The latest investor deck, which also can be found under the Investor Relations tab of the company's corporate homepage. Paul, thank you for taking the time to join us today.
Hey, you're welcome, Jeff. And I'd like to thank you for holding this event and to thank your audience for their interest in Ring Energy and for participating today.
Just by way of background, for anyone unfamiliar, Ring is an exploration production company whose assets are concentrated in conventional plays in the Permian Basin. At the end of March, the company expanded one of its core areas in the Central Basin Platform through the $100 million acquisition of assets in Andrews County from Lime Rock Resources.
Third quarter total average production was 20,789 BOE per day, about 64% of which was oil. The company generated $13.9 million of Adjusted Free Cash Flow during the quarter and importantly reduced outstanding borrowings by $20 million. In fact, since closing the Lime Rock transaction in very early second quarter, Ring has repaid long-term debt by about $32 million.
Paul, if we let's touch on the Lime Rock assets, you've now had two full quarters of experience operating those properties.
How is the production performance compared to the assumptions that Ring used when the acquisition was underwritten?
Yeah, the performance has been very strong and have exceeded the estimates we used to value the assets. If you recall, production during the month of April, our first month of operations, exceeded the forecast in volumes by almost 15%. Since that time, the wells have collectively as a group either exceeded our forecast or met them.
Today, we're extremely happy with the performance of the wells. We have produced more oil than we thought we would have by this time, and I extend a sincere congratulations to our operating team for this outstanding performance.
Paul, are the assets now fully integrated into your field operations team, or is there still any work left to be done there?
Yes, they are. They are fully integrated. We are not done making all of the changes we believe will help reduce costs, though. And we have several more ideas to implement, but that is generally the case in all of our operating areas. We're always looking for ways to reduce costs no matter how low they are.
Oil accounting for about 64% of total third quarter production compared to 68% in the second quarter of 2025 and accounts for 66% of your fourth quarter guidance. Since oil accounts for roughly 100% of revenue, it's obviously critically important from a cash flow standpoint. Are there any seasonal issues that cause the fluctuations in percentages in oil and gas recovery?
Seasonal issues generally do have an impact on oil and gas production percentage variance from one quarter to another. But the primary issues affecting our production mix percentages during these two quarters were associated with, or more associated, I should say, with the efficiency of the gas gathering and processing systems that take our gas.
During the third quarter, the system taking our gas in Andrews County, Gaines County, and Ector County had a larger amount of downtime than usual. However, during the second quarter, the efficiency of that system was closer to normal. Typically, when the gas takeaway systems are having problems, the line pressures tend to be higher and can affect our oil production as well, which makes things challenging to predict.
Our guidance for the fourth quarter takes into account our predictions associated with the performance of our wells and the ongoing efficiency of the various gas plant and pipeline systems gathering and marketing our gas and NGLs.
Just given the asset base and where you might direct capital in 2026, should we think about the oil mix in 2026 staying pretty consistent with where it's been for the last three quarters of 2025?
Yes, I believe they should. We will be allocating, and you're going to hear me say a lot about this, we will be allocating our capital in 2026 to the highest, most capital-efficient projects in our inventory. Having said that, because our current revenue is essentially from our oil production, our most capital-efficient projects are also believed to be the highest oil-weighted projects as well.
I imagine that our production mix will be similar to our historical norms, which have been in between, say, 65% and say at a higher end, 67% or 68%, depending on the gathering system takeaway issues we just discussed.
Lease operating expenses were a bright spot in the quarter at an average $10.73 per BOE, which was below the low end of guidance at $11 per BOE. What's behind the cost-out performance that you've been able to achieve?
Yeah, the biggest impacts came from several initiatives that our operating team identified at the early stages of integrating the Lime Rock assets into our operations. These ideas have since been rolled out to many of our other operating areas with varying degrees of success. Several of these initiatives provide both short-term cost savings and long-term savings.
An example of this is our chemical program. Not only did we incur immediate savings on a dollar per gallon basis for the same chemicals, we have optimized the use of the chemicals and are using less chemicals as well. We're also using a series of different chemicals that deliver better results, and the delivery system is superior. So when combined, we are actually extending our run times and reducing the failure rates of our wells.
The reduced failure rates have perhaps the biggest impact on reducing our operating costs than anything else, a tremendous impact. But those savings tend to be realized over time, perhaps six months or even a year later. An example of that would be if you had a producing well that historically had, let's just say, corrosion problems.
So you have holes in the tubing or pitted rods and rod failures. Once you switch to a superior delivery system and chemical cocktail, if you call that, the well will run for longer periods of time. And so the real savings is the fact that if it went down once a year or once every other year, and you can extend that to two to three years, well, then you're just deferring those repair costs. And that is where the real savings comes in.
