Q2 2022 SandRidge Energy Inc Earnings Call
In the prior quarter.
We have also helped our LOE and expense workovers to approximately $95 million or $5 87 per Boe during the quarter, a decrease of approximately $1 4 million or <unk> 89 per Boe from the prior quarter.
This level of expense is partially driven by an increase in workover activity associated with well reactivation and well repairs at higher commodity prices.
We believe we compare favorably with our peers in regards to G&A in the elderly on both an absolute and a per Boe basis.
We continue to generate net income for our shareholders. During the quarter. We earned net income of approximately $48 million or $1 32 per share up from $35 million or <unk> 95 per share.
An approximate 40% increase from the prior quarter.
Before shifting to our outlook, we should note that our earnings release posted yesterday and the 10-Q that we plan to file soon provide further detail on our financial and operational performance during the quarter. Thank you slot. We thought it would be helpful to walk through some of the company's highlights management strategy and other business.
Detail.
As I mentioned previously we are pleased with the results in the second quarter and have begun to further capitalize on our robust commodity prices with high rate of return drilling in the northwest stack continued well reactivation and further strengthened cash flow from our already producing properties in mid con.
We were able to keep quarter over quarter production flattened midcon, despite no new production from drilling and completion activity during the period.
Driven in part by the continued benefit of our well reactivation of a 158 wells since early 2021.
We will continue to reactivate wells, averaging over 100% rate Irr's now targeting an additional 25 projects over the remainder of the year for a total of 54 by year end and.
In addition, we will convert artificial lift systems of 36 wells to Rod pump.
Some of which were converted over the first half of the year that will aid in optimizing lifting efficiency and lowering costs for this well set.
The rod pumps, we have or will be installing are tailored for the wells current fluid production.
Reduce the electrical demand from the current artificial lift system.
This is key to offset increases in utility costs associated with the rise in fuel surcharges from elevated commodity prices.
We have successfully drilled completed and are now producing the first two wells in this year's capital program.
Targeting the Meramec in the northwest stack play and are currently drilling the third and extended reach lateral.
The first two one mile lateral wells are producing an average of approximately 400 barrels of oil per day and nearly the same level and gas at the end of July .
Gross D&C costs for the two wells averaged $4 6 million.
Let's pause for a moment to revisit the key highlights of Sandridge.
Our asset base is focused in the mid continent region with a primarily a PDP well set which do not require any routine flaring of produced gas.
PV 10 of future net discounted cash flows to proved developed oil gas and NGL reserves. These assets is approximately $619 million.
Based on year end, 2021 reserves and assumptions roll forward to July one 2022, and using <unk> 'twenty two SEC pricing.
These assets include more than 1000 miles each of owned and operated <unk> and electrical infrastructure over our footprint.
This substantial owned and integrated infrastructure provides the company both cost and strategic advantages.
Bolstering asset operating margin reduced lifting as well as water handling and disposal costs and combined with other advantages help derisk individual well profitability for more than 70% of producing wells down to $40 <unk> and $2 Henry hub.
In addition, the Interconnectivity and ample capacity helped buffer against unforeseen curtailment.
Our assets continue to yield significant free cash flow with total net cash now totaling over $200 million zero debt as of quarter end.
This cash generation potential provides several path to increase shareholder value realization and has 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.
<unk> value proposition has materially derisked from a financial perspective by our strengthened balance sheet.
Robust net cash position financial flexibility and over $1 6 billion an NOL.
Further the company is not subject to nbc's or other significant off balance sheet financial commitments. Currently the company does not have any open hedging contracts before June 32022, However, we could enter into hedges from time to time in support of securing returns for our capital.
Campaign manage commodity risk or other fundamental drivers.
Finally, it's worth highlighting that we take our ESG commitments seriously and have implemented disciplined processes around them.
We remain committed to our strategy to focus on growing the cash value and generation capability of our business in a safe responsible and efficient manner, while prudently allocating capital to high return organic growth opportunity and remain watchful for potential value accretive opportunities.
This strategy has four points.
Maximize the cash value and generation capacity of our incumbent Midcon PDP assets five.
Extending and flattening our production profile with high rate of return Workover, well reactivation and artificial lift conversions.
Continuously press on operating and administrative costs.
