Sandridge Energy Inc. (SD)

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Sandridge Energy, Inc. (SD)

February 28, 2012 8:00 am ET

Executives

Kevin R. White - Senior Vice President of Business Development

Tom L. Ward - Chairman and Chief Executive Officer

Matthew K. Grubb - President and Chief Operating Officer

Todd N. Tipton - Executive Vice President of Exploration

Rodney E. Johnson - Executive Vice President of Reservoir Engineering

David C. Lawler - Executive Vice President of Operations

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

Analysts

Unknown Analyst

Charles Meade - Johnson Rice & Company, L.L.C.

Presentation

Kevin R. White

Good morning, and welcome to the SandRidge Analyst Day. We've got a big crowd today. So welcome, and hope everybody enjoys the day, and more importantly, the buckyballs. I want to take a quick second to introduce our Board of Directors. And for the board, if you guys could stay standing up after I call you. We got -- excuse me, Jim J. Brewer; Everett Dobson, you've seen Everett this morning; Bill Gilliland; Dan Jordan, he's right over here; and Roy Oliver. So that's the SandRidge Board of Directors, and welcome to those guys.

I just wanted to go through what the agenda is going to look like today, and you can see the forward-looking statements on the first page there. For the day today, we've got Tom, who's going to lead us off with some introductory comments, and Matt, who will go over high-level operations review. Todd Tipton and Rodney Johnson will go over the Extension Mississippian and the original Mississippian technical overview. Dave Lawler will go through our development plan for 2012. And then after Dave is done, we're going to take a short break at that time. And then finish up the day with Rodney Johnson going over the company's year-end reserves and James Bennett wrapping up with our finance overview.

Another thing I wanted to point out, in your book, we've got guidance for 2012 in the back of the book in the appendix. And we don't have any plans to go over the information specifically today, but if you've questions, feel free to ask about it. And through the course of the presentation today, most of the information that is presented, is presented as SandRidge only, so it's pre our Dynamic acquisition. There'll be some slides through the course of the day where we will have footnoted it and noted when we've included Dynamic's information in some of our numbers. And then in the guidance information that's at the back of the table, we have included Dynamic assuming a close of April 30.

So with that brief overview, we'll let Tom come up and get started.

Tom L. Ward

Thanks, Kev. I was running just a little bit late this morning. I was on the phone with my counterpart in Nigeria, looking a little bit of cheap oil. Just kidding, just kidding, I was just kidding. So a few years ago, as we started looking at the transition of the company from gas to oil, we had some big objectives, how do we move the company forward? But more -- and just the last year, we started to focus down. And whenever I looked at the growth of the Mississippian project, what I kept seeing in our model was that 3 years out, things were really very good for us as long as we could do some transactions to get us there, as long as we could keep our CapEx up at a $1.6 billion to $2 billion range. There were some objectives that we could reach that I thought would be different than most companies were able to achieve. So those objectives were tripling EBITDA, doubling our oil production, having a company that is mature. In my definition, mature is you could have a couple of billion dollars of CapEx that can be funded within cash flow, then you're looking at making acquisitions that would be funded with straight debt and equity. So that's kind of the goal post-2014 as whenever I think of SandRidge as a mature company.

Now keep in mind, we're only 5 years old. And with that 5 years, we had a U-turn in the middle where we moved from a 95% natural gas company to today by PV, we drill basically 94% oil. So it is a very rapid growth we've had, and that we've been able to achieve that in a short amount of time is -- a lot of credit is given to the guys in our organization you'll be hearing from today. I'm going to keep my presentation very short and try to just give the strategic overview of the company, but I want to spend most of the day will be with Matt and Dave, Todd and Rodney and James. And so what I do want to focus on that along with being able to have tripling of EBITDA and doubling of oil production is that we'll continue to make transactions and improve our credit metrics.

There's really not much that's changed for the company post-Dynamic. We still are low-risk, shallow conventional oil. We're really focusing on the 2 best areas from a rate of return perspective in the U.S. And that's the Mid-Continent and the Mississippian play, and the Permian is where we drill all of our wells basically, or onshore looking for shallow conventional oil out of carbonates. The Dynamic transaction doesn't change that. In fact, it just helps us with our growth engine of being the main drilling part of the company in the Mid-Continent.

Much like what we did in the Permian basin in 2009, when we moved into the Permian, it was an out-of-favor area. We looked at places that were being drilled shallow, very shallow oil. Most of the wells that were drilled and still are drilled on the Central Basin Platform are at 4,000 feet or so of vertical wells being drilled. And so what we looked at, it was a way, can we logistically drill 600 to 800 wells a year and can we take something that is known that there's oil in place and make an acquisition, and on around that acquisition, build an oil company. And that's what we did with our -- starting in 2009. When we met right here in March of 2009 and our board was here then, that was a decision point we had to go forward to oil. And oil was at $39.96 and gas was at $4.13, and that was the transitioning date basically 3 years ago today that we looked back and said, we want to change the company. And with that, we had a net investment in our Permian assets of $1.4 billion. It has a PV-10 value of growth of $2.7 billion so a growth in investment of over $1 billion in that time period. We think the Dynamic transaction we just made is like this, not the growth engine of the Permian, but that we went and bought very inexpensive oil in a place that is out-of-favor in the investment public. And so that there was a dislocation in the market just like there was with the Permian assets 3 years ago.

But the main growth area for the company is the Mississippian. For this, we found something that we knew about that others weren't focused on really a few years ago. But starting in 2009 and 2010 with our drilling and basically starting in Alfalfa County, moving to Grant and Woods and now into Comanche County in Kansas. Now you can see the red is where we've drilled, the blue is where others have drilled. We drilled basically half of all the wells in the Mississippian on the horizontal, but the key of the play was done decades before that we got here. And that's the -- there have been 15,000 wells drilled across a very large area, and what were those people looking for? They were looking for very subtle structures. So it's a huge stratigraphic trap, that red area, in the center of the page is the Central Kansas Uplift. There's no Mississippian present there. There's a large stratigraphic trap wrapping around the Central Kansas Uplift with a perfect trap, the Pennsylvanian Unconformity, and the Mississippian is eroding into that Unconformity. So we have newer rocks tipped away from the Central Kansas Uplift and older rocks because of the new rocks have been eroded off as you move towards the Central Kansas Uplift. Rodney and Todd will go into this in great detail, but this is all the same rock as you wrap around from the Nehema Ridge in Central Oklahoma and Central Kansas up to the Los Animas Arch, which is in Eastern Colorado. Those are the 2 structures where the stratigraphic trap is in between, up against the Central Kansas Uplift. The reason that's where your trap is and there's oil in place, the reason it wasn't drilled, is you have to have the ability to move water. And so what our guys will talk about today is the key to the play is this disposal system that we have in place, and what I would call the genius of the idea is that there's oil in place. At high prices, you can move a lot of water and have very high rates of return. And that's what the idea was that gave us the leg up to go put together the acreage.

So what did we do? We spent basically $400 million to buy 2 million acres, around $200 an acre. And we sold 550,000 of that and still -- and created $2.33 billion worth of value. That's through the Mississippian Trust, number one, the joint ventures that we have; and then a second pending royalty trust that James will talk more about. So that leaves us with 1.5 million acres. The implied value of that, 4,236 as we implied $6.35 billion. The resource NAV, so this is an important number, is $23 billion or $15,000 an acre. So whenever I talk about the ability to hold onto more of this acreage and use the Dynamic transaction as a funding mechanism, that's when I talk about the -- being so accretive, the NAV to us. So the Dynamic acquisition complemented the 3-year plan of doubling production, tripling EBITDA and reducing our leverage. So we had a few alternatives that we could've done, I talked about this at the conference call, is we could've -- in moving forward with our plan, we could've just reduced CapEx. We knew if we kept our CapEx as we projected over the next 3 years, we needed some funding. That's always been known. So how are we going to fund it? Well, first of all, you could've reduced CapEx and just not needed the funding. But then we wouldn't have had the growth and -- that we're projecting in our EBITDA, where you could have -- you could've raised debt, just fund it all with debt, but we were already 4x leveraged. So that wouldn't have been -- this wouldn't have been the appropriate time to be adding debt. We could've issued straight equity. I had a lot of people calling to say, you should just issue straight equity, and frankly, with straight equity, you wouldn't have liked that either. And you would have been -- you wouldn't have had 25,000 barrels of oil a day. So that leaves -- the royalty trust is a good idea, so you could've done more royalty trust, but they're actually fairly small in scale. And you have to sell the most proven assets, so around the production that you have, and you're also selling EBITDA at the same time. It's a good structure, but not one that you could -- that I believe you could build the company going forward over the 3-year plan.

