Ring Energy(REI) - 2021 Q3 - Quarterly Report

Forward-Looking Statements The report contains forward-looking statements based on management's beliefs and assumptions, involving risks and uncertainties that could cause actual results to differ materially - The report contains forward-looking statements based on management's beliefs and assumptions, which involve risks and uncertainties that could cause actual results to differ materially[8] - Key risk factors include declines or volatility in oil and natural gas prices, ability to raise capital, general economic conditions, drilling risks, uncertainties in reserve estimates, environmental regulations, cybersecurity incidents, and the ongoing COVID-19 pandemic[9][13] PART I – FINANCIAL INFORMATION This section presents the unaudited condensed financial statements and management's discussion and analysis of Ring Energy, Inc.'s financial performance and condition Item 1. Financial Statements This section presents Ring Energy, Inc.'s unaudited condensed financial statements, including balance sheets, statements of operations, stockholders' equity, and cash flows, with detailed notes Condensed Balance Sheets This section provides a snapshot of the company's financial position at specific dates, detailing assets, liabilities, and stockholders' equity | Metric | Sep 30, 2021 ($) | Dec 31, 2020 ($) | Change ($) | % Change | | :-------------------------------- | :----------- | :----------- | :------- | :------- | | Total Assets | $678,618,843 | $663,456,197 | +$15,162,646 | +2.28% | | Total Liabilities | $402,981,349 | $368,690,384 | +$34,290,965 | +9.30% | | Total Stockholders' Equity | $275,637,494 | $294,765,813 | -$19,128,319 | -6.49% | | Cash and cash equivalents | $2,046,946 | $3,578,634 | -$1,531,688 | -42.80% | | Accounts receivable | $20,306,264 | $14,997,979 | +$5,308,285 | +35.39% | | Derivative liabilities (current) | $38,402,944 | $3,287,328 | +$35,115,616 | +1068.10% | | Revolving line of credit | $295,000,000 | $313,000,000 | -$18,000,000 | -5.75% | Condensed Statements of Operations This section outlines the company's revenues, expenses, and net income or loss over specific periods, reflecting operational performance | Metric | 3 Months Ended Sep 30, 2021 ($) | 3 Months Ended Sep 30, 2020 ($) | Change ($) | % Change | | :-------------------------------- | :-------------------------- | :-------------------------- | :------- | :------- | | Oil and Natural Gas Revenues | $49,376,176 | $31,466,544 | +$17,909,632 | +56.92% | | Total Costs and Operating Expenses | $24,989,161 | $24,955,383 | +$33,778 | +0.14% | | Income (Loss) from Operations | $24,387,015 | $6,511,161 | +$17,875,854 | +274.54% | | Net Income (Loss) | $14,163,934 | $(1,961,603) | +$16,125,537 | N/A | | Basic Earnings (Loss) per share | $0.14 | $(0.03) | +$0.17 | N/A | | Metric | 9 Months Ended Sep 30, 2021 ($) | 9 Months Ended Sep 30, 2020 ($) | Change ($) | % Change | | :-------------------------------- | :-------------------------- | :-------------------------- | :------- | :------- | | Oil and Natural Gas Revenues | $136,638,810 | $81,673,465 | +$54,965,345 | +67.30% | | Total Costs and Operating Expenses | $72,752,027 | $221,926,283 | -$149,174,256 | -67.22% | | Income (Loss) from Operations | $63,886,783 | $(140,252,818) | +$204,139,601 | N/A | | Net Income (Loss) | $(20,789,318) | $(93,157,551) | +$72,368,233 | N/A | | Basic Earnings (Loss) per share | $(0.21) | $(1.37) | +$1.16 | N/A | - The significant decrease in Total Costs and Operating Expenses for the nine months ended September 30, 2021, compared to 2020, is primarily due to the absence of a $147.9 million ceiling test impairment recorded in 2020[20] - Gain (loss) on derivative contracts swung from a $32.9 million gain in 9M 2020 to a $73.6 million loss in 9M 2021, significantly impacting net income[20] Condensed Statements of Stockholders' Equity This section details changes in the company's equity accounts, including common stock, additional paid-in capital, and accumulated deficit | Metric | Dec 31, 2020 (shares) | Sep 30, 2021 (shares) | Change (shares) | | :-------------------------------- | :----------- | :----------- | :------- | | Common Stock (shares) | 85,568,287 | 99,359,938 | +13,791,651 | | Common Stock (amount) ($) | $85,568 | $99,360 | +$13,792 | | Additional Paid-in Capital ($) | $550,951,415 | $552,598,622 | +$1,647,207 | | Accumulated Deficit ($) | $(256,271,170) | $(277,060,488) | -$20,789,318 | | Total Stockholders' Equity ($) | $294,765,813 | $275,637,494 | -$19,128,319 | - During the nine months ended September 30, 2021, the company issued 13,428,500 shares from