#REI GUSO DROP FREE#
Now the market is going to watch that free cash flow progress to make sure the debt can be repaid in a reasonable amount of time. That depressed the stock price to an extremely low level. Even though that strategy was wildly successful, the market worried about sustained low prices due to a depression. In that year, management shut down production completely for a while to wait for a commodity price recovery and lived off the hedging program. It also seems unlikely that something like 2020 will repeat.
However, some costs like administrative are now spread over more production and so will be less per barrel. The market worries about price declines ending up with the company reporting losses (even company destroying losses). The key idea here is that management is trying to communicate that corporate profitability is improving. Ring Energy Profitability Progress Through Fiscal Year 2022 (Ring Energy First Quarter 2022, Earnings Conference Call Slides) That means that those with a hedging program are valued similarly to those without a hedging program because big chunks of the market ignore the hedging results. Hence, a lot of prices are declining in the industry despite steady profit progress. A consistent hedging program is generally viewed as a zero-sum game by the market. This should make it easier for shareholders to see the benefits of the capital program (and really management decisions in general). The hedging program is there to smooth out the commodity price gyrations. This is largely due to overall better realized prices. Management did report in the presentation that the margin has improved. The other major effect is that if commodity prices remain at decent levels, then the hedging program allows for steadily better-realized prices net of hedging. That was largely due to the acquisition made recently. In this case, shareholders can see the progress made from the fourth quarter to the first quarter. Ring Energy Calculation Of Adjusted Earnings Per Share (Ring Energy First Quarter 2023, Earnings Press Release)Īdjusted Earnings is an attempt to take out the effects of the hedging program when reporting results. In absolute terms, the company set a few records as noted above.īut what is important to shareholders is that the company made per share earnings progress when compared to the first quarter of fiscal year 2022. Management made an accretive acquisition that blunted the effect of lower commodity prices. This management did exactly what shareholders would expect management to do when faced with a declining commodity price. Ring Energy Comparison of Fourth Quarter 2022, And First Quarter 2023 (Ring Energy First Quarter 2023, Earnings Conference Call Slides) That is a big change from 50 years ago, when the largely conventional industry took more time to adjust to periods of oversupply. The latest technology has a lot of wells, whether conventional or not, declining overall at rates that almost "guarantee" a quick adjustment to overproduction during times of weak commodity prices. But as long as an acceptable minimal return is achieved, then the primary future risk is usually seen as more or less profits over that minimum amount. So, profits remain uncertain throughout the life of the well. The wells have a relatively long production life. But in the meantime, the company can demonstrate reasonable profits from capital expenditures because the cash flow in the future has been set by the hedging program. That will nearly always correct one way or the other. In the latest case, it would appear that oil demand and commodity price actions are going in opposite directions. Instead, the hedging program is there to justify capital expenditures and to assure lenders of a cash flow should a downturn last. Those who think that hedges matter to the market only need to look at the latest stock price action to realize that the market does not value the hedging program at all. Yet this is exactly what the hedging program is designed to prevent. So, when commodity prices drop, then the stock price follows regardless of the hedging results.īut there is also some investor confusion that if the company reported a certain level of profits when commodity prices were great, then surely the company should be reporting losses in the first quarter. The reason appears to be that the stock market values the company based upon the prices received, without hedging. This is something that I have seen in the commodity business for a very long time. Ring Energy ( NYSE: REI) reported profit progress despite a commodity price drop. (Note: This article was in the newsletter on and has been updated as needed.)
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