Q3 2022 SandRidge Energy Inc Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to the Q3 2022 Sandridge Energy conference call.
At this time are all lines are in a listen only mode. After the Speakers' remarks, there will be a question and answer session. If.
If you would like to ask you a question simply press star followed by the one on your telephone keypad.
Now I would like to turn the call over to Scott Prestridge director of Finance and Investor Relations.
Thank you and welcome everyone with me today are <unk> Brennan, our CEO and COO.
<unk> <unk> our CFO .
As well as being perish, our SVP of operations.
I would like to remind you that today's call contains forward looking statements and assumptions, which are subject to risk and uncertainty.
Actual results may differ materially from those projected in these forward looking statements.
We 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 and good morning.
I am proud to report another strong quarter results for Sandridge.
Company cost focus and efficient activity with high graded drilling in the core of the northwest stack as.
As well as the well reactivation program continued to add incremental economic production.
Strong free cash flow contribution from our producing assets this year and projected into 2023.
Before expanding on this well will touch on a few highlights from the third quarter.
Thank you Grace and production for the third quarter.
It remained flat at approximately $17 eight Boe per day over the last three quarters.
Production benefited from the completion of three new wells this quarter as well as the reactivation of 42 wells during the first nine months of 2022 that were previously curtailed during the commodity price downturn in 2022.
The production from the three new wells contributed to an increase of oil production over the prior quarter by 25%.
We expect production from this year's drilling program to continue to add the base levels in the fourth quarter of this year and into 2023 as we finish completions on wells drilled in the second half of the year.
Net cash, including restricted cash increased to approximately $241 million, which represents $6 56 per share of our common stock issued and outstanding as of September 32022, the approximate $35 million increase over the quarter was supported by production from our new wells and well reactivation program as well.
Strong commodity prices realizations net of capital expenditures made for inventory of drilling and completion activities related to our 2022 capital program.
The company has no term debt revolving debt obligations as of September 32022, and continues to live within free cash flow.
Funding all of its capital expenditures with organic free cash flow and cash held on the balance sheet.
Over the quarter the company generated adjusted EBITDA of approximately $55 million.
As we have pointed out in the past, our adjusted EBITDA and unique metro for sandwich due to us having no <unk> and very little T. Given that we have no debt and substantial NOL position that shields, our cash flows from federal income taxes.
Commodity price realizations in the third quarter before considering the impact of hedges were $92 24 per barrel and $5 99 per Mcf for oil and natural gas.
And NGL realizations were 30 79 per barrel.
The company maintained its commitment to protecting shareholder capital invested and its development program by entering into commodity derivative contracts for natural gas the commodity derivative contracts of average strike prices of 839 for <unk> for the mark to market asset value of $4 million as of September 32022.
As alluded to earlier, we have maintained our large NOL position, which is estimated to be approximately $1 6 billion as of the <unk>.
End of <unk> to our NOL position has and will continue to allow us to shield our cash flows from federal income taxes.
Our commitment to cost discipline has continued to be impactful with adjusted G&A of approximately $2 million.
Approximately $6 million or $1 22 per Boe for the three and nine months periods ended September 32022.
We also held LOE and expense workovers to be approximately $9 7 million or $5 92 per Boe during the quarter. This level of expense was partially driven by an increase in workover activity associated with our well reactivation program.
We believe we compare favorably with our peers in regards to the G&A and LOE.
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 $54 million or $1 46 per share up from approximately $48 million or <unk> 32 per basic share an 11% 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 later today provide further detail on our financial and operational performance during the quarter.
Okay.
Thank you Pablo.
I thought it would be helpful to walk through some of the company's highlights.
Management strategy and other business details.
As I mentioned previously we are pleased with the results in the third quarter and have capitalized on strong commodity prices with high rate of return drilling in the northwest stack.
<unk>, well reactivation and further strengthened cash flow from our producing properties in mid con.
We're able to keep quarter over quarter production flat mid con with oil increasing by 25% over the quarter driven in part by three new northwest stack wells as well as the continued benefit from over 170, well reactivation since early 2021.
