SandRidge Energy Inc. has eliminated some funding issues hanging over its development plans after securing a $1 billion joint venture (JV) in a key onshore play with Spain's Repsol YPF SA.
The agreement, announced late Thursday, centers around 363,636 net acres in the Mississippi Lime in Western Kansas, a tight oil play that for decades has seen vertical drilling success and of late a renewed interest from horizontal drillers armed with well fracturing stimulation techniques.
Under the multi-year JV, Repsol is acquiring a 25% nonoperated working interest, or 250,000 net acres, in SandRidge's "extension" Mississippian leasehold. The second transaction gives Repsol a 16% nonoperated stake, or 113,636 net acres, in what SandRidge calls its "original" Mississippi play.
"We compare the scope of this play to the Bakken [shale] and believe it will be transformational for the Midcontinent region of the United States," said SandRidge CEO Tom Ward, who co-founded Chesapeake Energy Corp. "SandRidge has led the way in developing the Mississippian play and has now drilled more than 195 horizontal wells, representing nearly half of all the horizontal wells drilled in the play to date."
During a conference call with financial analysts on Friday Ward said the Mississippian wells are expected to average 300,000-500,000 boe/well. To date they have "surprised to the upside" with natural gas reserves. "This area has been producing for decades and is part of a well-known stratigraphic trap focused between the Nemaha Ridge to the east and the Los Animas Arch to the West," he said.
The Central Kansas Uplift separates the Mississippi formation. The Nemaha Ridge runs between the Sedgwick and Cherokee basins in Kansas. To the south of the Los Animas Arch is the gassy Hugoton Embayment, which is north of the Oklahoma border and the prolific Anadarko Basin.
SandRidge's horizontal drilling program is "around vertical wells, which in general are not deeper than 6,000 feet and are averaging around 5,000 feet deep," said Ward. "Over 400 horizontal wells have been drilled there and nearly half of those are by SandRidge."
The company now has 195 horizontal producing wells in the play. The Mississippi formation covers an estimated 17 million acres and there already are more than 14,700 vertical analogous wells, Ward told analysts.
SandRidge in the past two years has acquired almost two million acres in the play at a cost of about $350 million, which puts its lease costs at about $175/acre. Today it has an estimated 9,400 potential locations but it's lacked the funding to quickly advance a program, Ward said.
Taking a cue from Chesapeake, which has become an expert in monetizing its onshore program in the United States, SandRidge now has three vehicles to fund the play. In April it formed the SandRidge Mississippian Trust I to help fund the drilling program. In August SandRidge secured $500 million by executing a separate JV on about 140,000 net acres with South Korean investment firm Atinum Partners Co.
Together with the Repsol deal, SandRidge now has monetized about 500,000 net acres for $1.83 billion, which gives the Mississippian leasehold an implied value of $3,660/acre, Ward said.
Repsol agreed to pay $250 million in cash at closing and the remainder in the form of a drilling carry. In addition to paying for its working interest share of development costs, Repsol also agreed to pay an amount equal to 200% of its working interest to fund a portion of SandRidge's cost of development until the additional $750 million drilling carry obligation is satisfied.
Based on current drilling expectations, SandRidge expects the drilling carry obligation to be satisfied within three years. The JV would exclude all wells and acreage within the associated spacing units spudded before Jan. 1, 2012 and all wells and acreage associated with SandRidge Mississippian Trust I, which it created in April. The transaction is expected to close early next year.
Because of Repsol's drilling carry and working interest, SandRidge's 2012 capital expenditure budget "is expected to decline to $1.6 billion from a previous budget of $1.8 billion," Ward said. "This JV with Repsol puts us on a clear path to bridge the 2012 funding gap with nondebt capital" and to execute the company's three-year plan to triple earnings and double oil production.
Ward hinted that there could be another royalty trust or an additional JV to come in the Mississippian play. But the company is done buying acreage, he told analysts.
For Repsol, the JV is its first in the North American onshore. The European behemoth already is a big North American energy player, but until now its focus has been as a marketer; it has been keen on importing liquefied natural gas (LNG) into the United States and Canada. Among other things Repsol has stakes in an LNG import facility in Mexico and in the Canaport LNG facility in Saint John, NB.
In 2009 Repsol also bought all of the planned natural gas production from Encana Corp.'s Deep Panuke field offshore Halifax, NS, which is slated to ramp up in March. The gas is to be delivered to markets in Eastern Canada and the northeastern United States.