Q2 2021 Ring Energy Inc Earnings Call
Good day and welcome to the ring Energy second quarter 2021 earnings Conference call. All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing Star then zero. After today's presentation, there will be an opportunity to ask questions to ask a question you May Press Star then 1 on a touch.
The tone of town to withdraw your question. Please press Star then 2.
Please note. This event is being recorded I would now like to turn the conference over to Al Petrie Investor Relations. Please go ahead.
Thank you, Matt and good morning, everyone. We appreciate you taking the time to join US today and for your interest in ring energy will begin our call with comments from Paul Mckinney Chairman of the board and CEO, who will provide an overview of the key matters for the second quarter. The will then turn the call over to Travis Thomas Our Chief Financial Officer.
The review of our detailed financial results, Paul will then discuss our future plans and outlook.
Also joining us on the call today and available for the Q&A session are Alex <unk> Executive Vice President of Engineering, and corporate strategy Marinas, Baghdad Executive Vice President of operations, and Steve Brooks Executive VP of land legal human resources and marketing.
During the Q&A session. We ask you to limit your questions to 1 and a follow up.
Youre welcome to reenter the queue later with additional questions. During the course of this conference call of the company. We are making forward looking statements investors are cautioned that forward looking statements are not guarantees of future performance and those actual results or developments may day.
The differ materially from those projected in the forward looking statements.
Energy disclaims any intention or obligation to update or revise any forward looking statements, whether as a result of new information future events or otherwise accordingly, you should not place undue reliance on forward looking statements. These and other risks are described in yesterday's press release and the reports filed with the SEC.
As a reminder, this conference is being recorded I would now like to turn the call over to Paul Mckinney, Our chairman and CEO.
Thank you al I want to welcome everyone to our second quarter 2021 earnings call. We are pleased with the overall results for the second quarter. This makes our seventh consecutive quarter of generating free cash flow that we partially utilized of further pay down debt.
Looking at our results in more detail during the second quarter of 2021, we sold 792551 barrels of oil equivalent for 8709 barrels of oil equivalent per day, which was an 11% increase from this years first quarter sales of 716400.
<unk> 22 barrels of oil equivalent or 7960 Boe per day.
Contributing to the higher production was the success of our northwest shelf phase, 1 and phase 2 drilling programs as a result.
And as we discussed on our last earnings call our for well Phase 1 program came in on schedule and within budget and collective production results continue to meet or exceed our original expectations. During the second quarter collectively the for wells produce 101800 growth both barrels of.
All of equivalent or approximately 280 Boe per day per well.
Also during the second quarter, we drilled completed and placed on production all 3 phase 2 wells now.
1 of the phase 1 the phase 2 wells came in on schedule and within budget and with all 3 wells brought online by June 3rd the.
The collective production results from the phase 2 wells have also met or exceeded our original estimates, including total production from the 3 wells of 22007 hundred gross barrels of oil equivalent or approximately 270 barrels of oil per equivalent per day per well for the last 28 days of June.
<unk>.
If you recall on our first quarter conference call, we expected a significant increase in second quarter sales volumes given the ongoing success of our development programs and the anticipated restoration of natural gas sales disrupted by the severe winter storm in February.
The second quarter sales volumes did increase 11% from the first quarter they were lower than anticipated primarily due to continuing downtime from these third party processing facilities in the central basin platform that negatively affected natural gas sales.
Additionally, we incurred pipeline capacity constraints during the quarter in the northwest shelf debt further impacted our natural gas sales in late May and early June we also experienced lightning strike related damage of several of our facilities that impacted oil sales for the period with repair of completed and the wells brought back online.
The mid July.
As you know natural gas is the minor component of our total sales revenue. Although these reduced natural gas sales impacted our total sales volumes on a BOE basis, they had a relatively minor impact on EBITDA for the quarter.
With respect of sales revenue, we benefited from higher crude pricing during the period.
Which when combined with the 11% increase in crude oil sales contributed to the overall, 21% increase in revenues over the first quarter. The combined impact from these items as well as our ongoing cost reduction initiatives resulted in second quarter 2021, adjusted EBITDA of $20.6 million.
And $5.6 million of free cash flow we utilized.
A large portion of our free cash flow during the quarter to pay down 5 million of bank debt and ended the period with approximately $51 million of liquidity I, 13% increase from the end of the first quarter.
When considering the first half of 2021, we generated $39.6 million in adjusted EBITDA.
$8.6 million of free cash flow and reduced the borrowings on our revolver by 12 and a half million dollars in.
In response to the higher.
