Ring Energy: Rising Interest Rates Shouldn't Be A Major Issue

Jun. 21, 2022 6:36 PM ETRing Energy, Inc. (REI)4 Comments


  • Ring Energy's long-term debt is entirely credit facility debt, which has a variable rate.
  • Rising interest rates may lead to higher annual interest costs, but this is less important than oil prices.
  • A 1% change in interest rates affects Ring's projected unhedged cash flow by less than a $1 change in oil prices.
  • I estimate that Ring could generate $83 million in positive cash flow in 2023 at current strip.
  • This would allow it to reduce its net debt to $175 million by the end of 2023.
  • Looking for more investing ideas like this one? Get them exclusively at Distressed Value Investing. Learn More »

Rise in gasoline prices concept with double exposure of digital screen with financial chart graphs and oil pumps on a field.

peshkov/iStock via Getty Images

Ring Energy (NYSE:REI) may need to deal with higher interest costs in the future, as it has variable interest rate credit facility debt. The effect of a 1% change in the credit facility interest rate on Ring's cash flow is less than the effect from a $1 change in oil prices though. So at current strip of approximately $94 WTI oil in 2023, Ring is projected to generate around $83 million in positive cash flow next year.

Ring is relatively indebted for an upstream company (compared to its peers), so it will need to continue to focus on reducing its debt for the time being. A scenario with $90s oil in 2023 would help it considerably, although it now has a decent amount of room under its credit facility to weather a significant downturn in oil prices.

Potential 2022 Outlook At Current Strip

At current strip of roughly $103 to $104 WTI oil for 2022, Ring Energy is projected to generate $328 million in oil and gas revenue before hedges. Ring's 2022 hedges have around negative $72 million in estimated value.

Barrels/Mcf $ Per Barrel/Mcf (Realized) $ Million
Oil 2,947,375 $102.00 $301
Natural Gas 2,682,750 $7.50 $20
Hedge Value -$72
Total Revenue $249

This results in a projection that Ring can generate $30 million in positive cash flow in 2022, allowing it to reduce its net debt to $258 million by the end of the year. Ring's net debt would be approximately 1.5x hedged 2022 EBITDAX or 1.1x unhedged 2022 EBITDAX at the end of the year.

$ Million
Production Expenses $45
Production and Ad Valorem Taxes $17
Cash G&A $14
Capital Expenditures $130
Cash Interest Expense $13
Total Cash Expenditures $219

Potential 2023 Outlook At Current Strip

If Ring can then average 9,900 BOEPD (87% oil) in production during 2023 with a similar $130 million capex budget, it would be able to generate $308 million in revenues at current 2023 strip of roughly $94 WTI oil. This would be 6% to 7% year-over-year production growth. At last report Ring was unhedged for 2023.

Barrels/Mcf $ Per Barrel/Mcf (Realized) $ Million
Oil 3,143,745 $92.50 $291
Natural Gas 2,818,530 $6.00 $17
Total Revenue $308

This would allow Ring to generate around $83 million in positive cash flow in 2023. I've also assumed that Ring's credit facility interest rate goes up a few percentage points from its last reported level of 4.3%. A 1% increase in interest rates has the same effect on Ring's unhedged cash flow as a bit under $1 decrease in oil prices.

$ Million
Production Expenses $48
Production and Ad Valorem Taxes $17
Cash G&A $14
Capital Expenditures $130
Cash Interest Expense $16
Total Cash Expenditures $225

At current strip prices Ring would be projected to end 2023 with $175 million in net debt. This would be 0.8x its 2023 EBITDAX, which is a reasonable level.

Other Notes

Ring currently has a fairly high level of debt for an E&P company these days, since there has been a lot of focus on deleveraging within the industry. A common target is to get leverage down to 1.0x or lower, which Ring appears capable of achieving in 2023.

Ring is somewhat vulnerable if oil prices go down significantly. At $65 WTI oil in 2023, Ring could have a small amount of cash burn if it doesn't trim its capex budget. Ring's leverage would also end up around 1.9x in that $65 WTI oil scenario, although it should still have plenty of room under its credit facility since that was previously reaffirmed at $350 million at a time (June 2021) when oil prices were around $70.


Ring Energy may face some increased interest costs due to rising interest rates since all its debt is variable interest credit facility debt. This should have a relatively limited impact on its cash flow though, as a 1% change in interest rates would have a bit less of an impact on Ring's cash flow than a $1 change in oil prices.

I noted before that Ring (at around $3.50 per share) appeared appropriately priced for long-term $70 WTI oil. Stronger oil prices in 2023 may give Ring a bit of upside by helping it deleverage quicker.

Free Trial Offer

We are currently offering a free two-week trial to Distressed Value Investing. Join our community to receive exclusive research about various energy companies and other opportunities along with full access to my portfolio of historic research that now includes over 1,000 reports on over 100 companies.

This article was written by

Elephant Analytics profile picture
Unique insight into distressed opportunities to target outsized returns.
Elephant Analytics has 15 years of analytical experience and unique skills in numerical analysis and practical mathematics. He is currently ranked in the top 2% of analysts by TipRanks.
Elephant Analytics has also achieved a top 50 score on the Bloomberg Aptitude Test measuring financial aptitude (out of nearly 200,000 test takers). He has also achieved a score (153) in the 99.98th percentile on the WAIS-III IQ test and has led multiple teams that have won awards during business and strategy competitions involving numerical analysis. In one such competition, he captained his team to become North American champions, finishing ahead of top Ivy League MBA teams, and represented North America in the Paris finals.

Elephant Analytics co-founded a company that was selected as one of 20 companies to participate in an start-up incubator program that spawned several companies with $100+ million valuations (Lyft, Life360, Wildfire). He also co-founded a mobile gaming company and designed the in-game economic models for two mobile apps (Absolute Bingo and Bingo Abradoodle) with over 30 million in combined installs.

Legal Disclaimer: Elephant Analytics' reports, premium research service and other writings are personal opinions only and should not be considered as investment advice. Only registered investment advisors can provide personalized investment advice. While Elephant Analytics attempts to provide reports that include accurate facts, investors should do their own diligence and fact checking prior to making their own decisions.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Recommended For You

Comments (4)

To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.