Earnings call: Ring Energy posts record Q2 results, focuses on debt reduction

Inc. (NYSE: REI), an oil and gas exploration and production company, has announced record sales volumes and cash generation for the second quarter of 2024. The company reported significant improvements in financial and operational metrics, including a net income of $22.4 million and record adjusted EBITDA of $66.4 million, marking a 7% increase from the previous quarter. Ring Energy’s strategic focus on paying down debt was evident as they reduced their borrowings by $50 million and plan to continue this trend. The company also emphasized its commitment to improving stock price performance and communication with the investment community.

Key Takeaways

• Ring Energy achieved record sales volumes and cash generation in Q2 of 2024.
• The company paid down $50 million in debt, with plans to further reduce debt levels.
• Sales volumes surpassed guidance, and operating expenses and capital spending were lower than expected.
• Ring Energy increased full-year production guidance and plans to drill an average of 11 wells per quarter.
• Significant hedging of oil and sales secured for the remainder of 2024.

Company Outlook

• Anticipated third-party takeaway capacity to ease pricing pressure in the basin by year-end.
• A focus on reducing absolute debt levels and improving the balance sheet.
• Increased communication with the investment community to attract more analyst coverage and educate potential investors.
• A plan to participate in industry events and schedule roadshows to differentiate from other oil and gas investment opportunities.

Bearish Highlights

• The company is currently navigating infrastructure constraints and managing capital allocation to address this challenge.

Bullish Highlights

• Improved lease operating costs and balance sheet strength.
• Record adjusted EBITDA and free cash flow demonstrate strong financial performance.
• Drilling and completion efficiencies have led to cost reductions with further improvements expected.

Misses

• There were no specific misses reported in the earnings call.

Q&A Highlights

• Ring Energy is targeting acquisitions to expand inventory, focusing on non-core assets from larger organizations in the Midland and Delaware Basins.
• The company expects cost savings in the current macro environment and plans to allocate capital towards high-potential investments.
• Upcoming spending on facility upgrades and emissions reduction to improve environmental performance.

Ring Energy’s second quarter of 2024 has set a precedent for the company’s operational and financial trajectory. With a clear strategy to reduce debt, enhance communication with investors, and improve operational efficiencies, Ring Energy is positioning itself for sustained growth and shareholder value creation. The company’s management remains optimistic about the future, underpinned by a strong earnings report and a strategic approach to expansion and technology-driven exploration.

InvestingPro Insights

Ring Energy Inc. (NYSE: REI) has shown resilience in its stock performance over various time frames, reflecting investor confidence in the company’s strategic initiatives and solid earnings report. The InvestingPro data underscores the company’s recent market trends:

• The 1 Week Price Total Return as of late 2024 stands at a slight dip of -0.23%, indicating a minor pullback following recent gains.

• However, the 1 Month Price Total Return shows a robust increase of 8.44%, suggesting a positive investor response to the company’s financial results and operational progress.

• Looking at the longer term, the 1 Year Price Total Return of 10.16% demonstrates the company’s ability to create shareholder value over an extended period.

InvestingPro Tips highlight the importance of considering both short-term fluctuations and long-term performance when evaluating a company like Ring Energy:

1. “Monitor the trend in price total returns to gauge market sentiment following earnings reports and strategic announcements.”

2. “Consider the company’s ability to sustain long-term growth as reflected in the 1 Year Price Total Return, which can be indicative of underlying business strength.”

For investors seeking more in-depth analysis, InvestingPro offers an additional 15 tips that can provide further guidance on investment decisions in the oil and gas sector. These tips, along with real-time metrics, can be invaluable for assessing the potential of companies like Ring Energy as they navigate the dynamic energy market.

Full transcript – DJ Equity All REIT (REI) Q2 2024:

Operator: Good morning, and welcome to the Ring Energy second-quarter 2024 earnings conference call. [Operator Instructions]. I would now like to turn the conference over to Al Petrie, Investor Relations for Ring Energy. Please go ahead.

