Ring Energy, Inc. Q1 FY2025 Earnings Call

Good day, and welcome to the Ring Energy’s First Quarter 2025 Earnings Conference Call. All participants will be in a listen-only mode. Please note, this event is being recorded. I would now like to turn the conference over to Al Petrie, Investor Relations. Please go ahead.

Thank you, operator, and 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 2025 as well as our updated 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 the call up for questions. Also joining us on the call today and available for the Q&A session are Alex Dyes, Executive VP and Chief Operations Officer, James Parr, Executive VP and Chief Exploration Officer, and Shawn Young, Senior VP of Operations. During the Q&A session, we ask you to limit your questions to one and a follow-up. You are welcome to re-enter the queue later with additional questions. I would also note that we have posted an updated investor 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 the 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 correct, 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 yesterday's earnings release. Finally, as a reminder, this conference call is being recorded. I'd now like to turn the call over to Paul McKinney, our Chairman and CEO.

Thanks, Al. We appreciate everyone for joining us today and for your interest in Ring Energy. We began 2025 with a strong first quarter, where we met or exceeded all guidance targets. Driving our outperformance was exceptional oil sales volumes from newly drilled wells and our legacy assets through the outstanding efforts of our operations team to maintain our PDP production. During the quarter, we sold 18,392 barrels of oil equivalent per day, which was above the midpoint of our previously announced guidance range. And more importantly, we sold 12,074 barrels of oil per day, exceeding the high end of our guidance range despite the impact of weather-related downtime in January. We drilled, completed and placed on production seven wells in the first quarter, including four horizontal wells in the Northwest shelf and three vertical wells in the Central Basin platform. Not only have those wells all exceeded initial pre-drill production estimates. Another highlight is that we improved our capital efficiency again this quarter with average well costs coming in around 7% less than budget. We also closed the highly accretive acquisition of Lime Rock's CBP assets that continue to exceed the forecast originally used to value similar to what we did to prepare for the Founders acquisition closing. We strategically adjusted the timing of our drilling program and capital spending initiatives during the first quarter to reduce the capital spent to optimize our financial position and better position the balance sheet. Like our Founders CBP asset acquisition that closed in the third quarter of 2023, the accretive Lime Rock transaction checks all the right boxes. As a reminder, we purchased a little over 100 wells with approximately a 75% oil cut with low decline production, enhancing the company's metrics for both measures. The transaction also modestly increased scale and captures operating synergies through reductions in the number of field personnel required to operate the assets, benefits from integrating saltwater disposal systems and lower costs from a variety of changes being made in the field. We also gained approximately 17,700 net acres, all held by production, with the majority of that acreage being contiguous with our legacy operations in the Shafter Lake area; the non-contiguous acreage to the South exposes additional active plays on the platform, providing additional opportunities when oil prices improve. With this transaction, over 40 gross drilling locations have been added to our existing high-return drilling inventory that immediately competes for capital. Last but not least, production from these assets during April, our first month of operations, averaged over 2,500 barrels of oil equivalent per day, representing a 9% increase over the estimates used to value the assets. The result is an expected meaningful increase in adjusted free cash flow supported by $120 million of oil-weighted proved developed reserves and ultimately, a stronger and more resilient company. Regarding our guidance for the remainder of 2025, consistent with the revised second quarter outlook we provided last month, we are updating our outlook for the second half of the year to reflect a reduction in capital spending in response to the weakened price environment. As a result, for the final three quarters of 2025, Ring intends to reduce total capital spending by more than 47% or 36% for the full year, with only a modest reduction in production during the last half of the year guiding to approximately 2% annual production growth over 2024. This is only made possible by the production outperformance for the new wells drilled in the first and second quarter and higher than expected production from the existing and newly acquired assets. All of this leads to projected higher adjusted free cash flow levels. For more details on the adjusted free cash flow levels, please refer to our investor presentation. With that, I will turn this over to Travis to provide financial details for the quarter, more details associated with our guidance ratings, and then return to share more about our plans to not only survive the potential for extended lower oil prices but thrive and emerge even stronger.

