A Deeper Look at SandRidge Energy Inc.’s First Quarter Results

Photo credit: SandRidge Energy

SandRidge Energy (NYSE: SD  ) delivered surprisingly strong first-quarter results last week. The Mid-Continent-focused driller blew past analysts' estimates despite battling rough winter weather. Let's take a closer look at what the company did right last quarter.

Producing results
Going into the quarter I noted that the company needed to do three things right in order to exceed expectations. The two most important areas for the company were to keep its well costs below $2.9 million on the quarter while improving upon the initial production rate of 386 barrels of oil equivalent per day, or BOE/d, for the wells it drilled in the quarter.

On the downside the 71 wells the company drilled in the quarter cost more than expected at $3 million per well. The culprit was the fact that the company drilled less than the 94 wells it planned to drill and complete in the quarter. The weather, which included the 12th coldest winter on record, caused the company to miss 56 drilling days due to weather-related rig drill time. That increased its well costs by adding time to drill each well. Because of this we can basically give the company a mulligan on missing the well costs by a hundred thousand dollars per well.

The other area of interest, initial production rates, was where SandRidge Energy really shined. Those 71 wells produced an average 30-day initial production rate of 410 BOE/d, which was well ahead of last quarter as well as last year's first quarter well set average of 366 BOE/d. This was actually the company's second highest quarterly 30-day initial production rate on record. That was a big factor in the company's ability to outperform despite weather related issues.

Adding opportunities
SandRidge Energy also impressed with its ability to add to its future opportunity set. The company added a new drilling focus area in northern Garfield County, Oklahoma. While it also produced strong well results from a dual stacked lateral well in Kansas.

The company talked about the potential of its stacked and dual lateral prototypes at its investor and analyst day earlier this year. As good overview of the concept can be seen in the below slide.

Source: SandRidge Energy Investor Presentation (link opens a PDF

In the first quarter the first one of these innovative new wells was drilled and delivered strong results. The well achieved a 30-day initial production rate of 707 BOE/d and cost $5.2 million. Drilling two single wells would have cost the company about $6 million, so SandRidge Energy was able to see significant cost savings in addition to solid production from this design. The company sees the potential to take this well design across much of its acreage position, which could provide a big boost to its future drilling returns.

One area to watch
The other important area for SandRidge Energy was its well results from testing other zones on its acreage. The company drilled wells which tested the Chester and Woodford last quarter. Unfortunately, the three wells underwhelmed. The one Chester well had a 30-day initial production rate of 194 BOE/d while the two Woodford wells had an average 30-day initial production rate of 133 BOE/d. Last quarter the company's Chester wells achieved 30-day initial production rates of 726 BOE/d while its Woodford wells averaged 143 BOE/d.

Of the two, the Woodford Shale is the one that would appear the most promising given what peers like Devon Energy (NYSE: DVN  ) are seeing from the shale elsewhere in Oklahoma. Last quarter, for example, Devon Energy's Mississippian-Woodford Trend position produced an average of 19,000 BOE/d, which is 35% ahead of just the previous quarter as the company's 63 new wells produced results that continue to match Devon Energy's expectations. The hope is that this shale can fuel production growth for SandRidge Energy the same way it's doing so for Devon Energy. To that end, SandRidge Energy has updated the geologic model for its future Woodford wells and plans to test three more wells with the new model. These wells really need to deliver otherwise it becomes more likely that the Woodford Shale underneath SandRidge Energy's acreage is a bust. 

Photo credit: Devon Energy 

Investor takeaway
While SandRidge Energy still has some work to do the company continues to head in the right direction. The company was able to overcome rough winter weather to beat expectations. That just goes to show how good the company's operations are getting as this well-oiled machine continues to impress.

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