FORM
2023
RING ENERGY, INC.
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Nevada | 90-0406406 | ||||
| (State or other jurisdiction of incorporation or | ( | ||||
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) |
(281)397-3699
(Registrant’s telephone number, including area code)
| Title of | Trading Symbol | Name of | ||||||
Common Stock, | REI | NYSE American | ||||||
Indicate by check mark whether the registrantregistrant: (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 registrantRegistrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
☒ Yes ☐x No
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☒ Yes
| Large accelerated filer | o | Accelerated filer | ||||||||||||
Non-accelerated filer | o | (Do not check if a smaller reporting company) | Smaller reporting company | |||||||||||
Emerging growth company | o | |||||||||||||
☐ Yes
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Among thesubject to many important factors that could cause actual future results to differ materially arefrom those contemplated. Such factors include:
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Should our underlying assumptions prove incorrect or the consequences of the aforementioned risks worsen, actual results could differ materially from those expected. There may also be other risks and uncertainties that we are unable to predict at this time or that we do not now expect to have a material adverse impact on our business.
Forward-looking statements speak only as toof the date hereof. Allthat such statements are made. We undertake no obligation to publicly update or revise any forward-looking statements and any subsequent written or oral forward-looking statements attributable to us or any person acting on our behalfafter the date they are expressly qualified in their entirety by the statements contained herein or referred to in this section and any other cautionary statements that may accompany such forward-looking statements. Except as otherwise required by applicable law, we disclaim any intention or obligation to update publicly or revise such statementsmade, whether as a result of new information, future events or otherwise.
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September 30, 2022 December 31, 2021 ASSETS Current Assets Cash and cash equivalents $ 890,567 $ 2,408,316 Accounts receivable 45,864,400 24,026,807 Joint interest billing receivable 1,897,125 2,433,811 Derivative assets 13,322,013 — Prepaid expenses and other assets 3,246,569 938,029 Total Current Assets 65,220,674 29,806,963 Properties and Equipment Oil and natural gas properties, full cost method 1,418,931,111 883,844,745 Financing lease asset subject to depreciation 2,067,375 1,422,487 Fixed assets subject to depreciation 2,985,778 2,089,722 Total Properties and Equipment 1,423,984,264 887,356,954 Accumulated depreciation, depletion and amortization (269,541,416) (235,997,307) Net Properties and Equipment 1,154,442,848 651,359,647 Operating lease asset 1,071,482 1,277,253 Derivative assets 11,545,982 — Deferred financing costs 19,029,907 1,713,466 Total Assets $ 1,251,310,893 $ 684,157,329 LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS’ EQUITY Current Liabilities Accounts payable $ 86,822,997 $ 46,233,452 Income tax liability 36,736 — Financing lease liability 406,890 316,514 Operating lease liability 306,715 290,766 Derivative liabilities 23,767,689 29,241,588 Notes payable 877,631 586,410 Deferred cash payment 14,511,687 — Total Current Liabilities 126,730,345 76,668,730 Noncurrent Liabilities Deferred income taxes 5,920,300 90,292 Revolving line of credit 435,000,000 290,000,000 Financing lease liability, less current portion 564,205 343,727 Operating lease liability, less current portion 905,524 1,138,319 Derivative liabilities 8,734,388 — Asset retirement obligations 29,426,737 15,292,054 Total Liabilities 607,281,499 383,533,122 Mezzanine Equity Convertible preferred stock - $0.001 par value; 153,176 shares outstanding 137,858,446 — Stockholders’ Equity Preferred stock - $0.001 par value; 50,000,000 shares authorized; 153,176 shares issued or outstanding — — Common stock - $0.001 par value; 225,000,000 shares authorized; 131,586,927 shares and 100,192,562 shares issued and outstanding, respectively 131,587 100,193 Additional paid-in capital 634,845,283 553,472,292 Accumulated deficit (128,805,922) (252,948,278) Total Stockholders’ Equity 506,170,948 300,624,207 Total Liabilities, Mezannine Equity and Stockholders’ Equity $ 1,251,310,893 $ 684,157,329 For the Three Months For the Nine Months Ended September 30, Ended September 30, 2022 2021 2022 2021 Oil Natural Gas and Natural Gas Liquids Revenues $ 94,408,948 $ 49,376,176 $ 247,551,855 $ 136,638,810 Costs and Operating Expenses Lease operating expenses 13,029,098 6,983,196 30,283,706 22,634,259 Gathering, transportation and processing costs — 1,051,163 1,846,247 2,883,348 Ad valorem taxes 1,199,385 703,774 3,100,578 2,144,800 Oil and natural gas production taxes 4,563,519 2,240,759 11,939,338 6,291,860 Depreciation, depletion and amortization 14,324,502 9,310,524 34,854,993 26,693,808 Asset retirement obligation accretion 243,140 182,905 617,685 560,662 Operating lease expense 83,590 83,589 250,770 439,896 General and administrative expense 7,393,848 4,433,251 18,748,427 11,103,394 Total Costs and Operating Expenses 40,837,082 24,989,161 101,641,744 72,752,027 Income from Operations 53,571,866 24,387,015 145,910,111 63,886,783 Other Income (Expense) Interest income 4 — 4 1 Interest (expense) (7,021,385) (3,551,462) (13,699,045) (10,947,960) Gain (loss) on derivative contracts 32,851,189 (6,720,320) (2,201,970) (73,586,199) Net Other Income (Expense) 25,829,808 (10,271,782) (15,901,011) (84,534,158) Income (Loss) Before Provision for Income Taxes 79,401,674 14,115,233 130,009,100 (20,647,375) Benefit from (Provision for) Income Taxes (4,315,783) 48,701 (5,866,744) (141,943) Net Income (Loss) $ 75,085,891 $ 14,163,934 $ 124,142,356 $ (20,789,318) Basic Earnings (Loss) per share $ 0.65 $ 0.14 $ 1.16 $ (0.21) Diluted Earnings (Loss) per share $ 0.49 $ 0.12 $ 0.92 $ (0.21) Additional Retained Earnings Total Common Stock Paid-in (Accumulated Stockholders’ For the Nine Months Ended September 30, 2022 Shares Amount Capital Deficit) Equity 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 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 For the Nine Months Ended September 30, 2021 Balance, December 31, 2020 85,568,287 $ 85,568 $ 550,951,415 $ (256,271,170) $ 294,765,813 Common stock and warrants issued for cash, net — — (65,000) — (65,000) Exercise of pre-funded warrants issued in offering 13,428,500 13,429 — — 13,429 Exercise of common warrants issued in offering 184,800 185 147,655 — 147,840 Restricted stock vested 94,350 94 (94) — — Share-based compensation — — 355,494 — 355,494 Net (loss) — — — (19,066,093) (19,066,093) Balance, March 31, 2021 99,275,937 $ 99,276 $ 551,389,470 $ (275,337,263) $ 276,151,483 Exercise of common warrants issued in offering 100,000 100 79,900 — 80,000 Restricted stock vested 3,480 3 (3) — — Shares to cover tax withholdings for restricted stock vested (28,272) (28) 28 — — Share-based compensation — — 351,775 — 351,775 Net (loss) — — — (15,887,159) (15,887,159) Balance, June 30, 2021 99,351,145 $ 99,351 $ 551,821,170 $ (291,224,422) $ 260,696,099 Restricted stock vested 12,500 13 (13) — — Shares to cover tax withholdings for restricted stock vested (3,707) (4) 4 — — Share-based compensation — 777,461 — 777,461 Net income — — 14,163,934 14,163,934 Balance, September 30, 2021 99,359,938 $ 99,360 $ 552,598,622 $ (277,060,488) $ 275,637,494 For the Nine Months Ended September 30, 2022 2021 Cash Flows From Operating Activities Net income (loss) $ 124,142,356 $ (20,789,318) Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation, depletion and amortization 34,854,993 26,693,808 Asset retirement obligation accretion 617,685 560,662 Amortization of deferred financing costs 1,483,621 496,533 Share-based compensation 4,964,188 1,484,730 Deferred income tax expense (benefit) 5,830,008 141,943 Loss on derivative contracts 2,201,970 73,586,199 Cash (paid) for derivative settlements, net (48,593,882) (33,278,132) Changes in assets and liabilities: Accounts receivable (21,300,907) (5,017,078) Prepaid expenses and other assets (2,308,540) (902,692) Accounts payable 33,992,075 8,329,563 Settlement of asset retirement obligation (2,548,344) (1,782,779) Net Cash Provided by (Used In) Operating Activities 133,335,223 49,523,439 Cash Flows From Investing Activities Payments for the Stronghold Acquisition (183,359,626) — Payments to purchase oil and natural gas properties (1,211,691) (579,156) Payments to develop oil and natural gas properties (83,776,050) (34,680,935) Purchase of fixed assets subject to depreciation (158,598) (609,633) Sale of fixed assets subject to depreciation 134,600 — Proceeds from divestiture of oil and natural gas properties 25,066 2,000,000 Net Cash Provided by (Used in) Investing Activities (268,346,299) (33,869,724) Cash Flows From Financing Activities Proceeds from revolving line of credit 592,000,000 34,400,000 Payments on revolving line of credit (447,000,000) (52,400,000) Proceeds from issuance of common stock and warrants 7,563,126 241,269 Payments to cover tax withholdings for restricted stock vested (264,484) — Proceeds from notes payable 1,245,303 1,233,138 Payments on notes payable (954,082) (375,987) Payment of deferred financing costs (18,762,502) (76,887) Reduction of financing lease liabilities (334,034) (206,936) Net Cash Provided by (Used in) Financing Activities 133,493,327 (17,185,403) Net Change in Cash (1,517,749) (1,531,688) Cash at Beginning of Period 2,408,316 3,578,634 Cash at End of Period $ 890,567 $ 2,046,946 RING ENERGY, INC. For the Nine Months Ended September 30, 2022 2021 Supplemental Cash Flow Information Cash paid for interest $ 12,371,753 $ 10,622,077 Noncash Investing and Financing Activities Asset retirement obligation incurred during development $ 218,082 $ 160,285 Asset retirement obligation acquired 14,538,550 662,704 Asset retirement obligation revisions — 153,475 Asset retirement obligation sold — (2,934,126) Capitalized expenditures attributable to drilling projects financed through current liabilities 13,233,975 5,921,816 Operating lease assets obtained in exchange for new operating lease liability — 839,536 Operating lease asset revision — (621,636) 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 — Payments for the Stronghold Acquisition $ 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 $ —(“SEC”("SEC"). Accordingly, certain disclosures required 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 financial statements should be read in conjunction with the Company’sCompany's audited financial statements and related footnotesnotes included in its most recent Annual Report on Form 10-K.5June 30, 2023 December 31, 2022 ASSETS Current Assets Cash and cash equivalents $ 1,749,975 $ 3,712,526 Accounts receivable 32,044,159 42,448,719 Joint interest billing receivables, net 2,617,815 983,802 Derivative assets 8,307,537 4,669,162 Inventory 7,327,295 9,250,717 Prepaid expenses and other assets 3,061,216 2,101,538 Total Current Assets 55,107,997 63,166,464 Properties and Equipment Oil and natural gas properties, full cost method 1,524,510,887 1,463,838,595 Financing lease asset subject to depreciation 3,144,038 3,019,476 Fixed assets subject to depreciation 2,762,370 3,147,125 Total Properties and Equipment 1,530,417,295 1,470,005,196 Accumulated depreciation, depletion and amortization (331,153,213) (289,935,259) Net Properties and Equipment 1,199,264,082 1,180,069,937 Operating lease asset 1,628,832 1,735,013 Derivative assets 10,555,937 6,129,410 Deferred financing costs 15,458,204 17,898,973 Total Assets $ 1,282,015,052 $ 1,268,999,797 LIABILITIES AND STOCKHOLDERS’ EQUITY Current Liabilities Accounts payable $ 90,021,106 $ 111,398,268 Income tax liability 98,481 — Financing lease liability 761,110 709,653 Operating lease liability 394,404 398,362 Derivative liabilities 7,848,580 13,345,619 Notes payable 1,412,674 499,880 Deferred cash payment — 14,807,276 Asset retirement obligations 408,958 635,843 Total Current Liabilities 100,945,313 141,794,901 Non-current Liabilities Deferred income taxes 4,074,183 8,499,016 Revolving line of credit 397,000,000 415,000,000 Financing lease liability, less current portion 765,753 1,052,479 Operating lease liability, less current portion 1,263,936 1,473,897 Derivative liabilities 10,829,096 10,485,650 Asset retirement obligations 28,296,455 29,590,463 Total Liabilities 543,174,736 607,896,406 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; 195,350,672 shares and 175,530,212 shares issued and outstanding, respectively 195,350 175,530 Additional paid-in capital 791,450,835 775,241,114 Accumulated deficit (52,805,869) (114,313,253) Total Stockholders’ Equity 738,840,316 661,103,391 Total Liabilities and Stockholders' Equity $ 1,282,015,052 $ 1,268,999,797 6For the Three Months Ended For the Six Months Ended June 30, 2023 June 30, 2022 June 30, 2023 June 30, 2022 Oil, Natural Gas, and Natural Gas Liquids Revenues $ 79,348,573 $ 84,961,875 $ 167,431,485 $ 153,142,907 Costs and Operating Expenses Lease operating expenses 15,938,106 8,301,443 33,410,797 17,254,608 Gathering, transportation and processing costs (1,632) 549,389 (2,455) 1,846,247 Ad valorem taxes 1,670,343 949,239 3,340,956 1,901,193 Oil and natural gas production taxes 4,012,139 4,157,457 8,420,279 7,375,819 Depreciation, depletion and amortization 20,792,932 10,749,204 42,064,603 20,530,491 Asset retirement obligation accretion 353,878 186,303 719,725 374,545 Operating lease expense 115,353 83,590 228,491 167,180 General and administrative expense 6,810,243 5,832,302 13,940,382 11,354,579 Total Costs and Operating Expenses 49,691,362 30,808,927 102,122,778 60,804,662 Income from Operations 29,657,211 54,152,948 65,308,707 92,338,245 Other Income (Expense) Interest income 79,745 — 79,745 — Interest (expense) (10,550,807) (3,279,299) (20,941,086) (6,677,660) Gain (loss) on derivative contracts 3,264,660 (7,457,018) 12,739,565 (35,053,159) Gain (loss) on disposal of assets (132,109) — (132,109) — Other income 116,610 — 126,210 — Net Other Income (Expense) (7,221,901) (10,736,317) (8,127,675) (41,730,819) Income Before Benefit from (Provision for) Income Taxes 22,435,310 43,416,631 57,181,032 50,607,426 Benefit from (Provision for) Income Taxes 6,356,295 (1,472,209) 4,326,352 (1,550,961) Net Income $ 28,791,605 $ 41,944,422 $ 61,507,384 $ 49,056,465 Basic Earnings per Share $ 0.15 $ 0.39 $ 0.33 $ 0.47 Diluted Earnings per Share $ 0.15 $ 0.32 $ 0.32 $ 0.39 7Common Stock Additional
Paid-in
CapitalRetained Earnings
(Accumulated Deficit)Total
Stockholders'
EquityFor the Six Months Ended June 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 For the Six Months Ended June 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 8For the Six Months Ended June 30, 2023 June 30, 2022 Cash Flows From Operating Activities Net income $ 61,507,384 $ 49,056,465 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion and amortization 42,064,603 20,530,490 Asset retirement obligation accretion 719,725 374,545 Amortization of deferred financing costs 2,440,769 388,548 Share-based compensation 4,204,008 3,421,155 Bad debt expense 22,209 — Deferred income tax expense (benefit) (4,575,710) 1,550,961 Excess tax expense (benefit) related to share-based compensation 150,877 — (Gain) loss on derivative contracts (12,739,565) 35,053,159 Cash received (paid) for derivative settlements, net (478,930) (33,732,766) Changes in operating assets and liabilities: Accounts receivable 8,748,338 (14,393,828) Inventory 1,923,422 — Prepaid expenses and other assets (959,678) (2,267,717) Accounts payable (15,061,289) 6,847,979 Settlement of asset retirement obligation (919,886) (1,666,576) Net Cash Provided by Operating Activities 87,046,277 65,162,415 Cash Flows From Investing Activities Payments for the Stronghold Acquisition (18,511,170) — Payments to purchase oil and natural gas properties (878,743) (743,851) Payments to develop oil and natural gas properties (72,551,222) (49,654,172) Payments to acquire or improve fixed assets subject to depreciation (25,894) (91,760) 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 Receipt from sale of Delaware properties 7,992,917 — Net Cash (Used in) Investing Activities (83,587,324) (50,330,117) Cash Flows From Financing Activities Proceeds from revolving line of credit 84,500,000 50,500,000 Payments on revolving line of credit (102,500,000) (70,500,000) Proceeds from issuance of common stock from warrant exercises 12,301,596 5,163,126 Payments for taxes withheld on vested restricted shares, net (276,063) (257,694) Proceeds from notes payable 1,565,071 928,626 Payments on notes payable (652,277) (620,741) Reduction of financing lease liabilities (359,831) (230,642) Net Cash Provided by (Used in) Financing Activities (5,421,504) (15,017,325) Net Increase (Decrease) in Cash (1,962,551) (185,027) Cash at Beginning of Period 3,712,526 2,408,316 Cash at End of Period $ 1,749,975 $ 2,223,289 For the Six Months Ended June 30, 2023 June 30, 2022 Supplemental Cash Flow Information Cash paid for interest $ 18,622,944 $ 6,228,393 Noncash Investing and Financing Activities Asset retirement obligation incurred during development $ 173,516 $ 122,206 Asset retirement obligation sold (2,262,478) — Operating lease assets obtained in exchange for new operating lease liability 1,148,400 — Financing lease assets obtained in exchange for new financing lease liability 142,719 — Capitalized expenditures attributable to drilling projects financed through current liabilities (2,621,236) 11,181,178 Supplemental Schedule for Stronghold Acquisition Investing Activities - Cash Paid Payment of deferred cash payment $ 15,000,000 $ — Payment of post-close settlement $ 3,511,170 $ — Payments for the Stronghold Acquisition $ 18,511,170 $ — 9CONDENSED STATEMENTS OF CASH FLOWS(Unaudited)10
The accompanying notes are an integral part of these unaudited condensed financial statements.
11
(UNAUDITED)
2022.
