Q1 2022 Ring Energy Inc Earnings Call
[music].
Good day and welcome to Ring Energy's first quarter 2022 earnings conference call. All participants will be in a listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then two please.
Please note this event is being recorded.
I would now like to turn the conference over to Al Petrie Investor Relations for Ring Energy. Please go ahead.
Thank you operator, and good morning, everyone. We appreciate your interest in <unk> energy.
We'll begin our call with comments from Paul Mccartney Chairman of the board and CEO , who will provide an overview of key matters for the first quarter.
I'll turn the call over to Travis Thomas brings Chief Financial Officer, who will review our financial results.
Paul will then return to discuss our future plans and outlook before we open the call up for questions also joining us on the call today and available for the Q&A session are Alex tires.
<unk> VP of engineering and corporate strategy.
He knows Baghdad.
<unk> VP of operations.
Steve Brooks executive VP of land legal human resources and marketing during the Q&A session. We ask you to limit your questions to one and a follow up your.
You're welcome to reenter the queue later with any additional questions. I would also note that we have posted a Q1 2022 earnings corporate presentation to our website.
During the course of this conference call the company will be making forward looking statements within the meaning of federal Securities laws investors are cautioned that forward looking statements are not guarantees of future performance.
Actual results or developments may differ materially from those projected in those forward looking statements and the company can give no assurance that such forward looking statements will prove to be correct, bringing <unk> 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 in our filings with the SEC. These.
These documents can be found in the investors section of our website at www Dot <unk> dot com should one or more of these risks materialize or should underlying assumptions prove incorrect actual results may vary materially.
This conference call also includes references to certain non-GAAP financial measures.
Reconciliations of these non-GAAP financial measures to the most directly comparable measure under.
GAAP are contained in our earnings announcement released yesterday finally as a reminder, this conference call is being recorded I am glad I would like to turn the call over to Paul Mckinney, Our chairman and CEO .
Thanks Al welcome everyone and thank you for your interest in renewable energy. We appreciate you joining us today to discuss our regional results and outlook for the rest of the year. We are executing on our value focused proven strategy. The results of which can be clearly seen in our operational and financial performance. This quarter, we believe.
Our first quarter sales results set a solid foundation for 2022 and are indicative of the increase in revenue and cash flow, we anticipate for the remaining quarters. This year as long as prices continue to remain strong.
As you know first quarter sales volumes were 8870 barrels of oil equivalent per day, which exceeded our guidance range by almost 2% contributed to this performance were two key operational factors.
First all four of the Central Basin platform Wells, we drilled during the first quarter were placed on production sooner than originally anticipated.
We were able to complete the installation of certain field compressors, which benefited natural gas sales.
We also benefited considerably from higher realized oil and natural gas prices as a majority of our lower priced oil hedges expired at the end of 2021 and none of our natural gas sales were hedged.
The combination of strong sales volumes and higher realized pricing and our ongoing focus on cost control enabled us to grow adjusted EBITDA by almost 50% compared to the fourth quarter we.
We generated approximately 36 million of adjusted EBITDA during the first quarter, what was almost half of what we generated in all of last year.
Although we increased our activity in place for Central Basin platform Wells online ahead of schedule and capital spending for the first quarter came in under budget. Our team has done a great job executing our drilling completion capital Workover program driving further efficiencies in our capital spending.
With higher adjusted EBITDA and lower capital spending we generated almost 13 million in free cash flow. This quarter. We used the majority of that to pay down $10 million of debt and we ended the quarter with $71 million of liquidity.
Proximately, 60% higher than at the end of 2021, and a 57% increase from the same time last year.
With respect to our development initiatives, we decided to take advantage of a strong commodity price outlook and implement a continuous one rig drilling program during 2022.
Our program is designed to remain within cash flow and drive production revenue and adjusted EBITDA growth and to significantly lower our leverage ratio by the end of the year as in the past we are targeting our highest rate of return inventory across our central basin platform and northwest shelf acreage.
