Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s Discussion and Analysis of Financial Condition and Results of Operations analyzes the major elements of our balance sheets and statements of operations. This section should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2019, and our interim unaudited financial statements and accompanying notes to these financial statements.
Overview
Ring is a Midland-based exploration and production company that is engaged in oil and natural gas acquisition, exploration, development and production activities. Our exploration and production interests are currently focused in Texas and New Mexico. The Company seeks to exploit its acreage position through the drilling of highly economic, vertical and horizontal wells using the most recent drilling and completion techniques. Our focus is drilling and developing our oil and gas properties through use of cash flow generated by our operations and reducing our long-term debt through the sale of non-core assets or through our excess cash flow while still working towards providing annual production growth. We continue to evaluate potential transactions to acquire attractive acreage positions within our core areas of interest.
Business Description and Plan of Operation
Ring is currently engaged in oil and natural gas acquisition, exploration, development and production in Texas and New Mexico. We focus on developing our existing properties, while continuing to pursue acquisitions of oil and gas properties with upside potential.
Our goal is to increase stockholder value by investing in oil and natural gas projects with attractive rates of return on capital employed. We plan to achieve this goal by exploiting and developing our existing oil and natural gas properties and pursuing strategic acquisitions of additional properties, while remaining cash flow positive, maintaining low operating costs and striving to show a gain in annual production while reducing the Company's debt. Specifically, our business strategy is to increase our stockholders’ value through the following:
● Growing production and reserves by developing our oil-rich resource base through conventional and horizontal drilling. Ring intends to drill and develop its acreage base in an effort to maximize its value and resource potential, with a focus on the further drilling and development of its Northwest Shelf asset. Ring plans to operate within its generated cash flow. Ring's preliminary plan for 2020 included drilling 18 horizontal wells on the Northwest Shelf and performing workovers and extensive infrastructure projects on its Northwest Shelf, Central Basin Platform and Delaware Basin assets . Due to the recent drop in the price of oil and the ongoing COVID-19 pandemic, Ring re-evaluated its current capital expenditure budget for 2020 and made changes that the Company believes are in the best interest of the Company and its stockholders, including ceasing any further drilling until oil prices stabilize. Of the 18 new wells, the Company drilled four new horizontal San Andres wells on its Northwest Shelf asset in the first quarter of 2020. All four new wells drilled were completed, tested and had Initial Potentials (“IP”) filed. In addition to the four new wells drilled in the first quarter which had IPs filed, the Company completed testing and filed IPs on two additional horizontal wells drilled in 2019. The Company performed nine conversions from electrical submersible pumps to rod pumps in the first quarter 2020, four conversions in the second quarter 2020 and eight conversions in the third quarter 2020. Starting the last week of April, the Company curtailed essentially all production, other than that associated with Ring’s Delaware Basin property. The curtailments continued until early June, when, with commodity prices improving and price differentials decreasing, the Company began to bring wells back on line, returning to near April levels by the end of the second quarter. In the third quarter 2020, we restored production to 9,219 net barrels of oil equivalent per day (“BOEPD”). Currently, the Company is considering whether to resume its drilling program in the fourth quarter 2020. In view of the uncertainty of the extent of the contraction in oil demand and the volatility of oil futures contracts due to the COVID-19 pandemic, combined with the generally weaker commodity price environment, the Company has turned its strategic focus to reducing costs and maintaining cash flows.
● Reduction of long-term debt and de-leveraging of asset. Ring intends to reduce its long-term debt, either through the sale of non-core assets, the use of excess cash flow from operations, or a combination. Ring incurred long-term indebtedness in connection with the acquisition of core assets from Wishbone Energy Partners, LLC and its related entities. The Company believes that with its market-leading completion margins, it is well positioned to maximize the value of its assets and plans to de-lever its balance sheet through strategic asset dispositions.
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● Employ industry leading drilling and completion techniques. Ring’s executive team intends to utilize new and innovative technological advancements and careful geological evaluation in reservoir engineering to generate value for its stockholders and to build development opportunities for years to come. Improved efficiency through employing technological advancements can provide a significant benefit in a continuous drilling program such as the one Ring contemplates for its current inventory of drilling locations.
