Ring Energy Q1 2024 Earnings Call Transcript

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May 7, 2024

There are 7 speakers on the call.

Operator

Good morning, and welcome to the Ring Energy First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. Please also note today's event is being recorded. At this time, I'll turn the floor over to Al Petrie, Investor Relations for Ring Energy.

Operator

Sir, you may begin.

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, who will provide an overview of key matters for the Q1 of 2024 as well as our outlook. We will then turn the call over to Travis Thomas, Ring's Executive VP and Chief Financial Officer, who will review our financial results. Paul will then return with some closing comments before we open up the call for questions.

Speaker 1

Also joining us on the call today and available for the Q and A session are Alex Daiaz, 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 an updated 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 those forward looking statements. Finally, 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.

Speaker 1

These documents can be found in the Investors section of our website located at www.ringenergy.com. Should 1 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. Reconciliation 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 call is being recorded.

Speaker 1

I would now like to turn the call over to Paul McKenney, our Chairman and CEO.

Speaker 2

Thank you, Al, and thank you for everyone joining us today and your interest in Ring Energy. As you may have read by now, we began 2024 with a solid Q1. Sales volumes exceeded the high end of our guidance, while operating expenses and capital spending both came in below our guidance ranges, placing us in a strong position for the rest of the year. The primary driver of our sales volume performance was a robust returns from our drilling program and reduced downtime since the winter storm we incurred in January. The key factors contributing to our lower than expected capital costs were increased efficiencies associated with our well completions and the improved logistics of drilling our wells.

Speaker 2

Additionally, we benefited from lower costs realized by an improved macro environment associated with the drilling and completion services for our wells. LOE on a per BOE basis came in below our guidance range as well, primarily due to our continuing focus on reducing costs generally and more specifically associated with the progress we are making integrating the Founders assets into our operations. These efforts not only led to lower costs, but lower downtime as well that contributed to our sales volumes performance as mentioned earlier. Our results this quarter are a direct reflection of the dedication and commitment of our employees in both the field and the office. And on behalf of the Board and management team, we thank all of you for your hard work.

Speaker 2

With respect to our performance this quarter, we sold 13,394 barrels of oil per day, which was 5% higher than the top end of our sales guidance. On a total product basis, we reported 1st quarter 2024 sales volumes of 19,000 and 34 barrels of oil equivalent per day that was 3% above the top end of our BOE sales guidance. As important, we increased oil to 70% of our product mix. Lease operating expenses or LOE during the Q1 were $10.60 per BOE. The combined impact of higher than expected sales volumes and lower than anticipated LOE per BOE led to adjusted net income of $20,300,000 adjusted EBITDA of $62,000,000 and net cash provided by operating activities of $45,200,000 During the Q1, we invested $36,300,000 in capital expenditures, which included the drilling and completion of 5 horizontal wells, 3 of which were in the Central Basin Platform and 2 in the Northwest Shelf and the drilling and completion of 6 vertical wells, all in the CVP South, 3 in Hector County and 3 in Crane County.

Speaker 2

Total capital spending included capital workovers, infrastructure upgrades and leasing as well. Adjusted free cash flow was $15,600,000 for the Q1 of 2024, which was 48% higher than the same quarter a year ago and represents the 18th consecutive quarter of positive adjusted free cash flow for the company. Turning to the balance sheet. We paid down $3,000,000 of debt in the Q1 $33,000,000 since the closing of the Founders acquisition in late August. This allowed us to exit the quarter with $179,300,000 of liquidity.

Speaker 2

Regarding our guidance for the year, we still plan to drill an average of 5 horizontal and 6 vertical wells per quarter, which is consistent with what we did in the Q1. We intend to continue utilizing a phased 2 rig drilling program, including 1 horizontal rig and 1 vertical rig, as opposed to a continuous drilling approach to retain the flexibility to react to changing commodity prices and market conditions as well as manage our quarterly cash flows. Our phase driven program is designed to organically maintain or slightly grow our oil production and so we are not changing our full year production guidance at this time. Regarding the 2nd quarter, we anticipate our production to range between 18,519,100 barrels of oil equivalent per day and perhaps more importantly, our oil production to range between 13,000 and 13,400 barrels of oil per day. This implies an oil mix of approximately or slightly more than 70%.

