Ring Energy (REI) reached an agreement to sell its Delaware Basin asset for $31.5 million. This is a solid price given the current market environment, but does not make that much of a difference to Ring’s overall leverage and credit facility issues. Ring remains vulnerable to ending up with a borrowing base deficiency with its upcoming borrowing base redetermination, and it will be hard for it to reduce its debt faster than its production declines in the current pricing environment.
If Ring could achieve a similar price (as a multiple of 2019 PDP PV-10) for its other assets, then it would be worth around $1.37 per share. There are significant risks though, given the challenge of achieving decent sale prices again in the current market environment. Ring’s credit facility lenders could also apply additional pressure to the company, although due to its lack of non-credit facility debt, it is more likely to end up in runoff mode than in bankruptcy.
Delaware Basin Sale
The sale price of $31.5 million appears quite decent to me given the current market environment. I noted before that Ring’s Delaware Basin asset had fairly limited value outside of PDP, as the asset contained mostly vertical locations other than some prospective Delaware Mountain Group (Bell Canyon, Cherry Canyon, Brushy Canyon) horizontal locations. These are not the more valuable Wolfcamp/Bone Spring horizontal locations.
Source: Ring Energy
The PDP PV-10 of the Delaware Basin asset was $43 million based on 2019 SEC prices. This was down from $75 million at the end of 2018, affected by decreased PDP reserves as well as lower gas prices. Given the sharp fall in oil prices since 2019, the $31.5 million sale price is probably above PDP PV-10 at strip.
The Delaware Basin assets are currently producing 908 BOEPD (63% oil). The roughly $34,700 price per flowing BOE also seems pretty solid given the environment. The non-refundable deposit is $0.5 million, and Ring expects to close the deal in approximately 60 days.
Effect On Debt
While the Delaware Basin asset sale was at a decent price, it probably won’t do all that much to help Ring’s debt and credit facility situation. Ring had $366.5 million borrowed under its credit facility at the end of 2019. The sale price represents 8.6% of the credit facility borrowings. The Delaware Basin assets represented 6.6% of Ring’s PDP PV-10 at 2019 SEC prices, and perhaps somewhat more than that at current strip prices since Ring’s other assets have a higher oil percentage and thus would be more affected by the oil price crash.
A 20% borrowing base reduction due to low oil prices would bring Ring’s credit facility borrowing base down to $340 million. Adjusting that by another 7% (for the Delaware Basin asset sale) would reduce its borrowing base to $315 million. Pro-forma for the asset sale, Ring would still have a $20 million borrowing base deficit in this example, although this would be reduced from $26.5 million without the sale.
If Ring was able to achieve a similar multiple to PDP PV-10 (based on 2019 SEC prices) for its remaining assets, then its value might be $110 million more than its outstanding debt. However, Ring also had a $17 million working capital deficit (excluding derivatives) at the end of 2019, so adjusting for that would result in a value of $1.37 per share.
There isn’t much of a safety buffer there, as a 13% decrease in asset value would reduce Ring’s value to $0.52 per share, below its current share price.
Ring Energy achieved a decent price for its Delaware Basin asset given the current market environment. A similar valuation (compared to year-end 2019 PDP PV-10) for its remaining assets would make Ring’s shares worth more than their current price.
It wouldn’t take much (a 13% decrease in asset value compared to its Delaware Basin PDP multiple) to drop Ring’s value below its current price, though. Ring also has to contend with a likely significant borrowing base reduction and the potential for a borrowing base deficiency. It is unlikely to end up filing for bankruptcy since it doesn’t have other long-term debt outside of its credit facility. Ring’s focus will be on continuing to pay down its credit facility, and its credit facility lenders may want this debt paydown to continue even if oil prices recover.
As a result, Ring’s shares remain fairly risky due to their probable declining production and the uncertainty about how much it could get for its other assets (if it even attempted to sell those assets).
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.