Q3 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.
Jeffrey Scott Grampp; Senior Research Analyst; Alliance Global Partners, 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 Third Quarter 2023 Earnings Conference Call. (Operator Instructions) 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'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 third quarter and our outlook. We'll then turn the call over to Travis Thomas, Ring's Executive VP and Chief Financial Officer, who will review our financial results. Paul then will 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 of Engineering and Corporate Strategy; Marinos Baghdati, Executive VP of Operations; and Steve Brooks, Executive VP of Land, Legal, Human Resources, and Marketing.
I would also note that we have posted a third 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.
Finally, the company can give no assurance that such forward-looking statements were proved 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 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 on the GAAP are contained in yesterday's earnings release.
Finally, as a reminder, this conference is being recorded. I would now like to turn the call over to Paul McKinney, our Chairman and CEO.
Paul D. McKinney
Thanks, Al, and welcome everyone joining us today, and thank you for your interest in Ring Energy. It is amazing how conditions can change from one quarter to the next. Realized oil prices improved considerably in the third quarter, setting us up for record-tying financial results, despite several unanticipated downtime events affecting our sales. Overall, we are reporting another great quarter and are encouraged by the positive mood and outlook we see in the industry today.
As we discussed on our second quarter earnings call, our efforts for the third quarter of 2023 were squarely focused on successfully closing the Founders Acquisition and making significant progress on the integration of their operations into our business. In addition, we continue the targeted execution of our 2023 development program. Next, we remain diligent in our efforts to drive cost efficiencies throughout our business. And finally, we continued to generate solid free cashflow that was used to further pay down our debt balance exclusive of funding the Founders Acquisition.
Addressing the details of the quarter, first, we completed the final due diligence for the Founders Acquisition and closed on the acquisition on the agreed to timeline. In addition, our plans remain on track, integrating the Founders assets into our existing operations. We remain excited about the opportunities afforded by the acquisition and look forward to beginning our development efforts on the acreage in the early part of next year.
As a reminder, 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.
During the third quarter, we continued our successful 2023 development program with the drilling and the completion of 2 1-mile horizontal wells in the Northwest Shelf, one with a working interest of 100% and the other with a working interest of 75%, and 3 1.5-mile horizontal wells in the Central Basin Platform, each with a working interest of 100%.
Additionally, in our Crane County acreage within the CBP, we drilled and completed 3 vertical wells, all with a working interest of 100%. Lastly, we drilled and began the completion process on 3 1-mile horizontal wells in the Northwest Shelf, each with a working interest of 90%. These 3 wells were completed and brought online in October, so we will benefit from over 2 months of production from these wells in the fourth quarter while the substantial majority of the drilling and completion capital was incurred during the third quarter.
Our third quarter 2023 was highlighted by continued strong cashflow generation, including $58.6 million of adjusted EBITDA that was 10% higher than the second quarter and also tied the record we posted in this year's first quarter, contributing to the sequential increase in adjusted EBITDA with higher realized pricing and sales volumes for all products.
During the third quarter, we sold 17,509 barrels of oil equivalent per day, which was an increase from the second quarter of 2023, but it felt short of our expectations. While our sales benefited from the August 15th closing of the Founders Acquisition as planned, several unanticipated and temporary downtime events at certain third-party natural gas processing facilities affected our natural gas and NGL sales.
Additionally, we incurred 3 weeks of downtime due to a tank battery fire that shut in oil, natural gas, and associated NGL sales at that battery. I'm happy to report that the production is back up to expected levels as evidenced by our third quarter exit rate, which was in excess of 19,000 barrels of oil equivalent per day. This places us in a solid position to achieve our fourth quarter sales volumes guidance of 18,900 to 19,500 barrels of oil equivalent per day that we will discuss in more detail later.
