Greetings and welcome to the Ring Energy, Inc. 2020 Second Quarter Financial and Operating Highlights Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note, that this conference is being recorded. I will now turn the conference over to your host, Mr. Tim Rochford, Chairman of the Board of Directors of Ring Energy. Thank you, sir. You may begin.

Thank you, operator. I want to thank all of our listeners today for the 2020 second quarter financial and operations conference call for Ring Energy, Inc. Again, I'm Tim Rochford, Chairman of the Board. Joining me on the call today is Kelly Hoffman, our CEO; David Fowler, our President; Randy Broaddrick, our Chief Financial Officer; Danny Wilson, Executive VP and Head of Operations; Hollie Lamb, Vice President of Engineering; Matt Garner, VP of Land; and Bill Parsons, our Head of Investor Relations. Today we'll provide a quick, concise overview of the financial and operational results for the three months and the six months ended June 30th, 2020. We will spend the majority of this call identifying, discussing, and summarizing the factors that directly affect the current and future operations of your company. At the conclusion of the second quarter review, we'll turn it back to the operator for any questions you may have. Now, with that said, I'm going to turn this over to Randy Broaddrick for just a brief financial overview. Randy, please.

Thank you, Tim. Before we begin, I would like to make reference that any forward-looking statements made during this call are within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. For a complete explanation, please refer to our release issued on Monday, August 10th. If you do not have a copy of the release, one will be posted on our company website at www.ringenergy.com. For the three months ended June 30th, 2020, we had revenues of $10.6 million, a net loss of $135 million, and a loss per diluted share of $1.99. This net loss included a pre-tax unrealized loss on hedges of $26.8 million, $147.9 million in ceiling test impairment, and $1.3 million in stock-based compensation expense. Without these items, after the effective income taxes, our net income would have been approximately $1.5 million or $0.02 per share. For the six months ended June 30th, 2020, we had revenues of $50.2 million, a net loss of $91.2 million, and a loss per diluted share of $1.34. This net loss included a pre-tax unrealized gain on hedges of $20.3 million, $147.9 million in ceiling test impairment, and $2 million in stock-based compensation expense. Without these items, after the effect of income taxes, our net income would have been approximately $9.2 million or $0.14 per share. The unrealized gain or loss on hedges is recorded because the value of derivatives changed due to fluctuations in oil prices. The ceiling test impairment results from a reduction in the value of our reserves, again due to lower oil prices. During the three months ended June 30th, 2020, we recorded $9.7 million in net cash flow and $1.8 million in capital expenditures, resulting in a post-CapEx positive cash flow of approximately $7.8 million. For the six months ended June 30th, 2020, we had $33.6 million in net cash flow and $17.9 million in capital expenditures, leading to post-CapEx positive cash flow of approximately $15.8 million. For the three-month period, we reported oil sales of 429,751 barrels and gas sales of 417,491 MCF for a total of 499,333 BOE. Our received prices were $24.23 per barrel of oil, $0.53 per MCF of gas, and $21.30 per BOE. For the six-month period, we reported oil sales of 1,285,354 barrels and gas sales of 1,183,042 MCF for a total of 1,482,528 BOE. Our received prices were $38.16 per barrel of oil, $0.98 per MCF of gas, and $33.87 per BOE. The differential between our oil price received and WTI averaged approximately $2.50 per barrel. This would have been higher had we not limited our sales during May. We curtailed production from late April until early June and stored most of what we produced to sell in June. I will discuss this further later in the call. Before I turn it back to Tim, I would like to highlight a few additional items. With the second quarter of 2020, we have now recorded three consecutive quarters of positive post-CapEx cash flow. We intend to use cash flows to continue to reduce the debt under our credit facility. Regarding our credit facility, during our spring redetermination, our borrowing base was reduced to $375 million. We reduced our borrowings under the credit facility to $375 million and initiated the process yesterday to reduce that by an additional $3 million from cash flows, bringing our drawn amount on the credit facility to $372 million. We drew down $21.5 million in April for our accounts payable discount program, and since that time, with this $3 million payment, we will have paid $16 million down on our credit facility. We are receiving today another $3 million related to the divestiture of the Delaware assets, which we will be using to further reduce the debt by another $3 million, bringing our outstanding balance down to $369 million. The status of the Delaware asset divestiture will be covered more in-depth later in the call. We have also reduced our accounts payable, which now stands at $19.2 million down from $54.6 million at year-end. We had cash on hand as of June 30th of $17.2 million. With that, I will turn it back to Tim.

All right, Randy. Thank you for that overview. I'm going to turn this over to Kelly and ask Kelly just to give us an update on how things are going out in Delaware and generally. Kelly?

