Ring Energy, Inc. (REI) Earnings Call Transcript

Good morning, and welcome to Ring Energy's third quarter 2026 earnings conference call. [Operator Instructions] Please note this event is being recorded. I'm now turning the call over to Al Petrie, Investor Relations of Ring Energy. Please go ahead.

Thank you, Operator, and good morning, everyone. We appreciate your interest in Ring Energy. We'll begin our call with comments from Paul McKinney, our Chairman of the Board and CEO, who will provide an overview of key matters for the third quarter of 2026. We'll then turn the call over to our CFO, Sundip Johl, Executive Vice President, Chief Financial Officer, and Treasurer, who will review our financial results. Paul will then return with some closing comments before we open up the call for questions. During the Q&A session, we ask you to limit your questions to 1 and a follow-up. You're welcome to reenter the queue later with additional questions. I would also note that we have posted an updated corporate presentation on our website. During the course of this conference call, the company will be making forward-looking statements within the meaning of federal securities laws. Investors are cautioned that forward-looking statements are not guarantees of future performance, and that actual results or developments may differ materially from those projected in the forward-looking statements. Finally, the company can give no assurance that such forward-looking statements will prove to be correct. Ring Energy disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Accordingly, you should not place undue reliance on forward-looking statements. These and other risks are described in yesterday's press release and in our filings with the SEC. These documents can be found in the Investors section of our website, located at www.ringenergy.com. Should 1 or more of these risks materialize or should underlying assumptions prove incorrect, actual results may vary materially. This conference call also includes references to certain non-GAAP financial measures. Reconciliations of these non-GAAP financial measures to the most directly comparable measure under GAAP are contained in yesterday's earnings release. Finally, as a reminder, this conference call is being recorded. I would now like to turn the call over to Paul McKinney, our Chairman and CEO.

Thank you, Al, and good morning, everyone. As you may recall, we entered 2026 focused on positioning Ring for the next phase of the company's development. Our priorities were clear: improve the quality of the portfolio, deepen our development inventory, and build a more capital-efficient and repeatable development model. The progress we made during the third quarter moved each of these priorities meaningfully forward. During the quarter, we completed approximately $30.5 million of non-core asset sales, representing approximately 130 BOE per day, 63% of which was oil, and approximately 9,800 net acres. We applied $10 million of those proceeds to reducing the borrowings under our revolving credit facility, and approximately $18.8 million towards acquiring leasehold interests within and offsetting our existing Central Basin Platform operating footprint. Together, these actions reflect a capital allocation framework we have executed successfully in the past and intend to keep following in the future: selectively invest in higher-return opportunities within our core operating areas, monetize assets that are not expected to compete for near-term capital, and use a portion of the proceeds to reduce debt. At the same time, we continued to execute on our development program and delivered strong operating results. Total sales volumes averaged 20,635 barrels of oil equivalent per day, up 3% from the second quarter, while oil sales volumes averaged 12,818 barrels of oil per day, up 1% sequentially. We drilled 8 horizontal wells during the quarter and completed 7. In Crane County, we drilled 6 and completed 5 2-mile horizontal wells representing Ring's first 5 completed 2-mile co-developed laterals. We also drilled and completed 2 1.5-mile horizontal wells in Andrews County and completed the saltwater disposal well that was underway at the end of the second quarter. The development activity this quarter also reflects how Ring has evolved and how we think about investing capital today. When I became CEO, 1 of my key priorities was building a business that could consistently live within its means. That discipline helped us strengthen the balance sheet and establish the financial foundation we have today. With that foundation in place, we now have greater flexibility to invest ahead of production when we see opportunities that we believe can generate attractive returns. During the third quarter, we did just that. We invested approximately $64 million to advance our co-developed longer-lateral program and supporting infrastructure. We have continued to shift capital forward this year to accelerate our transition to a more capital-efficient development of our reserves and resources. As a result, our adjusted free cash flow was negative during the third quarter. This was a deliberate decision where we took advantage of continued higher commodity prices and surplus proceeds from our disposition and leasing efforts to accelerate our capital spending this quarter, positioning the company for significant organic growth going into 2027. But let me be clear about this. We have not lost focus on maximizing adjusted free cash flow, strengthening our balance sheet, and lowering our leverage ratio. With the capital spending stepping down in the fourth quarter, we expect a return to positive free cash flow and remain positive for the full year. Ultimately, our focus is on allocating capital to opportunities where we believe we can generate the strongest risk-adjusted returns, improve capital efficiency, and create durable per-share value. The portfolio actions and development investments we made during the third quarter reflect that approach and position us well as we move into 2027. And as you can see, that strategy is beginning to show. Through our updated outlook for the fourth quarter of 2026, adjusted for the asset divestitures, we expect oil sales volumes to be between 12,900 and 13,500 barrels per day and total sales volumes of 20,400 to 21,200 barrels of oil equivalent per day. We expect fourth quarter LOE of $9.80 to $10.30 per BOE and capital spending of approximately $43 million to $48 million. Looking further ahead to 2027, we expect oil sales volumes to be 13,200 to 14,300 barrels per day and total sales volumes of 21,000 to 23,000 barrels of oil equivalent per day. Our preliminary capital range is $135 million to $165 million, including 20 to 30 new horizontal wells with laterals longer than 1.5 miles. We expect LOE of $9.70 to $10.50 per BOE. We are excited about the momentum we have built as we move into 2027. We have strengthened the portfolio, expanded our undeveloped inventory, and are advancing our longer-lateral, more capital-efficient program that we believe can deliver sustainable growth at attractive returns. With that, I will turn the call over to Sundip to discuss the financial results, balance sheet, and capital allocation in greater detail. Sundip?

