Ring Energy(REI) - 2023 Q1 - Quarterly Report

PART I — FINANCIAL INFORMATION Item 1. Financial Statements Unaudited condensed financial statements, covering balance sheets, operations, equity, cash flows, and significant accounting policies Condensed Balance Sheets Condensed Balance Sheet Highlights (March 31, 2023 vs. December 31, 2022) | Metric | March 31, 2023 | December 31, 2022 | | :--------------------------------- | :------------- | :---------------- | | Cash and cash equivalents | $1,725,700 | $3,712,526 | | Total Current Assets | $58,462,304 | $63,166,464 | | Oil and natural gas properties, full cost method | $1,502,859,154 | $1,463,838,595 | | Total Assets | $1,281,437,987 | $1,268,999,797 | | Total Current Liabilities | $110,401,497 | $141,794,901 | | Revolving line of credit | $422,000,000 | $415,000,000 | | Total Liabilities | $582,195,561 | $607,896,406 | | Total Stockholders' Equity | $699,242,426 | $661,103,391 | Condensed Statements of Operations Condensed Statements of Operations Highlights (Three Months Ended March 31, 2023 vs. 2022) | Metric | March 31, 2023 | March 31, 2022 | | :--------------------------------- | :------------- | :------------- | | Oil, Natural Gas, and Natural Gas Liquids Revenues | $88,082,912 | $68,181,032 | | Total Costs and Operating Expenses | $52,431,416 | $29,995,735 | | Income from Operations | $35,651,496 | $38,185,297 | | Gain (loss) on derivative contracts | $9,474,905 | $(27,596,141) | | Net Income | $32,715,779 | $7,112,043 | | Basic Earnings per share | $0.18 | $0.07 | | Diluted Earnings per share | $0.17 | $0.06 | Condensed Statements of Stockholders' Equity Condensed Statements of Stockholders' Equity Highlights (March 31, 2023 vs. December 31, 2022) | Metric | March 31, 2023 | December 31, 2022 | | :--------------------------------- | :------------- | :---------------- | | Common Stock (Shares) | 180,627,484 | 175,530,212 | | Common Stock (Amount) | $180,627 | $175,530 | | Additional Paid-in Capital | $780,659,273 | $775,241,114 | | Accumulated Deficit | $(81,597,474) | $(114,313,253) | | Total Stockholders' Equity | $699,242,426 | $661,103,391 | | Net income (Q1 2023) | $32,715,779 | N/A | | Exercise of common warrants issued in offering (Q1 2023) | $3,613,941 | N/A | | Share-based compensation (Q1 2023) | $1,943,696 | N/A | Condensed Statements of Cash Flows Condensed Statements of Cash Flows Highlights (Three Months Ended March 31, 2023 vs. 2022) | Metric | March 31, 2023 | March 31, 2022 | | :--------------------------------- | :------------- | :------------- | | Net Cash Provided by Operating Activities | $43,680,096 | $24,439,765 | | Net Cash (Used in) Investing Activities | $(55,469,588) | $(14,222,711) | | Net Cash Provided by (Used in) Financing Activities | $9,802,666 | $(10,486,159) | | Net Increase (Decrease) in Cash | $(1,986,826) | $(269,105) | | Cash at End of Period | $1,725,700 | $2,139,211 | | Payments for the Stronghold Acquisition | $(18,511,170) | $— | | Payments to develop oil and natural gas properties | $(36,939,307) | $(13,860,249) | Notes to Condensed Financial Statements NOTE 1 — BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES Details financial statement basis, key accounting policies (full cost, revenue), Permian Basin focus, and liquidity - Ring Energy, Inc. is a growth-oriented independent exploration and production company focused on oil and natural gas development, production, acquisition, and exploration activities primarily in the Permian Basin of Texas and New Mexico[33] - The company uses the full cost method of accounting for oil and natural gas properties, capitalizing all costs associated with acquisition, exploration, and development[52] - Liquidity sources include cash flow from operations, cash on hand, available borrowing capacity under its revolving credit facility, and proceeds from sales of non-strategic assets[34] Share-Based Compensation Expense | Period | Share-Based Compensation Expense | | :-------------------------- | :----------------------------- | | Three Months Ended March 31, 2023 | $1,943,696 | | Three Months Ended March 31, 2022 | $1,521,910 | NOTE 2 — REVENUE RECOGNITION Outlines revenue recognition for oil, gas, and NGLs, focusing on delivery, net royalties, and three-stream reporting - Revenue from crude oil and natural gas sales is recognized when the product is delivered to the customer, net of royalties due to third parties[73] - The company began reporting volumes and revenues on a three-stream basis (crude oil, natural gas, and natural gas liquids) prospectively from July 1, 2022, due to the Stronghold Acquisition[64][142] Disaggregated Revenue by Product (Three Months Ended March 31, 2023 vs. 2022) | Product | March 31, 2023 | March 31, 2022 | | :-------------------------- | :------------- | :------------- | | Oil | $83,586,327 | $63,430,627 | | Natural gas | $1,064,563 | $4,750,405 | | Natural gas liquids | $3,432,022 | $— | | Total | $88,082,912 | $68,181,032 | NOTE 3 — LEASES Covers operating and financing leases, short-term lease capitalization election, and lease liability reconciliation - The company has operating leases for offices in Midland and The Woodlands, Texas, and financing leases for vehicles with 36-month terms[79][81] - The company elected not to capitalize short-term leases (12 months or less) for office equipment and compressors[80] Operating and Financing Lease Liabilities (March 31, 2023 vs. December 31, 2022) | Lease Type | March 31, 2023 | December 31, 2022 | | :--------------------------------- | :------------- | :---------------- | | Operating lease liability, total | $1,774,340 | $1,872,259 | | Financing lease liability, total | $1,668,928 | $1,762,132 | NOTE 4 — EARNINGS PER SHARE INFORMATION Basic and diluted EPS significantly increased in Q1 2023, driven by higher net income and dilutive securities changes Earnings Per Share (Three Months Ended March 31, 2023 vs. 2022) | Metric | March 31, 2023 | March 31, 2022 | | :--------------------------------- | :------------- | :------------- | | Net Income | $32,715,779 | $7,112,043 | | Basic Earnings per Share | $0.18 | $0.07 | | Diluted Earnings per Share | $0.17 | $0.06 | | Diluted Weighted-Average Shares Outstanding | 190,138,969 | 124,004,178 | NOTE 5 — DERIVATIVE FINANCIAL INSTRUMENTS Details derivative contracts for commodity price risk, fair value accounting, and Q1 2023's significant gain - The company utilizes derivative strategies, including forward contracts, futures contracts, swaps, or options, to manage exposure to commodity price risk for its oil and natural gas production[87][88] - Derivative instruments are recorded at fair value, and any gains or losses from changes in fair value or settlement are recognized in earnings as 'Gain (loss) on derivative contracts'[90] Gain (Loss) on Derivative Contracts (Three Months Ended March 31, 2023 vs. 2022) | Metric | March 31, 2023 | March 31, 2022 | | :--------------------------------- | :------------- | :------------- | | Realized loss on oil derivatives | $(663,762) | $(14,115,501) | | Unrealized gain (loss) on oil derivatives | $8,107,021 | $(13,480,640) | | Gain (loss) on oil derivatives | $7,443,259 | $(27,596,141) | | Realized gain on natural gas derivatives | $5,237 | $— | | Unrealized gain on natural gas derivatives | $2,026,409 | $— | | Gain on natural gas derivatives | $2,031,646 | $— | | Total Gain (loss) on derivative contracts | $9,474,905 | $(27,596,141) | NOTE 6 — FAIR VALUE MEASUREMENTS Classifies fair value measurements into a three-level hierarchy, valuing derivatives with Level 2 market-based inputs - Fair value measurements are classified into a three-level hierarchy: Level 1 (quoted prices in active markets), Level 2 (observable inputs other than quoted prices), and Level 3 (unobservable inputs)[95][96][97] - The fair values of the company's derivative instruments are estimated using a market approach, utilizing commodity futures pricing from a reputable third party, classified as a Level 2 fair value measurement[99] Commodity Derivatives Fair Value (March 31, 2023 vs. December 31, 2022) | Metric | March 31, 2023 | December 31, 2022 | | :--------------------------------- | :------------- | :---------------- | | Commodity Derivatives - Assets (Level 2) | $13,030,896 | $10,798,572 | | Commodity Derivatives - Liabilities (Level 2) | $(15,930,164) | $(23,831,269) | | Total (Net) | $(2,899,268) | $(13,032,697) | NOTE 7 — REVOLVING LINE OF CREDIT Details Credit Facility modification, $600 million borrowing base, variable rates, covenants, and Q1 2023 compliance - The Credit Facility's maturity date was extended to August 2026, and a borrowing base of $600 million was established, collateralized by newly acquired assets from the Stronghold Acquisition[105] - As of March 31, 2023, $422.0 million was outstanding on the Credit Facility, and the company was in compliance with all covenants[111][163] - The interest rate on SOFR Loans is adjusted term SOFR plus a margin between 3.0% and 4.0%, while Base Rate Loans have a margin between 2.0% and 3.0%[108][160] - Covenants require a total Leverage Ratio of not more than 3.0 to 1.0 and a minimum Current Assets to Current Liabilities ratio of 1.0 to 1.0, along with hedging requirements for at least 50% of projected production[109][110][161][162] NOTE 8 — ASSET RETIREMENT OBLIGATION Asset retirement obligation (ARO) increased in Q1 2023 from incurred liabilities and accretion, offset by settlements Changes in Asset Retirement Obligation (Q1 2023) | Metric | Amount | | :--------------------------------- | :------------- | | Balance, December 31, 2022 | $30,226,306 | | Liabilities incurred | $95,062 | | Liabilities settled | $(428,357) | | Accretion expense | $365,847 | | Balance, March 31, 2023 | $30,258,858 | NOTE 9 — STOCKHOLDERS' EQUITY Q1 2023 saw 4.5 million common warrants exercised for $3.6 million, with 14.6 million remaining exercisable - During the three months ended March 31, 2023, 4,517,427 common warrants were exercised at $0.80 per warrant, generating total proceeds of $3,613,941[115] - As of March 31, 2023, 14,590,366 common warrants remained exercisable[115] NOTE 10 — EMPLOYEE STOCK OPTIONS AND RESTRICTED STOCK AWARDS Q1 2023 share-based compensation increased, with over $13.8 million in unrecognized costs for stock and performance units Share-Based Compensation Expense | Period | Compensation Expense | | :-------------------------- | :------------------- | | Three Months Ended March 31, 2023 | $1,943,696 | | Three Months Ended March 31, 2022 | $1,521,910 | - As of March 31, 2023, the company had $6,408,759 of unrecognized compensation cost related to restricted stock grants (weighted average period of 2.25 years) and $7,402,107 for performance stock units (weighted average period of 1.95 years)[120][121] - Outstanding stock options as of March 31, 2023, totaled 265,500 with a weighted average exercise price of $4.21[119] NOTE 11 — COMMITMENTS AND CONTINGENT LIABILITIES Details standby letters of credit, surety bonds, and a vigorously defended lawsuit for breach of contract and fraudulent inducement - As of March 31, 2023, the company had standby letters of credit totaling $760,438 and surety bonds totaling $650,288[112][122][124] - The company is a defendant in a lawsuit filed in July 2021, claiming breach of contract and fraudulent inducement, with the plaintiff requesting a $5.5 million forfeited deposit plus related damages and attorneys' fees. The company denies the claims and is conducting a vigorous defense and counterclaim[186] NOTE 12 — SUBSEQUENT EVENTS Post-quarter, 14.5 million common warrants had exercise price reduced, generating $9.0 million, with 78,200 remaining - On April 11 and 12, 2023, the company reduced the exercise price of 14,512,166 common warrants from $0.80 to $0.62 per share[126] - This resulted in aggregate gross proceeds of $8,997,543 from the full exercise of these warrants[126] - Approximately 78,200 shares of common warrants remain outstanding after these exercises[126] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Analyzes Ring Energy's Q1 2023 financial condition and results, covering business, operations, production, revenues, expenses, and liquidity Overview - Ring Energy is a growth-oriented independent exploration and production company focused on oil and natural gas development, production, acquisition, and exploration activities in the Permian Basin of Texas[129] - Primary drilling operations target oil and liquids-rich producing formations in the Northwest Shelf, Central Basin Platform, and Delaware Basin[129] Business Description and Plan of Operation - The company's plan is to balance long-term debt reduction with further developing oil and gas properties to maintain or grow annual production[130] - This will be achieved through proper allocation of cash flow from operations and potentially through the sale of non-core assets[130] - Ring Energy intends to continue evaluating potential transactions to acquire strategic producing assets with attractive acreage positions[130] 2023 Developments and Highlights - Ring Energy aims to grow production and reserves by developing its oil-rich resource base through conventional and horizontal drilling in the Northwest Shelf and Central Basin Platform, operating within generated cash flow[131] - The company intends to reduce long-term debt using free cash flow from operations and potential non-core asset sales, leveraging attractive field-level margins[131] Q1 2023 Drilling and Completion Activities | Quarter | Area | Wells Drilled | Wells Completed | Recompletions | | :-------- | :-------------------------- | :------------ | :-------------- | :------------ | | 1Q 2023 | Central Basin Platform (Vertical) | 3 | 3 | 6 | | 1Q 2023 | Northwest Shelf | 4 | 4 | — | - In Q1 2023, $15 million in deferred cash consideration and $3.5 million in post-close settlement were paid for the Stronghold Acquisition, contributing to an increase in long-term debt[131] Market Conditions and Commodity Prices - The company's financial results are highly dependent on the volatile prices of crude oil and natural gas, which are influenced by domestic and worldwide supply and demand factors beyond its control[135] - Oil and natural gas prices have demonstrated and are