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Ring Energy Second Quarter 2021 Results

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   |    Monday,August 23,2021

Ring Energy, Inc. reported operational and financial results for the second quarter 2021.

In addition, the Company announced drilling plans for the second half of 2021 that include three or more wells in each of Ring’s Northwest Shelf and the Central Basin Platform areas.

Highlights and Recent Key Items:

  • Sold 8,709 Boe/d, or 792,551 BOE (89% oil), in the second quarter of 2021, up 11% from the first quarter of 2021;
  • Reported a net loss of $15.9 million, or $0.16 per share, and Adjusted Net Income1 of $7.3 million, or $0.07 per share, in the second quarter of 2021;
  • Generated Adjusted EBITDA1 of $20.6 million for the second quarter of 2021;
    • Adjusted EBITDA for the first half of 2021 totaled $39.6 million;
  • Produced Net Cash Provided by Operating Activities of $16.3 million and Free Cash Flow1 of $5.6 million in the second quarter of 2021;
    • Net Cash Provided by Operating Activities and Free Cash Flow for the first six months of 2021 totaled $32.0 million and $8.6 million, respectively;
  • Further reduced debt on the Company’s revolving credit facility by $5.0 million during the second quarter 2021;
    • Reduced long-term debt by $12.5 million in the first half of 2021;   
  • Successfully reaffirmed Ring’s borrowing base at $350 million, while easing the minimum required oil hedges for calendar 2022;
  • Reduced future operating costs and costly workovers through the conversion of five wells from downhole electrical submersible pumps to rod pumps (“CTRs”) in the second quarter, including four in the NWS and one in the CBP;
    • Performed 14 CTRs in the first six months of 2021, including 11 in the NWS and three in the CBP;
  • Drilled, completed and placed on production all three Phase II wells (all in NWS and 74% working interest) by early June, on schedule and within budget. Production results to date are meeting or exceeding expectations;
  • Exchanged calendar 2021 calls for calendar 2022 swaps, thereby increasing the opportunity for near-term cash flow which will be used to accelerate debt repayment; and
  • In response to a higher crude oil price environment, the Company initiated a four-well Phase III drilling program in early August that will be followed by a Phase IV drilling program of two or more additional wells to begin early in the fourth quarter.

Mr. Paul D. McKinney, Chairman of the Board and Chief Executive Officer, commented, “We were pleased with our overall results for the second quarter, including another period of generating free cash flow and further paying down long-term debt. Supporting our second quarter and 2021 year-to-date performance was a continued emphasis on driving operational efficiencies and the ongoing benefits afforded from our successful development program. Our targeted efforts have generated $39.6 million in Adjusted EBITDA in the first half of 2021, which allowed us to invest $26.0 million in capital expenditures and pay down $12.5 million in debt. Partially offsetting our solid results for the second quarter were certain unanticipated third-party facility processing and pipeline capacity constraints that affected our natural gas sales volumes. We also had lightning strike-related damage to several of our facilities in late May and early June that impacted oil sales volumes for the period, with repairs completed and related production brought back online by mid-July.”

“During the second quarter, all three wells included in our Phase II drilling program were placed online, within budget, and we have been pleased with their production results to date. When considering these results and that the economic returns of our Phase I and Phase II wells are being improved by current commodity prices, the Company approved an increase to its original drilling plans for the rest of the year. We picked up two rigs last week and initiated the drilling of the first two wells of a four-well Phase III drilling program. We intend to follow up these four wells with an additional two or more wells early in the fourth quarter, all of which target high rate-of-return drilling prospects in our NWS and CBP acreage. We anticipate the payback on invested capital in these wells to be approximately one year or less, which places us in a strong position as we enter 2022.”     

“Supported by our strategic development efforts as an operator with proven expertise at lowering costs and increasing production efficiencies, we believe Ring is positioned for continued success. We also remain encouraged by the M&A prospects we are seeing in the marketplace and continue to actively evaluate potential accretive transactions that can add value for our shareholders. Over the longer term, we believe the ongoing successful execution of our internal and external efforts will continue to further differentiate Ring in the marketplace.”

Q2 Financials

For the second quarter of 2021, the Company reported a net loss of $15.9 million, or $0.16 per share, which included before tax adjustments of $22.8 million for a non-cash unrealized commodity derivative loss and $0.4 million for share-based compensation. Excluding the estimated after-tax impact of the adjustments, the Company’s Adjusted Net Income was $7.3 million, or $0.07 per share. In the first quarter of 2021, the Company reported a net loss of $19.1 million, or $0.19 per share, which included before tax adjustments of $25.7 million for a non-cash unrealized commodity derivative loss and $0.4 million for share-based compensation. Excluding the estimated after-tax impact of these adjustments, the Company’s Adjusted Net Income was $7.0 million, or $0.07 per share. In the second quarter of 2020, Ring reported a net loss of $135.0 million, or $1.99 per share, which included before tax adjustments of $147.9 million for a non-cash ceiling test impairment primarily due to lower oil pricing, $26.8 million for a non-cash unrealized commodity derivative loss and $1.3 million for share-based compensation. Excluding the estimated after-tax impact of these adjustments, Adjusted Net Income in the second quarter of 2020 was $1.5 million, or $0.02 per share.