Thank you, Paul. I'll focus my comments on our financial performance during the quarter, the progress we continue to make on the balance sheet, and then I'll discuss our approach to commodity price risk. With Paul having covered volumes, I'll start with revenue and pricing. Revenue was $102.3 million, down 2% from the second quarter, despite a 12% decline in our realized oil price. Importantly, our overall realized price declined by a more modest 6% to $53.91 per BOE. Significantly improved natural gas realizations and strength in NGL pricing partially offset the impact of lower oil prices. Natural gas realizations improved meaningfully during the quarter. Our net realized natural gas price was -$0.30 per Mcf, compared with -$5.20 per Mcf in the second quarter. Last quarter, we said we expected some relief as additional Permian takeaway and processing came online, and we began to see that benefit during the third quarter. NGL pricing also strengthened during the quarter, with our realized NGL price increasing to $10.38 per barrel from $9.96 in the second quarter. That improvement, combined with better natural gas realizations, helped partially offset the decline in oil pricing. Against that pricing backdrop, our financial performance strengthened during the quarter. Adjusted EBITDA increased approximately 5% sequentially to $57.1 million, with adjusted EBITDA margin improving to 56% from 52%, while adjusted cash flow from operations increased approximately 7% to $50.4 million. That performance, despite a 6% decline in our overall realized price, reflects the resilience of the underlying business and continued cost discipline. Turning to costs, LOE was $10.20 per BOE, compared with $10.12 in the second quarter, remaining relatively stable on a per-unit basis. Overall, all-in cash operating costs declined to $21.03 per BOE from $21.59 in the second quarter. Cash G&A increased to $3.45 per BOE from $3.19 in the second quarter, primarily reflecting higher professional services and legal costs during the quarter. Our core employee costs remain relatively stable, and the higher professional services costs are not indicative of an increase in our underlying run-rate G&A. Interest expense also continued to move lower, declining to $7.7 million from $8.4 million in the second quarter, reflecting lower debt balances. Turning to the balance sheet, we continue to make meaningful progress during the quarter. We ended September with $350 million outstanding under our revolving credit facility, down $10 million from the end of the second quarter and $70 million from the beginning of the year. At the same time, total liquidity increased to approximately $236 million, compared with approximately $226 million at the end of the second quarter. Our leverage ratio, based on total debt to last quarter annualized adjusted EBITDA, improved to approximately 1.5x from 1.7x last quarter. We remain fully compliant with all financial covenants and continue to target long-term leverage of less than 1.25x. The progress we continue to make strengthening the balance sheet gives us greater flexibility in how we allocate capital across the business while maintaining financial discipline. I'll finish with a few comments on hedging. Our hedge strategy is an extension of how we think about capital allocation and risk management. Our objective is not to predict commodity prices, but to provide greater certainty around the cash flows supporting our development program and balance sheet, while retaining appropriate exposure to commodity price upside. As we look to 2027, we've been particularly focused on protecting the first half of the year, when we expect our development capital to be more concentrated. With that in mind, we recently strengthened our oil hedge position by increasing the level of downside protection on a portion of our existing hedged volumes. Importantly, this was less about increasing the percentage of production we have hedged and more about improving the quality of the protection. Based on the midpoint of our full-year 2027 oil sales guidance, approximately 59% of our first half 2027 oil volumes are currently hedged, and the additional swaps we put in place provide greater cash flow certainty during the period when we expect our capital requirements to be highest. For additional detail on our current hedge positions, including volumes, pricing, and contract structure, I'd refer you to the hedging disclosure in our investor presentation. The impact becomes meaningful in a lower price environment. Based on our current outlook for the first half of 2027, the additional protection is designed to help ensure we remain free cash flow positive, even at $65 WTI. That gives us greater confidence in our ability to execute the development program while maintaining balance sheet discipline through a range of commodity price environments. On natural gas, we're taking a similarly disciplined approach. Given the volatility we've seen in Permian gas pricing, we're managing both commodity price and regional basis exposure to provide additional protection around our expected gas cash flows. The key financial takeaway is this: the third quarter was a deliberate investment quarter. We funded that investment and high-graded the portfolio while reducing debt, increasing liquidity, and lowering leverage. With capital stepping down in the fourth quarter, greater hedge protection around the first half of 2027, and a stronger balance sheet, we believe we're well positioned to fund our 2027 development program and continue reducing debt. With that, I'll turn the call back to Paul.