We will continue to reactivate wells for a total of 54 for the year, which will average over 100% IRR.
In addition, we have converted artificial lift systems of 22 wells to Rod pump with 13 planned for the remainder of the year, which will aid in optimizing lifting efficiency and lower <unk> cost for this well set.
The rod pumps, we have or will be installing our tailored for the wells current fluid production and will 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.
These type of assessments optimizing our wells production profile and cost focus have contributed as a flattening expected asset level decline of our producing properties.
Approximately 8% over the next 10 years.
We have successfully drilled five wells and are now producing the first three wells in this year's capital program through the third quarter.
Which have all targeted the Meramec formation in the core of the northwest stack play.
Well its four and five were recently completed and are anticipated to have first production. This week with wells <unk> completing in mid November .
The first two one mile lateral wells are producing a pad total of nearly 600 barrels of oil per day and over one Bcf a day after more than 90 days of production.
The third well with over 8000 feet of completed lateral length is producing 460 barrels of oil per day and nearly two bcf per day of gas.
And it's still increasing after 30 days as we continue to open chokes during managed flowback.
Okay.
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 PDP well set which do not require any routine flaring of produced gas.
These well understood assets are almost fully held by production with a long history shallow and diversified production profile and double digit reserve life.
PV 10 of future net discounted cash flows to proved developed oil gas and NGL reserves of these assets.
$807 million based on year in 2021 reserves and assumptions roll forward to October one 2022, and using <unk> 'twenty two SEC pricing.
<unk> assets include more than 1000 miles each of owned and operated activity and electric 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.
Percent 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.
Total net cash now totaling $241 million with zero debt as of quarter end.
This cash generation potential provide several path to increase shareholder value realization and has benefited by relatively low G&A per <unk>.
As we realized value and generate cash our board is committed to utilizing our assets, including our cash to maximize shareholder value.
Sandwiches 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 in NOL.
Further the company is not subject to nbc's or other significant off balance sheet financial commitments.
The company did enter into commodity derivative contracts for its natural gas.
Which have an average strike price of $8 39 per ml btu with a mark to market asset value of $4 million as of September 32022.
We could enter into additional commodity derivative contracts from time to time to superior 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 opportunities and remain open to value accretive opportunities.
The company will continue to monitor forward looking commodity prices result cost and other factors that could influence returns on the investments.
Which will continue to shape its disciplined development decision in 2022 and beyond.
This strategy has five points.
One <unk>.
Maximize the cash value and generation capacity of our incumbent Midcon edp assets by extending and flattening our production profile with high rate of return Workover, well reactivation and artificial lift conversions as well as continuously pressing on operating and administrative costs.
The second is to ensure we convert as much EBITDA to free cash flow as possible.
Exercising capital stewardship, and investing in projects and opportunities that have high risk adjusted fully burdened rates of return.
To include executing on our drilling program in the core of the northwest stack to economically add production.
The third is to maintain optionality to execute on value accretive merger and acquisition opportunities that could bring synergies leverage the company's core competencies complement its portfolio of assets.
They utilize its approximately $1 6 billion of net operating losses or otherwise yield attractive returns for its shareholders.
Fourth as we generate cash we will continue to work with our board to assess past maximize shareholder value.
To include investment in strategic opportunities and return of capital and other uses.
Please note that the company's cash position is also a strategic advantage and provides competitive leverage in evaluating M&A opportunities.
Especially given the outlook on interest rates capital markets and impact of the Optionality on the number and types of opportunities that could become available at certain levels.
No doubt there is a high bar at both the management and board levels for mergers and acquisitions and that management ways. The cost of its growing cash balance versus patients to evaluate and execute on accretive opportunities.
And it will continue to progress these with Ernest on multiple fronts.
Promote regular way return of capital discussions advanced M&A evaluations meet with shareholders and investors and worked with our board to advance path to maximize shareholder value.
The final step is to uphold our ESG responsibilities.
