Ring Energy, Inc. ($REI)

Good day, and welcome to Ring Energy's First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Al Petrie, Investor Relations. 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 first quarter of 2026. We'll then turn the call over to Sundip Johl, Ring Energy's Executive VP and 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. Also joining us on the call today are James Parr, Executive VP and Chief Exploration Officer; Alex Dyes, Executive VP and Chief Operations Officer; and Shawn Young, Senior VP of Operations. [Operator Instructions]. 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 those 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 one 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'd now like to turn the call over to Paul McKinney, our Chairman and CEO.

Good morning, everyone, and thank you for joining us. As many of you may know, Ring Energy stock has performed well year-to-date, and we believe, as do others, that Ring may qualify for inclusion in the Russell 2000 Index this year. We understand the list of companies that will be joining the index will be published later this month and become effective after market close on June 26, 2026, and we look forward to this. Because we know others are anticipating our inclusion as well and may be joining us for the first time, we intend to begin this earnings call a little differently. We want to take the opportunity to introduce ourselves and point out where we operate, the distinguishing aspects of our asset base the strategy that we are pursuing that differentiates us from our peers and how the current macro and geopolitical environment impact our business. So before we get into the quarterly results, we want to take a step back and introduce the company. For those of you who are existing investors and know our story, I thank you in advance for your patience. Hopefully, you too will learn something new since we are a dynamic and growing company where things change at a fast pace. To help me with this endeavor are James Parr, our Chief Exploration Officer; and Alex Dyes, our Chief Operations Officer, each brings a different perspective to the Ring story. James on the asset base and technical opportunity and Alex on the operations and execution. Afterwards, Sunu and I will cover the first quarter results and expand on our financial strategy, capital allocation and investor perspectives. So on a high level, Ring is an oil-weighted upstream energy company focused on the Texas portion of the Permian Basin. We are not built around the high decline shale model that many investors associate with our basin. Our business is built on commercializing historically overlooked once believed to be uneconomic conventional assets by applying recently developed technologies and perspectives with an exploration mindset. Distinguishing aspects of our core assets are long-life wells with shallow base declines, highly oil-weighted with high operating margins and netback interest and undeveloped opportunities with relatively low drilling and completion costs with significant returns and low breakeven costs. Our existing 10-year-plus inventory of conventional assets in the Central Basin Platform and the Northwest Shelf include a deep set of undeveloped wells, recompletion workover and optimization opportunities capable of sustainable year-over-year cash flow generation. Our asset profile is important. It gives us a durable production base, a lower maintenance capital requirement and the ability to generate free cash flow through commodity cycles. Our strategy is not to chase production growth for its own sake. Our strategy is to protect the balance sheet, allocate capital to the highest return opportunities in the portfolio and convert our resource base into sustainable cash flow over time. This is why we believe Ring is particularly well positioned in the current environment. With that context and before we get into the quarterly results, we want to ground everyone listening with us today with the virtues of our asset base. To understand Ring, you must understand where we operate and why those assets are unique. So with that, let me turn the call over to James Parr to walk us through our asset base, why the Central Basin Platform and Northwest Shelf are so important to Ring and our shareholders and how your Ring Energy team continues to unlock value across the portfolio. James?

