Ring Energy - Earnings Call - Q4 2024

Executive Summary

• Q4 2024 revenue was $83.4MM and diluted EPS was $0.03; Adjusted EBITDA was $50.9MM with a 61% margin, while volumes beat guidance midpoint but lower realized pricing and hedge mark-to-market reduced profitability.
• Cash generation remained positive: Adjusted Free Cash Flow was $4.7MM, CapEx was reduced 12% QoQ to $37.6MM, and debt was paid down by $7MM, bringing revolver borrowings to $385MM and liquidity to $216.8MM.
• 2025 guidance introduced: FY oil sales 13,600–14,200 Bo/d (midpoint 13,900), total 20,000–22,000 Boe/d (midpoint 21,000), CapEx $138–$170MM (midpoint $154), LOE $11.25–$12.25/Boe; assumes Lime Rock assets from Q2 2025 with synergies not yet included.
• Strategic catalyst: pending Lime Rock CBP acquisition expected to close by end of Q1 2025; management emphasized cost synergies (e.g., water handling) and conservative guidance with potential upside, alongside ongoing deleveraging focus and possible CapEx moderation if WTI sustains ≤$65/bbl.

What Went Well and What Went Wrong

What Went Well

• Volumes beat guidance midpoint with 19,658 Boe/d (66% oil), and Q4 oil/NGL realized mix improved (NGL at ~13% of WTI); company delivered its 21st consecutive quarter of positive cash flow and raised FCF QoQ.
• CapEx discipline: Q4 CapEx dropped 12% QoQ to $37.6MM; Adjusted Free Cash Flow was $4.7MM; debt fell by $7MM in Q4 and $70MM since the Founders deal, reaffirming balance sheet progress.
• Management quote signaling execution and flexibility: “We intend to maintain or slightly grow our production… and allocate the balance [of cash flow] to paying down debt”.

What Went Wrong

• Pricing headwind and hedge swing: realized price/boe fell 4% QoQ to $46.14 and 18% YoY; hedge mark-to-market shifted to a $6.3MM net loss vs a $24.7MM gain in Q3, compressing net income to $5.7MM and EPS $0.03.
• Oil price differentials widened vs Q3 (WTI -$1.42/bbl vs -$0.56/bbl), and gas/NGL realizations remained impacted by fees, keeping gas pricing negative and pressuring cash margins.
• G&A per Boe increased sequentially (to $4.44 from $3.47), and LOE per Boe ticked up to $11.24, though both stayed within guidance ranges; Adjusted EBITDA fell QoQ to $50.9MM.

Transcript

Operator (participant)

Good morning, and welcome to the Ring Energy Fourth Quarter and full year 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. To ask a question, you may press star, then one on a touch-tone phone. To withdraw your question, please press star, then two. Please note this event is being recorded. I will now like to turn the call over to Al Petrie, Investor Relations for Ring Energy. Please go ahead.

Al Petrie (Investor Relations)

Thank you, Operator, and good morning, everyone. We appreciate your interest in Ring Energy. We'll begin our call with comments from Paul McKinney, our Chairman of the Board and CEO, who will provide an overview of key matters for fourth quarter and full year 2024, as well as our outlook. We will then turn the call over to Travis Thomas, Ring's Executive VP and Chief Financial Officer, who will review our financial results. Paul will then return with some closing comments before we open the call up for questions. Also joining us on the call today and available for the Q&A session are Alex Dyes, Executive VP and Chief Operations Officer, and Shawn Young, Senior Vice President of Operations. During the Q&A session, we ask you to limit your questions to one and a follow-up. You're welcome to re-enter the queue later with additional questions.

I would also note that we have posted an updated investor corporate presentation on our website. During the course of this conference call, the company will be making forward-looking statements within the meaning of federal securities laws. Investors are cautioned that forward-looking statements are not guarantees of future performance, and those actual results or developments may differ materially from those projected in the forward-looking statements. Finally, the company can give no assurance that such forward-looking statements will prove to be correct. Ring Energy disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Accordingly, you should not place undue reliance on forward-looking statements. These and other risks are described in yesterday's press release and in our filings with the SEC. These documents can be found in the Investors section of our website located at www.ringenergy.com.

