Ring Energy: May be able to reduce net debt below $250 million by end of 2021 (NYSE: REI)

Energy Ring (NYSE: REI) ability to earn some more headroom under its credit facility is aided by improving WTI oil prices to lows of -$50. WTI oil’s move to the $40 high has already allowed the re-determination of its borrowing base in the fall of 2020 to result in a relatively modest reduction (from $375 million to $350 million). The further improvement in oil prices has put its warrants in the money and could allow Ring to reduce its net debt below $250 million by the end of 2021.

Ring should further reduce its debt further as its leverage is still above ideal with oil at $50. However, if Oil stays around $50, it might be able to bring its net debt down to below $200 million by the end of 2022. That would seem like a more reasonable level of debt for its debt levels. production.

Potential results 2021

Ring has yet to announce its operational plans for 2021, but with WTI oil at $50, it will likely launch at least a modest amount of new development. In December 2020, Ring announced its first new horizontal well in 10 months and it had previously indicated that WTI oil at $40 was an acceptable price for it to start drilling again.

At current strip prices, if Ring opts for a relatively limited capital budget (such as $30 million) for 2021, it should be able to generate $50 million in positive cash flow while experiencing modest declines. production compared to fourth quarter 2020 levels.

Share account and debt

Ring noted that it had issued 13.1 million shares, 16.7 million prefunded warrants and 29.8 million ordinary warrants. This resulted in initial net proceeds of approximately $19.1 million, while the exercise of all warrants could add an additional $23.9 million. Ring would end up with approximately 127.6 million shares outstanding if the warrants were all exercised.

The ring was $315 million borrowed under its credit facility in December, and proceeds from its warrants and positive 2021 cash flow could reduce its debt on the credit facility below $250 million by the end of the year. end of 2021.

This amount of debt would be around 2.7x EBITDAX (for low WTI oil at $50), which is closer to a more reasonable level. Ring’s debt would likely need to be reduced to less than $200 million for it to be in reasonably good financial shape.

Notes on assessment

Ring currently looks appropriately priced for around $50 of longer-term WTI oil. At this oil price, Ring’s EV/EBITDAX multiple is around 4.5x with a stock price of $1.17 (and the full exercise of warrants). The 2021 band is a few dollars above $50, but the 2022 band is currently slightly below $50.

The surge in Ring’s share price since the end of 2020 can be attributed to improving oil prices and the associated reduced risks of further dilution. The oil band for 2021 has increased by approximately $4 since the end of 2020, which improves Ring’s cash flow projections for 2021 by approximately $10 million. Longer-term prices haven’t moved as much, but the ~$2 improvement in oil prices for 2022 improves Ring’s EBITDAX by ~$5 million per year.

This increase in Ring’s near-term cash flow along with the positive impact of higher oil prices on the value of Ring’s reserves means it has a solid path to increase liquidity without needing to issue more. of shares. The concern with a low $40 oil scenario was that Ring would see significant reductions in the borrowing base and would need to issue additional stock and warrants to give itself a bit more breathing room.

Conclusion

Ring Energy benefits significantly from improving oilfield prices to $50 for 2021 and $40 for 2022. This gives it the potential to reduce its net debt below $250 million by the end of the year. 2021. Ring’s leverage is still slightly above ideal with net debt of $250 million and low value WTI oil of $50, but its situation has improved significantly from mid -2020.

This came at the cost of a large increase in its number of shares, but the risk of additional dilution is relatively modest with oil at $50. When the coming year’s strip was in the $40s, I thought Ring might end up with nearly 200 million shares as it tried to deleverage.

Ring appears to be trading roughly at fair value now based on longer term oil prices of $50.

Ann J. Cox