● Pursue strategic acquisitions with exceptional upside potential. Ring has a history of acquiring leasehold positions that it believes to have substantial resource potential and that it believes will meet its targeted returns on invested capital. Ring has historically pursued acquisitions of properties that it believes to have exploitation and development potential comparable to its existing inventory of drilling locations. The Company has developed and refined an acquisition program designed to increase reserves and complement existing core properties. Ring’s experienced team of management and engineering professionals identify and evaluate acquisition opportunities, negotiate and close purchases and manage acquired properties. Management intends to continue to pursue strategic acquisitions that meet the Company’s operational and financial targets. The executive team, with its extensive experience in the Permian Basin, has many relationships with operators and service providers in the region. Ring believes that leveraging its relationships will be a competitive advantage in identifying acquisition targets. Management’s proven ability to evaluate resource potential will allow Ring to successfully acquire acreage and to heighten the value of the assets.
Executive Summary - 2020 Developments and Highlights
In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. Governments have tried to slow the spread of the virus by imposing social distancing guidelines, travel restrictions and stay-at-home orders, which have caused a significant contraction in global economic activity , including a decline in the demand for oil and to a lesser extent natural gas.
Our business and operations have been adversely affected by, and are expected to continue to be adversely affected by, the COVID-19 pandemic and the public health response thereto. As a result of the COVID-19 outbreak and the adverse public health developments, including voluntary and mandatory quarantines, travel restrictions and other restrictions, our operations, and those of our subcontractors, customers and suppliers, have experienced, and are anticipated to continue to experience, delays or disruptions . Starting the last week of April, essentially all of our production, other than that associated with our Delaware Basin property, was curtailed. The curtailments continued until early June, when, with commodity prices improving and price differentials decreasing. In the third quarter 2020, we had restored production to 9,219 net BOEPD.
In addition, our financial condition and results of operations have been, and are likely to continue to be, adversely affected by the coronavirus outbreak. The timeline and potential magnitude of the COVID-19 outbreak and its consequences are currently unknown. The prolongation or exacerbation of this pandemic could more extensively affect the United States and global economy, including the demand for oil and natural gas.
The Company has experienced the effects of a negatively impacted domestic and international demand for crude oil and natural gas, which has contributed to price volatility and impacted the price we receive for our production, and moreover has materially and adversely affected the demand for and marketability of our production. For the Company, this means that production was shut in for some of our wells, and that we held some of our production as inventory to be sold at a later date because we refused to accept a loss price for our production. Our 2020 first quarter end was negatively impacted by the pandemic response, and we continued to experience the pandemic’s negative impact through the third quarter of 2020. At this time, we expect that our financial results for the full fiscal year will be adversely impacted by the existence of and the global response to the COVID-19 pandemic.
Also, in March 2020, Saudi Arabia and Russia, along with OPEC producers, failed to agree to cut oil production, and Saudi Arabia significantly cut the sell price of its oil and announced plans to increase production, which events together contributed to a sharp drop in global oil prices. While OPEC, Russia and other allied producers reached an agreement in April 2020, and most recently in July 2020, to reduce production, oil prices have remained low. While OPEC+ producers ultimately agreed to cut global petroleum output, such cut has not been enough to offset the impact of COVID-19 on demand. As a result of this decrease in demand and increase in supply, oil and natural gas prices have decreased, which has affected our liquidity. Additionally, with depressed oil and natural gas prices, we have incurred a write-down to our oil and gas properties and additional write-downs may be required in future periods if prices do not recover further.
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The imbalance between the supply of and demand for oil, as well as the uncertainty around the extent and timing of an economic recovery, have caused significant market volatility and a substantial adverse effect on commodity prices since March 2020. The Company expects ongoing oil and gas price volatility over the short-term. The full impact of the coronavirus and of the decrease in oil and natural gas prices continues to evolve and to be realized as of the date of this report. As such, the full magnitude of such events on the Company remains uncertain. Management is actively monitoring the global situation and its impact on the Company’s future operations, financial position and liquidity in fiscal year 2020.
As a producer of oil and natural gas, we are recognized as an essential business under various federal, state and local regulations related to the COVID-19 pandemic. We have continued to operate as permitted under these regulations while taking steps to protect the health and safety of our workers. We have implemented protocols to reduce the risk of an outbreak within our field operations, and these protocols have not reduced production or efficiency in a significant manner. A substantial portion of our non-field level employees have transitioned temporarily to remote work-from-home arrangements. With these arrangements in place, we have been able to maintain a consistent level of effectiveness, including maintaining our day-to-day operations, our financial reporting systems and our internal control over financial reporting.
