How SandRidge Energy Inc. Is Doing the Little Things to Improve Returns

The little things add up to big savings at SandRidge Energy.

Apr 17, 2014 at 1:10PM
 Sandridge Energy Tanks

Photo credit: SandRidge Energy

I don't think investors realize how focused SandRidge Energy (NYSE:SD) is on improving shareholder returns. It's the little things really, but these little things add up to big savings.

Expensive paint job
Take for example the photo to the right of an oil tank battery. It has a nicely painted SandRidge Energy logo on it. The cost of painting those oil tank batteries with that logo is $15,000 per well. That might not sound like a lot considering it costs SandRidge Energy around $3 million to drill each well, but if you consider the company drills 460 wells each year this really adds up. In fact, it costs SandRidge Energy about $7 million each year just to have its logo painted on those tank batteries.

The company decided that this was not an investment that was creating any value for investors so the company is no longer painting those tank batteries. For perspective, that's enough of a savings to actually fund two additional Mississippian wells each year. This and a whole host of other improvements is enabling SandRidge Energy to improve its rate of return for each well it drills, which is real good news for shareholders.

 Chesapeake Energy Rig Site

Photo credit: Chesapeake Energy 

Improved designs
SandRidge Energy is really focused on optimizing its development plans. One way it's achieving optimal results is through multi-well pad drilling. This industry trend is saving companies a lot of money. Chesapeake Energy (NYSE:CHK), for example, has focused on drilling more wells on multi-well pads. That shift, when combined with other operational efficiencies, has enabled Chesapeake Energy to see a 7% year-over-year decrease in its Midcontinent drilling and completion costs while its spud-to-first sales cycle time is down 30% year over year. That's pushing up the rate of return Chesapeake Energy is earning on each well it drills in the region.

SandRidge Energy is seeing similar results in the Midcontinent. Last year the company drilled about 40% of its wells utilizing multi-well pads, which saved the company $25 million. This year the company's plan is to drill 70% of its wells on pads, which is expected to save the company $65 million. One of the biggest savings in this shift is found in sharing well-site facilities like the tank batteries as well as separation equipment. For example, moving from a single well facility to a four well share facility enables SandRidge to reduce its well facility costs from $540,000 per well to just $170,000 per well.

As the following slide shows, SandRidge Energy's shift to multi-well pads and shared facilities is able to generate significant savings over its competitors due to its focus on costs.

Sandridge Energy Shared Well

Source: SandRidge Energy Investor Presentation (Link opens a PDF)

First off we should note in that above slide that in the picture at the bottom of the slide SandRidge Energy doesn't have any white painted tanks with its logo; instead the tanks here are painted a standard green color. Add that savings with synergies from drilling a dual well pad and the company was able to drill these wells for an average of $2.6 million. Those savings, combined with better well design enabled SandRidge's wells to each produce more oil and gas than a nearby competitor's well for a much lower cost. This shift is really moving the needle for the company as a whole.

Investor takeaway
SandRidge Energy is doing the little things to improve its returns. The company is focused on reducing its well costs from the current $2.9 million to $2.7 million, which will boost its internal rate of return per well from 54% to 79%. But it's not stopping there as the company has an aspirational goal to get its well costs down to $2.3 million per well, which would push its returns to 128% per well. That goal will only be achieved as the company continues to work on taking small costs out, which really were adding up. Given what we've seen so far, I think the company will one day achieve and possibly exceed that goal, which will produce really great returns for investors. 

OPEC is absolutely terrified of this game-changer
SandRidge Energy one of the few companies profitably extracting oil out of the Mississippi Lime formation. It's a formation that really doesn't worry OPEC as it won't make America independent of its oil. That said, there is a technology that could do just that at it has OPEC terrified. In an exclusive, brand-new Motley Fool report we reveal the company we're calling OPEC's Worst Nightmare. Just click HERE to uncover the name of this industry-leading stock.

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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers