SandRidge Energy, Inc. (fka SDOCQ)

[catdaddyrt]

http://seekingalpha.com/article/2490075-can-sandridge-energy-get-its-mojo-back?uprof=45

David White
Long/short equity, value, REITs, macro
Profile| Send Message| Follow (55,311 followers)
Can SandRidge Energy Get Its Mojo Back?
Sep. 12, 2014 5:54 AM ET | 3 comments | About: SandRidge Energy, Inc. (SD)
Disclosure: The author has no positions in any stocks mentioned, but may initiate a long position in SD over the next 72 hours. (More...)
Summary

SandRidge sold production assets in early 2014. Therefore, its revenue comparisons will tend to be bad for the rest of 2014.
SandRidge also suffered from the same bad weather that hit other oil and gas E&P development companies.
However, the reality is that its management strategy is sound, and it is executing that strategy well for good growth, especially in liquids.
It has already gotten much of its mojo back. If you are interested in the details of this, read more. It may be fascinating.
SandRidge Energy Inc. (NYSE:SD) is an oil and gas E&P company that has continually frustrated investors who chose to believe in it. The latest iteration of this frustration may be mostly being caused by some uninformed analysts. SD announced in January 2014 that it had sold its Gulf of Mexico assets to Riverstone Holdings LLC for $1.12B. SandRidge kept a 2% overriding royalty interest in two exploration projects (the deep Miocene in Green Canyon 65 -- the Bullwinkle field -- and the South Pass 60).

This article was sent to 12,973 people who get email alerts on SD.
Get email alerts on SD »
SandRidge said the assets had proved reserves of 29 million barrels of liquids as of December 1, 2013, and 168 Bcf of natural gas. It cited figures from Netherland, Sewell & Associates. The properties included 23,500 Boe/d of production over the month of December 2013. 48% of that was natural gas. Subsequently, Fieldwood said (also according to Sewell) that the properties had proved reserves of 57.2 million Boe (51% of which was oil). They had probable reserves of 11.4 million Boe, and possible reserves of 9 million Boe (or 3P reserves of 77.5 Boe). This restatement seemed to make SD look foolish; but the actual numbers were almost identical (168 Bcf = 28 million Boe). Fieldwood also said that the assets had production of 25,000 Boe/d. Again, this is more than the SD figure.

Okay, so SD looked a bit foolish; but what it really wanted was to get out of a business (deep sea development) that it knew little about. It wanted to be able to concentrate on its Mid-Continent business that it now considers itself an expert in. With the $750 million in cash from that sale, it was able to fund a lot of its Mid-Continent development for FY2014. The FY2014 CapEx budget for this was $1,040 million. To some, the further development of the Mid-Continent may seem like spinning your wheels when you give up a lot of good production to be able to afford the development in another area, which will lead in the near term only to lower production. Plus, SD gave up 11.3 MMBoe of production that it had in FY2013. Yet, SD is only guiding for an increase of other SD production from 22.5 MMBoe to 26.7-27.7 MMBoe (4.7 MMBoe at the midpoint) for FY2014. For FY2014, there will also be about 1 MMBOE contributed from divested assets.

Why do this? It would seem SD will spend two years just getting back to where it was. On a surface perusal, this would seem true; and some analysts probably never examined the situation further. However, on more in-depth analysis, SD's move make sense. It did not just sell the Gulf of Mexico assets because it was going broke. The real reason is that SD signed a lot of 5-year leases on its Mid-Continent properties. It started ramping up its Mid-Continent leasing in mid-2010; and as of December 31, 2013, it had 1,805,000 net acres in the Mississippian formation (Mid-Continent). Yet, it had only 1,167 wells on this acreage as of December 31, 2013. It will take a lot more wells to hold this large amount of acreage by production. If SD is unable to do it over the next several years, a lot of good-to-great production properties will have to be given up or re-leased at higher cost. The Mid-Continent leases also tend to require more wells to hold smaller leases than, say, the Permian Basin, where there are a lot of government leases that require little drilling to hold large sections of land by production.

When you include the cost of the acreage that SD would have lost to expiring leases if it hadn't gotten the extra development monies from the sale of its Gulf Of Mexico assets, the deal makes a lot more sense. When you look at the following chart of SD's recent improvement in its Mid-Continent EURs (expected ultimate recovery) results, you can really see why SD was interested in making the deal.

(click to enlarge)


According to SD, only the wells with EURs of 151-200 and above are commercially viable. According to SD's chart, about 41% of wells drilled prior to 2013 were "not commercially viable". Yet, in 2014, that percentage has been reduced to about 16% of all wells drilled in the Mississippian by SD. That's a huge improvement; and it makes the fundamentals for drilling in the Mississippian much more profitable. Further, SD is continuing to improve its recoveries, so the 2014 results are not likely to be the best the company sees in the future. It is much easier now to see why holding onto these leases was a priority for SD.