pre-funded warrant exercises and 284,800 shares from common warrant exercises, generating $241,269 in gross proceeds[22][108] Statements of Cash Flows This section reports the cash generated and used by the company's operating, investing, and financing activities over specific periods | Metric | 9 Months Ended Sep 30, 2021 ($) | 9 Months Ended Sep 30, 2020 ($) | Change ($) | | :-------------------------------- | :-------------------------- | :-------------------------- | :------- | | Net Cash Provided by (Used In) Operating Activities | $49,523,439 | $44,903,306 | +$4,620,133 | | Net Cash Provided by (Used in) Investing Activities | $(33,869,724) | $(30,275,770) | -$3,593,954 | | Net Cash Provided by (Used in) Financing Activities | $(17,185,403) | $(6,711,341) | -$10,474,062 | | Net Change in Cash | $(1,531,688) | $7,916,195 | -$9,447,883 | | Cash at End of Period | $2,046,946 | $17,920,817 | -$15,873,871 | - Cash flows from operating activities increased primarily due to higher cash received from customers in 2021[161] - Increased cash used in investing activities was driven by higher payments to develop oil and natural gas properties[161] - Net cash used in financing activities increased significantly, including $18 million paid on the credit facility during the nine months ended September 30, 2021[161] Notes to Condensed Financial Statements This section provides detailed explanations and additional information supporting the condensed financial statements, clarifying accounting policies and specific line items NOTE 1 – BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES This note outlines the preparation basis for interim financial statements and the company's key accounting policies, including revenue recognition and derivatives - The unaudited condensed financial statements are prepared in accordance with GAAP for interim information and should be read with the 2020 Form 10-K[28][29] - The Company is an independent E&P company focused on oil and natural gas properties in Texas and New Mexico, with profitability dependent on volatile commodity prices[31] - COVID-19 caused significant oil price declines in early 2020, which have since recovered, but continued volatility or new variants could still adversely impact operations[32] - Liquidity is maintained through cash flow from operations, cash on hand, available borrowing capacity, and non-strategic asset sales, with hedges in place to mitigate price declines[33][34] - Derivative instruments are recorded at fair value, with changes recognized in earnings; for 9M 2021, an unrealized loss of $40.3 million and realized losses of $33.3 million were recognized on derivatives[43][44] - The Company uses the full cost method for oil and gas properties and did not incur a ceiling test impairment for 3M/9M 2021, unlike the $147.9 million impairment in 2020[48][49] - For 9M 2021, the Company recorded state deferred income tax expense of $141,943 but no federal income tax expense or benefit due to a full valuation allowance against net federal deferred tax assets[58] NOTE 2 – REVENUE RECOGNITION This note details the company's policy for recognizing revenue from crude oil and natural gas sales, including product and geographical breakdowns - Revenue is primarily derived from crude oil and natural gas sales, recognized when control transfers to the purchaser at delivery, net of royalties[67] | Product | 3 Months Ended Sep 30, 2021 ($) | 3 Months Ended Sep 30, 2020 ($) | 9 Months Ended Sep 30, 2021 ($) | 9 Months Ended Sep 30, 2020 ($) | | :-------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Oil | $45,889,548 | $30,327,668 | $126,927,318 | $79,379,242 | | Natural gas | $3,486,628 | $1,138,876 | $9,711,492 | $2,294,223 | | Total | $49,376,176 | $31,466,544 | $136,638,810 | $81,673,465 | - All revenues are generated from production in the Permian Basin in Texas and New Mexico[71] NOTE 3 – LEASES This note describes the company's lease accounting policies, including the recognition of operating and financing lease assets and liabilities - The Company adopted ASU 2016-02 (Leases) effective January 1, 2019, recognizing certain lease assets and liabilities on the balance sheet[73] - Operating leases include office spaces in The Woodlands and Midland, Texas, with the Tulsa office lease terminated in March 2021[75] - Financing leases are primarily for vehicles with a 36-month term, after which the Company owns and typically sells them for new vehicle proceeds[78] | Lease Type | 2021 (remaining $) | 2022 ($) | 2023 ($) | 2024 ($) | 2025 ($) | | :----------------------- | :--------------- | :----- | :----- | :----- | :----- | | Operating