Why Ring Energy’s latest equity raise matters for current and prospective shareholders

Ring Energy (REI) has just completed a US$60.0 million follow on equity offering, pricing 44,444,445 new common shares at US$1.35 each, shortly after reporting a sizeable first quarter net loss.

Despite the equity raise being priced below recent trading levels, Ring Energy’s share price return is up 46.86% year to date and the 1 year total shareholder return is 59%, while 3 and 5 year total shareholder returns show declines, suggesting recent momentum contrasts with weaker longer term results.

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With Ring Energy trading around US$1.33 after issuing new shares at US$1.35, while sitting well below a US$2.50 analyst price target and reporting a sizeable loss, are you looking at a genuine opportunity or a stock already pricing in future growth?

Preferred Price-to-Sales of 1x: Is it justified?

On a simple P/S basis, Ring Energy’s last close of $1.33 screens as cheap compared with both peers and the broader US oil and gas industry.

The P/S ratio compares a company’s market value to its revenue, which can be useful for lossmaking businesses where earnings based metrics such as P/E are not meaningful. For Ring Energy, a P/S of 1x sits well below the peer average of 1.9x and the US oil and gas industry average of 2.1x. This points to a lower valuation being placed on each dollar of current sales.

What stands out is that Simply Wall St’s fair P/S ratio estimate for Ring Energy is 2.5x. The current 1x level is therefore far beneath where the market could theoretically settle if sentiment and expectations moved closer to that fair ratio. Together with the separate DCF based estimate of future cash flow value of $10.67 per share versus the current $1.33 price, this highlights a large gap between market pricing and these valuation tools.

Result: Price-to-Sales of 1x (UNDERVALUED)

However, this gap comes with real risks, including the recent net loss of US$264.4 million and the potential for further dilution after the US$60.0 million equity raise.

Another view: SWS DCF model points to a much higher value

While the 1x P/S ratio suggests Ring Energy screens as cheap against peers, the SWS DCF model points to something far more aggressive, with an estimated future cash flow value of $10.67 per share versus the current $1.33 price. That is a very large gap, so it may be viewed as either a potential bargain or a signal to be cautious about the assumptions behind that model.

Simply Wall St performs a discounted cash flow (DCF) on every stock in the world every day (check out Ring Energy for example). We show the entire calculation in full. You can track the result in your watchlist or portfolio and be alerted when this changes, or use our stock screener to discover 47 high quality undervalued stocks. If you save a screener we even alert you when new companies match - so you never miss a potential opportunity.

Next Steps

With such a wide gap between different valuation signals and a mix of risks and potential rewards, it makes sense to look at the numbers yourself and decide how they stack up against your own expectations, then weigh up the 3 key rewards and 2 important warning signs

Looking for more investment ideas?

If Ring Energy has you rethinking your portfolio, this is a good time to widen your view and line up a few fresh, data backed ideas.

• Spot potential standouts early by scanning 27 elite penny stocks with strong financials with tighter financial filters than you could realistically run by hand.
• Focus on quality at a sensible price by reviewing the 47 high quality undervalued stocks and see which stocks line up with your preferred balance of price and fundamentals.
• Prioritise resilience by checking the 67 resilient stocks with low risk scores so you are not missing companies with steadier risk profiles while attention sits elsewhere.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.