OGIB BULLETIN #221 - October 16th, 2017 RING ENERGY; REI-NYSE COMPANY ANALYSIS UPDATED OCTOBER 18, 2017

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1 OGIB BULLETIN #221 - October 16th, 2017 I like Ring Energy a lot for 4 factors: RING ENERGY; REI-NYSE COMPANY ANALYSIS UPDATED OCTOBER 18, It s the oiliest play I can find in the US at 91% oil. Almost every other US oil stock is at best 60% oil. 2. Tight share structure only 54 million out and no great need to raise more cash. 3. Shallow, low cost play with huge well inventory over 800 locations 4. FAST PAYBACK, HIGH IRR wells at $50 WTI & $2.50 gas, these wells pay back their costs in under a year. 5. Management team has built and sold a junior before, creating huge win for shareholders. In his last venture, Ring Energy s Chairman Tim Rochford took Arena Resources from 13 cents per share in 2001 to $43 per share when it was acquired by Sandridge Energy less than 10 years later in 2010 a 34,396% return. So they ve done it before. I m sure it helped that oil prices quadrupled over this time. Having a strong wind at your back helps a lot. Now they are back operating in the Permian Basin with Ring Energy where the company s core asset is just 11 miles away from where they were with Arena. Chairman Tim Rochford and his team know the area like the back of their hands and have used a roll-up strategy, buying up small leases that larger companies have ignored. The team s pedigree is the main reason that the stock has been historically able to trade at a HUGE premium to its peers. For Canadians, think how a Tier 1 CEO like

2 Neil Roszell of Raging River or Dave Wilson of Kelt Exploration gets a similar premium when they start a new company. With results from Ring s Central Basin Platform horizontal drilling program now rolling in we can see that the premium valuation was for a good reason. Ring has found itself a very high rate of return oil play (a real American oil play a rarity!). At $50 WTI pricing wells here are showing IRRs of over 100% --- some over 200%. Today Ring s valuation is starting to look more than reasonable with the company poised to grow production by more than 100% in QUICK FACTS Share Price: $13.09 Basic Shares Outstanding: 54.1 million Market Cap: $708 million Net Cash: $12 million Enterprise Value (EV): $696 million 2017 Average Production: 4,122 boe/d (91% oil) 2018 Projected Production: 9,525 boe/d (91% oil) 2018 EBITDA estimate: $102 million 2018 Enterprise Value / EBITDA: 6.82 times POSITIVES - High IRRs should be allow them to grow big while living within or very close to cash flow - Management team s last venture in the Permian was a grand slam homerun - Balance sheet = net cash - Big growth ahead should be a major catalyst - Underlying low decline conventional production

3 NEGATIVES - First year of hztl well results VERY encouraging but still not fully proven given short production history - Starting from scratch is always tough in E&P land - Smaller companies don t get preferential pricing from service cos BACKGROUND/PROPERTIES In the oil & gas business, size matters. Banks hate lending to small companies. When you are a big borrower you own the bank. When you are a small borrower the bank owns you. Small producers have no leverage with the service companies and that hurts both pricing and the quality of the crews and equipment they get. When you buy in bulk you get a discount and the best quality. Because of those challenges the only time I m interested in looking at a junior is if there is a proven management team attached to it who will get more respect from both the banks and the service industry. That might mean that I miss out on the play that turns an unknown management group into first time winners.but that is ok because it guarantees that I miss out on all kinds of duds. (Making money in the investment world isn t The Hard Part. Keeping that money is the challenge.) This group built Arena Resources from scratch in 2001 and sold it to Sandridge Energy in 2010 for $1.6 billion. Shareholders who jumped in at the start of that journey at 13 cents per share ultimately sold for $43.12 when the deal closed. That was a cool 34,396% total return. By anyone s measure that is an incredible return.

4 Management s stated desire is do basically the same thing with Ring Energy by using the experience it gained the first time around and leveraging its industry contacts. Who you know in this business is important. With Arena Resources this group was focused on the Permian Basin. Prior to Arena these gentlemen built other companies also in the same area, some of them within miles of where Ring Energy now finds itself with assets. To avoid confusion, I need to break down what the Permian Basin is actually comprised of. The map below does most of the hard work for me.

5 The two parts of the Permian that have everyone talking these days are the Midland Basin and the Delaware Basin. This is where the horizontal oil production growth is coming from for the oil and gas industry. Ring is in the middle. Ring s assets are more focused on the Central Basin Platform which is where they were at Arena. You can see it in the map as the platform that separates the Midland and Delaware Basins. In addition to the acreage it has in the Central Basin Platform, Ring has also entered the Delaware Basin and has some acreage in Kanas.

