Q4 2021 SandRidge Energy Inc Earnings Call
Good morning, My name is David and I'll be your conference operator today at this time I'd like to welcome everyone to the Sandridge Energy fourth quarter 2021 earnings call. Today's conference is being recorded all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there'll be a question and answer.
Session, if you'd like to ask a question. During this time simply press the Starkey followed by the number one on your telephone keypad, if you'd like to withdraw your question Press Star one once again.
Scott Preston Prestwich director of Finance and Investor Relations you May begin your conference.
Thank you and good morning, everyone with me today are Grayson, Brandon, our CEO and CFO .
The <unk> community, our CFO and CEO as well as deemed perish, our VP of operations.
We would like to remind you that 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 in these forward looking statements.
Also refer to adjusted EBITDA, and adjusted G&A and other non-GAAP financial measures reconciliations of these measures can be found on our website with that I'll turn the call over to Grayson.
Thank you Scott and good morning.
Hopefully you have had time to review the earnings release and Investor presentation, We posted yesterday after market close.
We will be referencing both during the call.
The company is well positioned to capitalize on recent commodity price tailwind to.
To include expanded capital program this year with focus.
<unk> drilling in the core of the northwest stack.
And a continuation of our well reactivation program.
Before expanding on this in the presentation. So I will touch on a few highlights from the fourth quarter and full year 2021 results.
Thank you Grayson simply put 2020.
One was a strong year, despite no new drilling or completion activity.
To keep January to December production flat, averaging $18 six Boe per day for the company and $18 four Boe per day for mid Con the production for the quarter as well as the year benefited from the reactivation of over 129 wells throughout 2021 that were curtailed during commodity price down.
<unk> in 2020.
Net cash, including restricted cash increased to approximately $140 million, which represents a net cash of $3 84.
Our share of our common stock issued and outstanding as of December 31, 2021.
$41 million increase from the prior quarter was primarily driven by production from a well reactivation program higher commodity price and commodity price realizations and our continued focus on cost minimization.
As of March seven 2022, the company's cash on hand, including restricted cash was approximately $161 million.
The company has no remaining term debt revolving debt obligations of the company repaid $20 million term loan in full and terminated its previously existing credit facility in early September .
Our adjusted EBITDA increased to approximately $37 million for the quarter.
And approximately $114 million for the year again, despite no new drilling or completion activities. During the idle period adjusted EBITDA as a unique metric for sandridge as we have no.
And very little T. Given that we have no debt and a substantial NOL position commodity.
Commodity price realizations in the fourth quarter increased by 9%, 36% and 5% from the prior quarter to $75 72 per barrel $3 94 per Mcf and $28 39 per barrel for oil gas and Ngls, respectively before considering the impact of hedges.
As of today, we have no open hedge position for commodity derivative contracts. However, as we invest shareholder capital into our drilling completion and well reactivation program. We will work side by side with our board to evaluate potentially enter into hedge positions in order to help protect investor capital spent.
As alluded to earlier, we have maintained our large NOL position, which was over $1 7 billion as of year end 'twenty. One our NOL position has and will continue to allow us to shield our cash flows from federal income taxes.
Our cost discipline and continued to improve during the quarter with previously implemented initiatives by the board and management further manifesting in our financials, partially offset by an increase in mortgage activity associated with well reactivation. This year total G&A was lower year over year at approximately $9 7 million.
Or $1 42 per Boe.
Compared to $15 3 million or $1 76 per Boe for the prior year and.
And adjusted G&A decreased by $5 8 million to $8 3 million or $1 22 per Boe from $14 1 million or $1 62 per Boe.
In the prior year.
The team also help LOE and expense workovers to approximately $36 million or $5 30 per Boe during the year, while reactivated over 129 wells. We believe we compare favorably with our peers with regards to G&A and LOE on both an absolute and apparel.
Mrs.
We continue to generate net income for our shareholders. During the quarter. We earned net income of approximately $37 million, an approximate 29% increase from the prior quarter at $117 million or $3 21 per share for the year.
Before shifting to our Investor presentation, we should note that our earnings release posted yesterday and the 10-K that we will file later today provide further detail on our financial and operational performance during the quarter and full year ended 2021.
Thank you Phil.
Now turning to the presentation.
We thought it might be helpful to walk through some of the company's highlights.
Management strategy and other business detailed over the past few years, the board and management have focused the company's assets optimize the production profile streamline his organization and cost structure and strengthened its balance sheet.
As a result, we entered the year positioned to capitalize on robust commodity prices with high rate of return drilling in the northwest stack.
