Earnings Call Transcript - REI Q2 2025

Operator, Operator

Good morning, and welcome to the Ring Energy Second Quarter and Full Year 2025 Earnings Conference Call. Please note this event is being recorded. I will now turn the call over to Al Petrie, Investor Relations for Ring Energy.

Al Petrie, Investor Relations

Thank you, operator, and good morning, everyone. We appreciate your interest in Ring Energy. We'll 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 second quarter of 2025 as well as our updated outlook. We'll then turn the call over to Travis Thomas, Ring Energy's Executive VP and CFO, who will review our financial results. Paul will then return with some closing comments before we open the call for questions. Also joining us on the call today are Alex Dyes, Executive VP and Chief Operations Officer; James Parr, Executive VP and Chief Exploration Officer; and Shawn Young, Senior VP of Operations. 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 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. 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 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.

Paul D. McKinney, CEO

Thanks, Al, and thank you, everyone, for joining us today and for your continued interest in Ring Energy. We enjoyed another strong quarter, a quarter where we not only set new records for oil and BOE sales, but we also set a record for adjusted free cash flow despite considerably lower oil prices. Our operational performance during the second quarter of 2025 was largely due to the continuing success we enjoyed in the first quarter, namely that our PDP production base, the new wells drilled so far this year and the newly acquired Lime Rock assets continue to perform at the higher end of our forecast. Also contributing to our success was the progress our operating team made by reducing operating costs. There are several highlights to point out in this regard. First was the quick and efficient integration of the Lime Rock assets into our operations, where we not only reduced the LOE cost of the acquired assets but also realized cost savings with our existing assets in the Sater Lake operating area as well. These cost reductions were due to the reduction of the required field staff by approximately 50% due to the proximity of our existing assets and the ability of Ring's field management to reorganize operational responsibilities, resulting in the combined operations being more efficient. We have been able to arrest the decline rates by reducing the downtime associated with well failures with more responsive repairs and getting the wells back online sooner. We are also able to incorporate existing vendor services, such as workover rigs and haul trucks, that resulted in more efficient use and reduced expenses for these services in our combined operations. Other highlights are related to LOE reductions across other areas of our operating base. Our operations team continues to drive costs out of our operations, where we realized about $400,000 in savings per month during the second quarter. Our production performance, cost savings, and the acquisition of Lime Rock assets had an important impact on our performance in the second quarter, and the benefits to our stockholders are depicted on Slide 10 in our corporate presentation posted this morning. Our production per share increased 13% over the prior quarter because of the Lime Rock acquisition and the strong performance and improved metrics reported this quarter. Our all-in cash operating costs dropped almost $3 per BOE or 12% due to our cost savings initiatives. Finally, and because of our strong performance this quarter, our adjusted free cash flow on a dollar per BOE basis is up over 250%, but we are not stopping there. We believe we have additional gains to make reducing our operating costs. One change we are making worth pointing out is that we are currently expanding the scope of operations of one of the chemical vendors used in the South into our Northern assets. We expect this important change to drive future incremental savings already seen in our Southern operations by reducing direct chemical treating costs by eliminating hot oil treatments, lowering well failure frequencies, and reducing associated workover costs. This transition should be completed in the third quarter of this year. So let's review some of the specific results of the second quarter. We sold 14,511 barrels of oil per day, which was near the high end of guidance and 21,295 barrels of oil equivalent per day, which was just below the midpoint of guidance. When combining our record-setting quarterly production with below the low end of guidance lease operating expenses of $10.45 per BOE and a 48% reduction in capital spending over the prior quarter, we achieved record free cash flow of $24.8 million, marking the 23rd consecutive quarter of generating free cash flow. With respect to our drilling and completion activities during the quarter, we drilled, completed, and placed on production 2 wells in the Central Basin Platform. This included a 1-mile horizontal well in Andrews County and 1 vertical well in Crane County, both with a working interest of 100%. Like the wells drilled and completed in the first quarter of 2025, both wells are meeting or exceeding our pre-drill expectations associated with initial production results. Regarding our financial success for the second quarter, it was largely due to our quick response to the drop in oil prices experienced early in the quarter and the operational outperformance we've just described. I will now turn this call over to Travis to share the highlights and details of our second quarter financial position.