Should one or more of these risks materialize or should underlying assumptions prove incorrect, actual results may vary materially. This conference call also includes references to certain non-GAAP financial measures. Reconciliations of these non-GAAP financial measures to the most directly comparable measure under GAAP are contained in yesterday's earnings release. Finally, as a reminder, this call is being recorded. I'd now like to turn the call over to Paul McKinney, our Chairman and CEO.

Paul McKinney (Chairman and CEO)

Thanks, Al, and good morning, everyone, and thank you for joining us today. The fourth quarter 2024 represented a strong ending to a year in which the Ring Energy team enhanced nearly every controllable metric. Our total sales grew 8% over 2023 to a record 19,648 barrels of oil per day, and oil sales grew 6% to a record 13,283 barrels of oil per day. We reduced our year-over-year all-in cash operating costs on a per BOE basis by 2%. We drilled 13 more wells in 2024 than the prior year for slightly less capital, representing a substantial increase in capital efficiency for both our horizontal and vertical wells.

For the year ended December 31, 2024, we spent $151.9 million, which included cost to drill, complete, and place on production 21 horizontal wells, including five in the Northwest Shelf and 16 in the northern portion of the CBP, and 22 vertical wells in the CBP. Also included in the full year capital spending were costs for capital workovers, infrastructure upgrades, recompletions, facility upgrades to reduce emissions, and leasing. We paid down debt by $40 million and $70 million since the closing of the Founders Acquisition in August of 2023. We exited the year with $385 million of debt on the balance sheet and approximately $217 million of liquidity. Our performance led to generating an adjusted EBITDA of $233.3 million despite a 7% reduction in realized prices.

Supported by our focus on capital discipline, we delivered an adjusted free cash flow of $43.6 million, remaining cash flow positive for five years, for over five years. Turning to reserves, we grew proved reserves by 4.4 million barrels of oil equivalent, or 3%, to 134.2 million barrels of oil equivalent. A key point to note regarding our 2024 reserves was that we organically added 16 million barrels of oil equivalent that more than offset the 7.2 million barrels of oil equivalent of production, the 1.2 million BOE from sales of non-core assets, and 3.2 million BOE in reserve reductions due to lower SEC prices. Proved reserves, PV-10, was approximately $1.5 billion at year-end 2024. Included in that total was approximately $1.1 billion of PV-10 for 92.6 million barrels of oil equivalent proved developed reserves.

The primary contributors to our success in 2024 are directly related to the benefits of our Stronghold and Founders acquisitions in 2022 and 2023. These acquisitions have exceeded our expectations in many regards, further established our strategic foothold in the Central Basin Platform, and significantly increased our undeveloped inventory of highly economic drilling locations. As we have previously stated, we continue to look for similar acquisitions that can help us replicate the success of those two transactions. We believe the proposed Lime Rock transaction does that. As previously released, the purchase price of $100 million is comprised of $80 million of cash and up to 7.4 million shares of Ring common stock at closing, and an additional $10 million deferred cash payment due nine months after closing. The transaction has an effective date of October 1, 2024, and is expected to close by the end of first quarter of 2025.

In short, Lime Rock's CBP acreage is in Andrews County, Texas, where the majority directly offsets Ring's core Shafter Lake operations, and the remaining acreage to the south is prospective for multiple horizontal targets and exposes Ring to active new players. The acquisition ideally suits Ring's focus on consolidating producing assets in core counties on the CBP defined by shallow declines, high-margin production, and undeveloped inventory that immediately competes for capital. Additionally, as previously disclosed, these assets add significant near-term opportunities for field-level synergies and cost savings. Regarding our guidance for 2025, our estimates include three full quarters of operations with the Lime Rock assets. Driving the top line, we anticipate an average annual sales midpoint of 21,000 barrels of oil equivalent per day and 13,900 barrels of oil per day, a 7% and 5% increase respectively.

An annual capital spending midpoint of $154 million essentially flat with the prior year and a midpoint of approximately 49 total wells drilled, completed, and placed online. In summary, our 2025 plans will follow a very similar playbook from the past. We will remain focused on maximizing free cash flow generation. We will maintain a disciplined capital spending program that maintains or slightly grows our production and liquidity and allocate the balance of our cash flow to paying down debt. Travis will provide more detail regarding our guidance along with other comments concerning our fourth quarter and full year financial results. With that, I will turn it over to Travis. Travis?