Thanks, Paul, and good morning, everyone. As Paul noted, we posted solid first quarter operational and financial performance, driven by outstanding execution by our team across the board. The result was better than expected oil and total sales volumes as well as in-line operating and capital spending levels. The combination allowed us to conserve capital in anticipation of the closing of the highly accretive Lime Rock's CBP asset acquisition, which has outperformed initial expectations and places Ring in a much stronger position to better succeed in the current pricing environment. It also allows us to pay down debt at a faster rate than we could have done on a stand-alone basis. As I say every time, balance sheet improvement has been and will remain a top priority for the company. With that overview, let's take a closer look at the quarter. Starting at the top line, we sold 12,074 barrels of oil per day and 18,392 Boe per day with both exceeding guidance. As a reminder, with the March 31st closing, we began to benefit from the recent acquisition of the additional CBP assets beginning on the first day of the second quarter, which is reflected in our guidance for the remainder of 2025. Turning to the first quarter 2025 pricing, our overall realized price increased 4% to $47.78 per Boe from $46.14 per Boe in the fourth quarter of 2024. Driving the overall increase was a 2% higher first quarter 2025 realized oil price. Our first quarter average crude oil differential from NYMEX WTI futures pricing was a negative $0.89 per barrel versus a negative $1.42 per barrel in the fourth quarter. This was mostly due to the Argus WTI and WTS that increased by $0.59 per barrel, offset by the Argus CMA roll that decreased by $0.08 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 $3.81 per Mcf compared to a negative $3.83 per Mcf for the fourth quarter. Our realized NGL price for the first quarter averaged 15% of WTI compared to 13% for the fourth quarter. The result was revenue for the first quarter of $79.1 million. We continue to target the higher oil mix opportunities as oil accounted for 97% of total revenue, while it was only 66% of total production. Although we continue to see slightly negative realized natural gas pricing, there was a material improvement in the first quarter from the fourth quarter of 2024. While the majority of our GTP costs are reflected as the sales price reduction, the larger impact on realized prices is from the continued gas takeaway constraints in the basin. However, we are starting to realize the benefits from additional takeaway capacity that came online with the Matterhorn Express Pipeline in late 2024. We are also excited about the prospect of increased large-scale AI infrastructure in West Texas that could potentially use local gas for power generation. This increased usage could further alleviate in-basin takeaway constraints and give a boost to gas pricing going forward. Overall, our sequential revenue had a 5% decrease from the fourth quarter, which was driven by a negative $7.3 million volume variance, offset by a positive $3 million price variance. Moving to expenses. LOE was $19.7 million or $11.89 per Boe versus $20.3 million or $11.24 per Boe for the fourth quarter. We are pleased to see LOE lower on an absolute basis quarter-to-quarter and below our guidance midpoint of $12 per Boe. Cash G&A, which excludes share-based compensation, was $6.9 million compared to $6.4 million in the fourth quarter. The increase was partially driven by annual costs associated with the audit, 10-K and proxy. Our first quarter results included a loss on derivative contracts of $900,000 versus a loss of $6.3 million in the fourth quarter. The first quarter loss included a $400,000 unrealized loss and a $500,000 realized loss. As a reminder, the unrealized gain/loss is just the difference between the mark-to-market values, period to period. Finally, for Q1, we reported net income of $9.1 million, or $0.05 per diluted share, compared to fourth quarter net income of $5.7 million, or $0.03 per diluted share. Excluding the estimated after-tax impact of pre-tax items, including non-cash unrealized gains and losses on hedges and share-based compensation expense. Our first quarter 2025 adjusted net income was $10.7 million, or $0.05 per diluted share, while fourth quarter 2024 adjusted net income was $12.3 million, or $0.06 per diluted share. We posted first quarter 2025 adjusted EBITDA of $46.4 million versus $50.9 million for the fourth quarter, with most of the difference attributed to lower oil revenue. During the first quarter, we invested $32.5 million in capital expenditures, which was 14% lower than the fourth quarter and within our guidance of $26 million to $34 million. As Paul discussed, we have been extremely pleased with the production from the new wells coming in ahead of expectations and lower combined overall cost. Adjusted free cash flow was $5.8 million, versus $4.7 million for the fourth quarter of 2024, with the net increase primarily associated with $5.2 million lower capital spending, partially offset by $4.5 million less in EBITDA, compared to the fourth quarter. We ended the period with $460 million drawn on our credit facility, with the increase mostly due to $63.6 million in cash required for closing on the acquisition of the Lime Rock CBP assets, along with the $5 million deposit earlier in the quarter. With the current borrowing base of $600 million, we began the second quarter with availability of $140 million, with a leverage ratio of 1.9 times, which includes a $10 million deferred payment due in December 2025. Moving to our hedge position; for the last nine months of 2025, we currently have approximately 1.7 million barrels of oil hedged with an average downside protection price of $64.44. This covers approximately 47% of our oil sales guidance midpoint. We also have 2 Bcf of natural gas hedged with an average downside protection price of $3.43, covering approximately 37% of our estimated natural gas sales based on the midpoint. For a detailed breakout of our hedge position, please see our earnings release and presentation, which includes the average price for each contract type. Looking at our guidance, we had provided full details in our earnings material. In addition, Paul did a great job explaining how our business model, including low breakeven economics, places us in a solid position to navigate these pricing headwinds. Our proven value-focused model is battle-tested to drive success through the cycle. And we will pull all necessary levers to ensure we maintain a healthy financial position and capitalize on opportunities to further reduce debt. Consistent with our revised second quarter outlook we provided last month, we are updating our outlook for the second half of the year to reflect a reduction in capital spending in response to the weakened price environment. As a result, for full-year 2025, Ring now expects total capital spending of $85 million to $113 million, with a midpoint of $99 million, versus our previously disclosed expectation of $138 million to $170 million. Included in the full-year 2025 CapEx guidance is estimated spending of $14 million to $22 million for the second quarter and $38 million to $58 million in the last half of the year. Please refer to our first quarter earnings release and company presentation for full details by period, but I would note that the two to three wells included in our drilling program for the second quarter we have drilled, completed and placed on production, one horizontal and one vertical well to date. As in the past, we will retain the flexibility to react to changing commodity prices and market conditions as well as manage our quarterly cash flow. Our updated full year 2025 production guidance is 12,700 to 13,700 barrels of oil per day and 19,200 Boe per day to 20,700 Boe per day. We continue to expect second quarter total sales volumes of 20,500 Boe per day to 22,500 Boe per day and oil production to range between 13,700 and 14,700 barrels of oil per day, resulting in a 66% oil mix. For second half 2025, we are guiding it to total sales volume of 19,000 Boe per day to 21,000 Boe per day and oil production to range between 12,500 and 14,000 barrels of oil per day, also a 66% oil mix. On the cost side, I would note that we now anticipate full year 2025 LOE of $11.25 to $12.25 per Boe, and are providing guidance of $11.50 to $12.50 per Boe for both the second quarter and second half of 2025. So with that, I will turn it back to Paul for his closing comments.

