SandRidge Energy, Inc. (NYSE:SD) Q3 2022 Results Conference Call November 3, 2022 11:00 AM ET
Scott Prestridge - Director, Finance and Investor Relations
Grayson Pranin - President, CEO & COO
Salah Gamoudi - EVP, CFO & CAO
Dean Parrish - SVP of Operations
Conference Call Participants
Josh Young - Bison
Jeff Robertson - Water Tower Research
Harvey Sax - Alpha Wealth Funds
Ladies and gentlemen, thank you for standing by, and welcome to the Q3 2022 SandRidge Energy Conference call. At this time, our all lines are in a listen-only mode. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]
Now, I would like to turn the call over to Scott Prestridge, Director of Finance and Investor Relations.
Thank you, and welcome everyone. With me today are Grayson Pranin, our CEO and COO; Salah Gamoudi, our CFO and CAO; as well as Dean Parrish, our SVP of Operations.
We would like to remind you that today's call contains forward-looking statements and assumptions, which are subject to risk and uncertainties, and actual results may differ materially from those projected in these forward-looking statements.
We may also refer to adjusted EBITDA and adjusted G&A and other non-GAAP financial measures. Reconciliations of these measures can be found on our website.
With that, I'll turn the call over to Grayson.
Thank you, and good morning. I am proud to report on another strong quarter results for SandRidge and that the Company's cost focus in efficient activity with high-graded drilling in the core of the Northwest STACK as well as a well reactivation program continue to add incremental economic production with strong free cash flow contribution from our producing assets this year and projected into 2023.
Before expanding on this, Salah will touch on a few highlights from the third quarter.
Thank you, Grayson. Production for the third quarter remained flat at approximately 17.8 MBoe per day over the last three quarters. Production benefited from the completion of 3 new wells this quarter as well as the reactivation of 42 wells during the first nine months of 2022 that were previously curtailed during the commodity price downturn in 2020.
The production from the 3 new wells contributed to an increase of oil production over the prior quarter by 25%. We expect production from this year's drilling program to continue to add the base levels in the fourth quarter of this year and into 2023 as we finish completions on wells drilled in the second half of the year.
Net cash including restrictive cash increased to approximately $241 million, which represents $6.50 per share of our common stock issued and outstanding as of September 30, 2022. The approximate $35 million increase over the quarter was supported by production from our new wells and while reactivation program, as well as strong commodity prices realizations, net of capital expenditures made for inventory drilling and completion activities related to our 2022 capital program.
The Company has no term debt or revolving debt obligations as of September 30, 2022, and continues to live within free cash flow, funding in all of its capital expenditures with organic free cash flow and cash held on the balance sheet.
Over the quarter, the Company generated adjusted EBITDA of approximately 55 million. As we have pointed out in the past, our adjusted EBITDA is unique metric for SandRidge due to us having no eye and very little teeth given that we have no debt and a substantial NOL position that shields our cash flows from federal income taxes.
Commodity price realizations in the third quarter before considering the impact of hedges were $92.24 per barrel and $5.99 per Mcf for oil and natural gas and NGL realizations were $30.79 per barrel.
The Company maintained its commitment to protecting shareholder capital invested in its development program by entering into commodity derivative contracts for natural gas. The commodity derivative contracts have average strike prices of $8.39 per MMBtu, but the marked market asset value of $4 million as of September 30, 2022.
As alluded to earlier, we have maintained our large NOL position, which is estimated to be approximately $1.6 billion as of the end of 3Q '22. Our NOL opposition has and will continue to allow us to shield our cash flows from federal income taxes.
Our commitment to cost disappointed has continued to be impactful, with adjusted G&A of approximately $2 million and approximately $6 million or $1.22 per Boe for the three and nine month periods ended September 30, 2022.
We also held LOE and expense workovers to approximately $9.7 million or $5.92 per Boe during the quarter. This level of expense is partially driven by an increase in workover activity associated with a well reactivation program.
We believe we compare favorably with our peers in regards to G&A and LOE, on both an absolute and a per Boe basis. We continue to generate net income for our shareholders. During the quarter, we are net income of approximately $54 million or $1.46 per share, up from approximately $48 million or $1.30 per basic share an 11% increase from the prior quarter.
