Ring Energy(REI) - 2020 Q4 - Annual Report

Form 10-K General Information Registrant Information Ring Energy, Inc is an accelerated filer with 99,181,587 common shares outstanding as of March 16, 2021 - Ring Energy, Inc. is an accelerated filer, not a well-known seasoned issuer[1][2] - As of March 16, 2021, the company had 99,181,587 shares of common stock outstanding[4] - The aggregate market value of common voting stock held by non-affiliates was $74,553,881 as of June 30, 2020, based on a closing price of $1.16 per share[3] Forward Looking Statements The report contains forward-looking statements subject to risks like commodity price volatility and regulatory changes - All statements regarding strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects, plans, and objectives are forward-looking[8] - Key factors that could cause actual results to differ materially include declines in oil and natural gas prices, ability to raise capital, operational risks, and environmental regulations[8] - The company undertakes no obligation to publicly update or revise any forward-looking statements after their date of issuance[9] PART I Item 1: Business Ring Energy is an independent oil and gas company focused on the Permian Basin, emphasizing debt reduction and strategic growth - Ring Energy, Inc. is a growth-oriented independent exploration and production company focused on oil and natural gas development in the Permian Basin[12] Company Metrics (as of Dec 31, 2020) | Metric | Value (as of Dec 31, 2020) | | :-------------------------------- | :------------------------- | | Leasehold Acreage (Gross) | 104,455 acres | | Leasehold Acreage (Net) | 76,745 acres | | Producing Wells (Gross) | 610 | | Producing Wells (Net) | 441 | | Proved Reserves (BOE) | 76.5 million | | Oil-weighted Reserves | 87% Oil, 13% Natural Gas | | Proved Developed (PD) Reserves | 57.5% | | Proved Undeveloped (PUD) Reserves | 42.5% | - The company's strategic vision includes operational excellence, generating free cash flow, and pursuing accretive strategic acquisitions[15][16][17][18][19][21][22] - In 2020, due to the drop in oil prices, Ring re-evaluated its capital expenditure budget, shifting focus to reducing costs and paying down debt[31] - The company drilled 6 new horizontal San Andres wells in the Northwest Shelf in 2020[31] - Significant management changes occurred in late 2020, including the appointment of a new CEO and Chairman, Paul D. McKinney[24][25][26][27][28] - Operations are subject to extensive governmental regulations which can increase costs and affect profitability[44][47][58][74][79] - As of December 31, 2020, Ring Energy had 41 full-time employees[91][92][93][96] - In response to COVID-19, the company implemented work-from-home provisions and safe working protocols for production teams[97][100] Item 1A: Risk Factors The company faces significant risks from commodity price volatility, drilling uncertainties, hedging limitations, and regulatory changes - Horizontal drilling and completion techniques involve additional operational risks such as landing in the desired zone and successful fracture stimulation[101] - A substantial percentage (43%) of proved reserves are undeveloped, requiring significant capital and carrying a higher risk[104] - Hedging transactions may limit potential gains from price increases and expose the company to counterparty default risk[106][107] - The COVID-19 pandemic significantly impacted global oil demand and prices, leading to production curtailments and a weaker industry outlook[111][112] - A substantial or extended decline in oil and natural gas prices can adversely affect revenues, profitability, and the value of proved reserves[114][115][118][119] - New governmental regulations, such as the moratorium on new federal leasing, could materially affect operations[116][134] - The company's credit facility, with $313 million outstanding, contains covenants that limit financial flexibility[142][274] - The market price of common stock may be volatile due to operating performance, commodity prices, and general economic conditions[145] Item 1B: Unresolved Staff Comments The company reported no unresolved staff comments from the SEC - There are no unresolved staff comments[152] Item 2: Properties The company's properties are concentrated in the Permian Basin, with 76.5 million BOE of proved reserves as of year-end 2020 - The company's business strategy focuses on increasing stockholder value by exploiting and developing existing properties and pursuing strategic acquisitions[154] Proved Reserves Summary (as of December 31, 2020) | Metric | Value | | :----------------------------------- | :------------------- | | Oil (Bbl) | 66,264,286 | | Natural Gas (Mcf) | 61,305,027 | | Total (Boe) | 76,481,791 | | Pre-Tax PV10 Value | $638,107,637 | | Standardized Measure of Discounted Future Net Cash Flows | $555,871,253 | - Proved reserves are 87% oil and 13% natural gas, with 57.5% classified as proved developed (PD)[13][180] Proved Reserves by Type (2019 vs. 2020) | Reserve Type | 2020 (BOE) | 2019 (BOE) | | :----------------- | :----------- | :----------- | | Developed | 43,983,225 | 46,986,709 | | Undeveloped | 32,498,566 | 34,084,285 | | Total | 76,481,791 | 81,070,994 | - Reserve estimates for 2020 were based on significantly lower SEC average prices of $36.04 per Bbl for oil and $1.99 per MMBtu for gas[171] Changes in Proved Reserves (2019-2020) | Category | Oil (Bbl) Change | Gas (Mcf) Change | | :------------------------------------------ | :----------------- | :----------------- | | Improved recovery | +3,495,210 | +1,824,310 | | Production | (2,801,528) | (2,494,501) | | Upward revisions of estimates | +2,591,965 | +6,158,076 | | Downward revision (well performance) | (4,484,425) | +44,370 | | Downward revision (commodity prices) | (2,313,890) | (2,303,700) | | Downward revision (undeveloped locations removal) | (1,582,060) | (195,410) | - The company plans to convert 32.5 million BOE of PUD reserves to PD by 2024 with estimated costs of $219.2 million[182][186] Acreage Summary (as of December 31, 2020) | Region | Developed Gross (Net) | Undeveloped Gross (Net) | Total Gross (Net) | | :------------------- | :-------------------- | :---------------------- | :------------------ | | Central Basin Platform | 23,668 (18,712) | 15,046 (6,650) | 38,714 (25,362) | | Delaware Basin | 18,521 (18,256) | 248 (212) | 18,769 (18,468) | | Northwest Shelf | 11,723 (8,085) | 35,249 (24,830) | 46,972 (32,915) | | Total | 53,912 (45,053) | 50,543 (31,692) | 104,455 (76,745) | Production History (2018-2020) | Metric | 2020 | 2019 | 2018 | | :-------------------- | :----------- | :----------- | :----------- | | Oil (Bbls) | 2,801,528 | 3,536,126 | 2,047,295 | | Gas (Mcf) | 2,494,502 | 2,476,472 | 1,112,177 | | Total production (BOE) | 3,217,278 | 3,948,871 | 2,232,658 | | Daily production (Boe/d) | 8,790 | 10,819 | 6,117 | Average Sales Price and Production Cost (2018-2020) | Metric | 2020 | 2019 | 2018 | | :------------------------------------ | :------- | :------- | :------- | | Average oil sales price (per Bbl) | $38.95 | $54.27 | $56.99 | | Average natural gas sales price (per Mcf) | $1.57 | $1.54 | $3.05 | | Total average sales price (per Boe) | $35.13 | $49.56 | $53.78 | | Average production cost (per Boe) | $11.49 | $12.28 | $12.45 | | Average production taxes (per Boe) | $1.63 | $2.31 | $2.52 | - In 2020, the company drilled 6 gross (5.61 net) productive development wells in the Northwest Shelf, with no dry wells[205][207] Costs Incurred for Property Acquisition, Exploration and Development (2019-2020) | Category | 2020 | 2019 | | :------------------------------------ | :----------- | :------------- | | Wishbone Acquisition | $0 | $304,392,921 | | Acquisition of proved properties | $1,317,313 | $3,400,411 | | Divestiture of proved properties | $0 | $(8,547,074) | | Development costs | $42,457,745 | $152,125,320 | | Total Costs Incurred | $43,775,058 | $451,371,578 | Item 3: Legal Proceedings The company is not currently involved in any material litigation or legal proceedings - The company does not have any material litigation pending or threatened[214] Item 4: Mine Safety Disclosures This item is not applicable