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United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2023
o Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from ______ to ______
Commission file number 001-36057
Ring Energy, Inc.
(Exact name of registrant as specified in its charter)
| | | | | |
Nevada | 90-0406406 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| |
1725 Hughes Landing Blvd., Suite 900 The Woodlands, TX | 77380 |
(Address of principal executive offices) | (Zip Code) |
| |
(281) 397-3699 | |
(Registrant’s telephone number, including area code) | |
Securities registered under Section 12(b) of the Exchange Act:
| | | | | | | | |
Title of Each Class | Trading Symbol | Name of Each Exchange on Which Registered |
Common Stock, par value $0.001 | REI | NYSE American |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | | | | |
Large accelerated filer | o | | Accelerated filer | x |
Non-accelerated filer | o | (Do not check if a smaller reporting company) | Smaller reporting company | o |
Emerging growth company | o | | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is shell company (as defined in Rule 12b-2 of the Act). Yes o No x
As of November 2, 2023, the registrant had outstanding 195,630,301 shares of common stock ($0.001 par value).
TABLE OF CONTENTS
Forward Looking Statements
This Quarterly Report on Form 10-Q (herein, “Quarterly Report”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements, other than statements of historical fact included in this Quarterly Report regarding our strategy, future operations, financial position, estimated revenues and expenses, projected costs, prospects, plans and objectives of management are forward-looking statements. When used in this Quarterly Report, the words “may,” “will,” “could,” “would,” “should,” “believe,” “anticipate,” “intend,” “estimate,” “expect,” “plan,” “pursue,” “target,” “continue,” “potential,” “guidance,” “project” or other similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. All forward-looking statements speak only as of the date of this Quarterly Report. Although we believe that our plans, intentions and expectations reflected in or suggested by the forward-looking statements we make in this Quarterly Report are reasonable, we can give no assurance that these plans, intentions or expectations will be achieved. We are making investors aware that such forward-looking statements, because they relate to future events, are by their very nature subject to many important factors that could cause actual results to differ materially from those contemplated. Such factors include:
•declines or volatility in the prices we receive for our oil and natural gas;
•our ability to raise additional capital to fund future capital expenditures;
•our ability to generate sufficient cash flow from operations, borrowings or other sources to enable us to fully develop and produce our oil and natural gas properties;
•general economic conditions, whether internationally, nationally or in the regional and local market areas in which we do business;
•risks associated with drilling, including completion risks, cost overruns, mechanical failures and the drilling of non-economic wells or dry holes;
•uncertainties associated with estimates of proved oil and natural gas reserves;
•the presence or recoverability of estimated oil and natural gas reserves and the actual future production rates and associated costs;
•the effects of inflation on our cost structure;
•substantial declines in the estimated values of our proved oil and natural gas reserves;
•our ability to replace our oil and natural gas reserves;
•the effects of rising interest rates on our cost of capital and the actions that central banks around the world undertake to control inflation, including the impacts such actions have on general economic conditions;
•unanticipated reductions in the borrowing base under the credit agreement we are party to;
•the potential for production decline rates and associated production costs for our wells to be greater than we forecast;
•risks and liabilities associated with acquired companies and properties;
•risks related to integration of acquired companies and properties;
•cost and availability of drilling rigs, equipment, supplies, personnel and oilfield services;
•geological concentration of our reserves;
•the timing and extent of our success in acquiring, discovering, developing and producing oil and natural gas reserves;
•the possibility that acquisitions and divestitures may involve unexpected costs or delays, and that acquisitions may not achieve intended benefits;
•our dependence on the availability, use and disposal of water in our drilling, completion and production operations;
•significant competition for oil and natural gas acreage and acquisitions;
•environmental or other governmental regulations, including legislation related to hydraulic fracture stimulation and climate change measures;
•our ability to secure firm transportation for oil and natural gas we produce and to sell the oil and natural gas at market prices;
•future environmental, social and governance ("ESG") compliance developments and increased attention to such matters which could adversely affect our ability to raise equity and debt capital;
•management’s ability to execute our plans to meet our goals;
•the occurrence of cybersecurity incidents, attacks or other breaches to our information technology systems or on
systems and infrastructure used by the oil and gas industry;
•our ability to find and retain highly skilled personnel and our ability to retain key members of our management team on commercially reasonable terms;
•adverse weather conditions;
•costs and liabilities associated with environmental, health and safety laws;
•the effect of our oil and natural gas derivative activities;
•social unrest, political instability or armed conflict in major oil and natural gas producing regions outside the United States, including evolving geopolitical and military hostilities in the Middle East, Russia and Ukraine and acts of terrorism or sabotage;
•our insurance coverage may not adequately cover all losses that may be sustained in connection with our business activities;
•possible adverse results from litigation and the use of financial resources to defend ourselves; and
•the other factors discussed in Part I, Item 1A-- “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022, as well as in our condensed financial statements, related notes, and the other financial information appearing elsewhere in this Quarterly Report and our other reports filed from time to time with the Securities and Exchange Commission (the “SEC”).
Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date that such statements are made. We undertake no obligation to publicly update or revise any forward-looking statements after the date they are made, whether as a result of new information, future events or otherwise.
Unless the context otherwise requires, references in this Quarterly Report to “Ring,” “Ring Energy,” the “Company,” “we,” “us,” “our” or “ours” refer to Ring Energy, Inc.
PART I — FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
The following (a) condensed balance sheet as of December 31, 2022 which has been derived from our audited financial statements, and (b) the unaudited condensed financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Accordingly, certain disclosures by accounting principles generally accepted in the United States ("GAAP") and normally included in Annual Reports on Form 10-K have been omitted. Although management believes that our disclosures are adequate to make the information presented not misleading, these unaudited interim condensed financial statements should be read in conjunction with the Company's audited financial statements and related notes included in its most recent Annual Report on Form 10-K.
RING ENERGY, INC.
CONDENSED BALANCE SHEETS
(Unaudited)
| | | | | | | | | | | | | | |
| | September 30, 2023 | | December 31, 2022 |
ASSETS | | | | |
Current Assets | | | | |
Cash and cash equivalents | | $ | 138,581 | | | $ | 3,712,526 | |
Accounts receivable | | 45,756,047 | | | 42,448,719 | |
Joint interest billing receivables, net | | 3,306,125 | | | 983,802 | |
Derivative assets | | 1,845,133 | | | 4,669,162 | |
Inventory | | 5,548,835 | | | 9,250,717 | |
Prepaid expenses and other assets | | 2,033,013 | | | 2,101,538 | |
Total Current Assets | | 58,627,734 | | | 63,166,464 | |
Properties and Equipment | | | | |
Oil and natural gas properties, full cost method | | 1,628,230,243 | | | 1,463,838,595 | |
Financing lease asset subject to depreciation | | 3,306,372 | | | 3,019,476 | |
Fixed assets subject to depreciation | | 2,946,274 | | | 3,147,125 | |
Total Properties and Equipment | | 1,634,482,889 | | | 1,470,005,196 | |
Accumulated depreciation, depletion and amortization | | (353,111,293) | | | (289,935,259) | |
Net Properties and Equipment | | 1,281,371,596 | | | 1,180,069,937 | |
Operating lease asset | | 2,644,519 | | | 1,735,013 | |
Derivative assets | | 6,465,355 | | | 6,129,410 | |
Deferred financing costs | | 14,199,738 | | | 17,898,973 | |
Total Assets | | $ | 1,363,308,942 | | | $ | 1,268,999,797 | |
| | | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | |
Current Liabilities | | | | |
Accounts payable | | $ | 110,392,713 | | | $ | 111,398,268 | |
Income tax liability | | 264,261 | | | — | |
Financing lease liability | | 806,993 | | | 709,653 | |
Operating lease liability | | 503,420 | | | 398,362 | |
Derivative liabilities | | 23,906,800 | | | 13,345,619 | |
Notes payable | | 950,068 | | | 499,880 | |
Deferred cash payment | | 14,783,879 | | | 14,807,276 | |
Asset retirement obligations | | 279,681 | | | 635,843 | |
Total Current Liabilities | | 151,887,815 | | | 141,794,901 | |
| | | | |
Non-current Liabilities | | | | |
| | | | |
Deferred income taxes | | 497,067 | | | 8,499,016 | |
Revolving line of credit | | 428,000,000 | | | 415,000,000 | |
Financing lease liability, less current portion | | 690,456 | | | 1,052,479 | |
Operating lease liability, less current portion | | 2,207,248 | | | 1,473,897 | |
Derivative liabilities | | 18,089,847 | | | 10,485,650 | |
Asset retirement obligations | | 28,482,982 | | | 29,590,463 | |
Total Liabilities | | 629,855,415 | | | 607,896,406 | |
Commitments and contingencies | | | | |
Stockholders' Equity | | | | |
Preferred stock - $0.001 par value; 50,000,000 shares authorized; no shares issued or outstanding | | — | | | — | |
Common stock - $0.001 par value; 450,000,000 shares authorized; 195,380,527 shares and 175,530,212 shares issued and outstanding, respectively | | 195,380 | | | 175,530 | |
Additional paid-in capital | | 793,603,238 | | | 775,241,114 | |
Accumulated deficit | | (60,345,091) | | | (114,313,253) | |
Total Stockholders’ Equity | | 733,453,527 | | | 661,103,391 | |
Total Liabilities and Stockholders' Equity | | $ | 1,363,308,942 | | | $ | 1,268,999,797 | |
The accompanying notes are an integral part of these unaudited condensed financial statements.
