Q3 2023 SandRidge Energy Inc Earnings Call

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Good day My name is Karen and I will be your conference operator today at this time I would like to welcome everyone to the Q3 2023 Sandridge Energy conference call. All lines have been placed on mute to prevent any background noise.

After the Speakers' remarks, there'll be a question and answer session if you'd like to ask a question. During this time simply press star followed by the number one on your telephone keypad.

If you'd like to withdraw your question Press Star again, thank you.

I'd now like to turn the call over to Scott Frustrate senior VP of finance and strategy.

Thank you and welcome everyone with me today are Greg <unk>, our CEO Brandon Brown our CFO.

And these perish, our SVP of operations.

We'd like to remind you that today's call contains forward looking statements and assumptions, which are subject to risks and uncertainties 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 Greg.

Thank you and good morning, I'm pleased to report on another consistent quarter of results.

And that the company's activity continues to translate to meaningful free cash flow from our producing assets year to date.

Before expanding on this brand and we'll touch on a few highlights.

Thank you Grayson progesterone for the quarter averaged $17, two and BOE per day and oil production increased approximately 12% in the first nine months of 2023.

They are to the same period in 2022, driven by the higher all content provide northwest stack as well.

The company generated adjusted EBITDA of nearly $23 million for the quarter and 74 million for the first nine months of the year.

We have pointed out in the past our adjusted EBITDA is a unique metric for sandridge.

Due to us, having new and very little team.

Given that we have no debt no substantial NOL position that shield with our cash flows from federal income taxes.

On the I portion, we in fact generated approximately $2 $5 million of interest income during the quarter and approximately $7 $8 million for the first nine months of the year from cash held in a diversity of high yield deposit accounts net cash, including restricted cash totaled $232 million, which represent.

Just over $6 per share of our common stock issued and outstanding as of September 32012.

The company has no term debt.

And debt obligations ended September 32023.

Live within cash flow funding all 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 $73 88 per barrel.

$1 78.

Per mcf of gas and $20 77 per barrel of Ngls for the first nine months of the year.

While oil and natural gas market benchmark prices for <unk> and Henry hub.

Lower over the first half of the year. The company had maintained healthy commodity price realizations year to date and its position to benefit from increases recent strip price.

As alluded to earlier, we have maintained our large federal NOL position, which is estimated to be approximately one $6 billion at the end of the quarter.

Our NOL position and that 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 SG&A for the quarter.

Possibly $2 1 million or <unk>.

One dollar and $35 per vehicle.

We continued to generate net income for our shareholders.

In the quarter, we are net income of $18 7 million or 61 cents.

Per basic share.

Net cash provided by operating activities of nearly $46 million.

This is I'll call it a normal company producing approximately $64 million in free cash flow. During the first nine months of 2023, which represents a conversion rate of approximately 86% relative to adjusted EBITDA of just over $1 70 per share of common stock outstanding.

Before 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.

Thank you Brandon.

Thought it would be helpful to walk through some of the company's highlights management strategy and the other business details.

As I mentioned previously this past quarter had positive results with the northwest stack wells, adding relatively oil production, while converting over 86% of EBITDA to free cash flow during the first nine months of the year.

Production from our mid Con assets averaged $17 two Boe per day for the quarter with all of the volumes increasing 20% over the first nine months of the year compared to the same period in 2022.

Aided by the or their production content from our northwest stack area.

The company's largest natural gas purchaser remained in ethane rejection during the quarter.

And we anticipate that a majority of our natural gas stream could remain in ethane rejection for the remainder of the year.

While this could impact the total volume of Ngls. The remaining volume will be composed of more profitable C. III plus components like propane butane and gasoline on a percentage basis.

Likewise, the ethane remaining in our natural gas stream will improve its btu quality.

Let's pause here for a moment to revisit the key highlights of Sandridge.

Our asset base is focused in the mid continent region with a primarily PDP will 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 ing and deferred supplied production profile and double digit reserve life.

