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Summary

  • The shortfall in production during the second quarter has created some doubts in investors' minds but this was mainly due to weather conditions and out of company's control.
  • The company has been able to decrease its per well costs, which should allow it to grow its margins and enhance its cash position.
  • Falling costs will also allow the company to depend less on debt and fund its capital requirements through internally generated funds.

SandRidge (NYSE:SD) has one of the best assets in the region and has been able to achieve impressive per well costs. However, for the most recent quarter, the company reported lower production results due to harsh weather in the region - this is an uncontrollable event, which has caused the production to fall. However, the company has a strong asset base, which gives it a solid platform for future growth. SandRidge reported six cents earnings per share for the second quarter, beating analysts' estimates. The impact of the decline in production was strong on the stock and it lost about 5% after the company announced the results. The company has lowered its production guidance for the second half of the year, which has increased concerns of the investors.

SandRidge: Will the Growth be Sustainable in the Long Run?

SandRidge has been exploring the Mississippian formations - a shallow hydrocarbon system in the Mid-continent area of Northern Oklahoma and Kansas, and has excelled in the region by recording impressive production and revenue gains. The company anticipated strong growth prospects from the region, but the decline in production has caused some investors to doubt the optimism of the management. However, the company has reported substantial growth in some segments, which could derive growth in the coming quarters. Further, SandRidge has been consistently lowering its drilling and completion costs over the last few quarters, thus increasing per well profit margins of the company despite decreased production volumes.

Let's take a look at where the company stands right now - the company reported decreased revenues of around $374 million in the second quarter, down 27% compared to $512 million in the same period last year. The revenue shortfall is mainly due to company's decreased net realized price per barrel of oil, which fell by almost 4% to $96.9 during the period. However, the company showed significant progress in its natural gas liquids [NGLs] recovery and reported 35% year-over-year increase. Also, the company showed strength in the net realized price per barrel of NGLs, which is up around 10.7% to $36.41 per barrel. However, the lower oil production volumes with decreased net realized oil price have offset the significant increase by the NGL segment.

(click to enlarge)

Source: Second Quarter Earnings Release, August 2014.

Along with decreased net realized value of oil, SandRidge also lowered its crude oil production guidance to around 10.7 - 11.3 million barrels [MMBbls], compared to the first quarter estimates. Moreover, the total production guidance has decreased overall from 28.0 to 29.0 MMBOE. These reductions are explained by the power and weather interruptions during the second quarter along with high water saturation levels in the Permian Basin, which deeply affected SandRidge's production in the region.

Efforts towards Future Growth

As the company is facing production constraints and revenue shortfall, the decrease in costs will play an important role in the future. SandRidge has significantly lowered its drilling and completion costs over the last few quarters, which will ensure high profit margins in the future. The company recorded drilling and completion costs of $2.85 million per well in the second quarter, which is the lowest ever costs over the last two years. This decrease is due to pad drilling technique used by the company - around 80% of the total wells are drilled with multi-well pads methods.

Source: Investor Presentation, August 2014.

Going a bit into technicalities, the multilateral method achieved success on three dual stacked laterals and a single co-planar well in Grant, Alfalfa, and Harper counties. These four wells averaged $2.5 million per lateral and the laterals averaged around 108% of the type curve 30-day IP. Moreover, six rigs are already planned to drill multilateral wells during the second half of the year. This will save huge capital to the company, which will strengthen its cash position. The company has increased its debt by $260 million in the second quarter with capital expenditures reaching $391 million during the period. The production cost saving will enable the company to increase its capital efficiency in the coming years. Further, the Mid-continent production of SandRidge grew 11% to 56.3 MBoe per day in the second quarter, which unfortunately did not translate in the second quarter. However, the region holds strong output capabilities, which should enable SandRidge to increase its production volumes.

Conclusion

The production guidance shortfall has raised some doubts in investors' minds regarding future yield sustainability of the company. However, the long-term growth prospects of the company are intact, in our opinion. The company's ability to decrease its costs should allow it to save cash and enhance its cash position - this should also allow the company to depend less on debt to finance its capital needs and use internally generated cash. We believe investors should not focus on short-term price fluctuations as long-term growth prospects of the company are bright, and it should be a solid long-term investment.

Additional Disclosure: This article is for educational purposes only and it should not be taken as an investment recommendation. Investing in stock markets involves a number of risks and readers/investors are encouraged to do their own due diligence and familiarize themselves with the risks involved.

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Source: Long-Term Growth Prospects Of SandRidge Remain Intact