The Second Quarter Could Make or Break SandRidge Energy

Technological breakthroughs and financial discipline hold the key to SandRidge Energy’s success.

Jun 7, 2014 at 10:38AM

SandRidge Energy's (NYSE:SD) core acreage in the Mississippi Lime could witness some solid oil production growth if the latest technology employed by the Oklahoma-based company turns out to be as successful as claimed. A failure, however, could prove disastrous for this debt-laden company. But if the initial test results -- as well as well rates of fellow Mississippian operator Chesapeake Energy (NYSE:CHK) -- are any indication of future oil production, then SandRidge could be building out a solid portfolio of oil and gas reserves in the Mid-Continent region.

First let's see where the challenges lie.

Sd Re

SandRidge Energy oil tank battery near Alva, Okla. Source: SandRidge Energy.

The "unconventional" among the conventional
The Mississippi Lime had long been a site for conventional drilling. It was only in 2009 that SandRidge Energy drilled the first horizontal well. Most unconventional drilling in the United States occurs on shale formations, so the Mississippi Lime is somewhat unique. As you could figure out from the name, the horizontal lateral is drilled in a layer of limestone. In terms of depth, this limestone layer is relatively shallow at 3,000 to 6,000 feet. This also brings down well costs to about $3 million per well, compared to roughly $9 million for a typical Bakken shale well.

Yet when it comes to fracking, the Mississippi Lime hasn't always been in the good graces of exploration and production companies. Quite a few operators, such as Royal Dutch Shell (NYSE:RDS-A), last year sold off their positions and exited from this limestone play.

Three reasons the Mississippi Lime is challenging
One major concern is that the Mississippi Lime hasn't been unfolding as a typical "resource play." For example, an oil gusher at a particular location may not guarantee a similar well nearby. In other words, there is no consistency in determining the oily sweet spots. Consequently, drilling wells with consistently high production rates was not a simple "rinse and repeat" exercise.

Second, depletion rates were high, which affected the estimated ultimate recovery, or EUR, figures per well. As a consequence, the original reserves had to be written down. Moreover, this means that the operator has to drill a larger number of wells just to maintain existing production rates.

Third, the Mississippian limestone play produces huge quantities of saltwater. This adds to the cost structure as E&P companies have to drill additional wells to dispose of the saltwater. Roughly speaking, the industry drills one saltwater disposal well for every six oil wells.

These challenges force operators to approach the limestone play in a disciplined manner, while simultaneously undertaking a high initial investment. SandRidge Energy chose to do exactly that. Following the 2013 ouster of CEO Tom Ward, the company sold assets in the Permian Basin and the Gulf of Mexico, and paid down some of its debt. It chose to focus wholly on its core acreage in the Mississippi Lime, where it holds about 1.8 million net acres.

Why the second quarter is crucial
So far, SandRidge has been struggling to get its act right when it comes to production. While CEO James Bennett facilitated a fantastic turnaround by instilling fiscal discipline and trimming debt, such improvements are limited in nature. Beyond a point, cost cuts and operational efficiency alone can't boost shareholder value.

SD Chart

SD data by YCharts.

In the first quarter, the company connected only 71 of its planned 94 wells in the Mid-Continent, due to a harsh winter. As a result, SandRidge lost 56 drilling days in the quarter while its overall Mississippian production fell 2% compared to the fourth quarter of 2013. Connecting more than 75% of the planned wells wasn't sufficient to increase production.

Technology: The game changer?
Two things, however, stand out from the company's first-quarter earnings call. First, SandRidge made up for the drilling shortfall in the first quarter by connecting 45 new wells in April alone. As a result, management didn't have to amend projected production volumes for 2014.

But the next point really caught my attention. The company drilled a dual-stacked well in Harper County, Kan., with a 30-day initial production rate of 707 barrels of oil equivalent per day. That boils down to roughly 353 Boe/d per lateral. Additionally, the total cost for this multilateral well came to just $5.2 million, compared to the average $6 million for drilling two wells. This is a hugely positive result. Compared to the costs, I don't think production results are bad at all. SandRidge plans to drill three more dual-stacked wells in the second quarter.

Thanks to the advent of 3-D seismic technology, I'm gradually becoming more optimistic about the Mississippian Lime. Energy and production companies can now map their drilling locations more accurately for oil formations. The strong performance in Northern Garfield County, Chester, and Sumner can all be attributed to this groundbreaking technology, which could give a solid boost to production volumes. Chesapeake Energy, for example, has been using 3-D seismic quite successfully in the Mississippi Lime:


Source: Chesapeake Energy Investor Presentation, May 2014.

SandRidge's Biggest Advantage: Its SWD Infrastructure
SandRidge's biggest advantage is, in fact, its saltwater disposal, or SWD, infrastructure. No exploration company in the United States has such an extensive network of saltwater disposal wells, pipelines, and related infrastructure. Not even Chesapeake Energy enjoys this kind of an advantage.


Source: SandRidge Energy Investor/Analyst Meet, March 2014.

Note that the SWD system is only about 50% utilized despite SandRidge pumping out 980,000 barrels of water per day. This is inclusive of the 66% higher volumes of water pumped out in 2013. SandRidge's SWD infrastructure eliminates one of the major challenges of operating in the Mississippi Lime. In hindsight, it's not a major surprise why bigger companies such as Royal Dutch Shell exited the limestone play.

Foolish takeaway
The second quarter holds key to SandRidge's promises. From the evidence gathered so far, it looks like good days are ahead, but one can never be too sure. The next quarterly results should affirm our predictions for the long run.

OPEC is absolutely terrified of this game-changer
Imagine a company that rents a very specific and valuable piece of machinery for $41,000 per hour (That's almost as much as the average American makes in a year!). And Warren Buffett is so confident in this company's can't-live-without-it business model, he just loaded up on 8.8 million shares. An exclusive, brand-new Motley Fool report reveals the company we're calling OPEC's Worst Nightmare. Just click HERE to uncover the name of this industry-leading stock... and join Buffett in his quest for a veritable landslide of profits!

Isac Simon has no position in any stocks mentioned. 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

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, 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

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