Q3 2024 SandRidge Energy Inc Earnings Call
Thank you for standing by and welcome to the Sand Ridge Energy 3rd Quarter 2024 Earnings Conference Call.
All lines have been placed on mute to prevent any background noise.
After the speaker's remarks, there will be a question and answer session.
Speaker Change: If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again press the star one. Thank you. I'd now like to turn the call over to Scott Prestridge, SVP of Finance and Strategy. You may begin.
Scott Prestridge: Thank you and welcome everyone. With me today are Grayson Pranin, our CEO, Jonathan Freitas, our CFO, Brandon Brown, our CAO, as well as Dean Parrish, our COO.
Scott Prestridge: We would like to remind you that today's call contains forward looking statements and assumptions which are subject to risk and uncertainty and actual results may differ materially from those projected in these forward looking statements.
Scott Prestridge: These statements are not guarantees of future performance and our actual results may differ materially due to known and unknown risks and uncertainties as discussed in greater detail in our earnings release and our SEC filings.
Speaker Change: 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 afternoon.
Grayson Pranin: I am pleased to report on a positive quarter for the company.
Scott Prestridge: At the end of August, we closed on our acquisition in the Western Anadarko Basin.
Scott Prestridge: In September, total production for the first month reflecting the contribution, these assets averaged approximately 19 MBOE per day, made up of 52% liquids, and the company's activity continues to translate to free cash flow from our producing assets.
Speaker Change: Before expanding on this, Jonathan will touch on a few highlights for the quarter.
Thank you, Grayson.
Speaker Change: Despite the downdraft in natural gas prices during the period, the company generated adjusted EBITDA of nearly $18 million in the third quarter. As we have pointed out in the past, our adjusted EBITDA is a unique metric for Sand Ridge due to us having no I and very little T.
Speaker Change: Given that we have no debt and a substantial NOL position that shields our cash flows from federal income taxes.
Speaker Change: On the I portion, we generated approximately $1.6 million of interest income during the quarter from cash held in various high-yield deposit accounts, which nearly offset our adjusted T&A for the quarter.
Speaker Change: The company initiated a return of capital program last year, with total cumulative dividends paid to date of approximately $150 million.
Speaker Change: for more than $4 per share. On November 5th, 2024, the Board of Directors declared an 11 cent per share cash dividend payable on November 29th, 2024 to shareholders of record on November 15th, 2024.
Speaker Change: Following our recent acquisition, cash, including restricted cash, at the end of the third quarter was more than $94 million, which represents more than $2.50 per share of our common stock issued and outstanding.
Speaker Change: The company has no term debt or evolving debt obligations and continues to live within cash flow, funding all capital expenditures and capital returns with cash flow from operations and cash held on the balance sheet.
Speaker Change: Commodity price realizations for the quarter before considering the impact of hedges.
Speaker Change: for $73.07 per barrel of oil, $0.92 per mcf of gas.
Speaker Change: and $16.25 per barrel of NGLs. As mentioned earlier, we have maintained our large federal NOL position, which was roughly $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.
Speaker Change: Our commitment to cost discipline continues to yield results with adjusted GNA for the quarter of approximately 1.6 million or $1.02 per BOE.
Speaker Change: We continue to generate net income for our shareholders, and during the quarter we earned approximately $26 million, or $0.69 per basic share. Net cash provided by operating activities was approximately $21 million during the period.
Speaker Change: Over the first nine months of the year, the company generated approximately $34 million in free cash flow, which represents a conversion rate of approximately 76% relative to adjusted EBITDA. Before shifting to our outlook, we should note that our earnings release in 10-Q will provide further details on our financial and operational performance during the quarter.
Thank you, Jonathan.
Speaker Change: Thought it would be useful to give a brief update on a recent acquisition before touching on other company highlights.
Scott Prestridge: As a quick recap, our recent acquisition in the western Anadarko Basin focused in the Cherokee Plague included 44 producing wells and 4 drilled but uncompleted wells concentrated in Ellis and Roger Mill Counties of Oklahoma.
as well as interest in 11 drilling and spacing units.
Scott Prestridge: From an activity standpoint, two of the four ducts have now been completed with the most recent achieving a 30-day IP over 1,000 DOE per day, 70% oil.
Scott Prestridge: We recently finished completions on the last two ducts with anticipated first production later this month.
Scott Prestridge: As Jonathan mentioned earlier, the contribution of these new assets helped the company achieve a new peak average daily rate this year, at nearly 19 MVOE per day, while also increasing our percentage of oil and liquids.
Scott Prestridge: This represents a 27% increase to the second-quarter average daily production rate on a BOE basis.
and a 65% increase on an oil basis.
Scott Prestridge: Please keep in mind that September was the first full month of contributions from the newly acquired assets to our financials, and Q4 will be the first full quarter.
