SandRidge Energy (SD) presented at the Johnson Rice Energy Conference yesterday. The presentation didn't provide a lot of new information, but it did further highlight how this company is less risky than it appears.
The company is an oil and natural gas exploration and production company focused on the Mississippian, Permian Basin, and now Gulf of Mexico.
Since the CEO, Tom Ward, was a co-founder of Chesapeake Energy (CHK), the company is routinely painted with the broad swath as being a risky wildcatter, similar to how Aubrey McClendon supposedly runs that company.
While SandRidge has a propensity for debt and aggressive growth, management has correctly steered this company towards oil production that is hedged considerably into the future. Not to mention, the company takes on less risky and less costly drilling programs.
The company reported the following highlights in the presentation:
- Adjusted EBITDA target of more than $2B in the next three years. On a pro forma basis, the company has over $1B in EBITDA for the trailing 12 months.
- CapEx to be funded with cash flow. The company is funded for 2012 and expects 2013 to be funded with cash flow and available liquidity.
- The leverage ratio is now 2.9x the pro forma adjusted EBITDA.
- The company has 2H 2012 oil hedges of 8.25 MMBbls at $100.60 and 2013 oil hedges of 18.5 MMBbls at $96.24.
As detailed in this article, after the Q2 earnings report, the stock was wrongly hit due to the increased capital expenditures. As long as the company can lock in oil production above $90, it should be spending as much as feasible.
Back on the Q2 earnings report, the company provided improved guidance for the rest of 2012 as follows:
- Increasing 2012 production guidance to 33.0 MMBoe from 32.3 MMBoe
- Increasing 2012 capital expenditure guidance to $2.1 billion from $1.85 billion
- For the second half of 2012, 81% of projected oil production is hedged at over $100 per barrel and another 37 million barrels of oil are hedged from 2013 to 2015
While the market didn't like the increased capital expenditure guidance, the company is producing more oil at very attractive prices.
The company averaged 43 drilling rigs during the last quarter with the majority of the rigs working in the Mississippian play. With the expectation of increasing the Mississippian play by a rig per month, the company expects to end 2013 with nearly 60 drilling rigs. With an inventory of 8,000 drilling locations on approximately 1.7M net acres, SandRidge is set for years.
One major benefit from this play is the close proximity to the Cushing oil hub. The benefits are huge over plays such as the Bakken in North Dakota where production has a difficult time of reaching market.
SandRidge has a huge advantage over the sector with its leading infrastructure of 95 water disposal wells and miles of power lines. The company controls the play with so much acreage that competitors find it difficult to build concurrent acreage positions. As such, the company is the leading driller with more than twice the active rigs as the nearest competitor.
Mississippian Rig Counts
The Permian Basin is another strong play with approximately 7,350 drilling locations. The area remains a low risk play, as the company can be successful with wells producing only 53 Boe/d after 30 days. The company remains the most active driller with 11 rigs working now.
Permian Basin Rig Counts
The Gulf of Mexico operations will provide steady cash flow with two rigs operating and around $200M in CapEx this year. Oddly though, the company doesn't discuss the plans in much detail in presentations.
The price action of SandRidge recently suggests the stock might finally breakout of a four-month range between $6 and $7 since mid-May. The stock recently popped to $7.75. If it holds the current test of $7, it might be set for a solid run during Q4.
1-Year Chart - SandRidge Energy
As natural gas prices slowly rise and oil remains elevated above $90, investors should look back at the exploration sector. SandRidge has been one of the better-positioned companies over the last couple of years after correctly predicting industry shifts. The company focused on oil before the rest of the industry and recently raised capital spending budgets as the rest of the market retreated.
Now SandRidge needs to remain disciplined and focused on developing existing properties while reducing leverage. Such moves will help distant itself from the constant comparisons to Chesapeake.
With analysts expecting 30% revenue growth in 2013, the company could see solid stock returns from remaining focused.
Additional disclosure: Please consult your financial advisor before making any investment decisions.