Ring Energy, Inc. (AMEX:REI) Q1 2024 Earnings Call Transcript May 7, 2024
Ring Energy, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning and welcome to the Ring Energy First Quarter 2024 Earnings Conference Call. [Operator Instructions] Please also note today’s event is being recorded. At this time, I will turn the floor over to Al Petrie, Investor Relations for Ring Energy. Sir, you may begin.
Al Petrie: Thank you, operator. Good morning, everyone. We appreciate your interest in Ring Energy. We will begin our call with comments from Paul McKinney, our Chairman of the Board and CEO, who will provide an overview of key matters for the first quarter of 2024 as well as our outlook. We will then turn the call over to Travis Thomas, Ring’s Executive VP and Chief Financial Officer, who will review our financial results. Paul will then return with some closing comments before we open up the call for questions. Also joining us on the call today and available for the Q&A session are Alex Dyes, Executive VP of Engineering and Corporate Strategy; Marinos Baghdati, Executive VP of Operations; and Steve Brooks, Executive VP of Land, Legal, Human Resources and Marketing.
During the Q&A session, we ask you to limit your questions to one and a follow-up. You are welcome to reenter the queue later with additional questions. I would also note that we have posted an updated corporate presentation on our website. During the course of this conference call, the company will be making forward-looking statements within the meaning of federal securities laws. Investors are cautioned that forward-looking statements are not guarantees of future performance and those actual results or developments may differ materially from those projected in those forward-looking statements. Finally, the company can give no assurance that such forward-looking statements will prove to be correct. Ring Energy disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise.
Accordingly, you should not place undue reliance on forward-looking statements. These and other risks are described in yesterday’s press release and in our filings with the SEC. These documents can be found in the Investors section of our website located at www.ringenergy.com. Should one or more of these risks materialize or should underlying assumptions prove incorrect, actual results may vary materially. This conference call also includes references to certain non-GAAP financial measures. Reconciliation of these non-GAAP financial measures to the most directly comparable measures under GAAP are contained in yesterday’s earnings release. Finally, as a reminder, this conference call is being recorded. I would now like to turn the call over to Paul McKinney, our Chairman and CEO.
Paul McKinney: Thank you, Al and thank you for everyone joining us today and your interest in Ring Energy. As you may have read by now, we began 2024 with a solid first quarter. Sales volumes exceeded the high end of our guidance, while operating expenses and capital spending both came in below our guidance ranges, placing us in a strong position for the rest of the year. The primary driver of our sales volume performance was the robust returns from our drilling program and reduced downtime since the winter storm we incurred in January. The key factors contributing to our lower-than-expected capital costs were increased efficiencies associated with our well completions and the improved logistics of drilling our wells. Additionally, we benefited from lower costs realized by an improved macro environment associated with the drilling and completion services for our wells.
LOE, on a per BOE basis, came in below our guidance range as well primarily due to our continuing focus on reducing costs generally and more specifically associated with the progress we are making integrating the Founders’ assets into our operations. These efforts not only led to lower costs but lower downtime as well that contributed to our sales volumes performance, as mentioned earlier. Our results this quarter are a direct reflection of the dedication and commitment of our employees in both the field and the office. And on behalf of the Board and management team, we thank all of you for your hard work. With respect to our performance this quarter, we sold 13,394 barrels of oil per day, which was 5% higher than the top end of our sales guidance.
On a total product basis, we reported first quarter 2024 sales volumes of 19,034 barrels of oil equivalent per day that was 3% above the top end of our Boe sales guidance. As important, we increased oil to 70% of our product mix. Lease operating expenses, or LOE, during the first quarter were $10.60 per Boe. The combined impact of higher-than-expected sales volumes and lower-than-anticipated LOE per Boe led to adjusted net income of $20.3 million, adjusted EBITDA of $62 million and net cash provided by operating activities of $45.2 million. During the first quarter, we invested $36.3 million in capital expenditures, which include the drilling and completion of 5 horizontal wells, 3 of which were in the Central Basin Platform and 2 in the Northwest Shelf and the drilling and completion of 6 vertical wells, all in the CBP South, 3 in Andrews County and 3 in Crane County.