to Ring Energy, Inc - Mine safety disclosures are not applicable to the company[215] PART II Item 5: Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on the NYSE American under 'REI' and it does not currently pay cash dividends - Ring Energy's common stock is listed on the NYSE American under the trading symbol 'REI'[218] - As of March 1, 2021, there were approximately 21,632 holders of record of the company's common stock[220] - The company does not currently anticipate paying cash dividends, intending to retain earnings to pay down debt and finance expansion[221] - The company did not make any repurchases of its equity securities during the year ending December 31, 2020[222] Item 6: Selected Financial Data The company reported a significant net loss in 2020 due to a ceiling test impairment, contrasting with net income in prior years Selected Statement of Operations Data (2018-2020) | Metric | 2020 | 2019 | 2018 | | :------------------------------------ | :------------- | :------------- | :------------- | | Revenues | $113,025,138 | $195,702,831 | $120,065,361 | | Cost of revenues | $42,196,963 | $57,626,604 | $33,433,082 | | Depreciation, depletion and amortization | $43,010,660 | $56,204,269 | $39,024,886 | | Ceiling test impairment | $277,501,943 | $0 | $14,172,309 | | Net income (loss) | $(253,411,828) | $29,496,551 | $8,999,760 | | Basic income (loss) per common share | $(3.48) | $0.44 | $0.15 | | Diluted income (loss) per common share | $(3.48) | $0.44 | $0.15 | Selected Balance Sheet Data (2019-2020) | Metric | 2020 | 2019 | | :------------------------------------ | :------------- | :------------- | | Current assets | $20,799,890 | $38,708,541 | | Oil and gas properties subject to amortization | $836,514,815 | $1,083,966,135 | | Total assets | $663,456,197 | $973,006,148 | | Total current liabilities | $36,941,737 | $59,092,554 | | Total long-term liabilities | $331,748,647 | $390,403,661 | | Total Stockholders Equity | $294,765,813 | $523,509,933 | Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the adverse impact of low 2020 oil prices, which led to a $277.5 million impairment and a focus on debt reduction - The COVID-19 pandemic and OPEC+ price war caused a sharp drop in oil prices in 2020, leading to a strategic shift to cost reduction[228][229][233][234] - Oil sales represented approximately 96.5% of total revenue in 2020, making the company highly sensitive to oil price fluctuations[236] Derivative Contracts (as of December 31, 2020) | Commodity | Year | Type | Volume (per day) | Price Range/Average | | :---------- | :--- | :----------- | :--------------- | :------------------ | | Oil | 2021 | Costless Collars | 4,500 Bbl | Floor: $40.00-$45.00 (Avg $42.22); Ceiling: $52.71-$55.35 (Avg $54.57) | | Oil | 2021 | Swaps | 4,500 Bbl | Avg $45.42 | | Oil | 2022 | Swaps | 1,750 Bbl | Avg $44.84 | | Natural Gas | 2021 | Swaps | 6,000 MMBTU | $2.991 | | Natural Gas | 2022 | Swaps | 5,000 MMBTU | $2.7255 | - The company recorded a realized gain on derivatives of $22.5 million in 2020, with an unrealized loss of $1.2 million[236][252][253] - The borrowing base of the Credit Facility was reduced twice in 2020, from $425 million to $350 million[239][271][274] Key Financial Performance (2019 vs. 2020) | Metric | 2020 | 2019 | Change (YoY) | | :------------------------------------ | :------------- | :------------- | :------------- | | Oil and Natural Gas Sales | $113.0 million | $195.7 million | $(82.7) million | | Oil Sales | $109.1 million | $191.9 million | $(82.8) million | | Natural Gas Sales | $3.9 million | $3.8 million | $0.1 million | | Average Oil Price (per Bbl) | $38.95 | $54.27 | $(15.32) | | Average Natural Gas Price (per Mcf) | $1.57 | $1.54 | $0.03 | | Production Costs (incl. ad valorem) | $37.0 million | $48.5 million | $(11.5) million | | Production Costs (per BOE) | $11.49 | $12.28 | $(0.79) | | Depreciation, Depletion & Amortization | $43.0 million | $56.2 million | $(13.2) million | | Ceiling Test Impairment | $277.5 million | $0 | $277.5 million | | Realized Gain (Loss) on Derivatives | $22.5 million | $0 | $22.5 million | | Net Income (Loss) | $(253.4) million | $29.5 million | $(282.9) million | | Basic EPS | $(3.48) | $0.44 | $(3.92) | | Interest Expense | $17.6 million | $13.9 million | $3.7 million | | Deposit Forfeiture Income | $5.5 million | $0 | $5.5 million | - The company closed two equity offerings in October 2020, raising total net proceeds of $19.4 million[277] Cash Flows from Operating Activities (2018-2020) | Year | Net Cash Provided by Operating Activities | | :--- | :---------------------------------------- | | 2020 | $72,159,255 | | 2019 | $106,616,221 | | 2018 | $70,357,321 | - The company's critical accounting policies include revenue recognition, the full cost method, and the write-down of properties (ceiling test)[291][292][293][294][297] Item 7A: Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from commodity price volatility, which it mitigates with derivative contracts - The company's major market risk exposure is the volatile pricing of oil and natural gas[303] - To reduce price uncertainty, the company uses crude oil and natural gas hedging arrangements, including costless collars and swaps[304] Major Customers and Accounts Receivable (as of December 31, 2020) | Customer | % of Oil and Natural Gas Revenues (2020) | % of Accounts Receivable (2020) | | :--------- | :--------------------------------------- | :------------------------------ | | Phillips 66 | 68% | 80% | | Occidental Energy Marketing | 10% | 0% | | NGL Crude Partners | 8% | 5% | - The company is subject to interest rate risk on its $313 million outstanding Credit Facility, which bears variable interest[309][310] Item 8: Financial Statements and Supplementary Data This item refers to the location of the company's audited financial statements within the Annual Report - The financial statements and supplementary data are included starting at page F-1 of this Annual Report[312] Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reported no changes in or disagreements with its accountants - There are no changes in or disagreements with accountants on accounting and financial disclosure[313] Item 9A: Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2020 - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2020[314] - The company remediated a material weakness identified in 2019 by incorporating additional review into its quarterly process[315] - Management assessed that the company's internal control over financial reporting was effective as of December 31, 2020[319] - Eide Bailly LLP issued an attestation report on the effectiveness of internal control over financial reporting[320][342] Item 9B: Other Information The company reported no other information requiring disclosure under this item - There is no other information to report under this item[321] PART III Item 10: Directors, Executive Officers and Corporate Governance Information regarding directors and corporate governance is incorporated by reference from the 2021 Proxy Statement - Information for this item is incorporated by reference from the 2021 Proxy Statement[323] Item 11: Executive Compensation Information regarding executive compensation is incorporated by reference from the 2021 Proxy Statement - Information for this item is incorporated by reference from the 2021 Proxy Statement[324] Item 12: Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership is incorporated by reference from the 2021 Proxy Statement - Information for this item is incorporated by reference from the 2021 Proxy Statement[325] Item 13: Certain Relationships and Related Transactions, and Director Independence Information regarding related transactions and director independence is incorporated by reference from the 2021 Proxy Statement - Information for this item is incorporated by reference from the 2021 Proxy Statement[326] Item 14: Principal Accounting Fees and Services Information regarding accounting fees is incorporated by reference from the 2021 Proxy Statement - Information for this item is incorporated by reference from the 2021 Proxy Statement[327] PART IV Item 15: Exhibits, Financial Statement Schedules This section lists the