Ring Energy (REI) Update - Aug 7

Ring Energy (REI) Update - Aug 7

Postby dan_s » Fri Aug 07, 2020 8:10 am

Note from John White at Roth Capital 8-7-2020

Our valuation is based on a net asset value (NAV) analysis which produced $1.32 per share which we adjusted to our $1.30 per share price target. We recognize our new target price of $1.30 would normally merit a Buy recommendation, however, we are maintaining our Neutral rating while we await the announced agreement for the Delaware asset sale to close for the consideration announced. Once the closing of this transaction is announced, and pending other developments in this very volatile commodity environment, we will reevaluate our rating.

REI: All Eyes on Delaware Basin Divestiture

We have updated our estimates for previously announced production of 5,500 BOE per day, actual WTI oil and Henry Hub gas prices and previously announced actual realized oil and gas prices for 2Q 2020. Our estimates for 2Q 2020 EPS/CFPS/EBITDA are $(0.08)/$0.01/$5.8 million compared to the consensus figures of $0.01/$0.14/$12.6 million. The differences are primarily due to a consensus realized oil price $33/bbl versus REI’s announced $24.98/bbl and a consensus interest expense estimate of $4.1 million versus our $4.8 million.

In its recent operations update REI announced 2Q 2020 production was 5,500 BOE per day and that in the first two weeks of July production approached 9,000 BOE per day. The realized oil price was $24.98/bbl and the realized natural gas price was $0.53 Mcf as Permian gas differential continue to suffer although natural gas is not a meaningful component of REI’s production mix.

Based on the announced early July production figure, we estimate 3Q 2020 production increasing a meaningful 64% to 9,039 BOE per day. We estimate 4Q 2020 production of 8,768 BOE per day due to natural production declines and no new drilling. We are currently modeling no new drilling in 3Q and 4Q 2020 as we await further updates on the proposed Delaware Basin divestiture which will, in turn, materially affect liquidity.

Our assumption of no new drilling in 3Q and 4Q 2020, and thus very low capex assumptions, results in free cash flow of $8.2 million in 3Q and $8.9 million in 4Q. We model a modest free cash flow shortfall of $(1.1) million.

As previously announced, the borrowing base was reduced from $425 million to $375 million and REI has reduced the outstanding balance from $388 million to $375 million. The sale of the Delaware assets will be used to further reduce the outstanding balance. On June 17, 2020, REI announced the delay of the closing of the sale of the Delaware assets was due to the buyer being unable to do necessary ownership title searches due to county office closures because of the coronavirus. If there is another delay in this asset sale, our antenna will be raised that the buyer is experiencing difficulty in obtaining financing. This would increase the risk of REI’s credit profile and if another delay follows, it would further increase our concerns regarding short term liquidity and the fall redetermination of the bank credit facility borrowing base.

For background, on April 14, REI announced an agreement to sell its Delaware Basin asset located in Culberson and Reeves Counties, Texas for $31.5 million.

Ring Energy, Inc. (NYSEAM: REI) ("Ring") ("Company") has scheduled a conference call on Tuesday, August 11, 2020 at 11:00 a.m. ET to discuss the second quarter 2020 financial and operating results. Ring expects to issue a press release summarizing these results after the close of market on Monday, August 10, 2020.

To participate, dial 877-709-8150 at least five minutes before the call is to begin. Please reference the Ring Energy conference call. International callers may also participate by dialing 201-689-8354. A telephone replay will also be available for one week beginning two hours after the completion of the live call, and can be accessed by dialing 877-660-6853, or 201-612-7415 for international callers, and entering the conference ID 13708182 when prompted. The results will also be available via live and a 3 month archived webcast at https://www.public.viavid.com/index.php?id=141193.
Dan Steffens
Energy Prospectus Group
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