Ring Energy, Inc. (NYSE:REI) Q3 2023 Results Conference Call November 3, 2023 11:00 AM ET
Al Petrie – IR
Paul McKinney – Chairman & CEO
Travis Thomas – EVP & CFO
Alex Dyes – EVP, Engineering & Corporate Strategy
Marinos Baghdati – EVP, Operations
Steve Brooks – EVP, Land, Legal, Human Resources & Marketing
Conference Call Participants
Jeff Grampp – Alliance Global Partners
Neal Dingmann – Truist
Noel Parks – Tuohy
Good morning, and welcome to the Ring Energy Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] Please note today’s event is being recorded.
I would now turn the call over to Al Petrie, Investor Relations for Ring Energy.
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 the third quarter and our outlook. We will then turn the call over to Travis Thomas, Ring’s EVP 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 of Engineering and Corporate Strategy; Marinos Baghdati, Executive VP of Operations; and Steve Brooks, Executive VP of Land, Legal, Human Resources and Marketing.
During the Q&A session, we ask you to limit your questions to one and a follow-up. You are welcome to re-enter the queue later with additional questions. I would also note that we have posted a third quarter 2023 earnings 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, www.ringenergy.com. Should one or more of these risks materialize or should underlying assumptions prove incorrect, actual results may differ materially.
This conference call may also include 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 conference is being recorded.
I would now like to turn the call over to Paul McKinney, our Chairman and CEO.
Thanks, Al. And welcome, everyone joining us today, and thank you for your interest in Ring Energy. It is amazing how conditions can change from one quarter to the next. Realized oil prices improved considerably in the third quarter, setting us up for record tying financial results despite several unanticipated downtime events affecting our sales. Overall, we are reporting another great quarter and are encouraged by the positive mood and outlook we see in the industry today.
As we discussed on our second quarter earnings call, our efforts for the third quarter of 2023 were squarely focused on successfully closing the Founders acquisition and making significant progress on the integration of their operations into our business. In addition, we continue the targeted execution of our 2023 development program. Next, we remain diligent in our efforts to drive cost efficiencies throughout our business.
And finally, we continued to generate solid free cash flow that was used to further pay down our debt balance exclusive of funding the Founders acquisition. Addressing the details of the quarter, first, we completed the final due diligence for the Founders Acquisition and closed on the acquisition on the agreed two timeline. In addition, our plans remain on track integrating the Founders assets into our existing operations. We remain excited about the opportunities afforded by the acquisition and look forward to beginning our development efforts on the acreage in the early part of next year.
As a reminder, these assets are similar to the CVP assets we acquired last year, having stacked pay zones of high quality rock with proven performance, as we have successfully done with our other assets, we intend to leverage our expertise applying the newest conventional and unconventional technologies to optimally develop the inventory of undeveloped drilling locations afforded by the transaction.
During the third quarter, we continued our successful 2023 development program with the drilling and the completion of two 1-mile horizontal wells in the Northwest Shelf, one with a working interest of 100% and the other with a working interest of 75%, and three, 1.5 mile horizontal wells in its Central Basin platform, each with a working interest of 100%. Additionally, in our Crane County acreage within the CBP, we drilled and completed three vertical wells, all with a working interest of 100%.
Lastly, we drilled and began the completion process on three 1-mile horizontal wells in the Northwest Shelf each with a working interest of 90%. These three wells were completed and brought online in October, so we will benefit from over two months of production from these wells in the fourth quarter, while the substantial majority of the drilling and completion capital was incurred during the third quarter.
Our third quarter 2023 was highlighted by continued strong cash flow generation in including $58.6 million of adjusted EBITDA that was 10% higher than the second quarter and also tied the record we posted in this year’s first quarter, contributing to the sequential increase in adjusted EBITDA with higher realized pricing and sales volumes for all products.