expected to continue to show volatility, making future price predictions uncertain and impacting drilling programs, production volumes, and revenues[135][136] Results of Operations Selected Operating Data (Three Months Ended March 31, 2023 vs. 2022) | Metric | March 31, 2023 | March 31, 2022 | | :--------------------------------- | :------------- | :------------- | | Net production (Boe) | 1,646,306 | 798,262 | | Total sales | $88,082,912 | $68,181,032 | | Average sales price (per Boe) | $53.50 | $85.41 | | Lease operating expenses (per Boe) | $10.61 | $11.22 | | Depreciation, depletion and amortization (per Boe) | $12.92 | $12.25 | | Net Income | $32,715,779 | $7,112,043 | | Gain (loss) on derivative contracts | $9,474,905 | $(27,596,141) | | Interest (expense) | $(10,390,279) | $(3,398,361) | - Oil sales increased by approximately $20.2 million due to a 68.5% increase in sales volume (from 676,215 to 1,139,413 barrels), primarily from the Stronghold Acquisition, despite a decrease in average realized price from $93.80 to $73.36 per barrel[139][140] - Natural gas sales decreased by approximately $3.7 million, driven by a significant reduction in average realized price from $6.49 to $0.66 per Mcf, despite a 118.7% increase in sales volume (from 732,283 to 1,601,407 Mcf)[141] - Interest expense increased from $3.4 million to $10.4 million due to higher outstanding debt (weighted average daily debt of $424.3 million in Q1 2023 vs. $293.9 million in Q1 2022) and higher weighted average interest rates (8.2% in Q1 2023 vs. 4.3% in Q1 2022)[151] Liquidity and Capital Resources Cash Flow Summary (Three Months Ended March 31, 2023 vs. 2022) | Metric | March 31, 2023 | March 31, 2022 | | :--------------------------------- | :------------- | :------------- | | Cash on hand | $1,725,700 | $2,139,211 | | Net cash provided by operating activities | $43,680,096 | $24,439,765 | | Net cash used in investing activities | $(55,469,588) | $(14,222,711) | | Net cash provided by financing activities | $9,802,666 | $(10,486,159) | - The company will continue to focus on maximizing free cash flow in 2023 through cost monitoring and prudent capital allocation, prioritizing high-return projects[156] - Strategic goals for the remainder of 2023 include maximizing free cash flow, reducing debt levels, and maximizing liquidity[157] Availability of Capital Resources under Credit Facility - The Credit Facility has a borrowing base of $600 million, with $422 million outstanding as of March 31, 2023[159][163] - The company was in compliance with all covenants of the Second Amended and Restated Credit Agreement as of March 31, 2023[163] - The unused line of credit was $177.2 million as of March 31, 2023, calculated from the $600 million borrowing base less the outstanding balance and standby letters of credit[112] Derivative Financial Instruments - The company uses derivative contracts, including oil hedges (WTI swaps, deferred premium puts, two-way and three-way collars) and natural gas hedges (Henry Hub NYMEX swaps, two-way collars, Waha basis swaps), to manage commodity price risk[165] - All derivative instruments are with lenders under the company's Credit Facility, and their fair values are recorded as assets or liabilities on the balance sheet, with gains or losses recognized in earnings[166][165] Effects of Inflation and Pricing - The oil and natural gas industry is cyclical, and commodity price volatility significantly impacts the company's revenue, estimates of future reserves, borrowing base calculations, property values, and ability to raise capital and retain personnel[167] - Business costs are anticipated to fluctuate in accordance with commodity prices for oil and natural gas and the associated demand for services[167] Off-Balance Sheet Financing Arrangements - As of March 31, 2023, the company had no off-balance sheet financing arrangements[168] Capital Resources for Future Acquisition and Development Opportunities - The company continuously evaluates potential acquisitions and development opportunities, prioritizing lower-risk producing properties with undeveloped drilling potential[169] - Acquiring additional oil and gas properties may require substantially greater capital than currently available, potentially necessitating short-term or long-term debt or equity sales[170] Item 3. Quantitative and Qualitative Disclosures About Market Risk Details the company's exposure to commodity price, customer credit, and interest rate risks, and management strategies Commodity Price Risk - The company's major market risk exposure is the volatile pricing of its oil and natural gas production, which can materially adversely affect its financial condition and results of operations[172] - To reduce commodity price uncertainty and increase cash flow predictability, the company enters into crude oil and natural gas price hedging arrangements for a portion of its expected production[173] Customer Credit Risk - The company has significant credit risk concentration with three major customers (Phillips 66 Company, Enterprise Crude Oil LLC, and NGL Crude Partners) for its oil and natural gas receivables[174] Customer Concentration (Three Months Ended March 31, 2023) | Customer | % of Total Revenues | % of Accounts Receivable | | :-------------------------- | :------------------ | :----------------------- | | Phillips 66 Company | 66% | 73% | | Enterprise Crude Oil LLC | 13% | 10% | | NGL Crude Partners | 11% | 9% | - The company believes that the loss of any of these customers would not materially impact its business due to the availability of other purchasers for its oil and natural gas[174] Interest Rate Risk - The company is exposed to market risk from changes in interest rates on its variable-rate Credit Facility[175] - A 1% change in the interest rate on the $422.0 million outstanding Credit Facility would result in an estimated $4.2 million change in annual interest expense[176] - The company does not currently use interest rate derivative instruments to manage this exposure[177] Currency Exchange Rate Risk - The company has no foreign sales and accepts payments only in U.S. dollars, therefore it is not exposed to foreign currency exchange rate risk[178] Item 4. Controls and Procedures Details management's evaluation of disclosure controls, confirming effectiveness and no material changes in internal control Evaluation of disclosure controls and procedures - Management, including the CEO and CFO, evaluated the effectiveness of disclosure controls and procedures as of March 31, 2023[180] - They concluded that the disclosure controls and procedures were effective in ensuring timely and accurate reporting of information required by the Exchange Act[181] Changes in internal control over financial reporting - There were no changes in internal control over financial reporting during the three months ended March 31, 2023, that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[184] PART II — OTHER INFORMATION Item 1. Legal Proceedings The company is a defendant in a July 2021 lawsuit claiming breach of contract and fraudulent inducement, seeking $5.5 million - Ring Energy, Inc. is a defendant in a lawsuit (EPUS Permian Assets, LLC, v. Ring Energy, Inc.) filed in July 2021 in Harris County District Court, Houston, Texas[186] - The plaintiff claims breach of contract, fraudulent inducement, unjust enrichment, and constructive trust, seeking a forfeited deposit of $5,500,000 plus related damages and attorneys' fees[186] - The company believes the claims are without merit and is conducting a vigorous defense and counterclaim, asserting breach of contract and requesting a declaratory judgment and attorneys' fees[186] Item 1A. Risk Factors Refers to 2022 Form 10-K for business risk discussion, noting potential future additional or immaterial risks - For a discussion of risks and hazards, readers are referred to 'Item 1A. Risk Factors' in the company's Annual Report on Form 10-K for the year ended December 31, 2022[187] - The company acknowledges that additional risks and uncertainties not currently known, or conditions currently deemed immaterial, may materially and adversely affect its business, financial condition, cash flows, and results of operations in the future[187] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No unregistered sales of equity securities or use of proceeds were reported for the period - None[188] Item 3. Defaults Upon Senior Securities No defaults upon senior securities were reported for the period - None[189] Item 4. Mine Safety Disclosures No mine safety disclosures were reported for the period - None[190] Item 5. Other Information No other information was reported for the period - None[191] Item 6. Exhibits Lists exhibits filed with Form 10-Q, including CEO/CFO certifications and XBRL taxonomy documents - Exhibits include Rule 13a-14(a) Certifications by the Chief Executive Officer and Chief Financial Officer[192] - Section 1350 Certifications by the Chief Executive Officer and Chief Financial Officer are furnished[192] - Inline XBRL Taxonomy Extension Schema, Calculation, Definition, Label, and Presentation Linkbase Documents, along with the Cover Page Interactive Data File, are filed[192] SIGNATURES The report is signed by Paul D. McKinney, CEO, and Travis T. Thomas, CFO, for Ring Energy, Inc. on May 3, 2023 - The report was signed by Paul D. McKinney, Chief Executive Officer, and Travis T. Thomas, Chief Financial Officer[197] - The signing date for the report was May 3, 2023[197]