Thanks, Tim. I appreciate it. Thanks everyone for joining the call. In a minute, I would like to turn the call over to Danny Wilson, our Executive VP of Operations, and Hollie Lamb, our Vice President of Engineering. They are going to walk you through operational events of the quarter and our current activity. But before I do, I want to bring our listeners up-to-date on the status of the Delaware divestiture. First and foremost, I want everyone to hear me when I say, we are selling the Delaware, that's what's happening. But, you know, even if we didn't, it's not life or death. I know for some of you, it might seem so, but that's not the case. Our buyer has multiple groups expressing interest in funding this acquisition. We have had many conversations, and our buyer continues to work forward and to spend money, recently releasing $1.5 million to us. They have also asked for additional time to make the best deal possible with these financial entities they are in discussions with. Additionally, they have requested an extension which we have agreed to grant, and they wired us an additional $3 million for this extension. This is a 60-day extension, resulting in us receiving $4.5 million of non-refundable money—this is not in escrow; it's in our bank account. The buyer is spending money and moving the process forward, and we are excited to report that. I'm proud of the job that my team has done during this process and the collaborative effort that the Board has put in working with us, allowing us the flexibility to get a deal done during very difficult times. Just to give you some context from public records, I think this is all inverse data, but in 2018, there were 368 deals recorded, 250 in 2019, and this year-to-date, we have seen 47 deals, highlighting the difficult times we are experiencing. That’s why I say I'm really proud to be with the group that I'm with, both the Board and the Management, given their experience and collaborative effort. So with that, I'm going to turn this over to Danny and Hollie, so they can give you an update on operations for the second quarter. Danny?

Thank you, Kelly. As mentioned in our operations update in July, activity in Q2 was limited due to the dramatic drop in commodity prices, particularly oil prices. During that quarter, we had no drilling activity, and due to these price drops, we took the unprecedented step of shutting in almost all of our production beginning in the last week of April. Prior to the shutdown, we prepped or pickled all of our key wells to limit issues when we decided to restart production. In May, we limited production just enough to hold the leases with almost no sales, as Randy mentioned. During this time, we constantly monitored the process and the differentials, and as they improved during June, we started production back up in the first week of the month; most production was back online by the end of the month. Due to the prep work in April and May, there were very few operational issues with the restart. Due to the lower activity, our CapEx spend was only $1.8 million for the quarter versus our original plan to spend between $3 million and $3.5 million. For the quarter, we completed 4 ESP to rod conversions, and this program continues to yield very impressive results for us. Our failure rate on our wells has been cut in half from early last year, which has allowed us to dramatically reduce our CapEx spend. Prior to beginning the rod conversion program, our average workover cost per well was approximately $200,000; currently, over half of our well work is around $30,000 or less. To date, we have converted nearly half of our horizontal wells on the Central Basin Platform and the Northwest Shelf to rods, and we plan to continue our effort as we approach the point where rod pumps become the optimal production method, which will also lower our CapEx spend over time. Current production continues to run at about 9,000 BOE per day, and with the lower production in Q2 and no planned drilling activity through year-end, we anticipate an approximately 20% drop in year-over-year production from 2019 to 2020. With that, I'm going to turn it over to Hollie Lamb, our Vice President of Engineering.

Thank you, Danny. We're continuing to focus on reducing CapEx while maintaining our positive cash flow. As Danny mentioned, we spent $1.8 million in capital expenditures in the second quarter and $17.9 million for the first six months of this year. Approximately $16 million was spent in Q1. In Q1, we drilled 4 horizontal wells and completed 2 additional wells. Overall, we've converted 13 wells to rods as Danny said, because of the favorable economics. The Northwest Shelf has continued to exceed our expectations, and we're very eager to return to drilling. Our CapEx plans for H2 of 2020 are minimal based on the current economic environment but are subject to change. As stated on previous calls, a stabilized price in the mid-$40 range would signal a return to drilling, and that remains the case. Our average oil differential is approximately $2.50. The market isn't there yet, but it's moving in the right direction. We're excited about the outlook. Our internal rate of return in the mid-$40 range is from the mid-60s to upper 70s, sometimes even low 80s, depending on the area. We have modeled a drilling and completion program of 16 to 18 wells within cash flow at these prices. I'll turn it over to David.

