Ring Energy, Inc. Q1 FY2024 Earnings Call

Good morning and welcome to the Ring Energy First Quarter 2024 Earnings Conference Call. Please also note that this event is being recorded. At this time, I will turn the floor over to Al Petrie, Investor Relations for Ring Energy. Sir, you may begin.

Thank you, operator. Good morning, everyone. We appreciate 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 of 2024 as well as our outlook. We will then turn the call over to Travis Thomas, Ring's Executive VP and Chief Financial Officer, who will review our financial results. Paul will then return with some closing comments before we open up the call 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 reenter the queue later with additional questions. I would also note that we have posted an updated corporate presentation on 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 those forward-looking statements. Finally, the company can give no assurance that such forward-looking statements will prove to be correct. 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 our filings with the SEC. These documents can be found in the Investors section of our website located at www.ringenergy.com. 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. Reconciliation of these non-GAAP financial measures to the most directly comparable measures under GAAP are contained in yesterday's earnings release. Finally, 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.

Thank you, Al, and thank you for everyone joining us today and your interest in Ring Energy. As you may have read by now, we began 2024 with a solid first quarter. Sales volumes exceeded the high end of our guidance, while operating expenses and capital spending both came in below our guidance ranges, placing us in a strong position for the rest of the year. The primary driver of our sales volume performance was the robust returns from our drilling program and reduced downtime since the winter storm we encountered in January. The key factors contributing to our lower-than-expected capital costs were increased efficiencies associated with our well completions and the improved logistics of drilling our wells. Additionally, we benefited from lower costs realized by an improved macro environment associated with the drilling and completion services for our wells. Lease operating expenses, or LOE, on a per BOE basis, came in below our guidance range as well, primarily due to our continuing focus on reducing costs generally and more specifically associated with the progress we are making integrating the Founders' assets into our operations. These efforts not only led to lower costs but also lower downtime that contributed to our sales volume performance, as mentioned earlier. Our results this quarter are a direct reflection of the dedication and commitment of our employees in both the field and the office. And on behalf of the Board and management team, we thank all of you for your hard work. With respect to our performance this quarter, we sold 13,394 barrels of oil per day, which was 5% higher than the top end of our sales guidance. On a total product basis, we reported first quarter 2024 sales volumes of 19,034 barrels of oil equivalent per day, which was 3% above the top end of our BOE sales guidance. As important, we increased oil to 70% of our product mix. Lease operating expenses, or LOE, during the first quarter were $10.60 per BOE. The combined impact of higher-than-expected sales volumes and lower-than-anticipated LOE per BOE led to adjusted net income of $20.3 million, adjusted EBITDA of $62 million, and net cash provided by operating activities of $45.2 million. During the first quarter, we invested $36.3 million in capital expenditures, which included the drilling and completion of 5 horizontal wells, 3 of which were in the Central Basin Platform and 2 in the Northwest Shelf, and the drilling and completion of 6 vertical wells, all in the CBP South, with 3 in Andrews County and 3 in Crane County. Total capital spending included capital workovers, infrastructure upgrades, and leasing as well. Adjusted free cash flow was $15.6 million for the first quarter of 2024, which was 48% higher than the same quarter a year ago and represents the 18th consecutive quarter of positive adjusted free cash flow for the company. Turning to the balance sheet, we paid down $3 million of debt in the first quarter and $33 million since the closing of the Founders acquisition in late August. This allowed us to exit the quarter with $179.3 million of liquidity. Regarding our guidance for the year, we still plan to drill an average of 5 horizontal and 6 vertical wells per quarter, which is consistent with what we did in the first quarter. We intend to continue utilizing a phased 2-rig drilling program, including 1 horizontal rig and 1 vertical rig, as opposed to a continuous drilling approach to retain the flexibility to react to changing commodity prices and market conditions as well as manage our quarterly cash flows. Our phased drilling program is designed to organically maintain or slightly grow our oil production, so we are not changing our full-year production guidance at this time. Regarding the second quarter, we anticipate our production to range between 18,500 and 19,100 barrels of oil equivalent per day and, perhaps more importantly, our oil production to range between 13,000 and 13,400 barrels of oil per day. This implies an oil mix of approximately or slightly more than 70%. With that, I will turn this over to Travis to provide more details on the quarter and I will return for closing comments before we open the call for questions.

