Sandridge Energy Inc. (SD)

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SandRidge Energy (SD)

Q1 2011 Earnings Call

May 06, 2011 9:00 am ET

Executives

James Bennett - Chief Financial Officer and Executive Vice President

Unknown Executive -

Matthew Grubb - President and Chief Operating Officer

Tom Ward - Chairman of the Board and Chief Executive Officer

Analysts

Daniel Morrison - Global Hunter Securities, LLC

Philip Dodge - Stanford Group Company

Scott Hanold - RBC Capital Markets, LLC

Unknown Speaker

David Heikkinen - Tudor, Pickering, Holt & Co. Securities, Inc.

Amir Arif - Stifel, Nicolaus & Co., Inc.

David Kistler - Simmons & Company

William Butler - Stephens Inc.

Michael Breard - Hodges Capital Management

Duane Grubert - Susquehanna Financial Group, LLLP

Joseph Stewart - KeyBanc Capital Markets Inc.

Neal Dingmann - SunTrust Robinson Humphrey, Inc.

Unknown Analyst -

Noel Parks - Ladenburg Thalmann & Co. Inc.

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the First Quarter 2011 SandRidge Energy Incorporated Earnings Conference Call. My name is Kiana, and I'll be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. Now I'd like to turn the call over to Mr. James Bennett, Chief Financial Officer. Please proceed,

James Bennett

Thank you, Kiana. Welcome, everyone, and thank you for joining us on our first quarter 2011 earnings call. This is James Bennett, Chief Financial Officer. With us today, we have Tom Ward, Chairman and Chief Executive Officer; Matt Grubb, President and Chief Operating Officer; and Kevin White, Senior Vice President of Business Development.

Please note that today's call will contain forward-looking statements and assumptions, which are subject to inherent risks and uncertainties. The 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 numbers that we discuss can be found in our earnings release and on our website. Now let me turn the call over to Tom Ward.

Tom Ward

Thank you, James, and welcome to our first quarter financial and operations update. I'll lead with a few opening remarks and turn over to Matt and James.

For the last 2 years, we've had a very simple and focused strategy of acquiring and drilling for shallow conventional oil and carbonate reservoirs. We initiated our acquisition of oil by focusing on the Permian Basin because of the tremendous source rocks and production that have been developed over the last 80 years. The Permian Basin is the largest oil-producing basin in the Continental U.S. with over 29 billion barrels of oil produced. After focusing on the Permian, we decided to further focus on the Central Basin Platform as our core area of interest. The CBP has produced over 12 billion barrels of oil from only 3 million acres, defining the best oil-producing area within the best oil-producing basin.

We made 2 acquisitions with a net investment of $1.8 billion. It's now worth over $3.2 billion, showing a growth to investment of nearly $1,400,000,000 in than a year. Not only have we made tremendous value growth, we now have nearly 10 years' worth of drilling even though we drill over 800 wells per year and own over 185,000 acres of prime land. Plus, we did not have to spend capital on expensive non-EBITDA-producing acreage.

At the same time, as we are acquiring on the Central Basin Platform, we targeted another shallow carbonate oil play in the Mid-Continent. The Horizontal Mississippian play is now recognized as one of the premier shallow oil projects in the U.S. SandRidge storage [ph] worked this area in 2007 by drilling less than a dozen vertical wells. However, as we developed the idea that there were tremendous amounts of oil in place over a very large area, we stepped up and drilled horizontally nearly 30 miles away and found the same great reservoir. This gave us confidence to buy one of the industry's leading acreage positions at a very low cost. We now have 12 rigs drilling and are projecting to double our rig count in 2012.

We have said that we can only hold approximately half of our projected 1 million acres over the next 5 years if we keep our CapEx flat at its current level. Therefore, we're now reviewing 3 ways to fund the doubling of our rig count next year: we can either sell a portion of our acreage or joint venture with another entity; form additional royalty trusts; or raise CapEx within SandRidge. We've not decided which way or ways that we will fund the drilling, but we are now planning for increased Mississippian rig count in 2012. We currently are spending approximately $300 million per year drilling in the Miss in our $1.3 billion budget.

The Mississippian continues to gain traction as 9 operators are now active in the play with 24 total rigs running. SandRidge has drilled 72 horizontal wells to date, and our average 30-day IP has increased to 270 barrels a day versus the 244 barrel a day equivalent-type curve that produces 409,000 barrels equivalent of reserves.

It is also important to note that our drilling now spans across an area greater than 100 miles east to west. An industry drilling has proven up the play beyond that distance. Vertical well performance suggests the western portion of the play to be statistically better. But we don't have enough horizontal well information to verify at this time. This is important as most of our acreage is in Grant County, Oklahoma and West. We also believe reservoir thickness is good, and we have kept our acreage acquisition in the region of the play with anticipated gross thickness of 200 to 800 feet of Mississippian reservoir. Both of these areas we drill in have tremendous rates of return because we drill for oil and because the costs are low due to the shallow reservoir depths.

We continue to see very little pressure on overall costs in these plays due to the current availability of equipment in both drilling and stimulation services. We believe this is one of the distinguishing factors of our company. Even though we do not see the potential for material increases in costs today, we believe there will be competition for drilling services in the next year as we anticipate a continued ramp-up of industry activity in the Mississippian play due to robust economics and strong oil prices. Therefore, we are moving ahead aggressively to lock in rigs for our 24-rig program next year. Perhaps even more important than any slight increases in cost is that we want the assurance that we can accelerate drilling where each type curve well has a PV-10 of nearly $7 million at current oil and gas strip.

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