We generated $6.1 million of adjusted free cashflow during the quarter, which marked our 16th consecutive quarter or 4 straight years of generating positive adjusted free cashflow. $6.5 million decrease from the second quarter was driven by increased capital spending of $10.8 million and $800,000 of higher cash interest expense that was materially offset by adjusted EBITDA of $5.1 million.
On accrual basis, we spent $42.4 million on capital projects during the third quarter, which was at the high end of our guidance range of $37 million to $42 million. Driving our higher spending was an increased well level activity compared to the guidance we provided in early August. During the third quarter, we drilled 8 horizontal wells and 3 vertical wells and completed and placed online 8 total wells.
As a reminder, our guidance was to drill 5 to 7 horizontal wells and 1 to 2 vertical wells and complete and place online 5 to 6 total wells during the period. We stepped up our spending program for these products to help ensure we deliver on our production guidance for the fourth quarter and set us up for a good start for the new year.
We were pleased to complete the sale of our non-core operated New Mexico assets to a private buyer on September 27th for net proceeds of $3.8 million.
Consistent with the sale of our non-core Delaware Basin assets that closed in the second quarter, the New Mexico asset sale emphasizes our focus on building and developing our core operating position in the Northwest Shelf and the Central Basin Platform in Texas that continues to generate significant returns for our stockholders.
Also consistent with the Delaware Basin asset sale, we use the net proceeds from the New Mexico asset sale to further pay down debt. On that point, while we borrowed the initial $50 million from our credit facility to fund the third quarter cash outlay for the Founders Acquisition, our borrowings outstanding at September 30th were only $31 million higher than the end of the second quarter. The $19 million difference reflects our net paydown of debt and is another clear example of our commitment to improving our balance sheet, increasing liquidity, and better position the company for long-term success.
Before turning this over to Travis, I'd like to discuss our updated outlook for the rest of the year. We anticipate a continued positive pricing environment benefiting from previously mentioned 5 wells coming online early in the quarter and a full quarter of production from the wells associated with the Founders Acquisition.
We are now targeting total capital spending of between $35 million to $40 million in the fourth quarter due to increased drilling and completion activity. This brings our full year capital spending program to $148 million to $153 million. Our fourth quarter development program is focused on a balanced and capital efficient combination of drilling 3 to 4 horizontal wells and 2 to 3 vertical wells, as well as completing and placing online 8 to 10 wells.
Additionally, our capital spending program includes funds for targeted capital workovers, infrastructure upgrades, leasing costs, and non-operated drilling completion and capital workovers. A primary assumption that underpins our capital spending plans is that WTI oil prices will range between $65 and $85 per barrel.
As in the past, we have designed our spending program with flexibility to respond to the changes in commodity prices and other market conditions. We continue to expect fourth quarter sales volumes of 18,900 to 19,500 barrels of oil equivalent per day, despite the reduced volumes from the New Mexico asset sale and additional volumes expected from the stepped up capital spending program. We anticipate 69% of fourth quarter sales to be oil. Additionally, our third quarter production exit rate of over 19,000 barrels of oil equivalent per day increases our confidence in our fourth quarter outlook.
So with that, I will turn the call over to Travis to discuss our financial results in more detail. Travis.
Travis T. Thomas
Thanks, Paul. And good morning, everyone. Overall, we had a great quarter with record-tying EBITDA. Technically, there was less than a $5,000 variance. So it was a great reminder to save our paper clips and make every penny count. Our realized oil price was up $9 from the second quarter. So that gave us the license to resume capital projects and LOE workovers that were deferred last quarter. This catch up work contributed to our higher LOE and CapEx spend in the third quarter of 2023.
Of course, the scheduling of getting the production back online was a bit tricky. So along with the gas takeaway issues and the fire that Paul mentioned, we were a bit lower on volumes compared to the forecast. But with record EBITDA and the knowledge that these deferred volumes were back online at a higher price environment, we are very pleased with the results.