Other initiatives we have discussed in the past are related to operating our wells with fewer operators. As you know, we reduce our operators by 50% in the Shafter Lake area after we integrated Lime Rock in. We also rebid our goods and services we need to operate, and we're concentrating on all the costs of our operation. The team is continuing to do a great job in this regard.
It sounds like some of those efforts around chemical treatment processes and extending run times not only lowers the cost, but equally important from a cash flow standpoint, probably adds production over time. So you get a double benefit. Is that a fair way to think about it?
Yes, it does. It helps with those decline rates. So the fewer repairs you have, the more on time and more time that you're actually producing your wells. And so it really does help out with your overall production rates.
The Lime Rock deal that I referenced added about 40 gross drilling locations to Ring's inventory. The majority of those locations targeted San Andres Formation. At the time of the acquisition, you highlighted that those locations had a sub-$40 per barrel break-even economics. How are those locations being folded into your capital plan, and have any changes, structural cost changes in the Permian Basin affected where you think those break-evens are today?
Yeah, so just to get back to the Lime Rock wells, they are competing very well in our portfolio of undeveloped opportunities and are in one of our core areas of development. We drilled and completed the first horizontal well on the Lime Rock acres during this quarter, and as predicted, due to the newer use or the use of newer completion design, the early well performance is considerably better than any of the offset wells previously drilled in the area.
The well recently came online, so we are still in the early life of this well, but its performance is at least meeting our pre-drill expectations. With respect to the service costs, service costs are still coming down due to the malaise created by softer oil prices, and so I'm tempted to tell you that our break-evens are coming down. However, we haven't completed the analysis on that yet.
And so we will be completing a post-appraisal of our 2025 drilling completion program very soon. And so we'll have more to share on that in the future. But having said that, and as you know, our break-even costs are very competitive and are among the lowest break-even costs in our industry. The trend is looking good, though I suspect that our break-even costs during this oil price malaise are coming down.
Mentioned oil prices softening earlier this year. The Lime Rock deal was announced in February and closed right around the beginning of the second quarter before Liberation Day. That asset gave the management the flexibility to adapt the capital program as oil prices declined in the second quarter. At the beginning of 2025, Ring's original total CapEx budget, which would have included Lime Rock, was $154 million.
That's right.
The midpoint of the current budget is $97 million, including $23 million expected in the fourth quarter of 2025.
That's also correct.
In third quarter 2025, CapEx was about $28 million. Paul, can you just highlight for us where you're allocating capital in the fourth quarter and whether or not that capital should be expected to impact first quarter of 2026 production?
Yes. So let's see. We have allocated drilling capital to a mix of well types that we believe will help us develop a more capital-efficient drilling and completion program next year. The results of our fourth quarter drilling program should deliver more production per dollar spent in the fourth quarter. And of course, a big benefit of this new production will affect the first quarter.
We have finished our 20-well drilling program and are in the final stages of finishing the completion program. But so far, every well has either met or exceeded our pre-drill estimates. And we hope that the results of these final few wells will turn out to be the same.
Paul, I understand that a detailed 2026 capital and operating plan won't be released until Ring releases its year-end financials in March. Just from a high level, given the current oil price backdrop, can you share your thoughts on how you think about budgeting across a range of potential oil outcomes as you look out into 2026?
Yeah. Yes, I can. But what I share with you today should be taken with a grain of salt, so to speak, because we live in a volatile world and future oil prices will have the biggest impact on our capital spending levels next year than anything else. So if oil prices decline appreciably from where we are today, we will end up limiting our capital spending plans in preference of paying down debt.
So the capital levels that we discuss, we may not deliver on. This is a balancing act, as you know. And delivering the most capital-efficient programs is what will see us through this cycle of low oil prices. So regarding our current plans and the general assumptions and principles that will guide our planning for next year, we are currently assuming $60 WTI per barrel of oil as our base case oil price assumption.
I hope that proves to be a good assumption. Regarding our capital spending plans, we intend to spend only enough to maintain or slightly grow our production. This will allow us to maintain our liquidity with the banks and help reduce our leverage ratio. If we are fortunate enough to receive higher oil prices than $60 WTI, we will apply the windfall to paying down debt.
What have you learned about the asset base with the 2025 capital program, maybe between what you've done between the Northwest Shelf and the Central Basin Platform that will inform where you allocate capital in 2026? And as a second follow-up to that, do infrastructure constraints or infrastructure requirements in either area dictate how and when you allocate capital for development?
Yeah, and so, yeah, I'll address your second question first, and so, yes, there are infrastructure issues. There typically are and always have been in our programs. In 2026, we will still be balancing our capital spending plans with the need to optimize the use of our infrastructure, and that will be true regarding managing our saltwater disposal systems to ensure we have sufficient water to frac our wells.
