session of the Water Tower Virtual Insights Conference. It is a pleasure today to welcome Paul McKinney, CEO from Ring Energy, and Sonu Johl, CFO from Ring Energy. I am Jeff Robertson, Managing Director for Natural Resources. Ring's safe harbor disclosures concerning forward-looking statements are available under the Investors tab of the company's homepage. I would like to mention that participants can submit questions in the conference portal, and we will work to address those in the follow-up management series report. Investors wishing to schedule a management meeting can indicate their interest in the portal, and we will work toward accommodating those requests as well. Paul, Sonu, thank you for taking the time to join us.
Hey, Jeff, it is a pleasure, and thank you for inviting us.
Ring is an exploration and production company whose assets are concentrated on the Northwest Shelf and the Central Basin Platform areas of the Permian Basin in West Texas, where reservoir targets consist of multiple stacked conventional formations with known hydrocarbons. Ring and offset operators are turning more toward horizontal drilling to extract greater value from some of the producing reservoirs. For those that might be unfamiliar with Ring, Paul, can you just lay out what you believe the key ingredients are to building a sustainable oil and gas operator capable of delivering shareholder value?
Well, the first thing that comes to my mind is a disciplined management team, committed to the pursuit of excellence and really basically focused on the basic fundamentals of what really drives value for shareholders. The second thing that I would think of, and jump in here, Sonu, anytime you would like. The second thing is basically the assets under management. Assets with high margin to low operating costs, that basically allows you to withstand low oil prices. Assets with shallow declines and low operating costs allow the company to withstand all kinds of things, but essentially, shallow declines and long lives basically reduces your maintenance costs, provides resilience to oil price volatility. It does a lot of things for you.
Third thing I also think about is an adequate inventory of opportunities necessary to sustain the organization, maintain your production, maintain your liquidity with the banks, and also have an inventory enough to grow. Growing organically, in our opinion, is really one of the most effective ways of generating value. Sonu, you have anything you want to add?
No, I think that summarized it perfectly, Paul. Just where we are in the phase of a life cycle of our business, Paul and team has done a great job of creating the runway of opportunities that we have today, and we have the capital and discipline to go after it now.
Yeah. Those things combined basically lead to what the shareholder's interested in. They want to see EBITDA growth. If you have an asset base that is, like I said, high operating margins, low operating costs, shallow declines, and long lives, you have the staying power to do what you need to do with an inventory of high return opportunities to drill. All of that leads to sustainably delivering EBITDA and growing EBITDA for the shareholders.
Well, acquisitions have played a role in Ring building up its presence in the Central Basin Platform, and the Northwest Shelf over the last several years since you and the rest of the team joined. How important are the acquisitions in building out future organic growth opportunities, just from an operational scale standpoint? Maybe secondarily, Sonu, as a company gets bigger with greater production base, improved reserves, how does that translate into financial scale to allow the company to grow from where it is today?
Yeah. I'll take the first part of that. The assets when we bought them at the time, and the technology that was available at the time, and we're talking about a very short period of time ago. We anticipated that with the Stronghold acquisition, the Founders acquisition, and the Lime Rock acquisition. Lime Rock was predominantly in an area where we had already gone horizontal in the San Andres. But those other two were primarily considered to be opportunities to drill inexpensive vertical wells and apply the modern multi-stage frack technologies that's been developed for horizontal wells to these vertical wells, these inexpensive vertical wells, and generate really high returns.
But since that time, we've learned that many of these stacked pay zones, although they're not as thick as many of the shales in the Delaware and Midland basins, these longer laterals have demonstrated that they too can be economic. Especially when you develop them all at the same time on a location. That's what we call co-development. That is something that we did not think of early on. Then because the technology just wasn't there, we have proven now that that is developing a significantly higher undeveloped inventory of drilling locations. It's really huge in terms of improving the capital efficiency, delivering more barrels a day of production, and more barrels of reserves per dollar spent. Yeah, it's really impactful. From a financial standpoint, it also will be impactful. I'll turn that over to you, Sonu.
Yeah, and just to add to Paul's point, if your listeners go to our Q2 earnings presentation and go to page seven, it really highlights the point that Paul describes. All the acquisitions that were done to date were essentially done for the vertical drilling program and all the horizontal development that we're prosecuting today. What you'll notice on the page is where all the horizontal development is occurring in the Central Basin Platform, we're in all those hotspots.
