SandRidge Energy Inc

NYSE:SD

Earnings Call Analysis

Earnings Call Transcript 2023-Q3

[Operator]

Good day. My name is Karen, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Q3 2023 SandRidge Energy Conference Call. [Operator Instructions] I'd now like to turn the call over to Scott Prestridge, Senior VP of Finance and Strategy.

[Scott Prestridge, executive]

Thank you, and welcome, everyone. With me today are Grayson Pranin, our CEO; Brandon Brown, our CFO; and Dean Parrish, our SVP of Operations. We'd like to remind you that today's call contains forward-looking statements and assumptions, which are subject to risks and uncertainties, and actual results may differ materially from those projected in these forward-looking statements. 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.

[Grayson Pranin, executive]

Thank you, and good morning. I'm pleased to report on another consistent quarter of results and that the company's activity continues to translate to meaningful free cash flow from our producing assets year-to-date. Before expanding on this, Brandon will touch on a few highlights.

[Brandon Brown, executive]

Thank you, Grayson. Production for the quarter averaged 17.2 MBoe per day and oil production increased approximately 20% from the first 9 months of 2023 compared to the same period in 2022, driven by the higher oil content from our Northwest Stack wells.

The company generated adjusted EBITDA of nearly $23 million for the quarter and $74 million for the first 9 months of the year. As we have pointed out in the past, our adjusted EBITDA is a unique metric for SandRidge due to us having no I and very little T, given that we have no debt and a substantial NOL position that shields our cash flows from federal income taxes.

On the I portion, we, in fact, generated approximately $2.5 million of interest income during the quarter and approximately $7.8 million for the first 9 months of the year from cash held in the diversity of high-yield deposit accounts. Net cash, including restricted cash totaled $232 million, which represents over $6 per share of our common stock issued and outstanding as of September 30, 2023. The company has no term debt of revolving debt obligations as of September 30, 2023, and continues to live within cash flow, funding all its capital expenditures with cash flow from operations and cash held on the balance sheet.

Commodity price realizations before considering the impact of hedges were $73.88 per barrel or $1.78 per Mcf of gas and $20.77 per barrel of NGLs. For the first 9 months of the year, while oil and natural gas market benchmark prices for WTI and Henry Hub were lower over the first half of the year, the company has maintained healthy commodity price realizations year-to-date and is positioned to benefit from increases in recent strip prices.

As alluded to earlier, we have maintained our large federal NOL position, which is estimated to be approximately $1.6 billion at the end of the quarter. Our NOL position has and will continue to allow us to shield our cash flows from federal income taxes.

Our commitment to cost discipline has continued to be impactful with adjusted G&A for the quarter of approximately $2.1 million or $1.35 per Boe. We continue to generate net income for our shareholders. During the quarter, we earned net income of $18.7 million or $0.51 per basic share to net cash provided by operating activities of nearly $26 million. This is all culminated in the company producing approximately $64 million in free cash flow during the first 9 months of 2023, which represents a conversion rate of approximately 86% relative to adjusted EBITDA, or just over $1.70 per share of common stock outstanding.

Before shifting to our outlook, we should note that our earnings release and 10-Q provide further detail on our financial and operational performance during the quarter.

[Grayson Pranin, executive]

Thank you, Brandon. We thought it would be helpful to walk through some of the company's highlights, management strategy and other business details. As I mentioned previously, this past quarter had positive results with the Northwest Stack wells adding relatively oilier production while converting over 86% of EBITDA to free cash flow during the first 9 months of the year.

Production from our Mid-Con assets averaged 17.2 MBoe per day for the quarter, with oil volumes increasing 20% over the first 9 months of the year compared to the same period in 2022, aided by the oilier production content from our Northwest Stack area. The company's largest natural gas purchaser remained in ethane rejection during the quarter, and we anticipate that a majority of our natural gas stream could remain in ethane rejection for the remainder of the year. While this could impact the total volume of NGLs, the remaining volume will be composed of more profitable C3+ components like propane, butane and gasoline on a percentage basis. Likewise, the ethane remaining in our natural gas stream will improve its BTU quality.