Travis Thomas (CFO)

Thanks, Paul, and good morning, everyone. We were pleased with our overall outcome for the fourth quarter. In addition to the results that met our overall guidance, the fourth quarter capped off another successful year for Ring. Similar to past calls, I will take a few minutes to cover some additional color detailing the most significant sequential quarterly results. Let's start with production. During the fourth quarter, we sold 19,658 BOE per day compared to 20,108 BOE per day in the third quarter, a slight decrease of 2%. A portion of the decrease was attributable to a third-party gas plant being shut down due to a fire impacting our sales volumes.

Our fourth quarter total sales volumes were above the midpoint of our guidance range and contributed to a record full year 2024 sales of 19,648 BOE per day. The year benefited from a full year production from our Founders Acquisition, which closed in August of 2023.

As Paul discussed, also materially contributing to our record full year 2024 sales volumes was another successful drilling campaign across our asset base, with continued focus on our highest rate of return inventory. Turning to the fourth quarter 2024 pricing, our overall realized price declined 4% to $46.14 per BOE from $48.24 per BOE in the third quarter. Driving the overall sequential decline was the 7% lower realized pricing for oil in the fourth quarter of 2024. Our fourth quarter average crude oil price differential from NYMEX WTI Futures pricing was a negative $1.42 per barrel versus a negative $0.56 per barrel for the third quarter. This was mostly due to the Argus WTI WTS that decreased by $0.36 per barrel, offset by the Argus CMA roll that decreased by $0.44 per barrel on average for the third quarter.

Our average natural gas price differential from NYMEX Futures pricing for the fourth quarter was a negative $3.83 per MCF compared to a negative $4.43 per MCF for the third quarter. Our realized NGL price for the fourth quarter averaged 13% of WTI compared to 11% for the third quarter. Oil revenue decreased by $5.8 million, with a $3.8 million price variance and a $2 million production variance. Gas and NGL revenues, on the other hand, saw a combined $2.6 million increase quarter-to-quarter, providing a combined total of $1.5 million for the fourth quarter compared to a $1.2 million negative in the third quarter. This resulted in fourth quarter revenue of $83.4 million compared to $89.2 million in the third quarter, a 7% decrease.

Fourth quarter LOE of $20.3 million was essentially flat compared to the third quarter. On a unit basis, fourth quarter LOE was $11.24 per BOE, which was within our guidance range.

Third quarter LOE was $10.98 per BOE. Cash G&A, which excludes share-based compensation and transaction-related costs, was $3.51 per BOE for the fourth quarter versus $3.45 per BOE for the third quarter. Our fourth quarter 2024 results included a loss on derivative contracts of $6.3 million versus a gain of $24.7 million for the third quarter, which was primarily due to lower relative pricing at the end of the fourth quarter. We recorded an income tax provision of $1.8 million during Q4 2024 versus a provision of $10.1 million in the third quarter, which was driven by the increase in pre-tax book income.

Finally, for Q4, we reported net income of $5.7 million, or $0.03 per diluted share. Excluding the estimated after-tax impact of pre-tax items, including non-cash, unrealized gains and losses on hedges, share-based compensation expense, and transaction costs, our fourth quarter adjusted net income was $12.3million, or $0.06 per diluted share.

This is compared to a third quarter 2024 net income of $33.9 million, or $0.17 per diluted share, and adjusted net income of $13.4 million, or $0.07 per diluted share. Moving to our hedge position. For 2025, we currently have approximately 2.4 million barrels of oil hedged, or approximately 48% of our estimated oil sales based on the midpoint of guidance. We also have 2.4 BCF of natural gas hedged, or approximately 33% of our estimated natural gas sales based on the midpoint. For quarterly breakout of our hedge positions for 2025, please see our earnings release and presentation, which includes the average price for each contract type. Turning now to the balance sheet. We incurred $37.6 million in CapEx in the fourth quarter, which was in line with the midpoint in guidance.

We reduced D&C CapEx by 23% to $22 million in the fourth quarter from $29 million in the third quarter.