So let's dive into the numbers. During the third quarter, we sold approximately 1.1 million barrels of oil, 1.6 Bcf natural gas, and 243,000 barrels of NGLs for a total of 1.6 million BOE or 17,509 Boe per day. Realized pricing was $81.69 per barrel of crude, $0.36 per Mcf natural gas, $11.22 per barrel of NGLs, or $58.16 per Boe. This was 15% higher than the second quarter of 2023 of $50.49 per Boe.
Our third quarter average crude oil price differential from NYMEX WTI futures pricing was a negative $0.78 per barrel versus a negative $1.77 per barrel for the second quarter, almost $1 improvement for those without a calculator. This was mostly due to the Argus WTI, WTS that increased $0.91 per barrel and the Argus CMA roll that increased $0.21 per barrel on average from the second quarter.
Our average natural gas price differential from NYMEX futures pricing for the third quarter was a negative $2.45 per Mcf compared to a negative $3.07 per Mcf for the second quarter. Our realized NGL price for the third quarter averaged 16% of WTI compared to 13% for the second quarter. The combined result was revenue for the third quarter 2023 of $93.7 million, which was up $14.3 million or an 18% increase in the second quarter.
LOE was $18 million versus $15.9 million for the second quarter. On a per Boe basis, LOE for the third quarter was $11.18 versus $10.14 per Boe for the second quarter. LOE per Boe for the third quarter of 2023 was slightly above the guidance of $10.50 to $11 per Boe primarily due to lower sales volumes related to the unanticipated and temporary downtime previously discussed.
Contributing to the sequential increase in absolute LOE from the second quarter, increased due to a higher well count from the Founders Acquisition and higher expense workover activity, including projects deferred from the second quarter. Partially offsetting the overall increase in sequential quarterly absolute LOE for the third quarter was a sale of our non-core Delaware Basin assets during the second quarter.
Keep in mind, the disposition of our non-core operated New Mexico assets had minimal impact on the third quarter LOE given the transaction closing date of September 27th. As such, we look forward to seeing a full 3 months of cost reduction during the fourth quarter.
As a reminder, both the New Mexico and Delaware Basin assets had a higher listing cost profile than our core properties. Production taxes were $4.8 million or $2.95 per Boe versus $4 million or $2.55 per Boe for the second quarter with the tax rate remaining steady at approximately 5%. DD&A was $22 million compared to $20.8 million for the second quarter. On a per Boe basis, DD&A sequentially increased from $13.65 from $13.23 per Boe.
SG&A, which excludes share-based compensation, was $3.05 per Boe versus $2.89 per Boe for the second quarter of 2023. Excluding transaction-related costs, SG&A was $3.15 per Boe for the third quarter versus $2.75 per Boe for the second quarter and $3.85 per Boe for the third quarter of 2022, an 18% decrease year-over-year.
Interest expense is $11.4 million versus $10.6 million for the second quarter with the increase substantially due to a higher interest rate and 1 additional day in the period. I would also note that interest expense includes about $400,000 per month in non-cash amortization.
Due to the sharp increase in oil prices since June 30th, which is a good thing, our third quarter loss on derivative contracts was $39.2 million compared to a $3.3 million gain in the second quarter of 2023. We recorded an income tax benefit of $3.4 million versus a benefit of $6.4 million in the second quarter. As a reminder, a significant driver in the level of our second quarter tax benefit was the release of the valuation allowance during the period.
During the third quarter, we reported a net loss of $7.5 million or $0.04 per diluted share. Excluding the estimated after-tax impact of pre-tax items, including $33.9 million for non-cash unrealized losses on hedges, $2.2 million for share-based compensation expense, and an approximate reduction of approximately $200,000 in transaction costs.
Our third quarter 2023 adjusted net income was $26.3 million or $0.13 per diluted share. This is compared to the second quarter 2023 net income of $28.8 million or $0.15 per diluted share, and second quarter 2023 adjusted net income of $28 million or $0.14 per diluted share.