As you know we initiated our 2022 development campaign in late January and drilled six wells in the first quarter. This included four wells in the Central Basin platform and two wells on the northwest shelf with all wells, having 100% working interest as I mentioned, the four central basin platform and while were placed on <unk>.
Darden in the first quarter and we have since completed and brought online the two northwest shelf wells.
We are encouraged by the results we've seen to date from our 2022 drilling program leveraging our learnings from last year, we remain squarely focused on the geology selecting the best landing zones and improving our completion methods.
We are also continuing our program to convert wells in downhole electrical submersible pumps to rod pumps, a capital Workover program, we call <unk>, we performed four ctr in the northwest shelf in the first quarter as we've discussed in the past the long term benefit of our targeted Ctr program allows us to significantly.
We reduced our operating costs through lower electricity usage and considerably lower future repair costs. These lower operating costs lead to larger economic lives of the wells and improve the ultimate recovery of oil and gas reserves.
Looking forward to the second quarter, we expect to drill eight to 10 wells, while completing and placing our production 79 wells for the full year, we are still planning to drill between 25, and 33 wells and complete and place online between 25 and 30 miles of course, we will continue to retain the ability to adjust our drilling.
And other capital spending program to reflect any material changes in commodity prices, so with that I'll turn it over travelers to discuss our financial results in more detail Travis.
Thanks, Paul and good morning, everyone. My comments today will primarily focus on our financial position and sequential quarterly results are detailed discussion concerning comparisons to last year's first quarter. Please see our press release and 10-Q, we filed yesterday with the SEC.
During the first quarter of 2022 we sold 676000 barrels of oil and 732000 Mcf of natural gas for a total of 798000 Boe.
This is compared to sales of 715000 barrels of oil and 762000 Mcf of natural gas or a total of 842000 Boe.
For the fourth quarter of 2021.
First quarter realized pricing was $93 80 per barrel and $6 49 per mcf or $85 41 per Boe.
During the fourth quarter, we had realized oil pricing of $76 35 per barrel and natural gas pricing of $6 65 per mcf or $70 85 per Boe.
Our first quarter average oil price differential from Nymex, our ETR was a negative 90 cents per barrel for the first quarter versus a negative $1 12 per barrel for the fourth quarter of 2021.
Our average natural gas price differential from Henry hub for the first quarter was a positive $1 81 per mcf compared to a positive differential of $1 85 per mcf for the fourth quarter.
This combined results first quarter revenues of $68 $2 million, there were 14% higher than fourth quarter 2021 revenues of $59 $7 million.
Looking at the more significant expense line items on the income statement.
Italy was $9 million or $11 22 per Boe compared to $7 7 million.
Or $9 <unk> per Boe for the fourth quarter of 2021.
Primarily contributing to the increase was inflationary cost pressures and a higher than usual amount of workovers performed to return wells to production.
Gathering transportation and processing, our GTP costs decreased $1 3 million from $1 $4 million in fourth quarter of 2021, primarily due to lower gas sales.
Production taxes were $3 2 million versus $2 $8 million in the fourth quarter with a tax rate remaining steady at four 7% for both periods.
DD&A was $9 $8 million compared to $10 five for the fourth quarter of 2021, but was substantially unchanged on a Boe basis.
Cash G&A, which excludes share based compensation was flat at $4 million for both periods.
Interest expense was $3 4 million versus $3 5 million for the fourth quarter with the decrease due to a lower average daily borrowing balance on RPI.
During the first quarter, we posted net income of $7 1 million or <unk> <unk> per diluted share. Excluding the estimated after tax impact of pre tax items, including a $13 5 million for.
Our noncash unrealized losses on hedges and $1 5 million for share based compensation expense. Our first quarter. Adjusted net income was $22 3 million or 22 cents per share.
This is compared with fourth quarter 2021, net income of $24 1 million or 20 cents per diluted share excluding the after tax impact of pre tax items, including a $15 2 million for noncash unrealized gains on hedges and approximately $900000 per share.
Compensation expense, our fourth quarter adjusted net income was $9 9 million or <unk> 10 per share.
