Q2 2023 Ring Energy Inc Earnings Call
Participants
Al Petrie; Officer of IR; Ring Energy, Inc.
Alexander Dyes; EVP of Engineering & Corporate Strategy; Ring Energy, Inc.
Marinos Christos Baghdati; EVP of Operations; Ring Energy, Inc.
Paul D. McKinney; CEO & Chairman of the Board; Ring Energy, Inc.
Travis T. Thomas; Executive VP, CFO, Corporate Secretary & Treasurer; Ring Energy, Inc.
John Marshall White; MD & Senior Research Analyst; ROTH MKM Partners, LLC, Research Division
Neal David Dingmann; MD; Truist Securities, Inc., Research Division
Noel Augustus Parks; MD of CleanTech and E&P; Tuohy Brothers Investment Research, Inc.
Presentation
Operator
Good morning, and welcome to the Ring Energy Second Quarter 2023 Earnings Conference Call. (Operator Instructions) Please note, today's event is being recorded.
I will now turn the call over to Al Petrie, Investor Relations for Ring Energy.
Al Petrie
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 second quarter and subsequent events. We will then turn the call over to Travis Thomas, Ring's EVP and Chief Financial Officer, who will review our financial results. Paul will then return to discuss our future plans and outlook before we open 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 re-enter the queue later with additional questions. I would also note that we have posted a second quarter 2023 earnings 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, and 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, www.ringenergy.com. Should one or more of these risks materialize or should underlying assumptions prove incorrect, actual results may differ materially.
This conference call may also include 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 is being recorded.
So now let me turn the call over to Paul McKinney, our Chairman and CEO.
Paul D. McKinney
Thanks, Al. Welcome, everyone, and thank you for your interest in Ring Energy and for joining us today. Our second quarter of 2023 was highlighted by strong cash flow generation despite lower commodity prices and lower production levels when compared to the first quarter. Through our combination of lower capital spending, reduced LOE, lower cash G&A expense, proceeds from the sale of our noncore Delaware Basin assets and proceeds from the early exercise of the substantial remainder of our outstanding warrants, we paid down $25 million in borrowings under our credit facility. There is a lot to unpack here, so let's get into the details.
During the second quarter, we sold 17,271 barrels of oil equivalent per day, which fell short of our earlier expectations primarily due to 2 things; the previously announced sale of our noncore Delaware Basin assets and the deferral of certain drilling and workover projects due to lower commodity prices and the anticipated funding and incremental benefits of the Founders acquisition.
However, when looking at year-end or year-over-year metrics, we grew sales volumes 85% over the second quarter of last year. Impacting this year's second quarter was our ongoing efforts to drive further cost efficiencies in the business. This included posting lower lease operating expense of $10.14 per BOE, which was 9% lower than the midpoint of our guidance and 4% lower than the first quarter. We also saw a reduction in sequential quarterly G&A expense, excluding share-based compensation and transaction costs for the sale of our Delaware Basin assets, we recorded second quarter G&A expense of $2.75 per BOE, which was a 13% decrease from the first quarter and a 41% decrease from the second quarter of last year. Travis will share more details in this regard in his comments.
During the second quarter, we drilled and completed 2 1-mile horizontal wells in the North West Shelf, each with 91.1% working interest. We also drilled 2 1.5-mile horizontal wells in the North West Shelf, one with a working interest of 100% and the other with a working interest of 75.4%. Additionally, we drilled and completed 2 vertical wells and performed 3 recompletions in our CBP South acreage, all of which have a working interest of 100%.
In the second quarter of 2023, we reported net income of $28.8 million or $0.15 per diluted share. We also generated adjusted EBITDA of $53.5 million that was 9% lower than the first quarter, but 13% higher than last year's second quarter. On an accrual basis, we spent $31.6 million on capital projects, which was below our guidance range of $34 million to $38 million, primarily due to our decision to defer certain drilling and workover projects.
