Q4 2020 Ring Energy Inc Earnings Call
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Good morning, and welcome to the ring Energy fourth quarter 2020 earnings Conference call.
All participants will be in a listen only mode.
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After todays presentation, there will be and opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press the Star then two.
Please note this event is being recorded.
I would now like to turn the conference over to David Fowler with Investor Relations. Please go ahead.
Thank you Chad and good morning, everyone. Thank you for taking the time this morning to join us and for your interest and ring energy.
We'll begin our call with comments from Paul Mckinney, Our chairman of the board and CEO, who will provide an overview of key matters during the fourth quarter and full year, including a review of our year end Reserve report. We will then turn the call over to Randy Broaddrick our CFO.
And we'll review our financial results.
Paul will then return with a review of the strategy and plans for 2021.
Also joining us this morning on the call is Alex died our executive Vice President of engineering, and corporate strategy and Marinos Bagdad, Our executive Vice President of operations and Steve Brooks, Our executive Vice President of the land legal human resources and marketing of.
All of whom will be available for our Q&A session. During our question and answer session will ask you to limit your questions to one and the follow up you can always reenter the queue with additional questions. During the course of this conference call. The company will be making forward looking statements investors are cautioned that forward looking statements are not guarantees of future perform.
And those actual results or developments may differ materially from those projected and the forward looking statements ring energy disclaims any intention or obligation to update or revise any forward looking statements whether as a result of the 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 and the reports filed with the Securities and Exchange Commission. As a reminder of this conference call is being recorded I would like now to turn the call over to Paul Mckinney, Our chairman and CEO.
Thank you David and welcome everyone to our year end 2020 call, let's start with the review of the key highlights of our fourth quarter.
We exceeded the high end of our guidance with sales volume of 9307 barrels of oil equivalent per day of which 86% was oil.
Tribute to our production outperformance was the continuation of our highly successful workover and.
And reactivation numbers.
We also performed <unk> in the fourth quarter, including four in the northwest shelf and four and the Central Basin platform and our ongoing Ctr program converts wells from electrical submersible pumps to rod pumps, which reduces future overall operating costs and the lessons costly workovers.
During the fourth quarter, we generated $25 million of adjusted EBITDA that contributed $13 million of free cash flow during the period, marking our fifth consecutive quarter of free cash flow we.
We utilized our free cash flow and the cash on hand to pay down $47 million of bank debt and ended the period.
And with $41 million of liquidity, increasing our liquidity by more than 25% and what we had at the end of the third quarter <unk>.
And finally with.
With the funds from equity raise and supported by rising oil price environment.
And early December we initiated a targeted and northwest shelf drilling program that focuses on our highest rate of return inventory.
All four of the wells drilled and our winter drilling campaign have been completed and are on production as we noted in our release and the first well we drilled the Badger 709 be fixed X age is currently producing over 400 barrels of all the day.
And is still cleaning up we are pleased to see initial production results from these four wells have exceeded our expectations.
Now, let's take a look at the full year of 2020, our average sales.
Our 8790 barrels of oil equivalent per day of which 87% was oil we performed 29, <unk>, including 17, and the northwest shelf and 12 and the Central Basin platform.
Our continuing target targeted ctr, workover and reactivation programs combined with our ongoing cost optimization initiatives.
Contributed to a lifting cost of $10 52.
Per Boe and 8% decrease year over year, we generated $86 million of adjusted EBITDA that contributed to $40 million of free cash flow, which we used to help pay down $75 million of bank debt during 2020.
Turning to our year end 2020 reserves and based on SEC reserve prices.
Yes, the average prices of $36.04 per Boe.
Our barrels of oil and $1 99 per MMP Teu of natural gas. We reported year end of 2020 proved reserves of 76, and a half a million barrels of oil equivalent which was down modestly from our $81 1 million barrels of oil equivalent we had at the year end 2019.
For comparison.
Average prices in 2019 were $52 19 per barrel of crude oil and $2 58 per <unk> btu of natural gas.
