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SandRidge Buys Into Niobrara, Takes $1.1B in Impairments

SandRidge Energy Inc., stumbling financially as it dwells in a lower-priced commodity world, is once again attempting to diversify its operations by acquiring proved reserves and producing wells in the Niobrara formation of Colorado. The $190 million cash agreement announced Wednesday followed news that the Oklahoma City-based independent reported a $640 million net loss in the third quarter, including a $1.1 billion writedown on the value of its portfolio.

The Niobrara acquisition, with privately held EE2 LLC, is set to close by the end of the year. The deal would give SandRidge a position in the North Park Basin in Jackson County, CO. The acreage "is largely concentrated in rural north-central Colorado and ideal for pad drilling and efficient infrastructure installation," management said. The property, 100% operated, has proved reserves estimated at 27 million boe, 82% weighted to oil, and currently is producing 1,000 boe/d from 16 horizontal wells.

SandRidge is planning initially to run one rig beginning in January and would increase to a two-rig program by mid-year. Thirteen drilling permits already have been approved, it said. It has 3-D seismic coverage on 54 square miles, with close to half of the 136,000 acres held by production and by two federal units.

The acquisition "has the potential to add half or more to our current reserves base" and "represents judicious use of our liquidity," CEO James Bennett said. "Our right-sized and derisked acquisition of assets in the North Park Basin deliberately matches our expertise with a clear line of sight to over 1,300 high-return drilling locations."

SandRidge plans to deploy expertise learned from its Midcontinent drilling program, using "extended lateral designs and improved completion designs. We will be mobilizing to spud our first well in January."

The Niobrara deal would give SandRidge another avenue for its exploration and development program, which now focuses on Midcontinent properties, particularly in Oklahoma, as well as in the Permian Basin. The operator had surprised the industry in 2012 after it agreed to buy Gulf of Mexico operator Dynamic Offshore Resources LLC for $1.28 billion, but the offshore business was scuttled in early 2014 (see Shale DailyJan. 7, 2014).

The Niobrara purchase may offer diversity, but SandRidge still is dealing with a share price that hasn't edged above $1.00 on the New York Stock Exchange since late July (see Shale DailyJuly 27). After issuing its earnings report and the news of the Niobrara deal, SandRidge stock ended the day on the New York Stock Exchange up close to 8% at 44 cents/share.

Bennett said the third quarter results showed that SandRidge had addressed $925 million of debt through bond repurchases and made other bond exchange agreements at a premium to the recent share price. He also noted that in October the company re-acquired the Pinon Gathering Co. LLC gas gathering system in the Permian, which reduced annual expenses by about $40 million (see Shale DailyOct. 5).

The Niobrara assets are to be allocated "significant capital...to diversify and improve our overall capital efficiencies. We are visibly capturing balance sheet, operational and acquisition opportunities to enhance our value proposition to investors."

SandRidge produced about 10% less sequentially during the latest period, with output of 79,900 boe/d, about 52% weighted to natural gas. Full-year production guidance has been increased to 29.5-30.5 million boe from 29-30.5 million boe, while lifting costs were lowered to $10.50-11.50/boe from $11.50-12.50.

In the Midcontinent, SandRidge drilled 31 laterals between July and September, and it averaged six horizontal rigs across its Oklahoma holdings, including the Mississippian Lime. The assets produced 70,600 boe/d, 51% weighted to gas. In West Texas, the Permian properties produce about 4,200 boe/d, 82% oil-weighted, while the legacy Overthrust properties produced 5,100 boe/d, 99% gas-weighted.

SandRidge, which has suspended its dividend payment, ended the quarter with $1.3 billion in liquidity, including $790 million in cash.

The company reported a net loss of $640 million (minus $1.23/share) for 3Q2015, versus earnings in the year-ago period of $157 million (30 cents). Included in the latest losses was a $1.1 billion writedown for the value of the gas and oil portfolio. Net operating cash fell to $41,892 from $164,892. Adjusted net loss was $45 million (minus 7 cents/share) in 3Q2015, versus adjusted net income a year ago of $43 million (7 cents). Revenue plunged to $180 million from $394 million.

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