Speaker 2

With that, I will turn this over to Travis to provide more details on the quarter and will return with closing comments before we open the call for questions.

Speaker 3

Travis? Thanks, Paul, and good morning, everyone. As Paul discussed, we're pleased to have a strong start to 2024 with the solid first quarter results that exceeded expectations on multiple key fronts, including higher sales volumes, lower operating expenses and lower capital expenditures. We continue to materially benefit from our 2 strategic acquisitions completed over the past 2 years. Also contributing to the Q1 results was the successful kickoff and initial execution of our 2024 drilling program, complemented by further efficiencies achieved through our expanded scale and focused on the best operational practices.

Speaker 3

The combined result was continued strong generation of adjusted free cash flow during the Q1 of 2024 that was used to further pay down debt with balance sheet improvement remaining a top priority for the company. With that overview, let's take a look at the quarter in more detail. As in the past, I'm going to focus my comments on the most important sequential quarterly results. During the Q1, we sold 13,394 barrels of oil per day and 19,034 BOE per day, both of which were higher than the top end of our guidance. The slight decrease in sales volumes from the 4th quarter was primarily due to approximately 10 days of partial downtime due to the winter storm in January.

Speaker 3

Also impacting first quarter results was the overall realized pricing of $54.56 per BOE, a 3% decrease from the 4th quarter. Our 1st quarter average crude oil price differential from NYMEX WTI futures pricing was a negative $1.34 per barrel versus a negative $0.92 per barrel for the 4th quarter. This was mostly due to the ARGUS WTI WTS that increased $0.96 per barrel offset by the Argus CMA roll that decreased by $1.04 per barrel on average from the 4th quarter. Our average natural gas price differential from NYMEX futures pricing for the Q1 was a negative $2.57 per Mcf compared to a negative $3.12 per Mcf for the 4th quarter. Our realized NGL price for the Q1 averaged 15% of WTI compared to 14% for the 4th quarter.

Speaker 3

The result was revenue for the Q1 of $94,500,000 a 5% decrease from the 4th quarter. As noted, we are targeting higher oil mix opportunities since oil accounted for 98% of the revenue even though it was 70% of our production. While the gas revenue was negative, NGLs contributed for $3,000,000 So overall, our wellhead gas contributed $2,200,000 for the quarter. LOE was $18,400,000 versus $18,700,000 for the Q4. Echoing Paul's comments, we are pleased to see LOE come in below the low end of our guidance range of $10.75 to $11.25 per BOE.

Speaker 3

LOE per BOE increased nominally in the Q1 to $10.60 per BOE versus $10.50 per BOE in the 4th quarter. Cash G and A, which excludes share based compensation and transaction related costs was $5,700,000 for the Q1 versus $5,300,000 for the 4th quarter. Contributing to the sequential quarterly increase in cash G and A or additional costs attributable to administrative functions related to the year end audit, SOX compliance and 10 ks preparation. Our first quarter results included a loss on derivative contracts of $19,000,000 versus a gain of $29,300,000 for the 4th quarter. As a reminder, the gain and loss is just the difference between the mark to market values period to period.

Speaker 3

Finally, for Q1, we reported net income of $5,500,000 or 0 point share. Excluding the after tax impact of pre tax items, including non cash, unrealized gains and losses on hedges, share based compensation expense and transaction costs, our 1st quarter adjusted net income was $20,300,000 or $0.10 per diluted share. This is compared to the Q4 2023 net income of $50,900,000 or $0.26 per diluted share and adjusted net income of $21,200,000 or $0.11 per diluted share. 1st quarter 2024 adjusted EBITDA was $62,000,000 and net cash provided by operating activities was $45,200,000 versus $65,400,000 $55,700,000 respectively for the 4th quarter. During the Q1, we invested $36,300,000 in capital expenditures.

