Ring Energy Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 3, 2023

There are 9 speakers on the call.

Operator

Good morning, and welcome to the Ring Energy Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. I will now turn the call over to Al Petrie, Investor Relations for Ring Energy.

Speaker 1

Thank you, operator, and good morning, everyone. We appreciate your interest in Ring Energy. We'll begin our call with comments from Paul McKinney, our Chairman of the Board and CEO, We'll provide an overview of key matters of the Q3 and our outlook. We'll then turn the call over to Travis Thomas, Ring's Executive VP and Chief Financial Officer, who will review our financial results. Paul then will return with some closing comments Before we open the call up for questions.

Speaker 1

Also joining us on the call today and available for the Q and A session are Alex Daes, Executive VP of Engineering and Corporate Strategy Morinos Baghdadi, Executive VP of Operations and Steve Brooks, Executive VP of Land, Legal, Human Resources and Marketing. During the Q and 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 Q3 2023 earnings corporate presentation on our website. During the course of this conference call, the company will be making forward looking statements within the meaning of federal securities laws.

Speaker 1

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. Finally, the company can give no assurance that such forward looking statements were proved correct. Ring Energy disclaims any intention or obligation to update or revise any forward looking statements whether as a result No 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.

Speaker 1

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 yesterday's earnings release. Finally, as a reminder, this conference is being recorded.

Speaker 1

I would now like to turn the call over to Paul McKinney,

Speaker 2

Our Chairman and CEO. Thanks, Al, and welcome everyone joining us today and thank you for your interest in Ring Energy. It is amazing how conditions can change from 1 quarter to the next. Realized oil prices improved considerably in the 3rd quarter, setting us up for record time financial results despite several unanticipated downtime events affecting our sales. Overall, we are reporting another great quarter and are encouraged by the positive mood and outlook we see in the industry today.

Speaker 2

As we discussed on our Q2 earnings call, our efforts for the Q3 of 2023 were squarely focused on successfully closing the Founders acquisition and making significant progress on the integration of their operations into our business. In addition, we continue the targeted execution Our 2023 development program next, we remain diligent in our efforts to drive cost efficiencies throughout our business And finally, we continue to generate solid free cash flow that was used to further pay down our debt balance exclusive of funding the Founders acquisition. Addressing the details of the quarter. First, we completed the final due diligence for the Founders acquisition Enclosed on the acquisition on the agreed to timeline. In addition, our plans remain on track integrating the Founders assets into our existing operations.

Speaker 2

We remain excited about the opportunities afforded by the acquisition and look forward to beginning our development efforts on the Acreage in the early part of next year. As a reminder, these assets are similar to the CVP assets we acquired last year, Having stacked pay zones of high quality rock with proven performance, as we have successfully done with our other assets, we intend to leverage our extensive expertise applying the newest conventional and unconventional technologies to optimally develop the inventory of undeveloped drilling locations afforded by the transaction. During the Q3, we continued our successful 2023 development program with the drilling and completion of 2 1 mile horizontal wells in the Northwest Shelf, 1 with a working interest of 100% and the other with a working interest of 75% And 3 1.5 mile horizontal wells in the Central Basin platform, each with a working interest of 100%. Additionally, in our Crane County acreage within the CBP, we drilled and completed 3 vertical wells, all with a working interest of 100%. Lastly, we drilled and began the completion process on 3 1 mile horizontal wells in the Northwest Shelf, each with a working interest of 90%.

Speaker 2

These 3 wells were completed and brought online in October, so we will benefit from over 2 months of production from these wells in the 4th quarter, while the substantial majority of the drilling and completion capital was incurred during the Q3. Our Q3 2023 was highlighted by continued strong cash flow generation, including 58 point $6,000,000 of adjusted EBITDA that was 10% higher than the 2nd quarter and also tied the record we posted in this year's Q1. Contributing to the sequential increase in adjusted EBITDA was higher realized pricing and sales volumes for all products. During the Q3, we sold 17,509 barrels of oil equivalent per day, Which was an increase from the Q2 of 2023, but fell short of our expectations. While our sales benefited from the August 15 closing of the Founders acquisition as planned, several unanticipated and temporary downtime events At certain third party natural gas processing facilities affected our natural gas and NGL sales.