Total capital spending included capital workovers, infrastructure upgrades and leasing as well. Adjusted free tax flow was $15.6 million for the first quarter of 2024, which was 48% higher than the same quarter a year ago and represents the 18th consecutive quarter of positive adjusted free cash flow for the company. Turning to the balance sheet. We paid down $3 million of debt in the first quarter and $33 million since the closing of the Founders acquisition in late August. This allowed us to exit the quarter with $179.3 million of liquidity. Regarding our guidance for the year, we still plan to drill an average of 5 horizontal and 6 vertical wells per quarter, which is consistent with what we did in the first quarter. We intend to continue utilizing a phased 2-rig drilling program, including 1 horizontal rig and 1 vertical rig, as opposed to a continuous drilling approach to retain the flexibility to react to changing commodity prices and market conditions as well as manage our quarterly cash flows.
Our phased drilling program designed to organically maintain or slightly grow our oil production and so we are not changing our full year production guidance at this time. Regarding the second quarter, we anticipate our production to range between 18,500 barrels and 19,100 barrels of oil equivalent per day and perhaps more importantly, our oil production to range between 13,000 barrels and 13,400 barrels of oil per day. This implies an oil mix of approximately or slightly more than 70%. With that, I will turn this over to Travis to provide more details on the quarter and will return for closing comments before we open the call for questions. Travis?
Travis Thomas: Thanks, Paul and good morning, everyone. As Paul discussed, we are pleased to have a strong start to 2024 with the solid first quarter results that exceeded expectations on multiple key fronts, including higher sales volumes, lower operating expenses and lower capital expenditures. We continue to materially benefit from our two strategic acquisitions completed over the past 2 years. Also contributing to the first quarter results was the successful kickoff and initial execution of our 2024 drilling program complemented by further efficiencies achieved through our expanded scale and focused on the best operational practices. The combined result was continued strong generation of adjusted free cash flow during the first quarter of 2024 that was used to further pay down debt with balance sheet improvement remaining a top priority for the company.
With that overview, let’s take a look at the quarter in more detail. As in the past, I’m going to focus my comments on the most important sequential quarterly results. During the first quarter, we sold 13,394 barrels of oil per day and 19,034 Boe per day, both of which were higher than the top end of our guidance. The slight decrease in sales volumes from the fourth quarter was primarily due to approximately 10 days of partial downtime due to the winter storm in January. Also impacting first quarter results was the overall realized pricing of $54.56 per Boe, a 3% decrease from the fourth quarter. Our first quarter average crude oil price differential from NYMEX WTI futures pricing was a negative $1.34 per barrel versus a negative $0.92 per barrel for the fourth quarter.
This was mostly due to the Argus WTI, WTS that increased $0.96 per barrel, offset by the Argus CMA roll that decreased by $1.4 per barrel on average from the fourth quarter. Our average natural gas price differential from NYMEX futures pricing for the first quarter was a negative $2.57 per Mcf compared to a negative $3.12 per Mcf for the fourth quarter. Our realized NGL price for the first quarter averaged 15% of WTI compared to 14% for the fourth quarter. The result was revenue for the first quarter of $94.5 million, a 5% decrease from the fourth quarter. As noted, we are targeting higher oil mix opportunities since oil accounted for 98% of the revenue, even though it was 70% of our production. While the gas revenue was negative, NGLs contributed for $3 million, overall, our wellhead gas contributed $2.2 million for the quarter.
LOE was $18.4 million versus $18.7 million for the fourth quarter. Echoing Paul’s comments, we are pleased to see LOE come in below the low end of our guidance range of $10.75 to $11.25 per Boe. LOE per Boe increased nominally in the first quarter to $10.60 per Boe versus $10.50 per Boe in the fourth quarter. Cash G&A, which excludes share-based compensation and transaction-related cost was $5.7 million for the first quarter versus $5.3 million for the fourth quarter, contributing to the sequential quarterly increase in cash G&A or additional costs attributable to administrative functions related to the year-end audit, SOX compliance and 10-K preparation. Our first quarter results included a loss on derivative contracts of $19 million versus a gain of $29.3 million for the fourth quarter.
As a reminder, the gain and loss is just the difference between the mark-to-market values period-to-period. Finally, for Q1, we reported net income of $5.5 million or $0.03 per diluted share. Excluding the after-tax impact of pretax items, including noncash unrealized gains and losses on hedges, share-based compensation expense and transaction costs, our first quarter adjusted net income was $20.3 million or $0.10 per diluted share. This is compared to the fourth quarter 2023 net income of $50.9 million or $0.26 per diluted share and adjusted net income of $21.2 million or $0.11 per diluted share. First quarter 2024 adjusted EBITDA was $62 million and net cash provided by operating activities was $45.2 million, versus $65.4 million and $55.7 million, respectively, for the fourth quarter.