Thanks, Paul, and good morning, everyone. As Paul discussed, we are pleased to have a strong start to 2024 with the solid first quarter results that exceeded expectations on multiple key fronts, including higher sales volumes, lower operating expenses, and lower capital expenditures. We continue to materially benefit from our two strategic acquisitions completed over the past two years. Also contributing to the first quarter results was the successful kickoff and initial execution of our 2024 drilling program complemented by further efficiencies achieved through our expanded scale and focus on the best operational practices. The combined result was continued strong generation of adjusted free cash flow during the first quarter of 2024 that was used to further pay down debt, with balance sheet improvement remaining a top priority for the company. With that overview, let's take a look at the quarter in more detail. As in the past, I'm going to focus my comments on the most important sequential quarterly results. During the first quarter, we sold 13,394 barrels of oil per day and 19,034 BOE per day, both of which were higher than the top end of our guidance. The slight decrease in sales volumes from the fourth quarter was primarily due to approximately 10 days of partial downtime because of the winter storm in January. Also impacting first quarter results was the overall realized pricing of $54.56 per BOE, a 3% decrease from the fourth quarter. Our first quarter average crude oil price differential from NYMEX WTI futures pricing was a negative $1.34 per barrel versus a negative $0.92 per barrel for the fourth quarter. This was mostly due to the Argus WTI, WTS that increased $0.96 per barrel, offset by the Argus CMA roll that decreased by approximately $1.40 per barrel on average from the fourth quarter. Our average natural gas price differential from NYMEX futures pricing for the first quarter was a negative $2.57 per Mcf compared to a negative $3.12 per Mcf for the fourth quarter. Our realized NGL price for the first quarter averaged 15% of WTI compared to 14% for the fourth quarter. The result was revenue for the first quarter of $94.5 million, a 5% decrease from the fourth quarter. As noted, we are targeting higher oil mix opportunities since oil accounted for 98% of the revenue, even though it was 70% of our production. While the gas revenue was negative, NGLs contributed $3 million, and overall, our wellhead gas contributed $2.2 million for the quarter. LOE was $18.4 million versus $18.7 million for the fourth quarter. Echoing Paul's comments, we are pleased to see LOE come in below the low end of our guidance range of $10.75 to $11.25 per BOE. LOE per BOE increased nominally in the first quarter to $10.60 per BOE versus $10.50 per BOE in the fourth quarter. Cash G&A, which excludes share-based compensation and transaction-related costs, was $5.7 million for the first quarter versus $5.3 million for the fourth quarter, contributing to the sequential quarterly increase in cash G&A or additional costs attributable to administrative functions related to the year-end audit, SOX compliance, and 10-K preparation. Our first quarter results included a loss on derivative contracts of $19 million versus a gain of $29.3 million for the fourth quarter. As a reminder, the gain and loss is just the difference between the mark-to-market values period-to-period. Finally, for Q1, we reported net income of $5.5 million or $0.03 per diluted share. Excluding the after-tax impact of pretax items, including noncash unrealized gains and losses on hedges, share-based compensation expense, and transaction costs, our first quarter adjusted net income was $20.3 million or $0.10 per diluted share compared to the fourth quarter 2023 net income of $50.9 million or $0.26 per diluted share and adjusted net income of $21.2 million or $0.11 per diluted share. First quarter 2024 adjusted EBITDA was $62 million and net cash provided by operating activities was $45.2 million, versus $65.4 million and $55.7 million, respectively, for the fourth quarter. During the first quarter, we invested $36.3 million in capital expenditures. Importantly, actual first quarter CapEx came in below our guidance of $37 million to $42 million, while the actual number of producing wells drilled and completed, 11 in total, was at the high end of our guidance for well count. We also drilled a SWD originally planned for the second quarter. The primary driver for the lower CapEx was reduced well completion costs and drilling efficiencies. The combined result was adjusted free cash flow of $15.6 million for the first quarter, versus $16.3 million for the fourth. We paid down an additional $3 million of borrowings on our revolver in the first quarter and $33 million since the closing of the Founders acquisition last August. Impacting the level of debt reduction in the first quarter was the annual payment of ad valorem taxes, another once-a-year cost, as well as the growth in our cash balance of approximately $1 million. Moving to our hedge position, for the last 9 months of 2024, we currently have approximately 1.5 million barrels of oil hedged or approximately 43% of our estimated oil sales based on the midpoint of guidance. We also have 1.9 billion cubic feet of natural gas hedged or approximately 41% of our estimated natural gas sales based on the midpoint. For a quarterly breakout for hedge position through Q2 to Q4 of 2024, please see our earnings release and presentation, which includes the average price for each contract type.

