SandRidge Energy Inc

NYSE:SD

Earnings Call Analysis

SandRidge's Positive Financial Health and Strategy

In a year marked by a 10% rise in oil production and impressive free cash flow generation, SandRidge manifested strong financial health. Production averaged 17 MBoe per day, heavily supported by Northwest Stack wells. The year's adjusted EBITDA hit $93 million, and the company benefited from having no debt and substantial tax assets, resulting in a net cash position, including restricted cash, of roughly $200 million after dividends adjustments. Its Mid-Continent assets, shielded by owned infrastructure, have fortified operating margins. SandRidge's commitment to shareholder value is clear from its return of capital program, which includes cumulatively $137 million in dividends and an increase in the quarterly dividend by 10%, as well as an opportunistic share repurchase program of up to $75 million.

An Active Year with Strong Performance and Capital Discipline

The energy company led by CEO Grayson Pranin experienced an active year marked by increased average production and a boost in oil output. Production levels reached roughly 17 MBoe per day for the year, with oil production seeing a notable gain of 10% compared to the previous year. This uptick was primarily due to the higher oil content harvested from the Northwest Stack wells. Financial achievements included generating adjusted EBITDA of almost $93 million annually and realizing approximately $89 million in free cash flow. These results reflect the company's ability to adeptly navigate operational challenges while bolstering its financial health.

A Commitment to Shareholders and Strategic Financial Management

The company remained dedicated to delivering shareholder value; this is reflected in its return of capital program which dispensed cumulative dividends amounting to $137 million, equaling $3.70 per share. This sum includes an exceptional one-time dividend and the approval of an $0.11 per share dividend, a 10% rise from the previous quarter’s dividend. At the year's end, SandRidge maintained a strong net cash position of $254 million, which after accounting for dividends, stood at around $200 million, equivalent to $5.30 per share.

Strategic Value Creation and Environmental, Social, and Governance (ESG) Focus

Leadership stressed the importance of transforming the company's potent cash flow into increased shareholder value. Pranin highlighted a five-point strategy centered on maximizing the existing Mid-Con assets, boosting free cash flow, and eyeing value-adding M&A opportunities while remaining vigilant regarding capital allocation. Maintaining flexibility, the company has paused operations of drilling rigs due to the prevailing commodity price environment, signaling a cautious approach to resource development. Even with this pause, the company's decline profile is anticipated to be modest over the decade due to earlier optimizations. At the same time, an emphasis on ESG responsibilities underscores the company's dedication to sustainable practices.

Navigating the Commodities Market with Prudence

SandRidge showcases a prudently conservative approach to the current commodity price dynamics, with operational and financial flexibility to adjust as needed while monitoring the commodity market closely. Guided by its policy of economic viability even at lower commodity prices — $40 WTI and $2 Henry Hub — the company’s financial stability in multiple market scenarios is clearly demonstrated. They express readiness to leverage their position for potential mergers and acquisitions in the sector, especially considering the financially derisked position owing to their strong balance sheet and around $1.6 billion in NOLs. The company's guidance for natural gas prices in 2024 reflects a range between 50% and 70% of Henry Hub, acknowledging the fluctuating nature of the market.

Shareholder Returns and the Debate Around Cash Balances

In the earnings call, an analyst praised the company for its excellent results, especially considering the minimal reinvestment into gas production in the face of low prices, highlighting the company's low decline rates. CEO Pranin discussed the company's three-fold focus: maintaining a consistent regular dividend, evaluating potential mergers and acquisitions especially given the reduced natural gas price, and considering additional shareholder returns through special dividends or share repurchases. Balancing these factors is seen as essential in ensuring the company's continuing growth and shareholder value.

Earnings Call Transcript 2023-Q4

[Operator]

Ladies and gentlemen, thank you for standing by. My name is Desiree, and I will be your conference operator today. At this time, I would like to welcome everyone to the SandRidge Fourth Quarter 2020 Conference Call. [Operator Instructions]

I would now like to turn the conference over to Scott Prestridge, SVP, Finance and Strategy. Please go ahead.

[Scott Prestridge, executive]

Thank you, and welcome, everyone. With me today are Grayson Pranin, our CEO; Brandon Brown, our CFO; as well as Dean Parrish, our SVP of Operations.

We would 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 in the year, and the company's activity continues to translate to meaningful free cash flow from our producing assets. Before expanding on this, Brandon will touch on a few highlights.

