Sandridge Energy Inc. (SD)

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SandRidge Energy, Inc. (SD)

2013 Investor/Analyst Meeting Conference Call

March 05, 2013, 08:00 am ET

Executives

Kevin White - SVP, Business Development

Tom Ward - Chairman & CEO

Matt Grubb - President & COO

James Bennett - EVP & CFO

David Lawler - EVP, Development & Production

Rodney Johnson - EVP, Corporate Reserves, A&D

Gary Janik - SVP, Offshore Operations

Analysts

Presentation

Kevin White

Welcome to the Sixth Annual SandRidge Investor/Analyst Day. We are glad to have such a big crowd here today. I am just going to do real quick brief introduction. Also at the lawyer’s request, actually always read the forward-looking information. Also, we do sponsor three public trusts, SandRidge, Mississippian Trust I and II and SandRidge Permian Trust and today we will not really cover anything related to those trusts. This will just all be on SandRidge, the [C]-Corporation.

Just to outline for the day today, most of the day is going to be spent with our technical executives here, doing a deep dive into our assets and we’ll save the questions for the end of the day. I believe we have a break about halfway through, I think it’s after Dave Lawler’s presentation.

And with that just brief introduction, I'll introduce Tom Ward.

Tom Ward

Sorry, running a little bit late, I was back to talking to Aubrey about Board seat; just kidding, just kidding. Okay, our operating regions have changed a bit over the years. We now have three operating regions that we are active in, still active in the Permian, even after the sale. We are most active in the Mississippian, where we have, that's the area that is the growth interest for the company and then in the Gulf of Mexico we had the acquisition last year of Dynamic, that continues to exceed our expectations and then lastly we still have our gas asset in the West Texas Overthrust. So if you were to be here six years ago as Kevin mentioned, you would have had a company that was focused only in the West Texas Overthrust and a 100% natural gas. So moving forward overtime what we've done is the most dramatic shift to oil of any public company.

Our corporate objectives are, I'll keep my part of the presentation very brief, because I want you to make sure that you see our deep management team and all the work that’s going on and especially in the Mississippian project where we're the premier operator to our corporate objectives and we want to continue to perform as the premier operator in the Mississippian. I think that by the end of today, you will know that we have the best drilling team, the best completion team, the lowest LOE and the best operations in the Mississippian.

Our second goal is to invest in high rates return projects. The Mississippian is a very high rate return project. We had to overcome the issue of saltwater and we've done that successfully now. Last year was a big year for us to build out saltwater disposal. This year we're drilling within that infrastructure and I think that makes 2013 a pivotal year for the company and we want to continue to improve our credit metrics. So one of the things James will be talking about is just the continuing efforts to make the company in a better financial position, which today we're in the best financial position the company has ever been in our six year history.

This is just a slide that goes to show that really if you just focus on the bottom right, on the financial leverage of the company, proforma of the Permian sale, we're in the best debt-to-EBITDA position that we've been in and we've historically had a high leverage position, especially after we moved out of the natural gas production after we moved from a product that as EBITDA was falling in 2008, 2009, with natural gas process moving down, we had to use some leverage to ride the ship and we were able to do that and now successfully have moved forward with our financial leverage down to approximately two times.

We did make a move as I mentioned in 2009 into oil that was with building around the Permian, we chose the Permian at that time, because no one else was really working there. We liked the shallow nature of the Central Basin Platform. It was the area that had produced the most oil and gas in the tightest and concentration of any place onshore US that had 2.5 million acres that produced billions of barrels of oil. So we thought that the best place to find oil was where it already been found and we focused on the Permian Basin. We invested about $1.2 billion over the course of the couple of years and then end up making a sale for $2.6 billion and just closed.

So we can see that our strategic rationale behind that was that we bought Permian assets at a time when other people weren’t buying in 2009 and early 2010. And then we chose to sale the Permian when those assets had moved up in price and became one of the hotter places in United States to sell. And I think that and everybody knows today that we got out at a good time and today is more of a buyer’s market. There is a lot of properties held for sale and I think we timed that perfectly to move our Permian oil and to put the company in a great financial position.

So today’s agenda is again my comments are very brief, but today’s agenda is we will talk about the Mississippian, we will talk about the Gulf of Mexico, we will talk about our corporate finance and then Rodney will go through reserves in the Mississippian. It is our growth engine. We will be drilling a lot of wells there; over 580 wells this year. So it is an area that we’ll see continued production growth and EBITDA growth. We will continue to delineate and develop our Kansas acreage. We will drill 200 wells in Kansas this year, I got lot of questions about Kansas; we will dive into that in deep detail.