We incurred costs of approximately $4.7 million for facilities upgrades, which contribute to our year-over-year reduction in emissions. Also included in our fourth quarter CapEx was over $1 million in leasing costs, approximately 60% of our full year leasing, which added to our reserve replacement and organic inventory growth. As Paul discussed, we drilled 13 more wells in 2024 than the prior year for slightly less capital, representing a substantial increase in capital efficiency for both our horizontal and vertical wells. The result was a full year 2024 total CapEx of $151.9 million, which was slightly lower than 2023. At year-end 2024, we had $385 million drawn on our credit facility. With a borrowing base of $600 million that was reaffirmed in December, we had $215 million available net of letters of credit. Combined with cash, we had a liquidity of $217 million and a leverage ratio of 1.66x.

During the fourth quarter of 2024, we generated $4.7 million of adjusted free cash flow and paid down $7 million in debt, resulting in debt reduction of $70 million since completing the Founders Acquisition in mid-August 2023. For full year 2024, we paid down $40 million in debt and generated $43.6 million in adjusted free cash flow. We will continue to utilize our free cash flow to improve our long-term financial profile through further debt repayment, which we expect will be fueled primarily through further growth in cash flow driven by our successful execution of our targeted 2025 development program. Our primary focus remains the same, utilizing our substantial free cash flow generation to primarily reduce debt and better position ourselves to ultimately provide a meaningful return of capital to shareholders. Looking at our 2025 outlook, we plan to follow the same general approach as in 2024.

In addition, our guidance reflects the recently announced agreement to acquire Lime Rock CBP assets and includes results from those operations after closing, which is expected by March 31st. As Paul discussed, and we have said in the past, our focus is on maintaining or slightly growing BOE per day total production while continuing to grow crude oil sales. Our full year 2025 total sales guidance is 20,000-22,000 BOE per day and 13,600-14,200 barrels of crude oil per day. I would point you to yesterday's press release for quarterly guidance. We expect to spend $138 million-$170 million on our full year 2025 development program, with anticipated capital spending of between $26 million and $34 million for the first quarter. We also anticipate full year 2025 LOE to be between $11.25 and $12.25 per BOE and between $11.75 and $12.25 per BOE for the first quarter.

All prices and estimates are based on assumed WTI oil prices of $65-$75 per barrel and Henry Hub prices of $2-$4 per MCF. With that, I will turn it back to Paul for his closing comments. Paul?

Paul McKinney (Chairman and CEO)

Thank you, Travis. Up to this point, we've reviewed our fourth quarter and full year 2024 results and discussed generally our outlook and guidance for 2025. What we haven't shared, though, are our thoughts associated with managing the company through the volatility we continue to experience in commodity markets. The question that could be asked, what are our priorities and how will those priorities impact our decision-making going forward? Let's discuss what Ring is likely to do if WTI oil prices remain substantially at or below $65 a barrel. Before going there, though, I think it is good to remind ourselves of the virtues associated with our assets. Turning to page 8 of our investor presentation, Ring Energy has the second highest margin on a dollar-per-barrel basis in our peer group.

This enables the company to have a relatively better ability to manage the challenges of low oil prices compared to many of our peer group if we do not consider the benefits or the differences in company hedging practices. Furthermore, as shown on page nine, Ring has the second lowest production decline rate in our peer group, which means if we want to maintain our production levels, we would require a relatively lower level of capital spending to achieve that goal. Another thing we can discuss is our hedging practices. As you know, Ring strives to hedge 50% of our forecasted PDP production from our most recent reserve report as a method of limiting the exposure to sustained low oil and natural gas prices and to protect future cash flows supporting our debt repayment and our capital spending plans.

Having said all that, if WTI oil prices remain at or below $65 per barrel for an extended period of time, we believe the right thing to do is to cut back on capital spending in favor of reducing debt. On page seven of our investor presentation, we show estimates of, among other things, our projected leverage ratio at different WTI oil prices. I am referring to the chart on the lower right of the page entitled Enhancing Balance Sheet Targeting Leverage Ratio Less Than One Times. The scenarios depicted in the chart assume our capital spending levels remain the same; only the oil price assumptions were changed. The $65 per barrel case shows that we believe our leverage ratio under those assumptions will reduce only modestly.