financial statements, supplementary data, and various exhibits filed with the Annual Report - The financial statements filed with this Annual Report include the Report of Independent Registered Public Accounting Firm, Balance Sheets, and Statements of Operations[329][330] - A comprehensive list of exhibits, including agreements, charters, and certifications, is provided[331][333] Financial Statements Report of Independent Registered Public Accounting Firm Eide Bailly LLP issued an unqualified opinion on the financial statements and internal controls as of December 31, 2020 - Eide Bailly LLP provided an unqualified opinion on the financial statements and the effectiveness of internal control over financial reporting[341][342] - Critical audit matters identified include the estimation of proved oil and natural gas reserves and the valuation allowance of deferred tax assets[349][350][356][357] Balance Sheets Total assets decreased to $663.5 million in 2020 from $973.0 million in 2019, driven by a property impairment Balance Sheet Summary (as of December 31, 2019 and 2020) | Metric | 2020 | 2019 | | :------------------------------------------ | :------------- | :------------- | | Cash and cash equivalents | $3,578,634 | $10,004,622 | | Total Current Assets | $20,799,890 | $38,708,541 | | Oil and natural gas properties subject to amortization | $836,514,815 | $1,083,966,135 | | Net Properties and Equipment | $638,782,560 | $929,216,155 | | Total Assets | $663,456,197 | $973,006,148 | | Total Current Liabilities | $36,941,737 | $59,092,554 | | Revolving line of credit | $313,000,000 | $366,500,000 | | Total Liabilities | $368,690,384 | $449,496,215 | | Total Stockholders' Equity | $294,765,813 | $523,509,933 | Statements of Operations The company reported a net loss of $253.4 million in 2020, driven by a $277.5 million ceiling test impairment Statements of Operations Summary (2018-2020) | Metric | 2020 | 2019 | 2018 | | :------------------------------------------ | :------------- | :------------- | :------------- | | Oil and Natural Gas Revenues | $113,025,138 | $195,702,831 | $120,065,361 | | Oil and natural gas production costs | $36,968,873 | $48,496,225 | $27,801,989 | | Depreciation, depletion and amortization | $43,010,660 | $56,204,269 | $39,024,886 | | Ceiling test impairment | $277,501,943 | $0 | $14,172,309 | | General and administrative expense | $16,874,050 | $19,866,706 | $12,867,686 | | Realized gain (loss) on derivatives | $22,522,591 | $0 | $(11,153,701) | | Deposit forfeiture income | $5,500,000 | $0 | $0 | | Net Income (Loss) | $(253,411,828) | $29,496,551 | $8,999,760 | | Basic Earnings (Loss) per share | $(3.48) | $0.44 | $0.15 | | Diluted Earnings (Loss) per share | $(3.48) | $0.44 | $0.15 | Statements of Stockholders' Equity Stockholders' equity decreased to $294.8 million in 2020 from $523.5 million in 2019, primarily due to the net loss Statements of Stockholders' Equity Summary (2018-2020) | Metric | 2020 | 2019 | 2018 | | :------------------------------------------ | :------------- | :------------- | :------------- | | Balance, December 31 | $294,765,813 | $523,509,933 | $462,599,430 | | Common stock shares outstanding | 85,568,287 | 67,993,797 | 63,229,710 | | Additional paid-in capital | $550,951,415 | $526,301,281 | $494,892,093 | | Accumulated deficit | $(256,271,170) | $(2,859,342) | $(32,355,893) | | Net (loss) / income | $(253,411,828) | $29,496,551 | $8,999,760 | | Common stock and warrants issued for cash, net | $19,379,832 | $0 | $81,821,138 | | Share-based compensation | $5,364,162 | $3,082,625 | $3,870,934 | Statements of Cash Flows Cash from operations decreased to $72.2 million in 2020, while investing activities saw a significant reduction in spending Statements of Cash Flows Summary (2018-2020) | Metric | 2020 | 2019 | 2018 | | :------------------------------------------ | :------------- | :------------- | :------------- | | Net Cash Provided by Operating Activities | $72,159,255 | $106,616,221 | $70,357,321 | | Net Cash Used in Investing Activities | $(43,830,397) | $(423,040,251) | $(203,421,314) | | Net Cash Provided