Travis T. Thomas, CFO

Thanks, Paul, and good morning, everyone. We began the quarter energized by the integration of the new assets into the Ring family. But on day 2, the tariff turmoil instilled uncertainty into the market, driving prices down by 17% over the next week. We quickly adapted to a lower price environment, and we were able to finish the quarter with record production, LOE below the guidance range, reduced sequential G&A and a pullback in capital spending. The combination of these resulted in adjusted free cash flow of $24.8 million, a new record high, enabling us to pay down $12 million in debt. As I say every time, balance sheet improvement has been and will remain a top priority for the company. Another highlight is that we entered into the amended and restated credit agreement with a $585 million borrowing base in June. It was a challenging time with prices ranging between $57 to almost $73, but in the end, we are encouraged by the improved terms of the facility. One of the most impactful was a 25 basis point reduction in the pricing grid leading to interest expense savings on day 1. For context, that is $250,000 in annual savings on each $100 million outstanding. This amended facility provides Ring with a 34-month extension of the facility's tenure expiring in June of 2029. We are excited to welcome Bank of America as our new administrative agent and to add Citibank to the banking syndicate. Of course, we are grateful to all of our banks for the ongoing support, and we believe our strong partnerships will be a catalyst for future growth. Turning now to the metrics for the quarter. It is evident that our team is executing on the operational plan. Starting with sales volumes. We sold a record 14,511 barrels of oil per day, exceeding the midpoint of our guidance and a record 21,295 BOE per day, slightly below the midpoint. As for the second quarter 2025 pricing, our overall realized price decreased 11% to $42.63 per BOE from $47.78 in the first quarter. Driving the overall decrease was an 11% lower realized oil price of $62.69, which is the lowest realized price since the first quarter of 2021. Realized gas price, which includes the majority of our GTP cost, was a negative $1.31, down from negative $0.19 in the first quarter. NGL prices decreased 36% in the quarter to $6.19. Our second quarter average crude oil differential from NYMEX WTI futures pricing was a negative $0.99 per barrel versus a negative $0.89 for the first quarter. Our average natural gas price differential from NYMEX futures pricing for the second quarter was a negative $4.67 per Mcf compared to a negative $3.81 per Mcf for the first quarter. Our realized NGL price averaged 10% of WTI compared to 15% for the first quarter. The result was revenue for the second quarter of $82.6 million despite the weakening prices. We continue to target higher oil mix opportunities as oil accounted for 100% of total revenue, while it was only 68% of total production. Overall, our sequential revenue had a 4% increase from the first quarter, which was driven by a positive $16.8 million volume variance, offset by a negative $13.3 million price variance. Moving to expenses. LOE was $20.2 million or $10.45 per BOE versus $19.7 million or $11.89 per BOE in the first quarter. We were pleased to see LOE lower on a BOE basis quarter-to-quarter and well below our guidance of $11.50 to $12.50 per BOE. Cash G&A, which excludes share-based compensation, was $5.8 million compared to $6.9 million in the first quarter. The decrease was partially driven by annual costs incurred in the first quarter associated with the audit, 10-K and proxy. The second quarter also saw lower salaries and bonus accrual. Our second quarter results included a gain on derivative contracts of $14.6 million versus a loss of $900,000 for the first quarter. The second quarter gain included a $14 million unrealized gain and a $600,000 realized gain. As a reminder, the unrealized gain and loss is just the difference between the mark-to-market values period-to-period. Finally, for Q2, we reported net income of $20.6 million or $0.10 per diluted share compared to the first quarter net income of $9.1 million or $0.05 per diluted share. Excluding the after-tax impact of pretax items, including noncash unrealized gains and losses on hedges and share-based compensation expense, our second quarter 2025 adjusted net income was $11 million or $0.05 per diluted share, while the first quarter 2025 adjusted net income was $10.7 million or $0.05 per diluted share. We posted second quarter 2025 adjusted EBITDA of $51.5 million versus $46.4 million for the first quarter, with most of the difference attributed to higher oil revenue, higher realized hedges and lower G&A. During the second quarter, we invested $16.8 million in capital expenditures, which was 48% lower than the first quarter and below the $18 million midpoint of guidance. Adjusted free cash flow was $24.8 million versus $5.8 million for the first quarter, with the net increase primarily associated with approximately $15.6 million in lower capital spending, combined with $5 million higher EBITDA compared to the first quarter. We ended the period with $448 million drawn on our credit facility after a $12 million paydown. With a current borrowing base of $585 million, we ended the quarter with availability of $137 million and a leverage ratio of 2.05x. Moving to our hedge positions. For the last 6 months of 2025, we currently have approximately 1.3 million barrels of oil hedged with an average downside protection price of $64.87. This covers approximately 55% of our oil sales guidance at midpoint. We also have 1.5 Bcf of natural gas hedge with an average downside protection price of $3.37, covering approximately 42% 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 include the average price for each contract type. We are reaffirming our updated full year 2025 production guidance of 12,700 to 13,700 barrels of oil per day and 19,200 to 20,700 BOE per day. Yesterday, we presented our guidance for the third quarter total sales volumes of 19,200 to 21,200 BOEs per day and oil production to range between 12,850 and 13,850 barrels of oil per day, resulting in a 66% oil mix. For second half 2025, we are continuing to guide to total sales volumes of 19,000 to 21,000 BOE per day and oil production in the range of 12,500 to 14,000 barrels of oil per day, also a 66% oil mix. On the cost side, we are updating guidance to $11 to $12 per BOE for the remaining quarters of 2025. We have drilled, completed, and placed on production 3 horizontal wells to date in our drilling program for the third quarter. As in the past, we retain the flexibility to react to changing commodity prices and market conditions as well as manage our quarterly cash flow.