And then the one that I had the most questions about is why don't you sell more acreage, and the last slide shows you why. It's that if the Mississippian is as successful as I think it's going to be, every acre we hold onto is worth $15,000 and we won't be able to sell it today for $15,000. So the Dynamic transaction -- well, oh no, I forget that we could do mezz debt. I mean, there's a lot of mezzanine or mezzanine financing, and I don't even put that in 1 of the 6 ways, I don't even to put that in as something we considered. But the other was to do an acquisition of Dynamic, and in all ways, that was accretive to us. And so that's how come that we talk about the Dynamic acquisition and 25,000 barrels a day. And the Gulf of Mexico has not been a place that I necessarily wanted to go and have a growth engine and it's not considered to be a growth engine, but we do believe by spending $200 million a year, we can keep our production flat, and we'll spend more time. And, well, even post this quarter once we get the Dynamic acquisition in place, we'll spend much more time talking about what we're going to do there.

2011 was really the key year for us. This was the year that was -- the difficult year to do all the transactions that we had to do, to have 440 -- $410 million of adjusted cash flow from operations and have a $1.833 billion CapEx budget. It took 7 transactions to be able to make that together and we did that without adding to -- straight equity. We didn't have to issue equity, and we didn't increase our leverage. So that was the transitional year for the company. Now in 2012, all the hard work's already been done. So we basically have SDR left, and then we're -- our funding is done. And actually, we can add leverage in '13 and '14 and still improve our credit metrics. So the way I look at this is that we're -- the Dynamic acquisition was one of the last 2 things we need to do in order to fulfill our 3-year plan. So I'm very pleased to be here, and I can't wait for you guys to be able to look -- especially at our Mississippian area and why we thought that the Extension Mississippian is as good as the original. And Rodney and Todd will spend a lot of time today going into that, and we're very excited to put together the plan. And we'll have -- this year, we'll have 26 rigs averaging in the Mississippian. We'll end the year with 5 of those continuing to move up into the Extension Mississippian. And next year, we should end the year of 2013 at 45 rigs in the Mississippian. So it's -- I think we're going to be bringing in about 100,000 jobs to Oklahoma and Kansas. It's a wonderful play, over the next 3 years, of growth for the company that'll allow us to execute our 3-year plan of tripling EBITDA, doubling our oil production and continue to improve our credit metrics.

So with that, I will turn it over to Matt.

Matthew K. Grubb

Thank you, Tom. And good morning, everybody, and welcome. My name is Matt Grubb, I'm the President and Chief Operating Officer for SandRidge. And I have about a dozen slides to go through before we get to the technical part of the presentation.

And 2011 is a great year for us in many fronts, not only on the -- to strengthen our balance sheet, but also on a performance and production, executing on our drilling program. We currently produce about 67,000 barrels of oil equivalent per day, and that's 16% growth in total production year-over-year, and 60% growth in oil production. In 2011, we produced about 11 8 million barrels of oil. And in 2012, with Dynamic, we expect to produce about 18.2 million barrels of oil, so that continues with our strategy to increase oil production within the company. Proved reserves, adjusted for what we produce, which was 23.4 million barrels of oil equivalent, and what we sold during the year, which was about 123 million barrels of oil equivalent, we were up 122% year-over-year. Our 2012 drilling plan is similar to our 2011, which is focusing on the Mississippian play and also on the Permian. We're just going to drill more Mississippian wells this year. We expect to drill 380 Mississippian wells and 759 wells on the Central Basin Platform. In 2012, production guidance, 54% of oil growth is projected for the year.

We operate primarily in 2 areas, which I believe, right now, are 2 of the best areas for developing oil and gas. The Mid-Continent, which is our Mississippian play, covers northern part of Oklahoma and Western Kansas, and of course, our Permian Basin is primarily in the Central Basin Platform. The West Texas Overthrust is at PiƱon Field, which is a dry gas area, and we don't plan any activity there this year. Like last year, we didn't do a whole lot there. And then, of course, the Gulf of Mexico now with the Dynamic acquisition, we expect to spend about $200 million in the Gulf this year. So overall, we should drill about 1139 wells and roughly about 1150 -- 1155 wells with the Gulf of Mexico.

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