Ring Energy, Inc. Q1 FY2021 Earnings Call

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

Thank you, Rocco, and thank you everyone for joining us this morning. We appreciate you taking the time to join us and for your interest in Ring Energy. We will begin our call with comments from Paul McKinney, our Chairman of the Board and CEO, who will provide an overview of key matters for the first quarter. We will then turn the call over to Travis Thomas, our Chief Financial Officer, who will review our detailed financial results. Paul will then discuss our future plans and outlook. Also joining us on the call today is Alex Dyes, our Executive Vice President of Engineering and Corporate Strategy; and Marinos Baghdati, our Executive Vice President of Operations; and Steve Brooks, our Executive Vice President of Land, Legal, Human Resources and Marketing; all of whom will be available for our Q&A session. During this session, we ask that you limit your questions to one and a follow-up and reenter the queue with additional questions. During the course of this conference call, the company will be making forward-looking statements. Investors are cautioned that forward-looking statements are not guarantees of future performance, and those actual results or developments may differ materially from those projected in the forward-looking statements. Ring Energy disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Accordingly, you should not place undue reliance on forward-looking statements. These and other risks are described in yesterday's press release and in the reports filed with the Securities and Exchange Commission. As a reminder, this conference call is being recorded. I would now like to turn the call over to Paul McKinney, our Chairman and CEO.

Hey, thank you, David. And welcome everyone to our first quarter 2021 earnings call. Let me begin with a few key highlights of the period. By the challenges all of us in Texas faced in February with the unusually severe winter storm and its aftermath, we were pleased to still remain free cash flow positive during the quarter, even with an active drilling program underway. Continuing to generate free cash flow allows us to further pay down debt and increase our liquidity during the period. As you know, our first quarter sales volumes were significantly impacted by the winter storm. We sold 716,422 barrels of oil equivalent or 7,960 BOE per day, which is approximately 15% less than the fourth quarter. We incurred shut-in and deferral of more than 60% of our production for the majority of the storm with restoration of most of the production taking more than two weeks to complete. Our first quarter financial performance was also negatively impacted by additional costs to bring these wells back online. Further contributing to the decrease in sales volumes from the fourth quarter was temporary downtime associated with shutting-in offset wells during the completion operations of our Northwest Shelf Phase 1 well, which we completed during the quarter. We also experienced temporary downtime during the quarter on the nine wells we converted from electrical submersible pumps to rod pumps, or what we call CTRs. Of those nine CTRs, we completed seven in Northwest Shelf and two in the Central Basin Platform. As a reminder, our CTR reduces overall operating costs and helps stabilize production levels, and we will continue with this initiative moving forward. Due to the incredible efforts of our employees during the storm, many of whom at the same time were facing their own challenges at home, we were able to return our operations back to substantially pre-storm production levels as quickly as possible. This was evidenced by our average net sales volume of almost 9,100 barrels of oil equivalent per day for March, which does not include approximately 200 barrels of oil equivalent per day associated with the full restoration of certain third-party gas processing facilities damaged during the storm. Our targeted development activities helped to partially offset the impact of the storm as we completed and placed on production four wells included in the Northwest Shelf Phase 1 drilling program. We saw a collective production from the four wells of 37,550 barrels of oil equivalent in March, and production levels from the wells continue to meet or exceed our expectations. Importantly, all four wells were completed on schedule and within budget. Finally, we benefited from a much higher commodity price environment during the first quarter, which resulted in a 26% increase in revenues from the fourth quarter despite the impact of the lower sales volumes. This included an average realized sales price for crude oil of $58 a barrel that was 43% higher than the fourth quarter. For natural gas, our average realized sales price of $6.46 per Mcf represented almost a three-fold increase from the fourth quarter, primarily driven by the spike in natural gas prices during February's winter storm. The combined effect of all the factors I just described resulted in first quarter 2021 adjusted EBITDA of $19 million, contributing almost $3 million of free cash flow. I am pleased to report this marks our sixth consecutive quarter of free cash flow generation. Also contributing to free cash flow during the first quarter was the sale and exchange of certain oil and gas assets in Andrews County, Texas with Vin Fisher Operating Inc., for which we received a net value consideration of $2 million in cash. We utilized a portion of our free cash flow during the first quarter to pay down $7.5 million of bank debt and ended the period with approximately $46 million of liquidity, a 14% increase from the end of the fourth quarter. With that, I will turn the call over to Travis to discuss our financials in more detail. I will then come back to make a few closing comments.