Crude oil pricing environment yesterday, we announced an increase to our original drilling plans, we picked up 2 rigs last week and initiated the drilling of the first 2 wells of a 4 well phase 3 drilling program, we have 100% working interest in all of these well our current plan is a follow up the fab.
These 3 wells with a 1 rig phase for program.
To drill an additional 2 or more wells beginning early in the fourth quarter. The wells in the northwest shelf are planned to be 1 mile laterals, while the well one's in the Central basin platform are planned to be 1 of the half mile hours laterals, we anticipate the payback on invested capital for these wells to be 1 year of less given the current price environment.
Although the anticipated production will not have a meaningful impact on 2021 production volumes keep in mind that of the current price environment continues these new volumes will place us in a very strong position as we enter 2022 with that I will turn the call over to Travis Thomas to discuss our financials in more detail I will then come.
Back and make a few closing remarks Travis.
Paul.
For the second quarter of 2021, we generated revenues of $47.8 million recorded a net loss of $15.9 million or a loss of <unk> 16 per share.
Cleared in the loss for pretax items, including $22.8 million of noncash unrealized losses on hedges as a result in the change of an oil price and approximately $350000 of share based compensation expense excluding.
Excluding these items, our adjusted net income was $7.3 million for 7 cents per share.
During the second quarter of 2021, we had $17.1 million in cash flow from operations of 11.5 million in capital expenditures. The combined result was positive free cash flow of $5.6 million.
For the 3 months ended June 30th 2021 we had oil sales of 702408 barrels and gas sales of 540857 Mcf for a total of 792551.
Our second quarter of 2021 realized pricing was $65 per barrel of oil and $3.90 per Mcf of natural gas for an average of $6.26 per Boe.
The differential between our average oil price received in Nymex Debbie Ti was the negative 99 per barrel for the second quarter of 'twenty, 1 compared to our average first quarter differential of negative <unk> 37 per barrel per.
For detailed discussions of our other income statement line items. Please refer to our earnings release and 10-Q that was filed yesterday of course I'll be happy to answer any questions. You may have during today's Q&A session.
As Paul discussed we are pleased to generate free cash flow once again during the second quarter of 2021, and further paying down debt by $5 million moving forward. We will continue to use much of our free cash flow for this purpose with the level of free cash flow and the cadence of debt pay down primarily driven by the timing of capital spending and market conditions.
As of June 30th 2021, we had $305 million drawn on our revolving credit facility and liquidity of $51.4 million, including $48.7 million available on the revolver and $2.7 million of cash.
Turning to our outlook for the remainder of this year.
We expect second half 2021 sales of 8700, 9200 Boe per day, including 7700.8100 barrels of oil per day.
Assuming the successful completion of completion and timing of the phase III and phase for drilling program, we expect to exit 2021 with sales volumes in excess of the high end of our second half guidance.
We expect an average lifting cost for the second half of 2021 of $10.50 to $11 per Boe.
Lifting costs include lease operating expenses and gathering transportation and processing costs.
Turning to our 2021 capital investment program.
Including the 6 to 8 phase III and phase for Wells, We announced yesterday, we expect the total capital spending of $30 million to $35 million for the second half of this year with all expenditures funded by cash on hand, and cash from operations. In addition to company directed drilling and completion activities our capital spending out of the outlook include.
The targeted well reactivation workovers infrastructure upgrades and continuing our successful Ctr program in the northwest shelf and Central basin platform areas.
Also included as anticipated spending for leasing cost contractual drilling obligations and non operated drilling completion and capital Workovers.
Our second half 2021 capital program has been designed to sustain our minimally grow our production and reserve levels have sufficient return have returns sufficient to generate free cash flow to further reduce debt and allow us to enter 2022 and the stronger position so with that I will turn it back to Paul.
Thank you Travis.
Over the last 7 quarters, we have generated more than $50 million in free cash flow that has helped us pay down debt and continue our drilling program.
The result has been a meaningful strengthening of our balance sheet and market position. Although we may not cash flow every quarter, we will on an annual basis and remains focused on becoming a peer leader in debt to EBITDA metrics.
Regarding our ongoing process of sell our Delaware assets, we have seen significant interest from a number of parties and are hopeful that we will have more details to announce once we enter a definitive sales agreement.
Regarding our pursuit of strategic acquisitions.
And as I shared with you in detail on the last earnings call. We promised the demonstrate 2 essential things and in this regard first a potential.
Transaction will need to bring in sufficient production revenue and cash flow to improve our leverage ratio, thereby strengthening our balance sheet.
Second the transaction metrics will need to be accretive to our existing shareholders. So the bottom line is this we will not acquire assets using the equity unless it meets these 2 tests and over the last several months, we have been screening the opportunities in the marketplace to ensure we meet the criteria.
