Continued to Generate Free Cash Flow, Reduce Debt & Increase Liquidity Position

Source: www.gulfoilandgas.com 11/9/2021, Location: North America

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

Highlights and Recent Key Items
- Sold 8,243 barrels of oil equivalent per day (“Boe/d”), or 758,387 barrels of oil equivalent (“Boe”) (87% oil), in the third quarter of 2021;
- Reported net income of $14.2 million, or $0.12 per diluted share, and Adjusted Net Income1 of $6.8 million, or $0.07 per share, in the third quarter of 2021;
- Generated Adjusted EBITDA1 of $19.7 million for the third quarter of 2021;
- Adjusted EBITDA for the nine months ended September 30, 2021 was $59.3 million;
- Delivered Net Cash Provided by Operating Activities of $17.5 million and Free Cash Flow1 of $2.6 million in the third quarter of 2021;
- Net Cash Provided by Operating Activities and Free Cash Flow for year-to-date September 30, 2021 totaled $49.5 million and $11.2 million, respectively;
- Paid down $5.5 million of debt on the Company’s revolving credit facility during the third quarter 2021;
- Reduced long-term debt by $18.0 million for the first nine months of 2021;
- Reduced interest expense by $2.0 million for the nine months ended September 30, 2021 when compared to the similar period in 2020;
- Reduced costly workovers and future operating costs by converting 10 wells from downhole electrical submersible pumps (”ESPs”) to rod pumps (“CTRs”) in the third quarter, including seven in the Northwest Shelf (“NWS”) and three in the Central Basin Platform (“CBP”);
- Performed 24 CTRs year-to-date September 30, 2021, including 18 in the NWS and six in the CBP;
- Successfully completed Ring’s Phase III drilling program of four wells (two in NWS and two in CBP) within budget in the third quarter;
- Contributed less than 1% of total net Boe sales volumes because the wells were brought online during the last three weeks of the quarter;
- However, to date the wells are realizing strong production results and exceeding expectations with all wells at 100% working interest; and
- Commenced Phase IV drilling program with one well in the NWS, which was brought online at the end of October, and one well in the CBP, which is expected to be online by the end of this year.

Mr. Paul D. McKinney, Chairman of the Board and Chief Executive Officer, commented, “We were pleased to once again generate free cash flow and strengthen our balance sheet through further debt reduction during the third quarter of 2021. While our production levels for the period were lower than anticipated due to certain events that we discuss later in this release, we were able to generate strong Adjusted EBITDA and operational cash flow through cost reduction initiatives primarily linked to our CTR program. Our strategic initiatives designed to drive increased operational excellence, complemented by our focus on investing in our highest rate-of-return opportunities, solidly positioned Ring for ongoing success as we close out the year and move into 2022.”

“We continue to benefit from our targeted 2021 drilling programs designed to not only mitigate the decline in our baseline production but also maximize long-term cash flow as we capitalize on the current higher commodity price environment,” continued Mr. McKinney. “We are very pleased with the results of our drilling programs and look forward to the additional production as we enter the new year when our 2021 lower-priced hedges roll off. As you know, our Phase III drilling program included two wells on our NWS acreage, as well as two CBP wells. These two CBP wells were the first to be drilled in over two years in that area and we are excited about the upside we continue to have on our legacy acreage. In October, our estimated Company net production averaged over 9,000 Boe/d. Our collective strategic efforts remain squarely focused on generating strong cash flows to further pay down debt while we continue to capitalize on the organic opportunities within our portfolio, divest non-strategic assets, and pursue potential accretive acquisitions that can strengthen our balance sheet.”

Financial Overview: For the third quarter of 2021, the Company reported net income of $14.2 million, or $0.12 per diluted share, which included adjustments of $8.2 million before tax for a non-cash unrealized commodity derivative gain and $0.8 million before tax for share-based compensation. Excluding the estimated after-tax impact of the adjustments, the Company’s Adjusted Net Income was $6.8 million, or $0.07 per share. In the second quarter of 2021, the Company reported a net loss of $15.9 million, or $0.16 per share, which included adjustments of $22.8 million before tax for a non-cash unrealized commodity derivative loss and $0.4 million before tax 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 third quarter of 2020, Ring reported a net loss of $2.0 million, or $0.03 per share, which included adjustments of $6.2 million before tax for a non-cash unrealized commodity derivative loss and $0.6 million before tax for share-based compensation. Excluding the estimated after-tax impact of these adjustments, Adjusted Net Income in the third quarter of 2020 was $3.4 million, or $0.05 per share.