We have the flexibility to add more capacity. At the P.J. Lea area, most constraints related to electrical, salt water disposal, and frac water have been resolved, allowing us to accelerate operations as needed. We are carefully adding proved undeveloped locations as we expand into the reservoir's outskirts, wanting to see promising results before increasing the number of wells significantly. In Penwell, we are addressing some salt water disposal issues to ensure there are no bottlenecks before we can fully accelerate our operations, but we currently have the capacity to drill more than three wells each quarter. We aim to manage our capital expenditure prudently.

Thank you, Travis. We believe our operational and financial success this quarter demonstrates the long-term benefits of our strategy designed to leverage the low breakeven cost of our drilling inventory and the quality of our assets to drive sustainable free cash flow generation. In short, our focus remains the same as in the past. And while I have discussed the components of our strategy previously, it is worth repeating again today. First, we will continue to pursue operational excellence with a sense of urgency and remain focused on safety and environmental stewardship. Second, we will continue to high-grade and execute our targeted drilling program focused on our highest rate of return prospects to organically maintain or slightly grow our production while maximizing free cash flow generation. Next, we will continue our focus on improving the balance sheet. And finally, we will seek growth through the pursuit of strategic, accretive, and balance sheet-enhancing acquisitions. To sum it up, our commitment to our value-focused proven strategy better prepares the company to manage industry risks and uncertainties, results in the generation of sustainable and competitive returns, and supports our efforts to achieve the necessary business size and scale to position Ring to sustainably return capital to stockholders. I want to thank our stockholders for their continued support. I also want to once again thank everyone for participating in today's call. And with that, we will turn this over to the operator for questions.

Our first question today comes from Neal Dingmann from Truist Securities.

Nice quarter, Paul and team. My first question is regarding your regional focus. Could you discuss how much of your plan for the remainder of this year and into next year will concentrate on the multi-stack vertical play in the South compared to the San Andres horizontal development up North? I’m interested in how much emphasis will be placed on each and how the returns differ between these two areas given today’s economic conditions.

Yes. Good question, Neal. Yes. And so we're fortunate that the economics of the investment types are very similar. Very, very robust. We've demonstrated over the last several years, the economics of the San Andres horizontal oil play, both in Yoakum County and also in Andrews County. What we've discovered here this quarter with the drilling results from the wells we drilled in Penwell, Founders' assets, those are coming in really strong, really robust. And the good thing about them is that they have a much higher percentage of oil. And so as you know, we're concentrated on that, especially when we're actually paying to have our natural gas hauled away. And so but looking at the future, right now, we're still looking at a balanced program and that balancing more has to do with limitations in infrastructure, a few things like that. In some areas, we're a little challenged getting the fresh water to frac the wells. Other areas we can tap out the salt water disposal capacity of those systems. And so we tend to move the rig back and forth. And so, right now, we are looking at the drilling program and we are basically selecting the wells that give us the highest cash flow generating capital spending program that we can deliver. So we're looking for returns. And so we juggle the wells around even today. I know we're only in the first quarter but we've already rearranged our drilling schedule for this year because we've identified what we believe are the wells that have the quickest payout and the highest cash flow generating capacity. So again, the capital allocation will have more to do with trying to maximize our free cash flow generation than it is looking at one area versus the other.

No, that makes a lot of sense. You touched on my second question regarding the two plays. I know you have made significant investments in infrastructure, so could you discuss the situation on the back end related to infrastructure and takeaway? While I understand you keep track of the oil, what is your perspective on gas and other infrastructure limitations in both your northern and southern plays? Additionally, could you provide details on the development you have initiated in that area?

We continue to face challenges with the older infrastructure in the Central Basin Platform, particularly with gas takeaway, which is unpredictable. In the past, we've had difficulties in this area, and that continues today. The Permian Basin also has its own issues, as evidenced by the discounts from Henry Hub. When you combine the regional takeaway challenges in the Permian Basin with our production from older infrastructure that lacks consistent run times, it presents a significant challenge. Consequently, we are strategically directing our capital spending towards wells that yield a higher percentage of oil and much less gas due to these circumstances. This fall, we anticipate some new infrastructure that may alleviate the discount issues in the Permian Basin; we’ll see how that develops. Historically, the Permian Basin has demonstrated a remarkable capacity to quickly fill any available capacity since much of the flared gas could otherwise reach the market if infrastructure allowed. Additionally, the resourcefulness of American oilfield workers has a proven track record of ramping up production to match the available capacity. We’ll monitor the situation closely. I hope that answers your question, Neal.

And gentlemen, at this point I'm showing no additional questions. I'd like to turn the floor back over to Paul McKinney for any closing remarks.