Al Petrie: Thank you, operator, and good morning, everyone. We appreciate your interest in Ring Energy. We’ll begin our call with comments from Paul McKinney, our Chairman of the Board and CEO, who will provide an overview of key matters for the second quarter of 2024 as well as our updated outlook; who will then turn the call over to Travis Thomas, Ring’s Executive VP and Chief Financial Officer, who will review our financial results. Paul will then return with some closing comments before we open the call for questions. Also joining us on the call today and available for the Q&A session are Alex Dyes, Executive VP of Engineering and Corporate Strategy; and Shawn Young, VP of Operations. During the Q&A session, we ask you to limit your questions to one and a follow-up. You are welcome to reenter the queue later with additional questions. I would also note that we have posted an updated corporate presentation on our website. During the course of this conference call, the company will be making forward-looking statements within the meaning of federal securities laws. Investors are cautioned that forward-looking statements are not guarantees of future performance, and those actual results or developments may differ materially from those projected in the forward-looking statements. Finally, the company can give no assurance that such forward-looking statements will prove to be correct. Ring Energy disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise. Accordingly, you should not place undue reliance on forward-looking statements. These and other risks are described in yesterday’s press release and in our filings with the SEC. These documents can be found in the Investors section of our website located at www.ringenergy.com. Should one or more of these risks materialize or should underlying assumptions prove incorrect, actual results may vary materially. This conference call also includes references to certain non-GAAP financial measures. Reconciliations of these non-GAAP financial measures to the most directly comparable measure under GAAP are contained in yesterday’s earnings release. Finally, as a reminder, this conference call is being recorded. I would now like to turn the call over to Paul McKinney, our Chairman and CEO.

Paul Mckinney: Thanks, Al, and thank you, everyone, for joining us today and your interest in Ring Energy. Before I begin to discuss our second-quarter results, I wanted to welcome two new Ring executives, Shawn Young and Phillip Feiner. As we announced in late June, Shawn was promoted to lead our operations team. And as announced yesterday, Phillip joined us last week to lead the legal and human resources efforts here. All of us here at Ring are pleased to be working with them and look forward to properly growing Ring Energy together for the benefit of our stockholders. Let’s now turn our attention to the subject at hand, our second-quarter performance. We are pleased to post record sales volumes and record cash generation for both the second quarter and year-to-date. We used our excess cash from this record quarter to pay down $15 million of debt and intend to make additional and material progress reducing debt over the coming quarters, subject, of course, to all remain at the range or in the range of current and/or more recent prices. Similar to the first quarter, second-quarter sales volumes exceeded the high end of our initial guidance, while operating expenses and capital spending both came in below our guidance ranges. Combined with our improved operational outlook, for the second half of 2024, we are well positioned for ongoing success for the remainder of the year and into next. The primary driver of our record sales volumes in the second quarter was the continued strong returns from our drilling program and the outstanding performance of our operating team maintain our existing production. The result for the period was a sale of 13,623 barrels of oil per day, which was 2% higher than the first quarter. On a total product basis, we reported second-quarter 2024 sales volumes of 19,786 barrels of oil equivalent per day, which was 4% above the first quarter. Another point to make is a high oil percentage of our product mix of 69%. We will continue to focus our capital spending on undeveloped opportunities with high oil percentage, especially during these times of favorable realized pricing relative to natural gas. Turning over to lease operating costs. Lease operating expenses, or LOE, during the second quarter were $10.72 per BOE, which is below the low end of our guidance range. Similar to first-quarter performance, our second-quarter LOE results reflect our continuing focus on reducing costs and downtime and completing the integration of the Founders’ assets into our operations. I’d like to thank our operating team for their hard work and their dedication to these efforts. Thank you, everyone. Higher-than-anticipated sales volumes and lower-than-expected LOE per BOE, supported by a backdrop of solid oil pricing, resulted in record adjusted EBITDA of $66.4 million for the second quarter as well as year-to-date growth of 15%. Looking at CapEx, we were pleased to once again post spending levels that were less than the low end of our guidance, while the number of producing wells drilled and completed was at the high end of our guidance. The key factors contributing to our lower-than-expected capital costs were increased efficiencies associated with our well completions, enhanced drilling and related logistics, and an improved macro environment associated with our drilling and completion services costs. During the second quarter, we invested $35.4 million in capital expenditures, which included the drilling and completion of five horizontal wells in the CBP and the drilling and completion of six vertical wells in CBP South, three in Ector County, and three in Crane County. Total capital spending also included capital workovers, infrastructure upgrades, and leasing. Record adjusted EBITDA and lower-than-expected CapEx resulted in record adjusted free cash flow of $21.4 million for the second quarter of 2024, which is 70% higher than the same quarter a year ago and represents a 19th consecutive quarter of positive adjusted free cash flow for the company. Combined with our success in the first quarter, we posted record year-to-date adjusted free cash flow of $37 million that was 60% higher than last year. Turning to the balance sheet. We used a portion of our adjusted free cash flow to pay down $15 million of debt in the second quarter and $48 million since closing the Founders acquisition last August. As a result, we ended the second quarter with liquidity of $194.1 million and a leverage ratio of 1.59 times, which was 5% lower than at the beginning of the period. Regarding our guidance for the year, we are updating our full-year 2024 outlook to reflect our first half performance and a solid view for the remainder of the year. We still plan to drill an average of five horizontal and six vertical wells per quarter, which is consistent with what we did in the second quarter. This approach provides flexibility to react to changing commodity prices and market conditions as well as manage our quarterly cash flow. As we have discussed in the past, our drilling program is designed to organically maintain or slightly grow our oil production. Given the success we are seeing in our development efforts, we are increasing our full-year 2024 production guidance to 13,200 to 13,800 barrels of oil per day and 19,000 to 19,800 barrels of oil equivalent per day, which represents an increase of 4% and 5%, respectively, from our initial guidance earlier this year, assuming the midpoints. Regarding the third quarter, we anticipate sales volumes of 19,000 to 19,800 barrels of oil equivalent per day, and more importantly, our oil production to range between 13,200 and 13,800 barrels of oil per day or an oil mix of approximately 70%. With that, I will turn this over to Travis to provide more details on the quarter, and we’ll return to closing comments before we open the call for questions. Travis?

