This summer, after months spent working its way out from under crippling debt, Ring Energy Inc. emerged as the buyer of Stronghold Energy II Royalties LP’s assets in the Permian’s Central Basin Platform.
The $465 million deal, layered with cash, stock and contingency payments, nearly doubled Ring’s production, reserves and projected adjusted EBITDA. But the deal was also notable for its focus on mature conventional assets that the company believes are storehouses of vast amounts of oil waiting for the application of new technology.
Ring Energy’s CEO and Board Chairman Paul D. McKinney spoke with Hart Energy at the A&D Strategies and Opportunities Conference in Dallas about the deal — and the almost limitless opportunities he sees for future acquisitions.
Darren Barbee: The first thing I wanted to ask Paul is, conventional assets: You're kind of the odd man out at this conference. A lot of people obviously talking about conventional or unconventional assets. And so I'm kind of curious what the value proposition as you see what the acquisition you did this year for stronghold.
Paul D. McKinney (00:41): Very good. No, we believe the conventional angle is what differentiates us from the rest of the marketplace. We believe that we are a unique investment opportunity for people that wanna invest in the oil and gas space. We are experts at horizontal drilling and multi-frac technology that was traditionally developed to recover resource for, from the unconventional shales and really, really tight rocks. But what we've found is that as the industry rushed to develop these unconventionals, they have forgotten the fact that many of the more mature fields and oil field developments in North America limited really by the economic limit of the producing vertical wells. And with the advent of horizontal drilling multi fact technology, when you apply that to conventional resource that has considerably better higher pros and permeabilities, you can get incredible rates of return.
And so that's what we specialize in. Many of these zones are at shallow or depth, so the well costs are gonna be considerably less. And by applying these modern technologies, you are covering a much larger percentage of the oil in place than you could have done back in the old days or the earlier days using the traditional and older conventional technologies. And so that is what sets us apart. If you look at our San Andres horizontal oil play that we have in Yocum County, Texas, 5,000-ft wells one- to one-and-a-half-mile horizontals, and we're getting incredible rates of return. And we're finding that in the public market space, because the majority of the public market space is seeking unconventionals, we believe that we can pick up acquisitions of conventional rock where these technologies work at higher discount rates.
And so I leave that margin for my shareholders. And so that is a strategy that is what sets us apart. And we also believe that because we're a relatively small company compared to many of the other companies out there, that the opportunity set out there represent, I'm not gonna say it's infinite growth, but it does represent substantial growth for a company our size. So we got years and years; more acquisition opportunities are going to hit the marketplace than we'll ever be able to take in on our own. And so we're looking forward to what the marketplace kind of you know, throws our way as we go into 2023.
DB: You, you talked a lot on stage about the unfavorable leverage position that you inherited when you first got there and how you had to hedge to some criticism from industry and from analysts. But I'm curious, going forward, how do you deal with leverage issues when you're trying to expand and do it further acquisitions? Is there a period where you have to sort of clear the decks of some of the debt you have now? Or do you think that you're able to you're in a financial position where you can go ahead and make some additional acquisitions right away?
PDM (3:47): Well we're still in the transition services agreement on the last one. So we're still integrating these assets in; we almost double the size of the company. We actually did double the number of the wells we operate, double daily production increase our reserves by 90%. So it was a very transformational acquisition. So first we're gonna digest that, but we are very keenly focused on several different opportunities that we are looking at, even before we actually took that transaction down. And so we do believe that there are opportunities out there. When we bring all that back to hedging, I think it would be very easy to say that our banks and my board of directors really kind of share a similar philosophy that you really need to keep about 50% of your production hedged for the next least 24 months.
But the key to being and having a successful hedging strategy is not being put in a position where you have to put in hedges as a defensive mechanism. But if you can get on the other side of that, and you can be more opportunistic, if you've met that basic hedging requirements as some of the more punitive lower price hedges roll off, you pick that strategic time in the right time and put in the right type of derivative that preserves the upside for your shareholders. And so that can only happen with a careful study of the marketplace, understanding where you are in the cycles and being aggressive. And so there may be times where we'll be hedge more than 50% so that we can unwind some of the less favorable hedges. And so you'll see us working the book over the time period going forward, but by and large, we believe that it is the right thing to do to manage risk ensure that you have the cash flows to sustain your capital development programs, your debt repayment programs and all of that kind of stuff. So we'll always have in that vicinity of 50% or more of our production hedged.
DB: And I'm also curious since mostly we talked to, in the words on stage today, you have your unconventional companies that are looking to develop those assets. Can you tell me about the competitive landscape as far as conventional assets are concerned? I know we talked that we heard about Maverick purchasing some assets in the central platform basin, but maybe you can talk to that.
PDM (6:19): There's competition. What we've seen here for the last half of 2022 the volatility has kind of put everybody into a 'wait and hold and see' mode, right? And so there were some failed sales. The majority of those failed sales processes were associated with conventional assets. And so we'll see how that plays out. But I do believe though that, and I said it on stage a little earlier, the pullback that we've seen here in the last part of this year in terms of commodity prices, which is actually cause of volatility in the public market space. I believe that pullback really is the pullback before the next surge. I think that the world set it itself up for a really high inflationary environment, which the world is experiencing now.
I'm sure there is at least a high probability of not certainty that will enter a recessionary period sometime in the future. Predicting that is really hard to do. You have other factors associated with the lockdowns in China and those parts of their economy opening back up and, and then the demand for energy as a result of them opening up all of these dynamics. There are so many of these various different issues that are affecting commodity prices. It's really hard to predict, but I think that the fundamentals still remain; the world has not invested enough capital over the last five to eight years to keep up with a growing demand, especially for many of these emerging economies around the world. So I think that the fundamentals are in place. Were a really exciting 2023. That's how we feel: We believe that A&D activity will pick up because if it is true that you see a steadily increasing oil price environment, you'll see more sellers willing to sell, and you'll have more buyers that have stronger balance sheets and more wherewithal to buy.
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