Earnings Call: Q2 2021

Aug 10, 2021

Good day, and welcome to the Ring Energy Second Quarter twenty twenty one Earnings Conference Call. All participants will be in a listen only mode. Please note this event is being recorded. I would now like to turn the conference over to Al Petrie, Investor Relations. Please go ahead. Thank you, Matt, and good morning, everyone. We appreciate you taking the time to join us today and for your interest in Ring Energy. We'll begin our call with comments from Paul McKinney, Chairman of the Board and CEO, who will provide an overview of key matters for the second quarter. We will then turn the call over to Travis Thomas, our Chief Financial Officer, who will review our detailed financial results. Paul will then discuss our future plans and outlook. Also joining us on the call today and available for the Q and A session are Alex Dias, Executive Vice President of Engineering and Corporate Strategy Marinos Baghdadi, Executive Vice President of Operations and Steve Brooks, Executive VP of Land, Legal, Human Resources and Marketing. During the Q and A session, we ask you to limit your questions to one and a follow-up. You're welcome to reenter the queue later with additional questions. During the course of this conference call, the company will be making forward looking statements. 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 the forward looking statements. 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 the reports filed with the SEC. As a reminder, this conference is being recorded. I would now like to turn the call over to Paul McKinney, our Chairman and CEO. Thank you, Al. I want to welcome everyone to our second quarter twenty twenty one earnings call. We are pleased with the overall results for the second quarter. This makes our seventh consecutive quarter of generating free cash flow that we partially utilized to further pay down debt. Looking at our results in more detail. During the 2021, we sold 792,551 barrels of oil equivalent or 8,709 barrels of oil equivalent per day, which was an 11% increase from this year's first quarter sales of 716,422 barrels of oil equivalent or 7,960 BOE per day. Contributing to the higher production was the success of our Northwest Shelf phase one and phase two drilling programs. As a result and as we discussed on our last earnings call, our four well phase one program came in on schedule and within budget, and collective production results continued to meet or exceed our original expectations. During the second quarter, collectively, the four wells produced 101,800 gross barrels of oil equivalent or approximately two eighty BOE per day per well. Also during the second quarter, we drilled, completed and placed on production all three phase two wells. Similar to phase one, the phase two wells came in on schedule and within budget and with all three wells brought online by June 3. The collective production results from the phase two wells have also met or exceeded our original estimates, including total production from the three wells of 22,700 gross barrels of oil equivalent or approximately 270 barrels of oil per equivalent per day per well for the last twenty eight days of June. If you recall, on our first quarter conference call, we expected a significant increase in second quarter sales volumes given the ongoing success of our development programs and the anticipated restoration of natural gas sales disrupted by the severe winter storm in February. While second quarter sales volumes did increase 11% from the first quarter, they were lower than anticipated primarily due to continuing downtime from these third party processing facilities in the Central Basin Platform that negatively affected natural gas sales. Additionally, we incurred pipeline capacity constraints during the quarter in the Northwest Shelf that further impacted our natural gas sales. In late May and early June, we also experienced lightning strike related damage to several of our facilities that impacted oil sales for the period, with repairs completed and the wells brought back online by mid July. As you know, natural gas is a minor component of our total sales revenue. Although these reduced natural gas sales impacted our total sales volumes on a BOE basis, they had a relatively minor impact on EBITDA for the quarter. With respect to sales revenue, we benefited from higher crude pricing during the period, which when combined with the 11% increase in crude oil sales, contributed to the overall 21% increase in revenues over the first quarter. The combined impact from these items as well as our ongoing cost reduction initiatives resulted in second quarter twenty twenty one adjusted EBITDA of $20,600,000 and 5,600,000.0 of free cash flow. We utilized a large portion of our free cash flow during the quarter to pay down 5,000,000 of bank debt and ended the period with approximately 51,000,000 of liquidity, a 13% increase from the end of the first quarter. When considering the 2021, we generated $39,600,000 in adjusted EBITDA, $8,600,000 of free cash flow, and reduced the borrowings on our revolver by 12 and a half million dollars. In response to the higher crude oil pricing environment, yesterday, we announced an increase to our original drilling plans. We picked up two rigs last week and initiated the drilling of the first two wells of a four well phase three drilling program. We have a 100% working interest in all of these wells. Our current plan is to follow-up the phase three wells with a one rig phase four program to drill an additional two or more wells beginning early in the fourth