Our oil and natural gas producing properties are located in the Permian Basin. Oil sales represented approximately 96% and 97% of our total revenue for the three and nine months ended September 30, 2020, respectively, and approximately 98% and 98% of our total revenue for the same periods in 2019, respectively. While natural gas prices also declined as a result of changes in demand, the decline in natural gas prices was far less significant than the decline in oil prices. We have hedged 5,500 barrels per day of oil through derivative contracts for the month of July 2020 at $33.24 and 5,500 barrels per day of oil through derivative financial contracts at a $50 floor for August through December 2020. We also have hedges in place for 4,500 barrels per day of oil at a weighted average price of $42.22 per barrel for 2021. Our 2020 and 2021 derivative hedges resulted in total unrealized fair value loss of approximately $6.2 million during the three months ended September 30, 2020 and total unrealized fair value gain of approximately $14.1 million during the nine months ended September 30, 2020 and realized gain on derivates of approximately $1.7 million and approximately $18.8 million, respectively, during the three and nine months ended September 30, 2020. All of our hedges are financial hedges and do not have physical delivery requirements. As such, any decreases in anticipated production, whether as a result of decreased development activity or shut-ins, will not impact our ability to realize the benefits of the hedges.
Our supply chain has experienced some interruptions. In the second quarter 2020, one of our purchasers cancelled its existing contracts to purchase produced oil from the Company. However, we have since entered into new contracts with an existing purchaser to purchase the oil previously covered by the cancelled contracts. In the second quarter of 2020, the industry overall experienced severe storage capacity constraints with respect to oil and certain natural gas products. Although such restraints have relaxed significantly, we may become subject to such constraints if we are not able to sell our production, or certain components of our production. The lack of a market or available storage for natural gas product or oil could result in us having to shut in production.
In addition, as previously announced, we have reduced our drilling and completion capital budget for 2020 by approximately 70% since the beginning of the year. We will continue to monitor our capital expenditure plan throughout the year and will make further revisions if deemed necessary. Reductions in the 2020 capital budget may impact production levels in 2021 and forward to the extent fewer wells are brought online.
In May 2020, the Borrowing Base supporting our Credit Facility was subject to its semi-annual redetermination, which led to us entering into a second amendment to our Credit Facility on June 17, 2020. The amendment, among other things, reduces the Company’s Borrowing Base under the Credit Facility from $425 million to $375 million. As of September 30, 2020, the Company had approximately $360 million outstanding on the Credit Facility. As our Borrowing Base is subject to a semi-annual redetermination, our available borrowings and liquidity could be impacted by a redetermination later in 2020.
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The COVID-19 pandemic, commodity market volatility and resulting financial market instability are variables beyond our control that can adversely impact our generation of funds from operating cash flows, our available borrowings under our Credit Facility and our ability to access the capital markets. We believe we are taking appropriate steps in response to the evolving circumstances. However, past performance is not a promise of future events and the Company cannot estimate all aspects of the ongoing impact of the pandemic-related events and the OPEC+ production adjustments on the Company’s financial statements.
Results of Operations – For the Three Months Ended September 30, 2020 and 2019
Oil and natural gas sales. For the three months ended September 30, 2020, oil and natural gas sales revenue decreased $18,872,561 to $31,466,544, compared to $50,339,105 for the same period during 2019, primarily as a result of lower production and lower commodity prices.
Oil sales decreased $19,174,988 and natural gas sales increased $302,427. For the three months ended September 30, 2020, oil sales volume decreased 125,248 barrels to 781,626 barrels, compared to 906,874 barrels for the same period in 2019. The average realized per barrel of oil price decreased 29% from $54.59 for the three months ended September 30, 2019, to $38.80 for the three months ended September 30, 2020. For the three months ended September 30, 2020, gas sales volume decreased 150,504 thousand cubic feet (MCF) to 581,123 MCF, compared to 731,627 MCF for the same period in 2019. The average realized natural gas price per MCF increased 71% from $1.14 for the three months ended September 30, 2019, to $1.96 for the three months ended September 30, 2020.
