a percentage of oil
and natural gas sales increased slightly to 4.8% for the three months ended
Depreciation, depletion and amortization. Our depreciation, depletion and
amortization expense increased by
Asset retirement obligation accretion. Accretion of asset retirement obligations
("AROs") increased by
Operating lease expense. Operating lease expense remained consistent at
General and administrative expense. General and administrative expense increased
to
For The Three Months
Ended September 30,
2022 2021
General and administrative expense (excluding share-based compensation)
$ 5,850,815 $ 3,655,790 Share-based compensation 1,543,033$ 777,461 General and administrative expense$ 7,393,848 $ 4,433,251
Interest expense. Interest expense increased
Gain (loss) on derivative contracts. In the Statements of Operations, the total
gain (loss) on derivative contracts changed from a loss of
35
Table of Contents
Net income (loss). For the three months ended
Sales volumes and commodity prices received
The following table presents our sales volumes and received pricing information
for the periods indicated (note that for periods prior to
For the Three Months
Ended September 30,
2022 2021
Oil volume (Bbls) 932,770 659,247Natural gas volume (Mcf) 952,762 594,841 Natural gas liquids (Bbls) 130,052
-
Total Production (Boe)(1) 1,221,616 758,387
Average Sales Price Oil price (per Bbl)$ 92.64 $ 69.61 Gas price (per Mcf)$ 4.89 $ 5.86
Natural gas liquids (Bbl)
$ 77.28 $ 65.11
(1) Boe is calculated using six Mcf of natural gas as the equivalent of one
barrel of oil.
Results of Operations - For the Nine Months Ended
Oil, natural gas, and NGL sales. For the nine months ended
The following table presents our sales revenues for the periods indicated (note that for periods prior toJuly 1, 2022 , sales for NGLs were presented with natural gas): For The Nine Months Ended September 30, 2022 2021 Operating Revenues Oil$ 229,532,827 $ 126,927,318 Natural gas 14,678,747 9,711,492 Natural gas liquids 3,340,281 - Total operating revenues$ 247,551,855 $ 136,638,810 36 Table of Contents
Lease operating expenses. Total LOE expressed on a per Boe basis increased
approximately 6% from
Gathering, transportation and processing costs. Our total gathering,
transportation and processing costs decreased by approximately 36% from
Ad valorem taxes. Our ad valorem taxes increased approximately 45% from
Oil and natural gas production taxes. Production taxes as a percentage of oil
and natural gas sales increased slightly to 4.8% for the nine months ended
Depreciation, depletion and amortization. Our depreciation, depletion and
amortization expense increased by
Asset retirement obligation accretion. Accretion of AROs increased
Operating lease expense. Operating lease expense decreased
General and administrative expense. General and administrative expense increased
to
For The Nine Months
Ended September 30,
2022 2021
General and administrative expense (excluding
share-based compensation) $ 13,784,239 $ 9,618,664
Share-based compensation 4,964,188 1,484,730
General and administrative expense $ 18,748,427 $ 11,103,394 Interest expense. Interest expense increased
Gain (loss) on derivative contracts. In the Statements of Operations, the total
loss on derivative contracts decreased by approximately 97%, from
37
Table of Contents
experienced an increase of
Net income (loss). For the nine months ended
Sales volumes and commodity prices received
The following table presents our sales volumes and received pricing information
for the periods indicated (Note that for periods prior to
For the Nine Months
Ended September 30,
2022 2021
Oil volume (Bbls) 2,338,469 1,971,776Natural gas volume (Mcf) 2,408,241 1,773,506 Natural gas liquids (Bbls) 130,052 Total Production (Boe)(1) 2,869,895 2,267,360
Average Sales Price Oil price (per Bbl)$ 98.16 $ 64.37 Gas price (per Mcf)$ 6.10 $ 5.48 Natural gas liquids (Bbl)$ 25.68 Total per Boe$ 86.26 $ 60.26
(1) Boe is calculated using six Mcf of natural gas as the equivalent of one barrel of oil.
Capital Resources and Liquidity
As of
We will continue to focus on maximizing free cash flow in 2022 through a combination of cost monitoring 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, our continuous drilling program and successful wells on the Stronghold properties resulted in capital expenditures for 2022 that are significantly higher than 2021 levels. With the increased level of capital expenditures, our oil and natural gas production has increased 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 the remainder of 2022, we will remain focused on maximizing free cash flow, reducing our debt level, and maximizing our liquidity.