6 I ll go through each of the properties but I need to make clear that with a Central Basin Platform focus Ring is a little different than the other Permian companies I have bought. This is a shallow play, mainly focused on one zone, with strong IP rates that give them great IRRs. It is not about stacked pay (multiple oil rich zones on top of each other) which is what I usually talk about in the Permian. It is amazing the new life that the Permian region has been given. The Permian has had oil production for over 80 years. A total of 30 billion barrels have been produced over that time. Despite all of that time and that massive number of barrels produced the Permian still has a long way to go. The Permian contains 22% of the remaining oil reserves in the entire United States. There is a huge amount of oil still in the ground and that is why this old oil play has been given a new life.

7 Property #1 Central Basin Platform (CBP) This is the growth engine of the company. The targeted San Antonio formation is only feet down, so even horizontal well costs are only $2 million. I ll explain the history here, and then end with the amazing economics that Ring is getting at just $45/b WTI. Ring so far has assembled 69,456 net acres of land in Andrews and Gaines Counties in the Central Basin Platform. This land is right on the Texas-New Mexico border and is only 10 miles north of where Arena Resources core production was located.

8 What is a little different about these assets is how they have been developed so far by Ring. This has been a conventional development, which means old fashioned vertical wells and not horizontals until Ring built up its Permian acreage through a steady stream of bolt-on acquisitions of small leases acquired from different owners. This is where management s deep experience and relationships in this region has allowed them to be patient and persistent. With the Market s eyes on the Midland and then Delaware basins Ring snuck right up the middle in the Central Basin Platform when no one was really looking, and assembled their land package.

9 Most of this land already contained legacy producing wells. The previous slide details 277 total producers. That provides a base of very low decline production that can generate cash flow to fund drilling. The formation that Ring has targeted is the shallow San Andres. The San Andres has long been developed using conventional wells (which was originally the Ring plan as well). The thinking was that the discontinuous nature of the formation did not suit horizontal drilling. In 2017 after carefully studying competitor drilling results Ring decided to move to horizontal drilling. Look at the bottom right of the chart below for the reason why. See how they are spending 8.6x the well cost to get 15.2x the reserves? That s what we call ACCRETIVE.

10 The Permian horizontals that have made so much noise in recent years have been targeting deeper formations like the Wolfcamp. Ring is targeting the much shalllower San Andres formation. The discontinuous nature of the San Andreas means that the hydrocarbon bearing rock in the formation is not all found at the same depth. The picture above helps make the point. Think of potato chips in a bowl. The odds are good, but not guaranteed. Typically horizontal wells drill for long distances sideways through a shale formation that stretches for miles and miles so consistent they re often called a blanket shale. Hit with one well, the Market expects you will hit the next 100 with % success. And the Market then goes and prices in that future growth very quickly. See stock price jump HIGH! That s what happens to producers drilling the more well known Wolfcamp formation. Competitors near Ring had been successful drilling horizontal wells into the San Andres. Ring management has participated in a small interest in some of those horizontals and has also gathered insight from local service companies.

11 From all this information, Ring decided to go horizontal themselves. The vertical drilling program was working fine, but REI mgmt concluded that the horizontals would be better. In its Q ops update released in early April, the Market got to see how Ring was doing with that horizontal transition. The Market liked what it saw. Ring has completed 5 one-mile lateral horizontal San Andres wells on the Central Basin Platform. The average initial production rate (15 to 30 day rates) of those wells was 660 boe/day with a range between 377 boe/day and 800 boe/day.

12 Based on those results the estimated rates of return on those production rates range from 70 percent at the low end to 500 percent for the best performing wells. That is assuming $2 million per well cost and a $45 per barrel realized oil price. Those are Big Time Numbers for a $2 million well. As 2017 has rolled on updated drilling results have confirmed the profitability of these horizontal wells. One mile San Andres laterals have type curves that project 100% plus IRRs at just $45 oil and $2.50 Mcf gas. 1.5 mile horizontals have type curves that project 200% plus IRRs. To give some context, I really want to see a tight oil play, or shale oil, have an IRR of at least 75%; that usually equates to a one year payout on wells. A junior producer MUST get payback on wells that fast to increase production within cash flow, i.e. not adding any debt or equity to grow. For a conventional play like Ring has in the San Andres, I m willing to go as low as 60% IRR because conventional plays have lower decline rates, so can still payback the wells in a year. This is 200% IRRs!!!!! This is very very very profitable oil probably the most profitable primary production in the USA.

13 Ring has 70,000 net acres almost 800 net horizontal drilling locations in the San Andres years of inventory. Management was very patient and sat on their hands until they were sure it was time to go horizontal. Now they are hitting the gas pedal and showing what they have put together.

14 As of August 2017 Ring is running two rigs drilling horizontal San Andres wells. They can drill 5-6 wells a month for a long time. And REI mgmt has secured a dedicated fracking crew that will deal only with Ring completions should to better execution, without disruption. Property #2 - Delaware Basin In addition to its land in the Central Basin Platform, in 2016 Ring made a $75 million acquisition in the Delaware Basin. OGIB readers will be very fond of the Delaware given our experience with Resolute Energy (REN-NYSE). As mentioned earlier, this Basin is also part of the Permian now the hottest part by far. The 15,154 net acres that were acquired were from a private company. Ring has added to this and now has over 20,000 Delaware Basin acres.