Thanks, Sundip. We accomplished a lot during the third quarter, but more importantly, the actions we took strengthened the foundation of this company. We improved the portfolio, expanded our undeveloped inventory, advanced our longer-lateral development program, and reduced debt. As we look to 2027, we believe we have the asset base, financial flexibility, and development opportunity to continue improving capital efficiency, generate strong returns, and position this company to deliver profitable organic growth. Our focus is straightforward: allocate capital to the highest-return opportunities, maintain financial discipline, and continue creating durable per-share value for our stockholders. We are excited about the momentum we have created this year, and even more importantly, we believe in where we can take this company from here. With that, operator, we are ready to open the call for questions.

[Operator Instructions] And today's first question comes from Jeff Robertson with WaterTower Research.

I'm looking at slide 14 of the deck where you talk about some operational improvements. For 2027, as you think about capital efficiency, can you share your perspective on the metrics with respect to how much production Ring would expect to add as you pivot to 1.5-mile horizontals or 2-mile horizontals compared to where you've been in the past couple of years?

Sure. Yes, good morning, Jeff. Yes, that's a really good question. And this is what we've been trying to communicate to the investment community about the transition we're in the middle of right now. Based on the early well results that we've seen, we believe that switching to longer laterals, co-developing our locations on a location where we have multiple zones that are productive, you drill all of your wells on that same location. And that delivers significantly more production per dollar spent and also more barrels of reserves per dollar spent. And so right now, we believe we can generate, like we've already guided, 10% production growth next year on a very similar, actually slightly lower capital spending program, and so that should be an indication to you as to what kind of capital efficiency you're going to see. But the challenge that we have and that the shareholders are going to have to be a little patient with, it's going to take a couple of quarters for the results of this shift to a more capital-efficient program to actually follow through and be revealed in the financials. For example, of the co-developed wells that we developed this quarter, only 2 of those wells were on early enough to have a measurable contribution to our production this quarter. We were really having a difficult time trying to predict last quarter when we gave guidance. But the other wells that we completed this quarter are going to contribute meaningfully to the fourth quarter, and I think we'll begin to show the benefit of this transition. Sundip, do you have anything else you want to add, or Alex? Appreciate it. Does that answer your question, Jeff?