Now circling back to this year's drilling program.
Despite recent downdraft in commodity prices oil has maintained around $80 per barrel or more in natural gas between five and $6 per mcf.
This commodity price environment combined with our team's efforts to combat inflationary pressures and execution have and will translate to high rates of return in our capital program.
The average performance of the direct offsets for our current drilling program at the October 31 strip as well as today's estimated cost averaging an approximate 60% rate of return.
The focus area, we will be developing with this year's program has been previously delineated by Sandridge and other reputable operator.
We know this area well you have a long tenured history in the mid con.
Previous development programs and can lever, a very tight cost structure to add incremental barrel to our base production and a very efficient way.
60% of the program will be infill development with the remaining 40% being first wells in section or co development that again directly offset productive and profitable well.
I am extremely pleased with the planning and approach our team has taken to help control cost.
We have continued to buy ahead of planned activity pre purchasing nearly $5 million of materials to include casing for the drilling program pumping units for capital Workovers and other items.
As well as high grading cost efficient co development opportunities utilizing company owned equipment and other best practices.
We are targeting growth P&C for one mile lateral to average just over $5 million roughly $1000 per foot.
The investments made earlier this year and could continue to do is key to awarding off inflationary pressures in today's market.
Which has already benefited the program.
While we will continue to lean forward into cost control efforts inflation will continue to be a central focus this year and has bearing on unsecured costs, which could influence future drilling decisions.
Also the service sector has continued to be choppy.
As the surface industry his ramp to meet activity demand through adding new employees.
Out of the yard and stretching across supply chain weak points.
While we have been able to secure the equipment material and services needed to execute on the program thus far.
Service efficiency and equipment quality will continue to be pressure points across the industry in the near term.
As we look forward to the remainder of the year, we anticipate to maintain drilling activity at a one rig pace with both drilling and completions to carryover into next year.
From a production timing perspective, we anticipate that the wells turned in line in the fourth quarter to add more than 25% more oil on top of the PDP level.
But the total program, adding 13% on a BOE basis next year.
With respect to capital, we protect to come in below the midpoint of guidance.
Not the low end of guidance due to project shifting from late 2022 to early next year.
We will provide more details on 2023 activity on our next call.
Shifting to expenses, we were able to keep adjusted G&A to an average of roughly $2 million per quarter over the last nine months.
Despite meaningful increases in activity benefiting from our core values remain cost disciplined as well as prior initiatives, while having tailored our organization to be fit for purpose.
Yeah.
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 core functions such as operations accounting and administration.
Tax and HR.
Despite expanding activity and producing well count our total personnel remains just over 100 people.
Although corporate personnel stand at 16 people, we have retained key technical skill sets that have both the experience and institutional knowledge of our area of operations to support drilling and completions as well as the ability to flex through additional outsourcing specialized areas to do more.
Despite inflationary pressures, we were able to keep LOE and expense workovers to within 2% of the previous quarter at $9 7 million or $5 92 per Boe.
Or roughly 10% below the midpoint of guidance on an annualized basis.
We will continue to actively press on operating costs, we anticipate expenses.
Specifically workover expenses to remain near these levels as we reactivate and repair more wells this year.
Strong commodity prices have improved the economics of the wells that would've remained shut in otherwise.
The good news is that this will translate to additional production.
However, while profitable remaining fronts of well reactivation of relatively higher operating costs.
Which will increase power water chemical and other expenses.
On an absolute and per Boe basis.
In addition to the cost of an increasing producing well count inflation will continue to be a theme throughout the year and into next year.
We will continue to combat inflationary pressures on expenses as well through rigorous bidding processes, securing material equipment and services over an appropriate tenure to partially offset market increases as well as continuing to leverage our significant infrastructure.
Operation Center and other company advantages.
In summary, the <unk>.
Company has 241 million net cash and cash equivalents at quarter end, which represents $6 52 per share of our common stock.
Stock issued and outstanding.
Consistent production over the last three quarters with a 25% increase in oil over the last quarter from our mid con producing assets.