Thank you, Travis. As an industry, we have experienced a high level of oil price volatility over the last five years, where the amplitude and frequency seem to be increasing. Although current oil prices remain above our breakeven requirements, most of our industry, both domestically and abroad, depends on higher oil prices to continue to invest and maintain production levels. For many of us, oil and gas price volatility has been with us for our entire careers, which is the reason we designed our strategy to be successful in low price environments and in high ones. Our proven value-focused strategy is focused on maximizing cash flow generation that has a proven track record over the last 22 reporting periods. And let me remind you, oil prices were much lower at times during that period than current prices today. Our strategy seeks to retain and acquire wells with shallow declining production with long lives, low operating costs and high netback interest. The shallow decline rates reduce the capital intensity required to maintain the company's production levels; long-lived wells provide stability through the price cycles and better full cycle economics. The low operating costs and high netbacks allow for the highest margins regardless of the oil price. We also like highly oil-weighted assets because Permian Basin gas typically receives significant discounts to Henry Hub prices, forcing us to occasionally pay to have our gas processed and delivered to market. We also seek to acquire and invest in undrilled development opportunities that have low breakeven costs and superior economics. Regarding capital spending, our strategy also emphasizes extreme capital discipline, allocating capital to our highest return on opportunities with the execution flexibility necessary to ensure we meet our debt reduction goals and strengthen our balance sheet. This aspect of our strategy plays a big part in the terms negotiated in our drilling contracts and other operational services. They are designed to retain the flexibility to respond quickly to market changes and minimize the costs associated with those changes. As we look to the remainder of 2025, we will capitalize on the production overperformance experienced so far this year and the benefits of the Lime Rock acquisition to reduce our capital spending and allocate more of our cash flow to paying down debt. Although our production guidance for the last half of the year is less than previously guided, our forecast suggests that we will deliver modest annual production growth of approximately 2% over the prior year. If oil prices recover to previous ranges, at this time, we do not intend to increase capital spending this year, keeping our focus on debt reduction. If oil prices recover to higher levels than previous ranges, we will evaluate and respond to those conditions in a way most beneficial for our stockholders. In closing, I want to emphasize one more time that our disciplined approach highlights the strength and flexibility of our proven strategy, ensuring we not only weather this price cycle, but emerge even stronger. So with that, we will turn this call over to the operator for questions.