quarter. The wells in the Northwest Shelf are planned to be one mile laterals, while the well ones in the Central Basin Platform are planned to be one and a half mile laterals laterals. We anticipate the payback on invested capital for these wells to be one year or less given the current price environment. Although the anticipated production will not have a meaningful impact on 2021 production volumes, keep in mind that if the current price environment continues, these new volumes will place us in a very strong position as we enter 2022. With that, I will turn the call over to Travis Thomas to discuss our financials in more detail. I'll then come back and make a few closing remarks. Travis? Thanks, Paul. For the 2021, we generated revenues of $47,800,000 recorded a net loss of $15,900,000 or a loss of $0.16 per share. Included in the loss were pretax items including 22,800,000 of noncash unrealized losses on hedges as a result in the change in oil price and approximately $350,000 of share based compensation expense. Excluding these items, our adjusted net income was $7,300,000 or $07 per share. During the 2021, we had $17,100,000 in cash flow from operations and $11,500,000 in capital expenditures. The combined result was positive free cash flow of $5,600,000 For the three months ended 06/30/2021, we had oil sales of 702,408 barrels and gas sales of 540,857 MCF for a total of 792,551 BOE. Our 2021 realized pricing was $65 per barrel of oil and $3.90 per Mcf of natural gas for an average of $6.26 per BOE. The differential between our average oil price received and NYMEX WTI was a negative $0.99 per barrel for the '1 compared to our average first quarter differential of a negative $0.37 per barrel. For detailed discussions of our other income statement line items, please refer to our earnings release and 10 Q that was filed yesterday. Of course, I will be happy to answer any questions you may have during today's Q and A session. As Paul discussed, we are pleased to generate free cash flow once again during the 2021 and further paying down debt by $5,000,000 Moving forward, we will continue to use much of our free cash flow for this with the level of free cash flow and the cadence of debt paydown primarily driven by the timing of capital spending and market conditions. As of 06/30/2021, we had $300,500,000 drawn on our revolving credit facility and liquidity of $51,400,000 including $48,700,000 available on the revolver and $2,700,000 of cash. Turning to our outlook for the remainder of this year. We expect second half twenty twenty one sales of 8,700 to 9,200 BOE per day, including 7,700 to 8,100 barrels of oil per day. Assuming the successful and timing of the Phase three and Phase four drilling program, we expect to exit 2021 with sales volumes in excess of the high end of our second half guidance. We expect an average lifting cost for the 2021 of $10.5 to $11 per BOE. Lifting costs include lease operating expenses and gathering transportation and processing costs. Turning to our 2021 capital investment program. Including the six to eight phase three and phase four wells we announced yesterday, we expect a total capital spending of $30,000,000 to $35,000,000 for the second half of this year with all expenditures funded by cash on hand and cash from operations. In addition to company directed drilling and completion activities, our capital spending outlook includes targeted well reactivations, workovers, infrastructure upgrades, and continuing our successful CTR program in the Northwest Shelf and Central Basin Platform areas. Also included is anticipated spending for leasing costs, contractual drilling obligations, and non operated drilling completion and capital workovers. Our second half twenty twenty one capital program has been designed to sustain or minimally grow our production reserve levels, have sufficient return have returned sufficient to generate free cash flow to further reduce debt and allow us to enter 2022 in a stronger position. So with that, I will turn it back to Paul. Thank you, Travis. Over the last seven quarters, we have generated more than $50,000,000 in free cash flow that has helped us pay down debt and continue our drilling program. The result has been a meaningful strengthening of our balance sheet and market position. Although we may not cash flow every quarter, we will on an annual basis and remain focused on becoming a peer leader in debt to EBITDA metrics. Regarding our ongoing process to sell our Delaware assets, we have seen significant interest from a number of parties and are hopeful that we will have more details announced once we enter a definitive sales agreement. Regarding our pursuit of strategic acquisitions, and and as I shared with you in detail on the last earnings call, we promised to demonstrate two essential things in in this regard. First, a potential transaction will need to bring sufficient production, revenue, and cash flow to improve our leverage ratio, thereby strengthening our balance sheet. Second, the transaction metrics will need to be accretive to our existing shareholders. So the bottom line is this, we will not acquire assets using equity unless it meets these two tests. And over the last several months, we have been screening the opportunities in the marketplace to ensure we meet these criteria. With that, I would like to turn it over to our operator for questions. Matt, it's all yours. We will now begin the question and answer session. Our first question will come from Jeffrey Campbell with Alliance Global Partners. Please go ahead. Morning. I want to I'll limit myself to a couple of