I graded capital program with infill and development drilling in the core of the northwest stack and continuation of our well reactivation program, which will economically enhanced production and deliver strong rates of return.
Low overhead top tier adjusted G&A of $1 22 per Boe.
Note that in fact negative leverage.
Significant free cash flow and a growing net cash position.
Ported by a diverse production profile flattening expected annual PDP decline to an average of approximately 8% over the next 10 years Mueller.
Multi digit reserve life asset base.
One $6 billion in Nols, which will show future free cash flow from federal income taxes.
Large owned and operated activity in electrical infrastructure, which provides cost and strategic advantages requiring a little to no future capital to maintain.
This concludes our prepared remarks. Thank you for your time, we'll now open up the call to questions.
At this time I would like to remind everyone in order to ask a question simply press star one on your telephone keypad.
One moment, while we compile the roster.
Your first question comes from the line of Josh Young with Bison.
Your line is open.
Hey, guys great results.
So.
Question and a follow up my.
My question is on the PDP decline rate that you showed in your announcement you said there was an 8% PDP decline rate can you elaborate on that a little bit is that are you guys, saying that your existing wells are in aggregate declining by 8% a year or is there.
There are sort of more color on that.
Sure Josh.
And good morning, yes.
Yes, we're saying that the.
The base decline of our producing assets will average in the 8% decline in with EMEA.
Without capital.
Great. Okay. That's helpful. Thank you and then.
Can you talk about.
Your estimate of inventory of <unk>.
Additional well locations that may be similar to the wells that you're drilling right. Now. So this is less of a.
Proved undeveloped or probable and more of the estimation of similar locations to what Youre drilling.
Currently that seems to be hitting like you guys said, 100% percent rates of return.
Sure.
I think you are.
On the inventory of well reactivation.
So.
We're planning a new 54 for the year.
Through the end of this year and we continue to monitor.
Prices and costs as we go for the next year, we have additional inventory this economic today.
But we are economic animals, and we will continue to adjust that plan.
Conditions.
No change during the quarter.
Alright, Thanks, sorry, I meant the northwest stack wells that you that you guys have drilled and that you have it sounds like two or three online right now.
Sure.
We're focused on executing the current programming monitoring results right now what we've seen in.
In the first.
Four months on our first two well are within expectation ranges and the third well is just cleaning up after the first 30 days of production.
We don't see anything that.
Causing the change however.
Allografts in previous quarters, we're going to be a controlled and disciplined.
Before we lean further outside of what we've.
Amount with this year's capital program, and we will continue to monitor and hope to provide more detail in next quarter's call.
Great. Thanks, guys.
Your next question comes from the line of Jeff Robertson with water Tower Research. Your line is open.
Thank you Grace under Siloxane, you I'll talk just in very general terms, how you might be able to use.
The Nols to shareholder value and in the context of an acquisition.
Yes sure.
In the context of an acquisition I think the cash balance that we currently have provides like I said on the call with a strategic advantage and competitive leverage in today's market given the outlook on interest rates.
The capital markets themselves and what actual opportunity you might be able to look at.
So I do believe that.
<unk> advantage however.
We're also looking at other uses like return of capital.
I think there is an area of contingent.
Investors that maybe you can walk and chew gum at the same time.
Implementing a railroad with dividend.
Buying back Opportunistically.
During the market dislocation and maintaining that Optionality. However, the larger that you maintain that dry powder.
More.
Practice opportunities and look at it as brand new into that next year.
Things that become.
Sure.
Yeah.
On the NOL so law.
Are there certain.
Structures or certain types of acquisition characteristics, where the NOL.
Could be.
A big benefit for Sandridge.
Yes, so Jeff there is acquisitions, whereby there's not a lot of.
Tax basis, our capital intensity needed.
To maintain or develop an asset. So those specifically are typically late life PDP type assets in the E&P space and then there is also.
Other.
Potential assets that we could acquire outside of traditional upstream energy looking at midstream gathering systems.
Services and things like that so.