Speaker 2

Additionally, We incurred 3 weeks of downtime due to a tank battery fire that shut in oil, natural gas and associated NGL sales at that battery. I'm happy to report that the production is back up to expected levels as evidenced by our 3rd quarter exit rate, which was in excess of 19,000 barrels of oil equivalent per day. This places us in a solid position to achieve our 4th quarter sales volumes guidance of 18,900 19,500 barrels of oil equivalent per day that we will discuss in more detail later. We generated $6,100,000 of adjusted free cash flow during the quarter, which marked our 16th consecutive quarter For 4 straight years of generating positive adjusted free cash flow, dollars 6,500,000 decrease from the 2nd quarter was driven By increased capital spending of $10,800,000 $800,000 of higher cash interest expense that was materially offset By adjusted EBITDA of $5,100,000 On an accrual basis, we spent 42 point $4,000,000 on capital projects during the Q3, which was at the high end of our guidance range of $37,000,000 to $42,000,000 Driving our higher spending was an increased well level activity compared to the guidance we provided in early August. During the Q3, we drilled 8 horizontal wells and 3 vertical wells and completed and placed online 8 total wells.

Speaker 2

As a reminder, our guidance was to drill 5 to 7 horizontal wells and 1 to 2 vertical wells and complete in place online 5 to 6 total wells During the period, we stepped up our spending program for these products to help ensure we deliver on our production guidance for the Q4 and set us up for a good start for the New Year. We were pleased to complete the sale of our non core operated New Mexico assets to a private buyer on September 27 for net proceeds of $3,800,000 Consistent with the sale of our non core Delaware Basin assets that closed in the 2nd quarter, The New Mexico asset sale emphasizes our focus on building and developing our core operating position in the Northwest Shelf and the Central Basin platform in Texas That continues to generate significant returns for our stockholders. Also consistent with the Delaware Basin asset sale, we use the net proceeds from the New Mexico On that point, while we borrowed the initial $50,000,000 From our credit facility to fund the Q3 cash outlay for the Founders acquisition, our borrowings outstanding At September 30, we're only $31,000,000 higher than the end of the second quarter.

Speaker 2

The $19,000,000 difference reflects our net pay down of debt And as another clear example of our commitment to improving our balance sheet, increasing liquidity and better position the company for long term success. Before turning this over to Travis, I'd like to discuss our updated outlook for the rest of the year. We anticipate a continued positive pricing environment Benefiting from previously mentioned 5 wells coming online early in the quarter and a full quarter of production from the wells associated with the Founders acquisition. We are now targeting total capital spending of between $35,000,000 to $40,000,000 in the 4th quarter due to increased drilling and completion activity. This brings our full year capital spending program to $148,000,000 to $153,000,000 Our Q4 development program is focused on a balanced and capital efficient combination of drilling 3 to 4 horizontal wells and 2 to 3 vertical wells, As well as completing and placing online 8 to 10 wells.

Speaker 2

Additionally, our capital spending program includes funds for targeted capital workovers, Infrastructure upgrades, leasing costs and non operated drilling completion and capital workovers. A primary assumption that underpins our capital spending plans is that WTI oil prices will range between $65 $85 per barrel. As in the past, we have designed our spending program with flexibility to respond to the changes in commodity prices and other market conditions. We continue to expect 4th quarter sales volumes of 18,900 to 19,500 barrels of oil per day barrels of oil Equivalent per day, despite the reduced volumes from the New Mexico asset sale and the additional volumes expected from the stepped up capital spending program. We anticipate 69% of 4th quarter sales to be oil.

Speaker 2

Additionally, our 3rd quarter production exit rate Of over 19,000 barrels of oil equivalent per day increases our confidence in our 4th quarter outlook. So with that, I will turn the call over to Travis to discuss our financial results in more detail. Travis?

Speaker 3

Thanks, Paul, and good morning, everyone. Overall, we had a great quarter with record tying EBITDA. Technically, there was less than a $5,000 variance, so it's a great reminder to save our paper clips And make every penny count. Our realized oil price was up $9 from the Q2, so that gave us the license to resume capital projects and LOE workovers were deferred last quarter. This catch up work contributed to our higher LOE and CapEx spend in the Q3 of 2023.