Speaker 3

Importantly, actual first quarter CapEx came in below our guidance of $37,000,000 to $42,000,000 while the actual number of producing wells drilled and completed, 11 in total, was at the high end of our guidance for well count. We also drilled an SWD originally planned for the 2nd quarter. The primary driver for the lower CapEx was reduced well completion costs and drilling efficiencies. The combined result was adjusted free cash flow of $15,600,000 for the Q1 versus $16,300,000 for the 4th. We paid down an additional $3,000,000 of borrowings on our revolver in the Q1 and $33,000,000 since the closing of the founders acquisition last August.

Speaker 3

Impacting the level of debt reduction in the Q1 was the annual payment of ad valorem taxes and other once a year costs, as well as the growth in our cash balance of approximately $1,000,000 Moving to our hedge position. For the last 9 months of 2024, we currently have approximately 1,500,000 barrels of oil hedged or approximately 43% of our estimated oil sales based on the midpoint of guidance. We also have 1,900,000,000 cubic feet of natural gas hedged or approximately 41% of our estimated natural gas sales based on the midpoint. For quarterly breakout for hedge position for Q2 through Q4 of 2024, please see our earnings release and presentation, which includes the average price for each contract type. Now, let's turn to the balance sheet in more detail.

Speaker 3

At March 31, we had $422,000,000 drawn on our credit facility. With the current borrowing base of 600,000,000 dollars we had approximately $178,000,000 available net of letters of credit. Combined with cash, we had liquidity of $179,300,000 with a leverage ratio of 1.67 times. To be clear, our primary focus remains the same, improving our balance sheet to better position the company to ultimately provide a meaningful return of capital to shareholders. To accomplish this, we'll continue to evaluate and execute on available opportunities that drive modest growth through the organic development projects and cost reduction initiatives with a focus on more significant growth through acquisitions that are accretive, enhance size and scale, generate significant near and long term cash flow, reduce overall operating expenses and provide strategic benefits.

Speaker 3

Looking at our outlook and guidance. During full year 2024, we are utilizing a phased drilling program that maintains our flexibility to react to changing market conditions, adjust spending levels as appropriate as well as manage our cash flows quarter to quarter. Our focus is on maintaining our slightly growing BOE production per day, while continuing to grow crude oil sales. Our average daily sales volume guidance for full year of 2024 remains unchanged. Crude oil sales volumes of 12,600 to 13,300 barrels of oil per day and BOE sales volumes of 18,000 to 19,000 BOE per day or 70% oil.

Speaker 3

For the 2nd quarter, we are providing a sales outlook of crude oil sales volumes of 13,000 to 13,400 barrels of oil per day and BOE sales volumes of 18,500 to 19,100 BOE per day at 70% oil. For CapEx, we continue to expect to spend $135,000,000 to $175,000,000 on our full year development program and are providing an estimate of between $37,000,000 $42,000,000 for the 2nd quarter. We also continue to anticipate full year 2024 LOE of 10.50 to $11.50 per BOE and are providing guidance of $10.75 to $11.25 per BOE for the Q2 of 2024. Finally, I would like to note that all projects and estimates are based on assumed WTI oil prices of $70 to $90 per barrel and Henry Hub prices of $2 to $3 per Mcf. So with that, I will turn it back to Paul for his closing comments.

Speaker 3

Paul?

Speaker 2

Thank you, Travis. We believe our operational and financial success this quarter demonstrate the long term benefits of our strategy designed to leverage the low breakeven cost of our drilling inventory and the quality of our assets to drive sustainable free cash flow generation. In short, our focus remains the same as in the past and while I have discussed the components of our strategy previously, it is worth repeating again today. First, we will continue to pursue operational excellence with a sense of urgency and remain focused on safety and environmental stewardship. 2nd, we will continue to high grade and execute our targeted drilling program focused on our highest rate of return prospects to organically maintain or slightly grow our production while maximizing free cash flow generation.