During 2020, we recorded net of upward revisions of one 3 million barrels of oil equivalent primarily related to additions improved well performance and technical revisions that were offset by reductions of $2 7 million barrels of oil equivalents due to lower commodity prices and three.
And 2 million barrels of oil equivalent of production.
Our SEC proved reserves.
Were comprised of 87% crude oil and 13% and natural gas with 57, 5% of total proved reserves classified as proved developed and the remaining 42, 5% is proved undeveloped or reserve life ratio based on year end 2020, SEC proved reserves and 2020 production.
<unk> was 23 eight years.
The PV 10 of our year end 2020, SEC proved reserves taken from our standard measure of future cash flows was $556 million, which was down 40% from the $923 million at the end of 2019, primarily due to lower prices with these operators.
<unk> financial results, we are carrying forward a strong momentum into 2021, where we believe we will have even a better year with that I will now turn the call over to Randy to discuss our financials in more detail.
Thank you Paul.
It was discovered after our 10-K with published yesterday that a type of occurred and the conversion of our 10-K for filing.
The typo is that the earnings or loss per share for 2020 was presented without the parentheses day, noting it is the loss we.
We'll be filing the 10-K, a as soon as practical to correct of the typo.
For the fourth quarter of 2020, we generated revenues of $31 4 million and recorded a net loss of $163 million or at $1 and 83 loss per diluted share.
Included in the loss of our pre tax items, including $129 6 million for a ceiling test impairment due to the reduction and the value of reserves from lower oil and gas pricing.
$15 2 million for unrealized losses on hedges as a result of the changes and oil price.
And $2 8 million for share based compensation expense.
Without these items after the effect of income taxes on the adjusted items.
And adjusting for evaluation allowance of $50 6 million. Our net income would have been approximately $6 5 million or a seven and gain per diluted share.
For the full year 2020, and we generated revenues of $113 million and reported a net loss of 25 253.
<unk> million dollars or a loss per diluted share of $3 48.
Included in the loss were pre tax items, including $277 $5 million per ceiling test impairment.
$5 $4 million per share based compensation expense.
And $1.2 million per unrealized losses on hedges as the result of the changes and oil price.
Without these items after the effect of income taxes on the adjusted adjusted items and adjusting for the $50 6 million.
Valuation allowance.
Net income would've been approximately $27 million gain.
<unk> of 28 cents per diluted share.
During the fourth quarter of 2020, we had $20 5 million and cash flow from operations and $7 8 million and capital expenditures for post capex of positive cash flow or free cash flow of $12 7 million.
For the full year 2020, we had $69 7 million and cash flow from operations.
$30 million and capital expenditures, which resulted in free cash flow of $39 7 million.
For the three months ended December 31, 2020, we had oil sales of 734548 barrels.
And gas sales of 730337 Mcf.
For a total of 856271 Boe.
I'll received the prices were $40.48 per barrel of oil.
$2 and 21 per Mcf of gas for an average of $36 61 per Boe.
The differential between our oil price received and a weighted average Nymex and <unk>.
Average approximately $2 per barrel for the fourth quarter of 2020.
For the full year 2020, and we had oil sales of $2 million 801528 barrels and.
And gas sales of 2 million and 494502 Mcf.
For a total of $3 million 217278 Boe.
Ah received prices were $38 and 95 per barrel of oil.
$1 and 57 per Mcf of gas.
And for an average of $35 13 per Boe.
The differential between our oil price received and a weighted average and IMAX wty averaged approximately $2 per barrel for the year.
Per barrel for the full year 2020.
For detailed discussions of of various income statement line items. Please refer to our earnings release and 10-K that was filed yesterday I'm happy to answer any questions on them during our Q&A.
As Paul discussed we were pleased to generate free cash flow once again during the fourth quarter of 2020, our fifth consecutive quarterly period.
During 2020, we paid down $75 million on our credit facility and we will continue to use much of our free cash flow for that purpose.
Paul will discuss in more detail in his closing comments, but with the recently initiated targeted drilling program, we are and a stronger position to pay down debt, even faster given the high rates of return of afforded by our deep inventory of drilling prospects.
