Ring Energy - a little treasure, hidden behind a cloud of debt

[Petroleum economist]

Summary
• Ring Energy is a small cap (market value $ 340 M), operating light tight oil in the Northwest Shelf and the Delaware areas of the Permian basin in Texas.
• Ring has ample reserves, enabling a growing production.
• Solvency is good, but debt is too high. In 2024 and 2025 100% of the free cash flow should be headed towards the balance sheet. Debt should reduce to an acceptable level in 2026.
• Profitability is decent and over time will improve due to higher production, lower interest payments and higher realized NGL and gas prices. The PE in 2026 will be very low.
• There will be no shareholder returns in 2024 and 2025. As such money is trapped. Shareholder returns can start in 2026.
• Ring is a very attractive investment for the patient investor.

Reserves
• Ring has ample reserves.
• Proven reserves (130 M BoE in late 2023) are equivalent to 17.8 years of production (industry average 9.5-10 Years). The 17.8 years of production is the highest of all the oil and gas companies that I track
• The RRR over the period 2019-2023 was a low 0.23 (industry average 1.02). As reserves are already high, Ring has limited incentive to drill in unexplored areas.
• The reserves, despite the low RRR, allow production to grow substantially.

Production
• Q1 production (19.0 K BoE/d) was 2% below Q4 (19.4 K BoE/d). Production was low due to winter weather and limited drilling in the early part of Q1.
• Due to the limited drilling in Q1, Q2 production will fall 0-4% (outlook 18.1-19.0 K BoE/d).
• 2024 outlook (18.0-19.0 K BoE) indicates a flat production in the rest of 2024. Production grows 0-5% compared to 2023 (18.1 K BoE/d). I expect production to be at the higher end of the guidance.
• From 2025 onwards, due to the ample reserves, production can grow with 3-4%/year to a level over time of 26-28 K BoE/d.
• Fluids in 2024 consist of 70% oil, 15% NGL and 15% gas.
• As the production (70/15/15) is not aligned with reserves (63/17/19), fluids over time will become gassier.

Balance sheet
• Ring has a good solvency, but debt is too high
• Solvency improved from 51.1% (late 2022), 57.1% (late 2023) to 57.3% (Q1 2024).
• Equity ($ 793 M) equates to $ 4.02 per share. The $ 4.02 is more than double the current share price, The ratio is the highest of all the shares that I track.
• Debt at the end of Q1 was a high $ 422 M.
• With WTI at $ 80/bbl and all the free cash flow headed towards the balance sheet, debt can reduce to $ 406 M (late 2024), $ 362 M (late 2025), and $ 303 M (late 2026).
• The 2023 debt/EBITDA ratio (1.80) was too high. From 2023 to 2026, EBITDA will increase due to higher production, higher gas prices and lower interest payments.
• Debt/EBITDA ratio can reduce to 1.78 (late 2024), 1.33 (late 2025) and an acceptable 1.09 (Late 2026).
• The improved debt/EBITDA ratio and the solvency will enable Ring to start shareholder returns in 2026.

Profitability
• Ring has a reasonable profitability.
• Unit costs (inclusive interest, depreciation, and overheads) are a highish $ 39.20/BoE. This is partially due to interest payments contributing $ 6.25/BoE.
• Ring in 2024 is struggling with its realized gas and NGL prices.
• In Q1 2024 the sales price of gas was $ 1.19/MM Btu., -$ 0.62/MM Btu below Henry Hub. Further to this, Ring paid a fee of $ 1.74/MM Btu (access rights to export pipelines?), meaning that the total realized gas price was negative (-$ 0.55/MM Btu).
• NGL suffered a similar fate. The sales price of $ 21.40/bbl was offset by an incurred a fee of $ 9.93/bbl, reducing the realized NGL price was only $ 11.47/bbl.
• New export systems, materializing in 2025/2026, should improve the realized prices for both gas and NGL.
• Interest payments should reduce from the $ 44 M in 2023 due to a reducing debt and lower interest rates due to improving credit ratings.
• With a WTI at $ 75-80/bbl for Q2-Q4, I expect for 2024 an eps of $ 0.31-0.36 (PE = 4.8-5.5),
• The eps can increase to $ 0.43-0.49 in 2025 and $ 0.48-0.56 in 2026. In 2026 the PE can be as low as 3.0-3.5.

Shareholder returns
• Due to the high debt, shareholder returns in 2024 and 2025 are unlikely. Money in Ring in 2024 and 2025 is trapped.
• Shareholder returns can start in 2026. Assuming a dividend in 2026 of $ 0.10-0.12, this would equate to a yield of 5.8-7.0%.
• After 2026 shareholder returns can increase.

Conclusions
Ring Energy is a little treasure, hidden behind a cloud of debt.

Ring has ample reserves, enabling a growing production. Solvency is good. Debt should reduce by 2026 to acceptable levels, such that shareholder returns can start. Profits over time should increase with higher production, lower interest payments and higher realized NGL and gas prices. The PE in 2026 will be very low.

Ring Energy in my oil and gas ranking of 72 oil and gas companies sits at a very high 2nd position This is due to high reserves, a growing production, growing profits, reducing debt, impending shareholder returns and a low PE. Only Riley Exploration ranks higher.

Ring is an excellent investment for patient investors.

[dan_s]

Paul McKinney, Ring's CEO will be speaking at our Houston luncheon on Thursday. Seats are still available. < Register on the EPG website today.

Current share price is $1.66 < Less than 1.5 X 2024 operating cash flow per share

My updated valuation is $4.30/share, which is just 4X annualized operating cash flow per share.
Ring is profitable and free cash flow positive.
~70% of current production is crude oil and 95% of total revenues.
Rising natural gas and NGL prices will give future revenues a boost.

As pointed out above, Ring's proven reserves are VERY GOOD for a company of this size.

[admin]

In case anyone needs it, here is the link to the Ring Luncheon Event on the EPG Website: https://energyprospectus.com/ring-energy-houston-luncheon-3/

This event is at Maggiano's Little Italy (2019 Post Oak Blvd, Houston, TX 77056). EPG Members are always able to attend for free. Guests & Non-members are welcome at $30/person (pre-registration is required). Hope to see you all there!

[aja57]

Thanks for posting PE. This one will get eaten by a bigger shark E&P.