Travis Thomas: Thanks, Paul, and good morning, everyone. As Paul discussed, we are pleased to post second-quarter operational and financial performance that exceeded our initial expectations. The combination of record sales volumes, along with below guidance LOE per BOE and CapEx, contributed to the generation of record adjusted free cash flow that we used to materially pay down debt. To be clear, balance sheet improvement has and will remain a top priority for the company. With that overview, let’s look at the quarter in more detail. As in the past, my prepared comments will be focused on our key sequential quarterly results. During the second quarter, we sold 13,623 barrels of oil per day and 19,786 BOE per day. This represents an increase from the first quarter of 2% and 4%, respectively, and, again, was above the top end of our initial guidance. As Paul discussed, the primary driver of our record sales volumes in the second quarter was the outsized positive impact of our drilling program. Our second-quarter average price differential from NYMEX WTI futures pricing was a negative $0.61 per barrel versus a negative $1.34 per barrel for the first quarter. This was mostly due to the Argus CMA role that increased $0.80 per barrel, offset by the Argus WTI WTS that decreased $0.30 per barrel on average from the first quarter. Our average natural gas price differential from NYMEX futures pricing for the second quarter was a negative $4.31 per Mcf compared to a negative $2.57 per Mcf for the first quarter. Our realized NGL price for the second quarter averaged 12% of WTI compared to 15% for the first quarter. The result was revenue for the second quarter of $99.1 million, a 5% increase from the first quarter, which was due to a $2 million volume variance and a $2.6 million price variance. As noted, we are targeting higher oil mix opportunities since oil accounted for 100% of the revenue, while it was 69% of our total production. That means our positive NGL sales were not quite able to fully offset our negative gas sales, resulting in a minor net loss. As I noted, in the second quarter, we continue to see negative realized pricing for natural gas. While the majority of our GTP costs are reflected as a reduction of the sales price, the larger impact on our realized natural gas pricing reflects the continued product takeaway constraints we have seen in the basin. The good news is additional third-party takeaway capacity is expected to come online with the Matterhorn Express pipeline in West Texas around the end of 2024 that we hope will alleviate some pricing pressure. LOE was $19.3 million for the second quarter versus $18.4 million for the first quarter. Echoing Paul’s comments, we were pleased to see LOE come in below the low end of our guidance range of $10.75 to $11.25 per BOE due to lower-than-expected workover costs partially offset by higher electricity and chemical costs. LOE per BOE increased slightly in the second quarter to $10.72 per BOE from $10.60 per BOE in the first quarter. Cash G&A, which excludes share-based compensation, was $5.6 million for the second quarter, essentially flat with the $5.7 million from the first quarter. Our second-quarter results included a loss on derivative contracts of $1.8 million compared to a loss of $19 million for the first quarter, of which $2.6 million was a realized loss, offset by an $800,000 unrealized gain. As a reminder, the unrealized gain loss is just the difference between the mark-to-market values from period to period. Finally, for Q2, we reported net income of $22.4 million or $0.11 per diluted share. This was a significant improvement compared to the first-quarter net income of $5.5 million or $0.03 per diluted share. Excluding the estimated after-tax impact of pretax items, including noncash unrealized gains and losses on hedges and share-based compensation expense, our second-quarter adjusted net income was $23.4 million or $0.12 per diluted share, while