SandRidge Energy Inc. Q1 2023 Earnings Call
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Good morning, and welcome to Sandridge Energy's Q1, 2023 earnings conference call.
All participants are in a listen only mode. After the speaker's presentation, we will conduct a question and answer session.
To ask a question you will need to press star followed by the number one on your telephone keypad.
As a reminder, this conference call is being recorded.
I would now like to turn the call over to Scott Prestridge, Vice President Finance and Treasury. Thank you. Please go ahead.
Thank you and welcome everyone with me today are Grayson Brannan, our CEO and COO.
<unk> <unk>, our CFO and CEO as well as being perish, our SVP 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.
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'm pleased to report on another good quarter of results and that the company sufficient activity continues to translate into meaningful free cash flow from our producing assets this past quarter and projected into 2023.
Before expanding on that Bob will touch on a few highlights.
Thank you Grayson.
<unk> for the quarter averaged $16 seven M Boe per day and oil production increased approximately 22% from the first quarter 2022, driven by the higher oil content of our new northwest stack wells.
Over the quarter the company generated adjusted EBITDA of approximately $31 million as we have pointed out in the past our adjusted EBITDA is a unique metric for sandridge due to having no <unk> and.
And very little T. Given that we have no debt and a substantial NOL position that shield, our cash flows from federal income taxes.
Net cash, including restricted cash increased to approximately $288 million, which represents $7 79 per share of our common stock issued and outstanding as of March 31 2023.
The company has no term debt revolving debt obligations as of March 31, 2023.
Continues to live within cash flow.
Putting all of its capital expenditures with cash flow from operations and cash held on the balance sheet.
Commodity price realizations over the first quarter before considering the impact of hedges were $74 96 per barrel and $2 73 per Mcf for oil and natural gas, which were 98% and nearly 100% fair to average WTO and Henry hub benchmarks before the impact of any hedges.
DL realizations were $24 62 per barrel or 32% of WTS.
The company realized commodity derivative settlement gains of approximately $5 9 million in the first quarter.
As alluded to earlier, we have maintained our large federal NOL position, which is estimated to be approximately $1 6 billion at quarter end.
Well 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 approximately $2 5 million or <unk> 68 per Boe.
We also held LOE and expense Workovers to approximately $11 7 million for the quarter.
We believe we compare favorably with our peers in regards to the G&A and LOE and.
On both an absolute and a per Boe basis.
We continue to generate net income for our shareholders. During the quarter were net income of approximately 24 million or <unk> 64 per basic share and net cash provided by operating activities of nearly $40 million.
The company has also generated approximately $2 5 million in interest income during the first quarter. This is all coordinated and the company producing approximately $30 million and free cash flow during the first quarter, which represents a conversion rate of approximately 98% relative to adjusted <unk>.
EBITDA and approximately 82 per.
Per share of common stock outstanding at the end of the first quarter.
Before shifting to our outlook, we should note that our earnings release and 10-Q provide further detail on our operational and financial performance during the quarter.
Thank you thought we thought it would be helpful to walk through some of the company's highlights management strategy and other business details.
As I mentioned previously this past quarter had good results, adding relatively oily production from new wells in the northwest stack, while converting over 98% of EBITDA to free cash flow.
Benefiting from our commodity derivatives settlements of nearly $6 million as well as $2 5 million from interest income during the quarter.
Production from our mid continent assets averaged $16 seven Boe per day for the quarter as.
With oil volumes, increasing 22% compared to the first quarter of 2022.
Aided by the oil production content of our new northwest stack wells.
The company's largest natural gas purchaser was in ethane rejection for two months during the quarter with more ethane staying in natural gas stream.
While this resulted in less NGL and Boe barrels.
Improved realizations, which were nearly 100% compared to Henry hub for natural gas and 32% of WTO for NGL.
We anticipate that the majority of our natural gas stream could remain in ethane rejection for the remainder of the year.
Again, while this could impact the total volume of Ngls.
Nice realizations for Ngls will be relatively improved on a per barrel basis.
As it will be composed of more profitable C III plus components.
Propane butane and gasoline on a percentage basis.
Likewise, the ethane remaining in the natural gas stream will improve its btu quality.
Since the beginning of 2021 the company has returned 182 wells to production in.
In addition, we have converted artificial lift systems of four wells for their long term systems over the first quarter with 24 planned for the remainder of the year.