Thank you, Hollie. I appreciate that report. As Kelly mentioned earlier, M&A activity has underperformed in 2020 primarily due to the pandemic and the flooding of the oil markets by OPEC+. Further M&A activities have likely been pushed to either the second half of this year or more likely into 2021. Until we see a vaccine approved, get past the elections, and witness an increase in consumer confidence that drives demand to reduce the significant global inventory overhang, evaluations and consolidation talks are expected to remain strained. Additionally, in the second quarter, we decided not to renew a block of acreage predominantly located in northern Gaines County. That acreage was not a focus area since it would have required a large upfront CapEx investment to construct SWD facilities, electrical, and oil and gas infrastructure to support a development program that we already have in place on our southern Central Basin Platform acreage as well as our recently acquired Northwest Shelf assets in Yoakum County. With the addition of the shelf acreage—we're talking about 48,000 gross acres and 36,000 net acres—we now have a high-quality inventory of over 340 Tier 1 and Tier 2 locations that provides us with over a 15-year drilling inventory. Now that we have these top-tier locations in hand, we determined that extending these mostly Tier 4 locations, which are unexplored or underexplored and carry a higher element of risk, just wasn't a prudent use of capital given the current price environment compared to the notable economic impact from growth in proved reserves and increased EBITDA if we invest in the high-rate-of-return horizontal wells on the shelf. In case you're wondering, there were no proved reserves allocated to this acreage, so it will not affect our stated and published reserve numbers in any way. With that, I'll turn it back to Tim.

All right. Thank you, David. Thank you, everyone. This concludes the company's portion of the 2020 second-quarter and six-month review. I'm going to turn it back over to the operator and ask Diego to open it up for our listeners' questions. Diego?

Thank you, sir. At this time, we will conduct a question-and-answer session. Our first question comes from Neal Dingmann with Truist Securities. Please state your question.

Good morning, guys. Kelly, my question for you or Danny, when you decide to come back, you know, prices certainly rising nicely. Could you give us an idea of regionally will it be up in the shelf that you're still targeting in? If so, what might that plan look like?

Danny, go ahead.

Yeah, Neal, that's a great question. It'll be a mix of both areas, but predominantly it will be in the Northwest Shelf. We do have some drilling commitments with the University Lands Asset that we bought from Tessara prior to the Wishbone acquisition, but the bulk of the activity will be on the Northwest Shelf.

Very good. And just one last follow-up on hedging, you guys were successful this year. Your thoughts being on well still kind of in the low 40s. Kelly, how do you feel about it, or Randy, or just Tim, in general, what does the team think going forward as we get into '21?

Yeah, well, Neal, that's a good question. As you know, we do have hedges in place for '21 now. Randy probably has the exact number in front of him, but my recollection is that we're probably somewhere in the low to mid 40s locked down on about, I believe, 4,000, maybe 4,500 barrels a day. We are certainly open to adding more hedges as time goes on. For now, I think we're well positioned for the rest of this year. As you know, we're locked in at $50 on 5,500 barrels and, as I just explained, for '21, but we will be looking to enhance that as we approach 2021.

And it is 4,500 barrels a day with an average floor of $42.22.

Yeah. Thank you, Randy.

Very good. Thanks, guys.

Our next question comes from Dun McIntosh with Johnson Rice & Company. Please state your question.

Good morning, Kelly.

Good morning.

My first question was on the trajectory over the second half of the year. In your pre-release, you talked about production being down about 20% year-over-year. Could you explain that trajectory, both on an exit basis and full year versus full year? Considering you mentioned you're currently at 9,000 BOE per day, where might you position that for Q3, assuming that it might be too early for guidance for Q3 and Q4 as you start looking at '21?

Yeah, Dun, this is Danny. The 20% figure I provided is a year-over-year number, not representative of exit rates. For this quarter, we project something around that 8,900 to 9,000 BOE per day as a good estimate for us, with fourth quarter possibly being slightly less than that.

Okay, great. Thanks. David, could you provide clarity on the closing of the Delaware sale? You mentioned a 60-day extension, but are there additional asset sales into '21?

Kelly, do you want to take that since you've been involved?

Yeah, sure. Dun, the 60-day extension pertains to the Delaware sale. I think David was generally referencing the market. We're currently receiving numerous inquiries by interested parties. During our discussions with the particular buyer for the Delaware prospects, we have been turning down calls from others wishing to pursue similar interest because we are locked in with this group moving forward. They have shown commitment by spending the necessary resources. It's interesting and exciting to see the larger number of interested parties lining up.

Thank you.

Thank you. Our next question comes from John White with ROTH. Please state your question.

Good morning.

Good morning, John.

On the impairments, could you provide an approximate breakdown by area?

Randy, can you respond to that, please?

It's not really calculated by area. As a full cost accounting company, the full pool is considered against the value of the reserves. Therefore, there isn't a practical way to break that down.