Speaker 2

Next, we will continue our focus on improving the balance sheet. And finally, we will seek growth through the pursuit of strategic accretive and balance sheet enhancing acquisitions. To sum it up, our commitment to our value focused proven strategy better prepares the company to manage industry risks and uncertainties, results in the generation of sustainable and competitive returns and supports our efforts to achieve the necessary business size and scale to position Ring to sustainably return capital to stockholders. I want to thank our stockholders for their continued support. I also want to once again thank everyone for participating in today's call.

Speaker 2

And with that, we will turn this over to the operator for questions. Operator?

Operator

Our first question today comes from Neal Dingmann from Truist Securities. Please go ahead with your question.

Speaker 4

Good morning, guys. Nice quarter, Paul and team. Paul, my first question maybe just now you've got the footprint has nicely increased. Just wanted my first question then would be sort of on your what I'd call your regional focus specifically. Could you talk about maybe the remainder of this year and then the next year will how much of the plan will be focused more on the multi stack vertical play in

Speaker 5

the South versus

Speaker 4

more on the San Andreas sort of horizontal development up north. I'm just wondering if you could talk about how much we focus on each and how different in today's economics, how different the returns are between those 2 sort of broad areas?

Speaker 2

Yes, good question and good morning, Neil. Yes, and so we're fortunate that the economics of the investment types are very similar, very, very robust. We've demonstrated over the last several years the economics of the San Andres horizontal oil play, both in Yoakum County and also in Andrews County. What we've discovered here this quarter with the drilling results from the wells we drilled in Penwell, the old Founders assets, those are coming in really strong, really robust. And the good thing about them is that they have a much higher percentage of oil.

Speaker 2

And so as you know, we're concentrated on that, especially when we're actually paying to have our natural gas hauled away. And so by looking at the future, right now, we're still looking at a balanced program and that balancing more has to do with limitations in infrastructure and a few things like that. In some areas, we're a little challenged getting the freshwater to frac the wells. Other areas, we can tap out the saltwater disposal capacity of those systems and so we tend to move the rig back and forth. And so right now, we are looking at the drilling program and we are basically selecting the wells that gives us the highest cash flow generating capital spending program that we can deliver.

Speaker 2

So we're looking for returns and so we juggle the wells around even today. I know we're only in the Q1, but we've already rearranged our drilling schedule for this year because we've identified what we believe are the wells that have the quickest payouts and the highest cash flow generating capacity. And so again, the capital allocation will have more to do with trying to maximize our free cash flow generation than it is looking at one area versus the other.

Speaker 4

No, that makes a lot of sense. And then you kind of go in the direction of my second question when it comes to the 2 plays. I know you all have done a nice job of investing in infrastructure and all. Maybe could you just talk about you were talking about I get it on the front end sort of fresh water and getting things there. What about on sort of the back end when it comes to infrastructure and takeaway and all?

Speaker 4

I know you certainly truck the oil, but when it comes to gas and everything else, infrastructure, do you see many limitations either in that Northern or Southern play of yours now? Or maybe if you could just talk about details on I know you've put some development in that area.

Speaker 2

Yes. So we still tend to struggle with what we consider the older infrastructure in the Central Basin platform. The gas takeaway is not nearly as predictable. For example, I'm not going to get into the details, but we have struggled in the past there and we are still struggling today with gas takeaway. And so I think the Permian Basin in general has issues as you can see in the discounts from Henry Hub.

Speaker 2

And so when you consider that you have a Permian Basin regional takeaway issue and then at the same time, we're producing some of our gas into the older infrastructure that has not as consistent run times, that's a challenge. And so we are purposely focusing our capital spending program on these wells that produce higher percentage oil and much less gas just because of those circumstances. Now, this fall, we understand there will be some additional infrastructure that should help out the Permian Basin in terms of these the discount from Henry Hub. We'll see how that goes. We should have a period, I think, coming on into 2024 where you will be able to sell more natural gas out of the Permian Basin.

Speaker 2

And so we'll see how things go. But if you just look at history, the Permian Basin has this magical ability to fill that capacity pretty quick because there's a lot of volumes being flared that otherwise would go to market if they could do it. And at the same time, the ingenuity of American oilfield worker just has an ability to increase production to fill that capacity when it's there. So we'll see how that goes. I hope I answered your question, Neil.