With that I would like to turn it over to our operator for questions, Matt It's all yours.
We will now begin the question and answer session to ask the question you May Press Star then 1 on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys if at any time of your question. That's been the trusting you would like to withdraw your question. Please press Star then 2 at this time, we will pause momentarily to the.
Simple our roster.
Our first question will come from Jeffrey Campbell with Alliance Global Partners. Please go ahead.
Good morning.
Good morning, Jeff.
Thank you I'll limit myself to a couple of questions on the phase III and the phase for drilling the first 1 is.
Can you provide some color on the well length and any anticipated well cost inflation and here Im thinking about we've been hearing about increased steel costs.
The the industries during this earnings cycle.
Yeah, Jeff the other good questions and I'll tell you, what I'm going to I'm going to let our Marino will take that.
Good morning.
The north West shelf, the phase III and phase 4 wells or forecast are going to be 1 mile laterals were planned to be 1 mile laterals and then the CBP wells were planned to be 1 of half mile laterals in terms of cost we've seen cost increases.
Like the rest of the industry of.
The range of 10% to 20%.
On all of the quotes we received for the the fees and the preparation for the drilling program.
Primarily the cost of been in casing and tubular.
As well as some some other service costs, but the major cost increases from the pacing of Jupiter.
Yes.
And so the assets.
This is Alex die.
We have a presentation, we posted along with our earnings this time and in the range of the increase in costs are still well within the guidelines of what we put in that presentation. If you want to reference more on what amount of.
Well costs and amount of half well costs, you can see them there.
Alright, Thank you, yes the presentation.
And my follow up questions on the free in the core.
First of all should we expect that all of the for phase III wells are going to be completed in 2021.
Well the fourth quarter sales for wells likely be completed in first quarter 22, or whenever you want to identify and finally bearing in mind. The rapid paybacks on these wells identified do you intend to protect these returns with hedges.
Thank you.
I'll take the timing.
Question there the phase III wells are expected based on our current frac dates to be online by the end of the third quarter and the phase for wells were expected to be online late in the fourth quarter.
Contingent on us us being able to maintain the frac dates we we've secured already.
In regards to the hedges I'll turn it over yes, I'll take the hedges yeah. So Jeff.
Although we currently do.
Do not have any additional hedging requirements going into 2022 hedging will always be a significant component of our future plans and yes, we will be protecting our future cash flows our ability to pay down debt.
But at the same time.
And of heavily backward dated environment like this we also are seeking to employ more of an opportunistic hedging strategy.
To capture the upside for our shareholders as well.
And so we will share more details as we layer those hedges and going into the new year.
Okay, Great I understand thank you.
Our next question will come from Neal Dingmann with Travis. Please go ahead.
For now all of my first question.
Just look at the prepared remarks that you'd mentioned here in the the release could you talk about kind.
Kind of build on the last question is well how you think about balancing the debt repayment of the production growth, especially as Jeff was saying the you know.
I love the of course, the less than 1 year payback.
Really I think provide some nice optionality to take a look at both so again glad you guys added a couple of rigs and just wondering now that you've done that.
The broader terms, how you think about balance of the debt repayment with a bit of this growth.
Yeah, Neil Good question and so I think you point out the core of what this management team is committed to do.
When we state that we are committed to becoming a peer industry leaders and debt to EBITDA metrics.
We're truly committed to that I mean, and so right now during the time period when our balance sheet is of heavily levered. As it is we are going to continue to concentrate on reducing that leverage and so the whole goal of our capital program is the maintain or slightly grow our production.
So that we can continue that debt paydown as you know and as we've discussed in the past we believe that there is opportunities to divest of certain properties that we don't believe are core to our business.
To help accelerate that.
And we're also trying to employ.
The acquisition strategy that could also help accelerate that but as we continue to reduce that leverage ratio we will.
Divert more of our capital towards drilling to increase our production and provide the growth that we believe our shareholders also are looking for us to do and so it's a balancing act right now until we get the leverage ratio into a stronger position.
We will continue to concentrate on that but as we get that leverage ratio into a better position, you'll see that will start contributing more and more of our capital towards growth.
Does that answer the question.
Yes, yes, absolutely.
Combination makes a lot of sense.
I really like the quick payback quick cycle times interest gives you guys. Some of the damages to do that and then just in the.
Released I was reading last night it sounds like you guys have the confidence in you guys hit on this a little bit earlier as well.
On the production I guess could you talk about you know now that you of these 2 rigs.