Speaker 3

Of course, the scheduling of getting the production back online was a bit tricky. So along with the gas takeaway issues the fire that Paul mentioned, we were a bit lower on volumes compared to the forecast. But with record EBITDA and the knowledge that these deferred volumes We're back online at a higher price environment. We are very pleased with the results. So let's dive into the numbers.

Speaker 3

During the Q3, we sold approximately 1,100,000 barrels of oil, 1.6 Bcf natural gas and 243,000 barrels of NGLs For a total of 1,600,000 BOE or 17,509 BOE per day, Realized pricing was $81.69 per barrel of crude, dollars 0.36 per Mcf of natural gas, $11.22 per barrel of NGLs or $58.16 per BOE. This was 15% higher than the Q2 of 2023 of $50.49 per BOE. Our Q3 average crude oil price differential from NYMEX WTI futures pricing was a negative $0.78 per barrel versus a negative $1.77 per barrel The Q2 almost a dollar improvement for those without a calculator. This was mostly due to the Argus WTI WTS The increase of $0.91 per barrel and the Argus CMA roll increased $0.21 per barrel on average from the 2nd quarter. Our average natural gas price differential from NYMEX futures pricing for the Q3 was a negative $2.45 per Mcf Compared to a negative $3.07 per Mcf for the 2nd quarter, our realized NGL price for the 3rd quarter averaged 16% of WTI compared to 13% for the 2nd quarter.

Speaker 3

The combined result was revenue for the Q3 of 2023 of $93,700,000 which was up $14,300,000 or an 18% increase in the 2nd quarter. LOE was $18,000,000 versus $15,900,000 for the 2nd quarter. On a per BOE basis, LOE for the 3rd quarter was $11.18 versus $10.14 per BOE for the Q2. LOE per BOE for the Q3 of 2023 We're slightly above the guidance of $10.50 to $11 per BOE, primarily due to lower sales volumes related to the unanticipated and temporary downtime previously discussed. Contributing to the sequential increase in absolute LOE from the 2nd quarter Increased due to a higher well count from the Donners acquisition and higher expense workover activity, including projects deferred from the 2nd quarter.

Speaker 3

Partially offsetting the overall increase in sequential quarterly absolute LOE for the Q3 was the sale of our non core Delaware Basin assets during the Q2. Keep in mind, the disposition of our non core operated New Mexico assets had minimal impact on the 3rd quarter LOE As a reminder, both the New Mexico and Delaware Basin assets had a higher listing cost profile than our core properties. Production taxes were $4,800,000 or $2.95 per BOE versus $4,000,000 or $2.55 per BOE for the 2nd quarter, with the tax rate remaining steady at approximately 5%. DD and A was $22,000,000 compared to $20,800,000 for the 2nd quarter. On a per BOE basis, GD and A sequentially increased from $13.65 from $13.23 per BOE.

Speaker 3

SG and A, which excludes share based compensation, was $3.05 per BOE versus $2.89 per BOE for the Q2 of 2023. Excluding transaction related costs, cash G and A was $3.15 per BOE for the 3rd quarter Versus $2.75 per BOE for the 2nd quarter and $3.85 per BOE for the Q3 of 2022, An 18% decrease year over year. Interest expense was $11,400,000 versus $10,600,000 for the 2nd quarter, With the increase substantially due to a higher interest rate and one additional day in the period, I would also note that interest expense includes about $400,000 per month And non cash amortization. Due to the sharp increase in oil prices since June 30, which is a good thing, Our Q3 loss on derivative contracts was $39,200,000 compared to a $3,300,000 gain in the Q2 of 2023. We recorded an income tax benefit of $3,400,000 versus a benefit of $6,400,000 in the 2nd quarter.

Speaker 3

As a reminder, a significant driver in the level of our 2nd quarter tax benefit was the release of the valuation allowance during the period. During the Q3, we reported a net loss of $7,500,000 or $0.04 per diluted share. Excluding the estimated after tax impact of pre tax items, including $33,900,000 for non cash unrealized losses on hedges, $2,200,000 for share based compensation expense and an approximate reduction of approximately $200,000 in transaction costs, Our Q3 2023 adjusted net income was $26,300,000 or $0.13 per diluted share. This is compared to the Q2 of 2023 net income of $28,800,000 or $0.15 per diluted share. And Q2 2023 adjusted net income of $28,000,000 or $0.14 per diluted share.