The second is to ensure we convert as much EBITDA to free cash flow as possible by exercising capital stewardship and investing in projects and opportunities that have high risk adjusted fully burdened rate of return to include executing on our expanded 12, well drilling program in the core of northward.
Stack to economically add production.
The third is to remain open and patient and maintain optionality for opportunistic value accretive acquisitions.
We will focus on value, adding opportunities that bring synergies further leverage <unk> core competencies.
Implement our balance the company's portfolio or otherwise yield a competitive advantage and attractive returns.
Fourth as we generate cash we will continue to work with our board to assess path to maximize shareholder value to include investment opportunities strategic opportunities and return of capital and other uses.
The final staple is to uphold our ESG responsibilities.
Going back to this year's drilling program.
We have had our controls and purposeful start to drilling and completion and we will continue to pursue with thoughtful and disciplined execution. This year in order to realize high rate of return with these investments.
Program consists of 12 wells that are offset to highly profitable horizontal wells and have favorable geologic and reservoir characteristics.
Our current Investor presentation highlights the average performance of these offsets and at the July 25th strip.
As well as today's estimated cost delivers nearly 90% IRR.
The focus areas, we will be developing in this year's program has been previously doing these by Sandridge and other reputable operators.
We know this area well.
Approximately 60% of the program will be infill development and the remaining 40% being first wells in a section or co development that again directly offset productive and profitable well.
Of note is that we are benefiting from having a long tenured history in the mid con.
Previous development programs and can lever, a very tight cost structure to add incremental barrels to our base production in a very efficient way.
Gross D&C costs for one mile lateral is now estimated to average just over $5 million, which reflects casing drilling and other material equipment and services already six years at reasonable cost and current market estimates.
The team has done a great job at bringing for co development opportunities utilizing company owned equipment and other best practices to try and combat increasing market costs associated with inflation.
We will continue to lean forward into these efforts to offset inflationary pressures. However.
Inflation will continue to be a central focus this year and has bearing on unsecured cost, which could influence future drilling decision.
As we mentioned in last quarter's call, we would continue to monitor commodity prices costs and <unk>.
Results before bringing forward of additional projects for this year's capital plan.
We have observed commodity price improvement over the last several quarters and both spot and future prices have sustained at generally high levels during the second quarter and.
In addition, we have turned in line. The first two wells of the program, which are currently within expectation ranges.
Based on these and other factors, we will be expanding this year's program from nine to 12 well.
Given the current drill schedule, we anticipate to be drilling the last well at year end.
With completions to carryover to the next year.
From a production timing perspective, we anticipate that this year's capital drilling program will add 10% more relatively oil production on top of PDP levels. During the second half of the year and 13% next year.
Additional inventory is economic at today's commodity prices program results.
Timing commodity price stabilization or further flattening well costs to include levels of inflation and effect of controls.
Answer well spacing and other factors will guide future drilling decisions and inventory considerations.
In addition to well reactivation, we will continuously assess these factors along with our board evaluate the potential for future capital allocation next year's program in a prudent manner.
Put simply we will continue to prove out the results first and then expand from there.
Shifting to expenses, we were able to lower adjusted G&A quarter over quarter, even with increases in capital activity from $2 2 million or $1 35 per Boe in the prior quarter to $1 8 million or $1 nine per Boe in the second quarter.
Benefiting from our core values to remain cost disciplined as well as prior initiatives.
Which have tailored our organization to be fit for purpose.
We continue to balance the weighting of field versus corporate personnel to reflect where we actually create value and outsource necessary, but more perfunctory unless a core functions such as operations accounting land administration ITE tax in HR.
Fight expanding activity and producing well count our total personnel remains just over 100 people.
Although corporate personnel stand at 15, you have retained key technical skill sets that have both the experience and institutional knowledge of our area of operations.
Port drilling and completion operations as.
As well as the ability to flex through additional outsourcing our specialized areas to do more.
We're able to reduce LOE and expense workovers to $9 5 million or $5 87 per Boe.
During the second quarter, a decrease of $1 4 million or <unk> 89 per Boe from the prior quarter.
However, while we continue to press on operating cost, we anticipate expenses, specifically workover expenses to remain near first half levels as we reactivate and report repair more wells this year.
The increase in commodity prices has improved the economics of these wells that may have been or would have remained shut in otherwise.
The good news is that this will translate to additional production.
