Ring Energy (NYSE:REI) has continued to deliver strong results from its wells. However, it has been spending a lot on non-D&C capex, which has resulted in cash burn at high-$50s WTI oil despite relatively flat production growth. My view on Ring's future prospects will be significantly influenced by how much non-D&C capex it will need to spend going forward. With modest non-D&C capex requirements, Ring would do quite well at mid-$50s WTI oil, being able to both generate positive cash flow and grow production. If its non-D&C capex requirements approach the levels it spent at the last couple years, then Ring would need $60+ WTI oil to maintain production without cash burn.
Ring Energy estimated that proforma for the Wishbone Northwest Shelf acquisition, production would have been around 11,667 BOEPD in Q1 2019. Production dropped significantly in Q2 2019 as it filed IPs on only five wells in Q2 2019 compared to 15 wells in Q1 2019. Since then, average daily production has been increasing, but Q4 2019 still appears to be a couple percent below Q1 2019 (assuming a full quarter of production from its acquisition).
|Q1 2019||Q2 2019||Q3 2019||Q4 2019|
I estimate that around 7 to 8 new wells per quarter is enough to maintain Ring's production at around 11,500 BOEPD.
This relative lack of production growth during 2019 comes despite a $152 million capital expenditure budget for Ring. It drilled 30 new horizontal wells and filed IPs on 39 horizontal wells during 2019. Ring's well-level results have been good, with an average IP of 105 BOE per 1,000 feet for those 39 horizontal wells. This exceeds its average type curve IP of 86 BOE per 1,000 feet.
Source: Ring Energy
Given that Ring's D&C costs range from $1.9 million to $2.4 million per well (for 1 mile laterals), its D&C capex for 2019 is probably around $80 million. That would leave around $72 million in non-D&C capex for items such as the reworking and upgrading of existing wells, and infrastructure improvements.
Ring also appeared to spend a lot of money on non-D&C capex in 2018 as well. It drilled 57 new horizontal wells in 2018 while spending $199 million on capital expenditures (excluding acquisitions). Those wells may have cost around $125 million with Ring's Central Basin type curve using a D&C cost of $2.2 million per well at that time. Thus, around $74 million may have been non-D&C capex in 2018 (not including leasehold acquisitions).
It is uncertain how much of Ring's non-D&C capex is essentially required versus discretionary items that help it in the long run but aren't necessary. The $80 million D&C capex for 2019 appears to be close to Ring's maintenance capex level to maintain around 11,500 BOEPD in production. If it only had another $10 million in required non-D&C capex (for a total of $90 million capex), then Ring's breakeven point would involve a realized price of around $41 per BOE, which would translate into an WTI oil price of around $48.
That would be a pretty solid position for Ring to be in. On the other hand, if it was committed to spending $60 million on non-D&C capex per year, then Ring's breakeven point would include a WTI oil price of around $62, and it would have trouble growing production without significant cash burn.
Ring Energy has been generating strong results from its wells, which appear to have pretty quick paybacks at high-$50s WTI oil (translating into a realized price of around $50 per BOE).
It is also projected to end up with a significant amount of cash burn in 2019 while seeing its production in Q4 2019 end up slightly lower than its Q1 2019 production proforma for its Northwest Shelf acquisition. This is due to it spending a large amount (estimated at 47% of its total 2019 capex budget) on non-D&C items. It also spent a large amount on non-D&C capex in 2018 as well.
Thus, Ring Energy's outlook is significantly affected by how much non-D&C capex it needs to spend in the future. If there are only modest non-D&C capex requirements (such as 10% to 15% of its total budget), it would look fairly good at its current share price due to the ability to deleverage through efficient production growth. If non-D&C capex requirements end up being 40% of its total budget, Ring would not be able to grow production much without cash burn, and thus would have higher than ideal leverage.
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