Ring Energy, Inc. (REI) Q2 2022 Earnings Report, Transcript and Summary

Good day, and welcome to the Ring Energy Second Quarter 2022 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Al Petrie, Investor Relations for Ring Energy. Please go ahead.

Thank you, operator, and good morning, everyone. We'll begin our call with comments from Paul McKinney, our Chairman of the Board and CEO, who will provide an overview of key matters for the second quarter. We will then turn the call over to Travis Thomas, Ring's 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 up for questions. Also joining us on the call today and available for the Q&A session are, Alex Dyes, Executive Vice President of Engineering and Corporate Strategy; Marinos Baghdati, Executive VP of Operations; and Steve Brooks, Executive VP of Land, Legal, Human Resources and Marketing. [Operator instructions] I'd also note that we've posted a Q2 2022 earnings corporate presentation to 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 intentions or obligations 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 under GAAP are contained in our earnings release issued yesterday. Finally, as a reminder, this conference call is being recorded. I would now like to turn the call over to Paul McKinney, our Chairman and CEO.

Thanks Al. And welcome, everyone and thank you for your interest in Ring Energy. We appreciate you joining us today to discuss our recent results and outlook for the rest of the year. As you know, on July 05, we announced, we had entered into a definitive agreement to acquire the assets of privately held Stronghold Energy. The operations are focused on the development of 37,000 net acres in the Permian Basin's Central Basin platform, where we also conduct operations. Before we get into a discussion about the pending transaction, we want to share with you the results of our very successful second quarter. Our second quarter results are direct reflection of our ability to execute on our value-focused proven strategy. During the quarter, we benefited from strong performance of our drilling and completion program, our continued focus on operating cost control and significantly higher realized oil and natural gas prices. The result was record-setting sales revenue and adjusted EBITDA. Adjusted EBITDA increased 33% when compared to this year's first quarter. In fact, we have already generated nearly as much adjusted EBITDA in the first half of 2022, as we did in all of 2021. We also posted another quarter of free cash flow generation, our eleventh consecutive quarter and reduced debt by an additional $10 million. Our posted sales volumes for the quarter were 9,341 barrels of oil equivalent per day, which was over 5% higher than the first quarter and at the higher end of our guidance range. As I said earlier, driving our higher end performance was a continued success of our 2022 drilling program, as well as our capital work-over program. Looking specifically at our drilling program, during the second quarter, we drilled nine wells, completed seven wells and began the completion process on four wells, with all activity for the period focus on our Northwest shelf acreage. Leveraging our learnings from the last year, we remained squarely focused on the geology, selecting the best landing zones and improving our completion methods. Two of the wells completed in the second quarter were one mile horizontal wells that were drilled in the first quarter and had a working interest of a 100%. In addition, we drilled and completed three, one mile horizontal wells with a work in interest of a 100% and two, one and a half mile horizontal wells with a working interest of approximately 99%. We also drilled and began the completion process on an additional four, one mile horizontal wells. Two of the wells have a working interest of a 100%, one had the working interest of 87.5% and the fourth has a working interest of 75%. During the second quarter, our lease operating expense is expressed on a per BOE basis were 13% lower than the first quarter of 2022 due to lower costs and higher production. We attribute the lower cost to the efforts of our operating team and their focus on driving efficiencies in our operations. As you know, we have continued to execute on our program to convert wells from down hole electrical submersible pumps to rod pumps, a capital workover program we call CTRs. This program leads to longer economic lives of the wells, improves the ultimate recovery of oil and gas reserves and has been a significant contributor to reducing our total cost of operations. As we look to the future, we have achieved our goal of optimizing artificial lift on our existing wells, and we will be performing fewer CTRs. During the second quarter, we perform four CTRs, including three in the Northwest shelf in one in the Central Basin platform. With respect to our capital spending, we spent $41.8 million during the quarter and exceeded our second quarter guidance of $34 million to $36 million. The variance was primarily due to accelerated completion activities on the four additional wells that were placed on production in the early July. Our full year capital spending guidance of $120 million to $140 million remains unchanged. We have simply changed the timing and pace of spending this quarter as a result of the efficient execution of our drilling and completion program. We look forward to our continued efforts in this regard during the second half of 2022, as we drive additional efficiencies to increase production. The combined result of our efforts to date has been free cash flow generation that was used to reduce our debt and further strengthen our balance sheet. During the first half of 2022, we paid down $20 million in debt and lowered our lever ratio to $2.1 times, which was almost a full ton and a half lower than where we stood at year end 2021. We ended the second quarter with $81.5 million of liquidity, which was approximately 33% higher than at the end of 2021 and a 58% increase from the same time last year. Looking into the third quarter, we expect to drill seven to nine wells while completing and placing on production 8 to 10 wells and expect sales volumes to be higher than the second quarter and range between 9,500 barrels to 9,900 barrels of oil equivalent per day. In response to the strong performance we experience in the second quarter and to date in the third quarter, we are increasing our full year sales volume guidance range to 9,300 barrels to 9,700 barrels of all equivalent per day from our previous guidance of 9,000 barrels to 9,600 barrels of oil equivalent per day. With respect to the fourth quarter, we intend to provide more insight after we close the pending stronghold acquisition. We believe there is a great opportunity to take advantage of the improved capital efficiency of the combined portfolio to meet or exceed our production growth goals for less capital. Having said all of this, we will continue to retain the ability to adjust our drilling and other capital spending programs to reflect any material changes in commodity prizes if necessary. So with that, I will turn it over to Travis to discuss our financial results in more detail. Travis?