Let's pause here for a moment to revisit the key highlights of SandRidge. Our asset base is focused on the Mid-Continent region with a primarily PDP well set, which do not require any routine flaring of produced gas. These well-understood assets are most fully held by production with a long history, shallowing and diversified production profile on double-digit reserve life. These assets include more than 1,000 miles each of owned and operated SWD and electric infrastructure over our footprint. This substantial owned and integrated infrastructure provides the company both cost and strategic advantages, bolstering asset operating margin through reduced lifting as well as water handling and disposal costs, and combined with other advantages help derisk individual well profitability for a majority of our producing wells down to $40 WTI and $2 Henry Hub. In addition, the interconnectivity and ample capacity help buffer against unforeseen curtailment.

Our assets continue to yield meaningful free cash flow with total net cash now totaling $242 million. This cash generation potential provides several paths to increase shareholder value realization and has benefited by relatively low G&A burden. As we realize value and generate cash, our Board is committed to utilizing our assets, including our cash, to maximize shareholder value.

SandRidge's value proposition is materially derisked from a financial perspective by our strengthened balance sheet, robust net cash position, no debt, financial flexibility and approximately $1.6 billion in NOLs. Further, the company is not subject to MVCs or other significant off-balance sheet financial commitments.

Finally, it's worth highlighting that we take our ESG commitment seriously and have implemented disciplined processes around them. 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 opportunities and remaining open to value-accretive opportunities.

This strategy has 5 points. First is to maximize the cash value and generation capacity of our incumbent Mid-Con PDP assets by extending and flattening our production profile with high rate of return workover and artificial lift conversions, as well as continuously pressing on operating and administrative costs. The second is to ensure we convert as much EBITDA to free cash flow as possible by exercising capital stewardship and investing in projects and opportunities that have a high risk-adjusted fully burdened rate of return to economically add production. The third is to maintain optionality to execute on value-accretive merger and acquisition opportunities that could bring synergies, leverage the company's core competencies, complement its portfolio of assets, further utilize its approximately $1.6 billion of net operating losses or otherwise yield attractive returns for its shareholders.

I'd like to pause here for a moment to highlight the acquisition that closed over the quarter, which increased our interest in 26 operated wells in the Northwest Stack play. We like these types of small ball bolt-ons where we can efficiently add production for accretive returns. We will continue to look for opportunities similar to these as well as larger ones that meet the characteristics I described earlier.

Fourth, as we generate cash, we will continue to work with our Board to assess paths that maximize shareholder value, to include investments in strategic opportunities, return of capital and other uses. To this end, the company expanded its return of capital program earlier this year that consists of a $2 per share onetime dividend paid on June 7, 2023; a $0.10 per share regular way cash dividend, subject to quarterly approval by the Board of Directors; and expanded its share buyback program of up to $75 million.

Please note that the company's cash position is also a strategic advantage that provides competitive leverage in evaluating M&A opportunities, especially given the outlook on interest rates, capital markets and impact to the optionality on a number and type of opportunities that could become available at certain levels. Know that there is a high bar at both the management and Board levels for mergers and acquisitions. Management will continue to assess and promote regular way of return of capital discussions, advanced M&A evaluations, meet with shareholders and investors and work with our Board to further enhance paths to maximize shareholder value.

Besides executing this year's capital plan and operating in a safe and responsible manner, these topics remain paramount in the top priority. In the interim, we have secured favorable banking terms and keep our cash position diversified across interest-bearing accounts at multiple significant well-capitalized financial institutions.

The final staple is to uphold our ESG responsibility. Circling back to this year's capital program, during the first 9 months of 2023, we completed 12 artificial lift conversions as the company continues to focus on high return and value-adding projects that provide benefits such as lowering forward-looking costs, enhancing or reactivating production on existing wells and further moderating its modest decline profile. The systems we have and will be installing are tailored for the wells' current fluid production that will reduce the electrical demand from the current artificial lift systems and is key to decreasing utility costs.

In addition, the company has returned over 180 wells to production since 2021. However, we have reduced this program earlier in the year, electing to defer more meaningful levels of reactivations for periods of increased commodity prices, with specific emphasis on natural gas prices for these types of projects.

The focused efforts over the past several quarters in optimizing our wells' production profile and cost focus have contributed to flattening the expected base asset level decline of our already producing assets to an average of approximately 8% over the next 10 years before the impact of additional reactivations, development or acquisitions. The company continues to ensure that all projects meet high rate of return thresholds and remains capitally disciplined as the commodity price landscape changes.