If we stay at $65 per barrel for a duration of that forecast, we are more likely to reduce our capital spending to a lower level than that assumed in the $65 per BOE scenario depicted there, and we will apply more of our cash flow to paying down debt. Although the calculation is very complicated and lower capital spending levels would imply lower production revenue and EBITDA levels, we believe we would end up at a better leverage ratio by focusing on reducing absolute debt. Another point I'd like to make is associated with our success in organically growing our proved reserves in 2024 and what that means regarding our future plans for growth.

Earlier today and in the past, you have heard us say we intend to allocate a portion of our cash flow from operations to maintaining or slightly growing our production and liquidity and allocating the balance to reducing debt, and that our growth will come from accretive balance sheet enhancing acquisitions. Building on that strategy, in 2024, we began focusing on identifying and capturing opportunities for reserve and inventory growth with our cash flow and as a part of our capital program. We intend to increase our focus on organically growing our reserves and undeveloped inventory over time, and by doing so, we are adding another component to our growth strategy, another way to win, so to speak, and not rely solely on acquisitions for reserve and undeveloped inventory growth. We believe the benefits of adding organic growth to our growth strategy are compelling.

Another point refers to the question, why did Ring use stock as part of the total consideration in the pending Lime Rock transaction? There are a couple of reasons, the primary one being our balance sheet. By using a small amount of equity, we anticipate having a stronger balance sheet and corresponding leverage ratio at closing. Another benefit is related to the confidence Lime Rock has in our ability to create value. As you may know, Lime Rock is a premier oil field operator, and the parent company provides growth capital for the energy industry. The last subject I would like to address before turning this call over to the operator to answer questions is our low stock price. Our stock price has not been this low since 2021.

Since that time, we have increased our reserves and production per share, lowered our leverage ratio, and are a larger and more resilient company than we were then. The value proposition established with our current stock price is compelling and, in my opinion, represents a very opportunistic investment opportunity. With that, we will turn this call over to the operator for questions. Operator?

Operator (participant)

Thank you. We will now begin the question-and-answer session. To ask a question, you may press star, then one on your touch-tone phone. If you are using a speakerphone, please pick up your headset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. The first question will come from Bert Donnes with Truist. Please go ahead.

Bert Donnes (Financial Analyst)

Hey, good morning, team.

Paul McKinney (Chairman and CEO)

Good morning, Bert.

Bert Donnes (Financial Analyst)

I saw your note on the new guide that it does not assume any synergies or cost reductions in it from the recent acquisition. I was just wondering if maybe you could talk us through low-hanging fruit on the savings you might be able to find on the combined assets, and then maybe how quickly do you expect to kind of fold in those 40 new locations that you just added to the portfolio?

Paul McKinney (Chairman and CEO)

Yeah, very good. I'm going to allow a couple of other people to join me answering this question because it's a very good one. Our operations are literally right next door, and the operations are very, very similar to what we're currently doing. One of the areas that we've identified that we believe represents an opportunity is, and it relates back to one of the primary causes or costs in our operating costs, and that's basically handling water. They have a saltwater disposal system over there, and I believe they have 12 saltwater disposal wells. It is underutilized, especially compared to our system. If you recall in the past, Bert, we have had to manage our drilling program so that we don't produce too much water, more water than our saltwater disposal system could handle.

This provides opportunities there to not only combine the system but also reduce the resulting operating costs. If you do not mind, I will just turn it over to Shawn. Shawn, we just visited the assets for the first time this last week. What did you discover while you were over there, Shawn?

Shawn Young (SVP of Operations)

Yeah, I think there's definitely some opportunities for synergies beyond just the water infrastructure. We have an extensive oil infrastructure there as well. Also just taking advantage of our personnel, our office that is currently right there. There's some synergies there as well. Also, just point to kind of our track record, right? If you look back at the FOG acquisition, the lifting costs and cost structure here is somewhat similar. We've been able to reduce our lifting costs in that FOG acquisition by over 22%. While there's not anything in the forecast that basically outlines kind of those synergies, they're definitely there, and we expect to capitalize on them.

Paul McKinney (Chairman and CEO)

Yeah, the challenge we had, Bert, is we really didn't want to get out over our skis and predict something before we had an opportunity to actually see what those potential savings would be firsthand. Again, pointing out what Shawn identified, we have a track record of doing this, and we're very confident it could even result in just changing the pumper routes and reducing the number of people just to operate the wells. There's all kinds of opportunities there. We just didn't want to get over our skis, and we wanted to make sure that we just continue to use in our forecast the operating cost track record that Lime Rock had. We do believe that the combined benefit of both areas now all being one, we'll see some cost reductions.

