Ring Energy, Inc. (AMEX:REI) Q4 2023 Earnings Call Transcript March 8, 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 Fourth Quarter and Full Year 2023 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Al Petrie, Investor Relations for Ring Energy. Please go ahead.
Al Petrie: Thank you, operator, and good morning, everyone. We appreciate your interest in Ring Energy. We'll 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 fourth quarter and full year 2023 as well as our outlook. We'll 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 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 re-enter 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 the 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. Reconciliations of these non-GAAP financial measures to the most directly comparable measure under GAAP are contained in yesterday's earnings release. Finally, as a reminder, this conference call is being recorded. And I'd now like to turn the call over to Paul McKinney, our Chairman and CEO.
Paul McKinney: Thanks, Al, and thank you to everyone joining us today and your interest in Ring Energy. Looking back to 2023, it was a very good year. We ended at establishing new records during the fourth quarter and the full year, both operationally and financially. As we shared in our earnings release, we grew our year-over-year production related sales volumes by 47%, our adjusted EBITDA by approximately 21%, and our adjusted free cash flow by 30%. This was a direct result of our team's ongoing efforts related to the key aspects of our growth strategy. The primary contributors to our success are directly related to the successful integration of the two acquisitions executed over the past 18 months, the Stronghold Energy II and the Founders oil and gas assets acquisitions.
Our disciplined and highly successful capital spending program also contributed significantly, as did our continuous focus on reducing operating costs. These acquisitions have further established our strategic foothold in the Central Basin platform of the Permian Basin and have significantly increased our undeveloped inventory of highly economic drilling locations. Another contributor to our success was the divestiture of certain non-core assets located in the Delaware Basin, the operated assets in the state of New Mexico and a few assets in Gaines County, Texas. As a result, all our operated acreage is now located in a business-friendly state of Texas. Our average operating costs are lower since the assets sold had higher per BOE operating cost than most of our retained assets, and we moved the undeveloped opportunities of these assets that were challenged to compete in our portfolio to operators that value them higher.
The outperformance of our fourth quarter capital spending program is largely due to new well production performance that brought our sales volumes near the high end of guidance, providing for an 11% increase in our daily BOE production over the third quarter of 2023. During the fourth quarter, we invested $38.8 million in capital expenditures and drilled four horizontal wells, three in the CBP, and one in the Northwest Shelf and two vertical wells in the Central Basin platform. We completed 10 wells, six in the CBP and four in the Northwest Shelf. Additionally, costs for capital workovers, infrastructure upgrades and leasing were also included. For the year ended December 31, 2023, we spent $152 million, which included cost to drill, complete and place on production 20 horizontal wells, 14 in Northwest Shelf and 6 in the Central Basin platform and 11 vertical wells in the Central Basin platform.
Also included in the full year capital spending were cost for capital workovers, infrastructure upgrades, recompletions and leasing. Ring also participated in the drilling and completion of five non-operated wells in the Northwest Shelf and Central Basin platform. Adjusted EBITDA was a record $65.4 million for the fourth quarter, which represents a 12% increase over the previous quarter of $58.6 million and a 16% increase over the fourth quarter of 2022, which was $56.3 million. Adjusted free cash flow for the fourth quarter was a record $16.3 million compared to $6.1 million in the third quarter of 2023 with a 165% increase primarily due to increased revenue and lower capital spending in the fourth quarter. Fourth quarter 2023 adjusted free cash flow increased 197% from $5.5 million for the fourth quarter of 2022.
Adjusted cash flow from operations was a record $55.1 million for the fourth quarter compared to $48.5 million for the prior quarter and $47.4 million for the fourth quarter of the prior year 2022. With respect to our cash return on capital employed, in 2023, our capital spending program generated slightly more than 17% return. At this point, and on behalf of the Board of Directors and management team, I would like to thank our employees for their hard work and dedication for the success we enjoyed in 2023 and to express my excitement for the opportunity to continue working along their side in the future as we further execute our value-focused proven strategy. With respect to our reserves, we ended 2023 with SEC total proved reserves of 129.8 million barrels of oil equivalent versus 138.1 million barrels of oil equivalent at the end of 2022.
We benefited from reserve additions of 8.2 million barrels of oil equivalent from acquisitions and 4.8 million BOE from our internal development efforts. Offsetting these increases were 6.6 million barrels of oil equivalent of production, 5.7 million barrels of oil equivalent for the sale of non-core assets, 3.7 million barrels of oil equivalent related to changes in performance and other economic factors, and 5.3 million barrels of oil equivalent for reductions in year-over-year prices. In short, a significant driver in the reduction in our year-end SEC proved reserves was associated with the decreased SEC prices. The PV-10 of our total proved reserves was approximately $1.6 billion as of year-end, assuming SEC prices. Turning to the balance sheet.