In addition to our small ball artificial lift and prior well reactivation programs, we completed 4 operated wells in the Northwest Stack this year, which has helped to offset the natural decline of our base PDP assets while increasing overall oil content on a Boe basis. While oil price has shifted up from the 60s seen earlier this year, it continues to fluctuate between the $80 and $90 per barrel range. Henry Hub, on the other hand, until recently has been in the mid- to-high 2s but within contango now approaching the mid-$3 per MMBtu as we look towards year-end.

Given the commodity dynamics earlier in the year and that our Mid-Con assets are 99% held by production, which preserves a tenor in our development option, we concluded our drilling program with the last operator wells that came online during the second quarter. We will continue to monitor commodity price dynamics and maintain flexibility to adjust as maybe warranted and factor in these considerations when planning 2024 activity.

Commodity prices firmly over $80 WTI and $4 Henry Hub over a confident tenor and/or a reduction in well costs are needed before we will return to exercise the option value of further development or reactivations. With that said, our team's efforts to combat inflationary pressures and execute operationally have and will translate to attractive returns in our remaining capital program, which is now primarily focused on artificial lift conversions and other small ball PDP enhancing projects.

While we have reduced activity near term, a tempered commodity price environment could be constructive for M&A. Our producing Mid-Con assets will continue to generate meaningful cash flow near term with the recent strip natural gas prices projected to increase over the next year plus. In the interim, the lower natural gas and NGL price environment, down from the previous year's highs to present more cost-effective opportunities for acquisitions, which could then be positioned to capitalize on future price improvements.

Now shifting to expenses. We're able to keep adjusted G&A to $2.1 million or $1.35 per Boe for the quarter, which compares favorably with our peers. 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. We continue to balance the weighting of our field versus corporate personnel to reflect where we actually create value and outsource necessary but more perfunctory and less core functions such as operational accounting, land administration, IT, tax and HR given our efficient structure and ability to flex with expanded activity over the past several quarters through outsourcing. Our total personnel have remained consistent at just over 100 people while retaining key technical skill sets that have both the experience and institutional knowledge of our areas of operations.

We believe that this efficiency and structure are favorable advantages that could be effectively applied over a broader asset base and the benefit as the company evaluates potential for M&A. Despite inflationary pressures and increased well count from our prior well reactivation and development programs, as well as increased interest associated with our recent Northwest Stack acquisition, LOE and expense workovers for the quarter were $11.5 million and $32 million for the first 9 months or $6.83 per Boe.

We are projecting a decrease in expense workovers for the remainder of the year as well as a softening in utility costs with future projects and reduced water handling costs from new Northwest Stack wells as they naturally decline from her peak production. We will continue to actively press on operating costs through rigorous bidding processes, leveraging our significant infrastructure, operation center and other company advantages.

In summary, the company has $232 million net cash and cash equivalent at quarter end, which represents more than $6 per share of our common stock issued and outstanding; average production over the quarter of 17.2 MBoe per day with 20% increase in oil the first 9 months compared to the same period in 2022; Mid-Con position that is 99% held by production, which preserves the option value of future development potential in a cost-effective manner; low overhead, top-tier adjusted G&A of $1.35 per Boe; no debt and in fact, negative leverage; meaningful free cash flow and growing net cash position supported by a diverse production profile, flattening expected annual-based PDP decline to an average of approximately 8% over the next 10 years multi-digit reserve life asset base; $1.6 billion in NOLs, which will shield future free cash flow from federal income taxes; large owned and operated SWD in electrical infrastructure, which provides cost and strategic advantages requiring little to no future capital to maintain.

This concludes our prepared remarks. Thank you for your time. We'll now open the call to questions.

[Operator]

[Operator Instructions] And our first question comes from the line of [ David Cardell ] with Bluepond Cap.

[Unknown Analyst]

Yes. Can you talk a little bit about your buyback and whether or not at this level we should expect for you to be active in it?

[Grayson Pranin, executive]

Sure. Yes. Thank you for the question. It's a great one. I should explain that the intent of the buyback program, which has been authorized up to $75 million, is to opportunistically repurchase shares during market dislocations. It's not really intended to buy back to meet certain amounts or time periods under any conditions. It's really just meant to take advantage of dislocations and specifically dislocations between commodity and market price.

[Operator]

[Operator Instructions] All right, ladies and gentlemen, this concludes today's call. Thank you very much for joining. You may now all disconnect. Have a great rest of the day.