Thanks, Paul. As you stated, to understand Ring, you really have to understand the asset base. Our core positions in the Central Basin Platform and the Northwest Shelf are long-lived, oil-weighted conventional assets. And the important thing to remember is our existing operating footprint has significant remaining potential. These two well established areas are literally at the heart of the Permian Basin petroleum system. The focal point of oil migration from the adjacent Midland and Delaware Basins into multiple stacked conventional reservoirs that the original targets of the Permian. In many cases, these reservoirs were initially developed decades ago using older technology, limited subsurface data and less advanced completion and production techniques, which resulted in low recovery factors, particularly in deeper and lower quality conventional reservoirs, leaving much of the original oil in place behind. Since then, the industry has overlooked these two areas for the past several years where modern technology has developed to commercially exploit low permeability shale reservoirs. Utilizing modern technologies and methods in these prolific conventional areas has created an attractive opportunity set for Rain that is different from the high-intensity shale plays, which have higher decline rates due to their intrinsically poorer reservoir properties. As a result, we have a promising portfolio of stacked, lower decline oil-bearing conventional reservoirs with multiple development targets in a wide range of project types from horizontal and vertical drilling to recompletions, workovers and well reactivations. That diversity gives us flexibility to allocate capital where we see the best risk-adjusted returns at any point in the cycle. Our technical expertise is understanding the rocks, pores and fluids, understanding the production history and applying modern subsurface and engineering techniques to improve recovery and reduce uncertainty. We're not trying to reinvent these fields. We're trying to optimize them. As a result, we see a multiyear inventory of attractive commercial opportunities across our acreage that will support a stable production, shallow decline rates and durable cash flow. That asset base is the foundation of Ring's strategy and underpins what we do operationally and financially. With that, I'll turn it over to Alex to talk about how we're executing against that opportunity set in the field. Alex?

Thanks, James. From an operations standpoint, our focus is simple: execute safely and consistently, keep driving structural cost reductions and convert the opportunity set James covered into reliable and sustainable results. Last quarter, I walked through the strategy we've been executing, accretive complementary acquisitions, disciplined integration, organic growth and a cost structure that keeps getting more durable. In Q1 2026, we delivered proof of these points and build momentum for the rest of 2026. First, costs. Q1 LOE was $18.1 million or $10.41 per BOE, below the low end of guidance for the fourth quarter in a row. This is more than $1.7 million per month lower than pro forma Q1 '25 and over $2 per BOE better. This highlights our operating team's continued focus on cost reduction and commitment to adding value and margin expansion. Second, execution. We drilled five horizontal wells and one vertical well with horizontals representing over 80% of the Q1 program. In the Northwest Shelf, we improved our drilling efficiency by reducing spud to TD times by 15% versus the 2025 average, with further efficiency gains expected as we shift to longer laterals and co-development opportunities going forward. Third, well performance results. Recent Crane County horizontal completions continue to outperform expectations. After successfully testing multiple horizontal benches in the historically vertical developed area, we see a clear path to improving returns through longer laterals and selective multi-bench co-development. In addition, in 2025, over 100 horizontal wells were drilled by offset operators within just a couple of miles of our core acreage, providing further evidence of the future potential we see as described by James earlier. To support that plan, we accelerated targeted infrastructure in Q1, just over $5 million or about 15% of our total capital in the quarter, included in that was work on our saltwater disposal wells, frac water infrastructure and production facilities. These investments expand our flexibility and provide needed infrastructure to unlock longer laterals and multi-bench horizontals later this year and beyond. Our approach is relentless continuous improvement, drill faster and more efficiently, a structurally lower cost base and maintain a predictable low-decline foundation. The investor takeaway is longer laterals, multi-bench co-development, disciplined execution will keep driving capital efficiency and translate into more durable free cash flow across commodity cycles. With that, I'll turn it over to Paul McKinney to walk through the financial results.

