SandRidge's Future Is Coming Into Focus

Mississippian Lime-focused oil producer SandRidge Energy (NYSE: SD  ) recently reported its first-quarter earnings. It was a solid report and a really good indication of things to come. What stood out most in the report is the company's shift in strategy to become a much more fiscally conservative company.

For the past few years SandRidge had been following the aggressive growth plan that's commonplace in the industry. The strategy was simple, secure as much land as you can, develop the oil and gas that's underneath as fast as you can, and don't think twice about how much it costs. That strategy worked for a while as commodity prices skyrocketed and capital was easily accessible. Unfortunately, as the steam went out of commodity prices, it caused the wellspring of capital to run dry and with it, those ambitious growth plans.

Now, SandRidge and its peers are really getting religion, so to speak, when it comes to capital allocation and return on investment. After slashing $700 million from its 2012 capital spend, the company is now slicing an additional $300 million from what it had previously announced it would spend this year. What it's doing now is focusing its capital on the highest-return plays in a pursuit of profitable growth instead of empire building.

It's a story that's becoming commonplace in the industry. Chesapeake Energy (NYSE: CHK  ) for example sliced its capital plan by 39% over last year. Its previous strategy of asset capture and holding acreage by production has given way to a new strategy of capital efficiency and financial discipline. It's a similar story at Ultra Petroleum (NYSE: UPL  ) which is taking things a step further and only investing within its cash flow. That's meant a large drop in capital spending, which has gone from $1.56 billion in 2011 to $835 million last year and is now down to just $415 million this year. That's discipline the industry hasn't seen in a long time.

SandRidge now embracing this discipline means that investors can expect changes as the company's future starts to come into a clearer focus. We saw glimpses of what to expect in its most recent quarterly report. The company spent $235 million in capital to develop its Mississippian acreage in the quarter and was able to drill 122 producing wells. Last year the company spent $220 in the Mississippian and only drilled 68 wells. So, you're seeing a slight increase in capital yielding significantly more wells being drilled. That means more oil being produced which is yielding a nice pickup in cash flow.

What the company is doing is focusing its drilling close to its existing infrastructure. It has identified six core areas of focus and its investing 90% of its capital into those focus areas. By concentrating its activities in these six areas the company is able to achieve better rates of return by capitalizing on the infrastructure investments it has already made.

This change is lowering the risk profile of SandRidge in two significant ways. First, by focusing its drilling on these lower-risk areas, SandRidge can deliver a higher, more certain return. Further, by cutting its capital spending it's able to fund the company for a longer duration without seeking external capital. When it sold the Permian Basin assets the funds from that sale were enough to fund the Mississippian development thought the end of next year. Now, by reducing its development plan by an additional $300 million, it can push back that funding gap well into 2015.

The SandRidge that is beginning to emerge is a much more compelling investment opportunity than the SandRidge of old. The company has done a solid job in getting its leverage in check and pushing off its funding shortfall, both of which have significantly reduced the overall risk profile of the company. While it still has a tough climb ahead of it, SandRidge has found a much safer path.

This path forward, which has included massive portfolio reshuffling in an effort to focus on growing its liquids production, now has the company's future looking very optimistic. If you'd like to drill down deeper and 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!


Read/Post Comments (4) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 10, 2013, at 1:54 PM, rjf53 wrote:

    Hi Matt,

    I largely agree with your assertion that SD' recent moves has made it safer but that in itself is only one side in any Risk vs. reward calculation. While kicking the can down the road helps avert a catastrophe that might befall investors during any macro type events it in all likelihood kicks any potential reward down the road as well.

    There are still a lot of questions surrounding SD and in my mind the latest quarter while good raised additional questions that need answered.

    First I have new questions about their SWD system as it looks to me that a substantial part of their new found efficiency is simply a reduction of the numbers and money spent on SW wells. Absent their new revelation about a new type of SW well they are experimenting with and their hope of improving upon their previous 10 to 1 ration of wells an investor might be concerned since they are basically at the 10 to 1 ratio already and they could be risking bottlenecks developing. I'm not claiming they will experience any problems but at a minimum it is quite a coincidence that they come up with this new type well and start talking 15 or even 20 to 1 ratios now considering how under the gun as they are currently with regards to getting more efficient.

    Dunno, but I've never been comfortable with coincidences and IMO this is something that bears watching.

    The downside from their new approach, no matter how the company chooses to spin it, is the odds have gone up a lot that huge chunks of the New Miss acreage was likely money flushed down the hole.

    Whether you agree with this statement or accept the company's more optimistic version of the future (listening to the CC it was clear several analysts weren't buying it) I think it is safe to say that there is a high probability that the my more negative view will weight on the stock price with many investors.

    That being said it is difficult for me to see a scenario where SD outperforms the sector which led me to close out my position and to take my modest 10% gain.

    B

  • Report this Comment On May 10, 2013, at 4:55 PM, TMFmd19 wrote:

    Hey B -

    A couple of things, I'm a glass is half full kind of guy so I almost always tend to see the positives. Second, I'm also coming to SD late in the game (just started covering it this year) so, I don't have the history of disappointment that those longer term investors have.

    From what I see, there's a lot of value potential here and the company appears to be heading in the right direction. Its making all the right moves given what it has to work with (or really the hole it dug for itself).

    Now, I do tend to vote with my wallet and I've yet to be convinced enough to buy shares so its one thing to like what's going on and a far greater thing to commit capital to the idea. I'm not there yet, however, its a much more compelling story to me than it was when I first came across it last year.

    Last comment RE: Miss acreage being flushed. Tom Ward did a good job running through that math: http://www.fool.com/investing/general/2013/05/10/sandridge-i...

    I can understand most long-term investors don't trust him. I don't have that same bias and right now I like what I see.

    -Matt

  • Report this Comment On May 10, 2013, at 9:25 PM, rjf53 wrote:

    Hey Matt,

    A couple things back, isn't it reasonable for someone pitching a premium research report to ditch his tendency to always see the positives and put more effort into exploring the potential negatives as well?

    Next and speaking only for myself here, it is not a matter of having a history of disappointment (I made money on every share of SD I ever owned) but rather taking into account what the company has said and done in the past and applying that knowledge as I attempt to determine just how much credibility I should afford to what they are saying now.

    I listened to the CC and I heard Tom's rational and quite frankly found it absurd. In essence he is asking you to ignore the fact that the legacy ng assets that he brought the company public based on now have a negative value (factoring in the Century plant contract), ignore all of the debt accumulated based on his past decisions, the hundreds of millions in interest paid, and yet to be paid, and instead only judge him on his calculation that any acres he lets go now "really didn't cost him anything".

    So in other words he found a sucker, but even then shouldn't an investor ask; if that is this is all you have to hang your hat on and it's becoming apparent that the pool of suckers has dried up why in the world should anyone trust you going forward?

    Never mind that 9 months ago you were saying that all of the acres should be viewed as equal.

    Never mind that 9 months ago you claimed a IRR based on $80 oil and $2.50 ng north of 50% and now with the strip considerably above that for both oil & ng it is reported as 40%.

    Never mind that you went from including SWD wells in the cost of your wells to excluding them and then portray the lower number as a result of efficiencies.

    Never mind that for your supposed low cost operator advantage doesn't mean a thing when you see an operator like Midstates operating right next door to you in your two premier counties (Woods and Alfalfa) simply trouncing your initial production numbers (average 30 day rate of 586b/d) and oilier to boot.

    Sorry Matt, but I don't feel judging a CEO on his past performance constitutes a bias, it is simply dealing with reality.

    I will say one thing, after the board shakeup and given the initial exodus of talent I started to wonder if perhaps it would be better for shareholders to have a reigned in Tom stay. Not anymore I'm firmly back in the camp where he should go because in my opinion if psychopath doesn't fit him it's something disturbingly close.

    But then I'm kind of a glass half empty kind of guy. :<)

    B

  • Report this Comment On May 11, 2013, at 8:11 AM, TMFmd19 wrote:

    I must say you give some of the most reasoned responses that are both challenging and intelligently laid out. Kudos to you on that.

    As for pitching the premium report...I recently dug into SD and rewrote that report for the Fool so I stand 100% behind that work. I do look at SD from a critical standpoint, however, on metrics that matter to me as an investor I see improvement across the board.

    Now, I in no way think SD is the best investment in the energy space, but it is a compelling deep value play that has the potential to make investors $. I like the shift into a more fiscally conservative company. I see oil as a % of Miss production ticking up. From what I see, the fundamentals are improving.

    I will say though that you're right about how the company handles historical costs and that is a concern. Most companies archive investor presentations on the IR part of the website. As soon as numbers change SD removes those so its tough to compare apple-to-apples. I am digging into this but its like finding a needle in a haystack.

    Thanks again for the comments, you've given me some interesting concepts to dig into.

    Matt

Add your comment.

DocumentId: 2420912, ~/Articles/ArticleHandler.aspx, 7/23/2014 10:48:30 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement