Sandridge Energy Inc. (SD)

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SandRidge Energy (SD)

Q3 2011 Earnings Call

November 04, 2011 9:00 am ET

Executives

Tom L. Ward - Chairman of the Board and Chief Executive Officer

James D. Bennett - Chief Financial Officer and Executive Vice President

Matthew K. Grubb - President and Chief Operating Officer

Analysts

Pearce W. Hammond - Simmons & Company International, Research Division

Richard M. Tullis - Capital One Southcoast, Inc., Research Division

David Deckelbaum - KeyBanc Capital Markets Inc., Research Division

Craig Shere - Tuohy Brothers Investment Research, Inc.

William B. D. Butler - Stephens Inc., Research Division

Duane Grubert - Susquehanna Financial Group, LLLP, Research Division

Neal Dingmann - SunTrust Robinson Humphrey, Inc., Research Division

Phillip Jungwirth - BMO Capital Markets U.S.

Daniel J. Morrison - Global Hunter Securities, LLC, Research Division

Hsulin Peng - Robert W. Baird & Co. Incorporated, Research Division

Michael Breard - Hodges Capital Management Inc.

Unknown Analyst -

Mark P. Hanson - Morningstar Inc., Research Division

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Third Quarter 2011 SandRidge Energy, Inc. Earnings Call. My name is Modesta, 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, Mr. James Bennett, Chief Financial Officer. Please proceed, sir.

James D. Bennett

Thank you, Modesta. Welcome, everyone, and thank you for joining us on our third quarter 2011 earnings call. This is James Bennett, Chief Financial Officer. And 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 risks and uncertainties, and actual results may differ materially from those projected in these forward-looking statements. Additionally, we will 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 this call is intended to address SandRidge Energy, not our 2 royalty trusts, SandRidge Mississippian Trust I or SandRidge Permian Trust. The trusts will have separate earnings calls at 8 a.m. and 9 a.m., Central Time, one week from today on Friday, November 11. So please hold any trust-related questions until the calls next week. Now let me turn the call over to Tom Ward.

Tom L. Ward

Thank you, James, and welcome to our third quarter operation and financial update. We continue to make great progress in executing on our 3-year plan of tripling EBITDA, doubling oil production and lowering our debt-to-EBITDA ratio. The plan revolves around our growth engine in the Mississippian formation of Northern Oklahoma and Western Kansas. This area has received a tremendous amount of attention in the last year, not only from SandRidge but from other large industry players.

A snapshot of where we were last year to where we are now reveals that we have nearly doubled our acreage position in the original Mississippian play from 400,000 acres to 800,000 acres, while generating more than $800 million of capital from our initial investment of less than $200 million in acreage cost.

Our organic production growth has increased by sevenfold from about 150 Horizontal Miss wells we drilled since January 2009. This represents nearly half of all the horizontal wells to date in the play. On the first 37 wells drilled at year end 2010, we averaged a 30-day peak IP of 244 barrels of oil equivalent, while the last 119 wells drilled in 2011 have averaged 308 barrels of oil equivalent a day. We currently have 18 rigs drilling horizontal producers, 2 rigs drilling saltwater disposable wells, while planning to exit this year with 20 horizontal rigs running.

We have now adjusted our goal for 2012 to average 26 rigs, and this is averaging 2 more rigs than we would have indicated in the past for our 2012 Mississippi drilling plan. However, this will not impact our 2012 capital spending plan, as we will offset the increase in the Mississippian activity by reducing our Permian drilling by 4 rigs to 12 rigs.

We're currently seeing better capital efficiency in the Miss program, as we're experiencing some facility constraints in the Central Basin Platform. Matt will go into detail on the production constraints in the Permian, but the quick answer is that we've outdrilled some of our infrastructure and we'll be working to eliminate these bottlenecks over the next couple of quarters. Therefore, our production is increasing in the Permian, but not at the rate we projected in our August guidance update.

With that said, we continue to see the Permian wells performing on type curve. At the same time, our Mississippian production has performed above our expectations. The Mississippian oil production is in line with our type curve, and our natural gas production is better than we anticipated. Our Miss well is now projected to produce 56% natural gas.

We have also tested the idea of drilling 4 wells per section. In fact, we have drilled 36 wells, or 18 lease line offsets, and have not experienced any evidence of negative interference between the wells to date. We did not want to visit the idea of 4 wells per section until we had tested the theory. But so far, the indication is positive to increase the amount of wells to be drilled. However, we will not officially change our position on spacing until more time is seen on the producing wells.

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