In the second quarter, we also generated strong adjusted free cash flow of $12.6 million that was 20% higher than the first quarter and marked our 15th consecutive quarter of adjusted free cash flow generation.
During the second quarter, we were pleased to complete the sale of our noncore Delaware Basin assets for a net proceeds of $8 million. The sale emphasizes our focus on building and developing our core positions in the Northwest Shelf and the Central Basin platform that continues to generate significant returns for our stockholders.
As you may know, we are pursuing the potential sale of our New Mexico assets, which we hope will help us consolidate our core development efforts in Texas.
As previously announced, in April, we entered into agreements with certain holders of the company's outstanding warrants for the early exercise of 14.5 million warrants that resulted in net cash proceeds of $8.7 million. At the end of the second quarter, only 78,200 warrants to purchase shares of our common stock remained outstanding.
Strong cash flow generation, combined with the net proceeds from the sale of our Delaware Basin assets and the early exercise of the warrants resulted in the pay down of $25 million worth of debt. As a result, we ended the second quarter with $204 million of liquidity, which was 14% higher than the first quarter and 150% higher year-over-year. Finally, we ended the second quarter with a leverage ratio of 1.64x.
Before turning this over to Travis, I'd like to discuss our recently announced Founders Acquisition and our outlook for the remainder of this year. Last month, we announced that we had entered into an agreement to acquire the Central Basin Platform assets of Founders Oil and Gas. Founders operations are located in Ector County, Texas and are focused on the development of approximately 3,600 acres that are similar to the CBP assets that we acquired in the third quarter of last year.
The total consideration of $75 million, subject to customary closing adjustments, consists of $60 million in cash at closing and a $15 million deferred cash payment due 4 months after closing. The transaction is expected to close later this month, hopefully, August 15, and it has an effective date of April 1.
The Founders Acquisition is immediately accretive to Ring's stockholders, including production, reserves, adjusted free cash flow and other key metrics. The transaction strengthens our balance sheet by lowering our leverage ratio, accelerates our ability to pay down debt, further increases our inventory of low risk, high rate of return drilling locations and improves our capital allocation flexibility. The transaction strategically expands our core operating area with existing infrastructure that provides takeaway capacity, opportunities to reduce costs, improve efficiencies and capture the synergies associated with expanding the core operating area. These assets are similar to the CBP assets we acquired last year, having stacked pay zones of high-quality rock with proven performance. As we have successfully done with our other assets, we intend to leverage our extensive expertise, applying the newest conventional and unconventional technologies to optimally develop the inventory of undeveloped drilling locations afforded by the transaction.
In the announcement for the transaction, we provide a pro forma third and fourth quarter 2023 guidance to reflect the pending transaction as well as the impact of the completed sale of our Delaware Basin assets during the second quarter.
We are targeting total pro forma capital spending of $67 million to $77 million in the second half of 2023. That brings our full year 2023 capital spending program to $137.5 million to $147.5 million, which is $10 million less at the midpoint than our guidance prior to the acquisition announcement.
Our second half 2023 development program includes a balance and capital efficient combination of drilling 8 to 11 horizontal wells on our legacy acreage and 4 to 6 vertical wells and a few recompletions in the CBP South acreage. Additionally, our capital spending program includes funds for targeted capital workovers, infrastructure upgrades, leasing costs and non-operated drilling, completion and capital workovers. All projects and estimates are based on an assumed WTI oil price between $65 and $85 per barrel.
As in the past, we have designed our standing program with flexibility to respond to changes in commodity prices and other market conditions. With respect to the third quarter of 2023 production guidance, we continue to expect sales volumes of 18,100 barrels of oil equivalent per day to 18,600 barrels of oil equivalent per day, with 68% of those volumes being oil. With respect to the fourth quarter, we expect 18,900 barrels of oil equivalent per day to 19,500 barrels of oil equivalent per day and 69% of those volumes being oil. Assuming the midpoint of guidance, this represents a 6% and 11% increase for the third and fourth quarter, respectively, from this year's second quarter.
