Ring Energy, Inc. (AMEX:REI) Q3 2023 Earnings Call Transcript

Ring Energy, Inc. (AMEX:REI) Q3 2023 Earnings Call Transcript November 3, 2023

Operator: Good morning, and welcome to the Ring Energy Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] Please note today's event is being recorded. I would 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 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 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.

The sun rising over a sprawling network of oil & gas pipelines near Midland, Texas.

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 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 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. I would now like to turn the call over to Paul McKinney, our Chairman and CEO.

Paul 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 cash flow 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 CVP 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 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 two 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 three, 1.5 mile horizontal wells in its Central Basin platform, each with a working interest of 100%.

Additionally, in our Crane County acreage within the CBP, we drilled and completed three vertical wells, all with a working interest of 100%. Lastly, we drilled and began the completion process on three 1-mile horizontal wells in the Northwest Shelf each with a working interest of 90%. These three wells were completed and brought online in October, so we will benefit from over two 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 cash flow generation in 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 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 three weeks of downtime due to a tank battery fire that shut in oil natural gas and associated NGL sales at that battery. I am 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 cash flow during the quarter, which mark our 16th consecutive quarter or four straight years of generating positive adjusted free cash flow. $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 an accrual-basis we spent $42.4 million on capital projects during the third quarter, which was at the high end of our guidance 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 in place online 5 to 6 total wells during the period. We stepped up our spending program for these projects to help to ensure we deliver on our production guidance for the fourth quarter and set us up for good start for the New Year. We are 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 continue to generate significant returns for our stockholders.

Also consistent with the Delaware Basin asset sale, we used 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 30, were only $31 million higher than the end of second quarter. The $19 million difference reflects our net pay down of debt and as 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 the 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 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's a great reminder to save our paperclips 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 Q3, 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. Mexico. Realized pricing was $81.69 per barrel of crude, $0.36 per Mcf of natural gas and $11.22 per barrel of NGLs or $58.16 per Boe. This was 15% higher than the second quarter 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 a dollar 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 an increase of $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 the 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 three months of cost reduction during the fourth quarter. As a reminder, both the New Mexico and Delaware Basin assets had a higher lifting 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, cash G&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 was $11.4 million versus $10.6 million for the second quarter with the increase substantially due to a higher interest rate and one 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 have 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 have reported a net loss of $7.5 million or $0.04 per diluted share. Excluding the estimated after tax impact of pretax items, including $33.9 million for non-cash unrealized losses on hedges, $2.2 million for share-based compensation expenses and 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 in the second quarter of 2023. We look forward to growing our operating cash flows as we continue to execute on 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, and consistent 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've recognized that remaining focused on debt reduction is a key priority for the Company. This was evidenced by our pay down 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 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 leveraged 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 will 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 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 in production, reserves, adjusted free cash flow, and other key metrics. In addition, the two transactions further strengthened our balance sheet and accelerated our ability to pay down debt. They also increased our inventory of low risk, high rate of return drilling locations, and approved 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 of return drilling and recompletion 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, but 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 and 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?

Operator: [Operator Instructions] And our first question here will come from Jeff Grampp with Alliance Global Partners.

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