SandRidge Energy, Inc. (SD) Q2 2019 Earnings Call Transcript

SandRidge Energy, Inc. (SD -0.61%)
Q2 2019 Earnings Call
Aug 08, 2019, 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning. My name is Denise, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the SandRidge Energy second-quarter earnings conference call. [Operator instructions] Johna Robinson, you may begin your conference.

Johna Robinson -- Investor Relations

Thank you, and welcome, everyone, to the conference call. With me today are Paul McKinney, president and chief executive officer; Mike Johnson, chief financial officer; and John Suter, chief operating officer. We would like to remind you that in conjunction with our earnings release and conference call, we have posted slides on our website under the Investor Relations tab that we will be referencing during the call. Keep in mind, today's call contains forward-looking statements and assumptions, which are subject to risks and uncertainty, and actual results may differ materially from those projected in these forward-looking statements.

We will also make reference to adjusted EBITDA and adjusted G&A and other non-GAAP financial measures. Reconciliations of these measures can be found on our website. Also, you will see us file our 10-Q later this afternoon. Now let me turn the call over to Paul.

Paul McKinney -- President and Chief Executive Officer

Thank you, Johna, and good morning, everyone. Thank you for taking the time to join us today and for your interest in SandRidge. We plan to review with you our second-quarter results and to provide updates on our operations and guidance. We'll be referencing the investor presentation, Johna mentioned just now, and we posted on our website earlier this morning.

So I encourage you to use and follow along. SandRidge is an independent oil and natural gas exploration and production company headquartered in Oklahoma City with principal focus on acquisition, exploration and development of hydrocarbon resources in the United States. On Page 3 of our corporate presentation, we provide an overview of the company that includes a map that highlights the location of our operations and a few tables that summarize updated market and financial information and our company production reserves and asset statistics. We hope you find the consolidation of this information useful.

Moving on to Page 4. This is a summary we include to remind our investors of our business strategy and the key components we believe lead to both near-term and sustainable long-term success for our shareholders. We have discussed this strategy with you in the past, and it continues to guide us and provide us with the flexibility to change as industry conditions change. Later in this call, we will discuss some of the changes we observed happen in our industry and how SandRidge is responding to them.

Moving on to Page 5, you will find a summary of our second-quarter highlights. Mike Johnson will review our results with you. But before doing so, I want to leave you with one important point. Our results this quarter demonstrate our ability to deliver on our promises and commitments we made earlier this year.

We believe it is important to demonstrate quarter over quarter, our commitment to financial discipline, cost control and to other aspects of our strategy, we believe, lead to success. So with no further ado, I will turn this over to Mike Johnson to review our second-quarter 2019 financial results. And afterwards on to John Suter to review our second-quarter operational results. Once they're done, I'll be back to finish up with some closing comments.

Mike Johnson -- Chief Financial Officer

Thank you, Paul, and good morning, everyone. Despite the fact that our second-quarter results were challenged by low commodity prices. They also reflect our progress in two key areas. First, they demonstrate our operational success and adding more oil to our product mix.

Second, they reflect our ongoing efforts to reduce our cost structure. We believe these accomplishments will enable us to meet or exceed our expectations and guidance in 2019. We posted a net loss of $13 million in the current quarter, compared to a net loss of $34 million in the same quarter last year. Adjusted EBITDA was $35 million in the current quarter, compared to $33 million last year.

The slight increase in adjusted EBITDA was accomplished during a period where we saw commodity prices decrease across the board. Wellhead prices were down 13% for oil, 53% for NGLs and 18% for natural gas. In the aggregate, we had a 13% reduction in the blended price of our commodities, yet we still increased adjusted EBITDA year over year. This was achieved primarily as a result of our development efforts in the North Park Basin that drove the increase in our higher-margin oil sales as evidenced by the 30% increase in oil production year over year and a roughly 200% year-over-year increase in our operating margin for this important asset.

We also made the difficult decision this quarter to reduce our workforce, which is expected to decrease our annual cash G&A run rate by at least $6 million, and this is reflected in our revised 2019 full-year guidance for adjusted G&A. The current quarter's results reflect a charge of $4.5 million related to this staff reduction. Although we had no derivatives in place during the second quarter, we've since added swaps on 20% of our expected oil production during the remainder of 2019 at a strike price just above $60 per barrel, and we intend to layer in additional derivatives during 2019 as the right opportunities arise. Because our 2019 capital expenditure plan is front-end loaded with roughly 65% of our capital allocated to the first half of the year, we exited the second quarter with $52 million drawn on our revolver and $8 million in unrestricted cash.

