Agreement for Ring Energy to Purchase Stronghold's Permian Basin Assets

Source: 7/5/2022, Location: North America

Stronghold Energy II Operating, LLC and Stronghold Energy II Royalties, LP, two privately held companies ("Stronghold"), have announced that Ring Energy, Inc. (REI) ("Ring") has entered into an agreement to purchase their assets (the "Transaction"). Stronghold's operations are largely based in Crane County, Texas, and are dedicated to the development of about 37,000 net acres on the Central Basin Platform (or "CBP") of the Permian Basin. Leading growth investor Warburg Pincus, LLC, owns a majority of Stronghold ("Warburg Pincus").

Consideration for the Transaction, subject to customary closing adjustments, consists of:
- $200.0 million in cash at closing;
- $15.0 million deferred cash payment due six months after closing;
- $20.0 million of existing Stronghold hedge liability; and
- $230.0 million in Ring equity based on a 20-day volume weighted average price (“VWAP”) of $3.60 per common share as of June 30, 2022, all of which will be issued to the owners of Stronghold.

The cash portion of the consideration will be funded primarily from borrowings under a fully committed revolving credit facility (the “Credit Facility”) to be underwritten by Truist Securities, Citizens Bank, N.A., KeyBanc Capital Markets and Mizuho Securities. The borrowing base of the Company’s $1.0 billion Credit Facility will be increased from $350.0 million to $600.0 million upon closing of the Transaction. The equity component of the consideration will be approximately 21.3 million shares of Ring’s common stock based on a 20-day VWAP of $3.60 per share as of June 30, 2022, and 153,176 shares of new Series A convertible preferred stock that will be automatically converted to common stock upon stockholder approval of the conversion into approximately 42.5 million shares of common stock at the equivalent price of $3.60 per common share. The effective date of the Transaction is June 1, 2022 and closing is anticipated in the third quarter of 2022.


- Expected to substantially enhance financial position by increasing free cash flow (“FCF”)(1) generation and lowering operating costs
- Proven, high-quality asset base with substantial, capital efficient and low break-even-cost inventory is expected to be immediately accretive to the following metrics:
- Cash flow per share;
- FCF per share(1);
- FCF yield(1);
- Net production per share(1);
- Net proved reserves per share(1); and
- Return on capital employed (“ROCE”).
- High quality, high margin CBP assets are expected to immediately lower the following metrics(1):
- Lease operating costs (“LOE”) per barrel of oil equivalent (“Boe”);
- Gathering, processing and transportation (“GP&T”) per Boe; and
- General and administrative (“G&A”) expense per Boe.

- Expected to strengthen balance sheet and accelerate ability to pay down debt
- Expected to lower 2022 year-end leverage ratio(2) on a combined basis of below 1.5 times versus previous target of below 2.0 times for Ring on a standalone basis;
- Accretive FCF generation expected to accelerate debt repayment;
- Ability to optimize future capital spending program potentially enhances FCF generation and debt repayment even further; and
- Positions Company for future potential transactions or other stockholder return-of-capital opportunities.

- Expected to enhance size and scale
- Expected to increase Ring’s estimated Q4 2022 sales volumes(3) by nearly 100% from the midpoint of the Company’s current Q2 2022 guidance;
- Anticipated Q4 2022 Adjusted EBITDA(1)(3) expected to grow from the current consensus by more than 80%;
- Expected to increase proved reserves by over 80%(3), including proved developed reserves by approximately 90%; and
- Expected to grow operating footprint 56% to more than 100,000 net acres.

- Expected to materially grow inventory of high rate-of-return projects
- Over 200 low-cost and low-risk drilling locations;
- More than 200 identified low cost, high rate-of-return recompletions in target rich, stacked pay areas;
- Over 100 low-cost, low-risk step out locations; and
- Additional potential opportunities with contingent resource and exploration locations being evaluated.

- Q4 2022 estimated pro forma Company metrics(3)
- 18,000 - 19,000 barrels of oil equivalent per day (“Boepd”) (~70% oil, 81% liquids);
- $82 - $86 million Adjusted EBITDA; and
- $50 - $54 million capital expenditures.

- Highly aligned management team sharing a common vision for success
- Proven track record of execution and strong returns; and
- Continued commitment to ESG with focus on best practices and sustainability.


- High-quality, conventional, Proved Developed Producing (“PDP”) asset base with high margins and low decline rates
- Consists of approximately 37,000 net acres (31,000 leasehold and 6,000 mineral) that are approximately 99% operated, 99% working interest, and 99% held by production;
- High margin net ownership with approximately 88% oil net revenue interest and 96% natural gas net revenue interest primarily for all depths;
- Strong current net production of approximately 9,100 Boepd (54% oil, 75% liquids)(4); and
- Expected to add long-life Proved Developed (“PD”) reserves of 41.2 million barrels of oil equivalent (“MMBoe”) and $719 million PV-10(1)(5), including PDP reserves of 24.8 MMBoe and $481 million PV-10.

- Premium de-risked inventory in most active county in the CBP
- Expected to increase inventory by approximately 500 new vertical drilling and recompletion locations with short-cycle times and high rates of return; and
- Ongoing activity in Crane County and around Stronghold’s position reinforces future inventory additions and development opportunities.

Attractive current cash flow profile
- Projected asset level Adjusted EBITDA of approximately $36 to $38 million for Q4 2022(3); and
- Low breakeven drilling economics of approximately $20 to $25 per barrel of oil(3) and LOE of approximately $8.25 to $8.75 per Boe(3).

- Significant asset development flexibility and upside potential
- Opportunity for further development in prolific stacked pay formations including waterflood potential; and
- Material operational improvements, synergies and efficiencies available for Ring given established operations in the area(6).

Mr. Paul D. McKinney, Chairman of the Board and Chief Executive Officer, commented, “We are excited to announce the agreement to acquire Stronghold’s conventional asset base, which we expect will further diversify our commodity mix and provide increased optionality on multiple fronts upon closing. The Transaction truly complements our existing footprint of conventional-focused Central Basin Platform and Northwest Shelf asset positions in the Permian Basin. We intend to leverage our extensive expertise in applying the newest unconventional and conventional technologies to optimally develop Stronghold’s deep inventory of investment opportunities. We believe the Transaction will provide for a material increase in our size and scale, and more importantly, will be immediately accretive across all of the key operational and financial metrics for Ring’s existing stockholders. On closing, we expect to nearly double our production, reserves and forecasted free cash flow with assets that we know well. We also expect to capture meaningful synergies from this acquisition.

“Once we complete the Transaction, we will have materially increased our inventory of high rate-of-return drilling, recompletion and workover projects, and fully expect to increase our activity across our expanded footprint. The combination of lower operating costs and a substantially expanded inventory of high-margin, capital efficient development opportunities is expected to increase free cash flow and our ability to rapidly pay down debt. This will allow us to expand even further through potential acquisitions or enhance stockholder returns through other potential return of capital opportunities.”


Following the closing of the Transaction, Stronghold’s owners will own approximately 34% of Ring and become its largest stockholder. The closing of the Transaction is subject to customary closing requirements, including satisfactory review of title and environmental conditions.

The Transaction was approved by a unanimous vote of Ring’s Board of Directors (the “Board”). Following the closing of the Transaction, the Board will be expanded from seven to nine directors to include two members proposed by Warburg Pincus. Ring’s current senior management team will continue to lead the pro forma Company.

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