We paid down an additional $3 million of borrowings on our revolver in the fourth quarter. The level of debt reduction was impacted by the final net payment for the Founders acquisition in December of approximately $11.9 million. I would note that through year-end 2023, we paid down $30 million of borrowings since the closing of the transaction in August, which had a final net purchase price of approximately $62 million. And finally, we entered 2024 with liquidity of approximately $175 million, including a recently reaffirmed borrowing base of $600 million. Our debt at year-end was $425 million. The company continues to remain focused on cash flow generation and reducing our debt. Looking at our guidance for 2024, while Travis will go through more details in his comments, I wanted to provide a high-level overview and strategic rationale driving our full year plans.
The immediately accretive 2022 Stronghold and 2023 Founders acquisitions materially improved our size, scale and drilling inventory. This backdrop provides key support and flexibility as we execute a 2024 drilling program specifically designed to organically maintain or slightly grow our oil production. Our current plan is to drill an average of five horizontal and six vertical wells per quarter. As in the past, we are focused on developing our highest rate of return inventory while also investing in necessary field infrastructure and other critical capital projects. For 2024, we are planning a two-rig phase drilling program, including one horizontal and one vertical rig. We are using a phased versus continuous drilling approach in 2024 to provide maximum flexibility to react to commodity price fluctuations and other market conditions in the current environment.
After Travis provides his comments, I will come back with some additional thoughts on our business position and where we are headed. With that, I will hand it off to Travis to discuss our recent financial results and outlook in more detail. Travis?
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Travis Thomas: Thanks, Paul, and good morning, everyone. Paul summed it all up nicely, but to further recap, our fourth quarter and full year 2023 operational and financial results materially benefited from our two acquisitions completed over the past 18 months. Also, driving our results was the successful execution of our 2023 drilling program, complemented by additional efficiencies achieved through our expanded scale and leveraging the best operational practices. We also executed targeted divestitures of non-core assets. We might sound like a broken record, but that's what we did. We broke records. In the fourth quarter and full year of 2023, we had record sales volumes, record adjusted EBITDA, record adjusted cash flow from operations, and record adjusted free cash flow.
So, here are my takeaways. We drove record adjusted EBITDA and adjusted free cash flow for Q4 and 2023 despite lower overall realized pricing. Supporting our results was an 11% increase in Q4 sales volumes and a 47% increase in full year sales volumes. We also focused on growing crude oil production as a percent of product mix, given the enhanced economics and will continue to do so in 2024. We paid the final $12 million Founders deferred payment in December, and we were able to pay down $3 million on a revolver during Q4. We have been extremely pleased with the results from the Founders acreage. And through year-end, we paid down $30 million of debt since closing on the transaction in mid-August. With the net purchase price for Founders of around $62 million, we are quickly recouping our investment.
As in the past, we will continue to focus on paying down debt as fast as appropriate. Next, we completed our successful 2023 development program. Our 2024 drilling program has been underway since January, and we look forward to keeping our stockholders apprised of our progress. With that background, let's hit the other key highlights. I'm going to focus my comments on the most important sequential quarterly results. We benefited from a full quarter of production from our Founders acquisition completed in mid-August and a full year of production uplift and scale provided by the Stronghold acquisition that closed in August of 2022. In addition, our ongoing field development efforts continue to drive further cost efficiencies. During the fourth quarter, we sold 19,400 BOE per day at the higher end of our guidance range.
Partially offsetting the increase in sales volumes was a lower overall realized pricing of $56.01 per BOE, a 4% decrease from the third quarter. Our fourth quarter average crude oil price differential from NYMEX WTI futures pricing was a negative $0.92 per barrel versus a negative $0.78 per barrel for the third quarter. This was mostly due to the Argus WTI WTS that decreased $1.07 per barrel, offset by the Argus CMA roll that increased by $0.85 per barrel on average for the third quarter. Our average natural gas price differential from NYMEX futures pricing for the fourth quarter was a negative $3.12 per Mcf compared to a negative $2.45 per Mcf for the third quarter. Our realized NGL price for the fourth quarter averaged 14% of WTI compared to 16% for the third quarter.