During the third quarter, we sold 17,509 barrels of oil equivalent per day, which was an increase from the second quarter of 2023 but felt short of our expectations. While our sales benefited from the August 15th closing of the Founders acquisition as planned, several unanticipated and temporary downtime events at certain third-party natural gas processing facilities affected our natural gas and NGL sales.
Additionally, we incurred three weeks of downtime due to a tank battery fire that shut in oil natural gas and associated NGL sales at that battery. I am happy to report that, the production is back up to expected levels as evidenced by our third quarter exit rate, which was in excess of 19,000 barrels of oil equivalent per day. This places us in a solid position to achieve our fourth quarter sales volumes guidance of 18,900 to 19,500 barrels of oil equivalent per day that we will discuss in more detail later.
We generated $6.1 million of adjusted free cash flow during the quarter, which mark our 16th consecutive quarter or four straight years of generating positive adjusted free cash flow. $6.5 million decrease from the second quarter was driven by increased capital spending of $10.8 million and $800,000 of higher cash interest expense that was materially offset by adjusted EBITDA of $5.1 million.
On an accrual-basis we spent $42.4 million on capital projects during the third quarter, which was at the high end of our guidance of $37 million to $42 million, driving our higher spending was an increased well level activity, compared to the guidance we provided in early August. During the third quarter, we drilled 8 horizontal wells and 3 vertical wells and completed and placed online 8 total wells.
As a reminder, our guidance was to drill 5 to 7 horizontal wells and 1 to 2 vertical wells and complete in place online 5 to 6 total wells during the period. We stepped up our spending program for these projects to help to ensure we deliver on our production guidance for the fourth quarter and set us up for good start for the New Year. We are pleased to complete the sale of our non-core operated New Mexico assets to a private buyer on September 27th for net proceeds of $3.8 million.
Consistent with the sale of our non-core Delaware Basin assets that closed in the second quarter, the New Mexico asset sale emphasizes our focus on building and developing our core operating position in the Northwest Shelf and the Central Basin platform in Texas that continue to generate significant returns for our stockholders. Also consistent with the Delaware Basin asset sale, we used the net proceeds from the New Mexico asset sale to further pay down debt.
On that point, while we borrowed the initial $50 million from our credit facility to fund the third quarter cash outlay for the Founders acquisition, our borrowings outstanding at September 30, were only $31 million higher than the end of second quarter. The $19 million difference reflects our net pay down of debt and as another clear example of our commitment to improving our balance sheet, increasing liquidity and better position the Company for long-term success.
Before turning this over to Travis, I’d like to discuss our updated outlook for the rest of the year. We anticipate a continued positive pricing environment benefiting from previously mentioned 5 wells coming online early in the quarter and a full quarter of production from the wells associated with the Founders acquisition.
We are now targeting total capital spending of between $35 million to $40 million in the fourth quarter due to increased drilling and completion activity. This brings our full year capital spending program to $148 million to $153 million. Our fourth quarter development program is focused on a balanced and capital efficient combination of drilling 3 to 4 horizontal wells and 2 to 3 vertical wells as well as completing and placing online 8 to 10 wells.
Additionally, our capital spending program includes funds for targeted capital workovers, infrastructure upgrades, leasing costs, and non-operated drilling, completion and capital workovers. A primary assumption that underpins our capital spending plans is that WTI oil prices will range between $65 and $85 per barrel.
As in the past, we have designed our spending program with flexibility to respond to the changes in commodity prices and other market conditions. We continue to expect fourth quarter sales volumes of 18,900 to 19,500 barrels of oil equivalent per day despite the reduced volumes from the New Mexico asset sale and the additional volumes expected from the stepped up capital spending program. We anticipate 69% of fourth quarter sales to be oil. Additionally, our third quarter production exit rate of over 19,000 barrels of oil equivalent per day increases our confidence in our fourth quarter outlook.
So with that, I will turn the call over to Travis to discuss our financial results in more detail. Travis?