Which will aid in optimizing lifting and efficiency and lower <unk> cost for this well set.
The systems, we have and we'll be installing our tailored for the wells current fluid production and will reduce electrical demand from the current artificial lift system and is key to decreasing utility costs.
These types of investments optimizing our wells production profile and cost focus have contributed to flattening the expected asset level decline of our already producing assets to an average of approximately 8% over the next 10 years.
Over the quarter, we have successfully drilled completed and are now producing two operated wells.
We're getting the Meramec formation in the core of the northwest stack play.
Well three and four were recently completed and are anticipated to have first production early this month.
Let's pause for a moment to revisit the 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 almost fully held by production with a long history shallow ing and diversify 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.
Approximately $757 million based.
Based on <unk>, 2023, SEC pricing and assumptions.
And then the effective date of April one 2023.
These assets include more than 1000 miles each of owned and operated <unk> and electric infrastructure over our footprint.
This substantial owned and integrated infrastructure provides the company both cost and strategic advantages, while bolstering asset operating margin reduced lifting as well as water handling and disposal costs and.
And combined with other advantages helped de risk individual well profitability for majority of our producing well 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 meaningful free cash flow with total net cash now totaling approximately $288 million and zero debt as of quarter end.
This cash generation potential provide several paths 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.
Thus net cash position financial flexibility and approximately $1 6 billion an NOL.
Further the company is not subject to nbc's or other significant off balance sheet financial commitments.
Finally, it's worth highlighting that we take our ESG commitments seriously.
<unk> 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 remaining open to value accretive opportunities.
This strategy has five points.
One <unk>.
<unk> is the cash value of generation capacity of our incumbent Midcon PDP assets by extending and flattening our production profile with high rate of return Workover and artificial lift conversions.
As well as continuously pressing on the operating and administrative costs.
The second is to 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 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. So.
So that utilize its approximately $1 6 billion of net operating losses or otherwise yield attractive returns for its shareholders.
Fourth as.
As we generate cash we will continue to work with our board to assess path to maximize shareholder value.
Include investment in strategic opportunities return of capital and other uses.
Please note that the Companys 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 to the optionality on the number and types of opportunities that could become available at certain level.
Note that there is a high bar at both in management and board levels for mergers and acquisitions and that management ways. The cost of its growing cash balance versus the patients to evaluate and execute on accretive opportunities.
Management will continue to progress these with Ernest on multiple fronts.
Promote regular way return of capital discussion.
As Vance M&A evaluations, English shareholders, and investors and work with our board to advanced past maximize shareholder value.
Besides executing this year's capital plan and operating in a safe 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 as to uphold our ESG responsibilities.
Circling back to this year's drilling program.
Oil has fluctuated around the $70 per barrel range Henry hub has fallen to the mid to low two near term.
But it is in contango approaching.
Approaching near $4 per Btu by year end.
Given these near term dynamics and then their mid con assets are 99% held by production.
This preserves the tenor of our development options, we have concluded our drilling program.
But the remaining operated wells coming online later this month.
We will continue to monitor commodity price dynamics and maintain flexibility to adjust as may be warranted.
Commodity prices firmly over $80 sub UTI and $4 Henry hub or reduction in well costs are needed before we would return to exercise the option value.
Further development or reactivation.
But that said our teams efforts to combat inflationary pressures and execute operationally have and will translate to attractive returns and our remaining capital program, which will further enhance the meaningful cash flow from our base PDP assets.
While this reduced activity is not enough to keep overall production flat.
Expect oil volumes to increase.
With relatively more attractive pricing near term enhanced oil production will further bolster our per Boe realizations and translate to cash flow.
Also the recent commodity price environment could be constructive for M&A.
Producing mid con assets will continue to generate meaningful cash flow in the near term with at recent strip natural gas prices projected to improve by year end.
In the interim the relatively lower commodity prices down from the previous year's highs pits presents more cost effective opportunities for acquisitions, which would then be positioned to capitalize on future price improvements.
In addition to drilling we will be investing in approximately 28 artificial lift conversions this year and limited leasing to support future development and attractive commodity environments.
We could lean further into focus well reactivation in the second half of the year, if natural gas prices improve as forecasted with a recent strip.
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.
These prior investments in equipment and material have been key to combating inflationary pressures in today's markets.
