SandRidge Mississippian Trust II (SDR)

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http://seekingalpha.com/article/2157433-sandridge-energy-set-to-grow?isDirectRoadblock=false&uprof=45

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SandRidge Energy Set To Grow
Apr. 23, 2014 12:10 PM 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 financial position of the company has been enhanced by the recent movements in the assets mix.
The focus on increased efficiency and resource rich areas should result in better operational results.
The improvement in the natural gas prices is expected to continue due to the prospect of exports which should benefit SandRidge in the short-medium term.

SandRidge Energy (SD) engages in on-shore oil exploration and production activities, and the company is mainly focused on the Mississippian oil play of the northern Oklahoma and southern Kansas. The company mainly drills low-risk and high rate of return oil wells in the shallow carbonate reservoirs. SandRidge has been taking steps to improve its capital efficiency and it is continuously growing its assets in the Midcontinent region.

The market has been very happy with the performance of the company and the stock has gained about 47% over the last twelve months. However, some peers of the company such as Newfield Exploration (NFX) and Stone Energy (SGY) have left SandRidge behind, showing that the growth in the sector has been strong. Newfield and Stone Energy gained 63% and 156% respectively. However, despite strong upward movement in the price over the last twelve months; we believe there is still room for SandRidge to grow.

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SandRidge Growth Story

The company has excelled in the exploration and production with a primary area of focus in the Mississippian formation - a shallow hydrocarbon system in the Midcontinent area of northern Oklahoma and Kansas. SandRidge generates the majority of its revenues from the production and sale of oil, natural gas and NGLs. The image below shows the revenue mix over the last three years.

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Source: SEC Filings

The company has moved its focus towards the oil rich Midcontinent region which carries considerable output and growth potential. During the last year, the company drilled a total of 511 wells, which includes proved and developed reserves, with a key target on the 1.8 million acre Mississippian formations.

According to the well results provided by the company in the investor presentation in March, the most highly yielded areas include Comanche in Kansas State with a yield of 542 MBoe along with Alfalfa and Woods in Oklahoma, yielding 388 MBoe. Among the newly reported results by the company, two wells displayed prominent throughput potential which includes; Highfill 2711 #2-12H located in the Alfalfa County, which showed an impressive output rate of 1,394 barrels of oil and 2.4 MMcf of natural gas per day. Also, the Alfalfa County includes Highfill 2711 #1-12H which resulted in 739 barrels of oil and 1.9 MMcf of natural gas per day. The production of these two wells increased by the end of March and contributed greatly towards the company's first quarter results.

Impact of Divestments

The recent asset divestments should not be ignored while analyzing the performance of the company over the last few years. During the last year, SandRidge divested its operations in the Permian Basin for net proceeds of $2.6 billion - the funds were used to redeem senior notes worth $1.1 billion due 2016, and to fund its capital expenditures in the Midcontinent region.

The company achieved its goals for the divestment and managed to decrease its long-term debt by about 26% over the last year. At the moment, the company has approximately $3.2 billion in long-term debt which came down from $4.2 billion at the end of the last year. As a result of the reshuffling in the long-term debt, SandRidge does not have any repayment obligation regarding its long-term debt before 2020. However, if we include the off-balance sheet and contractual obligations; the company has an obligation of $428.6 million in less than a year. The image below shows the breakdown of the obligations of the company.

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Source: SEC Filings

The current cash position of the company is very strong and its cash and cash equivalents stand at over $814 million, mainly due to the asset sales and continued growth in the operating cash flows. The company further wants to fund its drilling operations in its primary focused area by the recent sale of Gulf of Mexico and other gulf coast properties for $750 million in February 2014.

Future Growth Prospects

The company is focusing on becoming a high-return, growth oriented resource conversion company. This has been proved by the disposal of its Permian Basin, Gulf of Mexico and Gulf Coast properties. Also, since the new management came in, the company has delivered three consecutive quarters where it beat the estimates and raised guidance for the future. Moreover, the company has increased focus towards the natural gas production over the last two years and increased its proved and developed natural gas reserves by 6%; however, oil still remains the largest contributor towards the total revenues of the company. The image below shows the reserves position of the company.

(click to enlarge)Source: SEC Filings

The situation has materially changed for the natural gas market over the last few months, and the recent increase in the prices has encouraged the natural gas producers to utilize their assets better. Furthermore, the prospect of exporting natural gas to Asia and South America will support the upward trend in the natural gas prices. As a result, an increase in the natural gas production will likely benefit the company in the short-medium term.

Being focused on a single energy variant could slow the company growth and efficiency in the longer run. However, SandRidge is focusing on optimizing its development plans to achieve optimal results in the exploration processes. The multi-well pad drilling is the new cost saving technique in the energy exploration industry. Using the technique, the company observed a 7% year-over-year decrease in the drilling and completion costs in its Midcontinent drilling in the last year.

Conclusion-

SandRidge has been performing brilliantly -WTH ?????? which has translated into the stock price appreciation. The financial position of the company is stronger and its leverage has decreased along with the increase in the maturity of its long-term debt. The growth in the operating cash flows is strong, which has resulted in increased cash balances of the company. Furthermore, the company is focusing on operational efficiencies along with resource rich areas which should allow the company to extract better results from its operations and enhance future profitability.