I think the statement in there was you didnt feel confident you'd probably end the year I'm just trying to get at maybe a bit more color on this in the year around the high side of that production guide or something I'm just 1.
And again not net no details nothing specific for 'twenty, 2 but just how youre thinking about the ramp is it more would it be a hockey stick there at the end of the year. If these 2 rigs now have come in.
We should think about sort of leading into 2022.
And that is again very observant now that is the plant.
You know.
This year, we have.
Well you know early in the year and late last year as you know we put in the defense of hedges and so the cash flows at our production stream can generate.
As is.
Is limited to what those hedges allow outside of the production of we can exceed.
But.
With respect to affect this year's production. We know we can in fact affect this year's production too much but the the purpose really of the capital program coming in at the end of the year is to take advantage of the strong prices that we didn't anticipate earlier in the year and the added benefit is it really puts us in a really strong positions as the hedges roll off.
Going into the new year, and so yes, we're looking now towards 2022, and we're looking for ways to optimize our revenue generation and the EBITDA that hit the bottom line.
Great answers thanks, Bob.
Thank you.
Again, if you have a question. Please press Star then 1 of our next question will come from Noel Parks with Tuohy Brothers. Please go ahead.
Hi, good morning.
Good morning.
I just had a few things 1 of them to run value so as far as the.
You're getting back on them.
They're drilling.
There was something that in the for the last operations update you had suggested might be on the way and I'm. Just curious about the decision to go ahead with 2 rigs instead of just wanting running 1 steadily.
Was that.
Largely determined by you saw.
The price out there for for taking on both of the same time.
Well I was wondering if.
If you had thoughts around trying to sort of stagger.
The.
The completion dates of the wells, maybe cluster of them a little more tightly while we were in a good and.
The commodity price environment.
Well Theres a lot of the things that came into that decision, but I tell you what I'm going to turn this back over to Marinos and he can address some of the logistical issues associated with our rigs.
You know after the phase 2 wells, we wanted to monitor the wells of the for moving forward make sure that we're getting the results.
Wanted to get.
And in doing that the pricing environment changed.
And with that the service availability, we're finding a hard time with not having a continuous program to schedule of the Frac dates like you mentioned and so we had a window of frac.
Frac dates available in both the CVP in the northwest shelf for around the same time and thought that the the most efficient way to get those executed was volume.
Employing 2 rigs rather than just 1 and taking a little bit longer. So that was the major decision for picking of 2 rigs in the <unk>.
In phase for we're going to go back to 1 rig because we think those practice, we can stagger and plan now for those.
In the fourth quarter.
Does that answer your question.
It does thanks a lot of.
Great and.
The other thing I was looking at the.
The production.
Production guidance for <unk>.
The second half at the store.
And the relative to your sort of run rates from first debt stood straight line is up a little bit conservative and I was just wondering if there was.
Again anything having to do with timing or anything.
And their debt.
It was making just a little bit cautious in setting expectations for for second half.
Well if.
If you remember in the first.
The call.
Call that we had and we discussed the impact of the winter storm, we endured in February.
We told our shareholders that we thought the we can make up of that deferred production.
At that time, we were not aware of that the facilities.
That process, our gas in the Central Basin platform.
We're going to continue to incur.
The issues that were created as a result of that winter storm and so.
That gas production is still has not been fully restored.
And we've given up trying to predict when they will deliver on on.
That steady and restored production.
And so.
These estimates.
I can see why you would believe that they look a little conservative, but we've decided we can't continue to predict what other people are going to do and so we decided to focus on the oil production that we knew that we had a good handle on and and and so I hope we're surprised but.
We're in the hands of other people.
I'd like to add something to that the <unk> hit on it.
The original budget with our with our forecast our guidance.
We had anticipated for the last few wells of the for the 2021 drilling capital program.
To come online a lot sooner or a little bit sooner than what the current ones are coming on because of the frac dates that you mentioned so that also impacts the the guidance, we're giving for the southern half of the year of little bit as well.
Great. Thanks, Ed the definitely fills in the fields in the GAAP.
And what I was the when I was.
Coming up with.
And then just curious.
Among the factors involved in the additional activity in the in the timing and so forth.
We've touched on.
I was just wondering.
Was there.
Much thought given specifically to the for.
For shape of the base decline curve.
With this extra activity I guess I was thinking about heading into 2022, where you had the first half.
Phases, 1 and 2 wells come on and then originally it sounded like you weren't going to be really getting a rig out there more until.
Later in the year or so.
Also in the mix of of your thinking.
Yeah.
Yeah, the timing of when we drill our wells will always have the big impact.