The chart below reaffirms the above thoughts. It shows the improvement in recoveries for Mississippian wells from Q3 2013 through Q2 2014.



The recoveries of oil show steady improvement in 30-day IP rates. The chart shows a roughly 33% improvement in the BOPD flowing from the wells from Q3 2013 to Q2 2014. That's a great achievement in the oil business.

The following graph shows the IRRs (internal rate of return), and the outlook for IRRs for development in the Mississippian.



The chart shows SD's 3-year planned improvement in its average well cost (and its consequent IRR improvements). It also shows SD's "aspirational" improvement. The company sees the first goal as reachable. It hopes for the "aspirational" goal, but it is not really claiming it yet. Still, many companies have seen consistent increases in well EURs over time in almost every different unconventional development field. The technology is improving as the engineers become more familiar with the strata and the ways of recovering oil and gas from it.

This is another reason SD claimed to want to "concentrate on the Mid-Continent". It wants to become as expert as fast as possible. This is not a specious talking point. It is instead a reality in the oil business; and SD was "SMART" to recognize this in the way it did. Its decision showed good management, even if it might have made it earlier.

Why wasn't it made earlier? The about 41% "not commercially viable statistic" for Mississippian wells drilled before 2013 by SD should explain that. SD management is not schizophrenic. They are just playing the cards they have at the time they are dealt; and they seem to be doing an overall good job. In 2014, the picture for the Mississippian profitability has dramatically improved over the picture prior to 2013.

Naturally, the revenue comparisons for FY2014 have to suffer. That 11.3 MMBoe of Gulf of Mexico production is gone. The revenues appear to be shrinking due to comparisons with 2013, which had that production. However, the management direction is well thought-out. The "new" SD is growing nicely. SD is seeing good-to-great production growth and increasing liquids contributions (see charts below of the 2014 guidance).

(click to enlarge)


The company has guided for 27%-34% pro forma liquids growth in FY2014. This is great growth, especially since oil and NGLs provide much higher revenues per Boe of production.

I further point out that SD beat on adjusted earnings in Q2 2014 by +$0.02 (+50%). Admittedly, some power disruption in 1H caused overall production guidance to be revised downward a bit to a 19%-23% range. SD suffered from the same inclement weather that many other companies found hard to deal with.

Still there were many positives in Q2 2014. 122 Q2 2014 Mid-Continent lateral wells had an average 30-day IP of 412 Boe/d (30% above the type curve). Seven lateral wells had 30-day IPs over 1000 Boe/d (across four counties). Plus, SD reduced its Mid-Continent average lateral well cost to $2.85 million and Lease Operating Expenses to $6.69 per Boe for Q2 2014. These were both impressive statistics; and they should make SD more profitable in the future. Further, SD had multilateral well successes for three dual stacked laterals and a single co-planar well in three different counties. These four wells averaged $2.5 million per lateral (83% of the normal cost of a vertical with a single lateral). Plus, they achieved 108% of the 30-day IP type curve.

I could go on, but SD has been performing well. I agree with its strategy, which makes logical sense once you have reviewed it. For analysts such as those at TheStreet.com that seem to only pay attention to the actual numbers, they are missing the bigger picture; and the term "bean counter" seems very applicable to their approach. They might say numbers don't lie; but in this case, they don't seem to come close to telling the truth. SD is a buy; and next year, when the bad comparisons disappear, TheStreet.com and other such analysts will likely agree with me. SD has gone a long way toward getting its mojo back. It is a buy with an average analysts' next five years' EPS growth estimate per annum of +45.60%. In the oil and gas business, it is hard for a company of SD's size to beat that figure; and I think it is a largely "real" figure.

The two-year chart of SD provides some technical direction for this trade.

(click to enlarge)


The slow stochastic sub chart shows that SD is near oversold levels. The price of oil, which has also been falling, may also be near a near-term bottom. The main chart shows that SD has fallen precipitously over the last few months. It is now very near strong long-term support. There is good reason to believe it can rally from here. There is better fundamental reason to believe that SD can consistently improve its results in future years. SD is a buy. The average analysts' recommendation is 3.0 (a hold); but that includes a number of analysts, such as TheStreet.com, that are lazily going strictly by the numbers. The oil business has never been a business that lends itself well to bean counters, except perhaps at huge companies such as Chevron (NYSE:CVX) and Exxon Mobil (NYSE:XOM). For smaller companies, the analysts with specialized knowledge tend to do a lot better; and I believe I have done better than the "bean counters" on this one. SD has come a long way towards getting its mojo back.

NOTE: Some of the above fundamental fiscal data is from Yahoo Finance.

Good Luck Trading.








I am a buyer at 4.50 the top is 6 for this year imo BWDIK