Ring Energy, Inc. (NYSEAmerican: REI)
Ring Energy, Inc. (NYSEAmerican: REI) is a Midland, Texas-based oil and gas exploration, development, and production company with current operations in the Permian Basin of West Texas, which is recognized as the top producing oil basin in North America. Founded in 2012, the experienced management team has aggressively sought to acquire select properties in the Permian Basin with development opportunities for future years. As of 12/31/18, the company has, through exploitation and acquisitions, increased their proved reserves to an estimated 36.6 million BOE’s (barrel of oil equivalents). CEO Kelly Hoffman cut his teeth in the Permian Basin. He started out there in 1975 with Amoco Production Company. In the early 1990’s, Mr. Hoffman co-founded AOCO and drilled 60 wells in the Fuhrman Mascho field in Andrews, Texas. After 18 months and a 600% increase in revenue, AOCO sold the properties to Lomak (Range Resources). He did the same thing again in 1999 when he acquired 12,000 acres in Lubbock and Crosby counties. After drilling and completing 19 successful wells, he sold his interest in the property to Arrow Operating Company. My take is the management team at Ring Energy knows the Permian Basin very well.
Permian Basin Pure Play E&P
The Permian Basin is unique in its size, vast infrastructure, thickness of strata, and multiple producing horizons/benches, providing a variety of exploration opportunities to develop oil and gas reserves. As a result, the Permian Basin is the top producing basin in North America.
The Permian Basin produces approximately 4.1 million Bopd, or about 34%, of the U.S. daily production of approximately 11.8 million Bopd (EIA week ending March 29, 2019).
Over the years it’s been said that “good Permian Basin deals don’t make it out of Midland”. Although this statement isn’t completely accurate, it’s probably truer than not, and as a result, management strategically located REI’s headquarters in Midland, Texas. With the clear majority of REI’s management team being from the Permian Basin area, and having built other successful companies here, their relationships run deep and continue to positively impact its ability to acquire assets and build its infrastructure.
Although traditionally produced vertically, REI has focused on drilling the San Andres horizontally resulting in enhanced rate-of-returns (IRR’s), and exceptional return on investments (ROI’s).
Central Basin Platform Target Reservoir
On the Central Basin Platform (CBP) REI is targeting the San Andres formation which is a highly oil saturated “conventional shallow non-contiguous carbonate reservoir” at approximately 5,000’ and is primarily an oil barring formation (approximately 95% oil) drilled and produced for over 90 years. Of the over 30 billion barrels produced from the Permian Basin approximately 40%, or 12 billion barrels, came from the San Andres reservoir. Although traditionally produced vertically, REI has focused on drilling the San Andres horizontally resulting in enhanced rate-of-returns (IRR’s), and exceptional return on investments (ROI’s).
REI’s leasehold position in Andrews and Gaines Counties as of Q4’2018 totals 107,203 gross / 76,028 net acres of which 74,800 net acres is within its horizontal footprint. This gives REI an approximate inventory of 769 gross horizontal locations equaling an approximate 13-year drilling inventory running two rigs.
After drilling and completing three successful horizontal San Andres pilot wells at the end of 2016, REI initiated a horizontal drilling program within its core development area of Andrews and Gaines Counties. With the success and production growth experienced with one rig, a second was added in Q3’2017, and a dedicated frack crew was secured to ensure drilled wells were timely completed and put on production. As of Q4’2018 Ring has drilled 105 total gross horizontal wells and added 13 salt water disposal wells (SWDs).
Top Tier Returns
The benefits of horizontal drilling, versus vertical, enables San Andres reserves to be economically accessed beyond traditional field boundaries at reduced development costs, have increased ultimate oil recoveries, and generate some of the top tier rate-of-return (IRR’s) in the Permian Basin of over 70% at a $50/Bbl realized price. on See page 12 of REI’s Corporate Presentation for the single well economics on a horizontal San Andres well.
Delaware Basin Target Reservoir
REI’s other core asset is located in northern Culberson and Reeves Counties of the Delaware Basin with production primarily from another “conventional” reservoir known as the Delaware Mountain Group which includes the Bell Canyon, Cherry Canyon, and Brushy Canyon formations ranging in depth from 2,000’ – 6,000’ respectively. Since acquiring the asset in June 2015, REI has drilled 10 successful vertical Cherry Canyon wells, recompleted 9, drilled 4 Brushy Canyon horizontal wells in 2018, revamped the existing disposal infrastructure and continues to enhance product takeaway capacity. REI is greatly encouraged by the early results of its Brushy Canyon horizontal wells to date, and believes the asset also has horizontal potential in the shallower Cherry Canyon Formation as evidenced by the log and core analysis from recently drilled wells.
REI’s leasehold position in Culberson and Reeves Counties as of Q4’2018 totals 20,218 gross / 19,917 net acres, providing a potential inventory of 468 vertical gross locations. Also noteworthy is all the acreage is held-by-production (no obligation to drill).
For fiscal 2018 Ring Energy had diluted EPS of $0.35 on Revenue $146.11 million. Ring Energy’s Quarterly Revenue Growth year over year is 71.70%, while Quarterly Earnings Growth year over year is 162.20%. The book value per share is $7.61, so with a current price of $1.73, you are buying the stock at about a 78% discount to book. As of 06/30/2018, Ring Energy had $10,578,982 in cash, so with 67,811,111 issued and outstanding as of 06/30/2018, about $0.155 of the book value per share is in cash. One other interesting note on Ring Energy is that they have 63.97 million shares in the float and there are 8.06 million shares short. That’s 15.74% of the float and about six or seven trading days to cover using their average daily trading volume. https://ringenergy.com