<unk>, well reactivation and further strengthened cash flow from our already producing properties mid con.
Let's start on page four.
<unk> mentioned 2021 was truly an exceptional year for the company.
We were able to beat production by more than 6% relative to the midpoint of guidance.
Driven by our well reactivation program was more than 20% increase the guidance at the beginning of last year.
Note that we were able to added production offsetting annual decline for the year with $11 million of capital, which.
Which was 9% below the midpoint of guidance.
On the expense side, we're able to come under adjusted G&A midpoint of guidance by 35%.
Low at $36 million, despite increased activity and inflationary pressures.
And the other notable accomplishments for the year.
We paid off our previous $20 million term loan and ended the year with zero debt.
To close the sale of North Park basin assets in February of last year.
<unk> and focusing our asset base in the mid continent region.
And completed the purchase of all overwriting royalty interest asset of Mississippian Trust one.
The key highlights the sandridge on page five.
Again, our asset base is focused in the mid continent region, with primarily PDP wells that which do not require any routine flaring our produced gas.
These well understood assets almost fully held by production with a long history shallow and diversifies production profile and double digit reserve life.
As a result of this focus on the mid Con the company was able to keep annual production relatively flat at 18, 6%.
Bo per day, despite no new drilling or completion activities driven in part by the reactivation of over 129, well throughout 2021.
In addition to a continuation of our well reactivation program. This year, we plan to resume drilling with a focused purposeful high return program in the northwest stack.
Listing of nine wells.
We will expand on this later in the presentation on page eight.
Our assets continue to yield significant free cash flow, which added $41 million of net cash including restricted cash this past quarter now totaling nearly $140 million net of debt pay down as of year end 2021.
As detailed on page 14, the company has demonstrated and then the leader and efficiently converting EBITDA to free cash flow given our LOE per Boe cost structure in light Capex last year.
As well as improved commodity prices and realizations.
Further over 75% of operated wells will produce profitably down to $40 <unk> and $2 Henry hub.
This cash generation potential provide several paths to increase shareholder value realization and it's benefited by relatively low G&A burden.
As we realize value and generate cash our board is committed to utilizing our assets.
Including our cash to maximize shareholder value.
Sandwiches value proposition is materially derisked from a financial perspective by our strengthened balance sheet.
Robust net cash position and financial flexibility and over $1 7 billion.
Noel.
Further the company is not subject to MVC or other significant off balance sheet financial commitments.
Currently the company does not have any open hedging contracts after March of this year.
We could enter into hedges from time to time in support of securing returns for a capital campaign.
Manage commodity risk or other fundamental drivers.
Finally worth highlighting that we take our ESG commitments seriously.
And in a disciplined processes around that.
Page six plays out our go forward strategy in summary, we are focused on growing the cash value and generation capability of our business in a safe responsible and efficient manner, while prudently allocating capital for high return organic growth projects.
While remaining vigilant for value accretive opportunities.
This strategy has four points.
One maximize the cash value generation past the of our incumbent Midcon PDP assets by.
Extending and flattening our production profile with high rate of return Workover and well reactivation.
Initiate a nine well drilling program in the core of northwest stack to economically add production.
Continuously press on operating and administration costs.
Ensure we convert as much EBITDA to free cash flow as possible, while exercising capital stewardship and investing in projects and opportunities that have high risk adjusted fully burden rates of return.
The third it's remained vigilant patient and maintain optionality for opportunistic value accretive acquisitions, we will focus on value, adding opportunities that bring synergies.
Are there leverage <unk> core competencies.
Complement our balanced the company's portfolio or otherwise yield a competitive return.
The final prong is to uphold our ESG responsibility.
Moving to page seven which details our core mid con asset position.
I'm gonna points here are.
Long history and long lived.
Double digit reserve life, Manful, Hi, Rez production history to aid in projections.
Salary base declines that will be lessen further from nearly 30, well reactivation and focused drilling in 2022.
Diversified production profile.
Both from a gas to liquid hydrocarbon mix perspective and value diversity of perspective.
High interest and mostly HCP, which a breakeven and mixed spending commitments to amendments.
Turning to page eight we will discuss this year's drilling program.
We will have a controlled and purposeful start to drilling this year with high graded locations in the northwest stack.
The program consists of nine well that are offsets the highly profitable horizontal well.
Favorable geologic and reservoir characteristics.
The focused area, we will be developing with this year's program has previously been delineated by Sandridge and other reputable operators.
We know this area well.
Approximately 60% of the program will be infill development with the remaining 40% being first wells a section.
Co development that again.
Offsets productive and profitable well.