We will now begin the question-and-answer session. The first question today comes from Jeff Robertson with Water Tower Research. Please go ahead.

Thank you. Paul, do you have a leverage target in mind as you allocate more free cash flow to debt reduction in this environment before you'd want to go back to trying to have a capital program that would generate more growth?

Good morning. That's a great question, Jeff. Yes, we do have a long-term goal for our leverage ratio, which is to maintain it comfortably below one. In a low price environment, it is more difficult to reduce that leverage ratio since oil prices play a significant role in the calculation, making it challenging. This is part of why we are placing increased emphasis on debt reduction. If you look at our investor presentation, we forecast future free cash flow levels at various price points. These cash flow levels directly relate to our ability to pay down debt. Predicting future oil prices is uncertain for both of us, making it hard to estimate that leverage ratio. However, we are taking all possible measures during this lower price environment to keep our leverage ratio as low as we can. Some factors are beyond our control, but for those we can manage, we are doing everything possible to minimize our leverage ratio. We have faced criticism in the past for being on the higher end of the leverage ratio compared to our peers. Furthermore, we are a group of managers who are very cautious about debt. We recognize that debt has not been beneficial in a capital-intensive industry like oil and gas, and we are very focused on managing it.

Paul, as you look at the back half of the year and the guidance that you laid out this morning for capital of $38 million to $58 million, do you assume any cost improvements in there? In other words, if you spend the $48 million midpoint and costs go lower, would you think you could complete more absolute projects? Or would the delta in cost savings go toward free cash flow and ultimately debt reduction?

Yes. That's another good question. Currently, our forecast for capital includes the existing prices. We have not made adjustments. This relates to recent reductions we've observed in our capital costs, and I could ask Shawn to provide more details, but I believe these reductions are mainly associated with the completion side and the fracking operations.

Yes, we are noticing a decrease in both frac costs and cementing and wireline expenses in drilling. Currently, these costs are in the range of 4% to 6%. We are optimistic that they will decrease further given the current prices.

