Ring Energy Inc (REI) 2022 Q2 法說會逐字稿

Good day, and welcome to the Ring Energy Second Quarter 2022 Earnings Conference Call. (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 will begin our call with comments from Paul McKinney, our Chairman of the Board and CEO, who will provide an overview of key matters for the second quarter. 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 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 Vice President of Operations; and Steve Brooks, Executive VP of Land, Legal, Human Resources and Marketing.

During the Q&A session, we ask you to limit your questions to 1 and a follow-up. You're welcome to reenter the queue later with additional questions. I would also note that we have 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 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 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 5, 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, 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 a 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 11th 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 workover program.

Looking specifically at our drilling program. During the second quarter, we drilled 9 wells, completed 7 wells and began the completion process on 4 wells with all activity for the period focused on our Northwest Shelf acreage, leveraging our learnings from the last year, we remain 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 1-mile horizontal wells that were drilled in the first quarter and had a working interest of 100%. In addition, we drilled and completed 3 1-mile horizontal wells with a working interest of 100%, and 2 1.5-mile horizontal wells with a working interest of approximately 99%. We also drilled and began the completion process on an additional 4 1-mile horizontal wells. Two of the wells have a working interest of 100%; one had a working interest of 87.5%; and the 4 had a working interest of 75%.

During the second quarter, our lease operating expense as expressed on a per BOE basis was 13% lower than the first quarter of 2022 due to lower cost 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 downhole 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 performed 4 CTRs, including 3 in the North West Shelf and 1 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 4 additional wells that were placed on production in 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 leverage ratio to 2.1x, which was almost a full 1.5 turns 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 to the third quarter, we expect to drill 7 to 9 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 to 9,900 barrels of oil equivalent per day. In response to the strong performance we experienced in the second quarter and to date in the third quarter, we are increasing our full year sales volume guidance range to 9,300 to 9,700 barrels of oil equivalent per day from our previous guidance of 9,000 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 prices 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 interest in 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 of 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 roll, which averaged $2.60 per barrel in the second quarter and only $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 $1.81 per Mcf for the first quarter.

Contributing to the difference was a change in the agreement in 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 have 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 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 workover 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 1, 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 and 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, both 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 of 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 pretax items, including $12.2 million of noncash 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.

Excluding the estimated after-tax impact of pretax items, including $13.5 million for noncash 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 are pleased to pay down the facility by an 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 a 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 7 to 9 wells and complete and place on production 8 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 of 25 to 33 wells and complete 25 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 nonoperated 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 priced 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 1-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. Complementing 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's Central Basement Platform assets. We expect to close the acquisition later this month or early September. As you may recall, when we announced 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 1.5x despite adding debt. In comparison, we previously targeted 2x leverage ratio on a stand-alone basis at the end of this year. This improvement in leverage ratio is due to the improved capital efficiency and higher free cash flow 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 complements our existing footprint of a conventional focused Central Basin platform and Northwest Shelf assets. Our operating team has extensive experience operating stacked pay, multizone 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 4 banks that underwrote the financing, Truist Securities, Citizens Bank, KeyBanc 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 2 Warburg directors to our Board and look forward to working together.

With respect to the 4 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 the 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 in support of our value-focused and proven strategy.

And with that, I will turn the call back to the operator, and we look forward to answering your questions. Operator?

(Operator Instructions) Our first question today comes from Jeffrey Campbell with Alliance Global Partners.

Congratulations again on the Stronghold acquisition. I wanted to ask you for your overview on the services and materials costs for the second half of 2022. Ring seems to be making some of the upward revisions to their cost that we hear about from peers. Yet Slide 10 of the presentation shows that your D&C costs have risen versus prior periods. So my overall impression is that perhaps you built inflationary pressures into your forecast and modeled more accurately than some peers, but I wanted to get your comment.

Yes. 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 the 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're -- 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 in 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 recompletions inventory, because they're both pretty large inventories. I'm wondering if we should think of the new wells as more aligned with potential production growth and with the workovers targeted more for managing declining rates.

Yes, 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 recompletion, the production volumes that you get after completing the recompletion are generally less than drilling new wells. Do you want to add any more color to that, Marinos? .

Sure. Another thing 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 it's coming 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. I look forward to more color on things like AURs and costs and so forth once you close the acquisition.

The next question comes from Noel Parks with Tuohy Brothers.

I guess I was wondering, could you talk a bit about the sort of the status of just your rig outlook 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 detail with the Stronghold assets, spending more time with the Stronghold team because they know them so well.

And so with respect to adding another rig or the absolute capital spending levels, we haven't decided that, and that's the primary reason why we said we're going to wait until after we close the transaction before we announce our guidance for the fourth quarter.

Great. And I guess the other thing -- maybe could you just touch again on the GTP costs, and if 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 will -- everything will just be reflected in the realized price then.

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

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

Paul, with respect to your comments about Warburg Pincus, does their ownership stake of 34% and 2 directors or 2 Board seats, does that suggest that they think they can get a lot more value longer term from their investment in Stronghold through Ring equity upside? And then secondly, are their shares covered by a standard registration rights agreement?

All are good questions. And I'm not going to speak on behalf of Warburg Pincus. But yes, that's my assumption, that the reason why they were willing to accept. So it's 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 of sale agreement that was included in our announcement in the table of content, as you can see in there, 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 yes, that registration rights agreement, as you know, stipulates our support and assistance associated with any future transactions or sale of the stock.

So my observation of Warburg Pincus with other similar transactions is they tend to hold on to their stock, and they tend to work with the management team to create additional value. They have a long history of doing that. And so yes, 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. So as a second question, you talked about the pro forma free cash flow capacity of Ring in 2021 -- I'm sorry, 2022 and '23. And you mentioned the notion of share -- or 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, yes. 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 make any kind of restricted payments. But the facility that we'll 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 stockholders in the future. And that's part of the reason why we've put these mechanisms into the future and the credit facility we'll have upon closing. And -- but I'm not going to say what that will be at this point. I think it's a little premature. It 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 that we actually do that.

Did I answer your question on that?

Yes, you did.

(Operator Instructions) The next question comes from Neal Dingmann with Truist Securities.

Paul, my first question is just on the Stronghold. Might be a little early, again, obviously, the deal hasn't closed. But I'm just wondering, I think on the M&A call, you had mentioned at least, I know they hadn't had a rig there towards the end, and I don't -- I think their 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 the deal when you all look at capital allocation, do you anticipate either this year or early next year, allocating some D&C funds there? Or how should we think about just the allocation for the second half of this year and going in and net.

Yes. I'm going to give you my two cents, but I'm going to let a couple of others here chime in. 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 D&C 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 the 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 so -- but to say that we won't allocate D&C 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 D&C. 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'll actually drill. That's kind of where we're at right now, again, evaluating everything in that regard.

Got it. No, great detail, Paul. And then just a follow-up. I'm not asking, I know it's too early yet for '23 guide, but I'm just wondering when you all kind of look now how the year-over-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 you 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 sort of broader how you're thinking about sort of exit the year and starting next year and broad we think about the activity at all? .

Yes. And we're willing to talk about broad terms. I mean 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 it was included in the analysis 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 wouldn't take that fourth quarter and multiple it times 4x, 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, everything is caveated on what future prices are and all that kind of stuff. But the portfolio really does provide an opportunity to optimize. It broadens our inventory of really high rate of return, low breakeven cost opportunities. And so capital spending will be less than if you were to take those fourth quarter estimates and multiply them by 4.

Could we be that high? Perhaps as a function of -- if oil prices rebound to continue moving at higher levels, 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 remarks.

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

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