Of note is that we are benefiting from having a long tenured history and mid con previous development programs and can lever a very tight cost structure to add incremental barrels through our base production and very carefully efficient way.
As Bob mentioned earlier, having no interest or federal income tax further makes our investment dollars spent very capital efficient.
The graph on the bottom of the slide illustrates the average performance of offsets which include both first wells in sections as well as child infill wells drill bit denser spacing than our planned 2022 program as.
As well as an IRR sensitivity over a range of flat pricing.
It is important to note that historically the play has been developed at 3% to five well spacing.
This year as well that is space conservatively at two to three well per section spacing.
Gross D&C costs are estimated to be $4 $75 million for single laterals and $7 million for extended reach laterals.
Which reflect casing drilling and other material equipment and services already secured at reasonable cost and current market estimates.
We will continue to lean forward and requisitioning the remaining items for the program to offset inflationary pressures.
However, inflation will be a central focus this year and has bearing on unsecured costs and future drilling decision.
Program result, commodity price stabilization or further flattening.
Ill call to include the effectiveness of inflationary controls or projections.
Vince or well spacing and other factors will guide future joined decisions and inventory considerations.
We will continuously assess these factors along with our board evaluate the potential for future capital allocation in a prudent manner.
Put simply we will prove out the results first and then go from there.
Page nine addresses our approach to production optimization.
Last year, we brought back online 129 wells, which collectively added an average of 3200 gross barrels of equivalent production per day and delivered more than 100% casually weighted rate of return.
We plan to continue this program through the remainder of this year bring on approximately 30 incremental well, we will continue to monitor commodity prices, which could influence further well reactivation later in the future. In addition, we plan to convert a subset of these and other PDP wells to a more efficient.
Long term artificial lift method, which will likely reduce their go forward cost.
Shifting to page 10, which outlines our various initiatives of the board and management over the last several years have led to an absolute and per BOE reduction in low of 75% and 30% respectively.
2016.
We are pleased of our expense performance relative to peers.
While we continue to press on operating costs, we anticipate expenses.
Specifically workover expenses to remain in prior period levels as we reactivate more wells this year.
Further we will continue to combat inflationary pressures here as well through rigorous bidding processes, securing material equipment and services over an appropriate tenor to offset market increases as well as continuing to leverage our significant infrastructure operation Center and other companies.
Vintages.
Page 11 illustrate the more than 1000 miles each of owned and operated SWT in electric infrastructure over quicker.
Representing significant prior investment over the last decade plus.
This substantial owned and integrated infrastructure provides the company both costs and strategic advantages.
Bolstering asset operating margin through reduced lifting cost as well as water handling and disposal costs, while de risking with positive free cash flow down to $40 <unk> and $2 Henry hub.
In addition, the Interconnectivity and ample capacity helped buffer against unforeseen curtailment.
Please note that with the assistance from the University of Oklahoma, We continue to evaluate the technical feasibility and potential commercial <unk> of carbon capture utilization and sequestration.
<unk> U S applications across our infrastructure.
While we are interested in opportunities to increase the utilization and profitability of our own infrastructure.
Any project will need to compete for capital within the company's portfolio and demonstrate an adequate rate of return.
Currently there is no significant capital allocated at least in the U S.
On page 12.
To provide an overview of the organizations today over.
Over the last year, plus we have tailored our organization to be fit for purpose.
This change has rebalanced the weighting of field versus corporate personnel to reflect where we actually create value.
And outsource necessary, but more perfunctory and less corporate functions such as operations accounting land administration.
The tax and HR how's.
However, we've retained key technical skill sets that have both the experience and institutional knowledge of our area of operations to support drilling and completion operations.
As well as the ability to flex the additional outsourcing on specialized areas to do more.
Beyond the more than $6 million and per year, G&A savings outsourcing provides us greater flexibility and scalability to adjust the changes in our business or the market.
As page 13 illustrates the effect of our organizational streamlining, which is a 75% and 60% reduction in absolute.
<unk> per Boe.
G&A, respectively since 2018.
Needless to say, we are very pleased with our administrative cost reductions.
That performance relates to our peers.
Now encapsulating many of the points, we discovered lots of the page 14, which highlights the company's efficiency of converting EBITDA to free cash flow.
This metric is important to us.
Quite a smart risk adjusted high rate of return investments are value accretive opportunities. Our goal is to translate as much of the company's value generating resources to free cash flow.
On the lower graph, we can see how sandridge has no debt position stacks up relative to the peers.
Now on page 15, we lay out our guidance for the year.
Let's circle back to page three for a moment to summarize some of the company's current strengths to include.