To answer your question, Jeff, we are currently implementing a capital program focused on our highest return opportunities to maximize free cash flow. If we are fortunate to continue seeing reductions as we did in the first quarter, our capital program came in about 7% below what we budgeted. Should this trend persist, all savings will be directed toward debt repayment, rather than pursuing additional drilling opportunities. We’ve learned that while we have the flexibility to adjust quickly due to our contracts, constantly switching our program on and off leads to inefficiencies, so we try to minimize that as much as possible. We did respond rapidly to recent price changes, leading to a deferral in deploying another rig for horizontal wells, which contributed to a 50% reduction in our capital spending for the second quarter. To reiterate your question, in these times, it's crucial to show our shareholders the real flexibility and strength of our strategy and our commitment to debt reduction. We cannot predict whether we will enter a prolonged period of low prices; volatility remains high, and we could experience spikes in prices at any moment. Given this uncertainty, we will take a conservative approach, focusing on reducing debt, strengthening our balance sheet, and preparing for future growth.

Sure. We're very excited about bringing the Lime Rock assets in for the next redetermination. If that is in process right now, it is the season for that and our assets and the low decline nature of them at the low cost really help us out when they're making them more bankable. So we've got good expectations and I think that everything should go just normal.

Yes. We're still in the early stages of that process, so it's difficult to make predictions. However, it relates to our strategy of choosing shallow decline wells that have high net interest, high margins, and low operating costs. All these factors contribute to creating a much stronger and more bankable portfolio. Since we are at the beginning of the process, it's too early to tell how everything will unfold. Nonetheless, we remain confident it will proceed as a typical redetermination process.

Paul, as you laid out your focus is on reducing debt with free cash flow. I'm wondering, is there anything in the credit facility that limits Ring's ability to repurchase shares? In other words, do you have any kind of leverage test that you have to meet if you wanted to repurchase shares?

Yes. So our leverage ratio has to be less than 2. And we also have to be within a certain percentage of our draw on the total credit base. I believe that's 80%.

80%. We also have the free cash flow bucket, available free cash flow for a trailing 12 months.

That's right. So they're very typical, I think, in terms of what's typically required of a company, nothing out of the usual.

Hi, good morning. I was wondering if you could provide some insights on the current activity on the platform and in the market. There seems to be a pattern of capital moving in and out of various investments. I'm curious about the current trend; it appears there have been more exits and consolidations lately compared to new investments coming in. Could you share your observations on this?

That's a great question. It's a complex topic because we've observed trends on both sides. Last summer, Hilcorp made a significant move by acquiring two large assets in the Central Basin platform, which we were also interested in. They took over Apache's and Exxon's positions and paid a notable premium, for example, $950 million for the Apache assets. To us, we couldn't reach that valuation, which I see as a high benchmark. We have been forecasting this for years, and you have been part of that journey. We are focused on the Central Basin platform because we believe there are many overlooked conventional oil and gas assets that can be developed with modern drilling technologies, leading to positive returns. While the industry has concentrated on the Delaware and Midland Basins, we felt we had a unique opportunity there. We have been clear about our goal to aggregate assets in the Central Basin and Northwest Shelf. We know those assets well and have proven our ability to operate them successfully in both low and high price environments, demonstrating our capability to drill wells and deliver strong returns for our shareholders. Our focus remains there.

