Executive Summary / Key Takeaways

• Ring Energy (NYSE:REI) is executing a resilient, value-focused strategy centered on maximizing adjusted free cash flow and aggressive debt reduction, particularly in the current volatile commodity price environment.
• The company's asset portfolio in the Permian Basin, characterized by high margins, shallow declines, and long reserve lives, underpins its operational sustainability and ability to generate consistent cash flow.
• Recent operational successes, including the accretive Lime Rock acquisition and ongoing cost-cutting initiatives, have driven significant reductions in lease operating expenses and improved capital efficiency, contributing to record free cash flow generation.
• Management is prioritizing balance sheet strength, aiming to reduce the leverage ratio to competitive levels, and is actively building its undeveloped inventory through organic growth to position the company for significant future production and revenue growth.
• Despite strong operational and financial performance, the stock is perceived by management as undervalued, presenting a compelling opportunistic investment given the company's enhanced resilience and strategic roadmap.

Setting the Scene: Ring Energy's Core Business, Strategy, and Market Position

Ring Energy, Inc. (NYSE:REI) operates as a growth-oriented independent oil and natural gas exploration and production company, strategically concentrated in the Permian Basin of Texas. Its core business revolves around the acquisition, exploration, development, and production of oil and natural gas, specifically targeting the oil and liquids-rich formations within the Northwest Shelf and Central Basin Platform. The company's overarching strategy is deeply rooted in maximizing cash flow generation, a principle consistently applied across varying commodity price cycles. This is achieved by focusing on assets characterized by shallow production declines, extended reserve lives, low operating costs, and high netback interests.

In the competitive landscape of the Permian Basin, Ring Energy carves out a niche by focusing on what it identifies as overlooked conventional oil and gas assets. While larger independent E&P players like EOG Resources (EOG), Devon Energy (DVN), and ConocoPhillips (COP) operate with broader portfolios and greater scale, Ring Energy's concentrated approach allows for localized expertise and potentially faster decision-making. The company aims to be an aggregator of Central Basin Platform and Northwest Shelf assets, leveraging its deep understanding of these specific plays. This focused strategy, combined with its asset characteristics, positions Ring Energy to achieve high operating margins, enabling it to better withstand periods of lower oil prices.

Ring Energy employs industry-leading drilling and completion techniques, utilizing new and innovative technological advancements for completion optimization, comprehensive geological evaluation, and reservoir engineering analysis. These advancements are critical for generating value and building future development opportunities, contributing to a low-cost structure that maximizes returns from drilling programs. The company has consistently improved its capital efficiency, with average well costs coming in approximately 7% less than budget in Q1 2025. For its Central Basin Platform horizontal assets, the cost structure has dropped by an estimated 15% to 20% over the last couple of years, primarily due to optimized drilling and frac techniques, and better landing zone execution. This technological edge enables higher recoveries from the same wells and lateral lengths, effectively converting what was once considered Tier 2 acreage into Tier 1 acreage economics.

Furthermore, Ring Energy is actively studying the application of horizontal drilling technology in areas traditionally developed with vertical wells, such as Crane and Ector counties. This initiative aims to improve capital efficiency, increase the net present value per location, reduce surface footprint, and lower emissions, representing a more efficient path for future growth. The company is also expanding the scope of operations of a chemical vendor from its Southern assets to Northern assets, anticipating future incremental savings by reducing direct chemical treating costs, eliminating hot oil treatments, and lowering well failure frequencies and associated workover costs, with this transition expected to be completed in Q3 2025. These technological and operational innovations are fundamental to Ring Energy's competitive moat, driving lower costs, better margins, and a stronger market position, even in challenging price environments.

The broader industry is currently experiencing significant trends that impact Ring Energy's operations. Commodity price volatility remains a persistent challenge, with the Permian Basin also facing insufficient natural gas pipeline transportation, which has at times led to negative natural gas prices. This directly impacts natural gas revenues, making the company's preference for highly oil-weighted assets a strategic advantage. However, the recent commissioning of the Matterhorn Express Pipeline and the potential for increased large-scale AI infrastructure in West Texas, which could use local gas for power generation, offer prospects for alleviating in-basin takeaway constraints and boosting gas pricing. Inflation also continues to affect costs associated with capital programs and production operations, a factor the company actively monitors and mitigates.

Financial Performance and Operational Excellence

Ring Energy has consistently demonstrated robust financial performance, particularly through its focus on operational efficiency and strategic capital allocation. For the nine months ended September 30, 2025, the company reported total oil, natural gas, and natural gas liquids revenues of $240.30 million, a decrease from $282.89 million in the comparable period of 2024. This revenue decline was primarily driven by lower average realized prices for oil and NGLs, despite an increase in natural gas sales volume. Net income for the nine months ended September 30, 2025, was $21.89 million, compared to $61.81 million in the prior year period. The third quarter of 2025 saw a net loss of $51.63 million, largely due to a non-cash ceiling test impairment charge of $72.91 million on oil and natural gas properties, a direct consequence of lower oil prices impacting the present value of estimated future net revenues.

Despite these headwinds, operational metrics highlight the company's underlying strength. In the third quarter of 2025, Ring Energy achieved oil sales of 13,332 barrels per day and total sales of 20,789 barrels of oil equivalent (BOE) per day, exceeding the midpoint of its BOE guidance. This performance was bolstered by the better-than-expected production from the recently acquired Lime Rock assets and new wells drilled during the year, which helped offset natural production declines from legacy assets. The Lime Rock acquisition, closed on March 31, 2025, proved highly accretive, with production from these assets averaging over 2,500 BOE per day in April 2025, a 9% increase over initial estimates. This acquisition also contributed to a 13% increase in production per share in Q2 2025.

