Q4 2019 Earnings Call

Hi, and welcome to the Sandridge energy fourth quarter and full year 2019 earnings conference call.

At this time all participants are in listen only mode. After the speakers presentations will be a question and answer session.

Ask the questions during the second only to press star one on your telephone if you require any further assistance. Please press star zero I would now like to hand or conference over to your speaker today John Roberts. Please go ahead.

Thank you and welcome everyone with me today or John Theater, Chief Operating Officer, an interim President and Chief Executive Officer, Mike Johnson, Chief Finance Financial Officer, Atlanta, Scotland, SVP of corporate reserves.

We would like to remind you that in conjunction with our earnings release and conference call. We have posted slides on our website under the Investor Relations tab that we'll be referencing during the call.

Today's call contains forward looking statements and assumptions, which are subject to risks and uncertainty and actual results may differ materially from those projected and these forward looking statement.

We will also make reference to adjusted EBITDA and adjusted DNA and other non-GAAP financial measures reconciliations of these measures can be found on our website now let me turn the call over to John.

Thank you and good morning.

Today, We will review, our 2019 business performance, along with 2020 outlook and guidance.

Before we dig into the numbers I'd like to look back at changes that occurred in our business environment during 2019.

Which were will provide context spar results.

One of the obvious yet most significant changes occurred due to decreases in our natural gas and NGL pricing.

Although oil prices were quite volatile throughout the year natural gas prices decreased continuously with only minor seasonal improvement.

Along with this decline NGL realizations saw a precipitous decreases.

This combination has negatively impact impacted our business as well described shortly.

Low commodity prices have affected many E N P companies.

Resulting in impairments due to decreased PV 10 values from nearly a 10 dollar drop in oil and a 50 cent drop in natural gas.

Because of these pricing pressures.

Drilling schedules for undeveloped reserves had been modified to adopt a new strategies.

For Sandridge. These commodity price changes have also resulted in lower cash flow.

During the second half of last year.

Fortunately.

We have minimal leverage and debt servicing commitments relative to the industry.

The impact from all of these factor influences, how we formulate our tactics and achieve our stated strategies.

Our business strategy to provide shareholder value isn't any different.

Yeah, we have shifted our focus to remain patient during this period of low prices harvesting cash flow and maintaining a clean balance sheet through the cycle.

We are rigorously seeking opportunities to reduce the cost structure of our business.

We have made and continue to make meaningful reductions to our general and administrative costs.

We have put plans in motion for 2020, reducing our lease operating expenses I just below 20% from 2019.

This all leads to a plan that should generate positive cash flow and maintains optionality for selective capital spending should commodity prices normalize.

Or for a in d. as more and more distressed opportunities arise.

We do have minor investments that's still generate good returns and short payouts at current prices and we'll pursue several of these opportunities in 2020.

Fortunately, we have no long term contracts or other commitments the obligate us to a drilling program until we're ready.

We will have more discussions our outlook and 2020 plans when we discuss guidance and our capital budget plan and a few minutes.

We intend to efficiently run the business and deliver on our forecast and guidance numbers.

As we did during 2019.

Additionally, we continue to evaluate merger and acquisition opportunities.

We believe bid asks we'll continue to narrow in this environment.

Now with a lower cost structure, we believe patience is the best approach in deal evaluation, making sure not to over lever our company.

Moving now to our financial results well end the call over to Mike.

Thank you John and good morning to everybody on the call.

Although 2019 was a year full of challenges, we successfully met where outperformed on all guided metrics as shown on slide five in particular, we beat full year guidance on production capital expenditures Halloween and adjusted DNA.

2019 was a year of happens during the first half we reported generally positive results as commodity prices compared favorably with 2018.

As oil natural gas and NGL prices consistently declined throughout the second half of the year, we'd be we began to see a deterioration and earnings and the impact of noncash impairments. However, we feel our diverse asset base served us well in this volatile.

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To illustrate the impacts of commodity prices on our current asset portfolio.

Please see slide six and seven and our deck.

Slide six illustrates full year 2019 asset level margins separately for our mid continent, and North Park assets.

North Park production is essentially 100% oil.

So this assets gross margin remains attractive and stable and the $30 per BOE a day range throughout the year.

The mid Con mid continent, where 70% of art 2019 revenue was generated.

