Ring Energy: Rising Interest Rates Shouldn’t Be A Major Issue

Ring Energy (NYSE:REI) may need to deal with higher interest costs in the future, as it has variable interest rate credit facility debt. The effect of a 1% change in the credit facility interest rate on Ring’s cash flow is less than the effect from a $1 change in oil prices though. So at current strip of approximately $94 WTI oil in 2023, Ring is projected to generate around $83 million in positive cash flow next year.

Ring is relatively indebted for an upstream company (compared to its peers), so it will need to continue to focus on reducing its debt for the time being. A scenario with $90s oil in 2023 would help it considerably, although it now has a decent amount of room under its credit facility to weather a significant downturn in oil prices.

Potential 2022 Outlook At Current Strip

At current strip of roughly $103 to $104 WTI oil for 2022, Ring Energy is projected to generate $328 million in oil and gas revenue before hedges. Ring’s 2022 hedges have around negative $72 million in estimated value.

	Barrels/Mcf	$ Per Barrel/Mcf (Realized)	$ Million
Oil	2,947,375	$102.00	$301
Natural Gas	2,682,750	$7.50	$20
Hedge Value			-$72
Total Revenue			$249

This results in a projection that Ring can generate $30 million in positive cash flow in 2022, allowing it to reduce its net debt to $258 million by the end of the year. Ring’s net debt would be approximately 1.5x hedged 2022 EBITDAX or 1.1x unhedged 2022 EBITDAX at the end of the year.

	$ Million
Production Expenses	$45
Production and Ad Valorem Taxes	$17
Cash G&A	$14
Capital Expenditures	$130
Cash Interest Expense	$13
Total Cash Expenditures	$219

Potential 2023 Outlook At Current Strip

If Ring can then average 9,900 BOEPD (87% oil) in production during 2023 with a similar $130 million capex budget, it would be able to generate $308 million in revenues at current 2023 strip of roughly $94 WTI oil. This would be 6% to 7% year-over-year production growth. At last report Ring was unhedged for 2023.

	Barrels/Mcf	$ Per Barrel/Mcf (Realized)	$ Million
Oil	3,143,745	$92.50	$291
Natural Gas	2,818,530	$6.00	$17
Total Revenue			$308

This would allow Ring to generate around $83 million in positive cash flow in 2023. I’ve also assumed that Ring’s credit facility interest rate goes up a few percentage points from its last reported level of 4.3%. A 1% increase in interest rates has the same effect on Ring’s unhedged cash flow as a bit under $1 decrease in oil prices.

	$ Million
Production Expenses	$48
Production and Ad Valorem Taxes	$17
Cash G&A	$14
Capital Expenditures	$130
Cash Interest Expense	$16
Total Cash Expenditures	$225

At current strip prices Ring would be projected to end 2023 with $175 million in net debt. This would be 0.8x its 2023 EBITDAX, which is a reasonable level.

Other Notes

Ring currently has a fairly high level of debt for an E&P company these days, since there has been a lot of focus on deleveraging within the industry. A common target is to get leverage down to 1.0x or lower, which Ring appears capable of achieving in 2023.

Ring is somewhat vulnerable if oil prices go down significantly. At $65 WTI oil in 2023, Ring could have a small amount of cash burn if it doesn’t trim its capex budget. Ring’s leverage would also end up around 1.9x in that $65 WTI oil scenario, although it should still have plenty of room under its credit facility since that was previously reaffirmed at $350 million at a time (June 2021) when oil prices were around $70.

Conclusion

Ring Energy may face some increased interest costs due to rising interest rates since all its debt is variable interest credit facility debt. This should have a relatively limited impact on its cash flow though, as a 1% change in interest rates would have a bit less of an impact on Ring’s cash flow than a $1 change in oil prices.

I noted before that Ring (at around $3.50 per share) appeared appropriately priced for long-term $70 WTI oil. Stronger oil prices in 2023 may give Ring a bit of upside by helping it deleverage quicker.