Ring Energy Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 7, 2024

There are 10 speakers on the call.

Operator

Good morning, and welcome to the Ring Energy Second Quarter 2024 Earnings Conference Call. At this time, all participants will be in a listen only mode. A question and answer session will follow the formal presentation. Please note this event is being recorded. I would now like to turn the conference over to Al Petrie, Investor Relations for Ring Energy.

Operator

Please go ahead.

Speaker 1

Thank you, operator, and good morning, everyone. We appreciate your interest in Ring Energy. We will 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 Q2 of 2024 as well as our updated 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 the call 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 and Sean Young, VP of Operations. During the Q and A session, we ask you to limit your questions to 1 and a follow-up. You are 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 the 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. 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 call is being recorded.

Speaker 1

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

Speaker 2

Thanks, Al, and thank you, everyone, for joining us today and your interest in Ring Energy. Before I begin to discuss our Q2 results, I wanted to welcome 2 new Ring executives, Sean Young and Philip Feiner. As we announced in late June, Sean was promoted to lead our operations team. And as announced yesterday, Philip joined us last week to lead the legal and human resources efforts here. All of us here at Ring are pleased to be working with them and look forward to properly growing Ring Energy together for the benefit of our stockholders.

Speaker 2

Let's now turn our attention to the subsequent hand, our 2nd quarter performance. We are pleased to post record sales volumes and record cash generation for both the Q2 year to date. We use our excess cash from this record quarter to pay down $15,000,000 of debt and intend to make additional and material progress reducing debt over the coming quarters subject of course to all remaining at the range or in the range of current and or more recent prices. Similar to the Q1, 2nd quarter sales volumes exceeded the high end of our initial guidance, while operating expenses and capital spending both came in below our guidance ranges. Combined with our improved operational outlook for the second half of twenty twenty four, we are well positioned for ongoing success for the remainder of the year and into next.

Speaker 2

The primary driver of our record sales volumes in the Q2 was the continued strong returns from our drilling program and the outstanding performance of our operating team maintaining our existing production. The result for the period was a sale of 13,623 barrels of oil per day, which was 2% higher than the 1st quarter. On a total product basis, we reported Q2 2024 sales volumes of 19,786 barrels of oil equivalent per day, which was 4% above the Q1. Another point to make is a high oil percentage of our product mix of 69%. We will continue to focus our capital spending on undeveloped opportunities with high oil percentage, especially during these times of favorable realized pricing relative to natural gas.

Speaker 2

Turning over to lease operating costs. Lease operating expenses or LOE during the Q2 were $10.72 per BOE, which is below the low end of our guidance range. Similar to Q1 performance, our 2nd quarter LOE results reflect our continuing focus on reducing costs and downtime and completing the integration of the Founders assets into our operations. I'd like to thank our operating team for their hard work and their dedication to these efforts. Thank you, everyone.

Speaker 2

Higher than anticipated sales volumes and lower than expected LOE per BOE supported by a backdrop of solid oil pricing resulted in record adjusted EBITDA of $66,400,000 for the 2nd quarter as well as year to date growth of 15%. Looking at CapEx, we were pleased to once again post spending levels that were less than the low end of our guidance, while the number of producing wells drilled and completed was at the high end of our guidance. The key factors contributing to our lower than expected capital costs were increased efficiencies associated with our well completions, enhanced drilling and related logistics and an improved macro environment associated with our drilling and completion services costs. During the Q2, we invested $35,400,000 in capital expenditures, which included the drilling and completion of 5 horizontal wells in the CBP and the drilling and completion of 6 vertical wells in CBP South, 3 in Ector County and 3 in Crane County. Total capital spending also included capital workovers, infrastructure upgrades and leasing.

Speaker 2

Record adjusted EBITDA and lower than expected CapEx resulted in record adjusted free cash flow of $21,400,000 for the Q2 of 2024, which was 70% higher than the same quarter a year ago and represents a 19th consecutive quarter of positive adjusted free cash flow for the company. Combined with our success in the Q1, we posted record year to date adjusted free cash flow of $37,000,000 that was 60% higher than last year. Turning to the balance sheet. We used a portion of our adjusted free cash flow to pay down $15,000,000 of debt in the 2nd quarter and $48,000,000 since closing the Founders acquisition last August. As a result, we ended the 2nd quarter with liquidity of $194,100,000 and a leverage ratio of 1.59 times, which was 5% lower than at the beginning of the period.

Speaker 2

Regarding our guidance for the year, we are updating our full year 2024 outlook to reflect our first half performance and a solid view for the remainder of 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 2nd quarter. This approach provides flexibility to react to changing commodity prices Given the success Given the success we are seeing in our development efforts, we are increasing our full year 2024 production guidance to 13,200 to 13,800 barrels of oil per day and 19,000 to 19,800 barrels of oil equivalent per day, which represents an increase of 4% 5%, respectively, from our initial guidance earlier this year assuming the midpoints. Regarding the Q3, we anticipate sales volumes of 19,000 to 19,800 barrels of oil equivalent per day and more importantly our oil production to range between 13,000 201,800 barrels of oil per day or an oil mix of approximately 70%. With that,

Speaker 3

I will turn this over to Travis to provide more details on the quarter and we'll return to closing comments before we open the call for questions. Travis? Thanks, Paul, and good morning, everyone. As Paul discussed, we are pleased to post 2nd quarter operational and financial performance that exceeded our initial expectations. The combination of record sales volumes along with below guidance LOE per BOE and CapEx contributed to the generation of record adjusted free cash flow that we used to materially pay down debt.

Speaker 3

To be clear, balance sheet improvement has and will remain a top priority for the company. With that overview, let's look at the quarter in more detail. As in the past, my prepared comments will be focused on our key sequential quarterly results. During the Q2, we sold 13,623 barrels of oil per day and 19,786 BOE per day. This represents an increase in the Q1 of 2% and 4%, respectively, and again was above the top end of our initial guidance.

Speaker 3

As Paul discussed, the primary driver of our record sales volumes in the 2nd quarter was the outsized positive impact of our drilling program. Our 2nd quarter average crude oil price differential from NYMEX WTI futures pricing was a negative $0.61 per barrel versus a negative $1.34 per barrel for the Q1. This was mostly due to the Argus CMA roll that increased $0.80 per barrel offset by the Argus WTI WTS that decreased $0.30 per barrel on average from the Q1. Our average natural gas price differential from NYMEX futures pricing for the 2nd quarter was a negative $4.31 per Mcf compared to a negative $2.57 per Mcf for the Q1. Our realized NGL price for the 2nd quarter averaged 12% of WTI compared to 15% for the Q1.

Speaker 3

The result was revenue for the Q2 of $99,100,000 a 5% increase from the Q1, which was due to a $2,000,000 volume variance and $2,600,000 price variance. As noted, we are targeting higher oil mix opportunities since oil accounted for 100 percent of the revenue, while it was 69% of our total production. That means our positive NGL sales were not quite able to fully offset our negative gas sales resulting in a minor net loss. As I noted, in the second quarter, we continue to see negative realized pricing for natural gas. While the majority of our GTP costs are reflected as a reduction of the sales price, the larger impact on our realized natural gas pricing reflects the continued product takeaway constraints we have seen in the basin.

Speaker 3

The good news is additional third party takeaway capacity is expected to come online with the Matterhorn Express Pipeline in West Texas around the end of 2024 that we hope will alleviate some pricing pressure. LOE was $19,300,000 for the 2nd quarter versus $18,400,000 for the 1st quarter. Echoing Paul's comments, we were pleased to see LOE come in below the low end of our guidance range of $10.75 to $11.25 per BOE to lower than expected due to lower than expected workover costs, partially offset by higher electricity and chemical costs. LOE per BOE increased slightly in the 2nd quarter to $10.72 per BOE from $10.60 per BOE in the Q1. Cash G and A, which excludes share based compensation, was $5,600,000 for the 2nd quarter, essentially flat with the $5,700,000 from the Q1.

Speaker 3

Our 2nd quarter results included a loss on derivative contracts of $1,800,000 compared to a loss of $19,000,000 for the Q1, of which $2,600,000 was a realized loss offset by an $800,000 unrealized gain. As a reminder, the unrealized gain loss is just the difference between the mark to market values from period to period. Finally, for Q2, we reported net income of $22,400,000 or $0.11 per diluted share. This was a significant improvement compared to the 1st quarter net income of $5,500,000 or $0.03 per diluted share. Excluding the estimated after tax impact of pre tax items, including non cash unrealized gains and losses on hedges and share based compensation expense, our 2nd quarter adjusted net income was $23,400,000 or $0.12 per diluted share, while first quarter adjusted net income of $20,300,000 or $0.10 per diluted share.

Speaker 3

We posted record Q2 2024adjusted EBITDA of $66,400,000 versus $62,000,000 for the Q1, which was a 7% increase. As Paul mentioned, during the Q2, we invested $35,400,000 in capital expenditures. This was below our guidance of $37,000,000 to $42,000,000 and the actual number of producing wells drilled and completed 11 in total was at the high end of guidance. The primary driver for lower CapEx was reduced well completion costs and drilling efficiencies. The combined result of record operating cash flow and lower than expected CapEx drove record adjusted free cash flow of $21,400,000 for the 2nd quarter versus $15,600,000 for the 1st quarter.

Speaker 3

In addition, we generated record year to date adjusted free cash flow of $37,000,000 that was 60% higher than the same period in 2023. We used our record excess cash flow to pay down $50,000,000 of borrowings on our revolver in the 2nd quarter and $48,000,000 since the closing of the Founders acquisition in late August. The difference between our adjusted free cash flow and the debt pay down was due to working capital changes, including a $9,100,000 decrease in accounts payable quarter to quarter. As I mentioned at the beginning of my comments, further balance sheet improvement through additional debt pay down remains a top priority for the company. Moving to our hedge position.

Speaker 3

For the last 6 months of 2024, we currently have approximately 1,200,000 barrels of oil hedged or approximately 49% of our estimated oil sales based on the midpoint of our revised guidance. We also have 1.2 Bcf of natural gas hedged or approximately 38% of our estimated natural gas sales based on the midpoint. For a quarterly breakout of our hedge positions for Q3 and 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 some more detail. At June 30, we had $407,000,000 drawn on our credit facility.

Speaker 3

With the current borrowing base of 600,000,000 dollars we had $192,900,000 available net of letters of credit. Combined with cash, we had liquidity of $194,100,000 with a leverage ratio of 1.59 times. Looking at our outlook and guidance. For the second half of twenty twenty four, we will continue to utilize a 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 or slightly growing BOE per day production levels, while continuing to grow crude oil sales.

Speaker 3

Our average daily sales volume guidance for full year 2024 have been increased from the previous including crude oil sales volumes of 13,200 to 13,800 barrels of oil per day and BOE sales volumes of 19,000 to 19,800 BOE per day or 70% oil. For the Q3, we are providing a sales outlook of crude oil sales volumes of 13,200 to 13,800 barrels of oil per day and BOE sales volumes of 19,000 to 19,800 BOEs per day at 70% oil. Those who are still who are still paying attention probably have noticed that our Q3 and full year production guidance mirror each other and reflect a midpoint that is similar to where we ended the first half of twenty twenty four. For CapEx, we now expect to spend $141,000,000 to $161,000,000 on our full year development plan, which is 3% lower at the midpoints to our previous full year guidance. In addition, we are providing an estimate of between $35,000,000 to $45,000,000 for the Q3.

Speaker 3

We now anticipate full year 2024 LOE of $10.50 to $11.25 per BOE and are providing guidance of $10.50 to $11.25 per BOE for the Q3 of 2024. Finally, I would note that all projects and estimates are based on assumed WTI oil prices of $70 to $90 per barrel in Henry Hub prices of $2 to $3 per Mcf. So with that, I will turn it back to Paul for his closing comments. Paul?

Speaker 2

Thank you, Travis. Similar to the Q1, we view our operational financial success during the Q2 as a direct reflection of the merits of our proven and disciplined strategy designed to maximize free cash flow generation, further improve the balance sheet, properly grow the business and ultimately provide a sustainable return of capital to stockholders. In short, we are executing a plan that we believe generates sustainable value and is in the best interest of our stockholders. Having said that, I want to address in my closing comments several key questions related to our strategy that we continue to hear from our institutional and individual stockholders. Perhaps the most common question appears to be regarding our commitment to paying down debt.

Speaker 2

As I have stated previously, we are focused on reducing our absolute debt levels and our goal is to make material progress in this regard in the future depending on oil prices and other factors that affect our ability to do so. However, there are opportunities for growth that may require increases in the absolute debt levels that can have a material benefit to our stockholders. I am referring to opportunities to grow through strategic and accretive acquisitions. Regarding the debt that we could incur associated with a potential acquisition, you have heard me say in the past that we intend any future acquisitions in addition to being accretive to our stockholders to be balance sheet enhancing. We have also said that if they are not balance sheet enhancing, we will attempt to keep the deal as close as being balance sheet neutral as we can with clear sight to the pay down of the debt incurred.

Speaker 2

Two examples of how our intentions in this regard have panned out in the past are the acquisitions we closed during the last 2 years, the Stronghold acquisition and the Founders acquisition. Let's look at the details of those transactions specifically regarding their impact on our balance sheet and our leverage ratio. If you recall, we structured the financing of the Stronghold acquisition with a mixture of debt, equity, a deferred cash payment and a novation of their hedge position. Result of that extremely accretive deal was that our leverage ratio went from 3.5 times our trailing 12 months EBITDA to 1.4 times, greatly enhancing our balance sheet. When considering the Founders acquisition and the impact that deal had on our balance sheet, we drew down the funds necessary to purchase those assets from our credit facility, so the deal increased our absolute debt.

Speaker 2

However, we structured the deal and took advantage of several attributes of the assets to position the transaction so that it was essentially balance sheet neutral from a leverage ratio perspective. Let me explain. 1st, we took advantage of the cash flow from the high cash flow and assets to help reduce the amount we had to draw down on the credit facility at closing. We paid $75,000,000 for the assets with an effective date of April 1, 2023. The cash flow from the assets from the effective date until closing August 15, 2023 reduced the amount owed to $62,000,000

Speaker 4

Part of

Speaker 2

the closing obligation was deferred 4 months in the form of a deferred payment of $15,000,000 reducing the draw against the credit facility at the closing even more. The next thing we included in that deal was the ability to apply post closing adjustments to the deferred payment. Instead of paying the $15,000,000 as originally planned, we paid $11,900,000 And if you recall, we did not have to draw the $11,900,000 against the credit facility because the company's cash flow during quarter was sufficient to cover the deferred payment and pay down debt. After including the trailing 12 months EBITDA from the acquired assets, the deal was essentially balance sheet neutral from a leverage ratio perspective when not including the deferred payment. Since closing, we have paid down $48,000,000 of the debt incurred and are on track to pay off the entire amount very soon, hopefully by the end of this quarter if oil prices return to recent levels.

Speaker 2

So the bottom line is this, we incurred additional debt for the Founders deal, but it was essentially balance sheet neutral from a leverage ratio perspective. We had and still have a very clear sight to a rapid pay down of the debt incurred. The benefits of the stockholder is that after the debt is paid off, we will have approximately an additional 2,000 barrels of oil equivalent per day of production or more to accelerate the repayment of the remaining debt. Another question we often get is regarding our stock price and what many have identified as a disconnect between our operational financial performance and our stock price performance. As you know, there are numerous factors that affect stock price performance and investors and industry pundits have shared with us the issues they believe are having the largest impact.

Speaker 2

I don't plan to speculate in this regard or try to force rank which are the most important or whether some of them are truly affecting our stock price. But what I will do is share the things we are doing to help improve our stock price performance. First, we don't believe a large enough cross section of the investment community knows about Ring Energy. We also don't believe many are adequately educated about our assets in Northwest Shelf in the Central Basin Platform and what makes them different from the assets they typically know about in the Delaware and the Midland Basins. We also believe there is more we can do to educate the investment community about our strategy and the aspects of Ring that make us different from other public oil and gas investment opportunities.

Speaker 2

To help with all of this, we are stepping up our communication strategy by participating in more industry events and conferences to educate and tell our story. We are also scheduling more non deal roadshows, both in person and virtually with potential investors, institutional investors, lenders and a broader cross section of the banking and investment banking communities, all with hopes of attracting long term institutional investors. Another related thing we are trying to do is attract more analyst coverage. We have and continue to meet with analysts that for one reason or another have not yet initiated coverage on us. Our efforts to date have been focused on understanding their requirements and to position the company to meet those requirements.

Speaker 2

Last, but certainly not least, is our data. We are focused on improving our balance sheet and absolute debt levels. We believe making material progress in this regard can have a positive impact on the value creation. We are targeting getting our leverage ratio comfortably below 1 times and believe that it is a realistic and achievable goal. To sum up, we believe our value focused proven strategy better prepares the company to manage the industry risks and uncertainties, results in 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.

Speaker 2

We also believe staying the course with our strategy will ultimately deliver growth and competitive returns despite the continuing volatility we endure in our industry. I want to thank all of you for your interest in Ring Energy and for participating in our call today. I also want to thank our stockholders for their continued support and trust. And with that, we will turn this call over to the operator for questions. Operator?

Operator

Thank The first question comes from Neal Dingmann with Truist. Please go ahead.

Speaker 5

Good morning. Good nice update, Paul and team. My first question is on your inventory. Specifically, guys, looking at that Slide 26, no doubt you all continue to put up some nice vertical and horizontal wells in the platform as well as in the shelf and even the recompletion activity. So I guess what I'm wondering here is can you remind me majority of this year sort of going forward the remainder and even into next year, where you're thinking about the capital be allocated?

Speaker 5

And maybe just talk about inventory depth, because it's interesting to me on all the vertical and horizontal potential as well as the refrac potential.

Speaker 2

Yes, very good. Those are good questions. We like the allocation mix that we currently have. And we've talked about this in the past, our allocation strategy really in terms of how we allocate capital are basically based on 2 things. Number 1, cash flow generation is the first consideration, but the other thing is the results of or the issues associated with managing infrastructure constraints, where we have the saltwater disposal capacity, whether there are electrical constraints, whether there's enough fresh water or water we can use for the frac jobs, all of these types of constraints go into planning all of that.

Speaker 2

And so all of that works together to maximize capital generation. And so the allocation between horizontals and the verticals, the horizontals tend to generate larger producing volumes and also higher net present value. But the mix with the verticals, they have very rapid payback and many of the vertical areas have higher oil percentages, so we're also focused on that. And so now getting back to the depth of the inventory, I've said and I'll say it again, we have a really handsome short and medium term inventory to keep us going for the next several years. However, we don't have a luxury that many of the other companies have, especially those in the Beadell River and Midland Basin of a big 15 to 20 year inventory.

Speaker 2

So that's the reason why we're so focused on acquisitions. And so we believe though that in the area that we're focused, there's plenty of opportunity to continue to fill the hopper so that we can continue to deliver the types of returns. Now the other thing that's going on that we haven't really talked much about, and I think you'll hear us talk more about this as we go into the future, is that we're now to the point we're testing ideas on our existing acreage that could organically generate additional drilling opportunities. Some of these would be vertical, some of these would be horizontal. And so, there is a little sprinkle of capital allocation towards these higher risk tests, but the benefit to that was we could significantly improve our inventory and we can do that organically, and that's a lot better than going out and acquiring undeveloped opportunities through acquisitions.

Speaker 2

So that's kind of

Speaker 4

what you're going to see with us going on in the future.

Speaker 2

And I hope that answers your question, Neil.

Speaker 5

It certainly did. And what you said sort of tied right into my second question, that is just on the upcoming conventional M and A opportunity. It seems to me there's several I conventional packages, really interesting packages already out there. Sounds like there's more that may hit the market. So just wondering maybe what do you guys see it if you've heard the same and given kind of what your restrictions are to when you're looking at some of these deals?

Speaker 2

Yes. And so you heard us say in the past that we believe that the activity of the larger organizations in our industry as they consolidate the Midland and Delaware that they would want to help pay down or pay off and reduce our leverage associated with those deals by selling what they consider non core assets, assets where they have not historically allocated a lot of capital to. And so it's proved out to be true. As you know, and I'm not going to name any of these, but there are several packages out there on the street. We do hear like you have heard that we believe there are more packages that are going to hit the street over the next couple of years.

Speaker 2

We've said this in the past, we believe that the number of opportunities that will hit the Street will exceed our ability to take them all down and several of these we've been mapping and looking at for quite some time. Some of these we've actually approached to try to initiate a negotiated deal. We haven't been successful in that regard all the time. But, yes, we're very interested. Currently, we are focused in the very areas that we currently operate, again, because we can capture the synergies associated with spreading our operating team over more wells and more production.

Speaker 2

This is an area that we know very well. It's an area that we've been concentrating on. Our geoscience teams have been mapping, identifying undeveloped opportunities that reside under other people's acreage. And so, we're actually very excited about what we're seeing play out. And in some regards, we're kind of hoping that maybe these acquisition opportunities will hit the market a little bit more spread out, so that we have a better chance of capturing some.

Speaker 2

Some of them are coming so fast that we'll have to let 1 or 2 of them go just because we can't take it all in, right?

Speaker 5

No. Well said. Thank you, Paul. I'll go ahead.

Speaker 6

If I may, this is Alex. We created specifically a slide for this question, Slide 15. And it should give both the analysts and just the investing community. It's our acquisition strategy and backs up everything Paul just covered.

Speaker 2

Yes, if you go back to that slide, you'll notice that if you look at all of the potential acquisition opportunities that reside out there in the very area that we're focused, It represents 480,000 plus barrels of oil equivalent per day of production. That's a huge target for a company our size. And it's just self explanatory. By observation, you know that we can't take all of that down, but that just does represent the true opportunity that's out there before us.

Speaker 5

Great comment. Thanks guys. Thanks, Alex.

Operator

The next question comes from John White with ROTH Capital. Please go ahead.

Speaker 7

Good morning and congratulations on a strong quarter and your Congrats on your increased production guide. So to be clear, you have not announced an increase in CapEx, right?

Speaker 2

No, we have not. The guidance for our CapEx that we have provided for the rest of the year does represent, if you consider just the midpoint, a slight reduction in our capital spending. Again, we are enjoying a time period in the macro environment where the drilling activity in the Permian Basin has not increased, it's actually been holding flat or slightly down a little bit. And so, in my opinion, the oilfield services industry has they're designed really to operate at a higher activity level that we currently are. And so as a result, we're not seeing the pressures, the inflationary pressures on increasing cost, actually they're slightly coming down.

Speaker 2

So, we're taking advantage of that. And so, we believe that the rest of the year, unless something changes, we can enjoy that. We'll see quite a bit of savings. Now, we're still targeting essentially the same number of wells. We're just saying that we can now drill them and complete them and bring them online for less money than we originally estimated.

Speaker 2

And John, there's actually

Speaker 6

a slide, Slide 6 describes exactly what Paul is talking about. And comparing the original guidance that we provided at the beginning of the year compared to this updated guidance, the midpoint a 3%

Speaker 7

reduction. Well, that's favorable and thanks for the detail.

Speaker 4

You're welcome.

Operator

The next question comes from Jeff Grampp with Alliance Global Partners. Please go ahead.

