Ring Energy, Inc. (NYSE American: REI) (“Ring” or the “Company”)
today announced it has entered into an agreement to acquire (the
“Transaction”) the assets of privately-held Stronghold Energy II
Operating, LLC and Stronghold Energy II Royalties, LP
(collectively, “Stronghold”). Stronghold’s operations are located
primarily in Crane County, Texas and focused on the development of
approximately 37,000 net acres in the Permian Basin’s Central Basin
Platform (“CBP”). Stronghold is majority owned by Warburg Pincus,
LLC, a leading growth investor ("Warburg Pincus").
Consideration for the Transaction, subject to
customary closing adjustments, consists of:
- $200.0 million in cash at
closing;
- $15.0 million deferred cash payment
due six months after closing;
- $20.0 million of existing
Stronghold hedge liability; and
- $230.0 million
in Ring equity based on a 20-day volume weighted average price
(“VWAP”) of $3.60 per common share as of June 30, 2022, all of
which will be issued to the owners of Stronghold.
The cash portion of the consideration will be
funded primarily from borrowings under a fully committed revolving
credit facility (the “Credit Facility”) to be underwritten by
Truist Securities, Citizens Bank, N.A., KeyBanc Capital Markets and
Mizuho Securities. The borrowing base of the Company’s $1.0 billion
Credit Facility will be increased from $350.0 million to $600.0
million upon closing of the Transaction. The equity component of
the consideration will be approximately 21.3 million shares of
Ring’s common stock based on a 20-day VWAP of $3.60 per share as of
June 30, 2022, and 153,176 shares of new Series A convertible
preferred stock that will be automatically converted to common
stock upon stockholder approval of the conversion into
approximately 42.5 million shares of common stock at the equivalent
price of $3.60 per common share. The effective date of the
Transaction is June 1, 2022 and closing is anticipated in the third
quarter of 2022.
TRANSACTION HIGHLIGHTS
- Expected to substantially
enhance financial position by increasing free cash flow
(“FCF”)(1) generation and lowering operating
costs
- Proven, high-quality asset base
with substantial, capital efficient and low break-even-cost
inventory is expected to be immediately accretive to the following
metrics:
- Cash flow per share;
- FCF per share(1);
- FCF yield(1);
- Net production per share(1);
- Net proved reserves per share(1);
and
- Return on capital employed
(“ROCE”).
- High quality, high margin CBP
assets are expected to immediately lower the following metrics(1):
- Lease operating costs (“LOE”) per
barrel of oil equivalent (“Boe”);
- Gathering, processing and
transportation (“GP&T”) per Boe; and
- General and administrative
(“G&A”) expense per Boe.
- Expected to strengthen
balance sheet and accelerate ability to pay down debt
- Expected to lower 2022 year-end
leverage ratio(2) on a combined basis of below 1.5 times versus
previous target of below 2.0 times for Ring on a standalone
basis;
- Accretive FCF generation expected
to accelerate debt repayment;
- Ability to optimize future capital
spending program potentially enhances FCF generation and debt
repayment even further; and
- Positions Company for future
potential transactions or other stockholder return-of-capital
opportunities.
- Expected to enhance size
and scale
- Expected to increase Ring’s
estimated Q4 2022 sales volumes(3) by nearly 100% from the midpoint
of the Company’s current Q2 2022 guidance;
- Anticipated Q4 2022 Adjusted
EBITDA(1)(3) expected to grow from the current consensus by more
than 80%;
- Expected to increase proved
reserves by over 80%(3), including proved developed reserves by
approximately 90%; and
- Expected to grow operating
footprint 56% to more than 100,000 net acres.
- Expected to materially grow
inventory of high rate-of-return projects
- Over 200 low-cost and low-risk
drilling locations;
- More than 200 identified low cost,
high rate-of-return recompletions in target rich, stacked pay
areas;
- Over 100 low-cost, low-risk step
out locations; and
- Additional potential opportunities
with contingent resource and exploration locations being
evaluated.
- Q4 2022 estimated pro forma
Company metrics(3)
- 18,000 - 19,000 barrels of oil
equivalent per day (“Boepd”) (~70% oil, 81% liquids);
- $82 - $86 million Adjusted EBITDA;
and
- $50 - $54 million capital
expenditures.