Now, going to the second part of your question about the undeveloped inventory, again, the playbook is going to be similar to what we did with Founders. The first thing we wanted to do is get our arms around the operations, get those wells and operations integrated into our company, and then start the process of drilling. Right now, we anticipate drilling some of the first Lime Rock opportunities in the H2 of the year. Alex, is there more you'd want to share there?

Alex Dyes (Executive VP and COO)

Yes, definitely. Hi, Bert, this is Alex. Just a few things talking about the inventory, much like we did at Ring over the last few years, disproportionately, the CBP horizontal assets have been taking a lot of our capital to drilling very good-performing horizontal wells, mainly due to the cost structures dropped a lot there. We are going to do the very same things on the Lime Rock assets, right? We have found a better way to drill the well, stay more in zone, optimize the frack. Our cost structures dropped about 15%-20% over the last couple of years. Our new cost structure with a more improved completion and better landing zone should lead to really good inventory that will compete for capital today.

Paul McKinney (Chairman and CEO)

Yeah, that goes back to some other things we've talked in the past, Bert. Technology is our friend. At the early parts, early stages of developing the San Andres horizontal oil play, both in Yoakum County and Andrews County and Gaines, primarily though in Andrews and Yoakum, technology has continued to roll on, and we've learned how to develop higher recoveries from the same wells and the same lateral lengths. Yeah, technology is our friend. I think we answered your question, Bert.

Bert Donnes (Financial Analyst)

I think you sure did. I think you're doing the right thing. Keep the guidance conservative and give yourself a chance to beat it there. On my second question, just on the M&A front, you continue to fold in accretive boltons. I just want to get an update on maybe how you think about the volatility that we're seeing. Does this maybe slow that down, or do you think it's the other way, maybe third-party operators are maybe looking to sell some of their assets and shore up their balance sheets, and maybe you'll be the beneficiary of that? Just the other side of that as well, you sold about $6 million in those high-cost non-core wells. Is there anything left at the company on that front?

Paul McKinney (Chairman and CEO)

Yeah, currently, our inventory, we don't have more really to sell. With every acquisition, because no portfolio that you acquire will be a perfect set of assets. Some of those assets will fall into the bucket of non-core or well types that, if you have undeveloped opportunities, they may not compete. Not every economic opportunity, even in the Lime Rock acquisition, is equally economic. If you look at some of the opportunities in the south, we've identified some of those, the Barnett and the Devonian opportunities. Those are economic, and they work, especially at higher oil prices, but they're not as economically attractive as the San Andres horizontal opportunities that we have offsetting our Shafter Lake operations. Okay? That's kind of where we are there. I don't think anybody else has anything else they want to chime in.

Bert Donnes (Financial Analyst)

Just follow up on the first part. Are there more Lime Rocks out there, or do you think the volatility in the market kind of affects your ability to find more Lime Rocks?

Paul McKinney (Chairman and CEO)

Yeah, thanks for the reminder. No, the volatility is a challenge. It is also complicated. The volatility tends to bring buyers' and sellers' expectations closer together, so you're more likely to get a transaction done. The challenge for us is to lower the prices. If you're in a sustainably lower price environment, we're going to protect our balance sheet, and our first priority is to strengthen the balance sheet so we can enter the marketplace again. I'm not going to tell you that we're not going to do a deal because there are all kinds of creative ways to structure deals. In a lower price environment, right after completing a transaction like we're hoping to do with this pending transaction, our balance sheet won't be strong enough for us to want to go out there and keep going.

There will be a time period for us where we're going to concentrate on restoring the balance sheet so we can get out there and get active when the next opportunities come out.

Alex Dyes (Executive VP and COO)

Yeah. Let me add to that. Actually, we have a new slide, Bert, slide 14. Think about Founders and what we did in 2023, right? It took us a little bit to integrate it and optimize it. You can see all the metrics there, but we cleaned up the balance sheet and strengthened it up to be able to do another deal. It is the same concept here.

Paul McKinney (Chairman and CEO)

Yeah.