So with that, I will turn the call over to Travis to discuss our financial results and guidance in more detail. Travis?
Travis T. Thomas
Thanks, Paul, and good morning, everyone. To sum up the second quarter, there was a pullback in oil and gas prices, so we adjusted our CapEx program accordingly. This resulted in lower production but also reduced LOE. Combined with lower G&A, this helped preserve our cash flow from operations. Further supported by the net proceeds from the early warrant exercise and sale of our Delaware Basin assets, we were able to pay down $25 million on our credit facility to prepare for the pending Founders Acquisition.
Looking at the second quarter 2023 in more detail. We sold approximately 1.1 million barrels of oil, 1.6 Bcf of natural gas and 233,000 barrels of NGLs for a total of 1.6 million BOE or 17,271 BOE per day.
Realized pricing was $72.30 per barrel of crude oil, a negative $0.71 per Mcf of natural gas and $10.35 per barrel of NGLs or $50.49 per BOE. This was 6% lower than the first quarter of 2023 of $53.50 per BOE. Driving the negative realized price of natural gas for the second quarter was processing costs that exceeded Henry Hub pricing less basis differentials. Please see the 10-Q for more details.
Our second quarter average oil price differential from NYMEX WTI futures pricing was a negative $1.77 per barrel versus a negative $2.67 per barrel for the first quarter. This was due to the Argus WTI WTS to increased $0.84 per barrel in the Argus CMA role to increase $0.23 per barrel on average from the first quarter. Our average natural gas price differential from NYMEX futures pricing for the second quarter was a negative $3.07 per Mcf compared to a negative $2.08 per Mcf for the first quarter.
Our realized NGL price for the second quarter averaged 13% of WTI compared to 19% for the first quarter. The combined result was revenue for second quarter 2023 of $79.3 million, which was down $8.7 million from the first quarter, but only down $7.9 million after realized hedges. LOE was $15.9 million versus $17.5 million for the first quarter. On a per BOE basis, LOE for the second quarter was $10.14 or 4% lower than the $10.61 per BOE for the first quarter and 9% below the midpoint of our guidance. Contributing to the decrease in absolute LOE was the sale of our Delaware assets and lower variable costs associated with reduced sales volumes.
Production taxes were $4 million or $2.55 per BOE versus $4.4 million or $2.68 per BOE for the first quarter with the tax rate remaining steady at approximately 5%.
DD&A was $20.8 million compared to $21.3 million for the first quarter. On a per BOE basis, DD&A increased to $13.23 from $12.92. Cash G&A, which excludes share-based compensation, was $4.5 million versus $5.2 million for the first quarter. In addition, the second quarter included about $220,000 of transaction costs for the sale of our Delaware assets. Adjusting for the transaction costs, cash G&A was $2.75 per BOE versus $3.15 per BOE, a 13% decrease. Contributing to the sequential decrease was approximately $600,000 for the employee retention tax credit received in the second quarter. Year-over-year, we saw a 41% decrease in cash G&A on a BOE basis. Interest expense was $10.6 million versus $10.4 million for the first quarter, with a slight increase substantially due to the higher interest rate and 1 additional day in the period. I would also note that the interest expense includes about $400,000 per month in noncash amortization.
Our gain on derivative contracts was $3.3 million compared to $9.5 million for the first quarter. We recorded an income tax benefit of $6.4 million versus a provision of $2 million in the first quarter, primarily driving the second quarter noncash income tax benefit was the partial release of our valuation allowance.
As of June 2023, the company is in a 3-year cumulative income position. As a result, future forecasted pretax book income was considered as positive evidence in assessing the valuation allowance. We released a portion of the allowance in the second quarter, recording a tax benefit of $7.7 million as a discrete item with the expectation of a full release of the valuation allowance by the end of 2023 based on current projections.