Before shifting to our outlook, we should note that our earnings release posted yesterday and the 10-Q that we plan to file later today because I further detail on our financial and operational performance during the quarter.
Thank you, Salah. I thought it would be helpful to walk through some of the Company's highlights, management's strategy and other business details.
As I mentioned previously, we are pleased with the results in the third quarter and have capitalized on strong commodity prices with high rate of return drilling in the Northwest STACK, continued well reactivations and further strengthened cash flow from our producing properties and Mid-Con.
We're able to keep quarter-over-quarter production flat in Mid-Con, with oil increasing by 25% over the quarter, driven in part by three new Northwest STACK wells, as well as the continued benefit from over 170 well reactivations since early 2021. We will continue to reactivate wells for a total of 54 for the year, which will average over 100% IRRs.
In addition, we have converted artificial lift systems of 22 wells to rod pump, with 13 plans for the remainder of the year, which will aid in optimizing lifting efficiency and lower point forward cost for this well set. The rod pumps we have or will be installing are tailored for the wells' current food production and will reduce the electrical demand from the current artificial lift system. This is key to offset increases in utility costs associated with the rise in fuel surcharges from elevated commodity prices.
These types of investments optimizing our wells production profile and cost focus has contributed to flattening expected asset level decline of our producing properties took approximately 8% over the next 10 years. We have successfully drilled 5 wells and are now producing the first 3 wells in this year's capital program through the third quarter, which have all targeted the Meramec formation in the core of the Northwest STACK play.
Wells 4 and 5 we recently completed and are anticipated to have first production this week, with wells 6 completing in mid November. The first two 1 mile lateral wells are producing a pad total of nearly 600 barrels of oil per day and over 1 Bcf a day after more than 90 days of production. The 3 well with over 8,000 feet of completed lateral rank is producing 460 barrels of oil per day and nearly 2 Bcf per day of gas, and it's still increasing after 30 days as we continue to open chokes during manage flow back.
Let's pause for a moment to revisit the key highlights of SandRidge. Our asset base is focused in the Mid-Continent region with a primarily PDP well set, which do not require any routine flaring of produced gas. These well-understood assets are most fully held by production with a long history shallowing and diversified production profile and double-digit reserve life.
PV-10 a future net discount of cash flows to prove develop oil gas and NGL reserves of these assets is $807 million based on year-end 2021 reserves and assumptions roll forward to October 1, 2022 and using 3Q '22 SEC pricing. These assets include more than a thousand miles each have owned and operated SWD and electric infrastructure over our footprint.
This substantial owned integrated infrastructure provides the Company both costs and strategic advantages, bolstering asset operating margin reduced lifting, as well as water handling and disposal costs, and combined with other advantages help derisk individual well profitability for more than 70% of producing wealth down to $40 WTI and $2 Henry Hub. In addition, the interconnectivity in ample capacity help buffer against unforeseen curtailment.
Our assets continue to yield significant free cash flow with total net cash now totaling 241 million with zero debt as of quarter end. This cash generation potential provides several paths to increase shareholder value realization and is benefited by relatively low G&A burden. As we realize value and generate cash, our board is committed to utilizing our assets including our cash to maximize shareholder value.
SandRidge's value proposition is materially derisked from a financial perspective by our strength and balance sheet, robust net cash position, financial flexibility, and over 1.6 billion in NOLs. Further, the Company is not subject to MVCs or other significant off-balance sheet financial commitments.
The Company did enter into commodity derivative contracts for its natural gas, which have an average strike price of $8.39 per MMBtu with a mark-to-market asset value of $4 million as of September 30, 2022. We could enter into additional commodity derivative contracts from time to time to secure returns for our capital campaign, manage commodity risk, or other fundamental drivers.
Finally, it's worth highlighting that we take our ESG commitment seriously have implemented discipline processes around them. We rank committed to our strategy to focus on growing the cash value and generation capability of our business in a safe, responsible, efficient manner while prudently allocating capital to high return organic growth opportunities and remain open to value creative opportunities.
The Company will continue to monitor forward looking commodity prices, results, comp, and other factors that could influence returns on the investments, which will continue to shape its disciplined development decision in 2022 and beyond. This strategy has five points.
