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Ring Energy: Hedges Limit Its Cash Flow Upside For 2021

Mar. 04, 2021 9:00 PM ETRing Energy, Inc. (REI) Stock13 Comments


  • Ring has managed to make good progress with cost reductions and its unhedged margins should be quite strong with $60 WTI oil.
  • It is over 110% hedged on its oil production for 2021, and may have slightly decreasing cash flow with oil price improvements above $55.
  • Debt situation is improving, although further debt reduction is needed to get its leverage to ideal levels.
  • Share price isn't cheap, with Ring valued at around $60,000 per flowing BOE.
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Ring Energy (NYSE:REI) is able to deliver quite strong margins before hedges after its cost reductions and with $60 WTI oil. However, it appears to be more than 100% hedged on its oil production in 2021, and that may limit its positive cash flow generation to approximately $30 million to $35 million in 2021.

Ring's shares also appear to be pricing in high-$50s long-term oil prices, so I don't consider it a great value at its current price despite the improvements to its cost structure.


Ring appears to have oil hedges covering 9,000 barrels per day of production in 2021 now. Half of the hedges are costless collars with an average $54.64 ceiling and the other half are swaps at an average price of $45.43. Ring's oil production is expected to be around 8,000 barrels per day in 2021, so it has hedged approximately 113% of its 2021 oil production.

Source: Ring Energy

This means that any oil price increases above $55 may actually be slightly negative for Ring's 2021 cash flow. Each $5 movement in 2021 oil prices above $55 reduces Ring's 2021 cash flow by an estimated $2.5 million. This is due to Ring's hedges decreasing in value by approximately $16.4 million with a $5 increase in oil prices (above $55) while its revenues (net of production taxes) would go up $13.9 million in that scenario.

The increase in near-term oil prices may allow Ring to add more 2022 hedges at a decent level though, as 2022 strip is in the mid-$50s.

Ring's 2021 Outlook At $60 WTI Oil

Ring may end up averaging 9,300 BOEPD in total production during 2021, with 8,000 barrels per day of oil production (for an 86% oil cut). This represents close to 6% production growth compared to Ring's 2020 average production, and roughly equal to its Q4

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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 (13)

@Elephant Analytics I'm curious how you view the value of increased 2022+ earnings due to a higher WTI price now (versus the hedge limitations discussed).

I've been waiting for the inevitable 2022 hedges, and am hoping for $65 max on 50% of production max. But, in order to get there, we need to see oil climb through the next few months.

Just curious how this might impact your sense of valuation in the short term.
Elephant Analytics profile picture
I've been assuming $55 WTI oil in the longer-term (beyond 2021) in my valuation calcs. Current strip for 2022 is around $57 and around $54 for 2023. If it can lock in hedges at above $55 (or if oil strip moves higher) that would be a positive for valuation.
Correct me if I'm wrong, but aren't they planning to bring more wells online soon? And thus those producing wells won't be hedged? Have we taken that into account?
Elephant Analytics profile picture
That's accounted for in its projected production already. If Ring further increases its capex budget above $44 million to $48 million, then it may end up less than 100% hedged on oil, but might need a $70+ million capex budget for that to happen.
From what I recall they almost sold off reserves last fall when WTI was below $50, what would selling that today with WTI approaching $70 do to their debt and share value? How can a share price below NBV be properly valued?
Elephant Analytics profile picture
Price could certainly be stronger for the Delaware Basin asset now, although the limited horizontal inventory at that asset reduces the upside beyond PDP.

Book value has historically been a fairly poor method to value E&P companies.
@Elephant Analytics thanks for your analysis on this; this stock is so heavily shorted and manipulated that its hard to know what a good market value is; I still sense $4-$5 range for 2021 is in line
Maybe they should try to add rigs and grow aggressively.
Saries profile picture
Serious question. Any reason why they can't increase production with another rig. If you're right about being completely hedged with current production, it would probably make sense to expand production, if oil and gas continue at current pricing. It would more than cover the additional cap/ ex.
@Saries the challenge of that strategy is sourcing capital to accelerate drilling activity. The D&C cost must be paid up front and the revenue comes in over time. So where would REI get $3mil per well to be recovered over the next two years?
@oilguyNTX from selling the Delaware
very good summary, thank you
Blacklick Capital profile picture
@ApocalypseDude not really. They can be bought for 500 million dollars just in oil reserves and mineral options and you would double your money. There is 3 billion in oil reserves....this is nothing more than a hack
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