RING ENERGY, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended | | For the Nine Months Ended |
| | September 30, 2023 | | September 30, 2022 | | September 30, 2023 | | September 30, 2022 |
| | | | | | | | |
Oil, Natural Gas, and Natural Gas Liquids Revenues | | $ | 93,681,798 | | | $ | 94,408,948 | | | $ | 261,113,283 | | | $ | 247,551,855 | |
| | | | | | | | |
Costs and Operating Expenses | | | | | | | | |
Lease operating expenses | | 18,015,348 | | | 13,029,098 | | | 51,426,145 | | | 30,283,706 | |
Gathering, transportation and processing costs | | (4,530) | | | — | | | (6,985) | | | 1,846,247 | |
Ad valorem taxes | | 1,779,163 | | | 1,199,385 | | | 5,120,119 | | | 3,100,578 | |
Oil and natural gas production taxes | | 4,753,289 | | | 4,563,519 | | | 13,173,568 | | | 11,939,338 | |
Depreciation, depletion and amortization | | 21,989,034 | | | 14,324,502 | | | 64,053,637 | | | 34,854,993 | |
Asset retirement obligation accretion | | 354,175 | | | 243,140 | | | 1,073,900 | | | 617,685 | |
Operating lease expense | | 138,220 | | | 83,590 | | | 366,711 | | | 250,770 | |
General and administrative expense | | 7,083,574 | | | 7,393,848 | | | 21,023,956 | | | 18,748,427 | |
| | | | | | | | |
Total Costs and Operating Expenses | | 54,108,273 | | | 40,837,082 | | | 156,231,051 | | | 101,641,744 | |
| | | | | | | | |
Income from Operations | | 39,573,525 | | | 53,571,866 | | | 104,882,232 | | | 145,910,111 | |
| | | | | | | | |
Other Income (Expense) | | | | | | | | |
Interest income | | 80,426 | | | 4 | | | 160,171 | | | 4 | |
Interest (expense) | | (11,381,754) | | | (7,021,385) | | | (32,322,840) | | | (13,699,045) | |
Gain (loss) on derivative contracts | | (39,222,755) | | | 32,851,189 | | | (26,483,190) | | | (2,201,970) | |
Gain (loss) on disposal of assets | | — | | | — | | | (132,109) | | | — | |
Other income | | — | | | — | | | 126,210 | | | — | |
Net Other Income (Expense) | | (50,524,083) | | | 25,829,808 | | | (58,651,758) | | | (15,901,011) | |
| | | | | | | | |
Income (Loss) Before Benefit from (Provision for) Income Taxes | | (10,950,558) | | | 79,401,674 | | | 46,230,474 | | | 130,009,100 | |
| | | | | | | | |
Benefit from (Provision for) Income Taxes | | 3,411,336 | | | (4,315,783) | | | 7,737,688 | | | (5,866,744) | |
Net Income (Loss) | | $ | (7,539,222) | | | $ | 75,085,891 | | | $ | 53,968,162 | | | $ | 124,142,356 | |
| | | | | | | | |
Basic Earnings (Loss) per Share | | $ | (0.04) | | | $ | 0.65 | | | $ | 0.29 | | | $ | 1.16 | |
Diluted Earnings (Loss) per Share | | $ | (0.04) | | | $ | 0.49 | | | $ | 0.28 | | | $ | 0.92 | |
The accompanying notes are an integral part of these unaudited condensed financial statements.
RING ENERGY, INC.
CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional Paid-in Capital | | Retained Earnings (Accumulated Deficit) | | Total Stockholders' Equity |
For the Nine Months Ended September 30, 2023 | | Shares | | Amount | | | |
Balance, December 31, 2022 | | 175,530,212 | | $ | 175,530 | | | $ | 775,241,114 | | | $ | (114,313,253) | | | $ | 661,103,391 | |
Exercise of common warrants issued in offering | | 4,517,427 | | 4,517 | | 3,609,424 | | | — | | | 3,613,941 | |
| | | | | | | | | | |
| | | | | | | | | | |
Restricted stock vested | | 659,479 | | 659 | | | (659) | | | — | | | — | |
Shares to cover tax withholdings for restricted stock vested | | (79,634) | | | (79) | | | 79 | | | — | | | — | |
Payments to cover tax withholdings for restricted stock vested, net | | — | | — | | | (134,381) | | | — | | | (134,381) | |
| | | | | | | | | | |
| | | | | | | | | | |
Share-based compensation | | — | | — | | | 1,943,696 | | | — | | | 1,943,696 | |
Net income | | — | | — | | | — | | | 32,715,779 | | | 32,715,779 | |
Balance, March 31, 2023 | | 180,627,484 | | | $ | 180,627 | | | $ | 780,659,273 | | | $ | (81,597,474) | | | $ | 699,242,426 | |
Induced exercise of common warrants issued in offering | | 14,512,166 | | 14,512 | | 8,673,143 | | | — | | | 8,687,655 | |
| | | | | | | | | | |
| | | | | | | | | | |
Restricted stock vested | | 288,709 | | 289 | | | (289) | | | — | | | — | |
Shares to cover tax withholdings for restricted stock vested | | (77,687) | | | (78) | | | 78 | | | — | | | — | |
Payments to cover tax withholdings for restricted stock vested, net | | — | | — | | | (141,682) | | | — | | | (141,682) | |
| | | | | | | | | | |
| | | | | | | | | | |
Share-based compensation | | — | | — | | | 2,260,312 | | | — | | | 2,260,312 | |
Net income | | — | | — | | | — | | | 28,791,605 | | | 28,791,605 | |
Balance, June 30, 2023 | | 195,350,672 | | | $ | 195,350 | | | $ | 791,450,835 | | | $ | (52,805,869) | | | $ | 738,840,316 | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Restricted stock vested | | 39,443 | | 39 | | | (39) | | | — | | | — | |
Shares to cover tax withholdings for restricted stock vested | | (9,588) | | | (9) | | | 9 | | | — | | | — | |
Payments to cover tax withholdings for restricted stock vested, net | | — | | — | | | (18,302) | | | — | | | (18,302) | |
| | | | | | | | | | |
| | | | | | | | | | |
Share-based compensation | | — | | — | | | 2,170,735 | | | — | | | 2,170,735 | |
Net loss | | — | | — | | | — | | | (7,539,222) | | | (7,539,222) | |
Balance, September 30, 2023 | | 195,380,527 | | | $ | 195,380 | | | $ | 793,603,238 | | | $ | (60,345,091) | | | $ | 733,453,527 | |
| | | | | | | | | | |
For the Nine Months Ended September 30, 2022 | | | | | | | | | | |
Balance, December 31, 2021 | | 100,192,562 | | $ | 100,193 | | | $ | 553,472,292 | | | $ | (252,948,278) | | | $ | 300,624,207 | |
Share-based compensation | | — | | | — | | | 1,521,910 | | | — | | | 1,521,910 | |
Net income | | — | | | — | | | — | | | 7,112,043 | | | 7,112,043 | |
Balance, March 31, 2022 | | 100,192,562 | | $ | 100,193 | | | $ | 554,994,202 | | | $ | (245,836,235) | | | $ | 309,258,160 | |
Exercise of common warrants issued in offering | | 6,453,907 | | | 6,454 | | | 5,156,672 | | | — | | | 5,163,126 | |
Options exercised | | 100,000 | | | 100 | | | (100) | | | — | | | — | |
Shares elected to be withheld for options exercised | | (47,506) | | | (48) | | | 48 | | | — | | | — | |
Restricted stock vested | | 610,195 | | | 610 | | | (610) | | | — | | | — | |
Shares to cover tax withholdings for restricted stock vested | | (73,047) | | | (73) | | | 73 | | | — | | | — | |
Payments to cover tax withholdings for restricted stock vested | | — | | | — | | | (257,694) | | | — | | | (257,694) | |
Share-based compensation | | — | | | — | | | 1,899,245 | | | — | | | 1,899,245 | |
Net income | | — | | | — | | | — | | | 41,944,422 | | | 41,944,422 | |
Balance, June 30, 2022 | | 107,236,111 | | | $ | 107,236 | | | $ | 561,791,836 | | | $ | (203,891,813) | | | $ | 358,007,259 | |
Exercise of common warrants issued in offering | | 3,000,000 | | | 3,000 | | | 2,397,000 | | | — | | | 2,400,000 | |
Restricted stock vested | | 13,504 | | | 14 | | | (14) | | | — | | | — | |
Shares to cover tax withholdings for restricted stock vested | | (2,674) | | | (3) | | | 3 | | | — | | | — | |
Payments to cover tax withholdings for restricted stock vested | | — | | | — | | | (6,790) | | | — | | | (6,790) | |
Common stock issuance for Stronghold acquisition | | 21,339,986 | | | 21,340 | | | 69,120,215 | | | — | | | 69,141,555 | |
Share-based compensation | | — | | | — | | | 1,543,033 | | | — | | | 1,543,033 | |
Net income | | — | | | — | | | — | | | 75,085,891 | | | 75,085,891 | |
Balance, September 30, 2022 | | 131,586,927 | | | $ | 131,587 | | | $ | 634,845,283 | | | $ | (128,805,922) | | | $ | 506,170,948 | |
| | | | | | | | | | |
The accompanying notes are an integral part of these unaudited condensed financial statements.