Thanks, Paul. For the first quarter of 2021, we generated revenues of $39.5 million and recorded a net loss of $19.1 million or $0.19 loss per share. Included in the loss are pre-tax items including $25.7 million for non-cash unrealized losses on hedges as a result of the change in oil prices, and $355,000 for share-based compensation expense. Excluding these items, our adjusted net income was $7 million or a $0.07 gain per share. During the first quarter of 2021, we had $15.4 million of free cash flow from operations, $14.5 million in capital expenditures, and $2 million in proceeds from the Vin Fisher transaction. The combined result was positive free cash flow of $2.9 million. For the three months ended March 31, 2021, we had oil sales of 610,121 barrels and gas sales of 637,808 Mcf for a total of 716,422 Boe. As Paul discussed, our realized prices were significantly higher in the first quarter compared to the fourth quarter. This included first quarter average pricing of $58 per barrel of oil, and an exceptionally high price of $6.46 per Mcf on natural gas for an average of $55.14 per Boe. The differential between our average oil price received and the weighted average NYMEX WTI was $0.37 per barrel in the first quarter of 2021. This was an improvement from an average fourth quarter differential of approximately $2. This was primarily a result of renegotiating our oil contracts to receive a better marketing adjustment at the beginning of February. The WTI ETF spread went from an average of $0.16 in the fourth quarter to an average of $1.08 in the first quarter, and the Argus CMA role went from an average of negative $0.35 in the fourth quarter to an average of negative $0.01 in the first quarter. For detailed discussions of our other income statement line items, please refer to our earnings release in 10-Q that was filed yesterday. Of course, I will be happy to answer any questions you may have during today's Q&A session. Echoing Paul's comments, we're pleased to generate free cash flow once again during the first quarter of 2021 and further pay down debt of $7.5 million. We expect to continue to use much of our free cash flow for this purpose, with the cadence of debt pay down primarily driven by market conditions and the timing of capital spending. As of March 31, 2021, we had $305.5 million drawn on our revolving credit facility and liquidity of $46.2 million, including $45.5 million available on the revolver and $1.7 million in cash. Finally, despite the impact of our winter storm, our first quarter results were reaffirming our full year 2020 outlook, including year-over-year average sales volume growth of 2% to 8%, equating to 9,000 to 9,500 Boe per day, with approximately 85% to 87% oil. For full year 2021, we anticipate an average lifting cost of $10 to $10.50 per Boe, which reflects a decrease compared to the full year of 2020 lifting costs of $10.52 per Boe. Lifting costs include lease operating expenses and gathering transportation and processing costs. Turning to our 2021 capital investment program, we continue to target capital spending of $44 million to $48 million, with all expenditures to be funded by cash-on-hand and cash from operations. In addition to company-directed drilling, completion activities, our capital spending outlook includes targeted well reactivations, workovers, infrastructure upgrades, and continuing our successful CTR program in the Northwest Shelf and Central Basin Platform areas. Also included is this anticipated spending for leasing, contractual drilling obligations, and non-operated drilling completion and capital workovers. Our 2021 capital program has been designed to sustain or minimally grow our production and reserve levels and have returns sufficient to generate free cash flow to further reduce debt. I would note that our existing commodity hedges were implemented last year to ensure that the necessary net cash flow was there to adhere to these plans. So with that, I will turn it back to Paul.

