SandRidge Energy Inc (SD)

[ErnieBilco]

Summary
SandRidge has done very well to reduce lease operating expenses to below $4 per BOE in Q3 2020 compared to over $7 per BOE in 2019.

This has enhanced its value as it tries to harvest its assets.

It sold its North Park Basin assets for $47 million, a decent price that is estimated at around 3.0x 2021 EBITDAX.

SandRidge may be able to generate around $100 million in positive cash flow between Q3 2020 and the end of 2023.

That will give it around its current share price in net cash. Further value improvement will depend on what it does with that money.

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SandRidge Energy (SD) has done well to reduce its lease operating expenses and also sell its North Park Basin assets for a solid price. In particular, SandRidge has done a fantastic job of reducing its lease operating expenses from $7.61 per BOE in 2019 to $3.94 per BOE in Q3 2020.

The cost reduction combined with improved oil prices this may allow SandRidge to generate around $100 million in positive cash flow by the end of 2023. SandRidge is worth around its current share price based on the cash flow that it can generate over the next few years, but may have an opportunity to generate additional value depending on how it uses its cash balance.

North Park Basin Sale
SandRidge announced the sale of its North Park Basin assets for $47 million. This appears to be a decent price for the North Park Basin, which averaged around 2,200 barrels of oil production (NPB production is 100% oil) in Q3 2020. The purchase price is approximately $21,500 per flowing barrel based on Q3 2020 production, but probably higher based on current production levels as SandRidge last brought wells to sales in Q3 2019. I estimate that the purchase price is also roughly 3.0x 2021 EBITDAX at mid-to-high $40s WTI oil.

The North Park Basin accounts for a relatively small amount (under 10%) of SandRidge's total proved developed reserves and total production, although it does account for a significantly larger amount value wise due to the 100% oil content. In Q3 2020, the North Park Basin accounted for around 45% of SandRidge's total oil production and around 27% of its total revenues.

The North Park Basin also accounted for around 24% of its PDP PV-10 (at mid-$50s oil) at the end of 2019, and 36% of its proved reserves PV-10.



Source: SandRidge Energy

SandRidge did pay $190 million for the North Park Basin assets in 2015, but that was a different environment under different management.

Harvest Mode
The sale of the North Park Basin assets reinforces the idea that SandRidge is in harvest mode. SandRidge mentioned in March 2019 that its NW Stack and Mississippian Lime assets did not have compelling economics at mid-$50s oil. The proved undeveloped PV-10 for those assets was only $14 million at the end of 2019 using $55.69 WTI oil and $2.58 NYMEX gas.

SandRidge now has 20,000 BOEPD of remaining production (based on Q3 2020 production levels) with approximately 14% of that production being oil, 35% NGLs and 51% natural gas.

SandRidge's oil percentage is declining over time, as its oil decline rate appears to be higher than its overall base decline rate. SandRidge's oil percentage (excluding the North Park Basin) went from 18% in Q4 2019 to 14% in Q3 2020.

% Oil Q4 2019 Q1 2020 Q2 2020 Q3 2020
Miss Lime 16% 14% 14% 12%
NW STACK 44% 34% 32% 31%
SD (Ex. NPB) 18% 15% 15% 14%
Thus SandRidge is probably looking at a 12% to 13% oil percentage for 2021.

At current strip prices, SandRidge may be able to generate approximately $100 million in positive cash flow by the end of 2023. This assumes that SandRidge is able to keep lease operating expenses at or below $4.00 per BOE as its production continues to decline.

SandRidge had a working capital deficit of approximately $25 million at the end of Q3 2020. This excludes asset retirement obligations and derivative contracts. The sale of its North Park Basin assets and its positive cash flow would result in it having around $122 million in cash at the end of 2023 (with no working capital deficit). This is approximately $3.40 per share.

Source: SandRidge Energy - Q3 2020 - 10Q

SandRidge would be able to generate a modest amount of positive cash flow per year beyond 2023, but it also reported $75 million in asset retirement obligations at the end of Q3 2020. It is uncertain whether any of that is associated with the North Park Basin assets, but given that the NPB only had 5% of SandRidge's net wells, it seems that most of the asset retirement obligations are associated with its remaining assets.

At the end of 2023, SandRidge's remaining assets may not be worth much net of asset retirement obligations.

Conclusion
SandRidge has managed to improve its value by significantly reducing its lease operating expenses. It also sold its North Park Basin assets for a decent price. With its remaining assets having quite limited development potential, it is now firmly in harvest mode and could generate around $100 million in positive cash flow between Q3 2020 and the end of 2023 at current strip prices.

This would result in SandRidge ending up with around its current share price in net cash at the end of 2023, although the remaining asset value at that point may be minimal due to asset retirement obligations. However, having a significant amount of cash on hand would allow SandRidge to potentially generate additional value via acquisitions.

https://seekingalpha.com/article/4394736-sandridge-energy-strong-cost-reduction-efforts-and-decent-price-for-north-park-basin-assets?utm_medium=email&utm_source=seeking_alpha&mail_subject=elephant-analytics-sandridge-energy-strong-cost-reduction-efforts-and-a-decent-price-for-north-park-basin-assets&utm_campaign=rta-author-article&utm_content=link-1