Oil and gas production costs, including ad valorem taxes. Our lease operating expenses (LOE) decreased from $15,478,052, or $15.04 per barrel of oil equivalent (BOE) for the three months ended September 30, 2019, to $9,678,011 or $11.02 per BOE for the three months ended September 30, 2020. The decreases both in total and in the per BOE rate are a result of efforts to improve efficiencies in our operations.
Production taxes. Production taxes as a percentage of oil and natural gas sales were 5% during the three months ended September 30, 2019 and remained steady at 5% for the three months ended September 30, 2020. These rates are expected to stay relatively steady unless we make acquisitions in other states with differing production tax rates or the states of Texas or New Mexico change their production tax rates.
Depreciation, depletion, amortization and accretion. Our depreciation, depletion, amortization and accretion expense decreased by $3,293,604 to $11,057,773 for the three months ended September 30, 2020, compared to $14,351,377 during the same period in 2019. The decrease was the result of a combination of a lower depletion rate per BOE and lower production volumes between periods. The lower depletion rate is primarily the result of the ceiling test write down during the second quarter 2020.
General and administrative expenses. General and administrative expense decreased $1,249,001 to $2,496,927 for the three months ended September 30, 2020, as compared to $3,745,928 for the three months ended September 30, 2019. The decrease in general and administrative expense is primarily attributable to lower cash and stock based compensation related expenses and legal expenses in 2020 as compared to 2019.
Interest expense. Interest expense decreased $99,259 to $4,457,250 for the three months ended September 30, 2020, as compared to $4,556,509 for the three months ended September 30, 2019. This decrease was the result of lower interest rates between periods.
Realized gain on derivative instruments. Realized gain on derivatives for the three months ended September 30, 2020 was $1,726,373. There was no realized gain or loss on derivatives during the three months ended September 30, 2019. This change is the result of significantly lower oil prices.
Unrealized loss on derivative instruments and hedging activities. The Company records all derivative instruments, other than those that meet the normal purchases and sales exception, on the balance sheet as either an asset or liability measured at fair value. Changes in fair value are recognized currently in earnings unless specific hedge accounting criteria are met. During the three months ended September 30, 2020, the change in fair value resulted in the recognition of a loss of $6,228,453 on derivative contracts as compared to a gain of $1,877,368 during the same period in 2019.
Net income (loss). For the three months ended September 30, 2020, the Company had net loss of $1,961,603, as compared to net income of $8,858,000 for the three months ended September 30, 2019. The primary contributors to this change are lower revenues as a result of lower commodity prices and the unrealized loss on derivatives instruments.
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Results of Operations – For the Nine Months Ended September 30, 2020 and 2019
Oil and natural gas sales. For the nine months ended September 30, 2020, oil and natural gas sales revenue decreased $61,798,180 to $81,673,465, compared to $143,471,645 for the same period during 2019, primarily as a result of lower production and lower commodity prices.
Oil sales decreased $61,794,869 and natural gas sales decreased $3,311. For the nine months ended September 30, 2020, oil sales volume decreased 545,762 barrels to 2,066,980 barrels, compared to 2,612,742 barrels for the same period in 2019. The average realized per barrel of oil price decreased 29% from $54.03 for the nine months ended September 30, 2019, to $38.40 for the nine months ended September 30, 2020. For the nine months ended September 30, 2020, gas sales volume increased 66,792 thousand cubic feet (MCF) to 1,764,165 MCF, compared to 1,697,373 MCF for the same period in 2019. The average realized natural gas price per MCF decreased 4% from $1.35 for the nine months ended September 30, 2019, to $1.30 for the nine months ended September 30, 2020.
The primary cause of the decrease in sales volumes is that we shut in most of our production in late April which continued through all of May. Additionally, the volumes that were produced during those times were largely held until June for sale. We returned to full production in June 2020 and continued at full production throughout the third quarter of 2020.
Oil and gas production costs including ad valorem taxes. Our lease operating expenses (LOE) decreased from $36,455,925, or $12.59 per barrel of oil equivalent (BOE) for the nine months ended September 30, 2019, to $27,128,768 or $11.49 per BOE for the nine months ended September 30, 2020. The decrease in total is the result of having much of our production shut in for the second quarter 2020. The decrease in the per BOE rate is a result of efforts to improve efficiencies in our operations.