Well, yes, very good. It looks like Neal Dingmann just jumped back in there with another question. If Neal had another question, he'd like to follow up?

We do have Neal back in the queue. And Mr. Dingmann, if you would like to ask your follow-up, please proceed.

Could you talk about opportunities? You have done a great job. I want to give you some time to discuss mergers and acquisitions. It seems like you are now in a better position, especially with the addition of both Founders and Stronghold. I'm curious about your focus on that area and whether you see any potential bolt-on acquisitions. Please elaborate on the M&A opportunities in that space.

Yes, thank you for that, Neal. There are bolt-on opportunities, but I need to be cautious. We expect additional assets to become available in the Central Basin Platform and the southern part of the Northwest Shelf due to some significant transactions that have either closed or are pending. Many of the purchased operators are active in this area, and those acquiring them also possess nonstrategic assets here that may come onto the market. We're excited about this area; we've conducted extensive mapping and identified several desirable opportunities. In the past, we've attempted negotiations for acquisitions—like with the Stronghold deal, which turned into a successful process, and the Founders deal, which also stemmed from a failed sale. We're open to pursuing acquisitions, whether they are smaller bolt-ons nearby or larger opportunities that allow us to leverage our operational expertise. We believe the pipeline for the next several years is robust, likely providing more opportunities than we can pursue. We're looking forward to 2024 and are encouraged by potential stability in oil prices. If prices can maintain between $75 and $85, it could lead to more sellers in the market, making transactions more probable due to aligned expectations in a stable oil price environment. We'll see how that evolves, but we are open to everything from small acquisitions to significant ones like Stronghold and Founders in the past.

Sure, I really appreciate the options. If I could ask one last question about the multi-stack vertical, could you remind me how you're continuing to add different zones? Additionally, could you discuss the current targets and how they differ from about a year ago?

About a year ago, we were exploring various opportunities. The Stronghold acquisition has opened up many possibilities, particularly in the Magnite region, but natural gas represents a significantly larger part of the product flow. We have chosen to focus more on the P.J. Lea area in Crane County and the Penwell area linked to the Founders acquisition. The P.J. Lea area is particularly appealing due to the excellent returns we have seen. The results from many of the wells we’ve drilled have allowed us to add to our proved undeveloped (PUD) reserves, expanding our reserves beyond the initial definitions. We believe there is still a substantial amount of reserves to be added in this area that were not included in the original acquisition, which is very exciting for us. Regarding Founders, we recently initiated work there, having drilled three wells last quarter, and we are quite pleased with the results. We believe this program has a lot of potential, so we plan to allocate more capital than we initially anticipated, but we will monitor how that progresses. If we continue to see strong returns in both areas, it could lead to adjustments in our production plans for the remainder of the year. This year, we have benefitted from wells performing better than our type curves, with one well matching our type curves and the rest slightly exceeding them. Given these types of returns, we may have to adjust our production estimates going forward if this positive trend continues.

And our next question comes from Jeff Grampp from Alliance Global Partners.

Maybe just to build on that last comment. I noticed in the slide deck, those P.J. Lea and Penwell vertical results look really impressive there. Can you touch on how much more capital can you put into those areas, taking into account, I suppose, infrastructure, maybe inventory management constraints, if there are any? And just how much more aggressive could you guys be, if any, relative to the 5, 6 wells a quarter pace that you guys seem to be at, at least for Q1?

Yes. And so I probably need to defer that to Marinos Baghdati.

Yes, we have the ability to add more. We're still focused on the Penwell area. Let me clarify. In the P.J. Lea area, we have removed nearly all obstacles related to electrical, saltwater disposal, and frac water for completing the wells. This allows us to speed up our operations in P.J. Lea at a pace of our choosing. We're being cautious, as Paul pointed out, about adding proven undeveloped locations since we're exploring the outer edges of the reservoir. We want to see some results before increasing the number of wells significantly. At Penwell, we are addressing some saltwater disposal issues to ensure there are no bottlenecks before we can truly accelerate. However, we currently have the capacity to drill more than three wells per quarter. We're comfortable with this pace and prefer not to spend more capital than necessary.

And ladies and gentlemen, at this point I'm showing no additional questions. I'd like to turn the floor back over to Paul McKinney for closing comments.

Thank you, Jamie. On behalf of the management team and Board of Directors, I want to thank everyone for listening and participating in today's call. We appreciate your continued support of the company. We look forward to keeping everyone appraised of our progress. Thank you again for your interest in Ring and have a great day.

Ladies and gentlemen, that will conclude today's conference call and presentation. We thank you for joining. You may now disconnect your lines.