Ring Energy, Inc. Q4 FY2021 Earnings Call

Good morning, and welcome to the Ring Energy Year End 2021 Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Mr. Al Petrie, Investor Relations for Ring Energy. Please go ahead.

Thank you, Andrea, and good morning, everyone. We appreciate your interest in Ring Energy. We'll begin our call with comments from Paul McKinney, our Chairman and CEO, who will provide an overview of key matters for the fourth quarter and full year. We will then turn the call over to Travis Thomas, Ring's Chief Financial Officer, who will review our detailed financial results. Paul will then return to discuss our future plans and outlook before we open the call up for questions. Also joining us on the call today and available for the Q&A session are, Alex Dyes, Executive VP of Engineering and Corporate Strategy; Marinos Baghdati, Executive VP of Operations; and Steve Brooks, Executive VP of Land, Legal Human Resources and Marketing. During the Q&A session, we ask you to limit your questions to one and a follow-up. You are welcome to rejoin the queue later with additional questions. I would also note that we have posted a Q4 and full year 2021 investor presentation to our website. During the course of this conference call, the company will be making forward-looking statements within the meaning of Federal Securities Laws. 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 and the Company can give no assurance that such forward-looking statements will prove to be correct. Ring Energy disclaims any intentions or obligations 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 our filings with the SEC. These documents can be found in the Investors section of our website. Should one or more of these risks materialize or should underlying assumptions prove incorrect, actual results may vary materially. This conference call also includes references to certain non-GAAP financial measures. Reconciliations of these non-GAAP financial measures to the most directly comparable measure under GAAP are contained in our earnings announcement released yesterday. Finally, as a reminder, this conference is being recorded. I would now like to turn the call over to Paul McKinney, our Chairman and CEO.