However, while profitable remaining tranche of well re activations have relatively higher operating costs, which will increase power water chemical and other expenses, both on an absolute and a per Boe basis.
In addition to the cost of an increase in producing well count inflation will continue to be a theme throughout the year.
We will continue to combat inflationary pressure on expenses as well through rigorous bidding processes.
<unk> material equipment and services over an appropriate tenor to partially offset market increases as well as continuing to leverage our significant infrastructure operation Center and other company advantages.
We would like to point you towards our updated guidance for the year that was included in the company's earnings release published yesterday evening.
We have increased the midpoint of guidance on production roughly 5% driven by expanded capital investment for the year.
On capital, we are increasing investments to a range of 56% to $70 million with over half of the expansion relative to prior guidance coming from additional well reactivation and rod pump conversion.
And the remainder from additional high rate of return drilling in the northwest stack discussed previously.
We have also increased our expense guidance to account for increased workover activity and producing well count spurred from robust commodity pricing as well as projected rising utility service and other field related expenses.
By both commodity prices and inflation.
As I mentioned earlier Broadcom conversions will help reduce.
<unk> cost in this regard over this well set.
We project that operating cash margin of the program will increase from the first half by nearly $7 per Boe in the second half of this year at the July 25th strip.
Despite inflationary pressures on expenses and cost driven.
Driven by the combination of strong commodity prices as well as increased production associated with expanding investing.
We'll continue to bolster production into next year.
In summary, the company had $205 million net cash and cash equivalents at quarter end, which represents a $5 58 per share of our common stock issued and outstanding.
Consistent production from Q1 to Q2, 2022, and our mid con position.
Expand in 2022 capital program I return projects to economically enhanced production to include 12, New wells high graded and the core of the northwest stack and continuation of our well reactivation program.
Low overhead top tier adjusted G&A of $1 90 per Boe.
No debt in fact negative leverage.
Significant free cash flow and a growing net cash position.
Ported buys the first production profile low decline multi digit life asset base.
One 6 billion, NOL, which will shield future free cash flow from federal income taxes.
Large owned and operated SPD in electrical infrastructure, which provides cost and strategic advantages.
And little to no future capital to maintain.
This concludes our prepared remarks. Thank you for your time I will now open the call to questions.
Thank you we will now be conducting a question and answer session.
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One moment, please while we poll for questions.
Okay.
Thank you our first question comes from Josh Young.
With Bison. Please proceed with your question.
So.
Just wanted a little more clarity on these first Meramec wells that you that you just announced.
You talk about how many days of production. The initial rates you described.
Represent and it sounded like production was still inclining and then.
I just wanted to clarify that the production rate per well or not for the two wells combined.
Yes, Im wondering if <unk>.
Great question.
Yes, the production profile still increasing.
Online.
Just under 30 days and like I mentioned in my remarks earlier, we anticipate the gas specifically to go from.
400, Mcf per day too.
Just over a million.
Okay, Great and again, that's per well 400 barrels a day.
Great, Okay and then.
Just a follow up on.
Capital return.
You guys have an approved buyback I asked this on the last call and prior ones.
It does seem odd to have cash build on the balance sheet have an approved buyback how the stock price down and have the company not execute on it could you could you clarify a little bit what was intended with that approved buyback as well as what the company is planning for this cash that's building on the balance sheet.
Sure Josh.
I'm going to let Bob add in here, but before I do just want to reinforce that suddenly looked at routinely in a significant priority.
We discussed the topic daily and monitor the markets.
No the board approved a <unk> 18 program.
Take advantage of a significant dislocations in the marketplace.
However, I'll point out that the San Diego team is restrictive when you have material nonpublic information.
Because we're active in the M&A space. It can really limit the window to take advantage of the significant dislocations that may be situational.
We have raised the topic of the <unk> program as an alternative.
The board and continue to evaluate our considerations for share repurchases return of capital and strategic uses of cash.
I'll also point out that our share price performance improved substantially since early last year, so relative to that period.
There is less consistent dislocation on a day to day basis that creates a broad window of opportunity relative.
So the attendees and program.
And Josh This is bill I'll add to that it's a little bit.
We do have.
A diverse set of investors and they come with a diverse set of opinions and physicians and we view our board and management.
Take their suggestions and recommendations very seriously there is a contingent of investors that.
<unk> believes that perhaps the best use of cash.
Is one in which we'll be able to leverage our NOL position to the maximal level.