One, maximize the cash value and generation capacity of our incumbent Mid-Con PDP assets by extending and flattening our production profile with high rate of return workover, well reactivations in artificial lift conversions, as well as continuously pressing on operating and administrative costs.
The second is to ensure we convert as much EBITDA to free cash flow as possible by exercising capital stewardship and investing in projects and opportunities that have high risk adjusted fully burden rates of return, to include executing on a drilling program in the core of the Northwest STACK to economically add production.
The third is to maintain optionality to execute on value-accretive merger and acquisition opportunities that could bring synergies, leverage to the Company's core competencies, complement its portfolios assets, further utilize its approximately $1.6 billion of net operating losses or otherwise yield attractive returns for shareholders.
Fourth, as we generate cash, we will continue to work with our Board to assess path to maximize shareholder value to include investment and strategic opportunities, return of capital and other uses.
Please note that the Company's cash position is also a strategic advantage and provides competitive leverage in evaluating M&A opportunities, especially given the outlook on interest rates, capital markets, and impact to the optionality on a number and types of opportunities that could become available at certain levels.
Know that there is a high bar at both the management and Board levels for mergers and acquisitions and that management weighs the cost of its growing cash balance versus patients to evaluate and execute on a creative opportunities.
Management will continue to progress these with earnest on multiple fronts, promote regular way return of capital discussions, advance M&A valuations, meet with shareholders and investors, and work with our Board to advance paths to maximize shareholder value. The final step is to uphold our ESG responsibilities.
Now circling back to this year's joint program, despite recent downdraft in commodity prices, oil has maintained around $80 per barrel or more in natural gas between $5 and $6 per Mcf. This commodity price environment combined with our team's efforts to combat inflationary pressures and execution, have a will translate to high rates of return in our capital program.
The average performance of the direct offsets for our current drilling program at the October 31 strips as well as today's estimated cost averaging approximate 60% rate of return. The focus area we will be developing with this year's program has been previously delineated by SandRidge and other reputable operators.
We know this area well. We have a long tenure history in the Mid-Con, previous development programs and can lever a very tight cost structure to add incremental barrels to our base production in a very efficient way. Approximately 60% of the program will be infill development, with the remaining 40% being first wells in section or co-development that again directly offset productive and profitable well.
I'm extremely pleased with the planning and approach our team has taken to help control costs. We've continued to buy ahead of planned activity, pre-purchasing nearly 5 million of materials to include casing for the drilling program, pumping units for capital workovers and other items, as well as high grading cost efficient code development opportunities, utilizing company-owned equipment and other best practices.
We are targeting gross D&C for 1 mile lateral to average just over 5 million to roughly $1,000 per foot. Investments made earlier this year and could continue to do is a key to warding off inflationary pressures in today's market, which has already benefited the program. Now we will continue to lean forward into cost control efforts. Inflation will continue to be a central focus this year has bearing on unsecured costs, which could influence future drilling decisions.
Also, the service sector has continued to be choppy as the service industry has ramped to meet activity demand through adding new employees, pulling rigs out of the yard, and stretching across supply chain weaken. While we've been able to secure the equipment material and services needed to execute on the program that far, service efficiency and equipment quality will continue to be pressure points across the industry in the near-term.
As we look forward to the remainder of the year, we anticipate to maintain drilling activity at a 1 rig pace with both drilling and completions to carry over into next year. From a production timing perspective, we anticipate that the wells turn in line in the fourth quarter to add more than 25% more oil on top of the PDP level, but the total program adding 13% on a Boe basis next year.
With respect to capital, we protect to come in below the midpoint of guidance, if not the low end of guidance due to project shifting from late 2022 to early next year. We'll provide more details on 2023 activity on the next call.
Shifting expenses, we're able to keep adjusted G&A to an average of roughly 2 million per quarter over the last nine months. Despite meaningful increases in activity, benefiting from our core values for main cost discipline as well as prior initiatives or having tailored our organization to be fit for purpose.
We continue to balance the weighting of field versus corporate personnel to reflect where we actually create value and outsource necessary, but more perfunctory and less core functions, such as operations accounting, random administration, IT, tax and HR.