During the second quarter, we reported net income of $28.8 million or $0.15 per diluted share. Excluding the estimated after-tax impact of pretax items, including $3.1 million for noncash unrealized gain on hedges, $2.3 million for share-based compensation expense and approximately $200,000 in transaction costs, our second quarter 2023 adjusted net income was $28 million or $0.14 per diluted share. This is compared to our first quarter 2023 net income of $32.7 million or $0.17 per diluted share. Excluding the estimated after-tax impact of pretax items, including $10.1 million for noncash unrealized gain on hedges and $1.9 million for share-based compensation expense, our first quarter adjusted net income was $25 million or $0.13 per diluted share.
We generated adjusted EBITDA of $53.5 million versus $58.6 million in the first quarter. Second quarter adjusted EBITDA was 13% higher than the $47.4 million reported in the same period in 2022 despite a 49% decrease in realized pricing on a BOE basis. More than offsetting the year-over-year decrease in pricing, we materially increased adjusted EBITDA as a direct result of last year's acquisition of additional CBP assets, our targeted legacy field development initiatives and ongoing efforts to drive further cost efficiencies.
Adjusted free cash flow for the second quarter of 2023 was $12.6 million, a 20% increase from the $10.5 million in the first quarter. So let me repeat that. We saw a 20% increase in adjusted free cash flow despite lower pricing and lower production. This demonstrates the optionality and discipline associated with our second quarter capital spending program.
Looking at our share count, I'll discuss that in April, we executed agreements with certain holders of nearly all of our remaining outstanding warrants that resulted in the early exercise of an aggregate of 14.5 million warrants. We received net proceeds of $8.7 million, which helped us accelerate debt reduction. At June 30, we only had 78,000 warrants outstanding.
Additionally, during the second quarter, we received $8 million in net proceeds from the sale of our noncore Delaware assets. Strong cash flow generation from operations, combined with the net proceeds from the sale of our Delaware assets and early exercise of the outstanding warrants resulted in a pay down of $25 million of debt during the second quarter.
As a result, at June 30, we had $397 million drawn on the credit facility. With a current borrowing base of $600 million, we had $202.2 million available, net of letters of credit. Combined with the $1.7 million in cash, we had liquidity of approximately $204 million and a leverage ratio of 1.64x.
As Paul discussed, while the Founders Acquisition will add debt to our balance sheet in the near term, we believe we will be better positioned to pay down debt more quickly once we close the acquisition. As we look beyond the funding commitments for the transaction, we remain focused on further debt reduction. Realized commodity prices, the timing and level of capital spending and other considerations will impact the cadence of quarterly debt pay down.
Turning to our outlook for the third and fourth quarters. Please see our earnings press release and presentation for details. We are reaffirming our target for capital spending pro forma for the Founders transaction of $67 million to $77 million in the second half of 2023. Looking at our sales volume guidance. We continue to expect sales volumes of 18,100 to 18,600 BOEs per day, including 68% oil for the third quarter and 18,900 to 19,500 BOE per day, including 69% oil for the fourth quarter.
Looking at the midpoint of guidance, this represents a 6% and 11% increase for the third and fourth quarters, respectively, from the second quarter. For operating expenses, pro forma for the Founders acquisition, we continue to target third and fourth quarter LOE of $10.50 to $11 per BOE.
Now let's talk about our hedge position. For the remainder of 2023, we currently have approximately 1.2 million barrels of oil hedged or approximately 52% of our estimated oil sales based on the midpoint of guidance. We also have 1.3 Bcf of natural gas hedged or approximately 39% of our estimated natural gas sales based on midpoint. For a quarterly breakout of our hedge position, please see our earnings release and presentation, which includes the average price for each contract type.
So with that, I will turn it back to Paul for his closing comments. Paul?
Paul D. McKinney
Thank you, Travis. Over the past year, we have made substantial progress increasing our size and scale, improving our per share metrics and strengthening our financial position. As we look to the near term, a key priority of closing the pending transaction with Founders Oil and Gas and integrating those assets into our operations.
