Executive Summary / Key Takeaways

• Ring Energy is executing a value-focused strategy centered on maximizing free cash flow, reducing debt, and growing its oil-weighted production base in the Permian Basin through disciplined acquisitions and emerging organic initiatives.
• The recent accretive acquisition of Lime Rock's Central Basin Platform assets significantly enhances scale, adds high-margin, low-decline production, provides operational synergies, and contributes valuable drilling inventory, outperforming initial estimates.
• In response to a weakened commodity price environment, Ring has significantly reduced its 2025 capital spending outlook by 36% for the full year, prioritizing debt reduction while still projecting approximately 2% annual production growth over 2024 due to strong well performance and acquired assets.
• The company is actively pursuing organic inventory growth by leveraging its geoscience team to identify and test new zones and apply modern technologies on existing and nearby acreage, complementing its acquisition strategy.
• Management believes REI's stock is significantly undervalued compared to recent M&A transactions and common trading metrics, highlighting the compelling value proposition and efforts to increase market awareness and attract long-term investors.

Setting the Permian Scene: Strategy, History, and Competitive Ground

Ring Energy, Inc. (REI) operates as a growth-oriented independent oil and natural gas exploration and production company with a concentrated focus on the oil and liquids-rich formations within the Permian Basin of West Texas, specifically targeting the Northwest Shelf and the Central Basin Platform. At its core, Ring's strategy is value-focused, aiming to maximize cash flow generation and enhance its balance sheet, primarily through debt reduction. This objective is balanced with the need to develop its properties to maintain or grow production, achieved through prudent capital allocation and strategic transactions.

The company's recent history is defined by a series of calculated acquisitions that have fundamentally reshaped its scale, asset base, and strategic trajectory. The acquisition of Stronghold's Central Basin Platform (CBP) acreage in 2022 marked a pivotal moment, significantly expanding Ring's footprint and improving its leverage ratio from 3.5x to 1.4x trailing 12 months EBITDA. Building on this, the all-cash acquisition of Founders' CBP assets in August 2023 further solidified its position. While increasing absolute debt, this transaction was structured to be leverage-neutral, leveraging asset cash flow and a deferred payment to manage the initial draw on the credit facility. These deals brought in low-decline, high-margin production and added valuable drilling inventory, demonstrating a clear path to accelerated debt paydown using the acquired cash flow.

In the competitive landscape of the Permian Basin, Ring operates alongside much larger players like Diamondback Energy (FANG), EOG Resources (EOG), and Devon Energy (DVN). These competitors often boast greater scale, more extensive reserve bases, and higher levels of operational efficiency, reflected in metrics like lower depreciation, depletion, and amortization (DD&A) per Boe and higher profitability margins. For instance, while REI's DD&A per Boe was $13.44 in Q1 2025, peers like FANG and EOG typically operate with lower unit costs. REI's market share in the Permian is estimated to be less than 1%, positioning it as a niche player compared to FANG's 5-7% or EOG's 8-10% of U.S. shale oil production.

However, Ring carves out its competitive space through an agile acquisition strategy targeting overlooked conventional assets in the CBP and Southern Shelf. This focus allows for potentially lower entry costs compared to the highly competitive shale plays in the Midland and Delaware Basins. Ring leverages its deep regional knowledge and relationships to identify opportunities, sometimes even pursuing negotiated deals before assets formally hit the market. While lacking the extensive proprietary technology R&D budgets of larger peers, Ring employs industry-leading drilling and completion techniques, applying modern technologies like multi-stage hydraulic fracturing to its conventional vertical wells ("stack and frac") and increasingly exploring horizontal applications. This technological approach is focused on maximizing recovery and improving capital efficiency within its specific asset base, contributing to its low breakeven costs on drilling wells, estimated around $30 to $35 per barrel. The company's geoscience and engineering team is also actively engaged in identifying new organic growth opportunities by analyzing existing and nearby acreage for untested zones or new applications of technology, aiming to build inventory beyond acquisitions.