lease payments | $68,132 | $349,127 | $356,991 | $376,855 | $384,719 | | Financing lease payments | $126,889 | $336,206 | $215,530 | $142,354 | $0 | NOTE 4 – EARNINGS (LOSS) PER SHARE INFORMATION This note provides a breakdown of basic and diluted earnings per share calculations, including the impact of potentially dilutive securities | Metric | 3 Months Ended Sep 30, 2021 ($) | 3 Months Ended Sep 30, 2020 ($) | 9 Months Ended Sep 30, 2021 ($) | 9 Months Ended Sep 30, 2020 ($) | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net Income (Loss) | $14,163,934 | $(1,961,603) | $(20,789,318) | $(93,157,551) | | Basic Weighted-Average Shares Outstanding | 99,358,504 | 67,980,961 | 99,251,532 | 67,985,168 | | Diluted Weighted-Average Shares Outstanding | 121,220,748 | 67,980,961 | 99,251,532 | 67,985,168 | | Basic Earnings (Loss) per Share | $0.14 | $(0.03) | $(0.21) | $(1.37) | | Diluted Earnings (Loss) per Share | $0.12 | $(0.03) | $(0.21) | $(1.37) | - Certain stock options, restricted stock, and common warrants were excluded from diluted EPS calculation for various periods as their effect would have been anti-dilutive[83] NOTE 5 – ACQUISITIONS & DIVESTITURES This note details the company's acquisition and divestiture activities, including the sale and exchange of oil and gas interests - In February 2021, the Company completed a sale and exchange of oil and gas interests in Andrews County, Texas, receiving $2,000,000 in cash[84] - This transaction reduced the Company's asset retirement obligations by $2,934,126 for properties sold and added $662,705 for properties acquired[84] NOTE 6 – DERIVATIVE FINANCIAL INSTRUMENTS This note describes the company's use of derivative contracts to manage commodity price risk and their impact on financial statements - The Company uses derivative contracts (costless collars, puts, swaps) to manage exposure to crude oil and natural gas price fluctuations, but does not designate them as hedges for accounting purposes[85][88] | Metric | Sep 30, 2021 ($) | Dec 31, 2020 ($) | | :-------------------------------- | :----------- | :----------- | | Derivative liabilities, current | $(38,402,944) | $(3,287,328) | | Derivative liabilities, non-current | $(6,061,724) | $(869,273) | | Total Derivative Liabilities | $(44,464,668) | $(4,156,601) | | Metric | 3 Months Ended Sep 30, 2021 ($) | 3 Months Ended Sep 30, 2020 ($) | 9 Months Ended Sep 30, 2021 ($) | 9 Months Ended Sep 30, 2020 ($) | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Gain (loss) on oil derivative | $(6,720,320) | $(4,502,080) | $(73,387,510) | $32,900,767 | | Gain (loss) on natural gas derivatives | $0 | $0 | $(198,689) | $0 | | Cash (paid) received on oil derivatives | $(14,921,008) | $1,726,373 | $(34,030,310) | $18,814,068 | | Cash (paid) received on natural gas derivatives | $0 | $0 | $743,178 | $0 | - As of September 30, 2021, the Company had various oil derivative contracts for 2021 (costless collars and swaps) and 2022 (swaps) to manage price risk[92] NOTE 7 – FAIR VALUE MEASUREMENTS This note explains the company's fair value measurement hierarchy and the valuation techniques used for financial instruments, particularly derivatives - Fair value measurements are classified into a three-level hierarchy, with Level 1 being unadjusted quoted prices in active markets and Level 3 being unobservable inputs[95][99] - The fair values of the Company's derivative instruments are estimated using a market approach with commodity futures pricing from a third party, classified as Level 2 fair value measurements[96] | Asset/Liability | As of Dec 31, 2020 (Level 2, $) | As of Sep 30, 2021 (Level 2, $) | | :-------------------------- | :--------------------------- | :--------------------------- | | Commodity Derivatives - Liabilities | $(4,156,601) | $(44,464,668) | - No triggering events for impairment assessment of oil and natural gas properties or goodwill were observed during the nine months ended September 30, 2021, unlike in 2020[98] NOTE 8 – REVOLVING LINE OF CREDIT This note details the terms and conditions of the company's credit facility, including borrowing base, outstanding amounts, and covenants - The Credit Facility, amended in April 2019 and further in June 2021, has a maximum borrowing amount of $1 billion and matures in April 2024[103] - The borrowing base was reaffirmed at $350 million in June 2021 and is subject to semi-annual redeterminations[103] - As of September 30, 2021, $295,000,000 was outstanding on the Credit Facility, and the Company was in compliance with all covenants, including a total Leverage Ratio not exceeding 4.0 to 1.0 and a minimum Current Assets to Current Liabilities ratio of 1.0 to 1.0[105] NOTE 9 – ASSET RETIREMENT OBLIGATION This note outlines the changes in the company's asset retirement obligations, including liabilities incurred, acquired, and settled | Item | Amount ($) | | :-------------------------------- | :----------- | | Balance, December 31, 2020 | $17,117,135 | | Liabilities incurred | $160,285 | | Liabilities acquired | $662,704 | | Liabilities sold | $(2,934,126) | | Revision of previous estimates | $153,475 | | Liabilities settled | $(722,005) | | Accretion expense | $560,662 | | Balance, September 30, 2021 | $14,998,130 | NOTE 10 – STOCKHOLDERS' EQUITY This note provides details on changes in stockholders' equity, including warrant exercises and their impact on common stock - During the nine months ended September 30, 2021, 13,428,500 pre-funded warrants and 284,800 common warrants were exercised, generating gross proceeds of $241,269[108] - As of September 30, 2021, 29,519,500 unexercised common warrants remained outstanding[108] NOTE 11 – EMPLOYEE STOCK OPTIONS AND RESTRICTED STOCK AWARD PLAN This note describes the company's share-based compensation plans, including stock options and restricted stock awards, and related expenses | Metric | 3 Months Ended Sep 30, 2021 ($) | 3 Months Ended Sep 30, 2020 ($) | 9 Months Ended Sep 30, 2021 ($) | 9 Months Ended Sep 30, 2020 ($) | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Share-based compensation expense | $777,461 | $565,819 | $1,484,730 | $2,557,156 | - In May 2021, a new long-term incentive plan was approved, allowing for the issuance of up to 9,900,000 shares of common stock[112] | Stock Options | Sep 30, 2021 | Sep 30, 2020 | | :-------------------------- | :----------- | :----------- | | Outstanding Shares (shares) | 465,500 | 483,500 | | Weighted-Average Exercise Price ($) | $3.26 | $3.52 | | Weighted-Average Remaining Contractual Term (Years) | 2.61 Years | 1.9 Years | | Aggregate Intrinsic Value ($) | $375,250 | $0 | | Restricted Stock | Sep 30, 2021 | Sep 30, 2020 | | :-------------------------- | :----------- | :----------- | | Outstanding Shares (shares) | 3,247,623 | 1,326,709 | | Weighted Average Grant Date Fair Value ($) | $1.56 | $4.99 | - As of September 30, 2021, there was $3,481,966 of unrecognized compensation cost related to restricted stock grants, to be recognized over a weighted average period of 2.21 years[116] NOTE 12 – CONTINGENCIES AND COMMITMENTS This note outlines the company's contingent liabilities and commitments, including standby letters of credit and surety bonds - The Company has standby letters of credit totaling $760,438 issued by a commercial bank to state and federal agencies and an insurance company, collateralized by the Credit Facility[118] - Surety bonds totaling $500,438 have been issued to various New Mexico agencies, with $400,000 intended for annual renewal and $100,438 related to inactive wells[119][121] NOTE 13 – SUBSEQUENT EVENTS This note reports on events occurring after the balance sheet date that may require disclosure or adjustment to the financial statements - The Company evaluated all events subsequent to September 30, 2021, and determined there were no material subsequent events requiring reporting[122] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial condition, operational results, business strategy, and performance drivers for the three and nine months ended September 30, 2021 Overview This section provides a high-level introduction to Ring Energy, Inc. as an independent exploration and production company focused on the Permian Basin - Ring Energy, Inc. is a growth-oriented independent exploration and production company focused on oil and natural gas development, production, acquisition, and exploration in the Permian Basin (Texas and New Mexico)[125] Business Description and Plan of Operation This section outlines the company's strategic objectives, including optimizing properties, pursuing acquisitions, generating free cash flow, and reducing debt - The Company's strategy focuses on optimizing existing properties, pursuing accretive acquisitions, generating free cash flow by lowering operating costs, and maintaining disciplined capital spending to reduce debt[126] - Key initiatives include growing production and reserves through conventional and horizontal drilling (e.g., 13 horizontal wells and 24 rod pump conversions expected in 2021), reducing long-term debt (paid down $5.5 million in Q3 2021), and employing industry-leading drilling and completion techniques[127] - The Company also aims to pursue strategic acquisitions with exceptional upside potential, leveraging