RING ENERGY, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
| | | | | | | | | | | | | | |
| | For the Nine Months Ended |
| | September 30, 2023 | | September 30, 2022 |
Cash Flows From Operating Activities | | | | |
Net income (loss) | | $ | 53,968,162 | | | $ | 124,142,356 | |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | |
Depreciation, depletion and amortization | | 64,053,637 | | | 34,854,993 | |
Asset retirement obligation accretion | | 1,073,900 | | | 617,685 | |
Amortization of deferred financing costs | | 3,699,235 | | | 1,483,621 | |
Share-based compensation | | 6,374,743 | | | 4,964,188 | |
Bad debt expense | | 41,865 | | | — | |
Deferred income tax expense (benefit) | | (8,160,712) | | | 5,830,008 | |
Excess tax expense (benefit) related to share-based compensation | | 158,763 | | | — | |
(Gain) loss on derivative contracts | | 26,483,190 | | | 2,201,970 | |
Cash received (paid) for derivative settlements, net | | (5,829,728) | | | (48,593,882) | |
Changes in operating assets and liabilities: | | | | |
Accounts receivable | | (5,671,516) | | | (21,300,907) | |
Inventory | | 3,701,882 | | | — | |
Prepaid expenses and other assets | | 68,525 | | | (2,308,540) | |
Accounts payable | | 3,500,913 | | | 33,992,075 | |
Settlement of asset retirement obligation | | (1,025,607) | | | (2,548,344) | |
Net Cash Provided by Operating Activities | | 142,437,252 | | | 133,335,223 | |
Cash Flows From Investing Activities | | | | |
Payments for the Stronghold Acquisition | | (18,511,170) | | | (183,359,626) | |
Payments for the Founders Acquisition | | (49,902,757) | | | — | |
Payments to purchase oil and natural gas properties | | (1,605,262) | | | (1,211,691) | |
Payments to develop oil and natural gas properties | | (112,996,032) | | | (83,776,050) | |
Payments to acquire or improve fixed assets subject to depreciation | | (209,798) | | | (158,598) | |
Sale of fixed assets subject to depreciation | | 332,230 | | | 134,600 | |
Proceeds from divestiture of equipment for oil and natural gas properties | | 54,558 | | | 25,066 | |
Proceeds from sale of Delaware properties | | 7,608,692 | | | — | |
Proceeds from sale of New Mexico properties | | 4,312,502 | | | — | |
Net Cash (Used in) Investing Activities | | (170,917,037) | | | (268,346,299) | |
Cash Flows From Financing Activities | | | | |
Proceeds from revolving line of credit | | 179,000,000 | | | 592,000,000 | |
Payments on revolving line of credit | | (166,000,000) | | | (447,000,000) | |
Proceeds from issuance of common stock from warrant exercises | | 12,301,596 | | | 7,563,126 | |
| | | | |
Payments for taxes withheld on vested restricted shares, net | | (294,365) | | | (264,484) | |
Proceeds from notes payable | | 1,565,071 | | | 1,245,303 | |
Payments on notes payable | | (1,114,883) | | | (954,082) | |
Payment of deferred financing costs | | — | | | (18,762,502) | |
Reduction of financing lease liabilities | | (551,579) | | | (334,034) | |
Net Cash Provided by (Used in) Financing Activities | | 24,905,840 | | | 133,493,327 | |
Net Increase (Decrease) in Cash | | (3,573,945) | | | (1,517,749) | |
Cash at Beginning of Period | | 3,712,526 | | | 2,408,316 | |
Cash at End of Period | | $ | 138,581 | | | $ | 890,567 | |
RING ENERGY, INC.
STATEMENTS OF CASH FLOWS (CONTINUED)
| | | | | | | | | | | | | | |
| | For the Nine Months Ended |
| | September 30, 2023 | | September 30, 2022 |
Supplemental Cash Flow Information | | | | |
Cash paid for interest | | $ | 27,804,707 | | | $ | 12,371,753 | |
| | | | |
Noncash Investing and Financing Activities | | | | |
Asset retirement obligation incurred during development | | $ | 261,786 | | | $ | 218,082 | |
Asset retirement obligation acquired | | 2,090,777 | | | 14,538,550 | |
Asset retirement obligation revision of estimate | | 53,824 | | | — | |
Asset retirement obligation sold | | (4,717,507) | | | — | |
Operating lease assets obtained in exchange for new operating lease liability | | 1,713,677 | | | — | |
| | | | |
Financing lease assets obtained in exchange for new financing lease liability | | 305,052 | | | — | |
| | | | |
Capitalized expenditures attributable to drilling projects financed through current liabilities | | (1,394,081) | | | 13,233,975 | |
| | | | |
Supplemental Schedule for Founders Acquisition | | | | |
Investing Activities - Cash Paid | | | | |
Escrow deposit released at closing | | $ | 7,500,000 | | | $ | — | |
Closing amount paid to Founders | | 42,502,799 | | | — | |
Interest from escrow deposit | | 1,747 | | | — | |
Direct transaction costs | | 1,361,843 | | | — | |
Post-close adjustments | | (1,463,632) | | | — | |
Payments for the Founders Acquisition | | $ | 49,902,757 | | | $ | — | |
Investing Activities - Noncash | | | | |
Assumption of suspense liability | | $ | 677,116 | | | $ | — | |
Assumption of asset retirement obligation | | 2,090,777 | | | — | |
Assumption of ad valorem tax liability | | 234,051 | | | — | |
Deferred cash payment at fair value | | 14,657,383 | | | — | |
| | | | |
Supplemental Schedule for Stronghold Acquisition | | | | |
Investing Activities - Cash Paid | | | | |
Cash paid by bank to Stronghold on closing | | $ | — | | | $ | 121,392,455 | |
Deposit in escrow | | — | | | 46,500,000 | |
Direct transaction costs | | — | | | 9,162,143 | |
Cash paid for realized August oil derivative losses | | — | | | 1,777,925 | |
Cash paid for inventory and fixed assets acquired | | — | | | 4,527,103 | |
| | | | |
Payment of deferred cash payment | | 15,000,000 | | | — | |
Payment of post-close settlement | | 3,511,170 | | | — | |
Payments for the Stronghold Acquisition | | $ | 18,511,170 | | | $ | 183,359,626 | |
Investing Activities - Noncash | | | | |
Assumption of suspense liability | | $ | — | | | $ | 1,651,596 | |
Assumption of derivative liabilities | | — | | | 24,784,406 | |
Assumption of asset retirement obligation | | — | | | 14,538,550 | |
Deferred cash payment at fair value | | — | | | 14,511,688 | |
Financing Activities - Noncash | | | | |
Common stock issued for acquisition | | $ | — | | | $ | 69,141,555 | |
Convertible preferred stock issued for acquisition | | — | | | 137,858,446 | |
The accompanying notes are an integral part of these unaudited condensed financial statements.
