IPO Preview: SandRidge Permian Trust

| About: SandRidge Permian (PER)

Based in Austin, Texas, SandRidge Permian Trust (NYSE:PER) scheduled a $630 million IPO with a market capitalization of $1.05 billion at a price range mid-point of $20 for Thursday, August 11, 2011. The full IPO calendar for the week of August 8 includes 12 scheduled IPOs trying to raise almost $2 billion.

OVERVIEW -- PER is another 20 year Trust from SandRidge Energy (NYSE:SD) similar to the SandRidge Mississippian Trust (NYSE:SDT) that IPO’d April 4, 2011 at $21 and is up 25% from its IPO price, as of August 5, 2011.

A "20 year trust" means the trust is worth zero after 20 years.

Looking at recent stock prices, the parent SandRidge was down 12.6% on Thursday, August 4 and was down an additional 19% on Friday, August 5.

On August 4 comparables SandRidge Mississippian Trust was down 4%, while VOC Trust (NYSE:VOC) was down 4.3%. VOC IPO’d May 4, 2011. On Friday August 5 SDT and VOC declined respectively 1% and 4%.

PURPOSE OF THE IPO -- The purpose of the PER IPO is to fund a development and drilling program for the parent, SandRidge Energy.

VALUATIONS -- At the price range mid-point PER target payouts appear to be very similar to the other oil trust from the parent SandRidge Energy, which is SandRidge Mississippian Trust.

COMPARING TARGET RETURNS AT $20, IPO price range mid-point*

*SDT's price an Aug 9 was $25.85






















% change

Exp 2011

Cap (mm)


IPO price

As of Aug 5


SandRidge Permian Trust (PER)



Recent IPOs

SandRidge Miss Trust (SDT)





VOC Energy Trust (VOC)





*annualizing Sept & Dec qtr target distributions for SDT and VOC

annualizing the Dec 2011 and March 2012 qtrs for PER



Existing Oil Trusts

price change


MV Oil Trust (NYSE:MVO)




Mesa Royalty (NYSE:MTR)




*source: Google Finance

CONCLUSION -- Structurally SDT and PER are very similar. The target returns are similar, so it appears that PER may get its IPO done this week and may even climb to a small premium.

BUSINESS -- The parent SandRidge will convey royalty interests in

  • 509 producing wells, including 13 wells currently awaiting completion, and
  • 888 development wells to be drilled within the "Area of Mutual Interest," or "AMI."

Seventy percent of the estimated reserves from PER are from "development" rather than "producing" wells. In comparison, the plan for SDT is to harvest from 37 horizontal wells already producing from the Mississippian formation and to get royalty interests from 123 horizontal development wells to be drilled and harvested.

PER royalty interests will not burdened by operating or capital costs. According to PER, it’s exposure to oil price volatility mitigated through March 31, 2015.

PER acquired the Underlying Properties in July 2010 and expects to operate substantially all of the Underlying Properties. The parent SandRidge presently holds 16,700 gross acres (15,900 net acres) in the "Area of Mutual Interest" or AMI.

SandRidge is obligated to drill, or cause to be drilled, the development wells from drilling locations in the AMI on or before March 31, 2016.

Except in limited circumstances, 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.

A GOOD DEAL FOR THE PARENT -- SandRidge, the "parent," is an oil & natural gas exploration/production company with activities in the Permian Basin, Mid-Continent, West Texas Overtrust, Cotton Valley Trend in East Texas, Gulf Coast and Gulf of Mexico. The parent SD has a market cap of $3.2 billion. The stock increased 9% year-to-date, as of August 5, 2011.

The Deal -- SandRidge paid $1.55 billion to acquire NYSE listed Arena Resources. The acquisition closed in July, 2010. The underlying properties to be conveyed by SandRidge were formerly owned by Arena Resources.

The underlying properties represent approximately 40% of the Arena Properties, on a PV-10 basis, as of December 31, 2010, and have a reserve profile that is substantially consistent with the reserve profile of the Arena Properties.

Good for SandRidge -- SandRidge will net $577 million from the IPO, will retain 40% worth $400 million on the IPO, and will still own 60% of Arena’s underlying properties.