[Brandon Brown, executive]

Thank you, Grayson. Production averaged approximately 17 MBoe per day for the year, with oil production up approximately 10% compared to the prior year, driven by the higher oil content from our Northwest Stack wells.

The company generated adjusted EBITDA of nearly $20 million for the quarter and approximately $93 million for the year. As we have pointed out in the past, our adjusted EBITDA is a unique metric for SandRidge due to us having no eye and very little teeth, given that we have no debt and a substantial NOL position that yields our cash flows from federal income taxes.

On the eye portion, we, in fact, generated approximately $2.8 million of interest income during the quarter and $10.6 million for the year for cash held and a diversity of high-yield deposit accounts.

The company initiated a return of capital program last year with a total cumulative dividends paid to date of approximately $137 million or $3.70 per share, including the onetime dividend of $1.50 per share paid on February 20 of this year. In addition, our Board recently approved an $0.11 per share dividend, which is a 10% increase over the previous quarter's regular way dividend. This will be paid on March 29, 2024, to shareholders of record on March 15, 2024.

Net cash, including restricted cash at year-end 2023, was $254 million and adjusted for the $1.30 per share dividend paid on February 20, 2024, approximately $200 million, which represents over $5.30 per share of our common stock issued and outstanding.

The company has no term debt or revolving debt obligations as of December 31, 2023, and continue to live within cash flow, funding all its capital expenditures and cash flow from operations and cash held on the balance sheet.

Commodity price realizations for the year before considering the impact of hedges were $74.69 per barrel of oil, $1.71 per Mcf of gas and $20.83 per barrel of NGLs.

As alluded to earlier, we have maintained our large federal NOL position, which is estimated to be $1.6 billion at quarter end. 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 $2.2 million and $8.8 million or $1.42 per Boe for the year.

We continue to generate net income for our shareholders. During the year, we earned adjusted net income of approximately $69 million or $1.87 per basic share and net cash provided by operating activities of approximately $116 million. This is all culminated in the company producing approximately $89 million in free cash flow for the year, which represents a conversion rate of approximately 96% relative to adjusted EBITDA or approximately $2.40 per share of common stock outstanding.

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

[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, we had positive results this past year with the Northwest Stack wells adding oilier production, while converting over 96% of EBITDA to free cash flow. Production for the year from our Mid-Con assets averaged approximately 17 MBoe per day, roughly 4% over the midpoint of 2023 guidance, with oil volumes increasing 10% from the prior year, aided by the oilier content from our Northwest Stack area.

The company's largest natural gas purchaser remained in ethane rejection, and we anticipate that a majority of our natural gas stream could remain in ethane rejection this year. While this impacts 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, [ gasoline ] remaining in the natural gas stream will improve its BTU quality.

Let us pause for a moment to revisit the key highlights of SandRidge. Our asset base is focused in 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 almost fully held by production with a long history, shallowing and diversified production profile and 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 margins through reduced lifting as well as water handling and disposal costs and, combined with other advantages, help derisk individual well profitability for majority of our producing wells down to $40 WTI and $2 Henry Hub.

While we have recently seen spot prices below $2 Henry Hub, WTI has been in the mid- to high 70s, which has and will buoy our revenue and cash flows this year. Our assets continue to yield meaningful free cash flow, with total net cash as of year-end and adjusted for recent dividends totaling approximately $200 million.

This cash generation potential provides several paths to increase shareholder value realization and is benefited by low G&A burden. In fact, interest income earned from our cash assets offsets our cash G&A last year.

As we realize value from our producing assets 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 a 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 is 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-returns organic growth projects and remain open to value-accretive opportunities.

This strategy has five points. The 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 high risk-adjusted, fully burdened rates 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 utilizes 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 touch on the Northwest Stack acquisition that closed last year, which increased our interest in 26 operated wells. We like these types of small bolt-ons where we can efficiently add production for accretive returns. We will continue to look for opportunities like this 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 path to maximize shareholder value to include investment in strategic opportunities, return of capital and other uses. To this end, the company expanded its return on capital program that consisted of: one, a $3.70 per share of cumulative dividends paid to date; two, $0.11 per share regular way cash dividend, an increase of 10% from the prior quarter; and finally, an opportunistic share repurchase program of up to $75 million.