Thank you, Alex. So now let's turn our attention to the quarter. As I said in our earnings release, we successfully delivered on our sales guidance, but the big story for the quarter is that through the continued efforts of our office and field operating teams, we handsomely beat LOE and improved the capital efficiency of our drilling program, way to go team. The management team and Board of Directors thank you once again for your hard work and perseverance, safely keeping our operating costs low and our production up. Another point to make is shortly after the Iranian crisis broke out, we began the process of identifying investment opportunities to accelerate because we believe the cost and competition associated with certain key investments are likely to increase very soon. This is because we believe the market has yet to acknowledge the long-standing impacts of the supply side disruptions we're experiencing in the Middle East. And that, in our view, oil prices are likely to be higher for longer than what the market is currently implying. We're not alone in this belief. With higher oil prices comes higher costs for goods and services and increased competition. The investments we are accelerating are focused on increasing the capital efficiency of our long-term capital program and help ensure optionality and the potential to meaningfully expand our drilling inventory. The shift in capital spending caused us to temporarily pause debt reduction this quarter, and we are steadfast in our belief that these accelerated investments are in the best interest of our stockholders. We intend to resume debt reduction in the following quarters of the year and are likely to revise production guidance once the impact of these and other potential capital changes are evaluated. Regarding our operations, our oil sales were 12,276 barrels of oil per day, and our total sales were 19,351 barrels of oil equivalent per day, both essentially at the midpoint of guidance despite the challenges we faced with the winter storm and the sale of approximately 200 barrels of oil equivalent per day of nonoperated production. Production from our recently acquired Lime Rock assets as well as the new wells drilled so far this year continue to meet or perform better than expected. We deployed $34.5 million in capital spending during this quarter, which is slightly above the high end of our guidance range. As we shared earlier, the capital spending was focused on accelerating certain key projects in addition to drilling and completing the wells planned. Ring drilled and completed six wells during the first quarter and completed one DUC drilled previously for a total of seven completions. Five of the new wells were 1-mile horizontal wells drilled in the Northwest Shelf with an average working interest of 91%. One vertical well was drilled and completed in Crane County and the DUCs also in Crane County have 100% working interest. At this point, I'd like to turn the call over to our Executive Vice President and Chief Financial Officer, Sundip Johl. He will provide insight and details of our first quarter numbers and financial position. Afterwards, I'll return to share more about our priorities and outlook. for the future. Sunu?

Thanks, Paul. In the interest of time, I'll focus my comments on the key performance drivers and notable financial items from the quarter rather than walking line by line through the income statement. Overall, first quarter results were in line with guidance and demonstrate the resilience of Ring's operating model in a quarter marked by significant weakness in natural gas and NGL pricing and oil price strength that emerged late in the quarter. From a pricing standpoint, the quarter was very much a tale of two parts. The year began in a weaker pricing environment, and we positioned the business accordingly. As the quarter progressed, particularly in March, oil prices strengthened meaningfully due to macro and geopolitical developments. Given where prices were for much of the quarter, our first quarter results largely reflect that earlier environment. As we move into the second quarter, our exposure to commodity pricing increases materially as our hedges roll off. Assuming current oil price levels persist, this creates a very different earnings and cash flow profile going forward than what is reflected in our Q1 results. Against that backdrop, overall realized pricing improved quarter-over-quarter to $42.30 per BOE for the first quarter, driven primarily by higher oil realizations of $68.97 per barrel. This improvement was partially offset by continued weakness in Permian natural gas and NGL markets, where processing and transportation fees resulted in a negative realized gas price of $2.54 per Mcf. On the cost side, lease operating expenses averaged $10.41 per BOE, below the low end of our guidance for the fourth consecutive quarter. These results reflect continued progress on cost control initiatives and operational efficiencies, and we view these reductions as structural improvements. Reported net income for the quarter was impacted by two noncash items. First, we recorded a $77 million unrealized derivative loss driven primarily by changes in the forward oil curve during the quarter. On a cash basis, hedge settlements were relatively modest with oil hedges settling at a loss of approximately $6 million, partially offset by $0.8 million of gains on natural gas hedges. Second, we recorded a $162.1 million noncash ceiling test impairment. Under the full cost accounting methodology, because this test relies on a trailing 12-month average of the first day of the month SEC prices, it can diverge meaningfully from current market conditions, particularly when commodity prices move sharply late in the quarter as they did this quarter. Most importantly, this impairment does not reflect the underlying performance, margin structure or cash-generating ability of our assets today. If current pricing levels persist, we would expect the trailing average price deck used in the ceiling test to increase meaningfully going forward, which would substantially reduce the risk of further write-downs. Excluding these items, adjusted net income was $7.4 million and adjusted EBITDA totaled $38.3 million. Given the timing of the oil price recovery and the level of hedge protection in place during the quarter, these results are more reflective of the pricing environment earlier in the period, with the earnings impact of higher oil prices expected to become more apparent as we move into the second quarter. Capital allocation remained disciplined during the quarter. We invested $34.5 million of capital, slightly above the high end of guidance. And as both Paul and Alex mentioned earlier, we accelerated certain key investments we believe are subject to price increases and increased competition. These investments were largely directed toward facility and infrastructure projects and investments designed to secure optionality and the potential to increase our long-term drilling inventory. We believe these investments are in the best interest of our stockholders. We're also proud to report our 26th consecutive quarter of positive free cash flow. Now turning to the balance sheet. We exited the quarter with $160 million of liquidity under our credit facility. During the quarter, we intentionally paused debt paydown with borrowings increasing by approximately $6 million. Leverage ended the quarter at roughly 2.4x, and we remained in full compliance with all bank covenants with no near-term maturities, the balance sheet is well positioned to support continued deleveraging. Our objective remains to reduce leverage to approximately 1.25x as cash flows strengthen. On hedging, our portfolio is intentionally structured to balance risk with upside participation. While we have 72% of oil volumes hedged at an average ceiling price of $73.27 for the remainder of 2026, a meaningful portion of production remains unhedged and fully levered to current oil prices. Our natural gas hedges at an average floor price of $3.78 per Mcf cover 73% of expected volumes and are designed to stabilize cash flow. In summary, while reported results were impacted by noncash accounting items, the underlying fundamentals of the business remain strong, and we are reaffirming guidance for the next three quarters as disclosed in the press release. We encourage you to check out our investor presentation on our website and quarterly financials for additional details. And back to you, Paul.