As of March 31, we had $280 million drawn on our revolving credit facility and liquidity of $71 million, including 2 million of cash and $69 million available on our revolver, which reflects a reduction for letters of credit.
We were pleased to pay down the facility by $10 million in the first quarter and look forward to further debt reductions during the remainder of 2022.
To sum it all up we had a great quarter with the addition of approximately $36 million on our first quarter adjusted EBITDA, our trailing 12 months EBITDA increased to $100 million.
With $280 million outstanding on the RVO. The math is simple to calculate our leverage ratio of 2.8 times versus three five times, a year and it looks even better when you annualize the first quarter, which would bring our <unk> leverage ratio to under two times.
I'd also note that early April a total of $6 5 million of our common warrants were exercised at a price of 80 cents per warrant.
Accordingly, our second quarter results will reflect the issuance of $6 5 million shares of common stock and a receipt of $5 $2 million of cash. There are currently approximately 23 million common warrants remain unexercised.
Turning to our outlook.
We continue to expect full year 2022 sales volumes of 9000 to 9600 Boe per day, which is a 9% year over year increase using the midpoint of our guidance. We continue to anticipate total capital spending of $120 million to $140 million for full year 2022, which.
<unk> the estimated cost to drill 25 to 33 wells and complete 25% to 30 wells primarily in the northwest shelf.
Our full year capital spending outlook includes targeted ball reactivation workovers infrastructure upgrades and continuing our successful Ctr program in the northwest shelf and Central Basin platform.
Also included as anticipated spending for leasing contractual drilling obligations and non operated drilling completion and capital Workovers.
As Paul noted, our 2022 capital spending program assumes and favorable commodity pricing environment.
If prices were to pull back materially get the flexibility to reduce capital spending as necessary.
For full year 2022, we anticipate alloy of $10 90 to $12 per Boe.
And G T P costs of $1 60 to $2 per Boe.
For second quarter 2020 to you we are targeting sales volumes of 9000 to 9400 Boe per day, the midpoint of our guidance represents a 4% increase from the first quarter and more fully reflects the benefit of continuous drilling program that we initiated in late January .
As Paul discussed, we expect to drill eight to 10 wells and complete and place on production seven to nine wells during the second quarter. We also expect Ela, we are $10 90 to $12 per Boe and GTP cost at $1 70 to.
To $2 per Boe for the second quarter.
In terms of our hedge position. We are pleased to have the majority of our lower priced hedges roll off at the beginning of the year as reflected in our first quarter results. This provides us with the opportunity for substantially higher revenue and operating cash flow in 2022, assuming a continued strong oil price environment I will now.
Turn it back to Paul for his closing comments before we answer your questions Paul.
Thank you Travis.
As we have discussed today, we have seen the initial benefits of our transition to a continuous one rig drilling program supported by stronger realized prices for oil and natural gas.
We expect production and operating cash flow will continue to steadily grow throughout the remainder of 2022 as long as hydrocarbon prices remained strong and we continue to bring more wells online.
Complementing these efforts are ongoing initiatives to drive further efficiencies in our operating cost structure.
Consistent with past, we plan to use our operating cash flow to fully fund our capital investment plans and further reduce debt.
We are targeting a leverage ratio of less than two times by the end of this year, which is a substantial improvement from just under three and a half times at the end of 2021.
To sum things up and based on our current industry outlook, we expect 2022 to be a good year for ring energy and stockholders. We remain focused on finding the right acquisition opportunity and as we have heard me say in the past, we believe that by increasing size and scale, we can provide greater stability to our production.
And earnings and place the company on the radar so to speak with a greater audience of potential investors.
Our commitment is to our existing stockholders and any transaction, we completed an equity will be strategic and accretive on a debt adjusted per share basis, we look forward to keeping everyone apprised of our progress in this regard with that I will turn the call back to the operator, and we look forward to answering your questions operator.
Thank you.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.
Youre 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.
At this time, we will pause momentarily to assemble our roster.
And the first question will be from Jeffrey Campbell from all the owns global partners. Please go ahead.