Despite expanding activity and producing well count, our total personnel remains just over 100 people. Although corporate personnel stand at 15 people, we have retained heat and technical skill sets that have both the experience and institutional knowledge of our area of operations, the sport drilling and completions, as well as the ability to flex through additional outsourcing of specialized areas to do more.
Despite inflationary pressures, we were able to keep LOE in expense workovers to within 2% of the previous quarter at 9.7 million or $5.92 per Boe or roughly 10% below the midpoint of guidance on an annualized basis. I will continue to actively press on operating costs, we anticipate expenses, specifically work over expenses to remain near these levels as we reactivate and repair more wells this year.
Draw commodity prices have improved the economics of the wells that would remain shut-in otherwise. The good news is that this will translate to additional production. However, while profitable remaining tranche of well reactivations have relatively higher operating costs, which will increase power, water, chemical and other expenses both on an absolute and per Boe basis.
In addition to the cost of an increasing producing well count, inflation will continue to be a theme throughout the year and into next year. We will continue to combat inflationary pressures and expenses as well through rigorous bidding processes, to carrying material equipment and services over an appropriate tenure to partially offset market increases, as well as continuing to leverage our significant infrastructure, operation center and other company advantages.
In summary, the Company has 241 million net cash and cash equivalent at quarter end, which represents $6.52 per share of our common stock issued and outstanding, consistent production over the last three quarters with a 25% increase in oil over the last quarter from our Mid-Con producing assets.
High graded capital program with infill and development drilling in a core the Northwest STACK and continuation of our well reactivation program, which will economically enhance production deliver strong rates of return, low overhead, top tier just a G&A of $1.22 per Boe no debt in fact negative leverage.
Significant free cash flow and a growing net cash position supported by a diverse production profile, flattening expected annual PDP declined to an average of approximately 8% over the next 10 years, multi digit reserve life asset base $1.6 billion in NOL which will shield future free cash flow from federal income taxes. Large owned and operated activity and electrical infrastructure, which provides costs and strategic advantages requiring little to no future capital to maintain.
This concludes our prepared remarks. Thank you for your time. We'll now open in the call to questions.
[Operator Instructions] Your first question comes from the line of Josh Young with Bison. Your line is open.
So a question and a follow-up. My question is on the PDP decline rate that you showed in your announcement, you said there was an 8% PDP decline rate. Could you elaborate on that a little bit? Is that -- are you guys saying that your existing wells are in aggregate declining by 8% a year? Or is there sort of more color on that?
Sure, Josh, and good morning. Yes, we're saying that the base decline of a producing asset will average in 8% decline with the next 10 years without capital.
And then, can you talk about your estimate of inventory of additional well locations that may be similar to the wells that you're drilling right now? So, this is less of a proved undeveloped or probable and more of estimation of similar locations to what you're drilling currently that seems to be hitting, like you guys said, a 100% or so, rates of return.
Sure. And I think you're hitting on the inventory of well reactivations. So, we're planning to do 54 for the year through the end of this year, and we continue to monitor prices and costs as we look for to the next year. We have additional inventory that's economic today, but we are economic animals and we'll continue to adjust that plan as conditions change over the quarter.
So, I meant, the Northwest STACK wells that you guys have drilled and that you have, it sounds like two or three online right now.
Sure. We're focused on executing the current program and monitoring results right now. What we've seen in the first less than four months on the first 2 wells are within expectation ranges. And the 3 well is just cleaning up after the first 30 days of production. So, we don't see anything that causes the change. However, if we telegraph in previous quarters, we're going to be controlled and disciplined before we lean further outside of what we've come out with this year's capital program, and we'll continue to monitor and hope to provide some more detail in next quarter's call.
Your next question comes from the line of Jeff Robertson with Water Tower Research. Your line is open.
Grayson or Salah, can you all talk just in very general terms how you might be able to use the NOLs to for shareholder value in the context of an acquisition?
Sure. In the context of an acquisition, I think the cast balance that we currently have provides like I said on the call, strategic advantage and competitive leverage in today's market, given the outlook on interest rates. The capital markets themselves and what actual opportunities you might be able to look at. So, I do believe that it provides that advantage. However, we're also looking at other uses, like return of capital.