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 costs and strategic advantages.

Bolstering asset operating margin through reduced lifting as well as water handling and disposal costs.

And combined with other advantages help derisk individual well profitability for a majority of our producing wells down to $40 <unk> and $2 Henry hub.

In addition.

Interconnectivity and ample capacity helped buffer against unforeseen curtailment.

Our assets continue to yield meaningful free cash flow, but total net cast off totaling $232 million.

This cash generation potential provide several path to increase shareholder value realization and it's 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.

<unk> value proposition has materially derisked from a financial perspective by our strengthened balance sheet.

Bus net cash position no debt financial flexibility and approximately $1 6 billion in Nols.

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 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 remaining open to value accretive opportunities.

This strategy has five points.

First is to maximize the cash value and 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 operating and administrative costs.

Second ensure we convert as much EBITDA to free cash flow as possible by.

By exercising capital stewardship, and divesting of projects and opportunities that have a high risk adjusted fully burdened rate of return to economically add production.

The third is to maintain optionality execute on value accretive merger and acquisition opportunities that could bring synergies.

Leverage the company's core competencies.

Supplements its portfolio of assets.

Further utilize its approximately $1 6 billion of net operating losses.

Otherwise yield attractive returns for our shareholders.

I'd like to pause here for a moment to highlight the acquisition that closed over the quarter, which increased our interest in 26 operated wells in the northwest stack play.

We like these type of small ball bolt ons, where we can efficiently add production for accretive returns we.

We will continue to look for opportunities similar to these 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 <unk> capital and other uses.

This is the company expanded its return of capital program earlier. This year that consists of a $2 per share onetime dividend paid on June seven 2023.

<unk> per share regular way cash dividend subject to quarterly approvals by the board of directors.

Expanded share buyback program of up to $75 million.

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.

We will continue to assess and promote regular way of return of capital discussions advanced M&A evaluations.

Meet with shareholders and investors and work with our board to further enhanced path to maximize shareholder value.

Besides executing this year's capital plan and operating in a safe and responsible manner. These topics remain paramount and the top priority.

In the interim we have secured favorable banking terms and keep our cash position diversified across interest bearing accounts at multiple significant well capitalized financial institutions.

A final staple as to uphold our ESG responsible.

Circling back to this year's capital program.

During the first nine months of 2023, we completed 12 artificial lift conversions as the company continues to focus on high return and value adding projects.

<unk> provides benefits such as lowering forward looking costs.

Enhancing or reactivating production on existing wells.

And further moderating it's modest decline profile.

The systems, we have and we'll be installing a tailored for the wells for fluid production.

Do you see electrical demand from the current artificial lift system and is key to decreasing utility costs.

In addition.

The company has returned over 180 wells to production since 2021. However, we have reduced this program earlier in the year electing to defer more meaningful levels of reactivation for periods of increased commodity prices with specific emphasis on natural gas prices for these type of projects.

The focused efforts over the past several quarters and optimizing our wells production profile at <unk>.

<unk> focus has contributed to flattening the 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 development or acquisition.

The company continues to ensure that all projects with high rate of return thresholds and remains capital disciplined as the commodity price landscape changes.

In addition to our small ball artificial lift and prior well reactivation programs.

We completed four operated wells in the northwest stack. This year, which has helped to offset the natural decline of our base PDP assets, while increasing overall oil content on a Boe basis.

While oil price has shifted up from the 60 seen earlier this year. It continues to fluctuate between the $80 $90 per barrel range rehab.

The rehab on the other hand until recently has been in the mid to high twos, but it is in contango now approaching the mid $3 per <unk> as we look towards year end.

Given the commodity dynamics earlier in the year and that our mid con assets are 99% held by production, which preserves the tenor and our development option. We concluded our drilling program. The last operated wells that came online during the second quarter.

We will continue to monitor commodity price dynamics and maintain flexibility.