Thank you, Al. Welcome, everybody and thank you for your interest in Ring Energy, and for joining us today for our fourth quarter and year end 2021 earnings call. As you may know, we finished 2021 with strong fourth quarter results. We generated free cash flow of $9.3 million during the fourth quarter, and $20.5 million of free cash flow during the full year 2021, marking our ninth consecutive quarter of producing positive cash flow. We used the cash flow to help pay down $23 million of debt in 2021 including $5 million during the fourth quarter, which helped us reduce our interest expense by almost 18% when compared to the prior year. During the fourth quarter, we enjoyed higher product prices, while continuing to make progress driving operational efficiencies that resulted in adjusted EBITDA and adjusted net income growth over the third quarter of 2021 of 21% and 46% respectively. For the full year 2021, we posted adjusted EBITDA of $83.3 million and adjusted net income was $30.6 million, which was 48% higher than the full year 2020. We ended 2021 with $61.6 million of liquidity, a 10% increase from the end of the third quarter and 52% higher year-over-year. If you recall, we have a $1 billion revolving credit facility, with a borrowing base of $350 million, which was reaffirmed in December. Availability under our credit facility at December 31, 2021 was $59.2 million. With respect to our development initiatives, we continue to benefit from our successful 2021 drilling program that targeted high-rate return opportunities in our Northwest Shelf and Central Basin Platform areas. The result was fourth quarter 2021 sequential sales volume growth of 11%, where we averaged 9,153 barrels of oil equivalent per day, of which 85% was oil. We concluded our 2021 drilling program with a phase four package of two wells that were drilled and completed on time and within budget and placed on production in the fourth quarter. Both wells are performing at or above expectations to date, which is consistent with the overall results of our 2021 program. We drilled 11 wells last year including eight wells in Northwest Shelf and three wells in the Central Basin Platform. And we completed 13 wells including 10 wells in Northwest Shelf and three wells in the Central Basin Platform. My favorite part of what we accomplished last year in our drilling and completion program was our success in the Central Basin Platform. All three CVP wells are performing better than the average wells drilled there in the past, with two of our wells on course to exceed the ultimate recovery of the best wells drilled in the offsetting area. We accomplished this by focusing on the geology, selecting the best landing zones and improvements in our completion methods. We not only improved the performance of our wells, we unlocked incremental value from the legacy portion of our asset base. In 2021, we also converted 25 wells from downhole electrical submersible pumps to rod pumps, something we call CTRs for short. In 2021, we converted 19 wells in the Northwest Shelf and six wells in the Central Basin Platform, the long-term benefits of our targeted CTR program come in two forms. First, we're able to significantly reduce our operating costs through lower electricity usage and considerably lower repair costs. The resulting lower operating costs drive the second benefit, which is the wells generally experience longer economic lives, leading to higher ultimate recovery of the oil and gas reserves. With respect to our reserves, our 2021 capital development program helped us grow our year-end 2021 SEC approved reserves by 2% to 77.8 million barrels of oil equivalent more than replacing our production for the full year. Turning to our 2022 outlook. On January 1, nearly 60% of our low price hedges rolled off, which allows us to capitalize on improved commodity prices and generate higher revenue and operating cash flow, assuming of course that commodity prices remain strong. In response, we are increasing our capital spending to organically grow production and adjusted EBITDA. We intend to continue paying down debt, and we plan to do so all within operating cash flow. The success of our 2021 program has given us confidence to increase our 2022 capital investment program, which is designed to enhance our scale and improve our financial metrics, while dramatically reducing our leverage ratio. We are forecasting a meaningful reduction of our leverage ratio from approximately 3.5x at December 31, 2021 to less than 2x at the end of 2022. As we have said earlier, we initiated our one-week continuous drilling program in late January, which is again focused on our highest rate return inventory in both Northwest Shelf and Central Basin Platform areas. To date, four wells have been drilled in the Central Basin Platform, including two wells that were placed on production earlier this month, and two wells that are expected to be online in April. By running a continuous drilling program, we believe we can more than offset the natural decline rates of our wells and grow our quarterly production levels starting in the second quarter. We anticipate full year production to increase almost 10% based on the midpoint of our guidance. Of course, we will continue to retain the ability to adjust our drilling and other capital spending programs to reflect material changes in our commodity prices. We currently plan to drill 25 to 33 wells in 2022 and complete 25 to 30 wells across our Northwest Shelf and Central Basin Platform acreage. The midpoint of our total capital spending guidance includes approximately 82% for drilling, completion and equipment activities. Complementing our drilling program, we are allocating approximately 12% for continued execution of our success with CTR recompletion in capital work over programs with the remaining 6% intended for land related costs and other miscellaneous spending. Our guidance reflects our current view of the inflationary impact on our operating and development costs. Now before I turn this call over to Travis, I would like to share one more point with you concerning our ESG initiatives. Promoting environmental stewardship, supporting our employees and communities where we work and ensuring sound corporate governance are cornerstones of our culture. Last year, we made substantial progress on our ESG journey by issuing our inaugural ESG report, revising all of our charters and updating our corporate guidelines to be consistent with modern governance practices. We believe that ESG is not just the responsibility of our Board and our Executive Leadership, but also extended to our employees. Our inaugural report provides a great foundation upon which to build and we will continue to demonstrate the importance of ESG to the long-term sustainability of this company. So with that, I will turn it over to Travis to discuss our financial results in more detail.