questions on the phase three and the phase four drilling. The first one is, can you provide some color on the well length and any anticipated well cost inflation? And here, I'm thinking about we've been hearing about increased steel costs throughout a host of industries during this earnings cycle. Yeah, Jeff. Those are good questions. And I tell you what, I'm gonna I'm gonna let Marino take that. Good morning. The Northwest Shelf Phase three and Phase four wells are forecast are going to be one mile laterals or planned to be one mile laterals. And then the CVP wells are planned to be 1.5 mile laterals. In terms of cost, we've seen cost increases just just like the rest of the industry of the range of 10 to 20% on all the quotes we received for the for the AFEs and and the preparation for the drilling program. Primarily, the cost have been in in casing and tubulars as well as some some other service costs, but the the major cost increase has been casing and tubular. And, Jeff, I'd like to add to that. Is Alex Stie. We have a presentation we posted along with our earnings this time, and the range of increase in costs are still well within the guidelines that that we put in that presentation. So if you wanna reference more on what a mile well cost and a mile and a half well cost, you can see it there. Great. Thank you. Yeah. I do have that presentation. And my my follow-up question is on the the three and the four. First of all, should we expect that all the four phase three wells are gonna be completed in 2021 Will the fourth quarter phase four wells likely be completed in the first quarter twenty two or whenever you wanna identify? And finally, bearing in mind the rapid paybacks on these wells that you identified, do you intend to protect these returns with hedges? Thank you. I'll take the timing question there. The Phase three wells are expected based on our current frac dates to be online by the end of the third quarter. And the phase four wells are expected to be online late in the fourth quarter contingent on us us being able to maintain the frac dates we've we've we've secured already. In regards to the hedges, I'll I'll turn it over to I'll take the hedges. Yeah. So, Jeff, although we currently do do not have any additional hedging requirements going into this 02/2022, Hedging will always be a significant component of our future, plans, and, yes, we will be protecting our future cash flows, our ability to pay down debt. But at the same time, in in a heavily backwardated environment like this, we also are seeking to employ more of an opportunistic hedging strategy, to capture the upside for our shareholders as well. But, and so we'll share more details as we, layer those, hedges in going into the New Year. Okay. Great. I understand. Thank you. Our next question will come from Neal Dingmann with Truist. Please go ahead. Well, my first question, and I just looked in prepared remarks that you've mentioned here and then the the release. Could you talk about, you know, kind of build on the last question as well, how you think about balancing the debt repayment and production growth, you know, especially as Jeff was saying the, you know, I love the, of course, the the less than one year payback. Really, I think, provides some nice optionality to take a look at both. So, again, glad you guys added a couple rigs. And just wondering now that you've done that, you know, just just in broader terms, how you think about balancing the debt repayment with with a bit of this growth. Yeah. Neil, good question. And so and I think you point out the core of what this management team is committed to do. When we state that we are committed to becoming peer industry leaders in debt to EBITDA metrics, we're truly committed to that. Mean And so right now, during the time period when our balance sheet is as heavily leveraged as it is, we are going to continue to concentrate on reducing that leverage. And so the whole goal of our capital program is to maintain or slightly grow our production so that we can continue that debt pay down. As you know and as we've discussed in the past, we believe that there's opportunities to divest of certain properties that we don't believe are core to our business to help accelerate that. We're also trying to employ an acquisition strategy that could also help accelerate that. But as we continue to reduce that leverage ratio, we will divert more of our capital towards drilling to increase our production and provide the growth that we believe our shareholders also are looking for us to do. And so it's a balancing act right now. Until we get the leverage ratio into a stronger position, we'll continue to concentrate on that. But as we get that leverage ratio into a better position, you'll see that we'll start contributing more and more of our capital towards growth. Did that answer your Yeah. Yeah. Absolutely. I mean, I I think that combination makes a lot of sense. And as I said, I really like the the quick payback, cycle times a year gives you guys some advantages to do that. And then just in the the the release, I was reading last night, sounds like you guys have the confidence, and you guys hit on this a little bit earlier as well. On this production, I guess, could you talk about, you know, now that you have these two rigs, I think you the statement in there was, you know, you feel confident you'd probably end the year. I'm just trying to get maybe a bit more color on this. End the year around the high side of that production guide or something. You know, I'm just wondering, again, not not no details, nothing specific for '22, but