As we previously announced in December we completed our fall Bank Redetermination and our borrowing base was set at $350 million.
As of December 31, we had $313 million drawn on our credit facility, which resulted in liquidity of $40 6 million, including $37 million available on the revolver and $3 6 million of cash and cash equivalents.
Finally, we are affirming the full year 'twenty 2021 outlook, we provided on February 22nd including you.
Year over year average sales growth between two and 8%, which equates to 9000 to 9500 Boe per day with approximately 85 of $2, 87% oil.
For full year 2000.
'twenty, one we anticipate and average sorry, yes, 2021, and we anticipate and average lifting cost of $10 to $10 50 per Boe.
Which reflects a decrease compared to full year 2020 lifting.
Lifting cost of $10 52 per Boe.
Turning to our 2021 capital investment program, we plan to drill six to eight wells and complete eight to 10 wells during the full year 2021.
We are targeting total capital spending of $44 million to $48 million with all expenditures to be funded by cash on hand and cash from operations.
In addition to company directed drilling and completion activities, our capital spending outlook includes targeted well reactivation and workovers infrastructure upgrades and.
And continuing our successful Ctr program and northwest shelf and Central basin platform areas.
Also included as anticipated spending for leasing contractual drilling obligations and non operated drilling completion and capital Workovers.
Our 2021 capital program has been designed to sustain or minimally grow of production and reserve levels and have return sufficient to generate free cash flow to further reduce debt.
Our existing commodity hedges were implemented when prices were lower last year to ensure the necessary cash flow to adhere to these plans.
And with that I will turn it back to Paul.
Thank you Randy.
On our third quarter earnings call I discussed in detail ring competitive strength as well as the challenges we face and how we're addressing them.
A lot of change over the past four months since we last spoke mostly for the better. However, I wanted to talk a little about the severe winter storm that affected most of the in the.
Energy industry here in Texas, and more specifically, how it affected our production.
We incurred a considerable hit on our production and February down more than 60% for the majority of the storm. We had an unusual amount of downtime that took us two weeks or more to restore our first quarter production and will be less and what we were originally predicting as a result of this downtime.
However, we have restored our production and with the performance of our new wells and the continued improvements we are seeing and our other and initiatives, we will still generate free cash flow for our sixth straight quarter, we will still pay down debt and and we are not going to change our full year guidance.
The next thing I want to discuss is our new strategic vision we.
We are committed to key principles that we are squarely focused on ensuring health safety and environmental excellence and a strong commitment to our employees and the communities and which we worked and operating.
Continuing to generate free cash flow to improve and build a sustainable financial foundation per.
Pursuing rigorous capital discipline and focus on our highest returning opportunities and.
Improving margins and driving value by continuously targeting additional operating cost reductions and capital efficiencies and strengthening our balance sheet by steadily paying down debt divesting of non non core assets and becoming a peer leader and debt to EBITDA metrics.
These key principles will continue to guide us.
And we are committed to them by pursuing the following five strategic objectives first we will attract and retain the best people knowing that our future success can only be achieved through our employees.
Second we will pursue operational excellence with a sense of urgency. This objective is the foundation that will define our culture and the future success. So what does that mean exactly we will execute our operations and a safe and environmentally responsible manner apply advanced technologies and continuously.
Ways to reduce our operating cash costs on a per barrel basis, we plan to deliver low cost consistent and efficient execution of our drilling campaigns, our work programs and other operations all with the high sense of urgency.
And example of this is our highly successful PPR program, which reduces operating expenses and the lessons costly workovers and the impact from this program can be seen and the decrease in our lifting cost per Boe.
From a $11 42, and 2019 to $10 52, and 2020, our confidence and this aspect of our culture is reflected in our forecast of continuing to lower cost this year.
And from anywhere from 10% to $10 50 per BOE a day.
And yet another example.
As we relocated our headquarters to the woodlands and downsize of the Midland Office clothes are Andrew field office are and the process of close and the Tulsa office, reducing leasing expenses and resulting in meaningful annual cost savings, but the biggest impact of this change is not the cost savings. It is the consolidation.