Paul D. McKinney, CEO

Thank you, Travis. As you know, we enjoyed a strong quarter despite the backdrop of lower energy prices. We are proud of the team's operational performance this quarter, delivering strong production, significant reductions in LOE costs, and robust performance from the new wells drilled this year. We also demonstrated this quarter that we can successfully manage the aspects of our business that are within our control to help achieve the results we need despite the adverse conditions beyond our control. In high-priced markets, we balanced growth with improving the balance sheet. In today's lower price landscape, we are prioritizing debt reduction. I say this to reassure our stockholders that Ring's management team and Board of Directors are unwavering in this regard. Even if oil prices rise to higher-than-anticipated levels later this year, we will not significantly change our capital spending plans and will retain our capital discipline. If we are fortunate to experience higher oil prices later this year, we will capture the windfalls and apply them to reducing debt. With that, we will turn this call over to the operator for questions.

Operator, Operator

And your first question comes from Jeff Robertson with Water Tower Research.

Jeffrey Woolf Robertson, Analyst

Starting with the stock price. You've reported good results on the assets and underlying production and favorable cost trends, including the Lime Rock assets that were closed at the end of the first quarter. The stock has underperformed some of your peers. Can you just share your thoughts on how the stock has performed and what you think might be causing the performance?

Paul D. McKinney, CEO

That's a great question, Jeff. To be honest, I wasn't quite prepared for it. It's a complex matter primarily due to the uncertainty surrounding the factors that influence stock prices. Many elements affect a public oil and gas company’s stock price, some of which we can control and others we cannot. Oil prices, for example, are beyond our control, and their impact on Ring is similar to that of other companies, so that’s not particularly distinctive. In my view, the main differentiators in stock price performance among companies in our sector often relate to factors within the company's control. One prominent issue raised by our shareholders is our debt and leverage ratio. As you're aware, Ring is positioned at the higher end within our peer group. Companies with lower leverage typically enjoy a higher trading premium based on the available data. Additionally, our size and scale are on the lower end of the peer spectrum, with larger firms also trading at a premium. However, Ring has several distinguishing attributes. For instance, we have the longest reserve life among our peers, with an average of 18.7 years compared to the median of 11.1 years. This longevity enhances our sustainability and helps us manage the risks associated with fluctuating oil and gas prices over time. Another key metric is our production decline rate, which is the second lowest in our peer comparison, minimizing the capital intensity needed to maintain production levels. Higher operational ownership enables us to effectively manage our portfolio, resulting in improved margins and profitability. Moreover, a larger percentage of oil in our product mix is significant, particularly as Permian Basin companies face challenges in profitably selling natural gas. All these factors contribute to our higher operating margins, leading to greater profitability per barrel of oil equivalent and enhancing our ability to endure lower oil prices. Given these attributes, it stands to reason that Ring should ideally be trading in the middle or even at the higher end of our peer group. Reflecting on the dynamics affecting our stock price, it’s important to recognize the selling pressure we’ve experienced over the past few years. A chart in our corporate presentation illustrates Ring Energy's historical price patterns since January 2022, alongside oil prices. This chart highlights the significant selling pressure on our stock, particularly when warrant holders converted and sold their shares around mid-2022. Although oil prices peaked during this time, our stock price dropped sharply due to the elevated selling pressure. We took action and negotiated with remaining warrant holders to convert their shares in early 2023. Following that, we announced a significant transaction, which led to a positive market response, free from the selling pressure that had