Please note that the company's cash position is also a strategic advantage and provides competitive leverage in evaluating M&A, especially given the outlook on interest rates, capital markets and the impact to the optionality on the number and type of opportunities that could become available at certain levels.

Note that there is a high bar, both at the management and Board levels for mergers and acquisitions. Management will continue to assess and promote regular way return of capital discussions, advance M&A evaluations, meet with shareholders and investors and work with our Board to further enhance the path to maximize shareholder value.

These topics remain paramount. 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 institution. As Brandon mentioned before, the company earned $10.6 million in interest income this past year. Final staple is to uphold our ESG responsibilities.

Now circling back to our capital program. During the past year, we completed 16 artificial lift conversions, as the company continues to focus on high-return, value-adding projects that provide benefits such as lowering forward-looking costs, enhancing production on existing wells and further moderating its already modest decline profile.

The systems we have and will be installing are tailored for the well's current fluid production and will reduce the electrical demand in the current artificial lift systems and is key to decreasing future utility costs. This year, our production optimization campaign includes 14 artificial lift conversions as well as heel completions, accessing previously unsimulated intervals, recompletions that would add new uphole zones and proven productive formations and refracs that would restimulate quality reservoir. We plan to spend between $8 million to $11 million in CapEx on production optimization and limited opportunistic leasing this year.

In addition to our production optimization projects last year, we completed 4 operated wells in the Northwest Stack, which increased overall oil content on a Boe basis as well as our prior well reactivation program, which has returned over 180 wells to production over the past few years.

However, given the commodity price dynamics this year and that our Mid-Con assets are 99% held by production, which preserves the tenor of our development option, we will not be operating a drilling rig this year, and we'll deploy more meaningful levels of well reactivations.

We will continue to monitor commodity price dynamics and maintain flexibility to adjust as may be warranted and factor in these considerations. Commodity price is firmly over $80 WTI and $4 Henry Hub of a confident tenor and/or a reduction in well costs are needed before we could return to exercise the option value of further development or reactivation.

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 single-digit average over the next 10 years before the impact of further production optimization, development or acquisitions.

Company continues to ensure that all projects meet high rate of return thresholds and remains capitally disciplined as commodity price landscape changes. While we have prudently reduced activity near term, a tempered commodity price environment could be constructive for M&A.

Our producing Mid-Con assets will continue to generate cash flow near term. With the recent strip, natural gas price is projected to increase over the next year plus. In the interim, the lower natural gas and NGL price environment could present more cost-effective opportunities for acquisitions, which would then be positioned to benefit from future price improvement.

In addition, to further leverage the temporal low natural gas price environment, as well as activity around it, we have allocated capital for targeted high-graded leasing near our footprint this year, which could further bolster our drilling inventory in the future.

Now shifting to expenses. We're able to keep adjusted G&A to $2.2 million for the quarter and $8.8 million or $1.42 per Boe for the year, which compares favorably with our peers. It was 7% below the midpoint of 2023 guidance.

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 field versus corporate personnel to reflect where we actually create value and outsource necessary but more perfunctory and less core functions, such as operations, accounting, land administration, IT, tax and HR.

Given our efficient structure, the ability to flex with both activity and commodity prices, our total personnel has remained consistent at just over 100 people, while retaining key technical skill sets who have both the experience and institutional knowledge of our area of operations.

We believe that this efficiency and structure are favorable advantages that could be effectively applied over a broader asset base and a benefit as the company evaluates the potential for M&A.

Despite inflationary pressures and an 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 $9.9 million or $6.73 per Boe for the quarter, and $41.9 million or $6.80 per Boe for the year, which was 3% below the midpoint of 2023 guidance.

We are projecting a decrease in expense workover this year as well as softening in utility costs and reduced water handling costs. We will continue to actively press on operating costs through rigorous bidding processes, leveraging our significant infrastructure, operation center and other company advantages.

While I have previously addressed commodity price dynamics, I wanted to reinforce a few salient points here. The first being that the majority of our producing properties are economic, down to $40 WTI and $2 Henry Hub. While oil made up 17% of total production last year, it contributed over 50% of revenue on a Boe basis.

Despite current sub $2 natural gas prices, the forward-looking future curve remains in contango and at recent strip projected to nearly double spot price by this winter. Also WTI has remained constructive in the mid- to high 70s this year.

