Sandridge Energy Inc. (SD)

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SandRidge Energy (SD)

Q2 2011 Earnings Call

August 05, 2011 9:00 am ET

Executives

James Bennett - Chief Financial Officer and Executive Vice President

Kevin White - Senior Vice President of Business Development

Matthew Grubb - President and Chief Operating Officer

Tom Ward - Chairman of the Board and Chief Executive Officer

Analysts

Scott Hanold - RBC Capital Markets, LLC

Daniel Morrison - Global Hunter Securities, LLC

Chris Pikul - Morgan Keegan & Company, Inc.

Craig Shere - Tuohy Brothers Investment Research, Inc.

Hsulin Peng - Robert W. Baird & Co. Incorporated

Peter Kissel - Howard Weil Incorporated

Gil Yang - BofA Merrill Lynch

Dan Chandra - Brevin Howard

David Kistler - Simmons & Company

William Butler - Stephens Inc.

Duane Grubert - Susquehanna Financial Group, LLLP

Mark Hanson - Morningstar Inc.

Joseph Allman - JP Morgan Chase & Co

Neal Dingmann - SunTrust Robinson Humphrey, Inc.

Richard Tullis - Capital One Southcoast, Inc.

Noel Parks - Ladenburg Thalmann & Co. Inc.

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2011 SandRidge Energy Earnings Conference Call. My name is Keysha and I will be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, James D. Bennett, CFO. Please proceed.

James Bennett

Thank you, Keysha. Welcome, everyone, and thank you for joining us in our Second Quarter 2011 Earnings Call. This is James Bennett, Chief Financial Officer. And joining 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.

Please note 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 may 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.

Also note that today's call is intended to address SandRidge Energy and not the Royalty Trust, Sandridge Mississippian Trust I, ticker SDT. SDT will have a separate earnings call at 8 am Central time on Friday, August 12.

Now, let me turn the call over to Tom Ward.

Tom Ward

Thank you, James. Welcome to our second quarter operational and financial update.

As you've read, we've had a busy few weeks. I'll use this small amount of time to update you on our progress from the last quarter and give you a glimpse of our new acreage play in the Miss plus develop the development of our 3-year growth plan.

Yesterday, we announced the signing of a joint venture with Atinum Partners, a highly respected financial partner and energy investor based in Seoul. The joint venture encompasses the original Mississippian idea that we've been developing over the last few years.

SandRidge will receive $500 million in consideration, composed of $250 million in cash at closing and $250 million in a carry structure over a 3-year drilling term. We will deliver 113,000 net acres of our greater than 900,000-acre Mississippian position. With this sale, we will have monetized $580 million of cash and $250 million of additional carried interest on an initial investment of approximately $200 million and continue to own our nearly 90% of our acreage. The transaction further substantiates that the Mississippian carbonate play is considered one of the best areas to drill in the U.S. today.

There have now been 92 wells operated by SandRidge with at least 30 days of production history. These wells have a 30-day rate of 297 barrels of oil equivalent per day compared to the 244-barrel of oil equivalent per day rate used in the Netherlands Sewell type curve that has an EUR of 409,000 MBoe per well.

We have information on a total of 136 total wells with at least 30 days of production, and these wells have a 30-day rate of 284 barrels of oil equivalent per day. We calculate our type curve well to have an excess of 100% rates of return using a $3 million well cost. The play in total now has over 250 horizontal wells that have been drilled.

Given the positive performance of our wells, we are now increasing guidance to 24.1 million barrels of oil equivalent in 2011, which is a 20% production increase over 2010, and we're projecting a corresponding 20% production increase in 2012 to 29 million barrels equivalent.

We have also announced our second horizontal Mississippian Play, in which we have purchased over 200,000 net acres with a plan to be at 1 million acres by the end of this year. We do not anticipate spending any more, per acre, than we did for the original Mississippian acreage bought in Oklahoma and Southern Kansas. This new play has all the same characteristics of our original Mississippian play.

We are focusing on shallow carbonate, low-cost oil that can be acquired and drilled for approximately the same amount as we have invested in the current Mississippian play. We also have and focus on thickness of reservoir and have chosen to stay in areas that have at least 250 feet of Mississippian thickness.

We like carbonates because of the matrix porosity and permeability. However, maybe the most important factor in describing what we look for in a play is history. We want to understand what production decline will look like several years into the play. The original Miss Play had 7,800 vertical wells drilled within our buy areas. The new Miss play has over 8,500 vertical wells drilled by -- with very similar EURs to current Miss but even at shallower depths.

We also continue to believe that 3 wells per section is the appropriate estimate for wells in the Mississippian formation. The storage capacity to find 400 to 500 Mboe per well is found through matrix porosity, fracture porosity and higher perm rock. Therefore, we are hesitant to drill too close as we want to spend the least amount of capital to get the most oil and gas from the reservoir.

It is also impossible to predict, with any accuracy, how a reservoir will decline over a long period of time without some history of production. Within our areas of focus, carbonate wells have been drilled for decades, giving us confidence in that future well performance. We want to manage and minimize risk by investing in plays that will allow us to drill and complete wells with equipment that is plentiful and developing reservoirs that have a proven production history. The abundance of low horsepower drilling and completion equipment has allowed us to keep our drilling cost relatively flat during the last 2 years, at a time when the industry's drilling cost have risen quite dramatically.

In summary, our strategy is quite simple: drill in areas with historically proven production and keep our costs down while taking advantage of high oil prices to create strong rates of return. We then lock in these rates of return by hedging future oil production. We have already hedged over 30 million barrels of oil for the next 3 years and continue to be willing to hedge more.

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