RING ENERGY, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Index to the Notes to the Condensed Financial Statements NOTE 1 — BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Condensed Financial Statements – The accompanying condensed financial statements prepared by Ring Energy, Inc., a Nevada corporation (the “Company,” "Ring Energy," “Ring,” "we," "us," or "our"), have not been audited by an independent registered public accounting firm. In the opinion of the Company’s management, the accompanying unaudited condensed financial statements contain all adjustments necessary for fair presentation of the results of operations for the periods presented, which adjustments were of a normal recurring nature, except as disclosed herein. The condensed results of operations for the three and nine months ended September 30, 2023, are not necessarily indicative of the results to be expected for the full year ending December 31, 2023, for various reasons, including the impact of fluctuations in prices received for oil and natural gas, natural production declines, the uncertainty of exploration and development drilling results, fluctuations in the fair value of derivative instruments, and other factors.
These unaudited condensed financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) applicable to interim financial information, and, accordingly, do not include all of the information and notes required by GAAP for complete financial statements. Therefore, these condensed financial statements should be read in conjunction with the financial statements and notes included in the Company’s annual report on Form 10-K for the year ended December 31, 2022.
Organization and Nature of Operations – Ring Energy is a growth oriented independent exploration and production company based in The Woodlands, Texas engaged in oil and natural gas development, production, acquisition, and exploration activities currently focused in Texas. Our primary drilling operations target the oil and liquids rich producing formations in the Northwest Shelf and the Central Basin Platform, both of which are part of the Permian Basin.
Liquidity and Capital Considerations – The Company strives to maintain an adequate liquidity level to address volatility and risk. Sources of liquidity include the Company’s cash flow from operations, cash on hand, available borrowing capacity under its revolving credit facility, and proceeds from sales of non-strategic assets.
While changes in oil and natural gas prices affect the Company’s liquidity, the Company has put in place hedges in seeking to protect a substantial portion of its cash flows from price declines; however, if oil or natural gas prices rapidly deteriorate due to unanticipated economic conditions, this could still have a material adverse effect on the Company’s cash flows.
The Company expects ongoing oil price volatility over an indeterminate term. Extended depressed oil prices have historically had and could have a material adverse impact on the Company’s oil revenue, which is mitigated to some extent by the Company’s hedge contracts. The Company is always mindful of oil price volatility and its impact on our liquidity.
The Company believes that it has the ability to continue to fund its operations and service its debt by using cash flows from operations.
Use of Estimates – The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses during the reporting period. The Company’s unaudited condensed financial statements are based on a number of significant estimates, including estimates of oil and natural gas reserve quantities, which are the basis for the calculation of depletion and impairment of oil and gas properties. Reserve estimates, by their nature, are inherently imprecise. Actual results could differ from those estimates. Changes in the future
estimated oil and natural gas reserves or the estimated future cash flows attributable to the reserves that are utilized for impairment analysis could have a significant impact on the Company’s future results of operations.
Fair Value Measurements - Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The Financial Accounting Standards Board (“FASB”) has established a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. This hierarchy consists of three broad levels. Level 1 inputs are the highest priority and consist of unadjusted quoted prices in active markets for identical assets and liabilities. Level 2 are inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. Level 3 are unobservable inputs for an asset or liability.
Fair Values of Financial Instruments – The carrying amounts reported for our revolving line of credit approximate their fair value because the underlying instruments are at interest rates which approximate current market rates. The carrying amounts of accounts receivables and accounts payable and other current assets and liabilities approximate fair value because of the short-term maturities and/or liquid nature of these assets and liabilities.
Fair Value of Non-financial Assets and Liabilities – The Company also applies fair value accounting guidance to initially, or as events dictate, measure non-financial assets and liabilities such as those obtained through business acquisitions, property and equipment and asset retirement obligations. These assets and liabilities are subject to fair value adjustments only in certain circumstances and are not subject to recurring revaluations. Fair value may be estimated using comparable market data, a discounted cash flow method, or a combination of the two as considered appropriate based on the circumstances. Under the discounted cash flow method, estimated future cash flows are based on management’s expectations for the future and include estimates of future oil and natural gas production or other applicable sales estimates, operational costs and a risk-adjusted discount rate. The Company may use the present value of estimated future cash inflows and/or outflows or third-party offers or prices of comparable assets with consideration of current market conditions to value its non-financial assets and liabilities when circumstances dictate determining fair value is necessary. Given the significance of the unobservable nature of a number of the inputs, these are considered Level 3 on the fair value hierarchy.
Derivative Instruments and Hedging Activities – The Company periodically enters into derivative contracts to manage its exposure to commodity price risk. These derivative contracts, which are generally placed with major financial institutions, may take the form of forward contracts, futures contracts, swaps or options. The oil and gas reference prices upon which the commodity derivative contracts are based reflect various market indices that have a high degree of historical correlation with actual prices received by the Company for its oil and gas production.
As the Company has not designated its derivative instruments as hedges for accounting purposes, any gains or losses resulting from changes in fair value of outstanding derivative financial instruments and from the settlement of derivative financial instruments are recognized in earnings and included as a component of other income (expense) in the Condensed Statements of Operations.
When applicable, the Company records all derivative instruments, other than those that meet the normal purchases and sales exception, on the balance sheet as either an asset or liability measured at fair value. Changes in fair value are recognized currently in earnings unless specific hedge accounting criteria are met. See "NOTE 6 — DERIVATIVE FINANCIAL INSTRUMENTS" below for additional information.
Concentration of Credit Risk and Receivables – Financial instruments that potentially subject the Company to a concentration of credit risk consist principally of cash and receivables.
Cash and cash equivalents - The Company had cash in excess of federally insured limits of $0 and $3,462,526 as of September 30, 2023 and December 31, 2022, respectively. The Company places its cash with a high credit quality financial institution. The Company has not experienced any losses in such accounts and believes it is not exposed to significant credit risk in this area.
Accounts receivable - Substantially all of the Company’s accounts receivable is from purchasers of oil and natural gas. Oil and natural gas sales are generally unsecured. The Company has not had any significant credit losses in the past and believes its accounts receivable are fully collectable. During the nine months ended September 30, 2023, sales to three purchasers represented 67%, 12% and 10%, respectively, of total oil, natural gas, and natural gas liquids sales. As of September 30, 2023, receivables outstanding from these three purchasers represented 69%, 9% and 7%, respectively, of accounts receivable.
Production imbalances - The Company accounts for natural gas production imbalances using the sales method, which recognizes revenue on all natural gas sold even though the natural gas volumes sold may be more or less than the Company's ownership entitles it to sell. Liabilities are recorded for imbalances greater than the Company’s proportionate share of remaining estimated natural gas reserves. The Company recorded no imbalances as of September 30, 2023 or December 31, 2022.
Joint interest billing receivables, net - The Company also has joint interest billing receivables. Joint interest billing receivables are collateralized by the pro rata revenue attributable to the joint interest holders and further by the interest itself. Accounts receivable from joint interest owners or purchasers outstanding longer than the contractual payment terms are considered past due. The following table indicates the Company's provisions for bad debt expense associated with its joint interest billing receivables during the three and nine months ended September 30, 2023 and September 30, 2022.
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended | | For the Nine Months Ended |
| September 30, 2023 | | September 30, 2022 | | September 30, 2023 | | September 30, 2022 |
Bad debt expense | $ | 19,656 | | | $ | — | | | $ | 41,865 | | | $ | — | |
The following table reflects the Company's joint interest billing receivables and allowance for credit losses as of September 30, 2023 and December 31, 2022.
| | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 |
Joint interest billing receivables | $ | 3,484,616 | | | $ | 1,226,049 | |
Allowance for credit losses | (178,491) | | | (242,247) | |
Joint interest billing receivables, net | $ | 3,306,125 | | | $ | 983,802 | |
The reduction of $63,756 in the allowance for credit losses during the nine months ended September 30, 2023 was primarily due to a clearing of $105,620 in allowances that were associated with the Delaware Basin asset sale, offset by new allowances booked (see NOTE 5 — ACQUISITIONS AND DIVESTITURES for more detail).
Cash and Cash Equivalents – The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. At September 30, 2023 and December 31, 2022, the Company had no such investments.
Inventory - The full balance of the Company's inventory consists of materials and supplies for its operations, with no work in process or finished goods inventory balances. Inventory is added to the books upon the purchase of supplies (inclusive of freight and sales tax costs) to use on well sites, and inventory is reduced by material transfers for inventory usage based on the initial invoiced value. The Company reports the balance of its inventory at the lower of cost or net realizable value. Inventory balances are excluded from the Company's calculation of depletion.
Oil and Natural Gas Properties – The Company uses the full cost method of accounting for oil and natural gas properties. Under this method, all costs (direct and indirect) associated with acquisition, exploration, and development of oil and natural gas properties are capitalized. Costs capitalized include acquisition costs, geological and geophysical expenditures, lease rentals on undeveloped properties and costs of drilling and equipping productive and non-productive wells. Drilling costs include directly related overhead costs. Capitalized costs are categorized either as being subject to amortization or not subject to amortization. All of the Company’s capitalized costs, excluding inventory, are subject to amortization.
