Q4 2022 SandRidge Energy Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Q4 2020 to Sandridge Energy Conference call I would now like to turn the call over to Scott pressed right.
Rector of finance and Investor Relations. Please go ahead.
Thank you and welcome everyone with me today are Grayson Brannan, our CEO and C O O.
<unk> <unk>, our CFO and C E O as well as Dean 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 risks and uncertainty and actual results may differ materially.
As projected in these forward looking statements.
We may 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 on another strong quarter and year of results for Sandridge.
And that the company's cost focus and efficient activity with high graded drilling in the core of the northwest stack as well as a well reactivation program continued to add incremental economic production.
Strong free cash flow contribution from our producing assets this past year and projected in 2023.
Before expanding on this Bob will touch on a few highlights.
Thank you Grayson production remained relatively consistent throughout the year evergreen $17 seven Boe per day in 2022.
This steady production profile was driven by the company's stable low decline production base in 2022 drilling completion and Workover programs net.
Net cash, including restricted cash increased to approximately $257 million, which represents nearly $7 per share of our common stock issued and outstanding as of December 31 2022.
The company has no term debt revolving debt obligations as of December 31, 2022 and continues to live within cash flow.
Funding all of its capital expenditures with free cash flow and cash held on the balance sheet.
Over the quarter the company generated adjusted EBITDA of approximately $43 million and approximately $191 million for the year.
As we have pointed out in the past, our adjusted Ebitdas and unique metric for sandridge due to us having no I and very little T. Given that we had no debt and a substantial NOL position and shield our cash flows from federal income taxes.
Commodity price realizations in the fourth quarter before considering the impact of hedges were $79 10 per barrel and $4 40 per Mcf for oil and natural gas and NGL realizations were $25 73 per barrel.
The company maintained its commitment to protecting shareholder capital invested and its development program with the commodity derivative contracts for natural gas.
Commodity derivative contracts have an average strike price of $8 39 per M. M. Btu for the mark to market asset value of $4 4 million as of December 31, 2022.
As alluded to earlier, we have maintained our large federal NOL position, which is estimated to be approximately $1 6 billion as of the end of last year. 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 and despite increased activity adjusted G&A for the quarter was $2 million and.
The $8 million or $1 22 per Boe for.
For the year, which was below the low point of guidance.
We are also help our LOE and expense workovers to approximately $11 million for the quarter and approximately $41 million or <unk> 39 per Boe for the year.
Which was below the midpoint of guidance. This level of expense is 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 G&A and LOE on both an absolute and a per Boe basis.
We continued to generate net income for our shareholders. During the quarter. We earned net income of $105 $2 million or $2 86 per share and cash provided by operating activities of $30 1 million.
Before shifting to our outlook, we should note that our earnings release and 10-K provide further detail on our financial and operational performance during the quarters.
Thank you.
That would be helpful to walk through some of the companies highlight management's strategy and other business detail.
As I mentioned previously we are pleased with the results from last year capitalizing on commodity price dynamic with high rate of return drilling in the northwest stack.
Continued well reactivation and further strengthened cash flow from our producing properties in mid con.
We're able to keep production from our mid continent assets consistent for the year at 17, seven Boe per day with the continued benefit from approximately 180, well reactivated since 2021.
While increasing oil volumes more than 25% from the first the second half of the year aided by the oil content of our new northwest stack well.
In addition, we have converted artificial lift systems of 28 wells that are long term systems, which will aid in optimizing lifting efficiency and lower cost for this well set.
The systems, we have and we'll be installing are tailored to the world Courier fluid production and will reduce the electrical demand from the current artificial lift systems and is key to decreasing utility costs.
These types of investments.
<unk>, our wells production profile and cost focus have contributed to the flattening expected asset level decline of our already producing asset to an average of approximately 8% over the next 10 years.
We successfully drilled eight wells and are now producing six wells from last year's capital program, which of all targeted the Meramec and the core of the northwest stack play.
While 7% and eight were recently completed and are anticipated to have first production. This month.