But having said that, in a low price environment like this, I think you'll find a mix, because most people are not going to want to sell their assets in a low price environment, because they're looking to achieve different goals or whatever. So unless the companies are in trouble or have a strategic need to get out of them, you may not see as many assets hit the market. Now that doesn't mean that we're going to give up. We're not going to continue to try. We think that the best time to actually make an acquisition is when prices are low, so it's all a function of finding the right assets. As you know, over the last four and a half, five years, we're very selective on the types of assets we acquired. We, in the past, have sold the assets that don't fit our strategy, because we're constantly looking for ways to reduce our operating costs and maximize our margins. We like the shallow declines. They all bring a lot of virtues. But I do believe, though, that although at one point, we thought we were alone out here, we're not alone anymore, because other people have seen the success we've had. And so we anticipate continued interest in assets in the Central Basin Platform. We'll have to get our elbows up to compete in that regard, but we will not overpay. But there is kind of a mix right now out there. We've seen larger private operators like Telco come in, in a large way. I'm not sure that they're done. I don't know anything about that company's desire to move forward. But we still like the area, and we'll continue to compete there. In addition, though to the M&A market because we are predicting that the industry is going to turn more towards areas like the Central Basin Platform because the entry costs are a lot lower than they are in the Midland and the Delaware Basin. We decided to expand and increase the capability of our Geoscience department led by James Parr, where we are focusing on organic growth in the same area. So we're mapping all aspects of the Central Basin Platform, the Southern part of the shelf. We’re identifying remain opportunities that can compete with our portfolio. We're seeing whether or not those operators value those assets the same way we do, whether they're investing in those assets the same way we are. And if there are acquisition opportunities, we're knocking on doors. We're trying to negotiate things and try to prevent those assets from actually hitting the street. So that's another component of our go-forward strategy. But again, going back to your question, Noel, yes, there's a mixed bag right now of interest in the Central Basin Platform. But I believe as time goes on, you're going to see an increased interest in the Central Basin Platform.

I was reflecting on the progress made about ten years ago when we began exploring horizontal drilling in the San Andres, which once seemed impractical. This led me to consider what the next wave of resource potential could be, whether it involves alternative horizons or other areas that haven't been explored yet. The vastness of the area suggests that achieving critical mass would require significant investment. It appears there is growing awareness in the basin, and I assume capital will eventually follow to enable companies to explore what can be done next.

Absolutely. You've been studying this area for a long time, so your insights are spot on. They also highlight some of the benefits of the Lime Rock acquisition that we haven't discussed extensively. We've focused a lot on the synergies from combining operations in the Shafter Lake area. However, our acreage in the South gives us access to newer emerging plays like the Barnett and the Woodford, which are attracting significant interest from other operators. Our current analysis indicates that these plays are not as competitive as our existing investments, but we anticipate that with slightly higher oil prices, they will become competitive and generate the returns our shareholders expect. And we like the idea and the aspect of being exposed to some of these new plays. The other thing that you can go back and look at is that in the South, where we made the two acquisitions, a strong hold acquisition and also the Founders acquisition, those areas are predominantly conventional vertical wells where we apply the unconventional completion technology, where you per frac and plug all the various different stack zones, you bring them all on vertical sense and you generate really strong returns. As you also know, our Founders assets have really outperformed our original estimates. We're currently looking at the application of horizontal drilling technology in those very same areas. So instead of developing them with inexpensive verticals, we can go with fewer wells, but longer laterals and higher capital efficiency, and that there's a little bit of risk associated with that, but other operators are already pioneering some of these changes. We're looking at that. And so the potential on our acreage in the south is also appealing in the very same zones that we're currently looking at from a vertical perspective. And so, that also lends right into. We love this area. There are other operators that are not as active. They haven't been allocating capital. They don't understand perhaps these opportunities as well as we do. And so we're very active in terms of trying to take advantage of our footprint down there and expand our growth through organic means and the acquisitions we made, both the Stronghold and the Founders have demonstrated more drilling opportunities and more opportunities to add reserves than what we used originally when we made those investments.

There are no further questions at this time. I would like to turn the conference back over to Paul McKinney, Chairman and CEO, for any closing remarks.

Thank you. On behalf of the entire team and Board of Directors, I want to once again thank everyone for listening and participating in today's call. We are pleased to have posted solid operational and financial results for the first quarter of 2025, and our outlook for the remainder of the year remains solid despite the current price environment. We will continue to keep everyone apprised of our progress. And thank you again for your interest in Ring Energy. Have a great day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.