first-quarter adjusted net income of $20.3 million or $0.10 per diluted share. We posted record second-quarter 2024 adjusted EBITDA of $66.4 million versus $62 million for the first quarter, which was a 7% increase. As Paul mentioned, during the second quarter, we invested $35.4 million in capital expenditures. This was below our guidance of $37 million to $42 million. and the actual number of producing wells drilled and completed, 11 in total, was at the high end of guidance. The primary driver for lower CapEx was reduced well completion costs and drilling efficiencies. The combined result of record operating cash flow and lower-than-expected CapEx drove record adjusted free cash flow of $21.4 million for the second quarter versus $15.6 million for the first quarter. In addition, we generated record year-to-date adjusted free cash flow of $37 million that was 60% higher than the same period in 2023. We used our record excess cash flow to pay down $50 million of borrowings on our revolver in the second quarter and $48 million since the closing of the Founders acquisition in late August. The difference between our adjusted free cash flow and the debt pay down was due to working capital changes, including a $9.1 million decrease in accounts payable quarter to quarter. As I mentioned in the beginning of my comments, further balance sheet improvement through additional debt pay down remains a top priority for the company. Moving to our hedge position. For the last six months of 2024, we currently have approximately 1.2 million barrels of oil hedged or approximately 49% of our estimated oil sales based on the midpoint of our revised guidance. We also have 1.2 Bcf of natural gas hedged or approximately 38% of our estimated natural gas sales based on the midpoint. For a quarterly breakout of our hedge positions for Q3 and Q4 of 2024, please see our earnings release and presentation, which includes the average price for each contract type. Now let’s turn to the balance sheet in some more detail. At June 30, we had $407 million drawn on our credit facility. With the current borrowing base of $600 million, we had $192.9 million available net of letters of credit. Combined with cash, we had liquidity of $194.1 million with a leverage ratio of 1.59x. Looking at our outlook and guidance. For the second half of 2024, we will continue to utilize a drilling program that maintains our flexibility to react to changing market conditions, adjust spending levels as appropriate as well as manage our cash flows quarter-to-quarter. Our focus is on maintaining or slightly growing BOE per day production levels while continuing to grow crude oil sales. Our average daily sales volume guidance for full-year 2024 have been increased for the previous, including crude oil sales volumes of 13,200 to 13,800 barrels of oil per day and BOE sales volumes of 19,000 to 19,800 BOE per day or 70% oil. For the third quarter, we are providing a sales outlook of crude oil sales volumes of 13,200 to 13,800 barrels of oil per day and BOE sales volumes of 19,000 to 19,800 BOEs per day at 70% oil. Those who are still paying attention probably have noticed that our third-quarter and full-year production guidance mirror each other and reflect a midpoint that is similar to where we ended the first half of 2024. For CapEx, we now expect to spend $141 million to $161 million on our full-year development plan, which is 3% lower at the midpoint to our previous full-year guidance. In addition, we are providing an estimate of between $35 million to $45 million for the third quarter. We now anticipate full-year 2024 LOE of $10.50 to $11.25 per BOE and are providing guidance of $10.50 to $11.25 per BOE for the third quarter of 2024. Finally, I would note that all projects and estimates are based on assumed WTI oil prices of $70 to $90 per barrel and Henry Hub prices of $2 to $3 per Mcf. So with that, I will turn it back to Paul for his closing comments. Paul?

