Ring Energy: A Look At Its Outlook For 2023 (NYSE:REI)

Ring Energy (NYSE:REI) reduced its Q4 2022 capex budget (while maintaining production expectations) and provided its initial outlook for 2023. At current (high-$70s WTI oil) strip prices I estimate that Ring could generate $127 million in positive cash flow in 2023, allowing it to reduce its net debt to approximately 1.0x EBITDAX by the end of 2023. Ring benefits from its 2022 hedges (including a substantial amount of sub-$50 hedges) rolling off, as well as the additional production from its Stronghold acquisition.

Ring’s 2023 outlook is largely in-line with my earlier expectations. I had budgeted slightly higher capex (basically a bit above the high end of its outlook for 2023 capex) for Ring to average 19,000 BOEPD in 2023 though, so that is a minor positive in my model.

Debt Situation

Ring had $268 million in net debt at the end of Q2 2022. This increased to approximately $471 million proforma for the closing of the Stronghold acquisition.

With Ring’s reduced capex budget for Q4 2022, it may now be able to reduce its net debt to approximately $440 million by the end of 2022. As discussed more below, Ring is expected to generate $127 million in positive cash flow at current strip, which would result in it having $313 million in net debt at the end of 2023. This would be around 1.0x EBITDAX.

Potential 2023 Outlook At Current Strip

Ring Energy has talked about maintaining to slightly growing production from Q4 2022 levels in 2023. This may result in it averaging approximately 19,000 BOEPD in production during next year, which is at the high end of its guidance for Q4 2022 production.

At current strip (including approximately $78 WTI oil) for 2023, Ring is projected to generate $440 million in oil and gas revenues before hedges. Ring’s 2023 hedges have around negative $3 million in value, with $12 million in deferred put premiums slightly more than offsetting the $9 million value of the puts themselves.

Ring provided Q4 2022 guidance based on three-stream reporting (breaking out NGLs separately), so I am now modeling its production that way.

	Barrels/Mcf	$ Per Barrel/Mcf (Realized)	$ Million
Oil	4,854,500	$77.00	$374
NGLs	901,550	$36.00	$32
Natural Gas	7,073,700	$4.80	$34
Hedge Value			-$3
Total Revenue			$437

Click to enlarge

Ring is budgeting $150 million to $175 million for 2023 capital expenditures currently. I’ve also assumed that production expenses average around $11 per BOE in 2023.

	$ Million
Production Expenses	$76
Production and Ad Valorem Taxes	$26
Cash G&A	$20
Capital Expenditures	$163
Cash Interest Expense	$28
Total Cash Expenditures	$310

Click to enlarge

This results in $127 million in projected positive cash flow for Ring in 2023 at current strip of high-$70s WTI oil.

Corporate Breakeven Point

Ring’s unhedged breakeven point for 2023 appears to be roughly $50 WTI oil. That’s the oil price where it could attain approximately neutral cash flow while maintaining production at Q4 2022 levels. I’ve also assumed there would be some cost deflation in that scenario, particularly in the later part of 2023.

With its 2023 hedges, Ring would have around $20 million in positive cash flow in a maintenance capex scenario and $50 WTI oil in 2023.

Conclusion

Ring may be able to make a fair amount of progress reducing its debt in 2023 as its hedges should prove to have much less of a negative impact next year. This would allow Ring to reduce its net debt to around 1.0x EBITDAX by the end of 2023 at current strip prices.

Assuming that Ring can reduce its debt as projected in 2023, I’d estimate that it is worth approximately $4 per share in a longer-term (after 2023) $70 WTI oil scenario.

Ring is mostly unhedged for 2023 at the moment, so its cash flow would decrease largely in tandem with oil prices. At $50 WTI oil, it could probably still eke out $20 million in positive cash flow in a maintenance capex scenario for 2023 though.