Which would typically fall or some sort of M&A.
Or something or other and so we're constantly having these discussions with the board and.
I'd just like to remind all of our investors. We do take your thought seriously we bring these things to our board would ultimately the borders.
The only one authorized to.
Actually perform a buyback.
Or execute a transaction.
Okay. Thank you.
Okay.
As a reminder, if you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is another question here.
Okay.
Our next question is from Jeff Robertson with water Tower Research. Please proceed with your question.
Thank you good morning.
Can you talk about the inventory of wells that are still offline that could be reactivated and what their economic sensitivity is.
Yes sure good morning, Jeff. Thank you for the question.
As I mentioned.
Activated.
158 through the second half.
From the beginning of last year 29 over the first half will be adding an additional.
45%.
<unk> expanded capital program at this now for a total of 54 for the year.
There are you know.
Several hundred additional opportunities and it's very great April .
And I don't mean to be obfuscate here, but it's a multi variant equation.
Because it's dependent on.
Not only commodity price, but what the costs are at the time. So Adam you have increased cost rather can change that breakeven relative to that commodity price.
So there are additional opportunities that we continue to evaluate and we do this on a weekly basis with with our team and continue to bring forward our projects that have high rates of return.
As we do with everything else, we want to make sure that we're.
Delivering all those.
So we're very conservative with our our hurdle rates in that regard.
Some of them.
Some of the economic consideration based on where in the system, the wells or wells or offline are located.
With respect to how much water they may produce and how far you have to transport the water to put it back into the ground.
It's not necessarily water driven.
While water.
Our components.
It's not really the transportation of the water per se is really neat.
Electricity that is required.
Pools of total fluid out of the ground and I think you hit the nail in the head.
We've gone from you know.
$90 oil and $5 gas environment at $90 oil and $8 gas.
So some of these wells are more gassy. So last year, we brought on some of the more oily relative well.
And there were cheaper to fix right some of them in Q1 that required very little cost to bring back online the wells that where we're moving to now.
Our higher cost per Boe.
But they add incremental.
Margin.
It also required.
Increased capital relative to Q1 of last year, so instead of a cheaper broadcom repaired.
It means instances you may be installing in the rod pump, which is just more expensive.
Okay.
Question on the 12 wells.
In the northwest stack Wells. These wells Derisked locations that you might think about 2023 capital program.
I'm sorry can you repeat the question Jonathan.
Well the wells will the 12 wells that Youre drilling this year.
Well I know I know that's been an area, that's well defined by existing producers, but will the performance on these.
Further derisk wells that you might think about into 2023 capital program.
Oh absolutely.
Not only from a.
Extending beyond because were directly offsetting a highly profitable well so to the extent that you pushed the boundaries a little bit more is bound to be unethical.
Higher confidence in our materials the risks, but also from a spacing perspective. So originally this program.
Mostly two to three wells per section and to extent that we have outperformance we sit down space.
Would add additional locations.
Okay.
Thank you very much.
Thank you. Our next question comes from Eric Cole with Cole capital. Please proceed with your question.
Good morning, and thank you gentlemen for hosting this call one tax question for you as you know in Congress.
There is a bill pending too.
Change corporate tax rates were a big government toward Institute.
15% minimum tax rate for all corporations.
Could you just explain to me based on your understanding from lawyers what impact. This would have on you I. Obviously understand you have your net operating loss carryforwards, but how would that how would this 15% corporate tax for potentially impacted you.
Yes. Good question or is this is the law.
And take us.
So it's a little bit first on details and it is I think a proposal on item unemployment and signed by President Biden and there's still some some drafting going on but from what we understand.
That minimum tax will be levied on GAAP income for corporations that have net income of $1 billion or more.
So unless we incur or gather net income of a 1 billion or more.
Going out into the future and if this bill passes as it is and it shouldnt affect us.
Based on what we understand today, but those things can change and we're constantly monitoring that and we'll be sure to alert investors.
We believe it impacts us in any material way.
But with that said.
Given our current position.
We have a $1 billion in net income coming up that'll be a good problem to have.
Great. Thanks for the clarification I appreciate it.
Yeah.
Okay.
Thank you there are no further questions at this time.
This does conclude our conference for today you may now disconnect. Your lines. Thank you for your participation.
Okay.
Okay.
Okay.