Recent Performance Reflecting Strategy and Market Dynamics

Ring Energy's recent financial and operational performance reflects the execution of its strategy amidst a volatile commodity price environment. In the first quarter of 2025, the company reported total revenues of $79.09 million, a decrease from $94.50 million in Q1 2024. This decline was primarily driven by a 16% decrease in oil sales revenue, resulting from an 11% decrease in volume (from 1.22 million barrels to 1.09 million barrels) and a 7% decrease in the average realized price per barrel (from $75.72 to $70.40). Natural gas sales, while still experiencing negative net realized pricing due to processing fees and takeaway constraints, saw an increase in volume and a higher average realized price per Mcf compared to the prior year period.

Operational costs saw some fluctuations. Total Lease Operating Expenses (LOE) increased to $19.68 million in Q1 2025 from $18.36 million in Q1 2024, and on a per Boe basis, LOE rose from $10.60 to $11.89. This increase occurred despite lower production volumes, primarily due to higher electricity, contract services, environmental, equipment rental, and chemical costs, partially offset by reductions in workovers and salaries. Ad valorem taxes decreased significantly, partly due to the reversal of a methane tax accrual. General and administrative (G&A) expense increased to $8.62 million from $7.47 million, mainly driven by higher bonus compensation and salaries. Depreciation, depletion, and amortization (DD&A) decreased to $22.62 million from $23.79 million, primarily due to lower production volumes.

The company's financial results were also impacted by derivative contracts, which are used to manage commodity price risk. In Q1 2025, Ring recorded a loss on derivative contracts of $0.90 million, a significant improvement from a $19.01 million loss in Q1 2024, largely driven by changes in crude oil futures prices affecting unrealized gains/losses.

Cash flow generation, a core focus of the strategy, saw Net Cash Provided by Operating Activities at $28.37 million in Q1 2025, down from $45.19 million in Q1 2024, primarily due to lower revenues. Net Cash Used in Investing Activities increased substantially to $102.61 million from $39.51 million, driven by payments related to the Lime Rock Acquisition. Net Cash Provided by Financing Activities was $73.47 million, compared to $4.60 million used in Q1 2024, reflecting increased borrowings on the Credit Facility to fund the acquisition.

As of March 31, 2025, Ring had $460 million outstanding on its revolving Credit Facility, which has a borrowing base of $600 million and matures in August 2026. This left approximately $140 million in available liquidity. The company remains in compliance with all Credit Agreement covenants, including the Leverage Ratio and Current Assets to Current Liabilities requirements. Management emphasizes that maintaining adequate liquidity and strengthening the balance sheet through debt reduction remains a top priority, viewing cash flows from operations as the primary means to fund operations and service debt.

Strategic Execution, Outlook, and Inventory Building

The closing of the Lime Rock Central Basin Platform asset acquisition on March 31, 2025, is a key recent development that aligns directly with Ring's strategic objectives. The acquisition, valued at $87.73 million (including cash, deferred payment, and stock), brought in over 100 wells with a high oil cut and low decline rates, enhancing the company's production profile and metrics. It added approximately 17,700 net acres, largely contiguous with existing operations, and identified around 40 gross drilling locations that immediately compete for capital. Management noted that production from these acquired assets averaged over 2,500 Boe per day in April 2025, exceeding their initial valuation estimates. The transaction is expected to significantly increase adjusted free cash flow and accelerate debt reduction efforts, reinforcing the balance sheet. Operational synergies, such as integrating saltwater disposal systems and optimizing field personnel, are anticipated to further enhance cost efficiency.

The company's drilling program continues to focus on high-return opportunities within its portfolio. In Q1 2025, Ring drilled and completed seven wells (four horizontal in the Northwest Shelf, three vertical in the Central Basin Platform), all of which exceeded initial pre-drill production estimates. Management highlighted improved capital efficiency, with average well costs coming in around 7% less than budget.

Looking ahead, Ring has significantly adjusted its 2025 outlook in response to the prevailing weakened commodity price environment. The updated full-year 2025 capital spending guidance has been reduced to a midpoint of $99 million ($85 million to $113 million), a substantial decrease from the previously disclosed range. This reduction is concentrated in the final three quarters of the year, with planned spending of $38 million to $58 million. This strategic pivot prioritizes debt reduction, with management explicitly stating that if oil prices remain sustainably low, they will reduce capital spending to maintenance levels to meet debt reduction goals. Even with this reduced capital program, the company projects approximately 2% annual production growth over 2024, supported by the strong performance of recent wells and the contribution from the newly acquired Lime Rock assets. The full-year 2025 production guidance is set at 19,200 to 20,700 Boe per day (total) and 12,700 to 13,700 Bopd (oil).