Thank you, Travis. While we clearly had to navigate some significant operational challenges during the first quarter as a result of the winter storm that crippled much of Texas for several days in February, we remain focused on the execution of our work program and, more importantly, our strategic vision. If you recall, during the fourth quarter and full year 2020 earnings call in mid-March, we provided a detailed discussion of our strategy and how we expect to achieve sustainable long-term success for the benefit of our shareholders. First, we emphasize that our future success is dependent on our ability to attract, develop, and retain the best people. We also define what we mean by operational excellence and why we believe it is important to pursue operational excellence with a sense of urgency as a fundamental aspect that defines our culture. This includes executing our operations in a safe and environmentally responsible manner, being quick to apply advanced technologies where it makes sense, delivering low costs, consistent and efficient execution of our drilling campaigns and our work programs, and continuously seeking ways to improve our margins and reduce our operating cash costs on a per barrel basis. All of these things are vital to our future success. We also reviewed why it is important to allocate our capital to the highest risk-adjusted rate of return projects in our inventory. Earlier we discussed the success we have seen from our four Northwest Shelf Phase 1 drilling program wells, which were all placed on production in the first quarter, with collective production results today meeting or exceeding our original expectations. We also previously announced our three well Northwest Shelf Phase 2 drilling program where we began drilling in early April and have since successfully finished those operations. Similar to our Phase 1 program, all three Phase 2 wells are anticipated to be completed on schedule and within budget. We expect all wells to be online by the end of May. We also said that the combination of reducing our operating costs per barrel and targeting the development of only the highest risk-adjusted rate of return projects in our inventory supports our ultimate goal of generating and continuing sustainable free cash flow. This will allow us to further strengthen our financial and market position, drive meaningful returns to our shareholders, and provide additional financial flexibility to manage commodity price cycles in the future. As such, we remain focused on steadily paying down debt, divesting of non-core assets, and becoming a peer leader in debt-to-EBITDA metrics. Since I mentioned the divestiture of non-core assets, I thought I would take a moment to announce that we are opening our virtual data room and launching the sales process of our Delaware assets tomorrow. We have seen considerable interest in our Delaware assets since making our plans known earlier this year and are encouraged by the interest shown. Finally, we also shared that we will continue to pursue strategic accretive acquisitions that maintain or reduce our breakeven costs. We said we will only focus on acquisitions, mergers, dispositions that not only improve our breakeven costs but also enhance our margins, lower our operating costs, and are accretive on a cash flow basis. We also said that our financial strategies associated with these efforts will focus on delivering competitive risk and debt-adjusted per share returns to our shareholders. So what has changed since we last spoke about growing through M&A? One thing is that we are starting to see asset sales entering the marketplace that we believe would make great additions to our portfolio. We also believe that other operators with similar assets are planning to bring them to market for sale as well, perhaps soon. We would like to take advantage of these acquisition opportunities before oil prices improve significantly more. And as we have previously stated, we would like to accelerate the strengthening of our balance sheet through one or more strategic and accretive acquisitions. So how do we do that? We believe that the best way for us to finance an accretive acquisition at this time is primarily by using equity. We also believe that if our existing stockholders are going to agree with us, we will need to demonstrate two essential things. First, the transaction will need to bring in sufficient production revenue and cash flow to improve our debt-to-EBITDA ratio, thereby strengthening our balance sheet. Second, the transaction metrics will need to be accretive to our existing shareholders. So the bottom line is this: we will not acquire assets using equity unless it meets these two criteria. Now, before we take your questions, I want to let you know about a change underway in the management of our Investor Relations effort. David Fowler is stepping out of his Investor Relations and Business Development role with Ring to start a new company called Permian Energy Partners that will be headquartered in Midland. His new firm will provide other services. He will continue to assist us and others in the marketplace to potentially identify and bring in merger and acquisition opportunities for consideration. I want to personally thank David for his many years of dedicated service to Ring. He has held senior management positions and has always been a trusted public face for Ring. Since I joined the company last year, David has been an invaluable and steady resource to myself and the other new members of the management team and board. For that, I'm truly grateful, and David is a true friend. We wish David great success in his new business endeavor and look forward to his continued physical relationship with him for years to come. Earlier this year, to assist David in our Investor Relations efforts, we engaged Al Petrie Advisors, who many of you know from their advising a number of other E&P and LMS companies. Al and his team have a long history of successfully working with many clients in the oil and gas sector. We look forward to their continued assistance as we further enhance our investor communications program. In our earnings release, we included Al's contact info, as he will be the primary contact for investors and analysts following David's departure later this month. With that, I would like to turn back over to the operator for questions.

Good morning.

Hey, good morning, Jeff. How are you?

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

Thank you, Jeff.

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

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

Good morning. If we look at the total Boe production we've had to date and what we're estimating April and May to be, then what we need starting June 1 onward is around 9,400 to 9,500 Boe per day in order to meet our 9,000 Boe per day average for the year guidance. We think we can get there with the Phase 2 drilling program and the addition of the 200 Boe per day that is currently shut-in due to the purchaser in this area.

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

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

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

Okay, great. Thank you.

