imaginima/E+ via Getty Images Ring Energy (NYSE: REI ) is aiming for some (high-single digits) production growth in 2022 compared to 2021. This will come at a significant cost though, with its hedges and the increase in its capital expenditure budget contributing to Ring only being projected to generate $27 million in positive cash flow at $95 WTI oil in 2022.
Ring is reducing its debt relatively slowly (with $23 million in credit facility pay down in 2021), but its leverage should be okay as long as oil averages at least in the $60s going forward. Production Growth
Ring’s production growth is somewhat slower than I expected given the increase in its capital expenditure budget (to a range of $130 million to $150 million) for 2022. It is expecting approximately 9% year-over-year production growth, although the midpoint of its 2022 guidance calls for only a 2% increase in average 2022 production compared to Q4 2021 production.
This appears to be at least partly due to the 2022 continuous drilling program starting in late January, resulting in wells being placed on production starting in March. As a result of no wells being placed on production during the first couple months of the year and the winter weather effects, Ring expects Q1 2022 production to average around -6% compared to Q4 2021 production.
Ring’s production should end up in the 9,500 BOEPD to 10,000 BOEPD range for Q4 2022. Potential 2022 Outlook At Current Strip
Ring expects to average around 9,300 BOEPD (87% oil) in 2022 based on its guidance midpoint. This would allow it to generate around $301 million in oil and gas revenue at $95 WTI oil, which is around current strip.
Ring’s hedges cover around 50% of its 2022 oil production at an average of $55.20 per barrel, and thus have around negative $59 million in estimated value at $95 WTI oil. Barrels/Mcf $ Per Barrel/Mcf (Realized) $ Million Oil 2,947,375 $93.50 $276 Natural Gas 3,558,750 $7.00 $25 Hedge Value -$59 Total Revenue $242 Source: Author’s Work
With a $130 million capital expenditure budget, Ring would be projected to generate $27 million in positive cash flow during 2022. $ Million Production Expenses $45 Production Taxes $14 Cash G&A $14 Capital Expenditures $130 Cash Interest Expense $12 Total Cash Expenditures $215 Source: Author’s Work
This would help reduce its net debt from $288 million at the end of 2021 to $261 million at the end of 2022. This would be approximately 1.5x EBITDAX, which is an acceptable amount of leverage, although upstream companies are most often targeting around leverage of 1.0x EBITDAX or less these days. Delaware Basin Sale
Ring is attempting to sell its Delaware Basin assets and will apply the net proceeds from such a sale to debt reduction. It appears likely that this asset sale will only result in a small amount of proceeds though. Ring’s Delaware Basin production averaged only 417 BOEPD (68% oil) during 2021, down 36% from 2020. As well, lease operating expenses for the Delaware Basin assets were very high at $32.75 per BOE . Thus the asset may only be worth around $10 million to $15 million despite strong commodity prices, with the low production and high operating costs limiting its value. Notes On Valuation
At around $3.50 per share, Ring appears roughly fairly priced for a long-term (after 2022) scenario with $70 WTI oil. For comparison, Ring reported having a PD PV-10 of $795 million based on SEC pricing (with a realized price of $68.32 per barrel of oil). At $3.50 per share, Ring would have an enterprise value that is approximately 0.9x PD PV-10, assuming that the remaining warrants are exercised and that it ends up with 121 million shares outstanding as a result. Conclusion
Ring Energy is making progress reducing its debt, although this progress is relatively slow compared to many other upstream companies as it is also aiming for some production growth. By the end of 2022, Ring may be able to pay down its credit facility debt by around $50 million compared to the beginning of 2021. If it sells its Delaware Basin asset, it may be able to pay down its debt a bit more, although this asset appears to have limited value.
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