Year end 'twenty, one SEC proved developed reserves PV 10 of $433 million.
And managements internal unaudited PD reserve PV 10 at March 2nd prices of 546 nine.
Note that this does not reflect market changes over the past peak.
$140 million net cash and cash equivalents at year end 2021, which represents net cash of $3 80 per.
<unk> share of our common stock issued and outstanding.
Flat production over the trailing 12 months with $11 million of invested capital.
The expanded 2022 capital program of high return projects to further enhance production and arrest decline.
To include nine new wells high graded in the core of the northwest stack and continuation of our well reactivation program.
Low overhead top tier G&A of $1 42 per Boe for full year 2021.
No debt in fact negative leverage.
Significant free cash flow and a growing net cash position supported by a diverse production profile low decline multi digit life asset base.
One $7 billion in NOL, which will shield future cash flow from federal income taxes.
Our low operating cost benefiting from a large <unk> and electric infrastructure, requiring little to no future capital to maintain.
This concludes our prepared remarks, thank you for your time.
I'll now open the call to questions.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad, we'll pause for just a moment to compile the Q&A roster. We will take our first question from Michael <unk> with Johnson Rice. Your line is open.
Hi, good morning, and thanks for taking my questions.
Good morning, Thanks for calling in.
So sandridge is in a free cash flow generating mode, now and combined with a healthy balance sheet opens up plenty of options for you guys for uses of cash whether that be shareholder returns are drilling new wells or some combination of both.
So we haven't seen any share repurchases in the third or the fourth quarter. Despite the initiation of that program. It to keep reporting so I think it would be helpful. If you could sort of explain management's view on capital allocation going forward.
Typically on buying back shares versus drilling new wells.
Great Great question Michael.
I think that.
Overall, I would like to highlight.
Number one that the buyback program that we put in place was meant to maximize strategic Optionality and we did that.
Entering into a <unk> 18 program and so.
Just to ensure that all of our investors are aware of some of the dynamics and challenges with the 2018, while it does give you and the board and management Ulf.
Ultimate flexibility.
And executing on a share repurchase or buyback program.
It also can be very restrictive because we have to act very similar to any other shareholder and so if we have any material nonpublic information.
That restricts us and so for instance in the preparation of the financials that starts two weeks before every quarter until we file.
And then if we are in any sort of strategic discussion whether that's M&A.
Whether thats, even discussing other modes of returning capital with our board and key investors that that's.
Set of discussions can restrict us from being able to execute on the buyback so.
While we have it in place to maximize strategic Optionality, we are constantly reviewing ways that we can maximize shareholder returns.
And but that also can limit us on being able to execute at the right time and place via the buyback program with that said.
We are working with our board continuously.
Continuously and constantly having discussions on this topic I think that the inertia that we have right now is basically pointing us in the direction of saying Hey, we really do have something special in our space with a large NOL position.
Lot of cash in our balance sheet with no debt and plenty of free cash flow as you mentioned.
And we're wanting to make sure that we deploy that capital in the most strategically accretive manner.
Our investors and social share buybacks for one option, we are evaluating dividends.
And then we are also evaluating more strategic optionality outside of.
Organic inventory.
To try to maximize our shareholder returns.
Great. Thank you that makes it makes plenty of sense to me.
My next question is on the well reactivation program. So sandridge reactivated just close to 130 wells last year, but it looks like in the 22 plants is to complete just 30.
Leaves me to believe as a result of this allocation of capital towards the northwest stack drilling program.
But slide eight very clearly illustrates the profitability of the program, especially at these commodity prices.
<unk>.
Well reactivation program also appears to have some favorable economics as well. So is there any sort of reason why the company has decided to reinitiate a drilling program versus continuing with the same reactivation pace seen in 2021 and why exactly was this specific area chosen in the acreage.
Sure I think that's a great series of questions.
I'll try to address all of them.
First I think.
We'll talk about the area the Meramec in the northwest stack is the highest rate return within our drilling inventory. So I think that makes most sense at a high rate.
I think the Miss lime and the Chester.
More meaningful.
The stabilization around the current spot rate for the flattening and also we'd like to see that GNC for the Miss line being sub $2 million.
In regards to capital allocation decisions.
<unk>.
It's one thing to hydrate based off of rate of return, but we also consider PV 10 at PDI or present valuing that on how much meaningful value.
Investment is that experience at the table because some of these while reactivation have a high return, but they add significantly less TV Ted.
And that's just a product of our highest rating the program from last year accelerating most meaningful portion of the <unk>.
While reactivation and the remaining inventory at very relational. So we continue to high grade and try to bring on more profitable with the pro.