So we're always.
Make sure that we're looking at acquisitions and M&A.
Kind of what's what's most value accretive to our investors would want to make sure that we have a cohesive story and thats an M&A scenario.
But that that would be the typical type of characteristics because a.
<unk>, an asset with a lot of pud inventory or drilling locations and things like that it takes a lot of capital intensity is going to differ a lot of taxable income down the line and so you might not use as much of those Nols.
And those sorts of assets and you would let's say a PDP asset that you buy for a discounter or speed up on Opex.
So on a PDP asset you could defer you could use.
Use the Nols to shield, our cash taxes, correct first of all at least for some period of time.
Correct correct because in theory, a PDP asset doesn't require a lot of additional capital investment outside of the initial acquisition and.
And so you are making your margin by beating beating up on Opex and gather.
Gathering more efficiencies and efficiency at scale by expanding your number of barrels that you are producing and number of wells that you're operating.
And the way that you would you would tap into the Nols in that scenario is that because youre not.
Putting a lot of dollars into the ground and therefore deferring.
Taxes.
You're generating a lot of taxable income.
Near term post acquisition of those assets and so.
Therefore, you will be able to tap into the NOL very quickly.
Great. Thank you.
Your next question comes from the line of Harvey sacks, with Alpha wealth funds. Your line is open.
Thank you.
And that you back in August .
And I had a question for you.
On your company's valuation looks incredibly low.
I'm not an expert in the oil and gas industry.
Not factoring the Nols, what do you what do you.
I think the company is fair value should be clearly undervalued.
Can you hear me, yes, yes, we can hear you we can hear you.
So this is philosophy, we don't put out specific guidance that speaks to.
No our holistic net asset value we do.
Sure some of your thoughts that there are value dislocations.
Between our share price in the market at times.
But we can't really comment on.
Our internal views at this time, because we haven't.
Yeah.
By our board.
And that's what this is Robert.
I don't want that out there.
I mean, you must have some idea.
Youre looking at evaluating acquisition opportunities you must have some idea on like your company is where it is at.
20% under bad 50% undervalued can you just talk in some generalities.
Because I don't understand how you are going to increase shareholder value. If your if youre looking at your cash as an asset.
The acquisition then you only have your stock.
To use as currency.
And if your stock is way on your value.
Then that becomes very difficult if not impossible to make an accretive acquisition.
So how do you plan on.
Increasing.
And the value and the shareholder value how do you how.
How do you plan on increasing the price of the stock.
I mean, you're doing an excellent job.
Managing expenses and.
Activating wells.
Stock looks incredibly cheap to me, but.
I'm just one person.
I think I think great question good points. This is Greg.
I'd point, you if youre looking for evaluation method.
The value piece.
Your discounted cash flows of our proved developed properties.
Oil and gas and NGL.
As approximately 800 million.
At <unk> SEC prices.
I would say as far as it is.
Increasing.
The share price performance.
<unk> is executing on the program that we just laid out.
With continued investor outreach.
And all the things that we laid out during the call.
Kind of focus in our overall strategy I think that will continue to be impactful.
<unk>.
Happy to do this in more detail.
But.
Our short view.
No I think some insider buying by management.
Draw some attention to that the valuation discrepancy.
Clearly.
And then you asked his position in natural gas.
Is going to be greatly enhanced by.
Uh huh.
Loss of Russia, as a supplier to Europe .
And this is a long term.
Significant change in valuation in my opinion.
Certainly appreciate so I would like to say I'd like to see you guys buy some stock I'd like to.
Say more confidence from management and the valuation.
That's all.
I would say relative to that.
<unk>.
A portion of our personal income is tied to Shannon and raising the continued performance and increase in valuation of bandwidth. So we're very much aligned on that front.
And I would say.
Second point.
Yeah, so active looking at opportunities in the M&A space.
Anytime that we have material non public information it keeps us from trade.
Alright.
Alright, Thank you and good luck great job.
There are no further questions at this time. This concludes today's call you may now disconnect.
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