Q2 2023 SandRidge Energy Inc Earnings Call
Ladies and gentlemen, thank you for standing by my name is Brent and I will be your conference operator today.
At this time I would like to welcome everyone to the Sandridge Energy second quarter 2023 earnings Conference call.
All lines have been placed on mute to prevent any background noise.
It is now my pleasure to turn today's call over to Scott <unk>, Vice President of Finance and Treasury. Sir. Please go ahead.
Thank you and welcome everyone with me today are Grayson, Brandon, our CEO and C. O O pillar Gomuti, 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 from those projected in these forward looking statements. We may also refer to adjusted EBITDA and adjusted G&A.
Other non-GAAP financial measures reconciliations of these measures can be found on our website.
I'll turn the call over to Grayson.
Okay.
Thank you and good morning.
I am pleased to report on a good quarter of results that the company has sufficient activity continues to translate to meaningful free cash flow from our producing assets year to date.
And the announcement of a regular quarterly cash dividend of 10 cents per share first payable in August 2023.
A quarterly approval by the board of directors.
And the $2 per share onetime cash dividend that was paid on June seven 2023.
Before expanding on this one.
I'll touch on a few highlights.
Thank you Grayson before jumping into operational and financial results I would like to highlight the recent closing of an acquisition, which increased the company's working interest in 26 operated wells within our northwest stack area, adding approximately 500, net BOE, a day or approximately 30% oil or <unk>.
$11 $3 million.
These types of small ball bolt ons will add value accretive production with low decline profiles.
Further strengthen the company's commodity price realizations operating margins and cash flow.
Production for the quarter averaged $17 five Boe per day up from $16 7 million Boe per day in the previous quarter and an increase of approximately 39% in oil production from the second quarter of 2022, driven by the higher oil content of new wells from our recent development program.
In the northwest stack play, but before the benefit of our recently closed acquisition.
Over the quarter the company generated adjusted EBITDA of approximately $20 million.
As we have pointed out in the past our adjusted EBITDA is a unique metric for sandridge do those having no.
And very little T. Given that we have no debt and a substantial NOL position that shields, our cash flows from federal income taxes.
On the ice portion we in fact generated approximately $2 9 million of interest income during the quarter from cash held in the diversity of high yield deposit accounts.
Net cash, including restricted cash was approximately $224 million, which represents approximately $6 per share of our common stock issued and outstanding as of June 30, 'twenty three and net of the one time dividend of $2 per share paid on June seven 2023.
The company has no term debt revolving debt obligations as of June 32023, and continues to live within cash flow lending all of its capital expenditures with cash flow from operations and cash held on the balance sheet.
Commodity price realizations before considering the impact of hedges were.
Or $70.99 per barrel of oil $2 per mcf of gas and $20 19 per barrel of NGL for the first half of the year. While there has been a reduction in oil and natural gas market benchmark prices for <unk> and Henry hub over the first six months of the year. The company has maintained commodity price realizations.
<unk> is in line with previously issued guidance for the period.
As alluded to earlier, we have maintained our large federal NOL position, which is estimated to be approximately $1 6 billion at quarter end.
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.
Adjusted G&A for the quarter was approximately $1 9 million.
Our $1 21 per Boe.
Despite inflationary pressures.
And in an increased well count from our prior well reactivation and development programs, our LOE and expense Workovers for the quarter were approximately $8 8 million or <unk> 53 per Boe.
A near 25% reduction from the prior quarter.
We believe we compare favorably with our peers in regards to the G&A and LOE and.
On both an absolute and per Boe basis.
We continued to generate net income for our shareholders. During the quarter. We earned net income of $16 6 million or <unk> 45 per basic share in net cash provided by operating activities of $24 million.
The company also generated approximately $2 9 million in interest income during the first quarter totaling approximately $5 4 million for the first six months of 2023.
This is all culminated in the company producing approximately $40 million in free cash flow. During the first six months of 2023, which represents a conversion rate of approximately 77% relative to adjusted EBITDA of just over $1 per common share common stock outstanding.
Shifting to our outlook, we should note that our earnings release and 10-Q provide further detail on our financial and operational performance during the quarter.