Production taxes. Production taxes as a percentage of oil and natural gas sales were 5% during the nine months ended September 30, 2019 and remained steady at 5% for the nine months ended September 30, 2020. These rates are expected to stay relatively steady unless we make acquisitions in other states with differing production tax rates or the states of Texas or New Mexico change their production tax rates.
Depreciation, depletion, amortization and accretion. Our depreciation, depletion, amortization and accretion expense decreased by $9,798,674 to $32,542,206 for the nine months ended September 30, 2020, compared to $42,340,880 during the same period in 2019. The decrease was primarily the result of lower production from having much of our production shut in during the second quarter 2020 and a lower depletion rate per BOE.
Ceiling test write-down. The Company recorded a non-cash write-down of the carrying value of its proved oil and natural gas properties of $147,937,943 for the nine months ended September 30, 2020 as a result of ceiling test limitations, which is reflected as ceiling test impairments in the accompanying statements of operations. The write-down reduced earnings in the period and will result in a lower depreciation, depletion and amortization rate in future periods. The ceiling test write-down primarily resulted from a reduction in the value of the Company’s reserves due to a reduction in commodity prices. The Company did not have any write-downs for the nine months ended September 30, 2019.
General and administrative expenses. General and administrative expense decreased $5,577,641 to $9,709,431 for the nine months ended September 30, 2020, as compared to $15,287,072 for the nine months ended September 30, 2019. The primary reason for the decrease is the acquisition related costs incurred in 2019 that were not incurred in 2020.
Interest expense. Interest expense increased $3,369,354 to $12,958,788 for the nine months ended September 30, 2020, as compared to $9,589,434 for the nine months ended September 30, 2019. This increase was the result of a larger amount drawn on our Credit Facility, most of which was incurred in the acquisition of our Northwest Shelf assets in 2019.
Realized gain on derivative instruments. Realized gain on derivatives for the nine months ended September 30, 2020 was $18,814,068. There was no realized gain or loss on derivatives during the nine months ended September 30, 2019. This change is the result of significantly lower oil prices.
Unrealized loss on derivative instruments and hedging activities. The Company records all derivative instruments, other than those that meet the normal purchases and sales exception, on the balance sheet as either an asset or liability measured at fair value. Changes in fair value are recognized currently in earnings unless specific hedge accounting criteria are met. During the nine months ended September
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30, 2020, the change in fair value resulted in the recognition of a gain of $14,086,699 on derivative contracts as compared to a gain of $3,066,913 during the same period in 2019.
Net income (loss). For the nine months ended September 30, 2020, the Company had net loss of $93,157,551, as compared to net income of $24,469,857 for the nine months ended September 30, 2019. The largest contributor to this change is the ceiling test write down, though reduced revenues from lower production, lower received commodity prices and unrealized losses on derivative instruments had a significant impact as well.
Sales volumes and commodity prices received
The following table presents our sales volumes and received pricing information for the three and nine month periods ended September 30, 2020 and 2019:
For The Three Months
For The Nine Months
Ended September 30,
Ended September 30,
2020
2019
2020
2019
Oil volume (Bbls)
781,626
906,874
2,066,980
2,612,742
Natural gas volume (Mcf)
581,123
731,627
1,764,165
1,697,373
Total production (Boe)
878,480
1,028,812
2,361,008
2,895,638
Average sales price
Oil price (per Bbl)
$
38.80
$
54.59
$
38.40
$
54.03
Natural gas price (per Mcf)
1.96
1.14
1.30
1.35
Total (per Boe)
$
35.82
$
48.93
$
34.59
$
49.55
Capital Resources and Liquidity
As shown in the financial statements for the nine months ended September 30, 2020, the Company had cash on hand of $17,920,817, compared to $10,004,622 as of December 31, 2019. The Company had net cash provided by operating activities for the nine months ended September 30, 2020, of $44,903,306, compared to $62,588,212 for the same period of 2019. The other most significant cash inflows during the periods were proceeds from draws on our Credit Facility of $21,500,000 and $327,000,000, respectively in 2020 and 2019 and proceeds from oil and gas property divestiture of $4,500,000 in 2020 which were accounted for as a reduction of our full cost pool. The most significant cash outflows during the nine months ended September 30, 2020 and 2019 were capital expenditures in connection with the purchase and development of oil and gas properties of $34,775,770 and $385,266,163, respectively, and payments on our Credit Facility of $28,000,000.
