Simon Skavar
Ring Energy Company (New York Stock Exchange:Re) announced sales volumes for the first quarter of 2024 that were above expectations, although it did not change its guidance range for the full year. Given the relatively strong first quarter results, I now assume that Ring’s oil sales volumes will do just that However, it will end up about 1.5% above the midpoint of its full-year guidance.
Despite the increase in oil volumes, Ring’s projected free cash flow for 2024 is expected to be slightly lower than it was when I last looked at it. This is mostly due to a decline in 2024 oil sector prices of about $5 (partially offset by changes in the value of Ring’s hedges). I now expect Ring to generate $55 million in 2024 in free cash flow.
The decline in free cash flow (and the associated incremental increase in leverage) leads me to lower Ring’s valuation to $2.50 per share right now. That still leaves a lot out Up at its current price.
Results for the first quarter of 2024
Ring ended up selling 19,034 barrels of oil per day during the first quarter of 2024, which was 3% above the high end of its guidance for the quarter. Ring’s production cut ended by 70% instead of the 69% that was expected. This resulted in oil sales of 13,394 barrels per day during the quarter, 5% above the high end of its guidance. Ring noted that downtime was lower than expected during the quarter, which helped increase trading volumes.
Higher production/sales volume levels brought Ring’s lease operating expenses to $10.60 per BOE, below its guidance of $10.75 to $11.25 per BOE during the quarter.
Overall, this was a positive quarter for Ring, as it also spent slightly less than its capex budget.
Natural gas pricing
For the second straight quarter (and the third of the last four), Ring achieved negative prices for its natural gas. In the first quarter of 2024, Ring achieved negative $0.55 per cubic foot for natural gas, which it noted was $2.57 lower than NYSE futures prices for the quarter.
Ring could achieve negative one or worse for its natural gas in the second quarter of 2024, as Permian natural gas prices were particularly weak this quarter. Ring reports cites gathering, transportation and processing costs as a discount to realized natural gas prices, which contributes to Ring’s often large natural gas spreads.
Although Ring’s natural gas revenues were negative $0.8 million in the first quarter of 2024, Ring noted that wellhead gas still contributes positively to revenues generated from natural gas liquids. Ring reported $3 million in Q1 2024 revenue from NGLs and generated $4.29 per BOE for total NGL and natural gas.
Due to lower natural gas prices, Ring has focused on oil development opportunities, which it expects to keep its oil ratio at 70+%.
2024 forecast update
It has decided to increase Ring’s expected 2024 sales volume to 18,700 barrels of oil per day (including 13,150 barrels per day of oil sales volume). This is approximately 1% above the guidance midpoint for total sales volumes and 1.5% above the guidance midpoint for oil sales volumes.
Although Ring did not change its full-year sales volume guidance, its relatively strong results for the first quarter of 2024 suggest it will likely finish above the full-year guidance midpoint. If Ring’s Q2 2024 sales volumes are at the guidance midpoint, it would need to sell about 18,500 barrels of oil per day (including 13,000 barrels per day of oil sales volumes) during the second half of 2024 to reach my updated numbers. This would allow volumes to fall by approximately 1.5% in the second half of 2024 compared to the second quarter of 2024.
2024 WTI oil sector prices are now around $76 to $77. At that price, Ring is now expected to generate revenue of $366 million, including a negative hedge value of $7 million.
Ring’s 2024 realized natural gas price is expected to be slightly negative before the hedges, but the natural gas hedges have approximately $3 million of positive expected value.
| barrel/mkv | $ per barrel/mkv (investigated) | Million dollars | |
| oil | 4,812,900 | $75.50 | $363 |
| liquefied natural gas | 1,035,963 | $11.00 | $11 |
| natural gas | 5,972,022 | -$0.20 | -$1 |
| Hedging value | – $7 | ||
| Total revenue | $366 |
This results in a forecast of free cash flow of $55 million for Ring in 2024, which will reduce its net debt to approximately $370 million at the end of 2024 without any changes to other working capital items.
| Million dollars | |
| Production expenses | $74 |
| Production and ad valorem taxes | $25 |
| General and administrative cash | $22 |
| Capital expenditures | $155 |
| Cash interest expense | $35 |
| Total cash expenditure | $311 |
Ring’s leverage will be 1.5x at the end of 2024 based on sector pricing, which seems manageable, but still a bit higher than ideal.
Notes about evaluation
I currently value Ring at $2.50 per share with a long-term $75 WTI price. This is about 10 cents lower than my previous valuation for Ring, reflecting lower free cash flow expectations as well as some risks related to leverage.
I’m also relatively conservative on Ring’s sales volume assuming the rest of the year is in line with initial expectations. If Ring’s better-than-expected volumes from Q1 2024 carry over into future quarters, that would boost Ring’s estimated value.
Conclusion
Ring Energy, Inc.’s results were The first quarter of 2024 was positive as it exceeded its sales volume guidance. It is also focusing on its oil assets due to weak natural gas prices. Oil makes up about 70% of Ring’s sales volume but is expected to provide about 97% of its 2024 revenue.
With oil prices (CL1:COM) falling into the 70s, Ring is now expected to generate about $55 million in free cash flow through 2024. That would reduce its net debt to $370 million by the end of 2024 if it doesn’t. No more acquisitions.
Ring’s leverage is on the higher side for oil producers, so I now value it at about $2.50 per share. I would likely increase this valuation if it continues to deliver higher-than-expected sales volumes or if it accelerates its progress in reducing leverage.
