A Closer Look at SandRidge Energy’s Fourth-Quarter Results

SandRidge Energy beat analysts’ estimates and here’s why.

Feb 28, 2014 at 1:05PM

Sandridge Energy Tanks

Photo credit: SandRidge Energy

Midcontinent oil and gas producer SandRidge Energy (NYSE:SD) recently reported a pretty solid fourth quarter. The company beat analysts' estimates as production grew while expenses fell. Let's take a look at a few of the key areas that drove its success in the quarter.

Drilling down into the numbers that matter
The two driving forces were production that exceeded targets while capital expenditures stayed below guidance. For the full-year that worked out to 1% more production than guidance that was achieved by spending 2% less capital. When a company spends less money and achieves higher growth that'll do wonders for the bottom line.  

For the fourth quarter, production growth was strong as the company grew Mississippian production by 8% over the prior quarter. That was good to see after SandRidge Energy just delivered meager 1% production growth the previous quarter.

Leading the production growth were the 80 new Midcontinent wells that came online in the fourth quarter. These wells delivered an average 30-day initial production rate of 386 barrels of oil equivalent per day, or BOE/d. The company was able to bring these wells online at the low cost of $2.9 million per well. The combination of redesigned facilities and pad drilling brought well costs down. In addition to that the company's operating costs fell as it used fewer diesel-fueled generators and while also reducing the amount of produced it hauled.


Photo credit: SandRidge Energy

Exploration update
One of the important exploration successes on the quarter was that SandRidge Energy added a new county in Kansas to focused area for future drilling. The development of acreage in Kansas had been a concern in the past as the industry hasn't seen drilling results as strong as those in Oklahoma. Royal Dutch Shell (NYSE:RDS-A) (NYSE:RDS-B), for example, decided to sell its entire 600,000 acreage position in Kansas last year. After drilling 45 wells in the state Shell just didn't see the economic returns it wanted in order to keep drill.

SandRidge Energy, on the other hand, had good success with the five most recent appraisal wells it drilled in Sumner Country Kansas. These wells had a 30-day initial-production rates that averaged 601 BOE/d, which is 90% higher than the company's type curve. Because of this the company is adding its 117,000 net acres in the county to its core drilling focus while planning to drill another 45 wells in that county this year.

 Sandridge Energy Test

Photo credit: SandRidge Energy

Additionally, SandRidge Energy enjoyed success in the two Chester wells drilled in the quarter. The average 30-day initial-production rate of those wells were 726 BOE/d, with 85% of the production being oil. Further, the company's Woodford test program saw a bit better success in the quarter. That said, the two wells were still below average as the 30-day initial-production rates were just 190 BOE/d and 96 BOE/d. But the company is seeing improved results so it doesn't yet appear that it's going to be giving up on the Woodford just yet. We should know much more about the company's plans when it introduces its three-year outlook at its Analyst Day on March 4.

Looking ahead
SandRidge Energy didn't give any changes to its production or financial guidance. The company is still on track to produce 29.3 million BOE in 2014, which represents 26% growth when stripping out the assets it sold. The company also continues to see liquids production growing by 42%, which is important because that's the company's biggest cash-flow driver. Despite higher gas prices, the company doesn't appear to be considering any new gas production at this time. But that is an area to watch on Analyst Day. 

Investor takeaway
Overall, this was as solid a quarter as SandRidge Energy investors could have expected. The company's production continues to grow and its costs keep heading lower. It's also enjoyed solid exploration success in places where global oil giants like Royal Dutch Shell aren't seeing success. Over time these trends should create solid value for investors.

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Matt DiLallo owns shares of SandRidge Energy. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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