Thanks, Sunu. As you've heard from James, Alex and Sunu, Ring's strategy is built around a clear set of priorities, long-life oil-weighted assets, disciplined operational execution, free cash flow generation and balance sheet flexibility. That framework, along with our ability to remain nimble and respond to market conditions is important in any commodity environment and especially in a period of elevated volatility like we're experiencing today. We believe we have built a company that can adapt and thrive through cycles and capitalize on opportunities as they emerge with a focus on creating long-term value for our shareholders. In 2026, the oil market has moved faster than sentiment. We entered the year with the market broadly focused on oversupply risk and the potential for prices to remain under pressure. Our response was disciplined. We protected the business, used hedges to support our development program and positioned Ring to continue executing in a low price environment, including scenarios below $60 WTI. Since then, the macro backdrop has evolved with geopolitical developments increasing focus on supply reliability, spare capacity and the security of physical barrels. We believe that dynamic is slowly being reflected in the forward curve and reinforces our view that the market is placing greater value on dependable low-decline barrels. We chose to accelerate certain key capital investments to get ahead of rising costs and competition. The benefit to shareholders is straightforward, advancing work that is expected to improve capital efficiencies and lead to stronger organic growth that is not dependent on future A&D. We are using the flexibility of our asset base to improve the durability and timing of value creation without compromising capital discipline. We look forward to the results of our capital program later this year and early next that we firmly believe will lead to increased capital efficiency and organic production growth, especially as it pertains to 2027 and beyond. And with that, we'll open up the call for questions. Operator?

[Operator Instructions] The first question today comes from Poe Fratt with Alliance Global Partners.

Yes. Would you expand on the investments you made in the first quarter and just confirm that the number was about $5 million as far as the impact on the budget?

Yes, I can do that, and I'll get a couple of other people that might have a few more details than I do. There are several things that occurred through the -- during the quarter. that led to these additional investments. We've talked about the infrastructure investments. One of the big things that we're doing right now in terms of significantly having a big impact on our ability to increase the capital efficiency of our future wells is really in providing water for our frac jobs. And so we've invested quite a bit of money, and we've accelerated this so that we can position our drilling program so that we can drill these longer laterals that require much, much larger volumes of water. And I think the best expert to turn this thing over to would be Alex and then Shawn, would you guys like to jump in on that?

Yes. I think the fundamental shift and thing we need to think about is that we're actually going from vertical, a lot of these fields that we're taking from vertical to horizontal. And so those are the investments we have to build in like saltwater disposal wells, we got to clean those out. We need to build infrastructure to be able to supply water for the bigger fracs. And then two, we've got to build the facilities. And so those are the things that we went into the $5 million. And so that's the transition that we're going from vertical to horizontal, and we're trying to also drill longer horizontal wells. With that, I'd like to hand it over to Shawn where he can give you a little bit more detail. Go ahead Shawn.