Paul Mckinney: Thank you, Travis. Similar to the first quarter, we view our operational and financial success during the second quarter as a direct reflection of the merits of our proven and disciplined strategy designed to maximize free cash flow generation, further improve the balance sheet, properly grow the business, and ultimately, provide a sustainable return of capital to stockholders. In short, we are executing a plan that we believe generate sustainable value and is in the best interest of our stockholders. Having said that, I want to address in my closing comments several key questions related to our strategy that we continue to hear from our institutional and individual stockholders. Perhaps the most common question appears to be regarding our commitment to paying down debt. As I have stated previously, we are focused on reducing our absolute debt levels and our goal is to make material progress in this regard in the future, depending on oil prices and other factors that affect our ability to do so. However, there are opportunities for growth that may require increases in the absolute debt levels that can have a material benefit to our stockholders. I am referring to opportunities to grow through strategic and accretive acquisitions. Regarding the debt that we could incur associated with a potential acquisition, you have heard me say in the past that we intend any future acquisitions, in addition to being accretive to our stockholders, to be balance sheet enhancing. We have also said that if they are not balance sheet enhancing, we will attempt to keep the deal as close as being balance sheet neutral as we can with clear sight to the paydown of the debt incurred. Two examples of how our intentions in this regard have panned out in the past are the acquisitions we closed during the last two years, the Stronghold acquisition and the Founders acquisition. Let’s look at the details of those transactions specifically regarding their impact on our balance sheet and our leverage ratio. If you recall, we structured the finances of Stronghold acquisition with a mixture of debt, equity, a deferred cash payment, and innovation of their hedge position. Result of that extremely accretive deal was that our leverage ratio went from 3.5 times, our trailing 12 months EBITDA, to 1.4 times, greatly enhancing our balance sheet. When considering the Founders acquisition and the impact that deal had on our balance sheet, we drew down the funds necessary to purchase those assets from our credit facility. So the deal increased our absolute debt. However, we structured the deal and took advantage of several attributes of the assets to position the transaction so that it was essentially balance sheet neutral from a leverage ratio perspective. Let me explain. First, we took advantage of the cash flow from the high cash flow in assets to help reduce the amount we had to draw down on the credit facility at closing. We paid $75 million for the assets with an effective date of April 1, 2023. The cash flow from the assets from the effective date until closing August 15, 2023, reduced the amount owed to $62 million. Part of the closing obligation was deferred for months in the form of a deferred payment of $15 million, reducing the draw against the credit facility at the closing even more. The next thing we included in that deal was the ability to apply post-closed adjustments to the deferred payment. Instead of paying the $15 million as originally planned, we paid $11.9 million. And if you recall, we did not have to draw the $11.9 million against the credit facility because the company’s cash flow during the quarter was sufficient to cover the deferred payment and pay down debt. After including the trailing 12 months EBITDA from the acquired assets, the deal was essentially balance sheet neutral from a leverage ratio perspective when not including the deferred payment. Since closing, we have paid down $48 million of the debt incurred and are on track to pay off the entire amount very soon, hopefully, by the end of this quarter if oil prices return to recent levels. So the bottom line is this: we incurred additional debt from the Founders deal, but it was essentially balance sheet neutral from a leverage ratio perspective. We had and still have a very clear sight to a rapid paydown of the debt incurred. The benefits of the stockholder is that after the debt is paid off, we will have approximately an additional 2,000 barrels of oil equivalent per day of production or more to accelerate the repayment of the remaining debt. Another question we often get is regarding our stock price and what many have identified as a disconnect between our operational financial performance and our stock price performance. As you know, there are numerous factors that affect stock price performance and investors and industry punters have shared with us the issues they believe are having the largest impact. I don’t plan to speculate in this regard or try to force rank which are the most are the most important or whether some of them are truly affecting our stock price. But what I will do is share the things we are doing to help improve our stock price performance. First, we don’t believe a large enough cross-section of the investment community knows about Ring Energy. We also don’t believe many are educated about our assets in the Northwest Shelf and the Central Basin Platform and what makes them different from the assets they typically know about in the Delaware and the Midland Basins. We also believe there is more we can do to educate the investment community about our strategy and the aspects of Ring that make us differ from other public oil and gas investment opportunities. To help with all of this, we are stepping up our communication strategy by participating in more industry events and conferences to educate and tell our story. We are also scheduling more non-deal roadshows, both in person and virtually with potential investors institutional investors, lenders, and a broader cross-section of the banking and investment banking communities, all with hopes of attracting long-term institutional investors. Another related thing we are trying to do is attract more analyst coverage. We have and continue to meet with analysts, that for one reason or another, have not yet initiated coverage on us. Our efforts to date have been focused on understanding their requirements and to position the company to meet those requirements. Last but certainly not least, is our debt. We are focused on improving our balance sheet and absolute debt levels. We believe making material progress in this regard can have a positive impact on the value creation. We are targeting getting our leverage ratio comfortably below 1 times and believe that it is a realistic and achievable goal. To sum up, we believe our value-focused proven strategy better prepares the company to manage the industry risks and uncertainties, results in generation of sustainable and competitive returns, and supports our efforts to achieve the necessary business size and scale to position Ring to sustainably return capital to stockholders. We also believe staying the course with our strategy will ultimately deliver growth and competitive returns despite the continuing volatility we endure in our industry. I want to thank all of you for your interest in Ring Energy and for participating in our call today. I also want to thank our stockholders for their continued support and trust. And with that, we will turn this call over to the operator for questions. Operator?