Okay.
Thank you.
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 this past quarter was good results adding.
Adding relatively earlier production from new wells in the northwest stack, while converting over 77% of adjusted EBITDA to free cash flow during the first six months of the year.
Production from our mid Con asset assets averaged $17 five <unk> per day for the quarter with volumes, increasing by 6% from the previous quarter and oil volumes, increasing nearly 40% compared to the second quarter of 2022.
Aided by the earlier production content of our new northwest stack wells.
The company's largest natural gas purchaser remain in ethane rejection during the quarter with more ethane staying in the natural gas stream, which had more favorable market pricing at the time of sales.
The decrease of ethane in the NGL stream resulted in Richard quality residue gas and increased natural gas volumes on a btu basis.
But decreased NGL volumes and subsequently total production on a barrel of equivalent basis relative to prior periods when more ethane was being recovered.
We anticipate that a majority of our natural gas stream could remain in ethane rejection for the remainder of the year.
Again this could impact the total volume of NGL. The remaining volume will become posed a more profitable C. III plus components like propane butane and gasoline on a percentage basis.
Likewise, the assay remaining in the natural gasoline will improve its btu quality.
During the first half of 2023, we completed 10 artificial lift conversions as the company continues to focus on high return on value, adding projects that provides benefits such as lowering forward looking costs enhancing or reactivating production on existing wells and <unk>.
Other moderating it's modest decline profile.
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 systems and is key to decreasing utility costs.
In addition, the company has returned over 180 wells production since 2021.
However, we have reduced this program in the near term electing to defer more meaningful levels of reactivation for periods of increased commodity prices.
With focused efforts over the past several quarter in optimizing our wells production profile and cost focus contributed to flattening expected base asset level decline of our already producing assets to an average of approximately 8% over the next 10 years before the impact of additional reactivation or <unk>.
<unk>.
The company continues to ensure that all projects meet high rate of return thresholds. It remains capital discipline as commodity price landscape changes.
Finally over the quarter, we successfully drilled completed and are now producing the last two operated well.
And this year's program these well targeting the Meramec formation in the core of the northwest stack play had a dual pad total peak 30 day average gross production rate of nearly 500 barrels of.
Of equivalent per day.
At 41% oil and continues to free flow with gas remaining relatively flat after nearly 90 days of production.
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 does not require any routine flaring of produced gas.
Well understood assets almost fully held by production with a long history, showering and diversified production profile and double digit reserve life.
These assets include more than 1000 miles each of owned and operated <unk> and electrical 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 help derisk individual well profitability for more than a majority of our producing wells down to $40 <unk> and $2 Henry hub.
In addition, the interconnectivity and ample capacity help buffer against unforeseen curtailment.
Okay.
Our assets continue to yield meaningful free cash flow with total net cash now totaling $224 million. After the recent $2 per share one time dividend paid during the quarter and zero debt.
This cash generation potential provides several path to increase shareholder value realization and has benefited by relatively low G&A burden.
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, our strengthened balance sheet robust net net cash position financial flexibility and approximately $1 6 billion and Nols.
Further the company is not subject to <unk> or other significant off balance sheet financial commitments.
Finally, it's worth highlighting that we take our ESG commitment seriously.
Implemented disciplined processes around them.
Okay.
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 maximize the cash value of generation capacity of our incumbent mid con 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 operating and administrative costs.
Second is to ensure we convert as much EBITDA to free cash flow as possible by exercising capital stewardship.
Testing in projects and opportunities that have a high risk adjusted fully burden rates of return to economically add production.
The third is maintaining optionality to execute on value accretive merger and acquisition opportunities that could bring synergies leverage the company's core competencies.
Its portfolio of assets.
It utilizes its approximately $1 6 billion of net operating losses or otherwise yield attractive returns for its shareholders.
I would like to pause here for a moment to highlight the acquisition, we recently announced which increased our interest in 26 operated wells in the northwest stack play.
We like this type of small ball bolt ons, where we can efficiently add production for accretive returns.
We will continue to look for opportunities similar to this as well as larger ones that meet the characteristics I described earlier.
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 and return of capital and other uses.