COVID-19 – In March 2020, the World Health Organization classified the outbreak of COVID-19 as a pandemic. The nature of COVID-19 led to worldwide shutdowns, reductions in commercial and interpersonal activity and changes in consumer behavior. In attempting to control the spread of COVID-19, governments around the world imposed laws and regulations such as shelter-in-place orders, quarantines, executive orders and similar restrictions. As a result, the global economy was marked by significant slowdown and uncertainty, which in turn led to a precipitous decline in oil prices in response to decreased demand, further exacerbated by global energy storage shortages and by the price war among membersare part of the Organization of Petroleum Exporting Countries (“OPEC”) and other non-OPEC producer nations (collectively with OPEC members, “OPEC+”) during the first quarter 2020. Prices recovered to pre-pandemic levels in 2021 and have recently increased to levels not seen since 2014, due in part to the accessibility of vaccines, reopening of states and other regions around the world after lockdowns, and optimism about the economic recovery. The renewed spread of COVID-19, including vaccine-resistant strains or variants, or another deterioration in oil and natural gas prices could result in additional adverse impacts on the Company’s results of operations, cash flows and financial position, including asset impairments/charges.
Permian Basin.
flows.
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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
Any
additional information.
At September 30, 2022, approximately 94% of the Company’s accounts receivables and joint interest billing receivables arereceivable 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 six months ended June 30, 2023, sales to three customers represented 68%, 13% and 11%, respectively, of total oil, natural gas, and natural gas liquids sales. As of June 30, 2023, receivables outstanding from these three customers represented 71%, 13% and 11%, respectively, of accounts receivable.
| For the Three Months Ended | For the Six Months Ended | ||||||||||||||||||||||
| June 30, 2023 | June 30, 2022 | June 30, 2023 | June 30, 2022 | ||||||||||||||||||||
| Bad debt expense | $ | 19,315 | $ | — | $ | 22,209 | $ | — | |||||||||||||||
| June 30, 2023 | December 31, 2022 | ||||||||||
| Joint interest billing receivables | $ | 2,776,650 | $ | 1,226,049 | |||||||
| Allowance for credit losses | (158,835) | (242,247) | |||||||||
| Joint interest billing receivables, net | $ | 2,617,815 | $ | 983,802 | |||||||
13
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 the acquisition, leasing, exploration, and development of oil and natural gas reservesproperties are capitalized. Costs capitalized include acquisition costs, estimated future costs of abandonment and site restoration, geological and geophysical expenditures, lease rentals on undeveloped properties and costs of drilling and equipping productive wells and drilling costs for non-productive wells. Drilling costs include directly related overhead costs. Capitalized costs are generally 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.
All capitalized costs of oil and gas properties, plus estimated future costs to develop proved reserves, are amortized on the unit-of-production method using estimates of proved reserves as determined by the Company’s independent petroleum engineers. The Company evaluates oil and gas properties for impairment quarterly. The Company did not incur a write down of oil and natural gas properties as a result of the ceiling test for the three and nine months ended September 30, 2022 or for the three and nine months ended September 30, 2021. Depreciation, depletion and amortization expense for the three and nine months ended September 30, 2022 was $14,324,502 and $34,854,993, respectively, based on depletion at the rate of $11.59 and $11.95, respectively, per barrel of oil equivalent compared to $9,310,524 and $26,693,808, respectively, based on depletion at the rate of $12.12 and $11.64 per barrel of oil equivalent for the three and nine months ended September 30, 2021. These amounts include $160,928 and $437,015, respectively, of depreciation and amortization for the three and nine months ended September 30, 2022, compared to $120,817 and $276,677, respectively, of depreciation and amortization for the three and nine months ended September 30, 2021.
Equipment, Vehicles and Leasehold Improvements – Office equipment and vehicles are valued at historical cost adjusted for impairment loss less accumulated depreciation. Historical costs include all direct costs associated with the acquisition of office equipment and placing such equipment in service. Depreciation is calculated using the straight-line method based upon an estimated useful life of 3 to 10 years.
Asset Retirement Obligation –
Dispositions of oil and natural gas properties are accounted for as adjustments to capitalized costs.
| For the Three Months Ended | For the Six Months Ended | ||||||||||||||||||||||
| June 30, 2023 | June 30, 2022 | June 30, 2023 | June 30, 2022 | ||||||||||||||||||||
| Depletion | $ | 20,511,809 | $ | 10,629,787 | $ | 41,492,351 | $ | 20,254,404 | |||||||||||||||
| Depletion rate, per barrel-of-oil-equivalent (Boe) | $ | 13.05 | $ | 12.51 | $ | 12.89 | $ | 12.28 | |||||||||||||||
| Leasehold improvements | 3‑5 years | |||||||
| Office equipment and software | 3‑7 years | |||||||
| Equipment | 5‑10 years | |||||||
| Automobiles | 4 years | |||||||
| For the Three Months Ended | For the Six Months Ended | ||||||||||||||||||||||
| June 30, 2023 | June 30, 2022 | June 30, 2023 | June 30, 2022 | ||||||||||||||||||||
| Depreciation | $ | 91,628 | $ | 8,567 | $ | 196,729 | $ | 48,622 | |||||||||||||||
| Three Months Ended | Six Months Ended | |||||||||||||||||||||||||
| June 30, 2023 | June 30, 2022 | June 30, 2023 | June 30, 2022 | |||||||||||||||||||||||
| Interest paid for notes payable | $ | 9,234 | $ | 4,682 | $ | 12,925 | $ | 9,284 | ||||||||||||||||||
Share-Based Compensation to Non-Employeesadditional information. – The Company accounts for share-based compensation issued to directors and other 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.
14
Since December 31, 2020, the Company has determined that a full valuation allowance is necessary due to the CompanyCompany's assessment that it is more likely than not that it will be unable to obtain the benefits of its deferred tax assets due to the Company’s history of taxable losses. During the nine months ended September 30, 2022, theThe Company determined that certain existing deferred tax assets will 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 had increased and the Company continues to project positive pre-tax book income. As of June 30, 2023, the Company is 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 judgement on the realizability of the related federal deferred tax assets in future years, the Company released $7.7 million of valuation allowance as a discrete benefit in the first six months ended June 30, 2023. Accordingly, the Company recorded the following federal and state income tax benefits (provisions) for the three and ninesix months ended SeptemberJune 30, 2022, the Company recorded federal income tax expense of $3,611,3812023 and $4,625,429, respectively. The Company recorded state deferred income tax expense of $667,666 and $1,204,579, respectively, during the three and nine months ended September 30, 2022. The Company recorded a state current income tax expense of $36,736 during the three and nine months ended September 30, 2022. The Company recorded a state deferred income tax benefit of $48,701 and expense of $141,943, respectively, for the three and nine months ended September 30, 2021.
| For the Three Months Ended | For the Six Months Ended | ||||||||||||||||||||||
| June 30, 2023 | June 30, 2022 | June 30, 2023 | June 30, 2022 | ||||||||||||||||||||
| Deferred federal income tax benefit (provision) | $ | 6,640,741 | $ | (1,014,048) | $ | 5,111,491 | $ | (1,014,048) | |||||||||||||||
| Current state income tax benefit (provision) | (41,191) | 12,813 | (98,481) | — | |||||||||||||||||||
| Deferred state income tax benefit (provision) | (243,255) | (470,974) | (686,658) | (536,913) | |||||||||||||||||||
| Benefit from (Provision for) Income Taxes | $ | 6,356,295 | $ | (1,472,209) | $ | 4,326,352 | $ | (1,550,961) | |||||||||||||||
The shares issued for the Stronghold Acquisition (further discussed in Note 5) resulted in the Company having an ownership change under Section 382 of the Internal Revenue Code. Section 382 limits the availability of certain tax attributes, including net operating losses and disallowed interest carryforwards, to offset future taxable income of the Company. In evaluating its need for a valuation allowance against its deferred tax assets, the Company has estimated the amount of tax attributes related to the pre-ownership change period to be available under Section 382 in periods in which it expects deferred tax liabilities to be realized based on currently available information. Based on its current analysis, the Company does not anticipate any material tax attributes to expire unused as result of the section 382 ownership change; however, the ultimate timing in the amount of tax attributes available in future periods may be different than our current estimate and will be determined in each year as new information becomes available. Changes in expectation in the timing of the availability of our tax attributes could result in adjustments to the valuation allowance in future years as we update our analysis based on new information.
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
Recently Adopted Accounting Pronouncements – In December 2019, See NOTE 5 - ACQUISITIONS AND DIVESTITURES for a discussion of the FASB released Accounting Standards Update (ASU) No. 2019-12 (“Stronghold Acquisition.
In October 2020,cost of employee services received in exchange for an award of equity instruments based on the FASB issued ASU No. 2020-10, “Codification Improvements” (“ASU 2020-10”),grant-date fair value of the award and recognizes the related compensation expense over the period during which clarifies or improves disclosure requirements for various topicsan employee is required to align with SEC regulations. This update was effectiveprovide service in exchange for the award, which is generally the vesting period.
In August 2020, the FASB issued ASU No. 2020-06, “Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40)” (“ASU 2020-06”). ASU 2020-06 wasaccounts for share-based compensation issued to reducenon-employees as either the complexity associatedfair 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.
15
| Three Months Ended | Six Months Ended | |||||||||||||||||||||||||
| June 30, 2023 | June 30, 2022 | Jun. 30, 2023 | Jun. 30, 2022 | |||||||||||||||||||||||
| Share-based compensation | $ | 2,260,312 | $ | 1,899,245 | $ | 4,204,008 | $ | 3,421,155 | ||||||||||||||||||
Recent Accounting Pronouncements - – In March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting”Reporting (“ASU 2020-04”), which providesprovided optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that referencereferenced LIBOR or another rate that is expected to be discontinued.rate. ASU 2020-04 will bewas 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. TheIn 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,
does not plan to enter into additional contracts using LIBOR as a reference rate.
Basic and Diluted Earnings per Share – Basic earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflects the potential dilution that could occur if all contracts to issue common stock were converted into common stock, except for those that are anti-dilutive. The dilutive effect of stock options and other share-based compensation is calculated using the treasury method.
16
Until April 30, 2022, under the Company’sCompany'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 well head.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.
| For the Three Months Ended | For the Six Months Ended | ||||||||||||||||||||||
| June 30, 2023 | June 30, 2022 | June 30, 2023 | June 30, 2022 | ||||||||||||||||||||
| Oil, Natural Gas, and Natural Gas Liquids Revenues | |||||||||||||||||||||||
| Oil | $ | 78,042,072 | $ | 79,688,536 | $ | 161,628,399 | $ | 143,119,163 | |||||||||||||||
| Natural gas | (1,100,776) | 5,273,339 | (36,213) | 10,023,744 | |||||||||||||||||||
Natural gas liquids (1) | 2,407,277 | — | 5,839,299 | — | |||||||||||||||||||
| Total oil, natural gas, and natural gas liquids revenues | $ | 79,348,573 | $ | 84,961,875 | $ | 167,431,485 | $ | 153,142,907 | |||||||||||||||
| | | | | | | | | | | | |
| | For The Three Months |
| For The Nine Months | ||||||||
| | Ended September 30, | | Ended September 30, | ||||||||
|
| 2022 |
| 2021 | | 2022 |
| 2021 | ||||
Operating Revenues | | |
|
| |
|
| |
|
| |
|
Oil | | $ | 86,413,665 | | $ | 45,889,548 | | $ | 229,532,827 | | $ | 126,927,318 |
Natural gas | |
| 4,655,002 | | $ | 3,486,628 | |
| 14,678,747 | |
| 9,711,492 |
Natural gas liquids | | | 3,340,281 | | | — | | | 3,340,281 | | | — |
Total operating revenues | | $ | 94,408,948 | | $ | 49,376,176 | | $ | 247,551,855 | | $ | 136,638,810 |
All revenues are from production from the Permian Basin in Texas and New Mexico.
NGLs were presented with natural gas.
vehicle.
| | | | | | | | | | | | | | | |
|
| 2022 |
| 2023 |
| 2024 |
| 2025 |
| 2026 | |||||
Operating lease payments(1) | | $ | 87,282 | | $ | 356,991 | | $ | 376,855 | | $ | 384,719 | | $ | 110,096 |
Financing lease payments(2) | | | 109,582 | | | 438,328 | | | 372,056 | | | 99,796 | | | — |
17
| 2023 | 2024 | 2025 | 2026 | 2027 | Other Future Years | ||||||||||||||||||||||||||||||
Operating lease payments (1) | $ | 220,193 | $ | 482,328 | $ | 494,692 | $ | 398,096 | $ | 216,000 | — | ||||||||||||||||||||||||
Financing lease payments (2) | 416,687 | 771,643 | 432,695 | 11,136 | — | — | |||||||||||||||||||||||||||||
RING ENERGY, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
| | | | | | |
|
| As of | ||||
|
| September 30, 2022 |
| December 31, 2021 | ||
Operating lease liability, current portion | | $ | 306,715 | | $ | 290,766 |
Operating lease liability, non-current portion | |
| 905,524 | |
| 1,138,319 |
Operating lease liability, total | | $ | 1,212,239 | | $ | 1,429,085 |
Total undiscounted future cash flows | |
| 1,315,943 | |
| 1,577,786 |
Imputed interest | |
| 103,704 | |
| 148,701 |
Undiscounted future cash flows less imputed interest | | $ | 1,212,239 | | $ | 1,429,085 |
| | | | | | |
Financing lease liability, current portion | | $ | 406,890 | | $ | 316,514 |
Financing lease liability, non-current portion | |
| 564,205 | |
| 343,727 |
Financing lease liability, total | | $ | 971,095 | | $ | 660,241 |
Total undiscounted future cash flows | |
| 1,019,762 | |
| 692,091 |
Imputed interest | |
| 48,667 | |
| 31,850 |
Undiscounted future cash flows less imputed interest | | $ | 971,095 | | $ | 660,241 |
| As of | |||||||||||
| June 30, 2023 | December 31, 2022 | ||||||||||
| Operating lease liability, current portion | $ | 394,404 | $ | 398,362 | |||||||
| Operating lease liability, non-current portion | 1,263,936 | 1,473,897 | |||||||||
| Operating lease liability, total | $ | 1,658,340 | $ | 1,872,259 | |||||||
| Total undiscounted future cash flows (sum of future operating lease payments) | 1,811,309 | 2,065,580 | |||||||||
| Imputed interest | 152,969 | 193,321 | |||||||||
| Undiscounted future cash flows less imputed interest | $ | 1,658,340 | $ | 1,872,259 | |||||||
| Financing lease liability, current portion | $ | 761,110 | $ | 709,653 | |||||||
| Financing lease liability, non-current portion | 765,753 | 1,052,479 | |||||||||
| Financing lease liability, total | $ | 1,526,863 | $ | 1,762,132 | |||||||
| Total undiscounted future cash flows (sum of future financing lease payments) | 1,632,161 | 1,900,595 | |||||||||
| Imputed interest | 105,298 | 138,463 | |||||||||
| Undiscounted future cash flows less imputed interest | $ | 1,526,863 | $ | 1,762,132 | |||||||
| For the Three Months Ended | For the Six Months Ended | ||||||||||||||||||||||
| June 30, 2023 | June 30, 2022 | June 30, 2023 | June 30, 2022 | ||||||||||||||||||||
| Operating lease costs | $ | 115,353 | $ | 83,590 | $ | 228,491 | $ | 167,180 | |||||||||||||||
Short-term lease costs (1) | 1,815,836 | 581,799 | 3,029,635 | 1,297,602 | |||||||||||||||||||
| Financing lease costs: | |||||||||||||||||||||||
Amortization of financing lease assets (2) | 189,495 | 110,850 | 375,523 | 227,465 | |||||||||||||||||||
Interest on financing lease liabilities (3) | 24,268 | 7,280 | 49,699 | 13,793 | |||||||||||||||||||
| | | | | | | | | | | | |
| | Three months ended | | Nine months ended | ||||||||
| | September 30, | | September 30, | ||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Operating lease costs | | $ | 83,590 | | $ | 83,589 | | $ | 250,770 | | $ | 439,896 |
Short term lease costs (1) | | | 639,708 | | | 964,873 | | | 1,937,310 | | | 2,903,387 |
Financing lease costs: | | | | | | | | | | | | |
Amortization of financing lease assets (2) | | | 106,982 | | | 85,367 | | | 334,447 | | | 189,831 |
Interest on lease liabilities (3) | | | 10,391 | | | 5,160 | | | 24,184 | | | 14,166 |
NOTE 4 – EARNINGS (LOSS) PER SHARE INFORMATION
| | | | | | | | | | | | |
| | For the Three Months | | For the Nine Months | ||||||||
| | Ended September 30, | | Ended September 30, | ||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Net Income (Loss) | | $ | 75,085,891 | | $ | 14,163,934 | | $ | 124,142,356 | | $ | (20,789,318) |
Basic Weighted-Average Shares Outstanding | |
| 115,376,280 | | | 99,358,504 | |
| 107,349,184 | |
| 99,251,532 |
Effect of dilutive securities: | |
| | | | | |
| | |
| |
Stock options | |
| 52,110 | | | 135,536 | |
| 93,688 | |
| — |
Restricted stock units | |
| 1,908,662 | | | 1,463,690 | |
| 2,135,675 | |
| — |
Performance stock units | | | 196,520 | | | — | | | 235,440 | | | — |
Common warrants | | | 19,884,296 | | | 20,263,018 | | | 20,180,729 | | | — |
Convertible preferred stock | | | 14,337,127 | | | — | | | 4,831,559 | | | — |
Diluted Weighted-Average Shares Outstanding | |
| 151,754,995 | | | 121,220,748 | |
| 134,826,275 | |
| 99,251,532 |
Basic Earnings (Loss) per Share | | $ | 0.65 | | $ | 0.14 | | $ | 1.16 | | $ | (0.21) |
Diluted Earnings (Loss) per Share | | $ | 0.49 | | $ | 0.12 | | $ | 0.92 | | $ | (0.21) |
18
For the threesix months ended SeptemberJune 30, 2022, stock options to purchase 70,500 shares of common stock, 37,487 shares of unvested restricted stock units,2023 and 860,212 shares of unvested performance stock units2022.
| For the Three Months Ended | For the Six Months Ended | |||||||||||||||||||||||||
| June 30, 2023 | June 30, 2022 | June 30, 2023 | June 30, 2022 | |||||||||||||||||||||||
| Net Income | $ | 28,791,605 | $ | 41,944,422 | $ | 61,507,384 | $ | 49,056,465 | ||||||||||||||||||
| Basic Weighted-Average Shares Outstanding | 193,077,859 | 106,390,776 | 185,545,775 | 103,291,669 | ||||||||||||||||||||||
| Effect of dilutive securities: | ||||||||||||||||||||||||||
| Stock options | — | 114,985 | — | 115,069 | ||||||||||||||||||||||
| Restricted stock units | 1,096,128 | 2,614,251 | 1,192,039 | 2,274,467 | ||||||||||||||||||||||
| Performance stock units | 276,566 | 393,023 | 241,140 | 243,475 | ||||||||||||||||||||||
| Common warrants | 1,415,980 | 21,084,554 | 6,045,012 | 20,327,025 | ||||||||||||||||||||||
| Diluted Weighted-Average Shares Outstanding | 195,866,533 | 130,597,589 | 193,023,966 | 126,251,705 | ||||||||||||||||||||||
| Basic Earnings per Share | $ | 0.15 | $ | 0.39 | $ | 0.33 | $ | 0.47 | ||||||||||||||||||
| Diluted Earnings per Share | $ | 0.15 | $ | 0.32 | $ | 0.32 | $ | 0.39 | ||||||||||||||||||
| For the Three Months Ended | For the Six Months Ended | |||||||||||||||||||||||||
| June 30, 2023 | June 30, 2022 | June 30, 2023 | June 30, 2022 | |||||||||||||||||||||||
| Antidilutive securities: | ||||||||||||||||||||||||||
| Stock options to purchase common stock | 265,500 | 70,500 | 265,500 | 70,500 | ||||||||||||||||||||||
| Unvested restricted stock units | 1,803,513 | 6,681 | 71,985 | 6,269 | ||||||||||||||||||||||
| Unvested performance stock units | 1,592,268 | — | 1,296,912 | 767,537 | ||||||||||||||||||||||
The fair value of consideration paid to Stronghold was approximately $395.7 million, of which $167.9 million, subject to post-closing adjustments, was paid in cash at closing, $15.0 million will be payable in cash after the six-month anniversary of the closing date of the Stronghold Acquisition, and 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 the novated hedges. The cash portion of the consideration was funded primarily from borrowings under a new fully committed revolving credit facility (the “Credit Facility”) underwritten by Truist Securities, Citizens Bank, N.A., KeyBanc Capital Markets Inc., and Mizuho Bank, Ltd. The borrowing base of the $1.0 billion Credit Facility was increased from $350.0 million to $600.0 million at the closing of the transaction. The remaining consideration was in the form of stock, consisting 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”). Please see “Note 10 – STOCKHOLDERS’ EQUITY AND MEZZANINE EQUITY” for further discussion. 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 in the Stronghold Acquisition.
