SandRidge Energy Inc. Better Watch Out

Chesapeake Energy is proving that it can produce drilling returns in the Mississippian Lime just as good as those enjoyed by SandRidge Energy.

May 21, 2014 at 12:08PM

Sd

Photo credit: SandRidge Energy.

Chesapeake Energy (NYSE:CHK) recently held its annual analyst day. One topic that stood out to me was how good the company is getting at drilling the Mississippian Lime. Chesapeake Energy is getting so good that SandRidge Energy (NYSE:SD) might need to worry about losing its spot as top dog in that play.

Stronger core?
Chesapeake Energy built a massive legacy position in the Mid-Continent region encompassing more than 1.9 million net acres. However, its core position in the Mississippian Lime consists of about 160,000 net acres. That's relatively small compared to SandRidge Energy's 670,000 core position in the play, as shown on the following slide, but it still packs quite a punch.

Sandridge Energy Core

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

Like Chesapeake Energy, SandRidge has whittled its massive acreage position in the Mid-Continent down to what it views as the most promising acres. Some acres have better long-term well results than others, but it's still a moving target as SandRidge Energy has added to its core over time. The bulk of its core, though, is still concentrated right around the Kansas-Oklahoma border.

The next slide shows that the bulk of Chesapeake Energy's core position in the Mississippian is concentrated in northern Oklahoma, in what appears to be the strongest oil-producing zones of the play.

Chesapeake Energy Mississippian

Source: Chesapeake Energy Investor Presentation (Link opens a PDF).

Because of that Chesapeake Energy is generating high rates of return each time it drills, while also enjoying consistent results. That means the Mississippian is a draw for Chesapeake capital, and that the company is likely to direct more capital from its large drilling budget to the play if the current trends persist.

Getting better
Chesapeake Energy is focusing on drilling its Mississippian wells more efficiently (meaning faster), which is cutting costs. The company's average well cost this year should be roughly $2.9 million, which is roughly what it costs SandRidge Energy to drill a well. This means Chesapeake Energy can add 100 additional economic wells to its future drilling inventory for every 10% it shaves off its well costs.

That also boosts the rate of return the company sees on its drilling capital. Just two quarters ago, Chesapeake Energy's rate of return for wells drilled in the Mississippian was 31%. That's now up to 50% as the company's improvements are having a noticeable effect on its bottom line. While that's still below the 64% internal rate of return that SandRidge Energy sees on its wells, Chesapeake Energy is catching up.

Investor takeaway
For a long time SandRidge Energy has held a distinct competitive advantage in the play because it could drill wells a lot cheaper than any competitor. Chesapeake Energy, however, appears to be narrowing that gap -- its well costs aren't that much higher. That means SandRidge Energy better watch out and continue to move forward; otherwise it could lose its place as the best operator in its core play. 

A better way to invest in the boom
Record oil and natural gas production is revolutionizing the United States' energy position. However, not every stock will fuel gains into your portfolio. One nearly sure fire way to see oil and gas income head your way it to invest in the companies using a small IRS "loophole" to help line their investors' pockets with money. It's an easy strategy to learn, you just need to check out our special report "The IRS Is Daring You To Make This Energy Investment." Don't miss out on this timely opportunity; click here to access your report -- it's absolutely free. 

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.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

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.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

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. The show is also heard weekly on dozens of 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. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers