Sandridge Energy Inc. (SD)

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SandRidge (SD)

Q4 2012 Results Earnings Call

March 1, 2013 9:00 a.m. ET


James Bennett - Chief Financial Officer and Executive Vice President

Tom Ward - Chairman and Chief Executive Officer

Matthew Grubb - President and Chief Operating Officer

Kevin White - SVP, Business Development


Neal Dingmann - SunTrust

Charles A. Meade - Johnson Rice

James Spicer - Wells Fargo

Duane Grubert - Susquehanna Financial

Jessica Lee - JPMorgan

Brian Singer - Goldman Sachs

Leon Cooperman - Omega Advisors

Craig Shere - Tuohy Brothers Investment Research

Adam Leight - RBC Capital Markets

Mark McCarthy - Wexford Capital

Adam Duarte - Omega Advisors

Richard M. Tullis - Capital One Southcoast

Jeffrey Robertson - Barclays Capital

[Lin Shen from Height]



Good day ladies and gentlemen, and welcome to the quarter four 2012 SandRidge Energy earnings conference call. [Operator Instructions] I would now like to turn the conference over to your host for today, Mr. James Bennett, Chief Financial Officer. Please proceed, sir.

James Bennett

Thank you, operator. Welcome everyone, and thank you for joining us on our fourth quarter and fully 2012 earnings call. This is James Bennett, Chief Financial Officer, and with me today are Tom Ward, Chairman and Chief Executive Officer; Matt Grubb, President and Chief Operating Officer; and Kevin White, Senior Vice President of Business Development.

Keep in mind that today's call will contain forward-looking statements and assumptions, which are subject to risks and uncertainties, and actual results may differ materially from those projected in these forward-looking statements. Additionally, we'll make reference to adjusted net income, adjusted EBITDA, and other non-GAAP financial measures. A reconciliation of any non-GAAP measures we discuss can be found in our earnings release and on our website.

Please note that this call is intended to discuss SandRidge Energy and not our public royalty trusts. Finally, earlier this morning, we filed our Form 10-K, where you can find additional disclosures and information.

Now let me turn the call over to Tom Ward.

Tom Ward

Thank you, James. Welcome to our fourth quarter earnings and operational update. We have now surpassed consensus estimates for our earnings per share in each of our last four quarters, and EBITDA and production in three of the last four quarters, including the fourth quarter of 2012.

The Mississippian Play continues to have strong production growth, coupled with lower cost, which is driving the better than anticipated results. We grew our Mississippian production to 35,900 BOE per day in the fourth quarter, which is a 19% quarter over quarter increase, and up from 15,500 BOE per day a year ago.

We drilled 10 wells in the fourth quarter, with 30-day production average above 800 barrels of oil equivalent per day. These wells were located in Alfalfa, Grant, and Woods Counties, Oklahoma. Of these 10, five were above 1,000 barrels of oil equivalent per day, and our best well was above 1,500 barrels of oil equivalent per day for the 30-day average. These 10 wells produced an average of 68% oil. We did not break out the liquids stream until after the start of 2013.

We’ve also announced the closing of our Permian sale, which has us in the strongest financial position in the company’s history, plus the Gulf of Mexico continues to perform above our projections.

As we enter 2013, SandRidge has two key goals: spending at or below our capex guidance and meeting our production guidance. These goals are aligned with our core focus to drive rates of return higher in the Mississippian, which we will achieve through improving the average production of new wells, leveraging our infrastructure, and continuing to reduce both operating and capital costs.

2013 is a pivotal year for SandRidge. We have a strong cash position, and our net debt to EBITDA ratio is approximately 2x. This strong liquidity will let us sharply focus on delivering superior rates of return from the Mississippian Play.

We have grown our production in the Miss to nearly 36,000 barrels of oil equivalent per day from a standing start in 2010, with an average of only 15 rigs. Our growth will continue as we ramp up to our ultimate rig count of 36 rigs by the end of 2013. Our drilling efficiencies have allowed us to reduce the ultimate rig count from the 45 rigs that we had previously projected.

In 2012, we spent extensively on our infrastructure systems, which provide significant competitive and economic advantages to SandRidge in the Mississippian. Because of the infrastructure development, we are optimizing our system utilization and will drill 80% of our wells this year within our existing system. By doing so, we’ll be able to control infrastructure capex and grow our production with development wells.

The salt water disposal system we have built can handle 1.6 million barrels per day of salt water, and we are currently injecting approximately 700,000 barrels of water per day, all of which is produced only from SandRidge operated wells. Effectively disposing produced water in the Mississippian is critical to controlling expenses. By developing our own disposal infrastructure, we’re able to save over $2 per barrel of water relative to trucking those water volumes.

We’ve been focused on eliminating our dependence on trucked water, and now we’re able to exit the year trucking less than 1% of our produced water volumes, resulting in considerable LOE savings. We’ve invested over $450 million in the system. As James will discuss, we believe there is a strong market demand for water disposal assets, and we are currently evaluating the merits of monetizing our system.

The savings we realize from our efforts to develop and optimize our infrastructure, coupled with the lowest per-well drilling and completion costs and lease offerings expenses in the industry is a primary reason that our Mississippian economics are so good, and why we’ve been able to secure excellent partner to share in those benefits for many years to come.

Access to affordable electricity is also critical in the Mississippian, given the high power demand to run electrical submersible pumps. We have worked to reduce our dependence on diesel generators by tapping into the local power grid. We’re able to access power from the grid by constructing our own distribution lines to substations. We began 2012 with approximately 35% of our wells using power from generators. We successfully reduced that ratio to 13% by year end.

Electricity from the grid results in up to $100,000 of savings per well per month, compared to running diesel generators. We choose to implement electrical submersible pumps because of the increased rates of return they achieve by producing approximately three times the fluid that a gasless system can.

In the first 77 wells, with over 30 days of production, we’ve increased the rate of return up to 86% per well using a $3.1 million well cost. We anticipate drilling wells for $3 million or below in 2013, which would move these rates of return up to 95%.

Our company’s clear strategy has always been focused on rates of return versus ultimate production numbers. That’s the reason we deliberately chose the Mississippian formation and projected our EURs of 500 MBOE in 2009. We knew we were in an active oil system that can be improved by finding more oil and by spending less money to enhance rates of return. These are the two ways to drive rates of return higher. Every day we focus on both.

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