The company's objectives and operations.
Over the last four
years, SandRidge's goal has been to acquire low priced oil assets in
the United States, where shallow, inexpensive oil can be drilled. It
currently has 42 rigs operating, and it had 36 rigs operating in the
first quarter. It produces 30,000 barrels of oil equivalent in the
Permian basin and Central Basin. Its wells have an estimated
ultimate recovery (EUR) of 456,000 barrels.
SandRidge has been
focusing new wells in the Mississippian formation in Oklahoma and
Kansas. In the opinion of CEO Tom Ward, this region is the best
place to drill for oil in the United States. In the Mississippian,
SandRidge operates 24 horizontal rigs, and anticipates it will be
oeprated 32 horizontal rigs at the end of 2012 and 45 horizontal rigs
at the end of 2013. It anticipes creating over 100,000 jobs over the
next 5 year and believes the area is as large and as important at the
Bakken is to North Dakota and Montana. It believes it has an
advantage in that it was the first in the region and was able to
acquire land at favorable prices. It has acquired a total of 1.7
million acres in the Mississippian---which is 200,000 more acres
than expected,---at $350 an acre. It does not anticipate acquiring
further acreage and wishes to limit its supply to a 15-year
inventory.
The company's objective is to be the lowest cost operator in the area it develops. It believes it is efficient because it chooses to focus on a single area. It has already built up the infrastructure in the area to allow it to drill a large number of wells.
Current production in the Mississippian was $19,300 barrels of oil equivalent per day for the first quarter, with an average of 14 rigs. It has already increased to over 26,000 barrels of oil equivalent per day. The company expects considerable growth once all 45 rigs are operating by the end of 2013. It expects that its wells will produce between 244 and 315 barrels per day.
SandRidge has also been acquiring wells in the Gulf of Mexico region as the Bureau of Ocean Energy Management, Regulation and Enforcement has become more aggressive in forcing operators to plug and abandon inactive platforms. Consequently, companies will prefer to sell producing assets at very low prices in order to eliminate these obligations, and SandRidge has been acquiring these wells where there is very little competition. SandRidge's goal is to produce 25,000 barrels of oil equivalent per day of production in the Gulf of Mexico and spend $200 million per year.
Risks and hedges
The biggest risk seen by the company is lower oil prices. It has been aggressively hedging through 2014, and possibly beyond that to lock in $100/barrel oil. The company's revenue is 80 percent oil, and therefore, it does not anticipate that lower natural gas prices will have much impact on its cash flow or earnings. Oil at a price of $60 and natural gas at a price of $2.50 would still result in a 30 percent return for the company. Oil at a price of $100/barrel would be a 100 percent rate of return.
Financials
For the first quarter, adjusted net income was $21.2 million or $0.04 per diluted share. Adjusted EBITDA increased 27% over the comparable 2011 period and 6% over the fourth quarter 2011.
The company has $1.6 billion of liquidity, $600 million of which is in cash, and an additional $1 billion undrawn on its revolver. It's capital expenditures in the first quarter were about $140 million, which were one time expenditures and frontloaded expenditures for infrastructure and land in the Mississippian play. It anticipates capital expenditures going down for the remainder of the year. It feels that its liquidity, plus cash flow from operations, will be sufficient to fund its capital expenditures in 2012.
SandRidge has raised capital through the sale of three royalty trusts, the sale of 8.125 percent senior notes ($750 million) and the issuance of additional shares. It projects that by 2014 it will be a mature company that is growing at double digit rates and can make acquisitions using both debt and equity.
The full transcript of the conference call can be found on Seeking Alpha at the following link:
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