Turning to cash flow metrics, as Paul discussed, we generated another record level of quarterly adjusted EBITDA and a 10% increase from the second quarter of 2023. We look forward to growing our operating cash flows as we continue to execute our 2023 development program and further investment initiatives to grow our business.
As Paul discussed, we received $3.8 million in net proceeds for the sale of our non-core operated New Mexico assets that inconsistent with the recent disposition of our Delaware assets was used to further pay down debt. While our debt position increased as a result of the closing of the Founders Acquisition, we recognize the remaining focused on debt reduction is a key priority for the company. This was evidenced by our paydown of $19 million, excluding the third quarter borrowings for the Founders Acquisition of $50 million.
As a result, on September 30th, we had $428 million drawn on our credit facility. With a current borrowing base of $600 million, we had $171.2 million available net of letters of credit. Combined with cash, we have liquidity of $171.4 million and a leverage ratio of 1.69x. I would like to note that excluding the estimated $11.9 million, net deferred payment due next month for the Founders transaction, our leverage ratio was 1.64x.
Essentially, we were leverage neutral for the quarter with all of the increase due to the deferred payment. As we discussed previously, while the Founders Acquisition added debt to our balance sheet in the near term, we believe we are better positioned to pay down debt more quickly over the long term. Of course, realized commodity prices, the timing and level of capital spending, and other considerations impact the cadence of quarterly debt pay down.
Moving to our hedge position, for the fourth quarter of 2023, we currently have approximately 593,000 barrels of oil hedged, or approximately 49% of our estimated oil sales based on the midpoint of guidance. We also have 518 million cubic feet of natural gas hedged, or 31% of our estimated natural gas sales based on the midpoint. For a quarterly breakout of our hedge positions, please see our earnings release and presentations, which include 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. We believe our strategic acquisitions over the past year have placed us in a stronger position to take the company to new heights, given the accretive -- the highly accretive attributes of the collective transactions, including per share growth and production, reserves, adjusted free cash flow, and other key metrics.
In addition, the 2 transactions further strengthen our balance sheet and accelerate our ability to pay down debt. They also increase our inventory of low-risk, high-rate return drilling locations and improved our capital allocation flexibility. With respect to the fourth quarter of 2023, we are squarely focused on the efficient integration of the assets from the Founders Acquisition and the successful completion of our 2023 capital spending program.
Complementing these efforts is our ongoing focus on reducing operating costs, with the primary goal of maximizing our free cash flow generation to pay down debt. We will remain disciplined by prioritizing our capital spending on high-rate return drilling and re-completion projects. We believe targeting excess free cash flow to pay down debt will drive long-term value for our stockholders.
Speaking of improving value for our stockholders, we are disappointed with our lagging stock price performance when compared to our peers. We are delivering competitive and oftentimes peer-leading returns, yet our stock price has not reflected that performance. We are continuing to investigate what we believe to be the potential causes, and we will address those potential causes within our control.
Wrapping up, and as I have 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 prepares the company to manage the risks and uncertainties associated with our industry and should generate sustainable and competitive returns to our stockholders.
We believe we are well-positioned for the fourth quarter in 2024 with the continued pricing environment, production benefits from our recent acquisitions, and the continued success of our capital spending program. We also believe 2024 will be a strong year for shareholders.
With that, we will turn this call over to the operator for questions. Operator?
Question and Answer Session
Operator
(Operator Instructions) And our first question here will come from Jeff Grampp with Alliance Global.
Jeffrey Scott Grampp
On the downtime events that impacted production in the quarter, do you guys have any kind of ballpark estimate for what that curtailment was and at the risk of maybe being too greedy if you could break it out by the exposure on the processing plants versus the fire?
Paul D. McKinney
Yes, I'll go ahead and begin this, but then I'll turn it over to Marinos. He knows the details far better than I do. But a little over 50% of the downtime events were associated with these gas processing and compression facilities. And then the fire itself, I don't really remember the percentage, but it was pretty substantial. It was --
Marinos Christos Baghdati
25%.
