SandRidge Energy, Inc. (fka SDOCQ)

[catdaddyrt]

Q4 2013 Well IP Rates Improved

As anticipated, SandRidge Energy (SD) reported a significant sequential improvement in IP rates in the Mississippian in the fourth quarter. The company's 80 Mid-Continent wells had an average 30-day IP rate of 386 Boe/d during Q4, compared to 307 Boe/d during Q3. 2013 average 30-day IP rate was 366 Boe/d.

SandRidge did not provide oil yields for its wells. Using production test data as a proxy, crude oil likely accounted for a somewhat lower percentage of IP rates than in the first three quarters of the year (in production tests for the majority of the company's wells located in Oklahoma, oil represented 51%, 56% and 61% in the fourth, third and second quarters of 2013, respectively).

During the fourth quarter, the company's Mid-Continent assets produced 51.7 MBoe/d. Crude oil and NGLs represented 49% of the quarter's total volumes, which is essentially in line with the average for the year. (The press release did not provide breakdown between crude oil and NGLs).

http://seekingalpha.com/article/2062893-sandridge-energy-what-are-the-assets-worth?isDirectRoadblock=false&source=email_rt_article_readmore&uprof=45

No Performance Revision To Proved Producing Reserves

A lot of analysts' questions during the conference call focused on well performance in the Mississippian.

Answering analysts' questions, management commented that there were no revisions to proved producing reserves booked at the end of 2012. The comment is positive news given the concerns related to the "tail" production trajectory of the Mississippian wells. (The striking recent underperformance by SandRidge Mississippian Trust I (SDT) and SandRidge Mississippian Trust II (SDR) - which represent a significant percentage of SandRidge operated wells with acreage within SandRidge's focus areas - is likely on many investors' minds).

SandRidge revised upward its type curve for PUD locations. Oil EUR was increased 10% to 118 MBo, while total EUR was increased 3% to 380 MBoe. The revision was in the center of intense questioning by analysts during the call. The EUR increase appears to be driven by two factors.

First, SandRidge eliminated from its PUD portfolio a portion of locations that had lower EURs: these locations are no longer part of the company's 5-year development plan. The measure is reflected in the 36 MMBoe negative reserve revision for the year. Based on my estimate, as many as ~150 gross drilling locations might have been eliminated from the books as a result of this high grading of the drilling plan. While the elimination had a positive impact on the projected average EUR, the associated type curve improvement is not driven by a better-than-expected well performance but rather represents management's plan not to drill wells next to select existing wells that had lower oil yields or lower EURs.
Second, new PUD locations booked during 2013 offset wells with higher average IP rates. Based on my estimate, as many as 430 new PUD locations were added. Management commented on the call that 2013 wells produced 8% more oil during the first year than what is implied by the 2012 type curve.

The upward revision in the company's PUD curve is a positive development, even though the use of a "high graded" set of locations makes it not fully comparable to the year-end 2012 curve.

The elimination of the lower-EUR locations from the PUD pool implicitly presumes that such locations can be reliably predicted (in other words, EURs of the infill wells correlate closely with EURs of the existing adjacent wells). However, given the extreme variability of well results in the Mississippian to date, it is not obvious that such correlation is indeed high.

SandRidge indicated it will provide details with regard to its reserves and type curve during the Analyst Meeting next week.

PV-10 Of Proved Developed Reserves Estimated At $2.8 Billion

SandRidge reported year-end 2013 proved reserves of 377 MMBoe (pro forma for the divestiture of the Gulf of Mexico assets). 63% of total reserves were proved developed reserves.

Estimated PV-10 value of pro forma proved reserves was $4.1 billion. 68% of that value, or ~$2.8 billion, represented value of proved developed producing reserves.

The $2.8 billion value of the existing production compares to the company's $5.6 billion current Enterprise Value (based on the stock price of $6.45 per share).

EBITDA Growth Guidance Provided

Pro forma for divestitures and net of Noncontrolling Interest, Adjusted EBITDA was $166 million for the fourth quarter and $609 million for 2013.

Using the annualized run-rate Adjusted EBITDA of $664 million, SandRidge's current stock price implies an 8.4x trading multiple.

Management commented during the call that year-on-year EBITDA growth rate in 2014 is estimated to be in the 35% range. This puts projected 2014 Adjusted EBITDA at ~$822 million.

On a forward-looking basis, SandRidge's current stock price implies a 6.8x trading multiple of 2014 Adjusted EBITDA.

The trading multiples remain high relative to peers, given that the Midcontinent EBITDA has been and will remain fueled by heavy outspending.

In 2014, SandRidge plans to spend $1,475 million. Including drilling carries ($205 million) and excluding Trust drilling obligations (~$140 million), total capital amounts to ~$1,540 million.
This represents an outspending of approximately $0.9 billion relative to the company's estimated internally generated cash flow in 2014 (140%+ outspending).

Given steep (and often very steep) decline rates in the Mississippian, EBITDA contribution from new wells is strongly front end-loaded. Clearly, the outspending "buys" a significant amount of incremental EBITDA and strongly impacts the trading multiple.

While the outspending per se may be a positive factor from a value-creation standpoint (assuming that fully-loaded returns are competitive), it needs to be taken into consideration when assessing the stock's current valuation and stock price.

Acreage Expirations Discussed

Management's discussion during the conference call provided interesting insight regarding the current "going" rate for acreage in the Mississippian play:

In the total play, we have 1.8 million acres. We have 715,000 acres expiring [in 2014], but we have extensions on 75% of that at $117 an acre. We have in the whole play 21% HBP. That is 53% in Oklahoma and 8% in Kansas.

So specifically on the focus areas, we have 670,000 acres net. That's 300,000 in Kansas, 370,000 in Oklahoma. I am rounding just a hair there. 45% of that is HBP. 64% in Oklahoma and 25% of Kansas is HBP. In 2014, again in the focus area, we have 180,000 acres expiring with extensions on about 40% of that at $350 an acre.

So in summary, we've got extensions on a lot of our acreage. We will extend some of that. We will let some expire and replace with some better acreage. You know, when we drill these good wells - a well comes in at 300, 500, 700 barrels a day - we go in and block up acreage around it. So we will let some acreage expire, and we will add in our better areas.

In 2013, we added over 130,000 acres in our focus area at a cost of between $300 and $400 an acre. So we can still pick up acreage at reasonable costs.

These data provide interesting valuation implications with regard to SandRidge's undeveloped acreage position. Given relatively low replacement cost and capital scarcity in the play, non-HBP acreage with close expiration deadlines has very little value. HBP acreage, on the other hand, potentially deserves a premium.

Assuming that ~75% of SandRidge's 490,000 HBP acres in the focus areas are undeveloped, the aggregate value of the company's focus areas acreage would be:

@ $400/acre: $150 million
@ $1,000/acre: $375 million
@ $1,500/acre: $550 million

Adding to that the value of acreage outside of the focus areas that is not expiring in 2014 (~0.6 million acres). At $100 per acre, that acreage would be worth an additional $60 million.

Based on these calculations, it is difficult to make a case for the private market value of the company's acreage to be much greater than $0.4-$0.6 billion.

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.