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Ring Energy: Debt Continues To Make Its Stock High Risk

Jun. 04, 2020 5:16 AM ETRing Energy, Inc. (REI)8 Comments


  • Ring had conservatively managed its finances before, primarily funding its growth via equity offerings.
  • The Wishbone acquisition was a high-risk, potentially high-reward acquisition that pushed its leverage up from 0.6x at the end of 2018 to 3.0x at the end of 2019.
  • Ring should be able to pay down its credit facility debt below $300 million in 2020.
  • Leverage based on forward EBITDA would still be 3.4x at $45 WTI oil in 2021 and 2.9x at $50 WTI oil in 2021.
  • A significant borrowing base reduction is still expected.
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Ring Energy (NYSE:REI) may have been conservatively managing its finances before its Wishbone acquisition, primarily funding its growth via equity offerings. This changed with the Wishbone acquisition though. Ring's Wishbone acquisition significantly increased its production, reserves and EBITDA, but also greatly increased its risk due to the company funding the acquisition primarily (approximately 90% of the price) with cash.

Ring is now a company that likely requires at least mid-$50s WTI oil and probably more like $60+ WTI oil in order to get its leverage down to a reasonable level. In any oil price scenario below mid-$50s WTI oil, Ring's elevated leverage makes its stock high risk. I considered the risk/reward for Ring's stock to be more balanced when it was at 60 or 70 cents. At over $1, this equation is less favorable though.

Before And After Wishbone Acquisition

Ring's 2019 production (including 11 months of Wishbone production) ended up 78% compared to its 2018 production.

Ring's adjusted EBITDA went up +81% over the same period, from $66.5 million in 2018 to $120.4 million in 2019. This was due to the increased production along with a slightly higher realized price per BOE in 2019 (after derivatives).

Source: Ring Energy

However, primarily due to the acquisition, Ring's leverage also increased considerably. At the end of 2018, its credit facility debt was only $39.5 million, or 0.6x its 2018 adjusted EBITDA. At the end of 2019, its credit facility debt reached $366.5 million, or 3.0x its 2019 adjusted EBITDA.

Source: Ring Energy

The 2019 adjusted EBITDA numbers come with WTI oil averaging $57 during the year. This suggests that Ring will need higher than mid-$50s WTI oil in the long run in order to bring its leverage down to an acceptable level.

Estimated Forward Leverage

Ring's production is expected to decline

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This article was written by

Elephant Analytics profile picture
Aaron Chow, aka Elephant Analytics has 15+ years of analytical experience and is a top rated analyst on TipRanks. Aaron previously co-founded a mobile gaming company (Absolute Games) that was acquired by PENN Entertainment. He used his analytical and modeling skills to design the in-game economic models for two mobile apps with over 30 million in combined installs. He is the author of the investing group Distressed Value Investing, which focuses on both value opportunities and distressed plays, with a significant focus on the energy sector. Learn more>>

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Comments (8)

Simple Capital profile picture
Hey do you think that they have a real risk of Bankruptcy? If they are just not able to pay enough debt to lower their leverage ratio however they have enough money to survive this pandemic then I think they are a good buy under a dollar... What do you think?
downlimit profile picture
succint. thanks. shorts at 27% volume at 3x today. 50% off the 52 week high.

book value at 8.00 ?
"but it is still vulnerable to the effects of its borrowing base re-determination" That is the key. If they isn't any major chance in the debt limit then REI is going to be just fine and the lenders already know that.
What are your thoughts on the CEO's comments playing down the risk of leverage, the relatively high value of their assets and the consistent discussion on conference calls regarding their unique 'low cost of production'
Elephant Analytics profile picture
That's what CEOs and senior management do - talk about how their company is well positioned, etc...

The leverage is certainly a concern. It was already a bit on the high side at $55, $60 WTI oil. Probably less risk of bankruptcy due to its debt being all credit facility debt though.

Ring isn't really a very low cost producer. Margins are usually decent due to high oil percentages, but costs are commensurately higher as well.
You obviously are not familiar with this businesses cost structure. It’s all in cost per barrel is $25.00. I don’t know very many companies that can produce at that cost. So to say they are not a low cost producer in my book is erroneous.
Elephant Analytics profile picture
@cowboys344 ,

The quote from Ring's management was "Our breakeven cost is under $25. ...including lifting cost, production taxes, G&A, cash expenses and interest, and this excludes capital cost of course""

There are quite a few companies that have a all-in cost per barrel of $25 or less, excluding capex.
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