Subsequent to September 30, 2020, the Company completed a public offering and concurrently completed a registered direct offering of common shares, pre-funded warrants and common warrants. In total, the company issued 13,075,800 shares, 16,728,500 pre-funded warrants and 29,804,300 common warrants. Gross proceeds received at closing were approximately $20.8 million and net proceeds are anticipated to be approximately $19.1MM.
Given the ongoing COVID-19 pandemic, challenging market conditions and recent market events, we continue to remain focused on maintaining a strong balance sheet and adequate liquidity. Over the near term, we plan to reduce, defer or cancel certain planned capital expenditures and reduce our overall cost structures commensurate with our expected level of activities. We believe that our cash on hand, cash flows from operations, cash flows from our hedges and availability under the Credit Facility will be sufficient to fund our operations and service our debt over at least the next 12 months.
The effects of the COVID-19 pandemic have resulted in a significant and swift reduction in international and U.S. economic activity. Furthermore, they have adversely affected the demand for oil and natural gas, and caused significant volatility and disruption of the financial markets. This period of extreme economic disruption, low oil prices and reduced demand has had, and is likely to continue to have, a material adverse impact on our business, results of operations, access to sources of liquidity and financial condition. In view of the uncertainty of the extent of the contraction in oil demand due to the COVID-19 pandemic combined with the weaker commodity price environment, we have turned our strategic focus to reducing costs and maintaining cash flows.
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Availability of Capital Resources under Credit Facility
On July 1, 2014, the Company entered into a Credit Agreement with SunTrust Bank, as lender, issuing bank and administrative agent for several banks and other financial institutions and lenders (the “Administrative Agent”), which was amended on June 14, 2018, May 18, 2016, July 24, 2015 and June 26, 2015. In April 2019, the Company amended and restated its Credit Facility with the Administrative Agent. In June 2020, the Company amended and restated its Credit Agreement with the Administrative Agent (as amended and restated, the “Credit Facility”). The amendment and restatement of the Credit Facility, among other things, decreased the borrowing base (the “Borrowing Base”) to $375 million, subject to periodic redeterminations, adjusted the interest rates and provided some relief on the total Leverage Ratio (as defined in the Credit Facility). The Credit Facility is secured by a first lien security interest on substantially all of the Company’s assets.
The Borrowing Base is subject to periodic redeterminations, mandatory reductions and further adjustments from time to time. The Borrowing Base is redetermined semi-annually on each May 1 and November 1. Subsequent to September 30, 2020, the bank group agreed to an extension of the scheduled borrowing base redetermination from November 2020 to December 2020. This was to allow the Company to properly reflect cost reductions and operational efficiencies in the reserve information provided. The Borrowing Base will be reduced in certain circumstances such as the sale or disposition of certain oil and gas properties of the Company and the cancellation of certain hedging positions.
The Credit Facility allows for Eurodollar Loans and Base Rate Loans (as respectively defined in the Credit Facility). The interest rate on each Eurodollar Loan will be the adjusted LIBOR for the applicable interest period plus a margin between 2.5% and 3.5% (depending on the then-current level of Borrowing Base usage). The annual interest rate on each Base Rate Loan is (a) the greatest of (i) the Administrative Agent’s prime lending rate, (ii) the Federal Funds Rate (as defined in the Credit Facility) plus 0.5% per annum, (iii) the adjusted LIBOR determined on a daily basis for an interest period of one month, plus 1.00% per annum and (iv) 0.00% per annum, plus (b) a margin between 1.5% and 2.5% (depending on the then-current level of Borrowing Base usage).
The Credit Facility contains certain covenants, which, among other things, require the maintenance of (i) a total Leverage Ratio (outstanding debt to adjusted earnings before interest, taxes, depreciation and amortization) of not more than 4.0 to 1.0 and (ii) a minimum ratio of Current Assets to Current Liabilities (as such terms are defined in the Credit Facility) of 1.0 to 1.0. As a part of the redetermination completed in June 2020, the amendment included an adjustment to the total Leverage Ratio to be not more than 4.75 to 1.0 as of the last day of the fiscal quarter ending September 30, 2020. The Credit Facility also contains other customary affirmative and negative covenants and events of default. As of September 30, 2020, $360,000,000 was outstanding on the Credit Facility. The Company was in compliance with all covenants contained in the Credit Facility as of September 30, 2020.