Speaker 8

Hey guys. Couple of questions on the capital side for you. Obviously, really nice performance thus far in the first half of the year. I think you probably averaged something in the neighborhood of like $35,000,000 a quarter in CapEx. Activity levels in the back half of the year, it sounds like they'll be similar to the first half, but CapEx is probably going to be more like the $40,000,000 a quarter range.

Speaker 8

So I was just wondering, is that just general conservatism there on your part? Or if there's any perhaps specific reasons why capital might creep a little bit higher in the back half versus the first half given the consistency in your activity levels?

Speaker 2

Yes. It's actually a combination of a couple of things. Our estimates probably are a little high versus the inflationary pressures we are seeing, kind of going back to the question we just fielded with John White. But at the same time, and I don't mind sharing this, because of the success we've had in the first half and because of the success of the ongoing programs we've budgeted for the year, we're also allocating a little bit of capital towards some more risky investments that could potentially prove up significant additional reserves organically. And so that's really the what represents the higher end.

Speaker 2

Sean, I don't know if you've got more you could add to that?

Speaker 9

Yes. Again, if you do look at Slide number 6 and the guidance we've provided there, there is a little bit of an increase in activity. As Paul mentioned, we do have a few more wells that we do plan to drill in the Q4. And so that's the majority of that incremental CapEx that you're seeing.

Speaker 1

And I think we're also

Speaker 2

going to step up some of our spending on some of our facility upgrades, putting in capturing emissions, doing that kind of thing. There is a few additional capital costs that we've decided to throw in. So, we believe that our guidance range is just about right. I'd love to come in below it, but if it does, it will be because industry inflation, the macro environment will continue to improve.

Speaker 8

Understood. Thanks for those details. And my follow-up, you guys have a slide kind of noting a bit of the well cost reductions towards the back end of the deck, I believe. Should we think about those as being mostly kind of near term and maybe more transitory related to softness in the overall OFS market? Or are there some more kind of ring specific internal efficiencies, where maybe some of those cost reduction captures a little bit more permanent, if you will?

Speaker 2

That's kind of hard to predict. I'm going to turn this to Sean to ask, but it's really hard to predict because we assume the same level of efficiency when we're drilling and completing our wells. And I have to turn my hats off to my drilling department because they continue to improve their efficiency beyond what our assumptions. So Sean, you got more to say there?

Speaker 9

Yes. Just to add a little color there. We are seeing some improvements in our overall efficiencies on the drilling side and the completion side where we are just driving out costs by being faster and more efficient. And so, yes, there is a component of that that is just the overall relaxation in the prices of the service industry. But there's definitely some that we are going to be able to realize going forward just from our the performance of our drilling team and completion team.

Speaker 8

Got it. I appreciate those details. Thank you, guys.

Operator

Our next question will come from Jeff Robertson with Water Tower Research. Please go ahead.

Speaker 4

Thank you. Paul, production this year seems to have benefited from 2 things. 1 is performance on the wells you've drilled, but also a lot of the field level steps Ring has taken to either increase run times or deal with water disposal and things like that. Is a lot of the heavy lifting on the field operations with respect to the Founders acquisition or the existing asset base, has that been done? Or do you see further opportunity to enhance production just by better field level operations?

Speaker 9

Yes. This is Sean. I'll take a stab at that one. Yes, I think there's always room for improvement. And as we continue to have more time in the saddle with these acquisitions, we do expect that we'll continue to see some improvement.

Speaker 9

But we are seeing it in our other assets as well, not just the newly acquired properties, just with some of the bottom hole assemblies and things that we've incorporated in our rod designs and artificial lift designs have really started to make an impact. And so you're able to see that in the numbers now.

Speaker 4

Paul, on the case study you talked about for the Founders acquisition, does the type of asset that include a pretty heavy PDP base with, as one of your slides points out, your corporate decline curve being a lot less than some of the peers who are probably more focused on unconventional assets. And in those types of deals, are you able to pick up inventory at a relatively low cost because of the conventional nature?

