A Quick Look at SandRidge Energy's Impressive Second Quarter

Photo credit: SandRidge Energy

Mississippi Lime-focused oil and gas driller SandRidge Energy (UNKNOWN: SD.DL  ) delivered exceptional second-quarter results on Aug. 6. Not only did the company blow past Wall Street's expectations but it increased its production guidance for the full year. Let's take a closer look at the numbers that drove its success this quarter.

Drilling down into the numbers
SandRidge reported adjusted EBITDA of $268 million which was virtually flat from last year's $269 million. However, that's not an apples-to-apples comparison -- last year's number includes the company's Permian Basin assets which were sold this past February. That's also why SandRidge's adjusted operating cash flow of $176 million was also well below last year's $223 million. What investors need to focus on is the fact that SandRidge sold more mature (i.e. cash-flow-focused) Permian Basin production in order to reinvest the cash into its higher-growth Mississippian acreage. For the company to nearly match last year's adjusted EBITDA numbers is actually a pretty impressive feat.

Drilling a little deeper into the numbers, SandRidge reported adjusted net income of $44.6 million, or $0.08 per share, which was actually well ahead of the $0.03 loss that analysts were expecting. It's also slightly ahead of the $0.07 earnings per share that the company reported in last year's second quarter. The big driver is that SandRidge was able to deliver better production results while slashing costs.

Hitting the sweet spot
SandRidge's average daily production in the Mississippian was 47,300 barrels of oil equivalent for the quarter. That's a 20% increase from last quarter, as the 111 wells it brought on line this past quarter really provided a boost. The company's application of detailed subsurface models, when combined with continuous learning and improvement have really paid off; it was able to find several wells that produced in excess of 1,000 barrels of oil equivalent per day in the quarter. Further, its move to test stacked pay, which is the act of testing new zones in areas of existing production, is also starting to deliver incremental results.

The really impressive news is that the company was able to get its well costs down to just $2.95 million per well, which is well below last quarter's $3.1 million and below its stated goal of less than $3 million. By getting its well costs down SandRidge is able to drill more with less capital, which is important in light of the fact that the company slashed its capital budget earlier this year. SandRidge's redesigned well site production facilities and focus on putting more wells into the same disposal system are the main drivers in its ability to cut its well costs in the quarter.

Looking ahead
Despite cutting its capital budget this past May, SandRidge's impressive results have inspired the company to increase its production guidance for the rest of the year. Overall, SandRidge is increasing its Mississippian production guidance by 4%, while also boosting its company-wide production guidance by 2%. What this really means is that SandRidge's new focus on returns is really starting to pay dividends.

So, what should you do with this information?
SandRidge has had quite the run over the past month -- it's up more than 17% -- but it could have a lot of room to run. In fact, billionaire investor Leon Cooperman believes its shares are worth upwards of $10 each. If this quarter is any indication, he could be right, and that means that investors willing to accept the risk could be very well rewarded.

However, I should warn you that SandRidge is just one of a number of companies driving the record oil and natural gas production that is revolutionizing the United States' energy position. Further, it's past missteps have frustrated investors, which is a reminder that finding the right plays while historic amounts of capital expenditures are flooding the industry are what will pad your investment nest egg. That's why the Motley Fool is offering a comprehensive look at three energy companies that really appear to be set to soar during this transformation in the energy industry. To find out which three companies are spreading their wings, check out the special free report, "3 Stocks for the American Energy Bonanza". Don't miss out on this timely opportunity; click here to access your report -- it's absolutely free. 

Read/Post Comments (2) | Recommend This Article (6)

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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 August 07, 2013, at 11:59 AM, Bpaxon wrote:

    Good earning and the stock tanks! Makes sense right!! Good ol stock market, good thing I've studied Elliott wave theory and saw it was tanking early and sold at 5.6.

  • Report this Comment On August 09, 2013, at 10:39 AM, kmacattack wrote:

    Great news for a great company. Sandridge has made a quicker turnaround than even Chesapeake was able to do over the past year. Chesapeake co founder and Sandridge founder and CEO Tom Ward was given the boot a few months ago, just as his former partner Aubrey McClendon was at Chesapeake. Although I admire the entrepreneurial spirit of both these men who built two great companies from scratch over the past 15 years or so, I think it was time for both to move on.

    Both men built these companies by being willing to take risks in the early days of the two respective companies. But I think it is appropriate at some point to pay attention to the advice given to gamblers who go to Las Vegas and hit a lucky streak and are a million dollars ahead of the house "Quit while you're ahead." ESPECIALLY considering the fact that you are playing with investors' money.

    Having said that, if these two wanted to get together again and start up a new company, I would buy stock in that company in a heart beat.

    But stockholders in an ESTABLISHED and VERY PROFITABLE company have a right to expect that the CEO isn't going to jeopardize stockholders' equity by going "all in" by taking the company into a huge amount of debt by aggressively purchasing large tracts of land, a strategy which could work out well, or could wipe out stockholders in the process. Buying shares in a start up company is GAMBLING, but if the company has been in operation for 20 years have a right to expect their share purchase to be an investment, not a high risk gamble.

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