Purchase Price Allocation
The Stronghold 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 Stronghold Acquisition. Additionally, costs directly related to the Stronghold 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 Stronghold’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.
19
The following table represents the preliminary allocation of the total cost of the Stronghold Acquisition to the assets acquired and liabilities assumed as of the Stronghold Acquisition date:
| | | |
Consideration: |
| |
|
Shares of Ring Common Stock issued | | | 21,339,986 |
Ring Common Stock price as of August 31, 2022 | | $ | 3.24 |
Common Stock Consideration | | $ | 69,141,555 |
| |
| |
Shares of Ring Preferred Stock issued | | | 153,176 |
Aggregate Liquidation Preference | | $ | 153,176,000 |
Conversion Price | | $ | 3.60 |
As-Converted Shares of Ring Common Stock | | | 42,548,903 |
Ring Common Stock Price as of August 31, 2022 | | $ | 3.24 |
Preferred Stock Consideration | | $ | 137,858,446 |
| | | |
Cash consideration: | |
| |
Closing amount paid to Stronghold by bank | | | 121,392,455 |
Escrow deposit paid at closing | | | 46,500,000 |
Cash paid for inventory and fixed assets | | | 4,527,103 |
Cash paid for realized losses on August oil derivatives | | | 1,777,925 |
Total cash consideration | | | 174,197,483 |
Fair value of deferred payment liability | | | 14,511,688 |
Fair value of consideration to be paid to seller | |
| 395,709,171 |
| |
| |
Direct transaction costs | |
| 9,162,143 |
Total consideration | | $ | 404,871,314 |
| | | |
Fair value of assets acquired: | | | |
Oil and natural gas properties | | | 441,318,763 |
Inventory and fixed assets | | | 4,527,103 |
Amount attributable to assets acquired | | $ | 445,845,866 |
Fair value of liabilities assumed: | | | |
Suspense liability | | | 1,651,596 |
Derivative liabilities, marked to market | | | 24,784,406 |
Asset retirement obligations | | | 14,538,550 |
Amount attributable to liabilities assumed | | $ | 40,974,552 |
Net assets acquired | | $ | 404,871,314 |
Approximately $11.7 million of revenues and $3.5 million of direct operating expenses attributed to the Stronghold Acquisition are included in the Company’s Statements of Operations for the period from September 1, 2022 through September 30, 2022.
NOTE 6 –— DERIVATIVE FINANCIAL INSTRUMENTS
20
derivative financial instruments are recognized in earnings and included as a component of “Other"Other Income (Expense)”" under the heading “Gain"Gain (loss) on derivative contracts”contracts" in the accompanying Condensed Statements of Operations.
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. At September 30, 2022, 100% of the Company’s derivative instruments are with lenders under its Credit Facility (as defined in Note 8). 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. Beginning September 1, the Company assumed the derivative liabilities (novated hedges) associated with its acquisition of the Stronghold assets (see Note 5), which are subject to master netting agreements. Additional derivative contracts with the same counterparty are also subject to netting. Still, in accordance with ASC 815-10-50-4B, the Company continues to classify the fair value of all its derivative positions on a gross basis in its corresponding Balance Sheets.
| | | | | | |
| | As of | ||||
|
| September 30, 2022 |
| December 31, 2021 | ||
Commodity derivative instruments, marked to market: |
| |
|
| |
|
| | | | | | |
Derivative assets, current | | $ | 24,206,887 | | $ | — |
Discounted deferred premiums | | | (10,884,874) | | | — |
Derivative assets, current, net of premiums | | $ | 13,322,013 | | $ | — |
| | | | | | |
Derivative assets, noncurrent | | | 15,204,782 | | | — |
Discounted deferred premiums | | | (3,658,800) | | | — |
Derivative assets, noncurrent, net of premiums | | $ | 11,545,982 | | $ | — |
| | | | | | |
Derivative liabilities, current | | $ | 23,767,689 | | $ | 29,241,588 |
| | | | | | |
Derivative liabilities, noncurrent | | $ | 8,734,388 | | $ | — |
| As of | |||||||||||
| June 30, 2023 | December 31, 2022 | ||||||||||
| Commodity derivative instruments, marked to market: | |||||||||||
| Derivative assets, current | $ | 14,604,030 | $ | 16,193,327 | |||||||
| Discounted deferred premiums | (6,296,493) | (11,524,165) | |||||||||
| Derivatives assets, current, net of premiums | $ | 8,307,537 | $ | 4,669,162 | |||||||
| Derivative assets, noncurrent | $ | 10,555,937 | $ | 7,606,258 | |||||||
| Discounted deferred premiums | — | (1,476,848) | |||||||||
| Derivative assets, noncurrent, net of premiums | $ | 10,555,937 | $ | 6,129,410 | |||||||
| Derivative liabilities, current | $ | 7,848,580 | $ | 13,345,619 | |||||||
| Derivative liabilities, noncurrent | $ | 10,829,096 | $ | 10,485,650 | |||||||
| | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | ||||||||
| | September 30, | | September 30, | ||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Oil derivatives: | | | | | | | | | | | | |
Realized gain (loss) on oil derivatives | | | (13,958,195) | | | (14,921,008) | | | (47,690,961) | | | (34,021,310) |
Unrealized gain (loss) on oil derivatives | | | 49,680,492 | | | 8,200,688 | | | 48,360,099 | | | (39,366,200) |
Gain (loss) on oil derivatives | | $ | 35,722,297 | | $ | (6,720,320) | | $ | 669,138 | | $ | (73,387,510) |
| | | | | | | | | | | | |
Natural gas derivatives: | | | | | | | | | | | | |
Realized gain (loss) on natural gas derivatives | | | (902,921) | | | — | | | (902,921) | | | 743,178 |
Unrealized gain (loss) on natural gas derivatives | |
| (1,968,187) | |
| — | | | (1,968,187) | | | (941,867) |
Gain (loss) on natural gas derivatives | | $ | (2,871,108) | | $ | — | | $ | (2,871,108) | | $ | (198,689) |
| | | | | | | | | | | | |
Gain (loss) on derivative contracts | | $ | 32,851,189 | | $ | (6,720,320) | | $ | (2,201,970) | | $ | (73,586,199) |
21
| For the Three Months Ended | For the Six Months Ended | ||||||||||||||||||||||
| June 30, 2023 | June 30, 2022 | June 30, 2023 | June 30, 2022 | ||||||||||||||||||||
| Oil derivatives: | |||||||||||||||||||||||
| Realized gain (loss) on oil derivatives | $ | (833,841) | $ | (19,617,265) | $ | (1,497,603) | $ | (33,732,766) | |||||||||||||||
| Unrealized gain (loss) on oil derivatives | 4,545,136 | 12,160,247 | 12,652,157 | (1,320,393) | |||||||||||||||||||
| Gain (loss) on oil derivatives | $ | 3,711,295 | $ | (7,457,018) | $ | 11,154,554 | $ | (35,053,159) | |||||||||||||||
| Natural gas derivatives: | |||||||||||||||||||||||
| Realized gain (loss) on natural gas derivatives | 1,013,436 | — | 1,018,673 | — | |||||||||||||||||||
| Unrealized gain (loss) on natural gas derivatives | (1,460,071) | — | 566,338 | — | |||||||||||||||||||
| Gain (loss) on natural gas derivatives | $ | (446,635) | $ | — | $ | 1,585,011 | $ | — | |||||||||||||||
| Gain (loss) on derivative contracts | $ | 3,264,660 | $ | (7,457,018) | $ | 12,739,565 | $ | (35,053,159) | |||||||||||||||
The components of “Cash (paid)paid for derivative settlements, net” within the Condensed Statements of Cash Flows are as follows for the respective periods:
| | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | ||||||||
| | September 30, | | September 30, | ||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Cash flows from operating activities: | | | | | | | | | | | | |
Cash (paid) on oil derivatives | | $ | (13,958,195) | | $ | (14,921,008) | | $ | (47,690,961) | | $ | (34,030,310) |
Cash received (paid) on natural gas derivatives | |
| (902,921) | |
| — | |
| (902,921) | |
| 743,178 |
Cash (paid) for derivative settlements, net | | $ | (14,861,116) | | $ | (14,921,008) | | $ | (48,593,882) | | $ | (33,287,132) |
| For the Three Months Ended | For the Six Months Ended | ||||||||||||||||||||||
| June 30, 2023 | June 30, 2022 | June 30, 2023 | June 30, 2022 | ||||||||||||||||||||
| Cash flows from operating activities | |||||||||||||||||||||||
| Cash received (paid) for oil derivatives | $ | (833,841) | $ | (19,617,265) | $ | (1,497,603) | $ | (33,732,766) | |||||||||||||||
| Cash received (paid) from natural gas derivatives | 1,013,436 | — | 1,018,673 | — | |||||||||||||||||||
| Cash received (paid) for derivative settlements, net | $ | 179,595 | $ | (19,617,265) | $ | (478,930) | $ | (33,732,766) | |||||||||||||||
| | | | | | | | | |
| | Oil Hedges (WTI) | |||||||
| | 2022 | | 2023 | | 2024 | |||
| | | | | | | | | |
Swaps: | | | | | | | | | |
Hedged volume (BBL) | | | 379,250 | | | 389,250 | | | 526,000 |
Weighted average swap price | | $ | 54.89 | | $ | 77.55 | | $ | 65.90 |
| | | | | | | | | |
Deferred premium puts: | | | | | | | | | |
Hedged volume (BBL) | | | 138,000 | | | 773,500 | | | 91,000 |
Weighted average strike price | | $ | 97.93 | | $ | 90.64 | | $ | 83.75 |
Weighted average deferred premium price | | $ | 11.81 | | $ | 15.25 | | $ | 17.32 |
| | | | | | | | | |
Two-way collars: | | | | | | | | | |
Hedged volume (BBL) | | | 97,201 | | | 487,622 | | | 475,350 |
Weighted average put price | | $ | 53.93 | | $ | 52.16 | | $ | 67.88 |
Weighted average call price | | $ | 67.68 | | $ | 62.94 | | $ | 83.32 |
| | | | | | | | | |
Three-way collars: | | | | | | | | | |
Hedged volume (BBL) | | | 89,985 | | | 66,061 | | | — |
Weighted average first put price |
| $ | 40.00 |
| $ | 45.00 |
| $ | — |
Weighted average second put price | | $ | 50.00 | | $ | 55.00 | | $ | — |
Weighted average call price | | $ | 62.03 | | $ | 80.05 | | $ | — |
22
| Oil Hedges (WTI) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Q3 2023 | Q4 2023 | Q1 2024 | Q2 2024 | Q3 2024 | Q4 2024 | Q1 2025 | Q2 2025 | Q3 2025 | Q4 2025 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Swaps: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Hedged volume (Bbl) | 181,700 | 138,000 | 170,625 | 156,975 | 282,900 | 368,000 | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Weighted average swap price | $ | 74.19 | $ | 74.52 | $ | 67.40 | $ | 66.40 | $ | 65.49 | $ | 68.43 | $ | — | $ | — | $ | — | $ | — | |||||||||||||||||||||||||||||||||||||||
| Deferred premium puts: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Hedged volume (Bbl) | 230,000 | 165,600 | 45,500 | 45,500 | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Weighted average strike price | $ | 80.47 | $ | 83.78 | $ | 84.70 | $ | 82.80 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||||||||||||||||||||||||||
| Weighted average deferred premium price | $ | 10.60 | $ | 14.61 | $ | 17.15 | $ | 17.49 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||||||||||||||||||||||||||
| Two-way collars: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Hedged volume (Bbl) | 211,163 | 274,285 | 339,603 | 325,847 | 230,000 | 128,800 | 474,750 | 464,100 | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Weighted average put price | $ | 55.56 | $ | 56.73 | $ | 64.20 | $ | 64.30 | $ | 64.00 | $ | 60.00 | $ | 57.06 | $ | 60.00 | $ | — | $ | — | |||||||||||||||||||||||||||||||||||||||
| Weighted average call price | $ | 69.25 | $ | 70.77 | $ | 79.73 | $ | 79.09 | $ | 76.50 | $ | 73.24 | $ | 75.82 | $ | 69.85 | $ | — | $ | — | |||||||||||||||||||||||||||||||||||||||
| Three-way collars: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Hedged volume (Bbl) | 16,242 | 15,598 | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Weighted average first put price | $ | 45.00 | $ | 45.00 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||||||||||||||||||||||||||
| Weighted average second put price | $ | 55.00 | $ | 55.00 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||||||||||||||||||||||||||
| Weighted average call price | $ | 80.05 | $ | 80.05 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||||||||||||||||||||||||||
| Gas Hedges (Henry Hub) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Q3 2023 | Q4 2023 | Q1 2024 | Q2 2024 | Q3 2024 | Q4 2024 | Q1 2025 | Q2 2025 | Q3 2025 | Q4 2025 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| NYMEX Swaps: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Hedged volume (MMBtu) | 144,781 | 203,706 | 152,113 | 138,053 | 121,587 | 644,946 | 616,199 | 591,725 | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Weighted average swap price | $ | 3.36 | $ | 3.35 | $ | 3.62 | $ | 3.61 | $ | 3.59 | $ | 4.45 | $ | 3.78 | $ | 3.43 | $ | — | $ | — | |||||||||||||||||||||||||||||||||||||||
| Two-way collars: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Hedged volume (MMBtu) | 404,421 | 579,998 | 591,500 | 568,750 | 552,000 | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Weighted average put price | $ | 3.17 | $ | 3.15 | $ | 4.00 | $ | 4.00 | $ | 4.00 | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||||||||||||||||||||||||||
| Call hedged volume (MMBtu) | 404,421 | 579,998 | 591,500 | 568,750 | 552,000 | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Weighted average call price | $ | 4.55 | $ | 4.50 | $ | 6.29 | $ | 6.29 | $ | 6.29 | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||||||||||||||||||||||||||
| Oil Hedges (basis differential) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Q3 2023 | Q4 2023 | Q1 2024 | Q2 2024 | Q3 2024 | Q4 2024 | Q1 2025 | Q2 2025 | Q3 2025 | Q4 2025 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Argus basis swaps: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Hedged volume (MMBtu) | 305,000 | 460,000 | 364,000 | 364,000 | 368,000 | 368,000 | 270,000 | 273,000 | 276,000 | 276,000 | |||||||||||||||||||||||||||||||||||||||||||||||||
Weighted average spread price (1) | $ | 1.10 | $ | 1.10 | $ | 1.15 | $ | 1.15 | $ | 1.15 | $ | 1.15 | $ | 1.00 | $ | 1.00 | $ | 1.00 | $ | 1.00 | |||||||||||||||||||||||||||||||||||||||
| Gas Hedges (basis differential) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Q3 2023 | Q4 2023 | Q1 2024 | Q2 2024 | Q3 2024 | Q4 2024 | Q1 2025 | Q2 2025 | Q3 2025 | Q4 2025 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Waha basis swaps: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Hedged volume (MMBtu) | 332,855 | 324,021 | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
Weighted average spread price (1) | $ | 0.55 | $ | 0.55 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||||||||||||||||||||||||||
| El Paso Permian Basin basis swaps: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Hedged volume (MMBtu) | 329,529 | 459,683 | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
Weighted average spread price (1) | $ | 0.63 | $ | 0.63 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||||||||||||||||||||||||||
| | | | | | | | | |
| | Gas Hedges (Henry Hub) | |||||||
|
| 2022 |
| 2023 |
| 2024 | |||
| | | | | | | | | |
NYMEX Swaps: |
| |
|
| |
|
| |
|
Hedged volume (MMBtu) |
| | 46,313 |
| | 175,421 |
| | — |
Weighted average swap price | | $ | 2.51 | | $ | 2.40 | | $ | — |
| | | | | | | | | |
Two-way collars: (1) | |
|
| |
|
| |
|
|
Put hedged volume (MMBtu) | | | 715,661 | | | 2,486,514 | | | 1,712,250 |
Weighted average put price | | $ | 3.76 | | $ | 3.18 | | $ | 4.00 |
Call hedged volume (MMBtu) | | | 435,061 | | | 2,306,514 | | | 1,712,250 |
Weighted average call price | | $ | 10.22 | | $ | 5.03 | | $ | 6.29 |
| | | | | | | | | |
Three-way collar: | |
|
| |
|
| |
|
|
Hedged volume (MMBtu) | |
| 304,250 | |
| — | |
| — |
Weighted average first put price | | $ | 2.20 | | $ | — | | $ | — |
Weighted average second put price | | $ | 2.50 | | $ | — | | $ | — |
Weighted average call price | | $ | 3.25 | | $ | — | | $ | — |
Weighted average deferred premium price | | $ | 0.19 | | $ | — | | $ | — |
| | | | | | | |
| | Gas Hedges (basis differential) | |||||
|
| 2022 |
| 2023 |
| 2024 | |
| | | | | | | |
Waha basis swaps: |
|
|
|
|
| |
|
Hedged volume (MMBtu) |
| 505,024 |
| 1,339,685 |
| | — |
Weighted average swap price |
| (2) |
| (3) | | $ | — |
NOTE 7 –— FAIR VALUE MEASUREMENTS
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. The Company considers active markets as those in which transactions for the assets or liabilities occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2: Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability. This category includes those derivative instruments that the Company values using observable market data. Substantially all inputs are observable in the marketplace throughout the full term of the derivative instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace.