So far if you look at the forecast that we have internally for our oil production, we've been remarkably and surprisingly in my opinion accurate and so we've been we've been really good in that regard the biggest misses of I have so far has been associated with the unanticipated downtime due to these like we mentioned the lightning strikes but.
It's primarily in the gas.
The.
The declines of the wells are basically coming in as we have seen in the <unk>.
And in the past and so I don't know if that really answers your question.
Yeah, no it totally does and.
And just 1 other for me is.
If I remember right. It seems that you have.
Have come along the way with the.
The rod pump conversion.
And so I.
I guess first I assuming that you.
Youre sort of wrapping up the most of that inventory and I was just curious if you could talk a little bit more about what other sort of the workover or maybe the recent completion of our other rework.
Yeah, you might have on the on deck for the rest of the year.
Yeah, I will say this.
As long as we're drilling wells out here because all of the wells that we're drilling.
We initially put in electrical submersible pumps, and so there'll always be of CPR component of our going forward program.
We have as you pointed out and made a lot of progress towards converting many of these electrical submersible pumps to rod pump, but we still do also retain a pretty sizable inventory. So we will continue that program throughout this year and into next year.
We do have ongoing workover opportunities that come along as well.
The latter part of their lives we're fortunate in the Central Basin platform, we have multiple horizons and re completion opportunities and that kind of thing.
But for this year and also next year, we will retain a pretty sizable component of our go forward capital spend associated with the CJR program.
Yes for and to add on to that.
The northwest shelf currently has 22 of the 76 wells the horizontal San Andres Wells. The northwest shelf are still on ESP, we expect those to reach a point, where they will be converted to rod pump as well and in CVP of the 114 wells that we have 63 of those are <unk>.
Still on ESP.
The total fluid production in Cdp's, a little higher so we don't expect all of those wells to be converted to rod pump at some point, but at least half of them will so.
We still have a number of wells that are going to be under our Ctr program.
In addition to the new wells the withdrawal overtime.
And any other kind of of interesting as we watch our operating costs.
You get the full effect of the <unk>.
A couple of months after you get them converted over where you are now starting to really see the reduction in the electrical usage.
And as you get into the repairs these rod rod part.
Broad parts of Rod repairs are so much less expensive than the electrical submersible pumps and so as time goes on you're seeing meaningful impact in the reduction of our operating costs and so.
We said that in the past, but I tell you what we really enjoy seeing those operating costs come down quarter over quarter.
And this is Alex again, I will comment that on slide on the slide deck that we attached to our earnings release Slide 12 addresses a lot of the <unk>.
Questions you had so the chairs a little bit of the historical failures and where we're going with the ctr.
Okay, great. Thanks, a lot.
Thank you.
Again, if you of a question. Please press Star then 1 our next question is a follow up from Jeffrey Campbell with Alliance Global Partners. Please go ahead.
Thanks for letting me back and I just wanted to ask a quick M&A question bearing in mind your your milestones for acquisitions.
Do you believe you're more likely to consummate an all stock transaction of our 1 that's the combination of stock and cash and assets as I'm thinking about the potential optionality of the impending asset sales.
Yeah and so.
There's a lot that can be said in that regard Jeff.
In the current environment I think of.
All of the.
Owners of assets that are in the marketplace trying to sell their assets would prefer cash okay.
We have seen and we.
And the expression of interest for many of our several different organizations that.
Would be receptive to stock.
But.
I can't say that there's any 1 preference or another.
Potentially do an all stock deal.
Those are going to be more rare I think of combination of stock and and the debt.
Again in that combination that right combination.
It will be a deleveraging.
And leverage ratio improving transaction.
And at the same time when you look at the share usage, we will.
Got.
It will be an accretive.
Deal with respect of the shareholder of otherwise, we won't do it and so.
That's a tall order right now because with the increase in oil prices that we've seen.
We've seen.
In our opinion anyway.
A rapid increase in the competitiveness for these oil and gas assets of they're hitting the hitting the street.
And so people are now willing to sell and there are now people willing to buy and is becoming more and more competitive and so we're out there competing.
Valuation, we're screening deals, but we're not losing side of the 2 promises we've made to our shareholders.
No I appreciate the comprehensive answer thank you.
As there are no more questions. This concludes our question and answer session I would like to turn the conference back over to Mr. Mckinney for any closing remarks.
Thank you, Matt and all of you that are on the call. Thank you for your time. Thank you for your interest in ring energy and thank you for your trust.
If you have any questions you're more than welcome to follow up and contact us and al Petrie is always available to take those calls and he transfers the send them on to us so anyway.
Thanks, again and have a great rest of the day.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.