I think 70.00 is a bottom and OPEC will not leave money on the table for long they are greedy basty's -with the new congress we may get to build the Keystone pipeline and new refineries also - if we can start selling oil abroad the entire game changes - next year new LNG exporting facilities are set to open and start shipping NG out of the country which will renew gas drilling again in the U.S - a lot of good things on the horizon -imo but even the drop in oil prices has not had any effect on drilling out here in West Texas with a new congress investors should be eager to jump in as they know some of the current White House BS is about to be halted - drill baby drill
now this is the best thing I have heard in a while from SD
The company signaled that it will have to reduce the pace of capital spending in 2015 relative to its initial $1.55 billion capex plan. However, given the low likelihood of SandRidge adopting a "live within cash flow" strategy, the remaining cash balance may drop further by the end of Q1 2015.
Richard Zeits
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SandRidge Energy: A Major Spending Cut On The Horizon
Nov. 9, 2014 12:30 PM ET | 4 comments | About: SandRidge Energy, Inc. (SD), Includes: SDR, SDT
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Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More...)
Summary
SandRidge delivered a solid operating quarter, driven by strong NGL and natural gas volumes.
I estimate SandRidge’s cash balance at the end of 2014 to decline to ~$240 million.
This compares to $1.35 billion as of the end of February 2014.
The company’s 2015 capital budget will have to be reduced substantially below the initial ~$1.5 billion continued spending plan.
In the third quarter, SandRidge (NYSE:SD) posted a solid production increase in its core Mid-continent operation while the drilling pace remained unchanged. The increase was driven by continued capital outspending relative to internally generated cash flow and a contractual change in the company's gas gathering and processing agreement that resulted in a step change in NGL volumes.
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The company's "cash burn" increased during the quarter due to the expiration of Repsol drilling carries and share buybacks. I estimate the company's cash balance to dwindle to less than $250 million at year end.
The company signaled that it will have to reduce the pace of capital spending in 2015 relative to its initial $1.55 billion capex plan. However, given the low likelihood of SandRidge adopting a "live within cash flow" strategy, the remaining cash balance may drop further by the end of Q1 2015.
Key Operating Metrics For The Quarter
In its core Mid-Continent operation, SandRidge completed 122 horizontal laterals, the same number as in Q2.
The company operated 33 horizontal rigs on average during the quarter (31 in Q2), of which 25 were in Oklahoma (20 in Q2) and 8 in Kansas (11 in Q2). The company averaged 2 rigs drilling saltwater disposal wells (3 in Q2).
Average IP-30 for the 122 laterals during the quarter was 368 boe/d, compared to 412 boe/d during the prior period. This represents an 11% decline, which I view as a favorable outcome in light of the weak reported initial production test data in Oklahoma for the quarter.
Single-lateral well cost of $2.9 million remained essentially in line with the previous quarter.
The Company's Mid-Continent assets produced 66.8 Mboe per day during the third quarter:
Oil production grew 12% sequentially to ~23.4 Mbo/d (35% of total). The growth rate compares to an 8% sequential oil production growth in Q2 that was impacted by electric system issues. Those issues were addressed during the third quarter, likely contributing to the higher growth rate. Taking this factor into consideration, I think of the company's Q3 production growth rate as more or less consistent with Q2.
NGLs volumes grew 55% sequentially to 11.4 Mbo/d (17% of total). The step change in the NGL volumes in the Mid-Continent reflects a contractual change in the gathering agreement (which was announced early in 2013). All of SandRidge's wells in the Mid-Continent are now subject to a percent-of-proceeds gas processing agreement.
Natural gas production grew 14% sequentially to 32.1 Mboe/d (50% of total).
The strong growth in natural gas and NGL confirms the results reported earlier in the week by SandRidge's Mississippian Trusts (SDT and SDR) that have also benefited from the transition to the new structure of the gathering contract.
Heavy Outspending Relative To Cash Flow Continues
SandRidge had to delay reporting its financial results for the third quarter due to an issue under discussion with the SEC that relates to the timing and periods of booking the under-delivery of natural gas under the company's existing CO2 contract. The delay is a non-issue, in my opinion.
I estimate that in the third quarter SandRidge generated discretionary cash flow of ~$150-$160 million.