Got it.
It has given us an opportunity set, which then leads to your second question, Jeff, about just the additional scale. Ring as a company right now has more optionality than it has ever had in its past. We are this year going to pay down debt. We get to accelerate our development program, go into 2027 stronger than we ever had, and just with more optionality of what we want to do with our capital.
A question on the Central Basin Platform from some of the things you talked about with the attractiveness of vertical targets, Paul. Back 15 years ago or so when a lot of companies in the Midland Basin were drilling vertical wells to develop tight formations, that evolved as they realized that horizontal drilling was a better way of developing those formations. Are you seeing that type of opportunity set in the Central Basin Platform that is creating new opportunities in the assets that you have acquired, as you mentioned? From a consolidation standpoint, is the platform still a target rich environment, in your opinion?
Well, I will answer that in reverse order. Yes, it is a target rich environment. What we find is that many of the public companies that are out there are really still focused on the development of the Delaware and Midland basins, the unconventional shales there. Many of their assets that they have on the Central Basin Platform, they are not applying this technology to them. What we find out there primarily that our main competition is with the private companies that are doing essentially the same thing we are. The opportunity set has expanded considerably, in multiple ways. Number one, with the existing assets that we already have that we have acquired through these acquisitions, we have now learned to apply these technologies. That has really increased the inventory of drillable locations now.
Where we would drill multiple vertical wells and then complete all of those zones, those stacked zones, now we can drill a horizontal well 2 mi in each of these zones, all co-developed on one location, and you eliminate a whole lot of well locations. So it makes it extremely capital efficient, but it also increases that inventory. The characteristics of this new development philosophy going forward, really lends to increased EBITDA growth and production growth for a fewer dollar spent. Sonu, you want to jump in there?
Yeah, it is really fascinating for me coming into this company, having seen. I was an investment banker for a number of years and followed the unconventional space to what you highlighted, Jeff. Just that same evolution, which I saw calling on clients, that they were evolving from vertical drillers to horizontal drilling, going from single well horizontal wells to multi well co-developed pads. It is the same exact life cycle that we are living through right now.
It is probably lost on a lot of people that Diamondback, I think, came public with the notion of drilling vertical wells in the Midland Basin and realized that a couple of horizontal wells that were drilled in their program were so much better and basically shifted their entire capital program and corporate emphasis to a horizontal development.
Absolutely. We could love to strive to try to be what Travis Stice and Kaes have done over there. Absolutely.
Absolutely. Yeah. It is kind of interesting to me when I look at the Central Basin Platform and the emerging technologies and how that is transforming the way we develop things. Many of the zones that we have known about for years, decades, were never adequately economic because of the low porosity, low permeability in the Central Basin Platform. These areas were never really pursued vertically because they just were not economic. With today's technology, many of these zones that have historically been forgotten are now becoming economic. That is where the real opportunity remains out there in the Central Basin Platform, southern part of the shelf. Is applying these new technologies even to zones. What you will find is that many of these areas that have this undevelopable resource, when you thought of it from a vertical standpoint, it is developable today.
Many of those, that acreage is not even leased yet. This is why it is a little surprising to us. We are finding less competition or very little competition out there. We feel like we have a lot of opportunity to grow.
A lot has changed since early 2026 when you all put your capital budget together, I think with the oil price probably around $60 a barrel.
Right.
Oil prices have touched $100, gone back to the $70, touched $100 again. Paul, and Ring executed an equity deal in May of this year to accelerate debt paydown. Paul, or Sonu, both, can you share some thoughts around oil prices and how the volatility or what your outlook and how that plays into your early preliminary planning for 2027?
Yeah. There is plenty for both of us to discuss there. We have held certain priorities associated with how we allocate capital. Even though the equity raise was successful and put our balance sheet in a much better position, then the surprise of this war brought on these higher oil prices, it has not affected the priorities on which we allocate, but it has allowed us to accelerate some. Because of the additional cash flow, because of the stronger balance sheet, we were able to accelerate some of these investments that really you got to have in place before you can launch a drilling program that can deliver the production and EBITDA growth. When we saw that we had that opportunity, we took it. We began making these investments.
