Ring Energy – Good Q3 results

[Petroleum economist]

Ring Energy reported good Q3 results. Production was higher than expected, Gas prices were low. The balance sheet needs reinforcement. Profitability is good and the PE is low. There will be no shareholder returns until 2026 earliest. Returns from 2027 onwards can be high.

Production
• Q3 production (20.1 K BoE/d) was above Q2 (19.8 K BoE/d).
• Ring Q3 outlook was 19.3-19.8 K BoE/d. I had expected a production of 19.7 K BoE/d.
• The oil cut over time has dropped from 69.2% (Q1 2023) to 65.7% (Q3). It can fall further as proven reserves oil cut is 63%.
• Ring Q4 production outlook was set at 19.2-20.0 K BoE/d. I expect a modest growth in Q4, towards 19.8 K BoE/d.
• Ring updated the bottom end of its 2024 the outlook to 19.5-19.8 K BoE/d. I expect 19.7 K BoE/d for 2024.
• After 2024, production can increase with 2-3%/year to 20.5-21.0 K BoE/d in 2027/2028.

Balance sheet
• Q3 equity ratio (=equity/balance sheet total) was high at 60.8% and well above Q2 (58.8%)
• Long-term debt in Q3 reduced by $ 15 M from $ 407 M (Q2) to $ 392 M (Q3).
• Debt/EBITDA ratio is heading for a too high 1.77 in late 2024.
• Debt/EBITDA ratio can reduce to an acceptable 1.2-1.3 by late 2026.
• The balance sheet does not allow shareholder returns in Q4, 2025 and 2026

Profitability
• Like Q2, results were affected by negative natural gas prices. Realized natural gas prices in Q3 were -$ 2.26/MM Btu.
• With the start-up of Matterhorn Express gas pipeline from west Texas to the Gulf coast in Q4 2024, gas prices should improve.
• Q3 adjusted eps ($ 0.07) was as expected, but below Q2 ($ 0.12) due to the lower oil prices.
• For 2024, with WTI at $ 71.77bbl, I expect an eps of $ 0.38 (PE=4.2).
• The eps can increase in 2027/2028 to $ 0.41-0.42 (PE= very low 3.8-3.9.
• Ring is very profitable.

Shareholder returns
• Ring did not pay any dividends in 2024 Q1-Q3.
• The lack of shareholder returns will continue in Q4, 2025 and 2026.
• Shareholder returns can start in 2027 and can be 6-7%, to increase to 10-12% in the years thereafter.

Conclusions
Ring Energy reported good Q3 results. Production was higher than expected. Natural gas prices were low. The balance sheet needs reinforcement in the period 2024 to 2026. Profitability is good and the PE is very low. There will be no shareholder returns in 2024 to 2026. Returns, which can start from 2027 onwards, will be high.

Ring can be good investment for the patient investor. Ring ranks a high 9th (out of 82) in my oil and gas company ranking.

[cmm3rd]

Anyone have an explanation for today's 12% haircut? Is it that there are many other companies who don't have the leverage Ring has and thus can do shareholder returns in the form of buybacks and dividends that Ring now cannot do? I could understand why investors want the returns and, other things being equal, would choose a company that won't require so much time to pay down debt to reasonable levels. Is there more?

[dan_s]

I have updated my forecast model for REI and posted it to the EPG website.
My valuation stays at $4.00 and TipRanks' price target stays at $3.00. My valuation is just 4X operating CFPS.

Ring is a profitable small-cap that is generating steady free cash flow, but it has no "Sex Appeal". The Wall Street Gang has little interest in the Central Basin Platform, even though well-level economic are good. REPX is doing quite well in the CBP.

Paul is doing the right thing of paying down debt as production drifts steadily higher. Sale of non-core assets pays off $5 million of debt, but it also lowers production.

Until it can start paying dividends or oil prices move higher, it is probably stuck trading in the $1.50 to $2.00 range.

For dividends and more share price upside I recommend HMENF and IPOOF. They have pristine balance sheets and lots of Running Room for growth.