Ring Energy Stock: Recent Transactions Reduce Its Operating Costs (NYSE:REI)

Ring Energy’s (NYSE:REI) recent transactions appear to be positive for the company. It divested some very high-cost Delaware Basin production (with lease operating expenses of nearly $45 per BOE in 2022), while acquiring Central Basin Platform assets for $65 million (after purchase price adjustments) that could generate $30+ million EBITDA at current production levels.

These transactions boost Ring’s estimated value slightly compared to my prior estimates and I now believe Ring is worth approximately $1.95 per share at long-term $70 WTI oil and $2.85 per share at long-term $75 WTI oil.

Ring’s interest costs are significant though, and are approaching $6 per BOE at current interest rates.

Acquisitions And Divestitures

Ring acquired Central Basin Platform assets from Founders Oil & Gas IV for a purchase price that was initially $75 million in cash. After purchase price adjustments, Ring is paying $65 million, of which it has already paid $50 million (in Q3 2023) and is scheduled to pay the remaining $15 million in December 2023.

Ring mentioned that the acquired assets had Q2 2023 production of 2,500 BOEPD (86% oil). Ring appears to be letting production decline fairly quickly in the near-term as Q4 2023 sales volumes from the assets may be close to 1,700 BOEPD, based on calculations around Ring’s 2H 2023 guidance.

At that lowered production level, the assets should still be able to generate $30+ million per year in annualized EBITDA (at high-$70s WTI oil) though, so the net $65 million purchase price appears to be pretty good.

Ring also sold its Delaware Basin assets for $7.8 million in net proceeds after purchase price adjustments and transaction costs. These assets were producing 240 BOEPD (85% oil). I view this sale price as being favorable too, due to the high operating expenses for Ring’s Delaware Basin assets. Ring reported lease operating expenses of $44.86 per BOE in 2022. At high-$70s WTI oil and 240 BOEPD, the Delaware Basin assets would only produce $1.4 million EBITDA per year.

Q2 2023 Results

After strong sales volumes in Q1 2023, Ring’s sales volumes ended up falling below expectations in Q2 2023. It expected to average 17,900 to 18,400 BOEPD in Q2 2023 and only sold an average of 17,271 BOEPD during the quarter.

This was partially due to its Delaware Basin divestiture, which closed in May 2023. However, even with a full quarter’s contribution from those assets, Ring’s sales volumes would have been only slightly over 17,400 BOEPD.

I had previously highlighted Ring’s low realized prices for its non-oil production. This became particularly apparent in Q2 2023 with benchmark natural gas prices falling to the low $2 range.

Ring realized negative $0.71 per Mcf for its natural gas in Q2 2023, with its gathering, transportation and processing costs exceeding regional natural gas prices. Ring’s differential for natural gas was negative $3.07 per Mcf during the quarter.

Ring realized $10.35 per barrel for its NGLs, so it ended up generating a total of $1.3 million in revenues from its roughly 490,000 BOE in non-oil production during Q2 2023.

From a realized pricing and sales volume perspective, Ring’s Q2 2023 results weren’t very good, but it did do well from a cost perspective. Its lease operating expenses ended up at $10.14 per BOE in Q2 2023, well below its guidance for $11.00 to $11.40 per BOE. Ring’s mid-quarter Delaware Basin divestiture helped lower lease operating expenses, but even without that benefit it would have been well below its guidance for the quarter.

Ring also noted that it deferred some well drilling and workover projects due to weakening commodity prices and plans to divert resources towards Founders acquisition. Ring’s capital expenditures for Q2 2023 ended up at $31.6 million, lower than its guidance range for $34 million to $38 million in capex.

2H 2023 Outlook

After its transactions, Ring expects to average sales volumes of approximately 18,775 BOEPD (68% to 69% oil) during 2H 2023, with Q4 2023 sales volumes around 5% higher than Q3 2023 sales volumes due to the closing of the Founders deal midway through Q3.

At high-$70s WTI strip for 2H 2023, I estimate that Ring can generate $181 million in revenues inclusive of hedges.

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This leads to a projection of $29 million in free cash flow for Ring in the second half of the year. Ring’s interest costs are becoming fairly significant and are approaching $6 per BOE on an annualized basis.

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Estimated Value

I now believe that Ring is worth around $1.95 per share at long-term $70 WTI oil and $2.85 per share at long-term $75 WTI oil. Ring’s recent transactions were favorable on the whole, and divesting its Delaware Basin assets helps to lower its overall lease operating costs per BOE despite the small amount of production involved.

While Ring has upside at long-term $75 WTI oil (which is the price I am currently modeling), it is also fairly risky due to its significant debt (and associated interest costs).

Conclusion

Ring’s recent transactions were positive for it overall and I now estimate its value at $2.85 per share at long-term $75 WTI oil, while it is fairly priced for long-term $70 WTI oil.

The transactions do add to Ring’s net debt (and interest costs though) after it made some progress reducing its debt during the first half of 2023. Ring may end up paying around $20 million in cash interest during the second half of 2023.

Ring’s debt is manageable in a $70s oil environment, but it is vulnerable to a significant drop in oil prices, such as to around $60 or below oil.