Thanks, Paul, and good morning, everyone. For the fourth quarter of 2021, we generated revenues of $59.7 million and net income of $24.1 million or $0.20 per diluted share. Excluding the estimated after-tax impact of pre-tax items, including a $15.2 million non-cash unrealized gain on hedges and approximately $900,000 per share based compensation expense, our fourth quarter adjusted net income was $9.9 million, or $0.10 per share. For the full year of 2021, we generated revenues of $196.3 million and net income of $3.3 million or $0.03 per diluted share, excluding the estimated after-tax impact of pre-tax items, including a $25.1 million non-cash unrealized loss on hedges and $2.4 million per share based compensation expense, our full year adjusted net income was $30.6 million or $0.31 per share. During the fourth quarter of 2021, we had approximately $20.6 million in cash flow from operations and $11.3 million in capital expenditures. The combined result was free cash flow of $9.3 million. For the full year 2021, we had approximately $69.5 million in cash flow from operations, $51 million in capital expenditures and $2 million in divestiture proceeds. The combined result was free cash flow of $20.5 million. For the three months ended December 31, 2021, we had oil sales of 715,163 barrels and natural gas sales of 761,682 Mcf for a total of 842,110 BOE. Our fourth quarter of 2021 realized pricing was $76.35 per barrel of oil, and $6.65 per Mcf natural gas for an average of $70.85 per BOE. The differential between our average oil price received in NYMEX WTI was a negative $1.12 per barrel for the fourth quarter of 2021, versus our third quarter average differential of a negative $1.05 per barrel. Our average natural gas price differential from Henry Hub was a positive $1.85 per Mcf for the fourth quarter, versus the third quarter positive differential of $1.43 per Mcf. For the full year of 2021, we had oil sales of 2,686,939 barrels and natural gas sales of 2,535,188 Mcf for a total of 3,109,470 BOE. Our full year 2021 realized pricing was $67.56 per barrel of oil, and $5.83 per Mcf for an average of $63.13 per BOE. For more details concerning our financials and other income statement line items, please refer to our earnings release in 10-K that was filed with the SEC yesterday. Of course, I will be happy to answer any questions you may have during today's Q&A sessions. One of our top priorities coming into 2021 was to strengthen our balance sheet through debt reduction. Our strategy has been to capitalize on the organic opportunities within our portfolio to maintain production, increase liquidity and produce strong cash flows. We are pleased with our fourth quarter results as we once again generate free cash flow and strengthened our financial position by paying down debt which in turn increased our liquidity. Looking forward, the levels of free cash flows and the cadence of debt paid down will continue to be driven by the timing of capital spending and market conditions. As of December 31, 2021, we had $290 million drawn on our revolving credit facility and liquidity of $61.6 million, including $2.4 million of cash and $59.2 million available on the revolver, which includes a reduction of approximately $800,000 for letters of credit. We are pleased to further pay down our revolver by $5 million in the fourth quarter leads to a total debt reduction of $23 million for the full year of 2021. Turning to our outlook for the first quarter and full year of 2022. As Paul discussed for the full year 2022, we anticipate total capital spending of $120 million to $140 million, which includes estimated costs to drill 25 to 33 wells and complete 25 to 30 wells primarily in the Northwest Shelf. Our full year capital spending outlook includes targeted well reactivations, workovers, infrastructure updates, and continuing our successful CTR program in the Northwest Shelf and the Central Basin Platform. Also included in the full year estimate is anticipated spending for leasing, contractual drilling obligations and non-operated drilling completion and capital work overs. We remain focused on further paying down debt and strengthening our financial position. Our full year 2022 capital spending plans are expected to generate strong operating cash flows that fully fund our capital investment plans. Of course, as Paul noted, our 2022 capital spending program assumes a favorable commodity pricing environment. If prices were to pull back materially, we have the flexibility to reduce capital spending as necessary. Supported by our targeted capital development program and continued focus on maintaining operations excellence, we currently expect full year 2022 sales volumes of 9,000 BOE to 9,600 BOE per day, compared with full year 2021 average sales volumes of 8,519 BOE per day and a 9% year-over-year increase at the midpoint of our guidance. Looking at the first quarter, drilling under our new continuous drilling program began in late January. As such there's minimal additional production impact expected for the new wells in the first quarter, including the expected normal decline in production during the first quarter and some short-term weather related sales disruptions, first quarter 2022 sales are expected to be in the range of 8,500 to 8,700 BOE per day. Second quarter 2022 sales are expected to reflect the benefit of the new continuous drilling program. For the full year of 2022, we anticipate LOE of $10.90 to $12 per BOE and gathering, processing and transportation or GPT costs of $1.60 to $2 per BOE. Contributing to the increased LOE per BOE costs from 2021, our inflationary related increases are partially offset by lower anticipated operating costs from our targeted and ongoing CTR program and the purchase of previously leased ESPs. Looking at operating costs for the first quarter, we currently expect LOE to range between $10.90 and $11.25 per BOE and GPT costs of $1.60 to $1.75 per BOE. Turning to our hedge position, as Paul discussed, we are pleased with the majority of our low priced hedges rolled off January 1. This provides us with the opportunity for substantially higher revenue and operating cash flow in 2022, based on a continued strong oil price environment. So with that, I'll turn it back to Paul for his closing comments before Q&A.

