REI Stock Forecast: Rising Oil Price Boosts Ring Energy by 227%

Viktoria VoronchukThis REI stock forecast article was written by Viktoriya Voronchuk – Financial Analyst intern I Know First.

Highlights:

  • Since December 2020, REI’s shares have risen by 227%
  • REI exceeded the US Oil and Gas industry by 55.5% over the past year
  • DCF Estimates $2.5 REI Stock Forecast For 2021

Overview

(Source: www.businesswire.com)

Ring Energy, Inc., an exploration and production company, acquires, exploration, development, and production of oil and natural gas in Texas and New Mexico. It mainly sells its oil and natural gas production to end-users, marketers, and other buyers. The company was formerly known as Transglobal Mining Corp. and changed its name to Ring Energy, Inc. in March 2008. Ring Energy, Inc. was founded in 2004 and is headquartered in Midland, Texas.

(Figure 1 – Source: finance.yahoo.com)

Since December 2020, REI’s share has risen by 227%. Figure 1 shows that currently, the short-term moving average crosses above the long-term moving average from February 2021, indicating a buy signal, despite the decline over the past week.

Oil And Gas Companies Amid COVID-19:Since December 2020, REI’s Shares Have Risen By 227%

2020-2021 are challenging years for the oil and gas industry. The circumstances of the pandemic are causing a real storm of falling prices and demand. What does this mean for oil investors or potential investors? Is oil still a good investment in 2021? Oil demand is expected to rise significantly in 2021 but will remain about 4% below pre-COVID-19 levels. The industry may even benefit from a small temporary jump in prices, as today’s large investment cuts will lead to tomorrow’s spot deficit. Let us conduct the SWOT analysis of Ring Energy, which strengths and weaknesses the company has now.

(Figure 2 – SWOT analysis of REI)

The entire Ring area is located in the Permian Basin in Texas and New Mexico. The Permian Basin is one of the leading mining companies in North America and has a rich manufacturing history. At the end of 2019, estimated net-provided reserves were approximately 88% of oil and 12% of natural gas.

What could be said about the team? So, the company has an experienced and proven management team. The company’s executive team has an average of approximately 25 years of industry experience per person, most of which is concentrated in the Permian Basin. The company believes that the management and technical team is one of the company’s main competitive advantages.

Some of oil production is sold through a third-party pipeline which has no regional competition and all other oil production is transported by the oil purchaser by trucks with competitive trucking costs in the area.

Attractive Clients: Major sales to three significant clients: Phillips 66, Occidental Energy Marketing, and NGL Crude Partners, accounted for 42%, 36%, and 7% of oil and natural gas revenues. Economic uptick and increase in customer spending, after COVID-19, is an opportunity for Ring Energy, Inc. to capture new customers and increase its market share.

If we consider the weaknesses, then, of course, the main reason is COVID-19 due to changes in global supply and demand for oil and natural gas. People do not leave their homes, do not go to work and on holidays, do not use cars and public transport. Along the chain, stocks of oil and petroleum products are overflowing worldwide, and the productivity of refineries and oil production is decreasing. So, yes, the company is loss-making now. REI is more volatile than 75% of US stocks over the past 3 months. REI’s debt to equity ratio is considered high (83.2%). Furthermore, the company is experiencing liquidity problems: REI’s short-term assets do not cover its long-term liabilities by $294.7M.

But, according to simplywall.st, REI has sufficient cash runway for more than 3 years, due to free cash flow being positive and growing by 9.6% per year. The oil and gas sector will recover until June 2021. However, average prices and demand will remain below pre-crisis levels: after recovering from the lows of the second quarter, average oil prices in 2021 will remain at $40-45 per barrel, which is below the levels recorded before the coronavirus pandemic.

Amid low prices for oil stocks, there is room for betting on the sector’s future recovery. Therefore, in my opinion, the company has long-term growth prospects. As for short-term purchases of this stock, I would refuse.

REI Stock Forecast For 2021 – DCF Supports $2.5 Target Price

The DCF analysis results show that REI’s stock target price should be around $2.5.  This projected share price makes $0.3 more difference from the current share price. The forecast is based on average data from previous years, the direction of the company’s policy, and the specifics of the development of this sector of the economy for the coming years. I accept the discount rate and perpetual growth rate as reasonable for the time horizon 2021-2025 years from the finbox.com source.

(Figure 3 – DCF model of REI’s shares)

Ring Energy’s 2020 capex budget included drilling 18 new horizontal wells on the Northwest Shelf. At the moment, Ring Energy has stopped drilling new wells until oil prices stabilize. The increase in depreciation, depletion, and amortization expenses was mainly a result of increased production.

The company exceeded its production forecast for the fourth quarter of 2020 and produced 9,307 net barrels of oil equivalent per day, of which 86% is oil, even though no new wells were commissioned during the quarter;

The company also plans to commission new wells by the first week of March 2021, increasing productivity. To reduce rental costs, the company relocated the Woodlands, Texas headquarters, downsized the Midlands office, Andrews field office, and closed the Tulsa office, resulting in significant annual savings. Oil production in FY2021 is expected to exceed FY2020 by 3-8%.

The company’s strategy is focused on a disciplined capex program, which is expected to be fully funded by operating cash flow and is designed to maintain production levels with the potential for some minimal growth.

Conclusion

Since December 2020, REI’s share has risen by 227%. The SWOT analysis shows that despite REI is loss-making now, it has high-quality assets, significant clients, and an experienced and proven management team. REI exceeded the US Oil and Gas industry by 55.5% over the past year. According to the DCF analysis results, REI’s stock target price will be around $2.50. Therefore, I consider it the right choice at these current levels for long-term investments, and I take the buy-side on REI’s stock. As mentioned above, looking ahead, oil demand is expected to rebound significantly in 2021. Consequently, the demand for oil, REI’s production, and the value of shares will increase.

It is worth paying attention that the stock-picking AI of I Know First has a high signal on the one-year market trend forecasts, supporting my position for the REI stock forecast. The light green for the short-term forecasts is mildly bullish, while the darker green is a strong bullish signal for the one-year forecast.

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