Speaker 4

You did. Very complete. Thank you all. Again, nice quarter.

Speaker 3

Very good.

Operator

And gentlemen, at this point, I'm showing no additional questions. I'd like to turn the floor back over to Paul McKinney for any closing remarks.

Speaker 2

Well, yes, very good. It looks like Neil Dingmann just jumped back in there with another question. Does Neil have another question you'd like to follow-up?

Operator

We do have Neil back in the queue. And Mr. Damon, if you would like to ask your follow-up, please proceed.

Speaker 4

Yes. Thanks for the time, Paul, putting me back in. Just could you just talk about opportunities? You guys have done a great job. I want to give you a little time on M and A.

Speaker 4

It seems like around your next now of the woods when I look especially in both these areas, now that you've added both founders at Stronghold, I'm just wondering when you look specifically in that area, you see bolt ons, maybe just talk about the M and A opportunities in that area?

Speaker 2

Yes, very good. Thank you for that, Neil. Yes, there are bolt ons, but there are other and so I got to be a little careful here. We're predicting that we're going to see additional assets become available in the Central Basin platform, the southern part of the Northwest Shelf as a result of some of these larger transactions we've seen close and or that are pending. And so many of the operators that have been purchased operate out here and many of the operators that are doing the purchasing and acquiring also have assets out here that have not been their focus and following the category that we believe anyway in their halls would be considered non strategic.

Speaker 2

So, we anticipate that they're coming to the marketplace for sale. And we're really excited about this area. We've done a lot of mapping. We've identified several opportunities out there that we would like. As you may recall, in the past, we have tried to negotiate transactions in the past.

Speaker 2

That's how the Stronghold deal started, but it ended up being a process that we ultimately prevailed in. Founders was a negotiated deal after a failed sale. And so we're not opposed to doing that. We are constantly seeking to make acquisitions and that ranges everything from smaller bolt ons that are just on the other side of the fence from us, because it makes a lot of sense. We can continue to play in the capital programs that we're currently doing.

Speaker 2

And I bet at the same time, there's other areas out there that are very close to our operations that allow us to capture the synergies of our operating team and our expertise. And so, we believe that pipeline is basically there for the next several years, probably more opportunities than we ourselves can take down. And so we're excited about it. And so we'll see how 2024 goes. I think one of the things that we have going for us right now is a little what appears to be a little bit more stability in oil prices.

Speaker 2

So if you can stay between 75 85 for a sustained period of time, I think you'll find more people willing to sell and at the same time, increase the probability of a transaction just simply because the expectations can are closer more closely aligned in a more stable oil price environment. So we'll see how that goes. But anything from small bolt ons to large acquisitions that could be as meaningful as a Stronghold deal and the Founders deal were for us in the past.

Speaker 4

Sure. No, I love the options. And then, if I could do one last one, just on the multi stack vertical. Again, could you remind me, I mean, again, have you just it seemed like you continue to add sort of different zones and you and the guys here in the team keep adding. Maybe talk about what makes most sense today to target and how that is different maybe than a year or so ago?

Speaker 2

Yes. So, a year or so ago, we had we were looking at opportunities. If you look at what the Stronghold acquisition, the McKnight area has a lot of opportunity, but their natural gas is a much larger percentage of the product flow. And so we've decided to concentrate more in the PJ Lee area down in Crane County and also in the Penwell area for what the newly acquired Founders acquisition. And the reason why PJ Lee is so attractive is number 1, the returns are great.

Speaker 2

We've had really good results and with many of the wells that we drill, we're adding putts and so we're increasing reserves by expanding that play out beyond where we originally defined. And so what we're we believe in that area that we have a lot more reserve to add than was included in the original acquisition. And so we're really excited about that. So anytime you can drill and add additional PUD reserves and extend the field and continue to have the success we're having, it's really exciting. Now when you go to Founders, we just got started out there.