Just as maybe warranted and.

And factor in these considerations when planning 2020 for activity.

Commodity prices firmly over $80, <unk> and $4 Henry hub over a confident tenor and or a reduction in well costs are needed before we would return to exercise the option value of further development for reactivation.

With that said our teams effort to combat inflationary pressures and execute operationally tab and will translate to attractive returns and our remaining capital program, which is now primarily focused on artificial lift conversions and other small ball pvp enhancing projects.

While we have reduced activity near term a tempered commodity price environment could be constructive for M&A.

Our producing mid con assets will continue to generate meaningful cash flow near term with at recent strip natural gas prices projected to increase over the next year plus.

In the interim the lower natural gas and NGL price environment down from the previous year's highs to present more cost effective opportunities for acquisitions, which.

Which could then be positioned to capitalize on future price improvements.

Now shifting to expenses, we're able to keep adjusted G&A, the $2 1 million or $1 35 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 is tailored our organization to be fit for purpose.

We continue to balance the weighting of our field force corporate personnel to reflect where we actually create value and outsource necessary, but more perfunctory and last core functions.

Such as operational accounting and administration.

Tax and HR.

Given our efficient structure and ability to flex with expanded activity over the past several quarters through outsourcing.

Total personnel has remained consistent at just over 100 people, while retaining key technical skill sets that have both the experience and institutional knowledge of our areas of operations.

We believe that this efficiency and structure, our favorable advantages that can be effectively applied over a broader asset base and the benefit as the company evaluates potential for M&A.

Despite inflationary pressures and increased well count from a prior well reactivation development programs as well as increasing interest associated with our recent northwest stack acquisition.

LOE and expense Workovers for the quarter were $11 5 million and $32 million for the first nine months or $6 83 per Boe.

We are projecting a decrease in expense workovers for the remainder of the year as.

As well as the softening in utility cost with future projects.

And a reduced water handling costs from new northwest stack wells.

Absolute decline from their peak production.

We'll continue to actively press on operating costs through rigorous bidding processes leveraging.

Leveraging our significant infrastructure operation Center and other company advantages.

In summary, the company has $232 million net cash and cash equivalent at quarter end, which represents more than $6 per share of our common stock issued and outstanding.

Average production over the quarter of $17 two Boe per day with 20% increase in oil the first nine months compared to the same period in 2022.

Mid composition that is 99% held by production, which preserves the option value of future development potential in a cost effective manner.

Low overhead top tier adjusted G&A of $1 35 per Boe.

No debt and the fact negative leverage.

Meaningful free cash flow and growing net cash position supported by a diverse production profile flattening expected annual base PDP decline to an average of approximately 8% over the next 10 years multi.

Multi digit reserve life asset base.

One 6 million in Nols, which will shield future fee cash flow from federal income taxes.

Large owned and operated activity 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, we will now open the call to questions.

At this time I would like to remind everyone in order to ask a question Star and then the number one on your telephone keypad well pause for just a moment to compile the Q&A roster.

And a quick reminder, just click the star button and the number one on your P Park.

We plan to ask your questions.

All right and our first question comes from the line of David Codell.

With Groupon cats.

David.

Yes.

Can you talk a little bit about your your buyback.

And whether or not at this level, we should expect for you to be active in it.

Sure Yes. Good morning. Thank you for the question, it's a great one.

I should explain that the intent of the buyback program.

What's been authorized up to $75 million.

Is to Opportunistically repurchase shares during market dislocations.

Not really intended to.

The buyback meet certain amount or time periods under under any conditions.

It's really just meant to.

Take advantage of dislocations in specifically dislocations between commodity and market prices.

David Mccann.

Okay.

Hello.

David was placed back into the queue.

And again anyone if you'd like to ask a question. Please press star and the number one on your telephone keypad.

Alright, ladies and gentlemen, this concludes today's call. Thank you Barry.

Much for joining you may now all disconnect have a great rest of the day.

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