previously affected us. Unfortunately, another large shareholder subsequently began selling their position, which has continued until recent disclosures revealed they fell below the 10% ownership threshold. While their current holdings are unclear, it seems likely they will continue to exit. Looking at our recent stock price, I believe we’ve reached a low point, especially following a drop in oil prices that caused our price to fall below $1, triggering further selling pressure from index requirements. I think our stock price has hit a low that may present a good investment opportunity, and I feel optimistic that we are nearing the end of this selling pressure. I believe we are about to return to the levels of trading we saw in 2021 and early 2022, aligning more closely with our operational and financial performance.

Jeffrey Woolf Robertson, Analyst

I do. You talked about the natural decline in Ring's asset base. And when you take on an acquisition like Lime Rock, which I think also had a shallower decline production base than your then existing production base. Can you talk about how you think about allocating or taking the free cash flow that's generated from an asset like that and using it to reduce leverage?

Paul D. McKinney, CEO

Yes, a great example is our approach to the Lime Rock assets. Although we are still new to them, we are on track to achieve similar outcomes. A prime illustration of this is the Founders acquisition. If you refer to our corporate presentation, you'll find a chart that summarizes our actions there. Essentially, we paid off the debt related to the Founders acquisition in less than five quarters—specifically in four quarters. By the end of that period, we had increased our production by an additional 2,800 barrels a day, which helped us pay down debt more quickly. We plan to implement a similar strategy with Lime Rock. Regarding decline rates, one significant advantage of shallow decline rates is that they lower the maintenance capital needed to sustain production, allowing for more capital-efficient growth. There are many parallels between Founders and Lime Rock, and one of the factors that makes Lime Rock even more appealing is its proximity to our existing operations in the Shafter Lake area, which enables us to realize considerable synergies. Many of these synergies contributed to this quarter’s lower-than-expected lease operating expenses. I want to commend the operating team for their efforts. Shawn Young and the team did an exceptional job integrating those assets and effectively reducing costs, which benefited not only those assets but all our operations in the area.

Jeffrey Woolf Robertson, Analyst

Yes. Just lastly, on cost, Paul, the cost synergies you're talking about, they're very sticky, right? So you'd be able to maintain those if things get more active out there.

Shawn D. Young, SVP of Operations

Yes. No, to your point, as Paul pointed out, by reducing the operating staff, going forward, that's going to be continued savings. But we're also looking at some other opportunities there and have identified a number of things that we're not quite realizing yet. So hope to be able to share those in the future as we actually realize those cost savings going forward.

Operator, Operator

And your next question comes from Poe Fratt with Alliance Global Partners.

Charles Kennedy Fratt, Analyst

Travis, could you walk me through the difference between your adjusted cash flow of, call it, $25 million and the debt paydown of $12 million?

Travis T. Thomas, CFO

Sure. That's a great question. The primary factor in that was changes in working capital, particularly the investment we made in the credit facility for the next four years. If you refer to Page 9 of our earnings release, you can see the changes in working capital and other related items. That accounted for about $5.4 million of the difference. When we transitioned from the old deal to the new one, we also brought forward about $3 million in interest that would have been due next quarter. Additionally, there was an increase in inventory of about $2 million, partly due to a pullback we had already planned for. The positive aspect is that we will have less cash interest to pay next quarter and reduced inventory expenses since we've already covered that amount. There was also about a $2 million increase in accounts receivable, which represents cash we will realize next quarter. In summary, despite the differences between the two, we expect those to reverse, and we should see the benefits in Q3.