Thank you, Travis. And as you just heard, we have a solid asset base that is generating strong operating cash flow and adjusted EBITDA, especially in the current pricing environment. We are planning to strategically and properly grow our production to build scale through a continuous drilling program. We believe that by increasing size and scale, we can more easily incorporate accretive acquisitions that meet our investment criteria and align with our strategic vision. In closing, we speak to our shareholders regularly and for some time now they have expressed that once we got beyond 2021, they want to see us grow more in 2022. Like your management team and board, they want us to build size and scale to reduce the volatility we have had in the past and become a more sustainable company. We believe our plans were increased drilling and capital investments this year puts us well on that path and does a small part to help the current supply situation that the world is facing. Nonetheless, we will monitor commodity prices to ensure our increased capital spending allows us to remain cash flow positive, reduce our debt and improve our leverage ratio. In summary, we're excited about the future and Ring Energy is well positioned for continued success in 2022 and beyond. And with that, I will turn this call over to Andrea for questions.

We will now begin the question-and-answer session. Our first question will come from Jeffrey Campbell of Alliance Global Partners. Please go ahead.

Good morning, Paul. And congratulations on staying the course on spending in debt reduction in 2021. I'll limit myself to three questions this morning. First, I wanted to ask if any third-party facilities downtime has been included in the 2022 guidance? And if so, is there any reasonable chance that this could improve over the course of the year?

Actually, it does. Things have improved as we've gone through 2022. There still is uncertainty associated with the third-party facilities. One of the big issues that we will face as we march through our capital drilling program this year is the takeaway capacity for that gas production. As you know, we're growing in both the Central Basin Platform and the Northwest Shelf. Both of those areas have their own unique issues associated with gas takeaway. And so it could be an issue. But our forecasts right now have incorporated our best estimate and associated with that restriction.

Okay, great. I appreciate that color. Second question, looking out into 2023. Do expect your bankers to continue to impose hedging requirements? Or maybe put another way, is there a debt level at which those requirements might be reduced or eliminated completely? And here I'm kind of thinking of the two times leverage goal that you've set for year end 2022?

Yes, that's a good question. And our credit facility, the way it is currently written, only requires us to maintain the hedges that we had in place from last year into 2022. There are no requirements going into 2023. And so the hedging activity that we will pursue will be one of what we've described in the past, as an opportunistic hedging strategy. We believe it's the right thing to do to protect our cash flows, and also put in the necessary protection so that we can pay down debt as planned. And but beyond those requirements, we believe our shareholders want to benefit from the marketplace. So we want our shareholders to participate in the marketplace. And so, but we will have a responsible hedging strategy that does take advantage of the opportunities in the marketplace provides. That answer your question?

It does. And it's great to hear that you're going to have complete freedom to do what you want to do in 2023.

Complete freedom, I don't know about complete freedom. But yes, I'll go with your words.

How about expanded freedom?

Expanded freedom, there you go.

Finally, your Delaware basin update noted that the proceeds from the sale when consummated, would go to further debt reduction, I thought this was interesting since in the past, there's usually been some mention of potential M&A as another variable. So I just wondered if you could expand on this a little bit.

There you go. By taking the proceeds from the sale of our Delaware assets and applying that to debt, that also increased our liquidity. It also increases our ability to take down another opportunity using cash. And so we are every bit as much focused on acquisitions as we have said in the past. The volatility that we're all experiencing right now in the marketplace has created, I would just call it confusion, a lot of noise out there. So people don't know what price tag to use. And so it’s not that there is an increased gap between expected buyers and sellers. But it has created a lot of confusion because people are still questioning. Okay, so what price tag do I want to use? As we saw just this morning, we saw another uptick in prices followed by sharp reductions in oil prices as a result of the world's interpretation of what's going on over there between Russia and Ukraine. So, but yes, we're still focused on acquisitions and divestitures and will continue to do so. And our plan for the Delaware assets, once those are sold that we will apply that to debt reduction.