We already had one frack pond in the original budget, but now we've accelerated more of those, additional saltwater disposal and saltwater handling facilities. We've purchased facilities so we can treat produced water so we don't have to depend on fresh water, so we can use produced water to frack our wells. All of this infrastructure costs, also, don't forget, we're also investing in these larger tank batteries for producing wells so that these tank batteries can manage the production of much higher rates. Because when you bring on a co-developed pad of four or five wells all at once, then you get a big surge of production that comes on board, so you got to have the facilities for that. All of these investments are what was necessary.
The changes that we occur, the equity raise and the higher prices allowed us to accelerate some of these so that now we're positioned for growth that we may not have otherwise really felt or incurred until the latter part of 2027 going into 2028. So from my standpoint, from an operational standpoint, that's been the big win for us.
What I wanted to do, Jeff, was to help Paul have the tool sets to really advance all those operational ideas that we had as a company. With oil being at $100, it's really easy for us to say oil's going to stay at this price forever. What we've seen over the last three months is that volatility that you described, we wanted to remove hope as a strategy and give Ring the most optionality. Really, if oil stays at $100 from here on out, we're better for it. We're going to have more volumes exposed to a higher commodity price environment. It really gave us a lot more opportunities on how to spend our capital going forward.
Yeah, I was going to say, we've also stress test our 2027 program, we would have to sustain unimaginably low prices for us to want to alter our plans, our capital spending plans for next year.
We'll be free cash flow positive at $60 oil.
That's right.
In 2027?
That's right.
2027.
Sonu, can you talk a little bit about hedging? I know the RBL has, or the lenders in the RBL group have certain hedging requirements, but with the forecast for 2027 production growth, pardon me, should you expect to have more production than exposed to potentially higher prices, which feeds into your free cash flow argument?
Yeah. We're naturally have more barrels exposed given our development program and given when we have to layer in our hedges, for our banks. We're going to have more barrels exposed, but we are going to have to roll on part of our covenants for our bank because every 20 or every six months they do a redetermination, they do a test to see where we are hedged and if we're within covenants, and we have to have 50% of our PDP hedged. So we will have to layer on some hedges. Where the market is today and the collars that you can get today are skewed to the high side. So you have collars now that are wide. They're giving you more participation in the upside than we've seen before. So, I would expect us to have to layer on and they'd be in the form of collars.
Okay.
But 60% of, right now, 60% of our production based off our forecast is going to be exposed to commodity price.
Even the put side of those collars are higher now, so.
That's right.
When you compare historically, yeah, we'll be able to withstand a lower price environment. But we still do want to minimize the amount we actually hedge so that we can retain the upside to the extent that we can. This is also the reason why we're still, and we will continue to be focused on reducing our debt and leverage ratio because getting our leverage ratio below a certain threshold is very meaningful for us. It reduces a requirement for hedges that are farther out on the backwardated curve, so to speak. Yeah, that's what's going on there.
On the second quarter earnings call in August, Ring laid out an initial 2027 outlook that implied more than 10% total production growth year-over-year from a capital budget of about $135 million- $165 million. The plan next year, and I think you alluded to it earlier, Paul, is really driven by doubling the number of horizontal wells greater than 1.5 mi lateral length from the 2026 program.
Right.
You talked about it earlier, Paul. What has Ring done in the last couple of years that really lays the groundwork for an expanded horizontal effort as you look out in 2027 and beyond?
Yeah. We've done quite a few things, actually. Everything from continuing to work on reducing our debt, continuing to focus our assets under management so that they meet a strict criteria of high margins, low operating costs, these type of things. We wanted to manage a portfolio that allows itself to do very well under a depressed price environment and actually really take off and shine really well in the higher price investment opportunities or environments as well. The things that we've done, there's several of them. We've accelerated our infrastructure into 2026, like I said, to prepare us so that we can have this development opportunities.
