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Summary

  • SandRidge has one of the best assets in the region and the company is utilizing its asset base well to grow.
  • Decreased cost should give an advantage to SandRidge and increase the profitability of the company.
  • Increased production per well shows that the company is utilizing its assets well.

The midcontinent focus of SandRidge Energy (NYSE:SD) has now started yielding substantial gains for the company as it is clear from the impressive first quarter results. The company is mainly focused on the Mississippian oil play of the northern Oklahoma and southern Kansas. Over the last five years, the company has moved its focus towards the midcontinent region, while other energy giants such as Chesapeake (NYSE:CHK) and Shell (NYSE:RDS.A) (NYSE:RDS.B) have decreased their presence in the region due to lower comparable yields. Chesapeake still has over 2 million net acres in Northern Oklahoma and Kansas. This enabled SandRidge to vastly explore the region - 1.8 million acre Mississippian formations, and drill a total of 511 wells in the last year. We believe the asset base of the company will give it a solid platform for the future growth. In this article, we will talk about the assets of SandRidge Energy and the potential of these assets.

Asset Base Will Ensure Long-Term Growth

Nowadays, when majority of energy companies are reviving their natural gas assets to benefit from continuously improving natural gas prices, SandRidge has also followed the trend and increased its gas yields over the last year. However, liquids still remain a major source of revenue for the company, with a total yield of 8,212 MBbls in the last year. Such high operational throughput is made possible by the lower-cost, shallower fields of the Mississippi region. Production per well may sometimes average less than other plays of the region; however lower cost wells and increased access to infrastructure countered such lower production yields. Moreover, the region remains one of the most active plays after Bakken, Eagle Ford and the Permian.

The highest yielding areas of the Mississippian region include Mississippi Lime Horizontal Field, Fuhrman-Mascho during the last three years. The Mississippi Lime Horizontal Field is located on the Anadarko Shelf in the northern Oklahoma and Kansas. However, the company divested the Fuhrman-Mascho field, largely to devote more resources to its Mississippi acreage development, and achieved a total proved reserves of 16,982 MBoe during the last year. Moreover, Pinon Field has been inactive over the last two years due to low natural gas price environment. Nevertheless, the upward trend observed in the natural gas prices will enable the company to take substantial benefit from the Pinon field in the short-medium term, with a natural gas reserve capability of 28,246 MMcf while operational.

(click to enlarge)

Source: SEC Filings

SandRidge is also focusing on increasing its efficiency by utilizing its undeveloped assets in the coming years. The company estimates that approx. 88% of its current proved undeveloped reserves will be developed by the end of 2016 and all of its current proved undeveloped reserves will be developed by the end of 2018. The development of these reserves will add 155.1 MMBoe for SandRidge over the next few years. Further, the company holds 2.3 million gross and 1.68 million net undeveloped acreage majorly in the midcontinent region, which additionally complements its near-term operational productivity goals. Moreover, the region also holds lower drilling costs and should highly contribute towards increased net margins of the company.

Decrease in Costs

Since the company has most of its assets in the Mississippian lime, it has significantly decreased its drilling and completion [D&C] costs. The D&C costs for the first quarter stood at $3 MM per well, down from $3.3 MM per well.

Source: Global Energy and Power Conference Presentation, New York, June 3, 2014

SandRidge has also planned to reduce its operational costs ensuring larger profit margins in the current year. The primary D&C cost savings are related to multi pad drilling technique, which has already accounted for up to 80% of its well costs in the first quarter. Moreover, the company has equipped its well sites with certain design improvements including centralized and commingled tank batteries and centralized Salt Water Disposal [SWD] systems, which will substantially decrease the costs and increase profitability in the long run.

A Deeper Look at First Quarter Results

The extreme weather conditions can impact the operations of the energy companies - SandRidge also felt the effects of the weather and lagged behind its operational estimates. For the first quarter, the company planned to keep its well costs under $2.9 million, which exceeded $3 million mainly due to the lower drilling activity than its planned estimates. The worse-than-ever winters caused SandRidge to lag behind 56 drilling days which increased its well costs by adding time to drill each well. However, the company reported impressive yield results for the 71 planned wells, with a total production of 7.1 MMBoe, during the first quarter. The initial production monthly average of these wells accounted for 410 BOE/d, which is up 12% from the last year's first quarter averages. Moreover, the production expenses also decreased to $13.83 per barrel of oil equivalent in the first quarter. This decrease is mainly due to the sale of high cost producing assets in the Gulf of Mexico and Permian Basin and lower cost per unit production in the midcontinent region.

On the other hand, oil and natural gas revenue decreased to $405 million, showing a decline of 15% compared to the last quarter, and 21% year-over-year. This decrease is due to reduction in total production as a result of Permian and Gulf of Mexico divestitures over the period. However, this decrease is temporary and the company is heavily investing in the midcontinent region, with lower drilling costs due to shallow resource availability. Further, the improved oil and natural gas prices have partially offset the decreased production during the period. The lower drilling costs will eventually increase the margins of the company and its asset base will be better utilized.

Conclusion

SandRidge has one of the best asset bases in the region and the company has been able to achieve impressive per well costs. Impressive asset base and lower cost should lead to higher profitability for the company in the medium-long term. These qualities make SandRidge an extremely attractive pick, in my opinion.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. IAEResearch is not a registered investment advisor or broker/dealer. This article was written by an analyst at IAEResearch and represents his/her personal opinion about the companies mentioned in the article. The article is for informational purposes only and it should not be taken as an investment advice. Investors are encouraged to conduct their own due diligence before making an investment decision. I am not receiving any compensation (other than from Seeking Alpha) for this article, and have no relationship with the companies mentioned in the article.

Source: SandRidge's Asset Base Will Ensure Its Long-Term Growth