Based in Oklahoma City, Oklahoma, SandRidge Mississippian Trust II (proposed SDR) scheduled a $520 million IPO with a market capitalization of $1 billion at a price range mid-point of $20 for Wednesday, April 18, 2012. [S-1]
SDR is one of 9 IPOs are scheduled for the week of April 16th. Full IPO calendar here.
Manager, Joint Managers: Morgan Stanley; Raymond James; BofA; Citigroup; RBC.
The proposed market capitalization is $1 billion. The present value (PV-10)combination of proved and probable reserves is $900 million, assuming oil is at $91 and natural gas is at $4 per thousand cubic feet.
On a 20 year basis including residual value all at the targeted payout rate an investor would recover $39.35 pre-tax, with almost half ($19.92) coming in the first 8 years. Production will decline over time, see chart.
SDR wants to IPO at 2.4 times book value.
Gas Glut Rejiggers Industry
"On Tuesday, April 10, 2012, natural-gas futures settled at $2.03 per million British thermal units-just a hint above $2, the lowest price since January 2002."
"The shock wave for industry could intensify this summer because the U.S. is running out of room to store the glut of natural gas, which could drive gas prices down to sustained lows not seen in decades."
- From the Wall Street Journal, April 10, 2012
SDR appears to be fairly priced at $20, given its expected $1 billion market value with $900 million of reserves based on a present value-10 calculation. The stock, however, may see a modest rise in the after market because investors may focus on the expected payouts (see below) without regard for the declining value of the assets.
% return at $20
|Total through 2019|
Through December 31, 2031 SDR's target distribution is $35.53 with $3.93 remaining.
Third Trust From SandRidge
But the parent SandRidge (NYSE:SD) is down 40% in the last year to $7.54, which is a negative.
SD is a publicly traded, independent oil and natural gas company concentrating on development and production activities related to the exploitation of its significant holdings in West Texas and the Mid-Continent area of Oklahoma and Kansas.
SandRidge is the sponsor of two other royalty trusts, SandRidge Mississippian Trust I and SandRidge Permian Trust. These trusts have many of the same terms as SandRidge Mississippian Trust II.
SandRidge Mississippian Trust II is a Delaware statutory trust formed in December 2011 to own A) overriding royalty interests to be conveyed to the trust by SandRidge in 67 producing horizontal wells, including 13 wells currently awaiting completion, in the Mississippian formation in northern Oklahoma and southern Kansas, and B) overriding royalty interests in 206 horizontal development wells to be drilled in the Mississippian formation on properties within an Area of Mutual Interest.
Other Oil/Gas Royalty Charts
Prices are off their March highs, see chart.
SD SPONSORED TRUSTS
SDR was formed in December 2011 to own overriding royalty interests to be conveyed to the trust by SandRidge in 67 producing horizontal wells, including 13 wells currently awaiting, in the Mississippian formation in northern Oklahoma and southern Kansas, and overriding royalty interests in 206 horizontal development wells.
The Development Wells are to be drilled in the Mississippian formation on properties within an Area of Mutual Interest (the "AMI"). The AMI, which is limited to the Mississippian formation and consists of approximately 81,200 gross acres (53,000 net acres) held by SandRidge.
The top of the Mississippian formation is encountered at depths between approximately 4,000 feet and 7,000 feet and lies stratigraphically between the Pennsylvanian-aged Morrow formation and the Devonian-aged Woodford Shale formation.
SandRidge intends to drill, or cause to be drilled, the Development Wells in the AMI by December 31, 2015 and is obligated to complete such drilling by December 31, 2016. Until SandRidge has satisfied its drilling obligation to the trust, it will not be permitted to drill and complete any wells for its own account within the AMI.
As of December 31, 2011, the total proved reserves estimated to be attributable to the trust were 26.1 million barrels of oil equivalent ("MMBoe"). This amount includes 10.2 MMBoe attributable to the PDP Royalty Interest and 15.9 MMBoe attributable to the Development Royalty Interest. The proved reserves consist of 46.8% oil and 53.2% natural gas. In addition, as of December 31, 2011, there were 9.8 MMBoe of probable reserves estimated to be attributable to the trust, all of which were attributable to
the Development Royalty Interest.
There are 67 Producing Wells and 122 Development Well locations attributable to PUD reserves or 1.8 Development Well locations attributable to PUD reserves for every Producing Well. There are 84 Development Well locations attributable to probable reserves or 1.3 Development Well locations attributable to probable reserves for every Producing Well.
SandRidge will retain 20% of the proceeds from the sale of oil and natural gas attributable to its net revenue interest in the Producing Wells, as well as 30% of the proceeds from the sale of future production attributable to its net revenue interest in the Development Wells.
SandRidge initially will own 47.7% of the trust units. By virtue of SandRidge's retained interest in the Producing Wells and the Development Wells, as well as its ownership of 47.7% of the trust units, it will have an effective average net revenue interest of 31.2% in the Producing Wells and 30.1% in the Development Wells, compared with an effective average net revenue interest for the holders of trust units other than SandRidge of 22.4% in the Producing Wells and 17.4% in the Development Wells.
SandRidge intends to drill, or cause to be drilled, 206 Development Wells in the AMI by December 31, 2015 and is obligated to complete such drilling by December 31, 2016.
For wells in which SandRidge has a net revenue interest greater than or less than 47.4%, SandRidge will receive credit for such well in the proportion that its net revenue interest in the well bears to 47.4%. As a result, SandRidge may be required to drill more or less than 206 wells in order to fulfill its drilling obligation.
SandRidge competes with major oil and gas companies and independent oil and gas companies for leases, equipment, personnel and markets for the sale of oil and natural gas.
Uuse of Proceeds
SDR expects to net $483.7 million from its IPO. The trust is expected to deliver the net proceeds to one or more wholly-owned subsidiaries of SandRidge as part of the consideration for the conveyance of the royalty interests.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.