by (Used in) Financing Activities | $(34,754,846) | $323,064,926 | $121,421,138 | | Net Increase (Decrease) in Cash | $(6,425,988) | $6,640,896 | $(11,642,855) | | Cash at End of Period | $3,578,634 | $10,004,622 | $3,363,726 | | Cash paid for interest | $16,911,344 | $10,364,313 | $323,916 | - In 2020, the company made payments of $42.5 million to develop oil and natural gas properties, a significant decrease from $152.1 million in 2019[370] - The company repaid $80 million on its revolving line of credit in 2020, compared to no repayments in 2019 or 2018[370] Notes to Financial Statements The notes detail accounting policies, including the full cost method and the $277.5 million ceiling test impairment in 2020 - The company uses the full cost method of accounting for oil and natural gas properties, capitalizing all related costs[380] - A quarterly ceiling test is performed, which resulted in a $277.5 million impairment in 2020[294][295][384] - Revenue from oil and natural gas sales is recognized when control transfers to the purchaser at the point of delivery[389] - In 2020, the company recorded a full valuation allowance of $50.6 million against its deferred tax asset[393][478] - The company recorded $5.5 million in deposit forfeiture income in 2020 from a terminated asset sale agreement[254][425] - Derivative financial instruments are recorded at fair value on the balance sheet, with changes recognized in earnings[401][440] - In 2020, officers and directors voluntarily returned 2,265,000 stock options, resulting in an additional compensation expense of $768,379[460] - The company accelerated the vesting of 1,131,955 shares of restricted stock in 2020, incurring an additional compensation expense of $2.4 million[461] Asset Retirement Obligation Reconciliation (2018-2020) | Metric | 2020 | 2019 | 2018 | | :------------------------------------ | :------------- | :------------- | :------------- | | Balance, December 31 | $17,117,135 | $16,787,219 | $13,055,797 | | Liabilities acquired | $0 | $3,745,642 | $2,571,549 | | Liabilities incurred | $99,436 | $631,727 | $1,311,956 | | Liabilities settled | $(710,577) | $(1,589,654) | $(577,824) | | Accretion expense | $906,616 | $943,707 | $606,459 | - Subsequent to year-end, the company entered into a new office sublease and completed an asset sale for $2 million cash[285][286][483][484] Supplemental Information on Oil and Natural Gas Producing Activities This section provides supplemental unaudited data on oil and gas operations, highlighting the 2020 net loss and reserve changes Results of Oil and Natural Gas Producing Operations (2018-2020) | Metric | 2020 | 2019 | 2018 | | :------------------------------------------ | :------------- | :------------- | :------------- | | Oil and natural gas sales | $113,025,138 | $195,702,831 | $120,065,361 | | Production costs | $(36,968,873) | $(48,496,225) | $(27,801,989) | | Production taxes | $(5,228,090) | $(9,130,379) | $(5,631,093) | | Depreciation, depletion, amortization and accretion | $(43,010,660) | $(56,204,269) | $(39,024,886) | | Ceiling test impairment | $(277,501,943) | $0 | $(14,172,309) | | General and administrative (exclusive of corporate overhead) | $(1,454,041) | $(5,696,189) | $(1,404,635) | | Results of Oil and Natural Gas Producing Operations | $(251,138,469) | $76,175,769 | $32,030,449 | - The standardized measure of discounted future net cash flows for proved reserves decreased from $923.2 million to $555.9 million in 2020[493][495] Changes in Standardized Measure of Discounted Future Net Cash Flows (2019-2020) | Category | 2020 | 2019 | | :------------------------------------------ | :------------- | :------------- | | Beginning of the year | $923,175,051 | $455,944,641 | | Net changes in price and production costs | $(368,974,767) | $(219,608,128) | | Revision of previous quantity estimates as a result of commodity prices | $(26,590,142) | $(71,545,320) | | Revision of estimated timing of cash flows | $(139,039,115) | $(107,443,484) | | Net change in income taxes | $97,384,365 | $(92,073,360) | | End of the Year | $555,871,553 | $923,175,051 |