Paul D. McKinney
Yes, so it was 25%. Why don't you go ahead and address this a little more specifically?
Marinos Christos Baghdati
Yes, the total overall volume was about, again, these are estimated numbers because they're not sales. They're based on our production volumes. But about 600 Boes a day, about 130 of that was from the prior.
Paul D. McKinney
That's 600 Boe a day is for the quarter, correct?
Marinos Christos Baghdati
For the quarter, yes. Equivalent for the quarter. Thank you, Paul. So we tuned it up to by about 92 days, yes. So about 130 of that was for the battery fire, and then 330 to 350 of that was for the gas plant. And then we had a couple of other weather-related. We didn't mention in the call, but that's basically the breakdown.
Jeffrey Scott Grampp
And for my follow-up, I know you guys haven't put out a '24 guide yet, so you're certainly not trying to front-run things here, but just looking at the Q4 numbers, that CapEx range that you guys provided, is it fair to think that that's kind of a run-rate maintenance number relative to that Q4 guide, or how might you guys edit that kind of commentary, or I guess just ultimately trying to think about a good maintenance CapEx number for you guys looking ahead?
Paul D. McKinney
Yes. And so that's a good question. We are currently evaluating various different capital spending levels for 2024 and trying to understand the merits and consequences associated with those different capital spending levels. Let me reiterate a couple of things that I've said oftentimes, and I know I sound like a broken record, but we are squarely focused on reducing our debt. And so -- and we know that the rate of debt paydown is a direct function of product prices and our capital spending levels, and so that's the reason why we're looking at these capital spending levels.
But I think that the capital spending levels that we are forecasting for the fourth quarter are pretty close to, might be a little higher than what is necessary for true maintenance, but because as we fell short on our production in recent times, and so that's part of the reason why we stepped up our capital spending to try to make up for that. But I think that, yes, our true maintenance capital spending levels are probably just a little less than what our fourth quarter capital guidance is, but it's close to that.
Marinos Christos Baghdati
And Paul, if I may say one more thing too, the 35 million to 40 million includes some facility upgrades in terms of ESG-related things that are not necessarily tied to maintenance but tied to us becoming a better operator in terms of emissions, and et cetera.
Paul D. McKinney
Yes. And on that note, I'm just going to take this opportunity to kind of expand on that. We take our responsibility as a publicly traded company and an oil company very seriously with regard to ESG, primarily associated with these emissions and also preventing spills.
We're probably spending more capital as a company, as a public company, for our size than many others out there, just because we're that focused on not only meeting, but just getting ahead of the requirements that we believe are coming our way. When we look at the things that the EPA are doing and other organizations, the pressure they're placing on our industry. I don't believe our industry can afford to not step up in this regard.
And so we're spending a little bit more capital on projects like that that really go unseen, but we believe that in future sustainability reports, as we disclose our emissions, people will recognize the benefits associated with what we're doing.
Jeffrey Scott Grampp
Yes. Agreed. And appreciate the insight, guys. Thanks for the time.
Operator
Our next question here will come from Neal Dingmann with Truist.
Neal David Dingmann
Paul, a question for you, really, I was just wondering now with the Founders rolled in, could you just talk about, you guys have done a great job of recent deals of sort of what I would call wetting or combining operations, and then continue to see more efficiencies as a result. And I'm just wondering now with Founders tucked in, could you talk about how we might see incremental efficiencies now from the D&C side, given the combination?
Paul D. McKinney
Yes, very good. Again, I'm going to address it initially, then I'll turn it over to Marinos. And then actually, I think Alex might want to chime in as well, but we're very excited about the Founders Acquisition. The very first thing we recognized when we made that acquisition that we believe that there are significant improvements in reducing operating costs that are associated with getting a better handle on water handling and disposal. And so we have been spending quite a bit of time in that regard, since we've acquired the assets.
