Analysis of Ring Energy Q1 results

[Petroleum economist]

Ring reported Q1 results in line with expectations. Production was above the outlook, debt needs reduction and profitability was as expected. Shareholder returns can start in 2026.

Production
• Q1 production (19.0 K BoE/d) was above the outlook (18.0-18.5 K BoE/d).
• Q1 production was down -2% versus Q4 2024 (19.4 K BoE/d) due to (1) natural decline with no drilling activity in January 2024 and (2) winter weather (-0.2 K BoE/d).
• Production will stay flat in Q2 (outlook 18.5-19.1 K BoE/d) and most likely for the remainder of 2024.
• The production outlook for 2024 (18.0-19.0 K BoE/d) was retained and indicates a 2.0% growth over 2023 (18.1 K BoE/d).
• Ring has proven reserves (130 M BoE) equivalent to 17.2 years of production (industry average 9.5-10 years). The reserves allow production growth of 3-5% /year from 2025 onwards, provided cash for drilling is available.
• Q1 fluids were mostly liquids (oil 70%, NGL 15%). Gas is limited to 15%.
• Q1 fluid composition (70/15/15) is not line with reserves (63/19/19), meaning that over time production will become a bit gassier.

Balance sheet
• The balance sheet is in a reasonable state, but debt needs reduction.
• 100% of the free cash flow ($ 15 M) was directed towards the balance sheet.
• Debt was reduced by $ 3 M, from $ 425 M to $ 422 M.
• The remaining $ 12 M of the free cash flow was used for: (1) an increase in cash available (+ $ 1 M), (2) an increase in accounts receivable (+$ 6 M) and (3) a reduction in accounts payable (-$ 5 M).
• Solvency is good. It marginally increased from 57.1% (2023) to 57.3 % (Q1)
• Equity per share is $ 4.01, double the share price!
• Debt/EBITDA ratio (1.82) late 2023 is too high. Based on Q1 results, the ratio can reduce to 1.62 (2024) and to 1.30 (2025).
• The debt/EBITDA ratio does not allow shareholder returns in 2024 and 2025. Shareholder returns can start in 2026.

Profitability
• Ring reported a net profit of $ 5.5 M (eps $ 0.03). This included -$ 11.5 M on non-cash hedging losses which I normally exclude. The adjusted eps ($ 0.10) was in line with analysts’ expectations ($ 0.08-0.12).
• For 2024, with WTI = $ 80-85/bl, I expect a net profit (excl non-cash hedging) of $ 71-78 M (eps $ 0.36-0.40). The PE is a low 5.0-5.5.
• In 2025/2026 the eps can increase to $ 0.52-0.69 (PE=3.0-3.8) due to growing production and reduced interest payments.
• The realized gas price in Q1 was negative (- $ 0.55/MM Btu). In 2023/2024 Ring has sold its gas at a discount of $ 2.00-2.70/MM Btu to Henry Hub. The negative gas prices thus may persist throughout 2024.
• 2024-unit costs ($ 39.10/BoE) are relatively high. The annual interest payments ($ 44 M) contribute $ 6.30/BoE to the unit costs. With growing production and reduced interest payments, unit costs over time should come down.
• Ring has hedged 43% of the remaining 2024 oil production, mostly through collars with a $ 64/bbl bottom and a $ 76/bbl top. The hedging has a very limited impact on the net profit. 2024/2025 hedges did not change in Q1. 34% of the 2025 oil production is currently hedged.

Shareholder returns
• The debt/EBITDA ratio does not allow shareholder returns in 2024/2025.
• I can see shareholder returns starting in 2026.
• If 50% of the FCF in 2026 is directed towards shareholders, returns per share in 2026 could bet $ 0.12-0.15, equivalent to a yield of 6-7.5%.
• After 2026, with a growing production and higher profits, shareholder returns can increase.

Conclusion
Ring, with a low PE, a growing production, an improving balance sheet and impending shareholder returns is an attractive share for the patient investor. The Ring share price has had a good run in 2024 (up 34.9%). Despite this the PE is still low. (5.0-5.5)
I can see the Ring share price late 2025 reaching $ 3.00 or more.

Ring dropped from 2nd to 3rd in my oil and gas companies. My hopes for production increases in H2 are diminished a bit due capex cash constraints effecting drilling. Ring however still ranks in the absolute top of my ranking and looks attractive. Only Riley Exploration and Inplay Oil rank higher. Both will report results later week.

Riley Exploration recently went to the top of the rankings due to a - for me inexplicable - 22% drop in share price over the last month. We will see this week whether this was justified or not.

[Cliff_N]

Thanks for an excellent analysis!

[dan_s]

Q1 Adjusted Net Income and production volumes beat my forecast.

Ignore GAAP net income that includes the misleading MTM loss on their hedges.

Ring just needs to stay focused on generating free cash flow to pay down debt.

Q1 realized prices, including the cash settlements on the hedges during the quarter were:
$73.48/bbl for crude oil
$0.31/mcf for natural gas < ngas prices are starting to drift higher and Ring's hedges should keep their realized gas prices positive.
$11.47/bbl for NGLs

[Cliff_N]

"Ring just needs to stay focused on generating free cash flow to pay down debt." Dan, that 422 million and 1.67 Leverage ratio is daunting. Many on the discussion boards on Yahoo Finance were disappointed in the 3M paydown on debt. Meanwhile the CEO is making 3.7 million.

[Fraser921]

It always seems next year for Ring

>The realized gas price in Q1 was negative (- $ 0.55/MM Btu)

Wow, they have to give it away!! Down 6 % to 1.85

I knew this had fleas

[dan_s]

As I posted earlier, Ring's realized natural gas price was a positive $0.31/mcf. They report gas prices net of GT&P expenses.

Ring is going to be fine, but HMENF and IPOOF are better choices at current prices IMO. Strong balance sheets (almost debt free) and they both pay nice dividends.

Ring has some work to do on the balance sheet, but Paul has a good team.