Speaker 3

Turning to cash flow metrics. As Paul discussed, we generated another record level of quarterly adjusted EBITDA As we continue to execute on our 2023 development program and further investment initiatives to grow our business. As Paul discussed, We received $3,800,000 in net proceeds for the sale of our non core operated New Mexico assets that And consistent with the recent disposition of our Delaware assets was used to further pay down debt. While our debt position increased As a result of the closing of the Founders acquisition, we recognize that remaining focused on debt reduction is a key priority for the company. This was evidenced by our pay down of $19,000,000 excluding the 3rd quarter borrowings for the Founders acquisition of $50,000,000 As a result, on September 30, we had $428,000,000 drawn on our credit facility.

Speaker 3

With a current borrowing base of $600,000,000 We had $171,200,000 available net of letters of credit. Combined with cash, we have liquidity of $171,400,000 And a leverage ratio of 1.69 times. I would like to note that excluding the estimated $11,900,000 net deferred payment due next For the Founders transaction, our leverage ratio was 1.64 times. Essentially, we were leverage neutral For the quarter, with all of the increase due to the deferred payment. As we discussed previously, while the Founders acquisition added debt to our balance sheet in the near term, We believe we are better positioned to pay Dom's debt more quickly over the long term.

Speaker 3

Of course, realized commodity prices, The timing and level of capital spending and other considerations will impact the cadence of quarterly debt pay down. Moving to our hedge position. For the Q4 of 2023, we currently have approximately 593,000 barrels of oil hedged We're approximately 49% of our estimated oil sales based on the midpoint of guidance. We also have 518,000,000 cubic feet of natural gas hedge with 31% of our estimated natural gas sales based on the midpoint. For a quarterly breakout of our hedge positions, please see our earnings release Presentations, which include the average price for each contract type.

Speaker 3

So with that, I will turn it back to Paul for his closing comments. Paul?

Speaker 2

Thank you, Travis. We believe our strategic acquisitions over the past year have placed us in a stronger position to take the company to new heights Given the accretive the highly accretive attributes of the collective transactions, including per share growth Production, reserves, adjusted free cash flow and other key metrics. In addition, the 2 transactions further strengthen our balance sheet and accelerate our ability to pay down debt. They also increased our inventory of low risk, high rate of return drilling locations and approved our capital allocation flexibility. With respect to the Q4 of 2023, we are squarely focused on the efficient integration of the assets from the Founders acquisition The successful completion of our 2023 capital spending program, complementing these efforts is our ongoing focus on reducing Operating costs.

Speaker 2

With the primary goal of maximizing our free cash flow generation to pay down debt, we will remain disciplined by prioritizing our capital On high rate of return drilling and recompletion projects, we believe targeting excess free cash flow to pay down debt will drive Long term value for our stockholders. Speaking of improving value for our stockholders, we are disappointed with our lagging stock price performance when compared to our peers. We are delivering competitive and oftentimes peer leading returns, yet our stock price Has not reflected that performance. We are continuing to investigate what we believe to be the potential causes And we will address those potential causes within our control. Wrapping up, and as I have consistently said in the past, We believe staying the course with our sense of urgency, our resolve and our commitment to our value focused proven strategy better prepares the company to manage the risks and uncertainties associated with our industry and should generate sustainable and competitive returns to our stockholders.

Speaker 2

We believe we are well positioned for the Q4 and 2024 with the continued pricing environment, Production benefits from our recent acquisitions and the continued success of our capital spending program. We also believe 2024 will be a strong year for shareholders. With that, we will turn this call over to the operator for questions. Operator?

Operator

We will now begin the question and answer session. And as a reminder, we ask that you please limit yourself to one question and one follow-up on today's call. At this time, we will pause momentarily to assemble our roster. And our first question here will come from Jeff Grampp with Alliance Global. Please go ahead.

Speaker 4

Good morning, guys. Thanks for the time.

Speaker 3

I was curious. Good morning.

Speaker 4

Good morning. On the downtime events that impacted production in the quarter, Do you guys have any kind of ballpark estimate for what that curtailment was? And at the risk of maybe being too greedy, if you could break it out by the exposure on the Processing plants versus the fire? Thanks.