Thanks, Paul and good morning, everyone. We appreciate your participation on today's call and your interest and Ring Energy. As in the past, my comments today will primarily focus on our financial position and sequential quarterly results. For a detailed discussion concerning comparisons to last year's second quarter, please see our press release and 10-Q we filed yesterday with the SEC. During the second quarter of 2022, we sold 729,000 barrels of oil and 723,000 MCF of natural gas for a total of 850,000 BOE. This is compared to sales of 676,000 barrels of oil and 732,000 MCF, natural gas or a total of 798,000 BOE for the first quarter of 2022. Second quarter realized pricing was $109.24 per barrel and $7.29 per MCF or $99.95 per BOE. During the first quarter, we had a realized pricing of $93.80 per barrel and $6.49 per MCF or $85.41 per BOE. Our second quarter average oil price differential from NYMEX WTI was a positive $0.81 per barrel versus a negative $0.90 per barrel for the first quarter of 2022. This difference is mostly attributed to the Argus CMA role, which averaged $2.60 per barrel in the second quarter and only a $1.01 per barrel in the first. Our natural gas price differential from Henry Hub for the second quarter was a negative $0.23 per MCF, compared to a positive differential of a $1.81 per MCF for the first quarter. Contributing to the difference was a change in the agreement and how we account for gathering, transportation and processing or GTP costs, which I will discuss shortly. Our second quarter natural gas price differential adjusted for the new contract and including estimated GTP cost would've been a negative $1.14 per MCF. The combined result was a record quarterly revenues of $85 million that were 25% higher than first quarter 2022 revenues of $68.2 million. Looking at the more significant expense line items on the income statement, LOE was $8.3 million or $9.77 cents per BOE, which was below the low end of our guidance range, compared to $9 million or $11.22 per BOE for the first quarter of 2022. Primarily contributing to the decrease was a lower level of work over expense in the second quarter. GTP costs were 500,000 versus $1.3 million in the first quarter of 2022. Due to a contractual change effective May 01, we no longer maintain ownership and control of the natural gas through processing. As a result, GTP costs moving forward will be reflected as a reduction to the natural gas sales price, and not as an expense line item. As such for modeling purposes for the third quarter at moving forward, the gas price deduct should be used in lieu of the GTP expense. Production taxes were $4.2 million versus $3.2 million for the first quarter. The tax rate remaining steady at a little less than 5%. DD&A was $10.7 million compared to $9.8 million for the first quarter, but substantially unchanged on a BOE basis. Cash G&A, which excludes share-based compensation was $3.9 million versus $4 million for the first quarter 2022. The first quarter included additional accounting tax and legal fees associated with filing the 2021 10-K. Interest expense was $3.3 million versus $3.4 million for the first quarter with the decrease substantially due to a lower average daily borrowing balance on our RBL. During the second quarter, we posted net income of $41.9 million or $0.32 per diluted share. Excluding the estimated after tax impact of pre-tax items, including $12.2 million of non-cash unrealized gain on hedges and $1.9 million for share-based compensation expense, our second quarter adjusted net income was $31.3 million or $0.29 per share. This is compared to the first quarter of 2022 net income of $7.1 million or $0.06 per diluted share and excluding the estimated after-tax impact of pre-tax items, including $13.5 million for non-cash unrealized losses on hedges, and $1.5 million for share-based compensation expense, our first quarter adjusted net income was $22.3 million or $0.22 per share. As of June 30, we had $270 million drawn on our revolving line of credit and liquidity of $81.5 million, including $2.2 million of cash and $79.2 million available on the revolver, which reflects a reduction of $800,000 for letters of credit. We're pleased to pay down the facility by additional $10 million in the second quarter, and look forward to further debt reduction during the remainder of 2022. As I mentioned on our last quarterly call in April, a total of $6.5 million of our common warrants were exercised at a price of $0.80 per warrant. Accordingly, our second quarter results reflect the issuance of $6.5 million shares of common stock and the receipt of $5.2 million of cash. There are currently approximately $23 million common warrants that remain unexercised. Turning now to the outlook; for the third quarter of 2022, we are targeting sales volumes of 9,500 to 9,900 BOE per day with the midpoint of our guidance representing at 4% increase from the second quarter and more fully reflects the benefit of the continuous drilling program we initiated in late January. As Paul discussed, we expect to drill seven to nine wells and complete and place on production eight to 10 wells during the third quarter. We also expect LOE of $10.25 to $11.50 per BOE. As noted in the earnings press release, GTP costs moving forward will be reflected as a reduction to the natural gas sales price and not an expense line item. We are increasing our full year 2022 sales volume outlook to 9,300 to 9,700 BOE per day. We continue to anticipate total capital spending of $120 million to $140 million for full year of 2022, which includes the estimated cost to drill 25 wells to 33 wells and complete 25 wells to 30 wells. Our full year capital spending outlook includes targeted well reactivations, workovers, infrastructure upgrades, and continuing our successful CTR program in the Northwest shelf and Central Basin platform. Also included is anticipated spending for leasing, contractual drilling obligations and non-operated drilling completion and capital workovers. As Paul noted, our 2022 capital spending program assumes a favorable commodity pricing environment. If prices were to pull back materially, we had the flexibility to reduce capital spending as necessary. For full year 2022 we anticipate LOE of $10.25 to $11.25 per BOE. In terms of our hedge position, as we have mentioned more than a few times before, the roll off of the majority of our lower price hedges occurred at the beginning of the year. The benefit has been clearly evident in our year-to-date financial results. In late June and during July, we added our hedge position to secure strong pricing levels in support of our acquisition of Stronghold CBP assets. We utilized put options with an average strike price of $100.90 in 2022 and $90.64 in 2023, We will continue to pursue a proactive hedging strategy that supports our ongoing capital investment strategies to help protect our cash flow generation and remove some of the pricing volatility that some of you might have noticed in the market recently. I will now turn it back to Paul for his closing comments before we answer any questions. Paul?