The Company records a liability in the period in which an asset retirement obligation (“ARO”) is incurred, in an amount equal to the discounted estimated fair value of the obligation that is capitalized. Thereafter this liability is accreted up to the final retirement cost. An ARO is a future expenditure related to the disposal or other retirement of certain assets. The Company’s ARO relates to future plugging and abandonment expenses of its oil and natural gas properties and related facilities disposal. Dispositions of oil and natural gas properties are accounted for as adjustments to capitalized costs.
All capitalized costs of oil and natural gas properties, including the estimated future costs to develop proved reserves and estimated future costs to plug and abandon wells and costs of site restoration, less the estimated salvage value of equipment associated with the oil and natural gas properties, are amortized on the unit-of-production method using estimates of proved reserves as determined by independent petroleum engineers. If the results of an assessment indicate that the properties are impaired, the amount of the impairment is offset to the capitalized costs to be amortized. The following table shows total
depletion and the depletion per barrel-of-oil-equivalent rate, for the three and nine months ended September 30, 2023 and 2022.
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended | | For the Nine Months Ended |
| September 30, 2023 | | September 30, 2022 | | September 30, 2023 | | September 30, 2022 |
Depletion | $ | 21,711,123 | | | $ | 14,163,574 | | | $ | 63,203,473 | | | $ | 34,417,978 | |
Depletion rate, per barrel-of-oil-equivalent (Boe) | $ | 13.48 | | | $ | 11.59 | | | $ | 13.09 | | | $ | 11.95 | |
In addition, capitalized costs less accumulated depreciation, depletion and amortization and related deferred income taxes are not allowed to exceed an amount (the full cost ceiling) equal to the sum of:
1)the present value of estimated future net revenues discounted at ten percent computed in compliance with SEC guidelines;
2)plus the cost of properties not being amortized;
3)plus the lower of cost or estimated fair value of unproven properties included in the costs being amortized;
4)less income tax effects related to differences between the book and tax basis of the properties.
Land, Buildings, Equipment, Software, Leasehold Improvements, and Automobiles – Land, buildings, equipment, software, leasehold improvements, and automobiles are carried at historical cost, adjusted for impairment loss and accumulated depreciation (except for land). Historical costs include all direct costs associated with the acquisition of land, buildings, equipment, software, leasehold improvements, and automobiles and placing them in service. Upon sale or abandonment, the cost of the fixed asset(s) and related accumulated depreciation are removed from the accounts and any gain or loss is recognized.
Depreciation of buildings, equipment, software, leasehold improvements, and automobiles is calculated using the straight-line method based upon the following estimated useful lives:
| | | | | | | | |
Leasehold improvements | | 3‑5 years |
Office equipment and software | | 3‑7 years |
Equipment | | 5‑10 years |
Automobiles | | 4 years |
Buildings and structures | | 7 years |
The following table provides information on the Company's depreciation expense for the three and nine months ended September 30, 2023 and 2022.
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended | | For the Nine Months Ended |
| September 30, 2023 | | September 30, 2022 | | September 30, 2023 | | September 30, 2022 |
Depreciation | $ | 80,690 | | | $ | 53,946 | | | $ | 277,420 | | | $ | 102,568 | |
Notes Payable – At the end of May 2023, the Company renewed its control of well, general liability, pollution, umbrella, property, workers' compensation, auto, and D&O (directors and officers) insurance policies, and funded the premiums with a promissory note with a total face value after down payments of $1,565,071. The annual percentage rate (APR) for this note is 7.08%. As of September 30, 2023, the notes payable balance included in current liabilities on the Condensed Balance Sheet is $950,068. The following table shows interest paid related to notes payable for the three and nine months ended September 30, 2023 and 2022. This interest is included within "Interest (expense)" in the Condensed Statements of Operations.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, 2023 | | September 30, 2022 | | September 30, 2023 | | September 30, 2022 |
Interest paid for notes payable | | $ | 22,286 | | | $ | 7,917 | | | $ | 35,211 | | | $ | 17,201 | |
Revenue Recognition – In January 2018, the Company adopted Accounting Standards Update (“ASU”) 2014-09 Revenues from Contracts with Customers (Topic 606) (“ASU 2014-09”). The timing of recognizing revenue from the sale of produced crude oil and natural gas was not changed as a result of adopting ASU 2014-09. The Company predominantly derives its revenue from the sale of produced crude oil and natural gas. The contractual performance obligation is satisfied when the product is delivered to the purchaser. Revenue is recorded in the month the product is delivered to the purchaser. The Company receives payment from one to three months after delivery. The transaction price includes variable consideration as product pricing is based on published market prices and reduced for contract specified differentials (quality, transportation and other variables from benchmark prices). The guidance regarding ASU 2014-09 does not require that the transaction price be fixed or stated in the contract. Estimating the variable consideration does not require significant judgment and Ring engages third party sources to validate the estimates. Revenue is recognized net of royalties due to third parties in an amount that reflects the consideration the Company expects to receive in exchange for those products. See "NOTE 2 — REVENUE RECOGNITION" for additional information.
Income Taxes – Provisions for income taxes are based on taxes payable or refundable for the current year and deferred taxes. Deferred taxes are provided on differences between the tax basis of assets and liabilities and their reported amounts in the condensed financial statements, and tax carryforwards. Deferred tax assets and liabilities are included in the condensed financial statements at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.
Since December 31, 2020, the Company determined that a full valuation allowance was necessary due to the Company's assessment that it was more likely than not that it would be unable to obtain the benefits of its deferred tax assets due to the Company’s history of taxable losses. The Company determined that certain existing deferred tax assets would not be offset by existing deferred tax liabilities as a result of the 80% limitation on the utilization net operating losses incurred after 2017. Since 2021, commodity prices increased and the Company continues to project positive pre-tax book income. As of June 30, 2023, the Company was no longer in a cumulative loss position. As a result, future forecasted pre-tax book income was considered as positive evidence in assessing the valuation allowance. Based on the change in judgment on the realizability of the related federal deferred tax assets in future years, the Company released $10.5 million of valuation allowance as a discrete benefit in the first nine months ended September 30, 2023. Accordingly, the Company recorded the following federal and state income tax benefits (provisions) for the three and nine months ended September 30, 2023 and 2022.
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended | | For the Nine Months Ended |
| September 30, 2023 | | September 30, 2022 | | September 30, 2023 | | September 30, 2022 |
Deferred federal income tax benefit (provision) | $ | 3,381,104 | | | $ | (3,611,381) | | | $ | 8,492,595 | | | $ | (4,625,429) | |
Current state income tax benefit (provision) | (165,780) | | | (36,736) | | | (264,261) | | | (36,736) | |
Deferred state income tax benefit (provision) | 196,012 | | | (667,666) | | | (490,646) | | | (1,204,579) | |
Benefit from (Provision for) Income Taxes | $ | 3,411,336 | | | $ | (4,315,783) | | | $ | 7,737,688 | | | $ | (5,866,744) | |
The Company had immaterial operations in New Mexico which is in a net deferred tax asset position for which a full valuation allowance is still recorded.
For the three and nine months ended September 30, 2023, the Company’s overall effective tax rates (calculated as Benefit from (Provision for) Income Taxes divided by Income Before Benefit from (Provision for) Income Taxes) were 31.2% and 16.7%, respectively. These rates were primarily impacted by the release of valuation allowance on its federal net deferred tax asset. A tax benefit of $10.5 million was recorded as a discrete item in the nine months ended September 30, 2023.
Accounting for Uncertainty in Income Taxes – In accordance with GAAP, the Company has analyzed its filing positions in all jurisdictions where it is required to file income tax returns for the open tax years. The Company has identified its federal income tax return and its franchise tax return in Texas in which it operates as “major” tax jurisdictions. The Company’s federal income tax returns for the years ended December 31, 2018 and after remain subject to examination. The Company’s federal income tax returns for the years ended December 31, 2007 and after remain subject to examination to the extent of the net operating loss (NOL) carryforwards. The Company’s franchise tax returns in Texas remain subject to examination for 2017 and after. The Company currently believes that all significant filing positions are highly certain and that all of its significant income tax filing positions and deductions would be sustained upon audit. Therefore, the Company
has no significant reserves for uncertain tax positions and no adjustments to such reserves were required by GAAP. No interest or penalties have been levied against the Company and none are anticipated; therefore, no interest or penalty has been included in our provision for income taxes in the Condensed Statements of Operations.