While we have judiciously decreased capital spending in light of natural gas prices, more significant reductions in oil prices and a structural change in natural gas futures would be needed before we implemented more severe steps, like material proactive well curtailment that would impact our production levels near term.

However, we will continue to monitor commodity prices and have the financial and operational flexibility to make further adjustments, in response to positive or negative commodity prices in the future to prudently steward the business and optimize cash flows.

Please note that our guidance for 2024 includes price realizations between 50% and 70% of Henry Hub for natural gas to capture the potential range of realizations of the year, with the high end more representative of winter pricing and the low end towards sub $2 Henry Hub.

That said, and to reinforce my earlier comment, SandRidge's value proposition is materially derisked from a financial perspective by our strong balance sheet, robust net cash position, no debt, financial flexibility and approximately $1.6 billion in NOLs. Long and short, the company is well positioned to navigate, if not leverage, i.e., M&A, the current landscape.

In summary, the company has approximately $200 million of net cash and cash equivalent at year-end after adjusting for recent dividends, which represents approximately $5.30 per share for common stock issued and outstanding; average production for the year of approximately 17 MBoe per day, which is a 10% increase in oil from the prior year; 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 $1.42 per Boe; no debt, in fact, negative leverage; impactful free cash flow and a growing net cash position supported by a diverse production profile, flattening expected annual base PDP declines at single-digit average over the next 10 years; and a multi-digit reserve life asset base; $1.6 billion in NOLs, which will shield future free cash flow from federal income taxes; and a large owned and operated SWD intellectual 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] Your first question comes from the line of Josh Young with Bison Interests.

[Joshua Young, analyst]

Grayson, first of all, your guys' results are great, considering how little you're reinvesting, so I wanted to commend you on that. Very low decline rate, and you're also not reinvesting into gas production at low prices. So I wanted to commend you for that.

I wanted to ask on the cash balance. So you guys have done some special dividends, which are sort of fun to receive as a shareholder, but don't really sort of compound value over time. And you are sitting on a very large cash balance.

How do you think about the sort of maximum return approach towards deploying that and what the opportunity cost is sitting on such a large cash balance considering the free cash flow profile of the assets?

[Grayson Pranin, executive]

Yes. Josh, thanks for joining the call and the questions. Appreciate your time here. Know this is something that we consistently spend a lot of time on and have meaningful conversations with our Board and are constantly evaluating.

We're trying to balance our growing cash position with maintaining the optionality of M&A, especially given the reduced natural gas price environment today that we think that we can take advantage of as well as the other things that I mentioned on the call as well as returning capital to shareholders.

And we're looking at that as a 3-pronged approach, right, on making sure that we have a good regular weight dividend that we can consistently approved quarter after quarter and bounce that out over time.

Second is to top off with special dividends. Again, just balancing the time that we're taking to review M&A versus being capitally disciplined in the current environment as well as opportunistic share repurchases.

So I don't think that we're sticking to any one often, and know that as dynamics change this year going forward, we'll reevaluate. So if something is not working, we'll have additional discussions and try to account for all the facts at the time.

[Joshua Young, analyst]

Okay. But I guess, two quick follow-ups on that. One, have you guys actually repurchased a single share since you went net cash positive at -- I think it was $5 a share 3 years ago? There's been discussion of it and approval of it. Have you guys actually bought a single share back?

[Grayson Pranin, executive]

We have not, but we continue to maintain the program. And since they're opportunistically repurchased during market dislocations compared to our NAV, the program is not intended to buy back certain amounts at certain times or do it under any circumstances.

So we're not trying to make a goal of repurchasing all $75 million this year. But for example, there's a dislocation between our share price and we still have strong support come out of the high NAV, those are perfect opportunities to buoy our share price and repurchase shares.

Fortunately, and unfortunately, the share prices performed relatively well since the announcement of the return of capital program, with the recent changes that we made last year and then again this year with less instances of market dislocation.

[Joshua Young, analyst]

Okay. Great. And then just last follow-up. Aren't you better off buying much smaller assets of the sort? You did buy one last year of this sort, just at a very high discount rate with a lot of cash flow versus the purchase cost.

Aren't you better off focusing on that rather than on sort of this M&A where you'd be advantaged with having a large cash balance? Are you better off going and hiring more land men and doing many million dollars to $10 million sorts of deals rather than trying to preserve this optionality?