management's experience in the Permian Basin[128] Executive Summary - 2021 Developments and Highlights This section summarizes key developments and achievements in 2021, including oil price recovery, drilling activities, hedging, and corporate changes - The economy's recovery and increased demand for oil and gas led to strengthened oil prices in 2021, exceeding pre-pandemic levels, though volatility remains due to OPEC actions and other factors[129] - Rising crude prices supported a targeted drilling program, with two 1-mile horizontal Northwest Shelf San Andres wells and two 1.5-mile horizontal Central Basin Platform San Andres wells completed in Q3 2021[130] - A severe winter storm in Texas in February 2021 shut in over 60% of production, negatively impacting sales volumes and increasing lease operating expenses, partially offset by higher gas prices[131] - The Company entered into swaps for 879 barrels of oil per day for calendar year 2022 at an average price of $49.03, and unwound gas swaps for 2021 and 2022 for a realized value of $581,424[133] - The corporate headquarters relocated to The Woodlands, Texas, effective January 1, 2021, and Travis Thomas was appointed Chief Financial Officer on March 24, 2021[134][135] - The borrowing base was reaffirmed at $350 million in June 2021, and the Company paid down $5.5 million of debt in Q3 2021, reducing the principal outstanding on the Credit Facility to $295 million[136] Results of Operations – For the Three Months Ended September 30, 2021 and 2020 This section analyzes the company's financial performance for the three months ended September 30, 2021, compared to the prior year, focusing on revenue and expenses | Metric | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | Change | % Change | | :-------------------------------- | :-------------------------- | :-------------------------- | :------- | :------- | | Oil and Natural Gas Sales Revenue ($) | $49,376,176 | $31,466,544 | +$17,909,632 | +56.92% | | Oil Sales Volume (Bbls) | 659,247 | 781,626 | -122,379 | -15.66% | | Average Realized Oil Price (per Bbl) ($) | $69.61 | $38.80 | +$30.81 | +79.41% | | Natural Gas Sales Volume (Mcf) | 594,841 | 581,123 | +13,718 | +2.36% | | Average Realized Natural Gas Price (per Mcf) ($) | $5.86 | $1.96 | +$3.90 | +198.98% | | Total Lease Operating Expenses ($) | $6,983,196 | $7,819,639 | -$836,443 | -10.70% | | LOE per Boe ($) | $9.21 | $8.90 | +$0.31 | +3.48% | | General and Administrative Expense ($) | $4,433,251 | $2,496,927 | +$1,936,324 | +77.56% | | Interest Expense ($) | $3,551,462 | $4,457,250 | -$905,788 | -20.32% | | Net Income (Loss) ($) | $14,163,934 | $(1,961,603) | +$16,125,537 | N/A | - Oil and natural gas sales revenue increased significantly due to higher commodity prices, despite a decrease in oil sales volume[137] - Lease operating expenses decreased in total but increased on a per Boe basis due to lower production volumes[138] - General and administrative expenses increased due to higher insurance, legal costs, additional personnel, and relocation expenses[143] - The Company reported a net income of $14.2 million, a significant improvement from a net loss of $2.0 million in the prior year, driven by higher revenues and lower LOE[147] Results of Operations – For the Nine Months Ended September 30, 2021 and 2020 This section analyzes the company's financial performance for the nine months ended September 30, 2021, compared to the prior year, focusing on revenue and expenses | Metric | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | Change | % Change | | :-------------------------------- | :-------------------------- | :-------------------------- | :------- | :------- | | Oil and Natural Gas Sales Revenue ($) | $136,638,810 | $81,673,465 | +$54,965,345 | +67.30% | | Oil Sales Volume (Bbls) | 1,971,776 | 2,066,980 | -95,204 | -4.61% | | Average Realized Oil Price (per Bbl) ($) | $64.37 | $38.40 | +$25.97 | +67.63% | | Natural Gas Sales Volume (Mcf) | 1,773,506 | 1,764,165 | +9,341 | +0.53% | | Average Realized Natural Gas Price (per Mcf) ($) | $5.48 | $1.30 | +$4.18 | +321.54% | | Total Lease Operating Expenses ($) | $22,634,259 | $21,887,356 | +$746,903 | +3.41% | | LOE per Boe ($) | $9.98 | $9.36 | +$0.62 | +6.62% | | General and Administrative Expense ($) | $11,103,394 | $9,709,431 | +$1,393,963 | +14.36% | | Interest Expense ($) | $10,947,960 | $12,958,788 | -$2,010,828 | -15.52% | | Net Income (Loss) ($) | $(20,789,318) | $(93,157,551) | +$72,368,233 | N/A | - Net loss significantly reduced from $93.2 million in 2020 to $20.8 million in 2021, primarily due to the absence of the $148 million