Torsten Asmus
Power Ring (New York Stock Exchange:REI) delivered Sales volumes for the second quarter of 2024 which significantly exceeded expectations and also raised its full-year guidance by 4% to 5%. Strong sales volumes enabled it to generate $37 million in adjusted free cash flow for the year. 1H 2024 despite low realized prices for its non-oil production.
However, Ring only paid down its credit line debt by $18 million in the first half of 2024, due to the impact of changes in working capital (some of its free cash flow went to reducing accounts payable).
I have raised my estimate of Ring's value to $2.70 per share in a long-term $75 WTI oil scenario. This is up $0.20 per share from when I analyzed Ring a few months ago and noted that continued strong sales volume performance would force me to raise my estimate. of its value.
Sales volume performance
Ring Energy had a total sales volume of 19,786 BOEPD in the second quarter of 2024, which was 4% higher than the first quarter of 2024 and also well above Your previous orientationRing delivered total sales volumes in the second quarter of 2024 that were 5% above the midpoint of its guidance for total production and 4% above the high end of its guidance.
Ring's oil sales volumes ended at 13,623 barrels per day in the second quarter of 2024, up 2% from the first quarter of 2024. This was also above expectations, 3% above the midpoint of its guidance and 2% above the high end of its guidance.
Ring outperformed Ring in both total sales volume and oil sales volume, although the magnitude of its oil outperformance was slightly smaller as its oil cut fell from 70% to 69%.
Realized prices for gas and natural gas liquids
In previous quarters when Ring had negative natural gas prices, it still generated positive overall revenue (before hedges) from wellhead gas due to contributions from natural gas liquids. This was not the case in the second quarter of 2024 due to the sharply negative realized natural gas price.
Ring finished with marginally negative combined revenue (before hedges) from its natural gas and natural gas liquids, at -$0.1 million for the quarter (or approximately -$0.26 per equivalent barrel). Ring earned -$1.93 per Mcf from its natural gas and -$9.27 per barrel from its natural gas liquids in Q2 2024 before hedges.
Ring had about 32% of its second-quarter 2024 natural gas sales volumes hedged, so that at least gave it positive combined revenue for natural gas and NGLs after hedging.
Ring provided some additional details on why it has been reporting low realized prices for natural gas and NGLs. Ring’s gathering, transportation, and processing fees are recorded as a deduction from the commodity sales price. In the second quarter of 2024, those fees totaled $1.59 per Mcf for natural gas and $10.22 per barrel for NGLs. Before tariffs, Ring realized a loss of $0.34 per Mcf for its natural gas (West Texas natural gas prices often turn quite negative) and $19.49 per barrel for its NGLs.
High oil prices enabled Ring to earn slightly more per barrel of oil equivalent despite a slightly lower oil cut and low prices for its non-oil volumes. It earned $55.06 per barrel of oil equivalent in the second quarter of 2024, compared to $54.56 per barrel of oil equivalent in the first quarter of 2024, thanks to oil prices that were about $4 per barrel higher.
Outlook for the second half of 2024
Ring now expects to average 19,400 BOEPD in sales volumes during 2024, including 13,500 barrels per day of oil sales volumes. This represents a 5% increase in total sales volumes and a 4% increase in oil sales volumes from Ring’s initial 2024 guidance.
I had previously modeled Ring's 2024 sales volumes above the midpoint of its initial guidance, but Ring's updated guidance is still for a 4% improvement in total sales volumes and a 3% improvement in oil sales volumes compared to my prior model.
Ring’s updated guidance indicates that it expects second-half 2024 sales volumes to end up being broadly similar to its first-half 2024 sales volumes.
With current prices of nearly $75 for WTI oil and $2.35 for NYMEX gas for the second half of 2024, Ring is projected to generate $187 million in oil and gas revenues over that period. Ring's hedges for the second half of 2024 have an estimated negative value of around $3 million.
| Barrels/Mcf | $ per barrel/Mcf (realized) | $ Millions | |
| Oil | 2,484,000 | $73.75 | $183 |
| LGN | 586.224 | $10.50 | $6 |
| Natural gas | 2,996,256 | -$0.75 | -$2 |
| Coverage value | -$3 | ||
| Total revenue | $184 |
Ring had $72 million in capital expenditures during the first half of 2024 and would end up with $79 million in capital expenditures in the second half of 2024 based on its full-year guidance.
This resulted in a free cash flow projection of $23 million for the second half of 2024. Ring generated $37 million in adjusted free cash flow for the first half of 2024, but its free cash flow for the second half of 2024 may be lower due to increased capital spending and lower oil prices (Ring is approximately 50% hedged in oil).
| $ Millions | |
| Production costs | $40 |
| Production and ad valorem taxes | $11 |
| General and administrative expenses in cash | $12 |
| Capital expenditures | $79 |
| Cash interest expense | $19 |
| Total cash expenses | $161 |
In this scenario, Ring's net debt at the end of 2024 would end up around $383 million, along with leverage of 1.5x.
This assumes no changes to other working capital items in the second half of 2024. Ring only paid down $18 million of debt in the first half of 2024 despite generating $37 million in adjusted free cash flow. This was due to changes in working capital items such as accounts payable.
Estimated rating
I have raised my estimate for Ring's value to $2.70 per share, with a long-term price of WTI oil at $75 and NYMEX gas at $3.75. The increase of $0.20 per share reflects Ring's improved sales volumes (both total volumes and oil volumes).
A $2.70 per share valuation would also be roughly 3.5 times EBITDAX based on 19,400 BOEPD (including 13,500 barrels of oil per day) and those commodity prices (along with $383 million in net debt).
Ring also appears capable of generating about $75 million in unhedged free cash flow at a $75 WTI oil price, which would be approximately 37.5 cents per share (based on 200 million shares).
Conclusion
Ring Energy's second quarter 2024 results were strong, with total sales volumes coming in 4% above the upper end of its guidance. Oil sales volumes were 2% above the upper end of its guidance.
This allowed Ring to generate $21 million in adjusted free cash flow during the quarter, despite minimal contributions from its non-oil volumes.
The strong performance in terms of sales volume resulted in an increase in my estimate of Ring's value, and I now estimate it is worth about $2.70 per share at a long-term WTI oil price of $75. However, Ring's debt remains substantial, so I would like to see it avoid acquisitions that increase leverage until it makes further progress in reducing debt.