Three-Stream Reporting - Beginning July 1, 2022, the Company began reporting volumes and revenues on a three-stream basis, separately reporting crude oil, natural gas, and natural gas liquids ("NGLs") sales. For periods prior to July 1, 2022, sales and reserve volumes, prices, and revenues for NGLs were presented with natural gas. This represents a change in our accounting and reporting presentation necessitated by a change in the underlying facts and circumstances surrounding the Stronghold Acquisition, as Stronghold had historically reported its revenues on a three-stream basis. As clarified in the interpretive guidance of ASC 250, such changes should not be applied on a retrospective basis. Accordingly, we began reporting on a three-stream basis prospectively, beginning July 1, 2022. See NOTE 5 - ACQUISITIONS AND DIVESTITURES for a discussion of the Stronghold Acquisition.
Leases - The Company accounts for its leases in accordance with ASU 2016-02, Leases (Topic 842), effective January 1, 2019. The Company made accounting policy elections to not capitalize leases with a lease term of twelve months or less (i.e. short term leases) and to not separate lease and non-lease components for all asset classes. The Company also elected to adopt the package of practical expedients within ASU 2016-02 that allows an entity to not reassess prior to the effective date (i) whether any expired or existing contracts are or contain leases, (ii) the lease classification for any expired or existing leases, or (iii) initial direct costs for any existing leases, and the practical expedient regarding land easements that exist prior to the adoption of ASU 2016-02. The Company did not elect the practical expedient of hindsight when determining the lease term of existing contracts at the effective date.
Earnings (Loss) Per Share – Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding during the applicable period. Diluted earnings (loss) per share are calculated to give effect to potentially issuable dilutive common shares.
Share-Based Employee Compensation – The Company has outstanding stock option grants and restricted stock unit awards to directors, officers and employees, which are described more fully below in "NOTE 11 — EMPLOYEE STOCK OPTIONS AND RESTRICTED STOCK UNITS". The Company recognizes the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award and recognizes the related compensation expense over the period during which an employee is required to provide service in exchange for the award, which is generally the vesting period.
Share-Based Compensation to Non-Employees – The Company accounts for share-based compensation issued to non-employees as either the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. The measurement date for these issuances is the earlier of (i) the date at which a commitment for performance by the recipient to earn the equity instruments is reached or (ii) the date at which the recipient’s performance is complete.
The following table summarizes the Company's share-based compensation, included with General and administrative expense within our Condensed Statements of Operations, incurred for the three and nine months ended September 30, 2023 and 2022.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, 2023 | | September 30, 2022 | | September 30, 2023 | | September 30, 2022 |
Share-based compensation | $ | 2,170,735 | | | $ | 1,543,033 | | | $ | 6,374,743 | | | $ | 4,964,188 | |
Recently Adopted Accounting Pronouncements – In July 2023, the FASB issued ASU 2023-03, Presentation of Financial Statements (Topic 205), Income Statement - Reporting Comprehensive Income (Topic 220), Distinguishing Liabilities from Equity (Topic 480), Equity (Topic 505), and Compensation - Stock Compensation (Topic 718): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 120, SEC Staff Announcement at the March 24, 2022 EITF Meeting, and Staff Accounting Bulletin Topic 6.B, Accounting Series Release 280 - General Revision of Regulation S-X: Income or Loss Applicable to Common Stock. The ASU provided updated views from the SEC Staff on employee and non-employee share-based payment accounting, including guidance related to spring-loaded awards. As the ASU did not provide any new ASC guidance, and there was no transition or effective date provided, the Company adopted this standard upon issuance, and the adoption did not have a material impact on our condensed financial statements.
Recent Accounting Pronouncements – In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”), which provided optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that referenced LIBOR or another rate. ASU 2020-04 was in effect through December 31, 2022. In January 2021, the FASB issued ASU No. 2021-01, Reference Rate Reform (Topic 848): Scope (“ASU 2021-01”), to provide clarifying guidance regarding the scope of Topic 848. ASU 2020-04 was issued to provide optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. In December 2022, the FASB issued ASU 2022-06, "Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848" ("ASU 2022-06"), which defers the sunset date of Topic 848 from December 31, 2022 to December 31, 2024. Beginning August 31, 2022, under the Company's Second Amended and Restated Credit Agreement, the Company's interest rates were transitioned from the LIBOR to the SOFR (Standard Overnight Financing Rate) reference rate. At this time, the Company does not plan to enter into additional contracts using LIBOR as a reference rate.
In October 2021, the FASB issued ASU 2021-08, "Business Combinations (Topic 805) – Accounting for Contract Assets and Contract Liabilities from Contracts with Customers” ("ASU 2021-08"). This update requires the acquirer in a business combination to record contract asset and liabilities following Topic 606 – “Revenue from Contracts with Customers” at acquisition as if it had originated the contract, rather than at fair value. This update is effective for public business entities beginning after December 15, 2022, with early adoption permitted. The Company continues to evaluate the provisions of this update, but it does not believe the adoption will have a material impact on its financial position, results of operations or liquidity.
On July 26, 2023, the SEC issued Final Rule Release No. 33-11216, Cybersecurity Risk Management, Strategy, Governance, and Incident Disclosure, which requires current disclosures (via Form 8-K, Item 1.05) about material cybersecurity incidents and requires periodic disclosures (via Form 10-K, Item 1C, "Cybersecurity") about a registrant’s processes to manage its material cybersecurity risks. The Company is currently considering the impact of this rule on its disclosures.
NOTE 2 — REVENUE RECOGNITION
The Company predominantly derives its revenue from the sale of produced crude oil, natural gas, NGLs. The contractual performance obligation is satisfied when the product is delivered to the purchaser. Revenue is recorded in the month the product is delivered to the purchaser. The Company receives payment from one to three months after delivery. The Company has utilized the practical expedient in Accounting Standards Codification ("ASC") 606-10-50-14, which states an entity is not required to disclose the transaction price allocated to remaining performance obligations if the variable consideration is allocated entirely to a wholly unsatisfied performance obligation. Under the Company’s sales contracts, each unit of production delivered to a purchaser represents a separate performance obligation, therefore, future volumes to be delivered are wholly unsatisfied and disclosure of transaction price allocated to remaining performance obligation is not required. The transaction price includes variable consideration, as product pricing is based on published market prices and adjusted for contract specified differentials such as quality, energy content and transportation. The guidance does not require that the transaction price be fixed or stated in the contract. Estimating the variable consideration does not require significant judgment and the Company engages third party sources to validate the estimates. Revenue is recognized net of royalties due to third parties in an amount that reflects the consideration the Company expects to receive in exchange for those products.
Oil sales
Under the Company’s oil sales contracts, the Company sells oil production at the point of delivery and collects an agreed upon index price, net of pricing differentials. The Company recognizes revenue at the net price received when control transfers to the purchaser at the point of delivery and it is probable the Company will collect the consideration it is entitled to receive.
Natural gas and NGL sales
Under the Company’s natural gas sales processing contracts for its Central Basin Platform properties and a portion of its Northwest Shelf assets, the Company delivers unprocessed natural gas to a midstream processing entity at the wellhead. The midstream processing entity obtains control of the natural gas and NGLs at the wellhead. The midstream processing entity gathers and processes the natural gas and NGLs and remits proceeds to the Company for the resulting sale of natural gas and NGLs. Under these processing agreements, the Company recognizes revenue when control transfers to the
purchaser at the point of delivery and it is probable the Company will collect the consideration it is entitled to receive. As such, the Company accounts for any fees and deductions as a reduction of the transaction price.
Until April 30, 2022, under the Company's natural gas sales processing contracts for the bulk of its Northwest Shelf assets, the Company delivered unprocessed natural gas to a midstream processing entity at the wellhead. However, the Company maintained ownership of the gas through processing and received proceeds from the marketing of the resulting products. Under this processing agreement, the Company recognized the fees associated with the processing as an expense rather than netting these costs against Oil, Natural Gas, and Natural Gas Liquids Revenues in the Condensed Statements of Operations. Beginning May 1, 2022, these contracts were combined into one contract, and it was modified so that the Company no longer maintained ownership of the gas through processing. Accordingly, the Company from that point on accounts for any such fees and deductions as a reduction of the transaction price.
Disaggregation of Revenue. The following table presents revenues disaggregated by product:
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended | | For the Nine Months Ended |
| September 30, 2023 | | September 30, 2022 | | September 30, 2023 | | September 30, 2022 |
Oil, Natural Gas, and Natural Gas Liquids Revenues | | | | | | | |
Oil | $ | 90,392,004 | | | $ | 86,413,665 | | | $ | 252,020,403 | | | $ | 229,532,827 | |
Natural gas | 562,374 | | | 4,655,002 | | | 526,161 | | | 14,678,747 | |
Natural gas liquids (1) | 2,727,420 | | | 3,340,281 | | | 8,566,719 | | | 3,340,281 | |
Total oil, natural gas, and natural gas liquids revenues | $ | 93,681,798 | | | $ | 94,408,948 | | | $ | 261,113,283 | | | $ | 247,551,855 | |
(1) Beginning on July 1, 2022, the Company began reporting volumes and revenues on a three-stream basis, separately reporting crude oil, natural gas, and NGL sales. For periods prior to July 1, 2022, sales revenues for NGLs were presented with natural gas.