Adjusted EBITDA was $19.7 million for the third quarter of 2021 versus $20.6 million in the second quarter of 2021 and $19.9 million in the third quarter of 2020. The slight decrease in Adjusted EBITDA compared to both prior periods was primarily due to lower oil sales volumes that were substantially offset by higher oil prices.

Free Cash Flow for the third quarter of 2021 was $2.6 million versus $5.6 million in the second quarter of 2021 primarily due to higher capital expenditures and lower sales volumes. Third quarter 2021 Free Cash Flow decreased $8.7 million from $11.3 million for the third quarter of 2020 primarily due to an increase in capital expenditures in 2021.

Adjusted Net Income, Adjusted EBITDA and Free Cash Flow are non-GAAP financial measures, which are described in more detail and reconciled to the most comparable GAAP measures, in the tables shown later in this release under “Non-GAAP Information.”

Sales Volumes, Prices and Revenues: Sales volumes for the third quarter of 2021 were 8,243 Boe/d (87% oil), or 758,387 Boe, compared to 8,709 Boe/d (89% oil), or 792,551 Boe, for the second quarter of 2021, and 9,549 Boe/d (89% oil), or 878,480 Boe, in the third quarter of 2020. Third quarter 2021 sales volumes were comprised of 659,247 barrels (“Bbls”) of oil and 594,841 thousand cubic feet (“Mcf”) of natural gas.

Sales volumes for the third quarter of 2021 were partially impacted by new well completion activities of the Company and an offset operator that temporarily reduced the production from a number of Ring’s higher producing wells. The production levels of these wells have recovered in the fourth quarter to normal levels. Additionally, the Company continued to experience lower natural gas sales due to certain third-party facility processing capacity constraints in both the CBP and the NWS areas. In the NWS, the plant restrictions also reduced oil sales due to higher pressures. Finally, the CTRs completed during the third quarter resulted in longer-than-anticipated downtime due to wells being cleaned out.

For the third quarter of 2021, the Company realized an average sales price of $69.61 per barrel of crude oil and $5.86 per Mcf for natural gas. The combined average realized sales price for the period was $65.11 per Boe, up 8% versus $60.26 per Boe for the second quarter of 2021, and up 82% from $35.82 per Boe in the third quarter of 2020. The average oil price differential the Company experienced from WTI NYMEX pricing in the third quarter of 2021 was a negative $1.05 per barrel of crude oil, while the average natural gas price differential from Henry Hub pricing was a positive $1.43 per Mcf.

Revenues were $49.4 million for the third quarter of 2021 compared to $47.8 million for the second quarter of 2021 and $31.5 million for the third quarter of 2020. The 3% increase in third quarter 2021 revenues from this year’s second quarter and the 57% improvement from the third quarter of 2020 were both driven by higher oil and natural gas prices and increased natural gas sales volumes that were partially offset by lower oil sales volumes.

Lease Operating Expense (“LOE”): LOE, which includes expense workovers and facilities maintenance, was $7.0 million, or $9.21 per Boe, in the third quarter of 2021 versus $7.4 million, or $9.37 per Boe, in the second quarter of 2021 and $7.8 million, or $8.90 per Boe, for the third quarter of 2020. Purchasing leased ESPs throughout the year has resulted in lower operating costs.

Gathering, Transportation and Processing (“GTP”) Costs: GTP costs, which are associated with natural gas sales, were $1.39 per Boe in the third quarter of 2021 versus $1.13 per Boe in the second quarter of 2021 and $1.20 per Boe in the third quarter of 2020. The increase in GTP costs was due to higher natural gas sales volumes.

Ad Valorem Taxes: Ad valorem taxes were $0.93 per Boe for the third quarter of 2021 compared to $0.89 per Boe in the second quarter of 2021 and $0.91 per Boe for the third quarter of 2020.

Production Taxes: Production taxes were $2.95 per Boe in the third quarter of 2021 compared to $2.77 per Boe in the second quarter of 2021 and $1.62 per Boe in third 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 $12.28 per Boe in the third quarter of 2021 versus $11.70 per Boe for the second quarter of 2021 and $12.32 per Boe in the third quarter of 2020. Asset retirement obligation accretion was $0.24 per Boe in the third quarter of 2021 compared to $0.23 per Boe for the second quarter of 2021 and $0.26 per Boe in the third quarter of 2020.