We are excited about the progress we're making. And once we finish some of those investments, change the way the water is handled and reduce those operating costs, we will be prepared to launch our drilling campaigns out there. We believe that the economics of the associated drilling on the Founders are very competitive. Matter of fact, some of them are equal to our very best investments that we have in our inventory. And so you'll see that we will be spending money there once we get a handle on the operations. Any more you want to share, Marinos?
Marinos Christos Baghdati
No, Paul. One thing, Neal, on the drilling and completion costs in general, the last quarter we have seen a pretty good reduction in completion costs, specifically the frac companies, and in casing costs. We've actually procured all the casing that we think we'll need for the first quarter, and it's about half the price of what we paid the same time last year, procuring casing for our first quarter of 2023. So those are benefits that I think we're going to see throughout the entire company, not just the Founders assets, and that we're excited about that. So that kind of goes into answering the maintenance question from earlier on too, that's a moving number because of the benefits that we're seeing on the cost right now.
Alexander Dyes
Yes. And, Neal, let me add one more thing. This is Alex. So, again, as we bring this asset in, we found some low-hanging fruit by just lowering some pumps. So we've arrested part of the decline on the asset. We'll continue doing that, going into 2024. So that's one thing, just the blocking and tackling as we bring in the asset.
The other thing is as we also optimize the infrastructure and start deploying some of the capital for next year, if you reference Slide 19, it shows you on a relative basis what the investment type that Paul was talking about. You can see how Founders investments versus some of our other investments in CBP verticals really brings on a lot more oil, so higher oil content, meaning like over 90% oil per well. So you should be able to see that in 2024.
Neal David Dingmann
Great details, guys. And then, Paul, maybe for you or Travis, just a question on going forward. I've got, looks like if prices remain stable and your operations continue to be as efficient as we think, it looks like free cash flow could continue to ramp quite nicely. You have mentioned in prepared remarks, so I know debt's always a priority. Maybe just talk about how you think about debt versus more accretive deals versus maybe shareholder return.
Paul D. McKinney
Yes, very good. And this is the classic question that we get all the time. I get shareholders that send us e-mails with their opinions and all this. And so, yes, just in general, debt is not our friend. Our interest expense is considerably higher than our G&A expense. And so, during times of high interest rates like we're experiencing, it behooves any company to reduce their debt. So, that's the reason why we're focused on it.
So, now with respect to taking on more debt, we would be willing to take on more debt through an acquisition of some kind, but it still has to be balance sheet improving. So, in other words, the ratio of the collateral backing up that debt has to improve versus the debt. And we have to buy these properties if we're going to pursue them in an accretive manner. And so, yes, I am willing to take on more debt, but it will reduce the leverage ratio and actually strengthen the balance sheet by doing so if we were to occur or pursue something in that regard. Travis, is there more you want to say?
Travis T. Thomas
No, just taking it a step further, but not too far, getting into the shareholder return look, we're always looking at the cost of capital on that as well. And the question does often come up, would you guys consider any sort of share buybacks or when are dividends coming? And those are things we look at: Where's our dollar best spent? Is it for paying down debt? Is it share buybacks? Is it dividends? And those are just things we're constantly looking at and evaluating and giving the right opportunities and thinking anything's really on the table. But for now, I think it's still a focus on debt.
Paul D. McKinney
Yes, just a little bit more. If we were to do a stock buyback today, that would take proceeds away from paying down debt. So, essentially, you're adding debt to buy stock back. And don't forget, you don't get additional real barrels of production. So, if you use those funds or proceeds to credibly buy assets, you get the production and cash flow to help pay that down. So we're all about acquisitions, but our focus on acquisitions up to now has been clearly that the result of that would be totally accretive on as many metrics as you can. You strengthen your leverage ratio, but at the same time, the future cash flow from those assets has to accelerate our ability to pay down debt.
