This analysis of SandRidge Mississippian Trust (SDT) was provided to TradingIPOs subscribers in advance of its IPO. On Thursday April 7, the company priced its 15 million unit IPO at $21 vs. expectations for 12.5 million units at $19-21.
SandRidge Mississippian Trust plans on offering 14.375 million units (assuming overs) at a range of $19-$21. Raymond James and Morgan Stanley are leading the deal, Wells Fargo, RBC, Oppenheimer, Baird, Madison Williams, Morgan Keegan and Wunderlich are co-managing. Post-IPO SDT will have 28 million units outstanding for a market cap of $560 million on a pricing of $20. IPO proceeds will go to parent SandRidge Energy (SD).
SandRidge Energy will own 49% of SDT post-IPO. SD will control SDT via a separate unit class. SD is an independent oil and natural gas operation focused on West-Texas, Oklahoma and Kansas. Market cap of $5.1 billion. Proved reserves of 545.9 MMBoe.
Initial distribution is expected to be made 8/30/11. Note that this distribution will include both the first and second quarter of 2011 even though SDT was not a public company in the first quarter of 2011. This initial distribution is expected to be $1.01 per unit.
From the prospectus: 'SandRidge Mississippian Trust I is a Delaware statutory trust formed in December 2010.'
SDT will own:
- royalty interests in 37 horizontal wells producing in the Mississippian formation in Oklahoma, and
- royalty interests in 123 horizontal development wells to be drilled in the same formation. Wells are required to be drilled by 12/31/14.
Parent SD holds 64,200 acres in the formation. Until SD drills the 123 wells for the royalty trust they will not be able to drill in the formation for themselves.
SDT will receive 90% of all SD's proceeds from the currently producing wells and 50% of SD's proceeds in the yet to be drilled wells. The lower % in the yet to be drilled wells reflects parent SD's costs to drill these wells.
***Note that parent SD owns on average a 56.3% interest in the producing wells. SDT will receive 90% of SD's 56.3% average interest in these wells, or 50.7% of all revenues from these wells. In the yet to be drilled wells, SD owns on average a 57% interest, putting SDT's total interest in these wells at 28.5%.
SD operates 73% of the producing wells and owns a majority interest in 75% of the yet to be drilled wells.
Note that the Trust will not be responsible for any drilling costs or other operating or capital costs. The Trust simply receives revenues from the wells.
Hedges - SD will hedge 60% of SDT's expected revenues through 12/31/15. 2011 hedged prices are $103.60 for oil and $4.61 for natural gas.
Total reserves attributable to SDT are approximately 19,276MBOE, with approximately 2/3 of that expected to come from the yet to be drilled wells.
48% of the reserves are oil, 52% natural gas. Oil will account for approximately 79% of 2011 revenues.
Risk here is quite similar to recent IPO ECA Marcellus (ECT) - 2/3 of SDT's expected revenues over the life of the trust are expected to come from wells yet to be drilled. If parent SD runs into any difficulty in drilling these wells, SDT's distributions would dry up quickly....even a short term event delaying drilling would impact the expected distributions listed below.
Mississippian Formation - Anadarko shelf in Northern Oklahoma and south-central Kansas. Thousands of vertical wells have been drilled over the past 70 years. Horizontal drilling and fracturing began in 2007. 140 horizontal wells drilled just since 2009 in the formation. Currently 20 horizontal rigs drilling in the formation with eight drilling for SD. SD has a total of 880,000 acres leased in the formation.
Distribution - Set up much like recent IPO ECT, production will ramp up through 2014 as new wells are drilling. After the peak in 2014/2015, production will decline annually as the reserves targeted for SDT begin to dry.
Yield assumes a $20 pricing and average 2011 selling prices of $98 for oil and $4.50 for natural gas with similar estimates through 2013. Oil hedges are $100+ through 2015, natural gas collared between $4 and $8.55 through 2015.
- 2011 - Total distributions of $2.31, yielding 11.55%.
- 2012 - $2.82, yield of 14.1%
- 2013 - $3.03, yield of 15.15%
- 2014 (peak yield) - $3.36, yield of 16.8%
- 2015 - $3.01, yield of 15.05%
In the first five years public SDT estimates unitholders will receive $14.53 in distributions. This compares favorably to ECT's distributions for the first five years of $13-$14 per unit.
ECT currently trades at $31.26 and relies on natural gas for the majority of revenues. ECT's 2012 expected yield is 10%, SDT's 14.1% at $20. 2013, ECT 11.6%, SDT 15.15%. 2014 ECT 9.4%, SDT 16.8%. If looking for a trust yield to buy, SDT in pricing range is the one to go for over ECT at $31+.
***Note that distributions will begin declining significantly beginning in 2016. Assuming a $20 price, SDT would yield 12.2% in 2016 and dip to 7 3/4%. Still not a bad yield nearly 10 years in.
Trust termination date is 12/31/30. Upon termination, any royalty interest retained will be sold by the Trust with proceeds going to SD and shareholders. SD has right of first refusal on purchase.
Nice mix here of both oil and natural gas. Oil is the driver here accounting for an expected 75%+ of Trust revenues through the lifespan of the Trust. Currently that is a positive as the price of oil has risen much faster the past two years than that of natural gas. Hedges in place to mitigate some price risk, also will cap some potential upside if oil blows off from here. SDT was structured to mimic ECT. ECT is up 50%+ from IPO last summer. Solid parent operation with extensive experience in the Trust assets area. Easy recommend here in range, would expect SDT to trade $30+ here sometime in its first year public.
Disclosure: As of blog post date (4/7/11), tradingipos.com is long SDT.