Graham, but they have much less relative PV 10 impact. So that's why you see more capital being allocated to drilling in the northwest stack.
Great. That's very helpful. Thank you for your time.
Thank you. Thank you.
Next we'll go to Josh young with Bison interest your line is open.
Hey, guys good morning.
Good morning.
So I have a couple of questions for you. The first is on in this drilling program. So it's good to see and it's helpful to see the rate of return you guys are expecting which I'm assuming is probably at least somewhat risk given the history.
Can you talk to how much of the spend for that program might be reflected in the net cash number you provided as of early March.
Sure happy to.
I think you are picking up.
Some of the comments made during the call that we're being proactive in combating inflationary pressures and requisitioning material equipment and advanced the program in order to ward off.
Future increases so.
A lot of time early this year securing casing pumping units.
Other equipment and material.
Just to make sure that we have a successful program and deliver the well costs that we've underwritten.
Im not prepared to disclose in absolute numbers, Dave but.
It hasnt impacted our cash balance.
As of March 17th of this year.
Okay, great. Okay. Yes that was my that was my understanding I just wanted to get clarification, because it does look.
A little light in terms of the cash balance that you guys also disclose the program. So that's helpful. I guess my other question is similar to the prior.
Questioner regarding return of capital given the substantial build of cash.
Whats managements view I guess I can't really ask about the board because they are not on this call but.
What's management's view on returning that capital if not through share repurchase through a dividend. It just looks like there is this huge amount of free cash flow based on guidance and based on the historic cash builds that there would be a meaningful dividend that could be payable.
Just from this may not even cut into the cash balance it could just reduce the amount of capital.
Josh Great question.
I think that the view of management and the process that we go through and how we think about this is that all options are on the table.
I think that if we do not bind.
A highly accretive strategic option.
Within the energy space or otherwise to deploy this capital and again to use the same burbidge, a highly accretive way for our investors both prudent.
And highly highly profitable.
<unk>.
Those options are on the table and we would be supportive of that.
And we will work with our board to discuss that and then just to make sure that.
That's the most.
Economically accretive as well as.
Via consensus with our board and shareholders that we can get to.
Also on the other side of that.
There are options for an expanded capital and drilling program as we go along.
We are very prudent and conservative in regards to what we want to put out there for investors and how we spend your money.
And so as we go along in the year and we.
Drilling complete new wells and.
Bring more wells back onto production.
And we kind of see where this these commodity tailwind as well as the volatility goes.
You could see us expand that drilling program, if it's the most accretive and prudent thing to do.
Okay, great. Thank you.
And I would like to remind everyone in order to ask a question press star one on your telephone Keypad next we'll go to Patrick Retzer with Retzer capital. Your line is open.
Okay.
Good morning, guys.
Okay first of all I'd like to congratulate.
Great job.
I'm, bringing this company to the point you have.
Very efficiently.
So thank you for that.
Secondly.
Im a.
A bit puzzled that give them the price levels for oil and gas currently.
As to.
I believe your guidance for 2022 is for production decline of 17% up to about flattish is that right.
Sure. Thanks for joining the call it's a great question.
I appreciate the comments.
Thank you.
What we anticipate with this program is.
Most of the production impact from the drilling of the nine wells were incurred in the second half of the year and if you look at over the next two years about half of the production volume impact is going to occur this year and next year.
So.
A long story short is the drilling program is going to meaningfully stem declines.
Oil production by about 5% January to December .
And then that will further extend from base declines next year.
Okay.
So you've got no debt a pile of cash you can reactivate wells at very low cost.
Yes, you are doing maybe 30 wells this year versus over 100 last year.
And lending near production decline.
High price environment can you talk about how we should think about.
And.
<unk>, what the inventory of wells is that you have that can be reactivated at some point.
Sure.
Let me address the well reactivation.
So we do have a meaningful inventory.
Obviously curtailed wells that not only occurred in 2020, but.
Further back than that so we're constantly assessing.
Which wells that we can reactivate.
In the current environment. The 30 wells was really a positive in our initial budget planning and of course, we've seen a tremendous surge in pricing over the last week that does not factor.
And so we continue to assess that and remain flexible to re look at things for further potential activation.
For Us next year.
And again, the drilling program is going to be pretty meaningful, adding economic barrel on the back half of the year. So our goal is to flatten the increased production.
The answer to your question.
Okay.
Alright, Thank you keep up the good work.
Thank you. Thank you.
That concludes today's question and answer session. We thank you for your participation in today's call you may now disconnect.
Please wait the conference will begin shortly.
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