Thank you, Travis. As you have heard, our second quarter results demonstrate the benefits of our decision to transition to a continuous One Rig drilling program supported by stronger realized prices for oil and natural gas. We expect production and operating cash flow will continue to grow throughout the remainder of 2022 assuming the existing price environment continues. Complimenting these efforts are our ongoing initiatives to drive further efficiencies in our operating cost structure. Before I turn the call over to questions, I would like to discuss the merits of the pending acquisition of Stronghold Central Basin platform assets. We expect to close the acquisition later this month or early September. As you may recall, when we announce this deal, the company's production after adding these assets will almost double and the stronghold production will further diversify our commodity mix. The transaction will be immediately accretive to cash flow per share, free cash flow per share, as well as production and reserves per share and it will improve our leverage ratio and ability to pay down debt. The inventory of investment opportunities included in this acquisition will also provide increased optionality and capital efficiency on multiple fronts. So what do I mean when I say increased capital efficiency? It means that the opportunities contained in the combined portfolio can achieve the same production growth for fewer dollars, which will allow us to allocate excess cash from operations to more quickly pay down debt and ultimately return capital to our stockholders through cash dividends or stock repurchases. To illustrate this point, our leverage ratio at the end of 2022, as a result of this transaction is expected to be approximately 1.5 times, despite adding debt. In comparison, we previously targeted two times leverage ratio on a standalone basis at the end of this year. This improvement in leverage ratio is due to the improved capital efficiency and higher free capital generation of the combined assets, which as I said earlier, will allow us to pay down debt at a faster pace both this year and next while continuing to invest and grow production assuming current pricing. The transaction truly compliments our existing footprint of conventional focus, central basin platform and Northwest shelf assets. Our operating team has extensive experience operating stack pay multi-zone vertical assets from the earliest parts of their careers. We look forward to further revitalizing an area we know so well with modern drilling and completion technologies. We also look forward to welcoming the Stronghold operating team to Ring. We also want to discuss the merits of partnering with Warburg Pincus and the four banks that underwrote the financing; Truist Securities, Citizens Bank, KeyBank and Mizuho Bank. As you know, the owners of Stronghold have agreed to take a significant amount of Ring equity as part of this transaction. We believe their ownership should encourage our existing stockholders because of Warburg's long history of creating value with similar transactions. We also welcome the addition of two Warburg directors to our board and look forward to working together. With respect to the four banks, they chose to underwrite this transaction because of their knowledge of the assets and the strength of the portfolio. The credit facility will provide new benefits to our stockholders, including the ability to pay dividends and buy back stock in the future under certain conditions. As you may know, our existing credit facility does not allow us to do this. To sum things up, we are very excited about the future and the many opportunities that lie ahead. Once we close a Stronghold transaction, we will be a bigger and stronger company with more alternatives for creating value for our stockholders. We will remain focused on the fundamentals of keeping our costs low and allocating our capital to projects that deliver the highest returns and support of our value focused and proving strategy. And with that, I will turn the call back to the operator and we look forward to answering your questions. Operator?