just how you're thinking about the ramp. Is it more you know, would it be a hockey stick there at the end of the year? You know, if these two rigs now have come in, you know, how we should think about sort of leading into 2022. Well, that is, again, very observant. That is the plan. This year, we have early in the year and late last year, as you know, we put in these defensive hedges. And so the cash flows that our production stream can generate is limited to what those hedges allow outside of the production that we can exceed. But with respect to affecting this year's production, we know we can affect this year's production too much. But the purpose really of this capital program coming in at the end of the year is to take advantage of the strong prices that we didn't anticipate earlier in the year. The added benefit is it really puts us in a really strong position as these hedges roll off going into the new year. And so, we're looking now towards 2022, and we're looking for ways to optimize our revenue generation and the EBITDA that hit the bottom line. Great answer. Thanks, Paul. Thank you. Our next question will come from Noel Parks with Tuohy Brothers. Please go ahead. Hi, good morning. Good morning. Just had a few things I wanted to run by you. So as far as you're getting back on out there drilling, that was something that in the last operations update you had suggested might be on the way. And I'm just curious about the decision to go ahead with two rigs instead of just, you know, wanting running one steadily. Was that largely determined by you saw a good price out there for for taking on both at the same time? Or I was wondering if if you're you had thoughts around trying to sort of stagger the completion dates of the wells, maybe cluster them a little more tightly while we were in a good, you know, in a good commodity price environment? Well, there's a lot of the things that came into that decision. But I tell you what, I'm gonna turn this back over to Marino's, and he can address some of the logistical issues associated with our rigs. You know, after the phase two wells, we wanted to monitor the wells before moving forward, make sure that, you know, we're we're getting the results we we we wanted to get. And in doing that, the pricing environment changed. And with that, the service availability, we're we're finding a hard time with not having a continuous program to schedule the frac dates, like like you mentioned. And so we we had a window of frac dates available in both the CVP and Northwest Shelf around the same time and thought that the the most efficient way to get those executed was by employing two rigs rather than just one and and taking a little bit longer. So that was a major decision for picking up two rigs. In in in phase four, we're gonna go back to one rig because we think those frac dates, we can stagger and plan now for those in the fourth quarter. Does that answer your question? It it does. Thanks a lot. Perfect. Great. And the other thing I was looking at, the the production guidance for the the second half, it it did strike me relative to your sort of run rates from first half. It stood straight to me as a a little bit conservative. I was just wondering if there was, again, anything having to do with frack timing or anything in there that was making you just a little bit cautious in setting expectations for second half. Well, you know, if you remember in the first call that we had and we discussed the impact of the of the winter storm we endured in February, we told our shareholders that we thought that we could make up for that deferred production. At that time, we were not aware that the the facilities that process our gas in the Central Basin Platform was going to continue to incur the issues that were created as a result of that winter storm. And so that gas production still has not been fully restored, and we've given up trying to predict when they will deliver on on that steady and restored production. And so these estimates, I I can see why you would believe that they look a little conservative, but we've we've decided we can't continue to predict what other people are gonna do. And so we we decided to focus on the oil production that we knew that we had a good handle on. And so I hope we're surprised, but we're in the hands of other people. Like to add something to that that you hit on. In our original budget with our second with our forecast, our guidance, we had anticipated the last few wells of the the 2021 drilling capital program to come online a lot sooner or a little bit sooner than what the current ones are coming on because of the frac dates that you mentioned. So that also impacts the guidance we're giving for the second half of the year a little bit as well. Great. That definitely fills in the gap in what I was coming up with. And I'm just curious among the factors involved in the additional activity and timing and so forth that we've touched on. I was just wondering, was there much thought given specifically to the shape of the base decline curve with this extra activity. I guess I was thinking about heading into into 2022 where, you know, you had the the first half phase one and two wells come on. And then, originally, it sounded like you you weren't gonna be really getting a a rig out there more until, later in the year. So, is that also in the mix of, of your thinking? Yeah. The timing of when we drill our wells will always have a big impact. So far, if you look at the forecast that we have internally for our oil production, we've been remarkably and surprisingly, in my opinion, accurate. And