Bert Donnes (Financial Analyst)

That's perfect. Thanks for the update, guys.

Paul McKinney (Chairman and CEO)

Hey, you're welcome, Bert.

Operator (participant)

The next question will come from Noel Parks with Tuohy Brothers. Please go ahead.

Noel Parks (Managing Director in Energy Research)

Hi, good morning. Just a couple. Just could you just talk a bit about inventory quality and your footprint and what close boltons like Shafter Lake do for you? I'm thinking sort of from just a location standpoint. I don't know if there's lateral length implications, but it would just be good to hear about that.

Paul McKinney (Chairman and CEO)

Okay, I'll give a stab at that, Noel. I think you're touching on subjects that we hear frequently from investors and shareholders. As you know, we have had the benefit of undeveloped locations that had superior economics, especially when you compare to many of the plays that other people are pursuing in the broader Permian Basin. Our San Andres horizontal locations have competed very handsomely against some of the Devonian or the Delaware and Midland Basin wells, the shale wells that people are drilling. That is part of, as a key component of our growth strategy. You've heard me say this in the past, Noel, we would love to have that 15- or 20-year inventory of undeveloped locations that have similar economics. The fact remains, we just don't have that.

That is why we are keenly focused on making these acquisitions that meet specific criteria that along come with it, undeveloped opportunities that compete in our portfolio. One of the things that we have talked about, and it is a change that has occurred over the last little over a year now, we have been focusing on organically identifying and capturing these opportunities so we do not also have to do that with acquisitions. By identifying and capturing future growth opportunities organically, we are using our cash flow and our annual budget, so to speak, to capture them. Although that additional capital could otherwise have gone to paying down debt, it is the most attractive way and the least costly way, and the opportunity presents itself as having the best economics going forward in terms of growing the inventory and capturing opportunities for sustained growth.

Alex Dyes (Executive VP and COO)

Let me add to that, Noel, I'd like to address a little bit of your inventory quality question. We actually put in a new slide on page 25 of the slide deck. That just shows year-over-year what our inventory looks like both on the horizontal basis and the vertical basis. If you look at that, year-over-year, we're still drilling really good horizontal wells, but for a reduced cost structure, 11% on horizontals. In the vertical sense, we actually increased substantially on well performance. That's mostly due to the Founders acquisition because when we did that, the Founders acquisition brought in good and even better inventory, yet we still reduced our vertical costs on a per-stage basis by like 3%. The inventory quality is still there, and actually, we have really good break-even.

In these lower oil prices, we have more optionality and flexibility.

Paul McKinney (Chairman and CEO)

Yeah. Our break-evens compare very favorably to our peer group. We have a great inventory. Is it a 15 or 20-year inventory? No. That is part of the strategy. That is part of what we are doing. We are out there looking for additional opportunities. We like the Central Basin Platform, the southern part of the shelf, because that is the playground we have been playing in for a long time. We know that playground. We believe that there are a lot of opportunities. Again, going back to the investor presentation, the entire Central Basin Platform has conventional reservoirs that have been historically overlooked by other operators and are still being overlooked.

To the extent that we can continue to pursue them and continue to build that inventory, I believe that we have a great opportunity ahead of us right here in the very playground that we have been playing. Who knows? There could be a day in the future where we actually expand beyond our current playground. We'll see. Does that answer your question, Noel?

Noel Parks (Managing Director in Energy Research)

Sure did. In the deal slides, I saw you had a mention of Devonian potential, and that sounds familiar to me. I have only read a little bit about Barnett potential in your neck of the woods. I guess that is sort of in the boundary between the Central Basin Platform and the Midland Basin. That was a new topic for me.

Paul McKinney (Chairman and CEO)

Yeah. This is an area that's been developing. If you were to take a little bit of time to understand or study what is actually going on on the eastern side of the Central Basin Platform, the Barnett play is a very successful play that several companies are still spending money trying to acquire acreage in it. It does present really nice optionality, especially if we ever get back to an environment where you're above $75 oil. Above $75 oil, these things are very attractive. Some of the other things that are very interesting, if you were to study the play, is that the operating costs for most of these Barnett wells are really, really low. You have really, really high cash-generating capacity. That is part of why we're so excited about that play.