An operational highlight the recently wells completed from a dual pad averaged over 1000 Boe per day in the first 90 days.
Also the first wells turned in line in the program also from a dual pad have a production rates that on average is 18% higher than the original well in section after a 239 days.
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 pvp, well set which do not require any routine flaring of produced gas.
He is well understood assets almost fully held by production with a long history shallow ing 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.
These assets is approximately $811 million.
Based on year end, 2022, SEC pricing assumptions and the effective date of January one 2023.
These assets include more than 1000 miles each of owned and operated activity and electric infrastructure over our footprint.
This substantial own an 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 helped derisk individual well profitability for nearly 70% are producing well down to $40 70, Ti 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 $267 million with zero debt as of year end.
This cash generation potential provides several path to increase shareholder value realization and has benefited by relatively low TNA Britain.
As we realized value and generate cash our board is committed to utilizing our assets, including our cash and maximizing 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 one point.
$6 billion in NOL.
Further the company is not subject to Mdc's and other significant off balance sheet financial commitment.
The company's natural gas commodity derivatives contract at an average strike price of $8 39.
Btu.
With a mark to market asset value of $4 4 million as of December 31, 2022.
We could enter into additional commodity derivative contracts from time to time and secure return for a 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 that.
We remain committed to our strategy to focus on growing the cash value generation capability of our business in a safe responsible and efficient manner, while prudently allocating capital to high return organic growth opportunities and remaining 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 investments.
Which will continue to shape its disciplined development decisions in 2023 or beyond.
This strategy has five points.
Maximize the cash value of generation capacity of our incumbent Midcon PDP asset by extending and flattening our production profile with high rate of return Workover, while reactivation and artificial lift conversion.
As well as continuously pressing on operating and administrative costs.
The second is sure we convert as much EBITDA to free cash flow as possible, while exercising capital stewardship.
<unk> and projects and opportunities that have high risk adjusted fully burden 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 asset.
So the utilizes 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 path to maximize shareholder value to include investment in strategic opportunities return of capital and other uses.
Please note that the Companys cash position is also a strategic advantage it provides competitive leverage in evaluating M&A opportunities.
It's actually given the outlook on interest rates capital markets and impact of the Optionality on the number and type of opportunities that could become available at certain levels.
No Thats there is a high bar, but 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.
Management will continue to progress these with earnings on multiple fronts.
Regular way return of capital discussion advanced M&A evaluation meet with shareholders and investors and work with our board to advanced path to maximize shareholder value.
Besides executing this year's capital plan and operating in that state and responsible manner. These topics remain paramount and a top priority.
In the interim we have secured favorable banking terms and keep our cash position diversified across interest bearing accounts at multiple financial institutions.
The final staple to uphold our ESG responsibilities.
Circling back to this year's drilling program.
Despite recent downdraft in commodity prices oil is maintained around the mid to upper $70 per barrel with the forward looking curve flattening for the year.
Henry hub has fallen to the mid to low $2 near term, but it is in contango approaching $4 per btu by year end given.
Given these near term dynamics and that our mid con assets are 99% held by production, which preserves the tenor of our development options, we will be concluding our drilling program early this year.
We will continue to monitor commodity price dynamics and.
And maintain flexibility to adjust further as may be warranted.
Commodity prices firmly over $80, <unk> and $4 Henry hub or a reduction in well costs are needed before we returned to exercise the option value of further development.
With that said our team efforts to combat inflationary pressures and execute operationally has and will translate to attractive returns and our remaining capital program, which will further enhance the.
The already meaningful cash flow from our base PDP assets.
While this reduced activity is not enough to keep overall production flat, we expect oil volumes to increase by nearly 5% at the midpoint of guidance from last year.
Increasing the relative production volume waiting in oil, which has more attractive pricing near term.
Further bolster our view realizations, which will translate to cash flow.
Our focused 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 ahead of the long tenured history, and the mid con and can leverage a very tight cost structure to add incremental barrels to our base production and a very efficient way.
