Sandridge Energy Inc. (SD)

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SandRidge Energy (SD)

Q3 2012 Earnings Call

November 09, 2012 9:00 am ET

Executives

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

Tom L. Ward - Chairman and Chief Executive Officer

Matthew K. Grubb - President and Chief Operating Officer

Analysts

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

Charles A. Meade - Johnson Rice & Company, L.L.C., Research Division

David W. Kistler - Simmons & Company International, Research Division

Joseph D. Allman - JP Morgan Chase & Co, Research Division

Brian Lively - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Craig Shere - Tuohy Brothers Investment Research, Inc.

Brian Singer - Goldman Sachs Group Inc., Research Division

James Spicer - Wells Fargo Securities, LLC, Research Division

David Snow

Duane Grubert - Susquehanna Financial Group, LLLP, Research Division

H. Monroe Helm - Barrow, Hanley, Mewhinney & Strauss, Inc.

Jeffrey W. Robertson - Barclays Capital, Research Division

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

Robert Carlson

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Third Quarter 2012 SandRidge Energy Earnings Conference Call. My name is Jeff, and I'll be your coordinator 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, and you have the floor, sir.

James D. Bennett

Thank you, Jeff. Welcome, everyone, and thank you for joining us on our third quarter 2012 earnings call. This is James Bennett, Chief Financial Officer. And with 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.

Keep in mind 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'll 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.

Please note that this call is intended to discuss SandRidge Energy and not our public royalty trusts. Also, earlier this morning, we filed our third quarter 10-Q.

Now let me turn the call over to Tom Ward.

Tom L. Ward

Thank you, James. You've now seen our announcement of our intent to sell our Permian assets outside of the Permian Royalty Trust. We intend to use the potential proceeds to strengthen our balance sheet, help us become cash flow positive, improve our leverage ratio and have long-term, profitable, double-digit production growth by focusing on developing our large Mississippian acreage position. We've been focused on this for some time, and this decision is not a reaction to the public letter we received yesterday from an important shareholder. As we said in our statement yesterday, the board and management of this company value your opinions, and we think we've been very open to constructive dialogue. While our perspectives on various points made in the letter differ in many instances, we do agree that we have valuable assets and our performance for shareholders is a focus and a priority.

With respect to the initiative on our Permian assets, the proceeds from the sale of these assets will be used to pay down debt and fund development of our Mississippian play. The transaction will also contribute to narrowing our CapEx to cash flow gap, provide consistent growth in the Mississippian and fully fund our CapEx through 2014. The assets we are offering for sale produce approximately 25,000 barrels of oil equivalent per day, of which about 80% is liquids. We built our Permian assets over the last 4 years by acquiring and drilling a very specific area of conventional assets on the Central Basin Platform in between the Midland and Delaware Basins.

This focused approach has allowed us to build one of the best conventional oil assets in the U.S. We started drilling in the Permian in 2007, but increased our activity after determining to make a move to oil in 2008. Our Permian assets were producing just 4,000 barrels of oil equivalent per day in early 2009, so we made 2 major acquisitions in 2009 and 2010, plus moved in up to 13 rigs and drilled nearly 750 wells per year to grow our production up to over 30,000 barrels of oil equivalent today.

Our total net investment, including the value held by SandRidge at PER, is just over $1 billion. We know this is a rare offering of operated, concentrated free cash flow and conventional assets. Our 2013 guidance does not reflect the sale of the assets. Upon a sale, however, we will update that guidance. Either way, we will lower our CapEx in the Permian, and we expect corporate CapEx to be at $1.75 billion next year.

Looking our Mississippian play, it continues to grow as we've now proven commercial horizontal production over more than 200 miles from Noble County, Oklahoma to Finney County, Kansas, with repeatable, low-risk attractive returns. SandRidge has drilled nearly half of the more than 1,100 industry wells to date as the Mississippian continues to expand across Northern Oklahoma and Western Kansas. However, no other operator has the infrastructure capability we have established to continue to add scale to the play across hundreds of thousands of acres.

Now this infrastructure is in place, we can also focus on drilling more wells with ESPs, which bring forward returns by moving more fluid than traditional gas lift wells. This -- the additional cost of an ESP installation is approximately $200,000. But the payback is quick because we can increase fluid volumes substantially.

We've also been discussing for the last year the testing of wells on tighter spacing pattern than 3 wells per section. We've now drilled more than 70 pairs of wells and have enough history of production to see that 4 wells per section is the appropriate development density. Therefore, at 4 wells per section and more than 1.8 million net acres, we've increased our resource location count to more than 11,000 wells. Developing on 4 wells per section also allows us to fully take advantage for our existing infrastructure systems and maximize efficiency. This increase in locations more than offsets the value of locations we anticipate selling in the Permian.

As we continue to grow the Mississippian well count across a larger area, we also are seeing an increase in our natural gas production. And this increase has been offset by a lower amount of oil than we anticipated at the beginning of last year. However, we continue to be driven by high rates of return, and the Mississippian oil production, along with the associated natural gas, continues to provide one of the best places to drill in the U.S. We do not need to drill the core of a core area, but can focus on one of the largest stratigraphic traps in North America that lies across Northern Oklahoma and Western Kansas. This is a massive area that has so far shown the same statistical potential across the entire area and covers hundreds of miles and thousands of locations.

Our Kansas activity continues to expand. We've now drilled 91 wells in Kansas and continue to have similar results as in Oklahoma. We currently have 9 of our 31 rigs working in Kansas and plan to drill 191 wells there in 2013.

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