Scott Prestridge: Revenue for the acquired assets in July and August were recorded as downward adjustments to the purchase price with details provided in our 10-Q.
This acquisition provides key benefits for the company to include.
Scott Prestridge: bolstering our base production and cash flow levels while preserving our strong balance sheet and planned capital return program.
Scott Prestridge: Diversifying the commodity mix of our producing asset base and providing commodity optionality with future investments.
Scott Prestridge: Upgrading our inventory through the Cherokee Shale Play, adding 22 two-mile laterals focused in a highly productive area of the play with break-evens roughly at $35 WTI.
provide synergies with the areas where we've been recently investigating.
Scott Prestridge: The potential for new sand ridge-operated drilling opportunities, enabling our team to be well-positioned to evaluate and execute on future organic growth opportunities.
Scott Prestridge: The Cherokee formation of the western Anadarko Basin has become a highly productive hydrocarbon target with increased horizontal activity over the last few years.
Scott Prestridge: It is comprised of mostly self-sourcing shells with innervated high porosity sands.
Scott Prestridge: The DSUs we will be developing are focused in the southern area of the Cherokee Corps.
offsetting some of the more productive wells in the play.
Scott Prestridge: Two recent wells in which we have interest in Roger Mills County, which were co-developed, meaning that the first and second wells were drilled and completed together, had an average IP30 of approximately 1400 BOE per day with 60% oil.
Scott Prestridge: Another pair of co-developed industry wells just to the north of these results had an average IP 30 of just under 2,000 BOE per day with 65% off.
Scott Prestridge: DDP assets included in this acquisition are in the core of the play and are connected to MidCon midstream purchasers and markets.
and do not require any substantial infrastructure investment.
Scott Prestridge: The assets are relatively new horizontal wells, with the oldest being just a few years old, which helps from a break-even or reserve-wide perspective.
We have endeavored over the past few weeks
Scott Prestridge: As we have with our incumbent asset base, to focus on efficiently integrating these new assets and implementing our low-cost operating expertise to these assets.
Scott Prestridge: Our lease operating expense for the quarter was approximately $9.1 million or $5.82 per BOE, which is a 9% reduction from the prior quarter on a BOE basis.
Scott Prestridge: Despite the incremental LOE associated with the expanded asset states from the acquisition.
are we continue to be mindful of commodity prices?
and Impact to Capital Allocation.
The transaction provides the potential for expanded activity.
Scott Prestridge: which could include the initiation of a development program this year.
Scott Prestridge: To sum up, the recent acquisition balances our portfolio of assets.
Scott Prestridge: Through Commodity Diversification, Near-Term Development Optionality, and Improving Reserve Life and Durability.
Scott Prestridge: Through this acquisition, we now have the multifaceted options to develop near-term in a constructive WTI price environment.
Scott Prestridge: as well as our incumbent properties in the appropriate natural gas and liquids price scenario. Or, both, when both WTI and Henry Hub prices are favorable.
Scott Prestridge: Long and short, this adds to our kit bag and better positions us to capitalize on not only the current, but future commodity cycles.
Scott Prestridge: Now pivoting back to the base business, I will turn things over to Dean.
Thank you, Grayson. Let's start on our capital program.
Dean Parrish: The ducks that were previously discussed were an anticipated expansion of activity associated with our recent acquisition.
Scott Prestridge: From a timing standpoint, two of the ducts were completed during the third quarter, and the operated well had a 30-day IP, over 1,000 BOE per day, with 70% oil.
Scott Prestridge: The last two ducts were completed during the fourth quarter and are planned to come online later this month.
Scott Prestridge: We did see some meaningful cost efficiencies with the most recent completions and are hopeful to leverage these savings going forward.
Scott Prestridge: In addition to the DUCs, we have focused on optimizing production from our incumbent asset base this year through high-return and value-adding projects that provide benefits such as lowering forward-looking costs,
Enhancing production on existing wells.
and further moderating our base decline profile.
Scott Prestridge: The artificial lift systems we have and will be installing in our conversion program are tailored for the well's current fluid production and will reduce the electrical demand from the current artificial lift system.
which is key to decreasing future utility costs.
Scott Prestridge: The focused efforts over past quarters in optimizing our wells production profile and costs have contributed to flattening the expected base asset level decline of our already producing assets.
Scott Prestridge: In addition to artificial lift conversions, our production optimization campaign has included heel completions, re-completions, and refracts.
Scott Prestridge: The heel completion that we piloted last quarter was successful, adding four times the production from pre-heel completion time.
Scott Prestridge: We have added three additional HEAL completion projects that will be executed this quarter.
Scott Prestridge: Our incumbent leasehold remains approximately 99% held by production, which cost-effectively maintains our development option over a reasonable tenor.
Scott Prestridge: These non-Cherokee assets have a higher relative gas content and commodity price futures are not yet at preferred levels to resume further development or more reactivations at this time.
