Oil and gas producer SandRidge Energy (NYSE: SD ) reported its first-quarter earnings after markets closed on May 7. The company barely squeaked by with a profit of just $2 million dollars which translated to earnings per share of, well, zilch. While that might sound terrible, it bested analysts' estimates that figured the company would lose $0.06 a share on the quarter. Let's take a look at what transpired during the quarter, which was very positive and a good indication of what's to come.
Behind the numbers
While the headline earnings number looks weak, underneath it earnings and cash flow were pretty good for the quarter. Adjusted EBITDA came in at $270 million, which is a big increase from the $185 million in the first quarter of last year. Further, operating cash flow for the quarter was $182 million which was also well ahead of last year's $151 million.
The company continued to maintain its industry-leading Mississippian well cost of $3.1 million during the quarter. Further, the company completed three wells with 30-day initial production of 1,000 barrels of oil equivalent per day. Finally, and most importantly, oil production in the Mississippian ticked up to 46% of overall production which is up from 45% last quarter. Producing more oil out of the Mississippian is important, as 80% of SandRidge's cash flow from the play is from oil.
While SandRidge's all-in strategy of focusing on the Mississippian carries risk, the good news is that the industry as a whole is reporting good numbers out of the play, which bodes well for SandRidge's future. For example, Devon Energy (NYSE: DVN ) recently brought 24 wells on line and reported that the wells hit its targeted economics. It also had several wells with 30-day initial production rates between 600 and 1,000 barrels of oil equivalent per day. Meanwhile, Chesapeake Energy (NYSE: CHK ) had one of its Mississippian wells achieve a peak rate of 1,485 barrels of oil equivalent per day. All this speaks of good things to come from the Lime as producers seems to be narrowing in on the sweet spot.
The biggest news on the quarter is that SandRidge has decided to scale back on its capital plans for the year. The company is reducing its capital expenditures by 33% over 2012. The company now plans to spend $1.45 billion this year, which is a $700 million reduction from last year and a $300 million cut from its $1.75 billion plan to start the year. While its Permian Basin sale provided enough capital to fund the development of the Mississippian through the end of next year, the company still needs to plan ahead – trimming its plans now will help it narrow future funding shortfalls.
The change in plans is really about becoming more disciplined to create a sustainable company and lower its risk profile. To get there the company will cut back on exploring its vast Mississippian acreage, instead, the new plan has SandRidge concentrating on its acreage near existing infrastructure. This not only saves on infrastructure spending as evidenced by the 27% reduction in planned disposal wells but this means drilling more of its wells where the outcome has more certainty.
Foolish bottom line
Overall, this was a very solid quarter for SandRidge and it looks to be a sign of good things to come. The newfound fiscal belt-tightening should be welcomed by investors as it's a sign the company is now focusing its efforts on profitable returns instead of growth at all costs. This should lead to a more sustainable model over time and one that better manages dampened future commodity cycles.
SandRidge is becoming one of the more compelling deep value plays in the energy industry. It's growing liquids production when combined with its fiscal belt tightening is leading to a future that looks very optimistic. If you'd like to learn more about the future of this emerging oil and gas junior and are looking to find out more about its strengths and weaknesses, then check out The Motley Fool's premium research report detailing SandRidge's game plan and what to expect from the company going forward. To get started, simply click here now!