Okay.
Good morning.
Paul Good morning press release.
How long are we discussing noted service cost inflation and on that front, we've heard from some quarters that even long term steel and sand contracts are now being delivered to the lack of supply or railroad constraints I wondered if you're hearing of any similar challenges in your operating area generally and of course right.
Specific status as regards supply of necessary services and materials.
Yeah at this point, we have not experienced any supply disruptions.
We are though experiencing.
Significant inflationary pressures with respect to steel and also the completion cost I guess following up behind that we're also seeing increases in electricity and some other things about directly answering your question, Jeff with respect to the supply chain and our ability to continue our operations we have not.
Experienced any other interruptions at all Raynaud's do you have any other comments you'd like to make where we have comfortably secured casing to get us through October .
We're in the process of securing program beyond and the sand is is an issue that we're fighting with everyone else, but as of right now.
It hasn't been an issue and we also want to emphasize that there are the nature of our completions don't require as much volume as the some of the other plays in the Delaware or the Midland Basin, So that puts us in a little bit of an advantage in that regard.
In terms of the volume that we require for our operations.
Okay I appreciate that last caller.
<unk>.
The press release noted ranch leverage reduction.
Continuing to pay down debt and increase production and EBITDA.
Do you have a leverage target in mind or what enabled you to either add a rig if commodity prices are supportive for transact in the market. It's an accretive deal was available late industrial sales.
Yeah, that's a very complex question, Jeff and so.
Yeah at this stage right now when we look at our projected cash flows at current industry strip prices, we are balancing the.
The need to keep our capital spending program within our cash flow.
But also we have very specific targets associated with reducing our debt.
And so anytime you start or pick up another rig you'll run that rig for a while.
And you're incurring costs until the production gets high enough to where they are starting to pay those costs back down.
You can with a rig and very quickly span a lot of money and so I'll before we pick up another rig.
Our cash flows balancing the cash flows higher more sustained prices are.
Or whatever need to be there. So that we can follow through with our commitment to ensure that we continue to strengthen the balance sheet. I mean, ultimately we our goal is a fortress balance sheet.
And because that really does a lot of good for us from a standpoint of strategically taken advantage of opportunities that may be presented in the marketplace. It's also in the proper way to use the liquidity that you have and the relationship you have with your banks is done.
I pursue opportunities.
With a clear sight on paying that debt down, but utilizing the capacity on your revolving credit facility just for those strategic reasons.
Did that answer your question Jeff.
Yeah actually that was great color I appreciate it.
Thank you and the next question will be from Neal Dingmann from Truest Securities. Please go ahead.
Good morning, good morning, guys.
Good morning, Neil how are you.
Good good.
Paul My question for you Marino so on the operational side, specifically could you discuss a bit.
You guys continue to be pretty active both on the platform the shelf.
With a nice combination of both which is great to see I'm just wondering could you all speak to.
Just how youre seeing how they sort of stack up versus each other right now when you look at returns of each I think both are pretty excited and then maybe speak to the workover opportunities in each of the areas.
Yeah sure I'll give a first stab and I'll turn it over to my expert.
What we've experienced as a result of the work that our geoscience and engineering teams have done.
We've now placed our central basin platform wells and a category that when you look at the range of outcomes.
It's hard to distinguish the difference between the economic returns of both the Central basin platform and north of our shelf Theyre So close.
Typically the northwest shelf wells might be a little bit better, but we've had some really good results in the central basin platform and we're really really pleased in that regard.
And so that's really all I'll say concern that I will turn it over here Marino.
You don't have it in that Paul.
Perfect, Yeah, and so yes it is.
When we first came on board, we saw the legacy acreage down there we felt obligated to spend the time to really study it hard and we put a lot of effort in that and then last year. When we drill those first three wells. It was kind of a test program, we want to see what we can do and we were very pleased with the results and so right now that the drilling program.
Between the northwest shelf and the Central Basin platform has more to do with balancing.
The.
The other costs associated with our development and so let me explain on that.