Those limitations will guide our capital spending, and we are fortunate that we have the opportunity and the flexibility to optimize these issues. Now, going back to the first question, yeah, we learned a lot about our assets in 2025. We've been doing a lot of extra studies. The focus of our capital program during the last half of this year has really provided us a lot of insights.
Our goals for next year's capital program is to make strides in improving our overall capital efficiency, which means we hope to, like I said a little earlier, develop more barrels of oil per day per dollar spent and more barrels of oil and gas reserves per dollar spent. During the last half of this year, we have spent a considerable amount of time and resources identifying the opportunities within our inventory that can help us achieve this goal.
I mentioned earlier that Ring has repaid $32 million of long-term debt in the two quarters following the Lime Rock closing. You have a $10 million deferred cash payment that's coming due for the acquisition before the end of the quarter. Can you share a fourth quarter 2025 debt reduction target at this point?
Yes, I can, and that's primarily because, if you recall, in our last earnings call, we received a question specifically associated with our estimates of year-end debt levels. We said then that paying down in a range, we gave a pretty broad range, but we kind of centered in on around $8 million of debt in addition to making our final deferred payment of $10 million to Lime Rock, and that was possible.
Now, oil prices have since softened a bit, but we have benefited from a few cost-saving initiatives, so we still hope to meet that expectation. In total, we hope to reduce our balance sheet liabilities by approximately $18 million this quarter. I think that would be a good number, and that would include the $10 million deferred payment to Lime Rock.
You've highlighted in a lot of presentations over the last couple of years that Ring's conventional production base has a lower result in a lower average natural decline rate than some of the peers whose assets are more heavily tilted toward unconventional reservoirs.
How does Ring's depletion rate factor into the way you think about capital allocation and managing cash flow for debt repayment in this environment?
Yeah. No, the lower decline rates will play a big part in achieving the debt and leverage ratio reduction plans we have for next year. Our value-focused proven strategy, as you've heard me say, has kept us focused on continuously trying to achieve lower natural decline rates because of the many benefits they provide both in good times and bad.
The bottom line is this: the lower the natural decline rates, the lower the maintenance capital necessary to maintain our production and liquidity, a key indicator of strong future performance.
I want to point people to page seven of your third quarter 2025 investor deck. The lower right-hand graph shows an Adjusted Free Cash Flow outlook for 2026 across a range of scenarios. From what you're emphasizing on drilling efficiencies and also cost efficiencies, is maybe a way to think about the CapEx number at various prices that you are increasing the ability to generate cash flow across a range of prices, which supports your overall goal of reducing long-term debt?
Yes. You know, when we think about balancing CapEx levels and maintaining or growing the underlying asset base versus debt reduction, you know, Jeff, you've heard me say in the past, the biggest challenges Ring has to achieving real stock price appreciation is basically two things.
First, lowering our debt and leverage ratio levels. And second, achieving the size and scale necessary to attract a larger cross-section of the marketplace. We believe achieving these two objectives will allow us to achieve a more favorable trading, the more favorable trading metrics other energy firms enjoy that have those attributes.
When oil prices averaged in the $75 range, we had the revenue and EBITDA to do both. We could pay down debt and grow the company. However, at $60 oil, we don't have the revenue to do both. So we are focused on reducing debt and thereby reducing risk to our stockholders.
As we look towards the future, we believe oil prices will return to higher levels. But I am in the camp that believe we may incur a period of lower prices than where we are even today before we return to those higher prices. So our highest priority in this price environment is to pay down debt. If prices decrease further for a sustained period of time, we will cut back on our capital spending in favor of protecting our balance sheet.
Paul, Ring's latest development inventory count included more than 210 proved undeveloped locations and more than 220 workover opportunities that target proved developed non-producing reserves. How does the current inventory blend play into your project selection for the 2026 capital program?
Yeah, and like I said, Jeff, our focus in 2026 is to deliver the most capital-efficient capital program we can. We will select from our existing inventory the best of the best, and so there's a lot of connotation to that, and we can get into that, but yeah, right now, we're choosing amongst that inventory blend to find the most capital-efficient program.
Paul, if in your scenario of lower prices and if they last a little bit longer, how do you work your technical teams to evaluate the existing asset base to identify opportunities that could offer future organic growth opportunities to grow the inventory? And then secondly to that, are you seeing any offset operator activity that has you thinking there could be opportunities on Ring's asset base that you haven't spent as much time trying to catalog?
Yeah. So I think the best way to answer that is to say yes to both of those questions. Our evaluations associated with improving the capital efficiency of our 2026 program touch on your questions here, and we believe will lead to building value through inventory growth.
