All-Cash Acquisition Of Founders CBP Assets And Debt Reduction Will Strengthen Future Operations

Key Takeaways

• Acquisition of Founders assets and operational improvements enhance cash flow, reduce costs, and expedite debt paydown, boosting earnings.
  
• Focused debt reduction and strategic financial management improve balance sheet and net margins by lowering interest expenses and financial risks.
  
• Decreased commodity prices, rising infrastructure costs, and debt focus may impact revenues, margins, and future growth amidst volatile oil prices and risky exploratory drilling.

Catalysts

An independent oil and natural gas company, engages in the acquisition, exploration, development, and production of oil and natural gas properties.

• The all-cash acquisition of Founders Central Basin Platform assets, similar to the prior Stronghold CBP acquisition, has expanded the core operating area, increased low-risk, high rate of return drilling locations, improved capital allocation flexibility, and reduced operating costs, which can lead to increased adjusted free cash flow and faster debt paydown. This is likely to impact earnings positively.
  
• The company's focus on debt reduction is expected to improve the balance sheet significantly. Year-to-date, Ring Energy has reduced its debt by $33 million, and $63 million since the Founders acquisition. Securing a better debt position could improve net margins by reducing interest expenses.
  
• The company's operational improvements and the sale of non-core assets, which contributed to paying down $15 million in debt, indicate strategic financial management, potentially improving its leverage ratio and reducing financial risks. This could positively impact net margins and earnings.
  
• The ongoing drilling program, with a focus on expanding inventory organically and capturing cost synergies, aims to maintain or slightly grow oil production. Successful outcomes from new producing zones could boost revenue.
  
• The anticipated start of the Matterhorn Express Pipeline in West Texas is expected to alleviate pricing pressure and enhance natural gas sale prices, which have been under pressure due to pricing constraints. Improvement in realized pricing could boost revenue and enhance cash flow.

Ring Energy Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Ring Energy's revenue will grow by 7.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 30.8% today to 29.5% in 3 years time.
• Analysts expect earnings to reach $133.3 million (and earnings per share of $0.61) by about February 2028, up from $112.7 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 6.0x on those 2028 earnings, up from 2.2x today. This future PE is lower than the current PE for the US Oil and Gas industry at 11.5x.
• Analysts expect the number of shares outstanding to grow by 0.13% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.41%, as per the Simply Wall St company report.

Ring Energy Future Earnings Per Share Growth

Risks

• The recent decrease in realized commodity prices, with a 7% reduction in oil and 12% in BOE sales pricing, resulted in a decrease in quarterly revenue, which could impact net margins and earnings if the trend continues.
  
• The company faces infrastructure costs related to water supply and disposal for new drilling projects, which could increase capital expenditures and impact net cash flow and margins.
  
• There is a heavy focus on paying down debt, which could limit capital available for growth opportunities and affect long-term revenue potential and earnings.
  
• The volatile oil price environment may require a reduction in capital spending to maintain production levels, potentially impacting future revenue growth and market competitiveness.
  
• The shift to more exploratory drilling to unlock new producing zones carries higher risks, which could impact earnings and the success of future revenue streams if these new endeavors don't yield anticipated results.

Valuation

• The analysts have a consensus price target of $3.0 for Ring Energy based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $452.1 million, earnings will come to $133.3 million, and it would be trading on a PE ratio of 6.0x, assuming you use a discount rate of 10.4%.
  
• Given the current share price of $1.27, the analyst price target of $3.0 is 57.7% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.