Was impacted by natural gas prices that decrease throughout the year and NJ NGL realizations that effectively crashed in 2019.

As shown on slide seven.

On an annual basis, we realized just over $12 per blended NGL barrel and 2019, where half of what was realized in 2018.

This helped drive mid continent operating margins in 2019 down to approximately $10 per Boe <unk> as compared to over $18 per BOE. We in 2018 and this is further contrasted with the healthier margins and our North Park asset.

That were three times that at the mid continent.

While we are prepared for a prolonged period of depressed prices.

Based on forward contracts, we expect natural gas and NGL prices to eventually normalize closer to historical averages throughout the year.

Moving to our fourth quarter financial results in current liquidity, we posted a fourth quarter net loss of 249 million.

Compared to net income of 54 million in 2018.

After adjusting for a 244 million impairment and other nonrecurring items, we generated a $4 million net loss for the quarter.

As shown on slide eight.

Fourth quarter, adjusted EBITDA was 32 million, an increase of 24% over third quarter.

Over the third quarter, yet down compared to 45 million in 2018 capital expenditures for 2019 amounted to 162 million with 13 million spent during the fourth quarter.

The reduced capital spend in the fourth quarter was a significant factor leading to the creation of 19 million of free cash flow during the quarter lease operating lease operating expenses were 19 million in the fourth quarter down 15% from last year adjusted DNA for the quarter of.

5 million was down 20% from 2018, a meaningful year over year improvement.

Shifting now to the balance sheet, our liquidity remains strong with 3 million in cash and 49 million currently drawn on our 225 million dollar credit facility.

We remain committed to maintaining attractive debt metrics and a clean balance sheet throughout 2020, as we add execute on a modest capital program, while generating free cash flow.

On the derivative front, we placed swaps on a portion of our 2020 oil production.

These contracts amount to 3000 barrels per day at just over $61 per barrel for the first quarter and 2000 barrels per day at $60 per barrel for the second quarter.

We will continue to monitor the market and execute additional contracts when commodity prices are trading favorably and opportunities arise.

Lastly, I'll briefly review, our 2020 outlook and guidance on slides nine and 10.

We developed our 2020 budget, assuming oil prices would average $53 a barrel and natural gas prices would average $2.15 per mcf.

Obviously, if these assumptions deviate from the actual market performance will adapt and modifier our budget accordingly.

This year as previously mentioned, we focused our efforts on reducing our cost structure and minimizing capital spending to maximize free cash flow.

Production is expected to decline to 8.2 million BOE, we at the midpoint and we plan our capital expenditures to be in the range of 25 to 30 million, primarily focusing on high return projects with quick payouts.

Lease operating expenses are expected to decrease from 91 million.

In 2019 to 75 million a plan decrease of 18%.

Note that other detailed guidance metrics are provided on page four of our earnings release and page 10 of our slide deck.

This combination of metrics is anticipated to provide positive full year 2020 free free cash flow.

That completes my comments so at this point I'll turn the call back to John for a review of 2019 operations and his closing remarks.

Thanks, Mike.

So we'll now turn to look at operational results for the full year 2019.

As Mike mentioned, our performance in each asset improved upon full year guidance targets for capital expenditures production and lease operating expenses.

The company's spent 162 million with 106 million for drilling and completion.

We drilled 21, new wells and brought 30 wells to sales this year.

The majority of our capital expenditures were focused in North Park, where we brought 16 of the 30 new wells online.

Production for the year was 12 million barrels of oil equivalent a 3% decline from 2018.

As new production in North Park and northwest stack.

Nearly offset ongoing declines in our miss lime producing wells.

For the year, we had an average lifting cost of $7.61 per Boe Lee.

Slight increase over 2018, driven primarily by higher cost associated with water disposal related to flush production from new wells.

Overall lease operating expenses were 2% below our midpoint of guidance.

Highlights of our 2019 drilling program include completing the Drillco and our northwest stack asset and finalizing spacing tests within North Park.

Drillco funded wells successfully established a solid production base and deep geological insights into where and how to develop the best drop in our asset.

Although we only have a few wells budgeted.

We have an inventory of wells that deliver solid returns when prices improve.

In North Park, our spacing test have been instrumental in establishing a pattern and density for developing the core of the field with 15 wells per section into stratigraphic rose.

In our Peters well spacing test.