Cost management remains a cornerstone of Ring Energy's strategy. Lease operating expenses (LOE) in Q3 2025 were $10.73 per BOE, marking the second consecutive quarter below the low end of guidance. This reduction was driven by efficiencies such as fewer field operators, lower chemical expenses, reduced well failures, and optimized well interventions. The integration of Lime Rock assets, for instance, led to a 50% reduction in required field staff and significant cost savings in the Shafter Lake operating area. Overall, all-in cash operating costs dropped by nearly $3 per BOE, or 12%, in Q2 2025 due to these initiatives. General and administrative (G&A) expenses, excluding share-based compensation, were $6.5 million in Q3 2025, a slight increase from $5.8 million in Q2 2025, primarily due to severance costs related to a former executive's departure.

Ring Energy's commitment to maximizing free cash flow is evident in its results. The company generated $13.9 million in adjusted free cash flow in Q3 2025, enabling a debt reduction of $20 million, surpassing its guidance. This follows a record $24.8 million in adjusted free cash flow in Q2 2025, marking the 23rd consecutive quarter of positive free cash flow. As of September 30, 2025, the company had $428 million outstanding on its revolving credit facility, with a borrowing base of $585 million, providing $157 million in liquidity and a leverage ratio of 2.1x. A significant development in June 2025 was the amendment and restatement of the credit agreement, extending its maturity to June 2029 and reducing the interest rate by 25 basis points, translating to annual savings of $250,000 per $100 million outstanding. The company's hedging strategy, covering approximately 53% of Q4 2025 oil sales and 33% of natural gas sales, further mitigates commodity price risk and protects cash flows.

Strategic Initiatives and Future Outlook

Ring Energy's strategic direction is unequivocally focused on strengthening its balance sheet through aggressive debt reduction. Management has explicitly stated that improving the leverage ratio to competitive levels with peers is the paramount priority. This commitment holds even if commodity prices rise, with any windfalls intended for further debt repayment rather than increased capital spending. The company aims for a long-term leverage ratio comfortably below one.

Beyond deleveraging, Ring Energy is actively cultivating organic growth opportunities to expand its reserves and undeveloped inventory. This strategy, initiated in 2024, is viewed as a crucial "another way to win," reducing sole reliance on acquisitions for growth. The company is systematically evaluating all potential zones within its existing acreage and mapping beyond to identify and capture economic opportunities near current operations. This includes exploring horizontal drilling applications in areas historically developed with vertical wells, such as Crane and Ector counties, to enhance capital efficiency and increase the net present value of each location. An active leasing program is also in place to secure longer-term inventory, with the goal of achieving a 10- to 20-year inventory life.

While attractive acquisition opportunities are continually evaluated, management acknowledges that significant acquisitions are challenging given the current leverage ratio and the perceived undervaluation of the company's stock. However, the Lime Rock acquisition, which closed in Q1 2025, exemplifies the company's disciplined approach, adding over 40 gross drilling locations and significant operating synergies. On the divestiture front, Ring Energy is currently testing the market for a small package of quality non-operated working interest, with any proceeds earmarked for debt reduction.

For the fourth quarter of 2025, Ring Energy projects total sales volumes between 19,100 and 20,700 BOE per day, with oil production ranging from 12,700 to 13,600 barrels per day, maintaining a 66% oil mix. Full-year 2025 production guidance is set at 13,100 to 13,500 barrels of oil per day and 19,800 to 20,400 BOE per day. Capital spending for Q4 2025 is planned to include 3 horizontal wells and 1 vertical well. The company anticipates full-year 2025 lease operating expenses (LOE) to be between $10.95 and $11.25 per BOE. Management's projections for Q4 2025 debt reduction are in the $10 million range, assuming commodity prices remain at current levels.

Risks and Challenges

Despite its strategic strengths, Ring Energy faces several pertinent risks and challenges. Commodity price volatility remains a significant concern, as sustained declines in oil and natural gas prices could materially impact revenues and cash flows, despite hedging efforts. The company's exposure to natural gas takeaway capacity constraints in the Permian Basin has historically led to negative realized gas prices, a risk that could continue to negatively affect natural gas revenues.

Inflationary pressures are also increasing costs across the capital program and production operations, impacting materials, supplies, equipment, and services. Furthermore, under the full cost method of accounting, lower oil prices can trigger non-cash ceiling test impairments on oil and natural gas properties, as evidenced by the $72.91 million impairment recorded in Q3 2025. Such impairments can significantly impact reported net income. The company's reliance on a few significant purchasers for its oil and natural gas production also presents customer credit risk, although management believes alternative purchasers are readily available. Lastly, the variable interest rate on its credit facility exposes Ring Energy to interest rate risk, with a 1% change potentially altering annual interest expense by an estimated $4.30 million.

Conclusion

Ring Energy is strategically positioning itself for long-term resilience and value creation amidst a dynamic energy landscape. The company's unwavering commitment to maximizing free cash flow and aggressively reducing debt, supported by its high-margin, shallow-decline Permian Basin assets, forms the bedrock of its investment thesis. Operational excellence, demonstrated through consistent cost reductions and efficient integration of accretive acquisitions like Lime Rock, continues to drive strong financial performance and debt paydowns.

Looking ahead, Ring Energy's focus on organically growing its reserves and undeveloped inventory provides a robust pathway for future growth, ensuring optionality when commodity prices and balance sheet strength align. While challenges such as commodity price volatility, gas takeaway constraints, and inflation persist, the company's disciplined capital allocation and technological advancements in drilling and completion techniques offer a competitive edge. For discerning investors, Ring Energy presents a compelling opportunity, as its strategic clarity and operational prowess are poised to unlock significant value, particularly as its leverage ratio improves and its inherent asset quality gains broader market recognition.