Level 3: Measured based on prices or valuation models that require inputs that are both significant to the fair value measurement and less observable from objective sources (i.e., supported by little or no market activity).
23
| Level 1: | Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. We consider active markets as those in which transactions for the assets or liabilities occur with sufficient frequency and volume to provide pricing information on an ongoing basis. | ||||
| Level 2: | Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability. This category includes those derivative instruments that we value using observable market data. Substantially all of these inputs are observable in the marketplace throughout the full term of the derivative instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. | ||||
| Level 3: | Measured based on prices or valuation models that require inputs that are both significant to the fair value measurement and less observable from objective sources (i.e., supported by little or no market activity). | ||||
Financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. The Company’sOur assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy. The Company continuesWe continue to evaluate itsour inputs to ensure the fair value level classification is appropriate. When transfers between levels occur, it is the Company’sour policy to assume that the transfer occurred at the date of the event or change in circumstances that caused the transfer.
Other financial instruments include cash, accounts receivable and accounts payable. The carrying amount of these instruments approximates fair value because of their short-term nature. The Company’s long-term debt obligation bears interest at floating market rates, therefore the carrying amounts and fair value are approximately equal.
| | | | | | | | | | | | |
| | Fair Value Measurement Classification | | | | |||||||
| | Quoted prices | | | | | | | | | | |
| | in Active | | | | | | | | | | |
| | Markets | | | | | | | | | | |
| | for Identical | | Significant | | | | | | | ||
| | Assets | | Other | | Significant | | | | |||
| | or | | Observable | | Unobservable | | | | |||
| | (Liabilities) | | Inputs | | Inputs | | | ||||
|
| (Level 1) |
| (Level 2) |
| (Level 3) |
| Total | ||||
As of December 31, 2021 | | | | | | | | | | | | |
Commodity Derivatives - Liabilities | | $ | — | | $ | (29,241,588) | | $ | — | | $ | (29,241,588) |
Total | | $ | — | | $ | (29,241,588) | | $ | — | | $ | (29,241,588) |
| | | | | | | | | | | | |
| | Fair Value Measurement Classification | | | | |||||||
| | Quoted prices | | | | | | | | | | |
| | in Active | | | | | | | | | | |
| | Markets | | | | | | | | | | |
| | for Identical | | Significant | | | | | | | ||
| | Assets | | Other | | Significant | | | | |||
| | or | | Observable | | Unobservable | | | | |||
| | (Liabilities) | | Inputs | | Inputs | | | | |||
|
| (Level 1) |
| (Level 2) |
| (Level 3) |
| Total | ||||
As of September 30, 2022 | |
| | |
| | |
| | |
| |
Commodity Derivatives - Assets | | $ | — | | $ | 24,867,995 | | $ | — | | $ | 24,867,995 |
Commodity Derivatives - Liabilities | | | — | | | (32,502,077) | | | — | | | (32,502,077) |
Total | | $ | — | | $ | (7,634,082) | | $ | — | | $ | (7,634,082) |
| Fair Value Measurement Classification | |||||||||||||||||||||||
| Quoted prices in Active Markets for Identical Assets or (Liabilities) (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | ||||||||||||||||||||
| As of December 31, 2022 | |||||||||||||||||||||||
| Commodity Derivatives - Assets | $ | — | $ | 10,798,572 | $ | — | $ | 10,798,572 | |||||||||||||||
| Commodity Derivatives - Liabilities | $ | — | $ | (23,831,269) | $ | — | $ | (23,831,269) | |||||||||||||||
| Total | $ | — | $ | (13,032,697) | $ | — | $ | (13,032,697) | |||||||||||||||
| As of June 30, 2023 | |||||||||||||||||||||||
| Commodity Derivatives - Assets | $ | — | $ | 18,863,474 | $ | — | $ | 18,863,474 | |||||||||||||||
| Commodity Derivatives - Liabilities | $ | — | $ | (18,677,676) | $ | — | $ | (18,677,676) | |||||||||||||||
| Total | $ | — | $ | 185,798 | $ | — | $ | 185,798 | |||||||||||||||
24
fifth amendment on June 25, 2021 incorporated contractual fallback language for US dollar LIBOR denominated syndicated loans, which language provides for the transition away from LIBOR to an alternative reference rate, and incorporates certain provisions that clarify the rights of agents to recover from lenders erroneous payments made to such lenders. The Credit Facility is secured by a first lien on substantially all of the Company’s assets. The borrowing base is subject to periodic redeterminations, mandatory reductions, and further adjustments from time to time. The borrowing base is redetermined semi-annually in May and November. The May 2022 redetermination was postponed due to the Stronghold Acquisition (see Note 5).
On August 31, 2022, the Company modified its Credit Facility through thea Second Amended and Restated Credit Agreement.Agreement, extending the maturity date of the facility to August 2026. In conjunction with the Stronghold Acquisition, with the newly acquired assets put up for collateral, the Company established a borrowing base of $600 million. The borrowing base is subject to periodic redeterminations, mandatory reductions and further adjustments from time to time. The borrowing base is redetermined semi-annually each May and November. The borrowing base is subject to reduction in certain circumstances such as the sale or disposition of certain oil and gas properties of the Company or its subsidiaries and cancellation of certain hedging positions.
The Credit Facility now allows for SOFR Loans and Base Rate Loans (as respectively These limitations include (i) no default or event of default has occurred or will occur upon such payments, (ii) the pro forma Leverage Ratio, as defined in the Second Amended and Restated Credit Agreement). Agreement, does not exceed 2.00 to 1.00, (iii) the amount of such payments does not exceed Available Free Cash Flow, (iv) the Borrowing Base Utilization Percentage is not greater than 80%, and (v) a Responsible Officer certifies that the other four conditions are satisfied.
| | | |
Balance, December 31, 2021 |
| $ | 15,292,054 |
Liabilities incurred | |
| 218,082 |
Liabilities acquired | |
| 14,538,550 |
Liabilities sold | | | — |
Revision of previous estimates | | | — |
Liabilities settled | |
| (1,239,634) |
Accretion expense | |
| 617,685 |
Balance, September 30, 2022 | | $ | 29,426,737 |
25
| Balance, December 31, 2022 | $ | 30,226,306 | |||
| Liabilities acquired | — | ||||
| Liabilities incurred | 173,516 | ||||
| Liabilities sold | (2,262,478) | ||||
| Liabilities settled | (151,656) | ||||
| Revision of estimate | — | ||||
| Accretion expense | 719,725 | ||||
| Balance, June 30, 2023 | $ | 28,705,413 | |||
June 30, 2023 December 31, 2022 Asset retirement obligations, current 408,958 635,843 Asset retirement obligations, non-current 28,296,455 29,590,463 Asset retirement obligations $ 28,705,413 $ 30,226,306
During the year ended
Common Stockwarrant, expiring five years from initial issuance in October 2020. During the six months ended June 30, 2023, a total of 19,029,593 common warrants were exercised. The following table reflects the common warrants exercised, including the proceeds received for such exercises. As of June 30, 2023 there remained 78,200 exercisable common warrants.
| Common Warrants | Exercise Price | Proceeds Received | ||||||||||||||||||
| Exercisable, December 31, 2021 | 29,361,700 | $ | 0.80 | |||||||||||||||||
| Exercised | — | — | $ | — | ||||||||||||||||
| Exercisable, March 31, 2022 | 29,361,700 | $ | 0.80 | |||||||||||||||||
| Exercised | (6,453,907) | 0.80 | $ | 5,163,126 | ||||||||||||||||
| Exercisable, June 30, 2022 | 22,907,793 | $ | 0.80 | |||||||||||||||||
| Exercisable, December 31, 2022 | 19,107,793 | $ | 0.80 | |||||||||||||||||
| Exercised | (4,517,427) | 0.80 | $ | 3,613,941 | ||||||||||||||||
| Exercisable, March 31, 2023 | 14,590,366 | $ | 0.80 | |||||||||||||||||
Exercised (1) | (14,512,166) | 0.62 | $ | 8,997,543 | ||||||||||||||||
| Exercisable, June 30, 2023 | 78,200 | $ | 0.80 | |||||||||||||||||
As part12, 2023, the Company and certain holders of the Stronghold Acquisition, 21,339,986 sharescommon warrants (the “Participating Holders”) entered into a form of ourWarrant Amendment and Exercise Agreement (the “Exercise Agreement”) pursuant to which the Company agreed to reduce the exercise price of an aggregate of 14,512,166 common stock were issued as “restricted shares”warrants held by such Participating Holders from $0.80 to Stronghold OpCo.
Also as part$0.62 per share (the “Reduced Exercise Price”) in consideration for the exercise of the Stronghold Acquisition, 153,176 sharescommon warrants held by such Participating Holders in full at the Reduced Exercise Price in cash. The Company received aggregate gross proceeds of Preferred Stock were issued. Each share of Preferred Stock is automatically convertible into 277.7778 shares of common stock upon stockholder approval$8,997,543 from the exercise of the conversion (42,548,892 sharescommon warrants by the Participating Holders pursuant to the Exercise Agreement, which was recognized as an equity issuance cost in accordance with ASC 815-40-35-17(a). In our Statements of common stockStockholders' Equity, the net impact to Stockholders' Equity is $8,687,655, which is net of $309,888 in total). We have classified the fair value of the Preferred Stock on our Balance Sheets under Mezzanine Equity.
On September 26, 2022, a proxy statement was filed under the Securities Exchange Act of 1934 for our stockholders to consider and vote upon the conversion of the preferred shares into 42,548,892 shares of common stock. A special meeting of stockholders to vote on the conversion was held on October 27, 2022. Please see Note 13 – SUBSEQUENT EVENTS for more information regarding the stockholder meeting at which the conversion was approved.
advisory fees.
UNITS
Condensed Statements of Operations.
| Three Months Ended | Six Months Ended | |||||||||||||||||||||||||
| June 30, 2023 | June 30, 2022 | Jun. 30, 2023 | Jun. 30, 2022 | |||||||||||||||||||||||
| Share-based compensation | $ | 2,260,312 | $ | 1,899,245 | $ | 4,204,008 | $ | 3,421,155 | ||||||||||||||||||
2023.
26
| | | | | | | | | | |
|
| |
| | |
| Weighted- |
| | |
| | | | Weighted- | | Average | | | | |
| | | | Average | | Remaining | | Aggregate | ||
| | | | Exercise | | Contractual | | Intrinsic | ||
|
| Shares |
| Price |
| Term |
| Value | ||
Outstanding, December 31, 2020 |
| 465,500 | | $ | 3.26 |
|
|
| | |
Granted |
| — | | | — |
|
|
| | |
Forfeited or rescinded |
| — | | | — |
|
|
| | |
Exercised | | — | | | — | | | | | |
Outstanding, March 31, 2021 | | 465,500 | | $ | 3.26 | | 3.00 Years | | $ | 134,850 |
Granted | | — | | | — | | | | | |
Forfeited or rescinded | | — | | | — | | | | | |
Exercised |
| — | | | — |
|
|
| | |
Outstanding, June 30, 2021 | | 465,500 | | $ | 3.26 | | 2.75 Years | | $ | 426,300 |
Granted | | — | | | — | | | | | |
Forfeited or rescinded | | — | | | — | | | | | |
Exercised | | — | | | — | | | | | |
Outstanding, September 30, 2021 | | 465,500 | | $ | 3.26 | | 2.61 Years | | $ | 375,250 |
Exercisable, September 30, 2021 | | 458,300 | | $ | 3.13 | | 2.57 Years | | | |
| | | | | | | | | | |
Outstanding, December 31, 2021 | | 365,500 | | $ | 3.61 | | | | | |
Granted | | — | | | — | | | | | |
Forfeited or rescinded |
| — | | | — |
| | | | |
Exercised |
| — | | | — |
| | |
|
|
Outstanding, March 31, 2022 | | 365,500 | | $ | 3.61 | | 2.21 Years | | $ | 536,900 |
Granted |
| — | | | — |
|
|
| | |
Forfeited or rescinded |
| — | | | — |
|
|
| | |
Exercised |
| (100,000) | | $ | 2.00 |
|
|
| | |
Outstanding, June 30, 2022 | | 265,500 | | | 4.21 | | 2.14 Years | | $ | 128,700 |
Granted | | — | | | — | | | | | |
Forfeited or rescinded | | — | | | — | | | | | |
Exercised | | — | | | — | | | | | |
Outstanding, September 30, 2022 | | 265,500 | | $ | 4.21 | | 1.89 Years | | $ | 62,400 |
Exercisable, September 30, 2022 | | 265,500 | | $ | 4.21 | | 1.89 Years | | | |
| Options | Weighted- Average Exercise Price | Weighted-Average Remaining Contractual Term | Aggregate Intrinsic Value | ||||||||||||||||||||
| Outstanding, December 31, 2021 | 365,500 | $ | 3.61 | ||||||||||||||||||||
| Granted | — | — | |||||||||||||||||||||
| Forfeited or rescinded | — | — | |||||||||||||||||||||
| Exercised | — | — | |||||||||||||||||||||
| Outstanding, March 31, 2022 | 365,500 | $ | 3.61 | 2.21 years | $ | 536,900 | |||||||||||||||||
| Granted | — | $ | — | ||||||||||||||||||||
| Forfeited or rescinded | — | $ | — | ||||||||||||||||||||
| Exercised | (100,000) | $ | 2.00 | ||||||||||||||||||||
| Outstanding, June 30, 2022 | 265,500 | $ | 4.21 | 2.14 years | $ | 128,700 | |||||||||||||||||
| Exercisable, June 30, 2022 | 265,500 | $ | 4.21 | 2.14 years | |||||||||||||||||||
| Outstanding, December 31, 2022 | 265,500 | $ | 4.21 | ||||||||||||||||||||
| Granted | — | — | |||||||||||||||||||||
| Forfeited or rescinded | — | — | |||||||||||||||||||||
| Exercised | — | — | |||||||||||||||||||||
| Outstanding, March 31, 2023 | 265,500 | $ | 4.21 | 1.39 years | $ | — | |||||||||||||||||
| Granted | — | $ | — | ||||||||||||||||||||
| Forfeited or rescinded | — | $ | — | ||||||||||||||||||||
| Exercised | — | $ | — | ||||||||||||||||||||
| Outstanding, June 30, 2023 | 265,500 | $ | 4.21 | 1.14 years | $ | — | |||||||||||||||||
| Exercisable, June 30, 2023 | 265,500 | $ | 4.21 | 1.14 years | |||||||||||||||||||
27
| | | | | |
|
| |
| Weighted- | |
| | | | Average Grant | |
|
| Restricted stock |
| Date Fair Value | |
Outstanding, December 31, 2020 |
| 2,132,297 | | $ | 1.03 |
Granted |
| — | |
| — |
Forfeited or rescinded |
| — | |
| — |
Vested |
| (94,350) | |
| 4.95 |
Outstanding, March 31, 2021 | | 2,037,947 | | $ | 0.85 |
Granted | | 1,196,102 | | | 2.77 |
Forfeited or rescinded | | — | | | — |
Vested | | (3,480) | | | 5.96 |
Outstanding, June 30, 2021 | | 3,230,569 | | $ | 1.55 |
Granted | | 29,554 | | | 2.69 |
Forfeited or rescinded | | — | | | — |
Vested | | (12,500) | | | 2.15 |
Outstanding, September 30, 2021 | | 3,247,623 | | $ | 1.56 |
| | | |
| |
Outstanding, December 31, 2021 | | 2,572,596 | | $ | 1.75 |
Granted | | 1,247,061 | | | 2.79 |
Forfeited or rescinded |
| — | | | — |
Vested | | — | | | — |
Outstanding, March 31, 2022 |
| 3,819,657 | | $ | 2.09 |
Granted |
| 19,642 | | | 4.27 |
Forfeited or rescinded | | (17,204) | | | 2.79 |
Vested | | (610,195) | | | 2.80 |
Outstanding, June 30, 2022 | | 3,211,900 | | $ | 1.97 |
Granted | | 126,570 | | | 2.95 |
Forfeited or rescinded | | — | | | — |
Vested | | (9,851) | | | 2.69 |
Outstanding, September 30, 2022 | | 3,328,619 | | $ | 2.00 |
| Restricted Stock Units | Weighted- Average Grant Date Fair Value | ||||||||||
| Outstanding, December 31, 2021 | 2,572,596 | $ | 1.75 | ||||||||
| Granted | 1,247,061 | 2.79 | |||||||||
| Forfeited or rescinded | — | — | |||||||||
| Vested | — | — | |||||||||
| Outstanding, March 31, 2022 | 3,819,657 | $ | 2.09 | ||||||||
| Granted | 19,642 | $ | 4.27 | ||||||||
| Forfeited or rescinded | (17,204) | $ | 2.79 | ||||||||
| Vested | (610,195) | $ | 2.80 | ||||||||
| Outstanding, June 30, 2022 | 3,211,900 | $ | 1.97 | ||||||||
| Outstanding, December 31, 2022 | 2,623,790 | $ | 2.29 | ||||||||
| Granted | 2,270,842 | 2.22 | |||||||||
| Forfeited or rescinded | (11,712) | 2.22 | |||||||||
| Vested | (659,479) | 2.80 | |||||||||
| Outstanding, March 31, 2023 | 4,223,441 | $ | 2.17 | ||||||||
| Granted | — | $ | — | ||||||||
| Forfeited or rescinded | (49,465) | $ | 2.22 | ||||||||
| Vested | (288,709) | $ | 2.85 | ||||||||
| Outstanding, June 30, 2023 | 3,885,267 | $ | 2.12 | ||||||||
Grant activity for the ninesix months ended SeptemberJune 30, 20222023 was primarily restricted sharesstock units for the annual long-term incentive plan awards for employees.