Thanks, Paul, and good morning everyone. Overall, we had a great quarter with record tying EBITDA. Technically, there was less than a $5,000 variance, so it’s a great reminder to save our paperclips and make every penny count. Our realized oil price was up $9 from the second quarter, so that gave us the license to resume capital projects and LOE workovers that were deferred last quarter. This catch up work contributed to our higher LOE and CapEx spend in the third quarter of 2023.
Of course, the scheduling of getting the production back online was a bit tricky. So, along with the gas takeaway issues and the fire that Paul mentioned, we were a bit lower on volumes compared to the forecast, but with record EBITDA and the knowledge that these deferred volumes were back online at a higher price environment, we are very pleased with the results.
So, let’s dive into the numbers. During the Q3, we sold approximately 1.1 million barrels of oil, 1.6 Bcf natural gas and 243,000 barrels of NGLs for a total of 1.6 million Boe or 17,509 Boe per day. Mexico. Realized pricing was $81.69 per barrel of crude, $0.36 per Mcf of natural gas and $11.22 per barrel of NGLs or $58.16 per Boe. This was 15% higher than the second quarter 2023 of $50.49 per Boe.
Our third quarter average crude oil price differential from NYMEX WTI futures pricing was a negative $0.78 per barrel versus a negative $1.77 per barrel for the second quarter, almost a dollar improvement for those without a calculator. This was mostly due to the Argus WTI WTS that increased $0.91 per barrel and the Argus CMA roll an increase of $0.21 per barrel on average from the second quarter.
Our average natural gas price differential from NYMEX futures pricing for the third quarter was a negative $2.45 per Mcf compared to a negative $3.07 per Mcf for the second quarter. Our realized NGL price for the third quarter averaged 16% of WTI compared to 13% for the second quarter. The combined result was revenue for the third quarter 2023 of $93.7 million, which was up $14.3 million or an 18% increase in the second quarter.
LOE was $18 million versus $15.9 million for the second quarter. On a per Boe basis, LOE for the third quarter was $11.18 versus $10.14 per Boe for the second quarter. LOE per Boe for the third quarter of 2023 was slightly above the guidance of $10.50 to $11 per Boe, primarily due to lower sales volumes related to the unanticipated and temporary downtime previously discussed.
Contributing to the sequential increase in absolute LOE from the second quarter increased due to a higher well count from the Founders acquisition and higher expense workover activity, including projects deferred from the second quarter. Partially offsetting the overall increase in sequential quarterly absolute LOE for the third quarter was the sale of our non-core Delaware Basin assets during the second quarter.
Keep in mind, the disposition of our non-core operated New Mexico assets had minimal impact on the third quarter LOE given the transaction closing date of September 27th. As such, we look forward to seeing a full three months of cost reduction during the fourth quarter. As a reminder, both the New Mexico and Delaware Basin assets had a higher lifting cost profile than our core properties.
Production taxes were $4.8 million or $2.95 per Boe versus $4 million or $2.55 per Boe for the second quarter, with the tax rate remaining steady at approximately 5%. DD&A was $22 million compared to $20.8 million for the second quarter. On a per Boe basis, DD&A sequentially increased from $13.65 from $13.23 per Boe.
SG&A which excludes share based compensation was $3.05 per Boe versus $2.89 per Boe for the second quarter of 2023. Excluding transaction related costs, cash G&A was $3.15 per Boe for the third quarter versus $2.75 per Boe for the second quarter and $3.85 per Boe for the third quarter of 2022, an 18% decrease year-over-year.
Interest expense was $11.4 million versus $10.6 million for the second quarter with the increase substantially due to a higher interest rate and one additional day in the period. I would also note that interest expense includes about $400,000 per month in non-cash amortization. Due to the sharp increase in oil prices since June 30th which is a good thing.
Our third quarter loss on derivative contracts was $39.2 million compared to a $3.3 million gain in the second quarter of 2023. We have recorded an income tax benefit of $3.4 million versus a benefit of $6.4 million in the second quarter. As a reminder, a significant driver in the level of our second quarter tax benefit was the release of the valuation allowance during the period.