Derivative Financial Instruments and Hedging Activity
During April and November of 2019 and February and March of 2020, the Company entered into derivative contracts in the form of costless collars of WTI Crude Oil prices in order to protect the Company’s cash flow from price fluctuation and maintain its capital programs. “Costless collars” are the combination of two options, a put option (floor) and a call option (ceiling) with the options structured so that the premium paid for the put option will be offset by the premium received from selling the call option. The trades were for a total of 5,500 barrels of oil per day for the period of January 2020 through December 2020 and 4,500 barrels of oil per day for the period of January 2021 through December 2021.
During May 2020, the Company unwound the costless collars for June 2020 and July 2020, resulting in the receipt of a cash payment of $5,435,136. Concurrently, the Company entered into swap contracts at $33.24 for 5,500 barrels per day for June and July 2020, equal to the barrels for which the costless collars were unwound. Similar to costless collars, there is no cost to enter into the swap contracts.
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On swap contracts, there is no spread and payments will be made or received based on the difference between WTI and the swap contract price. The following table reflects the prices of those contracts:
Date entered into
Barrels per day
Put price
Call price
2020 costless collars, in place for August through December 2020
04/01/19
1,000
$
50.00
$
65.83
04/01/19
1,000
50.00
65.40
11/05/19
1,000
50.00
58.40
11/07/19
1,000
50.00
58.25
11/11/19
1,500
50.00
58.65
2021 costless collars, in place for January through December 2021
02/25/20
1,000
$
45.00
$
54.75
02/25/20
1,000
45.00
52.71
02/27/20
1,000
40.00
55.08
03/02/20
1,500
40.00
55.35
2020 Swap, in place for July 2020
Swap price
05/29/20
5,500
$
33.24
Derivative financial instruments are recorded at fair value and included as either assets or liabilities in the accompanying balance sheets. Any gains or losses resulting from changes in fair value of outstanding derivative financial instruments and from the settlement of derivative financial instruments are recognized in earnings and included as a component of other income (expense) in the accompanying statements of operations.
The use of derivative transactions involves the risk that the counterparties, which generally are financial institutions, will be unable to meet the financial terms of such transactions. At September 30, 2020, 100% of our volumes subject to derivative instruments are with lenders under our Credit Facility.
Capital Resources for Future Acquisition and Development Opportunities
We continuously evaluate potential acquisitions and development opportunities. To the extent possible, we intend to acquire producing properties and/or developed undrilled properties rather than exploratory properties. We do not intend to limit our evaluation to any one state. We presently have no intention to evaluate offshore properties or properties located outside of the United States.
The pursuit of and acquisition of additional oil and gas properties may require substantially greater capital than we currently have available, and obtaining additional capital would require that we enter into the sale of either short-term or long-term notes payable or the sale of our common stock. Furthermore, it may be necessary for us to retain outside consultants and others in our endeavors to locate desirable oil and gas properties.
The process of acquiring one or more additional oil and gas properties would impact our financial position and reduce our cash position. The types of costs that we may incur include travel costs relating to meeting with individuals instrumental to our acquisition of one or more oil and gas properties, the costs to retain one or more consultants specializing in the purchase of oil and gas properties, obtaining petroleum engineer reports relative to the oil and gas properties that we are investigating, legal fees associated with any such acquisitions including title reports, and accounting fees relative to obtaining historical information regarding such oil and gas properties. Even though we may incur such costs, there is no assurance that we will ultimately be able to consummate a transaction resulting in our acquisition of an oil and/or gas property.
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Effects of Inflation and Pricing
The oil and natural gas industry is very cyclical and the demand for goods and services of oil field companies, suppliers and others associated with the industry puts pressure on the economic stability and pricing structure within the industry. Typically, as prices for oil and natural gas increase, so do all associated costs. Material changes in prices impact the current revenue stream, estimates of future reserves, borrowing base calculations of bank loans and the value of properties in purchase and sale transactions. Material changes in prices can impact the value of oil and natural gas companies and their ability to raise capital, borrow money and retain personnel. We anticipate business costs will vary in accordance with commodity prices for oil and natural gas, and the associated increase or decrease in demand for services related to production and exploration.