28
| | | | | |
| | | | Weighted- | |
| | Performance | | Average Grant | |
|
| Stock Units |
| Date Fair Value | |
Outstanding, December 31, 2020 |
| — | | $ | — |
Granted |
| — | |
| — |
Forfeited or rescinded |
| — | |
| — |
Vested |
| — | |
| — |
Outstanding, March 31, 2021 |
| — | | $ | — |
Granted | | — | | | — |
Forfeited or rescinded | | — | | | — |
Vested | | — | | | — |
Outstanding, June 30, 2021 | | — | | $ | — |
Granted | | — | | | — |
Forfeited or rescinded | | — | | | — |
Vested | | — | | | — |
Outstanding, September 30, 2021 | | — | | $ | — |
| | | | | |
Outstanding, December 31, 2021 | | 860,216 | | $ | 3.87 |
Granted | | 860,216 | | | 3.65 |
Forfeited or rescinded | | — | | | — |
Vested | | — | | | — |
Outstanding, March 31, 2022 | | 1,720,432 | | $ | 3.76 |
Granted | | — | | | — |
Forfeited or rescinded | | — | | | — |
Vested | | — | | | — |
Outstanding, June 30, 2022 | | 1,720,432 | | $ | 3.76 |
Granted | | — | | | — |
Forfeited or rescinded | | — | | | — |
Vested | | — | | | — |
Outstanding, September 30, 2022 | | 1,720,432 | | $ | 3.76 |
| Performance Stock Units | Weighted- Average Grant Date Fair Value | ||||||||||
| Outstanding, December 31, 2021 | 860,216 | $ | 3.87 | ||||||||
| Granted | 860,216 | 3.65 | |||||||||
| Forfeited or rescinded | — | — | |||||||||
| Vested | — | — | |||||||||
| Outstanding, March 31, 2022 | 1,720,432 | $ | 3.76 | ||||||||
| Granted | — | $ | — | ||||||||
| Forfeited or rescinded | — | $ | — | ||||||||
| Vested | — | $ | — | ||||||||
| Outstanding, June 30, 2022 | 1,720,432 | $ | 3.76 | ||||||||
| Outstanding, December 31, 2022 | 1,720,432 | $ | 3.76 | ||||||||
| Granted | 1,162,162 | 2.71 | |||||||||
| Forfeited or rescinded | — | — | |||||||||
| Vested | — | — | |||||||||
| Outstanding, March 31, 2023 | 2,882,594 | $ | 3.34 | ||||||||
| Granted | — | $ | — | ||||||||
| Forfeited or rescinded | — | $ | — | ||||||||
| Vested | — | $ | — | ||||||||
| Outstanding, June 30, 2023 | 2,882,594 | $ | 3.34 | ||||||||
29
Surety Bonds -– An insurance company issued surety bonds on behalf of the Company totaling $500,438 to various State of New Mexico agencies in order for the Company to do business in the State of New Mexico. The surety bonds are valid until canceled or matured. The terms of the surety bonds are extended for a term of one year at a time. The Company intends to renew the surety bonds on $400,000 as long as the Company does business in the State of New Mexico. The remaining $100,438 is related to inactive wells and will remain in place until the Company returns those wells to activity or plugs them. One of those wells has been plugged, and the bond released in the amount of $50,150, leaving the amount related to inactive wells as $50,288. On December 23, 2022, the Company increased its blanket plugging surety bond by $200,000. As of SeptemberJune 30, 2022,2023, the Company had surety bonds in total of $450,288, with $50,288 related to inactive wells.
$650,288.
Effective October 1, 2022,
On October 13, 2022, our Form S-3 Registration Statement was declared effective by the SEC in respect of 63,888,878 shares in aggregate of our common stock (21,339,986 shares of common stock issued at thePurchase Price upon closing of the Stronghold Acquisition and 42,548,892 shares of as-converted Preferred Stock), which shares may be offered by certain stockholders from time to time in one or more offerings.
On October 27, 2022, the Company’s stockholders approved the issuance of, 42,548,892 shares of common stock upon conversion of the 153,176 shares of our Preferred Stock. The preferred shares were automatically converted into suchFounders Acquisition.
30
forward-looking statements as a result of many factors, including those discussed under “Risk Factors,” "Forward Looking Statements" and elsewhere in this Quarterly Report.2.2: Management’s Discussion and Analysis of Financial Condition and Results of OperationsManagement’s DiscussionAnalysis of Financial Condition and Results of Operations analyzes the major elements of our Balance Sheets and Statements of Operations. This sectionanalysis should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2021 and our interim unauditedaccompanying financial statements and accompanyingthe notes to those financial statements included elsewhere in this Quarterly Report. The following discussion includes forward-looking statements that reflect our plans, estimates and beliefs and our actual results could differ materially from those discussed in these financial statements.(“Ring,” the “Company,” “our,” “we,” “us,” or(the "Company," "Ring," "we," "us," "our" and similar terms) is a growth oriented independent exploration and production company and isbased in The Woodlands, Texas engaged in oil and natural gas development, production, acquisition, and exploration activities currently focused in Texas and New Mexico.the Permian Basin of Texas. Our primary drilling operations target the oil and liquids rich producing formations in the Northwest Shelf and the Central Basin Platform, and the Delaware Basin, allboth of which are part of the Permian Basin.Our corporate headquarters are in The Woodlands, Texas.Recent DevelopmentsStronghold AcquisitionOn 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 “Purchase Agreement”). Pursuant to the 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 pursuant to the Purchase Agreement.The fair value of consideration paid to Stronghold was approximately $395.7 million, of which $167.9 million, subject to post-closing adjustment was paid in cash at closing, $15.0 million will be payable in cash after the six-month anniversary of the closing date of the Stronghold Acquisition, and 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 the novated hedges. The cash portion of the consideration was funded primarily from borrowings under an amended and restated fully committed revolving credit facility (the “Credit Facility”) underwritten by Truist Securities, Citizens Bank, N.A., KeyBanc Capital Markets Inc., and Mizuho Bank, Ltd. The borrowing base of the $1.0 billion Credit Facility was increased from $350.0 million to $600.0 million at the closing of the transaction. The remaining consideration was in the form of stock, consisting 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”). Please see “Note 10 – STOCKHOLDERS’ EQUITY AND MEZZANINE EQUITY” for further discussion. 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 in the Stronghold Acquisition.We aredeliveringbalancing the need to reduce long-term debt and further developing our oil and gas properties to maintain or grow our annual production. We intend to achieve both through proper allocation of cash flow generated by our operations and potentially through the sale of non-core assets. We intend to continue evaluating potential transactions to acquire strategic producing assets with attractive acreage positions that can provide competitive returns for our shareholders.sustainable returns to our stockholdersreserves by developing acquiring, exploring for,our oil-rich resource base through conventional and commercializing oilhorizontal drilling. In an effort to maximize its value and natural gas resources vitalpotential, Ring intends to drill and develop its acreage base in both the world’s healthNorthwest Shelf and welfare. Successfully achieving Ring’s mission requires a firm commitmentCentral Basin Platform assets, allowing Ring to execute on its plan of operating safely in a socially responsiblewithin its generated cash flow.environmentally friendly manner, while ensuringdeleveraging of asset. Ring intends to reduce its long-term debt primarily through the use of excess cash flow and potentially through the sale of non-core assets. The Company believes that with its attractive field level margins, it is well positioned to maximize the value of its assets and deleverage its balance sheet. The Company also believes through potential accretive acquisitions and strategic asset dispositions, it can accelerate the strengthening of its balance sheet. During the three months ended June 30, 2023, the Company conductsmade net paydowns of $25 million on its businessrevolving line of credit, which reduced the outstanding long-term debt balance to $397 million.honestyexceptional upside potential. Ring has a history of acquiring leasehold positions that it believes to have additional resource potential that meet its targeted returns on invested capital and integrity. Specifically, our businesscomparable to its existing inventory of drilling locations. We pursue an acquisition strategy isdesigned to increase our stockholders’ value throughreserves at attractive finding costs and complement existing core properties. Management intends to continue to pursue strategic acquisitions and structure the following:
potential transactions financially, so they improve balance sheet metrics and are accretive to shareholders. Our executive team, with its extensive experience in the Permian Basin, has many relationships with operators and service providers in the region. Ring believes that leveraging the relationships of its management and board of directors will be a competitive advantage in identifying potential acquisition targets.●Growing production and reserves by developing our oil-rich resource base through conventional and horizontal drilling. In an effort to maximize its value and resource potential, Ring intends to drill and develop its acreage base in both the Northwest Shelf and Central Basin Platform assets, allowing Ring to execute on its plan of operating within its generated cash flow.
31
During the second quarter of 2022, Ring drilled a total of nine wells, completed seven wells, and began the completion process on four wells, all in the Northwest Shelf. Two of the wells completed were 1-mile horizontal wells that were drilled in the first quarter with both wells at a working interest of 100%. In addition, there were three 1-mile horizontal wells with a working interest of 100% and two 1.5-mile horizontal wells with a working interest of approximately 98.7% that were drilled and completed in the second quarter. Ring also drilled and began the completion process on an additional four 1-mile horizontal wells. Two of the wells have a working interest of 100%, one has a working interest of 87.5%, and the fourth has a working interest of 75%. In addition to the nine drilled wells and seven new wells placed on production, during the second quarter, the Company continued its program of conversions from electrical submersible pumps to rod pumps (“CTRs”), with three conversions in the Northwest Shelf and one conversion in the Central Basin Platform.
In the third quarter of 2022, Ring completed and placed on production the four 1-mile horizontal wells in the Northwest Shelf on which the Company had begun the completion process during the second quarter of 2022. In the Central Basin Platform, the Company drilled and completed two 1.5-mile horizontal wells and one 1-mile horizontal well, each with a working interest of 100%. In the Northwest Shelf, the Company drilled and completed two 1-mile horizontal wells (each with a working interest of 100%. During the last month of the quarter, the Company drilled), and began the completion process on three 1-miletwo 1.5-mile horizontal wells in the Northwest Shelf, each(one with a working interest of 100%approximately 99.8% and the other with a working interest of approximately 75.4%). In total, during the third quarter of 2022, Ring drilled eight horizontal wells, completed nine horizontal wells, and began the completion process on three horizontal wells. Ring performed three recompletionsNext, in its Crane County acreage within the Central Basin Platform. In addition,Platform, the Company continued its CTR program,drilled and completed three vertical wells (each with five conversionsa working interest of 100%) and performed six vertical well re-completions (each with a working interest of 100%).
Platform, the Company drilled and completed two vertical wells (each with a working interest of 100%) and performed three vertical well re-completions (each with a working interest of 100%).
| | | | | | | | | | | | |
|
| |
| |
| |
| Wells Began |
| |
| |
| | | | Wells | | Wells | | Completion | | | | |
Quarter | | Area | | Drilled | | Completed | | Process | | CTRs | | Recompletions |
| | | | | | | | | | | | |
1Q 2022 | | Central Basin Platform | | 4 | | 4 | | — | | — | | — |
|
| Delaware Basin |
| — |
| — |
| — |
| — |
| — |
|
| Northwest Shelf |
| 2 |
| — |
| — |
| 4 |
| — |
| | | | | | | | | | | | |
2Q 2022 |
| Central Basin Platform |
| — |
| — |
| — |
| 1 |
| — |
|
| Delaware Basin |
| — |
| — |
| — |
| — |
| — |
|
| Northwest Shelf |
| 9 |
| 7 |
| 4 |
| 3 |
| — |
| | | | | | | | | | | | |
3Q 2022 |
| Central Basin Platform |
| 3 |
| 3 |
| — |
| 1 |
| 3 |
|
| Delaware Basin |
| — |
| — |
| — |
| — |
| — |
|
| Northwest Shelf |
| 5 |
| 6 |
| 3 |
| 5 |
| — |
32
| Quarter | Area | Wells Drilled | Wells Completed | Re-completions | ||||||||||||||||||||||
| 1Q 2023 | Northwest Shelf | 4 | 4 | — | ||||||||||||||||||||||
| Central Basin Platform (Vertical) | 3 | 3 | 6 | |||||||||||||||||||||||
| Total | 7 | 7 | 6 | |||||||||||||||||||||||
| 2Q 2023 | Northwest Shelf | 4 | 4 | — | ||||||||||||||||||||||
| Central Basin Platform (Vertical) | 2 | 2 | 3 | |||||||||||||||||||||||
| Total | 6 | 6 | 3 | |||||||||||||||||||||||
Executive Summary - 2022 Developments and Highlights
COVID-19 and Geopolitical Uncertainties
In December of 2020, the Food and Drug Administration authorized the use of the COVID-19 vaccination in the United States. The shots were first administered to front line workers and the elderly but were soon made available to all adults. The daily new infections peaked in the first quarter of 2021 and have seen an overall steady decline, giving states the ability to reopen to certain extents. In March 2021, the Federal Government passed a $1.9 trillion coronavirus relief package which included direct payments to qualifying individuals, extended unemployment benefits, and provided state and local assistance. During 2021, the demand forcrude oil and natural gas increased as the economy recovered from the effectsand our ability to market our production on economically attractive terms. Commodity prices are affected by many factors outside of the COVID-19 pandemicour control, including changes in market supply and demand both domestically and world wide, which strengthened energy prices. Although bothare impacted by many factors. As a result, we cannot accurately predict future commodity prices, and therefore, we cannot determine with any degree of certainty what effect increases or decreases in these prices will have on our drilling program, production volumes or revenues.
long-term success.
Our oil, for the Three Months Ended June 30, 2023 and 2022
| For the Three Months Ended | ||||||||||||||||||||||||||
| June 30, 2023 | June 30, 2022 | Change | % Change | |||||||||||||||||||||||
| Net sales: | ||||||||||||||||||||||||||
| Oil | $ | 78,042,072 | $ | 79,688,536 | $ | (1,646,464) | (2) | % | ||||||||||||||||||
| Natural gas | (1,100,776) | 5,273,339 | (6,374,115) | (121) | % | |||||||||||||||||||||
| Natural gas liquids | 2,407,277 | — | 2,407,277 | 100 | % | |||||||||||||||||||||
| Total sales | $ | 79,348,573 | $ | 84,961,875 | $ | (5,613,302) | (7) | % | ||||||||||||||||||
| Net production: | ||||||||||||||||||||||||||
| Oil (Bbls) | 1,079,379 | 729,484 | 349,895 | 48 | % | |||||||||||||||||||||
| Natural gas (Mcf) | 1,557,545 | 723,196 | 834,349 | 115 | % | |||||||||||||||||||||
| Natural gas liquids (Bbls) | 232,698 | — | 232,698 | 100 | % | |||||||||||||||||||||
Total production (Boe)(1) | 1,571,668 | 850,017 | 721,651 | 85 | % | |||||||||||||||||||||
| Average sales price: | ||||||||||||||||||||||||||
| Oil (per Bbl) | $ | 72.30 | $ | 109.24 | $ | (36.94) | (34) | % | ||||||||||||||||||
| Natural gas (per Mcf) | (0.71) | 7.29 | (8.00) | (110) | % | |||||||||||||||||||||
| Natural gas liquids (Bbl) | 10.35 | — | 10.35 | 100 | % | |||||||||||||||||||||
| Total per Boe | $ | 50.49 | $ | 99.95 | $ | (49.46) | (49) | % | ||||||||||||||||||
Commodity Risk Management
Effective February 1, 2022 we entered into a swap for 1,000 barrels of oil per day for the remainder of calendar year 2022. Additionally, we entered into 12 deferred premium commodity put options for oil on June 28 and 29, 2022. During the month of July 2022, we entered into five deferred premium commodity put options and three two-way collar arrangements, each for oil. On August 5, 2022, we entered into swaps for an average of 814 barrels of oil per day. As a part of the Stronghold Acquisition we novated hedge agreements for 33 derivative contracts in total, with 18 for oil and 15 for natural gas. At the end ofremainder attributable to our 2023 development program offset by the quarter on September 26, 2022, we entered into four derivative contracts, one for oil and three for natural gas.
For oil, we had derivative contracts for an average of 3,129 barrels of oil per day for the month of January 2022, 4,129 barrels per day for February through June 2022, 5,629 barrels per day during July 2022, and 7,716 barrels per day during August and September 2022. For October through December 2022, we have derivative contracts in place for an average of 9,216 barrels per day. For January through March 2023, we have derivative contracts in place for an average of 5,152 barrels per day. For April through June 2023, we have derivative contracts in place for an average of 5,012 barrels per day. For July through December 2023, we have derivative contracts in place for an average of 4,012 barrels per day. For January through June 2024, we have derivative contracts in place for an average of 3,956 barrels per day. For July through September 2024, we have derivative contracts in place for an average of 2,349 barrels per day.
For natural gas, we had derivative contracts for an average of 11,061 MMBtu per day during the month of September 2022. For October through December 2022, we have derivative contracts in place for an average of 13,592 MMBtu per day. For January through March 2023, we have derivative contracts in place for an average of 9,872 MMBtu per day. For April through December 2023, we have derivative contracts in place for an average of 12,212 MMBtu per day. For January through September 2024, we have derivative contracts in place for an average of 4,872 MMBtu per day.
33
Our 2022 derivative financial instruments resulted in a total non-cash fair value gain of approximately $47.7 million during the three months ended September 30, 2022 and a realized loss of approximately $14.9 million, for a total gain on derivative contracts of approximately $32.9 million.
Borrowing Base
The Company’s borrowing base increased from $350 million to $600 million due to the Second Amended and Restated Credit Agreement, dated August 31, 2022 as part of the Stronghold Acquisition. At the Closing of the Stronghold Acquisition, the Company had $452 million outstanding on its line of credit. The Company paid down $17 million of this debt during the third quarter of 2022 and had $435 million of principal outstanding on our Credit Facility as of September 30, 2022. As our borrowing base is subject to a semi-annual redetermination, our available borrowings and liquidity could be impacted by a redetermination later in 2022.
Officers and Directors
Upon closing of the Stronghold Acquisition, Stronghold exercised its right to designate two directors to the Board of Directors (the "Board"). On September 1, 2022, Roy Ben-Dor and David Habachy were appointed to the Board.
