Ring Energy (REI)

[dan_s]

Comments below from John White at Roth Capital:

Our net asset value and target price are based on proved and probable reserves, financial position, historical and expected drilling results. Our target price is $14.00, and we reiterate our Buy rating.

REI announced its operations update for the second quarter of 2016. Net production for the second quarter of 2016 was approximately 191,000 BOE as compared to our estimate of 240,000 BOE, a 20% miss. REI’s net production in 1Q 2016 was 225,500 BOE.

In 2Q 2016 REI drilled and completed two new vertical development wells and re-fracked two existing wells in its Central Basin Platform (CBP) area, and drilled one new vertical well on in its Delaware Basin area. As of June 30, 2016 the Delaware Basin well had not been completed. In addition, REI continued upgrades to its gas gathering system and began building the infrastructure necessary for the three well horizontal drilling programs scheduled to begin in early August.

The primary reason for the miss was timing. All three of the new development wells were drilled late in the second quarter, and although REI was able to complete the two CBP wells, production did not begin soon enough to have any impact on overall quarterly production. To a lesser extent, during 2Q 2016 REI estimates it lost approximately 17,000 BOE due to a combination of mechanical, weather and gas purchaser related issues.

We believe investors should overlook the 2Q 2016 production miss and focus on the horizontal (Hz) San Andres drilling program in 2H 2016. In our view, the Hz San Andres program has the potential to be strongly positive. Our estimates for the three wells are as follows: $2.0 million completed well cost (CWC); all to be spud and completed in 2H 2016, with our assumption of IPs ranging from 400 BOE per day to 600 BOE per day.

[dan_s]

My valuation of REI drops $0.25/share to $12.90. My updated forecast model has been posted to the EPG website.