During the first quarter, we invested $36.3 million in capital expenditures. Importantly, actual first quarter CapEx came in below our guidance of $37 million to $42 million, while the actual number of producing wells drilled and completed, 11 in total was at the high end of our guidance for well count. We also drilled an SWD originally planned for the second quarter. The primary driver for the lower CapEx was reduced well completion costs and drilling efficiencies. The combined result was adjusted free cash flow of $15.6 million for the first quarter versus $16.3 million for the fourth. We paid down an additional $3 million of borrowings on our revolver in the first quarter and $33 million since the closing of the Founders acquisition last August.
Impacting the level of debt reduction in the first quarter was the annual payment of ad valorem taxes, another once a year cost, as well as the growth in our cash balance of approximately $1 million. Moving to our hedge position. For the last 9 months of 2024, we currently have approximately 1.5 million barrels of oil hedged or approximately 43% of our estimated oil sales based on the midpoint of guidance. We also have 1.9 billion cubic feet of natural gas hedged or approximately 41% of our estimated natural gas sales based on the midpoint. For a quarterly breakout for hedge position through – for Q2 through Q4 of 2024, please see our earnings release and presentation, which includes the average price for each contract type. Now let’s turn to the balance sheet in more detail.
At March 31, we had $422 million drawn on our credit facility. With a current borrowing base of $600 million, we had approximately $178 million available net of letters of credit. Combined with cash, we had liquidity of $179.3 million with a leverage ratio of 1.67x. To be clear, our primary focus remains the same, improving our balance sheet to better position the company to ultimately provide a meaningful return of capital to the shareholders. To accomplish this, we will continue to evaluate and execute on available opportunities that drive modest growth through the organic development projects and cost reduction initiatives with a focus on more significant growth through acquisitions that are accretive, enhanced size and scale, generate significant near- and long-term cash flow, reduce overall operating expenses and provide strategic benefits.
Looking at our outlook and guidance. During full year 2024, we are utilizing a phased drilling program that maintains our flexibility to react to changing market conditions, adjust spending levels as appropriate, as well as manage our cash flows quarter-to-quarter. Our focus is on maintaining or slightly growing BOE production per day, while continuing to grow crude oil sales. Our average daily sales volume guidance for full year of 2024 remains unchanged. Crude oil sales volumes of 12,500 to 13,300 barrels of oil per day and BOE sales volumes of 18,000 to 19,000 BOE per day or 70% oil. For the second quarter, we are providing a sales outlook of crude oil sales volumes of 13,000 to 13,400 barrels of oil per day and BOE sales volumes of 18,500 to 19,100 BOE per day at 70% oil.
For CapEx, we continue to expect to spend $135 million to $175 million on our full year development program and are providing an estimate of between $37 million and $42 million for the second quarter. We also continue to anticipate full year 2024 LOE of $10.50 to $11.50 per BOE and are providing guidance of $10.75 to $11.25 per BOE for the second quarter of 2024. Finally, I would like to note that all projects and estimates are based on assumed WTI oil prices of $70 to $90 per barrel and Henry Hub prices of $2 to $3 per Mcf. So with that, I will turn it back to Paul for his closing comments. Paul?
Paul McKinney: Thank you, Travis. We believe our operational and financial success this quarter demonstrate the long-term benefits of our strategy designed to leverage the low breakeven cost of our drilling inventory and the quality of our assets to drive sustainable free cash flow generation. In short, our focus remains the same as in the past. And while I have discussed the components of our strategy previously, it is worth repeating again today. First, we will continue to pursue operational excellence with a sense of urgency and remain focused on safety and environmental stewardship. Second, we will continue to high-grade and execute our targeted drilling program focused on our highest rate of return prospects to organically maintain or slightly grow our production while maximize free cash flow generation.
Next, we will continue our focus on improving the balance sheet. And finally, we will seek growth through the pursuit of strategic, accretive and balance sheet-enhancing acquisitions. To sum it up, our commitment to our value-focused proven strategy better prepares the company to manage industry risks and uncertainties, results in the generation of sustainable and competitive returns and supports our efforts to achieve the necessary business size and scale to position Ring to sustainably return capital to stockholders. I want to thank our stockholders for their continued support. I also want to once again thank everyone for participating in today’s call. And with that, we will turn this over to the operator for questions. Operator?
Operator: [Operator Instructions] Our first question today comes from Neal Dingmann from Truist Securities. Please go ahead with your question.
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