Results of Operations – For the Three Months Ended September 30, 2022 and 2021
Oil, natural gas, and NGL sales. For the three months ended September 30, 2022, oil, natural gas, and NGL sales revenue increased $45,032,772 to $94,408,948, compared to $49,376,176 for the same period during 2021, primarily as a result of higher oil and natural gas prices, as well as increased production. Of this, oil sales increased $40,524,117, natural gas sales increased $1,168,374, and NGL sales increased $3,340,281. For the three months ended September 30, 2022, oil sales volume increased 273,523 barrels to 932,770 barrels, compared to 659,247 barrels for the same period in 2021.Delaware divestiture. The average realized price per barrel of oil price increased 33% from $69.61NGLs was $10.35 for the three months ended SeptemberJune 30, 2021, to $92.642023.
| For the Six Months Ended | ||||||||||||||||||||||||||
| June 30, 2023 | June 30, 2022 | Change | % Change | |||||||||||||||||||||||
| Net sales: | ||||||||||||||||||||||||||
| Oil | $ | 161,628,399 | $ | 143,119,163 | $ | 18,509,236 | 13 | % | ||||||||||||||||||
| Natural gas | (36,213) | 10,023,744 | (10,059,957) | (100) | % | |||||||||||||||||||||
| Natural gas liquids | 5,839,299 | — | 5,839,299 | 100 | % | |||||||||||||||||||||
| Total sales | $ | 167,431,485 | $ | 153,142,907 | $ | 14,288,578 | 9 | % | ||||||||||||||||||
| Net production: | ||||||||||||||||||||||||||
| Oil (Bbls) | 2,218,792 | 1,405,699 | 813,093 | 58 | % | |||||||||||||||||||||
| Natural gas (Mcf) | 3,158,952 | 1,455,479 | 1,703,473 | 117 | % | |||||||||||||||||||||
| Natural gas liquids (Bbls) | 472,690 | — | 472,690 | 100 | % | |||||||||||||||||||||
Total production (Boe)(1) | 3,217,974 | 1,648,279 | 1,569,695 | 95 | % | |||||||||||||||||||||
| Average sales price: | ||||||||||||||||||||||||||
| Oil (per Bbl) | $ | 72.85 | $ | 101.81 | $ | (28.96) | (28) | % | ||||||||||||||||||
| Natural gas (per Mcf) | (0.01) | 6.89 | (6.90) | (100) | % | |||||||||||||||||||||
| Natural gas liquids (Bbl) | 12.35 | — | 12.35 | 100 | % | |||||||||||||||||||||
| Total per Boe | $ | 52.03 | $ | 92.91 | $ | (40.88) | (44) | % | ||||||||||||||||||
The following table presents our sales revenues for the periods indicated (note that for periods prior to July 1, 2022, sales for NGLs were presented with natural gas):
| | | | | | |
| | For The Three Months | ||||
| | Ended September 30, | ||||
|
| 2022 |
| 2021 | ||
Operating Revenues |
| |
|
| |
|
Oil | | $ | 86,413,665 | | $ | 45,889,548 |
Natural gas | |
| 4,655,002 | |
| 3,486,628 |
Natural gas liquids | | | 3,340,281 | | | — |
Total operating revenues | | $ | 94,408,948 | | $ | 49,376,176 |
Lease operating expenses. Total lease operating expenses (“LOE”) expressed on a per barrel of oil equivalent (“Boe”) basis increased approximately 18% from $9.21 per Boe for the three months ended September 30, 2021, to $10.67 per Boe for the three months ended September 30, 2022 primarily due to increases in labor costs and industry wide inflationary pressures. Total lease operating expenses increased approximately 87% from $6,983,196 for the three months ended September 30, 2021, to $13,029,098 for the three months ended September 30, 2022 primarily due to a 61% increase to production of 463,229 Boe, as well as the higher per Boe costs mentioned above
Gathering, transportation and processing costs. Our total gathering, transportation and processing costs decreased 100% from $1,051,163 for the three months ended September 30, 2021 to $0 for the three months ended September 30, 2022, due primarily to a change in cost recognition due to a modification of the contract agreement. Specifically, beginning May 1, 2022, the Company and its processing entity modified the contract so that the Company no longer maintained ownership of the gas through processing. Accordingly,
34
the Company from that point on accounts for any such fees and deductions as a direct reduction of the sales transaction price. Accordingly, total gathering, transportation and processing costs expressed on a per Boe basis decreased 100% from $1.39 per Boe for the three months ended September 30, 2021 to $0 per Boe for the three months ended September 30, 2022 primarily due to the aforementioned change in cost recognition.
Ad valorem taxes. Our ad valorem taxes increased approximately 70% from $703,774 for the three months ended September 30, 2021 to $1,199,385 for the three months ended September 30, 2022 primarily due toOf the increase in tax commodity price from the prior year. Expressed on a per Boe basis, these costs increased approximately 5% from $0.93 per Boe for the three months ended September 30, 2021volume of 472,690 barrels, 293,848 barrels is attributable to $0.98 for the three months ended September 30, 2022.
Oil and natural gas production taxes. Production taxes as a percentage of oil and natural gas sales increased slightly to 4.8% for the three months ended September 30, 2022 compared to 4.5% for the third quarter of 2021. We expect these rates to stay relatively steady.
Depreciation, depletion and amortization. Our depreciation, depletion and amortization expense increased by $5,013,978 to $14,324,502 for the three months ended September 30, 2022, compared to $9,310,524 during the same period in 2021 due to higher 2022 production volumes. Average depreciation, depletion and amortization decreased to $11.73 per Boe for the three months ended September 30, 2022 compared to $12.28 per Boe for the three months ended September 30, 2021 due to the increased total estimated costs of properties acquired in the Stronghold Acquisition.
Asset retirement obligation accretion. Accretion of asset retirement obligations (“AROs”) increased by $60,235 to $243,140 for the three months ended September 30, 2022, compared to $182,905 for the three months ended September 30, 2021 because of more wells added due to new drilling and from the Stronghold Acquisition.
Operating lease expense. Operating lease expense remained consistent at $83,590 for the three months ended September 30, 2022, compared to $83,589 for the three months ended September 30, 2021.
General and administrative expense. General and administrative expense increased to $7,393,848 for the three months ended September 30, 2022 compared to $4,433,251 for the three months ended September 30, 2021. Within this change, we isolate share-based compensation, which increased to $1,543,033 for the three months ended September 30, 2022 compared to $777,461 for the three months ended September 30, 2021, primarily as the result of grants of equity awards in 2021 and 2022 pursuant to the Ring Energy, Inc. 2021 Omnibus Incentive Plan (the “2021 Plan”). For the three months ended September 30, 2022, general and administrative expenses excluding share-based compensation increased by $2,195,025 due to approximately $1.1 million in transaction costs primarily associated with the Stronghold Acquisition and approximately $1.4 million increased bonus compensation accruals and salaries and wages for new hires to support the Company’s growth, offset by a reduction in general legal and other professional fees.
| | | | | | |
| | For The Three Months | ||||
| | Ended September 30, | ||||
|
| 2022 |
| 2021 | ||
| | | | | | |
General and administrative expense (excluding share-based compensation) | | $ | 5,850,815 | | $ | 3,655,790 |
Share-based compensation | |
| 1,543,033 | | $ | 777,461 |
General and administrative expense | | $ | 7,393,848 | | $ | 4,433,251 |
Interest expense. Interest expense increased $3,469,923 to $7,021,385 for the three months ended September 30, 2022, compared to $3,551,462 for the three months ended September 30, 2021 due to a $58.8 million higher average daily loan balance (as a result of the Stronghold Acquisition) as well as an increase in weighted average interest rate from 4.4% to 6.3%. Also, within interest expense, amortization of deferred financing costs increased $908,791 as a result of our entering into the Second Amended and Restated Credit Agreement, in which approximately $18.8 million was booked to deferred financing costs, thereby increasing amortization, and $564,111 of prior deferred financing costs were written off that were associated with five prior lenders under the Credit Facility.
Gain (loss) on derivative contracts. In the Statements of Operations, the total gain (loss) on derivative contracts changed from a loss of $6,720,320 for the three months ended September 30, 2021 to a gain of $32,851,189 for the three months ended September 30, 2022. Underlying this overall change were changes within the realized and unrealized portions of the derivative instruments. We experienced a decrease of $59,892 in realized losses from $14,921,008 during the three months ended September 30, 2021 to $14,861,116 during the three months ended September 30, 2022. The Company records all derivative instruments on the Balance Sheets as either an asset or liability measured at fair value. Changes in fair value are recognized currently in earnings unless certain specific hedge accounting criteria are met. The unrealized (mark to market) gain increased from $8,200,688 during the three months ended September 30, 2021 to
35
$47,712,305 during the three months ended September 30, 2022 due to a decrease in commodity prices and the realization of third quarter derivative positions.
Net income (loss). For the three months ended September 30, 2022, the Company achieved net income of $75,085,891, compared to net income of $14,163,934 for the three months ended September 30, 2021. The primary difference was due to the higher sales volumes and revenue in 2022 compared to 2021 resulting from increased workovers, drilling activities, the Stronghold Acquisition, and the significantly higher oil prices in 2022, as well as a significant gain of $32,851,189 on derivative contracts in the third quarter 2022 due to favorable positions.
Sales volumes and commodity prices received
The following table presents our sales volumes and received pricing information for the periods indicated (note that for periods prior to July 1, 2022, sales for NGLs were presented with natural gas):
| | | | | | |
| | For the Three Months | ||||
| | Ended September 30, | ||||
|
| 2022 |
| 2021 | ||
Oil volume (Bbls) |
| | 932,770 |
| | 659,247 |
Natural gas volume (Mcf) |
| | 952,762 |
| | 594,841 |
Natural gas liquids (Bbls) | | | 130,052 | | | — |
Total Production (Boe)(1) |
| | 1,221,616 |
| | 758,387 |
| | | | | | |
Average Sales Price |
| | |
| | |
Oil price (per Bbl) | | $ | 92.64 | | $ | 69.61 |
Gas price (per Mcf) | | $ | 4.89 | | $ | 5.86 |
Natural gas liquids (Bbl) | | $ | 25.68 | | $ | — |
Total per Boe | | $ | 77.28 | | $ | 65.11 |
Results of Operations – For the Nine Months Ended September 30, 2022 and 2021
Oil, natural gas, and NGL sales. For the nine months ended September 30, 2022, oil, natural gas, and NGL sales revenue increased $110,913,045 to $247,551,855, compared to $136,638,810 for the same period during 2021, primarily as a result of higher oil and natural gas prices, increased production, and the Stronghold Acquisition with its associated revenues beginning September 1, 2022. Of this, oil sales increased $102,605,509, natural gas sales increased $4,967,255, and NGL sales increased $3,340,281. For the nine months ended September 30, 2022, oil sales volume increased 366,693 barrelsremainder attributable to 2,338,469 barrels, compared to 1,971,776 barrels forour 2023 development program offset by the same period in 2021. The average realized price per barrel of oil price increased 52% from $64.37 for the nine months ended September 30, 2021, to $98.16 for the nine months ended September 30, 2022. For the nine months ended September 30, 2022, gas sales volume increased 634,735 Mcf to 2,408,241 Mcf, compared to 1,773,506 Mcf for the same period in 2021. The average realized natural gas price per Mcf increased 11% from $5.48 to $6.10. For the nine months ended September 30, 2022, NGL sales volumes were 130,052 barrels of NGLs, compared to zero barrels for the same period in 2021, due to the Company’s change in reporting presentation for its natural gas products, which are presented on a three-stream basis beginning July 1, 2022.Delaware divestiture. The average realized price per barrel of NGLs was $25.68$12.35 for the ninesix months ended SeptemberJune 30, 2022.
2023.
The following table presents our sales revenues
| | | | | | |
|
| For The Nine Months | ||||
| | Ended September 30, | ||||
|
| 2022 |
| 2021 | ||
Operating Revenues | | | | | | |
Oil | | $ | 229,532,827 | | $ | 126,927,318 |
Natural gas | |
| 14,678,747 | |
| 9,711,492 |
Natural gas liquids | | | 3,340,281 | | | — |
Total operating revenues | | $ | 247,551,855 | | $ | 136,638,810 |
36
| For the Three Months Ended | ||||||||||||||||||||||||||
| June 30, 2023 | June 30, 2022 | Change | % Change | |||||||||||||||||||||||
| Lease operating expenses ("LOE") | $ | 15,938,106 | $ | 8,301,443 | $ | 7,636,663 | 92 | % | ||||||||||||||||||
| Average LOE per Boe | $ | 10.14 | $ | 9.77 | $ | 0.37 | 4 | % | ||||||||||||||||||
| Gathering, transportation and processing costs ("GTP") | $ | (1,632) | $ | 549,389 | $ | (551,021) | (100) | % | ||||||||||||||||||
| Average GTP per Boe | $ | — | $ | 0.65 | $ | (0.65) | (100) | % | ||||||||||||||||||
| Ad valorem taxes | $ | 1,670,343 | $ | 949,239 | $ | 721,104 | 76 | % | ||||||||||||||||||
| Average Ad valorem taxes per Boe | $ | 1.06 | $ | 1.12 | $ | (0.06) | (5) | % | ||||||||||||||||||
| Oil and natural gas production taxes | $ | 4,012,139 | $ | 4,157,457 | $ | (145,318) | (3) | % | ||||||||||||||||||
| Average Production taxes per Boe | $ | 2.55 | $ | 4.89 | $ | (2.34) | (48) | % | ||||||||||||||||||
| Production taxes as a percentage of total sales | 5.06 | % | 4.89 | % | 0.17 | % | 3 | % | ||||||||||||||||||
Lease operating expenses. Total LOE expressed Our total lease operating expenses (“LOE”) increased from $8.3 million to $15.9 million and increased on a per Boe basis increased approximately 6% from $9.98$9.77 to $10.14. These per Boe for the nine months ended September 30, 2021, to $10.55 per Boe for the nine months ended September 30, 2022 primarily due an increase to labor costs and industry wide inflationary pressures. Totalamounts are calculated by dividing our total lease operating expenses by our total volume sold, in Boe. Total LOE increased approximately 34% from $22,634,259 for the nine months ended September 30, 2021, to $30,283,706 for the nine months ended September 30, 2022 primarily due to a 27%an 85% increase toin production of 602,535721,651 Boe andas a result of the higher per Boe costs mentioned above
Stronghold Acquisition as well as our 2023 development program.
Ad valorem taxes. Our ad valorem taxes, increased approximately 45% from $2,144,800 for the nine months ended September 30, 2021 to $3,100,578 for the nine months ended September 30, 2022 primarily due to the increase in taxed commodity prices$0.6 million is from the prior year. Expressed on a per Boe basis, these costs increased approximately 14% from $0.95 per Boe foraddition of properties associated with the nine months ended September 30, 2021 to $1.08 for the nine months ended September 30, 2022.
Stronghold Acquisition.
| For the Six Months Ended | ||||||||||||||||||||||||||
| June 30, 2023 | June 30, 2022 | Change | % Change | |||||||||||||||||||||||
| Lease operating expenses ("LOE") | $ | 33,410,797 | $ | 17,254,608 | $ | 16,156,189 | 94 | % | ||||||||||||||||||
| Average LOE per Boe | $ | 10.38 | $ | 10.47 | $ | (0.09) | (1) | % | ||||||||||||||||||
| Gathering, transportation and processing costs ("GTP") | $ | (2,455) | $ | 1,846,247 | $ | (1,848,702) | (100) | % | ||||||||||||||||||
| Average GTP per Boe | $ | — | $ | 1.12 | $ | (1.12) | (100) | % | ||||||||||||||||||
| Ad valorem taxes | $ | 3,340,956 | $ | 1,901,193 | $ | 1,439,763 | 76 | % | ||||||||||||||||||
| Average Ad valorem taxes per Boe | $ | 1.04 | $ | 1.15 | $ | (0.11) | (10) | % | ||||||||||||||||||
| Oil and natural gas production taxes | $ | 8,420,279 | $ | 7,375,819 | $ | 1,044,460 | 14 | % | ||||||||||||||||||
| Average Production taxes per Boe | $ | 2.62 | $ | 4.47 | $ | (1.85) | (41) | % | ||||||||||||||||||
| Production taxes as a percentage of total sales | 5.03 | % | 4.82 | % | 0.21 | % | 4 | % | ||||||||||||||||||
a negative $2,455 and decreased on a per Boe basis from $1.12 to $—. GTP costs decreased from being re-classified as a reduction to oil and natural gas sales revenues, due to a natural gas processing entity taking control of transportation at the wellhead beginning on May 1, 2022. The negative $2,455 recognized during the second quarter of 2023 was a result of payout adjustments.
| For the Three Months Ended | ||||||||||||||||||||||||||
| June 30, 2023 | June 30, 2022 | Change | % Change | |||||||||||||||||||||||
| Depreciation, depletion and amortization (DD&A): | ||||||||||||||||||||||||||
| Depletion | $ | 20,511,809 | $ | 10,629,787 | $ | 9,882,022 | 93 | % | ||||||||||||||||||
| Depreciation | 91,628 | 8,567 | 83,061 | 970 | % | |||||||||||||||||||||
| Amortization of financing lease assets | 189,495 | 110,850 | 78,645 | 71 | % | |||||||||||||||||||||
| Total depreciation, depletion and amortization | $ | 20,792,932 | $ | 10,749,204 | $ | 10,043,728 | 93 | % | ||||||||||||||||||
| Depletion per Boe | $ | 13.05 | $ | 12.51 | $ | 0.54 | 4 | % | ||||||||||||||||||
| Depreciation, depletion and amortization per Boe | $ | 13.23 | $ | 12.65 | $ | 0.58 | 5 | % | ||||||||||||||||||
| Asset retirement obligation ("ARO") accretion | $ | 353,878 | $ | 186,303 | $ | 167,575 | 90 | % | ||||||||||||||||||
| Operating lease expense | $ | 115,353 | $ | 83,590 | $ | 31,763 | 38 | % | ||||||||||||||||||
| General and administrative expense ("G&A"): | ||||||||||||||||||||||||||
| General and administrative expense (excluding Share-based compensation) | $ | 4,549,931 | $ | 3,933,057 | $ | 616,874 | 16 | % | ||||||||||||||||||
| Share-based compensation | 2,260,312 | 1,899,245 | 361,067 | 19 | % | |||||||||||||||||||||
| Total general and administrative expense | $ | 6,810,243 | $ | 5,832,302 | $ | 977,941 | 17 | % | ||||||||||||||||||
| G&A per Boe | $ | 4.33 | $ | 6.86 | $ | (2.53) | (37) | % | ||||||||||||||||||
| G&A excluding Share-based compensation, per Boe | $ | 2.89 | $ | 4.63 | $ | (1.74) | (38) | % | ||||||||||||||||||
| For the Six Months Ended | ||||||||||||||||||||||||||
| June 30, 2023 | June 30, 2022 | Change | % Change | |||||||||||||||||||||||
| Depreciation, depletion and amortization (DD&A): | ||||||||||||||||||||||||||
| Depletion | $ | 41,492,351 | $ | 20,254,404 | $ | 21,237,947 | 105 | % | ||||||||||||||||||
| Depreciation | 196,729 | 48,622 | 148,107 | 305 | % | |||||||||||||||||||||
| Amortization of financing lease assets | 375,523 | 227,465 | 148,058 | 65 | % | |||||||||||||||||||||
| Total depreciation, depletion and amortization | $ | 42,064,603 | $ | 20,530,491 | $ | 21,534,112 | 105 | % | ||||||||||||||||||
| Depletion per Boe | $ | 12.89 | $ | 12.29 | $ | 0.60 | 5 | % | ||||||||||||||||||
| Depreciation, depletion and amortization per Boe | $ | 13.07 | $ | 12.46 | $ | 0.61 | 5 | % | ||||||||||||||||||
| Asset retirement obligation ("ARO") accretion | $ | 719,725 | $ | 374,545 | $ | 345,180 | 92 | % | ||||||||||||||||||
| Operating lease expense | $ | 228,491 | $ | 167,180 | $ | 61,311 | 37 | % | ||||||||||||||||||
| General and administrative expense ("G&A"): | ||||||||||||||||||||||||||
| General and administrative expense (excluding Share-based compensation) | $ | 9,736,374 | $ | 7,933,424 | $ | 1,802,950 | 23 | % | ||||||||||||||||||
| Share-based compensation | 4,204,008 | 3,421,155 | 782,853 | 23 | % | |||||||||||||||||||||
| Total general and administrative expense | $ | 13,940,382 | $ | 11,354,579 | $ | 2,585,803 | 23 | % | ||||||||||||||||||
| G&A per Boe | $ | 4.33 | $ | 6.89 | $ | (2.56) | (37) | % | ||||||||||||||||||
| G&A excluding Share-based compensation, per Boe | $ | 3.03 | $ | 4.81 | $ | (1.78) | (37) | % | ||||||||||||||||||
property, including properties acquired in the Stronghold Acquisition, as well as an increase of 1,569,695 in Boe produced. Additional trucks were purchased and leased for field operations, resulting in higher depreciation and finance lease amortization costs. Our average depreciation, depletion and amortization per Boe increased from $12.46 per Boe to $13.07 per Boe.
