Ring Energy: an RBL Case Study

“Annndd it's gone” - the South Park Bank teller


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BACKGROUND.

Today’s newsletter is a one-off. A more comprehensive write-up (much too large for email) is saved here; & the backup files are saved here (& a there’s pod for Unhedged users) -

  • Recently, we’d had couple non-E&P friends in bank risk departments finding themselves looking at RBLs - for the 1st time - specifically asking questions about reserves

  • A Sunday Twitter discussion spurred us to make a case study – we’d previously analyzed the subject company (Ring) & had the software / data to do a quick turn-around on the wells


PRODUCTION FORECASTS.

In 2019, Ring Energy (a US E&P) acquired Northwest Shelf assets from Wishbone, roughly doubling its proved reserves & production.

What we care about - today - is:

  • How Ring financed that transaction; &

  • The value of the underlying assets securing the loan

The $291M purchase price was funded with $264M in cash provided by a reserve based lending facility (RBL).

A couple years back, we’d looked at Ring - from the perspective of an equity investor:

  • On it’s surface, it had a nice coat of paint

  • But under the hood, it was ugly

A recent conversation dug up some memories:

With Ring, there were 2x issues (that we were aware of):

  • Historical public data submitted to state regulators did not empirically support the company’s production forecast; &

  • The inputs from their investor presentations / PRs could not mathematically by used as the inputs in a DCA formula and produces their claimed outputs (prod forecasts)

The company was forecasting something like this:

We ran a production forecast based on 2x third-party data providers (in particular, thanks to Enno at ShaleProfile for the data & visualizations), covering all of their 200 horizontal wells.

We created an individual well forecast for each horizontal well - the outcome was clear.

Out of 192 horizontal wells analyzed:

  • Average IP30 ranging from 220boepd to 270 boepd

  • Average IP360 consistently under 150 kboe (blue curves hereafter)

  • On average from 2016 to 2019 the IP360 reaches 40-45 kboe (red curve hereafter)

Now - armed with this historical data - it’s not too hard to extrapolate what EURs would look like, using traditional decline models (Arps hyperbolic, etc.).

The gross EUR for these wells averaged 111 kboe (Qi/IP30: 247 boepd, Di: 77%, Dt: 5%, b: 0.7).

All of this begs the question - how do you reconcile our 110kboe gross EUR from the Ring’s announced 400+ kboe net EUR?

The short answer:  someone broke the math.

[see pages 8-10 in the completed write-up file]


SEC PV10.

With the information that was available, we replicated Ring’s 2019 reserve report & estimated their PV10.

We did our own reserve valuation as of Jan 2020, based on public historical production data from all their wells (190+ horizontal wells, 600+ vertical wells).

We also forecasted their entire horizontal proved well inventory.

While - giving Ring the benefit of doubt w/ generous assumptions - we got these results:

Assumptions:

  • With production from every well they own

  • With Ring’s type curve parameters (with math reconciled)

  • Their full cost assumptions

  • Their full drilling inventory (ex. Non-operating & verticals)

  • The same pricing

We ended up with 1/5 of their published PV10 values.

On to where it mattersRing’s RBL -


THE RBL.

Since we’ve already calc’d every individual well decline, we figured (the ex-RBL banker authors of this case study) that it would be amusing to review Ring’s Spring borrowing base redetermination situation & reminisce a little about the past (flashback those Nigerian RBLs in 2015… oh, the memories)…

[Click here for the full assumptions / type curves & here for the model]

The output isn’t pretty:

At yr end, Ring had ~$370MM drawn on their credit facility.

We believe Ring’s borrowing base - empirically - should be $100MM in May and $86MM in November.

At $60/bbl oil, Ring would still have a borrowing base deficiency of >$200MM…

… so something’s gotta give -


BORROWING BASE DEFICIENCY.

At yr end, Ring had $10MM in cash on hand.

Facing a large deficiency, they’re probably doing everything in their power to raise more cash.

Actions like:

  • Selling acreage

  • Not / slow paying bills (feels like most of America is)

  • And raising capital via any / all securities offerings

Regarding that last point - on Monday, Ring filed a mixed shelf.

To us, that signals that the borrowing base redetermination process is a serious, near-term liquidity risk -


Ring’s NWS acreage lags behind their peer; thanks again to Enno at ShaleProfile for the data & visualizations

THE BANKS.

Ring’s lenders don’t want to be in this situation either…

  • There’s no junior lenders, so they’ll likely be relatively more flexible on the RBL redetermination process

  • But… there will likely be more flexibility, if Ring executes a securities offering

That said - now, or later - Ring has to come up with a substantial amount cash to pay down that borrowing base deficiency.

And we just don’t see how they’ll be able to generate that cash, from operations or asset sales -


Discussion

FINAL THOUGHTS.

The reason we did this analysis is not to show that Ring is about to be in a single-car-wreck:

  • Ring’s share price has decline by ~95% since we first took a look in 2018

  • And yeah, a big part of the problem is oil prices

Right now, Ring is that car that just wrecked on I-10, and there’s about to be a 20-car pile-up, starting with its RBL syndicate.

To be clear - we don’t hold any positions in Ring’s securities (long or short) – and we will not establish positions in them for the foreseeable future (by foreseeable, we mean months – but, realistically never).

We’re not short sellers.

We’re just saying that if you’re going to take a long position (equity or credit) backed by production - do the work yourself.

Or, hire someone with the right incentives to do the proper diligence.

Finally as always in A&D - there’s a winner & a loser. 

Congrats Wishboneselling was, without a doubt, the right move -


That’s it for this week - we’ll be back to our regularly scheduled programming on Tuesday - UFC this weekend -> Gaethje vs Ferguson, we’ll take rec’s for bets, so send any our way -