When we drilled our first four wells down there in the Central Basin platform. When they made the decision to go back up north.
When you bring these new wells on you get a lot of production.
And our infrastructure there to dispose of the water can only handle so much right and so by going up to.
To the north West shelf drilling some wells there and then coming back to the Central Basin platform later in the year that allows us earlier wells to decline and are minimizing the investments necessary to dispose of the water. So it's really an operational management issue.
As to where we're going to have a rig.
What time and so we're balancing a lot of other things. In addition to just the performance of the individual wells. It also has a lot to do with just managing your overall cost does that give you. The color you're looking for do you did you actually kind of led kind of two other pieces I was going to ask you about.
Just just on infrastructure takeaway is one rig or if you've ever decided to rig to see if you have.
How that sort of sits on both the plays and that just just you know on logistically. When you all are looking at to ensure you continue to keep that rig make sure you can get drill pipe in each of the areas could you just sort of hit if things sort of progressive things, obviously are tight on bolt to service to takeaway side, just how you all sit on both those sides for in each of the areas.
Yeah for us.
Step it up to another room first of all we need to have.
A more cash flow. So if you look at the rest of this year.
And the way our projections are.
With the drilling the one rig program, where we're spending money very quickly. Okay. So you don't want to outrun your cash flows.
We intend to pay down debt every quarter, we may not be able to do that just because we are managing those those issues.
But.
Other things that you brought up associated with the supply chain. If we were to pick up a second rig that would significantly increase the.
Long lead time purchases necessary to keep that rig going sourcing the sand getting the frac crews all lined up so that's another step.
Change in that regard and then at the same time it goes back to.
The infrastructure that we have to handle the water and the production and so at this stage right now we're not intending to pick up a second rig this year.
I can't really imagine the circumstances that would cause us to do that going into 2023.
That could happen.
The last point that you brought up associated with potential acquisitions, we do have our eyes on several different opportunities out there in the marketplace.
And those opportunities may or may not come with existing running rigs in capital programs and so our with an acquisition.
It wouldn't it shouldnt surprise shareholders that we would keep the second rig running depending on the size and the opportunities and the economics of those those acquisitions.
Paul if I can quantify on the infrastructure that Paul was mentioning.
Current capital.
Budget guidance, we mentioned that about 82% of that will be a D&C and equipping less than 10% of that is dedicated to infrastructure. The rest is so more than 90% is dedicated to drilling and completing wells and having production.
Come online and when.
We did a tremendous effort to make sure that in our scheduling we would ensure that we minimize our infrastructure costs and.
Adding another rig would possibly.
Needless to change directions there.
Good color.
No great Great Hello, Neil I'll say, yeah, no that's exactly what I was looking for a nice nice quarter. Thanks, guys.
Okay. Thank you.
Once again, if you have a question. Please press Star then one.
The next question is from Noel Parks from Tuohy Brothers. Please go ahead.
Hi, good morning.
Hey, good morning, Noel how are you.
Real good thanks.
Just a couple of things I was wondering and you just talked about.
All the effort you put into the logistics of that.
The drilling and completion plans in the pace I'm just wondering right now are you having any issue with the sort of the pairing up of the.
The Frac teams, arriving when you want them to according to your plans do you have to.
I believe Mike more wiggle room than than usual or is that gone fairly smoothly. These days.
No I'm really glad you asked that because we're actually really proud about the way we schedule things out we gave a couple of weeks.
<unk> lead way between the drilling rig, leaving the location and us being able to get the the frac crews to show up and we've actually exceeded that in every one of the eight eight wells were brought online so far this year, including second quarter. So we're very proud of that our team has done a great job.
Being in constant communication with the completion.
Service companies and.
It has not been an issue so far.
Oh terrific and.
I was wondering at this point with a yes.
Yes.
Terrific price environment, we have is the sort of furthest out here.
Central Basin platform inventory.
Reason I believe economic even at these prices.
Especially at these prices.
Yeah no everything.
That we are drilling this year.
You know again.
