A Deeper Look at What Fueled SandRidge Energy’s Earnings Beat

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SandRidge Energy (UNKNOWN: SD.DL  ) reported solid third-quarter results. The company beat analyst estimates, and raised production guidance. Let's take a deeper look at what fueled this earnings beat.

Drilling down into the numbers
SandRidge reported earnings of $40.4 million, or $0.07 per share. This was $0.04 ahead of what analysts were expecting on the quarter. It's also well ahead of last year's third-quarter earnings of $29.6 million, or $0.05 per share. The company also delivered operating cash flow of $235 million.

SandRidge was able to deliver such solid results because it has shaved 22% off of its lease operating expense over the past year, which also was 5% lower than the previous quarter. Further, the company was able to hold the line on well costs, at $2.95 million. This is exactly what we wanted to see heading into the quarter.

SandRidge continues to lead the industry with the lowest Mississippian well costs. Its costs are well below peers like Range Resources (NYSE: RRC  ) , which spent $3.2 million per well this past quarter. Range has been working to control its costs, and was actually able to keep them at $3.2 million, despite using larger fracs on the play in an effort to extract more oil and gas. Initial tests showed 45% higher production rates, which will improve Range's returns on the play. That said, SandRidge is still the best in the play when it comes to producing results.

A closer look at the Miss
Production from the company's key Mississippian Lime wells were also solid. The play has delivered production growth of 59% over the past year; however, production is just up 1% over last quarter.

The one number that really shined on the quarter was the company's oil production out of the Mississippian. In the quarter, 48% of SandRidge's Mississippian production was oil, which is up from the 45% it has been averaging. This is incredibly important to see, because 80% of SandRidge's Mississippian cash flow is generated from its oil production.

One other point worth mentioning is that production in the quarter could have been even higher. SandRidge reduced its well count by 15% over the prior quarter as part of its plan to keep its capital costs under control. Further, the company was forced to defer a dozen high-volume wells due to production outperforming gas infrastructure capacity. This is a pretty common problem in emerging plays like the Mississippian, where drillers are finding more oil and gas than can be handled by current midstream infrastructure. Those infrastructure issues have now been solved, and those wells are coming on line in the current quarter.

SandRidge is one of the few drillers that's able to fuel growth from the Mississippian. This past quarter, we saw oil major Royal Dutch Shell (NYSE: RDS-A  ) decide to give up on the Mississippian, as it put all of its acreage in Kansas up for sale. Shell just couldn't get consistent returns from the play; well costs well above SandRidge's hurt its overall economics. This is why SandRidge really has the play all to itself, which is great considering how good the company is at fueling returns from the Mississippian.

What's next for SandRidge?
SandRidge sees a strong end to the year as it again raised production guidance. The company continues to get better with each well it drills. Not only that, but it's finding new sources of oil and gas on additional zones within its acreage. This stacked pay potential could be a big future driver for the company.

Sandidge sees these solid results continuing into next year, as well, and the company provided initial production guidance for 2014. In the year ahead, the company sees production growing by 12% overall, and 35% in the Mississippian, and it expects to spend about $1.5 billion to do so.

Investor takeaway
SandRidge delivered another very solid quarter. The company continues to perform admirably. Further, with liquidity of $1.65 billion, growing cash flow, and a solid leverage ratio, SandRidge remains on solid financial footing as it pursues its growth plans.

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Read/Post Comments (6) | Recommend This Article (3)

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 November 06, 2013, at 10:05 AM, jerryd1956 wrote:

    The only damn stock in captivity that collapses on good news! I am so tired of this dog, but am in too far to get out now. Maybe some bad news will come along and cause a rally. Right!

  • Report this Comment On November 06, 2013, at 10:44 AM, LexSC wrote:

    The good report and drop in stock price is confusing. Perhaps the word "Miss" used in the conference call and reports such as this are keying those automated computer sell programs. I am probably as wrong about that as I was about the markets response to the report,

  • Report this Comment On November 06, 2013, at 11:31 AM, TMFmd19 wrote:

    Makes no sense to me either, but the same thing happened last quarter. Only disappointment I saw was in the initial Woodford Shale exploration, but I think those results have potential to get better (more on that in a future article).


  • Report this Comment On November 06, 2013, at 11:41 AM, Teacherman1 wrote:

    Maybe just profit taking and moving on to other plays.

    There seems to be a lot of "irrational investing" these days, or should I say "trading".

    Luckily I am in even lower than it dropped to, but will likely add if it keeps dropping.

    JMO and worth exactly what I am charging for it.

  • Report this Comment On November 06, 2013, at 4:43 PM, rjf53 wrote:

    Hi Matt,

    I tried responding to your piece yesterday with no luck (you aren't censoring me are you?)so I'll try again today.

    The one thing that popped out at me as I read their results was the 10% decline in their average IP. It popped out because of a disturbing trend I noticed as I attempted to analyse their infill drilling results.

    A few weeks back I did an analysis of their OK wells (577 sample size) and found the results to be rather shocking. What I did was look at the wells based on the section they were drilled in and numbered them 0 through 4. The # 0 wells are wells that were drilled and to date where no other wells have been drilled in the same section whereas #1 wells were the first of multiple wells in one section. The 2,3,4 wells are just that 2nd, 3rd and 4th wells drilled in the same section.

    For the sake of brevity I'll just share the average IPs by number designation.

    #0 164 wells average IP 265 BOE/d

    #1 152 wells average IP 423 BOE/d

    #2 152 wells average IP 431 BOE/d

    #3 75 wells average IP 342 BOE/d

    #4 34 wells average IP 241 BOE/d

    Do you think that might have something to do with the drop in overall IP rates for the quarter?

    To be fair, my little experiment leaves something to be desired because if you picture two sections sitting next to each other, lets label them section A & B, the westernmost well in A would have a closer proximity to the easternmost well in B than it would to the easternmost well in the section (A) it was located in. (Am I making sense?) Still though a disturbing trend if it holds given the introduction of ESPs and their supposed ability to improve results as their learning curve improves.

    There's nothing wrong with your bean counting from what I can see, but sometimes IMO it's a good idea to have a look at the bean stalk as well. :<)

    B (The glass half empty guy.)

  • Report this Comment On November 06, 2013, at 6:25 PM, TMFmd19 wrote:

    Hi B,

    No censoring, I always like to see what what you have to say. I think you are right that investors didn't like the drop in IP rates. However, management said on the CC that the wells are still exceeding the type curve by 15% so maybe last quarter's wells were just really good and this quarter's wells were more realistic.

    The big downer was the Woodford results, but those could be just outliers. (I know, always with the glass half full). The other thing, and you touched on this, is that as SD is drilling more wells around existing wells. The question is what zones are those wells being drilled into? Different zones could have different IP rates.

    That said, It's declining IP rates are something to watch. SandRidge isn't the best positioned energy company in America, but the risk/reward still looks really compelling.


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