We experienced well to well communication and pressure decline on the six wells drilled on a 23 well per section spacing pattern using three stratigraphic grows.

We were able to maximize our understanding of the field.

While minimizing the financial impact from testing only six wells in the pattern.

Avoiding the much broader industry approach to full section development with too many wells.

Our final four well spacing test using a 15 wells per section pattern with two stratigraphic rose.

Has been the key to understanding the best approach for full field development.

The Patriot wells exceeded our type curve early on and continue to perform above expectations.

We also performed a re frac of legacy well offsetting the Patriot wells.

The early results of this completion are very encouraging.

And we are evaluating additional refrac candidates.

For the year, New wells helped contribute to a north Park basin production increase of 48% year over year being 100% oil and achieve 52% of total company oil production during the fourth quarter.

As Mike discussed this increase in Northpark oil contribution has helped improve total company margin and operating cash flow.

For 2020, our capital budget guidance is focused on capital well work activity, but does include drilling to northwest stack wells that are in a key section.

We are robust returns are expected even at today's prices.

We do have contingency plans in place for 2020, Northpark drilling well the onset of higher oil price.

We have not included Northpark drilling capex at this stage of our budgeting process as we continue to progress several other initiatives that will provide long term value.

These are one midstream gas takeaway options.

We are pursuing a midstream alternative that could allow for the processing and sale of gas will then Colorado.

Limiting the amount of pipeline required right of way and permit time to achieve a modest amount of gas sales from the field.

This is still on a fairly early stage of development, but is promising from a number of perspectives.

Two is refrac consideration.

Due to the success of our grizzly well Refrac. We believe there are numerous other opportunities within the field to exploit.

And three our regulatory efforts, we continue to work with our regulatory partners define optimal and more efficient development options for when we are ready to return to drilling.

Shifting now to our year end reserves.

Proved reserves decreased from 160 million barrels of oil equivalent.

At year end 2018 to 90 million barrels of oil equivalent at year end 2019.

Approximately 70% or 49 million barrels of oil equivalent of the total reserves downward revision.

Is associated with the decrease in year over year, FCC commodity pricing and increase price differentials.

The remaining or reserve decrease primarily resulted from a combination of production rescheduling puds.

Modest performance revisions and wells being shut in at their economic limit.

Many of these wells could be returned to production under the right pricing environment.

Developed reserves made up 69% of the company's 2019 estimated proved reserves.

The company's standard measure and PV 10 at December 30, Onest 2019 was 364 million.

Utilizing your end FCC pricing.

Obviously should we see prices improve throughout this coming year some of the reserves and associated PV 10 could be added back to our proved reserve base with an adjusted drilling schedule.

As I wrap up I'd like to express my appreciation to our entire sandridge team for a year with exceptional safety performance.

Our culture continues to be one that places safety and environmental stewardship as a high priority, which was evident as we finished the year with records achieved in lowest total recordable incident rate and moving vehicle incident rate.

Finally, I'd like to reiterate that our strategy remains intact as we plan for 2020, assuming $53 per barrel of oil and $2.15 per Mcf.

With continued low NGL realization.

Our focus shifts to patients while implementing a plan that includes a rightsized lean cost structure and minimal capital spending concentrated on existing producing well projects that have robust economics in this environment.

On the adjusted DNA front.

Changes were implemented in February that will result in material improvement over 2019.

We reduced corporate office staff from 120 to 57.

And are working on non payroll efficiencies.

Total gionee will improved from 29 million in 2019.

To 19 million for 2020 at midpoint of guidance.

A decrease of $10 million for 34%.

We will remain flexible and opportunistic but disciplined in 2020.

Layering in additional hedges picking up development activity and evaluating M&A opportunities as they arise throughout the year.

This ends our prepared remarks I want to thank everyone for joining our call today.

I'll now turn the call back to our moderator and open it up for any questions.

At this time I'd like to remind everyone in order to ask a question. Please press star and the number one on your telephone keypad, well pause for just a moment to composite kuni roster.

Your first question.

Okay. There are no questions at this time I'll turn the call over to John centers.

Alright, I want to thank everyone again for joining the call we're committed to drive shareholder value from the assets, we own and manage.

This brings our conference call to an end and we look forward to updating you with our progress next quarter.

This concludes today's conference call you may now disconnect.

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