Operator: [Operator Instructions]. The first question comes from Neal Dingmann with Truist.

Neal Dingmann: Good morning, guys. Paul and team, my first question is on your inventory. Specifically, guys, looking at that slide 26, no doubt you all continue to put up some days vertical and horizontal wells in the platform as well as in the shelf and even the recompletion activity. So I guess what I’m wondering here is, can you remind me majority of this year sort of going forward the remainder and even into next year, where you’re thinking about the capital you allocated maybe just talk about inventory depth? Because it’s interesting to me on all the vertical horizontal potential as well as the refrac potential.

Paul Mckinney: Yes, very good. Those are good questions. We like the allocation mix that we currently have. And we’ve talked about this in the past, our allocation strategy really in terms of how we allocate capital are basically based on two things. Number one, cash flow generation is the first consideration. But the other thing is the result of issues associated with managing infrastructure constraints where we have the saltwater disposal capacity, whether they are electrical constraints, whether there’s enough fresh water or water we can use with frac jobs, all of these types of constraints go into planning all of that. And all of that works together to maximize cash flow generation. And so the allocation between horizontals in the verticals, the horizontals tend to generate larger producing volumes and also higher net present value. But the mix with the verticals, they have very rapid payback and many of the vertical areas have higher oil percentages. So we’re also focused on that. And so now getting back to the depth of the inventory, I’ve said, and I’ll say it again, we have a really handsome short, medium-term inventory to keep us going for the next several years. However, we don’t have a luxury that many of the other companies have, especially those in the Delaware and Midland Basin of a big 15- to 20-year inventory. So that’s the reason why we’re so focused on acquisitions. And so we believe, though, that in the area that we’re focused, there’s plenty of opportunity to continue to fill the hopper so that we can continue to deliver the types of returns. Now the other thing that’s going on that we haven’t really talked much about, and I think you’ll hear us talk more about this as we go into the future is that we’re now to the point we’re testing ideas on our existing acreage that could organically generate additional drilling opportunities. Some of these will be verticals, some of these would be horizontal. And so there is a little sprinkle of capital allocation towards these higher risk test, but the benefit to that is we could significantly improve our inventory and we can do that organically. That’s a lot better than going out and acquire undeveloped opportunities for acquisitions. So that’s kind of what we can see for us move on in the future. I hope that answered your question, Neal.

Neal Dingmann: It certainly did. And what you said sort of tied right into my second question. That is just on the upcoming conventional M&A opportunities. It seems to me there are several — I’ve even heard of some conventional packages, really interesting package is already out there. It sounds like there’s more that may hit the market. So just wondering maybe what — where do you guys see it, if you’ve heard the same? And again kind of what your restrictions are when you’re looking at some of these deals?

Paul Mckinney: Yes. And so you heard us say in the past that we believe that the activity of the larger organizations in our industry as they consolidate the Midland and Delaware that they would want to help pay down or pay off and reduce our leverage associated with those deals by selling what they consider non-core assets, assets where they have not historically allocated a lot of capital to. And so it’s proven out to be true. As you know, and I’m not going to name any of these, but there are several packages out there on the street. We do hear, like you have heard, that we believe there are more packages that are going to hit the street over the next couple of years. We’ve said this in the past, we believe that the number of opportunities that will hit the Street will exceed our ability to take them all down, and several of these we’ve been mapping and looking at for quite some time. Some of these we’ve actually approached to try to initiate a negotiated deal. We haven’t been successful in that regard all the time. But yes, we’re very interested. Currently, we are focused in the very areas that we currently operate, again, because we can capture the synergies associated with spreading our operating team over more wells and more production. This is an area that we know very well, and it’s an area that we’ll be concentrating on. Our geoscience teams have been mapping, identifying undeveloped opportunities that reside under other people’s acreage. And so we’re actually very excited about what we’re seeing play out. And in some regards, we’re kind of hoping that maybe the these acquisition opportunities will hit the market a little bit more spread out so that we have a better chance of capturing it. So some of them are coming so fast. And we will have to let one or two of them go just simply because we can’t take it all in, right?

