Ring Energy, Inc. (NYSE American: REI) (“Ring” or the “Company”)
today announced it has entered into an agreement to acquire the
Central Basin Platform (“CBP”) assets of Founders Oil & Gas IV,
LLC (“Founders”) for $75 million in cash (the “Transaction”).
Founders’ CBP operations are located in the Permian Basin in Ector
County, Texas and are focused on the development of approximately
3,600 net acres that are similar to Ring’s CBP assets acquired in
2022 from Stronghold Energy Operating II, LLC and its affiliate
(“Stronghold”).
Total consideration of $75 million, subject to
customary closing adjustments, consists of $60 million in cash at
closing and $15 million deferred cash payment due four months after
closing. The Transaction will be funded with cash on hand and
borrowings under Ring’s recently reaffirmed senior revolving credit
facility.
TRANSACTION HIGHLIGHTS
- Immediately
accretive to Ring’s shareholders, including production, reserves,
Adjusted Free Cash Flow(1) and other key metrics;
- Total
consideration is approximately 2.3x the assets’ next twelve months’
(“NTM”) Adjusted EBITDA(1) beginning April 1, 2023;
- Strengthens
balance sheet by lowering the Company’s leverage ratio(2) and
accelerates Ring’s ability to pay down debt;
- Further
increases inventory of low-risk, high rate-of-return drilling
locations and improves capital allocation flexibility;
- Strategically
expands core operating area capturing operating and G&A cost
synergies; and
- The Transaction
is expected to close in the third quarter of 2023 with an effective
date of April 1, 2023.
ASSET HIGHLIGHTS
- Second quarter
2023 production was approximately 2,500 net barrels of oil
equivalent per day (“Boe/d”) (86% oil);
- Margin enhancing
ownership with approximately 99% working interest and high net
revenue interest of approximately 87%;
- Total Proved SEC year-end 2022
reserves as calculated by Ring management of 9.2 million barrels of
oil equivalent (“MMBoe”) (80% oil), characterized by shallow
declines and long lives;
- Low-risk
inventory provides significant economic returns with potential
upside from targeted downspacing, including approximately 50
low-cost, high rate-of-return undeveloped drilling locations;
and
- Existing
infrastructure provides takeaway capacity and opportunities to
reduce costs and improve efficiencies.
Mr. Paul D. McKinney, Chairman of the Board and
Chief Executive Officer, commented, “We are pleased to announce our
agreement to acquire Founders’ conventional oil and gas assets in
Ector County, Texas. These assets strategically expand our existing
operations in the southern portion of the Central Basin Platform
allowing us to capture operating cost and G&A synergies
associated with a larger core operating area. These assets are
similar to the Stronghold assets acquired last year, having stacked
pay zones of high-quality rock with proven performance. Like the
Stronghold assets, we intend to leverage our extensive expertise
applying the newest conventional and unconventional technologies to
optimally develop the inventory of undeveloped drilling locations
afforded by the Transaction.”
Mr. McKinney concluded, “Today’s announcement is
another example of creating value for our shareholders through our
value focused proven strategy. This acquisition not only increases
our production, but it also allows us to reduce our expected
capital spending for the second half of 2023 thereby giving us the
ability to further pay down our debt. In addition, it expands our
proved reserves while lowering our leverage ratio. We look forward
to quickly integrating the assets into our operations and further
developing the inventory of drilling locations. In short, we view
this transaction as another step in gaining greater size and scale
and positioning the Company to deliver on our long-term goals for
our shareholders.”
PRO FORMA THIRD AND FOURTH QUARTER 2023
SALES VOLUMES, CAPITAL INVESTMENT AND OPERATING EXPENSE
GUIDANCE
Ring has provided pro forma third and fourth
quarter of 2023 guidance to reflect the pending Transaction. In
addition, the guidance includes the impact of the recently
completed sale of its Delaware Basin assets during the second
quarter of 2023.
Ring is targeting total pro forma capital
spending of $67 million to $77 million in the second half of 2023.
The development program includes a balanced and capital efficient
combination of drilling horizontal (“Hz”) wells on the Company’s
legacy acreage and vertical wells on the acquired Stronghold and
Founders’ acreage, as well as performing recompletions.
Additionally, the capital spending program includes funds for
targeted capital workovers, infrastructure upgrades, leasing costs,
and non-operated drilling, completion, and capital workovers.
All projects and estimates are based on assumed
WTI oil prices of $65 to $85 per barrel. As in the past, Ring has
designed its spending program with flexibility to respond to
changes in commodity prices and other market conditions as
appropriate.
Based on the $72 million mid-point of collective
spending guidance for the second half of 2023, the Company expects
the following estimated allocation of capital investment:
-
73% for drilling, completion, and related infrastructure;
-
19% for recompletions and capital workovers; and
-
8% for land, environmental and safety, and non-operated
capital.
