SandRidge Energy, Inc. (fka SDOCQ)

[catdaddyrt]

http://seekingalpha.com/article/2121863-sandridge-energy-sweet-spots-and-duds-of-the-mississippian-lime?isDirectRoadblock=false&uprof=45


SandRidge Energy: Sweet Spots And Duds Of The Mississippian Lime
Apr. 2, 2014 7:00 AM ET | 1 comment | About: SD

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More...)

Summary

The article provides well-by-well production data and analysis for SandRidge’s Mississippian wells within the company’s southern Comanche County focus area.
The analysis indicates the presence of a unique gas-prone sweet spot that stands behind the prolific company-estimated 542 MBOE EUR for the area.
The analysis also reveals poor well performance in other select areas, which indicates that acreage in those areas is uneconomic or marginal.

In its recent Analyst Day presentation, SandRidge Energy (SD) provided informative discussion of its development strategy focused on select core areas within the company's massive 1.8-million acre position in the Mississippian. Within the focus areas, SandRidge currently has ~670,000 net acres under lease (of which ~180,000 will see expirations this year).

The map below from the company's most recent investor presentation highlights these focus areas which include seven counties - Comanche, Barber, Harper and Sumner in Kansas and Woods, Alfalfa and Grant in Oklahoma. Within these seven counties, SandRidge categorizes its acreage into several broad areas in accordance with the EUR. (Average EUR figures shown on the map are for SandRidge's proved undeveloped locations booked at the end of 2013). The slide also summarizes key parameters of its year-end 2013 type curve which estimates average recovery per well across the entire PUD inventory at 118,000 barrels of oil, 64,000 barrels of NGLs and 1.2 Bcf of processed natural gas.

(click to enlarge)

(Source: SandRidge Energy's March 24, 2014 Investor Presentation)

A visible stand-out on the EUR map is the focus area which includes the southern half of Comanche County in Kansas. This area is assigned the highest PUD EUR: 542 MBoe per well versus 380 MBoe on average.

A "deep dive" analysis of SandRidge's well performance in Comanche County helps to better understand the nature and economics of the company's drilling inventory in this operating area. The following sections present and discuss specific data by area. Key conclusions are summarized at the end of the article.

Comanche County Focus Area

Comanche County represents the second, after Harper County, most active drilling area for SandRidge in Kansas. I have reviewed performance of approximately 70 horizontal wells drilled by SandRidge in Comanche since 2011, which I believe captures the vast majority of the company's horizontal wells in the area for which data is available as of March 2014 (all production data is through November 2013).

SandRidge's drilling activity in Comanche County has been concentrated around a relatively small number of focus areas. Within those areas, wells have been drilled mostly in "clusters" (part of the reason is the dependence on production infrastructure). As a result, a large portion of the company's acreage in the county remains unevaluated or under-evaluated.

While infrastructure availability has a strong impact on how the acreage is being drilled out, another important factor that seems to drive the selection of new drillsites is existing prolific wells, both recent and legacy, that give reasons to expect repeat strong performance.

In Comanche County, SandRidge has focused its drilling in three key areas (shown on the map below):

The evaluation and development have been most active in the County's northwestern corner where SandRidge has brought on production over 40 horizontal wells since 2011. SandRidge has assigned a 237 MBoe EUR to its 2013 PUDs in the northern half of Comanche, which is substantially below the company-wide average. A detailed analysis of well performance in northern Comanche County and its correlation to the company's EUR guidance will be provided in my follow-up article.
In southern Comanche, SandRidge has drilled most actively in what has proven to be a prolific natural gas sweet spot (where, as of November 2013, the company had brought on production at least 20 horizontals). Another evaluation area is located about ten miles to the east (where at least 9 operated horizontals were producing as of November 2013).

(click to enlarge)

(Source: Zeits Energy Analytics)

The Natural Gas Sweet Spot

Two years ago, SandRidge focused its attention on a prolific gas-producing legacy area in east-central Comanche (Collier Flats/Collier Flats East fields). In mid-2012, the company drilled a horizontal well, the Pepper 3419 1-4H, few miles to the east of the Collier Flats area. The well tested with a solid natural gas IP rate.