15 In March 2017 Ring was getting 1,047 boe/day (85% oil) of production from this land from 108 different producing vertical wells. Again, this is older, low decline production. Ring thought this land was not been optimally managed previously. They upgraded the salt water disposal (SWD) handling capability on the land and increased production without drilling a single well. Since acquiring the property Ring has drilled only a single development well. The company had virtually shut down all drilling (across the company) in 2016 waiting for oil prices to recover to a reasonable level. The very low decline nature of the conventional producing wells that Ring has allows the company to not drill and still see production hold up pretty well. The primary formation to developed in the Delaware Basin is called Cherry Canyon. The plan is to develop these at a cost of roughly $650,000 per vertical well.

16 This is still primarily a conventional vertical development but Ring also sees potential for 210 horizontal wells. In Q1 17, the Company drilled two new vertical wells, performed two recompletions on existing Cherry Canyon wells, drilled one new saltwater disposal well, and continued to upgrade and expand its gas and water handling systems. The two new vertical wells were drilled deep enough to perform tests and gather information on the Brushy Canyon. Both wells are scheduled to be completed in the Cherry Canyon in Q2. Clearly this one is well behind the Central Basin asset in terms of priority at this time. KANSAS PROPERTY #3

17 Ring has a third property which is located in Kansas. The target there is the Mississippian where Ring joined Sandridge in a joint development agreement in The company has 16,673 net acres here and shot extensive 3D seismic in the fourth quarter of As of today development of this asset is on hold. At higher oil prices it would be more interesting. FINANCES Ring s 2017 budget plan involved spending $70 million in spending to be split as follows: - 22 CBP (Central Basin Platform) horizontal wells - 6 CBP vertical wells - upgrading its existing infrastructure in the CBP - 8 Delaware Basin verticals - Workovers on 12 producing Delaware Basin verticals - upgrading Delaware Basin infrastructure

18 At the start of August 2017 on the back of very successful San Andres horizontal wells Ring expanded that capital budget to $120 million. The additional $50 million is going to be spent on a second drilling rig that was added in the middle of August Management believes that second rig will add another 20 horizontal CBP wells, taking the total to 42. With that expanded capital spending here is how production has progressed and is expected to grow into the future: 2016 full year 2,399 boe/day Q ,981 boe/day Q ,719 boe/day Q ,090 boe/day Q ,667 boe/day 2017 full year 4,122 boe/day 2018 full year 9,525 boe/day As you can see 2018 production will more than double 2017 production which almost doubled 2016 production. With that rate of growth you have to expect that Ring is outspending the cash flow that it generates. That is true. In 2017 Ring will generate $37 million in cash and spend a lot more..$120 million. That $83 million of overspending is financed by a $60 million equity issuance completed in July and the draw-down of the $71 million of cash that the company started the year with. In 2018 though the overspend drops as $110 million of cash flow will be generated and $140 million spent (that is assuming $50 WTI). Ring should still have $40 million of cash at the end of 2017 so the 2018 overspend is comfortably covered.

19 Remember, CEO Kelly Hoffman and his team aren t outspending cash flow to grow production by ten percent. They are doubling production again in 2018 after doubling it in The company also has a completely undrawn $60 million revolving credit facility. VALUATION Before we talk valuation let s remember that this company is going to grow by more than 100% in 2018 while coming close to living within cash flow. I should also mention that next year will not be the final year of rapid growth by a long shot. Given that kind of growth rate I don t think I m going out on a limb to say that the 6.8 times 2018 Enterprise Value to EBITDA that Ring trades at seems like a pretty good deal. You have 100% growth and a 6.8 times valuation at $50 WTI by the way. Take oil prices up a little higher and the rate of growth here increases further. Brief and to the point, Ring s valuation is very attractive. WHAT THE ANALYSTS SAY FIRM TARGET PRICE Canaccord - $18.00 Imperial Capital - $18.00 Ladenberg - $17.00 Northland - $20.00 Roth Capital - $20.00 SunTrust - $19.00

20 STOCK CHART CONCLUSION Ring Energy started off with a crazy premium, because of management s pedigree. But a tough oil market has brought the stock down to an average level, despite the great success they have had with the drill bit going horizontal has produced a huge inventory of fast payback wells that will allow Ring to grow quickly.

21 Trading at under 7 times Enterprise Value to EBITDA and growing by more than 100 percent year on year. You don t see that every day. In the United States there are very few true oil producers. Ring Energy is one of them a very good one. I OWN 10,000 SHARES AT $ STOP LOSS = $12.25