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Mississippian Paying Off for SandRidge; Market Wary

SandRidge Energy Inc.'s transition from a natural gas producer to an oil explorer appears to be paying off, with the company's Mississippian Lime operations experiencing success and its bottom line improving, but the market seems unconvinced.

"The Mississippian play continues to have strong production growth coupled with lower costs, which is driving the better than anticipated results," CEO Tom Ward said during an earnings conference call with analysts Friday.

"We grew our Mississippian production to 35,900 boe/d in the fourth quarter, which is a 19% quarter-over-quarter increase and up from 15,500 boe/d a year ago. We drilled 10 wells in the fourth quarter with 30-day production average above 800 boe/d." Those wells, which are located in Alfalfa, Grant and Woods counties in Oklahoma, produced an average of 68% oil, Ward said.

SandRidge drilled 125 horizontal wells in the Mississippian in 4Q2012 (85 in Oklahoma and 40 in Kansas) and 396 in the play in all of 2012. The company exited the year with 33 rigs operating in the Mississippian: 24 drilling horizontal wells in Oklahoma, eight drilling horizontal wells in Kansas and one drilling disposal wells. SandRidge drilled another 115 wells in the Permian Basin during 4Q2012.

The company plans to drill approximately 580 horizontal producers and 74 disposal wells in the Mississippian this year.

SandRidge reported adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) for 4Q2012 of $318 million, compared with $175 million in 4Q2011, and net loss applicable to common stockholders of $302 million (minus 63 cents/share), an improvement from a net loss of $389 million (minus 97 cents) in the year-ago period. For the full year 2012 adjusted EBITDA was $1.07 billion, compared to $654 million in 2011.

But despite those numbers and the promising results in the Mississippian, SandRidge share prices still lag well behind the $11-12 target set by some analysts. On Friday afternoon, SandRidge shares were trading at $5.44, down about 4.5% on the day and well off the 52-week high of $8.72. Tudor, Pickering, Holt & Co. on Friday downgraded SandRidge from "hold" to "sell," saying that while 4Q2012 results were good, "higher confidence [is] needed in underlying asset to support stock." So what is the Street missing?

"I'm not positive of why we're here, but one theory might be that we in 2009 had to make a fairly dramatic move with the company and that did require us to work in an unorthodox way to get to the point that we have the liquidity we have today, and people sometimes like more orthodoxy," Ward said.

Three years ago SandRidge slashed its capital expenditures (capex) plans from a guidance of $2 billion to $500 million and cut its U.S. onshore rig count to from 47 to 12 in an effort to operate within its cash resources and increase production (see Daily GPI, Dec. 17, 2008).

"Our company's clear strategy has always been focused on rates of return versus ultimate production numbers. That's the reason we deliberately chose the Mississippian formation and protected our EURs [estimated ultimate recovery] of 300,000-500,000 boe in 2009," Ward said. "We knew we were in an active oil system that can be improved by finding more oil and spending less money to enhance rates of return."

SandRidge estimates production of approximately 34.3 million boe and capex of $1.75 billion in 2013, with a majority of capex going to fund its Mississippian program.

In December SandRidge agreed to sell its Permian Basin portfolio for $2.6 billion in cash to privately held Sheridan Production Partners II, a sale that had been anticipated since early November (see Shale Daily, Dec. 21, 2012). The sale closed Tuesday with an effective date of Jan. 1, 2013, SandRidge said.

SandRidge racked up $365 million in debt during 4Q2012 and $1.4 billion in debt during 2012.

Oklahoma City-based SandRidge has been locked in a war of words with hedge fund TPG-Axon Capital, one of the exploration and production (E&P) company's largest investors for some time. TPG-Axon has alleged that a company controlled by Ward's children controls roughly 475,000 acres in the Mississippian near SandRidge operations (see Shale Daily, Feb. 21). SandRidge has urged shareholders to reject TPG-Axon's "false and misleading campaign" to replace the company's board of directors.

SandRidge has scheduled an investor/analyst meeting for Tuesday morning.

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