- Highly aligned management
team sharing a common vision for success
- Proven track record of execution
and strong returns; and
- Continued
commitment to ESG with focus on best practices and
sustainability.
STRONGHOLD ASSET HIGHLIGHTS
- High-quality, conventional,
Proved Developed Producing (“PDP”) asset base with high margins and
low decline rates
- Consists of approximately 37,000
net acres (31,000 leasehold and 6,000 mineral) that are
approximately 99% operated, 99% working interest, and 99% held by
production;
- High margin net ownership with
approximately 88% oil net revenue interest and 96% natural gas net
revenue interest primarily for all depths;
- Strong current net production of
approximately 9,100 Boepd (54% oil, 75% liquids)(4); and
- Expected to add long-life Proved
Developed (“PD”) reserves of 41.2 million barrels of oil equivalent
(“MMBoe”) and $719 million PV-10(1)(5), including PDP reserves of
24.8 MMBoe and $481 million PV-10.
- Premium de-risked inventory
in most active county in the CBP
- Expected to increase inventory by
approximately 500 new vertical drilling and recompletion locations
with short-cycle times and high rates of return; and
- Ongoing activity in Crane County
and around Stronghold’s position reinforces future inventory
additions and development opportunities.
- Attractive current cash
flow profile
- Projected asset level Adjusted
EBITDA of approximately $36 to $38 million for Q4 2022(3); and
- Low breakeven drilling economics of
approximately $20 to $25 per barrel of oil(3) and LOE of
approximately $8.25 to $8.75 per Boe(3).
- Significant asset
development flexibility and upside potential
- Opportunity for further development
in prolific stacked pay formations including waterflood potential;
and
- Material
operational improvements, synergies and efficiencies available for
Ring given established operations in the area(6).
Mr. Paul D. McKinney, Chairman of the Board and
Chief Executive Officer, commented, “We are excited to announce the
agreement to acquire Stronghold’s conventional asset base, which we
expect will further diversify our commodity mix and provide
increased optionality on multiple fronts upon closing. The
Transaction truly complements our existing footprint of
conventional-focused Central Basin Platform and Northwest Shelf
asset positions in the Permian Basin. We intend to leverage our
extensive expertise in applying the newest unconventional and
conventional technologies to optimally develop Stronghold’s deep
inventory of investment opportunities. We believe the Transaction
will provide for a material increase in our size and scale, and
more importantly, will be immediately accretive across all of the
key operational and financial metrics for Ring’s existing
stockholders. On closing, we expect to nearly double our
production, reserves and forecasted free cash flow with assets that
we know well. We also expect to capture meaningful synergies from
this acquisition.
“Once we complete the Transaction, we will have
materially increased our inventory of high rate-of-return drilling,
recompletion and workover projects, and fully expect to increase
our activity across our expanded footprint. The combination of
lower operating costs and a substantially expanded inventory of
high-margin, capital efficient development opportunities is
expected to increase free cash flow and our ability to rapidly pay
down debt. This will allow us to expand even further through
potential acquisitions or enhance stockholder returns through other
potential return of capital opportunities.”
OWNERSHIP, GOVERNANCE &
LEADERSHIP
Following the closing of the Transaction,
Stronghold’s owners will own approximately 34% of Ring and become
its largest stockholder. The closing of the Transaction is subject
to customary closing requirements, including satisfactory review of
title and environmental conditions.
The Transaction was approved by a unanimous vote
of Ring’s Board of Directors (the “Board”). Following the closing
of the Transaction, the Board will be expanded from seven to nine
directors to include two members proposed by Warburg Pincus. Ring’s
current senior management team will continue to lead the pro forma
Company.
CONFERENCE CALL &
PRESENTATION
Ring will hold a conference call today Tuesday,
July 5, 2022 at 11:00 AM ET to discuss the Transaction in more
detail. A related investor presentation will be posted to the
Company’s website prior to the conference call.
To participate in the conference call,
interested parties should dial 833-953-2433 at least five minutes
before the call is to begin. Please reference the “Ring Energy
Conference Call”. International callers may participate by dialing
412-317-5762. The call will also be webcast and available on Ring’s
website at www.ringenergy.com under “Investors” on the “News &
Events” page. An audio replay will also be available on the
Company’s website following the call.
