Potential Rewards Outweigh Risks In Ring Energy Stock

Looking at Ring Energy ([stock_market_widget type="inline" template="generic" color="default" assets="REI" markup="(NYSE: {symbol} {currency_symbol}{price} ({change_pct}))" api="yf"] stock, its current condition could easily confuse investors. Revenues and earnings have achieved record levels and look poised to continue their double-digit growth. However, RING stock has fallen to multi-year lows.

The Midland, Texas-based company, which operates in the Permian Basin, participates in the upstream (exploration and production) side of the industry. As such, investors have to expect wild swings in the RING stock price. However, with profit growth set to continue, and a low valuation, investors could profit long term by buying at these levels.

It Is Not Just RING Energy That Has Suffered

Like many upstream oil players, RING stock appears to be suffering from a glut of oil and gas available on the market. As recently as the spring of 2018, RING traded above $17 per share. Now selling for about $2.40 a share, it has even fallen below the lows it suffered at the height of the oil bust in early 2016.

It is not just Ring Energy. Oil stocks across the board have suffered. Chesapeake Energy (NYSE: CHK) has fallen below $2 per share. Encana (TSE: ECA.TO, NYSE: ECA) has fallen below $5 per share. With production exceeding demand, even geopolitical tension with Iran has failed to boost RING stock and its peers.

RING Declines Amid Record Revenues, Profits

Ironically, in many respects, the company has never looked better. Revenues have more than tripled from levels seen at the height of the last oil boom in 2014. For this year alone, analysts predict revenues will rise 68.8% from last year’s levels to a consensus $202.69 million.

They also forecast earnings of 66 cents per share for the year. If the company meets that estimate profits will have risen 106.2% from last year’s levels. They also believe that double-digit growth will continue in 2020. This takes the forward price-to-earnings (PE) ratio on RING stock to only 3.3. Hedge funds have also taken notice as an additional five funds have added to their stake this year.

To be sure, upstream oil companies depend heavily on prices. Consequently, they must weather frequent boom and bust cycles. However, with oil priced at about $56 per share, it trades at more than double the lows of early 2016. Admittedly, natural gas cannot seem to gain pricing power as it trades at about $2.20 per 1000 BTUs. Still, with increasing numbers of liquefied natural gas (LNG) terminals coming online, shippers can bring more of this LNG to higher-priced markets in Europe and Asia.

Should Investors Buy RING Stock?

I see RING stock as a potentially lucrative play for speculative investors. Stocks with a forward PE of just above three rarely appear at all, even less so when they post double-digit earnings growth. Moreover, twice in the last five years, RING has exceeded the $17 per share level. A repeat of that feat would deliver a seven-fold return.

I see enough points of concern besides the low stock price to call it speculative. Current assets often exceed current liabilities. Many take that as a sign that it cannot meet immediate expenses, though it could turn to the debt markets or asset sales if rising profits won’t cover the shortfall. Still, RING stock held no long-term debt this time last year. Now that it has borrowed $85 million, (a large sum for a $165 million company) further debt might create more nervousness among investors. Finally, the stock itself trades near its 52-week low and has shown no signs of a turnaround.

Still, debt levels remain manageable for now, and Ring Energy dealt with the same issues on high current liabilities when it was $17 per share. With the value proposition RING stock offers, a speculative position appears to bring more potential reward than risk.

The opinions provided in this article are those of the author and do not constitute investment advice. Readers should assume that the author and/or employees of Capital 10X hold positions in the company or companies mentioned in the article. For more information, please see our Content Disclaimer.

Will Healy is a freelance business and financial writer based in the Dallas area. In addition to marijuana, energy, and mining stocks, he has also written about real estate, insurance, personal finance, and macroeconomics. In addition to Capital 10X, his articles have appeared on sites such as InvestorPlace, Yahoo! Finance, MSN Money, Kiplinger’s Personal Finance, GOBankingRates, and Seeking Alpha. Will holds a B.S. in Journalism from Texas A&M University, an M.S. in Geography from the University of North Texas, and an MBA from the University of Texas at Dallas. Phone: 416-721-8257. Address: 682 Indian Road Toronto, Ontario M6P 2C9.


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