Understood. Regarding CapEx, Hollie was clear you'd start drilling new wells with sustained prices in the mid-$40 range. What kind of CapEx could we expect for the third and fourth quarters if prices hold above $40 but below $45 for the remainder of the year?

Let's look at it this way. We can model a potential drilling program between now and year-end. If prices stabilize and we are comfortable that we're going to realize prices in the $42 range plus or minus, we will accelerate thoughts on drilling. We're hoping by year-end to continue seeing improvements, and Hollie referenced the modeling of 16, 18, even 20 wells we could drill with a realized price in that $42 range, yielding a solid return.

Right now, when Tim mentioned the $40 to $50 range, that is on a BOE basis. Oil will need to be in the mid- to upper $40s, considering factors like differential and the dilution from lower gas prices. Currently, we want to stick to our plan of a CapEx of $25 million to $27 million for the year, having spent about $18 million thus far.

Okay, thanks very much.

Thank you, John.

Our next question comes from Noel Parks with Coker & Palmer. Please state your question.

Good morning.

Good morning, Noel.

You're certainly in good shape with inventory. But I was wondering, are you particularly active with leasing in the platform or regarding the Eastern Shelf?

Sure, Noel. Currently, we are renewing acreage as it comes up for expiration, but there isn't any new leasing activity ongoing. We're focused on maintaining the acreage that looks promising for development going into next year and beyond.

Great. And regarding your previous inquiries about what you would do if prices improved, what's the cheapest and most cost-effective way to position yourself for a future recovery? You mentioned you have 16, 18, and 20 wells identified; but is there anything else you can do regarding prep work that's cost-effective?

That's a great question. Danny and Hollie, could you address that?

Absolutely. We have approximately 30 permits waiting to be drilled; those are surveyed. We have infrastructure in those areas to limit long-term CapEx issues. We're prepared and ready to act as soon as we see clearer indicators.

Okay, great. Thank you. I just wanted to confirm if you have any expectations for differentials moving forward and whether you believe the worst of the volatility is behind us?

Danny watches that closely. Danny, could you comment on that?

No, that's a good question. Generally, as we look forward, differentials seem steady. We watch the two main differentials we deal with, the CMA role and the WTI-WTS differential. Information from last week indicated the WTI-WTS differential is expected to stabilize near zero in the foreseeable future, barring any significant jumps up or down in commodity prices. The CMA role's impact is minimal in contrast to back in April. Overall, I expect little volatility in differentials between now and the year's end and into next year.

Great. Thank you. Lastly, regarding the extension provided to the buyers of the Delaware Basin asset—did they approach the transaction assuming a particular funding source, or has that changed with new options arising?

Kelly, do you want to clarify that?

Yes, they had multiple interested parties from the beginning. We have observed that buyers are getting creative nowadays while structuring new deals. These groups are familiar with the field, having extensive experience. Throughout the process, we've received inquiries from other prospective buyers, but we are committed to completing this deal. As I mentioned previously, we have $4.5 million that is non-refundable and signals their commitment. The buyer's teams have also started contracting with third parties for water and other resources needed post-acquisition.

Thanks for clarifying. That helps a lot.

Thank you, Noel.

Our next question comes from Logan Moncrief with Thomist Capital. Please state your question.

Thanks, guys. A couple of questions. First, regarding the 9,000 barrels per day of current production: does that number include roughly 900 barrels per day set to be divested? Secondly, concerning the credit facility, how much capacity on the facility is tied to the divestiture, and could we expect the credit facility to decrease solely based on the reserves divested with the Delaware deal?

This is Tim, I’ll address the credit facility. Once the Delaware sale closes, we will reduce the facility by at least $20 million, dropping the base from $375 million to $355 million. As of now, our outstanding balance is down to $369 million. With this reduction, once Delaware is finalized, the outstanding balance will be $355 million. We also plan to roll out other planned reductions.

Currently, we have not spent any money on the Delaware asset, anticipating this sale process. Consequently, that production represents about 6% of our overall production. Once closed, our overall production will decrease by that same 6%—it won’t significantly impact us in the long term. However, as mentioned earlier, the Delaware carries some value that will be reflected after the closure.

Thanks, guys. Appreciate it.

There are no further questions at this time. I'll turn it back to management for closing remarks.

Thank you, Diego. We want to thank everybody for joining us today. We understand it’s a busy time, and as always, our doors are open. Should you have any follow-up questions, feel free to reach out to Bill Parsons in Investor Relations. If we need to set up calls with management, we can facilitate that as well. Have a great day, and we appreciate your support.

Thank you. This concludes today's conference. All parties may disconnect. Have a good day.