I think there is a scenario contingent of investors that think you can walk and chew gum at the same time by implementing a regular weight dividend. Buying back opportunistically during market dislocations and maintaining that optionality; however, the larger that you maintain in that dry powder, the more attractive opportunities that you can look at, and it brings you into that next tier of things that become live.
On the NOL Salah, can you -- are there certain structures or certain types of acquisition characteristics where the NOL could be a big benefit for SandRidge?
Yes, so Jeff, there's acquisitions whereby there is not a lot of tax basis or capital intensity needed to maintain or develop an asset. So, those specifically are typically late life PDP type assets in the ENP space, and then there's also other potential assets that we could acquire outside of traditional upstream energy, looking at midstream gathering systems, services and things like that. So, we'll always make sure that we're looking at acquisitions and M&A in light of what's most value credos to our investors.
We want to make sure that we have a cohesive story in that M&A scenario. But you know, that would be the typical type of characteristics because an asset with a lot of [HUD] inventory or drilling locations and things like that, that takes a lot of capital intensity, is going to defer a lot of taxable income down the line. And so, you might not use as much of those NOLs in those sorts of assets than you would let's say, a PDP asset that you buy for a discount, or just beat up on topics.
So on a PDP asset, you can defer -- you can use the NOLs to shield all the cash taxes correct for at least for some period of time?
Correct. Because in theory a PDP asset doesn't require a lot of additional capital investment outside of the initial acquisition. And so, you're making your margin by beating up on OpEx and gathering more efficiencies and scale by expanding your number of barrels that you're producing and number of wells that you're operating. And the way that you would you would tap into the NOLs and that scenario is because you're not putting a lot of dollars into the ground, and therefore, deferring taxes, you're generating a lot of taxable income, near-term, post-acquisition of those assets. And so, therefore, you'll be able to tap into the NOL very quickly.
Your next question comes from the line of Harvey Sax with Alpha Wealth Funds. Your line is open.
I am at you back in August and I had a question for you. Your company's valuation looks incredibly low. I'm not an expert in this oil and gas industry, but we're not factoring the NOLs. What do you think that company fair value should be? It's clearly undervalued.
So, this is a lot. We don't put out specific guidance that speaks to a holistic net asset value. We do share some of your thoughts that there are value dislocations between our share price in the market at times, but we can't really comment on our internal views at this time because we haven't or we're going to [Technical Difficulty] out there, but…
I mean, you must have some idea. I mean, you're looking at evaluating acquisition opportunities. You must have some idea of what your company is worth. Is it 20% undervalued, 50% undervalued? Can you just talk in some generalities? Because I don't understand how you're looking to increase shareholder value. If you're looking at your cash as an asset and an acquisition, then you only have your stock to use as currency. And if your stock is way undervalued, then it becomes very difficult, if not impossible to make an accretive acquisition. So how do you plan on increasing the value and the shareholder value? How do you plan on increasing the price of the stock? I mean you're doing an excellent job of managing expenses and activating wells and the stock looks incredibly cheap to me, but I'm just one person.
I think great questions at this point. This is Grayson. I point you, if you're looking for evaluation metrics, the value of future discounted cash flows of our proved developed properties for oil, gas and NGL is approximately 100 million at 3Q SEC prices. I would say as far as increasing the share price performance here it's executing on the program that we just laid out, it's continued investor outreach. And all the things that we laid out during the call that we've kind of focused in our overall strategy, I think that will continue to be impactful. So, I'm happy to visit more details, but that's our short view.
No, I think some insider buying by management would draw some attention to the valuation discrepancy. Because clearly, the U.S. is positioned and natural gas is going to be greatly enhanced by the loss of Russia as a supplier to Europe. This is a long-term significant change in valuation in my opinion.
Certainly, I appreciate.
I would like to see guys buy some stock. I'd like to see more confidence from management in the valuation.
Yes, I would say, relative to that a large portion of our personal income is tied to SandRidge and the continued performance and increase in valuation of SandRidge. So, we are very much aligned on that front. And I would say, at a second point, because we are so active at looking at opportunities in the M&A space, anytime that we have material non-public information, it keeps us from traded.
There are no further questions at this time. This concludes today's call. You may now disconnect.