Ring Energy, Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

ACQUISITIONS & DIVESTITURES

ACQUISITIONS & DIVESTITURES

12 Months Ended

Dec. 31, 2022

Business Combination and Asset Acquisition [Abstract]

Andrews County Acquisition

The Company entered into a Purchase, Sale and Exchange Agreement dated February 1, 2021, effective January 1, 2021, with an unrelated party, covering the sale and exchange of certain oil and gas interests in Andrews County, Texas. Upon the sale and transfer of wells and leases between the two parties, the Company received a cash consideration of $2,000,000 and reduced the Company’s asset retirement obligations by $2,934,126 for the properties sold and added $662,705 of asset retirement obligations for the wells acquired.

Stronghold Acquisition

On July 1, 2022, Ring, as buyer, and Stronghold Energy II Operating, LLC, a Delaware limited liability company (“Stronghold OpCo”) and Stronghold Energy II Royalties, LP, a Delaware limited partnership (“Stronghold RoyaltyCo”, together with Stronghold OpCo, collectively, “Stronghold”), as seller, entered into a purchase and sale agreement (the “Purchase Agreement”). Pursuant to the Purchase Agreement, Ring acquired (the “Stronghold Acquisition”) interests in oil and gas leases and related property of Stronghold consisting of approximately 37,000 net acres located in the Central Basin Platform of the Texas Permian Basin. On August 31, 2022, Ring completed the Stronghold Acquisition.

The fair value of consideration paid to Stronghold was approximately $394.0 million, of which $165.9 million, net of customary purchase price adjustments, was paid in cash at closing, $15.0 million will be payable in cash after the six-month anniversary of the closing date of the Stronghold Acquisition. Shortly after closing, approximately $4.5 million was paid for inventory and vehicles and approximately $1.8 million was paid for August oil derivative settlements for certain novated hedges. The cash portion of the consideration was funded primarily from borrowings under a new fully committed revolving credit facility (the “Credit Facility”) underwritten by Truist Securities, Citizens Bank, N.A., KeyBanc Capital Markets Inc., and Mizuho Bank, Ltd. The borrowing base of the $1.0 billion Credit Facility was increased from $350.0 million to $600.0 million at the closing of the Stronghold Acquisition. The remaining consideration consisted of 21,339,986 shares of Ring common stock and 153,176 shares of newly created Series A Convertible Preferred Stock, par value $0.001 (“Preferred Stock”) which was converted into 42,548,892 shares of common stock on October 27, 2022. Please see "Note 12 - STOCKHOLDERS' EQUITY" for further discussion. In addition, Ring assumed $24.8 million of derivative liabilities, $1.7 million of items in suspense and $14.5 million in asset retirement obligations.

Purchase Price Allocation

The Stronghold Acquisition has been accounted for as an asset acquisition in accordance with ASC Topic 805 - Business Combinations. The fair value of the consideration paid by Ring and allocation of that amount to the underlying assets acquired, on a relative fair value basis, was recorded on Ring’s books as of the date of the closing of the Stronghold Acquisition. Additionally, costs directly related to the Stronghold Acquisition were capitalized as a component of the purchase price. Determining the fair value of the assets and liabilities acquired requires judgment and certain assumptions to be made, the most significant of these being related to the valuation of Stronghold’s oil and gas properties. The inputs and assumptions related to the oil and gas properties are categorized as level 3 in the fair value hierarchy.

The following table represents the preliminary allocation of the total cost of the Stronghold Acquisition to the assets acquired and liabilities assumed as of the Stronghold Acquisition date:


Consideration:
Shares of Common Stock issued	21,339,986
Common Stock price as of August 31, 2022	$	3.24
Common Stock Consideration	$	69,141,555

Shares of Preferred Stock issued	153,176
Aggregate Liquidation Preference	$	153,176,000
Conversion Price	$	3.60
As-Converted Shares of Common Stock	42,548,892
Common Stock Price as of August 31, 2022	$	3.24
Preferred Stock Consideration	$	137,858,446

Cash consideration:
Closing amount paid to Stronghold	121,392,455
Escrow deposit paid	46,500,000
Cash paid for inventory and fixed assets	4,527,103
Cash paid for realized losses on August oil derivatives	1,777,925
Cash received for post-close adjustments, net	(5,535,839)
Total cash consideration	168,661,644
Fair value of deferred payment liability	14,807,276
Post-close settlement to be paid to Stronghold	3,511,170
Fair value of consideration paid to seller	393,980,091

Direct transaction costs	9,162,143
Total consideration	$	403,142,234

Fair value of assets acquired:
Oil and natural gas properties	439,589,683
Inventory and fixed assets	4,527,103
Amount attributable to assets acquired	$	444,116,786
Fair value of liabilities assumed:
Suspense liability	1,651,596
Derivative liabilities, marked to market	24,784,406
Asset retirement obligations	14,538,550
Amount attributable to liabilities assumed	$	40,974,552
Net assets acquired	$	403,142,234

Approximately $40.4 million of revenues and $13.6 million of direct operating expenses attributed to the Stronghold Acquisition are included in the Company’s Statements of Operations for the period from September 1, 2022 through December 31, 2022.