Based on the current strip for oil and natural gas, we expect to exit 2019 modestly drawn on our credit facility, demonstrating our commitment to financial discipline. In June, we also amended our credit facility, primarily to extend the maturity date, an additional year to April 2021 and to lower the interest rate pricing grid by 100 basis points. I'll now turn it to John for his thoughts on our second-quarter operational results and his outlook for the remainder of the year.

John Suter -- Chief Operating Officer

Thanks, Mike. Total company production for the quarter was 3.2 million barrels of oil equivalent comprised of 30% oil, 26% NGLs and 44% natural gas. Our lifting costs averaged $7.77 per BOE for the quarter. The company brought nine wells to sales, two in North Park Basin and seven in the Northwest STACK play.

Capex for the quarter was $35 million with $23 million in drilling and completion costs, primarily from North Park rig activity. Rig utilization will be substantially reduced in the second half of the year. We're preserving the option to utilize a rig in the fourth quarter, depending on various lease commitment requirements, while still staying within capital guidance range. Let's now look at the North Park asset on Slide 6.

As mentioned last quarter, we initiated drilling on a six-well pad on the north side of the field, two Peterson Ridge unit, XRLs, were drilled to reach the farthest limits north to date. From the same pad, we drilled four Patriot XRLs to the South. With the four Patriots, we're testing a 15-well per section, two-row wine rack pattern based on technical evaluation of our initial microseismic results from the previous Peters well spacing test. We finished drilling all six wells and released the rig as planned in early June.

We initiated stimulation operations on all six of these XRLs, plus a refrac of a legacy SRL within the same section in mid-June. We anticipate being completed with stimulation operations this week. After finishing remaining completion activities, we anticipate having all these wells tied into infrastructure and on production by early September. We look forward to this production information to help optimize our spacing plans for future development.

Additionally, we're anxious to see how refracs on legacy wells can be beneficial as we continue infill development in existing producing areas. On Slide 7, you can see updates on well results from three Surprise wells located in the southern extension of the play, that were turned in line near the end of Q1. These wells targeted three new undrilled sections. Aggregate cumulative oil production from these wells is 13% above type curve after 120 days.

Additionally, two Ray Ranch SRLs on the East Central edge of the field returned to sales in the second quarter. These wells have produced for roughly 90 days and have cumulatively produced 19% above the oil type curve in aggregate. As we delineate new areas of the field, we continue to be excited about well performance that consistently meets or outperforms type curve results, leading to higher returns. On Slide 8.

Our North Park net daily oil production plot shows that we achieved a record second-quarter 2019 oil rate averaging 4,920 net BOE per day. This was accomplished as we brought on our previously mentioned, Surprise and Ray Ranch wells in April, with peak production from these five wells in May. We will have spent the first two months of the third quarter, stimulating and completing our Northern six well pad. The fourth quarter will realize the full benefit of these six new wells, which should generate 4,500 barrels oil per day gross initial rate, assuming type curve performance.

This will be a great addition to our current base oil production to end the year strong. Now I would like to move from the North Park Basin to our assets in the Mid-Continent on Slide 9. As mentioned earlier, we brought seven new Northwest STACK Meramec wells to sales during the quarter that produced a 30-day IP per well average of 511 BOE per day, 70% oil. We concluded our drilling obligations within the drilling participation agreement as we brought these last seven wells to sales.

The drilling participation agreement successfully established 1.7 million barrels of oil equivalent of new cumulative gross production to date from drilling 26 wells, while holding 13,200 net acres by production. Additional high-quality Northwest STACK locations exist for development as commodity pricing and capital allocation allows. Our Mississippian assets contributed 2.5 million barrels of oil equivalent, 16% oil, 31% NGLs and 53% natural gas. In closing, I'm excited about our continued progress toward our North Park production with a record Q2 oil rate as well as strategic objectives we are accomplishing there.

Most of all, I'd like to thank the SandRidge team for another important record achieved that we haven't mentioned. We have now achieved one year with zero recordable incidents for company personnel. I'll now hand it back to Paul for closing remarks.

Paul McKinney -- President and Chief Executive Officer

Thank you, John. SandRidge delivered another solid quarter, executing on key elements of our award program and the strategy we laid out to shareholders earlier this year. As John pointed out, our teams are doing so in a safe and environmentally responsible manner. Congratulations to all of you, and I'm speaking to all of you that work here at SandRidge.

