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You've likely watched Chesapeake Energy (NYSE: CSK ) and others develop an exciting bevy of shale plays. You should know, however, that Sandridge Energy (NYSE: SD ) , in some ways a cousin of Chesapeake, has adopted an alternative approach to production -- one that provides a balance to the industry's expensive rush to the rocks.
In 2006, Oklahoma oilman Tom L. Ward joined Sandridge as CEO after leaving as president of Chesapeake, which he co-founded with its CEO, Aubrey McClendon, in 1989. Last year, Ward began a concerted movement toward higher-priced oil and away from gas. But unlike his former company, Sandridge has avoided the costly siren song of shale in favor of a tighter-fisted approach to finding and producing black gold.
As Ward said in his company's latest annual report, "Controlling costs is the key to success in our oil drilling program. By pursuing shallow, permeable carbonate reservoirs, we are able to drill wells quickly and at a low cost." His targets lie in the Permian Basin of West Texas and the horizontal Mississippian play of Oklahoma and Kansas.
Sandridge entered the long-producing Permian's Central Basin Platform through a 2009 acquisition from Forest Oil (NYSE: FST ) , and later expanded its assets there by acquiring Arena Resources. The acquisitions cost the company a manageable total of $1.9 billion, a value that has since doubled. In the process, it added proved reserves of 149 million barrels of oil equivalent, or Boe, three-quarters of which was in oil.
With 800 wells expected to be drilled this year on the Permian acreage -- Sandridge managed 199 in the first quarter, despite uncooperative weather -- the play will receive the largest portion of the 2011 drilling budget. But as Ward points out, it only costs about $760,000 per copy to drill the 4,000- to 8,000-foot wells, which require just four to eight days, yield an average of 83,000 Boe, and achieve a 90% return.
The Mississippian play cost the company a paltry $200 per average lease, which Ward compares to acreage costs "10 to 100 times higher" for many of the "high-profile plays now prominent in our industry." He just may be referring to the $9,000 per Marcellus acre that Exco Resources (NYSE: XCO ) coughed up not long ago, or to Marathon's (NYSE: MRO ) recent $20,000 per-acre tab in the Eagle Ford.
The Mississippian wells go vertically for about 6,000 feet, and then turn horizontal for another 4,000. Each well, for which the company has 3,400 locations mapped out, costs about $2.7 million. All in all, the two oil plays enabled Sandridge to increase its production by 155% in 2010, with another 66% likely to be added this year.
Should gas prices get a sudden bump, Sandridge won't be caught flatfooted. It currently has 8,000 gas drilling targets in Oklahoma, Texas, and the Gulf of Mexico. Indeed, it's able to hasten drilling by using its own 31 rigs.
So while the shale plays provide intriguing upside, there's lots to be said for balancing your portfolio with a successful miser like Sandridge Energy. You can easily keep track of the company by adding its name to your version of my watchlist.
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