We will now begin the question-and-answer session. [Operator instructions] Our first question today comes from Jeffrey Campbell - Alliance Global Partners. Please go ahead.

Good morning, Paul and congratulations again on the Stronghold acquisition. I wanted to ask you for your overview on the services and materials cost for the second half of 2022. Ring seemed to be making some of the upper revisions to their costs that we hear about from peers yet. Slide 10 of the presentation shows that your DNC costs have risen versus prior periods. So my overall impression is that perhaps you built inflationary pressures into your forecast and model more accurately than some peers, but I wanted to get your comment.

Yeah. thank you, Jeff for that, and yes you're right. We did try to factor in rising prices at the time we looked back at history and saw how prices for several of the goods and services that we employ had over 2021. And so as we budgeted for this year, we did extrapolate out a similar projection of increased costs. And so, so far in my opinion, anyway, we've knocking on wood here. We've been fairly accurate. Costs are still coming up, but they're still in line with what we had originally projected from the beginning of the year.

Okay, great. And for my second one, thinking about producing more and spending less that you referred to in your remarks, so I just wondered if you could provide some color regarding productivity expectations between the stronghold new well inventory versus the recompletion inventory, because they're both pretty large inventories. Wondering if we should think of the new wells as more aligned with potential production growth and with the workovers targeted more for managing decline rates.

Yeah, I'm going to turn that question over to Marinos, but I think that's a good assumption. The new wells do bring on more production. The recompletions do tend to maintain because they with each repletion, the production volume that you get after completing the repletion are generally less and drilling new wells. Do you want to add any more color to that Marino?