We've been very diligent, as I say, with testing all of the various different stacked pay zones in the Central Basin Platform that historically, oftentimes, people wouldn't waste their time testing because they weren't that economic under a vertical environment or the older technology. So we're testing some new zones, we're laying the groundwork so that we can know with confidence which areas you'll want to focus on, which zones, and how to co-develop those to maximize the value of those assets. Again, testing various different zones, accelerating our infrastructure for frack ponds and saltwater disposal, and installing those production facilities. All of these things are basically the groundwork necessary to provide that growth in 2027.
Well, you mentioned some of the infrastructure investments that Ring has made to prepare for an expanded development program, and you talk about increasing capital efficiency with greater horizontal wells. Two questions. One, for people, can you lay out how Ring measures capital efficiency? Secondly, how much of the prior infrastructure spend will you be able to leverage in the 2027 program such that more dollars in that program actually are in contact with the reservoir to affect the amount of production you can add per dollar spent?
Yeah. Well, capital efficiency is a pretty easy concept to understand. Basically, how many barrels a day of production are you getting for every dollar you spend, right? How many barrels of reserves are you getting for every dollar spent? Increasing that metric is really important because the more you can increase that metric, the less capital you need to spend to maintain your production or to achieve a certain growth rate. The rest of that capital can be used for, like in our current situation, we want to reduce debt, but there's going to be a day and time when we have achieved the size and scale and the balance sheet necessary for us to deliver a real capital return to our shareholders.
That is the long-term goal, is achieve that size and scale and have the optionality to deliver whatever it is that our shareholders are asking us to do. That is how I think about all of that. Sonu, you want to throw anything else into that?
Yeah, you have seen it already immeasurably in our D&C cost per foot on the wells that we have drilled over the last three years. We will hopefully continue to show that, where we will see a compression on our D&C cost per foot. We have also proven just on a LOE basis, our op costs also on a downward trend. So we continue to show those types of financial results and that would show a direct to the bottom line.
If I am correct, the initial outlook called for a higher production, lower LOE cost, which both of those factors should be positive for cash flow.
We should get, yeah, more from our capital program next year. More growth, less capital, and a lower LOE. So all good things for our investors.
Paul, I want to return just for a quick moment to the equity offering in May. Obviously, the proceeds from that were used to reduce debt. Between the headroom that that deal created with the RBL and oil prices and how you think about Ring's organic growth opportunities, can you just bring that together to how that influenced your 2027 initial plan?
Yeah. So again, I'll just back up just a little bit. If you remember how we entered the year, we entered the year believing that oil prices could potentially even test a $50 price range, so fall below $60 . But we needed $60 at the well head to protect the capital program. That's how we entered the year. So we're busy putting in hedges to protect our cash flows and all of that. Well, then along came the day after Sonu decided to join us, this conflict with Iran. That's when the war started. Welcome to the company, Sonu. Kind of funny, actually.
Yeah.
But those higher prices did not impact our cash flows as much as we'd like to them because to have those kind of floors in place, you've got to give up the upside, right? We did do that. But along came an opportunity in the marketplace, and we had several banks come to us and talk about the opportunity to raise some funds through an equity raise. So we were very fortunate to complete that equity raise. But when you combine the higher prices and that equity raise, it significantly improved the balance sheet, gave us the flexibility. Plus, when you consider the fact that during that same time period, we were testing some of these horizontal wells. Many of these zones we're testing for the first time, and we're getting very strong results. So we looked at that as an opportunity.
Wow, we could accelerate the growth that we were planning to have in the future by as much as six months or maybe even a year. So we did it, and that is the real significance of that equity raise and the significance of the timing of this conflict in terms of the development of Ring's development program and positioning ourselves for a real significant EBITDA growth.
Sonu, can you share any perspective based on the 2027 plan and at least what your base level oil price expectations are that are embedded in that? On to your comment earlier about free cash flow in 2027, about what the leverage ratio might look like at the end of 2027.
Yeah. We are running our base case for 2027 at $75 oil. We haven't moved it based off, and we try to pick a pretty conservative, or in our view, good mid-cycle price to run our financials on, and we like to stress test it, as we mentioned earlier, even down to a $60 oil case. But at our base case of running $75 oil, we will get to a leverage ratio at the end of next year of 1x .
Yeah, I think, Paul, you have spoken before about a 1x - 1.5 x target, so you could, if I remember correctly, you are accelerating the or the environment is allowing you to accelerate reaching those goals?