Speaker 2

Yes, I'll go ahead and begin this and then I'll turn it over to Marino. He knows the details far better than I do, but a little over 50% of the downtime events were associated with these Gas Processing and Compression Facilities. And then the fire itself, I don't really remember the percentage, But it was pretty substantial as 25%. Yes, so it's 25%. Why don't you go ahead and address this a little more

Speaker 5

Yes, the total overall volume was about Again, these are estimated numbers because they're not sales, they're based on our production volumes, but about 600 BOEs a day, About 130 of that was from the fire That 600 BOE a day is for the quarter. For the quarter, yes, equivalent for the quarter. Thank you, Paul. So we tuned it up to about 90 days. So about 130 of that was for the Battery Fire and then $330,000,000 to $350,000,000 of that was for the gas plant and then we had a couple of other weather related to We didn't mention in the call, but that's basically the breakdown.

Speaker 4

Got it. That's really helpful. Thank you. And for my follow-up, I know you guys haven't put out a 'twenty four guide yet, so certainly not trying to front run things here. But just looking at the Q4 numbers, To that Q4 guide or how might you guys edit that kind of commentary or I guess just Ultimately trying to think about good maintenance CapEx number for you guys looking ahead?

Speaker 2

Yes. And so that's a good question. We are currently evaluating various different capital spending levels for 2024 And trying to understand the merits and consequences associated with those different capital spending levels. Let me reiterate a couple of things that I've said oftentimes and I know I sound like a broken record, but we are squarely focused on reducing our debt. And so and we know that the rate of debt pay down is a direct function of product prices And our capital spending levels.

Speaker 2

And so that's the reason why we're looking at these capital spending levels. But I think that The capital spending levels that we are forecasting for the Q4 are pretty close to might be a little higher than what is necessary for true maintenance. But because as you know, we fell short on our production in recent times and so that's part of the reason why we stepped up our capital spending to try to make up for that. But I think that, yes, our true maintenance capital spending levels are probably just a little less than what our 4th quarter capital Guidance is, but it's close to that.

Speaker 5

And Paul, if I may say one more thing too. The $35,000,000 to $40,000,000 includes some Facility upgrades in terms of ESG related things that are not necessarily tied to maintenance, They're tied to us becoming a more better operator in terms of emissions and etcetera.

Speaker 2

Yes. And on that note, I'm just going to take this opportunity to kind Expand on that. We take our responsibility as a publicly traded company and an oil company very seriously with regard to ESG, Primarily associated with these emissions and also preventing spills, we're probably spending more capital as a company, as a public company for our size And many others out there, just because we're that focused on not only meeting, but just getting ahead of the requirements that we believe are coming our way When we look at the things that the EPA are doing and other organizations and the pressure they're placing on our industry, I don't believe our industry can afford to not Step up in this regard. And so we are we're spending a little bit more capital on projects like that, that really go unseen. But we believe that in future sustainability reports, as we Close our emissions.

Speaker 2

People will recognize the benefits associated with what we're doing.

Speaker 4

Yes. Agreed and appreciate the insight guys. Thanks for the time.

Speaker 1

Thanks, Jeff.

Operator

Our next question here will come from Neal Dingmann with Truist.

Speaker 6

A follow-up question for you, Rios. Just wondering now with the founders Needed rolled in. Could you just talk about you guys have done a great job of recent deals of sort of what I would call You know, wedding or combining operations and then, continue to see more efficiencies as a result. And I'm just wondering now, With founders tucked in, could you talk about how we might see incremental efficiencies now from the D and C side, given the combination.

Speaker 2

Yes, very good. Again, I'm going to address it initially, then I'll turn it over to Marinos. And then actually, I think Alex might want to chime in as well. But We're very excited about the Founders acquisition. The very first thing we recognized when we made that acquisition that we believe that there are Significant improvements in reducing operating costs there associated with getting a better handle on water handling and disposal.

Speaker 2

And so we have been spending quite a bit of time in that regard since we've acquired the assets. We are excited about the progress we're making. And once we finish some of those investments, change the way the water is handled and reduce those operating costs, we will be prepared to launch Our drilling campaigns out there, we believe that the economics of the associated drilling on the founders Are very competitive. Matter of fact, some of them are equal to our very best investments that we have in our inventory. And so you'll see that we will be spending money there once get a handle on the operations.