As I emphasized earlier, it is immediately accretive to Ring stockholders on multiple metrics. It strengthens our balance sheet, accelerates our ability to pay down debt and further increase our inventory of highly economic drilling locations, and it strategically expands our core operating area allowing us to capture those operating and G&A cost synergies I talked about before.
In short, we view this transaction as another step and position the company to deliver on our long-term goals for our stockholders. With respect to the rest of the year, our focus remains on efficient execution of our 2023 capital spending program, continuing our relentless focus on reducing operating costs and maximizing our free cash flow generation to pay down debt.
As in the past, we will remain disciplined by prioritizing our capital spending on high rate of return drilling and recompletion projects. We believe targeted excess free cash flow to pay down debt will drive long-term value for our stockholders. The sale of our noncore Delaware Basin assets and accelerated exercise of our outstanding warrants are additional examples that support our strategy, focusing on our core asset positions and simplifying our capital structure. These initiatives have allowed us to accelerate debt repayment.
In short, and as I've consistently said in the past, we believe staying the course with our sense of urgency, our resolve and our commitment to our value-focused proven strategy better prepared as a company to manage the risks and uncertainties associated with the industry and should generate sustainable and competitive returns for our stockholders.
And with that, we will turn this call over to the operator for questions. Operator?
Question and Answer Session
Operator
(Operator Instructions) Today's first question comes from Neal Dingmann with Truist.
Neal David Dingmann
Paul, it might be a little premature, but just on Founders I'm curious to know how you and the team are looking at sort of well economics there versus legacy acreage now and maybe just how quickly you plan on, I know like maybe get the cart before the horse here, but how quickly you might want to get after that.
Paul D. McKinney
The economics -- let's just talk about the assets for a little bit. The Founders assets and the Founders team have not completed really their 40-acre down space. And if you go back and compare, for example, to some of the stronghold assets that we acquired last year, this area is considered less mature in my opinion. So you have not only the 40-acre down spacing program out there to complete, but you also have the 20-acre down spacing. So economically, these are very competitive to anything we really have in our portfolio. These drilling opportunities had the short cycle times so you get the return on your investment very quickly. And so the best way to answer your question is that I think that they are very, very competitive in our portfolio and equally as economic as many of the best investment opportunities we have.
And so how quickly will we get on to these projects? We have not planned at this point to drill wells this year. Now that's not to say that we won't. But the first thing we're going to do, I'm going to turn this question over to Marinos to have him flesh out a little bit more detail. But to sum it up, we've identified opportunities out there to change some of the operations, especially on how the saltwater systems -- disposal systems are managed. We believe we can reduce operating costs. And once we get our arms around that, then we'll move forward with a capital spending program drilling wells. And Marinos, is there more you want to share there?
Marinos Christos Baghdati
No, sir, that was -- that's exactly right. We see an opportunity to optimize the current production in terms of lowering operating costs as much as we can and increasing production to kind of optimize that side of it before get our arms wrapped around it before we actually start drilling new wells. And then it also adds flexibility in terms of being able to pivot from one area to the next with infrastructure restraints that we always talk about and all that. So we're really excited about the assets.
Alexander Dyes
This is Alex. On Page 37 of our new earnings deck, you can actually see what Paul is talking about on how these investments compare to some of our other CBP vertical investments, and they're pretty competitive. They're a little bit more expensive. However, they're over 90% oil. So that's what really makes it a compelling investment. So once we get the operations handled, you'll see us deploy some capital here and it will be a nice combination to drill some horizontal wells, some other vertical recomplete as well as drilled this vertically, so.
Neal David Dingmann
That was going to be my next question, either for the new acreage or your existing, maybe just talk -- you guys have talked about on legacy acreage about the refrac and other rework opportunities. I'm just wondering, again, not trying to get pretty much on Founders, but maybe just talk about Marinos, Alex, Paul, you guys, the opportunities on potentially on the new or on existing work, rework and refrac type opportunities.