impairment charge in 2020, offset by a substantial loss on derivative contracts in 2021[158] - Higher commodity prices drove a 67.3% increase in oil and natural gas sales revenue, despite a slight decrease in oil sales volume[149] - LOE per Boe increased due to freeze-related repair expenses and reduced production from the winter storm in Texas[150] Capital Resources and Liquidity This section discusses the company's sources of capital and its ability to meet short-term and long-term financial obligations, including cash flow and capital expenditures | Metric | 9 Months Ended Sep 30, 2021 ($) | 9 Months Ended Sep 30, 2020 ($) | | :-------------------------------- | :-------------------------- | :-------------------------- | | Cash on hand (period end) | $2,046,946 | $17,920,817 | | Net cash provided by operating activities | $49,523,439 | $44,903,306 | | Net cash used in investing activities | $(33,869,724) | $(30,275,770) | | Net cash used in financing activities | $(17,185,403) | $(6,711,341) | - The Company aims to maximize free cash flow through cost control, financial discipline, and prudent capital allocation, limiting projects to those with high rates of return[162] - Planned capital expenditures for 2021 are significantly higher than 2020 levels, expected to improve oil and natural gas production[162] Availability of Capital Resources under Credit Facility This section details the company's access to capital through its credit facility, including borrowing base, interest rates, and compliance with covenants - The Credit Facility's borrowing base was reaffirmed at $350 million in June 2021 and is subject to semi-annual redeterminations[164][165] - Interest rates on Eurodollar Loans range from adjusted LIBOR plus 2.5% to 3.5%, and on Base Rate Loans from prime rate plus 1.5% to 2.5%[166] - The Credit Facility includes covenants requiring a total Leverage Ratio not exceeding 4.0 to 1.0 (4.25 for Q1 2021) and a minimum Current Assets to Current Liabilities ratio of 1.0 to 1.0[167][168] - As of September 30, 2021, $295 million was outstanding on the Credit Facility, and the Company was in compliance with all covenants[169] Derivative Financial Instruments This section describes the company's use of derivative contracts to manage exposure to commodity price fluctuations and their impact on cash flow - The Company uses costless collars, puts, and swap contracts to protect cash flow from oil price fluctuations[170][171] - In November and December 2020, the Company entered into oil swap contracts for 4,500 bbls/day for 2021 and 1,750 bbls/day for 2022, with additional swaps in early 2021[171] - All remaining natural gas swap contracts for 2021 and 2022 were unwound on March 30, 2021, for a realized value of $581,424[172] - In May 2021, the Company bought back a 1,500 bbls/day oil call option and entered into an approximate 879 bbls/day calendar 2022 swap contract at no net cost to unlock additional upside[173] Capital Resources for Future Acquisition and Development Opportunities This section discusses the company's approach to funding potential acquisitions and development projects, including the need for additional capital - The Company continuously evaluates potential acquisitions and development opportunities, prioritizing producing properties with lower-risk undeveloped drilled properties[179] - Acquisitions may require substantial additional capital through debt or equity, and there is no assurance that transactions will be consummated despite incurring associated costs[180][181] Effects of Inflation and Pricing This section examines how inflation and volatile commodity prices impact the company's revenue, costs, reserve estimates, and overall financial condition - The oil and natural gas industry is cyclical, with commodity price changes impacting revenue, reserve estimates, borrowing base calculations, and property values[182] - Business costs are expected to vary with commodity prices and demand for related services, with potential increases due to government spending and regulations[182] Off-Balance Sheet Arrangements This section confirms the absence of any off-balance sheet arrangements that could materially affect the company's financial position - The Company does not have any off-balance sheet arrangements and does not anticipate entering into any[183] Disclosures About Market Risks This section outlines the company's exposure to various market risks, including commodity price volatility, transportation, competition, personnel, and environmental regulations Oil and Gas Prices This section highlights the significant impact of volatile oil and natural gas prices