In the second quarter, SandRidge Energy, Inc. (SD) continued to increase its oil production, with over half of its total production of 8.2 mmboe, 4.6 mmbbls, in oil. In each of the last four years, SandRidge's oil production increased by 13% or more per year. What's most impressive is that according to current forecasts, SandRidge's oil production will increase by 30% year over year between 2011 and the end of 2012. Overall, its average daily production increased by 36% in the second quarter, helped in part by recent and strong wells on the Mississippian play with thirty-day IPs exceeding 1,000 boe per day.
The company's continued diversification into oil, which is only beginning to reap benefits, is a good sign for this small growth play. SandRidge has solid positions in multiple oil heavy plays in the U.S., and while it is edged out on total acreage and production by larger players, it is more than holding its own, promising growth for the future.
Driven by Production on the Mississippian, Permian
One of SandRidge's current focus areas is the Mississippian play, where it leases 1.75 million net acres encompassing 8,000 net potential drilling locations spanning Oklahoma and Kansas. SandRidge's estimate of three wells per section for this acreage might be low, considering that its extraction technology continues to improve, but either way, even with thirty rigs active on the play at last count, SandRidge has a healthy inventory.
Five of the rigs in its rig count are being put to work drilling saltwater disposal wells, part of SandRidge's efforts to build out its own infrastructure in the region. This is helping SandRidge to reduce cost, given that disposal wells reduce the amount of materials that need to be trucked out of the play and also shorten the time between spud and first sales. Cost reduction is important on this play even with high EURs, since with a debt to equity of 1.3 SandRidge needs to reduce its expenditures where it can.
After the Mississippian, SandRidge's next largest presence is on the Permian, where it is operating on 225,000 net acres with 7,350 net locations and 12 rigs drilling. With twelve rigs on the Permian, SandRidge is the most active operator, although it is fifth on the list of Permian players on active well counts, with competitors Occidental Permian, a subsidiary of Occidental Petroleum (OXY) and Apache (APA) occupying the number one and two spots for active well counts, respectively.
SandRidge's Permian production is one reason why the company's natural gas output continues to increase, despite the continued price depression, since 15% of its Permian production comprises natural gas. SandRidge is seeing the most success in the San Andres and Clear Fork complexes on the Permian. Roughly following the eastern edge of the Central Basin, the San Andres reservoir averages between 250 and 300 feet in thickness, with lower porosities located below the top of the deposition. This lower porosity for most of the interval is one reason why Permian wells sometimes underperform compared to Mississippian wells, since higher porosity rock yields more oil and gas. However, the top of this deposition has 11% porosity, making it an extremely attractive target for producers. As it is such an attractive target, the United States Geological Survey estimates that nearly all significant resources in this complex obtainable through conventional drilling are already discovered.
Clear Fork depositions are comparatively extensive and found in three distinct layers, Lower, Middle, and Upper Clear Fork, which can be more difficult to target due to intermingling with other depositions. Clear Fork rocks bear similarities to the upper Wolfcamp and are located above the Spraberry Field, an area of concentration for Pioneer Natural Resources (PXD). Due to Pioneer's early moves to lease out the Spraberry and its continuing efforts to increase its acreage position here, cost effective Spraberry leases can be difficult to acquire. It is in Pioneer's best interests to continue to be aggressive in this area, considering that 35% of its total production and fully 50% of its total proved reserves are dependent on the Spraberry play. While Clear Fork might be a good complex for SandRidge to pursue now, it does not represent strong opportunities for its growth.
Due to its comparatively small size, SandRidge is sometimes at a disadvantage on the Permian in other areas as well. According to the Railroad Commission of Texas, which oversees oil and gas exploration and production within the state of Texas, SandRidge only just makes the top 10 of Permian Basin operators. Here again Oxy is the largest producer, but SandRidge is also behind other smaller producers like privately held Endeavor Energy Resources LP and Cabot Oil & Gas (COG).
SandRidge is currently trading around $7, with a price to book of 1.2 and a forward price to earnings of 15.4. For comparison, Apache is trading around $86, with a price to book of 1.1 and a forward price to earnings of 7.6; these are great value metrics for Apache, which is on a strong growth track with multiple projects coming online over the next three to four years. Oxy is trading around $85 with a price to book of 1.8 and a forward price to earnings of 10.5. Pioneer is trading around $98, with a price to book of 2.2 and a forward price to earnings of 16.1. Cabot is trading around $41 with a price to book of 4.2 and a forward price to earnings of 54.3, a hefty premium, despite its leadership in low cost natural gas production.
What's most impressive about SandRidge is that it is able to leverage its small size to achieve well costs and production numbers on competitive acreage similar to its much larger peers. The recession and following drop in natural gas prices caused many producers to scramble and retrench, but SandRidge's positions on proven oil plays enabled it to continue focusing on production from leaseholds it already held. With strong revenue growth and industry leading margins, SandRidge is set to grow and reward stockholders who get in now, while the stock is undervalued.