Charles Kennedy Fratt, Analyst

That leads into the next question. Looking at the adjusted free cash flow for the second half, it appears you could be in the range of $20 million to $45 million. Considering your target for debt reduction this year or specifically in the second half, can you share how much debt you might be able to pay off during that period or if you have a specific debt level you are aiming for by year-end?

Paul D. McKinney, CEO

I'll do the first stab at that, and I'll turn it over to Travis. We don't have internal debt reduction targets yet. However, and so one of the more disappointing things I think about this earnings release is that I believe there are some out there that would like to see us pay down more debt. But we incurred those special circumstances we talked about. But many of those circumstances will not be there in the third quarter. And product prices have continued to hang in at the higher end of the $60 range so far this quarter. And so I say this with a little bit of trepidation and caution. I believe that we can exceed what we paid down this quarter, next quarter. But to what degree I'd hate to stand out.

Travis T. Thomas, CFO

Well, if we go to $50 million, that's one story. If we go to $75 million, that's another. So we'll call that between $20 million and $45 million, maybe that we could potentially pay down. So we're hoping for $75 to get that lower. It's hard. We don't have a hard target that we've come out with yet for debt reduction goal by the end of the year.

Charles Kennedy Fratt, Analyst

Yes. And as Travis pointed out, working capital is going to be favorable this coming quarter or 2 relative to the second quarter. And then Paul, you talked about Warburg selling. You don't really know where you are right now. But I think one of the good things, maybe it's obvious to everyone, but they're under 10% now, so they won't be constantly filing Form 4 showing the relentless sales that you saw sort of from the middle of May until the middle of June. So that potentially is a positive from the standpoint of seeing less headlines as far as the Form 4 filings, correct?

Paul D. McKinney, CEO

That is correct. They will need to provide a quarterly summary this month for the previous quarter. It will be interesting to see, as it will reflect how they finished in June, but there has been quite a bit of time since then. They used to be our largest shareholder and had two members on our Board; they have been a valuable partner. We gained a lot from them, and they made significant contributions to our company. I am unsure why they are in the process of reducing their position, but it's worth noting that they have exited other energy companies as well, which indicates it isn't specific to us. It seems to be related to internal matters we are not privy to. However, I believe they plan to fully exit their position, and we are approaching a point where the selling pressure will diminish.

Noel Augustus Parks, Analyst

I apologize if you maybe touched on this earlier, but any updated thoughts, especially I'm thinking about with the Lime Rock assets in the portfolio now on pursuing alternate horizons beyond the San Andres, just given, of course, everything that's happened with geosteering and so forth in recent years.

Paul D. McKinney, CEO

That's a great question. When we acquired Lime Rock, it included lands that provide exposure to other emerging plays that we are monitoring closely. One of these is the Barnett, located in the Midland Farms area of the acquisition we finalized last quarter. Other operators are active in this region. Based on our analysis, we believe the economic returns from those wells are not as strong as those from the wells we are concentrating on, such as the San Andres horizontal wells in Yochum and Andrews County, along with various vertical wells in Nectar and Crane County. However, these wells are noteworthy due to the significant resource potential they contain. Following our acquisition, we received inquiries from several parties, indicating that if prices rise, these wells could become economically viable for drilling or might be acquired by someone who values them more highly than we do. We haven't made a decision on that yet, but we are evaluating our options. This is just one area of interest. We think that as technology advances, many regions in our southern operations that have historically been dominated by vertical wells may become suitable for horizontal drilling. In fact, this quarter, we are testing a horizontal interval in the South, and we will provide more information once we have results. Other operators nearby have successfully transitioned from vertical to horizontal drilling as well, so we’ll see how technology develops. Overall, there are many similarities between Founders and Lime Rock. The close proximity of the Lime Rock assets to our existing operations in the Shafter Lake area presents us with significant synergy opportunities.

Operator, Operator

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

Paul D. McKinney, CEO

Thank you, Michael. And 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, and I hope you have a great rest of your day. Thank you very much.

Operator, Operator

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