Sure. Another thing that that adds to the equation is the fact that the cycle times between our assets and the Stronghold assets. It's less capital being spent, but the production gets online a lot sooner. So that's another big part of what creates the capital efficiencies with the combination of the assets compared to we're bringing in less production with those new wells, but because the it's coming on online so much faster, we're just going to have to evaluate the combined assets and get a better feel for things, once we get our good -- our hands on the properties.

Okay, great. And I appreciate that. Yeah. I look forward to more color on things like URS and costs and so forth once you close the acquisition. Thank you.

The next question comes from Noel Parks with Tuohy Brothers. Please go ahead. Noel park. Your line is open.

Oh, hi. Good morning. Can you hear me okay?

Yes, we can.

Great. I just was wondering, could you talk a bit about the sort of the status of just your rig outlook with the with the stronghold properties combined. I'm just wondering as far as what in combination you think you will have for contracts going forward?

Well at this stage right now, we haven't decided to make any changes to our existing program going forward. And I don't know if we got into a lot of the details about the Stronghold team earlier this year, the Stronghold team was running a rig. We are looking at the virtues of picking up a rig in that area but like I said, we have not decided on exactly what we're going to do in the fourth quarter, because we really want to spend more time getting into the details with the with the Stronghold assets spending more time with the Stronghold team because they know them so well. And so with respect to adding other rig or the absolute capital spending levels, we haven't decided that. And that's the primary reason why we've said we were going to wait until after we close the transaction before we announce our guidance for the fourth quarter.

Great. Thanks. And I guess the other thing maybe could you just touch again on the GTP costs and you could just kind of review that. I think I got most of it, but that expense line I guess, is going to be going away and then it'll everything will just be reflected in the realized price then?

This is Travis. That's correct. You've got a little background noise there as well. Going forward, because they are taking control of the gas of the wellhead because the ASC 606, just an accounting difference. So we will be netting that out of the realized gas price. So going forward, you will see the differential will change on the gas but we will not have that line item under the expenses going forward.

Okay. Okay, great. Thanks a lot.

The next question comes from Jeff Robertson with Water Tower Research. Please go ahead.

Thank you. Good morning. Paul, with respect to your comments about Warburg Pincus, does their ownership stake of 34% and two directors here two board seats, does that suggest that they think they can get a lot more value longer term from their investment in Stronghold through Ring and equity upside? And then secondly, are there shares covered by a standard registration rights agreement?

Those are good questions and I'm not going to speak on behalf of Warburg Pincus, but yeah, that's my assumption that the reason why they were willing to accept such a large amount of the total consideration is in Ring equity, is that they do believe that they can create more value with the combined assets. And so to answer your second question, yes, they are. If you go back to the purchase and sale agreement that was included in our announcement in the table of contents, you can see in there's a form of a registration rights agreement. The majority of those terms have been negotiated, but that will be signed and executed at the point of closing on the property. And so, yeah, that registration rights agreement, as you know stipulates our support and assistance associated with any future transactions or sale of the stock. My observation of Warburg Pincus with other similar transactions that they tend to hold on to their stock and they tend to work with the management teams to create additional value. They have a long history of doing that and so, yeah, that's my perspective. Did I answer your question, Jeff?

Yes, you did. I know they've held some of the companies they've been involved with they've been involved for years. And so as a second question, you talked about the pro forma free cash flow capacity of Ring in 2021, I'm sorry, 2022 and 2023 and you mentioned a notion of a share or a capital return to shareholders. Is there a leverage ratio that you need to get to, or you want to get to before you would even realistically consider that?

Well yeah. So if you look at the new credit facility that we'll have in place, as we've mentioned the current credit facility doesn't allow us to, to make any kind of restricted payments. But the facility that we will have in place upon closing does allow us to do that now. I believe the earliest that we could ever get to the point of actually paying a dividend or a stock buyback would be 12 months after I'm not committing that. That's when we would do that. But the marketplace has been very loud and clear to the oil and gas industry and investors in the oil and gas industry really want to have a real return. And it is our intention to provide real returns to our, our stockholders in the future. And that's part of the reason why we've you know, put these mechanisms into the future in the credit facility we'll have upon closing. And but I'm not going to say what that will be at this point. And I think it's a little premature and depends on all kinds of things, market conditions, prices, our stock price and all that kind of stuff. What is the best opportunity for our shareholders? And we'll make that decision closer to the time than we actually, we actually do that. Did I answer your question on that? Yes.