With time, the Pepper well proved to be an outstanding gas producer (at least by the standards of the Mississippian), delivering 0.7 Bcf of high-Btu gas during the first 16 months. Cumulative oil production from the well was weak - just ~3,400 barrels during the same period (which probably was expected). Of note, the well's production ramped up slowly (the peak was reached during month 5) and, after dropping 75% from its peak, stabilized at an essentially flat rate of 0.7 MMcf/d during the last four months for which data was available. The Pepper 1-4H remains the strongest gas well among SandRidge's horizontals producing in this area.

From mid-2012 through November 2013, SandRidge brought on production at least 20 horizontal Mississippian wells within the sweet spot' core and in its vicinity. The following graph shows cumulative natural gas production by well. Detailed production data for these wells is presented in the spreadsheet below. Averaging across the well sample, cumulative gas production for the first 12 months was ~340 MMcf per well. Oil represented approximately 8% of the cumulative BOEs produced, or approximately 4,500 barrels per well during the first 12 months.

In contrast to the majority of other areas in the Mississippian play, drilling returns in this location are defined by natural gas EURs and gas price realizations, not by oil.

(click to enlarge)

(Source: Zeits Energy Analytics)

Having analyzed production data for the 20 wells, it appears that the sweet spot's core is localized within a relatively small area (approximately one township in size). SandRidge's step-out wells - in the area marked as Tier I on the map below - have shown weaker performance relative to the wells within the core.

(click to enlarge)

(Source: Zeits Energy Analytics)

SandRidge's production history in this area is still too short to make a reliable prediction of the decline trajectory. However, the company's 542 MBoe EUR estimate does not appear unreasonable based on the well data for the core area (but may be too high if applied to locations in Tier I).

SandRidge did not provide oil EUR for this area. Based on my estimate, the oil EUR per well is low and is unlikely to exceed 20-25 MBo per well.

Given SandRidge's relatively low D&C cots and infrastructure control in select areas, 542-MBoe PUD locations should be economic in a $4.50/MMBtu gas price environment, assuming a meaningful price uplift from the NGLs. However, drilling returns for such wells would be lower than what is implied by the company's 388 MBoe average type curve. As a result, despite the impressive "headline EUR," this area is unlikely to be top-ranking in the company's current drilling plan.

Of note, lease ownership in the core of the gas-prone area appears highly fragmented (which is not a surprise given the area's prolific legacy production). While opportunities for lease consolidation may exist, lease acquisition costs would likely be higher than the average for the play, which will ultimately impact drilling economics.

(click to enlarge)

(click to enlarge)

(Source: Zeits Energy Analytics)

Sweet Spots Versus 'Ram Pastures'

The highly productive sweet spot described above appears to be the only one that SandRidge has been able to delineate on its acreage in Comanche County so far. In other areas, unfortunately, the company's drilling results have been mostly disappointing.

In the southern half of Comanche, SandRidge drilled nine horizontal wells located approximately 5-10 miles to the east from the gas sweet spot (the map below). Despite the proximity of the two areas, the nine eastern wells show radically different productivity and oil/gas mix: the wells are much "oilier" but a lot less prolific.

(click to enlarge)

(Source: Zeits Energy Analytics)

Just as it was the case with the gas-prone area to the west, the drilling program here seems to have been triggered by the success of SandRidge's first horizontal test, the Sara 3317 1-34H. The well was brought on production in May 2012 and tested with a strong oil IP rate. The well produced 44,100 barrels of oil in the first 17 months through November 2013, which is an excellent result. Oil represented 65% of the well's cumulative production on a two-stream basis. SandRidge's map shows that the company has invested in production infrastructure in this area.

Despite the success of the first well, the area did not live up to the initial expectation. The eight follow-up Mississippian horizontals did not come anywhere close to the first well in terms of production rates.

The graph below shows cumulative oil production for the nine wells. On average during the first 12 months, they produced only about 10,000 barrels of oil, less than half of what is implied by SandRidge's updated 118 MBo oil type curve. If the original well is excluded as an outlier, the average for the remaining eight wells would be less than 8 MBo over the first year. After being online for less than two years, the majority of these eight wells are now essentially stripper wells and, in my estimate, are unlikely to produce more than 30 Mbo, on average, over their economic lives.