Further details of the Transaction will be set
forth in the Company’s Current Report on Form 8-Ka, which will be
filed by Ring with the Securities and Exchange Commission (“SEC”)
and available for viewing under Ring’s profile at www.sec.gov or
under the “Investors” section of Ring’s website.
ADVISORS
Raymond James and Truist Securities acted as
financial advisors to Ring, and Piper Sandler & Co. acted as
financial advisor to Stronghold. Mizuho Securities provided a
fairness opinion to Ring’s Board. Jones & Keller, P.C. provided
legal counsel to Ring and Kirkland & Ellis LLP provided legal
counsel to Stronghold.
ABOUT RING ENERGY, INC.
Ring Energy, Inc. is an oil and gas exploration,
development, and production company with current operations focused
on the conventional development of its Permian Basin assets in West
Texas and New Mexico. For additional information, please visit
www.ringenergy.com.
SAFE HARBOR STATEMENT
This release contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. Forward-looking
statements involve a wide variety of risks and uncertainties, and
include, without limitation, the risk that the Transaction may not
close due to unforeseen circumstances and issues that may be
discovered in Ring’s review of the assets, the inability of Ring’s
lenders or Ring to complete the expected amendment to Ring’s
revolving credit facility, failure to achieve the expected benefits
of the Stronghold acquisition to Ring and its stockholders, the
anticipated completion of the acquisition or the timing thereof may
not meet management’s anticipated timing, the expected future
reserves, production financial position, business strategy,
revenues, earnings, costs levels of the combined company may not be
in line with management’s expectations , and plans and objectives
of management for future operations may be materially different
than planned. In addition, the ability to complete the Stronghold
acquisition on the anticipated terms and timetable may not
materialize and the ability to integrate the operations of the
combined entities successfully after the Stronghold acquisition and
achieve anticipated benefits from it may not occur in line with
expectations of Ring management. In addition, it is possible that
various closing conditions for the Stronghold acquisition may not
be satisfied or waived, and there are risks related to any
unforeseen liabilities of Ring or Stronghold, risks related to the
amounts of debt levels in periodic redeterminations of the
borrowing base under Ring’s credit agreement and risks involved in
amending the Ring credit agreement to increase the borrowing base
in order to complete the Stronghold acquisition. These statements
are also subject to certain risks and uncertainties that are
disclosed in the Company’s reports filed with the SEC, including
its Form 10-K for the fiscal year ended December 31, 2021, and its
other filings with the SEC. Readers and investors are cautioned
that the Company’s actual results may differ materially from those
described in the forward-looking statements due to a number of
factors, including, but not limited to, the Company’s ability to
acquire productive oil and/or gas properties or to successfully
drill and complete oil and/or gas wells on such properties, general
economic conditions both domestically and abroad, and the conduct
of business by the Company, and other factors that may be more
fully described in additional documents set forth by the
Company.
NON-GAAP INFORMATION
Certain financial information utilized by the
Company are not measures of financial performance recognized by
accounting principles generally accepted in the United States
(“GAAP”).
The Company defines Adjusted EBITDA as net
income (loss) plus net interest expense, unrealized loss (gain) on
change in fair value of derivatives, ceiling test impairment,
income tax (benefit) expense, depreciation, depletion and
amortization, asset retirement obligation accretion and share-based
compensation. Company management believes this presentation is
relevant and useful because it helps investors understand the
Company’s operating performance and makes it easier to compare its
results with those of other companies that have different
financing, capital and tax structures. Adjusted EBITDA should not
be considered in isolation from or as a substitute for net income,
as an indication of operating performance or cash flows from
operating activities or as a measure of liquidity. Adjusted EBITDA,
as the Company calculates it, may not be comparable to Adjusted
EBITDA measures reported by other companies. In addition, Adjusted
EBITDA does not represent funds available for discretionary
use.