Paul D. McKinney
Okay. I'll take that initially and then we'll all have our own point to make. Part of what we've tried to do through our acquisition efforts is to not only identify assets that fit into our core operating areas but we're specifically focused on identifying acquisition opportunities that bring with it undeveloped opportunities that have very similar or maybe even superior economics, okay? So we're very choosy in terms of the assets that we're pursuing. It's not to say that I wouldn't buy a PDP production, but I have to get it at a very compelling value to do that. And so right now, we're focused on acquiring assets that have very competitive economics. And so right now, the way the company is situated with the legacy assets and the stronghold assets, and then also the way we'll be situated once we complete this transaction, that we have investment opportunities that are very competitive in all of these areas. And so it gives us a lot of investment flexibility. We can move capital from one project to the next, depending on system constraints or whatever it might be. And so that's my response to your question. And I think that Alex and Marinos both have some points that they would like to make. So I'll just turn it over to them.
Alexander Dyes
So, this is Alex again. In regards to your question as far as like how are we going to handle or do both of these assets bring like cap workovers or some kind of recompletes? Yes, I think part of our portfolio moving forward, as we continuously view quarter-to-quarter, we will always do more recompletes and/or what we call blocking, tackling, cap workover, small asset jobs, whatever just that it takes to maintain our production base. And so what we always call blocking and tackling. So Marinos, anything you'd like to add to that?
Marinos Christos Baghdati
No.
Paul D. McKinney
Did that answer your question, Neil?
Neal David Dingmann
It did. Fantastic.
Operator
(Operator Instructions) Today's next question comes from John White with ROTH Capital.
John Marshall White
Following up on the Founders transaction, is there a date set for closing?
Paul D. McKinney
We have targeted August 15, based on the progress we've made in terms of inspecting the assets and looking for environmental issues, all the inspections associated with verifying title and all that, everything appears to be going along very well. And so I can't guarantee that we'll close on August 15, but we're still targeting August 15.
John Marshall White
Good luck with that. And on the Founders asset, would your first activity be recompletions or vertical wells or horizontal wells?
Paul D. McKinney
The first thing we're going to do is really get into the operations to understand how their systems work. We believe we have ideas on how to significantly change the operating -- the operations there and reduce costs and improve efficiencies. And so that's where we're going to spend the first amount of time doing. So that's going to be very little capital. But once we get our arms around that, I think the next thing we'll be doing is drilling wells. We've got quite a few -- yes, we'll start on a program of 40-acre down spacing. We'll be evaluating and completing the geological work associated with taking down to the 20-acre spacing as well. But yes, you can see us targeting to drill wells just as soon as we get our arms around the operations.
Marinos Christos Baghdati
And also to answer the part of the question, too, these will be vertical wells. It's a 1,000-foot vertical stacked or more, more than 1,000 foot vertical stacked pay that will do the multi-stage completions on, just like we do in our CBP South assets, it’s really analogous to that. And so at this time, we're not really contemplating horizontal wells but we are discussing it internally and that may pop up later. But for now, we're looking at vertical new drills.
Paul D. McKinney
And so since these wells are a little deeper, so the wells will cost a little bit more. But because they have such a higher oil content in the production, the economics are very robust.
John Marshall White
And the 40-acre down space and the 20-acre down space, do those involve different reservoirs?
Paul D. McKinney
No. Actually, they are the same.
Operator
And our next question today comes from Noel Parks with Tuohy Brothers.
Noel Augustus Parks
So -- and I apologize if you touched on this already, but with this rally you've had in oil and assuming that at the time you were working on pulling the trigger on Founders that frankly, maybe was a little bit less favorable. Any sense of sort of incremental return improvement you might see if we stay comfortably at, say, 75% or better for extended period?
