SandRidge Energy: Low Risk, Low Cost Oil Production

| About: SandRidge Energy, (SD)

SandRidge Energy (NYSE:SD) is an oil and gas exploration and production company. SandRidge has many low risk properties and generally speaking, can produce and explore properties as the current situation dictates. Most importantly, SandRidge is a top 15 holding of T. Boone Pickens. This company has a market cap of 3.27 million.

SandRidge is an oil weighted company. Current production is 64600 Boe/d, with 30000 Bo/d. SandRidge estimates 80% of company revenue will derive from oil in 2011. This company currently has 20000 locations, with 111100 being oil locations. 100% of current drilling for SandRidge is dedicated to oil.

SandRidge's current strategy is based on shallow, low cost, conventional oil plays. Its acquisition of the Permian Central Basin Platform demonstrates this. There has been a ramp up in production for SandRidge. In December of 2009 the company was producing 7600 Boe/d and by July of 2010 this number increased to 8200 Boe/d. The Central Permian Basin has had a marked increase in drilling as in 2009 there were 2 rigs and currently this number has increased to 16. Its horizontal Mississippi play has 750000 acres, with average acquisition costs of $200/acre. Mississippi drilling has also increased as there was only one rig in early 2009 with the current rig count being 11.

SandRidge has five areas of operation for 2011. First is the Midcontinent area in Oklahoma. The second is the Permian Basin, by Midland Texas. The third is the West Texas Overthrust, by Ft. Stockton Texas. It also has West Texas and the Texas Gulf Coast.

The Permian Basin has produced oil for over 80 years. This area is the third largest petroleum producing area in the United States after the Gulf of Mexico and Alaska. 29 billion barrels have been produced from this location. 13 billion barrels have been produced from the Central Basin Platform carbonates, which 45% of the Permian total.

The Central Basin Platform has a high rate of return with oil drilling. Drilling costs remain low here. Production is fairly predictable in this area. Acreages are accumulated at a low cost. SandRidge is the most active driller in the area with 16 of 44 rigs running. SandRidge has a possible 8073 locations here. The average Permian curve is 95% at strip from liquids, 87% crude, 75 total Mboe, $730 million from well, and 60% ROR (at NYMEX strip).

The Mississippi horizontal oil play has high permeability and shallow oil target. It is estimated there will be 300-500 MBoe/well. $2.7 M/well is estimated if water disposal facility costs are added. Rigs and service are readily available here, and SandRidge has approximately 750000 net acres. SandRidge has 37 drilled operated wells. This horizontal play has a high rate of return, and if 3 wells per section are drilled there are an approximate 3400 potential locations. Using the NYMEX strip, these wells are approximately 100% ROR.

What is interesting with the Mississippi horizontal wells is the rate of return, when compared to other areas being drilled in the industry. The IRR for a Mississippi horizontal well is 109%, and better than the average Bakken Shale well at 79%. Costs to drill and complete at $2.7 million which almost a third less than an average Bakken Shale well. Although the Mississippi horizontal well has a much lower IP rate and a much lower liquids content, after costs are figured the IRR is lower than not only a Bakken Shale well, but also an Eagle Ford well.

The Mississippi horizontal wells also do not suffer from a backlog like in other areas. It seems drill times are reaching completion sooner from the 30 day average, as now times have trended to 21 days. SandRidge currently has 6 rigs running, but has access to 31 rigs. Frac crews are readily available, as is water supply and proppant.

SandRidge stock has more than doubled since December. The company seems focused on producing oil as long as pricing dictates, and it's planning to expand fast. It is possible SandRidge could further increase oil production quickly in the Permian, and Mississippi regions. Although this company's stock was valued around $60 per share in June of 2008, it seems to have the ability to turn things around. Can the company do it? If T. Boone Pickens thinks so, so do I.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in SD over the next 72 hours.

Additional disclosure: Bakken Shale and Eagle Ford metrics compiled from industry sources.