NOTE 3 — LEASES
The Company has operating leases for its offices in Midland, Texas and The Woodlands, Texas. The Midland office is under a five-year lease which began January 1, 2021. The Midland office lease was amended effective October 1, 2022, with the revised five-year lease ending September 30, 2027. Beginning January 15, 2021, the Company entered into a five-and-a-half-year sub-lease for office space in The Woodlands, Texas; however, effective as of May 31, 2023, The Woodlands office sub-lease was terminated. On May 9, 2023, the Company entered into a 71-month (five years and 11-month) new lease for a larger amount of office space in The Woodlands, Texas. At the time of the new lease commencement, the additional office space that was added was under construction and until completed, the rental obligation for this space had not yet commenced, because the Company did not have control of the additional office space in accordance with ASC 842-40-55-5. On September 27, 2023, the Company provided a certificate of acceptance of premises to the lessor of the additional office space, and accordingly, as of September 30, 2023, the future payments for this space are included along with the other operating leases, reflected in the future lease payments schedule below.
The Company has month to month leases for office equipment and compressors used in its operations on which the Company has elected to apply ASU 2016-02 (i.e. to not capitalize). The office equipment and compressors are not subject to ASU 2016-02 based on the agreement and nature of use. These leases are for terms that are less than 12 months and the Company does not intend to continue to lease this equipment for more than 12 months. The lease costs associated with these leases is reflected in the short-term lease costs within Lease operating expenses, shown below.
The Company has financing leases for vehicles. These leases have a term of 36 months at the end of which the Company owns the vehicles. These vehicles are generally sold at the end of their term and the proceeds applied to a new vehicle.
Future lease payments associated with these operating and financing leases as of September 30, 2023 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2023 | | 2024 | | 2025 | | 2026 | | 2027 | | Other Future Years |
Operating lease payments (1) | $ | 118,616 | | | $ | 675,210 | | | $ | 727,460 | | | $ | 636,649 | | | $ | 460,497 | | | 400,234 | |
Financing lease payments (2) | 223,492 | | | 832,238 | | | 493,290 | | | 49,763 | | | — | | | — | |
(1)The weighted average annual discount rate as of September 30, 2023 for operating leases was 4.50%. Based on this rate, the future lease payments above include imputed interest of $307,998. The weighted average remaining term of operating leases was 4.51 years.
(2)The weighted average annual discount rate as of September 30, 2023 for financing leases was 6.25%. Based on this rate, the future lease payments above include imputed interest of $101,334. The weighted average remaining term of financing leases was 2.00 years.
The following table represents a reconciliation between the undiscounted future cash flows in the table above and the operating and financing lease liabilities disclosed in the Condensed Balance Sheets:
| | | | | | | | | | | |
| As of |
| September 30, 2023 | | December 31, 2022 |
Operating lease liability, current portion | $ | 503,420 | | | $ | 398,362 | |
Operating lease liability, non-current portion | 2,207,248 | | | 1,473,897 | |
Operating lease liability, total | $ | 2,710,668 | | | $ | 1,872,259 | |
Total undiscounted future cash flows (sum of future operating lease payments) | 3,018,666 | | | 2,065,580 | |
Imputed interest | 307,998 | | | 193,321 | |
Undiscounted future cash flows less imputed interest | $ | 2,710,668 | | | $ | 1,872,259 | |
| | | |
Financing lease liability, current portion | $ | 806,993 | | | $ | 709,653 | |
Financing lease liability, non-current portion | 690,456 | | | 1,052,479 | |
Financing lease liability, total | $ | 1,497,449 | | | $ | 1,762,132 | |
Total undiscounted future cash flows (sum of future financing lease payments) | 1,598,783 | | | 1,900,595 | |
Imputed interest | 101,334 | | | 138,463 | |
Undiscounted future cash flows less imputed interest | $ | 1,497,449 | | | $ | 1,762,132 | |
The following table provides supplemental information regarding lease costs in the Condensed Statements of Operations:
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended | | For the Nine Months Ended |
| September 30, 2023 | | September 30, 2022 | | September 30, 2023 | | September 30, 2022 |
Operating lease costs | $ | 138,220 | | | $ | 83,590 | | | $ | 366,711 | | | $ | 250,770 | |
Short-term lease costs (1) | 1,012,525 | | | 639,708 | | | 4,042,160 | | | 1,937,310 | |
Financing lease costs: | | | | | | | |
Amortization of financing lease assets (2) | 197,221 | | | 106,982 | | | 572,744 | | | 334,447 | |
Interest on financing lease liabilities (3) | 23,416 | | | 10,391 | | | 73,115 | | | 24,184 | |
(1)Amount included in Lease operating expenses
(2)Amount included in Depreciation, depletion and amortization
(3)Amount included in Interest (expense)
NOTE 4 — EARNINGS (LOSS) PER SHARE INFORMATION
The following table presents the calculation of the Company's basic and diluted earnings (loss) per share for the three and nine months ended September 30, 2023 and 2022.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended | | For the Nine Months Ended |
| | September 30, 2023 | | September 30, 2022 | | September 30, 2023 | | September 30, 2022 |
Net Income (Loss) | | $ | (7,539,222) | | | $ | 75,085,891 | | | $ | 53,968,162 | | | $ | 124,142,356 | |
Basic Weighted-Average Shares Outstanding | | 195,361,476 | | | 115,376,280 | | | 188,865,752 | | | 107,349,184 | |
Effect of dilutive securities: | | | | | | | | |
Stock options | | — | | | 52,110 | | | — | | | 93,688 | |
Restricted stock units | | — | | | 1,908,662 | | | 1,310,409 | | | 2,135,675 | |
Performance stock units | | — | | | 196,520 | | | 361,406 | | | 235,440 | |
Common warrants | | — | | | 19,884,296 | | | 4,045,648 | | | 20,180,729 | |
Convertible preferred stock | | — | | | 14,337,127 | | | — | | | 4,831,559 | |
Diluted Weighted-Average Shares Outstanding | | 195,361,476 | | | 151,754,995 | | | 194,583,215 | | | 134,826,275 | |
Basic Earnings (Loss) per Share | | $ | (0.04) | | | $ | 0.65 | | | $ | 0.29 | | | $ | 1.16 | |
Diluted Earnings (Loss) per Share | | $ | (0.04) | | | $ | 0.49 | | | $ | 0.28 | | | $ | 0.92 | |
The following table presents the securities which were excluded from the Company's computation of diluted earnings per share for the three and nine months ended September 30, 2023 and 2022, as their effect would have been anti-dilutive.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended | | For the Nine Months Ended |
| | September 30, 2023 | | September 30, 2022 | | September 30, 2023 | | September 30, 2022 |
Antidilutive securities: | | | | | | | | |
Stock options to purchase common stock | | 265,500 | | | 70,500 | | 265,500 | | 70,500 |
Unvested restricted stock units | | 3,866,023 | | | 37,487 | | 61,212 | | 11,312 |
Unvested performance stock units | | 2,882,594 | | | 860,212 | | 1,396,446 | | 798,768 |
NOTE 5 — ACQUISITIONS AND DIVESTITURES
Stronghold Acquisition
On July 1, 2022, Ring, as buyer, and Stronghold Energy II Operating, LLC, a Delaware limited liability company (“Stronghold OpCo”) and Stronghold Energy II Royalties, LP, a Delaware limited partnership (“Stronghold RoyaltyCo”, together with Stronghold OpCo, collectively, “Stronghold”), as seller, entered into a purchase and sale agreement (the “Stronghold Purchase Agreement”). Pursuant to the Stronghold Purchase Agreement, Ring acquired (the “Stronghold Acquisition”) interests in oil and gas leases and related property of Stronghold consisting of approximately 37,000 net acres located in the Central Basin Platform of the Texas Permian Basin. On August 31, 2022, Ring completed the Stronghold Acquisition.
