SandRidge Energy: An Interesting Proposition At $5, Although It Still Needs Better Commodity Prices

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About: SandRidge Energy, Inc. (SD)
by: Elephant Analytics
Summary

SandRidge's production has been stronger than expected in 2019 so far.

It appears likely to exceed its production guidance.

This is driven mainly by NGLs and to a lesser extent natural gas though, limiting the benefit of strong production on its financial results.

At current strip prices, SandRidge may continue to burn cash if it wants to maintain/increase production.

SandRidge's leverage remains low, and at $5, it is reasonably priced for a bet on close to $60 oil, which is a level that would work for it longer term.

SandRidge Energy's (SD) production looks like it will exceed expectations in 2019. While production is expected to decline a bit in the second half due to the frontloaded capex budget, it would take around a 20% decline in second half production (compared to the first half) for its total production to end up below the midpoint of its full year guidance.

The strong production is mainly driven by NGLs (and to a lesser extent natural gas) though. However, despite the stronger than expected production, SandRidge is still projected to burn cash with its $170 million capex budget due to the relatively weak prices for those commodities.

Q2 2019 Report And 2019 Outlook

SandRidge's production has been solid over the first half of 2019. It reported around 35,500 BOEPD in production during Q2 2019, slightly above Q1 2019 levels, while oil production increased 16% from Q1 2019. SandRidge spent around 63% of its full-year capex budget in the first half of the year, so its production may be lower in the second half of the year. It seems likely to exceed its total production guidance due to strong NGL production though, as its full-year production guidance is for around 32,900 BOEPD at the high end of its range.

While SandRidge has not changed its guidance for NGL production levels in 2019, it does seem likely that it will exceed its guidance range of 2.5 to 2.6 million barrels of NGLs. SandRidge produced 1.706 million barrels of NGLs in the first half of 2019, putting it at 66% of the high end of its full-year guidance already. Thus, I have revised my estimate of full-year NGL production to 3.3 million barrels.

I project that SandRidge will average around 34,500 BOEPD in 2019, around 5% above the high end of its production guidance. This would require it to average around 33,800 BOEPD in the second half of the year, around 4% below first-half production levels.

In terms of realised prices, as expected, SandRidge revised its guidance for the realised price for NGLs down to 25% of WTI from 37% of WTI (in its May guidance). SandRidge's current guidance appears to accurately reflect the state of the market for NGLs at the moment.

SandRidge also improved its guidance for adjusted G&A expense by around $3 million, reflecting the partial year impact of its June layoffs.

At current strip prices, SandRidge is now expected to generate $295 million in total revenue after hedges.

Type Barrels/Mcf $ Per Unit $ Million
Oil 3,800,000 $52.35 $199
NGLs 3,300,000 $14.15 $47
Natural Gas 33,000,000 $1.30 $43
Hedge Value $6
Total Revenue $295

SandRidge is projected to end up with $316 million in cash expenditures (excluding severance costs) in 2019 now, so it would have $21 million in cash burn. It also noted that cash severance costs added up to around $3.5 million.

$ Million
Lease Operating Expenses $91
Production Taxes $20
Cash General & Administrative $33
Interest Expense $2
Capital Expenditures $170
Total $316

SandRidge should generate modestly positive cash flow in the second half of 2019 due to its capex budget being concentrated in the first half of the year.

2020 Outlook

If SandRidge maintains a $170 million capex budget, I'd expect its total production to fall slightly (by around 3%) but its oil production to increase by around 11% due to its focus on developing oilier assets such as the North Park Basin.

At current strip prices, that would result in a projection that SandRidge would deliver $283 million in revenue during 2020. It continues to be hampered by expectations for weak prices for NGLs and natural gas, while 2020 strip prices are lower than 2019 prices for oil.

Thus, SandRidge's revenues may drop in 2020 despite the increased oil production.

Type Barrels/Mcf $ Per Unit $ Million
Oil 4,200,000 $49.00 $206
NGLs 3,050,000 $13.50 $41
Natural Gas 30,000,000 $1.20 $36
Total Revenue $283

SandRidge's lease operating expenses will probably go up a bit as it adds more wells, although its cash G&A expense should end up at around $30 million with a full year of savings.

This would result in an estimated $34 million in cash burn for SandRidge in 2020 if it went with a $170 million capex budget.

$ Million
Lease Operating Expenses $95
Production Taxes $19
Cash General & Administrative $30
Interest Expense $3
Capital Expenditures $170
Total $317

If SandRidge wanted to avoid cash burn at current strip prices in 2020, it would probably end up with roughly flat oil production and mid-to-high single digits declines in total production.

Leverage And Valuation

SandRidge may end up with close to $120 million in debt at current strip prices (including its working capital deficit) at the end of 2020 if it goes with a $170 million capex budget. This would still be only 0.9x EBITDAX, so SandRidge's debt wouldn't be a significant concern yet in this scenario.

At $5 per share, SandRidge is now valued at only 2.1x projected 2020 EBITDAX, but it remains in a challenging situation at current strip prices where it will either need to continue to burn cash to maintain/increase production or accept production declines.

Conclusion

Buying SandRidge Energy at $5 appears to offer reasonably good reward potential even if there are risks at current strip prices. If low-to-mid $50s oil and weak natural gas and NGL prices persist, SandRidge would not be able to increase or maintain production without cash burn. However, a $60 oil and $2.75 to $3.00 natural gas scenario would allow it to fund significant oil production growth without cash burn.

I was neutral on SandRidge when it was trading at closer to $7 in a similar commodity pricing environment, but think the risk/reward equation has now improved somewhat.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in SD over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.