Yes, so just on that, Paul, when you co-develop wells on pads, as you complete them, are you shutting in offset production to accommodate or to avoid some of the frac impacts that you might see as you complete new wells? So you get a bit of a sawtooth-type production profile?

That's exactly right. If you remember our past program where we just drilled a single horizontal on a pad, once you've moved the rig off, we had a completion crew in there to complete our frac jobs and drill our plugs out and get these wells on really quickly. Now what you're going to see is going to be a little bit more lumpy because we're going to stay on that location—let's say it's 2, 3, 4, or 5 wells per location. You'll drill them all, and then you'll complete them all, and then you'll bring them all on. And to the point that you brought up, yes, not in every instance, but in most instances we will be shutting in production offsetting because we're trying to minimize the frac interference and other things, and so that's a reality to the program we're going to. But what you'll find is on a multiple-quarter basis, you're going to see higher sustained production delivery. And then when you look at the resulting financials and metrics, we'll be delivering considerably more production per dollar spent as we go forward into 2027.

You said the 2027 capital program is weighted toward the first half of the year. What's informing your view of what kind of capital activity you might want in the second half of 2027? And I'm guessing that the capital spent in the fourth quarter of this year and the first half of next year is really what will shape the production profile for all of 2027. Is that correct?

That is correct. And that's part of the reason why we like a front-load, because you get the benefit of that production all year long. But the other thing that we have purposely done in our forecast, so again, we front-loaded our capital for 2027. But we don't know what the future holds, right? We don't know where future oil prices are going to go. So we'll have a decision to make as we enter the mid-year of next year with a lot more certainty with regard to all of that. We may curtail capital spending, and we may increase capital spending, all based on cash flow, the progress we've made in terms of reducing our debt, and getting our leverage ratio where we really want it. We really want to get below 1.25x, but I really want it below 1x. And I believe that if we continue to be in this higher-for-longer environment, we are poised to get our leverage ratio below 1x next year.

[Operator Instructions] And our next question comes from Noel Parks with Tuohy Brothers.

I was curious on the acreage you divested, and I realize they're a pretty small percentage of total production represented. But I was wondering if you could talk a little bit about how you evaluate the acreage that you have. I think you said in the release that it didn't really compete for capital in the near term, and just a little bit about how you're selecting what you're willing to sell near term.

Yes, that's a very good question. And you're actually pointing out an issue where we actually changed our own opinion over the year. Because earlier in the year, I really did not believe that we had very many assets within our portfolio that we would want to sell. But as we watched the rest of the industry and the industry's interest in some of these deeper, more expensive plays where we had interest, we found that those other parties were more interested in our acreage because, although that was acreage that we could eventually get to 1 day in the future, it wasn't something that was going to earn cash investment anytime soon in the next couple of years with us. And so it became very apparent to us that these assets that we had were more valuable in the hands of somebody else, and they were willing to pay the going price, and those prices, as you can see, are very attractive, very accretive. And so we took advantage of that to accelerate the value of those assets in our portfolio, and then reinvest that to expand our acreage position where we're currently focused, where we have a current very profitable program going on and build inventory. And then at the same time, we're also able to pay down debt. It also gave us the opportunity to accelerate some of these investments that we made this quarter. The most significant of that is basically the co-developed longer-lateral wells that we drilled this quarter, and also the infrastructure necessary to support that. So as a result of the events in 2026—first of all, the conflict in Iran gave us an environment of higher prices. The market was open last summer very briefly for an equity raise that we took advantage of, and that positioned this company. It basically catapulted us about a year and a half, almost 2 years forward in terms of debt reduction, financial stability, and wherewithal, and it gave us the opportunity to invest. We knew we had to invest in the infrastructure before we could actually start drilling these really highly capital-efficient locations. So we took advantage of all that, and that's where we are today. So these sales are just part of that same strategy. How do we move our balance sheet forward in time in terms of—if you just did it organically—we really had the ability to accelerate debt reduction, position the balance sheet so it's much stronger, and so now, getting below 1x is not unreasonable for next year. So we're really excited about what all that has done, but the sales are just another part of that, Noel.