on the company's financial performance and asset values - Oil and natural gas prices are highly volatile and influenced by numerous factors beyond the Company's control, including global economic conditions, supply/demand, and governmental regulations[185] - A substantial or extended decline in prices could materially and adversely affect the Company's business, financial condition, cash flows, and results of operations, potentially leading to asset impairments[186] Transportation of Oil and Natural Gas This section discusses the company's reliance on existing gatherers for transportation, which may lead to monopolistic pricing power - The Company is committed to existing gatherers, which may result in short-term monopolistic power over gathering and transportation costs, as alternatives would require substantial additional costs[187] Competition in the Oil and Natural Gas Industry This section addresses the highly competitive nature of the oil and natural gas industry, where the company faces larger, better-resourced competitors - The Company operates in a highly competitive environment for property development, acquisitions, marketing, and securing personnel, facing larger producers with greater resources[188] - As a smaller company, Ring may face a price disadvantage compared to larger producers who can negotiate more favorable terms for larger quantities of oil/gas[188] Retention of Key Personnel This section emphasizes the company's dependence on its experienced officers and the potential adverse impact of losing key personnel - The Company's success is highly dependent on its officers' extensive experience and expertise in the energy industry, and the loss of these individuals could materially affect operations[189] Environmental and Regulatory Risks This section highlights the extensive environmental and safety regulations governing operations, with compliance costs and potential penalties for violations - Business operations are subject to extensive federal, state, and local environmental and safety laws and regulations, compliance with which can be a significant cost[190][191] - Violations of environmental regulations could lead to cleanup orders, fines, or injunctions on drilling and production activities[192] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section details the Company's exposure to various market risks, including interest rate, commodity price, customer credit, and currency exchange rate risks, and outlines strategies for managing these exposures Interest Rate Risk This section assesses the company's exposure to fluctuations in interest rates, particularly on its variable-interest credit facility - The Company is exposed to interest rate risk on its variable-interest Credit Facility; a 1% increase or decrease in the interest rate would result in an approximate $3 million change in annualized interest expense based on the $295 million outstanding as of September 30, 2021[193] - Currently, the Company does not use interest rate derivative instruments to manage this exposure[194] Commodity Price Risk This section discusses the company's primary market risk from volatile oil and natural gas prices and its use of hedging strategies - The Company's major market risk is the volatile pricing of oil and natural gas, which significantly influences revenue, profitability, and access to capital[195][197] - To reduce price uncertainty, the Company enters into crude oil and natural gas price hedging arrangements for a portion of its expected production[196] Customer Credit Risk This section identifies the company's credit exposure from receivables related to oil and natural gas sales and joint interest partners - Principal credit risks are receivables from oil and natural gas sales ($20.3 million) and joint interest partners ($1.7 million) as of September 30, 2021[198] - Sales to three customers (Phillips 66, NGL Crude, BP) represented 78%, 6%, and 6% of oil and gas revenues, respectively, for the three months ended September 30, 2021[198] - Despite customer concentration, the Company believes the loss of any single oil or natural gas customer would not have a material adverse effect due to the availability of other purchasers[198] Currency Exchange Rate Risk This section confirms the company's lack of exposure to foreign currency exchange rate risk due to domestic sales and U.S. dollar payments - The Company has no foreign sales and accepts payments only in U.S. dollars, thus it is not exposed to foreign currency exchange rate risk[199] Item 4. Controls and Procedures This section details management's evaluation of the Company's disclosure controls