Of the executive and management teams, allowing for improved communication strategizing execution and continuing to build our culture.
Moving onto the third strategic objective is to prioritize our work program and and invest and only the highest risk adjusted rate of return projects and our inventory. This will allow us to profitably grow the our production and reserve levels and generate the excess free cash flow, we need to pay down debt.
We have already discussed our Ctr program and our northwest shelf drilling program, but both of these demonstrate our commitment to generate as much.
Free cash flow as we can from every dollar we spend.
As you know, we drilled four and northwest shelf and address horizontal oil wells in December and January including three one and a half mile horizontal wells and one one mile horizontal well all wells are now completed and producing at various stages of cleanup.
Early production results have been at or above expectations, and we look forward to completing the full program over the next few months.
Moving onto the fourth strategic objective, which is the <unk>, which is to focus on generating free cash flow and strengthening our balance sheet by reducing debt. We intend to do this through the use of excess cash from operations and potentially through the proceeds from the sale of noncore assets.
Last month, we announced our plans the launch of sales process to divest of our Delaware basin asset during the second quarter of this year, we are still committed to that plan.
Remaining focused and disciplined in this regard will lead to meaningful returns for our shareholders and also provides additional financial flexibility to manage commodity price cycles and the future.
And moving on to our fifth and final strategic objective is to pursue strategic acquisitions that maintain or reduce our breakeven costs, we will focus on accretive acquisitions and mergers and dispositions that not only improve our breakeven cost, but improve our margins lower operating costs and are accretive on a cash low.
Basis, our financial strategy the associated with these efforts will focus on delivering competitive risks and debt adjusted per share returns for our shareholders.
I wanted to and my prepared comments.
Once again thanking the entire team of ring employees for their continued hard work and dedication.
The past year has clearly been the most challenging and modern times on a global scale and especially for the oil and gas industry. While I have only been in the company for a little over five months I have quickly come to appreciate the collective determination and dedication of the rings employees at all levels of the organization.
As.
I appreciate the way they have so quickly embraced our new strategic vision, which is evident in our operational and financial results is a direct result of their actions I'll look forward to continuing to work closely with our team as we strive to take the company to new Heights, and further increase shareholder value and so with that I would like to turn it over to our <unk>.
Operator to moderate the Q&A session of this call.
Thank you Sir we will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.
And you were using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
We ask that you please limit yourself to one question and one follow up if you have additional questions you may reenter the question queue.
At this time, we will pause momentarily to assemble our roster.
And the first question will come from Jeffrey Campbell with Alliance Global Partners. Please go ahead.
Good morning.
Hey, good morning, Jeff.
My first question.
And the Delaware Basin asset sales I was wondering if you see 2021 of the more supported sales environment and last year generally and if anything might be different and how the sale is conducted or value. This year.
Yes, good question.
Yes, 2021 is a better year and if you recall.
We entered.
Of the pandemic, we actually.
Signed the purchase and sale of agreement and in April of.
2020, which probably was.
Alright, and the peak of the of the downturn and so yes, we believe that the prices are better. This year. We have also made investments out there to stabilize production and also.
We've done a better job of.
Of looking at and actually separating out our facilities that are associated with our production and then those portions of our facilities that could be used for commercial saltwater disposal and so we think that we can get really good value for our assets and so we're looking forward to do and so this year.
Great I appreciate that and then dig.
Digging into the M&A, a little bit without asking for any secret sauce.
And if you could give us some broad gating items with regard to M&A both.
On the sort of assets that you desire and any financing variables.
Yes, very good I'll address the financing first because thats the obvious thing, yes, we've got a challenge and balance sheet, okay, and so with the debt levels that we have we would like to use equity where we can we would like to emerge from any kind of of transaction.
With.
And making further progress.
<unk> and our balance sheet, and we think that we can do that we believe now that prices have come back up to more reasonable level there are more.
And sellers out there if you want to call them that the more sellers willing to sell at these prices whereas.
At the if you look back at the in November December of last year, when prices were still pretty low.