Yes, you did. Thanks for taking my questions.

No, you're welcome.

[Operator instructions] The next question comes from Neal Dingmann with Truist Securities. Please go ahead.

Paul, my first questions just on the Stronghold might be a little early, again, obviously deal hasn't closed, but I'm just wondering, I think on the M&A call you'd mentioned, at least I know they hadn't had a rig there towards the end and I think the comment was maybe not putting a rig there initially. Is that sort of still the thought I'm just wondering again, I guess, overall, I'm just thinking, , when you all look at capital allocation, do you anticipate either this year, early next year allocating, some B&T funds there, or how should we think about just the allocation for the second half this year and going in next?

Yeah, I'm going to give you my two cents, but I'm going to let the couple of others here chime in. I've no -- that would not be a good assumption. I look at the opportunities in their portfolio. Many of their opportunities are every bit as economic as ours. So we will be allocating some DNC capital to the Stronghold assets because they're just that strong. We just, haven't been willing to commit to say at this point when we will do that. I don't think it's out of the question to believe that we could pick up a rig in the fourth quarter. Right now we are looking at our capital spending program comparing that to the opportunity that are in those Stronghold portfolio. From my perspective and I'll reiterate my strategy or our strategy as a company. We have not liked the leverage that we've been carrying on our balance sheet, and we believe that with the combined portfolio and the increased capital efficiency of that portfolio we can actually achieve the same production growth for less dollars. And so we want to apply those dollars to reducing debt and we want to get, and the goal is to build a fortress balance sheet and but to say that we won't allocate DNC capital to those assets. No, that's not the case. I think that it's more probable that we will. Marinos, do you have anything else you want to add?

No, I agree 100% Paul. We're talking about DNC, we're planning on it as of right now. I think the questions are like Paul said, when we will start and how many wells we we'll actually drill that, that's kind of where we're at right now, again, evaluating everything in that regard.

Got it. No, great. I love the details, Paul, and then just to follow up, not asking, I know it's too early yet for '23 guide, but I'm just wondering when, when you all kind of look now how your year potentially is going to wind down and the next year start, could you talk about maybe when you think about '23, again, just very broad terms, what you might -- what it might look at from activity wise, maybe hedging and then maybe lastly service costs, any thoughts on, again, you guys, as somebody mentioned earlier, and I would agree, I don't think you guys have as much pressure as some others out there. So again, I'm not looking certainly for any sort of '23 guide, but just broader how you're thinking about sort X in the year and starting next year and broad terms you think about the activity though.

Yeah. And, we're willing to talk about broad terms. If you look at the materials we released at the time that we announced this acquisition we took the capital spending profile of the of ring. And then we combined it with a capital profile that we had assumed, or was included in the analysis of, of the of the stronghold assets. And I think that the capital spending that, that information suggested for the fourth quarter probably would be high if you don't, I, I wouldn't take that fourth quarter and multiply that times four times, assuming that that's what we're going to spend next year. We believe that we can optimize our capital spending spend less money than that, and then still deliver or meet the growth expectations that our shareholders have and also the debt repayment plans. And so I think that going into the next year again is everything's caveated on what, you know, future prices are and all that kind of stuff. But the portfolio really does provide an opportunity to optimize it, it broadens our, our inventory of really high rate return low break even cost opportunities. And so capital spending will be less than if you were to take those fourth quarter estimates and multiply them by four. Could we be that high per perhaps as a function of all prices are rebound and continue moving at higher levels we would, we would balance the issues associated with growth and paying down debt and preparing ourselves to actually deliver real returns to our shareholders.

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

Thank you, Betsy. And so thank you all for joining us today. As we said a little earlier, we're very excited about what the future hold, especially after we complete the pending transaction with Stronghold. And so we look forward to continue to work hard for you guys, and we look forward to hearing from you again, joining us on the next call.

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