so we've been we've been really good in that regard. The biggest misses have had so far have been associated with the unanticipated downtime due to these, like we mentioned, the lightning strikes, but it's primarily in the gas. The the declines of the wells are basically coming in as we have seen in you know, our in the past. And so I don't know if that really answers your question. No. It totally does. Okay. And and just one other for me is if I remember right, it seems that you have come a long way with the the rod pump conversions. And so I guess, first, I'm I'm assuming that you're you're sort of wrapping up the most of that inventory. And I was just curious if you could talk a little bit more about what other sort of workover or maybe recent completion or other rework that you might have on deck for the rest of the year. Yeah, I will say this. As long as we're drilling wells out here, because all the wells that we're drilling, we initially put in electrical submersible pumps. There will always be a CTR component of our going forward program. We have, as you pointed out, made a lot of progress towards converting many of these electrical submersible pumps to rod pump, but we still do also retain a pretty sizable inventory. We'll continue that program throughout this year and into next year. We do have ongoing workover opportunities that come along as well as approach the latter part of their life. We're fortunate in the Central Basin Platform. We have multiple horizons and recompletion opportunities and that kind of thing. But for this year and also next year, we will retain a pretty sizable component of our go forward capital spend associated with the CTR program. Yes, sir. And to add on to that, the Northwest Shelf currently has 22 of the 76 wells. The horizontal San Andres wells and Northwest Shelf are still on ESP. We expect those to reach a point where they will be converted to rod pump as well. And in CBP, of the 114 wells that we have, 63 of those are still on ESP. The the total fluid production in CVP is a little higher, so we don't expect all of those wells to be converted to rock pump at some point, but at least half of them will. So we still have a number of wells that are going be under our CTR program in addition to the new wells that we drill over time. And it's kind of interesting as we watch our operating costs, You get the full effect of these CTRs, you know, a couple months after you get them converted over where you're now starting to really see the reduction in electrical usage. As you get into the repairs, these rod parts and rod repairs are so much less expensive than electrical submersible pumps. As time goes on, you're seeing meaningful impacts reduction of our operating costs. And so we've said that in the past, but I tell you what, you know, we we really enjoy seeing those operating costs come down quarter over quarter. And, Noah, this is Alex Zeiss again. I I will comment that on a slide on the slide deck that we attached to our earnings release, Slide 12 addresses a lot of the the questions you had. So it shows a little bit of the historical failures and where we're going with the CPRs. Okay. Great. Thanks a lot. Thank you, Noah. Thank you. Our next question is a follow-up from Jeffrey Campbell with Alliance Global Partners. Please go ahead. Thanks for letting me back in. I just wanted to ask a quick m and a question. Bearing in mind your your milestones for acquisitions. Do you believe you're more likely to consummate an all stock transaction or one that's a combination of stock and cash? And an asset as I'm thinking about the potential optionality of the impending asset sale? Yeah. And so there's a lot that could be said in that regard, Jeff. You know, in the current environment, I think all of the owners of assets that are in the marketplace trying to sell their assets would prefer cash. Okay? We have seen expression an of interest from many or several different organizations that would be receptive to stock. But we I can't say that there's any one preference or another. Potentially do an all stock deal, those are gonna be more rare. I think a combination of stock and and debt. But, again, in that combination, that right combination, it will be a deleveraging and leverage ratio improving transaction. And at the same time, when you look at the share usage, we will we it will be an accretive deal with respect to the shareholders. Otherwise, we won't do it. And so that's a tall order right now because with the increase in oil prices that we've seen, we've seen, in our opinion anyway, a rapid increase in the competitiveness for these oil and gas assets that are hitting the street. So people are now willing to sell, and there are now people willing to buy, and it's becoming more and more competitive. And so we're out there competing. We're evaluating. We're screening deals, but we're not losing sight of the two promises we've made to our shareholders. No. I appreciate that comprehensive answer. Thank you. As there are no more questions, this concludes our question and answer session. I would like to turn the conference back over to mister McKinney for any closing remarks. Remarks. Thank you, Matt. And all of you that are on the call, thank you for your time. Thank you for your interest in Ring Energy. And thank you for your trust. If you have any questions, you're more than welcome to follow-up and contact us. Al Petrie is always available to take those calls and he transfers and sends them on to us. Anyway, thanks again and have a great rest of your day. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.