Speaker 2

Is there any more you want to share, Maria? Paul, one thing, Neil,

Speaker 5

On the drilling and completion costs in general, the last quarter we have seen a pretty good reduction in completion costs, Specifically, the frac companies and in casing costs, we've actually procured all the casing that we think we'll need The Q1 and it's about half the price of what we paid the same time last year procuring casing for our Q1 of 2023. So those are benefits that I think we're going to see throughout the entire company, not just the founders assets. And that we're excited about that. So that kind of goes into the answering the maintenance question from earlier on too. That's a moving number because of the benefits that we're seeing on the cost right now.

Speaker 7

Yes. Let me Neil, let me add one more thing. This is Alex. So again, as we bring this asset in, we've found some low hanging fruit by just lowering some pumps. So we've arrested part of the decline On the asset, we'll continue doing that going into 2024.

Speaker 7

So that's one thing, just the blocking and tackling as we bring in the assets. The other thing is as We also optimize the infrastructure and start deploying some of the capital for next year. If you reference Slide 19, It shows you on a relative basis what the investment type that Paul was talking about. You can see Our founders investments versus some of our other investments in CDP verticals really brings on a lot more oil, so higher oil Meaning like over 90% oil per well. So you should be able to see that in 24.

Speaker 6

Great details guys. And then, Paul, maybe for you, Travis, just a question on going forward. I've got Looks like if prices remain stable and look, your operations continue to be as efficient as we think, it looks like free cash flow could continue to ramp Quite nicely. You have mentioned in prepared remarks, I know debt's always priority. Maybe just talk about How you think about debt versus more accretive deals versus maybe shareholder return?

Speaker 2

Yes, very good. And this is the classic question that we get all the time. I get shareholders that send us emails with their opinions and all this. And so, yes, just in general, debt is not our friend. Our interest expense It's considerably higher than our G and A expense.

Speaker 2

And so during times of high interest rates like we're Experian, it behooves any company to reduce their debt. So that's the reason why we're focused on it. So now with respect to taking on more debt, We would be willing to take on more debt through an acquisition of some kind, but it still has to be balance So in other words, the ratio of the collateral backing up that debt has to improve versus the debt. And we have to buy these properties if we're going to pursue them in an accretive manner. And so yes, I am willing to take on more debt, But it will reduce the leverage ratio and actually strengthen the balance sheet by doing so if we were to occur or pursue something in that regard.

Speaker 2

Travis, is there more you want to say?

Speaker 3

No, just taking it a step further, but not too far. Getting into the shareholder return look, we're always looking at the cost Capital on that as well. And the question does often come up, would you guys consider any sort of share buybacks or when are dividends coming? And those are things we look at. Where is our dollar best spent?

Speaker 3

Is it for paying down debt? Is it share buybacks? Is it dividends? For now, I think it's still a focus on debt.

Speaker 2

Yes. And I know just a little bit more. When you if we were to do a stock buyback today, That would take proceeds away from paying down debt. So essentially, you're adding debt To pay buy stock back and don't forget, you don't get additional real barrels of production. So if you use those funds or proceeds To accretively buy assets, you get the production and cash flow to help pay that down.

Speaker 2

So we're all about acquisitions, but Our focus on acquisitions up to now has been clearly that the result of that would be totally accretive As many metrics as you can, you strengthen your leverage ratio, but at the same time, the future cash flow from those assets has to accelerate our ability to pay down And we've been successful in being able to do that. As you see, our ability to pay down debt has increased over time, and we believe it's going to continue. And of course, that's also dependent on energy prices. But from the overall health of the company, Being remaining focused on these debt adjusted per share metrics is the only way you're ever going to dig your way out and grow the company

Speaker 6

Yes. Paul, I think you and Travis hit nail ahead. I think it's cost to capital and it's going to be great. Got to have a ramp amount of free cash flow to decide what to do with it. So thanks guys.

Speaker 2

Yes, you're welcome.

Operator

Our next question will come from Noel Parks with Tuohy. Please go ahead.

Speaker 8

Hi, good morning.

Speaker 2

Hi, good morning, Noel.