The Company remains squarely focused on
continuing to generate Adjusted Free Cash Flow. All second half
2023 planned capital expenditures are expected to be fully funded
by cash on hand and cash from operations, with excess Adjusted Free
Cash Flow currently targeted for further debt reduction.
The pro forma guidance in the table below
represents the Company's current good faith estimate of the range
of likely results assuming a closing date for the Transaction of
August 15, 2023, and also reflects the previously announced and
completed divestiture of Ring’s Delaware Basin assets. Guidance
could be affected by the factors discussed below in the "Safe
Harbor Statement" section.
|
|
PRO FORMA(1) |
|
|
Q3 2023 |
|
Q4 2023 |
|
|
|
|
|
Sales
Volumes: |
|
|
|
|
Total (Boe/d) |
|
18,100-18,600 |
|
18,900-19,500 |
Mid Point (Boe/d) |
|
18,350 |
|
19,200 |
Oil (%) |
|
68% |
|
69% |
NGLs (%) |
|
15% |
|
15% |
Gas (%) |
|
17% |
|
16% |
|
|
|
|
|
Capital
Program: |
|
|
|
|
Capital spending(2) (millions) |
|
$37-$42 |
|
$30-$35 |
|
|
|
|
|
Hz wells drilled |
|
5 - 7 |
|
3 - 4 |
Vertical wells drilled |
|
1 - 2 |
|
3 - 4 |
Wells completed and online |
|
5 - 6 |
|
7 - 8 |
|
|
|
|
|
Operating
Expenses: |
|
|
|
|
LOE (per Boe) |
|
$10.50-$11.00 |
|
$10.50-$11.00 |
|
|
|
|
|
(1) In addition to the Transaction, the
guidance reflects the impact of Ring’s recent sale of its Delaware
Basin assets in the second quarter of 2023.(2) In addition to
Company-directed drilling and completion activities, the capital
spending outlook includes funds for targeted well reactivations,
capital workovers, and infrastructure upgrades. Also included is
anticipated spending for leasing costs, and non-operated drilling,
completion, and capital workovers.
ADDITIONAL INFORMATION
Ring will provide additional information
concerning the Transaction in a presentation that will be posted to
its website at www.ringenergy.com under the “News, Events and
Presentations” section prior to market open on Wednesday, July 12,
2023.
ADVISORS
Raymond James acted as exclusive financial
advisor and Jones & Keller, P.C. provided legal counsel to
Ring. TenOaks Energy Advisors served as exclusive financial and
technical advisor and O’Melveny & Myers LLP provided legal
counsel to Founders.
ABOUT RING ENERGY, INC.
Ring Energy, Inc. is an oil and gas exploration,
development, and production company with current operations focused
on the development of its Permian Basin assets. 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, statements with respect to the
Company’s strategy and prospects. The forward-looking statements
include statements about the expected benefits of the Transaction
to Ring and its stockholders, the anticipated completion of the
Transaction or the timing thereof, the expected future reserves,
production, financial position, business strategy, revenues,
earnings, costs, capital expenditures and debt levels of the
Company, and plans and objectives of management for future
operations. Forward-looking statements are based on current
expectations and assumptions and analyses made by Ring and its
management in light of their experience and perception of
historical trends, current conditions and expected future
developments, as well as other factors appropriate under the
circumstances. However, whether actual results and developments
will conform to expectations is subject to a number of material
risks and uncertainties, including but not limited to: the ability
to complete the Transaction on anticipated terms and timetable;
Ring’s ability to integrate its combined operations successfully
after the Transaction and achieve anticipated benefits from it; the
possibility that various closing conditions for the Transaction may
not be satisfied or waived; risks relating to any unforeseen
liabilities of Ring or Founders; declines in oil, natural gas
liquids or natural gas prices; the level of success in exploration,
development and production activities; adverse weather conditions
that may negatively impact development or production activities;
the timing of exploration and development expenditures;
inaccuracies of reserve estimates or assumptions underlying them;
revisions to reserve estimates as a result of changes in commodity
prices; impacts to financial statements as a result of impairment
write-downs; risks related to level of indebtedness and periodic
redeterminations of the borrowing base and interest rates under
Ring’s credit facility; Ring’s ability to generate sufficient cash
flows from operations to meet the internally funded portion of its
capital expenditures budget; the impacts of hedging on results of
operations; and Ring’s ability to replace oil and natural gas
reserves. Such statements are subject to certain risks and
uncertainties which are disclosed in the Company’s reports filed
with the SEC, including its Form 10-K for the fiscal year ended
December 31, 2022, and its other filings. Ring undertakes no
obligation to revise or update publicly any forward-looking
statements except as required by law.