Alexander Dyes: If I may, this is Alex. We created specifically a slide for this question, slide 15. And this should give some of the analysts and just the investment community, it’s our acquisition strategy and backs up everything Paul just covered.

Paul Mckinney: Yes. If you go back to that slide, you’ll notice that if you look at all of the potential acquisition opportunities that reside out there in the very area that we’re focused, it represents 480,000 plus barrels of oil equivalent per day of production. That’s a huge target for a company our size. And it’s just — it’s self-explanatory by observation, you know that we can’t take all of that down, but that just does represent the true opportunity that’s out there before us.

Operator: Our next question comes from John White with ROTH Capital.

John White: Congratulations on a strong quarter and on your increased production guidance. So to be clear, you have not announced an increase in CapEx, right?

Paul Mckinney: No, we have not. The guidance for our CapEx that we have provided for the rest of the year does represent, if you consider just the midpoint, a slight reduction in our capital spending. Again, we are enjoying a time period in the macro environment where the drilling activity in the Permian Basin has not increased, has actually been holding flat or slightly down a little bit. And so in my opinion, the oilfield services industry has — they’re designed really to operate at a higher activity level that we currently are. And so as a result, we’re not seeing pressures, the inflationary pressures on increase in cost. Actually, they’re slightly coming down. And so we’re taking advantage of that. And so we believe that the rest of the year, unless something changes, we can enjoy that, we’ll see quite a bit of savings. Now we’re still targeting essentially the same number of wells. We’re just saying that we can now drill them and complete them and bring them online for less money than we originally estimated.

Alexander Dyes: And John, there’s actually a slide, slide 6, that describes exactly what Paul is talking about. And comparing the original guidance that we provided at the beginning of the year compared to the updated guidance, the midpoint of the 3% reduction.

John White: Well, that’s favorable and thanks for the detail.

Operator: The next question comes from Jeff Grampp with Alliance Global Partners (NYSE:).

Jeffrey Grampp: Questions on the capital side for you. Obviously, really nice performance thus far in the first half of the year. I think you probably averaged something in the neighborhood of like $35 million a quarter. Activity levels in the back half of the year, some will be similar to the first half, but CapEx is probably going to be more like the $40 million a quarter range. So I was just wondering, is that just general conservatism there on your part? Or if there’s any perhaps specific reasons why capital might creep a little bit higher in the back half versus the first half given the consistency in your activity levels?

Paul Mckinney: Yes. It’s actually a combination of a couple of things. Our estimates probably are a little high versus the inflationary pressures we are seeing, kind of going back to the question we just — with John White. But at the same time, and I don’t mind sharing this because of the success we’ve had in the first half and because of the success of the ongoing programs we’ve budgeted for the year, we’re also allocating a little bit of capital towards more risky investments that could potentially prove up significant additional reserves organically. And so that’s really the — what represents a higher end. Shawn, I don’t know if you’ve got more you can add to that.

Shawn Young: Yes. Again, if you do look at slide number 6 and the guidance we’ve provided there, there is a little bit of an increase in activity. And as Paul mentioned, we do have a few more wells that we do plan to drill in the fourth quarter. And so that’s the majority of that incremental CapEx that you’re seeing.

Paul Mckinney: I think we’re also going to step up some of our spending on some of our facility upgrades, putting in — capturing emissions doing that kind of thing. So there’s a few additional capital costs that we’ve decided to throw in. So we believe that our guidance range is just about right. I’d love to come in below it. But if it does, it will be because of industry inflation, the macro environment will continue to improve.

Jeffrey Grampp: Understood. And my follow-up, you guys have a slide kind of noting a bit of the well cost reductions towards the back end of the deck, I believe. Should we think about those as being mostly kind of near term and maybe more transitory related to softness in the overall OFS market? Or are there some more kind of Ring-specific internal efficiencies where maybe some of those cost reduction captures a little bit more permanent, if you will?

Paul Mckinney: That’s kind of hard to predict. I’m going to turn this over to Shawn to ask. But it’s really hard to predict because we assume the same level of efficiency when we’re drilling and completing the wells. And I have to turn my hats off to my drilling department because they continue to improve their efficiencies beyond what our assumption. So Shawn, you got more to say there?