Adjusted EBITDA increased to $20.6 million for the second quarter of 2021 from $19.0 million in the first quarter of 2021 and $13.7 million in the second quarter of 2020. The increase in Adjusted EBITDA compared to both prior periods was primarily due to higher oil prices and sales volumes.

Free Cash Flow for the second quarter of 2021 increased to $5.6 million from $2.9 million in the first quarter of 2021 due to higher oil prices and sales volumes and lower capital expenditures. Second quarter 2021 Free Cash Flow decreased $2.2 million compared to $7.8 million for the second quarter of 2020 primarily driven by higher capital expenditures in 2021. 

Sales Volumes, Prices and Revenues: Sales volumes for the second quarter of 2021 were 8,709 Boe/d (89% oil), or 792,551 Boe, an increase of 11% compared to 7,960 Boe/d (85% oil), or 716,422 Boe, for the first quarter of 2021, and an increase of 59% compared to 5,487 Boe/d (86% oil), or 499,333 Boe, in the second quarter of 2020. Second quarter 2021 sales volumes were comprised of 702,408 barrels (“Bbls”) of oil and 540,857 thousand cubic feet (“Mcf”) of natural gas.

Sales volumes for the second quarter of 2021 were positively impacted by the Company’s successful NWS Phase I and Phase II development programs. Partially offsetting the overall increase, a significant portion of the Company’s CBP gas sales volumes were reduced by the unexpected and ongoing disruption associated with the previously announced third-party gas processing facilities damaged during the February winter storm. Also impacting the second quarter was lower-than-anticipated NWS natural gas sales due to third-party upgrades to its processing facility and pipeline constraints that began in May and have continued into the third quarter. Lastly, the Company incurred additional deferred production in May and June due to lightning strikes that damaged Company equipment at two tank batteries. Repairs were completed and the associated production was brought back online in the middle of July.

Ring expects second half 2021 sales of 8,700 to 9,200 Boe/d (7,700 to 8,100 Bopd). Assuming the successful completion and timing of the Company’s Phase III and Phase IV drilling programs, Ring expects to exit 2021 with sales volumes in excess of the high-end of second half guidance.

For the second quarter of 2021, the Company realized an average sales price of $65.00 per barrel for crude oil and $3.90 per Mcf for natural gas. The combined average realized sales price for the period was $60.26 per Boe, up 9% versus $55.14 per Boe for the first quarter of 2021, and up 183% from $21.30 per Boe in the second quarter of 2020. The average price differential the Company experienced from WTI posting2 price in the second quarter of 2021 was approximately ($0.99) per barrel of crude oil.

Revenues were $47.8 million for the second quarter of 2021 compared to $39.5 million for the first quarter of 2021 and $10.6 million for the second quarter of 2020. The 21% increase in second quarter 2021 revenues from this year’s first quarter and the 350% improvement from the second quarter of 2020 were both driven by higher oil sales volumes and improved oil prices.

Lease Operating Expense (“LOE”): LOE, which includes expense workovers and facilities maintenance, was $7.4 million, or $9.37 per Boe, in the second quarter of 2021 versus $8.2 million, or $11.48 per Boe, in the first quarter of 2021 and $5.6 million, or $11.31 per Boe, for the second quarter of 2020.

Gathering, Transportation and Processing (“GTP”) Costs: GTP costs were $1.13 per Boe in the second quarter of 2021 versus $1.31 per Boe in the first quarter of 2021 and $1.25 per Boe in the second quarter of 2020.

Ad Valorem Taxes: Ad valorem taxes were $0.89 per Boe for the second quarter of 2021 compared to $1.03 per Boe in the first quarter of 2021 and $1.60 per Boe for the second quarter of 2020.

Production Taxes: Production taxes were $2.77 per Boe in the second quarter of 2021 compared to $2.59 per Boe in the first quarter of 2021 and $0.87 per Boe in second quarter of 2020. Production taxes remained steady at 4-5% of revenue for all three periods.

Depreciation, Depletion and Amortization (“DD&A”) and Asset Retirement Obligation Accretion: DD&A was $11.70 per Boe in the second quarter of 2021 versus $11.32 per Boe for the first quarter of 2021 and $14.70 in the second quarter of 2020. The lower second quarter 2021 depletion rate compared with the same period in 2020 was primarily the result of the ceiling test write-down during 2020. Asset retirement obligation accretion was $0.23 per Boe in the second quarter of 2021 compared to $0.27 per Boe for the first quarter of 2021 and $0.46 per Boe in the second quarter of 2020.