During the third quarter, we have reported a net loss of $7.5 million or $0.04 per diluted share. Excluding the estimated after tax impact of pretax items, including $33.9 million for non-cash unrealized losses on hedges, $2.2 million for share-based compensation expenses and approximately $200,000 in transaction costs.
Our third quarter 2023 adjusted net income was $26.3 million or $0.13 per diluted share. This is compared to the second quarter 2023 net income of $28.8 million or $0.15 per diluted share. And second quarter 2023 adjusted net income of $28 million or $0.14 per diluted share.
Turning to cash flow metrics, as Paul discussed, we generated another record level of quarterly adjusted EBITDA and a 10% increase in the second quarter of 2023. We look forward to growing our operating cash flows as we continue to execute on our 2023 development program and further investment initiatives to grow our business.
As Paul discussed, we received $3.8 million in net proceeds for the sale of our non-core operated New Mexico assets that, and consistent with the recent disposition of our Delaware assets was used to further pay down debt. While our debt position increased, as a result of the closing of the Founders acquisition, we’ve recognized that remaining focused on debt reduction is a key priority for the Company. This was evidenced by our pay down of $19 million, excluding the third quarter borrowings for the Founders acquisition of $50 million.
As a result, on September 30th, we had $428 million drawn on our credit facility. With a current borrowing base of $600 million had $171.2 million available net of letters of credit. Combined with cash, we have liquidity of $171.4 million and a leverage ratio of 1.69x. I would like to note that, excluding the estimated $11.9 million net deferred payment due next month, for the Founders transaction, our leverage ratio was 1.64x.
Essentially, we were leveraged neutral for the quarter with all of the increase due to the deferred payment. As we discussed previously, while the Founders acquisition added debt to our balance sheet in the near-term, we believe we are better-positioned to pay down debt more quickly over the long-term. Of course, realized commodity prices, the timing and level of capital spending and other considerations will impact the cadence of quarterly debt pay down.
Moving to our hedge position. For the fourth quarter of 2023, we currently have approximately 593,000 barrels of oil hedged or approximately 49% of our estimated oil sales, based on the midpoint of guidance. We also have 518 million cubic feet of natural gas hedged or 31% of our estimated natural gas sales based on the midpoint. For a quarterly breakout of our hedge positions, please see our earnings release and presentations, which include the average price for each contract type.
So with that, I will turn it back to Paul for his closing comments. Paul?
Thank you, Travis. We believe our strategic acquisitions over the past year have placed us in a stronger position to take the Company to new heights given the accretive, the highly accretive attributes of the collective transactions, including per share growth in production, reserves, adjusted free cash flow, and other key metrics.
In addition, the two transactions further strengthened our balance sheet and accelerated our ability to pay down debt. They also increased our inventory of low risk, high rate of return drilling locations, and approved our capital allocation flexibility. With respect to the fourth quarter of 2023, we are squarely focused on the efficient integration of the assets from the Founders acquisition and the successful completion of our 2023 capital spending program.
Complementing these efforts is our ongoing focus on reducing operating costs with the primary goal of maximizing our free cash flow generation to pay down debt. We will remain disciplined by prioritizing our capital spending on high rate of return drilling and recompletion projects. We believe targeting excess free cash flow to pay down debt will drive long-term value for our stockholders.
Speaking of improving value for our stockholders, we are disappointed with our lagging stock price performance when compared to our peers. We are delivering competitive and oftentimes peer-leading returns yet our stock price has not reflected that performance. We are continuing to investigate what we believe to be, but the potential causes and we will address those potential causes within our control.
Wrapping up, and as I have consistently said in the past, we believe staying the course with our sense of urgency, our resolve and our commitment to our value-focused proven strategy better prepares the Company to manage the risks and uncertainties associated with our industry and should generate sustainable and competitive returns to our stockholders.