Now, at $65 oil, I don't believe we'd be able to allocate capital to those opportunities. The bottom line is acquisitions like this provide optionality in the future, especially in an environment where prices rebound and are stronger.

Noel Parks (Managing Director in Energy Research)

Just to—so is there a learning curve that conceivably sort of just lowers that threshold of what you'd need to make Barnett's work at a slightly better price?

Paul McKinney (Chairman and CEO)

Yeah, Noel, I think you already know the answer to that question. Yes, there's always a learning curve. Again, technology is your friend. We have learned that technology and climbing the learning curve associated with the experiences and figuring out the best ways to drill and complete the wells is the key to taking what used to be tier one acreage or tier two acreage and turning it into tier one acreage economics. Yes, there is a learning curve. Again, in a stage like you find us today and where we will be after we close the pending acquisition with Lime Rock, our balance sheet and our current price environment right now, it'd be very challenging for us to want to allocate capital to a development program where we know that we'd have to climb that learning curve.

We would want to do that in a higher price environment.

Noel Parks (Managing Director in Energy Research)

Got it. Thanks a lot.

Operator (participant)

Again, if you have a question, please press star, then one. Your next question will come from Jeff Robertson with Water Tower Research. Please go ahead.

Jeff Robertson (Managing Director in Natural Resources)

Thanks. Good morning. Paul, just to follow up on the organic growth concept, can you talk about what Ring is doing with maybe some portion of your capital or at least with your G&G to identify additional organic growth opportunities on the existing footprint, whether it's new zones or applying a different technology to an existing zone?

Paul McKinney (Chairman and CEO)

Yeah, that's a good question, actually. We are evaluating. The very first step you do is you evaluate all the potential zones under your existing acreage. As you map those various different zones, you tend to map beyond your acreage. We are also looking at acreage near and close to where we currently operate. That's the easiest, simplest, least expensive way to expand and identify and capture economic opportunities. We are starting there. On our existing acreage, we are very much aware of development opportunities both vertically and also horizontally. What's kind of interesting is the horizontal opportunities in areas that have traditionally been, for us anyway, vertical development areas. We drilled a couple of wells this last year. We have one of those horizontal wells that remained a DUC over the year.

We're going to be completing that here this year, that DUC as well, as we study the completion methods and, again, the potential learning curve associated with that. Several other offsetting operators have been very successful pursuing these plays. That is part of the reason why we are now in a study mode, so to speak, to decide how we want to allocate our capital to the least risky or the least risk-adjusted path forward to maximize free capital generation. Yeah, we are very excited about that. There are quite a few opportunities in the southern part of our acreage, so in Crane County, also in Winkler County, where we have been historically developing things vertically.

Right now, we believe there are opportunities to test and try horizontal technology to improve the capital efficiency and increase the net present value, so to speak, of each location, reduce the number of locations that are required. Your surface footprint is a lot lower. You have fewer facilities, so you also have fewer emissions. They are a lot easier to manage. It is just overall a much more efficient way to pursue our future growth.

Jeff Robertson (Managing Director in Natural Resources)

On the balance sheet, Paul, or maybe Travis, can you talk about whether or not the Lime Rock assets will have a material impact on the RBL when you fold those in and, I guess, spring redetermination?

Paul McKinney (Chairman and CEO)

Yeah. Yeah, we typically have a spring redetermination. Right now, we have the room and liquidity on our balance sheet to close this transaction, and we plan to do that. However, we do believe that with the added assets, we probably could deserve a higher borrowing base. That is something that the banks will have to decide after we provide all the information and all that. I do not want to get out over my skis in predicting that. Travis, is there a point you would like to make in that?

Travis Thomas (CFO)

They're just very bankable assets with a low decline rate. We think that the banks will really like them. It's also very PDP-heavy. We've got some upside, a lot of upside, but the banks are going to like the PDP aspect of it as well. We'll wait for the spring redetermination.

Jeff Robertson (Managing Director in Natural Resources)

Thank you.

Operator (participant)

This concludes our question-and-answer session. I would like to turn the conference back over to Paul McKinney for any closing remarks.

Paul McKinney (Chairman and CEO)

On behalf of the management team and board of directors, I want to once again thank everyone for your interest and for joining today's call. We appreciate your continued support, and we look forward to keeping everyone apprised of our progress. Have a great day.

Operator (participant)

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.