The Company defines Free Cash Flow as Adjusted
EBITDA (defined above) less net interest expense (excluding
amortization of deferred financing cost), capital expenditures and
proceeds from divestiture of oil and natural gas properties. For
this purpose, the Company’s definition of capital expenditures
includes costs incurred related to oil and natural gas properties
(such as drilling and infrastructure costs and the lease
maintenance costs) and equipment, furniture and fixtures, but
excludes acquisition costs of oil and gas properties from third
parties that are not included in the Company’s capital expenditures
guidance provided to investors. Company management believes that
Free Cash Flow is an important financial performance measure for
use in evaluating the performance and efficiency of its current
operating activities after the impact of accrued capital
expenditures and net interest expense and without being impacted by
items such as changes associated with working capital, which can
vary substantially from one period to another. There is no commonly
accepted definition Free Cash Flow within the industry.
Accordingly, Free Cash Flow, as defined and calculated by the
Company, may not be comparable to Free Cash Flow or other similarly
named non-GAAP measures reported by other companies. While the
Company includes net interest expense in the calculation of Free
Cash Flow, other mandatory debt service requirements of future
payments of principal at maturity (if such debt is not refinanced)
are excluded from the calculation of Free Cash Flow. These and
other non-discretionary expenditures that are not deducted from
Free Cash Flow would reduce cash available for other uses.
PV-10 is a non-GAAP measure that differs from a
measure under GAAP known as “standardized measure of discounted
future net cash flows” in that PV-10 is calculated without
including future income taxes.
ADDITIONAL INFORMATION ABOUT THE
PROPOSED TRANSACTION
In connection with the proposed transaction,
Ring will file with the SEC a proxy statement that will include
important information about both Ring and Stronghold. Ring also
plans to file other relevant documents with the SEC regarding the
proposed transaction. Investors and security holders are urged to
carefully read the proxy statement and other relevant documents
Ring files with the SEC when they become available because they
will contain important information about Ring and the proposed
transaction. Investors and security holders may obtain these
documents when available free of charge at the SEC‘s website at
www.sec.gov. In addition, documents filed with the SEC by Ring can
be obtained free of charge from Ring’s website at
www.ringenergy.com or by contacting the Company by mail at 1725
Hughes Landing Boulevard, Suite 900, The Woodlands, Texas 77380, or
by telephone at 281-397-3699.
PARTICIPANTS IN
SOLICITATION
Ring and its executive officers and directors
may be deemed to be participants in the solicitation of proxies
from the stockholders of Ring with respect to the proposed
transaction. Information regarding the persons who may, under rules
of the SEC, be considered participants in the solicitation of the
stockholders of Ring in connection with the proposed transaction,
including the interests of such persons in the proposed
transaction, will be set forth in the definitive proxy statement of
Ring when it is filed with the SEC. You can find information
regarding the directors and the executive officers of Ring in its
definitive proxy statement for its 2022 annual meeting of
stockholders filed with the SEC on April 28, 2022.
This release shall not constitute an offer to
sell or the solicitation of any offer to buy securities, nor shall
there be any sale of securities in any a jurisdiction and which
such offer, solicitation or sale would be unlawful prior to
registration or qualification under the securities laws of any such
jurisdiction.
CONTACT INFORMATION
Al Petrie Advisors
Al Petrie, Senior Partner
Phone: 281-975-2146
Email: apetrie@ringenergy.com
FOOTNOTES
(1) Represents
a non-GAAP financial measure that should not be considered a
substitute for any GAAP measure. See section in this release titled
“Non-GAAP Information” for a more detailed discussion.
(2) Defined
as total debt divided by trailing twelve months (“TTM”) Adjusted
EBITDA.
(3) Based
on NYMEX strip pricing as of June 21, 2022. Expected impact on
Ring’s guidance is dependent upon the timing of closing,
anticipated capital spending levels, and market conditions. Updated
guidance will be provided after closing.
(4) Net
daily production for June 2022.
(5) Proved
reserves determined by CGA mid-year 2022 based on NYMEX strip
pricing as of June 21, 2022. PV-10 is a non-GAAP measure that
differs from a measure under GAAP known as “standardized measure of
discounted future net cash flows” in that PV-10 is calculated
without including future income taxes.
(6) Based
on Ring management estimates as of June 30, 2022 and NYMEX strip
pricing as of June 21, 2022.
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