The company's total capital expenditures for the quarter were $468 million, which compares to $391 million in Q2. The biggest component of the capex increase was drilling and production spending in the Mid-Continent, which increased to $336 million in Q3 from $241 million in Q2. The increase likely reflects expiration of Repsol drilling carries and therefore is recurring in nature.
During the third quarter SandRidge repurchased 3.5 million shares at average price of $4.99 per share, for a total amount of approximately $17.5 million
As a result of the outspending during the third quarter, the company's debt, net of cash balances, increased by approximately $330 million. The cash balance at the end of the quarter stood at $590 million.
SandRidge continued share repurchases during the current quarter, spending a total of $111 million to date of its $200 million authorized. Average price was $4.06 per share. Pro forma for these additional repurchases, the company's cash balance at the end of Q3 was $496 million.
SandRidge updated its guidance for 2014, increasing its capital spending guidance for the year by $75 million to a total of $1.55 billion. This guidance implies Q4 capital spending of $413 million.
I estimate that the company will generate discretionary cash flow in Q4 of approximately $150 million. The estimated ~$263 million outspending in Q4 would translate into a cash balance at the end of 2014 of ~$237 million.
As a reminder, SandRidge had $1.35 billion of cash on its balance sheet as of February 25 of this year, which included the proceeds from the closing of the Gulf of Mexico divestiture.
Capital Spending To Decline In 2015
As I argued in my previous notes, SandRidge's current rate of spending is unsustainable given the trajectory of the company's production and EBITDA growth. In the absence of a capex reduction, the company's cash balance would evaporate already by the end of Q1 2015, whereas discretionary cash flow run rate during Q1 would still be far below the level that is needed for the company's credit metrics to remain stable.
As a result, a major slowdown in capital spending is inevitable.
During the conference call, the company signaled that the pace of capital spending will be reduced in 2015 but it still expects to deliver a meaningful production increase next year.
The important question is what minimum capital spending would be required to provide moderate sustainable growth (let's say, 10% annually) and whether internally generated cash flow would be sufficient to cover that capex.
The company's CEO commented that SandRidge can spend approximately $500 million on drilling and completions (not including infrastructure spending and capitalized items) to keep its production flat year-over-year. It was not clear from the comment what amount of minimal spending on non-D&C categories would be required to sustain the business. I estimate that for every dollar spent on drilling and completions, at least $0.20 would be spent on other categories, using the spending patterns in the Mid-Continent in 2014. This would imply that the company's "maintenance capital" is approximately $600 million per year, or approximately equal to the company's current discretionary cash flow run rate.
However, it was not entirely clear from the company's comment if such level of spending would result in a flat production volume from 2014 exit rate to 2015 exit rate or if the term "flat" meant 0% production growth in 2015 relative to 2014. If the former is true, the comment would be encouraging as it would imply possibility of moderate growth funded solely with internally generated cash flow, assuming additional productivity gains. If the latter is true, "flat" would in fact imply a declining production trajectory in 2015 from the 2014 exit rate.
Drilling Returns
The company re-iterated its estimate that it can generate ~40% drilling returns at the well level in the Mid-Continent at $80 oil and $3.50 natural gas price, assuming $2.9 million well cost. The estimate does not include infrastructure costs. The company clarified that by including infrastructure costs, the return estimate would be reduced by ~10% to about 30%.
In Conclusion…
SandRidge delivered a slightly stronger quarter. The transition to a new gathering contract will effectively provide a positive uplift to the realized gas price on a recurring basis.
The company's joint venture drilling carries have been fully utilized, effectively leading to a substantially higher average capital per well in the Mid-Continent.
The drilling carries utilization will be in part offset by the completion of drilling obligations associated with SandRidge Permian Trust (expected to be fully satisfied in Q4 2014) and SandRidge Mississippian Trust II (expected to be fully satisfied in Q1 2015).
Very strong hedging position in Q4 2014 and in 2015 should help reduce the impact of the oil price decline.
SandRidge will face challenging quarter-on-quarter comparisons beginning in Q1 2015 as the cash cushion that fueled the company's production growth in the Mid-Continent over the past two years will be essentially fully spent by the end of Q1 2015.
Disclaimer: Opinions expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisor capacity. This is not an investment research report. The author's opinions expressed herein address only select aspects of potential investment in securities of the companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies' SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of the date of publication, and are subject to change without notice.