Operating Lease Expense: Operating lease expense was $83,589 for the third quarter of 2021 versus $84,790 for the second quarter of 2021 and $295,631 in the third 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 $3.7 million, or $4.82 per Boe, for the third quarter 2021 versus $3.4 million, or $4.30 per Boe, for the second quarter of 2021 and $1.9 million, or $2.20 per Boe, in the third quarter of 2020. Contributing to the year-over-year increase in third quarter G&A were higher insurance and legal costs, the hiring of additional accounting, engineering, land, and operations personnel, and relocation expenses.

Interest Expense: Interest expense was $3.6 million in the third quarter of 2021 versus $3.7 million for the second quarter 2021 and $4.5 million for the third quarter of 2020. Interest expense declined year-over-year due to a lower average daily balance of long-term debt and a lower margin rate for the three months ended September 30, 2021. The lower margin rate was associated with a reduced percentage utilization of the borrowing base.

Derivative (Loss) Gain: In the third quarter of 2021, Ring recorded a loss of $6.7 million on its commodity derivative contracts, including a realized $14.9 million cash commodity derivative loss and an unrealized $8.2 million non-cash commodity derivative gain. This compared to a net loss of $35.3 million in the second quarter of 2021, of which $22.8 million was unrealized, and a net loss of $4.5 million in the third quarter of 2020, of which $6.2 million was unrealized.

Income Tax: The Company recorded a non-cash income tax benefit of $48,701 in the third quarter 2021 versus an expense of $190,644 in the second quarter of 2021 and a benefit of $486,565 for the third quarter of 2020.

Balance Sheet and Liquidity: Total liquidity at the end of the third quarter of 2021 was $56.2 million, an increase of 9% from June 30, 2021. Liquidity consisted of cash and cash equivalents of $2.0 million and $54.2 million of availability under Ring’s revolving bank credit facility, which includes a reduction of $0.8 million for letters of credit. On September 30, 2021, the Company had $295.0 million in borrowings on its revolving credit facility that has a current borrowing base of $350.0 million. Ring paid down $5.5 million of debt during the third quarter of 2021, and $18.0 million for the nine months ended September 30, 2021. The Company is targeting further debt reduction during the fourth quarter of 2021 and full year 2022.

The next regularly scheduled bank redetermination is underway and expected to be completed during the fourth quarter. Ring is currently in compliance with all applicable covenants of its revolving credit facility agreement.

Capital Expenditures and Asset Transfers: During the third quarter of 2021, capital expenditures were $13.7 million as the Company drilled, completed and placed on production the four wells of its Phase III program (two wells in NWS and two wells in CBP, with all wells at 100% working interest) and also performed 10 CTR projects.

The Phase III program utilized two rigs and all wells were drilled and completed within budget. The wells in the NWS were 1.0-mile laterals and the wells in the CBP were 1.5-mile laterals. Upon successful completion of activities, the Company released the two rigs used for the Phase III program. To date, these wells are exceeding production expectations with all wells at 100% working interest.

In the second quarter of 2021, capital expenditures were $11.5 million, which included costs to drill, complete and place on production the three wells of the Company’s NWS Phase II program (with all wells at 74% working interest) and perform five CTR projects.

For the nine months ended September 30, 2021, capital expenditures were $39.7 million, which included costs to drill nine horizontal wells (seven in NWS and two in CBP), and complete and place on production 11 horizontal wells (nine in NWS and two in CBP). Two of the NWS wells completed in 2021 were drilled in 2020. Also included in year-to-date capital spending for 2021 were costs for 24 CTRs, as well as costs for capital workovers, infrastructure upgrades, land and other capital expenditures.

Commences Phase IV Drilling Program
In response to a continued improvement in crude oil prices, Ring has commenced its previously announced Phase IV program to drill two wells, including one in the NWS (1.0-mile lateral at approximately 75% working interest) and one in the CBP (1.5-mile lateral at 100% working interest). The NWS 1.0-mile lateral was placed on production at the end of October and is meeting expectations. The CBP 1.5-mile lateral well was successfully drilled in October, is awaiting completion, and is expected to be placed on production by the end of 2021.

Update on Sales Process for Delaware Basin Assets
As previously announced, Ring launched a sales process during the second quarter of 2021 to divest of its Delaware Basin assets. The Company continues to be in discussions with several interested parties and will provide further updates as definitive information is known. Ring anticipates using the net proceeds from the potential sale of its Delaware Basin assets to further reduce its debt.

Fourth Quarter 2021 Sales Volumes, Operating Expense and Capital Spending Guidance
The guidance in the table below represents the Company's current estimate of the range of fourth quarter of 2021 results. Guidance could be affected by the factors discussed below in the "Safe Harbor Statement" section.


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