Scott Prestridge: Commodity prices firmly over $80 WTI and $4 Henry Hub over a confident tenor and or reduction in well costs are needed before we would return to exercise the option value of further development or well reactivations.
Scott Prestridge: With that said, we have and will be leasing in the Cherokee clay, which will further bolster Cherokee development opportunities next year.
Scott Prestridge: The oilier content and increased productivity from these Cherokee wells will help to boost relative rates of return while decreasing break-even pricing in high-grade areas down to roughly $35 WTI.
Now shifting to lease operating expenses.
Scott Prestridge: Despite continued inflationary pressures and increased wealth count from our recent acquisition and prior capital programs, LOE and expense markovers for the quarter were held to approximately $9.1 million or $5.82 per BOE.
an approximate 9% per BOE reduction to the prior quarter.
Scott Prestridge: This was driven by successful integration of the newly acquired assets in addition to reduced water handling costs.
Scott Prestridge: We will continue to actively press on operating costs through rigorous bidding processes, leveraging our significant infrastructure, operations center, and other company advantages.
Scott Prestridge: In regard to price realizations, the company's largest natural gas purchaser continued to be in ethane recovery during the quarter.
Scott Prestridge: which increased NGL volumes for the period but also impacted natural gas and natural gas liquid pricing as more ethane is pulled out of the natural gas stream and recovered as natural gas liquids.
Scott Prestridge: The duration of ethane recovery is unknown at this time and is dependent on the dynamics of pricing between natural gas and ethane moving forward.
Scott Prestridge: In addition, natural gas realizations were also impacted this quarter by both low Henry Hub benchmark prices, which averaged $2.19 per MCF over the quarter, which the fixed infield gathering and transportation costs take up a larger percentage.
as well as widening local basis.
Scott Prestridge: In addition, with the forecasted increase of Henry Hub over this winter and into next year, the fixed portion of our DEDUX will become a smaller percentage of the difference.
Translating into improved price realizations at higher benchmark prices.
Scott Prestridge: With that, I'll turn things back over to Grayson. Thank you, Dean.
Grayson Pranin: Let us pause for a moment to revisit the key highlights of Sandwich.
Grayson Pranin: Our asset base is focused in the mid-continent region with a primarily PDP well set, which should not require any routine flaring of produced gas.
Grayson Pranin: These well-understood assets are most fully held by production, with a long-history, shallowing, and diversified production profile in double-digit reserve life.
Grayson Pranin: Our incumbent assets include more than 1,000 miles each of owned and operated SWD and electric infrastructure over our footprint.
Grayson Pranin: This substantial, owned, and integrated infrastructure helps de-risk individual well profitability for a majority of our legacy producing wells down to $40 WTI and $2 Henry Hub.
Grayson Pranin: Our assets continue to yield free cash flow with total cash after a recent acquisition as of quarter end of more than $94 million.
Grayson Pranin: This cash generation potential provides several paths to increase shareholder value realization and is benefited by low G&A burden.
Grayson Pranin: Sandridge's value proposition is materially de-risked from a financial perspective by a strengthened balance sheet, robust net cash position, no debt, financial flexibility, and approximately 1.6 billion in federal annual wealth.
Grayson Pranin: Further, the company is not subject to NVCs or other significant off-balance sheet financial commitments.
Grayson Pranin: Bolstered inventory that provides further organic growth optionality and further oil diversification with break-evens roughly down to $35 WTI in high-graded areas.
Grayson Pranin: Financial flexibility that allows us to make adjustments to our business, to take advantage of commodity cycles.
This flexibility extends to our net cash position.
Grayson Pranin: To include the return of capital provides a buffer, if not a benefit, to any commodity headwinds and the optionality to further grow our business.
Grayson Pranin: Finally, it's worth highlighting that we take our ESG commitment seriously and have implemented disciplined processes around that.
Grayson Pranin: We remain committed to our strategy to focus on growing the cash value and generation capability of our business in a safe, responsible, efficient manner, while prudently allocating capital to high-return organic growth projects.
Grayson Pranin: We also remain vigilant and evaluate further merger and acquisition opportunities in a disciplined manner with consideration of our balance sheet and commitment to our planned return of capital program.
Our strategy has five points.
Grayson Pranin: At 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 production optimization projects.
as well as continuously pressing on operating and administrative costs.
Grayson Pranin: The second is to exercise capital stewardship and invest in projects and opportunities that have high, risk-adjusted, fully burdened rates of return, while being mindful and prudently targeting reasonable reinvestment rates to optimize our EBITDA to free cash flow conversion.
Grayson Pranin: The third is to maintain optionality to execute on value-accretive merger and acquisition opportunities that could bring synergies, leverage a company's core competencies.
complement our portfolio of assets.