And we've been successful in being able to do that. As you see, our ability to pay down debt has increased over time, and we believe it's going to continue. And, of course, that's also dependent on energy prices. But from the overall health of the company, remaining focused on these debt-adjusted per share metrics is the only way you're ever going to dig your way out and grow the company and profitability for your shareholder.
Neal David Dingmann
Yes. Paul, I think you and Travis nailed that. I think it's cost of capital, and it's going to be great. You're going to have a ramp in amount of free cash to decide what to do with. So, thanks, guys.
Operator
(Operator Instructions) Our next question will come from Noel Parks with Tuohy.
Noel Augustus Parks
So, we seem to be entering one of these stages where we sort of have increased macro uncertainty, geopolitical side also has added some new wild cards recently. And I think that the company is generally having been pretty proactive in down cycles as far as just getting real judicious with reactivity. I'm just thinking, with your horizontal inventory and also the vertical inventory now, are there different prices if, say, we did have a pullback into next year, just where it might be easier to keep vertical activity going and shift capital there instead of some of the horizontals? Or is the differential we get to return just not enough to really make a difference?
Paul D. McKinney
Yes. I mean, if you look back in our history in the last 12 months, you can see that when prices were lower earlier this year and exiting last year, we actually did curtail some of our capital spending program. As I alluded to earlier our budget plans are with the mindset that oil prices will remain between $65 and $85. If you fall below $65, and even as you approach $65, we will tighten up the capital spending requirements. We will only focus on those that have the absolute best returns. And so we do have a mix. We do have some vertical wells that compete with our horizontal wells.
Typically in the past, our best returning investments were the horizontal wells, especially those in the Northwest Shelf. But now with the Founders, some of those vertical wells will compete handsomely with that. And so rest assured, we will focus in a low price environment. We will continue to be active, but we will focus on those highest return aspects because our strategy going forward until our debt is down to well below a leverage ratio of 1, we're going to be focused on maximizing the free cash flow generation from those investments. So that's just the way to go. Did I answer your question, Noel?
Noel Augustus Parks
Absolutely. Absolutely. And just my other one is service cost environment certainly sounds encouraging as far as the year-over-year changes in services and materials. And I was just thinking about, again, with sort of if we have more volatility in the system of prices. Do you have a sense that in your region that with the other operators, is everyone's activity level fairly stable right now, or would you say it's either trending higher or lower one direction or the other these days?
Paul D. McKinney
And I talked to quite a few CEOs, I think all of us are of a very similar mindset right now. We're very disciplined in our capital spend. Everyone is focused on real returns to the shareholder. So if it wasn't for our debt and perhaps our size and scale, we would be delivering some kind of a real return either through a stock buyback or through dividends or something.
But everybody is focused on disciplined capital spending. That's the reason why even though we're at historically on the higher end of energy prices, you're not seeing the rig rates increase because everybody is focused on discipline. And I don't know of another CEO that'll tell you anything different than what I'm telling you. They're focusing their capital on the highest rate of return opportunities they have. And they're focused on real returns to their shareholders. And you can't go wild with your capital spending in that kind of environment.
So everybody's disciplined. And this is also part of the reason why we're seeing a pullback in some of the costs and the availability of many of the services we depend on for drilling and completing our wells.
It's good that natural gas prices fell in Europe, which allowed a lot of the steel manufacturers to go back to making steel, which reduced the demand for the steel here and other areas. And so, yes, I think that the discipline is the primary cause for now the pullback that we've seen or the slight pullback in some of the costs associated with drilling and completing our wells.
Operator
And this concludes our question-and-answer session. I'd like to turn the conference back over to Paul McKinney for any closing remarks.
Paul D. McKinney
Thank you, Joe. And on behalf of the management team and the Board of Directors, I want to thank everyone for listening and participating in today's call. We appreciate your continued support of the company, and we look forward to keeping everyone appraised of our progress. Thank you again for your interest in Ring and have a great day and have a great weekend.
Operator
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.