Yeah. One of the things that our shareholders probably need to understand is that, regarding our credit facility, and Sonu can talk more about this than I can, but our credit facility has a leverage ratio of 1.25x as a very meaningful leverage ratio regarding our requirements for hedging. If we can get our balance sheet, our debt levels to where we are equal to or below 50% of our borrowing base and below 1.25 x leverage ratio, well, then 50% of the hedges that we are currently required to put in place for months 13 through 24 go away. Instead of 50%, it is only 25%.
That is very significant for us because if you look at the historical hedge losses we have incurred over the last five years, the overwhelming majority of those hedge losses were associated with the hedges we put way out there on the backwardated curve. By achieving this leverage ratio and percentage drawn on your borrowing base goals, that allows us to turn our hedging program more into an opportunistic hedging program instead of a defensive one and allow us to provide a larger production of our production stream to the higher prices, which I believe our shareholders want to see us do. That allows us to accelerate paying down debt and everything tends to snowball at that point. Sonu?
Yeah, absolutely. That is one of the target reasons for obviously having lower leverage is to kind of remove our requirements for this covenant because a big piece of some of our cash outflow this year was having to pay for the mark to market on our hedges.
Yeah. I did an analysis about six months ago, and I looked back in the prior five years, we had $136 million worth of realized hedge losses, and the overwhelming majority of that was associated with layering out those hedges in those out months that are heavily backwardated. Our balance sheet would look a lot better, a lot different if we did not have to pay that, if we would not have incurred those realized hedge losses.
Well, the balance sheet is an issue, but I do not think you are standalone as a company that has had realized hedge losses in the last number of years. Paul, I would like to wrap up our discussion. Can you share or can you summarize your key thoughts on where you think Ring is positioned, as you start to think more about 2027 and executing on the plan that you have laid out to deliver value for shareholders?
Yeah, I think the most important thing that, and Sonu, jump in here anytime. The most important things our shareholders need to be looking for, as we complete the rest of this year and as we disclose our results for the rest of this year, I think our shareholders should be looking for the actual performance from the longer horizontal wells that we're saying, the co-development of these locations, and what does that really mean in terms of improving capital efficiency. That's going to be the key. The higher we can get our capital efficiency, the more production growth and EBITDA growth you can get from your future capital spending program, which we're forecasting for next year. We're really excited about that. If there's one thing I would leave with our shareholders, they need to be watching our performance.
Are we going to deliver what we said we're going to deliver? If we do, look out, because this company has a real significant opportunity for organic production and EBITDA growth.
Yeah, I would just add, Paul, we got multiple ways to win.
We're a stronger company today. The team has proven to be a prudent acquirer on the M&A front. We have an organic growth story that we can prosecute, and we have the ability to win through M&A and through land leasing.
Yeah, that's a really good point, Sonu. If you look at the last three years, if you just stripped out all the acquisitions, this company has grown organically from a standpoint of replacing our production with new reserves. We've done that because our geologists and engineers and our land team have been diligent, looking at where we have done a really good job in our core operating areas, and they've been able to expand those positions by leasing organically, from going straight to the lessors and leasing the land and continuing to drill and develop and test these new zones and continue to expand our core operating areas. That kind of thing.
When you can take the cash flows, a portion of your cash from operations and reinvest that into lands that are developing new locations, that's a business model that really delivers strong returns for their shareholders, and I'll be honest with you, I'm not aware of many, if any, of our peer companies that have demonstrated the ability to grow organically like that. We're really proud of that. It's another tool in the toolbox. We don't have to depend on acquisitions like many of the other companies appear to depend on acquisitions. We believe we can grow organically from the footprint that we have. That's really what I like to refer to, and we've kind of nicknamed it here, is we're now entering into a new chapter for Ring Energy.
We have the ability to grow organically in addition to a proven track record of growing through acquisitions. So we have multiple ways to win.
Great. Paul, Sonu, we'll leave it there for today. I want to thank you so much for taking the time to join us. For the participants, thank you for joining this session of our Insights Conference. Once again, please submit questions and indications of interest in management meetings through the conference portal, and we will work toward coordinating responses. Our next session will be up in just a few moments. Once again, Paul, Sonu, thank you.
Thank you very much. Have a great day.