Speaker 2

Yes, it's actually the conventional nature tends to reduce the competition for those opportunities. And so, I will say this, if you look at what's out there in the marketplace today for sale, there's a mix of acquisition targets that bring with them quite a few undeveloped opportunities based on our mapping and our analysis. There is also opportunities out there to pick up acreage that maybe more closely to fully or almost fully developed, so there's not as many or it'd be more considered a PDP buy. Each one of these asset acquisition opportunities bring different virtues that we consider, some of them are very beneficial to the company. So, we look at all of those things.

Speaker 2

And so, it's kind of hard to predict and at the same time, you always got to consider you have a low chance of capture for any one of these acquisition opportunities. And so, you do the best you can and you compete the best you can. You don't want to overpay, but all of these things have various different virtues that could actually enhance the value for our shareholders. And so, we look at all of

Speaker 4

that. If I could slip one more in. Paul, you talked about some higher risk opportunities in the drilling program. Is that applying new technology to known reservoirs or new technology to reservoirs that may not have been commercial in the past?

Speaker 2

The answer is yes. And so, it's kind of hard to explain all that. But what we've done is, as you march through the development of one area and you learn what works, what doesn't work, and you have your geologists continuing to work the acreage that you have and even acreage position that you don't have, you look at the logs, you look at the opportunity, you look at all the evidence that was uncovered before us and you say and you start asking questions, why won't this work over here, even though it hasn't been tried and so you do that. So some of these, we call them slightly higher risk, but when you look at the logs and you compare the information that you have about the rocks and the oil that's in the rocks, a lot of times it's just the fact that it hasn't been tried. And so, some of them, although we call them higher risk, they may not be higher risk in the end.

Speaker 2

And so, the good thing about it is that we're not only looking at these type of opportunities, doing what we're doing exactly where we're doing it, immediately offsetting on the other side of the fence, but we're also looking at opportunities on our acreage where we can apply horizontal drilling in areas that hasn't been applied yet. And so, yes, we're really excited about that, the opportunities that underlie our existing acreage, we believe can be very significant and so I'm proud to say that we've just now gotten to the point, we're still not finished building out our team, but our geoscience team is doing more than just steering the drill bit to keep our wells in line on our horizontals and that kind of stuff and evaluating our own acreage, but we're expanding now, we're generating now ideas so that we can grow organically outside of the acquisition front.

Speaker 4

Thank you for taking my bonus question.

Speaker 2

You're welcome.

Operator

Seeing no further questions, this will conclude our Q and A session. I would like to turn the conference back over to Paul McKinney for any closing remarks.

Speaker 2

Thank you, Nick. On behalf of the management team and Board of Directors, I want to once again thank you everyone for listening and participating in today's call. We are pleased to have posted record operational financial results to date for 2024 and are looking forward to the remainder of the year, which we believe remains strong. We will continue to keep everyone appraised of our progress. And again, I'd like to thank you for your interest in Ring Energy.

Speaker 2

Have a great day.

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Key Takeaways

  • Ring Energy delivered record Q2 sales volumes of 13,623 barrels of oil per day (19,786 BOE/day), driving adjusted EBITDA to $66.4 million and adjusted free cash flow to $21.4 million—70% above Q2 2023.
  • Operational efficiencies continued as volumes exceeded guidance while lease operating expenses of $10.72/BOE and capital spending of $35.4 million both came in below original guidance ranges.
  • The company used excess cash to pay down $15 million of debt in Q2 (and $48 million since the Founders acquisition), ending the quarter with liquidity of $194.1 million and a 1.59x leverage ratio, targeting sub-1x leverage going forward.
  • Full-year 2024 guidance was raised to 13,200–13,800 BOPD and 19,000–19,800 BOE/day, with CapEx of $141–161 million and maintained drilling plans of five horizontals and six verticals per quarter.
  • Management reaffirmed its commitment to accretive, balance-sheet enhancing acquisitions in its core Central Basin Platform and Northwest Shelf, citing a pipeline of 480,000 BOE/day of potential targets and prior success with Stronghold and Founders deals.
AI Generated. May Contain Errors.
Earnings Conference Call
Ring Energy Q2 2024
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