To this end the company initiated a return of capital program during the quarter that consists of.
$2 per share onetime dividend paid on June seven 2023.
10 cent per share regular way cash dividend first table in August of this year subject to quarterly approvals by the board of directors.
And an expanded share buyback program of up to $75 million.
Okay.
Please note that the company's cash position is also a strategic advantage that provides competitive leverage in evaluating M&A opportunities.
Especially given the outlook on interest rates capital markets and the impact of the Optionality on the number and type of opportunities that could become available at certain levels.
No that there is a high bar at both the management and board levels for mergers and acquisitions.
Management will continue to assess and promote regular way return of capital discussions advanced M&A evaluations, Inc.
Shareholders and investors and work with our board to further enhance path to maximize shareholder value.
By 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 large financial institutions.
Final staple as uphold our ESG responsibilities.
Circling back to this year's capital program, while oil has fluctuated between $70 to $80 per barrel range. Henry hub has fallen to the mid to near term, but it's in contango approaching upper threes by year end.
Given these near term dynamics and then our mid con assets are 99% held by production.
Preserves the tenor of our development options.
We have concluded our drilling program for the year with Alaska operated wells that came online over the quarter.
We will continue to monitor commodity price dynamics will maintain flexibility to adjustments may be warranted.
Commodity prices firmly over $80, <unk> and $4 Henry hub over a confident tuner <unk> reduction in well costs are needed before we would return to exercise the option value of further development or reactivation.
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 is now primarily focused on artificial lift conversions and other small ball PDP enhancing projects.
Okay.
While we have reduced activity near term the recent commodity price environment could be constructive for M&A or.
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 price.
Down from previous year's highs to present more cost effective opportunities for acquisitions.
Which would then be positioned to capitalize on future price improvement.
Shifting to expenses.
Even though keep adjusted G&A to $1 9 million or $1 21 per Boe for the quarter.
Which compares favorably with our peers.
The efficiency of our organization stems 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 a weighting of fueled the versus corporate personnel to reflect where we actually create value and outsource necessary, but more perfunctory and lost core functions such.
Such as operation accounting, we ended administration at.
Tax and HR.
Given our efficient structure and ability to flex with expanded activity over the past several quarters through outsourcing. Our total personnel and has remained consistent at just over 100 people while.
While retaining key technical skill sets they have both the experience and institutional knowledge of our area of operations.
We believe that this efficiency and structure are favorable advantages that could be effectively applied over a broader asset base.
And the benefit as a company evaluate the potential for M&A.
Despite inflationary pressures and increased well count from a prior reactivation and development programs are.
LOE and expense Workovers for the quarter were $8 8 million or $5 53 per Boe for the quarter.
The nearly 25% reduction from the prior quarter was primarily driven by lower utility and expense workover costs.
The former benefited from lower natural gas prices and power generation costs as well as our artificial lift conversions.
We anticipate workover expenses and utility costs to remain at these levels over the year and we will continue to actively press on operating costs through rigorous bidding processes.
<unk> to leverage our significant infrastructure.
Operation Center and other company advantages.
In summary, the company has $224 million net cash and cash equivalents at quarter end, which represents approximately $6 per share of our common stock issued and outstanding.
Average production over the quarter of $17 five Boe per day with nearly 40% increase in oil compared to the second quarter of 2022 from our mid con producing assets.
Yeah.
Mid composition that is 99% held by production, which preserves the option value of future development potential in a cost effective manner.
Overhead top tier adjusted G&A of $1 21 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.
Multi digit reserve life asset base.
One $6 billion in Nols, which will shield future fee cash flow from federal income taxes.
And a large owned and operated <unk> and 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, we'll now open the call to questions.
At this time I would like to remind everyone in order to ask a question. Please press star followed by the number one on your telephone keypad.
Pause for just a moment to compile the Q&A roster.
Again, if you would like to ask a question press star one on your telephone keypad.
There are no questions at this time, ladies and gentlemen, thank you for your participation. Today. This concludes today's conference call you may now disconnect.
Yeah.
Yeah.
Yeah.
Yeah.
Yeah.
Yeah.
Yeah.
Yeah.
Yeah.