Capital Efficiency Continues to Improve at SandRidge

SandRidge Energy (NYSE: SD  ) , the Oklahoma City-based oil and gas producer, is on a new path. In March, the company added four new directors to its board. Then, in June, the board decided that it was time for a change in leadership and named James Bennett, who served as SandRidge's chief financial officer since 2011, is the company's new CEO.

Since Bennett took over, there have been a few crucial changes at SandRidge that have helped deliver robust production growth, while simultaneously keeping capital expenditures low. Let's take a closer look at how the company is delivering on both these fronts.

SandRidge's new plan
The board's decision to appoint a new CEO was a promising development in a year that saw numerous other energy executives ousted by shareholder activism. At Chesapeake Energy (NYSE: CHK  ) , for instance, former CEO and founder Aubrey McClendon resigned because of similar pressures from shareholders, while Occidental Petroleum (NYSE: OXY  ) and Transocean (NYSE: RIG  ) both saw the departure of their board chairmen -- Ray Irani at Occidental and Michael Talbert at Transocean -- following a vote by shareholders.

With a new management team in place, I think SandRidge can finally start to recover and partially compensate for its dismal share-price performance over the past five years. Earlier this year, Bennett outlined the company's new strategy, which promises to deliver better returns through improved capital efficiency, while also reducing its risk profile. So far, progress on these fronts has been quite good.

Record low costs, record high production
In the second quarter, the company not only reduced its operating costs to a record low but also managed to grow liquids production to a record high. In the Mississippi Lime, the company's core holding, where it commands 1.9 million net acres, total production grew by 20% on a quarter-over-quarter basis, while oil production surged by an impressive 30%.

Meanwhile, second-quarter well costs fell from $3.1 million to $2.95 million, thanks largely to efficiencies gained through redesigning its well site production facility and through a permanent reduction in structural costs. Similarly, SandRidge's lease operating expenses fell 22% year over year, coming in at $7.38 per BOE during the quarter and saving the company $8.8 million in the quarter, thanks mainly to improvements in water disposal that allowed the company to virtually eliminate all trucked water in the play.

Improving capital efficiency
These dramatic year-over-year improvements are even more impressive when considering only a modest increase in capex. In the second quarter of 2012, the company spent roughly $216 million in the Mississippian -- a price tag that included the costs of drilling completions, saltwater disposal facilities, and workovers -- to drill 91 producing wells.

By contrast, in the second quarter of this year, it spent $224 million to drill 127 producing wells. That means the company drilled 40% more wells, while spending only 4% more. Importantly, the wells brought online in the second quarter of this year required 50% less spending on saltwater disposal, which shows that the company's new wells will require less infrastructure spending, while delivering better initial production rates.

The bottom line
Though it still has much further to go to fully unlock the value of its assets, SandRidge has come a long way in repairing itself. The company's new strategy under CEO James Bennett emphasizes capital efficiency and cost discipline, a much-needed reversal from the company's profligacy under former CEO Tom Ward.

Furthermore, SandRidge's improving financial health is another major positive sign for shareholders. With $1.8 billion in liquidity and a leverage ratio of 2.4, SandRidge should be able to fund its growth plans through at least 2015 -- a drastic reversal from prior years, where it consistently outspent its cash flow by a huge margin.

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