and procedures and reports on any changes in internal control over financial reporting during the period Evaluation of disclosure controls and procedures Management concluded that the company's disclosure controls and procedures were effective as of September 30, 2021 - Management, including the CEO and CFO, concluded that the Company's disclosure controls and procedures were effective as of September 30, 2021, providing reasonable assurance of achieving control objectives[200][201] Changes in internal control over financial reporting This section reports on changes in internal control over financial reporting, including accounting function relocation and CFO appointment - During Q1 2021, the Company transitioned its accounting and reporting functions from Tulsa due to corporate headquarters relocation[204] - Travis Thomas was named Chief Financial Officer on March 24, 2021, replacing William Broaddrick[204] - Except for the aforementioned, there were no other material changes in internal control over financial reporting during the three months ended September 30, 2021[205] PART II – OTHER INFORMATION This section covers additional information not included in the financial statements, such as legal proceedings, risk factors, equity sales, and exhibits Item 1. Legal Proceedings This section addresses potential legal actions and contingencies that the Company may face in the normal course of business, noting that costs are provided when a loss is probable and estimable - The Company may be subject to threatened or pending legal actions and contingencies in the normal course of business[208] - Insurance coverage is maintained for personal injury, property damage, and other liabilities, but there is no assurance of applicability or adequacy for all adverse outcomes[208] Item 1A. Risk Factors This section refers to the comprehensive discussion of risks and hazards detailed in the Company's 2020 Form 10-K, stating that no material changes have occurred - The Company is subject to risks and hazards inherent to its business activities, as discussed in 'Item 1A. Risk Factors' of its 2020 Form 10-K[209] - There have been no material changes to the risks described in the 2020 Form 10-K, but additional unknown risks or future developments could still adversely affect the Company[209] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This item reports that there were no unregistered sales of equity securities or use of proceeds from registered securities during the period - No unregistered sales of equity securities or use of proceeds from registered securities occurred[210] Item 3. Defaults Upon Senior Securities This item indicates that there were no defaults upon senior securities during the reporting period - No defaults upon senior securities were reported[211] Item 4. Mine Safety Disclosure This item states that there are no mine safety disclosures to report - No mine safety disclosures are applicable or reported[213] Item 5. Other Information This item indicates that there is no other information to disclose - No other information is reported under this item[215] Item 6. Exhibits This section lists all exhibits filed as part of the Form 10-Q, including certifications, XBRL taxonomy documents, and the cover page interactive data file | Exhibit Number | Exhibit Description | Filing Status | | :------------- | :------------------------------------------ | :------------ | | 3.1 | Articles of Incorporation (as amended) | Incorporated by Reference | | 3.2 | Amended and Restated Bylaws | Incorporated by Reference | | 31.1 | Rule 13a-14(a) Certification by Chief Executive Officer | Filed Herewith | | 31.2 | Rule 13a-14(a) Certification by Chief Financial Officer | Filed Herewith | | 32.1 | Section 1350 Certification by Chief Executive Officer | Filed Herewith | | 32.2 | Section 1350 Certification by Chief Financial Officer | Filed Herewith | | 101.SCH | XBRL Taxonomy Extension Schema Document | Filed Herewith | | 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | Filed Herewith | | 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | Filed Herewith | | 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | Filed Herewith | | 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | Filed Herewith | | 104 | Cover Page Interactive Data File | Contained in Exhibit 101 | SIGNATURES This section contains the official signatures of the company's Chief Executive Officer and Chief Financial Officer, certifying the report's contents - The report is duly signed on November 9, 2021, by Paul D. McKinney, Chief Executive Officer and Director, and Travis T. Thomas, Chief Financial Officer[221]