We believe we are well positioned for the fourth quarter and 2024 with the continued pricing environment, production benefits from our recent acquisitions and the continued success of our capital spending program. We also believe 2024 will be a strong year for shareholders.
With that, we will turn this call over to the operator for questions. Operator?
[Operator Instructions] And our first question here will come from Jeff Grampp with Alliance Global Partners.
On the downtime events that impacted production in the quarter, do you guys have any kind of ballpark estimate for what that curtailment was? And at the risk of maybe being too greedy, if you could break it out by the exposure on the processing plants versus the fire?
Yes, I’ll go ahead and begin this and then I’ll turn it over to Marinos. He knows the details far better than I do. But a little over 50% of the downtime events were associated with these gas processing and compression facilities. And then the fire itself, I don’t really remember the percentage, but it was pretty substantial as…
Yes, so it’s 25%, why don’t you go ahead and address this.
Yes, the total overall volume was about, again these are estimated numbers because they’re not sales, they’re based on our production volumes, but about 600 Boes a day, about 130 of that was from the prior…
That 600 Boe a day is for the quarter.
For the quarter, yes, equivalent for the quarter. Thank you, Paul. So, we’ve tuned it up divided by 92 days, yes. So about 130 of that was for the battery fire and then $330 million to $350 million of that was for the gas plant and then we had a couple of other weather related to what we didn’t mention in the call, but that’s basically the breakdown.
And for my follow-up, I know you guys haven’t put out a ’24 guide yet, so certainly not trying to front run things here. But just looking at the Q4 numbers, that CapEx range that you guys provided, is it fair to think that that’s kind of a run rate maintenance number relative to that Q4 guide or how might you guys edit that kind of commentary? Or I guess just ultimately trying to think about a good maintenance CapEx number for you guys looking ahead?
Yes. And so, that’s a good question. We are currently evaluating various different capitals spending levels for 2024 and trying to understand the merits and consequences associated with those different capital spending levels. Let me reiterate a couple of things that I’ve said oftentimes, and I know I sound like a broken record, but we are squarely focused on reducing our debt. And so and we know that the rate of debt pay down is a direct function of product prices and our capital spending levels. And so, that’s the reason why we’re looking at these capital spending levels.
But I think that the capital spending levels that we are forecasting for the fourth quarter are pretty close to, might be a little higher than what is necessary for true maintenance. But because as you know, we fell short on our production in recent times, and so that’s part of the reason why we stepped up our capital spending to try to make up for that. But I think that, yes, our true maintenance capital spending levels are probably just a little less than what our fourth quarter capital guidance is, but it’s close to that.
And Paul, if I may say one more thing to the $35 million to $40 million includes some facility upgrades in terms of ESG related things that are not necessarily tied to maintenance, but tied to us becoming a more better operator in terms of emissions and etcetera.
Yes. And on that note, I’m just going to take this opportunity to kind of expand on that. We take our responsibility as a publicly-traded company and an oil company very seriously with regard to ESG, primarily associated with these emissions and also preventing spills.
We’re probably spending more capital as a company, as a public company for our size and many others out there just because we’re — that focused on not only meeting, but just getting ahead of the requirements that we believe are coming our way when we look at the things that the EPA are doing and other organizations, the pressure they’re placing on our industry.
I don’t believe our industry can afford to not step up in this regard. And so we’re spending a little bit more capital on projects like that that really go unseen. But we believe that in future sustainability reports as we disclose our emissions, people will recognize the benefits associated with what we’re doing.
Our next question here will come from Neal Dingmann with Truist. Please go ahead.
A follow-up question for you, just wondering now with the Founders rolled in. Could you just talk about you guys have done a great job of recent deals of sort of what I would call wedding or combining operations and then continuing to see more efficiencies as a result. And I am just wondering now, with Founders tucked-in, could you talk about how we might see incremental efficiencies now from the D&C side given the combination?