Grayson Pranin: further utilize our approximately $1.6 billion of federal net operating losses or otherwise yield attractive returns for our shareholders.
Grayson Pranin: Fourth, as we generate cash, we will continue to work with our board to assess paths to maximize shareholder value to include investment and strategic opportunities, advancement of our return of capital program, and other uses.
Grayson Pranin: To this end, the company expanded its return of capital program earlier this year with a $1.83 per share of dividends paid this year and a total of more than $4 per share since last year.
The final staple is to uphold our ESG responsibilities.
Grayson Pranin: As we look forward to next year, we plan to further progress our Cherokee development and anticipate to extend our capital investment in these very high return projects.
Grayson Pranin: in order to help maintain our production levels while providing further oil diversification.
Grayson Pranin: Please keep in mind that our return of capital program will continue to be our top priority and given our financial flexibility we will exercise capital stewardship to respond to changes in commodity prices.
Grayson Pranin: to include activity slowdown with any potential commodity downdraft or expanded activity with commodity tailwinds.
Brandon Brown: Now shifting to administrative expenses, I'll turn things over to Brandon.
Thank you, Grayson.
Brandon Brown: We were able to keep adjusted GNA to $1.6 million for the quarter or $1.02 per BOE, which is leading among our peers. As noted, the interest earned from our existing cash deposits after the acquisition nearly offset adjusted GNA for the quarter.
Brandon Brown: 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.
Brandon Brown: We plan to maintain our low-cost and efficiency-focused mindset moving forward.
Brandon Brown: to include the recent acquisition, which will further benefit our per DOE cost metrics.
Brandon Brown: We will continue to balance the weighting of field versus corporate personnel to reflect where we actually create value and have outsource necessary but more perfunctory and less core functions.
such as operations accounting, land administration, IT, tax, and HR.
Brandon Brown: Given our efficient structure and ability to flex with both activity and commodity prices, our total personnel has remained consistent at just over 100 people.
Brandon Brown: while retaining key technical skill sets that have both the experience and institutional knowledge of our area of operations.
Brandon Brown: In summary, the company had a 76% EBITDA to free cash flow conversion rate over the first nine months of 2024.
Brandon Brown: More than $94 million in cash in cash equivalents at quarter end, which represents more than $2.50 per share of common stock issued and outstanding.
Brandon Brown: an expanded inventory of high rate of return, low break-even projects.
Brandon Brown: A mid-con position that is approximately 99% held by production, which preserves the option value of future development potential in a cost-effective manner.
Brandon Brown: Low overhead, top tier, adjusted GNA of approximately $1.02 per BOE for the quarter.
No debt. In fact, negative leverage.
Brandon Brown: Positive free cash flow and a growing net cash position supported by a flattening production profile and double-digit reserve life asset base.
Brandon Brown: and 1.6 billion dollars of federal NRLs which will shield future free cash flow from federal income tax.
Speaker Change: This concludes our prepared remarks. Thank you for your time. We will now open the call to questions.
Speaker Change: Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star 1 again.
Speaker Change: Your first question comes from a line of Kyle May from Sidotian Company. Your line is open.
Hey, good afternoon, everyone.
Speaker Change: I was wondering if we could start with the latest acquisition and if you could maybe expand on your drilling activity plans for the Cherokee Play Asset.
Speaker Change: Sure Kyle, appreciate you calling in and great question. You know our recent plans have been to complete the ducts that Dean talked about on the call and we're putting together a plan to initiate drilling on our drilling and spacing units that will extend into next year.
Speaker Change: so we have you know 11 DSUs, 22 extended reach or two mile laterals that we'll be developing over the next couple of years.
Speaker Change: Okay, great. Any sense of how many you might drill next year?
Speaker Change: I think our plan right now is to develop with one rig or a partial rig here and you can drill one well every 30 days so you'd get a massive of 12 wells in a year.
Speaker Change: So that would be our threshold for where we're at right now.
Speaker Change: Okay, great. And one follow-up for me, can you provide any details about the well costs and expected returns in the Cherokee play compared to your legacy asset?
Sure, no, we're glad to expand on that.
Speaker Change: I think as I mentioned a couple times on the call
Speaker Change: that the Cherokee assets have higher oral content relative to our legacy assets.
Brandon Brown: which are more gassy in nature and therefore the economics today look more attractive just given the ratio between WTI and Henry Hub. Again as that changes in the future, this acquisition gives us more tools in the kit bag for capital allocation purposes.
where WTI is constructive.
I think the returns in the area are robust enough.
Brandon Brown: that we feel it makes sense to continue to allocate capital there going into next year.
Brandon Brown: $35 per barrel at WTI to give you a relative sense on where the floor is at.
Okay, great. Appreciate the time today.
Yeah, thank you, Kyle.
Speaker Change: And we have no further questions. This does conclude today's conference call. We thank you for your participation and you may now disconnect.
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