The fair value of consideration paid to Stronghold was approximately $394.0 million, of which $165.9 million, net of customary purchase price adjustments, was paid in cash at closing, and $15.0 million was paid in cash six months after the closing. Also, shortly after closing, approximately $4.5 million was paid for inventory and vehicles and approximately $1.8 million was paid for August oil derivative settlements for certain novated hedges. The cash portion of the consideration was funded primarily from borrowings under our revolving Credit Facility, which was increased from $350.0 million to $600.0 million at the closing. The remaining consideration consisted of 21,339,986 shares of Ring common stock and 153,176 shares of newly created Series A Convertible Preferred Stock, par value $0.001 (“Preferred Stock”) which were converted into 42,548,892 shares of common stock on October 27, 2022. In addition, Ring assumed $24.8 million of derivative liabilities, $1.7 million of items in suspense, and $14.5 million in asset retirement obligations.
Delaware Basin Sale
On May 11, 2023, the Company completed the divestiture of its Delaware Basin assets to an unaffiliated party for $8.3 million. The sale had an effective date of March 1, 2023. The final cash consideration was approximately $7.6 million, subject to customary final purchase price adjustments. As part of the divestiture, the buyer assumed an asset retirement obligation balance of approximately $2.3 million.
Founders Acquisition
On July 10, 2023, the Company, as buyer, and Founders Oil & Gas IV, LLC (“Founders”), as seller, entered into an Asset Purchase Agreement (the “Founders Purchase Agreement”). Pursuant to the closing of the Purchase Agreement, on August 15, 2023 the Company acquired (the “Founders Acquisition”) interests in oil and gas leases and related property of Founders located in the Central Basin Platform of the Texas Permian Basin in Ector County, Texas, for a purchase price (the “Purchase Price”) of (i) a cash deposit of $7.5 million paid on July 11, 2023 into a third-party escrow account as a deposit pursuant to the Founders Purchase Agreement, (ii) approximately $42.5 million in cash paid on the closing date, net of approximately $10 million of preliminary and customary purchase price adjustments with an effective date of April 1, 2023, and (iii) a deferred cash payment of $15.0 million due 4 months after closing, or December 15, 2023, subject to final post-closing settlement between the Company and Founders.
The Founders Acquisition has been accounted for as an asset acquisition in accordance with ASC 805. The fair value of the consideration paid by Ring and allocation of that amount to the underlying assets acquired, on a relative fair value basis, was recorded on Ring’s books as of the date of the closing of the Founders Acquisition. Additionally, costs directly related to the Founders Acquisition were capitalized as a component of the purchase price. Determining the fair value of the assets and liabilities acquired requires judgment and certain assumptions to be made, the most significant of these being related to the valuation of Founder’s oil and gas properties. The inputs and assumptions related to the oil and gas properties are categorized as level 3 in the fair value hierarchy.
The following table represents the preliminary allocation of the total cost of the Founders Acquisition to the assets acquired and liabilities assumed as of the Founders Acquisition date:
| | | | | | | | |
Consideration: | | |
Cash consideration | | |
Escrow deposit released at closing | | $ | 7,500,000 | |
Closing amount paid to Founders | | 42,502,799 | |
Interest from escrow deposit | | 1,747 | |
Fair value of deferred payment liability | | 14,657,383 | |
Post-close adjustments | | (1,463,632) | |
Total cash consideration | | $ | 63,198,297 | |
Direct transaction costs | | $ | 1,361,843 | |
Total consideration | | $ | 64,560,140 | |
| | |
Fair value of assets acquired: | | |
Oil and natural gas properties | | $ | 67,562,084 | |
| | |
Amount attributable to assets acquired | | $ | 67,562,084 | |
Fair value of liabilities assumed: | | |
Suspense liability | | $ | 677,116 | |
Asset retirement obligations | | 2,090,777 | |
Ad valorem tax liability | | 234,051 | |
Amount attributable to liabilities assumed | | $ | 3,001,944 | |
Net assets acquired | | $ | 64,560,140 | |
Approximately $6.3 million of revenues and $1.7 million of direct operating expenses attributed to the Founders Acquisition are included in the Company’s Statements of Operations for the period from August 16, 2023 through September 30, 2023.
New Mexico Divestiture
On September 27, 2023, the Company completed the divestiture of its operated New Mexico assets to an unaffiliated party for $4.5 million, resulting in preliminary cash consideration of approximately $3.8 million, subject to customary final purchase price adjustments. The sale had an effective date of June 1, 2023. As part of the divestiture, the buyer assumed an asset retirement obligation balance of approximately $2.3 million.
NOTE 6 — DERIVATIVE FINANCIAL INSTRUMENTS
The Company is exposed to fluctuations in crude oil and natural gas prices on its production. It utilizes derivative strategies that consist of either a single derivative instrument or a combination of instruments to manage the variability in cash flows associated with the forecasted sale of our future domestic oil and natural gas production. While the use of derivative instruments may limit or partially reduce the downside risk of adverse commodity price movements, their use also may limit future income from favorable commodity price movements.
From time to time, the Company enters into derivative contracts to protect the Company’s cash flow from price fluctuation and maintain its capital programs. The Company has historically used costless collars, deferred premium puts, or swaps for this purpose. Oil derivative contracts are based on WTI (West Texas Intermediate) crude oil prices and natural gas contacts are based on the Henry Hub. A “costless collar” is the combination of two options, a put option (floor) and call option (ceiling) with the options structured so that the premium paid for the put option will be offset by the premium received from selling the call option. Similar to costless collars, there is no cost to enter into the swap contracts. The deferred premium put contract has the premium established upon entering the contract, and due upon settlement of the contract.
The use of derivative transactions involves the risk that the counterparties, which generally are financial institutions, will be unable to meet the financial terms of such transactions. All of our derivative contracts are with lenders under our Credit Facility. Non-performance risk is incorporated in the discount rate by adding the quoted bank (counterparty) credit default swap (CDS) rates to the risk free rate. Although the counterparties hold the right to offset (i.e. netting) the settlement amounts with the Company, in accordance with ASC 815-10-50-4B, the Company classifies the fair value of all its derivative positions on a gross basis in the Condensed Balance Sheets.
The Company’s derivative financial instruments are recorded at fair value and included as either assets or liabilities in the accompanying Condensed Balance Sheets. The Company has not designated its derivative instruments as hedges for accounting purposes, and, as a result, any gains or losses resulting from changes in fair value of outstanding derivative financial instruments and from the settlement of derivative financial instruments are recognized in earnings and included as a component of "Other Income (Expense)" under the heading "Gain (loss) on derivative contracts" in the accompanying Condensed Statements of Operations.
The following presents the impact of the Company’s contracts on its Condensed Balance Sheets for the periods indicated.
| | | | | | | | | | | |
| As of |
| September 30, 2023 | | December 31, 2022 |
Commodity derivative instruments, marked to market: | | | |
| | | |
Derivative assets, current | $ | 5,772,513 | | | $ | 16,193,327 | |
Discounted deferred premiums | (3,927,380) | | | (11,524,165) | |
Derivatives assets, current, net of premiums | $ | 1,845,133 | | | $ | 4,669,162 | |
| | | |
Derivative assets, noncurrent | $ | 6,465,355 | | | $ | 7,606,258 | |
Discounted deferred premiums | — | | | (1,476,848) | |
Derivative assets, noncurrent, net of premiums | $ | 6,465,355 | | | $ | 6,129,410 | |
| | | |
Derivative liabilities, current | $ | 23,906,800 | | | $ | 13,345,619 | |
| | | |
Derivative liabilities, noncurrent | $ | 18,089,847 | | | $ | 10,485,650 | |
The components of “Gain (loss) on derivative contracts” from the Condensed Statements of Operations are as follows for the respective periods:
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended | | For the Nine Months Ended |
| September 30, 2023 | | September 30, 2022 | | September 30, 2023 | | September 30, 2022 |
Oil derivatives: | | | | | | | |
Realized gain (loss) on oil derivatives | $ | (5,825,427) | | | $ | (13,958,195) | | | $ | (7,323,030) | | | $ | (47,690,961) | |
Unrealized gain (loss) on oil derivatives | (34,077,473) | | | 49,680,492 | | | (21,425,316) | | | 48,360,099 | |
Gain (loss) on oil derivatives | $ | (39,902,900) | | | $ | 35,722,297 | | | $ | (28,748,346) | | | $ | 669,138 | |
| | | | | | | |
Natural gas derivatives: | | | | | | | |
Realized gain (loss) on natural gas derivatives | 474,629 | | | (902,921) | | | 1,493,302 | | | (902,921) | |
Unrealized gain (loss) on natural gas derivatives | 205,516 | | | (1,968,187) | | | 771,854 | | | (1,968,187) | |
Gain (loss) on natural gas derivatives | $ | 680,145 | | | $ | (2,871,108) | | | $ | 2,265,156 | | | $ | (2,871,108) | |
| | | | | | | |
Gain (loss) on derivative contracts | $ | (39,222,755) | | | $ | |