Very good. Again, I am going to address it initially and then I will turn it over to Marinos. And then, actually, I think Alex might want to chime in as well. But we are very excited about the Founders acquisition, the very first thing we recognized when we made that acquisition that, we believe that, there are significant improvements in reducing operating costs there associated with getting a better handle on water handling and disposal. And so, we have been spending quite a bit of time in that regard since we have acquired the assets.
We are excited about the progress we are making. And once we finish some of those investments, change the way the water is handled and reduced those operating costs, we will be prepared to launch our drilling campaigns out there. We believe that the economics of the associated drilling on the Founders are very competitive. As matter of fact, some of them are equal to our very best investments that we have in our inventory. And so you will see that, we will be spending money there once get a handle on the operations. Is there any more you want to share, Marinos?
Sure, Paul. One thing, Neal, on the drilling and completion costs in general, the last quarter, we have seen a pretty good reduction in completion costs, specifically the frac companies and in casing costs, we have actually procured all the casing that we think we will need for the first quarter and it is about half the price of what we paid the same time last year, procuring casing for our first quarter of 2023. So, those are benefits that I think we are going to see throughout the entire company, not just the Founders’ assets, and we are excited about that. So, that kind of goes into the answering the maintenance question from earlier on to, that’s a moving number because of the benefits that we are seeing on the cost right now.
Neal, let me add one more thing. This is Alex. So again, as we bring this asset in, we have bounced some low hanging fruit by just lowering some pumps. So we have arrested part of the decline on the asset. We will continue doing that going into ’24. So that’s one thing, just the blocking and tackling, as we bring in the asset.
The other thing is that we also optimize the infrastructure and start deploying some of the capital for next year. If you reference Slide 19, it shows you on a relative basis what the investment type that Paul was talking about. You can see how Founders investments versus some of our other investments in CBP verticals really brings on a lot more oil to higher oil content, meaning like over 90% below per well. So, you should be able to see that in ’24.
And then, Paul, maybe for your, just question on going forward, I have got. Looks like if prices remain stable and, look, your operations continue to be as efficient as we think, looks like free cash flow could continue to ramp quite nicely, you have mentioned prepared remarks. I know, debt is always priority, maybe just talk about how you think about debt versus more accretive deals versus maybe shareholder return?
Very good and this is the classic question that we get all the time. I get shareholders to send us emails with their opinions and all this. And so, yes, just in general, debt is not our friend. Our interest expense is considerably higher than our G&A expense. And so, during times of high interest rates like we’re Experian it behooves any company to reduce their debt. So, that’s the reason why we’re focused on it.
So, now with respect to taking on more debt, we would be willing to take on more debt through an acquisition of some kind, but it still has to be balance sheet improving. So, in other words, the ratio of the collateral backing up that debt has to improve versus the debt. And we have to buy these properties if we’re going to pursue them in an accretive manner. And so, yes, I am willing to take on more debt, but it will reduce the leverage ratio and actually strengthen the balance sheet by doing so if we were to occur or pursue something in that regard.
Travis, is there more you want to say?
No, just taking it a step further, but not too far, getting into the shareholder return. Look, we’re always looking at the cost of capital on that as well. And the question does often come up, would you guys consider any sort of share buybacks or when are dividends coming. And those are things we look at where is our dollar best spent? Is it for paying down debt? Is it share buybacks? Is it dividends? And those are just things we’re constantly looking at and evaluating, and given the right opportunities, I think anything is really on the table. But for now, I think it’s still a focus on debt.
Go ahead, Paul.
And just a little bit more, when you if we were to do a stock buyback today, that would take proceeds away from paying down debt. So, essentially, you’re adding debt to pay buy stock back. And don’t forget, you don’t get additional real barrels of production. So, if you use those funds or proceeds to accretively buy assets, you get the production and cash flow to help pay that down.
So, we’re all about acquisitions, but our focus on acquisitions up to now has been clearly, that the result of that would be totally accretive on as many metrics as you can. You strengthen your leverage ratio. But at the same time, the future cash flow from those assets has to accelerate our ability to pay down debt and we’ve been successful and being able to do that.
