Ring Energy: faster debt reduction expected in 2023 (NYSE: REI)

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Energy Ring (NYSE: REI) continues to reduce its debt by repaying its $10 million credit facility during the first quarter of 2022. Further debt reduction in 2022 may be slower as its capital expenditures increase over the course of the rest of the year, while its hedges are expected to be negative $66 million at present value.

With no hedges in place yet for 2023, Ring should be able to pay off its debt faster next year. Having less debt will also give Ring more leeway to do things like potentially add another platform.

Q1 2022 results

Ring reported strong results for the first quarter of 2022, with production of 8,870 BOEPD (85% oil) beating its indicative range of 8,500-8,700 BOEPD (also 85% oil). Ring has yet to change its full-year production guidance, but the strong start to the year should bode well for it to hit at least the top half of its full-year production guidance range. complete.

While production looks good, inflationary cost pressures may end up offsetting the effect of stronger production. Ring has yet to change its full-year cost guidance, but cost inflation is something to watch.

Ring repaid its $10 million credit facility debt in the first quarter of 2022, but may not be able to repay debt as quickly through the rest of the year despite expectations of higher production levels and oil prices. Ring’s investments were $19.7 million for the first quarter of 2022, but it expects investments to average around $37 million per quarter for the remainder of 2022.

Hedges

Ring Energy’s hedges continue to negatively affect its near-term results, with a projection that it will end up with $66 million in realized hedge losses in 2022 at current strip prices. However, Ring is significantly less covered in 2022 than in 2021 and currently has no coverage for 2023.

Ring reorganized some of its hedging in June 2021 to improve its 2021 cash flow, but it appears that move backfired. Ring improved its 2021 cash flow by $6 million by repurchasing call options, but added 2022 swaps which now have a negative estimated value of $16 million (at the current strip).

If Ring had less debt, it probably could have simply bought back the 2021 call options without adding any 2022 swaps to make it a net zero cost trade.

Potential outlook for 2022 at current band

Ring maintained its guidance of approximately 9,300 BOEPD (87% oil) in average production in 2022. At the current band of $99 WTI oil, it is expected to generate $314 million in oil and gas revenue, while its hedges have an estimated negative value of $66 million. value.

Barrels/Mcf $ per barrel/Mcf (realized) millions of dollars
Oil 2,947,375 $97.50 $287
Natural gas 3,558,750 $7.50 $27
Coverage value -$66
Total revenue $248

Ring is now expected to generate $30 million of positive cash flow in 2022, which would reduce its net debt to approximately $258 million by the end of 2022. This assumes Ring’s costs remain unchanged from forecast, although he noted some inflationary pressure.

millions of dollars
Production expenses $45
Taxes on production and ad valorem $17
G&A in cash $14
Capital expenditure $130
Cash interest expense $12
Total cash expenditure $218

Ring should be able to pay off its debt at a faster pace next year, as it currently has no 2023 coverage and any coverage it adds is expected to be at a much higher average price than its 2023 coverage. 2022.

There was no update on the sale process for the Delaware Basin assets, but even if that asset is sold, it likely won’t have a major impact on Ring’s balance sheet.

Ring is unlikely to add a second rig just yet due to its debt situation, although payback times would be quick at $100 oil.

Conclusion

Ring Energy posted strong results in the first quarter of 2022, but its hedges will prevent it from rapidly reducing debt this year. Ring should be able to make more progress on its debt reduction in 2023 due to its current lack of hedges for next year.

Ring looks reasonably priced for a long term scenario of low to mid $70 WTI oil at the moment. Ring is constrained by its relatively high debt load (compared to other upstream companies) and its need to reduce that debt. Ring’s debt situation has forced it to hedge much of its production and also prevents it from adding another platform at this time. As her debt situation improves, she should have more freedom.