2 Encouraging Signs for SandRidge Energy

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Having recently sold its assets in the Gulf of Mexico, SandRidge Energy (NYSE: SD  ) is now concentrating exclusively on its core acreage position in the Mississippi Lime play. The Oklahoma City-based oil and gas producer's fourth-quarter and full-year 2013 results highlighted a few key improvements in the Mississippian that bode well for the company's future.

Source: SandRidge Energy 

Improving well performance and capital efficiency
One of the most encouraging signs for SandRidge during the fourth quarter was a marked improvement in Mississippian well performance and capital efficiency. The company's 80 Mid-Continent wells yielded an average 30-day initial production (IP) rate of 386 Boe/d in the fourth quarter, up by about 25% from 307 Boe/d in the third quarter.

Impressively, three of its Mississippian wells yielded 30-day IP rates averaging 1,401 Boe/d, which makes them among the most productive wells in the entire play. Further, the company's fourth-quarter wells were drilled at an average cost of just $2.9 million per well, down from $3.1 million in 2013 and $3.5 million in 2012.  

In fact, SandRidge has reduced its total wells costs by about 26%, or $1 million per well, over the past eight quarters, which is a truly impressive accomplishment. As a result of these well cost savings and its extensive investments in infrastructure, the company is easily the lowest-cost producer in the Mississippian -- a crucial advantage over peers that recently departed from the play.

For instance, Shell (NYSE: RDS-A  ) last year decided to sell its entire position in the Mississippian, including 600,000 net leasehold acres and 45 producing wells, while Chesapeake Energy (NYSE: CHK  ) divested a 50% interest in its acreage to China's Sinopec (NYSE: SHI  ) early last year and then sold its remaining gas gathering and processing assets in the play to SemGroup (NYSE: SEMG  ) later in the year.

Part of the reason why these companies exited their positions in the Mississippian is because they couldn't drive down well costs far enough to generate competitive rates of return. Shell, for instance, is seeing much stronger returns from oil projects in the Gulf of Mexico, while Chesapeake is targeting more lucrative opportunities in the oil-rich Eagle Ford and the liquids-rich Utica shale.

Multi-zone stacked pay potential
But SandRidge has a number of advantages that Shell and Chesapeake didn't have, including a highly sophisticated infrastructure network of electrical and salt water disposal infrastructure and a contiguous acreage position that features what's known as multi-zone stacked pay potential.

The main advantage of stacked pay zones is that the company can simultaneously drill into multiple productive zones, which increases the chances of encountering hydrocarbons in at least a few of the zones. By contrast, drilling vertical wells in a single-zone formation can turn out to be a losing proposition if a zone turns out to be uneconomic.

In addition to improved recovery rates and material wellsite cost savings, the prevalence of stacked pay zones across SandRidge's Mississippian leasehold could also meaningfully boost the resource potential of its acreage. With encouraging results from recent stacked pay tests, SandRidge believes that there could be several additional areas of its acreage with significant multi-zone development potential.

For example, the company reported strong results from appraisal drilling in Sumner County, Kansas, during its fourth-quarter earnings conference call. To date, SandRidge has drilled five appraisal wells in the county that delivered an average 30-day IP of 601 BOE per day, which is almost double the company's 2013 type curve and suggests significant upside potential from additional drilling.

The bottom line
While there's still much progress to be made, SandRidge's management team deserves credit for major improvements over the past year including refocusing the company's efforts exclusively on its Mid-Continent properties, drastically reducing its cost structure, and improving capital efficiency and returns. If SandRidge can continue to improve its Mississippian well performance and drive down operating costs further, its share price could follow suit.

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Arjun Sreekumar

Arjun is a value-oriented investor focusing primarily on the oil and gas sector, with an emphasis on E&Ps and integrated majors. He also occasionally writes about the US housing market and China’s economy.

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