Your hard work and commitment to our values make my job easier and thank you very much. Getting back to business. As you can see, our operating team continues to deliver according to our capital and operating plans, and we have advanced several important strategic objectives in North Park and continue to do so with our completions operations currently under way there. We remain encouraged by our well results in both North Park and in Northwest STACK, and now that we have completed our drilling program for the first half of the year, we are focused on developing our future drilling, completion and development plans as we continue to evaluate a multitude of A&D opportunities we have encountered in the marketplace.

Earlier this year, we told you that our capital spending programs were going according to budget, and they still are; but due to lower commodity prices, we may end the year with a minimal amount of debt on the balance sheet, something slightly different than what I predicted in our last call. We are reaffirming -- I apologize for that. We are reaffirming our guidance with exception of two changes. We are reducing our adjusted G&A expense down from a range of $34 million to $37 million to $31 million to $35 million, reflecting the changes we made this quarter associated with our reduction in force.

We are also decreasing our price realization for natural gas liquids from 37% of West Texas intermediate to 25% of WTI, reflecting the prices we anticipate for the rest of the year. Now with respect to the current market conditions and our ambition to grow through M&A, we have observed failed asset sale attempts and unsuccessful strategic alternative processes, leading us to believe there remains a gap between the expectations of buyers and sellers. We believe there are a multitude of issues contributing to this perceived gap, volatility in hydrocarbon prices being one of them. In light of this, we intend to be patient, disciplined and creative as we evaluate all opportunities and our M&A efforts will be guided by our strategy to improve our margins and lower our breakeven costs.

We also intend to evaluate the acquisition of producing assets at distressed companies. The important thing, our shareholders need to keep in mind about our efforts in this regard is that we are focused on acquisition and merger opportunities that we believe generate attractive returns. Having said all of that, at this point, I'd like to express my sincere appreciation to all of you joining us on the call today. We will now turn the call over to our moderator and open it up for questions.

Questions & Answers:

Operator

[Operator instructions] Your first question comes from Bill Dezellem with Tieton Capital. Your line is open.

Bill Dezellem -- Tieton Capital -- Analyst

Thank you. Let's start with your last point relative to acquisitions. First of all, I think you referenced in your commentary, a multitude of A&D, D would be for divestiture. To what degree is that part of the evaluation process today? And then secondarily, on the acquisition front, how many -- would you characterize how many transactions that you're looking at today versus one quarter ago, please?

Paul McKinney -- President and Chief Executive Officer

Well, with respect to divestitures, we do have properties that are -- that we operate, and we are contacted by various different operators associated with potential acquisitions. As you and I have talked, Bill, in the past, anything I have that is for sale for the right price. And anything you have, I'm going to buy for the right price. And so that's the nature.

And so we did actually sell a small portion of some of our Mid-Continent assets earlier this last quarter, a small amount, but it was meaningful for us to clean up some accounting and some other things. And so yes, we continue to participate there. Nothing big at this point. But pretty much minor dispositions.

Now with respect to acquisitions, we've actually gained a lot of momentum during the second quarter and up to now. I'm not going to give you numbers, but we are in a significant number of data rooms right now. We have signed a significant number of CAs, some of these are actual processes that are out there and being marketed by companies that specialize in that. One or two of these are with companies, where we contacted them and we've agreed to exchange CAs.

And so I guess, the point I'm making is that we're very, very active. As we've seen this year go by, we've seen a lot of properties hit the streets. We've seen a few failed sales and strategic alternative processes. And so this is a key component of our future growth plans.

And so we are -- like I said, we're going to remain patient. We're going to remain disciplined, and we're going to remain creative in the process.

Bill Dezellem -- Tieton Capital -- Analyst

Paul, have you had much churn in that list of acquisitions or properties that you're evaluating, meaning that they -- some dropped off the list compared to three months ago, but new ones have come on, which I understand is part of the normal process. I'm just wondering if a lot of that has taken place with the difference between the bid offer spread. Or if your analysis has really been rather continuous on a more static group properties?

Paul McKinney -- President and Chief Executive Officer

No, there has been quite a few opportunities that we've evaluated that have dropped off the list, and that's just kind of the nature of that kind of work. As you very well know, I mean, the success rate or I should say the capture rate for A&D is typically pretty low. So you'll a lot of tires before you'll find that deal that works. You got to remember there's two people on either side of that negotiation have to agree.

And so our perceived gap and expectations between buyers and sellers is the primary reason that transactions haven't happened yet. But we're representing our shareholders, and we believe we're doing the right thing by being patient and disciplined.

Bill Dezellem -- Tieton Capital -- Analyst

In that gap, do you perceive that it has narrowed or widened with the most recent consternation in the industry?

Paul McKinney -- President and Chief Executive Officer

I don't have a feel for that, to be honest with you. I do believe, though, that both sides of those transactions need to become a little bit more creative to get deals done. I think this volatility is frustrating for a lot of us that are in the industry, that are trying to make a living, drilling and completing wells and developing resource that this world desperately needs, right? But I don't have an opinion on that, Bill. I don't -- I just know that the gap exists.

Bill Dezellem -- Tieton Capital -- Analyst

Understood. I have a group of more questions? Would you prefer I step back in queue or shall I continue?

Paul McKinney -- President and Chief Executive Officer

Actually, you're welcome to call back here afterwards for a long conversation. You know that you're -- we're on a call here, and we'll schedule something at your convenience.

Bill Dezellem -- Tieton Capital -- Analyst

Great. I'll turn it over then. Thank you.

Operator

[Operator instructions] Your next question comes from Morris Profit Company. Your line is open.

Unknown Speaker

Good. Thank you very much for taking my call. Obviously, the big inconsistency in the room is that you're looking for distressed properties at a small fraction of book value. You're a pretty distressed property yourself.

And my question is rather than spending $0.05 on more assets should you be thinking about actively buying back shares here?

Paul McKinney -- President and Chief Executive Officer

Well, that is a strategy that other companies have pursued. And the point that you make is a very valid one, OK. The challenge that we have for a company our size is that if I take the liquidity we have and buyback shares, then that robs us of the liquidity we need to grow. And I joined this company with a clear mandate to grow this company.

And so -- and we had a similar -- not with you, but I had a similar question once before I think with our -- when we were reviewing our annual report or annual or 10-K. Similar question. And so all I can tell you that I agree with you from a standpoint that as a valid request and a valid position to hold, but we're committed to growing the company. I need the liquidity to grow this.

Unknown Speaker

OK. Can I continue? If you're interested in growth, let me tell you that I'm a shareholder, not an analyst. And I'm interested actually in the share price. I'm interested in how I return on my investment.

And I couldn't give a whit about how big you are, whether you become an Exxon or whether you don't. I'm interested and you're doing your job, and I want to tell your board of directors, that this is a fools' mission. You have enormous book value. Either writedown that book value to really what you think it's worth or you should be buying the hell out of the stock.

And I don't care a whit as I said about your growth. I care about how my investment in your company does. So with the question -- that was just a comment. My question is, does your balance sheet accurately reflect the value of your asset or are they overstated? And if they are overstated, I would suggest that you start writing them down to a place where I don't have to ask you questions to why you're not buying shares back.

Paul McKinney -- President and Chief Executive Officer

Well, first of all, they're not overstated. And as a shareholder, I really do appreciate your feedback. I really do. We have a difference of opinion.

I will do everything and my team will do everything we can to address your primary concern, which I have as well and that is with respect to share price growth. And we believe that we're taking the right steps. And my only request for you is to be patient because I'd like to encourage you to remain a shareholder with us and allow us to earn your confidence.

Unknown Speaker

But we have philosophical difference. Wait. We have a philosophical difference. On the one hand, you're interested in growth; on the other hand, I'm interested in creating value.

So how do you reconcile this?

Paul McKinney -- President and Chief Executive Officer

I really don't think it's productive for you and I to continue this debate. I'd encourage you to call me directly, and we'll have a longer conversation about this later. So please do call.

Operator

There are no further questions queued up at this time. I'll turn the call back over to management for closing remarks.

Paul McKinney -- President and Chief Executive Officer

Thank you, everyone, for participating in this call. We are excited about what the future holds for SandRidge and to our investors and are encouraged by your support. This is the end of our call. You are also welcome to call us here directly to talk to me and other members of the management team.

And so thank you, again.

Operator

[Operator signoff]

Duration: 28 minutes

Call participants:

Johna Robinson -- Investor Relations

Paul McKinney -- President and Chief Executive Officer

Mike Johnson -- Chief Financial Officer

John Suter -- Chief Operating Officer

Bill Dezellem -- Tieton Capital -- Analyst

Unknown Speaker

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