Shawn Young: Yes. Just to add a little color there. We are seeing some improvements in our overall efficiencies on the drilling side and the completion side, where we are just driving out costs by being faster and more efficient. And so yes, there is a component of that that is just the overall relaxation in the prices of the service industry. But there’s definitely some that we are going to be able to realize going forward just from our — the performance of our drilling team and completion team.

Operator: Our next question will come from Jeff Robertson with Water Tower Research.

Jeffrey Robertson: Thank you. Paul, production this year seems to have benefited from two things; one is performance on the wells you drilled, but also lot of the field level steps Ring has taken to either increase run times or deal with large disposal and things like that. Is a lot of the heavy lifting on the field operations with respect to the Founders acquisition or the existing asset base, has that been done? Or do you see further opportunity to enhance production just by better field-level operations?

Shawn Young: Yes. This is Shawn. I’ll take a stab at that one. Yes, I think there’s always room for improvement. And as we continue to have more time in the saddle with these acquisitions, we do expect that we’ll continue to see some improvement. But we are seeing it in our other assets as well, not just the newly acquired properties, just with some of the bottom hole assemblies and things that we’ve incorporated in our rod designs and artificial lift designs and have really started to make an impact. And so you’re able to see that in the numbers now.

Jeffrey Robertson: Paul, on the case study you talked about for the Founders acquisition, does the type of asset, does that include a pretty heavy PDP base with — one of your slides points out, your corporate decline curve being a lot less than some of the peers who are probably more focused on unconventional assets? And in those types of deals, are you able to pick up inventory at a relatively low cost because of the conventional nature?

Paul Mckinney: Yes. It’s actually the conventional nature tends to reduce the competition for those opportunities. And so I will say this. If you look at what’s out there in the marketplace today for sale, there’s a mix of acquisition targets that bring with them quite a few undeveloped opportunities based on our mapping in our analysis. There is also opportunities out there to pick up acreage that maybe more closely to fully or almost fully developed, so there’s not as many it’d be more considered a PDP buy. Each one of these acquisition opportunities bring different virtues that we consider, some of them are very beneficial to the company. So we look at all of those things. And so it’s kind of hard to predict. And at the same time, you always got to consider you have a low chance of capture for any one of these acquisition opportunities. And so you do the best you can and you compete the best you can. You don’t want to overpay but all of these things have various different virtues that could actually enhance the value for our shareholders. And so we look at all of that.

Jeffrey Robertson: If I could slip one more in. Paul, you talked about some higher risk opportunities in the drilling program. Is that applying new technology to known reservoirs or new technology or reservoirs that may not have been commercial in the past?

Paul Mckinney: The answer is yes. And so it’s kind of hard to explain all of that. But what we’ve done is, as you march through the development of one area and you learn what works, what doesn’t work, and you have your geologists continuing to work the acreage that you have and even acreage position that you don’t have. You look at the logs, you look at the opportunity, you look at all the evidence that was uncovered before us. And you say — and you start asking questions, why won’t this work over here, even though it hasn’t been tried, and so you do that. So some of these, we call them slightly higher risk. But when you look at the logs and you compare the information that you have about the rocks and the oil that’s in the rocks, a lot of times, it’s just the fact that it hasn’t been tried. And so some of them, although we call them higher risk, they may not be higher risk in the end. And so the good thing about it is that we’re not only looking at this type of opportunities, doing what we’re doing and back on where we’re doing it, immediately offsetting on the other side of the fence. But we’re also looking at opportunities on our acreage where we can apply horizontal drilling in areas that hasn’t been applied yet. And so yes, we’re really excited about that. The opportunities that underlie our existing acreage, we believe, can be very significant. And so I’m proud to say that we’ve just now gotten to the point, and we’re still not finished building out our team. But our geoscience team is doing more than just steering the drill bit to keep our wells in line on our horizontals and that kind of stuff and evaluating our own acreage, but we’re expanding now. We’re generating new ideas so that we can grow organically outside of the acquisition front.

Operator: [Operator Instructions]. Seeing no further questions, this will conclude our Q&A session. I would like to turn the conference back over to Paul McKinney for any closing remarks.

Paul Mckinney: Thank you, Nick. On behalf of the management team and Board of Directors, I want to once again, thank you, everyone, for listening and participating in today’s call. We are pleased to have posted record operational and financial results to date for 2024 and are looking forward to the remainder of the year, which we believe remains strong. We will continue to keep everyone apprised of our progress. And again, I’d like to thank you for your interest in Ring Energy. Have a great day.

Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.