Paul D. McKinney
Yes. So I mean, there's a lot that can be said there. When we first -- when we were negotiating this deal, as you remember earlier this year, we were experiencing lows in the oil price below what we had originally guided to in terms of $70 to $90 when we were originally guiding in our budget. So we were below $70 for a good part of the quarter and last quarter. And so the -- and so that is about the time that we were really finalizing the negotiations on this deal. We were faced with a couple of things. With the lower prices, we felt compelled to pull back on some of our capital spending. And then with the rebound now, of course, the opportunity to grow our production cost effectively is there. But, yes. But our goal is basically to maintain our production and to focus on paying down debt. And so that's kind of where we are.
Noel Augustus Parks
And actually, you talked about the opportunity for down spacing and the -- hadn't been as, as you can see, developed as some other properties. And I was just wondering, do you have a sense of what the tightest is that you might actually be able to do on the Founders assets?
Paul D. McKinney
Well, again, this rock is very similar, although a slightly deeper depths. It's very similar to what we have in our McKnight area that we picked up with the Stronghold Acquisition. I think 20-acre down spacing is pretty well proven in the industry right now. Even though it's not proven on these assets, it would more be -- it'd be classified as probable in many regards. Some of them will be proven. But still, I think 20 acres is probably pretty safe. Now if you recall in our announcement, we basically said that we have approximately 50 drilling locations, and that would be the combination of probable and -- or the 40-acre and the 20 acres. It is my hope that when we're done, we'll actually have the benefit of more than 50 well locations. But at this point right now, I'll wait until the engineers actually finish that analysis and we'll know more as we drill wells in the next year and the year after.
Marinos Christos Baghdati
But some of our offset operators have gone to even tighter spacing than 20 acres, they've gone down to the 10-acre space that's right over in the McKnight area. And we're not planning for it right now, but there is a possibility that we may end up there in all our areas as well.
Noel Augustus Parks
And I'm just assuming that with legacy penetrations over the years, there may be not a lot of surprises you're expecting to see geologically there. But I guess I'm wondering, do you feel like Founders had brought to bear sort of everything they could with current day technology in the drilling or completion?
Marinos Christos Baghdati
Yes, we do at this point. They've done an excellent job we believe. We haven't -- we need to get our arms around it and dig into the details, and we feel that there may be some improvements we can do on the capital expenditures, but we're not -- we didn't plan for them or bank on them right now. But there's a lot of possibilities of improving things as we get familiar with the assets and get our arms around them.
Paul D. McKinney
Yes. And I'll add to that. Noel, as you know, technology is the oil and gas industry's friend. And then -- and I'll just kind of draw an example to kind of give a bit of a foreshadow of what might happen in the future. If you look at our stronghold assets, we looked at the developments in those areas strictly as vertical development. And so right now, now that we've gotten into the details of those developments, there may be opportunities to apply horizontal drilling technologies and a few things like that. And so that's the benefit when you have a mature area or an area here that has multiple stack pays over intervals, there's just a lot of resource out there. And technology has proven to be our friend in terms of finding more and newer ways to extract and recover more oil and gas. And so we'll see how that goes. But I'm cautiously optimistic not only with the Founders because it's a lot like what we have in the South and Crane County. And I've seen how things are maturing now that we've evaluated the stronghold assets where the team is continuously coming up with new ideas. And so don't be surprised if we try some horizontal drilling here sometime going into next year on some of these assets that we originally thought would be just verticals.
Marinos Christos Baghdati
And we have the benefit of operating these properties with the long-term in mind. We're taking our time studying things. We're not rushing into making a decision that may affect us for the long-term. We're making sure every decision is the right one, so.
Operator
Ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to Paul McKinney for closing remarks.
Paul D. McKinney
Thank you very much. And on behalf of the management team and the Board of Directors, I want to thank everyone for listening and participating in our call today. We appreciate your continued support of the company and we look forward to keeping you appraised on our progress. Thank you again for your interest in Ring and have a great day and a great weekend.
Operator
Thank you, sir. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.