In terms of gas volumes, the nine wells' performance was not much stronger, also tracking far below SandRidge's type curve. Cumulative gas production volumes are shown on the second graph below.

(click to enlarge)

(click to enlarge)

(Source: Zeits Energy Analytics)

Even if drilling & completing was the only cost of adding incremental wells (which is never the case), new drilling in this would still be hard to justify, based on these production data. It is no surprise that SandRidge has not drilled new wells in this area since October 2012 (the table below).

(click to enlarge)

(Source: Zeits Energy Analytics)

To Drill Or Not To Drill?

Based on the maps provided by SandRidge in its presentations, the company has significant amount of undeveloped (and in many cases unevaluated) acreage in Comanche County. What is notable, after having drilled over 70 horizontal wells in the County, SandRidge's inventory of economically competitive drilling locations appears to be limited mostly to the singular, relatively small natural gas-prone area. In other areas, the company still needs to identify economically viable sweet spots via exploration.

As a result, SandRidge is likely facing a difficult dilemma - to continue testing its acreage with a risk of new disappointments, or to limit its effort to the best delineated inventory only.

While the latter approach would appear logical, given the technical challenges in the play, it potentially comes in conflict with the company's aggressive spending plan. SandRidge plans to drill 460 gross wells in the Midcontinent this year alone. At this pace, the company will quickly burn through its top-tier delineated development inventory and will again face the need to take on significant exploration risks.

Do Well Results Improve Over Time?

One minor observation is worth mentioning. The production data shown above indicate that, in few cases, infill wells have been less prolific than the initial producer that they offset. While this may reflect interference between adjacent wellbores, the statistical nature of the fractured carbonate may also be at play.

Even over very short distances, performance correlation between wells may break down, without obvious reasons. In other words, even if the well is drilled right next to an existing prolific producer, there is no guarantee that such well will also perform strongly.

It appears that the general expectation among investors and industry practitioners is that well performance should improve over time as a result of the technical learning curve. This has generally been true in several other high-profile resource plays (Eagle Ford, Bakken, etc.). If the well-to-well performance correlation in the Mississippian is indeed poor, this expectation may be frustrated.

As the industry tries to place many additional wellbores in the immediate vicinity of existing prolific producers, a more pedestrian outcome for these new offsets may create an impression of deteriorating performance.

Conclusions

Independent verification of SandRidge's well performance in southern Comanche County helps to interpret the company's 542 MBoe PUD EUR estimate for the area. The stand-out EUR appears to be driven by a high weight in the company's PUD inventory in Comanche County of a singular prolific sweet spot. The EUR reflects high well productivity over a relatively small area within the County but should not be extrapolated beyond the localized sweet spot area.

Assuming that all SandRidge's PUD locations in the southern half of Comanche County are associated with this gas-prone area, the oil component of the 542 MBoe EUR is likely very low (possibly in a 5% range). As a result, drilling economics in this area are likely inferior to what is implied by SandRidge's 380 MBoe type curve.

The company's ability to scale up its drilling effort in this area may be limited both by the natural limits of the sweet spot and due to several other operators holding acreage within its core.

This prolific natural gas asset appears to be SandRidge's only true success in Comanche County so far:

Drilling results for the nine horizontal wells in east-central Comanche are weak and do not lend support for further drilling in the area.
In the northern half of Comanche County, SandRidge estimates the EUR for its PUD locations at 237 MBoe, which does not sound particularly encouraging from the expected return perspective either.

Well productivity challenges that SandRidge faces in Comanche County are in fact not uncommon for the play as a whole: the formation's complexity seems to be the culprit of operators' poor track record of predicting prolific drilling locations, even on delineated properties.

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.
This article is part of Seeking Alpha PRO and is available to you on a time-limited basis. Fund managers subscribe to PRO to discover
research & experts on 3,000+ small & mid-cap stocks in the PRO library.
Learn More about PRO