Ring Energy (REI) Update - Aug 8

[dan_s]

Note below this morning from Neal Dingman at Truist Financial

Ring Energy, Inc. (REI, $2.85, Hold) - Solid Reported Operations as Transformational Deal Nearing Close
Neal's price target is $3.00

Ring continues to demonstrate efficient operations helping D&C times improve and boosting well returns. The company has also done a notable job of continuing to repay debt from its continuous FCF. REI recently announced a sizable attractive deal that will reshape the business going forward. We forecast pro-forma​
the company could generate up to ~$150mm FCF next year with potential upside if growth is better than our forecast. We believe the increased scale should eventually provide REI with multiple operational and financial options. - Neal Dingmann

[Cliff_N]

Any ideas on the beat down of Ring Energy today of over 4%?

[dan_s]

4% is not a "Beat Down" in this Bear market. Small-Caps have lower trading volume, so high percentage moves up and down are likely.

I will be taking a hard look at Ring this afternoon since I am focused today on updating the models for all of our Small-Caps that have reported Q2 results.

Ring's 2Q results were good and the Stronghold Acquisition they announced on July 5 is a potential "Game Changer".

[dan_s]

TipRanks: "On 8-1-2022 Roth Capital analyst John White downgraded Ring Energy to Neutral from Buy with a price target of $7.50, up from $4.90. The analyst is "turning cautious" on Ring Energy after his analysis of the recently announced acquisition of privately held Stronghold Energy II Operating and Stronghold Energy II Royalties. Some of his concerns include the transaction representing a very large increase in the amount of producing wells, and the assets being vertical wellbores versus its legacy assets of horizontal wellbores. On the positive side, White does model a strong amount of free cash flow which will enable debt reduction."

I know John White. Somewhat "weird" that he would increase his price target by such a large percentage and then downgrade the stock. Lots of analysts react to relatively large acquisitions like the Stronghold deal because they think it might not close or be difficult to integrate. IMO Ring has a solid team that can handle a deal of this size. It is near their other core areas and they will be adding staff from Stronghold. Plus, "transformative" acquisitions are fun to work on and can be very motivating to the staff. Paul McKinney is a good leader and he has a solid team. I hope to get him to join be on a webinar soon.

[dan_s]

I have updated my forecast/valuation model for REI for Q2 actual results that were very good with adjusted operating cash flow of $44.3 million ($0.41/share) and their fresh standalone guidance + the proforma impact of the Stronghold Acquisition that is expected to close mid-Q3.

My current valuation is reduced by $0.20 to $8.50. I've added more of a "cushion" since the timing of the Stronghold Acquisition will have a significant impact on Q3 results and additional merger related expenses may be $2 to $4 million in 2H 2022.

If actual results in 2H 2022 and their full-year 2023 production guidance confirms my forecast of 20,000 Boepd (70% crude oil), Ring should be in great shape heading into next year.

Ring has very little analyst coverage and it will take time for the Wall Street Gang to take a hard look at a company this small. The jump from 9,341 Boepd in Q2 (that beat my forecast) to over 18,000 Boepd when the acquisition closes should draw more attention.

Today, REI is trading at less than 2X this year's operating cash flow per share that should be approximately $1.50/share even if the Stronghold deal doesn't close. Adjusted CFPS in 1H 2022 was $0.71. 2X operating CFPS is way too low for a company that is profitable, with current FCF, steady production growth and lots of running room.

Hang Tough, there is a lot of upside here.

FWIW the First Call Price Target is $5.33