Okay, great. I appreciate the expansion. And again, congratulations on the fourth quarter, and we look forward to a good 2022.

Thank you, Jeff. Have a great day.

The next question comes from Noel Parks of Tuohy Brothers. Please go ahead.

Hi, good morning.

Good morning, Noel. How are you?

Good. Thanks. Just a couple of things. The hedge you did layer in the 1,000 barrels a day at just shy of 85? I was just curious how long had you been monitoring the market and the strip before you decided to pull the trigger on that?

Well, we watch it pretty much every day. We get a report in every morning that summarizes our mark-to-market differences in our hedge position in the current marketplace. We look at the statistics. Like we've said in the past, we are pursuing an opportunity strategy that puts in the right defenses to protect our capital spending program and our debt repayment plans. But this last year, or earlier this year, I should say, when the opportunity came along, we were looking at some historical records associated with what was out there in the marketplace, and we decided that with an additional contract of 1,000 barrels a day, that went a long way to ensuring our capital spending and our debt repayment plans, and so we took it.

Great thanks. And with cost inflation being such a hot topic these days, could you talk about the arrangement you have for your rig and whether you have it under contract, or just paying a spot rate for it, and just what your outlook is there?

Yes. We have a five well rolling contract with a drilling contractor right now. And that contract allows both parties to make adjustments as you roll along throughout the year to take into account inflationary measures. Due to the volatility that we've experienced, we've seen spurts of really high rates of inflation, and then things level off. And I think it's all associated with the supply chain, what's going on around the world. For example, if you look at our pipe prices today versus what we're paying in the fourth quarter of 2020, we've more than doubled those costs now. We've seen increases across all the goods and services that we use, whether it's cementing, fracking, or whatever that might be. It is my prediction, though, that the supply chain will start to level out as we go throughout the year.

Great. Anything in particular that steers you in that direction?

Well, I mean, the world has always been good to respond to changing situations and so yes, we've seen some volatility. We've seen some significant inflation in various areas. The manufacturing process whenever prices get really, really high for any one product, somebody else decides they want to get into the business. So the supply and demand situation has shown that our capitalist society has always been able to respond to the needs of the economy, and I'm confident that American people will follow through again.

Great, thanks a lot.

Thank you, Noel.

And our next question will come from Neal Dingmann of Truist. Please go ahead.

Good morning all. Paul, thanks for the details. All my question to you guys, kind of good job you and Travis were laying out what you're seeing for this quarter next quarter on production. I guess I don't want to get ahead of myself. But if prices start to come down, as you said for some of the OFS, would you all even consider? I mean, I love the quick payback to high returns you all have? Would you all consider even adding more activity, either through workovers or another rig if, again, overall, macro prices remain high and service costs even go lower?

Yes, and you bring up an interesting point Neal. Right now, all the things we've addressed suggest that we're going to be responsible with respect to our capital spending plan, so we're going to stay within cash flow. If you take your scenario, you just laid out, and cash flow has actually increased considerably, that's going to allow us to pay down debt faster. But it's also going to give us the opportunity to accelerate our capital spending programs. Now, there are some realistic limitations to our capital spending programs. One of those I mentioned a little bit earlier is our gas takeaway in both the Central Basin Platform and the Northwest Shelf, although they are for different reasons, they limit how much gas we can take away. So if we get ahead of ourselves and drill really fast by picking up a second rig, we may outstrip the ability for gas takeaway. The other issue that we have, while not as acute, would be our water disposal. Right now, we have the water disposal facilities necessary for the wells we plan to drill, but it's going to be close and the investment necessary to increase our disposable capacity is not that much. So we could probably take care of that. But the biggest limitation probably would be gas takeaway, and that would limit how much growth we could have at least in the areas that we're currently focused.