Operating lease expense.Acquisition (total of 913 wells added). Additionally, during the prior 12 months, 10 new wells were added from drilling and completion and non-operated activities, net of wells plugged and abandoned or sold.
2022.
| | | | | | |
|
| For The Nine Months | ||||
| | Ended September 30, | ||||
|
| 2022 |
| 2021 | ||
| | | | | | |
General and administrative expense (excluding share-based compensation) | | $ | 13,784,239 | | $ | 9,618,664 |
Share-based compensation | |
| 4,964,188 | |
| 1,484,730 |
General and administrative expense | | $ | 18,748,427 | | $ | 11,103,394 |
Interest expense. Interest expense increased $2,751,085 to $13,699,045 for the nine months ended September 30, 2022, compared to $10,947,960 for the nine months ended September 30, 2021cost increase due to an increase in share-based compensation costs. The remaining $1.8 million increase in G&A costs were primarily attributable to a $1.2 million increase in salaries and wages, a $0.6 million increase in bonuses, a $0.3 million increase in legal fees, a $0.3 million increase in software costs, and a $0.2 million increase in transaction costs, offset by a $0.6 million reduction in G&A costs from the Employee Retention Tax Credit as well as a $0.2 million reduction in employee health insurance costs.
| For the Three Months Ended | ||||||||||||||||||||||||||
| June 30, 2023 | June 30, 2022 | Change | % Change | |||||||||||||||||||||||
| Interest income | $ | 79,745 | $ | — | $ | 79,745 | 100 | % | ||||||||||||||||||
| Interest expense: | ||||||||||||||||||||||||||
| Interest on revolving line of credit | $ | 9,056,845 | $ | 2,987,366 | $ | 6,069,479 | 203 | % | ||||||||||||||||||
| Fees associated with revolving line of credit | $ | 240,075 | $ | 90,697 | 149,378 | 165 | % | |||||||||||||||||||
| Amortization of deferred financing costs | $ | 1,220,385 | $ | 189,274 | 1,031,111 | 545 | % | |||||||||||||||||||
| Interest on financing lease liabilities | $ | 24,268 | $ | 7,280 | 16,988 | 233 | % | |||||||||||||||||||
| Interest paid for notes payable | $ | 9,234 | $ | 4,682 | 4,552 | 97 | % | |||||||||||||||||||
| Total interest expense | $ | 10,550,807 | $ | 3,279,299 | $ | 7,271,508 | 222 | % | ||||||||||||||||||
| Gain (loss) on derivative contracts: | ||||||||||||||||||||||||||
| Realized gain (loss): | ||||||||||||||||||||||||||
| Crude oil | $ | (833,841) | $ | (19,617,265) | $ | 18,783,424 | (96) | % | ||||||||||||||||||
| Natural gas | 1,013,436 | — | 1,013,436 | 100 | % | |||||||||||||||||||||
| Total realized gain (loss) | $ | 179,595 | $ | (19,617,265) | $ | 19,796,860 | (101) | % | ||||||||||||||||||
| Unrealized gain (loss): | ||||||||||||||||||||||||||
| Crude oil | $ | 4,545,136 | $ | 12,160,247 | $ | (7,615,111) | (63) | % | ||||||||||||||||||
| Natural gas | (1,460,071) | — | (1,460,071) | 100 | % | |||||||||||||||||||||
| Total unrealized gain (loss) | $ | 3,085,065 | $ | 12,160,247 | $ | (9,075,182) | (75) | % | ||||||||||||||||||
| Total gain (loss) on derivative contracts: | $ | 3,264,660 | $ | (7,457,018) | $ | 10,721,678 | (144) | % | ||||||||||||||||||
| Gain (loss) on disposal of assets | $ | (132,109) | $ | — | $ | (132,109) | 100 | % | ||||||||||||||||||
| Other income | $ | 116,610 | $ | — | $ | 116,610 | 100 | % | ||||||||||||||||||
second quarter of 2022.
37
experienced an increase of $15,315,750 in realized losses from $33,278,132 duringprior year, we were party to swaps with prices as low as $44.22, compared to oil settlement prices as high as $114.34. For the nine months ended September 30, 2021 to $48,593,882 during the nine months ended September 30, 2022 due to an increase in oil prices. The Company records all derivative instruments on the Balance Sheets as either an asset or liability measured at fair value. Changes in fair value are recognized currently in earnings unless certain specific hedge accounting criteria are met. The unrealized (mark to market) loss changed from $40,308,067 during the nine months ended September 30, 2021 tomarked-to-market contracts, we recorded an unrealized gain of $46,391,912 during$3.1 million for the ninethree months ended SeptemberJune 30, 2023 and an unrealized gain of $12.2 million for the three months ended June 30, 2022. This significant unrealized gain recognized in the three months ended June 30, 2022 was due to 12 favorable positionsderivative contracts entered into during the current year.
last two days of that quarter.
| For the Six Months Ended | ||||||||||||||||||||||||||
| June 30, 2023 | June 30, 2022 | Change | % Change | |||||||||||||||||||||||
| Interest income | $ | 79,745 | $ | — | $ | 79,745 | 100 | % | ||||||||||||||||||
| Interest expense: | ||||||||||||||||||||||||||
| Interest on revolving line of credit | $ | 17,766,719 | $ | 6,116,987 | $ | 11,649,732 | 190 | % | ||||||||||||||||||
| Fees associated with revolving line of credit | $ | 478,250 | $ | 149,048 | 329,202 | 221 | % | |||||||||||||||||||
| Amortization of deferred financing costs | $ | 2,440,769 | $ | 388,548 | 2,052,221 | 528 | % | |||||||||||||||||||
| Interest on financing lease liabilities | $ | 49,699 | $ | 13,793 | 35,906 | 260 | % | |||||||||||||||||||
| Interest paid for notes payable | $ | 12,925 | $ | 9,284 | 3,641 | 39 | % | |||||||||||||||||||
| Deferred cash payment accretion | $ | 192,724 | $ | — | 192,724 | 100 | % | |||||||||||||||||||
| Total interest expense | $ | 20,941,086 | $ | 6,677,660 | $ | 14,263,426 | 214 | % | ||||||||||||||||||
| Gain (loss) on derivative contracts: | ||||||||||||||||||||||||||
| Realized gain (loss): | ||||||||||||||||||||||||||
| Crude oil | $ | (1,497,603) | $ | (33,732,766) | $ | 32,235,163 | (96) | % | ||||||||||||||||||
| Natural gas | 1,018,673 | — | 1,018,673 | 100 | % | |||||||||||||||||||||
| Total realized gain (loss) | $ | (478,930) | $ | (33,732,766) | $ | 33,253,836 | (99) | % | ||||||||||||||||||
| Unrealized gain (loss): | ||||||||||||||||||||||||||
| Crude oil | $ | 12,652,157 | $ | (1,320,393) | $ | 13,972,550 | (1058) | % | ||||||||||||||||||
| Natural gas | 566,338 | — | 566,338 | 100 | % | |||||||||||||||||||||
| Total unrealized gain (loss) | $ | 13,218,495 | $ | (1,320,393) | $ | 14,538,888 | (1101) | % | ||||||||||||||||||
| Total gain (loss) on derivative contracts: | $ | 12,739,565 | $ | (35,053,159) | $ | 47,792,724 | (136) | % | ||||||||||||||||||
| Gain (loss) on disposal of assets | $ | (132,109) | $ | — | $ | (132,109) | 100 | % | ||||||||||||||||||
| Other income | $ | 126,210 | $ | — | $ | 126,210 | 100 | % | ||||||||||||||||||
contracts of $35.1 million for the six months ended June 30, 2022. For the derivative contract settlements, we recorded a realized loss of $0.5 million for the six months ended June 30, 2023 and a realized loss
| For the Three Months Ended | ||||||||||||||||||||||||||
| June 30, 2023 | June 30, 2022 | Change | % Change | |||||||||||||||||||||||
| Benefit from (Provision for) Income Taxes: | ||||||||||||||||||||||||||
| Deferred federal income tax benefit (provision) | $ | 6,640,741 | $ | (1,014,048) | $ | 7,654,789 | (755) | % | ||||||||||||||||||
| Current state income tax benefit (provision) | $ | (41,191) | $ | 12,813 | (54,004) | (421) | % | |||||||||||||||||||
| Deferred state income tax benefit (provision) | $ | (243,255) | $ | (470,974) | 227,719 | (48) | % | |||||||||||||||||||
| Benefit from (Provision for) Income Taxes | $ | 6,356,295 | $ | (1,472,209) | $ | 7,828,504 | (532) | % | ||||||||||||||||||
The following table presents our sales volumes and received pricing informationother positive evidence, we released the federal valuation allowances in the first six months of 2023, of which $7.7 million was recorded as a discrete item.
| For the Six Months Ended | ||||||||||||||||||||||||||
| June 30, 2023 | June 30, 2022 | Change | % Change | |||||||||||||||||||||||
| Benefit from (Provision for) Income Taxes: | ||||||||||||||||||||||||||
| Deferred federal income tax benefit (provision) | $ | 5,111,491 | $ | (1,014,048) | $ | 6,125,539 | (604) | % | ||||||||||||||||||
| Current state income tax benefit (provision) | $ | (98,481) | $ | — | (98,481) | 100 | % | |||||||||||||||||||
| Deferred state income tax benefit (provision) | $ | (686,658) | $ | (536,913) | (149,745) | 28 | % | |||||||||||||||||||
| Benefit from (Provision for) Income Taxes | $ | 4,326,352 | $ | (1,550,961) | $ | 5,877,313 | (379) | % | ||||||||||||||||||
the six months ended June 30, 2023. The current year federal tax provision was the result of the release in valuation allowance. Due to increased commodity prices and other positive evidence, we released the federal valuation allowances in the first six months of 2023, of which $7.7 million was recorded as a discrete item.
| | | | | | |
|
| For the Nine Months | ||||
| | Ended September 30, | ||||
|
| 2022 |
| 2021 | ||
Oil volume (Bbls) |
| | 2,338,469 |
| | 1,971,776 |
Natural gas volume (Mcf) |
| | 2,408,241 |
| | 1,773,506 |
Natural gas liquids (Bbls) | | | 130,052 | | | |
Total Production (Boe)(1) |
| | 2,869,895 |
| | 2,267,360 |
| | | | | | |
Average Sales Price |
| | |
| | |
Oil price (per Bbl) | | $ | 98.16 | | $ | 64.37 |
Gas price (per Mcf) | | $ | 6.10 | | $ | 5.48 |
Natural gas liquids (Bbl) | | $ | 25.68 | | | |
Total per Boe | | $ | 86.26 | | $ | 60.26 |
(1) Boe is calculated using six Mcf
38
Availability of Capital Resources under Credit Facility
In April 2019, the Company amended and restated its Credit Agreement with Truist, as lender, issuing bank and administrative agent for several banks and other financial institutions and lenders (the “Administrative Agent”), (as amended and restated, the “Credit Facility”). The amendment and restatement of the Credit Agreement, among other things, increased the maximum borrowing amount to $1 billion, extended the maturity date through April 2024 and made other modifications to the terms of the Credit Facility. This Credit Facility was amended on August 31, 2022, June 25, 2021, June 10, 2021, December 23, 2020 and June 17, 2020.
On August 31, 2022, the Company modified its Credit Facility with the Administrative Agent through the Second Amended and Restated Credit Agreement. In conjunction with the Stronghold Acquisition, with the newly acquired assets put up for collateral, the Company established a borrowing base of $600 million. The syndicate was modified to add five lenders, replacing five exiting lenders.
The Credit Facility provides for SOFR Loans and Base Rate Loans (as respectively defined in the Second Amended and Restated Credit Agreement). The annual interest rate on each SOFR Loan will be the adjusted term SOFR for the applicable interest period plus a margin between 3.0% and 4.0% per annum (depending on the then-current level of borrowing base usage). The annual interest rate on each Base Rate Loan is (a) the greatest of (i) the Administrative Agent’s prime lending rate, (ii) the Federal Funds Rate (as defined in the Credit Facility) plus 0.5% per annum, (iii) the adjusted term SOFR determined on a daily basis for an interest period of one month, plus 1.00% per annum and (iv) 0.00% per annum, plus (b) a margin between 2.0% and 3.0% (depending on the then-current level of borrowing base usage).
The Credit Facility contains certain covenants, which, among other things, require the maintenance of (i) a total Leverage Ratio (outstanding debt to adjusted earnings before interest, taxes, depreciation and amortization, exploration expenses, and all other non-cash charges acceptable to the Administrative Agent) of not more than 3.0 to 1.0 and (ii) a minimum ratio of Current Assets to Current Liabilities (as such terms are defined in the Second Amended and Restated Credit Agreement) of 1.0 to 1.0. The Credit Facility also contains other customary affirmative and negative covenants and events of default.
the covenants under the Credit Facility. The Company is required to maintain on a rolling 24 month basis, hedging transactionsCredit Facility matures in respect of crude oil and natural gas, on not less than 50% of the projected production from the proved, developed, producing oil and gas. If theAugust 2026. The borrowing base utilization is less than 25% at the hedge testing date and the leverage ratio is not greater than 1.25 to 1.00, the required hedging percentage for months 13 through 24 of the rolling 24 month period provided for shall be 0% from such hedge testing date to the next succeeding hedge testing date. If the borrowing base utilization percentage is equal to or greater than 25%, but less than 50% and the leverage ratio is not greater than 1.25 to 1.0, the required hedging percentage for months 13 through 24 of the rolling 24 month period provided for shall be 25% from such hedge testing date to the next succeeding hedge testing date.
Derivative Financial Instruments
During February and March of 2020, the Company entered into derivative contracts in the form of costless collars of WTI Crude Oil prices in seeking to protect the Company’s cash flow from price fluctuation and maintain its capital programs. “Costless collars” are the combination of two options, a put option (floor) and a 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. The trades were for a total 4,500 barrels of oil per day for the period of January 2021 through December 2021.
In November and December of 2020, the Company entered into swap contracts with a weighted average of $45.42 for 4,500 barrels per day for 2021 and 1,750 barrels per day for 2022 with a weighted average of $44.84. In January and February of 2021, we entered into swap contracts for 500 barrels per day for 2022 for a weighted average price of $48.53. Similar to costless collars, there is no cost to enter into the swap contracts. On swap contracts, there is no spread and payments will be made or received based on the difference between WTI and the swap contract price.
In November of 2020, we entered into natural gas swap contracts for 6,000 MMBtu per day at $2.991 and 5,000 MMBtu per day at $2.726 for 2021 and 2022, respectively. On March 30, 2021, we unwound all remaining gas swaps for 2021 and 2022 for a realized value of $581,424.
In May of 2021, we bought back a 1,500 barrels of oil per day call option for June 1 through December 31, 2021 and entered into an approximate 879 Bbls/d calendar 2022 swap contract for no net cost. This allowed us to unlock additional upside to increase our cash flow for the remainder of 2021, while retaining the put to protect our downside.
39
Effective February 1, 2022, the Company entered into a derivative contract with a Credit Facility lender for 1,000 barrels of oil per day for the remainder of 2022 (total notional quantity of 334,000 barrels). Fixed swap prices vary by month, ranging from $90.78 per barrel in February to $80.01 per barrel by the end of the year, with a weighted average swap price of $84.61 per barrel.