And really nobody wants to sell their assets of $40 of oil.
And now getting back to the portion of your question associated with what type of assets.
Well, we really like the area that we're in and we really like the the economics of the project, but we have and our own inventory and so yes, ideally we would like Keith.
Spread.
The very effective operating team over more and more wells and more barrels of production and later and we operate from the synergies and.
And an obvious thing.
And so however, I'm not going to tell you that we would only buy asset and and around where we currently operate but I will say that if we do venture outside of the central basin platform. The southern shelf it'll be because of the attributes of the acquisition bring with them similar attributes of.
The shallow decline of high margin undeveloped opportunities have low breakeven cost and short payouts and that type of thing.
And probably the primary as well.
Okay I appreciate that color. Thank you.
And the next question comes from Don Mcintosh with Johnson Rice. Please go ahead.
Good morning, Paul.
Hey, good morning, Don how are you.
And.
I appreciate the color on the winter storms and I was wondering if we could dig in a little more kind of on the 21 program and how you kind of see that playing out with the 10 to 12 completions and the timing of those of.
Over the course of the year.
And I would assume that the four wells drilled in January or December and January that's that's.
Baked into those 10 to 12 is that right.
That is correct, yes, two wells were drilled in December.
And but they were completed in 2021.
Okay, and then over the remainder of the year, So I guess that leaves.
About.
And a six to eight or so for the remainder of the year, so that'd be pretty.
Weighted China second third and fourth quarter is should you kind of knock those out and then reevaluate the program as you get towards the end of the year.
Well.
We're being forced to kind of reevaluate things on a daily basis.
With the <unk>.
Product prices being what they are higher and higher.
Level today than anybody would predict and just a couple of months ago.
We were originally thinking that we were going to pick up of drilling rig to start our next campaign sometime in the summer.
But because of the price is being what they are.
We're actually thinking about accelerating our drilling program and little bit so don't be surprised and we start drilling and the second quarter.
Okay. Thank you and then I guess just to clarify that and then.
And listen, but when you talked about adding that second rig and the summer would that be included and the $40 million to $48 million of Capex that youre talking about for the year.
Yes, the way.
Okay.
Alright, Thank you all.
I appreciate the Don Thanks.
And the next question will come from Noel Parks with Tuohy Brothers. Please go ahead.
Hey, good morning.
Hey, good morning, and all.
Just a couple of things the.
Well that you gave of results for under the lease the Badger 796 X.
H.
Was that one of the.
And the mile and a half.
And my laterals or is that one of the regular length of laterals.
It's the one five mile lateral.
Great.
And.
For the.
A couple of years into the the.
Eastern shelf acquisition everything I'm, just curious what's sort of of the longest production history. You have now at this search of hunk of that.
The question, though.
On the production history you have.
Yeah.
With the the.
The wells there so far and.
And just how much does with the lateral length.
Help me and the economics of the World I think the.
And the curves and you've had in the past presentations.
And out of a one mile lateral of assumption.
You want to take that Alex.
And as Alex dies, our executive Vice President of engineering, and corporate strategy share. So.
And our presentation before the its just normalized to a one mile lateral so you and gift.
EBITDA multiply up to get to the mile and the hat.
And what was the first part of that question I didn't quite catch that.
Just asking about production history.
And now and.
And just maybe where your type curves might be headed.
Sure. So a lot of the first production history I mean, the original operator, they're drilled wells and 2016 and other operators within the area of had started drilling in 15, and so theres quite a bit of production history for those wells and as far as the amount of half well.
It's beneficial to get an extra half mile because <unk> already have the location set up and you get that extra completion from from that so the name of arena. So you want to elaborate a little bit more.
Yes, the incremental cost of the mall and a half lateral or 25% compared to the the model out of it so.
And the increased EUR, the we get it's beneficial to drove the mall and the Hess laterals, where we can.
Yes, and based on all of my observations the.
The one five mile wells have demonstrated not only with the team, but also with some of the other operators and the area to be beneficial and so everybody tried to as long as they have the acreage position.
The <unk> drove the one and half model has been beneficial and so youll see it not so much of an Ips, but you do see it considerably in terms of the.
The EUR and the ultimate economics of the well.
Great. Thanks, a lot.
Once again, if you'd like to ask the question. Please press Star then one the.
Next question will be from Richard Tullis with capital one. Please go ahead.
Hey, Thanks. Good morning, everyone. Just one quick question Paul for clarification. So you are not currently running the rig like.
Possibly pick one up and the second quarter to continue with the drilling program and then drop that rig.
Dependent on pricing after you get to the two.
The six to eight wells for the year and then consider of what you would do for the rest of the year is that the proper way to look at it.
That is the proper way to look at it.
Okay. Good I just wanted to clarify that thank you.
You bet.
Thank you and the next question will come Michael Bloomfield of private Investor. Please go ahead.
Hey, Paul how are you doing.
Hey, good morning, Mike.
Ed.
And on the focus on the balance sheet and the debt reduction and I understand the sensitivity of that and I'm all for it.
And from the standpoint of our internal target that youre, saying to yourself and need to get down to this level to be comfortable where the usage of cash flow going forward from that level is to maximize growth.
And.
Once you reach that balance and the balance sheet that gives you a great comfort just curious if you've identified that number.
Well I've said in the past, Mike that I prefer to be at or below one times debt to EBITDA I will say, though if prices continue to remain strong or have some of the pundits out there who have so I'm pretty optimistic forecasts for oil price is going off and the future we actually come closer.
Some of those forecast.
As we get to two five times debt to EBITDA below I'm going to be tempted to pour on the capital to.
To take advantage of those higher prices and I think that'd be the right thing to do for our shareholders. Because we have the inventory to really deliver some significant growth and total agreement with bedroom and one last question. When we talk about the new wells are coming on stream the.
Is the math for people that arent and the business each new well on an annualized basis would produce between five and $7 million of gross revenue.
Is that a fair and I'd have to go back and go back and check that number.
This is Alex.
Yes.
Yes. It also depends on prices and then your low and different areas have different law and you say, it's not easy and very easy answer. So I would say, we probably take that offline.
Okay.
We asked the question because it appeared to be again as the non oil and gas you take so many days time of barrel produced times the <unk>.
Current market value and you kind of get to a number and.
It would appear that you'd be looking at 30 or $40 million and additional revenues. When you start talking about eight wells and it was just the interesting number.
Hey, Mike will get back with you on that okay.
Thanks very much.
Youre welcome.
And the next question is a follow up from Jeffrey Campbell with Alliance Global Partners. Please go ahead.
Alright, great. Thanks, a lot of me back and I was just wondering do you have a forecast for how many more of the ESP to rod pump conversions are on tap for 'twenty, one and is this a fairly ratable program over the next several years.
Thanks, Yes ill tell you what I'm going to turn that question over to our executive Vice President of operations Marino Baghdad.
Yesterday, we currently have 92 wells are on ESP, excluding the new wells, we anticipate based on our failure of frequencies and the.
The forecast that we have that we will have 36 conversions to rod pumps by the end of this year.
There is.
20% to 30 wells and it'll probably won't be converted to rod pump throughout their life because of the water volumes. So after 2022 with an additional 30 the.
<unk> 35, Rod pump conversions in 2022 will be at a point, where all of the wells the need to be converted 12 pump are done and at that point and it'll just be the new wells and we drill once they get to that point there'll be converted.
Okay, great. Thank you that's very helpful.
Okay.
Ladies and gentlemen, this concludes our question and answer session I would like to turn the conference back over the call Mckinney for any closing remarks.
Very good thank you Chad and thank all of you for your interest and range. We are really excited about what the future holds for ring energy and our shareholders. We.
We are actively working every single day.
Trying to put the best dollars that we have to the best uses and we think of 2021 and really going to end up with a really good year and we look forward to 2021 and beyond.
And I'd like to again. Thank you one last time and we will talk again on the next call.
And thank you Sir.
Conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
Yes.
Okay.
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Okay.
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