SandRidge Energy (NYSE:SD) is expected to release its first-quarter results after the markets close this Wednesday. The Mid-Continent focused driller has really been firing on all cylinders of late as it has been drilling better wells with less money which is yielding better results. Because of that investors will be really disappointed if the company doesn't continue its strong recent results, which is why the following three areas will be the ones to watch when the company reports on Wednesday.
One of the keys to SandRidge Energy's success in the Mississippian Lime formation is its ability to drive its well costs down much lower than any of its competitors. Last quarter the company brought 80 wells online for a record average low cost of $2.9 million per well. However, its plan is to drop costs down ever lower in order to improve its rates of return.
At the company's investor and analyst meeting back in March, management spoke about wanting to get well costs down to $2.7 million per well over the next three years. That would improve its internal rate of return from 64% at $90 oil and $4 gas to 79%. However, as the following slide shows SandRidge Energy isn't looking to stop there as its aspirational goal is to get its well costs down to $2.3 million per well, which would push its returns to 128%.
Because of this investors need to keep an eye on first quarter well costs. We want to see the company drilling its wells for less than $2.9 million each.
In addition to falling well costs we want to see the average initial production rate of its wells heading higher. Last quarter the company's 80 newest wells average 386 barrels of oil equivalent per day, or BOE/d. However, the company drilled five wells in a new area, Sumner County in Kansas, that achieved 601 BOE/d. That area is now a new core focus area for the company and should help to push the company's overall initial production rate higher this quarter.
What investors will want to keep an eye on is if that new area actually does deliver as hoped. SandRidge Energy plans to drill 45 more wells there this year, however, it has had problems in the past where it thought it found a great area to drill only to see poor results as it drilled more wells. If that turns out to be the case here it could have a big impact on the company's first-quarter results.
The other really important area to watch is SandRidge Energy's exploration results as it drills into new zones within its acreage in the Mid-Continent region. Among the zones the company is testing is the Chester formation as well as the Woodford. So far results have been mixed. The first two Chester wells averaged 726 BOE/d while its two latest Woodford wells average 143 BOE/d.
While the latest Woodford wells were a big improvement over the first batch of Woodford wells, SandRidge Energy isn't seeing the success of peers like Devon Energy (NYSE:DVN). The company's emerging position in the Mississippian-Woodford Trend saw production surge 47% from the previous quarter to 16,000 BOE/d. That exceeded Devon Energy's projected exit rate. Further, the company is also finding success in the Cana-Woodford Shale, which has been an important area of growth for the company. Needless to say, SandRidge Energy would love to see its Woodford Shale acreage fuel production growth as it is for Devon Energy.
As long as SandRidge Energy keeps its well costs down and the initial production rates of its newest wells don't fall short of expectations, then the company is likely to have a quarter that pleases investors. Further, there's upside if the company shows progress in its exploration areas, with the Woodford Shale in particular being an area where the company could see upside given what Devon Energy and others are seeing. That said, if we see the stock take a dive after earnings, it's likely that the company fell short in one of these three important areas.
Matt DiLallo owns shares of SandRidge Energy. The Motley Fool owns shares of Devon Energy. 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.