Looked at another way, SandRidge will have created $1 billion in value by selling 40% of Arena, which it purchased for $1.6 billion. If the remaining 60% portion of Arena is valued on the same basis as the PER IPO, then SandRidge will have created an additional $1 billion in market value (assuming that Arena is worth $2.5bb based on 40% being worth $1 billion.

Since acquiring Arena in July 2010, SandRidge has drilled 101 wells and currently operates 496 producing wells in the AMI.

INCENTIVE DISTRIBUTIONS -- SandRidge will be entitled to receive incentive distributions equal to 50% of the amount by which the cash available for distribution on all of the trust units in any quarter is 20% greater than the target distribution for such quarter (each, an "incentive threshold").

The remaining 50% of cash available for distribution in excess of the incentive thresholds will be paid to trust unit holders, including SandRidge, on a pro rata basis.

ROYALTY INTERESTS -- The royalty interest in the producing wells entitles the trust to receive 80% of the proceeds (exclusive of any production or development costs but after deducting post-production costs and any applicable taxes) from the sale of production of oil, natural gas and natural gas liquids attributable to SandRidge's net revenue interest in the producing wells.

The royalty interest in the development wells entitles the trust to receive 70% of the proceeds (exclusive of any production or development costs but after deducting post-production costs and any applicable taxes) from the sale of oil, natural gas and natural gas liquids production attributable to SandRidge's net revenue interest in the development wells.

As of March 31, 2011 and after giving effect to the conveyance of the royalty interest and the development royalty interest to the trust, the total reserves estimated to be attributable to the trust were 21.8 million barrels of oil equivalent ("MMBoe").

This amount includes 5.8 MMBoe attributable to the PDP Royalty Interest and 16.0 MMBoe attributable to the development royalty interest. The reserves consist of 96% liquids (87% oil and 9% natural gas liquids) and 4% natural gas.

SandRidge on average owns a 73.0% net revenue interest in the producing wells. Therefore, the trust will have an average 58.4% net revenue interest in the producing wells.

SandRidge on average owns a 69.3% net revenue interest in the properties in the AMI on which the development wells will be drilled, and based on this net revenue interest, the trust would have an average 48.5% net revenue interest in the development wells.

COMPETITION -- The oil and natural gas industry is highly competitive. 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, natural gas and natural gas liquids.

Many of these competitors are financially stronger than SandRidge, but even financially troubled competitors can affect the market because of their need to sell oil, natural gas and natural gas liquids at any price to attempt to maintain cash flow. The trust will be subject to the same competitive conditions as SandRidge and other companies in the oil and gas industry.

USE OF PROCEEDS -- PER expects to net $577 million. PER will deliver all of the net proceeds to one or more of SandRidge's wholly-owned subsidiaries as full consideration for the conveyance of the term royalty interests and, if applicable, as partial consideration for the conveyance of the perpetual royalty interests.

SandRidge intends to use the proceeds received from the offering to repay borrowings under its credit facility and for general corporate purposes, which may include the funding of the drilling obligation. Although SandRidge has no plans to immediately draw down a substantial amount under its credit facility, it expects to draw on the facility from time to time to fund its capital expenditures.

As of June 30, 2011, the outstanding balance on SandRidge's credit facility, which matures in 2014, was approximately $80.0 million, and the weighted average interest rate of the credit facility was 2.44%. Borrowings under the credit facility in the past year were incurred by SandRidge for general corporate purposes, including to fund its capital expenditures.

Affiliates of Morgan Stanley & Co. LLC, Deutsche Bank Securities Inc., Goldman, Sachs & Co., J.P. Morgan Securities LLC, RBC Capital Markets, LLC, SunTrust Robinson Humphrey, Inc. and Wells Fargo Securities, LLC are lenders under the SandRidge credit facility being repaid with the offering proceeds being paid to SandRidge and will therefore receive a portion of the proceeds of the offering.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

About this article:

Want to share your opinion on this article? Add a comment.
Disagree with this article? .
To report a factual error in this article, click here