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Mississippian: Sandridge Energy's (SD) Golden Goose

|Includes: SandRidge Energy, Inc. (SD)

Sandridge Energy, Inc. is a major player in the Mississippian Lime, where it has a lease of around 1.85 million acres. The company's major operations are targeted to the "focus areas", which consist of six counties: Comanche, Barber, Harper, Woods, Alfalfa, and Grant. During the third quarter, the company operated around 22 rigs in the region, and it plans to operate 23 rigs in the coming quarter. In the focus area, Sandridge drilled around 211 wells as of the start of November this year, and it has identified 3,000 development locations. During the third quarter of this year the company was able to increase production by 59% year over year to around 47,900 barrels of oil equivalent per day, or boepd, which is around 53% of the company's total production. With the number of potential development locations, the company will be able to increase production from the Mississippian.

In the Mississippian play Sandridge has a cost of around $2.95 million per well. In general, at well cost of around $3 million, a driller in the Mississippian Lime play needs to generate around $4,110 per day to achieve break-even in two years. This means that a company has to produce around 41 barrels of oil per day at a price of around $100 per barrel of oil for break-even. Sandridge's wells have a 30-day initial production rate of around 140 barrels of oil per day and an initial decline rate of 76%. The company estimates a payback period of two years for its wells. With these production rates, the company has a certain degree of flexibility if the oil prices vary between $90 and $100 per barrel. The WTI prices are expected to be around $97 per barrel through the end of this year and an average of around $95 per barrel during the next year. At these price levels and the well production levels, Sandridge is likely to cover the cost of its well comfortably in the coming quarters.

Sandridge is not the only player in the Oklahoma shale formations; it has competition from Apache Corporation (NYSE:APA). The company operates in what it calls the Central Region, which constitutes western Oklahoma and the Texas panhandle, totaling an area of 2 million gross acres. During the third quarter the company produced around 94,773 boepd, a 4% quarter over quarter production rise. In the region, Apache is currently operating more than 300 wells in different shale plays like the Cleveland, Canyon Wash, Granite Wash, Sweetwater, Cottage Grove, and others. Apache plans to increase production to more than 160,000 boepd from the region by 2016, and it has good traction as it has exceeded its projected value with the rate of growth in drilling. The potential for exploration and exploitation of multiple shale formations in the Central region provide Apache the opportunity to grow its production in the coming quarters.

More from the Mississippian stack pay

The total oil and condensate recoverable from the Mississippian play is around 1.3 billion barrels through 2035. The Mississippian has three stacked layers known as the Upper, Middle, and Lower Mississippian. Sandridge is developing the Upper and the Lower Mississippian in Harper County and Grant County respectively to increase the productivity of its acreage. In Harper County the company is testing two stacked laterals, one in the Upper and the other in the Lower Mississippian. Stacked laterals are horizontal wells drilled one above the other. The data from these two wells showed 30-day initial production, or IP, of around 456 boepd from the Lower Mississippian and 391 boepd from the Upper Mississippian. In Grant County, Sandridge tested multi-well in the Upper and the Lower Mississippian, and these wells delivered more than 400 boepd. Sandridge's year to date average 30-day IP is 339 boepd. This shows that the new wells in the Upper and Lower Mississippian currently have 30 day IP rates that are currently above or in line with the company's average for the year.

Sandridge also started the appraisal of the Woodford Shale, which lies below the Mississippian Lime and is around 80 feet thick. The Woodford shale is expected to contain oil and natural gas in equal proportion. Sandridge is carrying out the appraisal program in five counties within its acreage and has completed three wells. Among the three wells, two wells produced hydrocarbons at the rate of 68 bpd and 37 bpd, while the third yielded only water. We believe the activity in the Woodford shale formation is gaining momentum and will continue into the coming quarters. The combined number of rigs in the Woodford formation as of November 15, 2013 is around 50, while it was around 41 during same time last year.

Continental Resources (NYSE:CLR) is a major player in the Woodford shale formation. The company operates in the Anadarko Woodford and Cana Woodford, which is located in Oklahoma. These two plays are located in the area the company calls South Central Oklahoma Oil Province, or SCOOP. In the SCOOP region the company has leasehold of 320,000 net acres, and it currently operates around 12 rigs in the region with plans to increase the number of rigs to 18 by the middle of next year. Continental's plans to increase the number of rigs are supported by the increase in production from this region. The company was able to produce around 20,100 boepd during the third quarter of this year, which was a 293% increase year over year. The SCOOP region has a thickness of 122 meters and around 70 billion barrels of oil in place. With this amount of oil in place and the company's robust plan, it will be able to increase the oil production from the region.

Goose that lays the golden eggs

While exploring the Mississippian Lime play to increase its productivity, Sandridge has the advantage of it being a stack pay. With its long history of operations in the Mississippian Lime, the company has a better understanding of the play. One of the high potential regions of the Mississippian stack pay could be the Woodford formation in which the company is currently investing. Currently Sandridge's stock trades at a price-to-book, or P/B, of around 1.50. The company's further development of the Mississippian Lime is expected to decrease its P/B value in the coming quarters.

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