[Grayson Pranin, executive]

No. It's a great question. The answer is we are looking at those things. We try to take advantage of them when they come. We're constantly doing [ BD ] to drive new opportunities. However, there's not always perfect timing with buyer and seller, right, and you have to have that line to get things done on the small-ball acquisition front.

And we'd like to maintain the optionality for something that's more significant than that. So we're evaluating a range of opportunities that range from a couple of million up to a couple of hundred million. And know that we have a high bar in anything that we do is going to be accretive to our shareholders, but we are promoting those small-ball acquisitions right alongside the larger ones.

[Operator]

Our next question comes from the line of [ David Cardell ] with Bluepond Capital.

[Unknown Analyst]

Yes. I'm interested in exploring more of the M&A environment and I'm curious if deal prices are better on -- for smaller deals or for larger deals. I'm curious how big a deal you feel you could do.

And I'm also curious about -- right now, you would think that the price environment is very good, that there will be a lot of opportunities. The Mid-Con, in a sense, is kind of an undervalued basin, and the pricing -- Henry Hub gas prices are so low. So I would think that there would be deals to be had, and I appreciate the fact that you're very careful. I totally am on board with that.

But I'm just trying to get a realistic understanding about what we can expect over the year -- over the course of the year, how you're seeing the deal flow, what there is out there, if it's looking better. So I've realized I've asked a lot of questions on an M&A. But if you can opine on any of those, that would be helpful.

[Grayson Pranin, executive]

Yes. Thank you, David. Appreciate your time and questions on the call here. I'll try to hit as many of them as I can. If I miss anything, please follow back up.

I think we're seeing a constructive M&A market within Mid-Con. We agree with you that Mid-Con is enable -- is a place we're able to generate meaningful cash flow, just like we have in our incumbent assets. We think we can further leverage that by expanding our asset base and taking our cost-focused efforts, both to the expense and the back office side to leverage, and we know the area of wealth.

So we continue to see things. Like I mentioned to Josh, the challenge is you have to have alignment between the buyer and seller. We're committed as a Board and management team to make this a top priority. With return of capital, MA is right behind it, making sure that we are actively looking at and evaluating opportunities that make sense and trying to do something that's really accretive to the shareholders, trying to take advantage of the currently lower natural gas prices.

But again, we can't opine on success rate there, only that we're going to roll up our sleeves, look at things that are small but make sense, look at things that are a little bit larger and that still makes sense.

And relative to how does one look to the other, it depends on the asset type. Obviously, where we bought back interest in the wells that we operate, we have an operating advantage there. So those things are really intuitive, makes a lot of sense, and you have a really strong margin there.

As we look at opportunities where we don't operate, there are things where you can get a better discount rate on things, both smaller and larger, depending on the asset quality. Are those things well historied? Are they relatively newer where there's more subjective interpretation of the performance? Is there upside? Those are all things that we look at and value differently, depending on the assets. So hopefully that's covered all your questions, David. Please let me know if I haven't.

[Unknown Analyst]

There was one more. I'm just curious. Are you more likely to find good deals on -- in small-sized acquisitions or maybe big deals, there are better deals because there are fewer bidders? And I'm also curious how big a deal could you do.

[Grayson Pranin, executive]

Sure. Again, go back to my previous comment. I think there are great small-ball deals. I think there are really good larger deals. We would have to have a string of pearls on the smaller deals, where they may have a better cash-on-cash return.

They are harder to string together to be as impactful. It's like the differences for our organic opportunities with our capital workover program that have really high rates of return versus our prior drilling campaign that still had high rates of return, a little bit less, but contributed more meaningfully on a value basis.

So we think there's justification for looking at both, because there's different drivers between each of those options, and know that we're going to do something that makes sense.

[Unknown Analyst]

Okay, okay. I'll just say that, personally, I think there is a dislocation in your share price given your net cash balance, your asset, your low-cost operations. Personally, I think that the stock is dislocated from the value that it offers shareholders.

[Grayson Pranin, executive]

Well, I appreciate your comments, David. I think that's something that we look at consistently from day to day to make sure we're making good long-term decisions. And we want to ensure that when we do repurchase shares, we're doing it at levels that also have good returns.

So we're valuing that option right alongside all the other options. So it's not an either/or answer, but know that we'll continue to assess that as we move forward through the year.

[Operator]

[Operator Instructions] There are no further questions at this time. Ladies and gentlemen, this concludes today's conference call. You may now disconnect.