Yes. So as both Paul and Alex have mentioned, we're really focusing on trying to get these assets set up for a horizontal development program. As I mentioned, I mean, all of our development up to this point has been more or less vertical development in these areas. And so there's a significant amount of money that has to be spent to get the infrastructure for supporting the completions, but also the production facilities are also needed to be upgraded and expanded. So that's where the majority of that.

That's right. But in addition to that, we also had the first five wells we drilled this year in Yoakum County, we were able to acquire one of our working interest positions in those five wells. And when you -- not only do we purchase their working interest, but we also had to cover for their capital portion. So that was about a little over 30%, 30 -- almost 35% of those five wells. So we took on 35% more capital plus we had to buy them out. And then when you add all these things together, actually exceeds the amount of money that we had to borrow. And so with these accelerated investments, first of all, the five wells that we drilled in Yoakum County, we're very happy with, and we think we have a very good deal there. The investments that we're making in our infrastructure for providing water for our frac jobs is going to pay out dividends as we transition. And I know it's kind of a painful transition, and many of our shareholders don't have the opportunity to really understand that yet because we're in the early phases of this, and we cannot wait to come out to start sharing some of the results of what we're doing. But that's going to be borne out here later this year and early into next year when the full benefit of all this is going to occur. But this is just something that we had to do. We know that these investments are in the best interest of our shareholders. And so -- and the bottom line is because we accelerated some of these investments this quarter, we're still going to pay down the same amount of debt this year that we've been saying we're going to pay down. It's just going to come out in a different profile. We're going to pay down a lot more debt as we exit this year than we are at the beginning of the year because of these accelerated investments. And so some of these accelerated investments are spilling over into the second quarter. And so that's just going to be the reality of the way it is. And I know that we have a lot of shareholders that I have an extreme amount of respect for that really want to focus on debt reduction. And we are still focused on debt reduction. But the opportunity before us in this first half of the year to prepare ourselves for what we believe is going to be a sustainably higher price environment than what we were in before the Iranian conflict occurred. And it's just -- we're confident this is the right thing for our shareholders, and we're standing by it. And the shareholders will realize a real benefit of this as we exit this year. There's no doubt in my mind. Does that answer your question, Poe?

That did. That was very thorough. And then could you, Paul, just talk about the timing of the wells that you completed in the first quarter were those all online for, say, a month of the quarter? Or I mean, I'm just trying to figure out the cadence of production, what kind of benefit we should see from those wells? Have we already seen it? Or should we see it more in the second quarter?

Yes. You'll have the full impact in the second quarter of the first quarter wells drilled for sure because we started out at the beginning of the year with a drilling rig up there in Yoakum County and we drilled those five wells. Then we went south and drilled a vertical well. But when you look at scheduling the fracs and all that kind of stuff, they were all coming on in mid-February and into March. And so we haven't seen the full impact. This first quarter really, when you begin January 1, you got to drill them first, you got to frac them and it's just a delay. So -- but yes, the full impact will be in the second quarter. And it's kind of the consequence of a lumpy phase drilling program as you get surge into production when the wells come on, but there is just a typical natural delay. I don't know if there's anything more you want to say about that, Alex.

Yes. I'd like to add one more thing. And always this happens is that we lay down the rig towards the end of the year, so at the year-end '25. So there's always a little bit of a lag in the beginning of a new year. So by the time we pick up the rig, get the wells drilled, complete them and then they slowly start cleaning up and ramping up. So we start -- as typical year-over-year, you start really seeing the benefit in the second and third quarter.

[Operator Instructions] At this point, we have no more questions. I would like to turn the conference back over to Paul McKinney for any closing remarks.

Thank you, operator. And on behalf of the entire team and the Board of Directors, I want to once again thank everyone for listening and participating in today's call. We are pleased to have posted solid operational and financial results for the first quarter of 2026, and our outlook for the remainder of the year remains very, very strong. We will continue to keep everyone appraised of our progress, and thank you again for your interest in Ring Energy. Have a great day and a great weekend.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.