38
Table of Contents
Availability of Capital Resources under Credit Facility
In
On
The Credit Facility provides for SOFR Loans and Base Rate Loans (as respectively defined in the Second Amended and Restated Credit Agreement). The annual interest rate on each SOFR Loan will be the adjusted term SOFR for the applicable interest period plus a margin between 3.0% and 4.0% 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 term SOFR 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 2.0% and 3.0% (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,
exploration expenses, and all other non-cash charges acceptable to the
Administrative Agent) of not more than 3.0 to 1.0 and (ii) a minimum ratio of
Current Assets to Current Liabilities (as such terms are defined in the Second
Amended and Restated Credit Agreement) of 1.0 to 1.0. The Credit Facility also
contains other customary affirmative and negative covenants and events of
default. As of
The Company is required to maintain on a rolling 24 month basis, hedging transactions in respect of crude oil and natural gas, on not less than 50% of the projected production from the proved, developed, producing oil and gas. If the borrowing base utilization is less than 25% at the hedge testing date and the leverage ratio is not greater than 1.25 to 1.00, the required hedging percentage for months 13 through 24 of the rolling 24 month period provided for shall be 0% from such hedge testing date to the next succeeding hedge testing date. If the borrowing base utilization percentage is equal to or greater than 25%, but less than 50% and the leverage ratio is not greater than 1.25 to 1.0, the required hedging percentage for months 13 through 24 of the rolling 24 month period provided for shall be 25% from such hedge testing date to the next succeeding hedge testing date.
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 seeking 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 of
In November and December of 2020, the Company entered into swap contracts with a
weighted average of
In November of 2020, we entered into natural gas swap contracts for 6,000 MMBtu
per day at
In May of 2021, we bought back a 1,500 barrels of oil per day call option for
39
Table of Contents
Effective
Near the end of the second quarter 2022, on
The following table reflects the contracts outstanding as of
Oil Hedges (WTI)
2022 2023 2024
Swaps:
Hedged volume (BBL) 379,250 389,250 526,000
Weighted average swap price $ 54.89 $ 77.55 $ 65.90
Deferred premium puts:
Hedged volume (BBL) 138,000 773,500 91,000
Weighted average strike price $ 97.93 $ 90.64 $ 83.75 Weighted average deferred premium price
Two-way collars: Hedged volume (BBL) 97,201 487,622 475,350 Weighted average put price$ 53.93 $ 52.16 $ 67.88 Weighted average call price$ 67.68 $ 62.94 $ 83.32 Three-way collars: Hedged volume (BBL) 89,985 66,061 - Weighted average first put price$ 40.00 $ 45.00 $ - Weighted average second put price$ 50.00 $ 55.00 $ - Weighted average call price$ 62.03 $ 80.05 $ - 40 Table of Contents Gas Hedges (Henry Hub) 2022 2023 2024 NYMEX Swaps: Hedged volume (MMBtu) 46,313 175,421 - Weighted average swap price$ 2.51 $ 2.40 $ - Two-way collars: (1) Put hedged volume (MMBtu) 715,661 2,486,514 1,712,250 Weighted average put price$ 3.76 $ 3.18 $ 4.00 Call hedged volume (MMBtu) 435,061 2,306,514 1,712,250 Weighted average call price$ 10.22 $ 5.03 $ 6.29 Three-way collar: Hedged volume (MMBtu) 304,250 - - Weighted average first put price$ 2.20 $ - $ -
Weighted average second put price
$ 3.25 $ - $ -
Weighted average deferred premium price
Gas Hedges (basis differential)
2022 2023 2024
Waha basis swaps:
Hedged volume (MMBtu) 505,024 1,339,685 -
Weighted average swap price (2) (3) $ -
The two-way collars for the fourth quarter of 2022 and first quarter of 2023 (1) include 2x1 collars where the put volumes of 561,200 and 360,000 are two
times the call volumes of 280,600 and 180,000, respectively.
The WAHA basis swaps in place for the remainder of 2022 consist of five (2) derivative contracts, each with a fixed price of the Henry Hub natural gas
price less a fixed amount (weighted average of
The WAHA basis swaps in place for the calendar year of 2023 consist of two (3) derivative contracts, each with a fixed price of the Henry Hub natural gas
price less a fixed amount (weighted average of
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. At
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 drilling opportunities 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 of
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.
41
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,
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 will impact our cash flow, 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; geopolitical events such as military actions, threats of war, war and the imposition of sanctions in connection with these events; 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.
42
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 is 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.
© Edgar Online, source