That makes sense. What are you seeing in terms of whether you're getting higher working interest or just looking for opportunities? I'm not specifically referring to large deals, but it seems like you are always exploring. I'm curious about the competition for smaller acquisitions or opportunities available on the platform. How does the situation compare today to a year ago, and is the bid-ask spread significant in your area, or is there possibly less competition?

Yes, we have. Although we have participated in some of the marketed deals that other people have bid on, and were successful, we've participated, we have been unsuccessful in one or two of the attempts that we thought would be great bolt-ons to the company. Our preferred method is to go to the principles that own and operate certain assets and try to negotiate something off the market. We have really low shallow declines, we have high margins, and the undeveloped opportunities offer really superior economics. We're trying to be disciplined, and acquire assets that meet that criteria. Those are also the superior assets in the marketplace that everybody wants, right? So the competition is pretty stiff. The volatility we're experiencing right now in the marketplace has created confusion and noise. That confuses buyers and sellers because of the differing expectations on price tags.

No, that makes sense. And then just lastly, you touched on this a little bit. You guys talked a lot about how you have been hitting some record wells? Is it just what you're continuing to learn? Is that through more efficiencies? I mean, what's driving that? Again, I don't know that you guys have even given yourself enough credit. But I'd love to hear more on what's pushing these results.

Yes, all the credit goes to my Geoscience and engineering teams. These guys strive for excellence every day. We keep our ear to the ground. We continue to walk in circles of others in the industry that are out there on the leading edge. We don't want to be on the bleeding edge. By staying close to those communities, keeping close contact with those that are developing new technologies and learning which technologies would apply to our specific rock is key, because every rock is different. I give all the credit to our operating team, and also our completions and drilling teams for staying up on all the technologies. Our geoscience team has focused on geology and petrophysics, nailing the landing zones. If you look at what we did in the Central Basin Platform, our technical team just nailed it.

Thanks so much, guys.

You're welcome.

And our next question will come from Dennis Richter, a Private Investor. Please go ahead.

Good morning, Paul. Congratulations on a great 2021.

Thank you.

So Paul actually, you just answered one of my questions that it was regarding the Central Basin Platform, you're using wells and how they compare to the Northwest Shelf? Can you give a bit more color in terms of how much running room you have in terms of acreage that is for how many drilling locations you possibly could have there with those kinds of economics?

Well, Dennis, I got to tell you, I don't have the number of undeveloped locations in our newly completed reserve report for those areas. But I do know that right now, our plans for 2022 include nine wells in the Central Basin Platform, four of those have already been drilled. We're looking at the performance of the three wells we drilled in 2021, they look really strong. Now although the rest right now is slated for the Northwest Shelf, our guidance reflects that we also have a handsome inventory of undrilled locations in the Northwest Shelf still as well. But for this year, I'm confident we will go back down to the Central Basin Platform as we do have more locations down there to drill.

Okay. And just one other question. This is a little bit in terms of the CO2, kind of secondary recovery or waterflood potential. Something that this is your neighbor in the Northwest Shelf, Riley Exploration Permian, they're doing a pilot project just wanted to see if in terms of the potential there to do something like that, if that is being looked at. I just wanted to see if you are willing to give some kind of perspective on that.

Yes. So Dennis, we know the Riley Permian guys well. We've all traded secrets and shared our opinions. We are aware of their programs. We've actually had a conference call with those guys, where we talked about their operations, our operations, and their CO2 program. Their section where they permitted their CO2 and water injection wells are in the section right next to our wells. Yes, we've shared quite a bit of information, and we wish them all the best. Their success could also lead to success and additional recoveries for us.

That's great. Thank you. That's all for me.

Thank you, Dennis.

This concludes our question-and-answer session. I would like to turn the conference back over to Paul McKinney for any closing remarks.

Thank you, Andrea. And all of you that have joined us on the call, thank you very much. Thank you for the questions and the interest in Ring. We're looking forward to a really strong year this year. And just we hope that you'll continue to invest and trust your investment with us, because we're working hard for you. This concludes our meeting for the day.

The conference is now concluded. Thank you for attending today's presentation and you may now disconnect.