The more I look, the more I like. Ring Energy completed their purchase of the private oil company in August and so included results of only one month of the combined companies. Production increased from 10K to 13K. In Q4, with all three months from both companies, Production will jump to 18K to 19K.
Ring operates in areas of the Permian that are not shale. They drill horizontal wells and frack but at much lower levels than in the true shale. Their land already has oil porosity. The fracking helps but isn't as necessary to get oil to flow. This leads to slower declines in production over the life of the well AND allows the company to apply secondary and tertiary methods to squeeze additional barrels out of the ground. So the life of these wells in the 30 to 50 year range of economic production. Offsetting these positives is the fact that these are not big wells. The initial production levels are in the 300-700bpd range. It takes a lot of wells to boost company wide production.
Like most US oil producers, Ring is not seeking production at all costs. They seek positive free cashflow, paying for all new drilling out of profits AND still having cashflow in excess of capex. Their most recent guidance is for 2023 production slightly higher than Q4 guidance of 18-19K. They also have to pay down debt from the acquisition that just closed. Their line of credit has $100+million plus in excess credit limit and given they are at a free cashflow level, this should be an adequate cushion. Company goal is to reduce outstandings next year from excess cashflow.
Ring is almost a pure play on oil. The level of liquids in their production in the 90+% range, counting oil + NGL. I think ngas pipelines in Texas will reach capacity soon and that will limit oil production since flaring is no longer allowed. Ring should have less problem with excess ngas production.
The oil porosity and the lack of need to frack as much leads to low cost oil wells. Ring has an extremely low cost of break even. Their break even is in the $25 to $30 range. This also leads to quicker drill times and completions. Wells can be drilled and turned to production in less than two weeks.
In addition to these cheaper horizontal wells, Ring also has hundreds of cheap vertical wells. The average production of these wells is in the 150bpd range. Again, not going to attract headline news but contributes to the company's low break even levels and long life assets.
Bottom line, I think Ring Energy will substantially increase net profits and cashflow in Q4 as production rises from 13K to 18K. They are very cost conscious and operating in areas that provide low cost, high return opportunities. The mgmt team founded Arena Resources and took that stock from nothing to a big cashout.
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