While we will continue to lean forward into cost control efforts inflation will likely persist and remain a central focus this year and has bearing on unsecured costs.
Also the service sector has continued to be choppy as it ramped to meet increased activity demand last year and now adjusting in response to a more tempered environment. This year.
Are able to secure the equipment material and services needed to execute.
Surface efficiency and equipment quality have been the persistent pressure point across the industry.
While recent or future deceleration may provide some relief to these issues and may take additional time or further activity reduction before any associated benefit or cost reduction will be realized.
Now shifting to expenses, we were able to keep adjusted G&A to $2 5 million or $1 68 per Boe for the quarter.
Which compares favorably with our peers.
Efficiency of our organization stems from our core values to remain cost disciplined as well other prior initiatives, which have tailored our organization to be fit for purpose.
We continue to balance the weighting of fields versus corporate personnel to reflect where we actually create value to outsource necessary, but more perfunctory and less core functions such as operations accounting landed administration.
Tax and HR.
Despite capital activity with drilling and completion and increase operating and producing well count. Our total personnel remains just over 100 people.
Which includes key technical skill sets that have both the experience and institutional knowledge of our area of operations.
Despite inflationary pressures, we were able to keep LOE and expense workovers to approximately $11 7 million for the quarter.
Besides Verizon costs associated with inflation expenses for the period were impacted by increased Workovers in response to winter weather events as well as more producing wells for the company as well reactivation program as well as utility costs that are just now beginning to call from last year's peak natural gas prices.
We will continue to actively press on operating costs and anticipate workover expenses and utility costs to begin to decrease over the year.
In addition, we will continue to combat inflationary pressures on expenses through rigorous bidding processes, securing materials equipment and services over an appropriate tinder to partially offset market increases.
Executing on our plan artificial lift conversion program as well as continuing to leverage our significant infrastructure operation Center another company advantages.
In summary, the company has.
Approximately 288 million net cash and cash equivalent at quarter end, which represents nearly $7 79 per share of our common stock issued and outstanding.
Average production over the quarter of $16 seven Boe per day, with a 22% increase in oil compared to the first quarter of 2022 from our mid con producing assets.
Efficient capital program over the remaining infill and development drilling in the core of the northwest stack with mid composition that is 99% held by production.
Low overhead top tier adjusted G&A of $1 68 per Boe.
No debt in fact negative leverage.
Meaningful free cash flow and a growing net cash position supported by a diverse production profile.
Flattening expected annual PDP decline to an average of approximately 8% over the next 10 years.
And multi digit reserve life asset base.
Approximately $1 6 billion in the Nols, which will help shield future free 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.
This concludes our prepared remarks. Thank you for your time now open up the call for questions.
As a reminder to ask a question. Please press star followed by the number one on your telephone keypad. If you would like to withdraw your question. Please press star one and got it we'll pause for just a moment to compile the Q&A roster.
Once again to ask a question. Please press star followed by the number one on your telephone keypad.
And we'll pause for just a moment to compile the Q&A roster.
Our first question comes from from.
From contract accounting services. Please go ahead your line is open.
Hi, good morning.
My question has to do I think.
<unk> commented on a lot of pressure.
As all oil.
Oil and gas companies have recently.
Is there any update on maybe possibly.
Using some of the cash to buy back some of the shares.
Yes.
Very good use I know everybody's asking about patents.
Any update on any kind of dividend.
That may be coming down can be paid down.
This cash we have.
My two questions. Thank you.
Hi.
Thanks Ashwin.
So some great questions.
Happy to discuss.
Ricky.
Return of capital is always top of mind for management and the board.
We believe that with increasing cost of capital and fed rate hikes. This year that will continue to see pressure.
From an economic perspective and.
That should open up some acquisition opportunities and lower valuations.
As we proceed throughout the year and then as well, we think competition for capital and low cost of capital will continue to be.
Challenging for some of our competitors, which should give us a strategic advantage. If we're holding on to dry powder with our current cash position and cash flow from operations and then.
That should be should allow us to execute on some very accretive.
Potential M&A.
With that said.
If we are we continue to be unable to execute on any highly value accretive M&A.
Our board <unk>.
<unk> and management will continue to.
Evaluate the possibility of return of capital and ultimately.
The goal regardless of if we do M&A or not is to make sure that we have.
<unk> of returning cash flow to shareholders through accretive buybacks and dividends.
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