Speaker 8

So we seem to be entering one of these Stages where we sort of have increased macro uncertainty, geopolitical side also You know, I've added some new wildcards recently. And I think that the company is generally having been pretty Proactive in down cycles as far as just getting With rig activity, and I'm just thinking with your horizontal inventory and also the vertical inventory now, are there different Prices, if say we did have a pullback into next year, just where it might be easier to keep vertical activity going and You shift capital there instead of some of the horizontals? Or is the differential we get to return just not enough to really make a difference?

Speaker 2

Yes. I mean, if you look back in our history in the last 12 months, you can see that When prices were lower earlier this year and exiting last year, we actually did curtail some of our capital spending program. As I alluded to earlier, our budget plans are with the mindset that Oil prices will remain between $65 $85 You fall below $65 and even as you approach $65 we will Tighten up the capital spending requirements. We will only focus on those that have the absolute best returns. And so we do have a mix.

Speaker 2

We do have some vertical wells that compete with our horizontal wells. Typically in the past, our best returning Investments were the horizontal wells, especially those in the Northwest Shelf. But now with the founders, some of those Our vertical wells will compete handsomely with that. And so rest assured, we will focus in a low price environment. We will continue to be active, but we will focus On those highest return aspects because our strategy going forward until our debt is down to well below a leverage ratio of 1.

Speaker 2

We're going to be focused on maximizing the free cash flow generation from those investments. So that's just the way to go. Did I answer your question, Noel?

Speaker 8

Absolutely. Absolutely. And just my other one is Service cost environment certainly sounds encouraging as far as the year over year changes in services and materials. And I was just thinking about, again, with sort of if we have more volatility in the system of prices, Do you have a sense that in your regions that with the other operators, is Is everyone's activity level fairly stable right now? Or would you say it's either trending higher or lower one direction or the other these days?

Speaker 2

And I talked to quite a few CEOs. I think all of us are of a very similar mindset right now. We're very disciplined in our capital spend. Everyone is focused on real returns to the shareholders. So If it wasn't for our debt and perhaps our size and scale, we would be delivering some kind of a real return Either through a stock buyback or through dividends or something.

Speaker 2

But everybody is focused on disciplined capital spending. That's the reason why even though we're at Historically, on the higher end of energy prices, you're not seeing the rig rates increase because Everybody is focused on discipline. And I don't know of another CEO that will tell you anything different than what I'm telling you. They're focusing their capital on the highest rate of return opportunities they have and they're focused on real returns to their shareholders And you can't go wild with your capital spending in that kind of environment. So everybody is disciplined.

Speaker 2

And this is also part of the reason why we're seeing Pullback and some of the costs and the availability of many of the services that we depend on for drilling and completing our wells. It's good that natural gas prices fell in Europe, which allowed a lot of the steel manufacturers to go back to making steel, which Reducing the demand for the steel here and other areas. And so, yes, I think that the discipline is the primary cause For now, the pullback that we've seen or the slight pullback in some of the costs associated with drilling and completing our wells.

Speaker 8

Great. Thanks a lot.

Speaker 2

You're welcome.

Operator

And this concludes our question and answer I'd like to turn the conference back over to Paul McKinney for any closing remarks.

Speaker 2

Thank you, Joe. And On behalf of the management team and the Board of Directors, I want to thank everyone for listening and participating in today's call. We appreciate your continued support of the company, and we look forward to keeping

Operator

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

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Key Takeaways

  • Ring Energy delivered a record‐tying adjusted EBITDA of $58.6 million in Q3, up 10% sequentially, driven by higher realized prices and sales volumes despite third‐party downtime and a tank battery fire.
  • The Founders acquisition closed on August 15 on schedule, and integration remains on track, adding high-quality stacked pay acreage similar to prior CVP assets for early-2024 development.
  • In Q3, the company drilled eight horizontal and three vertical wells, began completing three additional 1-mile horizontals (each 90% WI), all of which came online in October to bolster Q4 production.
  • Ring Energy generated $6.1 million of adjusted free cash flow—the 16th consecutive quarter of positive FCF—and used $3.8 million of non-core asset sale proceeds plus free cash flow to reduce net debt by $19 million.
  • For Q4, the company plans $35 million–$40 million of capital spending to drill 3–4 horizontals and 2–3 verticals, complete 8–10 wells, and achieve 18,900–19,500 BOE/d (69% oil) assuming WTI at $65–$85 /​bbl.
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Earnings Conference Call
Ring Energy Q3 2023
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