Ring Energy, Inc. (NYSE:REI) reported Q1 2024 sales volumes that were above expectations, although it did not change its full-year guidance range. Due to its relatively strong Q1 results, I am now assuming that Ring’s oil sales volumes will end up around 1.5% above the midpoint of its full-year guidance, though.
Despite the increased oil volumes, Ring’s projected free cash flow for 2024 is expected to be a bit lower than when I last looked at it. This is mostly due to 2024 oil strip prices going down around $5 (partially offset by changes in the value of Ring’s hedges). I now project Ring to generate $55 million in 2024 free cash flow.
The reduced free cash flow (and associated incremental increase in its leverage) leads me to trim Ring’s estimated value to $2.50 per share for now. This still leaves plenty of upside at its current price.
Q1 2024 Results
Ring ended up selling 19,034 BOEPD during Q1 2024, which was 3% above the high-end of its guidance for the quarter. Ring’s oil cut ended up at 70% instead of the 69% it had expected. This resulted in 13,394 barrels per day in oil sales during the quarter, which was 5% above the high-end of its guidance. Ring noted that there was less downtime than expected during the quarter, which helped its volumes.
The higher production/sales volume levels resulted in Ring’s lease operating expense ending up at $10.60 per BOE, lower than its guidance for $10.75 to $11.25 per BOE for the quarter.
Overall, it was a positive quarter for Ring, with it also spending slightly below its capex budget.
Natural Gas Pricing
For the second consecutive quarter (and the third quarter out of the last four), Ring realized negative prices for its natural gas. In Q1 2024, Ring realized negative $0.55 per Mcf for its natural gas, which it indicated was $2.57 less than NYMEX futures pricing for the quarter.
Ring could realize negative $1 or worse for its natural gas in Q2 2024 as Permian natural gas prices have been particularly weak this quarter. Ring reports gathering, transportation, and processing costs as a reduction to realized natural gas prices, which contributes to Ring’s often large natural gas differentials.
Although Ring’s natural gas revenues were negative $0.8 million in Q1 2024, Ring noted that its wellhead gas still positively contributed to revenues due to NGLs. Ring reported $3 million in Q1 2024 revenues for NGLs and realized $4.29 per BOE for its combined NGLs and natural gas.
Due to low natural gas prices, Ring has been focusing on oilier development opportunities, which it expects will keep its oil percentage at 70+%.
Updated 2024 Outlook
I’ve decided to increase Ring’s projected 2024 sales volumes to 18,700 BOEPD (including 13,150 barrels per day of oil sales volumes). This is roughly 1% above its guidance midpoint for total sales volumes and 1.5% above its guidance midpoint for oil sales volumes.
Although Ring has not changed its full-year sales volume guidance, its relatively strong Q1 2024 results suggest that it is likely to end up above the guidance midpoint for the full year. If Ring’s Q2 2024 sales volumes are at the guidance midpoint, then it would need to sell around 18,500 BOEPD (including 13,000 barrels per day in oil sales volumes) during the second half of 2024 to reach my updated numbers. This would allow for roughly 1.5% lower volumes in 2H 2024 compared to Q2 2024.
WTI oil strip prices for 2024 are now around $76 to $77. At that price, Ring is now projected to generate $366 million in revenue, inclusive of negative $7 million in hedge value.
Ring’s realized natural gas price for 2024 is expected to be slightly negative before hedges, but its natural gas hedges have approximately $3 million in projected positive value.
Barrels/Mcf | $ Per Barrel/Mcf (Realized) | $ Million | |
Oil | 4,812,900 | $75.50 | $363 |
NGLs | 1,035,963 | $11.00 | $11 |
Natural Gas | 5,972,022 | -$0.20 | -$1 |
Hedge Value | -$7 | ||
Total Revenue | $366 |
This results in a projection of $55 million in free cash flow for Ring in 2024, which would reduce its net debt to around $370 million at the end of 2024 with no changes to other working capital items.
$ Million | |
Production Expenses | $74 |
Production and Ad Valorem Taxes | $25 |
Cash G&A | $22 |
Capital Expenditures | $155 |
Cash Interest Expense | $35 |
Total Cash Expenditures | $311 |
Ring’s leverage would be 1.5x at the end of 2024 based on strip prices, which appears manageable, but is still a bit higher than ideal.
Notes On Valuation
I am currently estimating Ring’s value at $2.50 per share at long-term $75 WTI oil. This is around 10 cents lower than what I had previously valued Ring at, reflecting the reduced free cash flow expectations as well as some risks around its leverage.
I am also being relatively conservative about Ring’s sales volumes assuming that the remainder of the year is in line with initial expectations. If Ring’s better than expected volumes from Q1 2024 carries over to future quarters, that would boost Ring’s estimated value.
Conclusion
Ring Energy, Inc. Q1 2024 results were positive as it exceeded its sales volume guidance. It has also been focusing on its oilier assets due to weak natural gas prices. Oil makes up around 70% of Ring’s sales volumes but is expected to provide around 97% of its 2024 revenue.
Due to oil prices (CL1:COM) falling back into the $70s, Ring is now projected to generate around $55 million in free cash flow during 2024. This will reduce its net debt to $370 million by the end of 2024 if it doesn’t make any more acquisitions.
Ring’s leverage is on the higher side for an oil producer, and thus I now estimate its value at around $2.50 per share. I’d likely increase this estimated value if continues to deliver sales volumes above expectations or if it speeds up its progress in reducing its leverage.
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