CONTACT INFORMATION
Al Petrie AdvisorsAl Petrie, Senior PartnerPhone:
281-975-2146Email: apetrie@ringenergy.com
FOOTNOTES
(1) Non-GAAP Information. Certain financial
terms included in this release are not measures of financial
performance recognized by accounting principles generally accepted
in the United States, or GAAP. These non-GAAP financial measures
are “NTM Adjusted EBITDA” and “Adjusted Free Cash Flow.” These
disclosures may not be viewed as a substitute for financial
performance determined in accordance with GAAP and are not
necessarily comparable to non-GAAP performance measures which may
be reported by other companies. Non-GAAP financial measures should
not be considered a substitute for any GAAP measure. Note, however,
that to the extent forward-looking non-GAAP financial measures are
provided herein, they are not reconciled to comparable
forward-looking GAAP measures due to the inherent difficulty in
forecasting and quantifying certain amounts that are necessary for
such reconciliation.
- We define
Adjusted Free Cash Flow as our net cash provided by operating
activities less changes in operating assets and liabilities (as
reflected on our statements of cash flows); capital expenditures;
and bad debt expense; and adding back transaction costs for
executed acquisitions and divestitures; current tax expense
(benefit); proceeds from divestitures of oil and natural gas
properties; and excess tax (expense) benefit related to share-based
compensation. For this purpose, our 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 our capital expenditures guidance
provided to investors. Our management believes that Adjusted Free
Cash Flow is an important financial performance measure for use in
evaluating the performance and efficiency of our 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. Other companies may use
different definitions of Adjusted Free Cash Flow.
- The NTM Adjusted
EBITDA calculations were prepared solely by Ring Management. The
calculations use NYMEX strip pricing as of July 7, 2023 for the
period beginning April 1, 2023, including pricing for second
quarter 2023 of $73.76 per barrel of crude oil and $2.16 per Mcf of
natural gas, third quarter 2023 of $72.88 per barrel and $2.52 per
Mcf, fourth quarter 2023 of $73.05 per barrel and $3.08 per Mcf,
and first quarter of 2024 $71.88 per barrel and $3.62 per Mcf. We
define NTM Adjusted EBITDA as the assets’ net income (loss), as
applicable, 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, and asset retirement obligation accretion over the
stated 12-month period. Company management believes this
presentation is relevant and useful because it will help investors
compare the purchase price as it relates to anticipated operating
performance. NTM Adjusted EBITDA should not be considered in
isolation from or as a substitute for net income, as an indication
of cash flows from operating activities, or as a measure of
liquidity. NTM Adjusted EBITDA, as Ring calculates it, may not be
comparable to similar measures calculated or reported by other
companies. In addition, NTM Adjusted EBITDA does not represent
funds available for discretionary use.
(2) “Leverage Ratio” is calculated under our
existing senior revolving credit facility and means as of any date,
the ratio of (i) our Consolidated total debt as of such date to
(ii) our Consolidated EBITDAX for the four consecutive fiscal
quarters ending on or immediately prior to such date for which
financial statements are required to have been delivered under our
existing senior revolving credit facility; provided that for the
purposes of the definition of ‘Leverage Ratio’, (a) for the fiscal
quarter ended September 30, 2022, Consolidated EBITDAX is
calculated by multiplying Consolidated EBITDAX for such fiscal
quarter by four, (b) for the fiscal quarter ended December 31,
2022, Consolidated EBITDAX is calculated by multiplying
Consolidated EBITDAX for the two fiscal quarter period ended on
December 31, 2022 by two, (c) for the Fiscal Quarter ended March
31, 2023, Consolidated EBITDAX is calculated by multiplying
Consolidated EBITDAX for the three fiscal quarter period ended on
March 31, 2023 by four-thirds, and (d) for each fiscal quarter
thereafter, Consolidated EBITDAX will be calculated by adding
Consolidated EBITDAX for the four consecutive Fiscal Quarters
ending on such date.
We define “Consolidated EBITDAX” in accordance
with our existing senior revolving credit facility and it means for
any period an amount equal to the sum of (i) consolidated net
income for such period plus (ii) to the extent deducted in
determining consolidated net income for such period, and without
duplication, (A) consolidated interest expense, (B) income tax
expense determined on a consolidated basis in accordance with GAAP,
(C) depreciation, depletion and amortization determined on a
consolidated basis in accordance with GAAP, (D) exploration
expenses determined on a consolidated basis in accordance with
GAAP, and (E) all other non-cash charges acceptable to our senior
revolving credit facility Administrative Agent determined on a
consolidated basis in accordance with GAAP, in each case for such
period minus (iii) all noncash income added to consolidated net
income for such period; provided that, for purposes of calculating
compliance with the financial covenants set forth in our senior
revolving credit facility, to the extent that during such period we
shall have consummated an acquisition permitted by the senior
revolving credit facility or any sale, transfer or other
disposition of any person, business, property or assets permitted
by the senior revolving credit facility, Consolidated EBITDAX will
be calculated on a pro forma basis with respect to such person,
business, property or assets so acquired or disposed of.
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