The combined result was revenue for the fourth quarter of $99.9 million, let's call it an even $100 million, a 7% increase from the third quarter despite the lower overall realized pricing environment. For full year of 2023, we posted revenue of $361 million, almost $1 million a day, a 4% increase year-over-year. LOE was $18.7 million versus $18 million for the third quarter. On a per BOE basis, LOE decreased sequentially 6% in the fourth quarter to $10.50 versus $11.18 per BOE for the third quarter. The absolute increase in LOE was mostly driven by the full quarter of the Founders assets, but the higher production reduced the per BOE rate. I would note that our Q4 LOE per BOE results were at the low end of our guidance of $10.50 to $11 per BOE.
Cash G&A, which excludes share-based compensation and transaction-related costs, was $3 per BOE for Q4 versus $3.15 per BOE for the third quarter. We are pleased to see a 24% year-over-year decrease in cash G&A per BOE cost. Our fourth quarter results included a gain on derivatives of $29 million versus a loss of $39 million for the third quarter. You may recall, we discussed during our last call that prices at the end of the third quarter were higher, which resulted in a mark-to-market derivative loss, then the decline in prices in the fourth quarter reversed it to a mark-to-market gain. We recorded an income tax provision of $7.9 million during Q4 2023 versus a benefit of $3.4 million in the third quarter, which was primarily associated with the increase in pre-tax book income.
Finally, for Q4, we reported net income of $50.9 million or $0.26 per diluted share. Excluding the estimated after-tax impact of pre-tax items, including non-cash unrealized gains and losses on hedges, share-based compensation expense and transaction costs, our fourth quarter adjusted net income was $21.2 million or $0.11 per diluted share. This is compared to third quarter of 2023 with a net loss of $7.5 million or a negative $0.04 per diluted share, and adjusted net income of $26.3 million or $0.13 per diluted share. Moving to our hedge position. For 2024, we currently have approximately 2.1 million barrels of oil hedged or approximately 45% of our estimated oil sales based on the midpoint of guidance. We also have 2.6 billion cubic feet of natural gas hedged or approximately 43% of our estimated natural gas sales based on the midpoint.
For a quarterly breakout of our hedge positions for 2024, please see our earnings release and presentation, which includes the average price of each contract type. Turning to the balance sheet. Our primary focus remains the same: reducing debt to better position ourselves to ultimately provide a meaningful return of capital to our shareholders. At year-end 2023, we have $425 million drawn on our credit facility. With the recently reaffirmed borrowing base of $600 million, we had $174.2 million available net of letters of credit. Combined with cash, we had liquidity of $175 million with a leverage ratio of 1.62 times, only slightly higher than year-end 2022 despite additional borrowings for the Founders acquisition. As a reminder, from transaction completion in mid-August of 2023 through the end of the year, we paid down debt by $30 million, another clear indication of the cash flow generation afforded by our significant asset base and our dedication to improving our long-term financial profile.
To be clear, we will continue to pull all the levers at our disposal to further reduce our debt position, including driving further growth in operating cash flow through the successful execution of our targeted 2024 development program and further cost reductions. Let's pivot to our 2024 outlook. In summary, during 2024, we are utilizing a phased versus continuous drilling program approach that better maximizes our ability to react to changing market conditions and adjust spending levels as appropriate. Our focus is on maintaining or slightly growing BOE per day production levels while continuing to grow our crude oil sales. We expect to spend $135 million to $175 million on our full year development program and anticipate capital spending between $37 million to $42 million for the first quarter.
We also anticipate full year 2024 LOE to be between $10.50 and $11.50 per BOE and between $10.75 and $11.25 for the first quarter. All projects and estimates are based on assumed WTI 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 view our record results for Q4 and full year 2023 as clear indications of the long-term potential of our strategy, the quality of our assets and the low breakeven cost of our undeveloped drilling inventory. The opportunity provided by our expanded business plan and our focus remains the same as in the past. We will continue to pursue operational excellence and further cost efficiencies through the business, both on the capital and operating cost fronts. We will continue to high-grade and execute our targeted drilling and development campaign focused on our highest rate of return prospects to organically maintain or slightly grow our production while maximizing cash flow generation. We will continue to focus on improving the balance sheet by reducing debt.
We will continue to pursue growth through the evaluation and execution of acquisition opportunities to provide immediate accretion to our Ring stockholders and improve our balance sheet. In summary, we remain committed to our value-focused proven strategy, which we believe better prepares the company to manage the risks and uncertainties associated with our industry and should generate sustainable and competitive returns for our stockholders. The focus of our strategy remains on achieving the necessary business size and scale that positions our company to sustainably return capital to stockholders. I want to take the time to thank our stockholders for their trust in us and for all of you who have joined us on the call today. With that, we will turn this call over to the operator for questions.
Operator?
Operator: We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Jeff Grampp with Alliance Global Partners. Please go ahead.