If you look at what we did last year. We've taken the same approach. This year, we're really looking at the various risks associated with each of the drilling locations were selecting the highest risk adjusted rate of return wells to drill.
During this time period, we feel compelled and squeeze every last dollar.
Our out of every investment we make and to increase our production. So we can.
Strengthening the balance sheet and so it's all about efficiency, we do have other wells.
Undeveloped opportunities in our portfolio.
Don't have the returns of the wells that we're drilling.
And I'll just bring it up to here in the Delaware Basin has several pods on the books at.
They are economic at today's price, but they are not as economic as the ones that we're drilling and so we feel compelled at this stage.
Of.
Our pursuit of higher and better returns for our shareholders, we feel compelled to make sure that we optimize every last investment.
And so that's what we'll continue to do.
Got it and.
I was just wondering also against your forecasting all of that were.
More than a third of the way into the year.
Have the labor costs expectations, you had been.
And then more or less in language reality, and and just curious on the shelf and the platform.
Our services pretty much at full utilization now both frac sand and rigs.
I'll take the first part of that question I'll turn the rest over to marinos, but.
When we planned our programs. This year, we had already been experiencing what we consider to be a.
High level of inflationary pressure on our on all of them.
Alex and services and supplies and equipment that we need to complete our programs and so we tried to build that into our program.
So, but it's hard to predict that kind of goes back to one of the earlier questions that we answered earlier.
The pressures that we're seeing all steel prices have not let up.
Competition for sand is causing prices and the availability there.
To be a challenge and labor costs are going up very fast because most of the service companies that we employ are having difficulty attracting people back to the oil patch I mean after the pandemic. There was a large percentage of the labor force that left the industry and to attract them now.
Youre going to what we're seeing happen is that salaries are going up they're sweetening their benefit packages are doing all the things they can do to get the talent back in and so where we're dealing with.
Crews that are not as experienced so you can't have the same efficiencies from these grew some of these crews that used to run 24 hours are not only running during the daylight hours and so that causes a program to take longer. So we don't get the production on as soon as we otherwise would and it's also a cost anymore.
If there's any more you want to add to that no thats perfect Paul and we built in a lot of those but just for an example, our completion cost we bid out all our fracs.
In.
I'm not going to give out the numbers, but percentage wise. The second best bid is 25% higher than the best bid and the next bid is another is 50% higher than the best bid we start out with of course, the best bid company and to the second part of your question every all the surfaces.
Pretty much 100% utilized in.
In the in the Central Basin platform and northwest shelf. So we.
That could give us a big range on the cost of the wells.
Tried to adjust for that but it could if we end up having to go with with companies that are higher cost in order to get the work done that they might start changing our cost.
And the funny thing about that is that oftentimes when.
When you bid one job out versus another is not the same people come in with a low cost it seems to be more associated with the availability of their crews and how busy they are in the inventory of the.
Chemicals or sand or the other things that they need to complete the job. So we does there's a lot of volatility not only in the oil and gas price.
That we're experiencing but we're seeing a lot of volatility associated with the relationships, we have with the various service providers because they have shortages of supplies.
And inflationary pressures that they're dealing with as always it's a very interesting times.
Our second marinas, just said about our teams are drilling crews our completion crews.
And theyre scheduling they've done a great job of getting out ahead, we knew that we had these headwinds leading into this work program and so we started early we.
We're calling on relationships.
It's the benefit of all of those things that allowed us to maintain the efficiency and keep our programs going like we have.
Right well high class problems was at $100 oil so I guess one thing.
[laughter] yeah.
Thanks, a lot.
Hey, Thank you.
At this time there are no further questions. So I would like to turn the conference back over to Paul Mckinney, Chairman and CEO for any closing remarks.
Thank you Chad and thank you all of you that are tuned in today to listen to what we had to say we are very excited about this year, we have a lot of really good things going on.
Product prices are high we do have our challenges and our operational program, but we're really really enjoying the.
The benefits of all these things because we havent really good year going.
And so stay tuned and we'll keep you indeed with what we're doing.
Thank you Sir the conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
Sure.
[music].