Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
The Company is subject to market risk exposure related to changes in interest rates on its indebtedness under its Credit Facility, which bears variable interest based upon a prime rate and is therefore susceptible to interest rate fluctuations. Changes in interest rates affect the interest earned on the Company’s cash and cash equivalents and the interest rate paid on borrowings under the Credit Facility. As of September 30, 2020, the Company had $360 million outstanding borrowings under the Credit Facility. Our weighted average interest rate on borrowings under the Credit Facility was 4.5%. An increase or decrease of 1% in the interest rate would have a corresponding decrease or increase in our annualized interest expense of approximately $3.6 million based on the aggregate of $360 million outstanding under the Credit Facility as of September 30, 2020.
Currently, the Company does not use interest rate derivative instruments to manage exposure to interest rate changes.
Commodity Price Risk
Our major market risk exposure is in the pricing applicable to our oil and natural gas production. Market risk refers to the risk of loss from adverse changes in oil and natural gas prices. Realized pricing is primarily driven by the prevailing domestic price for crude oil and spot prices applicable to the region in which we produce natural gas. Historically, prices received for oil and natural gas production have been volatile and unpredictable. We expect pricing volatility to continue.
The prices we receive depend on many factors outside of our control. Oil prices we received during the nine month period ended September 30, 2020, ranged from a low of $13.23 per barrel to a high of $57.38 per barrel. Natural gas prices we received during the same period ranged from a low of negative $0.93 per MCF to a high of $2.60 per MCF. A significant decline in the prices of oil or natural gas could have a material adverse effect on our financial condition and results of operations. In order to reduce commodity price uncertainty and increase cash flow predictability relating to the marketing of our crude oil and natural gas, we may enter into crude oil and natural gas price hedging arrangements with respect to a portion of our expected production.
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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. 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
The Company’s revenues, profitability and future growth depend substantially on prevailing prices for oil and natural gas. Prices also affect the amount of cash flow available for capital expenditures and Ring’s ability to borrow and raise additional capital. The amount the Company can borrow under its Credit Facility is subject to periodic redetermination based in part on changing expectations of future prices. Lower prices may also reduce the amount of oil and natural gas that the Company can economically produce. Ring currently sells all of its oil and natural gas production under price sensitive or market price contracts.
Customer Credit Risk
Our principal exposures to credit risk is through receivables from the sale of our oil and natural gas production (approximately $12.5 million at September 30, 2020) and through receivables from our joint interest partners (approximately $0.7 million at September 30, 2020). We are subject to credit risk due to the concentration of our oil and natural gas receivables with our most significant customers. We do not require our customers to post collateral, and the inability of our significant customers to meet their obligations to us or their insolvency or liquidation may adversely affect our financial results. For the nine months ended September 30, 2020, sales to two customers, Phillips 66 (“Phillips”) and Occidental Energy Marketing (“Oxy”) represented 64% and 14% of oil and gas revenues, respectively. As of September 30, 2020, Phillips and Oxy represented 85% and 0% of our accounts receivable, respectively. Effective with May 2020 production, the volumes previously purchased by Oxy are now purchased by Phillips and so the concentration of our receivables from Phillips is likely to increase. However, due to availability of other purchasers, we do not believe the loss of any single oil or natural gas customer would have a material adverse effect on our results of operations.
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Currency Exchange Rate Risk
Foreign sales accounted for none of the Company’s sales; further, the Company accepts payment for its commodity sales only in U.S. dollars. Ring is therefore not exposed to foreign currency exchange rate risk on these sales.
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.