There are some beliefs that no wells in Kansas are any good, well that’s just not true. There are good areas to drill in Kansas and we have lot of acreage in Kansas, over 1 million acres, but there is nothing geologically that changes once you cross from Alfalfa County to Harper County Kansas; its just that’s a man-made barrier. And the geology is still the same, so we will go into that. We will also talk about our operational initiatives; Dave Lawler will spend a lot of time talking about how we have moved our drilling costs down, how we continue to move our costs down and how the three logistical changes and efficiencies that we have moved from $3.6 million per well to $3.1 million per well. Keep in mind, every time we drill our 581 wells this year we are saving over a $1 million over the average of our peers.

We have higher rates of return because of that, so there are two sides to rate of return, its how much oil you find and how much it cost you to get, so the Mississippian has always been a play, an idea that you know you are in oil system, it’s just how easily you can get that or how cheaply you can get that oil out and that's what we have worked on the most is how do we control costs. So there are really two kinds of place you can be in today where you might own 1 million acres of land onshore US, you can have ultra type reservoirs that have never been drilled before and those can be very profitable, but you have to spend more money in order to find more oil, that’s the way you increase your rates of return.

In hours its just not ultra-type, so what we do is we try to spend less money to find how much oil is attractable; we don't have to spend more to get our more oil, we just try to spend less money to get a higher rate of return and I think we are being very successful with that; driven around the saltwater disposal system. And then we will talk about the much debated and much discussed type curve. So that's taken on a life of its own and hopefully Rodney will be able to discuss that and give you a better clarity.

So the Gulf of Mexico, Gary Janik is going to be discussing that; our results have been extremely good, better than we expected when we bought that and we will spend a lot of time talking about how much the production has held on, the bolt-on acquisitions we made and it does generate free cash flow for us to drill on Mississippian asset.

James will spend his time talking about corporate finance. We are in the strongest position in our history. We have with the premium divestiture, we have the ability to fund well into our 2014 capital plan and that gives us multiple options to fund our Mississippian development out through 2015 and James will be talking about two or three of those as we as a team, management team, what we do is focus on now how do we get ourselves funded through 2015. If we are going to be out spending cash flow we need to know how we are going to be funding that or we’ll have to have CapEx out in the future, and then lastly, just the corporate reserves.

So with that, I'll turn it over to Matt and we can start today's program. Thank you very much.

Matt Grubb

Thanks Tom and my name is Matt Grubb; I am President and Chief Operating Officer. We have a 128 page presentation for you today and I think there will be seven presenters including Kevin. So there is a lot of information to go over, but there is really only four themes, four takeaways from this. One is the Mississippian type curve. I think that type curve has moved around some, but we always talk about this play being in the range of 300,000 to 500,000 barrels equivalent and we can stay in that range. I think it’s a very, very good play, a large area to drill.

Two is the Mississippian economics, you know we are still talking even with the type curve moved at year end, we are still talking 50% rate of return. Third is the progression we are making on costs. We've done a really good job operationally of driving costs down. At the beginning of Q1 of ’12 we were about $3.6 million per well and we finished the year about $3.1 million of wells. So that's a 14% reduction in costs. Then also our balance sheet, you know from a liquidity standpoint, we just sold the Permian basin, so we are well funded to execute on this very large play for next couple of years. So I think with those four things you can get comfortable with those things and walk away from here understanding all those and I think you see a really good opportunity here for SandRidge and where we are at today.

So in the Mississippian, we grew the production by 131% from Q4 of 2011 to Q4, 2012. So we finished 2011 producing about 15,000 to 16,000 barrels equivalent per day. We finished 2012 at about 36,000 barrels equivalent per day. Reserves in the play; we have increased reserves by 77% to 227 million barrels of oil equivalent. Tom mentioned, we continue to delineate the play drilling an additional 400 wells in 2012, so this is a very new play. In 2010, we drilled 37 wells, and in 2011 we had about 145 wells in our database and by year end in 2012 we had about 644 wells in the database and through February we are up to 690 wells, so a lot of wells, a lot of data and certainly more history.

We've expanded our saltwater disposal and electrical infrastructure and what that does is that substantially reduces LOE and so you’ll see really a major LOE reduction just year-over-year in this play and I'll talk a little about the well cost already, but we have been able to reduce well cost by $0.5 million of well just in 2012 and there is three or four more initiatives that Dave is going to talk about that’s underway now and what we hope to do is to reduce well cost by down to $3 million or even below exiting this year.

The Gulf of Mexico, we bought DOR last April and then we did a little blot-on acquisition with Hunt in June of last year and those two, at that time, at the time of acquisitions, those two assets were combining for about 25,000 to 26,000 a day and today we are at over 30,000 a day with those two assets and so we will talk a little bit more about that. Our plan in the Gulf of Mexico is to spend about $200 million a year and keep that production essentially flat and throwing out some free cash flow that we will reinvest into the Mississippian.

The Permian Basin, we just sold an asset there that was producing about 23,000 barrels a day in Q4 for $2.6 billion; we paid out some debt, reduced debt and it also gives us funding for our Mississippian play. And of course, the financials, Jay is going to get into more detail, but we're in a very good financial position today.

So just looking at year-over-year comparison from last Analyst Day to this Analyst Day, when we were here last year; we're producing about 66,000 barrels equivalent per day. This year we ended the year at 107,000 barrels equivalent per day. So a substantial increase in production. Mississippian production, we've gone from 15,000 barrels a day to 36,000 barrels per day. Reserves have grown by 20% from 471 million barrels equivalent to 566 million barrels equivalent and adjusted EBITDA is around $654 million to over $1 billion.

Just 2012 production and review, you can see the quarter over quarter progression in the top table; 66,000 barrels per day in Q1, of course Q2 moved up to 90,000 barrels per day that’s with additional drilling in the Miss and also Dynamic acquisition. Q3, Q4, those growth are essentially drilling, totally from the Mississippian growth. In fact from Q3 to Q4 as you can see in the bottom graph, our Permian production declined, once we get the [PSA] in the Permian permit, we’ll start completing wells and stop spending capital. So there was a slight drop off in the Permian Basin production, but the Miss more than carries that.

And talking about the Mississippian production you can see it’s very, very healthy quarter-over-quarter growth. We went from 19,000 barrels per day in Q1 to 36,000 barrels per day in Q2. So we averaged about 20 rigs in the Mississippian 2012, but from Q3 to Q4 even though we have a very, very nice increase in production, we ran 29 rigs in Q3 and 30 rigs in Q4, so just a one rig increase quarter-over-quarter at the end of the year there.

Gulf of Mexico, we started the year which is less than 3,000 barrels equivalent; we had some legacy Gulf Coast assets and a little bit of legacy Gulf of Mexico assets. We closed on Dynamic last April, that brought that up about 23,000 barrels equivalent per day and then in June we closed the acquisition of Hunt which was another 3,000 barrels equivalent per day. And so getting with our operation team getting all the production back on and do some re-completions we were able to end the year at nearly 32,000 barrels equivalent per day. And so what we hope to do this year is again spend about $200 million, we spent I think $150 million last year on some of these E&P activity, but spend $200 million in this year and keep that production basically flat.

Year-end reserves, we had 20% just absolute growth from year-over-year, from 471 to 566 and when you adjust for sales and production, we produced 33.6 million barrels and then we sold little tertiary we had in 2012, but adjusting for sales and production we had reserves growth of 37%.

Just on the oil side, we grew oil reserves by 35% and when adjusted for sales and production we grew it by 62%. PV-10 went from $6.9 billion to $7.5 billion, 9% growth; adjusting again for sales and production is 43% growth in present value. 454% proved reserves replacement, our proved developed planting cost and this is just the movement in the PDP, excluding PUDs was for the company $21.68 per barrel equivalent and for the Mississippian it’s $13.91 per barrel equivalent, so extremely good F&D cost in the Miss there. And we had a 112 million barrels equivalent of negative revisions and about 85%, 86% of those revisions was feted low natural gas pricing.

We will also show you a table here with the proforma adjustments for the Permian sale and so the Permian sale will account for about nearly 200 million barrels of equivalent bringing our reserves down to 367 million barrels equivalent. And then you see the pie chart showing the split commodity money mix of 46% oil and 54% gas and also of our reserves, you are looking at 46% PDP, 11% PDNP and 43% PUDs.

2012 spending, our CapEx in 2012 was $2.174 billion. We drilled 396 horizontal wells, 60 disposal wells and 717 wells in the Permian Basin. Drilling in the Permian’s can certainly be reduced dramatically this year as we sold off the assets and what we have left to drill in the Permians are drilling in the royalty trust.

So in 2012, we drilled 1,173 wells, spent about $400 million in infrastructure workovers and some non-op activity and then $150 million in capitalized G&A. Land and seismic, $191 million. This year, we are going to spend about $100 million in land and seismic and two years ago in 2011, we spent $350 million in land and seismic.

So that category has certainly been reduced dramatically just over the last couple of years and about $195 million we spent in Midstream and a lot of that has to do with the electrical infrastructure that we put in for the Mississippian. So about 81% of all our capital spending goes to E&P and then about 43% of that goes in the Mississippian drilling.

So some high level 2013 objectives and you know, our focus, our number one focus is to continue the increase rate of return on the Mississippian drilling and we know the range of the type curve. We've been talking a lot about that and so our number one goal is to continue to reduce costs both on the capital side and on the LOE side.

We are getting much better with all the data that we have now with nearly 690 wells drilled through February and with history we are getting a lot better at our selection process of not only were we drill it geographically but where we drill in the Mississippian, and so we are starting to learn more and more about the play.

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