Ring Energy (NYSE:REI) delivered Q2 2024 sales volumes that were significantly above expectations, and also increased its full-year guidance by 4% to 5%. The strong sales volumes allowed it to generate $37 million in adjusted free cash flow for 1H 2024 despite low realized prices for its non-oil production.
Ring only paid its credit facility debt down by $18 million in the first half of 2024 though, due to the impact of working capital changes (some of its free cash flow went to reducing accounts payable).
I have increased my estimate of Ring’s value to $2.70 per share in a long-term $75 WTI oil scenario. This is a $0.20 per share increase from when I looked at Ring a few months ago and noted that continued strong sales volume performance would compel me to increase my estimate of its value.
Sales Volume Performance
Ring Energy had total sales volumes of 19,786 BOEPD in Q2 2024, which was 4% higher than Q1 2024 and also well above its prior guidance. Ring delivered Q2 2024 total sales volumes 5% above the midpoint of its guidance for total production and 4% above the high end of its guidance.
Ring’s oil sales volumes ended up at 13,623 barrels per day in Q2 2024, up 2% from Q1 2024. This was also above expectations, at 3% above the midpoint of its guidance and 2% above the high end of its guidance.
Ring outperformed for both total sales volumes and oil sales volumes, although the magnitude of its oil outperformance was a bit smaller as its oil cut went down from 70% to 69%.
Realized Prices For Gas And NGLs
In previous quarters where Ring had negative natural gas prices, it still generated positive overall revenues (before hedges) from its wellhead gas due to the contributions from NGLs. This was not the case in Q2 2024 due to the very negative realized natural gas price.
Ring ended up with marginally negative combined revenues (before hedges) from its natural gas and NGLs, at negative $0.1 million for the quarter (or approximately negative $0.26 per BOE). Ring realized negative $1.93 per Mcf for its natural gas and $9.27 per barrel for its NGLs in Q2 2024 before hedges.
Ring had approximately 32% of its Q2 2024 natural gas sales volumes hedged, so that at least gave it positive combined revenues for natural gas and NGLs after hedges.
Ring provided some additional detail about why it has been reporting low realized prices for natural gas and NGLs. Ring’s gathering, transportation and processing fees are recorded as a deduction from the sales price of the commodities. In Q2, 2024, those fees added up to $1.59 per Mcf for natural gas and $10.22 per barrel for NGLs. Before fees, Ring realized negative $0.34 per Mcf for its natural gas (with West Texas natural gas prices often turning quite negative) and $19.49 per barrel for its NGLs.
The strong oil prices allowed Ring to realize a modestly higher amount per BOE despite a slightly lower oil cut and poor prices for its non-oil volumes though. It realized $55.06 per BOE in Q2 2024 compared to $54.56 per BOE in Q1 2024, helped by oil prices being approximately $4 higher per barrel.
2H 2024 Outlook
Ring now expects to average 19,400 BOEPD in sales volumes during 2024, including 13,500 barrels per day of oil sales volumes. This is a 5% increase in total sales volumes and a 4% increase in oil sales volumes from Ring’s initial 2024 guidance.
I had previously modeled Ring’s 2024 sales volumes at above the midpoint of its initial guidance, but Ring’s updated guidance is still a 4% improvement in total sales volumes and a 3% improvement in oil sales volumes compared to my prior modeling.
Ring’s updated guidance indicates that it expects 2H 2024 sales volumes to end up quite similar to its 1H 2024 sales volumes.
At current 2H 2024 strip of near $75 WTI oil and $2.35 NYMEX gas, Ring is projected to generate $187 million in oil and gas revenue during that period. Ring’s 2H 2024 hedges have around negative $3 million in estimated value.
| Barrels/Mcf | $ Per Barrel/Mcf (Realized) | $ Million | |
| Oil | 2,484,000 | $73.75 | $183 |
| NGLs | 586,224 | $10.50 | $6 |
| Natural Gas | 2,996,256 | -$0.75 | -$2 |
| Hedge Value | -$3 | ||
| Total Revenue | $184 |
Ring had $72 million in capex during 1H 2024 and would end up with $79 million in 2H 2024 capex based on its full-year guidance.
This lead to a projection of $23 million in 2H 2024 free cash flow. Ring generated $37 million in 1H 2024 adjusted free cash flow, but its 2H 2024 free cash flow may be lower due to the increased capex and weaker oil prices (with Ring being roughly 50% hedged on oil).
| $ Million | |
| Production Expenses | $40 |
| Production and Ad Valorem Taxes | $11 |
| Cash G&A | $12 |
| Capital Expenditures | $79 |
| Cash Interest Expense | $19 |
| Total Cash Expenditures | $161 |
In this scenario, Ring’s net debt at the end of 2024 would end up around $383 million, along with leverage of 1.5x.
This assumes that there are no changes to other working capital items in 2H 2024. Ring only paid down its debt by $18 million in 1H 2024 despite generating $37 million in adjusted free cash flow. This was due to changes to working capital items such as accounts payable.
Estimated Valuation
I have increased my estimate of Ring’s value to $2.70 per share at long-term $75 WTI oil and $3.75 NYMEX gas. The $0.20 per share increase reflects Ring’s improved sales volumes (both for total volumes and oil volumes).
A value of $2.70 per share would also be roughly 3.5x EBITDAX based on 19,400 BOEPD (including 13,500 barrels of oil per day) and those commodity prices (along with $383 million in net debt).
Ring also appears capable of generating around $75 million in unhedged free cash flow at $75 WTI oil, which would be approximately 37.5 cents per share (based on 200 million shares).
Conclusion
Ring Energy’s Q2 2024 results were strong, with total sales volumes that were 4% above the high end of its guidance. Oil sales volumes were 2% above the high end of its guidance.
This allowed Ring to generate $21 million in adjusted free cash flow during the quarter, despite minimal contributions from its non-oil volumes.
The strong sales volume performance resulted in an increase in my estimate of Ring’s value, and I now estimate that it is worth around $2.70 per share at long-term $75 WTI oil. Ring’s debt remains substantial, so I’d like to see it avoid leverage-increasing acquisitions until it makes more progress with debt reduction, though.
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