Operating Lease Expense:   Operating lease expense was $84,790 for the second quarter of 2021 versus $271,517 for the first quarter of 2021 and $292,207 in the second quarter of 2020. These expenses are primarily associated with the Company’s office leases.

General and Administrative Expenses (“G&A”): G&A, excluding share-based compensation, was $3.4 million, or $4.30 per Boe, for the second quarter 2021 versus $2.6 million, or $3.57 per Boe, for the first quarter of 2021 and $2.9 million, or $5.73 per Boe, in the second quarter of 2020.

Derivative (Loss) Gain: In the second quarter of 2021, Ring recorded a loss of $35.3 million on its commodity derivative contracts, including a realized $12.5 million cash commodity derivative loss and an unrealized $22.8 million non-cash commodity derivative loss, largely due to higher quarter-end oil prices compared to first quarter of 2021. This compared to a net loss of $31.6 million in the first quarter of 2021, of which $25.7 million was unrealized, and a net loss of $13.0 million in the second quarter of 2020, of which $26.8 million was unrealized.

In the second quarter of 2021, Ring added the following derivative positions:

In addition to adding the above derivative position, the Company bought back a 1,500 Bbl/d call option for June 1 through December 31, 2021, in the second quarter of 2021. A full listing of the Company’s current outstanding derivative positions is included in the tables shown later in this release.

Interest Expense: Interest expense was $3.7 million in both the second and first quarters of 2021 and $4.3 million for the second quarter of 2020. Interest expense declined year-over-year due to a $72.3 million lower average daily balance of long-term debt and a lower margin rate for the three months ended June 30, 2021. The lower margin rate was associated with a reduced percentage utilization of the borrowing base.

Income Tax: The Company recorded a non-cash income tax provision of $190,644 in the second quarter of 2021 and $39.1 million for the second quarter of 2020. There was no non-cash income tax benefit or provision recorded in the first quarter of 2021. The large tax benefit in the second quarter of 2020 was primarily related to the ceiling test write-down during that period.

Balance Sheet and Liquidity: Total liquidity at the end of the second quarter of 2021 was $51.4 million, an increase of 13% from March 31, 2021. Liquidity consisted of cash and cash equivalents of $2.7 million and $48.7 million of availability under Ring’s revolving bank credit facility, which includes a reduction of $0.8 million for letters of credit. On June 30, 2021, the Company had $300.5 million in borrowings on its revolving credit facility. Ring paid down $5.0 million of debt during the second quarter of 2021, and is targeting further debt reduction during the balance of 2021.

On June 10, 2021, Ring announced the successful results of the spring redetermination of its revolving credit facility, including:

  • Reaffirmation of the borrowing base at $350 million;
  • Easing of the minimum required oil hedges for calendar 2022 from 4,000 Bbls/d to 3,100 Bbls/d, which is fully covered by oil hedges currently in place; and
  • Enhanced price optionality and opportunity for higher forecasted 2021 cash flow generation.

The next regularly scheduled bank redetermination will be on or around November 1, 2021, and Ring is currently in compliance with all applicable covenants of its revolving credit facility agreement.

Capital Expenditures and Asset Transfers: During the second quarter of 2021, capital expenditures were $11.5 million as the Company drilled, completed and placed on production the three wells of its NWS Phase II program and also performed five CTR projects. In the first quarter of 2021, capital expenditures were $14.5 million, which included costs to finish drilling, completing and placing on production the four wells of its NWS Phase I program and perform nine CTR projects. During the first quarter of 2021, Ring also received net value consideration in cash of $2.0 million for the sale and exchange of certain oil and gas interests in Andrews County, Texas.

2H21 Phase III and Phase IV Drilling Programs

In response to a higher crude oil price environment, Ring recently contracted two rigs and commenced a Phase III drilling program of four wells, including two in the NWS and two in the CBP (all 100% working interest). Ring will retain one rig to commence a Phase IV drilling program of two or more wells in the NWS and CBP areas, beginning early in the fourth quarter. The wells in the NWS are expected to be one-mile laterals while the ones in the CBP are expected to be 1.5-mile laterals.  

2H21 Capital Investment Program

Incorporating the Company’s expanded drilling plans designed to capitalize on a higher crude oil price environment, Ring anticipates capital spending for the second half of 2021 of $30 million to $35 million, which includes the estimated cost to drill and complete six to eight horizontal wells. The capital spending outlook includes targeted well reactivations, workovers, infrastructure upgrades, lease costs and continuing the successful CTR program in its NWS and CBP areas. Capital expenditures are expected to be fully funded by cash on hand and cash from operations, with excess free cash flow allocated to debt reduction.     

As previously announced, Ring launched a sales process during the second quarter of 2021 to divest of its Delaware Basin assets. The Company anticipates using the net proceeds from the potential sale to further reduce its debt position.

2H21 Guidance


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