Near the end of the second quarter 2022, on June 28 and 29, the Company entered into 12 oil derivative contracts with a Credit Facility lender. On July 1, 8, and 25, and August 5, the Company entered into nine oil derivative contracts. As part of the Stronghold Acquisition, 18 oil derivative contracts and 15 natural gas derivative contracts were entered into on August 23 and 29. On September 26, we entered into one oil and three natural gas derivative contracts. Details are shown in the table below, all of which are with lenders under our Credit Facility is $600 million. The borrowing base is redetermined semi-annually on each May 1 and November 1. See "NOTE 8 — REVOLVING LINE OF CREDIT" in the Notes to the condensed financial statements for more information on our Credit Facility.
| | | | | | | | | |
| | Oil Hedges (WTI) | |||||||
|
| 2022 |
| 2023 |
| 2024 | |||
| | | | | | | | | |
Swaps: |
| |
|
| |
|
| |
|
Hedged volume (BBL) |
| | 379,250 |
| | 389,250 |
| | 526,000 |
Weighted average swap price | | $ | 54.89 | | $ | 77.55 | | $ | 65.90 |
| | | | | | | | | |
Deferred premium puts: | |
|
| |
|
| |
|
|
Hedged volume (BBL) | |
| 138,000 | |
| 773,500 | |
| 91,000 |
Weighted average strike price | | $ | 97.93 | | $ | 90.64 | | $ | 83.75 |
Weighted average deferred premium price | | $ | 11.81 | | $ | 15.25 | | $ | 17.32 |
| | | | | | | | | |
Two-way collars: | |
|
| |
|
| |
|
|
Hedged volume (BBL) | |
| 97,201 | |
| 487,622 | |
| 475,350 |
Weighted average put price | | $ | 53.93 | | $ | 52.16 | | $ | 67.88 |
Weighted average call price | | $ | 67.68 | | $ | 62.94 | | $ | 83.32 |
| | | | | | | | | |
Three-way collars: | |
|
| |
|
| |
|
|
Hedged volume (BBL) | |
| 89,985 | |
| 66,061 | |
| — |
Weighted average first put price | | $ | 40.00 | | $ | 45.00 | | $ | — |
Weighted average second put price | | $ | 50.00 | | $ | 55.00 | | $ | — |
Weighted average call price | | $ | 62.03 | | $ | 80.05 | | $ | — |
40
| Oil Hedges (WTI) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Q3 2023 | Q4 2023 | Q1 2024 | Q2 2024 | Q3 2024 | Q4 2024 | Q1 2025 | Q2 2025 | Q3 2025 | Q4 2025 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Swaps: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Hedged volume (Bbl) | 181,700 | 138,000 | 170,625 | 156,975 | 282,900 | 368,000 | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Weighted average swap price | $ | 74.19 | $ | 74.52 | $ | 67.40 | $ | 66.40 | $ | 65.49 | $ | 68.43 | $ | — | $ | — | $ | — | $ | — | |||||||||||||||||||||||||||||||||||||||
| Deferred premium puts: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Hedged volume (Bbl) | 230,000 | 165,600 | 45,500 | 45,500 | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Weighted average strike price | $ | 80.47 | $ | 83.78 | $ | 84.70 | $ | 82.80 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||||||||||||||||||||||||||
| Weighted average deferred premium price | $ | 10.60 | $ | 14.61 | $ | 17.15 | $ | 17.49 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||||||||||||||||||||||||||
| Two-way collars: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Hedged volume (Bbl) | 211,163 | 274,285 | 339,603 | 325,847 | 230,000 | 128,800 | 474,750 | 464,100 | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Weighted average put price | $ | 55.56 | $ | 56.73 | $ | 64.20 | $ | 64.30 | $ | 64.00 | $ | 60.00 | $ | 57.06 | $ | 60.00 | $ | — | $ | — | |||||||||||||||||||||||||||||||||||||||
| Weighted average call price | $ | 69.25 | $ | 70.77 | $ | 79.73 | $ | 79.09 | $ | 76.50 | $ | 73.24 | $ | 75.82 | $ | 69.85 | $ | — | $ | — | |||||||||||||||||||||||||||||||||||||||
| Three-way collars: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Hedged volume (Bbl) | 16,242 | 15,598 | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Weighted average first put price | $ | 45.00 | $ | 45.00 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||||||||||||||||||||||||||
| Weighted average second put price | $ | 55.00 | $ | 55.00 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||||||||||||||||||||||||||
| Weighted average call price | $ | 80.05 | $ | 80.05 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||||||||||||||||||||||||||
| | | | | | | | | |
| | Gas Hedges (Henry Hub) | |||||||
|
| 2022 |
| 2023 |
| 2024 | |||
| | | | | | | | | |
NYMEX Swaps: |
| |
|
| |
|
| |
|
Hedged volume (MMBtu) |
| | 46,313 |
| | 175,421 |
| | — |
Weighted average swap price | | $ | 2.51 | | $ | 2.40 | | $ | — |
| | | | | | | | | |
Two-way collars: (1) | |
|
| |
|
| |
|
|
Put hedged volume (MMBtu) | | | 715,661 | | | 2,486,514 | | | 1,712,250 |
Weighted average put price | | $ | 3.76 | | $ | 3.18 | | $ | 4.00 |
Call hedged volume (MMBtu) | | | 435,061 | | | 2,306,514 | | | 1,712,250 |
Weighted average call price | | $ | 10.22 | | $ | 5.03 | | $ | 6.29 |
| | | | | | | | | |
Three-way collar: | |
|
| |
|
| |
|
|
Hedged volume (MMBtu) | |
| 304,250 | |
| — | |
| — |
Weighted average first put price | | $ | 2.20 | | $ | — | | $ | — |
Weighted average second put price | | $ | 2.50 | | $ | — | | $ | — |
Weighted average call price | | $ | 3.25 | | $ | — | | $ | — |
Weighted average deferred premium price | | $ | 0.19 | | $ | — | | $ | — |
| | | | | | | |
| | Gas Hedges (basis differential) | |||||
|
| 2022 |
| 2023 |
| 2024 | |
| | | | | | | |
Waha basis swaps: |
|
|
|
|
| |
|
Hedged volume (MMBtu) |
| 505,024 |
| 1,339,685 |
| | — |
Weighted average swap price |
| (2) |
| (3) | | $ | — |
| Gas Hedges (Henry Hub) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Q3 2023 | Q4 2023 | Q1 2024 | Q2 2024 | Q3 2024 | Q4 2024 | Q1 2025 | Q2 2025 | Q3 2025 | Q4 2025 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| NYMEX Swaps: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Hedged volume (MMBtu) | 144,781 | 203,706 | 152,113 | 138,053 | 121,587 | 644,946 | 616,199 | 591,725 | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Weighted average swap price | $ | 3.36 | $ | 3.35 | $ | 3.62 | $ | 3.61 | $ | 3.59 | $ | 4.45 | $ | 3.78 | $ | 3.43 | $ | — | $ | — | |||||||||||||||||||||||||||||||||||||||
| Two-way collars: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Hedged volume (MMBtu) | 404,421 | 579,998 | 591,500 | 568,750 | 552,000 | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Weighted average put price | $ | 3.17 | $ | 3.15 | $ | 4.00 | $ | 4.00 | $ | 4.00 | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||||||||||||||||||||||||||
| Call hedged volume (MMBtu) | 404,421 | 579,998 | 591,500 | 568,750 | 552,000 | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Weighted average call price | $ | 4.55 | $ | 4.50 | $ | 6.29 | $ | 6.29 | $ | 6.29 | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||||||||||||||||||||||||||
| Oil Hedges (basis differential) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Q3 2023 | Q4 2023 | Q1 2024 | Q2 2024 | Q3 2024 | Q4 2024 | Q1 2025 | Q2 2025 | Q3 2025 | Q4 2025 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Argus basis swaps: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Hedged volume (MMBtu) | 305,000 | 460,000 | 364,000 | 364,000 | 368,000 | 368,000 | 270,000 | 273,000 | 276,000 | 276,000 | |||||||||||||||||||||||||||||||||||||||||||||||||
Weighted average spread price (1) | $ | 1.10 | $ | 1.10 | $ | 1.15 | $ | 1.15 | $ | 1.15 | $ | 1.15 | $ | 1.00 | $ | 1.00 | $ | 1.00 | $ | 1.00 | |||||||||||||||||||||||||||||||||||||||
| Gas Hedges (basis differential) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Q3 2023 | Q4 2023 | Q1 2024 | Q2 2024 | Q3 2024 | Q4 2024 | Q1 2025 | Q2 2025 | Q3 2025 | Q4 2025 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Waha basis swaps: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Hedged volume (MMBtu) | 332,855 | 324,021 | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
Weighted average spread price (1) | $ | 0.55 | $ | 0.55 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||||||||||||||||||||||||||
| El Paso Permian Basin basis swaps: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Hedged volume (MMBtu) | 329,529 | 459,683 | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
Weighted average spread price (1) | $ | 0.63 | $ | 0.63 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||||||||||||||||||||||||||
Derivative financial instruments are recorded at fair value and included as either assets or liabilities in the accompanying Condensed Balance Sheets. 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 accompanying Condensed Statements of Operations.
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The process of acquiring one or more additional oil and gas properties would impact our financial position, and reduce our cash position.position and possibly increase our debt. The types of costs that we may incur include the costs to retain consultants and investment bankers specializing in the purchase of oil and gas properties, obtaining petroleum engineering reports relative to the oil and gas properties that we are investigating, legal fees associated with any such acquisitions including title reports, SEC reporting expenses, and negotiating definitive agreements. Additionally, accounting fees may be incurred relative to obtaining and evaluating historical and pro formaproforma information regarding such oil and gas properties. Even though we may incur such costs, there is no assurance that we will ultimately be able to consummate other acquisitions of oil and gas producing properties.
Effects of Inflation and Pricing
The oil and natural gas industry is very cyclical and the demand for goods and services of oil field companies, suppliers and others associated with the industry puts pressure on the economic stability and pricing structure within the industry. Typically, as prices for oil and natural gas increase, so do all associated costs. Material changes in prices will impact our cash flow, estimates of future reserves, borrowing base calculations of bank loans and the value of properties in purchase and sale transactions. Material changes in prices can also impact the value of oil and natural gas companies and their ability to raise capital, borrow money and retain personnel. We anticipate business costs will vary in accordance with commodity prices for oil and natural gas, and the associated increase or decrease in demand for services related to production and exploration.We further expect that prices to explore, develop and produce oil and gas may increase depending in large part on government spending and regulations.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements, and it is not anticipated that the Company will enter into any off-balance sheet arrangements.
Disclosures About Market Risks
Like other natural resource producers, the Company faces market risks associated with the exploration and production of oil and natural gas. The most salient risk factors are the volatile prices of oil and gas, transportation of oil and natural gas, competition in the oil and natural gas industry, retention of key personnel, and environmental and regulatory concerns and obligations.
Oil and Gas Prices
The price we receive for our oil and natural gas will heavily influence our revenue, profitability, access to capital and future rate of growth. Oil and natural gas are commodities and, therefore, their prices are subject to wide fluctuations in response to relatively minor changes in supply and demand. The prices we receive for our production depend on numerous factors beyond our control. These factors include, without limitation, the following: worldwide and regional economic conditions impacting the global supply and demand for oil and natural gas; geopolitical events such as military actions, threats of war, war and the imposition of sanctions in connection with these events; the price and quantity of imports of foreign oil and natural gas; the level of global oil and natural gas inventories; localized supply and demand fundamentals; the availability of refining capacity; price and availability of transportation and pipeline systems with adequate capacity; weather conditions, natural disasters and public health threats; governmental regulations; speculation as to the future price of oil and the speculative trading of oil and natural gas futures contracts; price and availability of competitors’ supplies of oil and natural gas; energy conservation and environmental measures; technological advances affecting energy consumption; the price and availability of alternative fuels and energy sources; and domestic and international drilling activity.
A substantial or extended decline in oil or natural gas prices may result in impairments of our proved oil and gas properties and may materially and adversely affect our future business, financial condition, cash flows, and results of operations.
Transportation of Oil and Natural Gas
Ring is presently committed to using the services of the existing gatherers in its present areas of production. This gives such gatherers certain short-term relative monopolistic powers to set gathering and transportation costs. Obtaining the services of an alternative gathering company would require substantial additional costs since an alternative gatherer would be required to lay new pipeline and/or obtain new rights-of-way.
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Competition in the Oil and Natural Gas Industry
We operate in a highly competitive environment for developing and acquiring properties, marketing oil and natural gas and securing equipment and trained personnel. As a relatively small oil and natural gas company, many large producers possess and employ financial, technical and personnel resources substantially greater than ours. Those companies may be able to develop and acquire more prospects and productive properties than our financial or personnel resources permit. It is also significant that more favorable prices can usually be negotiated for larger quantities of oil and/or gas product, such that Ring views itself as having a price disadvantage compared to larger producers.
Retention of Key Personnel
We depend to a large extent on the services of our officers. These individuals have extensive experience in the energy industry, as well as expertise in evaluating and analyzing producing oil and natural gas properties and drilling prospects, maximizing production from oil and natural gas properties, and developing and executing financing strategies. The loss of any of these individuals could have a material adverse effect on our operations and business prospects. Our success is dependent on our ability to continue to hire, retain and utilize skilled executive and technical personnel.
Environmental and Regulatory Risks
Our business and operations are subject to and impacted by a wide array of federal, state, and local laws and regulations governing the exploration for and development, production, and marketing of oil and natural gas, the operation of oil and natural gas wells, taxation, and environmental and safety matters. Many laws and regulations require drilling permits and govern the spacing of wells, rates of production, water and waste use and disposal, prevention of waste, hydraulic fracturing, and other matters. From time to time, regulatory agencies have imposed price controls and limitations on production in order to conserve supplies of oil and natural gas. In addition, the production, handling, storage, transportation and disposal of oil and natural gas, byproducts thereof and other substances and materials produced or used in connection with oil and natural gas operations are subject to regulation under federal, state and local laws and regulations. Compliance with these regulations may constitute a significant cost and effort for Ring. In the event of a violation of environmental regulations, these environmental regulatory agencies have a broad range of alternative or cumulative remedies, including ordering a cleanup of any spills or waste material and restoration of the soil or water to conditions existing prior to the environmental violation; fines; or enjoining further drilling, completion, or production activities.
3.3: Quantitative and Qualitative Disclosures aboutAbout Market RiskInterest Rate RiskThe Company is subject to market risk exposure related to changes in interest rates on its indebtedness under its Credit Facility, which bears variable interest based upon a prime rate and is therefore susceptible to interest rate fluctuations. Changes in interest rates affect the interest earned on the Company’s cash and cash equivalents and the interest rate paid on borrowings under the Credit Facility. As of September 30, 2022, the Company had $435,000,000 outstanding borrowings under the Credit Facility. Our weighted average annual interest rate on borrowings under the Credit Facility was 5.1% for the nine months ended September 30, 2022. An increase or decrease of 1% in the interest rate would have a corresponding decrease or increase in our annualized interest expense of $4.4 million based on the aggregate of $435,000,000 outstanding under the Credit Facility as of September 30, 2022.Currently, the Company does not use interest rate derivative instruments to manage exposure to interest rate changes.43
The Company’s revenues, profitability and future growth depend substantially on prevailing prices for oil and natural gas. Prices also affect the amount of cash flow available for capital expenditures and Ring’s ability to borrow and raise additional capital. The Company’s borrowing base under its Credit Facility is subject to periodic redetermination based in part on changing expectations of future prices. Lower prices may also reduce the amount of oil and natural gas that the Company can economically produce. Ring currently sells all its oil and natural gas production under price sensitive or market price contracts.
Customer Credit Risk
| For the Six Months Ended | As of | |||||||||||||
| June 30, 2023 | June 30, 2023 | |||||||||||||
| Percentage of Oil, Natural Gas, and Natural Gas Liquids Revenues | Percentage of accounts receivables from the sale of our oil and natural gas production | |||||||||||||
| Customer: | ||||||||||||||
| Phillips 66 Company ("Phillips") | 68% | 71% | ||||||||||||
| Enterprise Crude Oil LLC ("Enterprise") | 13% | 13% | ||||||||||||
| NGL Crude Partners ("NGL Crude") | 11% | 11% | ||||||||||||
June 30, 2023, we had $397.0 million outstanding on our Credit Facility with a weighted average interest rate for the six months ended June 30, 2023 of 8.5%. A 1% change in the interest rate on our Credit Facility would result in an estimated $4.0 million change in our annual interest expense. See "NOTE 8 — REVOLVING LINE OF CREDIT" in the Notes to the condensed financial statements for more information on the Company’s interest rates on our Credit Facility.
procedures. reporting.4.4: Controls and Proceduresproceduresreportingninethree months ended SeptemberJune 30, 20222023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.44
1.1: Legal Proceedings.We may beProceedingssubject of threatened or pending legal actionsCompany plus related damages, and contingencies inattorneys’ fees and costs. The action relates to a proposed property sale by the normal course of conducting our business. We provide for costs relatedCompany to these matters when a loss is probablethe plaintiff, which was extended by the Company on several occasions with the plaintiff ultimately failing to perform on the agreement and the amount can be reasonably estimated.Company keeping the deposit. The effectCompany believes that the claims by the plaintiff are entirely without merit and is conducting a vigorous defense and counterclaim. The Company has filed an answer and a counterclaim denying the allegations and asserting affirmative defenses that would bar or substantially limit the plaintiff’s claims, asserting breach of the outcome of these matters on our future results of operationscontract and liquidity cannot be predicted because any such effect depends on future results of operationsrequesting a declaratory judgment and the amount or timing of the resolution of such matters. For certain types of claims, we maintain insurance coverage for personal injuryattorneys’ fees and property damage, product liabilitycosts. The parties have begun taking depositions and other liability coverages in amounts and with deductibles that we believe are prudent, but there can be no assurance that these coverages will be applicable or adequate to cover adverse outcomes of claims or legal proceedings against us. Reference is made to Item 3. Legal Proceedings, in our Annual Report on Form 10-K for the year ended December 31, 2021 as filed with the SEC on March 16, 2022. The information in such Item is incorporated herein by reference.
1A.1A: Risk Factors20212022 Form 10-K. The following are risks that have arisen since the filing of our 2021 Form 10-K on March 16, 2022. We may experience additional risks and uncertainties not currently known to us. Further, as a result of developments occurring in the future, conditions that we currently deem to be immaterial may also materially and adversely affect us. Any such risks may materially and adversely affect our business, financial condition, cash flows, and results of operations.We have recently registered 63,888,878 shares of our common stock for possible resale by certain of our stockholders.In connection with the recently completed Stronghold Acquisition as discussed above, we registered 63,888,878 shares of our common stock, par value $0.001 per share, with the SEC for possible resale by Stronghold stockholders. This represents approximately 37% of our presently outstanding shares of common stock and if the selling stockholders choose to sell all or a large number of their shares, from time to time, it could have a depressive effect on the market price of our common stock.We have significant indebtedness.We have a credit facility in place with $600 million in commitments for borrowings and letters of credit under our Second Amended and Restated Credit Agreement dated August 31, 2022 with Truist Bank, as Administrative Agent (“Credit Agreement”). As of September 30, 2022, $435 million was outstanding on our credit facility. If we further utilize this facility, the level of our indebtedness could affect our operations in several ways, including the following:●a significant portion of our cash flow could be used to service the indebtedness;●a high level of debt would increase our vulnerability to general adverse economic and industry conditions;●the covenants contained in our credit facility limit our ability to borrow additional funds, dispose of assets, pay dividends and make certain investments; and●a high level of debt could impair our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, general corporate or other purposes.In addition, our bank borrowing base is subject to semi-annual redeterminations. We could be required to repay a portion of our bank borrowings due to redeterminations of our borrowing base. If we are required to do so, we may not have sufficient funds to make such repayments, and we may need to negotiate renewals of our borrowings or arrange new financing or sell significant assets. Any such actions could have a material adverse effect on our business and financial results.We currently do not pay cash dividends on our common stock.We currently intend to retain future earnings, if any, to finance the expansion of our business. Our future dividend policy is within the discretion of our board of directors and will depend upon various factors, including our business, financial condition, results of operations, capital requirements, and investment opportunities. In addition, the terms of our Credit Agreement have restrictions on dividend payments to our equity holders, including our common stockholders.45
2.2: Unregistered Sales of Equity Securities and Use of ProceedsThe information required by this item was disclosed and reported under Item 3.02, Unregistered Sales of Equity Securities, of our Form 8-K dated August 30, 2022, filed with the SEC on September 6, 2022, which disclosure is incorporated herein by reference.
Securities3.3: Defaults Upon Senior Securities.
Disclosures4.4: Mine Safety Disclosures.
Information5.5: Other Information.
Incorporated by Reference Exhibit Exhibit Description Form File No. Exhibit Filing Date Filed 31.1 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document 104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) Ring Energy, Inc. Date: By: /s/ Paul D. McKinney Paul D. McKinney Chief Executive Officer (Principal Executive Officer) /s/ Travis T. Thomas Travis T. Thomas Chief Financial Officer (Principal Financial and Accounting Officer)6.6: Exhibits
Number
Here-withFurnished
HerewithX31.2X32.1X 32.2X 101.SCHX 32.2 X 101.SCH Inline XBRL Taxonomy Extension Schema Document X X X X X 46November 9, 2022 and DirectorBy:Date: November 9, 2022By:47