So this is going to be a long answer, but it is important for our stockholders to understand. We intend to improve our capital efficiency by continuing our pursuit of reducing the cost of drilling and completing our wells. So we are laser-focused on reducing them, and we have always been. And as you know, we have made great strides in reducing those costs. But we also believe that applying newer, more modern technologies associated with drilling and completing our wells will also improve our capital efficiency. So what does that mean?
We'll be allocating more of our capital in 2026 to drilling more horizontal wells than vertical wells because they tend to be more capital-efficient. The horizontal wells with longer lateral sections have also proven in our industry to be more capital-efficient. So in 2026, we intend to drill longer lateral sections in horizontal wells we drill. This will mean more one-and-a-half-mile wells, and we even intend to drill our first two-mile horizontal well in 2026.
Another way we intend to improve our capital efficiency is drilling and completing some of the horizontally untested zones underlying our existing acreage. The reasons are very compelling. Several offsetting operators have been testing horizontally many of the stacked pay zones up and down the Central Basin Platform with varying degrees of success. Many of the more successful tests have been drilled immediately offsetting our leases and have essentially proven locations on our acreage.
We intend to drill and prove some of these zones horizontally on acreage we have historically developed with vertical wells, which will do two things. First, it should provide the capital efficiency we are looking for in 2026. But the other thing it does is increase the inventory of proven, probable, possible, even contingent resource drilling locations on our acreage position. Although we do not intend to grow our production appreciably in 2026, we hope that our capital program can significantly grow our inventory of undeveloped locations to bolster our book value.
Just to follow up to that, given your background in completions from your engineering days, how much of the opportunity unlock is from drilling techniques versus stimulation techniques versus just a combination of the two?
It is a combination of the two. Completion technology continues to amaze me. So if you notice our industry, we're going to larger volumes of water with larger, higher sand loading percentages. And so those are leading to increased completion efficiency. But I mean, you can't discount the gains made in the horizontal drilling field as well because the new technology associated with horizontal drilling has been tremendous.
We've continued as an industry to extend our laterals to longer and longer lengths. Ring Energy has not been out there at the three-mile or four-mile lengths because we haven't had the acreage positions that could allow that. And at the same time, the rock quality of our lower quality conventional rock is considerably better than shale. And so we don't actually benefit, I don't think, by going to those extreme lengths.
But the longer laterals will prove to be very instrumental in terms of improving our capital efficiency, as will the completions.
I'd like to bring our discussion today to a close. I want to ask you if you can summarize your thoughts as we close out 2025 as to how Ring is positioned to withstand the oil market macro that you think could be coming or that we see coming in 2026. Really, to your last point, to really build opportunities to position the company to add value in the future.
Yeah, it's my pleasure to do so, Jeff. And I think you can tell that I'm pretty excited about our 2026 program. I hope so. I have never been more excited about our future as I am about our prospects for 2026 and 2027, all things considered, oil prices or whatever. We are past, and we've discussed this in the past, Jeff, we are past the selling pressure our stock has endured over the last three and a half years.
We have continued to perform both financially and operationally at the higher end of our peer group, which leads me to believe that our stock price will appreciate to its rightful place with respect to that peer group. We are poised to do well even in a lower price environment where many of our peers will be challenged.
We are able to do so because we have been focused for the last five years on all of the right things that have prepared us for times like these. We have peer-leading metrics such as shallower decline rates and longer life wells. Our production and drilling opportunities are highly oil-weighted with high operating margins and higher net backs.
Our drilling and completion costs are low, and our inventory of drilling opportunities that have some of the lower break-even costs of our industry are very real. I believe the excellent results of our 2025 capital program, despite the lower oil prices, have set the stage for a potentially outstanding 2026 capital program that, although it's not intended to deliver significant production growth, it should deliver strong progress reducing our debt as long as oil prices hang in there.
It should also lead to a strong inventory and book value growth. In 2026, we'll be laying the groundwork for our future success, strengthening our balance sheet and building a larger inventory of low break-even drilling opportunities. When we emerge from this oil price cycle, we'll be stronger than ever and have the inventory that can provide the opportunity to deliver significant organic growth when the time is right.
Jeff, I'd like to thank you for hosting this Fireside Chat and for inviting me to speak to your followers. I also want to thank your audience once again for their interest in Ring Energy and for calling in and participating in this event. Thanks again.
Paul, thank you for participating. We look forward to catching up again later in the first quarter after your 2026 plan is laid out. For our participants, I want to thank you for joining us for today's Fireside Chat with Paul McKinney, Ring Energy CEO. Our research on Ring Energy can be accessed from our website, www.watertowerresearch.com.
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Additional disclaimers can be found at watertowerresearch.com. Once again, thank you for joining us today.
Thank you.