Description
Ring Energy is a Permian E&P with core leaseholds in the Central Basin Platform and Northwest Shelf. Management is composed of industry veterans with no ESG board taint, with average breakevens of $25 to $30/barrel. Ring is led by the former Sandridge Energy CEO in 2019, who previously led Yuma Energy. Ring is entirely unhedged going into 2023 and performed a transformational acquisition with Stronghold Energy II.
Effective date of the Transaction is June 1, 2022. Anticipated closing date in the 3rd quarter 2022. The consideration is as follows -
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$200 million cash
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$15 million deferred cash payment, 6 months after closing
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$20 million existing Stronghold hedge liability
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$165 million Ring Energy stock ( was $230M at VWAP $3.6 deal price)
total consideration = $400M
Pro forma equity ownership – Ring ~66%; Stronghold ~34%
The acquisition leans gassy, shifting production from 87% oil to 70% oil. The acquisition was performed at 0.5 PV-10 given where Ring is trading today. This is in line to core Ring trading at nearly the same multiple. Pre-deal, Ring has a $270M market capitalization and $280M in debt, leading to an approximately $550M EV.
Ring is significantly weighted towards PUD compared to peers and has significant skew with no swap or hedges in 2023. Additionally, Ring is primarily focused on increasing production (10% growth in 2022) in the NWS while servicing debt.
The lack of hedges paints a significant upside picture in 2023, which puts Jan 2024 call options into the picture. Ring is also quite levered, similar to comparables like Laredo.
Ring also has an accountable shareholder base and is under owned by funds and ETFs. 50% of shares are held by the general public, with an additional 26% held by individuals / insiders. 7.1% of shares outstanding ($19.4M) are held by this author - https://seekingalpha.com/author/jack-yetiv. An additional 12% are held by the Kruse family which filed at 13-D previously to discuss ways to improve value at the company. Lastly, another 5% is held by the Pedevco CEO, who filed an activist campaign in October 2019 discussing a potential merger with his firm. Pedevco also has a significant foothold in the San Andreas formation. This is important to note as there are unlikely to be outside influences preventing production growth, unlike peers.
I think watching for Jan 2024 option call volume or being patient with Ring is the play. However, In candor I believe Laredo (recently pitched) and Amplify Energy (also recently pitched) are better ideas.
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.
Catalyst
Continued M&A transactions, particularly with Pedevco (was rejected under the former CEO, but more likely now)
Oil prices stay flat with an unhedged position going into 2023
Continued production growth in the San Andreas formation