Speaker 2

We drilled 3 wells there this last quarter. We're very pleased with the results. We feel like that program has a lot of running room and so it will get more allocation of our capital than perhaps we originally thought, but we'll see how that goes. But if the robust returns continue in both of those areas, it will have so again, this year, we just happen to have the benefit of wells that came in higher than our type curves. I think one well was right on our type curves, everything else is slightly above.

Speaker 2

And so when you have those kind of returns, yes, we might even have to adjust our production going forward for the rest of the year if we continue to have this type of success.

Speaker 4

Yes, I love that optionality. Thanks, Paul.

Speaker 2

Yes, you

Operator

And our next question comes from Jeff Grampp from Alliance Global Partners. Please go ahead with your question.

Speaker 5

Good morning, guys. Maybe just to build on that last comment I noticed in the slide deck, those PJ Lee and Penwale vertical results look really impressive there. Can you touch on how much more capital can you put into those areas taking into account, I suppose infrastructure, maybe inventory management constraints, if there are any? And just how much more aggressive could you guys be, if any, relative to the 5, 6 wells a quarter pace that you guys seem to be at, at least for Q1?

Speaker 2

Yes. And so, I probably need to defer that to Marino Baghdadi.

Speaker 6

Good morning, Jeff. Yes, we have flexibility there to add. We're still on the Penwell area let me back up. On the PGA Lee area, yes, we've eliminated pretty much all constraints in terms of electrical, saltwater disposal and frac water to complete the wells. So we can accelerate at whatever pace we want to at PJ Lee.

Speaker 6

One of the things that we're doing there is being very diligent about, like Paul mentioned, adding puds because we're stepping out to the outskirts of the reservoir there. So, we're wanting to see some results before we really accelerate the number of well count there. Over at PenWell, we are still going through some saltwater disposal, kind of making sure we eliminate any bottlenecks there before we can say we can really accelerate, but we do have capacity to drill more than 3 wells a quarter as it stands right now. We just really comfortable around that. So we don't I want to say waste capital, but just spend more capital than we absolutely have to.

Speaker 5

Does that kind

Speaker 6

of answer your question, Vijay?

Speaker 5

Yes. No, that's perfect. I appreciate it. My follow-up, on the CapEx side, obviously, really nice quarter coming in below the guide. And I know you guys have talked about some cost efficiencies, particularly with the Founders assets early on.

Speaker 5

I noticed the guide for Q2 is kind of consistent with Q1, even though you guys did have some better performance. Is there is that just kind of some general conservatism? Are there some other things related to maybe capitalized workovers or other things beyond new drills explaining that variance or just I guess maybe looking for a little more context Q1 versus Q2 on CapEx?

Speaker 6

We may add additional SWD wells in Q2. It hasn't been decided yet. So that would increase CapEx over Q1. I know we drilled 1 in Q1, but we may do 2 in Q2 and this for the Penwell area. In addition to that, we spent about $1,500,000 on ESG infrastructure improvements in the Q1.

Speaker 6

We think that may accelerate in the Q2. We're trying to go as fast as we can, but at the same time be efficient. And then Q1, we talked about our operational efficiency. All our AFEs have contingency costs that's normal to have. We didn't have any contingency issues with any of our work in the Q1.

Speaker 6

We may have a couple of operational hiccups with 2nd quarter wells. So, we're we still kept those contingency dollars in there and that's why the capital seems to not have changed very much. But we'll see as the quarter goes. So far, in the Q2, we haven't had any issues. So, we feel pretty good about that too.

Speaker 5

Perfect. That makes a lot of sense. I appreciate the details, guys.

Speaker 2

You bet. Thanks, Jeff.

Operator

And ladies and gentlemen, at this point, I'm showing no additional questions. I'd like to turn the floor back over to Paul McKinney for closing comments.

Speaker 2

Thank you, Jamie. On behalf of the management team and 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 everyone appraised for progress. Thank you again for your interest in Ring and have a great day.

Operator

Ladies and gentlemen, that will conclude today's

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Ring Energy Q1 2024
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