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

Good morning. Paul, my first one is for you. As a team, you mentioned going after the highest sort of return locations in order to generate that free cash flow. Can you talk a little bit about that, I guess, starting with two prongs: one, how many locations you've identified when you're thinking about this? Right now, the portfolio still seems you have quite a few? And then secondly, how you plan to balance, I'd like to hear a little more about how you plan to balance that, obviously, we want to see free cash flow; we'd like to see you mentioned earlier about keeping that production flat. So if you could talk a little on that? Thank you.

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

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

Go ahead, Marinos.

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

Yes, just to add to that. The larger the production base and the larger group of wells that you manage, workover opportunities are just things that come along with age and with more knowledgeable people working in the area. Workovers will continue to be an active component of our capital spending program. These types of projects tend to have higher rates of return and require a lot less capital than drilling programs or major infrastructure programs. You can expect to see us continue that to the level or the participation of the percentage of our actual capital program from one year to the next. It's really going to be a function of what opportunities actually present themselves during that time period.

Very good. Thanks for the details, guys.

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

Good morning.

Hey, good morning, Noel.

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

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

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

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

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

Great, thanks a lot.

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

Good morning, Mark.

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

Yes, if you don't mind, Mark, I'm going to take your two points in reverse order. So let's talk about hedges. Last fall, when we entered our hedges that was in November, when we started, three weeks prior, oil prices were around $35. We had already done the analysis and determined what price level we needed to secure our work program that would maintain our production or slowly grow it, but also provide us a cash flow to pay down debt at a level that meets or exceeded the bank requirements. That price was $45. We wanted to guarantee those cash flows. If we were fortunate to have higher prices, we were willing to forego the additional revenue, just to ensure we could guarantee debt repayment, and maintain our liquidity. Now we're looking at our future hedging strategies from a more opportunistic standpoint. As we go forward, our hedging will ensure not only our capital work programs but also retain the upside for our shareholders. But I can't really tell you about dividends right now. The healthier we get our balance sheet, and the quicker we can get that balance sheet to a healthy position, the quicker we'll be able to do either stock buybacks, variable dividends, or continue with strategic acquisitions that generate real returns. The sale of our Delaware assets will contribute to that, the success in using equity to pay down debt will help, and once our balance sheet is strong enough, we will then be generating and delivering returns to our shareholders.

Cool. I appreciate the answers. Thank you.

You're welcome.

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

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

The answer is yes to both. First of all, we are focused in the area where we currently have operations, because it makes a lot of sense. If I can take my field operating management team and spread them over more wells and more production, I reduce my costs on a per well basis. We are focused in the Permian Basin where we currently operate. However, we're more focused on the right types of properties that generate the right types of returns. If we could buy producing properties in the core of some other basin that delivers the same types of returns, we would be interested in that as well. We've worked all over North America; we know the basins in the United States very well. However, right now, we are focused in the area that we currently operate, because it makes sense to combine all the synergies.

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

There you go. I would be willing to consider production. Typically, there would have to be an advantage; we would need some way to significantly reduce operating costs or create some additional value. But I really get excited about an opportunity that brings in undeveloped opportunities that have similar economics as our existing portfolio. I'm not saying that investments that are just producing properties would be off the table. We look at ourselves as a logical aggregator and consolidator of assets out here in the Central Basin Platform. We believe being the low-cost operator is going to be a key attribute to being successful.

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

We got time for one more.

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

Yes, thank you. In your $44 million to $48 million CapEx program for this year, which I know includes the money you spent in Q1. And after putting online the three Phase 2 wells later this month, are you guys planning to put online any more wells between the end of May and the end of the year?

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

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

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

I'll turn that over to Travis.

Yes. We added the 500 barrels this year. But in total, we've got 2,250, I believe. We're also looking at another idea right now that we haven't put in place to unlock some upside potential in 2021. We could potentially take the ceiling off one of our callers and put 1,500 barrels per day for the balance of 2021 and push that out into 2022 into a swap that would be higher than our average pricing now. That would add to that balance at a decent rate, but also free up cash flow this year and give us more time next year to add more production.

This goes back to what we were talking about earlier. We're at a point in time now with stronger oil prices that our strategy is significantly changing. Last year, we just wanted to ensure our cash flows, but now we are looking at things more opportunistically. Travis just described an opportunity or strategy change we're considering right now. More of that can be expected going forward. We're still studying hedging for 2022 with our board and risk committee, and we'll announce more as time goes on.

Great, thank you very much for that color.

You're welcome.

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

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

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