Off Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements, and it is not anticipated that the Company will enter into any off-balance sheet arrangements.
Disclosures About Market Risks
Like other natural resource producers, the Company faces certain unique market risks associated with the exploration and production of oil and natural gas. The most salient risk factors are the volatile prices of oil and gas, operational risks, ability to integrate properties and businesses, and certain environmental concerns and obligations.
Oil and Gas Prices
The price we receive for our oil and natural gas will heavily influence our revenue, profitability, access to capital and future rate of growth. Oil and natural gas are commodities and, therefore, their prices are subject to wide fluctuations in response to relatively minor changes in supply and demand. The prices we receive for our production depend on numerous factors beyond our control. These factors include, without limitation, the following: worldwide and regional economic conditions impacting the global supply and demand for oil and natural gas; the price and quantity of imports of foreign oil and natural gas; the level of global oil and natural gas inventories; localized supply and demand fundamentals; the availability of refining capacity; price and availability of transportation and pipeline systems with adequate capacity; weather conditions, natural disasters and public health threats; governmental regulations; speculation as to the future price of oil and the speculative trading of oil and natural gas futures contracts; price and availability of competitors’ supplies of oil and natural gas; energy conservation and environmental measures; technological advances affecting energy consumption; the price and availability of alternative fuels and energy sources; and domestic and international drilling activity.
A substantial or extended decline in oil or natural gas prices may result in impairments of our proved oil and gas properties and may materially and adversely affect our future business, financial condition, cash flows, and results of operations.
Transportation of Oil and Natural Gas
Ring is presently committed to using the services of the existing gatherers in its present areas of production. This gives such gatherers certain short term relative monopolistic powers to set gathering and transportation costs. Obtaining the services of an alternative gathering company would require substantial additional costs since an alternative gatherer would be required to lay new pipeline and/or obtain new rights-of-way.
Competition in the Oil and Natural Gas Industry
We operate in a highly competitive environment for developing and acquiring properties, marketing oil and natural gas and securing equipment and trained personnel. As a relatively small oil and natural gas company, many large producers possess and employ financial, technical and personnel resources substantially greater than ours. Those companies may be able to develop and acquire more prospects and productive properties than our financial or personnel resources permit. It is also significant that more favorable prices can usually be negotiated for larger quantities of oil and/or gas product, such that Ring views itself as having a price disadvantage compared to larger producers.
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Retention of Key Personnel
We depend to a large extent on the services of our officers. These individuals have extensive experience in the energy industry, as well as expertise in evaluating and analyzing producing oil and natural gas properties and drilling prospects, maximizing production from oil and natural gas properties and developing and executing financing strategies. The loss of any of these individuals could have a material adverse effect on our operations and business prospects. Our success may be dependent on our ability to continue to hire, retain and utilize skilled executive and technical personnel.
Environmental and Regulatory Risks
Our business and operations are subject to and impacted by a wide array of federal, state, and local laws and regulations governing the exploration for and development, production, and marketing of oil and natural gas, the operation of oil and natural gas wells, taxation, and environmental and safety matters. Many laws and regulations require drilling permits and govern the spacing of wells, rates of production, water and waste use and disposal, prevention of waste hydraulic fracturing and other matters. From time to time, regulatory agencies have imposed price controls and limitations on production in order to conserve supplies of oil and natural gas. In addition, the production, handling, storage, transportation and disposal of oil and natural gas, byproducts thereof and other substances and materials produced or used in connection with oil and natural gas operations are subject to regulation under federal, state and local laws and regulations.
Compliance with these regulations may constitute a significant cost and effort for Ring. To date, no specific accounting for environmental compliance has been maintained or projected by Ring. Ring does not presently know of any environmental demands, claims, or adverse actions, litigation or administrative proceedings in which it or the acquired properties are involved or subject to or arising out of its predecessor operations.
In the event of a violation of environmental regulations, these environmental regulatory agencies have a broad range of alternative or cumulative remedies including: ordering a cleanup of any spills or waste material and restoration of the soil or water to conditions existing prior to the environmental violation; fines; or enjoining further drilling, completion or production activities.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.