Complementing its acquisition strategy, Ring is actively pursuing organic inventory growth. The geoscience team is evaluating potential zones and applying modern drilling and completion technologies to areas on existing and nearby acreage that have not been fully exploited or tested with current techniques. This includes exploring the application of horizontal drilling in areas traditionally developed with vertical wells and identifying opportunities in deeper zones like the Barnett and Woodford in the southern CBP acreage acquired through the Lime Rock transaction. While some of these initiatives involve slightly higher risk, management views them as a crucial component for building a longer-term inventory life beyond the current estimated five years, which is significantly shorter than that of larger peers. Capital allocation to these organic efforts is balanced with the primary goal of maximizing free cash flow for debt reduction, particularly as the company works towards its target leverage ratio comfortably below 1x.

Risks and Competitive Dynamics

Ring Energy operates in an industry inherently exposed to significant risks. Commodity price volatility remains a primary concern, directly impacting revenues, cash flow, and the economic viability of development projects. While hedging activities provide some mitigation, extended periods of low prices could materially affect financial results. Natural gas takeaway constraints in the Permian Basin continue to result in negative realized gas prices, although new infrastructure like the Matterhorn Express Pipeline and potential local demand from AI data centers offer some hope for future improvement. Inflation also poses a challenge, increasing costs for materials, supplies, equipment, and services, though the company is working to mitigate these effects through cost monitoring and efficiency improvements. Rising interest rates on the variable-rate Credit Facility increase interest expense, impacting profitability and cash flow available for debt reduction. Credit risk from purchasers, particularly given concentration with a few significant customers, is also a consideration, although the company has not experienced significant losses historically.

In the competitive arena, Ring's smaller scale compared to major Permian players like FANG, EOG, and DVN presents challenges. These larger companies often benefit from economies of scale, greater operational efficiencies, and more extensive technological R&D budgets. Their ability to execute large-scale drilling programs and integrate advanced technologies can lead to lower unit costs and potentially higher returns, putting pressure on smaller operators. The ongoing consolidation trend among larger players could also impact the availability and pricing of acquisition targets that fit Ring's strategy.

However, Ring's focused strategy on the conventional, low-decline assets in the CBP and Southern Shelf provides a degree of differentiation. These assets often have lower upfront acquisition costs and less capital-intensive maintenance requirements compared to high-decline unconventional plays. Ring's expertise in applying modern completion techniques to these conventional reservoirs allows it to generate competitive returns. The company's agility in pursuing bolt-on acquisitions in its core operating areas enables it to capture synergies and build scale incrementally. Management's explicit focus on debt reduction and balance sheet strength is a strategic response to industry volatility, aiming to build resilience that may compare favorably to peers with higher leverage. The perceived undervaluation of Ring's stock relative to recent M&A valuations in its operating area suggests a potential opportunity, which management is actively trying to address through increased investor communication and outreach.

Conclusion

Ring Energy is executing a clear, value-focused strategy centered on disciplined growth, operational efficiency, and aggressive debt reduction within the oil-rich Permian Basin. The recent acquisition of Lime Rock assets is a testament to this approach, adding accretive production and inventory that immediately enhances the company's financial and operational profile. In response to a challenging commodity price environment, Ring has demonstrated strategic flexibility by significantly reducing its 2025 capital program to prioritize strengthening the balance sheet, while still forecasting modest production growth.

The investment thesis for REI hinges on its ability to continue generating robust free cash flow from its low-decline, high-margin assets, effectively reduce debt to improve its financial resilience, and successfully execute its dual growth strategy of accretive acquisitions and organic inventory building. While facing competitive pressures from larger, more efficient peers and inherent industry risks like price volatility and infrastructure constraints, Ring's focused approach, improving operational efficiencies, and commitment to balance sheet health position it to navigate these challenges. The current market valuation, viewed by management as a significant discount to intrinsic value based on recent transaction metrics, highlights the potential upside for investors who believe in the company's strategy and its ability to unlock value in the overlooked conventional plays of the Permian. Monitoring the progress of debt reduction, the success of organic growth initiatives, and the impact of future acquisitions will be key for investors evaluating Ring Energy's path forward.