The remaining four wells that will be turned online. This year will all be infill with co development on dual payouts that leverage cost synergies and directly offset productive and profitable well.
In addition to drilling we will be investing in 12, reactivation 28, artificial lift conversions and limited leasing to support future development and more attractive commodity environment.
We have continued to buy ahead of planned activity, having pre purchase casing for the drilling program pumping units for capital Workovers and other items.
In addition, we high graded cost efficient co development opportunities, we will be utilizing company owned equipment employ other best practices.
We are targeting growth P&C for one mile lateral to average over $5 million.
We're roughly over $1000 per foot.
Prior investments in pre purchases of equipment and materials to support our program has been key to awarding us inflationary pressures in today's market.
While we will continue to lean forward into cost control effort inflate.
Inflation will likely persist and remain a central focus this year and has bearing on unsecured cop.
Also the service sector has continued to be choppy as a service industry ramp to meet increased activity demand last year through adding new employees pulling rigs out of the yard and stretching across supply chain weak points.
While we've been able to secure the equipment material and services needed to execute.
Service efficiencies and equipment quality have been persistent pressure points across the industry.
While recent or future activity deceleration may provide some relief to these issues.
May take additional time or further activity reductions before any associated benefit or cost reduction will be realized.
Shifting to expenses, we were able to keep adjusted G&A to $8 million for the year, a slight reduction from the prior year, despite meaningful increases in capital activity.
This continued efficiencies stems from our core values 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 fueled versus corporate personnel to reflect where we actually create value and outsource necessary, but more perfunctory unless core functions such as operations accounting land administration.
Tax and HR.
Despite expanding activity and producing well count our total personnel remains just over 100 people.
Although corporate personnel stand at 15 people, we have retained key technical skill sets.
The experience and institutional knowledge of our areas of operations.
Despite inflationary pressures, we were able to keep LOE and expense workovers to $41 million or $6 39 per Boe for the year, roughly 4% below the midpoint of guidance.
While we will continue to actively pressed on operating costs, we anticipate expenses.
Specifically workover expenses to remain near these levels as we continue to reactivate and repair more wells this year.
The good news is that this will translate to additional production.
However, while profitable the remaining tranche of well, we're activations have relatively high operating costs.
While increased power water chemical and other expenses.
Both on an absolute and a per Boe basis.
In addition to the cost of an increasing producing well count.
Place and will continue to be a theme.
We will continue to combat inflationary pressures on expenses as well through rigorous bidding processes, the carrying material equipment and services over an appropriate tenor partially offset market increases as well as continuing to leverage our significant infrastructure operation Center and other companies.
In summary, the company has.
257 million net cash and cash equivalent at year end, which represents nearly $7 per share of common stock issued and outstanding.
Consistent production over the last several quarters with a 25% increase in oil over the last two quarters from our mid con producing asset.
A high graded capital program with infill drilling in the core of the northwest stack and a continuation of our well reactivation program.
Of $1 22 per Boe.
Note that in fact negative leverage.
Significant free cash flow and a growing net cash position supported by a diverse production profile flattening expected annual Pvp declined to an average of approximately 8% over the next 10 years multi digit reserve life asset base.
One $6 billion in Nols, which will shield future fee cash flow from federal income taxes.
Large owned and operated SWT in electrical infrastructure, which provides cost and strategic advantages requiring little to no future capital to maintain.
Before we conclude our prepared remarks I.
I would like to point you to the 2023 operational and capital guidance included in our earnings release for more detail on this year's program. Thank you for your time, we will now open the call to questions.
The floor is now open for your questions to ask a question at this time. Please press star one on your telephone keypad, if any point you'd like to withdraw from the queue. Please press star one again, you'll be provided the opportunity to ask one question and one further follow up questions.
We will now take a moment to render our roster.
Again the floor is now open for your questions to ask a question. This time. Please press star one on your telephone keypad.
Thank you ladies and gentlemen, this does conclude today's call. Thank you for your participation you may now disconnect.
Please wait the conference will begin shortly.
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