As you see, our ability to pay down debt has increased over time, and we believe it’s going to continue, and of course, that’s also dependent on energy prices. But from the overall health of the Company being remaining focused on these debt adjusted per share metrics is the only way you’re ever going to dig your way out and grow the Company profitably for your shareholder.
Paul, I think you and Travis hit the nail on the head. I think it’s cost of capital and it’s going to be great. You’ve got to have a ramp in the amount of free cash flow to decide what to do with it. So thanks, guys.
[Operator Instructions] Our next question will come from Noel Parks with Tuohy. Please go ahead.
So, we seem to be entering one of these stages where we sort of have increased macro uncertainty, geopolitical side also have added some new wildcards recently. And I think that the Company is generally having been pretty proactive in down cycles as far as just getting more judicious with rig activity. And I’m just thinking with your horizontal inventory and also the vertical inventory now. Are there different prices, if say we did have a pullback in the next year, just where it might be easier to keep vertical activity going and shift capital there instead of some of the horizontals? Or is the differential we get to return just not enough to really make a difference?
Yes. I mean, if you look back in our history in the last 12 months, you can see that, when prices were lower earlier this year and exiting last year, we actually did curtail some of our capital spending program. As I alluded to earlier, our budget plans are with the mindset that oil prices will remain between $65 and $85. You fall below $65, and even as you approach $65, we will tighten up the capital spending requirements.
We’ll only focus on those that have the absolute best returns. And so, we do have a mix. We do have some vertical wells that compete with our horizontal wells. Typically, in the past, our best returning investments were the horizontal wells, especially those in the Northwest Shelf. But now with the Founders, some of those vertical wells will compete handsomely with that.
And so rest assured, we will focus in a low price environment. We will continue to be active, but we will focus on those highest return aspects because our strategy going forward until our debt is down to well below a leverage ratio of one. We’re going to be focused on maximizing the free cash flow generation from those investments. So, that’s just the way it’ll go.
Did I answer your question, Noel?
Absolutely and just my other one is. Service cost environment certainly sounds encouraging as far as the year-over-year changes in services materials. And I was just thinking about, again with sort of if we have more volatility in the system of prices. Do you have a sense that, in your regions that, with the other operators, is everyone’s activity level fairly stable right now? Or would you say it’s either trending higher or lower, one direction or the other these days?
And I talked to quite a few CEOs. I think all of us are of a very similar mindset right now. We’re very disciplined in our capital spend. Everyone is focused on real returns to the shareholders. So, If it wasn’t for our debt and perhaps our size and scale, we would be delivering some kind of a real return, either through a stock buyback or through dividends or something.
But everybody is focused on disciplined capital spending. That’s the reason why even though we’re at historically, on the higher end of energy prices. You’re not seeing the rig rates increase because everybody is focused on discipline. And I don’t know of another CEO that will tell you anything different than what I’m telling you. They’re focusing their capital on the highest rate of return opportunities they have, and they’re focused on real returns to their shareholders.
And you can’t go wild with your capital spending in that kind of environment. So everybody is disciplined, and this is also part of the reason why we’re seeing a pullback in some of the costs and the availability of many of the services that we depend on for drilling and completing our wells.
It’s good that natural gas prices fell in Europe, which allowed a lot of the steel manufacturers to go back to making steel, which reduce the demand for the steel here in other areas. And so, yes, I think that the discipline is the primary cause for now the pullback that we’ve seen or the slight pullback in some of the costs associated with drilling and completing our wells.
And this concludes our question-and-answer session. I would like to turn the conference back over to Paul McKinney for any closing remarks.
Thank you, Joe. And on behalf of the management team and the Board of Directors, I want to thank everyone for listening and participating in today’s call. We appreciate your continued support of the Company, and we look forward to keeping everyone apprised of our progress.
Thank you again for your interest in Ring and have a great day and have a great weekend.
The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.